Littelfuse Inc (LFUS) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to this Littelfuse Incorporated Second Quarter Earnings Conference Call.

Today's call is being recorded.

At this time, I will turn the call over to Chief Executive Officer, Mr. Gordon Hunter.

Please go ahead, sir.

Thank you.

Good morning and welcome to the Littelfuse second-quarter conference call.

This is Gordon Hunter, the CEO Of Littelfuse.

And with me today, is Phil Franklin, our CFO and Vice President of Operations Support.

First, Phil will read our Safe Harbor statement and then give a brief summary of our press release, which was issued earlier this morning.

Following on from our mid-quarter conference call on June 22nd, we plan to give an overview of our second-quarter results as well as some details of our end markets and how we have progressed against some of our key corporate initiatives.

We'll then open up to some questions and expect this call to last about 40 minutes.

I'll now hand you over to Phil.

Thanks, Gordon.

Any forward-looking statements contained herein involve risks and uncertainties, including, but not limited to, product demand risks, the effect of economic conditions, the impact of competitive products and pricing, acquisition integration risks, commercialization and technological difficulties, capacity and supply constraints, exchange rate fluctuations, the effect of the Company's accounting policies, labor disputes, restructuring costs and excess of expectations, and other risks, which may be detailed in the Company's SEC filings.

Second-quarter financial results were similar to the first quarter and consistent with our recent guidance.

Sales for the quarter were 123 million, down 4% from the prior-year quarter, which included only eight weeks of Heinrich.

Excluding Heinrich, sales declined 10% compared to the prior-year quarter.

A 14% drop in our electronics business was the primary culprit, caused largely by the downturn in telecom and weak distributor sales in North America and Europe.

Automotive revenue declined 5%, reflecting onetime sales from an OEM recall in the second quarter of 2004 and slightly lower North American car build.

Electrical sales, on the other hand, were up 8% compared to the prior year, due to strong fundamentals in the non-construction market segments and positive price realization.

Heinrich sales were down sequentially from the first quarter, due to weakness in the electronic markets and weakening of the euro.

Gross margin for the second quarter of 2005 was 390 basis points lower than the prior-year quarter, due to reduced operating leverage, higher commodity prices, $2.1 million of inventory and quality charges, and a full quarter of Heinrich at lower margins in the Littelfuse base business.

Operating expenses increased by $2.4 million from the prior-year quarter, due primarily to only 8 weeks of Heinrich in the prior-year quarter.

However, compared to the first quarter of 2005, operating expenses were down 1.9 million due to cost reduction actions taken over the last several months and reduced expense for management bonuses.

Operating margin for the second quarter, while well below that of the prior year, was roughly flat with the first quarter, at 6%.

Cash from operating activities was 12.1 million for the second quarter of 2005 compared to 16.1 million for the same period in 2004, due to lower net income.

Capital expenditures for the second quarter of 2005 were 8.3 million compared to 6.1 million in the second quarter of 2004.

Thus, free cash flow was positive, 3.9 million, for the second quarter.

While we expect free cash flow to improve in the second half of the year, the full-year free cash flow will be lower than normal this year due to higher capital spending, primarily related to new products, and increased restructuring charges related to the Heinrich integration and various cost reduction programs.

As reported in our July 5th press release, we received the necessary German approvals to fully integrate Heinrich into Littelfuse.

Integration activities are well underway with integration of the US activities of Heinrich into Littelfuse now complete, and the integration of European and Asian activities in process and on schedule to be largely completed by yearend.

Separately, we are working through the German legal processes to purchase or squeeze out the remaining 2.8% of shareholders.

This will enable us to delist the Heinrich Industrie shares and complete the Heinrich acquisition.

We are targeting yearend for this delisting, but, as we have painfully learned over the last year, the process could take longer.

Now, let me turn it back to Gordon for some more detailed market commentary.

Thanks, Phil.

I'd now like to give an update on our 3 strategic business units, some details of the markets they serve, and some background to the key initiatives.

