Littelfuse Inc (LFUS) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse Incorporated Second Quarter 2011 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 and welcome to the Littelfuse Second Quarter 2011 Conference Call.

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

As you saw on the news release, this was a very solid quarter for Littelfuse.

We set a record for sales and earnings, even though we were just below the midpoint of our guidance.

Both the automotive and electrical businesses grew at double-digit rates and the electronics business bounced back from a weak first quarter.

Our top-line growth and the high level of profitability reflect our strong operational performance and the benefits of our leaner cost structure.

Our operating margin was, again, above 20% and we've achieved this level three times in the last four quarters.

We're very pleased with the acquisition of Selco, which is a great addition to the Startco platform, with similar growth potential.

Now I'll turn the call over to Phil, who will give the Safe Harbor statement and a brief summary of the news release.

Thank you, Gordon, and good morning.

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 from those expressed in forward-looking statements.

Sales for the second quarter of 2011 were $176.6 million, which was up 12% year-over-year, due to strong growth in the automotive and electrical businesses and the addition of Cole Hersee.

GAAP earnings for the second quarter were $1.11 per diluted share, which included a $0.04 charge, primarily for acquisition-related fees.

Excluding this charge, the diluted earnings were $1.15 per share compared to $0.90 in the prior year.

The strong year-over-year earnings improvement resulted primarily from higher sales, our improved cost structure and accretion from the Cole Hersee acquisition.

Cash provided by operating activities increased to $32.4 million for the second quarter of 2011, compared to $19.2 million for the prior year, due to improved profitability and better working capital performance.

Book-to-bill ratio for electronics was 0.98 for the second quarter.

This is indicative of the slowing order trend that began during the second quarter and has continued into the third quarter.

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

Thanks, Phil.

Now let's move on to the review of the three business units, starting with electronics.

Electronics sales were $98.4 million for the second quarter, up 13% from the first quarter of 2011, but down 1% from the second quarter of last year.

As we indicated last quarter, the year-over-year comparisons are going to be much more challenging in 2011, due to the strong inventory replenishment throughout the supply chain last year.

You can see that reflected in the comparisons to last year's second quarter.

The sequential increase from the first quarter is a better indicator of our progress.

It reflects strong sales in both our fuse and semiconductor products for a wide range of electronic applications.

The higher fuse and semiconductor sales helped to offset reduced run rates for Littelfuse products going into consumer electronic devices and particularly LCD and LED TVs.

The slowdown in TV production has been covered pretty extensively by the industry media.

Two solid contributors to the sales increase were our NANO and Barrier fuse lines.

We saw increased NANO sales to leading telecom customers in Europe and China.

Customers like Huawei in China and Sagem in France increased their run rates, plus we received a greater share of the business.

It's added an extra $250,000 to sales in the second quarter and we expect an extra $300,000 to $400,000 in sales in the next two quarters.

We've talked about our small surface-mount NANO fuse on prior calls.

It's the smallest fuse of its type in the industry.

Our increased production capacity for these fuses came online in the second quarter and this helped us to meet the demand from customers like Lenovo for laptops and ELDOR for ignition coil protection for Volkswagen, added about $90,000 to second quarter sales.

And we expect an additional $250,000 in sales in the third quarter.

We haven't talked about our Barrier network fuses in the past, but I'd like to highlight this product pipeline today, because it's a growing area within our electronics fuse business.

Our line of hazardous area Barrier network fuses is designed to enable greater safety in operating electronic equipment within potentially explosive environments.

Our Barrier fuses meet the stringent standards for hazardous applications such as offshore oil and gas platforms.

Key customers include MTL Instruments in the UK and [Pepperlin Hooks] in Germany.

Both of these companies provide protection equipment to the oil and gas industries.

We also saw strong sales of our barrier fuses in the second quarter.

Demand is expected to continue for the rest of the year, potentially adding $1.1 million of incremental revenue to Littelfuse in 2011.

Semiconductor product sales were also strong in the second quarter, driven by gains across the portfolio in end-markets ranging from consumer electronic products to datacom, telecom applications and industrial products.

We saw some slight over-ordering in the second quarter, due to concern about shortages of Japanese components as a result of the earthquake there.

But overall the impact on sales due to the earthquake remains at a level we indicated last quarter, about $1.5 million to $2 million per quarter or approximately $6 million to $7 million for the year.

We introduced several high performance products during the quarter that set Littelfuse apart in the market.

These new products are part of our more energy in a smaller body strategy, providing higher over-voltage, over-current protection in a smaller footprint than other existing products on the market.

This approach meets the needs of many electronics customers who are designing products with faster data speeds and higher volume, or within a smaller product body.

Think of the old cell phones compared to today's smart phones.

This trend extends to many other consumer product areas.

The new products include a new fast-acting cartridge fuse used in power supply systems for server banks that support cloud computing, as well inverters for solar applications.

