Gentherm Inc (THRM) 2008 Q2 法說會逐字稿

Welcome to the Amerigon Inc. 2008 second quarter and six month results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Wednesday, August 6 of 2008. And now I'd like to turn the conference over to Jill Bertotti with Allen and Caron. Please go ahead.

Good morning, everyone and thank you for joining us for the Amerigon Incorporated second quarter and six months results conference call. Before we start this morning's call, there are a few items I would like to cover with you. First, in addition to the [summary] through PR Newswire this morning news release announcing Amerigon's results for second quarter six months ended June 30, 2008. An e-mail copy of the release was also sent to a number of conference call participants. If any of you need a copy of the release, you can download a copy from the Amerigon website at www.amerigon.com or the Allen and Caron website at www.allencaron.com. Additionally, a replay of the conference call will be available via a link provided on the Events page on the Investors section of Amerigon's website.

Finally, I've been asked to make the following statements. Certain matters discussed on this conference call are forward-looking statements and involve risks and uncertainties and actual results may be different. Important factors that could cause the company's results to differ materially from its expectations on this call are risks that sales may not significantly increase, additional financing if necessary may not be available, new competitors may arise, and adverse conditions in the automotive industry may negatively affect its results. The liquidity and trading cost of its common stock may be negatively affected by these and other factors. Please also refer to Amerigon's Securities and Exchange Commission filings and reports including but not limited to its Form 10-Q for the period ending June 30, 2008, and its Form 10-K for the year ending December 31st, 2007.

On the call today from Amerigon we have Dan Coker, President and CEO; Bud Marx, Chairman; and Barry Steele, Chief Financial Officer. Management will provide a review of the results, after which there will be a question-and-answer period. I'd like to turn the call over to Dan. Good morning, Dan.

Good morning, Jill, good morning everyone, thank you for joining us today. It is a beautiful day here in Detroit. Bud usually gives us a weather report from Laguna Beach, so I thought I'd let everybody know it's a bright sunny day. Despite the economic forecast, things are looking okay. I've never listened to Jill's statements so intently as I did this morning when all of the things she warned of have come true during the second quarter. We have had a very tough market. The market conditions changed quite dramatically during the second quarter. We were fortunately able to react, although not as quickly as we would like -- we were able to react to the market conditions and I believe that our second quarter results are okay. We are working very hard in a continuing tough market condition and we do expect to see the second half of the year finish up in a bit of a stress, but we still see a 10% to 20% revenue growth opportunity for our company based upon the new platforms that we've seen come in.

During the second quarter we had a couple of -- oddly enough a couple of highlights. We had our 4 millionth seat set shipped in the seven, almost eight years since we began shipping revenue. We're quite pleased with that development. We also had several new model come into play even as late as yesterday. We had three new models announced, three Nissan -- sorry, one Nissan and two Infiniti platforms came on board. We're pleased with that development. Plus we've had good progress being made at our BSST Technology group. And we've also been allowed to announce today that we're working with the leader of the bedding industry, a company called Sealy. And Sealy and Amerigon have teamed together to bring a heated and cooled bed that we intend to bring to the market as soon as we get the development process completed and they will be our primary partner for marketing this product. We would like to follow the normal procedures. And I will turn the call over to Barry who will review a few of the metrics of the quarter. And then we would ask Bud to give us an update on BSST activities, and then we'll throw the floor open to questions. Barry, would you lead us through the numbers?

Sure. Thank you, Dan. Our revenue for the second quarter 2008 was $16.8 million. That represents an increase of $1.7 million or 12% year-over-year. For the full six months we're about 9% increase over the prior year. We are down sequentially from the first quarter about 3%. Some of that is due to impact from the American Axle strike which shut down a few models that we contribute product to.

Moving on, our gross margin percent was 31.4%. That is a decrease from the prior year -- the prior year was 34.2%. This is driven primarily by sales mix. Some of our products have slightly higher margin than some of our others, and as those change the overall mix, that will impact our percentage -- our margin. That is what happened this quarter.

R&D expense, net R&D expense was $1.5 million versus $1.3 million in the prior year for this current year quarter, We are giving notice that we do expect a fairly quick ramp-up in a higher expenditure rate for our net R&D. That's between $400,000 to $500,000 per quarter starting in the third quarter of 2008. And that's primarily associated with the increasing activities at BSST and opportunities that we're taking advantage of. The increase for the second quarter is more driven by the automotive products, automotive side and new automotive launches that we're doing throughout this year. There are quite a few.

