Good day, everyone, and welcome to the Littelfuse Second Quarter 2020 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to the Head of Investor Relations, Trisha Tuntland. Please proceed.

Good morning, and welcome to the Littelfuse Second Quarter 2020 Earnings Conference Call. With me today are Dave Heinzmann, President and CEO; and Meenal Sethna, Executive Vice President and CFO. Before we begin, we are deeply saddened by the sudden passing of Baird sell-side analyst, David Leiker. Notably, David followed our company for many years, and his passion for his work and quality of research will be greatly missed. Our thoughts go to David's family and the Baird team. This morning, we're reporting 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 discussion today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review today's press release and our Forms 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 comparable GAAP measure is provided in our earnings release available in the Investor Relations section of our website. Before proceeding, I'd like to mention that we will be participating in the Jefferies and CL King virtual conferences in August and September, and we look forward to engaging with you during these outreach opportunities. I will now turn the call over to Dave.

Thank you, Trisha. Good morning and thanks for joining us today. First, our thoughts go out to everyone who continues to be impacted by COVID-19. Over the last several months, we continued to see extraordinary efforts from global medical professionals, first responders and other essential personnel as the world joins together to overcome this persistent crisis. Daily, these individuals are making personal sacrifices, yet continue to demonstrate outstanding leadership. And we're truly thankful for their unwavering commitment and service. Since the earliest signs of the outbreak, our top priorities have been clear: first, protect our global associates, their families and the communities in which we operate; second, support our customers; and third, preserve the long-term financial health of the business. Our actions and performance are an indication that we stand firm by these priorities. I also want to personally thank each one of our Littelfuse associates around the world for their ongoing remarkable leadership during this time of tremendous uncertainty. We have all come together at Littelfuse to do our part to help slow the spread of the coronavirus. We are complying with recommended safety procedures, including hygiene and disinfection protocols, social distancing and wearing personal protective equipment. We expect these actions will continue for the foreseeable future. Today, many of our support functions continue to seamlessly execute in a remote working environment. As a result of our ongoing efforts and vigilance, today, all of our manufacturing sites are fully operational. Now, I will provide an update on the second quarter performance of our company, which reflects production and demand impacts related to the COVID-19 pandemic. The perseverance and hard work of our highly skilled global associates, along with our strong operational execution, enabled us to achieve performance exceeding our expectations within an ongoing challenging environment. We recorded second quarter…

Great. Thanks Dave. Good morning, everyone, and thanks for joining us today. I hope everyone has continued to stay safe and healthy. Our second quarter finished better than we expected 90 days ago, a testament to the incredible efforts of our teams around the world. Our financial position remains strong, giving us the foundation to continue investing across both organic and inorganic growth opportunities to drive our strategy. Today, I'll cover second quarter highlights, followed by an update on liquidity and capital allocation. I'll end with our views on various markets and other key drivers that impact our outlook. We finished the second quarter with sales of $307 million, down 11% sequentially. Versus last year, sales were down 23%, and 22% organically. Our better-than-expected finish was led by higher sales across our electronics segment. Previously, we had noted we were seeing strong demand across the segment, and production disruptions from government shutdowns would be the gating item. We were able to restart and recover from these shutdowns fairly quickly due to a significant amount of pre-planning across our production sites, and in some areas, running overtime to meet demand. We continue to monitor electronics channel inventory, which is at the lower end of typical weeks on hand. Sales across our automotive segment finished slightly better than expected, driven largely by a faster than anticipated production recovery in our commercial vehicle business. Second quarter GAAP diluted loss per share was $0.37, while adjusted diluted EPS was $0.71. Excluded from our adjusted results was a $34 million non-cash goodwill impairment charge related to our automotive sensor business, reflecting the near to medium-term outlook of the passenger vehicle markets. Adjusted operating margins were 7.7%, resulting in a 40% detrimental margin over last year. Margins were affected by the lower sales volumes, carrying costs…

Thanks Meenal. In summary, during these uncertain times, we remain highly focused and collaborative with our customers and suppliers, enabling us to manage through pandemic-related disruptions and come out stronger on the other side of this challenge. Looking ahead, we are proactively preparing for multiple potential scenarios, while continuing to prioritize our associates, customers and long-term financial health. On the other side of this challenge, I am confident that we will have retained our highly skilled associates, deepened customer relationships through our hyper-focus on their critical needs and strengthened the long-term financial health and capital structure of our business. Littelfuse will be a stronger, more resilient company than today and positioned for profitable growth as we continue to deliver ongoing value for all stakeholders. With that, I will now turn the call over to Trisha.