First, our automotive SBU, which accounts for about 25% of our total business.

Our second-quarter automotive revenues were down 2.9% compared to the same quarter last year, when we exclude the impact of the 2004 onetime fix we discussed last quarter.

Car builds during this time period were basically flat, with a 2% decline in North American car build, offset by modest growth in Asia.

The sluggish demand for light trucks and SUVs, which have a slightly higher fuse count than passenger cars, and steeper reduction in shipments prior to the planned summer holiday period in Europe this year, created the bulk of the decline in Q2 revenues.

Even with the very strong North America car sales in June and July, JD Power is still projecting the year to finish with North American and European car builds flat with 2004.

The current car sales strength in North America is being driven by the employee discounts being offered by the Big Three.

The sales push will bleed off excess inventories, while at the same time we see no signs of an increase in the car build significantly.

Our current expectation is that after the normal seasonally low third quarter we'll begin to show a steady, modest improvement in our revenues.

This improvement is being driven by the launch of new products and new car platforms utilizing Littelfuse products.

We've made significant progress in integration of the German-based Pudenz business.

Pudenz is the automotive subsidiary of Heinrich Industries, which we acquired a controlling interest in during 2005.

Integration of this business is significantly strengthened our European-based R&D activities as well as our key customer relationships in Europe.

We will also see good cost savings, when we complete the consolidation of their customer service and distribution activities in their existing center in The Netherlands.

This will be completed during the third quarter.

Year-to-date, the Pudenz business is 4% ahead of last year in sales revenue and seems to be on track for the remainder of the year, as we complete consolidation into the Littelfuse business.

We continue to be optimistic about the interest in the designing activities, resulting from our renewed focus on new product development and business developments.

With the integration of the Pudenz team, we've increased our investment in R&D by 2.2 percentage points compared to Q2 '04, and we continue to increase in this area.

Although this investment at 4.5% of sales, it is still relatively modest, we are making significant progress.

We are seeing particular interest in our new battery cable protection devices, such as CablePro and BF Inline, and our high current fuse arrays that we refer to as "master fuses."

These 3 new product types are used into the hood of a vehicle and protect the high current cables that deliver power between the battery, alternators, starters and primary junction boxes.

We're also progressing with the introduction of 2 key product families, Low-Profile JCASE and Low-Profile MINI.

Low-Profile JCASE is the next generation of our Female Fuse, which saves space inside the fuse box, and Low-Profile MINI is the development of our Blade Fuse.

High-volume production of Low-Profile JCASE will commence in the third quarter.

The $4.5 million investment in new capital for these programs will add to the growth of product offerings and capacity.

With 2 to 3 year design cycles in the automotive industry, meaningful revenue impacts will not begin till the back half of 2006, but should gain momentum, as we move into 2007.

Now, let me switch to our electrical business unit, known also as PowerGuard.

This is a North American business and represents approximately 9% of total sales.

This business was up 8% versus the same quarter in the prior year and also up 8% sequentially.

We continue to see new customer growth in the second quarter, but general market dynamics were also positive.

In the industrial sector, manufacturing activity is continuing to be robust versus the prior year, but recently has shown some signs of softening.

Shipments of OEM products using our fuses were strong in the first quarter and should indicate a similar trend in the second quarter.

We should continue to see strength in this sector through the remainder of the year.

In the known residential construction market, overall activity for 2005 has been running below 2004 levels.

But we continue to see positive signs that activity will pick up in the second half of the year, as commodity prices, especially steel, continue to drop.

We typically experience a 3 to 6 month lag time after a recovery or down turn due to the fact that fuses are typically the last product installed in new buildings.

The HBSC market has now begun to impact fuse demand positively after a very slow start due to the long protracted cooler than expected Spring.

We're now also concluding the final transfer of the manufacturing from central Illinois to a low-cost manufacturing site in Mexico.

Our planned capacity is in very good shape, allowing us to react quickly to any (inaudible) changes in overall demand.

