Littelfuse Inc (LFUS) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse, Inc., 4th quarter 2006 earnings conference call.

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

Thank you and welcome to the Littelfuse 2006 conference call. Here with me today is Phil Franklin, our Chief Executive Officer. As you saw in the news release, the 4th quarter came in at the high end of our earnings expectations with very strong cash flow performance. The expected fourth quarter sales results did not stop us from achieving record sales and cash flow for the year, along with a significant in earnings.

We also made excellent progress on our strategic objectives. Phil will begin today's call with a Safe Harbor statement and a brief summary of unusual release. And I will provide additional comments on the 4th quarter and review the highlights of 2006 and the outlook for 2007.

After that, we'll open the call for questions. We plan for this call to last about 40 minutes. I'll now turn the call over to Phil.

Thanks, Gordon. First, the Safe Harbor language.

Any forward-looking statements contained herein involves risks and uncertainties including, but not limited to product demand and market acceptance, risks, the effect of economic conditions, the impact of competitive products and pricing, product development and patent protection, commercialization and technological difficulties, capacity supply and restraints, the impact of changes in commodity prices, exchange rate fluctuations, actual purchases under agreement, the effect of company's accounting policies, structuring costs and excess and expectations and other risks which may be detailed in the company's SEC filings.

So, the 4th quarter played out much as we expected. Sales declined 11% sequentially, which was within the range of our guidance, which called for a 10% to 15% sequential decline. Diluted earnings per share adjusted for restructuring charges and one-time task benefits were $0.25 for the quarter, which was at the high end of our guidance, $0.18 to $0.25.

The sequential sales decline was due to the effects of the electronics inventory correction on top of normal seasonal factors. Compared to the prior year quarter, however, sales for the fourth quarter of 2006 were up $12.5 million or 10.8% due to higher electronic and automotive sales in Asia, due to higher electronic and automotive sales in Asia, the effect of recent acquisitions and favorable currency impact.

As expected, operating margins for the fourth quarter, excluding restructuring charges, dropped to just over 6% due to operating leverage associated with a sequential sales decline and temporary costs related to plant moves and acquisition integrations.

We expect margins to improve over the next few quarters as these temporary costs become less significant and operating leverage becomes more favorable. Sales for the year 2006 were a record $535 million, which was up 15% from the prior year, 12% in constant currency.

Major growth driver was strength in our electronics business across all regions. Automotive growth outside of North America in continued steady growth in our electrical business also contributed. GAAP earnings per share for 2006 were $1.06, which was a 38% increase from 2005. Due to higher sales and significant progress on cost reductions partially offset by restructuring charges.

Our greatest achievement for the year was our cash flow performance. cash flow was a record, $80.9 million, more than double that of the prior year, enough to fund four acquisitions, $20 million in Capex and $10 million in stock repurchases and still increase our cash balance.

Excellent working capital management contributed significantly to this result, with receivables outstanding dropping from 63 to 60, and inventory turns improving from 4.9 to 5.5.

Now, let me turn it back to Gordon for some market commentary and more detailed discussion of our business performance.

Thanks, Phil. As I indicated, fourth quarter sales increased over the prior year across all three of our business units. With sales of 10.7% in electronics, 10.9% in automotive. Geographically, Asia continued to be the fastest growing region with sales up 22.8% for the quarter. Sales in Europe increased 15.3%, while sales in the Americas declined 1.9%, due almost entirely to lower sales in the North American automotive market.

For the full year sales increased 19.5% in electronics, 4.2% in automotive. And 7.5% in electrical.

Geographically, Asia sales were up 22%, .7% for the year. Sales in Europe increased 13.5% and North America sales were up 8%. Looking at each of our business units, I'll start with our largest, electronics, which accounts for about 2/3 of total sales.

Electronics inventory corrections in the distribution channels, ODM's and end customers that is we have talked about for the last few quarters started as expected in the 4th quarter. The result was a 15% drop in sequential sales compared to the normal seasonal decline of between 7% and 10%. In spite of that, 4th quarter sales of $85.5 million still represented a double-digit increase over the fourth quarter of 2005 driven in part by the addition of $5 million of sales from acquired businesses.

