Littelfuse Inc (LFUS) 2003 Q1 法說會逐字稿

Good day everyone, and welcome to the Littelfuse Incorporated First Quarter 2003 Earnings Conference Call.

Today's call is being recorded.

At this time, I'd like to turn the call over to the Chairman, President and CEO, Mr. Howard Witt.

Please go ahead, sir.

Good morning everybody; thanks for being with us this morning on this call.

This is Howard, and with me is Phil Franklin, our CFO.

Welcome to our first quarter 2003 conference call.

Now as per the normal program after Phil and I finish our comments, we'll have questions and answers, and the total call will be approximately 45 minutes.

After opening comments, Phil will -- my opening comments, Phil will cover the first quarter in detail.

I'll come back on with a background to Quarter One, a few comments about the future, and then Phil will come back on, and then close with comments on how we see the balance of the year, and then we'll have our Q&A.

When Phil and I spoke with you in January, we commented on the activities we had taken over the past two years that would help set Littelfuse for the future.

We also talked about the importance of the balance created by being in several focused markets and the added balance of being an international player, with significant presence in the major world economies.

And all of this, we feel, has contributed to the respectable first quarter we reflected in the results that we've released this morning.

Phil, go ahead with the details first.

Yes, I'd like to read the Safe Harbor language first.

Any forward-looking statements contained herein involve risks and uncertainties, including, but not limited to, product demand risk, the effect of economic conditions, the impact of competitive products and pricing, commercialization and technological difficulties, capacity and supply constraints, exchange rate fluctuations, the effect of the 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 first quarter of 2003 were 70.0m up 7% from the year ago quarter.

Earnings pre share for the first quarter were 15 cents compared to 8 cents for the prior year period before restructuring charges.

By market segment, first quarter sales compared to the prior year were as follows; electronics, up 12%; automotive, up 2%; electrical, up 6%.

Excluding currency effects in the Semitron acquisition, first quarter sales were flat with the prior year with segment sales as follows; electronics, up 1% has strengthened Asia, offset weakness in Europe;

Automotive, down 4% due primarily to high year-end inventory levels of two major customers; electrical was up 6%, reflecting recent share gains in what continues to be a very weak market.

Our manufacturing rationalization program and other cost reduction programs remained on schedule and had been marginally responsible for a gradual improvement in gross margin over the last several quarters despite ongoing price erosion. 33.0% gross margin for the quarter, although still well below our historical norm was the best gross margin we have posted since the early stages of electronics downturn.

The operating margin at 7.5% for the quarter showed improvement over the full year 2002 operating margin of 6.9%, and this should continue to improve over the next several quarters as we benefit from seasonally stronger sales and continued cost reductions.

In the first quarter, we also gained about a penny a share on the other income line, which was a combination of a gain on the sale of our Korean manufacturing facility and some foreign exchange gains.

We are about breakeven on free cash flow for the first quarter; but let me remind you that the free cash flow is typically weak for us in the first half of the year when sales and working capital are increasing seasonally, and that we generate the majority of free cash for the year in second half.

Now I would like to turn it back to Howard.

As Phil has noted in the opening comments, several initiatives fairly contributed to the first quarter, and cost reduction is one of these.

Since continued progress on the plant consolidation program of the closure of our the plant closure of our Centralia facility this summer, is providing access to lower cost labor with our established Mexico, China and Philippines factories.

I would also add, we're expanding we are adding space to the China and the Philippines factories this year as well.

But cost reduction is not only moving production lines but we also take cost out by an aggressive program to substitute low cost materials and source them offshore.

We continue to take costs out of our products and exceed the market driven price pressures in each of our markets.

We've recently in this last year added talent to or Phil added talent [inaudible]this organization in our purchasing team, and that team is traveling globally seeking high quality lower cost sources and gaining the leverage of combing purchases from the more cross section of businesses.

Well, here are maybe two examples.

We talked a lot about of plastic materials savings, and those activities are going on primarily in our automotive area with material substitution and using consigned inventory programs.

