Q3 2023 Littelfuse Inc Earnings Call

Please standby were about to begin.

Good morning, ladies and gentlemen, welcome to the Little Hughes third quarter 2023 earnings Conference call. At this time all participants are in a listen only mode and please be advised that this call is being recorded after the speakers' prepared remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press.

Star one on your telephone keypad, and if you would like to withdraw your question simply press Star One again and now at this time I would like to turn the call over to <unk> head of Investor Relations. Mr. David Kelly. Please go ahead Sir.

Good morning, everyone and welcome to the a little for US third quarter 2023 earnings Conference call.

With me today are Dave Heinzmann, President and CEO, and <unk> <unk> Executive Vice President and CFO yesterday, we reported results for our third quarter and a copy of our earnings release and slide presentation.

It's available in the Investor Relations section of our website.

Webcast of today's conference call will also be available on our website. Please advance to slide two far 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 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 on the Investor Relations section of our website.

I will now turn the call over to Dave.

Thank you David Good morning, and thanks for joining us today before I begin I'd like to welcome our new head of Investor Relations David Kelly.

Expect many of you already know David from his prior role in equity research at Jefferies, where we were.

We're part of a sell side coverage.

<unk> brings a strong understanding of our business and industry and we'll continue fostering strong relationships with our investors and delivering valuable insights as we continue to drive.

The growth in shareholder value.

Please join us and extending a warm welcome to David.

With that let's start with a summary slide four.

Our global teams delivered solid Q3 results as both sales and earnings exceeded our prior guidance.

Performance reflects strong execution.

<unk> diversification and favorable content momentum within a continued challenging macro environment.

We're pleased with our overall performance, yielding strong year to date profitability profitability. Despite the ongoing channel destocking in pockets of end market softness, we're significantly improved our financial performance versus past market cycles.

This reflects our resilient business model and continued strong underlying fundamentals on slide five.

Secular growth themes, including sustainability.

Activity and safety continue to drive or our organic growth trajectory.

Our recent acquisitions have further balance our end market exposure.

Complementing our diverse technology capabilities and expanding our market leadership.

We remain well positioned to deliver on our long term strategy.

I want to thank our global teams for their unwavering commitment and persistent hard work.

Let me start with a view on what we're seeing across our markets.

Through the third quarter, we continued to see inventory destocking across our electronics and commercial vehicle distribution channels.

Our electronics book to Bill remains below one and while we have limited visibility. We also believe some of our OEM customers are working through inventory reductions.

Please stand by. We're about to begin.

Operator: Good morning, ladies and gentlemen. Welcome to the little few third quarter, 2023 earnings conference call. At the time, all parts of Spence are in a listen only mode, and please be advised that this call is being recorded. After the speakers prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad, and if you would like to withdraw your question, simply press star one again.

While we expect inventory destocking to continue into next year as inventory levels stabilize we expect to return to normalized order rates.

Regarding our end markets.

Seeing bearing demand patterns across our broad customer base, starting with electronics markets, we continue to see softness in consumer and personal devices as.

David Kelley: And now this time, I would like to turn the call over to the head of investor relations. Mr. David Kelley, please go ahead, sir.

As well as pockets of Datacom.

And industrials, we benefited from growth in renewables infrastructure power supplies and industrial safety offsetting pockets of softer demand.

David Kelley: Good morning, everyone. Welcome to the little few third quarter, 2023 earnings conference call. With me today are Dave Heinzmann, president and CEO and Meenal Sethna, executive vice president, CFO. Yesterday, we reported results for our third 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.

And finally, while the UAW strike had a modest impact in the quarter automotive demand remains solid driven by both low and high voltage applications.

Our automotive content expansion is benefiting from program launches led by China.

And we saw 15% growth above car build in the quarter strongly within our targeted double digit range.

David Kelley: Please advance to slide two bar disclaimers. Our discussions today will include four looking statements. These four looking statements may involve significant risks and uncertainties. Please review yesterday's press release and our forms 10K and 10Q for more detail about import risk that could cause actual results to differ materially from our expectations. We assume no obligation to update any of this four looking information.

Despite the current challenging macro environment, we continue to diversify our portfolio build upon our design wins and fortify our market position and we expect a return to growth during 2024.

Broadly across our end market exposures design activity remains robust and.

And we continue to benefit from content out.

David Kelley: Also, our remarks today refer to non-gap financial measures. A reconciliation of these non-gap financial measures to the most comparable gap measure is provided in our earnings release available in the investor relations section of our website.

Customers remain invested in expanding secular growth capabilities, and we are delivering a robust design win cadence with the port which supports consistent long term outgrowth.

David Kelley: I will now turn the call over to Dave. Thank you, David.

We believe our execution through this variable macro environment is reflected in our year to date margin performance.

David Heinzmann: Good morning and thanks for joining us today. Before I begin, we'd like to welcome our new head of investor relations, David Kelly. I expect many of you are already know, David, from his prior role in equity research at Jeffries, where we were part of itself like coverage. David brings a strong understanding of our business and industry. I'm going to continue fostering strong relationships with our investors and delivering valuable insights as we continue to drive the growth and shareholder value.

David Heinzmann: Please join us in extending a warm welcome to David.

As well as our robust cash generation.

For the full year 2023, we expect to exceed operating margins be delivered when we last experienced market down cycles and disruptions in 2019 and 2020.

We remain confident in our margin resiliency, despite the current challenging macro environment.

Collecting a robust outgrowth opportunity and well positioned cost structure.

Our ability to drive strong cash flow through cycles enables us to continue investing for future growth across our portfolio.

David Heinzmann: With that, let's start with a summary slide four. Our global teams delivered solid Q3 results as both sales and earnings exceeded our prior guidance. Our performance reflects strong execution, ongoing diversification, and favorable content momentum within a continued challenging macro environment. We're pleased with our overall performance, yielding strong year-to-date profitability. Despite the ongoing channel of stocking and pockets of end-market softness, we're significantly improved our financial performance versus past market cycles.

And deliver outsized long term shareholder value.

Now, let's move on to a business design wins during the third quarter.

For industrial end markets on slide six.

We continued to build a robust and global funnel of new business opportunities and secured a wide range of design wins.

We secured a multi technology win for energy storage in India and.

And leveraged our solutions focused product portfolio to deliver a solar design win in the EMEA region.

We also secured key industrial safety design wins across the energy sector, including wins in Indonesia in North America.

David Heinzmann: This reflects our resilient business model and continued strong underlying fundamentals on slide five. Secular growth themes including sustainability, connectivity, and safety continue to drive our organic growth trajectory. Our recent acquisitions have further balanced our end-market exposure while complementing our diverse technology capabilities and expanding our market leadership. We remain well-positioned to deliver on our long-term strategy.

Taking a step back industrial safety remains a long term growth theme for us given the need for safeguards against electrocution.

Higher power applications in an increasingly electrified world.

Turning to the transportation end markets on slide seven we.

We continue to see a strong funnel of meaningful content opportunities.

David Heinzmann: I want to thank our global teams for their unwavering commitment and persistent hard work.

And by the ongoing push towards greater sustainability connectivity and safety.

For passenger vehicles, the launch of several new OEM platforms, particularly new programs coming online in China.

David Heinzmann: Let me start with a view on what we were seeing across our markets. Through the third quarter, we continue to see inventory destocking across our electronics and commercial vehicle distribution channels. Our electronics booked the bill remains below one, and while we have limited visibility, we also believe some of our OEM customers are working through inventory reductions.

Were a key driver in the quarter.

Momentum with UBS and EV charging infrastructure helps secure wins for both low and high voltage applications. We won new business for our vehicle telematics module by leveraging product offerings from our C N K switches portfolio.

