Littelfuse Inc (LFUS) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse Incorporated first-quarter 2004 earnings conference call.

Today's call is being recorded.

At this time I would like to turn the conference over to the Chairman, President, and Chief Executive Officer Mr. Howard Witt.

Please go ahead, sir.

Good morning and thanks for being on the call this morning.

This is Howard, and with me is Phil Franklin, our Vice President of Operations Support and Chief Financial Officer, and for the first time on this call Gordon Hunter, our Chief Operating Officer, who joined Littelfuse last November after serving on our Board of Directors.

Again welcome to this first-quarter call.

After these opening comments Phil will cover the first quarter in detail; then I will provide background on Q1 for our three business units, with some comments from Gordon; and then Phil will close with added comments and the outlook for the year; and then we will entertain questions.

We expect the call will last about 45 minutes.

As this morning press release indicated, we had a very strong first quarter helped by last July's acquisition of Teccor.

Though favorable currency helped, sales were strong in each of our three businesses and all geographical regions.

Also, although ramping up output has been challenging, we're meeting customer increased demands while continuing to reduce costs and moving production lines to our established lower-cost factories in Mexico, the Philippines, and China.

We have also increased production at our higher tech manufacturing sites in Texas, Illinois, and the UK.

Phil, would you please now provide some more detail on the quarter?

Thanks, Howard.

Let me first read the Safe Harbor language.

Any forward-looking statements contained herein involve risks and uncertainties included but not limited to product demand risks, 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 2004 were 111.4 million, up 59 percent from the prior year period due to the addition of Teccor, improving market conditions, favorable exchange rates, and some early successes from our solution selling initiatives.

Sales were also up 9 percent sequentially compared to the 5 to 6 percent guidance we had given in our midquarter update six weeks ago.

All three of our business segments contributed to the strong top-line performance for the quarter.

Excluding Teccor, electronics was up 35 percent; automotive was up 15 percent; and electrical was up 6 percent.

On a constant currency basis, electronics was up 32 percent; automotive up 10 percent; and electrical was up 6 percent.

This is the second quarter in a row where all three businesses posted year-over-year gains, indicative of the breadth of the economic recovery.

Teccor sales for the quarter were up approximately 40 percent compared to last year's first quarter under the other previous owners, reflecting improvements in both the telecom and the industrial markets.

The operating leverage from these higher volumes, combined with ongoing cost reduction programs and favorable currency effects, resulted in continued improvement in gross margin for both the base business and Teccor.

Overall gross margin for the quarter was up 350 basis points sequentially, excluding the onetime charge in Q4, and 270 basis points versus the prior-year quarter.

As we have now fully integrated Teccor into Littelfuse, it has become difficult to break out Teccor performance from the base business.

Suffice it to say that Teccor's operating margin is now similar to that of the base business.

So going forward we will no longer report separately on Teccor profitability, although we will still report the sales contribution from Teccor products.

Mainly as a result of the gross margin improvements mentioned above, operating margin for the first quarter hit 14 percent, our highest level since the year 2000.

Improvements from these levels will become more difficult, but as long as our markets remain strong our previously stated goal of 15 percent operating margin seems achievable within the next year.

As is fairly typical for Littelfuse, first-quarter cash flow was weak.

We generated no free cash in the quarter, as the cash from our strong earnings performance was used to fund working capital increases to support higher sales and to fund the roughly $4 million of Teccor restructuring that occurred in the quarter.

The increases in inventory and receivables were entirely related to sales increases as inventory turns and receivables DSO both improved slightly.

As mentioned in the press release, the Teccor restructuring charge did not flow through the P&L since it was accrued in purchase accounting at the time of the acquisition.

These charges are for severance and other payments related to restructuring the union contract at Teccor's Mexico operation.

The savings from this restructuring are part of the 8 to 10 million of integration savings which we promised at the time of the Teccor acquisition.

Now I'll turn it back to Howard for some additional comments.

Now commenting on each of our three business units, first of all electrical.

Our electrical business, which is approximately 9 percent of our total sales, was up over 6 percent over the prior year's quarter 1.

Within electrical a few comments.

