CTS Corp (CTS) 2004 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the CTS Corporation first quarter earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during this call please press * then 0. As a reminder this conference is being recorded.

I would now like to turn the conference over to our host Mr. George Newhart. Please go ahead.

Thank you Alex. I’m George Newhart, Vice President, Investor Relations and I will your host for the CTS Corporation’s first quarter earnings conference call this morning. Thank you for joining us today. Participating from the company today are Donald Schwanz, President and CEO, Vinod Khilnani, Senior Vice President and Chief Financial Officer, and Don Schroeder, Executive Vice President and Chief Technology Officer.

Before beginning our business discussions I would like to remind our listeners that the conference call contains forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information on these risks and uncertainties was set forth in last evening’s press release and more information can be found in the company’s SEC filings. To the extent that today’s discussion refers to any non-GAAP measures relative to Regulation G the required explanations and reconciliations are available on our web site in the Industrial Relations section. I now turn the discussion over to our CEO Don Schwanz.

Thank you George. Last evening we released our financial results for the first quarter. Results were strong, actually above our expectations going into the quarter. Sales at $122.1m were up 15% over the first quarter of 2003. Though sales declined about 7% from the fourth quarter, the decline is a normal seasonal pattern. Q1 in fact is generally our weakest quarter. Earnings also improved significantly over Q1 of 2003 growing to 7 cents per share versus 2 cents per share in last year’s first quarter. On a segment basis our Electronics Manufacturing Services business with sales of $58.6m shows the strongest growth in the first quarter last year with sales jumping 29%.

Q1 EMS sales, however, were still down $6.3m or nearly 10% from a very strong Q4. Again, this is a fairly typical seasonal pattern for us. Year-over-year growth in quarterly EMS sales were primarily driven by stronger in demand for communications applications. The Components and Sensors segment also showed growth on a year-over-year basis increasing just over 5% versus the first quarter last year. Again due largely to seasonal factors, sales versus the fourth quarter were down about 5%.

Automotive products sales were the biggest driver growing nearly 18% from the first quarter last year and nearly 10% from the fourth quarter. Sales of electronic components, in contrast, were down about 5% from the first quarter last year and down nearly 18% from the fourth quarter. These declines were primarily driven by lower product sales for handset applications coupled with a typical seasonal drop-off from Q4 to Q1. A small portion of the drop was due to the continuing decline in the sale of end-of-life components as announced at the end of 2002.

On the positive side, we did see growth in component sales to communications infrastructure and computing applications. Overall the broad based sales strength we saw throughout the quarter was an encouraging indicator for the months ahead.

Before turning the call over to the Vinod to discuss our financial results in more detail, I want to spend a few minutes updating you on our growth initiatives. Our progress during the quarter on these initiatives was also very encouraging.

As you know in 2002 we set an objective to double automotive product sales by 2007. To accomplish this we focused on three key strategies, (1) aggressively introduce new high value added products, (2) expand in Asia and (3) widen our customer base.

These strategies are clearly working for us we remain on track to achieve or beat our growth objective. Wins in the quarter for belt tension sensor an integrated pedal module will add about $6m a year in new revenue by the 2007 time frame when all the platform applications are in production.

We also have been successfully increasing the value added content to the products we sell. In our fuel level sensor products, for example, we have enhanced the product we offer from just the sensor to now include the related sensor assembly about doubling the value capture in the product we bring to the market. Over the next few years a growing portion of our fuel level sensor related business will include this higher value added product.

Our efforts to grow our sales and presence in the Asia market also continue to show positive results. Sales into Asia in Q1 were up about 45% over Q1 last year and have grown to be about 10% of total automotive product sales. The rapid growth in automobile sales in China should continue to drive high growth rates for us in this region.

To support this growth we expanded our Don Guang (ph) China plant at the end of last year and are now initiating production of fuel level system products and integrated pedal modules in the facility. Products produced in that facility will serve in markets in Asia.

