Littelfuse Inc (LFUS) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse second quarter 2008 conference call.

Today's call is being recorded.

At this time I will turn the program over to the Chairman, President and Chief Executive Officer, Mr.

Gordon hunter.

Please go ahead, sir.

Thank you.

Good morning and welcome to the Littelfuse second quarter 2008 conference call.

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

As you saw in the news release our second quarter results came in pretty much as we had anticipated.

Sales of $150 million were actually above our guidance, increasing 16% over the second quarter of last year.

Adjusted diluted earnings per share were $0.45, which is right on track with our previously-stated guidance.

Sales increased in all three business units.

Both our automotive and POWR-GARD businesses achieved record results in the quarter.

Strong sales in the electronics business, our largest business unit, contributed significantly to the overall improvement for the quarter..

Our sales this quarter,, particularly in the automotive business were helped by foreign currency effects, primarily the strength of the euro compared to the dollar.

We will comment on effects of currency on our results in more detail later in the call.

I'd now like to turn the call over to Phil Franklin, who will give the Safe Harbor statement and a brief summary of the press release.

Thanks, Gordon.

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

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.

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

As Gordon said, we had strong sales performance in the second quarter, with overall sales growing 16% to $150 million.

Favorable currency added approximately four percentage points to the growth rate.

Margins were lower than expected given the sales increases.

Benefits of increased operating leverage were offset by higher costs for transportation, materials and utilities, driven primarily by increases in the prices of oil and commodity metals.

In addition, the sales benefits from the strength of foreign currencies, primarily the euro, were largely offset by the unfavorable effects of foreign currency denominated costs, such euro, Chinese wan, Philippine peso and Mexican peso.

As expected, costs related to manufacturing transfers increased to over $3 million in the second quarter of 2008.

Earnings per share, excluding one-time charges, were $0.45 for the quarter compared to guidance of $0.42 to $0.48.

Cash from operating activities, which was negative in the first quarter of 2008, improved to $16 million in the second quarter, due primarily to increased earnings and improved working capital performance.

For the first six months of 2008, cash from operating activities were $15 million compared to $16 million for the prior-year period.

Capital expenditures through six months of 2008 were $25 million compared to $13 million last year, reflecting additional investment in facilities and equipment related to the manufacturing transfers.

I will now pass it back to Gordon, who will provide more color on our performance for the quarter and review the current states of our markets.

Thanks, Phil.

I'll start by providing some additional comments on each of the business units and then update you on our major cost reduction initiatives and the outlook for the second half of the year.

I'll start with electronics, which contribute about 65% of Littelfuse sales.

Electronics sales were over $95 million in the second quarter, a 16% increase compared to the same quarter last year, which was a weak quarter due to the electronic distributor inventory correction that reduced sales in the first half of last year.

Similar to the prior quarter, sales of products in the computers and LCD TV applications continued to be strong.

Also, notebook computer shipments increased more than expected at 15% in the second quarter from an original prediction of 11% according to IDC and Gartner.

Growth was mainly fueled by western Europe and the emerging markets.

The market research companies and Intel, which shipped more microprocessors for notebooks and for desktops for the first time, predicts continued strength in the notebook market for the rest of 2008 supported by the growing lower-cost notebook market.

Moving on, the longer-term prospects for LCD TVs look bright.

Analysts still expect 2008 LCD TV shipments to grow 20% and surpass the 100 million unit mark, assuming historically stronger second-half shipments compared to the first.

We made progress during the quarter on our design win and new product initiatives.

From the design win front we've taken market share, with new contracts for our TBS diodes at [WahWeh] and ZTE, the two top telecom equipment manufacturers in China.

Our (inaudible) business is also growing with new contracts and an increased market share at [Adtram], ZTE and Lucent, and new wins at Sanken for LCD power supplies and the APC for a new cartridge fuse series are helping to grow sales.

We're also growing our nano fuse business with design wins in applications such as LCD inverters and IP/PBX and WiMax equipment.

We've increased thin-film fuse sales to a major Japanese S&D card manufacturer and have also grown our thin-film fuse share in Apple notebooks.

Our new polyfuse polymer series offers reliable over current protection for consumer electronic devices in the form of the world's smallest self-resetting device, the service man package of 0603, meeting industry demands for ever-smaller, electrical circuit components and end products.

