Littelfuse, Inc.

Good day, everyone, and welcome to the Little Fuse fourth quarter 2024 earnings conference call. Today's call is being recorded. At this time, I will turn the call over to the head of investor relations, David Kelly. Please proceed.

Good morning, and welcome to the Little Fuse fourth quarter 2024 earnings conference call. With me today are Dave Huntsman, president and CEO, Meenal Sethna, Executive Vice President and CFO, and Greg Henderson, Little Fuse Board Director and incoming CEO. Yesterday, we reported results for our fourth 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 details 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 revert 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, David. Good morning, and thanks for joining us today. Let's start with highlights on slide four. In the fourth quarter, as both sales and earnings were within our prior guided range. The consistency of our performance reflects our global team's strong operational execution and unwavering focus on our diverse and broad customer base as we delivered solid quarterly results amid a mixed environment across our end markets. For full year 2024, we continue to deliver design wind momentum and drive new product innovations alongside our global customers while navigating a choppy environment. We believe our steadfast commitment to our customers positions us to deliver continued long-term top-tier growth. We exited the year with the electronics de-shocking cycle behind us and signs of distribution inventory replenishment emerging. Notably, our electronics segment, Book to Build, Our passive business book-to-bill is above 1, and while power semiconductor remains below 1, we observed improved order rates in the quarter relative to levels seen earlier in the year. As order rates are gradually improving, we continue to see broader design and strength across our diverse technology offering and in-market exposures. We remain confident in our content, a key enabler of sustainability, connectivity, and safety megatrends. We also strove for improved operational performance in 2024 and delivered meaningful profitability enhancements across our businesses, driving solid second-half margin expansion. Into 2025, we continue to align our cost structure to reflect current business and market conditions, while positioning our company for a return to growth and further margin expansion. Finally, we generated strong free cash flow conversion in 2021. strategy. Taking a step back, we are confident our actions in 2024 will support growth and solid earnings expansion in 2025, as well as meaningful long-term momentum beyond the new year. I want to thank our global teams for their focused efforts and persistent hard work in the fourth quarter and throughout 2024. Now let's turn to our in-markets and design activities, starting with the electronics on slide six. Electronics market trends were mixed but improved through the fourth quarter. Data center remained a strong growth driver, in part driven by AI application. Medical demand was mixed, while demand for consumer products, appliances, and building technologies remained subdued. Yet as the quarter progressed, we observed some emerging signs of stabilization, particularly in North America and Asia regions. Broadly, electronics remains healthy, and we delivered another strong wind rate across a broad set of applications in the quarter. Of note, we saw strong taxes, opportunities, and conversion in China, driving meaningful order expansion in the region in the fourth quarter and full year 2024. In North America, we continue to observe some ongoing design wind order conversion delays, but a pickup in order trends late in the quarter was encouraging. Turning to our electronics in-market design wins in the quarter, we secured a meaningful data center win for a cooling application in North America and an infrastructure application in Japan. We secured datacom, server, and compute wins in North America, China, and Taiwan. We also delivered global wins for appliance applications that utilize our broad technology capabilities. Similarly, we secure business for multiple building technology and automation applications in regions including North America, China, Taiwan, and India. Finally, we deliver meaningful wins for medical applications in North America and Europe in the quarter. Moving on to transportation and markets and design wins on slide seven. Starting with our passenger car exposure, we benefited from our global positioning and balanced technology offerings. actions associated with our sensor product line. We delivered solid growth in China as we leveraged our technology expertise, experienced local teams, and strong partnerships with local OEMs. Outside of China, solid demand for our low voltage products partially offset weaker North American and European production volumes in EV sales. In 2025, we believe our exposure to multiple Regarding our commercial vehicle exposure, while SOPS underlying market trends continued in the fourth quarter, we delivered solid volume expansion and continued to drive favorable pricing. Into 2025, we see some initial, albeit early signs of improvement in certain commercial vehicle markets led by construction and heavy duty truck, with recovery likely weighted to the back half of the year. Given our strong content commercial vehicle positioning, and are excited about long-term opportunities across our broad exposures. In the quarter, we secured solid new transportation business across both passenger and commercial vehicle end markets. In passenger vehicles, we secured several meaningful high-voltage opportunities with customers in South Korea, China, and Europe. We also delivered multiple low-voltage fuse winds, including in North America, Europe, South Korea, and China. which demonstrates the global scale of our business. Finally, we secured ADAS application opportunities for customers in China and Europe. In commercial vehicle end markets, we secured several construction and agriculture equipment wins for customers in North America and Europe. We also delivered multiple recreational and specialty vehicle wins in the course. Turning to slide eight, industrial markets and design activities. In the fourth quarter, we observed mixed in-demand trends across our broad industrial exposure. We benefited from continued strong HVAC and industrial safety application demand. However, we observed continued soft industrial equipment, factory automation, and charging infrastructure trends. We continue to see more pronounced softness across our industrial power semiconductor products, where we have more meaningful exposure to weaker European and Asian industrial market Importantly, our industrial secular growth drivers remain intact, and we see continued strong momentum headlined by renewables, automation, and industrial safety. Regarding our design wins in the fourth quarter, we secured meaningful renewable opportunities, including for a solar application in North America and for a solar and energy storage application in China. We also secured several commercial HVAC wins in the quarter, so our teams continued to leverage core to drive new market expansion. In Japan, we secured a win for a rail traction drive application that will utilize our semiconductor capability. Finally, we delivered a variety of wins across heavy industrial markets, including construction, mining, and oil and gas in the quarter. Across our businesses, we continue to partner with our broad customer base to drive innovative solutions for our diverse in-market exposures. We will remain focused on operational execution as we strive to deliver leading performance in 2025. 