Littelfuse Inc (LFUS) 2008 Q3 法說會逐字稿

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  • Operator

  • Good day, everyone, and welcome to the Littelfuse, Incorporated Third Quarter 2008 Conference Call.

  • Today's call is being recorded.

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

  • Gordon Hunter.

  • Please go ahead, sir.

  • Gordon Hunter - Chairman, President & CEO

  • Thank you.

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

  • Joining me today is Phil Franklin, our Vice President of Operations Support and Chief Financial Officer.

  • As you saw in the news release, our third quarter results came in at the high end of the revised guidance that we issued on September 29.

  • Sales of $141.5 million were slightly above the $140 million we indicated and adjusted diluted earnings per share of $0.35 were at the high end of the range we provided.

  • As we anticipated, automotive sales decreased across all geographies due to the weakness in the passenger car market.

  • Our electronics business came through with a small increase in sales, however, the trends going forward are considerably more challenging.

  • A bright spot to the third quarter was our electrical business, which continued at strong momentum through another record quarter.

  • I will now turn the call over to Phil Franklin, who will give the Safe Harbor statement and a brief summary of the news release.

  • Phil Franklin - CFO & VP, Operations Support

  • 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.

  • Sales for the third quarter of $141.5 million were 1.5 million above our most recent guidance as Asian customers pulled forward deliveries into the last week of the quarter in the advance of shutdowns for Golden Week in the first week of October.

  • While this helped our third quarter, it contributed to a slow start for the fourth quarter.

  • Compared to the prior year quarter, sales for the third quarter were up 1% as strong growth in the electrical business and moderate growth in the electronics business offset a 15% decline in the automotive business.

  • Gordon will provide more specifics on these performances in a moment.

  • Earnings per share before restructuring charges were $0.35 for the quarter, which was down from $0.48 for the prior year quarter.

  • The lower earnings were due to additional costs in 2008 related to manufacturing transfers and freight surcharges, as well as price erosion in excess of cost reductions in our electronics and automotive businesses.

  • Cash performance was good given all the cash demands related to the manufacturing transfers.

  • Free cash flow was positive 1.3 million for the third quarter after funding $12 million of capital expenditures, $7 million of severance payments, and $3 million of inventory safety stock to support the manufacturing transfers.

  • 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.

  • Gordon Hunter - Chairman, President & CEO

  • Thanks, Phil.

  • I'll begin with some additional comments on each of the business units, then I'll update you on our cost reduction initiatives and the outlook for the fourth quarter and into 2009.

  • I'll start with automotive because this business had the most challenging third quarter.

  • Our automotive business contributes about 25% of total Littelfuse sales.

  • Let's begin with an industry overview.

  • The latest data from J.D.

  • Power shows that North America passenger car production declined 13% sequentially in the third quarter and 14% year-over-year.

  • However, production of larger vehicles was down 34% sequentially and 44% year-over-year.

  • In addition, European car production was down 18% sequentially.

  • Within that industry environment, our global automotive sales decreased 15% from the third quarter of last year to $28.9 million for this year's third quarter.

  • Geographically, our automotive sales were down most significantly in the Americas, followed by Europe, with a slight increase in Asia.

  • As the industry numbers illustrate after a strong first half of the year the automotive market has dramatically deteriorated.

  • This is due to a number of factors.

  • The economic uncertainty is causing many potential buyers of new cars to delay their buying decisions.

  • For those buyers who do want to buy, the tight credit market is making it difficult for them to finance their purchases.

  • Coupled with this, higher gas prices, and overall economic concerns are driving those buyers that are still in the market to smaller, more fuel efficient vehicles.

  • And while this is positive from an environmental standpoint, it's not as good for Littelfuse.

  • These smaller cars have less electrical systems and electronic content, which in turn drive down the total market for electronic components and correspondingly our sales at least for the short term.

  • I said short term because the same trends that drive increased electrical power consumption in larger vehicles are still coming to the smaller calls that are currently popular.

  • For example, systems like adaptive steering and cooling fans are now using electric motors and replacing traditional hydraulic power and belt driven systems in the smaller cars.

  • And OEMs are already investing in putting more content and functionality into these vehicles to provide some of the same features consumers have come to expect in the larger vehicles.

  • In Europe, the increasing trend towards diesel powered vehicles has also accelerated demand for electrical heating systems.

  • What this means for the big picture is while overall fuse content has declined due to the decrease in production of larger vehicles, it will increase in the future as these new systems and additional electrical content are designed into smaller vehicles.

  • In addition to the decline in OEM sales, our automotive aftermarket business was also down for the quarter.

  • Many of the retail outlets that cater for do it yourself customers are being cautious about carrying too much inventory.

  • There is also less traffic in these retail stores as consumers are holding off on discretionary purchases.