Based on the market outlook data available today, we're anticipating that the inventory correction will continue into the second quarter so essentially we are now giving back in the first half of 2007 the inventory buildup we had in 2006.

That said, we do not see this as the same situation we had two years ago, when 2005 ended up being a down year. All of the indicators we are seeing are consistent with the strong 2006 growth, slowing to moderate growth in 2007. While it will take some time to work through the inventory correction, overall, we continue to believe that 2007 will be better than 2006 for our electronics business.

Getting back to the fourth quarter, both the Telecom and consumer electronics markets remain strong. Telecom continues on a growth path driven by voice, data and video applications. The upward trend for these applications is driving sales for both infrastructure and customer premise equipment, and in turn, sales of our Telecom Nano, SIDACtor and GDT products.

The continue strength of LCD TV sales drove increased sales of our fuse and ESD protection products. There's also a strong demand for our TMOV transient voltage surge protection suppression products. Changes in URL security standards are forcing users to use the TMOV as the preferred industry standard. And high volume white goods manufacturers increasingly prefer the TMOV as well. Shipments of new design wins were $6.7 million in the fourth quarter, bringing total design win sales to $22 million.

This exceeded our target of $20 million for the year. With a number of excellent wins that will generate incremental sales in 2007 and beyond. An example of one of these design wins is for our 0805PCT resettable fuse. Which is used in high density circuit board applications in computers, mobile phones and other general electronics products where space is at a premium. We offer the smallest size PTC in the market, adding recent win for us on popular flash drives, data storage devices produced by companies like Scandisk.

We're also well represented on the Apple iPod and the next generation Apple products such as the iPhone with design wins for our thin film fuses and ESD suppression products. These wins build on the relationship we have developed with Apple design engineers and to gain highlights the fact that we work with the leading producers of consumer electronics around the globe.

Looking ahead, we anticipate continued growth in global end markets, including Telecom, industrial, and digital consumer electrics, as well as the white goods markets in China and developing regions around the world.

To capitalize on these growth areas, we are developing new products for the next generation of Telecom needs, extending penetration of our products into the white goods market and leveraging the broadline distribution channels for our TVS diodes that are used in many consumer electronics products.

A recent move that further strengthens our new product development is the opening of an office near San Jose, California, staffed by a small team of experienced silicon ESD engineers. This team will work exclusively on new product development. It is an outstanding addition to our R&D program. You'll be hearing more about the work of this new team in future quarters.

In summary, the electronics business grew strongly in 2006, after a very disappointing 2005, we expect to build on this momentum in 2007, although as I mentioned, it will take some time to work through the excess inventory. Overall end market growth is projected to be between 3% and 5% in 2007 with the number of key markets I mentioned growing at much higher rates.

We're developing new products to capitalize on this end market growth, and are working to capture new design wins, but also continue our restructuring and cost reduction initiatives to make us an even stronger global competitor. Overall, we are very positive about electronics business and it's long term growth potential.

Next our common and automotive business unit which accounts for about 25% of total Littelfuse sales. Aided by the stronger Euro, global sales increased nearly 11% in the fourth quarter, as compared to the prior year on a 4.3% increase in car build. For the year, automotive sales increased 4.2% on a 2.3% decline in car build in our core markets of North America and western Europe. In total, global car build increased 3.8%, driven by growth in Asia and eastern Europe.

As expected the bright spots were significantly increased sales in the Asia passenger vehicle and European off-road truck and bus markets which offset a decline in North American automotive revenues. Fourth quarter North American automotive revenues were down 9% from the fourth quarter of last year. This compares to a 6% decrease in North American car build in the fourth quarter as compared to the prior year.

