Littelfuse Inc (LFUS) Q4 2021 Earnings Call Transcript

Good day, everyone, and welcome to the Littelfuse Fourth Quarter 2021 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 2021 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 the 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. Continuing our momentum from prior quarters, our global teams delivered another quarter of strong performance to finish the year. We achieved a record fourth quarter sales of $553 million, up 38% versus last year and adjusted EPS of $3.16, an increase of 42% year-over-year. We finished 2021 with record annual revenue of $2.1 billion, up 44% compared to prior year, and reported adjusted EPS of $13.19, an increase of 106% year-over-year. Our teams achieved outstanding results, driven by superior execution and demand creation across the industrial, transportation, electronics end markets we serve. I'd like to thank all of our associates around the world for their unwavering commitment and hard work to significantly grow our company by winning new business and meeting customer demand during these challenging times. 2021 was truly an exceptional year for Littelfuse. Meenal will provide additional color on our strong financial results. Our results and successes during the year reflect both the strength of our team's execution and the power of our strategy, which is shown on slide 5. Over the last decade, we have positioned our company within the long-term structural growth themes of sustainability, connectivity and safety. The ever-increasing complexity of applications surrounding these themes continues to drive greater demand for our reliable products and, in turn, a higher level of product content. During 2021, we advanced our strategic business initiatives, driving content and share gains in high-growth markets, both organically and through acquisitions. We completed two strategic acquisitions during the year, adding approximately $300 million in annualized sales. One year into our five-year growth strategy, we are well on our way to delivering sustained double-digit revenue growth, best-in-class profitability and top-tier shareholder returns. Moving on to performance within our segments. During 2021, our Electronics Products segment drove strong growth across all regions. Revenue was up 39% and 37% organically compared to 2020. Our performance was driven by new business and our seamless execution to keep operations up and running and capacity additions coming online to support customer demand. Globally, we saw strength across a broad range of applications and end markets, including data center, telecom infrastructure, factory and building automation, appliances and automotive electronics driven by EV applications. We did see significant cost increases related to materials and freight. We're able to mitigate much of the impact with our disciplined pricing strategy and productivity improvements. Distribution partners have slowly built inventory, and levels are now appropriately matched to end market demand. We also have seen electronics and customers and contract manufacturers building inventory. However, Littelfuse remained strong across all regions and exiting the fourth quarter, our electronics book-to-bill remained above one. We expect ongoing healthy end market demand, driven by the amplified themes of electronification, energy efficiency, automation and connectivity. Moving forward, we're renaming our automotive product segment, and we'll refer to it as our Transportation Products segment. The term transportation represents a more comprehensive description of our broad range of products in the applications and end markets we serve. The Carling Technologies acquisition, which we have discussed with you before, has meaningfully increased our presence in commercial vehicles, which now represents about half of our segment revenue. We achieved strong growth in full year 2021, despite the challenging supply chain environment that impacted the passenger and commercial vehicle markets. Our transportation businesses also experienced significant metals and freight cost headwinds. We have been taking pricing actions to mitigate the cost increases and are implementing additional pricing actions, as well as continuing to drive productivity improvements across the business. Thanks to the execution by our global teams, revenue from our passenger vehicle business grew 25% versus 2020. Our global car build was largely flat. Our significant growth above market was driven by continued content growth in electric vehicles, the favorable mix of higher-end vehicles, market share gains and some inventory build at OEMs and Tier 1s, which we have commented on through 2021. Revenue for our commercial vehicle business grew 58% versus 2020. Demand for our commercial vehicle products was driven by strength in material handling, heavy-duty trucks and buses, construction and agricultural equipment markets, as well as some inventory build at our customers. Our completion of the Carling Technologies acquisition on November 30 contributed $15 million to our full year revenue. It's a pleasure to welcome the Carling employees to the Littelfuse team, and we look forward to their contributions as we continue to execute our long-term growth strategy. Turning to slide six. A combination of our company significantly expands our technologies and capabilities, enabling critical scale in the commercial vehicle space. Carling manufactures market-leading electromechanical and electronic switching and circuit breaker technologies. They also strengthen our engineering, design and test capabilities. The addition of Carling more than doubles the size of our commercial vehicle business, and our complementary customers, channels and products will accelerate our growth in strategic markets, including heavy-duty trucks and buses, material handling equipment, construction equipment and agricultural machinery. Carling has a strong global presence in these markets, as well as in the telecom infrastructure and marine markets. The integration of Carling is off to a strong start. Our combined teams are working closely together. We are already seeing opportunities for joint new product design, as well as sales synergies. We look forward to leveraging our respective strengths. Looking ahead, our overall transportation bookings are healthy in all regions. We see a number of ongoing content growth opportunities across the end markets we serve, and expect to continue to perform above the market for the year. That said, ongoing chip and other component shortages at our customers, as well as the timing of customer inventory burns can cause quarter-to-quarter variations. We expect our commercial vehicle strategic markets to remain healthy. For the first quarter, we expect car builds to be flat sequentially and modestly down year-over-year. For the full year, we expect car builds of approximately 80 million cars. Turning to our Industrial Products segment. We achieved revenue growth of 124% and 27% organically compared to 2020. Our performance was an outcome of our global team's ability to serve our customers and win new business to drive organic growth. Robust