Littelfuse, Inc.

Good day, everyone, and welcome to the Little Fuse first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaking presentation, there will be a question and answer session. To ask the question during this session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to you, speaker, for today. Trisha Tauntland, Head of Investor Relations. You may proceed.

Good morning and welcome to the Little Fuse First Quarter 2021 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 first quarter and a copy of our earnings release and slide presentation is available in the Investor Relations section of our website. A webcast of today's conference call will also be available on our website. Please advance to slide two for our disclaimers. Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review today's press release and our forms 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations. We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available in the Investor Release section of our website. Before proceeding, I'd like to mention that we will be virtually attending the Oppenheimer Conference on May 5th, Cowan Conference on June 2nd, DEFO Conference on June 8th, and the Baird Conference on June 10th. We look forward to you joining us during these outreach events. I will now turn the call over to Dave.

Thank you, Tricia. Good morning, and thanks for joining us today. On February 23rd, we shared our five-year growth strategy summarized on slide four. This is ultimately a continuation of the journey we started several years ago. We continue to build our strategy around the structural growth themes of a sustainable, connected, and safer world. These are multi-decade themes which are stronger today than ever before and continue to expand the need for our innovative, reliable solutions. We have positioned ourselves to drive significant content and share gains in targeted high-growth end markets, which will deliver long-term double-digit revenue growth, best-in-class profitability, and top-tier shareholder returns. Now let's turn to slide five. We are off to a strong start this year, building on strength in the prior two quarters, driven by our strong execution, commitment to customers, and our ability to manage supply chain challenges. During the first quarter, we saw continued demand recovery across a number of our end markets. We achieved first quarter sales of $464 million, representing record revenues for us, and a 34% increase over last year. We delivered adjusted operating margins of 17.1% within target range and adjusted EPS of $2.67, which is 107% growth year over year. MENA will provide additional color on our strong financial performance. The swift demand recovery has caused some broad challenges across Little Fuses and our customer supply chains, including supply chain disruptions and shortages and logistics constraints. And while there has been tremendous progress in the battle against COVID-19, there are continuing challenges. There are a number of countries still in and going into lockdown, and the pace of vaccine deployment varies across countries. Despite these ongoing challenges, we are seeing healthy demand across a number of our end markets, and our global teams remain focused on meeting stakeholder commitments. Moving on to the performance within our segments. During the first quarter, our electronics product segment continued to experience strong demand in all regions. Our significant revenue growth was driven by ongoing strength across a broad range of applications, including data center and communications infrastructure, factory, building, and home automation, and demand for consumer electronics. Also contributing to our sales growth was robust demand in automotive electronics. Exiting the first quarter, our electronics book-to-bill was well above 1.0. Our end markets remain healthy, but we believe the strong orders reflect some double bookings to ensure uninterrupted supply of components. While weeks of inventory of our products at our channel partners remain at the low end of our normal range, we believe that some of our end customers are building extra inventory where possible. While our lead times have increased for some of our products, We remain focused on meeting customers' needs as we continue to work closely with our distribution, EMS, and OEM partners. Moving on to our automotive product segment, during the first quarter, organic sales grew 17% year-over-year with the ongoing recovery in automotive and commercial vehicle end markets. Across passenger vehicle products, organic sales grew 22% year-on-year, significantly above global car build growth in the quarter. We had higher content gains coming from product mix for well-equipped vehicles, like luxury vehicles, SUVs, pickup trucks, and continued growth of electric vehicles. In commercial vehicles, we saw market strength across most geographies and sectors, including heavy-duty truck and bus, construction and agriculture, and material handling. We are seeing global semiconductor and resin shortages, with several OEMs announcing shutdowns. However, our order patterns remain healthy. We expect second quarter global car production to be significantly up year over year, given the very challenging quarter last year, but supply chain challenges will prevent car build from growing sequentially at a faster pace. We expect the long-term growth of our automotive segment to continue outpacing vehicle build with our expanding content opportunities. Turning to our industrial product segments, we saw significant strength on the top line with our acquisition of Heartland Controls in January, along with double-digit organic growth of our legacy business. The integration is going very well, and we are already seeing benefits based on our combined businesses, stronger customer relationships, and expanded portfolio of complementary products. We are seeing broad demand across HVAC in markets with particular strength in residential construction, as well as continued strength across renewables, energy storage, and power conversion markets. Similar to other areas of our business, we are seeing increased demand from our channel partners as they pull in orders to manage risk. Moving on to key design wins in the end markets we serve. In the industrials end markets on slide six, we are enhancing our capabilities and growth and target industrial markets like HVAC with the Heartland Controls acquisition. We had several key design wins in HVAC during the first quarter as we capitalized on the structural growth theme of sustainability. With our technical support and comprehensive product portfolio, we won new HVAC business in North America with a global manufacturer, and we saw numerous design-ins on temperature controllers, air monitoring, and air conditioner power control boards in China and Korea. With the driver of Industry 4.0, we secured several new wins in the U.S. to protect motor drives used in industrial automation. In addition, with the ongoing focus on power optimization, we won new business in the U.S., where we were designed in for a customized timer for a global manufacturer of portable power generators, and we had key design wins with a component manufacturer for power generation and distribution equipment. Our business wins across industrial end markets reflect how we are able to offer more solutions to our customers to create greater value. For transportation end markets on slide 7, we continue to extend our leadership position driven by numerous electric vehicle design wins across passenger vehicle markets. During the first quarter, based on our strong relationships and execution, we secured a key design win for a new electric vehicle platform with a leading European OEM. We also secured several additional battery and plug-in hybrid electric vehicle WINS globally. Off-board charging applications represent content opportunities for a broad range of products, and we were designed into an electric vehicle fast charging application in Europe and customized charging application in China. Securing these types of new business WINS will accelerate our long-term organic growth in these high-growth areas. With advancement in automotive electronics, we had a key win in Europe for an intelligent antenna module, and we continue to gain content wins with the luxury vehicle and SUV space. Our strong engineering relationship helped secure several key design wins with a US OEM for the heavy-duty pickup truck in North America, as well as a new line of SUVs for the China market. Design activity in the first quarter remained robust within commercial vehicle markets, but we are also seeing the progression of electrification. Leveraging the strength of our local sales and engineering support, we won a significant program with the European OEM on their battery electric heavy-duty truck and bus platform. In addition, we also won business for a traditional heavy-duty truck application in North America. Our component knowledge and long successful history of working together with this customer were key factors in this win. Across electronics end markets on slide eight, we are focused on leveraging our leadership and broad global access through our strategic distribution partnerships and deep OEM relationships. With the ongoing theme of connectivity, our technical support and our robust product features continue to drive design-win activity. During the fourth quarter, we had During the first quarter, we had a number of design wins in 5G telecom infrastructure systems in Japan and Korea and cloud infrastructure markets in both China and Taiwan. We continue to see good design work in the building and home automation markets, winning new business for a smart meter in India, and wins in Europe for smart home applications. We saw key wins across a wide spectrum of innovative consumer electronics applications, We secured a new business win for an electric bike battery management system in Asia, which is also seeing strong demand in Europe. In the ongoing proliferation of electronification, we secured a design win for a maker of wearable safety airbag system used for motorcycle riders in Europe. We won these new business opportunities based on our local design support in customer relationships and product delivery. We are confident that our broad product offering particularly well suited for the ever-evolving electronics ecosystem, will continue to drive long-term growth. I will now turn the call over to Meenal to provide additional color on our financial performance and outlook.

