Ingrid Aja - Banc of America/Merrill Lynch Reik Read - Robert W. Baird John Franzreb - Sidoti $ Company Shawn Harrison - Longbow Research

Good day, everyone, and welcome to the Littelfuse, Incorporated Fourth Quarter 2008 Conference Call. Today's call is being recorded. At this time, I will turn the conference over to Chairman, President, and Chief Executive Officer, Mr. Gordon Hunter. Please go ahead, sir.

Thank you. Good morning and welcome to the Littelfuse fourth quarter 2008 conference call. Joining me today is Phil Franklin, our Vice President of Operations Support and Chief Financial Officer. Like many other companies this was a tough quarter for Littelfuse. However the revised guidance, we issued on December 19, proved to be correct with our results for the quarter falling within the ranges we provided. Fourth quarter 2008 sales were $105.9 million were down 25% from the third quarter. For the full year sales were $530.9 million were down 1% from 2007. The first half of the year was on track, we then saw some weakening in the third quarter but the greatest impact by far was in the fourth quarter. As we indicated in our call in December electronic and automotive sales dropped up sharply in November and they declined even further in December. In Europe and North America consumers concerned about their jobs and the economy held off on new comp purchases and those who did want to buy faced very tight credit market. As a result the automotive OEMs globally slashed production rates and shutdown assembly lines for much of December with the reduced production continuing into January. Electronic end markets also weakened substantially in the fourth quarter, as consumers continued to lose confidence in the economy and cutback on spending. We were also impacted by electronic distributors reducing inventories in response to the decline in demand on the uncertain outlook for 2009. One bright spot was our electrical business which had another record year. But even this business began to slow late in the fourth quarter. With that background, I will now turn the call over to Phil Franklin, who will give the Safe Harbor statement and a brief summary of the news release. Then I will provide more detail on the market dynamics in our business units our cost reduction activities and our progress in other key strategic areas.

Thanks, Gordon. Before we proceed, let me remind everyone that comments made during this call include forward-looking statements. These statements are subject to various risks and uncertainties, and as a result, actual results may differ materially from those expressed in forward-looking statements. A discussion of these risk factors may be found in the quarterly and annual reports filed with the SEC. Sales for the fourth quarter were $105.9 million, which was consistent with our latest guidance but down 22% year-over-year. Our automotive sales declined 32% compared to the prior year quarter. As a result of unprecedented decline in car productions as well as weakening in the aftermarket and off-road truck and bus market. Electronics after posting modest sales growth for the first nine months of the year declined 25% in the fourth quarter with consumer electronics leading the decline. Electrical sales after nine months of double digit growth slowed to 1% year-over-year decline in the fourth quarter. These declines were partially offset by the addition of Startco, which added $3.9 million for the quarter. On a GAAP basis, the company had a loss of $0.42 per share in the fourth quarter, this included $0.27 per share of special charges most of which were non-cash and related to write down in both operating and financial assets. Excluding special charges, the company had a loss of $0.15 per share, which was consistent with the low end of our most recent guidance. Earnings for the quarter were impacted by high transfer related expenses coupled with unusually low production rates resulting in large unabsorbed overhead variances. Despite the poor P&L results cash from operating activities for the fourth quarter was $15.8 million the best performance of the year. This was the result of strong overall working capital management and in particular outstanding accounts receivable collections. Capital expenditures peaked at $17 million in the fourth quarter, primarily from spending on facilities and equipment to support the manufacturing transfers. From here forward, capital spending will show a significant downward trend. Now, I will turn it back to Gordon, for some more color on market trends and business performance.

