Q4 2022 Littelfuse Inc Earnings Call

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

Yeah.

And welcome to the little boost fourth quarter 2022 earnings conference call.

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

Yesterday, we reported results for our fourth quarter and a copy of our earnings release and slide presentation is available in the Investor Relations section of our website.

A webcast of today's conference call will also be available on our website.

Please advance to slide two for our disclaimers.

Our discussions today will include forward looking statements. These forward looking statements may involve significant risks and uncertainties.

Please review Yesterdays press release, and our 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 the highlights on slide four.

22 was truly an exceptional year for little tiers as we continued to expand our leadership in high growth end markets with significant new business wins and strategic acquisitions.

We delivered record revenue of $2 5 billion.

Up 21% over 2021.

Each of our business segments grew sales double digits.

Adjusted earnings per share was also a record of $16 87.

An increase of 28% year over year.

We launched our five year growth strategy in early 2021, and Thats what delivered strong performance within the first two years.

As shown on slide five.

Our strategy targets double digit average annual growth, coupled with sustained profitability and leveraged earnings growth.

We have averaged 32% revenue growth with organic revenue growth of around 20% and.

<unk> averaged adjusted earnings growth of 60%.

I am, particularly proud of our success as we navigate this unprecedented operating environment.

I want to thank our global teams for the hard work and persistent commitment to serve our customers and significantly grow our business.

I will provide additional color on our strong financial performance.

Moving on to slide six over the last two years, we have deployed approximately $1 billion in capital for acquisitions, adding approximately $500 million in annualized sales and further strengthen our technologies and capabilities and diversify the end markets the geographies we serve.

With the ongoing diversification of our business, we have expanded our addressable global market opportunities over $20 billion.

During 2022, we significantly advanced our strategic business initiatives.

Within the structural growth themes sustainability connectivity and safety.

We drove content and share gains in high growth end markets, both organically and through acquisitions.

We acquired Tnk's switches strengthening our global presence across industrial transportation, Datacom and aerospace end markets.

And then Beth expanding.

Expanding our software and firmware capabilities within transportation and industrial applications.

In addition, our integration of technology.

<unk> technologies is well on track.

And we made substantial progress capitalizing on strong demand across commercial vehicle end markets to drive significant growth.

Organically, we are investing to support continued growth in both the customer facing aspects of our business as well as in manufacturing capacity and productivity.

During 2022, we advanced our ESG program initiatives reinforcing our commitment to our long term strategy.

We set goals to increase our associate diversity and are proud of our progress shown on slide seven.

We believe our recognition by Forbes as one of America's Best Midsized companies and by Newsweek as one of its most responsible companies.

Further substantiates, our performance and the environmental social and corporate governance areas.

All of our achievements to date play a crucial role in building on our strong business Foundation.

The evolution of our capabilities to better serve our customers equips us to tackle new challenges and opportunities in the future.

We have a strong track record of achieving best in class results and expect to deliver ongoing performance consistent with our growth strategy.

Before we get into business design wins, I'd like to start with customer and market dynamics, we are seeing.

Starting with our channel partners, our electronics book to Bill continues to run below one pointed out.

We are seeing electronics distributors accelerate the reduction of inventory levels as supply chains and lead times normal.

We expect these inventory reductions to continue through the second quarter at current Pls levels.

Our industrial distribution partners are operating within normal inventory levels.

Within the end markets, we continue to see ongoing softer demand across various electronics markets.

<unk> consumer facing areas.

And telecom applications.

End market demand remains healthy across renewables, industrial automation and safety and electrification of vehicles and charging infrastructure.

We delivered solid performance with them passenger vehicle end markets during 2022.

However, this was overshadowed by unfavorable foreign exchange and inventory online at tier ones and Oems.

Absent these combined headwinds or automotive technology portfolio across all of our businesses outgrew the market by 600 basis points.

Considering the volatility of the automotive industry over recent years, we are proud of our long term performance.

Over the last three years, we have delivered double digit content outgrowth.

Looking ahead, despite our outlook for a flat global car build in 2023.

We expect to continue to outperform the market based on significant design wins in electrification and electrons vacation.

And.

Vehicle end markets, we continue to see stable demand across material handling agricultural and construction equipment and heavy duty truck and bus.

With our successful integration of Carling throughout 2022, we fulfilled a strong order backlog to achieve 20% growth over its previous standalone year.

We now see a short term inventory rebalancing of carling products at distributors and customers.

Nino will provide additional color on our outlook.

Now, let's move on to business design wins during 2022.