MRO or maintenance repair and other is approximately 30 percent of electrical sales.

We are seeing modest increase in activity here, likely due to customers' increasing plant utilization.

In the OEM side, which is approximately 20 percent of electrical sales, this area is also showing modest signs of pickup after a very slow fourth quarter.

Nonresidential construction, which is about half of our electrical sales and customers, is still slow with some forecast of improvement in the second half of 2004.

In the electrical business area we were able to increase prices partly offsetting cost increases in copper and other materials.

We have actually raised prices twice to date in 2004.

In electrical, Slo-Blo's business continues to gain recognition for creative marketing of its unique indicating products, most recently from an electrical distributors magazine called TED, where we were noted as Best of the Best Marketing Award for our Sample the Savings program.

In our second segment, automotive, projections for 2004 vehicle build are 2 percent positive for North America and Europe but 7 percent positive for Asia.

The growth in Asia will be at this level for several years, leading to our focus on the Far East as an area for sales support and leveraging off of our electronic organization and locations.

Though car builds are sluggish in the U.S. and Europe, our revenue was up 14 percent, helped by a customer's replacement of a competitor's product and some increase in Far East demand, especially in Korea and China.

U.S. vehicle inventories have decreased from a 93 day supply in January to a more normal 75 day supply at the end of March, therefore boding well for decent ongoing demand.

We are also, in automotive, experience good design-in activity for our CablePro protection system.

Though the revenue increase to date has only been modest, this design-in activity is an indicator of increasing demand for this product in the next few years.

Cost-reduction activity, as in all of our units, continues in the automotive SBU as we wind down our Swiss manufacturing side, moving production to the U.S. and Mexico, a project that will be completed by year end.

The automotive aftermarket business, part of automotive, this is approximately 15 percent of the automotive division sales, we are instituting 4 to 5 percent price increases with several of our major customers.

Lastly, in electronics as we indicated in our last call, the fourth-quarter conference call we did in February, we are excited about the trends in this business and are beginning to see the rewards of our solution sell strategy now enhanced by the addition of Teccor products.

Gordon Hunter will later share our solution sell approach, as well as commenting on our activity to strengthen our Far East and European technical sales organizations.

As we've done in recent calls, let me comment on some book-to-bill activity with our electronics markets around the globe.

Recent book-to-bills in North American distribution, 1.3.

This is still strong.

The overall feeling in the industry in the States remains optimistic.

I would note, however, delivery of other components being pushed out -- these are other manufacturers' components -- could affect the future demand for our products, as those other components are not available to build product.

In North American OEM, roughly a 1 book-to-bill.

This area has started slow, but we've seen some recent modest improvements.

In Europe, a 1.3 book-to-bill with markets clearly improving.

In the Far East, clearly a very important market as you will hear us comment generally;

I will break it down into pieces.

China and Hong Kong, 1.3 book-to-bill, where we are penetrating more handheld electronics.

When I talk handheld it is items like cellphones and cameras.

Taiwan, a 1.4 book-to-bill; this is a shift to more business in handheld where we are capturing this volume and adding to our base computer business.

The rest of Southeast Asia, 9.9; though we note that contract manufacturing is beginning to pick up.

Korea, a 1.1 book-to-bill; most notably Samsung and LG are capturing cellphone and digital camera market share, and we are enjoying some of that business as they capture it.

In Japan, a little over 1; a good business level but not as strong as the rest of Asia.

And as we highlighted in our last call, demand for our lead-free products are allowing us to gain market share in this market place.

And in Teccor, a 1.5 book-to-bill; very heavy demand, and as we have commented before we have good 90-day visibility in this business.

Overall about a 1.2 to 1, which is at the same positive level we reported generally in February.

Just a few comments on some of the product segments within electronics and handheld.

I will comment on cellphones and digital cameras to provide a little color.

First cellphones.

The forecast for 2004 is for about 585 million units, which is up 9.8 percent.

But generally make a comment that this is down from the 20 percent growth rate in 2003.

Samsung in cellphones, one of our focus customers, is increasing share and expects to ship about 20 million phones in this year.

Another major player is Motorola, a 14 percent market share; and Samsung, 10 percent.

