Littelfuse Inc (LFUS) 2006 Q1 法說會逐字稿

Welcome to Littelfuse's first quarter of 2006 earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the call over to the President and Chief Executive Officer, Mr. Gordon Hunter.

Please go ahead, sir.

Thank you.

Good morning, and welcome to the Littelfuse first quarter 2006 conference call.

Joining me today is Philip Franklin, our Vice President of Operations Support, and CFO.

As you saw from our news release, this was a very good quarter for Littelfuse.

First quarter sales were a record for any first quarter in our history, and diluted earnings per share from continuing operations were double those from last year's first quarter.

We also made good progress on our growth strategies as we will share with you later in the call.

We will begin today's call with a safe harbor statement and a brief summary of our press release, and I will provide additional comment on the first quarter results as well as trends in our three businesses and activity related to our major corporate initiatives.

After that, we will open the call up for questions.

We expect the call to last about 45 minutes.

I will now turn the call over to Phil.

Thanks, Gordon.

First the Safe Harbor language: Any forward-looking statements contained herein involve risks and uncertainties including but not limited to product demand and market acceptance, risks, effective economic conditions, the impact of competitive products and pricing, product development and patent protection, commercialization and technological difficulties, capacity and supply constraints, the impact of changes in commodity prices, exchange rate fluctuations, actual purchases under agreements, effect of the Company's accounting policies, labor disputes, restructuring costs and other risks which maybe detail in the Company's SEC files.

The ramp-up in our electronic business which began toward the end of 2005 has now evolved into a broad based markets up turn.

This strength in electronics was the main reason that overall sales were up 10% year-over-year for the first quarter, or 13% in constant currency.

Sequentially, sales increased 9% which is slightly below our pre-announcement guidance of at least 10%, primarily due to some temporary softness in electrical sales in March.

Diluted earnings per share from continuing operations were $0.49.

That is excluding the impact of FAS restructuring charge.

Compared to our most recent earnings of $0.40 this margin expansion for the quarter exceeded our earlier expectations.

As we stated in our press release this morning, all regions and end markets are currently trending positive, with particular strength in Telecom.

Geographically, Asia led the way with a 19% year-over-year increase.

Taiwan, China and Japan were the standout performers, with the Korean automotive business also a contributor.

North America grew 9% for the quarter, with electronic distribution the primary driver, and the electrical business also contributing.

Europe sales increased 2% in dollars, but 11% in local currency, due to strong growth through electronic distributors, and modest growth in the automotive OEM segment.

Gross margin excluding restructuring charges improved 260 basis points, reflecting higher plant utilization rates and the effect of continued cost reduction activities.

We also benefited in the quarter from substantial leverage in our operating expenses.

Even with higher sales, our increased R&D investment was more than offset by reduced SG&A spending.

So the combination of higher sales, improving gross margins, and tight control of SG&A spending generated a 630 basis point improvement in adjusted operating margin to 13.8%.

Free cash flow was also very strong for the first quarter at 9.4 million due to improving profitability, good working capital control, and lower bonus payments.

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

Thanks, Phil.

I'll start with electronics business which as Phil indicated drove a strong first quarter performance with a 15% increase in year-over-year sales for the quarter.

Electronics is our largest business unit accounting for approximately 2/3 of total sales.

As expected, sales increased sequentially from the fourth quarter of last year across all end markets, and all geographic areas.

We benefited from the continued strong recovery of the Telecom market, as well as solid growth in the overall electronics market.

These two factors were the primary drivers behind the sales increases in both North America and Europe.

The Telecom recovery also contributed to the increase in Asia sales along with new design wins in the customer premise equipment segment of the Telecom market, and strong growth in the digital consumer electronics market.

We achieved double digit growth across all product categories, with silicon products up 12%, futures up 18%, and other electronic products up 14% for the quarter.

As a result of this market strength, the electronics business ended the quarter with a book to bill ratio of 1.17.

The book to bill ratio at this point in the second quarter has been less robust at 1.07 for the entire electronics business, and 0.88 for North America, due primarily to strong sales in the region.

With orders flattening and inventory distribution beginning to increase, it would not be surprises to see some correction in the second half of the year.

That being said, based on the data we have, we expect the overall trend of increasing sales to continue in the second quarter.

This is due to further recovery in the Telecom market, continued strength in our key electronic end markets, that I'll discuss in more detail in a few minutes, and traditionally, positive seasonality.

We believe we are well positioned on the operating side to accommodate this growth.

