Q2 2020 Littelfuse Inc Earnings Call

Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to stand by and thank you for your patience.

[music].

Good day, everyone and welcome to the Middle East Second quarter 2020 earnings Conference call. Today's call is being recorded at this time I will turn the call over to the head of Investor Relations Trisha Tuntland. Please proceed.

Good morning.

Welcome to the little pieces second quarter 2020 earnings conference call.

With me today, or Dave Heinzmann, President and CEO, and Meenal, Sethna Executive Vice President and CFO.

Before we begin we are deeply saddened by the sudden passing of Baird sell side analysts David Leiker.

Notably David followed our company for many years and his passion for his work and quality of research will be greatly mess.

All right, that's going to David's family and the bare team.

This morning reported results for our second quarter and a copy of our earnings release is available in the Investor Relations section of our web site.

Webcast of today's conference call will also be available on our website.

Our discussion today will include forward looking statements. These forward looking statements may involve significant risks and uncertainties.

Please review today's press release, and our forms 10-K, and 10-Q for more detail about important risks that could cause actual results to differ materially from 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 mentioned that we will be participating in the Jefferies and C.L. King virtual conferences in August and September and we look forward to engaging with you during these outreach opportunities.

I will now turn the call over to Dave.

Thanks, Patricia good morning, and thanks for joining us today.

First our thoughts go out to everyone, who continues to be impacted by cobot 19.

Over the last several months, we continue to see extraordinary efforts from global medical professionals first responders another essential personnel as the world joins together it overcome this persistent crisis.

Daily These individuals are making personal sacrifices yet continue to demonstrate outstanding leadership.

We're truly thankful for their unwavering commitment and service.

Since the early signs of the outbreak our top priority as had been clear first protect our global associates their families and the communities in which we operate.

Second support our customers.

And third preserve the long term financial health of the business.

Our actions and performance are an indication that we stand from by these priorities.

I also want to personally thank each one of our little fuse associates around the world for their ongoing remarkable leadership during this time a tremendous uncertainty.

We have all come together at little fuse to do our part to help slow the spread of the Corona virus.

We are complying with recommended safety procedures, including hygiene, and disinfection protocols, social dispensing and wearing personal protective equipment.

We expect these actions will continue for the foreseeable future today, many of our support functions continue to seamlessly execute in their remote working environment.

As a result of our ongoing efforts and vigilance today all of our manufacturing sites are fully operational.

Now I will provide an update on the second quarter performance of our company, which reflects production and demand impacts related to the cobot 19 pandemic.

The perseverance and hard work of our highly skilled global associates.

Along with our strong operational execution enabled us to achieve performance exceeding our expectations within an ongoing challenging environment.

We recorded second quarter sales of $307 million, representing a sequential decline of 11%.

Better than our anticipated 20% reduction.

This is a direct outcome of our ability to meet customer demand quickly resuming production at sites that were temporarily shut down.

Our disciplined cost management actions enabled us to deliver an adjusted EBITDA margin of 15% and adjusted EPS of 71 cents.

Mena will provide additional color on our financial performance.

During the quarter, our electronics products segment saw some recovery throughout Asia, particularly within China as restrictions used for manufacturers and consumers.

The recovery has been slower in the Americas in Europe.

Demand has been driven by work from home data center and medical equipment applications.

Weeks of inventory for our products that distribution partners remain relatively lean and near the lower end of our normal 11 to 14 week range.

Exiting the second quarter, our electronics book to Bill was around 1.0.

Which indicates a sustained healthy level of demand for our products during the third quarter.

That said unless we see a meaningful change in order patterns, we do expect normal seasonal softness during our fourth quarter.

We continue to work closely with our distribution Dms and OEM partners proactively manage inventory consistent with demand patterns.

Across automotive markets Global car build was down nearly 50% with particular challenges in North America Europe.

Our second quarter automotive products segment revenue tracked better than market with continued content gains led by our passenger car fuse business.

Our ability to quickly rebound after government mandated shutdowns drove better than expected performance in our commercial vehicle business.

Due to the global pandemic fluctuating order behaviors are reducing visibility of inventory at Oems and tier ones.

This is further compounded by delayed encanto programs at some of our customers.

We are seeing good signals of recovery from some markets like in China Oems are almost back to normal operations as car build strongly recovered during the second quarter.

European and American Oems are back online, but many.

Our at lower capacity levels have been have seen some cobot 19 related interruptions.

We expect third quarter global car production to be down nearly 20% year on year as consumer sales remained significantly below last year's production levels, especially in Europe.

Sequentially, we're planning for a meaningful improvement in automotive sales coming off historical lows during the second quarter. However, we do not expect to reach last years levels due to demand impact related to covert 19.

We also expect improved sales in our commercial vehicle business.

For the full year 2020, we expect that global car build of 65 to 70 million cars.

The speed of recovery will depend upon consumer confidence and account economic recovery.

We expect our long term growth to continue outpacing global car build with our ongoing content opportunities.

During the second quarter, our industrial product segment saw pullback in demand in key end markets driven by macro uncertainties.

Our performance was further impacted by our manufacturing shutdowns due to the pandemic.

While end markets appear to be coming off second quarter lows, we expect a slower recovery across several end markets.

We expect ongoing soft demand in us non residential construction.

Oil and gas and mining markets and stable demand in HPC renewables and power conversion applications.

With an increasing number of design wins and our strong project funnel. We are confident this business will continue to drive long term profitable growth.

One month into our third quarter, we can't there continues to be a tremendous amount of uncertainty. While we are seeing from demand in some end markets and auto is coming off all time lows, we're proceeding with tempered optimism.

The Kobin 19 situation is fragile and in India and had any time could lead to plant shutdowns supply chain disruptions or further instability in end markets.

That said our global teams remain focused on what we can control to limit disruptions to our business. We are procuring additional PPD.

Jointly adhering to global safety guidelines and stacking additional raw materials and finished goods to serve the critical needs of our customers.

The long term secular trends of a safer greener and more connected world continue to drive strong design activity.

In today's virtual environment, it accelerated adoption and utilization of video and other collaboration tools has driven greater flexibility in response with us among sales and engineering teams.

We are proud of the efforts of our global teams in the current challenging environment and believe our associates have not miss to be.

During the second quarter, new product introductions of design in activities remain strong demonstrating the ongoing effectiveness of remote working.

Across the industrial electronics and transportation end markets, we serve we are expanding existing positions and gaining market share.

For industrial applications, we are seeing ongoing progress across R&D and new customer development efforts.

As a solutions provider these are leading indicators, which position us for recovery and growth.

There is robust design activity is engineers partner develop customized solutions during the quarter, we secured several design wins across hvdc and energy storage, including for residential systems.

Industrial safety continues to be a good catalyst for design win activity. Since we also won new business in the food and beverage industry, where a higher level of electrical safety as required.

One of the recent highlights of our industrial business is the expansion of our high speed fuse offering.

These products are designed for the increasing high power requirements for the energy storage power conversion and EV charging markets. The differentiated product performance provides customers with the highest power density circuit protection solution on the market.

And we're already seeing strong customer demand and product pull.

Our broad industrial design in activity further diversifies the business across many industrial markets.

For electronics applications, we are seeing significant opportunities in data center and telecom infrastructure, the backbone of the internet of things and good activity and work from home consumer electronics applications, particularly as the world has shifted to a remote working environment.

With our extensive bipolar discrete semiconductor portfolio, which was recognized by customers as best in class, We won new business in data centers and servers for power supplies switches.

Our high power solutions and packaging differentiates us from competitors.

We also won new business as a result of our local technical support designing capabilities and battery protection for data centers.

