Good day, everyone, and welcome to the Littelfuse Fourth Quarter 2021 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to the Head of Investor Relations, Trisha Tuntland. Please proceed..

Good morning, and welcome to the Littelfuse Fourth Quarter 2021 Earnings Conference Call. With me today are Dave Heinzmann, President and CEO; and Meenal Sethna, Executive Vice President and CFO.

Yesterday, we reported results for our fourth quarter and the copy of our earnings release and slide presentation is available in the Investor Relations section of our website. A webcast of today's conference call will also be available on our website. Please advance to slide 2 for our disclaimers.

Our discussion today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review yesterday's press release and our Forms 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations.

We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available in the Investor Relations section of our website.

I will now turn the call over to Dave..

Thank you, Trisha. Good morning, and thanks for joining us today. Let's start with slide 4. Continuing our momentum from prior quarters, our global teams delivered another quarter of strong performance to finish the year.

We achieved a record fourth quarter sales of $553 million, up 38% versus last year and adjusted EPS of $3.16, an increase of 42% year-over-year. We finished 2021 with record annual revenue of $2.1 billion, up 44% compared to prior year, and reported adjusted EPS of $13.19, an increase of 106% year-over-year.

Our teams achieved outstanding results, driven by superior execution and demand creation across the industrial, transportation, electronics end markets we serve.

I'd like to thank all of our associates around the world for their unwavering commitment and hard work to significantly grow our company by winning new business and meeting customer demand during these challenging times. 2021 was truly an exceptional year for Littelfuse. Meenal will provide additional color on our strong financial results.

Our results and successes during the year reflect both the strength of our team's execution and the power of our strategy, which is shown on slide 5. Over the last decade, we have positioned our company within the long-term structural growth themes of sustainability, connectivity and safety.

The ever increasing complexity of applications surrounding these things continues to drive greater demand for our reliable products and in turn, a higher level of product content. During 2021, we advanced our strategic business initiatives, driving content and share gains in high-growth markets, both, organically and through acquisitions.

We completed two strategic acquisitions during the year, adding approximately $300 million in annualized sales. One year into our five-year growth strategy, we are well on our way to delivering sustained double-digit revenue growth, best-in-class profitability and top-tier shareholder returns. Moving on to performance within our segments.

During 2021, our Electronics Products segment drove strong growth across all regions. Revenue was up 39% and 37% organically compared to 2020. Our performance was driven by new business and our seamless execution to keep operations up and running and capacity additions coming online to support customer demand.

Globally, we saw strength across a broad range of applications and end markets, including data center, telecom infrastructure, factory and building automation, appliances and automotive electronics driven by EV applications. We did see significant cost increases related to materials and freight.

We're able to mitigate much of the impact with our disciplined pricing strategy and productivity improvements. Distribution partners have slowly built inventory and levels are now appropriately matched to end market demand. We also have seen electronics and customers and contract manufacturers building inventory.

However, L-Fuse remained strong across all regions and exiting the fourth quarter, our electronics book-to-bill remained above one. We expect ongoing healthy end market demand, driven by the amplified themes of electronification, energy efficiency, automation and connectivity.

Moving forward, we're renaming our automotive product segment, and we'll refer to it as our Transportation Products segment. The term transportation represents a more comprehensive description of our broad range of products in the applications and end markets we serve.

The Carling Technologies acquisition, which we have discussed with you before, has meaningfully increased our presence in commercial vehicles, which now represents about half of our segment revenue. We achieved strong growth in full year 2021, despite the challenging supply chain environment that impacted the passenger and commercial vehicle markets.

Our transportation businesses also experienced significant metals and freight cost headwinds. We have been taking pricing actions to mitigate the cost increases and are implementing additional pricing actions, as well as continuing to drive productivity improvements across the business.

Thanks to the execution by our global teams, revenue from our passenger vehicle business grew 25% versus 2020. Our global car build was largely flat.

Our significant growth above market was driven by continued content growth in electric vehicles, the favorable mix of higher-end vehicles, market share gains and some inventory build at OEMs and Tier 1s, which we have commented on through 2021. Revenue for our commercial vehicle business grew 58% versus 2020.

Demand for our commercial vehicle products was driven by strength in material handling, heavy-duty truck and bus, construction and agricultural equipment markets, as well as some inventory build at our customers. Our completion of the Carling Technologies acquisition on November 30 contributed $15 million to our full year revenue.

It's a pleasure to welcome the Carling employees to the Littelfuse team, and we look forward to their contributions as we continue to execute our long-term growth strategy. Turning to slide six. A combination of our company significantly expands our technologies and capabilities, enabling critical scale in the commercial vehicle space.

Carling manufactures market-leading electromechanical and electronic switching and circuit breaker technologies. They also strengthen our engineering, design and test capabilities.

The addition of Carling more than doubles the size of our commercial vehicle business and our complementary customers, channels and products will accelerate our growth in strategic markets, including heavy-duty truck and bus, material handling equipment, construction equipment and agricultural machinery.

Carling has a strong global presence in these markets, as well as in the telecom infrastructure and marine markets. The integration of Carling is off to a strong start. Our combined teams are working closely together. We are already seeing opportunities for joint new product design, as well as sales synergies.

We look forward to leveraging our respective strength. Looking ahead, our overall transportation bookings are healthy in all regions. We see a number of ongoing content growth opportunities across the end markets we serve, and expect to continue to perform above the market for the year.