Our selling, general administrative and -- selling, general and administrative costs were relatively flat, exactly flat from the prior year. We expect that a slight increase in our spend rate for SG&A will happen in the second half of the year but nothing dramatic, $100,000 potentially. And that brings us down to the bottom line -- our earnings per share was $0.06 per share which is equal to the prior year.

Couple other things. Our operating cash flow for the quarter was $1.3 million. That compares to about $839,000 for Q1. So it is slightly better than the first quarter. Our depreciation and amortization for the quarter was $318,000, for those of you who want to complete your models. Cash and cash equivalents increased dramatically during the quarter -- it's now $13.6 million. It was only $1.2 million in the first quarter.

You may recall us discussing our investment portfolio, having had a substantial portion of auction rate preferred stock. That portfolio was $23 million at the end of the first quarter, but is now decreased down to roughly $13 million, the decrease coming primarily or exclusively from at par redemptions as that marketplace works through the liquidity issues and those things are getting refinanced. We do expect that we'll have additional redemptions occur in the second half of the year. We're not sure exactly what the timing is or what the amounts are, but at this point we are holding our auction rate preferred stock portfolio as a non-current asset on the balance sheet. And that's all I have at the moment. We'll look forward to your questions. I turn it back over to Dan.

All right. Barry, thank you for that rather exhaustive look through the numbers. And now we will switch out to Laguna Beach, where we ask Bud Marx -- our Chairman -- to give us update on BSST activities for the quarter.

Well, I first would say that the weather report is boringly beautiful, so -- I was in Detroit, actually the weather was great there. I think it's fair to say that we're seeing the positive effect of the wrenching changes that you've seen in the auto industry in terms of greatly increased customer interest in programs that save fuel by recuperating waste heat and turning it into power, and also in terms of programs that deal with fuel economy, effects of the big central stack AC in the vehicles and the facing effect of heating and defrosting. So the downside of the wrenching changes is obvious to us all, but in terms of where we're positioned, we're seeing this as playing clearly to the strengths of our development of the technology.

The second thing that happened, which was -- occurred in the second quarter, we had been spending money to develop materials because of our frustration that the pace of materials in academia and other research institutions was rather slow. And some of you have noted and commented to Dan Coker, that there was a press release out of Ohio State University earlier this month -- or last month -- that announced that they had significantly enhanced at high temperature the efficiency of materials, with different attitudes and a different approach, and we were one of the significant sponsors of that material development program. So that's not in production. Nobody should rush to expect that in the next three or six months. But the material breakthroughs that we've been pressing for seem to be quite a bit more tangible at this point.

And so this, for us, was quite good news, and it led us to conclude that we should raise the rate of our R&D spending. One, to bring these new materials to the marketplace to production capability, and, secondly, to develop product in concert with first tier and OEM automotive partners, and others perhaps. Because if the material comes, we pass from there to wanting it in product is going to be very short, and we want to have our product developed and ready to take advantage of that. So, that's a long-winded explanation for we think the increase in R&D is very much merited by the business case that we're seeing, and by the high interest of potential customers. So we have a buzz of activity in Irwindale. I guess I would say that. And that is the report from Laguna Beach.

All right. Thank you, Bud, cheerful as always. I think in order to keep things brief and on the road, I think we will go ahead and turn the floor over for questions from the audience. We're ready to answer questions.

Thank you, sir. We'll now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question is from the line of Brandon Ferro with KeyBanc Capital Markets. Please go ahead.

Good morning.

Good morning.

Can I start out with revenue guidance for '08? Can you give me a sense of what that is actually based on? Is that based on CSM forecasts or purely automaker schedules? What should I look for as being the base assumption if we get incremental production cuts?

It is primarily based upon industry data that we receive -- not only just CSM data but also the release data from the car customers, the P&L data. We get information from other sources, as well. But it is basically a homogenization of all the information available. We use CSM data for projections for production beyond what we have in terms of actual product releases, as well as data from Automotive News and J.D. Power and other people as well.

Perfect.

It is fair to say we don't just simply write down the forecast from the automotive companies, especially in a circumstance like this, because we knew it was important. We stepped back and tried to really rely on the -- I would say the most knowledgeable and the most recent, because the situation has been changing sources in developing this guidance.

Okay. Gross margins and ASPs, can you just refresh for me and help me understand the mechanics of the mix shift? The sourcing decisions, I think Ford actually sources the ECU where other automaker customers give that responsibility to you. Can you help me understand what actually impacts gross margins from a mix shift standpoint?

