Littelfuse Inc (LFUS) 2010 Q2 法說會逐字稿

Good day and welcome to the Littelfuse, Incorporated second quarter 2010 conference call. Today's call is being recorded. At this time, I'll turn the call over to Chairman, President and Chief Executive Officer, Mr. Gordon Hunter. Please go ahead, sir

Thank you and good morning. Welcome to the Littelfuse second quarter 2010 conference call. Joining me today is Phil Franklin, our Vice President of Operations Support and Chief Financial Officer.

As you saw in our news release, this was another excellent quarter for Littelfuse. We overachieved on the updated earnings guidance we provided on June 11 and our sales came in as we had anticipated.

Sales were up both sequentially from the first quarter and year-over-year. Sales increased in all three of our businesses led by electronics where strong demand continues in all geographies. While our automotive business is still not back to pre-recession levels, it continues to improve. In the electrical segment Startco products continue to outperform and the electrical fuse business is steadily recovering from its low point last year.

Both the gross margin and operating margin are steadily improving in line with the expected leverage we get from our improved cost structure. On top of that, we have just begun to see the additional cost savings from our last round of manufacturing transfers with further benefits still to come in the next three quarters.

As those of you who have followed us for some time now know firsthand, we've been through some very tough times as we managed through the recession and made the changes we needed to reduce our breakeven point.

The overall strategy was to become leaner, more efficient and more customer-focused in order to be a stronger global competitor and that is well-positioned to resume our growth as the economy recovers. As the momentum in our sales and earnings indicates, the strategy is working.

We've good news to report in all three of our businesses. But first 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 the 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 second quarter were $157.5 million which was up 9% sequentially and 55% year-over-year. Over the last year we have grown faster than most all of our competitors and peer companies. The biggest drivers of this out-performance have been crisp execution on our manufacturing ramp-up, traction in the market with several new products, including silicon protection arrays and solar fuses and over 70% growth for Startco products.

Operating margin in the second quarter increased to 17.5% from 15% in the first quarter reflecting the strong operating leverage enabled by our new cost structure and the beginning of savings from the last phase of manufacturing transfers.

Earnings for the second quarter were $0.90 per share, which handily surpassed the previous earnings record of $0.69 per share set in the first quarter of this year.

Cash provided by operating activities was $19.2 million for the second quarter. After funding $4.9 million of capital expenditures, this resulted in over $14 million of free cash flow for the quarter. We believe this is indicative of the free cash flow that we should be able to generate going forward.

The book-to-bill ratio for electronics for the second quarter was 1.1. While this is down from book-to-bill of 1.3 in the first quarter, we see this as an indication that the market has returned to a less frenetic but still healthy pace.

We continue to operate our factories at relatively high levels of capacity utilization, somewhere in the mid 80s. But in general, we've been able to maintain satisfactory lead times, which in most cases, are at or below those of our competitors.

We have mostly recovered from the recent fire in Taiwan but we do expect this to have a $2 million negative impact on sales in the third quarter.

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

Thanks, Phil. Now let's move on to the second quarter highlights of our three business units starting with electronics. Electronic sales were $103.6 million for the second quarter, a 17% increase from the first quarter and a 68% increase from the second quarter of last year.

The strength was across all products and all geographies with all of our major products and geographic markets achieving percentage sales increases in the mid-teens or higher. The strongest area continues to be end-market demand for consumer electronic products such as LCD TVs, computers and other digital consumer goods which also drove the increase in Asia sales.

As in the first quarter, a key driver behind our second quarter sales increase was inventory replenishment in the OEM, contract manufacturer and distribution channels. Some customers have also been placing orders further out in response to the longer industry lead times although we have been successful in ramping up production and are maintaining lead times that are lower, overall, than our competition.

Earlier Phil mentioned the impact of the fire at our Taiwan facility on our TVS diode sales for the second quarter. The impact is less than we originally estimated due to the good work of our operations people in working to bring capacity back online as quickly as possible. The Taiwan factory is now back up to over 80% of where it was before the fire and, in fact, we have taken lead times back down to a point where they are now better than the competition.

In the environment of longer lead times across the industry, our ability to maintain shorter lead times is a competitive advantage for us as we continue to push new business and design wins.

