Littelfuse Inc (LFUS) 2003 Q3 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse, Inc. third quarter 2003 earnings conference call.

Today's conference is being recorded.

At this time for opening remarks I would like it turn the conference over to Chairman, President and CEO, Mr. Howard Witt.

Please go ahead, sir.

Good morning to all.

This is Howard.

With me is Phil Franklin, our of our Vice President Operations Support and CFO.

Welcome to this, our third quarter 2003 conference call.

As we've patterned this in the recent past, Phil Franklin will cover third quarter detail after my opening comments.

I will provide backdrop to the quarter three and beyond for our three business units then Phil will close with comments on how we see the balance of the year.

We will then open up for Q and A and the total call will be approximately 45 minutes depending on the number of questions and answer activity.

[inaudible]Over the recent quarters we've commented on several areas of concentration, including maybe , probably three things we'd like to share with you that we’ve concentrated on.

One is the manufacturing rationalization that is shifting toward lower cost areas, reducing the number of our factories.

Secondly is our solution/sale strategy.

And thirdly, our acquisitions and product expansions initiatives funded from our strong cash generation, most specifically and recently our acquisition of Teccor which we announced on July 8th of this year.

In the last call we also noted despite weakness in some of our markets, we felt this was the right time to use our resources to make investments on these three fronts.

As we felt markets would ultimately recover and that this would set the stage for the future allowing us to capitalize on our broad product offering with a lowered manufacturing cost model.

As Phil will note in more detail, we now have completed the first manufacturing rationalization program, including the successful sales of the exited sites.

We are aggressively moving into new leadership in electronics with our solution/sale strategy, making the necessary changes in our sales organization in our sales reps and distributors across the globe.

Most of these changes will be completed by year-end.

The Teccor integration with Littelfuse continues on plan and we are maintaining this strong brand franchise.

Phil will provide more detail.

However, I would note that we are very pleased with the combinations of the joint Teccor/Littlefuse teams and are ahead of schedule to date.

Phil will now provide more details on the third quarter.

Thanks, Howard.

First let me read the [inaudible] Any forward-looking statements made on this call involve risks and uncertainties, including but not limited to product demand risks; the effect of economic conditions, the impact of competitive products and pricing, risks of acquisition integration, capacity and supply constraints, exchange rate fluctuations, the effect of the company's accounting policies, labor disputes, restructuring costs and other risks which maybe detailed in the company's SEC filings.

Sales for the third quarter of 2003 were $94.7 million, up 26% from the prior year period due to revenue from Teccor which was acquired on July 7th, 2003.

Sales for base Littelfuse business of $74.9 million and sales for Teccor of $19.9 million were both slightly above our guidance at the beginning of the quarter.

As the electronics business is showing spotty signs of recovery.

Diluted EPS were 19 cents for the quarter. 4 cents above the consensus estimate and our best earnings performance since the electronics market collapsed in the latter part of 2000.

The following is the market segment breakdown for third quarter revenue compared to prior year comps.

Electronic sales, excluding Teccor, were up 4% due to strength in Asia related to notebook computers, digital consumer electronics and mobile phones.

We are seeing particular strength in China and Taiwan.

Both Japan and Korea are showing some signs of improvement.

North America and Europe on the other hand remain weak.

And while distributor inventories are in generally good shape end-market demand or POS as we call it remains relatively flat.

Teccor’s telecom market has been trending positive, off its cyclical lows of earlier this year.

We believe increased DSL activity is the primary driver here.

Automotive sales were down 6% for the quarter, reflecting lower car-build which was down 5% in North America and 4% in Europe.

Price erosion has also become more of a factor as we have had to lower prices in some cases to protect our strong market share position.

The electrical business was down 4% for the quarter due to ongoing industry weakness, cyclical downturn in non-residential construction continues to be a major contributing factor.

The earnings improvement for the third quarter resulted primarily from higher gross margin in our base business, partially offset by 5 cents of dilution due to the Teccor acquisition.

The Teccor dilution was driven largely by 1.7 million dollars of charges for accounting policy changes related to inventory valuation, expensing of certain short-lived assets which had previously been capitalized.

