Dave Heinzmann - Chief Executive Officer Meenal Sethna - Chief Financial Officer.

Shawn Harrison - Longbow Research Christopher Glynn - Oppenheimer John Franzreb - Sidoti & Company Steven Fox - Cross Research Gary Prestopino - Barrington Research Matt Sheerin - Stifel Nicolaus.

Good day, everyone, and welcome to the Littelfuse, Inc. Second Quarter 2017 Conference Call. Today’s call is being recorded. At this time, I would turn the call over to President and CEO Mr. Dave Heinzmann. Please go ahead, sir..

Thank you, and good morning. Welcome to the Littelfuse Second Quarter 2017 Conference Call. Here with me today is Meenal Sethna, our Chief Financial Officer. We were very pleased with our performance in the second quarter, as we achieved record levels of sales and earnings.

Our strong performance was led by our electronics segment as well as the benefit of a lower adjusted tax rate for the second quarter. This was as well a very positive quarter for both our automotive and industrial segments with solid organic sales growth. We also saw profitability improvement in our industrial segment.

With that introduction, I will turn the call over to Meenal, who will give a brief summary of the second quarter results.

Meenal?.

Thanks, Dave. Before we proceed, let me remind everyone that certain comments we make on this call contain forward-looking statements. These forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties.

We refer you to the company’s Form 10-K and 10-Q as well as other SEC filings for more detail about important risks that could cause actual results to differ materially from our expectations. In addition, our remarks today refer to the non-GAAP financial measures, adjusted earnings per share, adjusted operating margin and adjusted tax rate.

These non-GAAP measures are intended to supplement but not substitute for the most directly comparable GAAP measure. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in our second quarter earnings release filed on Form 8-K today and available on our website.

Now, some highlights from our second quarter of 2017. Our strong second quarter performance had us finishing above the high end of our original guidance range for both sales and adjusted earnings per share. Sales for the second quarter were $313 million, up 15% over last year.

Organic sales growth was 11%, which excludes revenue from the ON portfolio acquisition, the e-house divestiture and currency effects. You can find sales growth by segment in the press release we issued this morning. GAAP diluted EPS was $2.11. Adjusted EPS was $2.10, which increased 46% over last year.

Operational leverage from the strong sales in electronics as well as the lower tax rates drove our EPS finish. Second quarter GAAP operating margins for the company were 19.2% and were 19.3% on an adjusted basis.

Similar to last quarter, commodities had nearly 100 basis point unfavorable margin impact versus last year as prices for both copper and zinc continued to remain higher than last year. We expect commodities to remain a headwind for us.

By business, electronics operating margin were a record 25.4% as we saw significant leverage from the strong revenue growth. Automotive margins of 13.5% were down 130 basis points versus last year, mainly due to the impact of higher commodity costs as well as a some non-recurring cost relating to a legacy acquisition.

We continued to make progress in industrial margins with a sequential improvement in profitability. As we noted last quarter, we incurred some costs related to our legacy e-house business again this quarter. Excluding these costs, we would have achieved our double-digit operating margin target in the second quarter.

Both our GAAP and adjusted effective tax rate were 15.2% for the quarter. Our second quarter tax rate included a $1.4 million benefit from the new stock compensation accounting guidance that we adopted earlier this year. Cash provided by operating activities was $71 million for the second quarter of 2017, and capital expenditures were $16 million.

Free cash flow finished at $55 million for the quarter. In summary, strength in our electronics business, along with solid operational execution across the company drove record performance for the quarter. With that, I'll turn it back to Dave for more color on business performance and market trends..

Thanks, Meenal. I'll start with the electronics segment, where second quarter sales of $169 million increased 28% and grew 16% organically. Our strong global sales performance was led by Europe and Asia. Similar to last quarter, the strength was broad-based with all major product lines in most markets contributing to the overall increase.

Our order rates remained strong throughout the second quarter but have slowed from the peak levels we saw during the quarter.

The second quarter marked the third quarter of our robust electronics cycle, and while we don't see anything of particular concern in our order patterns or distributor inventories, historically, there has been a pullback following a strong growth cycle.