Fourth quarter European automotive sales increased 30.8%, driven by the stronger Euro, increased off-road truck and bus sales and the start of successful implementation of commodity surcharges with European customers. Asia automotive sales increased more than 50% on a 15.2% increase on car builds due to some market share gains in Korea and China. Although Asia is still a relatively small base.

Major contributors to the increased fourth quarter sales were a win for a recently launched cable pro, battery cable protection cable in China, share gain in the Korean market and new sales in Brazil for FIAT which ramped up during the quarter.

Our results reflect the changes under way in the industry and our activities to take advantage of these trends. The biggest shift in the industry is the continued decline in production, Ford, GM and Chrysler, and the continuing shift to Asia-based OEM's operating and North America and Europe. Vehicle production is also shifting geographically, with North American and western European productions shared declining as producers located in Asia and eastern Europe gain share.

A good example that highlights to changes underway is the automotive market in China. China is set to experience overall economic growth in the 10.5% range. However, domestic car sales climbed 30% to 5.2 million units in 2006.

We are working to capitalize on this growth by increasing our focus in Asia, while not losing focus on our historically strong regions of North America and Europe.

Our efforts in Asia to win new business include: increasing staff levels, increasing our engineering capabilities in the region, pursuing more face-to-face meetings with all levels of our customers organizations and adding local managers to expand our base in the region. Over the next two years we will continue to expand production of automotive products in Asia, to support our customers localization efforts and better serve this rapidly growing market.

Recent wins in the Asia region include a program with Yazaki for our low profile mini fuse to make meet their needs outside of Japan. This opportunity's expected to produce about $1 million in new revenue in 2007. Another recent design win is with Sumitomo in Japan for a new master fuse product that protects their wire harness, this product will launch this year.

In addition to expanding in Asia, the automotive business unit is focusing on two other growth areas, the off-road truck and bus segment and the automotive electronics business I referred to earlier. We continue to penetrate into the off-road truck segment, executing on the growth strategies we identified earlier in the year. Our increasing penetration in Europe has resulted in many smaller short-term business wins.

We introduced our portfolio to major vehicle manufacturers. On a global basis, we're continuing to analyze the market and potential opportunities, add new distribution channels and strengthen our existing channels through increased training and joint selling activities.

Our expansion into the automotive electronics market is also moving forward. We've won some small projects in Europe and in Korea achieved a design-in win at a wash joint venture with Hyundai motor company for multilayered [inaudible]. In North America and Europe we're introducing our TVS diode product line to all major automotive module manufacturers. This introduction lays the groundwork for new business opportunities and further expansion into this market in the future.

We obtained TS 60 949 quality certification for the Concord Taiwan semiconductor operation in December 2006, which paves the way for us to introduce TVS diodes for automotive applications. Later this year, we plan to launch production on six new families of axial TVS diodes and five new families of SMD TVS diodes that are being specifically designed and qualified for automotive electronics applications.

The major challenge in our automotive business continues to be the increased cost of zinc, copper and silver, and our ongoing efforts to pass on these costs.

Commodity pressures eased a little recently. But they're still significantly higher than they were a year ago. We have implemented price increases with most of our after market customers in North America and Europe and continue to work with our global OEM accounts to implement the metals surcharge. Long term agreements have made this a challenge with some OEM's, however, we've been successful with other large customers. Several customers began paying a surcharge in the fourth quarter. And we expect to see further progress in 2007.

Looking ahead, we believe the product segments with some of the greatest growth potential are our master fuse and cable pro lines. Both these products are well positioned to meet the increasing need for high current circuit protection in today's vehicles. Our plans for 2007 are to continue to execute on our strategy to offset the flat to declining car build in North American and Europe, with growth in Asia and with new products and new applications.

We've been working to lay the groundwork for our expansion into automotive electronics, and the off-road truck and bus segment and anticipate further progress in 2007 through new products and expanding market activities. As all of these examples illustrate, we remain very positive about the long-term outlook for automotive business and our ability to leverage our well-established circuit protection expertise into increased sales and earnings in the years ahead.