Well, there are a lot of complexities involved in that. It really is pretty much what you just described. Each of the OEMs allow us to participate in the supply and support of some of the ancillary equipment as well as our basic core components. Some of those other things we actually have different margin rates on, so that there is a shift of margins as our business mixes from quarter to quarter. I don't want to get into it in too much detail, but that is essentially it. We do see a swing of bottom line margins as we get higher concentrations of business from one group of customers or the other.

Okay. Is it fair to assume, though, as you source a more complete CCS unit, meaning stuff outside of your core technology as well as core thermoelectric stuff, that more of it becomes passthrough and therefore gross margins should be lower?

Not necessarily. Our target gross margins are in the low 30s for all of our activities.

And can you give me a sense of how incremental growth in the back half of '08 and then maybe '09 might impact gross margins from a mix standpoint?

The growth itself I don't think are going to impact gross margins, and we haven't given any serious look at 2009 in term of revenue growth yet at all. We're still trying to survive 2008 at the moment. But I don't think that the topline revenue growth is going to affect our margins.

Okay.

I would remind you that we're a very highly variable cost structure here because of our outsourcing of production, and so that as we grow on the long term we can take advantage of fixed costs of our suppliers, but in the short term, gross margins vary as our revenue varies.

Okay. It's fair to assume the target is still in that low 30% range. Correct?

That is our target, yes.

It is also fair to observe that the second quarter of '07 was unusually high for the same reasons that we've described. So 34% was a bit of an outlier as well.

Okay. And, Dan, you had stated that you haven't given any indication of what you seen in terms of revenue growth in '09. I know the target was 25% on average through 2010. To the extent that you're going to do 10% to 20% this year, a lot of that is based on light truck, a lot of that is going to carry through into '09. Is it safe to assume that the 25% might not be feasible anymore?

I would certainly say that the 25% is open for review at this time.

Okay.

But I wouldn't draw any conclusions one way or another. It is just too early.

Brandon, I'm not trying to be evasive -- we haven't looked that far into the future yet based upon where we are today.

I totally understand. And I think the press release called out average unit selling prices as being up in the quarter? As far as I can tell, it looked like they were down. Am I missing something?

On a year-to-date basis they were slightly up.

Okay.

Or they were slightly down, that is correct.

Okay. I just wanted to clarify that. Okay. And can you just finally help me understand second half of '08 growth -- how is that growth going to layer itself in? Is it weighted towards fourth quarter given some of the production cuts and new platform delays, or is it spread third and fourth quarter evenly?

We are going to see more activity in the fourth quarter. There are some program delays that have pushed some programs that normally would have launched in July and August out into September, so you will see a little bit more activity in the fourth quarter as to the third.

Okay. I'll hop back into the queue. I appreciate it.

Thank you, Brandon.

Thank you. Our next question is from the line of Steve Denault with Northland Securities. Please go ahead.

Good morning, everyone. Barry, you had made reference to what SG&A should look like over the balance of '08, and I missed it.

We expect to be slightly up over our current run rate, nothing dramatic.

Did you say up $100,000 or something of that nature?

It could be on that order of magnitude, yes.

What about -- what is the latest thought on kind of R&D over the balance of this year? I think you make reference to $400,000 or $500,000 incremental over the balance of this year relative to the run rate in the first half?

We think that will be a pretty quick ramp-up. Where would we like to spend money is a little bit slower to get resources to bear, so you may not see it all in the third quarter, maybe you will -- but certainly in the fourth quarter.

And would there be an incremental ramp likely in '09?

I think that is yet to be seen.

Okay. The Sealy relationship, what's the timing of that and what are the Sealy's initial thoughts in terms of pricing of the bed?

Well, I don't really know. That's their business, but what we have been working together to try to achieve is a heated and cooled bed to provide better comfort for their customers in terms of individually controlling the temperatures, the surfaces of the bed for all -- not all of their customers but for a full line of products that they'll bring into the marketplace. We're currently involved in that process and we haven't completed it, but I would expect that we'll be making announcements fairly soon as to the progress of the program. We're very excited about it and we think it demonstrates the benefits of the thermoelectric device for delivering in a compact and convenient way, heating and cooling in many areas where people will need it in the future. And, frankly, this is one of those ideas that everybody slaps himself on the forehead when they hear about them. It is a great idea. Typically you're in bed, and you would like to have a little cooler or warmer and you flip a switch and get that within a few minutes. And typically, at least at my house, there is a difference of opinion of what the thermal temperature ought to be in the room and in the bed. So it's a great device. I think it's going to be a big hit.

