Earnings Call Transcript - LFUS Q1 2024

Operator, Operator

Good day, everyone, and welcome to the Littelfuse First Quarter 2024 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to the Head of Investor Relations, David Kelley, please proceed.

David Kelley, Head of Investor Relations

Good morning, and welcome to the Littelfuse First Quarter 2024 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 first quarter, and a copy of our earnings release and slide presentation is available in the Investor Relations section on 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 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 Form 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.

David Heinzmann, President and CEO

Thank you, David. Good morning, and thanks for joining us today. Let's start with highlights on Slide 4. The first quarter of 2024 brought a continuation of several of the themes we previously discussed and expect to continue into the new year. We continue to see meaningful new business opportunities and design activity across our diverse set of end markets. Our customers remain committed to advancing sustainability, connectivity, and safety themes, and we are helping them drive innovations across a broad base of applications. Our experienced global team continues to deliver solid execution amid an ongoing challenging macro environment. Following a record cash flow year in 2023, our strong first quarter cash generation reflects our disciplined operating model. Finally, our balance sheet and significant financial capacity provide us with the continued flexibility to enhance our long-term positioning. Our first quarter results reflect our resilient business model, ongoing diversification initiatives, and strong execution. We delivered first quarter sales above and earnings within our prior guidance range. I want to thank our global teams for their continued hard work and commitment to serving customers and growing our business. With the dynamic environment we experienced in 2023 continuing into 2024, I wanted to provide a brief update across our businesses. In the first quarter, we continue to see channel and OEM inventory reductions and also some areas of expanded end market weakness across our businesses. Regarding our Electronics segment distribution exposure, while still elevated, we saw consistent channel inventory reductions throughout the quarter. As we have discussed during prior earnings calls, we have been in an elongated electronics destocking cycle, and we continue to see signs of ongoing inventory reductions at EMS and end customers. However, we see emerging signs that suggest we are potentially nearing an inflection point. Our passive electronics business benefited from an uptick in order rates late in the first quarter and entered the second quarter with a more typical backlog and a book-to-bill above 1. Regarding our semiconductor exposure within the Electronics segment, we are seeing weakening industrial demand and ongoing softness across consumer applications. We expect the softer industrial outlook will impact our semiconductor sales through the next couple of quarters. Despite near-term trends, our Electronics segment remains well positioned to capitalize on strong long-term growth drivers, and our portfolio diversification initiatives have driven improved profitability relative to prior trough cycle levels. Moving on to our Transportation segment. Our passenger vehicle exposure continues to benefit from our balanced product capabilities and broad technology leadership. We are seeing solid interest in our core products as customers seek to better align with consumer demand for internal combustion and hybrid vehicles. In China, we continue to show solid traction in low voltage applications for high-growth local OEMs. The China auto industry is aggressively delivering vehicle advancements, and we are benefiting from strong content per vehicle expansion in the region. Globally, we believe customers are aiming to balance near-term consumer preferences with long-term electrification plans, and we continue to generate solid design wins with our high-voltage fuses and current sensing. Regardless of powertrain mix, we are well positioned to support our global passenger vehicle customers with innovative products that will drive long-term growth. Regarding our commercial vehicle exposure, we are also seeing ongoing distribution channel inventory reductions, yet our commercial vehicle initiatives are driving cost improvements while pricing actions are also bearing fruit, ultimately benefiting our Q1 results. Taking a step back, we are