Littelfuse Inc (LFUS) 2008 Q4 法說會逐字稿

Welcome to the Littelfuse Inc.

fourth quarter 2008 conference call.

Today's call is being recorded.

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

Gordon Hunter.

Please go ahead, sir.

Thank you.

Good morning and welcome to the Littelfuse fourth quarter 2008 conference call.

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

Like many other companies, this was a tough quarter for Littelfuse.

However, the revised guidance we issued on December 19th proved to be correct with our results for the quarter falling within the ranges we provided.

Fourth quarter 2008 sales of $105.9 million were down 25% from the third quarter.

For the full year, sales of $530.9 million were down 1% from 2007.

The first half of the year was on track.

We then saw some weakening in the third quarter but the greatest impact by far was in the fourth quarter.

As we indicated in our call in December, electronic and automotive sales dropped off sharply in November and they declined even further in December.

In Europe and North America, consumers concerned about their jobs and the economy held off on new car purchases and those who did want to buy faced a very tight credit market.

As a result, the automotive OEMs globally slashed production rates and shut down assembly lines for much of December with the reduced production continuing into January.

Electronics end markets also weakened substantially in the fourth quarter.

As consumers continued to lose confidence in the economy and cut back on spending.

We were also impacted by electronics distributors reducing inventories and response to the decline and demand of the uncertain outlook for 2009.

One bright spot was our electrical business which had another record year.

But even this business began to slow later in the fourth quarter.

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

Then I'll provide more detail on the market dynamics in our business units, our cost reduction activities and our progress in other key strategic areas.

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.

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

Sales for the fourth quarter were $105.9 million, which was consistent with our latest guidance but down 22% year over year.

Our automotive sales declined 32% compared to the prior year quarter as a result of unprecedented decline in car production as well as weakening in the after-market and off-road truck and bus market.

Electronics, after posting modest sales growth for the first nine months of the year, declined 25% in the fourth quarter with consumer electronics leading the decline.

Electrical sales after nine months of double digit growth slowed to a 1% year-over-year decline in the fourth quarter.

These declines were partially offset by the addition of Startco which added $3.9 million for the quarter.

On a GAAP basis, the Company had a loss of $0.42 per share in the fourth quarter.

This included $0.27 per share of special charges, most of which were non-cash and related to write-down of both operating and financial assets.

Excluding special charges, the Company had a loss of $0.15 per share which was consistent with the low end of our most recent guidance.

Earnings for the quarter were impacted by high transfer related expenses coupled with unusually low production rates resulting in large unabsorbed overhead variances.

Despite the poor P&L results, cash from operating activities for the fourth quarter was $15.8 million, the best performance of the year.

This was the result of strong overall working capital management and in particular, outstanding accounts receivable collections.

Capital expenditures peaked at $17 million in the fourth quarter, primarily from spending on facilities and equipment to support the manufacturing transfers.

From here forward, capital spending will show a significant downward trend.

Now, I will turn it back to Gordon for some more color on market trends and business performance.

Thanks, Phil.

Looking at each of our businesses in more detail, I'll begin with automotive which contributes about 25% of total Littelfuse revenues.

The latest data from JD Power shows that global car production continued its dramatic decline in the fourth quarter.

Fourth quarter production was down 18% year-over-year and down 6% from the third quarter of 2008.

The declines in our key markets were even more dramatic with fourth quarter production down 22% year-over-year in Europe and 25% in North America.

Asia was down 10% for the same period.

These production levels are way below the past few years and the most dramatic decrease we've ever seen in this business.

What is especially remarkable is how fast the market deteriorated.

While consumers who couldn't get credit or worried about their jobs stopped buying new cars, it was just a few short weeks until the OEMs slowed production.

And with just-in-time manufacturing, it didn't take very long for us to experience a sharp drop in sales of our automotive products.

Actually, our sales to many Tier 1 customers slowed even before the OEM shutdowns because these suppliers ran out of finished goods warehouse space and had to stop production.

We also experienced a downturn in the off-road truck and bus segment, particularly in the RV construction and transportation vehicle markets.

Unfortunately, we don't see production ramping up as quickly as it went down.

The reason for this is that most people can make their car last another six months or year if they need to so we expect that when the turnaround comes, it will be more gradual than it was on the downward side.

In addition to the decrease in car production, another factor in our automotive performance for the fourth quarter was the effective currency translations, specifically the strengthening of the US dollar against the Euro.