demand for our broad range of products was driven by renewable energy, led by solar and energy storage systems, HVAC and data centers. Our performance also includes a meaningful revenue contribution of approximately $100 million from a successful acquisition of Hartland Controls. We are seeing early successes driven by our combined capabilities and complementary product portfolios. In 2022, we expect our strategic markets, renewables, EV infrastructure, HVAC, and general industrials to remain strong. This sustained growth will be driven by a more sustainable ecosystem. For example, solar and wind energy and energy storage systems that enable lower carbon emissions, the ongoing proliferation of electric vehicles and charging stations, more efficient climate control units, increasing requirements for electrical safety and the rising demand for factory and process automation. Now let's move on to highlights and design wins in the end markets we serve. We are building forward momentum with our investments for best-in-class growth. We're advancing our customer-driven innovation, digital presence and new mobility resources and capabilities. 2021 proved to be a year of significant new business opportunities and design-in activity as our engineering teams continue to work closely and effectively with our customers in a hybrid work environment. Our joint collaboration drove significant new business growth. Within our industrial end markets on Slide 7, sustainability and safety are key drivers of our growth strategy. Throughout 2021, we captured new business across our regions for a broad range of renewable energy applications and for energy storage systems. In addition, we continued to focus on more efficient HVAC systems, which proved a major source of our design wins. We benefited from the integration of the Hartland Controls acquisition. We have already seen successes leveraging Hartland products with Littelfuse customers beyond HVAC. For instance, selling into general industrial applications related to food and beverage safety and selling Littelfuse's products to Hartland customers. We also secured several new business wins given the emphasis on Industry 4.0 and a push towards industrial automation and energy efficiency for industrial applications. Furthermore, our ability to deliver innovative products to meet tighter safety requirements for general industrial and food and beverage applications drove many new design wins during the year. Turning to our transportation end markets on Slide 8. We continue to expand our e-mobility investments to broaden our capabilities and high-voltage product offering. The ongoing electronification and electrification of applications drove significant design activity on business wins during 2021. Of all of our regions, the traditional vehicle manufacturers to newer EV-only entrants, we saw a pipeline of opportunities and numerous e-mobility-related design wins. Battery management systems for EVs were a major source of wins during the year. When we saw design wins for EV battery finishing. With the growth in e-mobility and robust design activity, we remain well positioned for on-vehicle charging and EV charging infrastructure applications and saw a wide range of wins throughout the year. Additionally, we are seeing EV-related design wins in the commercial vehicle space. We had numerous design wins for manufacturers of electric trucks and buses and secured design wins in the agriculture equipment space. We continue to build on our solid customer relationships in the material handling space and had several wins in this high-growth market. With the addition of Carling products, we are also better positioned to accelerate design wins and growth in our strategic commercial vehicle markets. The continued electronification of vehicles, both within traditional passenger vehicles and EVs are driving increased needs for automotive electronics, which remains a great source of design wins. In 2021, we saw wins across a wide range of applications from vehicle lighting to infotainment and navigation systems to components used in window, door and seat motor applications. ADAS applications also drove additional business wins from vehicle cameras and dashboard systems. On slide nine, during 2021, we saw a robust pipeline of diverse design lenders across a spectrum of electronics applications. Largely driven by the need for ongoing greater connectivity as design engineers qualify new products. Our differentiated far-reaching go-to-market strategy enables us to secure new business wins from appliances, building and home automation to battery management systems within tablets and notebook computers to 5G infrastructure. Data centers and cloud storage also continue to be a major source for design activity as online gaming and streaming services drove demand. In addition, to better serve our strategic partners, we accelerated advancements in our digital presence, giving evolving user expectations and hybrid work environments. This multiyear journey will further differentiate our go-to-market strategy and help us better serve our customers. Our pipeline of new business opportunities is healthy across the high growth, industrial, transportation and electronics end markets we serve. We are confident in our ability to secure these opportunities based on our innovative, reliable products, engineering and technical capabilities and customer responsiveness. The organic growth from these efforts, coupled with strategic acquisitions to enhance and sustain our organic growth positions us well to continue expanding our market presence. Finally, on slide 10, I would like to highlight our commitment to sustainability. Our first annual sustainability report published in October communicates our progress. Environmentally, our core products empower the sustainability megatrends by enabling our customers' applications focused on a more sustainable, connected and safer world. We also have goals related to our continued efforts focused on our own footprint such as our goal to achieve greenhouse gas reduction of 38% by 2035, and we continue to invest in programs to further our energy conservation initiatives. Socially, we have a number of programs addressing human capital management and the health and well-being of our global associates such as a zero-injury workplace goal. We also have goals to expand gender and minority representations and have launched various development programs to improve our female leadership position and initiatives to attract diverse talent. From a governance perspective, we continue to refresh our Board composition with members who bring fresh perspectives and help ensure continued diversity on our Board, supported by longer-serving directors who bring continuity and experience to our business and the end markets we serve. In addition, we have very strong global ethics and compliance policies and programs. We are focused on the long-term value of a robust ESG strategy for our business and for all stakeholders, and look forward to continuing to share our progress. I will now turn the call over to Meenal to provide additional color on our financial performance and outlook.

