Littelfuse Inc (LFUS) 2007 Q4 法說會逐字稿

Good day everyone and welcome to the Littelfuse Inc.

Fourth Quarter 2007 Conference Call.

Today's call is being recorded.

At this time, I'll 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 Inc.

Fourth Quarter 2007 Conference Call.

Joining me today is Phil Franklin, our Vice-President, Operations Support and Chief Financial Officer.

As you saw in the news release, our fourth quarter results were untracked with our guidance for both sales and recurring earnings.

Sales increased 6% over the fourth quarter last year and adjusted diluted earnings per share $0.38, increased 52% over the prior year adjusted earnings per share of $0.25.

Full year 2007 sales were just over $536 million up only slightly from 2006, but still a new record for Littelfuse.

Both our automotive and POWR-GARD businesses achieved record performance in 2007.

Electronics business had a challenging first half of the year, but improved in the second half as inventory levels in the distribution channel and end customers returned to normal levels.

At this point, I'd like to turn the call over to Phil Franklin who will give the Safe Harbor Statement and a brief summary of our press release.

Thanks, Gordon.

Before we proceed, let me remind everyone that comments made during this call include forward-looking comments.

These statements are subject to various risks and uncertainties.

And as a result, actual results may differ materially from those expressed in forward-looking statements.

The discussion of these risk factors may be found in the quarterly and annual reports filed with the SEC.

As Gordon said, the fourth quarter played out largely as we expected.

We experienced typical fourth quarter seasonality with sales down 4% sequentially which was in line with our guidance.

Earnings excluding one-time charges were $0.38 cents per share which was above our guidance of $0.33 to $0.37 cents due to a lower tax rate.

The tax rate for the quarter was 23% versus our guidance of 32% due to higher earnings and low tax jurisdictions and timing issues.

Compared to the prior year quarter, sales increased 6% as the automotive and electrical businesses continued their recent growth trajectories and electronics after several quarters of negative growth was up 3%.

For the full year 2007, sales were essentially flat with 2006.

Both automotive and electrical had record years posting growth of 9% and 14% respectively.

This was offset by electronics where sales declined 5% for the year.

I'll now pass it back to Gordon who will provide more color on our performance for the year and review the current state of our markets.

Thanks, Phil.

Sales increased in all three of our businesses in the fourth quarter compared to the same quarter last year.

We turned the corner on the electronic inventory correction with electronic sales up 3% in the fourth quarter.

As indicated earlier, our other two businesses had record quarters.

Fourth quarter automotive sales increased 9% over the same quarter last year and electrical or POWR-GARD as we refer to it, sales were up 14%.

Geographically, fourth quarter sales increased in all regions.

Sales increased 2% in the Americas, 7% in Asia, and 10% in Europe.

The gains reflected the improvement in the electronics business, the continued strength of our automotive and POWR-GARD businesses, as well as the strength in the Euro.

Looking at the full year, automotive sales were up 9% over 2006 and electrical sales increased 14%, while electronics sales were down 5%.

Geographically, 2007 sales were down 5% in the Americas, up 3% in Asia, and up 6% in Europe.

Next, I'll provide some additional comments on each business unit and update you on our major cost reduction initiatives and other 2007 highlights.

Then we'll conclude our prepared remarks with guidance for the first quarter and the full year of 2008.

I'll begin with electronics, our largest business unit accounting for about 2/3 of total Littelfuse sales in 2007.

Electronic sales were $88.2 million for the fourth quarter and $349 million for the year.

Consistent with our guidance and as evidenced by a 3% increase in fourth quarter sales over the prior year, this business has stabilized with the inventory levels in the channels and end customers at normal levels.

Several segments within electronics driving growth of our circuit protection products of flat panel TVs and notebook PCs which both experienced strong end unit growth in 2007.

Growth in sales of flat panel TVs continue to drive increased sales of our fuse and ESD protection products and notebook PC growth drives opportunities for a variety of our products including thin film and nano fuses, GDCs and ESD suppressors.

These digital consumer segments will continue to be the focus areas for us, particularly in Asia.

To highlight a few electronic product design wins, we recently gained approval at Nokia Siemens Networks for TBS diode overvoltage power supply protection for bay stations to be deployed in Europe and Asia.

