Earnings Call Transcript - LFUS Q4 2022

Operator, Operator

Good day, everyone, and welcome to the Littelfuse Fourth Quarter 2022 Earnings Conference Call. Today's call is being recorded. . At this time, I will turn the call over to the Head of Investor Relations, Trisha Tuntland. Please proceed.

Trisha Tuntland, Head of Investor Relations

Good morning, and welcome to the Littelfuse Fourth Quarter 2022 Earnings Conference Call. With me today are Dave Heinzmann, President and CEO; and Meenal Sethna, Executive Vice President and CFO. Yesterday, we reported results for our fourth quarter and a copy of our earnings release and slide presentation is available in the Investor Relations section of our website. A webcast of today's conference call will also be available on our website. Please advance to Slide two for our disclaimers. Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review yesterday's press release and our Forms 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations. We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available in the Investor Relations section of our website. I will now turn the call over to Dave.

David Heinzmann, President and CEO

Thank you, Trisha. Good morning, and thanks for joining us today. Let's start with highlights on Slide four. 2022 was truly an exceptional year for Littelfuse, as we continue to expand our leadership in high-growth end markets with significant new business wins and strategic acquisitions. We delivered record revenue of $2.5 billion, up 21% over 2021, as each of our business segments grew sales double digits. Adjusted earnings per share was also a record of $16.87, an increase of 28% year-over-year. We launched our five-year growth strategy in early 2021 and have delivered strong performance within the first two years, as shown on Slide five. Our strategy targets double-digit average annual growth, coupled with sustained profitability and leveraged earnings growth. We have averaged 32% revenue growth with organic revenue growth of around 20% and average adjusted earnings growth of 60%. I am particularly proud of our success as we navigated the unprecedented operating environment. I want to thank our global teams for their hard work and persistent commitment to serve our customers and significantly grow our business. Meenal will provide additional color on our strong financial performance. Moving on to Slide six. Over the last two years, we have deployed approximately $1 billion in capital for acquisitions, adding approximately $500 million in annualized sales to further strengthen our technologies and capabilities and diversify the end market in the geographies we serve. With the ongoing diversification of our business, we have expanded our addressable global market opportunities to over $20 billion. During 2022, we significantly advanced our strategic business initiatives within the structural growth themes of sustainability, connectivity, and safety. We drove content and share gains in high-growth end markets, both organically and through acquisitions. We acquired C&K Switches, strengthening our global presence across industrial, transportation, datacom, and aerospace end markets, and then expanding our software and firmware capabilities within transportation and industrial applications. In addition, our integration with Carling Technologies is well on track. And we made substantial progress capitalizing on strong demand across commercial vehicle end markets to drive significant growth. Organically, we are investing to support continued growth in both customer-facing aspects of our business as well as in manufacturing capacity and productivity. During 2022, we advanced our ESG program initiatives, reinforcing our commitment to our long-term strategy. We set goals to increase our associate diversity and are proud of our progress shown on Slide seven. We believe our recognition by Forbes as one of America's best midsized companies, and by Newsweek as one of its most responsible companies further substantiates our performance in the environmental, social, and corporate governance areas. All of our achievements to date play a crucial role in building on our strong business foundation. The evolution of our capabilities to better serve our customers equips us to tackle new challenges and opportunities in the future. We have a strong track record of achieving best-in-class results and expect to deliver our ongoing performance consistent with our growth strategy. Before we get into business design wins, I'd like to start with customer and market dynamics we are seeing, starting with our channel partners. Our Electronics book-to-bill continues to run below 1.0. We are seeing Electronics distributors accelerate their reduction of inventory levels as supply chains and lead times normalize. We expect these inventory reductions to continue through the second quarter at current POS levels. Our Industrial distribution partners are operating within normal inventory levels. Within end markets, we continue to see ongoing softer demand across various electronic markets, including consumer-facing areas, telecommunications, and telecom applications. End market demand remains healthy across renewables, industrial automation, and safety and electrification of vehicles and charging infrastructure. We delivered solid performance within passenger vehicle end markets during 2022. However, this was overshadowed by unfavorable foreign exchange and inventory unwind at Tier 1s and OEMs. Absent these combined headwinds, our automotive technology portfolio across all of our businesses outgrew the market by 600 basis points. Considering the volatility of the automotive industry over recent years, we are proud of our long-term performance. Over the last three years, we have delivered double-digit content outgrowth. Looking ahead, despite our outlook for a flat global car build in 2023, we expect to continue to outperform the market based on significant design wins in electrification and electronification. In commercial vehicle end markets, we continue to see stable demand across material handling, agriculture, and construction equipment and heavy-duty truck and bus. With our successful integration of Carling throughout 