Excluding charges related to accounting policy changes, Teccor financial performance was better than expected due to higher sales and production volumes and favorable product mix.

Littelfuse base business gross margin improved to approximately 35% for the quarter.

The primary drivers of this margin improvement were improving unit volumes, favorable product mix, effects of recently completed cost-reduction programs, and favorable currency effects.

Cash flow was another highlight in the quarter.

Cash from operating activities was $18.5 million for the quarter, compared to $8.6 million for the first six months of this year and 10.9 million for last year's third quarter.

Primary drivers of improvement in cash were working capital performance, particularly inventory; increased profitability of the base business; and a small positive contribution from Teccor, which we originally thought would be negative to cash for the quarter.

Through nine months, free cash flow, that is after capital expenditures, stands at about $15 million.

In the third quarter, we completed a new $50 million three-year revolving credit facility to replace the expiring $55 million line.

At the end of the quarter we had approximately $12 million outstanding on this new credit line at a variable rate of about 2.4%.

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

Thanks Phil.

What I'd like to do now is give you some color in the backdrop of each of our three business units.

I'll start with our smallest, electrical.

Our Resco business is approximately 10% of our sales our business down 2% over 2002, approximately.

But, we've seen modest upticks in industrial output.

Industrial capacity utilization continues low and there aren't any signs of real recovery in these markets that use our electrical fuses.

I’d note this business does usually lag a recovery.

Price erosion in this business will probably continue with 2 to 3% level we are experiencing.

In this sluggish market our electrical team has worked diligently in cost reduction, as well as efficiency improvements, resulting in improvements in operating margins in each of the quarters of this year.

We've also targeted inventory in receivable (ph) reductions that contributed to the increased cash flow that Phil had just discussed.

All in all this is a good business for us enhanced by the fact that there are good cross-selling opportunities in our electrical [inaudible] electronic customers for products such as handheld meters (ph) and into [inaudible] for applications such as Hybrid vehicles we are hearing more and more about.

The electrical team also continued to excel in creativity most recently earning the coveted Vendor of the Year Award – a major [inaudible] members buy over $10 million of our electrical product.

In automotive, car builds in 2003 are generally lower as Phil indicated than last year.

Builds in the second and third quarter of last year were high making comparisons difficult.

Car build for major U.S. and European markets are down 4 to 5% for the quarter.

In this normal - in this weaker than normal market we are experiencing as Phil indicated higher than normal price erosion in the range of 5 to 7%.

Looking forward in the next 4 years, projections are for car build globally to increase 3% per year on average with the largest gains being in China, Korea and eastern Europe.

Fuse counts will also continue to grow in vehicles at a rate of approximately 2% per year.

Given the near-term weakness in this market, the automotive team continues to aggressively reduce costs in all areas, including material and labor.

The recent reorganization and automation of the Chicago-area automotive production center is leading to over $1 million in yearly savings and is working to plan.

In total this automotive team is projecting $4 million in savings for 2003.

For our total solution/sale strategy is focused on electronic customers, we see it favorable affecting our automotive business, long-range.

Our high market share position that the traditional fuses provide gives us the entree to system design engineers in automotive.

In this business, the long design-in cycle means its takes longer for our total solution provider initiative to take hold and add sales beyond fuses.

On the other hand, once designed in, the life of a automotive platform is longer than our electronic market products.

As an example of this dynamic, in recent meetings with the Design Team, the world's largest wiring systems manufacturers, representatives of this customer indicated a shift from their total focus on cost reduction of recent years to a new focus on system product enhancements for their products.

They therefore expressed a desire for a partner who could bring them an array of technology for future designs, including silicon-based products.

Since the meeting they also requested we train their people [inaudible] of technologies and that training is now taking place.

All of this doesn't mean an instant revenue increase from automotive, but we see these trends leading to ultimate growth in this SBU by its ability to tap into our electronic and electrical circuit protection devices.

On to our electronics, our last SBU.

We are seeing as Phil indicated continuation of electronic growth in Far East markets with book-to-bill ratios over 1 in both north and south parts of this region.