Example of another area in we make fuses we have a metal in cap on each of the fuses that we have purchased from suppliers over a long period of time, and our new team with heavy offshore travel is consolidating from the two suppliers located in Europe and one in the U.S. to a source in China where we will [lose] our material cost by over 90% excuse me over 20%, pardon me.

Now there will be an additional freight savings, shifting to this China supplier because of our manufacturing base located there, and our shipping cost will re-decrease by 90%.

Total savings on this one initiative when this ones completed, will be approximately $1m per year.

We have also taken cost of our logistics operations through our new North America distribution centre located here in the Chicago area, where we have both we have actually increased customer service while reducing our direct labor by our overall labor cost by 20%.

In the automotive parts manufacturing, we have added over $1m in new plastic injection molding machines in our Des Plaines plants to improve productivity.

The improvement has been approximately 22% related to faster cycle times.

This investment has also allowed us to resolve our heavy overtime that we have been experiencing in the automotive business.

And I would note that in the first quarter of this year, one half of our CAPEX has been in our automotive business.

So you can tell, in addition to [obviously] moving sites of the basic blocking and tackling of raw materials costs, logistics are really adding to our bottom-line.

Related to acquisitions and product extensions, as Phil and I have pointed out, we have been we used our strong cash generation to find both new price activities and focused acquisitions.

The Semitron acquisition last year is now continues contributing to sales of new technologies to our product offering.

Our feeling is that to be successful and prosper in the future, we need to do more than sell parts, albeit important safety related parts; and the fact and what we need to do is to broaden our productive offering to our global electronic and automotive customer base.

The objective here, as we spelled out and touched down in our annual report recently and passed to you, is that rather than selling parts, we need to be able to sell solutions for our widened technology base.

We will continue to seek very focused product portfolio additions that add technology and increase our presence and, in fact, our market share, so that we can become even a more major player in total solution providing to our [circuit production] customers.

Being effectively debt free in the early part of this year provides us great flexibility in making strategic long-term investments.

We did provide a few comments on the three markets; as we see them and reminding those who maybe new to the stock and the call that we have P&L driven teams in each of our three business units.

Speaking to each of them; in the electric in the electrical area, as Phil pointed out; the market is weak due to several factors including low nonresidential construction and low plant utilization.

Given that tone in the electrical market, our distributors are very conservative about inventory investment.

However given that, we are still showing growth due to our new accounts we've gained last year and creative marketing of our unique indicating technology.

On the automotive side, we have seen weakness in the first quarter with the U.S.

Credit Bill for the year projected at 15.9m units, which will be down about 2-3% from a 2002, and again those are the U.S. numbers.

Car inventories at this point are high though with the labor negotiations coming in that industry and the full anticipation is that the car manufacturers at least many of them will tend to keep their car inventories high.

In auto in Europe, the build is flat, projected to be flat this year with the last year at about 16.7m units.

There is more positive activity as you probably read in the trade journals and others regarding a hybrid vehicles as the [inaudible] Japanese and now the U.S. manufacturers are beginning to offer these vehicles, and the good news is that these will be higher dollar value to us but with the clear caveat this market will take time to develop.

In the last of the three segments in the electronic, we are continuing to see strength in most of the Far East, though Europe is weak, though we were helped by currency and at this point in the European market.

In U.S., OEM is weak, our OEM customers.

However, we seeing distribution begin to show some signs of strength mainly just in the last 2 or 3 weeks in the month of April with increased bookings and sales.

I would comment a few glimmers of hope in this business that's been weak for a time period and these glimmers are coming primarily from the Far East and just a few recent examples I would share with you NEC, one of customers expects a climb in Notebook computer sales in the second quarter.

Secondly, as speaking, and about Nokia many of you maybe aware of or follow this company, Nokia is expecting its cell phone unit sales up in the second quarter in the range of 4-12% over the first quarter, and their handset profitability is also up.

Some of this business, some of this activity is driven by color displays and new features on their phones.

And for Nokia this will sound familiar, the profit increase that they recently released was due to increased efficient manufacturing.