We have also won approval for a similar application at ZTE, another leading communications infrastructure provider, these are for bay station [bills] in China.

Also, we made [end-rows] in the lighting application in Europe with a design win for a semiconductor-based switching product that triggers ignition of halide lighting of public spacing.

In our fuse business, we have won approval at Braun for over current protection for high volume electri toothbrush charger application.

We expect these design wins to begin to generate meaningful incremental revenue in 2008.

On the new product front, we launched our expanded TBS diode line in the fourth quarter.

These products protect telecommunications and industrial equipment, computers and consumer electronics applications against high voltage transients and they are being well received in the market.

We also launched a high temperature chip fuse in the quarter that compliments our existing fuse offering and is ideally suited by inverter applications.

We are sampling the product with our customers and expect to report progress on design wins in the coming quarters.

Additional new products for the telecom, mobile phone and consumer electronics markets will launch this year and we will continue to update you on our new product development progress.

For the global electronic equipment industry as a whole, Eyesupply and Henderson are estimating that revenue growth will deccelerate from 7.7% in 2007, to about 6.6% in 2008.

While we remain concerned about economic slowing, we are still targeting growth in electronic product sales in 2008.

With inventory levels in the channel and end customers at normal levels and an increased number of new product launches, we expect a resumption of growth in 2008.

So in summary, we are pleased with our electronics businesses back on track.

There are numerous opportunities in our markets and we look forward to work to grow this business in 2008.

Moving onto automotive, which accounts for about 25% of total Littelfuse sales, we are very pleased with the continuing momentum in this business.

Global automotive sales were $33.6 million for the fourth quarter and the record high of $135 million for the year.

Though aided by strength in the Euro, our global sales out paced global passenger car production for both the fourth quarter and the full year as we continue to build momentum in new products and begin to penetrate the off road truck and bus segments.

Due to success in design wins for high current circuit protection in passenger vehicles, Master Fuse sales continue to grow in the fourth quarter.

We also saw gains in Jcase due sales in the new platforms launching in Europe.

And in Asia, we are benefiting from the strong performance of Hyundai and Kia car sales.

In the off road truck and bus segments, we achieved a strong double-digit growth in 2007 over the prior year.

We added several new sales channels in all three regions during the year and are moving forward with the design and launch of a new Master fuse and the flexible electrical [center] auxiliary junction box specifically developed for this market.

We see a number of good growth opportunities in this business for 2008.

While passenger car production is projected to be down in North America and flat in Europe compare to 2007.

China and India are expected to see strong growth in 2008.

With our investments in Asia, we are better positioned to respond in both China and India and we expect to convert some of this increased car production into increased sales for Littelfuse.

On the product side, there are opportunities in high current distribution applications and for the adoption of a battery fused concept.

We will also benefit from new Master Fuse design wins ramping up in 2008 and the continued growth of our low-profile Mini Fuse and Cable Pro products.

To conclude this section, the automotive business unit continues to perform well and we are making good progress on our strategies to expand in Asia, to ramp up new products and to grow the off road truck and bus segment.

Moving onto the POWR-GARD electrical business.

Sales were $13.1 million in the fourth quarter and $52.1 million for the year.

A 14% increase and new records for both periods.

Once again, the fourth quarter sales increase was driven primarily by strong price realization, along with the continuing head wave we are making on our initiatives to engineer custom products for OEM applications and to expand our services business.

The market fundamentals in the non-residential construction and industrial segments were fairly robust in 2007.

The indications are that this activity will slow in 2008.

So, we remain cautious by the slowing of the economy, but we are targeting growth in 2008.

Both of our two key initiatives are gaining traction.

Capital wins in developing customized products for specific OEM applications in the industrial and commercial markets were begin to generate incremental sales in 2008 along with sales of the new product developed for industrial material handling equipment.

Our service initiative is also gaining momentum as we continue to add new contracts for electrical hazard assessments and electrical hazard assessments.

In summary, the outlook for the electrical business continues to be positive and we anticipate continued growth in 2008.

That brings us to an update on our cost reduction initiatives.

As we have discussed in prior quarters, the objective is to leverage our fixed costs over fewer plants located in lower cost countries that are close to our customers facilities.

To achieve this, we are moving production from Europe and the U.S.

to Mexico, China and the Philippines.

We are on track with all of these major cost reduction projects.

