Littelfuse Inc (LFUS) 2004 Q2 法說會逐字稿

Good day everyone and welcome to the Littelfuse Incorporated Second Quarter 2004 Earnings Results Conference Call.

Today's call is being recorded.

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

Please go ahead sir.

Thank you very much good morning everybody on the call.

This is Howard and with me are Phil Franklin, our Vice President of Operations Support and Chief Financial Officer, as well as Gordon Hunter, our Chief Operating Officer who was introduced to you on our last call.

Welcome to this, our second quarter conference call.

After my brief comments, Phil will cover the second quarter in detail and then Gordon will provide background information on the progress of our 3 SBUs or strategic business units, as well as an update on our latest acquisition of the majority interest in Heinrich Industries AG announced in May.

Gordon is leading the integration efforts in Heinrich and has spent a significant time both in Europe on site as well as hosting the fine people from that company at our company locations here in U.S.

Gordon's leadership of our 3 SBUs and his efforts in the Heinrich are preparing him for taking over leadership of Littelfuse at the end of the year.

This call will last approximately 45 minutes including 15 minutes for question and answers.

Basically, accompanying, you’ll see our release this morning, we were very pleased to share this good information with you on significant increases in sales and earnings as our expected strategy plays out.

As we noted in this morning’s press release, we are seeing continuing strength through the second quarter across all of our geographies and end markets.

Teccor, which we talked to you about last year, last quarter as well as we acquired last July of last year is fully integrated and we are now getting a nice boast not only from added revenue and profit contribution, but also from the added breadth of circuit protection offering.

We now hit the strongest and deeper circuit protection offering in the world allowing us to pursue our solution and sell strategy.

Phil will now talk the specifics of the quarter.

Phil.

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, acquisition and integration risks, commercialization and technological difficulties, capacity and supply constraints, exchange rate fluctuations, 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 in the second quarter of 2004 were 129 million, up 77% from the prior year period which was a Littelfuse record for both quarterly revenue and revenue growth.

Major drivers of this impressive growth were the recent acquisitions of Teccor and Heinrich, continue to strengthen our key electronic end market, solid performance from our automotive business, and the beginnings of a recovery in the electrical market.

All of our business segments had double gains for the quarter with electronics excluding the Heinrich and Teccor, up 13%, automotive up 10% and electrical up 19%.

Teccor continues to perform well with sales growth of over 30% for the quarter.

Heinrich also had a good performance contributing $14.6 million in sales for the sub-period to be approximately $90 million annual run rate.

We continue to hit our cost reduction and profit improvement targets, consolidated operating margin of 12.4% was down sequentially due to the addition of the Heinrich business and $1.3 million in charges related to manufacturing moves and [playing] downsizing activities.

Excluding the Heinrich and restructuring charges, operating margin for the quarter was just a little shy of our 15% operating margin target.

We expect to incur an additional $1.4 million of restructuring charges in the second half of the year mostly in the third quarter.

Diluted earnings per share for the quarter was 46 cents, which is our best performance since the peak quarter of 2000.

Heinrich contributed 1 cent per share for the quarter and should continue to be slightly accretive for the reminder of the year.

After a weak first quarter for cash flow, the second quarter was outstanding as we generated over $10 million of free cash.

Excellent profitability and strong working capital control wire the major drivers.

Capital expenditures are beginning to ramp up as we spent $6.1 million in the second quarter.

This will continue to increase in the second half of the year with the addition of Heinrich and as we add capacity for both our electronics and automotive businesses.

Now I will turn it over to Gordon for some comments on our markets.

Thanks Phil, and now I would like to add a little to the performance of the three business units.

First, our electric business, which is known as POWR-GARD; this is primarily a North American business and is 9% of Littelfuse’s total sales and was up 19% over the prior year second quarter.

In addition to some strong second quarter growth for some yearly targeted customers, the business also benefited from the overall electrical industry, all moving or beginning to move more positive in relation to the prior year.

In the maintenance and repair segment, the MRO segment as we call it, which is 30% of our mix measurably replacement of fuses in to the manufacturing sector continue to show strength after a very strong first quarter.