Automotive sales in electronics in Hong Kong, China were strong, and I would say the overall electronic book-to-bill in March in the south portion of the Far East was 1.1.

So, again there were positive sign.

Some of you maybe aware of Henderson, this is an electronic market forecasting service side.

I quote, "it is kind of forward-looking comment from them."

This was an April comment, a [really] strong rebound is projected for next year, as obsolescence becomes increasingly prevalent in the corporate world, a postpone PC upgrade fueled by renewed profitability will be at the top of the list.

Laptop supporting wireless communication cables may just be the killer act next year, if the wireless infrastructure, including Wi-Fi is expanded aggressively.

Regarding SARS, I would expect there be some questions about this as we are all concerned about this issue in the Far East.

Henderson also reports a possible defensive build of parts by OEMs in the quarter [inaudible] to be sure of [inaudible] and continued a smooth production in the face of this challenge.

Impact on us regarding SARS that we haven’t already seen the impact on our business to-date, and we are someway insulated from direct problems because we had local people and local language selling that is we are not dependent on travelers to cover our accounts.

We have also -- as we have shared before we have a by design, locally staffed design in support center in Japan, China, Taiwan, Korea, and Singapore, in all of these major markets.

So one last point before Phil closes and this is an overriding point that we still feel very strongly [inaudible] -- a new strategy in our distinctly different markets, and although electrical or electronic with each team focusing on their P&L, and we feel as really paying off.

Phil.

Thanks Howard.

I would like to conclude now with some forward-looking guidance with the caution that our markets are still quite uncertain and visibility has really not improved to any significant degree.

With that caveat here is our latest thinking.

We are planning for sequential growth in the neighborhood of 5% over the first quarter; this is for the second of this year reflecting the typical seasonal improvement in our business driven primarily by electronics.

With this modest increase in volume and completion of the final stage of our manufacturing rationalization program we could move out of Centralia, Illinois facility.

We expect gross margins to show continued improvement.

Earnings per share for the second quarter are expected to be in the range of 17-20 cents.

The full year outlook is much less certain with the current analyst consensus of 69 cents per share seems reasonable to us at this time.

Now we’d be happy to take your questions.

Thank you.

The question and answer session will be conducted electronically.

If you would like to ask a question, you may do so by pressing the "" key followed by the digit "1" on your touchtone telephone.

If you’re on a speaker phone, please be sure your mute function is turned off to allow your signals to read our equipments.

We will proceed in the order that you signal us, and we’ll take as many questions as time permits.

Once again ladies and gentlemen, that’s "" "1" on your touchtone telephone, and we’ll pause for just a moment to assemble our roster.

And we’ll take our first question from Victor Hawley with Reed Conner.

Hi folks, you mentioned that you’re doing some consignment on inventory, and I’m wondering what, you know, what is that of larger percentage than in the past or is it just a seasonal switch, and how bigger order magnitude is it?

It’s not -- we've done this in selective areas before, Victor, but this an additional enhancement for purchasing of our heavy raw materials especially in the plastic area, and this is not short-term, these are new contractual arrangements, a couple of largest purchased commodities one of which plastics.

We will only pull inventory in and as we actually using our manufacturing process, so it’s, it’s a new initiative and again with our new team and our focus global procurement we’ll look for other areas where we can use these consignments.

So is this not actually showing up on the numbers that you, you know, for March 29th that you just showed?

It’s, it’s probably, it’s probably not in there in a significant way and really that, you know, the consignment we did on the purchase side so far.

You know, it’s not insignificant, but it’s not going to be I mean it’s going to be, you know, hundreds of thousands dollars, not millions of dollars, so you know?

Okay, it’s not masking much bigger inventory number?

No, absolutely not.

Okay.

That’s all.

You’re welcome.

We’ll take our next question from John Franzreb with Sidoti & Company.

Good morning guys.

Hi John, how’re you doing?

Good.

A quick question about the auto-related sales;

It looked like the production rate in North America was up just over 1%, yet axing out currency you had a it looks down unit volume quarter, what’s going on there and also your comments kind of hint that, you know, that there weren't anticipating maybe an interruption in production in latter half of year and when I continue to build backlog against that, so why is it disconnect there?

