Good day, everyone, and welcome to the Littelfuse second-quarter 2015 conference call. Today's call is being recorded. At this time, I will turn the call over to Chairman, President, and Chief Executive Officer Mr. Gordon Hunter. Please go ahead, sir.

Thank you and good morning. And welcome to the Littelfuse second-quarter 2015 conference call. As always, joining me today is Phil Franklin, our Executive Vice President and Chief Financial Officer. As you saw in the news release, we outperformed our earnings guidance in the second quarter. The automotive business continued to be strong and the electrical business improved, while electronic sales were sluggish. We continue to focus on operational excellence with improvements in our manufacturing performance as well as good results from our cost-containment efforts. This strong operational performance helped offset the somewhat slower seasonal sales ramp-up in electronics and continued weakness in the Euro. I'll discuss the second-quarter performance in more detail in a few minutes, but first, I'll turn the call over to Phil, who will give the safe harbor statement and a brief summary of the news release.

Thanks, Gordon, and good morning. Before we proceed, let me remind everyone that comments made during this call include forward-looking statements based on the environment as we currently see it. And as such, do include various risks and uncertainties. Please refer to our press release and SEC filings for more information on the specific risk factors that may cause actual results to differ materially from those expressed in forward-looking statements. Sales for the second quarter of 2015 were $222 million, which was up 1% year over year and up 6% in constant currency. GAAP earnings for the second quarter were $1.26 per diluted share compared to $1.08 for the prior-year quarter. Excluding special items, earnings for the second quarter were $1.33 per diluted share, which was up 6% compared to the prior year. For the quarter, we were able to more than offset the significant euro headwind with improved operational performance and good expense control. We also had another strong quarter for cash flow. Through 6 months, we have now generated cash from operations of $62 million, which is up 46% from the prior year. Capital expenditures of $26 million for the first half are also well ahead of last year as we near completion of the new Philippines plant and add production capacity for new automotive products. Now I'll turn it back to Gordon for more color on the business performance and market trends.

Thanks, Phil. I'll begin the segment reports with electronics business, which accounts for about 47% of total Littelfuse sales. Electronic sales were down 1% in constant currency from the second quarter of last year. As we indicated in the news release, a slower seasonal ramp-up for core products and capacity constraints for our sensor products related to the transfer of production to the Philippines were the primary reasons for the lower year-over-year sales. Sales were up 6% from the first quarter, with growth in all regions. Electronics channels inventories were up slightly at the end of the second quarter compared to the first quarter, with most of the increase in North America and, to a lesser extent, Taiwan. This is reflected in the book to bill of 0.94 at the end of the second quarter, as North American distributors in particular are placing orders with very short lead times. And while there is definitely some sluggishness in the overall market, we are not overly concerned about this book to bill number as end-customer bookings remain steady and our book to bill for July showed some improvement. Now I'd like to highlight some of our design wins in the second quarter. Our LED surge protector modules, new surface mount fuse products, and semiconductor products for automotive electronics all continue to build momentum. We've talked about the outdoor LED lighting market before, but I want to highlight it again because the demand for energy efficient, low maintenance outdoor lighting systems is continuing to grow at a fast pace. The market is in the early stages of a move to more global LED lighting due to the benefits of energy efficiency and low maintenance and we are well positioned to benefit from this market growth. Our surge protection modules improved the reliability of…

Thanks, Gordon. Sales for the third quarter of 2015 are expected to be in the range of $211 million to $221 million. This represents approximately 4% growth on a constant currency basis at the midpoint. Excluding special items, earnings for the third quarter are expected to be in the range of $1.24 to $1.36 per diluted share. This includes negative currency effects of approximately $0.10 per share compared to the prior year. This concludes our prepared remarks. Now we would like to open it up for questions.

Thank you. We will now begin the question and answer session. [Operator Instructions]. Our first question is from Matt Sheerin from Stifel. Your line is open.

This is Nikhil Kumar for Matt Sheerin. Just a quick question on your electronics business. You talked about weakness in the June quarter. Can you talk about what you're seeing so far in the quarter and what's your book to bill so far in the quarter?

We're not going to -- we don't talk about intra-quarter book to bill. We did say in the prepared remarks that book to bill did improve in some in July. Generally, we're seeing continuation of the same trends we saw in the second quarter with distributors: pretty short order cycles, pretty short lead times. But end markets seem to remain fairly stable -- not great, but stable. We -- I think Gordon mentioned on the call that we are seeing book to bills at the end customer level -- i.e., the distributor's book to bill for our products is generally close to one. So we're not overly concerned about the low book to bill, but -- for electronics, but we do recognize that it is an indicator of a somewhat slower seasonal ramp-up than we would normally have.

