Littelfuse Inc (LFUS) 2016 Q2 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse Inc. second-quarter 2016 conference call. Today's call is being recorded.

At this time, I would like to turn the call over to Chairman, President, and Chief Executive Officer, Mr. Gordon Hunter. Please go ahead, sir.

Thank you and good morning, and welcome to the Littelfuse second-quarter 2016 conference call. Joining me today is Meenal Sethna, our Executive Vice President and Chief Financial Officer; and Dave Heinzmann, our Chief Operating Officer.

Overall this was another solid quarter for Littelfuse. Both sales and earnings were above the midpoint of our guidance, despite a continued mixed macroeconomic environment where we saw some end-market challenges in our commercial vehicle products business and parts of our industrial segment. Our electronics and automotive segments performed well in spite of the challenging environment.

However, we were disappointed with the performance of our industrial business, and have taken recent actions to reduce our cost structure across this segment.

This was also our first full quarter with the PolySwitch business as part of Littelfuse. Last quarter, we outlined our plans and progress for the business. And I'm happy to report that we are on track. Sales and earnings were in line with our expectations, and we are making excellent progress on the integration. We will provide more details on some early design wins and our integration activities later on in the call.

First, I will turn the call over to Meenal, who will give the Safe Harbor statement and a brief summary of the news release.

Thanks, Gordon. Before we proceed, let me remind everyone that certain comments we make on this call contain forward-looking statements. These forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties. Actual results may vary materially from those in the forward-looking statements as a result of various factors. Factors that might cause such differences include, but are not limited to, those discussed in our Forms 10-Q and 10-K, as well as other SEC filings.

In addition, our remarks today refer to the non-GAAP financial measures, adjusted earnings, and adjusted earnings per share. These non-GAAP measures are intended to supplement but not substitute for the most directly comparable GAAP measures. A reconciliation of these measures is provided in our press release filed today.

Now onto the second quarter. Sales for the second quarter of 2016 were $272 million, which was up 22% year-over-year. Excluding PolySwitch revenue of $36.4 million, sales grew 6%. GAAP earnings for the second quarter of 2016 were $1.20 per diluted share, and included $5.5 million of special charges primarily related to purchase accounting and integration costs for the PolySwitch acquisition, partially offset by nonoperating foreign exchange gains. Excluding these items, adjusted earnings per share included the PolySwitch business were $1.44. Adjusted earnings per share increased 8% compared to the prior-year quarter.

Our PolySwitch business performed as we expected. Sales and earnings were in line with our expectations, and included favorability from operating expense management, and lower amortization versus our prior estimates, offset by some nonrecurring expenses relating to the acquisition. Cash provided by operating activities was $26 million for the second quarter, which was a decline versus last year. The year-over-year decline was primarily due to integration costs and other one-time cash items relating to the PolySwitch acquisition.

Capital expenditures were $11 million for the quarter, about $3 million lower than last year, mainly due to the completion of our new Philippines plant in 2015.

In summary, we had a solid second quarter, both across our core and PolySwitch businesses.

Now we will turn it back to Gordon for more color on business performance and market trends.

Thanks, Meenal. We will start the segment review with electronics, which accounts for nearly half of total Littelfuse sales. Second-quarter electronics sales of $132.2 million were up 25%. Excluding PolySwitch, sales increased 2%. As we saw last quarter, sales were strong in Europe and China, and stable in North America. Japan and Korea remained sluggish.

Channel inventories for our core electronics business are in line with our expectations at this point in the year. We've talked before about our strategy to meet the needs of customers whose end products are smaller than ever before, and at the same time require higher performance. This strategy generated a number of design wins in the second quarter.

For example, we are seeing increased demand for our surface mount components that are used in low-cost automated assembly. One win in this area was for a high-voltage, low-profile NANO fuse with a major Chinese TV manufacturer. Another win our NANO fuse was with a major consumer appliance maker for a high-end hairdryer. We also won new business for our high-surge varistor disk that has been designed into a space-saving residential electrical surge protection unit developed for the China market.