Thanks, Dave. Good morning, everyone, and thanks for joining us today. Let's start with slide 12. Sales in the quarter were $553 million, up 38% versus prior year and 23% organically. Our Hartland and Carling acquisitions plus the extra 14th week in this quarter added $61 million in sales versus the prior year quarter. GAAP operating margins were 16.8%, while adjusted operating margins were 17%, expanding 40 basis points versus last year. Fourth quarter GAAP diluted earnings per share was $2.08 and adjusted diluted EPS was $3.16, up 42% over prior year. These included both a GAAP and adjusted effective tax rate of 12.7%. The adjusted effective tax rate was lower than our forecast due to the receipt of a foreign tax holiday during the quarter retroactively for all of 2021. Turning to slide 13. For 2021, sales of $2.08 billion were up 44% versus last year and grew 33% organically. Our acquisitions plus the extra week added $134 million in sales versus last year. GAAP operating margins were 18.5%, while adjusted operating margins expanded nearly 500 basis points for the year to a record 19.1%. Incremental operating margins were 30% versus last year, a testament to how our teams have driven pricing and productivity actions to offset many of the ongoing inflationary challenges we've seen. GAAP diluted EPS for the year was $11.38 and adjusted diluted EPS was $13.19, up 106% versus last year. Our full-year GAAP effective tax rate was 16.8%, and adjusted effective rate was 16.1%. As I've referenced through the past year, inflationary pressures unfavorably impacted margins in excess of 300 basis points, mainly across foreign exchange, input and transportation costs. We were able to offset about half of these costs through price realization. Our discretionary spend continues to run at reduced levels than typical, also mitigating the inflation impact to margins. We generated a record $373 million in operating cash flow during the year and $283 million in free cash flow, 100% conversion from net income and aligned to our conversion target. The ongoing strength of our balance sheet gives us the flexibility to maintain some strategic inventory builds to meet anticipated customer demand. We also delivered on our capital allocation strategy, reinvesting in our business for our ongoing growth. We invested about $90 million in capital expenditures with a key focus on capacity and utilized over $400 million in cash for our Hartland and Carling acquisitions this year, adding nearly $300 million in annualized sales. We also returned $50 million in capital to our shareholders through our dividend. Slide 14 references a 5-year financial framework we discussed at our investor event last February. This framework has been fairly consistent over the past decade and we've demonstrated we can deliver financial performance that's in line with our objectives through market cycles. We're off to a strong start in the first year of our current strategy across all of these metrics. I'm confident in our ability to deliver these outcomes again through our strategy. Now moving on to our fourth quarter segment performance on Slide 15. I'll start with our Electronics Products segment. Sales in the quarter were $342 million, growing 39% versus last year and 36% organically. Operating margins were 23.2%, expanding over 600 basis points versus last year, led by a combination of ongoing volume leverage and pricing strategy driving strong performance in this ongoing robust demand environment. As Dave noted, we've renamed our automotive products segment to Transportation. Sales in this segment were $142 million in the quarter, up 14% versus last year and down 2% organically, the main differences being the extra week of sales and the acquisition of Carling Technologies during the quarter. Sales in the commercial vehicle business were up 81% versus last year with the addition of Carling as well as organic growth from strong end market demand. Sales from our passenger vehicle business were down 7% versus last year, versus global car build decline of 17% over the same period. Operating margins for the segment were 7.5%. Margins were unfavorably impacted by nearly 500 basis points versus last year due to ongoing FX and metals inflation and margin dilution from our Carling acquisition. Lower passenger vehicle volumes also reduced benefits from operating leverage. Sales to the Industrial segment of $70 million grew 121% in the quarter and were up 23% organically with the main differences being our Hartland Controls acquisition from early last year and the extra week of sales. Operating margins were 6%, where we incurred higher logistics costs across our Hartland business due to rate increases and costs for some internal strategic repositioning of inventory. Excluding Hartland, our legacy businesses expanded operating margins over 200 basis points versus last year. Slide 16 outlines full year performance for our segments. Electronic sales finished at $1.3 billion. Despite the number of operational challenges we faced, including ongoing inflationary increases across the supply chain, our adjusted operating margins for the year were 23.8%, expanding 750 basis points versus last year. Sales in our Transportation segment were $528 million. Margins finished at 12.5%, up 200 basis points versus last year despite absorbing more than 400 basis points of headwind from FX and metals. Industrial segment sales finished at $251 million. Margins ended the year at 9%. The Hartland integration is on track with our expectations, and we had expected some margin dilution in year one of ownership. Excluding Hartland, our legacy Industrial segment expanded margins from 150 basis points. Now, turning to slide 17, the demand environment remains strong across most of the end markets in which we are positioned, especially in areas covering e-mobility, vehicles and infrastructure, renewable energy, data centers and cloud applications, and Industry 4.0. As a result, we continue to see expanding content growth of our products across numerous applications. The demand is being negatively affected by currency challenges. At current exchange rates, foreign exchange could impact our sales by approximately $20 million for 2022. Despite these positive demand trends, our teams are navigating daily COVID disruptions along with a growing number of supply chain issues, which are contributing to ongoing inflationary pressures. Given the current market conditions, we anticipate an additional margin challenge of about 100 basis points for the year, due to rising input costs, including metals, higher transportation expenses, and increased wage and service costs. Our teams are actively implementing various productivity and automation measures, along with ongoing pricing strategies to counter these challenges. For the first quarter, we expect sales to be between $563 million and $577 million, which represents a 23% increase compared to last year and a 12% increase organically. We estimate first quarter adjusted earnings per share to be between $3.14 and $3.30, assuming an adjusted effective tax rate of 17%. The midpoint of the earnings per share is a 21% increase over the prior year. At the midpoint, earnings per share would rise 28%, excluding a non-operating mark-to-market benefit from the first quarter of last year. Slide 19 includes some other items to consider in your full year modeling. 2022 will include a full year of Carling, versus one month in our 2021 results. We expect Carling to contribute $185 million to $190 million in sales and about $0.30 of EPS, net of ongoing deal amortization. For the year, we expect 100 basis points dilution to the company operating margin resulting from Carling, including non-cash deal amortization. With our integration roadmap underway, we expect the Carling margins to align with the mid-teens operating margin target for our transportation segment as we exit year three of ownership. On other 2022 estimates, we are projecting non-cash amortization in the low $50 million range, $17 million in interest expense at current rates and full-year adjusted effective tax rate in the range of 16% to 18%. We expect 100% free cash flow conversion and estimate $110 million to $120 million in capital expenditure. In closing, I want to thank our associates for their tireless efforts that led to our record success this year and also a thank you to our customers and suppliers for their partnership in growing our businesses together. And with that, I'll turn it back to Dave for some final comments.

