Littelfuse, Inc.

Good day, everyone, and welcome to the Little Fuse 4th Quarter 2021 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to the Head of Investor Relations, Tricia Tuntland. Please proceed.

Good morning, and welcome to the Little Fuse 4th Quarter 2021 Earnings Conference Call. With me today are Dave Heinzman, President and CEO, and Mino Sethna, Executive Vice President and CFO. Yesterday, we reported results for our fourth quarter. Any 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 yesterday'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 Relations section of our website. I will now turn the call over to Dave.

Thank you, Tricia. Good morning and thanks for joining us today. Let's start with slide four. Continuing our momentum from prior quarters, our global teams delivered another quarter of strong performance to finish the year. We achieved record fourth quarter sales of $553 million, up 38% versus last year, an adjusted EPS of $3.16, an increase of 42% year-over-year. We finished 2021 with record annual revenue of $2.1 billion, up 44% compared to prior year, and recorded adjusted EPS of $13.19, an increase of 106% year-over-year. Our teams achieved outstanding results driven by superior execution and demand creation across the industrial, transportation, and electronics end markets we serve. I'd like to thank all of our associates around the world for their unwavering commitment and hard work to significantly grow our company by winning new business and meeting customer demand during these challenging times. 2021 was truly an exceptional year for Little Juice. MENA will provide additional color on our strong financial results. Our results and successes during the year reflect both the strength of our team's execution and the power of our strategy, which is shown on slide five. Over the last decade, we have positioned our company within the long-term structural growth themes of sustainability, connectivity, and safety. The ever-increasing complexity of applications surrounding these themes continues to drive greater demand for our reliable products, and in turn, a higher level of product content. During 2021, we advanced our strategic business initiatives, driving content and share gains in high-growth markets, both organically and through acquisitions. We completed two strategic acquisitions during the year, adding approximately $300 million in annualized sales. One year into our five-year growth strategy, we are well on our way to delivering sustained double-digit revenue growth, best-in-class profitability, and top-tier shareholder returns. Moving on to performance within our segments. During 2021, our electronics product segment drove strong growth across all regions. Revenue was up 39% and 37% organically compared to 2020. Our performance was driven by new business and our seamless execution to keep operations up and running and capacity additions coming online to support customer demand. Globally, we saw strength across a broad range of applications and in markets, including data center, telecom infrastructure, factory and building automation, appliances, and automotive electronics driven by EV applications. We did see significant cost increases related to materials and freight, but were able to mitigate much of the impact with our discipline pricing strategy and productivity improvements. Distribution partners have slowly built inventory, and levels are now appropriately matched to end market demand. We also have seen electronics-in customers and contract manufacturers build inventory. However, bookings remain strong across all regions, and exiting the fourth quarter, our electronics book-to-bill remained above 1%. We expect ongoing healthy in-market demand driven by the amplified themes of electronification, energy efficiency, automation, and connectivity. Moving forward, we are renaming our automotive product segment and will refer to it as our transportation product segment. The term transportation represents a more comprehensive description of our broad range of products and the applications and in-markets we serve. The Carling Technologies acquisition, which we have discussed with you before, has meaningfully increased our presence in commercial vehicles, which now represents about half our segment revenue. We achieved strong growth in the full year of 2021, despite the challenging supply chain environment that impacted the passenger and commercial vehicle markets. Our transportation businesses also experienced significant metals and freight cost headwinds, We've been taking pricing actions to mitigate the cost increases and are implementing additional pricing actions, as well as continuing to drive productivity improvements across the business. Thanks to the execution by our global teams, revenue from our passenger vehicle business grew 25% versus 2020. Our global car bill was largely flat. Our significant growth above market was driven by continued content growth in electric vehicles. the favorable mix of higher-end vehicles, market share gains, and some inventory build at OEMs and Tier 1s, which we have commented on through 2021. Revenue for our commercial vehicle business grew 58% versus 2020. Demand for our commercial vehicle products is driven by strength in material handling, heavy-duty truck and bus, construction and agriculture equipment markets, as well as some inventory build at our customers. Our completion of the Carling Technologies acquisition on November 30th contributed $15 million to our full-year revenue. It is a pleasure to welcome the Carling employees to the Littlefuse team, and we look forward to their contributions as we continue to execute our long-term growth strategy. Turning to slide six, a combination of our companies significantly expands our technologies and capabilities, enabling critical scale in the commercial vehicle space. Carling manufactures market-leading electromechanical and electronic switching and circuit breaker technologies. They also strengthen our engineering, design, and test capabilities. The addition of Carling more than doubles the size of our commercial vehicle business and our complimentary customers, channels, and products will accelerate our growth in strategic markets, including heavy-duty truck and bus, material handling equipment, construction equipment, and agriculture machinery. Carling has a strong global presence in these markets, as well as in the telecom infrastructure and marine markets. The integration of Carling is off to a strong start. Our combined teams are working closely together. We are already seeing opportunities for joint new product design as well as sales synergies. We look forward to leveraging our respective strengths. Looking ahead, our overall transportation bookings are healthy in all regions. We see a number of ongoing content growth opportunities across the end markets we serve. and expect to continue to perform above the market for the year. That said, ongoing chip and other component shortages at our customers, as well as the timing of customer inventory burns, can cause quarter-to-quarter variations. We expect our commercial vehicle strategic markets to remain healthy. For the first quarter, we expect car build to be flat sequentially and modestly down year-over-year. For the full year, we expect car builds of approximately 80 million cars. Turning to our industrial product segment, we achieved revenue growth of 124% and 27% organically compared to 2020. Our performance was an outcome of our global team's ability to serve our customers and win new business to drive organic growth. demand for our broad range of products was driven by renewable energy led by solar and energy storage systems, HVAC, and data centers. Our performance also includes a meaningful revenue contribution of approximately $100 million from our successful acquisition of Heartland Controls. We are seeing early successes driven by our combined capabilities and complementary product portfolios. In 2022, we expect our strategic markets, renewables, EV infrastructure, HVAC, and general industrials to remain strong. This sustained growth will be driven by a more sustainable ecosystem. For example, solar and wind energy and energy storage systems that enable lower carbon emissions, the ongoing proliferation of electric vehicles and charging stations. more efficient climate control units, increasing requirements for electrical safety, and the rising demand for factory and process automation. Now let's move on to highlights and design wins in the end markets we serve. We are building forward momentum with our investments for best-in-class growth. We are advancing our customer-driven innovation, digital presence, and e-mobility resources and capabilities. 