That brings me to our third business unit, the POWR-GARD electrical business, which sells only in North America and comprises about 10% of total Littelfuse sales. Sales in this business increased 11.4% in the fourth quarter, as compared to the prior year, and 7.5% for the year.

The strong fourth quarter sales reflect the impact of the price increases implemented in 2006, and the continuing strength of the nonresidential construction segment. Our electrical business has done an excellent job of increasing prices and reducing costs to offset the impact of higher copper prices resulting in stable margins. Our results also benefited from the unusually warm weather in certain regions of the U.S. Which helped to drive double-digit increases in nonresidential construction throughout the quarter according to data provided by McGraw Hill.

According to data from the Federal Reserve Board, manufacturing activity was strong all year with the fourth quarter slowing a little, but still strong. This is offset somewhat by a decline in electrical manufacturing shipments, a measure of the OEM product shipments that use our fuses. This could become a factor in 2007 if this trend continues, but at this point it's too early to project.

As with our other two business developments, new product development is also a focus for the business. We've reengineered some of our commonly used fuse holders to include features that reduce assembly time and costs for our OEM customers. Our emphasis in 2006 however was on the OEM segment where we see opportunities to leverage our circuit protection expertise, by developing niche products that meet their specific needs. We strengthened our engineering capabilities to support the custom design and quick turn requirements of this market and developed a number of products in 2006 that will be released in the next few months.

Continued growth of this segment is a priority for our electrical business in 2007.

Another growth area for the electrical business is selling services. The concept here is to increase revenues by providing services that help our customers to assure the safety of their manufacturing facilities. For example, our electrical safety services program is capitalizing on the growing industry awareness of arc flash and the need for employers to reduce electrical hazards in order to comply with OSHA requirements.

Another growing trend for architects designing in new commercial construction is to require electrical contractors to conduct electrical hazard assessments prior to developing the buildings. To more effectively pursue these opportunities, we've established a nationwide services infrastructure that enables us to provide a full array of electrical safety consulting services to industrial, manufacturing and commercial customers in every major market around the U.S.

Our sales force has been trained on our services capability and starting in 2007, we'll be aggressively marketing our services to end customers through our distribution network.

In the short time since we've established this group, we've already generated $2 million in quotations for new business opportunities.

In summary, we're going to continue to focus on growing the OEM and services segments, both of these initiatives provide opportunities to leverage our circuit protection expertise, by adding value in the distribution channel. There are also excellent opportunities in the strong, nonresidential construction market by working to get our fuses in new structures.

Within that framework, commodity pricing will remain a concern and we'll continue to look for additional ways of cost reduction.

Overall, we're encouraged by the progress we're making and the opportunities we have to expand the electrical business into profitable new markets. That completes my review of the three business units.

Next I'd like to comment briefly on our results and corporate initiatives for 2006.

Coming off of 2005, we were optimistic with 2006 would be a better year for Littelfuse and it was. We delivered solid financial performance and made excellent progress on our four growth objectives.

Sales in cash flow both set new records. Precash flow was extremely strong at $61.3 million for the year. A significant increase over last year's free cash flow of $10.8 million.

We continued to ramp up research and development. Developing the new products I've talked about, and others that will drive our future growth and support our expansion into new markets. R&D expenditures increased 12% to $18.7 million in 2006. And we are anticipating another significant increase to approximately $22 million in R&D expenditures in 2007.

In 2006 we made five strategic acquisitions. We added new polymer technology through the SurgeX acquisition. The Concord Semiconductor acquisition added TVS diode sales and silicon manufacturing capabilities in Taiwan and China. Catalina Performance Accessories expanded our automotive product line. The acquisition of the gas discharge tube business of SRC Devices adds new industrial applications to the existing Littelfuse product line. The Song Long acquisition adds lower costs for [inaudible] production capacity in China. The Song Long acquisition is expected to close in the second quarter. This has taken longer than expected due to the extensive Chinese approval process, but will shortly be behind us.

In the meantime, we've advanced our detailed operation transfer plans and completed our island facility exit plans.