Our business is continuing to operate at the strategic profit levels.

Unfavorable PTC (ph) based primarily on higher copper prices continues to offset some of the favorable impact of price realization.

We did benefit from price realization as a result of the first quarter of price increase.

We expect our bottom line to continue to benefit from this throughout the balance of the year.

We've just completed development of some price control software that should allow us to ultimately manage pricing more effectively and improve quotation hit rates.

We're also in the process of releasing a new marketing program to capitalize on the second half rebound in the nonresidential construction market.

And lastly, we're currently rolling out a web-based training program for all of our reps and distributed customers.

We're continuing to educate customers on the dangers associated with what is called an arc flash event, random, dangerous, short-circuit event that can occur in an industrial setting.

Fuses when properly applied can help minimize the danger associated with such an event.

Overall, we remain bullish about the PowerGuard business and the execution of the key programs for the remainder of the year.

Now let me switch to our electronics strategic business unit.

Overall of sales in the second quarter were up 3.6 million, or 5%, versus the first quarter.

However, sales were down 10.6 million, or 14%, compared to the second quarter of last year.

Sales of the Teccor silicon products accounted for 4.1 million of this decrease, a 16% decrease over Q2 '04.

As discussed in previous calls, the overarching trend affecting our 2005 performance has been broad-based slowdown in the overall growth rates of the end markets we serve, when we compare them to the very robust growth that we saw in 2004.

Our served electronic markets have slowed from a 12% weighted average growth rate in '04 to a 1.8% weighted average growth rate for 2005.

Even slower than the 6% rate we've estimated in our May call.

This slowdown is across all major end markets we participate in, especially via Telecom.

Within the overall slowdown of our end markets, the Telecom market has actually been more negative for us, due to some infrastructure sub segments specific trends where our business is highly concentrated.

Specifically, these sub segment trends are the reduction in China government spending on Telecom, PSTN infrastructure in 2005, and delays worldwide broadband infrastructure deployment for the next generation systems, such as ADSL2plus and BDSL.

We see demand for our components in these sub segments declining 8 to 10% in 2005.

More generally, we've seen a moderate drop in end customer POS sales performance in our distribution network in North America and Europe, reflecting the weak markets.

As we've discussed throughout the year, one of the key issues affecting our sales for 2005 is the inventory correction in our global distribution channels as a reduced inventory levels to support these slower end markets.

As mentioned previously, this effect is accentuated by the fact that distributors were aggressively building inventory in the second quarter of last year.

Hence we've seen a major reversal in inventory position year-on-year.

Distributing inventory levels appear to have stabilized through second quarter.

So this correction appears to be largely complete, in terms of distributor inventory levels reaching a stable plateau.Also as a result of the slowing markets and inventory correction, we've seen a reduction in our total order backlog, down from the peak levels of last summer.

Our order backlog bottomed down in the first few months of '05, and has since been recovering backup to more normal levels through Q1 and Q2.

For this reason, we've seen relatively strong book-to-bill ratios for all of Q2 and only a minor corresponding increase in shipments level as our backlog fills back to a more healthy post-inventory correction levels, this is in contrast to our feeling in the May investor call, and we believed that a stronger return in shipments would occur within Q2 based on the strong book-to-bill ratios.

Geographically speaking, one area of recovery for us in the second quarter was in South Asia, especially Taiwan and Southeast Asia.

In the general electronics markets, as well as experience some revenue gains in target applications, such as Voice-over-IP and ADSL Telecom applications.

I'll talk more about these target applications and why they're examples of successful implementation of our solution strategy.

North America and Europe still face a variety of issues during the quarter, including distribution inventory corrections, reduced telecom infrastructure spend, and continued shift in business to Asia.

In the third quarter, I expect a continuation of our backlog build back to a healthy steady state level.

As this backlog build progresses, we expect to see some strengthening in shipments.

So for overall Q3, we expect a gradual improvement in shipments to continue.

