Good day, everyone, and welcome to the Littelfuse Inc. First Quarter 2012 Conference Call. Today's call is being recorded. At this time, I will like to turn the call over to the Chairman, President and Chief Executive Officer, Mr. Gordon Hunter. Please go ahead, sir.

Thank you, and good morning. Welcome to the Littelfuse First Quarter 2012 Conference Call, and joining me today is Phil Franklin, our Vice President of Operations Support and Chief Financial Officer. As you saw in the news release, our sales and earnings for the first quarter were both above the guidance we provided in our fourth quarter conference call. Sequentially, first quarter sales increased for all 3 business units, and our margins also reflected the higher sales. Year-over-year, our first quarter sales were down as a result of a continued inventory correction in the Electronics business. The good news is, we believe the inventory correction is now behind us, as reflected in our increasing shipments and the strong first quarter book-to-bill ratio. I'll have more comments on the quarter on each of our business units, but I'll first turn the call over to Phil, who would give the Safe Harbor statement and a brief summary of the news release.

Thanks, Gordon. Before we proceed, let me remind everyone that comments made during this call include forward-looking statements based on the environments as we currently see it, and as such, do include various risks and uncertainties. Please refer to our press release and SEC filings for more information on the specific risk factors that may cause actual results to differ materially from those expressed in forward-looking statements. Sales for the first quarter of 2012 were $160.6 million, which was up 9% sequentially, but down 5% year-over-year. The Electronics inventory correction, which impacted us significantly in the fourth quarter, continued to affect us in the first quarter. However, order and shipment rates improved as the quarter -- as the first quarter progressed. Margins and earnings for the first quarter also increased compared to the fourth quarter, and were above the high end of our guidance, due primarily to improving electronic sales. Earnings per share for the first quarter of 2012 were $0.81 compared to $0.96 in the first quarter of 2011. The primary reasons for the year-over-year decline were lower electronic sales and production volumes and the effects of a weaker euro. Operating cash flow was on track in the first quarter at $8 million, after funding the $5 million voluntary pension contribution and paying out over $10 million for 2011 bonuses. Now I will turn it back to Gordon for some color on market trends and business performance.

Thanks, Phil. Now let's move on to the review of our 3 business units. As always, I'll be highlighting the markets, products and design wins for each business to give you an overview of the many ways we are benefiting from our broad and deep product portfolio, our growth strategies and industry leadership. Let's start with Automotive. The first quarter Automotive sales of $52.6 million were 33% of total Littelfuse sales. Automotive sales increased 15% sequentially, but were down 2% compared to last year's record first quarter. The decline was due to a weaker euro and a favorable impact in last year's first quarter of a onetime stock fill for our newly won contract with O'Reilly Auto Parts. And this was partially offset by increased sales of commercial vehicle products. The double-digit sequential improvement over the fourth quarter of last year was primarily driven by higher sales in North America and Europe. Global car production for the first quarter was up approximately 2% from the fourth quarter. Our higher percentage increase was due to several new programs that started to ramp up late last year and are now generating increased revenues. A bright spot for us in the first quarter was a double-digit sales increase in the U.S. This was mainly driven by increased production for the big 3, as well as incremental sales to a key customer for a temporary production fix that we'll phaseout during the second quarter. The increase in our European sales was due to strong sales of VW cars, where we are very well-positioned, along with increased sales of our high-current products, such as MasterFuse, that we have introduced over the past few years. While Europe had solid overall performance for the quarter, we are seeing a slowdown by French OEMs, as they are delivering…

Thanks, Gordon. The following is our guidance for sales and earnings for the second quarter and comments regarding cash flow for the remainder of the year. Sales for the second quarter are expected to be in the range of $168 million to $178 million, which represents 5% to 11% sequential growth. Earnings for the second quarter are expected to be in the range of $0.94 to $1.04 per diluted share. As is typical for our business, we expect operating cash flow to improve as the year progresses. We also expect capital expenditures to increase over the next few quarters related to capacity expansions in support of our growth initiatives. The highest priority for our free cash continues to be acquisitions, and we are currently active on the M&A front. This concludes our prepared remarks. Now we would like to open it up for questions.

