Q1 2020 Earnings Call
It's a cold thank you for your patience.
[music].
Good day, everyone and welcome to the little piece incorporated first quarter 2020 conference call.
Today's call is being recorded.
This time I like to turn the conference over to head of Investor Relations Trisha Tuntland. Please go ahead ma'am.
Good morning.
Welcome to the Littelfuse first quarter 2020 earnings conference call.
With me today, or Dave Heinzmann, President and CEO, and Meenal, Sethna Executive Vice President and CFO.
It's my report results for our first quarter in 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 form 10-K, and 10-Q for more detail about important risks that could cause actual results to differ materially from 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 and several virtual conferences, including Oppenheimer's industrial growth conference on may fit and non deal Roadshows and we look forward to engaging with you during these outreach opportunities.
I'll now turn the call over to Dave.
Thank you Trisha good morning, and thanks for joining US today first my thoughts go out there every every one impacted directly by the Coburn 19 pandemic I want to express my gratitude to the global medical professional first responders and other central personnel further sacrifice some leadership during these trying times.
These are indeed challenging times and little fuse.
And our global associates or doing our part to help flattened occur.
Recognizing the severity of the situation our leadership team has acted with urgency to focus on three key priorities.
Our first priority is our global associates to protect the health and wellbeing of them their families and the communities, where we operate while working to preserve jobs.
From the early signs of the outbreak in China, we implemented a wide range of preventative measures and adhere to government recommendations and requirements in every country, including compliance with stay at home orders.
The strong support of our global IP team enabled us to quickly expand our mobile infrastructure and flawlessly shift to remote working environment for most support functions. As a result, we did not lose itself.
Our associates in China have guided us through this extraordinary experience.
Closely working together with our global teams sharing their learnings and best in class practices.
Plays who can work from home have been required to do so and we suspended all travel we cancelled in person meetings postpone trade show participation and limited visitors to our sites.
Virtually all of our manufacturing sites have been deemed essential due to the customers end markets we serve.
And these locations where our associates are needed on site, we implemented strict social distancing enhanced our cleaning and disinfection protocols and provided PE or personal protective equipment for our associates.
Around the world, we're providing PPD such as masks for all of our associates and their families.
We have donated PE and many of our global locations to local hospitals and supported extraordinary efforts by many of our customers to produce critical needed medical equipment.
These actions are consistent with our corporate initiatives to support our communities.
I want to personally thank each one of our associates for their remarkable leadership during this time of tremendous uncertainty.
We will continue to take proactive measures to protect our people and keep our associates around the globe employed.
Our second priority is to continue to support and served a critical needs of our customers.
At the onset of cope with 19 outbreak, we deployed our global business continuity task force.
This team has been working extremely hard to mitigate the disruption to our customers and is focused on the recovery of operations manufacturing and supply chains.
I'm very proud of how our global teams have collectively come together to respond to this challenge where safe to operate with very strict controls in place. We are continuing to produce for our customers. The products. We manufacture often play in the central role in the supply chains of our customers and vital and industries. They serve from health care and medical device.
It is like the freebie leaders and ventilators to critical communications equipment transportation and key infrastructure like energy.
We take great pride in knowing that many of our products are required to keep the world's safe and moving forward.
Like many of our customers suppliers and peers, we're seeing some does logistics constraints and disruption across the global manufacturing footprint as regions work to contain the virus.
While this is a rapidly changing situation Oliver plants are operating with varying limitations, except for our locations in Mexico.
The situation in Mexico is a very recent event, which is quickly evolving we expect the disruptions in production, we are experiencing to temporarily impact our impact us during the second quarter.
On a positive note following the reopening of China in early February our manufacturing plants, there returned to normal levels during March.
We're also mindful that while we understand the direct impacts of our plan is more difficult to forecast the indirect impacts like supply chain constraints supplier ramp up and workforce availability as a result, our ability to continue to manufacture may change at anytime.
As our sites in China returned to normal operations, we're continuing to leverage our associates leadership for our other global locations.
It is a remarkable efforts hard work and dedication of all of our associates around the world that has enabled us to execute contingency plans to limit supply chain disruptions. So we can continue to serve our customers.
Our third priority is the long term financial health of the business over the past several years, we have made structural changes refining our portfolio of products and footprint around the world, while adjusting our cost structure commensurate with demand levels.
Along with these optimizations, we have taken decisive actions over the past several weeks to reduce non essential spending.
We have postponed hiring in most areas delayed merit increases suspended our annual incentive program reduced capital expenditures and temporarily reduced compensation across our board of directors and executive leadership team.
These reductions will be in place until we are solidly improve situation.
All of these actions position us to weather the near term challenges and prepare us to outperform the market post the pandemic.
We've also maintaining a conservative financial position over the years, which is even more important during these difficult times challenging conditions will not be behind as quickly and given the level of uncertainty we're focused on preserving our financial flexibility, meaning we will provide an update on our strategies here in the context of koeppen 19.
