Littelfuse Inc (LFUS) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse second-quarter 2012 conference call.

Today's call is being recorded.

At this time I would now like to 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 2012 conference call.

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

As you saw in the news release, our second-quarter sales were consistent with the guidance we provided in our call last quarter and were within $1 million of last year's record second quarter.

Earnings per share exceeded our guidance for the second quarter, but were below last year's second quarter due to unfavorable currency effects.

As we expected, the inventory correction in the Electronics business is now behind us, as indicated by the strong sequential growth in electronic sales in the second quarter.

Our focus on acquisitions in attractive markets adjacent to our core business is paying off.

Strong sales of commercial vehicle products contributed to the year over year increase in automotive sales along with the recently completed acquisition of Accel and our protection relay and custom electrical products continue to drive the increase in electrical sales.

I'll have more comments on the quarter on each of our business units, but first I will turn the call over to Phil who will give the Safe Harbor statement and a brief summary of the news release.

Thanks, Gordon.

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

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

Sales for the second quarter of 2012 were $175.9 million which was up 10% sequentially and flat year over year.

The strong sequential growth was driven primarily by recovery in the electronics business from the recent inventory correction.

Margins and earnings for the second quarter also increased nicely compared to the first quarter and were above the high end of our guidance.

Operating margin improved from 16.1% in the first quarter to 18.3% in the second quarter due to increased operating leverage and strong operational execution across all businesses.

Earnings per share improved to $1.07 in the second quarter from $0.81 in the first quarter, but were still below second-quarter 2011 earnings of $1.11 due to the effects of the weaker euro.

Operating cash flow increased as expected to $24.7 million in the second quarter compared to $7.9 million in the first quarter as the first quarter was impacted by bonus payouts and pension contributions.

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 review of our three business units.

As always, I will be highlighting the markets, the products and the design wins for each business to give you an overview of the many ways we are benefiting from our broad and deep product portfolio, our growth strategies and strong brand name.

I will also comment on the third-quarter outlook for each business.

Let's start with Electrical which accounted for 20% of total Littelfuse sales in the second quarter.

Electrical sales were $34.9 million for the second quarter, a 25% increase from the second quarter of 2011.

This business continues to be driven by significantly higher sales of protection relays and custom electrical products.

Sales of protection relays were up 51% in the second quarter due in part to the addition of Selco last August.

Sales of custom products increased 59% from last year's second quarter.

As we have discussed in prior calls, the primary markets for our protection relays and custom products are mining, oil and gas, marine and general industrial applications.

Our largest market, mining, has been very strong for some time.

While demand is softening for some commodities due to macroeconomic concerns, global mining companies are projected to increase expenditures in 2012 and 2013 in the categories of health and safety services and equipment according to ICD Research global mining survey.

One bright spot in the mining industry right now is the Canadian potash market, which is expected to have a record year in 2012.

We are well positioned with the leading Canadian potash mining companies and continue to benefit from the growth of the market.

The Australian mining market has been a good source of growth for our protection relay business and sales into this market are up almost 50% over the second quarter of last year.

We continue to invest in our sales efforts for this region and expect our growth to continue as the current wave of new construction projects is completed over the next 18 months.

The oil and gas market is also growing, providing very good opportunities for us.

Oil and gas industry capacity utilization is close to a 10 year high and companies have been investing heavily to expand their production output.

Our protection relay line will benefit from this growth as will our custom products business.

As mentioned last quarter, we opened a sales and engineering office in Western Canada capitalize on the growth of the Canadian Oil Sands market and have been building up the strength of our team.

We are very optimistic about the opportunities ahead in this market.

Looking at custom products, this business produces portable power distribution equipment for heavy-duty environments such as those found in the mining and oil and gas industries.

Second-quarter sales of our custom products were up significantly from the first quarter due to increases in production output.

This was a direct result of our lean initiative in our Saskatoon, Canada plant to further streamline production methods.

We also added new employees at this location.

And as mentioned on prior calls, we are expanding our facility in Saskatoon with an addition that more than doubles our current production capacity for custom products.

The addition is expect to be completed in the fourth quarter.

The expanded capacity will enable us to meet the increasing demand for our custom Electrical products in the mining industry as well as to step up our efforts to our new business into other growing markets such as oil and gas and industrial applications.

One of our strategies for the protection relay and custom product business is international expansion and we continue to add new customers and contracts all across the globe.

An iron ore mine in Brazil specified our ground resistor monitors for the first time, giving us access to other mines in Brazil operated by the same company.

The value of this new order is about $200,000.

We continue to grow our protection relay business in China with a significant order for a leading coal mine.