Our new SEP, which is a [sidactor] ethernet protector series devices provide robust over-voltage protection for Ethernet applications without degrading data rates.

This low-capacitors product series was developed in response to the increasing demand of broadband communications rates sufficient for combined voice, data and video applications.

Turning to our outlook, the book-to-bill ratio nor the electronics business was approximately one-to-one at the end of the second quarter.

This is not as robust as we would like and translates into a cautious outlook for the third quarter, which is historically our strongest period.

The impact of high oil prices on spending and consumer confidence in the economy are covered daily in the media so I won't repeat the specifics here.

In our business, this cautionary spending attitude translates into concern about electronics products run rates for the second half the year and an expectation of modest, sequential growth for the third quarter.

Next, I will move to automotive, which accounts for about 25% of total Littelfuse sales and achieved strong performance in the quarter.

Global automotive sales were approximately $39 million for the second quarter, a 15% increase over the second quarter of last year including favorable currency translation.

With a little more than half of automotive business unit sales in Europe, currency translation added seven percentage points of growth over the prior-year quarter.

Our global sales increased once again and significantly outpaced global passenger car production, which was basically flat for the quarter.

With very little growth in global passenger car build, it's obvious that our automotive business could not rely on the growth in car production for increased sales.

As we've discussed in past quarters, our growth strategy for the automotive business continues to be centered around three basic initiatives: Increasing our presence in Asia, especially in emerging geographies like China and India, where there is significant growth potential; secondly, pursuing designing opportunities with the OEM segment that produce multiyear revenues; and thirdly, executing on our new product development initiatives, particularly in the off-road, truck and bus segment.

We made good progress in all three of these areas during the second quarter.

There were several key contributors to the quarter's performance.

Our CablePro® sales continued to climb in North America as GM continues to design in CablePro® in its new platforms as a replacement to fuse link technology.

Master fuse sales also continued to ramp up during the quarter and we expect continued master fuse growth for the remainder of the year and into 2009.

This is especially true for Europe, where we've had good success with design win programs.

We've also won new future design programs across Europe and North America during the quarter and we are pursuing designing opportunities in China, Korea and Brazil.

Also on the design win front we had our first success with our CablePro® product for battery power protection for the MRAP armed vehicle through Navistar.

With six CablePro® assemblies per vehicle, an average selling price of more than $3, and potential for annual vehicle platform volume of 30,000 units, this generates a significant design win value.

Also, we are working with Navistar and other bidders on the designing of CablePro® for the new JLTV tactical vehicle, which is replacing the Hummer platform.

Looking ahead to the second half of the year, our outlook is guarded.

Car sales and production in North America are at a ten-year low.

With the high cost of fuel, truck and SUV production is also very low.

Passenger vehicle manufacturers are focusing on small car production, which typically has lower fuse content than trucks and SUVs.

The European market enjoyed stronger-than-expected sales and production for the first half of 2008, but sales in Europe are not expected to be as strong for the remainder of the year.

And while industry analysts expect continued growth in emerging markets like Asia and Brazil, it's unlikely that strong sales in these regions will fully compensate the weakness in North America.

Overall, the automotive business continues to outperform the global passenger car build, but the sustained market weakness in North America is limiting our overall growth rate.

We're continuing to move forward with our strategies to build the business for the long term.

Moving on to the POWR-GARD electrical business, sales were over $15 million in the second quarter of 2008, a 17% increase and a new record for the quarter.

A number of factors contributed to the higher sales of POWR-GARD.

Price increases continued to be strong this year-over-year comparison.

Additional growth came from the unit's key focus areas; engineering custom products for OEMs and expanding hazard assessment consulting services.

The K-Tec line of ground-fault protection products we acquired in March contributed several points of growth to the second quarter's POWR-GARD sales, as well.

We continue to execute well on designing opportunities for new products and are benefiting from design wins in the segments, such as solar, traffic lighting and air conditioning.

Also, we remain encouraged by the design wins for products, such as our coordination panels and ground-fault products.

Activity has ramped up for our recently-introduced custom engineered coordination panels, and we are now shipping orders to large commercial development projects.

We've completed the integration of the K-Tec line of ground-fault products purchased in the first quarter and are excited about the opportunities that we are seeing to increase sales of these products into electrical control panels in industrial, petrochemical and mining end segments.

We will continue to invest in these attractive growth products and we'll update you on our progress.

