Q3 2022 Littelfuse Inc Earnings Call
Will also be available on our website.
Please advance to slide two for our disclaimers.
Our discussion today will include forward looking statements. These forward looking statements may involve significant risks and uncertainties.
Please review 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 which provides an overview of recent highlights.
We delivered strong third quarter results, which were above our expectation.
Our outperformance was driven by a faster than expected recovery from China Covid shutdowns in the second quarter.
And continued growth from global business wins and progress on our operational initiatives.
We achieved revenue growth of 22%.
And organic growth of 8% despite FX headwinds.
We have created tremendous demand for a broad range of products and expanded our capabilities through acquisitions and.
Continuing to deliver margins and earnings growth above our strategic long term targets.
I'd like to thank our associates around the world for another outstanding quarter.
I'm, particularly proud of our sustained success, which is an outcome of our highly skilled people in the market leading solutions, we deliver to customers our year to date record performance, including double digit sales and earnings growth.
Estimate to our global team's execution across the breadth of our end markets and the power of our strategy, which is shown on slide five.
We're investing for growth both organically and through acquisitions.
Versify the end markets, we serve and expand organic growth opportunities within the structural growth themes of sustainability connectivity and safety.
As a result, we continue to increase our product content and share gains in high growth markets and geographies.
Our significant achievements to date <unk>.
Position us for ongoing long term profitable growth and top tier shareholder returns.
Nino will provide additional color on our strong financial performance and fourth quarter outlook.
Moving on to slide six we published our 2021 sustainability report, which is available on our website.
Last year, we set a goal to achieve a greenhouse gas reduction of 38% by 2035.
To help accomplish this goal we have been conducting and got it at all manufacturing locations and implementing action plans.
We also expanded our programs and investments to support our energy and water conservation and waste reduction initiatives, which contributed to lower intensity levels in 2021.
We established goals to increase our percentage of global female leaders to 25% and more than double our percentage of our black and African American employees in the United States by 2026, consistent with these goals, we launched additional initiatives around diversity, Inc.
<unk> increased our focus on talent development and expanded our efforts around inclusion and belonging.
We are committed to the long term value of our robust ESG strategy and are proud of our achievement before we get into highlights from the quarter I'd like to discuss some market customer and channel dynamics, we are seeing.
Starting with sales through our distribution channel partners Pos remains robust and end market demand is solid across a broad set of markets.
We are strategically aligned ourself with customers' applications, enabling the greater sustainability connectivity and safety.
Black factory in building automation and industrial safety.
Data centers telecom infrastructure.
Energy efficiency.
Electrification of vehicles and charging infrastructure.
As discussed last quarter, we continue to see softer demand in consumer oriented end markets like appliances and personal electronics, we're also experiencing broader softening in China.
Within our electronics distribution partners inventory levels of some of our products are above our target range and more recently, we have seen our electronics book to bill below one.
This is driven by our product lead time reductions and inventory rebalancing from some of our channel partners.
Across our industrial distribution partners book to bills are running around one point al and inventory are solidly within our target ranges.
Within passenger vehicle end markets.
<unk> to operate in a noisy environment.
<unk> continue to unwind last year's global inventory build.
Leading to quarterly fluctuations in our sales.
Supply chains continue to improve.
Do expect to see stabilizing car build and modest global auto production growth next year.
The growing themes of electrification electronic vacation and Adas, we expect continued long term market outperformance.
Now, let's move on to highlights and design wins in the end markets we serve.
Yes.
Within our industrial end markets on slide seven.
We're expanding our leadership presence in applications focused on sustainability.
During the third quarter, our design in efforts captured business for energy storage systems and alternative energy.
In HVAC, our broad range of offerings secured business for commercial and residential applications.
In the area of safety, we continue to expand our market positions for electrical safety systems, and commercial kitchens with major restaurant chain.
We also grew our business in general industrial applications.
And secured business and industrial motor drives electric utility infrastructure and automated test equipment with our technical expertise and reputation for quality.
With our diverse portfolio, we are increasing.
Increasing product content with leading customers and expect this to continue given their intensifying focus on sustainability and safety.
Turning to our transportation end markets on slide eight.
We continue to increase our leadership in the passenger vehicle market leveraging the growth of both electrification and electronic vacation of vehicles.
