Welcome to the Littelfuse, Inc., Third Quarter Fiscal 2016 Conference Call. My name is Jason and I will be your Operator. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session. And please note this conference is being recorded. I will now 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 Littelfuse third quarter 2016 conference call. Joining me today are Meenal Sethna, our Executive Vice President and Chief Financial Officer, and Dave Heinzmann our Chief Operating Officer. We are doing this call from our headquarters here in Chicago this morning and this is a very happy Chicago this morning after the Cubs' tremendous performance. We announced revised third quarter guidance on October 24, 2016 our third quarter sales and earnings finished at the midpoint of this revised guidance. Beyond the specific factors that contributed to the revised guidance it was another solid quarter. Our electronics and automotive segments performed well. The Industrial segment was down due to weakness in several end markets and we continue to take actions to further reduce our cost structure in this segment. I’ll now turn the call over to Meenal, who will give a brief summary of the news release.

Great, thanks, Gordon. Before we proceed let me remind everyone that certain comments we make on this call contain forward-looking statements. These forward-looking statements are not guarantees of future performance and may involve significant risk and uncertainties. We refer you to the Form 10-K and 10-Q as well as other SEC filings for more detail about important risks that could cause actual results to differ materially from our expectations. In addition, our remarks today refer to the non-GAAP financial measures, adjusted earnings per share and adjusted tax rate. These non-GAAP measurer are intend to supplement but not substitute to the most directly comparable GAAP measures. A reconciliation of these financial measures to the most directly comparable GAAP measure is provided in our third quarter earnings release available on our website. Now some highlights from our third quarter, sales in the third quarter of 2016 were $280 million. Sales were up 30% year-over-year and up 2% excluding revenue from acquisitions. GAAP diluted earnings per share was $1.35, and adjusted diluted EPS was $1.87. GAAP earnings included $17 million in pretax special charges driven by non-cash impairment charge related to the custom business within the Industrial segment. Excluding the special items, adjusted earnings per share increased 31% year-over-year. As we mentioned in our October 25 call, our full-year adjusted effective tax rate is now projected to be 18% versus the prior estimate of 22%. The third quarter adjusted tax rate of 11.2% which includes a year-to-date adjustment to an 18% effective tax rate. Interest expense in the quarter was $900,000 higher versus the second quarter due in part to the additional drawdown from our credit facility of $104 million purchase of the ON product portfolio in August. Cash from operating activities was $65 million for the third quarter of 2016. This was a $13 million increase versus last year and we have continued our focus on working capital. Capital expenditures were $14 million for the quarter which was about $5.5 million higher than last year, led by capital spending for recent acquisitions in integration activities, primarily PolySwitch. In summary, we had a strong third quarter across the business as well as the benefit from our 400 basis point tax rate reduction in our full-year forecasted tax rate. Now, I will turn it back to Gordon for more color on business performance and market trends.

Thanks, Meenal. Starting with the Electronic segment third quarter sales of $148 million were up 44%, excluding acquisitions sales increased 4%. As we’ve seen this year sales were strong in Europe and China and stable in North America. Japan and Korea remain sluggish. Margins improved in the third quarter. This was driven by favorable product and regional mix, strong operational performance at our plants in Asia, particularly our China semiconductor fab and some additional currency benefits. Electronics channel inventories were fairly stable versus the second quarter and are in line with our expectations at this point in the year. We saw a strong order rates in the third quarter that has continued so far into the fourth quarter. In Europe we saw increased demand for our products as part of the smart meter rollout and in applications for cellphone base stations, automotive electronics and led lighting. Our products were also selected for a smart meter program in South Africa that includes 500,000 meters. In China our fuses and custom BARISTA were selected for a datacenter power system, and as part of a large HVAC program. Battery's and appliances are two vertical markets we've targeted for growth. We have a significant opportunity in the battery category with the move towards USB type-C connectors for charging smartphones, tablets and other consumer electronics products. The new connector types provide more power at higher currents and can connect various pieces of equipment together, therefore requiring more robust protection to prevent overheating. This is a big change in the industry that will ultimately impact all of us as the new connector design is a more and more new product. And while this evolution in the early stages we are well-positioned and believe it will be very good for us in the months and years ahead.…