Okay, thank you. And just a follow-up question. You're seeing a strong growth here in your automotive segment. Can you remind, what's your exposure in China and what you see going forward, given this macro slowdown in the region?

So we have about 25% -- a little over 25% of our revenue for automotive goes into Asia. China is the biggest piece of that. So I think it's approaching -- it's not quite 20% of the automotive business, but it's approaching that kind of a number. I think we have seen a little bit of slowdown in China. Clearly, the car build has flattened out, but we still have a very good content play going on there. So our growth is still running in the mid- to high-single digits, even on flat car build.

Our next question is from Shawn Harrison from Longbow Research. Your line is open.

Good morning. So going back to the electronics business once again. If you could just provide a little bit more color maybe -- was there any impact from direct business? Was it solely distribution in certain markets? You said the markets were okay. You had mentioned the distributors. So Arrow, they just posted a 1.02 book to bill. So just curious if you could comment on that a little bit more. And then the July improvement, while you don't comment intra-quarter, can you give us an idea of it's close to parity now or is it above parity?

We're not going to comment any more on the book to bill than we have already done. I think the -- what clearly continues is with the relatively short lead times that most of the suppliers into distribution are able to provide right now, I think the distribution channels are just being very cautious in their ordering. And given some of the -- not necessarily weakness in the end markets, but sluggishness or certainly a little bit of uncertainty there. I don't think there's any particular end market that we've seen that we are concerned about. Certainly the TV market, which has been widely talked about -- that has impacted our Korean business, which that was a significant part of our Korean business. And Korea is, as Gordon called out in his remarks, has been one of the causes for the weaker second quarter for electronics than we had originally assumed. But we have lots of other segments that are doing fine.

Great, thanks. And then just kind of going back to cash deployment. So while we appreciate the dividend increase and then looks like you have two deals that you'll close relatively [soonly] how does the pipeline look for the rest of the year? And how close are you -- I think that you had previously mentioned a desire to complete more deals in the second half of the year. So just curious about the remaining pipeline.

Yes, as I mentioned, the pipeline is growing, so we have got more and more activity. We have put more resources into it over the last year. And we're very pleased with that. But some of these just take a long time to get into fruition. And it depends on the right fit, the right strategic fit. We're very pleased with the two small deals in the sense of the technology fit for us, so it's important that we find good quality companies with good technology, good market position. And we have got a healthy pipeline going to the second half of the year, so I'd say we are optimistic about that. But it takes time to get deals to come to fruition and the timing is often unpredictable. But we are still very optimistic about it and still working very hard in that area.

I'd just might add to that that as we mentioned, I think, on our last call and have mentioned in the past, we are working on a few larger deals. And I think are -- some of the decisions that we'll be making relative to capital allocation targets will largely be driven by how those deals progress or not. Because these smaller deals are great, they're going to help bring us technologies that we can grow over time, but they're not going to have a significant impact on the capital allocation.

If I could squeeze one more in. I think you typically provide some regional growth rates or the breakdown within automotive. Are you able to provide that? And then also comment on any flowing in the content story. It seems like in Asia, you said it's not flowing. What about the other regions?

On the automotive side, we did say that the -- all regions grew in constant currency grew double digits for the quarter year-over-year. But we're not providing any more specificity than that.

All right. And the content story hasn't -- is unchanged, right?

Yes, content story I think is still very healthy. We have talked a lot about design wins, so we do give some look into the future. And I think the new products that we've qualified from the electronics side into the automotive electronics segment is something where we have a relatively small share. And we see that is a big growth opportunity. So while we have done I think a very good job in circuit protection inside the low current fuse box in the vehicle and the high current opportunities that have come through the different vehicle architectures that we've talked about a lot with our Masterfuse products, I think we're in very early stages of getting more content in automotive electronics and having more products to offer there. So as I talked about, not just our TVS diodes, but our TVS diode arrays for ESD protection in the infotainment systems. So I expect the content play to continue for quite some time, as manufacturers are really differentiating their vehicles around the electronics that they offer and that's what consumers demand. So we think we have got quite a long-term growth opportunity in the automotive electronics segment.

The numbers Gordon mentioned in his remarks indicate that the content play is very much still in place and intact, with us able to grow our automotive fuse business 6% in constant currency and flat with flat car build. We grew our sensor business 20% in constant currency -- over 20% in constant currency with a flat car build. Now, some of that is content and some of that is winning some additional programs and beginning to take share in some of the parts in the market for the sensor piece. But clearly, a meaningful piece of that is the content play.