That said, ongoing chip and other component shortages at our customers, as well as the timing of customer inventory burns can cause quarter-to-quarter variations. We expect our commercial vehicle strategic markets to remain healthy. For the first quarter, we expect car builds to be flat sequentially and modestly down year-over-year.

For the full year, we expect car builds of approximately 80 million cars. Turning to our Industrial Products segment. We achieved revenue growth of 124% and 27% organically compared to 2020. Our performance was an outcome of our global team's ability to serve our customers and win new business to drive organic growth.

Robust demand for our broad range of products was driven by renewable energy, led by solar and energy storage systems, HVAC and data centers. Our performance also includes a meaningful revenue contribution of approximately $100 million from a successful acquisition of Hartland Controls.

We are seeing early successes driven by our combined capabilities and complementary product portfolios. In 2022, we expect our strategic markets, renewable -- renewables, EV infrastructure, HVAC, and general industrials to remain strong. This sustained growth will be driven by a more sustainable ecosystem.

For example, solar and wind energy and energy storage systems that enable lower carbon emissions, the ongoing proliferation of electric vehicles and charging stations, more efficient climate control units, increasing requirements for electrical safety and the rising demand for factory and process automation.

Now let's move on to highlights and design wins in the end markets we serve. We are building forward momentum with our investments for best-in-class growth. We're advancing our customer-driven innovation, digital presence and new mobility resources and capabilities.

2021 proved to be a year of significant new business opportunities and design in activity as our engineering teams continue to work closely and effectively with our customers in a hybrid work environment. Our joint collaboration drove significant new business growth.

Within our industrial end markets on Slide 7, sustainability and safety are key drivers of our growth strategy. Throughout 2021, we captured new business across our regions for a broad range of renewable energy applications and for energy storage systems.

In addition, we continued to focus on more efficient HVAC systems, proved a major source of our design wins. We benefited from the integration of Hartland Controls acquisition. We have already seen successes leveraging Hartland products with Littelfuse customers beyond HVAC.

For instance, selling into general industrial applications related to food and beverage safety and selling Littelfuse's products to Hartland customers. We also secured several new business wins given the emphasis on Industry 4.0 and a push towards industrial automation and energy efficiency for industrial applications.

Furthermore, our ability to deliver innovative products to meet tighter safety requirements for general industrial and food and beverage applications drove many new design wins during the year. Turning to our transportation end markets on Slide 8.

We continue to expand our e-mobility investments to broaden our capabilities and high-voltage product offering. The ongoing electronification and electrification of applications drove significant design activity on business wins during 2021.

Of all of our regions, the traditional vehicle manufacturers to newer EV-only entrants, we saw a pipeline of opportunities and numerous e-mobility-related design wins. Battery management systems for EVs were a major source of wins during the year. When we saw design wins for EV battery finishing.

With the growth in e-mobility and robust design activity, we remain well positioned for on-vehicle charging and EV charging infrastructure applications and saw a wide range of wins throughout the year. Additionally, we are seeing EV-related design wins in the commercial vehicle space.

We had numerous design wins for manufacturers of electric trucks and buses and secured design wins in the agriculture equipment space. We continue to build on our solid customer relationships in material handling space and had several wins in this high-growth market.

With the addition of Carling products, we are also better positioned to accelerate design wins and growth in our strategic commercial vehicle markets. The continued electronification of vehicles, both within traditional passenger vehicles and EVs are driving increased needs for automotive electronics, which remains a great source of design wins.

In 2021, we saw wins across a wide range of applications from vehicle lighting to infotainment and navigation systems to components used in window, door and seat motor applications. ADAS applications also drove additional business wins from vehicle cameras and dashboard systems.

On slide nine, during 2021, we saw a robust pipeline of diverse design lenders across a spectrum of electronics applications. Largely driven by the need for ongoing greater connectivity as design engineers qualify new products.

Our differentiated far reaching go-to-market strategy enables us to secure new business wins from appliances, building and home automation to battery management systems within tablets and notebook computers to 5G infrastructure.

Data centers and cloud storage also continue to be a major source for design activity as online gaming and streaming services drove demand. In addition, to better serve our strategic partners, we accelerated advancements in our digital presence, giving evolving user expectations and hybrid work environments.

This multiyear journey will further differentiate our go-to-market strategy and help us better serve our customers. Our pipeline of new business opportunities is healthy across the high growth, industrial, transportation and electronics end markets we serve.

We are confident in our ability to secure these opportunities based on our innovative, reliable products, engineering and technical capabilities and customer responsiveness. The organic growth from these efforts, coupled with strategic acquisitions to enhance and sustain our organic growth positions us well to continue expanding our market presence.

Finally, on slide 10, I would like to highlight our commitment to sustainability. Our first annual sustainability report published in October communicates our progress. Environmentally, our core products empower the sustainability megatrends by enabling our customers' applications focused on a more sustainable, connected and safer world.

We also have goals related to our continued efforts focused on our own footprint such as our goal to achieve greenhouse gas reduction of 38% by 2035, and we continue to invest in programs to further our energy conservation initiatives.

Socially, we have a number of programs addressing human capital management and the health and well-being of our global associates such as a zero-injury workplace goal.