A noteworthy aspect of this win is that we were selected over competitors offering lower quality and much lower priced relays.

In the growing Australian market we are working with a major mining operation that wants to comply with new mandates that require them to monitor the status of their electrical grounding systems.

We have a product that is designed for this application and we have already secured the first order.

We have several multimillion dollar opportunities around the globe for our Arc-Flash Relay.

These relays detect dangerous electrical arcs 300 times faster than the blink of an eye, greatly reducing the severity of electrical problems that would otherwise harm employees and cause severe damage to equipment.

With a continued focus on safety we are in the right place at the right time with these products.

We received a number of large orders in Canada for our ground fault ground check monitors and accessories from an OEM serving the [I/O] market and from several Canadian distributors.

The total value of these orders is more than $400,000.

So as you can see, our protection relay and custom product business is doing well and there's many good growth opportunities in the pipeline.

Moving on to the core electrical fuse business.

Sales were basically flat for the quarter.

On the positive side, continued solid demand from our industrial fuse customers is enabling our fuse business to remain steady.

The construction market is still down with the latest data from McGraw-Hill indicating that nonresidential contracts put in place through May were down about 16% from last year.

Our sales into the solar market were up 45% compared to last year's second quarter.

The increase was driven by end customer production start-ups for several design wins we mentioned on prior calls along with normal seasonal increases.

Although the overall solar market continues to grow more slowly than expected, we continue to win new business.

The fact that our products are more energy-efficient and globally approved gives us a competitive advantage.

These factors helped us win new business with two key solar OEMs in the second quarter.

The solar OEMs are pushing the technology envelope with more efficient and cost effective designs and our new products are a part of these advancements and position us well for further growth as the market recovers.

Other bright spots for the fuse business in the second quarter include the conversion of a significant regional North American distributor to Littelfuse and sales resulting from a design win with a European telecom equipment manufacturer.

Together these successes are expected to generate more than $1 million in incremental sales over the next year.

In summary, we expect continued growth from our Electrical business.

The base fuse business will continue to be driven by the industrial segment as well as by improvement in the solar segment later in the year.

The drivers for our protection relay and custom electrical products include the continued growth of the mining industry, increased penetration in the oil and gas industry, further international expansion and increased sales of the new Arc-Flash Relay.

All areas of our Electrical businesses are also expected to benefit from the increasing focus on electrical safety including new safety mandates worldwide.

Moving to our Automotive business, second-quarter Automotive sales of $51.5 million were 29% of total Littelfuse sales.

Year over year automotive sales increased 2% in the second quarter.

The increase was driven by strong sales of commercial vehicle products and increased demand in the US, India and Korea.

This was offset by lower sales in Europe which accounts for about 45% of our total passenger car sales and $2 million in currency effects from the weaker euro.

Excluding our commercial vehicle products and the impact of the weaker Europe, our core Automotive sales were off most equal to year's second quarter which was one of the highest in the history of Littelfuse.

Sequentially our second-quarter Automotive sales were down only 2% from the first quarter in spite of the unfavorable effect of the euro.

This compares to a 3% sequential decrease in global car production.

Program wins with Tata Motors in India and Hyundai/Kia in Korea enabled us to outperform the industry.

Our higher sales in the US resulted from increased production by the Big 3 as well as some ramp-up orders for new programs, especially the Ford CD4 program.

CD4 is Ford's next generation of midsize sedans including the Ford Fusion launching with the 2013 models.

The slowdown in Europe in the second quarter continued to reflect lower sales into the Southern European countries where reduced financial power is causing consumers to delay new investments.

This affected virtually all of the OEMs selling into this market from the French and Italian manufacturers to General Motors and Ford.

Only the premiere brands such as Porsche, Audi and BMW that export heavily to Asia and North America are performing well.

We believe this will continue through the second half of the year and, in combination with the weak euro, will present a short-term challenge for our Automotive business.

We had a very solid quarter in Asia.

While Hyundai/Kia, GM and VW are all still growing, the local Chinese manufacturers are in a weaker position.

The Chinese market recovered from the weak first quarter but is still not at the level forecasted in the third quarter of last year.

In response to the slowing economy the Chinese government is expected to allow lower interest rates for consumers and this may result in more new car sales, especially in the fourth quarter.

In India we are in the ramp-up phase of a project for Tata that will generate significant revenue for us.

And in Korea we expect to win more share for our low current fuses.

As a result of these successes we expect the growth of our Asia business to be in the high single digits for 2012.

On a global basis third-quarter car production is forecasted to be down more than 6% from the second quarter, but up 10% in the fourth quarter compared to the third.