We also have continued to focus on expanding our customer base. Not surprisingly given our heritage the Big Three in North America has historically accounted for the majority of our sales. While we certainly work hard to serve those customers well and grow those accounts we also have focused on developing new customers and increasing our penetrations with other OEM’s. Here too we are achieving success. Over 2/3 of the business we won in the first quarter was for non-Big Three applications. So I feel comfortable that our automotive growth initiative is on track.

In the electronics components arena we have been very selectively focusing our growth initiatives into markets which we believe offer favorable long term market dynamics and where we believe we can successfully grow share. Communications Infrastructure is an example of such a market. Though the communications infrastructure market has actually softened over the last couple of years this trend is showing signs of reversing and many analysts are projecting a return to growth beginning this year. Longer term, we expect this to be a good growth market for our products.

Even during the downturn these few years, we have continued to invest in new product development for this market and as a result we have been able to grow our sales and our market share even in the face of the market trending down.

In 2003 we grew our sales of precision frequency products, into infrastructure applications by about 19%. First quarter results continues the positive trend with sales up about 3% with the 4th quarter and about 50% in Q1 last year. Typical seasonal patterns would have suggested a decline in Q1 versus Q4. But inputs from our customers indicate that equipment spending in this market has held up.

Based upon the first quarter results, we believe our full year’s sales growth for frequency products in the infrastructure market is likely to exceed 50%.To give some context to this we have sales of about $18m in frequency products into infrastructure markets last year.

As I noted earlier, we saw strong Q1 growth in our EMS sales compared to the year ago quarter. While this was largely driven by our existing customer step, we also saw a very robust level of new business activity with four significant new customers added in Q1. In using the term significant customer, I mean a customer that is expected to produce several million dollars in EMS sales for us by next year and that has a reasonable potential to grow from there. Three of these new customers incidentally come from transportation, medical and industrial markets. So our initiative to broaden our industry participation in our EMS business is also paying off.

Now I will turn the meeting over to Vinod Khilnani our CFO to provide some color on our financial results for the quarter

Thanks Don and good morning everyone. We were pleased to announce strong first quarter results yesterday. As you know the first quarter is our weakest quarter seasonally so we believe we are off to a good start on the year. As Don noted sales were up 15.5% year-over-year in the first quarter of 2004. Net earnings of $2.5m or 7cents per share diluted compared to very favorable net earnings of $0.6M for EPS of 2 cents in the same quarter last year. Two major areas showed earnings improvements year-over-year. Growth margins which were up in absolute terms and as a percent of sales and operating expenses which were down as a percent of sales. Growth margins were up $3.5m driven by the 15.5% year-over-year sales growth. At 20.1% they were also two-tenths of a percent higher over the same period last year.

Despite two items which negatively affected the margins by a combined 1.1% point. First, the higher mix of EMS revenue adversely affected the margins by seven-tenths of a percent, as EMS sales increased to 48% of total revenue in the first quarter of 2004, versus 43% in the same quarter last year. As you know EMS business and inherently has lower growth margins than components and sensors. Secondly, lower pension income had a negative impact on the margins of four-tenths of a percent. Pension income was $2.3m in the quarter, a reduction of $0.6m year-over-year.

However, constant factors like higher mix of automotive sensors sales within our sensors and component segment, lower depreciation expenses, further operational cost improvements and higher absorption of manufacturing fixed costs due to increased volumes were able to more than offset the adverse impact of a higher mix of EMS sales and lower pension incomes.

Compared to the seasonally strong fourth quarter however, growth margins were seven-tenths of a percent lower, primarily due to volume effects. Operating expense (Technical Difficulties) (Inaudible) also contributed to the improved results. We are continuing to manage our operating expenses carefully as manufacturing operation ramp up, and new product launch activities increase to support recent design developments. As a result SG&A and R&D expenses as a percent of sales came down in the first quarter, to 16.1% versus 17.5% in the same quarter of last year.

As high volumes allowed us to leverage the expenses. It is our intent and expectation to continue to drive down our operating expenses as a percent of sales through a combination of expense control and growth leverage over the next two to three year time frame - until we achieve our full-year target range of 14% to 14.5% of sales. As a result of improved margins and leveraging of SG&A and R&D expenses, operating earnings were $4.9m or 4% of sales versus $2.6m or 2.5% of sales in the same quarter last year.