  • The result is a decrease in demand for our aftermarket products.

  • The off road truck and bus segment, which is a market we have targeted for expansion, is holding steady for us.

  • We're still growing from a relatively small share, so the new customers and new applications we are bringing onboard are helping to offset declines in the market itself.

  • Looking ahead to the remainder of the year, at this point global OEM passenger car production is expected to be down about 10% for the fourth quarter of 2008, compared to 2007.

  • As in the third quarter, the biggest decline will continue to be in North America followed by Europe.

  • Our off road truck and bus markets are forecasted to see a downturn of between 1 and 2% in North America and Europe in the fourth quarter and into 2009.

  • We are continuing to win customers and market share with our existing product offerings and expect that our sales growth should be enough to compensate for the decline in the market.

  • As I indicated earlier, our aftermarket business is strongly influenced by the dynamics of general consumer retail buying.

  • When consumer confidence and retail purchasing begin to pick up, sales in our aftermarket business should improve as well.

  • One piece of good news for the third quarter is that even in this down market, we continue to win new automotive design-in contracts.

  • One was part of a GM recall for the microheat washer fluid heater system called the Hotshot on 944,000 of its cars and trucks.

  • This problem was an electrical short on the circuit board of a fluid heater which could overheat the control circuit groundwire.

  • To fix the problem, dealers will add a wiring harness with an inline fuse from Littelfuse.

  • The required parts are shipping to all GM retail outlets in the fourth quarter.

  • Vehicles affected include Buick, Cadillac, GMC, Saturn, Hummer, and Chevy cars and trucks.

  • We also had two major design wins for our successful Master Fuse.

  • For those of you who aren't familiar with Master Fuse, this is a custom product that protects multiple cables in a vehicle and is ideally suited for the high current applications in today's cars and trucks.

  • The two wins are the new Ford F Series truck that launches in 2012 and for a Renault Samsung opportunity in Korea.

  • In the off road truck and bus market we received the first order for our new flexible electric center, which we refer to as the FLEC, for a next generation agricultural vehicle.

  • FLEC is an electric junction box with standard components that can be configured for each consumer's specific needs.

  • This product was developed specifically for the off road truck and bus market and we are encouraged by this first win.

  • Next, I'll move on to our electronics business, which contributes about 65% of our total sales.

  • Electronic sales were 95.8 million for the third quarter, a 4% increase over the same quarter last year.

  • The third quarter is typically a strong quarter for this business, as consumer electronics manufacturers ramp up production in anticipation of the holiday season.

  • This year, however, we did not enjoy the usual seasonal up tick.

  • This reflected the concerns of manufacturers about the holiday season being weaker this year due to the decline in consumer confidence.

  • As a result, we started to see demand decline in a number of markets.

  • Two of our major markets, telecom and LCD TVs, both started to slow down after experiencing double-digit growth in the first half of the year.

  • Many LCD panel manufacturers cut output in the third quarter to firm up their pricing by reducing inventory in the channel.

  • This had a negative impact across many of our fuse products, including our nano, thin film, and cartridge fuses.

  • In the telecom market, demand weakened for our semiconductor products used in DSL network infrastructure and modems.

  • Sales of products for computer applications also declined.

  • On the positive side, we had typical sequential growth from the second quarter to the third quarter in our ceramic and polymer products.

  • These include baristas, gas discharge tubes, PGB ESD for suppressors, and resettable PTCs.

  • Our electronic sales increase this quarter was not what we had anticipated based on historic demand for the quarter.

  • The trends going forward are even more challenging.

  • We're seeing a significant downturn in shipments and orders as manufacturers and distributors are taking a cautious approach in the face of the economic uncertainty and reduced consumer demand for electronic products.

  • The reduced demand for telco applications and the wide variety of electronic consumer products is reflected in the book to bill ratio, which was at .9 to 1 at the end of the third quarter.

  • Currently, the book to bill is about .8 to 1, reflecting the continuing downturn.

  • We expected the lower growth in demand would also put downward pressure on pricing.

  • Given the swings in the financial markets and the present uncertainties around the economy and consumer spending, it's difficult to predict how the fourth quarter will end up.

  • That said, based on the knowledge we have at this point, we are estimating that electronic revenues will decline sequentially about 20% in the fourth quarter, compared to the usual seasonal decline of about 10%.

  • The outlook for 2009 is even more difficult to predict.

  • Clearly, consumers are becoming more cautious and the market for consumer electronics is slowing.

  • We've seen forecasts for production cutbacks at major OEMs, including Sony and Samsung.

  • The demand for LCD TVs, which up until now have been a high growth area, is slowing significantly.

  • The markets for PCs and mobile phones are also slowing.

  • While we can't control the economy, we are continuing to move forward with our focus on developing new products and getting our circuit protection devices designed in to our customers' new products.

