Littelfuse Inc (LFUS) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse Inc.

first-quarter 2009 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.

Thank you.

Good morning and welcome to the Littelfuse first-quarter conference call.

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

As we discussed on our call last quarter, we knew going into the first quarter that this was going to be a very challenging quarter for us.

The quarter progressed even slower than we originally anticipated, and in fact we did not see much improvement until well into March.

As a result, we ended the first quarter of 2009 with sales of $84.4 million, down 37% from the first quarter of 2008.

Sequentially, sales were down 20% from last year's fourth quarter.

Key markets, including automotive, consumer electronics and telecom were exceptionally weak during the quarter due to the global economic downturn and the credit crisis.

Holiday shutdowns for automotive OEMs and electronic contract manufacturers extended further into the first quarter than typical and electronic distributors continued to reduce inventories.

The electrical business, which had been holding up fairly well until last year's fourth quarter, continued to weaken in the first quarter.

This reflected the downturn in nonresidential instruction and inventory reductions by distributors.

The net loss of $0.36 per share for the first quarter was within the range of our guidance, but nevertheless it was a significant decline from earnings of $0.19 per share from the first quarter of last year.

Returning to profitability is our top priority.

We believe we reached the bottom in the first quarter and that our results will improve considerably beginning in the second quarter.

I will talk more about this in a few minutes, but first I will turn the call over to Phil Franklin, who will give the Safe Harbor statement and a brief summary of the news release.

Thanks, Gordon.

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

These statements are subject to various risks and uncertainties 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.

As Gordon said, it was a very challenging quarter.

Sales of $84.4 million were below the low end of our guidance, and due to the exceptionally slow start to the year.

There was a bright spot in the quarter.

It was that our aggressive cost reduction actions enabled bottom-line performance to be in line with expectations despite lower sales and an unfavorable tax rate.

Gross margin improved as the quarter progressed as costs declined throughout the quarter and sales ticked up in March.

We expect these improving sales and margin trends to continue through the second quarter.

On our last conference call, we committed to $43 million of cost reductions in 2009 as follows -- $20 million of savings related to manufacturing transfers; $15 million of operating expense savings; and $8 million of non-transfer related manufacturing savings.

We have now executed on all these commitments and are working on additional cost reductions that will further reduce our breakeven point as the year progresses.

The first quarter is typically our most challenging quarter for cash flow, and this year was no exception.

Cash from operating activities was negative $1.9 million for the quarter, as good working capital performance was not enough to offset our operating loss plus $7 million of severance payments.

In addition, capital expenditures were $7 million for the quarter as we neared the end of major spending related to our manufacturing transfers.

We ended the quarter with a strong balance sheet and plenty of liquidity, including $60 million of cash and $75 million of availability on our revolving credit facility.

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

Thanks, Phil.

I would like to begin my remarks with an overview of our three businesses.

First-quarter sales decreased 49% for the automotive and 40% for electronics compared to the first quarter of 2008.

The electrical business was down 17% for the quarter, excluding sales from Startco, which we acquired last September.

Including Startco, electrical sales were up 17% for the first quarter.

By geography, sales were down 26% in the Americas, 41% in Asia-Pacific and 47% in Europe compared to the first quarter of 2008.

Looking at each of our businesses in more detail, I'll begin with automotive, which contributes about 20% of total Littelfuse sales.

Globally, the automotive passenger car market continued to decline, decreasing 39% for the first quarter of 2009 compared to the first quarter of last year.

North American OEM passenger car production was down 53%, Europe was down 40%, Brazil was down 22% and Korea was down 36%.

The bright spot was China, where production increased by 4.5%.

As you know, the vehicle build has been trending downward since the middle of 2008.

This decline continued in the first quarter of 2009 with global car production decreasing 20% from the fourth quarter of 2008.

The biggest decreases continued to be in North America, Europe and Korea.

The global off-road truck and bus market was down 42% for the first quarter compared to the same quarter last year and down 20% from the fourth quarter of 2008.

Sales of heavy trucks in both North America and Europe continued to lag significantly behind last year.

However, the lower sales haven't stopped us from moving forward with our strategies to build a sales infrastructure and grow our presence in the off-road truck and bus market.