Thanks, Gordon. I'll start with our Industrial segment were third quarter sales of $26 million were down 16%. This was due to weakness across many of our key end markets including solar, mining and oil and gas. Looking at the fuse business we mentioned last quarter the extension of the solar tax credit stimulus in the U.S. is driving many solar OEMs to push out their projects. The weakness in the solar market was more pronounced in the third quarter then it was in the second, and we expect this to continue. On the positive side we had a very nice win during the quarter for our new high speed Q-series fuses for a new electric vehicle charging stand being manufactured by one of the industry leaders in electric vehicle charging here in North America. This is our first major design win for this new fuse line and an encouraging start. As part of our strategy into expand globally and into more attractive markets our Arc-Flash Relay was recently selected by a leading specialty glass manufacturer for the Company's plant in Japan. With the sustained weakness in the major end markets for our protection relay's and custom products we have been taking actions to resize these businesses, reduce cost and improve profitability. Last quarter we announced a restructuring of the business that is expected to generate approximately $1 million in savings by the end of the year, and $2.5 million annually going forward. In October we took another step to improve profitability with the sale of the portable electric E-House business located in Canada that primarily serves the mining and utility markets. As we discussed previously this business was lower in profitability and not consistent with our margin profile expectation. We expect the sale of this business to reduce revenue…

Thanks, Dave. Recently our semiconductor manufacturing plant in Wuxi, China received the 2016 Manufacturing Excellence Award from the Association for Manufacturing Excellence. The Award recognizes manufacturing plants for continuous improvement, best practices, creativity and innovation. Our Wuxi facility is the first plant outside North America to win this award. This is a tremendous accomplishment for the Wuxi team that has done an outstanding job in developing best in class systems and processes. We are confident we are well positioned for the future investments that we will be making in this facility. A few weeks ago, we celebrated the opening of our new Silicon Valley Technology Center in Fremont, California. This facility is located close to many of our customers, and will enable us to accelerate the development and validation of the next generation materials and products for the automotive and electronics market. One final note, we are hosting an analyst day on Friday, December 9 in New York City. We look forward to sharing an update on our strategy at that time. I will now turn the call back to Meenal who will provide the outlook for the fourth quarter, and then we will take your questions.

Thanks, Gordon. As a reminder, the fourth quarter of 2015 included an extra week. The impact of that week to our earnings was $9 million in additional sales and $0.02 of earnings per share in last year’s fourth quarter results. So far in the fourth quarter, we are seeing solid demand in the electronic segment and continued softness in end markets impacting our industrial segments. Our automotive business remains strong with continued content growth and design wins. As we noted in our press release, we expect Q4 auto revenue to be flat to last year largely based on expected timing for customer transitions out of some legacy auto sensor business. Based on the current economic environment in foreign exchange rates, we expect the following for the fourth quarter 2016. Sales are expected to be in the range of $270 million to $280 million. Excluding acquisitions, the impact of the E-House business sale and the Q4 2015 extra week, sales growth over last year would be 3%, at the midpoint of the range. Fourth quarter adjusted earnings per diluted share are expected to be in the range of $1.45 to $1.59. This assumes an adjusted effective tax rate of 18%. At the midpoint of the range EPS growth would be 26% growth over last year. The fundamentals of our business remain strong despite topline head winds from a few of our end markets. We remain focused on margin improvements in those areas of our core business, while continuing to drive integration efforts on acquisitions to bring margins in line with our long-term expectations. We are committed to sustaining our strong operating margins and cash flow and focusing on improvements when market and business conditions change. Now, we will open the phone for questions. I will turn it back to the operator. Jason?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Shawn Harrison from Longbow Research.

Good morning, everybody.

Good morning.

There is no joy in Mudville, here in Cleveland this morning. With that aside I have a two part question on auto, if I may. First, on the China incentive dynamic, how much of a drag, if any do you think that will be in 2017? And then just, a clarification, the inorganic contribution to revenue in auto for the fourth quarter will be about $40 million give or take year-over-year?

Let me take the question on the China incentives. As we talked about obviously in the third quarter we saw performance driven out of that program, fourth quarter so far still pretty strong, but that may tail off towards the end of the quarter. There is kind of mixed opinions on the impact of what that will look like going into 2017. But our view would be that growth in car build in China will certainly soften the amount of growth that we have seen in the last couple years due to the incentive, most likely rolling off.

