Littelfuse Inc (LFUS) 2009 Q4 法說會逐字稿

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

fourth-quarter 2009 conference call.

As a reminder, 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 fourth-quarter 2009 conference call.

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

Our fourth-quarter results were strong in virtually every area.

We had double-digit sales growth both sequentially and year over year.

Both the gross margin and the operating margin improved to their highest levels in more than three years.

Our earnings of $0.53 per share was one of the best performances in the Company's history.

Free cash flow of over $26 million for the quarter was an all-time record.

That said, 2009 was a very challenging year with dramatic highs and lows.

The first quarter was the worst in the Company's history, but both electronics and automotive businesses improved sequentially throughout the year.

Startco ramped up from less than a $20 million runrate in the first half to a $28 million runrate in the second half.

And while the core electrical business is still suffering from the downturn, it did achieve modest sequential growth in the fourth quarter, which is normally a seasonally weak period for this business.

Our earnings are benefiting from the cost savings achieved from the plant consolidation and cost-cutting initiatives that have been underway for several years.

While we didn't anticipate a major global recession when we began these programs back in 2006, we were well into these initiatives when the downturn hit.

With our leaner cost structure and reduced breakeven point, we were ahead of many other companies at first start of their cost-cutting programs when the recession began.

You've seen the significant growth in our margins over the past few quarters.

This improvement is flowing through to the bottom line as sales rebound.

I'd also like to recognize our teams who have done a tremendous job of not only reducing costs, but also increasing production and maintaining lead times as sales ramped up pretty quickly.

On that high note, I'll 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 risk factors that may cause actual results to differ materially from those expressed in forward-looking statements.

Sales for the fourth quarter of $127.9 million were up 10% sequentially and 21% year over year.

The fourth quarter included 14 weeks, as well as one or two extra holidays, so our best guess is that the extra week added about 5% or 6% to sales.

No matter how you look at it, it was an unusually strong fourth quarter, driven primarily by higher electronics and automotive sales, and continued strong performance at Startco.

Earnings for the fourth quarter were $0.53 per share, which was just above our most recent guidance, reflecting a slightly more favorable tax rate.

Gross margin improved by 250 basis points to 34.1% and operating margin, at 12.4%, was our best performance in several years.

Margins and earnings are really beginning to ramp up as the top line recovers and we leverage our much improved cost structure and lower breakeven point.

With over $15 million of cost savings yet to come from the consolidation of four semiconductor factories into one, our 15% operating margin target is well within reach.

Cash flow was another highlight of the quarter.

Cash from operating activities increased sharply to $28.7 million, and with capital expenditures trailing off to $2.2 million for the quarter, we significantly improved our already strong balance sheet.

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

Thanks, Phil.

I'll begin with a report on our three businesses and our markets, and then update you on our strategic initiatives.

Starting with electronics, our sales momentum continued in the fourth quarter, with sales of $79 million.

This represented an 11% sequential increase over the third quarter and a 19% increase over the fourth quarter of 2008.

This was the first favorable year-over-year comparison in the year, and a welcome sign of progress.

The strength in fourth-quarter electronics sales was driven by growth in North America, Europe, China, and Korea.

Helping drive the growth in Asia was continued demand for products going into LCD TVs, computers, and other digital consumer goods.

The year-over-year improvement in the fourth quarter was the largest in Asia, which led the world with the most significant decline at the start of the downturn in the fourth quarter of 2008.

These areas of strength were on top of the foundation that's been built over the last several quarters as demand improved for a broad range of applications in all geographies.

Our major distributor partners continue to report end customer book-to-bill ratios of greater than one, which signals strong first-quarter sales and a good start to 2010.

While we remain watchful of inventory levels in the channel, our distributor partners report to us that inventories are at appropriate levels and that end demand continues to be at least as strong as in the last several months of 2009.

Next, I'd like to discuss several focus areas and new product introductions.

Let me begin with our investment in a product category we call silicon protection arrays.

These semiconductor products are designed and used to protect sensitive electronic components and chipsets from electrical threats such as electrostatic discharge, or ESD for short.

ESD is caused when someone using a computer or MP3 player, for example, touches the device and discharges static electricity into the product.

When ESD finds its way into today's increasingly sensitive electronic applications, it can damage or render the electronic chipsets inoperable.

ESD transients can enter electronic applications through keypads, buttons, or antenna, or through connector points such as USB or HDMI.