We are continuing to monitor order rates and believe inventories are at reasonable levels based on our distributors' sales to end customers. Strategic growth areas we highlighted at our Analyst Day were strong contributors to the excellent quarter for the electronics segment.

These focus areas include automotive electronics, the Internet of Things and cloud computing and general and industrial. Automotive Electronics is a fast-growing market for us with almost $6 million in new business wins in the second quarter. These wins primarily relate to electric vehicles in the U.S. and Asia.

$2 million of the new revenues at peak were with two key customers for electric vehicle battery protection using our surface mount fuses. We also secured design wins for our semiconductor products in China and in the U.S. that will be used in infotainment and electric vehicle charging applications.

Other Automotive Electronics design wins include varistors and fuses for ignition and infotainment systems. We continue to gain traction with leading customers and are building a robust pipeline of future business across the Automotive Electronics.

The Internet of Things and cloud computing provide an excellent growth opportunity for us in a broad array of end products. One of these is data centers and data center infrastructure applications. Sales into this market have grown at about 10% in the year over the last five years, and we expect to reach $20 million in total sales in 2017.

We recently won new business for our in-phone fuse with a data center customer in Taiwan.

In addition, our new ultra-high current surface mount fuse for data center infrastructure applications has been well received by leading manufacturers in Korea, Taiwan, Thailand, China and the U.S., with incremental annual revenues of $500,000 anticipated for 2018. Sales of TVS diodes and diode arrays were particularly strong in the second quarter.

We broadened our reach into the Chinese security systems market with a win for our TVS diodes with China's largest security systems manufacturer. This is our first semiconductor win with this customer, which has been specifying our electronic fuse products for some time.

Our TVS diodes will be used to protect surveillance equipment and will add new revenues of about $400,000. The combination of our cost-effective single-chip technology and superior performance enable us to win this new business. We've talked in our prior calls about our TVS diodes and diode arrays that are used in mobile phone applications.

A recent win in for a leading manufacturer in China, where our products will protect the fast charging ports, display power and battery charger. Other new business in the Internet of Things category includes a win for our diodes with a global gaming machine manufacturer that will generate approximately $900,000 in new revenues.

Additionally, we have a win for our PolySwitch resettable fuse with a leading set-top box manufacturer in Taiwan that will bring additional revenues of about $500,000. Our presence in industrial OEM markets extends beyond our industrial segment.

Products from our electronics segment are also sold across multiple industrial end markets such as industrial lighting, motor controls and HVAC. Last quarter, we mentioned the strength of our LED lighting business, particularly in India.

In the second quarter, we secured an additional $1 million of new business of a key OEM in India for our temperature-protected varistor and surge protection module. Additional wins for our fuses and semiconductor products with two leading indoor and outdoor lighting customers will add another $700,000 in incremental annual revenues.

We talked in the past about design wins in Europe for smart metering. As the region plans to replace 80% of its existing power meters or approximately 250 million units by 2020, regional e-meter installations in France and Italy have ramped up. We’ll generate incremental annual sales of approximately $500,000 for our varistor products.

We expect continued growth through the differentiated products such as our TMOV thermally protected varistor. We made progress in our strategy to double our sensor platform with the acquisition of U.S. Sensor Corporation last month. Based in Orange, California, U.S.

Sensor manufactures sensors used in demanding temperature-sensing applications in key electronics and industrial end markets including home automation, HVAC and appliances. U.S. Sensor’s strong design capabilities provide a solid platform for expanding our portfolio and temperature sensing technology.

With our global reach, we are focused on growing this business beyond its largely North America customer base. In summary, our electronics segment is performing very well.

Our focus on faster growing strategic growth areas is producing positive results, and we continue to win new business through our leading technology, extensive product portfolio and strong customer relationships. Next is the industrial segment, where sales of $28 million in the second quarter grew 5% organically.

Our fuse, relay and custom businesses all achieved both sequential and year-over-year organic sales growth. The positive quarter was helped by improvements in the mining and construction markets. We are also gaining traction in our efforts to grow sales beyond North America.