The Internet of Things is another growth area for us. One of our most recent wins in this space is for the Ring Video Doorbell system. This system offers high-definition video and audio, smart motion detection, and cloud recording that is streamed over your home Wi-Fi to your mobile device. We worked with Ring to design in our NANO fuse, TVS diodes, and power switching thyristors to provide safe and reliable functionality. Estimated revenues for the first year of the program are $500,000.

LED outdoor street lighting continues to be an excellent market for us, with sales expected to reach approximately $10 million in 2016. This is on top of the approximately $8 million to $10 million we expect to ship into the indoor LED lighting market this year.

Last quarter, we highlighted some design wins in the automotive electronics business. Building on that success, our fast-acting subminiature PICO fuse was recently designed into a truck lighting assembly to prevent overheating. Our fuse was selected due to its small size, and the design was completed in several design centers in Europe and Japan. This win is expected to contribute approximately $500,000 in annual revenues, with production starting in the third quarter.

Our ultra-low-capacitance diode arrays are designed to provide ESD protection in end products requiring high-speed data transmission. We had six design wins for these products in the second quarter that will contribute approximately $4.7 million in annual revenue.

One of these wins is for our diode arrays that will be used to protect the HDMI ports on a new gaming console. We also won new business and multiple customers in the US and Taiwan to protect Ethernet, HDMI, and USB ports in datacom applications.

Last quarter we talked about our expansion into the power control market. During the second quarter, we introduced a new ultrafast silicon carbide diode, designed for power conversion at higher frequencies and higher temperatures than standard silicon, thereby increasing efficiency for our customers. We are continuing to leverage our technology expertise by launching new products that differentiate us in the market and enable us to expand into new market segments.

An example is our TVS diode product line. We are growing in this relatively mature market with several new products designed for high-power applications. Four new business wins in the second quarter are expected to generate about $1.7 million in annual revenues. One win is for a surface mount load dump diode that protects automotive electrical systems when a large voltage spike is discharged from the alternator if the battery is disconnected.

Another win is for our unique surface mount diode that is designed for very compact applications. Our device will be used in the telecom infrastructure market as part of a small-profile base station for cellular phones.

I would also like to highlight some positive trends in our electronic sensor business. We've completed the transfer of our reed switch sensors from Wisconsin to the Philippines, which has eased our previous capacity constraints, and enables us to better serve our customers. This plant transfer is also a key step in improving the profitability of this business.

We continued our success in custom sensors, with 11 design wins this quarter, primarily in small appliances. We were selected as the sole source on a next-generation blender from a major appliance maker. Our custom sensor is unique in the way it prevents the blender from operating when the lid is not secured properly. This is the third consecutive sole-source design win with this manufacturer, and is a direct result of our engineering expertise and high level of customer service.

As these highlights illustrate, the strength of our electronics business is our ability to design and do a broad variety of end markets and market segments. We are continuing to win new business and then produce new products in targeted growth areas, including power control, automotive electronics, and custom sensors.

Automotive electronics is a particularly attractive high-growth end market that allows us to leverage our core strengths in both electronics and automotive. Many of our electronic component technologies have applications within automotive electronics, and we've been launching enhanced automotive versions of these products. We are having good success in leveraging our strong relationships with automotive OEMs and Tier 1 suppliers to get our electronic devices designed into their automotive electric systems.

To accelerate our growth, we are increasing our investments into this space, and recently created a dedicated automotive electronics team.

I will now turn the call over to Dave, who will cover our industrial and automotive segments, and provide an update on PolySwitch. Dave?

Thanks, Gordon. The industrial segment accounts for about 10% of our total sales. Second-quarter industrial sales of $28.4 million were down 7%. After four quarters of growth, our fuse sales were down slightly in the second quarter. The fuse business showed pockets of strength in both Asia and Europe, but North America was soft.

As many of you know, our fuse business has benefited from a strong US solar market for some time. However, the market slowed in the second quarter. As Congress extended the tax credit stimulus late last year, many solar OEMs pushed out their projects to focus on scale and efficiencies.

Sales in both our protection relays and custom products businesses continued to be impacted by weakness in the heavy industrial markets, particularly mining and oil and gas, as those customers restrict their capital spending. To offset these slower end markets, we are focusing on growth in other general industrial end markets.