Yes John, as I mentioned in my earlier remarks we did have a we had a couple of customer specific situations where, I won’t go into the details, as well as, and I won’t name the customers, but as you know we have, you know, five or six customers who make up a significant percentage of our automotive volume and we had two of those that had a different reason, it had large inventories at the end of 2002, and have worked through those inventories, you know, so far in the quarter.

That did impact negatively our first quarter sales, but the most significant reason why, you know, why we didn’t, you know, more of a flat quarter that could’ve been more consistent with cargo.

Forecasting of what the demand was in the in-product line or can you give me some kind of color what their problem was?

It was two different, fairly unique problems that, you know, I’m not going to into here, but it really it had to do with internal situations that were going on within their companies.

Okay.

Fair enough.

These are not OEMs these are second tier player earnings manufacture, John.

Okay.

The other question related to was related to the car manufactures inventory of vehicles and this is just an estimate based on services that we use that inventories are bit high and they probably tend to keep them somewhat high going into labor negotiations to be sure they can keep selling cars.

Okay.

It seems [inaudible] said forecasting a significant pullback in production in the second quarter.

Could you, kind of, alluded to the fact that they may want to keep the plans humming in the second quarter?

Yes, they want the degree of keeping this is get one guess you know from one service.

We do not pretend to be experts on car bill, but as they get into UAW and they don’t know who the target is going to be at this point.

They maintain the key car inventories a little higher than normal going into those situations.

Okay.

And how much is Semitron's contribution in the quarter?

Phil?

Semitron in terms of revenues?

Yes.

In there roughly in the little over $2m, I believe.

Okay thank you very much.

We will go next to Paul Haggenson (ph.) with State Street Research(ph).

Yes good morning.

Could you comment on the tone of business as the quarter progressed and same sort of question about the upcoming quarter?

Well, each comment on the first quarter and let Phil talk about, you know, the upcoming quarter.

Certainly, although, we are not in that quarter regarding the Iraq and then more recently SARS, certainly the skittishness was certainly displayed.

We see [met] with distributors; we monitored the data and distributors, which is significant to us in our in electronic side certainly almost week-to-week to see what the tone is.

So, again skittish uncertainty was probably an issue during the quarter.

I can’t think very specific month-to-month issues.

Really, I think that I mean we saw a pretty steady flow of orders and sales through the quarter.

We didn’t see big spike up in towards the end of the quarter anything like that.

It was pretty steady during the quarter.

However, diluted to in a couple of various electronics, we have seen a little bit of a positive trend, you know, really more since the quarter ended on bookings and billings.

In a couple of specific areas North American distribution is being line and Asia continues on the electronic side to be reasonably strong.

So but really other than those two not a whole lot of change in any of the trends that we have seen.

It’s pretty you know pretty flat trend line.

And expectations for the current quarter are sort of steady business there or across the months?

That’s kind of we are normally what we would experience would be somewhat improving trend if the quarter goes on and that’s typically, you know, that the seasonal pattern is that we tend to reach kind of peak levels around the June time frame.

And so we would more if we experience the normal seasonal patterns particularly in electronics, we would see the orders in the sales build as the quarter goes on.

Okay thank you.

Our next question comes from John Emurey (ph.) with AAA Capital.

Hi thanks.

I understand the inventories bill rise on your balance sheet due to seasonality’s.

Why would the receivables and other current assets prepays be up sequentially?

And what was, you know, almost a flat sequential revenue quarter?

Good question.

Our on the receivable side, we alluded to this at the end of the year.

I think that on our last conference call, that our receivable our DSO was at an unusual low number.

I think we were down on the 54 day range more typically, we have seen our business run in the high 50s to, you know, low 60s kind of number.

And really, what we saw in first quarter was we saw small sequential increase in sales, but the bigger factor is our DSO went up by 2 or 3 days to, I think, something in the 56-57 range, which is still a relatively good performance for us, but it was up 2 to 3 days from the end of the year.

Got you.