Notable international wins in the second quarter include one for our Arc-Flash Relay series with a railway switchgear manufacturer in Europe and another for our high speed fuses with an electric vehicle battery systems manufacturer in China.

We’ve seen strong interest in our high-speed fuse products, leading to several design wins in North America and Asia in target market verticals of electric vehicles and HVAC. The design wins amount to over $600,000 of estimated annual revenue at full production.

We expanded our line of high-speed fuse products with the launch of our new high-speed square body fuses during the second quarter.

The new fuses are designed to protect sensitive power semiconductors used in devices such as variable frequency drives, uninterruptible power supplies and inverters that cannot withstand a line surge or overcurrent condition.

The new high-speed square body fuses offer optimized circuit protection and operate at extremely fast speeds required to protect today's power-conversion devices. Overall, we are encouraged by the improvement in key end markets and progress on our strategic growth initiatives.

We are on track to return the industrial segment to double-digit operating margins this year. This was also a good quarter for the automotive segment. Our second quarter sales of $116 million increased 6% organically. Our passenger car fuse, PolySwitch and commercial vehicle products businesses all saw sales increases.

As we expected, sensor sales were below last year's level due to the exit of low-margin legacy programs. With our broad automotive product portfolio, we are well positioned to support the higher power and higher voltage needs of today's OEMs as they add more electrical features and performance capabilities to their vehicles.

Our focus on targeted growth areas helped to generate a total of more than $12 million of new business for the automotive segment in the second quarter. Our passenger car fuse sales continued to outpace global car build. We had another strong quarter in China as well as increase sales in Korea and India, which offset some softness in Europe.

Sales in North America also increased. The strength in China and softness in Europe was partially due to our customers transferring some of their production between the regions to optimize their efficiency.

As discussed last quarter, our MICRO2 and MCASE+ fuses are the new standard for utilizing minimal space to protect vehicles with high volumes of circuits. The recent win for these fuses with Chrysler North America will add $1 million in additional revenue at peak production.

Hybrid and electric vehicles are another targeted growth area where we won new business that will add nearly $3 million and additional revenue at peak production. The wins are with leading Tier 1s or OEMs including Renault in Europe, GM in China and PSA in Korea.

The evolution towards 48 volt systems continues to move forward as OEMs are designing more components that require more electric power into their vehicles. The applications range from vehicle air-conditioning compressors, electric superchargers to active suspension and starter alternators that help to reduce fuel consumption.

Our 48-volt MEGA Fuse was specifically designed for these applications, continues to gain customer acceptance. New business wins in the second quarter include new programs in China with a passenger car OEM and a large manufacturer of SUVs. Together, the wins will add an additional $1 million in revenue at peak production.

The PolySwitch product line also had another good quarter, winning new business with an OEM in North America for a resettable fuse for window motor protection.

The sales decline in automotive sensor business was due to a challenging comparison against last year's second quarter, where we saw a revenue boost from the last-time buys for low margin legacy program. We secured new wins in the second quarter that will deliver more than $5 million in annual revenues at peak production.

One win was for a seatbelt sensor with one of the fastest growing vehicle manufacturers in China. Another is with a Chinese transmission manufacturer that will use our position sensors to detect the position of the gearshift lever in vehicles.

These programs tend to have quite a long life because they will be used in multiple vehicle platforms over time. Sales of our commercial vehicle products, or CVPs, saw double-digit increases over last year. The increase was primarily due to strength in North America heavy-duty truck market and the construction equipment market in China.

We continue to grow in our largest -- in our target market of power distribution modules. We won new business for two programs with a global agriculture OEM that will generate peak annual revenues of approximately $400,000 with production beginning later this year for one program, at the end of 2018 for the other.

Our automotive segment continues to make progress on its strategic growth objectives. Our strong relationships with OEMs and Tier 1 suppliers facilitate our strategy, increase content per vehicle, which supports the growth of the automotive segment beyond the growth of global car build.

