Sypris Solutions Inc (SYPR) 2008 Q1 法說會逐字稿

Good day and welcome to the Sypris Solutions First Quarter Earnings Conference Call.

Today's call is being recorded.

At this time for opening remarks, I'd like to turn the call over to the President and Chief Executive Officer, Mr.

Jeffrey Gill.

Please go ahead, Sir.

Thank you, Matt, and good morning, everyone.

Scott Hatton and I would like to welcome you to this call this morning, the purpose of which is to review the trends reflected in the Company's financial results for the first quarter of 2008.

For those of you who have access to our PowerPoint presentation this morning, please advance to slide 1 now.

We always begin these calls with a note that some of what we might discuss here today may include projections and other forward-looking statements.

No assurance can be given that these projections and statements will be achieved and actual results could differ materially from those projected as a result of several factors.

These factors are included in the Company's filings with the Securities and Exchange Commission including our most recently filed Form 10-K and the form 8-K filed earlier today.

In compliance with Regulation G, you can access our website at sypris.com to review the definitions of any non-GAAP financial measures that may be discussed during this call.

With these qualifications in mind we would now like to proceed with the business discussions.

Please advance to slide 2.

I will lead you through the first half of our presentation this morning starting with a brief overview of the first quarter to be followed by a look at several of our key markets before concluding with a brief wrap up.

Scott will then provide you with a more detailed dive into the Company's financial results and the outlook for the balance of 2008.

Please advance to slide 3.

Results of the first quarter exceeded our expectations and prior guidance.

Earnings per share at $0.02 per share versus guidance of breakeven and a loss of $0.01 per share for the prior year was primarily driven by improved results in our Industrial Group.

Revenue was at the top end of our guidance at $106.3 million for the quarter with our Electronics Group revenue increasing 13% year-over-year.

Within the Electronics Group, our Aerospace and Defense segment posted a 19% increase in revenue for the quarter while our Test and Measurement business continued to grow, posting a 3% increase in its top line.

Also, that was notable during the quarter was a certification launch of the new generation link encryption product.

As many of you may recall this is the product that we have been working on for some time.

The certification was delayed through much of 2007, but we are certainly pleased to report that we've received certification and began shipments during the quarter.

For our Industrial Group, revenue declined 12% on a year-over-year basis as expected, but increased to $69.8 million during the quarter from $58.9 million in the fourth quarter of 2007.

From an order standpoint, our Electronics Group posted a 7% increase in orders over the prior year, led by a 13% increase in our Aerospace and Defense segment as demand for new products and manufacturing services continue to pace.

As a result of our increase in orders, backlog increased for the Electronics Group to $115 million, and this is noticeable because it represents the highest level of backlog that we've had in almost two years.

Gross profit improved over the prior year despite the sales decline in our Industrial Group and was driven by an improvement in gross margin for our Industrial Group to 9.8% during the quarter, which was up significantly from 6.7% for the prior year and (inaudible) from 6.5% in the fourth quarter of 2007.

From a free cash flow standpoint, the operations did an excellent job during the quarter.

As many of you may recall we were forecasting roughly an $8 million usage, $8 million to $9 million usage, in cash during the quarter.

And we actually generated $15 million of free cash flow thanks to improved collections and favorable timing on a couple of onetime items.

In summary, we continue to make important progress in a challenging environment and expect that we will continue to advance margins that we move throughout the year.

Turning to the next slide, let's take a look at our market for our Industrial Group.

In the area of heavy-duty vehicles, ACT is forecasting a softening in the outlook for 2008 with the total year brought down slightly, roughly 5% from the prior forecast.

This reflects the impact to the rising fuel prices and slowing economy.

So when you look at it all in, the current view is that 2008 will be flat with 2007 before rebounding in 2009.

ACT is forecasting a 49% increase in demand during 2009, albeit not to 2006 or 2005 levels.

The silver lining in this forecast is that, based upon the current outlook for 2009, it is well within our stated capacity.

Therefore we should be able to handle it without much problem.

In the market for medium duty vehicles, the forecast is down as well.

We are now looking at a 2008 full year where the forecast is down 11% from the actuals for 2007.