In fact, last week our Board of Directors attended the dedication ceremony for expanded facility in the Philippines.

We consolidated production from this location from other facilities in Germany and the U.S.

and is scheduled to transfer the remainder of Des Plaines electronic product manufacturing over the next 12 months.

Building construction in Piedras Negras, Mexico is complete and ready to receive automotive production from Des Plaines during 2008.

We will also transition our North America distribution centers to this location.

We are still on schedule to be out of our Des Plaines facility by the middle of 2009.

Construction of a new way for [inaudible] Wuxi, China is nearing completion which will enable to transfer production from our Irving, Texas location.

The transfer on track to start in mid 2008 with completions schedule at the end of 2009.

The transfer of varistor production from [Ireland] to our expanded Dong Guang, China location is on schedule production wrapping up in Ireland in the third quarter of this year.

In addition to this production transfers, we are also continuing to focus on lean manufacturing projects and global IT supply chain and finance and purchasing initiatives that increase efficiency and reduce costs.

Although these transfer activities require increased capital investment and are resulting in additional costs to the P&L in the short-term, we remain focused on, and committed to the actions necessary to reduce our cost structure.

Executing on these major projects is critical to meet our objective to reduce fixed costs and improve our operating margin to 15%.

We continue to dedicate the necessary resources to achieve this goal with no disruption to customer shipments.

In summary, 2007 was a mixed year for Littelfuse.

On the positive side we had a record performance in our automotive and POWR-GARD businesses, a lean manufacturing initiatives and streamline supply chain resulted in a 34% improvement in inventory turnover which helped drive strong cash flow from operations.

We also made excellent progress on our manufacturing transfers that will fundamentally change our cost structure over the next two years.

The challenge in 2007 came in the electronics business and the inventory correction that took a good portion of the year to work through.

While we had record results in our other two businesses, there was simply not enough to compensate for the reduced performance in electronics.

So while 2007 was a year of many accomplishments, we were not satisfied with the overall results.

So we begin 2008 in a more positive position.

Electronics is stabilized and its targeting growth and we expect continued growth in our automotive and electrical businesses.

We are continuing to make progress on our operational initiatives and expect to see significant earnings improvement in 2009.

While we start the year with a back drop of economic uncertainty, we are focusing on those things we can control.

Increasing sales and improving profitability are top priorities.

We are also going to continue to move forward with the growth strategies and operational initiatives that will position Littelfuse for continued success in the years ahead.

Now I'll turn the call back to Phil who will provide additional comments on our guidance for the first quarter and the year and then we will open the call up for questions.

Thanks, Gordon.

As we said in the press release, our guidance for the first quarter and the full year of 2008 is as follows.

Sales for the first quarter are expected to be in the range of $134 to $138 million, which represents 2% to 5% growth over the prior year quarter.

Earnings for the first quarter are expected to be in the range of $0.32 to $0.37 per share.

Sales for the year 2008 are expected to increase 5% to 7% compared to 2007.

For the second half of the year being stronger than the first half due primarily to increasing new product sales.

Diluted earnings per share for the year 2008 are expected to be in the range of $1.80 to $1.90.

Earnings are expected to be stronger in the back half of the year, due to higher sales and increased cost savings.

We will not generate much free cash flow in 2008, as we will have severance payments of approximately $20 million and net capital expenditures of approximately $45 million both related largely to the manufacturing transfers.

In summary, 2008 will be a transition year in which expenses and capital spending, related to the manufacturing transfers are at their peak and savings from these transfers are only beginning to ramp up.

In 2009 the savings will increase substantially and the transfer costs will begin to decline.

As a result, earnings are expected to increase to $2.50 per share in 2009 and cash flow should return to more normal levels.

Upon completion of the manufacturing transfers, we remain confident that we will achieve the 15% operating margin.

This concludes our prepared remarks, now we would like to open up for questions.

Thank you.

(OPERATOR INSTRUCTIONS).

We will go first to Ingrid Aja of Merrill Lynch.

Good morning.

I'm just trying to get a better understanding, if your EPS comes in at the low end of the range this quarter at $0.32, maybe you could give me a little more understanding how you get to $1.80 for the year.

Well as we said Ingrid, we have a little bit of a back end loaded plan this year due to both the sales ramp up and in kind of the shape of the cost savings versus the transfer costs.