In summary, and similar to our other two businesses, we have a cautious outlook for the POWR-GARD business for the remainder of the year due to macroeconomic conditions.

Consistent with our communication in the prior quarter, we remain concerned about the effects of softness in nonresidential construction and industrial manufacturing activity.

I'll turn next to an update on our cost reduction initiatives.

As we've 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 customer's facilities.

To achieve this, we are moving production from Ireland and the US to Mexico, China and the Philippines and we are working to implement Lean manufacturing practices in all of our facilities.

Overall, these initiatives remain on track.

We've been moving equipment into our newly-constructed and expanded facilities in China, the Philippines and Mexico and are qualifying products coming out of the new factories.

We continue to reduce our Ireland production levels on schedule and they're ramping up to full capacity for production of our varistor products in Dongwan, China.

The automotive and electronic production moves from our Des Plaines, Illinois facility to Mexico and the Philippines are on track.

They're expected to be completed in early 2009.

We have largely completed plant construction of our new wafer fab in Wushi, China and are setting up equipment this quarter.

We'll begin wafer process validation soon and still plan to start transferring production at the end of this year.

When all of the plant moves are completed, by early 2010, we will have significantly reduce our number of manufacturing facilities.

Although these transfer activities continue to cause additional costs to the P&L in the short term, they are necessary investments that will make a strong global competitor over the long term.

They're also critical in achieving our objective to improve our operating margin to 15% of sales.

Looking at the Littelfuse business as a whole, we're pleased with our performance in the second quarter.

The automotive and POWR-GARD businesses had successful quarters and electronics showed solid improvement.

We executed on our key initiatives in each of the three business units.

We continue to make good progress on our major cost reduction initiatives.

As I indicated earlier, we have some concerns going to the second half of the year,.

including a weakening US automotive market and slowing in Europe.

Also, macroeconomic conditions and uncertainty causes us to be cautious about the outlook for the electronics and electrical markets.

Additionally, rising energy and transportation expenses, coupled with increased prices for commodity metals, are having a meaningful effect on our P&L.

Of course we're evaluating price increases to customers to offset these increased costs.

The POWR-GARD business has been successful at this in the past, but price increases in the automotive and electronics business units are historically more difficult due to multiyear contract agreements and more competitive and price-sensitive markets.

Dispute this, we plan to raise prices on electronics products in some markets.

In this uncertain environment, we're going to do all that we can to cope with the softening US economy and the higher metals and oil costs.

We're also going to remain focused on those things we can control, specifically, executing on our long-term growth strategies.

Our cost reduction initiatives are on track.

We're developing new products and expanding geographically.

We are financially strong and able to invest in attractive products and market segments.

We believe we are well positioned to weather any turbulence ahead as we work to make Littelfuse an even stronger and more profitable global leader.

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

Thanks, Gordon.

As we said in the press release, our updated guidance is as follows.

Sales for the third quarter are expected to be in the range of $145 million to $150 million, which represents 3% to 7% growth over the third quarter of 2007.

Diluted earnings per share for the third quarter are expected to be in the range of $0.42 to $0.48.

Diluted earnings per share for the year 2008 are now expected to be approximately $1.70, which is down from our previous guidance of $1.80 to $1.90 due primarily to higher-than-expected commodity and freight costs.

We believe our 2009 earnings target of $2.50 is still possible, but because of the uncertain economy and building cost pressures, we believe this number could be as low as $2.30.

This concludes our prepared remarks.

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

thank you.

(OPERATOR INSTRUCTIONS) Our first question will come from Jeff Rosenberg with William Blair.

-- ask about what you're seeing in terms of inventory, particularly at distribution.

Some of the semiconductor companies that book sales into the channel have talked about a slowing in orders and sales into the channel at the end of the quarter.

What are you seeing there?

Actually, it's held up reasonably well, Jeff.

The concerns we had a year ago, when we had the correction, I think we've been much more able to monitor our channels, particularly in Asia and we think that we have a good handle on inventory levels.

So, I think that we saw a little slowing toward the end of the quarter, which brought the book-to-bill to 1.0.

It was tracking a little higher than that before the end of the quarter, so we saw some slowing of that, but nothing dramatic.

And you feel like inventory levels in your channels or at your customers are pretty normal?

Yes, we do.

We think that, in fact, that's something we really have worked on in the last year from the experiences of that correction.

