Richardson Electronics Ltd (RELL) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter earnings release conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to your Chief Executive Officer, Mr. Ed Richardson. Please go ahead, sir.

Good morning. Well, believe it or not we have a blizzard in LaFox this morning. I think it's about the earliest snowstorm that I can remember. I've been here a few years, to say the least. I have Dave DeNeve with me, who is Chief Financial Officer, Greg Peloquin, who is Executive VP of the RF and power division, and Murray Kennedy, who is Executive Vice President of the Electron Device Group.

As you know, we released earnings last night, and the full earnings release is on our Website, which is www.RELL.com.

Sales were quite good in the first quarter. I think that's a real credit to the whole team. We are about well over halfway through the restructuring and reorganization of the Company, which has probably touched 2 or 300 people within the organization. So, to have record sales while all that's going on is a real credit to the team.

Sales were up 4.8% from the prior year. Actually, on a direct comparison basis, a year ago we had 14 weeks in the quarter. This year we had only 13 weeks, which would have impacted the sales about 7% in a normal quarter. So, sales would have actually been up even higher than the 4.8% on a direct comparison. You should keep that in mind as we talk through the numbers as well.

First-quarter gross margin improved as we got more of the Engineered Solutions product through the channel. Margin improved from 24.4% a year ago, up half a point to 24.9% in the first quarter.

Operating income improved to 6 million, from 5.7 million last year. And if you actually look at the severance expense and various items within SG&A that were extraordinary, the operating income was 7.6 million -- up about 4.-- 4.6% of net sales.

So, within the quarter, we had $900,000 worth of severance expense included in SG&A, we had $600,000 in restatement-related expenses for auditors, primarily, and we had $200,000 in additional expense related to stock options and the FSAS 123R regulation.

When you look at SG&A, SG&A would be -- extraordinary items out would be 20.4%; what we reported was 21.3%, which had a 1.6 million in extraordinary items. And that included the $860,000 worth of restructuring expense, the restatement expenses, and also the stock option expense.

So, on a pro forma basis, SG&A was actually 20.4. And our objective right now is about 20%, as we get the full benefit of the restructuring in place.

At the same time, when you look at operating income, we reported just about 6 million -- 5,959,000. But if you took the 1.6 million out, operating income would have been 7,563,000 on a pro forma basis, or 4.6% of sales.

Also, we had 2,540,000 worth of retirement expense, retiring the convertible bonds on the long-term debt. And if you actually took that out, which is a non-cash item, the EPS or earnings per share would have been $0.17 positive, versus the $0.06 loss which we reported.

So, overall, we thought it was a good quarter, and we were really on our way to getting the reorganization in place.

By SBU, RFPD, or the RF and power division, really did well. They were up 12.5% to 91.3 million in sales. They also improved their gross margin about a full point, from 22.4% to 23.5%, again, as we get more of the Engineered Solutions through the channel.

Within that, the network access group was up 5.9% to 32.5 million, and their margin improved from 24.7 to 25.5. The infrastructure group was up about 12.8% in sales. The passive/interconnect group was up 17.3%. And geographically for RFPD, Asia was up 9.5% to 34 million. Europe was up 20.4% to 21 million. So, all across the board, RFPD was really strong.

Greg, maybe you want to comment on some of the highlights of the quarter for RFPD?

Sure. Good morning. As Ed mentioned, it was a very strong quarter, both in bookings and billings. In fact, if you track it on a per-day basis, which we keep our eye on, sales were up 20% in Q1 on a sales-per-day basis, with a strong book-to-bill of over 1.15.

I'm just going to go through a few orders. Numerous (technical difficulty) numerous applications and markets that they address, and then with our ability to serve these ES solutions and niche suppliers and exclusive agreements in a global infrastructure, you've seen the results with the growth.

Within the (indiscernible) infrastructure business, we're getting very excited as we've booked and shipped over $3 million to two key customers in China, supporting the China 3G rollout, which looks as if it's getting some steam. And their schedule of Q1 to Q2 next year seems to be on target.

We see our military and defense business continue to grow. Each of these contracts I'm talking about averages between 1 and $5 million. The two major contracts are going into defense tactical communication; what's strong about this is it includes products from every single business unit within RFPD, active and passive RF, and our power conversion products.