Liteon in China is one of our lead customers in the server bank power supply market and numerous solar inverter customers in China are currently evaluating the product.

A second new product is a sub-miniature fuse used in power supplies, LCD TVs and other consumer product applications.

Designers like this product because its smaller footprint gives them more flexibility in developing circuit board lay-outs.

The leading customer for this new fuse is Panasonic's LCD TV group.

Another new product category is in our line of TVS diode arrays.

We've talked about these products before, but today I'd like to update you on how and why we are expanding this offering to take advantage of growth opportunities in the market.

TVS diode arrays are semiconductor products that protect sensitive electronic components and chipsets from electrical threats, such as electrostatic discharge, or ESD, and lightning surges.

While other technologies can also be used to protect against ESD, semiconductor technology is the best suited for these applications.

We made significant investments in design resources and people prior to launching the expanded TVS diode array line about two years ago and we continue to expand our product offerings.

We recently introduced a new product series, the 0201, which is the smallest form factor ESD device in the market.

It has been tested by customers to be the best-in-class.

The growth opportunities for our ESD product is formed of three general areas.

The first is high-speed ESD protection on data ports and consumer digital products, such as set-top boxes and TVs.

We've been very successful in this category with our devices now in products produced by the largest set-top box makers in the world.

The second growth area for our TVS diode arrays is what we call human interface, because it protects against ESD in the areas you touch, the buttons, switches and keypads.

E-Readers and tablet computers are two fast-growing areas we talked about last quarter.

We're already in a good position in the e-Reader market, with our cartridge fusers and the charger of the Apple iPad 2, and our thin-film fusers on Samsung's Galaxy Tab 2, as well as our ESD protection products in both the leading e-reader and several tablet products.

As more companies enter these markets, we have even more opportunities to increase sales of our TDS diode arrays.

The third growth area is protecting against lightning surges in broadband applications, such as data communications, Voice-over-IP phones, servers and routers.

We recently had a very nice win in this area with the global leader in networking and expect to expand sales of this offering to other leading data communications equipment providers.

All three of the new products introduced in the second quarter help our customers to gain an advantage.

Our products ensure the reliability of their products and their brand name and our smaller footprint strategy gives design engineers the ability to reduce the size of their end-product.

Both of these benefits help customers stay on the leading edge in a very competitive market by offering the latest advancements to technology hungry customers.

We also had some good design wins during the second quarter.

We're continuing our success in getting our fuses designed into the LED light bulb market.

Our initial success with Osram, Philips and Lightning Science Group expanded to Sharp this past quarter and we are looking at additional potential wins in the second half of the year.

We expect this market to generate sales of approximately $500,000 in the third and fourth quarters.

Another product category that is building momentum is our Pigtail cartridge fuse, which has been designed into the Sony PS3 game console as well as into the power supply market in Taiwan.

The Sony win is $350,000 per year opportunity for us.

Looking to the third quarter, distributors have become more cautious.

The electronics order rate has softened, as indicated by the second quarter book-to-bill of 0.98.

End-customer demand held steady in June and July, but distributors are carefully managing their inventories, which is causing some slowdowns in their purchases.

As a result, we expect third quarter sales to be down to flat from the second quarter.

And while the strong momentum we saw earlier in the year has slowed, we expect to continue to benefit over the long term from our investments in new product development, successful design wins with leading companies across the industry and market growth in key areas, like e-readers, tablets, and cloud computing.

Overall, we believe our electronics business is well positioned for continued growth.

As mentioned in our press release, last quarter we made an investment in a Silicon Valley start-up called Shocking Technologies.

This polymer technology could have very interesting opportunities in the future application of circuit protection.

That brings us to our second business unit, automotive.

Second quarter automotive sales of $50.4 million were up 46% year-over-year.

Excluding Cole Hersee, which we acquired last December, automotive sales increased 13% year-over-year.

The increase reflected improved demand in all geographies and the positive effect of the stronger euro.

But a number of other factors contributed to the sales increase.

One was our market position.

The OEMs, where we have the highest product content, outperformed the overall market in the second quarter.

This includes European OEMs, such as BMW and Volkswagen and also GM, with its global brands.

These three OEMs I just mentioned were all at close to or above 10%, which is above the 6.1% increase in total non-Japanese car production.

Overall, global car production was down 2.7% due to the continued decrease in car production in Japan, as a result of the earthquake in March.

We also benefited from launches of new cars in Europe and North America that use our high-current circuit protection products, primarily MasterFuse.

The launches include GM models and the VW Up small car platform, designed for emerging markets with an initial launch in India.

In addition, we won new business from a competitor in Europe for the Volkswagen platforms by designing in a new higher temperature environment ATO fuse, which will continue to add new revenue going forward.

Sequentially, global car production was down about 10% from the first quarter.