Likewise, induced lightning transients can find their way into applications through ethernet or telecom interfaces.

Recognizing this evolving circuit protection need, we've worked over the last year to expand our existing semiconductor ESD product offering with the introduction of silicon protection arrays, a general-purpose keypad and button protection, and higher-speed USB and HDMI ports, as well as for ethernet port protection.

These products have also increasingly been developed as a small form-factor products that are well-suited to today's smaller electronic applications that have a growing need for ESD protection.

We're making additional investments in our silicon protection array of product offering to improve our penetration into the growth areas of electronic applications.

This investment is beginning to pay off.

We've won a number of designs for these new products in LCD TV, set-top box, e-book, and computing applications.

Several of these design wins have begun to ship.

The largest is a multimillion-dollar win for a new custom product designed to protect an LCD-TV application for a large market player in this segment.

The product was developed last year through a collaborative effort with our customer's engineering team to make sure the new device met the customer's application needs.

Shipments for this design began at a lower level in the fourth quarter and are expected to ramp up in the first half of 2010 as the various TV models transition to the new design.

There's been strong growth for us in this application as prices for flat screen TVs have come down.

The technology continues to evolve with increased growth in LED backlit screens and also the introduction of 3-D TVs, which are expected to continue to drive growth in this segment.

The new silicon protection array design win represents additional Littelfuse penetration into this specific customer.

We've successfully supported this customer with fuses for many years, and also won the TVS diode protection in this application in the first half of 2009.

All of this contributed to year-over-year growth in the third and fourth quarters of last year and, as expected, it continued to [provide] growth in 2010.

While not as large a win as I just talked about, we also have several design wins for silicon protection arrays with several set-top box customers.

Set-top box applications provide good opportunities for us due to the range of product technologies that are commonly needed because of the many ports on these devices.

We've introduced new silicon protection array ESD devices with ultra-low capacitants to protect high-speed HDMI ports without causing data signal degradation.

We began to ship these new components in late 2009 and continue to pursue additional design wins for these products.

We've also won designs for our new ESD products in other applications, such as in the next generation of a popular e-book line and in mobile computing.

They've not yet begun to ship, and we continue to work to turn these design wins into orders as production sets to ramp up at contract manufacturers in Asia.

I'd like to highlight another product category and application that began to contribute to sales growth in the latter half of 2009.

This is a new line of surface-mount varistor products that are designed to protect against overvoltage surges in power supplies, electric meters, and other industrial applications.

The product is an enhanced version of a popular radio leaded varistor device.

It saves space and provides additional manufacturing assembly flexibility for our customers.

Called the SM7, it was designed for applications that see continuous AC power, and was first built for a smart meter application at a large North American electric meter customer.

This new varistor product protects the smart meter from overvoltage surges and extends the position that we have at this customer for ceramic fuse and TVS diode products.

Sales contribution from this customer has increased over the last two quarters, due to higher demand and also from the addition of this new varistor product.

We also have several additional design wins for TVS diodes in meter applications for customers in North America, China, and Europe.

When you put this together, you can see we are benefiting from the growth drivers leading to higher-functionality meter products around the world and why this market continues to be a focus for us.

That brings us to our second business unit, automotive, which had 2009 sales of $99 million and contributed approximately 23% of total Littelfuse sales in 2009.

Global passenger-car production increased 9% in the fourth quarter of 2009, compared to the third quarter.

We outperformed the market, with Littelfuse fourth-quarter automotive sales of $30 million an 11% increase over the third quarter.

Both Asia and Europe contributed to this sales increase.

On a global basis, we saw net increases with several of our major Tier 1 wire-harness manufacturers as they ramped up their production to support increased vehicle builds.

The increases in global car build drove sales increases in almost all of our standard fuses used in junction boxes and our bolt fuses used in high current applications, such as alternator cable protection.

In the Asia region, we outperformed the market in China, Korea, and the Southeast Asia countries.

And our sales tracked car production in Japan and India.

Sales volumes for our low-profile MINI Fuse product line continued to grow through new business we've previously won on Hyundai, Kia, and Nissan platforms.

We outperformed the market in China because many of the higher production vehicle platforms that are increasing in China are with Western OEMs where we have approval and strong share.

A good example is Volkswagen.

We also have solid positions with domestic China car manufacturers, where we are continually increasing share with new platforms that are being launched or are ramping up.

We also outperformed the car build in Europe in the fourth quarter with our sales up 10% in local currency.

