Earnings Call Transcript - LFUS Q2 2020

Operator, Operator

Good day, everyone, and welcome to the Littelfuse 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.

Trisha Tuntland, Head of Investor Relations

Good morning, and welcome to the Littelfuse Second Quarter 2020 Earnings Conference Call. With me today are 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 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 thoughts go to David's family and the Baird team. This morning, we're reporting results for our second quarter, and a copy of our earnings release is available in the Investor Relations section of our website. A webcast of today's conference call will also be available on our website. Our discussion today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review today's press release and our Forms 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations. We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available in the Investor Relations section of our website. Before proceeding, I'd like to mention that we will be participating in the Jefferies and CL 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.

Dave Heinzmann, President and CEO

Thank you, Trisha. Good morning and thank you for joining us today. Our thoughts are with everyone affected by COVID-19. Over the past few months, we have witnessed remarkable efforts from medical professionals, first responders, and essential personnel as they work to overcome this ongoing crisis. Every day, these individuals make personal sacrifices and display exceptional leadership, and we are genuinely grateful for their steadfast dedication and service. Since the outset of the outbreak, we have prioritized protecting our global associates, their families, and the communities we serve; supporting our customers; and ensuring the long-term financial health of our business. Our actions and results reflect our commitment to these priorities. I would also like to personally thank all our Littelfuse associates around the globe for their exemplary leadership during this uncertain time. We have united at Littelfuse to help slow the spread of the virus, following recommended safety procedures including hygiene protocols, social distancing, and wearing personal protective equipment. We expect to maintain these actions for the foreseeable future. Currently, many of our support functions are successfully operating in a remote working environment. Thanks to our proactive approach, all of our manufacturing sites are fully operational. I will now update you on our second quarter performance, shaped by the impacts of COVID-19 on production and demand. The resilience and dedication of our skilled global workforce, coupled with our strong operational execution, led us to exceed our performance expectations amid these challenging circumstances. In the second quarter, we recorded sales of $307 million, reflecting an 11% sequential decline, which is an improvement over our expected 20% reduction. This was a direct result of our capability to meet customer demand by swiftly resuming production at previously shut down sites. Due to our disciplined cost management, we achieved an adjusted EBITDA margin of 15% and an adjusted EPS of $0.71. Meenal will provide further details on our financial performance. During the quarter, we saw some recovery in our electronics products segment, especially in Asia, notably in China, as restrictions for manufacturers and consumers eased. However, recovery has been slower in the Americas and Europe. Demand has primarily stemmed from work-from-home initiatives, data centers, and medical equipment applications. Our inventory with distribution partners remains relatively low, staying near the lower end of our typical range of 11 to 14 weeks. As we exited the second quarter, our electronics book-to-bill ratio was around 1.0, indicating a sustained healthy demand level for our products moving into the third quarter. That said, unless we observe significant changes in order patterns, we anticipate normal seasonal softness in the fourth quarter. We are closely collaborating with our distribution, EMS, and OEM partners to manage inventory in line with demand patterns. In the automotive sector, global car production was down nearly 50%, with notable challenges in North America and Europe. Our second quarter automotive product revenue outperformed the market, driven by continued content gains, particularly within our passenger car fuse segment. Thanks to our swift recovery following government-mandated shutdowns, our commercial vehicle business performed better than expected. The pandemic's effects on fluctuating order behaviors are creating visibility issues in inventory at OEMs and Tier 1s, further complicated by some customers delaying or canceling programs. Positive recovery signals are emerging from markets like China, where OEMs are nearing normal operations following strong recovery in car production during the second quarter. Although European and American OEMs have resumed operations, many are doing so at reduced capacity levels, experiencing some interruptions related to COVID-19. We predict third quarter global car production will decrease by nearly 20% year-on-year due to consumer sales remaining significantly lower than last year's production levels, particularly in Europe. Sequentially, we are anticipating a significant improvement in automotive sales coming from historical lows in the second quarter, but we do not expect to reach last year's levels due to COVID-19 related demand impacts. We also foresee improved sales in our commercial vehicle business. For the entirety of 2020, we expect a global car production total of 65 million to 70 million cars. The pace of recovery will depend on consumer confidence and economic conditions. We anticipate our long-term growth trajectory will continue to outpace global car production thanks to ongoing opportunities in content. In the second quarter, our industrial products segment experienced a decline in demand across key end markets due to broader macro uncertainties. Our results were further affected by manufacturing shutdowns stemming from the pandemic. Although end markets seem to be recovering from the lows of the second quarter, we