We expect a pandemic will have a meaningful and lingering impact on the global economy.
At present shelter in place orders in some regions are limiting our ability to fulfill all customer demand.
While we expect these limitations to subside in the coming weeks, we do expect demand softness to impact our business through most of 2020.
That said, we will continue to prioritize our people customers and financial health.
The success of each is highly dependent on one another.
I am confident that the mitigation actions taken and other potential levers position our company for profitable growth beyond the pandemic.
Now I will provide an update on the first quarter performance of our company.
Our financial performance was significantly impacted by Copel 19, we recorded first quarter sales of $346 million, which reflects disruptions related to the pandemic in China.
Our disciplined cost management actions helped mitigate the impact to the pandemic to deliver an adjusted operating margin of 14% and adjusted EPS of $1.20 cents.
Cobot 19 impacts in China, mainly affected our electronics product segment.
During the quarter, we continued to see electronics inventory destocking with distribution Dms and OEM partners and as expected saw weeks of inventory levels near the bottom of our normal 11 to 14 week range.
Our electronics book to Bill exiting the first quarter was well above one which may reflect some ordering in anticipation of coal with 19 supply chain disruptions.
We are working with our strategic channel partners to closely monitor this very fluid situation.
Our automotive products segment performed above market led by our passenger car fuse business. However, given the pandemic related automotive shutdowns. We believe there is a buildup of inventory at Oems and tier ones. The magnitude of the shutdowns will require a significant amount of time to burn through excess inventories.
On a positive note China Oems are slowly starting up again and it is likely Europe and the U.S. will follow pending the reopening of different economies.
As the financial impacts of the pandemic ripple their way through the global economy demand patterns for vehicles will likely be affected.
We expect second quarter global car production to be down more than 40% year over year as consumer sales remained significantly below production levels and.
And we anticipate soft commercial vehicle markets for the remainder of the year.
For the full year 2020, we expect global car production to be down more than 20% compared to the prior year. We do however continue to expect our long term growth to outpace global car build with our ongoing content opportunities.
Our industrial product segment saw healthy demand pre KOVA 19, led by renewables and power conversion looking ahead, we anticipate softer conditions as macro uncertainties around the oil and gas industry and the pandemic weighs on mining and us nonresidential construction.
Based on current orders, we're seeing a pullback in demand during the second quarter.
With the exception of oil and gas, we expect to slow recovery and other industrial markets. During the second half of this year.
Longer term, we are confident this business will continue to drive profitable growth.
During the quarter, we made significant progress on our strategic footprint initiatives.
We continued integration activities across our semiconductor business completing the construction of our new facility in the Philippines, which expands our capabilities and module and discrete assembly and test operations.
New equipment has been installed and we have begun product and customer qualifications.
In addition, we are on schedule with our epitaxial facility consolidation and capacity expansion.
Expect to complete the transfer products in the third quarter.
We are also embarking on a manufacturing site consolidation within our industrial business.
These strategic strategic infrastructure actions build on our foundation of operational excellence and position us to continue the execution of our company's long term growth strategy.
Despite near term challenges, we're working through we're balancing our time to remain focused on winning new business opportunities.
The long term secular themes of a safe greener more connected world persist well into the future. These focus areas are driving next generation electrical architecture and power conversion.
And increase the complexity and applications and the content opportunity for our protect control and sense products.
As a market leader, we are positioning our company for growth within these themes based on our differentiated broad range of highly reliable products and application knowledge.
In this the strength of our product offerings in the technical capabilities of our engineers that have earned our company exceeded the OEM design index.
This is this is substantiated by a recognition as a gold award winner of the 2020 Edison Awards are innovators were in knowledge toward developing digital temperature sensors that deliver improved reliability and safety for fast charging us be connections for electronic applications. It is our product.
An application expertise and deep relationships that set us apart from our competitors.
During the first quarter, we were able to close strategic design wins across a wide range of applications in all regions.
As we all adapt to working remotely we're finding that a virtual and by element is conducive to ongoing design in work as Oems engineers are sifting shifting the balance of their focus from operations to design activity.
Across industrial applications. There is a healthy level of design activity and strong engagement as a result of new product designs and superior local technical support we can capture new business in renewable energy storage in Japan and won designs in motor drive applications for HIV HD.
Additionally, our engineering support and customer relationships enabled us to secure new business from mining application and power supplies in welding equipment.
For electronics applications development programs and research work is ongoing and there's a high level of collaboration with customers.
Responsive engineering and application support and customer relationships enabled us to secure new business in Fiveg base stations, Entercom systems, consumer appliances and metrics medical devices like ventilators.
Unmatched product differentiation led the business wins in power supplies for servers and portable electronic devices.
Within the transportation applications, we continue to leverage our engineering relationships and see positive customer interaction. We are focused on long term opportunities and program wins with our differentiated products. We continue to win new designs and global electric vehicle platforms.
Based on our engineering support our products were selected for several light truck platforms with a major global OEM.