Took share from Nokia by focusing on higher end phones, that is, those with color screens, cameras, and other devices that to our benefit tend to include more circuit protection devices.

We also note replacement phone purchases are robust in both Europe and North America.

Having said that, global brands continue to move designs and production to Asia ODMs, original design manufacturers, where we have good position.

Also local Chinese manufacturers continue to increase their market share.

Over all on cellphones, Littelfuse is positioned well since our greater China selling organization is very capable of interfacing with the design teams to provide a total solution provider approach.

This is especially true in Taiwan which dominates design activity.

Making a side comment, I just noticed this in the Chicago Tribune this morning.

It indicated that Nokia reduces phone prices 20 percent, yet Motorola is well positioned.

It talks about the difference between the Nokia candy bar designs and the clamshells, with the additional features that are becoming more predominant with new purchases.

I would note, just as I read that article, that our objective in electronics and automotive as well is to serve all the major manufacturers by providing solutions to their problems and their designs, as well as covering emerging companies and markets with our global people.

So as we talk about Motorola, Nokia, Samsung, LG, and others we have major shares with all of those manufacturers.

So, as demand moves around we're able to handle the increased demand.

We have also worked very hard the last several years to increase our position with the ODMs based in Taiwan as well as the two major cellphone manufactures in Korea; and we're also covering the new Chinese startup cellphones as well in Taiwan and in other areas.

Products used on cellphones, to close this, our fuses, MLVs, and ESD protectors.

A nice array of our products.

Secondly, digital still cameras; estimated 68 million units to be sold in this calendar year.

This is up 43 percent from last year, and long-term the forecasts that we're seeing are for rates of 80 to 100 million units.

Not be surprising to you, but roughly 60 percent of the digital cameras will be made by Taiwanese-based ODMs and CEMs.

This again fits well with our TSP or total solution provider approach, that is, a focus for our marketing teams, products in the cameras that are applied, our fuses, resistors, PTCs, ESD devices, diode arrays, basically most everything that we offer.

Now I would like Gordon to comment on our total solution provider approach and how he's building our global organization to maximize our growth opportunities.

Gordon?

Thanks, Howard.

Good morning.

The total solution provider approach is really a critical part of our strategy to move from being just a supplier of fuse products to being a total solution provider and a partner to our customers for all electronic circuit protection.

Our customers and the changing market conditions are increasingly requesting that we provide technical support, that we provide application knowledge, and very important compliance testing to support our products in the customer design process.

An example of this would be in the telecommunications equipment market, for example someone designing a modem, where there's a need to understand the telecom industry compliance requirements for circuit protection for both over voltage and over current.

We are able to provide the technical appliance knowledge, the application expertise, and also the laboratory testing of our components when installed in the customer's equipment.

This technical support is becoming increasingly valuable.

As product design cycles get shorter, there is more need for this kind of support and designs get outsourced increasingly to contract manufacturers and the ODMs that Howard mentioned, particularly in Asia and Taiwan in particular.

Secondly to support this total solution provider approach we're investing in a more technical sales force around the world and also in more technical channel partners, especially in Asia, as well as increased field application engineering and lab testing support.

We're also investing in extensive technical training of our channel partners so that we can benefit from having the broadest offering of circuit protection components and the technical support capability that we have.

And then lastly, which will be following onto this, is really that we are starting to build the investment in R&D to be able to develop new products to meet our customers' future requirements and also to be able to maintain our market leadership position.

Thanks, Gordon.

In closing my comments and Phil will ultimately close, with our strong financial position we will continue to explore very focused acquisitions like Teccor that contribute to our market share in electronics, by the way, as well as our automotive business.

Both our product development programs and acquisitions will help our efforts to leverage our wide product portfolio in circuit protection to provide solutions for our customers, as Gordon indicated.

Now Phil will share comments on our outlook for the rest of the year, and we will take any of your questions.

Thanks, Howard.

Our market outlook at this point for the remainder of the year is generally positive, as you've heard from Howard.

Book-to-bill ratios are still running about 1.2 to 1 in electronics as Howard mentioned; a little bit lower in our other two businesses; and our end markets seem to be healthy and generally trending positive.