Our next question is from Tim Wojs, from Baird. Your line is open.

So I guess just on electronics. I think historically, the sequential revenue growth on an organic basis in electronics has been down maybe 2%, 3% from Q2 to Q3. And I guess I'm just curious, just given the lower book to bill, are you expecting within the guidance range you provided on total revenue that typical seasonality holds? Or should we expect it to maybe a little bit weaker than history?

I think the book to bill is probably not indicative that we're going to see that much of a drop, but clearly, we are seeing less than seasonal performance. Or at least we're setting up for less than seasonal performance for the electronics business for Q3. Fortunately, electrical seems to have some pretty good momentum right now, being in recovery mode. And automotive continues to show steady growth. So the guidance would assume that we're able to get some offsets from the other two businesses, but certainly electronics is expected be somewhat weaker than normal seasonality.

Got you. Okay, no, that's helpful. And just around EBIT margins within electronics. You guys have done a great job over the last few years improving those. I know FX is a little bit of a headwind as well, but is there anything outside of maybe seeing a more cyclical downturn in electronics that you can't sustain the 20% margins in electronics?

I don't think so. I think the electronic fuses and the semiconductor products should be able to continue to perform at similar margins to what we have been able to achieve in the recent quarters there. I think the opportunity actually there is with the move of the reed switch sensor components to the Philippines that we're in the process of doing. A significant part of that benefit will accrue to the electronic sensor part of the business. So we expect those margins to go up considerably once that move is completed. So I think that will add a little lift when it happens to electronics as well as some of the automotive as well.

And then I guess just talking about automotive. The margins there were really good and I think that FX actually has a pretty adverse impact there. So if I back that out, I think margins -- I'm calculating margins may be being up 300 basis points in auto in Q2. And I think you also mentioned that sensors were very strong and I know that that's a little bit of a lower margin products. So I guess what is driving the increase in automotive margins? Is it just scale; is it mix? And then as we get into the back half of the year and into 2016, what's -- why couldn't margins continue to expand at that pace?

We think, as we have said in the past, Tim, the best opportunity we have for margin improvement in the business is within automotive. We have a pretty good improving trend that's been happening for little while now in the commercial vehicle business. That will start to plateau out probably sometime within the next year or so. But that's on the way up to 20%. The passenger vehicle business now is benefiting from the improvement in the Mexico plant metrics that Gordon referred to his remarks. And that was a meaningful part of the performance that we were able to achieve for the -- for earnings and margins for the second quarter. And we expect that to continue to get better. And then the sensor -- automotive sensor business is where we have the most opportunity for improvement, as we've talked about. I think we started to see a little bit of improvement this quarter, as most of that we haven't really implemented any cost reductions yet. Most of that's due to I think just that business starting to scale up a little bit more. But we will, over the next couple of years, we will see a meaningful change in mix there as well, as we have talked to before, as some of our newer higher-margin programs begin to ramp up. And some of the low margin programs that we inherited with the Hamlin acquisition begin to roll off. So I think all those things together will -- should enable the automotive margins to continue to improve over the next couple years.

Okay. No, that's great. That's really helpful color, thanks. And then I guess lastly, just in electrical, strongest margin performance there in -- since probably 2013. Is there -- is mid-teens kind of the good run rate now? Or is it just that custom was a little bit better in the quarter and that helped margins. And that maybe normalizes a little bit in the back half of the year?

I would say I think the performance for this quarter will be fairly indicative of where we are at this point. It will depend on top line, primarily. I think on the electrical side, we have some pretty high-margin products. And if we're able to continue to see recovery in the fuse business, which has been an ongoing trend for the last couple of quarters, which hopefully can continue. The custom business, as Gordon mentioned there, we have a lot of opportunities there. So as that business begins to recover even a little bit more, we should -- that should be beneficial to margins. And what would be really beneficial to margins if we could start to see some growth in the relay business. And that will be dependent on some of these new product wins that we need to see start ramping up. So I'd say there's further upside in the electrical business, but it's going to depend on the top line largely.

Our next question is from John Franzreb from Sidoti. Your line is open.

Everyone's trying to get their hands around the electronics book to bill, in part because of the magnitude that it's down. And over the last 10 years, it's not been close to this kind of a number. What kind of confidence can you give us that this is a temporary glitch and we're not seeing a more meaningful retrenchment in electronics business going into a key selling season?

