Good day, everyone, and welcome to the Littelfuse Inc. First Quarter 2018 Conference Call. Today's call is being recorded. At this time, I would turn the call over to the President and CEO, Mr. Dave Heinzman. Please go ahead, sir.

Thank you, and good morning. Welcome to the Littlefuse First Quarter 2018 Conference Call. Here with me, as always is Meenal Sethna, our Chief Financial Officer. We're off to a great start in 2018, with first quarter performance significantly above our expectations. We are seeing broad-based demand across all of our businesses, and we delivered double-digit organic sales growth across all segments, including record sales for our IXYS business. We continued to leverage our bottom line and delivered strong cash flow for our quarter. We're making solid progress integrating the IXYS Corporation business and take an initial steps to drive synergy realization is, which I will discuss later in further details. I am pleased with the consistent execution by our team as we continue to focus on the market of a safer, greener and more connected world. We remain on track with our strategy, and achieve our financial goal of double-digit sales and earnings growth combined with our strong balance sheet and the numerous growth opportunities across our circuit protection, power control sensor portfolios, we are well-positioned for the future. With that brief introduction, I'll turn the call over to Meena, who will provide additional color on the first quarter results.

Great. Thanks, Dave. Good morning, everyone. Let me start with some forward-looking statements. First during this call, certain comments will be -- we will make contain forward-looking statements, if forward-looking statements 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 details 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. Now some highlights from our first quarter of 2018. We had an exceptional start to 2018 with sales growth much stronger than we expected, driving our sales and adjusted earnings per share well an excess of our January guidance. Sales in the first quarter were for $418 million, up 46% over last year, and up 10% organically. Notably, all of our segments had double-digit organic growth for the quarter. In addition, the IXYS business also stronger than our expectation with $86 million in sales for the 2.5 months in our portfolio and achieved a record $103 million in sales for the fourth quarter. GAAP operating margins finished at 9%. Our adjusted operating margin was 18.4%. We expanded adjusted margins 80 basis points over last year even with IXYS business results at margins lower than the company average. Our adjusted operating income was up 53% over last year, as we continue to drive leverage through the P&L. We recorded GAAP diluted earnings per share of $1.45, which included approximately $23 million in after-tax charges. These will mainly the doing to certain purchase accounting adjustments, acquisition, and integration comps related to IXYS partially offset by nonoperating foreign exchange gains.…

Thanks, Meenal. Starting with the electronics segment. First quarter sales of $264 million were up 72% year-over-year, which included about 2.5 months of IXYS results. Organic sales growth were at on us were up 10% with a strong performance in all regions. The strong momentum of the current electronics cycle continued in the first quarter. The robust demand patterns we saw later in the fourth quarter extended through the Chinese New Year when we typically see seasonal decline. Excluding IXYS, we finished the first quarter with the book-to-bill ratio of 1.14, slightly higher than we normally see at this time. Third-party industry forecast have upgraded projected 2018 growth for discrete semiconductor components to about 7%, up from 4% of late last year. Going into the second quarter, electronics has a strong backlog across all product lines. We are seeing improved lead times in some of the legacy Littlefuse semiconductor business, result of the additional capacity we ramped up last year. We have very few capacity constraints with our core electronics products. We continue to carefully monitor the landscape to ensure that some of the extended lead times and capacity constraints seen in the broader industry aren't driving double bookings and excess inventory against our distribution channels. While the channel inventories are up year-over-year, we are keeping it close watch and believe that current levels are consistent with the increase in-customer sales. Current channel inventories are running within our normal expected levels of 11 to 13 weeks. Our IXYS business had record demand and sales levels in the first quarter. With the strong backlog in the second quarter and increased lead times for some products, we are focusing integration activity to address the strong demand and support our customers. Our electronics business remains focused on strategic growth opportunities in targeted market,…

