Littelfuse Inc (LFUS) 2003 Q2 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse, Incorporated second-quarter 2003 earnings conference call.

Today's conference is being recorded.

At this time, I'll turn the call over to Chairman, President and Chief Executive Officer Mr. Howard Witt.

Thanks, Wendy.

Good morning.

This is Howard.

With me is Phil Franklin.

As usual, our team here will be with me and my CFO.

We welcome you to our second-quarter 2003 conference call.

After my opening comments, Phil will come in and cover the second quarter in more detail.

I will come back on to talk about the quarter from our three business units' standpoint, and then Phil will close with comments on how we see the balance of the year.

We'll then have questions and answers, as usual, and we are anticipating a total call time of approximately 45 minutes.

When Phil and I spoke with you in April, we commented on how the actions we have taken in the last two years would help set us up for the future.

Included in this were three areas, basically.

First was the manufacture and rationalization, i.e., shifting to lower-cost regions and reducing the number of factories, an effort which is largely complete as of this time.

Secondly, we talked about other cost-reduction initiatives across the Company.

And then lastly, we introduced more detail about our solution sell (ph) strategy.

At the time of the call, and before that, we also commented on our acquisition and product extension initiatives, with our intent to use our strong cash generation to fund both new product activities, as well as acquisitions.

Specifically, we said that we would continue to seek very focused product portfolio additions that add technology and increase our market share, to allow us to become be clear leader as the total solution provider in circuit protection.

The Teccor acquisition announced just a few weeks ago on July 8th is a major follow-through on this announced verbalized strategy.

In our communication with investors, Phil and I have been stressing our building competitive advantages of offering more circuit protection technologies than our competitors.

The acquisition of Teccor was a significant step to add depth to our product offering, as well as adding a significant design-in capability of the strong Teccor team.

Simply put, as we mentioned in our acquisition call, we acquired this business for a couple of reasons.

One, most importantly, we like their people and their products, and we have gotten to know them over a number of years.

Clearly, this fits our solutions sell strategy with our product offering.

Our global reach will expand the marketplace for the Teccor products, and also the edition of this established over voltage company deepens our already leading position in protection.

Despite weakness in some of our markets, we felt this was the right time to make this investment for the future.

I fully believe, and Phil does as well, and our team does, that the markets will recover.

And I will add some color to this in my letter commentary on the business units.

This coming recovery, combined with our cost reduction efforts, should set the stage to capitalize on our newly broadened product offering.

Phil will now provide more details on the second quarter.

Thanks, Howard.

Let me first read the Safe Harbor language.

Any forward-looking statements contained herein involve risks and uncertainties, including but not limited to product demand risks, the effect of economic conditions, the impact of competitive products and pricing, commercialization and technological difficulties, capacity and supply constraints, exchange rate fluctuation, 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 SEC filings.

Sales for the second quarter of 2003 were consistent with our guidance at $72.8 million, which was down 2 percent for the year-ago quarter.

Earnings per share for the second quarter equaled the First Call consensus of 18 cents, which was flat with the prior-year quarter.

The following is the market-segment breakdown for second-quarter revenue compared to the prior-year comps, which, by the way, were very strong for both electronics and automotives.

Electronics was up 3 percent, due to the Semitron acquisition and favorable currency effects.

Automotives was down 6 percent, reflecting lower car builds than last year's second quarter, with North American car builds down 9 percent and Europe car build down 3 percent.

Electrical was down 7 percent, due to continued weakness in the non-residential construction and industrial sectors of the economy.

Electronics and electrical both showed sequential growth in the second quarter, 7 percent and 2 percent, respectively, while automotive on a sequential basis was flat with the first quarter.

Operating margin improved to (technical difficulty) percent for the quarter, which compares favorably to the 7.5 percent for the first quarter of this year and 6.9 percent for the full year 2002.

We continued to reduce manufacturing and SG&A costs and gain leverage from higher sales volume.

The manufacturing rationalization program is essentially complete, as Howard mentioned, as less than 20 people remained in our Centralia, Illinois plant.

Final reductions will be made and the plant will be sold before the end of this year.

After a first quarter in which we generated very little cash, we had a strong second quarter with free cash flow of $5.8 million.

The major reason for the improvement was working capital, as we were able to reduce receivables DSO to 54 days, we improved inventory turns to just over 4.

