Good day everyone and welcome to the Littelfuse Inc. Fourth Quarter 2017 Conference Call. Today's call is being recorded. At this time, I will turn the call over to President and CEO, Mr. Dave Heinzmann. Please go ahead sir.

Thank you, and good morning. Welcome to the Littelfuse fourth quarter 2017 conference call. With me is as always, Meenal Sethna, our Chief Financial Officer. Our fourth quarter performance provided a solid finish to a terrific year for Littelfuse. Adjusted fourth quarter earnings per share of $1.81 increased to 15% over last year. Sales of $305 million were at the top end of our estimate, up 7% over a very strong fourth quarter in 2016. Organic growth of 4% was led by our Industrial and Automotive segments, with Electronics also growing against an exceptionally strong quarter last year. For the full year, net sales of $1.2 billion, up 16% versus last year, with 7% organic growth. Adjusted earnings per share was $7.74, up 24% from 2016. In 2017, the first full year of our updated strategy, we delivered record sales, earnings and cash flow. We also made substantial progress in several of our key strategic initiatives. We took a majority ownership position in Monolith Semiconductor and launched our first silicon carbide product. We acquired U.S. Sensor, expanding our sensor portfolio in several key electronics in industrial end markets. And we announced the IXYS acquisition, the largest in our history, which closed two weeks ago. Back in December of 2016, we held our Analyst Day, where we shared our updated strategy. We outlined our updated strategy. We outlined our plans to achieve double digit top line growth and sustain profitability through a combination of organic growth and acquisitions. At the intersection of the key global mega trends of safety, energy efficiency and the connected world, the focus of our strategy is to grow our core circuit protection business, accelerate power control and double our sensor platform. This strategy builds on the strength of our previous strategy. About five years ago we…

Thanks Dave. During this call 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 risks and uncertainties. We ask you to review today's press release and our Form 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release and available on our Investor Relations website. Before I discuss our 2017 results and 2018 outlook, I'll start with a summary of the impact of the new US tax reform to our fourth quarter results and our estimate of the 2018 impact and beyond. As noted in our press release, we recorded an estimated one time $49 million tax charge on the deemed repatriation of the cumulated foreign earnings. This $49 million charge equates to $2.16 of EPS for the fourth quarter resulting in a GAAP loss per share of $0.48. This charge has been excluded from our adjusted earnings. With available tax credits, we expect the net cash impact of this charge to be approximately $35 million, payable over the next eight years. This charge only includes the legacy Littelfuse impact and it's our best estimate based on the information we have as of today. We'll have details on the IXYS estimated one time tax charge as part of our first quarter earnings call. The IXYS charge will be included as part of our acquisition purchase accounting and will not impact our 2018 earnings. US tax reform gives us increased financial flexibility to bring cash back to the US. This aligns well with our near term capital allocation focus…

Thanks, Meenal. Starting with the electronics segment, fourth quarter sales of $163 million, increased 4% year-over-year and were up 1% organically. For the full year, sales of $662 million, increased 24% overall and grew 10% organically. The robust electronic cycle we've seen for more than a year now still has momentum going into 2018, as indicated by our strong backlog across all regions. We saw increased orders through the fourth quarter with a book-to-bill of 1.1, well above our historical fourth quarter average. We continue to closely monitor channel inventories and distribute our sales to end customers and believe they're at reasonable levels. Fourth quarter sales were strong in Europe and North America, but as expected, were down year-over-year in Asia due to the exceptional fourth quarter of 2016. For the full year, we saw solid growth across most vertical markets, with strong increases in automotive electronics, the Internet of Things, appliances and building and home automation. I'll highlight a few wins we had in these markets. Our automotive electronics business had another good quarter. We had $3 million in new business wins in the fourth quarter for product applications will include LED headlights, dashboards and other general automotive electronic systems. These include two wins for customers in Japan, one of our target markets. We also saw wins for EV battery management and charger applications. In the Internet of Things and infrastructure space, we had good design wins for our protection thyristors, which protect telecom and data networking equipment. We also secured a number of 5G network infrastructure design wins for our high power TVS diodes. We expect these wins to contribute more than $3.5 million in 2018 revenues. We had ongoing design wins with appliance manufacturers, as they looked to improve energy efficiency and shift to even more electronic…