Thanks, Dave. Demand remains strong across most of our key end markets. The second quarter is typically our strongest quarter of the year, and we expect to see sequential sales growth across our businesses. Our second quarter guidance also includes a full quarter of the IXYS business. Based on the current foreign exchange rates and the regulatory environment, we expect sales for the second quarter of 2018 to be in the range of $450 million to $462 million. The midpoint of the guidance reflects 45% reported sales growth and 8% organic growth over the last year. We expect adjusted earnings per diluted share to be in the range of $2.39 to $2.53 with the midpoint representing 17% growth over last year. This assumes a diluted share count of 25.4 million shares. As noted in our press release, we historically, had a higher stock compensation expense in the second quarter, due to retirement provision in our equity class. This incremental expense equates to about $0.08 in earnings per share. Our guidance assumes an adjusted effective tax rate of 19.5% to 20.5% for the second quarter compared to a 15.2% rate in the same quarter last year. At a constant year-over-year tax rate, our EPS growth would be 25%. Beyond the higher tax rate, our near-term EPS growth is unfavourably impacted by lower IXYS profit profitability levels and related share dilution in interest expense. However, as we continue to execute on our synergy plans to improve IXYS profitability, we will see our overall leverage return to our expectations. Looking beyond the second quarter, I wanted to provide some additional color for the rest of the year. As I mentioned, the second quarter is typically our strongest quarter in the year. The first and the fourth quarter are typically dampened by regional holiday…

[Operator Instructions]. Our first question comes from Christopher Glynn of Oppenheimer .

So question on long-term electrical -- electric vehicle paradigms out there. You are going to see huge served market expansion and we're hearing from some players just indications there is going to be a lot of investment targeting leadership positions in that space, may be that would bring some changes to the traditional industry structures versus your current run rate and market share positions? Just wondering how you're viewing that whole ball of wax? And what that could mean for long-term margins as investment dollars chase market share in a more wide-open marketplace than has been tradition?

Thanks, Chris. It's good question and it's an evolving picture of what we see in the marketplace. We tend to look in our 2 different ways. We look at on-vehicle or onboard systems that are driven by the EV side and then the infrastructure side for things like EV charging, station high-speed charging and sort of thing. We have a little view on each one of those. Certainly on the on-vehicle, we have talked about this before, this question has come up before, we enjoy a strong position with key OEMs around the globe. And our current electrical infrastructure products and fusing side, we are very engaged with them and have a lot of strong relationships with those same customers and additional OEMs as they migrate to EV. So we think the opportunity there, certainly content per vehicle go dramatically. We think we're well-positioned to take advantage of that transition as we have ongoing relationships, we also have a lot of high-voltage experience out of our industrial side of our business that helps us solve problems there so we think we're well positioned for that. However, we said, we may not perhaps have the staying market share globally as that evolves as maybe we have in our current business today on-vehicle, but still the opportunity is significant we think it bodes well for us. Now on the EV infrastructure side, it's all additive. The applications that don't exist today, and there are a lot of companies both developing charging systems as well as trying to sell into those. And so every opportunity we have there is additive to our core business and we see this as an opportunity.

Great. And I know electronics is very diverse, but any particular end markets or supply chain feels particularly running hot right now? Or does it remain very granular and widespread.

I would say a little different than maybe historical cycles we have seen where -- historical cycles tend to have been driven by 1 or 2 key areas that drive the strong growth and then pulled back. I think a little different than this cycle it's more broad based, certainly automotive electronics, it's certainly a strong growth area in our electronics field, but also in areas I would, kind of, classify as industrial electronics are pretty robust these days as well. So it's really more broad based than what we've seen in the past, but those are a couple of areas I would say may be kind of leading the growth areas.

Our next question comes from David Leiker with Robert Baird & Co.

Couple of things on IXYS first. In terms of accretion, synergies profitability improving will quickly, is that a function of getting your arms around and executing on initiatives more quickly than what you have thought? Or are you finding more opportunities than you expected?

