Good day everyone and welcome to the Littelfuse Fourth Quarter 2023 Earnings Conference Call. Today's call is being recorded. At this time, I'll turn the call over to the Head of Investor Relations, David Kelley. Please proceed.

Good morning and welcome to the Littelfuse fourth 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 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 2 for 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 on the Investor Relations section of our website. I will now turn the call over to Dave.

Thank you, David. Good morning, and thanks for joining us today. Let's start with highlights on Slide 4. 2023 was a solid year for Littelfuse as our global teams remain focused on driving sustainable long-term growth and profitability. We made considerable progress with existing and new customers as our differentiated technologies and global scale allowed us to secure meaningful new business wins and drive industry innovations. We are helping our customers solve complex challenges further positioning us as a leading enabler of structural growth themes, including sustainability, connectivity, and safety for years to come. We also delivered resilient margin performance and record cash generation, all while navigating a challenging macro environment. For the full year, we recorded sales of $2.4 billion and achieved an adjusted operating margin of 16.5%. Our 2023 results reflect our ability to execute through cycles, delivering more resilient profitability versus prior macro downturns. Our ongoing portfolio diversification strategy and well-positioned cost structure allowed us to mitigate the impact of channel inventory reductions and pockets of end demand weakness as we delivered full year adjusted earnings per share of $11.74. Furthermore, we demonstrated the resiliency of our business and strength of execution as we generated $457 million in operating cash and $371 million in free cash flow, both records for the company. We launched our five-year growth strategy in early 2021 and have delivered strong performance within the first three years, as shown on Slides 5 and 6. Within our strategy, we target double-digit average annual sales growth, coupled with sustained profitability and leveraged earnings growth. Three years in, we have averaged 18% annual revenue growth driven by organic momentum and complementary acquisitions that enhance our leading technical and engineering expertise within the high-growth end markets. Similarly, three years into the strategy, we have delivered average annual…

Thanks, Dave. Good morning, everyone, and Happy New Year. Thank you for joining us today. Please turn to Slide 11 to start with our fourth quarter results. Revenue in the quarter was $534 million, down 13% versus last year. Sales were down 14% after adjusting for foreign exchange. GAAP operating margins were 12.1% and adjusted margins 13.2%. Adjusted EBITDA margins finished at 19.6%. Fourth quarter GAAP diluted earnings per share was $1.71 and adjusted diluted EPS was $2.02. Let's turn to Slide 12 for full year performance. We finished the year with sales of $2.36 billion, down 6% versus last year and down 10% organically. GAAP operating margins were 15.3%. Adjusted operating margins finished at 16.5% and adjusted EBITDA margins were 22.3%. Excluding an FX headwind of 60 basis points, OI and EBITDA margins would have finished at about 17% and 23%, respectively. We're very pleased with the resiliency of our company margins this year, which were 200 basis points stronger than our performance in the prior down cycle. Our portfolio diversification and strength of execution have been foundational in achieving our upper teens operating margin target while managing through a correction cycle. GAAP diluted EPS was $10.34 and adjusted diluted EPS finished at $11.74. Our full year GAAP effective tax rate was 21% and adjusted effective rate was 20.1%. Our full year rate finished about 150 basis points higher than projected due to greater shift in earnings mix across jurisdictions. The true-up for the full year rate is reflected in our higher-than-anticipated fourth quarter tax rate. Turning to cash, we generated operating cash flow of $457 million and free cash flow of $371 million for the year, both records for the company. Our free cash flow conversion from net income was 143%, significantly higher than our target of 100%…

Thanks, Meenal. In summary, on Slide 18, 2023 was a solid year for Littelfuse, an exemplary of our resilient business model. We generated record cash flow and executed well as evidenced by our resilient margin performance, which outpaced our profitability levels in prior downturns. We saw continued robust design activity, and believe we strengthened our customer relationships, expanded our leadership and broadened our presence in attractive high-growth end markets. Three years into our most recent five-year growth strategy, we are outpacing our targets. And our strong execution is overshadowing a continued dynamic underlying macro environment. And while we expect continued macro variability into the New Year, we remain confident that we will return to growth during 2024. We also have a very strong balance sheet and significant financial capacity and strategic M&A will continue to be a capital deployment focus. We believe our diversified business model, strong technology offerings across the end markets and well-positioned cost structure will drive continued long-term top-tier value for our stakeholders. Again, I want to thank our global Littelfuse team for their unwavering commitment to our customers and supplier partners. We were recently recognized again as one of America's most responsible companies by Newsweek, an honor that would not be achievable about the hard work of our team, as well as our strong customer and supplier partnerships. And with that, I will now turn the call back to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Luke Junk with Baird. Your line is open.