2021 proved to be a year of significant new business opportunities and design inactivity, as our engineering teams continued to work closely and effectively with our customers in a hybrid work environment. Our joint collaboration drove significant new business growth. Within our industrial end markets, on slide 7, sustainability and safety are key drivers of our growth strategy. Throughout 2021, we captured new business across our regions for a broad range of renewable energy applications and for energy storage systems. In addition, the continued focus on more efficient HVAC systems proved a major source of our design wins. We benefited from the integration of Heartland Control's acquisition. We have already seen successes leveraging Heartland products with Littlefuse customers beyond HVAC. For instance, selling into general industrial applications related to food and beverage safety and selling little-fused products to heartland customers. We also secured several new business wins given the emphasis on Industry 4.0 and a push towards industrial automation and energy efficiency for industrial applications. Furthermore, our ability to deliver innovative products to meet tighter safety requirements for general industrial and food and beverage applications drove many new design wins during the year. Turning towards transportation and markets on slide 8, we continue to expand our e-mobility investments to broaden our capabilities and high-voltage product offering. The ongoing electronification and electrification of applications drove significant design activity at business winds during 2021. Across all of our regions, the traditional vehicle manufacturers to newer EV-only entrants, we saw a pipeline of opportunities and numerous e-mobility-related design wins. Battery management systems for EVs were a major source of wins during the year, and we saw design wins for EV battery conditioning. With the growth in e-mobility and robust design activity, we remain well positioned for on-vehicle charging and EV charging infrastructure applications and saw a wide range of wins throughout the year. Additionally, we are seeing EV-related design wins in the commercial vehicle space. We had numerous design wins for manufacturers of electric trucks and buses and secured design wins in the agriculture equipment space. We continued to build on our solid customer relationships and material handling space and had several wins in this high-growth market. With the addition of Carling products, we were also better positioned to accelerate design wins and growth in our strategic commercial vehicle markets. The continued electronification of vehicles, both within traditional passenger vehicles and EVs, are driving increased needs for automotive electronics. which remains a great source of design wins. In 2021, we saw wins across a wide range of applications, from vehicle lighting to infotainment and navigation systems to components used in window, door, and seat motor applications. ADOT's applications also drove additional business wins in vehicle cameras and dashboard systems. On slide 9, during 2021, we saw a robust pipeline of diverse design lens across a spectrum of electronics applications, largely driven by the need for ongoing greater connectivity as design engineers qualify new products. Our differentiated, far-reaching go-to-market strategy enables us to secure new business wins from appliances, building and home automation, to battery management systems within tablets and notebook computers, to 5G infrastructure. Data centers and cloud storage also continue to be a major source for design activity as online gaming and streaming services drove demand. In addition, to better serve our strategic partners, we accelerated advancements in our digital presence, giving evolving user expectations and hybrid work environments. This multi-year journey will further differentiate our go-to-market strategy and help us better serve our customers. Our pipeline of new business opportunities and health is healthy across the hydro, industrial, transportation, and electronics end markets we serve. We are confident in our ability to secure these opportunities based on our innovative, reliable products, engineering and technical capabilities, and customer responsiveness. The organic growth from these efforts, coupled with strategic acquisitions to enhance and sustain our organic growth, positions us well to continue expanding our market presence. Finally, on slide 10, I would like to highlight our commitment to sustainability. Our first annual sustainability report, published in October, communicates our progress. Environmentally, our core products empower the sustainability megatrend by enabling our customers' applications focused on a more sustainable, connected, and safer world. We also have goals related to our continued efforts focused on our own footprint, such as our goal to achieve greenhouse gas reduction of 38% by 2035. And we continue to invest in programs to further our energy conservation initiatives. Socially, we have a number of programs addressing human capital management and the health and well-being of our global associates, such as our Zero Injury Workplace Goal. We also have goals to expand gender and minority representations and have launched various development programs to improve our female leadership position and initiatives to attract diverse talent. From a government's perspective, we continue to refresh our board composition with members who bring fresh perspectives and help ensure continued diversity on our board, supported by longer-serving directors who bring continuity and experience to our business and the end markets we serve. In addition, we have very strong global ethics and compliance policies and programs. We are focused on the long-term value of a robust ESG strategy for our business and for all stakeholders, and look forward to continuing to share our progress. 