Littelfuse, Inc.

Ladies and gentlemen, and welcome to LegalFuse fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press the star, then zero on your touchtone telephone. And as a reminder, this conference call is being recorded. Thank you. I would now like to hand the conference over to your host. Ms. Tricia Thompson, Head of Investor Relations at Little Fuse. Ma'am, please go ahead.

Good morning, and welcome to the Little Fuse fourth quarter 2020 earnings conference call. With me today are Dave Hindsman, President and CEO, and Meenal Sethna, Executive Vice President and CFO. This morning, we reported results for our fourth quarter, and a copy of our earnings release is available in the Investor Relations section of our website. A webcast of today's conference call will also be available on our website. Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review today's press release and our forms 10K and 10Q for more detail about important risks that could cause actual results to differ materially from our expectations. We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available in the investor relations section of our website. Before proceeding, I'd like to remind everyone that we will be hosting our virtual investor and analyst event on February 23rd at 9 a.m. Central Time. You can register for the event in the investor relations section of our website. We look forward to you joining us. I will now turn the call over to Dave.

Thank you, Tricia. Good morning, and thanks for joining us today. With a robust demand rebound across a number of automotive, electronics, and industrial end markets, we saw a stronger than expected finish to the year. We continued our return to growth and recorded fourth quarter sales of $401 million, up 18% versus last year. Through our focused execution, we achieved an adjusted EBITDA margin of 23% and delivered an adjusted EPS of $2.23, an increase of 91% year over year. Despite the challenging conditions, we delivered solid performance for the full year, with over $1.4 billion in sales and an adjusted EBITDA margin of 21%, while generating over $200 million in free cash flow. turning now to performance within our business areas. During the fourth quarter, our electronics product segment continued to experience a strong recovery across our product portfolio and in all regions. Our revenue growth was driven by higher than expected demand from ongoing work and learning from home trends. Consumer demand for a broad range of electronics, including laptops, tablets, and gaming devices, as well as small and large appliances, data center and communications infrastructure, and home automation applications continued to show strength. We also saw robust demand in automotive electronics with recovery in automotive in-market demand. Sales to our channel partners were balanced with in-market demand as weeks of inventory for our products remained within our normal range. Exiting the quarter, our electronics book-to-bill was significantly above one, While end markets remain healthy, we believe the strong bookings also reflect expected inventory build ahead of the lunar new year and to ensure uninterrupted supply of components in the months ahead. These behaviors can create volatility in orders and could lead to inventory build in the channel in the coming months. Our lead times are relatively stable, and we remain focused on meeting customer needs as we work closely with our distribution partners. Moving on to our automotive product segment. During the fourth quarter, we experienced a strong sequential and year-over-year improvement in sales. Across passenger vehicle markets, we grew more than 20% sequentially and year-on-year. We grew well above the mid-single-digit market growth in the quarter, with higher content gains coming from the demand shift towards trucks, SUVs, and other luxury vehicles, and continued growth in electric vehicles. We also saw growth from inventory build at OEMs and Tier 1s as they worked to catch up with market demand and build buffers to protect against any potential component supply disruptions. In our commercial vehicle business, we achieved solid fourth quarter revenue as we continue to see good market rebounds in heavy duty truck, construction and agriculture, as well as automotive aftermarket. We expect first quarter global car production will be down sequentially to around 21 million cars, although still significantly ahead of last year. We expect our first quarter revenue to be up significantly versus last year, with content growth continuing to outperform car build. However, we expect our sales later in 2021 to be unfavorably impacted by potential inventory burndown at OEMs and Tier 1s. While car builds are nearing a return to 2019 levels, The ongoing trajectory will depend on the economic recovery and shortages of components. We expect our long-term auto growth to continue outpacing global car build with our ongoing content opportunities. Within our commercial vehicle products, we expect momentum to continue near-term. In our industrial product segment, we saw healthy demand in several end markets, including renewables, energy storage and power conversion, and steady demand in HVAC. U.S. non-residential construction appears to be stabilizing after bottoming out, although demand has remained weak, and oil and gas and mining markets continue to be soft. As we announced in our press release last week, we acquired Heartland Controls, a manufacturer and leading supplier of electrical components to use primarily in HVAC and other industrial control systems, with annualized sales of approximately $70 million. We are excited to welcome Heartland Controls Associates to Littlefuse as we combine our capabilities and strong customer relationships. We are confident our industrial business will continue on a positive long-term trajectory. Our increasing number of design wins and new business opportunities, continued expansion outside North America, and expanded opportunities in the HVAC market with the acquisition of Heartland Controls will support this. We are seeing a strong start to 2021 with continued momentum across many of our end markets and remain cautiously optimistic for the year. However, there are several factors that limit our visibility to the latter part of the year. These include the ongoing uncertainties of the pandemic trajectory and vaccine