And then in 2009 ACT is forecasting a 16% growth in this market, ahead of the 2010 emissions standards change.

So as we look at the four-year outlook for the commercial vehicle market, clearly, it's reflecting some softening demand as results of the economy, fuel prices and things of this nature, which should be of no surprise to any of us.

I can say, however, that we are using this period of time to make a number of improvements that we talked about over the past year and that this current situation is not having a negative impact on us in terms of our financial performance.

In many respects, [is] kind of a silver lining in that it is giving us a little bit more time to get things done the way they need to happen.

So if you will advance to the next slide, the trailer market is also in a weak state and volume for 2008 is now expected to be substantially below 2007 levels.

But as I alluded to just a second ago, despite these obstacles, new programs will fuel a gradual recovery on the side of our business and we are forecasting top line growth of 5% for the Industrial Group during 2007 and material improvement in its margins.

In looking at the Electronics Group, our Aerospace and Defense segment is expected to continue to show strong double-digit growth during 2008.

As I mentioned in the opening, we certified the new product and it began shipments in February.

We've also had a number of important wins in our Manufacturing Services segment of this business that we expect to propel the top line during the back half of 2008 and into 2009.

Overall, our markets for intelligence, missile defense and secured communications are expected to remain positive for the next several years.

And as a result we've expanded our R&D budget to heed demand for additional products beginning as early as the latter part of the first half of 2009.

All in, orders for 2008 are expected to reach a new high, and so, therefore, it's clear that execution will be a key for this segment is -- this is one of our businesses where demand continues to be positive.

Please advance to the next slide.

So, in conclusion for the quarter we are off to a good start.

Margin improvement in the Industrial Group and strong cash flow performance for the quarter served as notable positives.

The economy as we mentioned continues to be uncertain throughout a recession, soaring fuel prices but despite this, we expect 2008 to show material improvements over 2007 for each of our key metrics.

Our managerial focus, then, for 2008 will continue with the realignment of our Industrial Group and laying the groundwork for additional growth in electronics for 2009 and beyond, starting a margin expansion portfolio balance, customer diversification and investments for growth, all of which we have discussed over the past year and which Scott will give you a bit of brief update here in just a minute.

And in summary, then, we are beginning the year on improved footing; and we believe that our progressive improvements throughout 2008 will lead to a strong 2009.

This concludes my portion of the presentation and now I would like to introduce Scott Hatton to you.

He will lead you through the balance of our formal presentation.

Thank you, Jeff, and good morning, everyone.

If you will advance two slides to slide eight, we can begin the financial discussion.

As you can see on slide eight, the details of our first quarter performance compared to guidance, revenue was $106 million in first quarter, down 5% from prior year.

This was near the high end of our guidance range of $102 million to $107 million.

Better than expected truck volumes more than offset a weaker trailer market in the quarter as Industrial Group revenue reached $70 million in first quarter which was slightly above our expectation and represented a 12% decline from first quarter of '07.

Electronics Group revenue was in alignment with our expectations at $36 million, which was an increase of 13% over prior year, driven by strong product shipments and manufacturing service growth in our space business.

Our top five customers represented 70% of our total revenue in the first quarter, which included Dana at 41%, Arven at 11%, U.S.

Government and related agencies at 8%, Ford at 7% and Boeing at 3%.

Electronics orders for first quarter were strong at $44 million, representing a 7% increase year-over-year driven by a robust 13% growth rate in Aerospace and Defense orders.

Orders for our new secured product as well as new program wins in our Electronic Manufacturing services were the catalyst behind the Aerospace and Defense order rate.

Our profit before tax in Q1 was positive $0.5 million leading to a net income of $400,000 and a positive $0.02 earnings per share.

This was above our breakeven earnings per share guidance by $0.02.

Gross profit for the Industrial Group was in line with expectation at 9.8% as the impact of the Dana settlement and other productivity and pricing improvements offset volume declines.

Electronics Group gross profit was $5.9 million or 16.2%.

Although slightly short of expectations due to some higher program costs and unfavorable sales mix, it was a measurable improvement from the 13% in the subsequent quarter.

With SG&A and interest costs lower than expected, combined with our gross profit performance, we exceeded expectations for the quarter.

