Littelfuse Inc (LFUS) 2002 Q4 法說會逐字稿

Please stand by, we're about to begin. Good day everyone and welcome to the Littelfuse Inc 2002 conference call. This call is being recorded. I would like to turn the call over to Chairman, President and Chief Executive Officer Mr. Howard Witt.

Good morning this is Howard Witt and with me is Phil Franklin, our CFO. Welcome to our fourth quarter conference call. After Phil and I finish our comments we will take questions and answers, the total call will be about 45 minutes. In the call Phil will cover the full year and fourth quarter financial performance. I will jump in and talk about 2002 accomplishments and current market trends and Phil will talk about the 2003 financial guidance.

Given the challenges in many markets we serve, Littelfuse had solid performance in 2002. We produce respectable earnings and strong cash flow further strengthening of our balance sheet and allowing us to make investments to enhance our future. We feel the actions we are taken, I'll talk about those later in more detail, will have a positive impact in 2003, especially when business activity further improves. Now Phil will cover the fourth quarter and past year.

Thanks, let me start by reading the safe harbor language. Any forward-looking statements contained herein involve risks and uncertainties, included but not limited to product demand and market acceptance, risks, the effect of economic conditions, the impact of competitive products and pricing, commercialization and technological difficulties, capacity and supply constraints or difficulties, exchange rate fluctuations, actual purchases under agreements, the effect of company's accounting policies, labor disputes, restructuring costs in excess of expectations and other risks which may be detailed in the company's SEC filings.

Sales for the fourth quarter of 2002 will 69.3m which was up 14% from the year ago quarter. Earnings per share for the fourth quarter were 12 cents compared to 1 cent for the prior year period before restructuring charges. Sales were at the high end of our most recent guidance and earnings were slightly above guidance due to somewhat better than expected gross margins. By market segment, fourth quarter sales compared to the prior year were as follows, electronic up 20%, automotive up 11%, electrical down 3%.

Excluding currency effects in the Semitron acquisition, third quarter sales compared to the prior year were up 8% with segment sales as follows, electronics up 11% reflecting strength in Asia, automotive up 8%, reflecting stronger vehicle build rates, and electrical down 3% reflecting the continued weak performance of the nonresidential construction and industrial sectors of the economy.

Looking at our business geographically, again excluding the effects of currency and Semitron, Asia grew 18% for the quarter, North America grew 5% and Europe declined 2%. The decline in Europe reflected continued weak conditions in the European electronics markets. For full year 2002, sales were 283.3m, up 4% from 2001. Earnings per share, before restructuring charges increased to 55 cents, compared to 37 cents for 2001. By segment for the full year, electronic sales were up 3%. Automotive sales up 8% and electrical sales were down 2%.

While 2002 was more challenging in many respects than most of us expected going into the year, it was also a year of important accomplishments for Littelfuse which Howard will recap in a moment. I would like to touch on our most significant financial accomplishment for the year which was delivering record free cash flow of over $32m. This was accomplished by strong execution of in the areas of cost reduction, inventory management and accounts receivable collections. One of the strengths of Littelfuse has always been the ability to consistently generate strong cash flow. In fact over the last ten years we’ve averaged over 22m in free cash annually. This will continue to be a focus for us. Now I would like to turn it over to Howard.

Thanks Phil. Looking back on 2002, it's easy to get caught up on the ongoing weakness in several of our markets, while it's important to keep in mind significant progress we made throughout the year to strengthen our position for the future, and I’ll mention several of these, firstly as Phil touched on, we reduced working capital by over $10m which contributed to record cash flow of over $30m. Secondly, we acquired and integrated Semitron, in the UK, into the company, significantly broadening our offering of lower voltage product and adding silicon wafer fabrication to our core competencies. We also converted both Singapore distribution center and our European distribution center in Holland to our S.A.P. information system. Recently, we had an in-depth meeting with the top management from Molex, Molex is an S.A.P. user, and this confirmed our original conclusion that this is the right system for us and will provide significant efficiencies and added value going forward. We had aggressive cost reduction activities that continued world wide with over $10m saved in 2002. And our ongoing program to shift manufacturing to a higher percentage in low cost areas we closed U.K. Washington site and sold the building in December. Our Centralia site which we referred to a number of times, we will finish moving product from that site and that will be closed in 2003 at the same time we are enlarging our factory in [Sujzo], China. We also moved our Korean based fuse manufacturing into the Philippines and we’re in the process of selling our Korean factory as we speak.