The global structural themes of sustainability connectivity and safety are complementary and are driving innovation and growth across the industrial transportation and electronics end markets we serve.

Given our diversified technologies and capabilities, we play a significant role in the advancement of these themes.

Within our industrial end markets on slide eight we.

We expanded our global leadership presence based on technical expertise and high performing technologies R.

Our capabilities are critical to enabling customers high voltage applications focused on sustainability and safety.

In renewables, our solar wind and energy storage systems, our companywide portfolio in a variety of new products won a significant business to grow our market share.

In the area of safety.

<unk> electrical standards require our application expertise and innovative solutions to achieve compliance with.

We substantially grew our market position with major restaurant chains and manufacturing companies.

Commercial and residential HVAC.

Systems are required to meet energy efficiency and safety standards, and our broad portfolio of secured a sizable business.

I should say and safety requirements also pertaining to electrical infrastructure motor drives power supplies factory automation and manufacturing equipment, where we grew our business.

Our product content and rates from new business wins, this increasing with leading customers and we expect this to continue based on our capabilities and intensifying focus on enabling applications around sustainability and safety.

Turning to our transportation end markets on slide nine our investments for growth extending our leadership position.

We are partnering with our customers to drive key developments in the electrification and electronic vacation of passenger and commercial vehicles.

Our joint collaboration focused on sustainability connectivity at safety drove significant new business.

Passenger vehicles, we continue to grow with major Oems based on our global technical support and <unk>.

Strength of our product portfolio as.

As a result, our average content across passenger vehicles has grown to $7.

Our ability to continue our growth is supported by our design wins across vehicle platforms, we secured over $550 million and new design wins over the life of the programs.

Over half of these new business wins are on electrified platforms.

We won significant business in electrification within battery management systems.

Voltage power distribution and onboard Chargers.

And electronic vacation, we captured a substantial business in Adas infotainment telematics and comfort convenience applications.

We also continued to expand our business traditional low voltage applications.

Our design wins extended pipeline of new business opportunities and expanding technologies for electrified platforms support the continuation of double digit content outgrowth.

In commercial vehicles, we made significant progress integrating heartland and see a broad range of growth opportunities ahead of us with.

We leveraged our expanded offerings to win global business with major Oems.

In electrification, we grew our business in trucks buses and two and three wheelers within battery management systems onboard Chargers powertrain control modules.

And broader commercial vehicle markets, we increased our product content and heavy duty trucks material handling construction and agricultural equipment and rail traction for screening.

For off board charging infrastructure to support passenger and commercial vehicles, our engineering capabilities and differentiated range of products such as power semiconductors.

Ladies and switches secured significant new business.

Overall electrification and electronic vacation are important themes in the transportation industry that are helping to reduce emissions and improve efficiencies connectivity and safety.

We are confident in our abilities investments in E mobility will strengthen our market leadership through greater product content and crop.

Moving on to slide 10 sustain.

Sustainability connectivity and safety of our drivers of growth in the electronics end markets.

We leveraged our global reach and broad portfolio further enhanced with TNK and Carlin.

Extend the relationship with the Oems to secure a multi technology business.

With the ongoing push towards energy efficiency and battery power, we won business in appliances and hand tools.

Greater connectivity requirements drove new business in data centers telecom infrastructure and building technologies and automation.

Our products are vital to safety and protection of human life, as we secured business for security systems, and a variety of medical devices.

We are extremely well positioned to expand.

Proliferation of our electronics content across a wide range of applications focus on sustainability connectivity and safety.

Our pipeline of new business opportunities is robust and expanded with our acquisitions.

We look forward to building on our collective market position.

With our various industry leading brands.

Our combined success of winning business will serve as a platform for continued growth.

Our new business wins represent a diverse range of end markets applications and geographies.

We also continue to build the pipeline of identified new business opportunities as we see our customers' engineering teams returned to focus on new product development.

Now the customers have worked through many supply chain challenges they have pivoted back to new design in activity, which has accelerated.

We are well positioned within this design rich environment, which will drive long term business plans.

We fully expect that the organic growth from both new business activities, coupled with our acquisitions will enhance and sustain our long term growth.

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

Okay.

Thanks, Dave Good morning, everyone.

And thank you for joining us today, let.

Let's start with slide 12.

Revenue in the fourth quarter was $613 million up 11% versus last year.

Sales were up 4% organically after adjusting for acquisitions foreign exchange and last year's 14th week.

GAAP operating margins were 15, 4% and adjusted margins 17, 4% expanding 40 basis points versus last year.