2022, we fulfilled a strong backlog to achieve 20% growth over its previous stand-alone year. We now see a short-term inventory rebalancing of Carling products at distributors and in customers. Meenal will provide additional color on our outlook. Now let's move on to business design wins during 2022. The global structural themes of sustainability, connectivity, and safety are complementary and are driving innovation and growth across the Industrial, Transportation, and electronics end markets we serve. Given our diversified technologies and capabilities, we play a significant role in the advancement of these themes. Within our Industrial end markets on Slide eight, we expanded our global leadership presence based on technical expertise and high-performing technologies. Our capabilities are critical to enabling customers' high-voltage applications focused on sustainability and safety. In renewables, for solar, wind, and energy storage systems, our company-wide portfolio and a variety of new products won significant business to grow our market share. In the area of safety, evolving electrical standards require our application expertise and innovative solutions to achieve compliance. We substantially grew our market position with major restaurant chains and manufacturing companies. In Commercial and Residential HVAC, systems are required to meet energy efficiency and safety standards, and a broad portfolio of secured sizable business. Efficiency and safety requirements also pertain to electrical infrastructure, motor drives, power supplies, factory automation, and manufacturing equipment where we grew our business. Our product content and rates of new business wins are increasing with leading customers, and we expect this to continue based on our capabilities and intensifying focus on enabling applications around sustainability and safety. Turning to our Transportation end markets on Slide nine, our investments for growth are extending our leadership position. We are partnering with our customers to drive key developments in the electrification and electronification of passenger and commercial vehicles. Our joint collaboration focused on sustainability, connectivity, and safety drove significant new business. In passenger vehicles, we continue to grow with major OEMs based on our global technical support and strength of our product portfolio. As a result, our average content across passenger vehicles has grown to $7. Our ability to continue our growth is supported by our design wins. Across vehicle platforms, we secured over $550 million in new design wins over the life of the programs. Over half of these new business wins are on electrified platforms. We won significant business in electrification within battery management systems, high-voltage power distribution, and onboard chargers. In electronification, we captured substantial business in ADAS, infotainment, telematics, and comfort convenience applications. We also continue to expand our business in traditional low-voltage applications, our design wins, extended pipeline of new business opportunities, and expanding technologies for electrified platforms to support the continuation of double-digit content outgrowth. In commercial vehicles, we made significant progress integrating Carling and see a broad range of growth opportunities ahead of us. We leveraged our expanded offerings to win global business with major OEMs. In electrification, we grew our business in trucks, buses, and two and three-wheelers within battery management systems, onboard chargers, and powertrain control modules. In broader commercial vehicle markets, we increased our product content on heavy-duty trucks, material handling, construction and agricultural equipment, and rail traction for training. With off-board charging infrastructure to support passenger and commercial vehicles, our engineering capabilities and differentiated range of products in power semiconductors, fuses, relays, and switches secured significant new business. Overall, electrification and electronification are important themes in the Transportation industry that are helping to reduce emissions and improve efficiencies, connectivity, and safety. We are confident in our ability's investments in e-mobility will strengthen our market leadership through greater product content and growth. Moving on to Slide 10. Sustainability, connectivity, and safety are drivers of growth in the electronics end markets. We leveraged our global reach and broad portfolio, further enhanced with C&K and Carline, who have extended their relationship with OEMs to secure multi-technology business wins. With the ongoing push towards energy efficiency and battery power in various applications and hand tools, greater connectivity requirements drove new business in data centers, telecom infrastructure, building technologies, and automation. Our products are vital to the safety and protection of human life as we secure business for security systems and a variety of medical devices. We are extremely well positioned to expand the proliferation of our electronics content across a wide range of applications focused on sustainability, connectivity, and safety. A pipeline of new business opportunities is robust and expanding with our acquisitions. We look forward to building on our collective market positions with our various industry-leading brands. Our combined success of winning business will serve as a platform for continued growth. Our new business wins represented a diverse range of end markets, applications, and geographies. We also continue to build a pipeline of identified new business opportunities as we see our customers' engineering teams return to focus on new product development. Now that customers have worked through many supply chain challenges, they have pivoted back to new design-in activity, which is accelerating. We are well positioned within this design-rich environment, which will drive long-term business wins. We fully expect that the organic growth from the new business activities, coupled with our acquisitions, will enhance and sustain our long-term growth. I will now turn the call over to Meenal to provide additional color on our financial performance and outlook.