We've been able to ramp up our operations to meet the increased demand levels in the first quarter, and we believe we will be able to continue to meet the robust demand we anticipate in the second quarter.

This is due to the flexibility we've gained by moving important production and support operations including our engineering and support teams closer to our customers in Asia, establishing three worldwide distribution centers that are aligned with product manufacturing in each key region, and increasing our emphasis on global purchasing and outsourcing initiatives that links supplier relationships with manufacturing needs.

Our lean manufacturing efforts are now paying off as we can react to the increase in volume levels with minimal operational adjustments.

While there are a number exciting developments in virtually all of our end markets, I would like to highlight a number of industry trends we believe are excellent future growth opportunities for Littelfuse There are a number of high growth segments in the consumer electronics market, and Littelfuse has strong participation in all of them.

The top three fastest growing consumer electronics devices in the period from 2003 to 2009 are predicted to be portable digital audio players, with a 57% compounded annual growth rate, LCD televisions, at 52%, and DVD recorders at 51% according to Instep.

These niche consumer electronic applications have been strong contributors to our electronics performance, as we sell more of our product due to original equipment manufacturers, and original design manufacturers who produced them.

Some of our strong Asia performance in 2005 and in this year's first quarter can be contributed to the steady growth of these market segments.

For many consumers MP3 players are a must-have product that are continuing to expand through the introduction of new models, and added features.

According to information from Apple Computer, the company shipped 8.5 million IPODs in the first quarter, a 60% increase over the same period a year ago, and a dramatic indicator of the success of these products.

Every single IPOD produced today is protected by Littelfuse circuit protection components.

Mobile phones are another fast growing market segment.

Total shipments of 227 million units were up 26% in the first quarter compared to the same period last year, according to IDC although shipments were down 7% from the fourth quarter of last year due to the traditional seasonal dip after the holidays.

Much of this growth is in developing countries such as India, where some people are purchasing their first ever cell phone and China, where some consumers are purchasing their first cell phone, and others are now upgrading to new models with enhanced features.

Nokia and Motorola both posted strong year-over-year results in the first quarter of 2006, with Nokia mobile phone unit shipments up 40%, and Motorola mobile phone union shipments up 61% for the quarter.

Nokia continues to expect a 15% increase in unit shipments for the mobile phone market in 2006, as well as sequential growth in the second quarter.

The mobile phone market has been a focus area for Littelfuse through sales to these and other key OEMs.

The significant sales increase in our thin film fuse and USB product offerings reflect the success of this high growth market segment.

Regionally, the strong mobile phone market has boosted our Asian sales performance as many of the leading mobile phone companies are based in Asia, or have significant operations there.

One of the sub segments of the mobile phone market that we believe has good future growth potential for us is digital media broadcasting.

This technology enables consumers to watch live digital TV broadcast on their mobile phones.

We are seeing a growing consumer trend towards this technology in countries such as Korea, China, and Japan, which are on the leading edge of global mobile phone product development.

This is good news for Littelfuse as frequently these types of phones require an increased amount of circuit protection because of their more sophisticated functionality.

For example, a typical mobile phone equipped for digital media broadcasting could contain up to five Littelfuse technologies: CTC's, fuses, diode rays, metal oxide arresters, and polymer devices with a total value of up to $0.40 or $0.50 per unit.

Another growth area is end applications that utilize an emerging high definition multimedia interface known at HDMI.

Shipments of HDMI enabled devices increased from 5 million in 2004 to 17.4 million in 2005.

This bodes well for our recently expanded polymer ESD product offering which is targeting high-data rate applications.

The HDMI interface is increasingly being incorporated into many consumer electronics applications, such as LCD TV's, and DVD players and recorders, which carry data at very fast speeds, and require special ESD protection.

Our line of polymer ESD product is capability of carrying the stringent product performance demanded by the HDMI circuit.

Performance on HDMI application has been especially strong in the Japanese region, as many of the key OEMs behind the consumer product companies that use HDMI interfaces are Japanese.

Computers and laptops continue to grow as well.

The category is expected to grow about 10% in units, due to the continuing strength of the Personal PC market, especially Notebooks.

This segment grew 12.9 % in 2005, over 2004, fueled by 20 % year-over-year growth in Asia.

Moving on to our corporate growth initiatives, the electronics SBU moved forward in several of our focus areas during the quarter.

As we've discussed in prior quarters, one of our strategies is to work closely with our customers to bring our circuit protection expertise to the design of their new products and product applications.

Our target for the electronics business is to generate $20 million in sales through new business designing opportunities in 2006.

