Littelfuse, Inc. (NASDAQ:LFUS) Q4 2023 Earnings Call Transcript
Littelfuse, Inc. (NASDAQ:LFUS) Q4 2023 Earnings Call Transcript January 31, 2024
Littelfuse, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day everyone and welcome to the Littelfuse Fourth Quarter 2023 Earnings Conference Call. Today's call is being recorded. At this time, I'll turn the call over to the Head of Investor Relations, David Kelley. Please proceed.
David Kelley: Good morning and welcome to the Littelfuse fourth quarter 2023 earnings conference call. With me today are Dave Heinzmann, President and CEO; and Meenal Sethna, Executive Vice President and CFO. 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 2 for disclaimers. Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review yesterday's press release and our Forms 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations.
We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available on the Investor Relations section of our website. I will now turn the call over to Dave.
Dave Heinzmann: Thank you, David. Good morning, and thanks for joining us today. Let's start with highlights on Slide 4. 2023 was a solid year for Littelfuse as our global teams remain focused on driving sustainable long-term growth and profitability. We made considerable progress with existing and new customers as our differentiated technologies and global scale allowed us to secure meaningful new business wins and drive industry innovations. We are helping our customers solve complex challenges further positioning us as a leading enabler of structural growth themes, including sustainability, connectivity, and safety for years to come. We also delivered resilient margin performance and record cash generation, all while navigating a challenging macro environment.
For the full year, we recorded sales of $2.4 billion and achieved an adjusted operating margin of 16.5%. Our 2023 results reflect our ability to execute through cycles, delivering more resilient profitability versus prior macro downturns. Our ongoing portfolio diversification strategy and well-positioned cost structure allowed us to mitigate the impact of channel inventory reductions and pockets of end demand weakness as we delivered full year adjusted earnings per share of $11.74. Furthermore, we demonstrated the resiliency of our business and strength of execution as we generated $457 million in operating cash and $371 million in free cash flow, both records for the company. We launched our five-year growth strategy in early 2021 and have delivered strong performance within the first three years, as shown on Slides 5 and 6.
Within our strategy, we target double-digit average annual sales growth, coupled with sustained profitability and leveraged earnings growth. Three years in, we have averaged 18% annual revenue growth driven by organic momentum and complementary acquisitions that enhance our leading technical and engineering expertise within the high-growth end markets. Similarly, three years into the strategy, we have delivered average annual adjusted earnings growth of 22%, as we have effectively leveraged our disciplined cost structure and sales growth to deliver strong profit and earnings expansion. I want to thank our global teams for their persistent commitment to serving our customers and significantly growing our business. Turning to the current dynamics in our served end markets.
We continue to see inventory destocking across our electronics, commercial vehicle distribution channels in the fourth quarter. We are also seeing a subset of OEM customers continue to work down inventory levels. In the quarter, our electronics book-to-bill remained below one. We expect inventory destocking well into the New Year, but as inventory levels stabilize, we expect to return to normalized order rates during 2024. Though we are experiencing a longer-than-typical electronics channel destocking following robust growth in 2021 and 2022, we are well positioned to drive strong performance in the recovery. On Slide 7, turning to electronics, end-market demand and design activity, demand continued to be soft in consumer products, personal devices and appliances in the quarter.
Despite these near-term headwinds, we continue to be a leading technology enabler in the broad electronics market and have the track record to deliver strong execution and meaningful long-term growth. Structural electronics end-market drivers such as artificial intelligence, automation and more stringent safety requirements remain a key opportunity. As our customers continue to rely on us for technology expertise and enable innovation. And we are seeing excellent traction with new product introductions across key electronics platforms as well as continued robust design activity across our diverse technology offering. Taking a closer look at electronics design activity, we had meaningful wins across a broad set of product categories and end-market applications, highlighted by data center, medical and building solutions, among others.
In the quarter, we won multiple circuit protection opportunities for building solution customers in Europe. We also won business for a smart home application for multiple regions. We had a meaningful win in a medical equipment application in the Americas. Finally, we delivered multiple data center wins in the quarter across technology offerings, including switches and fuses. Long-term, we believe the use of artificial intelligence, computing will drive strong demand for our products in data center applications. Taking a step back, our superior reliable technology offerings positions us well to continue winning across an increasingly diverse and evolving electronics end-market. Turning to Slide 8 in industrials. We continue to drive growth with customers, delivering solid momentum in utility energy storage and industrial drives.
