Littelfuse, Inc.

Good day, everyone, and welcome to the LittleFuse Second Quarter 2024 Earnings Conference Call. Today's call is being recorded, and at this time, I would like to turn the call over to the Head of Investor Relations, David Kelly. Please proceed.

Good morning, and welcome to the LittleFuse Second Quarter 2024 Earnings Conference Call. With me today are Dave Heinsmann, 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 discussions today will include forward-looking statements. These forward-looking statements may involve significant risk 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 relief available in the investor relations section of our website. I will now turn the call over to Dave. Thank you, David. Good morning, and thanks for joining us today. Let's start with highlights on slide four. Our second quarter results exceeded our expectations, reflecting our resilient business model, diverse and balanced technology offering, and broad customer reach. Our seasoned global teams navigated through a continued dynamic environment and delivered solid results while we saw solid design inactivity and secured significant new business across sustainability, connectivity, and safety megatrends. We again delivered strong free cash flow, a testament to our proven operating model, while our balance sheet and significant financial capacity positions us to enhance our long-term growth strategy. We will continue to prioritize capital allocation towards thoughtful M&A while maintaining our commitment of returning capital to shareholders. Our second quarter results exceeded the high end of both our sales and earnings guidance ranges. Meno will provide additional color on our financial performance and outlook. I want to thank our global team for their hard work, dedication, and meaningful achievements through the first half of 2024. Turning to slide five, We highlight several of our key accomplishments from our recently published 2023 Sustainability Report, which is available on our website. Sustainability is core to LittleFuse, as our history is deeply rooted in providing solutions to our broad customer base across our diverse set of in-markets that ultimately drive an increasingly sustainable world. Whether advancing electrification and transportation, providing robust solutions for renewable energy, or enabling safety critical medical technology, sustainability is incorporated into our daily actions across our businesses. I am proud of the efforts of our global teams. We strive to deliver internal progress and external enhancement for the betterment of our communities, employees, customers, and investors. Ultimately, we view sustainability as an integral part of our long-term growth strategy highlighted on slide six. Before diving into our end markets and design activity, I wanted to highlight a few key market, channel, and OEM inventory trends. We believe the passive electronics channel destocking that negatively impacted 2023 and the first half of 2024 results is largely behind us. Our passive electronics book-to-bill remains above 1 as passive electronics channel inventory levels have normalized. We expect a return to more normalized order rates as typical following a destocking period. However, thus far in 2.3, we are seeing some ongoing signs of cautiousness from customers and hesitancy to restock passive electronics inventory following what ultimately has been a historic and elongated destocking cycle. We are also seeing moderating inventory reductions across our protection semiconductor product lines, and we expect more stable order trends in the second half of the year. Finally, we observed further industrial OEM destocking in the quarter, which had a more pronounced impact on our power semiconductor exposure. As we see continued soft industrial demand, which I will provide more detail on shortly, we expect these conditions will impact us through the second half of the year. Now let's turn to our in-market and design activity, starting with the electronics on slide seven. Second quarter electronics markets remain soft, although we are seeing initial signs of demand recovery. Consumer products, appliances, and building technologies demand was again soft in the quarter, although customers are increasingly optimistic in a nearing recovery led by AI applications. Demand for data center and especially AI-driven data center applications was robust in the second quarter. Taking a step back, we believe customers are increasingly upbeat in subset of regions such as Taiwan, while design and activity continues to be healthy and encouraging across our global exposures. Regardless of our near-term trends, we remain well positioned to enable ongoing innovation and drive long-term three-cycle growth across our diverse electronic market exposures. We believe this is evidenced by our strong design win cadence in the quarter. We delivered numerous wins ranging from innovative data center solutions to safety-critical medical applications. Specifically in the quarter, we secured several data center wins, including fused business for customer in Asia and for liquid cooling application in North America. We also secured business for a data center customer in Asia that will utilize our switch technology. We delivered multi-technology and safety critical wins for medical customers in Europe and South Korea for defibrillator applications as well as medical switch technology for a customer in North America. Finally, we secured appliance business with customers in Europe and multiple regions in Asia that will utilize our diverse set of technologies, including our sensor and circuit protection capabilities. Moving on to transportation in markets and design wins on slide eight, our passenger vehicle exposure again benefited from our balanced product capabilities, broad technology leadership, and global customer reach. We continue to see strong interest in our core products as customers delay EV launches and pivot to internal combustion and hybrid vehicles in North America and Europe markets. In China, we again delivered strong results in low voltage