Okay. So they have essentially allowed you to say that you're in development on a product, not something that is going to be commercially available yet this year?

We didn't say that at all.

Either way.

Didn't say that either way. We're not commenting on the product's availability. That really depends upon our partner's efforts to get ready and to get the product in place and to get ready to move into the market on their schedule.

Thank you.

Thank you. Our next question is from the line of Steve Dyer with Craig-Hallum. Please go ahead.

Good morning, guys, thanks for taking my call. I want to make sure I'm clear on the R&D ramp-up in the back half of the year. Would you expect $400,000 to $500,000 additional each of the last two quarters as opposed to stepping up $400,000 to $500,000 in Q3 and $400,000 to $500,000 in Q4?

I think, Steve, we're going to a $2 million run rate, if you will, and that will likely be the run rate for the second half of the year for each quarter. Maybe not quite there in Q3, but we're trying.

Okay. That's helpful. And then, Barry, what was stock comp for Q2.

I don't have it. For the six months, I do have it. It was $435,000. You could probably back into it.

Back into Q2. Interesting.

Sounds like the dogs have gotten Bud.

Just curious, I guess, in terms of program delays. I'm familiar with the F-150. What else has been pushed out?

The other programs are not really like as dramatic as the F-150 has been, but there are what I would call gaps in the schedule. They've launched on schedule. But they also are building in schedule reductions with time-out during the second half of the year. And the example that would be like a GMT-900 series, where they are launching on schedule, but they are also building in one shift instead of two and also building in two and three-week shutdowns during the second half. So the biggest and most dramatic I'd say deferral has been the F-150 series that is now scheduled to not even go into production until late September. So that's the biggest deferral. The others are just very dramatic slowdowns as they attempt to absorb the inventory out of the market.

Okay. Are you able at this point to talk about the GMT-900, what's optional and what's standard on the platforms that you announced today?

No, I'm not. Actually, I don't think it's standard on any of the GMT-900 programs. I think it's an optional feature on all.

Front seats only?

Yes, sir.

Okay. Curious to your thoughts the recent prices of your input costs, particularly tellurium, and what you're seeing there, what that may do to your gross margins over time?

As we reported last quarter, the tellurium market along with many other markets in the raw commodity -- base metals have gone a bit insane during this year. I think they peaked somewhere in the $350 kilo range in the April timeframe. Today they are down to below to $200 in many cases, but they're still at record levels. But they're also continuing to soften. Our first and second quarter were not impacted directly by this market trend. The third and fourth quarter will be subject to cost pressures and we're working on programs to try to, number one, shop smarter and find better suppliers, better vendors -- but also to try to look at our designs to see what we can do to offset some of these cost increases. But they are real. They are here. We have to deal with them. And they will be impacting us in the second half.

Are you able to quantify that at all as related to gross margin? Does this take you below 30%? Are you still lower 30s?

We're in the low 30s right now and we haven't had any impact from this material. We have said in the past that we thought that at full load the impact could be up to $2 per seat in terms of gross margin. We don't really know where it's going to wind up, but certainly the auto industry is not in the mood to accept price increases and so we're trying to deal with it in terms of a cost and cost avoidance process.

Okay. So have you done any -- trying to get obviously more color around this. If you had to buy out a year today, where would your gross margins shake out as a result?

We wouldn't buy it a year out today, because the costs have been dropping. So we would certainly continue our pattern of buying strategically and picking up material as we see the market advantages. So we're not trying to establish any long-term commitments based on this current price level. We believe the price level will continue to go down.

This is Bud. I think it's fair to say, and a couple of people that when we talked about this last quarter, made the same observation -- that we've been pretty resourceful about finding ways to attain our low 30s gross margin target. And if there is an impact, that we have the design flexibility and the capability over time to offset that. So we may have an impact. We don't know at this point how pronounced it will be, but our intention over the period of time we're talking about, which would be through 2009, is to achieve our margin target. Is that a fair statement, Dan?

That is absolutely a very good clarification. The gross margins for our type of business, there are things that happen to you that your reaction is not immediate. We have to do some things -- and get ready to do some cost avoidance programs to get in position to react to the cost of the market. And we have been working on that in particular since the tellurium phenomenon occurred. We are under pressure. There is a chance our margins will be impacted. I'm pretty sure they will be. But we don't know -- to what extent or how long.

Okay. Good. And then I guess finally and I'll hop back into the queue. Additional BSST non-auto related projects. Is the bed our last for the year? Would we expect potentially something else yet this year?

