Q2 2023 Littelfuse Inc Earnings Call
Good day, everyone and welcome to the a little to second quarter 2023 earnings Conference call today's call is being recorded.
At this time I'd like to turn the call over to head of Investor Relations Trisha pump. One. Please proceed.
Good morning.
And welcome to the little period second quarter 2023 earnings Conference call.
With me today are Dave Heinzmann, President and CEO , and senior Executive Vice President and CFO .
Yesterday, we reported results for our second quarter and a copy of our earnings release and slide presentation is available in the Investor Relations section of our website.
A webcast of today's conference call will also be available on our website.
Please advance to slide two for our disclaimers.
Our 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 highlights on slide four.
While our second quarter financial results were below our expectations. Our global teams delivered solid results driven by our strong operating fundamentals within an ongoing dynamic environment.
Design in activities remain quite robust and we secured significant new business and sustainability connectivity and safety applications and continue to advance our strategic investments in high growth end markets.
Our strong overall performance to date in 2023 reflects the resiliency of our business model.
I am confident with our diverse technologies and capabilities and the strength of our execution continue to position us to deliver on our long term growth strategy.
Together, our global teams have achieved significant performance within our strategy.
And I want to extend my gratitude to our associates for their unwavering dedication and remarkable contributions.
Nino will provide additional color on our financial performance and outlook.
As announced in June we entered into a purchase agreement to acquire a 200 millimeter wafer fab located in Dortmund, Germany from Alma semiconductor.
This acquisition is an important element in our long term growth strategy for power semiconductors Quito.
<unk> sustained success in expanding our portfolio of technologies and growing internal capabilities to enable us to meet the increasing demands of our customers.
In high growth power conversion applications.
This strategic investment will expand our long term business opportunities and industrial end markets like renewables energy storage automation motor drives power supplies and E mobility off board charging infrastructure.
<unk> fab will complement our current footprint, adding a highly skilled technology team extensive 200 millimeter manufacturing and development experience.
And then an efficient high quality wafer processing operation.
We're excited about the future prospects with our combined teams and capabilities, which I am confident we will continue to position us for long term profitable growth consistent with our strategy as shown on slide five.
Okay.
On to sustainability, we recently published our 2020 to report which is available on our website slide six provides an overview of our 2022 highlights.
We believe we have responsibility to our customers employees investors and the communities, where we live and work to conduct our business in a thoughtful sustainable way.
I am proud of the efforts of our global teams, who everywhere every day helped to create a culture that embraces diversity, both solutions and sustained success as we make ongoing progress on our continuous improvement journey, which will continue to play an instrumental role in the growth and advancement of the company.
We are proud of our achievements and remain committed to the long term value of our robust ESG strategy.
Before we get into business design wins, I would like to start with the market and customer dynamics, we are seeing taken.
Taking a step back our company's end market exposure remains highly diversified balanced and broad.
Where we are selling into industrial markets. We are seeing strong growth across passenger vehicle markets, we achieved double digit content outgrowth across our product portfolio.
<unk> activity remains robust and we are capturing new business with our differentiated capabilities and intensifying focus on enabling applications around sustainability connectivity and safety.
Our execution is accelerating the rate of new business wins, and expanding the product content with leading customers, which positions us well for the future and market demand remains healthy across many of our end markets. We are seeing value creation and strong demand driven by our strategic positioning within renewed.
<unk> industrial automation and safety medical specialty high end power supplies cloud computing to support artificial intelligence applications and electrification of vehicles and they're charging infrastructure.
We continue to see inventory destocking across parts of our electronics commercial vehicle businesses.
With our lead times coming down and current POS levels. We expect this to continue through the year as customers adjust their inventory levels to a more stable demand.
Given that many of our end markets are in a growth trajectory. This will continue to help moderate the transitory destocking that is taking place.
I am, particularly proud of our strong year to date performance as we continue to leverage our sound business fundamentals to successfully navigate the bearing end markets and inventory management trends across our businesses.
Our global teams remain focused on driving long term growth profitability and cash generation.
We continue to actively manage costs to align to business conditions, while also advancing our strategic initiatives across the industrial transportation and electronics end markets, we serve demonstrating our ability to balance short term cost optimization and long term strategic investments.
Looking ahead I am confident that our global execution will deliver long term best in class financial results consistent with our growth strategy.
Now, let's move on to business design wins during the second quarter.
For industrial end markets on slide seven our leading technologies are critical for empowering greater sustainability and safety.
Ongoing focus on renewables is expanding the requirement for our reliable products.
During the quarter, we leveraged our deep customer relationships and technical expertise to secure significant business and combine or boxes for solar and battery storage systems given.
Given the breadth of our product portfolio. We also see substantial new business opportunities related to government funded initiatives and infrastructure investments that support electrification. We won business with several of our solutions for a construction project for a battery plant the major automotive manufacturer.