The other asset we did have a somewhat of increase in prepays, there were a number of things going on thereby, I know, we had we tend to pay things like some of our insurance early in the year and so we see the prepaid assets go up and even that will decline as we go into the year.

Great thank you.

Welcome.

We will go next to Michael Gresens with Robert W. Baird.

Good morning gentlemen.

Good morning.

Wondering, if there is any inset you can give by end-market in the electronic segment or like the Dell Telecom, data-com, wireless type markets.

Well, this will be fairly, generally and generally fortunately, what we are still seeing in spite of SARS issues in the Far East, you know, we are seeing good design in activity over there and decent demand levels and we are beginning to see some nice pickup on our the solution cell approach that we are taking for providing a broad cross section offering.

Whether the comments on some indications of PC sales as I mentioned from the NEC and a reasonably positive common side of Nokia.

That’s heavily coming out of the Far East, nothing much here in the states of Europe that I can really pinpoint as a trend indicator in electronics?

The only other one that we see continued strength and we would expect to be strong looking forward would be the digital consumer electronic segment, you know, digital cameras and DVDs and game players and things like that.

Is there been any changes in your sales in the EMS market place?

We haven’t really seen that move much.

It has been pretty similar this quarter to what it was last quarter.

Okay and you could pretty quantify the currency benefits during the quarter and then also the gain on sale that you had mentioned?

Yes, okay you are coming to currency benefits as it relates to the P&L?

Right.

Okay, I think we had for the quarter we had about 300 and some thousand dollars of other income.

I believe it is just over 200,000 of that is related to gain on sales of assets, the biggest piece of it being the sale of our Korean facility.

As you’ll recall, we went out of the manufacturing business in Korea.

We saw a strong presence in sales and distribution there, but we took our manufacturing out of Korea and we've now shut down and sold that plant.

So that so, we have a little over $100,000 that would have related to various currencies tax.

Okay, and in the sales line.

What was the total there?

The sales line would be just I’ll take a look at that.

Overall, I believe that we have been in the neighborhood of about $3m.

Okay.

A positive impact and that obviously the biggest piece of that would be Euro, I believe, about two-thirds of it was Euro-related and the other third related to Asian currencies, primarily the Yen and the Korean Won.

Okay.

And is there any change in the price erosion by the various segments of prior quarters?

Pretty much as we have been reporting, we really haven’t any seen any trend changes there.

Automotive continues, it has been steady all along, and electronics continues it higher than higher than historical levels, although than what it was like a year and a half ago 9 months ago or so when it really spiked up.

Thank you.

Let me add just on the plant move, much more on the currency issue, but very good news too is we move out of these occasions in the UK and clearly we have been able to sell the sites basically at small breakeven, small profits.

So, we don’t have any [drag] going forward as we move location.

Thank you.

We will now move on to Richard Hilgert with Fahnestock.

Good morning.

Hi, Richard.

How are you?

Doing good, how are you guys?

We are doing fine thanks.

Hey the Cubs are in first place.

Things can’t be all bad.

Yeah and the Detroit's last.

Hey, could you separate out the three segments, you know, you gave the guidance as far as sequential growth of 5% driven mostly by electronics, but I was wondering if you could separate those out for the quarter and the for the full year what you are looking at?

Well, I can give you kind of a sense of what we are looking at.

There the most of the sequential growth is in the second quarter is going to be coming out of electronics, both in dollar terms, and I would expect electronics to show the highest percentage increase in sequential growth as well because they have a little bit more of a seasonal pattern and we would expect that to be the lion share really to drive it.

Both I think on a sequential growth from a sequential growth standpoint, we think automotives in Power-Guard will both be flat to up slightly, but electronics will drive most of it.

And pretty much similar story for the year.

Electronics has really got a drive though for the year.

We think that automotive will because of lower car bill, automotive will probably be down slightly, maybe at best flat but probably down slightly and Power-Guard will be up modestly.

Again, we expect to see some positive impact from our share gains that we’ve talked about that’s still not clear as that market is going to give us any help at all this year.

