Littelfuse, Inc.

Good day everyone and welcome to the Little Fuse, Inc. second quarter 2022 conference call. Today's call is being recorded. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. At this time, I will turn the call over to the Head of Investor Relations, Tricia Tuntland. Please go ahead, ma'am.

Good morning, and welcome to the Little Butte Second Quarter 2022 Earnings Conference Call. With me today are Dave Heinsman, President and CEO, and Meenal Sethna, Executive Vice President and CFO. Yesterday, we reported results for our second 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 discussion 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, which provides an overview of recent highlights. We delivered very strong second quarter results, which were above our expectations. Our continued outperformance within a volatile environment was driven by strong customer pull and the persistent operational execution of our associates. We achieved revenue growth of 18% and expanded adjusted earnings by 25% compared to last year. Across our electronics, transportation, and industrial segments, we attained double-digit sales increases driven by demand creation for a broad range of products, and our leverage of capabilities and resources from our recent acquisitions. Our first half double-digit sales and earnings growth is a testament to our global team's execution across the breadth of our end markets within the structural themes of sustainability, connectivity, and safety. Advancing our strategic initiatives, on July 19th, we completed our previously announced acquisition of C&K Switches, I am excited to welcome C&K to our organization. C&K significantly expands our ability to serve our customers with market-leading technologies, capabilities, and talent. Later, I will share more on the strategic rationale for C&K. Consistent with our capital allocation priorities, we have increased our quarterly cash dividend by 13%. This deployment reflects our confidence in the long-term growth of the business and commitment to return ongoing value to shareholders. I would like to thank all of our associates around the world for another great quarter. Our global teams have relentlessly overcome daily obstacles to fulfill customer demand while working safely. They have also shown their ongoing passion and commitment to advancing our sustainability initiatives across the organization, and we look forward to sharing our continued progress when we publish our report later this year. I'm particularly proud of our sustained success, which is an outcome of our highly skilled people and the innovative, reliable solutions we deliver to customers, which continues to differentiate our company. Moving on to performance within our segments. Our electronics product segment delivered revenue growth across all regions, along with strong profitability, driven by our diverse product offering and go-to-market strategies. In particular, demand for our products was driven by our customers' applications, enabling greater connectivity and sustainability, like factory and building automation, data centers, telecom infrastructure, energy efficiency, electrification of vehicles, and charging infrastructure. Exiting the second quarter, our combined electronics book-to-bill was hovering around one, with continued strength and sell-through from our channel partners. Average weeks of inventory at our distribution partners are at the upper end of the normal range. However, there are some pockets where inventory remains lean. Our transportation product segment delivered solid performance in a tough environment. Our passenger vehicle business was impacted by Tier 1's unwinding last year's inventory build and lower OEM vehicle production. due to the ongoing material shortages, COVID lockdowns in China, and declining car build forecasts. Since 2019, our passenger vehicle business has grown high single digits on a compounded annual basis, while global car production has declined high single digits. We see a number of ongoing content growth opportunities with electrification, electronification, and ADAS, and expect to continue our long-term market outperformance. Within our commercial vehicle business, we have a robust order backlog driven by demand for a combined portfolio of legacy and Carling products, and our record revenue reflects our ability to fulfill demand. Notably, we have been able to drive strong output increases at our Carling factories, and as a result, we are realizing growth above our initial expectations Looking ahead, we see a healthy backlog pattern with particular strength and demand for our Carling product groups, and our target markets continue to show strength across material handling, construction, and agriculture equipment. Turning to our industrial product segment, our ability to cross-sell expands solution sets to include multiple technologies, while enhancing operating efficiency and productivity, delivered record revenue performance and strong profitability. We continue to capitalize on robust demand in our strategic markets across electrical safety, renewables, and HVAC. A large part of our success comes from enabling our customers' applications focused on sustainability, such as solar, energy storage systems, support vehicle electrification. We are also seeing robust demand for general industrial electronics applications like data centers and cloud computing. Looking ahead, the underlying fundamentals within our strategic markets remain strong. NINA will provide additional color on our strong financial performance and third quarter outlook. Our ongoing results and successes and the power of our strategy, which is shown on slide five. We are investing for growth both organically and through acquisitions within the structural themes of sustainability, connectivity, and safety. Since early 2021, we have deployed $1 billion in capital for acquisitions, adding approximately $500 million in annualized sales to further diversify and strengthen the end markets we serve and expand our organic growth opportunities. Building on our acquisition of Heartland Controls and HVAC, Carling Technologies and Commercial Vehicles, telecom infrastructure and renewables, and embed in transportation and industrial applications, we are pleased to complete our acquisition of C&K, which serves a variety of end markets. We continue to make organic investments in the business to advance our new product development, capacity expansions, digital presence, and sustainability initiatives. We are confident the investments we are making will continue to deliver long-term profitable growth and returns for our shareholders. C&K brings over 90 