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Edited Transcript of LFUS earnings conference call or presentation 1-May-19 2:00pm GMT

Q1 2019 Littelfuse Inc Earnings Call

CHICAGO May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Littelfuse Inc earnings conference call or presentation Wednesday, May 1, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David W. Heinzmann

Littelfuse, Inc. - President, CEO & Director

* Meenal Anil Sethna

Littelfuse, Inc. - Executive VP & CFO

* Trisha Lee Tuntland

Littelfuse, Inc. - Head of IR

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Conference Call Participants

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* Christopher D. Glynn

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* David Jon Leiker

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Gary Frank Prestopino

Barrington Research Associates, Inc., Research Division - MD

* George James Godfrey

CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst

* Matthew John Sheerin

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Shawn Matthew Harrison

Longbow Research LLC - Senior Research Analyst

* Steven Bryant Fox

Cross Research LLC - MD

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Littelfuse Inc. First Quarter 2019 Conference Call. Today's call is being recorded.

At this time, I will turn the call over to Head of Investor Relations, Trisha Tuntland. You may begin, ma'am.

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Trisha Lee Tuntland, Littelfuse, Inc. - Head of IR [2]

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Good morning, and welcome to the Littelfuse First Quarter 2019 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 first quarter, and a copy of our earnings release is available in the Investor Relations section of our website. A webcast for 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 in 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 our participation at upcoming investor events. On May 7, we will be at Oppenheimer's Industrial Growth Conference in New York. On June 5, we will be attending Baird's Global Consumer, Technology & Services Conference in New York. And on June 10, we will be at Stifel's Cross Sector Insight Conference in Boston. We hope to see you at these events.

I will now turn the call over to Dave.

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [3]

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Thanks, Trisha. Good morning, and thanks for joining us today. We delivered a solid first quarter in line with our sales and adjusted EPS guidance. We achieved revenue of $406 million, and our adjusted EPS of $1.96 was above the midpoint of our guidance range.

During the first quarter, we continued to see good design win activity across the electronics, industrial and transportation end markets we serve, driven by the strong fundamentals of the business and the content opportunities, driven by a safer, cleaner and more connected world. Later, I will provide more commentary on the performance of the business.

With ongoing softness in global auto production and excess channel inventories in electronics, we anticipate soft demand to persist. We continue to expect improving conditions in the second half of the year. Despite slower growth in some areas of our end markets, we remain well positioned to continue the execution of our 5-year strategy of double-digit sales and earnings growth.

We've demonstrated in the past, we will deliver exceptional value for our shareholders by driving above-market sales growth, leveraging our operational excellence and managing our costs to align to business conditions.

With that brief introduction, I will now turn the call over to Meenal to provide additional color on our financial results.

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Meenal Anil Sethna, Littelfuse, Inc. - Executive VP & CFO [4]

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Thanks, Dave, and good morning, everyone. I'll start with highlights from our first quarter of 2019.

Sales of $406 million met guidance. And as projected, we're down 3% overall and 4% organically versus last year. Foreign exchange headwind of 2% was higher than we had projected while acquisitions, net of business exit, added 3% sales growth. Sales across our electronics and industrial segments finished largely as we expected. Our automotive segment sales were slightly softer than our expectation. Global car build, excluding Japan where we have limited automotive sales, was down 7%, a greater decline than we had expected.

GAAP operating margins were 15% while adjusted operating margins finished at 16.2%. Sequentially, adjusted operating margins improved 110 basis points on essentially flat sales, more than offsetting foreign exchange headwind. This improvement was a combination of our team's ongoing efforts to contain costs while driving ongoing benefits from IXYS synergy initiatives. First quarter GAAP diluted EPS was $1.48. GAAP EPS included $12 million in after-tax charges mainly due to nonoperating foreign exchange losses as well as acquisition, integration and restructuring charges.

Adjusted diluted EPS of $1.96 for the quarter was above our guidance midpoint of $1.93. Foreign exchange headwinds, along with negative mark-to-market comparisons, reduced adjusted EPS by about $0.27 compared to last year. Lower volumes and associated leverage partially offset by lower expenses resulting from our IXYS synergies and cost containment efforts drove the remainder of our EPS decline over last year. Our GAAP effective tax rate was 20.3% for the quarter. Our adjusted effective tax rate was 19.7%, essentially flat to last year.