So, unique applications -- we just booked a large contract with an automotive manufacturer to supply peregrine switches into all the new remotes for Audi vehicles for 2007. Peregrine is becoming one of our largest suppliers over the last 12 months.

The broadcast industry -- again, it's strong for us, as we've talked about for a number of quarters, and we received two large contracts from two broadcast OEMs in Russia and Italy, mainly for broadcast power transistors.

A strong Engineered Solutions product was developed and booked to a large military OEM. This contract is over $1 million. It was designed by our design center for components here in LaFox, Illinois, and margins are well north of 30%.

And in general, the power conversion business, which, as you know, Murray and I worked together in transferring that over to the RF and Wireless group. And after restructuring, sales are up 36%, led by North America and Asia. Today it is our smallest business unit, but it won't be for long.

So, in general we continue to add key suppliers to these niche applications as the RF and wireless market keeps asking for more and more wireless products. The restructuring is going very, very well, and supports our growth strategy. And we are well on our way to our first $100 million quarter sometime this year. There's some internal betting going on to when that will be, but everything seems to be in line to do that. So we continue to be very, very excited.

Thanks, Greg. The Electron Device Group was up about 3.5% to 24.7 million; still our most profitable strategic business unit and our -- contains a large point portion of our legacy tube business, which is very profitable.

The tube business was actually down in the quarter. If we'd been able to ship the products that we actually had orders for, we would have seen an up quarter. But one of our largest suppliers is involved in a move, a factory move. And we have somewhere around 2 to $2.5 million worth of product that we could have shipped if we had gotten delivery.

At the same time, the semiconductor wafer fab portion of that business was up 45.5% and the margin on that business was 33.7%. So, impressive growth there. And geographically for the Electron Device Group, Europe was up 16.9%, and their margin was 31.1%. Murray, maybe you want to touch on some highlights for the Electron Device Group?

Thanks, Ed. Good morning. EDG had an excellent first quarter, led by our semiconductor equipment group. As Ed mentioned, sales in Q1 were up 45% over the same quarter prior year. But more importantly, our bookings increased by 73% over the same period prior year, and were up 23% sequentially. Our book-to-bill for Q1 for this business unit was 1.2.

We credit this growth to our ability to capture market share at several major OEMs as they continue to outsource technical assemblies and components. And as an example of this, we worked with one of our semiconductor customers on an RF distribution plate that generated over $500,000 in sales for Q1. This business will continue into the future throughout the year and future years.

We've also begun to supply coil assemblies to a major manufacturer of RF generators. We now have orders for not only the U.S. division of this company, but also their China facility. This shows that although outsourcing to China still exists, companies are sourcing critical components and assemblies from technically-capable vendors like Richardson.

As more and more of our components are designed into semiconductor equipment, we are rewarded with a high-margin aftermarket. And as proof of this, we booked orders for replacement products in China, Taiwan and Korea for more than $1 million in Q1.

As Ed mentioned, on the electron tube side of the business, it's a major part of the Electron Device Group's business. We're beginning to see the results of some efforts to further penetrate the scientific and broadcast markets.

As part of this initiative, we implemented a formalized process to monitor government bids around the world. And this effort has led to bookings in excess of $2 million at four major national labs in Europe, Asia and the United States.

And then, as Ed mentioned also, part of the decline in the tube business was due to deficiencies at one of our major suppliers. But we're starting to see improvements in deliveries on some of the delinquent orders that were due to the relocation of their manufacturing facilities. This should result in margin improvement for EDG in the remainder of the fiscal year as we are able to meet our customers' demand for this high-margin product.

Ed, I will turn it back over.

Thanks, Murray. The Security Systems division was actually down about 2.2%, although their margin was up about a full half point, at 26.3 million. The Burtek sales in Canada were up 9.5%, so that remains really strong to 17.1 million in the quarter.

DSG was also down. They were down about 10.7% to 21.8 million. This primarily had to do with their custom display business, which is very much project-based. A year ago we had a large shipment in the quarter for the New York Stock Exchange which didn't reoccur this year. So, the custom display business was down 15.8%. However, the medical monitor business was up a couple of points and the margin there was also very good.