Our projection in Q3 will show continued gradual growth versus Q2.

And for the balance of 2005, we expect the second half to be somewhat better than the first.

Let me give you some specifics on our end market growth rates.

Computer segment growth projection for the full year is estimated to be 11.8% by iSuppli.

However, the forecast for the second half is only showing 6.7% growth.

Computer market growth is being driven by continued strong adoption of notebooks in the household market in the US, as well as low cost PC's in Asia.

As indicated earlier, we are seeing a significant down turn in the telecom market.

Gartner forecast the wired communication semiconductor market to be down overall 1.4% this year.

However, the sub segments we participate in are down much more significantly.

As previously indicated, we see demand in the telecom segments we participate in, to be down 8 to 10%.

All indications are that the consumer electronics market will continue to grow in the 8 to 10% region as previously forecast.

Our general and industrial electronic segment is also expected to grow in the low single-digits about 3 to 5%.

Overall, as indicated earlier, the end markets we participated have fallen about 10% from 2004 growth rates.

We expect this trend to continue for the rest of the year.

Even as the overall slowdown in the markets we're selling into, we continue to see traction on our solutions selling approach.

We're also continuing to see increases in the amount of designing activities that our sales and marketing team are involved in.

There's a broad increase in activity across all regions and market segments, and we feel that this is positioning us well for the upcoming quarters.

R&D investment is another positive trend for us, as planned new product platforms are rolling towards completion and form a stronger basis for growth in 2006 and beyond.

On the bright spot in the Telecom market, however, it's the Voice-over-IP market.

As we've discussed in previous calls, this is an extremely attractive market for circuit protection, especially, for Littelfuse with our broad product offering, technical sales approach, and the strong local presence in Taiwan.

We've seen strong performance with our Teccor brand SIDACtor protection products recently, in Taiwan in this segment.

This is due to our solutions approach to SIDACtor protection, and as discussed in earnings calls earlier, we've invested recently in until technical sales and marketing resources around the world, but specifically in Asia to support the solutions approach.

These new resources have helped us to start to work with chipset designers, to get our product offering on reference design in the Telecom market segment.

These reference designs are critical because they have recommend components of the chipset manufacturer, and most times are followed by the actual end product designers.

We've been working with both chip set designers, as well as the key OEMs and ODMs in the Voice-over-IP and ADSL modem markets to get our Telecom circuit production products designed in.

These successes are the result of a strong technical sales team, support by strong field application engineering, and product management working together to provide solutions to the customer's circuit protection needs.

So in summary, the Q2 electronics performance was an improvement over Q1, as distributor inventory levels appear to have stabilized.

We've seen stronger sales in China, as well as revenue gains in targeted applications and a continuing build of our backlog.

We expect the second half to be somewhat better than the first.

Lastly, on Heinrich, as mentioned by Phil, we are making progress on the ownership situation.

We're also moving ahead with the integrations, and as mentioned in the automotive comments, we are very positive about the Pudenz business benefits and the current performance.

However, the Wickmann electronics business is integrating into our ESBU and moving production as planned from Germany to Dongguan, China.

The Wickmann electronics business offered a similar down turn in Q2 to our own Littelfuse electronics business and was down 20% versus one year ago.

I'll now hand back to Phil to make some additional comments.

Thanks, Gordon.

So after achieving sequential sales growth of 2% in the second quarter, we are expecting sequential sales growth for the third quarter in the range of 2 to 5%.

Our cautious optimism for Q3 is based on a book-to-bill ratio that is slightly over one, the shippable backlog that has increased, since the beginning of the second quarter, and the sales rate for the first 4 weeks of the third quarter that is up modestly, from the second quarter rate.

With sales and production rates trending modestly higher and cost reductions continuing, we're also expecting to see margins begin to improve.

Thus, even after a $1.5 million restructuring charge, we expect improved earnings in the third quarter, most likely in the range of 24 to $0.28 per share.