Interest expense of $1.5m in the first quarter was $0.4m lower than the same period last year, due to lower debt balances and better interest rates under our new bank revolving credit agreement. Interest expense were also $100,000 lower sequentially from the fourth quarter of 2003. Overall, I believe these results again demonstrate that we continue to make progress in improving the underlying cost structure in the business which will provide strong bottom line leverage if markets improve and sales growth ensues.

Let me make a couple of quick comments on currency exchange and tax rates before we move on to the balance sheet management. As you know, the US dollar has weakened considerably between the first quarter of 2003 and 2004. Against the Pound Sterling and Euro, it has depreciated approximately 15% and 17% respectively. Overall, from currency full perspective, CTS still needs balance operationally so that currency fluctuations generally will not have a material impact on its bottom line.

However, a 15% to 20% change in the value of the US dollar, is fairly significant and it does affect CTS although differently for our two business segments. If the dollar weakens, as it has against the Pound and Euro for example, our EMS business sees a negative impact while our component and sensors business benefits. In fact, a weaker dollar adversely affected the EMS business’ profitability by approximately $800,000 to $900,000 in the first quarter year-over-year. The components and sensors business on the other hand benefited by approximately $600,000 in the same period.

On the tax front, our effective tax rate remains at 25%. We continue to look for opportunities to maintain or improve this tax rate over the long term. In this regard, we recently received some positive indications from the Singapore government economic development board regarding certain tax credits and response to our EMS expansion in Singapore.

On the balance sheet front, controllable working capital working capital which includes accounts receivable, accounts payable and inventory went up from $52m at the end of last year to $53.2m at the end of the first quarter 2004. Approximately two-thirds of this increase was due to the timing of sales within the quarters. Although first quarter of 2004 sales were $10m or 7.5% lower than fourth quarter last year, due to our seasonality pattern. March 2004 sales were actually $7m or 15% higher than December 2003 sales. These unusually heavy sales in the final month of the quarter caused our receivables to be approximately $8m higher.

As a target we expect our controllable working capital to come down by about 1% point to average in the 11.75% - 12% of sales range. I believe that will be a sustainable number as we go forward.

Free Cash Flows, defined as operating cash flow plus all investing activities, was a positive $3.1m. The key driver of high cash in the first quarter was the deposit of approximately $11.7m which we received in Taiwan as we signed a definitive agreement to sell a held for sale, unutilized facility there. Since then we have closed that transaction and received the rest of the proceeds of approximately $5m which completes the sale at a price of $16.6m which net of cost of disposal is essentially equal to the book value. Please note that we have recorded positive Free Cash Flow in seven of the last eight quarters - totaling approximately $40m.

We look at total debt, net of cash and cash equivalent, that was $48.3m down from $50.5m at the end of 2003. Total debt to capital ratio at 21.5% was similar to year end 2003 levels of 20.5% and 2.9% points lower than the 24.4% level of first quarter last year. Capital expenditures were at a low level of $2m in the first quarter. Please note that we expect our full year 2004 CapEx to be close on the normal level of $20m as we indicated in our January 2004 earnings conference call. And with that I turn it back to you Don.

Thank you Vinod. Based than the stronger than anticipated first quarter and continued positive indicators in the economy and markets we serve, we are revising our guidance for the year. We now are anticipating that year-over-year sales growth will be in the range of 7-10% and earnings per share will be in the range of 43 cents to 47 cents. Obviously there remains a lot of uncertainty in these numbers despite increased optimism, occasioned by improved demand these last six months or so, it is also a fact that many of our customers remain very cautious about the sales outlook for the second half of the year. Now I will open the call to questions. Alex.

Ladies and gentlemen if you wish to ask a question please press * then 1 on your touch tone phone. You will hear a tone indicating you’ve been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone please pick up your handset before pressing the numbers. Once again, if you have a question please press * then 1 at this time. One moment for the first question. First question comes from the line of Lee Zeltser from Needham & Company, please go ahead.