In total, global car production for 2012 is now forecasted by LMC to be up about 6% over 2011 with strong recovery by the Japanese OEMs.

During the second quarter we focused on strengthening strategic partnerships with now leading OEM customers.

As most of the car manufacturers move from single car model to global platform development we are leveraging our strong customer relationships and technical expertise to develop concepts and solutions across car lines.

We believe we are well positioned to benefit from this major change in the way cars are produced.

There's another industry trend that also provides good opportunities for Littelfuse.

As more and more car manufacturers move the battery to the trunk and along with this often convert copper cable to aluminum cable we see the need for a new family of fuses that will meet those new technical requirements.

While the new requirements apply to all current fuse ratings, the attention at the moment is on the high current applications that are part of our focused growth area of advanced power systems.

This aluminum wire technology is quickly moving into the mass market providing good growth potential for us, especially for the fuses we develop for starter cable protection.

Other wins for our high current fuse line include a Master fuse win with a growing Tier 1 customer in the US for a Ford car in Brazil and India.

This program launches in 2013 and is expected to generate peak revenues of about $1.3 million.

In Europe we've started the first series of deliveries of a high current fuse array of for the VW MQB platform.

The first launch will be the Audi A3; this is VW's highest volume car platform that is expected to reach up to 2.5 million cars in peak including the VW Golf.

In China we won some additional pre fuse business with a local Tier 1 supplier for VW that is already using this system for other VW platforms.

We won this business from a competitor in Europe because we localized the production in China to help Volkswagen meet its need to increase local content.

This is just one example of how our strategy to locate production close to our customers is giving us a competitive advantage in the marketplace and is helping to drive our top-line growth.

Now let's move on to commercial vehicle products, a growing segment of our Automotive business.

As you may recall from prior calls, CVP is a targeted growth area for us and we significantly expanded with the acquisition of Cole Hersee about a year and a half ago.

Our Cole Hersee products performed very well in the second quarter with sales up 13% from the prior year.

The increase in CVP sales came primarily from the mining equipment business in Australia along with higher sales to our largest customer, Caterpillar.

We also won new ignition switch business with Doosan that is extending our business with Doosan Bobcat into Korea and China and we picked up new business in China for our Littelfuse disconnect products.

From a product perspective our Master disconnect products were the largest contributor to the higher second-quarter CVP sales.

We also saw some growth in our high current solenoid relays.

During the second quarter we released a new 250 amp low-voltage disconnect product called the Compact Magnum.

This new product extends the product line range from 100 amps up to 250 amps but in the same package as the previous 100 amp version.

These low-voltage disconnect products help to eliminate dead batteries by disconnecting noncritical loads when the battery charge is low so that a commercial truck will start when needed.

We expect the new low-voltage disconnect products and our high current solenoid relay product to help us win new business on platforms that will need to adhere to the new Tier 4 environmental requirements.

These strict new rules will apply to all new truck engines as well as engines for construction and agricultural equipment around the world.

Our CVP business had several interesting design wins during the quarter; one is a design in win for several new products with a US company that manufactures self-propelled sprayers for the agricultural sector.

And in China we had design wins for our hardware fuse box with two different construction equipment manufacturers.

One is for a new bulldozer and the other is for new drilling equipment.

Our business also expanded in June with the acquisition of Accel AB based in Sweden with a manufacturing facility in Kaunas, Lithuania.

Accel had 2011 revenues of approximately $22 million.

We were attracted to Accel for several reasons; first it is another step in our strategy to expand beyond circuit protection into adjacent complementary technologies.

In addition, Accel gives us an initial foothold in the growing automotive safety market, a low cost manufacturing base in Eastern Europe and a platform for future acquisitions.

Accel has four product lines; the largest is solar sensors that are sold to customers including GM, Chrysler, Mercedes, Peugeot and Sitra.

Solar sensors which are located on the dashboard give the car's HVAC system information about the amount and direction of sunlight hitting the vehicle so that the HVAC controller can take this into account in maintaining the selected inside temperature.

Accel's seat buckle sensors measure whether the driver and/or passenger are buckled up.

In the case of a crash this information is used by the airbag controller to determine if the airbag should be fully deployed.

Accel also produces steering wheel switches that control various functions such as the radio or phone from the steering will and also water and fuel sensors for diesel fuel injection systems.

Phil and I recently came back from visiting the Accel operations in Lithuania and we continue to be impressed with the company's efficiency of operations, its product offerings and strong customer base.

The acquisition is a good fit for Littelfuse and we look forward to growing the business.