Thanks, Dave. Good morning, everyone, and thanks for joining us today. So let's start with slide 10. We've continued our momentum from the back half of last year as our first quarter results were well above expectations on both sales and earnings. Sales of $464 million were up 34% versus last year and up 16% sequentially as we saw the continued recovery across most of our end markets. Our Heartland Control acquisition added 5% to sales and Foreign Exchange contributed 3% with our organic sales growth at 26%. Adjusted operating margins were 17.1% for the quarter, expanding 270 basis points versus last year. We would typically expect higher incremental flow through at these volume levels, but are experiencing a number of supply chain and inflationary headwinds, including higher freight rates and input costs, especially in commodities. Overall, we've been successful in managing through these challenges to deliver operating margins in our targeted range. First quarter gap diluted earnings per share was $2.32, and adjusted diluted EPS was $2.67, up 107% over last year. This included 54 cents of non-operating benefit versus last year, resulting from a mark-to-market gain from an equity investment and a year-over-year reduction of over 700 basis points in our tax rate. Excluding these items, adjusted EPS was up 65%. Our GAAP effective tax rate was 20.6%. Our adjusted effective tax rate was 19.2%, better than our forecast due to higher profitability in lower tax jurisdictions. In the quarter, we generated $50 million in operating cash flow and $35 million in free cash flow, both a solid start to the year. Our typical cash flow patterns have cash generation improving through the year, with second-half cash generation stronger than the first half. We expect a free cash flow conversion rate of about 100% of net income for the year. We spent $15 million in capital expenditures in the quarter, led by prioritization of capacity investments. We continue to expect to spend approximately $80 million in capital expenditures this year. In other cash uses, beyond our Heartland acquisition earlier in the quarter, we paid down $30 million in debt and deployed $12 million of cash to shareholders via our dividends. We ended the quarter with $573 million of cash. The strength of our cash generation profile and solid balance sheet reinforces our financial flexibility. We also announced that our board approved a three-year, $300 million stock buyback authorization. Our stock buyback philosophy is unchanged and remains opportunistic with our primary capital allocation focus on acquisitions that enhance our organic growth trajectory. Moving on to our segments on slide 11. All of our segments grew sales over 20% versus last year with each achieving double-digit organic growth. We're benefiting from ongoing strength across many of our end markets and seeing some elevated content growth as we continue to focus our resources on higher growth and markets. At the same time, we are seeing margin pressures across all of our businesses from the supply chain challenges I noted earlier. These market costs dampened margins by approximately 250 to 300 basis points in the quarter across each segment, and we expect these pressures to continue at this level in the near term. Starting with electronics, segment sales were up 34% and 32% organically. Operating margins were 19.4% in the quarter, expanding more than 400 basis points over last year. Key drivers were ongoing volume growth led by favorable end-market demand trends, as well as content growth from both electrification and electronification trends. Automotive segment sales in the quarter grew 23% and 17% organically. Operating margins finished at 15.8%, up over 200 basis points versus last year. The ongoing demand across passenger and commercial vehicle markets drove significant volume growth along with content growth from an increasing number of electric vehicles. We also saw expanded content growth in our passenger vehicle businesses from both larger and higher-end vehicles. Across the industrial segment, sales were up 80% over last year with the addition of the Heartland acquisition and up 10% organically. Operating margins declined from last year to 7.2% in the quarter. Beyond the supply chain challenges I noted earlier, we completed the final stages of our production transfer in the quarter and are now ramping up production in our new manufacturing site. It typically takes a few quarters of transition to achieve expected productivity levels and margin benefits. The segment also continues to be impacted by softness in a mix of favorable end markets, such as non-residential construction, oil and gas, and mining, which dampens margins. We continue to target high TEENS margin rates for the industrial segment and expect margin improvements as end markets recover and we execute our Heartland integration plans. Moving on to our outlook, on slide 12, Our second quarter forecast reflects an ongoing momentum in the demand environment, but we are keeping a close watch on the supply chain dynamics and any potential disruption that could emerge. We expect second quarter sales in the range of $463 to $477 million, up 53% over last year at the midpoint. We expect year-over-year sales growth from all of our segments. Sequentially, we are projecting a sales decline in our auto segment due to the well-telegraphed supply chain market challenges, and our industrial segment now includes a full quarter of the Heartland acquisition. We expect EPS to be in the range of $2.12 to $2.28, up over 200% at the midpoint with last year's challenging second quarter. This assumes an adjusted effective tax rate of approximately 17% for the quarter and diluted share count of 25 million. We are projecting improved year-over-year operating income flow through in the second quarter, though lower than we would typically expect at these volume levels. We are continuing to see elevated cost headwinds from freight rates and input costs, especially in commodities, but are offsetting some of that through productivity and pricing actions. Sequentially, we expect second quarter EPS to be down 18% at the midpoint. This includes 42 cents of unfavorable impacts from higher stock compensation expense in the quarter due to our equity grant structure and a first quarter mark-to-market gain that we are not expecting to reoccur. As we look at the full year of 2021, We expect double-digit sales growth for the year across each of our segments, and we continue to project 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, Mito. In summary, on slide 13, we began this year delivering strong performance within an ongoing dynamic market environment. Demand remains healthy, but we continue to manage supply chain and COVID-related challenges. Our sound business fundamentals enables us to effectively operate during challenging times, overcoming supply chain disruptions, flexing capacity, and mitigating cost impacts to our performance. We have a strong track record of successfully integrating these activities with our strategic initiatives as we empower a sustainable, connected, and safer world for our customers and their end customers. I am confident our company is well positioned for continued long-term profitable growth. 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. Tawanda, please assemble the Q&A roster.