We are also focused on the key end markets, where our global reach and expertise offer exceptional growth opportunities. As discussed at our Analyst Day, these include the electrification of vehicles, sensors and CVP power distribution modules.

Today, we highlighted a number of the strategic growth areas in each of our businesses that align with global trends and where we can leverage our product portfolio, global customer relationships and technology leadership into above average growth rates. As indicated by the significant business wins in all three segments, we are making good progress.

The strong first half of 2017 gives us a solid foundation for the remainder of the year. On the capital allocation front, our Board of Directors approved a 12% increase in our cash dividend, increasing our quarterly dividend to $0.37.

The increase is consistent with our capital allocation strategy to balance strategic acquisitions with return of capital to shareholders. This is our seventh consecutive year of double-digit percentage growth in the dividend rate as we continue to deliver on our commitment to deliver value for our shareholders.

On that high note, I will return the call back over to Meenal, who’ll provide the outlook for the third quarter; then we’ll take your questions..

Thanks, Dave. For the third quarter, we expect a continuation of the robust demand across our electronics segment. As the order rates have flowed from peak in the second quarter, we do continue to monitor ordering patterns and inventory levels closely.

Across both the auto and industrial segments, we expect solid year-over-year revenue growth and margin expansion. Based on the current economic environment and foreign exchange rates, we expect the following for the third quarter of 2017. Sales are expected to be in the range of $311 million to $323 million.

The midpoint of the guidance reflects 13% reported sales growth and 9% organic growth over last year. Adjusted earnings per diluted share are expected to be in the range of $2.02 to $2.16. We expect our strong operating performance to continue in the third quarter with both sequential and year-over-year margin expansion.

Our EPS guidance also includes a higher tax rate in the second half of the year as our first half of the year tax rate was 16.5%, and we expect a full year adjusted tax rate in the range of 18% to 19%. This concludes our prepared remarks. We’d now like to open it up for questions.

Sylvia?.

Thank you. We will now being the question-and-answer session [Operator Instructions] And our first question comes from Shawn Harrison from Longbow Research..

First question. Meenal, just on the U.S. Sensor acquisition.

How much revenue will that contribute either for the third quarter or the second half of the year?.

It's pretty small overall. I'd call it in the $10 million to $15 million range for the year. So second half would be about half that..

And then just on the electronics business. Hearing that you guys maybe sounding some caution even though you're not seeing it in the exact order rates right now.

Maybe if you could talk about your product lead times or what distributors are saying about your inventory or if you're even seeing a dynamic, where we had TE Connectivity last week saying they're seeing longer-term orders to match up their products to maybe extended lead times in certain semiconductors.

Just anything within the supply chain or normal in the supply chain either that you saw in the quarter through July?.

Shawn, of course, this is an area we focus on and pay a lot of attention in our electronics business. And although our book-to-bill ratio, I talked about them kind of slowing from kind of peak levels, they were pretty high levels kind of going into Q2, and the slowing in those book-to-bill. There's still positive book-to-bill that we're seeing today.

However, it's kind of seasonal declines, if you will, in book-to-bill rates that are kind of normal for us as we would see. Our lead times on our products have not fundamentally extended much. So we've been able to serve demands relatively quickly and kind of a normal pattern.

So therefore, perhaps longer-term bookings have not changed that much for us. We continue to watch very closely our distributor inventory levels. And at this point, we see that our inventory position versus our POS matches up quite nicely.

So we really don't see any major concerns with it, but we're kind of seeing normal seasonal shift in book-to-bill, but still a positive book-to-bill over 1 right now..

Just are you guys seeing pricing tighten up in your favor? It seems like we're seeing some of that within, I'd call it, low-power semiconductor or some passive components, where it's getting a little bit tighter or probably maybe a bit of a benefit to the component manufacturer?.

Yes. It's something we look at obviously. And although I would say, we're not in the position because there aren't particular product categories. There's not meaningful shortages in the market. So there isn't a strong pricing power situation, if you will, that shifted.

I will say that, probably, there's a little less pressure from our electronics customers on pricing than there would be in a normal year because they're a little bit more focused in general -- their sourcing organizations on just making sure they have product.