making solid progress with our previously disclosed transportation segment actions as our product line initiatives and cost structure improvements helped to drive sequential margin improvement in the first quarter. Finally, with our Industrial segment, we are seeing softer-than-expected end market demand, which we believe will continue through the next couple of quarters. In the first quarter, we saw incremental in-demand weakness led by MRO and construction, charging infrastructure, and factory automation applications. Demand is mixed for renewable applications, with energy storage strong across all regions, while the solar market softened in the quarter. Yet industrial safety applications continue to show signs of growth, and we are seeing early indications of troughing residential HVAC demand. Meenal will provide more segment-level details shortly. Now let's turn to our end markets and design activity. Moving to Slide 6 and electronics design activity. We continue to be a leading technology enabler for a broad base of customers. We are seeing new product launches gain traction as customer design activities accelerate. In the quarter, we secured a meaningful medical win with our custom power semiconductors for a customer in China. We also won business for multiple appliance customers in China for both fuses and switches. We delivered a semiconductor win for a space-related communications application. We also won business for data server power supplies for a customer in Taiwan. Finally, we delivered a meaningful telecom win in India that will utilize our core circuit protection offering. Beyond near-term trends, structural electronics end market drivers such as artificial intelligence, automation, and technology reliability remain key opportunities as our customers continue to depend on us for innovative engineering expertise. Turning to Slide 7. Industrial design activity remains solid across our exposures, supporting long-term industrial end-market growth themes. In the first quarter, we had success in North America and renewables, where we had a meaningful win within an energy storage application with a leading customer. We won business with multiple customers for industrial safety applications in North America, highlighted by commercial kitchens. We also secured wins for EV infrastructure applications across multiple regions, including Level 2 charging wins in North America and Europe and DC fast charging wins in Asia. Taking a step back, long-term industrial investment remains strong, supported by infrastructure spending, increasing electrical efficiency requirements, and global commitments to decarbonization. We will continue to benefit from deep engineering expertise and product offerings as well as continued execution reflected in ongoing strong design wins and broad customer momentum. Moving to Slide 8. Within transportation and our passenger vehicle exposure, we continue to leverage our balanced product capabilities, global scale, and technology leadership as customers adapt to evolving consumer preferences. In the quarter, we secured customer wins for high-voltage fuses across multiple regions, including North America, China, and Korea. We won multi-technology business for an onboard charging system in Europe. We also won low-voltage fuse business for multiple OEM customers in Europe. Finally, we secured a motor protection win for an electric motor application in Europe. We remain encouraged by our passive vehicle momentum, supported by our continued solid cadence of design wins across electrification and electronification applications. While we are seeing customers in North America and Europe adapt to shifting consumer preferences, which could impact the pace of EV adoption, we are confident in our well-rounded long-term automotive content opportunity. Regarding our commercial vehicle exposure, we delivered several wins from various applications and regions in the quarter. We secured a custom multi-technology opportunity for an electric commercial truck provider in Europe. We won switching business for an agriculture equipment provider in North America. And delivered wins for material handling and mining customers. Long term, we believe we are well positioned to enable ongoing electrification and electronification advancements in material handling, agriculture, construction equipment, and heavy-duty truck and bus markets. Across our businesses, our innovative solutions and technical expertise continue to resonate with our broad customer base. I will now turn the call over to Meenal to provide additional color on our financial performance and outlook.

