Q3 2024 Littelfuse Inc Earnings Call
Speaker Change: Good day, everyone, and welcome to the little few third quarter 2024 earnings conference call. Today's call is being recorded. At this time I will turn the call over to ahead of investigations David Kelly, please proceed.
Speaker Change: Good morning and welcome to the little few third quarter 2024 earnings conference cost. With me today are Dave Heinzmann, President and CEO, and Meenal Sethna, Executive Vice President and CFO.
David Kelly: Yesterday we reported results for our third quarter, and a copy of our earnings release in slide presentation is available in the investor relation section of our website. A webcast of today's conference call will also be available on our website. Please advance to slide two for disclaimers.
David Kelly: Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainty.
David Kelly: Please review yesterday's press release and our forms Tim K and Tim Q for more detail about important risk that could cause actual results to differ materially from our expectations.
David Kelly: We assume no obligation to update any of this forward-looking information.
Speaker Change: Also, our remarks today refer to non-gap financial measures. Correct insulation 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. I will now turn the call over to Dave.
Dave Heinzmann: Good morning and thanks for joining us today. Let's start with highlights from Slide 4. In the third quarter, our performance was ahead of our expectations, but sales at the high end of our guidance range and earnings exceeding our guidance range.
Dave Heinzmann: The strength of our third quarter results are a testament to our experience teams and our strong correct record and commitment to execution.
Dave Heinzmann: We demonstrated the resiliency of our diversified businesses as we navigated an ongoing difficult environment with agility, while driving sequentially higher profitability across our three business segments.
Dave Heinzmann: We once again delivered strong free cash flow, and our balance sheet remains well-positioned to support our long-term growth strategy.
Dave Heinzmann: We leveraged our unique technology positioning while partnering with our global customer base to again generate meaningful new business wins in the quarter. We also continue to benefit from robust design and activity given our broad exposure to secular themes across our end markets.
Dave Heinzmann: In the quarter, we saw a continuation of cautious customer ordering patterns and challenging in-market conditions. As we see these trends continuing, and given our typical observed seasonality, we expect fourth quarter sales to be sequentially lower than our third quarter levels.
Dave Heinzmann: Beyond the current dynamic macro environment, we remain confident in our long-term growth strategy and our ability to drive top-tier shareholder value seen on slide 5.
Dave Heinzmann: Meenal will provide additional color on our financial performance and outlook, but I want to thank our global teams for their dedication, hard work, and meaningful accomplishments in the third quarter.
Speaker Change: Before diving into our specific in market exposures and design activity, I wanted to highlight a few key market and inventory trends.
Speaker Change: Starting with passive electronics, we believe Cannell partner inventories have mostly returned to healthy levels, while customer design activity remains solid.
Speaker Change: In the third quarter, we continued to observe cautious order patterns from our customers, a reflection of ongoing muted demand trends. We observed particular weakness in Europe and China, while book-to-bills softened from the prior quarter.
Speaker Change: We observed similar trends across our protection semiconductor product lines, where order patterns broadly stabilized in the quarter, but have yet to meaningfully recover from recent levels.
Speaker Change: Now let's turn to our end markets and design activity, starting with electronics on slide six.
Speaker Change: Third quarter electronics market trends were broadly unchanged from the second quarter.
Speaker Change: Consumer products, appliances, and building technology demands continue to be subdued. Medical sales remained solid in the quarter, while demand for AI driven applications and broader data center was again robust.
Speaker Change: Regardless of near-term trends, electronics in-market design inactivity remains healthy and we delivered another strong win rate across a broad set of applications in the quarter.
Speaker Change: We see significant opportunity for design-win conversion to meaningful order growth once in-demand begins to recover, and we remain confident in our ability to drive long-term above-market growth.
Speaker Change: Turning to our electronics in-market design wins in the quarter, we secured a fused win for a data center application in North America, continuing to build on our momentum in this expanding market.