David Heinzmann: While we expect inventory destocking to continue in the next year, as inventory levels stabilize, we expect to return to normalized order rates. Regarding our end markets, we're seeing varying demand patterns across a broad customer base. Starting with electronics markets, we continue to see softness in consumer and personal devices, as well as pockets of data. In industrials, we benefited from growth in renewables, infrastructure, power supplies, and industrial safety offsetting pockets of softer demand.

An area, where we are seeing design win success is our innovative current sensor offerings.

Helping drive new business opportunities for EV battery management systems and inverter applications.

Within the commercial vehicle space, we secured a multi technology win for medium duty EV truck that will utilize software from our embed acquisition in conjunction with hardware from our legacy portfolio.

Great example of leveraging and complementary technologies to drive revenue synergies.

We also won new business for commercial truck and bus applications in South America and China.

David Heinzmann: And finally, while the UAW strike had a modest impact in the quarter, automotive demand remained solid, driven by both low and high-voltage applications. Our automotive content expansion is benefiting from program launches led by China, and we saw 15% growth above car bills in the quarter, strongly within our targeted double-digit range.

In Japan, we were able to leverage some of the rugged and reliable switch products from our carling portfolio to win new business for construction and specialty vehicle application.

Moving on to slide eight electronics end markets.

Zion activity continues to be robust, we're seeing multi technology design wins globally across a broad set of end markets.

David Heinzmann: Despite the current challenging macro-environment, we continue to diversify our portfolio, build upon our design win, and fortify our market positions, and we expect to return to growth during 2024. Broadly, across our end-market exposures, design activity remains robust, and we continue to benefit from content outbreak. Customers remain invested in expanding sector of their growth capabilities, and we are delivering a robust design win cadence which supports consistent long-term outgrowth. We believe our execution through this variable macro-environment is reflected in our year-to-day margin performance, as well as our robust cash generation.

We secured a diverse range of design wins, including power tools.

Raj door openers appliances, and other general electronics.

We continue to see growth in medical equipment.

And security end markets with wins globally.

Our momentum in securing meaningful design wins remained strong we've achieved success across the diverse range of end markets applications and geographies.

Which underscores our global capabilities and extensive reach are.

Our close collaboration with our customers' engineering teams.

Played a pivotal role in accelerating the development of next generation products and design initiatives.

As we continue to grow organically through the new business activities bolstered by strategic acquisitions, we are well positioned to continue executing on our long term growth strategy.

David Heinzmann: For the full year 2023, we expect to exceed operating margins to be delivered when we last experienced market down cycles in disruptions in 2019 and 2020. We remain confident in our margin resiliency despite the current challenging macro-environment, reflecting our robust outgrowth opportunity and well-position cost structure. Our ability to drive strong cash flow through cycles enables us to continue investing for future growth across our portfolio and deliver outsize long-term shareholder value.

I will now turn the call over to me at all to provide additional color on our financial performance.

Okay.

Good morning, everyone.

Joining us today.

Please turn to slide 10.

Good results.

Revenue of $607 million exceeded the high end of our guidance as we continued working through backlog.

Several customer product launch.

Revenue was down 8% and down 11% organically versus last year.

David Heinzmann: Now let's move on to business design wins during the third quarter. For industrial and markets on slide six. We continued to build robust and global funnel of new business opportunities and secured a wide range of design wins. We secured a multi-technology win for energy storage in India and leveraged our solutions focused product portfolio to deliver a solar design win in the AMA region. We also secured key industrial safety design wins across the energy sector, including wins in Indonesia and North America.

Acquisition, and foreign exchange and a 3% growth.

GAAP operating margins were 15, 4% in the quarter.

Adjusted operating margins were 16, 5%, while adjusted EBITDA margin finished at 22%.

GAAP diluted earnings per share in the quarter was $2.30 adjusted diluted EPS was $2.97 higher than our projections driven by our stronger sales performance.

Our GAAP effective tax rate was 23, 3% and adjusted effective tax rate was 20%.

David Heinzmann: Taking a step back, industrial safety remains a long-term growth theme for us given the need for safeguards against electric fusion from higher power applications in an increasingly electrified world.

We've continued to be prudent in spending while furthering investments in high growth opportunities for our future pipeline.

With the resiliency of our business and operating execution across multiple factors, resulting in year to date adjusted operating margin of 17, 4% and adjusted EBITDA margins over 23%.

David Heinzmann: Turning to the transportation markets on slide seven, we continue to see a strong funnel of meaningful content opportunities driven by the ongoing push towards greater sustainability connectivity and safety. For passenger vehicles, the launch of several new OEM platforms, particularly new programs coming online in China, were a key driver in the quarter. Momentum with EVs and EV charging infrastructure helps secure wins for both low and high voltage applications. We won new business for a vehicle telematics module by leveraging product offerings from our seeing case switches portfolio. An area where we are seeing design win success is our innovative current sensor offerings, which are helping drive new business opportunities for EV battery management systems and inverter applications.

The strength of our business model also shine this quarter as we generated yet.

$62 million in operating cash flow.

$140 million in free cash flow.

Year to date, we generated $250 million in free cash flow and 116% conversion rate to net income.

We are ahead of last year, despite lower cash earnings are testament to our ongoing focus on inventory and overall working capital management.

We've reduced our own inventory $66 million, so far this year and lowered inventory days on hand at 15 days.

We've got a typical fourth quarter seasonality, we expect another strong quarter of cash generation aligned to our full year target of 100% free cash conversion as a percentage of net income.

David Heinzmann: Within the commercial vehicle space, we secured a multi-technology win for a medium-duty EV truck that will utilize software from our embedded acquisition in conjunction with hardware from our legacy portfolio. A great example of leveraging complementary technologies to drive revenue synergies. We also won new business for commercial truck and bus applications in South America and China.

We've also maintained our net debt to EBITDA leverage at one four times continuing to provide ample capacity for both organic and inorganic growth.

Okay.

Moving on to our segment results turning to slide 11.

David Heinzmann: In Japan, we were able to leverage some of the rugged and reliable switch products from our carling portfolio to win new business for construction and specialty vehicle applications.

<unk> sales were down 14% year over year and down 17% organically.

Operating margins continue to get over 22% and adjusted EBITA margin to over 28%.

David Heinzmann: Moving on to slide 8 in electronics and markets, design activity continues to be robust. We're seeing multi-technology design wins globally across a broad set of end markets. We secured a diverse range of design wins including power tools, garage door openers, appliances, and other general electronics. We continue to see growth in medical equipment and security in markets with wins globally. Our momentum in securing meaningful design wins remain strong. We've achieved success across a diverse range of end markets, applications, and geographies, which underscores our global capabilities and extensive reach. Our close collaboration with our customers engineering teams has played a pivotal role in accelerating the development of next generation products and design initiatives.

Sales were stronger than we had expected as we continue to work through backlogs with semiconductor customers in the quarter.

We've maintained our strong profitability profile amongst the dynamic end market environments and in between rebalancing.

Turning to the transportation segment on Slide 12 sales were down 3% overall and down 4% annual.

Organic basis.

Trends theory, Thank you Mark.

Again to support.

Our passenger vehicle business grew 12% as we supported several customers on the platform launches, particularly across China.

Our commercial vehicle business.

Down 16% with continued inventory destocking, largely among distribution partners as well as continued weakness across China markets.

David Heinzmann: As we continue to grow organically through the new business activities, bolstered by strategic acquisitions, we are well positioned to continue executing on our long term growth strategy.

Segment operating margins improved sequentially to five 5% and adjusted EBITDA margin over 11%.

We're starting to see the benefits.

Meenal Sethna: We will now turn the call over to Meadle to provide additional call on our financial performance.

We work across our passenger vehicles.

Ah contract commercial vehicle business.