Now let me provide some additional performance highlights by product segment for the first quarter. Currency headwinds, followed by lower year-over-year sales volumes and leverage, had the largest impact to our company operating margin. The volume and leverage drop have the greatest margin impact within our electronics segment. Excess inventory reductions at our channel partners was the main driver of volume decline. This volume impact more than offset benefits from the IXYS cost synergies that we had started to drive in the first quarter last year.

Our automotive margins were heavily impacted by foreign exchange, which was about a 400 basis point headwind versus last year. Excluding foreign exchange impacts, our automotive margins would have been up year-over-year despite lower volumes.

Sequentially, segment margins improved 270 basis points as we continue to work on both short- and long-term margin improvement business opportunities, heavily focused on the sensor business. Within the sensor business, we followed fourth quarter cost reduction with additional action during the first quarter. We also announced the closure of one of our automotive sensor manufacturing plants in Europe. A more streamlined manufacturing footprint is one of the many actions we're taking to drive margin expansion across our auto-sensor business.

Our industrial segment continued to have strong sales progression, driving 4% organic growth for the quarter. Margins were down compared to last year as we had a onetime benefit with the closure of the custom business last year. And as the business has grown across new products and geographies, our sales mix can vary, impacting margins in a quarter. The focused portfolio we now have within our industrial segment is aligned with our profitability expectations and continues to show a strong organic growth trajectory.

Looking at cash flow. We generated $31 million in operating cash flow for the quarter and $17 million in free cash flow. Both were lower last year mainly due to lower sales volume impacting earnings along with higher restructuring and interest payments and timing of supplier payments. We continue to drive our capital allocation strategy, executing on several areas this quarter. During the first quarter, we repatriated nearly $100 million of cash, ending the quarter with over 25% of our cash in the United States. We expect to repatriate at least another $100 million during the remainder of the year, which gives us ongoing flexibility to execute on our growth strategy.

Our debt levels were unchanged during the quarter with our adjusted growth leverage ending at 1.7x on a total debt to adjusted EBITDA basis and under 1.0x on a net basis. During the first quarter, we repurchased approximately 80,000 shares at an average price of approximately $170 per share. Since last October, we repurchased a total of 472,000 shares at about $173 per share. Our share buyback authorization expired on April 30, and our Board approved a new authorization of 1 million shares through April 30, 2020, similar to prior years.

We've maintained a consistent share buyback philosophy over the past several years, entering the market when we feel our valuation is at a low point. This philosophy has served our shareholders well ensuring we optimize returns on our buybacks.

Overall, the first quarter played out as we expected, reflecting the slower-growth market environment. Our teams remained focus on what we can control, delivering value to our shareholders through identifying new growth opportunities while managing costs in a dynamic market environment.

And with that, I'll turn it back over to Dave for more color on business performance and market trends.

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [5]

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Thanks, Meenal. I'll start with our electronics product segment.

In the first quarter, reported sales of $265 million were up slightly with organic sales down 4%. While we saw softness across some of our electronics end markets, we had success and growth opportunities across appliances and automotive electronics despite a significant decline in global auto production. We continue to see channel inventory corrections in response to lower growth rate and excess inventory at end customers. Our electronics book-to-bill exited the first quarter was nearing 1.0, an improvement over where we were -- what we were seeing 3 months ago. We continue to closely monitor distributor point-of-sales data and inventory levels. Broad line distributor book-to-bill for our products was also around 1.0.

During the quarter, we saw stable demand for our power semiconductor products, which have less automotive and distribution exposure. However, the protection side of the semiconductor business, similar to our Passives business, is more reliant on the distribution channels and was impacted by excess inventory. While our channel partners have reduced absolute inventory levels in our products, slower end market demand resulted in a static level of weeks of inventory in the channel. As we exited the first quarter, channel inventories across most of our electronics products remained at the upper end of our normal range, which is typically 11 to 14 weeks. As a result, we expect continued softness with ongoing distributor inventory destocking consistent with our comments in January.

Our long-term relationships with our channel partners are a significant factor contributing to our success across our electronics products segment, as about 75% of sales in this segment are fulfilled through our distribution partners. These relationships jointly drive demand creation, end--customer partnerships and, ultimately, collectively drive profitable growth. However, when the market growth patterns change, it does expose us to greater sales volatility. Historically, over 3 to 4 quarters, sales can be impacted due to both inventory stocking trends as well as end-customer demand. We are seeing the impact of this volatility within our electronics products segment.