So as I would say pricing pressures are maybe a little softer than normal, but it certainly hasn't switched where we have the ability to go make any meaningful change..

Very helpful. Thank you so much..

The next question comes from Christopher Glynn from Oppenheimer..

On industrial, you made a comment on mining.

Is there potentially anything meaningful starting up there?.

What I would say is kind of some of our relay products sell into kind of broad-based mining applications. It's not just potash mining. As you know, our custom business is very aligned with Canadian potash mining but not much going on there. Although Potash Corp. last week said that demand was up a little bit.

For us, it would have to be up enough that they do investment cycles, capital investment cycles that we're clearly not seeing. So this is more of a broad-based mining application for some of our relay products..

And then on electronics. I’m wondering if we could try to peel back the onion on the growth there. Obviously, there’s a helpful cycle. I think you also have some culminating efforts around years of kind of looking to penetrate to tailor customers and maybe some share gains with deals. So, wondering how you view the run rate.

Maybe something different from other cycles and how that’s influencing your ability to continue to scale from current levels versus past cycles? If there’s anything different in this build-up..

Sure. And I think at our Analyst Day, we talked about what we thought were kind of the longer-term underlying organic growth potential for our different parts of our business. And we talked about in electronics that we think our underlying growth rate there is in probably between 4% to 6% range from an organic standpoint.

That is higher than the organic rates we’ve seen in the past. So that is an improvement in our fundamental penetration, in our ability to serve a very broad customer base. So, I think, if anything, maybe that fundamental is a little stronger than it what it has been in the past.

But certainly a lot of the really strong level that we’re seeing right is driven by the cycle as well. So, kind of a mix of both. However, often in the cycle, that’s driven by one or two markers that are really the main drivers for it. We’re seeing it very, very broad based. And people often ask the question about, Oh, Internet of Things.

What does that mean? Is that impacting you? It’s my belief it is impacting us. It’s hard to identify because it’s in very, very, very different applications. So it’s pretty broad-based in nature right now, which we think is maybe a healthier dynamic than maybe historical cycles..

Our next question comes from John Franzreb from Sidoti & Company..

Yeah. Just following up on that thought.

In the electronics, given the change in both the product mix or the end market mix, would you expect less seasonality in Q4 versus Q3 than you’ve seen in previous years? I mean, does it -- LED lighting and computing kind of offset some of the normal holiday related consumer product sales that kind of swayed the volumes and the order rates in Q4 versus Q3?.

I think it’s a good question, John. I think if you go back a few years ago, we would have been a little more aligned on consumer electronics, and those certainly had kind of cyclical nature driven by build patterns for Christmas holidays and things like that.

We’ve moved away from that as a core driver for us over the last few years, where it’s really not driven so much by that. However, what I would say is a fair amount of our electronics components we sell through the distribution channels. Distributors also manage on a bit of a calendar as well.

And if anything, they will tend to try to unless there’s a strong end market demand, they’ll tend to end their year, calendar year sometimes with a little lighter inventory position than they might have in midyear. So, I think there is calendarization, but I don’t think it’s maybe quite as extreme as it was three, four years ago..

And then speaking of prepared remarks, you said something to the effect that in the auto section, automotive segment, that the relocation of production impacted sales. Just talk a little bit about that. And I'm curious if whether or not there was an inventory build by your customers ahead of that relocation..

That's a good question. This was kind of really specifically between Europe and China.

And we sometimes get the question, when you're talking about regional demands, does that relate to regional car build? Is it where they're producing and whether it stays? What we saw during this last quarter was where there was an electronics tier or an automotive Tier 1 in Europe, who was actually producing products for Asian consumption, they made the move to align their manufacturing with their customer base actually.

So it became a little better aligned, if you will, with the end car build.

We didn't see any significant kind of build for us because most of the products sent to these customers are standardized products, so we have chip releases kind of anywhere in the world to support them, and they had manufacturing both locations anyway, so it's really just a kind of shift, so we didn't see any meaningful change there..

