Littelfuse, Inc.

Good day, everyone, and welcome to the Little Fuse third quarter 2022 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 third 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 third 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 strong third quarter results, which were above our expectations. Our outperformance was driven by a faster-than-expected recovery from China COVID shutdowns in the second quarter and continued growth from global business wins and progress on our operational initiatives. We achieved revenue growth of 22% and organic growth of 8% despite FX headwinds. We have created tremendous demand for our broad range of products and expanded our capabilities through acquisitions. while continuing to deliver margins and earnings growth above our strategic long-term targets. I'd like to thank our associates around the world for another outstanding quarter. I'm particularly proud of our sustained success, which is an outcome of our highly skilled people and the market-leading solutions we deliver to customers. Our year-to-date record performance, including double-digit sales and earnings growth, It's a testament to our global team's execution across the breadth of our end markets and the power of our strategy, which is shown on slide five. We are investing for growth both organically and through acquisitions to diversify the end markets we serve and expand our organic growth opportunities within the structural growth themes of sustainability, connectivity, and safety. As a result, we continue to increase our product content and share gains in high-growth markets and geographies. Our significant achievements to date position us for ongoing long-term profitable growth and top-tier shareholder returns. MEDA will provide additional color on our strong financial performance and four-quarter outlook. Moving on to slide six, we published our 2021 Sustainability Report, which is available on our website. Last year, we set a goal to achieve a greenhouse gas reduction of 38% by 2035. To help accomplish this goal, we've been conducting energy audits at all manufacturing locations and implementing action plans. We also expanded our programs and investments to support our energy and water conservation and waste reduction initiatives, which contributed to lower intensity levels in 2021. leaders to 25%, and more than double our percentage of our Black and African American employees in the United States by 2026. Consistent with these goals, we launched additional initiatives around diversity, increased our focus on talent development, and expanded our efforts around inclusion and belonging. We are committed to the long-term value of a robust ESG strategy and are proud of our achievements. Before we get into highlights from the quarter, I'd like to discuss some market, customer, and channel dynamics we are seeing. Starting with sales through our distribution channel partners, POS remains robust, and in-market demand is solid across a broad set of markets. We have strategically aligned ourselves with customers' applications, enabling the greater sustainability, connectivity, and safety, like factory and building automation, industrial safety, data centers, telecom infrastructure, energy efficiency, electrification of vehicles, and charging infrastructure. As discussed last quarter, we continue to see software demand and consumer-oriented end markets like appliances and personal electronics. We're also experiencing broader softening in China. Within our electronics distribution partners, inventory levels of some of our products are above our target range. And more recently, we have seen our electronics book-to-bill below 1. This is driven by our product lead time reductions and inventory rebalancing from some of our channel partners. Across our industrial distribution partners, book-to-bills are running around 1.0, and inventory is solidly within our target ranges. Within passenger vehicle land markets, we continue to operate in a noisy environment. Tier 1s continue to unwind last year's global inventory build, leading to quarterly fluctuations in our sales. As supply chains continue to improve, we do expect to see stabilizing car build and modest global auto production growth next year. With the growing themes of electrification, electronification, and ADAS, we expect continued long-term market outperformance. Now let's move on to highlights and design wins in the end markets we serve. Within our industrial end markets on slide seven, we are expanding our leadership presence in applications focused on sustainability. During