Good day everyone and welcome to the Littelfuse Inc. Second Quarter 2018 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to Head of Investor Relations, Ms. Trisha Tuntland. Please go ahead ma'am.

Good morning. And welcome to the Littelfuse second quarter 2018 earnings conference call. I'm very excited to join the Littelfuse team and I look forward to working with you as we develop and execute our investor relations strategy, with a focus on messaging, communications and outreach to the financial and investor community. We me today are Dave Heinzmann, President and CEO and Meenal Sethna, Executive Vice President and CFO. This morning we reported results for our second quarter and a copy of our earnings release is available in the investor relations section of our website. A webcast of today's conference call will also be available on our website. Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please 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. We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most compatible GAAP measure is provided in our earnings release available in the investor relations section of our website. I will now turn the call over to Dave.

Thanks Trisha. Good morning everyone and thanks for joining us. Before we get started, I'd like to know that on June 25, we announced the appointment of Trisha as our Head of Investor Relations. We're excited to have her onboard and we look forward to the leadership and expertise she will bring to this newly created role within Littelfuse. Our record second quarter results were driven by broad-based demand for our products across all segments and consistent operational performance including the ongoing integration of the IXYS business. As we remain focused on the execution of our strategy, we achieved 11% organic revenue growth in the quarter. A record adjusted earnings per share of $2.68, reflect the ongoing efforts of our worldwide associates to profitably expand our business through a focus on high growth in the markets and applications, supported by a foundation of strong operational excellence. This also drove very strong quarter of cash generation and year-to-date we generated more than $100 million of free cash flow. We remain well positioned to benefit from a safer, greener and increasingly connected world, as we deliver on our long-term strategy of double digit sales and earnings growth. With that brief introduction, I will turn the call over to Meenal who will provide some additional color on the second quarter results.

Thanks Dave. Now some highlights from our second quarter of 2018. We continued our momentum in the second quarter as the organic revenue growth was stronger than expected, partially offset by some foreign exchange unfavorability from a weaker euro. Our team delivered strong operating performance again this quarter supplemented with some non-operating benefits, driving adjusted EPS in excess of our May guidance. Sales in the second quarter of $459 million were up 47% over last year and up 11% organically. In addition, the IXYS business also had another strong quarter, with $100 million in sales growing 20% %over last year. GAAP operating margins finished at 13%. Our adjusted operating margin was 19.2%, essentially flat to last year. We continue to see robust leverage from higher volume and ongoing operational performance in our legacy business with some offsets from the IXYS business results and margins lower than the company average. We recorded GAAP diluted earnings per share of $1.67, which included approximately $26 million in after-tax charges. These were mainly related to certain purchase accounting adjustments, acquisition and integration costs related to IXYS business, as well as, some non-operating foreign exchange losses. Our adjusted diluted was $2.68, which was 28% over last year. Our record finish was led by additional volumes in our legacy business, along with related leverage assets. Our IXYS business also finished above our expectations with favorable end market mix and improved operational efficiencies as we’ve started to deliver initial synergy savings in several areas. Our adjusted EPS also included some non-operating benefits again this quarter. As I noted last quarter, accounting rules changed in 2018 relating to equity investments. We recorded a mark-to-market gain equivalent to $0.05 in EPS on a few non-operating investments. We expect the accounting change will continue to drive future volatility, due to…

Thanks Meenal. Beginning with the Electronics segment, our record second quarter sales of $299 million were up 77% year-over-year. This reflects our first full quarter results for IXYS, which grew 20% year-over-year. Organic sales growth for Electronics was 14% led by strong performance in Europe and Asia. Our results in the second quarter again benefited from strong broad-based industry demand. During the quarter, we were able to leverage our existing capacity to reduce our near-term backlog. These efforts contributed to exceptionally strong growth this quarter. We exited Q2 at a book-to-bill of 1.02, excluding the IXYS business. Industry demand remains healthy and we continue to see a solid backlog. With our legacy Electronics products, we see limited capacity concerns and anticipate normal sales patterns for the third quarter. We continue to keep a watchful eye on distributor inventory levels and believe they are consistent within customer sell-through. Our Electronics business continues to generate numerous design wins across key markets and geographies. From the Internet of Things to LED lighting and automotive electronics to appliances and industrial electronics, we are well positioned to take advantage of the strategic growth opportunities across our broad protect, control and sensor portfolio. The Internet of Things continues to be a key driver for our business, as we saw innovative design wins in the quarter for products used across a wide range of connected devices. We secured design wins for a line of smart smoke detectors and digital security cameras, as well as, robotic vacuum cleaners and smart barcode readers. While IoT drives direct opportunities for our products, we also continue to generate battery protection and USB Type C charging cable protection wins. Across these numerous opportunities, our product performance and close customer collaboration are key differentiators. LED outdoor street lighting continues to be an important…