Our high power solutions captured business with customers and their energy management systems.
Within industrial safety, our leading product performance and application knowledge want us additional business for commercial kitchens with major retailers.
We also grew our business in HVAC and industrial motor drives based on our customer relationships and expansive offerings.
Our differentiated capabilities position us well to partner with customers to meet their increasing requirements than the global structural themes of sustainability and safety, which will continue to drive our long term growth.
Turning to our transportation end markets on slide eight.
We continue to see meaningful product content opportunities driven by the ongoing push towards greater sustainability connectivity and safety.
In passenger vehicles, our new business opportunity pipeline is robust given the increasing complexity related to the electrification of platforms.
During the quarter, our differentiated high voltage product features and technical support delivered wins for onboard Chargers and high voltage power distribution.
For our electrical sensor products, we are seeing intensifying design activity for battery management systems and drive applications.
Our technical capabilities and innovative solutions won significant business with a multinational automotive manufacturer.
We captured business by leveraging our proprietary technologies and unabashed designs to grow our presence in conventional low voltage applications.
Within electronic vacation as it relates to safety, our design expertise and broad portfolio of one business within in cabin cameras and for hands on detection applications.
Okay.
Across commercial vehicle applications within electrification, our design capabilities and innovative solutions secured significant business for high voltage power distribution modules and construction equipment and battery management systems in two and three wheelers.
And broader commercial vehicle markets with our local engineering support we continue to increase our product content and agriculture equipment applications.
EV charging infrastructure expansion efforts continue to accelerate with the electrification of transportation applications.
With our broad range of solutions, we secured significant global business with our power semiconductors electronic components and fuses.
<unk> from our western automation portfolio further expand our new business opportunity pipeline.
Given the intention to make charging infrastructure more accessible and widespread on a global scale, we're extremely well positioned where their comprehensive technologies to participate in the proliferation of stations worldwide.
Okay.
Moving on to slide nine and electronics end markets. We continue to engage in very robust design activities customers focus on meeting future needs across the structural growth things of safety connectivity and sustainability.
Our global reach and superior design support our accelerating demand for our reliable products.
We went and global business for life saving medical devices across multiple applications, including a wearable <unk> and an implantable device.
Connectivity requirements are driving wins across data centers, including for our seeing case switch portfolio for communications infrastructure.
We expect.
Opportunities like these to become more prevalent as high performance computing for machine learning and AI expands requirements for next generation platforms.
We are seeing good success with cross selling <unk> products to <unk> customers.
Sustainability continues to drive wins in power supplies for power tools and led lighting.
Our pipeline of new business opportunities remains strong and our global teams are positioned to support customers, which will continue to expand our electronics content across diverse applications with a focus on sustainability connectivity and safety.
We continue to generate robust design win momentum and the array of new business wins, we have secured spans a wide spectrum of end markets applications and geographies, highlighting our global capabilities and footprint.
Through engaging closely with our customers' engineering teams our collaborations have been instrumental index expediting next generation product development and design in activities.
With your organic growth stemming from these new business activities complemented by our strategic acquisitions, we are confident that our long term growth trajectory will be further fortified and sustained.
I will now turn the call over to Neal to provide additional color on our financial performance and outlook.
Thanks, Dave Good morning, everyone and thank you all for joining us today.
Please turn to slide 11, let's start with our second quarter results.
Revenue of $612 million was down, 1% and down 8% organically versus last year.
Acquisitions added 7% and <unk>.
GAAP operating margins were 15% adjusted operating margins were nearly 17% and EBITDA margin was 22.5%.
For the first half of this year, we delivered adjusted operating margins, just shy of 18% and EBITDA margins of 23, 6% continuing to drive results and our targeted margin ranges.
Our strong margin performance reflects our portfolio diversification efforts across both end markets and technologies.
<unk> of our partnerships with customers and distributors and continued focus on operational excellence.
Second quarter GAAP diluted earnings per share was $2 79 and.
And adjusted diluted EPS $3 in 12 months.
Just an EPS finished lower than projected.
Due to a combination of the drop through from slightly lower sales than expected unfavorable nonoperating items, partially offset by some reductions in operating expenses.
Our GAAP effective tax rate was 18%.
The adjusted effective tax rate was 17, 4%, which was higher than projected.
The combination of the higher tax rate and unfavorably from nonoperating investments reduced EPS by <unk> <unk>.
Operating cash flow in the quarter with $98 million and we generated $82 million in free cash flow year.
Year to date, we generated $110 million in free cash flow, yielding a 69% conversion rate.
We reduced inventory levels through the first half of the year contributing to our solid cash flow performance.
We expect to drive both a higher cash generation and free cash flow conversion rate in the second half as per our typical seasonal patterns.
Our capital structure remains very strong ending the quarter with one four times net debt to EBITDA leverage.
