Littelfuse Inc (LFUS) 2009 Q2 法說會逐字稿

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

second 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 Littelfuse's second quarter conference call.

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

Our second quarter results came in as we had anticipated in our updated guidance release of July 7th.

Sales improved sequentially in all three of our business units from the first quarter, and excluding restructuring charges returned to profitability in the second quarter.

Sales for the second quarter were $101.4 million, up 20% from the first quarter but still down 32% from the second quarter of last year.

Adjusted earnings per share, which exclude restructuring charges, were a positive $0.10.

While we're pleased to see some bright spots in what's been a very difficult time for our Company and our customers, we're not yet ready to begin celebrating.

We still have a long way to go to get our sales and profitability to the levels we want to achieve over the long term.

So while we made some good progress we are still in hunker down mode, with an ongoing emphasis on reducing costs and controlling inventories, while at the same time focusing on increasing sales and providing our customers with the high level of service they expect.

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.

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.

So after a very challenging first quarter, we made meaningful progress in the second quarter.

As Gordon said, sales of $101.4 million were up 20% sequentially and consistent with our most recent guidance.

On a GAAP basis we had a loss of $0.12 per share, which included restructuring charges of $0.22 per share.

Excluding these charges we had positive earnings for the quarter of $0.10 per share.

Gross margin excluding restructuring charges improved by 720 basis points compared to the first quarter, due primarily to operating leverage from the sales increase and reduced costs related to manufacturing transfers and other cost reduction actions.

Operating expenses excluding restructuring charges declined by $2.6 million compared to the first quarter, and have now been reduced by over $7 million compared to last year's quarterly run rate.

This is the result of the many actions we have taken over the last several quarters, including leaning out processes, flattening the organization, moving more functions to low cost countries, and reducing the cost of outside services in addition to temporary measures, such as freezing salaries and retirement benefits and eliminating bonus plans.

So while there are some costs that will come back next year, we expect to find additional cost reduction opportunities to offset this.

This leaner cost structure has enabled us to reduce our breakeven point to $95 million in quarterly sales.

This is down from a $120 million breakeven point in 2008.

We expect continued modest reductions in this breakeven point over the next year.

Capital expenditures were $4.2 million in the second quarter, down from $7.2 million in the first quarter.

Operating cash flow was negative $2.3 million for the second quarter as favorable inventory performance was more than offset by increased accounts receivable due to accelerating sales late in the quarter.

Our balance sheet remains in good shape, as debt was reduced to $74 million and we still have $48 million in cash and $75 million in borrowing capacity.

For the quarter we were well within the limits of our loan covenants and expect to remain so for the foreseeable future.

Both the balance sheet and the covenant positions should only get better as the year progresses.

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

Thanks, Phil.

I'll begin with an overview of our three businesses, and then cover some additional key points.

As I indicated, sales in all three of our business units were up sequentially.

Electronic sales increased 20%, automotive sales increased 25%, and electrical sales were up 14% in the second quarter of 2009 compared to the first quarter.

Comparing the second quarter of 2009 to the second quarter of 2008, you can see the dramatic drop in sales we've experienced over the past year.

Electronic sales were down 36% and automotive sales were down 40% in the second quarter, compared to the second quarter of 2008.

Electrical sales increased 8% due entirely to the acquisition of Startco Engineering, which added $5.3 million in sales for the quarter.

By geography second quarter sales were down 33% in the Americas, 45% in Europe, and 24% in Asia compared to the second quarter of 2008.

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

Compared to the first quarter of 2009, second quarter passenger car production increased in nearly every region where we do business, with the largest increases in Asia and Europe.

European car production was up 30% sequentially, exceeding the JDPowers' expectations for the quarter, which was only 22%.

This sizable increase in European car production was a major contributor to our second quarter automotive sales and was mainly driven by stimulus spending and incentives to scrap old vehicles.

In addition to the general market increase, we also benefited in Europe from the continued ramp-up of new Masterfuse Programs for BMW and Volkswagen that we've discussed on prior calls.

In Asia, our second quarter sequential sales in Japan and Korea were both up very significantly.

In addition to the market growth in Japan we also had incremental sales of our low profile MINI Fuse to an OEM supplier for Nissan and Isuzu car production.

This is new business that just began to ramp-up during the second quarter.

And in Korea we won share with suppliers to Hyundai and Kia.