The average exchange rate dropped from $1.51 in the third quarter to $1.32 in the fourth quarter, creating an additional 12.5% decline in our European business due to currency translations.

We had a similar experience in South Korea with a 22% decline due to currency translation there.

Although sales were down substantially overall, we continue to pursue new opportunities and won several new pieces of business.

A major win was the fuse business for the GM global Delta II platform.

In North America, this platform comprises cars we would call compact or low mid-size.

The models in the Delta II platform include the Chevy Cruze, the Pontiac G6, the Saab 9-3 and the Chevy Volt.

Global volumes for the Delta II start with about 287,000 vehicles in 2009 but are projected at this time to ramp up to one million vehicles in 2011 and 1.6 million in 2013.

In Brazil, we added the Blade Fuse business on all Honda motorcycles produced in that country.

This includes both our mini and ATO fuses depending on the model.

This win will add more than $300,000 annually once the peak rate is achieved next year.

Also, in Brazil, we won another contract from GM for the Gamma Three platform which launches this year.

Like the Delta II, this is also a standardized global platform but this one is for small sub-compact cars such as the Chevy Aveo and the Opel Corsa.

A good win on the automotive aftermarket side was with [Ballcamp], a leading aftermarket automotive distributor.

The win significantly extends our Smart Glow blade fuse line which is proven to be a very good acquisition for us.

These fuses have an indicator that lights when the fuse is blown making replacement simple and easy.

As I indicated earlier, the reduced vehicle production volumes have extended into the first quarter which will impact our sales once again.

Our key focus in this very uncertain market is on winning share in underpenetrated areas and taking advantage of currency translation effects where they're favorable, such as in the Asia region.

We're also focusing on the North American off-road truck and bus market where we have opportunities to build our presence with our existing products or products that can be easily modified for specific applications.

A good example is our cable pro fuses which we're currently providing for Navistar's mind resistant ambush protected vehicles known as the MRAP.

The MRAP contract is our first breakthrough in the military segment and we anticipate additional opportunities in this market.

Overall, we believe the automotive business can outperform the growth of its markets with its new products and further inroads into the North American off-road truck and bus market.

We'll be extremely cost conscious and cautious in our approach.

Now, let's move on to electronics which accounts for about two-thirds of our total sales.

Here too, we saw a dramatic decline of sales deteriorated throughout the fourth quarter.

The weakness was across all major end markets and across all geographies.

The decline was most pronounced in Asia, for over voltage products used in applications such as broadband and high-speed internet access equipment set top boxes, modems and telecom infrastructure equipment.

The drop in demand was so significant that many customers in Asia curtailed their orders at the end of the fourth quarter and into the first quarter of 2009.

In addition, many Asia customers particularly contract manufacturers and original design manufacturers had extensive plant shutdowns around the Chinese New Year at the end of January.

As a result, we expect to see modest improvements in order and ship rates to Asian customers in the months ahead.

On the distribution side, the inventory levels have been reduced to modest levels, which could also contribute to some improvement in demand as distributors restock their inventory.

As in the automotive business, we did not let up on our efforts to win new business.

One win that stands out in 2008 is for our new improved metal oxide varistor which is part of a new wall outlet ground fault circuit interrupter being manufactured by Leviton.

Another win is our expanded relationship with Samsung for their LCD TVs.

These Samsung products contain three Littelfuse circuit protection components -- TVS diodes, Thin-Film and Nano fuses to protect the high definition video transmission data and to protect against electrostatic discharge.

Another win is with Cisco for TVS diodes that will protect an ethernet application in wireless switching equipment from overvoltage surges.

This new contract is expected to generate about $400,000 in 2009.

We're also on board several recently launched consumer products.

In the Apple iPhone 3G, our new series of Thin-Film fuses is protecting the high-speed data and video capabilities of the new smartphone.

For Panasonic's latest generation of digital still cameras, the battery charging power supply was designed using our TR series of fuses designed for high power applications.

That brings us to our electrical business or POWR-GARD, as we refer to it internally, which had a record 2008.

Startco Engineering which we acquired in the fourth quarter was also a solid contributor to our results and actually exceeded our performance expectations for the quarter.

We also made good progress on our initiative to expand our presence in the OEM segment and continued to benefit from price increases implemented earlier in the year.

POWR-GARD sales grew at strong levels for most of the year but began to slow in the fourth quarter.