deployment and the potential disruptions these factors could cause across both supply chains and market demand. Though we are managing our lead times, we are seeing customer inventory builds in some pockets in response to specific component shortages. We are starting to see this in the automotive industry, which will eventually lead to sales impacts as inventory is rebalanced. We are also experiencing higher costs in a number of areas, especially pandemic-related costs. We are seeing increasingly higher freight rates due to ongoing capacity limitations. We are continuing our COVID employee safety protocols at all of our sites this year, but do not expect to receive international government subsidies to offset these additional costs, as we did in 2020. Also, commodity costs such as copper and silver are at multi-year highs, and as discussed in our 2020 calls, we significantly reduced our discretionary expense last year and plan to add back a portion of those in 2021. Despite these uncertainties and headwinds, our teams will continue doing what we do well, meeting commitments to our customers and other stakeholders, minimizing disruptions to our business, and mitigating the factors we can't control. Our products are at the center of a long-term secular themes of a safer, connected, and more sustainable world. Even in a year like 2020, where virtual became the new normal, engineers and customers were still highly engaged and design activities continued. Based on our application expertise and operational excellence, we expanded existing positions and gained market share. In industrial end markets, we are leveraging our operational capabilities, including our global infrastructure, positioning us to capture a range of new business opportunities around the world. Customer relationships have proven valuable in this virtual environment as we continue to work closely with leading OEMs on a range of applications. During the fourth quarter, our broad portfolio of industrial fuses and relays, as well as our power semiconductor products, secure design winds, and renewable energy and energy storage, as well as HVAC and industrial motor drive applications. With close customer collaboration, we had a solar design win in North America and design wins for energy storage applications with leading OEMs, in Korea for our high-speed fuse, and in Europe for discrete MOSFETs. For HVAC applications, we secured a design win for our TVS diodes with the Chinese manufacture of residential air conditioners. In addition, our line of bipolar modules won new business for industrial motor drive applications in North America. Our new business funnel is healthy, and we are well-positioned to secure ongoing opportunities across a broad range of industrial end markets. Across electronics and markets, we continue to see product architecture enhancements focused on safety and efficiency. Our engineering and manufacturing teams are collaborating with leading customers to develop new solutions in the areas of overvoltage and thermal protection, ultimately expanding our market opportunities. For example, during the quarter, we worked closely with a strategic customer and launched a new protection product which prevents mobile electronics from overheating when placed on a wireless charging pad. We are now broadly marketing this new platform to other global customers. We also secured design wins for very small form factor resettable fuses, protecting battery management systems used with consumer electronics. We also won business with our new ground fault protection relay control panel for a data center application in Korea. In addition, we secured circuit protection and sensor design wins for large and small appliances. Our building and home automation vertical markets remain strong and intersect well across many HVAC applications. We saw design wins for TVS diodes for connected thermostats and solid-state relays for building automation applications. Our consistent ability to deliver reliable products is evidence that we never stand still and are committed to serving our more than 100,000 electronics end customers. For transportation end markets, We continue to experience strong momentum across EV and automotive electronics applications with the ever greater sophistication of electrical architecture and safety systems. We leveraged our strong OEM and Tier 1 relationships, technical expertise, and broad product portfolio to generate several design wins on onboard charging applications for EV programs across Europe and Asia. We also secured a power semiconductor silicon carbide design win for an EV charging infrastructure application in Europe. We had several automotive electronics design wins in the quarter for TVS diodes, in North America for powertrain system applications, and in China for a micropower distribution unit used to convert power for infotainment and telematics systems. We secured a few breakthrough traditional fuse design wins in strategically important markets in Japan and Korea. We believe these business wins will drive further momentum in these target regions. Our new business opportunity funnel is strong, and with our leadership in passenger car markets, we are confident in winning new business in high-growth areas that will drive our content growth well above global car build. Our commercial vehicle business continues to see growth in a number of regions beyond North America. Based on strong customer relationships, product differentiation, and quality, We secured design wins with a heavy-duty truck maker in China and an agriculture equipment manufacturer in Europe. Material handling applications continue to drive design wins across our product portfolio and the regions we serve. In North America, we won new business for our power distribution module and secured another design win for a customized timer used on a fuel cell charging circuit. And in Europe, Our temperature sensor probe will be used in forklift batteries for one of the world's largest manufacturers of batteries. In addition, we also won new business for an electric truck platform where several of our products support the low-voltage applications on the truck. We have made broad progress in expanding our global presence in commercial vehicle applications. I will now turn the call over to Minal to provide additional color on our financial performance and outlook.