Within the relay business, a bright spot is our growing line of Arc-Flash Relays. Our newest Arc-Flash Relay has been winning awards since it was launched last year, and was recently selected as one of the best new products in 2016 by readers of Consulting-Specifying Engineer Magazine. We recently had a design win with a crane manufacturer that installed our relays on switchgear used for heavy industrial cranes at a shipping port in Canada.

In our custom products business, we continue to see a decline in our potash market. The continued steep drop in potash pricing has led to further slowdowns and delays in investment. To offset this decline, we increased our focus on E-Houses used in the heavy industrial and utility markets. However, profitability for these products is lower than our potash products, which has impacted our operating margin.

Given the sustained weakness in key industrial end markets, we recently restructured the business to reduce our costs. The restructuring is expected to generate approximately $1 million in savings in the second half of 2016. We expect the weak end markets to continue through the year and are assessing other opportunities to improve margins across the segment.

Overall, the primary near-term focus of our industrial segment is on resizing our cost structure to improve profitability, while expanding our global reach and increasing our focus on more attractive end markets, such as alternative energy and HVAC.

That brings us to the automotive segment, which contributed approximately 40% of total Littelfuse sales. Second-quarter automotive sales of $111.4 million increased 30%. Excluding PolySwitch, sales grew 15%. Sales increased in all three geographic regions.

Passenger car fuse sales were up 9% over last year, outperforming global car production, which increased 2% in the second quarter. Passenger car fuse sales had strong growth in the Americas. The increase was driven by sales of Masterfuse and standard fuse products on new models, as well as extensions of existing programs.

Strong sales of the Chevrolet S-10 and TrailBlazer trucks in Brazil, where we have high content, also contributed. European sales were also up, as we benefited from a strong increase in car builds, particularly at Renault and PSF. Our strongest growth in passenger car fuse sales this quarter was again in Asia, where we have content on newly introduced platforms in China. SUVs, including the Buick Envision and the Fiat K4, where we have both Masterfuse and standard fuse content, are also selling well. In addition, we won new business in India for several automotive fuse products.

We are working with OEMs and Tier 1 suppliers in all three geographic regions on a number of projects for our newly developed high-performance MIDI and MEGA fuses that are designed for the new 48-volt battery architecture. This new architecture response to the increasing demand for higher power electrical systems and engine boost systems that reduce fuel consumption in vehicles. The 48-volt architecture provides good content growth opportunities for Littelfuse, with our new fuses being used in many new programs beginning in the second half of 2017.

We are also seeing increased sales and design-in opportunities for high-voltage fuses for battery management systems in hybrid and full electric vehicles. We expect to see an increased demand for electric vehicles, plug-in hybrids, and gas electric hybrids, and are well-positioned to participate in this growth.

Our high current fuses are a target growth area for us as we continue to win new business with these innovative products. One recent win is for our high-current MEGA fuse with a large lithium-ion battery manufacturer in North America. Peak sales are expected to reach $1 million annually.

We also won our first program for our high-current fuses at Hyundai, with a program starting in late 2017 that is expected to generate $400,000 in annual sales at peak in 2019.

We believe the trends and projects highlighted today, along with many others, will continue to drive opportunities for increased passenger car fuse content over the next several years. While we anticipate continued growth -- content growth in the second half of the year, we do expect seasonally lower passenger car fuse revenues.

This was another strong quarter for the automotive sensor business, with growth of 21% over last year. Sales were slightly lower than the first quarter, where we benefited from customer inventory builds associated with our exit from low-margin legacy projects from a previous acquisition.

Our second-quarter sales growth was driven primarily by strong sales into the occupant safety market, as well as fuel and fuel filter-related sensor applications. We continue to win new business with second-quarter design wins that will contribute $5.2 million in annual revenues at peak, and approximately $40 million over the life of the programs. Several of these programs extend longer than we've traditionally seen, and also include an aftermarket component, both of which are beneficial to us.

These wins highlight our ability to gain significant new business in the market segments we choose to participate in, which, in turn, is generating the higher-than-market growth rate of our sensor business.

A major win during the second quarter is with a large European OEM for solar sensors. This new business is a significant -- is significant because it opens the door to other opportunities with this key manufacturer. We also won new water and fuel and fuel heater business in the European heavy truck market that is expected to generate total sales of $20 million over the life of the program, including the aftermarket replacement business.