We introduced new products across all three of our businesses during the year, it solidifies as world’s leading producer of circuit protections solutions. We also opened a new state of the art distribution center in the Chicago area to further our efforts to improve customer service and efficiency while continuing to reduce our manufacturing investments in working capital. We also in our busy automotive business added several work centers to improve efficiencies and reduce cost in line we are running through most of the year, 7 days a week 24 hours a day. And lastly, we added two talented board members from Molex and Intel. All in all, these initiatives as well as the balance of our businesses, both serving three distinct markets and selling all over the world’s major markets, helped us to weather the weakness in electronics and t he general sluggishness that Phil described in Europe.

The marketing trends as we see them looking ahead 2003, this is the year coming I should say, has been characterized as world economic recovery without zest. Initial indicators are for the US electronics market we served would be up in the range of 6% to7%, however, US car build will at16b units down 3% from 2002. Overall demand is expected to remain sluggish in the US, Europe and Japan, especially in the first half. On the other hand, Korean and China, two markets where we have established a presence, are expected to gain in the 5% to 8% range. Our electrical markets will continue to be weak and there is basically a slow start across most of our markets as we start into 2003.

As noted in recent Morgan Stanley report, the overall outlook for 2003 might be characterized by Morgan Stanley as low revenue growth, no pricing power and weak investment spending. Given the sources of margin growth per Morgan Stanley will continue to be labor cost reduction, that is by moving to lower cost regions and capacity rationalization. I feel, and our team does, that our ongoing initiatives, our conservative balance sheet and our significant ability to generate cash should serve us well into 2003. I’m hesitant to repeat this but most prognosticators are forecasting resurgence in automotive and electronics in their markets in 2004. Phil?

Thanks Howard. I would like to conclude with discussion on current operating trends and some 2003 guidance with a caveat that our markets are still murky and seeing more than a quarter ahead is difficult. After a slow start to the fourth quarter, we did experience a modest up tick in December for our automotive and electronic businesses, however as Howard mentioned the first quarter has started off very slowly across-the-board.

From a margin standpoint, we saw gross margin improve sequentially in the fourth quarter due to more flow through of cost savings from our manufacturing rationalization program and somewhat better than expected overhead absorption. We expect margins in the early part of 2003 to be similar to Q4 but expect to see modest improvements, through the year as 2003 cost savings related to the completion of the manufacturing rationalization program kick in.

This presumes that we are able to hold price erosion to mid single digits and we get the benefit of some volume improvements during the year. For the full year we based our planning around mid single digit revenue gains overall. With electronics revenues up high single digits. Automotive roughly flat and our power fuse business up mid single digits. Assuming we achieve gains in this range and with a margin improvement just mentioned we should be able to make the current consensus earnings estimate of 75 cents for the year. Now we will take any questions you may have.

Thank you, ladies and gentlemen, if you have questions press star key followed by the one key. If you are using a speakerphone make sure your mute function is turned off to allow your signal to reach our equipment. That was star 1 and we'll stake the first question from Alexander Paris from Barrington Research.

Good morning,

Good morning.

Nice quarter.

Thanks very much.

Just a couple questions on your outlook and particularly your cost cutting, without talking about the actual dollars, I noticed the SG&A to sales you were able to knock than down to 21.8% of sales down from 22.9% in the previous year. Given the sales are you talking about, would you expect that ratio to be lower in 2003?