Hey Guys, a couple of questions, first off if you can give us a better sense of the sales mix by vertical market, in the quarter.

Hi Lee, George Newhart here.

Hey George

For the total communications, our inventory communications market was 28% - of that handsets were about 7% and the remainder of course the infrastructure and EMS business in total computer was about 36% automotive was 27% and the remainder, about 8 or 9% would be all our smaller markets.

Okay, great. Now if you could talk a little bit about your normal level of returns business which you saw in the quarter and what would expect going forward?

Say it again Lee Zeltser

In terms of turns business Vinod how much was turns business in the quarter and what kind of a normal level going forward?

Returns you mean?

Yes that’s right

You mean sales returns?

No, no. How much was turns business versus backlog?

We generally don’t look at it that way, we do track our backlog but as we have said in the past, number turns very quickly and it different in different business. For example in EMS business we can turn it within a day or two so it makes it lot less meaningful. We would highlight though that our back orders are at a high level. The highest in 2 years I believe.

OK. Seeing the backlog as high as it is, I was trying to get a sense of where lead times were, how far they may have stretched from the previous quarter. Just trying to get a sense of demand and your ability to fill that demand?

I would think that not much has changed from the point of view of moving the lead time between last quarter and this quarter so we would interpret the increase in backlog as a true indicator of demand

Okay, okay and then, you know, as demand has improved you talk about pricing trends, has that strengthened at all on a sequential basis or from recent months?

Probably going back to normal is the simplest way of saying it.

Okay can you

We’re looking at a few percentage points at a quarter basis. It varies from product to product but…

Okay this is pretty normal at this point. And then if you can talk about utilization levels that you’re currently running now.

Not much difference in what we have said earlier it obviously is different and different businesses, but utilization ratios are probably the lowest in all our communication component business and probably the highest in automotive. As we have said in the past. Overall we have talk about utilization factors ---capacity utilization factors of around 55, 70% kind of a numbers. Of course they’re very--- vary a lot between products, some would be at much higher level of utilization than others. But no significant change in those numbers this quarter versus last quarter.

Okay fair enough. Alright I let someone else have a turn.

Next question comes from the line of Kevin Castle from Bear Stearns, please go ahead.

Good morning.

Morning Kevin.

Vinod you were mentioning that the primary reason for the decrease in the gross margins sequential more related to volume factors but what about pricing just following up on the question prior about pricing. Did you guys see negative pricing impact on gross at all in the March quarter and if so how much and which business won it?

We did not see any significant impact on our margins because of pricing in down set. The pricing and volumes has come back to normal and we are obviously on an ongoing basis driving cost reduction which will compensate for that. As I did say there was a substantial impact on my EMS business and this quarter versus the same quarter last year because of currency exchange. And you know if you take in those impacts and combine that with probably some additional expenses due to transition of that business and opening up additional operating facility in Singapore, you will not find much, much margins much different.

What were those start up costs in Singapore, can you quantify that?

Fairly small, $300 -400,000 range maybe.

Okay. You guys make reference there up the fact that there were some pricing issues in EMS though, does the pricing in Singapore start up expenses, so in addition to currency exchange rate?

One of the things---this is Donald---one of the things that maybe characterizes the EMS business is little different than the components businesses end up with like annual adjustments on your prices.

Okay

And so depending upon the timing you’ll see some of that stuff come in early in the year and then you work through with the supply base over the next few quarters.

I see--- to try to work some of it back…

Yes

When you guys saying it’s back to a normal environment in terms of pricing, I didn’t catch what you said earlier Don, did you say that it’s down a couple percent of quarter. Would you guys consider a normal environment?

It varies from product to product but normally what we’re seeing right now kind of on the averages is a couple percent of quarter.

Okay. And in terms if it’s the largest part of the EMS business is the storage simple that you guys do was that ---- how did that react in the March quarter, or was it down seasonally? Was it down less than normal seasonally or was it pretty much in line with expectations?

I would say pretty much in line with expectations.

Yes it was inline with expectations I don’t know that I could tell you that it was far off of what we would call the normal seasonal expectations.