And then, Shawn on the second part of your question if I understood it correctly, you were asking about the inorganic, or the acquisition impact year-over-year in automotive. For automotive, we have both the PolySwitch acquisition, and then our Menber's acquisition. Both which really only would have impacted the first quarter. So for 2017. So really, once we get into the second quarter of next year, we will have lapsed both acquisitions.

Maybe the way I was trying to look at it, if organic was flat in the fourth quarter, just wondering how much acquisition will contribute to the auto business for the fourth quarter of this year.

You know, let me just come back to you on that one.

Okay. And then the second part, on the acquisition beyond business, I know it was highlighted as neutral to EPS this year, but is there a way we can describe maybe what you anticipate the EPS contribution will be next year knowing that you're investing in the business, but there is probably some expected contribution?

Yes. What we’ve talked about is it’s not going to be substantially different until we really get through the integrations of the ON business. So over the course of 2017, and I'd say later in 2017, but into 2018 is when the integration of the manufacturing out of, ON's manufacturing footprint into ours, it's going to take, we've talked about two or three years. We will start to see some benefits probably later 2017, but it will be 2018 before we will start to see that ramp up a little bit.

What is the EBIT margin profile currently in the business, if I may ask?

We haven't really said. We've just said that going forward it would be 30%, 30% plus EBITDA margin. I think what we have talked about is the gross margins are lower than our normal margin profile right now and then when you add in amortization expense which is about $5 million on an annualized basis, the additional interest expense that we have taken on - it is definitely a lower margin profile business right now.

That's very helpful. Thanks. And, we all say congratulations to the CUBS.

Thanks, Shawn.

Thank you. Our next question comes from Matt Sheerin from Stifel.

Yes, thanks. Good morning and congratulations on the results and to your Chicago Cubs. Regarding your electronics business, it looks like you are backing into the number given what you are talking about for automotive. It looks it's going to be down only 1% or 2% sequentially. And it looks like that is better than seasonal. I know that you've some incremental revenue from ON. And it looks like that is going to be, what, an incremental $6 million, or $7 million a quarter, but you also have one less selling week from the PolySwitch business. A, is my math correct? And B, why do you think you are seeing a little bit better than a seasonal demand here?

Yes, I think it is a phenomenon that's a little unusual, we do feel the business is stronger, as I pointed out. We saw good orders throughout the third quarter, continuing into the fourth quarter. So it is a year of seeing strength, which we've - sometimes in past years seen. But usually there is more of a decline and maybe also the timing of Chinese New Year that will impact the business a little bit this year. But it is strong in Europe for some of the reasons I mentioned, some of the programs we have there and it’s strong in China and North America is very solid, too. So globally it’s seems to be holding up very well and it's across multiple segments.

I would just going to add, I think Matt, on ON, what we talked about for the third quarter, it was about $6 million in revenue, but that was only one month of revenue and that was really a five-week month, on top of that. So what we had talked about on an annualized basis for ON, was about $55 million, for the business. And then, also, you talked about PolySwitch. What we have generally said, and we haven't come off of this is, in the fourth quarter expect somewhere in the neighborhood of for total PolySwitch, about $40 million in revenue.

That's why I came up with the incremental $6 million or $7 million, or so, for ON, based on just partial results for the September quarter. And the PolySwitch is two-thirds electronics and one-third automotive, right?

Yes.

Okay. So we are right there. And then on the margins in the Electronics, I think that was close to a record quarter for operating margins and I know you had good growth and obviously you have good mix there. I know it is going to be down with the business as it is seasonally, but it still looks like it’s going to be up significantly year-over-year. Is that sustainable? Those margins? Is it just the mix and the efficiencies of your, the semiconductor consolidations over the years, PolySwitch and just a combination of those things?

That's a good question. I think that is a record, 23%. We have never said that we think the business would be running consistently at 23%. We've sort of said high teens; around 20% has been the long-term for the business and for the Company. I think that as we do further acquisitions it would not be surprising that acquisitions have a lower margin profile than the existing business. But our current passive business and semiconductor business, we are running it extremely efficiently, our plants in China and the Philippines, in particular, are doing extremely well. So at the moment we are very confident about the level of that business. But as we add-in acquisitions we would be very comfortable taking acquisitions with lower margin profile. And having that business running about 20% we'd be very happy with that. We're not trying to drive the operating margin to a peak into the mid20s. We want to invest in this business. We think it's got very good growth prospect and we continue to expect to invest in it.