Geographically, North America was just up 1.4% to 83.2 million. In Asia-Pacific in total, they were up about 6.2% to 39.5 million. This was led by Japan that was up just about 25%, Taiwan was up 21%, and China was up about 15% at 12.7 million. So, China will exceed 50 million this year for the first time.

In Europe, Europe was up 11% in sales to 36.4 million, led by Germany that was up 29.5% to 10 million. Israel was up 18.7%, and Spain was up 10.7%. Spain had excellent margin as well; their margin was 31.4% in the quarter.

Latin America was down about 7%. The major effort of our restructuring has been impacting Latin America. We're actually closing warehouses in Mexico and in Columbia. That was a portion of the reason why their sales were down. So, they were down about 7% at 5.6 million, although the margin was up almost 4 points to 29.1%.

With that, I'll turn it over to Dave DeNeve.

As Ed already went through the income statement and highlights during the quarter, I'll focus on the balance sheet and the cash flow.

Looking at inventory, inventory increased 4.7 million during the quarter, primarily in order to support our future sales growth as we continue to hit record sales levels quarter-over-quarter.

Our total debt increased to 138 million versus 127 at year-end. The increase was primarily due to the higher levels of working capital to support the growth. In addition, many of our annual expenses, such as insurance and information technologies, are paid during our first quarter, and we also had the higher audit tax and SOx expenses due to the restatement in the year-end audit that also impacted our debt levels.

Looking at cash flow, net cash used in operating activities was 7.5 million this year, versus cash provided by operating activities of 4.8 million last year. Capital spending was 900,000 in the first quarter of fiscal 2007, versus 1.1 million last year. Capital spending is primarily related to information technology projects currently underway.

With that, I'll turn it back over to Ed.

Alright. Well, it's certainly encouraging to see the record levels of sales continuing while we work through the restructuring plan. As you know, we started the restructuring plan with the beginning of the fiscal year. We did have about $900,000 worth of additional severance costs in the first quarter. We estimated that for the total year to be somewhere in the area of 6 million. So, now we have reported about 3.7 million, or thereabouts, and the balance will be completed over the rest of the fiscal year.

Involved in the project, just to repeat, from the first quarter, we're ultimately going to go to a three-hub structure, where we'll have a hub in Europe, centralized hub, consolidating eight warehouses down to one or two. Similar situation in Asia. We'll have a centralized warehouse in Singapore and also one in Hong Kong, and then the central hub in the U.S., as well as closing offices in Brazil -- I'm sorry -- in Colombia and Mexico and downsizing our facility in Brazil, which will be the centralized hub for Latin America.

We estimate that once the total restructuring is implemented, there's about $8.5 million worth of annual savings, and the cost to implement that structure is about 6 million in total, which so far we've taken about 3.7 million. So, you'll see just about 1 million in each quarter for the balance of the year.

The full impact of the cost savings -- we think we'll have the complete restructuring in place by June 1 or the beginning of FY 2008. But we're already seeing some encouraging improvement, as you can see.

To try to forecast the second quarter, we think sales will be in the range of 170 to 175 million, somewhere between 9.1 to 12.12 percentage points higher than the second quarter last year, which was 155.8 million; gross margin, somewhere in about the same area as where we are now, somewhere between 24.5 and 25; SG&A of about 35 million, which is our 20% goal; and again, we'll probably report somewhere between 500,000 and $1 million worth of additional severance in the quarter.

So, that's where we are. We're encouraged with the progress, and really working hard at completing the reorganization. Joyce, with that I will turn it over to you for questions.

(OPERATOR INSTRUCTIONS). Bill Benton, William Blair.

Congratulations, obviously, on the results. One of the things I wanted to explore with you is that -- and I know Greg will be happy that I said this -- but the gross margins in wireless looked quite a bit stronger, sequentially, at least, and nice improvement (indiscernible) year-over-year. So, I'm just trying to get a general sense at why that was and how sustainable that is.