In Fiveg networking power systems, we captured new business, driven by our field support and superior product durability.

With our compact design and customer relationships. We also won new business and high power mobile handset Chargers proliferation of greater connectivity will continue to drive demand for our electronic solutions.

Within transportation applications based on our high performing solutions and superior design capabilities, we have proven ourselves to be a valuable you design and partner we won new business for several models in China, Europe and North America.

We also captured new ERP onboard to onboard charging business.

Based on our strong engineering relationships, we secured new protection business for advanced driver assist systems as well as for regulator applications and two in two and three wheelers in Asia.

We also won new business for batted control management in Japan.

With our broad bipolar discrete solutions I referred to earlier, we secured a win and traction motor drives for a high speed train application.

Within sensor applications, we captured several new solar sensor wins in China, and North America, and new business in Europe, with our temperature and occupant safety sensors.

Our new business pipeline is healthy and includes opportunities in Japan, and Korea high growth regions, where we are expanding our presence.

The ever greater sophistication of electrical architecture, and safety systems will continue to drive demand for our transportation solutions.

Our commercial vehicle business saw significant new business opportunities along with good design in activity in the quarter.

We won new business for refrigeration units on heavy duty trucks in the North American and European markets.

Leveraging our strong customer relationship and engineering capabilities, we were able to design in our line of power distribution models, one of our strategic growth products.

The material handling market again generated new business as we were able to secure a key design win with the Canadian manufacturer.

Strategic growth in Asia continues to show promise as we captured a construction market design win in China and wins in the heavy duty truck space in both China and India.

As we continue to navigate ongoing challenging environment. Our global teams remain focused on driving long term growth and profitability within the sector themes of safety resource efficiency.

And the ever increasing connected world.

I am confident that the ongoing design in activity, along with our appropriate balancing of costs to align to business conditions and investments for growth. We will continue to execute our long term strategic initiatives.

I'll now turn the call over to Meenal to provide additional color on our financial performance capital allocation and outlook.

Great. Thanks, Dave Good morning, everyone. Thanks for joining us today.

I hope everyone has continued to stay safe and healthy.

Second quarter finished better than we expected 90 days ago, a testament to the incredible effort of our teams around the world.

Our financial condition remains strong, giving us the foundation to continue investing across both organic and inorganic growth opportunities to drive our strategy.

Today I'll cover second quarter highlights followed by an update on liquidity and capital allocation.

I'll end with their views and Gary markets and other key drivers that impact our outlook.

We finished the second quarter with sales of $370 million down 11% sequentially.

Since last year sales were down, 22% and 22% organically.

Our better than expected finish was led by higher sales customer electronic segments.

Previously we've noted we were seeing strong demand across the segment and production disruptions from government shutdowns would be the gating item.

We were able to restart and recover from the shutdown fairly quickly due to the significant amount of pre planning a cost of production site and in some areas running overtime to meet demand.

We continue to monitor electronics channel inventory, which is at the lower end typical we can handle.

Sales across our automotive segment finished slightly better than expected driven largely by faster than anticipated production recovery.

National vehicle.

Second quarter GAAP diluted loss per share with 37 point, while adjusted diluted EPS was 71 cents.

Excluded from our adjusted results with a 34 million dollar noncash goodwill impairment charge related to our automotive sensor business.

Reflecting the near to medium term outlook at the passenger vehicle market.

Adjusted operating margins were 7.7%.

Resulting in a 40% decremental margin over last year.

Margins were affected by the lower sales volumes carrying cost during production disruption in pulled news related costs, partially offset by the benefits from the cost reduction actions we've taken.

Adjusted EBITDA margin finished over 15% in the quarter and nearly 19% year to date, reflecting the rapid actions, we took to manage costs and mitigate the sales downturn.

Our GAAP effective tax rate was 15.1% and adjusted tax rate was 18.2%.

We are projecting a full year adjusted tax rate in the 23% to 25% range given the earnings across our tax jurisdiction.

All of our segment had lower operating margin due to the lower sales volume versus last year.

Electronics segment sales were down 14% over last year, the cost reduction, including synergy benefits mitigated the decremental margin impact.

Sales were down a record 43% year over year, and our automotive segment due to customer production stoppages and resulted in an operating income loss for the quarter.

In the industrial segment sales declined 26%.

Breakeven margin was driven by internal production shutdowns and some additional costs incurred for our factory move activities.

We expect both our auto and industrial segments to be profitable again in the third quarter.

We made significant progress on our strategic footprint initiatives. Despite the challenges space in critical activities like equipment installation associate training and travel.

We will complete the consolidation of our us semiconductor epitaxial site this quarter.

At our new Philippines facility much of the factory readiness is completed and we've shifted our focus to equipment installation and customer qualifications, which we expect to continue to late 2021.

Within our industrial business, we made significant progress on our North American factory move and expect to complete this move early next year.

The strategic infrastructure action to build upon our foundation of operational excellence, a key component of our growth strategy.

Cash generation and liquidity remained the key priorities for our long term financial health.

Despite the number of external challenges last quarter, we continued to execute across both of these areas, which gives us flexibility to pivot and react quickly to market conditions as needed.

We ended the quarter with $652 million in cash about half of which is in the United States.

During the quarter, we generated $56 million in operating cash flow and $43 million in free cash flow.

After funding our quarterly dividend, we grew our cash on hand by $30 million.

Working capital management remains one of our top focus areas and our teams delivered.

Our receivable days for consistent with the past several quarters led by strong customer collections, while payable days improved slightly.

Our days of inventory on hand increase.

Combination of uneven demand patterns as well as our decision selectively stock excess levels key raw materials and finished good.

We want to ensure our ability to support shifts in customer demand given limited forecasts visibility as well as take precautions in the event of further production shutdowns.

Our debt levels remain constant versus last year with our net debt to EBITDA leverage sustained below 1.0 times and gross leverage up 2.9 tank.

Our capital allocation priorities remain unchanged, we continue to invest internally.

Expanding our customer facing capabilities and design initiative.

As well as capital investments to both growth and cost reductions.

To support these efforts we are maintaining a full year capex forecast of $60 million to $65 million.

We are continuing to spend our share buyback activity given the near term macro uncertainties.

This also allows us to allocate resources towards acquisitions, which remain a top allocation priority for us.

Okay.

Transaction activity remained slow from both buyers and sellers.

Given continued uncertainties around valuation and end market projections.

Our M&A framework has remained consistent for several years strategic fit and alignment is our first criteria and then ensuring the economics align with our financial objective.

We continue to keep close to several opportunities that fit our strategic criteria, but aligning and valuation will likely take some time given the lack of clarity on end market trajectory.

This is the time of year, our board of directors evaluate changes in our dividend rate.

Our board approved keeping the quarterly dividend rate flat at 48 cents per share equating to $1.92 per year.

This marks the 10th continuous year of our dividend program and a 12% compounded growth rate in our dividend rate over that time.

Despite the turbulent quarter, we finished in a position of financial strength.

We continued to execute across the business managing costs and cash flow, while continuing to invest for the future.

So let me move onto our outlook.

We expect the next few quarters to remain volatile.

As Dave noted all of our production facilities are currently operating.

But the growth in cobot infection rates in many countries could disrupt our production and increases the potential risk for further governmental shutdown.

We've implemented a number of safety protocols at all of our site to lower the risk in our facilities.

Along with the unpredictability across the geopolitical environment. The combination of these factors create a challenge in projection beyond the near term.

For the third quarter of 2020, we expect sequential sales growth of 12% to 15% with a roughly 40% sequential fall through on operating income based on the revenue growth.

We expect sequential sales growth across all of our segment with the greatest growth coming from our automotive segment.