In sensors, we captured new solar business with two big Oems in Europe in Korea, and business wins for seat positioning and comfort.
We continue to win new business and commercial vehicles with the strength of our product development and engineering efforts.
As a result of our ability to make customized products aligned with customer specifications. We won business for class eight heavy duty trucks in North America.
In Europe with our focus on growth beyond North America, our product reliability and customer support secured us power distribution business for electric forklift trucks, expanding our presence within a strategic customer.
Across our businesses, we see this elevated level of design in activity, continuing which is supported by our robust pipeline of new products.
As we continue to navigate the challenging macro environment. Our global teams remain focused on driving long term growth profitability and cash generation. We have actively managed cost to align the business conditions, while advancing several strategic initiatives across the industrial electronics and transportation end markets we serve.
Demonstrating our ability to balance short term cost containment with the execution of our long term strategic initiatives.
I'll now turn the call over to Meenal to provide additional color on our financials capital allocation and outlook.
Great. Thanks, Dave and good morning, everyone and thanks for joining us today.
Hello, everyone and of close to you are staying safe and healthy.
So let me start with some summary comment.
Fundamentals of our business remains strong and our long term view on strategy and growth opportunities hasn't changed over the years, we've maintained a conservative financial passenger positioning us well to navigate Tunis uncertain time.
With this foundation, we expect to come out stronger when we see markets improve.
This morning, I'll cover some highlights from our first quarter, followed by our capital allocation views and liquidity.
Close with current thoughts on our outlook in key near term driver.
We finished the first quarter with sales of $346 million down 15% on a reported basis over the last year and down 13% organically.
Production disruptions from government directive affected our factories in China.
These disruptions affected sales across our electronics segment and parts of our automotive segment.
As we projected in January weeks of inventory in the channel were down in normal ranges based on current demand level.
First quarter GAAP diluted EPS was one dollar while adjusted diluted EPS was $1.29.
We had on favorable leverage from lower sales versus last year, along with coal did 19 related expenses ranging from additional production costs.
Hi, and higher freight costs.
Partially offsetting this split their cost reduction efforts.
Favorable foreign exchange and lower commodity prices, which collectively contributed 55 cents EPS benefit.
Our GAAP effective tax rate with 30.6% and adjusted tax rate with 26.5%.
We are projecting a full year tax rate in the upper 20% range due to the expected lower earnings across our low tax jurisdictions.
Across our segments electronics, and automotive were affected by lower volumes impacting leverage.
Operating margins across all of our segment benefited from favorable foreign exchange as well as the cost reduction actions, we took in the quarter.
Notably our automotive margins improved 190 basis points versus last year also benefiting in the cost actions, we've been taking over the past year.
Now, let me Benson extra time, covering liquidity and capital allocation is I expect there likely top of mind.
We ended the first quarter the $621 million in cash. This includes $100 million that we drew down from our revolver late in the first quarter.
While we have no immediate use for these farms, we to the cautious view to ensure liquidity during this uncertain macro environments.
During the quarter, we generated $45 million in operating cash flow and 29 million in free cash flow a conversion rate at 116%.
Our working capital metrics are consistent with the past several quarters with a cash conversion of 104 days.
During April we also entered into an amended five years 700 million dollar credit facility.
We started that process late last year as part of our normal activity to optimize our capital structure.
Our amended revolver continued to provide us with additional liquidity and flexibility, while improving our debt covenant ratios and lowering overall theme.
We have about $240 million drawn down at the ended the first quarter on the revolver.
The maturity of our remaining debt our spread over the next several years with our next maturity a $25 million in Twentytwenty too.
With this debt structure in place we finished the quarter well below 1.0 time on net debt to EBITDA leverage.
Our growth flags 2.6 times, well under our covenant ceiling.
Our current capital priorities, our funding organic growth for our business.
Continuing to build on design activity to support new growth opportunities and capital expenditures, we need to support the open.
We continue to invest capital and new products to support our long term growth strategy as well as cost reduction initiatives.
But with different other capacity expansion program due to new term volume expectations.
We have reduced capital investment to $60 million for the year 30, 30% reduction versus our January view.
Acquisitions remain our top priority for long term growth and value creation for our shareholders, but will likely be tables in the short term given the market dynamics.
We've seen deal activity slowed down dramatically given uncertainties around valuation and market clarity and even the basics a deal logistics.
We've seen deals and progress get deferred by sellers and we stepped away from the transaction we were expecting to close this quarter.
We are keeping a close eye on a number of targets in our funnel and may see some prospects converts down the line amidst the current financial dynamics.
Moving on to share buybacks, we replaced our expiring authorization with a one year 1 million share authorization.
This is consistent with what we've had in place for the past several years.
During the first quarter, leaving we purchased $23 million of our shares the suspended our buyback activity late in the first quarter.
We don't expect to repurchase our shares in the near term while the impact in duration from Cobot 19 remains unclear.
As noted in our press release, our board approved our second quarter dividend and our dividend rate is unchanged.