We continue to make good progress on our IXYS integration effort. In 2018, we were focused on expanding our customer relationships and meeting elevated demand requirements, resulting in 15% revenue growth. At the same time, we aligned our resources to begin driving to our $30 million run rate synergy target. We made significant progress, exceeding our year-1 goal and achieved 40% of the target. We are continuing that momentum in 2019 and expect to realize 90% of our target by the end of this year. As we look beyond 2019, we expect to meaningfully exceed our $30 million savings target as we continue to identify opportunities to streamline our collective business operations.

As part of these synergy efforts, we completed another round of portfolio rationalization actions. During April, we sold an RF product line from the IXYS portfolio that doesn't align with our long-term growth strategy. The transaction will not have a material impact on our sales but does emphasize our ongoing focus on synergy realization and optimizing our business.

Also, on the IXYS front, there are several manufacturing rationalization actions we intend to take in a phased approach. These long-term actions will help us better leverage resources and systems while enhancing capabilities to better serve our customers. They are also a key part of exceeding our $30 million synergy target over the next few years. We have announced a new facility, our third plant at our Philippines site. Our intent is to consolidate most of our European semiconductor assembly and test operations over the next 2 to 3 years in this new plant. Our ongoing progress integrating the IXYS business is on track with our expectations and continues to add value for our customers and shareholders.

Turning to the end markets we serve. We continue to see strong design wins in electronification, and sophistication continues its momentum -- and our customers -- as our customers develop safer, greener and more connected products. We secured wins for a wide range of applications, including telecom for 5G and data centers. Appliances continue to be a strong end market for us in circuit protection and especially electronic sensor products where you're seeing several quarters of double-digit growth. We captured design wins for a variety of home automation products and white goods. Automotive electronics is another good end market where we have made sustained progress. We won business for our rearview mirror camera system as well as battery management systems.

As a wrap up -- as I wrap up the electronics products segment, our competitive advantage is centered around our leadership in circuit protection and growing platforms in power control and sensing technologies. The strength of our brand is further reinforced by more than 100,000 end customers we serve each quarter.

Next, I will cover our automotive products segment. In the first quarter, sales of $113 million were down 10% as reported and down 7% organically compared to a car build decline of about the same magnitude. We continue to see global content increases for our automotive circuit protection products while our results outpace the production declines in North America and Europe. In Asia, in particular in China, revenue declines were driven by excess inventory in the channel.

Compared to our protection business, our automotive sensor portfolio is more program-based independent on Tier 1 sell-through and end customer take rates. It is therefore subject to greater volatility. Our results in the first quarter reflect this dynamic where we saw customer delays for several major sensor projects and a key Tier 1 customer losing a significant program with an OEM. Similar to our protection business, in sensors, we also saw excess inventory buildup in China.

Looking ahead for automotive product segment, we expect continued car build softness during the second quarter. Volatility in demand persists due to global trade and slower economic conditions in China and Europe. Beyond the near-term noise, we continue to see meaningful content opportunities across the transportation end markets we serve. These are driven by the long-term trends of increasing electrification with the transition to hybrids and EVs, even greater sophistication in the electrical architecture of today's vehicles and continuous advancements in vehicle electronification.

We continue to prioritize margin improvement across our automotive products segment with a particular focus on the sensor business. As Meenal noted earlier, foreign exchange across this segment was a significant headwind for us, slowing our path to improvement this quarter. But focusing on what we can control, we took further cost-reduction actions in the sensor business in this quarter along with the announcement of the closure of one of our European automotive sensor manufacturing sites. Also, as we mentioned previously, we are launching several new products and technologies across our sensor business. While we're making progress, these launches continue to create a near-term drag on profitability. Beyond these short- and long-term cost reduction actions, we are looking broadly at additional profitability improvements across the auto sensor portfolio.

On the new business front, we continue to gain new design wins across transportation end market as manufacturers remain focused on safer, greener and more connected vehicles. In the first quarter, we secured global design wins in several applications across a spectrum of vehicle types from conventional to hybrid to full EV. For example, we won new business on emission modules for standardized C engines and EV on-vehicle chargers. We saw significant design wins for engine cooling and emergency call or e-call applications and captured design wins across solar, position and temperature sensing applications.

We also secured another design win in the material handling market, one of the strategic growth areas for our commercial vehicle business. This win was for a power distribution model -- module with a large European forklift manufacturer.