Despite the move of plants out of North America, overall manufacturing activity in North America is very strong versus the prior year.

Our OEM segment, which is 20% of our electrical business mix, this segment has began to show now a very positive trend and should continue through the balance of '04.

The NEMA Index, which is the National Electrical Manufacturers Association, has reported very strong positive trend versus the prior year as it relates to shipments of industrial products and equipment, which is the equipment into which our fuses are installed.

And that was increasing in the first quarter and [inaudible] for the moment in the second quarter results will have a continuation of this trend.

In the non-residential construction area, which is 50% of our mix, the segment is tracking year-to-date below 2003, however, it has posted two very positive months in April and May by comparison with last year.

And this strong optimism of the second half of the year should be stronger than the first half.

We also increased our list prices during the first and second quarter approximately 7% to 8% and these are helping to offset the increases in our costs for copper and other materials.

The second quarter also marked the launch of our POWR-GARD MRO Plus inventory management program.

This program shows companies how to reduce operating costs through proper fuse selection.

The program analyzes the company’s fuse inventory and then provides detailed reports demonstrating how they can improve the circuit protection, while simultaneously reducing inventory usually by 30% or more.

Littelfuse distributors and sales representatives have then produced the MRO Plus program and have already seen customers converting over the purchasing Littelfuse's products due to this program.

Now, let's move on to the electronic segment.

The electronics business unit had a very strong quarter in all geographies and segments.

Growth of 94% year-over-year was achieved by excellent integration of the Teccor business and strength in all core of Littelfuse’s product lines.

However, the end of the quarter and nearly July has shown a slowdown particularly the North America distribution as inventories have increased.

We have also being restructuring our North America distribution channels to optimize them for solution selling approach.

It is noticeable that book-to-bill ratios have declined recently in Europe and North America recently dropping below 1.0, while Asia has continued to remain robust at levels still above 1.2.

If we look at the end markets, into which our products are sold, this has driven much of our recent top line growth.

The overall electronics market is still experiencing solid double-digit growth with the key driving regions being the U.S. and China and now if you look at some of the segments that are showing robust end-user growth, firstly the cell phone market.

Handset growth forecasts have just been increased to 610 million for 2004 and that's up 17% from the 521 million in 2003.

This by the way is four percentage points higher growth than was forecast just one quarter ago.

The recent challenges for Nokia are the market segment share leader, have been well publicized recently, less well known factors, the rapid increase in the position of the Taiwanese ODMs.

These are the original design and manufacturers in this segment.

These companies are now projecting to manufacture over 73 million phones this year, which will be 13% of worldwide production with the leading players in this segment being companies hold BenQ, Arima, Quanta, Compal, and Lite-On, and these ODMs have been developing very strong relationships with the major OEMs and design it and gaining many design wins.

Littelfuse has continued to focus on developing relationships with these companies for the circuit protection support as design cycles continue to get shorter.

Also, China is emerging as a key country for cell phone manufacturing with projections showing that over a 160 million phones will be made there in 2004.

This is 27% of the world market.

Another [end-use] segment is digital cameras, which are forecast to grow at a 68 million units in 2004, which is up 43% from 2003.

Once again the Taiwanese ODMs and contract manufacturers have forecast to manufacture over 60% of worldwide production in 2004.

The digital still cameras have very short design cycles and a little bit of voltage and over current protection.

This is an excellent example for us about solutions selling approach.

Another segment is computers, computer growth in second quarter was up 13% over a year ago, 43 million units.

Enterprise replacement and upgrades are driving this growth, which is expected to remain about 13% for the remainder of the year.

We still remaining -- we’re still maintaining design contact with those U.S companies still engaged in design activities companies such as Hewlett-Packard, Dell and Apple.

But the real focus in this segment now is also with the Taiwanese ODM manufacturers.

Another segment, which we’ve been focusing on, is the telecom equipment segment.

Growth remains robust in some segments here such as broadband and the new Voice-over-IP equipment.

And here are the example of the combination of the Teccor and Littelfuse [called] product has made us a very attractive segment of what we call companion sales, where we have bringing together all of our products and our total solution provider approach where we really help with design and compliance testing systems.