applications. We support local OEMs that continue to experience robust growth. Second quarter global passenger vehicle production was modestly lower versus the prior year, and we expect a modest decline in the full year 2024. We remain well-positioned to deliver on long-term passenger vehicle growth drivers as we continue to enable electronification as well as next-generation electrification advancements across hybrid and electric vehicle architectures for a diverse and global customer base. Regarding our commercial vehicle exposure, our ongoing profitability initiatives led by our pruning and pricing actions continue to bear fruit while we remain encouraged by design inactivity and traction with our broad customer base. We are seeing continued soft market conditions driven by our ag construction exposures. However, on-road truck and bus demand was more resilient than expected in the second quarter. Looking forward, we see continued soft demand led by Europe and China regions extending into the second half of the year. Long-term, we remain well-positioned to deliver electronification and electrification innovations across our broad commercial vehicle exposures, including material handling, agriculture, construction equipment, and heavy-duty truck and bus markets. In the quarter, we secured meaningful new transportation business across both passenger and commercial vehicle and markets. In passenger vehicles, we secured a high-voltage fuse opportunity with a customer in South Korea We also delivered multiple low voltage fuse winds across our global customer base, including for customers in the Americas, Europe, and in China. We also secured a win within a battery management system for a customer in South Korea, as well as for a key customer in China. Finally, we continue to gain traction with our broad switch portfolio as we secure meaningful business in North America during the quarter. In commercial vehicles, We secured several wins highlighted by construction equipment business for customers in North America, Japan, and South Korea. We also delivered on-road truck win for a customer in Brazil and a bus win in Mexico. Turning to slide nine, industrial markets and design activity. In the quarter, we saw ongoing demand weakness led by industrial equipment and factory automation, construction, and charging infrastructure applications. Demand remains mixed for renewable applications with energy storage robust, while the solar market was again soft in the second quarter. Yet industrial safety applications continue to show further signs of growth, and we are benefiting from residential HVAC volume recovery, although at a modest pace to date. Broadly, power semiconductor customers continue to work down inventories and push out orders. Looking forward, we believe stock in-demand conditions will persist through year-end, with a more pronounced impact where we have semiconductor exposure. Taking a step back, long-term industrial growth trends remain attractive, supported by ongoing infrastructure spend, increasing electrical efficiency requirements, advancements in automation, and global commitments to decarbonization. Industrial design activity remains strong across our exposures as customers seek to drive ongoing innovations. In the second quarter, we had success in the North America HVAC market where we won business with multiple customers across a variety of product categories. We continued our recent industrial safety momentum, turning meaningful business with a North America customer. In renewables, we secured business for a residential solar application and for a wind turbine application in Asia. We also delivered multiple EV charging winds in the quarter across several regions. Finally, we secured business within an industrial smart meter application in North America customers. Across our businesses, we continue to deliver innovative solutions to our broad customer base for our diverse in-market exposure. We remain well positioned to deliver on our long-term double-digit annual revenue growth target, as evidenced by our continued design wind momentum supporting sustainability and activity and safety megatrends. I will now turn the call over to Minal to provide additional color on our financial performance and outlook.

Thanks, Dave. Good morning, everyone, and thank you for joining us today. Please turn to slide 11 to start with details on our second quarter results. Revenue in the quarter was $558 million, down 9% versus last year and down 8% organically. The product lampooning actions we discussed reduced sales 2% in line with our expectations in the prior quarter. GAAP operating margins were 11.7% and adjusted operating margins 12.7%. Adjusted EBITDA margins finished at 18.6%. Corn Exchange and Commodities had an 80 basis points unfavorable impact to margins largely due to commodity inflation and primarily driven by copper and silver exposure. Second quarter GAAP diluted earnings per share was $1.82 and adjusted diluted EPS was $1.97. Our second quarter GAAP effective tax rate was 26% and adjusted effective tax rate was 25%. Our adjusted effective tax rate was slightly higher than expected due to income shifts across jurisdictions. Please turn to slide 12 for updates on capital allocation. We continue to deliver strong cash generation year-to-date. Operating cash flow in the quarter was $69 million, and we generated $50 million in free cash flow. Year-to-date, we generated $92 million in free cash flow, yielding a 98% conversion rate. We've continued to reduce both inventory days and dollars this year, contributing to our solid cash flow performance. We expect to deliver on our targeted 100% free cash flow conversion for the full year, aligned with our long-term goals. We ended the quarter with $562 million of cash on hand and net debt to EBITDA leverage of 1.6 times. Given the strength of our balance sheet, we'll continue to prioritize our free cash flow for thoughtful acquisitions. And we will continue to return capital to our shareholders through our dividend and periodic share buyback. In the quarter, we returned $41 million of capital to