[Operator Instructions] Our first question comes from Shawn Harrison from Longbow Research.

Just first question, maybe you could talk about the demand environment in terms of, are you seeing restocking now in the channel or are you just back to kind of a normalized pattern? How did April go relative to March, maybe just a little bit kind of what you've seen so far in the second quarter?

Yes. I think that the book-to-bill number obviously shows that we've seen that strengthening, and it's been really as we predicted starting from slow start to the year with particularly, with the Chinese New Year in January and then gradually through the quarter getting stronger and continuing. And so we -- everything I've said there, in the section about the inventory is that we are pretty confident it's all behind us. I mean the level of orders that we see and what we call the PLS data, the sales from our distribution channels to the end markets are also picking up. And that's really the leading indicator that tells us that the distribution channels have the appropriate level of inventory, and they're going to start reordering and we expect it to strengthen.

And the positive trend, Shawn, that we mentioned -- that we saw towards the latter part of the first quarter, those trends have continued into Q1 in terms of good order rates and good book-to-bill.

Okay. And then just as a follow-up question, within the guidance forward to the June quarter, it looks as if there may be some incremental costs coming back, just kind of incremental EBIT margin looks a little lower than what you would've seen off the bottom in the March quarter. If you can just help out either-- is there some COGS pressure or something coming back in SG&A.

Well, we're certainly expecting significant sequential margin improvement going from Q1 to Q2. I think that in terms of cost pressures that we're currently seeing, we're certainly seeing some effects of the weaker euro is pressuring margins a bit in our European business. I think we had about $1.2 million of euro impact in Q1 versus the prior year quarter. We've also seen, as a lot of people have, higher transportation costs and some other material costs driven by the higher cost of oil. But -- and obviously, the wage pressures in China and some of the other developing countries continue as well. So we're definitely facing some margin pressures. But Gordon mentioned a whole series of cost reductions that we're working on and those combined with the operating leverage that we'll see in the business as the business recovers. We're -- I mean we're very confident that we'll see operating margins, if not in the second quarter, certainly in the third quarter back up to the levels we were seeing at the kind of the peak quarters last year.

Okay. And I guess that implies incremental gross margin is kind of in the mid-40s going forward, is that the best way to think about it?

Incremental gross margins, I would say, would be probably closer to 50%.

Our next question comes from Param Singh from Stifel, Nicolaus.

This is Matt Sheerin calling in. So a question, Gordon, on the Auto business, it looks like that was a bit better than seasonal and certainly you're not the first supplier to talk about robust sales there. Could you remind us what the geographic breakdown of your business is now by region? And then also talk about electronic content trends, is that beginning to also have a favorable impact on your broader business there?

Yes. First of all, I think it is robust. I think that having the geographical presence that we've got has been strong. And I think we've said several quarters that we've been surprised how Europe, with the macro problems that we hear about Europe, how strong the European Automotive business has been, and a lot of that has been European exports. For a long time in our passenger car model before, we talked about CDP and the addition of Cole Hersee, the European business was the largest part, sort of in the mid-40s as a percent of the total business, and really was driving the last couple of years, particularly with the strong euro as we sell in euros in Europe. I think it's continued because of the strength of a lot of the German manufacturers with their exports with -- particularly the high-end BMWs and Porsches being successful in exporting to China and the Middle East and Russia and even India. So there's been very strong health in the German automotive mark through exports. Obviously, that percentage, when we now look at our bigger Automotive segment since the Cole Hersee acquisition, which had brought about $50 million of revenue, was mostly a North America business that we are really trying to expand into other parts of the world as part of our strategy in commercial vehicles. So that 45% or so was sort of a model number for passenger cars has obviously been diluted level a little in the overall market. Regarding your second question about Electronics content, absolutely, a main driver for our business, I mean the fuse content and circuit protection content continues to be increased with demand of electronics in vehicles. But it's also really a significant reason that we focus on the commercial vehicle segment because there's even more dramatic increase in electronics content in commercial vehicles. If you look at new agricultural and construction equipment, it's got a lot of electronics content in there. And it needs to be very specialized as it's in very harsh conditions, tough environments that it works in. And so making really robust, reliable products for electronics in commercial vehicles, as well as passenger cars, is a major part of our strategy, and we believe that's a real growth opportunity for us.