  • We continue to make progress on this front with several recent wins.

  • We added about $1 million of new Varistor and Thyristor business as part of a new wall outlet ground fault circuit interrupter, commonly known as a GFCI, being manufactured by Leviton.

  • This device provides over-voltage protection in a residential environment.

  • It features a lockout mechanism option that protects the consumer by disconnecting power in the event of a device failure.

  • This GFCI design includes Littelfuse surface mount SCRs and a new improved Super Mount Varistor.

  • Our teams worked closely with Leviton engineers on the custom design for the Varistor, with the design engineering handled at Leviton's labs in the U.S.

  • and local design and manufacturing at Leviton in Dongwan, China.

  • Another major design win was accomplished by our local team in India for our customer APC in Bangalore.

  • This design provides over-current protection for a new UPS electrical power backup system.

  • This is a higher power rated system sold globally by APC to protect server and data center applications.

  • We are providing a custom cartridge fuse from our new 505 series designed for high energy applications.

  • Shipments will begin in the fourth quarter with total sales estimated at approximately $600,000.

  • In two other new design wins for our subminiature surface mount fuses, one win is for our fast acting nano fuses with [alsram] for a new LED lighting product, and the other is a thin film fuse win with Huawei in China for a cell phone application.

  • The design and production for both of these is based in China.

  • New product development is another key focus for the electronics business.

  • For example, we are continuing the release our new line of surface mount chip fuses, which includes fuses that are capable of withstanding high operating temperatures in products such as LCD monitors, notebook computers, set top boxes, and gaming consoles.

  • These and other new products introduced earlier in the year offer the latest circuit protection technology for our customers' next generation products and position us to resume our growth when the economy improves.

  • That brings us to the POWR-GARD electrical business.

  • POWR-GARD sales were $16.8 million for the third quarter, a 23% increase and another new record for the quarter.

  • There were a number of factors that contributed to the higher POWR-GARD sales.

  • Price increases continued to be a strong factor.

  • Additional growth came from increased sales of fuses to OEMs and sales of ground fault protection products.

  • We recently added ground fault protection products to our portfolio with the Shock Block, Incorporated acquisition that was completed in March.

  • And we are pleased with the expansion of this product line.

  • While we had a good third quarter in our POWR-GARD business, our outlook for the next few quarters is more cautious.

  • The construction market has softened as projects go on hold due to the difficulty in getting financing.

  • The industrial market for fuses needed for maintenance, repair, and operations, also appears to be softening.

  • One area that's encouraging is demand for our work in engineering custom products for OEMs.

  • This area, which is one of our key growth strategies, is still growing at this point.

  • Another bright spot in the quarter for the POWR-GARD business was the acquisition of Startco Engineering headquartered in Saskatoon, Canada.

  • Startco is the second largest manufacturer of ground fault protection equipment in North America.

  • The company's annual revenues are around $20 million and growing at double-digit rates, which we expect to continue through 2009 and beyond.

  • Startco offers a complete line of ground faults and motor protection relays and also engineers custom power distribution centers that are used in industrial manufacturing and mining applications.

  • This product portfolio adds significantly to the base we established with the Shock Block acquisition.

  • As we discussed last quarter, ground fault is a natural extension of our knowledge of fuse based circuit protection products and can help to offset the slower growth of our electrical fuse business.

  • Two of the many things that attracted us to Startco are the strong engineering and technical expertise and the attractive margins its products generate.

  • The majority of the company's sales are currently in Canada and the United States, but we see opportunities to leverage our global sales and marketing capabilities to expand into other regions as well.

  • That completes my review of the three businesses.

  • As you can see, the global economic downturn is affecting all of our businesses and the business of our customers.

  • And while we can't control the economy, we are taking actions to manage those aspects of our business that we can control.

  • We're continuing the manufacturing transfers that have been in process over the past two years.

  • We're going to accelerate them where we can.

  • The primary objective of these transfers is to reduce costs by leveraging our fixed costs, so we'll have fewer plants in lower cost countries that are close to our customers' facilities.

  • We are moving production from Mexico, Taiwan, Thailand, and the U.S., to China, the Philippines, and one site in Mexico.

  • This initiative continues to be on track.

  • We are moving into our newly constructed and expanded facilities in China, the Philippines, and Mexico.

  • The transfer of our Varistor production from Ireland to Dongwan, China has been completed and we are no longer manufacturing in Ireland.

  • Construction of our new wafer fab in Wuxi, China is nearly complete.

  • We will start up the clean room and begin process validations before the year end and we plan to start production transfers from Irving, Texas by mid-2009 with completion expected in early 2010.

  • The consolidation of our semiconductor backend packaging operations from Matamoras, Mexico and [YangMay] Taiwan to Wuxi, China is well underway and we expect completion by the end of 2009 as planned.