We remain both disciplined and consistent capital allocation, we continue to prioritize organic and inorganic opportunities driving ongoing growth and returns while ensuring a return of capital to our shareholders.
Our board of directors approved an 8% increase in our quarterly cash dividend equating to a $2 60% annual rate.
Grown our dividend, 12% on a compounded annual basis since inception, a testament to our long term earnings trajectory and cash generation power.
Moving to our second quarter results across our segments. Please turn to slide 12.
Electronic sales were down 2% year over year and down 13% organically the delta being the <unk> acquisition.
Operating margins were nearly 23% and EBITDA margins ended at 28, 5%.
While transitory inventory Destocking has impacted our near term growth trajectory, we continue to see underlying growth drivers across our portfolio.
In the quarter, we continued our positive momentum across industrial medical and renewable applications and also auto electrification theme.
Along with the operational groundwork we've laid over time, we've maintained strong margin performance in a challenging market environment.
Turning to the transportation segment on Slide 13 sales were down 5% overall and down 6% on an organic basis.
We saw diverging trends across end markets with our passenger vehicle business growing 7% a significant driver of the double digit content outgrowth, we realized across the breadth of our automotive portfolio.
Our commercial vehicle business was down 17% on an organic basis.
And market growth continued we saw higher than expected inventory destocking across our customers.
Segment operating margins finished just under 5% and EBITDA at 11% below our expectations.
Weaker sales and related volume deleverage across our commercial vehicle business slowed down our expected margin improvement.
We are taking actions to reduce costs further.
Span the scope of our operating footprint shifts and optimize product and customer profitability.
We are also progressing on our integration initiatives to overcome the margin dilution from the <unk> acquisition.
We remain committed on driving an improved segment margin trajectory to a mid teens margin target.
Across our industrial segment on slide 14 sales were up 15% and up 9% organically.
We continued to drive wins across a broad set of higher growth in newer end markets, while demonstrating the value we continue to deliver to our customers.
Operating margins were 16, 8% and EBITDA margins finished at over 21%.
Turning to the forecast on slide 15, we continue to see growth across many of our end markets.
However, we expect this to be overshadowed by inventory destocking within electronics and transportation during this year affecting both sales and margins with the volume deleverage.
With this backdrop, we expect third quarter sales in the range of $570 million to $595 million.
At the midpoint, we project sales to be down 12% versus last year.
By segment, we expect sequential sales growth across industrial offset by a decline across electronics and transportation.
We expect adjusted EPS to be in the range of $2 48 to $2 72.
Which assumes a 19, 5% tax rate.
Slide 16 includes some additional full year 2023 color.
At current foreign exchange rates, we expect a 35% unfavorable impact on EPS and no material impact to sales.
We expect $66 million in amortization expense and $40 million and interest expense at current interest rates.
We expect our full year tax rate of 18% to 19% higher than previous projections due to shifts in earnings mix across jurisdictions.
We are modestly reducing our capital expenditures to the range of $100 million to $110 million.
Dave referenced our announcement on the future acquisition of the Dortmund semiconductor fab is.
As the expected close is early in our fiscal year 2025, we do not expect this transaction to have a material impact to our 2023 or 2024 financial results.
Over the years, we've diversified our portfolio continuing to pivot to higher growth markets and increased organic investment while leveraging strong secular themes. Our portfolio expansion is helping us weather the interim cycling across certain markets and transitory destocking.
We remain focused on driving our business forward in the second half elevating lever cash generation and continuing our operating margin trajectory in the high teens for the year.
We're confident that our ongoing execution positions us to deliver on our long term growth strategy.
I'd like to extend my gratitude to all of our team members for their unwavering hard work and dedication.
Efforts have been instrumental in continuing to drive our success.
And with that I'll turn it back to Dave for some final comments.
Thanks, Neal and summary on slide 17, we have achieved strong year to date results <unk> business model has proven its resilience in this dynamic environment, while supporting the strength of our growth strategy.
This is evident in the consistent double digit sales and earnings growth achieved over the past 510 15 years are.
Our expansion into high growth end markets technologies, and geographies has diversified our business and significantly improved our profitability our.
Our experienced teams have refined our playbook, enabling us to effectively navigate through ever changing environments.
We remain excited about the opportunities we have ahead of us and confident in our ability to deliver sustained long term value for all stakeholders through continued execution diversification and strategic investment for growth.
And with that I will now turn the call back to the operator for Q&A.
Thank you at this time, if you'd like to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster. We will take our first question from Luke junk with Baird. Your line is now open good morning Luke.
This is a question probably for <unk>.
I'm wondering if you can help to animate what's underpinning the guidance in the third quarter for electronics, specifically youre singling it should be.
Sequentially overall, but I'm just wondering if we look at the passive and semiconductor portions of the profile profile of that business.