Fourth quarter GAAP diluted earnings per share.

$3 74 and.

And adjusted diluted EPS was $3 and 34.

Up 6% over last year.

Turning to slide 13, we finished a record year with sales of $2 five $1 billion up 21% versus last year.

Sales were up 11% organically after adjusting for acquisitions foreign exchange and last year's 14th week in the fourth quarter.

GAAP operating margins were 19, 9%.

Adjusted operating margins finished at 21, 6% and adjusted EBITDA margins were 26, 4%, both expanding 250 basis points in the year.

Incremental operating margins for the year were 34%.

And this is the year positive on price cost continuing to demonstrate the value we bring to our customers, while managing our cost structure.

GAAP diluted.

With $14 94.

Adjusted diluted EPS was $16 87.

Up 28% versus last year.

Our full year GAAP effective tax rate was 15, 7% and adjusted effective rate was 17, 4%, finishing slightly better than our expectation.

Our business model amplifies the continued strength of our cash generation.

For the year operating cash flow was $420 million and free cash flow $315 million both records for the company and grew 12%.

Our free cash flow conversion from net income was 84% a bit lower than our historical trends as we've maintained.

Inventory levels aligning to our customers' needs and supply chain chat again.

We have a strong balance sheet and capital structure, ending 2022 with over $550 million in cash on hand, and net debt to EBITDA leverage of one two times.

Yes.

Ongoing flexibility to continue allocating capital for both growth and return to shareholders.

During 2022.

Vested over $600 million back into our business through strategic acquisitions and capital expenditures.

And we returned $56 million.

Shareholder.

Im going quarterly dividend.

Let's move to fourth quarter and full year segment highlights starting with electronics on slide 14.

Within the quarter organic growth was 2% we.

We saw continued strength across industrial end markets and electrification themes.

Partly offset by softer demand across various electronics end market.

You also saw an increasing trajectory and channel inventory reductions as we exited the quarter.

We ended the quarter with operating margins, just shy of 25% expanding 160 basis points versus last year.

Yes.

We capped the year with organic revenue growth of 12%.

Margins finished at nearly 29% for the year and adjusted EBITDA margin at 33, 5% plus expanded 500 basis points versus last year and well above our segment target range.

We finished the year positive on price cost as our team balanced price increases to offset ongoing inflationary costs.

Yes.

Moving to our transportation segment on slide 15, our passenger vehicle business.

5% organically in the quarter and was down 1% for the year.

Our content growth for the year was masked by customers continuing to reduce inventory levels.

Within commercial vehicles sales for the quarter were up 7% organically and up 9% for the year as we delivered on content growth, while leveraging strong end markets.

We thought a sequential sales decline into the fourth quarter largely from our Karli.

Following several quarters of strong demand from pent up backlog.

<unk> fourth quarter slowdown from common customers also adjusting their inventory levels.

Within the quarter operating margin it is slower than our expectations at three 5%, but we maintained double digit EBITDA levels.

Margins were weakened by 200 basis points.

Unfavorable foreign exchange effects as well as excess costs from lower production volumes.

For the year operating margins finished at nearly 9%, while adjusted EBITDA margins were a solid 15%.

We continue to focus on both sides of the price cost equation implementing price actions to cover ongoing inflation and reducing costs to better align our operating structure to expected volume.

We expect margins to progressively improve in the coming quarters.

On slide 16, our industrial segment had another strong quarter of double digit organic growth with organic sales, finishing up 20% for the year.

We continue to see strong demand across most end markets the number of wins, new and higher growth end markets.

Operating margins finished at 16% for the year and adjusted EBITDA margins close to 19%, both expanding 700 basis points.

Our teams are focused on continued operational execution aligned to the volume growth and pricing actions to offset inflationary trends.

Turning to the forecast on slide 17, I'll start with our view of the market landscape.

We're seeing a broad range of signals across our end markets ranging from continued growth across E mobility themes industrial and commercial vehicle markets.

Also by weakness across many of our electronics end markets.

We expect increased inventory rebalancing at our distribution channel partners continuing through the first half of this year.

<unk> our electronic segments.

We also expect a continuation of customer inventory reductions affecting our transportation segment.

Inflationary trends continue largely a resin based materials and energy costs and wages with some offsets from reduced transportation costs.

With this backdrop, we expect first quarter sales in the range of $575 million to $605 million.

At the midpoint, that's a total sales decline of 5% and organic decline of 11% versus last year.

We expect sales to decline across both the electronics and transportation segments due to the inventory reduction at our customers and channel partners.