We also have goals to expand gender and minority representations and have launched various development programs to improve our female leadership position and initiatives to attract diverse talent.

From a governance perspective, we continue to refresh our Board composition with members who bring fresh perspectives and help ensure continued diversity on our Board, supported by longer serving directors who bringing continuity and experience to our business and the end markets we serve.

In addition, we have very strong global ethics and compliance policies and programs. We are focused on the long-term value of a robust ESG strategy for our business and for all stakeholders, and look forward to continuing to share our progress.

I will now turn the call over to Meenal to provide additional color on our financial performance and outlook..

Thanks, Dave. Good morning, everyone, and thanks for joining us today. Let's start with slide 12. Sales in the quarter were $553 million, up 38% versus prior year and 23% organically. Our Hartland and Carling acquisitions plus the extra 14th week in this quarter added $61 million in sales versus the prior year quarter.

GAAP operating margins were 16.8%, while adjusted operating margins were 17%, expanding 40 basis points versus last year. Fourth quarter GAAP diluted earnings per share was $2.08 and adjusted diluted EPS was $3.16, up 42% over prior year. These included both a GAAP and adjusted effective tax rate of 12.7%.

The adjusted effective tax rate was lower than our forecast due to the receipt of a foreign tax holiday during the quarter and retroactive for all of 2021. Turning to slide 13. For 2021, sales of $2.08 billion were up 44% versus last year and grew 33% organically. Our acquisitions plus the extra week added $134 million in sales versus last year.

GAAP operating margins were 18.5%, while adjusted operating margins expanded nearly 500 basis points for the year to a record 19.1%. Incremental operating margins were 30% versus last year, a testament to how our teams have driven pricings and productivity actions to offset many of the ongoing inflationary challenges we've seen.

GAAP diluted EPS for the year was $11.38 and adjusted diluted EPS was $13.19, up 106% versus last year. Our full year GAAP effective tax rate was 16.8%, and adjusted effective rate was 16.1%.

As I've referenced through the past year, inflationary pressures unfavorably impacted margins in excess of 300 basis points, mainly across foreign exchange, input and transportation costs. We were able to offset about half of these costs through price realization.

Our discretionary spend continues to run at reduced levels than typical, also mitigating the inflation impact to margins. We generated a record $373 million in operating cash flow during the year and $283 million in free cash flow, 100% conversion from net income and aligned to our conversion target.

The ongoing strength of our balance sheet gives us the flexibility to maintain some strategic inventory builds to meet anticipated customer demand. We also delivered on our capital allocation strategy, reinvesting in our business for our ongoing growth.

We invested about $90 million in capital expenditures with a key focus on capacity and utilized over $400 million in cash for our Hartland and Carling acquisitions this year, adding nearly $300 million in annualized sales. We also returned $50 million in capital to our shareholders through our dividend.

Slide 14 references a 5-year financial framework we discussed at our investor event last February. This framework has been fairly consistent over the past decade and we've demonstrated we can deliver financial performance that's in line with our objectives through market cycles.

We're off to a strong start in the first year of our current strategy across all of these metrics. I'm confident in our ability to deliver these outcomes again through our strategy. Now moving on to our fourth quarter segment performance on Slide 15. I'll start with our Electronics Products segment.

Sales in the quarter were $342 million, growing 39% versus last year and 36% organically. Operating margins were 23.2%, expanding over 600 basis points versus last year, led by a combination of ongoing volume leverage and pricing strategy, driving strong performance in this ongoing robust demand environment.

As Dave noted, we've renamed our automotive products segment to Transportation. Sales in this segment were $142 million in the quarter, up 14% versus last year and down 2% organically, the main differences being the extra week of sales and the acquisition of Carling Technologies during the quarter.

Sales in the commercial vehicle business were up 81% versus last year with the addition of Carling as well as organic growth from strong end market demand. Sales from our passenger vehicle business were down 7% versus last year, versus global car build decline of 17% over the same period. Operating margins for the segment were 7.5%.

Margins were unfavorably impacted by nearly 500 basis points versus last year due to ongoing FX and metals inflation and margin dilution from our Carling acquisition. Lower passenger vehicle volumes also reduced benefits from operating leverage.

Sales to the Industrial segment of $70 million grew 121% in the quarter and were up 23% organically with the main differences being our Hartland Controls acquisition from early last year and the extra week of sales.

Operating margins were 6% where we incurred higher logistics costs across our Hartland business due to rate increases and cost for some internal strategic repositioning of inventory. Excluding Hartland, our legacy businesses expanded operating margins over 200 basis points versus last year. Slide 16 outlines full year performance for our segments.

Electronic sales finished at $1.3 billion. Despite the number of operational challenges we faced, including ongoing inflationary increases across the supply chain, our adjusted operating margins for the year were 23.8%, expanding 750 basis points versus last year. Sales in our Transportation segment were $528 million.

Margins finished at 12.5%, up 200 basis points versus last year despite absorbing more than 400 basis points of headwind from FX and metals. Industrial segment sales finished at $251 million. Margins ended the year at 9%. The Hartland integration is on track with our expectations and we had expected some margin dilution in year one of ownership.

Excluding Hartland, our legacy Industrial segment expanded margins from 150 basis points.

Now, turning to slide 17, the demand environment remains strong across most of the end markets in which we are positioned, especially in areas covering e-mobility, vehicles and infrastructure, renewable energy, data centers and cloud applications, and Industry 4.0.