the third quarter, our design and efforts captured business for energy storage systems and alternative energy. In HVAC, a broad range of offerings secured business for commercial and residential applications. In the area of safety, we continue to expand our market positions for electrical safety systems and commercial kitchens with major restaurant chains. We also grew our business in general industrial applications and secured business in industrial motor drives, electrical utility infrastructure, and automated test equipment with our technical expertise and reputation for quality. With our diverse portfolio, 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 markets on slide eight, we continue to increase our leadership in the passenger vehicle market, leveraging the growth of both electrification and electronification of vehicles. Over the years, we have leveraged our automotive technology portfolio across all of our businesses and expanded the range of our offerings, especially from our electronics business. As a result, we have seen double digit content outgrowth over the last three years. This has led to average content across vehicles increasing to $7. This year's design wins support a continuation of this content growth. Our extended pipeline of new business opportunities and our expanding portfolio support our ability to continue that double digit outgrowth. During the third quarter, we captured substantial business in onboard chargers with key OEMs based on our technical leadership and the strength of our product portfolio secured business in battery management systems. For off-board electric vehicle charging, our engineering capabilities and differentiated range of products like power semiconductors, fuses, relays, and switches from our C&K acquisition secured significant new business. The addition of the C&K portfolio will further expand opportunities to grow our product content. With the global ongoing transition to electric vehicles, our company is playing a tremendous role with the breadth of our products that are enabling our customers' applications. We look forward to continuing to grow our leadership with them in this high-growth end market. Within all passenger vehicles and automotive electronics, we secured business with multiple OEMs based on our long-term relationships and innovative solutions for infotainment, telematics, and comfort and convenience applications. We also captured wins in ADAS applications with the ongoing focus on safety. In addition, we won business with C&K start-stop buttons in the vehicle interior due to our speed and flexibility. In commercial vehicles, we captured business in key strategic end markets. Within the electrification of trucks, we secured business wins with several of our legacy products, as well as Carling products based on performance and the breadth of the portfolio. For electric two and three wheelers in Asia, we grew our business for battery management systems, telematics, and keyless systems with CNK switches. For trains, we secured business in railway traction. In construction equipment, we won a project with our market-leading Carling products based on our strong relationships and the breadth of our portfolios across the businesses. In heavy-duty trucks, we won business with our high-quality solutions and lower cost of ownership. Given our significant business wins and investments in transportation applications, including expanded capabilities and portfolios from acquisitions, we are positioned very well for strong, continued long-term growth. Moving on to slide nine, electronics in markets, greater connectivity requirements continue to drive product content opportunities and new business wins. During the third quarter, we expanded our business for data centers and building automation systems based on product features. With the ongoing push towards sustainability and battery power, we captured business in power tools and electric bicycles. As it pertains to safety, of applications centered within connectivity, sustainability, and safety. Our new business wins have been significant and represent a diverse range of end markets and applications. We also continue to build the pipeline of identifying new business opportunities as we see our customers' engineering teams return focus to new product development. We fully expect that the organic growth from new business activities coupled with our acquisitions, will enhance and sustain our long-term growth. I will now turn the call over to Miedl to provide additional color on our financial performance and efforts.