This came from a number of new programs that launched in the third quarter but ramped up incremental sales in the fourth quarter.

An example is the new GM Delta II platform of compact or lower mid-size models, like the Astra.

This program was a major win for our fuse business that grew steadily over the second half of 2009.

In the Americas, our sales were below the market growth of 12%, due primarily to a matter of timing.

You may recall that in the third quarter, we substantially outperformed the market at some of our Tier 1 customers as they refilled inventories to higher levels.

As a result, there wasn't as much inventory replenishment in the fourth quarter.

Our sales in the off-road truck and bus segment in North America were up 7% sequentially in the fourth quarter, compared to the third.

This was on top of 56% growth from the second quarter to the third quarter.

Inventory replenishment was a key factor in both the third and fourth quarters, reversing the inventory-bleed downtrends from the first half of 2009.

The off-road truck and bus segment in Europe also grew in the second half.

One of the contributors to these increases was advanced customer purchasing in preparation for our manufacturing move from Duensen, Germany, to Mexico later this year.

Littelfuse sales into the global automotive aftermarket increased 15% in the fourth quarter of 2009, compared to the third quarter.

The addition of a new customer in North America and increased sales through our distribution channel into Eastern Europe contributed to the sales increase.

We also had higher sales of our Smart Glow product line in North America in the fourth quarter.

This was also a good quarter for automotive on the new-business front.

To highlight just a few, we achieved new design wins in North America for our new MICRO II product on a new global Ford platform that launches into production in 2011.

These products are our newest generation of junction-box fuses which enable automotive-box manufacturers to miniaturize their boxes and modules.

We have a new program awards pending with several other OEMs, but this Ford program was the first to officially award us the business for these new products.

In Europe, we won incremental new business with a multinational wire harness and box manufacturer for fuses going on the Volkswagen Golf, Jetta, Touran, and other models.

This business started in the first quarter of this year.

Earlier in 2009, we announced our new business position on the Tata Nano in India.

We are continuing to expand our relationship with Tata and won new business in the fourth quarter for a high-current fuse to protect the Nano's alternator circuits.

We also expanded into Tata's off-road truck and bus division with new design wins in one of our standard automotive blade fuses.

We also are continuing to investigate new applications with Tata in both the auto and OTB segments.

During 2009, China surpassed the United States in total car sales to become the world's largest automotive market.

China had vehicle sales of nearly 13 million units.

This was approximately 3 million units more than the second-largest market, the U.S..

Both car sales and car production in China saw growth of almost 48% over 2008.

This astonishing growth in vehicle demand is a direct result of aggressive tax cuts, including the reduction of sales taxes for cars below 1.6-liter engine displacement.

There were also subsidies for new minibus and light truck sales for rural residents, helping to boost the performance of the manufacturers of these smaller vehicles.

A longer-term factor behind the continued automotive growth in China is the rapid development of China's smaller cities.

Until now, China's explosive automotive growth has been most evident in the Tier 1 cities, but with the trends toward urbanization and growth of per-capita GDP, the demand for vehicles is expanding into other cities.

Early movers in the China market, such as Volkswagen and General Motors, enjoyed healthy profit margins in their mid-size, full-size, and MPV segments, where there was not a lot of competition.

Examples are the VW Santana and the Buick GL8 minivan, which realized strong share in their segments with good margins.

We are well positioned with the leading OEMs in China.

For 2010, Volkswagen and Hyundai, who are major customers of Littelfuse, are forecasted to be the two top growth leaders in the region.

In 2010, we can expect to see even more intense competition among the foreign and domestic vehicle manufacturers as they attempt to capture growth opportunities in China.

As this is happening, the local manufacturers will strive to upgrade their brands and product portfolios to meet the more upscale image aspirations of Chinese consumers.

This increased competition will provide opportunities for us to further strengthen our presence in this important major market.

Now let's move on to the electrical business unit.

This business had sales of nearly $69 million in 2009 and contributed approximately 16% of total Littelfuse sales.

There are two parts to this business, the core fuse business and then the Littelfuse Startco business.

Looking at the core fuse business first, sales for the fourth quarter were down 9%, compared to the fourth quarter of 2008.

For the full year, sales for the core business were down 22%.

Although we're still down from 2008, industrial activity improved slightly from the third quarter to the fourth quarter, and industry data indicates there may be some improvement as we enter 2010.