So, what we see is -- typically we would have sales kind of peaking out in the second and third quarter and that really is the case this year, but we have a steeper ramp up than our normal seasonal pattern in sales because of the new product introductions that we are doing and both in electronics and automotive.

It tends to be a little bit more back end loaded than normal.

And then, in addition to that, the cost savings from some of the big transfer programs begin to show up in the back half of the year and those would be for Ireland, and then a couple of smaller programs that we have like the move out of the Old [Wickman] Dongguan plant to the Philippines, those savings are back end loaded.

So, it's a combination between a somewhat stronger back half for sales and better cost savings in the second half of the year.

We should see pretty substantial margin improvements as we get into Q3 and even better than normal Q4 for margin -- from a margin perspective.

Okay.

And then, I guess, on your revenue assumptions you brought them down slightly from 6 to 8 to 5 to 7.

Right.

And I'm just wondering what drove that change and maybe what are the biggest risks in the end market?

Yes, I think we are a little bit cautious on the kind of the overall outlook for the macro economy, number one, and you know, particularly as it relates to our electronic business.

You know, we are still confident of growth this year and we turn to a growth position in the fourth quarter, but we are still -- we are still being a little cautious.

I think the overall macro economic outlook is probably a little less positive than it was when we gave our earlier guidance.

So, we really haven't backed off significantly on that, but we have tweaked it down a little bit.

Okay great, thank you.

Sure.

Next we move out to Alexander Paris of Barrington Research.

Good morning, nice quarter.

Good morning, thanks Alex.

Could you break down for me the auto and the electronics by region, you know, was it up or down in America versus Europe versus Asia-Pacific?

In each of those two areas?

You are talking about for the fourth quarter, Alex?

Yes, or the year, or both.

Well, I mean let us talk about for the year and I'll just talk generally.

Okay.

For the automotive business, it was really -- it was really up in all three -- all three regions for the year.

You know, we have talked about -- we have some growth initiatives in Asia so we had pretty strong growth in Asia, good growth in China, particularly, and that should continue.

Europe, we were -- we had a pretty strong year in Europe, of course, the strength of the Euro contributed to that for automotive.

But, we also had some decent growth, even in local currency and our OEM business there and then the U.S.

was kind of a mixed tag for automotive, but overall -- overall we had growth largely thanks to the growth in the off road truck and bus business.

And then for electronics, you know, we had modest growth in Asia and the other two regions were down.

Okay.

And just one other thing, in auto I think you said, you are assuming that in the auto industry, as far as industry production is concerned that North America will be down and Europe, did you say flat is your assumption?

Yes, we said, that is sort of the -- that is the industry model research data that we are using and this indicates flat, pretty much in Europe.

And Asia up some?

And Asia up, yes, Asia up, and in particular, the emerging places of China and India are remaining still very strong double-digit growth.

Okay, thanks very much.

Thanks, Alex.

Next we will go to Reik Read at Robert Baird and Company.

Good morning.

With respect to the transition costs, are those something that holds steady at $3 million per quarter or is that more of an average and you willl see some degree of fluctuation throughout the year?

It's an average and you will see some degree of fluctuation right, but the fluctuation is not going to be great.

I mean -- I think you are probably talking about fluctuation between $2.5 million and $3.5 million in any given quarter.

Okay.

And it's not necessarily, you know, it's not necessarily building or declining during the year, it will just bounce around a little bit from quarter-to-quarter depending on -- if we happen to have like a lot of equipment transfers in a particular quarter, the cost of that could bounce it up and so it will bounce around, but generally it would be in that range.

So, you will have something along the lines of $12 million in cost and the benefits that you will get in the back half of the year, should I think of that as kind of $4million to $5 million?

I'd say it will be probably a little less than that, but it will be several million and it will be almost all in the back half of the year.

Okay, and then with respect to the transition costs, you mentioned that they dissipate in 2009 Phil, can you give us a sense for how quickly that would happen?

You know, It will be declining -- a declining trend as we, you know, as we exit the year and go into the first quarter of next year and it will decline pretty rapidly as we get to the middle of 2009.

So, you know, it's going to be -- compared to the $12 million that we have, that we are going to be incurring in 2008, it's probably going to be no more than 1/3 of that in 2009.

Okay.