Other segments such as consumer electronics, robotics and industrial instrumentation are also growing although at much more modest rates.

Trends such as price declines of LCD panel TVs will continue to drive growth in some of these areas.

Overall electronics business is progressing very well with its solution selling approach and its focus on Asia.

This month we celebrated the one-year anniversary of the Teccor acquisition, which has brought us complementary technologies and product to the time in the telecom market is beginning to recover.

We also will be opening a new technical center in Hong Kong this quarter, which will replicate some of the compliance in applications capabilities that we currently have in the Teccor headquarters in Irving, Texas.

Our long-term outlook for this segment is strong, for the near-term North America distribution inventory build and reduced book-to-bills give us some caution for the second half of 2004.

Now, let's move on to our third market which is our automotive market.

Global light vehicle production or car builds are now projected by the JD Powers to grow by 6% in 2004, which is down 2 percentage points from the first quarter projections.

Projections have been decreased in North America and Western Europe which are geographies [where we have our] strongest presence.

In Asia, Eastern Europe, and South America, car builds will continue to be well in the double-digit growth for 2004.

Our revenue growth in automotive of 10% reflect increased fuse [cabin] vehicles, modest growth of our CablePro protection system where we are experiencing good design success which bodes very well for the future.

However, we also had significant additional business in the second quarter from a recall program which will decrease during the course of the second half.

We are now moving into the slower seasonal car build period in North America and Europe which will impact the second half.

Our cost reduction activities continue with the moving of our production from Switzerland right on track.

We are also continuing to selectively invest in global sales and technical support and we will be increasing our R&D spending on new circuit protection opportunities as we develop closer relationships with the leading OEMs and Tier 1 suppliers.

Now, let me conclude with an update on our acquisition of the majority interest in Heinrich Industries, the German-based company also known as the WICKMANN Group. 12 weeks ago when we announced this transaction, we explained that there were three business units which mapped very well into our own three SPUs.

The electrical business, known as EFEN, is focused on the European industrial fuse and switchgear market with particular strength in Germany.

We’ve been working with the EFEN team on cost reduction programs and evaluating new product opportunities and making very good progress.

The electronics business known by the brand name, WICKMANN, fits very well with our electronics SPU which includes the Teccor products.

WICKMANN brings some new products to our business, particularly in the power supply segment, which strengthens the product portfolio of our electronics SPU.

WICKMANN does product development and manufacturing in Britain, Germany, but also operates a plant in Dongguan, China.

Asia focus of this business maps very well the electronics strategy.

Also, the second site in China is very beneficial to us as we continue to build capacity in the region.

Additionally, the combined businesses will become the number one supplier of all the current protection in Europe.

Current performance and outlook for the WICKMANN business is on target as we work on integration plans and synergies.

The WICKMANN team is proving to be a strong addition to our circuit protection capabilities and our total solution provider approach to our customers.

Our third SPU, automotive, maps perfectly well will the Pudenz business which is based in, Dünsen, Germany.

The Pudenz team brings a strong brand name and presence at European automotive OEMs and Tier 1 suppliers, and also an excellent culture of new product development.

The combined Littelfuse and Pudenz product development teams are already evaluating growth opportunities as we invest in our automotive circuit protection solutions strategy.

So, in summary Heinrich businesses are performing as we expected.

We’re very pleased with progress we’re making on integration planning.

We believe we’ve made good progress with an excellent team of dedicated employees and look forward to giving further integration updates in the futures.

I will now hand back to Phil for some closing comments.

Thanks Gordon.

Our market outlook for the reminder of the year is generally positive.

As Gordon mentioned, we have seen some recent softness in some of our markets, but contrary to some recent views in the business press, we do not believe that the economic recovery is over.

Our end markets are still fundamentally healthy and we feel confident that Littelfuse is well positioned from both cost and market perspective.

This said, we believe third quarter sales excluding Heinrich will be in the neighborhood 3-4% lower than they were in the second quarter reflecting seasonality in the automotive business and slowing order trends in the electronics business in North America and Europe.

Excluding Heinrich, margins for the third quarter should be similar to the second quarter.