In 2006, we also took significant steps to reduce complexity and improve our operational cost structure by moving manufacturing from higher cost areas to lower cost locations primarily in Asia. We transferred our U.K. based gas discharge tube line to [inaudible] China, and are in the process of transferring the GTD line we acquired from SRC Devices to this facility as well.

We move production from a former [inaudible] facility in Germany to Asia, we announce plans to move metal oxide from island to a Song Long electronics facility in [inaudible] China over the next two years. And most recently we renounced plans to move semiconductor wafer manufacturing from Irving, Texas, to [inaudible] China where we acquired a facility as part of the Concord semiconductor purchase.

We expect to break ground on a new silicon planned in [inaudible] the first quarter. In addition, we've been steadily moving our U.S.-based electronics production out of the country. Most recently transitioning the thin film fuse line to our assembly facility in the Philippines.

All of these actions are designed to strengthen our capabilities as the worldwide leader in circuit protection, and make us an even stronger global competitor. We believe 2007 has the potential to be even better than 2006 and our previously stated earnings target of $2 per share is achievable. On that note I'll turn the call back to Phil for more specific comments on our guidance for the first quarter, then we'll open the call up for your questions.

Thanks, Gordon. As we said in the press release, sales for the first quarter of 2007 are expected to be at similar levels to the fourth quarter of 2006.

Margins should improve in the first quarter as the temporary transition costs referred to earlier become less significant and automotive surcharges begin to take effect. Earnings for the first quarter of 2007 are expected to be in the range of $0.32 to $0.37 per share.

Although the first half of 2007 will be impacted by electronics inventory correction, we expect overall sales to grow 3% to 5% for the year. Our cost reduction initiatives should drive further margin improvements as the year progresses. We still believe that earnings of $2 per share as Gordon mentioned is achievable for the year. This concludes our prepared remarks, now we'd like to open it up for questions.

[OPERATOR INSTRUCTIONS] We'll go to Reik Read, Robert Baird & Company.

Hi. Good morning. Gordon, as part of your comments, you had suggested the consumer segment was doing reasonably well. I think last quarter you had suggested that maybe there was a deceleration there, just in overall end market demand. I think that's one of the reasons you felt you were fighting inventory. Has that consumer demand changed a little bit. It sounds like your tone is a little more positive?

I think we were being very cautious, and I think the inventory correction data has born out exactly what we were saying then, I think we're feeling the end market demand is still solid, that many things such as LCD TVs and MP3 players still have solid growth. But I think we just have to be wary that that's business that usually goes through distribution channels and has seen a correction that we were really calling last quarter.

In -- is that really the bulk of the inventory, is it more on the consumer side, or is it more evenly distributed?

I think we believe it's a combination primarily of Telecom and consumer.

Okay. And then Phil, just, can you talk a little built about excluding the cost reductions, how much leverage do you think you'll get from the 3% to 5% growth, and then obviously, there's some temporary cost that is go away. Can you talk about how that would change the dynamics for the margins?

Yes, I think the way to look at that Reik is really the -- I mean, the leverage -- made me focus a little less on the 3% to 5% growth and focus on where we feel like we're going to be in the first quarter and then in sales ramp up from there. We think we continue to see margin improvement at the EBITD line.

So, it's -- as you recall last year when we -- in the Q2, Q3 time frame, we were hitting numbers, excluding restructuring charges, approaching the $0.50 a share range and as we've indicated, we think that sales levels and in that general range we're talking about $140 million a quarter, so we think that's still very achievable. And it's going to come from improvement at the gross margin level primarily, but also some languaging of SG&A expenses.

And the cost reduction initiatives, it sounds like -- you guys had historically said $10 million. Is that still the case and how much would we assume would be lost to pricing and other variables throughout the year?

Yes, that's always the big question. We feel very good about the cost reductions that we're going to be bringing to the table this year, and we haven't thrown out a specific number, but I think there's a combination between programs coming to completion, i.e. some of the plant moves that Gordon referred to.