Over the years, we have leveraged our automotive technology portfolio across all of our businesses and expanded the range of our offerings, especially from our electronics business.
As a result, we have seen double digit content outgrowth over the last three years.
This has led to average content across vehicles increasing to $7.
This year as design wins support a continuation of this content growth.
Our extended pipeline of new business opportunities and our expanding portfolio and support our ability to continue that double digit outgrowth.
During the third quarter, we captured substantial business and onboard Chargers with key Oems based on our technical leadership and.
And the strength of our product portfolio secured business and battery management systems.
For off Board electric vehicle charging our engineering capabilities and differentiated range of products like power semiconductors fuses relays and switches from our <unk> acquisition secured significant new business.
The addition of the TNK portfolio will further expand opportunities to grow our product content.
With the global ongoing transition to electric vehicles, our company is playing a tremendous role with the breadth of our products that are enabling our customers' applications.
We look forward to continuing to grow our leadership with them in this high growth end market.
Yeah.
Within all passenger vehicles and automotive electronics, we secured business with multiple Oems based on our long term relationships and innovative solutions for infotainment telematics and comfort and convenience applications.
We also captured wins and Adas applications with the ongoing focus on safety.
In addition, we won business with TNK start stop buttons and the vehicle interior due to our speed and flexibility.
In commercial vehicles, we capture business and key strategic end markets.
Within the electrification of trucks, we secured business wins with several of our legacy products as well as Carling products based on performance and the breadth of the portfolio.
Our electric two and three wheelers in Asia.
Through our business for battery management systems, Telematics, and keyless systems with TNK switches.
Four trains, we secured business and railway traction and construction.
Equipments, we won a project with our market, leading carling products based on our strong relationships and the breadth of our portfolios across the businesses.
And heavy duty trucks, we won business with our high quality solutions and lower cost of ownership.
Given our significant business wins and investments in transportation applications, including expanded capabilities in portfolios from acquisitions.
We're positioned very well for strong continued long term growth.
Moving on to Slide 19, electronics end markets greater connectivity requirements continue to drive product content opportunities and new business wins.
During the third quarter, we expanded our business for data centers and building automation systems based on product features.
With the ongoing push towards sustainability and battery power, we captured business in power tools and all electric bicycles.
As it pertains to safety, we also secured business for a medical infusion pump application with are seeing case switches.
With our broad portfolio, we're extremely well positioned to expand our electronics content across a wide range of applications centered within connectivity sustainability and safety.
Our new business wins have been significant and represent a diverse range of end markets and applications.
We also continue to build the pipeline of identified new business opportunities as we see our customers' engineering teams return focus to new product development.
We fully expect that the organic growth from new business activities, coupled with our acquisitions will enhance and sustain our long term growth.
I'll now turn the call over to <unk> 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 11.
We continued our strong execution on both growth and requirements.
Exceeding the high end of our sales and earnings guidance for the third quarter.
Revenue was $659 million up 22% over last year and up 8% organically.
Our Carling and CN, Keith switches acquisitions added 18%.
Foreign exchange reduced revenue 4%.
GAAP operating margins were 18, 5%, while adjusted operating margins were 21% adjusted.
Adjusted EBITDA margins were nearly 26% continues to trend solidly above our 21% to 23% EBITDA margin targets.
Third quarter GAAP diluted earnings per share was $3 <unk>.
And adjusted diluted EPS was $4 28.
Up 8% over last year.
Our top line growth and margins continued above our long term target ranges again this corner.
We will continue to focus on the elements, we can control and we remain positive on price costs, offsetting inflationary cost pressures and lingering supply chain challenges.
We've also continued to invest for ongoing growth, including investments in our newly acquired businesses.
We had another strong quarter of cash generation.
Through the third quarter, we generated a record $313 million in operating cash flow and $236 million and free cash flow up 29% versus last year.
We ended the quarter with $474 million of cash on hand, and our net debt to EBITDA leverage at the low end of our target range.
The strength of our cash generation and balance sheet is a competitive advantage and provides us flexibility to allocate capital for several vectors of growth. While also continuing to return capital to our shareholders.
Let's move to third quarter commentary by segment on Slide 12.
In electronics our perform.
<unk> continues to be strong with 7% organic growth.
<unk> solid volume and pricing across the segments.
Operating margins remained robust at nearly 29% and EBITDA margins of 33% generally.
