Littelfuse Inc (LFUS) 2009 Q3 法說會逐字稿

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

third 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 third quarter conference call.

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

Our third quarter results came in on the high end of the guidance we issued on September 16.

Sales in all three of our business units improved sequentially over the second quarter.

Sales for the third quarter were $116.4 million, a 15% increase from the second quarter, but still an 18% decline from the third quarter of 2008.

Adjusted earnings per share, which exclude restructuring charges, were $0.33 compared to $0.10 in the second quarter.

As the numbers indicate, the trend lines are improving.

Revenues have moved steadily upward from $84 million in the first quarter to $101 million in the second quarter to this quarter's $116 million.

Moving to earnings, it's good to be back to talking about a good profitable quarter as we have in the third quarter.

As we discussed last quarter, we're seeing the benefits of the plant moves and our very comprehensive cost reduction programs.

We're building momentum, but at the same time we're still cautious about the near-term future in some of our markets.

And while they are improving, our sales and earnings are still not at the levels we believe we can achieve over the long term.

So while we are pleased with our progress, we are still very focused on controlling costs, pursuing growth opportunities, especially with key customers, and in emerging markets and maintaining a high level of customer service.

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

Thanks, Gordon.

Before we proceed, let me remind everyone that comments made during this call include forward-looking statements based on the environment as we currently see it, and as such, do include various risks and uncertainties.

Please refer to our press release and SEC filings for more information on the specific risks that may cause actual results to differ materially than those expressed in forward-looking statements.

Sales for the third quarter of $116.4 million were slightly above our most recent guidance of $113 million to $116 million, as demand continues to improve in our automotive and electronics businesses.

Adjusted earnings per share of $0.33 for the third quarter also slightly exceeded our most recent guidance of $0.27 to $0.32.

It is now clear that the many cost reductions we have executed this year are flowing through to the bottom line.

These cost reductions, combined with operating leverage from higher sales, drove significant margin expansion in the quarter.

Adjusted gross margin for the third quarter increased to 31.6%, a 270 basis point improvement from Q2.

Operating expenses, excluding charges, declined to 22.0% of sales in the third quarter, compared to 25.4% in Q2.

This resulted in adjusted operating margin increasing to 9.4% in the third quarter compared to 3.7% in Q2.

Our P&L results for the third quarter imply a breakeven point of $94 million to $95 million in quarterly sales, which is exactly where we expected to be at this point in time.

This indicates that we are achieving our planned cost savings and holding the line on fixed costs as sales ramp up.

We expect further reductions in the breakeven point through 2010, as we continue to lean out our organization and successfully execute on cost reduction initiatives such as the consolidation of three silicon manufacturing facilities into our new low-cost facility in Wuxi, China, and transfer of our remaining automotive manufacturing in Germany to our state--of-the-art automotive plant in Mexico.

As projected last quarter, free cash flow turned positive in the third quarter.

Cash from operating activities increased to $5.1 million even after a $6.4 million voluntary contribution to our US pension plan.

Capital expenditures also declined to $1.9 million in the third quarter from $4.2 million in Q2 and $7.2 million in Q1.

Our balance sheet remains in good shape as debt net of cash was reduced from $25 million to $20 million.

Now I'll 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 our markets and then update you on our strategic initiatives.

As I indicated, sales in all three of our business units were up sequentially, both electronics and automotive sales increased 16%, and electrical sales were up 10% in the third quarter of 2009, compared to the second quarter.

Comparing the third quarter of 2009 to the third quarter of 2008, the percentage decline in sales is also improved.

Electronics sales were down 26% and automotive sales were down only 7% in the third quarter of 2009, compared to the third quarter of 2008.

Electrical sales increased 10%, due entirely to the acquisition of Startco Engineering, which added $7 million in sales for the quarter.

By geography, third quarter sales were down 17% in the Americas and 15% in Asia compared to last year's third quarter, while sales increased 25% in Europe.

Looking at each of our businesses, we will give you some color around these numbers.

I'll begin with automotive which contributes about 20% of total Littelfuse sales.

The biggest contributors to the 16% sequential increase over the second quarter was increased global car production.

Third quarter passenger car production continued the momentum we had had in the second quarter, increasing almost 10% overall compared to the second quarter of 2009.

However, this increase was not consistent across all regions.

The main contributor to the increased production was the stimulus programs in North America, Germany and China which in turn drove increased sales of our products.

Some of the increases in production were very substantial.