It's a combination, I'd say, one the performance of the business, see the underlying business is much stronger than we were expecting and mentioned that in some of my earlier comments so that's been helpful. And with the synergy plans, right, it's always been were exiting now we have taken the first set of steps in terms of looking at the portfolio and some of the synergies activities, is quarter more concrete view of the timing of that, and so that's really was driven up our target of synergies and accretion of this year.

And then the other thing right now, you mentioned that in the body of the presentation. But very strong demand patterns hitting the IXYS business. So a lot of our activities from our teams have gone on supporting their efforts to try to maximize, taking advantage of those potential planning folks our logistics folks or our operational excellence folks have been very involved in, kind of, trying to take advantage of the opportunities there and help the IXYS business maximize potential.

Great. Are you finding cross sell opportunities I read is that too early?

Yes, we certainly are finding areas of opportunities that we talked about historically, we would say our industrial OEM present as a company has been relatively weak it's a strong point of IXYS Corporation so they are very strong relationships with some of the large multinational industrial OEM. So certainly, their capabilities of cross selling into those are very advantageous for us in the long term for our broad portfolio. So we're certainly are getting a lot of cross-selling opportunities to sit down with customers. Haven't really starting to having so much revenue synergies yet, but we're confident over time they will. And we also know that IXYS has delays shied away from automotive potential, in the past they just weren't prepared to take on the automotive challenge, it's core to how we operate our business so we're very engaged and getting them up to speed and was wanting to support automotive customers. And we think longer term there is certainly a huge opportunity.

Great. And then one other item here as we look at the electronics business, we had this conversation that historically, this has been very productivity cycles through the business and they seem to be a lot more secular opportunities across all kind of mending, product. Are we at the point that we can say that, that cycles in some fashion has been broken?

That's a great question, and we ask yourself the question of when. I have lived through too many cycles to be comfortable saying it's not a cycle. So I think it's a different pattern that when we have seen in the past, so I think the behavior is already been difficult and will likely be different in this cycle, and a secular demand whether it's electrification, specification in automotive, the IoT, and industrial spaces of things like that, that maybe it's not the same sort of cycle but there is still the supply chain dynamics that exist in the marketplace, that has demand grow our description partners build inventory to support the demand and if demand begin to soften, there'll be a pulled back. So I wouldn't be the 1 to call that there is not going to be cyclical impact to the business at this stage, but it does feel a bit different.

Our next question comes from Steven Fox with Cross Research .

I had a couple of question. First on menial on the cash flows cash flows from operations was nicely above that income but you are calling for further improvements on the working capital side. So I was just curious and obviously this seems seasonality to cash flow, but what type of improvement do you think you get out of working capital this year either or days or dollars? And what other efficiencies can you see this year. And then if you will find during a rough idea of what Capex will come out for the year I got a follow?

Sure. A couple of things one of the cash flow from, we have been actively working on the legacy business now for a few years. And you can see the fruits of our labor from that around receivables, and just DSO management, and even more importantly, where we see the improvement in the really around DPO and payable days and we have been flowing and starting watching that upwards. So those efforts are still continues in our legacy business, inventories one that we usually takes longer to do because you quarter take a look at your entire supply chain, from a broader manufacturing and logistics for festive and so that was early efforts are making there. I'd say a lot of the improvements we're seeing short-term have been around payables of what we're working on inventory. As it relates especially to IXYS, the 2 areas that we see for opportunities are in payable days, and inventory. No surprise for a papable perspective when you are smaller company, you tend to have less negotiating power around that and your payables tend to be lower so that tends for us to probably be in the near-term opportunities and we're looking to see what we can do for this year. Inventory again, as I mentioned, will take some time, and also we want to be careful around inventory given the strong demand and demand patterns where we have really focused on really meeting customer demand and customer engagement so that may take us a little longer. So we would expect improvement I don't have dollar amount for you at this point. Your second question around capital. We're projecting around $80 million to $85 million in capital expense for the year we include the IXYS business as well.