We would expect that to continue to get leverage off SG&A. Our intent is to hold those expenses fairly flat in the face of, hopefully, as we mentioned mid single digital revenue gain which should drop that percentage another percentage point or so.

So you think you can keep the actual dollar, SG&A cost level

Yeah, or roughly level, that's our goal. We're experiencing, as I think everybody is, increases in cost related to medical and pension and some of those things, but some of the cost cutting we have been doing and we did some of that in the fourth quarter and continuing on should offset the majority of those inflationary increases.

That includes any increased pension expenses you have?

Correct.

And I guess, you said in terms of your 2003 guidance, seems like everybody in the world that's second half loaded, right?

We indicated that the first quarter is starting off slowly. Getting to the kind of numbers we talked about would presume some improvement during the year.

To add to that, one of the benefits of having Intel and Molex senior executives on our board is tapping into what those companies see, I know you personally follow Molex and see a similar story, from Intel's perspective, they are seeing improvements in second half of the year, with demand and new markets in China basically and the emerging markets is their growth drivers, clearly a second half issue.

Tax rate, is that going to stay the same in 2003?

Yes, it will.

Thanks very much.

We will go next to Richard Hilgert, Fahnestock & Company.

Good morning Phil, Howard.

Good morning Richard. How are you doing?

Good. Couple things, Howard, you said you expect what was it 5%-7% growth out of China and Asia?

That's the projection for those economies and certainly, we would look for growth at that number depending on our designing activities for this year.

Is that across-the-board, or is that in electronics or automotive? Where is that coming from?

It's heavily electronics based at this point in time. But as you are well aware, the projections for building of cars in China will be increasing overtime. I think we are laying the groundwork for growth in China, but that build will come on a little more slowly. The China auto build is up by 36% for the first ten months of 2002. But they are still not as large as other parts of world. But ultimately they will be up at annualized rate of 3m or so vehicles, we see it as a growth opportunity but the initial bulk of the sales will come out electronics.

Uh-huh. G.M. is talking about making bigger headway into China, especially with adding capacity into there. Is most of that growth you’re looking at in auto coming from the G.M. side?

No, it's really scattered. We have a position with G.M. because of our global single source with them. But we are also looking at the other manufacturers in other parts of Far East as well. We are kind of laying the seeds for that. The investments G.M. made in Shanghai and their capacity up to 200,000 vehicles, as I remember, that should serve us well as they begin to rash up the G.M. products.

Are the U.S. OE's making a better effort into the hybrid market as you can see?

Hybrid vehicles?

Yes.

We are seeing GM and Ford bringing up their versions of the gas/electric hybrid. We do have presence with them which should help us. There's not a significant chunk of that built into this forecast, as you know, that's probably more a 2004-2005 issue. On the other hand we are well positioned for that 3 to 5 times fuse content when they begin bringing those vehicles out.

Good. I was wondering if you would have off the top of your head what you are looking at in terms of new product coming out over '03, '04 time frame. You used to give a dollar amount of what that would be. In electronics seems like you have been prolific, I wonder if you have those numbers?

We are looking at $10m-$15m revenue improvements. Like the markets will start out sluggish, most companies will be skewed towards the end of the year. Basically, our focus is on over-voltage products, both our own-designed ESD, electrostatic discharge prevention-type devices and the acquired products through our Harris and Semitron acquisitions. So the activity will be focused on electronic base with those kinds of low voltage types going to motherboards and hubs and routers, telecom line cards and those kinds of devices. Some of those markets are significantly sluggish now, so it will take a little time to get them going. We have the current [reference] designs and we are designed in, so late this year, next year kind of a deal in terms of 2004. Separately, I might add in the electronic business we were pleased last year to see our old-v sales into automotive grow faster than our fuse sales. OV sales were actually up about 13% year over year in automotive in the US. We're beginning to see some traction there for OV products and are looking for other kinds of solutions selling into that industry, things like our GDT, gas discharge tube which have application in auto head light system.

That was 10m – 15m year --

Million year per over prior years in new products. Again, heavily oriented towards electronics. There will be an automotive component that will increase over time.