Okay. Great. And I just might as well just to stick with the automotive theme.

Dave, can you just give your general sense of what your customers are telling you given the rising inventories that we're hearing in North America on the other side?.

Yes. Again, North America, which represents somewhere around 20% of the car build globally that we serve, a lot of press around it. And certainly, car build was down in the second quarter in North America. There was only, car build was only down by like a 1% from the second quarter last year in North America. It's down a little bit more in Q3.

However, I think that the OEMs inventory position, if anything, is improving slightly right now. So we certainly expect Q3 in North America to be relatively soft from a car build perspective but then pick back up a little bit.

Globally, I think we look at the fact that, globally, I think the math would say car build was down about a percentage point in the second quarter. We see the second half globally being 1% to 2% sort of growth in car builds from a global perspective in the back half of the year. So we're not overly concerned with what's going on, on car build.

It certainly has an impact on us but because we're very global in nature, we don't see a big shift that's driving. And for us, really, this story is more content growth anyway. So that's kind of our deal..

The following question comes from Steven Fox from Cross Research..

A couple questions for me. First of all, simple one on commodities. So you mentioned 100 basis points drag on margins year-over-year. Can you just describe how that looks based on current prices as you head into the third and fourth quarter? And then I have a couple of follow-ups..

Yes. So to what we've been talking about, about 100 basis points drag, I would say recently in the past few weeks, we've seen prices pop up. The ones that impact us the most are both copper and zinc, and we've seen prices increase so that drag could be higher in the back half of the year, if that's where the prices stay.

And then also from a segment perspective, the bulk of the impact really comes through our automotive business as well..

And then in terms of just looking at the automotive segment margins, so you're still targeting the double-digits by the end of the year.

Can you just remind at sort of how much volume is required to hit that? Or how much can you do just on where the volumes are currently?.

So Steve, I just wanted to clarify. Were you asking about auto or industrial, because our auto margins are already double-digits..

Oh, I’m sorry. I misspoke on that. I meant industrial. Sorry..

So….

I have another question..

So, that’s okay. So on the industrial front, it’s only been a little bit of a combination.

We have been talking about the fact that we weren’t going to really see a significant rise in the margins if we didn’t get a little bit of help from end market improvement, which we have started to see, and so we’ve started to see better organic growth, and we expect that to continue.

That along with a lot of the cost programs that we’ve put in place, whether it’s cost improvement, other cost reductions and manufacturing efficiencies, the combination of those two that are really improving our margins, and we see that it’ll continue into the back half of the year..

So I’m just trying to get a handle. Like, could you get halfway there or just your own cost improvements or....

So, I mean, I would say, -- well, what we said about the second quarter is we took some -- we had some one-off charges relating to a business that we divested last quarter -- or sorry, late last year. Had it not been for the cost that we incurred in the second quarter, we would have already been in the double-digit range. So....

So, we don’t really need sequential growth....

Sequential growth, yeah. .

And revenues just to be able to do double-digit margin..

Got it, and then just..

That’s okay..

No, just bigger picture question on the auto then. So, Dave, you mentioned a lot of sort of megatrends around electric vehicle sensors, et cetera. I guess -- and a lot of interesting wins during the quarter across not just auto but electronics as well.

Are you seeing areas where maybe design activity is picking up more so than other areas that's helping you? Would you say that the win pace was in line with what you’re thinking? Just curious what you think about the macro around some of these technology advancements. Thanks..

I think we see it very positively. And I think now I’ve been in this business a long time, ran our automotive business for a lot of years. So I think some of the fundamental technology shifts are more favorable today than we’ve seen historically.

And those shifts really that impact us, that we can take advantage of, are certainly electrification of vehicles. And when we say that, again, it doesn’t have to be full EV.

But just like when Volvo kind of they made their announcement about after 2019, everything will be some type of electric content hybrids, mild hybrids, 48-volt systems, and certainly, parallel hybrids and full EVs. All of those are very positive trends for us. We have a great deal of activity around that.