Thanks Meenal. In summary on slide 19, 2021 was indeed an outstanding year for Littelfuse. Day in and day out, Littelfuse associates worked hard to support one another and serve our customers around the world. I want to thank our global teams for their tremendous efforts. Their commitment to execution during these challenging times has been remarkable. As a result, we delivered record financial performance and made strong progress on our strategic business initiatives. We have entered 2022, well positioned to deliver continued profitable growth and value for all stakeholders. This year notably represents our 95th anniversary and long-standing track record as a successful global company. In recognition of this key milestone on April 5, the 95th day of the year, we will be ringing NASDAQ's closing bell in celebration of our people, innovation and operational and commercial excellence and in recognition of all stakeholders who have supported our business and continue to believe in our strategy. I'm truly proud of the company's global leadership and growth over the years and the strong reputation we have built. And with that, I will now turn the call back to the operator for Q&A.

Thank you. Our first question is from Karl Ackerman with Cowen. Your line is open.

Yes, good morning, everyone. I hope you’re all doing well. I have two questions, if I may. First, I would like some clarification regarding the 100 basis point impact on operating margins. Are you indicating that operating margins for the full year will be 100 basis points lower than the December quarter 2021 level? I just wanted to clarify that, please.

No, Karl. Hi, it's Meenal. So maybe just two things when we're talking about 100 basis points. I mentioned two different things on the call. One being with Carling, with adding Carling into the portfolio with the work that we've got to do around the integration roadmap, we expect an impact to the company margin of 100 basis points or so for the year, just with the margin dilution with Carling coming into the portfolio. I also talked about for 2022 for the year that we're seeing an incremental 100 basis points of cost headwinds coming through, but we expect to mitigate that with pricing. So at this time, don’t expect a net-net impact on the bottom line from that.

Understood. I appreciate that. I guess that dovetails into my next question, which is, it's great to hear you've implemented pricing actions to help mitigate the rising input costs. However, Dave also indicated that your sales channels are seeing more balanced inventory that indicates it may be a bit more challenging to pass along cost perhaps beyond this quarter. And so, if you could discuss that and what actions you may be able to take from a procurement perspective to limit freight and logistics cost going forward, that would be very helpful. Thank you.

Certainly. Our inventory position within the electronics channels is now more aligned with demand as we have gradually built up inventory over the past few months. As we review the actions we've taken throughout 2021, including those implemented late in the year, we expect to see benefits that will help counter ongoing challenges as we move into 2022. We are closely monitoring our elevated logistics costs as well as increases in metals and other commodity prices. We may take further actions in this area as necessary.

Thank you.

Thank you for your questions, Karl. We'll take our next caller, please.

Thank you. From the line of Matt Sheerin with Stifel. Please go ahead.

Good morning, Matt.