Thank you. As a reminder, ladies and gentlemen, to ask the question, you will need to press star then 1 on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Our first question comes from the line of Nick Toterov with a long vote. Your line is open.

Good morning, Nick.

Good morning, Dave and Nino. Dave, I guess you guys deviate from the rest of your peers by calling out some inventory builds where everyone else is dismissing it. I think at the end of the day, investors appreciate your honesty. But I guess for the first question, what evidence do you see of inventory build maybe versus strong content gains as electric vehicles, electrification, and also factory automation and all these trends are going on? And also, can you parse out potentially how much was your content growth In automotive, I think you talked about potentially being last quarter twice as much as your long-term range due to favorable mix. So I just would appreciate any thoughts there. Thank you.

Sure. So let's start with kind of the inventory situation. And we try to be as open with whatever information we have on inventory. In our fourth earnings call, you heard us talk about the fact that we were seeing some of our automotive customers actually build some inventory during the fourth quarter. So we talked about that, and that was part of our outperformance in the fourth quarter. We did not see so much of that during the first quarter in automotive. From the standpoint, really kind of our sell-through to customers matched up pretty well with the content increases we were seeing, particularly with the mix of sales vehicles being, you know, heavy on the luxury vehicle side as OEMs, you know, certainly diverted supply chains to make sure they supported their most profitable product lines as well as EV vehicles. So the content, you asked about the content story. We saw content growth of, you know, somewhere between 8% and 10% during the first quarter, so very much well above, you know, are expected long-term, and that's because of that mix of vehicles being produced. Other inventory areas we see, while historically we often talk about our electronics distribution channels and inventory builds there and how they impact the business, we have not seen inventory build at our distribution partners. Inventory there continues to be quite lean. However, we certainly do see some evidence that contract manufacturers, and some OEMs. There's some evidence clearly they are, where they can, building up inventories to assure supply during a potential disrupted supply chain environment. So we don't see kind of the normal buildup at the distribution customers, but we do see a little bit at the OEM and contract manufacturing level. So I hope that helps.