shareholders, including $25 million via share repurchases and $16 million via a cash dividend. Through the first half of 2024, we've returned $73 million of capital to shareholders. Our Board of Directors approved an 8% increase in our quarterly cash dividend, equating to a $2.80 annual rate. We've grown our dividend 12% on a compounded annual basis since inception, a testament to our long-term earnings and cash generation power. We'll remain disciplined in our capital allocation strategy as we strive to maximize long-term shareholder value. Please turn to slide 13 for our product segment highlights, starting with the electronics product segment. Sales were down 13% versus last year and 12% organically. Sales across passive products were down 4% versus last year, while semiconductor products declined 19%. Passive products were impacted by ongoing but moderating inventory declines, and we're starting to see similar trends across our protection semiconductor products. A continued weakness we saw in industrial markets particularly impacted our power semiconductor product sales in the quarter. Operating margins in the quarter were 15.1%, while EBITDA margins finished at 21.6%. Margins improved 210 and 180 basis points sequentially, reflecting our portfolio diversification efforts and strong execution. We're proud of the margin resiliency of our electronics product segment through this extended destacking cycle and are confident in the team's ability to drive continued expansions. Moving to our transportation product segment on slide 14, segment sales were down 2% and down 1% organically. Sales were negatively impacted 4% versus last year from pruning actions we've been undertaking largely within our commercial vehicle business. Across our passenger vehicle business, sales grew 2% organically. We saw continued strength in China and weaker trends across Europe, with some partial offsets due to ongoing sensor product line pruning. Within commercial vehicles, sales for the quarter were down 3% organically as pruning actions and ongoing end market softness were in part offset by continued favorable pricing momentum. For the segment, operating margins were 9% and EBITDA margins finished at 14.4% in the quarter. We believe our pricing and pruning initiatives, as well as structural cost actions, are bearing fruit as margins align with our expectations. On slide 15, industrial product segment sales were down 7% and 6% organically. We continue to see soft industrial and market conditions across our broad and diverse exposures, as well as a continuation of inventory reductions at some OEMs. However, we again benefited from solid industrial safety growth while we also observed early signs of residential HVAC volume recovery in the quarter. Operating margins finished at 11.4% and EBITDA margins were 16%. These represented positive improvements of 490 and 410 basis points sequentially, reflecting strong execution following our capacity additions and footprint actions noted in the first quarter. Please turn to slide 16 for the forecast. Summarizing Dave's earlier comments, while we believe the passive electronics inventory destocking is largely behind us, we are seeing some ongoing cautious order patterns from customers. We also expect continued weakness across our semiconductor products due to ongoing market softness and inventory destocking. And we expect some persistent commodity headwinds. With these assumptions, we expect third quarter sales in the range of $540 to $570 million. This includes about a 3% headwind from FX and expected product pruning versus last year. Across our segments, we expect sales to be largely flat relative to the second quarter. We're projecting third quarter EPS to be in the range of $1.95 to $2.15, and includes a tax rate of 26%. This incorporates about 25 cents in headwinds from FX and commodity rates, as well as a higher tax rate versus the prior year. Please turn to slide 17 for our full year 2024 expectations. For the full year, we expect our product line pruning actions to reduce total sales about 2% and reduce transportation sales growth about 6% versus last year. We are seeing mitigating currency movements, but increasing commodity costs. At current rates, we expect those to be a headwind of 1% to sales and about 40 cents to EPS for the year. We've demonstrated the resiliency of our electronic segment margins through cycles. We've also delivered solid transportation and industrial segment margin traction, reflecting operational execution and structural initiatives. However, We do expect a more gradual margin ramp, reflecting continued subdued end market demand and cautious order patterns across our customers and channels. With these market undercurrents, we expect company operating margins to finish in the range of 12% to 14% for the full year. Across our segments, we expect electronics operating margins to average in the mid-teens and industrial operating margins in the low-teens. We continue to expect transportation to exit the year with high single-digit operating margins. On other modeling items, we're assuming $63 million in amortization expense and $39 million in interest expense, about two-thirds of which we expect to offset through interest income from our cash investment strategies. We are estimating a full-year tax rate of about 23%, slightly higher than our prior estimate due to income shifts across jurisdictions. And we expect to invest about $100 million in capital expenditures. We continue to execute well through a dynamic environment and remain well positioned to support our broad customer base and diverse market exposures. We are confident in our positioning, reflecting our diverse technology offering, strong relationships across a global customer base, and ongoing profitability improvements. We will continue our path forward to best-in-class profitability and cash generation, driving value creation for our stakeholders. Thank you to our Little Fuse colleagues worldwide and their unwavering commitment in steering our company forward every day. And with that, I'll turn it back to Dave for some final comments.