Littelfuse, Inc. (LFUS) Earnings Call Transcript & Summary

Thank you, Andy. Good morning, everyone, and thanks to Meenal and Dave for joining from Littelfuse, ahead of their one-on-ones today. Just off a strong first quarter result that came in ahead of expectations. I think really reflecting the significant destock in some of the markets over the past 1.5 years or so.and Littelfuse's ability to quickly respond efficiently to normalizing demand in some areas. So with that introduction, Meenal, how would you characterize the recovery path for Electronics and the Passives area, and particularly, the booking trends and the visibility, given the second quarter in a row with the strong book-to-bill for that segment? And any other high-level dimensions of the first quarter result that you think are good for leading?

Sure. Let me start with -- first of all, good morning, everyone. Thanks for joining us today virtually. Happy to be here with Chris Glynn, but also David Kelly, our Head of IR, and representing Littlefuse today. So maybe just circling back to where Chris started on our first quarter and our first quarter results. We released earnings last week. We had a very strong first quarter. saw sales growth, we have been talking about a return to growth, as Chris mentioned, with the destocking that we had seen over the past several quarters. This quarter, the first quarter of 2025 was a return to growth. And really, you could see that across our Electronics segment, in our Passive Electronics Products as well as our protection semiconductor products. They were really the first to go more into a down cycle. And so we saw them really driving some of the growth as well as our Industrial segment really broad based across a number of different end markets, and we had some very strong growth coming out of our industrial segment as well. Some of what we talked about as part of our first quarter earnings call was just the fact that we were seeing very strong book-to-bill coming into the first quarter and then through the first quarter, book-to-bills across all of our businesses were running over 1. We were seeing good demand. Our lead times are generally back to, I'll call it, pre whatever level -- pre-pandemic, pre different levels at this point. And so that's really where we were coming into the earnings call. On top of that is, of course, the topic of the day. We have been working through with our customers a number of different tariffs and trade dynamics, et cetera. So that was a big part of our April and April activities, especially working closely with a number of customers and distribution partners around a number of different logistics and supply chain opportunities to try and minimize some of the impact on that, which I can get into more detail later. But overall, a good first quarter and then a solid start into April as well with continuation there.

Okay. Great. And just as a reminder before we continue here, there is a Q&A portal that I'll be checking so if people have specific questions throw them in there, I'll do my best to get them asked. So Meenal since we've left off of the tariffs there. If we think about the 2Q guide and the full year comments, how did you factor in potential demand impacts from trade rebalancing in terms of maybe how -- you're waiting to see what customers do, maybe they ship their production. How close are you to those customer considerations at present? Is it still early to have a sniff test done if it's more about shipping from where you are to where they are versus adjusting your own production locations.

Yes. So just from a tariff trade dynamics, Chris from your question, I mentioned earlier, we've been working with a lot of our customers around supply chain and logistics activities. And if I take a step back, for us, it really comes down to 2 places that we're manufacturing from where we're bringing production into the United States. First of all, from China, about 15% of our sales in the United States our products that are coming in from China, largely across our electronics segment. So in a number of cases, we're working with both customers as well as distribution partners there where over the past several years, we have moved some areas of production to other areas outside of China, but more in the near term now -- more time spent from a supply chain and logistics possibilities where in a lot of cases, where product was coming into the U.S., but it was then moving out of the U.S. So rather than having product coming into the U.S., as an example, we'll work with them to ship products to other locations, which is where some of the product is ultimately being consumed anyway. So we've been able to work through that. We had some -- a little bit of our product coming out of our -- from our Industrial segment, the same sort of thing where we're working closely with customers for products coming out of China. Another 60% of our products sold in the U.S. are coming in from Mexico. Again, a lot of cases. This is, of course, through our transportation segment and industrial segment, where a lot of our production is in Mexico for a lot of North America customers. But again, some similar types of opportunities where either one we have customers where they're taking products in the U.S., but then shipping them back into Mexico for their own production. And another -- in most other cases, over 90% of our products either fall in under USMCA exemptions or in the case of, as I mentioned, products maybe going into the U.S. and coming back to Mexico. We rerouted logistics and done some other things with customers so that in general, we've been able to avoid tariffs. Net-net, when you take a look at all of our product coming into the U.S. beyond all the supply chain logistics works and other things that we're doing, we will be able to minimize the tariff impact as it relates to our P&L. And so in our second quarter guide, there's really an immaterial impact as it relates to tariffs to our bottom line.

