Littelfuse Inc (LFUS) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse, Incorporated, first quarter 2007 earnings conference call.

Today's call is being recorded.

Now at this time, I will turn the call over to Chairman, President, and Chief Executive Officer, Mr.

Gordon Hunter.

Please go ahead, sir.

Thank you.

Good morning and welcome to the Littelfuse first quarter 2007 conference call.

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

As you saw in the news release we had a solid first quarter.

Earnings absent restructuring charges exceeded our guidance for the quarter.

Sales increased 5% year-over-year in spite of the continuation of the inventory correction in the electronics business that we've discussed on the past few calls.

We also made good progress on our growth strategies and cost reduction initiatives.

Phil will begin today's call with the Safe Harbor statement and a brief summary of our press release.

Then I will provide additional comments on our first quarter performance, highlight trends in our three business units and discuss the progress on our major corporate initiatives.

After that we will open the call for questions and we expect the call to last about 40 minutes.

I will now turn the call over to Phil.

Thanks, Gordon.

Any forward-looking statements contained herein involve risks and uncertainties included 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, the effect of the Company's accounting policies, labor disputes, restructuring costs in excess of expectations and other risks which may be detailed in the Company's Securities and Exchange Commission filings.

As Gordon said, we had a solid quarter despite the continuing effects of the electronics inventory correction, which began back in the fourth quarter.

Sales were up 5% year-over-year and 3% sequentially.

This modestly exceeded our guidance which called for sales to be flat sequentially.

Diluted earnings per share adjusted for restructuring charges were $0.40, which exceeded our guidance of $0.32 to $0.37.

This better than expected performance was due to higher sales in Japan and Korea, benefits from a stronger euro, and increased price realization in the electrical business.

In the first quarter we booked approximately $4 million, or $0.12 per share of restructuring charges, primarily related to the announced shutdown of the Des Plaines, Illinois manufacturing facility.

Excluding these restructuring charges, we achieved a 34% gross margin for the first quarter, which was up 200 basis points sequentially, as we realized cost savings from the Heinrich consolidation and recovered some of our lost automotive margin with the implementation of surcharges tied to commodity prices.

We expect further gross margin improvements in Q2 and Q3.

The first quarter is generally a weak quarter for cash flow, and this year was no exception.

Cash from operating activities for the quarter was only about $1 million, as most of our cash income was used to pay liabilities, that had been previously accrued for items such as annual bonuses, severance, and income taxes.

On the positive side, we continue to manage our assets effectively.

Accounts receivable DSO was reduced to 58 days, which is down from 60 days at year end, and 63 days a year ago.

Inventory continues to turn at a respectable 5.5 times, although we are working on initiatives that could improve this to 6 turns by the end of the year.

Capital expenditures were $5.1 million for the first quarter, but this will ramp up later in the year as we add brick and mortar in China and the Philippines to accommodate our manufacturing transfers.

While growth CapEx for 2007 is expected to be in the 35 to $40 million range, we also expect some property sales which should result in net CapEx somewhere in the 20 to $30 million range.

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

Thanks, Phil.

Once again, first quarter sales increased across all three of our business units.

Sales increased 2.6% for electronics, 8.7% for automotive, and 12.7% for electrical.

Geographically, sales were up 12.4% in Europe and 13.6% in Asia, but went down 5.7% in North America.

Electronic sales in North America were negatively impacted by the continuing trend of our customers to move their manufacturing sites to Asia and also by the inventory correction.

North America sales in our automotive and electrical businesses both increased but they were not enough to compensate for the decline in electronic sales in this region.

I will begin my comments on the business units with electronics, our largest business.

Electronics business accounts for about two-thirds of our total sales.

The first quarter is historically a slower period for this business, due to the Chinese New Year and post-holiday seasonality.

The inventory correction within the distribution channels, contract manufacturers, and OEMs that started in the fourth quarter continued into the first quarter as anticipated.

