Good morning. Thanks for joining us bright and early today. My name is Saree Boroditsky. I cover Multi-Industrials here at Jefferies. We're really excited to have Littelfuse with us today, including Meenal Sethna, the CFO, and David Kelly, IR. And with that, we're gonna start with a few prepared remarks, and then we'll get into Q&A. We're happy to take questions from the audience. If not, we'll start on fireside chat. So with that, I'll turn it over to you, Meenal.
Great. Thank you. And good morning, everyone. Saree, thanks for the introduction. Happy to see everybody on this bright and early day here. What I wanted to do is just start with. I see many familiar faces, but I wanted to start with a bit of an overview of Littelfuse for those that may be a little less familiar, and just to give everybody a brief update on really some of our goals, objectives, and a little bit more on our strategy. Disclaimers as always. But let me start with, you know, what we always refer to as strategy on a page, but I think this, you know, the slide's really important for us because we think it really helps define and describe as we think about our strategy.
Typically, you know, we come out every five years or so with an update to our strategy. It tends to be very consistent year after year, and I think that's an important foundational part of Littelfuse, that we're nearing a hundred years as a company, and as we think about our strategy, it's been pretty consistent for the past several years. For us, it really starts with what we think about as our structural or secular growth themes. We've been talking a lot about sustainability, connectivity, and safety.
As we think about, you know, what's going on as we look much more broadly across the world, and we take a look at our products and where they fit into so many different applications and so many different end markets, this idea of sustainability, whether it's, you know, a number of different renewable applications, a lot of discussion these days about that, but over the long term, a lot of great sustainable applications as we see more and more progression to electronics, electrical products, and the use of electricity. So the sustainability aspect is important for us. We think about connectivity. Clearly, we've seen a big jump up, big growth over the past few years as we think about what's happened during the COVID period and the expectations around connectivity.
Now when you think about AI, data, you know, machine learning, and a lot of different aspects there, connectivity becomes very important, and our products play a key role in that. Then lastly, I would talk about safety. As we think about this idea of a lot of our products, really the core of our products, where we started as a company, have been around safety, reliability, and performance. So whether that's in medical devices, whether that's, you know, protecting you from electrical shock, in a number of different applications, safety is, for us, always a secular growth theme. Then we think about our growth drivers. Really, what's going to drive our growth? How are we going to grow well above the market?
You'll hear me talk in a minute about our five to seven percent organic growth rate expectations on an annual basis, average annual basis, as well as about 5-7% average annual growth from acquisition. We're talking double-digit sales growth, really driving that through content and share gains, as we think about more electronics, more electrification, additional electronics in a lot of the products we have, as we talk about electronification. We think about as we get into new applications, new opportunities, whether that's through organic investments we're making or acquisitions, and we think about share gains. Secondly, really positioning ourselves and focusing our investments on higher growth areas, higher growth markets, higher growth geographies.
You know, we think about really our broad horizon on a number of niches across the world, and so we tend not to focus on a couple of big areas, but instead really think about the breadth that our products provide, and we think about niches and really focus on where we think we can get the best growth rates. And then lastly, we think about acquisitions as adding for us, adding into the organic growth that we have, expanding our capabilities, expanding our opportunities across end markets. Rather than talking about the financials here, let me go to the next page, and I can talk about, you know, what we expect to do to drive top-tier shareholder returns, so first of all, taking a look at the goals, I mentioned double-digit revenue CAGR. That's our expectation through market cycles.
And I'll show you in a minute, you know, that's really what we have been doing over the past fifteen years. You know, a lot of talk these days about the down cycle that we're in, but we talk about through cycle metrics that we have. Double-digit revenue growth is one. Secondly, leverage earnings growth, where we expect our earnings to grow faster than our sales growth, and so that, of course, is double digits. Cash flow for us and cash generation is a strong hallmark of the company. 100% free cash flow conversion is what we target, and we've been very successful with that. And then really a focus on returns. Are we making the best investments to drive really strong returns with the goal of, you know, again, over time, through cycles, at a high teens return?