Good morning. Thanks for taking my questions. For -- starting us here, Dave, hoping you could just double-click on areas of your passive portfolio that might turn the fastest as you return to growth, any new clues there? And then any updated perspective from your distributor partners would also be helpful just in terms of the progress that they've made working inventory lower? And then maybe if you can square all of that, just how it figures into your -- continue to expect to return to growth during 2024?

Sure. Thanks, Luke, for the question. Within our passives business, obviously, we've got several different technologies, kind of at different stages and also through distribution, some of our semiconductor protection products that heavily flow through distribution. And what I would say is, we had some kind of hit their peak a little earlier than others, started a correction a little earlier. I would say, our semiconductor or semiconductor protection business kind of started the correction a little later than the others, although, it's got a heavy auto exposure. So that's one that we don't expect to necessarily elongate further. So, it's a mix, it's kind of hard to give you a good read on it. What I will tell you, it's been making steady month-over-month progress in the distribution kind of over-inventory situation. And we'd estimate kind of in the range of -- we've made our way through maybe 70% of the excess inventory in our distribution channels. So the turn really to return to growth does not require an end market uptick. What it requires is that we get to a stable inventory position and then order rates to kind of return to more normal sorts of levels. As far as timing, it's a little hard to kind of place that. And I think that the downturn has been a little elongated, because the end customers and the EMS customers probably carried a bit more inventory than typical. So that's kind of elongated this down cycle. So the visibility is a little challenging, hard to say when. However, it's certainly our belief while the destocking kind of continues well into 2024, that we will hit that point where the inventory settles out at its normal operating range and that will create the return to growth and be a tailwind for us.

Got it. And then for a follow-up, maybe a question for Meenal. I'm looking at just transportation margins and your expectation for progressive improvement going forward. And I was just hoping you could help us rank order some of the drivers in that business between price recovery, the portfolio pruning that we discussed again today any additional overhead reduction and then ultimately, the importance of volume growth in that business on the path to high single-digit margins exiting this year.

Sure. Thanks, Luke. So what I'm going to do is break it down into two parts, right? Our Transportation segment are made up of both an automotive business and our commercial vehicle business. And I'd tell you on the automotive front, we're really pleased with the progress that we've made there. I have been talking for some time about a number of footprint adjustments that we were making to really scale it to a smaller footprint and to really better align to the car builds going on. That's largely completed, and we've been seeing the benefits come through on that. The team had really also worked on pricing as well. And so that's been a good adjustment that we've made there. Dave talked a little bit about some additional actions that we're taking around looking at the portfolio, specifically around some non-core automotive sensor parts of our business, low margin, low growth. So that's something that we're continuing to do. A little bit of headwind to the sales line, but that will help from a margin expansion perspective. And I'd also say we are investing for the long-term with current setting that's a little bit of a headwind right now, the transportation segment overall. But in general, that's going to pay back as we start to see sales come about later this year and really into 2025. So I'd say good progress in automotive. On the commercial vehicle front, I'd say we're working on actions, we definitely have more to go after, and we know that. Volume recovery, to your point, is pretty key here, right? With all the destocking that we've been talking about going on. Sales are down much more than a normal trend line. So when we get back to more normalized run rates, we'll see some good margin recovery there. There's footprint work that's underway, more to go as well as cost reductions, and this is both for operating and also more administrative areas that we're looking at. So we're working through that. And I'd say probably some deeper portfolio tuning here, a combination of, as I talked about with our newly tech companies that we acquired currently and we’re just taking a step back on our legacy business and that’s going to be a headwind of the down sales of margin expansion. So I'd say, overall, we are taking the step that we need to take, working our way through, by the way, some other headwinds on inflation and FX, and we've got to get through to that. But its taking up a little longer than we might like but at the same time, we know what we need to do. We have confidence in these markets and these businesses that we'll get there.

Got it. I’ll leave it there. Thank you.

Thanks for your questions, Luke.

Your next question comes from the line of Matt Sheerin with Stifel. Your line is open.