And then if I could just follow-up on the off road truck and bus market.

You guys have talked about that for a number of quarters now, as something that is a pretty good opportunity, it sounds like the penetration rate is increasing there.

Can you talk about what happened in the last couple of quarters in terms of -- to the extent that you could quantify that increase in penetration.

What the opportunity is throughout the 2008 timeframe?

Yes, you know, it's -- we didn't focus on it until really about a year and a half ago.

We really started that increased focus in all three geographies now.

And we see it both as a new market segment where we have got new channels to market, but also an area where we can develop more new custom products and it's much more custom, smaller volumes, but we see it as an area where we can drive a much broader range of products for that.

As a percent of our total business, it's still relatively small from the majority of our business is still passenger car business, but you know, we see it with much higher growth rates that the passenger car business, right now.

Yes, it's in the neighborhood, roughly it's in the neighborhood about 10% of our revenues today, but that should be increasing over time.

And then just one last question on China, can you guys talk a little bit about -- you have just given that you continue to move more into that region, that China labor increases there going on and the impact with that might have and if you are seeing any disruption right now from some of the weather issues they have?

We have not seen any disruption, we certainly had some surprising weather in Suzhou plant, that is an area that does not typically get a lot of snow.

We did have some power outages there briefly last week, but has not been anything that significantly impacted us.

But, of course, we are going into Chinese New Year right now anyway.

So, we have not seen that the business itself has really been impacted by the weather.

And in terms of labor rates, that is obviously going to be an ongoing issue as the strength of the Chinese, the expectation would be that the strength of the Chinese currency would continue to strengthen against the dollar overtime on a gradual basis.

And, you know, labor inflation, even in local currency is -- it's been up in the, 6%, 7%, 8% range as opposed to the 3% or so that it has been over here.

So, we will continue to see some cost pressures there and, you know, we are just going to have to deal with that, through continuing to drive efficiencies in those factories as we -- as we get to consolidate things and get more and more efficient and get better leverage on our overhead costs.

Great, thank you guys.

Sure.

Thanks, Reik.

We will go next to Jeff Rosenberg at William Blair.

Good morning.

Good morning, Jeff.

First on the comments you made about the economic uncertainty, I just wanted to be sure -- I mean, are you just reflecting sort of what we are all hearing every day or is there anything specific that you are talking about relative to what your customers are saying to you or cancellations or difference on your bookings trends at this time of the year versus what you should normally see at the beginning of the calendar year?

It's really on the format, I think just the macro picture of expected decreases in consumer spending here.

We are not seeing any signals of that really, I think like a lot of companies in the business, we are all waiting until after Chinese New Year and seeing how things pick up and what we see as trends.

But certainly in our order, incoming order rate for electronics specifically, we have not seen anything that specifically would make us be concerned and surely the macro picture.

Are you surprised by that?

Given there seems to be a lot of signs that would lead weakness in your end markets that it has not flowed through at all.

Or is it in your prior experience when we are at the front end of what might prove to be a demand driven downturn, the timing of when you see it, you would not know it yet.

Well, it's a good question .

I was recently at the electronics consumer show and their was a presentation there from Bill Gates and talking about their business.

And, you know, they were talking about the dramatic growth in gaming for their products and PC sales still being robust, still being double-digit forecasts for this year.

Notebook PCs is still being in excess of 20%.

So, I think that they had a theory when the question was asked to them that, you know, maybe in times of a downturn, maybe people cut back on the travel, on vacations, on meals and sports events.

But maybe consumer electronics is still something that is providing good value and people will continue to maybe stay home and buy gaming PCs et cetera.

So that was a theory from Microsoft and certainly a very robust consumer electronics show.

So, I don't think we are anymore experts on that.

We obviously are followers in the trend of consumer electronic spending, but that's a theory that says that maybe things will stay reasonable for the year.

I think we are just trying to look at all those things and be a little more cautious in our own

Okay, and you characterized the fourth quarter as coming in largely as expected.

I wanted to focus on that from a margin perspective.

It looks like the operating margin was a little bit lower than we have been thinking about it normalizing about 8%.

Is it fair to say that, that was a little bit weaker than you thought and could you focus in on why that might have been in terms of higher expense levels or weaker gross margin?

Yes, Jeff.

I mean, I think it was, it was certainly, you know, it was certainly in the range of what we thought it would be.