Meenal Sethna, Executive Vice President and CFO

Thanks, Dave. Good morning, everyone, and thank you for joining us today. Please turn to Slide 10 to start with details on our first quarter results. Revenue in the quarter was $535 million, down 12% versus last year, both in total and organic. The product line pruning actions we discussed last quarter reduced sales by 2%. GAAP operating margins were 10.3%, and adjusted operating margins were 11%. Adjusted EBITDA margins finished at 17.1%. Foreign exchange had a 50 basis point unfavorable impact on margins, largely due to cost increases from a stronger Mexican peso. First quarter GAAP diluted earnings per share was $1.93 and adjusted diluted EPS was $1.76. Our first quarter GAAP effective tax rate was 13% and adjusted effective rate was 19.3%. Our adjusted effective tax rate was slightly lower than expected due to some one-time discrete benefits. Please turn to Slide 11 for updates on our capital allocation. Starting with cash generation, we began the year on a strong footing, generating $57 million in operating cash flow, up 7% versus last year. Free cash flow was $42 million with an 86% conversion to net income. We remain on track to achieve our expected 100% free cash flow conversion target for the year. We continued our focus on working capital optimization this quarter, reducing both inventory dollars and days on hand. We ended the quarter with $562 million of cash on hand and a net debt to EBITDA leverage of 1.4x. We're able to leverage the strength of our balance sheet as we continue to assess opportunities and remain disciplined in our capital allocation strategy. Our goals are unchanged with an intent to return about 40% of our free cash flow to shareholders and the balance invested in strategic acquisitions. In the quarter, we returned $32 million of capital to shareholders, evenly split between our quarterly dividend and share repurchases. During the second quarter, we've repurchased an additional $23 million in shares through last Friday. We also announced yesterday that our Board approved a new 3-year $300 million stock buyback authorization effective May 1. We will continue to assess periodic share buybacks, especially when we believe our valuation doesn't reflect our continued confidence in our long-term growth strategy. Please turn to Slide 12 for our product segment highlights, starting with the Electronics Products segment. Sales were down 19% versus last year in total and organic. On an organic basis, sales across passive products were down 10% versus last year, while semiconductor products declined 25%. The increased weakness we saw across industrial markets presented a greater headwind across our semiconductor products. Operating margins in the quarter were 13% while EBITDA margins finished at 19.8%. We remain confident in the margin resiliency in the Electronics segment with the work we've done on portfolio diversification, improved execution, and cost structure. We expect robust improvements in our segment margins as we return to growth. Moving to our Transportation Products segment on Slide 13. Segment sales were up 2% and up 3% organically. Sales were negatively impacted by 6% versus last year from the pruning actions we've been undertaking. Across our Passenger Vehicle business, sales grew 12% organically. We continue to see strong growth from both content and product launches we supported, especially in China. Within Commercial Vehicles, sales for the quarter were down 6% organically, a combination of continued inventory destocking at distribution partners and our product line pruning actions. For the segment, operating margins were 9.5%, and EBITDA margins finished at 14.6% in the quarter, expanding margins sequentially by 480 basis points and 380 basis points, respectively. We've taken a number of concrete actions to drive improved profitability, including a balance of price increases and product pruning, as well as structural cost actions to improve gross margins and reduce operating expenses. We are focused on steady improvements as we work our way back to double-digit margins. On Slide 14, the Industrial Products segment was down 13% and 14% organically. We saw weakness from an expanded set of industrial end markets and continuation of inventory reductions at some OEMs. Operating margins finished at 6.5%, and EBITDA margins were 11.9%, both down versus last year and below our expectations. Volume is a key driver in our typically strong margin profile. We are also in the midst of footprint shifts to improve profitability and add capacity, which produced some near-term manufacturing costs and constraints. We expect progressive margin recovery in the coming quarters. Please move to Slide 15 for the forecast. Summarizing Dave's earlier comments, we continue to see channel and end customer inventory reductions, though we believe we are nearing an inflection point. We're also seeing select areas of expanded industrial market weakness. As reported through the headlines, inflationary trends are continuing. With these assumptions, we expect second quarter sales in the range of $525 million to $555 million, equaling 1% sequential growth at the midpoint. By segment, we expect sales across electronics to be flat and for transportation and industrial to be slightly up. With the recent shifts in a number of currencies, foreign exchange is a net unfavorable impact to us for revenue and earnings. For the second quarter, we project a 1% headwind on sales and a $0.16 negative impact to EPS. We're projecting adjusted EPS to be in the range of $1.65 to $1.85, which assumes a tax rate of approximately 23%. As we've discussed historically, our second quarter guidance also includes higher stock compensation expense versus other quarters due to certain retirement provisions. This has an unfavorable $0.30 impact to EPS and a negative 170 basis point effect on margins in the quarter. Please turn to Slide 16 for our full year 2024 expectations. We anticipate a return to sales growth later this year. We expect product line actions to reduce total sales by about 2% and reduce transportation sales growth by about 5%, slightly less than our projection last quarter. At current rates, we expect foreign exchange to be a headwind of 1% to sales and a $0.50 headwind to EPS. We've made significant progress in improving through-cycle margins within our Electronics segment and are on a solid path for improvements to our Transportation segment profitability. However, the elongated inventory destocking and end market variability have impacted the timing of our volume recovery. With these market undercurrents, we expect company operating margins to finish in the mid-teens for the year with improvements as the year progresses. Across our segments, we expect electronic operating margins to average in the upper teens and industrial operating margins in the mid-teens. We remain confident in the progress we are making in transportation and expect to exit the year with high single-digit operating margins. Another modeling item, we're assuming $64 million in amortization expense and about $39 million in interest expense. We are estimating a full-year tax rate of around 22%, slightly higher than our prior estimate due to shifts in earnings mix by jurisdiction. We expect to invest about $100 million in capital expenditures. We are executing through a difficult macro environment, and we're well positioned as we emerge out of it. Our priorities remain focused on the areas we can control, ensuring we are well poised as the destocking diminishes and markets recover to drive growth and commensurate margin expansion. We're leading sustained profitability improvements across our transportation segment and continuing our path forward to best-in-class profitability and cash generation. Thank you to our Littelfuse colleagues worldwide and their unwavering commitment in steering our company forward every day. And with that, I'll turn it back to Dave for some final comments.