We expect Heinrich to add approximately $22 million in sales for the quarter and to be slightly accretive to earnings, most likely in the range of 1-2 cents per share.

That concludes our prepared remarks and we would now like to open it up for question.

Thank you Mr. Franklin.

Ladies and gentlemen, today's question-and-answer session will be conducted electronically.

If you would like to ask a question you may do so by pressing the "*" key followed by the digit "1" on your touchtone phone.

If you are using a speaker phone today, please disengage your mute function to allow your signal to reach our equipment.

We will take as many questions as time permits and in the order that you signal.

Again, "*" "1" for questions.

We will pause just a moment to assemble the roster.

We'll go first today to Alexander Paris at Barrington Research Associates.

Good morning, great quarter.

Thanks Alex, I appreciate your support.

This is kind of a big question, but it's one that's I am passing over in terms of your growth, I am just wondering if there has been a see change in your overall outlook for a long-term growth.

I'm just looking at things like, you know, electronics is much bigger for your business and is a faster growing business.

I would presume with Heinrich now you can go full out after the electrical equipment business -- in electrical business in Europe where you haven't really been very much and also a chance to gain market share in the autos in Europe.

So, I was wondering roughly what would had been your growth assumptions, you know, through the cycle in the past and what would you guess -- what have you added to it?

In other words, are you at a new higher growth plan, is kind of what I am getting at.

I have got that feeling that it's not a cyclical bounce, but something more than that.

Let me -- this is Howard, Alex, let me start and then let the other follows join in.

Certainly you heard Gordon, Phil and all those relates to solution and sell strategy and basically I thinks the foundation of what you see us going in all of our markets, most heavily electronic, somewhat beginning in the auto business is to offer up a broadened array of products that can allow us in these marketplaces to solve customers' problems as opposed to just selling parts.

Internally, with the Gordon's comments on the original design manufacturers, we certainly see this happening with cell phones, computers and the devices that he mentioned.

So what -- I think we're beginning to see -- again, our math is clearly enhanced by the acquisitions, but these are acquisitions were purposeful with Teccor to add the silicon protection products and now frankly a Heinrich in Germany adding some broadened customer base as well as the additional electronic fuse line to our electronic offerings.

So, one, we have reset the agenda going back of couple of years and we are seeing that and also beginning to payout in -- we are beginning to see that payout in revenue.

Gordon, do you want to add to that.

Yeah, I think that the fact that we have what we call companion sales as we bring our products together that the effect of the Teccor products and eventually the Heinrich products, I think we are seeing a bit of a lift as we have customers that we had for one product lines that we have now have for several products.

And I think we start receive those customers working with us for much more product design.

So I think that we are seeing a period as we bring these product together that we get a certain lift from these companion sales.

Does that help Alex?

So, I guess, answering the question, you would expect whatever your growth assumption was in the past longer term, it’s somewhat higher now?

No, I think it’s a fair statement and hope -- you should see it growing somewhat faster than the markets we're, you know, we are serving, we are gaining share, we are becoming much more valuable to our customer base.

Just to summarize all that, I think we -- clearly we are -- we do have more electronics exposure than we did before, which I think gives us a little bit of higher growth profile.

We are clearly benefiting from the cyclical balance right now, which is the part of the reason the numbers are so strong, but we also believe that we are growing somewhat faster than the market as both Howard and Gordon said and I think with the thing that we are going, particularly in electronics, we think we could continue to do a little better than market growth rates.

So I think the answer to your question is that yes, II think we fundamentally have changed, to some extent, the overall growth profile at Littelfuse.

Well, the electronics growth -- industry -- the end market is faster than your combined industry growth in electrical and autos and then on top of that you can [begin] a market share.

So bringing down the total Littelfuse sales growth should be significantly higher then?

I think it's reasonable to expect a higher growth rate than what we have done historically for the two reasons you just mentioned.

Yeah, there is -- I asked this -- and I think you probably have a notion among investors that you -- reasonably steady growth and if the stock price moves up too much then it's overvalued, but the missing ingredient is [made] that your long-term growth assumptions should also be kicked up higher.