Globally, with significant amounts of that in Asia of that activity. So that certainly is a driver for us. But say Automotive Electronics, certainly the content continues to increase and all the infrastructure in a vehicle needed to support ADAS and those systems.

Also although we may not participate directly in ADAS as far as the particular type of sensing elements of things, the electrical infrastructure to support that and electronics infrastructure continues to grow, and really, it has meaningful impact for us in the Automotive Electronics side. That’s also one.

I think, Steve, we’ve talked about our market share in Automotive Electronics is lower than what our market share is in electrical infrastructure in vehicles and lower than it is in general electronics.

Those also are an opportunity for us, so we see that nice and then on the sensor side, that mix story we've been talking about where we're exiting legacy businesses we don't like the margin profile of but our design activity is very robust.

And if you kind of take out the impact of that business you're walking away from, even now we're still seeing double-digit growth in that business and would expect to continue to see that as well. So we think those technology shifts we're seeing were very well aligned for and should be able to take very strong advantage of..

Our next question comes from David Leiker from Baird..

Hi, this is Joe on for David. I wanted to pick up on the topic of automotive electronics. So it seems like based on the new wins, you have really strong momentum here.

And I'm wondering, can you maybe characterize the penetration of this TAM relative to where you're penetrated in the traditional auto segment? Or if you can't put a firm number on it, just talk about engagement because it's a different set of customers, same automakers, but different set of Tier 1s you're probably interacting with now.

As they get more experience with Littelfuse, it's not new experience, but as they interact with you more, is the opportunity expanding?.

Sure. That's a good question, Joe. And as I talked about a little earlier, certainly our penetration in traditional automotive electronics is significantly lower than what our penetration is in kind of the electrical infrastructure side in automotive.

And really, with investments we've made over the last couple of years, with a couple of recent acquisitions particularly the ON portfolio we acquired, which about half of which was automotive electronics, we have a much stronger offering for those key automotive Tier 1s.

So I would characterize our level of engagement with those automotive electronics Tier 1s as really increasing pretty significantly in the last 12, 18 months. So in automotive it takes times, obviously, to kind of go establish some of that, win business and then drive it to revenue.

But certainly, our activity and our engagement level with those key Tier 1s is up significantly..

And then one more question on automotive. Looking at the electrification opportunity, and it tends to gravitate to talk about pure electrics. But when we look at the market, 48-volt mild hybrid is probably the much more significant volume.

Are the wins coming from China on 48-volt a new phenomenon? Or have you been seeing that because the Europeans and the U.S. OEMs are fully invested in 48-volt, but you don't hear about the opportunity in China as much, at least not yet..

What I would say is our engagement with the Western OEMs in 48-volt is very active. We're very involved with kind of all the OEMs. And the vast majority of OEMs and Tier 1s, we're involved with them and supporting them.

What we're seeing is largely the Western OEMs tend to be focusing on the higher-end vehicles and rolling out 48-volts and higher-end vehicles with higher electric loads that they're bringing into them. The difference, I would say, the level of engagement in China far more platforms that we're working on with Chinese OEMs.

So kind of our expectation is that based on our engagements we’re having is, whereas Western OEMs are kind of starting at the high-end of vehicles and working their way down, we see in China specifically, it seemed to be much more broad based and are looking to do 48 volt systems a little more broadly.

So we’re kind of expecting right now that we’ll see quicker uplift in 48 volt drivers out of China than we will out of the West..

That’s a great color. Thank you..

Sure..

Next question comes from Gary Prestopino from Barrington Research..

Hi. Good morning. Most of my questions have been answered. But, David, you were framing around a reference around the auto industry and the build and all.

Is it your feeling that maybe the headlines out there are a lot more negative than what the real reality is?.

I think our....

In the market….

Yes, I believe so. First of all, most of us are sitting here in North America, and so we get maybe an overexposure to what’s going on in North America. It’s our smallest region. So, I think more importantly, it’s the global aspect. And because we have strong penetration globally, our business really moves with global car build.

And really, the shift in global car build from a year ago to where it's at now and what we’re seeing into next year is not as material of a shift. So yeah, if anything, I think the concerns are a little stronger than the reality as we see.