We continue to build on a relationship with a leading all-electric auto OEM, with a win for seatbelt buckle sensors, and also added new business for level sensors as part of a selective catalytic reduction system for two French automakers.

As we have discussed previously, we expect flat to declining automotive sensor revenues in the back half of this year as we exit the low-margin legacy business. This transition is a key part of our margin expansion strategy, along with more cost-effective designs, choosing applications where we add more value, and higher production volumes. We have a solid funnel of new business wins and opportunities, and look forward to long-term profitable growth in our sensor business.

Sales of our commercial vehicle products, or CVP, were up 22%, which included the Menber's acquisition completed in early April. Excluding the acquisition, sales were down 10% for the quarter as we saw continued weakness in North America heavy truck, construction, and agriculture end markets.

As we announced last quarter, we took a major step in our strategy to expand our CVP business beyond North America with the acquisition of Menber's. The integration is underway, and our combined salesforce is actively pursuing new business. We recently won new business for a master disconnect switch with one of Menber's customers, a large heavy-duty truck manufacturer in Italy. We also won new business for one of our standard power distribution modules with a European agriculture OEM, with shipments beginning later this year. Both opportunities will add approximately $500,000 in annual revenues when the programs ramp up.

In summary, our passenger car fuse business remains strong. Automotive sensors continue to profitably grow. And the Menber's acquisition will help to broaden our geographic reach in our CVP business.

Next is the update on PolySwitch. As Gordon mentioned, we have owned the business for four months now. During that time, we have learned much more about the PolySwitch operations, technologies, and growth opportunities. One of the many reasons we are excited about the acquisition is the opportunity we have to leverage products and customers of both companies.

Our combined sales teams generated several new business wins in the second quarter. One is in the smartphone lithium-ion battery protection space. While some manufacturers are using semiconductor-based protection solutions, others still prefer polymer PTC devices due to their high reliability and total cost effectiveness. We won new business for a small form factor, low-profile surface mount PolySwitch PTC used for battery protection in two new smartphone models in Korea. The value of these wins is $1.5 million annually, beginning in the third quarter.

PolySwitch has a strong presence in Japan, which provides another good growth opportunity for the combined business. As a result of the acquisition, we had greater visibility among OEM customers in Japan that allowed us to get early design-in involvement for next-generation programs in two major markets: gaming and mobile phones.

Two industry-leading gaming customers in Japan have designed both our Littelfuse thin-film fuse and resettable PolySwitch PTC device into their gaming consoles. This solution is a great example of cross-selling opportunity between Littelfuse and PolySwitch, as it offers both overcurrent and thermal protection and is expected to generate over $1 million in annual revenue.

Additionally, we recently designed in our surface mount PTC which is embedded into a USB type-C cable used for charging mobile phones. These cables are designed to carry higher charging currents, and therefore also need better thermal protection. Our PTC is the perfect solution, as it detects high temperature and prevents damaging case of malfunction or fault conditions. This program will be launched by one of the largest mobile electronics companies based in Japan, and is expected to generate over $1.3 million in annualized revenue.

The integration of PolySwitch into Littelfuse is well underway, and is progressing well. Our initial focus has been on our key stakeholders: employees, customers and distributors. Key employee activities, such as aligning our organizational structures, are moving forward; while others, such as the payroll system migrations, have been completed. The consolidation of the salesforce is moving forward on schedule, and we have exited almost all of TE's sales offices. We completed the consolidation of our manufacturers' rep network during the second quarter, and we are on track complete the consolidation of our distribution channels in the third quarter.

We are also making good progress on consolidating various IT systems and back-office function. The biggest IT-related activities are for ERP implementations. We have completed three successful conversions to date, with more planned over the next few quarters.

On our last call, we mentioned that PolySwitch distributors have been carrying approximately 4 months of inventory compared to our model of about 2.5 months. We are pleased to report that the inventory levels of PolySwitch products are now generally aligned to our core business inventory levels in every region.

Overall, we are pleased with the progress we've made in the PolySwitch integration and the initial design wins we've achieved by leveraging the combined product line.