But if the macro economic disruption intent intensified our board of directors would consider a change in the dividends.
Overall, we feel our balance sheet is well positioned within reasonable leverage we've implemented a capital structure to ensure liquidity, while executing our capital allocation objective.
But we're not complacent, we're keeping a close watch on market conditions, and how they could evolve our capital priority.
So let's move onto our outlook.
Given the lack of market and operational clarity at this time, we are withdrawing our full year guidance. We provided in January and we are unable to provide specific second quarter guidance.
However, our goal is to provide you with as much insight and transparency is possible into our business.
So let me share with you today, what we're seeing across our internal operations and end markets.
We estimate our second quarter sales down, we estimate or second quarter sales to be down more than 20% versus the first quarter.
Our main gating factors, our automotive market demand and government directed in certain countries affecting our supply chain.
We expect automotive sales to be down substantially in the second quarter with car builds estimated to be down more than 40% last year led by the us in Europe.
We also believe a tier one customers are carrying excess inventory due to their shutdowns and in many cases experiencing some of the same production challenges that we are.
And our production side, we are running at partial levels in our factories in the Philippines and in Italy, and expect to weren't returned to normal production levels. During the month of May.
Our factories in Mexico are currently shutdown and we expect us to continue to at least mid may.
These directive began at varying time in late March and April and evolve often based on local health and safety views.
We continue to work with government authorities closely as we produce many critical components used in essential products.
However, as health and safety conditions evolve across these countries the government constructions do as well.
Given these production limitations current demand exceeds our ability to supply excluding in the automotive end market.
We continue to see reasonable demand levels, and our closely monitoring and customer demand and production levels closely.
Looking beyond the top line, we're expecting our operating income decremental margin to be about 45% given the steep volume decline and our cost running higher than typical or current levels of production.
So we're not running many of our operations at full capacity, we're committed to maintaining jobs for our associates.
We're also incurring additional cobot 19 related expenses at all of our locations.
And we're running at lower levels of productivity due to a partial operations and safety measures that we've implemented around the world.
To offset some of these cost and productivity hits, we've taken aggressive steps to reduce full year operating expenses by $30 million versus last year.
These actions targeted reduction in compensation and discretionary spend.
This is in addition to the $50 million spend we took out in 2019 totaling 25% reduction in our operating expenses versus 2018.
As market conditions evolve, we will evaluate other actions if needed.
We expect interest expense of $20 million to $23 million for the year.
Amortization expense of $40 million and as I mentioned earlier, a tax rate in the upper 20% range.
We continue to drive strong cash flow performance and expect to remain free cash flow positive with the ongoing actions, we're taking for the year.
We believe our production disruptions will supply will subside after this quarter and our goal would be to provide financial guidance again, starting with the third quarter.
We can't control the virus, nor can we control the economy, but we can control our business.
We are working diligently to balance the need and expectations of all of our shareholder all of our stakeholders our employees, our customers suppliers and our shareholders.
Well, we've had to take a number of difficult actions to reduce costs around the globe I'm confident these will position us with positive momentum as we start to see a recovery.
I'd also like to add a thanks to our associates for the extraordinary effort and dedication. They demonstrate every day during this unprecedented times.
Inspired by our teams around the world and Im proud to be a part of the little team family.
And with that I'll turn it back to Dave for some last comment.
Thanks Meenal.
In summary, we will get through this period with the perseverance hard work and dedication of our talented associates around the world with the ongoing support of our customers and suppliers.
Similar to historical challenges I'm confident that our learnings during this crisis will benefit we beneficial to our business going forward.
As we work through these challenging times, we'll see as remains a strong resilient company, while there remains a high level of uncertainty and it's difficult for us to project demand at this time, we are confident that by working together, we will continue to deliver on our priorities for all stakeholders.
With that we'll open up the call for questions.
Thank you if you would like to ask an audio question. Please press star followed by the number one on your telephone keypad. Once again that is star one to ask your question.
And your first question from line of Karl Ackerman of Cowen.
Good morning Carl.
Hey, good morning, Middle and James.
Thanks for taking my questions too if I may.
I guess first on inventory last quarter, you indicated that the electronics business should see an end to the inventory correction and thats, probably the industry for nearly four quarters obviously.
Total 19 as impacted supply chain and demand, but on your own inventory levels within distribution.
In line with sell through at this point or should we expect some some further inventory rationalization.
The electronics products in the channel lashing in the second half the year and I've a follow up please.
Okay.
Yeah, Karl So we have talked a lot about channel inventories in electronics markets for the last several quarters and as we talked about last quarter. We expected further decline in weeks of inventory in the supply chain.
During the first quarter, we saw that as I talked about in the in the prepared remarks, we see and normal range for US is 11 to 14.
And we're at the very kind of at the low end of that 11 to 14 range at this stage. So there was actually further inventory that was taken out during the first quarter and kind of reached the bottom side of that.