It’s clearly important that we have significant design-in and distribution presence to serve the surging growth and opportunities in the Far East.

Europe and U.S. for electronics, remains sluggish to flat.

Greater China is experiencing some upside demand led by Taiwan.

This is driving production schedules in several products to near-term capacity.

Overall factory electronic capacity utilization is currently at approximately 68%.

China is showing growth, but the main driving force in 2003 is Taiwan.

Korea is expecting to see improved demand as the (indiscernible) such as Samsung and LG respond to improved exports for consumer goods.

Like Taiwan, Korea is expanding their position in digital cameras and Samsung is now number two in the cell phone business.

Within the Taiwan-China markets, there is a growing role of what I would call Super ODMs.

These ODMs are owned design manufacturers are taking more and more of the designs of the major companies worldwide.

These ODMs are also taking on more and more applications as they increase their electronics design expertise into products including cell phones, PDAs, desktops, laptops, games et cetera.

Relationships with these accounts are growing in importance and I would name the five ODMs – and you will hear more and more of these over the years [inaudible] Compel, Foxcom, vistron and Quantum are some of the customers we are dealing with.

By deepening relationships with these ODM accounts we are experiencing multiple product design-in application opportunities.

As I will share in a field report in a few minutes, we are -- our objective is to become the ODM’s source for circuit protection and total solution expertise.

Some other comments from our Far East associates , that you might find interesting, some data from the field, recent book-to-bill activity in Hong Kong, China that for September and generally speaking, recent months 1.25.

Taiwan 1.05.

Japan 1.25.

As Phil is indicating we are seeing improvement in that market.

Overall average for most of the balance of Asia is about 1.1.

In a recent Wall Street journal article noted that PC shipments are up 14 to 16% over (ph) the third quarter.

Actually rising in all global markets, Europe and U.S. included, with projections for the year to about 40 million shipped units.

In talking about these PCs, a large portion of the PCs and cell phones will be built in China.

We are having success designing our OV products – over (ph) voltage products -- for cell phones in China, again, piggy-backing on our experience and the buying of fuses by those cell phone manufacturers.

In Taiwan, the laptop PC manufacturers are forecasting shipping roughly 23 million units, and this is up 28% over last year.

In DVDs in 2003 we track all these things because important to us expecting DVD production will be made primarily in China with 60 to 70% of all DVDs made in China.

And we are finding that our good customer Samsung is moving their PC manufacturing operations from Korea to China.

All this said, we are not focusing on the far east, however, this is where we are finding most of the current growth opportunities.

As I mentioned before, let me just share one example of total solution provider example of how our wide technology offering is working.

This is with a real-life report from one of our field engineers just in the last few weeks.

And I quote "we've grown the business at this major ODM at a plus 20 percent rate for the last 2 years.

We started focusing in this account in the middle of 2002.

They were doing OD work for Dell's new PDA.

For the second half of 2002 we were providing ESD, that's electronic static discharge testing, design and technical assistance.

One of our first ESD designs was a [inaudible] for the Dell PDA.

Since then we deepened our relationship with their ESD reliability group.

We are now seen as the ESD and circuit protection expert, this helps us at both the design side and purchasing side.

A key part of our attack has been to constantly be in front of designers as well as procurement.

Because they’re an ODM there are multiple applications that are being designed and a constant request for providing circuit protection technical expertise.” But, again, I offer this up as very good example of our total solution provider activity working in the field.

A few comments to add to those from Phil on Teccor.

As we indicated in the press release, we are pleased with this acquisition and our progress to date.

We are ahead of our plan due to our [inaudible] volume favorable product mix.

Our major team efforts are under way to rationalize our U.S. sales representative organization before year-end and we've also begun an aggressive two-year manufacturing cost reduction effort.

A first step in the manufacturing was reduction of 160 people in September at the Teccor Mexico manufacturing site.

We've also known we have not had to change integration and action plans and we are just beginning to see some of the benefits of adding these great products to our solutions [inaudible].

In closing I wanted to add a comment -- I wanted to note that we recently strengthened our management team with the addition of Gordon Hunter.

Gordon has been on our board of directors for a number of years and he will be joining us as COO next month.