years of experience to Little Fuse and is a leading designer and manufacturer of high-performance electromechanical switches and interconnect solutions. aerospace, and datacom in markets, as reflected on slide six. We are very excited about the addition of C&K and its close alignment with our strategic priorities. Our disciplined approach towards M&A positions us to accelerate our success in higher growth markets through diversification, expands our geographic presence, and leverages our core competencies, creating value for all of our stakeholders. Moving on to slide seven, a combination of our companies significantly expands our technologies and capabilities, enabling us to deliver a comprehensive solutions offering to our broad customer base. B&K enhances our technical and application expertise, engineering and designing capabilities, and our technology leadership and high-precision manufacturing, miniaturization, and haptics. Our businesses are highly complementary and enable us to leverage our collective partnerships with distribution channels, OEM relationships, and global footprints, including expanded capabilities in India and Vietnam. The integration is underway, and we look forward to leveraging our respective strengths. Now let's move on to highlights and design wins in the end markets we serve. Within our industrial end markets on slide eight, We are generating new business with our applications knowledge and breadth of products. We are expanding solutions that focus on sustainability. During the second quarter, we secured business by delivering multiple technologies for large-scale and home-based energy storage systems. With a large-scale battery manufacturer, our product was designed into battery formation equipment. In HVAC, we captured opportunities based on our customer relationships and cross-selling capabilities. Within industrial safety applications, new standards continue to drive elevated design activity to achieve compliance. With our reputation for engineering and reliability, we expanded our market position in commercial kitchens for electrical systems in buildings, with our major restaurant chain, and with a beverage equipment supplier. We also want business for welding equipment used in electric vehicle collision repair shops, motor drives and elevators, and industrial power grids. With our diverse, high-quality offerings, we are increasing product content with leading customers and expect this to continue given their intensifying focus on sustainability and safety. Turning to our transportation end market on slide nine, We are expanding our wins with the electrification of vehicle platforms. During the second quarter, our investments in engineering and new products allowed us to increase our positions across multiple applications within an electric vehicle, whether a hybrid or full battery electric vehicle. Our early engagement, reputation for quality, and strong high-voltage technology portfolio secured several opportunities in battery management and protection distribution, and onboard chargers. For off-board electric vehicle charging, our technical support and product performance secured significant new business. With the global ongoing transition to electric vehicles, our company is playing a tremendous role in enabling our customers' applications. We look forward to expanding our presence with them in this high-growth end market. For traditional passenger vehicles, We expanded our leadership with our wide range of products, given the increasing functionality and complexity in architectures. In automotive electronics, we won global business with our long-term relationships and reliability for telematics, infotainment, and comfort and convenience applications. In commercial vehicles, we captured business in our strategic end markets. With an existing European customer in heavy-duty trucks, Our unique technical solution met stringent customer requirements, which won us new business. In electric buses, we secured a project with our high quality Carling products. We are pleased with our early integration success. We see a broad range of sales synergies ahead of us. In electric two and three wheelers, we won business for battery management systems and powertrain control modules. For commercial vehicle charging infrastructure, we expanded our wins for forklift applications. With our investments for growth, including expanded capabilities and portfolios with the addition of Carling and Embed, we are seeing new business opportunities, which continues to position us well for continued growth within transportation applications. Moving on to slide 10, electronics end markets, greater connectivity requirements continue to drive favorable macro trends. During the second quarter, we won business for data centers and telecom infrastructure based on product features and delivery support. These wins also included products from our Carling acquisition based on a strong global presence in telecom applications. For building solutions, our far-reaching go-to-market model and deep portfolio enabled us to secure a multi-technology business systems, and smart doorbells. Our long-term engagement, support, and the ongoing push towards expanded efficiencies and safety drove wins in appliances and general-purpose electronics. The pipeline of new business opportunities is robust and further expanded with our completed acquisition of C&K. We look forward to building on our collective market positions with our various industry-leading brands. Our combined successes of winning business will serve as a platform for continued growth. We are extremely well positioned to expand the proliferation of our electronics content across a wide range of applications centered within sustainability, connectivity, and safety. Our new business wins have been significant and represent a diverse range of end markets and applications. We've also worked hard to build a robust pipeline of new business opportunities that I am confident we will secure with capabilities and differentiated solutions. We fully expect that the organic growth from all of our new business activities, coupled with our acquisitions, will enhance and sustain our 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. Let's start with slide 12. We delivered another strong quarter of performance, exceeding the high end of our sales and earnings guidance. Revenue was $618 million, up 18% over last year, and up 10% organically. Our Carling acquisition added 11%. Foreign exchange reduced revenue by 3%, mainly due to the weaker euro. GAAP operating margins were 21.7%, while adjusted operating margins were 22.6%, up 310 basis points versus last year. Adjusted