Yes. Hi. Good morning, everyone. Just another question, just regarding the near-term outlook, ex that incremental revenue from Carling acquisition, looks like you're guiding sequentially flat. Are those the expectations for each of the big segments, transportation and electronics? Because it looks like you've been well above seasonal for electronics for three or four quarters now? And I guess with the inventory commentary, are you seeing things slow down to kind of a normal seasonal cadence or anything else there?

Yes, I don't think it's unusual, Matt. We're generally guiding towards seasonal trends, but considering the last few years, it's hard to define what seasonal really looks like. Typically, the transition from Q4 to Q1 is flat. If we exclude the variables from Carling, like one month in the fourth quarter and three months in the first quarter, along with the additional week, we find that we're generally flat across the board.

Yes. I’d also mention, Matt, that in the Electronics segment, we continue to see strong ongoing demand from the end market. It has likely stabilized after a period of consistent growth and is now at a stable, high level. Inventories are fairly balanced, so we expect to see the benefits in that part of the business. For the transportation segment, we have forward-looking projections indicating an increase in car builds throughout 2022. Currently, the car build from the fourth quarter to the first quarter appears to be flat based on what we’re observing in the market and from rating agencies. However, the overall outlook shows continued increasing demand in those areas.

Okay. Thanks for that. And then just on the margins and your near-term margin outlook. It looks like you expect the transportation margins to get back to that target 16-plus percent or so. But it looks like near-term, maybe for most of this year, you still have some headwinds with Carling as well as cost inputs and the inability to maybe pass along all those prices. So how should we think about margins in that segment this year?

Yes. So just refreshing back, right, we've always talked about our Transportation segment, the old auto segment really having target margins in the mid-teen range, and that's what we continue to look at as expectations. You're right. In the near term, we've talked about, especially most recently in the past year, it's been around metals. Metal price increases have gone up a lot. There are some other input costs as well. And then just on an interim basis, with Carling it will be about 100 basis points, maybe a little bit more across that segment. So I would say for us, what would improve margins short term, it definitely changes with market pricing around metals. That would be we would start to see that fairly quickly within a quarter or so once we lead off the inventory, but that would be the general expectation.

Okay. Thanks a lot.

Thanks for your questions, Matt. Can we go to our next caller please?

From the line of Luke Junk with Baird. Please go ahead.

Yes. Good morning. Thanks for…

Good morning, Luke.

Thank you for taking the questions. For starters, hoping to better understand, I guess, primarily how Hartland and to what extent any Carling synergies would layer in from here in 2022, given the related margin dilution that we're currently seeing both in industrial and transportation. I know it's something you typically look at over a two to three year period. So Hartland might be more front and center in terms of 2022 actions, but if there's anything initially on the Carling front as well I'd be curious?

Yes. Regarding Carling, we've had ownership for a couple of months now, and we've established an integration roadmap, making solid initial progress. Our focus areas for integration include sales growth and examining pricing across all our businesses. We're expecting these pricing adjustments to help mitigate the inflationary pressures we're facing, including those related to Carling. The teams are also identifying growth opportunities, particularly among different customer bases, and we believe there are promising design-in opportunities available. We anticipate some pricing actions this year. From a cost standpoint, with the scale of our commercial vehicle platform, we see procurement opportunities that we are already pursuing, as well as potential reductions in transportation logistics costs. Additionally, the Carling team has identified many opportunities for investment that could enhance productivity and automation. Therefore, part of our capital plan includes investments we plan to make soon to drive these initiatives.

I think it's also on the Hartland Controls piece that you asked about. Also, we continue down that path or a little further down the path there at year-end, and we've seen nice growth on that business, which ultimately will help drive synergies for us. There is ongoing work to look on the cost side that we think we'll be able to complete in the next year or so that will show improvements in the Hartland margins as well. So I think it's typical for us. Usually, it's a kind of two or three-year horizon for us to be able to get our synergies in place and begin to get the margins to the levels that we feel the business should run at in the longer term.

Okay. Thank you for that. And then my follow-up question, I wanted to ask about Carling, more on a strategic front, which, of course, has really enhanced the company's presence in the commercial vehicle market, both on-road and off-road. But I'm really hoping to better understand this morning is the scope of the opportunity set for Littelfuse going forward as it relates to the electrification of commercial vehicles. You've, of course, shared some incremental content in terms of a framework for light vehicles. And I'm just wondering if there's anything big as breadbox that you might be able to share as it relates to the incremental opportunity now on commercial vehicles as this really bulk up that part of the portfolio? Thank you.

Yes. Certainly. We've talked for some time now about our desire to grow the commercial vehicle portion of our business. And we're very fortunate and pleased with the acquisition of Carling as it does that more than doubles the size of our commercial vehicle position, which increases the importance that we bring to our customers in that space. And in that space, we tend to sell directly to OEMs, so the more we bring there and the more solutions we bring are certainly beneficial for us. The complementary technologies. We've already seen some cases where Littelfuse was maybe not quite prepared to take on an opportunity with the customer. Carling wasn't either. Actually, the combined technologies are now positioning us to better serve that and the customer is recognizing that, and it's increased the opportunity set for us. Carling, overall, on the commercial vehicle space, electrification is absolutely a trend we're seeing. We discussed in our prepared remarks the positive design wins we've achieved in high-voltage applications for trucks and buses, as well as in agriculture. These developments largely pertain to power distribution and protection. They align closely with our core offerings, including electronics switching, and present additional opportunities in that area. Therefore, I would say this fits into both the electronification and electrification trends in the commercial vehicle sector, particularly with Carling enhancing our capabilities.