  • The automotive and electronic production moves from our Des Plaines, Illinois facility to Mexico and the Philippines are now expected to be completed by year end, a few months early.

  • We are also on schedule to move our corporate headquarters from the Des Plaines facility into the new location in Chicago in early 2009.

  • However, we have delayed the move of our technical engineering center, which is also housed in our Des Plaines facility until later in 2009.

  • With the downturn in the global economy, we are taking a more cautious approach to major capital expenditures and with credit remaining very tight we expect it will take longer to complete the sale of the Des Plaines facility.

  • So for now, we're going to keep the tech center in the Des Plaines location while we assess alternative sites and develop our interest in our current facilities.

  • Another ongoing initiative and one of our strategic objectives is developing a Lean enterprise across all of our operations.

  • This strategy focuses on improving processes and reducing waste, while [inputting] implementation plans and timetables for this initiative.

  • This is a challenging time for our management team, our associates, and our customers.

  • We are taking actions to respond [today].

  • This is now more important than ever and is a top priority for all of our managers.

  • Our overall strategy, however, remains the same.

  • We're going to stay the course and focus on those aspects of our business that we can control and will enable us to come out of this economic turbulence better positioned for the future.

  • This includes continuing to execute on our strategic initiatives.

  • As I discussed earlier, we're moving ahead with the manufacturing transfers and developing a Lean enterprise.

  • We're going to continue to invest in new product development, which is critical to our future, and maintaining our technology leadership in circuit protection.

  • We're also going to continue leveraging our circuit protection expertise by providing more consulting services that add value to our customer relationships and expand our revenue sources.

  • We will continue to pursue design wins that can generate product sales for many years into the future.

  • And we'll continue to acquire companies and products that expand our portfolio and technical expertise as opportunities arise.

  • We believe we are well positioned to weather the turbulence ahead in the economy and in our markets.

  • We also believe that by continuing to execute on our growth strategies, we'll come out of this downturn a stronger, more profitable global leader.

  • For the short term, however, our fourth quarter guidance reflects the current outlook for the business.

  • I will now turn the call back to Phil who will comment on the fourth quarter guidance in the news release, and then we'll open the call for questions.

  • Phil Franklin - CFO & VP, Operations Support

  • Thanks, Gordon.

  • Our guidance for the fourth quarter is as follows.

  • Sales are expected to be in the range of 12 to 16% below the third quarter of 2008, reflecting continued weakness in automotive, declining electronic sales and negative currency effects on top of the normal seasonal weakness.

  • Personally offsetting these negative effects will be the acquisition of Startco, which should contribute $4 to $5 million of revenue for the quarter depending on the Canadian dollar exchange rate.

  • Overall, negative currency effects are expected to have a negative impact on sales of three percentage points for the fourth quarter, which is included in our guidance.

  • Diluted earnings per share for the fourth quarter are expected to be in the range of $0.04 to $0.14 before restructuring charges.

  • We expect to incur approximately $0.09 of restructuring charges in the quarter, which will be mostly noncash.

  • As Gordon mentioned, there's still a great amount of uncertainty regarding 2009.

  • Lack of end market visibility, combined with high volatility in exchange rates and commodity prices make forecasting a major challenge to say the least.

  • That said, we believe that the global credit crisis, weak consumer demand, and a weaker dollar, will likely cause our sales to be down year-over-year with the inclusion of Startco.

  • On the positive side, our costs will be significantly lower in 2009.

  • Our manufacturing transfer projects are on track and they are expected to deliver approximately $20 million of savings compared to 2008.

  • We are streamlining our SG&A and as a result expect operating expenses to be down more than 5% compared to 2008, excluding Startco.

  • Finally, commodity prices including copper, zinc, silver, and tin, not to mention oil, are all down substantially from their 2008 averages and should provide significant benefit in 2009.

  • In summary, we expect 2009 to be a very tough year with major top line challenges.

  • Nevertheless, with our cost initiatives and some help from commodity prices we believe we can still achieve significant margin improvement and meaningful earnings increases compared to 2008.

  • This includes--this concludes our prepared remarks.

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

  • Operator

  • Thank you, sir.

  • (OPERATOR INSTRUCTIONS.) Our first question will come from Ingrid Aja with Merrill Lynch.

  • Ingrid Aja - Analyst

  • Good morning.

  • Gordon Hunter - Chairman, President & CEO

  • Good morning, Ingrid.

  • Ingrid Aja - Analyst

  • I was wondering if you could tell me a little bit more about the pricing pressures that you may--remarked on in your prepared remarks.

  • How much extra pricing pressure do [you see]?

  • And how much of that is baked into your guidance at this point?

  • Phil Franklin - CFO & VP, Operations Support

  • It's a tough question looking forward.