expect a slower recovery across several sectors. Ongoing soft demand is anticipated in the US non-residential construction, oil and gas, and mining markets, alongside stable demand in HVAC, renewables, and power conversion applications. With an increasing number of design wins and a robust project pipeline, we are optimistic about the long-term profitable growth of this business segment. As we enter the third quarter, there is still considerable uncertainty. While we see robust demand in certain end markets and automotive is rebounding from historic lows, we are taking a cautious approach. The situation regarding COVID-19 remains fragile and may lead to plant closures, supply chain disruptions, or further market instability at any time. Nonetheless, our global teams are dedicated to what we can control to minimize disruptions to our business. We are increasing our procurement of PPE, strictly adhering to global safety protocols, and amassing additional raw materials and finished goods to meet our customers' critical needs. The long-term trends toward safety, sustainability, and connectivity continue to foster strong design activity. The expedited adoption and usage of video and collaboration tools within today's virtual environment have enhanced flexibility and responsiveness among our sales and engineering teams. We are proud of our global teams' efforts during these challenging times, and I believe our associates have maintained excellent productivity. Throughout the second quarter, we remained active in new product launches and design initiatives, showcasing the ongoing effectiveness of our remote working arrangements. We are expanding our foothold and gaining market share across the industrial, electronics, and transportation sectors we serve. In industrial applications, we are witnessing continued progress in R&D and new customer development efforts. As a solutions provider, these indicators affirm our position for recovery and growth. There is strong design activity as engineers collaborate to create customized solutions. During the quarter, we obtained several design wins in HVAC and energy storage sectors, including residential systems. Our continued focus on industrial safety has also resulted in new business opportunities in the food and beverage industry, where heightened electrical standards are required. A recent highlight in our industrial segment is the expansion of our high-speed fuse offerings, designed for the increasingly high power demands of energy storage, power conversion, and electric vehicle charging markets. The superior performance of these products provides customers with the highest power density circuit protection available, and we are already experiencing strong demand and product traction. Our extensive design efforts across industrial sectors further diversify our business footprint. In electronics applications, we are identifying substantial opportunities in data center and telecom infrastructure—the backbone of the Internet of Things—and in work-from-home consumer electronics, particularly as remote working becomes more commonplace. Our wide portfolio of bipolar discrete semiconductors is recognized as top-tier by customers, leading to new business in power supplies and switches for data centers and servers. Our high-power solutions and innovative packaging set us apart from competitors, and we have also secured new business through our local technical support and design-in expertise, especially in battery protection for data centers. In 5G networking power systems, our field support and durable products have won us new contracts. Our compact designs and strong customer relationships have also translated into new business with high powered mobile device chargers. The escalating demand for connectivity will continue to drive the necessity for our electronic solutions. In the transportation sector, our high-performance products and outstanding design capabilities position us as a trusted partner for electric vehicle design. We have secured new business for various EV models in China, Europe, and North America, along with new contracts in EV onboard and off-board charging. Our engineering relationships have led us to wins in advanced driver assist systems and regulator applications for two and three wheelers in Asia. Additionally, we have acquired new business for battery management control in Japan. Using our robust bipolar discrete solutions, we have also won contracts in traction motor drives for high-speed train applications. In sensor applications, we achieved several new solar sensor wins in China and North America and expanded our business in Europe with temperature and occupant safety sensors. Our healthy new business pipeline includes attractive opportunities in Japan and Korea, high-growth regions where we are strengthening our presence. The increasing sophistication of electrical systems and safety features will continue to stimulate demand for our transportation solutions. Our commercial vehicle division has witnessed significant new business developments and strong design-in activity this quarter. We have obtained new business for refrigeration units on heavy-duty trucks in both North American and European markets. By leveraging our strong client relationships and engineering skills, we designed in our range of power distribution models, which are strategic growth products. The material handling sector has also yielded new business, including a key design win with a Canadian manufacturer. Growth opportunities in Asia remain promising as we captured a design win in the construction market in China, along with victories in the heavy-duty truck market in both China and India. As we continue to navigate this challenging environment, our global teams are focused on driving long-term growth and profitability, grounded in the themes of safety, resource efficiency, and connectivity. I am confident that through ongoing design efforts and carefully balancing costs according to business conditions while investing for growth, we will successfully implement our long-term strategic initiatives. I will now hand the call over to Meenal for more insights on our financial performance, capital allocation, and future outlook.