Meenal Sethna: Good morning everyone, and we appreciate you joining us today. Please turn to slide 10 to start with the reporter results. Revenue of $607 million exceeded the high end of our guidance as we continued working through backlog and supported several customer product launches. Revenue was down 8% and down 11% organically versus last year. Acquisition in foreign exchange added 3% of growth. Gap operating margins were 15.4% in the quarter. Adjusted operating margins were 16.5% while adjusted EBIT down margins finished at 22%.

We are reducing cost structure, and also extending actions to optimize our product and customer mix.

While this will reduce sales growth in the near term.

Back to reduce and refocus our resources.

I'm confident ability.

We anticipate these actions will sustain our progress towards our mid teens segment margin target.

Across our industrial segment on slide 13 sales were up 8% and up 5% organically.

We continued to drive wins across growth areas, and solar Cleantech manufacturing and EV fast charging infrastructure.

Sales were a bit softer than we expected as we started seeing market softness in some industrial end markets, such as mining residential HVAC and capital equipment.

Meenal Sethna: Gap diluted earnings per share in the quarter was $2.30. Adjusted diluted EPS was $2.97 higher than our projections driven by our stronger sales performance. Our Gap effective tax rate was 23.3% and adjusted effective tax rate was 20%. We continued to be prudent in spending while furthering investments in high growth opportunities for future pipeline. We're pleased with the resiliency of our business and operating execution across multiple vectors resulting in near-to-date adjusted operating margins of 17.4% and adjusted EBIT down margins over 23%.

Well as some customers working through excess inventory.

We maintained strong profitability with operating margins over 15% and adjusted EBITDA margins just over 20%.

Turning to our forecast on slide ports.

We expect fourth quarter sales in the range of $520 million to $550 million.

At the midpoint, that's a decline of 13% versus last year.

12% sequentially.

As a reminder, our sales are typically down sequentially all of our segments going into the fourth quarter.

Meenal Sethna: The strength of our business model also shines this quarter as we generated $162 million in operating cash flow and $140 million in free cash flow. Year-to-date generated $250 million in free cash flow a 115% conversion rate to that income. We are ahead of last year despite lower cash earnings, a testament to our ongoing focus on inventory and overall working capital management. We've reduced our own inventory $66 million so far this year and lowered inventory days on hand by 15 days.

Would you expect a more pronounced at a more pronounced decline high power electronics products segment.

Some of the softness we're seeing in some industrial end markets.

Additionally, we've assumed about a 1% sales decline relating to the product line pruning and our commercial vehicle business.

We've also factored in continued inventory destocking, which we expect to continue into 2024.

We expect adjusted EPS to be in the range of $1 90 to $2 10, which assumes an 18% tax rate in the quarter.

Meenal Sethna: With our typical fourth-order seasonality, we expect another strong quarter of cash generation aligned to our full year target of 100% free cash conversion as a percentage of net income. We've also maintained our net debt to EBIT down leverage at 1.4 times continuing to provide ample capacity for both organic and inorganic growth and growth.

The sequential decline in earnings.

Actually driven by the sale of <unk>.

Slide 15 includes some additional full year 2023 color.

Current rate.

Ex foreign exchange to have about 35%.

<unk> impact on our EPS and a 50 basis point headwind to operating margins, but no material impact to sales.

Meenal Sethna: Moving on to our segment results, let's turn to slide 11. Electronic sales were down 14% year over year and down 17% organically. Operating margins continued at over 22% and adjusted EBIT down margins at over 28%.

We're projecting amortization expense of $66 million and interest expense of $40 million.

Based on our fourth quarter forecasted rate, we expect a full year tax rate of around 18, 6% and.

Meenal Sethna: Sales were stronger than we had expected as we continued to work through backlog with semiconductor customers in the quarter. We've maintained a strong profitability profile amidst the dynamic and market environment and inventory rebalancing.

And we are projecting full year capital expenditures of $90 million to $100 million.

Before I turn it back to Dave I Wonder reiterate we remain confident in the strength of the long term fundamentals of our business.

Meenal Sethna: Turning to the transportation segment on slide 12, sales were down 3% overall and down 4% annual on-hand organic basis. Trends vary by end-market, again, the support. Our passenger vehicle business goods 12% as we supported several customers on their platform launches, particularly across China.

As laid the foundation for our structural growth combining that with ongoing portfolio diversification and operational execution.

We are well positioned to drive upper teens operating margin for the year.

Stronger than our historical performance joined past market cycles.

Meenal Sethna: Our commercial vehicle business was down 16%, with continued inventory destocking, largely among distribution partners, as well as continued weakness across China markets. Segment operating margins improved sequentially to 5.5% and adjusted either down margins over 11%. We're starting to see the benefits from our production work across our passenger vehicle business. Across our commercial vehicle business, we're reducing the cost structure and also extending actions to optimize our product and customer products.

We will continue to focus on the areas, we control investing for both organic and inorganic growth opportunities and bolstering our cash generation.

We're confident these core building blocks position us well to deliver on our long term growth strategy.

I'd like to thank our team members and their unwavering hard work and dedication I think you'll ever for our customers everywhere and every day.

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

Thanks Neil.

<unk> I wanted to highlight some additions to the little fuse board of directors as we continue to refresh our board, adding diverse talented and capable business leaders Dr.

Meenal Sethna: While this will reduce sales growth in the near term, we expect to reduce and refocus our resources to amplify profitability. We anticipate these actions will sustain our progress toward our mid-team segment margin target.

Dr. Greg Henderson joined the board earlier this year, Greg as senior Vice President of the automotive and energy Communications and Aerospace group for analog devices.

Meenal Sethna: Across our industrial segment on slide 13, sales were up 8% and up 5% organically.

He is a seasoned global public company leader with extensive technology experience across the broad range of end markets we serve.

Meenal Sethna: We continue to drive winds across growth areas in solar, clean tech manufacturing, and EV fast charging infrastructure. Sales were a bit softer than we expected as we started seeing market softness in some industrial and markets, such as mining, residential HVHV, and capital equipment, as well as some customers working through access inventory. We've maintained strong profitability with operating margins over 15% and adjusted EBIT down margins just over 20%.

This comprehensive technical expertise management experience will make him a great addition to our board.

Gayla Delly also recently joined our board de La with CEO and member of the board of directors of benchmark electronics before retiring in 2016.

<unk> Board leadership, and broad management experience across companies operating in a diverse set of end markets.

Complement our board her track record of driving growth with market expansion.

Delivering financial performance will be beneficial as we execute our growth strategy.

Meenal Sethna: Turning to the forecast on slide 14, we expect 4th quarter sales and the range of 520 to $550 million. At the midpoint, that's a decline of 13% versus last year and 12% sequentially.

We're pleased to add both Greg and gala to airports.

In summary on slide 16, our solid year to date performance in a challenging macro environment reflects a resilient and increasingly diversified business model.

Meenal Sethna: As a reminder, our sales are typically down sequentially across all of our segments going into the 4th quarter. We do expect a more pronounced decline across our electronic product segment with some of the softness we are seeing in some industrial and markets. Additionally, we've assumed about a 1% sales decline relating to the product line pruning in our commercial vehicle business. We've also factored in continued inventory stocking, which we expect to continue into 2024.

While our financial results will be impacted in the near term from.

From continued market challenges, we expect to return to growth during 2024.

We remain confident in our ability to deliver long term shareholder value.

We continue to target double digit sales and EPS growth, we believe our projected 15 years sales and EPS CAGR of 10% and 18% <unk>.

Exemplify our execution track record through multiple cycles.

And with that I will now turn the call back to the operator for Q&A.

Meenal Sethna: We expect adjusted EPS to be in the range of $1.90 to $2.10, which assumes an 18% tax rate in the quarter. The sequence of decline in earnings is largely driven by the sales volume decline. Slide 15 includes an additional full year 2023 color. At current rate, we expect foreign exchange to have about a 35 cent unfavorable impact on our EPS and a 50 basis point headwind to operating margins, but no material impact to sales.