Yes. Thank you. Good morning, everyone. A question on the electronics segment. And Meenal, you talked about getting back to a 20% operating margin for the year. It looks like your revenue in Q1 is going to be down 20-plus percent year-over-year, looks like operating margins would be below 16% or so if I did the math right. So what are the drivers other than return to volume growth, which we don't know exactly when that's going to hit. What are the other drivers of – of getting those margins, particularly in an environment when we may start to see some more pricing pressure as volumes come back?

Sure. So I would take a step back on electronics, but a lot of the work that we had done was really very foundational, right? We talked about the past few years, all the work that we had done is relating to the IXYS acquisition, a lot of supply chain work volume place of a key part in that as well and just some operational efficiencies that we've had. For us, on the pricing side, right, the pricing was really meant to offset the cost inflation that we have seen. So it wasn't a change in the market or changes in the long-term pricing strategy necessarily, but that was really to make sure that we were keeping up and/or in some cases staying ahead on the cost inflation side. So with the sustainable floor of the things that we have done, all the efficiencies, et cetera, and volume starts to come back, right? Dave talked in an earlier question about at some point, we'll see inventory destocking stop and we'll start to see some recoveries. The incremental from those from every sales dollar tends to be pretty strong for us. So that will be a big part of margin recovery. I’d also say during this time, we continue to manage our cost structure and our discretionary spend as we always do during the challenging market times. So while we may have quarters that are not at the 20% range, I still expect the year to be at that level.

Okay, great. Thank you. And just back to the order rates in electronics. Could you tell us, Dave, what the book-to-bill is? And has that changed materially in the last quarter or so?

Yeah. We have not really – it remains well below one still. And we really haven't seen it change too much from third quarter to fourth quarter to the end of January. It's been reasonably stable as there's continuing to work and bring down that inventory level at a distribution partners of ours. Although, it’s certainly not above one, where we loved to see it, it’s been reasonably stable at the level it's at.

Okay, great. And just one last question, if I may. Just regarding your M&A strategy? And obviously, that's been a big part of your growth rate. You've been very successful there. But it sounds like you're, sort of, and really focused here on trying to improve margins across the business, dealing with this correction. So are we to assume that you're going to be maybe more focused on the business than acquisitions or if there's attractive opportunities will you do that?

Yeah. No. We believe we can walk and chew gum at the same time on this. So actually, M&A continues to be a focus area for us. Our balance sheet is quite strong. We have a good funnel of opportunities as we've looked to diversify the end markets we're targeting and the technology niches where we think we can add value with our current customers. We continue to evaluate those. Yes, we haven't had acquisitions we've announced in the last couple of quarters. However, they can be a little lumpy. So we continue to drive that. We continue to see that is a way to sustain and continue to grow our organic growth pattern over the long time. So while we clearly are focused on execution and making sure that we're managing through the downturn more effectively than we have in the past, which we're demonstrating. We still see M&A as a key opportunity for us, and we continue to be quite busy in that space.

Okay. Fair enough. Thanks very much.

Thanks for your questions, Matt.

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

Hey, good morning. Thanks for letting me ask the few questions here. So I guess maybe if you could just talk first about the geographic demand divergences maybe in auto, but also industrial, if you're seeing anything from the industrial standpoint that stands out geographically? Thank you.

Sure. I would say, if we look at the fourth quarter from a geographic standpoint, maybe the big area of difference is in transportation, where China was quite strong in the fourth quarter and really outperformed what we expected there. With the launch of a lot of new vehicles, both high voltage but a whole lot of low-voltage applications, where we saw really strong performance there. I would say North America, although overall car build was okay, with the UAW strike in the fourth quarter, GM, for particularly, were a little softer for us than we anticipated, and we have high content opportunities there. So that maybe hurt us a little bit there. But overall, that's the mix we saw in transportation. On the industrial side, what I would say is our industrial is probably heavier North America content with growth in Europe and in Asia. And we generally continue to see broad-based softness in China that kind of cross everything but transportation. We see a lot of softness in the Chinese market right now. Other than that, I think North America we saw particular softness in residential HVAC, which is a market that we target in industrial. And you may have seen reports there with kind of excess inventory of units in the field and at distribution. Some of the HVAC residential in North America was down like 30% in the fourth quarter. So, certainly, that weighed a bit on us there.