We do think that they're at the right levels.

Okay.

I just wanted to clarify one other thing.

When you talked about the benefit of foreign currency translation, was that -- how did that compare to your expectations in terms of your guidance?

Was that a significant reason why the numbers were better than expected or toward the high end of the range or was it more of a year-over-year color you were providing us in terms of the benefit of currency?

Jeff, the numbers we cited were year-over-year numbers, but it was -- clearly the currency was -- the dollar was weaker than what we planned for when we gave our guidance, so it was a contributing factor to the guid -- to the performance versus guidance but not to the level that we cited, which was a year-over-year impact.

Okay And then the last question I had, could you just remind us as we look to next year, what are the expenses related with the plant moves that start to go away so that we can normalize operating expenses or the impact in gross margin as we think about how margins improve just as you finish these projects and the timing of how that starts to occur looking into '09?

Yes, so we talked about those transfer-related costs, as we call them, peaking in really the second and third quarter of this year at a little over $3 million a quarter and then beginning to moderate in Q4.

I think the numbers in the early part of '09 are more like a $2 million number in the early part of '09 declining to probably half that by the end of the year.

And that schedule's pretty much unchanged from what it was 90 days ago?

Largely unchanged from our original plan, yes.

Okay, thanks a lot.

And your next question will come from Alexander Paris with Barrington Research.

Good morning.

While you're on the subject of the cost and the savings, could you review what you expect the annual savings to be once you've completed the transfer?

Yes, Alex.

What we've talked about from the -- in aggregate of all of the programs, from the beginning to end compared to where we started the savings accumulate to about $35 million on an annualized basis and that full impact won't be reached until we get into the early part of 2010.

That would include all of the major projects we've talked about as well as more minor ones, so the Wushi move of the silicon, the Ireland move to China and the Des Plaines move to Mexico and the Philippines.

You said they would start kicking in before the end of 2009?

Yes, we'll start to see some benefit in the fourth quarter of this year from some of the programs that are furthest along, Ireland being the most notable of those.

The Ireland savings will start to kick in to Q4.

We will get -- start to get some savings in the fourth quarter and that will ramp up pretty quickly as we get into '09.

Looking at your geographic breakdown, I think for the year to date, you're about 37% Americas, 24% Europe and 38.7% Asia.

When you're all done with this, say in early 2009, do you have a guess as to what those percentages would be roughly?

You're talking our sales revenue in the region?

Right, percentage of the total from each of those three regions.

I just want to see how much they're changing.

I'm not sure that the plant moves per se are going to change the revenue split.

I think we're able to ship products from, for example, our factory here in Des Plaines to Asia today.

We certainly expect it to be lower cost of manufacturer and lower cost of freight being closer to customers.

So, I think that the plant moves will certainly help on the cost side but I'm not sure they're going to change the revenue splits.

But as we've seen, over the last few years Asia has gradually cent up to now being the largest region for us.

Obviously electronics manufacturing has been moving there steadily and we've grown significantly our electronics business in Asia over the last few years.

And then as we started our real investment in automotive, just a few years ago, that's consistently been the fastest-growing region for automotive; admittedly from a relatively small base compared to Europe and North America.

But we continue to invest there, so I think we'll see the automotive business, of which the majority is now in Europe followed by North America and Asia.

I think we'll continue to see Asia growing faster for some time in automotive, particularly China, India.

So, I think we'd see a similar progression to the last few years as those investments in automotive and electronics in Asia grow and we'll see Asia continuing to grow, although we've had good success in automotive in Europe this year.

We're certainly investing in all regions, but I think just the natural momentum will be that Asia will be always picking up a few percentage points of the global split.

But what you're saying is the final market to where your goods are sold is going to stay relatively the same, is what you're saying?

I don't think it is going to change dramatically.

I think we'll just see Asia picking up a point or two per year at the expense of Europe and North America.

And it'll be really unaffected by the plant transfers.

And when this is all done your aim is to have a 15% operating margin, you said, and the gross margin, has that changed much from 32%, roughly where it is now?

Sure, it has to, Alex.

That's where -- when we talk about the $35 million of savings coming from transfers, most of it shows up in gross margins, so there will be significant benefit to the gross margin line.