There's no doubt at this point that the recovery is real.

But there are also a few warning signs we will continue to watch.

For example, while our sales to distributors are still trending up, some of our largest North American distributors tell us that bookings from their customers have begun to drop off.

Also a few markets that have had several quarters of robust growth, such as computers and cellphones, are beginning to level off a little bit.

Nothing here to be alarmed about; just to caution that there may be a few bumps in the road as this recovery progresses.

Our best guess at this point is that sales for the next few quarters will be similar to Q1.

We also believe the higher margins achieved in the first quarter are sustainable except that, as indicated in the press release, margins will be reduced by approximately $3 million of restructuring charges related to further plant consolidation.

And these charges should be about evenly split between quarter 2 and quarter 3.

And that's really all our prepared remarks.

At this point we would be happy to take questions.

(OPERATOR INSTRUCTIONS) Jeff Rosenberg, William Blair.

First can you give us a breakdown on North America, of how much sales are OEM versus distribution?

In round numbers, you have about 65 percent distribution and the balance OE.

That is in electronics.

In electronics, yes.

The automotive business, except for the roughly $15 of aftermarket business, the balance, about 105 or so, is OEM.

Do you have a good feel for how much inventory the distributors have right now?

In terms of electronics?

Just generally we are trying to track that data there.

Their turns are about -- they actually moved up from 2.5 last November to about 3 turns now.

Their overall inventory of our products is probably in the 16, $17 million level, which is also -- Phil kind of indicated caution.

We are seeing their inventory build.

We don't think that's excessive at this point in time, but it certainly is moving up.

Phil, any comments?

Yes.

Inventory is moving up, turns seem to be okay.

The only real caution we see on the distributor front in North America is the one I just mentioned.

Right now a number of our large distributors are reporting that their bookings are starting to drop off some from the significant rates they have been at in the last several months.

If that were to continue obviously that would ultimately impact probably inventory levels and certainly their orders to us.

Again, that relates primarily to the U.S. distributors, where we have the best data.

I think one of the things Gordon will be doing over time is building a better database for our European and our Far East distributors where we have little less visibility.

That said, in terms of your outlook for not much growth in Q2, it sounds like they are looking to still build inventory.

Given the positive book-to-bill, are you just being cautions that at some point, as the quarter unfolds, things moderate?

Or based upon what you see today you don't expect growth in electronics quarter on quarter?

(technical difficulty)

In the distribution channel.

I think we really -- we do have positive book-to-bills; things are looking pretty strong; but there are a few signs that we mentioned that we do see things dropping off.

It's not out of the question that we could see some weaknesses as we get further into the quarter.

Okay.

What was CAPEX in the quarter, and what do you expect it to be for the year?

CAPEX for the quarter was very modest.

In the first quarter it was about $3 million.

We have quite a number of significant projects that are in the works right now related to capacity, primarily in electronics but also in automotive.

We would expect that number still.

We had originally reported or indicated that we would probably spend about $25 million for the year.

Even with the slow start we still think we will spend something in that range.

As you approach $100 million run rate at Teccor, do you have to start thinking about expansion there or what is your -- I would think that you have got another 20 percent or so availability.

What kind of lead time do you need to expand that capacity?

We've got a little bit of leeway there.

But it is clearly with the way things have ramped up there, probably don't have 20 percent anymore.

We are closer to the max than that.

I think we had reported that we might be able to get to that 110 million with the current capacity; and as you indicated we're pretty close to 100 million run rate right now.

We are putting some plans together to put in some capacity at Teccor over the next year or so.

Okay.

Thanks.

To add color, in the meantime we are adding some capacity in thin-film and some of our nano and other fuse lines to increase output, because we are -- in the other product categories we're up at about an 85 percent utilization rate on a five-day basis, certainly in electronic products.

Alexander Paris of Barrington Research.

Good morning, great quarter.

Thanks, I thought you might like the numbers.

I always like to be wrong in that direction.

Going to Teccor, just to refresh my memory, what was the annual run rate when you acquired it?

About 75 million.

And now you are saying it's running close to 100 million annual rate.

That is correct, right.