This market is a natural extension of our existing automotive business and one with good long-term growth opportunities.

To help us further penetrate this segment, we added two more independent sales representative companies in North America during the quarter.

Without question, the decrease in global vehicle production was a major factor behind our lower first-quarter sales.

Another contributor was the strength of the US dollar against both the euro and the Korean yuan.

We also have less than anticipated volumes for two new Masterfuse programs that were supposed to launch and begin ramping up during the first quarter of 2009.

We expect some ramp-up in the second quarter, but the main volumes for 2009 will most likely be realized in the second half.

In the automotive aftermarket, we had two good wins during the quarter for line fills for two new aftermarket customers.

One of these is Kmart Sears.

Another bright spot is our Smart Glow fuse line, which is growing market share and continues to perform well.

While less significant, our automotive aftermarket business is also being helped by increased traffic in aftermarket retail stores as people keep their cars longer and therefore need to maintain and repair them.

While products like tires and batteries are benefiting the most from this trend, we are seeing more sales of our fuse products as customers make impulse purchases while in the stores.

In this very challenging time for our automotive business, we have not let up on pursuing new business opportunities.

Once again, we had some significant wins during the quarter.

One win was for our new flexible electrical center which has standard components that can be configured for each customer's specific needs.

We developed FLEC specifically for the off-road truck and bus market.

Our most recent win was for a North American manufacturer that produces vehicle chassis for emergency, recreation and specialty vehicles.

In Europe, we won a special new fuse holder for high current fuses that will be used in the new Porsche Panamera which is launching this September.

We've also won approval for new high-current strip fuse to protect battery cables on marine inboard motorcraft.

In Asia, we are in the early stages of working with a major manufacturer of construction equipment that wants to enter the export market.

We see several opportunities for Littelfuse circuit protection products as the equipment is designed to conform with global ISO and quality standards.

New business wins are an important part of our growth strategy.

But what we really need is a turnaround in global car production.

We are seeing an improvement in monthly passenger car production more in Europe, Asia and Brazil and in North America, but it is very gradual.

This is driving slower recovery in our sales as well, led by China.

In Europe, the stimulus packages that provides a credit for scrapping old cars is driving a change from larger cars to smaller cars and is supporting additional sales of smaller cars in this region.

These are cars that would not be sold or built otherwise, so this is a new source of product sales for us.

A report last week from JDPower indicate that while sales levels remain low overall, new vehicle retail showed signs of stabilizing in April.

The report also indicated that market conditions are expected to slowly improve during the remainder of 2009, and this is consistent with what we are seeing in our business.

I am sure you have all seen the reports in the press about GM's planned shutdowns of 14 plants in North America for between one and 11 weeks, depending on the plant.

The shutdowns will result in reduced passenger car production of up to 170,000 vehicles based on market projections.

We estimate that the impact of these shutdowns in our automotive sales will be a maximum of about $400,000 in the second quarter and approximately $50,000 in the third quarter.

This is less than 2% of our quarterly automotive sales, so the shutdowns will not have a major impact on our numbers.

Now let's move onto electronics, which accounts for about 60% of our total sales.

As I indicated earlier, first-quarter sales were down 40% from the first quarter of 2008 and 23% sequentially.

The beginning of the quarter was very tough.

Sales were weak going into the Chinese new year, the end of January, and many customers in Asia, particularly contract manufacturers and original design manufacturers, had extended shutdowns around the holiday.

The consumer electronics, telecom and datacom end markets, which are all major markets for Littelfuse, were the hardest hit.

Sales were down in all of our product lines from fuses to ceramic and polymer components to our semiconductor products.

If there is a bright spot, it is at the quarter ended in a better position than it started.

Beginning in March, we saw modest improvement in order and ship rates to customers in the consumer products and telecom markets in Asia as anticipated in our call last time.

We believe the inventory position in Asia has pretty much corrected itself, so we expect that sales to distributors in this region will begin to build once again.

The inventory channels in North America and Europe are a different story.

The correction of these regions is taking longer to turn around and as a result, a slower ramp-up in these regions is expected than Asia.

Specifically in Asia, the improvement we are seeing there is driven in large part by the China stimulus package, which focuses on prompting domestic consumption of [white] goods and consumer electronics.