I think you are probably right that relative to our going into the quarter forecast, it was a [tad] lower than we were expecting.

And really, I guess I wouldn't attribute that to any, you know, any real negative trends that would affect our performance going forward.

It was really, you know, the fourth quarter is always a bit of a crap shoot in terms of, you know, the cost and absorption overhead absorption that you get in the quarter with plant shut downs and weakness at the end of the year.

And I think, when you add all that stuff up, there was probably a little bit higher cost generally in the main manufacturing area than what we had built into our original models going in.

It was not dramatically so, but we didn't see anything in that that would affect our views or cause us concern in terms of our outlook going forward.

And I think relative to what you told us about the details of your outlook for 2008, three months ago, SG&A would need to go down on an absolute basis for the year.

If that's right, is that something you think you can achieve the other cost reductions or is it higher gross margin than the 33% you talked about that kind of factors for the full year.

How do the -- I think you gave us some detail last time, just maybe looking for an update on how you see the P&L.

Yes, I think certainly what the most of the improvement in margin, you know, there's only going to be modest improvement in margin from 2007 to 2008 because of some of the transfer costs that we talked about.

But I would expect most of that improvement to occur in the operating expense line and it's basically going to be holding the line on operating expenses on an absolute dollar basis and getting -- we are going to get -- we will get leverage on the operating expense line to the tune of probably 50 to 75 basis points.

Okay.

And then, the last thing I wanted to ask about was just, on the electronic side, the new products that you expect to drive the growth.

Specifically which ones?

You highlighted anecdotally a number of different things.

Anything in particular that is most important in terms of new product introductions that will contribute to growth?

There is not any one big hitter.

It's a large number of singles here, but the TBS diodes, which are the products that we acquired from Concord some years ago and investing in a broader line of those products, the silicon protectional rays that we are investing in, even some of the increases fuse products that we talked about.

Higher temperature chip fuse, so there is a pretty broad range.

It's not one major product.

And are you -- do you have the design wins already or the design cycles more going on now for holiday season ramp.

What's the visibility of the success of those new products?

Yes, it's a mixture.

Some of those we have design wins that we talked about.

Things like the --

Infrastructure?

The Nokia Siemens infrastructure, the ZTE-based stations.

Those are real design wins and real products that we are excited about.

Some are more product launches like the high temperature chip fuse that should be a more generic product that will be used in the consumer electronics applications where there is a requirement for higher temperature.

So, some have got firm design wins, some have been products that, you know, we have a lot of costumer requests form and we need to get the product out there.

Sampling, starting now before we get design wins.

Okay, thanks, good luck .

Thanks, Jeff

We'll move next to Shawn Harrison of Longbow Research.

High, good morning.

A quick follow-up question on the design wins.

How much of the 5% to 7% sales growth expected for 2008 is from new product design wins?

Probably, the majority of that.

Okay, so the overwhelming percentage of that was very little, I guess, end market growth [baked] into the number?

Well, we have got some end market, we have got a model that would show us, but some end market growth, there is volume growth and there is price erosion to take off from there, and then there is the growth from new products and that is how we sort of come to that number.

Okay.

I think, Shawn, for us to achieve the high end of that range, we are going to have to have some modest market growth, but we can get most of the way to the low end of the 5% to 7% on the backs of our new product efforts.

Okay.

And then, just secondly, looking into the lead times situations, and the potential for demand to weaken, if you could kind of go by each of the individual business units.

How much visibility do you have out in the channel in terms of production schedules?

And I guess, just typically, if things were to weaken in previous cycles, when do you began to see that?

What is the timeframe and how quickly does it occur?

You know, in automotive, we have very good visibility to what our designs in basically for the entire year.

We can -- we know what products we have designed in and kind of what the schedules are for those products.

Obviously, you know, if the end markets slow down more than expected, there can be some adjustments in production schedules that ultimately affects us there and we don't have a lot of it.

So we have a lot of visibility to the former -- you know, what the schedules are and what our products are in those platforms, we have less visibility to kind of what is going to happen to those schedules as we go through the year.

Obviously that depends on end markets.

In electronics, there is -- the visibility is clearly not as far out.

The one thing we do add visibility to is the distributor positions in pretty good shape and that would give us at least some optimism that borrowing, you know, some real downturns in our end markets that we should be okay for the near term here.