Thanks Dave. Now let’s move on to our guidance. Based on the current foreign exchange rates and the regulatory environment, we expect sales to the third quarter of 2018 of $434 million to $446 million. The midpoint of the guidance reflects 38% reported sales growth and 8% organic growth over last year. We expect third quarter adjusted earnings per diluted share to be in the range of $2.31 to $2.45. This midpoint representing 13% growth over last year. The EPS guidance assumes an adjusted effective tax rate of approximately 21%. A few points to note around our guidance. Second quarter is typically our strongest sales quarter of the year. We’ve historically seen a slight sequential decline in the third quarter, led by our auto businesses. The sequential decline also reflects our robust second quarter sales, as we reduced backlog across Electronics, as well as, negative foreign exchange impacts. Our foreign exchange has been a tailwind of revenue during the first half of this year that has reversed with the recent strengthening of the U.S. dollar, negatively impacting revenue growth. Our guidance also includes the impacts from the recently implemented Section 301 China tariff, which we generally expect to be neutral to earnings. We’ll provide an update on any future impacts in subsequent quarters. Our bottom line leverage is impacted in the near term by lower IXYS profitability level, including the related share dilution and interest expense. With our synergy activities well under way, we're starting to see an improvement to the IXYS business profitability. Over the next several quarters, we’ll return operating leverage back to our expectation. Looking ahead at full year estimates on some specific financial items, we’re projecting adjusted amortization expense of approximately $40 million, and interest expense in the range of $22 million to $23 million. Our…

Thanks Meenal. Valerie, we'll take our first question please.

[Operator Instructions] Our first question comes from Shawn Harrison of Longbow Research. Your line is open.

Congrats on the strong second quarter results. If I were to think about the components of the guidance and sales looking down around $20 million at the midpoint. How much of that is if we could break it up into different buckets, seasonality in auto versus the backlog work down in Electronics versus maybe the currency factor?

Yeah, look let me – so let me break it down, Shawn, maybe into basis points. So sequential you know we’re calling about 4% down, the $20 million you talked about. I’d say FX is about 200 basis points of that. The Electronics backlog is probably another 100 basis points. And then the exit of our custom business is about another 50 basis points. After that, we've got some other normal sequential declines in Automotive and other pieces with offsets of increase, so those are probably the three biggest areas.

That's very helpful. And just kind of following up on that, Dave you mentioned a little bit of a caution on European auto. Did you reduce your expectations for the Automotive market for the year because of that and then also just on the Electronics business, maybe some commentary on sell-in versus sell-through at distribution.

Sure. Yeah so, first on the auto; I think it's a little bit unknown, particularly in Europe exactly how the OEMs are going to deal with the new approvals. They've been testing; they've got to go through. I know some of them are leasing space to park vehicles and some of them are talking about slowing down. So, yeah, it's probably softened our view of revenues in the third and fourth quarter, but not of significant amount. It’s just one that I think the volatility issue that we've got to keep our eyes on, as we kind of look into the second half of the year. On the Electronics side, on the sell-in and sell-through side, during the second quarter because of our ability to continue to pull lead times actually in, we actually burn through some of our backlog at a pace faster than we anticipated during the during the second quarter, which contributed to very strong sales performance in the second quarter and consequently margins you know that drop through. We still have positive book-to-bills so we left Q2 with 1.02 book-to-bill. The book-to-bill remains above 1 now, so we continue to see no signs of demand, in demand really dropping or any negative signs there. In general, the POS, the sell-through at our distribution partners remains healthy. Their inventory position, which we watch very, very closely these days is in line with our sell-through, so we're not overly concerned with that at this point.

On the backlog in lead times, do you add for both the legacy Littelfuse and then, as well as, IXYS where you would like to be or will you be there maybe exiting the September quarter?

What I would say our core – our legacy electronics products for most of them we would be at or very near our normal source of lead times. So, kind of going to normal sort of pattern there. IXYS still has extended lead times in some of the product categories there that we’ll continue to work on, some of that's related to internal capacity and some of it is related to subcontracting capacity and things like that. We continue to work to try to optimize our ability to get products through the IXYS business. But I would say on the core, it's pretty close to a normal sort of lead time at this stage.