We hit the ground running in the first quarter with over 3.3 million in sales, resulting from several key design wins.

Of this total about 1.3 million or 40% of these new design wins is from newly developed products.

One of these wins is for our TVS diode power line protection products that will be used in 3G wireless Telecom bay station in China.

Each bay station will contain about $26 of Littelfuse products with a total value exceeding $1 million.

One of our key sales engineers in China worked very closely on this opportunity, meeting numerous times with the customer DaTang [ph] to gain a thorough understanding of the customer's application needs.

This particular application had some unique requirements that the engineer articulated through the development team in Irving, Texas.

They Irving team developed customer designs and new product samples in a very fast turn around, resulting in a significant order for Littelfuse, and cementing another strong customer relationship.

Another win is a voice-over IP telephone modem application for Vonage, a high speed Internet phone service.

This win was a successful combination of our worldwide sales footprint and our full circuit protection product offering that provided a total solution for the customer.

Littelfuse technology on these new phone modems includes fuses,SIDACtor and voices.

This worldwide project included coordinating efforts between Littelfuse sales engineers around the world, and customer locations in North America, England and China.

The demand for our products came on strong beginning at the end of 2005, with orders for large quantities of product on a tight time line, and of course, Littelfuse delivered.

The third win is for our TR 5 fuse line acquired through the Heinrich acquisition.

The design in for these products which would be used a new mobile phone charger for Motorola was handled in Germany.

We added this business as a result of the strong Wickman name and presence in Germany, and successful team effort between the two lead designing and manufacturing engineers who put the project together.

These are just a few examples of new business opportunities we are pursuing.

These opportunities highlight our ability to work closer with our customers by applying our industry leading circuit protection expertise to new products as they are developed.

The second corporate strategy for Littelfuse is to leverage and improve the Asia position.

During the quarter, the electronics business continued to upgrade and develop the Asian go to market team.

In the last two years, we've upgraded 70% of our team, adding experienced technical California design capabilities, and in addition to implementing a field application engineering function in all major regions in Asia.

Finally, as many of you already know, we have focused on making strategic acquisitions and partnerships that strengthen our product portfolio, and add new markets and customers to Littelfuse.

The electronics business made excellent progress on this initiative in the first quarter with three major announcements.

In February, we acquired SurgX Corporation based in San Jose, California.

This acquisition solidified our position at the market leader in polymer ESD circuit protection product and technology.

As I mentioned earlier, this technology is ideal for high speed data interfaces such as HDMI and DDI that are used in product offering LCD's, TV's, computers, mobile phones, and many other electronic applications.

Also in February, we announced the definitive agreement for the acquisition of Concorde semiconductor a leading Taiwan based designer and manufacturing of TVS diodes, and other overvoltage circuit protection products.

One of the most significant aspects of this acquisition is Concorde's silicon wafer fab facility in Asia.

The addition of this facility will further strengthen our capabilities in Asia and will complement our existing silicon design, manufacturing capabilities in Irving, Texas, and Mexico.

Our plan is to expand the Concorde semiconductor operations in Asia as we continue to grow in this region.

The third announcement during the quarter was our expanded relationship with Polytronix, our Polymer PTC partner in Taiwan.

Littelfuse has a minority interest in this company.

Polymer PTC products protect against over current conditions in consumer electronics, computer, Telecom, mobile power, and other electronic applications.

This new business cooperation agreement greatly expands our product portfolio in this key product area.

This agreement is focused on developing new products that leverage our combined technology base and market reach.

As we look ahead, there are a number of products that we believe will continue to drive electronics markets.

These includes LCD TVs and DVD players in the consumer electronics segment, and applications such as voice-over IP and set top boxes, in the customer premise, equipment segment of the Telecom market.

With the advent of HDMI, many customers will want to change out and upgrade their existing TV's and DVDs to the latest technology.

An emerging market within this segment is high definition DVD players, the next wave in DVD technology.

So first, there were DVD players, then DVD recorders, and now high definition DVD players, that use one of the new digital optical storage formats, HDDVD, or blue rid disk.

These two competing storage formats provide greater resolution in today's standard DVD disks.

Our extensive product offerings, recent acquisitions, and much of our new product development is focused on taking advantage of these fast-growing markets, and new technologies to fuel our future growth.

In summary, as I indicated earlier, we are cautiously optimistic about the rest of the year for our electronics business.

We anticipate continued growth in the second quarter, although, as I mentioned earlier, the flattening order and inventory build up in the distribution channel to lead to some correction later on in the year.