We expect a partial offset with growth in the industrial segment.

With projected adjusted EPS to be in the range of $2 73 to $2 97.

It includes a 19% tax rate.

As a reminder.

First quarter last year with a record for the company due to mix and elevated backlog and a much more robust macro environment.

Create a challenging comparable for the first quarter of 2023.

Sequentially, we expect first quarter adjusted earnings to decline, 15%, reflecting the segment mix of electronics sales declining sequentially, partially offset by sales growth across industrial and transportation.

Turning to slide 18, I'll add some color for the full year 2023.

Last quarter, we estimated foreign exchange to have a $15 million negative sales impact for the full year.

At current rates, we don't expect foreign exchange to have a material impact to our 2023 sales or earnings.

For the year, we expect to maintain our company average operating margin within our long term target range of 17% to 19%, but may vary by quarter out of the range.

By segment, we are projecting electronics operating margins to average over 20%.

Industrial in the upper teens and transportation.

Improving through the year with double digit operating margins in the back half of the year.

In addition, we're projecting $64 million in amortization expense and about $40 million interest expense at current interest rates.

We're estimating our full year tax rate of 18% and we expect to invest $110 million to $120 million.

And capital expenditures.

In summary, the continued broadening of our portfolio and end markets and geographies have enabled us to drive profitable growth across the company while.

While we may see some near term macro weakness and customer inventory reductions impacting parts of our business. We will continue balancing both the short term and the long term.

Our near term focus will be on margin optimization prioritizing our transportation segment.

And our long term priorities remain investing for content growth and share gains to high growth end markets.

Our strong balance sheet and cash generation ability gives us the ongoing foundation to invest for value creation.

Like to thank our diverse teams and partners around the world for their innovation capability.

Dedication driving a record year for our company.

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

Yes.

Thanks.

In summary on slide 19, our talented associates investments for growth and operational excellence.

Livered record performance in 2022.

Our track record of double digit sales and earnings growth over the last 510 15 years speaks to the resiliency of the little juice business model and the strength of our growth strategy.

Over this time, we have expanded our leadership presence in high growth end markets technologies, and geographies, which has diversified our business and improve the resiliency of our profitability.

But we may see some near term market challenges, we are better diversified today and have honed our playbook to successfully manage through dynamic environments.

Our experienced teams investments in diversification.

This should allow us for continued growth and will deliver ongoing substantial value to all of our stakeholders and with that I will now turn the call back to the operator for Q&A.

At this time, if you'd like to ask a question simply press Star then the number one on your telephone keypad. Our first question will come from the line of Matt Sheerin with Stifel. Please go ahead.

Good morning, Matt. Thank you Hey, good morning.

That's the first question.

Regarding the outlook for the electronics business, you're talking about channel inventory correction.

Could you give us an idea of what the channel inventory look like versus normalized levels.

And what makes you think things are going to sort of bottom out in Q3 Q2.

Distributors are talking about having elevated levels up again this quarter. It sounds like it's going to take longer for them to work it down so what kind of visibility do you have into that.

Sure. Thanks, Thanks, Matt.

Yes, we've talked historically about the fact with our electronics distribution channels that kind of on average across the globe and across the different types of distributors 14 to 17 weeks was really kind of our normal range that we choose to operate.

And what I would say is that.

It varies our weeks of inventory varies across the product lines. We have some of our core product lines that are a couple of weeks above that range. We also have some other product lines like our power semiconductor products that are on the bottom end of the range.

And have really strong backlog, so it's a bit of a mixed bag between.

But clearly there is accelerating actions by our distribution partners to drive their inventory levels down.

I know you're wrong calls with with Avnet.

And <unk> released today and obviously their inventories are pretty high.

Right now.

While our distributors booked.

Book to bills are slightly below one.

POS is still hanging in at a pretty good level. There. So it kind of all of our views are really based on where are we at the current Pos levels across the globe.

And how does that drive our inventory actions for US obviously, you saw a little bit in the in the fourth quarter, where there's actions be cannon began to take place. So already inventory corrections were taking place in the fourth quarter. Yes. There is certainly accelerating into the first quarter.

That's our current view of the current Pos levels and things like that should work our way through that through the kind of the first half of the year.

But the reality is as you know cycles.

Kind of difficult to predict and it's been a pretty.

Unpredictable last two or three years and it may be unpredictable this year as well that's why we're kind of really look at one one quarter out.

Okay fair enough.

And then regarding the operating margin guide for the year of 17% to 19%.

Turning off the low 16% range.