  • I think if we look back to the most recent quarter, the price erosion and the price pressure has been pretty similar to what it was in the earlier part of the year and even back into last year.

  • Going forward, it's a hard thing to gauge, particularly with commodity prices coming down and other things coming down and also volumes.

  • The expectation would be that there should be--that there probably will be some additional price pressures.

  • And we have baked some amount of that into our guidance.

  • But we're not expecting that--I mean, we typically see 5% or so price erosion in electronics and 2 to 3% in automotive.

  • While that could tick up modestly above those numbers, we don't see it going dramatically higher than those.

  • Ingrid Aja - Analyst

  • And you think with the electrical business that you're not going to be able to continue with the price increases that you've been able to see?

  • Phil Franklin - CFO & VP, Operations Support

  • Well, I think it's pretty safe to say that we won't be able to continue at the levels that we've had over the last year or so, some of which were justified and rationalized by price increases in things like copper that were pretty significant.

  • With those prices going down, it's clearly going to be tougher to put through price increases in the electrical business.

  • So, yes, I would say that's a safe statement.

  • Ingrid Aja - Analyst

  • Okay.

  • And then, on the transfer costs, since you're slightly ahead of schedule, do you see that rolling off more into Q4 than you originally expected?

  • Phil Franklin - CFO & VP, Operations Support

  • I don't think--you mean getting more benefit in Q4?

  • Ingrid Aja - Analyst

  • Right.

  • Phil Franklin - CFO & VP, Operations Support

  • Not--I don't think so necessarily.

  • We have pulled a few things ahead, but we're still going to have substantial transfer costs in the fourth quarter as well, although we will start to get some savings benefits in the fourth quarter from some of these programs that completed a little bit early.

  • So I would say net-net not tremendously different than what we previously thought.

  • But the fourth quarter from the cost of the transfers and savings from the transfers perspective should be somewhat better than the--or the fourth quarter should be better than the third quarter was, and then it should get consistently better and pretty significantly better as we start to roll into 2009.

  • Ingrid Aja - Analyst

  • Right.

  • So I mean, looking at gross margins, what kind of benefit do you think you're going to be able to get this quarter given that you're seeing such a decrease in volume?

  • Phil Franklin - CFO & VP, Operations Support

  • Yes.

  • So that's the big question.

  • If you look at the guidance that we have given it would imply that we're able to offset most of the negative operating leverage that we're going to get in the fourth quarter from the lower volumes with the combination of savings from transfer programs and lower commodity prices.

  • So--.

  • Ingrid Aja - Analyst

  • --Okay--.

  • Phil Franklin - CFO & VP, Operations Support

  • --We may see some modest or minor drop in margins from the third quarter, but we would expect them to be roughly comparable to the third quarter margins.

  • Ingrid Aja - Analyst

  • Okay.

  • And then, if you could just maybe expand on the order trends that you're seeing in October.

  • You're saying that they've actually weakened since September.

  • Have you also seen any push-outs?

  • Gordon Hunter - Chairman, President & CEO

  • When you say push-out, do you mean push-outs of our own ordering on our products?

  • Ingrid Aja - Analyst

  • From your customers--if they're pushing out the orders?

  • Gordon Hunter - Chairman, President & CEO

  • Yes.

  • The automotive system, particularly for the passenger car world, pretty much works on a pretty fast reacting [pull] system.

  • When they decrease their production volumes, they very quick order less on us.

  • So there's not really very much inventory really held anywhere that would be giving a push-out.

  • It's more that the response, for example, in the month of September, the decrease in production volumes was pretty dramatic and it was fairly quickly transferred through to us.

  • And so, I think the automotive industry is characterized more by us responding very quickly to a decline in production, which actually declines fairly quickly in line with a reduction in demand in sales.

  • So I wouldn't say it's a push-out.

  • I would say it's more just very quickly reflecting the lower production volumes that really dramatically reduced in September, but are forecasted to continue through the rest of this quarter and into next year.

  • Phil Franklin - CFO & VP, Operations Support

  • And in the electronics business, Ingrid, I think that we haven't seen--I don't think we've seen a lot of push-outs.

  • What we've seen is very cautious ordering through really all the third quarter and certainly into the fourth quarter from distributors particularly who are placing orders closer to the time they need the product than probably they were before.

  • But given that we didn't have big backlogs going into the quarter or exiting the quarter that we--I don't think--we haven't really seen a lot of push-outs per se.

  • Ingrid Aja - Analyst

  • Are you expecting longer plant shutdowns from some of your customers and is that factored into your guidance?

  • Gordon Hunter - Chairman, President & CEO

  • I think we--there may be some shutdowns.

  • I think it's more just decreased production volumes.

  • I know there are some European car manufacturers that have gone to producing fewer days per week, but cutting back production.

