Good day everyone ,and welcome to the Littelfuse Third Quarter 2022 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to the Head of Investor Relations, Trisha Tuntland. Please proceed.

Good morning, and welcome to the Littelfuse third quarter 2022 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 third 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 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 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.

Thank you, Trisha. Good morning and thanks for joining us today. Let's start with Slide 4, which provides an overview of recent highlights. We delivered strong third quarter results, which were above our expectations. Our outperformance was driven by a faster-than-expected recovery from China COVID shutdowns in the second quarter, and continued growth from global business wins, and progress on our operational initiatives. We achieved revenue growth of 22% and organic growth of 8% despite FX headwinds. We have created tremendous demand for our broad range of products and expanded our capabilities through acquisitions while continuing to deliver margins and earnings growth above our strategic long-term targets. I'd like to thank our associates around the world for another outstanding quarter. I'm particularly proud of our sustained success, which is an outcome of our highly-skilled people and the market-leading solutions we deliver to customers. Our year-to-date record performance, including double-digit sales and earnings growth is a testament to our global team's execution across the breadth of our end markets and the power of our strategy, which is shown on Slide 5. We are investing for growth, both organically and through acquisitions to diversify the end markets we serve and expand our organic growth opportunities within the structural growth themes of sustainability, connectivity, and safety. As a result, we continue to increase our product content and share gains in high-growth markets and geographies. Our significant achievements to date position us for ongoing long-term profitable growth and top-tier shareholder returns. Meenal will provide additional color on our strong financial performance and fourth quarter outlook. Moving on to Slide 6, we published our 2021 Sustainability Report which is available on our website. Last year we set a goal to achieve a greenhouse gas reduction of 38% by 2035. To help accomplish this goal, we've…

Thanks, Dave. Good morning everyone and thanks for joining us today. Let's start with Slide 11. We continued our strong execution on both growth and performance exceeding the high-end of our sales and earnings guidance for the third quarter. Revenue was $659 million, up 22% over last year and up 8% organically. Our Carling and C&K Switches acquisitions added 18% and foreign-exchange reduced revenue 4%. GAAP operating margins were 18.5%, while adjusted operating margins were 21%. Adjusted EBITDA margins were nearly 26% continuing the trend solidly above our 21% to 23% EBITDA margin target. Third quarter GAAP-diluted earnings per share was $3.02 and adjusted diluted EPS was $4.28, up 8% over last year. Our topline growth and margins continued above our long-term target ranges again this quarter. We continue to focus on the elements we can control as we remain positive on price cost, offsetting inflationary cost pressures, and lingering supply chain challenges. We've also continued to invest for ongoing growth including investments in our newly acquired businesses. We had another strong quarter of cash generation. Through the third quarter, we generated a record $313 million in operating cash flow and $236 million in free cash flow, up 29% versus last year. We ended the quarter with $474 million of cash on hand and our net debt to EBITDA leverage at the low end of our target range. The strength of our cash generation and balance sheet is a competitive advantage and provides us the flexibility to allocate capital for several vectors of growth while also continuing to return capital to our shareholders. Let's move to third-quarter commentary by segment on Slide 12. In electronics, our performance continues to be strong with 7% organic growth on continued solid volume and pricing across the segments. Operating margins remained robust at nearly…

Thanks, Meenal. In summary, on Slide 19, our talented associates, investments for growth, and operational excellence have delivered record performance this year. Consistently over the last several years, the strength of our growth, strategy, and resiliency of the Littelfuse business model has resulted in sustained record of double-digit compound annual sales and earnings growth. Through this time, we have expanded our leadership and presence in target high-growth end markets and improved profitability throughout the organization. We've honed our playbook to successfully manage through dynamic environments, prioritizing long-term strategic investments while managing our overall cost structure. Our track record, double-digit sales, and earnings growth over the last 5, 10, and 15 years, speaks to the resiliency of our business, leveraging the experience of our teams, prioritizing growth investments in attractive end-markets, and diversification of our business. This gives us confidence in the longevity of our strategy, which positions us for continued success and will deliver ongoing value to all our stakeholders. With that, I will turn the call back to the operator for Q&A.