That’s kind of the answer I was looking for, but -- thank you very much.

We will take our next question from John Franzreb of Sidoty and Company.

Good morning, gentlemen.

Hi, John.

My first question is regarding the margin guidance that you gave out.

You said it would be higher and that excludes the impact of Heinrich.

Is that correct?

That it would higher, we said it was higher in the second quarter excluding Heinrich and excluding restructuring charges.

And in the third quarter your expectations are?

What we said was that we would expect similar margins in the third quarter to the second quarter.

Okay.

Excluding Heinrich again.

Again excluding.

Okay, so that's just you are going to get some benefit despite having the seasonality impact of the weak auto sales in the period?

That’s basically, yeah, I think with the positive margin trends that we are seeing because of some of the cost reductions that we implemented, we think that that positive trend will basically offset the margin impact of somewhat lower volumes in Q3 primarily on the automotive side.

Great, great.

Thanks that helped.

Now, my understanding originally was that EFEN wasn’t a clean fit.

Has there been a change in what you think about EFEN or may be it's still not viewed as a core Littelfuse operation?

Yeah, this is Gordon.

Let me answer that.

I think it's true, but it's not as not as clean fit as automotive and electronics, it's not a global business.

Electrical business tends to be much more regional.

So the products that EFEN has fit the German market and somewhat the rest of Europe market, it's much more in the switchgear business than the direct fuse business.

So although it has a lot of similarities to our powerguard business it's true it's not as clean a fit.

We don’t get the global synergies that we clearly get from automotive and electronics where the products can be sold, sent it around the world and we get some new customers and obvious synergies.

So we are evaluating the EFEN business really trying to understand those synergies much more.

So it is different from the other two businesses in terms of how clean it fits.

I don’t think our view of the business has changed over the last month or so, John.

Will you be throwing money into the business or you are going to continue to evaluate it?

We will continue to evaluate it.

We haven’t made those decisions yet.

Okay and the -- what is the capital expenditure budget for all of '04?

Well, we had talked about a number approaching $25 million worth of business prior to the Heinrich acquisition.

I think for the base business we're obviously running quite a bit below that number through the first half, as I said my comments, the base business CapEx will ramp up in the second half, so we will see a number up in the 20 plus million range probably in the neighborhood of 22 million or for the base business and then may be another 5 or 6 million or so for Heinrich, so I would guess something in the high 20s could be the total CapEx budget for the year.

Great, and could you just provide a little bit more color on your comments about inventories at the customer level, you said there’s some modest build of slowing deposits and inventory concerns, could you kind of elaborate a little bit about that comment.

Well first of all that’s was specific to the electronics business and specific to North America.

It is North America distribution related and while we show of a very strong growth and very positive booked bills in the first quarter in North America distribution, we have seen that turned down in the last two months and start to see that they have more inventory and the book-to-bill is decreasing there.

You said below 1, are we talking about a 0.95 or 0.85.

More like 0.95.

Okay.

Yeah I might add to that, John one of other things is that -- they were doing in the electronic distribution mainly in the U.S. and this again relates back to our solutions self strategy.

As our teams have gone out and looked at our distribution structure and we’ve really decided to terminate some distributors and bring some new ones on related to their ability to tactically sell the broadened array products.

So that that’s process was completed in June and July and we've terminated certain distributors and bring certain on and that will in the third quarter come add some discontinuity to it, but there will be a shifting inventory, this will happen in the July-August timeframe so that can be impacting short-term book-to-bill as well.

Great thank you, that's very helpful.

That's all of now

Thanks John

And we'll take our next question from Jeff Rosenberg at William Blair.

Good morning

Hey Jeff.

Let's see, first I have a couple of Heinrich questions, Phil could you tell what the operating margin was for Heinrich in the quarter or may be [inaudible] full quarter this quarter what sort of level we should expect.

We had indicated that you know this business has been running in the 3-5% range and we are still in that general range in terms of EBIT margins.

And I don't expect a material change in that margin until we get into '05 where we'll start to see benefits of the cost reduction activities that we are beginning to undertake.