As a result, we continue to see expanding content growth of our products across numerous applications. Softening the strength of the demand are currency headwinds. At current exchange rates, FX could be a sales hit -- at current exchange rates, FX could be a sales headwind of about $20 million for 2022.

Amidst these positive demand trends, our teams continue to manage through daily COVID disruptions and an increasing number of supply chain challenges, leading to ongoing inflationary pressures.

With today's market conditions, we see about 100 basis points of additional margin headwind for the year, a combination of input cost inflation, including metals, higher transportation costs as well as wage and other service cost increases.

Our teams continue to drive a number of productivity and automation initiatives and ongoing pricing actions to mitigate these. For the first quarter outlook, we expect sales in the range of $563 million to $577 million, up 23% versus last year and 12% on an organic basis. We project first quarter adjusted EPS to be in the range of $3.14 to $3.30.

This assumes an adjusted effective tax rate of 17%. The EPS midpoint is up 21% over prior year. EPS at the midpoint would be up 28%, excluding a non-operating mark-to-market benefit in the first quarter last year. Slide 19 includes some other items to consider in your full year modeling.

2022 will include a full year of Carling, versus one month in our 2021 results. We expect Carling to contribute $185 million to $190 million in sales and about $0.30 of EPS, net of ongoing deal amortization. For the year, we expect 100 basis points dilution to the company operating margin resulting from Carling, including non-cash deal amortization.

With our integration roadmap underway, we expect the Carling margins to align with the mid-teens operating margin target for our transportation segment as we exit year three of ownership.

On other 2022 estimates, we are projecting non-cash amortization in the low $50 million range, $17 million in interest expense at current rates and full year adjusted effective tax rate in the range of 16% to 18%. We expect 100% free cash flow conversion and estimate $110 million to $120 million in capital expenditure.

In closing, I want to thank our associates for their tireless efforts that led to our record success this year and also a thank you to our customers and suppliers for their partnership and growing our businesses together. And with that, I'll turn it back to Dave for some final comments..

Thanks Meenal. In summary on slide 19, 2021 was indeed an outstanding year for Littelfuse. Day in and day out, Littelfuse associates worked hard to support one another and serve our customers around the world. I want to thank our global teams for their tremendous efforts. Their commitment to execution during these challenging times has been remarkable.

As a result, we delivered record financial performance and made strong progress on our strategic business initiatives. We have entered 2022, well positioned to deliver continued profitable growth and value for all stakeholders. This year notably represents our 95th anniversary and long-standing track record as a successful global company.

In recognition of this key milestone on April 5, the 95th day of the year, we will be ringing NASDAQ's closing bell in celebration of our people, innovation and operational and commercial excellence and in recognition of all stakeholders who have supported our business and continue to believe in our strategy.

I'm truly proud of the company's global leadership and growth over the years and the strong reputation we have built. And with that, I will now turn the call back to the operator for Q&A..

Thank you. [Operator Instructions] Our first question is from the line of Karl Ackerman with Cowen. Your line is open..

Yes. Hi, good morning, everyone. Dave, Meenal and Trisha, hope you’re doing well. Two questions, if I may. The first one is a clarification question.

The 100 basis point impact on operating margins, are you suggesting that operating margins for the full year will be 100 basis points below the December quarter 2021 level? I'm just -- wanted to clarify that, please..

No, Karl. Hi, it's Meenal. So maybe just two things when we're talking about 100 basis points. I mentioned two different things on the call.

One being with Carling, with adding Carling into the portfolio with the work that we've got to do around the integration roadmap, we expect an impact to the company margin of 100 basis points or so for the year, just with the margin dilution with Carling coming into the portfolio.

I also talked about for 2022 for the year that we're seeing an incremental 100 basis points of cost headwinds coming through, but we expect to mitigate that with pricing. So at this time, don’t expect a net-net impact on the bottom line from that..

Understood. I appreciate that. I guess that dovetails into my next question, which is, it's great to hear you've implemented pricing actions to help mitigate the rising input costs.

However, Dave also indicated that your sales channels are seeing more balanced inventory that indicates it may be a bit more challenging to pass along cost perhaps beyond this quarter.

And so, if you could discuss that and what actions you may be able to take from a procurement perspective to limit freight and logistics cost going forward, that would be very helpful. Thank you..

Sure. Yes. Absolutely, Karl, as I talked about the inventory position within our electronics channels, they're a little more balanced with the demand, as they've kind of slowly built some inventory over the last few months.

However, within that segment, as we look at actions we've taken through the course of 2021, including actions that took place late in 2021, we'll see benefits from that helping to offset continuing headwinds as we go into 2022.

And clearly, as we monitor costs in the transportation side of the business -- or excuse me, not transportation side of the business, but our actually logistics costs being elevated, as well as metals and other commodity costs being up, we'll continue to monitor. And there may be additional actions that we take in that channel as well..

Thank you..

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

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

Good morning, Matt..

Yes. Hi. Good morning, everyone. Just another question, just regarding the near-term outlook, ex that incremental revenue from Carling acquisition, looks like you're guiding sequentially flat.

Are those the expectations for each of the big segments, transportation and electronics? Because it looks like you've been well above seasonal for electronics for three or four quarters now? And I guess with the inventory commentary, are you seeing things slow down to kind of a normal seasonal cadence or anything else there?.