Great. Thanks, Dave. Good morning, everyone. And thanks for joining us today. I hope everyone is off to a healthy start for the year. We concluded a challenging 2020 with a strong finish to the year as our fourth quarter results were well above expectations on both sales and earnings. We also had our second consecutive quarter of year-over-year sales growth, including another quarter of operating margins in our target range. Fourth quarter sales were up 18% over last year and up 16% organically. Sales benefited 2 percentage points from foreign exchange. Adjusted operating margins were 16.6% for the quarter, up 590 basis points versus last year, a function of our strong sales growth and continued focus on cost management. This also drove year-on-year adjusted operating margin flow through of 49%, stronger than we had forecasted. Adjusted EBITDA margins finished at 23% in the quarter, up 510 basis points versus last year. Fourth quarter GAAP diluted earnings per share was $2.39, and adjusted diluted EPS was $2.23, up 91% over last year, despite a much higher fourth quarter tax rate versus a year ago. For the full year 2020, sales of $1.45 billion were down 4% versus last year, both in total and organically. Adjusted operating margins were 14.3% flat to last year despite our sales decline. Notably, adjusted EBITDA margins finished at nearly 21% up 50 basis points versus last year and in our target financial range. We managed the decline in our operating margin drop through to 14% for the year versus our typical 35 to 40% range. This was an outcome of our operations quickly responding to the demand recovery and our teams taking several early actions to reduce costs and pursue government financial subsidies, all while preserving jobs for our associates during the down periods. I'm proud of our company's performance during this unprecedented year. Gap diluted EPS finished at $5.29 and adjusted diluted EPS was $6.40, down 6% versus last year. Our full year gap effective tax rate was 19.4% and our adjusted effective rate was 18.3%. Our tax rate favorability versus our forecast was primarily due to higher than forecasted profitability in lower tax jurisdictions. Moving on to our segments, fourth quarter electronic segment sales were up 17% over last year. Operating margins were 17.1% in the quarter, up over 800 basis points over last year, with a strong volume recovery and focused cost management. For the year, sales were down 2%, while margin improved to 16.3%. Automotive segment sales in the quarter were up 22%, with margins finishing at 16.9%, up over 500 basis points versus last year. We saw improved profitability from the sales recovery and also benefited from a 300 basis point margin benefit in foreign exchange rates, net of higher commodity costs. For the year, sales were down only 8% despite passenger and commercial vehicle end markets down significantly higher than that. Margins finished at 10.5% as our teams did a terrific job managing through a significant amount of volume volatility through the year. Across the industrial segment, fourth quarter sales were up 13% over last year and up 5% organically, while for the year, down 2% and down 5% organically. Margins were 11.4% in the quarter and 10.7% for the year, both down versus last year. During the year, we saw margin impacts from sales mix as a number of our higher margin and markets declined in 2020. We also incurred additional costs related to pandemic-related supply chain inefficiencies and for our plant transfer, which will be completed in the first half of 2021. A top priority during the pandemic has been preserving our financial strength and liquidity, and we finished 2020 in a stronger financial position. We generated $258 million in operating cash flow in the year and $202 million in free cash flow both higher than last year and with a free cash flow conversion of 155%. We ended the quarter with $688 million in cash on hand. The strength of our balance sheet and strong cash flow generation capability provides us ongoing financial flexibility. We continue to prioritize reinvestment for best-in-class organic growth and adding acquisitions that align to our growth strategies. We will continue investing in key building blocks, including operating expense investments to enhance our capabilities and critical capital expenditures to meet our volume growth. While we deferred some planned capital spend in 2020, we are ramping up capacity investments so we are well situated to capture the ongoing growth and demand spikes. We expect to spend approximately $80 million in capital expenditures in 2021. We are off to a strong growth start this year with our acquisition of Heartland Controls. We funded the purchase from our cash on hand and remain well positioned to fund additional acquisitions from our balance sheet. We remain committed to returning capital to our shareholders through our dividend program as well as through periodic share repurchases. Moving on to our outlook, our first quarter forecast reflects a demand environment that is continuing its strong momentum but we continue to monitor the uncertainties we see across the globe. We expect first quarter sales in the range of $418 to $432 million of 23% over last year at the midpoint of the range. We expect about 3% of the sales growth to come from two months of ownership of Heartland and also expect growth from all of our segments. And while we typically see a sequential growth into Q1, we expect our automotive and industrial segments to be down sequentially with the atypical seasonality we saw in the fourth quarter. We expect EPS to be in the range of $1.76 to $1.92 with 43% growth versus last year at the midpoint of the range. This includes an adjusted effective tax rate of approximately 21% for the quarter 550 basis points lower than the first quarter of 2020. We are projecting a 20 to 25% year-over-year operating income flow through in the quarter, lower than our typical average of 35 to 40%, with a few cost wins driving this. As Dave noted, the largest impacts stem from record high commodity prices and freight rates and ongoing COVID costs that aren't mitigated by government subsidies we received last year. We're also reinstating a portion of our variable costs, including compensation. These items are collectively about a 15% drag on our operating income flow through. I'll provide a few other items to consider in your full year modeling. For 2021, we expect sales growth for the year across all of our segments. Our results will also include approximately 11 months of Heartland, which we expect to be about $65 million in sales, and 6 to 10 cents of EPS net of ongoing deal amortization. In addition, we will have an extra week in our fourth quarter of 2021. As this will be during the holiday period, it will include only a few extra billing days for us. and expect it will add approximately 100 basis points to our full-year sales and EPS growth. And we are projecting a 2021 tax rate in the range of 18 to 20%. And with that, I'll turn it back to Dave for some final comments.