Speaking of design wins, our new 3.6 X 10 Cartridge Fuse continues to gain market acceptance. As we discussed last quarter, this fuse is a first in the market with an innovative design that gives it the smallest form factor for a fuse of this type. With manufacturers continuing to put more and more electronics into smaller and smaller spaces, the 3.6 X 10 fuse is in the right place at the right time.

A recent win for the 3.6 X 10 is with Samsung for the LED TVs which are very popular with consumers right now. Up to four of our fuses are used on each 55 inch LED TV power board, generating over $150,000 in sales in the second quarter alone. This win builds on our already strong relationship with Samsung for other consumer electronic products.

You may recall that last quarter I also talked about an opportunity for our 3.6 x 10 fuse with Apple for their new iPad. We had another nice win with Apple in the second quarter, this time for our new [low roll] surface mount PTC product for battery protection on the iPhone 4.

The new [low roll] product minimizes power consumption during operation while maintaining the same performance of our other PTC devices, making it an ideal safe for small, portable products like the iPhone 4.

Another interesting new win is on the telecomm side for our metal oxide varistors. Our products are being designed into Nokia Siemens network base stations. The products will start to ship in the third quarter; and we're anticipating sales of over $2 million next year as a result of this win.

Our innovative silicon protection array product line continues to gain traction in the market. The multi-billion dollar win for the new LCD TV application that we've talked about last quarter ramped up as planned to $3 million in the second quarter.

In addition to this large order we've also had wins for our SPA electrostatic discharge applications for set-top-box protection, LCD converter board protection and PC applications. In fact, we are now shipping SPA devices to three of the top 10 set-top-box manufacturers in the world. Our most recent SPA wins include ESD protection for a popular e-reader and also ethernet surge protection for data communications equipment.

In mid-June we launched the smallest form factor in our SPA line for ESD protection. We've already received orders that will produce an annual run rate of several hundred thousand dollars in sales for a new Smart phone. The SPA line is growing from a small base but we are very pleased with the market acceptance it's received over the past few quarters.

All of these examples highlight two important points. First, we're continuing to invest in new products that meet the evolving needs of our customers to protect the sensitive electronic circuitry in their new products.

The second point is the design wins and incremental sales that are resulting from our investments in new product development. Our investments in the SPA and 3.6 X 10 Cartridge Fuse lines are paying off through increased sales and stronger customer relationships.

Leading companies like Apple and Samsung count on Littelfuse because they know we can deliver the circuit protection technology they need.

Although we are cautiously optimistic and are winning new designs that are measurable, electronics markets are now reaching equilibrium and inventory replenishment is now stabilized. As a result of this equilibrium we expect more modest sequential growth in the third quarter. Overall, however, we expect that 2010 will be a record year for our electronics business and well above our electronics sales in 2008.

That brings us to our second business unit, automotive. Second quarter automotive sales of $32.1 million were down 7.8% from the first quarter but were up 38% year-over-year. As you may recall from our call last quarter, our first quarter automotive sales were unusually high as our customers rebuilt their inventories to appropriate levels and we expected and forecasted a decline in the second quarter.

Two other factors contributed to the lower second quarter sales. The first was a 3% decline in global car production from the first quarter. The second factor that contributed to the lower second quarter automotive sales was the impact of the weaker Euro. The Euro was down almost 8% versus the average of the first quarter. If the Euro had remained constant in the second quarter, our global OEM sales would have been down only 4%.

Looking at sales by region, European car production declined about 1.5% but in local Euro currency our sales were down just 0.6%. In US currency, however, sales were down 8% which is consistent with the change in the Euro I just mentioned.

In North America, car production was up almost 4% while our sales were up just over 3% which is primarily due to the earlier point about inventory rebuild in Q1. In China, car production was down 9% but our sales were down 31%. This was entirely due to the reason we stated in our Q1 call where several of our distributors in China placed large orders in March and received their shipments earlier than they anticipated as we increased production.

Their order rates didn't return to the prior levels until June, so we had some large monthly swings in sales that we don't expect to see again.

In Korea, our sales increased 8%, which considerably outperformed the growth in car production, which was about 1%. We've been increasing our share at Hyundai and Kia for our low-profile fuses since 2009; and as new models launch and as production ramps up we are realizing incremental new sales of our products.