At $15 million of positive free cash flow for Q1 we were $24 million better than our guidance range of $8 million to $10 million of cash usage.

As Jeff suggested, much of this was driven by stronger collections within the quarter, some of which came from fourth quarter '07.

And some was due to favorable disbursement timing that would largely come back on us in Q2.

By turning to slide 9, we can now discuss the second quarter outlook.

Second quarter revenue for 2008 is forecasted to be between $115 million and $118 million.

At the midpoint of the range this is flat to the second quarter of '07, which was $116 million.

We expect Industrial Group revenue to be down 3% in the quarter year-over-year as heavy truck volume pricing improvements and material revaluation largely offsets the trailer and light-duty declines.

On the other hand, Electronics Group is expected to grow 5% compared to last year due to increased revenue from new product launches and strength in our test and measurement markets.

With a new classified product in production, we expect quarter intake for our Electronics business to post another double-digit increase over the prior year with a 12% expansion forecasted.

Profit before tax is expected to improve by $3.2 million over the prior year and deliver a $0.10 earnings per share improvement year-over-year to achieve an earnings per share range of $0.025 loss.

Within this performance we expect Industrial Group will improve their year-over-year gross profit by 4 points to achieve approximately a 9% gross profit rate, driven by various pricing, productivity, and portfolio initiatives.

Electronics Group gross profit rates are expected to rise 5 points over the prior year, as we increase our product mix and have favorable comparisons to last year's startup challenges with the new product.

Although free cash flow usage is forecasted to be between $14 million and $16 million within the quarter, the majority of that was driven by favorable disbursement timing from first quarter.

And we will still achieve a breakeven free cash flow performance for the first half of 2008.

It should be noted as well that Cash Flow From Operations, excluding our Mexican tax payment related to the Dana settlement, is expected to be neutral in the second quarter and $17 million to $18 million positive for the first half of 2008.

By advancing to slide 10, we can now look at the full year.

Our previous guidance for the year remains unchanged since prior guidance -- as prior guidance was forecasted to be $460 million to $480 million in revenue, earnings per share at $0.05 to $0.10 positive, and free cash flow of 0 or breakeven.

As we take a closer look at these elements, we are still expecting revenue growth of 8% over last year.

Both pieces of our business are still expecting growth with the Industrial Group up 5% and the Electronics Group up 13%.

Second half growth is still expected for Industrial Group as the year-over-year comparisons get easier and volumes in the fourth quarter start to increase in anticipation of a considerably stronger 2009 for the truck markets.

With a very strong backlog, our Electronics Group will be focused on delivering that backlog and ramping up delivery of our latest product introductions.

Orders will be up 5% in Electronics on the year as a richer mix of products will emerge in the year-end backlog, setting up a strong performance for 2009.

Earnings per share of $0.05 to $0.10 positive implies a $5 million to $6 million improvement in profit before tax to achieve roughly a $1 million to $1.5 million positive profit before tax for the year.

With the number of restructuring activities and productivity measures behind us, and commercial efforts to realign and improve our portfolio, our Industrial Group will be prepared for the market upswing in 2009.

Likewise, our Electronics Group will have improved the mix of new products in their backlog and be driving a higher level of contribution in the second half as they prepare for a full year of new products in their portfolio in 2009.

Free cash flow is forecasted to be breakeven in 2008 as we still expect to generate $30 million in positive operating cash flow, prior to be Mexico tax payment, and CapEx is expected to be 4% of revenue or approximately $20 million.

Turning to slide 11, I would like to review our progress in a number of focus areas.

The last time we talked there were three areas that we discussed that we were going to be focusing on in 2008.

The first was completing Phase 1 of restructuring efforts in the Industrial Group; preparing ourselves for market upturn.

I can tell you that we continue to remain on schedule and on track with various initiatives to bring new business in and exit noncore businesses.

The new leadership team in this group has been populated and is driving important commercial and operating improvements, some of which we have started to see bear fruit in the margin performance around productivity as we drive those improvements throughout the plant network.

Achieving double-digit in electronics growth, both from the revenue and profit side, as most of you would be aware, we did announce the placement of a new President for the Sypris Electronics Business.

He is in place.