That concludes the business review. I will now turn the call back to Gordon.

Thanks, Dave. Two weeks ago, we were pleased to announce a 13.8% increase in our cash dividend. This is our sixth consecutive year of double-digit growth in the dividend rate, a very nice track record for our investors. The increase is consistent with our capital allocation strategy, which is to build balanced strategic acquisitions with a return of capital to shareholders.

On a final note, as we complete an update of our strategies for the next five years, we will be hosting an Investor Day on Friday, December 9, in New York City. We will provide more information as we get closer the date.

With that, I will turn the call back to Meenal, who will provide the outlook for the third quarter, and then we will take your questions.

Thanks, Gordon. Now looking ahead to the forecast, sales in the third quarter of 2016 are expected to be in the range of $262 million to $272 million. The midpoint of the range represents 24% growth over the prior year. This forecast includes approximately $40 million in revenue from our PolySwitch business for the third quarter. Revenue growth over last year would be 5% at the midpoint of the range, excluding PolySwitch sales.

Third-quarter adjusted earnings are expected to be in the range of $1.36 to $1.50 per diluted share. The forecast includes some tailwind from currency, but at lower levels than what we saw in the second quarter. We now expect PolySwitch amortization expense to be about $8.5 million per year, which equates to about $0.30 per diluted share on an annual basis. This revised estimate is included in the third-quarter adjusted earnings guidance.

Our effective tax rate assumption continues to be 22%, including the PolySwitch business. We are pleased with the benefit of the structures we've implemented over the past few years, and we expect to see further reductions in the effective rate over subsequent periods.

Looking at cash flow, the core fundamentals of our business remain the same, as the acquisitions we've made this year align well with our existing business models. We continue to focus on working capital management, and our cash conversion metrics remain strong.

For 2016, we have several one-time acquisition-related cash impacts, primarily driven by the extensive integration activity we have for our PolySwitch business and other acquisition-related items. Given these activities, we are expecting our operating cash flow to be 12% to 14% of revenue for this year, versus our typical target of 16% to 18% per year. We expect 2017 operating cash flow to be back to historical run rates.

We are pleased with our overall performance to date. While we continue to see some volatility and challenging end-market trends in certain areas of our business, we remain committed to expanding our operating margins, excluding acquisitions, by 150 basis points for the year.

Now I will turn it back to Gordon for some last comments.

Thanks, Meenal. We've performed well in the first half of the year, and we are on track with the PolySwitch integration. As I look back through the past few years of macroeconomic and end-market shifts, our team has delivered 15 quarters of consecutive year-over-year revenue growth in constant currency. I am proud of what our teams have accomplished as they have continued to profitably grow the business through some challenging periods. This concludes our prepared remarks.

And with that, we would be happy to take any questions.

(Operator Instructions). Matt Sheerin, Stifel.

Just a few questions from me. First off, just on your margin guidance going forward, with the lower amortization expenses, we were modeling something like $13 million, which you had previously guided to, and it is now less than that. Yet, your margins in terms of your near-term guidance look a little bit lower than we had been forecasting.

I know that there's a lot of moving parts within the various divisions here, and you are still backing your 150 basis point increase in margins for the core business for the year. So just trying to figure out what's going on in terms of near-term margin headwinds.

Maybe just some comments on margin. I did just mention 150 basis points margin expansion, excluding acquisitions. We had always talked about this with PolySwitch, given general amortization expense; and just with what we are doing this year, margins would be a bit lower for PolySwitch.

In the core business, excluding PolySwitch, as you mentioned, there's a few different puts and takes. You heard from Gordon and Dave, our electronics and automotive businesses are doing well, even though we are seeing a little bit of softness in the end markets in the commercial vehicle product side of that business.

But at the same time, we are seeing continued end-market challenges on the industrial segment, especially in our relay and our custom business. And we've seen even a little bit further downturn during the second quarter within the potash piece of the custom and the relay business. So that has taken our margins down a bit as that has taken revenue down a bit as well.

Okay, that's helpful. And jumping around a little bit, you talked about the opportunity with higher-voltage batteries in automotive, and it sounds like there are some good wins there. Could you talk about the electronic content in the fuse opportunity? Because I know you've been running in the mid-single digits, more or less, in terms of fuse content. Could you tell us, as you get to the next-generation programs, what the content might look like?

