Good day, everyone, and welcome to the Littelfuse Fourth 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 Fourth 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 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 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.

Thank you, Trisha. Good morning, and thanks for joining us today. Let's start with highlights on Slide four. 2022 was truly an exceptional year for Littelfuse, as we continue to expand our leadership in high-growth end markets with significant new business wins and strategic acquisitions. We delivered record revenue of $2.5 billion, up 21% over 2021, as each of our business segments grew sales double digits. Adjusted earnings per share was also a record of $16.87, an increase of 28% year-over-year. We launched our five year growth strategy in early 2021 and have delivered strong performance within the first two years, as shown on Slide five. Our strategy targets double-digit average annual growth, coupled with sustained profitability and leveraged earnings growth. We have averaged 32% revenue growth with organic revenue growth of around 20% and average adjusted earnings growth of 60%. I am particularly proud of our success as we navigated the unprecedented operating environment. I want to thank our global teams for their hard work and persistent commitment to serve our customers and significantly grow our business. Meenal will provide additional color on our strong financial performance. Moving on to Slide six. Over the last two years, we have deployed approximately $1 billion in capital for acquisitions, adding approximately $500 million in annualized sales to further strengthen our technologies and capabilities and diversify the end market in the geographies we serve. With the ongoing diversification of our business, we have expanded our addressable global market opportunities to over $20 billion. During 2022, we significantly advanced our strategic business initiatives within the structural growth themes of sustainability, connectivity and safety. We drove content and share gains in high-growth end markets, both organically and through acquisitions. We acquired C&K Switches, strengthening our global presence across industrial, transportation, datacom and aerospace end…

Thanks, Dave. Good morning, everyone. Happy New Year, and thank you for joining us today. Let's start with Slide 12. Revenue in the fourth quarter was $613 million, up 11% versus last year. Sales were up 4% organically after adjusting for acquisitions, foreign exchange and last year's 14th week. GAAP operating margins were 15.4% and adjusted margins 17.4%, expanding 40 basis points versus last year. Fourth quarter GAAP diluted earnings per share was $3.74 and adjusted diluted EPS was $3.34, up 6% over last year. Turning to Slide 13. we finished a record year with sales of $2.51 billion, up 21% versus last year. Sales were up 11% organically after adjusting for acquisitions, foreign exchange and last year's 14th week in the fourth quarter. GAAP operating margins were 19.9%. Adjusted operating margins finished at 21.6% and adjusted EBITDA margins were 26.4%, both expanding 250 basis points in the year. Incremental operating margins for the year were 34%. We finished the year positive on price cost, continuing to demonstrate the value we bring to our customers, while managing our cost structure. GAAP diluted EPS was $14.94, adjusted diluted EPS was $16.87, up 28% versus last year. Our full year GAAP effective tax rate was 15.7% and adjusted effective tax rate was 17.4%, finishing slightly better than our expectations. Our business model amplifies the continued strength of our cash generation. For the year, operating cash flow was $420 million and free cash flow $315 million, both records for the company and growing 12%. Our free cash flow conversion from net income was 84%, a bit lower than our historical trends as we've maintained higher inventory levels, aligning to our customers' needs and supply chain challenges. We have a strong balance sheet and capital structure, ending 2022 with over $550 million in cash…

Thanks, Meenal. In summary, on Slide 19, our talented associates, investments for growth and operational excellence have delivered record performance in 2022. Our track record of double-digit sales and earnings growth over the last five, 10 and 15 years speaks to the resiliency of the Littelfuse's business model and the strength of our growth strategy. Over this time, we have expanded our leadership and presence in high-growth end markets, technologies and geographies which has diversified our business and improved the resiliency of our profitability. But we may see some near-term market challenges, we are better diversified today and have honed our playbook to successfully manage through dynamic environments. Our experienced teams, investments in diversification position us for continued growth and will deliver ongoing substantial value to all of our stakeholders. And with that, I will now turn the call back to the operator for Q&A.