Sharp decline that seems to be implied here or is this just further weakening in passive or should we be thinking about semi also weakening sequentially, possibly thank you.
Yes. Thanks, Luc So we of course, we've been talking about all the transitory destocking thats been going on and really the bulk of what we're seeing within the quarter. The sequential quarter Q2 to Q3 is destocking pre.
Primarily because of the size you see it coming through electronics some of the passive side and we also have semiconductors that are a little bit more passive like in terms of.
Through distribution et cetera, and so thats really where were seeing the sequential down and then of course, we also talked about in the prepared remarks within our transportation segment.
We're expecting the continuation on the commercial vehicle side of the business and from continued destocking there as well.
Got it and then.
So the cash actually.
Actually and on the power semi side, we actually continue to enjoy seeing growth in that business thats really kind of focused on industrial applications.
No.
Kind of a balancing between the two we continue to see pretty good strength in the power side.
Got it Thats helpful.
After Dave My second question I think we would probably be best for you gave and I was just hoping you could zoom out and give us a better view of the overall picture around the auto or passenger vehicle this quarter thinking on a combined basis between electronics and what's in the transportation segment I know that you've made.
Comments about the content growth that youre, seeing and I think that might maybe better enemy.
The underlying trend in the business versus what we can just see for pass car insurance rotation. Thank you.
Sure happy to.
Yes overall, the passenger car business remains a very positive spot for us.
As we stated in the prepared portion of the remarks, we continued to see double digit outgrowth and while reported and in transportation specifically in this segment, we showed that a 7% growth in pass car.
We've talked about this before a great deal of our growth in the electrified applications actually come from products outside of our segment reporting and passenger car.
We actually saw double digit so we continue to see over the last three years, we've seen double digit outgrowth. Our design wins continue to be quite robust. There. So really when you look at the challenge of the transportation segment to really focused on kind of the Destocking challenge within the commercial vehicle side.
Yeah.
Got it. Thank you for that and then for if I could just sneak in one more question.
Dave You mentioned in your prepared remarks sensor applications, specifically some increased demand for I think you said battery management and drive related applications and I'd just be curious if you could demoed and look at whats in your sensor business insurance litigation right. Now I think it may be is something that is a little bit ignored by investors.
Great just to get a quick primer on what are some of the key opportunities that youre looking at whats in the sensor portfolio. Thank you.
Historically, our sensor portfolio within the passenger car side of the business was related to solar sensors and the applications in the cabinets for cabin comfort and also in safety applications for our speed and position sensing and that type of thing thats been our core over the last.
Year, and a half or so we've been focused heavily on how do we transition to also focus on the electrical systems as vehicles electrify. So we have organically developed and launched current sensors that are used extensively within electric drive applications.
In battery management types of applications and we have launch those and have had some.
Nice traction in the early days there with some design wins with multinationals that it'll be meaningful for us overtime.
I appreciate your question Luke. Thank you, we'll take our next caller. Please.
Next we'll go to David Williams with benchmark. Your line is now open good morning.
Hey, good.
Good morning, and thanks for letting me sneaking a question here. So I guess, David if we kind of think about the inventory rebalancing. It feels like this has been ongoing for some time and in the electronics segment at least the last four quarters or so so I guess my question is how should we think about the normalized run rate here.
Given that maybe you've been over shipping to consumption over the last several quarters.
Yes.
Let me start with the backdrop that I am not sure what normal is anymore over the last handful of years with Covid related challenges.
So supply chain issues, but if you look back at our history, obviously in the electronics product.
Products, we ship a great deal of our product through distribution to a very broad customer base.
That model certainly does create.
A swing in inventories.
Demands increase in lead times go out as lead times begin to shorten.
And availability comes down or demand started to soften then there is a correction that takes place here.
Historically, what would be kind of normal for us there would be kind of from a peak to trough of about a four to five quarter sort of cycle, there and so certainly yes kind.
About this time last year is really where we were seeing the big peaks within the electronics side of our business.
So we're clearly going through that cycle, we've been going through destocking actions by our channel partners.
Over the last couple of quarters, we're certainly saw it.
For the bulk of this year, we kind of expect that to go through this year to get through that peak to trough that we need to.
The good news is underlying design activity continues to be quite robust and we see pockets, where we continue to see really good strength.
Still softness in kind of consumer facing sorts of products, but.
Kind of working our way through that normal cycle.
Yeah.
Okay, great. Thanks for the color and then maybe one for you.
Current midpoint of the guidance.
Revenue profitability.
Deteriorating about two to three times out of the top line at least on a percentage basis.
Should we think about the leverage again, what ever normalize maybe but how do we think about that leverage going forward as sales begin to rebound in and you really start to see the benefits of the strategy come into play.
Yes no.