Thanks, Dave. Turning to our guidance, please note that our outlook includes IXYS operations and the first quarter outlook includes approximately two and a half months of IXYS as the transaction closed in mid-January. Based on the current foreign exchange rates in the regulatory environment, we expect sales for the first quarter of 2018 to be in the range of $384 million to $396 million. The midpoint of the guidance reflects 37% reported sales growth and 6% organic growth over last year. We expect adjusted earnings per diluted share to be in the range of $1.73 to $1.87, representing a 6% growth over last year. This assumes an adjusted effective tax rate of 22.5% to 23.5% for the first quarter compared to 18% rate in Q1 last year. Our first quarter EPS growth will be 13% at a flat year-over-year tax rate. While our 2018 tax rate range is 18% to 21%, the rate within individual quarters may vary due to the timing of certain discreet tax items. The net IXYS transaction is slightly diluted this quarter when factoring in the additional interest expense and dilution from the shares we issued. With our synergy planning and execution underway, we still expect the transaction will net $0.05 to $0.10 of positive EPS or accretive EPS for 2018. For the full year a few additional financial model updates, with the additional shares we issued for the IXYS transaction, our basic share count as of the transaction close was approximately 24.8 million shares and our diluted shares were approximately 25.2 million. We're projecting interest expense for the year in the range of $23 million to $24 million. This includes the additional debt we incurred for the IXYS transaction. Note that the interest expense will be heavier rated earlier in the year as our debt pay down plan will reduce our expense later in the year. We're projecting non-cash amortization expense of approximately $41 million for the year. This includes an estimated $16 million in amortization expense related to IXYS. As we have further updates, we'll provide you with any revised estimates. Overall, we're pleased with our 2017 finish and look forward to continued success in 2018. This concludes our prepared remarks. Now we'd like to open it up for questions. Brian?

Thank you. [Operator Instructions] Our first question comes from the line of George Godfrey from CL King. Sir, your line is now open.

Thank you. Good morning, Dave and Meenal. Nice job on the quarter.

Thanks.

Thanks.

Few questions, the first one is the revenue - I understand the cost synergy is 30 million or more annualized over the next three years. When do you think, if you can't put a dollar for you on the revenue synergies, when do you think they start kicking in? And then my second question is, electronics margins dipped in the Q4 and gets in as if a difficult comparing on the lower end organic growth.

Sure, why don't I take both of those? From a synergy perspective George, we'd always talked about what the $30 million run rate, it would definitely be heavier rated in the second year as we think about it, just because with actions we have to take, some of which involves manufacturing process at facilities that would just take some time to put in place as we look at the overall footprint. But having said that, some of the synergies we have already started, if you think about public company cost for example, immediately upon close we'll start to see some savings when it comes to things like audit fees and other types of infrastructure expenses like that. But I would say, definitely heavier weighted as we get into later in the year. I'd say the other piece related to that is also interest expense, we got to start the debt pay down, which we'll start - we expect in the second quarter. So the interest expense will lighter as we get into the back half of the year. And then on your second question on the electronics operating margins, we had - we don't talk about all the different footprint things we're doing, but we had a couple of product line consolidations that we were doing in the electronic segment when we were moving step between plans relative to the PolySwitch acquisition from a couple years ago and every time we do that there's always some cleanup involved, some one time cleanup cost that we end up taking through the P&L, so that was really more about a onetime hit that we took at the P&L this quarter. Nothing out of the ordinary and it's pretty typical when we do plant or product line consolidations.

Great, thank you for taking my questions.

Our next question comes from the line of Steven Fox from Cross Research. Your line is now open.

Thanks, good morning. Just first broadly speaking, you guys were correctly concerned about the step down in organic growth for the electronics business, but book to bill looks very strong. So I was wondering if you could just sort of give your updated view on the cycle, your general outlook for organic growth from that business in 2018 and then I had a follow up.