Generally flat to last year.
On slide 13, we continue to see differing trends within our transportation segment.
Commercial vehicles grew 5% organically along with ongoing outperformance across our Carling acquisition.
Passenger vehicles was up 3% organically tempered by tier ones ongoing unwind of last year's inventory in Dallas.
Operating margins of seven 1% and EBITDA margins over 13%, including FX headwind of nearly 200 basis points.
While we've driven a number of pricing actions inflationary impact still outpaced these efforts.
We've initiated cost reduction actions within our passenger vehicle business and expect to see segment margin improvements in the fourth quarter.
On slide 14, we continue to have growth trajectory across our industrial segment with sales up 18% organically in the quarter.
Year to date sales growth is 27% on broad based strength across end markets.
Price realization.
Operating margins exceeded 15% and EBITDA margins over 18% both expanded over 500 basis points.
The segment is focused on pricing actions to offset inflationary costs manufacturing efficiencies and let a swifter recovery from China Covid shutdowns in the prior quarter.
Turning to slide 15, and the forecast.
Normal sales run rate as the fourth quarter seasonally sequentially down mid single digits.
Our forecast within our electronics segment to incorporate some rebalancing of channel inventory levels.
We also expect continued tier one auto inventory unwind within our transportation segment.
And we've incorporated the varying economic signals as we see them today.
For the fourth quarter, we expect sales in the range of $603 million to $623 million up.
Up 11% versus last year and up 4% organic at the midpoint.
This assumes about 15% growth from our acquisitions and a 4% headwind from foreign exchange.
Growth was also negatively impacted by 3% from last year's 14th week.
We're projecting fourth quarter adjusted EPS to be in the range of $3 14 to $3 34, which assumes an 18% tax rate for both the quarter and full year.
Our fourth quarter last year included a 25 cent benefit from both a tax holiday and then and the additional 14th week.
Excluding these one offs.
Yes, we'd be up 11% over last year at the midpoint.
And as a reminder, we've added two substantial acquisitions to our portfolio in the past year.
Both are well accretive they dilute operating margins about 150 basis points versus last year.
The midpoint of our fourth quarter guidance implies full year sales of just over $2 5 billion.
And adjusted earnings per share of $16 77 tons, both records for the company.
This implies 21% sales growth over last year and 27% adjusted earnings growth.
Turning to slide 16, a few estimates for the full year 2022.
Our forecast incorporates positive price cost for the year.
We are projecting $56 million and amortization expense and just over $26 million in interest expense.
We are maintaining our forecast of around 100% free cash flow conversion and estimate $105 million to $115 million and capital expenditures for the year.
Looking ahead to 2023, we estimate foreign exchange to be a $50 million headwind to year over year sales and generally neutral to earnings.
Based on current exchange rates.
Incorporating our <unk> acquisition, we are estimating 2023 amortization expense of about $62 million.
And with interest rate changes and our increased debt, we are projecting interest expense of around $40 million for 2023 at current rates.
In summary on slide 17, we've continued outperforming on the areas, we can control, resulting in top tier performance year to date.
94% sales growth versus last year, and 13% organic growth.
We've expanded margins 300 basis points and driven adjusted earnings growth of 35%.
We're making tremendous progress towards achieving our five year strategy objectives.
And with that I'll turn it back to Dave for some final comments.
Thanks Neal.
In summary on slide 19, our talented associates investments for growth and operational excellence have delivered a record performance this year.
Consistently over the last several years the strength of our growth strategy and resiliency of the little juice business model has resulted in sustained record double digit compound annual sales and earnings growth.
Through this time, we have expanded our leadership presence and target high growth end markets and improved profitability throughout the organization.
Holland, our playbook to successfully manage through dynamic environments prioritizing long term strategic investments while <unk>.
Managing our overall cost structure.
Our track record double digit sales and earnings growth over the last 510 15 years.
Thanks to the resiliency of our business leveraging.
Leveraging the experience of our teams prioritizing growth investments and attractive end markets.
And diversification of our business.
This gives us confidence in the longevity of our strategy, which positions us for continued success and will deliver ongoing value to all stakeholders.
With that I will turn the call back to the operator for Q&A.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And your first question comes from the line of Matt Sheerin from Stifel. Your line is open.
Good morning, Matt Yes. Thank you good morning, everyone.
My first question is.