For example, in North America, third quarter car production was up 31% over the second quarter.

Car sales were up significantly more than that.

Two reasons for this are that our Tier 1 customers were not holding near as much inventory as they have in the past, so they are starting to refill some of the inventory levels as the market improves.

Also, the forecast for the fourth quarter in North America shows continued sequential growth.

In Europe, overall car production was basically flat in the third quarter versus the second and the forecast is also flat for the fourth quarter.

As you may recall, European car production ramped up very strongly in the second quarter, led by the stimulus programs.

As some of these programs ended in Q3, car production did level off.

In Brazil, car production in the third quarter increased almost 10% over the second quarter, and our sales increased at an even higher level.

Much of the sales increase came from new business we won from GM for a subcompact car called the Gamma Platform.

We mentioned this win a few quarters ago and now it has ramped up.

Both GM and Fiat had higher growth rates in the average for Brazil, and since this is where we have most of our business in Brazil our sales benefited as well.

The third quarter was also a strong quarter for car production in Korea, with a 20% increase over the second quarter.

China has been in the spotlight for car sales and production for much of this year.

China's stimulus program, which as we've mentioned on prior calls, has resulted in a significant increase in production and sales of our vehicle segment called the microvan.

Our sales in China were up about 19% in the third quarter with much of this growth directly attributed to sales into these microvan vehicles.

The microvans are replacing the traditional three-wheel light commercial vehicles that have been the standard in China for some time.

In addition to new segments like the microvan, we've also won new customers in China, both direct and through our distribution partner channels.

Much of this business is going into domestic China platforms such as Chery, Geely and Great Wall Motors.

In India last quarter we announced a win for our MINI Fuse for the new Tata Motors Nano.

This business started to ramp up in the third quarter.

We've also won additional business in India for Hyundai, GM, and VW.

Moving on to the off-road truck and bus segment, the market continues to be down but our sales were up about 25% in the third quarter over the second quarter.

This was primarily due to several new program wins in North America that launched during the quarter.

The OTB segment in Europe also saw some modest sequential growth in the third quarter.

Additionally, during the third quarter, we did win a new program in the OTB segment for a high-current bolt-down fuse that will be used in a new commercial truck application.

This new business will begin production in early 2010.

So we are making progress in growing this business.

We're in a very challenging market.

The aftermarket segments were pretty much flat and in line with the seasonal factors we've seen in the past.

On the product level in addition to sales increases in our standard fuse products like MINI and JCASE and Cable Pro for high current applications, we also saw sales increases in some of our new products and applications with MasterFuse, MINI Diodes and the Low Profile MINI.

For MasterFuse, we realized growth in Europe and China with new GM and VW programs that launched or ramped up during the third quarter.

For the MINI Diode, we won and started new business with several of our major Tier 1 customers where we are replacing a competitor that did not survive the economic downturn.

We had a very significant increase in Low Profile MINI volumes in the third quarter from several new business wins for programs with Nissan and Isuzu in Japan and Hyundai-Kia in Korea.

Looking at new product development, one of the areas we are focusing on is advancing the technology on high-voltage fuses for hybrid electric vehicle applications.

This segment is continuing to evolve with a number of platforms in the market and under development.

We're going to be on the Chevy Volt, which is the first plug-in hybrid that will hit the market and we're also on a standard dual mode hybrid with Renault that will be launched soon in Europe.

While we've already had some nice wins, we're continuing to develop our strategy for this emerging segment to determine where and at what level we can be most successful.

We're working closely with customers to gain a thorough understanding of the technical and performance requirements for their specific applications.

For example, advanced design-in activities are currently underway with customers such as Lear and Drexel Meyer, or OEM programs at GM, Renault, and BMW.

As we look ahead to the fourth quarter, at this point we're expecting overall passenger car production to be flat to slightly up.

With the end of some of the stimulus programs in Europe, J.D.

Power predicts that European car production will be slightly down in the fourth quarter.

The same goes for Korea, which as I mentioned, had a strong third quarter, but is forecast to be slightly down in the fourth quarter.

Brazil as well is expecting a soft fourth quarter.

The forecasts for China are also down, but this does not include the microvan segment which continues to be strong due to the stimulus continuing through the fourth quarter.

A bright spot here is North America where production is expected to increase over the third quarter and should contribute enough growth to pull fourth quarter global car production up to third quarter levels.

For automotive this means that we do expect to realize sequential fourth quarter growth due to our higher content share in North America and European vehicles.