So we don't believe at this time in the electronics portion of our business that theres any kind of inventory overhang in the market. However, order patterns coming in to our distribution partners. Those are a little more challenging to get your arms around.
Book to bills for our distribution partners are above one there clearly above one for us.
Some of those coming from a central business requirements, but also some of those we believe our efforts to buy forward in case, there are further disruptions and cope with 19.
Got it Thats helpful.
Dave you've obviously had the opportunity of being seeing this downturn and the downturn in la and now I think little fuses.
Dennis.
The company as a whole has.
For a much better this downturn in the last downturn.
Finally, with trough margins being higher than they were.
Given some of the production limitations, Mexico in Italy, as as we think about Opex for the second half of the year, given the 30 million of top in discretionary spending plan to be curtailed for the year.
Should we expect Opex to decline second half versus first half. Thank you.
Yes, so right now Carl we we talked about the 30 million dollar reduction.
For the full year, which is going to benefit all quarters right now.
And that's that's where we're at based on our current views on demand and what we're seeing having said that we continued to keep a qualifying we're watching to see what happens in the second quarter and what that means for the rest of the year in if if we start to see the the disruption continue longer than than expected where a deepen.
Well, absolutely look at further cost actions.
Thanks, Carl will take our next question please.
Your next question from the line of mix total wells of Longbow Research.
Good morning, I could ask hi, good morning. This is gossage salary on for Nick.
Is there any way to estimate the dollar amount the access axis inventory.
The auto Oems like how much the buildup in the first quarter and how much of an impact the second quarter and then I think you had said it would take a significant amount of time to burn off that inventory is there any estimate on how long you would expect that to take.
Yes, it's a great question and then it and it's a difficult one to kind of get an exact answer on because as you know we have a very global footprint and into customer bases that we serve the tier ones. We serve the Oems that we serve so trying to get an exact picture of where that is.
It is quite challenging however, what we do track is really our content increases that we see and weighted when you see that our revenues were down only about 6%.
Global car build was down well over 20%.
We know that Theres, a mismatch there and we know from several conversations that yes, there is inventory there.
I think we would probably estimates that theres maybe.
Two three weeks of extra inventory in the channels right now and automotive and really depending on their ramp up speeds how quickly they take it out much of that could come out in the second quarter, but some may come out in the third quarter. So it's a little challenging to kind of see exactly where it is but I think our belief.
As it's in that two to three weeks range.
Okay, great. Thank you and then I think it also asks about auto dealer.
The second quarter, Apollo likely being the trough and then normalizing in the back half of the year.
And then if you could provide any.
Color by region, especially with China returning.
How how thats been looking at Nada. Thank you.
Sure.
Yes, we're we're reading all the same materials and talking to all the same people that that you are with regards to car builds and trying to project that it's pretty difficult to get exacting sort of view on that.
But certainly we expect Q2 to be a pretty challenging quarter with regard to car build yes, China is beginning to kind of.
Continue to ramp back up the question Mark is really what's the demand pattern from from the end customers in China. So we do see that ramp continuing to ramp back up during the second quarter and into the back half of the year.
Europe, and North America, obviously with the shutdowns this kind of very steep drop off you were seeing actions already as you read about two as they are trying to open back up slowly some of the operations in the west.
So we do expect that the second quarter is likely the trough.
Third quarter fourth quarter, I think the challenge on that we expected to be a bit of a slow crawl back.
That will take more than just this year it will take through the following year as well really the wildcard is just how bad the global economic situation is and how that impacts buying patterns, that's a little difficult to project, but from a scenario planning perspective, we're certainly.
Expecting car build to be down meaningfully and yes for the year, maybe in the range of 70 million vehicles is probably what worst scenario planning around.
With improvements in 2021, but it's going to be two three plus years to get back to where we were two years ago.
So that's kind of think our our current view.
Thanks, guys, Yes, we'll take our next question please.
Your next question from line of Christopher Glynn with Oppenheimer.
Good morning, Chris.
Hey, good morning.
So it sounds like it doing a lot of good work and good luck for this.
Thank you.
Interesting were describing your design in activities going on into can use the term elevated design in activity going on.
Wondering if you could.
I want to use that term elevated as can you know smaller competitors kind of falling out of the game a little bit or is it just tend to.
The way you know innovation in design cycles pulse across your customer base.
Yeah, It's certainly an area, where Chris where we're spending a lot of time in discussions because a bit of our concern would which is our had been would design in activity start to fall off as design engineers or maybe working from home both our own.
Application engineers as well as customer design engineers and things like that they working from home would what activity falloff and create a challenge for us. So we spent a lot of time and energy around that we've worked very hard to make sure that our teams are very much engaged using a lot of tools doing lots of training lots of application.
At work for our customers. So we probably elevated our activity level to try to make sure that we're engaged at the right level and we're seeing very receptive experience from customers really across our segments. Our goal is absolutely to outperform on the back.
Side of this pandemic situation and that doesn't happen without doing a lot of design in activity.