We had tremendous growth in India where car production was down 8% and our sales were up more than 50%. This is due to new sales to Tata Motors for our high-current fuses and holders that are protecting the alternator and starter circuits in these vehicles. Tata Motors is India's largest automotive OEM. It is achieving impressive growth rates for its commercial and passenger vehicles.

In Japan, most of our business is with Nissan. As I mentioned last quarter, all of the Nissan vehicles we supply have now launched and, as a result, our second quarter sales were flat with the first quarter.

There were several bright spots for our automotive business in the second quarter and one of these was the US aftermarket. During the summer, many of our retail customers have special promotions on key products, including Littelfuse replacement fuse kits. We saw the increased sales of these kits in the second quarter as our retail customers stocked up for their summer promotions.

Sales of some of our low-profile products also continued to increase as these new product families become the standard on new vehicles launching in the 2011 model year, which began in July 2010.

The off-road truck and bus segment had the same increase in first quarter sales and then lower second quarter sales as the rest of our automotive business. However, we did see increased sales in Europe in the second quarter, which tracks with reports of increased vehicle registrations in Europe.

In North America, SAT research reports that commercial vehicle orders were up starting at the beginning of the second quarter, which will translate into increased vehicle production in the second half of the year and into 2011.

A number of key design wins in the second quarter set the stage for increased sales down the road. One of these is in Brazil where we've been working with General Motors Brazil to develop a new master fuse for several high-current fuse applications on a new Chevy pickup truck program which is scheduled to launch in 2011.

This win was a global effort as we coordinated with GM and also with two of our Tier I customers who are going to be the direct systems suppliers to GM for this program.

We talked on previous calls about the variety of low and high-voltage products we have on the Chevy Volt flex fuel electric car. We recently added a high-voltage fuse box application to our list of products on this exciting new vehicle that will begin launching in the US at the end of 2010.

In Europe, we have a win for our master fuse on a very large program that will replace several Volkswagen models including the Audi A3, the VW Golf series and the VW Touareg. This program represents more than 1.5 million vehicles annually once full production is reached. The program will start in late 2011 and ramp up over the next few years as new models are added.

Looking ahead, the third quarter is historically a slower period for car production because of summer plant shutdowns for model changeovers and vacation time. We expect that trend to continue this year. JD Power and Associates is predicting the third quarter global car production will be down almost 10% from the second quarter but production is expected to increase again in the fourth quarter with the current growth projection at about 6%.

A bright spot in car production is Asia, now forecasted to reach 33.7 million units in 2010, growing 17% over 2009 and setting another record thanks to the growth in China and India, both countries where we have built a strong presence and share.

For 2011 global car production growth is about 6%. While these numbers could change as the year progresses, we believe it's safe to say that fourth quarter will be up over a third and we can also anticipate year-over-year growth in 2011.

In addition to the growth in car production, we're also in a good position to benefit from the increase in the number of electrical power circuits in newer vehicles launching in the second half of 2011 and 2012.

In one new model the number of fuses increased almost 10%. More circuit protection content for new systems like improved HVAC and additional multimedia applications is being added to all new vehicles as standard equipment. This is a trend we're happy to see as it contributes to growth in our sales-per-vehicle content as well as from car production.

One final comment on our automotive business is in the area of new product development. We're currently engaged in more new product development projects than ever before. Later this year, we launch new product families for miniaturized low-current fuses and high-current fuses and a new line of high-voltage fuses for the electric vehicle and hybrid electric vehicle markets. We'll update you on these new products as they're introduced in the coming months.

Now let's move to the electrical business. Second quarter sales of $21.8 million were up 4% from the first quarter and 31% year-over-year. As in prior quarters, most of the improvement came from the custom product and protection relay business but we made progress in the base fuse business as well.

Core fuse sales, not including custom products and relays were up 12% over the second quarter of last year and 9% sequentially. This was in spite of the tremendous negative drag of the non-residential construction market segment which represents over 40% of the market we serve.

We're going through one of the steepest construction downturns in generations and the outlook for non-residential construction does not anticipate any signs of recovery until the second half of next year. As you would expect in this environment, price erosion continues to be a challenge.