December was especially weak as distributors paid more attention to their own year-end inventory position.

Both non-residential construction and industrial activity have slowed and we expect this to continue in 2009 until better economic conditions return.

The newest segment we're now tracking is mining because there is a key market for Startco.

Although global demand for uranium and potash has slowed, none of the major mining companies have pulled back on their capital investments.

So as long mines are being expanded or refurbished, we can expect to see demand for the Startco products.

As in our other two businesses, POWR-GARD also had some significant wins in the fourth quarter.

A number of these were with OEM customers for applications such as high efficiency LED street lighting, industrial power strips for servers used in data centers, load centers for testing generators and power pedestals.

We're also penetrating the emerging solar market.

We had more than $2 million of sales in the solar market in 2008, an increase of over 50% from 2007.

The largest percentage of sales were in Europe, especially Germany.

We're also selling these products in Asia and North America.

Later this year, we will launch two new fuse products developed specifically for solar applications.

Both of these products improve on solutions that currently exist in the market.

Our circuit protection components are being used in two types of solar energy products.

(inaudible) turn the solar power into electricity and combiner boxes which connect several solar panels into one output.

This market is a unique opportunity for power fuses because the elevated direct current capabilities of these systems make it expensive and cumbersome to apply circuit breakers.

The Littelfuse products used in these applications are coming out of our POWR-GARD business but the electronics business is also involved in pursuing new opportunities in this segment.

We expect the OEM momentum to continue in 2009 as we begin to see the benefits of our work in this market over the past two years.

This will help to offset the impact of the major slowdowns in the construction and industrial segments of our core fuse business.

We plan to launch a new POWR-GARD protection relay line into the US market in 2009 through our current electrical distribution channel which should lead to additional sales.

Pricing pressure is expected to increase with the economic challenges and as a result, we do not expect to see the same level of price realization that we've had in the past several years.

That completes my review of the three businesses.

With the downturn in the economy having such a significant impact on our results, this is a time where we're benefiting from having three diverse business units.

The balance we get from electrical is helping us to compensate for the severe downturn in automotive.

That's another reason why we want to make POWR-GARD and Startco a bigger contributor to our total business.

This background on our markets and the economic impact on them, the next question is, what are you doing in response?

The answer is twofold.

First, I want to emphasize the controlling costs and reducing operating expenses that our prime refocus at this time.

We're taking this mandate very seriously and I can honestly say there's no area of our business that's not being touched by our expense reduction efforts.

These cost reduction programs include work force reductions.

We've also implemented a global salary freeze for anyone not included in a labor contract, eliminated non-critical Company travel, and are being extremely selective in new hiring.

Most recently, we reduced the total compensation of our top executives for 2009.

We continue to scrutinize and prioritize any and all spending for projects and programs.

We're cutting costs wherever we can but we won't cut into muscle that would reduce product quality and new product development or harm customer relationships.

This delicate balance is made a easier by our strong financial position with our solid balance sheet and significant line of credit.

With all of these cost reduction activities underway, we're on track to reduce operating expenses by at least $15 million in 2009.

The second part of our response to the challenges in the economy and our markets is the manufacturing transfers that began several years ago.

When we started this program, we had no way of knowing how the economy would play out in 2008 but with 20/20 hindsight, the timing for this initiative was extremely good.

While many companies are just beginning to consolidate operations, we're now in the final stages of our program.

The automotive and electronic production moves from our Des Plaines, Illinois, facility to Mexico and the Philippines were completed at the end of 2008, ahead of schedule.

The North American distribution center move from the Chicago area to Mexico was completed in November as planned.

We've moved out of Ireland entirely with the varistor production from this facility now being handled at our new plant in Dongguan, China.

Telecom wafer fab production from Irving, Texas will be transferred to our new facility in Wuxi, China beginning in mid 2009.

We're continuing to build the technical team in Wuxi as we target full operational capability later this year.

With nearly all of the equipment set up and operational, we've begun to process wafers in Wuxi to qualify the processes.

The transfer should be completed by the middle of next year.

We're also transferring our semiconductor back end packaging operations to Wuxi from Mexico and Taiwan.

We expect this transfer to be completed on schedule by the end of 2009.

And finally, the relocation of our corporate headquarters to a smaller and more cost-effective location in the Chicago area is on track to be completed during the first quarter of 2009.

By the end of this year, the vast majority of the program will be completed with the final moves finished shortly after that.