Overall, however, we believe our electronics business is well positioned for long term growth.

The acquisitions we made over the past few years and most recently in the first quarter, expand our product portfolio as well as our ability to develop the leading edge circuit protection products of the future.

Next I'd like to comment on our automotive business unit that account for about 25% of our total revenues.

First quarter automotive sales were up 4% in constant currency over the same quarter last year on a 3.6% growth in global car bills.

This growth came from gains in our after market segment, the European off road truck and bus segment, and mark share gains in China and Korea.

The global off road truck and bus market is a new market segment for us we entered in the beginning of this year.

This market provides opportunities to leverage our core products and technologies in new applications and we are pleased with initial response from this market.

Sales in the North American passenger car segment declined slightly.

The major contributor to this decrease was the continued shift in vehicle mix away from light trucks and SUVs where we have higher product content to small and midsized sedans where our content is lower.

We are activity working to counteract this content shift over the mid to long-term by pursuing designing opportunities with new applications and products on trucks and SUVs as well as on sedans.

However, as you know, there is considerable lead time for new product development in this business due to the length of the design cycles for new vehicles.

JD Power's current outlook for 2006 still shows very modest car builds increases of 1% to 1.5% North America and Europe.

Much of the growth in global vehicle production is in Asia.

Globally, JD Power forecasted about a 3% increase in vehicle production, which is down from last quarter's view of 2006.

With Asia the fastest growing geographic area for vehicle production, we have continued to increase our presence in this region.

We have particularly focused on the emerging hybrid electric vehicle market in Japan, steady car bill increases in China, market share gains in a strong Korean market, and the emerging India market.

We also want to expand our presence in Brazil by working more directly with customers in this market.

As we've discussed on prior calls, we see significant opportunity for growth in our new high current products such as our master fuse, Cable Pro, and BF inline fuses.

This opportunity is driven by the increasing number of systems in the vehicle that require higher power, such as electronic power steering, PTC heating systems, and diesel engines, and Battax engine strategies.

We've achieved key wins for our new master fuse products that pave the way for future growth with customers including BMW, in Europe, and Ford in North America.

New business opportunities in Asia continue to be very robust.

We see significant gains in Korea.

Our sales efforts in China are beginning to show results and our activities in Japan have opened up significant new opportunity for us to pursue in multiple areas of key accounts.

These areas include securing new business on recently launched products, gaining key Japanese OEM product approvals, and launching activities to develop major new products for Japanese tier 1 and OEM customers.

Of course, we continue to work to maintain and build our already strong position in North America and Europe.

One factor that is a concern is the substantial increase our automotive product lines are experiencing in commodity prices, particularly zinc and copper.

We are developing plans to pass these costs increases through to the market as much as possible.

While this is a current challenge for us, overall, we are excited about the growth opportunities in the automotive market.

We believe that over time, they will outweigh the competitive and commodity price pressures we are currently experiencing.

That brings me to our third business unit, the Powr-Gard electrical businesses that sells only in North America and comprises about 10% of total Littelfuse's sales.

Sales in this business increased 6% in the first quarter of 2006, compared to the same quarter last year.

I should note the last year's first quarter was 15% ahead of of the first quarter of 2004, making this quarter a tough comparison.

In addition, we had expected a stronger rebound in demand for fuses in the non-residential construction business than actually occurred in the quarter.

One very positive development is our success in continuing to pass on price increases and effectively managed pricing.

We generated about 3% in price realization during the first quarter.

About 50% of our electric sales are in the industrial market with the other half in the nonresidential construction market.

The industrial sector that we sell our MRO replacement fuses into grew about 3.5% in the first quarter, and shipments of OEM products ing our fuses increased about 9.4% of the quarter indicating continued growth in overall industrial activity.

Over half of our business is the nonresidential construction market.

This market was very strong in the first quarter with a 16% increase in new contracts over the prior year quarter according to McGraw Hill Construction.

A recent article in this publication indicated that nonresidential building has been helped by the start of several major projects, plus improving market fundamentals, which at least to this point in 2006 appears to be outweighing any dampening coming from higher materials costs.

Since fuses are typically one of the last items put in place in new building, the contracts could potentially generate increased sales for our electrical business in the next 6 to 12 months.

Electrical business continued to move forward with its strategies to pursue opportunities in the OEM segment, and strengthen customer relations by offering services that help them to better operate their business.

One of these services is educating customers on the dangers associated with what is called an arc flash event a random dangerous short circuit event that can occur in virtually any type of industrial setting.