Thanks, Mino. In summary, 2020 was indeed an extraordinary year with no shortage of challenges to navigate. I want to thank our global team for their tremendous efforts throughout the year, especially related to the COVID-19 pandemic. Their commitment, sacrifice, and determination during these uncertain times has been remarkable. Day in and day out, Little Fees Associates work hard to support one another, and they consistently demonstrate an unwavering commitment to serving our customers around the world. We made significant progress across our businesses, and have entered 2021 well-positioned to deliver continued profitable growth and value for all stakeholders. With that, I will now turn the call over to Tricia.

Thanks, Dave. For participants, Meenal and Dave are in separate locations, so feel free to direct your questions to one or the other of them. Operator, please assemble the Q&A roster.

And ladies and gentlemen, if you have questions at this time, please press start and the number one key on your touch-tone telephone. Our first question comes from the line of Luke Junk from Baird. Your line is open. Good morning, Luke.

Good morning, everyone. The first question I want to ask, maybe this would be a good question for Dave. In terms of the impact of the chip shortage, I'm thinking of The impact on electronics specifically, could you maybe just talk a little bit more about the puts and takes there in terms of what it means from a demand side fundamentally on an underlying basis for the electronics segment and then those supply chain impacts, you know, some increased costs potentially coming along there, but in terms of what a potential increase in inventory might be for the business in terms of channel inventories this year.

Sure. Sure. So the chip shortage certainly gets a lot of press related to the auto industry, but also it's a broader issue. First of all, our products, we have relatively stable lead times, so we're not seeing significant shortages from little fused components. But we certainly see history would show that when there are shortages in electronics components, in particular technologies, it is quite common that orders will come in heavier as there's an effort to drive some inventory increases, either at distribution or even at EMS providers or at OEMs. So it certainly has the impact of increasing order rates, and we have seen some of that. We actually saw you know, some tendency towards putting inventory in place from our customers in the automotive segment. During the fourth quarter, we have not seen inventories rise in the electronics side yet, but that's something we continually look for. And certainly shortages and strong order patterns certainly do increase cost challenges, as you mentioned, Luke.

Okay, thanks for that. And then the second question in the wake of the Heartland Controls deal and your commentary that you could fund additional M&A purely off of what's on the balance sheet right now. What I'm wondering is how you're finding the market for M&A right now. Clearly a lot of disruption last year with respect to the environment, with respect to the ability to do due diligence in a traditional fashion. Just curious what you're seeing in terms of your pipeline there, in terms of the, let's say, the availability of assets and sort of the meeting of buyer and seller expectations in regards to pricing as well.

Yeah. So I think there clearly is a bit of a trend where people have become a little more accustomed to this new sense of normal and how to deal through challenges. I think visibility has improved a bit in what's going on in the markets. There's a little less volatility, and most regions of the world are not locking down manufacturing for periods of times and things like that. So that stability, I think, has kind of helped with that. We continue to drive a healthy funnel and a significant effort to continue to build and curate our funnel, if you will. So I think we have found that people have found other ways to deal with with diligence and questions and management meetings and things like that. So I think it is an improving environment from an M&A perspective, and certainly it's a key strategic part of our growth initiatives. Great. Thank you for that. I'll pass it on.