In summary, despite the headwinds of the weaker euro, our Automotive business made good progress in the second quarter.

We have good growth opportunities in the core Automotive business, in the Commercial Vehicle segment and now with Accel.

We believe we will continue to outperform the market as a result of our advanced technologies and strategic positioning, as well as our new products that are on the leading edge of the industry.

That brings us to our Electronics business which accounts for the other half of total Littelfuse sales.

Second quarter Electronics sales of $89.5 million were up 16% sequentially, but were down 9% from the second quarter of last year.

As we indicated in our last call, we reached a low point in channel inventories during the first quarter.

We also said that the worst of the inventory was behind us.

It appears we were correct as there has been no significant increase or decrease in the channel inventory levels compared to the first quarter.

While we saw an improvement in market conditions early in the second quarter, as evidenced by an increase in shipments of our products from our distribution channel partners to end customers, this pattern stalled towards the end of the second quarter.

This resulted in a book to bill ratio of 1.02 for the second quarter.

July was a bit weaker and at this point our book to bill ratio is slightly less than 1.

This is below the numbers we typically see in a normal year when we benefit from a third quarter ramp up for products produced in anticipation of the holiday season.

However, concerns about European region, as well as a slowing in high-growth regions like China, are continuing to create a mixed message from the field.

Looking at some of the key electronics segments you can see why the market is not as robust at this point as it normally is.

Global personal computer sales as reported by IDC were flat in the second quarter compared to the same period last year.

PC growth has been limited by saturation in the mature markets, but is expected to improve during the latter half of the year as a result of the new Ultrabook and reductions and the release of Windows 8.

IDC anticipates that about 25 million Ultrabooks will be sold this year, the majority in the second half.

This compares to less than 1 million sold last year reflecting the improved performance and pricing of these thin lightweight ultra-portable laptops.

These developments combined with the anticipated launch of Windows 8 in the fourth quarter are expected to create new consumer interest in PCs, particularly Ultrabooks.

At this point most PC makers are being cautious in not wanting to be stuck with too much finished goods inventory prior to the Windows 8 release.

As I mentioned a few quarters ago, the Ultrabooks are being designed by the same companies in Taiwan that make the majority of all of the PCs and notebooks in the market that we have strong relationships with the design engineers at these ODMs and OEMs.

Plus we have a broad offering of fuses, PTCs and TVS diodes designed into these products and stand to benefit from the ramp up in sales.

We have talked on several prior calls about the fast-paced growth of the tablet and eReader markets worldwide.

As you may have seen in The Market News, this segment is growing at a rate above 50% right now and is expected to continue to grow at a good pace.

Best estimates today are that about 120 million tablets will be sold in 2012 and this number may grow to 400 million by 2017 according to Display Search.

We are continuing to work with engineers at key OEMs to design in our overcurrent and ESD products into next-generation tablet platforms to protect chargers, battery packs, inverter circuits and data lines.

This activity is expected to deliver about $6 million in revenue from this segment in 2012, nearly double the level of 2011.

Here is where the mixed messages I mentioned earlier come in.

The Ultrabook tablet and eReader drivers I've just talked about support a positive outlook for this segment for the second half of the year.

However, the concerns about the global economy and the slowing of growth in China and other emerging markets could in fact counter this anticipated growth.

And right now we don't have enough clarity around these market dynamics and neither do our channels and, as a result, there is caution in the order rates making third-quarter predictions difficult.

That said, we believe we are well positioned for continued growth in the popular segments of the P&C market when they do occur.

We also continue to win new business in other growing segments and for a wide range of applications.

One of these is LED lighting, which we've discussed on prior calls.

We have numerous wins now for products including A/C line fuses, metal oxide varistors and TVS diodes with the leaders in the retrofit bold market as well as in the commercial luminaire replacement market.

LED lighting is an exciting market opportunity for Littelfuse.

We just brought in a design win for our PICO fuse and a metal oxide varistor in the next-generation LED bulb that will be sold at stores like Home Depot under the EcoSmart brand name.

Our PICO fuse was selected because it gives the designer great flexibility in layout due to its very small footprint.

This single opportunity could add another $800,000 in revenue in 2013.

Our PICO fuse will also be used to protect the battery pack on the newer models of Dyson portable vacuum cleaners.

This illustrates the diverse array of applications that are a good fit for our PICO fuses.

Other design wins in the second quarter include a win for a PTC product at Western Digital in their new model Thunderbolt hard drives that are used in Mac computers.

Or product will be used to protect the data port lines.

And we also designed in one of our overcurrent technologies into the next generation of Xbox.