No, I think there is a good chance we'll see something else come out of our non-automotive efforts in the calendar 2008.

Okay. Great. Thanks, guys.

Thank you, sir.

Thank you. Our next question is from the line of Rick Hoss with Roth Capital Partners. Please go ahead.

Good morning, quickly for Bud, what was the BSST expenses for the quarter, if you have that?

I can give you that.

Why don't you pull the trigger. I have it here, Barry, but you have all the numbers.

The net number for BSST was $684,000. That is compared to $695,000 for the prior year second quarter.

Okay. That is a net. Okay. And then a little more philosophical. Can you explain the opportunities within the manufacturers that are out there, specifically Chrysler and then, say, the German manufacturers, which -- two that I view as opportunities?

Well, philosophically they are untouched fields for us. We have no current business announced at Chrysler, nor do we in Germany. We are working with several Chrysler teams. We're also working with several of the German companies. And we have stated that we are working very hard and that is one of our targets to try to achieve penetration for all of our products in both of those major markets.

Okay. And how much would, say, the sense of nationalism play into the decision-making process, for say some of the German manufacturers? Is that a significant roadblock that is difficult to overcome?

As they turn the dogs on us, it is a problem for us as an American company based here to do business in Germany because we don't have a physical presence there. We have one engineer who helps us try to gain entrance into a huge market. So he's a very busy fellow. It would be easier if we were headquartered is in Stuttgart or Munich, but for us really I don't think that there is really any direct regional prejudice against using American companies. I think it is difficult for us to get over there and make -- make our story clear and have the type of support that they're used to getting from their local domestic suppliers. So we recognize this. We're working on it. We're trying to increase our presence there. And we're trying to increase our activity levels to penetrate that market.

Okay. As we look at potential platform penetration activity in say 2009, probably not the order of magnitude that we've seen this year. I think we've seen some pretty substantial penetration, specifically in the GM product line, but just taking a look at what's out there and potential manufacturers that are out there, just any sense of what's left?

Yes, well, there is a whole lot of market left.

Okay.

We think we have less than 5% of the total available markets that we would be targeting. And we are working and we are trying to get new customers -- we already have some customers for 2009. We know who they are. We've been working with them for several years. It's again our common strengths. We're very strong in the Asian marketplaces and we're continuing to gain penetration and market share there, and we continue to press here in North America. I don't anticipate any German business falling in our lap for 2009, but we are continuing to work for future down-road programs.

Appreciate it. Thanks.

This is Bud, just two things on that score. I think it would be a mistake to assume that 2009 is going to be an absolute quiet period in terms of launches. And then, secondly, the secondary effect of the decline in the big SUV and truck market is that the people who were in those segments and are now falling down into what I call the mid-range vehicles, are not interested in abandoning their creature comforts. So we're seeing that's opening another set of doors for us that we knew were there, but had been slower to develop, where the heated and cooled seats I would say are now both a profit improvement and significant demand item on customers' lists. So that for the next two or three years should I think be quite a good opportunity.

Okay. Thank you very much.

Thank you. Our next question is from the line of Joe Amaturo with Buckingham Research, please go ahead.

Hi, good afternoon. I am assuming that the recurrent revenue guidance does not include any Sealy related revenue. Is that correct?

That would be correct.

And then as you roll on this new GMT-900 and F-150 business, could you just give us a sense of what the composition of Euro/Asian sales as a percentage of the total would be?

I think the Euro/Asian sales get up above, I think we had it in the press release.

In the second quarter, they were about 50%.

They're approaching 60% in our total revenues for the second quarter.

Right, understood. But I mean going forward, I got to imagine that GMT-900 is going to represent a larger percentage of future revenue base.

Net market, should it come back to near strength -- it will certainly resurge and be more than 40% of our total market demand. In the future we suspect the domestic markets will come back, although we continue to have growth in the Asian and European markets as well.

Okay. And then lastly, could you just give us a sense of what production level you're expecting for the GMT-900 and F-150 when you arrived at your guidance for 2008, your revenue guidance?

We look at the market and we see them currently either at plan or below plan about 40% off of last year's numbers, and that's about the numbers that we have decided to use in our forward-looking projections.

Okay. And what type of deviation from the current expectation would -- I mean, is that why you have such a wide range, or -- ?