[Operator Instructions] And your first question comes from the line of Matt Sheerin from Stifel. Your line is open.

Yes, thank you. Good morning everyone. My first question is just regarding that inventory correction you're seeing at the distribution channels. Could you give us an idea - and you also mentioned the book-to-bill was below 1 in electronics, could you tell us what that was and how you see that correction playing out, we talking about a couple of quarters, any visibility there in terms of when that bottoms out?

Sure, Matt. So let me start a little bit with the - with our book-to-bill. Kind of baseline behind that is, we're seeing point-of-sales data from our distribution partners continuing to be pretty robust. We've talked a bit about some softness in consumer-facing types of applications and in China, in general, some softness. But beyond that POS remains pretty solid through our channels on the electronics side of things. If you look at book-to-bills, it's a bit of - it's a mixed bag a little bit from the standpoint of our passive products. Really, particularly driven by the fact that we brought down our lead times and there is some rebalancing going on, it's well below one. However, the semiconductor products are still remaining around one, so it's a bit of a mixed bag on the book-to-bill side of things there, so there clearly there is some rebalancing that we're seeing from some of our partners. As far as the length of the cycle and things like that or how long we might see that, I'm not sure that we have great visibility into it, we can look back in history and see what history would say. But I think the dynamics in the market this cycle are perhaps a bit different, so it's not clear to us exactly what the length of any kind of rebalancing might look like.

Understood, okay. And then on ASPs, I know your ASPs have trended higher year-on-year and that's helped on the topline. But given the - some of the bookings pressure and perhaps your input costs coming down, are you seeing pricing back to normal? And as we get into your OEM contracts for next year what's your take on what the pricing environment looks like?

Yes. I would say from a pricing environment of course it's different across the different segments of our business. And there are some input costs that are coming down but there are others that are still going up. So I would not say we're kind of past inflationary headwinds that we're dealing with. So when are seeing those, we do pass those along to customers where we can. In the electronics side of this, we have not seen kind of change in pressure on the pricing environment there. We feel like the adjustments we've made are going to be pretty sticky. We don't really see those changing too much. We've talked openly about the fact that the more challenging in transportation, particularly the passenger car side of our business where it's difficult to pass those along in multi-year contracts, so we've been able to pass along some costs and will get further gains on that as we move forward in the next couple of quarters, pricing in the passenger car side of things. The industrial side, we've certainly been successful in passing that along and we don't see that environment changing either. So we feel pretty good about the pricing environment we're in right now.

Your next question comes from the line of David Williams from Benchmark. Your line is open.

Good morning. Thanks for letting me ask the question and congrats on the results this quarter very, very solid execution. I guess, maybe my first question is if you're kind of thinking about the macro and kind of where we are now, obviously, there's lots of moving pieces here but what do you think in terms of the demand environment is looking out two to three quarters if we see a recession or a slower-growth environment, which segments would you expect to be most impacted? And do you feel like maybe you've gone through some of that now with some of the inventory rebalancing that - you will be better-positioned as we kind enter a slower period of growth?

Yes. I think it's a good question. As we've often talked about, we're highly focused on end markets and applications and segments that have kind of outsized growth over periods of time. So we continue to see a lot of strength in those core areas and the mega-trends that we kind of build our strategy around, we don't see those shifting too much. We've been open about the fact that the consumer-facing side, which is a relatively small part of our electronics business has already seen that slowness. So we feel pretty good about the demand environment hanging in there in those core areas. As far as any kind of inventory rebalancing, that take some time to work their way through that, that's not all going to happen in one quarter, that's going to be a kind of a continuing headwind for us for a period of time to kind of the electronics side. We don't really see so much on the industrial or commercial vehicle side where inventories are a concern. Pass car we've seen a little bit there where there's some pullback from inventory that was built in the last year or so, and that's certainly impacted our growth rate in passenger car. And that probably continues a bit into the fourth quarter and maybe even leads into 2023, but that should be behind us relatively quickly on the asset.