We can point to a couple things, which we already talked about. I think if you -- one thing I'd point you to is the recent Arrow Electronics release, which indicated their business is actually holding up pretty well. They outperformed for the quarter; they gave I think pretty solid forward guidance. And both in -- their components business was holding up pretty well. So I think that is kind of indicative to me that at least broadly, the distribution business is not going into the tank and there's not some huge inventory retrenchment coming up. But clearly, we're seeing some softness there, but I don't think it's quite as soft as the 0.94 book to bill might indicate.

So you're not seeing any particular sector weaker than another? It's broad-based still?

Korea, we talked about.

Yes, but that's a region. I'm wondering more if it's a particular -- is it the PC market that's dragging you down?

PCs are certainly weak. TVs, in particular, for us where we had fairly high content and were doing fairly well a few years ago. We talked a lot about the success we were having in TVs with the Korean manufacturers and that business has certainly been hit pretty hard. So I think the healthy thing about our electronics business that we always go back to is we are in so many segments, even when TVs were doing very well and it was probably one of the biggest segments for us. It was never so big that it was dominating our results. And we're doing very well in lighting, we're doing very well in data centers, we are doing very well in Internet of Things related, we're doing well in wearables. So there's some good positive segments to offset the challenges in PCs and TVs. So I think that product diversity and market segment diversity is still very healthy for us.

The book-to-bill impact is probably most significant for North American distribution. And again, based on the [arrow] numbers, it would not seem to be as much an end market issue as it is the distributors are just being very cautious with their orders and their inventories.

Okay. Thanks. Fair enough, Phil. And one other question. Regarding the reed product line, you're capacity constrained. Is there an opportunity -- are you leaving money on the table in that business? Or do you feel like you can immediately get, once you transfer the facility to the Philippines, can you give us kind of a color of the opportunity there in Reed that you feel like you're not capturing?

Yes. So that business is running -- it has been running roughly about $10 million a quarter, $40 million a year. It was actually a little bit below that this last quarter and probably will be next quarter as well, and maybe even the following quarters until the time we really get that ramped up in the Philippines. We're starting to -- we have started to build product there already, and that will be ramping up during Q3 and further in Q4. And as we roll into next year, particularly as we get into the second quarter of next year, we should have significantly more capacity online there than what we've had in the past. So could that business be, rather than the slightly below $40 million that it's running now, it could be $45 million or $50 million fairly quickly? I think within a year or so, when we get the transfer completed, that's certainly reasonable to think. And longer term, certainly, we have aspirations of making it a bigger business than that by quite a bit.

Our next question is from Christopher Glynn from Oppenheimer. Your line is open.

Good morning. Phil, you mentioned the nice opportunity for mix improvement from automotive sensors over the next couple years. I think if we switch over to electronics, you've had a nice mix impact there as well in the recent past. My question is if over time you were to take electronics margin up to yet another level, would that more likely be driven by if it's around mix or plant productivity?

I think our plant performance with the Lean initiatives that we have implemented, when we have implemented them, as we have discussed in the past, particularly well in the electronics plants over in China and also in the Philippines. I'd say we're going to continue to drive those initiatives, but those plants are already performing at reasonably high levels. So I think further margin improvement in the electronics business is going to depend more on new products coming out that are at higher margins than our existing products and products that have some differentiation to them. And I think Gordon in some of his comments in the past has mentioned this up-into-the-left strategy we have, where we are building products that have more performance capability in a smaller package. But more of that we can do and the more of those products we can introduce ahead of our competition, the better our margin opportunity is going to be. But it's going to be mostly driven by new products and mix rather than further leverage of the plant performance, I think.

Okay. And then in terms of auto, I'm just wondering how much sensors might be growing aside from any one-time phase-in? And is the seatbelt buckle now at full penetration in Europe?

At full penetration. We're still -- in all of our sensor products, we're still at relatively small market shares. I don't think there are any of our sensors where we have more than 25% of the global market. We may have a little bit more than that in Europe, but we're still at relatively modest shares, even in the products that we are strongest in. So there's still quite a bit of share gain opportunity in North America. There is share gain opportunity in Asia and there's certainly plenty of share gain opportunity in Europe still as well.

Okay, that's good color. I also meant by full penetration, have the OEMs fully phased in the backseat?

Oh. No, that one's got a long ways to run. I think that one is really only starting to occur.

We have a question from Gary Prestopino from Barrington Research. Your line is open.

Most have been answered. But Phil, are we still looking at about $0.50 per share from currency effects for this year?