Great. Dave, there was a whole long list of new [indiscernible] hired on the electronic side. If I exclude auto from that and think about, sort of, the timing for some of these ramps, is this something that we can think about as ramping in 6 months to 12 months? If so like what areas are most likely to ramp sooner than later? Any kind of color on that would be helpful. Clarification I need.

Yes. The design wins in the electronic side if you take automotive, electronics out, those come to revenue much faster. So it depends on the wins. In some case they are launching programs right away and the design cycles are quite fast, some are a little longer. But I would say, generally in the electronics side, from design win to revenue is 6 months or less so a very different. So design wins we are seeing their that see revenues from those this year.

Which ones are maybe most likely to contribute this year like what end markets are you most excited about for the rest.

I think a lot of them will contribute this year, LED lighting is what continues. In that case we tend to win, it's project-based, you win it, and it moves to production relatively quickly, we'll see impact from those for sure. The appliance sensor businesses, we won we'll begin shipping those in the back of this year, and we see revenue came from that as well. So those are couple of areas that may be our fastest in responding to the wins.

Great. Just a quick clarification. When you talk about the updated outlook for IXYS synergies, the $0.10 at least, does that still include the Korean operations in the microcontroller-s that you put into exit? Or is that included -- or not included in the is number?

So the numbers that I quoted our net of basically closing that business. Realistically, we have a lot of customers that we still need to work with about last time buys et cetera so that's why I said that we don't expect much of a revenue impact, but there are costs that we can take out faster while we're still working with our customers.

Our next question comes from Matthew Sheerin of Stifel.

This is Alvin Park in for Mat Sheerin. I had a question so IXYS results on the call I mentioned it was 103 for the full quarter and compared to last year, if I'm not mistaking, it was there was a 83 so that was 20% year-over-year growth. Could you provide some color on the strength of that growth? Is there any -- was it because of cross-selling or from tight supply, [indiscernible] higher ASPs? Are there any concerns for potential double ordering for the quarter for IXYS?

Yes, I think, clearly, because this is a revenue in the first quarter we closed in January, with typical lead times in the semiconductor space anywhere from 10 to 20 weeks. It's not cross-selling that's driving the revenue gains there and the strength of that, it's broad-based demand is that we're seeing. What a lot of strength out of the -- they serve the industry markets or industrial electronics very heavily, those markets have been growing steadily. So I think that fundamentally it's overall market strength and opportunities that they've had some nice design wins that are doing there. So I guess general patterns there. Lead times in IXYS products are longer than in our core business today, and we will be working to drive those down, and we didn't talk about book-to-bill in the IXYS business, because we, kind of, artificially drove book-to-bills from the stand fast point, we updated their lead times to the customer base, which meant the lead time went out and the customers or particularly distributors systems, which meant they drove higher quarters that they dropped in the quarter to kind of get there place in line, if you will.

I see. Okay. And another question. SG&A, I think, it was around $41 million for this quarter, but the previous year same quarter, it was $45 million. And given the fact that IXYS came on board as Q1, just wondering if you could talk about how much of that incremental SG&A was from IXYS and how much is it from Littlefuse's business?

Yes. I got to come back to you on some of the specific numbers on what's IXYS versus the quarter, but some of this is just -- we get have some reduction in IXYS G&A, even within the first quarter so that post was helpful as well. And it's some of the cost containment activities that we are doing, from our perspective as we get leverage. The other last pieces we moved some of our stock compensation expense some of that was in G&A and moved into other areas of the P&L where it really belonged and so that ended up being a little bit of shift as well.

Our next question comes from Gary Prestopino with Barrington Research Associates.

Dave could you maybe out in the future but could you maybe thoughts or comments on Ford's move to jettison most of their passenger sedans, I would assume that, that has to help you longer term as there is more content in any kind of SUV or crossover come? So maybe comment on that a little.