We expect the balance of the correction to play out in the second quarter.

Our book-to-bill ratio for the quarter was even.

We would have liked to see a stronger ratio to support the increased sales that are anticipated for the second and third quarters, but overall we're satisfied with the start to 2007.

Recent forecasts of industry trends are showing growth in our primary electronics markets across the board.

However, the forecasts show a more moderate upper single-digit growth rates as compared to the double-digit growth rates we experienced in 2006.

Telecom growth is forecast to be about 6.7% in 2007, down from 13.1% in 2006, according to the market research company WSTS.

The market continues to be driven by Voice over IP and the popular triple play of bundled voice, data, and video technologies, which, in turn, drive sales of our Telecom Nano, SIDACtor and gas discharge tube products.

In the semiconductor area, all indications are for a slowing in 2007 but a soft landing.

The Henderson Electronic market forecast and semi core research are both forecasting semiconductor growth of 5.8% in 2007 down from 7 to 8% in 2006.

World Semiconductor Trade Statistics is predicting thyristor growth of 4.9% in 2007 compared to 8.4% in 2006 and sees transient diodes growth at 5.2% in 2007, down from 18.1% in 2006.

The LCD TV market continues to be a dynamic one.

Although growth is projected to slow from the triple digit increases of 2006, to approximately 50% increase in 2007, this is still a very strong number.

The market's continued strength provides excellent opportunities for our fuse and ESD product lines.

Notebook computer unit volume growth rates are expected to be about 7.1% in 2007 compared to 9.9% in 2006.

However, 2008 should be a rebound year for PC notebooks with an anticipated 10.2% increase due to Microsoft Vista's impact on the replacement market.

Notebook computers typically contain a number of Littelfuse products such as fuses, modulator varistors, PTCs, and silicon protection arrays.

New design wins continue to be a key priority for us.

After surpassing our $20 million goal with total design win sales for 2006 of $22 million, we've increased the target for 2007 to $28 million.

We secured approximately $6 million in new business wins during the first quarter, putting us right on track to meet the new goal.

A sampling of our first quarter design wins highlights the extensive capabilities we bring to the table and the broad range of end markets we serve with our nine circuit protection technologies.

Littelfuse products will be protecting the USB ports on all models of Samsung LCD televisions in the new 2007 platform.

There will be eight of our PulseGuard devices on each TV for a total of about 50 million pieces per year.

This is expected to generate between 2 and $4 million in annual sales.

Longer term, this design may be expanded to include HDMI ports which would raise the PulseGuard count per TV to 24.

We won a design-in project with [Sachem] Communications, the French-based mobile and broadband communications company, to supply our Telecom Nano fuses for a set-top box.

This is a $250,000 contract for the year with the first units shipped in March.

We will be supplying our TVS diodes to Sony computers in Taiwan for a charger application on its GPS systems.

This will represent $400,000 in revenue annually.

We are qualified with our PTC resettable fuses at Lexmark for a printer application worth $250,000, and at Phillips for a set-top box application that will generate $100,000 in revenues.

In addition to these wins, several new products are gaining traction in the market.

Our new line of ceramic based Thin-Film fuses is currently being qualified by a major manufacturer of computer hard drives.

On the telecom side, Corning has selected our new semiconductor SIDACtor device for use in its primary protection modules which will generate $3 million annually.

Building on the success of our multipulse Sidac power thyristor technology we will be introducing a new high current Sidac that is specifically designed for high intensity industrial lighting applications.

The first design win is a tridonic in Austria for approximately $2 million in revenue per year.

These and other new products enable to us take advantage of the growth in key end markets.

These include broadband, notebook PCs, LCD TVs, and a wide array of consumer products, such as MP3 players, mobile phones, and digital game consoles that transfer data at high speeds and in high volumes.

Other fast growing areas for us is the market for consumer appliances in Japan.

Offsetting this end market growth are some delays in the new DSL rollout by British Telecom in the UK.