Thanks Phil. Looking at each of our businesses in more detail; I will begin with automotive which contributes about 25% of total Littelfuse revenues. The latest data from J.D. Power shows that global car production continued its dramatic decline in the fourth quarter. Fourth quarter production was down 18% year-over-year and down 6% from the third quarter of 2008. The declines in our key markets were even more dramatic with fourth quarter production down 22% year-over-year in Europe and 25% in North America. Asia was down 10% for the same period. These production levels are way below the past few years and the most dramatic decrease we have ever seen in this business. What is especially remarkable is how fast the market deteriorated. While consumers who couldn't get credit or worried about their jobs stopped buying new cars, it was just a few short weeks until the OEMs slowed production. And was just in time manufacturing, it didn't take very long for us to experience the short drop in sales of our automotive products. Actually our sales to many Tier I customers slowed even before the OEM shutdowns. Because these suppliers run out of finished goods warehouse space and had to stop production. We also experienced a downturn in the off-road truck and bus segment, particularly in the RV construction and transportation vehicle markets. Unfortunately, we do not see production ramping up as quickly as it went down. The reason for this is that most people can make their car last for another six months or year if they need to. So we expect when the turnaround comes it will be more gradual than it was on the downward side. In addition, to the decrease in car production another factor in our automotive performance for the fourth quarter was the…

Thanks Gordon. Let me first summarize and recap the expected 2009 financial impact of the cost reduction actions that Gordon just described. Then I will discuss the outlook for 2009. Our manufacturing transfer programs will generate at least $20 million of savings in 2009. We have taken further actions to reduce manufacturing cost by an additional $8 million. Also, $20 million of transfer savings and the additional $8 million look at the cost of sales volume. Our operating expense reduction actions are expected to result in operating expenses being at least $15 million lower in 2009 compared to 2008. Now, for the 2009 outlook. As we said in the press release and as Gordon just reiterated we had an extremely slow start to the year reflecting weak end markets cautioned by distributors of inventory levels and the timing of holidays. With this very close start and unprecedented lack of visibility, sales and earnings guidance comes unusually difficult. Nevertheless, we decided to give guidance for the first quarter, albeit, with wider to normal ranges. We expect sales for the first quarter to be in the range of $88 million to $98 million. Gross profit margins for the first quarter will be impacted by negative operating leverage associated with running the business at unusually low levels of sales and production. Although, significant manufacturing cost savings will occur in the first quarter most of these savings will go in the inventory and the P&L until the second quarter when the inventory is sold. We will get some benefit from our operating expense reductions in the first quarter but again most of these savings will not hit until the second quarter. As a result, the company expects first quarter loss in the range of $0.20 to $0.40 per share. We are not ready to give specific guidance out past the first quarter but we do know that both manufacturing costs and operating expenses will be significantly lower beginning in the second quarter. But the cost reductions we've described by mid-2009 will have a dramatically lower breakeven point to somewhere in the range of $100 million in quarterly sales. Assuming typical seasonal sales increases even after the depressed first quarter levels, we should be able to return to profitability in the second quarter to show strong sequential earnings growth in the third quarter. In 2009, we will continue to focus on cash and aggressively manage our balance sheet. Capital expenditures will be reduced to approximately $27 million in 2009. Although, the first quarter is always a difficult quarter for cash but for the full-year 2009, we expect to generate enough cash from operations to more than cover our capital expenditure needs. This concludes our prepared remarks. Now, we would like to open it up for questions.

Thank you (Operator Instructions) We will go first to Ingrid Aja at Banc of America, Merrill Lynch. Ingrid Aja - Banc of America/Merrill Lynch: Good morning. Just, if I go back to the gross margins this quarter and maybe, if you can just add, give us a little more color. Was that just negative operating leverage and how much of that was in transfer pressures indicated a higher transfer related cost in the quarter?

Yeah, we had the final push on the transfers to get the completion of Ireland transfer to China and the transfers our Des Plaines to Mexico during the quarter and therefore we did see peak transfer costs during Q4. Those transfer costs combined with an extremely low volume and the negative operating leverage on that's extremely well volume were really the major causes of the margin being what it was. As I indicated in my comments earlier, Ingrid we had very high unabsorbed overhead because of a high level of spending coupled with very low levels of production in the fourth quarter. Ingrid Aja - Banc of America/Merrill Lynch: Okay, so, can you quantify what those transfer related costs were in the quarter?