This concludes our prepared remarks.

We'd now be happy to take any questions.

Thank you.

[Operator Instructions].

And we'll go first to George Nissan (ph) of Merrill Lynch.

Hello.

Hi.

Yes.

Thank you very much.

Congratulation on the good results.

Over the past year, a lot of your competitors have recently been implementing some new strategic initiatives to reduce their raw material costs by establishing a better line of communication of their suppliers.

I'm interested if you can add some color to us on the call today of what you plan on doing in the future to reduce your overall raw material costs by opening up a better line of communication with your supplier base?

I'm not sure exactly what you mean by that, but I can tell you that we are certainly working very hard on material costs across a broad range of spectrums including working in close partnership with many of our key suppliers, and more and more of these suppliers tend to be Asia-based.

So, we have a number of cost reduction programs that we're driving through our purchasing team, and we, so far we've been able to largely offset commodity price increases that we're seeing some positive pressure on this year.

Quality is always been over the last couple of years as a supplying company, a big priority within Littelfuse.

How do you make me sure, your suppliers are meeting up to your quality standards?

Are you score-carding them on a quarterly basis, are you meeting with them in global supply forums?

What do you guys do to make sure they're meeting your top quality standards?

We have supplier scorecards.

We do quality audits.

We spend time in their factories.

We're very intimate with our suppliers and their manufacturing processes.

We've actually shared with our suppliers overall business strategy.

We had a global supplier conference, and we had all of our suppliers come together, and we've really taken them through where we are going strategically and what our expectations are for them, so we clearly think that's a critical initiative for us.

Okay.

And final question, what is your supplier's feedback?

Are they open to some of these initiatives you are doing?

What's in your supplier's feedback?

Are they responsive?

What's been -- what have they been saying to you?

Yes.

Absolutely -- we found that the closer we work with our suppliers, the more favorably they respond and the better results we get.

Okay.

All right.

Thank you very much.

Good luck down the road.

Thank you.

And we'll go next to Jeff Rosenberg with William Blair.

Good morning.

I wanted to start by asking about gross margin.

And, Phil, the $2.1 million in charges that were called out in the press release, does that include the 400,000 that we were expecting or -?

Well, let me comment on that.

That's a good question.

We did have, I think in addition to the 2.1 million I called out, we had about roughly 600,000 of what we would call restructuring or severance-related type charges, which that -- was slightly higher than the 400 that we indicated in our last call.

The reason I didn't mention that is because that was essentially offset by reductions in management bonus expenses, so it kind of netted out.

Okay.

So, if we wanted to compare gross margins to the first quarter when I think the number was -- I forget, it was over a million in that restructuring.

We would add back the 2.1 million.

And if that happened, I would see gross margins down about 150 basis points sequentially.

So, can you comment on what's happening there in terms of should we blame that on poor utilization at Teccor or any other color commentary there on what's happening on gross margin?

Yes.

I mean, certainly poor utilization of Teccor is a significant piece of that -- just, overall, low levels of plant utilization was contributed.

I think that what we're seeing though is we are starting -- we have seen our factories start to ramp-up some from very low levels, and we are expecting a bounce back in margins in Q3 to higher than the levels that we saw in the first quarter.

Okay.

So above -- I think I've got 33.5% or thereabouts in the first quarter, so you think you can get that sort of a bounce?

I mean, as it gets -- yes, I think that the first quarter, I think, it was actually a little bit lower than that, maybe if you took the charges out of there.

But, I think that certainly we're going to need to see some significant margin bounce back to hit the $0.24 to $0.28 we've talked about.

And that's a combination of operating leverage, it's a combination of beginning to see some improvement in Heinrich with some of the integration activities that are going on and just some of our own cost reduction activities that are going on.

So again, that 24 to 28 includes the 1.5 million?

It does.

And that's the last traunch of the original restructuring than the last year?

Exactly.

The 1.5 million was -- we had talked about that as early, I think, is the first quarter, and that's part of that same restructuring.