Thanks, Dave. Good morning, everyone, and thanks for joining us today. Let's start with slide 11. We continued our strong execution on both growth and performance, exceeding the high end of our sales and earnings guidance for the third quarter. Revenue was $659 million, up 22% over last year, and up 8% organically. Our Carling and C&K switches acquisitions added 18%, and foreign exchange reduced revenue 4%. GAAP operating margins were 18.5%, while adjusted operating margins were 21%. Adjusted EBITDA margins were nearly 26%, continuing to trend solidly above our 21 to 23% EBITDA margin target. Third quarter GAAP diluted earnings per share was $3.02 and adjusted diluted EPS was $4.28, up 8% over last year. Our top line growth in margins continued above our long-term target ranges again this quarter. We continue to focus on the elements we can control as we remain positive on price cost, offsetting inflationary cost pressures and lingering supply chain challenges. We've also continued to invest for ongoing growth, including investments in our newly acquired businesses. We had another strong quarter of cash generation. Through the third quarter, we've generated a record $313 million in operating cash flow and $236 million in free cash flow, up 29% versus last year. We ended the quarter with $474 million of cash on hand and our net debt to EBITDA leverage at the low end of our target range. The strength of our cash generation and balance sheet is a competitive advantage and provides us flexibility to allocate capital for several vectors of growth while also continuing to return capital to our shareholders. Let's move to third quarter commentary by segment on slide 12. In electronics, our performance continues to be strong with 7% organic growth on continued solid volume and pricing across the segment. Operating margins remained robust at nearly 29% and EBITDA margins over 33%, both generally flat to last year. On slide 13, We continue to see differing trends within our transportation segment. Commercial vehicle grew 5% organically, along with ongoing outperformance across our Carling acquisition. Passenger vehicle was up 3% organically, tempered by Tier 1's ongoing unwind of last year's inventory bills. Operating margins of 7.1% and EBITDA margins over 13% including FX headwind of nearly 200 basis points. While we've driven a number of pricing actions, inflationary impacts still outpace these efforts. We've initiated cost reduction actions within our passenger vehicle business and expect to see segment margin improvements in the fourth quarter. On slide 14, we continued our growth trajectory across our industrial segment with sales up 18% organically in the quarter. Year-to-date, sales growth is 27% on broad-based strength across end markets as well as price realization. Operating margins exceeded 15% and EBITDA margins over 18% both expanded over 500 basis points. The segment is focused on pricing actions to offset inflationary costs, manufacturing efficiencies, and led a swifter recovery from China COVID shutdowns in the prior quarter. Turning to slide 15 and the forecast, our normal sales run rate has the fourth quarter seasonally sequentially down mid-single digits. Our forecast within our electronic segment incorporates some rebalancing of channel inventory levels. We also expect continued Tier 1 auto inventory unwind within our transportation segment. and we've incorporated the varying economic signals as we see them today. For the fourth quarter, we expect sales in the range of $603 to $623 million, up 11% versus last year, and up 4% organic at midpoint. This assumes about 15% growth from our acquisitions and a 4% headwind from foreign exchange. Growth was also negatively impacted by 3% from last year's 14th week. We're projecting fourth quarter adjusted EPS to be in the range of $3.14 to $3.34, which assumes an 18% tax rate for both the quarter and full year. Our fourth quarter last year included a 25 cent benefit from both a tax holiday and the additional 14th week. Excluding these one-offs, EPS would be up 11% over last year at the midpoint. And as a reminder, we've added two substantial acquisitions to our portfolio in the past year. While both are well accretive, they dilute operating margins about 150 basis points versus last year. The midpoint of our fourth quarter guidance implies full year sales of just over $2.5 billion and adjusted earnings per share of $16.77, both records for the company. This implies 21% sales growth over last year and 27% adjusted earnings growth. Turning to slide 16, a few estimates for the full year 2022. Our forecast incorporates positive price cost for the year. We are projecting $56 million in amortization expense and just over $26 million in interest expense. We are maintaining our forecast of around 100% free cash flow conversion and estimate 105 to $115 million in capital expenditures for the year. Looking ahead to 2023, We estimate foreign exchange to be a $50 million headwind to year-over-year sales and generally neutral to earnings based on current exchange rates. Incorporating our C&K acquisition, we're estimating 2023 amortization expense of about $62 million. And with interest rate changes and our increased debt, we are projecting interest expense of around $40 million for 2023 at current rates. In summary, on slide 17, we've continued outperforming on the areas we can control, resulting in top-tier performance year-to-date, 24% sales growth versus last year and 13% organic growth. We've expanded margins 300 basis points and driven adjusted earnings growth of 35%. We're making tremendous progress towards achieving our five-year strategy objectives. And with that, I'll turn it back to Dave for some final comments.