Okay. And you said you have four new customers in the quarter that was four new wins or four new customers actually contributed to revenue?

That’s wins.

Four new wins. Okay ---so ----so that you guys expect over the 6 to 9 months ramp up schedule or how do you think this will follow?

Its varies but not that’s why I characterized it in terms of revenue next year because it depends on what you’re doing for them, how fast you can get the program or product ramped up.

Okay, okay I’ll stop there and let someone else in.

The next question comes from the line of Amy Yunker from Robert Beard, pleas go ahead.

Hi, I’m calling for Greg Reid. Just had a couple of quick questions, one on the follow-up on the EMS side, understanding the margins if you strip out the Singapore cots and - - the effects from FX it looks like its coming in more like 5.1%, that still lags a little bit where we would see companies such as yourself higher mix, lower volume business which tend to get 6%. Is that a level, first of all you feel is achievable and if so, you know, when do you expect to get there?

Amy if you look back, I think we have talked about 5% that’s probably the normal EMS business margins, of course its affected by not only the storage business but as we grow our infrastructure side of the EMS business in China, that is also part of the mix.

Okay.

We would consider five a probably the target number that’s attainable.

Okay. And I’m sorry if you said this and I just didn’t catch it, but will the - - those expenses from Singapore continue going forward or are those it at this point.

I’d say about another quarter of them.

Yeah, probably another quarter, because we will be starting shipments from there, an April time frame and then there will be some additional shipments which will start or programs which will start May/June time frame. So we may see some more in the second quarter.

Okay.

Maybe not to that extent.

Okay, great. And just one final question, looks like your book to bill was close to 1.1 given the orders you gave, can you just tell us what that’s been the last couple of quarters so we can see the trend line?

Just a moment.

Sure

We are looking for it.

Okay

Book to bill numbers which this quarter are 109, last quarter, which was the fourth of our 03 was 99, it was just below hundred.

Yes

And couple of quarters before that, they were ranging around 100%

Okay. Great, that’s all I have - -

So you can say they’re roughly 9/10% higher

Okay, great. Thank you.

The next question comes from the line of John Frenswhip from Sidoti & Company, please go ahead.

Good morning gentlemen.

Hi john.

Quick question, it seems to in your EMS business you are either de-emphasizing communications infrastructure or you’re making a strategic shift going after more the medical and automotive side of the business. I see there’s four new wins in the quarter, I wonder - - two things, a -- can you this strategic shift, is it an opportunity based thing or do you think, you know, something else is going on there in that - - in those sectors? And secondly, those four new wins, which sector do they come from?

First of all if I implied that we were making a strategic shift away from communications infrastructure, I didn’t intend to do that, because we certainly haven’t done that at all. We have, if you look back over the last, I’ll say two years, we have steadily grown our participation in the communications segment for our EMS business, and continue to work on doing that and have a number of new programs underway, many of those being new programs with existing customers. So I didn’t comment on new programs in the context of existing customers, was commenting on it in the sense of it being a brand new customer.

Okay.

The - - before industrial medical automotive, and if I remember correctly, it was communications.

So three out of the four were not communications.

Were outside of communications or the computing segment, and all we’ve really done here, John - - John, is just recognize that there is a significant opportunity for us to take the business model that we have in our EMS business and to extend it into some markets that we have not traditionally gone after very aggressively.

We have a - - for a - - an EMS company that offers a high mix, low to medium volume kind of capability, we also have a global footprints and we have integrated operations around the world and a number of our customers, right today, have products - - the same products delivered by us to multiple locations, and we can deal with changes across those locations. So we have that kind of capability and there are customers out there in these other markets that look for a company like CTS that can handle that high mix, that provide that level of service and can provide that global delivery capability as well. And we’re getting a very positive reaction to that.

Okay. And secondly, you recently announced a major contract win with a Japanese customer, I wonder if you can just discuss a little bit about what kind of incremental revenues this kind of business can generate, maybe a little bit about contract and opportunity there?

Just a minute. What was you question again, I was just looking at some of the material again, so if - -

Sure, sure. You recently announced win at a major - - major, major Japanese OEM. Can you talk a little about the significance of that, and how that kind of impacts your automotive business going forward?