The growth in wireless infrastructure driven by 4G and LTE deployment continues to present opportunities for our semiconductor and ceramic overvoltage products.

The significant growth in smartphone adoption, increased consumer data usage and the related pressure these trends put on the data communications infrastructure continue to fuel the growth in equipment.

While they carry substantially more data, the 4G cell sizes are typically smaller than the 3G cells and the 4G network base stations are also smaller and more portable.

This puts pressure on component sizes.

We met this challenge by developing a unique smaller surface mounted version of our high-power AK TVS diode.

This new device will allow the protection to be incorporated inside the base station adding value to the application and helping customers to meet their portability and deployment needs.

The new TVS diode product is now shipping to Nokia Siemens Networks with other opportunities in the pipeline.

The projected revenue for our wireless infrastructure segment is over $6 million.

On the production side the final stage of the consolidation of all of our semiconductor manufacturing at our facility in Wuxi, China will take place in the third quarter with the final transfer of TVS diode production to Wuxi and the closing of our facility in Yangmei, Taiwan.

As the center of our semiconductor manufacturing we'll have both labor wafer fabrication and assembly and testing in the same location in Wuxi providing increased efficiency and productivity.

To summarize, Electronics inventory correction is behind us and inventories are at stable levels.

While there are positive drivers for many of our key and emerging markets such as Ultrabooks and LED lighting, the overall outlook for the third quarter is below normal levels.

We are seeing a general lack of confidence compared to the traditional momentum we see at this point in the year.

And as a result we expect our third-quarter Electronic sales to be flat with the second quarter.

So that completes my review of the three business units.

To sum up the quarter, the macroeconomic outlook appears to be one of caution as reflected in all three of our businesses.

In this environment we're continuing to focus on the areas where we have higher growth rates and good opportunities for expansion.

Many of these are areas where we've made strategic acquisitions and have invested in new industry-leading products.

Our investment in the Startco protection relay and custom products business three years ago is paying dividends as these products continue to drive the growth of our Electrical business.

The acquisition of Cole Hersee and now Accel in the Automotive business enable us to enter growth markets adjacent to circuit protection that extend our product portfolio into faster growing markets.

And our new products in the Electronics business, such as our TVS diodes and metal oxide varistors are generating good design wins that add incremental sales to Littelfuse.

The third quarter is typically our strongest quarter, this year however will not be as strong due to all the factors I have discussed.

And while the outlook is not as optimistic for the short-term, long-term we continue to believe we have good growth opportunities through our unparalleled circuit protection expertise, expansion into faster growing markets adjacent to circuit protection and ongoing investments in new products.

Our confidence in our long-term growth potential is reflected in the Board's approval of an 11% increase in the quarterly cash dividend from $0.18 to $0.20 per share.

When we initiated our first cash dividend two years ago we said we would increase the dividend gradually over time, we started with a quarterly cash dividend of $0.15 per share in December 2010 and increased it to $0.18 last September followed by the increase we announce today.

With our strong financial position we can honor our commitment to returning a portion of our free cash to shareholders and pursue strategic acquisitions that will fuel our future growth.

On that positive note I will turn the call over to Phil who will provide the outlook for the third quarter and then we will open the call for questions.

Thanks, Gordon.

The following is our guidance for sales and earnings for the third quarter of 2012 and comments regarding cash flow for the remainder of the year.

Sales for the third quarter are expected to be in the range of $170 million to $180 million; the middle of this range represents 1% growth compared to the prior year.

Earnings for the third quarter are expected to be in the range of $1 to $1.15 per diluted share.

As is typical for our business, we expect operating cash flow to be stronger in the second half of the year than the first half.

We expect capital expenditures to increase significantly over the next few quarters related to capacity expansions in support of our growth initiatives.

Capital expenditures for the year are expected to be approximately $25 million.

This is down from earlier guidance due to several projects starting later than originally anticipated.

This concludes our prepared remarks, now we would like to open it up for questions.

(Operator Instructions).

Peter Lisnic, Robert W. Baird.

This is Josh Chan filling in for Pete.

On your comments about mixed messages in the Electronics business, are you noticing any differences in order patterns by geographic regions?

And then sort of to follow up on that, are you seeing any incremental pricing pressure that you would not normally expect to see?

Hi, Josh, good questions.

No, it is not really much different.

Even though we know there is a macroeconomic weakness in Europe, actually Europe is not performing too badly.

So it is pretty much just caution everywhere I think.

And I think we know that our distribution channels have got inventory levels at the right level.

But they are just not I would say very confident about the near term and they are ordering more cautiously and it is pretty balanced around the world.

And we haven't really seen any change in the pricing environment.