Yes. I don't think it's anything out of the ordinary, Matt. We are guiding generally to seasonal, and we think of seasonal -- it's tough to think about seasonal these days because the past few years have been anything but for us, a normal seasonal trend, Q4 to Q1 is generally flat.

And when you take out all the noise from Carling, right, one month in the fourth quarter, three months in the first quarter, you take out the extra week, et cetera, we're generally flat across the board..

Yes. And I'd also say, Matt, that from a demand side in the Electronics segment, clearly, we continue to see very robust ongoing demand -- end market demand. It's probably stabilized, for a while they're climbing and climbing, and it's more of a stable environment. It stabilized at a pretty high level. Inventories are reasonably balanced.

So we kind of expect to see the flow-through there in that part of the business. Transportation portion of our business, obviously, there is forward-looking views of increased car builds over time through the course of 2022. We are seeing kind of the car build from fourth quarter to first quarter being flattish.

That's kind of what we're seeing from the market and the rating agencies on that. But the outlook overall is continuing increasing demand in those areas..

Okay. Thanks for that. And then just on the margins and your near-term margin outlook. It looks like you expect the transportation margins to get back to that target 16-plus percent or so.

But it looks like near term, maybe for most of this year, you still have some headwinds with Carling as well as cost inputs and the inability to maybe pass along all those prices.

So how should we think about margins in that segment this year?.

Yes. So just refreshing back, right, we've always talked about our Transportation segment, the old auto segment really having target margins in the mid-teen range, and that's what we continue to look at as expectations. You're right. In the near term, we've talked about, especially most recently in the past year, it's been around metals.

Metal price increases have gone up a lot. There are some other input costs as well. And then just on an interim basis, with Carling it will be about 100 basis points, maybe a little bit more across that segment. So I would say for us, what would improve margins short term, it definitely changes with market pricing around metals.

That would be we would start to see that fairly quickly within a quarter or so once we lead off the inventory, but that would be the general expectation..

Okay. Thanks a lot..

Thanks for your questions, Matt.

Can we go to our next caller please?.

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

Yes. Good morning. Thanks for….

Good morning, Luke..

Thank you for taking the questions. For starters, hoping to better understand, I guess, primarily how Hartland and to what extent any Carling synergies would layer in from here in 2022, given the related margin dilution that we're currently seeing both in industrial and transportation.

I know it's something you typically look at over a two to three year period.

So Hartland might be more front and center in terms of 2022 actions, but if there's anything initially on the Carling front as well I'd be curious?.

Yes. So we're -- specifically on Carling, if I step back right, we're over a couple of months now with the ownership. We've got an integration roadmap laid out and we're making good initial progress on that.

I'd say our integration-focused areas are a few main points, one being really on the sales, sales growth, including -- looking at pricing right across all of our businesses. Dave mentioned this, we're looking at pricing and that's our expectation to offset a lot of the inflationary headwinds we're seeing, no different for Carling.

So we're working on those activities as well as very quickly the teams together see opportunities for growth. We've talked about from different customer bases and we think there's some good opportunities for design-in opportunities across business there. So that's one. A little bit longer price, but we would expect some price actions this year.

Secondly, just from a cost perspective, we think now with the scale of our commercial vehicle platform, very quickly, there's opportunities around procurement that we're already starting to go after as well as transportation logistics costs.

And I would also say, especially the Carling team has pointed out, a lot of opportunities with some investment where we can look at productivity and automation opportunities there. So part of our capital plan reflects some investments we plan to make pretty quickly to be able to drive that..

I think it's also on the Hartland Controls piece that you asked about. Also, we continue down that path or a little further down the path there at year-end, and we've seen nice growth on that business, which ultimately will help drive synergies for us.

There is ongoing work to look on the cost side that we think we'll be able to complete in the next year or so that will show improvements in the Hartland margins as well. So I think it's typical for us.

Usually, it's a kind of two or three-year horizon for us to be able to get our synergies in place and begin to get the margins to the levels that we feel the business should run at in the longer term..

Okay. Thank you for that. And then my follow-up question, I wanted to ask about Carling, more on a strategic front, which, of course, has really enhanced the company's presence in the commercial vehicle market, both on-road and off-road.

But I'm really hoping to better understand this morning is the scope of the opportunity set for Littelfuse going forward as it relates to the electrification of commercial vehicles. You've, of course, shared some incremental content in terms of a framework for light vehicles.

And I'm just wondering if there's anything big as breadbox that you might be able to share as is relates to the incremental opportunity now on commercial vehicles as this really bulk up that part of the portfolio? Thank you..

Yes. Certainly. We've talked for some time now about our desire to grow the commercial vehicle portion of our business. And we're very fortunate and pleased with the acquisition of Carling as it does that more than doubles the size of our commercial vehicle position, which increases the importance that we bring to our customers in that space.

And in that space, we tend to sell directly to OEMs, so the more we bring there and the more solutions we bring are certainly beneficial for us. The complementary technologies. We've already seen some cases where Littelfuse was maybe not quite prepared to be able to take on an opportunity with the customer. Carling wasn't either.

Actually, the combined technologies are now positioning us to better serve that and the customer is recognizing that, and it's increased the opportunity set for us. Carling, overall, on the commercial vehicle space, electrification is absolutely a trend we're seeing.