Gordon brings us over 20 years of diverse global experience in our industry with his most recent experience at Intel.

Before that he managed a major portion of the Rakean Corporation, competing with (indiscernible) in several product categories.

Our three SBU managers and our human resource VPwill report to Gordon, And with that, Phil has some closing comments and then we will open for Q and A.

Let me briefly give a little color on what we expect for the fourth quarter.

Our fourth quarter tends to be seasonally weaker than the third quarter, although this year the normal seasonal effects should be offset by an extra week in the quarter.

We have 14 weeks in this year's fourth quarter instead of the normal 13.

This is something that happens every seven years with our 4-4-5 calendar.

The base Littelfuse business is expected to continue to benefit from many of the trends that drove higher margins in the third quarter.

Although, margins may not reach Q3 levels due to usual manufacturing disruptions caused by fourth quarter holidays and plant shut-downs.

Teccor is performing above expectations, as Howard mentioned and we talked about earlier. and we now expect Teccor to be close to break-even in the fourth quarter.

With the shutdown of the Centralia plant in the third quarter we’ve now successfully completed our manufacturing rationalization program, which has been a two-year program.

This program achieved our 15 million dollar target in annual cost savings.

Over the next 6 to 12 months we will be announcing additional programs with a goal to achieve over $20 million in savings in 2004.

Two of these initiatives which we will begin implementing immediately are the downsizing of our facility in Dundalk Ireland and Arcola, Illinois.

As mentioned in the press release, we expect to take a charge of approximately $3.2 million on a pre-tax basis in the fourth quarter related to these programs.

Even with this charge, we expect to be able to meet the current 2003 full-year consensus estimate of 60 cents a share.

Now, we'd be happy to take your questions.

Thank you.

The question-and-answer session will be conducted electronically today.

If you would like to ask a question, press 1 on your touchtone telephone.

If you joining us on speakerphone make sure the mute function is disengaged to allow the signal to reach our equipment.

That's 1 for your questions.

We'll go first to Alexander Paris with Barrington Research.

Good morning, nice quarter.

Just a question on Teccor.

When you first announced it, there was $7 million cost was going to run through the P&L and you mentioned 1.7, was that part of it leaving 5.3 for the fourth quarter?

No, there were a couple things there, Alex.

There were – I’m not sure what the 7 million was.

There was $7 million of leases that we were going to buy out that went into our capital account that showed up as cap ex for the quarter.

We also had I believe we talked about $6 million of restructuring charges which would not hit the P&L because it would be accrued for in the opening balance sheet.

I think that number, ultimately, is going to be somewhat lower than that, but those charges do not go through the P&L.

And then we did talk about some one-time type charges that we expected that would flow through the P&L.

I think that number was more like a couple million dollars, not 6 or 7.

But, the view is right now that we'll have minimal one-time charges in the fourth quarter and that the business should be near break-even level for the fourth quarter with whatever charges that we do incur.

I see it was $7 million, but that included the leases.

So, that didn't go through the P&L?

That did not go through the P&L.

Ok, what were the sales peak at Teccor before it turned down?

I think it reached 150 or 160 million, I think it was kind of a peak level .

Okay.

Just one other question.

You said you would announce in the next six to 12 months the additional programs, but there is already some you mentioned that you are going to be doing immediately and that's $20 million.

Is that a multi-year program or do you expect 20 million in 2004?

The -- just to clarify that, Alex.

The $20 million is our cost-reduction target for the year 2004, which include a whole range of programs.

Okay.

Two of those programs were the ones that we called out in the press release, which are downsizing two of our plants in Ireland and Arcola, Illinois.

Those will begin immediately.

Those downsizings will begin in the fourth quarter.

We will take charges related to those downsizings of something a little over $3 million.

So, putting them together you do expect to reduce cost by $20 million in 2004?

Right, that would include the Teccor cost reductions, as well, that are part of the integration.

Yes, $20 million is the target.

Alexander Paris Okay.

Thank you very much.

And Our next question comes from is from David Tages, with Seigal Bryant.

Good morning, I am a little confused on the guidance for the fourth quarter, I am just looking at – you’ve done 52 cents essentially through the first three quarters, including a charge.