The only disappointment with the transfers is that the new facilities were designed to achieve the greatest efficiencies with higher production volumes than we have right now.

That's why in 2008, the slowdown in demand for our products somewhat offset the benefits of the new facilities we had expected to achieve.

We expect the level of savings to pick up significantly in 2009 with at least $28 million of savings budgeted for the year.

Longer term, when the economy does turn around, we'll be ready to ramp back up with efficient new plans and added capacity to meet the increasing demand for our products.

While our main focus right now is reducing costs in response to the turmoil in the economy, our strategies to position Littelfuse for the long-term growth have not changed.

One of these key strategies is investing in new product development and working closely with our customers to get our components designed into their new products.

Even in a tough market, we made good progress on this initiative in the fourth quarter with the GM and smart fuse wins in automotive, the Leviton, Samsung, Cisco and Apple opportunities electronics and the increased OEM business in POWR-GARD.

Some of our strategy we have focused right now on reducing costs and response to the economy.

But at the same time, we are continuing to move ahead with the initiatives that will make us a healthier and better Company and a stronger global competitor when the economy improves.

We believe we'll come out of this well-positioned to increase sales and improve profitability which is our overriding objective.

Beyond the opportunities in our more traditional markets, we also see good opportunities for our products in a number of emerging markets.

The growth in these markets is coming from the increasing awareness of conservation and the need for alternative energy sources.

Earlier I mentioned our role in solar energy and LED lighting.

In automotive, production of hybrid and all electric vehicles like the Chevy Volt, continues to grow.

We're excited about the many growth opportunities we see on the horizon and new applications for our products are still in the concept stages.

We're confident in our future and our ability to add value to our customers and shareholders in the years ahead.

Looking shorter term however, our visibility for the first quarter and beyond is not very clear at this point.

Our markets are unpredictable and there's much uncertainty around the economy.

In that environment, the first quarter has started like the fourth quarter ended -- with very weak sales and order rates for electronics and automotive.

The announcement yesterday of huge decreases in North American passenger car sales in January shows just how weak 2009 has started.

GM sales were down 49% in January with Ford sales down 40%, Toyota down 32%, and Honda sales falling 28%.

If there is any encouraging news here, it is that we expect to see modest improvement in February and March.

On the earnings side, we expect the profitability will improve significantly beginning in the second quarter as a result of the savings achieved through our reduced cost structure.

With that, I will now turn the call back to Phil who will comment on the first quarter guidance in the news release then we'll open the call to questions.

Thanks, Gordon.

Let me first summarize and recap the expected 2009 financial impact of the cost reduction actions that Gordon just described.

Then I will discuss the outlook for 2009.

Our manufacturing transfer programs will generate at least $20 million in savings in 2009.

We've taken further actions to reduce manufacturing costs by an additional $8 million.

Both the $20 million of transfer savings and the additional $8 million will hit the cost of sales line.

Our operating expense reduction actions are expected to result in operating expenses being at least $15 million lower in 2009 compared to 2008.

Now, for the 2009 outlook.

As we said in the press release, and as Gordon just reiterated, we had an extremely slow start to the year reflecting weak end markets, cautioned by distributors at inventory levels and the timing of the holidays.

With this very slow start and unprecedented lack of visibility, sales and earnings guidance becomes unusually difficult.

Nevertheless, we decided to give guidance for the first quarter albeit with wider than normal ranges.

We expect sales for the first quarter to be in the range of $88 million to $98 million.

Gross profit margin for the first quarter will be impacted by negative operating leverage associated with running the business at unusually low levels of sales and production.

Although significant manufacturing cost savings will occur in the first quarter, most of these savings will go into inventory and not hit the P&L until the second quarter when the inventory is sold.

You will get some benefit from our operating expense reductions in the first quarter but, again, most of these savings will not hit until the second quarter.

As a result, the Company expects a first quarter loss in the range of $0.20 to $0.40 per share.

We're not ready to give specific guidance out past the first quarter but we do know that both manufacturing costs and operating expenses will be significantly lower beginning in the second quarter.

With the cost reductions we've described by mid 2009, you will have -- we will have a dramatically lowered break-even point to somewhere in the range of $100 million in quarterly sales.

Assuming typical seasonal sales increases, even off the depressed first quarter levels, we should be able to return to profitability in the second quarter and show strong sequential earnings growth in the third quarter.