Just regarding that inventory correction you're seeing.
The distribution channels.
Could you give us an idea of what one.
You also mentioned the book to Bill was below one and electronics could you tell us what that was and how you see that correction playing out or are we talking about a couple of quarters any visibility there.
When that bottoms out.
Sure Matt.
So let me start a little bit with the.
With our book to Bill.
Kind of baseline behind that is were seeing point of sales data from our distribution partners continue to be pretty robust we've talked a bit about.
Some softness in consumer facing types of applications and in China in general some softness but beyond that Pos remains pretty solid through our channels in the electronic side of thing. If you look at book to bills, it's a bit of.
It's a mixed bag a little bit from the standpoint on our passive products.
Really, particularly driven by the fact that we brought down our lead times and there is some rebalancing going on.
It's well below one however, the semiconductor products are still remaining around one.
So it's a bit of a mixed bag on on the.
The book to Bill side of things there. So there clearly is some rebalancing that we're seeing from some of our partners.
As far as the length of the cycle things like that or how long we might see that.
Im not sure that Thats, we have great visibility into it we can look back in history and see what history would say.
Yes.
The dynamics in the market this cycle or perhaps a bit different.
So it's not clear to us exactly what the length of it.
Kind of rebalancing might look like.
Understood, Okay, and then on Asps.
I know.
Asps have trended higher year on year, and that's helped on the top line, but given.
Some of the bookings pressure.
And perhaps.
Your input costs coming down are you seeing pricing back to normal and as we get into your OEM contracts for next year Whats your take on what the pricing environment looks like.
Yes, I would say from a pricing environment of course, it's different across the different segments of our business.
And there are some input costs are coming down, but there are others are still going up so I would not say, we're kind of past inflationary headwinds that we're dealing with.
So when we're seeing those we do pass those along to customers.
Where we can in the electronic side of this is we have not seen.
Kind of change and pressure on the pricing environment, there we feel like the.
Adjustments we've made.
To be pretty sticky, we don't really see those changing too much we've talked openly about the fact that it's a little more challenging in.
The transportation, particularly the passenger car side of our business, where it's difficult to pass those along in multiyear contracts.
So we've been able to pass along some costs and we will give further gains on that as we move forward in the next couple of quarters.
Pricing in the passenger car side of things.
The industrial side, we've certainly been successful of passing that along and we don't see that environment changing either so we feel pretty good about the pricing environment. We're in right now.
Okay.
That's it for me thank you.
Thanks, Matt I appreciate your questions, we'll take our next caller please.
Your next question comes from the line of David Williams from Benchmark. Your line is open.
Good morning, David good.
Good morning, Thanks for let me ask the question and congrats on the results this quarter very very solid execution.
I guess, maybe my first question is if youre, if youre kind of thinking about the macro.
And kind of where we are now obviously theres lots of moving pieces here, but what are you thinking in terms of the demand environment looking out two to three quarters, if we see that.
The recession or slower growth environment, which segments would you expect to be most impacted and do you feel like maybe you've gone through some of that now with some of the inventory rebalancing that you'll you'll.
You'll be better position as we kind of enter a slower period of growth.
Yes, I think it's a good question.
As we often talk about.
Highly focused on end markets and applications and segments that have kind of outsized growth.
Over periods of time, so we continue to see a lot of strength.
In those core areas in the Mega trends that we kind of build our strategy around we don't see those shifting too much we've been open about the fact that the consumer facing side, which is a relatively small part of our of our electronics business has already seen that slowness.
So we feel pretty good about the demand environment.
Hanging in there in those core areas.
As far as any kind of inventory rebalancing and that takes some time to work your way through that's not all going to happen in one quarter, that's going to be a kind of a continuing headwind for us for a period of time, particularly on the electronics side, we don't really see so much.
On the industrial or commercial vehicle side, where inventories are or a concern pass car, we have seen a little bit there where there's some pullback from inventory that was built in the last year or so and that certainly impacted our growth rate in passenger car and that probably continues a bit into the fourth quarter maybe leads into.
2023.
But that should be behind us relatively quickly on that asset.
Okay. Thanks for the color there.
I was I've listened to the Vishay call earlier this morning, and they had talked about the IC supply chain seemingly improving a bit we think we fully and maybe some of the other content around that just kind of curious if youre seeing that in and if that dynamic is something that could help maybe.
