Littelfuse Inc (LFUS) 2002 Q3 法說會逐字稿

Good day everyone, welcome to the Littlefuse third quarter 2002 earnings conference call.

Today's call is being recorded.

At this time, I will turn the call over to chairman, president, and chief executive officer, Mr. Howard Witt.

Please go ahead, sir.

Good morning, this is Howard.

With me is our CFO, Philip Franklin.

Thanks for being on line for our third quarter release conference call this.

Call will be approximately 40 minutes with one half of my and Phil comments and a balance of question and answer.

As noted this in this morning's release, the revenue from all the business and regions improved over a year ago period.

We have continued to see continued strength in our automotive business, our electronic business also increased with the edition of Semitron.

Our electrical business is up slightly from the second quarter and up 4% over 2001, outperforming that industry.

Regarding the July acquisition of Semitron, a UK-based long-established manufacturer of protection device, we're moving ahead with the integration and beginning to uncover the sales opportunities.

We feel very positive about what the small and focused business will bring to our electronic as well as our automotive business long-term.

Phil will now cover the quarterly detail, I'll come back with background and Phil will close with fourth quarter outlook comments.

Let me first state the forward-looking statements, any forward-looking statements, including market and acceptance risks, effective on the conditions, the impact of competitive products and pricing, product development patent protection, commercialization and technological difficulties, supplies and straints, exchange rate fluctuations, actual purchases under agreement, effecting the company's accounting policies, labor disputes, restructuring costs and other risks that might be in the company's SEC filing.

Sales for the second quarter of 2002, were 75.0 million, up 12% from a year ago quarter.

Earning -- earnings per share was 17 cents in the second quarter, compared to 2 cents for the prior-year period or 7 cents, um, before restructuring charges in the prior year.

By market segment, third quarter sales compared to the prior year were as follows: Electronics up 16%, automotive up 6%, electrical up 4%.

Excluding currency effects, um, in the Semitron accession, third quarter sales compared to the prior year were up 7% W segment sales as follows.

Electronics up 8% primarily reflecting improvement in orders from our North American distributors, automotive up 6% reflecting stronger vehicle build rates in North America, electrical up 4% reflecting strong relative performance in a continuing weak market.

Geographically, sales increased in all three regions, with the Americas up 13%, Asia up 7%, and Europe up 20%.

Europe, however, if we exclude Semitron and as stated in constant currency was only about 1% growth, um, over the prior year quarter.

Operating margins improved significantly from a year ago.

We saw a sequential margin decline compared to a second quarter, due to continued price pressure, lowered electronic volumes in Semitron.

Cost savings from our manufacturing rationalization program were on target, but were not enough to offset the other factors in the third quarter.

We expect these savings to increase through the rest of this year and the first half of next year as we close, um, the Washington-UK plant before year end, and the Centralia plant by mid-2003.

Cash flow was again a bright spot in the quarter, good working capital control, and lower capital expenditures resulted in free cash flow of over $19 million.

Putting us over $9 million, putting us at 19.8 million through the first month of the year.

Now, I would like to turn it back to Howard.

Let me, as we usually do, make comments in each one of our three segments, starting with electrical.

As Phil noted in our sales increase 4% compared to last year, performing better than the other electrical manufacturers in the U.S. industry where we serve these markets.

In the period, we captured several significant regional distributors we feel good about for the future, and we did this with the support of a major buying group.

Our sample of savings multiphase marketing program launched in April is creating new business conversion opportunities, focused on our innovative and -- we have confirmed 675 end-user calls demonstrating specific site savings to customers when they changed to the syndicating fuse product that we're seeing excitement about the product, even though it's been several years in the marketplace.

With the, um, their tight use of metrics, the team has also reduced inventory by 19% for the year, holding customer service at high levels, from these comments, you can tell we continue to feel very good about the electrical business unit's ability to increase market share and to profit -- for profitably react as customary factory reutilization increases.

The second, our market's automotives, as Phil indicated, auto parts sales continued at high levels, driven by the near record U.S. automobile at a yearly rate of 16 1/2 million.

Helping our math is an increase of fused devices per vehicle in the U.S. mounting to plus 3% that is 3% more fuses per vehicle this year over last.