Capital expenditures continued to be modest, at less than $5 million through six months.

However, this will increase significantly in the second half, with the start of plant expansions in the Philippines and China and $7 million of lease buyouts related to Teccor.

Now, I will turn it back to Howard for some additional comments.

Thanks, Phil.

As I usually do, I would like to give you some color and background on our three market areas, our three business units that we have in this business, reminding you that we have full P&L-responsible teams in each of these three businesses.

Electronics, with the edition of Teccor, is now, on a looking-forward basis, about two-thirds of our sales, and therefore certainly the most significant component.

Some comments on electronics -- we're seeing strengthening in sales to the North American distributors, and in addition, this business usually falls off somewhat in July.

And we have yet to see that fall-off in this month.

So this is at least indicating some positive ness in the North American distribution.

In North American OEM, we have seen, for the first time, somewhat of a pick up, and this is a positive contribution, again for the first time, from the contract manufacturers, or the CEMs, as they are called.

Europe, at this point, has not shown (indiscernible) low; that is not saying it may not happen, but at this point, it has not.

And we're getting more upbeat feelings from our distributors in the European marketplace.

In the Far East, SARS for our teams over there has been cleared, to use their terminology.

Business is returning to normal, as evidenced by them, by local airlines now reporting full flights in the Far East for the first time.

However, with the backwash (ph) of SARS, business is still mixed.

Let me give you some specific color comments in those areas, by some of the geographical areas.

Taiwan is the strong spot, at this point.

PCs are strong, with an overall book-to-bill ratio of 1.1 in that marketplace.

In China, bookings are off a bit; we are looking at a book-to-bill of 0.9, which is probably due to the working down of stocks built up as a SARS contingency I think we mentioned in our previous call.

Having said that, summer will be a bit sluggish until the distortions related to SARS are fully cleared through.

Japan and Korea are a bit soft, but we're seeing good design-in activities, as more electronic devices are being built in that part of the world.

Despite the overall short-term weakness in the Far East -- that is, other than Taiwan -- we are optimistic about increasing demand for notebook PCs, games, video games, digital cameras and other devices using our electronic products.

Now, let me give you some background.

Some of this is sort of forward-looking in terms of industry forecasts that we have access to.

And a few of the categories are focused product categories for us.

Cell phones is the first category.

There, the forecast for the year 2003 is roughly 450 million handsets, or up 5 percent from the prior year.

Now, looking forward, the forecast for 2004 is for 505 million handsets, or about 11 percent.

Maybe an interesting comment -- China is becoming more of a design-in center for phones, with an expected activity level there of about 40 percent by year end.

In the PDA area, the personal data assistant, in 2002 there were 11 million units shipped.

The 2003 forecast is for a little under 14 million.

And the projected growth rate for 2003 to 2008 is about 18 percent of these devices that are becoming combinations of cell phones and data devices.

We have not talked much in the past about digital still cameras, but this is a significant market for us.

In 2002, there were 25 million units shipped.

In 2003, that number is expected to be 33 million.

In 2004, that number is also projected to be about 40 million units, or about 18 percent up.

This is one of the fastest-growing segments of the digital consumer markets that we serve.

Some other commentary, perhaps of interest, is that Taiwan and Korea manufacturers continue to take large share, again primarily away from the Japanese manufacturers.

But having said that, we are well-positioned as a solution provider in all three of these marketplaces with local language sales engineers in these countries.

Computer is the last segment I'll comment on.

Electronics in 2002 -- there were a total of 130 million units. 2003 is expected to be 145.

Some background comment that may again be of interest -- 80 percent of the motherboards or the guts of these devices and 60 percent of the notebook computers are made by Taiwanese companies, and this is mainly transferring now to mainland China in terms of the manufacturing.

That move will continue aggressively; it was somewhat slowed by SARS, but it is continuing as we look forward.

Again, with our sales representatives or engineers in our manufacturing site outside of Shanghai, we are nicely positioned for that growth.

Moving on to automotive, as many of you know by reading the popular press, the automotive business is weak in North American, with car build-down (ph) approximately 9 percent, quarter two of this year versus quarter two of last year.

But behind those numbers, it's important to understand some additional data.

GM and Chrysler are actually off 13 percent, Ford off 16 percent, as these manufacturers work down their high inventories of vehicles.