Meenal Sethna, CFO

Thanks, Dave. Good morning, everyone. Happy New Year, and thank you for joining us today. Let's start with Slide 12. Revenue in the fourth quarter was $613 million, up 11% versus last year. Sales were up 4% organically after adjusting for acquisitions, foreign exchange, and last year's 14th week. GAAP operating margins were 15.4% and adjusted margins 17.4%, expanding 40 basis points versus last year. Fourth quarter GAAP diluted earnings per share was $3.74 and adjusted diluted EPS was $3.34, up 6% over last year. Turning to Slide 13, we finished a record year with sales of $2.51 billion, up 21% versus last year. Sales were up 11% organically after adjusting for acquisitions, foreign exchange, and last year's 14th week in the fourth quarter. GAAP operating margins were 19.9%. Adjusted operating margins finished at 21.6% and adjusted EBITDA margins were 26.4%, both expanding 250 basis points in the year. Incremental operating margins for the year were 34%. We finished the year positive on price cost, continuing to demonstrate the value we bring to our customers while managing our cost structure. GAAP diluted EPS was $14.94, and adjusted diluted EPS was $16.87, up 28% versus last year. Our full-year GAAP effective tax rate was 15.7% and adjusted effective tax rate was 17.4%, finishing slightly better than our expectations. Our business model amplifies the continued strength of our cash generation. For the year, operating cash flow was $420 million and free cash flow $315 million, both records for the company and growing 12%. Our free cash flow conversion from net income was 84%, a bit lower than our historical trends as we've maintained higher inventory levels, aligning to our customers' needs and supply chain challenges. We have a strong balance sheet and capital structure, ending 2022 with over $550 million in cash on hand and net debt-to-EBITDA leverage of 1.2 times. This gives us ongoing flexibility to continue allocating capital for both growth and return to shareholders. During 2022, we invested over $600 million back into our business through strategic acquisitions and capital expenditures, and we returned $56 million to shareholders through our ongoing quarterly dividends. Let's move to fourth quarter and full-year segment highlights, starting with Electronics on Slide 14. Within the quarter, organic growth was 2%. We saw continued strength across Industrial end markets and electrification themes, partly offset by softer demand across various Electronics end markets. We also saw an increasing trajectory in channel inventory reductions as we exited the quarter. We ended the quarter with operating margins just shy of 25%, expanding 160 basis points versus last year. We capped the year with organic revenue growth of 12%. Margins finished at nearly 29% for the year and adjusted EBITDA margins at 33.5%, both expanding 500 basis points versus last year and well above our segment target range. We finished the year positive on price cost as our teams balanced price increases to offset ongoing inflationary costs. Moving to our Transportation segment on Slide 15. Our Passenger Vehicle business grew 5% organically in the quarter and was down 1% for the year. Our content growth for the year was masked by customers continuing to reduce inventory levels. Within Commercial Vehicles, sales for the quarter were up 7% organically and up 9% for the year as we delivered on content growth while leveraging strong end markets. We saw a sequential sales decline into the fourth quarter, largely from our Carling business. Following several quarters of strong demand from pent-up backlog, we experienced fourth quarter slowdown from Carling customers also adjusting their inventory levels. Within the quarter, operating margins finished lower than our expectations at 3.5%, but we maintained double-digit EBITDA level. Margins were weakened by 200 basis points in unfavorable foreign exchange effects as well as excess cost from lower production volumes. For the year, operating margins finished at nearly 9%, while adjusted EBITDA margins were a solid 15%. We continue to focus on both sides of the price/cost