Our forecast assumes a third quarter car build production of 17 million cars as we expect some recovery in both customer production and demand levels.

We're also continuing to fulfill backlog from our second quarter production shutdowns across most of our other business.

Our forecast assumes all of our production facilities continue to operate can meet demand levels.

Looking beyond the third quarter, our typical fourth quarter sales pattern is the sequential mid single digit percentage decline.

We would expect that to continue this year absent any other market dynamics that could alter our sales trajectory.

We continue to expect our operating expenses to be down $80 million versus 2018 with about $35 million of this reduction coming in twentytwenty.

Our actions this year have been fairly evenly split across headcount savings from actions, we took let last year, along with compensation and discretionary spend reduction.

We expect interest expense of about $22 million for the year.

Amortization expense of $40 million and as mentioned earlier and adjusted effective tax rate in the 23, 25% range.

Our free cash flow performance continues to be robust as we generated $72 million through the first half of the year.

Our teams have been hyper focused on working capital management and prioritizing capital spend.

We expect our free cash flow for the year will more than covered our dividend and our first quarter share buyback.

We are seeing signs of stabilization and improvement in some areas of our business, but our end markets remain challenged and a number of macro factors remain fluid.

We're focused on managing items, we can't control across our business, ensuring the path to long term financial health and continuing investments for our return to growth.

I would also like to thank our talented team members around the world, who continue to Adeptly navigate each day in this challenging environment.

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

Okay.

Thanks meal.

In summary during these uncertain times, we remain highly focused and collaborative with our customers and suppliers, enabling us to manage through pandemic related disruptions and come out stronger on the other side of this challenge.

Looking ahead, we are proactively preparing for multiple potential scenarios, while continuing to prioritize our associates customers and long term financial health.

On the other side of this challenge I'm confident that we will have retained our highly skilled associates.

Deepening customer relationships through our hyper focused on their critical needs.

And strengthen the long term financial health and capital structure of our business.

Little fuse will be a stronger more resilient company than today and position for profitable growth as we continue to deliver ongoing value for all stakeholders.

With that I will now I'll turn the call over to Trisha.

Thanks, Dave.

For participants Mena, one day bar in separate locations. This morning, so feel free to director questions to one or the other of them.

Justin please assemble the queue in a roster.

As a reminder to ask the question you'll need to press star one on your telephone to withdraw your question press the pound Keith Please stand by we've compiled the Q and a roster and again that is star one if you like to ask a question.

And our first question comes from Karl Ackerman from Cowen. Your line is now open good morning Carl.

Hey, good morning, everyone. Thanks, Thanks for taking my question.

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I guess that perhaps meenal. After the first question I wanted to touch on your outlook first did you indicate what your book to Bill was this quarter I may have missed that and then you spoke significantly about your design wins this quarter.

Im curious what level of your outlook is secured by orders in hand today now the follow up.

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

Yes, so Carl I think I think it varies on the parts of the business.

With design wins in hand versus bookings that are taking place.

As we go through a quarter.

And our automotive business very much so.

Our sales revenue was driven by design, we have one historically.

And.

The rollout of new platforms that our customers are running and global car build in that way.

In the industrial part of our electronics business and the OEM part of our industrials is quite similar we're very long design cycles that will drive that electronics, where it's a very very broad based customer you know a great deal of that is really not driven by design wins at hand going into the quarter, it's really going through sales too. Many many many dip.

Front end customers.

Got it I appreciate that.

As a as a follow up if I may.

How are you thinking about inventory levels across your channel partners in automotive I know last quarter I think that was a concern for you, particularly in China. However, some of your peers have indicated that China has seen the largest snap back in demand.

And so could you perhaps quantify whether you believe you're running outlook is selling too.

Largely true end demand is it some pull some level of order pull ins at us in European customers, just any incremental color you may have on the level of inventory and demand within automotive I'd be very helpful. Thank you sure sure.

We talked about in our first quarter that we felt that there was probably some inventory that went into our automotive customer base during the first quarter.

When we if it's quite difficult to get exactly what that is because we don't have visibility into the tier ones and ultimately the Oems.

And where their inventory position is but just based on car build by by our customers and our sales to them our general belief as there's probably still some excess inventory hanging out there I don't believe that we built any further inventory during the second quarter I think our our sales.

Into our automotive customer base matched up reasonably well to car builds Indian demands there.

Lot of that comes just from our kind of back calculating into that looking our revenues understanding the car builds of those customers our design wins those types of things and we certainly saw some.

Outperformance versus car build.

But we think that was really related to content increase.

Thanks, Carl will take our next question please.

Thank you and our next question comes from Nick total ROE from Longbow Research Good morning.

Hi, Good morning. This is basi cadre on for Nick regarding your auto production assumptions. So like you appears you seem a little bit more conservative versus third party estimates.

Can you provide any more color by region, possibly and then do you still expect to grow content, 3% to 4% in access of SAR.

Sure.

Like that.

Yes, I think.

We like many of you as well as other peers of ours, and we get a lot of information, whether it's from LMC or somebody like that are.

That has projections for car build we look at those we look at.

The conversations we have with our end customers and understanding in the regions.

And certainly we've seen strong bounced back in China.

Now to be fair the bulk of that yes in demand in China has been driven.

Not by retail sales, but fleet sales in China. However, we continue to kind of expect to believe that continue to be pretty robust North America is bouncing back reasonably well.

We're probably a little more skeptical of what is projected in Europe and the rest of the world.

As we just don't see evidence that there are bouncing back quite at the rate that maybe China and even the US are doing at this point in time, So that's where perhaps our conservatism is.

If you look back at our last two or three quarters. We also would have different projections less than what the.

The third party providers would give.

Generally we feel good about our projections in that way, so thats kind of what goes into our calculations and yes. We absolutely continue to expect we have three four or 5% content great build.

Beyond the car build.

With our success in the passenger car portion of our business.

Great. That's helpful. Thank you and then its production the book to Bill can you tell us where it's tracking in July and if there's any.

Additional color by region. There and then you mentioned that there were a few delayed programs that customers I'm just curious if theres any abnormalities, meaning are you seeing delays beyond the normal one or two quarters or is there anything going on there. Thank you.

Sure.

From a book to Bill standpoint.

As we saw kind of exiting Q2, the book to bills were right around parity at 1.0, and they're running similar levels right now.

So it's kind of that stable.

Demand patterns versus sales are reasonably stable right now in the electronic side of the business, So really hasn't changed to dramatically at this point in time.

As far as delayed platforms and things like that nothing really systemic in that I think some of the Oems are just making choices on where to spend their time and in many cases delayed launches they put forward.

I really.

Delayed launches that are replacing platforms and we may already be on anyway, yes. So I don't know that it's a huge thing theres been a few cases, where they've actually cancel programs whether it's one of the forward Transit program, Scott got canceled and they're just sticking with where they're at the one thing I would tell you is that we're not seeing.

Cancellations or significant pullbacks from.

The ECB types of applications, we continue to see very strong design activities and if anything we're seeing more and more focus.

With some incentives in Europe, certainly that remains strong.

So a lot of activity continues in the space.

Great. Thanks.

Thanks, guys for your questions, we'll take our next question. Please.

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

Hey, good morning needle.

So yes, you got some nice throughput out of your facilities there for OLED electronics, showing some upside just just wondering if.

You had any sense of if there's any was any demand pull forward as customers look safeguard their own inventory levels. Just as you mentioned you guys Doug.

Yeah, Chris.

When we when we kind of watch Pos.

At our distributors versus.

Versus our bookings and things like that kind of watch that very carefully what we would say is.