At these levels, we're continuing to run our automotive department six to seven days a week, however, newly-purchased sales being installed in the third quarter should allow us to return to a more efficient 5 or 6 day work schedule.

Additional capacity has been added in our newer product, as being well-received and in response to this increasing demand for that product.

Our operations teams continue to make good progress on cross reduction, in addition to the plant closures, Phil related to, we're continue -- continuing to substitute lower-cost materials, cleaned young plastics and moving work sales -- cells to our -- sales to our factories, particularly Mexico.

We're, in changing to lower-cost plastic, this alone will save us $1.2 million this year, and over $3 million per year in future years.

We're also pleased with acceptance of our new cable pro patented circuit protection Colt.

It's now been designed into several high-end vehicles, particularly products like this start in the high-end and migrate to other vehicles, resulting revenue near term will be half a million per year within a year.

Related to our electronic focus, Semitron acquisition, we're covering, in fact, a lot of automotive opportunities for some of our unique design over voltage protection products, like we're moving aggressive to get the Semitron UK factory QS 95 qualified to enable us to respond to the opportunities.

The electronic and our July call, we noted a steady recover in our electronic component.

The same thing others were seeing at that time.

Since the middle of the third quarter, we have seen stable demand, but not the progressive growth noted in July.

U.S. distribution orders have stabilized, Europe remains weak, yet with continued strength in south Asia, especially Korea.

All in all, a more sluggish recovery.

This more subdued electronic market causes us to ramp plans to for factory outdoor to keep our inventories basically in balance with demand.

Also, electronics, the higher-than-normal price pressure that we noted in the last conference call, noted that we have some moderation over the last quarter.

As Phil mentioned, the combination of lower-than-projected demand as well as better, but above normal price pressure resulted in margins stable but not yet reflecting the ongoing significant cost takeout.

The most recent U.S. 2003 sales forecast we're seeing for passive components are for next year, um, we're in the upper single digit growth range.

Our presuming markets, we will see improving, in fact, of our new lower-cost structure.

Regarding the Semitron acquisitions, we're now, acquisition, rather, we're now fully integrate -- integrating the product offers into this company into the circuit protections portfolio.

In each of the new product categories, technically for the techy on the line, referred to as CIBODS, GDTs and bios, we're including.

We're starting to pull products through our traditional sales chapels and of higher and experienced semiconductor marketing manager in the UK to speed our growth possibilities.

Experience Littlefuse [INAUDIBLE] Also on-site to approve the products level in the company that had historically long-delivery cycles and plan with some processes to the factories to reduce product costs.

In addition to integrating Semitron, we restricted our Europe season -- European sales under a new and talented manager.

Phil.

Thanks, Howard.

I would like to conclude with guidance for the fourth quarter, and some general comments about 2003.

So far in the fourth quarter, the auto most -- auto motive and elect cat -- electrical businesses are exhibiting their typical fourth quarter slowdown in, the modest recovery beginning in the second quarter of this year, seems to have lost momentum as Howard mentioned a moment ago.

Sales for what is typically our seasonally weakest quarter look like they'll be down 7 to 10% sequentially, but should be substantially ahead of last year's fourth quarter even before the effective Semitron.

Gross margins should be similar to Q3 as lower production levels offset the benefits of our manufacturing rationalization program.

We believe gross margins will begin to improve against production levels increase next year, savings from the closures of the plant in the Washington, England, and Centralia Illinois facilities kick in.

We have been trimming SG&A costs all year, we will take more aggressive action in the fourth quarter, that will ultimately load lead to a 1.5 to $2 million in annualized savings.

The fourth quarter, however, will be negatively impacted by severance costs that should approximate 2 to 3 cents per share.

Earnings for the fourth quarter after all charges were expected to be in the range of 8 to 10 cents per share.

We will continue our focus on working capital control and expect free cash flow to be over $20 million for the year despite heavier cash outflows for capital expenditures and restructuring costs in the fourth quarter.

As we look forward to 2003, the market picture is far from clear.

Market experts are projecting North American automotive Bills in 16 million vehicle range down about 3% from this year, -- range, down about 3% from this year while Europe is expected to be flat.