Speaker Change: We also secured meaningful gaming wins for customers in China and North America. We delivered several medical wins across multiple regions in the quarter, led by a defibrillator application for a customer in North America that will utilize our power semiconductor expertise.
Speaker Change: We also secured business for a European appliance application that will utilize our Switch product portfolio.
Speaker Change: Finally, we secured a win for a telecom application in India which demonstrates the global reach of our electronics expertise.
Speaker Change: Moving on to transportation in markets and design wins on slide 7. Our passenger vehicle exposure again benefited from our global scale, balanced technology offering, and strong customer relationships.
Speaker Change: In the third quarter, we observed global passenger vehicle production declines, but delivered content growth despite ongoing crooning activities.
Speaker Change: We observed continued growth in China as we leveraged our core low-voltage technology expertise to deliver meaningful expansion with local OEMs on both internal combustion and electric vehicles.
Speaker Change: We observed weaker vehicle production trends in North America and Europe, as well as slowing EV production growth. We are seeing solid low voltage demand from customers that has shifted recent production plans in favor of increasingly advanced internal combustion and hybrid vehicles.
Speaker Change: Our third quarter sales were also impacted by pruning associated with our passenger vehicle sensor product line.
Speaker Change: Taking a step back, we expect continued global passenger vehicle production declines in the fourth quarter. However, we are seeing continued innovations and content expansion opportunities as remain a key global partner to OEMs and Tier 1 suppliers pushing for electronification and next generation electrification advancements.
Speaker Change: Regarding our commercial vehicle exposure, our pruning and pricing actions continue to bear fruit despite continued soft in-market conditions in the quarter. Into the fourth quarter, we see soft in-demand trends persisting, driven by construction and agriculture markets.
Speaker Change: We remain confident in our ability to execute in an ongoing difficult commercial vehicle environment. We are encouraged by design inactivity and traction with our broad customer base.
Speaker Change: Long-term, we are well-positioned to deliver innovations across our broad commercial vehicle exposures, including material handling, agriculture and construction equipment, and heavy-duty truck and bus markets.
Speaker Change: In the quarter, we secured meaningful new transportation business across both passenger and commercial vehicle end markets.
Speaker Change: In passenger vehicles, we secured a meaningful current sensor opportunity with a customer in South Korea.
Speaker Change: We also delivered multiple low-voltage fuse winds for local OEMs in China.
Speaker Change: We secured multiple wins for onboard charging applications across China and Europe that will utilize our extensive circuit protection offering.
Speaker Change: Finally, we secured a meaningful solar sensor application win for a customer in Europe.
Speaker Change: In commercial vehicles, we secured several wins highlighted by construction equipment business for customers in Japan and North America that will utilize our broad switch product offering.
Speaker Change: We also delivered a low-voltage wind for an agriculture equipment application in Europe. Finally, we won circuit protection business for a specialty vehicle application for a customer in North America.
Speaker Change: Turning to slide 8, Industrial Markets and Design Activity.
Speaker Change: In the third quarter, we observed continued soft demand trends, including weakness for industrial equipment and factory automation applications, charging infrastructure, motor drives, and renewables. We are seeing an outsized impact across our power semiconductor business, where we have meaningful industrial in-market exposure.
Speaker Change: We are continuing to drive strong industrial safety growth given our leadership position as an innovator in this niche market.
Speaker Change: We are also benefiting from rebounding HVAC demand, albeit at a moderate pace to date.
Speaker Change: Looking forward, we believe current soft-in-demand conditions will persist through year-end.
Speaker Change: We remain confident in our niche positioning in a highly attractive and growing industrial end market supported by ongoing infrastructure spend, increasing electrical efficiency requirements, advancements in automation, and global commitments to decarbonization.
Speaker Change: In the third quarter, we secured a renewable solar application opportunity in Europe that will utilize our semiconductor product offering, as well as a solar opportunity that leverages our broad circuit protection capabilities.
Speaker Change: We also secured semiconductor business for a motor drive application in Europe in the quarter. We secured business for a commercial HVAC opportunity in North America that will utilize our temperature sensor offering.
