Littelfuse Inc (LFUS) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to this Littelfuse, Inc., First Quarter 2008 Conference Call.

Today's call is being recorded.

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

Gordon Hunter.

Please go ahead, sir.

(OPERATOR INSTRUCTIONS)

Thank you.

Good morning and welcome to the Littelfuse First Quarter 2008 Conference Call.

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

As you saw in the news release, our first quarter sales of $133.7 million increased 1% over the first quarter of last year and adjusted diluted earnings per share were $0.36 which is at the higher end of our guidance.

Our automotive business had a record quarter.

Our power guard business had a record first quarter, and our electronics business order rate has improved.

At this point, I'd like to turn the call over to Phil Franklin who will gave the Safe Harbor Statement and a brief summary of our press release.

Phil?

Thanks, Gordon.

Before we proceed let me remind everyone that comments made during this call include forward looking statements.

These statements are subject to various risks and uncertainties, and as a result, actual results may differ materially from those expressed in forward looking statements.

A discussion of these risk factors may be found in the quarterly and annual reports filed with the SEC.

Overall, as Gordon said, the first quarter played out about as we expected.

The top line grew modestly compared to last year and earnings were consistent with our guidance.

The automotive and electrical businesses, which both carried strong momentum into the year, continued to perform well with growth of 8% and 5% respectively.

The electronics business had a slow start to the year with sales ending the quarter down 1% from the prior year quarter.

With lunar new year, however, in early February, electronics orders have been strong and sales have been increasing.

Earnings per share, excluding one time charges related primarily to the recently announced closure of the Matamoros, Mexico plant, were $0.36 for the quarter, compared to guidance of $0.32 to $0.37.

Capital expenditures for the quarter increased to $11.5 million due to investment, and facilities, and equipment mostly related to the manufacturing transfers.

Cash flow from operating activities was negative $1.0 million for the first quarter compared to positive $1.0 million for the prior year quarter.

The lower cash flow result was due primarily to increases in inventory and accounts receivable.

Inventory increases were planned to support the manufacturing transfers and to move away from air freight to surface shipments.

The accounts receivable increase was, in part, due to increasing sales at the end of the quarter.

I will now pass it back to Gordon who will provide more color on our performance for the quarter and review the current state of our markets.

Thanks, Phil.

I'll start by providing some additional comments on each business unit and then update you on the major cost reduction initiatives and the other highlights.

I'll start with electronics, our largest business unit.

Electronics sales were $85 million in the first quarter.

This represents a decrease from first quarter of last year of about 1% and reflects a slow start to the year.

However, we saw improvement through the quarter and the book to bill ratio for the electronics business was 1.11 to 1 at the end of the first quarter, up from .96 to 1 at the end of 2007, indicating a stronger second quarter is on the horizon.

We continue to see strong demand during the quarter in the flat panel, HDTV market for our nano fuses where the control circuit requires its unique power handlings and small form factor features.

We're also experiencing strong ESD product demand related to the flat panel TV market for protection of the HDMI interface that connects the HDTV display to the DVD player.

This is consistent with a report from DIGITIMES in Taiwan that indicates global, large size LCD panel shipments grew 48% year-over-year in the first quarter.

The notebook PC market also continues to be strong, providing opportunities for several of our products, including nano fuses to protect against faults that occur at the power supply, thin film fuse for the inverter circuit, polymer PTC products that protect against overcurrent faults on the USB ports and ESD suppressors at the USB ports.

According to Gardner, unit growth of this market increased 12.3% in the first quarter of 2008 compared to the first quarter last year.

We also saw an increase in sales of our diode arrays in the first quarter due to strength in the medical sector where personal test and diagnostic electronics are the major growth segment for us.

Each electronics interconnect point, or human interface point, represents an electrostatic discharge protection need.

Turning to examples of design win progress in the quarter, we won a contract for our 1206 nano fuse, our new Cisco router application during the quarter.

Our nano fuse protects the power supply to the router card.

This project will be produced by Foxconn and we expect revenues to begin around the end of Q3 or the beginning of Q4.

We designed our 0402 thin film fuse on a high volume SD memory card application at a major Japanese OEM and we'll begin to ship this product this quarter.

We also added multiple new contracts for our TVS diodes at several leading consumer electronics companies, including Humax for a set top box, and Sharp, and Haier.