Yeah, that helps a lot, Dave. I really appreciate it. Maybe as a follow-up to that, what kind of measures are you taking to minimize the risk from double booking and excess inventory building? We've heard some other semi and component manufacturers adopt different policies. I wonder what type of measures are you taking, if any?

Yeah, so that's an area, of course, particularly if you start reaching constrained capacities, You want to make sure when you are shipping product, you're shipping product to customers who actually need it for shipping product out right away as opposed to building inventory. So it's in everybody's best interest for us to focus on that, which we do, and we'll push back and challenge at times as we get orders on that to make sure we're producing products that are going to go into end products and move through the supply chain rapidly. So there are measures we take. We do sometimes we increase lead times to push orders back you know, a little further out at times. We also increase the window of non-cancelable orders. So we are kind of mandating then that as the customers order near term that they can't cancel them. So there are actions like that that are kind of normally taken. But the primary thing is really just working with customers and making sure we're having those discussions and challenges on do you really need these products for shipping or Or are you building inventory? And we do that to the best of our ability.

Got it. If I can sneak one more from Mino. Mino, can you give us some color sequentially if we look between the gross margin and the implied operating margin? I guess there are lots of puts and takes. You know, you have lower tax rates and then but a full quarter of heartland, higher stock comp. I guess... Is there a number you can direct us to in terms of year-over-year flow-through for the operating margin, and also how should we think about the trajectory of gross margin and OPEX going forward? Thanks.

Yeah. So, you know, in terms of the, I'll say the general headwinds as we talk about the second quarter, two buckets. You know, in general, first and second quarter, you know, we talked about the input costs, inflationary costs, really for us, The bulk of that is coming out of higher freight costs that we're seeing, inbound and outbound, as well as increased commodity costs. I mentioned in the first quarter that's running about 250 to 300 basis points across each one of our segments. And in the second quarter, that's continuing actually at even a little bit of a higher rate on a year-over-year basis. So definitely a big headwind for us. On top of that, when you look at things sequentially, I mentioned in my prepared comments that There's about a 42-cent impact on EPS, some of that really coming out of the higher stock compensation, about half of that coming out of the higher stock compensation sequentially. So net-net, you know, we expect that our flow-through in the second quarter, year-over-year second quarter, will be better than the first quarter, but not, you know, I've talked about in the past our target flow-through ranges being, say, in the mid-30s. I wouldn't expect it to be that high.

Got it. Thanks, guys. Good luck. Thanks.

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

Our next question comes from the line of call, Ackerman with Cohen. Your line is open.

Good morning, Carl.

Hey, good morning, everyone. Two questions for me. Perhaps needle for the first one. So I understand there are rising sub-traded shipping costs as well as I think some currency headwinds that you may have not called out this quarter. But I guess I would have thought gross margins would be relatively flat in June versus, I think, the implied step down of 200-plus basis points. And so I guess with many of your larger peers raising prices across the distribution channel and lead times extending, maybe instead of raising prices, are you able to sign longer-term volume agreements with your customers?

Sure. You know, in terms of, we didn't comment on, you know, for our outlook on growth margin versus operating margin. But what I would say is the headwinds that we're seeing right now are largely around growth margin. So that is part of the challenge. And I just mentioned on with the last question that, you know, from a year over year basis, we're even seeing a increased elevated headwind in the second quarter versus the first quarter in terms of those headwinds coming through. But I would also say keep in mind that, you know, while there's a number of puts and takes going on in terms of, you know, costs, whether that's in gross margin or OPEX, you know, year over year we are also seeing some OPEX increases. And we had talked about that actually at our last quarter earnings call, just the fact that, you know, we are starting to see a little bit of discretionary spend pick up. We really weren't spending much last year. But as things are improving in pockets, we are seeing a little bit more discretionary spend pick up. and also areas like variable compensation has gone up, that's largely going to run through OPEX as well. So that's, you know, just I want to give you a mix between things going on in gross margin versus OPEX. And then as part of, you know, as part of our overall actions, I had commented that, you know, we are taking a number of actions, including productivity. Of course, we have ongoing productivity actions going on in our manufacturing and supply chain sites that to help mitigate some of these headwinds. as well as some pricing actions, I would say probably a little heavier weighted where we can versus long-term contracts, which are a little bit more difficult on pricing structures versus where you've got maybe a shorter-term contract, no contracts in distribution, that type of area. Yeah.