This in turn delays our sales to Tyco and Huawei where we've been successfully designed into the program.

Current forecasts are for a pickup in the third quarter.

Additionally, the mobile phone 3G standard deployment in China is still significantly slower than predicted.

Installation is supposed to start in the third or fourth quarter of this year, but final awards are still outstanding.

We have successfully designed several products into the power supply protection for the base station equipment of Alcatel, Shanghai Bell, Datang, and TD Tech, notably, our high-powered diode series.

This gives us a solid position once the deployment begins and is expected to eventually generate $1 million in annual revenues.

We continue to execute on our cost reduction initiatives.

Another step in this initiative was the announcement early in the first quarter of our decision to move front-end production for our Thin-Film and PulseGuard lines out of Des Plaines and into our lower cost facility in the Philippines.

Last quarter we completed the move of our gas discharge tube production from England to our facility in Suzhou, China.

The move of our varistor production from Island to Dong-Guang, China is underway.

We're also on track with our plans to move Teccor production out of Irving, Texas, and are set to break ground later in the second quarter on a wafer fab facility in Wuxi, China to handle this production.

In summary, although the industry forecast for end market growth are still positive, the growth rates are lower than the double-digit growth we experienced in 2006.

This is causing a slowing of sales and continued inventory correction.

However, with our new products and ongoing restructuring and cost reduction initiatives, we remain optimistic about our electronics business for 2007 and beyond.

Next, I will comment on our automotive business unit which accounts for about 25% of total Littelfuse sales.

This was a good quarter for our automotive business which had an 8.7% increase in sales on a flat global car build.

Sales increased in all three geographic regions.

Sales in the North America passenger car segment were up slightly in the first quarter on a 5.5% decrease in car builds.

The good news here is that sales were up 10.4% sequentially from the fourth quarter of 2006 on a 6.4% increase in car build.

Sales in Europe remained strong with a 7% local currency increase over the first quarter last year on a 1% increase in car builds.

As expected, the Asian market showed the strongest growth with a 20% increase in Littelfuse sales on a 2.5% increase in car builds, although our base in this region is still relatively small.

In North America, our first quarter performance was driven primarily by continued strong sales of our CablePro battery cable protection products along with a nice increase in JCASE cartridge fuse volumes for high current applications.

We picked up new program wins in Brazil for virtually all of our standard automotive fuses.

In Europe we saw increases in most of our standard products as well as in special fuses for the off-road truck and bus market.

In Asia, primarily in China and Korea, sales of several standard fuse lines increased while CablePro sales were down.

This was due to the customers working off excess inventory that they accumulated during their program ramp up late last year.

That inventory has been worked off now.

We've already started to see CablePro orders increase to their expected run rates.

In addition to organic growth in our traditional passenger car business, the automotive business unit is pursuing opportunities in two new market segments, the off-road truck and bus segment and the automotive electronic segment.

We made good progress in each of these areas in the first quarter.

As we've discussed on prior calls, the off-road truck and bus market is a natural extension for us, because it leverages our years of experience and the well established product line we've developed for the passenger car market into a new category.

Our presence in the off-road truck and bus segment is strongest in the European and U.S.

regions where we've seen a 33% growth rate compared to the first quarter of 2006.

Our current focus is on expanding our sales force to reach more potential customers.

This quarter we signed several new representatives from North America and anticipate adding additional territories in Europe to further expand our presence in this segment.

In the automotive electronics segment our focus is on developing two new families of automotive-grade TVS diodes.

Our automotive and electronics business units are working closely together to add this product offering for automotive electronics to our board-level fuses, silicon protection arrays, PulseGuard protection ESD protection devices and varistor products.

Launches of the new diode products are planned for the third quarter of 2007.

We have also seen good success in our aftermarket segment.

We've leveraged our recently acquired SmartGlow fuse line to win $1.2 million of new business at CSK, a major automotive aftermarket retailer.

We expect to start shipping this new business in the second half of this year.