Okay.

And then, when we look at progress you made in operating expenses this quarter, is that the benefit of the headcount reductions or is there something else there that, I mean, you can use -- are you going to continue to reduce operating expenses on an absolute basis or what's the outlook there?

It's largely the result of the actions that we took in the first quarter.

I would expect operating expenses for Q3 to look fairly similar to Q2.

Okay.

And I'll ask one more question just about the way the things trended, and from the point that you did the call at the end of June to where we stand today, I seem to remember book-to-bills were a little bit stronger, the sequential improvement expectation was a little bit better.

I think you expected more of a growth in backlog.

I mean did things slow in the month or they had been a little bit weaker than what you expected 5, 6 weeks ago?

I don't think so really, Jeff.

I think, we're obviously after our previous quarter, we're a little bit cautious.

But, as I said, we have seen book-to-bills continue to be slightly over one.

We've seen improving sales rates as we exited the second quarter and came into the third quarter.

And we do have a stronger backlog now, certainly, than we did at the beginning of the second quarter.

So, I think all those factors that we cited in our last call are still in place.

And, I think we just for obvious reasons, we're being a little bit cautious here.

Fair enough.

Okay.

Thanks.

And we'll go next to Amy Junker from Robert Baird.

Good morning.

A couple of quick questions on the revenue trends.

In your June 22nd announcement, you talked about a slowdown in North America and China distribution, now you're saying North America and Europe.

I guess what changed in Europe and China during the last week of the quarter that kind of make you flip-flop those?

Europe has been relatively weak.

It just didn't make the top of the hit list.

Earlier when we were talking -- talking earlier in our previous call, what has happened is that the improvements that we've seen is largely coming in Asia, coming in Taiwan, coming in China, coming in Southeast Asia.

And so, those parts of the world that were very weak in the first quarter, and still relatively -- not as strong as they had been in the second quarter, we've seen strong order trends in those areas, and we're expecting further improvement in Q3 in all those areas.

So China, the whole China, Southeast Asia area has gotten better than what it was a quarter ago.

Okay.

Great.

And you had indicated also during that call that, you didn't have a really great feel for what was driving the Heinrich weakness because you weren't very far along in the integration process at that point.

Now that that's underway, do you have a better sense of what's really driving the weakness, why their business has been weaker than the Littelfuse base business, kind of, excluding the Teccor?

I mean it really hasn't been -- their electronics business has shown pretty similar trends year-over-year to our electronics business.

I think that we -- there's still certain things in terms of the total understanding of all the cost drivers and everything that we're still getting into and understanding more, but it's not terribly surprising that Heinrich was down compared to where they were last year given that about 40% of their business is electronics.

Okay.

Last question for me.

What are the costs associated with Heinrich remaining a public company at this point?

I guess what I'm trying to get at is what costs will go away once you are able to de-list the company?

There are certain corporate costs related to audits and fees and legal costs and that kind of thing.

I mean it's not a huge number.

It's not millions of dollars.

It's probably, several hundred thousand dollars a year, but it's not the biggest driver of savings that we're expecting related to the integration.

Okay.

And can you just update us on what your expectations are for savings from the integration?

I know you threw a number out when you first announced the acquisition.

I'm wondering if that's changed now that that's going forward?

Yes, I think the number we've been talking to is a $5 million number.

As we've gotten further into the integration, we're very highly confident of that.

In all likelihood it's going to be several million dollars higher than that.

I mean, 5 to 7 would be the number that I'd give right now.

The way that's going to be spaced -- the way that's going to be timed is similar to what we indicated before.

We'll start to see some of those savings late in this year, but it's not going to be tremendously material in 2005.

We'll start to reach very significant levels as we get into mid 2006, and the savings will continue to grow probably out through the first quarter of 2007, until they reach a number in the 5 million to 7 million range.

Great.

Thanks so much.

And we'll go next to Alexander Paris of Barrington Research.