David Heinzmann, President and CEO

Thanks, Meenal. While the first quarter brought a continuation of many of the themes we have discussed last year, we believe our results and customer momentum continue to support our long-term growth strategy. Our increasingly diversified business model and agile teams improved the profit resiliency while positioning us for meaningful long-term earnings expansion. Our continued design win momentum reflects our robust technology offerings across broad end markets and the strength of our customer relationships. Our strong cash generation and balance sheet position us to further capitalize on growth opportunities while remaining confident that we will return to growth during 2024. We are also confident that we will continue to execute through cycles, drive long-term double-digit revenue growth and leveraged earnings expansion, and deliver top-tier shareholder value. I want to again thank our global Littelfuse team for their hard work and commitment to our customers and supplier partners. And with that, I will now turn the call back to the operator for Q&A.

Operator, Operator

Your first question comes from the line of Luke Junk from Baird.

Luke Junk, Analyst

Dave, hoping we could start with just your view that inventory destocking in the passive side is close to inflecting. And really what I'm hoping to tease out is your view of underlying point of sales demand and just kind of regardless of timing ultimately. What kind of feedback you're getting from distributors and customers relative to the level of real demand? If you will, once you finally clear these channel dynamics?

David Heinzmann, President and CEO

Thanks, Luke. Thanks for the question. Certainly, it's been a messy several quarters as corrections have been driving through the electronic side of the business. And the positive sign we see is that our book-to-bill is above 1, for the first time in 7 quarters for our passive products. So that's a good positive indicator. Now POS numbers are not dramatically increasing yet as we still think there's a little bit of time for EMS, customer inventories to work their way down, which is dampening the POS at the distributor level. But as we've walked through these types of cycles in the past, these are certainly the early indicators for us that things are about to turn on that side.

Luke Junk, Analyst

That's helpful. And then my follow-up would be for Meenal in Transportation. Just hoping you can help us bridge from the mid-single-digit level that the business was at from a margin standpoint last year to this quarter at 9.5%. And specifically, just trying to tease out anything that was maybe unique to the first quarter? And would you expect margins to sustain at this level or maybe dip some and come back to the high single digits exiting 2024?

Meenal Sethna, Executive Vice President and CFO

Sure. Thanks, Luke. Yes, happy to talk about our transportation margins. So as I mentioned last quarter, we have put a lot of effort, as you saw in the first quarter results, really on improving the transportation margins. They've been running below our expectations. I'd say some of the key actions over the past several quarters. One is cost reductions that we had put in place that are really bearing fruit as you can see through the margin improvement. Really breaking down some of our product line activities and working with customers looking at our profitability and then talking with customers about the value that we're bringing, and either that drives improved pricing for us, which we did in several areas, and we believe that's going to be pretty sticky. In other cases, we've exited some product lines, and overall, that includes the margin profile as well. And then along the way, we're working on what I call the rooftop reductions, not just looking at our manufacturing supply chain, but also some administrative sites that we're getting out of as well and that falls into that cost category. So as I look ahead with all of that to 2024, some of that you'll see continuations of all that activity bearing fruit. And I would say with volume and mix shifts across our commercial vehicle and automotive side of the business, we expect that high single digits to continue, but it may not necessarily look linear as we go through 2024, but our expectation is still this margin level overall.