Yes, we really don't know what's going to happen. If you look at the immediate future, this has been a very drastic and very dramatic drop in the markets -- the consumer market, actually. The consumer has not bought cars in the months of May and June, and those lack of sales through the system have caused a backlog of inventory to build up. And the market and the OEMs are trying to find ways to move the inventory out of the way so they can launch their '09 models. And we're not really sure how August is going to go in terms of the retail efforts for the car companies, and how it looks like petroleum prices are falling. And that's good news for the consumer and it should be good news for the OEMs and for the car companies in general worldwide.

Okay. All right. Thank you.

Thank you. Our next question is from the line of Frank Gristina with MicroCapital, please go ahead.

Good morning, it's actually Ian Ellis. And good morning to everybody. I was interested to see the announcement for the first sale you've made on heated and ventilated seats, Dan, and I think once we spoke about that being a market which is potentially as large, if not larger, than the opportunity for CCS -- and I was wondering what your thinking is in terms of expectations and adoption there. And also what target margin you would have in volume for that product?

Certainly. And nice to hear from you, again, Ian.

Absolutely.

We have actually announced and we have made shipments, a small shipment in the first quarter, but some pretty significant shipments in the second quarter of our heated and ventilated product where we take advantage of our patented air distribution systems and specially designed air movement fans and equipment. And our customer there is the Asian marketplace, particularly in the developing countries, China being the biggest target. These are markets where the costs of petroleum has always been extremely high, and many cars don't have air conditioning, and the presence of a seat ventilator or a seat cooler is a big advantage. They also have small engines that don't have surplus of electricity available. So as we had talked in the past, we believe that this is a very large market for heated and ventilation systems, particularly for the entry-level and mid-market vehicles, and also particularly for the growing and developing markets targeting primarily the Asian customers. If you look at the model that we've identified, the Nissan Tiana, it is only sold in Japan, China and in Russia, and in some of the Asian market -- smaller markets. So you'll never see one in the US, but you'll see a lot of them in Japan and in China. So we think that that particular product line will continue to grow for us, and we expect to see the same time of margins in this product. All owe the ASPs are lower, in the $50 range rather than the $70 range. But the gross margins for us are in the same range, in the low 30s.

Okay. And I mean, going back some years (inaudible) CCS adoption was based on take rates. Do you have any take rate data yet on heated and ventilated yet?

We have early data and it is quite positive. It is not in the range that we saw. These vehicles, again, are not upper end models -- they are mid-level and entry level markets. So the take rates are a little lower, but they're still quite significant and quite appealing to us.

Okay. Congratulations.

Thank you, sir.

Thank you. Our next question is from the line of Walter Ramsley with Walrus Partners, please go ahead.

Hi, Dan, congratulations under tough circumstances.

Thank you.

I had a couple questions about those take rates. Can you just kind of break down what the take rates are historically, maybe between the SUVs, the trucks, and the sedans? Are they different?

Actually we never really talked about that, but we have said that we believe that all of our take rates -- and they continue to be in excess of 70% over all of the vehicles that we have. I think really rather than breaking it out by segment of the market, it's really targeted more towards the price range of the market. If the vehicle is a middle-market vehicle, the take rates do typically tend to be lower. I think the lowest take rate we have is probably in the 25% to 30% range. And if I were to guess, I would say that we would expect to see something in the high to mid-80s on an upper-end vehicle, 40s on an entry level or mid-market vehicle. And that trend has not changed.

Okay. So even if the customers move from SUVs to sedans, as long as the selling price of the vehicle is the same, the take rate should be the same?

That's what we are seeing so far in early indications.

Okay. And then as far as the beds go, the technology being used, is that pretty much the same thing as the cars?

It's a convective system that uses a thermoelectric device with small fans that draw in ambient air, and heat and cool it, and distribute it to the bed surface in a patent-applied approach.

So the price would be about the same as the cars, or -- ?

Well, we have a -- we have not actually disclosed what our target revenues are for these items, but essentially a thermoelectric is a thermoelectric. So, yes, depends on how many we decide to use to achieve the comfort levels that they want.

Okay. Great. Sounds good. Thanks.

Thank you. Our next question is from the line of Richard Holt with Wealth Monitors Incorporated, please go ahead.

Good morning, gentlemen. Most of my questions have already been answered, but I just want to -- following up on 2009, is -- do you have a timeframe when you're going to be comfortable speaking about 2009 as you think at the end of Q3 or will it be later on in the year?

Probably most comfortable around the end of 2009. But we have traditionally looked at the following year at the end of the third quarter. So probably about 90 days from now, we'll give an indication of what we think we see in the market for 2009.

Okay. And forgive me, if I missed this, the BSST sales for the quarter, which would be primarily Herman Miller, what were they?