Looking ahead for 2010, current predictions are the global car production will be the similar level as the manufacturing run rate for the third and fourth quarters of 2009.

In the off-road truck and bus segment, ACT Research expects North America demand for new heavy- and medium-duty commercial vehicles to be off around 45% for the full year 2009 and remain at weak levels through the first half of 2010.

Europe heavy truck is expected to end 2009 down around 47%.

For 2010, current analyst predictions are that Europe could remain flat for most of 2010 and that North America could see low single digit growth, with most being realized in the second half.

But as we are winning new programs in this segment with new products we recently launched we expect to outperform the market in the OTB segment in 2010.

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

Consistent with what we communicated in our September 16th guidance, electronics business exceeded our earlier expectations for the quarter.

Although electronics sales of $71 million were down 26% from the prior year, they did grow 16% sequentially over the second quarter.

Asia and Europe were the only regions to grow sequentially in the second quarter but they continued to improve in the third quarter and were joined by North America in contributing to the sequential sales growth.

The increase in sales in all regions was due to improved end demand along with lower inventory levels in the channel and typically higher third quarter seasonal patterns.

The end demand increases continue to be broad based, ranging from consumer electronics to white goods and communications equipment.

Inventory in the channel has returned to more normal levels and our channel partner point of sales shipment data continues to point to improved end demand.

The rebound in Asia sales has been the most significant during the course of the year.

After rapidly declining in the fourth quarter of last year and bottoming out in the first quarter of this year, sales in this region have led the recovery.

Sales in Asia in the third quarter were over 65% higher than the first quarter and now stand at levels that are 15% below the prior year.

One of the key drivers behind the increased electronics sales in Asia was the China stimulus which helped consumers to buy popular electronic products and white goods.

China consumers have now become purchasers of products, not just producers which is helping to drive the overall demand for electronic products in China.

Due to our strength in the Asia region, we've been able to benefit from this market improvement, and take advantage of our strong customer position.

In fact, our Korea team has led our sales trends for the region with third quarter sales that were actually 22% above the prior year, making this a record quarter for Littelfuse sales in Korea.

This success reflects increased penetration into key LCD TV and other consumer electronics applications as well as increased volume due to market share gains made by some of our end customers.

At this point in the fourth quarter our backlog is strong.

And while we would normally expect a typically seasonal decline, this year the general market recovery and having one extra week in the fourth quarter will give us a quarter slightly ahead of Q3.

While our market visibility is not very fond of the future, we believe we've come through the downturn.

While we've held most of our lead times at normal levels, certain of our competitors have significantly lengthened lead times for some products, reflecting the broad based recovery that has occurred.

We are cautiously optimistic that we will build a base from the current levels, but the possibility still exists for softer demand in the first part of 2010.

With a continuing focus on what we can control, I'd like to highlight a few of the recent sales and design wins we've had in our electronics business.

We won business with a Japanese customer for a thin film fuse in an MP4 portable music player.

We've already begun shipping product to this customer, and estimated annual revenue will be more than $400,000 for this opportunity.

Also, we've had a good success with a design win at Sony for our PICO fuses on the next generation LCD TVs which have expected volumes of 15 to 20 million sets in 2010.

Also in the fuse business, we've had several design-in wins for cell phone chargers.

Some of this business is shipping already, and we expect incremental sales of several hundred thousand dollars per year from these wins.

One of these wins was the new Palm Touchstone wireless charging dock that is used with the new Palm Pre phone introduced in June.

The Touchstone technology generates a small electromagnetic field that is transmitted through the back of the phone so the phone charges without connecting a wire.

Another recent design win was for the small surface mount PTC device used to protect the USB memory stick.

This opportunity is expected to contribute several hundred thousand dollars in incremental sales in 2010 and represents a good growth application for us.

In the computing space, we designed a number of circuit protection components into a new netbook or ultra-mobile PC application with a customer in Asia.

Netbooks are a rapidly expanding category of small, light and inexpensive laptop computers.

This one has a touchscreen as well as a keyboard that has all the functionality of a notebook, including wireless internet connectivity.

One of the devices designed into this netbook application is a new product that we launched earlier this year, as part of the expansion of our silicon ESD Protection offering.

Each PC will contain nine silicon ESD devices providing protection for the keypad and touchscreen from potentially harmful transients.