Our capital allocation strategy, focused on really on acquisitions, is where we tend to allocate capital, whether that's organic investments first, acquisitions. Those tend to be our primary vehicle of capital allocation, really, we feel, to drive a return, strong return for our shareholders. Then the other 40% tends to be in the annual dividend that we continue to grow, as well as periodic share buyback. The last chart I'll leave you with is really something that we're proud of and really why we believe our strategy is working. When we take a look at our fifteen years, the past fifteen years, the actual metrics that we've driven, sales growth on average across this fifteen-year period of 10%, and then again, leveraged earnings growth of 18%.
So despite market cycles that come and go, you know, we persevere through those and really continue to drive that double-digit sales and then even stronger earnings growth through those times. And with that, I'll take a pause and take some questions from Saree and others.
Hopefully, this is working. I can't tell. So thank you so much for the overview remarks. So we'll turn to electronics first and kind of dive into what you've recently been seeing. And again, happy to take questions from the audience. So revenue in electronics peaked in 2022. It's been under pressure for the last seven quarters. You know, you cited some positive signs in the passive business, book-to-bill over one. You know, when would you expect to see passive sales turn positive, and what's the typical lead time on that?
Sure, so maybe just stepping back a little bit, our electronics segment is really the largest segment that we have as a company. It consists of, very broadly, our passive products as well as our semiconductor products. We've been talking about on many of our earnings calls and other investor interactions, where really we started to see some of that market downturn, down cycle early in 2023, for us, because part of our strategy for customer reach is working with distribution partners, as well as designing in through OEM customers. We tend to see a market down cycle of two pieces.
One is its actual end markets that may be in a decline, which is what we started to see in 2023, but then also with distribution being part of our strategy, we also see this inventory destocking that's going on. That's been going on. Typically, it would normally go about three or four quarters. I think there's been a lot of conversation about how this cycle seems to be a more elongated cycle because of other macro dynamics. And so, you know, we started to see maybe five quarters in, where inventory levels had stabilized a bit more at our distribution partners. We started to see book-to-bill at one, and then growing above one, and now it's really watching for the end market to start improving, and growing again. We're also seeing a bit of customer cautiousness, I would say.
I think that's also a bit of a broader trend right now, given some of the dynamics, but we're confident as we start to see these signs, you know, for us, as the growth comes back and we have that expectation, we tend to drive strong incremental margins from that, too, and we think that'll be a very strong positive for us as we lean into 2025.
Thank you for that overview. You know, maybe turn to the margins on that business. You know, if I look at incremental margins, you know, I think that they're pretty high in the first half of this year, first half of 2022 . So maybe just help break down the margin decline between volume, mix, price, cost, or any other drivers, yes.
Sure, sure. So, again, talking about our electronics segment, you know, if I take a step back, you know, when we think about the segment again, as we talk about through-cycle margins, we've actually, versus, when we had our last investor date, you know, we're now talking about a margin target of around 20%, through-cycle margin target of 20% for the electronics segment. Again, at various points in time, as an example, in 2022, we were far above that, getting closer to 30%, a 30% margin range. But then at different times when we see ourselves in the down cycle, we'll dip below that 20%. For us, we have a lot of different factors that drive that. You know, the past few years, it's been...
Pricing has been an interesting dynamic, where typically, these are markets where we typically see price downs coming through. However, with a strong volume growth as well as internal actions that we take to drive efficiencies, et cetera, you know, we tend to grow the electronic segment, you know, closer to 4-5% plus. In this particular cases, we think about as markets recover, as end markets recover, volume tends to be a key driver for us. The volume leverage we get, or in the case of the past, you know, several quarters, it's been volume deleverage from the destocking that's going on, from the end markets that we've seen. But the volume growth, again, that we expect as we lean into 2025, that tends to create very strong leverage and therefore strong margin expansion for us.
Just kind of building on that, what level of revenue or mix would you need to see to drive those operating margins back to that 20% level or above?
Yeah, I think for us, you know, there's a lot of different mix going on within our electronics segment and within the portfolio. But in general, you know, as we start to see some consistent revenue growth with end market recovery and passives, I have a lot of confidence that we'll see that 20% margin coming fairly soon.
So you're set to take over a fab in Germany early next year, and I think the agreement allows for you to grow your business over time. So just curious, like, what that growth trajectory looks like, and how much capacity does this add, and then how does this help you advance your semiconductor development?
Okay. And this, I'm sorry, this was a reference to what we call the Dortmund fab.
Yeah.