We've talked about a target gross margin in the neighborhood of about 36%, but we also will see -- we'll also see some leverage on the SG&A line as we consolidate into fewer facilities and that we -- as we've talked about before, we've done a lot of the build-out that we need to do in some of the support functions to support a larger sales revenue, so we don't see those costs increasing as we increase sales.

With the change in geographic mix, what happens to your tax rate?

That stay close to 29%?

It's been gradually coming down over time in part because of some of the transfers we've been doing where we're recognizing more income now in -- places like the Philippines would be an example as we transfer more stuff over there.

We think probably for the next couple of years there will be some gradual reduction in the tax rate, but it's not going to go dramatically lower than where it is right now.

So, it may go down another few points.

Okay, thanks very much.

Thanks, Alex.

And we take our next question from Rob [Himay] from Robert Baird.

Hi, good morning.

Has your M&A mindset changed at all the reduced or the tempered outlook for 2008, and then could you talk about where you see the greatest opportunities for acquisitions?

No, I don't think it's changed.

I think that it's been fairly consistent that we have growth strategies for all three of our business units.

We've looked for acquisitions that fit with our strategy, whether it's a technology extension, a geographical extension or a market extension.

We've talked about attractive segments even within automotive; the off-road, truck and bus segment, for example.

Our electronics business has still got some attractive segments.

So, we are constantly looking for companies that we think would be a good fit, as we have made, we think, good acquisitions in the past that would extend the strategy, the technology and the market presence.

And I think we keep the same discipline that we have We're not looking for really any huge acquisitions.

It's mainly those that would fit into the business units.

And the same discipline around the financials.

So, I don't think that any of that really is changing.

Okay.

What are your substance for commodity prices and for oil prices that are baked into your new guidance?

Do you expect those prices to remain the same or do you expect them to come up the high levels where they've been?

We essentially assumed that they would stay at similar levels to where they are today.

And as Gordon mentioned, we're attempting to do some things to offset some of those and I think we baked a little bit of that into our numbers, but I think we -- things like price increases and even some of the things on the cost side it will take awhile for those to really start showing up in the numbers, so the benefit of that would be minimal in 2008, probably more in 2009.

So overall, we're -- we haven't assumed a significant change in any of those prices but even at the current levels, it's still going to be a negative impact on us in the back half of the year.

Okay.

How long does it take to get price increases passed through typically?

I'm sure it's different for different customers but is there a rule of thumb we can think about?

It really depends on the market segment.

We've had quite good success in our electrical business of getting prices passed through because those products [all have] a very fast turnover through distribution channels in small amounts, so that's been a fast ramp up and been part of the success of the electrical business.

Contrast that to the automotive business, which are primarily long-term, multiyear contracts with the OEMs, it really means a negotiation of a new contract, a new platform that gradually will ramp up.

So, it takes a lot longer in automotive.

It can be many months ahead before you see any real impact in automotive and almost instantaneous in electrical.

And the electronics business, as we really try and move that, a lot of that will be business that's going through distribution so it will be somewhere in between the two extremes of that.

Okay, great.

That's helpful.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from Ingrid Aja with Merrill Lynch.

Your line is open.

Good morning.

If we could go back to your outlook for next year, if I understand correctly, you think that $2.50 is achievable but it could be $2,30.

How much is driven by the inflation pressures and how much is more of the top line possible weakness?

Good question, Ingrid.

There's a little bit of both that we're factoring in there.

Certainly we know that're going to be some inflationary pressures that we didn't necessarily account for when we first gave that number, then question becomes to what extent are we able to offset the inflationary pressures with either price increases or other actions to reduce costs more than we had planned.

A peak of it clearly is due to that, with some uncertainty around that, and then I think we also just have a general view that the macroeconomic environment could be a little bit tougher than what we had originally assumed when we put together our plans for that $2.50 number and not really any specifics there but just a general view that there could be some negative impact on the top line, which would inhibit our ability to get to $2.50 in the timeframe we talked about if that were to occur.

So it's a little bit of both.

So, given the fears about auto, top line could be flattening out for auto or do you think it's that Europe will hold up reasonably well?

Obviously not as strong as it's been but maybe not falling off a cliff, either.

We don't think Europe is poised to fall off a cliff.

We think on the margin, we could see some decline there.

We certainly think there's further room to go down in the US market from what we've seen so far.

And then on top of that, third quarter is usually a somewhat weaker quarter for our automotive business anyway with the plant shutdowns that our customers have during that timeframe and in this type of environment in some cases, extended plant shutdowns more than normal.