There may be some level of pole in for inventory for some of the and customers. We don't see strong evidence of that but there certainly could be some of that.

Although what I would say is right now our distribution partners are being relatively conservative on their inventory position.

So whatever concerns there may be on any kind of pull in from an end customer perspective, I think it's balanced out from the fact that we're running on a lean side of of inventory at our distributors.

So I don't think we have particular concerns that that's going to be a drag on our go forward.

Demand.

Okay. That's helpful. And then my follow up on the guidance for 12% to 15% sequential increase in sales in Q3 Q.

We have the kind to even kind of book to Bill relationship. It electronics is that suggests that really the entire sequential increases located at the auto segment.

I mean, all once you take that you talked a little bit about that sure.

So Chris is part of my remarks, I'd mentioned that we were seeing sequential growth across all of our segments, but by far the bulk of that is definitely coming out of automotive just with the you'd exceptionally low quarter in car builds in Q2 and we're seeing.

Good sequential improvement there.

Thanks to the clarification.

Thanks, Chris will take our next question please.

Thank you and our next question comes from Shawn Harrison from Loop capital. Your line is now open good morning, Sean.

Morning Trisha.

Question for you.

If you could talk about the weakening dollar here and just maybe how that's factored into your guidance. We know it's it's wreaks havoc on results in the past is leasing volatility quarters, but just kind of what you're planning with with currency impact to the business you over the next 90 days.

Yes, so I would say for us there's really two currencies that that will move the needle fourth one being the euro.

And it helps us on the topline, but as we have evolved the business over the years than we have a lot more production in Europe than we used to several years back it really doesnt have much of the bottom line impact I'd say, we're generally naturally hedged across the euro.

So that's that's I said, the euro and from China perspective.

The dollar weekend and are in the strengths and we're in a net short position. So that does have a slight.

Negative impact to us when that happened until all of that what we do when we run our forecast as we take the rates at a point in time within a few days of when we come out with with our forecast and so the rates as of today are baked into our forecast.

That's really helpful. And then go back to you spoke to 80 million of Opex coming out of the business.

Over 2019 in 2020 just.

Talk about how that comes back into 21, and maybe what may not come back because you either more efficient we're traveling was things things that.

You just realize synergies here during calls it that you won't see all of that come back maybe what portion I guess.

Yes, so I'd break it down into I thought about I commented on the three categories that there's there's head count pieces, which I would call.

More permanent in nature right. Those are choices made and we made the choice is to reduce headcount and we'll be very thoughtful before we look at it we adding new heads.

There is a pretty significant element on on compensation, we would like had to come back.

So we would expect this a lot of that variable and a lot of that was variable compensation and we'd expect that to come back next year, and then I'd say the third piece is the discretionary spend and I'd say, that's going to be a myth honestly I think in the month go by and you said last because you're not traveling you're not attending shows different things like that.

Yes, the overtime, we would expect a lot of that could come back, but I wouldn't expect that to come back over the course of one year I think is going to take some time in and I think right now we just don't know the endpoint if it will all come back. So I would look at it is 50% is taken out for good in another 50%, we'd expect to come back gradually.

Not clear that 100% of that'll come back.

Thanks, Sean will take our next question please.

Next question comes from Matt Sheerin from Stifel. Your line is now open.

Good morning, Matt, Yes, hi, good morning, everyone.

A question.

Is it in regard to your forward outlook for the December quarter for typical your mid single digit decline I know there is a typical seasonality in the electronics business, but I'm wondering.

What your expectations, maybe based on your backlog in bookings for December.

In auto because in theory, we should have additional growth in production and.

Most of the factories in terms of production level should be up so so I'm trying to figure out the expectations in terms of the auto growth and then the second part of that.

In terms of your operating leverage on lower volume would you expect the traditional or typical decremental margin or maybe better than that because of the opex reductions and other cost cutting.

Now let me take the.

Mid single digit decline and then Meenal can talk about the operating leverage.

From the mid single digit decline.

We talk about that historically when we're in a kind of a normal pattern that we would see that as a normal Q3 to Q4 sequential.

Yes, right now visibility is pretty challenged I.

I understand exactly where things are headed so therefore, we did put that in there to make sure that.

Theres at least some thought to that certainly the electronics segment is our largest segment and has the most influence on where revenues are going from quarter to quarter.

And.

With the fact that we're kind of seeing bookings that are relatively flat a reasonably stable level right now.

That would kind of imply to us that if anything unless something changes in a fundamental.

Stronger demand pattern doesn't arise that we would see that sequential.

Dropped in the electronics side of our business, we think thats likely.

On auto I think it's a little less clear right now and I think the wild cards there are really.

The area, where we're watching the calls this is probably Europe.

As right now they're doing some extended shutdowns because it just really arent seeing that strong pole and demand.

And we're a little concerned with the projections show that picking up in the fourth quarter as everything going to be the case or not so I think we're watching that quite closely. So we're not intending to give real specific guidance for the fourth quarter, where we just don't want to make sure that people are just taking drawing a straight line up.

On a demand ups because it can be seasonal patterns to deal with.

Maybe you can talk about leverage.

Sure.

So maybe echoing some of daves comments again, we weren't intending or Q4 commentary to be guidance on Q4, but if we were to follow the normal seasonal pattern of declines we typically see a lot of that decline coming out of our electronics and in our industrial segments. They tend to have higher Inc.

Terminal and therefore decremental margins I would expect than a decremental rate to be a little higher than the average at that 35% to 40% that we've been pegging more recently.

But again.

I would come back to its going to depend on some of the mix and the other dynamics going on right. Now. So we really just wanted to to really put this kind of a sales view out there. So people understood. What we were thinking about and typical trajectory throughout there.

Yes, Thats very helpful. Thats. It for me thanks, so much.

Thanks, Matt for your question.

Thank you and again, ladies and gentlemen, if you have a question that is star one again, if you'd like to ask a question that is star one.

Next question comes from David Kelley from Jefferies. Your line is now open good morning, David.

Hi, good morning, and thanks for taking my questions and maybe meet on web to start with that.

Comment you made earlier about the expected sequential ILEC electronic segment growth. If we were to remove your exposure to automotive electronics embedded within that segment would you expect the balance of electronics to recover into into Q3 year.

Yes. So my earlier comments were all of our all of our segments on the topline are seeing sequential growth, which does include electronics, but your comment is a fair one Ned.

Even though we are seeing sequential growth in electronics.

It is dampened a bit by the automotive electronics element the pieces that we have an electronic segment I'd say despite that we're still seeing some some positive signs there in a little bit a sequential increase.

Okay got it. Thank you. That's that's helpful. And then a question for Dave you talked about your auto outgrowth and expectations and given your commentary on ramping any exposure.

If we were to isolate Europe were TV penetration is ramping aggressively and it's still fairly early days thats still seems to be moving pretty quickly here I was just curious the here if you're starting to see an uptick in content per vehicle in that region tied to the penetration.

Well certainly our content exposure is in Europe are certainly higher than they are under traditional ice type vehicle. So yes, we're seeing some improvements there what I would tell you is lots and lots of activities on programs and things like that but most of the higher volume.

Platforms right now are kind of sold out their volume limited. So although we are you're seeing the penetration improve right now and some of the more popular vehicles. If you placed an order in Europe for for that Avi.

You are on the waiting list nine months out.

And so therefore, there kind of limited on their ramp up ability, we wish they weren't as limited because thats certainly would drive our content story, even more even more aggressively there, but that will catch up with itself right as they expand their capabilities, both internally and supply of batteries and things like that that will begin to drive it. So.

Certainly has a positive.

Content growth story, we're pretty bullish about the European E. the space for us.

Okay, Great really appreciate you taking my questions sure.