Thanks Dave. For participants, Meenal and Dave are in separate locations this morning, so feel free to direct your questions to one or the other of them. Justin, please assemble the Q&A roster.

[Operator Instructions] And our first question comes from Karl Ackerman from Cowen. Your line is now open.

Hey, good morning, everyone. Thanks for taking my question. I guess, perhaps Meenal for the first question. I want to touch on your outlook. First, could you indicate what your book-to-bill was this quarter? I may have missed that. And then, you spoke significantly about your design wins this quarter. I'm curious what level of your outlook is secured by orders in hand today. And I have a follow-up.

Sure. On the book-to-bill, Dave had mentioned that our book-to-bill is currently running around 1.0 times, so with orders coming in at about the same sales rate. And I'll let Dave I think provide more color on design win activity.

Yeah. So, Karl, I think it varies on the parts of the business, with design wins in hand versus bookings that are taking place as we go through a quarter. In our automotive business, very much so. Our sales revenue is driven by designs we have won historically and the rollout of new platforms that our customers are running and global car build in that way. In the industrial part of our electronics business and the OEM part of our industrial, it's quite similar. We’re very long design cycles that will drive that. Electronics, where it’s a very, very broad-based customer. A great deal of that is really not driven by design wins at hand going into the quarter. It's really going through sales to many, many, many different end customers.

Got it. I appreciate that. As a follow-up if I may, how are you thinking about inventory levels across your channel partners in automotive? I know last quarter, I think that was a concern for you, particularly in China. However, some of your peers have indicated that China has seen the largest snap-back in demand. And so, could you perhaps quantify whether you believe your revenue outlook is selling to largely true on demand? Is it some pull -- some level of order pull-ins at US and European customers? Just any incremental color you may have on the level of inventory and demand within automotive, that will be very helpful. Thank you.

Sure. We've talked about in our first quarter that we felt that there was probably some inventory that went into our automotive customer base during the first quarter. When we -- it's quite difficult to get exactly what that is because we don't have visibility into the Tier 1s and ultimately to the OEMs and where their inventory position is. But just based on car build by our customers and our sales to them, our general belief is there's probably still some excess inventory hanging out there. I don't believe that we've built any further inventory during the second quarter. I think our sales into our automotive customer base matched up reasonably well to car builds and the end demand there. A lot of that comes just from our kind of back calculating into that, looking at our revenues, understanding the car builds of those customers, our design wins, those types of things. And we certainly saw some outperformance versus car build. But we think that was really related to content increase.

Thanks Karl. Well take our next question, please.

Thank you. And our next question comes from Nick Todorov from Longbow Research. Your line is now open.

Hi, good morning. This is Gausia Chowdhury on for Nick. Regarding your auto production assumptions, so like your peers, you seem a little bit more conservative versus third-party estimates. Can you provide any more color by region possibly? And then, do you still expect to grow content 3% to 4% in excess of SAR?

Sure. I'll take that. Yeah, I think we -- like many of you, as well as other peers of ours, we get a lot of information, whether it's from LMC or somebody like that, that has projections for car build. We look at those. We look at the conversations we have with our end customers and understanding in the regions. And certainly, we've seen strong bounce back in China. Now, to be fair, the bulk of that end demand in China has been driven not by retail sales but fleet sales in China. However, we continue to kind of expect and believe that continue to be pretty robust. North America is bouncing back reasonably well. We're probably a little more skeptical of what is projected in Europe and the rest of the world, as we just don't see evidence that they're bouncing back quite at the rate that maybe China and even in the US are doing at this point in time. So, that's where perhaps our conservatism is. If you look back at our last two or three quarters, we also would have given projections less than what the third-party providers would give. Generally, we feel good about our projections in that way. So, that's kind of what goes into our calculations. And yes, we absolutely continue to expect we have 3%, 4%, 5% content build beyond car build with our success in the passenger car portion of our business.

Great. That's helpful. Thank you. And then, with regards to the book-to-bill, can you tell us where it's tracking in July and if there's any additional color by region there? And then, you mentioned that there are a few delayed programs at customers. I'm just curious if there's any abnormalities, meaning, are you seeing delays beyond the normal one or two quarters? Or is there anything going on there? Thank you.

