Littelfuse, Inc. (NASDAQ:LFUS) Q2 2023 Earnings Call Transcript August 2, 2023
Operator: Good day, everyone, and welcome to the Littelfuse Second Quarter 2023 Earnings Conference Call. Today’s call is being recorded. At this time, I’d like to turn the call over to Head of Investor Relations, Trisha Tuntland. Please proceed.
Trisha Tuntland: Good morning and welcome to the Littelfuse second 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 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 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.
David Heinzmann: Thank you, Trisha. Good morning and thanks for joining us today. Let’s start with highlights on slide four. While our second quarter financial results were below our expectations, our global teams delivered solid results, driven by our strong operating fundamentals within an ongoing dynamic environment. Design in activities remain quite robust, and we secured significant new business in sustainability, connectivity and safety applications and continue to advance our strategic investments in high-growth end markets. Our strong overall performance to date in 2023 reflects the resiliency of our business model. I am confident with our diverse technologies and capabilities and the strength of our execution continue to position us to deliver on our long-term growth strategy.
Together, our global teams have achieved significant performance within our strategy and I want to extend my gratitude to our associates for their unwavering dedication and remarkable contributions. Meenal will provide additional color on our financial performance and outlook. As announced in June, we entered into a purchase agreement to acquire a 200-millimeter wafer fab located in Dortmund, Germany from Elmos Semiconductor. This acquisition is an important element in our long-term growth strategy for power semiconductors. Key to our sustained success in expanding our portfolio of technologies and growing internal capabilities to enable us to meet the increasing demands of our customers and high-growth power conversion applications. This strategic investment will expand our long-term business opportunities in industrial end markets like renewables, energy storage, automation, motor drives, power supplies, and e-mobility off-board charging infrastructure.
The Dortmund fab will complement our current footprint, adding a highly skilled technology team, extensive 200-millimeter manufacturing and development experience and an efficient high-quality wafer processing operation. We are excited about the future prospects with our combined teams and capabilities, which I am confident will continue to position us for long-term profitable growth, consistent with our strategy shown on slide five. Moving on to sustainability. We recently published our 2022 report, which is available on our website. Slide six provides an overview of our 2022 highlights. We believe we have responsibility to our customers, employees, investors and the communities where we live and work to conduct our business in a thoughtful sustainable way.
I am proud of the efforts of our global teams who everywhere, every day, help to create a culture that embraces diversity solutions and sustained success as we make ongoing progress on our continuous improvement journey, which will continue to play an instrumental role in the growth and advancement of the company. We are proud of our achievements and remain committed to the long-term value of a robust ESG strategy. Before we get into business design wins, I would like to start with the market and customer dynamics we are seeing. Taking a step back, our company’s end market exposure remains highly diversified, balanced and broad. Where we are selling into industrial markets, we are seeing strong growth across passenger vehicle markets. We achieved double-digit content outgrowth across our product portfolio.
Design activity remains robust and we are capturing new business with our differentiated capabilities and intensifying focus on enabling applications around sustainability, connectivity, and safety. Our execution is accelerating the rate of new business wins and expanding the product content with leading customers, which positions us well for the future. End market demand remains healthy across many of our end markets. We are seeing value creation and strong demand driven by our strategic positioning within renewables, industrial automation and safety, medical, specialty high-end power supplies, cloud computing to support artificial intelligence applications and electrification of vehicles and their charging infrastructure. We continue to see inventory destocking across parts of our electronics, commercial vehicle businesses.
With our lead-times coming down and current POS levels, we expect this to continue through the year as customers adjust their inventory levels to a more stable demand. Given that many of our end markets are in a growth trajectory, this will continue to help moderate the transitory destocking that is taking place. I’m particularly proud of our strong year-to-date performance as we continue to leverage our sound business fundamentals to successfully navigate the varying end markets and inventory management trends across our businesses. Our global teams remain focused on driving long-term growth, profitability, and cash generation. We continue to actively manage costs to align to business conditions while also advancing our strategic initiatives across the industrial, transportation and electronics end markets we serve, demonstrating our ability to balance short-term cost optimization and long-term strategic investments.
Looking ahead, I am confident that our global execution will deliver long-term best-in-class financial results consistent with our growth strategy. Now, let’s move on to business design wins during the second quarter. For industrial end markets on slide seven, our leading technologies are critical for empowering greater sustainability and safety. The ongoing focus on renewables is expanding the requirement for our reliable products. During the quarter, we leveraged our deep customer relationships and technical expertise to secure significant business in combiner boxes for solar and battery storage systems. Given the breadth of our product portfolio, we also see substantial new business opportunities related to government-funded initiatives and infrastructure investments that support electrification.