Fuses when properly applied will help minimize the dangers of such an occurrence.

We are convinced that MRO replacement fuse customers receive the real value of an arc flash hazard assessment from Littelfuse because of the potential costs of a short circuit event in terms of employee injuries and lost production time.

We believe this service meets a customer need in the marketplace, and offers good opportunities to reinforce our position as the leading experts in circuit production.

Both the industrial and non-residential construction drivers are expected to remain strong in the second quarter, and the balance of the year.

The real challenge we currently face is the rise in commodity pricing especially copper that is used as a core raw material in many of our power fuse products.

Continued increases in commodity pricing could dampen the positive industry trends I mentioned earlier especially in the nonresidential construction market.

We've been very fortunate in our ability to raise prices and will continue to obtain price increases wherever possible to offset the unfavorable impact of rising copper prices on our margins.

In addition to the business units I covered, there's one more area I would like to discuss.

While all three business units sell to different markets they have many things in common.

First, and foremost, is a strong technology base we developed both internally and through strategic acquisitions.

We have more circuit protection technologies than any other company in the world, a competitive advantage that provides opportunities to leverage our reputation, and cross sell products between our businesses.

We are not resting on our laurels.

We continue to provide the advanced technology our customers need or might not even know they need right now.

We increased our investments in research and development last year.

We've continuing this commitment in 2006 with R&D expenditures up over 9% in the first quarter of 2006 over the prior year quarter.

Improving our cost structure continues to be a major focus across the entire Company.

We have numerous programs underway to reduce costs and increase efficiently and the improvement in operating margins has Phil discussed shows we are making good progress.

In summary, we believe 2006 is off to a great start, and we are optimistic about our ability to continue this momentum into the second quarter.

I'll now turn the call back to Phil who will comment on our guidance for the second quarter, and we will open the call for questions.

Thanks, Gordon.

So looking at the second quarter, with strong electronics momentum, and typical seasonal strength for the electrical business, we expect a 5% to 8% sequential sales increase in the second quarter compared to first quarter: We expect that further margin improvement from operating leverage and cost reductions will be offset by higher commodity prices such that operating margins in Q2 will be similar to Q1, excluding the restructuring charges.

Let me talk for a moment about commodity prices, which Gordon touched on also.

These could materially affect us going forward if current trends continue.

The most impactful commodity prices to our business are zinc, copper and silver, each of which has increased 40% to 50 % since March 1.

These prices are now roughly double the average prices in 2005.

At the current prices, these commodities will add almost $2 million of costs to the second quarter compared to the first quarter.

Electrical business has already announced a 6% price increase, and other two businesses are developing plans as Gordon mentioned to pass as much of this through to the market as possible.

Even if we aren't successful, however, there could be a significant lag before the price increases take effect.

The effective tax rate for the second quarter should be lower than Q1, although how much lower will depend on the timing of certain one-time tax benefits.

The full year effective tax rate will likely be in the range of 32% to 35%.

Diluted EPS are expected to be in the range of $0.45 to $0.50 for the second quarter.

This includes stock based compensation expense.

This excludes restructuring charges.This concludes our prepared remarks.

We would now like to open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Alexander Paris with Barrington Research.

Go ahead, please.

Great quarter.

On your guidance, your sales guidance, particularly in the second quarter, are you including anything for Concorde, or are you waiting for that to actually close?

That's a good point, Alex.

None of this guidance includes anything for Concord, although as we mentioned in the press release, we do expect to close that deal in the second quarter, so assuming all things go well, we will have Concorde for the back half of the year.

What would you expect the current run rate is once you have add it that you would add for the second half?

The revenues for Concorde are in the $16 million to $17 million a year level.

Uh-huh.

And the Efen sale cash proceeds, those were already reflected in your balance sheet numbers?

Yes.

Those would have been reflected in our quarter end, first quarter end balance sheet.

The restructuring charges, can you just give us a summary of what that was in the first quarter in cents per share, and what you expect it to be in the second quarter?

And the rest of the year?

Does it trail off as we go forward?

These were one-time, this was one-time shot hopefully of Heinrich expenses that were really, as we get further along in the Heinrich integration, and we really complete fully the latest view of how that integration plays out, we found some additional reductions that we needed to make over and above those which were assumed in the purchase accounting reserves when we first acquired Heinrich.

So that's what these charges are, and the intent is with the charge we took in the first quarter that we would fully cover the remaining Heinrich charges.

There could be some small charges, you know, in future quarters, but this is the bulk of it.