Thanks.

We'll go next to John Franzreb from Sidoti & Company.

I was wondering if you could talk about the impact of currency on income statement.

Phil, you’re our currency department, right?

John, for the quarter, we had about $1.3m of favorable currency effects on the sales line. That didn't necessarily translate into bottom line impact. Most of that came from the Euro, the stronger Euro, as we talked about before, we're pretty naturally hedged in Europe, where we have a fair number of Euro based sales, but we also have our Ireland manufacturing base that is predominantly Euro based cost. It didn't have a significant impact on the bottom line, but it did increase what was contributing to our sales increase for the quarter.

Okay, that's good.

If I can add one thing, not on the revenue line, but the cost line, we still have significant presence in Mexico, the peso weakening is helping us from a cost labor standpoint. I don't have math for you, but certain it will help us because we pay our folks in pesos.

We’re hearing from a lot of companies that the first half of this year, you could get a significant benefit, but listening to you are pretty well hedged.

From Euro, we are from sales point. The peso will help us from a labor cost standpoint.

Okay.

Yeah, in the Japanese yen, we also have that hedged with the cross currency swap we have talked about in the past as well. We won't see too much positive or negative on the bottom line relative to exchange rate changes.

Okay, the other thing is in the electronics segment, can you kind of give me a break down of how much went into the telecom/wireless, how much went into computers and peripherals and industrial, just for that segment on full year '02?

Phil you want to try?

I don't have specific numbers yet for 2002, John, but let me give you kind of our -- how those numbers typically have broken out of late. I think we would see roughly, if we talk about telecom, broadly speaking which is telecom, datacom, and wireless handsets, that number is probably in the 25%-30% range and maybe a little below. Typically it would be 30% or so, and it certainly lower than it has been over the last five year average. May be closer to 25% on that segment. Computers probably another 20% or so. Consumer electronics, 20%-25%. And the remaining 25%-30% would be industrial and other devices such as medical devices and, you know, test and measurement equipment and this kind of thing.

Okay, thanks very much, Phil.

Just a comment. The fact as Phil's math indicates we are in these areas is very helpful in this market which has weak pockets, especially telecom. Where there's still growth opportunities in areas like Y5 and others we participate in.

Great job in a tough environment, guys.

Thanks John.

We will go next to [David Callist, Gital Bryant & Hamill]

Can you talk a little more about China. You said seems like it will be a good chunk of growth over the next couple years. Just talk about profitability and the types of product that's go in that market are they less sophisticated and do you have more competition in those markets?

It's a good question. Certainly, we have been in -- I'll start and Phil can add. We've been in China for ten years from a manufacturing standpoint and really in terms of presence our product goes back, 20-25 years really, so we've had a long presence. If I answered that question a few years ago I would talk about fairly simple devices primarily electronic. Not automotive to the part of the questioner. Now basically anything you can think of in terms of (inaudible) technology is being manufactured and factories are being built to take things to the next level, including complete high [end] wafer operations now in China. So as that change has occurred, the mix of our products have changed to basically a cross section of essentially everything we manufacture, again because the manufacturing basis for the end products are sort of moving to that part of the area. The manufacturing base in China does remain the simpler products at this point in time for us. And we're accessing the dollar to dollar and a quarter labor rates in building those products, but also access to market. At this time the more sophisticated products are still coming out of the States and will come out of Ireland and the U.K. for electronics and as that is the manufacturers mature and they get more sophisticated then we will consider whether we shift other higher tech manufacturing to the area. If you visit industrial parks, outside of Shanghai and [Sujzo] it looks as sophisticated as any you see in the states, we will follow our customers with products they will be using.

Profitability, do you have any sense of that, are these products – you have a mix of how much is used for consumption in China and how much is used for exporting, do you have anything on that as it relates to profitability?

Want to try that Phil?

