Good day, everyone, and welcome to the Littelfuse Third Quarter 2020 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 go ahead ma'am.

Good morning, and welcome to the Littelfuse third quarter 2020 earnings conference call. With me today are Dave Heinzmann, President and CEO; and Meenal Sethna, Executive Vice President and CFO. This morning we reported results for our third 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 Baird and Stifel virtual conferences in November and we look forward to engaging with you during these outreach opportunities. I will now turn the call over to Dave.

Thanks Trisha. Good morning and thanks for joining us today and I hope all of you and your families are well. I want to take this opportunity to once again personally thank each of our Littelfuse Associates around the world. I'm extremely proud of the extraordinary leadership demonstrated by our global associates business partners during these challenging times. As a result of our ongoing effort's intelligence all of our facilities are operational and serving customer demand. It’s the remarkable focus of our entire team enables us to execute consistently. We've stated clearly our top priorities during this pandemic. 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. Because of our focus on these priorities, we delivered strong third-quarter results. Our ongoing commitment to operational execution enabled us to meet stronger-than-expected demand from our customers. We recorded third quarter sales of $392 million, which is up 8% versus the prior year period, signaling our return to growth. Sequentially, net sales were up 27% largely due to higher-than-expected demand in automotive end market and strength in several end markets like consumer electronics, gaming, appliances, medical equipment, HVAC and renewable. Our focus on serving critical customer needs enabled us to fulfill much of our backlog demand resulting from second quarter COVID mandated manufacturing shut downs. The incremental revenue improvement along with our ongoing disciplined cost management actions delivered an adjusted operating margin of 17% and adjusted EBITDA margin of 23%. We received and adjusted EPS of $2.16, an increase of 21% year-over-year. Meenal will provide additional color on our strong financial performance. During the quarter, our electronics products segment saw robust demand led by Asia, particularly in China with a strong COVID-19 recovery. In…

Thanks Dave. Good morning, everyone and we appreciate you joining us today. I hope everyone and those close to you have continued to stay safe and healthy. Since the early days of the pandemic, we implemented a number of priorities across the company, including building on our strong financial foundation to resume our profitable growth trajectory. We made great progress during the third quarter with our higher than expected sequential sales growth of 27% and growth of 8% versus last year. The growth was led by a combination of stronger than expected demand and our team's responsiveness in meeting customer requirements around the world. Adjusted operating margins were 16.9% for the quarter, up 230 basis points versus last year and a function of higher volume leverage and continued cost management. This also drove sequential operating margin flow through 50% better than we had forecasted. Adjust EBITDA margins finished over 23% in the quarter and are over 20% year-to-date. Third quarter GAAP diluted earnings per share was $2.25 with an effective tax rate of 17.9%. Adjusted diluted EPS for the quarter was $2.16 up 21% to last year due to the sales growth and improved profitability. Adjusted diluted EPS also finished much better than expected due to the higher-than-expected sales growth and a lower than forecasted tax rate. Our third quarter adjusted effective tax rate was 15.7%, as we reduced our full-year tax rate estimate due to improved profitability and lower tax jurisdiction. As we recorded a year-to-date reduction in our tax rate, the lower rate improved our adjusted EPS at $0.22 in the quarter. Moving on to our segments all had significant sequential margin improvement in the quarter, due to higher sales volumes. Electronics segment sales were up 14% sequentially and up 12% over last year. Sales growth coupled with…

Thanks Meenal. In summary, we delivered strong third-quarter performance and are pleased to see a return to year-over-year. As we near the end of 2020, we are confident that the actions we've taken this year position us well for sustained profitable growth. Our fundamentals are solid and always we're balancing our attention to ongoing designing activity and investments for growth while maintaining our operational excellence. As we near 2021, the latter portion of our current five-year growth strategy, I am excited to share that on February 23, we will host a virtual investor and analyst event. We look forward to sharing the specific details with you then, which reinforce how we will continue to deliver ongoing value to all stakeholders. With that, I'll now turn the call back 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. Operator, please assemble the Q&A roster.