Great question and it maybe going back to one of the earlier ones I talked about the fact, when you take a look at sequentially, what's happening and really where we're seeing a lot of the transitory destocking is coming to electronics, which as we know has our strongest margins today, so that incremental variable.
Variable margin I call it tends to be pretty strong in the upswing and so when we see this destocking environment, we tend to see a bit of a higher decline than normal I'd say over that 50% Mark as part of what we do knowing that thats.
That's part of what we see we quickly react to making sure that we're sizing our operations and adjusting adjusting our cost structure to really manage through that and mitigate some of that but thats really where youre seeing some of that degradation coming through.
Great. Thanks, Thanks, so much for that and then one more if I can real quick just can you talk about the product and customer profitability optimization can you give us a little color on what the process is there and maybe anything around what the expectation should be.
Thank you.
Sure. So this is this is pretty standard.
We normally do and especially when we talk about acquisitions and we talk about this idea of integration. This is absolutely something that we do with every acquisition coming into the portfolio.
So between those areas like Carling, which is specific to transportation, but even see NK will do a lot of work and I call. It a deep dive into really understanding the product mix the customers geographies a whole bunch of things.
Recall last year, where we normally would have done that all in year. One we were really spending a lot of time working with customers. It was a pretty significant backlog going on so that was really our priority last year, given where we are now, especially in the current environment, We're really shifting our focus to make sure. We go through that assessment.
And also I would say even in legacy parts of our portfolio, where we've seen that price cost equation move around we think theres an opportunity for us to just <unk>.
Sure that we are still on the right path and the right priority focus on that so that's really what we're going to be going through in the next few quarters.
I appreciate your questions David we'll take our next caller please.
Thank you next we'll go to David Silver with CL King Your line is open good morning.
David.
Yeah, Hey, good morning, So just a couple of areas to touch on.
First one would be I guess, China right, so roughly 25% of your revenues and I think compared to.
Our expectations at the beginning of the year for a number of my companies.
The development or the rebound from there.
Lockdowns and whatnot has been less than less than expected.
Wondering if you could just take a minute or two and characterize how you think that your operations in China and whatnot have developed over the first half of this year and maybe your expectations a quarter or two al. Thank you.
Sure David happy to take that and certainly yes there.
There was an expectation I think that as China came out of a lockdown after two or three years are locked down environment.
Would be a pretty strong rebound in demand overall and while I would say there has been an improvement in the past car portion of China and kind of a bounce back a bit on that.
The passenger car.
Carville in China.
We certainly are not seeing a lot of strength bouncing back in China and the broader demand.
From our standpoint, a lot of.
Customer base that we have.
In Asia in general and certainly in greater China is <unk>.
<unk> also on consumer oriented thanks, small appliances tablets laptops et cetera.
That market of course is down.
And we've seen that for some time, we haven't seen that bounce back yet so clearly I would say China remains a bit of a drag from our expectations going into the year.
But I don't think we're alone in that.
Yes.
Yes.
Okay, Great and then the second question I think I would maybe characterize it as just maybe like some incremental commentary on integration of recent acquisitions. So I think you had a couple of points in the slide deck and in your comments you've talked about kind of next next steps of integration.
Let's say with Carling in the in the auto Saar in the transportation segment and I believe.
<unk> K.
In the electronics area I was wondering if you could just take a minute and kind of maybe discuss.
From a historical perspective, how that integration has gone to date.
Has it met expectations.
Where if you had the greatest success and then in particular, maybe if you could highlight.
The incremental.
Integration moves that you've called out in the slide deck, you had a couple of points. Thank you.
Sure.
I'll take that and then you can add color if you'd like but.
Overall, if we take a step back and let's look at the two bigger ones.
And the corollary in Carlin coming first as <unk> talked about this just in the last couple of minutes.
Overall, the Heartland acquisition is going well and we had a very strong year last year. If you remember our first year of full ownership, we were up 20%.
Over the prior year under the previous ownership and that was really a year, where we cleaned up significant amounts of backlog. So we would say year. One of that integration was well ahead of our plan because of that cleanup clearly is challenged now with kind of both but the challenge.
Not building out that backlog and then also we're seeing kind of inventory rebalancing from supply.
Supply chain and customers that are driving a bit of a pause there. So overall I think it's going well.
Clearly there is the challenge as you focus here wanted to make sure youre, serving those customers in embracing those customers to the best we can now a lot of heavy lifting going on with some footprint work that's ongoing as well as Neil talked about kind of our traditional way of looking at product line and customer profit.
Ability that we're deep in the midst of now so overall, we believe.
That over the next couple of years will very much be upon our plan for the integration.
That business. So we feel good about that on the TNK side had some similar sorts of fields to it.
Last year was quite solid.
But we also in that case.
Stocking that's taking place.
With customers are particularly that goes through the channel because you remember that was one of the leverage points for us with TNK is the fact that.