Speaker Change: Further showcasing the diversity of our industrial expertise and reach, we delivered a meaningful circuit protection win for an EV bus charging opportunity in Europe, as well as a mining application for a leading customer in North America.
Speaker Change: Across our businesses, we continue to strive for operational excellence while driving innovations across our diverse set in markets for our broad customer base.
Speaker Change: We remain well-positioned to execute through cycles and deliver long-term, double-digit annual revenue growth, driven by our ongoing design and momentum, supporting sustainability, connectivity, and safety megatrends.
Speaker Change: I will now turn the call over to Meenal to provide additional color on our financial performance and outlook.
Meenal Sethna: Thanks Dave. Good morning everyone and thank you for joining us today. Please turn to slide 10 to start with details on our third quarter results.
Meenal Sethna: Revenue in the quarter was five hundred and sixty seven million dollars down seven percent versus last year in total and organically.
Meenal Sethna: The product line pruning actions we discussed reduced sales about 2% in line with our expectations in the prior quarter.
Meenal Sethna: Third quarter margins benefited from sequential sales growth as well as strong associated incrementals.
Meenal Sethna: Foreign exchange and commodities also had an 80 basis point favorable impact to margins relative to our expectations.
Meenal Sethna: Third quarter GAAP diluted earnings per share was $2.32 and adjusted diluted EPF was $2.71.
Meenal Sethna: Our third quarter GAAP effective tax rate was 25% and adjusted effective tax rate was 24%. Our tax rate was slightly lower than expected due to a favorable deduction.
Meenal Sethna: Please turn to slide 11 for updates on capital allocation. We continue to deliver strong cash generation year to date. In the quarter, operating cash flow was $80 million, and we generated $65 million in free cash flow.
Meenal Sethna: Year-to-date, we generated $157 million in free cash flow, yielding a 103% conversion rate.
Meenal Sethna: We've continued to drive working capital improvements, contributing to our solid cash flow performance.
Meenal Sethna: We expect to deliver on our targeted 100% free cash flow conversion for the full year, aligned with our long-term goals.
Meenal Sethna: We ended the quarter with $630 million of cash on hand and met debt to EBITDA leverage of 1.6 times.
Meenal Sethna: Given the strength of our balance sheet, we'll continue to prioritize our free cash flow for thoughtful acquisitions, and we will continue to return capital to our shareholders through our dividend and periodic share buyback.
Meenal Sethna: In the quarter, we returned $17 million of capital to shareholders via our cash dividend. Year-to-date, we've returned $91 million of capital to shareholders, $50 million through cash dividends, and $41 million through opportunistic share repurchases.
Meenal Sethna: We'll remain disciplined in our capital allocation strategy as we strive to maximize long-term shareholder value.
Meenal Sethna: Please turn to slide 12 for our product segment highlights starting with the electronics product segment. Reported and organic sales were down 12% versus last year.
Meenal Sethna: Sales across passive products were approximately flat versus last year while semiconductor products declined 21%.
Meenal Sethna: Operating margins in the quarter were 16.1% while EBITDA margins finished at 22.6%.
Meenal Sethna: Margins improved 100 basis points sequentially, reflecting our continued focus on execution.
Meenal Sethna: Moving to our transportation product segment on slide 13, purported and organic sales were down 3%.
Meenal Sethna: Sales were negatively impacted 5% versus last year from pruning actions we've been undertaking spread across our commercial vehicle business and our passenger vehicle sensor product line.
Meenal Sethna: Across our passenger vehicle business, sales declined 7% organically.
Meenal Sethna: Within commercial vehicles, sales to the quarter came in flat organically as pricing and volume were offset by ongoing end-market weakness and pruning acts.
Meenal Sethna: For the segment, operating margins were 13.7% and EBITDA margins finished at 19% in the quarter.