Sure. Dave, so when we look at - we expected a normal seasonal balance in electronics for the fourth quarter and we did see some of that fastening as kind of expected, but for the orders kind of through the quarter actually strengthened, so we did have a fourth quarter book to bill of 1.11, which is well above what we would typically see going in fourth quarter. So what I would say is, we remain - we continue to see strong quarter rates from the customer base, so we expect to kind of improve the level of demand that we have in electronic cycle. Right now we're seeing it continue. I'm not suggesting necessarily we're going to have the same growth rate through the full year of 2018 that we saw in 2017, but still at this elevated level, still solid demand patterns and if there's any reference point we kind of look back towards which is really published with demand rates on semiconductor discreet, which are projecting somewhere in the range of organic growth of about 4% for the year. We think that's probably a reasonable point for reference.

Great and then with the IXYS acquisition now closed, I understand that's only two and a half months for this quarter and you gave revenues for full year. I'm just curious on a standalone basis before you get into any sale synergies, what kind of organic growth that business should produce in Q1 and then how quickly could you see sale synergies as the two teams get together?

Yeah, I think IXYS is also seeing very strong bookings and demands on their business as most of the peer companies are seeing as well and its [indiscernible], but I think the demand pattern is quite solid for IXYS. I would say that perhaps IXYS is a little more capacity limited than Littelfuse is and so therefore the ability to grow that business in the near term is constrained by their capacity. So we may not see as much growth at the business as we'd like to until we're able to address capacity, capabilities and things in that business overtime. So we expect it to be a solid year for IXYS business with good volume demand, but maybe we can't take advantage of all the demand because of capacity limitations in the first part of the year.

And synergies are - when do you think you'll start commercializing some of the things you mentioned?

Yeah, I think sales synergies - when you look across the businesses - IXYS, one of the strengths they have is really strong relationships into industrial OEM accounts, stronger than Littelfuse. So we think that will be a hope for us to begin to bring Littelfuse into those accounts and drive that. We've talked about longer term the ability to take advantage of our relationships in the automotive industry and bringing some of the key high quality products out of the IXYS portfolio into those customer bases. The automotive synergies will clearly take time and those will largely not be impacting this year. Perhaps in the industrial side there some opportunities, but I think really sales synergies are kind of back end loaded in the year, probably in the IXYS side of things and really about in the coming year or two.

Great, thank you very much.

Our next question comes from the line of David Leiker from Baird. Your line is now open.

Hey, this is David. How is everyone?

We're doing great Dave.

Good. Couple of things, just I understand IXYS for a minute. I guess two points, two items there from my perspective. One, you've got this business model process in terms of bringing in acquired companies and this one I understand being a public company. Yes, that probably is going to take a little longer to implement enfranchise and then secondly, there are some pieces of that IXYS business that seem like they didn't quite fit and if you've been able to come out with any thoughts there in terms how you might either fix those or do other things with them?

So I think from the integration model, yeah, we clearly - we've built up over the last few years on acquisitions we've done are clearly standardized model of how we approach integration. I would certainly say that IXYS is a public company and the way that they are structured, they tend to be structured as several independent businesses within IXYS. So it takes perhaps a little more time to work through those independencies and look for places for us to try to integrate with other parts of Littelfuse and things. So I think you're probably appropriate in assuming the integration takes a bit longer here. And some of it from things like systems perspective, recall the PolySwitch acquisition is the car about from TE, we had no choices to get off of TE systems and have them on our system very, very rapidly, which we did. In this case there's several different ERP systems that exists throughout IXYS, it will take a little more measured approach to address that. We'll be highly focused on making sure that customer engagement and customer interface is as flawless as possible and so we think there's opportunities in and around or we'll spend a lot of time and energy in the near term, but perhaps it takes a little bit longer. From a product or business portfolio analysis, we closed the business - we closed on the acquisition two weeks ago. Clearly we began those discussions with the broader organization, it's too early at this point for us to kind of call out that there are things we think we want to invest in more heavily or the things we want to move away from, we just haven't completed that work yet, but I think we'll probably be able to share a bit more color both on integration and where we are at on portfolio when we have our first quarter earnings call.