Great. Thank you.

Thank you for your question Shawn. We'll take our next caller please.

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

Good morning, Steven.

Thanks. Good morning. First just following up on that last answer Dave, in terms of the lead at IXYS, how much of that is fixable on your end or how much would require additional capital spending maybe down the road in order to meet demand?

Yeah, there's clearly capital spending that we're doing now and will continue to do there and that's part of as you may have heard Meenal talk about. We increased our capital spending projection a little bit for this year, just with the IXYS business in there. You know, so there are normal capacity expansions we need to do. So, some of it is clearly just working on better efficiency and driving some of our operational excellence programs through the factories and through the supply chain at IXYS and that takes time to do that. But in addition, we also will be adding capacity as needed there and supporting capacity and the supply chain.

Great. That's helpful. And then in terms of the acquisition, so if you're now targeting $0.20 from the deal versus probably $0.10, how much did you get in Q1 in terms of earnings or Q2 rather? And then what kind of run rate would you exit in Q4 with the business?

Yeah, so Steven in the first half of the year, we've gotten, it's been less than $0.10, though it's definitely – it’s going to be back-end loaded in the second half of the year. I think some of that is still going to be dependent on the exiting run rate on a few bigger activities we have going on one being the strategic alternatives for the MCU business. So, I would say give us into the third quarter and we'll have a better indication for you of how we feel we’re going to exit the year on that.

Okay. And then just lastly on tariffs, you seem pretty comfortable with the idea of at least passing through these costs to customers, I guess, that's also a reflection of the demand environment. Can you give us a little bit of insight into how easy that is and where it's easier versus tougher and what else you would do to sort of manage yourself around some of these tariff issues. Thanks very much.

Yeah, Steven, it's great question and for us and our customers, our distribution partners, this is a very complex question to get your arms around. The answer is very different for different customers. In some cases, customers literally can, we can work with them and adjust their supply chain structure and help just kind of eliminate some of the potential tariffs and then drawback work that they might have to do. In other cases, it's just as simple as the fact that we're importing from China into the U.S., there is the tariff that’s involved and in that case, and there's nothing we can do with the customer to help them. In many of those cases its necessary for us to pass that on. This largely is impacting our Electronics components, which a high percentage of those also sell through distribution channels. So, we're working often with our distribution partners to pass those costs along where necessary.

Got it. Thank you so much.

Sure.

Thank you, Steven. We'll take our next question please.

Our next question comes from Matt Sheerin of Stifel. Your line is open.

Thanks. Good morning. So, just a question Dave, regarding the Electronics business and I’m sure you've seen on a lot of companies talk about supply constraints and things like passive components and capacitors and resistors and the like and, of course, your lead times are normal. Are you seeing any change in terms of customers rescheduling production because they're waiting for parts that are hard to find. It doesn't sound like you’ve called that out and probably because most of your electronics sales goes through distribution, but is that a concern or something that you've talked to customers about?

Yeah, something we certainly talked to our distribution partners and customers about and where our component and our technologies are in a limiting factor. Obviously there are sometimes where they have shortages on a particular technology that keep them from shipping at the rates they would like to. Where that may impact the overall demand pattern because of their inability to be able to ship because our lead times have been steadily moving in on our products, we don't see them necessarily booking dramatically more further out to reserve space, if you will, for us because our capacities are not so constrained there. So, we haven't seen a lot of it is the conversation we have regularly with our distribution partners, as well as, end customers.

Okay. And then on your auto business, could you remind us what the geographic breakdown of that business is roughly?

Yeah, in the core Automotive, it ends up kind of being a split between all three regions, it’s a reasonable split between them. Our commercial vehicle business tends to be a little more North America centric, followed by Europe and Asia. But in our passenger car world, it tends to be pretty evenly split from a revenue side between the regions because although the vehicle count that we’re selling into may differ in the region, the content within vehicles also differs. So, it ends up being a fairly even geographic split for us.

Okay. Thanks a lot.

Thank you, Matt. We'll take our next caller please.

Thank you. Our next question comes from Christopher Glynn of Oppenheimer. Your line is open.

Good morning, Chris.