equation, implementing price actions to cover ongoing inflation and reducing cost to better align our operating structure to expected volumes. We expect margins to progressively improve in the coming quarters. On Slide 16, our Industrial segment had another strong quarter of double-digit organic growth, with organic sales finishing up 20% for the year. We continue to see strong demand across most end markets and number of wins in new and higher growth end markets. Operating margins finished at 16% for the year and adjusted EBITDA margins close to 19%, both expanding 700 basis points. Our teams have focused on continued operational execution aligned to the volume growth and pricing actions to offset inflationary trends. Turning to the forecast on Slide 17, I'll start with our view of the market landscape. We're seeing a broad range of signals across our end markets, ranging from continued growth across key mobility themes, Industrial and Commercial Vehicle markets, offset by weakness across many of our Electronics end markets. We expect increased inventory rebalancing at our distribution channel partners continuing through the first half of this year, affecting our Electronics segment. We also expect a continuation of customer inventory reductions affecting our Transportation segment. Inflationary trends continue largely in resin-based materials, energy costs, and wages with some offsets from reduced transportation costs. With this backdrop, we expect first quarter sales in the range of $575 million to $605 million. At the midpoint, that's a total sales decline of 5% and organic decline of 11% versus last year. We expect sales to decline across both the electronics and transportation segments due to the inventory reduction at our customers and channel partners. We expect a partial offset with growth in the Industrial segment. We project adjusted EPS to be in the range of $2.73 to $2.97, which includes a 19% tax rate. As a reminder, first quarter last year was a record for the company due to mix and elevated backlog and a much more robust macro environment. This creates a challenging comparable for the first quarter of 2023. Sequentially, we expect first quarter adjusted earnings to decline 15%, reflecting the segment mix of electronics sales declining sequentially, partially offset by sales growth across the Industrial and Transportation. Turning to Slide 18, I'll add some color for the full year 2023. Last quarter, we estimated foreign exchange to have a $50 million negative sales impact for the full year. At current rates, we don't expect foreign exchange to have a material impact to our 2023 sales or earnings. For the year, we expect to maintain our company average operating margin within our long-term target range of 17% to 19%, but may vary by quarter out of the range. By segment, we're projecting Electronics operating margins to average over 20%, Industrial in the upper teens and Transportation improving through the year with double-digit operating margins in the back half of the year. In addition, we're projecting $64 million in amortization expense and about $40 million in interest expense at current interest rates. We're estimating a full-year tax rate of 18% and we expect to invest $110 million to $120 million in capital expenditures. In summary, the continued broadening of our portfolio, end markets, and geographies have enabled us to drive profitable growth across the company. While we may see some near-term macro weakness and customer inventory reductions impacting parts of our business, we will continue balancing both the short term and the long term. Our near-term focus will be on margin optimization, prioritizing our transportation segment. And our long-term priority remains investing for content growth and share gains into high-growth end markets. Our strong balance sheet and cash generation abilities give us the ongoing foundation to invest for value creation. I'd like to thank our diverse teams and partners around the world for their innovation, capabilities, and dedication in driving a record year for our company. And with that, I'll turn it back to Dave for some final comments.