EBITDA margins were 27%, up nearly 300 basis points over last year, and solidly above our 21 to 23% EBITDA margin target. Second quarter GAAP diluted earnings per share was $3.48 and adjusted diluted EPS. was $4.26, up 25% over last year. Our GAAP effective tax rate was 20.6%, while our adjusted effective tax rate, 17.3%, slightly higher than we'd expected due to earnings mix across jurisdictions. We continued our strong performance led by our growth and positioning across a number of diverse end markets. We'd call out headwinds related to the China lockdowns which extended longer than we had expected. We recovered quickly and were able to offset some of the sales impact with strength across other markets. Our teams have continued to manage pricing to offset the ongoing inflationary pressures. This, along with continued focus on productivity improvements, is reflected in our above-target margin performance. We were price-cost positive again this quarter and expect to remain positive for the remainder of the year. We continue to invest across our businesses for growth and for scale while maintaining discipline on overall spending levels. We had a strong cash flow quarter, generating $114 million in operating cash flow. We generated $87 million in free cash flow, 100% conversion of net income. The continued depth of our cash generation gives us ample capacity to execute on our capital allocation priorities shown on slide 13. Our first focus remains ongoing investments to enhance our organic growth. And with the acquisition of C&K, we've deployed $1 billion in capital on four acquisitions in the past 18 months, diversifying our end market reach by adding capabilities and talented teams across the company. Our board of directors approved a 13% increase in our quarterly cash dividend last week. Since inception in 2010, our dividend has grown 12% on a compounded annual basis, reflecting the power of our long-term strategy and resulting earnings growth. Over the past few months, we've strengthened our balance sheet by reducing costs and improving terms on our $700 million credit facility and outstanding debt. Through mid-July, we took on $400 million of additional debt to support our growth investments. Incorporating this activity and the acquisition of C&K, our pro forma debt to EBITDA leverage remains at the low end of our target range. Let's move to commentary by segment on slide 14. We've added in EBITDA margins by segment to provide enhanced comparability given the breadth of our organic and inorganic investments. Starting with electronics, second quarter revenue grew 13% organically. Operating margins were nearly 30%, with EBITDA margins approaching 34%, both expanding over 600 basis points over last year. We continue to drive positive price cost and to pursue productivity enhancements. We expect the combination of our execution and current market dynamics will sustain segment operating margins averaging in the mid-20% range. On slide 15, our performance across transportation reflects the varied dynamics across our markets. Our commercial vehicle business grew 6% organically, and we are pleased with outperformance across our recently acquired carling business. Organic sales across passenger vehicle were down about 8%, affected by Tier 1s unwinding last year's inventory build and global auto production declines. Operating margins were 10.1%, and EBITDA margins nearly 16%. Currency negatively impacted margins 200 basis points, along with negative volume leverage from lower auto sales, which more than offset benefits from price realization. On slide 16, industrial sales were up 22% organically. Operating margins of 19.5% and EBITDA margins over 22% both expanded over 600 basis points, driven by price realization and ongoing operational execution. While we also benefited from reduced logistics costs in the quarter due to the China lockdowns, we'll see the inverse impact in Q3 as we resumed operations. Our teams have driven outstanding performance year to date. with 26% sales growth versus last year, over 500 basis points of margin expansion, and adjusted EPS growth of 52%. We've prioritized high-growth markets and reinforced the value we drive for our customers while managing external disruptions and risks with agility. Moving to slide 17, demand remains strong across our end markets, including industrial, transportation, and most electronics areas. but we are seeing some softness in consumer-oriented end markets, such as appliances and personal electronics affecting our electronics segment. For the third quarter, we expect sales in the range of $630 to $644 million, up 18% versus last year, and 2% organic growth at midpoint. This assumes about 20% growth from our acquisitions. With the stronger dollar, we're estimating sales headwinds of 400 basis points in the quarter and approximately 300 basis points for the full year. We're projecting third quarter adjusted EPS to be in the range of $3.71 to $3.87, down 4% versus last year at the midpoint, and assuming a 17.5% tax rate. We are projecting a full year adjusted effective tax rate in the range of 17 to 18%. A few key points on our third quarter. First, on acquisitions, our forecast includes two and a half months of our C&K acquisition, which is accretive to EPS. With two sizable acquisitions new to our portfolio in the past few quarters and integration in early stages, we're seeing about 150 basis point dilution to company operating margins versus last year. We also navigated through a China COVID-driven lockdown at another one of our sites in July, which is now back to normal operations. The combination of this shutdown and recovery from last quarter are a 200 basis point headwind to sales and about 150 basis point impact to company margins versus last year, affecting the industrial and electronic segments. Slide 18 includes additional assumptions for the full year. We'll have five and a half months of C and K in our 2022 results, which assumes about 90 to $95 million in sales and about 25 cents of EPS net of ongoing deal amortization. This increases our estimated 2022 amortization expense to $55 million and a forward run rate of $16 million per quarter. With our additional debt issuance, we expect $27 million in interest expense for 2022 and a forward run rate of $9.5 million a quarter, all at current interest rates. We are maintaining our projection of 100% free cash flow conversion and estimate $110 to $120 million in capital expenditures for the year. I'd like to thank our associates for delivering on our commitments to our stakeholders who count on us, everywhere and every day. And with that, I'll turn it back to Dave for some final comments.