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

Thank you. Our next question is from Nik Todorov with Longbow Research. Please go ahead.

Good morning, Nik.

Hi, good morning guys, and congrats on great results. First question is, Dave, I think you talked last year that content growth was tracking, I believe you were seeing something in the 8% to 10% range in calendar year 2021. As we go in and look into 2022, how are you thinking about content growth in auto this year?

In 2021, the passenger car segment of our business experienced exceptional growth, with a content increase of about 25%, significantly outpacing the car build growth of approximately 1%. We previously mentioned that about 10% of this growth is attributable to inventory increases at Tier 1 suppliers and OEMs, contributing to our impressive content expansion. Additionally, the OEMs' focus on higher-end vehicles, electric vehicle launches, and the growing content associated with EVs played a role. We also gained market share in 2021, which is a rare achievement for us. Looking ahead to 2022 and beyond, we anticipate some volatility in content growth due to potential inventory pullbacks. It's uncertain how much of the 10% inventory growth from 2021 will represent a structural change in supply chains with our customers; some may revert. This could lead to fluctuations in content metrics from quarter to quarter. We also do not expect to see market share gains consistently every quarter or year, so we anticipate a normalization trend moving into 2022 and 2023, though significant opportunities for content growth remain.

Okay, great. Very helpful. Thanks for the details, Dave. Related to auto, can you share how much of your sales now come from electric vehicles and plug-in hybrids? Also, how do you anticipate that changing in 2022?

Yes. We have not disclosed the specific revenue generated from electrification trends. However, it is clear that this trend has significantly contributed to our content growth over the past year. Our business has a strong content opportunity in electrification, with our traditional low-voltage products remaining steady while we see increases from high-voltage components added to electric vehicles. For a full electric vehicle, the content opportunity can rise significantly from our low-voltage offerings, which can reach up to about $5 per vehicle. In the case of full electric vehicles, this can increase to six or even eight times that amount, depending on the design. Thus, electrification is a major contributor to our content growth and is expected to accelerate moving forward.

Sure. I would like to add that we are also experiencing content growth from infrastructure as part of our strategy. When considering e-mobility overall, we take into account everything Dave mentioned regarding passenger vehicles, the infrastructure aspect of our business, as well as the developments in the commercial vehicle segment. There are many broad opportunities when we consider electronification.

Thank you, Meenal. I have a question regarding the M&A integration and the near-term cost challenges. How should we view the follow-through in relation to your usual target of 30% for the year?

Yes, regarding the earlier margin question, we believe that with our current efforts around pricing, we can manage the challenges we are facing. Some margin dilution from Carling is expected this year, but that should improve as we integrate. Year-over-year, we anticipate our operating margins to remain strong, aiming for a target margin range of 17% to 19% for 2022. While we may be slightly lower on incrementals, we still expect solid margin performance.

Got it. Very helpful. Thanks, guys. Good luck.

Thanks, Nik. Appreciate your question.

Our next question is from Christopher Glynn with Oppenheimer. Your line is open.

Good morning, Chris.

Hi. Good morning, everyone. I have a question regarding your M&A pipeline. I'm interested to know if the passenger vehicle EV technologies are a focus for you, or if you prefer an organic approach in that area?

Yes. I think our primary focus on the electrification side and pass car is organic in our efforts, and we've invested in that, continue to increase our investments to support the e-mobility efforts there. However, there clearly are technology enablers that we have kind of within that funnel that we look at that perhaps could accelerate our uptake in the electrification efforts over time. Finding those, getting them broken loose and whether we can get those accomplished or not, that's the challenge today, at a reasonable price. But I would say, primarily, the focus is organic. However, there's opportunistic things there from a technology enabler.

Okay. Great. And as we think about the electronics profile coming off a strong year, any puts and takes you might advise versus my and perhaps others' presumption of normal seasonality to the balance of 2022.

Yes. So for our Electronics segment, Chris, we've always talked about, think on average, through cycles, upper teens to 20% range. Even with the work that we've been doing on optimization, we've talked about in the past few years on IC synergies, et cetera, I think either we would say we can look at an average of 20% through the cycles with really the strength and also the volume additions that we've had. So I think that helps us a bit as well.

Yes. Meenal, sorry, I'll try to ask the question more clearly. The question was about seasonality, which refers to revenue in the context of coming off a strong growth year, but you still have positive book-to-bill. My presumption for modeling would be your normal seasonal patterns through the quarters as we model out 2022 or update those models. So I'm wondering if against that assumption you'd advise any particular puts and takes?