As those that inventory digestion period that Youre speaking of.
Yes, clearly I think if you look across the different semiconductor types of products.
Some areas that are certainly easing in other areas that continue to be fairly tight on supply that are continuing.
Headed in the right direction.
Likely it is.
I think that May help.
Free up some of our customers.
Not so much of a first order impact to us while we do buy some semiconductors for some of our sensor components or some of our more complex related products, the things that impacts us, but it's fairly modest impact, it's really more what impact it might have on our customer base. So that may free up a bit and as we've seen we do it.
Spect, some modest growth in global car build.
In the coming year, which really is it's more driven by availability of components and things like that are driving some of that growth. So it could help a bit there.
Okay fantastic. Thanks, so much appreciate the time.
Sure. Thanks, David I appreciate your questions, we'll take our next caller. Please.
Our next question comes from the line of Joshua <unk> from Cowen Your line is open.
Morning or afternoon.
Good morning, Thanks for taking my question I kind of want to follow up on that last.
Bonds. So it sounds to me like you're you're indicating that some of your customers you haven't been able to get.
Semiconductor parts have therefore withheld.
Some of your parts, rather than the electronics or transports.
Verticals is that sort of fair and is there any way to quantify how much of it.
Sure.
Not really.
Yes, I think thats, a challenging question to give a crisp answer to really if I look back in the last year or two years.
Our customers have absolutely been impacted on their ability to produce what they wanted to because of shortages in the supply chain that it clearly has been an impact.
As that begins to ease I think that will become less of an impact on that balances a little bit with slowing economies.
And overall demand picture. So we're not seeing some major freeing up if you will of demand that's coming from that.
But we know like in the passenger car side, we know dealer inventories are low and.
And that was really driven by the ability to produce products.
Vehicles. So we do think that will balance out and that will drive some of the cargo growth going into the next year.
But I think it's a little difficult to say otherwise.
Understood. Thank you.
Yeah.
I guess stepping back you've had a sustained period of growth above your organic target.
And we're going through sort of an inventory digestion period now but still.
Recent year over year growth.
I guess.
Stepping back it's been a bit since you gave that target is the 5% to 7% organic growth number is still the right way to think about how in a normalized environment you would expect the business to grow in 2023 technology.
The material outperformance the last couple of quarters. Thank you.
Yes.
When we when we put out a five year strategy, we talked about organic growth rates that we expected between 5% to 7% through the cycle and we know we operate within a cyclical industry.
So theyre going to be times, where we're well ahead of that 5% to 7% and there may be some times, where we're behind that 5% to 7%.
Depending on what's going on in the marketplace.
We feel very good about that five to 7 million.
Shaving or over achieving that over our five year strategic horizon.
And I think also it's important to kind of look at that last slide I think it was slide 18.
Talking about the resiliency of our business model. If you look over the 15 year chart.
And if you look at over the last five years. The last 10 years. The last 15 years, we have driven double digit topline growth and double digit bottom line growth. So I think.
Yes, certainly demonstrates the strength of our growth strategy.
And quite frankly, the resiliency of our business model.
The 5% to 7% organic growth you know over the horizon, we absolutely feel feel very positive about.
Okay.
Understood I appreciate the color. Thank you.
Thanks, Josh for your questions, we'll take our next caller please.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Our next question comes from the line of David Kelley from Jefferies. Your line is open.
Good morning, David.
Hey, good morning team. Thanks for taking my question.
The cost reduction actions that you're initiating in transportation can you talk a bit more about those.
The magnitude of that opportunity in the timeline of the process and also if you could just remind us I think mid teens.
EBIT margin is how you would think about the transport business longer term just wanted to confirm that that's still the case given sort of the.
The outgrowth opportunities you've referenced.
Sure Thanks, David and good morning.
Yes, I did mention.
Talking about some cost reduction actions that we've initiated it really is aligning our cost structure and really the production to what we're seeing in terms of the inventory levels that were managing through which we are which we are reducing as well as when we think about our customer and their digestion and unwind.
A little bit of inventory.
We've adjusted our cost structure to align to what we see our own production inventory levels being over the next few quarters so that.
That's why I would say, that's one element of it but adding to that I would say.
In addition to the impacts that we've had have been some other other things that we're doing we talked a lot about price and we continue to to really work with our customers and Dave mentioned earlier, while we are seeing some cost come down there is other costs that that still continued to be up there and so we still continue to help.