Our new Haier power diode product is now shipping to key 3G mobile base station producers, Nokia and ZTE in China.

We also made good progress during the quarter on our new product initiatives with several launches that we expect to begin contributing to sales in the second half of the year.

New products launched included our enhanced EV Thyristor line designed for high stress and high reliability applications.

We expect to begin selling these into white goods, industrial and lighting applications during the latter half of the year.

Within this product line, we're already beginning to ship our new multipulse product in the European industrial lighting applications.

We've also launched our new SP03 series silicon protection arrays for overvoltage protection of Ethernet data lines and interface circuits.

These devices are for enhanced search capability for intrabuilding applications, which are a growing need in networking protection.

In our silicon protection array business, we've also launched our SP1000 series for general purpose ESD protection in consumer electronics.

We expect to report design wins on this new series in coming quarters.

Our new SP3000 series products bring low capacitance capability to the market for use in the latest voiceover IP equipment designs.

These applications require the precise voltage clamping characteristics or our silicon protection array technology combined with low capacitance to support broadband signals with no interference by the device.

In our SIDACtor product line, we have launched our new SDP series for broadband DSL equipment.

We've seen interest in these new SIDACtor products from a number of large OEMs and have already received a sample order from two key DSL equipment players.

To wrap up the electronics discussion, we're encouraged by the first quarter order rates, the second quarter shipment rates, and the sequential sales growth.

However, we remain cautious about distributor inventory levels in the second half of the year, and our limited visibility to end market demand.

While we feel that inventories at key distributors are at appropriate levels, we are watchful for signs of change in end market demand and for changes in inventory positions globally.

Moving on to automotive, which accounts for about 25% of total Littelfuse sales, we are very pleased with the continuing momentum in this business.

Global automotive sales were $36 million for the first quarter, up 8% over the first quarter of last year.

Our global sales increase dramatically outpaced global passenger car production, which was flat for the quarter as we continue to build momentum with new products, design wins, and increased penetration of the off road, truck, and bus segments.

With flat global passenger car builds, it's obvious that the automotive business cannot rely on growth in car production for increased sales.

The North American passenger car market is at its worst in ten years with production expected to be down approximately 5% compared to 2007, and this reduction could become larger as the year progresses.

European car sales and car builds are coming off a strong 2007, but market projections still only indicate modest growth of about 2% in 2008.

Asia continues to be the main driver in the overall passenger car market with 13% growth expected in China this year, and 18% growth projected for India.

In this environment, our strategy is to grow by increasing our presence in Asia, especially in emerging geographies like China and India where this is significant growth potential.

We're also continuing to pursue design in opportunities with the OEM segment, as well as new product development, particularly the off road, truck, and bus segment.

The automotive business continued to make inroads into this segment in the first quarter.

Sales of both our Megafuse and CablePro products increased in the OTB segment in Europe and North America.

We continue to build our sales force in this segment, adding new independent sales reps in both North America and Asia during the quarter.

Contributing to our strong sales performance, our CablePro Fuse for high current applications continues to grow across multiple regions and markets, including China, Australia, and North America.

Sales of our Smart Glow Fuses, which use LED technology to indicate a blown fuse, increased in the North America aftermarket, and we plan to launch this product line in the European aftermarket later this year.

On the new product development front, there are currently six Master Fuse programs that will launch between now and the second quarter of 2009.

So we expect Master Fuse to continue to contribute to sales going forward well into 2009.

Another new product is our recently launched flexible electric junction box for the off road, truck, and bus segment.

This product has standard components that can be configured for each customer's specific needs.

For the year we expect to continue to significantly outperform the increase in global passenger car build, which is forecast at approximately 2%.

This is based on the continued growth of existing products, new product launches, and design wins, as well as increasing our presence in the growing Asia market.

To conclude, the automotive business continues to perform well and we are making good progress on our strategies to build the business for the long term.

Moving on to the Power Guard electrical business, sales were a little under $13 million in the first quarter of 2008, a 5% increase and a new record for the first quarter.

A number of factors contributed to the higher sales.

Price increases accounted for about 1% point of the sales increase.

Additional contributes to growth came from the unit's key focus areas, engineering custom products for OEMs and expanding its hazard assessment consulting services.

