Executives
Gordon Hunter – Chairman, President and Chief Executive Officer
Philip G. Franklin – Chief Financial Officer, Vice President of Operations Support
Analysts
Alexander Paris – Barrington Research
Ingrid Aja – Merrill Lynch
Joe [Witten] – Longbow Research
[John Frenthrip] – Sidoti & Company
Littelfuse Inc. (LFUS) Business Update Call September 29, 2008 11:00 AM ET
Operator
Welcome to the Littelfuse Inc. conference call. (Operator Instructions) At this time I will turn the call over to Chairman, President and Chief Executive Officer, Gordon Hunter.
Gordon Hunter
Good morning and welcome to this brief Littelfuse conference call to follow up on the press release which we sent out this morning. This is Gordon Hunter, the CEO of Littelfuse and with me this morning is Phil Franklin, our CFO.
The intention of this call is to add some color to the announcement of this morning and to focus on the recent developments in the markets we serve and the impact on our business. We do not intend to discuss fourth quarter or the 2009 outlook at this time and we plan to address these topics in our regular third quarter review call, which will be held on October 29.
Let me start by addressing the automotive business first. As mentioned in our press release, we’ve had strong performance in our automotive business in the first half of the year. However, the seasonal shutdown in production during the summer months has been impacted by extended shutdowns because of high vehicle inventories and declining sales trends.
This has resulted in much lower ordering volumes for our products across all geographies. This, combined with the trend to smaller, lower cost vehicles with reduced circuit protection content has impacted our automotive OEM business during the last quarter.
The latest data from J.D. Power shows that the North America passenger car production declined by 13% sequentially in the third quarter and 14% year-over-year. However, the large car production is down by 32% sequentially and 45% year-over-year. Also, European car production was also down by 18% sequentially.
While we are very disappointed by this slowdown, we are confident that we’ve not lost any business, any of the key OEMs or any of the new programs for our new products such as Master Fuse have changed. Also our after market business, which has also been strong during the first half of the year, has also suffered in the third quarter in Europe and North America due to more cautious consumer spending.
Let me now turn to our electronics business which as you may recall held up very well during the second quarter. Usually we’d expect to see significant sequential growth in the third quarter caused by consumer electronics building products for the holiday season. We’ve seen much more cautious building of consumer products and distribution channels being very concerned about the inventory in the channel.
This has led to much milder sequential growth than we would have expected in a normal year. This trend is also being very broadly based with leading indicators of this caution coming from Korea, Japan and the greater China regions.
As mentioned in the press release, we’ve seen a more cautious ordering pattern this quarter with book-to-bill ratios down to 0.9 from 1.0 at the end of the second quarter, indicating a slowing trend and increased caution in the distribution channels. Lastly, our electrical business, which accounts for about 10% of total revenues, remains on track and continues to make very good progress on many of the key initiatives for this year.
I will now hand over to Phil to talk a little about the manufacturing moves and cost reduction programs we have ongoing and then we will open for questions.
Philip G. Franklin
As stated in our press release, we are still on schedule with all of our manufacturing transfers. The transfer of ristors from Ireland to China and the automotive transfer from Chicago to Mexico will both complete as planned in the fourth quarter. The transfer of electronic fuses from Chicago to the Philippines should complete by the end of this year, which will be a few months ahead of schedule. The transfer of the silicon products to China is in the early stages and is scheduled to complete in early 2010.
Savings from these projects will begin to show up in the fourth quarter of this year and will ramp up throughout 2009 and into 2010. At the same time, we’re working on other significant savings projects including moving transportation from air freight to ocean freight and a wide variety of purchasing projects including localization of raw materials. At the same time, with a weaker outlook for the next several quarters, we will be aggressively managing costs in all areas of the business.
This concludes our prepared remarks. Now we would like to open it up for questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Alexander Paris – Barrington Research.
Alexander Paris – Barrington Research
I’m sorry but I just got on a little bit too late and I missed the auto estimates that you had for this service that you use. Could you repeat those?
Gordon Hunter
This is information from J.D. Power and it shows that the North America passenger car production declined by 13% sequentially and 14% year-over-year. However, the large car production is down by 32% sequentially and down by 45% year-over-year. I also mentioned that the European car production was down by 18% sequentially.
Alexander Paris – Barrington Research
Did they change their forecast for the full year?