We're currently expanding capacity in China for our CablePro products to support design wins in China and the Philippines.

We're also adding capacity in China for MINI Fuse production to meet the demand generated by numerous wins in the Asian market.

As in our other two businesses reducing costs and improving margins is always a top priority.

Early in the first quarter we announced plans to move automotive production from Des Plaines, Illinois to a production facility in Mexico.

We will also move our North American distribution facility from Elk Grove Village, Illinois to Mexico.

The transition will be implemented in phases over the next two years.

The decision to move this line, as well as the Thin-Film electronics line I mentioned earlier, was difficult.

But it was a decision we needed to make in order to maintain our competitive position in the worldwide circuit protection market.

While commodity pricing pressures continue to be an issue for the automotive business unit, we've successfully implemented a metal surcharge or a price increase at most of our global OEM customers.

Looking at product development, in addition to the new product launches mentioned earlier, we have several new platform-specific master fuse products that are scheduled to launch in 2007 throughout North America, Europe, and Asia.

Our focus for the next quarter and beyond remains on building momentum within our growing off-road truck and bus segment in all geographic regions and introducing new products into the automotive electronics segment.

We will also continue to launch state of the art products for the core passenger car segment to keep Littelfuse at the forefront of automotive circuit protection technology.

As these comments illustrated, we're excited about the opportunities for our automotive business.

We're continuing to grow the base business and are achieving success with our strategy to leverage our technology expertise into new markets.

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.

This business achieved a 12.7% increase in sales in the first quarter over the same period last year.

This was driven primarily by continued strength in the nonresidential construction market, strong manufacturing activity in the industrial segment, and strong price realization as a result of price increases implemented in January.

2006 was a very robust for the non -- robust year for the nonresidential construction segment which continues to drive demand for power fuses that are typically installed six to nine months after a construction job starts.

As with our other two business units, new product development is a key focus for the electrical business.

One of the major trends in this business is that it is very positive for us in the focus by OEMs on analyzing their product designs to look for opportunities to reduce costs through component substitutions, reduced assembly times, and lean manufacturing practices.

Several new Littelfuse products released in the first quarter address these needs.

One example is our new Snap Mount Fuseholder which eliminates the need for additional hardware to mount in the fuse and electrical end closure.

Another example includes a fuse holder with pre-installed fuses and pre-attached wires cut to required lengths to reduce assembly time.

These products will eliminate several steps in the assembly operation saving time and increasing efficiency for our OEM customers.

We continue to work with our OEM customers to reengineer and tailor our products to meet their needs for increased efficiency in the manufacturing process.

As we have discussed in prior calls another area where our electrical business has achieved good success is expanding into the service business, offering safety consulting services to our customers.

The concept here is to increase revenues by leveraging our vast experience in circuit protection and our extensive knowledge of governmental regulations to help our customers assure the safety of their manufacturing facilities.

We laid the groundwork for this initiative in 2006, establishing service providers in the primary metropolitan markets.

In the first quarter we increased our service coverage in the secondary markets.

While this is a relatively new initiative for us, the response to the service program has been outstanding.

We've received inquiries from all areas of the country and from all of our industrial market segments.

During the first quarter, we landed high-profile end user accounts in sectors including plastics and molding, consumer goods, municipal wastewater treatment facilities, power utilities, and the paper industry.

We will receive revenues from these opportunities throughout 2007 and into 2008.

Looking ahead to the rest of the year our focus continues to be on growing our well established OEM business and expanding the electrical safety services program.

In addition, new product launches between now and the end of the year are designed to meet the evolving needs of our OEM customers and open new sales and distribution opportunities for Littelfuse.

As in our other two businesses, commodity pricing remains a concern, but this business unit has done a great job of implementing price increases to keep pace with the cost increases.

However, copper prices are continuing to rise, and this is something we need to keep our eye on.

In summary, we remain positive about the electrical business units.