In 2009, we will continue to focus on cash and aggressively manage the balance sheet.

Capital expenditures will be reduced to approximately $27 million in 2009.

Although the first quarter is always a difficult quarter for cash, for the full year 2009, we expect to generate enough cash from operations to more than cover our capital expenditure needs.

This concludes our prepared remarks.

Now, we would like to open it up for questions.

Thank you.

(Operator Instructions) We'll go first to [Ingrid Eihart] at Bank of America Merrill Lynch.

Good morning.

Just want to go back to the gross margins this quarter.

Maybe if you can just give us a little bit more color.

Was that adjusted negative operating leverage or how much of that was in transfer cost?

You had indicated a higher transfer related cost in the quarter?

We really -- we had the final push on the transfers to get the completion of Ireland, the Ireland transfer to China and the transfers out of Des Plaines to Mexico during the quarter and therefore, we did see peak transfer costs during the Q4.

Those transfer costs combined with the extremely low volume and the negative operating leverage on that extremely low volume were really the major causes of the margin being what it was.

As I indicated in my comments earlier, Ingrid, we had very high unabsorbed overhead because of a high level of spending coupled with very low levels of production in the fourth quarter.

Okay.

So, can you quantify who that's transfer-related costs were in the quarter?

Well, they were -- we had talked about transfer-related costs being in the neighborhood of peaking at around $3 million.

I think they were probably slightly above that for the fourth quarter.

Okay.

Great.

And then, in terms of inventories, you had mentioned the inventories company that will absorb some of those savings now but what about working down this quarter?

Will you be able to work down some of the inventory that you built up this quarter?

And how -- will that further impact your margins?

Inventories were relatively flat for the quarter but we did build up inventories during the year, largely related to the transfers as we -- we have a target to take inventories down in the $5 million to $10 million range during 2009.

A significant piece of that is related to taking excess inventories that we built to facilitate the transfers out.

We also believe with fewer plants and better lean manufacturing processes in those plants that we can drive further turns improvement over and above that.

Okay, great.

And then on the $15 million operating expense reduction, how much of that is going to be R&D-related versus SG&A?

Are you going -- is R&D going to come down?

Yes, I don't have a specific number for you but there is a meaningful piece of that that is related to R&D and the biggest piece relates to acceleration of the move we already talked about where we move the bulk of our R&D from the US and Europe into Asia.

So, we had a big R&D capability here in the US and for electronics and that will be moving more -- we'll be moving that faster and more aggressively over to Asia primarily in the Philippines.

And that's the major cause for the R&D reduction.

The R&D -- it is a meaningful piece of the $15 million.

I would guess about 25% to 30% of it.

Okay.

Great.

Thanks.

And I guess finally, on the gross margins, just looking forward this quarter, what kind of incremental margin are you looking at?

What kind of leverage do you have, operating leverage are you expecting?

Well, I think, we -- generally speaking, we -- if we can -- for every dollar that we can take sales up, we should be able to drop around half of that or slightly over half of that to the bottom line.

So, there is a significant amount of operating leverage as we scale the business back from revenue levels kind of in the $90 million -- $90 plus million per quarter up into the over $100 and ultimately back to the kind of levels that we would normally expect to operate in the $130 million to $150 million range per quarter.

Right.

And so then this quarter, a lot of those benefits you're also going to have impact because they're not going to show up?

Right.

So, I mean we will -- so this quarter, we get impacted by a lot of things.

We don't get the benefit of the cost reductions in a meaningful way.

Because all of the reductions that we're realizing in cost of sales for the quarter will be going into inventory and then only turn out of inventory in Q2.

The operating expenses, we will be executing on those, a lot of those during the quarter so we'll start to get some benefit but the major benefit will come in Q2.

And then those -- and then we also get hit with a negative operating leverage from the very low top line number that we're expecting for the first quarter, in part driven by the timing of Chinese New Year and the fact that our year started during the Christmas and New Year's holidays in Europe and the US.

Okay.

Great.

Thank you.

Yes.

Next we'll go to Reik Reed at Robert Baird.

Hey, good morning.

Good morning.

Phil, could you maybe walk through with the -- I take it to be a forward movement of those transfer costs in the fourth quarter.

Can you talk about what the transfer costs are as we go into 2009 and then maybe can you detail out a little bit of as you go through the year, how much of the $28 million that you're talking about -- is that by and large mostly kicking in in the back half of the year or if you can give us some --

By the time we get into the second quarter, we'll be seeing a meaningful chunk of that $28 million.