Thanks, David.

Those are all the questions. We have this morning. Thank you for joining us on today's call and you're interested Littelfuse. We look forward to talking with you again soon be safe and stay healthy.

Okay.

[music].

[music].

[music].

Good day, everyone and welcome to the Little few second quarter 2020 earnings Conference call.

Today's call is being recorded at this time I will turn the call over to the head of Investor Relations Tricia Tolivar. Please proceed.

Good morning.

Welcome to the Littelfuse second quarter 2020, <unk> earnings Conference call.

With me today, or Dave Heinzmann, President and CEO, and Meenal, Sethna Executive Vice President and CFO.

Before we begin we are deeply saddened by the southern passing <unk> Baird sell side analyst David Leiker.

Notably David followed our company for many years and his passion for his work and quality of research will be greatly missed.

Our that's got to David's family and the bare team.

That's my reported results for second quarter, and a copy of our earnings releases are available and the Investor Relations section of our website <unk>.

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 had a queue 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 mentioned that we will be participating and the Jefferies and C.L. King virtual conferences in August and September 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, Thanks for joining us today.

First our thoughts go out to everyone, who continues to be impacted by cope with my team.

Over the last several months, we continue to see extraordinary efforts from global medical professionals first responders another essential personnel as the world joins together it overcome this persistent crisis.

Daily These individuals are making personal sacrifices yeah continue to demonstrate outstanding leadership mirror truly thankful for their unwavering commitment and service.

Since the early signs of the outbreak our top priority has there been clear first protect our global associates their families and the communities in which we operate.

Second support our customers.

And third preserve a long term financial health of the business.

Our actions and performance are an indication that we stand from by these priorities.

I also want to personally thank each one of our little fuse associates around the world for their ongoing remarkable leadership during this time of tremendous uncertainty.

We have all come together at little fuse to do our part to help slow the spread of the Corona virus.

Your complying with recommended safety procedures, including hygiene and disinfection protocols social dispensing.

Good morning personal protective equipment.

We expect these actions will continue for the foreseeable future today, many of our support functions continue to seamlessly execute in a remote working environment.

As a result of our ongoing efforts and vigilance today all of our manufacturing sites are fully operational.

Now I will provide an update on the second quarter performance of our company, which reflects production and demand impacts related to the cobot 19 pandemic.

The perseverance and hard work of our highly skilled global associates.

Along with our strong operational execution enabled us to achieve performance exceeding our expectations within an ongoing challenging environment.

We recorded second quarter sales of $307 million, representing a sequential decline of 11%.

Better than our anticipated 20% reduction.

This is the direct outcome of our ability to meet customer demand quickly resuming production at sites that were temporarily shut down.

Our disciplined cost management actions enabled us to deliver on adjusted EBITDA margin of 15% and adjusted EPS of 71 cents.

I mean, I will provide additional color on our financial performance.

During the quarter, our electronics products segment saw some recovery throughout Asia, particularly within China as restrictions used for manufacturers and consumers.

Recovery has been slower in the Americas in Europe.

Demand has been driven by work from home data center and medical equipment applications.

Weeks of inventory for our products that distribution partners remain relatively lean and near the lower end of our normal 11 to 14 week range.

Exiting the second quarter, our electronics book to Bill was around 1.0.

Which indicates a sustained healthy level of demand for our products during the third quarter.

That said unless we see a meaningful change in order patterns, we do expect normal seasonal softness during our fourth quarter.

We continue to work closely with our distribution.

And OEM partners proactively manage inventory consistent with demand patterns.

Okay.

Across automotive markets Global car build was down nearly 50% with particular challenges in North America Europe.

Our second quarter automotive products segment revenue tracked better than market with continued content games led by our passenger car fuse business.

Our ability to quickly rebound after government mandated shutdowns drove better than expected performance in our commercial vehicle business.

Due to the global pandemic fluctuating order behaviors are reducing visibility of inventory at Oems and tier ones.

This is further compounded by delayed encanto programs at some of our customers.

We are seeing good signals of recovery from some markets like in China Oems are almost back to normal operations as car build strongly recovered during the second quarter.

European and American Oems are back online, but many.

Our at lower capacity levels have been have seen some cobot 19 related interruptions.

We expect third quarter global car production to be down nearly 20% year on year. That's consumer sales remained significantly below last year's production levels, especially in Europe.

Sequentially, we're planning for a meaningful improvement in automotive sales coming off historical lows during the second quarter. However, we do not expect to reach last years level student demand impact related to Carbonite team.

We also expect improve sales in our commercial vehicle business.

For the full year 2020, we expect that global car build of 65 to 70 million cars.

The speed of recovery will depend upon consumer confidence and account economic recovery.

We expect our long term growth to continue outpacing global car build with our ongoing content opportunities.

During the second quarter, our industrial product segment saw a pullback in demand in key end markets driven by macro uncertainties.

Our performance was further impacted by our manufacturing shutdowns due to the pandemic.

While end markets appear to be coming off second quarter lows, we expect a slower recovery across several end markets.

Expect ongoing soft demand in us nonresidential construction.

Oil and gas and mining markets and stable demand in HPC renewable power conversion applications.

With an increasing number of design wins and our strong project funnel. We are confident this business will continue to drive long term profitable growth.

One month into our third quarter, we can't there continues to be a tremendous amount of uncertainty. While we are seeing from demand in some end markets and auto is coming off all time lows, we are proceeding with tempered optimism.

The Kobin 19 situation is fragile and in India and had any time could lead to plant shutdowns supply chain disruptions or further instability in end markets.

That said our global teams remain focused on what we can control to limit disruptions to our business where procuring additional PPD.

Currently adhering to global safety guidelines and stacking additional raw materials and finished goods to serve the critical needs of our customers.

The long term secular trends of a safer greener and more connected world continue to drive strong design activity.

In today's virtual environment, it accelerated adoption and utilization of video and other collaboration tools has driven greater flexibility in response with us among sales and engineering teams.

We're proud of the efforts of our global teams in the current challenging environment I believe our associates have not Mississippi.

During the second quarter, new product introductions of design in activities remain strong demonstrating the ongoing effectiveness of remote working.

Across the industrial electronics and transportation end markets, we serve we are expanding existing positions and gaining market share.

For industrial applications, we are seeing ongoing progress across R&D and new customer development efforts.

As a solutions provider these are leading indicators, which position us for recovery and grow.

There is robust design activity as engineers partner develop customized solutions during the quarter, we secured several design wins across HPC and energy storage, including for residential systems.

Industrial safety continues to be a good catalysts for design win activity. As we also won new business in the food and beverage industry, where a higher level of electrical safety as required.

One of the recent highlights of our industrial business as the expansion of our high speed fuse offering.

These products are designed for the increasing high power requirements for the energy storage power conversion and charging markets. The differentiated product performance provides customers with the highest power density circuit protection solution on the market.

And we're already seeing strong customer demand and product Paul.

Our broad industrial design in activity further diversifies the business across many industrial markets.

For electronics applications, we are seeing significant opportunities in data center and telecom infrastructure, the backbone of the internet of things and good activity and work from home consumer electronics applications, particularly as it were all the shifted to remote working environment.

With our extensive bipolar discrete semiconductor portfolio, which was recognized by customers as best in class, We won new business in data centers and servers for power supplies and switches.

Our high power solutions and packaging differentiates us from competitors.

We also won new business as a result of our local technical support designing capabilities and battery protection for data centers.

And Fiveg networking power systems, we captured new business, driven by our field support and superior product durability.

With our compact design and customer relationships. We also won new business and Highpower mobile handset Chargers proliferation of greater can activity will continue to drive demand for our electronic solutions.