Our ability to leverage our channel. So there is destocking, that's taking place. There. However, we're really seeing good momentum and taken C. NK products to the <unk> core customer base. So we're seeing a lot of good cross selling opportunity and as you recall there are big opportunity there is really sales.
Synergies and we are beginning to see good momentum there and we feel good about that so overall, yes.
<unk> wells on inventory sorts of corrections going on rate this year, but overall the integration is going quite well.
Okay, great. Thank you very much.
Yeah.
Thanks, David I. Appreciate your question, we'll take our next caller please.
Next we'll go to Joshua Buchalter with TD Cowen. Your line is open good morning, Josh.
<unk>.
Question for Dave Thanks for taking taking my question.
I guess I wanted to ask a big picture on the Destocking you inventory on books went down in the second quarter, but clearly there.
A good bit more to go if we sort of disaggregate that can you help us understand where things are at on books and.
Where levels are now in the channel.
I guess any way you can quantify where they need to be in the back half of the year for us to be comfortable that sort of wrapped up by the end of the year. Thank you.
Sure Yes.
We have both.
Opportunities for US one uncertainty is on book inventories and you're seeing that decline through the course of the first half of.
The year end, we have more work to go there and clearly as a like a lot of companies are working through.
As supply chains are balanced out now an ability to kind of pull back on the inventory position there to support the business. So that's ongoing and we will continue to do work on that from a channel Destocking and clean up this ongoing as I mentioned earlier kind of typical is that 4% to.
Five quarter peak to trough sort of cycle.
And we're kind of halfway through it.
Our view, though is.
We expect it to kind of go.
As we have seen in the past and we will see that.
Bleed through the back half of the year.
Thank you and maybe one for Neil.
I wanted to ask you about margins, they're obviously running still above where they were.
2019 2020.
But coming down as volumes come down has there been any change in the pricing environment. As you go through this extended period of Destocking and how are you feeling about your ability to continue to pass on inflationary costs on the <unk>.
<unk> side. Thank you.
Yeah. Thanks, Josh So maybe just I'll I'll step back and this is probably off a part of the overall question. We had back in January talked about our overall company margins and the target we have for this year I'm talking about the high teens, 17% to 19% average for the year and we continue to remain committed to that.
As part of that as we're going through the year.
We've spent a lot of time laying the foundation around Dave talked a lot about the integration work that's going on on the price cost side.
So far we've maintained price and we've seen the cost balance out some increases in some places and decreases in others. So we continue to remain neutral around the price cost side. So I think compared to the last cycle, which was our intent.
Last cycle 2019, 2020, we were running in the 14% 14, 5% margin range that we feel good with all the work we have done and continue to do to keep the margins in that higher target range.
Thank you I appreciate all the color.
Thanks, Josh I appreciate your question.
Okay.
As a reminder, if you'd like to ask a question Press Star then the number one on your telephone keypad next we will go to William Cohen with Morningstar. Your line is open.
Good morning will.
Good morning, all.
Thank you for the question.
A lot of my main questions have already been asked so I think I'll switch a little longer term here.
Talk too much about the industrial segment.
Some nice growth in the quarter.
Definitely a place where some peers have been seeing some weaker performance. So just curious.
What you would call out is doing particularly well there this year.
Ask if you're seeing any incremental weakness and then also whats exciting new modes for the long term out of the industrial market.
Yes from an industrial end market, we continue to see overall strength in that end market that there is some mixed bag between different pieces of it. If you will we see particular strength out of renewable energy and energy storage types of applications that are quite strong.
We see kind of industrial safety applications also continuing to be quite.
Quite positive as well.
That we're seeing kind of play through there the area, where maybe we see a bit of weakness that we've talked about in the last couple of quarters as ACA.
Particularly residential HVAC tends to be down a bit and there is a bit softer and there may be a little bit of softness in industrial automation types of applications.
But it really kind of balances off we're also beginning to see that crosses over between industrial and electronics applications.
With communications and data centers.
Is there is a push to invest in and drive AI types of installations to support the higher compute needs. We have both on the servers and power supplies for their servers, there's lots of content for us, but also in the infrastructure of the data centers themselves and our power systems. There we have a lot of industrial play.
There, which we're beginning to see more activity again on as well there.
Awesome, that's great color and then one more for me if I may.
I know, it's a small part of your business, but I think it's been a while since we've heard about the silicon carbide business.
<unk>.
For semiconductors. So just wondering if there is any update there.
Sure.
No real change or update from what we've talked about in the past.
Obviously this is getting a significant amount of attention from the large semiconductor players, particularly for our traction drive applications.
And EV applications.
Where there's billions of dollars being invested to support that that is not our core market that is not where we're focused.
Do have a silicon carbide offering that's part of our more industrial focused power semiconductor business.