However, our OEM sales were down only 4.7%.

So we continued to outperform the market.

Moving on to design wins and new business awards, we won new business with a well-established tier one customer for our MasterFuse on the new GM K2XX platform in North America.

This is the biggest truck platform GM has, with production of more than 900,000 vehicles per year in peak, including models like the Chevy Suburban and Cadillac Escalade.

This 2013 model year platform starts production next summer.

Through a tier one customer in Asia, we won the high-current fuse content for the GM Corvette.

When it begins in 2013, this will be the first car equipped with the new ZKS MasterFuse.

The ZKS is a compact design specifically developed for cars with very limited space in the engine compartment.

We've also quoted the new ZKS for other major new car lines and we hope to have more wins to share with you in coming quarters.

We continue to focus on strategic partnerships for our new high-current fuse products in the United States and Asia, as well as new high-performing fuse for the electric vehicle market.

The electric vehicle market is just beginning to generate higher volume and is providing opportunities to design our components into new vehicles under development.

We are working with OEMs and other component manufacturers to develop a very fast-acting, high-current fuse for the electric vehicle segment, which will enable OEMs to optimize the performance and the cost of the high-voltage system.

As we mentioned in the news release, the integration of Cole Hersee is proceeding well.

For those of you who haven't been on our past calls, Cole Hersee produces power management products and switches for electrical systems in the commercial vehicle market.

The acquisition is a significant step in our strategy to expand the off-road truck and bus segment, which is a targeted growth area for Littelfuse.

We've already introduced Cole Hersee products to Littelfuse customers in Asia and Europe and have started to receive new orders in both China and Korea.

We're very pleased with the acquisition and the opportunities we have to grow the business.

And we expect to see significant growth starting next year.

Looking to the third quarter, we expect our automotive sales to continue to be up year-over-year, but lower than in the second quarter.

This is due to the normal seasonal impact of all of our major customers in Europe, the US and Korea.

For the full year, J.D.

Power and Associates has reduced its estimate of car production growth to 4.4% from 5.5%.

We believe we will continue to outperform the market as we benefit from the new platform win, new products and our strategic growth initiatives.

Now let's move on to our electrical business unit, where the overall results continue to be very strong.

Second quarter sales of $27.8 million were up 16% from the second quarter of 2010.

The continued growth in protection relays and custom mining products, as well as further recovery in the industrial fuse market, were the major contributors to the improvement.

Sales for the base fuse business were up 6% from the second quarter of last year, despite the continuing challenges in the commercial construction segment.

Sequentially, fuse sales were up 13% from the first quarter of 2011.

Year-over-year industrial activity continued to improve, as indicated by the 4% increase in the industrial production index through May.

This improvement drove sales increases over a broad cross-section of our industrial customer base.

Unfortunately, this momentum was offset in large part by a slowdown in revenue for our solar business.

This was primarily due to cuts in European tariffs, designed to encourage investments in renewable energy technologies and also overproduction of solar inverters last year.

While these factors have resulted in softer than forecasted demand for solar circuit protection products for the first half of the year, the long-term outlook for the segment remained strong, with global annual installed capacity forecasted to grow from 20 gigawatts in 2011 to over 40 gigawatts in 2015, according to IMS Research.

With this 19% compounded annual growth rate, we continue to execute on our growth strategies for this market.

One of these strategies is new product development.

We launched a key new product for the solar market in the second quarter, the industry's first UL listed 1,000 volt high amperage photovoltaic fuse.

In conjunction with our 1,000 volt String Fuse launch in the first quarter, we now have the broadest line of UL listed photovoltaic fuses in the world.

The fuses are used in solar inverters and combiner boxes.

We've had several early wins for the new solar fuse, including a multi-million dollar win with a manufacturer of equipment for photovoltaic systems in the second quarter.

The customer response to the new fuse line has been overwhelmingly positive and we expect additional new design wins to continue moving us forward in achieving our goal of long-term growth in the solar segment.

On the international front, a leading European telecommunications equipment, Ericsson, in Sweden, has designed our power fuses into a new direct current power circuit for the next generation of telecommunications base stations.

We estimate this win will add $250,000 of revenue growth over the next 12 months.

We still have concerns related to commodity pricing for the copper and silver that is used in our fuse products.

Although there has been a slight clawback recently, prices are still extremely high compared to a year ago.

But as we indicated last quarter, we implemented the price increase on April 1, which has helped offset some of the price increases.

The other side of our electrical business unit is protection relays and custom products.

Sales of these products increased 32% from the second quarter of last year, as a result of our continued focus on global markets and the strength of the worldwide market -- mining industry.

Overall, the domestic and international mining industry remained strong, driven by the rising costs of precious metals and commodities.

The global demand for potash, a key market for our mining products, also remains strong, due in part to the rising prices for crops, such as grains, oil seeds and other commodities that are heavy users of potash fertilizer.