Sure. From a book-to-bill standpoint, as we saw kind of exiting Q2, book-to-bills were right around parity at 1.0, and they're running similar levels right now. So, it's kind of that stable. Demand patterns versus sales are reasonably stable right now in the electronics side of the business, so really hasn't changed too dramatically at this point in time. As far as delayed platforms and things like that, nothing really systemic in that. I think some of the OEMs are just making choices on where to spend their time. And in many cases, delayed launches they put forward are really delayed launches that are replacing platforms, and we may already be on anyway. So, I don't know that it's a huge thing. There have been a few cases where they have actually canceled programs, whether it's one of the Ford transit programs got canceled and they are just sticking with where they're at. The one thing I would tell you is that we are not seeing cancellations or significant pullbacks from the xEV types of applications. We continue to see very strong design activities. And if anything, we're seeing more and more focus. And with some incentives in Europe, certainly, that remains strong. So, a lot of activity continues in the EV space.

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

Hey, good morning, Meenal. So, yeah, you got some nice throughput out of your facilities there for electronics, showing some upside. Just wondering if you had any sense of, if there's any -- was any demand pull forward, as customers look to safeguard their own inventory levels just as you mentioned, you guys have done?

Yeah, Chris. When we kind of watch POS at our distributors versus our bookings and things like that and kind of watch that very carefully, what we would say is, there may be some level of pull-in for inventory for some of the end customers. We don't see strong evidence of that, but there certainly could be some of that, although what I would say is, right now, our distribution partners are being relatively conservative on their inventory position. So, whatever concerns there may be on any kind of pull-in from an end customer perspective, I think it's balanced out from the fact that we're running on the lean side of inventory at our distributors. So, I don't think we have particular concerns that that's going to be a drag on our go-forward demand.

Okay, that's helpful. And then, a follow-up on the guidance for 12% to 15% sequential increase in sales into 3Q, we have the kind of even kind of book-to-bill relationship at electronics. Does that suggest that really the entire sequential increase is located at the auto segment?

I think, Meenal, why don't you take that? You talked a little bit about that.

Sure. So Chris, as part of my remarks, I mentioned that we were seeing sequential growth across all of our segments. But by far, the bulk of that is definitely coming out of automotive just with the exceptionally low quarter in car builds in Q2. And we're seeing good sequential improvement there.

Thanks for the clarification.

Thanks Chris. We'll take our next question, please.

Thank you. And our next question comes from Shawn Harrison from Loop Capital. Your line is now open.

Hi, good morning, Trisha. Meenal, a question for you. Just if you could talk about the weakening dollar here and just maybe how that's factored into your guidance? I know it's wreaked some havoc on results in the past as we've seen volatility in quarters, but just kind of what you're planning with currency and the impact on the business here over the next 90 days?

Yeah. So, I would say, for us, there's really two currencies that will move the needle for us, one being the euro, and it helps us on the top line. But as we have evolved the business over the years and we have a lot more production in Europe than we used to several years back, it really doesn't have much of a bottom line impact. I'd say we're generally naturally hedged across the euro. So that's, I think, the euro. And from a China perspective, as the dollar weakens and the RMB strengthens, we are in a net short position. So, that does have a slight negative impact to us when that happens. And so, all of that -- what we do when we run our forecast is, we take the rates at a point in time within a few days of when we come out with our forecast. And so, the rates as of today are baked into our forecast.

That's really helpful. And then second, I'll go back to -- you spoke to $80 million of opex coming out of the business over 2019 and 2020. Just talk about how that comes back into '21 and maybe what may not come back because you're either more efficient or traveling less, things that you just realized synergies here during COVID that you won't see all of that come back, maybe what portion, I guess?

Yeah. So, if I break it down into -- I thought about -- I commented on the three categories that there is head count pieces, which I would call more permanent in nature. Those are choices made and we made the choices to reduce head count, and we'll be very thoughtful before we look at we adding new heads. There is a pretty significant element on compensation. We would like that to come back. So, we would expect -- there's a lot of variable in it -- a lot of that was variable compensation, and we'd expect that to come back next year. And then, I'd say, the third piece is the discretionary spend. And I'd say, that's going to be a mix, honestly. I think as the months go by and you spend less because you're not traveling, you're not attending shows, different things like that, yes, over time, we would expect a lot of that to come back, but I wouldn't expect that to come back over the course of one year. I think it's going to take some time. And I think right now, we just don't know the end point if it will all come back. So, I would look at it as, 50% is taken out for good and another 50% we'd expect to come back gradually. Not clear that 100% of that will come back.

Thanks Shawn. We'll take our next question, please.

And our next question comes from Matt Sheerin from Stifel. Your line is now open.