Thanks, Meenal. In summary, on slide 19, we have delivered very strong year-to-date performance, which reflects our global team's unwavering commitment and hard work to drive our results. With our ongoing deployment of resources and capital to enable customers' applications, we remain extremely well positioned to further capitalize on current and future growth opportunities within the global structural themes of sustainability, connectivity, and safety. We continue to focus on what we can control to drive our performance within a volatile market. I'm confident our talent associates around the world, investments for growth, and operational excellence will deliver ongoing value for all of our stakeholders. And with that, I will now turn the call back to the operator for Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Nick Todorov of Longbow Research. Please go ahead. Nick Todorov, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research, Longbow Research

If maybe first question I would like to zoom on and the organic outlook. I think you talked about multiple. Can you hear me?

Yes, we can.

I'm sorry. I think you talked about multiple puts and takes, but I just like to zoom in and kind of understand the organic outlook of 2% year over year in 3Q. So a slow down relative to recent quarters. Maybe talk about some of the dynamics impacting that and what are you seeing any signs of inventory adjustments outside of what you called out in tier one automotive?

So let me start with, Nick, it's Meenal. Let me start with just, I'll give you a frame on sales year over year and that 2% organic. Really starting with 18% growth overall. As you know, we've made a significant number of acquisitions and so about 20% of the growth is coming in from the acquisition on a year over year basis. But we've also talked now about FX headwinds, and that's taken off about, you know, 4% or 5% or so off the top line for us. And that's kind of where we frame out at a 2% organic. Embedded in that 2% organic as well, we talked about two items in our prepared remarks. One was the fact that we had an additional COVID shutdown. In July, we were able to continue partial operations, operate in a bubble, etc. That is hampering a little bit of our third quarter, as well as the fact that with the shutdowns in the second quarter, we were able to sell, related to COVID, we were able to sell out of inventory, but we've got inventory and production that we've got to build back up, and that's also hampering sales in the third quarter. And then I'd say lastly, we also talked about a little bit of softness that we're seeing in a couple of our end markets, small portion, but, you know, what I call the consumer-oriented appliances and personal electronics, that's also hampering organic a little bit. And then you also wanted some color just overall on electronics in general.

Yeah, Nick, so you were kind of asking about the inventory position and what's going on there. First of all, I would say POS, for my distribution partners in the electronics side, continues to be very robust, you know, very strong POS. So in markets continue to be quite strong, except for, as Emil talked about, you know, a small portion of it in the, you know, personal electronics sort of space. So things, tablets, small appliances, white goods, that kind of an area. But overall, demand continues to be very robust. We often talk about what's our normal inventory level with our distribution partners in electronics. And for our broad line distributors, that normal range is somewhere in the 11 to 14 weeks of inventory. And as we talked about in the prepared remarks, overall, we're in the upper portion of that normal range. However, there are still also pockets where we have some lean inventory positions still as well in the channel.

Got it. Very helpful. Second question I have is the gross margin of 42.5% really stood out. I think if I go back in my model, I think it's a record going back to 1998. So maybe can you talk about some of the puts and takes impacting that? I think, Minho, you talked about price to cost being positive. I think previously you anticipated that to be the case in the first half. Now it seems like it's going to be a second that's going to continue through the full year. Maybe can you talk some of the reasons behind that and the sustainability of the gross margin at these levels?

Yeah, Nick. So, you know, I've talked about the fact in general, right, price cost has been very strong around that, just the fact that our teams have done really a tremendous job where we have seen those inflationary costs tick up. We have gone back to our customers, really re-articulating the value that we're providing and really making sure that that value stands out, and that's where really our pricing actions have come from. And also, you know, in robust times like this, this is where our teams really shine. They've done really a tremendous job around, you know, I'll generally call operational execution, but where you hear a lot of folks talking about supply chain challenges, we face them head on, and we've really been able to navigate through those well. And simultaneously, we're continuing all of our productivity initiatives. Those include a lot of lean activities, automation. You know, I've talked about the fact that we, while we're not very heavily capital intensive, we're very prudent about spending capital where the automation and the payback makes sense. And we continue to do that, you know, through these past few years. So you're really seeing that shine through in our results.

Got it. Thank you, guys.

Thanks, Nick. Appreciate the questions. We'll take our next caller, please.

Our next question is from Matt Sheeran of Spiegel. Please go ahead. Good morning, Matt.