Okay and kind of following on that first on the first on the [inaudible] of this, you said in the press release that you have completed the tender and the percentage of ownership is up but it's not at a 100%, I mean what's the process now to finally complete the acquisition and the related question is, as it relates to integration is how -- have you been able to move full speed ahead with your integration plans our your still somewhat in a planning mode as you wait till you have a 100% control.

We certainly moved full speed ahead with our planning we have not -- really executed anything to really bring the businesses more tightly together, but you have the two teams working with each other and they making joint customer call etc. so things are -- there really isn't anything that we would be doing at this point that would -- that we are being inhibited from doing, having said that you know, we are looking at our options right now, as far as our share ownership and deciding what's the best way to go going forward, we haven't made any decision on that quite yet.

We'll keep you informed as we do.

Okay.

And then inventories in the quarter were up some, how much of that was due to Heinrich?

It really -- I think is essentially all of that was due to Heinrich.

I mean inventories in the base business, our turns went up for the quarter and I think our actual inventories were pretty flat for the quarter.

Okay.

Great, and then one other question, or a different note; the discussions of the inventory level with customers one of the areas that the lot of people have cited a fair amount of inventory is in the handset market and you know some other challenge you talked about Gordon, ODMs in the domestic China market though what's your sense of how your business is -- how your order what have kept up in cell phones?

I think, and mainly good.

It has been fairly steady in Asia, I think that our you know, concerns have been more in North America distribution area.

Okay.

So other way, -- and how about sell-through in distribution, I mean, how big has your sell through been, steady and this is just an adjustment or has that turned down also.

Again I think that’s different in North America, and there is more concern in North America they're being a little slow, you know with distribution, I think in Asia it goes at the same speed very fast -- much faster cycle there.

Okay.

Thanks a lot.

Hey, Jeff, if you look at the cash flow statement regarding your inventory question, you can see that it's inventory were actually a net contributor to cash third for the quarter.

Okay.

So you have got the additional there is just because and of the investment -- is that the cash flow for the inventory goes into the purchase price.

Right.

Okay.

That's a clean number on Littlefuse on the --

Yes.

[inaudible] such a great.

Okay, thanks.

Welcome.

We'll go next to Reik Read at Robert Baird.

Hey, good morning.

Hi, Reik.

Can you guys talk a little bit more about the concerns that you have out there and I guess you know not just the cell phone inventory issue, but you know we have seen some concerns expressed in some of the consumer areas and I know that’s been an area that today’s been reasonably good for you guys is there something there that makes it look like the growth will continue to decelerate.

Well I think that you know part of our growth certainly comes from volume growth and certainly if we look at the growth percentages in cell phone’s going up, it has that history of growing very faster then flattening out and I think we are seeing some you know new features and new phones and then the industry is going through a growth spurts, but you know, I think projections are longer though and so maybe that growth rate will not continue.

We are also seeing great growth in digital cameras and computer rebounding to 13%, so we are somewhat susceptible to those macro numbers how well they grow.

What we are trying to do to offset that is making sure that we are designed in on all manufacturers irrespective of which manufacturer wins the business and also that we can bring more content to those.

But yes, it’s true one of the very fundamental things driving our business is the unit volume growth in all of these products, and you know as prices come down as they have in digital cameras and the volumes taken off and as we see for example price points coming down in LCD TV and we expect to see very rapid growth in LCD TVs.

As long as we can increase our circuit protection content and make sure we cover all of the manufacturers of these, so irrespective of who wins market share, we still think we can grow quite a bit faster than the unit volume market growth.

What about set-top boxes right now is that something that it a little bit of concern?

And I understand what you are saying about you know, long-term kind set-top with putting in additional content, but I guess what I'm driving at is, there just seems to be some near-term disruptions here that you know, might create a head-win for you?

I think that we try to cover all of these segments in set-top boxes, and one that gives us opportunities for content both overvoltage and overcurrent.

And as that you know, that trend continues upwards but I think that you know, there is so many different segments I think inevitably some of these were at set-boxes or cell phones will have some slowdown and I think that you know, we try to make sure we are covered across in our segments but it’s does have a huge impact on us in the electronics business.

Okay.

