Littelfuse Inc (LFUS) 2018 Q4 法說會逐字稿

Good day, everyone, and welcome to Littelfuse Fourth Quarter 2018 Earnings Conference Call.

Today's call is being recorded.

At this time, I'll turn the call over to the Head of Investor Relations, Trisha Tuntland.

Please go ahead, ma'am.

Good morning, and welcome to the Littelfuse Fourth Quarter 2018 Earnings Conference Call.

With me today are Dave Heinzmann, President and CEO; and Meenal Sethna, Executive Vice President and CFO.

This morning, we'll report results for our fourth quarter and fiscal year 2018, and a copy of our earnings release is available in the Investor Relations section of our website.

A webcast of today's conference call will also be available on our website.

Our discussions today will include forward-looking statements.

These forward-looking statements may involve significant risks and uncertainties.

Please review today's press release and our Form 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations.

We assume no obligation to update any of this forward-looking information.

Also, our remarks today refer to non-GAAP financial measures.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available in the Investor Relations section of our website.

I will now turn the call over to Dave.

Thank you, Trisha.

Good morning, and thanks for joining us today.

Littelfuse had an exceptional year in 2018, despite softening demand in the fourth quarter.

Fourth quarter revenue of $402 million was up 32% compared to last year.

Organic revenue growth for the quarter was up 4%.

Full year 2018 revenue grew 41%, with organic sales growth of 8% and adjusted EPS growth of 22%.

For the year, we generated nearly $260 million in free cash flow, a record for the company, and returned 40% of our free cash to shareholders through dividends and share repurchases.

These results reflect a strong execution of our strategy.

During the year, we made significant progress integrating the company's largest acquisition, IXYS Corporation, and are seeing the benefits of our expanded portfolio in combined global team.

Across our segments, we captured many strategic wins in our target end markets.

We remain confident that our leading technologies, global footprint, close customer relationships and talented associates position us for continued content growth in excess of the markets we serve.

Before we go into further detail on the results, I want to talk about our growth strategy and the progress we've made.

At our Analyst Day, 2 years ago, we introduced our updated 5-year strategy, centered on the long-term fundamental growth drivers of a safer, greener and more connected world.

These global trends are driving the increasing electronification and electrification of everything from Internet-connected devices to factory automation, full electric vehicles to more sophisticated appliances.

These trends will continue to increase content opportunities across the end markets we serve.

Continued growth in all these areas leverages our product portfolio centered around circuit protection, power control and sensing.

These long-term secular growth trends are key enablers for the goals and long-term guidance we communicated in 2016.

Our top line growth target includes average annual organic growth of 5% to 7% and average annual growth through strategic acquisitions of 5% to 7%, coupled with sustained profitability from double-digit earnings growth.

Expected free cash generation, in excess of net income, allows us to balance reinvestment in a business along with return of capital to shareholders.

These metrics provide a clear road map that we use to measure our progress and we have exceeded these metrics to date.

Two years into our strategy, our annual revenue growth has averaged 28%, with organic revenue growth of 8%, driving an adjusted annual earnings growth of 23%.

Our free cash flow has been well in excess of net income, and we've returned 30% of free cash flow to shareholders through dividends and share repurchases over those 2 years.

We have demonstrated solid execution against each of these metrics, and with our performance, we are well underway to achieving our 5-year growth target.

We expect continued growth in 2019, though slower, given softer market conditions driven by global trade tensions, slower economic growth in China and softer global auto demand.

The secular content trends remained strong and will enable us to focus on content growth beyond end-market growth.

Strategic M&A has been an important part of our growth over the last decade.

Over the past 2 years, we've made tremendous progress executing our acquisition strategy.

In 2017, we acquired US Sensor, further expanding our platform into temperature sensors.

A key part of our strategy is accelerating growth in power control.

In 2018, we took a major step forward expanding our power control technology platform with the acquisition of IXYS, a $340 million power semiconductor company and the largest acquisition in our company's history.

In our first year, we grew that business to $390 million in annualized revenue, as we focused on serving customer needs across a strong industrial electronics market.

In addition, we continue to focus on innovation, including our investment in silicon carbide.

Over the long term, we believe silicon carbide will be an important tool in helping us solve complex problems for our customers.

Growth through acquisition remains a key part of our strategy, which is enabled by the strength and flexibility of our strong balance sheet.

We'll continue to be active on the M&A front.

Currently, when we look at our existing portfolio, we see potential acquisition opportunities across the vast majority of our business.

Based on our M&A playbook, we closely examine strategic fit to ensure potential opportunities aligned with our M&A criteria of core consolidation, technology or platform building, geographic expansion and in-market access.

We continue to have an active pipeline of opportunities.

And when the right opportunity fits our strategic and financial profile, we'll move forward.

In 2018, we continued to evaluate and implement several portfolio rationalization action.

We exited the custom business within our industrial segment and also exited a few nonstrategic businesses from the IXYS portfolio.

These actions will reduce our overall growth rate by about 1% for 2019, but will drive better alignment with our long-term growth strategy, reduce costs and improve efficiencies.