We are not in a situation where there is a downturn and people are really being much more aggressive on pricing -- hasn't really been a change in that.

I'd say it's in a very stable position right now.

All right, that sounds good.

And if we switch gears to the Automotive side, I'm curious on your outlook on the commercial vehicle markets given some of the headwinds that the off-highway equipment manufacturers are facing, if you will.

So is the outlook there still pretty positive for you based on some of the new products that you have?

Well, we've got a very small market share.

The Cole Hersee acquisition, which has turned out to be a very good acquisition, was primarily a North America focused business and didn't really have the channels around the world.

And so, when we look at getting into Asia and places like China and we had a lot of success in Australia, we think about that by getting more coverage and we've got some very good products, very well-designed and being able to get those into channels around the world, that even if the market is not so robust there is really plenty of opportunity to take those products globally.

And I think that is going to help us for quite some time.

Okay.

And then last question is on the automotive margin for the quarter, which was a little bit below the same quarter last year.

Did the acquisition purchase accounting have an impact on that.

What were the drivers behind the margin?

It wouldn't have been acquisition purchase accounting, it would've been almost entirely Euro related.

I think we probably took about a $2 million hit relative to last year because of the change in the euro.

Okay, great.

Thanks for the time, Gordon and Phil.

Shawn Harrison, Longbow Research.

Wanted to just ask I guess on the consolidation of semiconductor manufacturing into China -- what type of potential savings would you realize during the fourth quarter and into 2013 from that move?

Yes, I think -- Shawn, I think a lot of those savings have probably already been realized as we wound down the workforce in Taiwan; we don't have a lot of people left there.

There will be some savings from when we finally exit the facility there and there are some, I would say at this point, a few production people and some administrative people left that will ultimately go off the payroll.

So there will be savings, but I don't think it will -- it won't be a material number.

I mean it could approach $1 million on an annual basis, but I don't think it would be much more than that.

Okay.

And then second, with the Accel acquisition, how much revenue did that contribute?

I think it was $1 million in the second quarter, but how much of that will it contribute into the third quarter?

So, it's a business that is running at about a $20 million run rate.

So if you prorate that it will be in the -- and probably with a little bit of the weakness in Europe at this point I would factor in something like $4 million or $5 million for Q3.

And then, I'm sorry, I missed it -- what did you say, Gordon, Automotive production was for the second quarter globally?

I believe I said it was down 3% from -- sequentially from the first quarter I believe is what I said.

And then final question just on the Electrical business particularly.

Great margins this quarter, back to peak.

Is there much upside as you add capacity in that business or are we kind of at peak operating levels in terms of profitability currently?

I think I wouldn't bake in lot of upside on the margin.

I think the real opportunity there is to continue to drive the top-line and continue to -- if we can continue to execute I think we can continue to deliver kind of mid-20s to maybe even pushing upper 20s operating margins.

But I wouldn't expect it to go a lot higher than that.

We are going to be continuing to reinvest in that business in selling and technical resources.

So I don't -- we are really not going to be focusing on driving that margin incrementally, we are going to be focusing on driving -- continuing to drive the top-line, that is really where the leverage is.

Thanks so much and congratulations on the great results.

Matt Sheerin, Stifel Nicolaus.

Just following up on Shawn's question on the Electrical business, margins have been strong, particularly last quarter.

How much of that is driven by mix because we've got lots of different types of products and customers there versus volumes?

Interesting, the mix doesn't really have much of an impact there because we -- if you look at our various product lines there, the fuse product line, the relay product line, the custom product line, they all deliver margins fairly similar to the range you are seeing there.

So mix typically is not a factor.

There is going to be some variation depending on what specific job shift in the custom business from -- because these are big $100,000 plus jobs and there will be some variation in those jobs in terms of margin.

But overall it shouldn't be much of an impact on mix.

And I think what you have typically seen is those margin seem to be pretty steady in the mid-20s.

That is helpful.

And then in terms of exposure, particularly within the mining business.

I know that the Canadian market and the potash market has been a big driver, but it looks like you have been diversifying.

So what kind of exposure do you have specifically to the Canadian market versus other markets.

I think in total Startco business it's probably about 70% I would guess that is still Canadian.

And we're expanding into all the places I mentioned -- China and Australia.

And I in previous calls talked about Latin America, Brazil, Chile, other mining countries.

But it's still probably our guess about 70% Canada.

And we do think that Canada will continue to be strong and we still invest there, but the share that we have in some of the other parts of the world is relatively small and getting established there in developing customer relationships is really the key factor for us to win market share.