On the other hand, the industrial production index was up 7.6% for the second quarter compared to the same quarter last year. While this is encouraging, there is some sentiment that similar to the projections for the electronics industry, this will slow down in the second half of the year.

Some of the positive trends for our core electrical business in the first quarter continued in the second quarter and we received strong order flow from our industrial distributors. Our sales into the construction market for the first half of 2010 are flat with the first half of 2009. While overall construction demand is down, our sales were bolstered by some new orders and distributor conversions.

A major distributor in the southeast converted to Littelfuse during the second quarter and we received strong reorders from a distributor conversion that was completed in the first quarter.

In addition, heavy flooding in the Nashville area drove several one-time replacement projects and the North American solar market remains strong. We also continue to see some very nice orders from several LED lighting manufacturers for our metal oxide varistor array that is used for over-voltage protection.

During the second quarter, we secured a win for a new fuse holder with a global manufacturer of outdoor lighting systems. The story behind this win goes back to 2008 when the manufacturer approached our sales engineers with a concept for a major modification to an existing fuse holder that would make their product safer and would make installation faster and more reliable.

Our engineers worked closely with the customer to develop, produce and certify the product to the desired US and international standards within the customer's time constraints. Production orders for the new fuse holder began in the second quarter and this win will produce about $350,000 in annualized sales for Littelfuse.

We expect the third quarter to be another solid quarter for the core fuse business based on the momentum of our first two quarters and the continuing progress in our targeted growth areas including solar and lighting. If the industrial segment does soften we wouldn't expect to see any impact on our results until the fourth quarter.

The other side of our electrical business unit is the protection relay and custom products business. Our custom products continue to be a major growth area of our electrical business as it has been since we acquired Startco Engineering nearly two years ago.

Sales of Startco products in the second quarter were up 53% on a Canadian dollar basis compared to the second quarter of last year. As you know, the custom products business is primarily driven by the mining industry. This industry, in general and particularly the Potash mining sector, where we have the majority of our sales, is continuing to rebound.

Potash mining companies and industry experts are both forecasting near-term and long-term increases for the global consumption of Potash, prompting Canadian Potash producers to continue investing in capacity expansions. These expansions require the use of our underground power centers as well as our protection relays.

We still have a significant backlog for our custom power centers used in underground mining, but we're continuing our efforts to add production resources and reduce cycle time. These actions have enabled us to maintain a production output that is similar to the record levels we achieved in the first quarter.

Beyond the Potash industry, the global mining sector in general continues to increase its usage of our protection relays in various types of electrical mining equipment. A recent win for our protection relay business was for an iron ore mine in Canada. The company was upgrading its power system and wanted to add resistance grounding and resistor monitoring to all of their low-voltage substations.

They contacted us to inquire about our resistor monitors. Not only were we able to provide the monitors, we also supplied the high-resistance grounding they needed as part of the package. The customer has already ordered about half of the units they need with orders for the second half coming in 2011.

Total value of this win is about $150,000. We also continue to make progress in selling relays through our electrical distribution network. You may recall that selling protection relays through our existing electrical distributors was one of the synergies we saw when we acquired the Startco business.

We recently worked with a distribution partner in Canada to target their local panel shops that provide ground fall panels to miners. This strategy has worked out well and the distributor has now sold several hundred thousand dollars in protection relays.

So, in summary, the core electrical business is making progress despite the headwinds in non-residential construction but it will be some time before it's back to pre-recession levels. Our custom products business continues to achieve strong sales growth and we look forward to continuing to grow this business in the years ahead.

That completes my review of our three business units. To summarize, the extensive manufacturing simplification and cost reduction initiatives we implemented several years ago are continuing to produce very strong results. These investments are improving our margins while at the same time making us an even stronger global competitor.

We now have a cost efficient, flexible and responsive structure in place to support our growth. We are focusing on growing the business through a strategy that has three main components. The first is organic growth through investments in new products and new product development.

We're going to continue to develop the next generation technology that has made us the highly-respected leader in circuit protection and is the foundation for our long and strong customer relationships across the world.

The second element of our strategy is growth through acquisitions. We continue to look for acquisition opportunities to broaden our product and technology portfolio and extend our business into related new markets. Startco has been an outstanding addition to Littelfuse and it's a perfect example of the type of acquisitions we are looking for.