Yes, in Germany, so maybe a little bit of a backdrop. About a year ago, you may have seen we made an announcement that we reached an agreement with Elmos Semiconductor to purchase a fab that they were in the process of transitioning out of, and we're partnering with them to acquire this semiconductor fab. I think of this, you know, again, stepping back is more of an organic investment for us. The trick with fabs, of course, for those that know the semiconductor industry is, you know, you want to get your products in there, you want to do your best to level load the fab, and so this partnership with Elmos is really one, unique, but beneficial to us both.
And so it's already a good partnership in that as they're transitioning out of the fab over the next several years, we will be transitioning into the fab. We will operate for them for a few years as a foundry partner as we continue to build up our business in that fab over the course of the next several years. For us, as we do that, really the focus and what we intend to do with that is really continue to grow our power semiconductor business with a continued focus on medium and high power industrial applications. You know, as we've talked about today, our power semiconductor business, those are the markets that are a priority for us, and those will continue to be the strong focus for us as well.
So we're really excited about the partnership and what this fab will do to help us continue to grow our business on the power semi side.
I'll just check with the audience to see if there's any questions early this morning. Okay, you leave it to me? So transportation saw growth in passenger offset by commercial vehicle. I think you've looked for some softer demand in Europe and China. Just give us an update on what you're seeing in this market to start with.
Sure. So again, stepping back on our commercial vehicle business, it tends to be pretty broad, broad from a perspective of the different types of end markets we participate in, ranging from heavy truck, agriculture, construction, material handling. And we've also been very focused over the past several years of growing that geographically as well. So with acquisitions that we've made in organic investments, while it's a heavier, bit of a heavier U.S. footprint, we do have quite a bit of business now, coming through Europe and China. Saree, as you mentioned, we have been seeing weakness in a lot of those end markets, near term in both Europe and China.
You know, some moderate activity going on in the U.S., but overall, you know, we continue. We look at the long term. We have a strong conviction on the commercial vehicle market, strong conviction for this business. I'd say in the near term, some of the other things that we've been talking about have been around portfolio pruning. What I would say is really taking a look at the portfolio, maybe taking some things off around the edges that don't make sense for us anymore, and instead, thinking about other ways that we're going to grow the business. We've been doing that, and that's really driven some nice margin expansion for us.
You see that as part of our transportation segment, where we've been improving margins for the past few quarters, and that is a key goal for us as we continue to look through the rest of this year, going into 2025 as well.
One thing we've heard a lot about recently is U.S. OEMs, you know, pausing EV investments.
Now, how do you think about content growth in that environment as it maybe goes more towards ICE or hybrids? Then maybe just how much of your EV exposure is in the U.S. versus outside?
Sure. So we've always, as I was talking about our transportation segment, there's really two parts that are in our transportation segment, about equally weighted. Half of that is our commercial vehicle business that I just mentioned, and the other half of our transportation segment is our automotive business. We've been in the automotive business for decades at this point. Our focus has been around the electrical infrastructure of vehicles, as well as small and medium-sized motor protection, and as well, as we think about more broadly across the markets that we're serving, also electronics, as we think about electronics, automotive electronics, as we refer to it. In this particular case, we see a lot of discussion these days about EV.
You know, a lot of what we've done really started with a twelve-volt or what I'd say, the lower voltage applications. We continue to be a market leader in that space. We're very strong in that space, and, you know, when it comes to either an ICE vehicle, hybrid, or even EVs, we're a little powertrain agnostic when it comes to our applications. So while we may see EVs temporarily pulling back or, you know, maybe for the short or the medium term, we still see a lot of strength in the low-voltage applications. I would also say we continue to see many of our customers, we work directly with OEMs as well as Tier 1s, wanting to continue different design activity.
Maybe it's migrating from a battery EV to, say, hybrid applications and/or continued on ICE vehicles, but we still feel very strong about really the work that we're doing with our customers and the growth that we see for the future.
Then, Meenal, we'll just ask another question on margins on a transportation side.
You know, if you're expecting in high single digits this year, keep margins, I think we're in the low, low double digits. You know, what level of sales or product mix do you need to see to reach those kind of higher margins?
Sure. So, maybe just repeating Saree's question, and we had some a mic issue, but Saree's question was really around our transportation segment, again, our auto commercial vehicle segment, and really what we're doing to drive margin expansion. We had been saying that we're targeting margin expansion this year, really focusing on the high single digits as we think about this year. There's a number of actions that we've really been taking.