As we wrap up the automotive products segment, I wanted to make mention of some well-deserved industry recognition for our teams received this quarter. Our Kaunas, Lithuania and Matamoros, Mexico locations were awarded the prestigious 2018 Supplier Quality Excellence Award from General Motors. This award acknowledges a supplier to meet various stringent quality criteria and is a testament to the hard work and commitment of our global teams to deliver the highest level of quality and service for our customers. We're proud of this recognition and look forward to continuing to partner with all our customers around the world.

Finally, we will cover our industrial products segment. Our first quarter sales of $27 million were down 2% due to the exit of the custom business in the third quarter of 2018. Organic revenue for the quarter was up 4%. We saw stable demand in North America. And based on our efforts to expand our presence in other regions, we achieved solid growth in Asia and Europe.

During the quarter, we secured several important design wins with key OEMs. In Korea and Spain, we won business for energy storage application, and in Japan, for a solar power conversion application. We also made progress with wins for LED lighting and factory automation applications.

Looking ahead, given our abundant opportunity pipeline and the consistent customer pool we are seeing, our industrial products segment remains poised to outpace industry growth across the end markets we serve. We are well positioned to secure business within high-growth applications such as alternative energy, industrial power conversion, mining, oil and gas, and HVAC. Market forecasts indicate these areas should continue to perform well, and we expect to participate in this growth.

With that, I'll turn the call over to Meenal to talk about guidance.

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Meenal Anil Sethna, Littelfuse, Inc. - Executive VP & CFO [6]

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Thanks, Dave. Onto guidance now. As we discussed in January, we expected the first half of 2019 was going to be a challenge due to a variety of market factors, but we expected to see improving conditions largely in the second half of the year. As Dave noted, the market trends in content opportunities we continue to see align to this view.

With this backdrop, we anticipate sales for the second quarter of 2019 of $409 million to $421 million. The midpoint of the guidance reflects a 10% decline in reported sales and a 7% organic sales decline versus last year. We estimate currency to be about a 2% headwind to sales growth for the quarter. We expect second quarter adjusted diluted EPS to be in the range of $2 to $2.14. Our adjusted EPS guidance assumes an adjusted effective tax rate in the range of 18% to 19% for the quarter. Our adjusted EPS guidance includes an estimated $0.25 decline from last year due to unfavorable foreign exchange impacts and mark-to-market comparisons as well as timing of stock compensation expense.

Sequentially, sales growth is projected to be up 2% with adjusted EPS growth projected to be 6% at the midpoint of our guidance, highlighting the cost improvement efforts that we're driving. We are estimating 25 million share -- 25 million diluted shares for the second quarter, which incorporates the shares bought back to date.

I'll also provide a few additional financial model updates for the full year. Consistent with the recent trends, currencies continue to be a headwind. Based on current foreign exchange rates, for the full year, we expect to see about a 1% sales decline from foreign exchange and about $0.50 in adjusted EPS decline versus last year due to currency. At current interest rates, we are estimating interest expense for the year in the range of $22 million to $23 million. We expect amortization expense of approximately $40 million for the year. We're maintaining our full year 2019 tax rate range in the 18% to 20% range but expect the rate to vary across quarters due to the timing of certain discrete tax items.

Our full year estimate for capital expenditures remains $90 million to $95 million. We expect to invest for long-term organic growth opportunities as well as the IXYS footprint and integration work, which is in full swing this year.

And with that, I'll turn it over to Dave for some final comments.

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [7]

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Thanks, Meenal. In conclusion, you can see by our actions that we remain focused on operational excellence and managing our costs to align to business conditions. Over the years, we have been a proven source of growth and value creation. Our business fundamentals remain strong, and we are well positioned to benefit from the content opportunities driven by the global megatrends of safety, energy efficiency and increasing connectivity. We will continue to differentiate our company by the consistency, reliability and performance we deliver with our circuit protection, power control and sensing products in the electronics, industrial and transportation end markets we serve.

I will now turn the call back to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Shawn Harrison with Longbow Research.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [2]

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The inventory correction that you're seeing in the electronics business based upon the POS you're seeing from distribution now through April, do you think you'll be freeing clear that inventory overhang as you move into the second half of the year and get more toward a typical organic growth rate?

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [3]

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Shawn, as we discussed in the prepared remarks, we did see absolute inventory dollars reduced in the channels with our distribution partners, but with sell-through, the weeks of inventory really didn't move down very much. So there's certainly more work to be done in driving that out of the channel. But clearly, that's impacting and reflected in our guidance in the second quarter. Our general view is there's a likelihood it bleeds into third quarter but certainly begins to improve in the back half of the year.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [4]

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Okay. Great. And then as a follow-up, is there a way to quantify the actions -- the non-IXYS actions you've taken to improve profitability, either be it in the sensors business or other businesses and when you would expect to see the full run rate of those potential profit improvement actions?