Whereas the Japanese transplants manufactured here in the U.S. are actually up slightly, in terms of their vehicle build.

That's important, because we do have higher fuse counts in domestic vehicles, and therefore, the weighted impact because of normally higher fuse contents in GM, Chrysler and Ford products -- the impact to us is effectively 11 to 12 percent negative for this time period.

Now, one quick comment -- Europe is down about three percent in car builds, as well.

Now, the U.S. auto inventory, though improving, is still at 64 days versus a 60 day normalized target.

However, again, here in the U.S. manufacturers are higher, with an example being General Motors, currently running about a 70 day supply.

There is more price erosion in this business, but mainly in our higher-amperage fuses.

That's affecting modestly our sales, as well.

All in all, it's a weaker market; however, we're not resting on our laurels.

We're continuing to take out costs out.

And I will use as an example a recent total relay out of our U.S. auto products production center here in the Chicago area, with automated material handling resulting in the reduction of 33 people this summer and a $1.1 million yearly savings going forward.

The last and smallest of our business units is electrical.

Again, with the addition of Teccor, this is now roughly 10 percent of our sales going forward.

The U.S. electrical market also, as you probably know, lags basically the economy, and we are continuing to see weakness, with low levels of industrial construction and low factory utilization.

Our numbers in factory utilization are roughly 72 percent.

Other companies in this industry are also reporting second quarter weaker than the first.

Regarding distribution in the electrical, as the quarter was weaker, the distributors are continuing to be conservative about keeping their inventories low and are not putting in large stocks.

However, as in the other markets, given the weak market condition, the Littelfuse team in this business unit has done a good job of reducing costs, resulting in significant operating profit improvement compared to the prior-year periods.

The team is also working on new joint sales opportunities with our U.S. electronics salespeople that ultimately can lead to improving revenue, leveraging our indicating fuse technology combined with sales of our deep electronic portfolio.

With that background, let me turn it over to Phil for some closing comments.

Thanks, Howard.

We have now owned Teccor for just two weeks or so, and in that time, there has been a lot of interaction between the Teccor people and their Littelfuse counterparts.

While we are still finalizing the details of the integration plan, the good news is that so far, we have found no surprises.

We still are confident that the $10 million of annual cost savings within two years is achievable.

We still believe that Teccor will be no more than 10 cents dilutive (ph) in 2003, neutral in 2004 and significantly accretive in 2005.

We still believe that the rationale for joining these two market-leading companies together is sound, and will lead to significant revenue opportunities in the future.

As we look forward to the third quarter, we expect sales for the Littelfuse base business to be similar to the second quarter, with Teccor adding something in the neighborhood of $18 to $19 million to that number.

As far as earnings guidance for the rest of this year, we are comfortable with the recently revised analyst estimate that put us in the neighborhood of 60 cents for 2003.

From a cash flow perspective, the cash that we would have generated in the second half of the year will be used to fund the near-term Teccor needs and the Asian plant expansions mentioned earlier.

Our best estimate right now is that free cash flow for the second half of 2003 will be slightly negative.

Now, we would be happy to take your questions.

(CALLER INSTRUCTIONS).

Rick Reed (ph), Robert Baird & Company.

Phil, can you just give us a little bit more color on the gross margin?

It was down sequentially by just a little bit, but the revenue was up, and you guys had thought last quarter that it would be up.

Can you just talk about what had changed there?

I don't think too much really changed.

We expected gross margins to be relatively flat with Q2, and they were; they were down, I think, about 20 basis points or so, as you mentioned.

There really was not anything that was a whole lot different than what we expected.

I think we might have had a little bit of unfavorable mix that may have contributed a few tenths of a percentage point, but we are still expecting in the base Littelfuse business that we have got some upside margin opportunity over the next quarter or two, and would expect those margins to still be generally trending up modestly, as well as the operating margins, which we have shown some nice sequential improvement on.

We would expect to, again on the base business, to see some modest improvements in those in the third quarter, as well.

And then, Howard, a quick question for you, about what you have given us from an end-market perspective.

Very helpful -- I wonder if you could comment, too, on what you guys are seeing right now in the telecom market, and as the blade server market emerges, are there opportunities for you there, as well?

certainly, in telecom, it was refreshing to see Tellabs report for the first time yesterday that their revenue was up for the first time, I think, since 2001.