In June, we launched our newest arc flash relay.

This product can identify an arc flash event in less than one millisecond, that's one one-thousandth of a second, and send a signal to shut down power before major damage occurs.

Traditional circuit breakers do not detect the early stages of an arc flash event rapidly enough to avoid major damage.

So our new product meets a previously unmet need in the market.

This is significant because arc flashes account for about 80% of all electrical accidents.

These accidents endanger workers and cost companies hundreds of thousands of dollars in medical expenses, equipment damage, lost productivity, fines and litigation.

And as you can expect, we have received very positive response to this technology advancement from customers across the globe.

We secured a number of noteworthy orders for our protection relays during the second quarter.

One of these was a large order placed by a Chinese OEM that manufactures electrical equipment for the mining industry.

This is a very important new customer as they're a major OEM for mining substations in China.

And while the China mining industry has traditionally been ungrounded, we are making very good progress and encourage them to convert to resistance grounding and use proper protection relays.

We're also very excited about the growth prospects for our products in the market that produces charging systems for electric vehicles.

We recently received an order from a Korean OEM and our ground-fault relay has been used in field trials in Japan to protect the high-voltage DC circuits of the EV charging stations.

If this field trial is a success, the OEM expects they will need over 1,000 units.

Another order in the electric charger market is an OEM in North America that purchased several direct current ground fault relays for testing, as a possible solution on their electronic vehicles.

Oil and gas production is another growth area.

During the second quarter, we sold a large neutral grounding resistor package to a leading backup generator manufacturer for use at a new oil and gas project in Canada.

This gives us an important reference in pursuing other oil and gas opportunities in the region.

In the mining industry, we received an order for four motor protection systems at one of the world' largest copper mines in South America.

And while this order was relatively small, we expect to see much more business from this customer, as they expand and upgrade older equipment.

In addition, we continue to maintain strong relationships with our existing customers.

For example, we recently supplied motor protection relays for a long-term customer in Alabama for a coal mine project in Columbia.

As mentioned in our press release, we completed the purchase of Selco, a Danish company specializing in protection relays for the marine and other industrial markets.

Selco develops, manufactures and sells a wide range of sophisticated electronic products for protection, control and monitoring of equipment and critical processes in marine, offshore and land-based applications.

Selco's annual revenue is approximately $9 million.

We're excited about the addition of this business, because it strongly complements our current line of protection relays.

Selco will also expand our sales and distribution network for relays in Europe and the Middle East, as well as provide new technological competencies that will strengthen our already robust engineering capabilities.

On the custom products side, we continue to move forward with plans to expand our production facilities in Saskatoon, Canada, on land we purchased adjacent to our existing plants.

We expect the final designs to be completed in the third quarter with the goal of breaking ground by the end of the year.

The fact we are already expanding the new facility we built just three years ago is a testimony to the strength of the mining industry and the strong reputation of our custom-designed power distribution centers.

The increased factory capacity will enable us to further expand our custom products business into new geographies and new vertical markets beyond mining.

We're only halfway through 2011, but looking forward to strong growth in 2012 and beyond for our custom products.

The nature of the mining industry is that mine operators plan capacity expansions and electrical equipment purchases years in advance.

As a result, our order book for 2012 is already filling up strongly with purchase orders from our current customers.

We're very enthusiastic about the growth prospects in this market for custom products and we're confident this is an area of business that we want to invest in for the future, as evidenced by the recent factory facility expansion.

As you've seen, for the base fuse business and our protection relays and the custom products for the mining industry are performing well.

We expect continued growth from the OEM and MRO segments, along with some wins for our new solar products.

We also anticipate further growth of both protection relays and custom products in international markets and deeper penetration of the new arc flash relay in the North American industrial customer base.

That completes my review of the three business units.

In summary, we are pleased with our second quarter performance.

The automotive and electrical businesses achieved double-digit growth and electronics business bounced back from a weak first quarter.

Higher commodity prices continue to be a concern, as well as increased freight costs, driven by higher oil prices.

But in spite of these headwinds, we were able to achieve an operating margin above 20% again this quarter.

We're continuing to focus on the areas of our business that we've targeted for sustained growth.

These include the TVS diode array of products, protection relays and custom electrical products, solar products, commercial vehicle products and advanced power systems for vehicles.

I've updated you on all of these today and how we're growing in each of these areas, whether it's through new products, new business wins, acquisitions or investments.

Today we also announced a 20% increase in our quarterly cash dividend from $0.15 per share to $0.18 per share, beginning with the dividend payment number six.

The increase reflects the Board's confidence in our ability to generate cash, industry leading products, growth initiatives and strong financial performance.

When we initiated the dividend last November, we indicated we intended to increase the dividend over time and we are pleased to deliver on this commitment.