While there is a lot of positive activity in this business, we are seeing a slow down in the non-residential construction and industrial manufacturing segments, which is translating into more conservative purchasing at the distribution level.

Indications are we will continue to see a slowing in both of these market segments with the non-residential construction market impacted the most by the tightened credit environment.

We're countering the slowdown of the market with focus on the OEM segment and growth in a selling services initiative.

The first quarter was especially active on the OEM front for Power Guard.

Many opportunities that have been in the pipeline for some time are coming to fruition, resulting in almost $1 million in potential annual new business.

The opportunities came from a broad range of products and applications.

First quarter sales benefited from contracts in the solar, traffic lighting, telecom, and air conditioning industries.

New wins during the quarter were for applications in the white goods, solar cell, and lighting areas.

We also saw a lot of activity on the Power Guard services initiative where we perform electrical training and provide hazard assessment consulting services.

There continues to be a high level of interest from our customers for this service, which compliments our product offering.

Looking at new product development, in January we launched a complete new line of custom engineered coordination panels.

This product assists electrical system designers and electrical contractors in meeting mandatory changes in the National Electric Code.

The panels allow for hundreds of combinations of fuses and breakers within a panel design with an easy to use, online selector tool that enables customers to easily configure the products.

End markets for the new panels include schools, healthcare facilities, lodging, and major commercial developments.

Also during the quarter, our electrical business acquired Shock Block, a Dallas, Texas based company with approximately $2 million in annual sales.

The company's products, which have been sold under the KTech brand include a line of ground fault relays and industrial ground fault circuit interrupters that are designed to protect workers from electrical shocks.

We've largely completed the integration and the products are being well received in the field.

In summary, the outlook for our electrical business is good.

Barring any additional, unexpected slowdown in the U.S.

economy, we believe we will continue to grow the Power Guard business in 2008.

That brings us to an update on our cost reduction initiatives.

As we've discussed in prior quarters, the objective is to leverage our fixed costs over fewer plants located in lower cost countries that are close to our customer's facilities.

To achieve this, we are consolidating most of our operations into sites in Mexico and Asia, and working to implement lean manufacturing practices in all of our operations.

During the quarter we announced plans to transfer our semiconductor assembly and test operations from Matamoros, Mexico to China over the next two years.

Much of this manufacturing will be consolidated into our existing facility in Wuxi.

This move will locate our primary assembly and test operations next to our new wafer fab, which is under construction in Wuxi.

The new fab building is progressing and we plan to start wafer process validation in the latter half of this year.

Wafer production will begin transferring from our Irving, Texas location in 2009.

Our other plant moves also remain on track.

Our expanded thin film production facility in the Philippines is now complete and product validations are underway.

Final electronics production will be transferred into this location from our Des Plains, Illinois facility by early 2009.

We've also begun the process of transferring automotive production from Des Plaines to our newly completed facility in Piedras Negras, Mexico.

The expansion of our varistors production facility in Dongwan, China is nearly complete and the transfer or our island production to this location is expected to be completed in the third quarter of this year.

When all of the plant moves are completed, we will have reduced our number of manufacturing facilities from 14 to 7.

During the quarter, we also announced the location of our new corporate headquarters.

We will move from the current location in Des Plaines to a nearby office plaza in Northwest Chicago.

We expect that move to take place early next year.

Although these transfer activities have resulted in additional costs to the P&L in the short term, we remain focused on and committed to the actions necessary to reduce our cost structure.

Executing on these major projects is critical in achieving our objective to improve our operating margin to 15% of sales by the end of 2009.

We continue to dedicate the necessary resources to achieve this goal with a strong emphasis on not disrupting customer shipments.

In many cases, we will perform simultaneous manufacturing in two locations to ensure delivery is on schedule.

In summary, the first quarter of 2008 indicates that for the most part the area is off to a good start.

On the positive side, we had record performance in our automotive and power guard businesses, and with its improved book to bill ratio, we expect a strong second quarter for the electronics business.

We're also making good headway on our cost reduction initiatives and strategic growth objectives.

However, we're also dealing with uncertainty surrounding the U.S.

economy in all of our businesses.

So I'd say we are cautiously optimistic about the remainder of the year.

As we've said before, we cannot control the economy but we can control our business.

For us, 2008 is a year of continuing to execute on our long term cost reduction, our new product development, and our geographical expansion initiatives.