As a manufacturer, our overall strategy is built upon a strong foundation of execution and operational excellence.

In 2018, we made great strides on our continuous improvement journey, advancing the deployment of our lean operating system.

We are making excellent progress driving our lean and Six Sigma culture across the enterprise.

In 2018, our Philippines site was recognized by the Association for Manufacturing Excellence.

This follows AME awards for 3 of our facilities in China.

The sustained recognition over a number of years is a testament to the commitment of our teams and the ongoing efforts to drive continuous improvement across our operations.

Operational excellence has been and will continue to be a foundation element of our success.

With that introduction, I'll turn the call over to Meenal to provide additional color on our financial results.

Thanks, Dave, and good morning, everyone.

Let me start with some highlights from our fourth quarter of 2018.

We finished the year with sales in the fourth quarter of $402 million, up 32% on a reported basis over last year and up 4% organically.

Sales growth is below our guidance due to weaker end market demand across both our electronics and automotive segments.

Within our legacy electronics businesses, we saw softer-than-expected demand patterns across China as well as in electronics products we sell into automotive end markets.

We saw similar declines in demand across our IXYS business, which grew 4% over last year in the quarter.

Across automotive, while market forecasts had estimated a 1% decline in global auto production, auto builds were down 4% and notably down 13% in China.

This had an unfavorable impact on our expected automotive sales for the quarter.

Foreign exchange also reduced our sales growth to 1% over last year due to the weaker euro and Chinese RMB.

For the year, sales finished at $1.72 billion with a reported growth of 41%.

Organic sales growth was 8%, finishing ahead of our target business model of 5% to 7% organic growth.

GAAP operating margins finished at 12.8%, while our adjusted operating margins were 15.1% for the quarter.

The lower sales volume and associated expense leverage unfavorably impacted our margins.

During the quarter, we also incurred some higher-than-expected inventory obsolescence charges related to our IXYS business.

For the year, GAAP operating margins were 13.1%.

Adjusted operating margins were 18.3%, well within our targeted margin range of 17% to 19% and are testament to our continued focus on profitable growth.

Fourth quarter GAAP diluted EPS was $1.29.

GAAP EPS included $15 million in after-tax charges, mainly due to purchase accounting and integration charges associated with the acquisition of the IXYS business and nonoperating foreign exchange losses.

Adjusted diluted EPS of $1.87 for the quarter was below our guidance, largely due to the lower sales volume and inventory obsolescence charges noted earlier.

We also incurred some unplanned costs related to unfavorable mark-to-market of nonoperating equity investments and charges related to foreign pension plans equivalent to $0.05 in EPS.

This was partially offset by an adjusted effective tax rate that was favorable to our guidance.

Our GAAP effective tax rate was 17.9% for the quarter.

Our adjusted effective tax rate of 14.6% was lower than expected due to the receipt of a foreign tax holiday late in the fourth quarter, which was retroactive for the full year of 2018.

For the year, GAAP diluted EPS of $6.52 increased 25% versus the prior year.

Adjusted diluted EPS was $9.44, an increase of 22% versus the prior year and well within our target business model of double-digit EPS growth.

For the year, our GAAP effective tax rate was 19.7% and our adjusted effective tax rate was 18.9%.

Let me provide some additional performance highlights by segment for the fourth quarter and full year.

Electronics operating margin for the quarter was 18.1% and 21.5% for the year.

Margins trailed behind last year in both periods as the acquired IXYS business margins are lower than the legacy electronics segment.

Margins were also unfavorably impacted by the higher inventory obsolescences charges in our IXYS business I mentioned earlier.

Auto operating margins finished at 8.9% and 11.5% for the quarter and the year, respectively.

The fourth quarter decline in volume contributed to unfavorable leverage.

And also, as we mentioned previously, we're launching several new products and technologies across our auto sensor business.

We're dedicating additional resources to ensure successful launches.

Along with higher cost from production inefficiencies, this has impacted profitability in the short term.

During the fourth quarter, we took some cost-reduction actions within this business and expect profitability improvements in the upcoming quarter.

Our industrial segment achieved a 12.3% and 15.2% operating margin for the quarter and full year, respectively.

During the fourth quarter, sales were down due to the custom business exit in 2018, and we incurred costs from the manufacturing move of a product line impacting profitability.

The 500 basis point improvement in the full year margin reflects the improved end market and 2017 profitability actions implemented in the business.

Looking at cash flow.

We generated $80 million in operating cash flow for the quarter and $61 million in free cash flow.

We finished the year with $332 million in operating cash flow and $257 million in free cash flow, both company records.

Free cash flow conversion as a percentage of net income was well over 100%, enabling us to fund growth initiatives with cash on hand.

Our capital structure remains well positioned to achieve our strategy.

We repatriated $175 million in cash during 2018, limiting the need to take on additional debt.

We ended the quarter at 1.7x on a gross-debt-to-EBITDA basis and well under 1.0x on our net leverage.

During the fourth quarter, we repurchased approximately 392,000 shares at an average of $173 per share.