It looks to me like you said you are going to -- Teccor is going to be break-even in the fourth quarter when it was supposed to be 5 cents – I believe 5 cents -- dilative and you are taking a – maybe a 7 to 10 cent charge in the quarter, also?

So, I am a little confused on exactly what you are saying.

The charge will be about 9 cents a share.

Okay.

Related to the downsizings.

You're right.

We're at -- I believe, 51 cents right now through Q3.

We said that we would at least achieve or possibly overachieve the 60 cent guidance for the year, including the charge.

So, I guess what that would imply anyway is that we would have to hit at least 9 cents to get to 60.

Add the charge to that, that is 18 and we said we expect to do at least 18 before the 9 cent charge for the fourth quarter.

David Tages Okay.

Then, how do we think about the dilution on Teccor?

Was that -- is that including the charge or excluding the charge?

Is the business doing better, sort of on an apples to apples basis, is it break even versus what you thought it was going to be -- 5 cents dilative?

Phil Franklin Yeah, what we talked about at the last call, was something up to possibly 10 cents of dilution in the remaining six months of the year 2003 from the time we bought it in early July.

We've incurred 5 cents of dilution in the third quarter in large part because of some of the charges that we took in the fourth quarter.

We said we'd be somewhere near break-even.

So, I think you can read from that that we're going to do significantly better than the 10 cents dilution that we expected.

David Tages Okay.

Thank you.

Finally, just on the management change or the management addition, Howard, what exactly -- what exactly does that do for you?

Is this more of a succession plan or just beefing up management or how should we look at it?

Howard Witt Really is part of a succession plan. [Inaudible] is moving to the board was through the end of next year and we would have started this process probably sometime in a succession process in detail in the coming year.

Gordon was on our Board.

We've known him for a number of years.

Back in the days when we had things going on with Raycam, and being on the Board, he threw his hat in the ring and we followed through and did some in-depth work and he joined us.

He will have the operating part of the business reporting to him.

Phil with his expanded responsibilities into logistics and IT will report to me and ultimately things are working out, Phil and Gordon will be moving in to lead this business probably sometime late in 2004.

Okay.

Then, finally, any comments on inventory levels at distributors?

Do you feel they are high, low, building inventory, so on and so forth..

Phil.

I think, generally, distributor levels are reasonable levels from everything we see and hear.

I think they're certainly not high.

We're hearing about maybe some areas where they are a little on the low side.

But, generally we think inventory levels are in pretty good shape.

We just need for the end demand to pick up a little bit, which certainly has not yet to any significant degree in North America or Europe.

Okay.

Thanks.

The next question comes from Jeff Rosenberg with William Blair.

Good morning.

Hi, Jeff.

First off, in terms of thinking of the 1.7 million dollar charge and trying to sort of look at the P&L, excluding that, should I just add it into gross margin or Phil -- more color how that kind of flowed through the P&L to some of the different line items?

It would have all gone through cost of sales related to inventory primarily.

It was entirely cost of sales charge, non-cash really to adjust to a really different -- to put Teccor on a consistent method of accounting which was a more conservative method with what Littelfuse is employing.

Okay.

To be more conservative.

Right.

I think if you look at operating margin adding that back, it is about 9.3%.

Any reason that wouldn't be a base that you could build off of?

I know there a little seasonality is in Q4, maybe it peaks a bit.

Excluding that -- I guess it would not be a huge number, anything different that you -- that I'm missing in terms of why we shouldn't think of that as what you are moving up from going forward?

I think that is probably a good way to look at it with the caveat of the seasonality that you mentioned, Jeff.

Okay.

And then, just switching to the pricing commentary in terms of automotive.

Can you talk a little bit about where that competition is coming from?

Is it a function of the fact that a lot of the growth is coming from Asia or just what are you seeing competitively there in terms of who is entering the market that is hurting you there?

Yeah, just a couple of comments on that.

One, the market is weaker generally from the automobile numbers that we related earlier.

It is not so much new competition.

I would say it is sort of nibbling at the margins with a few competitors we’ve had in Europe for a number of years.