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. Let's start with slide 12. Sales in the quarter were $553 million, up 38% versus prior year and 23% organically. Our Heartland and Carling acquisitions, plus the extra 14th week in this quarter, added $61 million in sales versus the prior year quarter. GAAP operating margins were 16.8%, while adjusted operating margins were 17%, expanding 40 basis points versus last year. Fourth quarter GAAP diluted earnings per share was $2.08, and adjusted diluted EPS was $3.16, up 42% over prior year. These included both a gap and adjusted effective tax rate of 12.7%. The adjusted effective tax rate was lower than our forecast due to the receipt of a foreign tax holiday during the quarter and retroactive for all of 2021. Turning to slide 13, for 2021, sales of $2.08 billion were up 44% versus last year and grew 33% organically. Our acquisitions plus the extra week added $134 million in sales versus last year. Gap operating margins were 18.5%, while adjusted operating margins expanded nearly 500 basis points for the year to a record 19.1%. Incremental operating margins were 30% versus last year, a testament to how our teams have driven pricing and productivity actions to offset many of the ongoing inflationary challenges we've seen. Gap diluted EPS for the year was $11.38, and adjusted diluted EPS was $13.19, up 106% versus last year. Our full year gap effective tax rate was 16.8%, and adjusted effective rate was 16.1%. As I've referenced through the past year, inflationary pressures unfavorably impacted margins in excess of 300 basis points, mainly across foreign exchange, input, and transportation costs. We were able to offset about half of these costs through price realization. Our discretionary spend continues to run at reduced levels than typical, also mitigating the inflation impacts to margins. We generated a record $373 million in operating cash flow during the year and $283 million in free cash flow, 100% conversion from net income and aligned to our conversion target. The ongoing strength of our balance sheet gives us the flexibility to maintain some strategic inventory builds to meet anticipated customer demand. We also delivered on our capital allocation strategy, reinvesting in our business for our ongoing growth. We invested about $90 million in capital expenditures with a key focus on capacity and utilized over $400 million in cash for our Heartland and Carling acquisitions this year, adding nearly $300 million in annualized sales. We also returned $50 million in capital to our shareholders through our dividend. Slide 14 references our five-year financial framework we discussed at our investor event last February. This framework has been fairly consistent over the past decade, and we've demonstrated we can deliver financial performance that's in line with our objectives through market cycles. We're off to a strong start in the first year of our current strategy across all of these metrics. I'm confident in our ability to deliver these outcomes again through our strategy. Now moving on to our fourth quarter segment performance on slide 15, I'll start with our electronics product segment. Sales in the quarter were $342 million, growing 39% versus last year and 36% organically. Operating margins were 23.2%, expanding over 600 basis points versus last year, led by a combination of ongoing volume leverage and pricing strategy, driving strong performance in this ongoing robust demand environment. As Dave noted, we've renamed our automotive product segment to transportation. Sales in this segment were $142 million in the quarter, up 14% versus last year, and down 2% organically, the main differences being the extra week of sales and the acquisition of Carling Technologies during the quarter. Sales in the commercial vehicle business were up 81% versus last year, with the addition of Carling, as well as organic growth from strong end market demand. Sales from our passenger vehicle business were down 7% versus last year versus global car bill decline of 17% over the same period. Operating margins for the segment were 7.5%. Margins were unfavorably impacted by nearly 500 basis points versus last year due to ongoing FX and metals inflation and margin dilution from our Carling acquisition. Lower passenger vehicle volumes also reduced benefits from operating leverage. Sales to the industrial segment of $70 million grew 121% in the quarter and were up 23% organically, with the main differences being our Heartland Controls acquisition from early last year and the extra week of sales. Operating margins were 6%, where we incurred higher logistics costs across our Heartland business due to rate increases and costs for some internal strategic repositioning of inventory. Excluding Heartland, our legacy businesses expanded operating margins over 200 basis points versus last year. Slide 16 outlines full-year performance for our segments. electronic sales finished at $1.3 billion. Despite the number of operational challenges we faced, including ongoing inflationary increases across the supply chain, our adjusted operating margins for the year were 23.8%, expanding 750 basis points versus last year. Sales in our transportation segment were $528 million. Margins finished at 12.5% of 200 basis points versus last year, despite absorbing more than 400 basis points of headwind from FX and metals. Industrial segment sales finished at $251 million. Margins ended the year at 9%. The Heartland integration is on track with our expectations, and we had expected some margin dilution in year one of ownership. Excluding Heartland, our legacy industrial segment expanded margins 150 basis points. Now turning to slide 17, the demand environment remains strong across most of the end markets in which we are positioned, especially in areas covering e-mobility, vehicles and infrastructure, renewable energy, data centers and cloud applications, and Industry 4.0. As a result, we continue to see expanding content growth of our products across numerous applications. Softening the strength of the demand are currency headwinds. At current exchange rates, FX could be a sales headwind of about $20 million for 2022. Amidst these positive demand trends, our teams continue to manage through daily COVID disruptions and an increasing number of supply chain challenges, leading to ongoing inflationary pressures. With today's market conditions, we see about 100 basis points of additional margin headwind for the year, a combination of input cost inflation, including metals, higher transportation costs, as well as wage and other service cost increases. Our teams continue to drive a number of productivity and automation initiatives and ongoing pricing actions to mitigate these. For the first quarter outlook, we expect sales in the range of $563 million to $577 million, up 23% versus last year, and 12% on an organic basis. We project first quarter adjusted EPS to be in the range of $3.14 to $3.30. This assumes an adjusted effective tax rate of 17%. The EPS midpoint is up 21% over prior year. EPS at the midpoint would be up 28%, excluding a non-operating mark-to-market benefit in the first quarter last year. Slide 19 includes some other items to consider in your full-year modeling. 2022 will include a full year of Carling versus one month in our 2021 results. We expect Carling to contribute $185 to $190 million in sales and about $0.30 of EPS, net of ongoing deal amortization. For the year, we expect 100 basis points dilution to the company operating margin resulting from Carling, including non-cash deal amortization. With our integration roadmap underway, we expect carling margins to align with the mid-teens operating margin target for our transportation segment as we exit year three of ownership. On other 2022 estimates, we are projecting non-cash amortization in the low $50 million range. $17 million in interest expense at current rates, and a full-year adjusted effective tax rate in the range of 16% to 18%. We expect 100% free cash flow conversion and estimate $110 to $120 million in capital expenditures. In closing, I want to thank our associates for their tireless efforts that led to our record success this year. And also, a thank you to our customers and suppliers for their partnership in growing our businesses together. And with that, I'll turn it back to Dave for some final comments.