Additionally, we have designed in a polymer ESD device for antenna protection, a TVS diode for overvoltage protection, and a fuse and PTC device for overcurrent protection.

This is a clear example of the value that we can bring to customers that require various forms of circuit protection all in the same application.

That brings us to our electrical business which we refer to as our POWR-GARD business.

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 the nonresidential construction and industrial markets.

But we continue to believe we have good growth opportunities in the OEM market in protection relays and in consulting services.

Let's look at the markets first.

The McGraw-Hill nonresidential construction index was down 37% year to date through August, compared to the prior year.

The Industrial Production Index, which measures industrial activity, was also down 21% for the same period.

Looking at our results, starting with the core fuse business, our construction and industrial sales reflected the market.

Sales registered large negative numbers compared to 2008.

The base OEM business continues to be negatively impacted by declines in commercial construction which affects products such as standard lighting, HVAC and other durable goods.

Industrial capacity expansion is also negative, affecting demand for fuses used in industrial power controls.

As a result of these adverse market conditions, POWR-GARD sales were down 13% in the first quarter year-over-year, 25% in the second quarter, and were down 28% in the third quarter year-over-year.

These numbers represent POWR-GARD without Startco where the story is much better.

The one exception to this downward trend was the OEM segment.

While the segment continues to be down overall, the comparison to the comparable 2008 quarter was actually better in the third quarter than the second.

We attribute this to some of the work we are doing in the solar power market, which generated orders that helped us in the quarter.

The services group, which provides electrical safety services and training programs, continued to show an increase in sales compared to the prior year.

While our markets remain down, there are a number of bright spots in the area of new orders.

We're starting to secure significant orders from the design wins in solar and LED street lighting.

We've received significant orders from three major solar inverter manufacturers, four solar system integrators and one LED street lighting manufacturer.

Forecasts from these manufacturers are very strong for 2010.

Also in the solar market we've already realized significant sales in our new series of Solar Protection Fuses that were released in the first and second quarters.

The customer response to these new products has been very positive and several new business opportunities are in process globally.

In the light commercial HVAC market we secured two significant new wins in the third quarter.

The first is a design-in of our dual element time delay fuses and fuse holder into a new air conditioning unit from a leading global manufacturer.

The other design win is with another leading global manufacturer for an air conditioning unit for the South Korean market.

The win was secured for the same reasons we got the HVAC win.

The customer has designed our Slo-Blo Midget Fuse into the product, and has also requested a new PC board mount fuse block and cover that we are scheduled to deliver at the end of the first quarter.

Purchases of the fuse will begin late this year with estimated sales in 2010 of $100,000 and $500,000 in 2011 and beyond.

The fuse block and cover will add another $60,000 in 2010 and approximately $1 million in 2011 and beyond.

And one additional nice win was in the white goods market for residential clothes dryers.

This win is also for our dual element time delay fuses and fuse holders on the main incoming power connections in order to meet a UL fire test.

Total estimated sales in 2010 will be about $200,000.

Looking ahead, the outlook for both the nonresidential and industrial markets indicate we're in for a tough ride through 2010.

Data from the National Electrical Manufacturers Association indicates the nonresidential market segment is expected to drop another 15% in 2010.

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

We are a little more optimistic about our other major market, industrial, which we believe has bottomed and could show some modest growth in 2010.

Meanwhile, we are continuing to tightly control costs, we are focusing our investments on those areas where we feel there is more immediate return, and we're keeping in very close contact with our distributors.

The story is much more positive in our Startco business.

We are extremely pleased with this acquisition, which is now performing above the plan we had when we acquired it in September of 2008 just before the economy dropped off.

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

I know I said this last quarter but this is such a significant point, and I think it's worth mentioning again.

As we've discussed before, there are two parts to the Startco business, the standard products group which 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, primarily potash mines.

Sales of the standard products are below last year and this reflects the general deterioration in the business environment and the closure of a number of mining projects due to the slower industrial segment overall.

The custom products segment is a very different story.

Sales are well ahead of last year, and we have a healthy backlog that we believe will exceed our plan for the year.

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

We've now moved into the new building in Saskatoon in the second quarter.

This building triples our square footage and eliminates the capacity constraints.

The major potash suppliers are continuing to make large capital investments in expanding existing mines and developing new mining sites in the Canadian market.

Our current focus for Startco is expanding the protection relay product line into the US through our existing electrical distribution channels.

So it will take some time but should reap rewards in the future through increased sales of our standard products.