As part of the stimulus spending, orders for our nanofuse for flat-panel TVs have increased fairly substantially.

Another positive development in China is the long-awaited buildout of 3G networks for mobile phones, which provides excellent opportunities for our specialty high-voltage TVS diodes for wireless base stations.

With successful penetration into the major equipment providers, as well as increasing base station builds, we expect that higher sales in the next several quarters will increase full-year sales into this application by over 50%, exceeding $1 million for 2009.

Sales related to LCD and plasma TVs are also improving in Korea, where the weak yuan is making Korean exports more attractive to North America and Europe and also within China.

Japan has continued to remain slow due to the inventory correction by distributors and the impact of a stronger yen on exports.

In this overall down economic cycle, we continue to achieve design wins for key customer applications.

We have won several substantial contracts with customers in Asia for our new ceramic, high-temperature chip fuse.

These fuses are capable of withstanding high operating temperatures and are used in a variety of electronics products.

We are shipping more than 300,000 of these fuses per month to (inaudible) Technology in Taiwan for power supply inverters and the design win for these fuses with [Qanta] Storage for hard disk drive applications begin shipping in February.

A new contract for our polymer PTC fuses for LCD TVs produced by a major manufacturer in Asia is expected to contribute about $250,000 in revenues in 2009.

Shipments began in the first quarter and will ramp up during the rest of the year.

We are seeing a lot of interest in our TMOVA (inaudible) resulting from an update in underwriters laboratories standards for transient voltage surge suppression devices that takes effect later this year.

One recent win related to this update is expected to generate between $200,000 and $300,000 in sales in 2009 and grow to about $750,000 in sales next year.

Another win was with a [Avocent], a leading global provider of IT infrastructure equipment for a power distribution strip used for data centers.

Each board contains 12 of our POWR-GARD fuses with a total contract value of $1.8 million.

Our ability to provide product testing for complex thermal issues at our lab in De Plaines was critical to this win.

We are also building momentum in the military segment.

You may recall that last quarter, we talked about our first breakthrough in this segment in our automotive business with a contract to provide our CablePro fuses for Navistar's mine-resistant ambush protected vehicles.

Our newest contract in this segment is with Parker Oildyne in Minneapolis, designer and manufacturer of hydraulic systems.

In this application for the US Army, our TVS diodes, automotive blade fuses and fuse blocks will be used in the hydraulic system that opens and closes the doors on the Humvee vehicles.

The anticipated volume is 3000 trucks with $73 of Littelfuse content per truck.

We gained share of an existing customer, Poseidon Corporation in Japan, for a Nokia charger cable that contains our Thin-Film fuse product.

A new model and larger production volume will generate an additional $320,000 for Littelfuse beginning in June.

We a substantial order with Samsung for our TVS diodes, Thin-Film and nanofuses going into their new LCD TVs.

The TVS diode portion of this alone will generate about $700,000 annually in new sales.

We have talked in the past about our plans to expand our silicon protection arrays in the consumer handheld products and set top boxes.

We are beginning to get some traction here with a contract for our new low-capacitance silicone protection array of product into a major set top box manufacturer.

This design has estimated sales volume of about $200,000 per year beginning in the third quarter.

We are also continuing to penetrate lighting applications with our powers thyristor products.

Most recently, we won business for our SIDAC that is being used by a leading global lighting OEM to trigger ignition of more power-efficient, high-intensity discharge outdoor lights.

This revenue will start in the second quarter and will be approximately $200,000 per year.

One of the reasons I wanted to include all of these wins is to make the point that although our markets are down and we are coming off a very challenging quarter, there are new business opportunities out there and we are actively pursuing them.

Also significant is the fact that the wins are across a broad range of products and end markets within the electronics industry.

So what is ahead for the second quarter and beyond?

Well, some product lines such as our ceramic devices have not yet bottomed out.

Overall the trends are improving.

Based on where we are today, we expect that second-quarter electronic sales will be up over 10% over the first quarter, but still down from the second quarter of last year.

Factors behind the quarter-to-quarter improvement include reordering and response to the relatively low inventory levels, an increase in demand related to the China stimulus package and the traditional seasonal uptick from the first quarter to the second quarter.