China car production was up more than 4% sequentially in the second quarter, according to JDPower, but this does not include sales from the Microvan segment.

Sales of Microvans to replace the traditional three-wheel light commercial vehicles is resulting from the China stimulus and has much higher growth rates than passenger cars.

This is important for us as we have no content in the three-wheeler segment, but we are selling into the Microvan segment.

The fastest growing car companies in sales and production during this quarter are the domestic Chinese brands, led by BYD Auto, according to the China market research organization, BTST.

In addition to sales from this increased vehicle production and our strong share with the domestic brands, we also had new business starts during the second quarter at Cherry and at Shanghai General Motors, as well as [Evequa], China, which all contributed to our sales performance in the second quarter.

Total car production in North America was up 4%, which was lower than had been expected.

These lower levels of production, well below the ongoing sales levels as inventory is run-down had a significant impact on our North America business.

On the positive side, we picked up some new business at several of our customers for a MINI diode product that had been supplied by a competitor that went out of business early in the second quarter.

Moving to the off-road truck and bus segment, global production is showing signs of bottoming out at low levels.

Our global off-road truck and bus sales were down 29% in the second quarter compared to the first, due primarily to efforts by our customers to reduce inventories and production.

For example, Volvo reduced new truck inventory by 16% in the second quarter over the first quarter, and its truck production was down 8% from the same period.

In the aftermarket segment our sales declined slightly, which was consistent with the overall market.

During these challenging times we are continuing to develop new products, pursue design in opportunities, and increased sales of our existing products.

For example, in the off-road truck and bus segment the launch of our new flexible electric center has also increased sales of other OTB products, such as our core fuse products and fuse holders.

We also continue to make progress on design wins.

A recent win is for our MINI Fuse for the new Tata Motors' Nano Car being manufactured in India.

This win is the result of our investment in developing a local automotive sales presence in India.

Another win was a prototype order for a device that will provide high current protection for electrical vehicle batteries for a premium segment car manufacturer in Europe.

Looking to the remainder of the year, we expect the global passenger car market will show a single-digit improvement during the rest of 2009.

The off-road truck and bus segment is expected to remain fairly flat from where it is now.

Industry data indicates the North America truck fleet is continuing to age, with the average age at an all-time high.

So there's a growing need for new vehicle production in North America, however, demand continues to be influenced by reduced access to capital.

As a result, it's not yet clear when demand for new off-road truck and bus vehicles will ramp-up.

The aftermarket, too, will probably also remain flat for the rest of the year.

Despite the challenges facing the global automotive market, with our increased presence in Asia, and our new product and reductions, we expect to see steady improvement for the remainder of the year.

Now, let's move to the electronics business unit, which accounts for about 60% of our total sales.

As I mentioned earlier, we saw substantial sequential improvement from the first quarter.

Second quarter electronic sales were up 20% from the first quarter, although compared to the second quarter of last year electronic sales were down 36%.

Asia was the primary driver behind the sequential improvement in second quarter sales.

As we discussed in our last call, we started to see modest improvement in order and ship rates to customers in Asia as the first quarter ended, and this positive trend continued in the second quarter.

The increased demand in Asia was due to several factors.

Inventory in the channel has reached an appropriate level.

We again had the seasonal sequential improvement that we normally see, and there was increased demand for consumer electronics and white goods in China resulting from the China stimulus.

Both Japan and Korea contributed to the sequential growth.

In Japan inventory returned to more typical levels.

Now, business in Korea is performing well and is at the same level as it was a year ago.

This is due to our continued penetration into large OEM accounts for consumer electronic applications that is generating increases in both fuse and semiconductor product sales.

The downward adjustment of channel inventories has occurred more slowly in North America and Europe as compared to Asia.

As a result, Europe and North American sales were slightly lower in the second quarter than in the first.

However, distributor inventories in these regions have been declining and should reach appropriate levels during this quarter.

Providing some additional signs that the worst is behind us, point of sales shipments from our distribution partners improved during the quarter, with demand in May and June turning up from the levels of March and April.

Looking ahead we see the improvement of the second quarter continuing into the third, as distributors continue to work down inventory levels in North America and Europe.

The book-to-bill ratio of 1.07, as stated in the news release, also supports the outlook for a modest sequential increase in the third quarter.

As with the automotive business, we continued our efforts to win new business, pursue design in opportunities, and introduce new products.