When I think your and kind of that challenging time, our customers yeah. They they probably are more likely to look to their core experienced supply base they've worked with over the years as opposed to.
Someone else they have less experience with so we think that probably worked to our advantage.
Well, we've been pleasantly surprised with the level of design activity kind of really across the board and.
I think it bodes well for our ability to to outperform on the back side of the situation.
Thanks for that and then a question about.
Mexico started here a little more of that curious if you could just.
Give Europe you Dave of some of the unique characteristics of how.
Sensing measures are playing out there versus here both in terms of.
Stipulated mandates and just the decisions that individuals are culturally.
Coalescing around.
Sure and.
So first of all.
We got exposure to the situation.
Early in the first quarter in China.
We learned a great deal from the actions in China, and our ability to keep.
Employees safe and trying to return to work in these difficult challenging environments, we implemented those learnings kind of across the globe early on.
So we took actions whether it's in Mexico, our Europe, or the us or wherever the Philippines.
Well before outbreaks, we're kind of happening in those areas.
Knock on wood were quite fortunate in the fact that to date, we have no employees who have.
Reported.
Getting.
The virus itself.
So we're fortunate in that we think the actions we've taken and maintained has helped contribute to that.
The situation in Mexico, we had proactively in the last several weeks had reduced our production output in Mexico really to make sure we could implement some of the distancing requirements and things like that within our factories within.
Yes, the shop floor as well as.
Bathrooms.
Dining facilities those sorts of things literally where you have one person per table for instance, in the dining area and those types of things. So we've implemented a lot of those things, but in order to accomplish that in Mexico, We had already scaled back our production in order to safely operate.
And we passed several local governments to audits of your facilities and we passed several of those audits and at very positive.
Feedback and comments for the actions, we're taking we've seen just in the last week, the Mexico regional governments take a much more assertive physician on what they deemed essential.
And so therefore, they really have been focused mainly on medical equipment and food.
Processing and so therefore, they've implemented more strategic controls in place.
So we've we've needed those controls and so we have shutdown, our Mexico operations, but what we've seen in other parts of the world. When we've gone through those things that evolves and changes very rapidly day to day.
Our ability to to have people maybe come in in the skeletal crude.
Take care of emergency shipments and then ill scale from there and so we expect that to be happening in Mexico.
Our our teams and Mexico, because we've been very proactive and how we manage and keep them safe have been very supportive of our access to try to operate one weekend.
So.
Very fluid situation, we expect to kind of work our way through in the in the coming weeks, though.
Hi, Thanks.
Well take our next question please.
Questions from the line of Shawn Harrison with Blue capital.
Right.
Good morning, everybody.
And just trying to put a finer point on thinking about the auto business for the second quarter.
If we use the Hs production number one imply your content to it and then the expectation would be you would see some destocking in terms of that overbuild in the first quarter.
And so you Wouldnt underperformed production in terms of the decline year over year is because that's the best way to think about kind of how it potentially toss out here in June quarter.
Yes, I think it's certainly possible and by the it's just a very very fluid situation with our customers.
And everyone is in a different position some of them like ourselves and our operating in Mexico and their shutdowns, where they can operate at all.
But but I think our belief is that during the second quarter, yeah, It's certainly possible that our revenues.
In our growth could underperform carville.
Because of those inventory excess that was kind of put in place during the first quarter.
To what extent, we don't know we're still highly confident in the fact that we're gaining.
With our applications in our products were gaining content. So we're continuing to see that but there certainly could be a quarter or two where things mismatch again.
Dave as you can remind me what have you been averaging in terms of.
Content outgrowth relative for.
Auto production over the past few years.
Again very fluid changes in depends on the region, the Oems and things like that but in general we expect that our content growth is in the kind of 4% range.
From a content increase.
Beyond Carville.
Okay. That's helpful and the needle maybe I missed it I'm sorry, I got on the call little bit late but is there a way to quantify how much.
Kind of the shut down here in Mexico is costing you.
In the June quarter in terms of one dollar amount I know you highlighted kind of the decremental margin of 45% being greater than normal for the company, but just to quantify kind of maybe a dollar impact of what Mexico being offline means means that CNL this quarter.
Yes, we havent, Sean we havent quantified, but plants, because we had so many different plants at different states and frankly, Dave mentioned this earlier the situation changes on a daily basis right now so well in some cases, we were still operating for an extra day or two to get product out the door with skeleton crew.
And that can start happening again in the next few days sell.
Any number I give you there's going to be Ron at this point, though and this is a situation not just in Mexico, but with any of our plants that are in this partial production state right now.
Maybe another way to ask it is what would you expect that kind of the normalized decremental are incremental to be.
Without shutdowns across little she is for I think given time period.
I think right now it's also a little tough because in addition to the plant shutdowns were incurring a lot of other Colgate 19 costs that were attempting to estimate. It was also change in some of the thing.
I started talking about where freight costs that means separate from our production, but from a freight perspective because of the near shutdown on international flights and a lot of our product slide through.