One thing I will say to that, John, or Dave, relative to your early question about competition. Certainly for the lower end product, the lower end fuse products, the glass fuses and things like that we sell in China, there's a significantly different competitive, set than what we would see in North America or Europe, there are a lot of indigenous manufactures that we compete with -- the pricing on those products is pretty tough and the profitability less than it would be on other products in other parts of the world. The more sophisticated products that Howard mentioned, we tend to do a little better from a margin standpoint, while maybe not quite at the level of North America and Europe, it would be approaching those than it would be for the less sophisticated one's because there's not as many competitors making them locally.

Thank you.

You’re welcome.

We will go next to Mr. Jeff Rosenberg from William Blair.

First I want to ask about Semitron. You talked about that operating at breakeven levels currently, I was wondering if there's anything you were doing to change to outlook over '03?

We certainly are. We bought this business and integrated during the bulk of 2002 and that basic integration has been done. As we learned from prior acquisitions an on-site presence of one of our senior engineering folks to serve as a bridge to parent company, from a culture and other standpoint, so we accomplished that, we are bringing the operation up to speed. We meet operation in the wafer-fab operation both from a modest capital standpoint but more of a process control standpoint to increase productivity and this will be going on early 2003. Separately in the back end of the process, we have linked that in with our manufacturing folks, excuse me, we have responsibility for sites around the world and we’re contemplating the move of some of the back end process to our other factories that hasn’t been accomplished, that will happen during 2003. We are pushing it from all aspects. At the same time, for this modest business we're seeing some nice opportunities in both auto, e and electronics for some of their protection devices and investing in test gear, R&D at the firm and we’re now in sampling process with couple major customers in Europe and the states. Generally a lot of activity going on in upgrading, whole operation in bits in pieces to really bring it up to our level, quote unquote. But we're now beginning to tap into our sales forces here in the U.S. and Europe and sampling customers that Semitron, because their size didn't have access to before.

So does that have quantifiable effect on your outlook for margins as you look at maybe towards the end of the calendar year?

I will let Phil get in here, it will certainly contribute to our emerging improvement, again the relative scale -- this is a $10m-$12 m revenue outfit. So on the scale of our electronics business, 150m, 160m is not a huge impact but certainly will contribute to improving margins. Phil you want to add?

Couple things, Jeff, now today, as Howard eluded to, we have invested a little by the more into that operation to bring it up to speed and ultimately to get more out of it. So far we haven't seen the volume increases we will need to get that into a meaningful profit contribution to the company, but we have a lot of opportunity that are out there that we're working on, we've identified some very nice opportunities for those products and really getting that to be a positive contributor will relate more to being able to pull in those volume opportunities and bring that wafer fab loaded up a little bit more than it is right now, we're talking about the end of this year because the cycle of bringing on large opportunities we have.

Just a comment there, add on, the design-in cycle is a 6-10-12 month cycle. We're moving along on that, but as Phil indicated it won't lead to fruition until late in the year.

I want to get your commentary on how the quarter started out into context, what would be normal expectation in terms of sequential seasonality in the March quarter?

I’m not sure there is any normality in this market. Phil you want to try?

Normally we would expect to start out the year slowly and as the quarter goes on we tend to gain momentum. With the second quarter being typically our best quarter, pretty much across-the-board in our businesses. So, I think there's reason to expect that we would see some building of revenues as the quarter progresses, but having said that, I would say we started out a little slower than we had hoped to or expected to.

And anything there in terms of inventories in your channel or at your automotive OEM's, anything that is contributing or just a general comment on state of inventories?

I'll start. The automotive business and maybe using the States as a indicator. The early forecast that came out in the States was for a similar volume to last year. Now you know it's been change today $16m or down 3%. In their forecast for their build and more recently, they shifted more of the weight to the latter half of the year. The number is still $16m, but in the auto business the build is expected to be more heavily weighted to the second half than originally was laid out to be. On the electronic side, though we have seen decent booking activity, we have seen inventories rise for distributors in December up $.5m on a $13m base roughly and the turns have come down, so certainly we're coming into the year, the distributors, though the booking activity has been okay, they are coming in with heavier than inventories they would like to see, there's certainly some sluggishness there that’s showing. The booking side, again, a mixed bag, the bad news is we participate in all these markets but the booking activity has been strong in the Far East and decent in the States and weak in Europe as we’re coming out of the box. So still pretty much a mixed bag.