Great. Thanks for the color there. And I was listening to the Vishay call earlier this morning and they had talked about the IC supply chain seemingly improving a bit which seems to be pulling in maybe some of the other content around that, just kind of curious if you're seeing that and if that dynamic is something that could help maybe ease those - that inventory digestion period that you're speaking of?

Yes. Clearly, I think it's - if you look across the different semiconductor types of products, there are some areas that are certainly using and other areas that continue to be fairly tight on supply that are continuing. Are they headed in the right direction, likely it is, I think that may help free up some of our customers. It's not so much of our first order impact to us while we do buy some semiconductors for some of our sensor components or some of our more complex relay products and things that impacts us, but it's fairly modest impact, it's really more what impact that might have on our customer base. So that may free up a bit and as we've seen we do expect some modest growth in global car build in the coming year which really is more driven by the availability of components and things like that, that are driving some of that growth so it could help a bit there.

Your next question comes from the line of Joshua Buchalter from Cowen. Your line is open.

Good morning. Thanks for taking my question. I kind of have a follow-up on that last response. So it sounds to me like you're indicating that some of your customers who haven't been able to get semiconductor products are therefore withheld procuring some of your parts whether in electronics or transport verticals. Is that sort of fair and is there any way to quantify how much you want to impact [indiscernible].

Yes. I think that's a challenging question to give a crisp answer to. Really, if I look back on the last year or two years, our customers have absolutely been impacted on their ability to produce what they wanted to because of shortages in the supply chain and that clearly has been an impact. As that begins to ease, I think that will become less of an impact and that balance is a little bit with slowing economies and overall demand picture. So we're not seeing some major freeing up if you will of demand that's coming from that. But we know like in the passenger car side, we know dealer inventories are low and that was really driven by the ability to produce products, vehicles. So we do think that it will balance out and that will drive some of the cargo growth going into the next year. But. I think it's a little difficult to say otherwise.

Understood. Thank you. I guess, stepping back, you've had a sustained period of growth above your organic target and where you're going through sort of an inventory digestion period now, but still decent year-over-year growth. I guess stepping back it's been a bit since you gave that target, is the 5% to 7% organic growth number still the right way to think about how in a normalized environment you would expect the business to grow in 2023 acknowledging the material outperformance in the last couple of quarters? Thank you.

Yes, what I would say is when we put out a five-year strategy, we talked about organic growth rates that we expected between 5% to 7% through the cycle and we know we operate within a cyclical industry. And so there are going to be times where we're well ahead of that 5% to 7% and there may be some times where we're behind that 5% to 7% depending on what's going on in the marketplace. We feel very good about that 5% to 7% achieving or over-achieving that over our five-year strategic horizon. And I think also it's important to kind of look at that last slide, I think it was Slide 18, talking about the resiliency of our business model. If you look over that, it's a 15-year chart. And if you look at over the last five years, the last 10 years, or last 15 years, we have driven double-digit top-line growth and double-digit bottom-line growth. So I think, it certainly demonstrates the strength of our growth strategy and quite frankly the resiliency of our business model. So the 5% to 7% organic growth over the horizon we absolutely feel very positive about it.

[Operator Instructions] Your next question comes from the line of David Kelley from Jefferies. Your line is open.

Hi, good morning team. Thanks for taking my questions. The cost-reduction actions that you're initiating in transportation, can you talk a bit more about those? The magnitude of that opportunity and the timeline of that process? And also, if you could just remind us, say, I think mid-teens EBIT margins as how you think about the transport business longer-term, just wanted to confirm that that's still the case given sort of the outgrowth opportunities you've referenced.

Sure. Thanks, David. Good morning. So, yes, I did mention talking about some cost structure actions that we've initiated and really its aligning our cost structure and really the production to what we're seeing in terms of the inventory levels that we're managing through which we were - we are reducing as well as when we think about our customers and their digestion and unwinding a little bit of inventory, we've adjusted our cost structure to align to what we see our own production inventory levels being over the next few quarters. So that's what I would say that's one element of it, but adding to that, I would say, in addition to the impacts that we've had, there've been some other things that we're doing, we've talked a lot about price. We continue to really work with our customers as Dave mentioned earlier, while we're seeing some cost come down, there's other costs that still continue to be up there. And so, we still continue to focus on price in - and coming back on a lot of the contracts there. So between that work that we're doing, we expect margins to improve again in the fourth quarter and going forward.