He brings a tremendous amount of technical, operational and industry experience.

We will be working to continue not only to deliver the double-digit revenue performance, but also bring the profit equation with it.

So a lot of his focus early on will be baselining operations, developing operational strategy for that business in his first months on the job.

We will continue, of course, to drive the technology behind that growth through continued investment and development of new products, the first of which is the link encryption product that got certified and started shipping this quarter.

We have another new generation secured product under development that got through the preliminary design review in the first quarter, and we do expect to launch early in '09.

Additionally on the test and measurement side, we have new magnetic product offerings that are under development that we expect to allow us to enter into new markets in 2009, as well.

Additionally, markets' new receiver offerings on the data recorder side have started to evolve.

And we see those markets starting to develop as new orders in those areas were booked in Q1.

The last area of focus has been on improving our business processes and operational execution focused on integration and automation.

We continue our work in factories scheduling, some important progress has been made on the industrial side.

And we look for more to be made on the electronics side as we go through the balance of the year.

Bid to order, processes enhancements have been finalized.

We expect second quarter implementation in that area.

We have done a lot in both groups within the quarter and the last six months, as well, to align our portfolio and, in some cases, rationalize our portfolio for improved execution and better profitability.

We also continue our work in working capital management as turns did improve from 5.1 on inventory to 5.4 year-over-year as we exited the quarter.

Commodity management, another area where we continue to have opportunity.

We recently hired two new folks that will be critical to our success in that area.

So I think in summary, we have made a lot of improvement and we continue to accelerate the momentum around these initiatives as we move through the balance of the year.

If you could advance to slide 12, I would like to just provide a few final wrap-up comments before we open it up to questions.

In summary first quarter performance exceeded expectations.

We also reaffirmed our guidance for total year 2008 and expect second half and, in particular, fourth quarter will be stronger for both segments of our portfolio.

We are on track to deliver on our priorities, both double-digit electronics [growth] as well as operational improvements in the Industrial Group that ready us for a market upswing in 2009.

Resourcing is also being provided to drive systemwide continuous improvement and lean focus throughout all of our operations, which we believe will continue to provide important traction and momentum to our efforts to drive profitability.

Alongside that, we have made important leadership team additions that are providing depth and experience which will be creating a lot of positive business impact as we move forward.

All of this, in sum, gives us a lot of confidence about not only the balance of the forecast for this year but what we believe is ahead of us in 2009.

So with that -- those are our -- we conclude our formal remarks and we open it up for questions.

(OPERATOR INSTRUCTIONS).

Jim Ricchiuti.

Needham & Company.

I was wondering if you guys could comment a little bit about what you are hearing from your industrial customers.

I'm curious just with respect to the ACT forecast.

Is that kind of growth outlook and the decline that is being forecast for '08, is that consistent with what you are hearing from your customers just in light of what's the more recent run-up in fuel prices?

Yes.

It seems to be fairly consistent at this point in time.

Late last year, early this year, there was a divergence between ACT's forecast and those of our customers.

But over the ensuing four or five months the customers' forecast have come down much more in alignment with that of ACT.

And, Scott, one of the things you guys have highlighted is the improvement in gross margins in the industrial business.

Now some of that has clearly come from the Dana settlement.

Is there any way you can give us a sense of what the gross margins might have looked like in the industrial business ex that?

Excluding that, you are looking at about a 3% gross margin performance.

Okay and how should we think about gross margin?

I assume, Q2, we are not going to see a whole heck of a lot of improvement, but more toward the back half of the year, some modest improvement?

I think as we look into second quarter, we will see some volume improvements.

It is hard to see it on the surface, but if you assume that we don't have the same level of contribution from the Dana settlement.

As we are exiting some of the non-core product, there was a lot of the settlement that was related to recognizing some of that earlier, as you know, rather than later in the year.

We kind of step off of that after Q1 and so those larger impacts from the settlement kind of go away.

So what you are left with is a much more of a view of what the ongoing operating performance is.

And we do see a step up in some volumes between Q1 and Q2, which we think will bring some improvement over, say, the normalized gross margin number for Q1.

In addition to that there's a number of productivity efforts as well as some other pricing improvements that will kick in in second quarter, which we believe will provide a continued strong view of that, as I think I suggested, 9% for second quarter of gross margin.

