Littelfuse Inc (LFUS) 2002 Q1 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse, Incorporated first quarter 2002 earnings conference call. Today's call is being recorded. At this time I will now turn the call over to Mr. Phil Franklin, Chief Financial Officer. Please go ahead sir.

Good morning. Welcome to our first quarter call. I'm going to start out this morning with some brief financial comments, and then I'm going to turn it over to Howard Witt, our CEO, for some additional comments on the business. Let me start first with the safe harbor language. Any forward looking statements contained herein involve risks and uncertainties, including, but not limited to, product demand and market acceptance risks, the effect of economic conditions, the impact of competitive products and pricing, product development and patent protection, commercialization and technological difficulties, capacity and supply constraints or difficulties, exchange rate fluctuations, actual purchases under agreements, the effect of the company's accounting policies, labor disputes, restructuring costs in excess of expectations and other risks which may be detailed in the company's FCC filings.

Sales for the first quarter of 2002 were $65.1 million down 14 percent from a year ago quarter. Including restructuring costs, the net loss for the quarter, was 3 cents per share compared to earnings of 14 cents per share in the first quarter of 2001. That's the bad news, but there is good news also. We achieved our first sequential sales increase since the second quarter of 2000 with first quarter sales that were up 8 percent compared to the fourth quarter of 2001. Also, our earnings before restructuring charges of 8 cents was 3 cents above the first call consensus estimate.

The other piece of good news is that all the restructuring charges we know of, relating to the manufacturing rationalization program have now been booked. Compared to the prior year's first quarter, electronic sales are down 24 percent, automotive sales were down, were up 2 percent, and electrical sales were down 4 percent. Now I would like to turn it over to Howard for some comments on business trends.

Thanks, Phil. As many of you know, we, a number of years back, restructured our business into three, automotive, excuse me, three SBU's, strategic business units, in automotive, electrical, electronic, so I want to comment on all three of those businesses to let you know what we see going on. In automotive, our auto OEM business continues to surprise us, basically on the up side. On the worldwide basis, sales increased 7 percent per year. On the year-over-year basis, led by North America which saw a 15 percent increase compared to last year's first quarter. On the other hand, the smaller auto after-market business declined by 17 percent due to soft market conditions in the U.S. and exacerbated by the K-Mart bankruptcy.

U.S. car build, which we originally planned at 14.7 million units is now projected at 15. 6 million. However, the car builds for Europe and Asia are roughly even with the year 2001. Regarding new products in automotive, we're beginning to ship a downsized mini fuse product primarily to Japanese OEMs, and our high-amperage cable pro products is being designed into new vehicles, such as the Cadillac CTS. This is a move in direction of combining things into assemblies at a higher value-added for our customers in all of our markets. In this case, the cable pro is a fuse and cable combination, which sells roughly at three to six dollars per unit and therefore per vehicle at higher revenue numbers than our normal fuses.

Demand for our J class product is growing with new design wins at tooling being installed this quarter to alleviate around the clock production of this product. Lastly, our special fuses for hybrid vehicles are seeing increased usage in new vehicle, vehicles such as the new, newly announced and high-profile acetic hybrid that was just introduced.

Related to automotive, when we talk our electronic strategy, we're adding new circuit protection products and technologies through partnering acquisition. When we're doing this, we are seeking companies that will also enhance our strong global automotive offering.

In the second electrical market, the overall market, as you probably know, dropped off significantly in the second-half of 2001. It really hasn't shown any signs of recovery at this point. Low levels of end-market machine tool orders, as well as low residential, excuse me, low non-residential construction and plant utilization rates that are also low, will keep this market subdued into the near future. We feel we did better, however, than the overall market with a 4 percent year-over-year sales decline in the first quarter.

Looking ahead, with a number of new distribution business opportunities we expect to continue this better than market performance through 2002, and in electrical, like our other business units, this group has targeted cost savings and full inventory reductions for this year. In the last of the three segments electronics, some comments. Electronic sales will go down substantially from a-year-ago, improved by 5 percent sequentially as demand in Asia, other than Japan, has begun to strengthen and the North American distribution business is starting to benefit from channel inventories, they're approximately 30 percent lower than they were one-year-ago.