Gordon Hunter
I believe they have. Yes. I don’t have those numbers, Alex, but I am sure they have brought those down.
Alexander Paris – Barrington Research
In the electronic business, I know you’re in the process of transferring things there. As you get transferred over there completely do you – I know your markets are worldwide in electronics but does your business there would tend to be more influenced by economic growth in the Pacific region compared to what the breakdown would be now? Or it pretty much stays the same because you ship everywhere pretty much the same?
Gordon Hunter
Well we ship everywhere but more and more our customer base for electronics has been consistently increasing and so our ship to points tend to be manufacturing locations in Asia at an increasing rate. Some of those, of course, are contract manufacturers or the ODMs that are building equipment for European and North American brand of names, but the manufacturing and more and more of the design choices is done in Asia.
As far as the end markets go, of course the U.S. consumer market is still a very important part of global consumer electronics, even if more of those products are made in Asia. But I do believe that the growth in Asia and the growth in population and wealth in the Asia region means that Asia becomes a bigger market over time also for consumer products, and obviously telecommunications equipment.
Alexander Paris – Barrington Research
Just finally having said that this lower than expected demand, is that kind of following the economic trends? That is, you saw more of a disappointment in North America and Europe and less in Asia?
Gordon Hunter
Well I think we see it in the ordering pattern that the major consumer electronics companies in Asia and the contract manufacturers in Asia for products such as flat screen TVs, we’ve seen the leading manufacturers of those reducing their forecasts for what they expect to be shipping in the fourth quarter. And I think those are products that end up in all parts of the world. But I think the credit concerns that people have here and also in Europe impact the end markets for those consumer products.
Operator
Your next question comes from Ingrid Aja – Merrill Lynch.
Ingrid Aja – Merrill Lynch
I was wondering if you had any details on the auto by car makers? Is there any specific car makers or applications that you’re seeing more weakness in?
Gordon Hunter
Well I think that we’ve always had the most penetration in the big three, the North America companies here rather than the transplants. And they have tended to be the ones with the larger vehicles, with the light truck and SUV vehicles. And they have typically had high circuit protection content. And I think that those are the ones I think which have been hardest hit.
There was even a report in the Journal on Friday about General Motors suffering in China in its competitive position there. So I think that the North American manufacturers are ones which are being impacted and that in turn impacts us.
Ingrid Aja – Merrill Lynch
Any in Europe that you’re seeing?
Gordon Hunter
Well I think we’ve seen the same trend.
Ingrid Aja – Merrill Lynch
Okay.
Gordon Hunter
As I mentioned car production was down 18% sequentially. I think we have just not seen the building after the shutdowns in the summer. It happened the same in Europe.
Ingrid Aja – Merrill Lynch
And then on the electronics are there any specific areas or is it more broad based?
Gordon Hunter
I think it’s very broad based. As I mentioned places like Korea, which have been very strong for us the last couple of years, greater China and Japan and I think across a broad range of consumer and professional electronics.
Ingrid Aja – Merrill Lynch
So there are no specific markets, no specific applications? It’s more general?
Gordon Hunter
Well I think if there’s one we’ve have good particular success and we’ve called out as one of our major focused areas and design wins it’s been flat screen TVs. And the very strong growth that we’ve seen in LCD TVs, particularly with some of the Korean companies, we’ve certainly seen that slowing.
Philip G. Franklin
And Ingrid as we’ve talked about all year we’ve seen weakness in the telecom segment and that certainly hasn’t gotten any better as well.
Operator
Your next question comes from Joe [Witten] – Longbow Research.
Joe Witten – Longbow Research
I was hoping you could just quickly discuss the linearity of the end market weakness that you’re seeing. I mean, is it a situation where you saw things get progressively worse as the quarter wore on?
Philip G. Franklin
I wouldn’t say they got progressively worse. Normally the third quarter is a difficult one to judge until you get into September. And what we did see certainly in our automotive business was that July and August with some of the extended shutdowns that manufacturers did were weaker than we thought they would be going into the quarter. But it wasn’t really conclusive until we got into September to see how much of a bounce back we got. In the case of automotive we didn’t get much of a bounce back in September and therefore the big shortfall there.
I think in electronics we’ve been running a book to bill in the 0.9 range for most of the quarter, although I think it’s started to get a little bit worse as we got into September. But that’s a fairly typical phenomenon as you get towards the end of the Christmas consumer build.