So I don't see a great deal of falling off there although it will bounce around a little bit between 7, 8 and 9 through the balance of the year.

That is as you know measurably better than where we have been in the past.

Just a quick question on the margins in the Aerospace and Defense business.

Are we basically through some of the cost issues now as we swing more into the ramp up in production on the new communications product?

I think we largely are.

I think in Q2 we will see with that 14% gross profit rate performance in second quarter continuing to ramp up.

But in the second half I think it's -- you should expect we are through that.

(OPERATOR INSTRUCTIONS).

Tom Carpenter with Hilliard Lyons.

You guys announced if a link product I guess received its final certification, it is going to begin shipping this quarter and ramp throughout the year.

Are both of the new products shipping this year?

I just want to make sure the other product you referenced that was going to begin shipping in '09 is a third product and not the two that you guys have talked about in the past.

That is correct.

It is a separate product.

So there are three different products.

We had one that as you know launched last year.

We had various starts and stops as we were making enhancements to that.

That program continues to ship.

The program that certified in January of this year and started shipping in February of this year is the second program that we have been discussing, which is our next-generation link encryption product and then beyond that, something in 2009.

That is a separate generation product development that we expect to start to show through the results in second or third quarter of next year.

Is the first product that began shipping late last year, is that at full capacity now?

And also are the margins at their full run rate?

It's not really at full capacity.

I would say we are still working at refining that program and so I wouldn't say margins (inaudible) is where we want it to be, but we are continuing to work it through the balance of the year.

Okay.

Final question.

I know this is something that probably frustrates you guys, the share price, at least before they open today, has been around $4.00, even down to $3.65 and your book value is closer to $10.

You guys have talked about in the past that you thought the businesses on their own could be worth $5.00, maybe $6.00.

Outside of execution which is something you guys, it looks like it is getting better in 2008 with some major improvements in '09, what are some other steps you guys would consider to unlock shareholder value.

Which right now and in the past, the market doesn't seem to grasp the businesses together, would they be more fully valued as separate companies?

I know we've talked about it in the past and, certainly, that is one of the logical options.

However, we -- I want to come back to what you mentioned also and that is we really believe the job, one, is execution and that over the next 12 or 18 months, as we bring these things to fruition and we are able to get margins back up to where we expect them to be and we're able to resume top line growth on a sustainable basis, we think we will have a better view of how the market is treating the Company.

In many respects right now, we feel that there's just no support for the Company.

And so people are sitting on the sidelines waiting to see what we're able to do.

I think that is a fair statement.

The think that's -- except for maybe a six-month period in the past, as you've gotten bigger in industrial, you tended to get a more industrial-like business [why] the Electronic Group.

I guess it's hurt -- on its own, it would be a higher multiple.

Right.

And we are making progress in balancing the portfolio.

True.

Last year, we increased the Electronics Group to 36% of the total portfolio from 27%.

When we complete this year, we expect the Electronics Group to be an even larger percent of the overall portfolio and our two or three year target is to have Electronics Group be 50% or more of the portfolio.

So, hopefully, that success will also be reflected in the market cap and staff.

All right.

I don't want to play a game of "what if" here, but say we get into the next year and things are similar to how they are now.

Are you or the Board of Directors adamantly opposed that the taking steps to unlock value in the Company -- actually in the Company (inaudible) we are taking in private?

I would characterize it this way, that we -- all of our management team here as well as the Board is always going to be open to ways to unlock value for the Company.

Because I guess my $0.02 would be if you aren't willing to pursue other steps to -- as a major shareholder you might be selling yourself and other shareholders short if the market is not going to realize the value of the two companies.

Sure.

David Shapiro with Aegis Financial.

This new encryption product that is sort of a new one that is being developed for '09.

Is that going to cannibalize the previous product that's going to be rolling out for the remainder of this year?

I'm trying to understand how that works.

No.

These are two different markets.

The one that was certified and launched this quarter is in the link encryption area; and the one that we are talking about introducing in 2009 is in the key field market.

Those are two distinct markets so there would not be cannibalization between those two.