I'll now turn the call back to Phil, who will provide the outlook for the third quarter and then we'll open the call for questions.

Thanks, Gordon.

The following is our guidance for the second quarter -- for the third quarter, sorry.

Sales for the third quarter of 2011 were expected to be in the range of $169 million to $177 million, which represents 3% to 8% growth over the prior year.

Earnings for the third quarter of 2011 are expected to be in the range of $1.00 to $1.10 per diluted share.

The expected sequential decline in earnings reflects slowing sales, continued commodity cost pressures and gradual increases in selling and R&D expenses to support our organic growth initiatives.

Some guidance for the full year, capital spending for the year 2011 is now expected to be $25 million to $28 million.

Most of this is for capacity to support new products and other growth initiatives.

This forecast has been reduced from our earlier forecast of $28 million to $30 million, due primarily to the push-out of a few projects.

Even with slowing sales and orders, we still expect to exceed our original full-year guidance of $3.75 to $4.05 per share.

This implies an operating margin for the full year of between 19% and 20%.

Full-year free cash flow is expected to be in the range of $100 million.

This clearly indicates that in spite of the near-term challenges of the slowing economic and commodity cost pressures, our business model is working.

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

(Operator Instructions) Your first question is from the line of Shawn Harrison with Longbow Research.

Please proceed.

Good morning, Gordon and Phil.

Good morning.

I wanted to just follow-up on the electronics business.

Seeing that it looks as if the statement was sales for distribution were flat, June to July, how did June compare to May?

And then, I guess, looking forward, since there is an inventory correction, maybe your best guess in terms of how long it's going to take to work through some of that excess inventory and distribution?

Well, I think that the general trend through the quarter was -- it was reasonably steady, but the -- in terms of sales.

But the order, the reorder rate, was weakening as the quarter progressed, I guess, is the way I would characterize that.

So it -- there's clearly a trend.

We entered the quarter with a pretty decent backlog.

And obviously finished it with a 0.98 book-to-bill, which would imply a slightly lower backlog going in terms of Q3, than what we would have expected going into the quarter.

I'm sorry, Shawn, the other part of your question?

Just given that distribution is reducing inventories, I guess, have you gotten any feedback in terms of how long this correction may take?

Or even just kind of your opinion, based upon what you're seeing in order rates right now?

Yes, our distributors, Shawn, I think are -- have been, for some time, thinking that there's going to be a bit of a correction in the third quarter, but felt confident that in the fourth quarter, things will stabilize.

So I don't think any inventories were tremendously over what their target was.

They've got a little bit ahead.

Their point of sales data, the sell-through from the distribution channels, has remained fairly strong.

So there's a feeling this is not a huge correction and I hear surprising optimism for the fourth quarter.

So we're not unduly worried by that.

Okay.

And then the second question, just on the commentary of investments in SG&A and R&D, over time.

Maybe if you could quantify a range?

The back half spending, up over the first half.

Just kind of help us out a little bit in terms of what to expect?

Yes, so, I mean, the excluding -- excluding the recent small acquisition, we would expect only modest sequential increases in Q3 and Q4.

So we're talking in the neighborhood of hundreds of thousands of dollars, not millions of dollars.

So if you think in terms of $400,000, $500,000, $600,000 increase in Q3, and probably no more than that in Q4.

Okay.

And these type of investments, is it typically a 12-month type of leverage pay-back that you're going to see?

Yes, obviously a lot of that depends on kind of where they all -- the overall market goes.

But we're -- I mean, if you think about the types of things that we're investing in, we're investing in sales people and field application engineers for some of our newer, higher growth categories like solar and like protection relays.

We're investing in new products for some of our semiconductor -- parts of our semiconductor business.

Those tend to be several year pay-backs and so I -- I would think about those as being investing now for growth that we're going to get maybe starting next year, but certainly ramping up over the next several years.

That's very helpful.

Thanks so much.

Yes, I think, just to qualify, we know that some of the things that we've talked about, like electric vehicles, we know the volumes are going to be still fairly small and there's a lot of new technology to develop there and so some of those investments, they're probably a bit further out.

And I think developing our custom products business will start going to other geographies.

That's an investment that's going to take a little bit longer.

So I think some of it, we clearly believe, is not going to have any significant pay-back in 12 months, but they're the right things to do for those businesses for the longer term.

I think some of the things that we talked about, solar to the -- has hit a bit of a speed bump in the inventory of inverters that are available.

But we strongly expect that to come back and be much faster growing.

So I think it depends on the end markets and we've taken a fairly long-term view on some of these.

Okay.

Your next question is from the line of Peter Lisnic with Robert W.

Baird.

Please proceed.

Hi, good morning.

This is Josh Chan filling in for Pete.

Based on your outlook for the rest of the year, I mean, it looks like you are expecting a modest sequential decline into 3Q and then maybe another decline into 4Q, but not overly dramatic.