Great my last question is on SG&A, looks like it picked up some on an absolute basis Q3 to Q4. Anything you control back downward relative to expectation or what should we look for in term of absolute SG&A levels to start the year?

Go ahead Phil.

I think as we indicated at the beginning of the quarter, we did have some one-time severance costs in the quarter to the tune of probably a little over $600,000. We will probably have some in the first quarter as well. I would expect to see SG&A tick down from the Q4 levels. I think a good -- we talked about SG&A for the year being relatively flat with on an absolute basis on a dollar basis with the 2002 number which would indicate that we should expect, you know, lower SG&A going forward than what we saw in the first quarter.

Thank you.

You're welcome.

Well go next to Michael Schneider, Robert W. Baird.

This is actually Michael Gresens. Part of the opportunity in the Chicago distribution centers appears to be consolidating some of the warehouses across the world or across the US. Have you been able to do that?

There's a bit of consolidation, but the bulk of this really was taking a warehouse we built years ago and upgrading it to the latest software systems and taking labor content out, that area is under Phil's responsibility so I’ll let him speak a little more.

At this point, Michael, as Howard mentioned we haven't consolidated anything else into that warehouse, we took what we had before in a not very good facility and put it into a nicer facility with modern processes and automation. There are opportunities going forward, once we get that operating at it's full potential, there's opportunity to do further consolidations, but we have not announced any intentions there at this point.

I might add to that the projected labor reduction did not take place really in last year, so we will see that happening in the first quarter, first half this year. And other area in terms of continuing our historical tract record of strong cash flow this is the next step of improving speed response time to customer orders, consolidating shipments, etc. that will let us take more cost out of inventory.

Share repurchases this quarter you did $2.2m, in terms of dollars, how many shares was that?

About 155,000 shares, I believe.

So roughly a $15 average?

A little under $15.

And how much is left under your authorization?

I think we have about 3/4 of a 1m shares.

And what is your priority for cash going forward in terms of either repurchases or any dividend we can see on the horizon?

We're looking really evaluating a couple different things in dividends being one of them. In more aggressive share repurchase program being another and we will have those discussions at our upcoming board meeting.

I might add to that to, with the weak market continuing as early as 2003, we have on our plate, or on our screen, if you will, a couple of acquisition opportunities and we'll continue to always look at that, we always want to invest in the business first in terms of basic efficiencies and productivity and cost take out, then we -- keeping the R&D moving roughly 3% of sale to keep the flow of new products and then we look at acquisition opportunities and there are a few more out there and after that certainly consider things like what Phil mentioned.

With acquisition opportunity what's things would you be willing to do would they be product line extensions or consolidation opportunities, can you comment?

We're very disciplined in that area, as indicated by the acquisitions we made of Harrison Semitron. The discipline is to really stay in this market basket of circuit protection technology that we currently offer. We're the only company that offers all 7 technologies from a manufacturing controlling the process standpoint, so certainly the focus is modestly enhancing those technologies but buying out basic competitors who serve the same markets, and some of the competitors because they are more narrowly focused than we are more in a stressed state now than we are. I'm in an industry meeting as we speak and some of those competitors will be here and as I will sometimes say, “Good morning how are you, are you for sale?” kind of a dialogue. I do that the right way, to let them know that we’re in a position should they want to latch on to this market basket of products that we offer in this niche to join up with us.

Thank you.

You're welcome.

We'll go next to Greg Halter, LJR. Great Lakes.

Hi Howard.

Good morning Greg.

I wonder if you could discuss in your third quarter you talked about expecting to record a charge to other comprehensive income for the pension, did that occur in the quarter?