And we do see design in activities there in things like renewable energy some off board charging types of applications and things, but we just have that as an offering as a part of our broader portfolio, it's not an outsized investment area for us.
Thank you Nicole.
Yes, I appreciate your questions, we'll take our next caller please.
Next we'll go to Christopher Glynn with Oppenheimer. Your line is open good morning. Thanks.
Good morning, David.
Yes, it was.
Intrigued by your comment around accelerating the rate of new business wins design in activity is there any way to quantify the ratios or otherwise.
Oriented more.
Your actual win rates or a proliferation of opportunities. Thank you.
Yes, I think it's kind of odd.
Obviously, we track design and activity is a key metric across all of our businesses.
Yes, we made kind of general statements about that where we're seeing those design in activities I think particularly on the electronics side, but overall if you look back over the last couple of years engineers in our customers Engineers, who spent an awful lot of time on redesigns to get better sources to keep their operations running.
Things like that which kind of backed up some of the new design activity as they wanted to do well that's freed back up when the engineers are very engaged in that we're seeing a lot of activity. There so increases in activities and design in and design wins for things like renewable energy power conversion types.
Of application so on that industrial side of things quite robust also in the past prior side, yes.
We don't share every quarter, what we're doing on design wins, there, but we're actually a bit ahead of where we were last year and design wins, we had a robust year last year and overall pass car design is that we're actually a bit of a head of that this year.
So we feel good about the activity.
It's easy for us sometimes to kind of.
Internally get turn in towards the challenge of the near term, but the reality is the bulk of our activities and our people are focused on the long term gains and we're seeing really good progress there.
Great.
And then.
Follow up on the.
The Dortmund acquisition, I know closings, a little way out but.
Any kind of indication on the scale of investment or run rate even in generic terms like small medium large.
Yes, so obviously thats, an acquisition that hasn't closed yet and and.
It being a yes, maybe an atypical acquisition for us in some ways. It's an area, where we're really focused on supporting and accelerating our activities on the power semiconductor for industrial applications power conversion renewable energy those sorts of areas.
And so.
So we have agreed upon with al Moss.
Capacity sharing application over the next few years as they move some of their products out to at other facilities.
We will begin the activity. According in some of our designs and developing new products that we launch within that fab during that transition period.
So it'll be a meaningful impact to our power semi business over the next several years as a company I would say, it's more of a small sort of investment. They really it's really focused on solidifying that power semi portion of our business.
Great. Thanks, Pat.
I appreciate your questions, Chris we'll take our next caller please.
Thank you next we'll go to Matt Sheerin with Stifel. Your line is now open good morning, Yeah. Thanks, Scott Good morning, everyone I do have a few follow up questions.
Just on the inventory correction within electronics, Dave could you give us an idea of what the inventory days as your distribution partners look like and what the book to Bill looks like.
Yes, let's start with kind of days and normal for us kind of on average across both our broad line distributors on a high service distributors normal for us would be in that mid teens.
Weeks of inventory and so thats kind of normal right now I'd say, we'd be running three to four weeks heavy on that that's less than we were a couple of quarters ago, and we're seeing month by month reductions in that inventory level.
Its going as expected I believe there.
So we're working our way through that and I think that'll be a positive.
Are there do you know what the point of sale or Pos sellout numbers looked like relative to your sell in is that starting to soften as well.
Yes, there is pockets of it right. So there is areas where that Pos is hanging in there really well in their pockets of applications where that softer.
So kind of our view of how things are going is based upon what we see as current Pos levels.
So underlying Pos remains pretty good.
So we continue to kind of watch that carefully.
Okay. Thank you and your book to Bill is still negative I imagine our book to Bill is below one and Thats a combination right of a couple of things. One is this inventory destocking that's taking place. The other is as we've worked our way back our lead times on almost all products are now have moved to pre COVID-19.
Levels of <unk>.
Normalized lead times. So every time, we pull those back that drops orders and so that kind of between those two things certainly it's running below one.
Got it okay, and just a couple of modeling questions.
It looks like sort of backing in based on your EPS and revenue guide it looks like operating margins are going to be sort of in the low 15% range.
With lower gross margin sequentially from.
From an opex standpoint are there any any plans to reduce costs or are you going to hold steady here based on where you were.
Yeah, Great question. So just circling back we don't guide operating margins in an individual quarter, but what I would say stepping back from one of the earlier questions. We're still committed to that high teens margin range, we talked about for the year at the same time, we may have quarters right some might be on the higher end.
Maybe at the lower end or even below that so.
No that theres going to be a balance there in terms of actions, we're taking or things that were doing especially in the businesses, where a lot of discussion on the transitory destocking with absolutely looking at cost whether it.
Interim cost right now variable costs that we can look at or even just the cost structure as we think about businesses, so, especially across the electronics side.