However, non-residential construction continues to be at historic lows and is down more than 30% year over year.

Data from the National Electrical Manufacturers Association indicates there won't be any improvement through 2010 and that there may be as much as a 10% to 15% additional decline in commercial construction activity during the year.

A bright spot is the fact that we continue to win new business even in this down market.

In the emerging solar market, we secured our first orders for high-amperage, high-power fuses for large solar-inverter systems.

This order came out of a design win in the second quarter of 2009.

Sales for this product family of this customer are expected to be about $400,000 in 2010, with the market growing at mid-double-digit pace throughout the year.

We've steadily expanded our presence in the solar market and now have significant customers in the United States, Canada, Germany, Italy, Switzerland, China, Korea, Taiwan, and India.

We also had a major win in the HVAC side of the business.

We converted one of the largest commercial HVAC manufacturers in the country to Littelfuse, and this will result in a total of $600,000 of new business in 2010.

Moving on to Littelfuse Startco, sales for the fourth quarter of 2009 were up 82% from the same quarter in 2008.

All of this growth was in the custom-product segment that produces electrical power distribution equipment for the mining industry.

As we've previously discussed, we moved into a new building in the second quarter that more than doubled our production capacity.

This enabled us to ship a major portion of our existing backlog to numerous mining customers, which drove a large increase in sales.

Sales of our protection relays were basically flat to slightly down from the prior year.

Potash mining in Canada is the main driver of Startco's sales for the large custom-power centers and is a strong driver of the ground fault protection relay product lines.

Potash is a major component of agricultural fertilizer, but the economic uncertainty in late 2008 led to reduced potash consumption by farmers throughout 2009.

With softening end-user demand and uncertainty about global potash prices, the mines temporarily reduced their output in 2009, which in turn impacted sales of our protection relays that are used for maintenance and repair.

Fortunately, potash producers are expecting farmers to increase crop-nutrient application rates in 2010 in response to higher predicted crop prices and the need to replace the large amount of nutrients withdrawn from the soil in 2009.

Looking ahead, the long-term growth demand for potash is expected to increase through 2020, so mining capital projects remain strong.

This is expected to drive continued sales of Startco's large custom-power centers.

Outside of mining, Startco's core industrial markets that use our protection relays are still suffering from the economic downturn.

As a result, manufacturing and equipment producers have reduced their consumption of all electrical products, including protection relays.

But similar to the core fuse business, Startco also had some nice wins in the fourth quarter.

The most significant was a new ground fault relay product that we developed specifically for one of the largest copper producers in South America.

We received our first order at the end of 2009 and expect to see additional orders this year.

Another notable sale was for ground fault relays that will protect several power generators that are being used at the Winter Olympics in Vancouver.

So to summarize, while the core electrical business is coming back slower than our other two businesses due to the severe downturn in non-residential construction, we are very pleased with the success and the future potential of Startco.

This acquisition has proven to be an excellent move for Littelfuse that's expands our business into a profitable adjacent market.

That completes the review of the three business units.

Now I'd like to update you on the major initiatives we have underway.

Our business simplification initiative is nearing completion as a result -- as we reduce our manufacturing footprint from 15 plants to six plants.

The transfer of manufacturing from Duensen, Germany, to Mexico will be completed in the second quarter.

The consolidation of global customer service activities into the Philippines will be completed by the end of the third quarter.

Our former Des Plaines, Illinois, site will be closed at the end of the first quarter, and the new high-power test lab we discussed last quarter will open later in the year in a research park adjacent to the University of Illinois.

We have made significant progress on expanding the back-end assembly of our semiconductor products in Wuxi, China, and in establishing wafer fabrication at the same location.

The coordination between our China, Texas, and Mexico teams to develop the capabilities at Wuxi, set up the equipment, and transfer the wafer-process technologies has resulted in excellent yields that are at the same level or better than those we achieved in Texas.

Most of our semiconductor products are now coming out of the new site at Wuxi as we ramp up to higher production levels and conclude the transfer in the first half of this year.

The increased semiconductor product capacity we now have in Wuxi has enabled us to meet customer expectations and even hold our competitive lead-times in a rebounding market.

We are confident this investment will serve us well for the long term.

The savings we are achieving from all of the moves I just mentioned, along with the transfers we've already completed, will continue to generate operating cost savings well into the future.

Beyond the direct savings, the simplification will enable us to focus our energies on improving our processes and better serving our customers.