Yes, hi. Good morning. Just another question regarding your guidance. If you exclude the addition of CNK, it looks like you're guiding revenue down sequentially. It sounds like you talked about some of the issues in Asia. as providing a headwind. But are you seeing, with that book to bill at normal levels within electronics and inventories at the high end, are you starting to see adjustments? Are you expecting overall electronics to be down sequentially? And I have a follow-up. Thanks.

Yeah, you know, so I would just go back to some of my year-over-year comments on sales, which are very similar to sequential. You're right, Matt. sales growth coming from the C&K acquisition, about two and a half months of that or so. So that's embedded in there. But on the flip side, FX headwinds continue even versus last quarter, where we've seen some weaker currencies, especially the euro. That's a bit of a headwind. And then the two other pieces that I mentioned that Dave also articulated around, I'll call it a little bit of this COVID China now, because we were not expecting to have another partial shutdown in the third quarter, and so that's hampering a bit in the third quarter, as is just a little bit of that softness in those consumer-oriented markets. So overall, end markets remain strong, but we're seeing that softness. And I would say we're also starting to enter to a point where we're at a pretty peak revenue level in terms of where we've come from when we take a look at growth over the past two years. So the growth continues to be strong, But it's, you know, we've grown so much over the past six, eight quarters that, you know, you're going to see it temper off a little bit.

And, Matt, you know, on the electronic side, other than those small pockets we talk about that Minal mentioned or we mentioned in the prepared remarks, you know, in the kind of personal electronic space, small appliances, that kind of thing, which particularly in Asia, you know, where a lot of that demand from our customer base is, It softened a little bit. But the broader electronics market continues to be still a really strong POS that we're seeing. So we're not expecting some major, you know, shifts there.

Could you remind us what percentage is the personal electronics segment is of your electronics business? Less than 10%?

Yeah. Overall, as a company, less than 10%. Certainly within electronics, it's well below 20%. So it's an important aspect, but it's certainly not the majority of the business.

Okay, thank you. And then on the margins, it looks sort of backing into operating and gross margin. It looks like gross margin could be below 40% for the reasons you talked about. But as we think about Q4, would you expect to see some of those offsets actually come back and improve? in Q4. I know that typically Q4 your margins are down because some of your markets are down, but how should we think about margins going into the back over the last quarter of this year?

Yeah, you know, so I'll talk about Q3 a little bit and then we can think about Q4. So, you know, if I just took OI margins first, I can write a lot of which is growth margins We've made now some pretty significant acquisitions over the past few quarters. And as we've always said, we have an integration plan. We have value drivers that we're going after. But in the early tenure of owning those acquisitions, they tend to be a little bit margin diluted. And that's also going to affect gross margin because that's a lot of where our value creation comes from. So that's about 150 basis points when you think about that in terms of margin dilution. I think secondly is foreign exchange, right? That has a direct impact also on gross margin. So that'll, you know, that don't know where rates are going, so can't answer the impact of that on the fourth quarter. So I think those are probably the two biggest ones. I would expect, you know, the acquisition dilution will still be there. As we get into the fourth quarter, I think FX remains to be seen.

Okay, thank you. And just one quick last one. Minal, in your opening comments, you talked about the operating margins in electronics. I think you said going forward the target is in the mid-20s. Was that sort of a near-term target or a longer-term? I think your longer-term target has been below that.

Yeah, you know, great question, Matt. So what I talked about was, you know, averaging in the mid-20s with the current dynamics. I'm talking about at this really unique time that we've really not seen before where you've got inflationary pressures that we've been able to offset with pricing. So we've seen some very strong price realization coupled with the volumes that are coming from that. We think in this current environment, those current dynamics, we'd be able to maintain the average of 20% through the cycle.

Through the cycle. Okay. All right. Thanks very much.

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

The next caller is Luke Junk from Baird. Please go ahead.

Good morning, Luke. Good morning. Thank you for taking the questions. Two transportation-related questions for me this morning. First, I want to start with the growth and just hoping we can unpack the transportation growth down mid-single digits all in this quarter, specifically what it would mean potentially for the remainder of the year. Would you anticipate... any additional impacts either year-over-year or sequentially from channel dynamics, or is there anything else that we should be baking into either the third quarter or the second half in that segment from a growth standpoint?

Sure, Luke. As we talked about in the prepared remarks, we saw our revenues in the passenger car portion of transportation down in a market where car bill was kind of globally down 4%. We have to stop, first of all, and kind of take a step back and remind that if you look at the last two years for us, we've had mid-teens outgrowth, you know, for two years running in the past car portion of the world. And we talked about last year some of that being inventory build for our customers that were being, you know, pushed by their OEM customers to build their inventory position. So some level of the revenue growth last year was inventory build. So if we look at our third quarter, I think it's kind of a combination of two things. One is, well, we don't have an inventory build in this year versus last year. So in the comparative quarter to year over year, you automatically get some decline because we're not building inventory. And then on top of that, we did see some inventory unwind. So the bulk of kind of that down portion of our revenues And the PASCAR side was driven really by that inventory kind of positioning. So we continue to still feel very strongly about, you know, likely overachieving kind of the 3% to 4% outgrowth that we have in our long-term strategy.