A significant design win during the second quarter was with Apple for their new MacBook.

We're providing direct current input and battery output circuit protection using our new ceramic subminiature slow blower series of fusers.

The annualized revenue for this win is $800,000.

Shipments are scheduled to begin in the third quarter.

In the white goods segment, we expanded our relationship with a water heater customer that already purchases our fusers, adding a high power thyristor semiconductor product to the relationship.

The customer's product is a consumer tankless water heater that is much more energy efficient than traditional water heaters.

Our thyristor has been designed into the new tankless water heater to provide a switching function for controlling the heating element.

This win is expected to generate several hundred thousand dollars of annual revenue.

Another recent design win was for our nano fuses with Pioneer Electronics in Japan for their automotive GPS system.

Each navigation system uses 11 fuses of various ratings.

The annualized revenue for this win is $200,000.

[Ila] production was completed in June, with mass production beginning to ramp-up in the third quarter.

On the product side we continue to introduce new silicon ESD protection products to further expand our portfolio of general purpose and lower capacitance devices for digital consumer applications.

A recent design win in this area is with a major broadband access equipment provider for a silicon protection array product that will be used in a voice over IP application.

The challenge in voice over IP is to protect sensitive and vital chipsets without degrading the high-speed data signal that is the foundation of the product.

Our low capacitant silicon ESD device meets this important objective.

As you can see, while we can't control the economy and our markets, we are working to make the best of the situation by actively pursuing new design in opportunities and continuing to invest in new product development.

We want to gain competitive advantages where we can now so that we'll be in a stronger position when the economy improves, which ultimately it will.

And that brings us to our electrical business, which we refer to as POWR-GARD.

This business contributes about 20% of total Littelfuse sales.

As an overview, our core POWR-GARD fuse business is down because of the slowdown in nonresidential construction and industrial markets, but we continue to believe we have good growth opportunities in OEM markets, in protection relays, and in consulting services.

Starting with the core fuse business, our two primary markets, nonresidential construction and industrial production, worsened during the second quarter compared to where they were in the first quarter.

In fact, nonresidential construction contracts for lease to build are now at historic lows.

These markets continue to be extremely slow.

This is reflected in a 26% drop in POWR-GARD fuse sales in the second quarter of 2009, compared to the same period a year ago.

In contrast, the first quarter year-over-year decline was about 18%.

These numbers represent POWR-GARD without Startco.

Data from the American Institute of Architects indicates that nonresidential construction will decline 15% this year and another 10% to 15% in 2010.

And since about 40% of our power fuse business goes into nonresidential this will continue to be a drag on our sales for another year or so.

We're a little bit more optimistic about our other major market, industrial, which we believe has bottomed and may begin to turn up within the next several quarters.

Meanwhile, we are working on those things we can control, including strengthening our distribution network, launching new products, and we continue to seek out new business.

We continue to build our infrastructure by adding additional distribution where needed and providing training for our field sales teams.

Also, in the distributor area we just launched our new line of POWR-GARD protection relays to targeted industrial, mining, and OEM accounts.

This product line was acquired through the Startco and Shock-Block acquisitions and was mainly distributed in the Canadian market to the mining industry.

We're now rolling it out to our electrical distribution partners in the U.S.

Many of the products now being offered have not been available to traditional electrical distributors in the past, and there's a lot of excitement in these channels about the opportunity they now have through our strategy to give this mainstream market access to the high quality products obtained through the two acquisitions.

Selling new innovative OEM products continues to be a major focus for POWR-GARD.

A significant win in the second quarter was with a major lighting manufacturer for a Littelfuse metal oxide varistor product that will be used in a new LED street lighting product.

Our MOV will protect the LED drivers against overvoltage condition.

The value of this contract is about $100,000.

The LED street lighting market has good potential for additional sales.

It's estimated that 35% of the government's $3.2 billion energy efficiency and conservation block grant program is going to be used for high efficiency street lighting upgrades.

If LED becomes the preferred solution this will create a market for MOV assemblies worth several million dollars.

We continue to focus on the solar industry, an emerging new market that we entered last year.

Successes this quarter include the first orders of our new SPF solar fuse and fuse holder.

These products will be used to protect the solar panels in large utility installations.

Our strategy to increase revenues by providing value added consulting services is proving to be successful, as the services team is generating revenues slightly above 2008 levels in spite of the challenging economic conditions.