It's on price.
Coming back on a lot of the contracts there. So between that work that we're doing we expect margin to improve again in the fourth quarter and going forward.
Okay got it thank you and just on the mid teens EBIT margin target is that still how are you.
You all think about longer term just a quick follow up sorry.
Nope.
Thank you yeah, absolutely on the mid teens margin, we're still we're still aligned to that mid teens margin.
There's work to do and there is also some some market shifts that have to happen one day.
Is car production as an example is the lowest levels that it's been in a long long time and it's been there for three four years. So we definitely have to see some volume growth come back in a more meaningful way and then the other thing that's.
That's also weighing a bit on the margins a little bit is just the carling acquisition and as we continue to drive synergies there that's going to help us and that's going to move that trajectory back to our target of mid teens.
Okay got it. Thank you and then just one more follow up here slide eight.
Really helpful. Slide. Thank you the double digit outgrowth opportunity really a meaningful step up from from your historical targets in transportation you referenced your incremental product opportunities are you also seeing stronger market share than previously anticipated given the new business pipeline.
Reference.
Yeah, David I think thats.
That's certainly a positive storyline for us as we look at our content outgrowth.
And what I would say is over the last it's been kind of.
Kind of a messy a couple of years on demand and inventory builds and inventory kind of rebalancing that's going on now in the in the passenger car world, but if you look over the three years for the last three years, we have averaged outgrowth.
Double digit.
And thats been a step up for us what I would say, while we're seeing really strong performance and outgrowth within our traditional transportation definition from a segment perspective, we're also seeing dramatic growth coming from our electronics products.
Into vehicles, and that's driven by the electronic vacation, but it's also driven by electrification as well some of the technologies that we apply to EV applications. They don't all come out of our transportation segments. Some come out of our industrial some come out of the electronics portion of the business.
So that's really led to a an uptick if you will in the outgrowth performance and the good news is assigned wins we're seeing.
This year and have been winning over the last couple of years make us feel pretty good about continuing to be able to see that double digit outgrowth.
From a market share perspective.
And our traditional transportation areas I don't think we're necessarily seeing a lot of market share shift.
But we are seeing where we're picking up.
Market share in some of our electronic components into the auto space. So it's a bit of a mix there on market share, but also just contact cross there. So very positive story and we feel very good about.
Okay, great. Thanks, Thanks, a lot.
Thanks, David I appreciate your questions, we'll take our next caller please.
Your next question comes from the line of Luke junk from Baird. Your line is open.
Good morning, Luke.
Good morning, Thanks for taking the questions I'll ask a follow up question to start with on the sustainability of double digit outgrowth in.
Transportation and what I'm wondering about is in the past you've talked about multiples of content on EV and what I'm hearing. This morning is if we think just.
Cars in general in combustion cars that there might be some lifting content. So maybe if you could speak to that and then second on EV. Specifically is there a change in your assumption around incremental content or is it more the market share piece, that's driving the increase in outgrowth expectations. Thank you.
Yes.
I would say, yes, there is an uptick in content opportunity in traditional vehicles, particularly on the electronics side.
If we think about the electronic vacation of vehicles I would say that has been.
Yes, growing for us as well so the traditional vehicles, there's certainly content growth, but as we think about the content growth at the double digit level and now reaching kind of on an average vehicle across all types of vehicles and moving our content up to being average around $7.
Clearly the growth of EV.
The accelerated pace of EV adoption has helped drive that content story forward and upwards for us So there's gains for us on both sides.
Certainly I think there are larger gains on the electrification side than there are on traditional vehicles, but we're seeing gains on both aspects of it.
Okay. Thank you for that and then my follow up question, probably one four.
I was just hoping to animate the year over year margin walk in the sequential walk in transportation. So the year on year, you called out the 200 basis points of that.
FX plus Carling just wanted to better understand the other pieces that are driving the margin change and then similarly, if we look on a sequential basis sales fairly flat sequentially, but margins coming down just want to touch on that and then last piece of this in the fourth quarter expectation for a lift in the margin.
As cost actions Rolling I don't know if you want to put a finer point on that but just wanted to understand what's baked into guidance. Thank you.
Okay.
Ill go back in and then start on your questions. I think your first question was really an auto margins, maybe unpacking hey.