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Meenal Anil Sethna, Littelfuse, Inc. - Executive VP & CFO [5]

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Yes. So Shawn, as I mentioned also in the prepared remarks, we started in the fourth quarter into the first quarter with cost reductions. And then also, we just recently announced the plant closure I mentioned. Those take a little bit of time to start to get into the run rate. These closures typically take 6 to 9 months to complete by the time you get everything out. So I would say you're going to see progressive sequential improvement in the margins. That's what we're expecting from the cost actions. I think the pieces that are a little bit difficult to predict right now are things like foreign exchange is an example, which had a pretty significant headwind for us. But we would expect progressive sequential improvement from all the cost actions that we're doing.

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Operator [6]

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And our next question comes from Christopher Glynn with Oppenheimer.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [7]

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On the IXYS integration comments that process, including some footprint stuff in full swing, just wondering if we should be thinking about impacts on the profitability of IXYS even on an adjusted basis. I know you exclude restructuring costs that are permitted, but typically, there's redundancies and such.

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [8]

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Well, certainly, we expect the profitability of the IXYS business that we acquired to continue to gradually improve profitability as we put these actions in place. As we've talked about, we've taken some steps on taking out some product lines that really didn't drive margin profiles that we felt were appropriate and didn't fit our strategy. And these cost reduction moves also longer term on footprint rationalization will take time to get in place. As we talked about, we literarily announced recently, we're starting construction of a new plant in the Philippines. That's going to take us 2 to 3 years to get the plant completed, the transfer is completed, customer approvals and things like that. But we certainly believe year-to-year, we will continue to see gains and profitability of the IXYS business.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [9]

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Okay. And on the $0.50 of EPS impact from FX for the year, can you review the mechanics on transactional exposure there overall and then where it hits particularly, it sounds like auto?

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Meenal Anil Sethna, Littelfuse, Inc. - Executive VP & CFO [10]

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Yes. So if I step back, bigger picture from the business that we have and where we do business, in general, we have a long position when it comes to the euro. So the weaker euro has hurt us, and we have short positions in -- largely in the countries where we've got larger manufacturing sites, so in places like China, where the stronger RMB does hurt us, the Philippines and Mexico. So I think with that backdrop with the direction where currencies have moved and moving around a little bit, it's the combination of really I'd say those 4 currencies that are really causing - and I'd say the bulk of that being from that euro and the RMB - that are really causing that year-over-year decline.

And specifically on your question on auto, Chris. When we take a look at our broader, I'll call it the sales and the manufacturing footprint, auto is probably the most dispersed in terms of sales around the world in multiple currencies and really manufacturing and locations around the world across the entire segment. So that's why it tends to get hurt the most from a currency perspective.

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Operator [11]

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And our next question comes from David Leiker with Baird.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [12]

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I guess 2 things I'd like to dig through. They're kind of related, I mean if you look at the timing of the stock comp, it's headwind here in Q2. I mean by definition, I think that implies there was a tailwind at some point last year. Can you help clarify that? And as you look at how the Q1 and Q2 are progressing and if you step back 3 or 4 months, can you give us some sense -- I know you don't give full year guidance, but some sense of what that full year looks like? Obviously, currency and production are headwinds, but what about the balance of that relative to what you are expecting at the start of the year?

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Meenal Anil Sethna, Littelfuse, Inc. - Executive VP & CFO [13]

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Yes. So let me take the stock comp piece first. So really the stock comp is really a timing issue. And if I put it simply, for us grants occur in the second quarter of the year. And we, like many companies, have provisions around retirement and age of service. And if individuals meet those provisions, you've got -- we accelerate vesting, and so you take expense immediately in the quarter. So rather than radically having that expense spread over multiple years, it gets -- it hits all in one quarter. And so that's really -- that ends up being the timing issue. I'd say twofold, one being second quarter for us tends to have the highest stock compensation expense because of that. And as we have some bigger vests that are going on, it even front-loads expense versus the multiple years of vesting that you have.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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But the timing of that is similar to what it would have been in past years, is that right?