Meenal Sethna: margins improved 470 and 460 basis points sequentially led by continued focus on pricing actions
Meenal Sethna: operational improvements, and a more favorable than expected currency impact. We believe our solid year-to-date margin progress reflects our strong focus on pricing, pruning initiatives, and structural cost actions, as well as our balanced global positioning with customers.
Meenal Sethna: On slide 14, industrial product segment sales increased 7% reported inorganically, growing for the first time since last year.
Meenal Sethna: In the quarter, we benefited from strong industrial safety demand, continued HVAC volume recovery, solid data center momentum, and favorable mix.
Meenal Sethna: Operating margins finished at 19.3% and EBITDA margins were 23.8%.
Meenal Sethna: These represented improvements of 790 and 780 basis points sequentially.
Meenal Sethna: We continue to drive strong execution, offsetting soft end-demand conditions.
Meenal Sethna: Favorable currency movements also benefited margins versus our expectations in the quarter.
Meenal Sethna: Please move to slide 15 for the forecast.
Meenal Sethna: We expect typical seasonality with fourth quarter sales sequentially down to the third quarter.
Speaker Change: Following on to Dave's earlier comments, demand trends remain muted across a number of our end markets and more recently we've seen additional weakening across certain industrial end markets and global passenger car production.
Speaker Change: With these assumptions, we expect fourth quarter sales in the range of $510 to $540 million. This includes about a 2% headwind from product pruning versus last year.
Speaker Change: We're projecting fourth quarter EPS to be in the range of $1.90 to $2.10 and includes a tax rate of about 14 percent.
Speaker Change: At current foreign exchange and commodity rates, we're expecting a 5 cent headwind to EPS versus the prior year.
Speaker Change: Please turn slide 16 for additional full year 2024 color.
Speaker Change: We are seeing mitigating currency and commodity headwinds. At current rates, we expect those to be net neutral to sales and about a 20 cent headwind to EPS.
Speaker Change: We've delivered solid transportation and industrial segment margin progression through the year, reflecting our strong positioning with customers, continued operational execution, and ongoing traction with structural initiatives.
Speaker Change: We're also proud of the margin resiliency of our electronics product segment through this challenging environment.
Speaker Change: With these undercurrents, we are narrowing our Company Operating Margin Outlook for 2024.
Speaker Change: We expect to finish at about 13%, consistent with estimates we provided in July, reflecting our continued focus and execution on operational initiatives.
Speaker Change: Across our segment, we expect electronics operating margins for the full year in the mid-teens, industrial operating margins in the low-teens.
Speaker Change: and we expect transportation to finish in the high single digits for the year.
Speaker Change: On other modeling items, we are assuming $63 million in amortization expense and $39 million in interest expense, about two-thirds of which we expect to offset through interest income from our cash investment strategies.
Speaker Change: We are estimating a full year tax rate of about 21.5%, and we expect to invest about $90 million in capital expenditures.
Speaker Change: We continue to execute through a challenging environment while delivering strong cash generation.
Speaker Change: We believe our actions coupled with our diverse technology offering and broad customer relationships will drive best-in-class profitability, leading to top-tier value creation for our stakeholders.
Speaker Change: In closing, I want to thank the Global Little Thieves team for their tireless efforts and unwavering dedication.
Speaker Change: And with that, I'll turn it back to Dave for some final comments.
Dave Heinzmann: Thanks Meenal. Our better-than-expected third quarter results are a testament to the strong execution of our global team.
Dave Heinzmann: We believe our innovative solutions and deep customer relationships will continue to drive strong design wind momentum and further position us to deliver long-term above market growth shown on slide 17.
Dave Heinzmann: Our well-positioned balance sheet and strong cash generation provide us with considerable flexibility as we prioritize thoughtful but disciplined acquisitions in attractive end markets.
Dave Heinzmann: All in, we remain confident that we are on a path to double-digit annual revenue growth through cycles.
Dave Heinzmann: We will also maintain our unwavering focus on execution as we remain on track to deliver meaningful long-term earnings leverage.