Roughly $60,000 for the first half, weren't they, Barry? Very small.

That is about right. Very small.

And one additional question. I think you had targeted two product announcements in the second half with BSST. I assume that the bed was one of them. I think it was something related to electronics. Is that correct?

We said so directly. So what Dan has said I think is about right, that we expect something else to happen in 2008.

Okay. Sounds good. Those are all of my questions. Thank you.

All right. Thank you.

Thank you. Our next question comes from the line of Chris Lippincott with Systematic Financial Management, please go ahead.

Good morning, Dan. Most of my questions have already been answered, but I had one that was interesting about your inventory. I was wondering what you were thinking might happen with inventory levels given the fact that we've seen just in this recent quarter alone about a 200% year-over-year increase in the finished goods. So I was wondering how you were thinking your inventory might be moving forward over the next couple of quarters given the environment we're in?

This is Barry. We were anticipating increasing our inventory levels with the number of new North American programs, in particular. And that's why you've seen the increase. I would point out that in the prior year, we quite significantly decreased our inventory levels, so that this is maybe a little bit shift towards normalizing, given that decrease we had in the prior year. But we would see probably a need to increase a little bit more for the rest of this year, but not dramatically so -- if not have a few opportunities with the lower volumes that we're seeing, to reduce that a little bit.

Okay. So you still think it's fairly in line with the production levels going forward?

We probably are holding a little bit more now than we would have liked, because we order out like a couple of months really, in giving our suppliers or contract manufacturers the idea of what to build. So we're probably a little ahead of ourselves at the moment and so that is why there is some opportunity now to thin it out. But I wouldn't say dramatically.

So nothing big. And, last, just CapEx and D&A, can you reiterate what you're expecting?

I'm not sure that we iterated anything in the past other than would expect a pre -- higher run rate than last year, I think to date we're about $1.2 million or something like that.

I thought you mentioned something about CapEx might be flat and slightly up from '07.

That may have been a comment we made in the past. There are some expenditures on the advanced materials and the BSST program that we'll be putting in place in relation to our lab, and some of the activities we're pursuing there. So that's probably a stale comment. So I would see maybe $1 million in the second half of the year, or something along those lines.

Okay. Great. Thanks.

Thank you. (OPERATOR INSTRUCTIONS) Next question is a followup from the line of Brandon Farro with KeyBanc Capital Markets. Please go ahead.

Thanks for taking my follow-up, guys. Bud, can you talk about the Sealy development program -- can you give us an idea of what the revenue split might be? And, secondly, is this technology going to be exclusive to Sealy or can you take that to other mattress companies?

I think probably Dan should probably speak to that, more than I. Because he's had the most direct conversations with the Sealy people. It is fair to say we're in the development process, and I think therefore a bit premature to be disclosing or even projecting what I'll call detailed financial splits. But go ahead, Dan.

That is a very good approach to it. Right now there is a lot of enthusiasm for this product. Actually we're conducting market studies right now to determine the exact size of the market. The people at Sealy are extremely good at doing this type of work and they're very good at marketing products in an area we have no knowledge of. That why we seek a partner like Sealy who is the world leader in this area and it's good to see them excited about it, but we don't have any hard data we could use. In terms of our relationship with Sealy, we are a very small company and we do tend to find leaders in an industry where we can add value to a relationship with them and work at least on an early basis and exclusive level, where possible. So we don't really have a lot we can tell you other than we are working with Sealy. We're quite pleased with that. The prospects for this product I think are very high.

Okay. So it does sound like there might be some level of exclusivity for a period of time with Sealy on that technology -- is that fair?

It would be fair, yes.

And then can you give me a sense of what -- let's say you guys do $80 million in revenue this year, what percentage will be North American light truck, best guess?

Probably in the 35% to 40% range would be North American light truck.

Okay. Back half of the year, how do you have any sense of what it might be relative to the first half?

Higher.

Higher.

Well --

We had nothing in the first half.

I guess the way I was looking at it, I think 60% of the business was Ford and GM in '07, and lion's share of that was light truck and a lot of the growth this year comes on light truck at Ford and GM. I was assuming it might go up relative to last year.

It is very possible, yes. We have more platforms in theory buying. Unfortunately they're buying at lower levels.

Okay. And then I wanted to go to the heated/ventilated piece of the business. I understand the gross margin piece. I think you guys had talked about gross margins on that piece of the business being commensurate with the CCS piece. I guess what I don't understand is you've got higher volumes on heated/ventilated versus CCS, so you can offset the fixed costs of the manufacturing better. At the same time there is potentially less technology, more competition. Can you help me understand the puts and takes on gross margins there?