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Meenal Anil Sethna, Littelfuse, Inc. - Executive VP & CFO [15]

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The timing is similar to past years, but we happen to have just some higher -- we happen to have just with the population that we have -- we just happen to have more people that fall into that and with some higher dollar amounts year-over-year.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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Okay. And then if we leave currency and leave the build rates on the side, if you look at the rest of the business, how would you characterize that that's performing relative to where you expected at the beginning of the year?

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [17]

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Yes. I think I'll take that, David. I think in general, the year is kind of shaping up as we expected going directly into the year. We certainly knew that the first half of the year with excess inventories and a bit of a correction in the electronics side of the business was going to be a challenge. That -- we're seeing that. Maybe it'll take up a little longer than we had hoped to kind of bleed through that. Maybe, again, as I mentioned earlier, little bit into the third quarter. From the automotive standpoint, we, going into the year, had a more pessimistic view on what car build was going to look like in the full year of 2019 than maybe what the agencies were putting out. Probably pretty consistent, though was I think what, David, your and Baird's view is on what car build is. So yes, kind of shaping out as we expected.

I do think the amounts of excess inventory in the channels in automotive, which normally has not been or has not historically been so much of a headwind in China because of our structure being a little different and a number of small Tier 1s and small OEMs that we serve, a lot of that gets served through distribution channels. And so there was more excess inventory in the channel in automotive than we would typically have seen. And that's probably a bit of a negative surprise for us, but we'll work our way through that as car builds pick up in Asia.

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Operator [18]

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And our next question comes from Matt Sheerin with Stifel.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [19]

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(technical difficulty)

stock comp and the year-over-year headwinds, that $0.25 year-over-year headwind on EPS, you talked about stock comp and mark-to-market and FX. Could you break that down for us and also kind of elaborate on what that mark-to-market impact was and what was that?

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Meenal Anil Sethna, Littelfuse, Inc. - Executive VP & CFO [20]

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Yes. So let me start with your second question. So we talked about in various calls that with the accounting rules changed around minority investments that you had and that changed in the beginning of 2018, so you're required to mark-to-market minority investments that you have, and that mark-to-market runs through that P&L. So we have a few investments that we've had impact every quarter, sometimes they end up being material. Last year for us, we had some positive income that came through and you know we don't forecast that. So that ends up being the issue and that's about a $0.05 impact on a year-over-year basis. The stock comp incremental piece on a year-over-year basis is about $0.09 and then the rest is foreign exchange.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [21]

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Okay. Great. That's helpful. And then back on to the electronics business and the headwinds that you're seeing and the correction, one thing, I think you did talk about that last quarter was the fact that the pricing has been stable, if not firm or up in some cases last year, and the thought from other suppliers, industry leaders, is that volumes come back, we're going to be -- see a return to normal more pricing and some pricing pressure. Are you starting to see that as volumes come back? And what's your take on the pricing environment as we go through the year?

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [22]

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Good question, Matt. And yes, we talked about last year, we probably had more about favorable pricing conditions than we would in a normal year with a strong kind of buildup that was going on and the focus on making sure they had product. So we do see that beginning to move back closer on its way towards normal. It's not back yet at a stage where we see pricing at kind of our average level, particularly in electronics. So it's still favorable compared to history, but it's becoming unfavorable compared to last year. So we -- our expectation is that kind of works its way back to normal levels over the course of the next maybe 3 or 4 quarters.

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Operator [23]

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(Operator Instructions) Our next question comes from Steven Fox of Cross Research.

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Steven Bryant Fox, Cross Research LLC - MD [24]

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First question was the operating leverage you called out in your -- for the current quarter, the 6% increase in profits versus 2% in sales, what are the main drivers quarter-over-quarter in that leverage? And then I have a follow-up.

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Meenal Anil Sethna, Littelfuse, Inc. - Executive VP & CFO [25]

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Sure. So the 2% and the 6% that I called out was really for the second quarter, the 2% growth.

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Steven Bryant Fox, Cross Research LLC - MD [26]

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Yes. That's what I was talking about.

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Meenal Anil Sethna, Littelfuse, Inc. - Executive VP & CFO [27]

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Sure. So the -- so when I talked about earlier with some of the questions, the stock compensation piece is actually, from a timing perspective, a sequential perspective, that's actually a negative for us. And then offsetting that, there were some of the operational improvements we've been talking about, it's the continued progression we see in the IXYS synergies that are coming through, the additional volume that we have, the sales volume, that helps from a margin and leverage drop-through as well. And then overall, we've been talking about the past couple of quarters, we're really containing costs in terms of, not just variable costs but other discretionary spend, et cetera, and you're seeing some of the benefits of that.