After the end of the fourth quarter, we repurchased an additional 67,000 shares, totaling $80 million in purchases across both periods.

Our buyback philosophy remains unchanged, and we will opportunistically buy back shares, especially when we believe our valuation is attractive.

Our capital allocation philosophy balances our focus on acquisitions as well as return of capital to our shareholders.

Over the past 2 years, we generated $460 million in free cash flow.

We've returned nearly 30% of cash generated for our shareholders through dividends and share repurchases, while continuing to invest in both organic and inorganic growth opportunities across the business.

In summary, we're pleased with our 2018 performance.

Two years into our updated strategy, we're on track to meet or beat all of our financial goals.

We continue to grow profitably and driving cash flow generation.

We're strategically deploying our capital to meet our growth objectives and return additional value to our shareholders.

We remain confident in our ability to build upon our performance to date to achieve our long-term growth strategy.

And with that, I'll turn it back to Dave for more color on business performance and market trends.

Thanks, Meenal.

We'll start with electronics segment.

In the fourth quarter, sales of $264 million were up 62%, a 7% organic growth.

Despite some softness in the fourth quarter, full year sales were $1.1 billion, up 70% versus last year, led by the addition of IXYS.

Organic growth was 11% for the year.

As we mentioned on our call at the end of October, we started seeing slowing order rates for Passives early in the fourth quarter.

Softness progressed through December as distributors began to rebalance their inventories in response to flattening demand.

Our electronics book-to-bill exited the fourth quarter -- exiting the fourth quarter was below 1.0.

We carefully monitor distributor point-of-sales data and inventory levels.

As we exited the fourth quarter, channel inventories were running higher than ideal, which is typically about 11 weeks to 14 weeks.

And we continue to see softening in broad line distributor demand, where their book-to-bill for our products is just below 1.0.

Looking ahead for electronics, we expect some continued softness in the first half of the year because of slowing Chinese economic growth as well as elevated inventory levels.

Turning to the new business front.

In our electronics segment, we continue to see strong broad-based design win activity from appliances, automotive electronics, building automation, to data center, cloud infrastructure, LED lighting and transportation.

We secured new design wins throughout the year as we continue to grow our electronics content across our Protect Control and Sense product portfolio.

The addition of the IXYS portfolio and leveraging their presence with industrial customers provided great growth in 2018 and will continue to present new opportunities for the future.

From heavy industrial to transportation and medical devices, we secured design wins across a wide range of applications.

January marked the 1 year anniversary of the IXYS acquisition.

We have welcomed the dedicated team of talented people to Littelfuse and are seeing excellent progress in our integration efforts as we work together as one team.

Cross-functional teams have been working together to combine processes and systems across the company.

We have integrated our sales organization and R&D teams to provide superior products and outstanding customer support.

With our expanded portfolio and our strong reputation with industrial OEMs, we remain bullish on the long-term synergy opportunities.

We took several IXYS-related portfolio actions in 2018, as we conducted a strategic review of the portfolio and made decisions to exit certain noncore or underperforming assets.

As I mentioned earlier, we acquired a $340 million business with significant focus in 2018 on maximizing business potential.

We successfully grew that to $390 million.

We achieved approximately $0.20 of accretion in 2018, well ahead of our expectations at the start of the year.

Our first-year synergy targets are ahead of plan.

With the focus on serving customers to maximize growth, we delayed some manufacturing and supply chain activities that will yield additional synergies.

These are complex, and in some cases, multiyear projects that will push our $30 million run rate synergy target into 2020.

While there's more work ahead of us, the strategic bit of the IXYS business is creating real value for our customers and shareholders.

As I wrap up the electronics segment, despite some near-term headwinds, the increasing electronification and electrification in the end markets we serve, remains a fundamental long-term growth driver for the business.

As customers continue developing safer, greener and more connected product, we are well positioned to deliver the technologies and solutions our customers need to be successful.

Next, I'll cover our automotive segment.

In the fourth quarter, sales of $112 million were down 3% as reported and down 1% organically on a global auto production decline of 4%.

Our growth in North America was more than offset by softness in Asia and Europe.

Our automotive segment saw full year sales of $480 million, up 6% as reported and up 4% organically versus last year on a small decline in global auto production.

Our ability to grow in excess of global auto production reinforces our content growth progress.

Despite some of the more macro-level headwinds that we have discussed previously, WLTP in Europe and significant softness in China, the trend towards safer, greener and more connected vehicles continues to be a growth driver that supports our content story.

Throughout the year, we had great design win progress across the passenger car market.

Our circuit protection technologies, combined with our wide range of innovative automotive sensors, enable today's sophisticated cars to deliver continued advancements in safety, efficiency, comfort and convenience.

As vehicle electrification momentum continues with 48-volt systems, hybrids and full EVs, we are well positioned for meaningful content opportunities well into the future.

Our commercial vehicle business continues to have success gaining new design wins across heavy-duty truck, agricultural equipment and construction machinery end markets.

Material handling remains a growth market.

We're seeing good traction as we secured a number of design wins during the year with forklift manufacturers.