Well its - - it - - it will ramp up into a very sizable program overtime, that’s the first thing.

Yes

So this is one of these wins that’s going to contribute to doubling our revenue as I mentioned a moment ago. The other thing is I talked about our efforts to broaden our costumer base so this is another indication that we are successful in doing it. So that’s very important to us, because once you get a relationship with a costumer and a very significant relationship you can build on that relationship to sell them other products so I think this will be very positive over the long term from that prospective as well.

Okay thanks, good job guys.

We have a follow up question from the line of Kevin Castle Bear Stearns.

Could I get what cash flow from operations was in the quarter? I didn’t catch that.

Cash flow from operations in the quarter was actually a negative $6.7m as I commented on the working capital side that we had very strong third month of the quarter in March, that was March and so it kind of lopsided the shipments and the receivable alone as we pointed out was higher than (indiscernible) have a more balance in the quarter that was $8m alone.

We’re also -- just another comment in that regard -- we’re also building some inventory to support the Singapore for our EMS business.

Right and I was going to ask about that next, in terms of the inventory increase I mean it rose about 20%, 21% or so sequentially part of that you’re saying is for Singapore?

Yes.

How much roughly was that bid is for Singapore?

We will be giving you a very approximate number I would say a couple $3m, maybe if Singapore and other initiatives which had timing or unusual kind of a temporary build up the inventory and they should clear it out of the system in the next three to four months.

So do actually expect inventory balance to be able to decrease I guess going forward?

Yes from that point of view yes.

You do okay because I think some other business some other companies are seeing certain customers are actually asking them to build inventory, a little bit of inventory here based on stretch and lead times and also potential price increases but you guys don’t really see that happening at the moment?

No we don’t see that and we think we will continue to drive a little more comp inventory front as we go forward as we have done in the past.

And then in terms of sales by geography do you guys have that break down for the quarter?

Yes we do.

Hang on one second.

In the first quarter of 2004 we break it down between Americas, Europe and Asia Pacific. So is we look at sales by geographic shipped to regions 47% was Americas, 22% was Europe and 31% was Asia Pacific. If you compared these numbers to what we did in the first quarter of 2003, the Americas numbers was very similar number 48%, Europe was a little bit higher with 24% and Asia Pacific was 28%.

And in terms of the for wins – on the EMS, going back to that -- did you guys ever talk about what packet maybe contributed on a annualize basis combined? And how large these could be?

No we haven’t talked about that.

Okay.

I think---it’s fair to think about it as several million dollars a piece.

Right, but I mean they’re all roughly the same size is what you’re saying roughly? Or is this (multiple speakers)?

It’s in the guidelines that I just gave you.

Okay and last question here is obviously you guys have a strong relationship with Motorola infrastructure side, can you remind us in terms of on the handset side where does that stand in terms of your handset components? Do you guys still supply them, if so how big of a customer are they?

We still supply them back in the end of 2002 you recall that we announced that we were going to go end- life on certain products, this was predominantly high volume frequency products went into handsets and for those fail to -- have steadily declined. So to Motorola as well as others. The primary products that we sell hand to hand set these days are ceramic duplexers (ph) and filters and Motorola is one of several customers that we sell to. Those kinds of products go predominantly into CDMA types of handsets, but not exclusively but that’s the single biggest driver for us. There are a couple other competing technologies to ceramic duplexers and depending upon the other factors in the handset that will drive whether they will use the other technologies because they have all the technologies and different price points and different performance characteristics. So they’re other things besides just the growth of CDMA’s that will effect that part of the business and it’s pretty complicated. It’s hard for me to give you a simple answer.

Okay well that does it thank you very much.

Thank you.

Is there any additional questions please press star then one at this time. You do have a question from the line of Dar Spellman from Delta Partners please go ahead.

Yes I have a question regarding a new product and design ramp up, you talked about Q1 being the weakest which product designs do you expect to ramp up during this year? If you could talk in terms of reference geographically or from customers standpoint or even from products standpoint individually, thanks.