Youre guiding here.

And I would think that electronics would continue to be depressed or even maybe margins down.

In the June quarter.

So what's going to drive those margins back to that 17% to 19% range.

Sure. Thanks, Matt.

In part of lines to what Dave just talked about right, which is as we as we look out we look out at the landscape at current dynamics and current Pos level, specifically around electronics, we would expect from where we sit today couple of quarter continuing of inventory destocking, but it's.

<unk> levels continue to remain where they are.

We would see improving margins.

As our sales aligns to that the other thing is in some of our prepared commentary I talked about improving transportation margins.

And also talked about really maintaining margins within our target range across our industrial segment. So the combination of all of that gives us confidence when we think about total company aligned to that to that range on average for the year.

Okay. That's helpful. Okay. Thanks, Thank you very much.

Thanks, Matt we'll take our next question. Please our next question will come from the line of Luke junk with Baird. Please go ahead.

Good morning, Tricia, Thanks for taking the questions everyone.

Wanted to start with the margin question on electronics in more of a mechanical question really can you just help us understand how that business should flexes growth turns negative here to start 2023, specifically.

Are there any differences between the passive side of your portfolio in the semiconductor business I know the why there is some higher capital costs. So just wanted to understand the margin dynamics given yourselves got it. Thank you.

Yes.

Overall across our electronics segment margins the margins in that segment are the strongest across the portfolio. So when we see.

Flexes up and growth, we get very strong Incrementals and then the opposite happens on the decremental side. So there are different bearing margin ranges across all of our products, but in general we just look at the electronics segment in aggregate and no debt compared to maybe other parts of our portfolio like transportation or <unk>.

Australia stronger Incrementals and so also on the flip side, some higher decremental margins and.

I know those are some of the questions about Q3 to Q4, we see that Q4 going into the Q1 forecast and that's really what we're seeing there we see that sequential sales decline going into the first quarter.

Okay. Thanks for that.

Staying with margins.

Just to the level of growth that you are contemplating to get to high teen margins in the industrial business. This year I know you've been targeting that longer term just wanted to understand growth dynamics and to what extent integration, especially heartland as being essentially reflected in that commentary as well incrementally. Thank you.

Sure Let me just yes, hi.

A high level as we think about segments, we talked about from where we sit today. The industrial markets remained strong so we remain positive on.

On that on that segment to where we sell into industrial markets.

We're confident in our our above market content outgrowth coming through across transportation, we think that that'll be solid as well.

Even across our electronics segment, right, where we're selling into a lot of markets that cover electrification to cover industrial markets et cetera, we expect to continue that to be.

And what we're seeing today, coupled that with ongoing work that we're doing across carlin with synergy realization with C. N K synergy realization and just in general work that we're doing around the transportation margin profile. Overall, that's really what continues to give us confidence in that and that 2000.

<unk> targeted in that 17% to 19% range.

Okay ill leave it there thank you.

Thanks, Luc will take our next question please.

Your next question will come from the line of Joshua Buchalter with Cowen. Please go ahead.

Good morning, Josh.

Hey, good morning. Thank you for taking my question and congrats on the record 2022.

I wanted to.

Holding specifically on gross margins you gave a lot of helpful color on the op margin line I was hoping you could.

Little guidance on what we should be modeling for gross margins, particularly as it sounds like your utilization rates are coming down and there is inflationary pressures.

Trying to understand the trajectory of that line and what that implies for opex for the year.

Yes.

Usually provide any specific guidance around gross margin. So I'll come back to what I was talking about with.

There are different segments.

In general when we think about stronger growth on the top line with the capacity that we built across our network across the company, we tend to see good variable margins stronger across electronics with the with the higher margin profile, but still very very solid across our transportation industrial so when we.

The margin profile into being good that comes through the gross profit line I would say just some opex commentary in general.

Past few years.

On the sales growth we've had we have definitely leveraged.

<unk> had good leverage on Opex and we have not like other companies you hear out there we didnt add to the same level as others did so we feel pretty good about our opex levels. We continued to invest for organic growth trajectory short term and long term, but we'll continue to monitor the situation and the broader environment, we have to make.

Adjustments in Opex will do that.

Got it no. Thank you I appreciate the color.

And I guess I wanted to also on the channel digestion topic.

Inventory.

It's well above where you've typically run but it's also a very different environment. After a couple of years of shortages and you've done a bunch of acquisitions.

I guess, you mentioned where levels are in the channel and what the target is there can you provide any similar metrics of how youre thinking about your <unk> inventory and where we should expect that to move the next couple of quarters. Thank you.