Our lean culture has a role in this as well, driving long-term sustainable gains in our processes.

Littelfuse is well established in our manufacturing operations.

We've seen tremendous benefits from lean and are now in the process of extending this culture across the enterprise.

Improving processes, reducing errors, and increasing speed and responsiveness are positive achievements, whether it's in accounting, sales, manufacturing, or human resources.

Now I'd like to circle back to our Mexico facility, which, as I mentioned, is in the new location for our Duensen operations.

All manufacturing for our core electrical products is also located there, as well as the majority of our automotive manufacturing.

Piedras Negras is also the home of our North America distribution center and some of our engineering, HR, finance, IT, and supply-chain functions.

We had our Board meeting at this facility last week, and I can tell you they were impressed with this operation and the efficiencies and cost savings we are achieving at this facility.

In terms of product positioning, we're continuing to move forward with the in-depth evaluation of our products, customers, and regions to identify the lower profit areas that need improvement, as well as the higher profit areas so we can direct our resources to the opportunities that have the greatest potential to increase sales and profits for Littelfuse.

And speaking of new products, one of the achievements we are most proud of was that in 2009, despite the recession, we continued to invest in new product development.

We released more than 50 new products during the year, products that extend our expertise into new areas, provide the latest technology to our customers, and strengthen our position as the global leader in circuit protection.

You heard about some of these new products today, such as the silicon protection arrays, the ground fault relay products, and our new products for the solar market.

In summary, we're encouraged by the improvement we saw in the latter half of 2009 that is continuing into the first quarter of 2010.

The business simplification and cost-control initiatives are achieving the results we anticipated, and we have not let up on new product development, which is the foundation of our global reputation as the leader in circuit protection.

But while we feel much more positive going into 2010 than we did going into 2009, we still have some work to do.

We need to get our sales back to the level of 2008, and then build from there in the years ahead.

Reducing our global manufacturing footprint and implementing significant cost-cutting measures was a difficult process, from both a personnel and an expense standpoint.

Now that we're at the level we want to be at, we aren't going back.

We're continuing to focus on keeping our expenses down and our quality and customer service high.

I am optimistic about 2010 for many reasons.

As a result of our restructuring, our facilities are in optimal locations close to our customers.

We have the broadest and deepest line of circuit protection in the world and we're continuing adding new products and technologies to the portfolio.

We are financially strong and we have an experienced team of associates across the globe who are the face of Littelfuse to our customers and communities.

The pieces are in place to grow our business and to achieve sustainable long-term profitability.

We look forward to the opportunities ahead in 2010.

So thank you, and I'll now turn the call back to Phil, who will comment on the first-quarter guidance we provided in the news release.

And then we'll open the call for questions.

Thanks, Gordon.

The following is our outlook for the first quarter of 2010.

Sales for the first quarter of 2010 are expected to be in the range of $130 million to $138 million, which would represent 54% to 64% growth over the first quarter of 2009.

In some areas, costs are expected to be higher than the fourth quarter, due to higher commodity prices, less favorable exchange rates, and approximately $0.6 million of one-time expenses related to relocation of R&D labs to the Company's new technical center in Urbana-Champaign, Illinois.

Earnings for the first quarter of 2010 are expected to be in the range of $0.50 to $0.62 per diluted share, assuming a tax rate of 29%.

Capital spending for the year 2010 is expected to be in the range of $16 million to $19 million.

This concludes our prepared remarks.

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

(Operator Instructions).

Reik Read, Robert W.

Baird & Company, Inc..

Can you guys talk a little bit about -- in the automotive space, and this may be a little bit early but I want to get your sense for it.

We had a lot of stimulus dollars flowing there that created some demand, and is there any sense that that demand may be backing off as a result of that?

That's a good question.

I think it depends on which part of the world.

Certainly, the place we probably have the most caution is Europe, where there has been a lot of discussion of the size of the stimulus program, particularly in Germany where they may have really pulled forward a lot of sales into last year.

Europe still is strong for us, but it's certainly one that we have some concerns about for the rest of the year, that we may not see the level of growth continue in Europe as these stimulus packages have ended there.

Also, there was tremendous growth in China last year.

We certainly don't expect to see that level of growth, but it is still expected to be growing at double-digit levels this year.

And I think you know the story in the U.S., where we really suffered but the production picked up in the second half of the year.

So I think we're very cautious about that on a global basis.