Looking ahead to 2019 for the automotive segment, there are varying external industry forecasts predicting global auto production.

Our current view is we expect global auto production in 2019 to be down low single digits with particular weakness in the first half of the year.

As we've demonstrated in recent years, our automotive business is well positioned to grow content per vehicle beyond global auto production as the auto industry continues to produce safer, greener and more connected vehicles.

In addition, we believe our CVP end markets will continue to grow in 2019.

Finally, we will cover our industrial segment.

In the fourth quarter, sales of $26 million were down 3% due to the exit of the custom business in 2018.

Organic revenue for the quarter was up 11%.

Strong growth in Asia and Europe complemented solid organic growth in North America.

For the year, we had strong sales of $114 million, up 8% versus 2017, with organic growth of 13%.

We made great progress in 2018 expanding the presence in our industrial product portfolio across our electronics distribution channel.

We saw good design wins for data center, solar and energy storage projects during the year.

Our growth in electric vehicles has generated new design win activity for products within our electronic and automotive segments.

That momentum has also driven growth in our industrial segment, as many of our products play key roles in EV charging infrastructure.

We continue to see stable demand in the global mining industry and oil and gas markets.

With that, I'll turn the call over to Meenal to talk about guidance.

Thanks, Dave.

Let's move on to our guidance.

As Dave mentioned, we see the muted demand environment continuing into the beginning of 2019, mainly impacting our electronics and automotive segments.

Across electronics, our book-to-bill continues to run below 1.0, with impacts in the global trade environment and slower China economy.

We also expect the continuation of the inventory rebalancing by our channel partners, largely across North America and Asia.

Given current indications, we expect this to continue through the first half of the year.

The lower global auto demand has slowed growth across all products we sell into the automotive end markets.

While external market sources point to a slight car production growth for 2019, our assumption is a 2% to 4% global auto production decline for the year with a greater decline in the first half of the year.

Given these factors, we anticipate sales for the first quarter of 2019 of $404 million to $416 million.

The midpoint of the guidance reflects a 2% decline in reported sales and a 4% organic sales decline versus the prior year.

We expect first quarter adjusted earnings per diluted share to be in the range of $1.86 to $2.

The EPS guidance assumes an adjusted effective tax rate in the range of 19% to 21% for the quarter.

On a year-over-year basis, we have a $0.10 drag on EPS from several items below operating income due to a mark-to-market benefit in the first quarter of last year, a higher tax rate and share dilution versus this quarter last year.

We are currently estimating 25 million in diluted shares for the first quarter, which incorporates the shares that we bought back to date.

A few additional comments on our first quarter forecast and beyond.

During 2019, we are undertaking several manufacturing and supply chain infrastructure activities, primarily related to various acquisitions over the past few years.

We mentioned that we had started work on IXYS activities in this area, and we'll have more details in the coming quarters.

We're also in the midst of the product manufacturing transfer related to the ON product portfolio that we purchased in late 2016.

We just started the transition for automotive products.

With any sizable manufacturing transfer, it suboptimizes our footprint and manufacturing efficiency in the near term, leading to some gross profit pressures, but optimizing gross margins long term.

While we have multiple infrastructure activities planned for 2019, the majority of these activities will be in our electronics segment.

Recognizing the near-term challenging end market dynamics, we have implemented short-term cost containment measures beyond our typical cost-reduction initiatives across our businesses.

We expect stabilizing end market dynamics in the back half of the year will lead to improved financial performance.

We will continue to keep a close eye on the market dynamics and will adjust our spending in other activities as needed.

For the full year, a few additional financial model updates.

Currencies have been favorable for the past few years, providing a tailwind to both revenue and profit.

With the shift in our basket of currencies, we're now expecting an unfavorable impact to revenue and a neutral bottom line impact for 2019.

We are estimating interest expense for the year in the range of $21 million to $22 million.

And we're projecting amortization expense of approximately $40 million for the year.

Our full year 2019 tax rate range is projected to be 18% to 20%, but the rate within individual quarters may vary due to the timing of certain discrete tax items.

During 2019, we expect to spend $90 million to $95 million in capital expenditure.

This level of investment will support the growth we continue to see across both organic opportunities as well as further integration activity for the IXYS business.

With our strong track record of free cash flow generation, we expect to continue our cash repatriation activities in 2019, and we will provide additional details in the coming months.

We're well positioned to deploy our capital for ongoing growth initiatives as well as return of capital to shareholders.

And with that, I'll turn it back over to Dave for some final comments.

Thanks, Meenal.

In summary, 2018 was a great year, and we made significant progress across our business segments.

We continue to execute our strategy.

Looking ahead with today's volatile macro environment, we expect to see continued softness in the first half of 2019.

However, the fundamentals of growth in our business remain sound.

We remain confident that the continued momentum towards a safer, greener and more connected world will provide increased content opportunities across our portfolio.

On that note, I just wanted to thank our Littelfuse associates around the globe for their commitment in 2018, and I look forward to their contributions in 2019 and beyond, as we create additional value for our customers and shareholders.