Yes, Chris, I can address that. The past couple of years in the electronics and broader markets have been anything but typical, making it challenging to make predictions for the future. Currently, we believe that end market demand has somewhat stabilized, albeit at high levels. If this trend continues, it’s possible that we might see normal seasonal patterns at these elevated levels in our electronics business. However, there are some caveats, particularly concerning the Omicron variants and their potential impacts, which introduce a degree of unpredictability that complicates forecasting. Clearly, while our distribution channel position, our inventories remain at a really healthy range and over inventory, they're in a pretty good healthy range. We feel good about that. However, keep in mind, we also stated that we have seen some evidence of increased inventory at contract manufacturers and at end OEMs that certainly show some inventory build out in the marketplace. So we all know that there is the potential for corrections within the electronics industry. We don't see near-term evidence of that. But certainly somewhere out in the future, that could come, and we watch very carefully for that.

Great. Thanks for the color.

Appreciate your questions, Chris. We’ll take our next caller, please.

From David Kelley with Jefferies. Please go ahead.

Good morning, David.

Hi, good morning, team. Maybe on the market share gains that you noted in transportation, Dave, could you provide some color on where you're gaining traction? And just curious, it's early days, but how do you see your market share playing out in the emerging EV space?

The market share gains we achieved in 2021 were primarily in our core traditional areas, particularly in the lower voltage segment of the business, with some progress in Europe and Asia. This was largely due to our ability to respond effectively to peaks in demand, allowing us to serve our customers better than some of our competitors, which has always been our strategy. We believe we have gained value from this and will maintain our market share. However, given our market position, we do not anticipate gaining market share every year. Regarding the electrification side, we have acknowledged that we expect to have a smaller market share compared to our low voltage business due to the emergence of new technologies and competitors. Nevertheless, the opportunities for growth and content remain significant, and we still aim to lead in this area, although our market share will not match that of our low-voltage segment.

Okay. Got it. Thank you. And then maybe, Meenal, there are several moving parts to transport margins in 2022. Can you give us a sense of how you're thinking about the core incremental volume leverage, maybe ex the Carling contribution?

Yes. I think right now, we talked about the fact and if we just talk about the automotive side of the Transportation segment for a minute, we talked about the fact that we believe car build will be about $80 million. So that's somewhere in the mid to upper single-digit growth rate range. That's the case. We will expect to get some growth and some improved volume leverage from that on the base. But I think our biggest headwind still, as I've mentioned, has really been around metals pricing. So that's one that we keep a very close eye on. If we start to see some improvements there between metals and some other input costs, that will definitely help faster for us. So that's a big part of what we're monitoring. And then, of course, I don't want to be remiss in mentioning, absolutely, we're going after pricing on auto. We've talked about that with OEM customers, one that takes longer in general where we have OEM customers; and two, because of the market share position that we enjoy there, we tend to have some longer contracts in place. So renewals take a while as we go in and think about those, but absolutely, that's a focus area for us as well.

You recently completed the Carling acquisition, and your commercial vehicle business is expanding significantly. Can you provide an overview of your commercial vehicle segment at Littelfuse today? Specifically, how do you break down your exposure in areas like highway, construction, and agriculture? Are there any notable regional differences that we should be aware of? I'm looking to understand the current status of the business.

Yes. And we talked about it within the Transportation segment now, commercial vehicle is kind of approaching that 50% range of that segment. So it's scaling nicely. When we think about the end applications between heavy truck and bus, ConAg, also kind of going to material handling which is an interesting space as well. We don't have an outsized position in any of those. It's a pretty broad exposure across those end markets, which we think is healthy. We see really strong technology shifts and changes coming in all of those spaces as they look at electrification. So we think the dynamics there play out is a very positive trend for us. Both electrification and growing sophistication in the electronics within those applications all play out to be very positive for us. Historically, we would have said we were more North America-centric. Carling actually helps us to kind of balance that a little bit better. So we still today would have the strongest exposure in North America, followed by Europe and then ultimately, Asia or more specifically China.

Okay. Perfect. Thanks, Dave and Meenal. Appreciate it. Yes. Thanks, David. We’ll take our next caller, please.

Thank you. From David Silver with CL King, your line is open.

Good morning, David.

Thank you. I have a couple of quick questions. In your guidance for 2022, you mentioned a CapEx budget of up to $120 million, which I assume is about two-thirds discretionary and significantly higher than what you were spending a few years ago. Could you clarify where the discretionary portion of your CapEx budget will be allocated and what your goals are? Are you focusing on global penetration, increased production capacity, or greater efficiency? Any insights on this would be appreciated. Thank you.