Thanks, good morning. A question on the testing standards in Europe that you talked about. Just wondering, if you look into that as kind of a second half adjustment period that would just in due course normalize beyond an adjustment period? Maybe even if that starts to normalize in the fourth quarter and you get a push from 3Q to 4Q, as you think about that?

Yeah, I don't – we certainly aren’t looking at it to say that it's going to create a long-term reduction in vehicle sales in Europe. There just maybe some delays, if you will, in production as right now they're already stacking up vehicles in parking lots waiting for testing before because its September when it kicks in and they have to get through it. So, sometimes as their modulating their output, particularly during the summer months in Europe and they may choose to modulate a little bit lower, so they don't build up more inventory, it’s a very fluid situation, so I'm not sure that we have the best vantage point to predict that. But we don't see it as a reduction in overall sales in Europe; it's just the timing issue on production I think.

Okay. And then a couple on IXYS, I’m wondering if you could quantify what the impact of dilution was for the Electronics margins. Secondly, as you've been working those lead times, I think maybe reducing backlog a little, if second quarter revenues from IXYS were a little bit above what you'd expect going forward?

Well, let me talk about -- do we think the numbers and the revenue and backlog and things like that in IXYS and then Meenal can talk a little bit to the dilution of that to the overall margins. But the revenues that we saw in IXYS in second quarter we’re in line with what our expectations were. Were well off from where they were a year ago, they're up over 20% from an IXYS to IXYS comparative, if you will. We continue to maximize, the throughput and continue to work those projects and when we talk about book-to-bill and things, so we pull out IXYS because of the extended lead times. Anytime we make adjustments the lead time and stuff that directly impacts what the book-to-bill ratios are, so, we kind of set those to the side. I would [indiscernible] in some products we’ve probably begun to eat away at backlog and other products the lead times are as long as they've ever been in IXYS, so it's a bit of a mix there. I think the revenue levels we saw there about what we anticipated in the second quarter. So, Meenal --

Sure. Chris, I think your question was on the margins delineating between I’ll call the legacy Electronics business versus IXYS. We haven't disclosed that because we're really – we're looking at within our Electronics segment, we now have about $600 million semiconductor business and we're trying to focus on it that way and it's the integration now we’re six months into that. We're seeing resources move between businesses and we're really putting operations together across the business. So, we’re trying to look at it more holistically and haven't been talking about the margin separately.

Okay. If I could sneak one more in, I think you mentioned, 20 design wins in commercial vehicle. I'm wondering if you're starting to see some real returns on the small Menber's acquisition.

Yeah, what I would say is overall our efforts to expand the technology offerings and the customers we’re reaching in commercial vehicle is certainly beginning to show some promise as we’re reaching more and more kind of diversified customer base there, which we think is a good healthy thing for us. I would say the Menber's acquisition in Italy, what it has done is it's improved our access and relationships with the European customer base, which ultimately will drive potential growth in Europe at even higher rates. So, I think we're getting that strategic benefit from that acquisition at this stage.

Thank you.

Thank you for your questions, Chris. We'll take our next caller please.

Thank you. Our next question is from David Leiker of Baird. Your line is open.

Good morning, David.

Good morning everyone. A couple of things on IXYS here to start. You’ve increased the contribution of the accretion from the acquisition from where you initially were talking as it relates to this year. Is that a timing, are some of the things that you would have thought were in 2019 are coming into 2018? Or are you finding more opportunities, are you driving revenue synergies or what combination of that might it be?

I think largely that is driven by the fact our ability to work with the IXYS factories to get more product out of the door. So, I think our -- although second quarter revenues as I’ve just stated with Chris weren’t a surprise being higher than we anticipated. Certainly, I think in first quarter our ability to go in and make a difference fairly quickly was more than we anticipated. So, I think a lot of its driven by the higher revenues we’re able to drive through it. I think the synergy activities are kind of in line with what we expected, those aren't materially different. I think it's just a stronger business in our ability to get product through the factors.

And I think David the other piece I would add is when we gave our view in January, the business has definitely performed overall, much stronger and then we've been able to add, I’d call the operational excellence programs we have to even try and boost the growth even beyond some of the initial forecasts. A lot of that is just the additional volume and then some better leverage that we're getting from that. So, you want to call some of that synergies and maybe we weren't anticipating, I suppose, that’s there, but some of the original synergies we were targeting are on track.

Okay. Great. And then as we got six months under your belt owning it, and then the [indiscernible] space. Anything that you've learned in terms of the technology position, competitive position of IXYS that you didn't know at the time that you bought it?