[Operator Instructions] Our first question will come from the line of Matt Sheerin with Stifel. Please go ahead.

Hi. Good morning. First question regarding the outlook for the Electronics business. You're talking about channel inventory correction. Could you give us an idea of what the channel inventories look like versus normalized levels? And what makes you think things are going to sort of bottom out in Q3 or Q2? The distributors are talking about having elevated levels up again this quarter. It sounds like it's going to take longer for them to work it down. So what kind of visibility do you have into that?

Sure. Thanks, Matt. And we've talked historically about the fact with our electronics distribution channels that kind of on average across the globe and across the different types of distributors. 14 to 17 weeks is really kind of our normal range that we choose to operate. And what I would say is that it varies, our weeks of inventory varies across the product lines. We have some of our core product lines that are a couple of weeks above that range. We also have some other product lines like our power semiconductor products that are on the bottom end of the range, and have really strong backlogs. So it's a bit of a mixed bag between them. But clearly, there's accelerating actions by our distribution partners to drive their inventory levels down. I know you were on calls with Avnet and Arrow's released today. And obviously, their inventories are pretty high. Right now, while our distributors book-to-bills are slightly below one. POS is still hanging in at a pretty good level out there. So kind of all of our views are really based on where are we at the current POS levels across the globe, and how does that drive our inventory actions for us. Obviously, you saw a little bit in the fourth quarter where these actions began to take place. So already inventory corrections were taking place in the fourth quarter. They're certainly accelerating into the first quarter. So it's our current view at the current POS levels and things like that, it should work our way through that through the kind of the first half of the year. But the reality is, as you know, cycles are kind of difficult to predict, and it's been a pretty unpredictable last two or three years, and it may be unpredictable this year as well. That's why we're kind of really looking one quarter out.

Fair enough. And then regarding the operating margin guide for the year of 17% to 19%, you're starting off in the low 16% range as you're guiding here. And I would think that Electronics would continue to be depressed or even maybe margins down in the June quarter. So what's going to drive those margins back to that 17% to 19% range?

Sure. Thanks, Matt. It in part aligns to what Dave just talked about, right? Which is, as we look out and look out at the landscape at current dynamics and current POS levels, specifically around Electronics, we would expect from where we sit today, a couple of quarters continuing of inventory destocking, but if POS levels continue to remain where they are we would see improving margins as our sales aligns to that. The other thing is in some of our prepared commentary I also talked about improving Transportation margins, and also talked about really maintaining margins in our target range across our Industrial segment. So the combination of all that gives us confidence when we think about total company aligned to that range on average for the year.

Okay. That’s helpful. Okay, thank you very much.

Thanks, Matt. We will take our next question please.

Our next question will come from the line of Luke Junk with Baird. Please go ahead.

Good morning, Luke.

Good morning, Trisha. Thanks for taking my questions everyone. I want to start with the margin question on Electronics. It's more of a mechanical question really. Could you just help us understand how that business should flex as growth turns negative here to start 2023? Specifically, we're hoping to tease out any differences between the passive side of your portfolio in the semiconductor business. I know the latter has some higher capital costs. So I just want to understand the margin dynamics given your sales guidance. Thank you.

Yes. I mean overall across our Electronics segment, right, margins -- the margins in that segment are the strongest across the portfolio. So when we see flexes up in growth, we get very strong incrementals and then the opposite happens on the decremental side. So there are different varying margin ranges across all of our products. But in general, we just look at the Electronics segment in aggregate. And know that compared to maybe other parts of our portfolio, like Transportation or Industrial, stronger incrementals and so also on the flip side some higher decremental margins. And as -- I know there were some of the questions about Q3 to Q4, we see that Q4 going into the Q1 forecast, and that's really what we're seeing there as we see that sequential sales decline going into the first quarter.

Thanks for that Meenal. And then staying with margins, could you [Technical Difficulty] just to the level of growth that you're contemplating to get to high teen margins in the industrial business this year. I know you've been targeting that. Longer term, I just wanted to understand growth dynamics and to what extent integration, especially Carling is being potentially reflected in that commentary as well incrementally. Thank you.