Operator, Operator

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

Matthew Sheerin, Analyst

Just a question, Meenal, on the margin targets for the full year, particularly electronics margins for the high teens from the low 20s now. So that would imply pretty significant expansion, particularly Q3, Q4. And I know you're expecting year-over-year growth, I suppose, by Q4 of this year. But what's going to drive the margins given that demand is still weak? And I would imagine that you're seeing, and maybe you can comment just on the pricing environment that you're at least seeing a normal price downs or cost downs from customers?

Meenal Sethna, Executive Vice President and CFO

Sure, I'll focus on your question about electronics. Just to recap, all of our margin targets are set as long-term goals. In recent years, our electronics margins have exceeded the 20% range, but this year we anticipate something a bit lower. Last year, we increased our overall long-term margin target to above 20%, which reflects the significant effort we've put into diversifying our portfolio, reducing costs, and executing well. Currently, what you're seeing in our first quarter and our guidance for the second quarter is influenced by ongoing destocking, particularly in certain areas of our passive products within the semiconductor sector. Additionally, we're experiencing increased weakness in the industrial market that particularly affects our power semiconductor segments. So, for the first and second quarters, we are facing challenges from both destocking and market weakness. However, as Dave mentioned earlier, we do see some positive signs and potential inflection points in the market, which gives us optimism for future growth. Typically, our incremental margins during recovery periods are quite strong. This is the basis for our margin expectations for the year. Although we expect it to be lower than average, over the next few years, we still anticipate maintaining a margin above 20%.

Matthew Sheerin, Analyst

Okay. And could you talk about the pricing trends that you're seeing? And also, could you talk about the inventory levels within distribution and versus where it was and expectations?

David Heinzmann, President and CEO

Sure. I'll take that, Matt. From a pricing standpoint, we start out with creating the basis points that the pricing that was gained in the last few years has continued to be pretty sticky. So we really haven't seen that erode or swing back because costs continue to be elevated, right? But from a normal month-to-month, quarter-to-quarter sort of outlook, what we've seen is really a pretty return to normal types of pricing activities. And often, there's a worry that as you have a little slower periods that there's going to be higher levels of pricing pressure. While we've seen it in a couple of small pockets, in general, we've seen more normal sorts of pricing pressures across the business on that. From an inventory perspective, if you look at our electronics channel partners and channel distribution levels, we're beginning to get to healthier levels there, we're probably 85% of the way through the inventory burns that need to take place there. So there's still a little more to go. But keeping in mind, the big opportunity for us is even if end market demand remains fairly muted, when we reach that inflection point of getting down to the inventory levels that are appropriate, we'll get gains in sales driven by that. And we also think there are some positive signs on the demand side and the broader electronics part of the business. Industrials are a little softer, that impacts, as Meenal said, the power semiconductor side. But we're beginning to approach a healthier position on the inventory.

Operator, Operator

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

Joshua Buchalter, Analyst

Maybe following up on the previous one. So, it sounds like you moved from 70% to 85% of the way through the inventory digestion. Do you expect the vast majority of the remaining 15% to be wrapped up by the June quarter? And if so, I know it's generalizing across your total business, but maybe you could remind us, like, if you were to ship to end demand in the back half of the year, maybe help us with what normal seasonality would look like?