[Operator instructions] And our first question comes from Karl Ackerman with Cowen. You may proceed.

So it's bright [ph] to see the material improvement in your results and outlook relative to the first half of the year. However, I'm curious given the fact that you just guided the December quarter in line with seasonality, is there any reason not to think your revenue trends wouldn't grow in line with seasonality in the first half of 2021?

I'll take that Karl and thanks. So obviously, we guided to normal seasonality in the electronics portion of our business, actually normal seasonality in the industrial and the automotive portion, which typically are also seasonally down in the fourth quarter. In both cases industrial and automotive we believe will actually be sequentially up. I think electronics is a very strong third-quarter and with that, strong third-quarter in the comparative and the sequential we see kind of normal downturn there. What that bodes for next year, there's just a lot of variability out in the marketplace and what's going on. We're not given guidance on what next year looks like. However, one of the strong things in electronics is the fact that our inventory positions are quite healthy. They're at the lower end of our normal range. So we won't have inventory corrections and things like that to impede our delay to grow next year.

For my follow-up, one of your peers earlier today spoke about the industry shift toward electric vehicle powertrains, particularly from Asia Pac and today you're a little bit less exposed to Asia from a geographical basis, but at the same time, you have internal capability for gain on silicon carbide from the IXYS acquisition that would seem to apply very well to electric vehicle powertrains and charging capabilities. And I think you mentioned in your prepared remarks some compounds semi design wins for trains. But I guess what sort of opportunities in design wins are you winning for your gain on silken within electric vehicles? Thank you.

So first from a technology standpoint, we do not have end technologies that we have in the marketplace. We do have silicon carbide in the marketplace and where our focus is in the EV space in our power semiconductor business is really in the charging infrastructure. The bulk of our opportunity in the near-term exists in charging applications, particularly the higher-speed charging applications where you get more of a DC-to-DC type high speed charging content opportunity and the opportunities are significantly larger than on type I, type II types of chargers. So that's where we're seeing today the best opportunities for ourselves and we are getting design wins in those spaces.

Thanks Karl. We'll take our next caller please.

And our next question comes from Gausia Chowdhury with Longbow Research. You may proceed.

So with regard to the auto production, a peer of your just noted that they expect the fourth quarter to be peak in production and for it to decline from there. So if the portfolio is at peak, how do you think about operating margins within auto and maintaining it within that mid teens of age that you spoke about? And then if you have any thoughts on inventory levels within auto too, that would be helpful please.

So, we haven’t really given guidance to what next year's volumes look like and I know that you're talking about and their financial calendar shows that is the beginning of the year. Certainly, we're expecting the car builds in the fourth quarter for us being the peak of this year. We haven't really given particular detailed view on what next year. There are just too many wildcards out there. How extended are the pandemic-related shutdowns that seem to be getting a little worse right now, what the economic confidence in different regions of the world. So we believe certainly that there will be a bit of a challenge going into next year on car builds to continue to drive significant growth there from a car build standpoint. However, we do expect that car build next year will have high single-digit growth may be as high as 10% growth compared to a very soft year this year. So those things will support our ability to keep margins at a reasonable level in the automotive business, but as a reminder, there are a lot of costs today that are -- we reduce costs overall, but some of those costs that we reduced are temporarily cost reductions, whether they be reductions in compensation and those type of things, reduction in travel. Some of those hopefully will come back during the course of next calendar year, which will make a bit of a challenge for us to continue to drive growth that we've outlined.

If I can just add, Gausia just your question on margin and what Dave was saying, we've talked about our target margin for our auto segment in that mid teens call it the 14% to 15% range and with the current sales levels we had, but also Dave pointed out with a much lower spend then we would expect to see because of all the discretionary cuts we took, were at that margin. I think we'll continue to see a balanced sales will grow, but spending will start to resume a little bit more on the discretionary side. So we stick to our target margins at the 14% to 15% for the auto segment.

With regard to electronic market, can you just provide some detail on the book-to-bill of [indiscernible]. How did that look by region and then is there -- it's seasonally down. Is that typically down mid single digits, is that the right way to think about it there?