We're also beginning to leverage the Littelfuse global sales force to grow this business internationally.

We have recently had some success selling product to customers in China.

Other targeted growth areas include the North American utility markets and the petrochemical industry.

In the custom products area we anticipate that the global price of potash will stay high enough to keep these mines in an expansion mode.

This will serve us well in the short term.

We're also looking at new markets and geographies for the future expansion of these products.

That completes my review of our three business units.

Now I'd like to update you on the key initiatives we've discussed on prior calls.

We're executing on the plans we announced in the second quarter to further consolidate manufacturing and continue to reduce operating expenses.

These plans include consolidating manufacturing from Duensen, Germany to Mexico, consolidating the Taiwan wafer fab facility into Wuxi, China, and closing a distribution center in the Netherlands.

We started these restructuring activities in the third quarter and expect them to be fully completed by the end of 2010.

In addition, the transfer of our semiconductor back-end packaging operations from Mexico and Taiwan to Wuxi is on schedule with now 85% of volume already transferred and completion planned for Q1 2010.

At the same time, of course, we're continuing to provide good customer service and are working hard to strengthen our customer relationships so that we will be well positioned for growth as the global economy recovers.

As you know, our well-established expertise in circuit protection is the foundation of our industry leadership.

During the third quarter, we announced our plans to create a new technical center in the research part on the University of Illinois Champaign-Urbana Campus.

The 15,000 square foot facility, which will include a high power test lab, will also support our customer's product testing requirements.

Our presence in the research park will enable us to leverage the skills and knowledge of the University's faculty and students.

University of Illinois is ranked among the top five electrical engineering schools in the US and the new technical center is scheduled to open in March of 2010.

Another initiative is to extend the tools and training of lean across the enterprise.

We've implemented lean in our manufacturing operations and are now expanding lean across all functions of the company.

We have deployed several lean training programs that will ultimately reach all of our employees as we believe every employee has a role in the lean process.

A number of lean projects have been launched across the business.

Each business unit has projects underway that relate specifically to the products and processes.

In general, we're looking at areas such as the order entry, fulfillment and payment process, budgeting and planning, and accounts payable areas.

The goal is to improve processes, reduce errors, and increase speed and responsiveness to make us a stronger global competitor.

To summarize, we continued our momentum into the third quarter.

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

And we expect to see further benefits in the year ahead.

While we are making good progress, we're still being very cautious.

We're continuing to focus on controlling costs, and when it comes to spending, we are focusing our investments to areas where we can capitalize on growing product lines and markets.

We will definitely end 2009 in a much better position than the year started.

Throughout this challenging year we've kept our focus on reducing costs, consolidating our manufacturing into fewer facilities and moving ahead with new product development.

These factors, combined with our strong balance sheet, broad product line and position of industry leadership, set the stage for a better 2010 and a promising future.

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 fourth quarter.

Sales are expected to be in the range of $116 million to $123 million, which represents sequential growth of 0% to 6%, and year-over-year growth of 6% to 13%.

Earnings for the fourth quarter are expected to be in the range of $0.33 to $0.46 per share.

We have further reduced our capital spending plan for 2009 and now expect to come in at $17 million to $19 million compared to our previous estimate of $21 million.

As is typical, fourth quarter is expected to be our strongest cash flow quarter of the year.

As for 2010, we are still in the planning stage but even in a scenario where our key markets remain flat with current levels, we believe earnings can return to levels similar to those achieved prior to the downturn.

This reflects our confidence in new product revenues, combined with continued improvements in our cost structure and breakeven point.

It also assumes the commodity prices do not spike up further from the current levels.

This concludes our prepared remarks.

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

(Operator Instructions).

We will take our first question from Shawn Harrison with Longbow Research.

Please go ahead.

Hi, good morning.

First question just has to deal with incremental margins, and the cost savings left over.

If my math is correct, at least in the December quarter, incremental margins on the gross margin line may be a little bit lower than what you're targeting long-term.

Is there something with the extra week that puts a little bit of pressure on that?

And then second, just correct me if I'm wrong, it's about $4 million in savings left from the transfer to Wuxi, and then $7 million of other savings left over from the distribution consolidation and some of the other moves expected in 2010.

Yes.

So, Shawn, relative to the incremental margins, I think you need to take into account an extra week of expenses in the fourth quarter.

So, for example, you are going to see a lower drop through on the sales because those sales are actually occurring over 14 weeks rather than 13 weeks so you have some additional expenses attached to those.