What's been going on a little bit about the margin trend.
So maybe a couple of things one you highlighted one of the things that I mentioned is quarter on quarter.
Q2, and Q3 definitely the stronger dollar impact and we've talked about this in.
In the past, but definitely impact this segment, especially in the automotive part of our transportation segment and so that was a 200 basis point impact largely with the euro just because of the global footprint that we have across that business. So that's that.
That was part one part two this combination discussion we're having about the inventory unwind two things happened as part of that when we talk about the tier one.
And the sales that we had in Q tier ones down with lower because they're they're digesting inventory that they have but that also means that production levels come down. So the combination of production coming down lets call. It a 100 basis points plus our sales volume.
A little bit lower even though really our content outgrowth story still holds true in the near term, we're going to see some lower sales of the combination of that that's also impacting margins and then I'd say the last piece is that we're working on and then price costs and I've talked about that a lot in the past several quarters. The fact that.
We are working on that.
Keeping pace with the cost increases just because of the timing of really going back and working on contracts and having to renegotiate them one by one so.
With the efforts that we're going through with the unwind only daily for a period of time and then with the ongoing synergy work, we're doing around Carling I would absolutely expect margins to start improving in addition to some of the cost reduction actions. We've taken as we go into the fourth quarter going forward.
Hey, David.
Thank you. Thank you I appreciate your questions, we'll take our next caller. Please.
Your next question comes from the line of David Silver from CL King Your line is open.
Good morning, David.
Yes, hi, good morning, Thank you.
My first question I guess would be about your <unk>.
EBIT margins on the electronics segment.
So I recall, maybe a couple of times over the past few quarters.
There was a comment about the sustainable level of margins, maybe being in the closer to the mid twenties.
And if I go back I think over the last five quarters right. So third quarter of last year up to today. This is kind of the fourth out of five quarters, where you have been meaningfully above that mid twenties threshold.
And I don't believe he made that same comment this time. So I'm just wondering first off what would you attribute to.
The relatively durable.
Margin strength in that segment and then how would you characterize.
The ceiling or the sustainable level.
Margins in that segment going forward. Thank you.
Sure.
So that's the way it I'll just I'll recap some of what you were commenting on for the past few quarters, what I've talked about I think that's four or five quarters that you noted is the fact that our electronics segment.
Given volume given the volume growth that we've seen giving given a lot of the price work that we're doing and especially because a lot of that segment is going through distribution and pricing, we're able to adjust and align pricing faster to market conditions.
Going through distribution, we've seen very strong margins coming that we are positive price cost.
When it comes to the electronics segment as well and what I talked about was given those dynamics strong volume of focus are around positive price cost I, absolutely expected the average margins to be in the mid 20% and I would say that even through that were now I think we're what I've talked about long term is we would think about that.
That electronics segment margin target being closer to 20% over time similar to Dave's comment when he was talking about overall company organic growth. We try to talk about margins also through the cycle and so for US, we know that especially in electronics because of business going through distribution.
There is there are times, where we see inventory rebalancing going on as we mentioned so we will see margins move around a little bit, but I would say.
That 20% long term target still holds for the electronics segment.
Okay. Thank you for that.
My next question would be about the C N K switch acquisition.
So apologies if I missed this during the prepared remarks.
Didn't recall, you calling out there.
That unit for maybe it's either it's EBIT contribution or its accretion impact on the third quarter.
So I was wondering.
What kind of quantitative.
Details you might share and then secondly.
I am wondering like longer term is the goal.
The acquisition to kind of keep that as kind of a.
Contained or separate unit, maybe even a fourth segment or if product breadth is important for capturing incremental business wins as I think you said a couple of times is this the case, where ideally that the functions within CDK switch would be integrated.
Good as appropriate into your other three segments, so maybe kind of the optimal structure of that particular.
Wired business going forward. Thank you.
David Let me take kind of the structural and strategic side of it can speak to the impact from a financial perspective, but the TNK switch business acquisition, we feel by the way very good about and the more we learn the more we like it.
And it's very crisp fit with our business and it really strengthens our ability to bring.
Broader offering to our core customer base.
It also enhances our position within our distribution partners in electronics, So the TNK business absolutely is rolling up.
Ambient integrated within our electronics business.
Now as we talked about.