So, yes, we do see temporarily potentially some automotive drop off in revenues, but in the medium to longer term we think our growth initiatives are going to let us continue to grow that business.

Okay.

And then on the book-to-bill, you mentioned that it had slowed toward the end of the quarter.

Are you seeing -- I don't know if you have this kind of visibility, but are you seeing any slowdown in ordering trends?

Have patterns changed in reaction to the economic risks?

Are there any pushouts on maybe new products that you've seen?

We haven't really seen any significant pushouts that I'm aware of.

I think the order just seems to indicate a little bit more caution from distributors than what we were seeing two or three months ago.

Some of that may be a little bit seasonal.

Generally, as we get into the August timeframe orders do start to slow down because the peak production periods are usually in the September timeframe and so people are reluctant to place orders out past that unless they have a pretty clear view of the future, which I think people don't at the moment.

So, we have seen some drop off in order rates.

Okay, great.

Thank you.

Our next question comes from Shawn Harrison with Longbow Research.

Hi, good morning.

Back to the pricing question.

What is the best case scenario in terms of pricing recovery say within the next six months?

It seems like electrical may be 100% but electronics, can you get a 50% recovery of the highest cost and then automotive is a number lower than that?

Just some color there would be helpful.

Yes, I think certainly electrical, we've had a good history of being able to pass through all of our cost increases there and we don't see that changing.

Electronics is a little bit tougher to call.

There are pieces of the business that we -- we're not even going to attempt to get price increases, but there's reasonable chunk of the business that we will be pushing through some price increases and there's questions as to how much of that really sticks.

But I would say if we could offset half of the cost increase, that that would -- we'd feel pretty good about that.

And automotive, the cost increases haven't been quite as significant as the other businesses, one, because they've seen increases in copper -- or in copper but they use a lot of zinc, too, which is actually not gone up in price, so that's been helpful to us on the automotive side.

Automotive, we also have a lot of -- quite a few customers we have surcharges built into the pricing so that our prices do go up and down with the commodity cost to a certain portion of our customer groups.

So automotive we're probably not going to be pushing through any new price increases, but we're not as impacted there, either, as the other two businesses.

Okay.

And the remaining 50% in electronics, just want to be sure that -- is it going to be additional price -- excuse me, cost reduction initiatives to offset that or is it going to eat into some of the total savings number of $35 million?

That remains to be seen.

I think we need to be a little bit further along in our price increase activities and some of the other things that we're looking at.

One of the things we talked about in the press release was switching from air freight to ocean freight and there we could mitigate a big part of the freight increase, which is a very substantial number right now for us, if we're successful in doing that.

So, I think it's a little bit too early to really say exactly what the outcome's going to be there.

Okay.

Just moving to the income statement this quarter, both R&D, as well as SG&A ticked up sequentially, was any of the SG&A increase tied to foreign exchange?

Yes, there was.

Certainly that was a contributing factor.

We had some other things that happened in the quarter that we don't necessarily expect to reoccur, so, we are projecting that SG&A will be coming down in the next quarter -- in the third quarter from the Q2 levels.

I would look at the Q2 levels as being a peak number for the year, but certainly some of that is foreign exchange related and the foreign exchange piece could be an ongoing issue.

So, maybe a little bit above, say, first quarter levels in terms of the dollar?

That's probably a reasonable gast guess.

And then the R&D, I'm guessing it's mainly tied to the new product initiatives, but of this $6.2 million number, a little bit north of 4% of sales, is that what we should assume as a run rate?

I think that number will start to come down a little bit over time as we -- in conjunction with moving our manufacturing overseas we're starting to move some of our R&D capability into Asia, for example, for electronics, as well.

As we do that, we should see some reductions in R&D costs with essentially the same amount of effort being put into that but at a lower cost.

So, I would expect to see a general downward trend in R&D spending, largely driven by our electronics business being able to do it at a lower cost.

Okay, and then just a final question just to make sure I have the number right.

Was it $18 million in savings projected for 2009?

Is that still the number?

That's in the ballpark, yes.

Okay.

Thank you very much.

Yes.

That would conclude our question-and-answer session.

At this time, I'd like to turn the program back to Mr.

Hunter for any additional or closing comments.

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

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

Thank you, everyone for your participation on today's conference call and you may disconnect at this time.