David Heinzmann, President and CEO

Well, I'm not sure what normal seasonality is anymore with the amount of disruptions that we've seen in the last several years. But what I would say is, it's always a little challenging to pick exactly when you hit that inflection point and it's really by product line, by distributor, where we have some product lines that are there already. They're kind of target inventory levels and are quite healthy, and others that are still a little farther to go. But we think the bulk of the channel destocking, we will work through in the next quarter, that's kind of the math as it has worked out and what we've been seeing the burn rates on our inventory position. We think we'll probably head into the back end of the year in our passive products that are in pretty healthy inventory position. So the challenge then becomes what's normalized from a calendarization because we'll have both the impact of normal calendarization. And typically, third quarter is a little stronger than the fourth quarter. Second and third quarter are kind of similar. That will be normal calendarization. But you throw on top of that destocking ends. So you would expect, if all things play out, that we'll start to see some things turning in the back half of the year because that end of destocking or slowing of destocking will help drive that and actually could produce better than normal seasonality in the back half of the year.

Joshua Buchalter, Analyst

Got it. And then on the second quarter guidance, it looks like a decent 100, 200 basis points of operating margin expansion back of the envelope based on 1% revenue growth. Maybe you could help us understand the drivers across OpEx? Or is it gross margin? Whether mix, volume, or pricing?

Meenal Sethna, Executive Vice President and CFO

Yes. I would say margins overall as sales pick up a little bit, and again, there's been cost work that we continue to do when we see businesses that are in a decline. So whether that's discretionary spend, some cost work a little bit of margin recovery on things that we've done. So I think those are positive as we think about the second quarter. The other things I wanted to mention that are also in the slides and prepared comments for the fact, with foreign exchange, as we've seen a strengthening dollar and the mix of currencies that we have, FX is a headwind for us on the margin, about 90 basis points for the second quarter. And then I think those who have been with us historically know that we have this bit of a second-quarter phenomenon on our stock compensation where just because of the provisions in some of our stock grants, there's a little bit of what I call a bullet vest that happens in the second quarter. And so while it's not an outsized cost, it's just that we have to recognize it all in the second quarter versus taking it over a longer period. So that's about a $0.30 impact in the second quarter, if you're just looking at sequential pieces. That's a little bit of a hit there too.

Operator, Operator

Your next question comes from the line of Christopher Glynn from Oppenheimer.

Christopher Glynn, Analyst

I had a question about the pruning. You reduced it from a 6% to 8% impact down to 5%. Is that due to market dynamics, timing, and customer service considerations? I'm curious about the narrower scope. Is this a process that will take a couple of years, or is it mainly an adjustment for 2024?

Meenal Sethna, Executive Vice President and CFO

Yes. No, great question, Chris. So on the pruning side, if I take a step back, where really, for us, the pruning is really taking a look at more granular pieces of the portfolio, really understanding the customers, the products, and the profitability on both of those pieces. So for us, it's really trying to ultimately balance the profitability and return in where we can as much as possible. We prefer to retain customers, we prefer to continue doing business with the customers, but it has to incorporate the value that we bring at an expectation of profitability and return. So in this specific case where we brought down the numbers a little bit, as we've gone back to a number of customers and even internally looked at ways to improve profitability, we found that, hey, maybe we have pruned a little bit less, and Dave talked about some of our pricing being sticky. In the case of our Transportation segment, we had price increases this quarter, and we went back to a number of customers again around price, and we expect that to stick. So that's really what's driving a little bit of that trend where it's less pruning. And I would say, yes, this will go through this year. But I would also say this is not a one-and-done either, this is something that we continuously look at. We don't always talk about it as much. This is just because we're going through a bigger effort through the transportation segment right now. But this is something that we look at continuously. I just don't expect it to continue at this level as we go into 2025.

Christopher Glynn, Analyst

Okay. So good chance it's not a talking point next year beyond a discussion of how you run the business in theory?

Meenal Sethna, Executive Vice President and CFO

Correct.

Christopher Glynn, Analyst

Okay. And then I just want to go back to Matt's questions about the electronics and industrial margins implied steep second half ramp to get to upper teens for the full year result for electronics and mid-teens for industrial. Is that just really all volume related? I guess, I don't know about how mix and absorption are factoring into that equation. But the first and second quarter guide, it does look like a steep ramp. So we want to kind of understand the model a little bit better.