As Gordon said, we have pushed into a lot of newer end markets and new geographies, but with the continued growth and very rapid growth in the Canadian potash business we -- that percentage really has changed a little bit to be a little bit less Canada centric.

But we are growing so fast there it's going to continue to be heavily Canada for a while here.

But as Gordon said, we do -- we are optimistic and we are pleased with the growth we have seen and we expect the non-Canadian piece of that to continue to grow pretty rapidly.

And just lastly, Gordon, on the Electronics business, you talked about obviously cautious stance and we're seeing that across the board from a bunch of suppliers and distributors.

Typically in the December quarter, at least the last two or three years and of course these cycles have not been so typical, but typically you are down a bit in the December quarter and off of a stronger September quarter.

So obviously visibility is limited.

But looking into the December quarter would you expect a normal sequential decline there?

I think it is very hard to say, frankly, at this time.

I think that we certainly are monitoring very carefully distributor inventories and it seems like they are not as enthusiastic as they normally would be this time of year.

So we are not going to see the typical growth in the third quarter and maybe that we don't have a typical decline in the fourth quarter as much I think is just very difficult to say.

Everyone is just being a little bit more cautious looking at end markets.

For sure, fair enough.

Okay, thanks a lot.

John Franzreb, Sidoti.

Regarding the SG&A line, given the acquisition is the current SG&A expense line -- is that a good type of a number to use going forward or are there some kind of one-time items maybe built in that that I should kind of consider one way or the other?

I don't think it is going to change dramatically.

The variations in -- SG&A, we are continuing to make some investments there in some of our growth areas.

I think that certainly, depending on how our performance is for the rest of the year, there is some possibility that the bonus accrual may come down later in the year if the weakness that we are seeing right now continues through the year end.

But I wouldn't anticipate any big changes there.

And surrounding the Accel purchase, getting into adjacent technologies, I guess notably the sensor market, can you talk a little bit about your appetite for continued growth in that market?

It sounds like you are setting up a fundamental platform to be a bigger grower in that product space.

Is that the case or I am just misreading this?

No, that's correct.

I think we have a healthy appetite, I would describe it.

I think what we have seen with Startco in Electrical, which was a very good adjacency, there's quite a lot of similarities in the size of Startco when we acquired it, age of the company.

We've got with Accel a company that is over 20 years old, very good technology, very good engineering capability.

And it took a little time to get the acceleration in the Startco business, but it is now a very healthy part of the Company.

And we added the Selco Arc-Flash relays which complement very well be offering at Startco and so we use Startco as the building of a platform in protection relays and custom products.

And I could see Accel being the same, $20 million company that doesn't really have global reach, it has very good operations in Lithuania and I think we have got a good appetite to look for adjacent sensing products to those products that Accel makes.

And we also believe that with our global reach with our customers, I mean we have a great sales force now in China and Korea that we can take those products into geographies that Accel didn't have the reach for.

So I think it is really the beginning of a platform very much like we did with Startco.

Gordon, aren't the multiples for M&A in the sensor market substantially higher than you would see in the Startco related markets?

John, I think it depends.

I mean if you look at the publicly traded companies that are more or less sensor pure plays, they are certainly trading at higher multiples.

If you look at some of the companies that they have been acquiring, some of smaller companies that they been acquiring, I would say the multiples aren't that much higher than some of the stuff we have been --.

And so, it kind of depends on the size, it depends on how much competition there is obviously.

But I would say generally speaking the sensor business overall -- the sensor market overall probably tends to trade a little bit higher multiple than some of our core markets because the growth is higher.

And one last question, back to the Electrical business.

You had talked a little bit about how well the protection relays are doing and some of your custom products.

I forget the numbers, north of 50%, somewhere in the 60% growth.

What products aren't doing so well that is offsetting some of the seller results?

Do you mean specifically in Electrical or in the Company in general?

In Electrical.

The Electrical, I mean the Electrical -- as Gordon said, the Electrical fuse business which is -- until recently it has been over half the business, now it is a little less than half, that business has been pretty flat for a while because of the weakness in non-residential construction and some of the issues of the challenges that we have had in solar.

So that part of the -- the business has been pretty flat.

So basically we are talking about kind of the Startco products growing 45% to 50% and the fuse business being pretty flat and you net all that out and you are at about a 25% growth rate.

Okay, thanks a lot.

I appreciate it.

Tony Kure, KeyBanc.

Just wanted to tie together the Electrical CapEx spending and then the Electrical growth rate going forward here.

Given that the capacity -- well first, the CapEx, it's fair to assume, as I think we have discussed in the past, mostly around the custom products and the Startco businesses.