Although, we experienced further softness in residential HVAC, construction and charging infrastructure in the fourth quarter. While we see renewable commercial HVAC and industrial safety growth into 2024, we expect softer demand in other pockets of the broader industrial sector. Despite the ongoing softness in certain industrial end-markets, we see longer-term momentum across our diverse exposures, reflecting ramping infrastructure spend, increasing electrical efficiency requirements and global commitments to decarbonization. We believe we will continue to benefit via deep engineering expertise and product offerings as well as continued strong execution reflected in ongoing strong design wins and broad customer momentum. Taking a step back, industrial design activity remains robust across our exposures.
We saw success in North America in renewables, where we won a multi-technology application for a utility level solar customer. We won business for multiple HVAC solutions driven by our designing capabilities and customer support. We also secured wins for a broad set of EV infrastructure applications across multiple regions, including for Level 2 and DC fast chargers where our superior quality and reliability are critical for the safety of these high-power systems. Finally, we had a multi-technology win for an industrial OEM in North America where we will be providing our temperature sensors and contactors. Moving to slide 9, within transportation and our passenger vehicle exposure, we continue to leverage our balanced product capabilities and broad technology leadership, to enable ongoing industry innovations.
We are seeing continued electrification new business and design momentum, and we believe our more conservative EV planning, which assumed a gradual industry transition is proving prudent as our investments, go-to-market strategy and planned content expansion are unchanged. Our traditional core low-voltage products also continue to deliver key wins globally, and we remain the leading provider in many core product categories. As an example, we continue to see strong traction in China in the quarter demonstrating our entrenched customer relationships and broad product leadership. Furthermore, we are a key enabler of electronification advancements, including in-vehicle technology such as telematics and active safety adoption, such as ADAS. Factoring the broad product offering and technology leadership, we continue to have a well-rounded automotive content outgrowth story.
Looking ahead, we will also continue to ramp current sensor investment ahead of launches, supported by our meaningful design pipeline and strong win cadence. As a reminder, current sensors play an important role in electric drive and battery management applications. And as we have discussed previously, we are confident in our positioning as a key player in the emerging category as supported by our strong customer traction to date, but also our technology offering and long-standing expertise within the vehicle electrical system. Given our long-time circuit protection leadership, we are a key customer partner and technology enabler at the electrical system engineering level. And current sensors are designed in by those same customer engineers and for the same applications as our core offering.
Strategically, we view current sensors as a great example of an adjacent technology that will further round out our already strong position in our vehicle electrical systems application. As part of our regular portfolio review process, we are continuing to review our passenger vehicle sensor portfolio as we transition our focus to current sensor launches expected in the coming quarters. Regarding our commercial vehicle exposure, we are taking a long-term strategic view on our business and footprint. We expect our previously disclosed commercial vehicle actions will last through 2024 as we continue our product line pruning initiatives and cost structure reductions. While this will impact our full year 2024 results, including a more pronounced impact on our Transportation segment, we believe our actions will position our commercial vehicle business for long-term success, and we remain confident in our positioning in the market.
We expect to ultimately exit certain low-margin product lines to optimize our product and customer mix. Meenal will provide additional color on the impact to 2024 results. Taking a closer look at passenger vehicle design activity, we closed the year strong with multiple wins across both our low- and high-voltage product portfolio for customers in all regions. Our safety critical solutions are essential for next-generation architecture, and we secured wins for high-voltage fuses, current centers and for onboard charging applications in EMEA with several OEMs. We also continue to show momentum in China securing a meaningful low-voltage win in the quarter. Finally, within commercial vehicles, we secured wins for high-voltage products and switch applications and construction equipment and low current switches for material handling applications.
We also won business in Australia for a heavy-duty truck application, leveraging our strong switch technology offerings and broader portfolio to design a semi-custom solution. I will now turn the call over to Meenal to provide additional color on our financial performance and outlook.