Well they were - we had talked about transfer related cost being in the neighborhood of peeking at around $3 million, I think, they were probably slightly above that for the fourth quarter. Ingrid Aja - Banc of America/Merrill Lynch: Okay great. And then in terms of inventories, to add, you had mentioned the inventories completely, that will absorb some of those savings now, but what about working down this quarter. Will you be able to work down some of that inventories that you have built out this quarter. And how does that, will that further impact your margins?

Well inventories were relatively flat for the quarter but we did build up inventories during the year, largely related to the transfers as we, we have a target to take inventories down in the $5 million to $10 million range during 2009 and that's significant piece of that is related to taking excess inventories that we build to facilitate the transfers out. We also believe with fewer plans and better means - you know manufacturing processes in those plans but we can drive further tons of improvement over and above that. Ingrid Aja - Banc of America/Merrill Lynch: Absolutely and then on the $15 million operating expense reduction. How much of that is going to be R&D related versus SG&A, is R&D going to come down?

Yes, so far it will come down. I don’t have a specific number for you but there is a meaningful piece of that, that's related to R&D and the biggest piece just relates to acceleration of the moves that we already talked about where we move R&D, our R&D the bulk of our R&D from the US and Europe into Asia. So, we had a big R&D capability here in the US for electronics and that will be moving more, we will be moving that faster and more aggressively over to Asia primarily in the Philippines and that's the major cause for the R&D reductions but the R&D, it’s a meaningful piece of the $15 million or we guess about your 25% to 30% of it. Ingrid Aja - Banc of America/Merrill Lynch: Alright, great, thanks and I guess, finally on the gross looking forward this quarter. And what kind of incremental margin are you looking at. And what kind of operating leverage you are expecting?

Well I think, generally speaking we, for every dollar that we can take sales up, we should be able to drop around half of that or slightly over half of that to the bottom-line. So there is a significant amount of operating leverage as we scale the business back from revenue levels. Kind of in the $90 million plus per quarter up in to the over 100 and then ultimately back to the kind of levels that we would normally expect to operate in $130 million to $150 million range per quarter. Ingrid Aja - Banc of America/Merrill Lynch: Right, and so then this quarter, a lot of those benefits you are also going to have impact because they are not going to show up.

Right. So we will, so this quarter we get impacted by a lot of things. We don’t get really the benefit of the cost reductions in a meaningful way because all the reductions that we were realizing in cost of sales for the quarter will be going in inventory and then only turn out of inventory in Q2. The operating expenses we will be executing on those. A lot of those during the quarter, so we will start to get some benefit but the major benefits will come in Q2. And then those, and then we also get hit with a negative operating leverage from the very low top line number that we are expecting for the first quarter part driven by the timing of Chinese New Year and the fact that our year started during the Christmas New Year’s holidays in Europe and the US. Ingrid Aja - Banc of America/Merrill Lynch: Okay, great. Thank you.

Hi, good morning.

Good morning, Reik.

Phil could you maybe just walk through with I take it to be a forward movement of those transfer costs in the fourth quarter. Can you talk about what the transfer costs are as we go into 2009, and then maybe can you detail out a little bit of, as you go through the year how much related to $28 million that you are talked about. Is that by and large mostly kicking in the back half of the year or can you give us some understanding on that?

No, by the time we get into the second quarter will be seeing a meaningful jump at $28 million. As well we will be seeing, we are not going to be quite at our operating expense run-rate that we hope to get to but will be certainly more than half way there. So, we will start getting the majority of that from the cost reductions we get into Q2 by Q3 we should be basically fully there. On the transfer related question, we still have some minor remnants from the Mexico move and the Ireland move the move out of Ireland, the move from the Spain, Mexico where we have some clean off and some mothballing of facilities and things like that, that will drag on a little bit, for the most part the big numbers related to those two transfers are behind us from a transfer cost standpoint. In 2009, the major transfer related cost relate to the moves from Irving, Texas to that of Matamoras, Mexico to Wuxi, but overall, we talked about a number that was started out in 2008 at roughly $2 million in change a quarter and peak down at over $3 million a quarter. So, something in the area of $10 million to $12 million I would expect those costs to be probably half that in 2009. That’s included in the $28 million that we talked about in manufacturing savings.