We don't expect distributors to be pulling back any farther than they already have on inventories.

Okay and the electrical too is mainly through distribution as well, so those inventories you are happy with?

Yes, we typically don't have the same kind of inventory issues in that business as we do with our electronic distribution.

And that business, it tends to be pretty predictable.

It tends to be driven by some macro factors that industry factors like non-residential construction and it's lagging that by 9 months or so.

So we have a pretty good idea on how that is going to trend for the year.

Okay, thank you very much.

Sure.

And next we will move to (inaudible) at KSA Capital Partners.

Good morning.

Good morning.

A couple of questions here.

Gordon, I want to go back to the operating profit margin.

You had good improvement, I guess, year-over-year, based on higher sales, but in terms of your three major product units, where did you kind of see improvement, either year-over-year or sequentially?

Where did you see a not so good performance?

If you can walk us through.

Are you talking about going from -- are you talking about 2007 performance or talking about going into 2008 versus 2007?

No, just for the quarter you just reported.

For the quarter we just reported.

Well, the quarter we just reported I think was a -- our margins were pretty much as we expected them to be.

They were better than we have had in the prior year and the biggest factor there -- well we got, I mean, it's a combination of small things.

We got some better leverage on or SG&A.

We have been -- we have really been holding the line on SG&A spending.

And with higher sales, we got some good leverage there and we got some modest improvement in margins.

You know, I think the biggest margin improvement that we saw in 2007 was in the automotive business where we picked up about, I think about 300 basis points on our operating margins due to a number of reasons.

It was due to the strong top line, it was due to the fact that in 2006 we had some negative impacts from the commodity price increases that we addressed successfully and got some benefit late in 2007 with zinc prices and copper prices moderating a little bit.

Okay, and Gordon, I think in your prepared comments you said that there are indications that non-residential markets and maybe the industrial markets could slow in 2008.

Can you provide a little more color on that?

I just filled this remark unusually, but instead of a leading indicator that when we expect to see an economy slowing, we expect to see some non-residential construction slowing and that would usually be something that would be a leading indicator for deep line in our sales.

We haven't seen anything at the moment in that business in either incoming order rate or sales, but were just said -- words I used I'm being very cautious about that, just due to the macro economic picture of the economy.

Okay, and for your automotive business, what are your assumptions on global car products and either by the geography or in terms of units?

What do you anticipate for 2008?

Well, as you mentioned, we expect, I think the latest forecasts that we have been using have shown that there is a slight decline in North America passenger car volume.

Europe is essentially flat, which in fact I think is Western Europe declining slightly, actually fairly robust growth in Eastern Europe, but off a smaller base although it's gradually catching up.

But Europe essentially flat net on Eastern Europe and Western Europe and then really it's growth in the developing world.

South America growth and the main growth drivers being Asia, Japan is pretty flat, but China and India having strong growth.

And again, those numbers start to become significant.

I mean, the volumes in China are now starting to get up there and really moving the dial.

So that's the reason for our focus in the Asia markets.

Very strong growth continued, maybe not projected to be as strong as it's been.

I think it has been in the high single digits.

And it's now I think projected in a little bit lower in the low single digits, but it's also getting off a much larger base.

Right.

But if you add these all up, will you say that the overall production will be up mid-single digits.

I think it's next to low single-digit, when you take the three big regions and you then you take the growth in the emerging regions of South America, Eastern Europe and Asia, it comes to low single-digit net.

Okay.

Great.

And last question, the assumption on Euro dollar exchange rate that you have?

We are not in the business of projecting that, but what we have built into our plan is similar, I think, actually slightly lower rates than a -- or slightly weakened or slightly stronger dollar that what it's trading at right now.

I think we built into our plans, a number of it was probably more consistent with where the dollar was maybe a month or so ago.

Probably closer in to the 140 level.

Okay, great.

Thank you.

[OPERATOR INSTRUCTIONS].

And Mr.

Hunter at this time we have no further questions.

We will turn the conference back to you for any closing remarks.

Thank you, well thanks to all of you for joining us on this call this morning.

As you can see, we are very optimistic about our company and the year ahead.

And we appreciate your interest and we look forward to talking with you again next quarter.

And that does conclude today's conference.

Again, thank you for your participation.