Thank you ladies and gentlemen at this time, if you do have any questions simply press star one and just a reminder, if you find your question has been addressed you can remove yourself from the queue by pressing star one again.

We will go first this morning to Luke junk at Baird.

Good morning, Thanks for taking the questions.

First question, Dave just wanted to gear off the comment.

With that you expect to return to growth in 2024, and I just want to align that with the Destocking you are seeing in the business right now.

I guess in our survey work, we're picking up on the fact that shorter lead times are hurting distributor order placements right now maybe a little mixed inventory at end customers as well just curious how that lines up with your world view and how long or it may be sure. These newer dynamics could take to digest, if you're also seeing them.

Meenal Sethna: We're projecting amortization expense of $66 million and interest expense of $40 million. Based on our fourth quarter forecasted rate, we expect a full-year tax rate around 18.6 percent, and we're projecting full-year capital expenditures of $90 to $100 million.

Great. Thanks, Luc it's that's always the challenge and the question as we look at kind of the Destocking, particularly in electronics.

Certainly if we're a little juice products lead times have been down and come back down to normal.

Meenal Sethna: Before we turn back today, I want to reiterate, we remain confident in the strength that the long-term fundamentals of our business. We've laid the foundation for their structural growth themes, combining that with ongoing portfolio diversification and operational execution. We're well positioned to drive upper teens operating margins for the year, stronger than our historical performance during past market cycles. We'll continue to focus on the areas we control, investing for both organic and inorganic growth opportunities, and both strengths, our cash generation.

For most product lines for quite some time now.

Some of our power semiconductor products are really just reaching that stage now to coming to a more normal.

Lead times and the environment.

What we've seen is our distribution partners.

Look at their inventory and where their carry most two months, we're seeing declining inventory.

And dollar inventory values at.

At the distribution partners, so, it's making steady progress.

We've just got to reach that stage, where in customers adjust their ordering lead times distributor as distributors get their inventories where they need them to be.

Meenal Sethna: We're confident these core building blocks, to position us well, can deliver on our long-term growth strategy.

And then things start matching up again and when we start matching up again of course, then that will actually drive that return to growth. Even if the end markets are reasonably flat, which we're hopeful that we'll begin to see some momentum in some of the end markets later next year.

Meenal Sethna: I'd like to thank our team members for their unwavering hard work and dedication as they deliver for our customers everywhere and every day.

David Heinzmann: And with that, I'll turn it back to Dave for some final comments. Thanks, Meadle.

So that's kind of our best view of it.

David Heinzmann: Before we wrap, I wanted to highlight some additions to the Little Fuse Board of Directors. As we continue to refresh our board, adding diverse, talented, incapable business leaders. Dr. Greg Henderson joined the board earlier this year. Greg is Senior Vice President of the Automotive and Energy Communications and Aerospace Group for Analog Devices. He's a seasoned global public company leader with extensive technology experience across the broad range of in-markets we serve. His comprehensive technical expertise, management experience will make him a great addition to our board.

Okay, great. Thank you for that and then.

In your remarks, you mentioned.

Working on actions insurance rotation in the commercial vehicle portion of that business, specifically to reduce costs and optimize your product and customer mix going forward.

Can you just comment specifically on what products and customers are looking at there and I appreciate the 1% sales headwind that you provided as well. Thank you.

Sure Yeah, Yeah, just taking a step back this is not necessarily anything new that we've done is something we do regularly within our portfolio, especially with taking a look at acquisitions and making sure that we're focusing our resources in driving the <unk>.

David Heinzmann: Gaila Deli also recently joined our board. Gaila was CEO and member of the Board of Directors of Benchmark Electronics before retiring in 2016. Gaila's board leadership and broad management experience across companies operating in a diverse set of in-markets. What complement our board? Her track record of driving, growth with market expansion, while delivering financial performance will be beneficial as we execute our growth strategy. We're pleased to add both Greg and Gaila to our board.

It is from the right areas in the portfolio. So.

We are focusing on the recently acquired carbon business, even though it's been a couple of years and.

This is an area where.

Call back in 2022, we were really focusing on the customer backlog and really delivering in trying to meet expectations as customers out there and now that we've gotten past some of that we're really taking a look at it really.

David Heinzmann: In summary, on slide 16, our solid year-to-date performance and the challenging macro environment reflects our resilient and increasingly diversified business model.

The entire portfolio, we have through that acquisition, both from a product perspective, and a customer perspective, and I'll just say there are select areas that we're starting with better.

David Heinzmann: While our financial results will be impacted in the near term, from continued market challenges, we expect to return to growth during 2024. The remaining company in our ability to deliver long-term shareholder value as we continue to target double-digit sales in EPS growth.

Forward, a little bit and you can there's an opportunity for us to really improve the profitability of the portfolio.

Remind you this is stuff we've done in the past as I mentioned as an example, we talked about this a few years back when we looked at our automotive sensor portfolio same type of thing. So this is just part of our playbook as we think about running the company.

David Heinzmann: We believe our projected 15-year sales in EPS Kagers have 10% and 18% exemplify our execution track record through multiple cycles.

Yeah.

Thanks for that and if I could just sneak one last question then.

Dave.

Operator: And with that, we'll now turn the call back to the operator for Q&A. Thank you, ladies and gentlemen. At this time, if you do have any questions, simply press star 1. And just a reminder, if you find your question has been addressed, you can remove yourself from the queue by pressing star 1 again.

If you could just comment on the.

Some of the backlog that you've been working through in terms of the semiconductor business in electronics and just how you see the backlog for the company compared to just a point of sales demand and the fact that you'd highlight it may be just some pockets of weakness in industrial thank you.

Luke Junk: We'll go first this morning to Luke Junk at the air. Good morning. Thanks for taking the questions. First question, Dave, just wanted to gear up the comments that you ended with that you expect to return to growth in 2024 and I just want to align that with the de-thocking you're seeing in the business right now. I guess in our survey work, we're picking up on the fact that shorter lead times are hurting distributed order placements right now, maybe a little mixed inventory and customers as well.

Yeah.

We've been like a lot of companies, particularly on the semiconductor side, particularly for us in the power semiconductor side, there has been an extended.

Extended lead times, there for quite some time.

And we've talked in the last couple of quarters, how we've been working on that and showing improvements in throughput to be able to bring that sort of inventory level down or the backlog down.

Yeah, we had a really strong quarter in the third quarter in the power semi business, where are we able to clean up the vast majority of that backlog to kind of get into a more stable environment, there and the power semiconductor business. So it becomes a bit business as usual.

Luke Junk: Just curious how that lines up with your real view and how long or maybe short these neurodynamics could take to digest as you're also seeing them. Thanks, Luke. It's always the challenge and the question is we look at the de-thocking, particularly electronics. Certainly for a little few products, lead times have been down and come back down to normal, you know, for most product lines for quite some time now. Some of our power semiconductor products are really just reaching that stage now to coming to more normal lead time in the environment.

We're seeing some pockets where there's some softness that's if you recall, that's a very heavy industrial customer base. So we've seen some softness there, but we also have areas, where we're seeing strong growth from there.

Some other industrial applications right like renewable.

I also have a medical business there that is quite strong right now as well.

Luke Junk: What we've seen is our distribution partners. We look at their inventory and where they're carrying months to months. We're seeing declining inventory, you know, and dollar inventory values at the distribution partners. So it's making steady progress. We just got to reach that stage where in customers adjust their ordering lead times, distributors, distributors get their inventory is where they need them to be. And then things start matching up again. And when we start matching up again, of course, then that will actually drive that return to growth, even if the end markets are reasonably flat, which we're hopeful that we'll begin to see some momentum and some of the end markets later next year.

Yeah.

Although we see some of these kind of broader based softness is there.

There's just pockets you know we've talked about it in the industrial side.