Dave Heinzmann: I want to again thank our global Little Fuse team for their unwavering effort and commitment to customers.
Dave Heinzmann: With that, I will now turn the call back to the operator for Q&A.
Speaker Change: Thank you. The floor is now open for questions.
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Speaker Change: Your first question comes from the line of Luke Junk of Baird. Your line is open.
Luke Junk: Dave, for starters, just hoping you could parse out the 4Q guidance assumption at a high level in electronics specifically, between seasonal factors and with still some weakening on the power semi side, and just be interested in terms of clues as we look into maybe early next year as well.
Luke Junk: through the lens of what you're seeing specifically on power semi-orders as well. Thank you.
Speaker Change: Thanks, Luke.
Dave Heinzmann: So we kind of have two different situations going on in the electronic segment. So we have our passives, and I would throw in our protection semiconductor.
Dave Heinzmann: and kind of lump into that area where I would say is generally our channel partner inventories are healthy and kind of work through excesses there.
Dave Heinzmann: in-demand point of sales is reasonably stable, so we see that pretty good.
Dave Heinzmann: So we see, you know, kind of normal seasonality hitting us in that portion of the business going into the fourth quarter. And we kind of expect kind of normalization as we go into next year.
Dave Heinzmann: On the power semiconductor portion of that business in that segment, as you know, it's heavily kind of geared towards the industrial applications with also some medical as well.
Dave Heinzmann: where we're seeing kind of maybe that the bigger challenge is the slowing industrial demand really particularly out of Europe which is a strong part of our power semiconductor business.
Dave Heinzmann: so things in like machine automation activities and things like that that have slowed meaningfully and so therefore we see that kind of pulling back yeah maybe
Dave Heinzmann: more than normal seasonality because of in-market demand softness there.
Dave Heinzmann: I wish I could give you great clarity on when we see that improving out in 2025.
Dave Heinzmann: Right now, the visibility is pretty challenging, kind of geopolitical dynamics going on. So, we don't have a lot of visibility on that. At the end of the day, we kind of feel like we're finding the bottom there in that portion of the business.
Dave Heinzmann: and then looking for end market improvement over the course of 2025.
Dave Heinzmann: David Kelly, David Williams, Meenal Sethna, David Williams, Meenal Sethna,
Speaker Change: In terms of book-to-bill, would that suggest that, I think you had said it was maybe closer to one in July. Did that backslide at all in the quarter, would you say, Dave, on color semi? Yeah, as we talked about in the prepared remarks, our overall electronics book-to-bill softened a little bit as we kind of headed into Q4. What I would say, again, a bit of a tale of two sides of that segment.
Speaker Change: on the passives products and the protection products.
Dave Heinzmann: Yeah, it's running just slightly under one. So near parity, but just slightly under that. Yeah, a little softer on the power semiconductor portion of that. Again, other than the industrial applications, we're seeing POS being reasonably stable.
Speaker Change: Got it. And then for my thought, Meenal, just hoping you could help us square the upside that we saw in transportation and industrial margins this quarter, just with where four-year guidance implies things shaking out in the fourth quarter, just anything temporary in 3Q we should be adjusting for maybe currency impacts or whatnot. And then just kind of looking into 2025, any reason that we shouldn't view these stronger 3Q margins as suggesting just a higher floor for margins in both transportation and industrial moving into next year. Thank you.
Meenal Sethna: Sure. Thanks, Luke. And so on your questions on both transportation and industrial, I would say for both of those segments, you know, we feel good about the actions we have been taking, the progress we're making, you know, we've talked about different for transportation versus industrial, but we've got strong conviction on the sustainability of the margins as we've seen from the past few quarters.
Meenal Sethna: I would say Q3 for both segments included a few one-offs, first starting with foreign exchange. We have a very heavy Mexico presence in both of those segments and with some weaker peso we saw a nice tailwind from foreign exchange of about a 200 basis points on margin for both the segments.
Meenal Sethna: Even when you take that out of the equation, you know, we had some good mix coming through from the transportation and industrial side. Some of that was one-off and that also maybe helped us a little bit more in the third quarter than we were expecting.