With that, we'll open the call for questions.

(Operator Instructions) And our first question comes from Christopher Glynn from Oppenheimer.

Just talking about the electronics profitability.

With the IXYS integration, sounds like a small deferral in synergies, but as you do make some progress, would you expect the electronics margins to expand a little bit for the full year 2019 or -- otherwise complexion if not a specific answer?

So I would say, it depends on the comparison date you're looking at.

I'd say, overall, as I think, in general, how I think about 2019 electronics margins, I would say, yes, we'll continue to see improvement due to IXYS synergies.

But at the same time, I've been mentioning for the past couple of years that we've had some positive tailwinds coming through in our electronics margins that we think have been a little more transitory, one being around currencies.

And I just mentioned that we think currencies will be more neutral which is where we fit today.

And secondly, as the market settles down, we've seen much less price erosion than we've typically seen in the past few years.

So I'd say, net-net, when you factor all those in, I wouldn't expect to see any significant increase in year-over-year margins versus where we've been in '18.

Okay.

And switching to auto, in the past, you've talked about a mid-teens operating margin target.

Just wondered what it takes to get those in gear?

And to what extent you need to maybe qualify that target, or at least in terms of what's plausible in the next couple of years?

Yes.

So our target margin for automotive is unchanged, and we still talk about mid-teens.

I would say, the -- in the near term, the lower levels of volumes have definitely hampered our margins.

As we think about the -- in our automotive business, the fixed cost is higher than we've seen through the other businesses because of some of the more customized equipment, et cetera, that we have for different platforms and different initiatives across the business.

Having said that, we do need to see some pickup back in the volume range that we've been seeing, I'd say, that's one.

But secondly, we've started talking about, I mentioned in my comments that we've taken some cost-reduction actions in our Sensor business.

I also mentioned some manufacturing footprint activities that we're looking at, some of which will include our automotive business.

So those are some pieces that we're looking at both in the short and the longer term.

Okay.

And then lastly, just capital allocation.

Looking back, this is the kind of most significant little burst of share repurchase that we can track.

Just wondering what the bias is there going forward?

What's the authorization?

And how actionable do you think the deal funnel looks today?

Sure.

Let me talk -- I'll talk a little bit about the share buyback and maybe let Dave comment a little more on the pipeline right now.

So maybe just setting the stage here, our share authorization, which is effective through April 30 of this year, is for 1 million shares.

To date, under that authorization, we repurchased a little over 450,000 shares, so we've got about 550,000 shares that, in theory, we could buy as well.

We've always talked about our philosophy that we're not the company that has a regular program that we put in place where we're buying back a set amount every quarter but more looking at things opportunistically.

I would say, for us, the opportunistic pieces in the past few quarters have been: a, with the market in a lot of the fluctuations that it's been, we've seen our share price dip quite a bit on some days, and so we've taken that opportunity to buy back our shares where we feel they've been pretty undervalued.

And then secondly, with all the strong cash generation we had, even balancing that with our acquisitions funnel, we thought that we had the cash on the balance sheet, didn't have to take on additional debt for it, that we could go buy shares.

I would also say one of the things that we looked at, as I mentioned, that we bought back shares in the low $1.70s was the average price.

And we had -- when we issued shares back to the IXYS deal about a year ago, it was really based on a value of the low $1.80s.

So that was also a breakpoint that we were looking at as we thought about share buybacks.

On the acquisition front, Chris, I -- what I'd say is, as always, acquisitions are going to be lumpy.

Our funnel continues to be quite healthy and a great deal of optionality really across our businesses and technologies and markets that we're looking at.

So lot of activity there.

Certainly, we continue to make sure they meet first the strategic threshold that we're looking for and followed by the financial return on that.

So certainly expect that we'll be doing more acquisitions in the coming months and years.

So we continue to be a pretty full funnel.

And our next question comes from Matt Sheerin from Stifel.

Just a question to Dave, just regarding your outlook for the year.

I think in your earlier comments, you talked about looking forward to some growth this year in -- for the overall business.

And if you look at, obviously, starting at a lower base here.

It sounds like electronics is going to go through at least a 2-quarter correction.

And so I guess, the question is, I mean, are you still confident that you can grow both businesses this year?

And then -- and obviously, it will be more back-end loaded.

And then the same thing for EPS because of some of the margins, headwinds that you talked about in both businesses?

Sure.

Yes, I know, great question, Matt.

And certainly, it's kind of our expectations, the early part of the year and the first half of the year is going to be a little bumpy.

And clearly, there is inventory in the channel at the bulk of the range, that our channel partners would like to see in the electronics world.

And with kind of their demands flattening, end markets -- we're not seeing their end markets declining.

They're really flattening instead of the spectacular growth they have kind of seen over the last couple of years.

That's really driving them to correct a little bit in their inventory position.

Typical for us, that's going to take a couple of quarters to kind of work our way through.

So we do expect that to drag on growth in electronics.

Global car build, our view -- and there's a lot of views on this.