Hopefully, that indicates some future growth in that area.

We're still building on our models very cautiously, presuming a modest kind of looking-forward 5 percent kinds of increases in that business.

And I think that's probably the color that we have.

The good news is that we are positioned now, especially with Teccor, to handle any increase we see kind of going forward.

Phil, any notes that you have picked up that you want to add on?

I don't think so.

I wish we could be a little more definitive, but certainly, I think we remain optimistic that as the economy begins to up tick and there is improvements in infrastructure, clearly there is improvements in wireless, as I indicated.

But as there is improvement in need and capacity and wireless, that we are positioned certainly to now share in that as it happens.

And, Howard, any comment on opportunities in the blade server market?

In terms of the blade devices in electronics?

Exactly.

I am not as technically up to speed as I should be, to be very honest, in that area.

What we might do is get you a better answer from our electronic guys and I will commit to do that.

(CALLER INSTRUCTIONS).

Mark Colton (ph), William Blair.

I know you mentioned that pricing in the automotive market remains tough.

Do you have any comment on pricing in the electronics business?

As volumes begin to pick up here, are you seeing any incremental ESP pressure there?

We had talked about electronics price erosion, which had been, at one point, six months ago, closer to 10 percent and had moderated to something in the 7 percent range, which is about where we see it right now.

We're hoping, as demand firms, that we will see that number come down a little bit more.

Right now, it's still hovering in the 7 percent range.

And then on capacity utilization, I don't know if you actually mentioned a specific number -- where that stands.

And then more specifically, in the Semitron business, how is the fab utilization looking there?

Let me comment on that.

Our base business capacity in electronics is still in the 55 to 60 percent range, basically.

Automotive is in the 90's.

Again, with demand backing off a bit, we have had a bit of a breather there, because it had been running seven days a week, 24 hours a day, which has allowed us to do things like this factory reorganization I mentioned to you earlier.

Phil, can you comment on the fab utilization?

Fab utilization is -- we have still got a fair amount of excess capacity there.

I think, in terms of the actual capacity of the fab, obviously there are always some short-term constraints, in terms of the people side of the equation.

But I think the fab itself -- we have got plenty of capacity to ramp that another 30 percent or so.

And obviously, with the capacity that we just acquired with Teccor, there's excess capacity there, as well, on the fab side.

Teccor, by the way, had done well over $100 million in the past.

So that might give you an idea on the revenue side.

We are certainly positioned, without the need for any dramatic capital improvement, to get to get up into the hundreds of millions of dollars -- above 100 million, I should say, not hundreds.

We hope it is a hundred, but up into the hundred million area with current fab status.

Finally, on the automotive side, I know last quarter, you mentioned that there were some inventory issues with a few specific second-tier players.

Has that all been worked through at this point?

Yes, that has been worked through, and we don't see any issues there at this point, and things are operating fairly normally.

Greg Halter, LJR Great Lakes Review.

I know on the last call, the Teccor call, I asked a question regarding the balance sheet post June 30th.

I was just wondering if you could provide some data there on where Littelfuse's cash stands and debt stands and so forth, at the present time.

I don't have a lot more color there, Greg, at this point.

There are a couple of things on the balance sheet that we had -- we had mentioned that we had an initial draw of 16 million on our revolver.

We referred to a $7 million equipment lease buyout that we were going to do, which has now been done, so we had to draw a little bit further on the revolver to do that.

I don't think we drew the whole 7 million;

I am not quite sure exactly where that is.

But some of that certainly came out of the revolver, as well.

In terms of the actual opening balance sheet, that has really yet to be determined.

We are in the process of getting an appraisal on the Teccor assets, and that will, in part, determine what our opening balance sheet looks like as we move forward.

We will certainly bring you up to speed on that, and we will have that done, certainly, by the end of this quarter.

(CALLER INSTRUCTIONS).

Gentlemen, it appears that we have no further questions.

Great.

Thanks for being on the call.

We are available if you want to have any follow-on conversation with us.

And we are very upbeat, as you can tell, about the Teccor combination and about the future, especially as we get into 2004 and beyond.

So have a good morning, and thanks for being on the call.

And that concludes today's Littelfuse Incorporated conference call.

We thank you for your participation, and have a good day.

(CONFERENCE CALL CONCLUDED)