As a result, I'll believe we'll come out of the year a stronger, healthier company that is positioned to be a stronger global competitor in the future.

I'll now turn the call back to Phil who will provide additional comments on our guidance for the second quarter, and then we'll open the call up for questions.

Thanks, Gordon.

As we said in the press release, our guidance for the second quarter is as follows.

Sales for the second quarter are expected to be in the range of $142 to $147 million, which represents 10% to 14% growth over the second quarter of 2007, and 6% to 10% sequential growth.

Diluted earnings per share for the second quarter are expected to be in the range of $0.42 to $0.48.

We have not changed our previous guidance for the year 2008, which was sales growth of 5% to 7% over 2007 and diluted earnings per share of $1.80 to $1.90.

Also as previously stated, it will be a challenging year for free cash flow.

We expect to invest approximately $45 million in capital expenditures net of asset sales and make severance payments of approximately $22 million.

Our pre-cash flow is expected to turn positive in the back half of the year, which is expected to be close to break even for the full year.

This concludes our prepared remarks.

Now, we'd like to open it up to questions.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to assemble the roster.

We will take the first question from Ingrid Aja with Merrill Lynch.

Good morning.

I was just wondering if you could quantify, how much of the Q2 sales outlook is due to seasonality versus new design wins?

Ingrid, certainly the typical seasonal-- we typically have a seasonal increase, sequential increase in the second quarter that would be probably closer to about a 5% increase.

So some of the increment over that would be due to new design wins.

I think in addition it's just, we had a relatively weak first quarter for sales in the electronics business, and we're starting to see a much better order flow, as we talked about, for Q2.

Some of that's related to new design wins.

I think some of it's related to just improving fundamentals.

Okay, great, and then, I mean are you able to quantify what increase you're expecting from design wins in the rest of the year?

I know you highlighted some new products.

Is there any way to quantify that?

We haven't really quantified it because it's a little bit difficult, because some of them are new design wins that bring us incremental sales.

Some of them are new products that are replacing older products.

But I think we've talked about it in electronics them being mostly in the back half of the year, but we haven't really quantified that number.

But I think certainly if you look at our backend loaded sales guidance, the improvement in the second half is largely due to the design wins both in electronics and in the automotive business as well.

Okay, great, and then I was just wondering, has there been any change to your cost saving estimate that you're expecting?

I guess you're going to start to see that the back half of the year and I just wanted to know if you had any update on that.

No, as Gordon mentioned we're very much on track on our cost programs.

We're hitting our dates and the savings numbers are still the same as we'd given previously.

Okay, great, and then just one last thing.

On the auto sales, is there any way to break down those auto sales for regions?

You mentioned that you were seeing headwinds in North America, that Europe is still progressing.

I was just trying to get an idea, I guess, of how the penetration in the Asian market, how that's growing.

Well, I think we haven't really talked about specifically those numbers, but the Asian market is clearly growing and in double digits.

The North American OEM market has been very week as you would expect, but we made that up in some other areas, in some of the off road, truck, and bus penetration, and we also have some new products that are offsetting some of that as well.

But I really can't get any more specific than that.

Fair enough.

Thank you very much.

We will now move to the next question.

That will come from Reik Read with Robert Baird and Company.

Hi, good morning.

Can you guys, just going back to maybe the last series of questions, with respect to the improved bookings, Phil, you talked about improving fundamentals.

Can you give a little bit more detail on what you mean by that?

I mean you guys had talked about the lunar new year going away, so it sounds like that's one thing, and then some new products coming online.

But what are the behind the scenes fundamentals that get you guys encouraged at this point?

I wouldn't say that we're thinking that there's going to be any big ramp up in the market here.

I think a lot of it is, I mean the sequential growth relates, I think, as much to the weak start to the year for electronics as it does to any particular or unusual strength in the second quarter.

And I think the second quarter is kind of getting us up to levels that were consistent to where we thought we would be at this time when we originally set our plan for the year.

I don't think it's anything more or less than that.

Can you give us a sense, if you kind of look at the portion of your business that's consumer related, I mean obviously there's some risks there.

Can you talk a little bit about level of demand, inventory, design ins that you're getting that help offset that potential weakness?

Reik, I think that's why we're maybe being cautious in our statements about the second half of the year related to consumer electronics.