Sure. I appreciate that. That, I guess, dovetails into my second question, which Dave and or Nino, you can maybe take this. But I think you referenced in your prepared remarks and also during the analyst day, the ICIS subsidiary has an overly complex supply chain, and I'd work to simplify that. I'd appreciate hearing your thoughts in terms of perhaps actually bringing incremental wafer capacity in-house, given that there are well-known shortages of wafers on lightning-edge process nodes.

Yeah, I'll take that call. And, yeah, it's a reasonable question. You know, if there are shortages, you know, impacting the semiconductor world, can we bring some of that in-house to kind of help offset that? For the most part, where the primary shortages are in the semiconductor space are not in the areas where we have a heavy focus. There are some small exceptions, you know, even where we have some constraints on our own. sensor products where we're buying in processors or microcontrollers for those sensor assemblies and have some challenges and shortages there that we're working through. There are some cases there on some of the MCUs where we can do those internally, and we are doing work to qualify them to kind of help support that. So there's some areas where we can do that, but it takes a lot of time to accomplish that.

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

Our next question comes from the line of Matt Shearing with Staple. Your line is open.

Good morning, Matt. Good morning, everyone. Just another question regarding the strong bookings you're seeing, Dave, on the component side. You did talk about book-to-bill above one. Could you be more specific and maybe compare that? to what you saw a quarter ago? Is it higher than what you've seen previously?

Sure. Yeah, Matt, we're not quoting a specific number because, quite candidly, the number doesn't mean a lot right now. Bookings are extending way out. It's a very large number. It's slightly up from what we saw a quarter ago. So bookings are quite strong. And as I talked about earlier, Yeah, we see some of that evidence of double booking and even some work to try to build inventories at contract manufacturing and OEMs like that. The reality is that the distribution partners have not been able to build inventory. They would love to build some inventory at a higher level, but it's just everything that we ship to them, they sell through. So, yeah, we remain in a pretty lean inventory situation at our distribution partners.

Got it. Okay. And then, you know, you talked about some price actions. I would have thought that you'd be more successful, particularly given that you've got a high percentage of component revenue through distribution, and we're hearing that distributors are able to pass those prices along. So is there kind of a lag effect in terms of, you know, that impact to operating margin within electronics? Do you think it sort of bottoms out here or really depends on the cycle and depends on input costs, et cetera?

Sure. So on the pricing actions, Matt, to your point, we did start putting pricing actions in in the first quarter. And as I mentioned on the previous question, yes, definitely on the distribution side across our segments. We'll definitely see a better impact of that coming through in the second quarter, which is why I had made the comment that the flow-through will improve, will improve a little bit there.

Okay. Go ahead. Matt, you know, on that, you know, through traditional customers and distribution, of course, we've passed through, you know, a couple different price increases, which will begin to flow through. We try to be a bit respectful and not drop it on effective today because that we'd like to give a little bit of notice to our end customers to kind of build some strong relationships there. Where we have the LTIs, it's a little bit more challenging in areas like automotive and things. However, what you do find is when you're negotiating or renegotiating LTIs during the course of a year in this kind of environment, you may positively impact the trend over the next couple of years.

Got it. Okay. And just lastly, on automotive and the outlook for a down sequential quarter, which is not out of line with what other suppliers have been talking about. How much of that related to some seasonality and the, you know, the inability for those customers to improve production versus any kind of rescheduling or any correction of inventory that you talked about there at, you know, basically having visibility into a couple of quarters ago.

Yeah, we see that it's really all reflected on the builds, you know, and the build schedules with our customers. You know, weekly we're seeing different customers who are having to shut down for periods of time, you know, that impact that. So it's really driven by the car build and particularly our core customers that are getting hit by some of the shortages, not ours, but other shortages. Okay. All right. Thanks very much.

Thanks, Matt. We'll take our next caller, please.

Our next question comes from the line of Christopher Glenn with Oppenheimer. Your line is open.

Good morning, Chris.

Good morning. Thanks. Maybe I'll direct the first one to Dave. You know, a lot of times when supply chains are challenged, you know, your global footprint, manufacturing and fulfillment position you for a little share gain. Sometimes Wondering with all the topsy-turvy out there right now if, you know, there's some structural competitive opportunities that might start to click, if they're not already.

Yeah, yeah, Chris, that's a great question. And it's clearly part of our long-term strategy because we don't have an overly capital-intensive business. We do have as part of our strategy to try to make sure we have the ability to flex up when we get these spikes in demand. because history has shown us when we're able to perform better than our competitors, you know, not all of that share gain in the near term sticks, but some of it does and ultimately helps that. And we clearly are seeing that where there are cases where we're able to outperform competitors, and that gives us an advantage right now, and some piece of that will carry over as you move through the supply chain, you know, challenges.

Okay. Do you feel like you're on the upward curve of realizing that, you know, wherewithal that you've had established for some time?