They're kind of broader based industrials are beginning to slow, but we're still seeing some growth driven out of these pockets of things like renewable energy industrial and safety and things like that that helped balance that so no.

It's a it's a complex business with a lot of different end markets that we're serving.

Part of the strength of the portfolios that we we do serve many different applications. We've targeted if that helps to balance that a bit.

Okay. That's very helpful. I'll Oh go ahead and leave it there. Thank you.

Luke Junk: That's kind of our best view of it. Great, great. Thank you for that. And then, you know, in your remarks, you mentioned that, you know, working on actions and transportation in the commercial vehicle portion of that business specifically to reduce costs and optimize your product and customer mix going forward. Can you just comment specifically on what products and customers are looking at there and, you know, appreciate the 1% sales that you provided as well.

Thank you for your questions Luc.

Thank you we'll go next to Matthew Matt Sheerin Stifel.

Yes, Thank you and good morning, a question regarding your guidance on <unk>.

On profitability it looks like.

Just backing into operating margin, it's going to be down roughly 6600 basis points, I'm, sorry, 300 basis points sequentially and.

Down significantly year on year.

I know that the negative volume leverage plays into that but is there a pricing or other factors because it looks like the margins will be basically where they were during the pandemic. So the lowest in four years. So does this mark the bottom in terms of margins or are there other things that play here.

Luke Junk: Thank you. Sure. Yeah, you know, just taking a step back. This is not necessarily anything new that we've done. This is something we do regularly. We did our portfolio, especially taking a look at acquisitions and making sure that we're focusing our resources and driving, you know, the values from the right areas of the portfolio. So, you know, we're focusing on their recently acquired carling business, even though it's been a couple of years, this is an area where you recall back in 2022, we were really focusing on the customer backlog and really delivering and trying to meet expectations of customers out there.

Thanks, Matt.

Question. So what I can say is you know.

We've talked in the past for us scale volume tends to be a pretty large driver for us in terms of the margin profile. If you will.

Quarter over quarter, especially when you have no near term trends that are going on so the case in the fourth quarter as I mentioned in my prepared comments with the sequential sales decline that we have really.

Luke Junk: And now that we've gotten past through some of that, we're really taking a look at really the entire portfolio we have through that acquisition, both from a product perspective and a customer perspective. And, you know, I'll just say there's select areas that we're starting with that are, you know, a little bit and there's an opportunity for us to really improve the profitability of the portfolio. You know, I remind you, this is stuff we've done in the past, as I mentioned, that's an example we talked about this a few years back when we looked at our automotive sensor portfolio, same type of thing.

The margin expected margin decline and im not going to comment on the exact margin here, but the expected margin decline really is a function of that sales volume as.

As I take a step back and think about our overall margin expectations for 2003 compared to past cycles.

We get reminded a lot of times, what life was like an OE down nine where marsh co Pal, which is up 10% and even during the pandemic period.

Luke Junk: So, this is just part of our playbook as we think about running this. Thanks for that, and if I could just sneak one last question in, Dave, if you could just comment on the backlog that you've been working through in terms of the semiconductor business and electronics, and just how you see the backlog for the company compared to just point of sales demand, and the fact that you'd highlighted maybe just some pockets of weakness in industrial.

2019 cycle that 19 to 20 period.

Margins finished off at about 14, and a half a percent or so and so our expectation is with all the work that we've done in the past few years from an execution perspective from a pricing perspective portfolio diversification I expect that we will finish better than that margin profile for 2023.

Okay and could you could you talk about the pricing environment I know you've had success in the last couple of years in terms of passing along.

Luke Junk: Thank you. Yeah, we've been like a lot of companies, particularly on the semiconductor side, particularly for us in the power semiconductor side. There's been an extended lead times there for quite some time, and we've talked in the last couple quarters how we've been working on that and showing improvements in throughput to be able to bring that sort of inventory level down or the backlog down. You know, we had a really strong quarter and the third quarter in the power semi-business where we were able to clean up the vast majority of that backlog to kind of get into a more stable environment there on the power semiconductor business.

Higher input costs.

Are you seeing pressure the other way here.

Yeah, Matt I think the pricing environment.

Ben.

A question a lot on that and what we've seen in it and I think it's kind of broad based actually it's not different than when I talk to our peers.

Our distribution partners are seeing quite similar that.

We do see pricing pressures.

But the pricing pressures are more of a return to kind of a normal environment.

The last couple of years have been abnormal where we've been able to pass along the cost increases to our to our customers and that's really driven pricing up meaningfully.

Luke Junk: So it becomes a bit business as usual. We're seeing some pockets, you know, where there's some softness that if you recall that's a very heavy industrial customer base. So we've seen some softness there, but we also have areas where we're seeing strong growth from there. Some other industrial applications were like renewable. We also have a medical business there that is quite strong right now as well. So, you know, although we see some of these kind of broader-based softnesses, there's these pockets, you know, we've talked about it in the industrial side where kind of broader-based industrials are beginning to slow.

We're not seeing that retrenching.

But we're kind of seeing a return to more normal environment. The reality is there's still a lot of cost pressures that we're dealing with.

We share that with our customers.

So right now what we see as kind of the big increases that were that we had to make to cover their cost increases over the last couple of years are holding.

But it kind of gets a return to that normal environment, where you do lose over a course of your a couple of percent on the pricing side.

Yeah.

Okay. Thank you and just lastly.

Luke Junk: We're still seeing some growth driven out of these pockets of things like renewable energy, industrial safety, and things like that that help balance that. So, you know, it's a complex business with a lot of different end markets that we're serving. And it's actually part of the strength of the portfolio is that we do serve many different applications we've targeted to help to balance it a bit. Okay, that's very helpful. I'll go ahead and leave it there. Thank you. Thank you for your question, Blue.

David you talked about demand in China auto being a little softer could you talk about your position there with China Oems.

Local Oems versus international Oems and content trends anything positive or negative going on there.

Yeah, I actually our comments were that our.

Our third quarter was quite strong in China.

There were preparations for a lot of platform launches.

Matt Sheeran: Thank you, the next now to Matt Sheeran at Cycle. Yes, thank you and good morning. A question regarding your guidance on profitability, it looks like just backing into operating margins is going to be down roughly 60, 600 basis points, I'm sorry, 300 basis points sequentially, down significantly year and year. I know that the negative volume leverage plays into that, but is there pricing or other factors? Because it looks like that the margins will be, you know, basically where they were in during the pandemic. So, you know, the lowest in four years.

Well, the Chinese Oems out lots of platforms and as they're launching those we have a strong position both with multinationals, but also with the local Chinese Oems.

And with a lot of launches going on there we had a very strong third quarter in China, Yeah far build in China, we expect to be okay, not particularly strong going.

Going forward, but.

We feel pretty good about it.

We've been open with the fact that on the high voltage side.

We expect we may not be able to maintain the same level of share with Chinese Oems as we do you know on the low voltage side, but we continue to have tremendous success on the low voltage side and pockets of success with Chinese Oems on the high voltage side as well.

Matt Sheeran: So, it does this mark the bottom in terms of margins or are there other things that play here? Thank you, Matt. Now, good question. So, what I would say is, you know, and we've talked in the past for us, sales volume tends to be a pretty large driver for us in terms of margin 12 highlights, you'll look quarter or over quarter, especially when you have, you know, near term trends that are going on.

Okay. Thanks for clarifying that's very helpful. Thank you.

Thanks for your questions Matt.

We'll go next to David Williams at benchmark.

Hey, good morning, first congratulations to David on the new role there.

Matt Sheeran: So, in the case of the fourth quarter, you know, they mentioned in my prepared comments with the sequential sales decline that we have, you know, really the margin expected margin decline and I'm not going to comment on in the exact margin here, but the expected margin decline really is a function of that sales volume. As I take a step back and think about, you know, our overall margin expectations for 23 compared to past cycles.