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Steven Bryant Fox, Cross Research LLC - MD [28]

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Great. That's helpful. And then I have a follow-up, if I could.

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [29]

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Sure.

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Steven Bryant Fox, Cross Research LLC - MD [30]

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In terms of closing the sensor plant, I guess I was trying to understand the thought process involved there, whether -- how reactionary it was or strategic? And given sort of the uncertain, hopefully improving markets and some of the product pruning you seem to have on your operating calendar to do, could you pull some of that in or push some of that out? Are you going to move that around depending on market conditions?

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [31]

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Yes. So in general, what's driven us to make the decision to do a plant consolidation and shut down a plant, we have a small -- relatively small sensor manufacturing plant in Italy. We have a larger factory in Lithuania, and we also do a lot of sensor manufacturing in Mexico. So we made the decision that simplifying the footprint for the long term would give us a better and a lower fixed overhead cost structure. So we made that decision really for the long-term strategy of the business. Pulling that in, pushing that out, it's really not related to particular cycles or things like that because as you know in the automotive world, when you're making transfers and changes like that, you got to work very closely with customers and get qualifications and go through that process. So that really dictates the timing of when you can complete those things.

Other actions that we're looking at in the automotive sensor business, clearly, in the automotive world, you don't move very rapidly with customers without creating problems for customers. So we will continue to look at those things and make decisions and take actions as quickly as possible, but with respect to what our customers need and make sure we're supporting our customers as we implement those changes.

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Operator [32]

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And our next question comes from David Godfrey with CL King & Associates.

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George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [33]

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It's George. I believe you said the organic growth on a sequential basis for Q2 about 2%, is that right?

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Meenal Anil Sethna, Littelfuse, Inc. - Executive VP & CFO [34]

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Yes. Correct.

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George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [35]

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Okay. So if I just annualize that 8%, there's no reason to think a 5% to 7% target is off the table, is that right?

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Meenal Anil Sethna, Littelfuse, Inc. - Executive VP & CFO [36]

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I would say we are -- we're pleased with the fact that we've been showing sequential growth the past couple of quarters, but I would say with a lot of the market dynamics that we've talked about on the electronics side with the excess inventory sitting in the channel, we're still working through that. And the other backdrop being automotive, the first half being so far down on car builds. I think you'd be a bit optimistic to assume an 8% growth for the year even on a sequential basis. I think we've got to see how things really play out the next couple of quarters.

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George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [37]

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No. I was thinking on the 3-year targets that you laid out before, the 5% to 7% on -- I realize any given year could be up or down, but those are still on the table, correct?

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Meenal Anil Sethna, Littelfuse, Inc. - Executive VP & CFO [38]

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Yes. I -- what I look back at is the 5% to 7% is still absolutely there. We stand by the 5% to 7% and don't really have any change to that. If I take a look at the past couple of years, we've been growing 7% and 8% organically, average out to about 8% the past 2 years. It's not going to be that when we look at a year-over-year growth this year, but we still feel very good about the long term, the 5-year view on our 5% to 7% target that we've set out to achieve.

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Operator [39]

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And our next question comes from Gary Prestopino with Barrington Research.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [40]

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When you guys -- when you reported Q4 numbers, you were talking about a decline in auto build of 2% to 4% for this year. Given what's happened in Q1 with the auto build, has that changed at all in your outlook?

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [41]

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Yes. I think our outlook of full year build remains pretty consistent in that, but we do expect it to be down low single digits for the year, that's kind of our view, and there are a lot of thoughts out there from all the different companies as well as the agencies that produce those forecasts. The comps on car build get easier in the back end of the year, so it'll certainly show an improvement year-over-year in the back end of the year compared to last year. But I think our view is still that we'll ultimately end up car build down a couple of percentage points.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [42]

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Okay. And then -- so then that would -- based on what happened in Q1, it would imply that it's got to get better as we go through the year. So in terms of what you are seeing there, is it going to be basically more North American-based for your business, European-based, China-based? Or is it just the content growth all across the board?

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [43]

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Yes. First of all, we certainly continue to see content growth beyond car build globally, so that continues to be a good story for us. And so we're comfortable with that continuing storyline. From a car build and how things are going to improve going into the back end of the year, I would say North America has been relatively stable, and we'll see it bounce around stable for our most of the year. We don't see that changing dramatically. Europe, we see softening in the second quarter compared to last year clearly. But if you remember last year, there was kind of a build-up to WLTP and then a decline in the back end of the year. The big swing will be whether China car build, particularly China car build, picks up in Q3 or ultimately into Q4, where they're expecting strong performance there. So a lot of it is really dependent on I would say Asia being the big swinger.