  • I think that the forecasts that we have are fairly pessimistic in terms of automotive growth next year, but based on either extended shutdowns or just decreased number of days of production.

  • Ingrid Aja - Analyst

  • Right.

  • Okay, great.

  • Thank you.

  • Gordon Hunter - Chairman, President & CEO

  • Thank you.

  • Operator

  • And our next question comes from Shawn Harrison with Longbow Research.

  • Shawn Harrison - Analyst

  • Hi.

  • Just looking to get a clarification.

  • I want to make sure I heard the number correctly.

  • It was 20 million in savings from the transfer programs next year.

  • And that would be up from the $18 million forecast originally?

  • Phil Franklin - CFO & VP, Operations Support

  • Yes.

  • It's a--it's really a net of savings and lower transfer related costs.

  • So I think that probably the 18--we had talked about an 18 million number previously.

  • That number, as we've said, our programs are pretty much on schedule and intact.

  • And in addition to that, we get some benefit from fewer transfer related costs.

  • So the net benefit, when you take everything into consideration year-over-year we think is going to be at the volumes that we're expecting for 2009.

  • We think it's going to be in the neighborhood of $20 million.

  • Shawn Harrison - Analyst

  • Okay, and that's still more loaded toward the back end of the calendar year?

  • Phil Franklin - CFO & VP, Operations Support

  • Yes, it will.

  • It will accelerate as we go through the year.

  • The first quarter will be quite a bit lower in terms of benefit and then we'll get a big jump in the second quarter, and then it will increase each of the next two quarters as well.

  • Shawn Harrison - Analyst

  • Okay.

  • And then, your commentary on SG&A.

  • Do you have kind of a target here for the fourth quarter?

  • I'm guessing it's probably maybe down a little bit, but not much, and then you'd start to see maybe more of those savings as we roll through 2009?

  • Phil Franklin - CFO & VP, Operations Support

  • Yes, I would say that would be the way to look at it.

  • Shawn Harrison - Analyst

  • Okay.

  • And on the R&D side, I'm guessing you're not going to see any pullback there.

  • Probably just maybe hold steady at kind of the current level.

  • Is that the best way to work?

  • Phil Franklin - CFO & VP, Operations Support

  • Yes, well, you actually will see some reduced spending in R&D, but not so much because we're pulling back resources.

  • As we move some of our factories over to China and into Mexico, we're also seeing more of our R&D resources follow the manufacturing.

  • So you'll see a similar level of R&D resources cost at a lower dollar, so you will see some savings in R&D as well.

  • But that's not included in that $20 million forecast?

  • Phil Franklin - CFO & VP, Operations Support

  • No, that's not included in the $20 million forecast.

  • That would show up in the SG&A, the operating expense forecast that we did in the guidance.

  • Shawn Harrison - Analyst

  • Okay.

  • And then, two follow-up questions.

  • I guess, what is the margin profile of Startco?

  • I thought maybe it would be a little bit more accretive this quarter than it is--or maybe should be expecting more accretion as we get into 2009?

  • And then, just secondly, if you could talk about some of the logistics costs.

  • I know they were a headwind for you in the third quarter as well as the second quarter.

  • What are you seeing there?

  • Phil Franklin - CFO & VP, Operations Support

  • Really in Startco, you're right.

  • We--I mean, we expect that to be a very accretive acquisition as we get into the back half of '09 and certainly into 2010.

  • We think it will be significantly accretive.

  • We do have some one-time costs that we're going to be incurring related to integration and trying to drive some of the sales growth initiatives that we have there that will happen over the next several quarters.

  • But as we get into late '09 and certainly into 2010, you'll see much more accretion coming from Startco than we talked about here.

  • And then, your other question is related to logistics.

  • And I think primarily you were referring to transportation costs, Shawn?

  • Shawn Harrison - Analyst

  • Yes.

  • Phil Franklin - CFO & VP, Operations Support

  • Yes, we--I mean, yes, we'll expect those to be coming down significantly.

  • If oil prices stay where they are today, we'd see a big ramp up in freight surcharges through the first half of 2008.

  • We're starting to see those surcharges come down.

  • They tend to--tend to sometimes come down slower than they go up.

  • But certainly, we expect to see some benefit in the fourth quarter from those, and meaningful benefit as we get out into 2009.

  • Shawn Harrison - Analyst

  • Okay.

  • And then, just back to Startco.

  • I mean, would using something like potentially up to $0.10 accretion for 2009 be too aggressive at this point in time?

  • Phil Franklin - CFO & VP, Operations Support

  • I think it will be that order of magnitude.

  • Maybe--it could be slightly less than that, but it's going to be that order of magnitude heavily weighted towards the back two quarters.

  • Shawn Harrison - Analyst

  • Okay, thank you.

  • Phil Franklin - CFO & VP, Operations Support

  • Okay, Shawn.