Meenal Sethna, Executive Vice President and CFO

Sure. Regarding electronics and industrial, they are somewhat different. For electronics, we anticipate some volume improvements and see signs that inventory destocking is coming to an end. As we replenish inventory, it should drive growth in that area. We're also examining costs, particularly in the semiconductor sector, where we've noticed some market weakening. These are the two key drivers for electronics. I’m optimistic about the margin trajectory, reflecting the efforts we've made in recent years. For industrial, we are expecting some volume growth, but we’re also focused on internal improvements. Over the last few years, this sector has experienced strong organic and inorganic growth. We are working on our operational footprint to be closer to our customers, optimizing our cost structure, and increasing capacity. Some challenges in the first quarter stemmed from these ongoing actions, leading to manufacturing constraints and costs that I expect will improve in the coming quarters, thereby enhancing profitability.

Operator, Operator

Our next question comes from the line of Saree Boroditsky from Jefferies.

Saree Boroditsky, Analyst

Just building on what you're just talking about. You mentioned some manufacturing issues impacting the first quarter margin in Industrials. Could you just size that impact for us so we can think about the recovery in margins there?

Meenal Sethna, Executive Vice President and CFO

Yes. I mean, I would think about it as I mentioned 2 things. One, I would say just some additional costs we incurred, but also just some capacity constraints as we were out getting into the weeds, some things on moving equipment around. So I'd say from a growth perspective, I'd say we were probably looking at a couple of points of growth on the top line, which, of course, drops into the margin, and then just maybe a point or so on cost. So again, as we work through that, I expect we still have a little bit of activity here in the second quarter, but we absolutely expect it to get better.

Saree Boroditsky, Analyst

That's helpful. It seems Industrial, as you talked about some weaker industrial markets and you provided some great detail on there. Maybe just think about, as you think about the improving signs of destocking, how do we actually think about the overall end market demand and how that impacts sales as we think about the remainder of the year?

David Heinzmann, President and CEO

Yes. Regarding the softening in the industrial sector, it affects two areas of our business. In the Electronics segment, our Power semiconductor business, which is closely tied to general industrial markets, has experienced a decline in demand. We anticipate this trend may persist for the next couple of quarters. Additionally, within our industrial segment, we have noticed mixed signals. Some sectors are slowing down, while others show resilience. Specifically, in renewable energy, our main focus is on two categories: energy storage and large-scale solar and wind installations. While large-scale solar has slowed down, the energy storage segment remains very strong. Overall, we believe that the industrial sector will likely continue at a slower pace for a couple more quarters before we start to see a stronger rebound.

Operator, Operator

Our next question comes from the line of David Williams from Benchmark.

David Williams, Analyst

I guess first, is there a way to think about the level you're under-shipping relative to maybe in consumption? And maybe you can speak to how you're feeling about your level of visibility there across maybe the full supply chain. I think in the past, you've mentioned that EMS, inventory was still elevated, but it was challenging to get a good view there. Or at least some better granularity, but you mentioned you feel like that's getting better. So just anything that could help there around those two?

David Heinzmann, President and CEO

Sure. And we've talked about how in the electronics side of our business that it's been a bit of a long-based cycle. So the peak to trough has been a little longer than we have typically seen before, and we really think that based on our analysis and the work we do with customers is that is really driven out of the fact that end customers, EMS, OEMs bulked up a little more on inventory in this past cycle than historically they have because of all the disruptions that were taking place. So that's what's kind of elongated. So right now, as we try to get a better handle on the end customers' inventories, we have discussions with them. We have discussions with our distribution partners to kind of get a sense of what they're seeing on demand and what they're seeing from, as an example, EMS customers. What the general sense is, we're getting at this point in time is that it's getting closer to working its way out. So maybe in the next quarter or so that that access at the end customers began to get to a more normal level. And we have full visibility, of course, to our distribution partners in the channel. So that's a mix of it. That's what gives us a little more confidence that we think things will get back to a bit more of a normal sell-in to sell out sort of mode as we head into the back half of the year.