Thanks, Luke. We appreciate the questions. We'll take our next caller, please.

And our next question comes from the line of Carl Ackerman. Carl, your line is open. Good morning, Carl.

Hey, good morning, team and Dave and Minal. It's nice to see a very strong finish to the year. For my first question, you know, to me, your full year outlook implies Heartland has operating margins in the mid-single-digit range. So could you discuss any cost and or operational initiatives from this acquisition that could help drive margins toward the company average? I've got a follow-up.

Yeah, Minal, why don't you take that?

Sure, sure. Thanks, Carl. Morning. So I'd say, you know, we just closed down Heartland last week, very early stages right now. I'd say a couple of things looking at it. Remember that when, you know, anytime we put a company into our portfolio, you automatically start with a drag with deal amortization. And, you know, we're still one of the companies that leads the amortization in our numbers. So that automatically will take margins down a little bit. it's still early. So, you know, we have some estimates in there and we'll refine those as the year goes on. And I would say just in overall in terms of operating synergies, right now for us, you know, you heard Dave comment about some of the opportunities across some of the industrial end markets, especially in the HVAC space. And our focus is really around revenue and revenue growth and where we can, you know, leverage our common portfolios and common customers together.

Understood. I appreciate that, Miedl. Perhaps, sorry, Dave, perhaps another question for Miedl, if I may. Sure. You know, I guess we've heard several suppliers across the supply chain have raised prices, you know, particularly given shortages across Foundry. You know, you spoke about some higher input costs in your prepare remarks. I guess, well, I guess maybe a question for Dave, too. You know, what is your strategy regarding the tradeoff between pricing and volume commitments from your customers and I guess I'm particularly interested in electronics, given that has typically seen the largest annual price decline. So if you could comment on that, that would be very helpful. Thank you.

Sure. I'll take that, Carl. You know, pricing is certainly a dynamic environment, and it's different by different end markets. So there's a little less flexibility in the automotive portion of our business as we have long-term contracts with customers that kind of define some of those things. However, as you stated, electronics is where you tend to have seen higher price declines annually and things like that. And it's also, if you look back in history during strong demand patterns, particularly if there are shortages, pricing becomes a little less unfavorable. So clearly, as we manage our business, we look at... what our cost basis are, what are some of the variables that are driving our cost. And certainly commodities are very unfavorable for us right now. Freight costs are quite high. So costs are certainly increasing, particularly in the electronics part of the business there. And if strong demand continues, it does lead to an environment where price erosion is not quite as heavy as customers focus more on assurance of supply of demand, and as we, frankly, pass along cost increases that we're incurring. So if these patterns continue through the course of the year, then we would expect a little more favorable pricing environment.

Thank you, Carl. We appreciate the questions. We'll take our next caller, please.

And our next question comes from the line of David Kelly from Jefferies. Your line is open. Good morning, David.

Hey, good morning, team. Appreciate you taking my questions. And maybe to start a question for Dave, in a really strong auto outgrowth in the quarter, you referenced customer builds to work through some of the semi-shortages. You saw content gains as well, and then clearly we're seeing LBP turn positive, led by China. Could you just provide a bit more color on the various drivers of that outsized ramp in the fourth quarter?

Sure. Yeah, it was clearly a very strong fourth quarter on the auto side for us. And, you know, as we've talked about, long-term we believe our content growth above car build is in that 3% to 4% range. Clearly during the fourth quarter we saw growth well beyond that both on the content side as well as this inventory build that took place. We think the content outgrowth beyond kind of our normal view of what it will be in the long term was driven by the mix of customers and the types of vehicles. So very strong demand on light trucks, on SUVs and luxury vehicles. Those vehicles tend to have a higher content in general than than other vehicles. So that mix of business certainly influenced that. And we would say probably our content growth was maybe as much as double of our long-term outlook during the fourth quarter. The remainder of the outgrowth is really inventory built, being done by tier ones and OEMs as they're looking to try to make sure they don't have other areas of shortages you know, as they deal with the chip shortages.

Thank you, David.

Okay, thank you. Sorry about that. I was on mute. Can you hear me?

Yes, we can. Yep.

Okay, thanks. Yeah, maybe one follow-up on that, Dave. Apologies again. Just on the inventory build comment, we've heard from others that most of the inventory is immediately being specced for vehicle production. The industry is still playing catch up. So just curious, do you think we're in a channel inventory build phase yet, or is most of the order ramp immediately going through to production and delivery?