And the savings that we get from those, as well as some of the cost that is we were incurring in some of these programs in 2006, particularly the most significant of those was costs related to the Heinrich integration that as we get through the first quarter here will be completely done. So not only will we get savings, but we won't be incurring the costs that we did last year. Those are big numbers, the really big numbers, the Ireland plant move and the Irving plant move, those are more '07, '08 and '09 -- or '08, '09 savings, and we'll start to get a little bit from the Ireland wind down this year.

Most of that will be out in future years, those are $10 million plus annual savings each, and those are the real big ones. 2007 is going to be a very good year for cost savings when you add up all the programs. We hit programs and logistics for transportation saving, as we streamline our network and negotiate better rates from the air freight carriers. We have significant purchasing savings, driven off some of our Asian purchasing strategies. There's a whole range of things that we feel confident about that are going to help us drive those margins and get that kind of leverage.

With respect to the gross margins, do you see a big step function after the first quarter?

Yes.

Okay. Great. Thank you.

We go next to Alexander Paris of Barrington Research.

Good morning, nice quarter.

Thanks, Alex.

Could you say just roughly, either now or after all your plant moves are through, what percentage of your sales in electronics would be coming from China or overall Asia?

Well, already electronics specifically more than half of the business this year transitioned to being more than 50% in the Asia region. And I expect that to continue growing. I think that the ODM growth in China will continue -- in Taiwan and China will continue. So I -- I think we've seen a pretty dramatic ramp the last few years to getting over 50%, which is quite dramatic, and I think we'll see that continuing.

The other -- the actual final number for electronics for 2006 was in the high 50% around 58%, Alex. And overall for the company, we're about 40% in Asia.

Thank you. You mention in your release you thought the electronic capital utilization rate in the fourth quarter was about 80%. In your opinion, is that low for a nonrecession year?

It's low compared to what we think it will be because we faced this inventory correction in the fourth quarter and we pulled back on production. And we had -- internally we had particularly in our tech or semiconductor part of the business -- we had some excess inventory that we ourselves had to burn off as well. So it was quite low in the fourth quarter.

So that was your utilization rate?

Yes, that's our utilization rate.

Right.

In the first quarter, we wouldn't expect to be too much different, but as we get toward the end of the first quarter, we expect that to start ramping up as our sales ramp up. And we'll get the associated operating leverage there.

And in the inventory liquidation, I guess from what you said, it's not just your North American distributors, it's pretty much North American distributors and your OEMs and ODMs, it's pretty much a global phenomenon for you and for the industry, right?

Absolutely. In fact, increasingly, I think it becomes an Asia problem, the ODMs in Asia, and the contract manufacturers in Asia as well as across the distribution channels, but very much a global. And, in fact the continuing movement of more of our business in Asia, probably brings more challenges because the electronics distribution channels in North America, while they're still being guilty of corrections and getting ahead of themselves, at least they're very transparent with information and sharing they're own business performance. That's not quite the same yet in Asia.

Asia, the distribution channels still tend to keep a lot more information to themselves regarding that information as their competitive advantage, which makes it a little more difficult to be able to see corrections happening.

But you get the feeling they're working on smaller inventories and giving you shorter lead times so their expectations are less predictable, but also they're more frequent so you avoid the bigger corrections?

I think that's true. I think that's a general trend that we see.

Okay. Thank you very much.

Thanks, Alex.

We'll go next to Jeff Rosenberg, William Blair.

Good morning.

Morning, Jeff.

Looking at your sales guidance relative to the book to bill, it seems to imply that you expect revenues to be stronger this quarter than the bookings you saw in the December quarter. Can you comment on that in terms of current order levels and how they compare to Q4, or kind of what gives you that -- the basis for that outlook?