Let me try and answer your question I’m not sure I fully understand it. We have talked about new products in the context of those products that are I’ll say early in the life cycle and that we’re not talking about just a part number spin those are going all the time.

No, no. I was more keen on understanding from the product family say even in Auto you talked about something in the module opportunities you’re going to expand during the year, same thing if you could talk little bit about both the infrastructure market, on the communication side or on the EMS side, for which product families do you expect to ramp up your interests here?

Okay and I think that we’re on the same track here in terms of what we’re talking about so we look at products like the Bell Tension Center or the Integrated Pedal module as products they’re early in the life cycle and are beginning to ramp pretty dramatically for us. So Bell Tension Centers for example just started into production in July of 2003 and the law said only 20% of 2004 cars and light trucks U.S. have to have that kind of capability that needs that product that rises to 100% by 2006. So there are things that drive that demand up over the next several years. So that’s one that will over the next three years will basically grow to what you would call to be a more stable level of demand.

The pedal module and I don’t have the data in front of me any more, but what’s going on there is more and more vehicles are converting from pedals coupled with electronics throttle control sensors to an integrated module. So you’re seeing a shift in the utilization and that will go on over I’ll say the next 5 or 6 or 7 years, may be even a little bit more than that. And I don’t recall the number George but we’re about 30% now or less than that penetration of pedal module…

A get little bit less.

So there’s a long way to go in terms – and it’s fairly steady so it’s that underlying trend driving the demand for pedal modules and we’re having very good success with our product. So a lot of the wins that we have start rolling out into the one to one module and then into another module and the car companies do this incrementally. So we’ll see some pretty steady growth from this. That’s the second example.

Another one is the frequency modules and new frequency products going into infrastructure. We’ve had in the last 12 months something like 35 or 37 module wins. These are new higher level products and it will only be in the later part of this year that these new designs they go into – start go into the market. And it will start to see revenue ramp up. But then next year it start to ramp up much more significantly and we expect to win a lot more.

Our clear one product, which is a terminating device we put on the market we’re seeing an average of 10 to 12 design wins a quarter. And they typically take 12 to 24 months to roll out to actual product introduction. And so we are seeing demand for that ramp at a pretty good rate on a -- doubling from last year for example. I don’t think that rate will continue but it’s going to be at a pretty healthy rate over the next couple of years. So that’s another example.

Just from the ESP as well as margins (inaudible) these new products how would you characterize that one? I mean how does the ESP for new products ramping up versus the old products been for the margin at such basis?

I think it’s different for example the mix is very different if you talking about three and one kind of a product, the ESP will be very, very small it would be less than a dollar. Yes, if you look the example Don gave you on the automotive side, if you look at pedal assemblies --.

Vinod maybe if we could talk about just the opportunity per car or even the opportunity per box up in post (inaudible) product, I mean how does that trend shaping up and how is the margins for new product -- for opportunity?

I think let me answer the margin question first if you put all the opportunities together because they have a different arenas, we don’t think that there is any dramatic impact on the margin either way on the positive side or negative side. The new products overall carry very similar margins than the families we have today.

If you look at from our penetration per vehicle point of view then I think that the best way to describe it is the way we described it in our investor relation presentation which I believe is on the web site. And if you look at that pedal assembly for example it shows you that dollar amount which we see ramping up between now and 2007, 2008 time frame and I believe the numbers are pretty substantial. They take then up to I believe about 70 million kind of a number on that product alone in 2007, 2008 time frame.

But we have one -- roughly half of that volume already has been awarded to that. So we do look at those bills and because they go on some car platforms and some that don’t don’t go we normally look at the overall number of cars and just divide our total sales with that and we do come up with a per car content. And we have said because of these new programs we see our per vehicle content grow 60, 70% kind of range over the next several years.

Got you.

We have said in that for example that in 2001 we had content per vehicle of $2.14 we believe that by 2007 if we lay out all these programs on top of it the content per vehicle will be $3.75 range that’s a 70, 75% range.

Yes thanks and congrats for the results

Thank you.

There are no further question please continue.

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