Yes, in general we talked about this in the past quite a bit. Overall, content from a North America from a passenger car vehicle to a crossover and SUV in general, the content is higher for us in those application. So we have a good position within the Ford platform in North America, so as the shift if anything that should be a net positive for us all the way we see even in the passenger car for but North America or globally, the content is increasing strength steadily in the passenger car side as well. But overall, we would say it's probably a net positive for us.

Okay, and then mean there in terms of some of these line items on non-GAAP adjustments could you give us some idea of on the full year run-rate basis but this acquisition-related cost would be stuff like that? Is that possible?

Yes, I will come back to you with a little bit more detail that could come back to everybody on that we just to give you a little color for the first quarter. So we had a significant number of purchase accounting almost everybody consider one-time purchase accounting adjustment as it relates to the inventory step up so there is inventory adjustments that we also because we ended up issuing shares as part of the deal. And we converted IXYS equity into Littelfuse equity there were some stock-based compensation adjustment that were there, and then also, a backlog amortization so we had quite a bit of activity come into that. A lot of which, we'll still continue into the second quarter, I would say that was really the bulk of the adjustments that came through, and then, the other piece was just actually deal related costs that we talked now as the deal has closed in the first quarter. That was about $12 million and to the most part that will go away going forward.

Our next question comes from Shawn Harrison with Longbow Research.

First question so let me correct the last quarter there was a concern in both IXYS as well as with LittleFuse that maybe there are going to be capacity constraints that [indiscernible] some of the demand upside and obviously, that was a good case given the robust 10% organic and the upside with the acquisitions. So maybe if you could talk about where both companies are with you capacity utilization? And is there going to be any [indiscernible] growth in the second quarter?

Sure. Let's first start with the core electronics Littelfuse products. In general, and as we stated in the body of the presentation, we have a limited capacity constraints within our core product areas. In fact kind of our longest lead time would have been in some of the areas in our core the semiconductor business and during the first quarter we actually reduced lead times, back down approaching more normal levels there. So I think we steadily have been addressing capacity concerns, and adding capacity in our core business as well as driving productivity gains to be able to increase capacity without capital investment. So we have said that and you have seen that study improvement as we have been going along, and really have limited areas in the core business where we are concerned ability to start customer demand. IXYS a little bit different story, where some of their product lines are very much constrained, sometimes in the supply chain sometimes in the factory, with the ability to serve these much higher demand levels but as you saw in the first quarter, and I think maybe we were a little surprised on the ability with a lot of focus from the IXYS team as well as our Littelfuse team the ability to ramp up a bit the outputs in IXYS business so we'll continue to focus on that and hope to see continued strength, and philosophically we will certainly on IXYS be looking at ways to make sure we have the capacity of in place to take advantage of strong demand patterns in the future.

And then is a follow-up, I think you said last year your book-to-bill was 1.2 or something like that, you not as high this year. But are there any other things that you saw that were potentially problematic distribution channel from customers read to another inventory correction risk in the second half of the year? Or does it feel a little bit better this year relative to last year?

Yes, I think the further we get into this cycle if you want to call it cycle. May be a most practical we become of it is really going to be some correction or not, but we continue to monitor that very carefully. I think our core book-to-bill of 1.14 being a little less from what they were first quarter last year, in some ways were driven by the fact that I described earlier that in our core semiconductor business, we actually reduced lead times during the quarter, which means our distribution partners can pull back on their orders because they know they can get them faster. So that drives the core book-to-bill down on during the quarter and the competitive you of it. From an inventory position in our distribution channels reported very, very closely by distributor whether it's a high service distributor or a broad line distributor, and we monitor our byproduct lines and byproducts to make sure they have the right place and things in place. And in general what we see today, yes, over the last 4 to 5 quarters, there has been an increase in absolute inventory dollars, but from a weeks of inventory or returns perspective, it's hanging in there pretty good, and kind of within the normal range we would see with our distribution partner, because their sales has been robust. So right now, we don't see any warning signs, particularly, but as I mentioned earlier, I tend to be sceptic in and around that, and we watch that very closely. If you see signs of those sort of things we'll absolutely share those with you guys.