We believe our new product development efforts and electrical safety services opportunities are a successful combination that will continue to drive top-line performance in 2007 and beyond.

That completes my review of the three business units.

Next I would like to comment briefly on our four corporate objectives.

We made significant progress on these objectives in 2006.

They continue to be our underlying strategy, not only maintaining but expanding our position as the undisputed global leader in circuit protection.

The first objective is to build stronger relationships with our customers.

One measure of our success in this area is design-in wins.

I highlighted a few of these wins earlier, but there's another very positive trend here.

In many new programs we are getting involved earlier in the process, working side by side with our customers to develop the best circuit protection solutions for their products from the ground up.

Not only does this assure new sales of our products, it's also an indicator of the value we bring to customer relationships through our extensive circuit protection expertise.

Our second strategic objective is leveraging and improving our Asia position.

Asia is the hub of the electronics industry.

It's critical that we have a major presence there to be closer to our existing customers, to gain new customers, and maintain a strong competitive position.

We also want to benefit from the growth of the region itself and the increasing demand for consumer products that comes with it.

We made great strides in this objective in 2006, expanding our organization, facilities, and staffing levels.

We continue to execute on this objective in the first quarter with the announcement of the plans I discussed earlier to move our Des Plaines automotive electronic manufacturing to other locations.

The third initiative is to redefine and establish the Littelfuse brand.

We have transformed the Company from a fuse manufacturer to a global leader in circuit protection.

Our branding opportunity is to leverage our extensive expertise by increasing awareness of the full array of circuit protection products and capabilities we offer today.

We developed a new branding strategy in 2006 and in 2007 we'll focus on implementation.

Our fourth corporate objective is to make strategic acquisitions.

We announced five acquisitions in 2006 that strengthened our position in six of the nine circuit protection technologies.

We added leadership and talent to our Asia team and added new lower cost manufacturing facilities.

Four of the five acquisitions closed last year, and the acquisition of the metal oxide varistor business of Song Long Electronics is expected to close later this quarter.

We will continue to pursue additional acquisition opportunities that enhance our product and manufacturing capabilities and add talent to the organization.

This year marks Littelfuse's 80th anniversary as a company.

While much has changed since our founding in 1927, our dedication to serving customers, developing new technologies and building shareholder value remains the same.

We look forward to continued progress in 2007 and continue to believe that we can achieve our earnings per share target of $2.

On that note, I will turn the call back to Phil, who will provide additional comments on our guidance for the second quarter, then we'll open the call for questions.

Thanks, Gordon.

As we said in the press release, sales for the second quarter of 2007 are expected to increase 2 to 5% sequentially.

Operating margins which were at 10.3% in the first quarter, excluding restructuring charges, are expected to improve approximately 200 basis points in Q2 as we realize increased benefits from our cost reduction programs and see modest increases in operating leverage.

We expect the tax rate for the second quarter to be approximately 32% and it is likely to be somewhat lower in the second half of the year.

Earnings for the second quarter of 2007 are expected to be in the range of $0.48 to $0.52 per diluted share.

While we are not ready to give specific guidance for the third quarter, we do expect to see sequential improvements -- sequential improvements in both sales and earnings.

And for the full year we still believe our earnings goal of $2 per share is achievable excluding restructuring charges.

This concludes our prepared remarks.

Now we'd like to open it up for questions.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go first to Alexander Paris, Barrington Research.

Great quarter.

Just a couple quick questions.

Just the bigger picture, you mentioned a number of industry forecasts on different categories, essentially down in 2007 from 2006.

Are those generally running, 2006 level, the first half of 2007 down -- full year [2000] pulled down by the first half, but the second half improving and going on to higher levels in 2008, is that kind of how those --?

I think that's a very good summary.

I think there was sort of, in general, across those electronic segments, a general inventory correction, and I think a slowing but I also think that -- almost all of those segment forecasts showing growth picking up the end of the year and into '08.