So, I am sorry, for the 28 million is a net number?

Yes, it includes the reduction in transfer related costs, it includes savings, it includes additional reductions that we have done unrelated to the transfers.

Okay. And so what you were saying just a minute ago on the related contribution margin, I mean, you ought to see a pretty significant movement just because you are lowering the cost that the breakeven point, pretty early on and as we get back into the back half of the year, I would assume that volume matters a lot less than it has historically?

I would say that necessarily that it matters less, I mean it has historically certainly, we are going to be able to have the business, it will be much more profitable at lower levels of sales than it was historically, but we still will have a significant amount of operating leverage as volume scales up and down. I think once we get all the facilities done in the Irving, Wuxi moved on and we are down to truly six facilities around the world, we will have a significant reduction in fixed costs as well, which not only will help us bring the breakeven point down even further than what we are talking about here, but it will mean we will be a little less sensitive to volume changes going forward. But it is probably not going to be that dramatically different in terms of how the business scales up and down. This year we still own the Ireland plant, we still own the Des Plaines plant until we clean some of that up. We are still going to have the issue where the business has a fair amount of operating leverage both on the up side and the down side. But, back to your point, that will improve as we move forward.

And then just back to the working capital side of things, just given the slowdown, the completed transfers you kind of alluded to inventory being down, would working capital be a larger source of funds in 2009 than it was in 2008?

I would say overall, I wouldn’t say that would be the case. I mean there are couple of factors there. As you saw we had a huge receivables reduction in the fourth quarter, with a big drop off that we had in sales. So, we are not going to see that repeat itself. On the other hand, we will do better in inventories in 2009. Overall for the year in 2008, we drop receivables by $23 million during the year, all of that was in the fourth quarter. We are not going to get a repeat of that. But on the other hand, our inventories actually went up, it went up by $6 million to $7 million in 2008. As I mentioned we expect that number to come down by $5 million to $10 million in 2009. So, now the better performance on inventory will largely offset the fact that we had this huge drop in receivables in '08 that won't repeat in '09, although, we do expect to aggressively manage the day sales outstanding, but we are already starting at such a low level. It's hard to see that receivables will come down a lot more from where they are. The other thing that will impact cash flow is the amount of severance that we pay out and obviously the capital expenditures. And the severance that we paid out about $20 million roughly in 2008 it will be about half of that in 2009, and then obviously that will drop way off as we get past 2009. And CapEx has obviously come down a lot from over $50 million to again about half that number in the $27 million range. So, there will be some things moving in different directions on cash flow, but overall even with a very challenging year for earnings we still expect to be positive free cash flow from the year.

Okay. Great. Thank you very much.

We will go next to John Franzreb with Sidoti & Company. John Franzreb - Sidoti $ Company: Good morning guys.

Good morning. John Franzreb - Sidoti $ Company: Gordon, could you talk a little bit about the order trends I mean clearly there is no sell-through going on the automotive side of the business, but what are your electronics customers telling you, right now that gives you confidence and profit rebound. These are in sales improvement in the second quarter of the year?

Right in the automotive business, we really have operating on a pool system, so very quickly as sales decline they really very quickly decrease their ordering on us. So we don't really have any inventory issues in automotive it's extremely responsive to the market, so the end-market trend is really critical and it really means that we are tracking sales of vehicles around the world that very quickly translates into production of vehicles and very quickly translates into sales of our products into the Tier 1. In the Electronics area, we have distribution channels which really slowed down as I mentioned extremely in the fourth quarter and really the period from the extended Christmas holidays right through in Asia to the Chinese New Year holidays that are just ending, people just really coming back to work has really been very slow in January. So tracking our book-to-bill which in these circumstances not necessarily the best indicator in a normal stable business it will be a metric we would be really looking at that's tracking just below one, but on a lower sales level. But we are really, I think we are looking to see to the contract manufacturers and the ODMs start to ramp-up production now after Chinese New Year and start to put some demand on the distribution channel. So we see our distributors reordering. And that's really what we are waiting for. In the next few weeks I think everyone in the electronics industry is going to be waiting to see demand picking up from I think really very low levels of inventory throughout the chain for all components and I think frankly for end-use products as well. John Franzreb - Sidoti $ Company: Okay. You touch a little bit, Phil, on being positive free cash flow for the year? What are your thoughts about debt repayments here? How do you kind of think you will finish out 2009 on the balance sheet?