Looking forward to working with you.

And just kind of going back to the two.

The inventory situation is there a way maybe to the size. The magnitude that you think is still needs to be digested across your end markets and can you talk about maybe this lasting into to next year, but do you think this is maybe.

Or maybe <unk> or is it into the first half of the year, just trying to get a sense on how big of an inventory Destocking, we had still remaining.

Matt Sheeran: I know, you know, we get reminded a lot of times of what life feels like in 0809 where, you know, our margin profile was 10 percent. And even during the pandemic period, the 2019 cycle that has 19 to 20 period, you know, our margins finished off at about 14 and a half percent or so. And so, our expectation is, with all the work that we've done in the past few years, from an execution perspective, from a pricing perspective, portfolio diversification, I expect that we will finish better than that large and profile for 2023.

Okay.

Yeah.

That's the question, we wrestle with regularly as.

Visibility is not perfect certainly visibility to our distribution partners inventories is quite good.

But to their end customers.

That's maybe a difference we've seen a little bit in this cycle than what we've seen in previous cycles, perhaps in customers carried a bit more inventory than they normally did so.

So that's impacted the speed at which.

Our distribution partners and we've been able to drive down the inventory in the channels.

Matt Sheeran: Okay, and can you talk about the pricing environment? I know you've had success in the last couple years in terms of passing along higher input costs. Are you seeing pressure the other way here? Yeah, Matt, I think the pricing environment, it's been, we have questioned a lot on that and what we've seen and I think it's kind of broad-based actually. It's not different than when I talked to our peers, our distribution partners are seeing quite similar that we do see pricing pressures, but the pricing pressures are more of a return to kind of our normal environment.

So it's not perfect visibility there.

Clearly, we would say if we look at our distribution channels in the electronics side, we still have a few weeks of extra inventory there.

So that kind of methodically will wind down as it's been doing you know if we look at that you know, it's going to last well into 'twenty 'twenty four unless something changes.

Exactly when we haven't been able to we don't have the visibility to say is it going to be this month or that month, but we certainly expect we should be able to work our way through the first half.

Matt Sheeran: The last couple years have been abnormal where we've been able to pass along the cost increases to our customers and that's really driven pricing up meaningfully. We're not seeing that retrenching, but we're kind of seeing a return to more normal environment. The reality is there's still a lot of cost pressures that we're dealing with and we share that with our customers.

Okay, Great and then.

Maybe to Matt's question is just on the differential in content.

If you look across maybe China, specifically is as opposed to maybe your domestic customers. How should we think about the difference in content there.

Matt Sheeran: So right now what we see is kind of the big increases that we had to make to cover the cost increases over the last couple of years are holding, but it kind of gets a return to the normal environment where you do lose over a course of year a couple percent on the pricing set.

And maybe how that plays out from an EV and in an ice vehicle, how what is that differential.

Significantly higher in in China versus domestically. Thank you.

Yeah kind of interesting mix there on on content, if you take I used vehicles.

The contents on Chinese ice vehicles is approaching what we would find in the west These days because of the sophistication of the vehicles continues to grow dramatically.

David Heinzmann: Okay, thank you. And just lastly, David, you talked about demand in China, auto, being a little softer. Could you talk about your position there with China OEMs, local OEMs versus international OEMs and content trends, anything positive or negative going on there? Yeah, actually, our comments were that our third quarter was quite strong in China. There were preparations for a lot of platform launches. As you may know, a lot of Chinese OEMs have lots of platforms and as they're launching those, we have a strong position both with multinational but also with the local Chinese OEMs.

A large drivers of growth where were working are with with pretty pretty sophisticated vehicles.

So on the low voltage side.

David Heinzmann: And with a lot of launches going on there, we had a very strong third quarter in China. Car build in China, we expect to be okay, not particularly strong going forward. But we feel pretty good about it. We've been open with the fact that on the high voltage side, we expect we may not be able to maintain the same level of share with Chinese OEMs as we do on the low voltage side. But we continue to have tremendous success on the low voltage side and pockets of success, which are Chinese OEMs on the high voltage side as well. Okay, thanks for clarifying. That's very helpful.

Operator: Thank you.

These oh.

Oh, yes on the EV side.

But it's a it's a tough environment in China there so.

Perhaps our content in an EV in China, maybe a little lower than our content and an easy in Europe.

Very helpful. Thank you.

Yeah.

Thanks for your questions David.

Yeah.

And ladies and gentlemen, just to reminder, star one please for questions. This morning, We'll go next now to David Silver CL King and associates.

Yeah.

Yeah, Hi, good morning.

Maybe I'll just start with a question on your Capex guidance, but if I'm correct here I think the number you put out for full year now as maybe.

2000, $25 million lower than it was earlier and I'm just wondering if you could maybe comment on that in terms of maybe.

David Williams: Thanks for your questions, Matt. We'll go next now to David Williams, Ed Benchmark. Hey, good morning.

Pinpoint where discretionary spending is being reduced and if you consider this maybe more of a delay.

David Williams: First congratulations to David on the new role there looking forward to working with you. And just kind of going back to the inventory situation. Is there a way maybe to decide the magnitude that you think is still needs to be digested across your urine markets? And you talked about maybe this lasting into next year, but do you think this is in the maybe one Q or is it into the first half of year, just trying to get a sense on how big of an inventory.

Rather than.

Suspension or cancellation so.

Where would the shifts in your Capex budget and how do you expect that to progress maybe into 2024.

Sure David So, yes, compared to if I think back to the beginning of the year and forecast we had on Capex. We have brought that down I think a few things one to answer one of your questions. This isn't a.

David Williams: He's talking we have still remaining. Yeah, that's, that's the question we wrestle with regularly as visibility is not perfect. Certainly visibility to our distribution partners, inventory is quite good. But to their end customers, and that's maybe a difference we've seen a little bit in this cycle than what we've maybe seen in previous cycles, perhaps in customers carried a bit more inventory than they normally did. So that's impacted the speed at which our distribution partners, and we've been able to drive down the inventory and the channels.

David Williams: So it's not perfect visibility there. Clearly, we would say if we look at our distribution channels in the electronic side, we still have a few weeks of extra inventory there. So that kind of mathematically will line down as it's been doing. You know, if we look at that, you know, it's going to last well into 2024, unless something changes. Exactly when we haven't been able to, we don't have the visibility to say, is it going to be in this month or that month, but we certainly expect we should be able to work our way through the first half.

Necessarily a permanent reduction in.

Most cases, it's just delayed and its delayed because when we start out the year, we had a few what we thought.

What's going to happen to be here clearly, it's it started to move a little bit softer and we've talked about volumes, maybe coming down a little bit and we're extending a little longer than we thought so where we have a lot of businesses that were anticipating capacity adds during the year.

They said you know what I think we can hold off a little bit given where the volume trends are and well look at moving some of that out into 2024.

At the same time, we continue to spend for the growth that we have aggressively anticipate.

Other areas like health and safety normal maintenance and even sustainability I guess, a lot of things that we're doing around our manufacturing and supply chain footprint around improving the energy usage to water usage, especially when we think of that new equipment. So trust those investment.

Manner, they're important to our customers and important to our employees and they are important to our profitability as well so.

David Heinzmann: Okay, great. And in the back, maybe the math question is just on the differential in content. And if you look across maybe China specifically as opposed to maybe your domestic customers, how should we think about the difference in content there? And then maybe how that plays out from an EV and an ICE vehicle? What is that that differential? And is it significantly higher in China versus domestically?

No big shift other than just a little bit of a delay given the macro environment.

Yeah.

Okay.

Okay. Thanks.

This is a question that has come up I guess with a couple of my other kind of electronics components.

Components related companies.

But the companies and I think I heard some parallels.