David Heinzmann, President and CEO

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

Operator, Operator

Our first question will come from Matt Sheerin with Stifel. Please go ahead.

Matthew Sheerin, Analyst

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

David Heinzmann, President and CEO

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

Matthew Sheerin, Analyst

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

Meenal Sethna, CFO

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

Matthew Sheerin, Analyst

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

Trisha Tuntland, Head of Investor Relations

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

Operator, Operator

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

Trisha Tuntland, Head of Investor Relations

Good morning, Luke.

Luke Junk, Analyst

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

Meenal Sethna, CFO

Overall, our Electronics segment has the strongest margins in our portfolio. When we experience growth, it leads to very strong incremental margins, and the same is true in the opposite direction when growth declines. There are various margin ranges for our products, but generally speaking, if we look at the Electronics segment as a whole, it shows stronger incrementals and consequently higher decremental margins when compared to other areas like Transportation or Industrial. Regarding the transition from Q3 to Q4, we anticipate a sequential sales decline as we move into the first quarter, which reflects what we are observing.

Luke Junk, Analyst

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

Meenal Sethna, CFO

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

Luke Junk, Analyst

Okay. I’ll leave it there.

Trisha Tuntland, Head of Investor Relations

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

Operator, Operator

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

Trisha Tuntland, Head of Investor Relations

Good morning, Josh.

Joshua Buchalter, Analyst

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

Meenal Sethna, CFO

We typically do not offer specific guidance regarding gross margin. However, I want to reiterate my earlier points about our different segments. Generally, when we anticipate stronger top-line growth, thanks to the capacity we've developed throughout our network and the company, we usually observe good variable margins, particularly stronger margins in electronics, which has a higher margin profile. Nonetheless, our Transportation and Industrial segments remain very solid as well. When we experience growth, the margin profile tends to be favorable, positively impacting the gross profit line. Regarding our operating expenses, over the past few years, despite significant sales growth, we have effectively leveraged our operating expenses and have not increased them to the same extent as others. We are quite satisfied with our operating expense levels. We will continue to invest for both short-term and long-term organic growth while monitoring the broader environment. Should we need to make adjustments to our operating expenses, we will do so.

Joshua Buchalter, Analyst

Thank you for the information. I would like to ask about the inventory levels in the channel. They are considerably higher than usual, and the market has changed significantly after a couple of years of shortages, along with your recent acquisitions. You mentioned the current levels in the channel and your targets. Could you share some insights on how you are approaching your on-hand inventory and what we might expect over the next few quarters? Thank you.

David Heinzmann, President and CEO

That's a great question. The challenge we're facing, like many of our customers, is the volatility we've experienced over the past couple of years. The situation remains unstable in the fourth quarter due to the COVID situation in China, which has caused major disruptions. However, we are starting to see a recovery as people return after the Chinese New Year. We're also noticing that demand remains relatively strong for us. The question we have is what level of increased inventory we should maintain compared to our historical norms. Many of our inventory increases are driven by cost rather than volume, as we've encountered significant inflation in the materials and components we're acquiring. Therefore, the elevated inventory levels reflect both cost increases and higher demand amidst the volatility. Our teams are actively working on this, and we aim to reduce our inventory levels throughout the year to return to a more normalized environment by year-end. We see this as an opportunity for our teams to address.

Joshua Buchalter, Analyst

That’s really helpful color. Thank you.

Trisha Tuntland, Head of Investor Relations

Thanks for your questions, Josh.

Operator, Operator

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

Trisha Tuntland, Head of Investor Relations

Good morning, David.

David Kelley, Analyst

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

Meenal Sethna, CFO

Sure. Thanks, David. Yes, I have been discussing this for several quarters. We have done a lot of structural work over the past few years by adding capacity, which has allowed us to improve our outlook. Financially, this helps us achieve better margins since we can increase production and capacity without expanding our footprint. This has been beneficial. Although we don't highlight this as much anymore, we have continued to optimize our footprint over the years. Compared to 2019, we now have a more streamlined operation due to various changes we made, which were part of our integration efforts. Additionally, our productivity initiatives, which are integral to our operations, have contributed positively. Lastly, we have experienced a couple of years of price adjustments aimed at countering inflationary pressures. I anticipate that pricing will return to more normal trends with some erosion, but I do not expect this to happen quickly, and we remain optimistic about our current position.

David Kelley, Analyst

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

Meenal Sethna, CFO

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

David Kelley, Analyst

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

David Heinzmann, President and CEO

Yes. We are noticing that discussions with our customers indicate some easing of their supply chain limitations. While challenges remain, some customers are showing improvement, which is a positive indicator. In 2022, we went through significant inventory rebalancing in our Passenger Car business, and I can say that we've completed most of that process. We anticipate some continued inventory adjustment in the first quarter, potentially extending into the second quarter, but we expect to navigate through the majority of it in the first quarter. On the passenger car side, we've managed the bulk of that already. In our prepared remarks, we also discussed the commercial vehicle segment, where we observed inventory rebalancing, particularly in the Carling products business we acquired. Comparing our Carling business in 2022 to its independent performance under previous ownership, we achieved 20% growth last year, which is quite notable. When we acquired Carling, it had a strong backlog, and our teams worked diligently to enhance production and capabilities. This is one of the advantages we bring to our acquisitions, as we apply discipline and productivity improvements at the factory level. We successfully grew that business by 20% since the acquisition. Customers had long backlogs prior to our acquisition, and we've addressed that. Now, customers and distribution partners are experiencing significantly lower lead times and quicker deliveries, which has led them to reduce their inventory levels a bit. We expect to see this trend continue to have an impact in the first quarter as well.