Okay. And just lastly, in the automotive margins with the legacy, I guess, the Cole Hersee sensor revenue rolling off, are you expecting margins to start improving in December quarter or will it take a couple quarters for us to see that mix, help the margins?

There are a couple of elements on the margin. One, it's that auto sensor business dropping off from the Hamlin acquisition, actually.

Hamlin, that’s right.

Yes, that’s where that came from. But I would say the other phenomenon, our commercial vehicle business, you know, there has been a lot of discussion these days on, still, the heavy truck market and construction in AG and that just doesn't seem to be recovering. So, we're still seeing softness on the top line there. The team has done a nice job managing margins but we are some lower margins in that part of the business along with the acquisition that we did earlier this year, also in the commercial vehicle space. As we've talked about, when acquisitions come into our portfolio early on, they tend to be at lower margins until we get some operational improvement from that as well as the amortization expense tends to depress margins a bit as well. So, that's what's tempering margins.

Okay. Thanks for clarifying.

Thank you. Our next question comes from Christopher Glynn from Oppenheimer.

Thanks. World Series and your earnings call is going nicely here. Does it get any better?

Could be here in Chicago.

Talking about industrial. I think that's one main area not covered yet, but - for the time being is 3Q now, is this result kind of a normalized result barring a macro inflection in the mid 20's and kind of breakeven? Or was it a soft spot even within the overall soft trend?

Yes. I would think - it was a bit of a soft spot in the overall trends. So I think you will see some improvement from the third quarter. However, we do see the end markets continuing to be challenged. We will continually monitor how that business from a revenue perspective is going and if we need to take further actions to make sure our costs align properly, we will. But I do think we probably hit a bit of soft quarter on the margin profile, industrial. It should have some improvement from that moving forward.

Okay and is it a little early at this point to talk about what a longer-term normalized profile might be?

Yes. I think we have to work through the lull and the end markets and kind of get the normalized into a more normal growth pattern in the business. We still do believe the industrial segment is a nice place for us in the long-term. But clearly, there are some challenges and we have time to work through that.

Okay. And then automotives has a lot of things below the surface right now. I just want to kind of hit on automotive margins directionally into 2017 where you have the new centers ramp might help, acquisition integrations, not hurting and then maybe some carry over impact. You had elevated margins in the first quarter. How should we net all of those thoughts?

Yes. I would say for 2017 we are not offering a view right now on margins. I would say stay tuned on that.

Okay. I'll stay tuned. Thanks.

Thank you. Our next question comes from Tim Wojs from Robert W. Baird.

Hey, everybody, good morning.

Good morning.

I guess going back to the automotive business and I know people ask a lot about margins, but maybe just on the dollar EBIT this quarter versus last year it is kind of flattish even though you saw a pretty good organic growth. I guess what is embedded in the Q4 guidance? Should we see another flattish year-over-year EBIT contribution? Why aren't we seeing a little more leverage on the organic sales growth this quarter?

I would go back to one of the earlier questions. Our commercial vehicle product business, even though we are seeing sales growth, a chunk of that is coming out of an acquisition that we made in the commercial vehicle business earlier this year that is really not dropping through much from a profit perspective and definitely not at the automotive segment margin trend. That's one of the issues. And then, also, our commercial vehicle business has been generally flattish down a little bit. And we have seen a little bit of a margin dip there. That's what was driving the third quarter. As we work on - as we do with all of the acquisitions as we work on the integration and work on margin improvement there, we will start to see the margin get back to a little better level. Those are some of the issues right now with commercial vehicles space.

Okay. So EBIT in those businesses it is definitely down year-over-year?

Well for the third quarter it has really been generally flattish or so, but that's not our intent going forward.

Okay. And then Gordon just on a book to bill on the demand environment, what - I mean it is really encouraging to see a lot of good activity there and good order growth. Is there any change in how distributors are ordering at all? And I am asking it from the perspective of if demand starts to take off a little bit and the distributors start to stock more inventory? What typically do you look for to think that maybe there is some inventory stocking versus sell through demand?