Okay. So that's a pretty good start. Some might be of the view that 2Q is still a little early days with inventory and process in the channel and in production. But I think you're making a broader point, nevertheless, that your internals are not anticipating much factor. So would the impact really be if there's demand fallout as the broader economy adjusts?

Yes. So 2 parts. Great question, Chris. So from a mitigating the near-term in tariff and tariff implications, that's probably part one. The question is, I know a lot of discussion out there about demand. Most of our -- the bulk of our sales really are B2B. So when we think about it, we're selling to -- we're a Tier 2 in some cases or we are a critical supplier for a number of customers, a number of distribution partners. And as we've talked to a broad array of customers and distribution partners, well, everybody is keeping an eye out on demand patterns as we sit here in the second quarter, people still felt pretty good, whether we were selling into industrial applications, commercial applications or even more broadly automotive, different things like that. I think the unknown at this time is, are there going to be implications to demand as we look at the back half of the year? Nobody is highlighting anything specific, but we all read the same headlines a lot of discussion out there about automotive as an example in understanding the tariff implications what that might do to demand. But at this point, where we sit in the second quarter, we still feel very good, and we feel very comfortable and confident about our Q2 guidance that we put out last week.

Makes sense. Good to hear. Stepping aside from this topic a bit, could you just visit your new CEO, Greg Henderson -- Dr. Greg Henderson, his background in the Board process. And what is a different dimension, maybe he brings to little Fuse and maybe an area that -- any areas of the portfolio or the strategy that might have been underexploited in the past relative to some of the areas that have been particular value drivers.

Sure. So a brief background on Greg. Greg had -- prior to joining us as CEO, Greg has been on the Littelfuse Board for about 18 months. So the great news is he was already familiar with the company, with our technologies, with our markets and also knew the management team and a number of leaders in the company. And part of the -- as you would expect, in a normal public company board succession process, once Dave Heinzmann, our former CEO, had talked to the Board, expressed his interest in retiring and is part of that process. The Board then had been working on -- working with Dave around timing. And then as things got a little bit closer started working on a typical succession process. As part of the evaluation of candidates inside the company and outside the company, there was an opportunity to really assess Board members and in this case, Greg. And so it was a nice match given Greg's background, which I'll get to in a second and really what Littlefuse was looking for. Greg joined us from ADI. So while he was on the Board, he was a senior leader -- senior executive at ADI Analog Devices semiconductor company. Before his 10 years or so in ADI, he was at a company called Hittite as well and then a number of other, I'll call them, industrial technology companies as well. [ TE ] connectivity and a few other companies there. Greg -- Dr. Greg Henderson. He was a great match for the company, given his technical background, but also when he was at ADI, he was really in charge of a number of the end markets that Littelfuse participates in from an automotive perspective, from an aerospace, from general industrial end markets, communications, et cetera. So that was a really good fit there. And I think the background that Greg brings from his role, he's very, very focused on customers, end markets applications. And that's really been the starting point as he's come in Littelfuse, he spent his first 90 days getting to know the company better, getting out on the road, meeting customers and teams and getting out to our sites. And a few of his initial observations and priorities are: One, hey, great company. We're in a number of really good end markets today. We really need to spend even more time on these end markets to maybe think about some sub-end markets either ones that we're in today, that we can grow further or adjacent end markets and maybe there are greater opportunities for us there. And so thinking about, one, from a market perspective. Two, I would call it, as he looks across the portfolio of the company, especially with the acquisitions that we've done over the past several years, the portfolio we have today is quite a bit different than what it used to be 5 years ago, 10 years ago. And I don't want to put words in Greg's mouth, but I think about the one Littelfuse that we can think about going forward where we have an array of technologies and we can go to customers on a broad basis really bringing the full weight of the portfolio to customers and really help them solve their most critical problems. So he thinks there's more opportunity there for us. to really pull together the technologies and our businesses to be able to do that with customers. And then lastly, as we think about our operational excellence. We think about our manufacturing, our supply chain, the work that we're doing across the company, how do we continue to grow and scale that and also apply best practices that we have in different pockets, different regions of the world and make sure we get those learnings and sharing across the company. So those are 3 of these initial observations and some priorities coming from there. Happy to talk a little bit more about where that leads into strategy, but I'll pause there for a minute.