As Howard mentioned, the forecast we have seen for our electronics market are generally for higher-single digit growth, while the electrical market, that has been weak all year, should begin to show modest improvement in 2003.

Our cost structure, as I mentioned earlier and Howard mentioned as well, will be significantly improved in 2003 reflecting the following: Worldwide manufacturing rationalization that we have talked about, including the closure of two plants between now and 2003, the new state-of-the-art distribution center for North America, which will be fully operational by the end of 2002, and then the fourth quarter SG&A reductions mentioned a moment ago.

Given the previously mentioned market outlook and our liner cost structure for 2003, we expect -- expect to see steady margin improvements throughout the year.

That concludes our prepared remarks.

We'll yep it up for questions now.

Operator: Thank you, today's question-and-answer session will be conducted electronically.

If you would like to ask a question, press the star key followed by the digit 1 on your touch taupe telephone.

Again, it's star 1 if you would like to ask a question.

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

Good morning.

Good morning, Alex.

Could you, um, give kind of a rough summary of the -- the size and your shares in your traditional, um, markets and then in your -- in your overvoltage markets, um, essentially I'm getting at how well you can do with your new product introductions and acquisitions, which I presume will be more in the overvoltage market.

How well you can do with a relatively continuing sluggish environment.

Sure, let me -- did you want to comment on all of those or mainly electronic?

I'm just -- kind of maybe a repeat of how much you have expanded the market that you're addressing.

Um, by adding your overvoltage business over the last couple of years.

Okay, well, certainly our acquisitions, as you characterize them and focus, go on in the overvoltage side of the business, both the acquisition two years ago and the acquisition of Semitron, they were both focused in that area, so the combination of those two businessing adds 35 to $40 million, um, of revenue, primarily in overvoltage.

UH.

Yeah, I think it's a little more than that.

It's going to be, um, anything over voltage area will be probably in the upper 40s.

Yeah.

yeah.

but, it also -- I think part of your question, too, Alex was the bark that we addressed on the overvoltage side, which, you know, is opposed to a -- a overcurrent market that is probably in the 3/4 of a billion-dollar range, the overvoltage market is well over a billion dollars, um, and obviously with a, you know, something probably a little shy of $50 million revenue base there, we have a relatively small share.

I think you also had asked about, um, about the end markets for electronics.

Uh-huh.

roughly how those brake out or, um, I guess we look at probably an average over the past three years, obviously these markets have been drastically different now compared to 2003 in terms of the breakout, but the, um, you know, what we consider to be telecom, which would be, um, cell phones, telecom infrastructure and networking, um, is -- is generally about 30% of our total market, probably a third of that being cell phones, a third roughly being networking and a third being, you know, being the infrastructure piece.

We're talking about the electronics market here.

Right.

The computer, computer and peripherals is probably about 20%.

Um, consumer electronics, is probably another 20% and then we have the remainder, which is a 30% slice, which is kind of the industrial and all other category, which would include everything from custom bedroom and equipment to, you know, machine controllers to um, lighting applications and those kinds of things.

I wanted to add to that.

Again, as you can tell, our market share to date is -- is modest against the bottom dollar opportunity in overall, overall markets.

I think the special opportunities beginning to bubble up is in the auto side where they're fairly a major global share, 70 to 90%, depend on this country.

We're seeing opportunities for these now products in automotive, um, where they want to deal with traditional automotive sources.

I think that's going to be the extra leverage we bring to the market.

Again, I just had a number of people ask questions of, you know, looking at your large share in automotive and -- and, um, and concerns that they were going to have a very slow extended recovery, just how you can go after your, um, your, I think target, roughly 15% or so growth, um, where it's going to come up o from, I guess, and it sounds like it's going to come up primarily from picking up a share in the -- in the overvoltage market.

Is that fair to say?

That's a good characterization.

Um, some innovative devices that really, um, combine technologies that our competitors don't have, might just share some, you know, receipt design activity, the fear of all of this is over voltage, but we have a -- box manufacturers, three new customers, and about a million-dollar revenue run rate for the three total per oh um, industrial TVSS, which is really, um, the surpression device, sort of like the strips you plug your computers into.

The two customers for kind of a level PCs, two customers, half a million in new traditional, nontraditional cell phone operators at a million a year.