Yeah, so first of all I think normal seasonal pattern for us in electronics if you look at sequential third quarter to fourth quarter, normal is in the high single digits to low double-digits is kind of normal seasonally declines that we see into the fourth quarter. Book-to-bill exiting the third quarter was right around one and we didn't see a huge differential in book-to-bill across the different regions of the world and keep in mind when you look at book-to-bill regions of the world really relate to manufacturing locations, which don't necessarily rate crisply to end market drivers and where the end sales of the devices are coming. So we didn’t see a huge differential between the regions for ourselves during the third quarter. We've continued to see solid bookings also through into the fourth quarter. So we feel good about that.

Thanks for your question Gausia. We'll take our next caller please.

And our next question comes from Christopher Glynn with Oppenheimer. You may proceed.

So a lot of operating discussion, but your operations in your demand patterns are normalizing here. So just kind of curious about the balance sheet, the action ability to the acquisition pipeline, your appetite and notional thoughts on share repurchase.

Yeah, I can take that. So from a balance sheet perspective, our view haven't changed much in the past quarter and we've talked about want to make sure that we had a strong balance sheet. I would say yes, we are seeing recovery today, but as Dave commented, still a lot of uncertainty out there, still a lot of lack of future visibility right now. So we want to make sure we have that solid ground. We are absolutely looking at M&A. We have the balance sheet to do that and that was always the intent, but I would say right now, the M&A market has not really returned to what I would call any sort of normal pattern right now. In general a lot of folks are still sitting on the sidelines, don't know that this is necessarily the environment from a seller perspective that they want to look at things. So we're looking at that, but we'll see how the market continues to evolve from an M&A standpoint. And then as it relates to share repurchase, our philosophy on capital allocation has always been share repurchase for us that is more opportunistic. We always prefer to look at M&A first and right now, given the environment, we're holding on to more -- we'll keep an eye at M&A and share repurchases that are just getting on the shelf right now for us.

Okay and just curious on the margin guidance for the fourth quarter, the 40% incrementals year-over-year implies kind of 75% sequential detrimental at the midpoint of the revenue guidance. Are you planning a lot of cost restoration or that number seems a little high, just wondering if you have in your normal cost base reloaded into the fourth quarter?

Yeah, so I would say on your comment on the sequential, if you go back to Dave's earlier comments also around we talked about a normal sequential decline in the quarter and that's on the electronic side. Our electronics business, we've always talked about tends to have the higher margin flow-through above the company average. So when you look at it sequentially it's not a surprise for us that we would see a bit of a higher detrimental, but again our normal incremental range on a year-over-year, we're talking about 40% that's well in the range that we talked for a normal incremental range on a year-over-year basis. And I think it's just the business mix on a sequential basis.

Okay so there are no particular cost restorations into the fourth quarter from your belt-tightening activities throughout your stake?

Nothing out of the ordinary, no.

Thanks for your questions Chris. We'll take our next caller please.

And our next question comes from Luke Junk with Baird. Your line is open.

Meenal, I was just wondering first to serve the possible maybe just to put a final point on some of the temporary cost factors in your auto margin this quarter, I guess I am just trying to think of a normalized margin to build on from here in that segment?

I would say we've now gone in detail for each one of our segments margin by margin, but what I said from a total company perspective is over a two-year period from '18 to '20, we will have taken out about $80 million in OpEx about half of which again I talked about is more fixed OpEx headcount and we took a lot of those actions in end of '18 into 2019 and we're still seeing some benefits from that, the other half being more discretionary or variable spend and that was a little bit of Dave's comment there. So think about things like compensation, variable compensation items, we really don't have people traveling etcetera. So you can assume that of that $80 million, there is a portion of that going in automotive. Some of that will come back next year. We would like to put the variable compensation back for employees and we'll see what happens with things like travel expenses. So that's part of the additional cost we've been talking about. At the same time, we do expect as we get through the next several quarters, we'll see a pick up on sales. So how that timing works between the add back versus the sales growth, I think it's going to be a '21 question.