Thanks, Mabel. In summary on slide 19, 2021 was indeed an outstanding year for LittleFuse. Day in and day out, LittleFuse associates worked hard to support one another and serve our customers around the world. Want to thank our global teams for their tremendous efforts. Their commitment to execution during these challenging times has been remarkable. As a result, we delivered record financial performance and made strong progress on our strategic business initiatives. We have entered 2022 well-positioned to deliver continued profitable growth and value for all stakeholders. This year notably represents our 95th anniversary and long-standing track record as a successful global company. In recognition of this key milestone, on April 5th, the 95th day of the year, we will be ringing NASDAQ's closing bell in celebration of our people, innovation, and operational and commercial excellence, and in recognition of all stakeholders who have supported our business and continue to believe in our strategy. I'm truly proud of the company's global leadership and growth over the years and the strong reputation we have built. And with that, I will now turn the call back to the operator for Q&A.

Thank you. And as a reminder, to ask a question, simply press star 1 on your telephone. To withdraw the question, press the pound or hash key. One moment while we compile the Q&A roster. Our first question is from the line of Carl Ackerman with Colin. Your line is open.

Good morning, Carl. Yes. Hey, good morning, everyone. Dave Meadle and Tricia, I hope you're doing well. Two questions, if I may. The first one is a clarification question. The 100 basis point impact on operating margins, are you suggesting that operating margins for the full year will be 100 basis points below the December quarter 2021 level? I just wanted to clarify that, please.

No, Carl, hi. It's Meenal. So maybe just two things when you're talking about 100 basis points. I mentioned two different things on the call. One being with Carling, with adding Carling into the portfolio with the work that we've got to do around the integration roadmap, we expect an impact to the company margin of 100 basis points or so for the year just with the margin dilution with Carling coming into the portfolio. I also talked about For 2022, for the year, that we're seeing an incremental 100 basis points of cost headwinds coming through, but we expect to mitigate that with pricing. So at this time, don't expect a net-net impact on the bottom line from that.

Understood. I appreciate that. I guess that dovetails into my next question, which is, you know, it's great to hear you've implemented pricing actions to help mitigate the rising input costs. However, Dave also indicated that your sales channels are seeing more balanced inventory. That indicates it may be a bit more challenging to pass along costs perhaps beyond this quarter. And so if you could discuss that and what actions you may be able to take from a procurement perspective to limit freight and logistics costs going forward, that would be very helpful. Thank you.

Sure. Yeah, absolutely. Carl, as I talked about the inventory position within our electronics channels, they're a little more balanced with the demand as they've kind of slowly built some inventory over the last few months. However, within that segment, as we look at actions we've taken through the course of 2021, including actions that took place late in 2021, we'll see benefits from that. helping to offset continuing headwinds as we go into 2022. And clearly, as we monitor costs in the transportation side of the business, or excuse me, not transportation side of the business, but our actually logistics costs being elevated, as well as metals and other commodity costs being up, We'll continue to monitor, and there may be additional actions that we take in that channel as well.

Thank you.

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

Thank you. From the line of Matt Shearing with Stiefel, please go ahead.

Good morning, Matt. Hey, good morning, everyone. Just another question just regarding the near-term outlook. X out of incremental revenue from Carling Acquisition looks like you're guiding sequentially flat. Are those the expectations for each of the big segments, transportation and electronics? Because it looks like you've been well above seasonal for electronics for three or four quarters now. And I guess with the inventory commentary, are you seeing things slow down to kind of a normal seasonal cadence or anything else there?

Yeah, I don't think it's anything out of the ordinary, Matt. We are guiding generally to seasonal, and we think of seasonal. It's tough to think about seasonal these days because the past few years have been anything but. But, you know, for us, a normal seasonal trend, Q4 to Q1 is generally flat. And when you take out all the noise from Carling, right, one month in the fourth quarter, three months in the first quarter, you take out the extra week, et cetera, we're generally flat across the board.

Yeah, and I'd also say, Matt, that from a demand side in the electronics segment, you know, clearly we continue to see very robust ongoing demand in market demand. You know, it's probably stabilized. You know, for a while there it kept climbing and climbing, and it's more of a stable environment, but it's stabilized at a pretty high level. Inventories are reasonably balanced, so we kind of expect to see the flow through there in that part of the business segment. Transportation portion of our business, obviously, there is forward-looking views of increased car builds over time through the course of 2022. We are seeing kind of a car build from fourth quarter to first quarter being flattish. That's kind of what we're seeing from the market and the rating agencies on that. But the outlook overall is continuing increasing demand in those areas.