Within transportation applications based on our high performing solutions and superior design capabilities, we have proven ourselves to be a valuable Avi design and partner, we won new business for several Remodels and China, Europe and North America.

We also captured new onboard to onboard charging business.

Based on our strong engineering relationships, we secured new protection business for advanced driver assist systems as well as for regulator applications and two in two and three wheelers in Asia.

We also won new business robotic control management and Japan.

With our broad bipolar discrete solutions I referred to earlier with secured a win and traction motor drives for high speed train application.

Within sensor applications, we captured several new solar sensor wins in China, and North America, and new business in Europe, with our temperature and occupant safety sensors.

Our new business pipeline is healthy and includes opportunities in Japan, and Korea high growth regions, where we are expanding our presence.

The ever greater sophistication of electrical architecture, and safety systems will continue to drive demand for our transportation solutions.

Our commercial vehicle business saw significant new business opportunities along with good design in activity in the quarter.

We won new business for refrigeration units on heavy duty trucks in the North America, and European markets, leveraging our strong customer relationship and engineering capabilities.

We were able to design and our line of power distribution models, one of our strategic growth products.

The material handling market again generated new business as we were able to secure a key design wins, but the Canadian manufacturer.

Strategic growth in Asia continues to show promise as we captured a construction market design win in China and wins in the heavy duty truck space in both China and India.

As we continue to navigate ongoing challenging environment. Our global teams remain focused on driving long term growth and profitability within the sector themes of safety resource efficiency.

And the ever increasing connected world.

I'm confident that the ongoing design in activity, along with our appropriate balancing of costs to align to business conditions and investments for growth. We will continue to execute our long term strategic initiatives.

Ill now turn the call over to mail to provide additional color on our financial performance capital allocation and Alpha.

Great. Thanks, Dave Good morning, everyone. Thanks for joining us today.

Hope everyone has continued to stay safe and healthy.

Second quarter finished better than we expected 90 days ago, a testament to the incredible effort of our teams around the world.

Our financial condition remains strong, giving us a foundation to continue investing across both organic and inorganic growth opportunities to drive our strategy.

Today I will cover second quarter highlights followed by an update on liquidity and capital allocation.

And with their views and Gary markets and other key drivers did impact our outlook.

We finished the second quarter with sales of $307 million down 11% sequentially.

Versus last year sales were down, 22% and 22% organically.

Better than expected finish was led by higher sales cost and electronic segments.

Previously we had noted we were seeing strong demand across the segment and production disruptions from government shutdowns would be the gating item.

We were able to restart and recover from the shutdown fairly quickly due to the significant amount of pre planning a cost of production site and in some areas running over time to meet demand.

We continue to monitor electronics channel inventory, which is at the lower end of typical we can handle.

Sales across our automotive segment finished slightly better than expected driven largely by us faster than anticipated production recovery.

National vehicle.

Second quarter GAAP diluted loss per share with 37 cents, while adjusted diluted EPS was 71 cents.

Excluded from our adjusted results with 34 million dollar noncash goodwill impairment charge related to our automotive sensor business.

Reflecting the near to medium term outlook at the passenger vehicle market.

Adjusted operating margins were 7.7%, resulting in a 40% decremental margin over last year.

Margins were affected by the lower sales volumes carrying costs during production disruption in cold news related costs, partially offset by the benefits from cost reduction actions we've taken.

Adjusted EBITDA margin finished over 15% in the quarter and nearly 19% year to date, reflecting the rapid actions, we took to manage costs and mitigate the sales downturn.

Our GAAP effective tax rate was 15.1% and adjusted tax rate was 18.2%.

We are projecting a full year adjusted tax rate in the 23% to 25% range given the earnings across our tax jurisdiction.

All of our segment had lower operating margin due to the lower sales volume versus last year.

Electronics segment sales were down 14% over last year, but cost reductions, including synergy benefits mitigated the decremental margin impact.

Sales were down a record 43% year over year, and our automotive segment due to customer production stoppages and resulted in an operating income loss for the quarter.

In the industrial segment sales declined 26%.

Our breakeven margin was driven by internal production shutdowns and some additional costs incurred for factoring move activities.

We expect both our auto and industrial segments to be profitable again in the third quarter.

We made significant progress on our strategic footprint initiatives. Despite the challenges faced in critical activities like equipment installation associate training and travel.

We will complete the consolidation of our us semiconductor epitaxial site this quarter.

At our new Philippines facility much of the factory readiness is completed and we've shifted our focus to equipment installation and customer qualifications, which we expect it continues to late 2021.

Within our industrial business, we made significant progress on our North American factory move and expect to complete this move early next year.

The strategic infrastructure action to build upon our foundation of operational excellence.

Component of our growth strategy.

Cash generation and liquidity remained the key priorities for our long term financial health.

Despite the number of external challenges last quarter, we continued to execute across both of these areas, which gives us flexibility to pivot and react quickly to market conditions as needed.

We ended the quarter with $652 million in cash about half of which is in the United States.

During the quarter, we generated $56 million in operating cash flow and $43 million in free cash flow.

After funding a quarterly dividend, we grew our cash on hand by $30 million.

Working capital management remains one of our top focus areas and our team is delivered.

Our receivable days for consistent with the past several quarters led by strong customer collections, while payable days improved slightly.

Our days in inventory on hand increase a combination of uneven demand patterns as well as our decision selectively stock excess levels of key raw materials and finished good.

We want to ensure our ability to support shifts in customer demand given limited forecast visibility as well as take the caution in the event of further production shutdowns.

Our debt levels remain constant versus last year with our net debt to EBITDA leverage sustained below 1.0 times and gross leverage up 2.9 correct.

Our capital allocation priorities remain unchanged, we continue to invest internally to expanding our customer facing capabilities and design initiatives.

As well as capital investment to both growth and cost reduction.

To support these efforts we are maintaining a full year capex forecast of $60 million to $65 million.

We continue to spend our share buyback activity given the near term macro uncertainty.

This also allows us to allocate resources towards acquisition, which remain a top allocation priority for us.

Okay.

Transaction activity remained slow from both buyers and sellers.

Given continued uncertainties around valuation and end market projections.

Our M&A framework has remained consistent for several years strategic fit and alignment is our first criteria and then ensuring the economics align with our financial objectives.

We continue to keep close to several opportunities that fit our strategic criteria, but aligning and valuation will likely take some time given the lack of clarity on end market trajectory.

This is the time of year, our board of directors evaluate changes in our dividend rate.

Our board approved keeping the quarterly dividend rate flat at 48 cents per share equating to $1.92 per year.

This marks the 10th continuous year of our dividend program and a 12% compounded growth rate in our dividend rate over that time.

Despite the turbulent quarter, we finished in a position of financial strength, we continued to execute across the business managing costs and cash flow, while continuing to invest for the future.

So let me move onto our outlook.

We expect the next few quarters to remain volatile.

As Dave noted all of our production facilities are currently operating.

But the growth in Covidien section rate in many countries could disrupt our production and increases the potential risk for further governmental shutdown.

We've implemented a number of safety protocols and all of our site to lower the risk in our facilities.

Along with the unpredictability across the geopolitical environment. The combination of these factors create a challenge in projections beyond the near term.

For the third quarter of 2020, we expect sequential sales growth of 12% to 15%, whether roughly 40% sequential fall through on operating income based on the revenue about.

We expect sequential sales growth across all of our segment with the greatest growth coming from our automotive segment.

Our forecast assumes a third quarter harvill production of 17 million targets as we expect some recovery in both customer production and demand levels.

We're also continuing to fulfill backlog from our second quarter production shutdowns across most of our other business.