As well, we'll be seeing -- we're not going to be quite at our operating expense run rate that we hope to get to but we'll be certainly more than halfway there.

So, we will start getting the majority of the benefits from the cost reductions when we get into Q2.

By Q3, they should be fully there.

On the transfer-related question, we still have some minor remnants from the Mexico move and the Ireland move -- the move out of Ireland and the move from Des Plaines to Mexico -- where we have some cleanup and some mothballing of facilities and things like that that will drag on a little bit.

But for the most part, the big numbers related to those two transfers are behind us from a transfer cost standpoint.

In 2009, the major transfer-related costs relate to the moves from Irving, Texas and Matamoros, Mexico to Wuxi.

But overall, we talked about a number that was -- started out in 2008 at roughly $2 million and change a quarter and peaked out at over $3 million a quarter.

Something in the area of $10 to $12 million, I would expect those costs to probably be half that in 2009.

That's included in the $28 million that we talked about in manufacturing savings.

I'm sorry.

So, the $28 million is a net number?

Yes.

It includes the reduction in transfer-related costs.

It includes savings.

It includes additional reductions that we've done unrelated to the transfers.

Okay.

And so with what you were saying a minute ago on the -- really the contribution margin, I mean you ought to see a pretty significant movement just because you're lowering the cost, the break even point pretty early on and then as we get back into the back half of the year, I would assume that volume matters but it matters a lot less than it has historically?

I wouldn't say necessarily that it matters less than it has historically.

Certainly, we're going to be able to have the business be still -- it will be much more profitable at lower levels of sales than it was historically.

We still will have the significant amount of operating leverage as volume scales up and down.

I think once we get all of the facilities done and the Irving, Wuxi move done and we're down to truly six facilities around the world, we will have a significant reduction in fixed costs as well which not only will help us bring the break even point down even further than what we're talking about here but it will mean -- it will be a little less sensitive to volume changes going forward.

But it is probably not going to be that dramatically different in terms of how the business scales up and down this year because we still have -- we still own the Ireland plant.

We still own the Des Plaines plant.

Until we clean some of that up, we're still going to have the issue where the business has a fair amount of operating leverage both on the upside and the downside.

To your point, that will improve as we move forward.

And then just back to the working capital side of things.

Just given that the slowdown, the completed transfers you kind of alluded to inventory being down.

Would working capital be a larger source of funds in 2009 than it was in 2008?

No I would say overall, I wouldn't say that would be the case.

I mean there are a couple of factors there.

There's -- as you saw, we had a huge receivables reduction in the fourth quarter.

With the big drop-off that we had in sales.

So, we're not going to see that repeat itself.

On the other hand, we will do better in inventories in 2009.

So, overall, for the year in 2008, we dropped receivables by $23 million during the year.

All of that was in the fourth quarter.

So, we're not going to get a repeat of that.

But on the other hand, our inventories actually went up by $6 million to $7 million in 2008.

As I mentioned, we expect that number to come down by $5 million to $10 million in 2009.

So, the better performance on inventory will largely offset the fact that we had this huge drop in receivables in '08 that won't repeat in '09 although we do expect to aggressively manage the day sales outstanding but we're already starting at such a low level, it is hard to see that debt receivables will come down more from where they are.

The other thing that will impact cash flow is the amount of severance that we pay out and obviously the capital expenditures.

And the severance that we pay out -- we paid out about $20 million roughly in 2008.

It will be about half that in 2009.

And then obviously that will drop way off as we get past 2009.

And CapEx is obviously come down a lot from over $50 million to again, about half that number -- in the $27 million range.

So, there will be some things moving in different directions on cash, on cash flow but, overall, we -- even with -- very challenging year for earnings, we still expect to be positive free cash flow for the year.

Okay.

Great.

Thank you very much.

Yes.

We'll go next to John Franzreb of Sidoti & Company.

Good morning, guys.

Good morning.

Gordon, could you talk a little bit about the order trends?

Clearly there's no sell through going on in the automotive side of the business.

But what are the electronics customers telling you that right now gives you confidence in a profit rebound, at least in sales growth improvement in the second quarter of the year?

You're right.

In the automotive business, we really are operating on a poor system.

So, very quickly, as sales decline, they really -- very quickly decrease their ordering on us.