Good morning, Matt.

Yeah. Hi, good morning, everyone. My question is in regard to your forward outlook for the December quarter for a typical mid-single digit decline. I know there is that typical seasonality in the electronics business. But I'm wondering what your expectations may be based on your backlog and bookings for December in auto because in theory, we should have additional growth in production, and most of the factories, in terms of production level, should be up. So, trying to figure out the expectations in terms of the auto growth. And then, the second part of that in terms of your operating leverage on that lower volume, would you expect the traditional or typical detrimental margin or maybe better than that because of the opex reductions and other cost cutting?

Let me take the mid-single digit decline, and then Meenal can talk about the operating leverage. From mid-single digit decline, we talk about that historically when we're in a kind of a normal pattern that we would see that as a normal Q3 to Q4 sequential. Yeah, right now, visibility is pretty challenged to understand exactly where things are headed. So, therefore, we did put that in there to make sure that there is at least some thought to that. Certainly, the electronics segment is our largest segment and has the most influence on where our revenues are going from quarter to quarter. And with the fact that we're kind of seeing bookings that are relatively flat at a reasonably stable level right now, that will kind of imply to us that if anything -- unless something changes and a fundamental stronger demand pattern doesn't arise, that we would see that sequential drop in the electronic side of our business. We think that's likely. On auto, I think it's a little less clear right now. And I think the wildcards there are really -- the area where we're watching the closest is probably Europe. As -- right now, they're doing some extended shutdowns because they just really aren't seeing that strong pull in demand. And we're a little concerned with the projections that show that picking up in the fourth quarter, is that really going to be the case or not. So, I think we're watching that quite closely. So, we're not intending to give real specific guidance for the fourth quarter. But we just don't -- we want to make sure that people aren't just taking, drawing a straight line up -- demand up because there can be seasonal patterns to deal with. Meenal, you can talk about leverage.

Sure. So, maybe echoing some of Dave's comments, again, we weren't intending our Q4 commentary to be guidance on Q4. But if we were to follow the normal seasonal patterns of declines, we typically see a lot of that decline coming out of our electronics and then our industrial segments. They tend to have higher incremental and therefore decrementals margins. I would expect that a detrimental rate to be a little higher than that average of the 35% to 40% that we've been pegging more recently. But again, I would come back to -- it's going to depend on some of the mix and the other dynamics going on right now. So, we really just wanted to really put this kind of a sales view out there, so people understood what we were thinking about and a typical trajectory is out there.

Yeah, that's very helpful. That's it from me. Thanks so much.

Thanks Matt for your question.

[Operator Instructions] And our next question comes from David Kelley from Jefferies. Your line is now open.

Good morning, David.

Hi, good morning, and thanks for taking my questions. And maybe, Meenal, I want to start with a comment you made earlier about the expected sequential electronics segment growth. If we were to remove your exposure to automotive electronics embedded within that segment, would you expect the balance of electronics to recover into Q3 here?

Yeah. So my earlier comments were, all of our segments on the top line are seeing sequential growth, which does include electronics. But your comment is a fair one that even though we are seeing sequential growth in electronics, it is dampened a bit by the automotive electronics element, the pieces that we have in electronics segment. I'd say, despite that, we're still seeing some positive signs there and a little bit of sequential increase.

Okay, got it. Thank you. That's helpful. And then a question for Dave. You talked about your auto outgrowth and expectations. And given your commentary on ramping EV exposure, if we were to isolate Europe where EV penetration is ramping aggressively, and it's still fairly early days, but still seems to be moving pretty quickly here. I was just curious to hear if you're starting to see an uptick in content per vehicle in that region tied to the EV penetration.

Well, certainly, our content exposure in EVs in Europe are certainly higher than they are in a traditional ICE type vehicle. So yeah, we're seeing some improvements there. What I would tell you is, lots and lots of activities on our programs and things like that, but most of the higher volume platforms right now are kind of sold out. They're volume limited. So, although you are seeing the penetration improve, right now, in some of the more popular vehicles, if you place an order in Europe for that EV, you're on the waiting list nine months out. And so, therefore they're kind of limited on their ramp-up ability. We wish they weren't as limited because that certainly would drive our content story even more aggressively there. But that will catch up with itself. As they expand their capabilities, both internally and supply of batteries and things like that, that will begin to drive it. So certainly, it's a positive content growth story, and we're pretty bullish about the European EV space for us.

Okay, great. Really appreciate you taking my questions.

Sure.

Thanks David. 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. Be safe and stay healthy.