But I think like a lot of companies that have announced recently, so far we haven't really seen any downturn in consumer electronics revenues or orders for our business in Asia where a lot of it is being built.

And just coming back from Asia, the feeling there is they're keeping a watchful eye on consumer spending, but yet still it seems that things like flat screen TVs and consumer electronics are still selling here.

But I think that those manufacturers in Asia are really trying to make sure that they've got strength in Europe and Asia in case there is a downturn here.

Certainly we are looking very carefully everywhere, and in fact I think we have much stronger POS data and tracking data, inventory data from our distributors in Asia than we used to have.

That used to be something we could track very well in North America and we're now able to track that in Asia and in Europe, and we really believe that inventory levels are at appropriate levels in our distribution channels, and that their sell through, the POS from the distribution channels has been strong.

So things are on track, but I think that of course with the macroeconomic picture we have to be cautious about there possibly being a slowdown in consumer electronics spending that we have not yet seen.

And Gordon is that perhaps what you were referring to in your comments when you said your kind of watchful back half of distribution inventory levels is that those guys may elect to lower further if there is some weakness?

Or is there something else behind that?

Absolutely.

It's a macro picture other than our own data.

If I look at our own data, we're very comfortable with the inventory levels and we're very comfortable with our distribution channels.

I do think that we are getting more success at distribution channels by having a broader product offering and focusing more on distributor training.

There's a lot of initiatives to make ourselves the supplier of choice to all of our distributors and certainly in Asia getting better tracking data in return.

But it's more the macro picture that we face every day that we have to be some concerned about the second half of the year if there is a slow down in consumer spending.

But our own data is very solid.

And then one more question on the automotive side if I could.

As I recall, you guys do have meaningful exposure to the North America market, and obviously as part of your comments you talked about that being fairly weak.

Phil, you talked about new products and off road, truck, and bus maybe being the keys to offsetting that.

But as I recall, off road, truck, and bus at this point is still a relatively small part of that overall segment.

So am I to understand by that, that you really think that there's a series of new products that gets you on new platforms to offset that weakness?

I'm just trying to understand.

No, absolutely.

I mean, Gordon talked about some of our Master Fuse programs, CablePro programs that we have design ins for that are ramping up as we speak and will ramp up further in the second half of this year and into 2009.

So clearly on the automotive side, a significant part of it is a new product story, almost all of which we already have design wins for.

There's the off road, truck, and bus.

It's starting to become a meaningful segment.

It's still only a little over 10% of our automotive revenues, but it's growing at significant double digit rates.

And then there's the penetration into Asia that is also contributing.

Great, thank you guys.

And now we'll take a question from Alexander Paris with Barrington Research.

Good morning.

Just to get a question about the autos, can you just give us just a general idea of the North American auto sales as a percentage of the total?

Yes, Alex, North America including OEM after market in off road, truck, and bus, it's about 45% of the total.

Thank you, and on restructuring, you've talked about $3 million a quarter.

Then you had $5.2 million in the first quarter related to Mexico.

Now, did that number include your estimated $3 million, or was that assumed in your $3 million ongoing forecast?

I'm sorry, could you repeat that again, Alex?

Well, you've been talking a while about your restructuring costs running about $3 million a quarter, right?

Now, that $5.2 million, was that in addition to that?

Okay, I'm sorry, yes, the $3 million, those are kind of the ongoing costs that are running through the P&L that were not separating out, and calling out, and pulling out in a supplemental schedule.

The $5 million was a one time, upfront severance charge that we did in the supplemental schedule and in the $0.36 that we reported.

We did pull that out.

The $0.36 that we reported on an adjusted basis for the first quarter, that did include those ongoing costs related to doing the transfer.

Oh, so that was all part of the suggested.

So the $5 million was out of that, but the something approaching $3 million a quarter, which we expect it to be for the second quarter through the fourth quarter, those will be included in the numbers that we report, even on the adjusted basis.

So the $0.36 included the taking out the $5.2 million and also taking out what you think is the non-operating part of that $3 million?

Exactly.

And it sounds like from all your comments that at least the current restructuring program is going to be pretty much done by mid-2009?

Well, I mean the one large program that won't be done by mid-2009 is some of the big silicon moves that we're doing out of Irving, Texas and Matamoros.

Those will be very far along by the end of 2009 but they will even continue a little bit into 2010.