Great and then just one last item here, you'd made some comments as it relates to your sensor business overall. Can you talk and that business has been a little bit choppy. It's good to see that the fact there are some improvements there, but what do you think that cadence looks like over the course of the year by quarters, that's something that ramps up over the course of time or is that something that can become a little bit more steady in terms of performance earlier?

Yeah, I think it ramps up over the course of the year. Clearly, we think the business has the potential of double digit sorts of growth and we've seen that prior to kind of stepping away from legacy pieces of business we didn't like and we kind of created a hole for ourselves. But when we look at launches of new programs and platforms and applications, we'll see heavier growth in the back of the year than we were in the first part of the year, but we do think the business overall has that potential of double digit growth force.

Okay, great. Thank you very much.

Our next question comes from the line of Shawn Harrison from Longbow Research. Your line is now open.

Hi, good morning. Thanks for kind of giving us the baseline for the electronics business for 2018. If we could maybe do a little bit of that for the automotive and the industrial business as well. I think you grew probably out grew auto production by maybe 74 point against potential headwinds last year, is that kind of the range in terms of maybe the expected growth for auto in 2018? And then the industrial business, it's just very difficult to forecast given the volatility, maybe if you could kind of set us on a path there as well might be helpful?

Yeah, I think let's start with the automotive side. If we look at automotive and we're not giving full year guidance for the business, but kind of directionally what I would say is, we had a very strong year in this past year and car build is a bit softer maybe in 2018 and whether it's 1% to 2% or somewhere in the range of car build and if you look at the mix of where the car build strength is, I think we have particular strength in places like North America and Europe and now growing in Asia, particularly China. What I would say is, overall the passenger car side of the business, our ability to extend to grow beyond the car build rate probably continues with the kind of experience we've been having. I believe the commercial vehicle side of the automotive business which has been - was extremely robust in 2017, while we see that momentum continuing right now, most of that we see is maybe that's a little softer in the back end of the year because of the tougher comparative, so maybe the overall organic growth - maybe it's a bit less than what we saw last year [indiscernible] really kind of depends on kind of those puts and takes and certainly as in the back half of the year particularly the sensor business picks up, that will help support that organic growth. On the industrial side, very broad based mix of customers and what I would say overall - oil and gas, mining, those things have been slowly improving. They continue to slowly improve end markets, which could be little more volatile for us and how they translate down to us on things like solar applications. It improved through the course of 2017 and looks really good right now, but there's a lot of cards out there with what's going happen in North America on solar implications with the new tie ups, so it's a little lumpy to figure that out.

Meenal, if I may follow up, in terms of the acquisition, if you could maybe just level set us in terms of what the gross margin was for pound rate for calendar '17 as well as operating expenses? Then I also was hoping to get some feedback just on your R&D spending and as a percentage of sales on a dollar basis, the fourth quarter was I think the highest the company has ever had and so where that money is going and we should think about your core R&D spending for calendar '18?

Yeah, I guess it's for IXYS to frame it. I mean, they've got a historical view, but I think for us to go forward looks different. I'd say the gross margins have trended in the low 30s generally like compared to our target around the 40% mark, so that's one area. And I would just generally say, EBITDA margins have also been in the very low double digits speaking kind of break into operating expenses there. There's some puts and takes right because they had some amortization expense that will go away, but we're going to have new stuff, so that's why it's hard to do a comparison on whole basis versus integrated with what have you on that first one. And I'm sorry, repeat the second question for me again?

Yeah, just R&D spending I think was recorded on both dollar basis as a percentage of sales basis for the fourth quarter, where's the money being spent now and then second, what should we expect in terms of the run rate for kind of core Littelfuse R&D spending in 2018?