Again, the pure number of exclusive lines that we've added over the last 12 months -- when you have an exclusive supplier, that helps your gross margin immensely, because you don't have the price pressure of people going into purchasing and competing with you on price. And in essence, we're getting paid for our engineering talents.

In addition to that, our Engineered Solutions sales continue to increase. Again, it's nowhere near where we want it to be as a percent of our total sales, what we're doing large growth in the semiconductor and the field team, the great sales team we have designing in components of these exclusive suppliers.

And then we've done some restructuring in terms of absorption issues we've had with these design centers. So, as I mentioned, that large order we got was designed at our facility here in LaFox, and we're centralizing our design capabilities. And that's helping our margins, not having the outstanding manufacturing out there.

So, it sounds like it's all sustainable (multiple speakers)

The answer is yes, and we hope to pick it up a few points here and there each year; as you know, 1 to 1.5% increase every year.

Was there any one of those items that you mentioned in terms of the exclusive lines, the Engineered Solutions, or the absorption issue in the restructuring, that maybe was [an] outsized contributor this quarter?

Yes. (indiscernible) Peregrine and ATC are two exclusive lines that we have that their business has doubled in this quarter. And they're going into -- every program that I mentioned has an ATC part in it, and that's just -- that's a strong margin because of exclusivity (indiscernible) the business doubled in the quarter. So, that helps.

And then, you guys, obviously, are guiding to the 20% target on the SG&A. Can you -- I guess if I looked back, kind of the -- probably (indiscernible) before -- but if I look back to the 2001 area, where you're kind of at sub-19% on a cost of sales basis, is there any reason that your target maybe not -- was there something unusual in the 2001 timeframe that allows you to achieve SG&A as a percentage of revenue that would be lower than your current goal would be after the restructuring?

I think it really had to do with the sales growth at that time. We were getting tremendous traction out of the team, and the whole wireless industry was on fire. If I remember correctly, in that period, Greg, your business was up like 58%, I think.

Yes. (inaudible)

So, it was an amazing period of growth. We still think we can be below 20, but it's going to be '08 before we get there. And if we can continue to see the kinds of sales growth that we have, and obviously we're trying to reduce the overall organization at the same time, I think we can get there. But as an objective for this year, I think 20% is a good number.

The objective on a full-year basis, kind of the 20% level?

Right.

Okay. And then, with regard to the restructuring, you said you're about halfway. Can you give us some idea on kind of what the big aspects of the restructuring that is kind of left, if you can offer us any color on that?

Sure. When you look at Europe, we still have eight warehouses. And we are involved in going to one centralized warehouse in Amsterdam. And once we do that, then the warehouses that we own will be sold. And the people involved in the logistics end of the business with those eight warehouses will be redundant as well. So, that takes out a substantial amount of cost.

And unfortunately, for a few months here, we have almost a dual expense because we'll be running parallel. We don't intend to just turn off the existing system and turn up the new warehouse until we're absolutely sure that we're not going to disturb our service to our customer. That's, obviously, the priority, is improving customer service.

But what it does do for us is right now, we ship consolidated shipments into Lincoln, England. And then those shipments are re-shipped out to our warehouses over Europe. In the new system, we'll be shipping one shipment to the warehouse in Amsterdam, and it will be shipped from there directly to the customer. So, it's actually going to improve the delivery time to the customer, and it's also going to cut out several layers of shipping expense.

And in addition to that, with some of the newer technologies, several of the companies -- UPS, for example, has a program called UPS World Ease, which allows you to ship even from LaFox to anybody in Europe in about three days. So, we'll be doing a lot of direct shipment as well, which will also improve the service and reduce costs. And there's no longer a need for the bricks and mortar with these eight warehouses all over Europe.

I think Murray talked about strong bookings growth in his segment. Could you give us an idea of kind of what the overall bookings growth was in the quarter for the Company?

Book-to-bill for the entire company -- maybe, Greg, you want to talk about it for RF and wireless, and then we'll let Murray talk about it for EDG.

The book-to-bill for wireless was 1.15 for the quarter.

Okay.

For EDG, as I mentioned, in the semiconductor arena it was 1.2. In the tube business, I believe that it -- overall for EDG it was above 1.1.