But by mid-2009 just about everything other than the silicon moves will be done.

And your tax rate, will that be changing as we go forward?

What are you assuming for the full year as you get more and more foreign business?

Yes, if you notice it has been coming down.

It was a little bit unusually low in Q1 and it will bounce around a little bit from quarter to quarter, but we're still expecting the number for the year to be in the 28% to 30% range.

And I think as we look forward we think that number could gradually come down maybe another couple points over the next several years as we generate more income in some of the low-tax jurisdictions, particularly in Asia.

Okay, just one other thing.

This Shock Block, I know it's a small acquisition but this fault protection, does that mean static electricity or are you talking earthquakes?

No, this is a ground fault protection.

So if you have water around an electrical system that it would protect personnel.

It's sort of a larger, more industrial version of the outlet you would have in a bathroom now by code as a ground fault protection.

Now, is that your first foray into that?

It is and it takes into some of the OEM segments that we've been penetrating with our fuse products and it gives us an additional technology.

It's a very interesting niche that fits the customer base that we're focused on.

So we're very excited about that, not just for its current revenues but where it will lead us in terms of having a broader product offering in this whole area of electrical safety, which we think is something which obviously the function that fuses do protect against.

But we think we have a lot of expertise in understanding the application around electrical safety and we believe we can broaden the product offering and the service offering around the electrical safety.

And the National Electric Code continues to get stricter on that, so we believe that there are opportunities for us to grow.

Okay, just finally and quickly I had to ask, I guess, in our cash positions do you have anything resembling options securities or anything in there?

No, we don't, Alex.

We've been pretty careful and conservative about how we have our cash invested and we haven't had any issues there at all with liquidity or any kind of impairment.

Thanks very much and you're doing a great job.

Hey, Alex, just to clarify on one of the comments I made previously on the automotive business.

The 45% North America number I gave, that would have been where we would have been last year.

This year it's probably closer to 40% as some of the areas have grown, and of that it's only about 27% or 28% of the total is specifically the OEM part of the automotive business.

Great, very helpful.

Thank you.

(OPERATOR INSTRUCTIONS) Now moving to Jeff Rosenberg with William Blair and Company.

Morning.

Let's see, looking at the second half of the year, it sounds like you guys are still expecting a relatively similar outlook on the top line.

So I think that implies that you're thinking of some good margin improvement on seasonal growth, and I know you've talked a lot about how the cost savings layer in, in '09 and in '10.

But can you talk a little bit about how you get that margin improvement in the second half of the year, and your confidence level in hitting those targets?

Yes, Jeff.

Yes, you're right.

I mean it's partly related to volume leverage as we expect another sequential increase in Q3 over Q2, but it's probably more related to the savings starting from some of these programs starting to show up in the back half of the year.

So we start to both see savings kick in and as we get towards the very end of the year, we'll see these transfer related costs that we keep talking about, the $3 million a quarter start to subside a little bit as well.

So if you look at the whole equation between costs of the transfer and savings coming from the transfers, we're in a better position in the back half of the year and the closer we get to the end of the year, the stronger that position is.

So a significant part of the margin improvement we're expecting to get to a $1.80 to $1.90 for the year is going to be driven off kind of the shape of those savings.

And that $3 million number, I mean is that number materially lower by the fourth quarter, and what kind of run rate do you think you'll be exiting the year in terms of cost savings?

It's peaking.

The number peaks in Q2 and Q3 and then it should be a little bit lower in Q4, and then the savings exiting the year, I think are at an annual rate of maybe $4 million, something like that.

Good, and then the other thing I wanted to ask.

It's interesting to hear that the various design wins and new product introductions, but trying to maybe focus in on where you really believe you're gaining share in terms of which maybe product families or product categories where you're seeing the most significant growth relative to the market?

Yes, I think we believe in our silicon products, our silicon protection arrays for ESD.

We think that's a growth segment and we haven't really had a very strong offering there, and we put a new design team in place, and invested in new product development.

I think that the ESD segment that we look at for handheld devices, consumer electronics, I think that that area is one we'll really penetrate.

The TVS diode business that we got when we acquired the Concord Semiconductor business is a broad product offering.

That company was really only able to sell those products in Taiwan and we're able to take those products globally.

We're seeing success through all of our global distribution channels.