Okay. Great. Well, let me take your queue there. I think in terms of strategy, what is the readiness of the composition of the sales structure and incentives? And what do you see is the complexity of migrating the sales organizations to leverage that full portfolio effect. Where are some of the gaps? And I assume you're doing some of this already, right? It's not brand new, but clearly, you're saying that's an area where Dave -- Greg is excited about the opportunity.

I would repeat exactly what you said, Greg's observation, and we've talked about this as a leadership team is there are definitely some key customers where we are already bringing the full weight of the portfolio. And so we'll have products across each of our segments that are being sold into a customer. And really what we're talking about doing is how do we replicate that on a much bigger scale. So it's coming back to the discussion on scale, how do we think about good practices today and how do we look at leveraging them further because we are, as an example, we're selling to a lot of industrial customers through, of course, our Industrial segment, through our power semiconductor business and even through parts of our passive electronics, how can we bring the weight of the portfolio forward with some customers there as an example. So that's definitely work that we're doing now. I would say that's also part of our strategy work that we're doing. We've talked about the fact that historic Littelfuse has had an updated strategy that we've gone through every 4 or 5 years. This is about the time that we're doing that now. And as we were talking with Greg, we talked about this will be the next evolution of the Littelfuse strategy. And he brings a different lens, given his experience and some of the feedback that he's gotten recently.

Yes. What should investors expect in terms of time line for Greg to sort of deliver? I expect there'll be evolutionary fitting the tone of the discussion you and I have conducted so far, but certainly some incremental [ slant ]. So curious, just time line.

Sure. David Kelly, would you like to chime in on this one?

Yes. Thanks, Meenal, and thanks, Chris, for the question. And as you can imagine, Greg being almost 3 months into the job, and meeting a lot with internal constituents, our customers, our partners and we're starting to work towards that next strategy iteration evolution, whatever you'd like to call it, but still in somewhat of the early days. Our thought process is, one, I expect to hear more in the coming months as we have some developments. And then as we get to a more solidified holistic strategy, we're going to look to get out quickly to investors. I'd like to have an Investor Day in the coming months as well. So stay tuned to expect to hear more sooner than later.

Okay. So it sounds like before too long?

Absolutely.

Okay. For the semiconductor portion of the portfolio, I think Passive's recovery is kind of leading the segment presently. Is the day-to-day steady at semiconductors, any areas falling off versus any areas actually showing recovery, in terms of the power semis, not the protection semis? I know you have a lot of end markets so we could probably go around, but maybe jumping to the net-net with a little context might be the most expeditious.

Sure. So real quick across our Electronics segment and Chris, you alluded to this. We have our path of Electronics Products. Those are some that I talked about in my earlier comments about the return to growth. We see the Passive Electronics a little bit heavier on the distribution channel. And so once we got through a lot of the destocking and we've seen, in addition to that, just some of the general recovery coming through some of the markets, we saw good growth coming out of Passive Electronics this quarter. Chris also mentioned our protection semiconductors, it's sort of sit in the middle of the -- they are a semiconductor product, but a little bit more Passive like. And similarly, with the distribution being a large partnership that we have as it relates to our protection semiconductors. We also saw some good recovery there and return to growth in the first quarter as part of our protection semiconductors. And as it relates to our power semiconductors, for us, our power semiconductor business is quite heavy in terms of industrial applications quite heavy from a market geography perspective in Europe, also in Asia. And so that's, one, I would say, our passive and our protection business had gone into a cycle downturn several quarters back, the power semiconductor business had continued to be fairly strong for several quarters after that. As we've seen recovery coming through in the Passives and Protection semiconductor, the power semiconductor side has lagged to that, again, just as part of the recovery with definitely inventory issues that had been with end customers, and this is much more a design-in portfolio. But secondly, our business, our Power Semiconductor business is also much heavier in Europe and a lot of the industrial applications, as an example, factory automation, has been weaker in Europe, and that's also been a little bit of the delay that we're seeing in the recovery. We feel good about still the opportunities going forward, still working with customers closely around design wins in that aspect and again, just working through some of these market issues.