Sure, from the R&D side, we've historically trended in what I'd say is 3% to 4% of sales. When we took over majority ownership Monolith earlier in the year, we started including - that R&D spend now was part of our P&L, so that gets us to the 4X or the 4 plus range on R&D. Combination of that as well as - we talked about it on our Analyst Day that we're working on making more investments for our organic growth and we opt spend in a few other areas beyond Monolith as well. So I think that would trend outside IXYS on the core Littelfuse side, I think somewhere in the range 4%, 4.5% R&D spend is probably where we'll trend at.

Okay, perfect. Thank you very much.

Our next question comes from the line of Christopher Glynn from Oppenheimer. Your line is now open.

Hey, good morning guys.

Good morning.

Good Morning.

Just a couple of margin questions, wondering on the electronic segment with still high levels of volumes, are we kind of contemplating the stable kind of margin outlook with the 2017 levels?

We had a record for the year at 23.5%. I would say definitely in places on the electronic side we're starting to hit capacity and so for us to - as we continue to see growth, we're adding now additional capacity either that's equipment, at some point we'd have to look at something more. So when you start to balance that with additional cost of doing that, I think we're starting to hit the high point on margins. We've historically talked about electronics as 21% yield, 21% is great and we're running above that. I would say the other thing that we're benefiting from right now has been generally for that business has been foreign currency and we've got other puts and takes elsewhere, but currency has been a tailwind for us the past couple of years. So I would say, electronics margins are definitely at a higher end right now.

Okay and then on free cash flow, I think if we take adjusted net income, you had about 115% conversion, I think 56 million combined accrued taxes and differed taxes and I know you had the TCGA, some non-cash there, but CFO grew 90 million year-over-year and adjusted net income was up 35 million. So wondering how you're thinking about long term free cash to adjust the net income conversion and 2018 are there any timing differences or is there any benchmark type of thoughts?

So a number of questions, maybe a couple of things, one is, if you're doing a '17 to '16 compare. If you recall back in '16 we were spending a fair amount of cash on the PolySwitch integration and also we started spending a lot of cash on the ON integration as well. So I would say that that was about $30 million or so of, I'd call it, more one time integration cost on the cash side, so that's part of the high growth you see there. At the same time, our '17 cash flow was good on a standalone basis. We've been doing a lot more active management around - if you take a look at our DSO, our receivable days were in good shape there. We've been working on increasing our payable days and there's just some other things that we've been doing to be more focused around cash flow, so the cash generation has been strong and we expected that. I'd say - and that's about 115%, 120% conversion. For 2018, we still expect it to be strong, but similar to what we saw in 2016, we're going to have a onetime cash cost as it relates to not just the integration but even deal cost related to IXYS. So as an example, in the first of quarter this year you can expect we'll have about $10 million or $15 million hit to cash flow just related IXYS deal from a cash side. So I think net-net, I would say the cash conversion will not be as strong. We don't expect it to be as strong in 2018, but it should still be going forward.

Great, thank you.

[Operator Instructions] Our next question comes from the line of Matt Sheerin from Stifel. Your line is now open.

Yeah, thanks. Good morning. I just had a question Meenal regarding the tax rate which starts at 23 and works its way down into 2019 to that - your normalized range of the 18% range or so. Could you just kind of walk us through, how you get there and what are the key moving parts to look for there?

Yeah, I would say - so, if I step back for a second, we're a month into US tax reform as well as IXYS transaction, so the combination of those two has kind of thrown our tax rate into little bit of a spin right now. Specifically, if you think about some moving pieces, we've got to do some more planning work as it relates to IXYS. Maybe we'll get a little bit of benefit back end of the year and so that's a little bit what's vacant, but that's going to take us a while. We've got some discreet items that are just running through in the first quarter or two, so we have that. And I'd say the third piece is, some of our - the lower tax rate we have is because we have what I'd call tax incentives or tax holidays in many of the locations that we manufacture and until we get confirmation from the governments about when those tax exemptions have been renewed, we got a book higher tax rate and that's what you're seeing now where we've got some of those coming up for renewal later this year. So that's some the timing on the tax rate as well.