Yes. No, great question, David. So, maybe just to frame it a little bit. In 2021, I mentioned in my prepared remarks, we spent about $90 million in capital, again, higher than we had spent at a previous time. But I would also say between the volume declines we saw in 2019 across multiple businesses as well as with the COVID implications from 2020. I would say, our spending was lighter than we would normally see in those two years. So there is some element of catch-up that's been going on in 2021 and 2022. That's not the bulk, but just to lay that groundwork. I would say a lot of our back half of 2021 and into 2022 is really around capacity. So I don't know that I would characterize that as much as discretionary, because we want to make sure that we're getting ahead of the growth that we've been keeping up, but we want to always be ahead of the growth because Dave talked about market share gains as an example, we got in auto. That's one great example where we invest ahead for the future, and we think about where the market is going and we've been very successful in doing that and not only across automotive, but of course, across electronics and some of our legacy parts of our industrial business, we've been pretty successful in doing that. With the acquisitions we've made, we're completing most of the IXYS work, which requires minimal capital expenditure. I've mentioned that we see opportunities for automation and efficiency improvements at Carling that the team has identified, and we plan to invest in similar initiatives at Hartland. These are some of the key areas of focus for 2022.

Yes. I think it's important also to know that as Meenal mentioned, our 2021 spending, we would have liked to have spent more in 2021. But just like there are delays in many markets, getting the equipment that we need and when we need it for capacity expansions and new products and things like that, it's a little more challenging, it takes longer. So some of that is kind of bleed over from things we would have spent in 2021 and we couldn't. But overall, we still see long-term. The business hasn't structurally changed how we spend CapEx, that 4%, 5% sort of range is the expectation we have.

Thank you. I realize we're a bit past the hour, so I would appreciate a concise response to my question. This relates to recent announcements from major automakers who have not previously been very proactive with their electric vehicle development, yet now seem to be unveiling significant investment programs on an accelerated timeline. I’m interested in your thoughts on this trend and what opportunities it might create for Littelfuse, particularly regarding design-in approaches. How do you see the announcements from companies like Ford, GM, or Toyota, and what should we consider in terms of the vehicle types, volumes, and timelines they are discussing? How does this wave of announcements and spending plans influence your perspective on how Littelfuse can engage effectively?

Yes, absolutely. We have been experiencing this for some time, and the trend towards electrification is certainly picking up speed. For many years, the progression was slower than we expected, but now it seems to be accelerating more quickly than anticipated. We have reached a crucial turning point. However, there are numerous structural challenges that need to be addressed to accommodate the increasing demands, such as lithium availability, battery cell capacities, and related issues. Additionally, there are significant challenges at the grid level regarding charging infrastructure, all of which require attention and resolution. Many of these issues remain unsolved, and numerous companies and customers are actively working on them. The positive aspect for us is our established relationships with key players, including original equipment manufacturers and Tier 1 suppliers. Moreover, we identify the potential beyond these connections in the infrastructure domain, particularly regarding EV charging and energy storage, which is often necessary for EV charging systems. These represent significant opportunities across our business segments. Some of these opportunities manifest in our industrial sector, others in electronics, and certainly within our automotive division. We recognize these fundamental shifts. We've also discussed battery conditioning, which involves integrating some of our products into the equipment within factories where battery packs are produced, where these packs must be charged and discharged for optimization and to check for potential issues. They also need to be in specific conditions before they are shipped. There is a variety of equipment needed in and around these factories, and we have strong design-ins in this area. Our positioning in this market is extensive, and we believe we are exceptionally well-prepared for it. Our existing core technologies align well with this trend, and we are continuously looking for ways to enhance our competencies to support this area, including pursuing strategic acquisitions that will also help. We are enthusiastic about this very real trend and confident in our ability to capitalize on it.

Okay. Great. Thank you very much.

Thanks, David. We’ll take our next caller please.

Thank you. From Karl Ackerman with Cowen, your line is open.

Yes, thank you for the opportunity to address a follow-up question. Dave, you spoke about gaining market share from opportunistic design wins across various parts of your portfolio. And Meenal, you spoke about adding CapEx to capture market growth. I'm curious whether some of these design wins have come from at least one of your larger peers who's been quite vocal about deemphasizing several hundred million dollars of products, some of which overlap with your own products. And I ask because that would argue there is a large runway on these existing designs. So if you could address that, that would be helpful, as you talk about expanding your design win pipeline? Thank you.

Yes, we are experiencing market share gains and design wins that are widespread, not limited to the semiconductor sector. While we are seeing gains there, our successes extend beyond that area. This relates to two key factors: our ability to serve customers effectively, which has worked to our advantage over the past year, and the diverse range of our offerings along with the new technologies and products we are launching, which are gaining traction across various applications. For example, the protective segment of our semiconductor business is performing well in the applications we cater to, but our success is not confined to a single area or competitor; it is much more widespread than that.

Yes. And Karl, I would add that my comments on capital expenditures were also very general and in line with what Dave mentioned. We are not allocating a disproportionate amount of capital expenditures to any single business. However, we have been receiving numerous inquiries about growth. A significant portion of our capital expenditures is directed towards electric vehicle growth and electronification, impacting various areas of our business, including automotive electronics. Thus, it is quite broad-based in nature.

Very helpful. Thank you.

Appreciate the tough question, Karl. That concludes today's call. Thank you for joining us and for your interest in Littelfuse. We look forward to talking with you again soon. Have a great day.

Thank you. And this concludes today's program, and you may now disconnect. Have a wonderful day.