  • Operator

  • (OPERATOR INSTRUCTIONS.) And we'll go to Alexander Paris with Barrington Research.

  • Alexander Paris - Analyst

  • Hi.

  • Phil Franklin - CFO & VP, Operations Support

  • Hi, Alex.

  • Alexander Paris - Analyst

  • Just looking at your fourth quarter earnings estimate, that's a very big range from $0.04 to $0.14.

  • What kind of assumptions do you have there at the extreme?

  • Does something really good have to happen to get to $0.14?

  • Is that related to the savings or what?

  • Phil Franklin - CFO & VP, Operations Support

  • Yes.

  • The savings is a pretty--that's a pretty defined number at this point.

  • We pretty much know what that's going to be and have that factored into the numbers.

  • The variables are certainly--revenue is a variable.

  • We still had a pretty wide range on revenue, four percentage points, which translates to about $6 million of revenue range.

  • So that's certainly--from the top to the bottom of that range, that accounts for a big part of the earnings.

  • The other things would be things like exchange rates and commodities, which as you know, have been all over the map recently, generally coming down, but--in the currencies weakening against the dollar.

  • But those have been pretty volatile, too.

  • So that--those would be other variables that we factored into the guidance that are uncertain at this point.

  • Alexander Paris - Analyst

  • Just focusing on 2009 on almost every conference call I hear talking to people and managements, too, is fourth quarter is--you can see the economy kind of ran into a brick wall late in the third quarter and it's continuing.

  • And they have a pretty good feel for that.

  • But once they go past the--past December, they--most admit they don't have the foggiest idea what's going to be happening.

  • So when you look at your--if you're going to be down to 16% in the fourth quarter, that brings your 2000 revenues--or 2008 revenues to about 544, and you think they're going to be down from that.

  • I'm just wondering just where you're getting some of that.

  • Like in the--in autos, for example, what's your assumption for the 2009 car (inaudible)?

  • Do you pretty much use J.D.

  • Power and then adjust it or what?

  • Gordon Hunter - Chairman, President & CEO

  • Yes, we do, actually, Alex, use J.D.

  • Power and that's a number that--their latest forecast has been down worldwide for 2009 by 1.4%.

  • I've said they've been changing that quite a bit recently, but their very latest forecast has got that down and, of course, the places that are suffering most is North America is down 6.2% and actually Europe is the same, down 6.2%, with Western Europe down 12%.

  • And of course, there's still growth in places like India and China, in particular, growing at 13% and 9%.

  • But the J.D.

  • Power number is what we really do use.

  • And what we then try and do is take from there what it means to our real customers and the vehicles, as I mentioned, that really impact us most.

  • And there's almost as much of an impact in the movement from large vehicles and SUVs that have been very prominent in North America the last few years to the small vehicle.

  • But certainly, the J.D.

  • Power forecast is down for the year-over-year.

  • Phil Franklin - CFO & VP, Operations Support

  • And Alex, also, I think that--I mean, the guidance--the assumption that revenues are going to be down year-over-year would assume that the downturn that we're in now persists through at least the first half of the year and doesn't get significantly better in the second half of the year.

  • Alexander Paris - Analyst

  • And if you just looked at your three areas - autos, electronics, and electrical - where would you expect the most weakness, in autos?

  • Phil Franklin - CFO & VP, Operations Support

  • Well, autos is going to be down--I mean, it's going to be down because we had a pretty good first half of 2008, right, so I mean, our first half of the year in '09 is going to be down--fairly likely going to be down pretty substantially from the first half of 2008 when things were still going pretty well for us in the auto business.

  • Gordon Hunter - Chairman, President & CEO

  • Yes.

  • In particular, we were very strong in Europe and we did point out that our European strength in the first half--a lot of that was from currency and--where it stands today, the currency impact of that significant amount of automotive European business on lower volumes is going to be significant for us.

  • Alexander Paris - Analyst

  • And the electronics, just roughly how do you--do you get any kind of feeling directly from your clients saying we're cutting back in the first half or so forth, or is that just kind of related to general conditions as you--as voiced around the--Wall Street and so forth as far as the downturn?

  • Are there any specific areas of weakness?

  • Gordon Hunter - Chairman, President & CEO

  • I think that's probably the least clear of all the areas.

  • I think the Asia manufacturers, whether it's the OEMs, like Samsung and Sony, or more and more the OEMs like [Fox Kahn] that make the equipment.

  • I think they are really trying to read the economies and the consumer health or consumer spending and see if as we get into the new year do people feel a little more confident to be spending money on discretionary purchases like consumer electronics, both in Europe and here.

  • Certainly in the last quarter I mentioned that I had visited Samsung with the LCD group there and frankly they were asking me what we thought that the consumer demand was going to be like here.