Sure. Let me just [Technical Difficulty] high levels we think about segments. We talked about from where we sit today, the Industrial markets remain strong. So we remain positive on that segment and where we sell into Industrial markets. We're confident in our above-market content outgrowth coming through across Transportation. We think that will be solid as well even across our Electronics segment, right, where we're selling into a lot of markets that cover Electrification, that cover Industrial markets, et cetera. We expect to continue that to be [indiscernible] what we're seeing today. Couple that with ongoing work that we're doing across Carling with synergy realization, with C&K synergy realization. And just in general, work that we're doing around the Transportation margin profile overall. That's really what continues to give us confidence in that 2023 target in that 17% to 19% range.

Okay. I’ll leave it there.

Thanks, Luke. We’ll take our next question please.

Your next question will come from the line of Joshua Buchalter with Cowen. Please go ahead.

Good morning, Josh.

Hey, good morning. Thank you taking my question and congrats on the record 2022. So, I guess I wanted to, I guess, hone in specifically on gross margins. You gave a lot of helpful color on the operating margin line. I was hoping you could give us a little guidance on what we should be modeling for gross margins, particularly as it sounds like utilization rates are coming down and there is inflationary pressures. I guess I’m trying to understand the trajectory of that line and what that implies for OpEx for the year. Thank you.

Yes. We don't usually provide any specific guidance around gross margin. So I'll come back to what I was talking about with our different segments. In general, when we think about stronger growth on the top line, with the capacity that we built across our network, across the company, we tend to see good variable margins stronger across electronics with the higher margin profile but still very, very solid across our Transportation and Industrial. So when we see growth, the margin profile ends up being good, that comes through the gross profit line. I would say just some OpEx commentary in general through the past few years despite the amount of sales growth we've had, we have definitely leveraged -- we've had good leverage on OpEx, and we have not like other companies you hear out there, we didn't add to the same level as others did. So we feel pretty good about our OpEx levels. We continue to invest for organic growth trajectory, short term and long term. But we'll continue to monitor the situation and the broader environment. If we have to make adjustments in OpEx, we'll do that.

Got it. Thank you. I appreciate the color. And I guess I wanted to -- also on the channel digestion topic that you are on inventories. It's well above where you've typically run, but it's also a very different environment after a couple of years of shortages, and you've done a bunch of acquisitions. I guess -- you mentioned where levels are in the channel and what the target is there. Can you provide any similar metrics of how you're thinking about your on-books inventory and where we should expect that to move the next couple of quarters? Thank you.

Sure. I think that's -- it's a great question. And I think the challenge that we deal with like many of our customers deal with is it's been a pretty volatile time over the last two or three years. And there's still a lot of volatility going on in the fourth quarter with the COVID situation in China and major disruptions going on there that took place kind of in the fourth quarter, it seems to be rebounding nicely after people are coming back after Chinese New Year. But I think the question mark for ourselves, too, as demand continues to be still relatively robust on us. What level of increased inventory do we carry versus maybe our historical norm? Keeping in mind that we, like many of our customers and other peers, a lot of that increase in inventory is not volume related, it's cost related, because we've dealt a lot with a lot of inflationary cost in our materials and our components that we're acquiring. So there's a big step-up that takes place just not in volume, but actually just in the inflationary cost. So that's reflected in a higher level. But also volumes are up as we've kind of dealt with higher demands and that volatility. For sure, it's an area that our teams are working on, and we would hope over the course of the year to begin to burn that level down -- to begin to kind of come back to a more normal environment as we kind of exit the year. I think that's an opportunity for us and our teams.

That’s really helpful color. Thank you.

Thanks for your questions, Josh.

Our next question will come from the line of David Kelley with Jefferies. Please go ahead.

Good morning, David.