So when that is complete -- it sound like that is pushing out a little bit into next year.

But when that is complete by my math over the last six quarters or so the segment overall is growing low teens.

So when this is complete will this actually accelerate that pace or are we getting to such large numbers that double-digit growth wouldn't be in the cards as we move into next year?

First of all, you talk about the CapEx.

Certainly we are -- the Electrical business overall is over a long period of time is going to be a relatively low CapEx business.

It's going to be -- your point is right that we are spending -- I think we are spending, what is it, $6 million or $7 million this year on a building expansion there.

But other than just brick-and-mortar square footage to do assembly for custom products there is not a lot of CapEx needs in that business going forward.

But basically we are providing capacity for pretty far out into the future here with some of the plans and some of the views we have of where that business can go.

But I don't think you are going to see an acceleration in the growth rate.

We are not really being constrained at the moment in any significant way in terms of how fast we are growing because we don't have the square footage.

This is really merely looking out into the future and saying, over the next five, six, seven years, what are we going to need to based on our growth plans here and what we think is possible.

Okay, that's helpful.

I guess with the CapEx higher in the second half and then the expectation that Littelfuse generally has more free cash flow in the second half, do you still think you could get free cash flow ahead of -- above net income in 2012?

I think we said that -- I think we said that the free cash flow was going to be -- I don't know if it will be ahead of net income because of the heavy CapEx this year.

But it is probably going to be -- it's probably going to be approaching net income if it is -- it's going to be a similar order of magnitude, let's put it that way, I would expect.

And then finally on the Electrics side, you mentioned the lean inventory levels at the distribution level and the caution.

But I think you have commented in the past about your visibility into the distribution channel as far as their sales out.

How are those trending and are those kind of hanging in there or has -- has their caution been warranted and we are seeing sales out decline in the third quarter?

Yes, I would say probably best characterized as sort of flat.

It's not that people are concerned that there is a big downturn; we are not in a market that is collapsing by any means.

It is just that normally seasonally we would see distributors are having ordered a lot more expecting production volumes to be going up during the third quarter for the holiday build.

And so, flat is a disappointment compared to the expected good momentum we would have this time of year.

So I think it is sort of characterized by caution and flatness which are not the words we'd normally be using this time of year.

Okay, great.

Thank you.

(Operator Instructions).

Alek Gasiel, Barrington Research.

Most of my questions have been asked.

Just looking at the second half providing expectations on gross and operating margins.

It is going to be largely dependent on how the sales roll up.

The biggest factor affecting that is always going to be operating leverage.

The third-quarter guidance we have with sales and earnings per share being similar to Q2, I think you can assume that operating margins will also be similar to Q2.

But Q4 we are not going to make any predictions at this point yet, it is just too early.

And I noticed something with some of these acquisitions.

Before, a while back it was concentrating on Electronics, then with Startco it was Electrical and now things have kind of been in the automotive -- the Commercial Vehicles segment.

Is there just -- is there a particular strategy or just kind of overall theme on this?

Or do you still see some potential acquisitions in Electronics or -- I don't know if you can provide any color on that.

Yes, I think that's -- provided all the color I think probably the theme has been we have been buying what we call high-quality companies that have got good technology and a good platform for growth.

Probably the thing that characterizes I would say the last five acquisitions, so Concord in Taiwan which was in Electronics, certainly Startco, Selco, Cole Hersee and now Accel.

I'd say the thing with all of those five is they are all private companies in the sort of $20 million range all of which had owners who were getting to an age where they were ready to sell the company, they didn't have a good succession plan, they built a very good company, they built good employees and good technology and they were good adjacent fits for us.

And the plan we had was to be able to take those companies more global and bring in some of our expertise in lean and integrate those companies into our platform.

So I would say the characteristic -- we have looked across all of our markets and the last two were in -- one in Automotive and one in Electrical and then Cole Hersee and Startco.

So I think we continue to look all the time at good acquisitions that are a good fit.

I think the point that was brought up earlier, could we see Accel being the beginning of a platform, I absolutely think that fits the platform as Startco is a platform and we look for things to add on to the Startco success.

So I think it's more looking for very good fits that are well-run companies that have good technology and all of our markets are places where we are continuously looking.

I might have missed this, but on Accel is that revenue primarily from Europe?

Yes.

All right, thank you so much, guys.

At this time we have no further questions.

I will now turn the call back over to Mr. Gordon Hunter.

Well, thank you for joining us on today's call.

We appreciate your interest in Littelfuse and we look forward to talking with you again next quarter.

Have a good day, thank you.

Thank you, ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.