But that should be the only factor that would cause our incremental drop through on sales to be any lower than it was in the third quarter.

Okay.

Relative to the additional savings, I think we had indicated previously, I think you're correct that on some of the savings that the new programs that we announced three or four months ago, the Duensen consolidation and the Yangmei move to Wuxi, I think we had said that was about $7 million of savings.

That number hasn't changed.

And then the bigger number is the consolidation of Matamoros and Irving facilities into Wuxi which completes somewhere about the middle of next year.

And that number's probably closer to $15 million of incremental savings.

Okay.

And some of that is tied to -- the Matamoros transfer is somewhat tied to just lower transfer costs as well as part of that $15 million.

That's correct.

Okay.

And then final question, in terms of March quarter seasonality, obviously you'll have the extra week that won't help you rolling off.

But as you look at kind of visibility out there coupled with kind of seasonal trends, what should we expect of -- or should we expect normal seasonality is the question.

Is there something out there that points to better than normal seasonality in terms of maybe more flattish trends?

Just kind of thoughts on what the market's showing in terms of seasonal growth?

So you're talking about our fiscal and calendar Q1.

Correct.

We don't have a lot of visibility to that at this point.

But I would say that with the kind of surprising strength that we're seeing in Q4, it wouldn't be surprising if we saw a little bit of softness beginning the new year.

And so while we don't really have much visibility and we're not in a position to make a projection as to what that might look like, I could certainly see a possibility that Q1 could be a little bit of a dropoff from kind of the Q4 rate that we're running at right now.

Just because things are probably a little hotter right now than we would normally expect them to be and we think that will slow down.

And then there's also just the roll off of the extra week on a sequential basis.

Yes, and you've got to take that into account for sure.

As we talked about we don't get a full extra week because some of it's consumed by holidays.

But clearly we get some extra days in the fourth quarter that we won't get in the first quarter of next year.

So you do have to consider that.

Okay.

Thank you very much.

You're welcome.

Thank you.

And our next question comes from John Franzreb with Sidoti & Company.

Please go ahead.

Good morning, guys.

Hi, John.

My first question is -- we've talked a little bit about how much costs are coming out of the business.

I'm curious how much costs come back?

How much in discretionary costs maybe that are coming back in 2010?

Could you talk a little bit about that?

Is that a meaningful number?

I mean it is a meaningful number.

I think -- there are probably between bonuses that we're not paying this year and retirement benefits and merit increases and things like that that were all pretty much frozen for 2009.

There could be $8 million or more of costs that come back in 2010, but I think what we've said in the past is because of some of the cost reductions that have already been done that are flowing through and some of the other things that we have in the works that we would not expect operating expenses to change much going from 2009 to 2010.

I think for the total year, I would expect them to be relatively flat, maybe only up slightly.

So, Phil, as you accrue for those expenses, though, I imagine that the first couple of quarters are going to see a reset in some of those operating expenses.

Yes, I think you're right there, John.

I think probably in the first quarter, and maybe to a lesser degree in the second quarter, you'll see some higher expenses coming back in, and then you should see lower expenses in the back half of the year.

Okay, excellent.

Regarding the capital expenditures, it's been ramping down rather significantly.

I know you have some transfer moves for next year.

Are we thinking that most of the CapEx that you put in place has covered all of those transfer moves, or is there going to be an adjustment to the CapEx line next year?

The bulk of the spending for the big moves is behind us, although we certainly do have some spending yet to go on the Wuxi move.

There's a little bit probably on the Duensen move to Mexico, so we do have some capital related to the moves, but the big numbers are clearly behind us.

We also have -- you heard Gordon talk about quite a number of new products that are coming out, both in the automotive electronics and also in the electrical areas for next year.

Those will drive some capital spending that we haven't quite figured out what that number looks like yet, but overall, I would expect CapEx levels in 2010 to be pretty similar to the '09 levels.

Okay.

Now in light of the -- looking at the 106 book-to-bill ratio, do you have a sense of how much is inventory restocking from your customers versus maybe a natural consumer sell-through?

Can you kind of address that?

Let me try to do that.

That's one thing we really try to dig in to is that -- I think there's probably a combination of both.

I think that inventory levels got very low when everyone was down in the depths of the recession and I think everyone was sort of trying to hold as little inventory as possible so there's some natural restocking.

But what we've been trying to be as careful as we can.

And I think I've said this a few times.