Good morning.

Morning, Alex.

You've mentioned a lot about spending on new products.

Is the -- over some time period, whether it's 2005 or some 12-month period, in your number of new products and the percentage of sales of new products, do you expect to be up significantly from, past years?

Well, we certainly do.

And certainly, you know, particularly in the automotive area, where our business has been relatively flat for quite a few years and not really had a lot of new product development, but coming from fairly modest levels as a percent of sales and total dollars.

Certainly, with the acquisition of the Pudenz business in automotive, they were spending significantly more as a percent of sales even as a much smaller business and a very strong R&D group.

And so, by integrating that group into us, you know, we've immediately increased our spending on R&D as overall percent.

But in the automotive area, the products we're working on, by the time we get them designed into new platforms, it really is a couple of years from even when the product is completed to getting a qualified onto a platform and seeing that platform ramped.

So, the investments we're making in automotive and have been for the last year with the Pudenz business also, we expect that it will probably be late 2006, but really the year of real ramping on that should be 2007.

Okay.

And it's not quite so significantly different in the electronics area in terms of new product impact?

Well, the difference in the electronics area is that the programs have been much faster and have much shorter design end cycle and also much shorter lifecycle.

And so investments that we make in new products for example, in the Teccor area where we're developing new products for the changing telecom network, we expect to see impact on those products much faster.

So, not having to wait a year and a half for a platform to build, but things like modems that are changing or set-top boxes or, equipment that has very fast design cycles, we expect to see the ramp up of that start to happen and be much more impactful in next year for electronics than for automotive.

Okay.

Just a comment there.

So we wouldn't -- we would expect to see a meaningful amount of our growth in 2006 come from new products, particularly in the electronics area, but also some in automotive towards the end of the year.

Okay.

Speaking of automotive, I mean that's a huge July increase following the big June increase -- I would imagine, the North American industry at least is going to go into the new product, new model year, with a lot lower carryover inventories remaining at a higher production.

What are you looking for in the second half or the third and fourth quarter in autos?

Are you expecting a bounce up in your business because of the higher production?

Well, we'd like to see one.

But, you know, the latest JD Power study, and we're really going by what they're projecting in the industry as the experts, they're really still projecting North America car build to be flat and really stating that the car sales strength is really just bleeding off excess inventory and that -- their forecasts for the year is still pretty flat.

So...

...

Is that the mid-June forecast.

Is there something more recent?

I think that was very recent, in fact.

Okay.

And just finally, in the second half, you're talking about second-half improvement.

Geographically, I guess, you're saying that Asia is going to be the biggest source of improvement in the second half, particularly coming off the slow first quarter.

And then Europe still the weakest and north America, moderate growth, is that kind of generally what you see in the second half?

That's correct.

And it has been the case in the first half.

I mean, hence the initiatives we have to add people in Asia, to focus on Asia.

You know, it's clear that that's a long-term trend we believe, that there will be continuing car production build, particularly in China and Korea and some other parts of south Asia.

So, that's clearly the focus area.

Okay, thank you.

Thank you.

[Operator Instructions].

And we'll go to Victor Hawley from RCB Investment Management.

Good morning.

I was wondering, on Heinrich, did your long-term outlook for that -- has that changed?

I mean, I know there has obviously been problems, but your long-term, do you expect it to still be as beneficial or have you lowered your sights on that?

I think we feel every bit as good about the business as we did when we bought it.

I mean we've seen real good progress on the Pudenz automotive integration already, which has proceeded ahead -- really ahead of the electronics one.

Teams are meshing very well.

I think we've got a very well laid out plan to integrate electronics over the last -- over the next several quarters, put in SAP.

And I think that the fit that we saw when we originally bought the business still exists.

And I think we feel just as good about it from that perspective, not withstanding the difficulties we've had with the whole process to acquire the remaining shares and get the integration going.

Okay.