David Heinzmann: Thank you. Yeah, I got an interesting mix there on content. If you take ICE vehicles, the content on Chinese ICE vehicles is approaching what we would find in the West these days. Because the sophistication of the vehicles continues to grow dramatically and large drivers of growth where we're working are with pretty sophisticated vehicles. So on the low voltage side. These, you know, OEMs on the EV side. But it's a tough environment in China there. So, you know, perhaps our content in an EV and China may be a little lower than our content in an EV in Europe.

In your opening remarks, so here goes but they did draw a pretty sharp contrast between on the one hand.

David Heinzmann: Very helpful. Thank you.

Continued healthy activity on the new contract wins or the new design front, but then.

The sluggish relatively sluggish demand for maybe legacy products in various end markets and I was just wondering if you could maybe comment on that and maybe think about it in terms of what you are hearing which you mentioned earlier from your distribution channel in other words.

Do you interpret the softness.

In distribution business now is.

Something temporary is it something where customers are becoming more price related is it cyclical.

Our customers waiting for the next generation products and some of that demand might.

Just might fall off due to obsolescence, but.

In serving the current softer markets.

Operator: Thanks for your questions, David. And ladies and gentlemen, just a reminder, star one, please for questions this morning.

Do you draw a pretty clear distinction between healthy activity at the leading edge versus.

David Kilver: We'll go next now to David Kilver at CLT and Associates. Yeah, hi.

Persistently soft markets this year.

Sorry for serving current end markets sorry about the long winded question, Yeah, No no I understand that the nature of the question you know our design activity.

David Kilver: Good morning. Maybe I'll just start with a question on your cap ex guidance. But if I'm correct here, I think the number you put out for a full year now is maybe 20, 25 million lower than it was earlier. And I'm just wondering if you could maybe comment on that in terms of maybe pinpoint where, you know, discretionary spending is being reduced. And if you consider this maybe more of a delay rather than, you know, suspension or cancellation. So, where would the shifts be in your cap ex budget and how do you expect that to progress maybe into 2020? for.

The board continues to be extremely robust and certainly electronics, we have you know.

A great deal of design activity in many many different end markets. So we don't see any signs of any kind of slowing of activity on designing in new products designing in new applications, we see that extremely robust right now so that's a healthy indicator for kind of the medium term.

Certainly long term for us we see that we've talked about the fact that there are pockets of end markets within electronics.

I've been down for a while so think of personal electronics consumer electronics, so kind of customer facing things like small appliances Pcs tablets those markets have clearly been down.

David Heinzmann: Sure, David. So, yes, compared to, if I think back to the beginning of the year and the forecast we had on CAPEX, we have brought that down. I'd say a few things, one, you know, to answer one of your questions, this isn't a, you know, necessarily a permanent reduction. In many cases, it's just delayed. And it's delayed because, you know, when we start out the year we had a few on what we thought was going to happen to the year, clearly it started to move a little bit softer.

We've heard from some others that perhaps they're seeing the bottom in some of that.

You know that are you know some of the whoever advanced semi chip guys, who we're serving some of those markets are beginning to see that they think that's bottoming out a bit which is certainly we welcome that that'd be a good news to see that kind of bottomed.

David Heinzmann: We've talked about volumes, maybe coming down a little bit and we're extending a little longer than we saw. So, where we have a lot of businesses that were anticipating capacity ads during the year, you know, they've said, you know what, I think we can hold off a little bit given where the volume trends are. And we'll look at moving some of that out into 2024. At the same time, you know, we continue to spend for the growth that we have, the growth that we anticipate, other areas like health and safety, normal maintenance and even sustainability.

The bulk of our challenge.

Is the digestion of the inventory in the supply chain that is that is the the primary story that we've just got to work our way through and as we get through that digestion.

And we won't Ashwin, just mathematically of course see a return to growth because we will balance off between.

You know orders in in orders out.

And so that in of itself will start to show growth for us and with a healthy design activity and things like that.

David Heinzmann: Right? There's a lot of things that we're doing around our manufacturing and supply change footprint around improving the energy usage, the water usage, especially when we think about new equipment. So, for us, you know, those investments matters. They're important to our customers, they're important to our employees, and they're important to our profitability as well. So, no big shifts other than just a little bit of the delay given the macro environment.

David Kilver: Okay, thanks. And this is a question that has come up, I guess, with a couple of my other kind of electronics components related companies.

And then the real growth comes when do you start seeing an uptick in demand beyond that.

So we still remain pretty bullish.

Okay, Great and then just a quick one I usually hate to grab a question from the headlines but.

It's hard to ignore I guess, a couple of high profile labor negotiations in recent weeks, maybe last couple of months.

And whether it's the auto workers or the truck truck drivers et cetera.

Has there been any change in your thinking about kind of your overall.

Labor situation for skilled industrial workers or how does that.

Just that general environment.

David Heinzmann: But the companies, and I think I heard some parallels in your opening remarks, though here goes, but they did draw, you know, a pretty sharp contrast between, on the one hand, you know, continued healthy activity on the new contract winds or the new design front. But then, you know, the sluggish, relatively sluggish demand for maybe legacy products in various end markets. And I was just wondering if you could maybe comment on that and maybe think about it in terms of what you're hearing, which you mentioned earlier, from your distribution channel.

Labor was <unk>.

Cost and availability, how does that factor into your thinking about next year. Thank you.

Yeah, we don't a we don't have any kind of unusual situations from a labor perspective, we have labor pretty balanced across different regions of the world that we've had long term positions with us.

We worked very hard to be kind of the favorite employer wherever we're at and we have a great reputation in those spaces invest heavily into the communities where we work.

And so we usually have pretty good balanced kind of relationships, there and don't see anything unusual obviously.

The UAW strike had a impact a modest impact on our third quarter and it has you know good news is it seems to have been winding down now, but it will even that will have a modest impact on our fourth quarter as well.

David Heinzmann: In other words, you know, do you interpret the softness in distribution business now as, you know, something temporary? Is it something, you know, where customers are becoming more price-related? Is it cyclical? I mean, are customers waiting for the next generation products? And some of that demand might, you know, just might fall off due to obsolescence. But, you know, in serving the current softer markets, you know, do you draw a pretty clear distinction between, you know, healthy activity at the leading edge versus, you know, persistently soft markets this year, you know, for serving current end markets.

But we don't see that as an overarching concern.

Thanks, very much I appreciate all the color.

Thanks for your questions David.

We'll go next to Matthew Joshua bus shelter at TD Cowen.

Hey, guys. Good morning, Thanks for taking my questions and let me Echo the congrats and good luck David.

I wanted to ask you about inventories as well so totally appreciate that trying to time or quantify things in the channel is difficult, but I wanted to ask you about your on books levels.

David Heinzmann: Sorry about the long-winded question. Thank you. Yeah. No, I understand that the nature of the question, you know, our design activity kind of crossed the board continues to be extremely robust. And certainly in electronics, we have, you know, a great deal of design activity and many, many different end markets. So we don't see any signs of any kind of slowing of activity on designing in new products, designing in new applications. We see that extremely robust right now.

Neal in your prepared remarks, you called out some good progress year to date I was wondering is there a target level that you'd like it to be because I still see it's over 100 days now pre COVID-19. They used to run sort of in the 80 to 90 days range I just would be curious how youre thinking about the level you'd like on books inventories to be in and how we should think about that as we.

Contextualize the channel inventory as well thank you.

Yeah, No. That's a great question, Josh as you mentioned you made really good progress this year on inventory reductions as you have been talking about the past few quarters thats been a huge working capital focus area for us and that's been a nice tailwind as it relates to our cash generation this year.

David Heinzmann: So that's a healthy indicator for kind of the medium term, and certainly long term for us. We see that we've talked about the fact that there are pockets of end markets within electronics that have been down for a while. So I think of personal electronics, consumer electronics, so kind of customer-facing things like small appliances, PC tablets. Those markets have clearly been down. And we've heard from some others that perhaps they're seeing the bottom of some of that, you know, that, you know, some of the advanced semi-chip guys who are serving some of those markets are beginning to see that they think that's bottoming out a bit, which is certainly we welcome that to be good news to see that kind of bottom.