Thanks, Meenal. In summary, on slide 19, our talented associates, Investments for Growth, and Operational Excellence have delivered record performance this year. Consistently over the last several years, the strength of our growth strategy and resiliency of the Little View's business model has resulted in sustained record of double-digit compound annual sales and earnings growth. Through this time, we have expanded our leadership and presence and target high growth in markets and improved profitability throughout the organization. We have honed our playbook to successfully manage through dynamic environments, prioritizing long-term strategic investments while managing our overall cost structure. Our track record of double-digit sales and earnings growth over the last 5, 10, and 15 years speaks to the resiliency of our business, leveraging the experience of our teams, prioritizing growth investments and attractive end markets, and diversification of our business. This gives us confidence in the longevity of our strategy, which positions us for continued success and will deliver ongoing value to all stakeholders. With that, I will turn the call back to the operator for Q&A.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. And your first question comes from a line of Matt Sheeran from Stiefel. Your line is open. Morning, Matt.

Yes, thank you. Good morning, everyone. My first question is just regarding that inventory correction you're seeing at the distribution. Could you give us an idea what one – and you also mentioned the book-to-bill was below one in electronics. Could you tell us what that was and how you see that correction playing out? Are we talking about a couple quarters? Any visibility there in terms of when that bottoms out?

Sure, Matt. So let me start a little bit with our book-to-bill. Kind of baseline behind that is we're seeing – Point of sales data from our distribution partners continue to be pretty robust. We've talked a bit about some softness in consumer-facing types of applications and in China in general, some softness. But beyond that, POS remains pretty solid through our channels and the electronics side of things. If you look at book-to-bills, it's a mixed bag a little bit from the standpoint on our passive products. really particularly driven by the fact that we've brought down our lead times and there is some rebalancing going on. It's well below one. However, the semiconductor products are still remaining around one. So it's a bit of a mixed bag on the book-to-bill side of things there. So there clearly is some rebalancing that we're seeing from some of our partners. As far as the length of a cycle, things like that, or how long we might see that. I'm not sure that we have a great visibility into it. We can look back in history and see what history would say, but I think the dynamics in the market this cycle are perhaps a bit different. So it's not clear to us exactly what the length of any kind of rebalancing might look like.

Understood. Okay, and then on ASPs, I know your ASPs have trended higher year and year and that's helped on the top line. Um, but given, um, the, some of the bookings pressure, uh, and perhaps, um, your input costs coming down, um, are you seeing, um, pricing back to normal? And as we get into, you know, your OEM contracts for next year, you know, what's your take on, on what the pricing environment looks like?

Yeah, I would say from a pricing environment, of course, it's different across different segments of our business. Um, And there are some input costs that are coming down, but there are others that are still going up. So I would not say we're kind of past inflationary headwinds that we're dealing with. So when we're seeing those, we do pass those along to customers where we can. In the electronic side of this, we have not seen kind of change in pressure on the pricing environment there. We feel like the adjustments we've made are going to be pretty sticky. We don't really see those changing too much. We've talked openly about the fact that it's a little more challenging in the transportation, particularly the passenger car side of our business, where it's difficult to pass those along in multi-year contracts. So we've been able to pass along some costs, and we'll get further gains on that as we move forward in the next couple of quarters on pricing and the passenger car side of things. The industrial side, We've certainly been successful passing that along, and we don't see that environment changing either. So we feel pretty good about the pricing environment we're in right now.

Okay, very good. That's it for me. Thank you.

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

Your next question comes from a line of David Williams from Benchmark. Your line is open. Good morning, David.

Good morning. Thanks for letting me ask the question, and congrats on the results this quarter. Very solid execution. I guess maybe my first question is if you're kind of thinking about the macro and kind of where we are now, obviously there's lots of moving pieces here, but what do you think in terms of the demand environment and looking out two to three quarters, if we see a recession or slower growth environment, segments would you expect to be most impacted? And do you feel like maybe you've gone through some of that now with some of the inventory rebalancing that you'll be better positioned as we kind of enter a slower period of growth?

Yeah, I think it's a good question. As we often talk about, we're highly focused on end markets and applications and segments that have kind of outsized growth over periods of time. So we continue to see a lot of strength in those core areas in the megatrends that we kind of build our strategy around. We don't see those shifting too much. We've been open about the fact that the consumer-facing side, which is a relatively small part of our electronics business, has already seen that slowness. So we feel pretty good about the demand environment hanging in there in those core areas. As far as any kind of inventory rebalancing, That takes some time to work your way through that. That's not all going to happen in one quarter. That's going to be kind of a continuing headwind for us for a period of time, particularly on the electronic side. We don't really see so much on the industrial or commercial vehicle side where inventories are a concern. Pass car, we've seen a little bit there where there's some pullback from inventory that was built in the last year or so, and that's certainly impacted our growth rate in passenger car. And that probably continues a bit into the fourth quarter, maybe even leads into 2023. But that should be behind us relatively quickly on that side.

Great. Thanks for the color there. And, you know, I was – I listened to the Vishay call earlier this morning, and they had talked about the IC supply chain seemingly improving a bit, which seems to be pulling in maybe some of the other content around that. I'm just kind of curious if you're seeing that and if that dynamic is something that could help maybe – ease that inventory digestion period that you're speaking of?