In addition to selling training and engineering services, this team is generating fuse and protection real opportunities as they continue to penetrate industrial and utility accounts.

The Startco business has performed almost to the plan we had when we acquired it in September of 2008, just before the economy really dropped off.

In today's environment there aren't a lot of businesses that are meeting the expectations of last September, which is an indication of the strength of this business.

As we've discussed on prior calls, there are two parts to the Startco business, the Standard Products Group that makes ground-fault and motor relays for the mining and industrial segments, and the Custom Products Group that designs, builds, and helps to install large power centers for the underground mining industry.

Sales of the standard products are down from last year because of the general deterioration in the business environment and the closure of a number of mining projects due to lower commodity pricing and the slower industrial segment, overall.

The Custom Products Segment is a different story, sales are well ahead of last year and we have a healthy backlog.

The main obstacle we face in further growing this business was the capacity restrictions of the old building.

We've now moved into our new building in the Canadian City of Saskatoon, which triples our square footage and eliminates this capacity constraints.

In fact, we hit a new record for shipments in June.

Startco sales increased to over $5 million in the second quarter, and we expect sales to again increase in the third.

A recent win for Startco was with a new ground fault product for the Chilean copper mining market.

Because of Chilean Government subsidies these mines are continuing to invest in expansions and improvements, and our new product offers unique features that significantly reduce the installation cost.

That completes my review of our three businesses, and now I'd like to comment on some of the key initiatives we have underway to reduce costs.

In May we announced plans to further consolidate manufacturing and further reduce operating expenses, resulting in $7 million of restructuring charges, that Phil referred to.

The latest announcement was a continuation of the overall strategies we've implemented over the past few years.

These include reducing our number of locations, moving activities to low cost regions, and becoming a leaner and flatter organization.

As anyone who has had to make workforce reductions is well aware, these are difficult decisions as they affect loyal associates who have contributed to our success.

However, as you know, we manage for the long term and we believe these moves are in the best interest of our Company, our customers, and our shareholders.

We continue to take cost out of the business wherever possible, while not letting up on our commitment to provide good customer service and maintain strong customer relationships.

In summary, we saw some improvement in the second quarter, and we believe this momentum will continue into the third.

The cost reductions we've made over the past year are beginning to flow through to the bottom line.

Our breakeven point has been reduced to $95 million per quarter, and we expect modest reductions in this level over the next several quarters.

We are in a significantly better position today than we were at the beginning of the year, but as I mentioned earlier we still have a long way to go.

We have laid the foundation to become a smarter, leaner, and more efficient Company.

We've made some tough decisions, but we believe they're the right ones for the future.

We have a strong balance sheet, a broad product portfolio, and an enviable position as the global leader in circuit protection.

With all of this going for us, I hope you can see why we believe we will come out of this recession a stronger global competitor that is well positioned for increased growth and profitability.

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

Thanks, Gordon.

The following is our outlook for the third quarter.

Sales for the third quarter are expected to be in the range of $104 million to $108 million, which represents 3% to 7% sequential growth from the second quarter.

Earnings for the third quarter are expected to be in the range of $0.14 to $0.21 per diluted share.

This assumes a tax rate in the upper 20s.

We have reduced our capital spending plan for 2009 to approximately $21 million and expect to have positive free cash flow in both the third and fourth quarters.

This concludes our prepared remarks.

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

Thank you.

(Operator instructions.)

And we'll go first to Reik Read with Robert W.

Baird & Company.

Please go ahead, sir.

Hey, good morning, guys.

Gordon, could you just give us a little bit more detail on the inventory situation in Europe and Asia?

You suggested that both would bottom this quarter.

Are they -- will they kind of bottom commensurate or there seems to be some thought that Europe is meaningfully behind the U.S., so can you just give us some understanding of that?

Certainly.

First of all, in the electronics segment, and Asia I said actually we are confident has bottomed, so Asia was really turning up this quarter.

And North America and Europe are the two that we expect to really correct during the course of this quarter.

Europe probably a little bit behind North America.

So they've taken a little bit longer to get down to their inventory positions, but we're pretty confident that that's going to happen during this quarter.

Okay.

And then can you just also comment on the -- I guess the relative levels of demand in those two regions, and I guess I'll leave it at that.

Yes, I think that we saw some decrease in sales in both those regions during the quarter, and we expect to see modest increases into the third quarter.