So I think that just in general our distribution channel programs, as we've got a broader product offering, is giving us more presence through our distribution channels into several of those segments.

I know you talked about one Thyristor product, but it's mostly outside of [Techor] where you're seeing the overvoltage protection, semiconductor business really the strongest?

I think that we're confident in the Techor business which also is being sold through distribution and we have two new Techor SIDACtor products that were released in the first quarter.

So we are developing that product line and still confident that we'll see growth in the SIDACtor products too, and I believe that we're gaining share in that segment.

I think that's a strong segment for us.

Okay, so if you roll it all together, do you have off the top of your head a feel for how much the electronics business represents semiconductors at this point, or maybe at some point in the future with your targets there?

Total business?

Or total electronics, either one.

It's a little bit less than a third of our total, 30% to 33% of our total business, which is the SIDACtor product that we got from Techor, the TVS diode products that we acquired from Concord, and then our increasing sales of the silicon protection array products that we are designing for ESD.

But that percentage will be going up.

I mean it's not a third today and as we look at where we expect to be a couple years from now with some of the growth in some of those silicon products outpacing growth in products like fuses, particularly given the new product investments we put in there, we would expect that percentage to increase.

And that's a third of electronics, or a third of total Littelfuse?

Electronics.

Thanks a lot.

Now moving to Shawn Harrison, Longbow Research.

Go ahead, sir.

Hi, a few quick questions.

Just if you can remind us what distribution represents as a part of electronic sales?

It's approximately 80% of electronics sales.

Would you expect that ratio to go up looking ahead?

It sounds like you're expanding your presence there.

I don't think we're sort of predicting it to significantly change.

We're certainly supporting distribution with better training, and tools, and a better product offering, and being much more relevant to them.

And I think that's a very important part of our strategy.

But we also have always stated that our design in activity is a key account, such as the Samsung that's making the next generation flat screen TV.

It's very important for us to have direct access as much for us to develop new products and understand the road maps of those companies.

So I don't think that we would see that we're going to change the strategy much in that area.

Okay, and then two quick follow ups just more on the cost side.

What are you seeing in terms of raw materials moving in either direction?

Well, unfortunately most raw materials are moving all in the same direction right now.

We've talked in the past, we certainly have some exposure to copper.

Of the metals that would be our most significant material buy and everybody's been watching that.

That price continues to go up.

Interestingly, though, I mean the one that hasn't gone in the wrong direction for us, probably about the only major one is zinc, which is a major input into our automotive business.

And the price of zinc has actually come down from where it was six months to a year ago, is down near $1.00 a pound right now, which at one point it was about half the price of copper.

Now it's about a quarter of the price of copper.

So copper has gone up.

Zinc has gone down.

So we've got an offsetting affect there, and certainly the other, I mean we have some exposure to things like tin and silver, which have both gone up.

Not so much to gold.

We certainly have been impacted and will continue to be by the price of oil coming up, which the major impact there is on our transportation costs and we continue to see pretty heavy surcharges on both surface transportation and air freight, and we're doing things to try to offset that, like moving more and more to sea transportation rather than air transportation.

But it's going to be hard to offset all of that if the price continues to go up as it has been.

I know typically there's no price increases within the electronics industry, but are you having an ability to get some price offsets maybe in terms of less annual pricing declines or things of that nature?

Yes, I think the other thing is bringing new products, bringing new features.

I think that's the way to alleviate the constant price decreases of bringing products that have new features, that fit the roadmaps of our leading OEMs.

And I think that the examples that we mentioned earlier about those silicon protection arrays and the new SIDACtor products, I think having new features that fit the latest networking equipment, that's the best way to avoid constant price pressure.

Certainly don't get price increases, but if you've got some new innovations and new features that are needed, there's an ability to get premium pricing at the beginning of the life cycle of those products.

Okay, and then last question.

SG&A ticked down a little bit this quarter.

What would you expect it to do for the rest of the year, hold relatively steady on $1.00 basis?

Yes, I think it will be relatively study.

We're certainly not adding cost to our SG&A structure.

In fact, as we get into the end of this year and into next year, as we start to shut down some operations as part of these plant consolidations we're doing, that will actually help our SG&A as well.

I mean there are some things pressuring it towards the up side.

One of those would be the weak dollar and where we have SG&A in places like Japan and Europe, obviously those are being affected by currency.