So, many of these applications, in fact, are for overvoltage applications.

Thank you very much.

We'll take our next question from John Emrick from Rickalour Capital

Thanks, um, when I put through some of the general comments you made about '03, I'm trying to make sure that I have an idea what have my model should say.

Maybe I'll have to question it a defend rent way.

Based on your earnings guidance for full year '02, um, the -- the consensus for '03 would imply something like 58% earnings growth in '03, and I'm wondering what kind of revenue growth you would need to hit that kind of earnings growth number, given all the, um, cost improvements you have made.

Yeah, um, I think that -- that certainly revenue growth, um, in -- it would be, um, in the range of -- of kind of the market growth numbers that we talked about, um, you know, just previously the way the market's being characterized, you know, we should be looking at, um, something like a, um, a, you know, it will be most likely single digit greet in the next year, but up in the upper single digit range, and with that kind of top-line growth and the cost reductions we have, um, that we talked about at some length on the call, we should be able to get to those kind of numbers.

Great.

Thanks.

We'll go next to Amid, William Blair and Company.

Hi.

Hi.

I had a question on extra utilization and what that looked like over the three business segments.

Let mow comment further, the easiest was the automotive world.

We're basically running, from my comments, continuing to run at close to 100% of current capacity, though, of the capital equipment was bringing in as focused to bring us, you know, bring us down at least to a normalized five to six bay operation.

Um, the electronic area, the number would be, generally, 55% number on it.

55 to 65.

Depending on -- depending on which product categories, but there are very few product categories where we're over 70% capacity utilization.

In a comment there, um, somewhat different from the automotive side where we're bringing our work cells to operate more efficiently as towe're stretched for capacity is we can add more output with relative little investments, summer in machinery, bricks and mortar, that business.

The power guard end of probably -- Phil? 50%?

It's harder to gage.

There are not a lot of significant equipment constraints that we can generally add capacity by adding people, so we're not -- we're not close to capacity there, you know, but maybe 60, 70% at the most.

With the same characterization to electronic where we can add out with very little investment and machinery.

Okay, and then really quickly, can you just -- you eluded to this in the press release, talked about pricing pressure.

As Howard mentioned, the pricing -- the pricing and electronics, um, quite through the -- certainly through the early part of 2002, it -- and well above our historical numbers, and we were seeing the first half of the year, price erosion, you know, something approaching the 10% range, um, that started to moderate down some, but we're still seeing erosion higher than our normal 3 to 5%, so I think probably for the year, um, in electronics, we, you know, we'll probably be at something like 17 or 8%, on a somewhat -- somewhat declining slope, so the slope is of that price erosion is moderating a little bit but, it's still above the trend line.

What do you kind of see to happen in order for that to improve let's say in '03.

The best cure would be heat-demand improvement if the market starts to pick up, you know, we would see that, you know, fairly quickly going back to trend line numbers.

In the current weak environment with everybody having a lot of excess capacities, it's tough.

And do you see anybody, um, continue to take out some capacity or -- are we pretty much settled on capacity?

We don't really see much capacity take out in most of the kinds of things that we make are not, you know, they're not big slugs of capacity and big process-type things where people would, you know, would do that.

So it's a little difficult to say, but we don't -- I mean we see people shutting facilities like we are but, you know, that doesn't necessarily take a lot of capacity out of the system.

Okay, thanks.

We'll go next to John Franzreb, with Sidoti & Company.

Good morning guys

Hey, John.

First, being more aggressive out of taking expenses out of the SG[INAUDIBLE] in the fourth quarter.

Could you talk more about that, and secondly, how much in one-time-type charges can we expect in the fourth quarter?

Let me talk about the takeoff, and talk about the accounting.

By the way, philosophically here, John, we're not -- this is not a reduce or cost by a 2 or 3%, a target number kind of thing.

Uh-huh.

rather we're looking at the markets as we see them and we're looking at where we had strengths needed to shore up our organization, and making selective -- selective moves, um.

To date, in fact, we have adjusted our SG and -- SG&A by $3/4 of a million.

Having said, that the net number of mass, where we see opportunity opportunities in this weak market to add significant talent, and I mentioned a couple of cases in Europe, we have been able to pick up outstanding people, so we're not, one, we're not cutting across the board, we're trimming selectively, and two, we're heading where we want to add strength in Europe, in fact, the far east.