The third component of our strategy is to run the business more efficiently through our global, lean initiative. We're investing in the training and processes needed to extend the lead enterprise culture across the entire company and are seeing some significant improvements resulting from this initiative.

We believe that together these three components of our growth strategy provide a strong foundation for the future. While the economy will always have its ups and downs, we believe the improvements we've made over the past few years put us in a very good position to weather another economic downturn.

Those of you who have followed us for some time, know that Littelfuse today, after our rationalization of the last three years, is stronger than ever. We're leaner, more flexible and better able to respond to changes in our markets, our customers and the economy.

We are confident about our future and the opportunities we have to increase sales and further improve our financial performance. With that, I'll now turn the call back to Phil who will comment on the outlook for the third quarter and then we'll open for questions.

Thanks, Gordon. The following is our guidance for the third quarter and some additional comments about the longer-term outlook.

Sales for the third quarter are expected to be in the range of $156 million to $164 million. Operating margin for the third quarter is expected to continue to trend up as more cost savings from the final phase of manufacturing transfers hit the bottom line.

Earnings for the third quarter are expected to be in the range of $0.92 to $1.04 per diluted share. Looking forward, there seems to be widespread concern about a slowdown in the global economy despite continued strength in the Asia end markets.

Although we have seen few signs of weakening in our business, we do know that we serve cyclical end markets and that at some point in the future these markets will cycle down. When this does happen, we are confident that our new cost structure combined with our organic growth initiatives will sustain double-digit operating margins even at the bottom of a typical cycle.

This concludes our prepared remarks. Now we'd like to open it up for questions.

The question-and-answer session will be conducted electronically. (Operator Instructions)

We'll go to our first question from Shawn Harrison from Longbow Research.

Hi, good morning. The first question, just with the incremental restructuring savings coming in the second quarter and through the back half of the year, if you could just go into -- again, I know, we've talked about it a lot -- just what the expectations are for annualized savings to hit in the third quarter, fourth quarter and then early 2011.

Yes, so we haven't really parsed it out quite that -- with that granularity. But what we've said is that we expect something in excess of $15 million of additional savings from these restructurings that include the silicon restructuring into Wuxi and include the move out of Dunsen, Germany into Mexico.

We did start to see some of those in the second quarter. We expect a significant amount of savings in the third quarter, hence the guidance that we gave for improved margins and earnings. Then there will be some more modest improvements all the way through the first quarter of next year. But I think these savings remain just about on our original plan and we're more confident than ever that we're going to see them materialize.

It sounds -- if I'm hearing this correctly from your commentary -- that you just started to maybe see them a little bit earlier than anticipated.

I don't think so, so much. I think -- I mean, we believe our guidance -- because it has consistently been pretty conservative and we've executed at or better than kind of what our expectations were built into the guidance and I think you can really attribute it really more to execution than anything else.

Understandable. The other question I had was lead times. It was mentioned during the prepared remarks that lead times across -- particularly on the electronics side are better than your competitors. Where are your lead times at right now and where would they be on those products kind of in a more -- whatever a normalized environment would be?

I think for our fuse product lines they are consistent with kind of where we would always like them to be in the four or five-week range. Where the market has really gone out on lead times has been more in the semiconductor products and products like TVS diodes and SIDACtors and thyristors, which most of our competitors are out 15, 20 weeks and quite a few of them in excess of 20 weeks on many of these products.

We like to keep those products. We would like to keep those products in the eight to 10-week range would be our target. We're a little bit above that right now but still well inside of the 15 to 20-week and up lead times where our competitors are. So I think most of those products would be 10 weeks or slightly above 10 to 12 weeks maybe but almost all inside of 15.

That's it for me. I'll hop back in the queue. Thank you.

We'll go to our next question from John Franzreb from Sidoti & Company.

Good morning, Gordon and Phil. I apologize if you've touched on these. I've been bouncing between conference calls. But, Gordon, one of the things I always like to talk to you about is your sense of the inventory levels at your customer base. I've always thought you have a great feel for it and you seem to be, I guess, tempering your expectations just in case.

Could you just give me some feedback on where things stand and what your kind of thought process is? Are we going to have normal seasonality? Just walk me through what you're thinking right now.