Meenal Sethna, Executive Vice President and CFO

Great. Thanks Dave. Good morning, everyone, and thanks for joining us today. I hope everyone has continued to stay safe and healthy. Our second quarter finished better than we expected 90 days ago, a testament to the incredible efforts of our teams around the world. Our financial position 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 our views on various markets and other key drivers that impact our outlook. We finished the second quarter with sales of $307 million, down 11% sequentially. Versus last year, sales were down 23%, and 22% organically. Our better-than-expected finish was led by higher sales across our electronics segment. 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 these shutdowns fairly quickly due to a significant amount of pre-planning across our production sites, and in some areas, running overtime to meet demand. We continue to monitor electronics channel inventory, which is at the lower end of typical weeks on hand. Sales across our automotive segment finished slightly better than expected, driven largely by a faster than anticipated production recovery in our commercial vehicle business. Second quarter GAAP diluted loss per share was $0.37, while adjusted diluted EPS was $0.71. Excluded from our adjusted results was a $34 million non-cash goodwill impairment charge related to our automotive sensor business, reflecting the near to medium-term outlook of the passenger vehicle markets. Adjusted operating margins were 7.7%, resulting in a 40% detrimental margin over last year. Margins were affected by the lower sales volumes, carrying costs during production disruptions, and COVID-related costs, partially offset by the benefits from the cost reduction actions we've taken. Adjusted EBITDA margins 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 mix across our tax jurisdictions. All of our segments had lower operating margins due to the lower sales volume versus last year. Electronics segment sales were down 14% over last year, but cost reductions, including IXYS synergy benefits, mitigated the detrimental margin impact. Sales were down a record 43% year-over-year in 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 break-even 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 faced in critical activities like equipment installation, associate training, and travel. We will complete the consolidation of our US semiconductor epitaxial sites 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 through 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. These strategic infrastructure actions build upon our foundation of operational excellence, a key component of our growth strategy. Cash generation and liquidity remain 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 the 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 were consistent with the past several quarters, led by strong customer collections, while payable days improved slightly. Our days of inventory on hand increased, a combination of uneven demand patterns, as well as our decision to selectively stock excess levels of key raw materials and finished goods. We want to ensure our ability to support shifts in customer demand, given limited forecast visibility, as well as take precautions in the event of further production shutdowns. Our debt levels remained constant versus last year with our net debt to EBITDA leverage sustained below 1.0 times and gross leverage of 2.9 times. Our capital allocation priorities remain unchanged. We continue to invest internally to expand our customer-facing capabilities and design initiatives, as well as capital investments for 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 suspend our share buyback activity, given the near-term macro uncertainties. This also allows us to allocate resources toward acquisitions, which remain a top allocation priority for us. Transaction activity remains 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 on valuations will likely take some time, given the lack of clarity on end market trajectory. This is the time of year our Board of Directors evaluates changes in our dividend rate. Our Board approved keeping the quarterly dividend rate flat at $0.48 per share, equating to a $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 continue to execute across the business, managing costs and cash flow while continuing to invest for the future. So, let me move on to 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 COVID infection rates in many countries could disrupt our production and increase the potential risk for further governmental shutdowns. We've implemented a number of safety protocols at all of our sites to lower the risk in our facilities. Along with the unpredictability across the geopolitical environment, the combination of these factors creates a challenge in projections 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 segments, 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 are also continuing to fulfill backlog from our second quarter production shutdowns across most of our other businesses. Our forecast assumes all of our production facilities continue to operate to 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 2020. Our actions this year have been fairly evenly split across headcount savings from actions we took last year, along with compensation and discretionary spend reductions. We expect interest expense of about $22 million for the year, amortization expense of $40 million, and as mentioned earlier, an adjusted effective tax rate in the 23% to 25% range. Our free cash flow performance continues to be robust, as we've 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 cover our dividends 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 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 comments.