So, we don't really have any inventory issues in automotive.

It is extremely responsive to the market.

So, the end market trend is really critical.

And it really means that we'll be tracking sales of vehicles around the world.

That very quickly translates into production of vehicles and very quickly translates into sales of our products into the Tier 1's.

In the electronics area, we have distribution channels which really slowed down as I mentioned extremely in the fourth quarter and really the period from the extended Christmas holidays right through in Asia to the Chinese New Year holidays that they're just ending, people just really coming back to work has been very slow in January.

So, tracking our book-to-bill, which is not -- in these circumstances, not necessarily the best indicator in a normal stable business, it would be a metric we'd be really looking at.

That's tracking just below one.

But on a lower sales level.

But we're really -- I think looking to see through the contract manufacturers and the OEMs, start to ramp up production now after Chinese New Year and start to put some demand on the distribution channels so we'll see our distributors reordering.

That's really what we're waiting for.

So, the next few weeks, I think, everyone in the electronics industry is going to be waiting to see if we're going to see demand picking up from really very low levels of inventory throughout the chain for all components and I think frankly, for end use products as well.

Okay.

You touched a little bit, Phil, on being positive free cash flow for the year.

What are your thoughts about debt repayment fee?

How do you kind of think you'll finish out 2009 on the balance sheet?

The only debt we have at the moment is the term loan we just took out in the end of the third quarter.

We had -- at the end of the year, we had an $80 million balance there.

And we had a clean revolver with $75 million of availability on it.

So, our view of that is that we like the term loan we have.

In all likelihood, we're probably not going to prepay that down.

It is cheap money and we think having a cash cushion until we get a little bit better picture of what this downturn looks like and what the shape of it is really going to be is a good thing and it also provides us with some cash to take advantage of any opportunities that might be out there.

So, our intent would not be to pay down the term loan that amortizes, starts amortizing the first quarter at $2 million a quarter.

So, we would expect to just pay down the amortization unless something else changed, we probably wouldn't prepay that.

We would keep the cash.

Okay.

And I apologize if I missed this.

In the guidance numbers for the first quarter, are there any one-time items included in that number or is that an operational number?

It is probably going to be -- it is a wide enough range, it probably includes both.

We're not anticipating significant one-time items.

We may have a little bit of severance costs but it is not going to be that meaningful.

The big pieces of severance related to the reductions that we described today in our press release, those reserves were taken in the fourth quarter.

So, we may have a little bit of additional severance that we have to suck up but other than that, we don't -- we're not anticipating any other big charges in the quarter.

Thanks a lot, Phil.

You're welcome.

(Operator Instructions) We'll go next to Shawn Harrison at Longbow Research.

Hi, good morning.

Just getting back to the debt question, what is the interest rate on that write-down?

Maybe just a run rate in terms of interest expense.

It is LIBOR plus 175 is what the spread is on that.

So, we've been running that mostly off one month LIBORs which have been, half a percent or so.

Okay.

So, looking at something -- that LIBOR rate plus another 500K a quarter in 2009?

Yes, that general neighborhood.

Okay.

Secondarily, two quick modeling questions.

Other income was up something like $3 million sequentially in the fourth quarter.

How should we look at going forward and what kind of comprise that and maybe a tax rate here for 2009.

There are a number of things in there we will have.

We will have some interest income on the $70 million or so of cash that we have around the world generally invested and very safe, very short-term type of investments.

We will also have some -- we do get some royalties but those are generally small numbers.

The biggest item that was in the Q4 number was foreign exchange, gains that we had.

Those were balance sheet re-evaluation gains that ran through the P&L.

We're not anticipating those are going to reoccur but obviously they may and could go either way depending on what happens to exchange rates.

So, something maybe in the $3 million, $3.5 million range going forward in terms of income?

Yes.

I would say it certainly wouldn't be any more than that.

Okay.

Then just a tax rate.

Tax rate should be similar to the tax rate this year.

Something in the high 20s.

We're typically modeling about 29%.

Okay.

Getting back to the cost saving initiatives, I want to be crystal clear on the $28 million manufacturing saves as well as the $15 million in operating expenses.

Are those cumulative numbers for the year or are those run rates exiting the year in terms of savings?

Those would be impact on 2009 and most of those are executed very early in the year so it is going to be pretty close to being the same thing but the impact we're giving you is the impact on 2009.