Overall for EDG was (inaudible). Okay. And then, final question is -- Germany, you mentioned, was very -- the European numbers were strong and, obviously, it sounded like it was driven by Germany primarily. Is there something unusual happening within Germany?

I'm not certain. Was it an RF and wireless order (multiple speakers)

Yes. They used to talk about the tube businesses -- it's going away; well, they keep talking about GSM being flat to reducing. And we're not seeing that. There's a very large customer in Germany that is increasing their purchases based on implementing some GSM amplifiers and base stations. And there's a large broadcast customer there.

The other area -- although a year ago we did own ACT Kern, but we acquired ACT Kern in Germany just about a year ago. And they were -- the numbers are comparable because they were already on board. But their performance is starting to improve, so there's some increased performance in Germany through Kern.

There's two customers there, Bill -- Siemens and Rohde & Schwarz -- that are doing very well this year.

Thanks, guys. Congratulations again.

Christian Schwab, Craig-Hallum.

Fabulous quarter, guys. The SG&A guidance, the 35 million, does that include the 1 million in restructuring expense?

No, it does not.

So, that's a pro forma number? Okay. And then, what -- share count? What should we be thinking?

The number of shares?

Yes. The number of diluted shares outstanding.

17.5 million.

Perfect. And then, we -- given the infrastructure, the plan still is to enter fiscal 2008 with recognizing the majority of all of our sales out of the United States? That's still the goal?

Yes. To complete the plan, it will be June of next year before we are completely up and running. And that will allow us, of course, to bring more of the income back into the U.S., and will create a lot of the extraordinary tax problems that we have.

Right. So, June of 2007 is the goal to complete that. So we'll certainly see the benefit in the last three quarters of that fiscal year, paying lower taxes?

Yes. (multiple speakers)

Fabulous. And then, is there any type of update that -- one other question. How much could we get for the warehouses that we're going to sell?

We're estimating about $1.25 million.

Just that little?

There are two of them that are involved that we actually own. The others are leases, so there'll be savings as we terminate the leases as well.

Fabulous. And then, on another operating leverage point, besides the restructuring and letting go of some people here. We saw almost 25% type of gross margins, expect similar type of gross margins in November. Is Engineered Solutions -- obviously, are becoming a larger and larger percentage of the revenue mix. Do you think that we could move gross margins up roughly 1% on a blended basis in '07, similar to what we saw in '05 versus '06?

We're trying to look at about a 1% linear improvement each year. That's pretty much our objective.

At what level does that kind of top out? When does it -- at what level of gross margins will the customer bear as far as mix? Can we get gross margins eventually to 26, 27, 28%? Where does it logically get as good as it gets?

You need to look at Murray's business. We followed the Engineered Solutions model with the Electron Device Group forever. So, well over 50% of his business, probably closer to 60, is Engineered Solutions today. And his margins are 31 or 32%. So, that's our goal. We would be quite happy to be up in the high 20s.

I think we all would be. I have no further questions. Thank you.

Rob Damron, 21st Century Research.

Congratulations from me as well. I wanted to talk to you a little bit about -- two businesses that you didn't talk that much about was the Security Systems and also the Display Systems business; saw slight declines from the year-go period. I'm just trying to get my arms around whether there were any onetime -- is that business -- are those businesses a little bit more chunky, and you need -- it just depends on when projects fall? Or is there anything going on with those businesses that might be in a little bit more of a decline mode?

Not really. DSG has to do pretty much with a project-based business. And as I mentioned, we had -- last year we had the New York Stock Exchange order in the first quarter, and I think it was around $2 million, which didn't occur this year. We do have an excellent backlog in the display business, so we look for that business to improve substantially the balance of the year.

The other thing that's happening -- and it wasn't reflected here because we actually saw an increase -- but the unit prices of the grayscale monitors that go into medical have probably been cut in half in the last year. So, we're actually selling more units. We continue to see an increase there, but nowhere near as dramatically as we had been seeing.

So, I think the display business -- we're really pleased with the organization and the resources that we have in place with ACT Kern now being the design center in Germany. And we're moving a lot more of our production to Taiwan and to China, and using pixel Pixelink and Kern as engineering centers. So, I think we're pleased with the progress there.