So we think a flat to slightly up year is probably most likely.

Okay and is the introduction of new products in electronics the primary driver for you or you’re getting additional market penetration from the same products year-over-year?

Where’re you going there?

Well, there is a little bit of both of those and I think we also do expect some very modest we expect the market to be slightly better this year, than it was last year.

We don’t expect any sharp increase in trend line or anything but 3% or so help from the market will make a lot of difference versus what we saw last year.

I think we do feel good as I shared -- we both shared before about the designing activity and we’re selectively adding resources, market places who are now able to offer the portfolio products, even though again the Semitron offering at [inaudible] sales is not a huge number about the addition of the technologies offered by that small acquisition.

All I think to go answer these customers and ask what their problem is as opposed to asking which perks they want, Rich and that I guess that’s why we feel good about.

When this market does turn in and again it’s -- we’re always seem to be in the mode of a second half of recovery.

This is about the full year to second half recoveries and the problems I’ve indicated, but when it does turnaround in probably next year, we feel very nicely positioned to be able to offer a cross section of our new devices.

Okay and then we’ve talked in the past about -- it seems like you’re doing maybe 10-15 new products on an annual basis.

Do you still see that kind of volume coming in of a new stock?

Well, there are new products coming out of labs and what we’re doing with these new teams in place, we’re listening to see what the customers want and then what we’re doing is adding new technology Semitron has brought with it’s introduction to silicon and to some of the traditional things devices called gas GDTs or gas discharge tube.

And what we’re doing is now going out of the market place and trying out the customers want those products but they want kind of specialized versions of them.

So making investments in some of this in actually in New York in our lab or in the U.K. to react to some specifics needs that affect the automotives industry and some of these electronic has over in that part of the world.

So this is least saying we’re brining out 50 new things and it is going out with our technology base listening to them, in some cases putting together kind of a unique device for unique application.

Now, with the closure of Watseka and did you you’re getting out of Centralia also?

Yeah.

By this summer, we will have a small engineering team left on that site.

Excuse me, Rich but we will be done with manufacturing then.

Okay.

So the only manufacturing operations left in the States are going to be what you’ve there in the Des Plaines?

We have one another central and oil factory in Arcola, south of [Champagne Reordered].

Yeah.

That’s right.

You know the area.

Power fuse our focus factory.

Okay.

So then all the electronics will be off shores?

With the exceptions of the high-tech products that’s coming out of this side.

Now, we will be going to a high-tech, low-tech model.

High-tech is going to be Des Plaines in the U.K. and Ireland and low-tech will be next to go China and the Philippines.

Okay.

Great.

Thanks guys.

My pleasure.

Once again "" "1" on your touchtone to ask a question.

We will go next to Jeff Rosenberg with William Blair.

Morning.

How are you?

Good, thanks.

Could you quantify a little bit in what you are seeing in terms of pricing?

Is it the same sort of pricing that you talked in the recent quarters?

Yeah.

Jeff its we mentioned, we really haven’t seen much of a trend line change.

It’s been steady for the last several years in automotive, the electronics business.

It’s steady meaning we have seen the same level of erosion that was there for last couple of years.

Yes. 3--4% has been pretty consistent over the last several years and we continue to see erosion at that kind of a rate.

Electronics as I mentioned earlier is -- continuous to trend above our kind of longer-term historical trend which on the last eight or so years basis has been 3-5% but it’s been trending a couple of points over the top of that range – down from even a higher number say 7, 8, 9 months ago.

So we feel our stock really spike up and then it’s moderated some but still above the historical trend lines.

Clearly the one change we have seen in the electrical market, given the deep long recession that business and the price erosion was fairly modest in the past.

And we are seeing lets say something in the 2-3% range and then market going forward.

Again we do track as that as fairly we’re closely and we always wanted to be sure that we were moving to take cost out with the multifaceted approach we talked a lot about to be sure we are ahead of that game and even with our fairly smaller share in the part of that business, we are able to accomplish that.

Okay and also can you talk about relative gross margin profile of the Semitron business and maybe the over voltage business in general, and the utilization of your fab that you acquired.