Accounting for that?

Well, yeah, we would, um, we're expecting for reductions to occur in the fourth quarter, um, it's -- the charges would -- would probably be in the range of, um, 700,000 to maybe as much as a million-dollars as, um, that would be --

that a pretax number?

That's a pretax number, placing it at roughly two to 3 cents a share, which was the way I characterize it -- characterized it in my prepared remarks, and savings relative to that as I mentioned, you know, we're not going to so a lot of savings from the fourth quarter, um, but we should see, going into next year, um, with those reductions, we will have pulled down our SG&A costs from where it is right now, from a million and a half to $2 million on an annual basis.

But that won't be realized fully in the until the year end?

Yeah, we may get some benefit in the fourth quarter, but we're not going to see that kick in until the first quarter of 2003.

One last question; um, the upper single digit, um, volume that you're looking at in electronics, does that assume any further price erosion or are you assuming the price environment, you know, zeros out into the end of the fourth quarter and stabilizes coming forward?

I think that we would -- we would expect there to be continued price erosion, albeit a somewhat lower rate than we had at 2002, so the, um, the market projections that -- that Howard referred to that, you know, we're seeing an upper single digits, those of you revenue projections, which have pricing assumptions built into them.

Okay, thank you.

Perhaps another comment on pricing, the major area we have seen the heavy erosion has been in the electronic side, frankly.

The power guard side has been fairly stable, um, you know, very modest erosion and the auto business is, um, has been a 3 to 4% kind of a business, and we sort of expect and build into our thinking that kind of erosion going forward.

also, John, I might add that we're building our cost structure around a lower revenue number than what we talked about in the, um, you know, in -- in the market projections, so we're -- we're kind of preparing for a lower number, but being prepared to respond to the higher number if it happens.

On a capacity basis and a structural basis.

Organizationally.

Great, got it.

Thanks, guys.

Thanks.

Our next question is from Greg Halter, LGR Great Lakes Review

Hello, gentlemen.

Hi, greg.

Regarding the -- your prepared comments of the earnings per share, ate to 10 cents, you stated that does include the 2 to 3% share in severance?

That would be including the 2 to 3 cents.

After the 2 to 3 cent charge that we would expect to make in the quarter.

Okay, and, I noticed on your cash-flow statement that you repurchased some common stock and warrants, 1.3 million is that.

A conscious strategy and you can give us an update there.

We were buying, um, we were buying shares in on the in the third quarter as our cash flow statement indicated.

We, um -- we purchased about, um, I guess it was about seven, a little over 70,000 shares in the, um NQ3 and we -- and that was at a price in -- in Q3, a price at an 18.50 range, and we bought additional shares in Q4 at significantly lower prices than that.

And how many shares do you have left authorized?

On our authorization, between 7 and 800,000 left.

Okay.

And I noticed your receivables about $50 million which is up from year end.

Do you care to comment on those?

The status?

Outstanding it's up a little bit at the end of the quarter, but certainly within, um, within historical range.

We tended to bounce around the last several quarters between the high 50s and low 60s, which is fairly typical of, you know, where we are, and, you know, we target a, um you know 60-day number, instead of being about where we think we can go on an ongoing basis and it was slightly above that.

Okay, and finally, any thoughts on capital spending in 2003?

It's a little early.

We haven't completed our plans yet but, you know, if we go back and look at, you know, what capital spending, it's been a wide range over the last three, four years, um, if we went back a few years ago, it was ranging up close to $20 million a year, it will be lower than that number.

It will, however, be a higher number than the number that we're going to have for 2002, which, you know, is -- has been exceptionally low for a number of reasons but, so I would on eye would guess at this point the number would probably be, um, something like in the 14, $15 million range.

Again, it's too early to make that call.

We haven't seen all the numbers roll up yet.

Okay, um, great.

Thanks a lot.

Once again, it's star 1 if you would like to ask a question.

We'll take a follow-up question from Alexander Paris, Barrington Research.

Hi, you -- I gave the 3 products for Semitron for the techies to show you where I am.

I would settle for the spelling of them. [ Laughter ]

First one is S-I-B-O-D.