I would say from our perspective on our particular products, we believe there is some inventory build taking place in the channels. Now, perhaps that's because of our ability to respond to orders faster than others, but clearly there is kind of the catch-up going on as vehicle inventories, particularly like here in North America, have been low. There's certainly that catch-up that's happening that's impacting demand that's kind of flowing through to vehicles. But we clearly are seeing that there is also some effort to build some inventory buffers. And that's why we kind of warn that, you know, put it in the prepared remarks of warning that, you know, if those inventory buffers, you know, have built, at some point when things kind of normalize and supply, you know, chain kind of gets healthier in the auto industry, you know, they'll go back to more normal conditions, which could have in the, you know, the back end of the year could have a negative impact on our revenues in the auto segment. So we clearly are seeing some inventory build of our particular components. Okay, perfect. Thank you.

Thank you, David. We appreciate the questions.

We'll take our next caller, please. Our next question comes from the line of Nick Todorov from Longbow Research. Your line is open. Good morning, Nick.

Hey, good morning. Yeah, thanks, everyone. Dave, maybe can you talk about your ability to improve margins of the first quarter? You talked about a longer list of impacts. It seems like some of them are within your ability to control and some of them are not. And also, do you see the first quarter as the low point of profitability for the year?

Well, certainly there are headwinds that are impacting our ability to get to kind of normal flow through on on growth that we would normally see. And Meenal talked about some of those headwinds. The largest headwinds are really coming from commodities. And as we talked about earlier, over time, there are abilities to kind of help to offset that with pricing in some segments of our business. But commodities, their freight rates are quite high and continuing to increase. They're at multi-year highs. On freight rates, there's little we can do about that. We'll see how that kind of settles out as hopefully the pandemic situation, you know, becomes more manageable in the back half of the year. You know, and COVID-related costs. So our costs in our factories and in our supply chain, you know, related to protection of employees and support for employees and social distancing and those sorts of things, those ongoing costs are still there, you know, and we are not seeing those go down anytime soon. And we were fortunate enough, through a lot of hard work of our teams, not so much in the U.S., but in Europe and in Asia, you know, we were able to get some government subsidies to kind of help offset some of those costs in 2020. We're not expecting that to continue into 2021. So all those things kind of create near-term headwinds for us that we've kind of got to work our way through with regard to, you know, is that a low point? You know, we're not giving guidance beyond the first quarter. We'll kind of see how the year develops. The visibility on how the pandemic situation stabilizes and settles out is just hard to call at this point.

Okay, great. And as a follow-up question, I think you talked about long-term content growth and auto being 3% to 4%. But, you know, clearly the industry is seeing acceleration towards electric vehicles, and you guys have a pretty decent increase in content as you move from ICE to EV. So, you know, is it reasonable to expect that your content growth will trend above the long-term range here, at least in the near-term future? And conversely, why not, you know, potentially raise that long-term target as the shift to EV is going to continue to grow up? And just as an additional one, is there any way you can quantify how much of your sales currently come from electric vehicles? Thanks.

Sure. Yeah, certainly, you know, the content outgrowth, you know, a great deal of our content growth is really being driven out of the electrification of vehicles. You know, historically, we had good content growth that was driven out of kind of changing architectures and higher power loads in the vehicle and And those have kind of, if you will, over the last five, six years, have been mostly adopted, you know, globally. And it's kind of, you know, that outgrowth has kind of settled out and has become the norm. So the bulk of our outgrowth is coming from kind of electrification of vehicles. So in the near term, certainly in the next couple years, the growth of EVs is somewhat, you know, restrained. by supply chain specifics, whether it's batteries and those types of things. Certainly in the longer term, as EVs gain a stronger position, we see next year it's in that range of maybe 10% of vehicles. However, only just around a third of those are battery electric vehicles. The others are really hybrids. So it's the battery electric vehicles that drive the largest increase for us. So it's still representing 3%, 4% of the global car build. You know, so as that continues to penetrate and certainly maybe more favorable environments today than there have been recently with regards to that, yeah, that content story could begin to grow at a faster pace in the back-end portion. But for the foreseeable future, we see it in that 3% to 4%. Thank you, Nick.

We appreciate the questions. We'll take our next caller, please.

Our next question comes from the line of David Williams from Luke capital. Your line is open. Good morning, David.

Hey, good morning. Thanks for taking my question and congrats on the progress.

Thank you.

I want to touch a little bit on the, some of the inventory bill dynamics that you've mentioned. And do you have a sense on maybe from a term of how much of your revenue might have been from the inventory builds or just maybe quantify the magnitude of what the builds look like today?

