Yahoo Finance Littelfuse, Inc. (NASDAQ:LFUS) Q1 2024 Earnings Call Transcript
Littelfuse, Inc. (NASDAQ:LFUS) Q1 2024 Earnings Call Transcript May 1, 2024
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Operator: Good day, everyone, and welcome to the Littelfuse First 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.
David Kelley: Good morning and welcome to the Littelfuse First Quarter 2024 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 first quarter and a copy of our earnings release and slide presentation is available in the Investor Relations section on our website. A webcast of today's conference call will also be available on our website. Please advance to Slide 2 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 Form 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.
David Heinzmann: Thank you, David. Good morning and thanks for joining us today. Let's start with highlights on Slide 4. The first quarter of 2024 brought a continuation of several of the themes we previously discussed and expect it to continue into the New Year. We continue to see meaningful new business opportunities and design activity across our diverse set of end markets. Our customers remain committed to advancing sustainability, connectivity and safety themes, and we are helping them drive innovations across a broad base of applications. Our experienced global team continues to deliver solid execution amid an ongoing challenging macro environment. Following a record cash flow year in 2023, our strong first quarter cash generation reflects our disciplined operating model.
Finally, our balance sheet and significant financial capacity provide us with the continued flexibility to enhance our long-term positioning. Our first quarter results reflect our resilient business model, ongoing diversification initiatives and strong execution. We delivered first quarter sales above and earnings within our prior guidance range. I want to thank our global teams for their continued hard work and commitment to serving customers and growing our business. With the dynamic environment we experienced in 2023 continuing into 2024, I wanted to provide a brief update across our businesses. In the first quarter, we continue to see channel and OEM inventory reductions and also some areas of expanded end market weakness across our businesses.
Regarding our Electronics segment distribution exposure, while still elevated, we saw consistent channel inventory reductions throughout the quarter. As we have discussed prior -- during prior earnings calls, we have been in an elongated electronics destocking cycle and we continue to see signs of ongoing inventory reductions at EMS and end customers. However, we see emerging signs that suggest we are potentially nearing an inflection point. Our passive electronics business benefited from an uptick in order rates late in the first quarter and entered the second quarter with a more typical backlog and a book-to-bill above one. Regarding our semiconductor exposure within the Electronics segment, we are seeing weakening industrial demand and ongoing softness across consumer applications.
We expect the softer industrial outlook will impact our semiconductor sales through the next couple of quarters. Despite near-term trends our Electronics segment remains well positioned to capitalize on strong long-term growth drivers and our portfolio diversification initiatives have driven improved profitability relative to prior trough cycle levels. Moving on to our Transportation segment. Our passenger vehicle exposure continues to benefit from our balanced product capabilities and broad technology leadership. We are seeing solid interest in our core products as customers seek to better align with consumer demand for internal combustion and hybrid vehicles. In China, we continue to show solid traction in low voltage applications for high growth local OEMs. The China auto industry is aggressively delivering vehicle advancements and we are benefiting via strong content per vehicle expansion in the region.
Globally, we believe customers are aiming to balance near-term consumer preferences with long-term electrification plans and we continue to generate solid design wins with our high-voltage fuses and current sense. Regardless of powertrain mix, we are well positioned to support our global passenger vehicle customers with innovative products that will drive long-term growth. Regarding our commercial vehicle exposure, we are also seeing ongoing distribution channel inventory reductions, yet our commercial vehicle initiatives are driving cost improvements while pricing actions are also bearing fruit, ultimately benefiting our Q1 results. Taking a step back, we are making solid progress with our previously disclosed transportation segment actions as our product line initiatives and cost structure improvements helped to drive sequential margin improvement in the first quarter.
Finally, with our Industrial segment, we are seeing softer-than-expected end market demand, which we believe will continue through the next couple of quarters. In the first quarter, we saw incremental in-demand weakness led by MRO and construction, charging infrastructure and factory automation applications. Demand is mixed for renewable applications with energy storage strong across all regions, while the solar market softened in the quarter. Yet industrial safety applications continue to show signs of growth and we are seeing early indications of troughing residential HVAC demand. Meenal will provide more segment level details shortly. Now let's turn to our end markets and design activity. Moving to Slide 6 and electronics design activity.
We continue to be a leading technology enabler for a broad base of customers. We are seeing new product launches gain traction as customer design activities accelerate. In the quarter, we secured a meaningful medical win with our custom power semiconductors for a customer in China. We also won business for multiple appliance customers in China for both fuses and switches. We delivered a semiconductor win for a space-related communications application. We also won business for data server power supplies for a customer in Taiwan. Finally, we delivered a meaningful telecom win in India that will utilize our core circuit protection offering. Beyond near-term trends, structural electronics end market drivers such as artificial intelligence, automation and technology reliability remain key opportunities as our customers continue to depend on us for innovative engineering expertise.