If you look at the market data, it's more favorable than this, but we talk to our peers, we talk to our customers, I think our outlook of actually a decline of 2% to 4% in global car build, it's probably a better planning place for us to work around, and that's certainly worse than that in the first half of the year.

So we expect first half of the year to be a little bumpy, certainly on the growth side.

And that does translate to some of our EPS performance.

But unless end market demands degrade from what we're seeing today, we do expect that the back half of the year to see improvement, both in growth of the business but certainly in the profitability of the business as well.

And we feel confident in improving margins and EPS in the back half of the year as long as there's not some additional bad news in the end market.

And on the IXYS, it sounds like you're pushing out some of the restructuring activities and capacity plans.

Do you expect, though, to see -- still have incremental accretion in the business this year from IXYS?

Yes.

On the IXYS synergies, we kind of laid out -- we said we would be at a run rate at the end of 2019 of $30 million of synergies.

In the plan we laid out from synergy actions, we're actually at the end of 2018 -- we're ahead of our timing plan.

However, really strong demands in the course of 2018, and we made strategic decisions that the return for us and our shareholders in the long term was certainly better for us to optimize the opportunity to take advantage of that, which really fell through in better accretion than we have planned in 2018; that'll flow though into 2019.

And when I say we made those decisions to push out, it's pushing out a couple of quarters.

It's not pushing it out dramatically.

We're still highly confident in getting $30 million plus in synergies out of the business.

And certainly, expect that accretion will continue to improve in IXYS through the course of 2019.

Okay.

Great.

And just last quick, regarding your book-to-bill commentary, you said it was below 1. I think last quarter it was 0.91 in the electronics.

Could you tell us what the number was?

Yes.

If you remember, last quarter, I talked a little bit about the fact that the book-to-bill data, it's getting a little less crisp for us.

And that's really driven by a few things: one is, our customer base has shifted particularly to IXYS through the higher mix of direct customers versus distribution.

They order in different ways, many times with scheduling agreements as opposed to orders -- booked orders as such.

Also, automotive electronics, which has now become somewhere in that 10% range of our electronics business, they also do scheduling agreements.

They don't do standard booking.

So those things kind of add complexity to it.

And then we've also had a couple of our -- particularly one of our larger distribution partners who has changed their ordering strategies through the course -- and by the way, they changed 3 times during the fourth quarter in how they were placing orders.

So our book-to-bill from day-to-day, week-to-week within the fourth quarter was all over the math.

So what I think we'd say is our best view of that is it's between 0.9 and 1. So it's not terrible but it's certainly below we would normally see kind of going into the first quarter.

And that's why we really didn't quote a number because the mathematical number was not very helpful because of the volatility.

And our next question comes from Steven Fox from Cross Research.

A few inventory questions to start off.

First of all, did you disclose the inventory obsolescence charge?

How much it hit gross margins in the quarter?

I didn't specifically, but for overall electronics margins, it was about a 50 basis point impact for the quarter.

And what does that say going forward about possible other obsolescence charges?

You think you've cleaned up the IXYS balance sheet?

Or could there be others?

So I would say, in the fourth quarter, there were a few things that were going on.

One, you heard in some of Dave's earlier comments that we did some workarounds in business exits, so there was some inventory obsolescence charges related to some of these exists and transitions.

Secondly, we don't talk about every single product line transfer that we do, but we actually, in 2018, we did a few IXYS product line transfers.

And any time you do that, there's typically some inventory obsolescence there, and so that was part of it.

And third, with the higher demand that we were seeing in 2018, we were expecting to sell various inventory that we had.

We worked on that, sold some of it.

But by the end of 2018, especially as we started to see a little bit of the demand slow down, we took an obsolescence charge.

I think most of it is behind us.

There might be, again, with some of these demand patterns, a little bit more to go.

And/or as we continue to have manufacturing and supply chain infrastructure changes, there may be some related to that, but I'd say the set of issues that happened in the fourth quarter are gone.

That's helpful.

And then just one -- sorry, one more inventory question.

If you look big picture now, your total inventories, and Dave, you were talking about distributor inventories also being high, which some of your distributors are not [in sync through] at this point.

But your inventories have gone up 2 quarters in a row, while your sales have gone down.

When you think about that versus what's going on in the channel, like how do we think going forward for the first half?

Or what you have to do to manage your inventories and like what could that be, in terms of just the natural impact on gross margins?

And then I had one more, if I could?

Yes.

So maybe just some comments on inventory, in general.

As some of the split sales have slowed down and I'd say even in the fourth quarter where we were a little more surprised by the magnitude of the slowdown, we set up our plant and our scheduling to meet what we expect to see ordering come in.

And with the order slowdown that really happened in the back end of the fourth quarter, we'd say we were left with some extra inventory there higher than we thought, which unfortunately that happens when you start to see some of these demand pattern changes.

Having said that, definitely, some of the opportunities for us around inventory are absolutely within the IXYS space, and we've talked about that.

What we've also said is, we really need to undertake some of this manufacturing supply chain infrastructure changes to really go after that because that's really, as you take a look at -- [despite] the number of locations internally and externally that we're manufacturing, that's really what drives a lot of the inventory level.