Dave Heinzmann, President and CEO

Thanks Meenal. 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 am confident that we will have retained our highly skilled associates, deepened customer relationships through our hyper-focus on their critical needs, and strengthened the long-term financial health and capital structure of our business. Littelfuse will be a stronger, more resilient company than today and positioned for profitable growth as we continue to deliver ongoing value for all stakeholders. With that, I will now turn the call over to Trisha.

Trisha Tuntland, Head of Investor Relations

Thanks Dave. For participants, Meenal and Dave are in separate locations this morning, so feel free to direct your questions to one or the other of them. Justin, please assemble the Q&A roster.

Operator, Operator

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

Karl Ackerman, Analyst

Hey, good morning, everyone. Thanks for taking my question. I guess, perhaps Meenal for the first question. I want to touch on your outlook. First, could 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. I'm curious what level of your outlook is secured by orders in hand today. And I have a follow-up.

Meenal Sethna, Executive Vice President and CFO

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

Dave Heinzmann, President and CEO

Yeah. So, Karl, 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. In our automotive business, very much so. Our sales revenue is driven by designs we have won 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 industrial, it's quite similar. We’re very long design cycles that will drive that. Electronics, where it’s a very, very broad-based customer. A 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 different end customers.

Karl Ackerman, Analyst

I appreciate that. As a follow-up, how are you approaching inventory levels with your automotive channel partners? I know last quarter this was a concern, particularly in China. However, some competitors have noted that China has experienced the biggest rebound in demand. Could you provide any insights on whether your revenue outlook is primarily based on true demand or if there are order pull-ins from US and European customers? Any additional information you could share about inventory levels and demand in the automotive sector would be very helpful. Thank you.

Dave Heinzmann, President and CEO

We've mentioned in the first quarter that we believed some inventory likely entered our automotive customer base. It's challenging to determine the exact amount since we lack visibility into Tier 1 suppliers and the OEMs and their inventory levels. However, based on our customers' car builds and our sales to them, we generally believe there may still be some excess inventory available. I don't think we've added any further inventory in the second quarter. Our sales to the automotive sector aligned reasonably well with car builds and end demand. Much of this assessment comes from analyzing our revenues, understanding our customers' car builds, and considering our design wins. We also observed some outperformance compared to car builds, which we attribute to an increase in content.

Trisha Tuntland, Head of Investor Relations

Thanks Karl. We'll take our next question, please.

Operator, Operator

Thank you. And our next question comes from Nick Todorov from Longbow Research. Your line is now open.

Gausia Chowdhury, Analyst

Hi, good morning. This is Gausia Chowdhury on for Nick. Regarding your auto production assumptions, so like your peers, 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 excess of SAR?