Good morning, team. Maybe also a follow-up on the margin discussion from end and specifically, the Electronics segment margin, you're guiding to above 20% for the full year, really impressive in light of the channel destocking. So, if we take a step back, can you walk us through what has changed structurally in your Electronics business that sets you up in this destocking period versus prior cycle downturns?

Sure. Thanks, David. Yes, a lot of it I've been talking about the past several quarters, right? There's a lot of structural work that we've done over the past few years as we've added capacity, we got to the point where we've added capacity. And we've been able to improve our outlook through the capacity we have. So just financially, what that does is that, it helps us drive better margins. You can drive more production, more capacity out of your same footprint. So that's been a positive. As always, we don't talk about all this anymore, but we continue to do footprint work through the past few years. So versus where we were in 2019, we've got a more streamlined footprint of a lot of things we've done, we had talked about that as part of the [indiscernible] integration, and that was the last piece. So that's how they're -- and then other work I talked about productivity initiatives, which are part of our DNA of things that we've done. So a lot of that has definitely helped. And then the last piece is, we've gone through a couple of years now of price realization really to offset some of the inflationary pieces. And yes, I would expect that we'll get back to some normal trends in pricing that will be a little erosion, but I don't expect that to happen overnight or quickly, and we still feel good about where we are today.

Okay. Got it. Thank you. Last point, can you still be or do you expect to still be positive price costs in electronics in 2023? Or should we model that rolling over a bit this year?

Yes. I think from where we sit today around our thoughts on both pricing and where inflation is going. I would say, from a company perspective, we'll probably be closer to neutral. Again, that's where we sit today. We talked about it in the prepared commentary, there's still pricing that we are going after with customers because our costs continue to go up, so there's pricing there, but not necessarily on the electronic side.

Okay. Thank you. And then maybe if I could squeeze in one more. On the Transport business, and I appreciate the color on the ongoing customer inventory unwind there. We're starting to see signs of supply chain improvement in autos that's enabling some better production and capacity utilization. So in light of that, where are we in the process with the customer inventory unwind? How is the visibility to that into 2023?

Yes. So clearly, we also see that -- in talking to our customers that some of their limitations on supply chain are beginning to ease. There's still some out there, but some are using, and that's a positive sign, certainly. We've gone through a fair amount of inventory rebalancing in our Passenger Car business in the course of 2022. And what I would say is we're through the bulk of it. We do expect to continue to see some inventory correction in the first quarter, maybe it bleeds into the second quarter, but for the most we see working our way through it in the first quarter. But we're through the bulk of that in the passenger car side. We mentioned in the prepared portions as well. On the commercial vehicle side, we also saw where there's some inventory rebalancing, particularly on the Carling products. So the Carling business that we acquired. I mentioned it, but -- if you take our Carling business in 2022 compare it to the stand-alone year under the previous ownership, we grew that 20% last year, which was very significant. When we acquired the business, it came with a really strong backlog. The teams worked very hard to ramp up production and capabilities, and that's one of the values that we bring sometimes to acquisitions as the disciplines and the ability to drive things at the factory level. And we were quite successful at doing that and grew that business 20% from when we acquired it. So customers have been dealing with long backlogs there prior to our acquisition. We've cleaned that up. And then the customers and distribution partners have reached that point where, okay, well, now lead times are significantly lower. You guys are delivering very rapidly on that. So therefore, they're pulling back a little bit on inventory, too. We see that also kind of impacting -- continue to impact a bit in the first quarter as well.

Okay. Got it. It’s really helpful. Thanks team.

Thanks.

Thanks David for your question. Appreciate it.

[Operator Instructions] Our next question will come from the line of David Williams with Benchmark. Please go ahead.

Good morning, David.

Good morning. And congrats on navigating the difficult environment here. So just a couple of quick things. And -- I'm sorry.

Yes, we can hear you.