Yeah. You know, so if, first of all, the only place we saw inventory builds in the fourth quarter were in the automotive portion of our business. We saw no inventory builds in the electronics portion of our business during the fourth quarter as kind of demand on our distribution partners and our fill to them matched up very well. So specifically, we see in the automotive portion of our business, again, we saw perhaps our kind of normal content above car build being maybe as much as double as our normal. So let's call that six to eight percent was kind of content increased. The remainder of the growth in that segment, we see was driven by inventory bills. So substantial.

Okay, great. I appreciate the color. And then maybe from an industrial standpoint, are there any areas that you're seeing maybe better or maybe softer growth? And kind of maybe what do you think about that outlook for the year, just kind of given some of the dynamics that we've seen in auto and just the strength that we've seen through other areas?

Yeah, so if you look at our industrial segment, there are different pieces to it that are really kind of going to drive our growth. And so a big portion of our business, you know, in industrial segment flows through North America distribution channels. Those North America distribution channels, which are our highest margin portion of our industrial segment, are serving MRO. They're serving non-residential construction. oil and gas, mining, those types of end markets. Generally, those have not been positive. Those have been pretty soft. So that portion of our industrial segment has been quite soft through 2020, and we really haven't seen that rebounding much yet, a little bit on the MRO side, but non-resi construction is not. Our products tend to be at the late stage of non-resi construction, So we're not seeing anything there. And of course, oil and gas and mining is not strong either. Offsetting that, we have seen pretty strong demand and growth for us in other portions of our business, which tend to be more global. So North America, but also other parts of the world. And as I talked about, those are things like renewable energy, Those are things like the HVAC space, you know, so motor drives. Those types of things have been more favorable. So it's kind of a balancing act right now. To get back to the levels of growth we'd like to see and candidly profitability in the industrial segment, you know, we're going to need to see some improving fundamentals in non-resi construction and kind of our distribution business in North America.

Thank you, David, for your questions.

And once again, if you have a question at this time, please press the start and the number one key on your touchstone telephone. Our next question comes from the line of Christopher Green from Oppenheimer. Your line is open.

Good morning, Chris.

Hey, good morning, everybody. I wanted to ask about Heartland there. I'm curious... You know, how long you've been looking at that company? What's kind of the customer breadth and diversification? And, you know, why are you guys kind of a better or the right owner for that?

Sure. Great, Chris. You know, so Heartland is a business we've been looking at for some time. You know, as with a lot of... The M&A sorts of activities, certainly 2020 certainly slowed those sorts of activities down and communication down there. You've heard us talk quite a bit in the previous quarters about the HVAC space as a space that we like and that we've organically been building and working towards. So we've got a nice fundamental base business in the HVAC markets in our core industrial segment. And Heartland Controls is kind of squarely in that space. They sell in other regions, but primarily they're focused on the HVAC space. So the attractiveness for us is they have very strong relationships, particularly with North American HVAC customers, also some in Asia. But it strengthens our position into that marketplace. So the combination of their technologies, our technologies, we believe that together we'll be stronger. And so the big strategic reason for that is we like that space for the long term. And as customers continually work to drive better efficiencies and more environmentally friendly approaches and more sophistication in their systems, we think that's attractive long-term growth patterns. And Heartland Controls gives us a stronger position there and more access to customers and more importance to key customers there.

Thanks. And then kind of a longer-range question. You know, it's been a couple interesting years with the, you know, corrections and destock in 2019 and then the pandemic year. But before that, your gross margins were pretty consistently 39%, 40% plus. Is that a good reference level to think about, you know, over time for you guys? Or are there some, you know, different investment and mixed profiles that make that not a relevant comparison?

Mel, why don't you take that?

Sure.

Yeah, Chris, I guess just, you know, stepping back and thinking about what are some of the things we're seeing in our margins today. Clearly, you know, overall volumes are still a bit lower than when we were at from a peak perspective. But you heard both Dave and I talk about some of the cost headwinds that we're still seeing, which really all impact gross margin for the most part. These are these ongoing COVID costs that we're incurring and some of the inefficiencies that are going on, the headwinds from commodities and freight, and the bulk of all that's in gross margins. So You know, we still expect the improvements in margins to continue. Some of those headwinds, though, have got to dissipate a little bit. And I would expect that over time, right? We're not going to be in this COVID state forever and things will start to settle back. But those are, I'd still say, in the near term, those are still things that are pulling down the growth margin for us.

Okay. Thank you for that.

Thank you, Chris. We appreciate your questions. We'll take our next caller, please.

Our next question comes from the line of Matthew Sheeran from Stifel. Your line is open. Good morning, Matt.