Thanks Matt. This is Dave. What I would say is in our traditional passenger car fuse business, as you stated, we are kind of -- an average car is going to be in that mid-single-digit sort of range. We've had really nice content increase over the last two or three years, and continue to see it with high-current devices. But that will begin to plateau in the next couple of years as that adoption is really kind of fully integrated across the segments and across the regions.

The next big drivers you mentioned is really a higher-voltage systems, particularly areas like 48-volt systems, which are really getting a lot of design activity from our customers across the globe. We estimate that moving to a 48-volt system, although it will be a small percentage of cars, but a very fast-growing percentage of cars, will increase the content opportunity for us by 25%, 30% within a vehicle. So it's a really nice content increase, driven out of just even the 48-volt systems. And then if you go up into hybrids or electric vehicles, it increases even dramatically from there.

Okay, and just lastly on the automotive sensor business, you talked about flattish growth because you are deselecting some lower-margin products. When does that start to show growth again? When do you start to see acceleration of growth in that business?

I think we will see most of that kind of dampening in the back half of this year. But with the number of design wins we've been -- that we already have, and we are continuing to win, we do expect next year for growth rates to pick back up to more normal rates we've been expecting from the sensor business.

Okay, thank you very much.

Christopher Glynn, Oppenheimer.

On light vehicle, I think you had previously talked about a little slower 2016 content, and ramping back in 2017. Did that pull forward and kind of flip the cadence a little bit?

I don't know that it particularly has pulled forward, but sometimes the mix between regions and OEMs, as it shifts from month to month, quarter to quarter, can kind of influence that a little bit. But, yes, we've had very solid content growth in the passenger car fuse side in the first half of the year. But we do expect to continue to see the content growth to drive better-than-market performance from that business.

Okay. And then on the PolySwitch, as we think about the bridge to the synergies target, run rates by the second half of 2017, I think this year you are working a lot through the transition service agreements and creating some new expense structures. How do we think about that timing? Do you see a meaningful kind of drop-through start to hit by year-end this year, for instance?

It's Meenal. What I would say is when we talked about we are well underway on the integration, we are on track with what our goals were, I would say we've still to get through some heavy lifting this year. The big part, these days, with any integration is really all the IT systems and all the work that's got to be done around that, and we are making good progress. But we've got work to do around that. And where that impacts expenses is just the spend to make sure that we are getting it done right, with the right resources; and then building up our internal capabilities, while we are still on the TSAs, to take over all that work ourselves.

I guess, bottom line, I would say you should still see a mixed bag of expenses coming through this year. But we will start to get some synergies; I would say, probably second quarter next year, you will start to see the effect of that.

Okay, thanks. That's helpful. And then last one is just an update on the pipeline, and with all the work going on on PolySwitch, how are you viewing the organizational bandwidth against your pipeline opportunities?

Yes, it's a good question. I think that there's obviously a lot of resources being used in the integration with PolySwitch. But there's other parts of the Company. This is very much around mostly our passive electronics team, and somewhat our automotive team. But there's other parts of the Company that are not really impacted by this. So we have still got very active program, a very active pipeline of targets that we are looking at. So it hasn't really slowed us in those areas. We are obviously going to be selective in terms of what makes sense for us, but it's still very much an active part of our strategy.

Great. Thanks, everybody.

Shawn Harrison, Longbow Research.

I don't know if it was my newborn waking up a lot last night or what, but I can't figure out your guidance into the third quarter. I know you gave some commentary into Matt. But with sales only being slightly lower into the third quarter where we are at right now, but having some synergies either related to PolySwitch or related to the industrial restructuring, the EPS drop is substantially greater than I would anticipate. So if you could just walk me through some of the moving pieces to help clarify, that would be helpful.

I would say it's a few things, largely in the core, excluding PolySwitch. So you're right; from a sales perspective, it doesn't look like it's down as much. But what we talked about, what Dave mentioned is a little bit of a mix shift, where our custom sales, we've seen a pretty significant decline on the potash side, both in the custom business and the relay business. And that has historically been a pretty nice profitable business for us.