David Williams, Analyst

Okay. Any thoughts on the level of under-shipment relative to demand?

David Heinzmann, President and CEO

Yes, it's a complicated situation. It ultimately involves examining the inventory depletion each month. The more difficult aspect to assess is the decline in point of sale at our distribution partners. I wish I could provide a clearer response, but it's tough to fully grasp at this time. While we can accurately measure the inventory depletion at our distribution partners, we lack complete visibility with the OEM or EMS customers, making it challenging to offer comprehensive insights. Nonetheless, having strong visibility remains important for us.

David Williams, Analyst

That's fair. And then just lastly here. I think last quarter, you had pointed to maybe the semi inventory being cleaned up coming out of the fourth quarter. But it seems like now maybe it's more of a demand issue. And if you're looking across that, is that still kind of a fair way to think about it that it's demand driven as inventory is clean? Or is there still some excess you're thinking up and maybe a little softer in demand?

David Heinzmann, President and CEO

Yes. Within the semiconductor piece of our business, we have two pieces. We have our protection Semiconductor business, which behaves a lot more like our Passives and there's still some excess inventory in the channels to work our way through. On the power semiconductor side of things, we really were talking probably more about backlog at our sites as opposed to excess inventory because there has not been a lot of excess inventory on the power semiconductor side of things. We have cleaned up a lot of that backlog, and we're back to more normal sorts of lead times on the power semiconductor side, which itself brings down then our shipping levels. And then in addition to that, we would see that there is softness in the industrial markets. We're seeing that with a kind of broad-based industrial side of things there, where we're seeing that softness. We're not alone in that. I think a lot of our peers are seeing that as well right now. And that's think about things of industrial automation in areas like that, where they're seeing some of that slowness at this point in time.

Operator, Operator

Your next question is a follow-up from the line of Christopher Glynn from Oppenheimer.

Christopher Glynn, Analyst

I wanted to ask about your comment regarding HVAC signs. I believe this relates mainly to the Hartland acquisition. Are these signs indicating a more challenging first quarter than expected, which would place it at the bottom? Can you clarify the reasoning behind that statement?

David Heinzmann, President and CEO

Yes. The comments pertain mainly to the residential HVAC sector, which constitutes a significant part of the Hartland Controls business. Currently, our HVAC customers have a high level of inventory in the distribution channel, which has negatively impacted demand. However, we are receiving signals from some customers indicating they are starting to reduce that inventory. This gives us a slight positive outlook on demand orders from that segment. Although we are not seeing a rapid recovery, it appears that the situation has stabilized and reached a low point.

Christopher Glynn, Analyst

Okay. And then wondering if you put any more color on the electronics book-to-bill being greater than 1? Was it materially so? And are the bookings kind of projecting normal lead times as opposed to the different behaviors in '21 and '22?

David Heinzmann, President and CEO

Sure. Absolutely, the lead times in our electronics business are normal at this point. The book-to-bill ratio being above 1 is specific to the passive part of the business, while the power semiconductor business is below 1. The passive side has a ratio of about 1.1, which is a positive sign. This is the first time we've seen a positive book-to-bill ratio there in seven quarters, indicating that we believe the bottom has been reached and we are nearing the end of the inventory burn. Additionally, we are beginning to see an increase in short cycle orders, which is another encouraging sign.

Operator, Operator

That concludes our question-and-answer session. I will now turn the call back over to David Kelley for some final closing remarks.

David Kelley, Head of Investor Relations

Thanks, everyone. We look forward to also speaking with you at the May 6, Oppenheimer Virtual Industrials Growth Conference. The June 4 Stifel Cross Sector Insight Conference in Boston and also the June 4 Baird Global Consumer Technology and Services Conference in New York. Have a wonderful day. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.