Joe Witten – Longbow Research
So maybe a better way to describe it then is lesser than expected seasonal pick up then?
Philip G. Franklin
Yes. That would be, I mean, certainly in electronics we didn’t see the strength that we would normally see in the September timeframe that would be indicative of a strong fourth quarter, I guess, is a way of putting that. Yes, I would say that we didn’t have a big decline in electronics in Q3 but we didn’t have the pick up, the sequential gain that would normally be expected. Normally we would expect electronics to be 6 to 7% sequentially in Q3 and this year it was flattish.
Joe Witten – Longbow Research
And then switching gears a lot of, I guess, raw material prices have come in over recent months. Do you expect any benefit from that phenomenon this year and in the fourth quarter?
Philip G. Franklin
Yes certainly with things like copper prices coming down, that will be helpful although I don’t think it’s probably going to help us in the third quarter. Probably it’s more of a fourth quarter and going forward phenomenon. And if it stays at the current level. And the other thing that ultimately will help us will be, depending on what happens to oil, obviously it’s come off its peaks. It’s still bouncing around, but as we’ve talked about in the past we have a significant amount of cost related to transportation which gets driven largely by the cost of oil.
Joe Witten – Longbow Research
I was hoping you could provide some quick commentary on the acquisition environment. Are you still on the prowl especially in light of the fact of valuations are obviously late coming in at this point?
Philip G. Franklin
Yes, certainly we’re still looking at acquisitions. As you’ve all seen we just recently announced a small one that should close this week. We’re excited about that. We also have a number of others that we’re out there looking at. And we expect certainly with the financing environment getting tougher and the overall economy getting tougher that valuations will start to come in some.
Operator
Your next question comes from [John Frenthrip] – Sidoti & Company.
John Frenthrip – Sidoti & Company
I also joined the call a little late, so I apologize if you’ve gone over this, but could you go to the electronics business? I mean, give us a sense of what the book to bill would be normally this time of year? And I guess related does this current credit market seizure does that have any impact maybe on the spending patterns of your customers?
Philip G. Franklin
I think your first question, the book to bill, I mean normally we’d see a weakening book to bill as we get towards the end of the quarter. So I’m not sure that phenomenon is that much different. But I think kind of the 0.9 area is probably a little bit below where we would normally be. And it was off a third quarter sales number where we didn’t show any sequential growth. So slightly lower book to bills and also off a lower third quarter sales number than we would typically have.
Relative to the credit markets and the tough financing environment having impact on our customers, I don’t think specifically in terms of we haven’t heard anything about projects getting cancelled because they couldn’t be financed. But certainly I think the outlook from a lot of our customers and many of our distributors because of the overall macro economy, including the tight credit markets is just everybody’s pulling in their horns for a variety of reasons. And there’s just a lot of caution out there right now.
John Frenthrip – Sidoti & Company
Given that backdrop, what’s your confidence level on achieving that 230 that you kind of put out there for next year?
Gordon Hunter
Well we did say at the beginning John actually that we wanted to give a very brief update call today and really focus on the third quarter and particularly the automotive volumes which are so dramatically down. I also talked a little about electronics as Phil just covered there. And we said that we would really limit the call to focusing there and when we have our regular scheduled call on October 29, we’d review the fourth quarter guidance and the outlook for next year. So we didn’t really want to comment on that today.
John Frenthrip – Sidoti & Company
Okay. I apologize.
Operator
Your next question comes from Alexander Paris – Barrington Research.
Alexander Paris – Barrington Research
I’m afraid this is looking a little bit forward, too, but in the fourth quarter you usually have a seasonal decline from the third quarter. Now you could look at this as saying well the third quarter was much weaker than expected so you’ll get less of a seasonal decline. Or you could say that the shortfall started picking up so late in the third quarter with the possibility of it just continuing to deteriorate in the fourth quarter. And it would be just as much of an as usual seasonal decline. Which would you guess, A or B?
Philip G. Franklin
Well I think Alex we’re just in the process of evaluating all that and pulling together all the data that we have to make our best guess at that. And we will update you the end of October when we have our regular third quarter call. At this point I wouldn’t want to speculate on that.
Operator
At this time I’ll turn the conference back to management for any additional remarks.
Gordon Hunter
Okay. Well we’d like to thank you for participating in this brief call this morning and we will look forward to giving you a much more in depth update in our regular call on October 29. Thank you.
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