There was certainly dramatic help with the stimulus packages, and most places are not going to have that happen again.

Does the guidance you provided, Gordon, and I know it's just a quarter out here, does that anticipate some of the European stuff softening or is that something that's a little later out?

No, it anticipates that.

We are not expecting dramatic growth in the automotive business.

We're really factoring in a potential slowing in Europe.

And then, could you talk a little bit more about some of the emerging opportunities out there?

You talked a little bit about solar.

Are there green opportunities beyond that?

I think in the past, you guys have talked about battery protection.

You've talked a little bit about Brazil and India.

Maybe if we take all of those together, is there a meaningful set of opportunities in 2010 and can you talk about what those may be?

Absolutely.

They all are incremental.

We talk about -- the solar opportunities being $0.5 million here and maybe $1 million there, so they're not going to be multimillion as they gradually pick up but there's lots of them.

Solar, in particular, there are a lot of initiatives in Europe, a lot of initiatives in Asia, tremendous amount of initiatives happening in places like India.

The whole, I think, green initiative starting from generation, using renewables; solar and wind; the whole smart grid initiatives, which are happening in many parts of the world; having smart meters, I did talk about that; so generally making more efficient use of the electrical grid and energy in general.

And then, storage is another area, and then we have initiatives that come from more efficient use of energy, such as LED lighting, which we know is an energy-saving area.

So the whole initiative from generation, transmission, storage, and then the use of more energy-saving devices, all of those drive more equipment that all has the need to have protection from overvoltage and overcurrent, and also, many cases, is the need for electrical and electronic components, and having the broad portfolio is very helpful for us to have those core electrical fuses as well as all of our electronic components.

So, we see this as an increasing trend for years to come.

Okay, great.

And then, just one last question on the margins, if I look at third quarter to fourth quarter, the contribution margin sequentially was 48%.

When I look at the mid-point of your guidance, it looks more like 17% to 20%.

I guess two questions.

Is really the higher commodity costs kind of factoring into that and -- or are there some transition costs still from some of the programs that you have there?

And then, should that margin be roughly the same as we look out the rest of the year as we think about cost reductions and what have you?

I think that your comment about some one-time costs is relevant.

We talked about some one-time costs related to the transfer of the lab down to southern Illinois.

We'll have some of those in the first quarter.

We -- I mean, the commodity price is still a little bit uncertain, but we see a little bit of a lag, probably a 30-, 60-day lag there, so we're going to be experiencing the impact of some of the high commodity costs of one month or two ago that hit us in the first quarter.

So there will be some of that, as well.

Going forward, though, I think you can expect the margins to continue to improve at the gross margin level as we get into -- even in the second quarter, but certainly as we get into the third quarter when we've largely completed the transfer of the Teccor facilities over to China.

We'll see a -- we should see a nice improvement in gross margins as a result of that.

We talked about in excess of a $15 million cost savings once that's done.

So, I think that we are being impacted in the first quarter, but with the volume increase we're talking about, we still should see some modest sequential margin improvement even with the headwinds we are talking about.

But then, as we get further into the year, we would expect our gross margins and operating margins to continue to improve.

And did -- as part of the first quarter, Phil, did the transition costs from all of the changes come in roughly where you -- are they going to come in roughly where you expected or is there something additional in there?

And then, when should we start to see that last round really kind of drop off?

I think it's -- the first quarter -- for 2010, the first quarter will be the peak of the transition costs, and then they should start to drop off more in the second quarter.

And then as we get into the back half of the year with the Teccor part of the consolidation largely complete and also with the Duensen, Germany, move for the automotive products to Mexico largely complete, we should see those transfer-related costs tail off pretty dramatically.

John Franzreb, Sidoti & Company.

Gordon, you carved out the electronics book-to-bill in this morning's press release.

I wonder if you could just provide some color around it.

What would it normally look like on a seasonal basis and what do you account for the variance now, considering you seem to imply that you are selling and the sellthrough are currently matching up pretty closely?

John, let me take that.

I think that normally, we, particularly in advance of Chinese New Year, which is where we are right now, we would expect to see some orders that are maybe a little bit stronger than what they might be in the back half of the quarter.

So I think we are benefiting from some of that.

The assumption is here that the order rate is going to level off and maybe start to decline a little bit as we get into the back half of the quarter, once Chinese New Year is complete, but we're still expecting, as we said in our guidance, a pretty robust shipping quarter for the first quarter and some sequential growth from Q4 to Q1, which isn't always typical, particularly given that we had an extra week in the fourth quarter.