A lot of it has really been through. I mentioned a bit earlier some of this product portfolio pruning, both on the commercial vehicle side of the business, but then also on the automotive side of the business, really taking a look at some parts of the business that we've referred to in the past few years, maybe certain sensor applications that are a little less relevant or in markets that don't make sense anymore. So there's some exits we're doing, which are adding to the margins. There's work that we're doing around operational improvements.
It's part of our DNA to do that, but in this case, an additional focus on some areas, as well as what I'd say, rooftop consolidation, as we've had some acquisitions, especially across our commercial vehicle space, where there's some opportunity for us to really take a look at our global footprint there as well. So those are some of the key activities. Then lastly, I would also say around pricing. We talked about over the past few years, where with all the inflationary cost increases that we've seen, you know, we chose to work with our customers, and as customers are coming up for renewal, having the conversations with our customers around the inflationary costs and a balance in taking a look at some of those price increases as part of our contract renewals, and that's also been a focus.
So all those levers that we're looking at have really added over the past few quarters now some nice margin expansion, which we expect to continue.
And then turning to industrial, we've seen some companies walk down estimates in the last couple of days at various conferences. So maybe just what you're seeing in the current environment in industrial, you know, how much of this is inventory versus underlying demand, and how that recovery goes over the next, you know, few years?
Sure. So, if I think about our portfolio, stepping back a little bit, we serve about, you know, our industrial market exposure is about a third of the company, and we serve industrial markets primarily through our industrial segment, as well as our, as I mentioned earlier, our power semiconductor business, where, you know, you see some heavier medium to high voltage applications across a broad array of industrial areas. We're generally seeing similar trends in that we're finding, one, market demand is down in a lot of different areas. I think that's, you know... We're not the only ones that are seeing that, but across a number of different end markets, a number of different applications.
And I think the second thing, which we're still working through, but hopefully through the end of this year, getting through the tail end, is a little bit of inventory, especially where when we serve the industrial end markets, a lot of that is through design-in activity. A lot of that is, you know, working directly with OEMs. In this case, again, it's a lot of this is more anecdotal as we work with individual OEMs, but we found that, you know, OEMs seem to be carrying excess inventory, and with the decline in various markets, you know, they're carrying a little bit more inventory.
And then I would say there's been just, in general, a little bit of cautiousness going on about not just in industrial areas, but in other areas about placing orders, about stocking up too much inventory, especially with a little bit of the unknown market dynamics going on. So, we expect to see still some of this cautiousness, some of this inventory work-through going through 2024 , and then, you know, hope for some, some brighter sunshine as we get into 2025 .
You know, I think you've highlighted a global addressable market of about $20 billion or over $20 billion. Now, what does that entail, and then how do you think about your maximum opportunity set within that market?
Sure. So, for us, you know, if I, again, if I refer to some of the comments that I made earlier, we tend not to index or focus on a couple of big mega areas and try to do everything and try to have great share in a couple of big areas, but rather, we really focus on a number of smaller markets as we define it, and we think about niches and where we can develop those relationships, whether it's through with customers directly and/or service them through our distribution partners. So for us, the 20 billion market TAM, as we think about all the different areas of opportunity we can grow in, it continues to grow as we continue to make organic investments. It continues to grow as we make acquisitions.
You know, over the past few years, we've made some acquisitions in, say, switches across you know, switches for electronics end markets, light industrial, it's got a little bit of auto exposure, as well as commercial vehicle exposure and industrial end markets, and so that expanded our TAM. When we made an acquisition of really our biggest part of our power semiconductor business, that was also a growth as we think about, you know, the opportunities and what we can serve. So for us, that continues to be a focus of two areas. One is: how do we think about additional investments, organic or acquisitions, where we can continue to grow market opportunities and market exposure?
But also, secondly, given the increasing array of technologies that we can offer, how do we continue to become more impactful, a greater partner for the customers and our distribution partners that we have with our broad array?
So it's an election year in the U.S., no surprise to anyone here. We're putting all of our companies on the spot, not on a candidate basis, but on a policy basis. You know, what could be beneficial on a policy basis? What could maybe be less beneficial as you think about what the candidates have said?