  • And really until fairly recently it was holding up quite well.

  • I think that even last quarter Best Buy still recorded quite strong sales growth.

  • So it's changed quite quickly I think in the last month and I think it gives people sort of some concern to try and make any predictions for next year.

  • Alexander Paris - Analyst

  • Your electronics business--a fairly high proportion of it in terms of your end market customers is really tied into the consumer.

  • Is that right?

  • Could you give kind of a rough percentage?

  • I know you've got the infrastructure in telcom and--.

  • Phil Franklin - CFO & VP, Operations Support

  • --Consumer would be probably in the neighborhood of a third, and then we've got a piece of that is--a smaller piece is telcom.

  • And the largest piece really, Alex, is in the what we call industrial and general electronics, all this broad market for things like test and measurement equipment and medical devices and lighting applications and white goods and all these things.

  • Alexander Paris - Analyst

  • But the white goods is really part of the consumer, right?

  • Phil Franklin - CFO & VP, Operations Support

  • Yes, well, they're--that's a good point.

  • They're probably--we don't--we categorize--I mean, the 30% or so or the third is more the digital consumer stuff, so we have some non--some consumer weighted items that would also be in the general electronics, but not a big number of that.

  • So maybe bump that by another few points, but it would still be less than 40% of our total electronics business I believe.

  • Alexander Paris - Analyst

  • Roughly, if you were looking at a number--not to say there's a real close correlation, but say 40% of your business is maybe more related to industrial/related capital spending and 40% consumer and the rest maybe miscellaneous, something like that.

  • Phil Franklin - CFO & VP, Operations Support

  • That's probably--.

  • Gordon Hunter - Chairman, President & CEO

  • --That's a good assumption.

  • Phil Franklin - CFO & VP, Operations Support

  • Probably not a bad assumption.

  • Alexander Paris - Analyst

  • Okay.

  • And just one other thing, your tax rate, do you think it will stay the same in 2009?

  • Was it 29%?

  • Phil Franklin - CFO & VP, Operations Support

  • Yes, I mean, it's--with everything else being as volatile as it is, it could also affect where our earnings come from, which would really determine the tax rate.

  • But right now, there is nothing I can see that would cause us to think that it would be much different than it was this year.

  • So I would say in the 28 to 30 range would be our best guess.

  • Alexander Paris - Analyst

  • Okay.

  • Thanks very much and good luck.

  • Gordon Hunter - Chairman, President & CEO

  • Thank you, Alex.

  • Operator

  • (OPERATOR INSTRUCTIONS.) We have a follow-up question from Shawn Harrison with Longbow Research.

  • Shawn Harrison - Analyst

  • Hi.

  • Just two quickies.

  • The other income number this quarter, I guess what comprised the majority of that and how should we think of that going forward?

  • Phil Franklin - CFO & VP, Operations Support

  • Yes, it's a good question, Shawn.

  • We're really--we're talking a number that was roughly $3 million in other income.

  • Probably--I think it was about 60% of that number was currency related, so it was mostly balance sheet currency translation.

  • So that one's a difficult one to call going forward as to what that's going to be.

  • Certainly, if current trends continue we'd probably get some currency benefit in the fourth quarter as well on the balance sheet from balance sheet translation.

  • The rest of it is related to--it's just other income items, such as royalties, interest income.

  • I think we had some small dividends in there.

  • It was a number of items, miscellaneous items, that show up from time to time in our numbers that are generally a little bit lumpy.

  • But we certainly will have--in total during the year next year we'll have similar numbers on those items.

  • The real question mark is on the $1.5 million to $2 million of that number for the quarter that was related to currency.

  • Shawn Harrison - Analyst

  • Okay.

  • And then, do we have a final purchase price related to Startco that we can model?

  • And I guess how would you--how did you fund that?

  • Phil Franklin - CFO & VP, Operations Support

  • We haven't announced the purchase price yet, but you'll see it shortly when we file our 10-Q.

  • But it will--and we did do--we did the financing through a term loan that we took down at the beginning of the fourth quarter.

  • Shawn Harrison - Analyst

  • Okay.

  • Thank you very much.

  • Phil Franklin - CFO & VP, Operations Support

  • Okay.

  • You're welcome.

  • Operator

  • And this concludes our question and answer session.

  • At this time, I would like to turn the conference back over to Mr.

  • Hunter for any additional or closing comments.

  • Gordon Hunter - Chairman, President & CEO

  • Thank you for joining us on the call this morning.

  • I hope our comments have addressed the current economic environment for our business and what we are doing, both short term and long term, to meet the challenges ahead while continuing to build our position as the global leader in circuit protection.

  • We very much appreciate your interest and look forward to talking with you again next quarter.

  • Operator

  • This concludes today's conference.

  • We thank you for your participation.

  • Have a great day.