So, I don't think we're expecting a continued ramp-up like the book-to-bill might imply.

But certainly, we feel pretty confident at this point that we're going to have a strong first quarter.

So, what's driving the book-to-bill, Phil?

If we're seeing normal -- call it pre-buying on the Chinese New Year, you had the benefit last quarter of the extra week, and also last quarter you had the normal holiday selling sellthrough, if you will.

What's the difference?

Well, I think we are still seeing, and I think we are still benefiting, from some inventory replenishment at distributors as well.

While all indications that we've seen and all the metrics that we look at would indicate that distributor inventories are not out of line, certainly they have replenished their inventories appropriate with the higher levels of POS that we are seeing in the end markets.

So, I think that we are still on the upward curve with inventory replenishment going on.

We think that's going to level off probably pretty soon here.

Gordon, you've always been very good at taking when you get concerned about inventory replenishment levels.

You are pretty comfortable with the current levels right now?

Well, as comfortable as we can be.

It's certainly the number one question of everything that I think, and it's going on in our business right now, is really trying to dig into the distribution channels.

We know that our business model where we have approximately 80% of our business in electronics going through distribution channels, and more and more of that moving to Asia, trying to understand the real sellthrough from our distributors and trying to understand the appropriate level of inventory, there's just clearly an industry where, when things are going well, they are all very, very bullish on the upswing and they are all ordering to replenish and make sure they don't miss any business, and when things go badly, they feel a downturn, they stop ordering very quickly.

So the amplitude of that fluctuation is much more severe for us with so much going through distribution, and we certainly felt that in the downturn a year ago.

So it's the number one question that we have in trying to predict the levels and predicting the future.

We try to ask that question more and more often.

And as we've said in the press release, we're pretty comfortable at the moment that they're appropriate levels.

Now, on the automotive side of the business, I guess two questions.

By geography, how do your auto sales kind of look, A, and, B, is your average dollar content in China -- how does that compare to your average dollar content, say, in the U.S.?

Because there are so many smaller vehicles there, it has been less, so certainly we were hurt by the downturn in the U.S..

There's clearly more content in selling a fully-equipped SUV here than a small 1.3-liter -- small car in China.

But it's increasing.

One of the points that I was making is we're starting to see the content increase, that the vehicle options that are demanded by, particularly in the urban areas with the wealthier middle class in China.

So it's starting to come up, and we're very optimistic that not only will the market grow in vehicles, but the number of applications and the luxury items that would've been considered a luxury in a vehicle in China some years ago start to become things that everyone expects to have.

So we start to see that increasing.

It's going to be a while before, on average, it's at U.S.

levels.

But long term, it's a very encouraging trend for us.

And do you have a sense of the split by geography in automotive?

The split of -- ?

Revenues by geography?

Yes, we sort of said, roughly, the biggest region for us has been Europe.

So Europe is sort of 40% to --

45%.

-- 45% now, and Asia, which really started from being single digits a few years ago when we first started talking about it, is now about 20%.

So that's primarily China, but, as we've mentioned, Korea, we've had very successful business in Korea and very good customer relations there, and the emerging India, which is still small, but more and more as India starts to design vehicles and we have a presence there, so getting Asia to 20% in a few years has been a real success for us.

We've had tremendous success in China.

Absolutely.

One last question.

What's the maintenance level of CapEx?

How should we think about that?

It obviously depends a little bit on how you define maintenance.

But I think that we're probably only a little bit above maintenance level at the rate we're going now, since we've done a lot of the big investments in brick and mortar to support these -- the repositioning of our manufacturing footprint.

So what we're down to now -- it's a little more than maintenance.

We have some expenditures that we're going to be doing this year to support new products.

Some of the products that Gordon mentioned in his discussion, we are going to require some CapEx to support those.

Pure maintenance is probably in the $10 million range, but I think for the next few years you should expect something, maybe, in the $15 million up maybe to the low $20 million, and then I think as we get further out, I would expect to see our CapEx gradually increase to something more like the 4% to 5% that we've done historically.

But the next few years, it should be relatively low.

(Operator Instructions).

Shawn Harrison, Longbow Research.

First question, just kind of following up on demand trends.

Within the electronics business, what are your lead times right now?

Kind of taking, I guess, a broad swath of the product offering?

You know, it depends a lot on the product type.