And then Dave for you, just bigger picture, maybe if could talk a little bit more about the opportunity in vehicle charging for EV specifically, with the election coming up, who knows what's going to happen, but if there is a change in administration, one of the balance proposals would include investments in EV charging infrastructure and just if you could talk about the Littlefuse would be positioned to benefit as that comes to fruition potentially?

I would say that EV charging in general is an application whether on vehicle or off vehicle to create opportunities for our core products. EV off-board charging is certainly an area really depends on which types of charging devices that we're talking about because there is three levels of charging. For sure, the high-speed charging is where the content is the richest for us and the opportunity there exists on our traditional passive components. It's just in our industrial type of fuse products and then it exists in our power semiconductor products. The challenge is a little bit on where you capture that as much of that doesn’t show up in our automotive segment. Much of that ends up showing up in electronics as well as in our industrial business that kind of get spread amongst those, but the meaningful opportunity for us we've had good design in activity, we continue to be very robustly engaged. There are many, many different OEMs that are working on charging systems. There are some leaders certainly but there are many EV charging companies out there. Some of them most of us have never heard of. Some of them are large OEMs as well involved in that globally. So a nice opportunity for you us.

Appreciate your questions Luke. We'll take our next caller please.

And our next question comes from Shawn Harrison with Loop Capital.

Good morning. My congrats on such a strong quarter. Wanted to talk about the electronics business and just what feedback you're getting on distribution, knowing that demand is so strong here, yet inventory channel is still at the lower end. If there are signs they look to add inventory and just within that context where your lead times right now for your products that go through distribution versus normal?

Sure as you imagine, these are discussions that are ongoing all the time, but particularly in this kind of volatile environments and where of course our revenues of sell in, in electronics were quite robust in the third quarter, we did not see an increase in inventory in the channel. So obviously our sales in were flowing through as our point of sales were up nicely for our products. So it's quite well matched in that. Our lead times at this stage continue to remain pretty sound. There are couple of areas where we had a bit of catch-up we had to do after mandatory shutdowns in the second quarter, but our capacities enabled us to respond to that pretty rapidly. So we really haven't seen strong increases in lead times for our products. So I don't think there is a huge indication right now of a need to increase weeks of inventory because of our ability to respond to pretty strong increases. If there is sustained point-of-sale increased trend, then I think our distribution partners will have to evaluate that and consider the ability to do it and as you know our distribution partners, differentiation between the public guys and the non-public guys and how they view those things. So right now we continue to have those discussions and watch it. We don't see any particular message that there is a solid effort to try to increase inventory for our product at this stage.

Very helpful. And then Meenal so can you maybe speak about prices and just the integration, exiting this calendar year, where will you be at in regards to that integration and I'm also looking at whether there is some additional savings from that $421 that you're not seeing right now or any other accounts permanent, fixed cost reduction actions that you’ve taken here in '20 that can maybe help possible leverage in '21.

So really what's left for us with the IXYS integration, we've talked about in the past few quarters, but it's really what I call supply chain manufacturing footprint and we've talked about a few different consolidation efforts we were going through. We just completed one of the smaller ones that we have to do. So we expect a small amount of benefit coming from that in 2021 where we did two US plant consolidation, but really our larger activity are a consolidation from a couple of our European sites into a new facility in the Philippines. That's really going to go on through all of 2021 for us. So I think as we get into the back half of '21, we'll start to see a little bit of the savings. I'd also say part of our challenge right now is given the fact that if you're not really traveling across the ocean anywhere, earlier we've had a little bit of slowdown in some of the transfers not just from our finance facility but even customers who want to come and qualify product. So that's why would say this is striking through 2021. So I think a little bit towards the backend but we really would expect to see some good savings coming out of 2021.

And with savings, is that a few million dollars as that $5 million just from a power standpoint I think?

Yeah what I'd say is we'll get into more detail later let's call it several million dollars and as we get further into '21, we'll talk about that.

[Operator instructions] And our next question comes David Kelley with Jefferies. You may proceed.