Okay. Great. Switching to transportation, your commercial vehicle business seemed to outperform the markets and other peers and players serving that sector. You actually had growth in the second half last year despite those contexts I referenced. And I think you also had some product pruning in there too and had a little bit of growth net of that. What's allowing that? Is that just a simple share gain from specification work years ago?

It's a few different things, Chris. So as Chris was talking about in our transportation segment, we have 2 parts that are most people inside the automotive part of our transportation segment and then the commercial vehicle side. The commercial vehicle side, we really built over the past 15 years through acquisitions and the most recent acquisition that really more than doubled the size of our commercial vehicle business in the past few years has been Carling Technologies. Carling well-known brand across the commercial vehicle space and very complementary to the existing portfolio that we had in our commercial vehicle business. I provide that background because really it's the combination of the portfolio. And there's been a lot of work that's been done over the past several quarters to really start working with customers to understand, again, I talked a little bit about the fact that how do we bring the power of the portfolio forward. This is almost a microcosm where we're taking the power of a much broader commercial vehicle portfolio. Now going to customers' legacy customers with the Carling product going to Carling customers with legacy product and even going to new customers to talk about where there are opportunities for us given the breadth of the portfolio. So that work is going on, and we're making some slow but steady traction there. And I would say the other part of the growth was -- and we had talked about this across our Transportation segment. But with the number of supply chain issues followed by pricing and different things. We had lagged a bit in pricing just with some of the contracts that we had, had, et cetera. So from 2023 going into 2024, we had done a lot of work across our commercial vehicle business but also our automotive business to really drive some pricing and really better align our pricing to where the inflation had taken some of our product lines. So that was a big part of the focus over that period as well, and we've been pretty successful with that, really because the customers see the value from the products we bring and that has really helped open up the dialogue even more with customers.

Okay. Great. I have one from the lines, talk is about increased competition from the business outside the U.S. from Chinese competitors that may be incentivized to dump products at low prices as they have excess capacity with the presumed inability to ship into the U.S.

So what I would say is, one, in terms of Chinese competition and a lot of our -- I'd say, a lot of our electronics segment probably has the biggest base as well as our automotive business. We have the biggest base -- biggest set of customer relationships across China. We've always had competition, local competition as it relates to our products. And that's something that we're always working through, whether it's making sure we understand our price and the value that we're bringing and thinking about that in the context of competition. What I wouldn't say though is a number of our customers in China really are -- have -- are and have global aspirations, whether that's in the automotive space and whether that's in the broader general electronics space. And so when they look at maybe Chinese competitors that may have similar products to us and/or can provide it at different price points, that's really their value proposition as we can give you something based on price. Our value proposition is much greater than that. Our value proposition talks about the global supply chain that we have, the 98-year history that we have as a company in terms of production, in terms of the quality that we have. We're producing at a scale that a lot of our competitors are not producing at. So when you think about what we can provide in terms of what you need, when you need it, where you need it, because a lot of our Chinese competitors have global aspirations, and they're not just manufacturing in China. They're manufacturing elsewhere and they really want to have partnerships with a company that is able to work with them and meet their needs as well. So we're continuing to have those discussions with our Chinese customers, many well-known global brands at this point. And it's a day-to-day discussion and day-to-day where we're talking through competition, but we're talking about what we can also bring to the table. We've been fairly successful with that.

Okay. So in terms of volume that they are used to shipping to the U.S. and maybe that volume has areas where it's a little more fungible than some of the specification and ongoing service side that you've won because of the attributes. Are you suggesting that you're not seeing that as a potential factor?

Are you referring to why we have been successful with...

Let's say you had a Chinese competitor. You have your just allocation of market shares with customers in Greater Asia and beyond, maybe even into the West, but some of your business is not highly specified. So Chinese competitors say they had been shipping 15% or 20% of their volume into the U.S. Now they're looking for other lower specification channels to reallocate that product.

So how are we -- a part of it is also when we talk about some products where we may compete with some of the local Chinese, there are number of markets, end markets that we participate in. And then there's a number of end markets that we don't even in China. So in a lot of cases, the Chinese competitors may not necessarily be coming after some of our business because maybe some of that is expecting or we have a long history or a lot of the things that I've mentioned, right, we have the global supply chain. They may also be going after business that we're not interested in business that other Chinese competitors have or other companies have beyond us. So it's not to say that we're able to -- that there aren't shifts here and there between customers and markets and products. But in general, we found that we've been really successful with the value proposition that we provide, which goes well beyond price.