Okay, thanks for that. And then just on the margins and your near-term margin outlook, it looks like you expect the transportation margins to get back to that, you know, target 16 plus percent or so. But it looks like near-term, maybe for most of this year, you still have some headwinds with carling as well as cost inputs and, you know, the inability to maybe pass along all those prices. So how should we think about margins in that segment this year?

Yeah, so just refreshing back, right, we've always talked about our transportation segment, the old auto segment, really having target margins in the mid-teen range, and that's what we continue to look at as expectations. You're right, in the near term we've talked about, especially most recently the past year, it's been around metals. Metal price increases have gone up a lot. There are some other input costs as well. And then just on an interim basis, you know, with Carling, it'll be about 100 basis points, maybe a little bit more across that segment. So I would say for us, you know, what would improve margins short-term is definitely changes with market pricing around metals. You know, that would be we would start to see that fairly quickly, within a quarter or so, you know, once we bleed off inventory. But that would be the general expectation.

Okay. Thanks a lot.

Thanks for your questions, Matt. We'll take our next caller, please. From the line of Luke Junk with Baird, please go ahead.

Good morning, Luke. Thank you for taking the questions. For starters, hoping to better understand, I guess, primarily how Heartland and to what extent any collaring synergies would layer in from here in 2022 given the related margin dilution that we're currently seeing both in industrial and transportation. I know it's something you typically look at over a two- to three-year period, so Heartland might be more front and center in terms of 2022 actions, but If there's anything initially on the Carling front as well, I'd be curious.

Yeah, so we're, you know, specifically on Carling, if I step back, right, we're a couple months now into ownership. We've got an integration roadmap laid out, and we're making good initial progress on that. I'd say our integration-focused areas are a few main points, one being really on the sales, sales growth, including looking at pricing, right, across all of our business's You know, Dave mentioned this. We're looking at pricing, and that's our expectation to offset a lot of the inflationary headwinds we're seeing. No different for Carling. So we're working on those activities as well as, very quickly, the teams together see opportunities for growth. You know, we've talked about some different customer bases, and we think there's some good opportunities for design-in opportunities across business there. So that's one. A little bit longer price, you know, but we would expect some price actions this year. Secondly, just from a cost perspective, we think now with the scale of our commercial vehicle platform, very quickly there's opportunities around procurement that we're already starting to go after as well as transportation, logistics costs. And I would also say, especially the Carling team has pointed out a lot of opportunities with some investment where we can look at productivity and automation opportunities there. So part of our capital plan reflects some investments we plan to make pretty quickly to be able to drive that.

I think it's also on the Heartland Controls piece that you asked about. Also, we continue down that path. We're a little further down the path there a year in. And we've seen nice growth on that business, which ultimately will help drive synergies for us. There is ongoing work to look on the cost side that we think we'll be able to complete in the next year or so that will show improvements in the Heartland margins as well. So I think it's typical for us, you know, usually it's that kind of two- or three-year horizon for us to be able to get our synergies in place and begin to get the margins to the levels that we feel the business should run at in the longer term.

Okay, thank you for that. And then my follow-up question I wanted to ask about Carling more on a strategic front, which of course has really enhanced the company's presence in the commercial vehicle market, both on-road and off-road. What I'm really hoping to better understand this morning is the scope of the opportunity set for LittleFuse going forward as it relates to the electrification of commercial vehicles. You've, of course, shared some incremental content in terms of a framework for light vehicles. I'm just wondering... If there's anything big as a breadbox that you might be able to share as it relates to the incremental opportunity now on commercial vehicles is to really bulk up that part of the portfolio. Thank you.

Yeah, certainly. We've talked for some time now about our desire to grow the commercial vehicle portion of our business. And we're very fortunate and pleased with the acquisition of Carling as it does that. More than doubles the size of our commercial vehicle portfolio. which increases the importance that we bring to our customers in that space. And in that space, we tend to sell directly to OEMs. So the more we bring there and the more solutions we bring are certainly beneficial for us. The complementary technologies, we've already seen some cases where LittleFuse was maybe not quite prepared to be able to take on an opportunity with a customer. Carling wasn't either. Actually, the combined technologies, are now positioning us to better serve that, and the customer's recognizing that, and it's increased the opportunity set for us. Carling, overall in the commercial vehicle space, electrification is absolutely a trend we're seeing. We spoke a little bit about it in the prepared remarks where we've seen nice design wins in the high-voltage space in truck and bus, as well as the agriculture side of the business. And that tends to be in and around power distribution, high voltage power distribution and protection. So it really kind of drives off of our core, but also switching, electronic switching, our opportunities within that space as well. So I would say it fits maybe as much into the electronification side of things as it does in the electrification side of things. within the commercial vehicle space when we look at Carling adding the capabilities.

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

Thank you. Our next question is from Nick Todorov with Longbow Research. Please go ahead.

Good morning, Nick.

Hey, good morning, guys, and congrats on great results. First question is, Dave, I think you talked last year that content growth With tracking, I believe you were saying something in the 8% to 10% range in kind of the year 21. As we go in and look into 2022, how are you thinking about content growth in auto this year?