Great. Thank you. And then maybe just -- the destocking seems like it's been kind of rolling through and been heavier in certain segments. But just are you seeing, I guess, areas where the inventory is running lean or has come back to more normalized levels? Or are you seeing maybe just a commentary across your segments in terms of the inventory? Thanks.

Yes, I think on the inventory side of things, in general, in our channel partners in the industrial space, I would say inventories remain kind of at normal level. So, we don't have any significant concerning areas in the industrial distribution space. There are some OEMs like residential HVAC, where we sell into that are a little heavy. And of course, in our transportation side of our business, the automotive piece, we don't really use distribution. So, that's more of a direct relationship. Commercial vehicle is a space where we're seeing that over inventory and our channel partners, that's been coming down, of course, as it has been in electronics. As I spoke about earlier, they were kind of or well into the burn of excess inventory. And the challenge a little bit is watching POS with our distribution partners because the end customers are also burning inventory. So, that's kind of put a dampening impact on the POS with our customer -- with our distribution partners. So, watching that balance between their POS and where it's at and our inventory position at what speed we're burning inventory. That's something we, of course, have always kept an eye on to continue to watch. But clearly, we're well into the inventory destocking and it's a little challenging to see when exactly the turn is, but it will be coming. And when it comes, then we'll get that return to growth.

Thanks for your questions David.

[Operator Instructions] Our next question comes from Joshua Buchalter with TD Cowen. Your line is open.

Hey guys, good morning. Thank you for taking my question. It sounds like within electronics and some of the other segments as well, as we go through this extended destocking, your utilization rates and factory loadings are kind of -- just -- you're keeping them flat right now as the inventory burns through. Is that a fair assumption? And I guess, any metrics you can give on how depressed utilization rates internally are right now as we think about what leverage could look like as demand POS kicks back in? thank you.

Sure. Utilization rates, of course, vary by product lines and factory locations. And certainly, utilization rates are lower than we'd like to operate at. So, when we do begin to see a return, there will be nice drop-through on the return to volume, as we see that and it varies by technology, right, how heavy the fixed cost is in the factory. So in some cases, we're able to flex our costs pretty aggressively and balance to our flow-through of orders, and it's not a major overhang for us. Other areas, it's a little more challenging. And so that's -- it's really a balance, and it's by business unit, by technology, how we manage that. But clearly, as volumes begin to come back later this year, yes, the drop-through should be very healthy.

Thanks, Dave. And maybe for Meenal, thank you for the color on the revenue impact of the sensor product portfolio review. Anything you can give us on gross or operating margins and potential OpEx savings as you go through the realignment? Thank you.

Yes. So I would say, in general, what I talked about in for overall for the transportation segment. We see progressive improvement through 2024. It will be improvement coming both out of gross profit. We'll see improved gross margin and we'll see an improved OpEx level as well, lower OpEx dollars improved OpEx levels, as we go through some of these restructurings. I'd say, it's probably going to be a little more pronounced in gross profit, because with volume, Dave has been talking about as we continue to see volume come back in different areas that margin incremental tend to be pretty strong. Couple that with the footprint actions that we're taking is still in couple of areas of remnant pricing that we're working on as well. I think, you'll see more of the pronounced benefit coming into gross profit.

Yes. And I think it's important to recognize and in this automotive sensor pruning, we're doing this kind of more of what we've done in the past. This is kind of normal for us, and it's a bit of a headwind on growth in the automotive passenger car piece of it. However, from an expense standpoint, we've shifted resources to current sensing. And so current sensing and our investment in that space is kind of ahead of revenue, as you know, we've had really nice design win cadence in the current sensor side of things. Revenues will start to kick in late 2024 and through 2025. But of course, our shifting resources and investing further in credit setting kind of balances off where we're going there. Also, I think important, the pruning is much heavier in the commercial vehicle space than it is in the passenger car space. And in that case, we clearly will be taking costs out on both the variable side and the fixed side to address that.

Thanks, Dave. Thanks, Meenal.

Thanks for your questions, Josh.

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

Yes. Hi. Good morning. Thank you. I guess, I was just wondering, you've talked a lot about the pruning that's going on the sensor side. I guess, I was just going to ask if maybe you could extend that thinking to maybe a couple of your recent acquisitions in general, and I'm thinking the C&K Switch acquisition. And maybe at this stage, Carling has been thoroughly kind of vetted and worked through. But what would you say looking back, I mean, what would you say the pruning or the maybe somewhat outdated element in the portfolios there have been? And how do you think those areas are set up for 2024?