Okay, great color. I appreciate that, Dave. And then maybe a question for Mino on the margins and transportation. Just hoping we could walk through, so you gave some commentary on the year-over-year margin bridge. I was hoping we could also look at it sequentially versus the first quarter where the margin was more towards the mid-teens level. Just want to understand if there was anything one time in nature in that first quarter number that would sort of hamper the comparability to what you reported in the second quarter, and then just anything else that might have changed sequentially, we should be aware of in the margin profile.

Yeah, you know, Luke, I would say from where we are, some of the drivers that Dave talked about from whether it's year over year or sequential, they're really also impacting margins as well. I'll call it the negative volume leverage from seeing some of the inventory unwind that's going on. That's definitely hampered the margins. I'd say that some of the newer issue that we're seeing is foreign exchange also. Our Our transportation business is quite global in nature. We're selling multiple customers around the world, multiple currencies. And I would say with the stronger dollar, that's definitely impacted us. And I would say, you know, even in parts of our commercial vehicle business where we really operate as a tier one component, prices and inflationary costs there are still a little tough. And so while the team has done really a tremendous job around really pushing on price realization to ensure, you know, that our value is recognized, that's still taking longer than it would versus where you, you know, with OAM customers versus, you know, where the customer base is different.

Okay, great. Thank you for the caller. I will go ahead and leave it there.

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

Our next caller is Josh Bacalter of Cohen. Please go ahead. Good morning, Josh.

Hey, good morning. Thanks for taking my question. I wanted to ask a bigger picture. You know, we've asked a lot about the gross margins, but talk about sustainability of these. I guess I'm, you know, it's there above the rates that you've sort of talked us to on the long term, despite the inventories normalizing the last couple of years. Is this a reflection of, I don't know, any realization from the customers of the value of the products you're bringing, your relative pricing power. I was just hoping to discuss the sustainability of levels going forward.

Sure. Josh, you were breaking up a little bit, but what I took away from your comment is we've had some very strong margin profiles the past few quarters, and you're asking about the sustainability of that. Is that what I heard?

Yes, in light of your inventory at your customer sort of normalizing. Thank you. That's right.

Yeah, so I'll take a step back on what we've been talking about, even going back to our investor day from about 18 months ago. We've always talked about across the company a target margin profile in the high teens, and that's 17% to 19% averaging through the cycle. So for us, what that means is, there are definitely going to be some quarters where we're going to see stronger margin profiles than that. I would say, again, I keep coming back to a lot of the operational execution that we've gone through, which includes making sure customers understand the value we provide and just the internal work we're doing. We've definitely driven these elevated margins, but knowing that we have businesses where markets can go up and down at times, you know, we'll probably see some different movements and different swings. That's why we try to talk about an average through the cycles, and we still stand by that in terms of a company margin high team.

Understood. Thank you. And then in the deck, you called out a number of different EV-related wins and content drivers. Any way that you can help us understand sort of what levels that's providing now to the segment's revenue as we sort of try to contextualize how that could help insulate from any potential digestion or continued unit weakness going forward. Thanks and congrats again.

Yeah. You know, trying to understand exactly what EV wins are driving as a portion of the business becomes kind of a complex question from the standpoint of when we're talking about in-market wins, That's really about the applications and the markets we're serving. A big portion of that certainly comes from our transportation segment, but we also see wins in e-mobility driven out of our electronics products that are being designed in heavily, I think, battery management, BMS systems, battery management systems, battery protection systems, broader electronics in and around the EVs that kind of show through as well. Even in our industrial products, we sell and design end products into off-board charging in support of EVs. So kind of from a broader sense, it's hard to kind of dial in exactly what that is. But certainly from an outgrowth standpoint in our transportation business, I would say the bulk of the outgrowth is coming from the transition to e-mobility. So our content opportunity is in a fully electric vehicle or a hybrid grows dramatically, and that drives that content story for us. Because remembering that our 12-volt products and the 12-volt systems in the vehicle continue on for the most part, so really the high-voltage systems tend to be additive to the content opportunity for us. So it's certainly the biggest driver of growth in our passenger car applications.

Thank you, Josh, for your question.

Again, if you have a question, please press star, then one. Our next question comes from David Kelly of Jefferies. Please go ahead.

Good morning, David.

Hey, good morning, Dave, Mino, and Tricia. Maybe following up on that last point, and Dave, I believe you noted significant new business and off-board charging. I was just hoping you could maybe elaborate on that comment, if that's a single customer win, kind of multiple wins you've been accumulating, and maybe if it was specific to either fast charging or level two.