The only debt we have at the moment is term loan we just took out in the end of the third quarter. Though at the end of year we had an $80 million balance there. And we had a clean revolver of $75 million availability on it. So, our view that is that we like the term loan we have, there is likelihood we are probably not going to prepay that down, just its cheap money. And we think having a cash cushion, so we get a little bit better picture of what this downturn looks like and what the shape of its really going to be, is a good thing and it also provides us with some cash, take advantage of any opportunities that might be out there. So, our intent would not be to pay down the term loan that amortizes, starts amortizing the first quarter of $2 million a quarter. So, we would expect to just pay down the amortization and while something else to change we probably wouldn't prepay that at all we just keep the cash. John Franzreb - Sidoti $ Company: Okay. And I apologize if I missed this. In the guidance numbers for the first quarter, are there any one-time items included in that number or is that an operational number?

It's probably going to be, for widened up range, it probably includes both. We are not anticipating significant one-time items. We may have a little bit of severance cost but the big pieces of severance related to the reduction that we described today in the press release, those reserves we have taken in the fourth quarter. So we may have a little bit of additional severance that we have to stock off, but other than that we are not anticipating any other big charges in the quarter. John Franzreb - Sidoti $ Company: Okay, thanks a lot, Phil.

You're welcome.

(Operator Instructions). We will go next to Shawn Harrison at Longbow Research.

Hi, good morning. Just getting back to the debt question. What is the interest rate on that debt right now maybe just give a run rate in terms of interest expense?

Its LIBOR plus 175 it is what the spread is on that. So we have been running that mostly of one month LIBOR which is in 1% or so.

Okay, so looking at something that LIBOR rate plus on their 500K quarter 2009?

Yeah that's in a neighborhood.

Okay. Secondarily just two quick modeling questions, other income was up something like $3 million sequentially in the fourth quarter. How should we look at going forward and what kind of comprise that and then maybe just a tax rate here for 2009?

Yes, I mean there are number of things in there, we will have some interest income on the $70 million or so of cash that we have around the world generally invested in very safe, very short-term type of investments. We will also have some, we do get some royalties but those are generally small numbers. The biggest item that was in the Q4 number was foreign exchange, gains that we had those were balance sheet revaluations gains that we were in through the P&L and we are not anticipating those are going to reoccur, but obviously they may and that could go either way depending on what happens to exchange rates.

So something maybe in the $3 million, $3.5 million range going forward in terms of income?

Yes, I would say it certainly wouldn’t be any more than that.

Okay, and then a just tax rate?

Tax rate should be similar to the tax rate this year something in the high 20s. We were typically modeling about 29%.

Okay. Turning back to the cost saving initiatives, I want to be crystal clear on the $28 million manufacturing sales as well as the $15 million in operating expenses. Are those cumulative numbers for the year or those run rates exiting the year in terms of savings?

Those are the impact on 2009 and most of those are executed very early in the year. So it's going to be pretty close to being the same thing. But the impact we are giving you is the impact on 2009. So, it would be a little bit higher than that in terms of the exit run rate.

Okay. And then getting back to the demand question maybe just kind of another way to ask. Given that the guidance you provided for the quarter in January run rates you have seen in the business. What type or percentage uptick would you need to see in February and March to meet the mid point of guidance? The other way to ask is, if we multiply January times three would we meet the low end of guidance?