Okay. Got it, thank you. And just so now in the mid-teens EBIT margin target, is that still how you all think about longer term? just a quick follow-up, sorry.

Yes. No. Thank you. Yes and absolutely at a mid-teens margin we're still aligned to that mid-teens margin. We know there is work to do and there is also some market shifts that have to happen one being as car production is an example of the lowest levels that it's been in a long, long-time and it's been there for three, four years. So we definitely have to see some volume growth come back in a more meaningful way and then the other thing that's also weighing a bit on the margins a little bit is just the Carling acquisition and as we continue to drive synergies there, that's going to help us and that's going to move that trajectory back to our target of the mid-teens.

Okay, got it. Thank you. And then just one more follow-up here, slide 8, really helpful slide, thank you. The double-digit outgrowth opportunity, really a meaningful step-up from your historical targets in transportation. You referenced here your incremental product opportunities, are you also seeing stronger market share than previously anticipated given the new business pipeline you referenced?.

Yes, David. I think that's certainly a positive storyline for us as we look at our content outgrowth. And what I would say is, over the last - it's been kind of a - kind of a messy couple of years on demand and inventory builds and inventory kind of rebalancing that's going on now in the passenger car world. But if you look over the three years - the last three years, we have averaged outgrowth that is double-digit and that's been a step up for us. But I would say while we're seeing really strong performance and outgrowth within our traditional transportation definition from a segment perspective, we're also seeing dramatic growth coming from our electronics products into vehicles, and that's driven by the electronification, but it's also driven by electrification as well like some of the technologies that we apply to EV applications. They don't all come out of our transportation segments, some come out of our industrial, some come out of the electronics portion of the business. So that's really led to an uptick if you will in the outgrowth performance and the good news is design wins we're seeing this year and have been winning over the last couple of years, make us feel pretty good about continuing to be able to see that double-digit outgrowth. From a market-share perspective, in our traditional transportation areas, I don't think we're necessarily seeing a lot of market-share shifts, but we are seeing where we're picking up market share in some of our electronic components in the auto space. So it's a bit of a mix there on market share but also just content growth there. So, very positive story, and we feel very good about it.

Your next question comes from the line of Luke Junk from Baird. Your line is open.

Good morning. Thanks for taking my questions. I'll ask a follow-up question to start with on the sustainability of double-digit outgrowth in transportation. And what I'm wondering about is, in the past you've talked about multiples of content on EV and what I'm hearing this morning is if we think just cars in general and combustion cars, that there might be some lifting content, so maybe if you could speak to that? And then second on EV specifically, is there a change in your assumption around incremental content, or is it more a market-share piece that's driving the increase in outgrowth expectations? Thank you.

Yes. So I would say, yes, there is an uptick in content opportunity in traditional vehicles, particularly on the Electronics side. If we think about the electronification of vehicles, I would say that has been, yes, growing for us as well. So in traditional vehicles, there is certainly content growth. But as we think about the content growth at the double-digit level and now reaching kind of on an average vehicle across all types of vehicles and moving our content up to being averaged around $7, clearly the growth of EV, the accelerated pace of EV adoption has helped drive that content story forward and upwards for us. So there's gains for us on both sides. Certainly, I think there are larger gains on the electrification side and there are on traditional vehicles, but we're seeing gains on both aspects of it.

Okay. Thank you for that. And then my follow-up question probably one for - just hoping to animate the year-over-year margin walk and the sequential walk in transportation, so look year-on year you called out the 200 basis points of FX, plus Carling, just want to better understand the other pieces that are driving the margin change and then similarly if we look on a sequential basis sale is fairly flat sequentially but margins coming down. So I just want to touch on that, and then last piece of this, in the fourth quarter, expectation for a lift in the margin as cost action is rolling, I don't know if you want to put a finer point on that but just wanted to understand what's baked into guidance? Thank you.