The belly passenger flights to freight cost there through the roof right now and they continue to go up as every week goes tie.
And even with our plants that are operating right now Dave talked a lot about we put a lot of the safety in protective measures in place that dose committed at a cost for fund to funds. One is just the cost of the supplies in terms of face masks and other protective equipment that's out there as well as just productivity right, we're not running in a lot.
Of casted full ships, so it without running.
Maybe to full gamut of the number of people that are typically there. So it's just it's hard to individually quantify location are factoring a business. The the totality of the cost that were encouraging right now and it and it continues to change, but certainly the 45 Decrementals situation is is we are.
Worse than it typically what would be in a normal environment.
Okay. That's fair thank you.
Sean just like our next question please.
Next question, some lines and Steven Fox Fox Advisors.
Hi, Good morning, Tom just to follow up on that when you think about some of the shutdowns and manufacturing issues you've had how does that compare competitively do you find that everyone is in the same both.
Or juicy, where it may be in certain regions, you're now disadvantaged in serving a customer or advantage and.
Just on top of that as you think about potential.
Ramp ups in North America, and Europe from your customers like is there is there a significant risks set.
You may have a mismatch with their needs added the box this quarter or do you think you can cover that thank you.
Sure.
From a competitive standpoint, it's very very fluid right because when we are experiencing these shutdowns are these periods when maybe we can't fulfill all the demand that's on a particular plant those situations are typically situations at last four maybe three or four weeks theyre not situations that are extending over months at a time so.
And the cases like in China, where we had the shutdown and had an extra couple of weeks worth of shutdown, we ramped back up and where we actually outperformed most of our competitors, including competitors in China, because our ability to react and respond was better.
So I think we actually probably gained some position during that sort of a situation.
Yes, there are certain product lines that maybe we're making the Philippines that are at less than 100% production that a competitor might be making in China, but it's a reverse to where we were a month ago, So and thats quickly kind of ramping back up. So we don't think theres really a sustaining.
It is concern for us because of the periods of times that we're dealing with on that.
We did talk to you know in regard to the second part of your question on risks to support ramp up.
Clearly as we stated in the prepared remarks.
If you set aside passenger car world where demands are quite low.
During the second quarter, the rest of our business the industrial side, the electronic side during the second quarter, our revenues will be dictated by our ability to produce.
So demand will be in our orders will be at a higher rate than our ability to produce during the second quarter. We do expect during the course of the corridor that that works its way out. So we do expect that as we kind of in the quarter that our ability to produce will probably be.
Above demand patterns. So we do see kind of short term challenges on that and that's reflected in kind of this high level outlook in modeling that we've done to expect things to be down in the 20% sequentially that kind of range that's reflected in those numbers.
Great Thats very helpful. Thank you very much.
Thank you Steven we'll take our next question please.
The next questions from the line of Matt Cherilyn with Stifel.
Good morning, Matt Hi, Thanks, Good morning.
Just following up on that in terms of the cost cutting efforts and I know, you're taking a big cut it took to opex, but looking at the overall infrastructure the company, particularly if as Dave says it takes two to three years for auto to get back to the kind of unit numbers that you saw a year or two ago are you looking.
Any.
The consolidation of your footprint and I also know that you're still in the middle over to toward the end of the integration of Ike says so anything going on in terms of the portfolio in the overall infrastructure that you're looking at.
Sure Matt the couple of things to think about a.
We talk pretty openly with our with our workforce and with those of you on the call by the fact that we have in the near term or priority to to keep our people employed during shutdowns and things like that we think it's the right thing to do.
So we're doing those things. However, we have also been straightforward and with with our employees as well that if ongoing levels of demand our reduced in the longer term after kind of we get through these locked down periods and shutdown periods.
Yeah, we we may actually take actions to re size our organization our staff to a lower level. If revenues are sustained at a lower level. So.
It Doesnt mean, we won't take actions, we may need to do that if thats the case.
From a footprint standpoint.
We've talked.
About the fact affair coming into this year, our last earnings call, we talked about the fact that.
We expect it actually our bottom line performance for this year was going to be a little less than we had hoped for because we had no footprint work, we were going to be working on.
We've talked a little bit about that certainly with the axis integration in the footprint work on our semiconductor business that continues to be ongoing yes. There is footprint work that we're doing in the industrial side of the business.
There is also footprint work fits that certainly contemplated and planning for you in the auto side of our business too so.
We're always looking at those things we have activities around those so expect us to be talking about those sorts of things on an ongoing basis.
Okay, great and I imagine that kind of heavy lifting is very difficult to do in this environment given the production shutdowns in the local mandate. So that's something I guess, we should expect over the next few quarters and.
Yeah, I think so and it's it's good and bad right as if you're in a period, where demand patterns are lower it's a great time to be moving things around but it's pretty hard to train people when you're moving people in and around and things like that so there are a lot of projects, where if possible we try to accelerate during these times.