Is that’s having any effect on the potential gross margins going forward?

Yes, Jeff.

Well, as we mentioned when we bought Semitron, the margins there considerably lower than our base business, in large part because we’re operating a wafer fab of something like 50% of capacity which we expect to fill that wafer fab up overtime as the market recovers and we add new products.

But at this point we’re still running a low level of capacity utilization which implies a significant lower margin than what we think is possible down the road and significantly lower than our base business.

So we had had a negative impact in the short term on our gross margin.

Having said that, we have seen some volume improvements there and we are optimistic based on some of the new products opportunities, we have a new business opportunity we have and we are going to see steady improvement there and ultimately that will be operating at much higher level of capacity.

And if would look at over voltage in general or even may be exclusive of Semitron, is that more typical margins for you or is there also a difference in profile there?

It is bit of a difference and I think it relates a large part to the fact that in the automotive over voltage side, we generally tend to be a relatively small player whereas in the fuse market, we are the big guy in the market, the market leader.

So we have scaled advantages.

We have some pricing power.

Those same dynamics really don’t exist on the over voltage side.

So we -- generally speaking at least from what we see, we see lower margins on the over voltage side of the business.

Again I think -- the attractiveness there is again is one stop shop.

I think we talked about which.

I think we will see the play out as we get into late this year and into next year.

But we’re also looking for unique applications out of the Irish facility.

We have which is call the TMOV which is the combination of our Metal Oxide Varistor and the temperature sensing device, which is temperature sensing opening device, which is unique to us and is opening the door in fact to that device which would sell at somewhat higher margins and also access to other businesses out there.

So for a modest investment, we’ve got access to this market, access to manufacturing base and we were able to kind of absorb that in the current business looking ahead due to the leverage out of new products and gain in volume.

Okay, thank you.

Welcome.

We'll go next to Elliott Schlang with Lynch, Jones & Ryan.

Good morning.

Hi Elliot.

Three quick questions if I may.

I was glad to see the SG&A come down as a percentage of sales but still up in I was surprised it was still up in dollars, especially given the cost cutting programs and restructuring and so on.

Could you give us any idea as to what we should anticipate for the rest of the year, whether that will be coming down at all?

Well Elliot, a couple of things; presumably compare you are comparing to the prior year quarter, when you say it was up.

Right.

Which is the case; two things there, one, last year we didn't have Semitron at this time, so that -- we -- not that they added -- we added a lot a SG&A with that, but there was modest SG&A that was added as a result of the acquisition.

The other thing is that the -- we -- because of the weaker dollar that's impacted the year-over-year comparisons in SG&A, particularly in Europe.

So those two things are really the major causes there.

What we would expect going forward is to see, -- we are continuing to look at all opportunities to cut cost including where we can, in SG&A, and you know -- so we would expect to see SG&A be -- to be flat, maybe modestly lower as the year goes on.

But we also -- as Howard mentioned, kind of like the counter to that is that we are adding resources in certain selected areas to execute and implement on this solution selling program that we have in strategy, that we have which ultimately will, we believe, lead to higher revenues and better margins.

So we are not -- we are cutting SG&A in some areas, we are also adding back selectively.

And we are not expecting to see a big drop in SG&A this year in absolute dollar terms, although we would expect to see a better percentage of sales as the year goes on.

And second; the tax rate at 36%, is that something that we should expect to continue for the foreseeable future?

Or are there any changes being made that would affect that rate?

36% is a good number for you know for certainly for this year.

And lastly;

I noticed the drop in numbers -- number of shares on the weighted average, did you buy in any shares in the quarter or could you bring us up-to-date on your corporate repurchase program?

Yes, we did not buy shares in the first quarter.

We had bought some shares in the prior quarter, which -- I think in the second or third and fourth quarters of last year, we bought shares in both third and fourth quarter.

So that could have a favorable impact on the weighted shares outstanding compared to last year's first quarter.

But to answer your question on the buyback program, we have about -- between 700,000-800,000 shares authorized and available under that program.

Thank you.

Okay.