Clearly, I think if you look across the different semiconductor types of products, there are some areas that are certainly easing and other areas that continue to be fairly tight on supply that are continuing. Is it headed in the right direction? Likely it is. I think that may help free up some of our customers It's not so much of a first-order impact to us. While we do buy some semiconductors for some of our sensor components or some of our more complex relay products and things, that impacts us, but it's a fairly modest impact. It's really more what impact it might have on our customer base. So that may free up a bit, and as we've seen, we do expect some modest growth in global car build in the coming year, which really is is more driven by availability of components and things like that that are driving some of that growth. So it could help a bit there.

Okay, fantastic. Thanks so much. Appreciate the time.

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

Your next question comes from the line of Joshua Buchalter from Cowan. Your line is open.

Good morning, Josh. Good morning. Thanks for taking my question. I kind of want to follow up on that last response. So it sounds to me like you're indicating that some of your customers who haven't been able to get semiconductor parts have therefore withheld procuring some of your parts, whether in the electronics or transport verticals. Is that sort of fair, and is there any way to quantify how much of an impact should the semiconductor parts be affected, really?

Yeah, I think that's a challenging question to give a crisp answer to. Really, if I look back in the last year or two years, our customers have absolutely been impacted on their ability to produce what they wanted to because of shortages in the supply chain. That clearly has been an impact. As that begins to ease, I think that will become less of an impact. Now, that balances a little bit with slowing economies. and overall demand pictures, so we're not seeing some major freeing up, if you will, of demand that's coming from that. But we know, like in the passenger car side, we know dealer inventories are low, and that was really driven by the ability to produce products, vehicles. So we do think that will balance out, and that will drive some of the cargo growth going into next year. But I think it's a little difficult to say otherwise.

Understood. Thank you. I guess stepping back, you've had a sustained period of growth above your organic target. And we're going through sort of an inventory digestion period now, but still decent year over year growth. I guess stepping back, it's been a bit since you gave that target. Is the 5% to 7% organic growth number still the right way to think about how, in a normalized environment, you would expect the business to grow in 2023, acknowledging the material outperformance the last couple quarters? Thank you.

Yeah, what I would say is when we put out a five-year strategy, we talked about organic growth rates that we expected between 5% to 7% through the cycle. And we know we operate within a cyclical industry. And so there are going to be times where we're well ahead of that 5% to 7%. And there may be some times where we're behind that 5% to 7%, depending on what's going on in the marketplace. We feel very good about that 5% to 7%, achieving or overachieving that over our five-year strategic horizon. And I think also it's important to kind of look at that last slide. I think it was slide 18. talking about the resiliency of our business model. If you look over that, it's a 15-year chart. And if you look at over the last five years, the last 10 years, the last 15 years, we've driven double-digit top-line growth and double-digit bottom-line growth. So I think it certainly demonstrates the strength of our growth strategy and, quite frankly, the resiliency of our business model. So the 5% to 7% organic growth, you know, over the horizon, we absolutely feel very positive about.

Understood. Appreciate the caller. Thank you.

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

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of David Kelly from Jefferies. Your line is open. Good morning, David.

Hey, good morning, team. Thanks for taking my question. The cost reduction actions that you're initiating in transportation, can you talk a bit more about those, the magnitude of that opportunity and the timeline of that process? And also, if you could just remind us, I think mid-teens... EBIT margins is how you think about the transport business longer term. Just wanted to confirm that that's still the case given some of the outgrowth opportunities you've referenced.

Sure. Thanks, David. Good morning. So, yes, I did mention, you know, talking about some cost reduction actions that we've initiated. I mean, really, it's aligning our cost structure and really the productions to what we're seeing in terms of the inventory levels that we're managing through, which we're reducing, as well as when we think about our customers and their digestion and unwinding a little bit of inventory, you know, we've adjusted our cost structure to align to what we see our own production inventory level being over the next few quarters. So that's, you know, that's where I would say that's one element of it. But adding to that, I would say, again, In addition to the impacts that we've had, there have been some other things that we're doing. We've talked a lot about price, and we continue to really work with our customers. As Dave mentioned earlier, while we're seeing some costs come down, there's other costs that still continue to be up there. And so we still continue to focus on price and coming back on a lot of the contracts there. So between that work that we're doing, we expect margins to improve again in the fourth quarter and going forward.

Okay, got it. Thank you. And just on the mid-teen C-bit margin target, is that still how you all think about log return? Just a quick follow-up, sorry.