So I think there's a general tend towards kind of flat to declining SG&A, I think overall, but right now that's being offset by currency.

Okay, thanks a lot.

(OPERATOR INSTRUCTIONS) Now, we will hear from John Franzreb with Sidoti & Company.

Good morning, everyone.

Gordon, I've learned over the years to listen to you when you talk about a cautious outlook, especially in the electronics business.

Last quarter, the book to bill was .96.

It's kind of accelerated into this quarter at 1.1.

What I'm wondering here is your concerns about the inventory level at the dealers, is that more based on your visibility and task emphasis on the ODM side?

Or just talk a little bit about the cautious outlook that you've kind of put out there.

Yes, and I think I tried to emphasize in the past, we used to say we had better data from North America not from Asia.

And as our business moves more and more to Asia, we're more likely to be called out with excess inventory in the channel, either in the distribution channel or at the OEM or the ODM, I think we have better data in Asia.

At the moment, our data is that we don't have excess inventory.

We don't have distribution that is ordering ahead of their own sales out from the distribution channels.

My caution is just that the business is strong.

It's healthy but on the macro side, the economy that we hear about, at some stage are we going to see a real drop off in consumer spending on consumer electronics, which does not seem to have happened as much you might expect given the price of gas and the credit markets.

So I just think that I don't think we're in bullish times in terms of consumer spending in the country, and it wouldn't be a great surprise that in the second half of the year that comes through to people no longer buying flat screen TVs.

I think that's just a macro picture.

We are very cautious and very diligent at looking at our own distribution inventories and we're not seeing a problem there at the moment.

Okay, on the electrical business, that was up despite that you had voiced some concerns in the first quarter.

You said only about 1% of it was price, but you also highlighted the services part of it.

Could you talk about what's going on at electrical and also how much is services as part of segment sales?

Services is still a rather small amount in terms of sales, less than $1 million.

It's growing.

It's a very interesting way for us to be able to also compliment our product offering, but I think that the new product development and the OEM focus is very critical for us.

We used to really look at our products being sold through distribution and not really calling directly on OEMs, people who make equipment such as air conditioning equipment, or white goods equipment.

And now we find that we actually can design new products, even new configurations of fuses that can make that a growth business and offset the headwinds that might be market related.

So both the OEM initiative and the services initiative give a few percentage points of growth, and then price increases.

It's been a market where we've constantly managed to be able to pass through increased costs, and there's a lot of copper content in the large electrical fuses, and we've been able to pass that through the channel and keep this business as a growth business.

And we still think that can happen for the rest of this year.

Okay, great, and just to clarify from an earlier question, the restructuring charge is $5.2 million in the quarter.

You were alluding to the fact that it was roughly going to be $12 million this year.

Does that suggest in coming quarters it will be closer to a $2 million number?

No.

So clarifying that, the $5 million doesn't relate to the $3 million a quarter that we talked about in any way.

That's a separate charge related to an upfront severance charge for the closure of the Matamoros, Mexico facility, which we announced in the first quarter.

The $3 million a quarter we talked about is these ongoing costs of moving equipment, of paying out retention incentives, people, higher overhead in the new location before we wind down the old location.

Those duplicative overhead costs.

All those costs are running through the P&L every quarter.

They were probably a little bit lower than $3 million in the first quarter.

They'll be ramping up to at least $3 million in the second quarter, and they'll be at that kind of a level until we get towards the end of the year and they'll start to come down a little bit.

So that keeps the pressures on the margins right there, right, Phil?

Exactly.

And one last question.

Could you fill in the gaps on the rest of the automotive business, the geographic sales mix?

40% North America, how does it look for the balance for the world?

So it would be 40% North America, Asia is, today it's about 10%, and then so the European piece is actually now become bigger than the U.S.

piece, largely because of the Euro to Dollar exchange rate.

And also it's where things like the off road, truck, and bus business, it's a bigger piece of that market than it is in North America at the moment.

Okay, great.

Thanks a lot, Phil.

And with no additional questions in the queue, I will turn the call back over to Mr.

Hunter for closing remarks.

Well, thank you all for joining us on the call this morning.

We appreciate your interest and we look forward to talking with you again next quarter.

That will conclude your conference for today.

Thank you for participation.

Everyone have a wonderful day.