Sure. And I'll start out by saying I'm not making any political statements, really trying to look at it with a, you know, with an independent eye. I think there, there's a lot of conversations, there's a lot of views of what's gonna happen to taxes and tariffs and, and government intervention in renewables. And it's, it's, I'm sure for all of us, it's, it's tough to, to try to guess what's going to happen in what areas. I think what that leads to for us and many people is a little bit of more cautiousness, right? And we see this. We've talked a little bit about this, where we're seeing customers being a little cautious about ordering. I think that's more of a near-term issue.
Customers may be a little more cautious in the near term about making major investments, as they think about footprint or longer-term footprint area. So I would say I think that's some of the near-term effect that we're seeing. But then when I take a step back and think about, well, what does this mean for the long term? I really think about. You know, you need to focus on the long-term strategy. What do you really think is going to drive the future? What are the technological innovations that we would expect to see? Again, whether it's EVs, maybe it's not gonna be tomorrow where it picks up, but, you know, down the line, what's good for our society, what's good for companies, what's good to advance us as an economy, I think those innovations are absolutely going to continue.
That's really the way we approach it, as we think about how are we trying to prioritize our investments. Again, we don't over-index to any, you know, just a couple of areas. We really try to invest, A, for the long term in a lot of different areas, and we don't stop doing that because of a near-term election or something going on in a particular country. Again, given our global footprint, we tend to stay focused on the long term and make those investments on the things that we believe will emerge for the future.
I would just add, [audio distortion] short term. Those, customer order patterns that have been a bit cautious-
Yeah.
but we've seen the design momentum, the opportunities.
Yeah.
and the win cadence kind of sustain through that, despite that, that near-term uncertainty.
Yeah, and I think that's a great reminder, David, because, again, that goes to what we're saying of the belief in the future, right? That while I might not be placing orders today, but I absolutely believe that we're going to see this still be important for the future. So we absolutely see customers still engaging in the long-term design activity.
And I think sticking with that, thinking about investments, you talked about some high-growth areas, renewables, energy storage have been some of them. You know, what percentage of sales do those markets represent today, and how do you expect that growth to trend versus maybe some of your traditional markets?
Yeah, so what I would say, in general, we tend to focus on higher growth end markets. You know, if you think about the goals that I outlined on the financial slide that I have, you know, we talk about five to seven% growth organically. And, you know, people ask us: "Well, what's your metric? What do you measure yourself against?" Given the breadth of end markets and applications and technologies we're in, we tend to think about global GDP as probably the main metric that we might look at or compare ourselves to. If you think about on average, over the long term, global GDP grows two, two and a half, maybe even 3%.
So for us, setting an organic growth target of 5%-6%, 5%-7%, sorry, 5%-7%, really means that we have to drive content growth, we have to drive share gain, we have to focus our investments and focus our priorities on areas that are higher growth to be able to stay ahead of really where the market trends are.
You made some points about organic versus inorganic growth. Obviously, acquisitions are a key focus for you guys. Maybe just talk through the current pipeline, what you're seeing in the market, you know, white spaces that you may think you have, and maybe some of your processes for integrating those businesses, given the high growth rate from acquisitions.
Sure. So as I mentioned earlier, when we think about capital allocation, for us, acquisitions tend to be the top priority as we think about capital allocation, along with organic investments. We validate that as we talk with, you know, our long-term investors, that here's our strategy, this is why we believe, here's the opportunities that we think we have in the spaces that we're looking at, and the validation we've gotten back from all of you is, yes, that we agree that, you know, there's so many more opportunities as we think about the TAM, as we think about, you know, where you could grow, that acquisitions should be a focus. We tend to keep a very active funnel. That funnel continues to grow as we continue to add various markets and applications into our portfolio.
And for us, we're continuing to look at a number of targets. I remind people, you know, you tend to see the things we announce, which are, of course, above the waterline, but there's a lot of activity that's, you know, really only seen inside the company that's under the waterline. So, big focus for us. We absolutely want to look at additional acquisitions. For us, it's, you know, growing in additional markets, growing in additional applications. Again, focusing on high growth, even looking at where can we think about some opportunities that are countercyclical. We've done a lot to diversify our portfolio over the past several years, and we want to continue to add new acquisitions that will further that diversification over the long term.
I think that's all the time we have today. Thank you so much for joining us-
Thank you, Saree.
so early in the morning.
Thank you.