There had been some period of integration with Kern in Europe, but that's coming along. So, I think that we'll see substantial improvement out of DSG going forward.

In SSD, we made a couple of changes. SSD is also -- the Security Systems Division has also been reorganizing in Latin America. So, that had an impact. Our business was really down for SSD in Latin America.

Where it's strong is where we're well organized -- Burtek in Canada. And we're using the Burtek organization now to manage the U.S. sales as well, and we're taking their strategy on private-label and implementing it throughout the balance of North America.

We also made a change in Europe in security. We've gone to what we call an FOB model in the UK, primarily handling the UK sales out of France for the Security Systems Division. We've we also closed the warehouse for security in Italy, and we're using Spain and France to service both Italy and the UK. So, that's had some impact. But the Burtek organization is doing quite well. And as we can bring their strategy through to the U.S., I think you'll see nice improvement over the balance of the year.

That's helpful. Another question on the restructuring. You've mentioned the $8.5 million of expected annual savings. Is there any way you can quantify how much of that we actually enjoyed in the first quarter of this year? How much of that 8.5 on an annual basis showed up in the first-quarter results?

Approximately $1 million. That will increase as we go throughout the year, but approximately 1 million in Q1.

[Shareen Quadre], Pilot Advisers.

Congratulations, guys. I have a couple of quick questions. One is, if you could you, obviously, talk about it, but just in a little more detail on the 3G opportunity. It sounds like things there, general to the industry, is really picking up a bit with that, at least in China. Can you just elaborate a little bit more on that, and what you'd expect to see over the next five or six quarters as opposed to just one quarter? And secondly, if we could just walk through that $0.17 of EPS, pro forma EPS for the first quarter, that would be great. Thanks.

On the 3G, we've been waiting for about, it's going on a year now, that -- waiting for the government to introduce the licenses so they can start rolling out the infrastructure for China's version of 3G. What (indiscernible) in the first quarter was the fact that our customers who are servicing China, and the customers in China, have started ordering components to build up the infrastructure. So, they've gotten the nod from the government to start putting in the piece parts to start getting inventory ready to do this rollout, which again, the latest date is Q1, Q2 of next year.

And you just see the growth in China in general. This would be a big win for us because of our ability to service the Chinese market with now nine locations and the design center, but also with the exclusive suppliers that focus specifically on this type of product. So, it will be a nice uptick for us, hopefully (indiscernible) Q1, Q2 of next year.

Do you think it's something that -- it really takes a while to build it out, obviously. Is this sort of a cycle that is somewhat sustained for more than even, let's say, next -- this fiscal year, I guess?

The big dollar rollout will be within 12 to 18 months. (multiple speakers) (multiple speakers) roll this out over 18 months. But then, there's other products that will be using that network that we'll participate in also. But the big rollout for infrastructure they will do within a year to 18 months.

Just the pro forma EPS -- I messed how you got to the 17.

Starting with the pre-tax income number of 85,000, you have to add back the 1.6 million of SG&A adjustments for restructuring, restatement expenses and the stock option expense; then add back the 2.5 million of the retirement of long-term debt expenses, gets you to a revised or pro forma pre-tax number of 4.2. Because of our tax situation in the United States, we have to record a valuation allowance on income in the United States. Or if we have a loss, we do not receive an income tax benefit. The majority of those adjustments that I described are related to the U.S. So, the tax effect of those adjustments is only 130,000. So, you get to a pro forma income tax number of 1.3 million and net income of 2.9.

So, the tax rate going forward, what should that be?

It will be much more predictable when we set up our LRD, or limited risk distributor, structure in FY '08. I'm guessing this year it's probably going to be in the 75% range. This was an unusual quarter, but hopefully we'll do better than we expect and that will lower. The more money we make in the U.S., the lower our tax rate will be.

The lower your tax rate. Okay. Thank you and congratulations. Great quarter.

Derrick Wenger, Jeffries & Company.

What was the total amount of depreciation and amortization for the quarter, and what is the capital expenditure outlook for the fiscal year June '07?

For the quarter was -- the capital spending was 900,000 for the quarter. The depreciation and amortization was 1.5 million.