So we're certainly seeing demand gradually picking up from the lower level that it's been at, not a bounce back in any way that we did see in Asia with the stimulus packages, and particularly in China and Taiwan.

So expectations are to see sequential growth in the third quarter but nothing like we've seen in Asia.

And POS has turned positive in both those regions, so that's, you know, I think some of what we saw in Q2 was continuation of inventory draw-down at both North American and European distributors.

Okay.

And then just on the cost side, can you guys just talk a little bit about what the status is of the transition costs, and with any of your incremental actions are there some things that will happen in the back half of the year that will necessitate higher transition costs or will those come down as expected?

Yes, Reik, so the big programs that have been ongoing for awhile, the last one really remaining, the big semiconductor move into Wushi is on track.

As we've talked about before there are transition costs or transfer costs that are coming through the P&L on a monthly and quarterly basis related to those.

Those costs will, they'll be reasonably significant.

They were in the second quarter, will continue to be in the third quarter out until we get probably into the first quarter of next year, and then they'll drop off completely.

For some of the newer programs that we just announced in May, some of the consolidation we're doing in Germany and the Taiwan fab consolidation that we're doing, there will also be some costs related to those that in addition to the severance that we've already accrued for come through the P&L, as well as some costs related to the -- you know, we are -- we're moving completely out of our Des Plaines, prior Headquarters Facility, and we have some lab moves there that will have some period costs associated with them that will happen in Q3 and Q4.

So we will, you know, Q3 and Q4 will be meaningfully, still meaningfully impacted by some of these transfer costs, and then those will start to decline pretty significantly as we get out into the first quarter of next year.

Is that something along the lines of like a million or a million and a half still a quarter?

Yes, it's probably in the -- all in, including Wushi, it's probably in the million to maybe there could be a quarter with some onetime charges that could be pushing up to $1.5 million and maybe even close to $2 million, but they're going to be in that range for the next few quarters.

Okay, great.

Thank you, guys.

Thanks.

We'll go next to Shawn Harrison with Longbow Research.

Hi.

To follow-up on that question, maybe just two different parts, if we look at operating expenses that were achieved in the quarter it looks like you're almost at that $20 million year-over-year run rate you were targeting.

Should we expect operating expense dollars, SG&A, to decline sequentially from here?

And then as we look into 2010, I just want to be crystal clear on your commentary that you'll look for additional restructuring savings to make some of the actions that were discretionary this year essentially permanent in terms of the reduction of OpEx?

Yes, so kind of the natural trend rate in SG&A should be going down slightly over the remainder of the year, but we have some of these additional transfer related costs that will be coming through SG&A that will offset that.

So net net I would expect flat, flattish SG&A for the rest of the year, maybe it's possible it could be up very, very modestly.

But because of the additional transfer related costs I would not expect to see additional reductions in Q3 and Q4 from the levels that we're at right now even though again the underlying trend is down.

As we get out into 2010 we'll, you know, you'll have a number of things happening, as you suggested, that we have some of these transfer related costs that start to go away, we have savings that start to accrue from some of the projects that we're working on, but we also have some of these onetime costs that are coming back.

And I would say net net, again, we would expect as we get into the back half of next year to see similar levels of SG&A probably to where we are right now.

They could be a little bit higher in the first half of the year as we're still, you know, we will have some costs coming back more than likely, and we will still be seeing a little bit of the transfer related.

So roughly speaking expect flat to slightly up SG&A over the next few quarters, and then it should start to come back down to similar levels to where we are today.

Okay.

And then the -- on the COGS side in terms of savings we should expect for 2009 and 2010, a run rate from this quarter, could you maybe quantify the dollar amount for that just given some of the incremental actions announced in the middle part of the June quarter?

Yes, I mean it's a little bit hard to do that.

But what we've talked about before is something on the order of $15 million of savings coming from the consolidation of the Wushi fab that those will start to hit sometime probably in the second quarter of next year and be fully in by probably midyear next year.

And then, in addition to that, we have another -- we've talked about another $7 million.

Not all of that is COGS, some of it is SG&A, but the majority of it is COGS related to the actions that we announced in May with some of these additional programs that we talked about.

And so those, again, those will hit, some of that will hit in the first half of 2010, some of it actually, a little bit of it is actually in the later part of 2010.

So you do have these additional savings coming in.