And again, as I mentioned earlier, for us, most of our growth is coming from content increase; not so much market share or car build. It’s really about content..

So the other question I have is, as we’re seeing more a shift to crossovers and SUVs, really, I guess, worldwide at the expense of sedans, does that help drive your content as well?.

In general, certainly here in North America and Western car manufacturers, the content in SUV is higher for us than it is in a sedan and a few other small car. And in general, we see a similar story in Asia.

And certainly, I think one of the other fundamental underlying things in Asia is the average content in a vehicle is lower for us in China than it is in, let’s say, Germany or the U.S. But the rate at which they’re adding content is much faster, right, so they’re catching up.

So the content story in China -- yes, SUVs are one of the hot sides in China right now. So that’s growing and it has higher content, and the rate of content increase is higher there..

Okay. Thank you..

Sure..

Our follow-up question comes from Matt Sheerin from Stifel..

Yes, thanks. And good morning. Just a couple more questions regarding the operating margin. You’re guiding to an increase in the September quarter. You talked about some potential headwinds on automotive with materials costs. On the other hand, you’ve got some headwinds going away, such as the onetime or nonrecurring cost relative to the legacy business.

And then in electronics, you’re well past your peak or record operating margins. And I think at your Analyst Day, in terms of your long-term expectations, I think it’s below where you were now. So the question is how much is left in terms of electronics opportunities there? Obviously, you’re getting a lot of leverage on acquisitions and growth.

And then within automotive, what we should be -- what should we be thinking about margins there?.

Sure. In the electronics, we get this question a lot, especially this past year where we've had strong top line growth, strong operational performance. And I would say, when you hit it on all cylinders, we would expect that we'd be able to get in our electronics business margins that are in the, call it, in the low 20s generally.

I'd say things are really going our way, also foreign currency as well generally. So we've got a lot of positives going our way. I don't know that we would say that this is necessarily a permanent level of margins, especially with the rate of growth that we have right now and the leverage that we're getting.

But we would expect something around the 20%. I think that's very reasonable. And so in that range, I think it's fair. I think with automotive, we've talked about that in general, we would expect automotive to get back to the company average when it comes to margins.

I think a couple of things that have taken us a while or are taking us a while, we talked about sensors in general. We've built that through acquisition over the past five years.

Margins are lower than the company average, and we've been working on a profitability improvement plan around that, that we took a lot of step forward for this year as we continue to get the growth that we're expecting, the organic growth there you'd see that to continue to improve. Well, commodities have been a headwind this year.

They're now baked into that. And so when you strip out maybe some one-timers, et cetera, we still expect margin expansion for next quarter, so that'll be good. But I'd say over the next couple of years, we're on a path to get to the company average on margin for automotive.

And I'd call that, what we talked about in our Analyst Day, in the upper teens..

And just a follow-up question. Dave, you've talked about the PolySwitch acquisition giving you an opportunity to expand market share in Japan in the core automotive business where you don't have much market share in the fuse business due to the PolySwitch relationships there.

Could you just talk about what you're seeing in terms of opportunities near term and longer term in Japan?.

Sure, yes. And certainly, first of all, I would preface it with winning business with automotive customers in Japan, that doesn't happen quickly.

So what I would say is we are getting the expected benefit of an increased level of engagement with the Japanese OEMs and Tier 1s, really supported by a strong team both on the engineering side as well as sales side in Japan from the PolySwitch group. So we're seeing the activity level increase.

We talked about last quarter about a couple of small wins, early wins that we got in the automotive side in Japan. So we're beginning to see the early stages of it, but it's not the kind of thing that it's going to happen in one year. It's a multi-year strategy, but we are seeing the expected step-up and engagement with those customers..

We have no further questions at this time. I will now turn the call back to Mr. Dave Heinzmann..

Thank you for joining us on today's call. With a strong first half of 2017 behind us, we're optimistic about the remainder of the year. We look forward to talking to all of you again next quarter, and have a great day. Thanks..

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..