I mean, is there any reason to expect there to be a significant drop down in margin or do you expect the margin to just move with volumes, basically?

Okay.

I mean, I think that in the Q4, first of all, we would typically have a seasonal drop in Q4 and what Gordon mentioned, some of the distributors and customers we talk to -- are thinking that Q4 may be a little bit more robust, at least relative to a weak Q3 than normal.

But you can pretty much count on at least some sequential decline going from Q3 to Q4.

In terms of how that impacts margins, I think you're not going to see -- you shouldn't see a big decline in gross margin.

You'll see a little bit on the operating leverage.

And then operating margin will decline.

I mean, we don't have much that's variable in our operating expenses and as we mentioned we are investing in a number of growth areas.

And therefore, I would expect operating expenses to be flat to up slightly going into Q4 and therefore you're going to see some negative operating leverage there, if sales drop off.

Okay.

And then, that was helpful.

And then on the electronics slow down and order rate, I mean, what is, I guess, your level of confidence that this is a one-quarter, or a little bit more than that, event?

I mean, Gordon talked about some optimism in the fourth quarter.

I mean, could you flesh that thought out a little bit in terms of how you think about this timing?

Well, there's a couple of things that we look at.

One is the point-of-sale data that we get, that's the sell-through from our distributors.

And that's remained fairly steady, so we haven't seen a decline in that.

So it makes us believe that the end markets, across all of those end markets, should remain fairly solid.

We certainly know that some segments, like LCD TVs, are clearly -- have slowed down.

But overall, the end markets for many of those examples I talked about, the emergence of things such as LED lighting, there's enough end-markets for our products that they all remain solid.

What we clearly see is that the inventory levels climbed up during the course of the year and we saw just six months ago, distributors being more confident and ordering more product and now as the confidence in the channels is a little less there, they're trimming back on their inventory.

But I think the main indicator for us, as a leading indicator, is the point-of-sale sell-through data from the distribution channels.

And that makes us feel this is really a correction in the channel as opposed to a significant weakening across all of the end-markets that we sell to.

Okay.

Great.

Thank you for your time.

Okay.

Okay.

Your next question here is from the line of John Franzreb with Sidoti and Company.

Please proceed.

Good morning, guys.

Hi, John.

Gordon, you went into a lot of examples of new program wins across different segments.

I wonder if you could kind of put a number to it or maybe some sort of percentage to how much that kind of adds to the revenue profile?

Not in the near term, but say in the 2012 time frame?

For 2012, well, I think that there, our sort of first look would be that our electronics business is probably in the mid- to high-single-digits of expected growth.

I think from organic growth and the new product development.

If we net out price decreases, which we always have to expect in the consumer electronics area, I think our first look at 2012 would be a mid- to high-single-digit number.

I don't think we're feeling that 2012 is a -- is going to be a disappointing year.

Yes.

But I think the -- in terms of the growth initiatives, I think -- if we think about organic, from the organic things that we're working on, we're probably -- you can probably think about targeting something like a couple of points of growth over and above market growth is how we're thinking about that.

And that's just based on the new program wins and the R&D benefits of the new -- that you're rolling out?

Yes, and it's highly leveraged in a few areas.

I mean, we talk about, certainly, the protection relays and custom mining products coming out of the Startco business, as one big driver of that.

We're -- we've been investing a lot in solar, as you've heard, solar has taken a temporary pause here.

But we're still very optimistic about that for the future.

That's going to help drive growth for -- we're seeing some very nice design wins in high-current automotive products.

That's going to drive growth above the automotive car build rate.

And Gordon mentioned a number of very nice wins that we're seeing and continue to see in our new semiconductor products.

So you think about those areas growing well up into -- well up into double-digits and that pulls the overall growth rate up by probably a couple of points over the -- over the overall market growth.

Okay.

Now looking into the fourth quarter, electronics, you typically have a sequential drop somewhere in the neighborhood of 5% to 8% historically.

It sounds to me that you don't think the book-to-bill will be that weak in the fourth quarter, due to some catch [effect.] Am I misreading that, or help me out?

No, I think the real answer is, John, that we don't -- we really don't know at this point.

I mean, the -- certainly the third quarter is setting up to be a weaker third quarter than we would normally have.

Right.

Just based on normal feasible trends.

We normally -- we would normally expect kind of a low single-digit -- mid-single-digit sequential growth over Q2.

Right.

And this year, it looks more like it could be down a little bit from Q2.

So does that mean that we're burning off some inventory and that's going to set up Q4 to be a little bit stronger?

Yes, it's really hard to say at this point.

You've got kind of the other kind of underlying or overriding trend of the overall macro economy, that seems to be slowing.

It's pretty hard to predict.

Okay.

Fair enough.