Phil?

Yes, we did record a charge of a little under $5m where we adjusted equity for the pension.

Okay, and your plan now in terms of funding status? Any idea how that's looking?

Well, like most people are, we're under funded and looking at going forward, it's unlikely that we would be required to do a pension contribution in 2003, but you know, at some point in the future we may have to.

Okay.

Just to comment, the size of our under funding is not as dramatic as some you have seen or read about in the press.

Okay. Can you comment on your capital spending plans for 2003?

Yes. For 2003 we're looking at right now something right around $15m .

Greg Halter Which would be up from the $8m?

$8m was really a net number. We had about $2m-$3m of asset sales in there, the biggest one being the U.K. plant that we sold in the fourth quarter. So it was really gross spending of $10m-$11m and we'll be up from that to something in the $15m range.

Any particular projects you're working on?

Let me comment there, when you look at $15 and a comment on that math, we don't pick a number and just lock it in for the year. Really there's additional work sales will continue to bring in, I will comment on in a minute that will relate to whether we see the volumes increasing. But the split of the capex is roughly going to be 30% equipment capacity expansion, new product related in about 30% pre-build replacements and upgrades and about 20% in facilities and I commented earlier, they were looking to additions to our China factory and perhaps our Philippines factory, so the 30, 30 and the 20 is the bulk of the capex. In terms of specific projects, especially capacity expansion, the auto business we have been operating 24/7 with heavy demand, as I indicated, will be adding [molding] machinery as well as additional fuse capacity. We commented on investments in our over voltage area including UK factory and there will be some investments there as well. That's generally the road map that we revisit each quarter.

Okay and your depreciation and amortization will be about 19m to 20m for the year?

A little less, 18-19.

Can you talk about the price erosion that you actually experienced in the fourth quarter and whether or not that was accelerated or decelerated from the prior quarter.

Phil?

Sure. Electronics we were in, for the fourth quarter, in the 6-7% range. I think for the year, probably a little over 7% for the year. So you know, the fourth quarter was with less than the year as a whole, but still higher than our historical average of 3%-5%. In automotive, that price erosion there has been pretty steady in the 3%-4% range and fourth quarter would have been similar. The power guard business which has been pretty flat from a pricing standpoint, we have started to experience a little bit of pricing competition there, and I don't have the exact number for the fourth quarter, but I believe some modest low single digit erosion there.

Just to comment on that too, our philosophy for some of you who may not have been on the call before or owned our stock before, is to keep ahead of that game and always be taking cost out of the business to exceed those numbers that Phil is commenting on?

One other quick one, you mentioned pension and medical costs being up -- can you comment on your insurance costs as well?

Property and liability insurance?

Yes.

Those are up also. Everything from property insurance to D and O to general liability. I think everybody is pretty familiar with those markets have hardened significantly and all are up ranging from 10-15% to 40-45% depending on the type of insurance.

Thank you, and good job in a tough environment.

Thank you I think we will take one more call and Phil will be happy to answer calls if you want to call hin.

Eric Oval, Finn Moore Asset Management.

Good morning I think mine is going to be a short one. Just to clarify an earlier point, when you talk about gross margin looking out to '03, I believe you said look early ’03 would be comparable to the fourth quarter and would ramp up through the rest of the year?

Ramp up might be a little too strong. We would expect to see some modest sequential improvement as the year goes on. I think, as we said, due to cost reductions that are going to be hitting pretty heavy in the first half relating to the rationalization program and hopefully volume improvements is what he we are planning our year around as well.

But you didn't give any specific number or target what you would expect to end the full year at?

I could give you a sense that -- we certainly would hope to see something like 100 basis point improvements in margin as the year goes on. It should be more than that.

That presumes the conditions that you described, Phil, right?

Right.

Okay, thank you gentlemen.

Great thanks for everybody being on the call today. And Phil is available by phone and we appreciate your ownership of the stock.

Once again that concludes today's call, thank you for your participation, you may now disconnect at this time.