Yeah. David, as we've talked about in the past, right, our business tends to be a business of, you know, singles and doubles. You know, so there aren't massive singular wins that drive the business forward. So if we think about off-board charging, We've had multiple wins with many different customers that we serve in the passenger car side, but also the commercial vehicle side. And so think about everything from our electronics kind of control systems in that side to high voltage over current protection. So some of our industrial type of fuses that get used in those applications, some of our power semiconductor products that are used in the power conversion in there. And we kind of get wins up and down the spectrum of, you know, level one charging, but certainly also the biggest opportunity is the content in high-speed charging and the direct DC to DC charging. And we're getting good opportunities there as well, again, both on passenger car side as well as commercial vehicle side of things as well.

Okay, got it. That's helpful. And just as a follow-up, can you remind us of the dollar content opportunity you see in kind of the ramp-up level two and fast charging opportunities?

Yeah, it's, as you're aware, right, the designs of these systems vary wildly by end customer. So, you know, the content story, you know, it's difficult to kind of pinpoint to a singular definition of that. But if you think about a level one charging, it's quite small, right? It's a relatively, think a couple dollars of content in a level one charging. But you go all the way up to fast DC charging, it can be hundreds of dollars in that space, particularly when you think about power semiconductors and the applications there. But in addition to power semiconductors, you've got industrial-type fuses that You can have ground fall, ground check sorts of relays that can get designed in. So really varies dramatically on whether it's fleet-based charging or whether it's kind of consumer-oriented sorts of DC fast charging. So lots of different opportunities there and lots of content.

Okay, got it. Thank you. And then, Meno, maybe a quick follow-up on the July COVID shutdown issue. You know, A, just wanted to confirm that that is in the rearview mirror and back up and running. And then, B, maybe if you could give us a little bit of color on the impacts to industrials and electronic segments. I think there's some cross-impact there.

Yeah, let me give you a little bit of color on it, and then me and I can follow up with kind of any details on it. Okay. Yes, the third quarter shutdowns and lockdowns that we've seen kind of outside of Shanghai that impacted us. The good news is our teams had plans in place to deal with that, quickly created a bubble, continued to be able to operate. It did have an added cost operator, of course, as you kind of build out a bubble. But for the most part, we were able to keep production running at a reasonable level. Fortunately, it only lasted about three weeks. That's behind us. Kind of the interesting carryover, if you will, from Q2 is particularly in the industrial side of our business, but also a little bit in the electronics. Think about the fact that particularly on the industrial side where things are being built as inventory that we carry to serve customers here heavily in North America, plus everything on boats, you know, coming – to and from. So in the second quarter, even though we had shutdowns of more than two months in some operations, we were able to continue to sell out of inventory, continue to sell out of stuff that's on the boat, right, as it arrives. If you get into the third quarter now, that hole, if you will, created by that couple months of shutdown, kind of bleeds over into third quarter and really has more of a revenue impact into our third quarter.

And let me just, I'll just add a couple of financial details with all the questions on, you know, what that means for us sequentially. And again, right on the sales side with everything Dave just talked about, right, I call it a transitory, more of a transitory issue where we saw, you know, we'll see a little bit of a dampening on sales in the third quarter because of that inventory build and because of the bubble that we were operating in at a little lower production in the third quarter. that does have an impact on margins operating that, and that's where you see the OI impact a little bit. And then, while unrelated to that, the other thing I just wanted to bring to your attention when you think about EPS unrelated to the OI margins, you know, we have taken on additional debt as part of our capital deployment strategy and all the acquisitions we've done, and the interest expense around that additional debt is also hitting EPS. It's about 15 cents on a sequential basis. So, I just wanted to make everybody aware of that as well.

Okay, great. Thanks, everyone.

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

The next question comes from David Silver of CL King. Please go ahead.

Good morning, David.

Yeah, good morning. Thank you. So I had a couple of questions, maybe bigger picture and maybe broader. a little bit more customer-focused right now. I'm going to mention this in the context of the transportation segment, but I guess it might touch one or two others. There's been a persistent chip shortage and some other part shortages that have persisted now for quite a while. And I know that your development efforts are focused not just on the current generation of products, but the next generation. And I'm just wondering if the persistence of the inability to kind of run at full production, is that creeping into customer thinking at all in terms of lack of confidence about the timing and the reliability of kind of their ability to get the next generation of automotive electronics or parts of the EV infrastructure either under the hood or outside. In other words, have the development timetables of your major customers been impacted in any way by the persistence of the chip shortages and other supply chain issues? Thank you.