Meenal Sethna: But I'd say overall, as we look
Speaker Change: Q4 going into 2025, we're making good progress. We expect to continue to make progress in 2025 with margin expansion and we're taking the actions around that, whether that's around
Speaker Change: footprint, cost reduction, and of course, you know, good some recovery on volume growth that we think that will really help drive the margin expansion into next year.
Speaker Change: Thank you for that. I'll go ahead and leave it there.
Speaker Change: Thanks for your questions, Luke.
Speaker Change: Your next question comes from the line of Matt Sheeran of Stiefel. Your line is open.
Matt Sheeran: Thank you.
Matt Sheeran: Yes, thanks. Good morning. So, just another question, Dave, regarding
Matt Sheeran: the semiconductor business and the weakness that you're seeing. It sounds like the inventory within passives within the channel are normal.
Matt Sheeran: POS is more stable. Can you give us a sense of what the inventory days in the channel look like for the semiconductors, the MOSFET business, and how long do you think that's going to take to normalize?
Speaker Change: Yeah, you know, so first of all in the power semiconductor portion of our business we have less distribution exposure. It's a bit, you know, it's a bit you know more even mix between direct
Speaker Change: and distribution in the Power Semi portion of our business.
Speaker Change: What I'd say is we don't see a lot of excess inventories in our channel partners on Power Semi. We do think industrial customers, end customers, perhaps have some inventory overhang.
Speaker Change: both on the component side and maybe finish split size as well, you know, which I think is adding to the dampening in the industrial segment there, so
Speaker Change: You know, it's not like in passives, you know, a year or so ago, it's really about driving inventory down in the channel. It's a little less of that dynamic in the power semiconductor side where it's a bit more related to, you know, the demand side and perhaps, you know, excess inventories that end customers.
Speaker Change: Okay, thanks for that. And then at the beginning of your comments, Dave, you talked about
Speaker Change: some of the margin improvement coming from pricing and working with customers. And I'm just wondering, what is the pricing environment, I would think, given the tough demand environment out there, that we would see some pricing pressure as volumes come back? Are you seeing that at all?
Speaker Change: You know certainly they've changed from a couple years ago but we've talked about this in the past and it really hasn't changed too much for us.
Speaker Change: So, first of all, the cost increases we saw over the last two or three years
Speaker Change: remain there. And so the pricing increases, meaningful ones, we had to put in place two or three years ago have been pretty resilient. So there, you know, we're not seeing things pull back from that. So they've been pretty sticky and pretty stable.
Speaker Change: We have seen kind of a return to more normalized sort of pricing environment. As you know, Matt, you know, price down year over year is a pretty common
Speaker Change: and we're certainly seeing that in the electronics and a bit in the industrial at a lower level. Quite frankly, we've been taking on the transportation side more active actions to drive pricing up to address some of our costs.
Speaker Change: concerns and profitability concerns there. So that's maybe a little less, you know, price erosion than normal in transportation. But we're not seeing really abnormal. You know, there might be a couple of products.
Speaker Change: in a couple of markets where we see a bit more challenge, but overall we're pretty comfortable with where we're seeing, you know, pricing hang in there.
Speaker Change: Okay, okay, that's it for me. Thank you.
Speaker Change: Thanks for your questions, Matt.
Speaker Change: Your next question comes from the line of Christopher Glenn of Oppenheimer. Your line is open.
Christopher Glenn: Thanks, good morning David Meenal. Morning. Just had a question on, you know, each quarter we hear about a
Christopher Glenn: pretty robust list of design wins and good kind of qualitative commentary on the wins. I'm curious...
Christopher Glenn: You know, if markets stay flattish, do those, you know, net to growth, or do they sort of play to offset, you know, trading older platform wins?
Christopher Glenn: Yeah, just curious about that.
Speaker Change: Sure, you know, what I would say is design inactivity across all of our segments continues to be pretty solid.