Matt, to your question, specifically on the percentages, in the passenger vehicle, as Gordon said, 45% maybe that's declined a little bit as some of the other markets have been a little stronger than Europe of late. So it's 40% to 45% for Europe, about 30% to 35% in the U.S. and about 25% in Asia. Obviously, that -- if you look at the whole Automotive segment that we report now, as Gordon said, that includes Cole Hersee and that which was primarily North America. So North America with Cole Hersee is closer to 50% of our total Automotive segment now.

Okay, that's helpful. So -- and then just sticking to Auto, if you look at -- and you're just coming off of obviously a very strong quarter, anything typically seasonal you see, sort of a mid single-digit sequential increase in June and then it's down in September because of the product changeovers and that sort of thing. Is that sort of how you're feeling about how Europe plays out?

I think because of the strong first quarter in Cole Hersee, generally, the first quarter is seasonally the strongest quarter for them, I would expect Automotive to look pretty flat going from Q1 to Q2. And then typically Q3 is a little bit lower for Automotive.

Okay. And then on an operating or EBIT margin basis, is that kind of flattish too or just mixed change that for that segment at all in the coming quarter?

I think that probably as a result of some of the things we're doing on the cost side, Gordon mentioned a couple of them, we would expect some EBIT margin improvements in the Automotive business as we go through the year.

Our next question comes from Tony Kure from KeyBanc.

Just to round out the Automotive discussion I guess and just sort of revisiting some comments from prior -- from last quarter, as we look at a pretty -- a little bit of stronger-than-expected first quarter, I think it's fair to assume, with the production being still forecasted 5%, that the Auto business for you, with the commercial vehicles now, should grow mid- to high-single digits for the full year? Is that a fair way to think about it?

I think mid- to high-single digits is a rule of thumb in terms of what we think we can grow in a typical year going forward. I think that's about right. I think that -- I'd probably characterize it for 2012 more as a mid single-digit kind of growth year is our expectation, particularly, given the euro -- some of the euro weakness, which is going to -- that's going to probably give us, in the Automotive, at least 1% or so headwind on growth and just some of the concerns about the European domestic market. We keep that number probably more towards the mid-single digit rather than the higher single digit that we might more typically expect going forward.

Okay. And similarly, if we look at Electronics, I think we're talking about sort of a flattish type, maybe up 1% or 2% growth environment organically for Littelfuse in 2012. Does that still hold even with a pretty good start to the year?

Yes, I mean I think, that -- we're still expecting to grow that segment this year. And obviously, even with a slightly better first quarter, we're still going to have to see some pretty good acceleration in Q2 and Q3, which is what we're currently thinking and currently planning for. So I don't think our views in terms of year-over-year growth for that segment has really changed.

Okay. And then my last question is just around the investment in Shocking Technologies. I guess, you give a little bit of what they do for those of us who aren't electrical engineers. Can you just talk a little bit more about sort of the strategic fit and the rationale behind the investment?