Yeah. So I think if we look at portfolio pruning and managing that. First of all, it's a normal part of what we do every year. And it's an ongoing sort of process I would say, the fortunate thing is, in C&K, we don't see significant areas of pruning that we're needing to do there. There has been price optimization that we've had to address there and kind of going through the de-stocking phase there. But we don't see a lot of pruning that's necessary in the C&K. We talked actively about it, the biggest area of pruning is in commercial vehicle, and a big part of that is Carling. And we talked about this a couple of quarters ago that the first year of ownership of Carling, there was a huge backlog, right? And so we were very focused on supporting customers and working our way through that backlog and cleaning that up, which probably put the pruning a little bit to the back burner while we were going through that. We started in earnest in that activity last year, and it's kind of carrying over into this year and those pruning actions there. Again, we're talking about automotive sensors coming up, but I think it's important to recognize the pruning we're doing in automotive sensor is pretty small. It's not significant. The bigger pruning is really in the commercial vehicle space that is a heavy amount of that is Carling.

And David, what I would add is you're hearing us talk more about this pruning today. But if I take a couple of steps back, I would say part of our value creation, whether it's legacy businesses or even with acquisitions is portfolio management overall. So, with every acquisition we make, right? You don't see everything during diligence. You don't do these deep dives but as part of the value creation process, we'll go through, we'll take a look at the products we're selling, we'll take a look at profitabilities in regions, it's customers and product line. Some, frankly, may not have a good strategic stat with where we're going with the company, and we'll do some different things with that. So the only reason you hear us talking a little bit more about it today and in different periods of time is, we feel that it's going to be material as we go into 2024 to our sales, right? And the return to growth, and we wanted to make sure that we just we highlight that so that you understand where our Transportation segment grows, when it looks maybe lower than it should be, it will be because of the pruning. It's not because there's anything wrong with the underlying portfolio.

No. Thank you for that. And I certainly understand pruning is probably an ongoing process all the time. And when you choose to talk about it is more selective. I have a follow-up question, and I apologize, a little sore throat today. On the EV development programs that you're involved in, so I do recall that you're working with virtually every major and emerging EV operation globally. And that gives you kind of a little bit of an insight into I guess, development progress. But there's been a number of headlines as you're well aware of kind of companies potentially kind of rethinking the trajectory of their spend and maybe the direction of their spend more directly. But from your perspective, maybe comparing today to, let's say, six months ago, what would you say the attitude or the -- has the approach to development either in scale or in direction for your major EV customers. Has there been a shift that you think is worth calling out and just a fine point. I mean, this would be the EV developments that end up in your electronics segment rather than programs for, I guess, the more traditional vehicles in your Transportation program. Thank you. Transportation Segment. Thank you.

Sure. So certainly, lots of press these days around EV adoption rates and what's going on there. What I can tell you is that our win cadence in both electrification and electronification applications in the auto space continue to be quite robust. In fact, our win rates in 2023 versus 2022 were up 17% and the value of the wins that we achieved in those spaces overall. So while perhaps we've always taken a little bit more of a prudent view of how quickly EVs would evolve. So we always have modeled a bit lighter slope to the growth than maybe what's been out in the press or maybe what the broader projections have been. So while it's certainly slowed down in some spaces, it's not wildly different than kind of what the expectations have been at the EV adoption rate. In Asia, EV adoption rates continue to be extremely robust. And the bulk of that, the big swing up at adoption rate really been driven out of Asia, followed by Europe. So we see a little bit of slowing, but I think you can maybe outsized kind of you, particularly here in North America, where adoption rates have been relatively slow. So what I would tell you is the engineering groups we're working with at the OEMs continue to be very, very focused on electrification and electronification in the vehicles. So the design cycles continue to be robust, our win in those space and the cadence of wins continues to be quite robust. So we're not overly concerned with maybe a slightly slower slope in adoption rate in EVs.

Okay. Great. Thank you very much.

Thanks for the questions, David

I will now turn the call over to management for closing remarks.

Thanks, everyone, for joining today. That concludes our Q&A session. Thank you for joining us in and for your interest in Littelfuse. Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.