So I would say that will -- similar to the projects themselves, it will take some time to go through that, but it's absolutely on our list of, what I'd say, outside of the $30 million cost synergies, other cash synergies that we're expecting to drive in the business.

Great.

That's great detail.

I appreciate that.

And then just lastly, from a content standpoint, on the auto side, I mean, obviously, the production slowdown has been discussed a lot by Wall Street.

If you think about how your average content above production is going, if you look at the auto segment plus the auto/electronics stuff, like, can you give us a either qualified or quantified number -- how much you're sort of outperforming?

And what the biggest drivers would be for that?

Yes.

What I would say is, in the long term, what we laid out is in our automotive business, we expect organic growth to be in that kind of range of 7% plus from an organic growth standpoint.

That's based on assuming about a 2% car build or so, and obviously, car build is not that today, right at this point in time.

But overall, we expect a content increase in that range of 4% or 5% sort of content increase across those applications.

What can happen within quarters, and things like that, it's not a perfect mix in that way.

So for instance, in North America and Europe, heavily we sell directly to the Tier 1. In Asia, because of the structure of the supply chain, often we actually sell through a distributor to the Tier 1. And still there's a little more inventory in the channel in a China environment than there's in the western world.

And so when things drop off, maybe there's channel inventories that they work through and carry a little heavier inventory that way.

So it's not a perfect quarter-to-quarter, but that's the range we see.

We still see that and still feel pretty good about that content story.

And our next question comes from Shawn Harrison from Longbow Research.

Just, I guess, a clarification on the auto business right now.

As you exited 2018, what is the mix of CVP versus your traditional auto circuit protection versus the sensing business, just in kind of rough percentages, right now?

Yes, kind of rough percentages, we don't report those independently on that, but we have shared in the past that kind of the passenger car circuit protection piece in the automotive segment is about half of the revenues.

And then between CVP as well as our sensor business, it's closer to 25% to 30% on the -- kind of 25% split between those 2.

Okay.

Perfect.

I know January is never a good month to make a trend in the electronics business, just given holidays and Chinese New Year buying.

But is the activity on kind of a pure demand basis continued to decelerate?

Or are you seeing some stabilization in trends?

And then on the inventory side, I'm guessing you're still seeing that being pulled out of the system here in the new year?

Yes.

What I would say is, of course, early in the year and kind of looking at the electronics space, there's always a little noise around Chinese New Year and things like that.

What I would say, because of the fundamental slowness in the Chinese electronics market, we didn't see a lot of pull-in that we typically would see heading into Chinese New Year.

Certainly, there are some of those smaller factories certainly in the south that are -- have shut down for longer periods than they normally would for Chinese New Year.

So that demand drag in the Chinese market, certainly, is impacting order rates coming into us.

Overall, I would say, North America and Europe and the rest of the world, still kind of hanging in there from end market demand.

We don't see huge negative news there.

It is -- kind of growth has flattened, maybe stabilized.

But the end market side, we don't see that being particularly negative at this point in time.

Clearly, some of our distribution partners are rebalancing inventory.

Okay.

Great.

And then, Meenal, on the CapEx growth into 2019.

Is most of that associated with bringing the former ON business in-house and some of the IXYS migration?

Or maybe where is the additional CapEx going in 2019?

Yes.

I'd say a couple of things.

So as it specifically relates to the ON business, the bulk of the spending we actually did in '17 and '18.

We had to get everything ready to then start moving everything in.

I'd say, for '19, definitely, a lot of activity is starting as it relates to the IXYS as we -- I talked about some of these manufacturing supply chain infrastructure pieces; I'd say, IXYS related, we've got some activities there.

And then just, in general, even though we're seeing growth has slowed down, maybe even flattened a little bit, we're still at more elevated levels than we were 2 years go.

So in some cases, we're still adding in capacity relating to the new volume levels that we're at.

We've seen that in -- both in automotive as well as across electronics.

So, in general, that's where those are.

Okay.

Then lastly, if I may, the industrial business, the growth has been fantastic for the past 12 months to 18 months.

I know you highlighted the EV charging infrastructure, which is helping.

But if we look ahead over the next 18 months to 24 months, what's going to continue that growth rate in the business?

Are there specific applications that are driving the majority of the growth right now that we can consider when forecasting the business?

Yes.

I think some of the growth drivers in the industrial segment that we report are really -- so we have kind of the fundamental heavier industry, oil and gas, and mining, and stuff like that.

We see that has continued to be kind of relatively stable.

It's returned to reasonable levels and stable.

What's driving the growth beyond that is, is actually broadening our distribution through maybe nontraditional ways and through our electronics partners, as our electronics distribution partners have begun to focus a little more on the industrial side to drive growth.

That creates opportunity there, that has been a good growth driver.

We continue to see that being a good driver.

Also, this business historically has been very North America-centeric.

And we've seen some of our strongest growth by -- it's still small numbers, but big growth drivers of expanding these products into Europe and Asia.

So I think growth in those areas continues to be pretty good, and will continue to be a good driver in the industrial segment.