And other projects, where we try to keep them moving but they may have to be delayed a little bit just as the practicality of you've got people from one country that that can't be coming to the other countries and those sorts of things.
Yeah, I expect to see footprint work from US, we'll be talking about that for the next several quarters for sure.
Likely late as with our M&A strategy, we'll be talking about that for the next several years.
Great and just look just lastly regarding the Mexico footprint, we will could you tell us what percentage of revenue that represents both for the auto and the electronic segment.
Yes, so our Mexico plans are.
They service our automotive segment.
Our parts of our industrial segment and also our electronic segment for the cover all the segments, but I'd say that the heaviest is really around auto from a company perspective, it's about it it services about 25% our products.
Where sales.
Overall, okay. Okay.
And auto.
Got it okay. Thank you.
Thank you Matt will take our next question. Please.
Next question is from the line of David Leiker with Baird.
Morning, David Good morning. Good morning. This is Aaron welcome back on David.
She is around just thinking about the cadence as the Opex declines and I guess, specifically, how you're thinking about reduction to engineering expense first kind of the balance of SGN, a RBC engineering expenses down pretty significantly.
Sequentially. So just the way to think about balancing that with Kennedy elevated levels of new business activity you mentioned this.
Sure. Let me, let me first talk a little bit about the R&D side and engineering expense side, and then let me know kind of respond to the rest of it from an R&D perspective, we're absolutely not reducing our R&D activities.
So we continue to be very focused on the long term introduction and content opportunities that we have their activities are quite strong there.
There have been some actions we've taken.
So things, yes, as simple as suspension of.
Of our bonus program that has an impact to draw down our engineering cost and things like that there were a couple specific actions we took.
In the semiconductor side as we've.
Changed our our product portfolio, particularly on the power semiconductor side that allowed us to take some cost out and redeploy some things there but for sure. It's not an area, we're looking to reduce cost it over time.
We continue to look to make investments there and in fact over over time, probably expect us to cease.
Small increases in the percent of spend in the R&D sites amino maybe you could talk authorized yes, and I'd say just on the and the SDN 18.
Right now we're projecting heavier reductions in the first half is there a lot of that so my comments a lot of it is related to compensation reductions we've made temporary compensation lot of cases.
Dave talked about bonus program as well as discretionary spend so if people are traveling you're not spending a lot of money not going to trade show things like that that's where a lot of the cuts come from and that's where we're going to continue to see right depends on how things start to pick up in the back half of the year is it is it a little slower.
They get a pick up a little bit more faster than we think in the third quarter, but it's possible. We continued to see more reductions in that kind of stand in a continuation of that in the back half.
Great. Thanks for taking my question.
Thank you and we'll take our next question. Please.
Your next question is from the line of David Kelley with Jefferies.
Hi, good morning.
Right.
Just a quick follow up on the footprint action discussion I believe you were previously targeting transition cost at 30 to 35 cents this year.
Has that changed given the macro disruption.
It might be down a little bit just because with the macro disruption Dave mentioned, we we absolutely 100% are moving forward with all of them, but they may get delayed because of some of the local disruptions at from the plants et cetera, but I would say that 30 to 35 cents is still a good estimate right now.
Okay, great. Thanks, and and then just following up on the excess auto inventory discussion just curious to hear if thats something you're seeing globally, we've heard from others that to build was skewed more towards China, but it sounds like from your comments, maybe it's more broad than that and then.
So we think about your autos exposure you have some auto sales embedded into your electronics segment, just curious if you're seeing the the end back there as well.
Down what I, what I would say is that in our traditional automotive found the electrical infrastructure of the vehicle in sensors and things.
We are seeing that inventory build kind of globally, but I would say its heavier probably in China than it is in other parts of the world. So I do think it's probably skewed towards Asia.
We see a little less of it in the electronics automotive electronics components and the reason being as many of our tier ones choose to fulfill through distribution channels in the automotive electronics and in that case, they're kind of flowing through and they have coverage through the the disties.
So we havent seen that impact that quite as directly there it's more on the electrical infrastructure cyber we've seen that happen.
Okay, great. Thank you and then last one from me pass along its head of on that discussion the strong electronics book to Bill. It just trying to get a sense of potential pre buy it could you talk about order flow in the last couple of weeks of March did you see any pullback or have you seen any substantial changes.
Even Q2 to date.
Yes, we have seen perhaps order rates slow a bit in the back end of the first quarter and then the second quarter.
But still would have book to bills that are well above one we have conversations I am conversations with senior folks at the our distribution partners pretty regularly and they're continuing to see.
Relatively strong order patterns, they do see at times, where maybe some other places orders and then they pushed a bit out after they have them in for awhile. So.
Is it changing a little bit maybe.
But still pretty robust books bookings out there.
Great appreciate the color. Thank you out.
I appreciate your questions David Thank you for joining us on today's call and your interest in Littelfuse, we look forward to talking with you again.
Be safe and stay healthy.