On the other hand, Europe and Japan both remain weak, and there is little sign of improvement in our North American OEM business, which is heavily telecom driven. Looking at some specific comments as we see our markets on a global basis. Starting first with Hong Kong and China. We do see the market picking up in that region with our top ten customer seeing increased demand, and our fuses there and devises are going into other power supplies, PDA's, personal data systems, and cell phones. Also in Hong Kong, China, our new Taiwan based distributor's

inventory in converting business to Littelfuse in their China branches. I think this all plays to our strategy which we've talked about a number of times of building our business base and extending it into mainland China, including our own factory outside of Shanghai.

In Taiwan, we have not seen the motherboard business yet pick up. It's still, it's still weak, partly due to the inventory overhang in motherboards. Yet, we are seeing some signs up take in a few markets including notebook computers. Manufacturing in Taiwan is slow, but most of it basically is due to manufacturing shifting to mainland China, again relates to our position of being present, both in Taiwan and in China.

In Taiwan, quoting activity is very heavy, partly resulting from the addition of several high-tech distributors as we look to design in our more high-tech, broad array of

devices. In Korea, we're seeing positive growth coming from a few telecom accounts and some display customers that are building product for Japanese customers, and the point here is that we see Japan really using both Korean suppliers as well as using China as a manufacturing base for their products.

In overall summary then in Asia, we see business showing gradual improvement, again, with the exception of Japan, and we are seeing demand for local consumption of end-products driving some of this increase.

The other side of the globe, in Europe, we've seen slight improvements in distributor orders, though the distributors stocks are too low in our opinion, in fact we've expressed that to the distributors in that part of the world. The contract manufacturers are also slow in Europe at this point. POS, or point of sale, for the most is still not improving in Europe. We did however, taking actions in this subdued weak market to lay the base for the future. We signed an agreement with a new major distributor branch in that part of the world, which we see as a significant growth opportunity for us in the future. We're also adding resident service people in France and Germany to get closer to the customers in those key markets.

In North America, the reduction of inventory and distributor inventories in our view seems completed, or close to completed. We have seen a modest uptake in distributor point of sale, as well as orders and somewhat more in March than we did in February. Our OEM business continues weak, and like Europe, the CENs are remaining weak, though we are seeing signs of an increasing quoting activity, a possible improvement.

We also watch trends like the hiring of temporary people. We've noticed that Manpower, Inc. is noting that they're getting some uptake in their request for temporary workers and that's usually a, we would, that's something we look at as a leading indicator for the CENs.

In the U. S., telecom remains weak, basically, largely on the infrastructure side. Overall, cell phones are starting to show some improvement, though this is mainly coming from the far east, again, with a real presence with Nokia in Korea as a case in point. Nokia usually builds about 3 million cell phones a month and that has now kicked up to about 5 million per month.

With those segment comments, let me ask Phil now to jump in, talking about gross margins, cost reductions, and then our outlook, and then we'll both open the line for questions.

Thanks Howard. Gross margins stabilized in the first quarter as our production rates have finally begun to increase, as our inventories has been reduced and we've seen slight improvements in our incoming order rates. Increasing production rates combined with our aggressive cost reduction programs should result in gradual improvements in margins through the remainder of the year, despite higher than normal levels of price erosion in our electronics business.

Our cost reduction programs are on track to deliver eight to ten million dollars cost takeout in 2002 with about half coming from our manufacturing rationalization program and half of it coming from other programs. Free cash flow was modestly positive in the first quarter as we continue to reduce inventories, albeit at a slower rate than the previous two quarters. As you remember last year, we achieved most of our free cash flow in the second half of the year, generally, we would expect to see that reoccur this year.

Looking forward to the second quarter, we expect slowly improving sales trends in electronics and electrical and continued strength in our auto OEM business. Overall sales for Q2 are expected to increase six to eight percent sequentially, which would put us in a similar sales range to last year's second quarter.

Looking forward to the second quarter, we expect slowly improving sales trends in electronics and electrical and continued strength in our auto OEM business. Overall sales for Q2 are expected to increase six to eight percent sequentially, which would put us in a similar sales range to last year's second quarter.

With modestly improving trends for both sales and margins, we're comfortable with 13 cents consensus estimate for the second quarter and with 55 cents consensus estimate for the year. At this time, we will open it up for questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your touch tone telephone. We will proceed in the order that you signal us, and take as many questions as time permits. Once again, that's a star, one, if you'd like to ask a question, and we'll pause for just a moment.

And we'll take our first question from Alexander Paris of Barrington Research.

Good morning.

Good morning, Alex.

I just noticed in your, your auto assumption of the build was at 15.5 or something?

Yeah, 15.7 I believe we said.