Yes, hi. Good morning, everyone. I just wanted to ask another question regarding the electronics sector. Just backing into the seasonal guides on the other sectors, it looks like that could be up 9%, 10% plus sequentially, which is certainly better than seasonal. You talked about good sell-through last quarter, still relatively stable. lean inventories. But what is your take on sell-through and POS so far this quarter? And are you seeing distributors start to layering inventory as lead times across your product categories and competitors' product categories continue to go out, which could lead to, as you said earlier, Dave, some volatility as we get through the year based on inventory and supply-demand levels?

Sure, Matt. Yeah, so what I would say is we have not seen inventory builds at our distribution partners yet. So we have not started to see inventory increases that aren't matched through with sell-through. So we're not seeing days of inventory go up. We're still at kind of the bottom half of our kind of normal weeks of inventory. We're in the bottom half of that. So quite healthy inventory positions right now. Bookings are quite strong. Many of the bookings are maybe extended further out than normal, which tends to be kind of an early sign of people making sure they want to be in line with orders and get orders booked out a little further in case we see further demand increases that are significant. So orders are very robust, certainly. So right now, it's hard to match up maybe long-term order patterns with sell-through, but certainly so far with demands and sales today and sell-through at POS at our distributors, it's well-matched right now. So we're kind of putting some verbiage in there just out of experience as we see these things over time. you know, it certainly has some indications and some signs that some inventory increase strategies may be coming. Haven't seen them yet, but they're some of those early signs that we're kind of putting out there just to kind of make sure everybody kind of keeps those top of mind as you look at the next coming quarters.

Okay. And the

strength you're seeing are you seeing in all geographies including north america in europe which have obviously been lagging asia yeah yeah we're seeing we're seeing it really across the board in the order patterns um you know it's not exactly level across all regions but but strong order patterns in all three regions right now okay thanks for that and you know i wanted to get uh

a little bit more color on the cost headwinds that you're seeing. You just did talk about in your last answer about gross margin being impacted perhaps most, although you've got OPEX costs going up. But sort of on an absolute basis in terms of dollars, are we talking about, you know, what, a 10%, 20% increase in SG&A year-on-year based on those costs you talked about?

Yeah, Matt. So I'd probably explain it two ways. One is The bulk of the increases that we're seeing that I talked about really are coming out of the commodities or input costs, freight, and that COVID relief. As it relates to OPEX, what we've been talking about for probably the past year or so has been the fact that we cut about $40 million over the course of 19 and 20. We cut about $40 million of discretionary spend over the course of those two years because volumes were down and then all of COVID last year. And we were expecting in 21 that we'd add back somewhere between a third and a half of that during 21, and that's still our projection from an increase perspective. I'd say it's a range now because, honestly, I think it's going to depend on, you know, how things start to recover and the trajectory of the recovery and how much traveling really happens and going out. But, you know, it absolutely includes things like the variable compensation piece. The other discretionary spend remains to be seen.

Okay. All right. That's helpful. Thanks so much.

Sure. Thanks, Matt, for your questions. We'll take our next caller, please.

And we have a follow-up question coming from the line of Nick Tudor of Longbow Research. Your line is open. Hello, Nick.

Hi. Thanks for allowing for follow-ups. I wanted to touch back on auto just to clarify a couple of things. Dave, I think last quarter you talked about seeing calendar year 21 light vehicle production up at least high single digit. any color or update or how are you thinking about production of autos in 2021? And also, can you just clarify, you know, how much was auto production in the December quarter from your perspective anyway, either an absolute basis or from a year-to-year growth perspective versus 4Q of 19? Thanks.

Sure. Yeah, so kind of our view of 2021, and we don't have a different view than what the professionals are that are paid to look at it is, It's in that low to mid-80s is probably what global car production is in 2021. I think it's a little unknown what supply constraints may impact on that. Some of that will be response from a handful of semiconductor suppliers and the ability to support that level. But as a reminder, that's still not back to 2019 levels. So still well below 2019 levels. And you know, certainly below 2018 levels. So nice recovery, but not back to kind of record levels at all in 2021 is kind of our view. Specific to the fourth quarter, yeah, we believe that car build globally was up low to mid single digits, you know, compared to the fourth quarter, the previous fourth quarter. So that's kind of our viewpoint on car build.

Thank you. Good luck.

We appreciate the follow-up question. Thanks, Nick. Thank you for joining us on today's call in your interest in LittleFuse. We look forward to talking with you on February 23rd at 9 a.m. Central Time during our virtual investor and analyst event. Be safe and stay healthy.