We have talked about, I guess the way we like to look at it is from a breakeven point, standpoint.

And what we've implied is that the $95 million breakeven gets progressively better at probably a fairly gradual rate, but as we get into the back half of next year that should be at least down in the $90 million range or so.

Okay.

Yes, that's what the -- it looks like the math, maybe $3 million to $4 million from the Wushi transfer, maybe an additional million dollars per quarter from the actions introduced mid-quarter here, and then the additional transfer costs would get you down to that $90 million breakeven.

Yes.

Okay.

Second, on market conditions, I was hoping that you could provide some commentary first on just what you're seeing in the pricing environment, and then in terms of peers are you seeing smaller peers either leave the business, get pushed out of the business, lose significant share here during the downturn?

Yes, it's interesting, we haven't seen a huge change in pricing in this environment.

It hasn't made a dramatic change from really a year ago.

We've typically been a business that our products have sort of had an average decline of a few percent a year, you know, lower single digits typically, and it's really continued that trend.

So we haven't seen specifically in the downturn a dramatic change.

Certainly, the overall trend of programs moving to Asia impacts our pricing because usually when programs move to Asia they are usually more competitive and there's a different price point there, so that certainly has an impact.

In the electrical business where we've seen very strong price realization for the last few years and been able to pass-through whenever there was a commodity cost increase in copper or zinc and be able to pass those through, that certainly is going to be much more challenging.

We don't see in the electrical area where we're supplying into the industrial and the nonresidential construction markets, which are much weaker, we certainly see that as an environment that we are not going to be able to as easily have price increases that we have experienced in the past.

In our automotive business it's really based on more long-term contracts, and they haven't dramatically changed.

There's an expectation in those contracts that our prices will decrease a little over the years of the contract, over that particular platform that we're expected to make up in manufacturing cost reductions, which we've usually managed to do.

And then our sort of thrust into the off-road truck and bus segment is much more a movement into more custom products where we think that there are more attractive margins and they're not as commodity as is the passenger car business and so the pricing environment is a little more healthy there.

And the other thing that's kind of figured into that situation with margins and pricing is that we, the last quarter or so we've had a heavier mix towards Asia since Asia was the first region to really bounce back, which has had a negative impact on margins.

As U.S.

and Europe start to recover we -- that should be positive from an overall mix and margin standpoint.

Okay.

And then just on the market share side are you guys, are you seeing any opportunities to take significant share, you know, particularly as I look into Asia recovering a little bit more rapidly?

Yes, we believe we are taking share.

I mentioned several areas in automotive, for example, where we are the leading supplier in China, and we've continued to expand there, particularly with the domestic players.

We had a strong position with the joint ventures, like General Motors there, but as we see the domestic players, like Cherry and BYD and [Gaylee] get stronger, the strong relationships that we have with them is important.

We also believe we're taking market share in Korea, where we're having dramatic increases this year, and even in Japan, although it's from a small base, where we have not been historically strong.

But certainly Korea and China are places where we're constantly taking market share.

And in the electronics area, you know, I think that in those same regions where we certainly feel that we're not losing any market share.

There's stiffer competition in the electronics area, but the fact that our business in Korea is the same as last year, as an example we're clearly gaining market share in Korea.

So I don't think the competitive environment has certainly gotten any worse.

If anything, I think that we've got enough examples of gaining market share, even an example of one competitor going out of business, so I think that it's certainly while I wouldn't say a downturn is a good thing, being seen as a company with a strong balance sheet, having a broad product portfolio, and having had good service, that certainly helps in a lot of customer relationships.

Okay.

And then just two quick follow-up questions.

Some industry peers have mentioned extended shutdowns at their customers here in the September quarter that were already put into place back in the June quarter negatively affecting demand to an extent.

Wondering if you're seeing that?

And then just as a follow-up on the transfer cost if you could remind me kind of what the typical breakout is that flows through COGS versus SG&A?

Was the first question related to the automotive business?

The -- principally, and then maybe in the electrical, as well?

Okay, well, we certainly are expecting to see car production start to resume and come back in the U.S.

I think the general consensus, I mean there was such -- the numbers which are usually in the press related to North America sales refer to a sales run rate somewhere in the $9 million to $9.5 million.

But what we track, more importantly, is really car production and that's been way below that in the first half of the year.