Oh, 15.7. I noticed that JD Power just increased theirs to 15.9 in North America and 16.2 in Europe. If that were true, compared to your assumption, would that have a meaningful change in your auto outlook?

Well, it certainly, it certainly will help. You're talking two or three hundred thousand units on a 15 million base so we... is it that large?....

aha.

But of the two things you mentioned, probably the, well the European numbers have been the most on in flux. In fact if you look at reports just out this morning, then some of the European car build is actually down in continental Europe and is actually up in the U.K. So it's actually very much a mixed bag over there. I will offer up that if the improvement in Europe is as they had indicated, that would probably further strengthen our business over there later in the year.

Okay. Thank you.

Sure:

Our next question comes from Michael Schneider with Robert W. Baird.

Good morning, guys.

Good morning.

First congratulations on a nice quarter. It looks like you're managing the margins very well. The production levels, you mention they are up sequentially, could you give a sense, either in man hours or units, how much production was actually up first quarter over fourth quarter?

I don't have that exact number yet Mike, but I think it's somewhere in the 10 to 15 percent range. Yeah, we saw it pretty flat in early in the quarter and it started to ramp up a little bit as we exited the quarter, the latter part of the quarter.

Okay, and, should we assume though, that production levels going forward will be flat to up if the markets don't deteriorate, and that's why you're confident gross margins should expand from here?

That's a good assumption. Yes.

Okay. Okay. And then, as far as just the order pattern throughout the quarter, you made some references, but, give us a general sense on the electronics side, how you exited the fourth quarter, and even just through April, what your sense is of the month-over-month progression.

Let me make some general comments, Mike, and then Phil will jump in. J or

was weak in the electronic market, and then we began to see in February and March, an uptake in booking activity, and then mid-to-late March we saw some POS activity pick up. So really, it was a, kind of a dip early, and then the beginnings of a rebound. We sort of relate that to a conservatism on the part of our distribution channel, which is a major component of our, our revenue in that side of the world, that side of the business I should say, with 65 to 70 percent through distribution. A conservatism on their part, to not overstock until they actually see some clear and obvious signs of uptake. So that's pretty much how, in Europe, as we mentioned earlier, we're, you know we're still not seeing distributors stock where they should. You know, the same kind of story. They got burned, so they're holding back. On the other hand, in the far east, where most of the signs are only positive, other than Japan, distributors are beginning to pick up on the stock, and we think we've got actually a better mix of distributors now who are much better able to sell the newer high-tech products. Does that help?

It does.

Phil, do want to add anything?

No. I think that's good. I think it's, I mean clearly we're seeing some more positive trends, but it's still kind of a two steps forward, one step back at this point. So, you know, we'll see good trends for a while then it will back off a little bit, but generally we're, we feel like we're moving forward.

Okay. And in North America in particular, on the electronics side, if you look at the order pattern, and in particular, what devices are going out-the-door faster than they were in the fourth quarter, can you surmise anything as to which end-markets are stronger in North America?

Well, you know Mike, I think, you know at this point, we're not sure yet that the end-markets really are much stronger yet, although our distributors are starting to report some slightly higher point of sales numbers, it really hasn't been meaningful yet. Most of the uptake, I think we've seen in North America, has been the results of distributor inventories being run down as opposed to, you know, stronger end-markets at this point. However, I think the thing that has changed is the distributors are a little bit more upbeat about, you know, the next several quarters, and therefore, I think they're looking at their risk profile on inventory and deciding that there's probably a little more risk in keeping their inventories too low than the other way around at this point.

Right.

Another comment on the

. We probably know what it isn't, and it is not a telecom infrastructure kind of a sign of market. The Cisco's, and the Nortel's, and the others remain troubled, to say the least, and that market probably won't return for them until 2003. So it's coming from the industrial side. Things like the nuts and bolts, power supplies, in some ongoing, again, business in PDA's in this country, as well in the cell phone. So it's those sort of things with some modest uptake.

Okay. And if we look at the guidance, Phil, in your comfort level with 55 cents number, you did 8 cents this quarter, a 13 cents number from next quarter. What that implies is definitely some sequential improvement each quarter through the balance of the year, but not much.

Right.

Is that just, again, your assumption that inventory levels are better, and you'll probably get a little boost from that as you move through the year, but you're not counting on an actual improvement in telecom, nor much in the other core businesses?