One other quick question of the looking at the automotive, if world sales were roughly flat this year, which is a good estimate, and maybe the same 2007, what kind of, say, global electronic content growth are you seeing now that would, in other words, if it were flat, would you expect to see on your sales from increment on content growth?

Alex, this is Gordon.

Yeah, I think it's true that the total vehicle production is relatively flat, and shift particularly in North America from SUVs and larger vehicles in electronic content and vehicles, I think that is still in the sort of mid to high single digits, and that's an area where we wish to focus.

And do you have some wins you've had in the past that will start resulting in sales in 2007?

We expect to have.

We have been investing as I said in some earlier calls, in new product development in the automotive area, both in some of the specific segments like off-road and truck and bus, to our current segments, and with a focus into automotive electronics.

Thank you very much.

Thank you.

Our next question comes from John Franzreb at Sidoti & Company.

A couple of questions.

Back to the guidance, $0.45 to $0.50, what is the number in the first quarter that's comparable meaning they both include the impact of FAS 123?

If we took out restructuring and include the stock compensation expense in the quarter the number was $0.45.

So, you know, we are talking about a quarter that is flat, up $0.05 from Q1.

Okay.

Perfect.

Exactly what I was looking for.

Now, you're talking about raising prices.

Historically, in the electronics and in the auto sector, you've had to give back on pricing.

What kind of confidence level do you have to be able to push through price increases in that kind of difficult environment?

We've been looking at the whole industry particularly in the automotive world, and I think there's just a general movement to a lot of these extreme commodity price increases being passed through, and I think that it's going to be certainly a challenge, but it's an area that we believe is going to happen in the industry.

As it has happened, consistently in the electrical industry in this country we've had over the past couple of years significant price increases based on the rising costs of raw materials.

And I think we are now starting to see that happening in the other segments.

I will say, John, that we do have some longer term contracts, particularly in automotive, that would, cause us to take some time to be able to pass those through, assuming we were able to do it.

Would this be one of those surcharges, or looking at general price increases?

We are looking at various options at this point.

We haven't finalized our strategy there yet.

And regarding Efen, what was the last year's sales number, if I want to account for sales numbers on a year-over-year basis.

How much of Efen was in the first quarter of '05?

We have a, you know, I think we filed an A-K that showed that the full year, 2005, excluding the Efen sales, but I can tell you that, let's see, for 2005, last year's second quarter was excluding Efen was 115.7 million.

Okay.

And one last question, could you just talk about some of the trends you are seeing in telecommunications market in China?

I know it was spotty in the second half of last year with a lot of other companies that I cover, just kind of talk about what you are seeing going on there right now for the first half of '06?

We have starting to see strengthening, we had a year ago, a period where we saw it soft, and of course, the much waited 3G wireless build-out, we've seen it starting to happen, and that's important for us, so that's encouraging to see that happening.

Thank you, guys.

Our next question comes from Jeff Rosenberg with William Blair.

Go ahead please.

First of all, Phil, can you talk about what lead times are at Teccor right now?

We haven't seen too much of a change in lead times, our normal lead times are in the kind of in the ten week time frame, and I think there may be a few exceptions, but generally, we've been able to maintain our lead times fairly well.

I think with, again, there's been some pressure on a few products, but generally, we haven't gone out much from the ten weeks.

You are comfortable that order rates are more reflective of new products and demand as opposed to double ordering possibilities?

I think we generally feel that, although as Gordon indicated, I think in his comments that the very strong order rate that we saw in the first quarter and into the second quarter, you know, we have seen that moderate, and I think in part, that was distributors and others getting in line and in the order book anyway, in terms of you know, the actual shipments we've had.

We don't see any real evidence that those numbers are overstated or poised to come down in any way.

Okay.

And then with the increase you are seeing in sales in Asia and, I guess, I would expect maybe more direct to the OEM, can you give us an update on what percentage of your revenues go through distribution?

Electronics?

Yeah, I'm thinking electronics.

Specifically electronics, probably in the 75% to 80 % range.

Okay.

And does that improve your confidence in being able to get price increases through, given through the distribution channel, or some of those more through Asian distributors where you are still dealing more direct with the customer, and there's not as much-- -- how much is through the traditional channel where I think you have a good ability to put that price increase through.

That's correct.

So no caveat there relative to international distributors where it's more of a sales channel as opposed to stocking distributors?

That's correct.

Okay.

And can you give us a current update of your automotive sales by geography?

In terms of a region where we are selling automotive?