Okay. Thanks for that. And then could you just discuss the background and backdrop for the doubling of transportation margins last year on down 1% organic. You already touched on some of it with the product management and integration of Carling and pricing modernization, we'll call it, versus legacy pricing modernization -- legacy pricing that may have not been as -- must have been below what you justifiably could have sought in the market. So [indiscernible] you've addressed a little bit of footprint there, but maybe I just answered the question. I don't know.

I'll try to summarize that back. So in terms of the pricing, and I do want to just make a comment on the pricing we were going after pricing. And in many cases, we had talked about this, especially in automotive, but the same applies to commercial vehicle, where we we had contracts in place. There were some companies that said, "Look, I'm going to go after pricing. I'm going to break on my contracts." We chose not to do that. And so that left us at a little bit of a lag, especially on the automotive side. So while I did talk about commercial vehicles and pricing, we also have been doing the same and are continuing to still do the same from an automotive perspective. So that was part of it. There's work that we've done also around what I call the footprint or the rooftop work with the Carling business and then you take our legacy commercial typical business. There were some opportunities not necessarily factories, but even just sales offices and some different sites that we had some opportunities to streamline and help make the business run more efficiently. So that was part of it. You mentioned pruning. One of the things that we've been talking about is that, again, as we took an assessment on the portfolio, both in the automotive side of the business, but also the commercial vehicle piece of the business. There were product lines that we were in that the strategy fit in with pricing where we weren't really getting the value from the customers based on what we thought we were providing. So the first thing we do is talk to the customers about pricing, which we did. In some cases, some of that pruning really turned into price increases and it's businesses that we've retained. In other cases, where products may be less important to the customer. And so over time, we'll do last time buys, and we were exiting those. And simultaneously, then you need to think about your cost structure as part of that, and we were adjusting that. So I'd say, overall, those were some of the levers that we were working on. But going forward, it is also about growth, right? I mean, these are businesses that we want to grow. We think there's a number of opportunities, whether in commercial vehicle, and I talked about the growth opportunities with the combined portfolio, but also with the automotive side of the business, right, the mega trends around electrification, electronification, we think there's opportunities, continued opportunities there for growth.

Okay. Great. I think we have time for one more. Industrial also had a really nice lift in the margins last year, and the growth has been very good there too. Similar story, acquisition integrations, certainly volume, but I think a lot of efficiencies footprint related there coming through now, and that should be pretty steady state. So I think that's a volume leverage story here with those margins restored. But I think you had double digits organic in the quarter, [ really ] stands out in the current environment. So I'm curious, do you have like a whole kind of backlog of time lag specification wins there. I think industrial, safety, commercial kitchens. Commercial HVAC has been a nice a market that's been -- the Heartland acquisition has really ramped into since you owned it. Is this just kind of like a world is your oyster type dynamic at the industrial segment in terms of continuing to scale even if the net of your end markets is flattish?

Yes, I would say for our industrial business, the leaders in our business have really done a terrific job around. Some of the work that I referred to earlier that Greg has been talking about around how do we win, where do we play? This business has already been doing that, saying, how do we think about subsegmenting pieces of the market where we maybe have some applications or a niche opportunity or we can get specked in and really develop a market ourselves. And you refer to industrial safety, that's an area where we sort of coined that space for us and developed some products that are used in a number of commercial kitchens as an example or fast casual restaurants, and we're really expanding where you could use that particular technology and some other applications. I would say the team has also really done a nice job in going after, as you mentioned, we started with the Heartland acquisition in residential HVAC, but then growing that business into commercial HVAC. That's been some good pockets there. Some work around renewables. We think about energy storage, grid storage, so some pockets there, electric vehicle infrastructure. That's been another opportunity there. So it's not just one market or one set of customers that's a win, but it's a number of different areas that I think aligns really well to what Greg is hoping to replicate much more across the company is really subdividing and thinking, how do you bring the power of the portfolio going forward with customers.

Okay. So it sounds like good shot at more of the same from industrial. And thank you very much for your time. We're at a close.

Thanks a lot, Chris. We appreciate it, and thank you for everybody who joined us today, really appreciate it.

Bye.

Take care.