Certainly we're not counting on any improvement in telecom, Mike. I would say that our expectation is that there will be some improvement in generally in the end-markets as we go through the year, and we're starting to see some, you know, the beginnings of signs of that at this point. So, yeah, we're going to need a little bit of help from the end-market. I don't think we can hit our $0.55 number purely on an inventory-fill situation. But we're not, on the other hand, we're not presuming a robust recovery in the second half either. And we're not projecting any recovery for telecom at all.

Okay. Then the second quarter revenue guidance of plus 68 percent. I know it's a seasonally strong quarter for you, is there anything else you're pinning your hopes on, or forecasting in terms of driving that strength?

One piece again is the automotive strength that we've talked about a couple of times.

Sure.

That, that's at least at this point, on a quarterly basis, quarter-to-quarter basis more predictable.

Well that's, so sequentially, we're not expecting an improvement in automotive. Really the, you know, we're anticipating that's going to hold off with the strong, stronger than expected levels that we had in the fourth quarters, or, or the first quarter. And virtually all, well the majority of the sequential improvements coming out of electronics, with a little bit in the electrical business as well.

Okay. That's what I was driving at. Okay, so that being said, what I'm ultimately leading here to, is it doesn't seem like you've built much in, into your forecast in terms of the, well, reflecting the savings that you expect to get in the second half. It seems like the numbers actually could be higher than 55 cents if you assume the inventory correction continues to benefit you, the car build holds up, or even modestly improves. It seems like there's even room in the numbers to reflect the savings that you guys are targeting.

That, I mean, that could be true, Mike. You know, the one caveat there, is the price erosion. As we have mentioned, we've, you know, over the last six to nine months we've seen higher levels of price erosion, particularly in electronics, than we've historically seen. There's some, you know, there's some indication that that's moderating, at least the rate of decline is moderating, and if that continues to moderate as the demand starts to improve, I would say your statement is true. However, there's still some concern that the price erosion could off-set some significant amount of the cost savings that we anticipate.

Okay. I'll jump back in line. Thank you.

Way Lewis of

has our next question.

Good morning.

Good morning, Mike.

How's everything? Just a question or two here. You mentioned pretty decent increases in sales on the auto-side of the business. How's the profitability doing on that side of the business? Are you increasing the sales but able to hold your margins, and I mean, what's the pricing issue there? I guess is what I'm trying to ask. And the second question is, as things begin to unfold in Asia, do you have any feel for how your market share is doing over there? You mentioned more activity in China and Korea than for Japanese markets. Do you have any feel for your market share as a slow down has come through?

Yeah, let me handle the, from the second part of that first, and come back on the automotive side. But certainly in, as we look at Asia regarding our electronic products, we're a number one player, but we're there with a 20 or 30 percent market share. So that a good news of the business, even though there will be a fairly large market share, generally speaking, that's the area where we're lightest across the board, and therefore the greatest in opportunities. So, I think our general feeling is we've taken the down turn to position ourselves with new distribution, with a new sales organization, with a new headquarters in, a small, cost-effective headquarters in Taiwan, a new design center in Japan.

We're doing the right things there to gain market share. So an easy answer to your question, and one we believe at this point is, we're better positioned now to gain more market shares when the market comes back again. The other lingering issue is, is we've broadened the product offering from only fuses to

...strategy we're lying out as well as the cost reductions that we built in over time and restructuring our global manufacturing.

Thank you. operator: Our next question comes from Michael Gresens of Robert W. Baird.

Morning gentleman.

Morning.

Question, briefly, coming back to the acquisition. How do you see your pipeline, and are there any opportunities in the next six months or so that you see out there as a potential.

We always keep this position, we keep the pipeline loaded, but loaded with very specific things that relate to, again, our focus which is circuit protection. We are not going off looking at things that really don't relate to that business. In any event, we particularly are working to keep our plate 5-6 things which we are looking at. The weakened market, globally I think has helped to move up some opportunities, a couple of which we are looking at as we speak. Having said that, you have to bring the horses to the trough and getting them to drink is always a challenge, but certainly, we go in with the financial position to be able to do it. We do have 2-3 relationships going now, with vicel and joint technical kinds of activities, and we would hope that at least one of these things might play out in the next year, year and a half and perhaps a couple.

I just think it is a reasonable expectation, I'll go out on a limb, that there is a reasonable expectation that we will do at least one acquisition before the end of this year. That's our target, and that's our goal.

Could you provide an update, just on the status of your production moves in terms Ireland, is everything done there? and also the Korean move to the Philippines.