No, thank you. Yeah, absolutely. On the mid-teens margin, we're still aligned to that mid-teens margin. We know there's work to do, and there's also some market shifts that have to happen, one being, you know, as car production, as an example, is at lowest levels that it's been in a long, long time, and it's been there for three, four years. So we definitely have to see some volume growth come back in a more meaningful way. And then the other thing that's also weighing a bit on the margins a little bit is just the Carling acquisition. And as we continue to drive synergies there, that's going to help us, and that's going to move that trajectory back to our target of the mid-teens.

Okay, got it. Thank you. And then just one more follow-up here. Slide eight, really helpful slide. Thank you. The double-digit outgrowth opportunity, really a meaningful step up from your historical targets in transportation. You referenced your incremental product opportunities. Are you also seeing stronger market share than previously anticipated, given the new business pipeline you referenced?

Yeah, David, I think that's certainly a positive storyline for us as we look at our content outgrowth. And what I would say is, Over the last, it's been kind of a messy couple of years on demand and inventory builds and inventory kind of rebalancing that's going on now in the passenger car world. But if you look over the three years, the last three years, we have averaged outgrowth that's double digit. And that's been a step up for us. But I would say while we're seeing really strong performance and outgrowth within the our traditional transportation definition from a segment perspective, we're also seeing dramatic growth coming from our electronics products into vehicles. And that's driven by the electronification, but it's also driven by electrification as well. Some of the technologies that we apply to EV applications, they don't all come out of our transportation segment. Some come out of our industrial, some come out of the electronics portion of the business, So that's really led to an uptick, if you will, in the outgrowth performance. And the good news is design wins we're seeing this year and have been winning over the last couple of years make us feel pretty good about continuing to be able to see that double digit outgrowth. From a market share perspective, in our traditional transportation areas, I don't think we're necessarily seeing a lot of market share shift. But we are seeing where we're picking up market share and some of our electronic components into the auto space. So it's a bit of a mix there on market share, but also just contact growth there. So very positive story we feel very good about.

Okay, great. Thanks. Thanks a lot.

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

Your next question comes from the line of Luke Junk from Baird. Your line is open.

Good morning, Luke. Good morning. Thanks for taking the questions. I'll ask a follow-up question to start with on the sustainability of double-digit outgrowth in transportation. And what I'm wondering about is, you know, in the past you've talked about multiples of content on EV. And what I'm hearing this morning is if we think just, you know, cars in general and combustion cars, that there might be some lifting content. So if you could speak to that, and then second, on EV specifically. Is there a change in your assumption around incremental content, or is it more the market share piece that's driving the increase in outgrowth expectations? Thank you.

Yeah. So I would say, yes, there is an uptick in content opportunity in traditional vehicles, particularly on the electronics side. If we think about the electronification of vehicles, I would say that has been – growing for us as well. So in traditional vehicles, there's certainly content growth. But as we think about the content growth at the double-digit level and now reaching kind of on an average vehicle across all types of vehicles and moving our content up to being average around $7, clearly the growth of EV, the accelerated pace of EV adoption has helped drive that content story forward and upwards for us. So there's gains for us on both sides. Certainly, I think there are larger gains on the electrification side than there are on traditional vehicles, but we're seeing gains on both aspects of it.

Okay. Thank you for that. And then my follow-up question, probably one for You know, just hoping to animate the year-to-year margin walk and the sequential walk in transportation. So I look, you know, year on year, you call out the 200 basis points of FX plus Carling. Just want to better understand the other pieces that are driving the margin change. And then similarly, if we look on a sequential basis, you know, sales fairly flat sequentially, but margins coming down. Just want to touch on that. And then last piece of this. In the fourth quarter, you know, expectation for a lift in the margin as cost action is rolling. I don't know if you want to put a finer point on that, but just want to understand what's baked into guidance. Thank you.