Yes, I think, Jeff, if you -- we didn't really comment on the order rates post end of December, but I will make some comment there. The book to bill had improved as we've gotten into January now, into the early parts of February, and as we would have expected, in consistent with the guidance we've been giving. With book to bills have ramped up from the high 80s, low 90s, and recently have -- across the one to one line, so we're seeing improvements in bookings as we expected and its inconsistent with a ramp up in the second quarter for -- particularly for our electronics business.

Okay. That's good. And on the -- can you be a little bit more specific on exactly what are involved in the temporary costs you've talked about that were affected Q4 and are still in Q1 and maybe both qualitatively and if you can quantitatively, how significant those charges are?

Really what I'm referring to is -- we had made a comment these costs were most significant back in Q3 of '06 and they were still reasonably significant in the fourth quarter, they'll become less significant in the first quarter, the kinds of costs we're referring to are some of the costs of making the transitions from the transition out of [inaudible] England, the final stages of that, which is largely complete at this point, we still have a little bit of costs related to that, but that's largely complete.

The final transition in Heinrich, not only the plant transfer and shutdown in Witten, Germany, but also the consolidation of the corporate function there we had -- we were incurring pretty significant costs in the back half of '06 on those that will -- have come down significantly, and will essentially go away as we get further into the first quarter.

Those are some of the big ones, we -- as we get into -- in the first half of the year here, we're starting to see meaningful savings from the [inaudible] fuse transfer to the Philippines, which we've talked about previously, and then -- so it's really a combination of some of the costs to make these transfers going away, and then the savings from the completion of the transfers starting to incur. And this really relates back to the comment that is we made on the last call, where we said that there would be a $2.5million of overall savings per quarter compared in Q3 to where we would be in the middle of 2007 that related to the combination of these temporary costs going away, and the savings from the completed programs.

So when we look at SG&A, because I'm trying to look at your margins given they'll probably be about 50 basis points or so higher in R&D in '07. Should we look at SG&A that could be down on an absolute basis in '07 versus '06?

I think that they're certainly -- I wouldn't say necessarily down, but I would say certainly pretty flat, so the increased investments we have in R&D and some of the other normal inflationary costs you get in your operating expenses and your SG&A would be offset by some of these programs that we're bringing to completion and some of these consolidations that have occurred, specifically the Heinrich one being the most significant of those.

So, look for something like a flat operating expense, and then we get leverage -- a little bit of leverage in the percent of sale.

Sure, okay. And then I had a -- just to finish, a couple questions on auto. I wanted to hone in on the pretty significant reduction in U.S. automotive production levels.

I mean, notwithstanding the gains you've made to offset that elsewhere, how does that affect you? What kind of growth do you think you can get? Or can you talk about specifically how you're affected by the specific production shutdowns from your North American automotive customers?

Yes, Jeff, well, we're trying to do is be able to compensate for that by being much less exposed to the historical areas we were strong in, which is North America and western Europe. They're still critical parts for us, and still areas that we want to invest in, but we realize that we can't control production volume decreases that have been quite significant.

So, we're trying to offset that by more geographical expansion and the growth area primarily is Asia. Although, there's also very healthy growth in Latin America and eastern Europe.

And, in fact that's how the car industry is rebalancing itself, is very significant growth in those three regions and they're taking enough market share. But to have moderate growth on global production overall while western Europe and North America continue to be flat at best, we're actually going back a few percentage points per year. So we're getting more geographical expansion that we mentioned, more sales presence, more technical support presence, as well as moving production to China.

But is there a timing issue there in terms of when those initiatives begin to bear fruit versus the immediate issue of declines in volumes and the fact that you're still relatively disproportionately exposed to the areas where there's weakness?

Well, there is a timing, we've been talking about this now for several quarters, so these are initiatives that we started some time ago. We expect to see these start to happen in '07, and then the -- because obviously the timing on passenger car platforms is a long time from first working a new design to when you actually seeing production volumes go up.

And then the secondary is really trying to diversify into the off-road truck and bus market, which is much more fragmented, smaller volumes, but some good niche segments and custom products. And the turnaround on those is much faster, so that the time line of the business and to some extent electronics is much faster to get in and start developing business in those segments.