We'll go next to Mike Hamilton with RBC Dain.

Good morning.

I was wondering if you could just update on capital spending plans for the remainder of the year.

Sure.

First quarter, we -- capital expenditure, in the first quarter we did about 2.5m, I believe, and of course that netted out was some of the asset sales that we have, but the net CAPEX was only a few $100,000.

But what we would expect for the rest of the year, we -- somewhere probably between $13-15m on a gross CAPEX basis.

And so that will net down to some lower number.

Thanks much.

Sure.

Just to add some color to that, again, we are reacting to where there is increase in demand or and called for which -- and we mentioned, our auto business has been quite good, we have and added capacity there to get off of 24/7 type approach.

In addition we are adding bricks and mortar in the Philippines and in China.

We do have a follow-up question from Paul Haggenson with State Street Research]

Yes.

On some of your newer voltage protection devices, could you comment how you are doing in those sectors relative to your business plan?

[I think] we have all the business planned a number of year ago and like its -- only the volumes have not been where we would have hoped they would’ve been just because of the dramatic drop off from the, you know, electronic business the historical drop off over a year -- year and a half ago.

You know, we remain confident that apart from the surge that happened in the year 2000 -- you know, our position is good.

We would like to see some more effect.

We’d like to see some more factory load as Phil indicated that where we are and the cost reduction things that we’ve been talking about and not only going on in this area, but there’s a case in point in the acquisition of Semitron.

In Europe, we’re in the process of moving selective pieces of that to lower cost areas when we acquired here several years back.

We’ve moved the bulk of that backhand process.

This is -- we make the high-tech ceramic chips with the silicon and then we want to do the more labor intensive things at other sites and we are moving.

So, we’re taking costs out at the levels we’re dealing with purely because the market turnouts were not increased as we would be at the higher levels.

We’re improving, [inaudible] we’re going to track to achieve some of the revenue numbers we have for the 2003 plan and those revenue numbers did assume some share gain and a number of deals per voltage area.

So we feel good about where we are there.

So, that’s here again at [Holding].

Yes, we’re on track to achieve that.

Yes, okay.

Thank you.

We do have another follow-up question from John Franzreb with Sidoti & Company.

You said earlier that you’re in the final stages of your rationalization program.

Two questions, first is there anything else as far as cost to be taken out of business that’s on the drawing board that you may execute in the second half of the year, and second what’s your target gross margin given the current business outlook, say by the fourth quarter of ‘03?

Let me take the first part and then I give Phil the couple of [inaudible] just to answer, but the answer to question.

I think you tell me if you have been on this call before that you should never give up.

There is always another opportunity.

We have other things that we’re doing here in the States that probably should be done at lower cost areas and we’ll continue to do that.

At the backend, I just described, backend process that’s that remains in the UK.

We’ll be moving over the next year and a half to move a lot of that out.

So no the moves will not be quiet as dramatic as they were a year ago, but we still have selective plan side moves.

While on the SG&A side, we’ve -- before [counted] on before we’ve added some new talent, retooling our teams to a higher level, to put people on airplanes and in spite of SARS going globally to look for new sources.

So there’s always another place to go.

Okay.

In addition to all the supply chain related and purchasing related savings, that Howard mentioned, which could be one we really more expect to see this year, some of the other ones that he just referred to would be more, you know, future years type expenditures, but we’ve got a whole list of things that we’re working on and we continue to.

On the gross margin question John, I’m not going to give you a number, but I will say that we would expect to see sequential improvement in each of the next two quarters that would relate both to cost take outs, continue cost takeout, and some volume improvement that has – quite to do with seasonality, but also hopefully in part to do with the, you know, being successful in some of the initiatives that we’re pursuing.

Okay.

Thanks Phil.

Okay, with that we’re just actually beyond the 45 minutes.

We will take, you know, one more question if there’s one out there and then leave it up to you to ring in if you’d like to ask any more?

We’re actually standing by with no further questions.

Thank you very much for being on the call.

Have a good day.

This does conclude today’s conference.

We thank for your participation.

You may now disconnect.