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

It seems like in your prepared remarks that you said that in the past years one of the benefits besides currency has also been the ability to maybe sidestep some pricing pressures.

Are you starting to see pricing pressures emerge in any of your product lines or end markets?

Yes.

What I would say is, 2018, maybe leading into 2018, was very strong growth rates and particular challenges in supply not for our products but other components in that space.

Purchasing people were mainly focused on getting product -- getting things out the -- getting products in the door to keep their operations running and fulfill their needs.

So they were not as focused on pricing.

And so -- yes, that's probably lessened the pricing pressure that we saw in 2018.

We have not particularly seen that pricing pressure increase yet in 2019, but I think their comments are really I think -- I'm not sure we can expect over a long period of time that lower pricing pressure is maintained.

So we haven't seen it really changing yet.

But our expectation is it will be back to being a little more of a headwind than we've had in the last year.

Great.

Got it.

And regards to IXYS, can you kind of give us some content on how that business performed during other semi-downturns?

And what your expectations are given the current environment for that business?

Yes.

I think, first of all, we're learning that a little bit more, right, as a new part of our business on the power semiconductor side.

Because of the market, the customer base of that business being fundamentally different than our traditional electronics customer base, it's more industrial electronics, larger industrial players and things like that.

And there are more in that range of maybe 50% direct, 50% for distribution.

I think they are maybe a little less volatile than our traditional electronics business has been, but certainly, cycles will impact them as well.

And our next question comes from George Godfrey from CL King.

Just a couple of questions.

I wanted to ask about the acquisitions.

Dave, you mentioned doing some more deals in the coming months and quarters.

Do you -- from a time standpoint, for you and Meenal as well as the organizational infrastructure, could you -- would you be full comfortable doing an IXYS-size deal at this point?

Or is that integration need to get further along?

Yes.

What I would say is that if we found the right strategic opportunity and the right financial return, we absolutely are prepared to take on another acquisition in similar size to IXYS.

We've had those discussions with our board and internally.

We've digested a significant amount of the activity in IXYS, still work to be done.

But certainly, if the right opportunity is there, we would be willing to do that.

And George, I would add when we -- as we have some of these different acquisitions, we look to see where we think the bulk of the work will be or in what parts of the business or functions.

And we can flex those parts of the organization where we add additional resources to make sure it's a successful integration, and we've done that.

Got it.

And the synergy target, $30 million, I understand that some of that gets pushed out to 2020.

I don't think you've ever quantified revenue synergies, but you did mention that the business is now running annualized $390 million versus $340 million.

Is that $50 million increase reflective of some of those synergies?

Or are those revenue synergies, or are those still on the come as well?

Yes, I would say that those are really still to come from -- were there some revenue synergies in that amount?

Sure.

As we've taken IXYS into some of our core customers and the other way around, right, there certainly have been some opportunities.

We did not build our financial modeling and return on revenue synergies, but certainly, that is a long-term play for us.

I think the bulk of those revenue synergies are clearly to come and particularly longer term taking their products into the automotive space, that's a 2-year, 3-year process to get there.

Those will come in coming quarters and years.

And our last question comes from Joe Vruwink from Baird.

If I look at your automotive organic growth the last 2 quarters, and I try to weigh it what end market production is by region and just compare your organic growth, it seems like the growth has pretty well reflected what end markets are doing, which being said, there's not a lot of above-market growth the last 2 quarters.

Dave, you mentioned that in some geographies, you're selling through distributors or various channels.

So maybe the inventories were just a little bit high and what we're seeing is destocking in Q3 and Q4.

I'm wondering, a, is my math correct?

And then b, if inventories are in better shape and we do maybe get some snapbacks in various markets -- China, for instance, is pursuing auto stimulus -- do you think there would be restocking?

Or do you think your automotive business would go back to reflecting this content growth above market that your model is really predicated on?

Yes.

I think our view of the math is maybe a little different than yours.

So if you look at like it's a fourth quarter, we had a decline of about 1% organically in our revenues in automotive, and the car build was down about 4%, so that would show about a 3% expansion, if you will, but in that segment.

So it shows some expansion there, and it was probably muted a little bit because of the China inventory position.

The other aspect is difficult to kind of peel out because it shows up elsewhere as automotive electronics.

So in-market driver there, the electronics content increase in the vehicle that's driven, of course, by safety investments and autonomous driving stuff as well as even the electrification of vehicles, that ends up rolling through our electronics segment.

And so it doesn't get called out as a growth driver.

So I do think we have seen in the last couple of quarters, we have seen automotive growth above what car build growth has been.

If things do snap back, and I know, just yesterday, the Chinese central government made some big comments around stimulus and automotive at the local regional level, if they have the money, kind of comment.

If that snapped back, would we see that inventory restocking?

Probably not, because I think they'll probably be a little more cautious because things have been blooming for so long, they were quite eager to put inventory in place to support that.

But I do think it would show an increase and kind of reflect to our content story.

Thank you for joining us on today's call and your interest in Littelfuse.

We look forward to talking with you again soon.

Have a great day.