We're going to take the last one first. We just completed negotiation with a small union in Korea, and that is part of the first quarter restructuring charge, and the balance of that production will be moved in the next 2-3 months to the Philippines, pretty modest production left right now. So that piece is largely in place, but other than that,

, again through Korean-speaking staff, and the Korean managers, we're getting access to the electronic business and are beginning to get access to the automotive industry over there, so that base in Korea which was manufacturing, marketing and sales is now a marketing, sales, design kind of a center which is

longer range.

In Ireland, we did get into the charge for some headcount reduction in the first quarter

indicated in the press release and comments that we, you know, essentially there is always tweaking that goes on over time. You know, we're never down in terms of cost reduction and cost take-outs and rethinking our business. Basically, the bulk of the activity which was this year, a back-end process in moving to the far east, in terms of the Irish side. The bulk of that has been completed.

Having said that, we feel positive about our design and activities going on in the new

devices that are coming out of the Irish technical team which is

folks here, and we are seeing truly how demands for some of those newer items which certainly makes us feel pretty good.

Do you have any goals for new products in 2002 such as revenue contribution or how many new product lines should contribute

during 2002.

In very round numbers, there is $9-10 million in revenue that, presuming a reasonably recovery. We should experience, in this year, and again, it has been a little slower coming than expected, during the downturn, because the market just became very flinchy about new things in current business, whatever.

But we have a number of design wins already for, so-called, reference designs for products of companies like Intel, Phillips, NEC, Intersil; some pending at TI and other customer bases, and these are low voltage devices that prevent these spark events form your fingertip to the product causing their problems.

So while we feel good about the reference design activity that has happened, we feel good about the design-end of the products. Now we have to see the recovery take place and end-use demand for those products to see that production really work out.

Thank you.

Welcome.

John Franzreb of Sidoti & Co. has our next question.

Good morning, guys.

Hi John.

Could you comment a little bit on the price erosion the electronics business, and what end-markets are more at risk, and how that is kind of affecting your gross margin expectations for the balance of the year.

John, yeah, obviously we feel that the margin expectations and the guidance again that we've already built that higher price erosions scenario into those, so we're not expecting that it to negatively impacted any more than it already has. But what we typically see, is we see it in more of our commodity products. The products, our newer products, where we have fewer our competitors, we have a much better ability to hold price than we do on the more commodity stuff which is really where most erosion has occurred.

We tend to see more price pressure over in Asia, for example, than we do in North America just because there is a higher number of competitors over there, a lot of local guys, and you know, I think that will continue to occur. It probably isn't any end-market, specifically, but it is region specific.

As you would expect, with the huge downturn that we've seen, you know, price pressures -we said at more than historic levels, we are seeing some sign that that is starting to moderate now as the market starts to recover, and if we do see a true recovery in the end-market, that will be the best thing that we can have that will help us offset some of this price erosion.

Probably to add to that, this is an area that has been getting a lot of attention on our team's part, and because we are seeing some demand in selected areas picking up, we are looking to really have a disciplined approach to pricing. There are some areas, not very many, where our production is really running 24/7 right now to cover demand, and we are assuring ourselves that our teams are working at that, and where we can sort of stop the erosion, and/or work at a price, or look at a pricing strategy to take advantage of the higher demands.

Now Phil, you eluded to the fact that it will take a couple of years to get the electronics revenues back up to the 2000's 232 level. How much of your growth expectations include the impact of acquisitions.

In making that statement, I wasn't assuming that we would be doing any acquisitions. I think we will, but I would be over and above that. I think what we're really anticipating is that we're going to get back in the next couple of years to a more normalized market that will be pumping something less than we saw in 2000 but more than certainly we've seen more recently, but also that anticipates some significant leveraging in our over-voltage products which Howard mentioned, we have lots of design ends on. We really, only now, as market recovers, only starting to see that leverage from the products we acquired in the Harris acquisition, and that is what is going to get us there.

We can probably take one more question before we have to get back to work here.

Our last question today comes from Greg Halter from LJR Great Lakes Review.

Good morning.

Morning.

What are your capital expenditure projections for the year and the D&A. Cap-ex looks like, you know this probably, the first quarter, it was quite well, a lot lower than the normal trend more

. That will increase, but we still guided people in the number in the $15 million range. Our expectation now is that it could be a couple of million dollars below that. So, maybe something in the $13-14 million range would be likely. The D&A should be about $18 million.

Thank you.

Thanks for your participation this morning. If you have any following calls, please give Phil or myself a call, and have a good day.

That concludes today's conference. Thank you for your participation.

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