So you have got about five months, I think, of incremental sales yet.

Is that run rate a good one to use on a monthly basis, divided by 12?

Probably not a bad one.

I guess our answer is yes, at this point.

Again, just with these caveats, we are very pleased.

Clearly what is going on and their book-to-bill is still high, but yes.

I think current run rate sounds fine.

Just at the end, Phil, you were saying your guidance for sales for the rest of the year would stay at the first quarter rate.

Were you talking about the dollar rate or the sequential growth?

No.

We were referring to -- the expectation at this point is that dollars of revenue would be similar to the first quarter over the next couple of quarters, anyway; we really can't see much farther than that at this point.

Remembering too that we benefited pretty significantly as distributors put in inventory over the first quarter.

So while there are some things that could indicate electronics could be a little bit stronger, I think our guidance at this point is that we expect a quarter pretty similar to Q1.

Going back to Teccor, you are running at a kind of $100 million rate; and now the operating margins are roughly equal to your core?

Yes.

In the automobile business you mentioned that the first quarter benefited from -- I think you said in the press release -- a customer recall; and in your conference call you said replacing the customer.

Is that the same thing or is that two different?

(multiple speakers) really is the same thing.

I can't get into specifics, but it was a competitor's product that was recalled and was replaced by our product.

I think this is a credit; our people jumped on the opportunity immediately and actually gained some long-term business in addition to solving the customer's problem.

But these recalls kind of tend to be a big and kind of one-shot kind of thing.

It that right?

Let me just quantify it a little bit.

This probably added maybe $0.5 million of revenue in the first quarter, Alex.

But the nice adder is this is going to add a nice million dollar plus business going forward each year for the next couple of years.

Do you have any change in tax rate coming up?

Or is this going to stay the same?

We have not indicated that yet.

We've alluded to in the past some things that could favorably change the tax rate going forward, but at this point I think the best assumption is the tax rate will stay the same for the rest of this year anyway.

And your telecom recovery that you noted in Europe and North America, is that mostly in floweds (ph) or infrastructure or?

I will let Gordon speak that.

But just to clarify, when we talk about our telecom category we're really referring to infrastructure.

We really put the handset into a digital consumer category that's different than wired telecom or telecom infrastructure.

So we really specifically are referring to the infrastructure side.

You answered my question; that is infrastructure that the recovery is coming from.

Yes, particularly in the Teccor products, which were really very strong in the infrastructure area.

We see really a strength of Teccor product into those modems and telecommunications equipment providers.

One other final thing.

In your Teccor, if there are any other restructuring or costs from that, does that still come under your purchase accounting?

It will.

At this point we will have pretty much exhausted the reserves that we had in purchase accounting.

So any additional restructuring will actually run through the P&L.

But any additional restructuring that we plan for this year would be included in the $3 million that we indicated over the next couple of quarters.

And that's mostly cash, not non-cash?

That would be cash and earnings hits.

Right.

Thank you very much.

Amy Junker with Robert W. Baird.

Quick question on the automotive.

During your midquarter conference call you had expected that the high demand you were saying, you thought that was in part due to inventory replenishment.

So does this recall or replacement business happen since that time?

Yes, it did.

So that is in addition to that.

I know at the time you had thought that the upside to auto would not be sustainable.

So we are talking about a different issue here.

Amy, just to be clear, the recall issue, that will be a temporary revenue stream.

So that will drop off at some point in time.

Probably towards the end of the second quarter is our best guess right now.

Great.

And in terms of R&D where do you see that heading?

And what's really the trend line?

Are we going to see a spike one of these quarters or is it going to continue to ramp up?

Where do you see that?

Let me answer that.

I think that we are not going to see a spike.

We are really starting a longer-term strategy of trying to get closer to our OEMs and start developing products for their future needs.

So it is a beginning of an investment program, but I would not expect to see one spike.

But I think the historical levels that we've seen of about 2.5 percent in Littelfuse and about 3.5 percent in Teccor will start to come up over the next couple of years.

Great.

Finally, in relation to the restructuring that you did at Teccor, the 4 million that occurred this quarter, what actions did you take exactly?

Is that completed at this point, or is that continuing and that's included in the comments you made in the press release?