That brings us to our third business unit, the POWR-GARD electrical business, which contributes about 20% of our total sales.

Two of this business unit's main markets, nonresidential construction and industrial production, were extremely slow in the first quarter as expected.

Nonresidential construction is down about 50% and industrial production is down about 10%, and with the long cycles in both of these businesses, there is little hope of a near-term recovery.

We continue to be very pleased with the performance of Startco, which makes protection relays for the mining and industrial segments, as well as custom power centers for the underground potash mining industry.

Startco's standard products are being negatively impacted somewhat by the closure of some mining projects due to lower commodity pricing and the slower industrial segment overall.

But the custom products are well ahead of last year and have a very good backlog.

We are in the process of moving the Startco operations into a brand-new building in Saskatoon, Canada which will eliminate our current capacity constraints.

We are continuing to move ahead with our strategy to expand our electrical business into the OEM segment with products like our new Up-LINK.

This is an innovative fuse holder that can actually communicate with the PLC controllers used in automated equipment.

Another focus is on the solar industry, an emerging new market that we entered last year.

A win in this market in the first quarter was for our new SPF series solar fuse and fuse holder, which will protect the solar panels in utility-owned solar systems.

On the distributor side, we just launched a program called Inventory Fitness.

This program is aimed at making sure our distributors are not running out of the bread-and-butter fuses they need to have on their shelves at all times.

This is critical because if the customer asks for one of our products, they generally need it immediately because something has stopped.

If they can't get it from our distributor, they will get it from a competitor.

Last quarter, I mentioned our plans to launch a new protection relay line into the North American distribution channel.

We acquired this line through the Startco and Shock Block acquisitions, and began rolling it out in the first quarter under the Startco POWR-GARD name.

Many of the products being offered have not been available to traditional electrical distributors before and there's a lot of excitement in the channel about this high-quality product that is now available to them.

We also had a good win for the protective ground fault relay products in the first quarter with the manufacture of petrochemical processing equipment.

The ground fault relays are being designed into the electrical control systems of this equipment.

The contract has a value of $200,000 with the first orders already shipped.

So that completes my review of the three business units.

Now let's talk about Littelfuse as a whole.

As we have indicated, the past few quarters, our major focus in this economic downturn is to control costs and reduce operating expenses.

The actions we are taking include workforce reductions, reduced travel, reduced spending for outside services, reduced capital expenditures, a global salary freeze for anyone not covered by a labor contract, and reduce compensation for our top executives and board of directors.

We are scrutinizing every product line, every location and every process to take cost out of the business while continuing to provide good customer service and maintain strong customer relationships.

Littelfuse is regarded as a well established strong supplier that will be there for the long term.

Customers are well aware of our strong financial position with a strong balance sheet and significant lines of credit that help to ensure that we will weather the economic crisis and come out of it stronger and healthier than ever.

We believe the solid reputation we have in the industry, which is built on our brand leadership, broad product line and solid financial position; is helping us to gain market share during this difficult environment.

The manufacturing transfer program we started several years ago is in the final stages.

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

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

We expect this transfer to be completed in the first half of 2010.

With the first quarter now behind us, we believe we'll be able to achieve even more reductions in operating expenses.

As we said in the news release, we now expect that operating expenses will be more than $20 million below 2008 levels.

Beyond that, we also plan to make further cuts in manufacturing costs and capital expenditures.

At the time, I'll turn the call back to Phil who will comment on the guidance we provided in the news release and then we will open the call to questions.

Thanks, Gordon.

I would now like to recap our outlook for the upcoming quarter and then add a few comments about the back half of the year.

Sales for the second quarter are expected to be in the range of $93 million to $97 million, which represents 10% to 15% sequential growth from the first quarter.

This expected sales increase is supported by the following.

We believe distributor inventories, which have declined for the last two quarters, are nearing appropriate levels and will not be reduced much further.

Automotive demand is improving gradually in Asia and Europe and seems to have bottomed out in the US.

Electronics order rates are improving and book to bill for April was 1.14.

Due to the aggressive cost actions we have taken, we believe we can now break even with quarterly sales in the mid-90s.