Our forecast assumes all of our production facilities continue to operate can meet demand levels.

Looking beyond the third quarter, our typical fourth quarter sales pattern is a sequential mid single digit percentage decline.

We would expect that to continue this year absent any other market dynamics that could alter our sales trajectory.

We continue to expect our operating expenses to be down $80 million versus 2018 with about $35 million of this reduction coming in twentytwenty.

Our actions this year have been fairly evenly split across headcount savings from actions, we took let last year, along with compensation and discretionary spend reduction.

We expect interest expense of about $22 million for the year.

Amortization expense of $40 million and as mentioned earlier and adjusted effective tax rate in the 23, 25% range.

Our free cash flow performance continues to be robust as we've generated $72 million to the first half of the year.

Our teams have been hyper focused on working capital management and prioritizing capital spend.

We expect our free cash flow for the year will more than covered our dividend and our first quarter share buyback.

We are seeing signs of stabilization and improvement in some areas of our business, but our end markets remain challenged and a number of macro factors remain fluid.

We're focused on managing items, we can't control across our business and showing the path to long term financial health and continuing investments for our return to growth.

I would also like to thank our talented team members around the world, who continue to Adeptly navigate each day in this challenging environment.

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

Okay.

Thanks meal.

In summary during these uncertain times, we remain highly focused and collaborative with our customers and suppliers, enabling us to manage through pandemic related disruptions and come out stronger on the other side of this challenge.

Looking ahead, we are proactively preparing for multiple potential scenarios, while continuing to prioritize our associates customers and long term financial health.

The other side of this challenge I am confident that we will have retained our highly skilled associates.

Deepening customer relationships through our hyper focused on their critical needs.

And strengthen the long term financial health and capital structure of our business.

Little fuse will be a stronger more resilient company than today and position for profitable growth as we continue to deliver ongoing value for all stakeholders.

With that I'll now turn the call over to Trisha.

Thanks, Dave.

For participants Lena one day bar in separate locations. This morning, so feel free to director questions to one or the other of them.

Justin please assemble the queue in a roster.

As a reminder to ask the question you'll need to press star one on your telephone to withdraw your question press the pound Keith Please stand by we compile the Q and a roster and again that is star one if you like to ask a question.

First question comes from Karl Ackerman from Cowen. Your line is now open good morning Carl.

Hey, good morning, everyone. Thanks, Thanks for taking my question.

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I guess, perhaps meenal. After the first question I wanted to touch on your outlook first did you indicate what your book to Bill was this quarter I may have missed that and then you spoke significantly about your design wins this quarter.

Im curious what level of your outlook is secured by orders in hand today and have a follow up.

Sure out on the book to Bill Dave had mentioned that that our book to Bill is currently running around 1.0 time with orders coming in at about the same sales rate and I'll, let Dave I think provide more color on design win activity.

Yes, so Carl I think I think it varies on the parts of the business.

With design wins in hand versus bookings that are taking place.

As we go through a quarter.

And our automotive business very much so.

Our sales revenue was driven by designs, we have one historically.

And.

The rollout of new platforms that our customers are running and global car build in that way.

In the industrial part of our electronics business and the OEM part of our industrials is quite similar were very long design cycles that will drive that electronics, where it's a very very broad based customer yes, great deal of that is really not driven by design wins at hand going into the quarter, it's really going through sales to many many many differ.

Front end customers.

Got it I appreciate that.

As a as a follow up if I may.

How are you thinking about inventory levels across your channel partners in automotive I know last quarter I think that was a concern for you, particularly in China. However, some of your peers have indicated that China has seen the largest snap back in demand.

And so could you perhaps quantify whether you believe you're running outlook is selling too.

Largely true end demand is it some pull some level of order pull ins at us in European customers, just any incremental color you may have on the level of inventory and demand within automotive that'd be very helpful. Thank you sure sure. Yes, we talked about in our first quarter that we felt that there was probably some inventory that went in.

Into our automotive customer base during the first quarter.

When we it is quite difficult to get exactly what that is because we don't have visibility into the tier ones and ultimately the Oems.

And where their inventory position is that just based on carville by by our customers and our sales to them.

We believe there's probably still some excess inventory of hanging out there I don't believe that we built any further inventory during the second quarter I think our.

Our sales into our automotive customer base matched up reasonably well to car builds in the end demands there.

A lot of that comes just from our kind of back calculating into that looking our revenues understanding the car builds of those customers our design wins those types of things and we certainly saw some.

Outperformance versus car build.

But we think that was really related to content increase.

Thanks, Carl will take our next question please.

Thank you and that next question comes from Nick total ROE from Longbow Research.

Hi, Ken.

Hi, Good morning. This is gossage Hadrian for Nick regarding your auto production assumptions. So like you appears you seem a little bit more conservative versus third party estimates.

Can you provide any more color by region, possibly and then do you still expect to grow content, 3% to 4% in access of SAR.

Sure I'll take that.

Yes, I think.

We like many of you as well as other peers of ours, and we get a lot of information, whether it's from LMC or somebody like that are.

That has projections for car Bill we look at those we look at.

The conversations we have with our end customers and understanding in the regions and certainly we've seen strong bounce back in China.

Now to be fair the bulk of that in demand in China has been driven.

Not by retail sales, but fleet sales in China. However, we continue to kind of expect to believe that continue to be pretty robust North America is bouncing back reasonably well.

We're probably a little more skeptical of what is projected in Europe and the rest of the world.

As we just don't see evidence that there are bouncing back quite at the rate that maybe China and even the U.S. are doing at this point in time, So that's where perhaps our conservatism is.

If you look back at our last two or three quarters. We also would have given projections less than what the.

The third party providers would give.

Generally we feel good about our projections in that way, so thats kind of what goes into our calculations and yes. We absolutely continue to expect we have three four or 5% contact great build.

Beyond the car builds.

Our success in the passenger car portion of our business.

Great. That's helpful. Thank you and then with regard to the book to Bill can you tell us where it's tracking in July and this is Andy.

Additional color by region, there and then you mentioned.

But over a few delayed programs at customers I'm, just curious if theres any abnormalities, meaning are you seeing delays beyond the normal one or two quarters or is there anything going on there. Thank you.

Sure.

From a book to Bill standpoint.

As we saw kind of exiting Q2, the book to bills were right around parity at 1.0, and they're running similar levels right now.

So it's kind of that stable.

Demand patterns versus sales are reasonably stable right now in the electronic side as a business so really hasn't changed to dramatically at this point in time.

As far as delayed platform, so things like that nothing really systemic in that I think some of the Oems are just making choices on where to spend their time and in many cases delayed launches they've put forward.

I really.

Delayed launches that are replacing platforms and we may already be on any way, yes, I don't know that it's a huge thing theres been a few cases, where they've actually canceled programs, whether it's one of the Ford Transit program, Scott got cancelled their just sticking with where they're at the one thing I would tell you is that we're not seeing.

Cancellations or significant pullbacks from.

ZBB types of applications, we continue to see very strong design activities and if anything we're seeing more and more focus with some incentives in Europe certainly that remains strong.

So a lot of activity continues.

The EDI space.

Great. Thanks.

Thanks, guys for your questions, we'll take our next question. Please.

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

Good morning meal.

So yes, you got some nice throughput out of your facilities there for OLED electronics, showing some upside just just wondering if.

You had any sense of.

If theres any with any demand pull forward.

Customers look safeguard their own inventory levels, just as you mentioned you guys Doug.

Yeah, Chris.

Well, we kind of watch Pos.

At our distributors versus our bookings and things like that kind of watch that very carefully what we would say is.

There may be some level of Colin.