Meenal Sethna: Thanks, Dave. Good morning, everyone, and Happy New Year. Thank you for joining us today. Please turn to Slide 11 to start with our fourth quarter results. Revenue in the quarter was $534 million, down 13% versus last year. Sales were down 14% after adjusting for foreign exchange. GAAP operating margins were 12.1% and adjusted margins 13.2%. Adjusted EBITDA margins finished at 19.6%. Fourth quarter GAAP diluted earnings per share was $1.71 and adjusted diluted EPS was $2.02. Let's turn to Slide 12 for full year performance. We finished the year with sales of $2.36 billion, down 6% versus last year and down 10% organically. GAAP operating margins were 15.3%. Adjusted operating margins finished at 16.5% and adjusted EBITDA margins were 22.3%.
Excluding an FX headwind of 60 basis points, OI and EBITDA margins would have finished at about 17% and 23%, respectively. We're very pleased with the resiliency of our company margins this year, which were 200 basis points stronger than our performance in the prior down cycle. Our portfolio diversification and strength of execution have been foundational in achieving our upper teens operating margin target while managing through a correction cycle. GAAP diluted EPS was $10.34 and adjusted diluted EPS finished at $11.74. Our full year GAAP effective tax rate was 21% and adjusted effective rate was 20.1%. Our full year rate finished about 150 basis points higher than projected due to greater shift in earnings mix across jurisdictions. The true-up for the full year rate is reflected in our higher-than-anticipated fourth quarter tax rate.
Turning to cash, we generated operating cash flow of $457 million and free cash flow of $371 million for the year, both records for the company. Our free cash flow conversion from net income was 143%, significantly higher than our target of 100% as we proactively managed working capital declines aligned to our sales decrease. Our cash generation continues to validate the strength of our business model, and we expect to generate approximately 100% free cash flow conversion going forward. During the year, we allocated about $200 million in cash towards strategic acquisitions, including the down payment of a 200-millimeter fab. We returned $62 million to shareholders via our quarterly dividend and repaid debt of $121 million. We ended the year with over $550 million in cash on hand and net debt-to-EBITDA leverage of 1.3 times.
Our cash generation model, coupled with our strong balance sheet, gives us the ability to allocate capital for both growth and return to shareholders. Let's move to segment highlights for the fourth quarter and full year, starting with electronics on slide 13. Sales were down organically 21% and 16% for the quarter and year, respectively. Channel destocking continued through the quarter with an ongoing decline in weeks of inventory at our channel partners. Across end markets, consumer-facing areas remained soft, and we saw increasing signs of weakness across a broad set of industrial end markets. Automotive markets remain strong. Operating margins in the quarter were 18%, while EBITDA margins finished at 24.7%. We finished the year with segment operating margins over 22% and EBITDA margins over 28%, well-positioned above our 20% operating margin target.
We demonstrated the broader resiliency across the segment from continued portfolio diversification, disciplined execution and improved cost structure. Moving to our transportation segment on slide 14. Segment to organic sales declined 5% for both the quarter and the year. In the passenger vehicle business, sales grew 5% organically in the quarter, and 4% for the year. Growth in the quarter was led by continued product launches we supported, especially in China, tempered by impacts from the extended UAW strike earlier in the quarter. Within commercial vehicles, sales for the quarter were down 13% organically and down 14% for the year as inventory destocking continued at our distribution partners. For the segment, operating margins were 4.7% and 5% for the quarter and year, respectively, while EBITDA margin finished at 10.8% in the quarter and 11.2% in the year.
Profitability has improved across the passenger vehicle business through footprint optimization, which we've largely completed. We have extended our margin improvement initiatives to a review of our auto sensor portfolio and will exit some existing low-margin product lines. We are also expanding investments for our growing current sensor offerings. With a solid pipeline of design wins, we are increasing resources in advance of product launches in the coming quarters. As Dave noted, we are extending our strategic portfolio review across the commercial vehicle business. We expect this to lead to broader portfolio pruning across our customer and product line mix. We're also expanding our cost reduction activities, both near-term and longer term structural actions.
We expect these segment-wide activities to extend over several quarters. For 2024, we expect the auto sensor and commercial vehicle portfolio pruning to reduce transportation segment sales growth by 6% to 8%, heavier weighted towards commercial vehicle products. We remain positive on the long-term growth profile and mid-teens margin profitability target for the segment and expect these actions and investments to drive progressive margin expansion. On Slide 15, the industrial segment grew 5% organically for the year. But signs of expanding industrial end market weakness led to a 5% organic sales decline in the quarter. Sales were softer than expected in the quarter with ongoing weakness across the residential HVAC markets, along with slower construction and MRO markets as well as some OEMs working down pockets of excess inventory.