It's probably a little less than that, but I'd say it's probably in the $0.40 to $0.50 range somewhere. Yes, you got the right general range. It's probably a bit below $0.50.

[Operator Instructions]. We have a quarter from Josh Overholt from ICM. Your line is open.

Congrats on the sensor deals. Based on some of the past comments, I kind of thought you guys were being priced out of that market. Can you talk -- I know you wanted to talk a little bit later on that, but can you talk a little bit on valuation targets that you have as you're looking at these? Kind of remind us of your requirements.

These smaller sensor deals that we just announced, they are -- we have always said that some of the kind of smaller private companies we're probably not going to have to pay the multiples that are being paid on some of the larger ones that have been made publicly available. But I would say the sensor state is generally -- the multiples are still relatively high. For these smaller deals that we're doing, though, the real opportunity for us, it almost doesn't matter whether we pay 8 times or 9 times or 10 times or 11 times. It's really how well and how quickly can we leverage the top line with some of the new technologies that they bring us. And really, what these deals are doing for us are bringing us more product, more technology, that we can leverage through our existing channels. So to the extent that we can do that, the multiple is not going to be that important. The forward multiple is going to be fine on all these deals. The trailing multiple may look a little high relative to some of our historic deals that -- we feel like we're paying reasonable prices for these properties that we just announced.

You've also talked about trying to get some larger deals done in the back half of the year. We have seen -- as you've said, sensor multiples are pretty high for the publicly offered deals. You've talked about electronics potentially being an opportunity. Recently on a call, Ixis, which might seem to fit some of the criteria you guys have listed, talked about wanting something like 3 times sales as a sales multiple. Are you guys at this point some of the larger deals just getting priced out based on your discipline? Can you talk a little bit more on that? There have been a number of transactions in the electronic space closer to that three times sales multiple. How do you think about balancing valuation and really trying to get these done? And then also you want to return cash to shareholders. You've talked about potentially if you can't get the deals done. So how do you balance those two?

I'd say first of all, we'd rather get deals done then return cash to shareholders, if we can get deals done that meet our criteria. The larger deals, I think we will be willing to maybe pay a little bit more than we have for some of the smaller deals to get some larger deals done. I don't think there's anything in electronics that I can think of right now that we'd be willing to pay three times sales for. But we think -- I think there are a number of factors on some of these larger deals that we are going to have to get over the hump on. Valuation is not the primary deterrent at the moment. But certainly we're going to maintain our discipline, but we would rather get some larger deals done than return cash to shareholders if we can make it happen. But we're not going to overpay to do that.

Our next question is from Garo Norian, from Palisade Capital Management. Your line is open.

In past calls, you've kind of talked about maybe a underlying kind of fundamental EPS of $5 or better for this year if you X out the currency and kind of give credit for the R&D tax credit. Is that something that's still kind of good in your minds? Or have kind of the pieces, it seems like, probably underneath have shifted about a bit. So I'm a little confused as to whether or not that probably is still valid or not.

It's a good question. I think you're right; there has been a little bit of shifting in how we would likely get to that kind of a number. But I don't think the overall number corrected for currency has really changed. I think the top line for electronics is probably going to be a little softer than we thought, but we probably have some upside on margin from what we thought, particularly given the recent performance of the electrical and the automotive business. So I think we're still on track to be at a currency adjusted $5 a share number, which I think in the currency -- I think when we said that, we were talking about a euro of 1.13. I think our most recent look at the year would have it more at 1.10. So we may be a little bit below it on a pre-currency adjusted basis, but I think we're still pretty much fundamentally on track to that kind of a number.

Great. And then just secondly, directionally, what if I try to think about CapEx for next year. Up, down, flat relative to this year?

It's a little early to call that, but we had some big projects this year that will be nonrecurring, particularly the Philippines plant. That will be completely done. I think that will be completely -- that should be completely done this year. It's largely done now. We have had some pretty big automotive expenditure's this year, with some new products coming on-stream and providing capacity for those. We'll continue to have Masterfuse new programs that we have to invest in. But I would say if anything, CapEx next year should be a little bit less than this year. I mean, $40 million to $45 million that we have indicated we'll be at this year has been the highest number we have been at probably any time in the last five years. So I would expect next year would be maybe a tad below that number.

We have no further questions at this time. I will now turn the call over to Mr. Gordon Hunter for final remarks.

Thank you and thank you for joining us on today's call. We have made very good progress during the first half of this year and we look forward to updating again you next quarter. Thank you and have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.