No, it is completed.

It mostly had to do with some severance and some restructuring of union contracts that had associated savings with it.

This was all stuff that we had planned going in.

The savings are part of the 8 to $10 million that we talked about.

But the costs related to that are done.

Great, thank you.

(OPERATOR INSTRUCTIONS) Richard Hilgert with Oppenheimer.

Good morning.

Hi, Rich, how are you?

Doing good, and it looks like you are doing better.

We've fell pretty good at this point, but we are always looking to get better.

Good.

During the quarter the margin improvement obviously came from some operating leverage; it was aided by cost restructurings in the past and gaining leverage over those cost initiatives.

But was there anything like healthcare expense that changed due to the Medicare bill or any unusual items in there that caused the margins to be where they are at right now?

Nothing unusual, Rich.

A big contributor to the jump in margins was the big improvement we saw at Teccor.

As we had indicated in our year-end call, they were running at margins, both on the operating margins and gross margins, pretty significantly below our base business.

And we indicated we had an intention to and a belief that we could get those up to our core business level margins.

It has happened quite a bit faster than we anticipated; certainly in part because of the strong volume trends that we've seen out of that business and the operating leverage that we have gotten.

Was that all organic growth that happened through Teccor?

Or was that also maybe a result of transferring some business from some other operations into Teccor facilities?

No, it really related -- there was a little bit of transferring.

But it didn't really amount to any significant dollars.

It's really organic growth, and it has mostly to do with the market recovery and the fact that Teccor is very, very well-positioned in that telecom market.

And as telecom has come back they've gotten a big chunk of the business.

Is there still open capacity left at Teccor?

I think what we indicated was there is some, but we are probably within 10 percent right now of our capacity limits in the near-term there; and we're already working on some things to add to that.

I am going to just differ a little bit with my COO;

I guess I can do that.

It might be a little higher if we really pushed seven-day a week capacity.

It might be 10, but it could be as much as 20.

Clearly that's a range that (inaudible) begin; and this is a good news issue.

We begin to think about capacity adds over time.

But the team in that business, we've done some things at the former Teccor Mexico operation to right-size that and move things around and change our union structure.

We have just begun to move some work sells out to other factories to free up some of the back-end capacity.

We have got -- I think we will certainly undertake now that these higher demands we are seeing, revisiting our action plan as we go ahead and move some of these lines around.

But probably another 10 to 20 percent capacity.

In that case then you would be running up a little bit on the short-term cost curve.

We would, but we really get good leverage short term out of the extra.

When it goes let's say above 20 percent more, then it gets a little more expensive.

But in the short term we get nice operating leverage out of these on this next 10 or 20 percent.

Is utilization right now -- are you pretty much running in your sweet spot at this point with the capacity footprint that you have?

Let me speak sort of generally.

I alluded to that a moment ago.

In our basic electronic products, I think it is interesting.

Global electronics and automotive were a similar number.

But on a five-day basis Littelfuse is about 85 percent of capacity;

Teccor is in the 85, 85-plus percent range.

By the way those are up from 80 and 74 about three months ago.

That is reflective of the positive trends on the automotive side, which you are most familiar with.

We are operating a six-day basis there, and we are operating at about 84 percent of capacity.

Having said that, those are averages.

We have some lines that are full out six days, full utilizing the capacity; and a couple that are in the 60 to 70 percent range.

We have relatively high rates.

We are not as concerned about that in the automotive business, as you would expect at this point in time.

But in electronics we're watching it carefully.

Some of the CAPEX that Phil alluded to will be to provide more capacity as we see electronic demand increase.

I know a couple years ago you were constrained to the point where you were having to allocate to some customers; and you were looking at pricing adjustments.

We are nowhere near that at this point, correct?

Clearly not at this point.

We are saying other competitors' products on very long delivery; and this is one of our caveats.

If they can not deliver product parts to make some of the products, this could create some sluggishness as we get into the middle or latter half of the year.

On the recall in the automotive --

This is your 12-part question, right?

One more.

On the automotive recall, recognizing that a part of that, you've got the big chunk up front.

But on an annualized run rate, how much does that add to automotive?