Sure I think that's a great question and yes, I think the challenge that we deal with.

Many of our customers deal with us it's been a pretty volatile time over the last two or three years and there's still a lot of volatility going on.

In the fourth quarter with the.

The COVID-19 situation in China, and major disruptions going on there that took place to come in the fourth quarter seems to be rebounding nicely. After people are coming back after Chinese new year.

I think the question Mark for ourselves to as demand.

<unk> to be still relatively robust on us.

What level of increased inventory do we carry versus maybe our historical norm.

Keeping in mind that we do.

We like many many.

Of our customers that have their peers a lot of an increase in inventory is not volume related cost related because we've done a lot with a lot of inflationary cost in our materials and our components that were acquiring so there's a big step up that takes place just not involved but actually just in the inflationary costs.

So that's reflected in the higher level.

But also volumes are up as we've kind of dealt with higher demands and that volatility.

For sure. It's an area that our teams are working on and we would hope over the course of the year to begin to burn that level down.

To get.

Begin to kind of come back to a more normal environment as we kind of exit the year. Thanks, Thats, an opportunity for us and our teams.

That's really helpful color. Thank you.

Thanks for your questions Josh.

Our next question will come from the line of David Kelley with Jefferies. Please go ahead.

Good morning, David Hey, Good morning team, maybe also a follow up on the margin discussion from my end and specifically the electronics segment margin youre guiding to above 20% for the full year really impressive in light of the channel Destocking. So if we take a step back can you walk us through what has changed structurally in your electronics.

Business.

Set you up in this destocking period versus prior.

Cycle downturns.

Sure. Thanks, Yeah. Thanks, David Yeah, and you know a lot of it I have been talking about the past several quarters right. There. There's a lot of structural work that we've done over the past few years.

We've added capacity, we get to the point, where we've added capacity and we've been able to improve our output through the capacity we have so.

Financially what that does is it helps us drive better margins you can you can drive more production more capacity out of your same footprint. So that's been a positive.

As always we don't talk about all this anymore, but we've continued to do footprint work through the past few years, so versus where we were in 2019, we've got a more streamlined footprint.

A lot of things we've done we had talked about that as part of the <unk> integration and that was the last piece. So thats help there and then you know other other work and you talked about productivity initiatives, which are part of our DNA of things that we've done. So a lot of that has definitely helped and then the last piece is weak.

Gone through a couple of years now of price realization really to offset some of the inflationary pieces and yes.

I would expect that we'll get back to some normal.

Trends in pricing that it'll be a little erosion, but I don't expect that to happen.

Alright, it quickly and we still feel good about where we are today.

Okay got it thank you.

Last point.

Can you still be or do you expect it to be positive price cost in electronics in 2023.

Or should we model that rolling over a bit this year.

Yeah.

From where we sit today around our thoughts on both pricing and where inflation is going I would say from a company perspective will probably be closer to neutral again, that's where we sit today.

<unk> talked about in the prepared commentary there's still pricing.

That we are going after with customers because our costs continue to go up so there is pricing there, but not necessarily on the electronic side.

Okay. Thank you and then maybe if I could squeeze in one more on the transport business and I appreciate the color on the ongoing customer inventory unwind there.

We're starting to see signs of supply chain improvement in autos.

Bling, some some better production and capacity utilization so.

Part of that.

Where are we in the process with the customer inventory unwind.

The visibility to that.

Into 'twenty three.

Yes.

Clearly, we also see that in talking to our customers that some of their limitations on supply chain and are beginning to ease theres still some out there, but some are using and that's a positive sign certainly.

We've gone through a fair amount of inventory rebalancing.

Passenger car business in the course of.

2022, and what I'd say is we're through the bulk of it.

We do expect to continue to see some inventory correction.

In the first quarter, maybe it bleeds into the second quarter, but for the most part we see working our way through it in the first quarter.

But we're through the bulk of that in the passenger car side.

We mentioned in the prepared portions as well on the commercial vehicle side. We also saw where there is some inventory rebalancing, particularly on the Carling products. So the Carling business we acquired.

I mentioned it but.

If you take our Carling business in 2022 compared to the Standalone year under the previous ownership.

We grew that 20% last year, which was very significant.

When we acquired the business it came with a really strong backlog.

The teams worked very hard to ramp up production and capabilities and that's one of the values that we bring sometimes through acquisitions as the disciplines and the ability to drive things at the factory level and we were quite successful at doing that and and grew that business, 20% from when we acquired it.