Speaker Change: So we're not seeing customers back away from designing next generation products and new applications for us. So that design activity continues to be good.
Speaker Change: We do continue to feel good about outgrowth on on the automotive side and also on the commercial vehicle side as those markets
Speaker Change: stabilize and drive improvement.
Speaker Change: Do we think that gives us growth expansion over time?
Speaker Change: And on the electronic side, really robust design activity. I will say that conversion from design end to production has been a little slower than kind of typical.
Speaker Change: We see some cautiousness there as people are making sure they're getting
Speaker Change: You know, the current products out the door and cleaned up before they're launching new ones, so that that conversion is taking maybe a little longer, but we also see that continuing to slowly add to our growth in addition to market growth there as well. So, I think actually signs are pretty positive for us in design activities.
Speaker Change: Thank you.
Speaker Change: Great. And then I was curious about capital allocation and how your pipeline looking overall. Is there a good mix of sizes and do you expect activity in 2025?
Speaker Change: Sure. As you know, M&A, thoughtful M&A, is a critical part of our long-term strategy.
Speaker Change: And we continue to have a robust funnel of being very active at looking at opportunities.
Speaker Change: We're looking for properties that will, you know, be into the spaces that we think will long-term create, you know, better diversification of our markets and be healthy places with good long-term growth trajectories that ultimately drive a higher organic growth pattern for us over time.
Speaker Change: So, continue to be very active in that, but we're also making sure that the opportunities we find are going to yield the returns that we feel are appropriate. And so that can be a little lumpy at times on that.
Speaker Change: So, you know, we don't have anything we're prepared to announce at this point in time, certainly, but I'd be shocked if there isn't some activity over the course of the next 12 months that we don't find some acquisitions to add to the mix, but nothing specific to talk about.
Speaker Change: Thank you.
Speaker Change: Thanks for your questions, Chris.
Speaker Change: Your next question comes from the line of Sari Boroditsky of Jeffries. Your line is open.
Speaker Change: Hey, good morning. This is Grant Smith, adversary. Thanks for taking our questions. So from your full year margin guidance by segment and some of the commentary on the one-time benefits in the third quarter, it seems to imply maybe a sequential step down in transportation and industrial margins in the fourth quarter. I'm just curious on the electronic side, there's some leverage that you can maybe pull to drive some continued sequential margin improvement in that segment despite the expectation for maybe some lower revenue.
Speaker Change: Sure grant I you know I can answer that one. Yeah, you know in general if I take a step back, you know we typically talk about
Speaker Change: David Kelley, Meenal Sethna, David Kelley, David Kelley, David Kelley, David Kelley,
Speaker Change: some of our businesses from a margin perspective.
Speaker Change: Similarly when you take a look at Q3 versus Q4 and our guide down in sales you know we are seeing a normal seasonal decline from a sales perspective so that volume impact that I talked about goes the other way as we think about the fourth quarter and that's really you know really what's what's the biggest factor driving that. We of course are focused on the things that we can do and what we can control and we continue to focus on cost reduction activities.
Speaker Change: Your comments specifically around electronics, we are focusing on on cost reduction in electronics, which includes, you know, some footprint work as well as just frankly, some ongoing costs and restructuring actions that we've been taking. So that is what we're focused on. And as we go into 2025,
Speaker Change: Again, another area for us where we expect to see margin expansion.
Speaker Change: Understood. Thank you for that. And then, you know, maybe on the industrial side you posted pretty impressive growth there this quarter. Just curious if you could provide a little bit more on what was the driver of that growth. Was it more so data center driven or kind of fairly broad across the categories you mentioned like data center, industrial safety, and HVAC? Thank you.
Speaker Change: Yeah, I would say...
Speaker Change: like a lot of our peers, industrial can be a bit of a mix on things, kind of broader based industrials tend to be a little a little slower with machine automation and those things particularly slow. Where we saw the growth drivers in our industrial segment were, as you pointed out, we do sell into data center applications there that continue to be robust.