So, it would be a little bit higher than that in terms of the exit run rate.

Okay.

And then getting back to the demand question, maybe just kind of another way to ask -- given the guidance you provided for the quarter in January run rates you've seen in the business, what type of percentage uptick would you need to see in February and March to meet the mid-point of guidance?

The other way to ask is if we multiply January times three, would we meet the low end of guidance?

January times three would probably be a little bit below the low end of guidance.

Remembering that, we've had a week of Christmas holidays in January and also probably a little bit over a week of Chinese New Year.

So, it is probably not a very indicative month.

But if it continued at that rate, it would most likely end up at the very low end or below the low end of our guidance.

The other side of that is you're not expecting a large kind of double digit uptick to exit the quarter?

Actually, we're really not expecting the market to improve at all.

What we're expecting is that to revert to more normal run rates and less inventory drawdown than what we have been experiencing.

We do think sales rates and order rates will improve but it is not going to be based on any improvement in the market.

It will be based on these other factors.

Okay.

And I know you highlighted some [ASP] potential pressures out there but not a lot of negativity.

Is that something that could worsen here as we progress in the quarter?

Is that something you're concerned with heading during the first six months of the year?

I think in the electronics industry, it is always a risk when demands are this low, there becomes more pressure on price and that has proven out in past downturns.

So, we're certainly -- we're modeling into our plans, probably a little bit higher than normal price erosion numbers for electronics.

We don't -- we think that automotive is going to -- automotive the concern is volume.

We don't think the pricing will be much different than it has been historically.

It is still going to go down.

Most of our automotive business is on contracts.

So, we don't think that's going to change materially from what it typically would run.

The electrical business, we don't think we're going to see major price reduction issues there but we certainly aren't going to get the kind of price increases we got over the last year or two.

In part driven by some of the commodity prices going up which obviously they're not this year.

Okay.

Just to summarize on the electronics, it is modeled into the business.

You just haven't seen anything of greater than normal pressure to date?

We have not seen a trend change yet.

But we have modeled in some higher price erosion.

Okay.

Thanks very much.

Okay, Shawn.

(Operator Instructions) We'll take a follow-up from Reik Read at Robert W.

Baird.

Hey, just given your guidance for the first quarter and if you kind of apply some element of normalcy now, it looks like revenue might be down about 20% in 2009 versus 2008.

I know that that's just roughing it out in this environment.

I mean assuming you're down a pretty meaningful amount like that, does EPS come down at a commensurate rate given that you've got some good offsets with these cost reductions or can you hold it flat?

How should we think about how much of the cost reductions really kind of go to the bottom line to help it out?

Yes, I mean clearly, we're clearly going to get a lot of positive impact from the cost reductions.

But we're talking about -- I think your numbers for year-over-year sales changes are probably a little bit higher than I would assume.

Remembering in there, we also have a full year of Startco in 2009 which should be about $20 million of revenues as opposed to the roughly $4 million that we had in 2008 or picking up $16 million on Startco.

But generally, to answer your question, generally, we are expecting -- particularly as we get out to the middle of the year -- that those cost reductions will flow to the bottom line and they're going to offset and more than offset the pretty severe negative operating leverage that we're going to experience and we still believe that even with the huge negative operating leverage that you talk about that we still should see some modest improvement hopefully in operating margins and other things even at those levels.

Certainly, if we can get up to the $120, $130 million quarters, we can be very profitable at those levels with the cost structure that we're going to have by the middle of the year.

Okay.

So, but if you think about -- first quarter, you have huge negative operating leverage and not real -- no real impact because it is all in inventory.

Second quarter, you may be -- I'm roughing this out.

You think about it as drawing even then as you get to the back half of the year, those costs reductions really kind of kick in more than the negative operating leverage.

They do.

And we're expecting just seasonably, we would expect some better sales results.

We expect to get past this -- what we think is going to be a very depressed first quarter to, even with the current state of the end markets which obviously is very weak.

We still think the sales numbers, when we get out to Q3 will be significantly higher than the Q1 numbers, even with no improvement in the end markets.

Okay.

Great.

Thank you, Phil.

You're welcome.

At this time, we have no further questions.

Mr.

Hunter, I'll turn the conference back over to you for any closing remarks.

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're doing both short term and long term to meet the challenges ahead while continuing to build our position as the global leader in surge protection.

So, thank you again for your interest in Littelfuse and we look forward to talking to you again next quarter.