And then I just -- a couple of follow up question on the solution side of things, can you talk about in what specific vertical markets you guys might be seeing the most traction and talk about the impact that that's having on pricing for you?

Well, I think that the solutions selling is one of for example, bringing together let's take the telecom market as one segment where maybe in the areas that are growing in that broadband area, DSL and cable modems, voice over IP equipment, we start to see that we can really bring the solutions sale by bringing the Teccor capability and the design-in capability and compliance testing of overvoltage.

We are also able to companion sell along with that the overcurrent devices that go there.

So that is a good vertical market example, where there solution selling works very well.

You know, I think that you know, our feeling is that the solution sale are bringing together broader products and more application support also helps to offset, any kind of real price declines in that area.

So, that -- I mean that is I guess what I'm trying to take away from that is that something where you are seeing some of that solution selling offset what is traditional pricing pressure?

Exactly.

I mean, one of the fundamental reasons for the broadest product portfolio and the technical support is trying to bring more of a total solution and broad range of products in circuit protection overall [as we] have offsetting just being picked up by one particular product line by someone who might be able to make that one particular product and be prepared to sell it at a lower price than us.

I think by having a complete solution and a broad range of products, we do believe that does offset our overall price declines.

Okay.

Great.

Thank you much.

Let me just add something on the price erosion, [I think] this is hard evidence at this in point, but you heard us talk in the past, recent months of 6 or 7% types of price erosion in electronics, we are seeing that at, you know, 5% or less now and it's difficult to connect all of the [data], but I think what Gordon was talking about is certainly we are seeing less erosion in the marketplace generally and we are setting ourselves up to be less vulnerable to commodity pricing.

Great.

Thank you.

We will take our next question from Greg Halter at Great Lakes Review.

Hi.

Good morning guys and great results.

You've commented on the capacity utilization in the various segments before.

Can you go through that exercise again with us?

Yes, in our electronics business, we are running -- in our core Littelfuse products at about 87% and in the Teccor business it's about 73% and then in our automotive business we are running at about 82% right now.

73% of the Teccor will be in the fab presumably and probably a little bit higher than that on the back end, I suspect.

Actually 73% on a [inaudible] Teccor facility.

Yeah, in those factories, by the way, again those are additionally high operating levels.

In automotive and electronics, we are adding work cells; and CapEx, Phil talked about earlier, are more heavily in our automotive and our electronic areas.

And the capacity that you talk about the electronic and automotive product side, when do you expect that to be completed and what kind of additions will that give you?

Basically when we’re adding capacity, it's in discrete work cells, so it's not overnight taking if from 80% down to 70 by some large chunk of automations.

So we really phase it in as we need it, almost month to month and by the way, it's a benefit we don’t have to put in a ton of quick capacity or pull a tone of capacity out.

Okay and on the last earnings call, you talked about price increases in the auto area as well as the electrical and just wondering what kind of pushback you are having, if any, or what kind of success you had?

Yeah I think the price increases was specific to the electrical area.

We did have less price increases of approximately 7-8 cents, we had two price increases during the year, first half of the year, and I think that was generally the norm in the electrical industry as commodity prices and raw material are higher content of those products and we saw couple of prices going up quiet lot in the first quarter.

So that industry in general had price increases that were generally accepted.

Great, thank you.

We will take our next question from Victor Hawley at RCB Investment Management.

Good morning.

I was curious about your balance sheet structure of the debt.

I noticed you took out 32 million of long-term debt for the acquisition, but you classified it as current.

So, I just wondering where, I know you guys like to be conservatively financed for -- to take advantage of acquisitions and downturns and things like that, but where do you see yourself long-term in terms of your debt structure?

We -- the borrowing that we did to do the Teccor or to do the Heinrich acquisition, you know, we used some cash for that and then we drew down on our revolver for the reminder and -- I mean right now the expectation is that we would continue to pay that debt down and at the same time as we get these acquisitions under our belt, we are going to looking for future acquisition opportunities as well.

So, I would expect over the nest 6-12 months most likely we won't be doing any additional acquisitions, we will continue to generate free cash and we would see our net debt continue to decline from the current levels.

But do you have a target for a debt structure?