We believe the numbers are showing that there's only about 3.4 million vehicles made, which is sort of an annualized run rate below $7 million, so there's quite a big gap between what was produced, and that's obviously the inventory drawdown that's happened.

But the underlying sales rate is certainly well ahead of the first half production.

So the expectations are for a step-up to happen gradually after the summer.

That's also the time of re-tooling and putting in the new model productions.

And we expect to see the new model launches and production to start to picking up.

So we are expecting to see automotive in North America picking up in the second half.

Okay.

So it doesn't sound like there's any abnormal type of shutdowns that's affecting demand?

Well, I think that it was certainly abnormal in the sense that I think when Chrysler and GM were going through their bankruptcy time they were really shutting down a lot of plants at that time, too, and focused on a few other things.

So I think the shutdowns this year started much earlier and have been prolonged, but I think the expectation is that they're probably -- I think the second half will look much more like a normal year for North America, albeit off a much lower base, but certainly all the indications would be that, and this is even without the stimulus package which is just getting started.

So between now and November when that stimulus is open we'd expect that to drive some additional sales.

There'd have to be some production to make that up.

So I think the second half will look much more normal, albeit at a lower rate than previous years.

And then on the transfer cost, the vast majority of that goes through COGS.

Of the $15 million of the semiconductor savings, not 100% but probably 90% plus of that is cost of goods, and on the $7 million maybe a little bit more of that is SG&A.

I'd say that's probably a 70, 30 kind of a mix.

Okay.

Thank you for taking all my questions.

Thanks.

(Operator instructions.)

And we'll go next to John Franzreb with Sidoti & Company.

Good morning, guys.

Hi, John.

I was just wanting to kind of reconcile the book-to-bill with your revenue guidance.

At 107 and almost like a 2% to 6% sequential improvement in revenue and (inaudible) that the auto business should get better in September versus what maybe the current run rate is in July and August, it would seem to me that that would imply that something else is going to weaken.

Is it the electrical side of the business, the electronics, can you just kind of connect the dots for me there?

I wouldn't see any way it's going to weaken.

I think we're just saying they're all going to have modest growth.

I think that they all have their own dynamics, as I mentioned.

I think that automotive we've had tremendous growth in Europe, bouncing back sequentially from the first quarter when things were really a disaster.

A lot of that driven by the stimulus packages of Europe which really had a tremendous impact in the second quarter.

So we don't expect to see quite that level of growth in Europe going forward.

And they had the shutdowns in the third quarter, as well.

So the third quarter for automotive should be pretty flat, John.

And electrical won't have probably as much of a sequential increase as they sometimes do in Q3 because some of the weak conditions that Gordon mentioned, particularly in nonresidential construction, and then the electronics business should show their normal sequential increase from Q2 to Q3.

Okay.

So the -- okay, that's fine, great.

Moving on to something else, R&D spend.

Could you talk a little bit about what you're spending on and keep it at this level, what are your thoughts on the R&D dollars right now?

Yes, we've tried, not in this downturn with all the cost reductions we've made to cut too much into R&D.

I think that we've tried to keep that relatively flat.

And what we have been doing is doing some reductions in terms of moving to lower cost locations.

We've been moving our electronics business much more to Asia, which is where most of our customers are now, where our production facilities are, so our R&D groups in China and the Philippines that's a lower cost structure than we have here.

But as a percent of sales we've tried to maintain that more or less the same, although obviously with a dramatic downturn in sales that impacts that formula.

But the gradual, you know, the headcount is more or less the same in the electronics area and the initiatives that we have for that, they're certainly not something that we're looking to change dramatically.

Also, in automotive we're keeping our Technical Group in Germany, which is critical for our European automotive customers, and we do have an automotive core group for Asia also in the Philippines.

So I think our spending, we've made some of the cuts by leaving things out and trying to save expenses on everything, travel and all of the other things, but not make dramatic cuts other than the movement to Asia.

Now, Gordon, you mentioned a competitor went out of business.

Given the weak environment, would you prefer to be a consolidator in this environment or would you just talk a little bit about your appetite, your continued or non-appetite for acquisitions?

Yes, I think we're -- obviously, everyone is a little more cautious in this environment, but for example the last acquisition we made was Startco, and we were making that acquisition a year ago.

And I think almost anything that was made a year ago would prove to usually be a disappointment.

We're extremely pleased with that.