Running at about 115 ish days yourself and inventory on hand.

Target somewhere 100, maybe a little bit more than 100 days of inventory on hand.

Biggest change for us versus the reference point, you mentioned is as our business has evolved versus pre pandemic times.

Theres different mix, some of which have longer lead times and if we continue to grow our OEM related business well, we are holding a lot of our own inventory also that that adds a little bit more so I would say our target maybe a little higher than historical but at the same time, we've got more.

David Heinzmann: The bulk of our challenge is the digestion of the inventory and the supply chain. That is the primary story that we've just got to work our way through. And as we get through that digestion. And we will naturally just mathematically, of course, see a return to growth because we'll balance off between, you know, orders in and orders out. And so that in and of itself will start to show growth for us and with the healthy design activity and things like that, you know, then the real growth comes when you start seeing an uptick and demand beyond that.

We can make that's going to help us from a cash generation still going into the end of the year and going into 2024, So I'm pretty pleased with where we are the progress we've made and where we're heading I think our teams have done really a tremendous job on managing through some really challenging market dynamics.

I appreciate all the color there and you actually teed up my follow up pretty nicely.

You called out softness in consumer and personal electronics that it sort of stabilizing could you remind us of within your electronics segment as we sort of think about this inventory digestion the exposure between things like consumer personal electronics datacom in the in the industrial and automotive anything you can help help us quantify.

David Heinzmann: Do we still remain pretty bullish? Okay, great. And then just a quick one, I usually hate to, you know, grab a question from the headlines, but, you know, it's hard to ignore, I guess, a couple of high-profile labor negotiations in recent weeks, maybe last couple months. And, you know, whether it's the auto workers or the truck drivers, etc. Has there been any change in your thinking about kind of your overall labor situation for skilled industrial workers or how does that, you know, just that general environment of labor-wise cost and availability?

It would be great. Thank you.

Yeah, what I would what I would say is on kind of a consumer facing the consumer electronics side.

That's around 20% or less of our electronics business or if you think about it corporately, it's less than 10% Corporately.

We don't really break out you know industrial within electronics, specifically, but keep in mind, our power semiconductor business has a heavy industrial piece to that and some of the core electronics does it as well so it's a meaningful portion.

David Heinzmann: How does that factor into your thinking about next year? Thank you. Yeah, we don't have any kind of unusual situations from a labor perspective. We have labor pretty balanced across different regions of the world that we've had long-term positions within. We work very hard to be kind of the favored employer wherever we're at. And we have a great reputation in those spaces. We invest heavily into the communities where we work. And so we usually have pretty good balance to kind of relationships there.

In fact, we've talked about from an end market exposure as a company.

Though we have our reporting segments, which are technology based kind of keeping in mind that we have about a third of our revenues that are targeting that are ending up in the transportation space. That's kind of split 50 50 between commercial vehicle and pass car about a third in traditional electronics and about a third.

David Heinzmann: And don't say anything unusual. Obviously, you know, the UAW strike had a impact, you know, a modest impact on our third quarter. And it has, you know, good news as it seems to have been winding down now, but it will, even that, will have a modest impact on our fourth quarter as well. But we don't see that as an overarching concern. Thanks very much. I appreciate all the color. Thanks for your questions, David.

In traditional industrial applications.

So hopefully that helps give you a little color.

Definitely thank you Dave I appreciate the color.

Thanks for your questions Josh.

And ladies and gentlemen, just a final reminder, starwood. Please for any further questions. This morning.

And it appears we have no further questions. This morning, Mr. Kelly I'll hand things back to you for any closing comments.

Joshua Buchalter: We'll be back next to Joshua Bushhalter at TD Cowan.

Joshua Buchalter: Hey guys, good morning. Thanks for taking my questions. Let me echo the congrats and good luck to David. I wanted to ask about inventories as well. So totally appreciate that trying to time or quantify things in the channel is difficult, but I wanted to ask about your on-books levels. You know, you're prepared and we'll actually call out some good progress here today. I was wondering, is there a target level that you'd like it to be?

Thanks, Bill and thanks, everyone for your questions that concludes our Q&A session. Thank you for joining us on today's call and for your interest and little to US. We look forward to speaking with many of you at the November 8th Baird Global Industrial Conference.

Joshua Buchalter: Because, you know, I still see it's over a hundred days now and pre-COVID used to run sort of in the 80s and 90s, days range. I just would be curious how you're thinking about the level you'd like on-books inventories to be and how we should think about that as we contextualize the channel inventory as well. Thank you.

And in November 9th Stifel Midwest, One on one growth conference have a wonderful day. Thank you.

Thank you Mr. Kelly again, ladies and gentlemen that will conclude the little few third quarter 2023 earnings call again. Thank you so much for joining us all a great day Goodbye.

Okay.

Hum.

David Heinzmann: Yeah, now that's a great question, Josh. As you mentioned, we made really good progress this year on inventory reductions as, you know, we're talking about the past few quarters that's been a huge working capital focus area for us and that's been a nice tailwind as it relates to our past generation this year. We are running it about, you know, 115-ish days or so of inventory on hand. They are targets somewhere, a hundred, maybe a little bit more than a hundred days of inventory on hand.

David Heinzmann: The biggest change for us versus the reference point you mentioned is as our businesses evolve versus pre-pandemic times, you know, there's different myths, some of which have longer lead time and as we continue to grow our OEM-related business, where we're holding a lot of our own inventory also, that adds a little bit more. So I would say, you know, our target might be a little higher than historical, but at the same time, we've got more progress that we can make that's going to help us from a cash generation still going into the end of the year and going into 2024. So I'm pretty pleased with where we are, the progress we've made and where we're heading. I think our teams have done really a tremendous job on managing through some really challenging market dynamics.

David Heinzmann: I appreciate all the color there and you actually teed up my follow-up pretty nicely. Do you called out softness and consumer and personal electronics that is sort of stabilizing? Could you remind us of, you know, within your electronics segment as we sort of think about this inventory digestion, the exposure between things like consumer, personal electronics, data comm and the industrial and automotive, anything you can help us quantify would be great. Thank you.

David Heinzmann: Yeah, what I would say is on kind of the consumer facing the consumer electronics side, that's around 20% or less of our electronics business or you think about it corporately, it's less than 10% corporately. We don't really break out, you know, industrial within electronics specifically, but keep in mind our power semiconductor business has a heavy industrial piece to that and some of the core electronics as well. So it's a meaningful portion.

David Heinzmann: In fact, we've talked about from an in-market exposure as a company, although we have our reporting segments which are technology-based kind of keeping in mind that we have about a third of our revenues that are targeting that are ending up in the transportation space and that's kind of split 50-50 between commercial vehicle and past car, about a third in traditional electronics and about a third in traditional industrial applications. So hopefully I helps give you a little color.

David Heinzmann: Definitely, thank you Dave, I appreciate the color. Thanks for your questions Josh.

Operator: And ladies and gentlemen, just a final reminder, star one please for any further questions this morning. And it appears we have no further questions this morning.

David Kelley: Mr. Kelly, I'll hand things back to you for any closing comments. Thanks, Bo. And thanks everyone for your questions.

Operator: That concludes our Q&A session. Thank you for joining us on today's call and for your interest and little views. We look forward to speaking with many of you at the November 8th fair global industrial conference and the November 9th steeple Midwest 101 growth conference. Have a wonderful day. Thank you. Thank you, Mr. Kelly.

Operator: Again, ladies and gentlemen, that will conclude a little few third quarter 2023 earnings call. Again, thank you so much for joining. I wish you all a great day.