Yeah, well, obviously in passenger car portion of our business in 2021 was kind of an exceptional year from a content growth and an overall growth there. And so within our transportation segment, the passenger car growth was about 25%, so well above car build, as car build growth was only up maybe 1% or so during that period. Now, we've talked about it for the last couple, two or three quarters, and again this time, we think maybe 10% of that growth is really related to inventory build that's taken place at the Tier 1s and OEMs, so that accounts for a portion of that kind of outsized content growth. In addition to that, Favorable mix of vehicles as the OEMs kind of focus on the higher end vehicles. EV launches and increasing content on EVs. And in 2021, we actually saw some market share gains, which we have a very strong market position. So getting market share gains doesn't come along that often for us. We were able to accomplish that in 2021. So as you kind of look forward into 2022 and beyond, it's going to be choppy a little bit in the content story because there will be some times where there will be some pullback of that inventory that takes place. We don't really know of that 10% that we built up in 2021 and how much of that will fundamentally be a supply chain structural change with our customers and will stick. Some of it will probably work its way back out, so that will create some choppiness from quarter to quarter and kind of the content calculations. Also, don't expect market share gains to repeat every quarter or every year. So I think it will normalize a little bit over the course of 2022 into 2023, but still a significant opportunity for us for content growth.

Okay, great. Very helpful. Thanks for the detailed response. Related also to auto, are you willing to say how much of your sales are now coming from electric vehicles and plugging hybrids, and maybe how do you expect those to move into 2022?

Yeah. We have not disclosed how much of our revenues are coming specifically from the electrification trends. Clearly, the opportunity and the content for us, a big part of our content growth, through the course of the last year, has certainly been driven by that electrification trend. Our content opportunity for our business is quite strong in the electrification side of things, where we would see our traditional low-voltage business kind of remains, and you get incremental increases from the high-voltage portions that get added to EVs. And for a full EV, that can increase from kind of our low-voltage offerings, which are in that, can be as high as about $5 per vehicle. And full EVs, you can get six times that. You can get eight times that, depending on the designs. So it's a big mover in the content for us. And it certainly is, you know, the vast majority of the content growth for us, you know, now and as we look forward, it's kind of accelerating. And then I would say that.

Sure, and I would just add in there's also content growth that we get out of infrastructure as part of that. When we think about e-mobility overall, we look broadly with everything Dave talked about with passenger vehicles, the infrastructure side of the business, as well as, and Dave also touched on earlier about work that we're doing in the commercial vehicle side of the business. So a lot of very broad opportunity when we think about electronification.

Okay, great. Thanks, Mina. One question for you. Just given all the backdrop of M&A integration and the cost headwinds near term, how should we think about fall through relative to your traditional target of 30% going through the year?

Yeah, so maybe related to that as well as the earlier margin question as well, you know, I talked about, look, we believe where we are today with all the work we're doing around pricing, even with the headwinds coming on, we can cover that. We do see some of the margin dilution I mentioned coming from curling for the year, and that will start to dissipate as we integrate. But I would say from a year-over-year basis, I'd expect, you know, think about our margins, our very strong margins in 19. we'd expect to see target operating margins. We would be in the target operating margin range of our 17% to 19% for 22%. That's our expectation right now. So maybe a little net-net, to answer your question, a little lighter on the incrementals, but still very strong margin performance.

Got it. Very helpful. Thanks, guys. Good luck. Thanks, Nick. Appreciate your questions.

And as a reminder, to ask a question, simply press star 1 on your telephone to get in the queue. Our next question is from Christopher Glean with Oppenheimer. Your line is open.

Good morning, Chris. Hey, good morning, everybody. I have a question on your M&A pipeline. I'm curious if the passenger vehicle EV side, you know, if those technologies are a focus or if you have more of an organic mindset there.

Yeah, I think... Our primary focus on the electrification side in PASCAR is organic in our efforts, and we've invested in that, continue to increase our investments to support the e-mobility efforts there. However, there clearly are technology enablers that we have kind of within that funnel that we look at that perhaps could accelerate our uptake in the electrification efforts over time. Finding those, getting them broken loose, and whether we can get those accomplished or not, that's the challenge today at a reasonable price. But I would say primarily the focus is organic. However, there's opportunistic things there from a technology enabler.

Okay, great. And as we think about the electronics profile coming up a strong year – And any puts and takes you might advise versus my and perhaps others presumption of normal seasonality to a balance of 22?

Yeah, so for our electronics segment, Chris, you know, we've always talked about think on average through cycles, you know, upper teens to 20% range. You know, with the work that we've been doing on optimization, we've talked about the past few years on ICES synergies, et cetera, I think, you know, we would say we can look at an average of 20% through the cycles, you know, with really the strengths and also the volume additions that we've had. So I think that helps us a bit as well.

Sorry, I'll try to ask the question more clearly. The question was about seasonality, which refers to revenue. In the context of coming off a strong growth year, but you still have positive book to build, my presumption for modeling would be your normal seasonal patterns through the quarters as we model out 2022 or update those models. So I'm wondering if against that presumption, you'd advise any particular puts and takes?

Yeah, Chris, let me take that. I think we've seen anything but normal over the last couple of years within the electronics or the broader markets, so it's a little challenging to predict too far forward on what may be coming or what may happen. We do think right now end market demand is has kind of, if you will, stabilized a bit, but at quite high levels. So if that continues, you know, yeah, perhaps kind of normal seasonality patterns at these elevated levels would make sense in the electronics portion of our business. You know, a couple caveats I would say with the Omicron variants that are out there and potential impacts, you know, that could come, That adds a degree of variability that is very difficult to predict what that may or may not bring. Clearly, while our distribution channel position, our inventories remain in a really healthy range, and not over-inventoried, they're in a pretty good healthy range. We feel good about that. However, keep in mind we also stated that we have seen some evidence of increased inventory at contract manufacturers, and end OEMs that, you know, certainly show some inventory build out in the marketplace. So we all know that there is the potential for corrections within the electronics industry. We don't see near-term evidence of that, but certainly somewhere out in the future that could come, and we watch very carefully for that.