And then secondly, on your -- long-term on your margins, do you still see them getting back to what you might have had in the latter part of the 90s, or do you see now that maybe that was an anomaly and that the gross margins won't return to that level?

Well, it's good question.

I think what's happened since the 90s is the characteristics of the business have changed some, particularly, in electronics.

Electronics has become a bigger part of our business, obviously.

And we've acquired some products and some businesses that go into even some of the more volatile areas of electronics, like Telecom, which I think is certainly going to make our electronics business, somewhat more volatile than our business was in the 90s, which was less electronics than it is today, and exclusively fuses at that point in time, even electronics tend to be a little bit steadier.

So, I think we'll see some more volatility.

I think in -- certainly in the out parts of the cycle, we ought to be able to achieve the kind of margins we were in the 90s, whether we can consistently achieve those across the entire part of the cycle, I guess that remains to be seen.

I mean that's something that we haven't really proven yet.

But I think, the key to also getting those margins up to closer to where they've been historically on a more consistent basis is to drive the new products that Gordon was talking about and the new business opportunities that were really driving hard through our solutions selling programs and our new product development programs.

I mean, that's going to really be the key is to get an ongoing steady stream of new product revenues that layer on top of the kind of a cyclical up and downs.

Okay.

And then, on the topline side, was the shortfall or decline was it mainly just unit volumes, or was there anything in the mix of fuses or the price -- any unusual pricing things that affected it?

It was largely unit volumes.

Okay.

All right.

Thank you, gentlemen.

And we'll take our final question from Steven Fox from Merrill Lynch.

Hi.

Good morning.

First of all, I just want to make you aware there's no George Nissan at Merrill Lynch.

Secondly...

Thanks, Steve.

I appreciate that.

No problem.

Secondly, just with regard to A bigger picture question, when you look across some of the passive and connector companies, a lot of them had pretty good sales in the distribution during the June quarter, it sounds like better than you guys, But including yourselves, are sort of looking for pretty benign trends in distribution in the third quarter.

I was wondering what metrics you're hanging your hat on that would make you think that distribution sell-through is solid and that there's not inventory building in the channels?

Well, I think we've been -- really tracking there, particularly in North America, really tracking their POS, and our sales in the distribution, and looking at the inventory levels that they had.

And I think it took a lot longer for the inventory correction to really get fully flushed through and to see that really become quite stable.

So I think that we just sort of got -- we've just taken a lot longer to get through than we expected, and I think we also just have to look at business that gets transferred offshore.

We certainly see the anomaly of business flat here, struggling versus a year ago, but in Taiwan and Southeast Asia growing very quickly.

As a result, I think the business is moving offshore.

I don't want to put words in your mouth, but your distributors have a pretty good feel for their own customers' inventories and they feel comfortable with those levels also?

I think so.

I think at the moment we really believe it has stabilized.

Okay.

Thank you very much.

And we did have one more question from John Franzreb from Sidoti & Company.

Good morning, guys.

Hi, John.

Just a question about the weakness in telecom.

I don't know if you have any kind of color on this, but do you think any of it's related to the breakup of China Unicom and its absorption by China Telecom and Netcom, or does that not play into the mix at all?

Well, I think that's all part of the China slowdown that has happened.

I do believe that's the case.

I think there are several things, the macroeconomic China slowing down the economy, the delay in the 3G infrastructure build out, and I think those are all related factors.

We certainly think it's still an attractive market for the future, but I think we've just seen it wasn't as buoyant as a year ago.

Right.

So, maybe when they finally work out the particulars of this, this might be an '06 kind of a rebound in the China telecommunications market?

We believe so.

Is that what you were thinking here?

Yes, I think so.

Okay.

Thank you very much.

Thank you.

And that does conclude today's question and answer session.

I'd like to turn the conference over to Mr. Gordon Hunter for additional or closing remarks.

I'd just like to thank you all for your questions, and we look forward to seeing you one quarter from now.

And that does conclude today's conference call.

We thank you for your participation.

And you may disconnect at this time.