We won business with several of our solutions for a construction project, for a battery plant, the major automotive manufacturer. Our high-power solutions capture business with customers in their energy management systems. Within industrial safety, our leading product performance and application knowledge won us additional business for commercial kitchens with major retailers. We also grew our business in HVAC and industrial motor drives based on our customer relationships and expansive offerings. Our differentiated capabilities position us well to partner with customers to meet their increasing requirements than the global structural themes of sustainability and safety, which will continue to drive our long-term growth. Turning to our transportation end markets on slide eight.
We continue to see meaningful product content opportunities driven by the ongoing push towards greater sustainability, connectivity, and safety. In passenger vehicles, our new business opportunity pipeline is robust, given the increasing complexity related to the electrification of platforms. During the quarter, our differentiated high-voltage product features and technical support delivered wins for onboard chargers and high-voltage power distribution. For our electrical sensor products, we are seeing intensifying design activity for battery management systems and drive applications. Our technical capabilities and innovative solutions won significant business with a multinational automotive manufacturer. We captured business by leveraging our proprietary technologies and unmatched designs to grow our presence in conventional low-voltage applications.
Within electronification, as it relates to safety, our design expertise and broad portfolio won business within in-cabin cameras and for hands-on detection applications. Across commercial vehicle applications within electrification, our design capabilities and innovative solutions secured significant business for high-voltage power distribution modules in construction equipment and battery management systems in two and three-wheelers. In broader commercial vehicle markets with our local engineering support, we continue to increase our product content in agricultural equipment applications. EV charging infrastructure expansion efforts continue to accelerate with the electrification of transportation applications. With our broad range of solutions, we secured significant global business with our power semiconductors, electronic components and fuses.
Solutions from our Western Automation portfolio further expand our new business opportunity pipeline. Given the intention to make charging infrastructure more accessible and widespread on a global scale, we’re extremely well positioned with our comprehensive technologies to participate in the proliferation of stations worldwide. Moving on to slide nine. In electronics end markets, we continue to engage in very robust design activities, customers focus on meeting future needs across the structural growth themes of safety, connectivity and sustainability. Our global reach and superior design support are accelerating demand for our reliable products. We won a global business for life-saving medical devices across some multiple applications, including a wearable defibrillator and in an implantable device.
Connectivity requirements are driving wins across data centers, including for our C&K Switch portfolio for communications infrastructure. We expect opportunities like these to become more prevalent as high-performance computing for machine learning and AI expands requirements for next-generation platforms. We are seeing good success with cross-selling C&K products to Littelfuse customers. Sustainability continues to drive wins in power supplies for power tools and LED lighting. Our pipeline of new business opportunities remain strong, and our global teams are positioned to support customers, which will continue to expand our electronics content across diverse applications with a focus on sustainability, connectivity and safety. We continue to generate robust design win momentum and the array of new business wins we have secured spans a wide spectrum of end markets, applications and geographies, highlighting our global capabilities and footprint.
Through engaging closely with our customers’ engineering teams, our collaborations have been instrumental in expediting next-generation product development and design-in activities. With the organic growth stemming from these new business activities, complemented by our strategic acquisitions, we are confident that our long-term growth trajectory will be further fortified and sustained. 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 thank you all for joining us today. Please turn to slide 11 to start with our second quarter results. Revenue of $612 million, was down 1% and down 8% organically versus last year. Acquisitions added 7% of growth. GAAP operating margins were 15%. Adjusted operating margins were nearly 17% and EBITDA margins were 22.5%. For the first half of this year, we’ve delivered adjusted operating margins just shy of 18% and EBITDA margins of 23.6%, continuing to drive results in our targeted margin ranges. Our strong margin performance reflects our portfolio diversification efforts across both end markets and technologies, expansion of our partnerships with customers and distributors and continued focus on operational excellence.
Second quarter GAAP diluted earnings per share was $2.79 and adjusted diluted EPS, $3.12. Adjusted EPS finished lower than projected due to a combination of the drop-through from slightly lower sales than expected, unfavorable non-operating items, partially offset by some reductions in operating expenses. Our GAAP effective tax rate was 18%. The adjusted effective tax rate was 17.4%, which was higher than projected. The combination of the higher tax rate and unfavorability from non-operating investments reduced EPS by $0.09. Operating cash flow in the quarter was $98 million, and we generated $82 million in free cash flow. Year-to-date, we generated $110 million in free cash flow, yielding a 69% conversion rate. We reduced inventory levels through the first half of the year, contributing to our solid cash flow performance.