Dave Heinzmann, President and CEO

Sure. I'll take that. We receive a lot of information, including projections for car production from sources like LMC. We analyze those along with feedback from our end customers and what we observe in different regions. We've definitely noticed a strong recovery in China, although much of the demand there has been driven by fleet sales rather than retail sales. We anticipate that this demand will remain strong. North America is also experiencing a decent recovery, but we are somewhat skeptical about the projections for Europe and other regions, as we haven't seen the same level of recovery there as we have in China and the US. This is where our caution comes from. In our recent quarters, we have typically provided projections that are more conservative than those of third-party analysts, and we feel confident in our own estimates. This informs our calculations, and we continue to expect a 3% to 5% growth in our content beyond overall vehicle production, particularly in our passenger car segment.

Gausia Chowdhury, Analyst

Great. That's helpful. Thank you. And then, with regards to 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 are a few delayed programs at customers. I'm just curious if there's any abnormalities, meaning, are you seeing delays beyond the normal one or two quarters? Or is there anything going on there? Thank you.

Dave Heinzmann, President and CEO

Sure. From a book-to-bill standpoint, as we saw kind of exiting Q2, 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 electronics side of the business, so really hasn't changed too 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 are really delayed launches that are replacing platforms, and we may already be on anyway. So, I don't know that it's a huge thing. There have been a few cases where they have actually canceled programs, whether it's one of the Ford transit programs got canceled and they are just sticking with where they're at. The one thing I would tell you is that we are not seeing cancellations or significant pullbacks from the xEV types of applications. We continue to see very strong design activities. And if anything, we're seeing more and more focus. And with some incentives in Europe, certainly, that remains strong. So, a lot of activity continues in the EV space.

Operator, Operator

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

Christopher Glynn, Analyst

Good morning, Meenal. It looks like you're achieving impressive throughput at your electronics facilities, which is a positive sign. I'm curious if you have any insight into whether there was any demand pull forward, as customers try to protect their own inventory levels, similar to what you mentioned you are doing.

Dave Heinzmann, President and CEO

Yeah, Chris. When we kind of watch POS at our distributors versus our bookings and things like that and kind of watch that very carefully, what we would say is, there may be some level of pull-in for inventory for some of the end 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 the lean side 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.

Christopher Glynn, Analyst

Okay, that's helpful. And then, a follow-up on the guidance for 12% to 15% sequential increase in sales into 3Q, we have the kind of even kind of book-to-bill relationship at electronics. Does that suggest that really the entire sequential increase is located at the auto segment?

Dave Heinzmann, President and CEO

I think, Meenal, why don't you take that? You talked a little bit about that.

Meenal Sethna, Executive Vice President and CFO

Sure. So Chris, as 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.

Trisha Tuntland, Head of Investor Relations

Thanks Chris. We'll take our next question, please.

Operator, Operator

Thank you. And our next question comes from Shawn Harrison from Loop Capital. Your line is now open.

Shawn Harrison, Analyst

Hi, good morning, Trisha. Meenal, a question for you. Just if you could talk about the weakening dollar here and just maybe how that's factored into your guidance? I know it's wreaked some havoc on results in the past as we've seen volatility in quarters, but just kind of what you're planning with currency and the impact on the business here over the next 90 days?

Meenal Sethna, Executive Vice President and CFO

I would say there are two main currencies that will significantly affect us. The euro positively impacts our top line, but since we've increased our production in Europe over the years, it doesn't greatly affect our bottom line anymore. We are generally hedged against fluctuations in the euro. Regarding China, a weakening dollar combined with a strengthening RMB puts us in a net short position, which has a slight negative impact when that occurs. When we forecast, we consider the exchange rates at a specific point in time just a few days before our forecast is released. The current rates are incorporated into our projections.

Shawn Harrison, Analyst

That's really helpful. And then second, I'll go back to the $80 million of operating expenses that were reduced from the business over 2019 and 2020. Can you discuss how that might return in 2021 and what aspects may not return because of increased efficiency or reduced travel, as well as any synergies realized during COVID that may not fully return? What portion do you anticipate will come back?