We expect this breakeven point to drop into the low 90s in the back half of 2009.

As a result, we believe that at the upper end of our sales guidance for the second quarter, we can return to profitability.

We have reduced our capital spending plan for 2009 to approximately $23 million and expect to have positive free cash flow in the third and fourth quarters of this year.

Before we conclude, I would like to mention a recent honor that we received.

Forbes just recognize Littelfuse as one of the 100 Most Trustworthy Companies in America.

This was based on quality and transparency of accounting and corporate governance as determined by Audit Integrity, an independent financial analytics firm.

We have always strived to be open and transparent in our communications and conservative in our accounting and governance and feel honored to be publicly recognized for this.

This concludes our prepared remarks.

Now we would like to open it up for questions.

(Operator Instructions) Shawn Harrison, Longbow Research.

Just a few points of clarification for me first.

Did you state what the book to bill was for the March quarter?

We said at the end of the quarter, it was about 1.0.

This is the CEO.

It is running at 1.14 currently?

Yes, for the month of April.

If you were to extrapolate the run rate you are seeing here in April in terms of revenues, where would that put you in terms of the guidance, or do you need to see a further lift in terms of the run rate as the quarter progresses?

Well, the guidance was 10% to 15% sequential increase.

So the 1.14 book to bill in April would seem to support something at least in the middle of that guidance that we gave.

Okay, I just wanted to make sure on that.

The other side of that is just the cost savings here.

Could you just do me a favor and run through real quickly the savings plan that you started at the beginning of the call?

I think it was the manufacturing moves, the OpEx and the additional manufacturing.

So the plans that we talked about in our call back in February and most things we've been talking about for a while now, the $20 million of 2009 savings related to the manufacturing transfers, the $15 million of operating expense savings; and then in addition to that, another $8 million of manufacturing savings unrelated to the transfers for a total of $43 million of year-over-year savings.

Those are the programs we talked about on the last call and then reiterated on this call that we have executed on.

We also alluded to additional cost savings actions that we are taking, which we haven't been as specific about those yet.

But we did indicate that we now expect operating expense savings in excess of $20 million compared to the $15 million that we originally indicated.

And I think you can take from that that we are looking at other savings in addition to that as well.

Okay.

I guess that was my follow-up on the OpEx savings, because quick math, the $88 million of just SG&A run rate achieved here in the first quarter is about $20 million below that -- $16 million to $20 million below what you realized in terms of operating expenses in 2008.

So it doesn't sound like there is much more room on a dollar basis for SG&A to decline from the point you had here in this quarter.

Is that correct, or are there some temporary moves here in the first quarter that may be coming back?

So, yes; I think what we are saying is that certainly there are some pieces of SG&A that are somewhat variable with revenues that will naturally increase as we go through the year.

So we are going to certainly -- we believe we are going to be offsetting those and again, we indicated that we now think it is a minimum of $20 million, which I think you can take from that that we are targeting something higher than that.

Okay.

So maybe just safe to assume the dollar amount of SG&A probably doesn't move much from here one way or the other?

Yes, I think it will move down some, but not dramatically.

Okay.

And then last, maybe you could just provide some commentary on what you think incremental gross margins are here, given you've completed a number of these moves in terms of the manufacturing side and you have the additional $8 million of saves here as well.

So incremental gross margin, I am assuming Shawn, you are referring to --

Your contribution margin.

Our marginal contribution on incremental sales.

Those -- it's going to be something north of a -- little bit north of 50% is typically how we look at that.

And it depends on which business those are coming from and which products they are coming from.

But a good average is probably something between 50% and 55% drop-through on additional sales.

(Operator Instructions) It appears that we have no more questions.

I would like to turn the call back over to Mr.

Gordon for any additional or closing remarks.

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

The key points I hope you will take away from this are that we are responding to the economic situation with a strategy that incorporates reducing costs and moving operations to lower-cost regions that are close to our customers while continuing to develop new products and pursue design-in opportunities.

We believe this multi-pronged approach combined with our strong financial position will position us to be a stronger, healthier competitor when the economy recovers.

We look forward to updating you on our progress next quarter.

Thank you.

And this concludes today's conference call.

Thank you for your participation.