Your sales, North America, Europe, Asia, currently the breakdown in automotive, roughly.

Sure, let me grab that.

It's still largely North America and Europe, although Asia is growing rapidly.

If we look at percentage-wise, you know, North America is still in the neighborhood of about 45%, Europe is about roughly 40% to 45%, and Asia at the moment is less than 10%.

Okay.

And then last question I had, in terms of the plans to expands capacity at Concorde, can you talk about what the, what that might mean for your CapEx, and is there opportunity to move equipment from other places, maybe a bit more color on the timing and magnitude of the plan there?

Just in terms of the general build-up of the Concorde platform?

Yeah, building your semiconductor capacity in Asia, maybe a little bit more detail there.

Those plans are still kind of early times, Jeff, but I think you can bank on the fact that we will, I mean one of the main reasons we acquires that was for a mat form to build off, and we have a number of semiconductor new product initiatives going on, some of them are through design houses in Asia, and we have a whole range of opportunities in terms of semiconductor products we could build in those facilities.

And I guess broadly on that point, do you feel like you've, as you make your way in the second half of the year that you have got enough new product introduction to have better diversification from the high voltage protection versus stuff that might diversify you if there's any fluctuations in Telecom demand?

Or is that going to take longer before you feel like you can try to address that volatility?

That's a good point.

That's part of the strategy, Jeff.

When we started the semiconductor initiatives with the first acquisition, with significant acquisition with Teccor, you know, we have a fairly narrow product offering, and that saw some volatility last year.

But we have the diodes that are used in many other market segments, not just in the Telecom offering but spread much broader, and also focusing on diode array products, we are expect to have a broader semiconductor offering that takes away that volatility of just being in the Telecom high voltage protection area.

Okay.

Thanks.

Thank you.

Our next question is from Greg Halter with Great Lakes Review.

Go ahead please.

Hello, and thank you for taking the questions.

I noticed in your release that you discuss the share repurchase authorization of a million shares and given the state of your balance sheet, which is in very fine shape, wondered about your appetite of acquiring shares under that authorization.

Sure, Greg.

We've operated historically, and I think we will continue to in the future.

We are going to balance our view about acquisitions in the pipeline, and need for cash to fund those acquisitions versus other options like stock buy-back, and the other factor we would look at there would be where the current price of the stock is, versus what we think the prospects are, so we would tend to take a bit of a view on how the stock is currently valued as well when we make those kind of decisions.

We would factor in a number of factors, but certainly the Board having the confidence to give us that authorization, certainly that's something we will continue to look at, at appropriate times, we in all likelihood will be buying shares.

Okay, and on your balance sheet, there's a category called investments, I presume under the long term section, $5.6 million, can you elaborate a little more on what is comprised of that figure?

I believe what you are referring to is the investment that we have in Polytronix Corp. which is the minority investment that Gordon referred to in his prepared remarks.

Okay great, and looking at Japan, and the auto side, I know you don't have much of a position or a position there, and I think there's some agreement with Pacific Engineering or so forth.

I'm wondering if you could elaborate on your plans regarding Japan and China and Korea, and maybe in some other Asian areas.

That's a good point.

We've said many times we have continuing focus on Asia so we've had a historical arrangement for some products with Pacific Engineering, but as we develop more and more products, we feel it's critical for our long term global automotive business to have more direct relationships.

For example the hybrids vehicle market where Japan is critical in being the leader in that market, and we've had success there, and working very closely with the OEMs, so as we've seen, you know, rapid growth in Korea, where we've had a strong position we intend to continue that focus across the whole of Asia.

Gordon, going back to your discuss on the Powr-Gard side, you indicated about 50% is industrial, 50% non-residential, and I missed the component growth pieces of the segment on a year-over-year basis.

Component, the market segment growth?

Yes.

Yeah, there's a very strong report from McGraw Hill that I quoted in nonresidential construction, which is up dramatically in the first quarter with new starts.

New starts at 16% it was, but Greg, you have to realize that won't start impacting the market for our fuses until probably late this year sometime.

While it's good news for the future, it didn't really have a positive impact on the first quarter.

And then on the industrial side, the market growth there?

Is that 9%?

I think 9% would be OEM fees which is an small piece of our total, and the other was like 3%, wasn't it Gordon?

That's correct, 3.5%, what we call the MRO, that's the replacement business.

That's the other big piece other than the nonresidential construction.

That's the bigger piece of the 50% that's, that is your industrial business?