That's a brand name, which --

really means silicon breakover device.

A thyristorr, kind of a family, you know, a name that is more generic in the industry.

Okay.

The second one was G-D-T.

okay.

And then T-B-S diodes.

Okay, and these are all relatively new products to you or variations of prescriptions that you already have?

I know you're in thyristors already.

We were through a secondary supply arrange met, Alex, but basically, the far majorities are new products to us.

Okay.

One caveat, the so-called gas discharge, it's really mature technology, but this is an area where we're seeing applications in the automotive industry.

Okay.

All right, thank you very much.

Sure.

We'll take our next question from Richard Hilgred.

Good morning, guys.

hey, Richard.

The drop-off in earnings per share from the third quarter to the fourth quarter.

The seasonality; um, third to the fourth quarter,it seems like, um, this is a bigger drop-off than normal seasonal drop-offs.

I'm wondering what is the biggest moving part in there?

Well, I think that -- that, you know, normally we would see an automotive and electrical drop-off in the revenue line in the father quarter and I think what we're seeing and what we're expecting to see is that drop-off.

Because of the strength of automotive in the last couple of quarters the, you know, the drop-off that we're expecting there might be a little more than the normal seasonal drop-off, you know, and hopefully we'll do better than that, but that's what we have based into our plans at this point.

And then, you know, we're also looking at the electronics business, um, being off slightly, um, from Q3, which would be, you know, fairly typical as well.

Because what you're saying on automotive, usually the third quarter's the low quarter for auto, but the fourth quarter is higher production numbers.

Are you saying that, um, for your business, though, you produce more in the third quarter and less in the fourth quarter for auto motive?

We're not expecting higher production numbers in the fourth quarter than in the third quarter for automotive, and I don't -- I don't know if you're ewing -- if you have different assumptions there, but our assumption is the Bill numbers for the fourth quarter will be, um, will be off somewhat.

sequentially from the third quarter, not from -- .

What is your model showing, Rich, from the third quarter?

I'm up a little bit from third quarter to fourth quarter but I don't have the number for you off the top of my head.

The issue here, too, is, because we start covering the waterfront, subject to very modest, you know, inventory adjustments in that business.

Full year, Howard, I'm saying 16.4 for North American build.

We're at 16.5.

We're pretty much on the same number.

Okay.

The subject there is whatever cars were built we'll be shipping the parts to, you know, so if it's a little up or down, we would we would flux since our market share is really high.

Okay, on the capacity utilization, um, are those numbers the 55% for electronic, um, and the 60, 70% for industrial electrical.

Is that, um, inexclusive of the shutdowns that you talked about, the two facilities in Washington, England, and in Centrailia, and if it's not, what would those utilization numbers look like after the closer of those facilities?

It basically were just -- they're inclusive of the product of the equipment.

Okay.

Is that, um - inclusive of the shutdowns that you talked about?

The two facilities in Washington, England and in Centralia, and if it's not, what would those utilization numbers look like after the closure of the facilities?

Basically they were just, um, they're inclusive of the production, the equipment.

Again, we're -- we're really -- this capacity is coming from -- [ Indiscernible ] The machines and we're moving the work center -- the 55% is indicating there needs to be more of a change of a manufacturing if the print on the market.

Do we need to adjust the capacity in there?

We don't think so.

Basically, our adjustments are fairly modest.

This is unlike other big processing industries, you know, to your taking, you know, petroleum production offline or something, um, in this case, you know, these are discreet work cells generally, and we ask can just add hours or shifts to police capacity, so we wouldn't take capacity out.

The other issue, um, is this -- this adjustment, you know, the industry has been short in adjustment, looking at next year into this, you know, 30% kinds of numbers, ultimately demands are going to come back on line, um in fact, you know, we're looking at, you know, cell phone build next year, probably up 10% as the forecast and PCs will be positive.

Ultimately, telecom stuff will come back later next year into 2004, so we see this, you know, being, you know, we would like to have more heavily utilized now, but we feel okay having the capacity ready to go.

Okay, thanks, guys.

Sure.

Gentlemen, there appear to be no further questions at this time.

Thank you very much.

This does conclude today's conference call.

Thank you for your participation, you may now disconnect.