Operating margins finished at 12.7% in the quarter and 16.4% for the year, both growing over prior year. Adjusted EBITDA margins were over 18% in the quarter, expanding over 300 basis points and over 21% for the year, expanding over 200 basis points. Let's turn to the forecast on Slide 16. We still see a moderated macro environment. Many of the electronics end markets have stabilized, but we've not seen significant signs of improvement. We're also seeing more softness across a broader set of industrial markets, including some customers working down excess inventory levels from 2023. We expect inventory rebalancing at our distribution channel partners, both electronics and commercial vehicle continuing into the first half of this year and we expect 2024 car build levels to be flat over 2023 at about 89 million cars.
Inflationary trends have moderated in some areas, but we see continued increases in wages and energy costs as well as transportation costs with the current geopolitical dynamics. With this backdrop, we expect first quarter sales in the range of $505 million to $530 million. At the midpoint, that's a sales decline of 15% versus last year. We expect sales to decline across both electronics and industrial segments with slight growth in the transportation segment. We project adjusted EPS to be in the range of $1.65 to $1.85, which includes a tax rate in the range of 20% to 21%. Please turn to Slide 17 for our full year 2024 expectations. We expect to return to sales growth during the year, but expect that to be tempered about 2% to 3% based on the transportation segment portfolio actions.
At current foreign exchange rates, FX is not expected to materially impact our full year sales, but has about a $0.07 headwind to earnings. We expect company operating margins to continue averaging in the upper teens for the year with variability across quarters. By segment, we expect electronics operating margins to continue averaging above 20%, industrial margins in the upper teens and transportation to improve progressively to high single-digit operating margins by year-end. In addition, we're assuming $66 million in amortization expense and about $40 million in interest expense. And we expect to invest $100 million to $110 million in capital expenditures. We are estimating a full year tax rate of around 21%. With the ongoing global tax legislation, a headwind on tax rates, we expect to maintain our tax rate in the low 20% range going forward.
We are continuing to evaluate opportunities to mitigate these rate increases. Despite the impact from the slower macro environment, our 2023 financial performance was much stronger than past market cycles. We distinctly improved our profitability and cash generation as we continue to enhance our operating model and capabilities. Our 2024 priorities will focus on areas we can control; readiness for our return to growth, driving profitability improvements within the Transportation segment and continuing our trajectory of best-in-class profitability and cash generation. I'd like to recognize our employees and partners for their contributions and the continued progress we have made as a company. And with that, I'll turn it back to Dave for some final comments.
Dave Heinzmann : Thanks, Meenal. In summary, on Slide 18, 2023 was a solid year for Littelfuse, an exemplary of our resilient business model. We generated record cash flow and executed well as evidenced by our resilient margin performance, which outpaced our profitability levels in prior downturns. We saw continued robust design activity, and believe we strengthened our customer relationships, expanded our leadership and broadened our presence in attractive high-growth end markets. Three years into our most recent five-year growth strategy, we are outpacing our targets. And our strong execution is overshadowing a continued dynamic underlying macro environment. And while we expect continued macro variability into the New Year, we remain confident that we will return to growth during 2024.
We also have a very strong balance sheet and significant financial capacity and strategic M&A will continue to be a capital deployment focus. We believe our diversified business model, strong technology offerings across the end markets and well-positioned cost structure will drive continued long-term top-tier value for our stakeholders. Again, I want to thank our global Littelfuse team for their unwavering commitment to our customers and supplier partners. We were recently recognized again as one of America's most responsible companies by Newsweek, an honor that would not be achievable about the hard work of our team, as well as our strong customer and supplier partnerships. And with that, I will now turn the call back to the operator for Q&A.
Operator: [Operator Instructions] Your first question comes from the line of Luke Junk with Baird. Your line is open.
Luke Junk : Good morning. Thanks for taking my questions. For -- starting us here, Dave, hoping you could just double-click on areas of your passive portfolio that might turn the fastest as you return to growth, any new clues there? And then any updated perspective from your distributor partners would also be helpful just in terms of the progress that they've made working inventory lower? And then maybe if you can square all of that, just how it figures into your -- continue to expect to return to growth during 2024?
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