Littelfuse Inc (LFUS) Q1 2024 Earnings Call Transcript Highlights: Navigating Market Challenges ...

• Revenue: $535 million, down 12% year-over-year.

• GAAP Operating Margin: 10.3%.

• Adjusted Operating Margin: 11%.

• Adjusted EBITDA Margin: 17.1%.

• GAAP Diluted EPS: $1.93.

• Adjusted Diluted EPS: $1.76.

• GAAP Effective Tax Rate: 13%.

• Adjusted Effective Tax Rate: 19.3%.

• Operating Cash Flow: $57 million, up 7% year-over-year.

• Free Cash Flow: $42 million, 86% conversion to net income.

• Cash on Hand: $562 million.

• Net Debt to EBITDA: 1.4x.

• Capital Returned to Shareholders: $32 million, split between dividends and share repurchases.

• Warning! GuruFocus has detected 4 Warning Sign with LFUS.

Release Date: May 01, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Littelfuse Inc (NASDAQ:LFUS) reported first quarter sales above and earnings within the prior guidance range, reflecting a resilient business model and strong execution.

• The company continues to see meaningful new business opportunities and design activity across a diverse set of end markets, supporting long-term growth.

• Littelfuse Inc (NASDAQ:LFUS) experienced strong first quarter cash generation, reflecting a disciplined operating model following a record cash flow year in 2023.

• The balance sheet remains robust with significant financial capacity, providing flexibility to enhance long-term positioning.

• Littelfuse Inc (NASDAQ:LFUS) secured multiple new product wins and design activities in various segments, including a meaningful medical win with custom power semiconductors and multiple wins in the transportation segment for high-voltage fuses.

Negative Points

• The company continues to experience channel and OEM inventory reductions, indicating ongoing market challenges.

• Littelfuse Inc (NASDAQ:LFUS) is facing expanded end market weakness across its businesses, particularly in the semiconductor and industrial segments.

• The Electronics segment is still in an elongated destocking cycle, particularly affecting semiconductor sales which are expected to impact the next couple of quarters.

• The Industrial segment saw softer-than-expected end market demand, particularly in MRO, construction, and factory automation applications.

• Foreign exchange had a 50 basis point unfavorable impact on margins, largely due to cost increases from a stronger Mexican peso.

Q & A Highlights

Q: Dave, could you share your view on inventory destocking in the passive side and the underlying point of sales demand? A: David W. Heinzmann, President and CEO of Littelfuse, noted that the book-to-bill ratio for passive products is above 1 for the first time in 7 quarters, indicating a positive sign. Although point of sale numbers haven't increased significantly yet, early indicators suggest that the market is nearing an inflection point.

Q: Meenal, could you help us understand the bridge from mid-single-digit margins last year to 9.5% this quarter in the Transportation segment? A: Meenal Anil Sethna, Executive VP & CFO, explained that the improvement is due to cost reductions, better pricing discussions with customers, and exiting some product lines. These actions are expected to sustain high single-digit margins through 2024, although the trajectory may not appear linear.

Q: What are the drivers for the expected significant margin expansion in the Electronics segment in the second half of the year? A: Meenal Anil Sethna mentioned that the margin expansion is expected from volume improvements and ongoing cost reductions, particularly as the market recovers from destocking and industrial market weakness.

Q: Could you discuss the current pricing trends and inventory levels within distribution? A: David W. Heinzmann stated that pricing gained in the last few years has remained stable, and normal pricing pressures have resumed. Inventory levels in electronics channel partners are healthier, with about 85% of necessary inventory reductions completed.

Q: How much of the remaining inventory digestion do you expect to complete by the June quarter? A: David W. Heinzmann indicated that the bulk of channel destocking should conclude in the next quarter, setting the stage for improved sales dynamics as inventory levels normalize.

Q: What impact did manufacturing issues have on first quarter margins in the Industrial segment? A: Meenal Anil Sethna noted that manufacturing constraints and additional costs impacted growth and margins, estimating a few percentage points impact on top-line growth and margins. Improvements are expected in the coming quarters as these issues are resolved.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.