Again, we're aggressive in terms of design-in activity.

We are maintaining, basically, our market position, but there is a little nibbling going on by some of the current competitors, mainly in Europe.

Okay.

And then, my last question was just some added detail on Teccor.

Could you talk about how much operating expense Teccor added quarter-on-quarter?

Just trying to -- your operating expense number was a little bit lower than I had guessed at, I guess I’m just trying to make sense of that.

Can you talk about how much operating expenses that increased?

Teccor runs in the 16 to 17% operating expense range at the current sales levels.

So, that would translate into Q3.

You know, something a little over $3 million.

Okay.

Great.

That helps.

Thanks a lot.

You're welcome.

Will take the next question from Rick Reid (ph) from Robert Baird and Company.

Good morning.

Can you guys talk a little bit about the $20 million, I guess I just want to be clear on that?

Maybe I will ask the question this way in terms of the savings.

How much of what you're doing now is incremental and how much savings in '04 is incremental to what you talked about previously?

It's really all -- Well, included in that number are the Teccor savings that we referred to in the last call and the kinds of numbers we talked about in total were $8 to $10 million for Teccor.

A chunk of that was in 2004, some of it was out in 2005.

I think the numbers I think we're looking at right now for Teccor for '04 probably in the 7 to 8 million dollar range.

So, that would imply that we'd be doing at least 12 to $13 dollars in the base business.

Okay.

Just a comment on that, too.

We talk about moving things around and reducing our overall headcount.

There's a significant chunk that’s just beginning now that will be happening through 2004 into 2005, which is automation, moving some product to the Far East, probably out of Mexico.

But, it's automation efficiency improvement tentatively (ph) and blocking and tackling at our site in Irving, Texas and [inaudible] Mexico.

Howard, just I wanted to go back to your comment on the ODMs.

And I guess this is a question in two parts in terms of what are you seeing with both the ODMs and EMS (ph) players?

Is business picking up there?

It sounds like it is picking up on the ODM side.

How much experience do you have with the ODMs versus the EMS people at this point?

And, given that you have got bigger companies like Flextronics and San Meena (ph) getting more into the ODM space are those incremental opportunities for you?

Well, again, we see opportunities in that whole space.

So, we have been dealing with the contract manufacturers for a number of years.

So, we have presence with those folks and we will continue that as they begin to migrate into some of the ODM areas.

But, the ODM and names I mentioned to you are relatively new to many manufacturers, but we have been dealing with them as my example provided for at least a couple of years.

We see a definite shift over time to screw (ph) the CEMs – (indiscerbible) to put you in a position, but -- More and more products will be not only made but designed by the ODMs and these be (ph) primarily in China.

So, again, one, it is an evolving market.

I think we have the advantage of have our feet on the street.

Local people wrote the language in China and Taiwan as hopefully the example provided.

We are close to these people.

We are tracking them literally by quarter.

There are roughly 30 ODM players in the Far East.

We rank them by their dollars and we track exactly where opportunities might happen.

But, I think the bottom line is this just provides such a neat opportunity for providing the service and not just selling the fuses, but the thyristors and the PTCs (ph) and the sillsilicon-based products.

So, we see this as a changing market that plays to our total solution strategy.

And are you seeing business pick up with the contract manufacturers at this point?

I guess just more on a sequential basis, is that something that is a near-term opportunity?

Well, the other end of that, ODM business is up about 33% this year.

So clearly on that end we are seeing growth.

The CEMs, they are going through their own migration themselves from a base in places like Ireland and the United States to Mexico to offshore.

So, we are seeing ongoing business with them.

It hasn't frankly surged as much as the ODM business.

Great.

Thanks very much.

Our next question comes from John Fox with Centimor Investment.

Good morning.

I have two questions.

One, Phil, could you talk about the gross margin?

I guess the 1.7 million went against that that you talked about a little earlier.

Is there anything else just from Traycore’s (sp) margin? ‘Cause, even if I add 1.7 million back it is still lower.

Is that a Freudian slip -- to Traycore (sp)?

I’m sorry (laughter).

1.7 is still lower than what?