Great. Thanks for the call, Eric.

Appreciate your questions, Chris. We'll take our next caller, please.

From David Kelly with Jefferies, please go ahead.

Good morning, David.

Hey, good morning, team. Maybe on the market share gains that you noted in transportation, Dave, could you provide some color on where you're gaining traction and just curious, you know, it's early days, but how do you see your market share playing out in the emerging EV space?

Sure. Sure. And the market share gains that we were fortunate to be able to accomplish in 2021 are really in our kind of more core traditional areas, lower voltage side of the business, some in Europe and some in Asia. And really some of that is our ability to respond to the market. As it were, peaks in demand and strong demand there. Our ability to serve was perhaps better than some of our competition, which allowed us to gain some space there, which has always been kind of our strategy to make sure we out-serve compared to others. So I think there's some value with that, that we came. We think we'll hold on to that market share, but again, because of our position in the market, we don't expect to see that every year, that we're going to gain market share and things. From the electrification side, we've been open about the fact that in the long term, we don't expect to have the same market share that we have in the low voltage side just with the dynamics of emerging technologies and emerging players and many companies focused on it. However, the content, the outgrowth, the content opportunity is such that we still drive significant content growth overall So what we would see is that we still expect to be the leader in that space, and we've seen that and continue to have success with that. But it won't be at the same market share we have in our low-voltage portion of our business.

Okay, got it. Thank you. And then maybe, you know, there are several moving parts to transport margins in 2022. Can you give us a sense of how you're thinking about the core incremental volume leverage, maybe X, the car lane contribution?

Yeah, I think, you know, right now we talked about the fact that if we just talk about the automotive side of the transportation segment for a minute, you know, we talked about the fact that we believe car bill would be about $80 million, so that's, you know, somewhere in the mid-to-upper single-digit growth rate range. That's the case. You know, we will expect to get some growth and some improved volume leverage from that on the base. But I think our biggest headwind still, as I've mentioned, has really been around metals pricing. So that's one that we keep a very close eye on. If we start to see some improvements there between metals and some other input costs, that will definitely help faster for us. So that's a big part of what we're monitoring. And then, of course, you know, I don't want to be remiss in mentioning absolutely we're going after pricing on auto. We've talked about that with OEM customers. One, that takes longer in general where we have OEM customers. And two, because of the market share position that we enjoy there, we tend to have some longer contracts in place. So renewals take a while as we go in and think about those. But absolutely, that's a focus area for us as well.

Perfect. Thank you. And maybe one more, if I could squeeze it in. You closed the Carling acquisition, and your commercial vehicle business is really scaling up here. So just high-level customers. How should we think about your commercial vehicle, Little Fuse as a whole today, your exposure there on highway versus construction versus ag, if there's any kind of outlier regional exposure, just trying to get a sense of how the business stands up now?

Yeah, you know, as we talked about it, within the transportation segment now, commercial vehicles is kind of approaching that 50% range of that segment. So it's scaling nicely. When we think about the end applications between heavy truck and bus, CONAG, also you're kind of going to material handling, which is an interesting space as well. We don't have an outsized position in any of those. It's a pretty broad exposure across those end markets, which we think is healthy. We see really strong technology shift. So we think the dynamics there play out as a very positive trend for us. Both electrification and growing sophistication in the electronics within those applications all play out to be very positive for us. Historically, we would have said we were more North America-centric. Carling actually helps us to balance that a little bit better. So we still today would have the strongest exposure in North America, followed by Europe, and then ultimately Asia, or more specifically China.

Okay, perfect. Thanks, David. I appreciate it.

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

Thank you. From David Silver with CL King, your line is open.

Good morning, David.

Yeah, hi. Thank you. Just a couple of quick questions, but In your guidance for 2022, you talked about a CapEx budget of as much as $120 million, which I'm guessing that's about two-thirds discretionary, and it is, you know, meaningfully higher than what you were spending just a couple years ago. So for the discretionary portion of your CapEx budget, if you could maybe highlight where those dollars are going and, you know, qualitatively what you're trying to achieve. Is it global penetration? Is it greater production capacity? Greater efficiency? Discretionary cap spending and maybe the goals for that would be helpful. Thank you.

Sure. Yeah, great question, David. So maybe just to frame it a little bit, in 21, I mentioned in my prepared remarks, we spent about $90 million in capital. Again, higher than we had spent at a previous time. But I would also say between the volume declines we saw in 2019 across the you know, multiple businesses as well as in, you know, with the COVID implications from 2020, I would say our spending was lighter than we would normally see in those two years. So there is some element of catch-up that's been going on in 21 and 22. That's not the bulk, but just to lay that groundwork. I would say a lot of our back half of 21 and into 22 is really around capacity. So I don't know that I would characterize that as much as discretionary because we want to make sure that we're getting ahead of the growth that we're, you know, we've been keeping up, but we want to always be ahead of the growth because, you know, Dave talked about market share gains as an example. We got an auto. That's one great example where we invest ahead for the future, and we think about where the market is going, and we've been very successful in doing that, and not only across automotive, but, of course, across electronics. In some of our legacy parts of our industrial business, we've been pretty successful in doing that. So there's that. There's with the acquisitions that we've made. You know, we're finishing off the bulk of the ICSIS work, not much CapEx there, but I did comment on the fact that we think that there's some automation and efficiency productivity opportunities across Carling that the team has brought up, so we want to invest in that, similar types of things in Heartland as well. So those are some of the bigger areas that we're focused on for 2022.