And when we talk about the sustainability, I guess, of the revenue run rate that you are expecting going into '09, are we talking multi years of sustainability on the A&D side?

Or what are we looking at there?

I think it is always hard to sustain double-digit growth in your order rates year -- year in and year out; and we had double-digit growth last year.

We'll have 5% growth in the order rates this year.

But I still think what we see is a very strong demand for the products that we've introduced that we are developing.

So I think it's certainly easy enough for us to forecast an above-market growth expectation.

Whether that always hits double-digit every quarter, every year I would say would be difficult to know.

A lot of it is tied to government funding, but we do expect robust growth throughout and, more importantly, I would expect improvement in profitability of that segment as we march through the next 12 months.

I wasn't talking so much about the sustainability in the growth rate, I was talking about the sustainability at that new plateau of revenues once it is achieved.

Right.

I think that is the unique think about having products.

They tend to have a lot less up-and-down.

Once you're locked in on a program you've developed they tend to be three to five, five to seven years in duration as opposed to on the electronic manufacturing side, where you can have a program that you completed 12 or 24 months and you are kind of at the mercy of how those programs close out and new ones start up.

So I do think with more product in our backlog as we move forward, we would expect to see more sustainability and less cyclicality.

Okay, and then in regards to comments made by the previous caller, I understand there's going to be no free cash flow expected for this year.

As that starts changing, and that picture starts changing in '09 and beyond, will there be, besides making an acquisition or putting more capital to different road projects, are those going to be valued against share buybacks?

If the value is there in the share, still.

Yes.

That's always a consideration.

(OPERATOR INSTRUCTIONS) Chris McDonald with Kennedy Capital.

I want to just walk through cash flow.

It seems like -- so you got the tax payment associated with the Dana settlement that will hit this year and since the Dana settlement itself isn't an operating item, it never shows up on free cash flow.

So you are kind of getting hit with the penalty of the Dana settlement, but when we look at the company on a free cash flow basis, we don't see the cash inflow or the potential cash inflow I guess, regarding Dana.

Is that a fair characterization?

It's a very fair characterization.

We have not assumed liquidation of the Dana stock in 2008.

So more broadly, your cash flow breakeven this year, you are fighting that $10 million headwind, but that's the only reason why you are not generating $10 million in free cash flow is because you've got a $40 million -- at least at the value right now roughly a $40 million settlement that you can't flow through as a cash from operations?

That's correct.

Okay.

Excellent.

I think it might be helpful if you would just walk through the competitive dynamics, the contract size, the peer to performance on the new link encryption product that you've now been certified on, just to give us a handle forth the opportunity there over the course of the next couple of years.

On the link encryption side, we do expect this program to have legs for at least five years.

So we will start with that.

We also would expect, probably, it to have the potential once it's running at full year rates to look like something like a $25 million a year revenue generator.

(multiple speakers) happens to be -- I'm sorry, Chris, what's your question?

No.

I'm sorry, go ahead.

As you know, this is a third generation derivative of what's been a highly successful product for us in the past.

So we expect the same level of contribution from this product that we've seen in its predecessor.

So we do expect not only for it to have dramatic top line improvements for us, but also bottom line improvements as we get up to full year ramp rates.

It's traditionally been significantly better than the run rate for the remainder of that Electronics Group from a margin standpoints.

Correct?

Not only that but even when it is compared to other products, it's very favorable.

And there's, as I understand it, just one other competitor on this program?

That's correct.

Yes.

Just more broadly on encryption in general, how narrow is the competitive field there, would you say?

Reasonably so.

There's very few entrants.

I mean, I think as we look at various markets you'll have different players, but it is usually certain established players and proven players.

So in the case of the link encryption you are looking at a couple of key players.

In the case of the key field market, other markets, you may see different players but it's generally two or three key players that participate.

So it is not a very dynamic group in terms of you see a lot of new entrance come in, because it does tend to have a certain level of expertise because you are working on government programs in very important critical military programs.

Generally, you won't see a lot of change because of that, as well, because there's a lot of discomfort with switching suppliers frequently in those kinds of programs.

Excellent.

Steel costs.

I just want to revalidate, in the Industrial Group, you really have 0 exposure to ramping fuel cost input because that is 100% pass-through on the Dana contract and your other contracts, correct?