Okay. Good. And not to proverbial dead horse here, but on the inventory level I’m kind of curious if you are seeing or maybe a change in rationale from your customers in terms of the levels that they carry. And if we're burning inventory back down to maybe an elevated level that they're carrying now versus what would be a normalized level? And just kind of how you think about that at those levels [indiscernible]

Yes. I think it's a great question. It's a question we ask ourselves. And we talk with customers often and when we talk with our distribution partners and what they're seeing with the end customers. I think it's our assertion right now that in customers probably carry a bit elevated inventories compared to they were pre-pandemic. Now, they're not going to carry at the level they've been operating in the last few months, so there's going to be some bleed down of that that's certainly impacting our business. But our current assertion is, they'll still keep a bit elevated because of the volatility we've experienced, which is -- it's been many different aspects that have impacted. It certainly got kicked off by COVID, but many other aspects, whether it's fires and semiconductor fabs in Japan or freezes in Texas and things like that. It's not a lot of volatility. And so I think our belief is that there will be slightly elevated inventories that our end customers carry for the foreseeable future.

Okay. Very helpful. Thank you. And then maybe secondly when you touched on China just a bit earlier, it sounds like you're seeing some indications of a recovery effort the Chinese New Year. Just maybe curious about that geography, how you're thinking about demand trends there? And is that an area that could be potentially maybe a little stronger than what you were thinking now as that economy recovers?

Yes. I would say it's a bit early to kind of -- to take much of a position on that yet. Certainly, at our own factories and our own suppliers and even kind of our core customers we're dealing with. The rebound and returning employees after the Lunar New Year has been pretty positive and has had kind of surprisingly robust. In some ways, there was nervousness about that. So we're seeing that as a positive sign. I think certainly on our teams, our teams in China have been phenomenal in dealing with the situation of early in 2022, having zero COVID policies to -- in the back half -- back end of the year where very high percentages of employees who had COVID and dealt with those disruptions. Our teams managed through that really effectively with the strength of our teams in China and has kind of recovered relatively quickly. So I guess I would say how does that impact potential demand in China in the back half of the year? What I would say is, I'm hopeful -- we're hopeful that, that might pretend that there could be an improvement in demand in the Chinese market as the year goes on. But I think it's kind of early to call that for sure. .

Thank you so much.

Appreciate your questions, David. We will take our next caller please.

Your next question will come from the line of David Silver with CL King & Associates. Please go ahead.

Good morning, David.

Good morning. Yes, thank you. So a few questions, and I'll copy my predecessors reference to maybe risking beating a dead horse. But there was a question about decrementals, and I believe it was related more to the Electronics segment. But when I looked across all of your segments, change in revenue versus change in operating income, 3Q to 4Q. I mean there was kind of a pretty high decremental in each of those segments. So I was just wondering if you could take a step back and maybe described some buckets where, I don't know, mix issues or the lower volumes in Transportation. But overall, I mean, what do you think were the key elements in kind of a 70% or so decremental kind of company-wide 3Q to 4Q? Thank you.

Sure, David. So stepping back on to some of the questions we've got, but if I aggregate it all, versus where we were a quarter ago. We definitely saw some additional and accelerated destocking in some areas. Dave has been talking about the channel destocking we saw, definitely accelerated as we got through the quarter going into Q1. And I talked about earlier the fact that with Electronics being our strongest margin segment, the decrementals on that also tend to be higher than the company average. So that's one. We’ve also talked about the fact that we saw continued destocking in auto and new destocking as we got into the end of the quarter with Carling customers because of the strong backlog and we were able to meet all of the customer demand. That also had an incremental reduction as well. And so when we talk about this element of destocking, what does it mean, it's a combination of the fact that sales come down, we're producing less. And in some cases, the environment changed rapidly within this past 90 days or so. So you've got sales dropping and you've got what we call stranded production cost. As you're reacting, you're trying to react very quickly, but you're watching this all happen real time. So with all that additional production cost. I would say the last piece also on our Industrial segment, and we had the same thing happened last year. The team really tried to pull in shipments out of China before the Chinese New Year. Good thing, given everything that has been going on. And so we incurred some extra logistics costs in that period then get washed out with additional sales in the next quarter. So it's really the combination of those, I'd say that's the 80:20 to the whole mix.