Conversely, I'm also hearing things about the automotive sector and some of the component supplies there are actually forecasting a stronger fourth quarter.

Is that what you're seeing?

Or are you seeing something else?

I wouldn't say that I've heard that the overall market, fourth quarter, is necessarily stronger.

We certainly feel very good about the new programs I talked about and the new design wins.

And particularly, I think, being -- having a much stronger position with those companies that are doing very well, the BMWs and Volkswagens, that are doing extremely well with their exports and emerging markets like China, where BMW and Volkswagen continue to do very well.

So I think being with the leading companies on new designs is successful for us.

I think that -- I cited that J.D.

Powers pulled their growth, their production rates, down from their last recent forecast, so I'm not sure that the overall market is predicting passenger growth being any more robust in the fourth quarter.

Certainly China, as a -- as one of the leading production countries, has seen slowing.

They're -- I think they're still bullish about the long term and next year, but the second half of this year, China, I think, is forecasting a cutback in production from the growth rates that they had.

So not sure I'm so bullish about the fourth quarter automotive surge.

All right.

Fair enough.

One last question.

You have a fair amount of cash on the balance sheet.

The stock's taken a sizeable hit today.

Could you talk a little bit about your appetite for share repurchases versus continued investments in other enterprises?

Well, first of all, I don't think it's an either or.

Yes.

We have cash on the balance sheet.

We just completed, as we said in the press release, a new revolving credit facility that's double the size of our old one.

So we have the balance sheet to fund all of our organic growth initiatives, to continue to fund acquisitions and to buy back stock, if we choose.

Yes.

As you know, historically, our patterns and our preference for stock buy-backs has been fairly aggressive buy-backs at opportunistic times as opposed to just buying back stock to offset dilution and that kind of thing.

And I can't remember too many times, based on the stock price that I looked at before I came into the meeting, and the enterprise value I looked at when I came into the meeting, where stock's been trading at much lower multiples than it is right now.

So I think that we would more than likely view this as an opportunity.

Great.

Could you remind me how much you have left in the share repurchase?

I think we have a new authorization from the Board that we haven't utilized yet, so it would be 1 million shares.

Okay.

Thanks a lot, Phil.

Thank you, John.

Your next question is from the line of Anthony Kure with Keybanc.

Please proceed.

Good morning, gentlemen.

How are you today?

Good morning.

Good morning, Tony.

I just wanted to follow up on the -- some of the similar thought processes as it relates to your comments, Gordon, on the electronics market into '12.

Maybe if you could maybe provide similar sort of framework of what your thoughts are from a growth prospective in the other two segments?

Yes, I think we are fairly -- as we've said, very bullish about the electrical segment.

I think the mining segment that we've done very well in, since we made the Startco acquisition.

That business has doubled, since we acquired it less than three years ago.

And as I mentioned also, we've got a very strong backlog, it's a business that places its orders very early.

So extremely confident, I would say, about the electrical business, particularly the protection relay and the custom products business, based on the long-term cycles of investments in capital projects like mining.

And we believe the diversification for the -- into the other vertical segments, like oil and gas and other industrial areas, as well as the geographical expansion that we're really just getting started on, as we mentioned, examples in South America and China and South Africa, we think there's a lot of geographical growth.

So we're extremely bullish about growth and confidently predict more than double-digit growth in the electrical segments for the next year.

I think that we are really just getting going with the momentum of, particularly, protection relays and custom products.

So very, very confident about that business.

It's very healthy.

And in automotive, I think that we saw a little bit of slowing down in China, which has been a huge engine of growth for us, being well above 20% year-after-year, of growth for our business.

And clearly the China production has got to a level where -- and some government restrictions has tailed that back a little bit, but we've got enough new programs and new products coming out that I'd say we're very confident, with our automotive business, that even if we have moderate, I'd probably predict single-digit, total production in passenger car vehicle growth next year, that we would be above that.

And then, the investment that we're making, commercial vehicles, the off-road truck and bus segment, getting moving with our Cole Hersee acquisition into other geographies and into the channels that we had with Littelfuse products, that we're very confident, I think, in our automotive business.

If I had to pick a number, it would be certainly in the high single-digits if not into the double-digits if I look at next year.

So I think those two segments, very comfortable with.

Great.

Thank you.

That's very helpful.

I just wanted to drill down in that capacity expansion going on in Canada.

I think you said you're going to break ground in the fourth quarter.

Could you just talk a little bit about timing next year?

First, how big of an expansion is this, as far as maybe provide us the framework for some perspective on how big of a production facility this is?

And then second, when does it become full production?

Are we talking the second quarter of next year?

Or second half of next year that this is up to full production?

So, yes.

I believe we're adding probably about -- I think it's in the neighborhood of about 40% to the manufacturing space that we have in that building.

Maybe closer to 50%.

So it's relative to the building we have now, which is a recently expanded building from what we had from when we first bought this business, is -- it's a significant -- it's a significant increase.