Talk a little bit about on the transportation side, we got work to do around the Carling integration, David and I, both talked about that we're looking at the customer and product line profitability and absolutely. We're also looking at cost structure in that business. So a number of different things going on to make sure that we continue to invest in the business.
As for the future because we know this is transitory, but I would say off to tighten up our cost structure for the environment that we're in today.
Okay. Thanks for that.
I appreciate that you don't.
Give specific guidance for the year.
But I know seasonally your electronics business is usually down sequentially and I would expect it to be perhaps more than that with this inventory correction.
And and then transportation kind of same thing so in terms of kind of how margins look like in Q4 and when they expect to bottom would you expect Q4 to be down from Q3 in terms of margins and revenue.
Yeah at this point.
We gave you the visibility that we have with our Q3 guide talking about really both electronics, we expect Q3 to be sequentially down a little bit off on the transportation side, a lot of that really coming because of the destocking.
After that I'll I'll, even go back to what Dave made a comment earlier about it's tough to pinpoint the normal anymore.
Not we're not offering a sequential view or really have enough there, but again I would say in our prepared comments, we talked about destocking going through this year.
Okay. Thank you and just lastly.
On the automotive our transportation margins, which are probably the lowest level in <unk>.
In many quarters.
Is it really just the matter of the volumes or also.
Getting synergies from the acquisitions and getting costs out and you're still committed to that mid teens. It looks like it's going to take a while to get there. So what's the timing of that.
Yeah, So maybe maybe just a little bit more color on Q2, and the path forward for us So absolutely in Q2 sort of the comments the destocking that we saw on the commercial vehicle side of the business.
<unk> higher than we were expecting you saw it in our sales you see it in the margins I'd say that was probably a couple hundred basis point margin impact.
Flat out right there we would have been at.
Had we been able to do.
Take out that Destocking at the margin definitely would've trended, where we expected I would also say the Mexican peso for us because.
Mexico is such a big footprint of manufacturing hub for us we have pretty sudden strengthening in the peso last quarter pretty unexpected and that also impact margins a bit maybe 100 basis points and that was a little bit of a color I'd say outside of those we would've seen absolutely margin projections expected.
That trajectory so I talked about earlier look we're looking at costs. We're looking at footprint work that we're doing which include some of the activities that Dave mentioned as it related to <unk>. We're also across the automotive business. It's really been now four years of car build debts in the upper seven needs.
Or lower 80 million build range. So we're also looking at the footprint that we have for automotive and maybe scaling that back a little bit and then I also talked about that customer product line profitability that we're working on especially with the newer parts of the business. So I think the combination of all that we continue to expect in that margin.
Trajectory moving forward positively moving higher and we're still committed to that.
Mid teen margin range for transportation, yes, it will take us maybe a little bit longer than we were expecting given the destocking, but we're absolutely committed to that Matt.
Okay, Matt I think Matt yes, okay.
I think it's important to take a step back overall right and take a look at overall performance of the margin profile in the business through the course of this year, which we still believe to be for the year in the high teens.
When we take a look at that versus previous cycles. When we've been in the depths of previous cycles. We've been in that $14 14, 5% range that has improved meaningfully really with our strategy to diversify the mix of the business in the end markets, we're serving execution across the businesses and by the way.
That's at a time, we've made some sizable acquisitions over the last couple of years, which overall is about 200 point drag on corporate margins. So seeing that overall improvement even while digesting. These sizable acquisition. So I think generally were moving up and the ability to execute through through the bottom side of the cycle.
Got it okay. Thanks for all that I appreciate it.
Thanks, Matt for your questions, we will take our next caller. Please.
Next we'll go to David Williams with benchmark.
Welcome back David.
Hey, Thanks for let me ask another question.
Just wanted to ask quickly on the on the cash cycle. It looks like that peak, maybe last quarter and it come down a bit this quarter, but just kind of thinking about your internal inventory levels, where you're comfortable.
Where do you think that number should be as you think about working capital and just getting them right sized on your internal inventories.
Yeah. So there's a there's a lot of work that our teams have been doing around inventory.
Days right now are somewhere in about the 102130 days I would expect that over time as we continue to work that down we get back closer to the 100 day, Mark and even lower over time, that's really where we were pre pandemic as we adjust our.
We think about adjusting our supply chain I think the other thing I would add is some of that also comes with acquisitions right typically.
Part of our synergies also come from working capital management, whether that's really the focus around data.
Days sales DSO and inventory levels. So that is also work that we're doing as it relates to areas like the <unk> and the <unk> acquisition. So absolutely, we're making good progress and more to go on that.
Okay. Thank you.
I appreciate your follow up question, David that concludes our Q&A session. Thank you for joining us on today's call and your interest in little fuse. We look forward to talking with you again soon have a wonderful day.
Yeah.
Okay.
That concludes our Q&A session. Thank you.