Yeah. Yeah. I think we're kind of in the position we normally are, you know, and seeing that. So, yeah, we're gaining some business right now that we wouldn't have gotten without the shortages. There's no doubt about that. And a piece of that will stick. And as needed, we continue to add capacity ourselves, but most of the work we're doing right now in capacity is targeted for what we're looking for to be prepared for the next couple years, not so much next quarter. Okay.

And, you know, I was curious if you could detail the equity investment gain, what triggered that. I think it was about $7 million.

Yeah, we have, you know, this has been an investment we've had for a long time in a public company that came with an acquisition years ago, and under the new accounting rules from a few years back, we're now required to market that every quarter. And because it's a public company, that's what really drives the volatility in the gain-loss every quarter.

Okay. If I could sneak one more in. The ISIS technology portfolio, simplifying that was a big part of your integration, I think, to narrow focus on the most scalable technology. So I wonder if you could provide an update on that holistic process.

Yeah, I can take that. Yeah, clearly there were product lines within the iAccess family when we acquired it that we didn't see as long-term strategic drivers for the business. And so we have worked our way through the bulk of that activity where we've either In some cases, we've sold. In some cases, we've shut down pieces of that business, where today what we're manufacturing in the former Ixos power semiconductor business are the core products that we expect to continue to be producing and building on as we move forward. So the bulk of that pruning and trimming is done and behind us. Thanks, guys.

Thanks, Chris. We'll take our next caller, please.

Our next question comes from the line of David Williams with Loop Capital. Your line is open. Good morning.

Good morning. Thanks for taking the question. Just want to ask maybe on the second half visibility, how you see that? Obviously, the automotive sector is challenging and the disruptions are giving you some difficulty reading that. But how do you think about your second half visibility and where maybe could we see some upside or maybe some downside as we think about the second part of the year?

Yeah, I think the visibility in the second half is a bit challenging. It's just been such a dynamic time, you know, in the last year and kind of folding into this year. Clearly, momentum in most parts of our business are quite strong right now, and we would expect that momentum to carry us well beyond, you know, the second quarter into the second half. I do think the two things that kind of hang out there as question marks are would be the supply chain side on auto. You know, the end customer demand is going to continue to be strong as, you know, in North America we know vehicle inventory on the lots is quite low and demand is pretty solid. There's beginning to see some improvement in demand in Europe and certainly in Asia. It's quite strong. So, Um, if the supply chain can hang in, you know, step up, then there could be some, some progress in the back half of the year. But right now we kind of see our view is the semiconductor shortages and things probably are pervasive through the course of the year in auto. Um, the other wild card is really just the pandemic situation. And, you know, do we get spikes? Do we see disruptions that could still happen in the back half of the year? Um, customers or contract manufacturers are building inventory? Do they reach, you know, a level of kind of that they're comfortable with and slow down their orders? Those are the kinds of things that are out there in the back half. We remain still pretty bullish, but we're cautiously optimistic on the back half.

Great. And then maybe if you could just talk a little bit about the demand through the quarter and how you've seen things, I guess, through April here. Are the I guess the cadence of demand trends that you're seeing in line with what your expectations would be? Or are you seeing anything, maybe any changes in more recent weeks?

No, we really haven't seen changes. We continue to see very strong demand and bookings through the quarters to date. So kind of as expected in this environment, we continue to see those orders flow through. Great. Thanks so much.

Thanks, David. We'll take our next caller, please.

Our next question comes from the line of Luke Junk with Bayer. Your line is open.

Good morning, Luke.

Sorry about that. I was on mute there. Good morning, Tricia. Probably a couple of questions for Meno this morning, both margin-related. First question I want to ask, really a big-picture question, which is in light of another strong margin performance this quarter in both electronics and auto, which, of course, in spite of the current supply chain situation, I'm wondering how much strength we can attribute right now to the underlying fundamentals of those businesses as we think out to your midterm margin targets and to what extent are the temporary benefits that you talked about last year due to COVID and workforce, you know, idling and things of that nature, temporary discretionary type things, you know, are those starting to come out or is there still a strong effect of that in the P&L right now?

Sure. So in our investor day back in February, we talked about the long-term margin targets of, as you mentioned, both electronics and auto are trending to those right now. Yes, there are margin headwinds going on from the supply chain input costs that I talked about. At the same time, I'd also say what I call our spending levels are still at a curtailed level. It's while people are trying to get out of COVID and get out to customers and do some different things, I'd say our spending levels are down. So that's why I noted lots of puts and takes going on. I'd say in the quarter still net negative for us, but at the same time, I would say the long-term margin targets that we set out with the high teens for electronics up to 20%, you know, automotive in that mid-teen 14% to 15% range, we still think those are the right long-term targets that we have for those businesses.