Turning to Slide 7. Industrial design activity remains solid across our exposures, supporting long-term industrial end-market growth themes. In the first quarter, we had success in North America and renewables where we had a meaningful win within an energy storage application with a leading customer. We won business with multiple customers for industrial safety applications in North America, highlighted by commercial kitchen. We also secured wins for EV infrastructure applications across multiple regions, including Level 2 charging wins in North America and Europe and DC fast charging win in Asia. Taking a step back, long-term industrial investment remains strong, supported by infrastructure spend, increasing electrical efficiency requirements and global commitments to decarbonization.
We will continue to benefit from deep engineering expertise and product offerings as well as continued execution reflected in ongoing strong design wins and broad customer momentum. Moving to Slide 8. Within transportation and our passenger vehicle exposure, we continue to leverage our balanced product capabilities, global scale and technology leadership as customers adapt to evolving consumer preferences. In the quarter, we secured customer wins for high-voltage fuses across multiple regions, including North America, China and Korea. We won multi-technology business for an onboard charging system in Europe. We also won low-voltage fuse business for multiple OEM customers in Europe. Finally, we secured a motor protection win for an electric motor application in Europe.
We remain encouraged by our passenger vehicle momentum, supported by our continued solid cadence of design wins across electrification and electronification applications. While we are seeing customers in North America and Europe adapt to shifting consumer preferences, which could impact the pace of EV adoption, we are confident in our well-rounded long-term automotive content opportunity. Regarding our commercial vehicle exposure, we delivered several wins from various applications and regions in the quarter. We secured a custom multi-technology opportunity for an electric commercial truck provider in Europe. We won switching business for an agriculture equipment provider in North America and delivered wins for material handling and mining customers.
Long term, we believe we were well positioned to enable ongoing electrification and electronification advancements in material handling, agriculture and construction equipment and heavy-duty truck and bus markets. Across our businesses, our innovative solutions and technical expertise continue to resonate with our broad customer base. 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 for joining us today. Please turn to Slide 10 to start with details on our first quarter results. Revenue in the quarter was $535 million, down 12% versus last year, both in total and organic. The product line pruning actions we discussed last quarter reduced sales 2%. GAAP operating margins were 10.3% and adjusted operating margins 11%. Adjusted EBITDA margins finished at 17.1%. Foreign exchange had a 50 basis point unfavorable impact to margins largely due to cost increases from a stronger Mexican peso. First quarter GAAP diluted earnings per share was $1.93 and adjusted diluted EPS was $1.76. Our first quarter GAAP effective tax rate was 13% and adjusted effective rate was 19.3%.
Our adjusted effective tax rate was slightly lower than expected due to some onetime discrete benefits. Please turn to Slide 11 for updates on our capital allocation. Starting with cash generation, we began the year on a strong footing, generating $57 million in operating cash flow, up 7% versus last year. Free cash flow was $42 million and 86% conversion to net income. We remain on track to achieve our expected 100% free cash flow conversion target for the year. We continued our focus on working capital optimization this quarter, reducing both inventory dollars and days on hand. We ended the quarter with $562 million of cash on hand and net debt to EBITDA leverage of 1.4 times. We're able to leverage the strength of our balance sheet as we continue to assess opportunities and remain disciplined in our capital allocation strategy.
Our goals are unchanged with an intent to return about 40% of our free cash flow to shareholders and the balance invested in strategic acquisitions. In the quarter, we returned $32 million of capital to shareholders, evenly split between our quarterly dividend and share repurchases. During the second quarter, we've repurchased an additional $23 million in shares through last Friday. We also announced yesterday that our Board approved a new three-year $300 million stock buyback authorization effective May 1st. We will continue to assess periodic share buybacks. Especially when we believe our valuation doesn't reflect our continued confidence in our long-term growth strategy. Please turn to Slide 12 for our product segment highlights, starting with the Electronics Products segment.
Sales were down 19% versus last year in total and organic. On an organic basis, sales across passive products were down 10% versus last year, while semiconductor products declined 25%. The increased weakness we saw across industrial markets with a greater headwind across our semiconductor products. Operating margins in the quarter were 13% while EBITDA margins finished at 19.8%. We remain confident in the margin resiliency in the Electronics segment with the work we've done on portfolio diversification, improved execution and cost structure. We expect robust improvements in our segment margins as we return to growth. Moving to our Transportation Products segment on Slide 13. Segment sales were up 2% and up 3% organically. Sales were negatively impacted 6% versus last year from the pruning actions we've been undertaking.