No, we don't have a target.

I think that certainly we -- as we saw during the downturn in 2001-2002, in our business there are some advantages of not getting too leveraged and it allowed us to take advantage of some very good acquisition opportunities during the downturn, particularly the Teccor acquisition and it allowed us to invest in the right parts of our business during that downturn.

So, I think our general bias is to not get the business too highly leveraged, but we don't have a target debt to cap ration or anything like that.

I think it will depend on the timing of acquisition opportunities and things like and the business will continue to generate free cash, it will give us plenty of opportunity to acquire things without getting the business unduly levered.

Okay.

And then how do you balance that with stock buybacks?

I know you want to pay down this acquisitions debt, but when stocks a dip, how do you balance between -- we are still very lowly levered while we buy shares back versus paying down the debt, how do you come to that, what's the trade-off?

Well.

I think, you know, obviously in the past from time to time we have bought back stock, we haven't done that recently and I think you can read that to be indicative that, you know, we see -- still see some pretty good acquisition opportunities out there and we feel that the best use of our cash -- our free cash ultimately is still some key acquisitions that will help us further lever our position in the circuit protection arena.

All right.

Thank you, very much.

We'll take our next question now from Mike Hamilton of RBS Dain Rauscher.

Good morning

Hi.

Couple of areas, one you talked at the time of the Heinrich acquisitions about some of the restructuring and transition facility going on there.

Can you give a little update on what you are seeing and thinking and kind of what you have found as you have gotten more involved?

Yeah.

I think some of the things that we talked about were that they had some activities going on before we purchased time Heinrich, the biggest one being a move of a good part of their electronics manufacturing from Germany to China, and you know those that projects proceeds on time, target, and they are continuing to move things that direction I mean obviously we are recording some cost related to that, that but they will be getting some significant benefit from that move.

And they have -- there is some other activities that they had going on and we're continuing on, but other than that.

We put together our integration teams and are beginning to add some pretty good plans going forward, but we have really haven’t begun to you know in a material way execute on those plans yet.

Just as a background comment to you know, Teccor was acquired last July and really as we have indicated, it is fully integrated within a, you know, actually less then time period.

The whole activity with Heinrich is going to be a multi-year program and again it's a little more complex because it does marry up to each of our three business units to move strongly as Gordon indicated earlier.

Just a final comment on that though, the other party request on is what have we seen as gotten in and now that we are into a few months versus when we first bought the company I think really the all the reasons that we made this acquisition, we still feel very good about and the initial planning activities, and the [inaudible] of the teams, respective teams has been very good, and we feel at least as positive if not more positive two months in to it as we did when we first made the acquisition.

Yeah, looks like it is another nice integration underway.

We feel that way though again more, -- it is going to take more time to complete it.

Can we switch gears and just get a little bit of your thinking with the combinations that have gone on how your approaching R&D and how we should think about that?

Yeah.

You know, we believe that we an in fact one the things just to relate that, Heinrich, I think they had a culture of spending a little bit more on R&D, both in the electronics area but also in the automotive area, and I think they worked little closer with some of the OEMs to develop their new products.

So we are looking to continue to focus on increasing our organic growth as well as looking for acquisitions and I think that means and as part of the solution cell is getting closer to the OEM; whether it's in the electronics or the automotive area; we're really working with them on new architectures, for example, in [class] of the future, in hybrid vehicles, for example, there are new architectures, new electrical demands, we want to work with this customers much more and understand what they need develop our new products based on their future plans.

So rather than just be throwing money at this immediately, it's going to be a gradual ramp up as we start to work closer with OEMs, bringing the help of the Heinrich people and really start working much closer for long-term programs and then developing our R&D resources here.

So we will see a gradual increasing in R&D, it's not going to be one big step function, but I think that it will take it, you know, up a few points somewhere it has been historically.

We are actually beyond the end of our 45 minute clock, we appreciate your questions this morning and again, if you got some thing we haven't been able to answer on the phone, ring us up.

We will appreciate you ownership of the stock and your participation this morning.

Ladies and gentlemen, this will conclude our conference call for today.

We do appreciate your participation and we may now please disconnect.