Yes. It's not very often in the what we call "the circuit protection area" that's something really different comes along and this is really a potential game changer in the way circuit protection is embedded, particularly into a cellphone circuit board. So usually, there would be components that would be embedded onto a circuit board in the cell phone. And what's Shocking has really developed is a way of embedding the polymer material, that's the ESD protection material, laminated into the actual circuit board manufacturing process. So it's a way of making a circuit board more robust in the manufacturing process and also more reliable, but embedding it at a much earlier stage of production rather than adding a discrete component under the board.

And probably, on a typical board, there'd be a dozen or more discrete components that the ESD Protection, probably more than that. So you eliminate all those discrete components by embedding this material.

So it could be said that it's a little bit defensive of defending the discrete components. But I think it's more, that if this is a game-changing way of doing really the very, very technical and very precise circuit boards that now go into smartphones in particular, that's sort of an incremental market for us, where we haven't really had a strong position. And we look at that as being, if this is a disruptive technology in the sense of how to put circuit -- how to put circuit protection into a cell phone or in a smartphone, that's incremental growth for us and really fits right in the place where we have the knowledge of circuit protection.

Is this -- Shocking, do they have patents on this? Is this something that is -- or does it change so fast, they don't even bother with patents? And just maybe give an idea of where Shocking is in this nascent market?

Absolutely. Patent's very strong, which is a very important part of this. The manufacturing process, obviously, will be something, it has to be an industry-standard and has to work with the manufacturers of the circuit boards and the population of the circuit boards. But the material itself, that is where the real secret sauce is and they have a very strong IP.

[Operator Instructions] Our next question comes from Peter Lisnic from Robert Baird.

First question, Phil, just on the model outlook. With the second quarter guidance, is it safe to say that full year still top-line consistent with kind of what you layout with 10-K?

Yes.

Yes, I don't think we really see any changes there. And as we've said before, we still think we can -- relative to last year, we can grow both the top and bottom line.

Okay. All right, fair enough. And then the comments around oil and gas being strong, I was wondering if we could break that apart a bit between oil and gas and maybe talk about the global opportunities that you see in gas specifically? And then if there's anything on the LNG side where you might be able to benefit from that potential trend, that would be useful information as well.

That's a good question. But oil and gas is a general term for that market segment. As we've said, our major focus has been mining, and our sort of next step into this, in some ways, the Canadian oil sands could be characterized as being the oil and gas segment. But it's sort of very closely linked to mining because the methods of getting oil sands out of the ground are very much linked to a special kind of mining. But it's sort of -- obviously, to do that is to get oil from the tar sands. So I'm using that term, generally, we don't have a lot of presence in that market, but we believe the market opportunity is huge. So I think at some stage later, we'll probably start talking about more specifics, the Canadian oil sands opportunity where we're going first. And then oil and gas opportunities. This clearly is a macro market, something that's got huge investments going into it in the infrastructure. There are many places where our Protection Relays have been used in oil segments and gas. But I think that we are looking at that as an opportunity for more understanding as we've learned from the mining segment, and think that there'll be decent and good opportunities for growth.

And we have opportunities all the way along basically that -- at that supply chain, everything from the front end, drilling and production to the back end, refining to the good oil sands that Gordon mentioned. So we haven't really parsed it that finally between oil versus gas. But as we get more into those markets, we can probably give you some more color on that.

Okay. And then I was just going to ask whether or not fracturing or hydraulic fracturing would be one of those opportunities as well and whether or not you had any color on that one yet.

It's not as obvious that, that is -- I think that there may be some opportunities there. But for example, it's not as clear an opportunity as the oil sands in Canada is for example.

Okay. Got it. And then Gordon, couple of quarters -- or at least a couple of quarter in a row of comment on lighting. I'm just wondering if you're seeing increased inquiries, if you will, just based on what looks like stronger, faster adoption of LED technologies.