What we've seen are some of the increases in what we call this E-House business part of custom. But that is at a much lower margin, so you get some margin shift there as well. And then also, we talked about the end markets, as well, on the commercial vehicle side. So sales are down a little bit there, offset by some of the small acquisitions that we made, things like that. So excluding PolySwitch, it's still -- sales look up a little bit. But there are some acquisitions and other things going on there.

And then the other thing that I had mentioned as part of my comments were that the FX benefits that we were getting in the first half of the year; we are still going to get some FX benefits. But it's lower in the third quarter. And actually commodity prices are starting to increase, and that's starting to flip for us.

How much did FX help you in the second quarter? And will the industrial business be above breakeven in the third quarter?

On FX, we have so many moving rates now. And they all are moving in different -- the euro is -- and now you can throw the pound in there -- and so many different things that we generally know we have a benefit, but it's just tough to quantify at this point.

And in terms of industrial, I would say, especially because we talked about some of the structuring and we are looking at what else we can do around that business, we will see margins that are better than they were in the first half.

Okay. And then two brief follow-ups, if I may. What was the dilution associated with PolySwitch for the second quarter? And do you have an expectation for the third quarter? And then my other one would just be -- there has been a lot of rumblings now of a peaking auto market domestically, and now concerns about Brexit. Just maybe what you are hearing from customers on that.

I will take the first part on PolySwitch. So the challenge we have, and the good news/bad news piece is we are well on track in a couple places where we are ahead on our integration. And the faster we integrate and the faster we comingle, it's just hard to separate the expenses, and how much is PolySwitch versus how much is our core business.

I would tell you directionally, excluding amortization expense, PolySwitch was right around breakeven-ish, which is what we talked about, maybe a little bit ahead. And for the third quarter, we had talked about excluding amortization a little bit better than that. And so we are on track for that.

And regarding peak auto, I think that's a little bit of a North America focus, which we have to understand is only about 20% of global production. And certainly our focus in Asia, which is more than 50% of the global production, and growing faster, is really paying off for us. But you really -- as Dave has said, a lot of it is about content.

And maybe Dave can just add a little bit about the trends in the content area.

Sure? And again, a lot of press recently here, particularly in North America, is the SAAR kind of peaking and leveling off, with Ford's comments and others. So those things clearly will have some impact on us, but very much a global business for us; and content increase story continues to be solid.

As I mentioned earlier, as higher loads continue to proliferate in the vehicles and the architecture of the vehicles, our high-current devices continue to show growth. And that's a content increase for us. And then as I mentioned, the 48-volt systems and higher voltage systems, as well as automotive electronics, all are growth drivers for us, to continue to drive increases in content and grow beyond what [car build does].

That's definitely very helpful. Thanks so much.

Tim Wojs, Robert W. Baird & Company.

On electronics, Gordon, the book-to-bill there I think includes PolySwitch. But it's one of the stronger book-to-bills in Q2 that we've seen in the last couple of years. So is there a way to think about what the book-to-bill looks like organically, and how you feel about the revenue growth in the back half of the year in electronics organically?

Yes, I would say it's a little bit stronger than historical. Looking back over the last six years, mean over the last six years is 102. So it's a bit stronger than that. But there is some noise in there. I think we are a little bit stronger than historical; healthy. But I think as we have sort of shifted a little bit more into, I would say, light industrial areas, that the consumer build phenomenon of years ago is probably less prevalent here now against the more solid, broader business that electronic segments sell into.

So I think we feel pretty strong about that. The noise that we get from PolySwitch is one that we have to keep taking out of that. So I think that, along with very careful monitoring our distributors, the sell-through from them, and the inventory levels around the world, we feel we are in pretty good position on the inventory level.

Okay. And then in the press release, I think you said the semiconductor business in electronics was down. And is that just the weakness in Japan and Korea that you cited? And is that -- would that help you on the margin side, from a mix perspective?

Well, it was down; but we are looking at that business actually being very healthy in the second half of the year.

Okay.

(multiple speakers) certainly been Korea and Japan, as for all of our business, it's been weaker there. But we are starting to see our semiconductor business look very healthy. And generally, when that business picks up, the margins are very healthy.