So customers have been dealing with long backlogs there prior to our acquisition, we've cleaned that up and then the customers and distribution partners. There have reached that point, where okay, well now lead times are significantly lower.

You guys are delivering very rapidly on that so therefore, theyre pulling back a little bit on inventory too we see that also kind of.

Impacting continued impact.

In the first quarter as well.

Okay got it.

Thanks, Steve.

Yes, Thanks, David for your questions I appreciate it.

And as a reminder to ask a question. Please press star one our next question will come from the line of David Williams with benchmark. Please go ahead.

Morning, David.

Good morning.

Congrats on navigating the difficult environment here.

I just had a couple of quick things.

Okay.

Okay I'm sorry.

Yes, we can hear you okay. Good good.

Not to the.

The proverbial a dead horse here on the inventory.

Kind of curious if you will see or.

Maybe a change in rationale from your customers in terms of the levels that they carry.

And if were burning inventory back down to maybe an elevated level that they are hearing now versus what would be a normalized.

And just kind of how you think about how you think about.

Those levels and move on.

Yes, I think I think it's a great question a question, we ask ourselves and we talk with customers often and we when we talk with our distribution partners and what they're seeing within customers.

Yes, I think it's our assertion right now that in customers.

We carry a bit elevated inventories compared to they were pre pandemic.

We're not going to carry at the level they've been operating in the last few months, so theres going to be some bleed down to that that's certainly impacting our business, but our current assertion is there'll still keep a bit elevated because of.

The volatility we've experienced which is.

It's been many different aspects that have impacted it certainly got kicked off by COVID-19, but many other aspects whether it's.

Fires and semiconductor fabs in Japan, or or freezes and taxes and things like that there's not a lot of volatility and so I think.

Our belief is that there will be slightly elevated inventories that are in customers carry for the foreseeable future.

Okay very helpful. Thank you.

And then maybe secondly, and you touched on China, just a bit earlier and it sounds like youre seeing some indications of a recovery effort.

In this new year, but just maybe curious about that geography, how you're thinking about demand trends there and is that an area that could be potentially maybe a little stronger than what youre thinking now.

Economy recovers.

Yes, I would say, it's a bit early.

Kind of.

Take much of a position on that.

Certainly in our own factories, and our own suppliers as <unk> been kind of our core customers we're dealing with.

The rebound in returning.

Employees after the lunar new year has been pretty positive and has had kind of a <unk>.

Surprisingly robust in some ways there was nervousness about that so we're seeing that as a positive sign of things certainly on our teams our teams in China have been phenomenal in dealing with.

Situation of early.

In 2022, having zero COVID-19 policies too.

You know in the back half of it back into the year were very high percentages of employees.

Covid and dealt with those disruptions our teams managed through that really effectively with the strength of our teams in China.

And it's kind of recovered relatively quickly.

So I guess I would say how does that impact potential demand in China in the back half of the year.

Well I'd say as.

I'm hopeful we're hopeful that that might pretend that there could be.

An improvement in demand in the Chinese market as the year goes on but I think it's kind of early to call that for sure.

Thanks, so much.

Well take your questions David we'll take our next caller please.

Your next question will come from the line of David Silver with CL King <unk> Associates. Please go ahead.

Good morning, David.

Good morning, Thank you.

So a few questions.

And I'll I'll copy my predecessors reference to maybe risking beating a dead horse but.

There was a question about Decrementals and I believe it was related more to the electronics segment, but when I look across all of your segments chain.

Change in revenue versus change in operating income <unk> <unk> to <unk> I mean, there was a.

And have a pretty high detrimental in each of those segments. So.

I was just wondering if you could take a step back and maybe.

Described some buckets.

Where I don't know mix issues or.

The lower volumes and transportation, but overall I mean, what what do you think were the key elements in kind of 70% or so decremental kind of companywide <unk>. Thank you.

Sure David.

Stepping back and just some of the questions, we've got but if I aggregate at all.

Versus where we were a quarter ago, we definitely saw some additional and accelerated destocking in some areas David has been talking about.

About the channel Destocking, we saw definitely accelerated as we got through the quarter going into Q1, and I talked about earlier, the fact that with electronics being our strongest margin segments like the decrementals on that also tend to be higher than the company average so that's one.

I also talked about the fact that we saw continued destocking in auto and new Destocking as we got into the end of the quarter with Carlin customers because of the strong backlog and we were able to meet all of our customer demands.

That also had an incremental reduction as well so when we talk about this element of Destocking what does it mean that the combination of the fact that <unk>.