Okay, let me - so I'll go back and then start on your questions. I think your first question was really on auto margins maybe unpacking, hey, what's been going on a little bit with the margin trend, that's what I heard. So maybe a couple of things, one, you highlighted one of the things that I mentioned, it's quarter-on-quarter Q2 to Q3, definitely the stronger dollar impact and we've talked about this in the past, but definitely impacted this segment the most, especially in the automotive part of our transportation segment and so that was a 200 basis point impact, largely with the Euro just because of the global footprint that we have across that business, so that's - that would be part one. I'd say part two, this combination discussion we were having about the inventory unwind, two things happened as part of that. When we talk about the Tier 1s and the sales that we have into Tier 1s now lowered because they're digesting inventory that they have but that also means our production levels come down. So the combination of just production coming down, call it a 100 basis points plus our sales volume being a little bit lower even though our content outgrowth story still holds true, in the near-term we're going to see some lower sales with the combination of that, that's also impacting margins. And then I'd say the last piece is that we're working on the price cost and I've talked about that a lot in the past several quarters, the fact that we are working on that not keeping pace with the cost increases just because of the timing of really going back and working on contracts and having to renegotiate them one by one. So with the efforts that we're going through with the unwind only thing for a period of time, and then with the ongoing synergy work we're doing around Carling, I would absolutely expect margins to start improving in addition to some of the cost-reduction actions we've taken as we go into the fourth quarter going forward.

Your next question comes from the line of David Silver from CL King. Your line is open.

Yes. Hi, good morning thank you. My first question, I guess, would be about your EBIT margins on the Electronics segment. So I recall maybe a couple of times over the past few quarters, there was a comment about the sustainable level of margins maybe being in the closer to the mid-20s. And, if I go back I think over the last five quarters, right, so third quarter of last year up to today, this is kind of the fourth out of five quarters where you've been meaningfully above that mid-20s threshold and I don't believe you made that same comment this time. So I'm just wondering, first off, what would you attribute the relatively durable margin strength in that segment? And then how would you characterize the ceiling or the sustainable level margins in that segment going forward? Thank you.

Sure. So that's the way and I'll just - I'll recap some of what you were commenting on in the past few quarters. What I talked about, I'd say the past four or five quarters as you noted is the fact that our Electronics segment, given volume - given the volume growth that we've seen giving - given a lot of the price work that we're doing and especially because a lot of that segment was going through distribution and then pricing, we're able to adjust and align pricing faster to market conditions as you're going through distribution. We've seen very strong margins coming there. We have positive price cost when it comes to the Electronics segment as well. And what I talked about was, given those dynamics and strong volume, the focus around positive price cost, I absolutely expected the average margins to be in the mid-20 percentage and I would say that even through now. I think we're - what I've talked about long-term is we would think about that Electronics segment margin target being closer to 20% overtime similar to Dave's comment when he was talking about overall Company organic growth. We try to talk about margins also through the cycle. And so for us, we know that especially in Electronics because of business going through distribution, there is - are times where we see inventory rebalancing going on as we mentioned, so we'll see margins move around a little bit. But I would say that 20% long-term target still holds in Electronics segment.

Okay. Thank you for that. My next question would be about the C&K switch acquisition. So, apologies if I missed this. But during the prepared remarks, I didn't recall you calling out that unit for maybe it's - either its EBIT contribution or its accretion impact on the third quarter. So I was wondering what quantitative details you might share? And then secondly, I am wondering longer-term is the goal of the acquisition to keep that as a contained or separate unit maybe even at fourth segment or if product breadth is important for capturing incremental business wins as I think you said a couple times, is this the case where ideally that - the functions within C&K switch would be integrated as appropriate into your other three segments, so maybe the optimal structure of that particular acquired business going forward? Thank you.