I think in the -- for the fuse products, we've been able to maintain pretty short lead times, or fairly typical lead times, in the four- or five-week lead-time area.

For our semiconductor products, I think we've done better than some of the rest of the market there.

I think, typically, those products would probably be in the eight- to 10-week lead-time range, and we've been able to maintain most of those in that kind of a lead-time time frame.

So generally speaking, we've been able to hold our lead times down to pretty close to what our targets are.

In a few product lines, they've started to go out a little bit, but for the most part we've done pretty well there.

Okay.

And so, I guess within the semis at this point in time in the quarter, you have a relatively high level of visibility into essentially what the quarter should look like.

It's more the fuse products where you still only have a month of visibility.

That's exactly right, Shawn.

I think the -- we will get relatively few drop-in orders in the quarter at this point in semis, maybe -- TVS diodes is probably the only exception to that where we do carry stock at distributors and that kind of thing, so we could get some drop-ins there.

But generally, the semis -- the quarter is pretty well established at this point.

Okay, then moving back to the restructuring.

I know you called out the $15 million related to the semi transfer, but there is also, if my memory serves me correctly, another, say, $7 million of savings related from the transfer from Germany to Mexico.

That's not quite right, but you're -- the $7 million I think you're referring to was when we announced a series of additional steps that we were going to take a year ago or so, and that included the automotive transfer out of Germany, it included closing our uTrack European facility where we had some support functions there.

It also included the consolidation of our Taiwan semiconductor operations into the Wuxi facility as well.

So some of that would be included in the $15-plus million, but I think if you include everything that we have, including the automotive stuff, it's probably closer to the $20 million number than the $15 million number.

And the timing of that hasn't changed?

You haven't been able to pull forward any of these savings?

No.

It's pretty much as we had laid it out previously.

So, we have the automotive transfer; we'll start seeing benefits from that in the third quarter.

And, as well, the transfers out of the Teccor facilities in Irving, Texas, and Matamoros, Mexico, those will be third-quarter savings, primarily.

We'll start to get a little of that in the second quarter, and then the Taiwan consolidation will happen right around the end of the year.

With some of the one-time items, or I guess the cost increases as well as the one-time items in the first quarter, commodities would run through COGS.

FX, would that run through SG&A or --

It depends what it is.

I mean, the FX is a -- it's obviously changing as we speak here, but what we're referring to there was mostly going to run through COGS.

It was not quite as a favorable rate for the Mexican peso and the Philippine peso, which is where we have short positions with some of our manufacturing facilities operating there.

So we'll probably face a little bit of headwind there on the cost side, which would run through COGS -- any commodities' increases run through COGS.

The one -- the things that would run through SG&A would be the transfer -- or the lab relocation costs that we'd mentioned in the press release, and also, we also had talked previously about some higher costs related to costs that would be coming back in operating expenses in 2010, like accruals for incentive plans and those kinds of things.

And the latter was, I think, the last discussion, a few millions dollars annualized.

No, it's actually more like that.

It was more like a couple million -- it was more like $7 million or $8 million annualized.

So, a couple of million dollars a quarter.

Okay, I'm sorry.

But, yes, so if you take into account that the fourth quarter had an extra week, so we had some extra expenses there, I would expect the first quarter to probably be just slightly a little bit above the fourth quarter runrate and operating expenses.

Then, final question, is just cash deployment, given the excellent free cash flow generated this quarter.

Where are you seeing the opportunities?

Is it still focused within businesses that would -- within electrical, and I guess how are valuations out there when looking at the landscape for acquisitions?

We certainly said that we are extremely pleased with the Startco acquisition.

It does give us some adjacent markets from the core fuse business, and acquisitions similar to and similar in size to Startco would certainly be attractive.

But we've also said that there are other attractive areas in electronics, even in automotive.

We've certainly said that the OTB segment is one where we have very little presence, and having a stronger product offering in the OTB business over the long term is something we're interested in.

So, I think that we continue to believe that we have done quite well with the acquisitions we've made over the years, and the most recent one is the best example of what we would be looking for in the future.

Thank you very much, and congratulations on the quarter, as well as the strong outlook.

That does conclude our question-and-answer session.

I would like to turn it back over to you, Mr.

Hunter, for any closing comments or remarks.

Thank you for joining us on the call this morning.

We are pleased with the progress and performance achieved in 2009, and are optimistic about the year ahead.

We look forward to talking with 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.