If January times three would probably get little bit below the low end of guidance. But remembering that we had week of Christmas holidays in January and also probably a little bit over a week of Chinese New Year. So, it's probably not a very indicative month. But if it continue with that rate we would most likely end up at the very low end or below the low end of our guidance.

So, but the other side of that is, you are not expecting a large kind of double-digit uptick to exit the quarter?

Actually, we really are not expecting the market to improve at all, what we are expecting is that to revert to more normal run-rates and less inventory draw down and what we have experienced. So, we do think sales rates and order rates will improve, but it's not going to be based on, any improvement in the market it's going to based on these other factors.

Okay. And I know you highlighted some ASP potential pressures out there but not a lot of negatively. Is that something that could worsen year as we progress in the quarter. Is that you are concerned with heading for during the first six months of the year?

I think in the electronics industry its always a risk. When demands are just low, that becomes more pressure on price and then that's proven out in past downturn. So, we are modeling into our plans probably a little bit higher than normal price erosion numbers for electronics. We think that automotive their concern is volume. We don’t think the pricing will be much different than this and historically it's still going to go down. But most of our automotive business is on contracts. So, we don't think that's going to change materially from what it typically would run. The electrical business, we are going to see major price reduction issues there but we certainly aren’t going to get the kind of price increase that we got over the last year or two, in part driven by some of the commodity prices going up which obviously but not this year.

Okay. So just to summarize on the electronics, it’s modeled into the business you just haven’t seen anything greater than normal pressure to-date?

We have not seen a trend change yet, but we have modeled in some higher price erosion.

Okay. Thanks very much.

(Operator Instructions). We will take a follow-up from Reik Read at Robert W. Baird.

Hey, just given your guidance to the first quarter and if you kind of applied some element of normal seasonality, it looks like revenue might be down about 20% 2009 versus 2008. I know that’s just roughing out in this environment, but I mean assuming you are down a pretty meaningful amount like that, does EPS come down at a commensurate rate given that you have got some good offset with these cost reductions, or can you hold it flat. I mean how should we think about how much of those cost reductions really kind of go to the bottom-line to help it out.

Yes, I mean we are going to get a lot of positive impact from the cost reductions, but we are talking about I think your numbers for year-over-year sales changes were probably a little bit higher than I would assume. Remembering and that we also have a full year of Startco in 2009, which should be about $20 million of revenues as oppose to the roughly $4 million that we had in 2008, or picking up $16 million on Startco. To answer your question generally right, we are expecting particularly as we get out to the middle of the year that those cost reductions are going to flow to the bottom-line, and they are going to offset, more than offset the pretty severe negative operating leverage that we are going to experience. We still believe that even with the huge negative operating leverage that you talk about that we still should see some modest improvements hopefully in operating margins and other things even at those levels. Certainly we can get up to the $120 million, $130 million quarters, we can be very profitable at those levels for the cost structure that we are going to have by the middle of the year.

Okay. But if you think about, for first quarter you have huge negative operating leverage and no real impact because it's all an inventory. Second quarter, and I am just roughening this out, you think about it has drawn even and then, as you get to the back half of the year those cost reductions really kind of kick in more than the negative operating leverage?

Yes, they do. And we were expecting just seasonally, we would expect some better sales results. We expect to get pass this, what we think it is going to be a very depressed first quarter, even with the current state of the end markets, which obviously is very weak. We still think the sales numbers when we get out to Q3 will be significantly higher than the Q1 numbers, even with no improvement in the end markets.

Okay. Great. Thank you, Phil.

You're welcome.

And at this time we have no further questions. Mr. Hunter, I will turn the conference back over to you for any closing remarks.

Thank you for joining us on the call this morning. I hope our comments have addressed the current economic environment for our business and what we are doing both short-term and long-term to meet the challenges ahead while continuing to build our position as the global leader in circuit protection. So, thank you again for your interest in Littelfuse and we look forward to talking to you again next quarter.

And that does conclude today's conference. Again thank you for your participation. You may now disconnect.