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Operator [44]

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And we have a follow-up from David Leiker with Baird.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [45]

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Just, I guess, a couple of other things here. If we look at IXYS, you talked about winning a contract for an onboard charger. Is that contract win a function of IXYS and being able to cross-sell that product or something that has been developed in contract one organically with what was within Littelfuse before?

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [46]

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Yes. Actually, that specific win we were talking about is actually in our circuit protection business. It wasn't with the power semiconductor business. But with that said, we are seeing good design wins and good activity, particularly in Asia with IXYS power semiconductors being designed into off-board charging systems. Not onboard yet, we talked about this before, IXYS really has not had a lot of business in the on-vehicle side of automotive. And we're working through readiness on that, and we see that long term on the roadmap for us for sure. But in the near term, the opportunity in the power semi side on the EVs is really in the infrastructure side.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [47]

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Okay. And then just one other item. Back on the inventory channel side of the equation, particularly on the automotive side, I guess more than others. We've heard comments from some other suppliers similar type of environment that you're in that have been talking about those inventories looking closer to more normal inventory levels to what you seem to be suggesting. Is there any -- do you have any thoughts on what you might be seeing that's different than what some others might be seeing?

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [48]

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Yes. I can't speak for the exact supply chain that others are seeing. In North America and Europe for us, we have a relatively short supply chain between us and ultimately the OEM. We ship directly to the Tier 1s. The Tier 1s then carry their kind of normal inventory levels into the OEMs. But that operates a bit differently for us in China with several smaller Tier 1s in the electrical infrastructure side and a number of OEMs being served. Much of that for us, we're serving through a distribution channel. So there's one more step in the supply chain, if you will, in China that we don't see in the rest of the world. And with that, it adds the typical inefficiency of another step in the supply chain. And with a lot of strong growth in car build in China for so long, I think they were carrying pretty heavy inventory levels to make sure they could respond to fluctuations in demands from the OEMs. And as car builds came down, they ended up having -- came down very meaningfully, particularly with the Chinese national OEMs, the amount of inventory they were carrying in the channel is higher, and they're bleeding that down. So I think I can't speak for others. That's a unique thing for us in China, specifically, that drives the problem.

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Operator [49]

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And our next question is from Steven Fox with Cross Research.

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Steven Bryant Fox, Cross Research LLC - MD [50]

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Sorry for the follow-up, I just want to make sure I was clear on one part of my question, Dave. When you look at product pruning going on, is that something that you can manage relative to markets or is that fixed given where you are with different end-of-life commitments?

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [51]

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Yes. So specific -- I think we're talking about automotive sensors on that. In the automotive world, when we make that decision, we want to work our way maybe out of a particular area, particular application. The reality is that does take time because we're not -- with our ongoing relationships with the automotive customers, we're not interested in putting them in a difficult position. So we'll communicate with them and work it off over the course of a couple of years to kind of work through those sorts of things in the automotive world. Whereas in other spaces where we've done some product pruning in and around the IXYS business, most of those cases, we're able to take faster actions to kind of work our way through that in a year or less than a year.

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Operator [52]

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And our next question is from David (sic) [George Godfrey] with CL King & Associates.

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George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [53]

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Dave, you are quite accurate in providing a little color on what you thought the automotive market would look like this year ahead of time. Do you have any -- just curious on your experience, any intuitions on what it might look like next year at this point or do you need to be closer to the end of the current year?

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David W. Heinzmann, Littelfuse, Inc. - President, CEO & Director [54]

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What I -- I think we would have to be able to closer at the end of the year because it is so much driven by kind of regional economies and things like that. It's a little hard for me to predict that. What I will say is kind of take us back to comments we've made before, which was we build our strategy over the long term, we believe global car build grows at about global GDP, which is about 2% on a year-over-year basis. By the way, if you look back from 2016, which was about a 5% car build growth, and in 2017 at a 2%, and you look over the period of time, it's going to end up being about 2%. So I don't have any particular insight on what 2020 looks like other than our long-term plan continues to build around that 2% or so.

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Trisha Lee Tuntland, Littelfuse, Inc. - Head of IR [55]

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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.