Yes, I think that's probably the number one question in the industry. We know that we've seen from the real downturn a lot of replenishment and we also know that the uptick happens faster than some manufacturers expected and that caused some lead times to go out. That, in turn, causes people to order a little more urgently if they find that one or two products in the [biller] materials have got long lead times.

So I think we clearly saw a lot of replenishment and we're always trying to find how much inventory there is at the OEM, how much is at the contract manufacturer and, for us most importantly, in the distribution channels.

I think we've felt that we've been monitoring inventory very closely and I think that the replenishment has pretty much happened, that we feel that while the end markets are still strong, especially in Asia, that we're now at a level where I think that we've got pretty much full replenishment and I think much more stable market conditions.

I think we'll see the lead times by our competitors coming down which I think will also help to stabilize. So I think we'll see much more back to historical seasonality which for us would be modest growth in electronics in the third quarter and then a usual seasonal decline in the fourth quarter after all the Christmas building has happened in the third quarter.

I think inventories are -- as Phil had mentioned, we've seen our book-to-bills come down from about 1.3 to 1.1 at the end of the quarter. I think that's very healthy and I think we're in actually a very healthy position in our electronics distribution channels.

Excellent, great news. The second thing I'd like to focus on is the statements you have in your press release. You talked about significant cost savings yet to come over the next three quarters. In light of the fact of how -- well, I guess I would say how good the restructuring costs have played out, any thoughts to maybe resetting your operating margin expectations to the cycle above that 15% threshold that you've kind of put out there?

I think it's probably a little early to do that and we probably wouldn't do that until we've actually cycled through a downturn, which hopefully will be a while away. But, yes, I think we've certainly -- on the high side we're going to overachieve, I think, probably where we originally thought we would be a year or two years ago as we set into this program.

It's pretty clear right now we're on our way to something like a 20% EBIT margin over the next couple of quarters assuming you don't have any glitches in the market, which we don't see right now, so even our guidance for Q3 would imply something approaching 20% on EBIT margin.

So I think on the high side we're certainly pleased with the levels we've been able to achieve and are probably overachieving a little bit where we expected to be and we're still very confident, as I mentioned in the script here, that during the down cycle we're going to still be in the double-digit range, for sure. So it's conceivable that it could be over 15% throughout the course of the cycle but I think it's probably a little bit premature to call that yet.

I'll keep pushing it. Thanks a lot, Phil.

We'll go to our next question from Dan McIntosh from Robert W. Baird.

Hi, good morning. I was curious if you guys are still seeing capacity constraints on certain lines. I know that you had planned to address some of the gaps that you were seeing by the start of Q3. I'm just curious if that is still on track.

Yes, so we've been adding as we indicated I think last quarter. We have certain lines in automotive and electronics where we've been adding incremental assembly machines and other pieces of equipment to add capacity where we've been tight on capacity.

I think there are certainly lines where we continue to be tight. We have additional capacity adds planned for the next couple of quarters. But they're incremental. It's nothing that's a step function change in capacity and we feel like we're in good position. Other than related to the fire we're not giving away any upside revenue opportunity because of capacity constraints.

That makes sense. Then are you still seeing some opportunities to increase prices similar to last quarter, I guess, typically in the semiconductor product area?

I think that in the environment that we've been in, given that normally the electronics industry is one of constant price reduction expectations and while that continues to be the industry norm I think there are certain times where selective price increases are appropriate and I think we've been taking, I think, that into consideration in our business in the last couple of quarters.

There's been an environment where we've been very well placed with product available and I think that we've been selectively increasing prices and I think that's also one of the things that's showing in our profitability model that we've seen that dropping through to the profit levels that we're at now.

All right, good to hear. Thanks again and congrats on a great quarter.

Thank you.

(Operator Instructions)

We'll go to our next question from Anthony Kure from KeyBanc.

Good morning, gentlemen. Just a couple quick things; could you just go through a little bit of color on what's really driving the better lead times relative to your competitors? What's different about Littelfuse that's really allowing you to gain traction here?