I mean, a good example of that was this last fourth quarter where we did have a -- we had a meaningful decline in North America for the reasons that you and Gordon cited in his script, but those were offset by growth in Asia for automotive that was over 50% year on year, and also very substantial growth? Our European off-road truck and bus business that more than offset the decline in North America. So I think we will continue to see that kind of a dynamic for the next few quarters anyway.

Okay. And then on the profitability front. You talked about challenges with some of your customers in terms of getting the surcharges through.

Can you talk about whether or not that means -- the timeline to get automotive profitability back to the corporate average, or perhaps even where it's been historically for that unit, specifically? And maybe as a side question to that, the timing of when the better environment for materials prices starts to flow through your business?

Yes, well, we've been working at the surcharge for some time, we knew that would take time to come into effect because many of the OEM contractor -- annual contracts, we have to wait until the renegotiation of those, but we have started to see progress on that, I think it's fair to say that the second axe of this year, I expect to see much more impact from the surcharges and price increases that we've put in place, and if current trends were to continue in the commodity price area, maybe things will get a little healthy for the rest of the year. Certainly still this is a year ago commodity costs are much higher, but at least they turned over, as the turn of the year from the trend of continuing to go up particularly for zinc and copper. Hopefully that's something that can be more helpful this year.

Okay, thank you.

Thanks, Jeff.

[OPERATOR INSTRUCTIONS] We'll go next to Satish Athavale with KSA Capital.

Good morning, gentlemen. Gordon, a question for you. As you are growing your business into more of this semiconductor kind of products and circuit protection devices, the question I had was, does it make sense strategically as a company to maybe utilize a outsource type of production model, where instead of building your own fabs, you outsource your production to somebody who already has that capability?

That's a good question, and it's one we're constantly looking at. What's the best model for us, and there are many fabulous models out there of companies that have been extremely successful by not having that full fixed cost of their own fab. We will actually be making some products that we'll be releasing this year, that we'll be getting made outside, that will be in China. But for the bulk of our products this is really a very special area of the semiconductor manufacturing process, the Bipolar Thyristor SIDACtor product line and to some extent the TVS product line, they're really characterized by still relatively small wafer size and very long deep diffusion cycles that really are not the commonplace manufacturing of what most of the large foundries are doing who are more focussed on maybe more digital electronics and specialty analog power circuits. So, the fact that it's kind of a niche as one of the areas that is attractive for circuit protection, but it also does not lend itself to being a large market where foundries are really offering the capability that we're developing. So, it's something we certainly, if we expand our semiconductor product offerings would be very forceful about that. But for the current products that we have, we really feel that we've analyzed that enough that it's the right thing to do and it's a competitive advantage to have our own fab.

As Gordon said, also the products that do lend themselves to outsourcing, we are outsourcing, and those would be some of our products that would be more in the category of diode arrays, which is a little more similar to an IC type fab process where there's lots of opportunity to do that. So where it makes sense, we're doing it, but the majority of our revenues are coming from these products that Gordon described and we haven't found a good outsource option there.

Okay. Fair enough. And last question from my side is, your cash flow is pretty strong, and you have a very strong balance sheet also. Would you consider paying out a dividend at some point?

Yes. It's something we've talked about at the board level, and I think the answer is, that we would consider it at some point. We have considered it.

I think at the moment we still see enough growth opportunities in our space that we would -- that we feel the best use of that cash is still acquisitions with also some stock buy back. But if we got to a point where we thought on a more permanent basis and a more long-term basis we were going to be generating cash in excess of our ability to profitably reinvest that cash, we would absolutely think seriously about a dividend.

Great. Thank you.

Thank you.

And having no further questions, Mr. Hunter I'd like to turn the conference back over to you for any additional or closing comments.

Well, thank you all for joining us on the call this morning. As always, we appreciate your interest and support. And we look forward to talking to you again next quarter.

And this does conclude today's conference, thank you for your participation. You may now disconnect.