It is 100% pass-through.

You are correct.

There are, as we've discussed before, some indirect consequences when material starts to go up.

We pass it through back to our customers dollar for dollar.

But the indirect impact of that is that your scrap cost can go up.

The material content of your scrap cost does get hit so to the extent that we have scrap cost, we will see pressure on our scrap cost as material goes up.

So that is the one indirect piece that hits us from a P&L perspective.

And then, of course, if you assume a fixed number of days of inventory, if that inventory is worth more it is going to have some implication to your cash, operating cash.

I don't know if you know offhand typically what scrap run rates have been?

It is a very low percentage.

Okay.

Not a huge (multiple speakers).

Not a huge number.

Jim Ricchiuti with Needham & Company.

Yes, I was just curious about the pickup that you are seeing in order activity in the Manufacturing Services area.

Can you maybe elaborate a little bit on that?

And also how would you characterize the margin profile of that business?

Let me start with your second question first.

As we've discussed before that is not as robust of a margin portfolio.

The margins seem to be pretty tough.

It a very competitive space on the Electronic Manufacturing Services side.

However we have stated our objective was to grow the space aspect of that business and some of the growth that we saw in Q1 was a result of that.

We had an objective to double our space business this year.

We will achieve that if not do better and, quite frankly, the margins in that area we feel are better.

They value the kinds of costs (multiple speakers).

Yes exactly.

The, I think there is a lot of risks of cost of failure there.

The customer base tends to value high-quality products and high-performance suppliers.

So we see that as a space where we are uniquely qualified and we think that that is going to continue to improve our overall margin performance of that segment.

In addition to that, we've also had some other important wins, that -- program wins that we think have some long legs to them and have the ability to provide improvement in the overall margin of that segment.

Can't really speak to the specifics of it, but we do think as we've gone through the customer alignment, there's been some rationalization of things that we think are less desirable along -- and that's been -- we've been able to do that because we have been able to find other important program wins that we think are more attractive.

That's helpful.

Just changing gears a little bit to test in measurement, wonder if you would talk a little bit about the overall economic environment and how that has begun to impact that business, if at all.

What do you see going forward there?

I still see us growing at probably a 5 to 6% rate there which is going to be above obviously any sort of economic outlook.

First quarter was slightly lower than that, around 3%.

But I will point out that Q1 of '07 was a particularly robust quarter.

There was a lot of if you will non-recurring revenue that was happening there.

So 3% is not viewed as bad in our perspective and we still believe, as we go forward, that 5 to 6 is a reasonable.

We did think earlier that overall economy might affect, for example, the rate of calibration services or something of that magnitude.

But as we've sat down recently with that business, we are just not seeing any immediate impact to that business related to the economy.

David Shapiro with Aegis Financial.

A few quick follow-ups here.

Your CapEx for '09, what are the expectations for that at this point?

4 to 5% of revenue.

Still off a much higher revenue number that is going to get all the way up to 4 to 5%?

Yes.

I would say you are looking at probably a $25 million number.

I'm just guessing.

And then your Dana, the Dana benefits and gross profit for 2Q, what -- I didn't see that on the slide there.

What are you guys estimating there?

You mean related to the settlement?

Right, right, the settlement benefit.

(multiple speakers)

There's not much really rolling through in terms of onetime-related settlement gains for Q2.

Right.

I'm talking about the (inaudible) -- you had about I don't know almost $5 million I guess in Q1.

What is that?

Right but that was related to noncore product divestiture so that got amortized over the nine months remaining on those noncore product lives and that ended at the end of Q1.

So you won't see those kinds of dramatic numbers going forward.

So will be more along the lines of the 2 million type?

No.

The onetime is basically finished.

So when Scott talked about a 9% gross margin for Q2 for this side of our business, it is primarily related to increased volume, a change in mix, some improved pricing, things of those nature.

At this time we have no further questions.

I would like to turn the call back to management for any additional or closing comments.

Scott and I would like to thank you for joining us for this call.

We welcome your continued interest and, of course, your questions about our business.

Thank you and have a good day.

That does conclude today's conference.

Again, thank you for your participation.

Have a good day.