Well, I think we've been extremely fortunate, frankly, that we started our manufacturing rationalization plan to go down from 16 plants to six around the world back about almost four years ago now and it's taken a long time to get through that. As we've gone down to fewer plants with lower fixed costs, which was all part of a structure, there's much to get our structure in line for the downturns, as Phil has explained, that we can be profitable through the cycle.

But as we've put those new plants in place and capacity expansions, we've obviously sized those for the future and for growth in the long term, which we believe that unit volume growth in circuit protection overall has many reasons why it will continue to grow.

So we put our plants in place with extra capacity and while it was very tough to be doing those transfers as the market was collapsing in 2008 and early 2009, as it ramped back up much faster we were in the very fortunate position of having put plants in place with plenty of capacity sized for growth and sized during that period of 2007 and 2008 when we had a trajectory of higher volume growth.

So those transfers were very fortunate in the timing and, as Phil had mentioned last quarter, we believe we've got a manufacturing footprint in place that can support business of about $180 million a quarter.

So we really had sized it for that size of revenue and those volumes back a couple of years ago. Sticking on that long-term path, when the recession came we really didn't have any choice but to continue with the plans that we had and they've turned out to be very fortunate for us. So sometimes the timing and the downturn and quick upswing have really worked in our favor.

I think also our operations teams have responded very well and I think some of the lean manufacturing processes and techniques that we've adopted over the last year or two have served us well during this time as well.

Great, that's really helpful. Just looking at your guidance into the third quarter and sort of thinking about the restructuring savings that are going to start hitting here in the third quarter, is it fair to assume that the biggest sequential uplift in operating margins will be in automotive versus the other two segments?

I mean, we will see continued progress on the automotive margin. I think the biggest beneficiary of the cost savings going forward is going to be our semiconductor business. So automotive will get benefit from the consolidation of the Dunsen, Germany manufacturing facility. That's a relatively small piece of their total manufacturing. So it'll help move the dial on the margin.

But the biggest gains are going to be within our semiconductor business as we completely shut down the Irving and Matamoras factories over here in North America and then ultimately the Taiwan factory over in Asia and consolidate that all into Wuxi. That's where the biggest benefit is coming.

Just a last question; do you guys have to endure any extra shipping costs associated with expediting this quarter?

Some but less than what we -- certainly less than what we did. We talked about a lot of extra costs in the first quarter that was going to carry over into the second quarter and certainly that happened. We still had some extra costs but they were pretty much back in line by the end of the quarter. So early in the quarter definitely some extra costs. As we got to the end of the quarter we were in pretty good shape on that front.

So it's fair to assume that third quarter won't have to go through that again.

That's correct. That's part of the reason for the guidance, the improvement not only the consolidation cost savings but also we should show a little bit better costs in the whole logistics area, as well.

Thank you.

Great.

(Operator Instructions)

We'll go to our next question, Shawn Harrison from Longbow Research.

Hi, two brief follow-ups. What is the Euro exchange rate assumed within the guidance?

I think we had assumed probably something in the 1.30 range.

So if the Euro holds there shouldn't be any impact one way or the other.

Yes, so it's a little bit above that right now but I wouldn't expect a big impact from Euro now. There is some positive impact going from Q2 to Q3. I think we took some of that into account in the guidance.

The other question just kind of as a follow-up in terms of the replenishment topic. How much was distributor point of acquisition greater than point of sale or just kind of across maybe the customer base within the second quarter in the electronics business?

Say that question again.

Looking at distribution, the point of sale of your product, it sounds from your commentary that with the restocking that happened, they built more product than they actually sold. Was it a substantial gap between what they acquired versus what they sold or was it just kind of a modest final step up in inventory.

No, I think it's fair to say it's modest and we track very carefully their inventory levels and their inventory versus historical levels and it doesn't look at all out of line. So I mean, I think there was naturally still some restocking from the very low levels they were at but if we look at that ratio and we look at their total inventory levels it's very much in line with history.

Thank you very much.

Thanks.

This concludes the question-and-answer portion of the conference call. I would like to turn the conference back over to Mr. Gordon Hunter for any closing remarks.

Well, thank you for joining us on the call this morning and for your comments and questions. As we indicated, we are pleased with our performance in the second quarter and we look forward to continued progress in the second half of the year. Thank you for your interest and support for Littelfuse and have a good day.

This concludes today's conference call. Thank you for your participation.