We spoke a little bit about it in the prepared remarks, where we've seen nice design wins in the high-voltage space in truck and bus as well as the agriculture side of the business. And that tends to be in and around power distribution -- high-voltage power distribution and protection.

So it really drives off of our core, but also switching, electronics switching, our opportunities within that space as well. So I would say it fits maybe as much into the electronification side of things as it does in the electrification side of things within the commercial vehicle space when we look at Carling, adding the capabilities..

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

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

Good morning, Nik..

Hi, good morning guys, and congrats on great results. First question is, Dave, I think you talked last year that content growth was tracking, I believe you were seeing something in the 8% to 10% range in calendar year 2021.

As we go in and look into 2022, how are you thinking about content growth in auto this year?.

Yes. Well, obviously, in passenger car portion of our business in 2021 was an exceptional year from a content growth and an overall growth there. And so within our transportation segment, the passenger car growth was about 25%, so well-above car build as car build growth was only up maybe 1% or so during that period.

Now we've talked about for the last couple -- two or three quarters, and again, this time, we think maybe 10% of that growth is really related to inventory build that's taken place at the Tier 1s and OEMs. So that accounts for a portion of that outsized content growth.

In addition to that, favorable mix of vehicles as the OEMs, kind of, focus on the higher-end vehicles, EV launches and increasing content on EVs. And in 2021, we actually saw some market share gains, which we have a very strong market position. So getting market share gains doesn't come along that often for us. We were able to accomplish that in 2021.

So as you kind of look forward into 2022 and beyond, it's going to be choppy, a little bit in the content story because there will be some times where there'll be some pullback of that inventory that takes place.

We don't really know of that 10% that we built up, in 2021, how much of that will fundamentally be a supply chain structural change with our customers, and we'll stick, some of it will probably work its way back out. So that will create some choppiness from quarter-to-quarter and the kind of the content calculations.

Also don't expect market share gains to repeat every quarter, every year. So I think it will normalize a little bit over the course of 2021 -- or 2022 into 2023 but still a significant opportunity for us for content growth..

Okay. Great. Very helpful. Thanks for the details, Dave.

Related also to auto, are you willing to say how much of your sales are now coming from electric vehicles and plugging hybrids? And how maybe -- how do you expect those to move into 2022?.

Yes. We have not disclosed how much of our revenues are coming specifically from the electrification trends. Clearly, the opportunity and the content for us -- a big part of our content growth through the course of the last year has certainly been driven by that electrification trend.

Our content opportunity for our business is quite strong in the electrification side of things where we would see our traditional low-voltage business kind of remains and you get incremental increases from the high-voltage portions that get added to EVs.

And for a full EV that can increase from kind of our low voltage offerings which are in that can be as high as about $5 per vehicle. And Full EVs, you can get six times that, you can get eight times that, depending on the designs. So it's a big mover in the content for us. And it certainly is the vast majority of the content growth for us now.

And as we look forward, it's kind of accelerating..

Sure. And I would just add in, there's also content growth that we get out of infrastructure as part of that.

When we think about e-mobility overall, we look broadly with everything Dave talked about with passenger vehicles, the infrastructure side of the business as well as -- and Dave also touched on earlier about work that we're doing in the commercial vehicle side of the business. So a lot of very broad opportunity when we think about electronification..

Okay. Great. Thanks, Meenal. One question for you.

Just given all the backdrop of M&A integration and the cost headwinds near-term, how should we think about follow through relative to your traditional target of 30% through -- going through the year?.

Yes. So maybe related to that as well as the earlier margin question as well. I talked about, look, we believe where we are today with all the work we're doing around pricing even with the headwinds coming on, we can cover that.

We do see some of the margin dilution I mentioned coming from Carling for the year, and that will start to dissipate as we integrate. But I would say from a year-over-year basis, I'd expect -- think about our margins -- our very strong margins in 2019. We'd expect to see target operating margins.

We would be in the target operating margin range of our 17% to 19% for 2022. That's our expectation right now. So maybe a little net-net, to answer your question, a little lighter on the incrementals, but still very strong margin performance..

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

Thanks, Nik. Appreciate your question..

[Operator Instructions] Our next question is from Christopher Glynn with Oppenheimer. Your line is open..

Good morning, Chris..

Hi. Good morning, everybody. I was curious on your -- I have a question on your M&A pipeline.

Curious if the passenger vehicle EV side, if those technologies are a focus or if you have more of an organic mindset there?.

Yes. I think our primary focus on the electrification side and pass car is organic in our efforts, and we've invested in that, continue to increase our investments to support the e-mobility efforts there.

However, there clearly are technology enablers that we have kind of within that funnel that we look at that perhaps could accelerate our uptake in the electrification efforts over time. Finding those, getting them broken loose and whether we can get those accomplished or not, that's the challenge today, at a reasonable price.

But I would say, primarily, the focus is organic. However, there's opportunistic things there from a technology enabler..

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

Yes. So for our Electronics segment, Chris, we've always talked about, think on average, through cycles, upper teens to 20% range.

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

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

So I'm wondering if against that assumption you'd advise any particular puts and takes?.

Yes. Yes, Chris, let me take that. I think we've seen anything but normal over the last couple of years within the electronics or the broader markets. So it's a little challenging to predict too far forward on what may be coming or what may happen.