But they're on the way to a longer recovery.

Yes.

And then as part of that, the inventory liquidations, you implied that it looked like they were maybe stabilizing and bottoming in the second quarter.

I am just looking at while your indications that if you look at -- you've got domestic distributors, international distributors, and OEMs.

The domestic distributors I would guess you have a fairly good handle on it.

Is that fairly clear that they have bottomed in terms of their inventory liquidation?

I think that's true.

I think that's where we have the best visibility in the domestic.

The other two you're not quite sure but there are indications from the OEMs, for example, that they're getting down to more historically levels?

I think it's a little more complicated in that the way the electronics industry has changed with the real emergence of these very large EMS, the formally contract manufacturing companies and the emergence of the new segment, which has been dramatically growing, called the ODMs, the original designer manufacturers, so it's not just like it used to be between the distribution channel and the OEM.

Right.

We now have the distribution channel and the ODMs and the EMS segment who are all trying to compete for business that sometimes OEMs hand over to them, and so I think that that very strong growth in ODMs and the emergence of that segment has meant that the chain is a little more complicated.

And it has been that I think when we see these swings in inventory the market gets ahead of itself.

There's more places for an inventory correction to need to correct, and a lot more of it being in Asia.

So I think what's broadly true is just accentuated by these additional segments.

But generally your customers, according to your input from your customers, you would surmise that the liquidation is over with in the second quarter.

Is that what you were saying?

Yes, I think -- this is Phil, Alex.

I think -- I agree with everything Gordon said.

I think there's still some indication that the EMS companies particularly still have some weakness, and may have some inventory, and that would affect primarily our Asian business.

But I think generally speaking, we think we're through the worst of the inventory correction, and by the time -- by the time we get to the end of the second quarter we should be mostly through it.

Speaking of Asia, just last question, is -- give me a rough idea of what Asia is now as a percentage of your global sales or maybe more specifically, China.

Asia in total is about 40%.

And China, is that the largest part of that?

Greater China would be the largest part of that, yes, although we're still -- Japan and Korea are still very important regions for us as well.

Okay.

Thank you very much.

Again, nice quarter.

Thanks, Alex.

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

First thing, I want to -- I had a couple questions about gross margin.

On the automotive side with the kicking in of the price increases and the surcharges, how would you characterize the gross margin there relative to the overall corporate average?

Is it back up to being at or above, or are we still looking for recovery there?

It certainly -- it recovered in the first quarter from where it had been running in the back half of the year, as you indicate.

I think overall it's still a tad below our corporate average, and hopefully, over the next couple of quarters we can bring that up some.

But it's near the corporate average but probably slightly below still.

Okay.

So -- is that an important driver of your expectation for Q2 and Q3, to continue to move higher?

Not as much.

It's really more driven by the electronics business, Jeff.

It's the -- some of the operating leverage that we're going get there is we get the second quarter and third quarter ramp-up in sales, although as we indicated, the second quarter may not be quite as much of a ramp as we've seen in some previous years, but we'll get some operating leverage there.

Then we'll continue to get benefits from some of the major cost reductions that we've been working on, some of the plant moves and consolidations that we're doing, although a lot of those big ones are still out in '08 and '09, but we are getting some benefits there.

We're also going to be getting benefits from some of the purchasing activities that we're working on when we have about a $7 million target for savings, and we're also targeting some pretty major savings coming out of logistics particularly in some of our global air freight and freight forwarding costs.

So is it fair to say that -- you had talked about going back that Q4 and Q1 would be messy as it related to all of these moves being put in place that would drive margins from that point forward is the only thing that's not on schedule is just the slope of recovery in the business in Q2 from a leverage perspective?

Everything else is pretty much meeting your expectations?

I would say that's accurate, yes.

And in terms of utilization at Teccor with the weakness you have described in -- at BT, is that keeping that from getting up above 80%?

And is that much of a drag?

It's still a bit of a drag, Jeff.