Okay. Let me go back and start on your questions. I think your first question was really on auto margins, maybe unpacking, hey, you know, what's been going on a little bit with the margin trend. That's what I heard. So maybe a couple things. One, you know, you highlighted one of the things that I mentioned is, quarter-on-quarter, Q2 to Q3, definitely the stronger dollar impact, and we've talked about this in the past, but definitely impacts this segment most, especially in the automotive part of our transportation segment. And so that was a 200 basis point impact, largely with the euro, just because of the global footprint that we have across that business. So that's That was part one. I'd say part two, this combination discussion we were having about the inventory unwind, two things happened as part of that. When we talk about the tier ones and the sales that we have into tier ones now is lower because they're digesting inventory that they have, but that also means our production levels come down. So the combination of just production coming down, let's call it 100 basis points, plus our sales volume being a little bit lower, even though our content outgrowth story still holds true. In the near term, you know, we're going to see some lower sales. It's a combination of that. That's also impacting margins. And then I'd say the last piece is that we're working on has been price cost, and I've talked about that a lot in the past several quarters, the fact that, you know, we are working – on that, not keeping pace with the cost increases just because of the timing of really going back and working on contracts and having to renegotiate them one by one. You know, with the efforts that we're going through, with the unwind only being for a period of time, and then with the ongoing synergy work we're doing around Carling, I would absolutely expect margins to start improving in addition to some of the cost reduction actions we've taken as we go into the fourth quarter going forward.

Thank you.

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

Your next question comes from a line of David Silver from CL King. Your line is open. Good morning, David.

Yeah. Hi. Good morning. Thank you. My first question, I guess, would be about your EBIT margins on the electronic segment. So I recall maybe a couple of times over the past few quarters, there was a comment about the sustainable level of margins maybe being in the closer to the mid-20s. And if I go back, I think, over the last five quarters, right, so third quarter of last year up to today, this is kind of the fourth out of five quarters where you've been meaningfully above that mid-20s threshold. And I don't believe you made that same comment this time. So I'm just wondering, first off, what would you attribute the relatively durable margin strength in that segment? And then how would you characterize the ceiling or the sustainable level of margins in that segment going forward? Thank you.

Sure. So, excellent. I'll just, I'll recap some of what you were commenting on from the past few quarters. What I talked about, I'd say past four or five quarters, as you noted, is the fact that our electronics segment, given volume, given the volume growth that we've seen, given a lot of the price work that we're doing, and especially because a lot of that segment is going through distribution and pricing. We're able to adjust and align pricing faster to market conditions as you're going through distribution. We've seen very strong margins coming there. We are positive price cost when it comes to the electronic segment as well. And what I talked about was given those dynamics of the strong volume of the focus around positive price cost, I absolutely expected the average margins to be in the mid-20%, and I would say that even through now. I think where what I've talked about long-term is we would think about that electronic segment margin target being closer to 20% over time, similar to Dave's comment of when he was talking about, you know, overall company organic growth. You know, we try to talk about margins also through the cycle. And so for us, you know, we know that especially in electronics because of, business going through distribution, there is our times where we see inventory rebalancing going on, as we've mentioned. So we'll see margins move around a little bit, but I would say, you know, that 20% long-term target still holds for the electronics segment.

Okay, thank you for that. My next question would be about the CNK switch acquisition. So apologies if I missed this, but during the prepared remarks, I didn't recall, you know, you calling out that unit for maybe it's either its EBIT contribution or its accretion impact on the third quarter. So I was wondering, you know, what kind of quantitative, you know, details you might share. And then secondly, I am wondering, like longer term, is the goal of the acquisition to kind of keep that as kind of a contained or separate unit, maybe even a fourth segment? Or if product breadth is important for capturing incremental, you know, business wins, as I think you said a couple times, is this the case where, you know, ideally that the functions within C and K switch would be integrated, you know, as appropriate into your other three segments. So maybe kind of, you know, the optimal structure of that particular acquired business going forward. Thank you.

David, let me take kind of the structural and strategic side of it. Minal can speak to the impact from a financial perspective. But the same case with which business and acquisition we feel, by the way, very good about. And the more we learn, the more we like it. And it's a very crisp fit with our business. And it really strengthens our ability to bring a broader offering to our core customer base. It also enhances our position within our distribution partners in electronics. So the C&K business absolutely is rolling up and being integrated within our electronics business. Now, as we talked about in... In our passenger car source of comments, C&K also has products that are being sold into automotive applications, industrial applications, as well as traditional electronics types of applications. So it is pretty broad, but our electronic components are that way and reach many end markets. So we're absolutely integrating it into our core business and have had meaningful steps in doing that already. Um, and we feel good about it. We think these board level switching capabilities and the strength of their, um, micro stamping types of capabilities are very much a technology enabler for us as well. So we feel very good about that. It'll fit right into our business and it'll be fully integrated. It will not be standalone. So maybe Amelia, you can give a little color on the impact to the business.