It's a lot easier on North America I think with more accurate data to be able to see in the electronics area, the POS data, the real end-market demand.

It's always more challenging in Asia to see that, and Asia is an increasingly bigger part of our business.

And the distributors in Asia tend to react much faster, both on the down side and on the up side.

But I think at the moment I'd say we're fairly comfortable that the majority of what we are seeing is real end-market demand and that distributors are themselves ramping up but somewhat cautiously.

I don't think that there's overstocking or double ordering by distribution channels.

I noticed, Gordon, I think you characterize in the past that you didn't expect it to be a non-linear recovery.

It certainly seems to me that you're suggesting now that it may be?

No.

I think we're certainly seeing, I think, a step up in Asia pretty dramatically.

I think that just going forward I think that like the question from Shawn earlier, I think it's very hard to look into the first quarter.

The building for the holiday season, I think that that's returned very strong.

I think the question is what happens in January and what happens in the Chinese New Year.

I think those are going to be questions in the first quarter we're going to have to address.

I think clearly just to reiterate on the first quarter, I don't think it would surprise any of us if we saw a bit of a lull in the first quarter.

That and the combination of coming off a 14 week quarter going into a 13 week quarter, I think we could easily see a 10% drop from Q4 to Q1.

I would expect the seasonal aspect of the business has been in place for some time that way.

Typically our Q1 and Q4 are pretty similar actually, John.

Sometimes you see a small drop but generally not that magnitude.

This is shaping up to be a stronger Q4 than normal.

And I don't think you can project that on a linear basis all the way out through the first half of next year or for the full part of next year.

I think we will see things slow down at some point and probably in the first quarter before they get back on track again.

Do you think if you kind of looked at it on a year-over-year basis that given the comps that the volume should be up on a year-over-year basis throughout the balance of next year?

Yes.

I mean, there's no question that we're going to be up significantly in the first two quarters because of the easy comps next year.

As we get into the back half, that remains to be seen.

But we'd certainly expect to probably have some very modest growth over this year's numbers.

But then you also have to take out the effect of the extra week in Q4 as well.

Okay, great.

Thanks a lot, guys.

Thanks, John.

(Operator Instructions).

I've got other questions.

Go ahead, John.

I guess John got dropped off.

Hello?

Am I on?

Yes, go ahead.

Okay, I'm sorry.

Gordon, it struck me significant that you talked about hybrids.

I believe in the past you've kind of, I don't know, I want to say played down the impact of it, is there a systematic change going on in your sell-through in the hybrid market we should be cognizant of?

I think we've talked for a few quarters now about the Chevy Volt as being one that we have a substantial content on.

The date of the launch seemed a long time off in the future; 2010 seemed a long way away.

As that starts to get a little bit closer it starts to become reality -- and also the Renault Kangoo.

So there's a couple of vehicles that I think are really getting a lot of emphasis as they come near the launch date.

I think the thing we try to temper it down is the volumes are still relatively small.

And our automotive business is successful when we have large platforms that are 300,000, 400,000 vehicles in one particular platform.

And getting a few dollars of content on a midsize compact with 400,000 vehicles is a big win.

The volumes of any kind of electric -- plug-in electric hybrid, they are still relatively small.

So it's going to take some time.

I think we're just emphasizing that now is the time to be doing the development work, working closely with the Tier 1's and the OEMs and looking at all of the opportunities.

There's not a standardized circuit protection configuration like there is in the low current fuse box in standard vehicles.

So it's one that requires an investment.

And I think the point is that we're continuing to make sure we invest in those while we've made significant cost reductions this year in general operating expenses.

And in the commentary you mentioned something about the length of lead times, I guess relative to the competition.

Could you just talk a little bit about that?

Is that giving you opportunities to see share?

Absolutely.

I think there's some element of that that's happening, too.

And I think you've seen some of the reports from some of our competitors talking about not being able to ramp up, not being able to respond to the market and lead times going out.

And I think we've, by good fortune put a lot of extra capacity with all of the moves that we've made to get into fewer facilities and in low cost locations over the last few years.

Usually when we've made those moves we've also increased capacity.

So our capacity situation is very healthy.

And we've worked a lot, as I've mentioned, on leaning out our processes and getting our inventory turns up and just generally our lead times down.

And I think that's a competitive advantage.

And I think we're seeing some of that in the response that we're getting right now from distribution.

Great.

And one last question.

Which will you be using as a tax rate assumption?