And then a second margin-related question, and this is more of a near-term question in terms of industrials. So, you know, you had mentioned in your remarks that right now we're working through some of the inefficiencies of that new facility that's coming online. And, of course, Heartland came to the numbers this quarter. And I'm just wondering, as we think about the normalized level of margin in that business right now, is that new facility – ramps to full productivity and you start to better integrate Heartland, how should we think about sort of the underlying margin trend in industrial specifically right now?

Sure. Yeah, good question. You know, I think about it a bit as a step function. So, you know, the endpoint, we talked about high-teens operating margin target for that business. That's unchanged, and we talked about that back in February. I'd say the manufacturing transition that I talked about, typical when we move factories, I'd say a little bit exacerbated because of the COVID situation, and we really haven't been able to do a lot of things we normally do in person as part of that transfer. But I think that'll work itself out during the year. That'll be a step function up on margins. The end market recovery that I mentioned, some markets like non-residential mining, oil and gas, I put that as another step function, and that, I would say, will get us into the middish teens range. The Heartland one is going to take a little bit longer. We've always said with acquisitions, no acquisition comes into our portfolio at our target margin range, and so we typically assume a two- to three-year time frame, both on the cost side, but also then really starting to ramp up on revenue synergies that will get the Heartland acquisition you know, embedded in our segment and get us back into that high teens area.

I agree. That was very helpful. Thank you.

Sure. Appreciate your questions, Luke. Thank you.

Thank you. As a reminder, ladies and gentlemen, that's star one to ask the question. Our next question comes from the line of David Kelly with Jefferies.

Good morning, David.

Hi, good morning, everyone. First question for Dave and wanted to follow up on your auto inventory comments. If we did not see that fourth quarter customer inventory bill continue into Q1, are you seeing a work down of inventories at all right now or customers simply maintaining stock given what feels like solid visibility to demand and production recovery once we get beyond some of these shorter term disruptions?

Yeah, I think that's, you know, there's not perfect visibility that in the auto world with the tier ones and the OEMs, but our sense is that, yeah, there was some inventory bill that took place in the fourth quarter, you know, perhaps because our ability to deliver, you know, outstripped others, you know, they kind of built up that and they're trying to kind of get some level plan there. It didn't, we didn't see it as much in the first quarter. We have not seen it, work down. We haven't seen evidence of it being worked down at this point. But right now, we would say kind of our first quarter demand, our best view is that it matched up pretty well with the pastor.

Okay, got it. That's helpful. And I may have missed it, but did you reference commercial vehicle organic growth? I'm assuming there was an inflection there, but was hoping for a bit more color and then maybe, you know, how should we think about margin implications in the automotive segment if we do see an uptick in commercial vehicle recovery?

Yeah, commercial vehicle, we talked specifically about passenger car organic growth at 22%, you know, and the other piece of that within the segment is commercial vehicle. where we also saw double-digit organic growth in the commercial vehicle portion of our business there. So healthy growth there. From a margin perspective, both of those businesses are going to tend to operate in that mid-teens range. So really the difference, the split between CBP or auto doesn't drive so much on the bottom line performance. We kind of get similar kind of flow through from both of them. But the CVP is certainly gaining strength and healthy. But by the way, the commercial vehicle space has the same shortage challenges that you have in the past car world as well that are getting impacted, whether it's semiconductors or resins and things like that.

Okay, great. Got it. And then last one for me, and I'll appreciate the color on some of the sequential input cost trends, things like freight costs. Is there anything else we should be thinking about, you know, raw materials come to mind specifically that, you know, could disproportionately impact flow through into the second quarter here?

No, you know, it's a good question. I think, you know, I tried to highlight the biggest ones as part of my comments with the, you know, mentioned commodities freight and then just on a sequential basis, I'd say in the operating margin, the elevated stock compensation expense that we typically have in the second quarter is Beyond that, you know, you've heard Dave talk about, yes, we are impacted with some of the semi-shortages, some of the resin, you know, a number of other input costs coming through. But really, I tried to highlight the big ones, and that's really, I'd say, moves the needle on our margin right now with the impacts that we're seeing.

Okay, perfect. Thanks, everyone.

Thanks for your question, David. We'll take our next caller, please.

Our next question comes from the line of David Silver with CL King. Your line is open.

Good morning, David.

Yeah, hey, good morning. My first observation is there are quite a number of Davids on this call.

There are.

About four times false alarms. Okay, thanks for laughing at that. I wanted to maybe ask a question about your China business as a whole. So, you know, as of 2020, that's now your largest country market in terms of revenues. So maybe, you know, a couple of questions, but in this quarter, would you say the sales growth from China was, you know, equal to your overall company growth rate, or was it greater than the company total itself? And then maybe, you know, you're looking out over the medium term, let's say through the end of 2021. I mean, how do you see the growth trends in that market, um, progressing through the year? And then maybe I'll just throw out one other thing, but some other companies that have reported have indicated that in terms of the double booking or the overordering, there seems to be a little more of that coming out of that particular market, in part just due to fears about how trade policies may develop. Maybe just a snapshot of what you see out of your China business. Thank you.