We do think right now end market demand has kind of, if you will, stabilized a bit, but at quite high levels. So if that continues, yes, perhaps kind of normal seasonality patterns at these elevated levels would make sense in the electronics portion of our business.

The one -- a couple of caveats, I would say, with the Omicron variants that are out there and potential impacts that could come, that adds a degree of variability that is very difficult to predict, what that may or may not bring.

Clearly, while our distribution channel position, our inventories remain at a really healthy range and over inventory, they're in a pretty good healthy range. We feel good about that.

However, keep in mind, we also stated that we have seen some evidence of increased inventory at contract manufacturers and at end OEMs that certainly show some inventory build out in the marketplace. So we all know that there is the potential for corrections within the electronics industry. We don't see near-term evidence of that.

But certainly somewhere out in the future, that could come, and we watch very carefully for that..

Great. Thanks for the color..

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

From David Kelley with Jefferies. Please go ahead..

Good morning, David..

Hi, good morning, team.

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

Sure, sure. The market share gains that we were fortunate to be able to accomplish in 2021 are really in our kind of more core traditional areas, lower voltage side of the business, some in Europe and some in Asia. And really, some of that is our ability to respond to the market.

As it were peaks in demand and strong demand there, our ability to serve was perhaps better than some of our competition, which allowed us to gain some space there, which has always been kind of our strategy to make sure we outserve compared to others. So I think there's some value with that we gained. We think we'll hold on to that market share.

But again, because of our position in the market, we don't expect to see that every year that we're going to gain market share and things.

From the electrification side, we've been open about the fact that in the long term, we don't expect to have the same market share that we have in the low voltage side, just with the dynamics of emerging technologies and emerging players and many companies focused on it.

However, the content -- the outgrowth, the content opportunity is such that we still drive significant content growth overall.

So what we would see is that, we still expect to be the leader in that space, and we've seen that and continue to have success with that, but it won't be at the same market share we have in our low-voltage portion of our business..

Okay. Got it. Thank you. And then maybe, Meenal, there are several moving parts to transport margins in 2022.

Can you give us a sense of how you're thinking about the core incremental volume leverage, maybe ex the Carling contribution?.

Yes. I think right now, we talked about the fact and if we just talk about the automotive side of the Transportation segment for a minute, we talked about the fact that, we believe car build will be about $80 million. So that's somewhere in the mid to upper single-digit growth rate range. That's the case.

We will expect to get some growth and some improved volume leverage from that on the base. But I think our biggest headwind still, as I've mentioned, has really been around metals pricing. So that's one that we keep a very close eye on.

If we start to see some improvements there between metals and some other input costs, that will definitely help faster for us. So that's a big part of what we're monitoring. And then, of course, I don't want to be remiss in mentioning, absolutely, we're going after pricing on auto.

We've talked about that with OEM customers, one that takes longer in general where we have OEM customers; and two, because of the market share position that we enjoy there, we tend to have some longer contracts in place. So renewals take a while as we go in and think about those but absolutely, that's a focus area for us as well..

Perfect. And then maybe one more, if I could squeeze it in. You closed the Carling acquisition and your commercial vehicle business is really scaling up here.

So just high level, how should we think about your commercial vehicle Littelfuse as a whole today, your exposure there, if you -- on highway, versus construction, versus ag, if there's any kind of outlier regional exposure? Just trying to get a sense of how the business stands up now..

Yes. And we talked about it within the Transportation segment now, commercial vehicle is kind of approaching that 50% range of that segment. So it's scaling nicely. When we think about the end applications between heavy truck and bus, ConAg, also kind of going to material handling which is an interesting space as well.

We don't have an outsized position in any of those. It's a pretty broad exposure across those end markets, which we think is healthy. We see really strong technology shifts and changes coming in all of those spaces as they look at electrification. So we think the dynamics there play out is a very positive trend for us.

Both electrification and growing sophistication in the electronics within those applications all play out to be very positive for us. Historically, we would have said, we were more North America-centric Carling actually helps us to kind of balance that a little bit better.

So we still today would have the strongest exposure in North America, followed by Europe and then ultimately, Asia or more specifically China..

Okay. Perfect. Thanks, Dave and Meenal. Appreciate it..

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

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

Good morning, David..

Yes. Hi. Thank you. Just a couple of quick questions but -- in your guidance for 2022, you talked about a CapEx budget of as much as $120 million, which I'm guessing that's about two-third of discretionary, and it is meaningfully higher than what you were spending just a couple of years ago.

So for the discretionary portion of your CapEx budget, if you could maybe highlight where those dollars are going and like qualitatively, what you're trying to achieve, is it global penetration? Is it greater production capacity, greater efficiency, just discretionary cap spending and maybe the goals for that would be helpful. Thank you..

Yes. No, great question, David. So, maybe just to frame it a little bit. In 2021, I mentioned in my prepared remarks, we spent about $90 million in capital, again, higher than we had spent at a previous time. But I would also say between the volume declines we saw in 2019 across multiple businesses as well as with the COVID implications from 2020.

I would say, our spending was lighter than we would normally see in those two years. So there is some element of catch-up that's been going on in 2021 and 2022. That's not the bulk, but just to lay that groundwork. I would say a lot of our back half of 2021 and into 2022 is really around capacity.

So I don't know that I would characterize that as much as discretionary, because we want to make sure that we're getting ahead of the growth that we're -- we've been keeping up, but we want to always be ahead of the growth because Dave talked about market share gains as an example, we got in auto.