Yeah, if anything I think we and certainly myself are more optimistic about the long-term potential of the power semiconductor. Design and capabilities, the customer base that IXYS has relationships with that we can also bring other Littelfuse products to. So, I think it's certainly strengthening our access to what I recall, industrial electronics customer base and I think that's very much a positive. Their business is a very strong design in business where you win a lot of the business at the engineering desk. I think that's something we were looking for, so that continues to be a very positive for us. So, if anything the opportunities we find are greater than when we bought, so, we remain very bullish about that.

Then just one last item here. If we look at on the Automotive side, when you look at the business that you're going after in your pursuit business, and the wins that you're getting. Is there any color details you can get in terms of the scale of the opportunities that the content, then just anything that you're seeing in that way that you can help us out a little bit in terms of what that business might be growing at on a kind of in the door type basis.

Yeah, sure and first of all, I would say because of how we report and our segments and things like that, it makes that a bit more complicated to get your arms around. So, for instance, one of the highest growth areas within our Automotive businesses are automotive electronics. So, it's the increasing electronic content in the vehicle. So, that's probably one of the highest growth areas that actually doesn't show up in our Automotive segments that shows up in our Electronics segments. In the second quarter, we had about a 19% growth rate in our automotive electronics. So, we’re having very robust growth in that space as the fundamentals of that market are growing and our ability to gain position and share there are very, very positive. I would say in the kind of, the electrical infrastructure vehicles where we've had our legacy business very well established. That continues to kind of at a normal pace, plus the fact that the higher voltage applications increased content as that progresses. So, that we expected to continue, where we are experiencing winning our business that’s above hard build growth. It's really driven by the content increase as have a higher voltage. As we move to EV and those types of applications. Then automotive sensors are also a pretty robust revenue growth story for us. So, we remain pretty confident in our ability in Electronics to still be doing kind of high single digits organic growth in that space over the over the coming years.

Great. Thank you very much.

Thank you for your questions David.

Thank you. [Operator Instructions] Our next question comes from George Godfrey of C.L. King. Your line is open.

Good morning, George

I just wanted to ask about the operating margin on IXYS and I understand you don't want to break that out. If I look at IXYS standalone before your acquisition, the margin was about 10%, your Electronics average over the last five years by my math is about 21.5%. Is there any reason to think that that can’t go to that level within the Electronics segment three acquisition? And then following that and tying that in with the $30 million cost savings that you're targeting by the end of 2019, is that a linear progression towards that $30 million? Or is it more back-end loaded that you exit 2019 at your annualized or quarterly rate as opposed to gaining a little bit each quarter. Thank you.

So, let me go back to when we announced the IXYS acquisition and where we thought we would end up. So, at that time you're right, the operating margin was running 10% or actually even a little bit lower than that and EBITDA margins were in the low double digits, somewhere in the 10% or 11% range. What we said at the time when we announced the acquisition is with the $30 million in synergies that we would expect to get the IXYS business up to the company average EBITDA margins. and I quote EBITDA because then you get into the intricacies of accounting amortization expense. So, leaving all that stuff aside and we talked about EBITDA down margins in the low 20s because that's what we've been projecting as the company. We have not changed that and we feel that that’s you know we definitely are seeing the run rate with that. We'll see over time here, but at this elevated volume level, possibly we could even see some higher levels from that as we worked on efficiencies even beyond the first two years. Then I’d also talk about the Electronics margins, which the past few years have been running higher than that average that you quote. I think a few things that we talked about maybe on some past calls, one is we're in this demand environment, very robust demand environment we've been talking about for a while. And a lot of folks including ourselves have been talking about the fact that we're not seeing the price erosion that we normally see, so that's been a huge benefit to our margins the past couple of years, as has also currencies generally have gone our way on average, so we've been seeing some benefits from that. But I think if you put those two pieces together over the long-term I think you’d see IXYS EBITDA margins maybe not being at the Electronics average, but well in the company average. And the Electronics margins maybe not quite at this current sustained level, but still at a very nice clip for to the business.

Yeah, and the synergy, the second half of your question on the synergy timing. We will gain synergies as we move through quarters. But it's still the bulk of it is fairly back-end loaded, so the rate of gain will increase as we approach the back-end of 2019.

Great. Thank you very much.

Thank you for your questions, George. Those are all the questions we have this morning. Thank you for joining us on today's call and your interest in Littelfuse. We look forward to talking with you again soon. Have a great day.