Sure. David, let me take kind of the structural and strategic side of it and Meenal can speak to the impact from a financial perspective. But the C&K switch business and acquisition, we feel by the way very good about, and the more we learn the more we like it, and it's a very crisp fit with our business and it really strengthens our ability to bring a broader offering to our core customer base. It also enhances our position within our distribution partners in electronics. So the C&K business absolutely is rolling up and being integrated within our Electronics business. Now as we talked about in our passenger car sorts of comments, C&K also has products that are being sold into automotive applications, industrial applications as well as traditional electronics types of applications. So it is pretty broad but our electronic components are that way and reach many end markets. So we are absolutely integrating it into our core business and I have had meaningful steps in doing that already and we feel good about it. We think these Board level switching capabilities and the strength of their micro stamping types of capabilities are very much a technology enabler for us as well, so we feel very good about that, and it will fit right into our business and will be fully integrated, it will not be standalone. So maybe Meenal you can give a little color on the impact to the business?

Sure. So maybe echoing one of Dave's comments, we really like C&K Switches the more we learn about it. And I would add, it's been a very well-run company so much so that we talked about the fact when we bought C&K Switches it was running EBITDA margins in the prior year of about 20% or so. So for us, as we think about margins even at that level, it's a bit dilutive to Company margins, it's a bit dilutive to Electronics segment margins, we think where the opportunities are to grow the margins will be, A, on growth for a lot of the reasons Dave mentioned topline growth as we go through there, and also just as we consolidate it within our business there's always cost structure improvements that we can do. Our goal in the next few years is really to align the operating margins of C&K to our company profile target that upper-teens level, so little work for us to do that in the interim. I mentioned between the C&K acquisition and the Carling acquisition, the combination of those two dilutive about 150 basis points, but we see definitely the path to improve margins in the next few years.

Your next question comes from the line of David Williams from Benchmark. Your line is open.

Thanks for letting me ask a follow-up here. I just - most have been touched on here, but I did want to ask about China and just wondering if there's any additional color in terms of the softness you're seeing there any particular areas or even geographically if there is anything notable there that you can provide color on?

Yes. I think primarily the softness there is driven by the end markets that are served through our customer base and when we talk about Chine, we are kind of talk about Greater China. So we probably have a higher split towards consumer-facing types of products at our customer base in Greater China, and we know those areas have been impacted earlier and more meaningfully. So that certainly has been a bit of a drag on the growth in Greater China, also just general economy is a bit soft in China and that the demand profile there has softened with maybe the exception of pass car where pass car has been reasonably strong - you know, car build growth in China driven by incentives there, but we think there's some caution in spending going on in China for sure.

Your next question comes from the line of Joshua Buchalter from Cowen. Your line is open.

Hi guys, thanks for taking my follow-up and letting me back in the queue. I wanted to follow up on the price and cost actions. It sounds like you're optimistic that they can support margin, but I was wondering given we keep hearing industrial weakening and consumer continuing to be soft, and you're going through digestion of some of your distributors. Have any of these --. have any of conversations changed materially over the last several quarters? And what allows you the confidence that you should be able to get pricing to come down in line with the cost at least in the short-to-medium term? Thank you.

First of all, I would say, for us, we have not seen softening in the industrial side of our business. I've seen that I've heard others kind of speak to that. As we focus very heavily on power conversion, renewable energy, HVAC, and these sorts of key market drivers for us, we have not seen softness as of yet. So on the industrial side, that's - I want to kind of correct that view. But from the pricing standpoint, conversations really haven't shifted too much for us. Clearly, we've talked about some of the rebalancing of inventory with some distribution partners, but that's really about their inventory position not about end demand and their POS is still holding up at a very solid level. So we continue to see end demand being pretty good on the Electronics side and through our distribution partners, so, no, we really haven't seen a lot of shift in momentum in the discussion from a pricing standpoint.

Yes. And maybe just the last piece I'll add just more on the cost side, Dave had mentioned this earlier, while we've seen some costs come down, there is other costs that have not come down or in some cases going up, right? When we think about energy costs in a lot of places putting - our own production costs there, wage inflation continues. So I would say that's another reason we're not - we're not hearing a lot from people around that because we still see those inflationary increases going on.

I appreciate your follow-up question, Josh. Thank you. That concludes our Q&A session. Thank you for joining us on today's call and your interest in Littelfuse. We look forward to seeing you during the Baird and Stifel conferences and talking with you again soon. Have a great day.