Yeah, I think it's important also to know that, you know, as Minal mentioned, our 2021 spending, We would have liked to have spent more in 2021. But just like there are delays in many markets, getting the equipment that we need and when we need it for capacity expansions and new products and things like that is a little more challenging. It takes longer. So some of that is kind of bleed over from things we would have spent in 2021 if we couldn't. But overall, we still see long-term. The business hasn't structurally changed how we spend CapEx. That 4%, 5% sort of range is the expectation we have.

Okay, thanks. And I know we're a little bit past the top of the hour, so I'd be happy with just a brief answer to this. And I hope not too many arms and legs to it. But this is more a big-picture question based on the whole string of announcements recently by major automakers who really haven't, to this point, been especially aggressive on their EV development programs. But now they're, you know, seemingly every week they're announcing, you know, nine or 10 or 11 figure programs, maybe on an aggressive or condensed timetable to expedite or accelerate their EV development. And I'm just wondering, Dave, if you have any thoughts about that. And when you think about that, what are the opportunities for LittleFuse to maybe participate as you prefer, maybe on a design-in basis Are there different keys for success, you know, when you think about the opportunity presented by a Ford or a GM or a Toyota announcement? And, you know, the types of vehicles, the types of volumes, the types of timetables that they're talking about. You know, how does that wave of announcements and spending intentions kind of – What does that make you think about, and how might LittleFuse best participate from your perspective?

Yeah, certainly you continue to see that. What it tells us is we've kind of been there for a while now, but clearly the trend towards electrification is accelerating. Probably for many years it was slower than anticipated. And now I think the view is it's probably accelerating faster than expected. So we've kind of hit that inflection point. Now there are many, many structural issues to solve to support the levels of increases that everybody have, everything from lithium availability to battery cell capacities and these sorts of things. There's lots of issues, even grid-level issues for charging infrastructure. All these things have to be worked on and solved. Many of those aren't answered yet. Many, many companies and customers working on that. So the great news for us is we have relationships with all those key players. And that's the OEMs that we're engaging with, the Tier 1s we're engaging with, By the way, we see opportunities beyond that, too, in the whole infrastructure side. Things in the EV charging space, and energy storage that needs to sit behind EV charging in some cases, right? Those are all opportunity spaces for us across our business. Some of it shows up in our industrial business. Some shows up in electronics. Some certainly shows up in our automotive business. We see those fundamental changes. We even talked about battery conditioning. So that's designed into some of our products into the factories, equipment in the factories where they're making the battery packs, where they have to charge and discharge those battery packs in order to optimize and also to look for potential faults. They also have to have them in a certain condition before they ship them. There's all this equipment around the factories that are needed to do that. We've got good design-ins there. So very far-reaching within our overall business. So we think we're extremely well-positioned for that. We think our current core technologies play very well into that space and continue to organically look for ways to continue to build out competencies there to support that, as well as opportunistic acquisitions that will support that as well. So we're excited about it. We think it's a very real trend that we're well-positioned to take advantage of.

Okay, great. Thank you very much.

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

Thank you. From Carl Ackerman with Colin, your line is open.

Yes, thank you for the opportunity to address a follow-up question. Dave, you spoke about gaining market share from opportunistic design wins across various parts of your portfolio. And Minal, you spoke about adding CapEx to capture market growth. I'm curious whether some of these design wins have come from at least One of your larger peers who's been quite vocal about de-emphasizing several hundred million dollars of products, some of which overlap with your own products. And I ask because that would argue there's a large runway on these existing designs. So if you could address that, that would be helpful as you talk about expanding your design wind pipeline. Thank you.

Yeah, certainly kind of the market share gains and the design wins we're having are very, very broad-based. They're not specific to, let's say, semiconductor space. We're getting gains there, certainly, but we're getting gains much more broadly than that related to kind of two areas. One is our ability to serve the customers. That certainly worked well for us in the last year or so. but also the breadth of our offering and the new technologies and the new products that we're launching are really gaining traction with applications. So, yes, so for instance, the protection portion of our semiconductor business is growing quite nicely, you know, in the business, in the applications we serve. But it's kind of broader base. I don't think it would, I wouldn't nail down one specific area, one specific competitor to say that's where our gains are happening. It's much more broad-based than that.

Yeah, and, Carl, I would add, you know, my comments on CapEx were also very broad-based, aligned to what Dave's saying. They're not, you know, we're not dedicating CapEx or, I should say, an outsized amount of CapEx to any one business. But, you know, we've been getting a lot of questions on growth, right? A lot of CapEx is going towards EV growth, but that's – and also electronification – So broadly across whether that's, you know, even in our automotive electronics part of our business and things like that. So it's pretty broad based in nature.

Very helpful. Thank you.

Appreciate the thought question, Carl. That concludes today's call. Thank you for joining us and for your interest in Little Fused. We look forward to talking with you again soon. Have a great day.

Thank you. And this concludes today's program. You may now disconnect. Have a wonderful day.