That's one great example where we invest ahead for the future, and we think about where the market is going and we've been very successful in doing that and not only across automotive, but of course, across electronics and some of our legacy parts of our industrial business, we've been pretty successful in doing that. So there's that.

There's -- with the acquisitions that we've made, we're finishing off the bulk of the IXYS work, not much CapEx there, but I did comment on the fact that we think that there is some automation and efficiency productivity opportunities across Carling that the team has brought up, so we want to invest in that, similar types of things in Hartland as well.

So those are some of the bigger areas that we're focused on for 2022..

Yes. I think it's important also to know that as Meenal mentioned, our 2021 spending, we would have liked to have spent more in 2021. But just like there are delays in many markets, getting the equipment that we need and when we need it for capacity expansions and new products and things like that, it's a little more challenging, it takes longer.

So some of that is kind of bleed over from things we would have spent in 2021 and we couldn't. But overall, we still see long-term. The business hasn't structurally changed how we spend CapEx, that 4%, 5% sort of range is the expectation we have..

Okay. Thanks. And I know we're a little bit past the top of the hour. So I'd be happy with just a brief answer to this. And I hope not too many arms and legs to it.

But this is more a big picture question based on the whole string of announcements recently by major automakers who really haven't to this point been especially aggressive on their EV development programs.

But now they're -- seemingly every week, they're announcing nine or 10 or 11 figure programs maybe on an aggressive or condensed timetable to expedite or accelerate their EV development. And I'm just wondering, Dave, if you have any thoughts about that.

And when you think about that, what are the opportunities for Littelfuse to maybe participate as you prefer maybe on a design-in basis, are there different keys for success when you think about the opportunity presented by a Ford or a GM or a Toyota announcement and the types of vehicles, the types of volumes, the types of timetables that they're talking about.

Just how does that wave of announcements and spending intentions kind of -- what does that make you think about? And how might Littelfuse best participate from your perspective?.

Yes. Certainly, you continue to see that. What it tells us is we've kind of been there for a while now, but clearly, the trend towards electrification is accelerating, right? Probably for many years, it was slower than anticipated. And now I think the view is it's probably accelerating faster than expected. So we've kind of hit that inflection point.

Now there are many, many structural issues to solve, to support the levels of increases that everybody have, everything from lithium availability to battery cell capacities and these sorts of things. There's lots of issues, even grid level issues on -- for charging infrastructure, all these things have to be worked on and solved.

Many of those aren't answered yet, many, many companies and customers working on that. So the great news for us is we have relationships with all those key players and that's the OEMs that we're engaging with, the Tier 1s we're engaging with.

By the way, we see opportunities beyond that too in the whole infrastructure side, things in the EV charging space and energy storage that needs to sit behind EV charging in some cases, right? Those are all opportunity spaces for us across our business. Some of it shows up in our industrial business.

Some shows up in electronics, some certainly shows up in our automotive business. We see those fundamental changes. We even talked about the battery conditioning.

So that's design-in in of some of our products into the factories, the equipment in the factories where they're making the battery packs, where they have to charge and discharge those battery packs in order to optimize and also to look for potential pulse. They also have to have them in a certain condition before they ship them.

There's all this equipment in and around the factories that are needed to do that. We've got good design-ins there. So it's very far reaching within our overall business. So we think we're extremely well positioned for that.

We think our current core technologies play very well into that space and continue to organically look for ways to build -- continue to build out competencies there to support that, as well as opportunistic acquisitions that will support that as well. So we're excited about it.

We think it's a very real trend that we're well positioned to take advantage of..

Okay. Great. Thank you very much..

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

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

Yes, thank you for the opportunity to address follow-up question. Dave, you spoke about gaining market share from opportunistic design wins across various parts of your portfolio. And Meenal, you spoke about adding CapEx to capture market growth.

I'm curious whether some of these design wins have come from at least one of your larger peers who's been quite vocal about deemphasizing several hundred million dollars of products, some of which overlap with your own products. And I ask because that would argue there is a large runway on these existing designs.

So if you could address that, that would be helpful, as you talk about expanding your design win pipeline? Thank you..

Yes. Certainly, kind of the market share gains and the design wins we're having are very, very broad based. They're not specific to let's say, semiconductor space. We're getting gains there, certainly, but we're getting gains much more broadly than that. Related to kind of two areas. One is our ability to serve the customers.

That certainly worked well for us in the last year or so, but also the breadth of our offering and the new technologies and the new products that we're launching are really gaining traction with applications. So yes.

So for instance, the protection portion of our semiconductor business is growing quite nicely in the business, in the applications we serve, but it's kind of broader based. I don't think it would -- I wouldn't nail down one specific area, one specific competitor to say that's where our gains are happening. It's much more broad-based than that..

Yes. And Karl, I would add. My comments on CapEx were also very broad-based aligned to what Dave is saying, they're not -- we're not dedicating CapEx or I should say, an outsized amount of CapEx to any one business.

But we've been getting a lot of questions on growth, right? A lot of CapEx is going towards the EV growth, but that's -- and also electronification, so broadly across whether that's even in our automotive electronics part of our business and things like that. So, it's pretty broad-based in nature..

Very helpful. Thank you..

Appreciate the tough question, Karl..

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

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