Sure. Sure, David. You know, I would say, first of all, you kind of got to ground yourself to a year ago in China where the pandemic started during the first quarter. So clearly the growth rate in China year over year comparatives is higher than it is for the rest of the world because it was such a low point last year in the first quarter. So clearly China is going to show in a percentage standpoint a much higher growth rate in our first quarter versus last year than the other regions of the world because of that. However, if you kind of normalize that, right, and say what's it look like through the course of the year, well, you're going to get this opposite impact in the second quarter where so much of the rest of the world got impacted and China was starting to turn back on by second quarter. that you'll see that maybe the rest of the world is growing faster than China in the second quarter when you do the comparatives on it. But that's really all to do with history on what was taking place last year. We continue to see ongoing strong order rates and demand in all segments of the business out of China and Asia in general. So it continues to be quite healthy. From a double booking standpoint, yeah, we see double bookings coming out of Asia and but we also see them kind of globally. I think it probably gets elevated from the standpoint in Asia in general. A lot of contract manufacturing is going on out in Asia, so therefore a lot of the bookings that are flowing through contract manufacturing are showing up there. But I'm not sure we would say that China specifically is driving the really strong orders or evidence of double booking specifically.

Okay, thank you for that. I had a question here maybe on the current semiconductor shortage and maybe a scenario analysis that persists. I know you've kind of come at this from a couple different angles, but my general question would be, given your strong outlook and everything, how well would you say your company is prepared to deal with the possibility that the Semiconductor shortage in terms of breadth and duration just turns out to be longer than most people are guessing. In other words, worst-case scenario. And I'm thinking not so much about your customers, but I'm thinking about your internal capabilities. I know you definitely have some capability of manufacturing, customizing, et cetera, but... are you taking any steps or do you consider it prudent to take any steps to kind of reinforce your internal capabilities to either produce or modify or customize chips in the event that there's a deepening or a broadening of the current shortage conditions at various parts of the market? Thank you.

Yeah, and certainly I think maybe Three months ago, there was some belief that maybe the semiconductor shortage would kind of lessen by kind of mid-year this year. It's not our belief or my belief that we hit that inflection point by mid-year. We're expecting it certainly to impact really through the year. And although we have some direct impacts of semiconductor shortages, they're relatively small. as we're not really large purchasers of semiconductors in for our assemblies. I mentioned during one of the other questions that we do have some opportunities for some of the more simple MCUs to be able to do some of that internally with our own designs. And so certainly prudent. We're working on those things to qualify them. So as you can imagine, we're working to get qualifications, and particularly on the auto side, it's much faster to get qualifications today than it normally is because everyone's interested in trying to get supply taken care of. So certainly some impact there that actions we're taking to try to shore that up. We are continuing to increase our investments in capacity in our core semiconductor business. That's not such related to that our space is where the constraints are, but just overall demand continues to be strong and our opportunity to gain share over the coming years is such that we need to be adding capacity to support that. So we are continuing to beef up our capacity capabilities in our own core semiconductor business.

Okay, great. And I'm just going to have one more fast one here, but this will be for me and all. And it would have to do with the repurchase authorization that was just re-upped, I guess, $300 million over three years. And if I go back to February, I mean, you were very clear about kind of the criteria for the company's deployment of capital for buybacks. And being opportunistic, I think, was at the top of the list. I'm looking at your stock price now and certainly based on recent earnings trends, the valuations have widened out a bit. I'm just wondering your thoughts on the optimal use for that authorization over a one to two year period. In other words, is there a desire to offset options issuance or just maybe how you think maybe in a world where opportunistic, you know, might not fit the bill for buybacks, just how you think the optimal, you know, deployment of that authorization might be. Thank you.

Sure. So, you know, just on the authorization itself, that's something where our authorization was expiring at the end of this month, and so really it's always prudent to make sure you have an authorization in place For those who have known us for a long time, we did change the structure of the authorization really to align to really more our capital allocation philosophy because it's now dollar-based as opposed to share count-based on the structure. So, nothing out of the ordinary there. In terms of philosophy, I would say our philosophy, as you mentioned in February, you know, we tried to articulate that, which is still our primary focus is still around acquisitions and acquisitions that enhance our organic growth. And from that perspective right now, you know, we made our Heartland Controls acquisition earlier in the first quarter. And I would say, as we look at the landscape today, the markets are definitely a lot of activity. We're quite busy looking at a lot of potential targets, and that continues to remain our primary focus. So, you know, as of now, I wouldn't change our philosophy on continuing to be opportunistic, mainly because of the prioritization that we have around capital allocation.

I appreciate your questions, David. That concludes our Q&A session.

Okay, thank you.

Thank you for joining us on today's call and your interest in Little Fuse. We look forward to talking with you during our May and June outreach events. Have a great day.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.