Great. Thank you. Next question would be about the comment, I guess, regarding design wins for off-board charging. And my recollection is you've discussed that opportunity in terms of Tier 1, Tier 2, Tier 3, where the lower two tiers kind of a single-digit dollar opportunity per unit, but the highest tier is triple-digit dollars more per unit. So I was just wondering if you could characterize the overall quality of your design wins in terms of the percentage that might be in that highest -- highest dollar opportunity tier. And then secondly, any idea or any sense of a timeline or when a design win in that area kind of converts into production shipments and revenue? Thank you.

Yes. That's a relatively complex question because the dynamics and the types of customers that are engaged in the off-board charging and things like that. Some of them are moving very rapidly and their design cycles are relatively short, can be a year or so to get from design to revenue more typically is a couple of years. There tend to be long design cycles in that space. So it can be, I would say, designed into production there one to two years. I think that's probably generally a good way of looking at it. And it's evolving differently in different regions of the world as well. So I think we have kind of a healthy mix. We're focused on Level 2 and Level 3, right? Level 1, the opportunity is, yes, there's a little bit there, but that's not our focus. It's Level 2 and Level 3. Level 2 by far the highest volume space and opportunity. And we continue to look for other additional technologies that we can bring to that space. And expand our TAM even within the Level 2 charging as well as Level 3. Level 3, obviously, per unit, the content opportunity is significantly higher. But design intensity tends to be much higher at the Level 3 charging. Because these are pretty complex systems that require really strong coordination between the systems within the unit. And so they require a higher level of engineering engagement. So I would say we're spending a higher level of time there because of the complexity and what it takes to support those sorts of design wins. So I think we're well positioned. We're working very crisply with all the leaders out there and then the really long tail of a lot of players who are not the leaders in the industry that we support in other ways. So we feel good the engagement. We think there's more things we can do to expand our TAM within those applications as well.

Okay. Great. And then last question would be big picture question maybe about China and not so much the lockdowns and reopening, but I think the -- during the fourth quarter, the current presidential administration issued a broad set of restrictions on technology trade with China. And I was just wondering from your perspective how that may have affected your business or that of your customers. So my guess is not too directly, but maybe there were some indirect factors that you have to adapt to in terms of supply chain or customer -- maybe your customers have to make some adjustments, and that's extended some delivery dates. But just broadly speaking, how has the prospect for a longer-term set of restrictions on technology trade with China. How has that flowed through your thinking about operating your business and prospects, let's say, over the medium term? Thank you

Sure. First and foremost, the enhanced restrictions that have taken place and even now that there seems to be agreement in the Netherlands and in Japan on further restrictions on tool sets and things like that into China. They have no direct impact on us. The technologies that we produce in China or sell into China, we tend to be on the power side, protection side of things. From a technology, they're really a bit technical here, but they're dealing with high voltage and voltage with stand, which means you operate in a much different way than you do in the high-end logic sort of applications. So lines and features in our world are quite large. Most of the restrictions that are taking place are on the more advanced, really small features and semiconductors that enable some of the advanced logic-based types of technologies. It's just not the world we play in. So from a direct perspective, it doesn't impact us. From selling into the customers, I would say the areas are going to start to hit the hardest are really the high-end electronics and communication side of things, those sorts of areas. We sell into those spaces. Consumer-facing is not a big outsized portion of our business. So we don't see that impacting as hard. So overall, I would say the challenges in the political -- geopolitical environments are not a positive outcome. We'd like to see those be a little more compatible when working between the regions for the long term. But in the near term, we don't see any meaningful impact to the business.

Great. Thank you very much. Appreciate it.

Thanks for your questions, David. That concludes our Q&A session. Thank you for joining us on today's call and your interest in Littelfuse. We look forward to talking with you again soon. Have a great day.