Lower than it was last year; lower than the third quarter.

Is that from the acquisition (multiple speakers) mixing in the lower gross margin?

Yeah, what we said with Teccor is that we said we are starting out with a business that was making gross margins in the low teens because of where they were relative to their capacity and relative to their historical volumes.

And what we talked about was a business we thought we could bring reasonably quickly up into the 20 in terms of a gross margin and ultimately to something like a 30% gross margin, but it going to take a couple of years and some pretty significant cost reductions and a little bit of help for volume to get there.

So, it will be a two-year process or so to bring Teccor up into close to the range of where our base business is.

Right now they're still 15 to 20 points below that.

Okay.

All right.

Great.

And could you talk about in the electronics business, kind of what the percentage of that business is in – I guess what I would call these consumer items.

But, like DVRs, DVD players I-pods, Digital cameras that whole area, is there any kind of percentage of the total?

Yeah, if we look at our electronics business now.

Things have changed a little bit with Teccor because Teccor is more heavily telecom focused.

But, let me give you -- we have – they’re four major categories of end markets and one of them is certainly the one that you just talked about, is the digital consumer/handheld device category that would include digital cameras and includes DVDs --

Right.

PDAs.

PDAs and those kind of things.

That probably is approaching 25% of our business, our end market.

Computers is probably our largest -- you know, it may be closer to 30% or so.

Computers including that are all the peripherals, you know --

Printers.

Printers and displays all those kind of things.

That is a large market for us.

That, as we talked about particularly with the ramp-up in notebook computers, we've seen that.

That has been a significant contributor to growth we've seen in Asia over the last year -- or last six months, I guess.

And then now particularly with Teccor, I mean, telecom has always been a meaningful part of our business.

With Teccor that’s similar size now to the other categories I just mentioned.

Okay.

And then we have a little bit more of a catch-all category which is industrial and kind of other stuff that makes up most of the rest.

Then, there is a small piece that goes into automotive, as well, which is an area we are focusing on making that a bigger piece.

Right now it is probably only 5 to 7%.

Industrial will include things like measurement and medical, TBSS (ph) -- that sort of thing.

By the way, it is nice to be able to speak to market positions in that diverse array of products by the way.

When we dissect it now, the nice thing is in things like cable modems, which we’re seeing as a relatively nice high-growth area.

We were talking about fuses (indiscernible) products cross-section of our products.

Okay.

Great.

Thank you.

We'll go next to John Frandrep with Sidoti.

Good morning gentleman, two questions.

First regarding the cost savings you expect to realize next year.

That is an annualized number.

Can you kind of talk me through how soon you expect to get there?

Is it kind of all back-ended to the end of the year.

Secondly, Phil, I was wondering if you can discuss a little bit about the impact on currency to the sales line?

Okay.

Uh, let me -- the cost reduction number, we're coming off a year where we did $15 million in cost reductions.

And we're expecting to go into a year where we are going to do 20.

So, we're going to get kind of an ongoing flow of savings that approaches something in the 15 to 20 million range.

So, it's not all back-end loaded.

Because we’re going to have carry-over savings from the strong programs that we implemented in 2003 that are going to carry into 2004 and then probably some of the larger programs in 2004, there is some back-end loading there.

But, $20 million is probably what we expect to have for the full year that would impact the P&L.

And you know, the as we mentioned, a significant piece of that is Teccor, but we have a whole range of other programs, as well.

On the currency side, John, we're -- you know, total impact to the business from a currency perspective -- I don't have the impact on Teccor right in front of me, but it’s pretty minimal on Teccor since Teccor is much more heavily weighted towards North America.

But, on the base business, you know, the impact was a favorable impact of a little over $2 million or about 3% positive impact on our overall sales.

That was -- it was kind of split roughly evenly between electronics and automotive.

Okay.

Thank you very much.

You're welcome.

Final reminder to our audience, if you do have a question, press 1 now.

And we'll go to Victor Holly with RBC Investments.

Good morning.

Couple of thing, this 1.7 million dollar charge was this something that was unexpected, unknown and just popped up or was that part of your expected charges in third quarter?