David Kelley, Analyst

Okay. Got it. It’s really helpful. Thanks, team. Good morning.

Trisha Tuntland, Head of Investor Relations

Thanks David for your question. Appreciate it.

Operator, Operator

Our next question will come from David Williams with Benchmark. Please go ahead.

Trisha Tuntland, Head of Investor Relations

Good morning, David.

David Williams, Analyst

Good morning. Congratulations on successfully managing through the challenging environment. I have just a couple of quick points to mention. I apologize.

Trisha Tuntland, Head of Investor Relations

Yes, we can hear you.

David Williams, Analyst

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

David Heinzmann, President and CEO

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

David Williams, Analyst

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

David Heinzmann, President and CEO

Yes. I would say it's a bit early to take much of a position on that yet. Certainly, at our own factories, suppliers, and core customers we're dealing with, the rebound and return of employees after the Lunar New Year has been quite positive and has shown surprisingly robust results. There was some nervousness about that, so we view it as a positive sign. Our teams in China have been exceptional in managing the situation early in 2022, adhering to zero COVID policies, and then in the latter half of the year, when a very high percentage of employees contracted COVID and faced disruptions. Our teams effectively managed through that with strength, recovering relatively quickly. Regarding potential demand in China in the second half of the year, we are hopeful that there might be an improvement in demand in the Chinese market as the year progresses. However, it is still too early to say for certain.

David Williams, Analyst

Thank you so much.

Trisha Tuntland, Head of Investor Relations

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

Operator, Operator

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

Trisha Tuntland, Head of Investor Relations

Good morning, David.

David Silver, Analyst

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

Meenal Sethna, CFO

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

David Silver, Analyst

Thank you. My next question pertains to your comments about design wins for off-board charging. From what I remember, you've outlined this opportunity in relation to Tier 1, Tier 2, and Tier 3, where the lower tiers represent single-digit dollar opportunities per unit, while the top tier represents triple-digit dollar opportunities per unit. Could you provide some insight into the overall quality of your design wins, particularly regarding the percentage that falls within the highest dollar opportunity tier? Additionally, do you have a sense of the timeline for when a design win in this area transitions into production shipments and revenue? Thank you.

David Heinzmann, President and CEO

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

David Silver, Analyst

Okay, great. My last question is a broad one regarding China, focusing not on the lockdowns and reopening, but rather on the recent restrictions on technology trade issued by the current presidential administration during the fourth quarter. I'm curious about how these restrictions might have impacted your business or that of your customers. I suspect the effects are not too direct, but there may be some indirect factors that require adjustments in your supply chain or among your customers, possibly leading to extended delivery dates. Overall, how do the potential for a longer-term set of restrictions on technology trade with China influence your outlook on operating your business and your prospects in the medium term? Thank you.

David Heinzmann, President and CEO

Sure. The recent enhanced restrictions, along with the agreements in the Netherlands and Japan regarding further limitations on tool sets being sent to China, do not directly affect us. The technologies we manufacture and sell in China primarily focus on power and protection, which operate differently than the high-end logic applications. Our products are larger in scale, while most restrictions are placed on advanced, smaller semiconductors that support cutting-edge logic technologies, which is not our focus. Therefore, from a direct standpoint, we are not impacted. However, the areas most affected will likely be high-end electronics and communications, markets where we operate but don't have a significant consumer-facing component. Consequently, we don’t anticipate a severe impact on our business. Overall, while the geopolitical challenges are concerning, we hope for better compatibility between regions in the long run. For now, we don't foresee any significant impact on our business operations.

David Silver, Analyst

Great. Thank you very much. Appreciate it.

Trisha Tuntland, Head of Investor Relations

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