Absolutely. I mean you can see this at the consumer level. The price of light bulbs, if you go to Home Depot, you can see the LED bulbs that were available a few years ago, much more expensive than today. And the lumens output of light from these bulbs are much more light-weight replacement bulbs you'd use at a much more reasonable price. And the first place for all of this is really more in the commercial industrial segments. And as the costs come down, the adoption goes up, the payback period of that investment is much shorter. And we are seeing it in our sales. It was a market that we -- I'd say, if we weren't that sure, we'd really have circuit protection content that would be significant a couple of years ago. And it's keeping a very strong momentum. And it's several different products that we're seeing in there: TVS diodes, Metal Oxide Varistors as well as fuses. So it's a protection of the power supplies that are inside these LED lights. And we are very enthusiastic about it.

Okay. As the business buys more toward the commercial luminaire side of the business versus consumer now? Is that safe to say?

It is. Although, we are -- I would say, it's fair to say we're surprised by the consumer part. But I think that -- I guess our feeling is that when these bulbs become really low-cost, and there's a belief that an LED replacement bulb will be less than $10 and then the market will really take off, when it become a standardized design, I think the circuit protection content in a low-cost consumer bulb will be relatively small. So we're being very cautious about that part. But for protecting the power supplies and the industrial segments or street lighting or commercial light areas, we think there's a very good opportunity.

Our next question comes from Alek Gasiel from Barrington Research.

All of my questions have been answered, however, I got a couple. Just curious in commodity year-over-year impact.

Could you repeat your question?

Back with your commodity year-over-year impact from commodity prices.

Probably not significant, if anything. If you look year-over-year, there'd probably be a slight benefit. I think copper prices were slightly lower in the first quarter of '12 versus '11, but not a material impact on the business one way or another.

Okay. And then with the tax rate, I know a little higher in the quarter, down for the year, do you still expect 28%, 28.5%...

Yes. I would expect for the year, 28%, or possibly even a little bit lower than that. I think we have mentioned on the last call, and it's still the case, that we'll have a little bit higher rates for the first half of the year. We are expecting -- we're working on some things from a tax planning perspective. It should help us probably very late in the year. We also are working on attaining some lower tax rates at least in one of our China locations, with a high-tech exemption there, which could give us some benefit in the second half of the year. So I think 28% is probably a safe number to use for the year. But it could be a little bit lower than that, depending on when some of these tax savings come through.

Okay. And I might've missed this part, so I apologize for this question, just sequentially the gross margin and SG&A going from Q1 to Q2, I mean did you guys say something about sequential improvement in that or...

Yes, I mean there would be sequential improvement driven largely by the operating leverage. So I think if you figure the revenue increase and assume, as we mentioned, that it's about a 50% variable contribution margin on that additional sales, that gives you 100-some basis points of gross margin improvement.

Okay. And one last question. This was on the call concerning -- I know you guys aren't economists, but with the mood in Europe and hearing some of the softness in Asia, wonder if you could provide me additional color on that at all.

Well, I think that for us, certainly in Europe, as I mentioned, the Automotive, Southern Europe is a little bit of a concern, the French and Italian OEMs. But Germany has remained remarkably robust, and that's the major market for us, for all of our businesses in fact. So certainly, it has impacted the solar business. The governments were very much behind the growth of solar with the feed-in tariffs. There were political decisions that drove a lot of the solar business. And that's certainly slowed for us. So it has impacted our business for sure. And I think the slowing of China, as the country just gets a much bigger economy, I think everyone expected that they're going to start slowing from double-digit GDP growth to high-single digit. But it's a much bigger economy, and I think we're still very bullish on Asia in general, as they try to control that growth and the size of the economy now. But I just recently read, the car manufacturers do not see the sort of flattening right now of the Chinese car market as a big concern, that their belief is that there's still many years of growth in China car markets. So I think we are still very bullish about the continued growth in Asia. And while we are concerned about Europe, I don't think that we're overly worried about the impact on our business. Phil, would the Dartmouth comment be any different from the London comment?

I think that I'm in agreement.

Okay. So now, I mean if there's conserve a double-dip in Europe and that kind of impacting everything else of lower expectations or something like that?