They're running at a steady rate but it's certainly not the utilization we were at at Teccor this time last year.

Overall there, I mean, I don't know, going back to the early days when you -- after you acquired the company, it was a pretty big swing factor as it relates to your gross margin.

Is that still the case, or has the overall impact, as you look at the scope of the business and how it's changed, been diminished?

It's still a significant factor.

Because we've grown some of the other parts of our business and we've added a couple of acquisitions, it's probably not quite as impactful as it once was.

I think we've streamlined the structure there a little bit, but it's still a fairly major impact, and that will obviously change as we begin to make more progress on the transfer, but for the next year, the next couple of years it will still be a meaningful factor in our gross margin equation.

Thanks a lot.

Thanks, Jeff.

(OPERATOR INSTRUCTIONS) We'll go next to John Franzreb, Sidoti & Company.

My first question is regarding the R&D expense.

We saw a 15% sequential jump in the number in the quarter.

Can you kind of talk about what's going on there and is that a sustainable rate going forward?

We've said in the past that we think we were under invested in R&D in the past, and we wanted to continuously be increasing that in all segments of the business, but we would only be doing that when we really have customer specific programs and new product developments that we really agree with customers.

So we'd expect to see that increasing maybe not always at that rate, but we've said that we don't have a final end number, but we -- a couple years ago were down about just over 2%, and we said we might be getting up towards 5% of sales, and so I think we'll see that continue to increase when we have appropriate programs.

And we have, John, we started a couple of the programs that we've talked about that we are investing quite a bit in some of the silicon areas.

I think one of the things we said on our last call, is we put a small design team into Silicon Valley and working on some new silicon products there.

We continue to invest pretty significantly in the automotive business as well.

We talked about a lot of opportunities and a lot of things we're working on there.

So we will continue to invest there and at least the initial indications that we've seen coming out of those programs we're pleased with and we think they're going to give a good return to the Company.

Did I hear you correctly, that could go as high as 5% of sales going forward?

I think when we've been asked what we think long term for the business that could be a level that we could get to.

I think it's a gauge of where we might get to long term if we have those kind of customer engagements and we're constantly bringing new products to market.

Okay.

And also regarding the tax rate, you kind of implied the second half that the second half tax rate would be about 30%.

Are we at a sustainable low 30 tax rate, or should we be thinking that the mix will bring us back into the mid 30 range in the '08 time frame?

How should we look at the tax rate?

It's -- I think the long term look at it should be that it -- assume that it's going to stay in the low 30s.

I think that we're working on some things that hopefully can even bring it just a little lower than that.

It's definitely not going to bounce back over any longer period of time to kind of the mid 30s that it had been running at so I think we've -- we have some sustainable things that we've done and we're doing that will bring that from a 35, 36 historical rate down into the low 30s.

It will -- the caution is it will bounce around from quarter to quarter.

It's -- and I think that for the year, we said that it could be in the 30 to 32% range.

32 would be a safer number.

We have some opportunities that could be a little bit lower than that for the year, but I wouldn't expect it to bounce back up again over any fourth quarter period.

Okay.

And one last question.

Given the cost savings initiatives you have in place, and given that we're looking at a relatively soft revenue profile, as the volumes pick up, say in the '08 time frame, are we looking at a gross margin or a peaking gross margin that could exceed the 2004's 36%, or is that just too aggressive of a number for you?

I think it could.

I mean, I think that with the change -- the fundamental change in the manufacturing platform that we're talking about with fewer plants, really virtually all our high-volume plants in low-cost regions, which is kind of a two-year-out scenario, I think that margins could potentially trend up above 36%.

Okay.

Thank you very much, Phil.

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

I will turn the conference back to Mr.

Gordon Hunter for any closing remarks.

Well, thank you for joining us on our call this morning.

As always, we appreciate your interest and support and look forward to talking to you again next quarter.

That will conclude our teleconference for today.

Thank you all for your participation.

Have a great day.