Across our passenger vehicle business, sales grew 12% organically. We continue to see strong growth from both content and product launches we supported especially in China. Within Commercial Vehicles, sales for the quarter were down 6% organically, a combination of continued inventory destocking at distribution partners and our product line pruning actions. For the segment, operating margins were 9.5% and EBITDA margins finished at 14.6% in the quarter, expanding margins sequentially, 480 basis points and 380 basis points, respectively. We've taken a number of concrete actions to drive improved profitability, including a balance of price increases and product pruning. As well as structural cost actions to improve gross margins and reduce operating expenses.
We are focused on steady improvements as we work our way back to double-digit margins. On Slide 14, the Industrial Products segment was down 13% and 14% organically. We saw weakness from an expanded set of industrial end markets and continuation of inventory reductions at some OEMs. Operating margins finished at 6.5% and EBITDA margins were 11.9%, both down versus last year and below our expectations. Volume is a key driver in our typically strong margin profile. We are also in the midst of footprint shifts to improve profitability and add capacity, which produced some near-term manufacturing costs and constraints. We expect progressive margin recovery in the coming quarters. Please move to Slide 15 for the forecast. Summarizing Dave's earlier comments, we continue to see channel and end customer inventory reductions, so we believe we are nearing an inflection point.
We're also seeing select areas of expanded industrial market weakness. And as reported through the headlines, inflationary trends are continuing. With these assumptions, we expect second quarter sales in the range of $525 million to $555 million, equaling 1% sequential growth at the midpoint. By segment, we expect sales across electronics to be flat and for transportation and industrial to be slightly up. With the recent shifts in a number of currencies, foreign exchange is a net unfavorable impact to us for revenue and earnings. For the second quarter, we project a 1% headwind on sales and a $0.16 negative impact to EPS. We're projecting adjusted EPS to be in the range of $1.65 to $1.85, which assumes a tax rate of approximately 23%. As we've discussed historically, our second quarter guidance also includes higher stock compensation expense versus other quarters due to certain retirement provisions.
This has an unfavorable $0.30 impact to EPS and a negative 170 basis point effect on margins in the quarter. Please turn to Slide 16 for our full year 2024 expectations. We anticipate a return to sales growth later this year. We expect product line actions to reduce total sales about 2% and reduced transportation sales growth about 5%, slightly less than our projection last quarter. And at current rates, we expect foreign exchange to be a headwind of 1% to sales and a $0.50 headwind to EPS. We've made significant progress in improving through-cycle margins within our Electronics segment and are on a solid path for improvements to our Transportation segment profitability. However, the elongated inventory destocking and end market variability has impacted the timing of our volume recovery.
With these market undercurrents, we expect company operating margins to finish in the mid-teens for the year with improvements as the year progresses. Across our segments, we expect electronic operating margins to average in the upper-teens and industrial operating margins in the mid-teens. We remain confident in the progress we are making in transportation and expect to exit the year with high single-digit operating margins. Another modeling items, we're assuming $64 million in amortization expense and about $39 million in interest expense. We are estimating a full year tax rate of around 22%, slightly higher than our prior estimate due to shifts in earnings mix by jurisdiction and we expect to invest about $100 million in capital expenditures.
We are executing through a difficult macro environment and we're well positioned as we emerge out of it. Our priorities remain focused on the areas we can control, ensuring we are well poised as destocking diminishes and markets recover to drive growth and commensurate margin expansion. We're leading sustained profitability improvements across our transportation segment and continuing our path forward to best-in-class profitability and cash generation. Thank you to our Littelfuse 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.
David Heinzmann: Thanks, Meenal. While the first quarter brought a continuation of many of the themes we have discussed last year. We believe our results and customer momentum continue to support our long-term growth strategy. Our increasingly diversified business model and agile teams improved the profit resiliency while positioning us for meaningful long-term earnings expansion. Our continued design win momentum reflects our robust technology offerings across broad end markets and the strength of our customer relationships. Our strong cash generation and balance sheet position us to further capitalize on growth opportunities while we are remaining confident that we will return to growth during 2024. We are also confident that we will continue to execute through cycles, drive long-term double-digit revenue growth and leveraged earnings expansion and deliver top-tier shareholder value.
I want to again thank our global Littelfuse team for their hard work and commitment to our customers and supplier partners. And with that I will now turn the call back to the operator for Q&A.
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