Meenal Sethna, Executive Vice President and CFO

If I break it down, there are three main categories to consider. First, we have headcount, which represents more permanent decisions. We have made choices to reduce headcount, and we will be careful before considering adding new hires. Next, there is a significant aspect related to compensation that we hope will return. A lot of it was variable compensation, and we anticipate that it will come back next year. Lastly, there's discretionary spending, which will vary. As time passes and we spend less on travel and events, we expect a lot of that spending to return, but it won't happen in just one year. It will take time, and right now, we don’t know if it will all come back. I would estimate that about 50% is gone for good, while we expect the other 50% to come back gradually. It's uncertain whether we will recover 100% of that.

Trisha Tuntland, Head of Investor Relations

Thanks Shawn. We'll take our next question, please.

Operator, Operator

And our next question comes from Matt Sheerin from Stifel. Your line is now open.

Matthew Sheerin, Analyst

Yeah. Hi, good morning, everyone. My question is in regard to your forward outlook for the December quarter for a typical mid-single digit decline. I know there is that typical seasonality in the electronics business. But I'm wondering what your expectations may be based on your backlog and 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, 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 that lower volume, would you expect traditional or typical detrimental margin or maybe better than that because of the opex reductions and other cost cutting?

Dave Heinzmann, President and CEO

Let me address the mid-single digit decline, and then Meenal can discuss the operating leverage. Historically, during a normal pattern, we would expect to see that decline as typical from Q3 to Q4. However, right now, it is difficult to predict exactly where things are going. We included that information to ensure there is some consideration of it. The electronics segment is our largest and has the most significant impact on our quarterly revenues. Currently, bookings are relatively stable, which suggests that unless we see a substantial change in demand, we may experience that sequential decline in the electronics portion of our business, which seems likely. Regarding the auto sector, the situation is less clear. Our main concern is Europe, where extended shutdowns are happening due to insufficient demand. We are cautious about projections indicating demand increases in the fourth quarter, and we are closely monitoring that situation. Therefore, we are not providing specific guidance for the fourth quarter to avoid assumptions of continuous demand growth, as seasonal patterns can impact that. Meenal, please go ahead with the leverage discussion.

Meenal Sethna, Executive Vice President and CFO

Sure. Echoing some of Dave's comments, we weren’t intending our Q4 commentary to serve as guidance for Q4. However, if we were to follow the usual seasonal patterns, we generally see a significant portion of declines originating from our electronics and industrial segments, which tend to have higher incremental margins as well as decrementals. I would anticipate that the detrimental rate may be slightly higher than the 35% to 40% average we've referenced recently. However, it's important to note that this will depend on the mix and other current dynamics. We simply wanted to provide this sales perspective to clarify our thoughts and the typical trajectory we foresee.

Matthew Sheerin, Analyst

Yeah, that's very helpful. That's it from me. Thanks so much.

Trisha Tuntland, Head of Investor Relations

Thanks Matt for your question.

Operator, Operator

And our next question comes from David Kelley from Jefferies. Your line is now open.

David Kelley, Analyst

Hi, good morning, and thanks for taking my questions. And maybe, Meenal, I want to start with a comment you made earlier about the expected sequential electronics 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 Q3 here?

Meenal Sethna, Executive Vice President and CFO

Yeah. So my earlier comments were, all of our segments on the top line are seeing sequential growth, which does include electronics. But your comment is a fair one that even though we are seeing sequential growth in electronics, it is dampened a bit by the automotive electronics element, the pieces that we have in electronics segment. I'd say, despite that, we're still seeing some positive signs there and a little bit of sequential increase.

Dave Heinzmann, President and CEO

Sure.

Trisha Tuntland, Head of Investor Relations

Thanks David. Those are all the questions we have this morning. Thank you for joining us on today's call and your interest in Littelfuse. We look forward to talking with you again soon. Be safe and stay healthy.