Okay, okay, and then just in automotive, just given some of the moving parts around acquisitions, and some of the low-margin work that you are exiting, can you just give us maybe a little bit more granular idea of what that business should grow organically in the back half of this year?

I'm going to have to come back to you. We will put something out there with all the bits and pieces, stripping out the acquisition stuff. I will have to come back to you on that.

But it should still grow, right?

Yes. It will still grow. Directionally, generally, we've talked about the automotive business growing mid- to upper-single-digits when you take it to the blend of passenger car and automotive sensor. But with what we've talked about with sensors being down as we are exiting the low-margin legacy business; and then also, as part of that mix, CDP has been down, flattish to down. So that's what's taking that back down.

Okay, that's helpful. Good luck on the third quarter. Thank you.

(Operator Instructions). John Franzreb, Sidoti and Company.

Maybe just to ask that sensor question a different way, how much in revenue contribution do you expect from the low-margin sensor business for all of 2016?

I don't really understand the question. Can -- so are you looking for specifically how much revenue we are walking away from? That's the question? Well, we haven't given guidance on the specific number we are walking away from. What we have said is the back half of this year, where we have been enjoying pretty significant growth in that space, the back half of this year compared to the back half of last year will look flat. And so it's kind of counteracting the organic growth we are getting by stepping away from these pieces of business. However, we will begin to lap ourselves on that going into next year and normal -- more normal growth rates will begin to rebound.

I guess, Dave, if we just had to tally, it would be easier for us to strip it out and figure out what the organic number looks like. That's kind of what I was backing into there.

You mentioned, Dave, that you look for normal seasonality in the second half of the year on the auto side. And Gordon I think mentioned a little bit about the electronics side of the business being more manageable, and that was pronounced in Q3 as you [just pass] because new end markets that you are entering.

My question really is, with the addition of PolySwitch, the seasonality of Q4 versus Q3, historically it's down 5% to 7%. Has that become a little bit more flattish? Or is it still normal seasonal trends in Q4 versus Q3?

I think it's probably going to be normal seasonal trends. I think the PolySwitch end markets, not significantly different from our core electronics business. So we haven't really thought that it would affect the seasonality of the business.

As we have gotten to know the PolySwitch business better, and we continue to do so, it's very consistent, very similar to our existing electronics business. So we are generally starting to see many of the same trends. We just haven't worked through -- as we are working on integrating the business, there are just some different things we are working through in a couple of quarters. So you might see some unevenness this year. But, generally, the trends would be about the same.

Okay, all right. All of my other questions were answered. Thank you.

Garo Norian, Palisade Capital Management.

Can you help me understand or think through the industrial segments; and let's call it the intermediate term, kind of think about the last few years post- the real strength in the potash market? Margins declined into kind of a single-digit -- high single-digit in 2014, and we bounced up into the mid-double digits. And now it looks like we are probably going back down. I just am challenged to try to figure out what normal is for that segment over the next two or three years.

Yes, it is a challenge. And one of the big drivers of that kind of volatility in the view there has really been driven around this heavy potash piece of our business. And as a reminder, that is our custom business that's driving into potash, as well as a lot of relays, protection relays, being sold into that space. And we've gone through the big ramp, and then again dropped off dramatically, and began to see improvement.

But what we've seen is with potash prices further falling, and just a week and a half ago as the Chinese signed their contract on potash at $219 a ton, which from the peak times where we were really having dramatic performance there, was over $700 a ton. The spending out of our core customer base on the potash side has dropped off dramatically. They have literally shuttered two or three of the key mines that we support there. So I think that volatility did come back this year, more than we anticipated. And it's certainly worse, and that's really pulled down margin profile of that business.

Okay, and so is it kind of a safer expectation to not assume improvement for the foreseeable future in that business?

I would say for the rest of this year, that's one of the things we talked about is that we don't -- in the end markets, we don't see anything changing. And so that's why we took some actions around restructuring, and we continue to look at other opportunities to improve profitability. But it's going to take us some time.

Got it, thank you.

We have no further questions at this time.

I will now turn the call back to Mr. Gordon Hunter for closing remarks.

Thank you all for joining us on today's call. We look forward to continued progress, and to updating you again next quarter. Thank you and have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.