And the capital expenditure outlook for the fiscal year '06-'07?

For the rest of the year, because we are putting in the final module of PeopleSoft, we are expecting approximately 2 million, then 2.5, then 3 million over the next three quarters. (multiple speakers) million for the total year.

Half million what?

I'm sorry; 8.5 million for FY '07.

[Sam Bergman], [Bayberry Capital Management].

Congratulations on the quarter. A couple questions. How many inventory turns did you have this quarter?

Our inventory turns have actually stayed pretty consistent year-over-year. We're at [90] days of inventory on hand. So, four times a year for both periods.

Are you presently putting in a new ERP system at all?

We're putting in the last module of our existing PeopleSoft system.

And that's going to be completed when?

During the first quarter of FY '08. So, next June.

You had mentioned a rough guess or estimate -- hopefully it's not a guess -- on where organic growth could be in the second quarter. Do you feel that you'll be able to do that throughout the whole year, in that 8 to 12% range?

I think it will average that for the entire year. What happens in the third quarter is we have December, which turns out because of Christmas to be a two-week month. So, normally our second quarter is stronger than our third quarter, and then the fourth quarter is the strongest quarter of the year. But I think for the entire year blended, that we'll be right in those numbers, yes.

And currently, what divisions are hiring and which aren't?

Which divisions are hiring and which aren't?

Right.

I guess we have probably open [racks] for each division, but they're fairly conservative. We're actually reducing our headcount overall.

The Security Systems Division, which had a drop for the quarter on revenue, that's been restructured to [some degree]. Don't you feel there could be some other costs taken out of that business so it could be a little bit more profitable?

We're certainly looking at that. We actually took some costs out in the first quarter. We, as I mentioned, closed operations in the UK, and we're now servicing that business out of France. And we're also closing the warehouse in Italy for security, and we're going to handle that out of France and Spain as well. And in addition to that, we reduced the number of people and warehouses in Latin America. So, that will take some cost out. So, we continue to look at it for sure.

In terms of headcount, what is total headcount for the Company?

1258.

Before the restructuring, do you know what it was before?

We took out about 35 people in the quarter, and we had taken out something like that already. So, we have taken out about 70 people in total.

Is there more coming on the restructuring, or not, in terms of people count?

Yes. You have logistics people in the various warehouses, the eight warehouses in Europe. And also in Latin America there are a number of people coming out yet also. That has to do with the additional 2.3 million or so in severance to come in the balance of the year.

You don't know how many people in the warehouses are going to be let go?

I'm guessing it will be somewhere below 50, another 35 to 50, something like that.

35 to 50. The only other question I wanted to ask you was in terms of raw material costs. How did you find the raw materials costs from the quarter?

Raw material costs.

Were they flat versus last quarter or the fourth quarter, or were they up somewhat?

I guess the only place that raw materials really impact us directly would be in the tube business. And I'm certain they were up; I can't quantify how much they were up.

We've seen a slight increase on the component side both for building Engineered Solutions and also buying from our suppliers because some of these precious metal costs have gone up quite a bit that I use in the packages for the [die]. So, we've seen some precious metal costs go up.

Are you able to pass that through?

Yes.

Yes.

In terms of IR, where is that headed to this year -- investors relations?

You know, we hope to be in the East Coast doing a road show at the end of October. We're doing the AEA conference the first week of November in California. We really want to get out and start talking about the reorganization and sort of what the refocused, refined company will look like going forward. So, now that we have the restatement and these issues behind us, we want to get back out there and let people know what we think the future looks like.

Nice to have that all behind you. Good luck in the coming quarters.

(OPERATOR INSTRUCTIONS). Gentlemen, we have no additional questions. Please continue.

Thank you very much. We are all here all day today. If you have further questions, please call us. We really appreciate your patience and continued investment in the Company. Thanks, Joyce.

Thanks you. Ladies and gentlemen, this conference will be available for replay after 12:30 PM today through January 11th, 2007. You may access the AT&T teleconference service by dialing 1-800-475-6701, and entering the access code 844434. International participants may dial 320-365-3844, and again using access code 844434. That does conclude our teleconference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

Thanks, Joyce.