It fits strategically extremely well for us long term, enables us to bring much more technical products into the channels that we've got a long history with our fuse products.

It enables us to go global with those products.

And if a company, like Startco, for example, that would fit our strategy, were to be available there's a lot of interest from us going forward.

I think that where there's a good strategic fit and the valuation is right that hasn't changed for us.

Are you implying you'd want to keep the acquisitions more into the electrical side of the business, or just with -- clarify that, please?

Well, it's certainly the area -- it's certainly one of the areas that for us we're strategically trying to build-up that segment, and the Startco acquisition allowed our electrical segment to now move from being a 10% or a rather small part of the Company to the 20%, and it brings a much stronger technical presence in that area.

And that's certainly one of the segments that we would look to.

That doesn't say that there are other areas, although it's a segment that's really on its back right now.

For example, the off-road truck and bus segment in automotive, we believe there's a very interesting business there where we can make custom products for a whole range of different vehicles that can be an attractive segment long term.

It's obviously struggling right now.

But that's a segment that we would also look to.

So I wouldn't say it's only electrical, but certainly the last electrical one is something we're very pleased with and it's certainly an area that we are paying more attention to.

I think in the past when it was only 10% of our business it didn't get a lot of airtime, and we're now seeing that's a very important segment for us.

Okay.

And one last question.

Can you just talk a little bit about the sell through, if you kind of break-down electronics into consumer versus communications, if there's any kind of difference in the sell through in your end markets on those two end markets?

I don't think we have really that level to think there's that much difference.

I think really our POS data from distribution is probably pretty even across all segments.

I don't think we're feeling that maybe there's, in China with the stimulus package some of the consumer electronics and white goods, appliances have really helped that a little more.

But I think that I wouldn't say any one segment has been with that exception any stronger or weaker.

And maybe, also, for the same reasons some of the telecom infrastructure stuff, 3G based stations and things like that have been strong.

And I think on the other side of that I think some of the more industrial stuff has probably been the slowest to recover here.

Okay.

Thanks a lot, guys.

Thanks, John.

We'll now go to Reik Read with Robert W.

Baird & Company for a follow-up.

Just a follow-up on the automotive, with all of the upheaval that's occurred in the industry how is your mix among the players and, or geographies changed?

Good question.

Certainly, North America went down in the first half of the year.

That's for sure.

The dramatic fall-off in production in North America in the first half.

And Europe acted very quickly with their stimulus packages, and so that really got European sales and for the most part production to be much stronger.

So Europe, as we used to always state that Europe and North America were pretty even, and what we've seen is Europe really go ahead because of this stimulus package.

And we have very good relationships with most of the European manufacturers, as we've often talked about in other calls.

So certainly that grew and meant that that was the biggest segment, the biggest region.

And the other thing is we've, you know, we've certainly taken market share.

And although China used to be a relatively small percent of business the fairly dramatic growth in production, which actually started in the first quarter, they had a couple of record months I think already in February and March.

So the growth in China and the continued strong position in Korea where we've had good levels of penetration.

So Asia, overall, has increased as a share for our automotive business, and I think for us if we believe long term that the Korean manufacturers and the Chinese domestic manufacturers are going to be significant players in the future, developing relationships with them is important.

And we've just got to stay close to our American customers when the business does ramp back up, but it certainly has made quite a shift in that geographical split.

The Asia, just a few years ago was only about 5% of our sales in automotive, it's now starting to approach 20%, so it certainly, as Gordon said, has had a big ramp-up.

And I take it from what you're saying, Gordon, is that your overall net position with all of these players has probably strengthened in terms of if you look at things on a geographic basis when those markets improve on the margin you would do better than you had before?

I think that's fair.

I think that the position of the Chinese and Korean, I'd also include India and Brazil, I think that the position -- those places I believe in the long term will continue to produce and those domestic manufacturers will become bigger players.

So I think will overall having a much stronger global footprint, will enable us to be in a stronger position.

Okay, great.

Thank you.

There are no further questions at this time.

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

Gordon Hunter for any additional or closing remarks.

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

In these challenging times relationships are more important than ever, and I want to thank you for your interest in Littelfuse and your support as we weather conditions that were unanticipated just a year ago.

We believe we're making good progress at not only weathering the storm but in positioning the Company for future growth.

And we look forward to updating you again next quarter.

Thank you.

That concludes today's conference.

We thank you for your participation.