Okay, alright. Thank you and then Dave, just back to your commentary on electronics, which appears a little bit better than it was a quarter ago when you were a little bit more cautious and of course you talked about the tough comps in Asia. But if you look at the EV areas in the different regions and end markets, on the margin which ones do you feel maybe a little bit better about than you did a month ago based on the orders that you're seeing?

Yeah, I think it's pretty broad based. You'll continue to see very strong patterns out of Europe. Europe has been a really strong market for us for the last couple of years and that continues to be the case, so we see that. Of course Asia, we're looking for how things bounce back after the Chinese new year, but overall kind of globally we see it and it's not just one end market, it's very many applications and end markets. So it's pretty broad based I would say led by Europe.

Okay, alright. Thanks a lot Dave.

Our next question comes from the line of John Franzreb from Sidoti & Company. Your line is now open.

Good morning everybody. Just could you talk a little bit about the pricing environment in electronics, especially given - I think you mentioned earlier it's been at the higher commodity post. How is that playing out? And also along those lines could you also touch on what you're seeing in pricing on the automotive side of the business, especially if you're looking at a downward double digit in North America?

Sure, so let's talk about electronics first and certainly I would say, when there's a robust cycle, we have the advantage sometimes that even if our product lines are not capacity constrained, many of the products that our customers and the sourcing groups of our customers are chasing after are and so they spend more time in energy and there are around chasing and making sure they don't have a capacitor missing that's keeping them from shipping their end product. So there's a little less focus on pricing, so I would say in 2017 certainly the pricing environment was probably favorable in the market and electronics. I don't see that changing dramatically right now because that continues to be pretty robust demand. But we'll see how the year evolves and if things start to kind of stabilize then likely in the back half of the year maybe pricing gets back to more normal rates, but right now we see it continuing to be a pretty good environment for us where our price pressures a little less than normal. On the automotive side, they're probably less volatile. In most cases in our automotive business, we have long term agreements, multiyear agreements often with our customers, whether it's in broad based with the tier 1 or whether it's on a platform or when we book the business or when the business - there's a price concession that's built in year-over-year in that contract. So I would not say that automotive pricing environment has changed too much and we don't see that changing. With that said, automotive pricing pressures are a bit less than what they're in the electronics world in general, but we don't see as much volatility in the automotive segment.

Okay, got it. And in regard to bringing IXYS over to the automotive side of your customer base, would that mean introducing some of their products, since you mentioned that they're somewhat capacity constrained already or you'd be adding capacity to areas of their footprint?

Yeah, I think there's a couple of things that happen in there. You kind of look at different places within our automotive, so I've mentioned like EV charging. In the case of EV charging, we'll focus on that pretty quickly because it's a little faster to get in on approvals in an infrastructure side in automotive than it is on vehicle. So perhaps IXYS is a bit more prepared for that and their quality systems and controls and things like that. So we likely will look at optimizing capacity at the IXYS locations. It's not huge overlap on our Fabs versus the Fabs in IXYS and things like that and in fact part of the IXYS business runs in a fables model. So we will be focusing on looking at capacity in the IXYS world and where we can add and where we can drive efficiencies out of their factories. On vehicle applications, we will be focused on making sure that IXYS has the systems in place to support expectations from automotive customers. That will take some time to have it in place and to get qualifications by customers out of the IXYS manufacturing locations. We'll be highly focused on doing that and we can - at the same time we're working on trying to win IXYS business in automotive applications, but revenues may not start for 12 to 18 months behind that as they've got to get qualifications and launch of new platforms and things like that.

Okay, got it. Thanks for the color.

Thanks John.

And I'm showing no further questions. I'd now like to turn the call back over to Dave Heinzmann for any further remarks.

Well, thank you for joining us on today's call. With our record 2017 performance and the many growth opportunities we have highlighted today, we expect 2018 to be another good year for Littelfuse and we look forward to talking to you again next quarter. And hope you all have a great day, thanks.

Ladies and gentlemen, thank you for participating in today's conference. This conclude today's program and you may all disconnect. Everyone have a great day.