I would stick with the 29% rate that we have.

We don't have any better information than that at this point in time.

Is that for Q4 or next year?

Both.

Okay.

Thank you very much, guys.

Thanks, John.

(Operator Instructions).

Our next question comes from Reik Read with Robert Baird & Company.

Please go ahead.

Hey, good morning.

Just a couple of follow-ups off of the questions that have been asked and the last one with the issues that other folks are having in the market of supplying.

Are you seeing any change in price that would be a little bit more favorable for you guys?

Not significantly.

I would say that that's, this is still a contact sport.

And it's always a tough negotiation on all of our pricing areas.

I don't think that we have the kind of product that we can command a price increase unless there were significant shortages.

I think pricing has remained fairly steady and fairly predictable.

But still not -- we haven't -- I think particularly as things have started to ramp up, I think maybe a little bit less pressure on the down side, but certainly very few opportunities to increase price.

But still think of things as kind of down annually maybe 3% to 5% or --?

Yeah, that's kind of the range.

Probably at the higher end of that range in electronics and at the low end of that range in automotive.

Okay.

And then I just also want to understand just the dynamics first quarter versus fourth quarter.

And I guess I look at the fourth quarter and I think with the exception of 2003, fourth quarter has always been sequentially down.

And you've had significant benefits from car programs in the US and Europe.

You've had the China stimulus.

And those things seem to be maybe ebbing back down.

If I've heard you correctly, you've kind of said the distributor inventories are normal which would suggest a normal order pattern.

So I guess I'm wondering, what gives you the confidence in the fourth quarter being up so much?

Or is it going back to your comments on the first quarter?

Are you borrowing a little bit from the first quarter to see those fourth quarter numbers become so strong?

Well, the first thing, as Phil mentioned, we have that extra week.

And although it's not a complete week with some vacation days, it's still a week.

So I think that's one factor.

And then really it's trying to build this up from all of the different market segments.

We see in our electrical business, the nonresidential construction really being very weak but our Startco business in the custom products continuing to gain momentum.

In our automotive business, we see that gaining momentum in certain geographies, especially China; North America coming back from extremely low levels where I think even through the last quarter there was still the selling of vehicles were from inventory and now everything is being built.

The sales are coming from cars being built.

So production levels have gone up.

So North America is going to really contribute in automotive.

So I think the net net of it, Reik, is sort of building it all up and taking into account that extra week across all of the market segments.

It sort of points to growth in the fourth quarter, which is not the norm seasonally.

Okay.

And then just with respect to, I guess, all the different puts and takes with the cost takeout and some of the discretionary spending that may be coming back, I guess I go back to what you guys have maybe said in the past is that, as you approach $120 million in revenue you might be able to generate somewhere in the neighborhood of $0.50.

You're getting pretty close with the guidance that you've given.

I guess as we look into 2010, what are the puts and takes that kind of get you there?

And I guess off of your comments, Phil, is that level of contribution more likely in the back half of the year than the front half?

Yes.

Absolutely in the back half of the year.

I think that we're clearly not at that level until we get kind of the big Irving and Matamoros to Wuxi moves done.

But when we do get those done, you get two effects as was alluded to earlier.

You get the effect of the savings that we get by shutting down two pretty high cost plants.

You also get the transfer costs that have been hitting us every quarter and will continue for another couple of quarters will go away as well.

So you get pretty big savings there.

So we'll see a step function reduction in our breakeven point from mid 90s where we say we are today probably to closer down approaching $90 million when that happens.

And at that point, we are at a point where we're probably generating $0.45 to $0.50 of earnings on $120 million quarter.

And the transition costs, will they, in the front half of the year, as those moves really start to take place, will they see a little bit of a spike up?

Or will they stay pretty flat?

I don't think they should spike much.

I think they'll probably be at pretty significant levels as they are now through most of the first quarter and then start to drop off after that.

So I think that once we're through the first quarter we'll largely be through these transition costs.

The first quarter, though, will still be relatively heavy.

Okay, great.

Thank you, guys.

There appears to be no further questions at this time.

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

Gordon Hunter for any additional or closing remarks.

Thank you for joining us on the call this morning.

As we indicated we're pleased with our third quarter results and the progress we've made in returning to profitability.

And we're looking forward to much better times in the year ahead.

We look forward to updating you again next quarter.

And as always, thank you for your interest in Littelfuse.

Have a good day.

That does conclude today's conference.

Thank you for your participation.