Correct.

The next question comes from John Franzreb from Sidoti & Company.

Gordon, in your prepared comments, you mentioned some enthusiasm about the ultrabook sector relative to what we're seeing the decline in the PC market. Wondered if you kind of put some numbers around that, give us a sense of what your average content is in ultrabooks relative to PC, so we could kind of get a handle on -- as one improves and another one accelerates, what would we look forward to?

Yes, we sort of believe that, that goes through different refresh cycles. And there's not really been a compelling reason to replace your laptop either at the enterprise level or personal level in the last year or 2. But with Windows 8 coming and the emphasis that Intel has had. Intel's certainly pushing very hard for their new processors into the ultrabook market. And our content is not so different to where it was really with laptops. And we've always said that's a pretty big range depending on the number of ports and power supplies that they're protecting. So it might sort of average around $1.50 a laptop, but the range could be from $0.50 up to a couple of dollars. I don't think it's a significant change in content per machine. But it's just that I think we'll see a bit of a rebound with Windows 8 and much sleeker machines becoming available. And looking at the market predictions, they've been expecting to see market growth in the second half.

I think the $1, $1.50, that would presume that we have all the circuit protection content in the device. So that would be kind of at the high end, I think, of what we would grab the opportunity for.

Okay. And just switch gears here. Your commercial vehicle sales, just can you give me a sense of how much of total Automotive sales are commercial vehicles?

Yes. I mean with the Cole Hersee business, which is in the neighborhood of about $50 million. And then I think the Littelfuse piece of that is maybe another $15 million or so, something like that. So we're in the $65 million range. So it's starting to get -- approaching half of our total Automotive segment, not quite there yet.

Okay. And what are you hearing from the customers on that side of the market? Are they looking for continued strength or what's the feedback you're hearing on the commercial vehicle market?

Yes, I think that -- first of all, I think the answer is sort of it's many different segments. Those that are doing large truck have a different dynamic to those that are making construction equipment or mining equipment. Certainly, mining equipment is very strong. Construction equipments remain to be pretty strong, and there seems to be a rebound in heavy truck. So it really does depend on the exact vertical segment there. But overall, I'd say that this market is very healthy. There's a lot of expansion in infrastructure mining, construction around the world. And I think you see the growth that Caterpillar's had the last couple of years in their global business. And saying it's finding the sweet spots of those verticals for us to work with that we've really been focused on.

Okay. And lastly, if you said anything about this topic, I apologize. M&A potential -- M&A targets in the year, what's the pipeline look like and can you just update us on that?

Yes. I think as I mentioned in my comments, John, we're quite active in the M&A market right now. There are quite a number of opportunities that we're looking at and working actively on. They're very -- I mean, none of them would surprise you. They're in the areas that we've talked about. They're in the size range that we've typically talked about and done. And we're pretty confident that we're going to have some things to announce later this year.

And we've added a very smart new person in corporate development. So investing in people in that area, I think is an indication that it's one of our strategic initiatives. And we believe that it's a key part of Littelfuse growth.

Is that the primary use of capital at this point, you do tend to build cash rather quickly?

Yes, I think we've said that it's a strategic initiative. We believe the acquisitions we've made have been-- fit to strategy. There've been good bolt-on to the business. And we absolutely believe it's the best use of cash. I think if we look back at, certainly, at Startco and the Cole Hersee and Concord Semiconductor, those have all been, I think, very good uses of cash.

I'll think you'll see, over the next 2 or 3 years, I think you'll see a seasonally higher percentage of our cash for that than maybe what you've seen over the last 3 years.

We have no further questions at this time. I would like to turn the call over to Mr. Gordon Hunter.

Thank you for joining us on today's call. 2012 is obviously off to a good start, and we look forward to continued progress in the second quarter and beyond. And so we appreciate your interest in Littelfuse, and we look forward to talking to you again next quarter. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.