One last one, if I may, Meenal, with the $35 million in sales that are considered non-core, as we get in the '19, is that -- I am assuming it doesn't stop immediately December 31, and so is there where you think about that how that rolls off the business as you progress maybe to the first half of '19?

I think we'll be able to give you a better indication next quarter, because as we mentioned, we're still looking at strategic alternatives for the MCU business, which is majority of that $35 million so depending on what we end up doing with that and the timing of that, we'll be able to give a better view on the roll off. But again, I would say I expect very little impact to 2018.

Our next question comes from John Franzreb of Sidoti & Company.

Dave, just going back to the industrial electronics business. It just had a great quarter but you also reference that the legacy business was -- was it up at the same magnitude as the IXYS business? A little color there would be helpful.

Yes. When I was talking about that there is what we call our industrial business, which are our power fuses and our relay businesses call on different segment. That tends to serve have year industry, mining, oil and gas, nonresidential construction, MRO those sort of things. And in that space we talked about good growth there in the mid teens area. A little different than the kind of industrial OEMs space or industrial electronic space I'm talking about, the IXYS had very strong growth as we have talked about earlier. I would not say our core electronics grew at that same pacreviein the industrial electronics but pretty robust. It's an area we're looking at our go-to-market approach and IXYS and we'll probably modify a little bit on how we approach that market to make sure we are taking advantage of that. So we think it's a very attractive space for us and we like that area. And IXYS really gives us a lot of momentum to try to drive that more aggressively.

Perfect. Great. And just going back to the content of that you're seeing in the automotive sector. Regarding the growth rates or the penetration rates in SUVs versus passenger cars, has passenger cars been accelerating maybe a little bit catch up effect or has the mix kind of always stayed the same?

I think in general, the mix overall has been moving more and more towards crossovers, SUVs and things like that. And it's bit of a global phenomenon, Europe has a little less so, but even in Europe you see a fair amount of that. So it's an ongoing and certainly in Asia, it is a big driver as well. So that's been an ongoing trend. And in North America it's been a trend and I think Ford is just going to reacting to maybe it's time to move on a little bit and focus their energies. But that's -- the content is always tended also a bit higher for us in SUVs, so it's a positive trend.

Okay. And last Meenal, that $0.07 gain that you referenced earlier, that was included in adjusted EPS? Did I understand that properly?

Yes. That's correct. It was part of our adjusted EPS.

[Operator Instructions]. Our next question comes from Steven Fox of Cross Research .

I just had one other question. I'm still having trouble understanding the exact makeup of your original guidance versus what you just reported? I mean [indiscernible] tax rate met could you sort of walk through how the difference given how substantial it is versus what you originally thought?

Sure. I'd say the big piece by far is the sales overage sales, because our sales are our guidance [indiscernible] the midpoint of the guidance about $28 million so that was a big part of we got really good drop-through as we would expect with the additional volumes of sales. The other couple of pieces, I mentioned in the nonoperatings or the other income expense section, we had a gain on some equity investments that we have of the mark-to-market gains that was about another $0.07 that was there, we had a tax rate pickup, I mentioned that was about $0.08 and then our share assumption, we were making some assumptions around shares with the partial period where we had issued new share with IXYS, we were a little off on that and then also added to EPS as well, share count ended up being lower.

And the drop-through was a typical conversion margin for you guys right?

Yes. Typical, I'd say, a little bit higher in the base business, but then it was offset by a lower drop from the IXYS business at the overall average where you would expect it today.

This concludes our Q&A. At this time, I'd like to turn back over to Dave Heinzman, you may proceed, sir.

Thank you for joining us for today's call. We look forward to talking to you again next quarter, and have a great day. Thanks.