In our passenger car sorts of comments TNK also has products that are being sold into automotive applications industrial applications.
As well as traditional electronics types of applications. So it is pretty broad, but our electronic components are that way and reach many end markets. So we're absolutely integrating it into our core business and have had meaningful steps in doing that already.
And we feel good about it we think these board level switching capabilities and the strength of their.
Micro stamping types of capabilities are very much.
Technology enabler for us as well so we feel very good about that it'll fit right into our business and it'll be fully integrated it will not be standalone. So maybe you can give a little color on the impact to the business sure.
So maybe echoing one of Dave's comments.
Really like being case, which is the more we learn about it and I would add it's been a very well run company. So much so that we talked about the fact, when we bought TNK switches.
EBITDA margins in the prior year of about 20% or so so for us as we think about margins even at that level. It is.
Big dilutive to company margins.
Diluted to electronic segment margins, we think where the opportunities are to to grow the margins will be on growth a lot of the reasons, Dave mentioned topline growth.
Let me go through there and also just as we consolidated within our business. There is always cost structure improvements that we can do.
Our goal in the next few years is really to align the operating margins of TNK to our company profile.
Target that upper teens level.
We don't work for us to do that in the interim I mentioned between the C and K acquisition and the <unk> acquisition.
The combination of those two dilutive about 150 basis points, but we see definitely the path to improve margins in the next few years.
Okay. That's great. Thank you very much.
We take your questions David we'll take our next caller please.
Your next question comes from the line of David Williams from Benchmark. Your line is open.
Hey, David.
Thanks for letting me ask a follow up here I just most of it's.
Been touched on here, but I did want to ask about about China, and just wondering if theres any additional color in terms of the softness youre seeing there any particular areas or even geographically if there is anything notable.
Pillar one.
Yes, I think primarily the softness there is driven by the end markets there.
That are served through our customer base and then when you talk about China talk about greater China.
So we probably have a higher <unk>.
Split towards consumer facing types of products that our customer base and greater China, and we know those areas have been impacted.
Earlier and more meaningfully so that that certainly has been a bit of a drag on the growth in greater China also just general economy is a bit soft in China and that the demand profile. There has softened with maybe the exception of <unk>.
We're past car has been reasonably strong.
<unk> growth in China, driven by incentives there.
But we think there is some caution in spending going on in China for sure.
Okay, great. Thanks, so much I appreciate the time.
Sure. Thanks, David Appreciate your final question, we will take our next caller. Please.
Your next question comes from the line of Joshua <unk> from Cowen Your line is open.
Hey, guys. Thanks for taking my follow up and let me back in the queue.
I wanted to follow up on the price and cost actions. It sounds like you're optimistic that they can support margin, but I was wondering you've given we keep hearing.
Industrial weakening in consumer continuing to be soft and.
And you're going through.
Got you.
Your distributors.
Have any of these.
Have any of these conversations changed materially over the last several quarters and what allows you the confidence that you should be able to get pricing to come down in line with costs.
At least in the short to medium term. Thank you.
First of all I would say for US we have not seen softening in the industrial side of our business.
I've seen that I've heard others speak to that as we focus very heavily on power conversion on.
Renewable energy HVAC and these sorts of key market drivers for us we have not seen softness as of yet.
So on the industrial side.
What are the kind of correct that view.
But from the pricing standpoint conversations really haven't shifted too much for us.
Clearly we've talked about some of the rebalancing of inventory with some distribution partners, but that's really about their inventory position not about in demand and their Pos is still holding up.
At a very solid level. So we continue to see end demand been been pretty good in the electronics side and through our distribution partner. So no. We really haven't seen a lot of shift in momentum in the discussion from a pricing standpoint.
Yes, and maybe just the last piece I'll add just one more on the cost side, Dave had mentioned this earlier, while it seems some cost come down as the other constant if not come down or in some cases going up right. When we think about energy costs and a lot of places.
Okay.
Our production.
Our own production cost there wage inflation continued so I would say that's another reason we're not we're.
We're not hearing a lot from people around that because we still see those inflationary increases going on.
Alright, Thank you I appreciate the color.
I appreciate your follow up question, Josh Thank you.
That concludes our Q&A session. Thank you for joining us on today's call and your interest in little P. As we look forward to seeing you during the Baird and Stifel conferences and talking with you again soon have a great day.
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