Littelfuse(LFUS) - 2023 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Revenue for Q1 2023 was $610 million, down 2% year-over-year and essentially flat sequentially, with an 8% organic decline offset by 7% growth from acquisitions and a 1% reduction from foreign exchange [33][34] - GAAP operating margins were 18.1%, adjusted operating margins were 19%, and adjusted EBITDA margins were just under 25%, indicating strong margin performance despite a challenging electronics environment [16][34] - Operating cash flow was $53 million, and free cash flow was $28 million, up 26% from the prior year [34][58] Business Line Data and Key Metrics Changes - The Transportation segment saw organic growth down 8%, with passenger vehicles down 6% and commercial vehicles down 9% [36] - The Electronics segment experienced a 2% overall sales decline and a 12% organic decline, with operating margins over 25% and adjusted EBITDA margins approaching 31% [37] - The Industrial segment achieved organic sales growth of 13%, with operating margins above 20% and adjusted EBITDA margins above 24% [52] Market Data and Key Metrics Changes - Demand in Asia was significantly down, while North America saw a smaller decline, and Europe experienced organic growth [48] - Inventory levels among electronics distributors remained elevated, with expectations for continued reduction into the third quarter [24][62] - The company noted strong demand in high-power applications such as renewables, industrial automation, and vehicle electrification, while consumer-facing markets remained soft [8][10] Company Strategy and Development Direction - The company is focused on integrating acquisitions to drive long-term profitable growth, particularly through the acquisition of Western Automation, which enhances capabilities in eMobility and industrial markets [7][30] - The strategy emphasizes sustainability, connectivity, and safety as key growth drivers across various end-markets [14][26] - The company aims to maintain average operating margins within the long-term target range of 17% to 19% while continuing to invest in growth opportunities [39][54] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate inventory rebalancing and varying end-market trends, highlighting the resiliency of the business model [9][41] - The outlook for the second quarter includes expected sales in the range of $607 million to $633 million, with a projected organic decline of 7% [53] - Management noted that while the current macroeconomic environment presents challenges, the company remains focused on executing its growth strategy and capitalizing on opportunities [54][57] Other Important Information - The company ended the quarter with a net-debt-to-EBITDA leverage of 1.4 times, below the target range of 1.5 to 2.5 times, and maintained a strong balance sheet with over $400 million in cash [18] - The company expects foreign exchange to have a 35% unfavorable impact on EPS for the year [39] Q&A Session Summary Question: Clarification on channel inventory situation in Electronics segment - Management confirmed that inventory levels are elevated but are declining month-to-month, with expectations for continued reduction into the third quarter [62][63] Question: Drivers of gross margin expansion despite flat revenue - Management attributed margin expansion to a balanced portfolio, strong performance in the electronics segment, and effective pricing strategies [64][65] Question: Details on footprint adjustments and expected savings - Management discussed ongoing evaluations of real estate portfolios post-acquisitions, with potential for consolidation of non-manufacturing sites [70] Question: Geographic demand trends - Asia experienced the most significant decline, while North America was down less, and Europe showed organic growth [48] Question: Competitive landscape in electric vehicles - Management acknowledged increased competition in the EV space but emphasized strong relationships with local OEMs in China and ongoing success in high-voltage applications [100][101] Question: Update on upward charging infrastructure strategy - The Western Automation acquisition is expected to enhance the company's position in EV off-board charging applications, particularly in Europe [102] Question: Resilience of the business model - Management expressed confidence in the improved resiliency of the business model due to diversification across technologies and markets [151]