Sure. So, you know, maybe echoing one of Dave's comments, we really like C&K Switches the more we learn about it. And I would add, you know, it's been a very well-run company, so much so that, you know, we talked about the fact when we bought C&K Switches, you know, it was running EBITDA margins in the prior year of about 20% or so. So for us, as we think about margins, even at that level, it is a bit dilutive to company margins. It's a bit dilutive to electronic segment margins. We think where the opportunities are to grow the margins will be, A, on growth for a lot of the reasons Dave mentioned, top-line growth. We go through there. And also just as we consolidate it within our business, there's always cost structure improvements that we can do. Our goal in the next few years is really to align the operating margins of C&K to our company profile goals. target that upper teens level. So a little work for us to do then in the interim. You know, I mentioned between the C and K acquisition and the Carling acquisition in the combination of those two dilute of about 150 basis points, but, you know, we see definitely the path to improve margins in the next few years.

Okay, that's great. Thank you very much.

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

Your next question comes from the line of David Williams from Benchmark. Your line is open.

Hey, David. Thanks for letting me ask a follow-up here. Most have been touched on here, but I did want to ask about China and just wondering if there's any additional color in terms of the softness you're seeing there in particular areas or even geographically, if there's anything notable there that's brought in color on it.

Yeah, I think primarily the softness there is driven by the in-markets that are served through our customer base. And when we talk about China, we kind of talk about greater China. So we probably have a higher split towards consumer-facing types of products that are customer-based in greater China. And we know those areas have been impacted significantly. you know, earlier and more meaningfully. So that certainly has been a bit of a drag on the growth in greater China. Also, just general economy is a bit soft in China and that the demand profile there has softened with maybe the exception of past car, where past car has been reasonably strong car build growth in China driven by incentives there. But we think there's some caution in spending going on in China for sure.

Thanks so much. Appreciate the time.

Sure. Thanks, David. Appreciate your follow-up question. We'll take our next caller, please.

Your next question comes from the line of Joshua Buchalter from Cowan. Your line is open.

Hey, guys. Thanks for taking my follow-up and letting me back in the queue. I want to follow up on the price and cost actions. It sounds like you're optimistic that they can support margins, but I was wondering, given we keep hearing industrial weakening and consumer continuing to be soft and you're going through digestion of some of your distributors, have any of these conversations changed material over the last several quarters and what allows you the confidence that you should be able to get pricing to come down in line with cost, at least in the short to medium term? Thank you.

First of all, I would say for us, we have not seen softening in the industrial side of our business. I've seen that. I've heard others kind of speak to that as we focus very heavily on power conversion, on renewable energy, HVAC, and these sorts of key market drivers for us. We have not seen softness as of yet. So on the industrial side, we want to kind of correct that view. But from the pricing standpoint, conversations really haven't shifted too much for us. Clearly, we've talked about some of the rebalancing of inventory with some distribution partners, but that's really about their inventory position, not about in demand. Again, their POS is still holding up at a very solid level. we continue to see in-demand being pretty good in the electronic side and through our distribution partners. So, no, we really haven't seen a lot of shift in momentum in the discussion from a pricing standpoint.

Yeah, and maybe just the last piece, I'll add just more on the cost side. You know, Dave had mentioned this earlier. While we've seen some costs come down, there's other costs that have not come down or in some cases going up, right? You know, when we think about energy costs in a lot of places, including our own production costs there. Wage inflation continues. So I would say that's another reason we're not hearing a lot from people around that because we still see those inflationary increases going on.

Donna, thank you. I appreciate the call.

I appreciate your follow-up question, Josh. Thank you. That concludes our Q&A session. Thank you for joining us on today's call and your interest in Little Fuse. We look forward to seeing you during the Bayard and Stiefel conferences and talking with you again soon. Have a great day.