We were expecting to have some one-time charges in that particular category, but probably not as much as we ended up taking.

So, I think the way to look at it, is there were some -- there probably are some other -- the total 1.7 million dollars for the six months of 2003 is probably similar to what we expected.

But, it kind of came in different places, more ended up being in the non-cash accounting type charges versus some of the other things that we thought might occur.

Okay.

So, this wasn't a function of you know, disclosure during the acquisition process and -- not disclosing something?

No, not at all.

It had to do with accounting -- we made a choice to you know, it makes sense for us to be accounting for Teccor on the same basis we are accounting for the rest of Littelfuse.

So, we had to make a choice whether we chose a -- to the extent we were doing things differently whether we chose a more conservative or more aggressive method.

Our choice was to move towards a more conservative method which was the Littelfuse method, which caused us to have to take some charges through the P&L in the third quarter.

And, these were, again, all non-cash charges that really related to how we were valuing PTE and inventory.

Okay.

And given that it sounds like Teccor is going better than your original expectations and you've got this $5 million contingent payment on the outlying part --

Right.

Do you think you will be paying the full 5 million or a good part of it?

We hope we have to pay it off.

Becauce the sales threshold was quite high.

I think where we are on that, Vic – I mean the sales are trending slightly -- somewhat more positively than what we expected.

Although it's still Even with where we are, it is still not clear we will hit the threshold for that 5 million pay-out.

Is it a binary thing, it's either you pay it or not or does it kind of ramp up?

Binary.

If you were a dollar below, you saved the 5 million?

Right.

Last question on Teccor.

You expected it to be kind of neutral next year.

Right.

Now, because of this are you saying now it will be accretive next year?

Phil Franklin It is likely to be accretive, yes.

We are still trying to get our arms around -- we only had three months of experience with the Company now, so are still trying to get our arms around that.

But, I think your assumption is right that it will probably be neutral to slightly accretive in the first half of the year and almost certainly accretive in the second half of the year.

A lot of that is driven by continuation of the somewhat increased sales we are seeing.

Right.

Okay.

We are seeing some DSL telecom type of demand.

In fact, that’s been ramping up at kind of a nice measured pace since April, May, going back into the earlier Teccor numbers, to the degree Teccor – that telecom comes back strongly, it makes more possible to the degree it takes longer it will come back a little more sluggishly.

Having said that, telecom hopefully will come back if not in 2004, 2005, in our judgment.

Victor Holly Okay.

All right.

Thank you.

You're welcome.

Back to Alexander Paris of Barrington Research.

Maybe I have too many conference calls , just too many today, Just go back --

You are on the right one, though Allen (ph).

Right. (laughter) Just go back to that 20 million cost savings for 2004.

Because you said some of that would be a carry-over of the cost savings in 2003.

Now, have you indeed from your past program added $15 million in annual savings and then you’re going to add another additional $20 million in annual savings?

Or is that just a $5 million --

No, that's not -- look at it as $20 million in programs.

Some of the programs will -- you know, will really happen in the second half of 2004.

So, we'll only get minimal benefit in 2004.

But, at the same time, we have some pretty big programs we did in 2003 that are going to carry over.

So, we have $20 million of programs that are identified and then there’s some of that carries over into 2005 and we get some carry-over from 2003 to 2004.

But, the net impact on the bottom line for 2004 should be in the neighborhood of $20 million.

Does that help?

Yeah.

Yeah.

But, you are saving $35 million when everything is all done and that part of the $20 million is in 2004 from 2003 and then more of the 2004 programs savings go into 2005 and maybe 2006?

Is that it?

If you’re looking at it on a multi-year basis, Alex, I mean the $15 million that we achieved in 2003 were programs that began, some of them began back in 2002.

If you look at it two-plus year timeframe, there are $35 million of cost reduction programs that are hitting the P&L over that several year time frame.

Okay.

Thank you.

And, Mr. Franklin, Mr. Witt, there are no further questions at this time.

I will turn the call back over to you.

Good.

Thank you very much.

We have no more comments.

So, we appreciate your listening in this morning.

That does conclude today's conference call.

I'd like to thank everyone for joining us today.