The new opportunity will add about 1 million to $1.5 million a year in revenue going forward.

Great.

Sorry about the 11 parts to the one question.

We are friends.

We will let you do that.

John Franzreb of Sidoti & Co.

Piggybacking on that recall thing, you've had $500,000 of incremental revenue from that, and you kind of backed that out of the quarter.

I am looking at a North American vehicle production rate that -- looking at the data, I am looking at it right now, (inaudible) down about 4 percent it looks like year-over-year.

Could you walk me through how you still got the good revenue bump year-over-year on the automotive side of the business?

What was driving that?

I think I might have heard you say you had actual price increases in that business?

No.

We wish that was the case.

Let me give you some more pieces to it, if you will.

In Europe we realized currency gains of approximately $1 million in the automotive business.

In Korea we picked up some additional work with some of the Korean manufacturers that was about 3 to $400,000.

In China we picked up some incremental new business of 2 to 300.

Those are a few more pieces of the puzzle.

The bottom line is that we probably had a little bit stronger -- I think our numbers said that vehicle builds were pretty flat or just down slightly for the quarter.

Anyway, assuming they were flat to down slightly, we did a little bit better even when you strip all that out than you would have expected in North America.

There is probably 0.5 to $1 million of volume that we got that could not be explained given the vehicle build.

So we're working to understand that better.

Was any of the increase electronic components?

I know you try to address the automotive market, kind of leverage that side of the business into the automotive.

Is any of that incrementally in there?

We would like to think that that was happening.

But it's probably a little bit too early for any of our strategies addressing that part of the market to really have an impact.

In your distributor bookings, talking about weakening, do you have a sense of what end markets from your distributors are softening as opposed to others?

We didn't get that from the distributors.

But I think things that we have seen and I referred to in some of my comments is cellphones, which has certainly been going great guns, has starting to plateau out.

Computers are not going to be running at the same rate in Q2 most likely as they have been for the past several quarters.

But really neither of those would affect North American distribution much, because those are mostly Asia build phenomenons.

You also cited in the comments, you pointed out cellphones with more features and digital cameras.

Can you give a sense of either on a dollar value or quantify somehow, how much more components you supply to a cellphone with a camera, as opposed to maybe a base model?

And what kind of revenue contribution digital cameras have versus regular cameras?

Can you give us a sense of the magnitudes there?

We used to try it, and again this really varies all over the board.

By the way, maybe a general comment; we like to be all over the board.

We want to supply all these folks whether they are building basic phones or basic cameras or the more exotic versions.

But in a simple phone it might be one device that would be 8 cent device.

A more complex phone would have several of our devices that could be as high as 30 cents.

Just to give you an idea.

Cameras, let me see if I have that.

Cameras would be more.

A little higher (inaudible).

It is kind of interesting.

Some of the new high-end cameras that have as many as two or three little motors that drive the focus device.

That can have even a higher value.

It could be up to anywhere from 15 cents per device up to as much as 50 cents per device, just to give you a range.

That's great.

Good job, guys.

Jason Rogers, LJR Great Lakes Review.

It's actually Greg Halter.

We will call you Jason and not Greg.

That's fine.

We've been reading a lot about the hybrid electric vehicles; and the sales there have been pretty good.

What kind of positive impact does that have on your auto business?

Because of the low volumes it's not very significant.

When I alluded to our automo (inaudible) activities, especially in the Far East.

I think we're still feeling our way here.

We have presence on a number of the hybrids.

The volumes, though they get a lot of press, are really in the tens of thousands of units compared to the millions we talk about.

The good news is the raw value on those vehicles is higher.

Again we're still feeling our way right now.

It is a 0.5 million, $1 million a year kind of issue for us.

But this is where we are looking forward to our activity not just with the Japanese who are currently building the most high-profile products; but for some of the domestic manufacturers as well.

I know that's not a terribly clear answer, but we're still feeling our way.

I think here we look to leverage our position, being a manufacturer of electrical fuses, to be able to provide something, some unique solutions for all those folks.

That's helpful.

On the pricing side on electronics, the last two or three years it's been an issue and it probably will continuously.