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 thank you for joining us today. Please turn to slide 10 to start with details on our fourth quarter results. Revenue in the quarter was $530 million. down 1% versus last year in total, and flat organically. The product line pruning actions we've discussed reduced sales about 2% in line with our expectations in the prior quarter. Gap operating margins were negative 6.9% and include $93 million of non-cash goodwill and intangible impairment charges. The charges are primarily related to the impairment of certain assets impacted by ongoing weak EV charging infrastructure trends. For the quarter, adjusted operating margins finished at 12% and adjusted EBITDA margins were 18.1%. Fourth quarter gap diluted loss per share was $1.57 and adjusted diluted earnings was $2.04. Our fourth quarter gap effective tax rate was negative 30% and adjusted effective tax rate was 13%. Let's turn to slide 11 for full year performance. We finished the year with sales of $2.2 billion, down 7% in total in organically versus last year. GAAP operating margins were 7.8%. Adjusted operating margins finished at 12.9%, and adjusted EBITDA margins were 18.9%. Foreign exchange and commodities had a 30 basis point unfavorable impact to margins. We drove improvements in our cost structure in 2024 and are pleased with our resulting margin trajectory as our second half operating margins expanded 220 basis points from the first half of the year. Finally, full year of GAAP diluted EPS was $4.51 and adjusted diluted EPS finished at $8.48. Our full year of GAAP effective tax rate was 31% and adjusted effective rate was 21%. Please turn to slide 12 for updates on capital allocations. We delivered strong cash generation in 2024. In the quarter, operating cash flow was $161 million, and we generated $135 million in free cash flow. For the full year, operating cash flow was $368 million, and we generated $292 million in free cash flow, driving cash conversion well over 100%. Our strong performance also reflects our ongoing focus on working capital management. Into 2025, we continue to target 100% pre-cash flow conversion aligned with our long-term goals. We ended the quarter with $725 million of cash on hand and net debt to EBITDA leverage of 1.2 times. Our balance sheet remains strong and gives us continued flexibility on capital deployment. continue to prioritize our free cash flow for thoughtful acquisitions, and we'll continue to return capital to our shareholders through our dividend and periodic share buyback. For the full year 2024, we returned $108 million of capital to shareholders, including $67 million through our cash dividend and $41 million through opportunistic share repurchases. 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 for this segment were down 4% organically and 12% for the quarter and year respectively. Versus prior year, sales across passive products were up 9% organically for the quarter and down 1% for the year, while semiconductor products declined 13% and 20% for the quarter and year. Our solid passive product sales growth in the quarter reflects stabilizing end demand trends and improved orders from channel partners. Within our semiconductor products exposure, we saw stabilizing demands for our protection products, but continued softness across power semiconductors. Operating margins in the quarter were 12.3%, while EBITDA margins finished above 19%, both in line with our expectations. We finished the year with segment operating margins of 14.2% and EBITDA margins of nearly 21%. Moving to our transportation product segment on slide 14, segment organic sales declined 1% for both the quarter and the year amidst declines across global car bills and commercial vehicle end markets. Segment sales were negatively impacted 6% versus last year for the quarter, and 5% for the year from pruning actions we've been undertaking. In the passenger vehicle business, sales declined 4% organically in the quarter and came in flat for the year. For the quarter, sales were negatively impacted by planned auto sensor product exits and ongoing global car bill declines, in part offset by growth in China. Within commercial vehicles, sales for the quarter were up 4% organically and down 1% for the year. In the fourth quarter, we delivered volume growth and favorable pricing despite continued end market weakness. This more than offset impacts from pruning action. For the segment, operating margins were 9% and over 10% for the quarter and year respectively, while EBITDA margins finished at 14.5% in the quarter and 15.6% for the year. Foreign exchange and commodities were a headwind for the full year, unfavorably impacting margins 110 basis points. We're pleased that our focus on cost actions, pricing, and pruning initiatives drove 530 basis points of operating margin expansion for the year. We believe these actions position us well for continued margin growth into 2025. On slide 15, industrial product segment sales increased 12% organically for the quarter and declined 1% for the year, navigating well through a number of weak industrial end markets. Fourth quarter sales benefited from strong HVAC growth, solid data center momentum, and continued industrial safety expansion. Segment operating margins finished at 17.1% in the quarter, expanding 440 basis points versus prior year level, while full year margins finished at 13.9%. Adjusted EBITDA margins were 20.8% in the quarter, while full year margins finished over 18% for the year. We delivered strong margin expansion in the quarter, led by continued solid execution and strong conversion on volume growth. Our improved industrial segment margins throughout 2024 also reflect our operational execution and solid volume leverage. We expect continued growth and margin momentum into 2025. Now please move to slide 16 for the forecast. As we start 2025, we continue to see a mixed macro environment. Within electronics, we expect passive products recovery, but ongoing soft semiconductor product sales in the first quarter. We expect ongoing industrial segment momentum while we see a mixed underlying transportation backdrop starting the year. We expect a low single-digit global car bill decline with signs of modest commercial vehicle market recovery projected for later in the year. With these assumptions, we expect first quarter sales in the range of $520 to $550 million. This includes about a 2% headwind from FX versus the prior year. We're projecting first quarter EPS to be in the range of $1.70 to $1.90, which includes a tax rate of 26%. Sequentially, the higher tax rate represents a 32-cent headwind to earnings as we benefited from a retroactive tax holiday extension in the fourth quarter. At current FX and commodity rates, we are expecting an 11-cent benefit to EPS versus the prior year. Please turn to slide 17 for additional full year 2025 color. We expect solid earnings expansion reflecting our growth positioning, recent cost scaling actions, and ongoing focus on operational execution. At current rates, we expect FX and commodities will represent a 1% headwind to sales, but a 22 cent benefit to EPS.