I mean, we're -- we talked about this -- and that's in terms of square footage.

I think in terms of doing things with lay-out and those kinds of things, it could certainly provide for significantly more than that in terms of revenue growth.

So we're building a building that we believe can get us to the kinds of numbers that we've indicated, where we said we think this can be a business that gets to $100 million.

Not all of that is going to come out of that Startco building, but certainly some of it is.

Okay.

Great.

Thanks.

And then just one last question on pricing.

You mentioned your price increase in -- on April 1.

Just you -- I wanted to sort of get your thought process on another price increase potential given your raws are still elevated and maybe the appetite for the market maybe isn't the best, but in two to three-year businesses, you are still growing.

So just wondered what your thought process on pricing could be going forward?

Yes, certainly in this environment of higher commodity costs, I mean, we're looking at price increases across all of our business units.

This was a specific price increase across all of our products -- the company price list in our electrical fuse business.

And I think that in this current environment, we're looking at either having copper clauses in some of our products, for example in the high-current MasterFuse product in automotive, where we have copper clauses in there.

Or in general, looking across our products, at potential price increases.

So clearly, clearly, at this level, a commodity cost, there's an expectation for that to happen.

Okay.

Great.

And I'd qualify that a little bit, in the electronics business, for at least the portion of our electronics business, that will be challenging.

But I think we're looking opportunistically where we can push price increases through, certainly, we will be doing that.

Okay.

Great.

Thanks, guys.

Yes.

Thank you.

As a reminder, ladies and gentlemen, if anyone has a question, please press star, one, to queue up.

And your next question comes from the line of Alek Gasiel with Barrington Research.

Please proceed.

Hi, Phil.

Hi, Gordon.

Most of my questions have been answered.

But just kind of getting back to the Selco acquisition, I wondered if you could just provide, maybe, a little bit more details?

I'm assuming it's similar margins to the Startco area.

And just kind of number of employees and anything else you might be able to provide?

And just also curious, then, with this acquisition, is this now going to strum up more additional acquisitions and acceleration.

Or could you just kind of comment on the acquisition environment?

Well, we -- I'll comment on margins first, relative to Startco, the -- as of right now, it's not achieving anywhere near the operating margins that Selco has, but it is -- those -- I -- that Startco has.

Selco's operating margins are quite a bit lower, but it's -- their gross margins actually are higher than Startco.

So, really, the opportunity for us, and we're already working on it, is leveraging sales out of that business.

We think we have a number of products there that we can fairly quickly sell through some of our global channels that we've set up, the same channels that we've set up to sell Startco products.

So we think there's a great opportunity there to sell very high margin products and see a significant increase in operating margin in that business over the next year or two.

So that's -- we didn't buy it for high operating margins.

We bought it for a product that we could -- that has very good margins on it, but we think we can drive much, much higher sales volumes on -- going forward and it has some other synergies with the Startco business as well.

So it's an exciting opportunity, but it's not going to provide us with immediate earnings accretion, if that's the question.

It's going to take -- it's going to take some top-line leverage to really see that earnings accretion start to come through.

And certainly we're looking at, as we said before, we're looking at other opportunities in that space for acquisitions and certainly investing a lot in organic growth in that space as well.

All right.

That's my only question.

Thank you.

And you have a follow-up from the line of Shawn Harrison with Longbow Research.

Please proceed.

Hi.

Hopefully a brief follow-up.

The tax rate for this year, given that it was lower, it doesn't change for the third and fourth quarters versus those 28% to 30% prior expectations?

Yes, I -- Shawn, I would probably say it will be at the low end of that range.

Most likely.

I think that it could -- we could see it creep up a little bit from the numbers that we saw in Q2, but I wouldn't -- I would expect it to be mid to upper 20%s, not -- probably not approaching 30% in the next few quarters.

And I guess the follow-on to that would be the expectation?

I think previously it had been for next year to see a slightly higher tax rate, given that it's lower this year, can it be in the 30%s next year?

Maybe just kind of expectations.

I would say it's probably -- I don't -- I wouldn't expect it to be in the 30%s.

I would expect it to maybe creep up because there are some things that could cause it to do that.

But given where its been so far this year, I think a high 20%s rate is still something that would be a better expectation.

Okay.

Thanks so much.

Sure, Shawn.

And there are no other questions at this time.

So with that, I'd like to turn the call back over to Mr.

Gordon Hunter for closing remarks.

Well, thank you for joining us on today's call and for your questions and comments.

We're at the halfway point of 2011 and we're on track for continued progress for the remainder of the year.

And we look forward to updating you on our progress again next quarter.

As always, we appreciate your interest and support.

Have a good day.

Ladies and gentlemen, that concludes today's conference.

Thank you for participating and you may now disconnect.

Have a great day.