Sure. let me take a step back and look at that. So clearly our customers in transportation and elsewhere have been dealing with shortages and ongoing issues there. And so it certainly has impacted their approach to their design activities and how they approach developing new products. Two things, I would say. One is, and you asked specifically about, like, e-mobility and electrification, What we've seen is a very strong focus from our transportation customers on that as a primary axis of design and activity. It does impact from the standpoint of they're much more careful about how they choose what types of chips, are there multiple sources for them, et cetera, like that, that impact their designs. Because sometimes in history they would use legacy products that have kind of been around a while and maybe aren't being reinvested in by the semiconductor manufacturers, but it didn't really matter because capacity was there. So that's altered their activity, I'd say. E-mobility has certainly been the primary focus for them. I would say in kind of legacy areas, what I would say is engineering efforts have been derailed a little bit, if you will, by the fact that they've done a lot of work on technology qualifying alternate products and things like that that just, yeah, finite resources. Resources have been working on that instead of doing redesigns for cost improvements or whatever, right? So it certainly has an impact, but I don't see it as a kind of overall arching long-term impact, you know, to how new development is going on in those areas. So we feel okay about it.

Okay, great. And the next question would just be on the M&A funnel, I guess, and maybe you're thinking about the next opportunity. So you did highlight your success in concluding a number of deals. It's my opinion that maybe the last step to getting the Carling or the C&K deal done was maybe some uncertainty on the part of the seller, and they may be you know, kind of met your disciplined, you know, standards. In other words, you didn't adjust your standards. They just adjusted their asking price. That's my opinion. But I'm just wondering, looking ahead, do you still see, you know, a very active acquisition funnel and, you know, following CK, looking at your balance sheet, is there still capability to, you know, to move forward maybe with the next opportunity? Thank you.

David, what I would say is, you know, our funnel activity continues to be robust. So there's a lot of optionality and a lot of areas that we continue to evaluate and look. So robust activities there. From a capacity standpoint, as Meenal talked about in the prepared portions of the comments, you know, our leverage still remains at the lower end of kind of our comfortable range of leverage from a financial perspective. From a capacity of our people internally, you know, we tend to have acquisitions driven and owned by the business units. So it varies dramatically by business unit, how busy they are, where they're focused and where they're at in the digestion of the business. So C&K and our electronics business, of course, just closed. So they're pretty engaged, pretty, you know, consumed in those early days of integration. Other areas where maybe we made an acquisition that was a year ago, a year and a half ago, they've kind of gotten through the early stages of it and they've kind of got it moving forward. So from a capacity standpoint from a human capital, we also continue to have capacity available to do that. Those are kind of a reminder of the areas we look that continue to look attractive for us are the industrial space that we like, Commercial vehicle continues to be an area that we think there's opportunity. It's also always consolidation opportunities for us to look at as well. So, you know, the funnel activity needs to be robust, and we will continue to look for opportunities.

I appreciate the caller. Thank you.

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

The next question is from Luke Junk with Baird. Please go ahead.

Good morning. Thanks for taking the follow-up. Just a quick follow-up for me, Ben. In terms of the electronics channel, some discussion of your inventory at distributor customers. Dave, you've also commented in the past on what you're seeing at end-user customers, including EMS customers, and just hoping you could give an updated perspective on that part of the market as well. Thank you.

Sure. Sure. Certainly, if you follow and you look at EMS guys who have been public and have have presented their data. Yeah, their inventories are elevated for sure. Now, when you look at understanding what the absolute dollars of elevated inventory are, particularly semiconductors tend to be a very heavy portion of those inventory investments for EMS or other end customers. Pricing on semiconductors has grown very dramatically. Also, over the last couple of years, So some level of that inventory increase from a dollar perspective is just cost-based, right? So there clearly has been an elevation in that driven by cost probably as the biggest driver. Also volume as well as they wait for shortages of one component. They build up other components. So inventories continue to be elevated in customers in some areas. We have not seen a lot of activity yet. of customers trying to kind of pull back from that or adjust that down dramatically. Because the simple fact is there remains volatility in the supply chain. So we still see volatility, whether it's coming out of China. And now as we talk to customers, one of the bigger issues they talk about is, well, what if Europe, you know, what if the gas supply in Europe is a problem, right? You know, is that going to disrupt things? So, um, There are elevated inventories out there. We're not seeing big actions taken to kind of adjust those down at this stage. And it's really reflected, because a lot of that flows through distribution, that's really reflected in the fact that POS levels at our distribution partners continues to remain very high and very strong. So we're not seeing that evidence at this point.

Yeah, and Luke, you know, I would add, I mean, we take ourselves and many other peer companies, you know, carrying inventory is part of our strategy right now, right? I mean, you've got a lot of strong companies that are managing their balance sheet. We are absolutely front and center on that, and we've chosen to carry some elevated levels of inventory to make sure we can service customers. So I think the main thing that we're looking at is end customer service. and customer demand and customer sales, and that's all very, you know, in the vast majority of our market, that continues to remain strong. So those are some really positive signs.

Okay, great. Thank you.

Appreciate the follow-up question, Luke. Thank you. Thank you for joining us on today's call and your interest in LittleFuse. We look forward to seeing you during the Jeffries and CL King conferences and talking with you again soon. Have a great day.

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