For inventory for some of the 10 customers, we don't see strong evidence of that but there certainly could be some of that.

Although what I would say is right now our distribution partners are being relatively conservative on their inventory position.

So whatever concerns there may be on any kind of pull in from an end customer perspective, I think it's balanced out from the fact that we're running on a lean side of of inventory at our distributors.

So I don't think we have particular concerns that that's going to be a drag on our go forward.

Demand.

Okay. That's helpful. And then my follow up on the guidance for 12% to 15% sequential increase in sales in Q3 Q.

We have the kind that even kind of book to bill relationship, but electronics does that suggest that really the entire sequential increase is located at the auto segment.

Okay.

I mean, all actually take that you talked a little bit about that sure.

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

Good sequential improvement there.

Thanks, and the clarification.

Thanks, Chris will take our next question please.

Thank you and our next question comes from Shawn Harrison from Loop capital. Your line is now open good morning, Sean Hi, Good morning Trisha.

Question for you.

Just if you could talk about the weakening dollar here and just maybe how that's factored into your guidance that knowledge. It's wreaks havoc on results in the past is we've seen volatility quarters, but just kind of what you're planning with with currency the impact of the business you over the next 90 days.

Yes, so I would say for us there's really two currencies that that will move the needle fourth one being the euro.

And that helps us on the topline, but as we have evolved the business over the years and we have a lot more production in Europe than we used to several years back it really doesnt have much of a bottom line impact I'd say with generally naturally hedged across the euro.

So that's that's I'd say, the euro and from China perspective.

As the dollar weakened and are in the strengthens weird and net short position. So that does have a slate.

Negative impact to us when that happened until all of that what we do when we run our forecast as we take the rates at a point in time within a few days of when we come out with with our forecast and so the rates as of today are baked into our forecast.

That's really helpful. And then second go back to the spoke to $80 million Opex coming out of the business.

Over 2019 in 2020, just you talked about how that comes back into 21, and maybe what may not come back because you either more efficient we're traveling less things things that.

You just realize synergies here during cold it that you won't see all of that come back maybe what portion I guess.

Yes, so I'd break it down into I thought about I commented on the three categories that there's there's head count pieces, which I would call.

More permanent in nature right. Those are choices made and we made the choice is through this head count and we'll be very thoughtful before we look at it we adding new head.

There is a pretty significant element on on compensation, we would like had to come back.

So we would expect this a lot of that variable and a lot of that was variable compensation and we'd expect that to come back next year, and then I'd say the third piece is the discretionary spend and I'd say, that's going to be a myth honestly I think in the month go buy in you then last because youre not traveling you're not attending shell is different things like that.

Yes over time, we would expect a lot of that did come back, but I wouldnt expect that to come back over the course of one year I think is going to take some time in and I think right now we just don't know the endpoint if it will all come back. So I would look at it is 50% is taken out for good in another 50%, we'd expect to come back gradually.

Not clear that 100% of that I'll come back.

Thanks, Sean will take our next question please.

Next question comes from Matt Sheerin from Stifel. Your line is now open.

Good morning, Matt, Yes, hi, good morning, everyone.

My question.

In regard to your forward outlook for the December quarter for typical your mid single digit decline.

No there is that typical seasonality in the electronics business.

I'm wondering.

What your expectations, maybe based on your backlog in bookings for December.

In auto because in theory, we should have.

Additional growth in production and.

Most of the factories in terms of production level should be up so so trying to figure out the expectations in terms of the auto growth and then the second part of that in terms of your operating leverage on lower volume would you expect the traditional or typical.

Decremental margin or maybe better than that because of the opex reductions and other cost cutting.

Now let me take the.

The mid single digit decline and then Meenal can talk about the operating leverage.

From the mid single digit decline.

We talk about that historically when we're in a kind of a normal pattern that we would see that as a normal Q3 to Q4 sequential.

Yes, right now visibility is pretty challenged.

To understand exactly where things are headed so therefore, we did put that in there to make sure that.

Theres at least some thought to that.

Certainly the electronics segment as our largest segment and has the most influence on where revenues are going from quarter to quarter and.

With the fact that we're kind of seeing bookings that are relatively flat a reasonably stable level right now.

That would kind of imply to us that if anything unless something changes in a fundamental.

Stronger demand pattern doesnt arise that we would see that sequential drop in the electronics side of our business, we think thats likely.

On auto I think it's a little less clear right now and I think the wild cards there are really.

Area, where we're watching the cost this is probably Europe.

As right now Theyre doing some extended shutdowns because it just really arent seeing that strong pull demand.

And we're a little concerned with the projection to show that picking up in the fourth quarter as ever they got to be the case or not so I think we're watching that quite closely. So we're not intending to give real specific guidance for the fourth quarter, where we just don't want to make sure that people are just taking drawing a straight line up.

On a demand up because of can be seasonal patterns to deal with.

Maybe you can talk about leverage.

Sure.

So maybe echoing some of Dave's comments again, we weren't intending or Q4 commentary to be guidance on Q4, but if we were to follow the normal seasonal pattern of declines we typically see a lot of that decline coming out of our electronics and in our industrial segments. They tend to have higher Inc.

The mental and therefore decremental margins I would expect a.

A decremental rate to be a little higher than that average at that 35% to 40% that we've been pegging more recently.

But again.

I would come back to its going to depend on some of the mix and the other dynamics going on right. Now. So we really just wanted to to really put this kind of a sale view out there. So people understood. What we were thinking about and typical trajectory it's out there.

Yes, Thats very helpful. Thats. It for me thanks, so much.

Thanks, Matt for your question.

Thank you and again, ladies and gentlemen, if you have a question that is star one again, if you'd like to ask a question that star one and our next question comes from David Kelley from Jefferies. Your line is now open good morning, David.

Hi, good morning, and thanks for taking my questions and maybe meet on web to start with.

Comment you made earlier about the expected sequential ILEC electronic segment growth. If we were to remove your exposure to automotive electronics embedded within that segment would you expect the balance of of electronics to recover into into Q3 year.

Yes, So my earlier comments, where all of our all of our segments on the topline are seeing sequential growth, which does conclude electronics, but your comment is a fair one Ned.

Even though we are seeing sequential growth in electronics.

It is dampened a bit by the automotive electronics element the pieces that we have any electronics segment I think despite that we're still seeing some some positive signs there in a little bit a sequential increase.

Okay got it. Thank you. That's that's helpful. And then a question for Dave you talked about your auto outgrowth and expectations and given your commentary on ramping any exposure.

If we were to isolate Europe, where TV penetration is ramping aggressively and it's still fairly early days thats still seems to be moving pretty quickly here I was just curious the here. If you are starting to see an uptick in content per vehicle in that region tied to the penetration.

Well certainly our content exposure is in Europe are certainly higher than they are under traditional ice type vehicle. So yes, we're seeing some improvements there what I would tell you is lots and lots of activities on programs and things like that but most of the higher volume.

Platforms right now kind of sold out their volume limited. So although we are seeing the penetration to improve right now and some of the more popular vehicles. If you placed an order in Europe for our four thatd be.

You are on the weighting last nine months out yet and so therefore, there kind of limited on their ramp up ability. We wish they worked as limited because thats certainly would drive our content story, even even more aggressively there, but that will catch up with itself right as they expand their capabilities, both internally and supply of battery.

Ladies and things like that that will begin to drive it. So certainly has a positive.

Content growth story, we're pretty bullish about the European space for us.

Okay, Great really appreciate you taking my questions sure.

Thanks, David.

Those are all the questions. We have this morning. Thank you for joining us on today's call and you're interested Littelfuse. We look forward to talking with you again soon be safe and stay healthy.