Exactly, that's the typical replacement into factories, however, the OEM part which are products such as an air conditioning unit that would be built, that would take our fuse in the industrial area, that's what we call that the OEM business, that's the part that I mentioned was growing 9.4% in the quarter, and that's an area of focus for us, so that direct to OEMs for putting into their equipment such as an air conditioning unit is one of the areas that the Powr-Gard business is focused on.

Great.

And one last one.

Phil, I think you mentioned on the, in the outlook section relative to the zinc, copper and silver which are all soaring again today, by the way, you indicated you would expect them to add about $2 million to your cost in the quarter, is that based on where they are today, not factoring in any price increase or decrease from here?

Yes.

Based on where they were as of a day or two ago.

That number changes as you point out, it's changing dramatically about every day, it seems.

Right.

I think copper is up another $0.06 today, $0.07.

Thank you.

Thank you, Greg.

[OPERATOR INSTRUCTIONS] We'll go next to Amy Young Kerr with Robert W. Baird.

Good morning.

I had a question, Gordon in your comments you talked about cautiousness.

I'm curious, are you seeing something specific or do you feel that the growth you are seeing right now or strength is not sustainable, and if you can just speak to it more on the Teccor side or other parts of the electronics business?

It's not one product specific, and it's something that the electronics industry historically has gone through, particularly with distribution, and I think many calls this quarter from other companies have pointed this out, too.

So we are trying to observe that very carefully, we've seen inventory levels at distributors picking up a little, although not at levels that would give us real concern that we've seen in the past.

But we are just pointing that out that the growth, as so much of our business goes through distribution, seeing that growth, we have to monitor their sales into the market, but also inventory levels, so we have some concern that there may be some double booking for products that happens when the market gets a little ahead of itself.

So we just want to make sure we point that out, and I think we are not looking at a significant correction, but we are concerned enough to say that we think that there might be some flattening in the second half.

Just to add to Gordon's comments, Amy, I think, for example, we talked about a book to bill of 1.17.

I think to take that 1.17 and begin to extrapolate that out into second quarter or second half growth rates would be a mistake in our view, because we have seen, we still are at nice levels, and levels we make good margins at, we've seen as we mentioned several times in our prepared remarks, We have seen a flattening of orders, so I think right now, it's really more of a flattening we are seeing, historically, there have been corrections in this industry, so we shouldn't extrapolate these great trends we are seeing right now out too far into the future.

That's helpful.

Just one last question from me.

Did you benefit at all from the Heinrich integration in either of first quarter or second quarter?

Is this still expected to really impact the back half of the year?

I mean, we get some impact, we did get some impact in the first half of the year, and, but let me just try to characterize.

The expected savings for the year 2006 are in the neighborhood of about $5 million from that we did get some in the first half, we expect a little bit more in the second half.

We also have increased the overall savings levels with a plan that necessitated a little over $2 million restructuring charges we took in the first quarter, and so that will add to those, to that 5 million savings, but that's almost all out in 2007, so we will see some additional savings in 2007, mostly in the first half of 2007 over and above the $5 million in 2006.

Great, thank you.

We'll go next to Alexander Paris at Barrington Research.

I think you answered most of this question, but the flattening in sales you are talking about, is that from distributors primarily?

Yes, I think we are primarily talking about that.

I think the programs we have joined directly with OEMs, I think we have better information on their bills of new products, and that's a focus area for us is to have those direct relationship to OEMs, so that we really can design products on their new platforms, but it usually does give better visibility when you can work with an OEM on their direct forecasts.

Okay.

Is it accurate to say that maybe in the first quarter in the first half that the distributors went from an under inventory position to position that is now more normal so that you wouldn't see that same in incremental ordering in the second half?

That's a very good summary of where we think it is, and I think just the fact that inventories have crept up a little bit, we are just giving that word of caution.

We've had a great quarter, it's been very strong, but we are just giving the caution there's a creeping up the that, and I don't think it's at high levels of inventory at all.

And just one thing, in Japan, I think I forgot.

Is that, is in the Pacific that you work with there?

Are you just, you are receiving just royalties?

We have been receiving royalties, but that's, those actually are coming to an end over a period of time.

Thanks very much.

Thank you.

We have no further questions at this time.

I will now turn the conference back over to management for any closing comments.

Thank you.

Well, to summarize today's call, we've had a great first quarter, and we look forward to continued improvement in the second quarter and beyond.

So thank you for joining us this morning and for your ongoing interest and support.

We look forward to talking to you again next quarter.

That does conclude today's conference call.

Again, we do appreciate your participation.

You may disconnect your line at this time.