Can you comment on the magnitude of the price pressure there?

As Phil indicated we presume in our business going forward, even though the wind is at our back a bit, that there still is going to be price pressure in each our businesses, though it varies somewhat.

We didn't comment earlier, but in the electrical business we're actually -- I think I did make a comment that we're actually seeing some positive pricing.

We have seen electronics pricing begin to subdue a bit.

We're probably in the 6 percent erosion area now, but it seems to be drifting down to perhaps 5.

So we are in that kind of mode.

Automotive is still in the 4 to 5 percent area.

Great, thank you.

Just an add-on comment there, because I think one thing that is just systemic in this business is our operating peoples' drive and procurement peoples' drive to really take out more cost in the business than we have to, negotiate to get major positions with our customers.

We are just very pleased that that continues to go on week after week.

Alexander Paris.

Just a quickie.

Could you break down your electronic business?

It was up 35 percent at Teccor.

Could you break that down roughly in terms of either the percent change or the percentage of the total for Asia, North America, and Europe?

Interestingly, Alex, it was about -- the percentage increase in each of those regions was almost identical.

They were all within a few points of 35 percent.

If you look at the -- and break it down the other way, the most important business as you might expect is Asia.

It's over 50 percent of our revenues.

I think U.S. is about 30, 35 percent; and European is the balance.

They are all in the mid 30 (multiple speakers).

For the quarter, over prior-year quarter, they all grew in the mid 30s.

With a caveat that Europe, probably almost half of that growth was currency related.

So could it be fair to say that if you're concerned maybe that Asia's overheating a little bit, and that's been a big positive, that maybe if it slows down, Europe and North America started up in a more lagged basis; so that maybe could pick up and offset anything from Asia?

Is that fair?

That is what we've seen.

I think one of the reasons our growth has been so strong the last two quarters is that up until the fourth quarter of last year it was pretty much Asia driving everything.

More recently over the last couple of quarters, certainly North America has gotten quite a bit stronger, and Europe is starting to get stronger.

So the recoveries that we're seeing in Europe and North America are certainly a lot earlier stage than the Asian one, which has been going on for quite a while.

Okay, thanks very much.

I will add to that too.

The Europeans are doing the same thing that's happening in the States.

Their manufacturing base is moving to the Far East.

So we will see some of that pickup happen with those ODMs and CEMs as well.

Part of this slowness in Europe, you are really just picking up in Asia. right?

That is correct.

There certainly is some of that, yes.

Good. (technical difficulty)

Jeff Rosenberg.

First of all, so a little bit higher SG&A than you had thought mid quarter.

Is that just variable stuff that drove that?

It is some variable stuff.

I think also, though, Gordon referred to the fact that we are putting some organization structure in place.

Not only R&D resources but also some selling resources and technical resources in some of our hot markets, particularly over in Asia.

We are beginning to see some of that show up.

From an SG&A standpoint I would look at Q1; it certainly has increased from what it was several quarters ago.

But I would look at that.

We are going to see certainly some dollar increases there.

And even if we are able to grow the top line from where we are now, which we hope to, I think the SG&A as a percent of sales I would not expect to see much leverage on that.

I guess that leads to my next question, which is you expressed the belief that you could still get the 15 percent within the next year.

If we assume for the moment -- does that require revenues to grow?

Or are the cost savings that you are implementing with this charge over the next couple quarters going to get you there in Q4 or whenever, Q1?

It depends on a lot of things.

It depends on price erosion and the trend there.

But I would say generally for us to sustain 15 percent operating margin we are going to need some growth in the top line from where it is today.

Not dramatic growth, but certainly some growth.

Okay.

In terms of the cost of (ph) charge, excuse me, my last question.

Is that all going to cost of goods sold?

It will go into cost of goods sold, almost exclusively in cost of goods sold.

Okay.

Thanks.

Thanks Geoff.

Gentlemen, it appears there are no further questions at this time.

Mr. Witt, I'd like to turn the conference back over to you for any additional or closing comments.

We have no closing comments other than just thanking all those folks who cover us and who own our shares.

Have a good day.

That will conclude today's conference.

Thank you for joining us and have a great day.