Sales come down we're producing less and in some cases, the environment changed pretty rapidly within this past 90 days or so so you've got a sale.

Sales dropping and you've got what we call stranded production costs as you'll be asking youre trying to react very quickly, but you're watching this all happened realtime. So with all that that additional production costs I would say the last piece also on our industrial segment and we have the same thing happened last year. The team really try to pull in shipments out of China before the Chi.

Many of the new year.

Good thing given everything that had been going on and so we incurred some extra logistics costs in that period that doesn't get washed out with additional sales in the next quarter. So it's really it's really the combination of those I'd say, that's the 80 20 due the whole mix.

Great. Thank you.

Next question would be about the comment I guess regarding design wins for off board charging.

And my recollection is you have discussed that opportunity in terms of tier one tier two tier three where the lower two tiers kind of single digit dollar opportunity per unit, but.

The the highest tier.

As you know a triple digit dollars or more per unit. So.

So I was just wondering if you could characterize the overall quality of your design wins in terms of the percentage that might be in that highest highest dollar opportunity tier and then secondly, any idea or any sense of.

Timeline or win that design win in that area kind of converts into production shipments and revenue. Thank you.

Yes.

It's a relatively complex question because of the dynamics in the types of customers that are engaged in the on off board charging and things like that.

Some of them are moving very rapidly and there. They are design cycles are relatively short can be a year or so.

From design to revenue more typically has a couple of years there tend to be long design cycles in that space.

So it can be I would say design into production there one to two years I think thats, probably a generally a good way of looking at it.

And it's evolving differently in different regions of the world.

As well so I think we have kind of a healthy mix.

We're focused on level, two and level III.

Level, one the opportunities yes, there is a little bit there, but that's not our focus it's level two and level three level two by far the highest volume space and opportunity and we continue to look for are there additional technologies that we can bring to that space.

And expand our Tam even within the level two charging as well as level III.

Level III, obviously per unit the content opportunity is significantly higher.

The design intensity tends to be much higher at the level III charging.

Because these are pretty complex systems.

That require a really strong coordination between the systems within the unit.

And so they require a higher level of engineering engagement.

So I would say we're spending.

Higher level of time there.

Because of the complexity of what it takes to support those sorts of design wins.

I think we're well positioned we are working very.

Crisply with with all the leaders out there and then the really long tail of a lot of players who are not the leaders of the industry that we support.

In other ways. So we feel good about the engagement, we think theres more things, we can do to expand our Tam within those applications as well.

Okay, Great and then last question would be Big picture question, maybe about China and not so much the lockdowns that reopening, but I think the during the fourth quarter of the current presidential administration.

Issued.

<unk> set of restrictions on technology trade with China.

And I was just wondering from your perspective, how that may have affected.

Your business or that are your customers. So my guess is not not too directly but maybe there are some indirect.

The factors that you have to adapt to in terms of supply chain or customer maybe your.

<unk> have to make some adjustments in that.

Extended some some delivery dates, but just broadly speaking how has the prospect for a longer term.

Set of restrictions on technology trade with China, how is that.

Flowed through Youre thinking about operating your business.

Prospects, let's say over the medium term. Thank you.

Sure.

First and foremost.

The enhanced restrictions that have taken place and even now that seems to be agreement in the Netherlands and in Japan on further restrictions on tool sets and things like that into China.

They have no direct impact on us.

The technologies that we produce in China sell into China, and we tend to be on on the power side protection side of things from a technology.

They are really good technical here, but they're dealing with high voltage and voltage withstand which means you operate in a much different way than you do in the really the high end logic sorts of applications. So.

Lines and features in our world are quite large most of the restrictions that are taking place are on either more advanced really small features in semiconductors and enable some of the advanced logic based types of technologies.

The World, we play out so from a direct perspective, it doesn't impact us.

From selling into the customers I would say the areas that kind of start getting hit the hardest are at really the high end electronics and communication side of things those sorts of areas, we sell into those spaces.

Sumer facing is not a big a big.

Outsized portion of our business. So we don't see that impacting us hard.

So overall I would say.

The challenges in the political geopolitical environments are not a positive outcome, we'd like to see those.

A little more.

Compatible and working between the regions for.

For the long term, but in the near term, we don't see any meaningful impact to the business.

Okay.

Great. Thank you very much I appreciate it.

Thanks for your questions David that concludes our Q&A session. Thank you for joining us on today's call and your interest in little views. We look forward to talking with you again soon have a great day.

Okay.

Okay.

Yes.