And maybe Meenal I wanted to follow up on the auto margin discussion, I was curious if there were any one time cost in the quarter and things like over time to help me what was clearly outsized ramp that might be getting lost in the shuffle given your strong execution in the third quarter?

Yeah what I'd generally say is we touched on the fact that what you see not just in automotive, but in all of our businesses is there is a fair amount of discretionary what we call the variable discretionary spend that just isn't happening right now, right. We've cut out a lot of the variable compensation we have and we really don't have anybody traveling. There is hardly any travel, no tradeshows things like that. So that's a benefit that we're seeing coming through. I'd say right now it's a little bit more benefit than we are seeing additional cost from things that you talked about whether it's inefficiencies that we're seeing in some factories and things like that. So that's why I think we had an earlier question on that. I mentioned that as we get into 2021 and beyond and we start to see, we start to add back some of this discretionary spend, but at the same time, we would expect sales to continue to improve. We mentioned in our prepared commentaries an example that our commercial vehicle parts of our business is still down and as the market improves, we would expect that improvement. So net, net, how the timing will work between expense add back in a quarter versus sales growth remains to be seen, but that's why we're saying really our target margin remains in that 14% to 15%.

And maybe a question for Dave, could you give us a sense of channel inventories in auto? There has been a popular discussion over the last few days of discerning cycle. I was just curious if you're seeing customers build inventory or can they even build inventory? I think when the questions out there, is the supply chain just simply trying to keep pace with demand at this point. So just curious to hear what you're seeing.

First of all to many, many customers many, many different regions and so it's hard to kind of make blanket statements. We did not see wholesale shifts in inventory that we can identify right. Obviously, OEM vehicle manufacturer there has been a fill of inventory as inventory at dealers have been depleted and things like that, that certainly has driven some of the end demand, but from a supply chain perspective, there certainly areas where we're seeing some customers increase their inventory as they try to ramp up. It also takes us where we've seen people bleed off inventory. If you remember, actually late last year going into the beginning of this year, there were some inventory increases that took place. So I don't know that it's been a huge driver for us in the performance in the quarter.

And maybe if I could just squeeze one more in there Dave, you could you talk about the commercial vehicle orders, the trajectory you're seeing? It like exposure improved sequentially, but it's trailing auto recovery and maybe if you could just remind us of your commercial vehicle exposure that would be great?

Yeah for the commercial vehicle exposure, if you look at our automotive segment, it's about a quarter of that segment is our commercial vehicle revenues and from a order pattern obviously, the overall commercial vehicle space is coming off pretty challenging times a year and half ago pretty strong and went through cycle and kind of a down cycle. We are seeing some improvements in some of the construction vehicle type application for us. Heavy truck in North America which had been down meaningfully is beginning to turn that quarter and showed some strength. Although Europe is not showing as much strength in the heavy vehicle side of things. So you got a lot of movement in a lot of different directions in different parts of the business, but we do believe we're gaining some momentum there and we do think we'll see year-over-year growth in that segment in the fourth quarter.

Thanks for your questions David. We'll take our next caller please.

And our next question comes from Matt Sheerin with Stifel. You may proceed.

You've answered most of the questions here. I guess one follow-up Dave regarding your commentary on the electronics business and it looks like you saw strength across several end markets and guiding to seasonally down, but we're hearing from other pockets of the supply chain that there we're seeing peak numbers in demand and things like work from home, PCs, consumer electronics concern that that market start to tail off and any read there on any of those end marketers or is it just seasonal at this point?

Yeah, what I'd say is that's an area where there has been pretty strong demand out of those spaces in the last quarter and which are certainly moving into fourth quarters as well. We continue to demand there, but there is certainly questions how long will that be sustained or not? We are seeing some improvement in kind of I would say the industrial electronics portion of our business that we see that it may be a more sustained improvement level through the course of next year to help continue to balance and create opportunities for growth for us in that business as well.

Appreciate your question Matt. That concludes today's conference call. Thank you for joining us and your interest in Littelfuse. We look forward to talking with you again soon. Be safe and stay healthy.