We expect to drive both a higher cash generation and free cash flow conversion rate in the second half as per our typical seasonal patterns. Our capital structure remains very strong, ending the quarter with 1.4x net debt-to-EBITDA leverage. We remain both disciplined and consistent in our capital allocation. We continue to prioritize organic and inorganic opportunities, driving ongoing growth and returns while ensuring return of capital to our shareholders. Our Board of Directors approved an 8% increase in our quarterly cash dividend equating to a $2.60 annual rate. We’ve grown our dividend 12% on a compounded annual basis since inception, a testament to our long-term earnings trajectory and cash generation power. Moving to our second quarter results across our segments, please turn to slide 12.
Electronics sales were down 2% year-over-year and down 13% organically. The delta being the C&K acquisition. Operating margins were nearly 23% and EBITDA margins ended at 28.5%. While transitory inventory destocking has impacted our near-term growth trajectory, we continue to see underlying growth drivers across our portfolio. In the quarter, we continued our positive momentum across industrial, medical, and renewable applications, and also auto electrification themes. Along with the operational groundwork we’ve laid over time, we’ve maintained strong margin performance in a challenging market environment. Turning to the transportation segment on slide 13, sales were down 5% overall and down 6% on an organic basis. We saw divergent trends across end markets with our passenger vehicle business growing 7%, a significant driver of the double-digit content outgrowth we realized across the breadth of our automotive portfolio.
Our commercial vehicle business was down 17% on an organic basis. While end market growth continued, we saw higher-than-expected inventory destocking across our customers. Segment operating margins finished just under 5% and EBITDA at 11%, below our expectations. Weaker sales and related volume deleverage across our commercial vehicle business slowed down our expected margin improvement. We are taking actions to reduce costs further, expand the scope of our operating footprint shifts, and optimize product and customer profitability. We are also progressing on our integration initiatives to overcome the margin dilution from the Carling acquisition. We remain committed on driving an improved segment margin trajectory to our mid-teens margin target.
Across our industrial segment on slide 14, sales were up 15% and up 9% organically. We continue to drive wins across a broad set of higher growth and newer end markets, while demonstrating the value we continue to deliver to our customers. Operating margins were 16.8% and EBITDA margins finished at over 21%. Turning to the forecast on slide 15. We continue to see growth across many of our end markets. However, we expect this to be overshadowed by inventory destocking within electronics and transportation through this year, affecting both sales and margins with the volume deleverage. With this backdrop, we expect third quarter sales in the range of $570 million to $595 million. At the midpoint, we project sales to be down 12% versus last year.
By segment, we expect sequential sales growth across industrial, offset by a decline across electronics and transportation. We expect adjusted EPS to be in the range of $2.48 to $2.72, which assumes a 19.5% tax rate. Slide 16 includes some additional full year 2023 color. At current foreign exchange rates, we expect the $0.35 unfavorable impact on EPS and no material impact to sales. We expect $66 million in amortization expense and $40 million in interest expense at current interest rates. We expect a full year tax rate of 18% to 19%, higher than previous projections due to shifts in earnings mix across jurisdictions. And we are modestly reducing our capital expenditures to the range of $100 million to $110 million. Dave referenced our announcement on the future acquisition of the Dortmund Semiconductor fab.
As the expected close is early in our fiscal year 2025, we do not expect this transaction to have a material impact to our 2023 or 2024 financial results. Over the years, we’ve diversified our portfolio, continuing to pivot to higher-growth markets and increased organic investments while leveraging strong secular themes. Our portfolio expansion is helping us weather the interim cycling across certain markets and transitory destocking. We remain focused on driving our business forward in the second half, elevating our cash generation and continuing our operating margin trajectory in the high teens for the year. We’re confident that our ongoing execution positions us to deliver on our long-term growth strategy. I’d like to extend my gratitude to all of our team members for their unwavering hard work and dedication.
Your efforts have been instrumental in continuing to drive our success. And with that, I’ll turn it back to Dave for some final comments.
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David Heinzmann: Thanks Meenal. In summary, on slide 17, we have achieved strong year-to-date results. The Littelfuse business model has proven its resilience in this dynamic environment while supporting the strength of our growth strategy. This is evident in the consistent double-digit sales and earnings growth achieved over the past five, 10 and 15 years. Our expansion into high-growth end markets, technologies and geographies has diversified our business and significantly improved our profitability. Our experienced teams have refined our playbook, enabling us to effectively navigate through ever-changing environments. We remain excited about the opportunities we have ahead of us and confident in our ability to deliver sustained long-term value for all stakeholders through continued execution, diversification, and strategic investment for growth. And with that, I will now turn the call back to the operator for Q&A.
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