Speaker Change: We've seen industrial safety, which we've talked about previously, as well as a nice niche where we have a lot of leadership in that position, and we're seeing that continue to be a growth driver for us.
Speaker Change: So I think those are pretty strong areas.
Speaker Change: And HVAC has been, you know, after being down for several quarters, beginning to kind of turn the quarter there and show some growth.
Speaker Change: Although kind of early stages on that, both residential and industrial, we really see opportunities in industrial as a big growth driver for us in the long term.
Speaker Change: Got it. Thank you.
Speaker Change: Thanks for your questions, Grant.
Speaker Change: And your next question comes from the line of David Williams of Benchmark. Your line is open.
David Williams: Hey, thanks for taking my question. Congratulations on the operating margin improvement, SQ.
Speaker Change: I guess first, maybe, David, are you seeing anything in terms of the design win, dollar value, or any changes that you look kind of maybe across that average win rate? Sounds like things are still robust, but just kind of curious how you're seeing the dollar value of each one of those wins come in. Has it changed meaningfully? Is it about the same? Are you seeing some growth in that ratio?
David: Sure, and let's start with a backdrop and I'll use my US terminology. We tend to be a business of singles and doubles, not home runs.
David Williams: So we're winning, you know, projects and platforms that are additive over time, right? So we don't get large, bulky sorts of wins. That's just not the nature of what our, how our business operates.
David Williams: So I would not say we've seen really any any shift or change in the size of wins or the size of opportunities. They continue to be pretty consistent. The only shift we've seen a little bit is that
David Williams: longer duration in the electronics cycle between design wind to production being a little bit elongated right now. We think that's really more of kind of a environmental, you know, situation now. I don't think that's an ongoing, we don't expect that to be the norm over time.
David Williams: So generally it's pretty stable, I think. I don't see big changes there.
Speaker Change: Thanks for the color. And then maybe if you just kind of think about the industrial segment that's been in this elongated down cycle.
Speaker Change: Do you think this is more of just cautiousness from customers, or do you think it's more demand-driven? I'm just kind of curious how you see that market in terms of recovery, and is it really Europe where you're seeing the biggest impact, or can you maybe give any color on North America and maybe outside of those regions?
Speaker Change: in terms of how Industrial is performing.
Speaker Change: and industrial I would say
Speaker Change: Yeah, we've talked a lot about Europe and China, by the way, too, where there's softer industrial demand that is certainly kind of showing up there.
Speaker Change: North America is a bit more stable. I would say we're not seeing it dropping. It's more of a stable environment, so the kind of shift or the change has been more Europe and Asia.
Speaker Change: As far as
Speaker Change: cautiousness and things you know I think it's people are being cautious about investment levels into factories and things like that at this point time interest rates are certainly not
Speaker Change: and necessarily positive for that.
Speaker Change: We are seeing a little bit on in the electronics portion of our business, which also sells into industrial applications, that
Speaker Change: Customers are kind of cautious on orders, so we're getting...
Speaker Change: more late orders, you know, last minute orders than maybe we typically do. Typically, we see things booked out a little further, and they tend to be dropping in, you know, with shorter lead times there, which I think demonstrates some of the cautiousness of that. And, you know, I think everything else equal. A lot of companies are ending their fiscal year at the end of the year, they'd prefer to have a little less
Speaker Change: inventory tied up at the end of the year as opposed to, you know, where they've operated through the course of the year. I think all those things kind of play a role in that.
Speaker Change: Thanks so much.
Speaker Change: Thanks for your questions, David.
Speaker Change: With no further questions that concludes our Q&A session. I will now turn the conference back over to David Kelley for closing remarks.
David Kelley: Yes, thanks everyone for joining today. We look forward to speaking with you at the November 12th Baird Global Industrial Conference in Chicago, as well as the December 11th Oppenheimer Midwest Virtual Summit. Thanks again and have a great day everyone.
Speaker Change: This concludes today's conference call. You may now disconnect.