We have taken that up to some hard lessons over the last 10 years of times when we have seen corrections. We really monitor that globally very carefully with our distributors. The inventory level and their sell through and we feel that it is in pretty good shape right now. I think maybe some years ago we saw more of a peak in the third quarter of a lot of building for the holiday season of consumer electronics. I think our business is just much more distributed across many more end segments. Like we talked about lightning and smart meters and industrial applications. I think our business is a little different profile. So maybe the peak can fall off in the fourth quarter and maybe changing from historical times. There is the timing of Chinese New Year that impacts things. But I think that we have very close relationships to our distribution channels and we monitor carefully their inventory and we are always on the lookout for business growing more in the channel than the end markets. And so monitoring their sell through is a critical part of our working with our channels. So I think we feel pretty good about the business right now.

Great. And then just on free cash flow for the year, any update on what we should expect for, I guess, free cash flow conversion as a percentage of earnings?

Yes, Tim. What we talked about back in the second quarter was a little bit lower level on free cash this year. We’ve been looking at cash flow from operations and we typically talked about that normally being in the 16% to 18% range and this year we said that would be a bit lower, more in the 12% to 14% range just with all the integration activity and some one-time things going on. CapEx levels we also talked about, being in the $50 million to $55 million range. I would say it’s probably going to be a little closer to the $50 million range, but that's what I would say for this year.

Okay, great. Good luck for the rest of the year.

Thank you.

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

Yes, in your prepared commentary you mentioned that automotive fuses were up 11% in the third quarter. It seemed like a surprisingly strong number. How much is that attributed to China versus say more confidence on the platforms?

What I would say, John is certainly China had a pretty meaningful impact to that, but we had design-ins on platforms that were launching in the back half of this year. Often that can exaggerate as they pull an inventory for their launch, can exaggerate that take rate, if you will, for our products. So, yes. It was a very strong organic growth in that area. It is driven a little by the launch of the new platforms we are on and the continued success of pickup trucks and SUVs in North America. By the way, smaller SUVs in China are a huge drivers as well which were well positioned in. However, it is certainly public that Ford in North America will be shutting down for a week or two in the fourth quarter to kind of burn down some of their vehicle inventory. We haven't seen others, but we will see that. There may be a little softening on that demand because of those actions.

Got it. Got it. Can you clarify the electronics book to bill; if you kind of take out the impact of the acquisitions was it more in line with normal seasonal trends, just marginally above? Gordon it sounds like it is a little better, but not much better.

It is a little better, but not anything we are concerned. As I mentioned earlier we get enough data that we analyze from the distribution channels and we think the book-to-bill is healthy.

All right. And one last question, just your thoughts about the capital structure and debt repayment. How aggressive are you going to be paying down debt give the free cash flow from the firm?

Typically Q3 and Q4 tend to be our strongest cash flow generating quarters. When we take a look, it is hard to tell in the netting, we did draw down more debt this quarter because in the third quarter related to the product acquisition business. At the same time we also pay back a little debt. Where we can, where we have strong cash generation, that's something we look at.

How much of free cash is overseas?

I would say the bulk of it.

Okay. Thanks for taking my questions. That's all I got.

Thanks, John.

Thank you. And we have an additional question from Matt Sheerin.

Thanks. A quick follow-up question regarding the OpEx in the quarter which was up significantly. I imagine some of that was due to the ON acquisition and amortization? Or was there more to within that?

Are you looking at sequentially or year-over-year? So year-over-year, yes, we have done a lot of acquisitions so OpEx was definitely up as was amortization expense, absolutely. On a sequential basis it was up a little, but some of that is also amortization expense.

Okay. What was the amortization in the quarter, total amortization expense?

I believe it is a little over $4 million.

$4 million, okay. And then in terms of for the December quarter, you expect that OpEx number to be sort of flattish or up a little bit with the full quarter?

I think right now Q3 is a reasonable run rate. I guess one thing I would add is with ON coming on board we will have a full quarter of amortization expense. I would think about amortization expense in the neighborhood of about $25 million on an annualized basis. That includes now PolySwitch as well as the ON acquisition.

Okay, thanks a lot.

Thank you. That will conclude our question-and-answer session. I will now turn the call back to Gordon Hunter for closing comments.

Thank you for joining us on today's call, and with our strong year-to-date performance we expect 2016 to be an excellent year for Littelfuse. We look forward to updating you again next quarter. Thank you and have a good day.

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