Well, the gross margins are quite simple on that. We have a cost to produce the product and we sell it for a price higher than that. We have patents on how we distribute air through seat surfaces which protect us in our particular method of distributing the air through the seats. And, in fact, there are other people who have ventilated designs and ventilated systems on the market and have been on the market for five or six years. We feel, and at least a few of the customers now feel, that we have a better solution. And so they are working with us to buy our product at a competitive price range that gives us a low 30s gross margin.

Perfect. Thank you. Last one. Let's assume, I think you guys have said the overall seat market, heated/ventilated, other, and CCS is probably $800 million this year. You guys --- roughly 10% of that market. I think you guys had always said see it going to roughly $1 billion by 2010. Can you give us a sense of on that incremental $200 million in revenue, what you intend to capture in term of market share? Is it going to be 10% as it is today? Is it going to be 20%? Can you help me answer that?

Well, I think that the [chocks] have been kicked out from our estimates sf the overall market with be the current shifts and dramatic drop in the automotive industry worldwide. But in general, I would say that we do intend to increase our share of the overall available markets for both the heated/cooled and heated/ventilated product. It is not our intention to today to go after the base heated market, which is usually handled quite efficiently by a lower technology application. But we do intend to push very hard into our market segments that we selected to compete in and in that $200 million. So we expect to increase our market share as that goes forward to 2010 and beyond.

Okay. Thanks a lot, guys, for taking my questions. I appreciate it.

Thank you.

Our next question is from the line of [Bob Momere] with Arbor Capital Management. Please go ahead.

Good afternoon, Dan, good morning Bud.

Hi.

Could you please lay out a reasonable commercialization timeline for those materials coming out of Ohio State, maybe starting with prototype device that a potential customer may be able to play with and ending maybe with a more commercialized production opportunity?

Good question. I think probably that's a timeline that we're not ready to lay out at this time. There are -- I would say a fair number of unknowns here. Suffice it to say this is a significant step. Suffice it to say that some of the CapEx that Barry was talking about, which I think certainly will not be in excess of $1 million, probably something less, will be to put in metallizing capability, and material characterization capability, that will take this -- what I'll call lump of raw material and begin to work to turn it into a module. And when we get to a module level, that's when customers will really get excited because we have the ability, therefore, to demonstrate hardware, and to trade it for that matter Munich and Ferris and so forth are hardware [towns]. So I think that as process that we will be going through over the six to nine months and I think we will be much better equipped to talk about that probably nine months from now. I think that is probably as much as I can say that is just not speculation.

Thank you, Barry. And as a follow up to that, are these activities being conducted within your own research and lab facilities? Or is this something you're still working with in concert with outside academic partners?

Well, I think what's going on is the work of the outside academic partners is continuing, but what we're seeing is enough progress that we want to start ramping up to create modules and product capability from that. So that certainly means we'll be looking for first tier partners and OE automotive partners and in the non-automotive world, strengthening the ties we have with others that are trying to bring this from a systems standpoint forward. And then it is definitely happening that we're putting more of our own capability in place, because that's where revenue comes from.

Okay. So suffice it to say, then, sometime in '09 hopefully if work progresses sufficiently, we should be hearing about a potential partner playing with some of these new materials?

Yes, I think we'll -- the conversation about mid-year could be very interesting. Let's put it that way.

Okay. Thank you very much.

Thank you. And at this time there are no additional questions. I would like to turn it back to management for any closing remarks.

All right. Well, thank you very much for everyone taking the time out of their day to come and listen to our story. It has been quite a convoluted story in the second quarter, but we believe we've survived the second quarter and we're now toiling into the third and fourth. We have a lot of good prospects. A lot of positive things that are happening to our little company. Fortunately we're still in a position to be able to hold our heads up. We're still cash-positive. We still have cash in the bank and we do have good solid prospects with lots of new opportunities and lots of new products coming. Some of them as we mentioned earlier, the bedding product, and potentially one other product coming out of the automotive space yet to be announced this year. And we have other products as you've all noted coming in 2009, '10, and '11 as well. So we have had a very tough quarter as has the entire industry. And frankly I think the whole world has had a tough quarter, and we look to getting together again in 90 days and hopefully talking about some more good news. Thank you very much for your time and attention.

Thank you, sir. Ladies and gentlemen, that concludes our conference for today. We would like to thank you for your participation. You may now disconnect.