Analog Devices' Management Presents at Barclays Global Technology, Media and Telecommunications Conference (Transcript)

May.23.13 | About: Analog Devices (ADI)

Analog Devices Inc. (NASDAQ:ADI)

Barclays Global Technology, Media and Telecommunications Conference

May 23, 2013 1:10 pm ET

Executives

David A. Zinsner - Chief Financial Officer and Vice President of Finance

Analysts

Blayne Curtis - Barclays Capital, Research Division

Blayne Curtis - Barclays Capital, Research Division

All right. We'll go ahead and get started. My name is Blayne Curtis. I'm the analyst here at Barclays. Very happy to have with me Analog Devices. From the company, Dave Zinsner, VP of Finance and Chief Financial Officer; as well as, Ali Husain, who many of you know from Investor Relations.

Question-and-Answer Session

Blayne Curtis - Barclays Capital, Research Division

So just to jump right in things, I mean, you just reported earnings 2 days ago, so maybe, Dave, it will be helpful to just kind of recap that a bit. The April quarter was essentially in line. The guidance was a bit muted, still seeing Analog growth. The rest of it, it is fairly flat. So maybe that would be a good entry. I think most of them know your business but maybe just step through kind of, just what do you think from the end market in the near-term here?

David A. Zinsner

Yes, okay. So last term -- wish I don't hit this mic. Last quarter was a pretty good quarter. It came in pretty much as expected. We thought we'd be somewhere between kind of 4% and 8% off then we finished kind of rate. We split the goal close and came in 6% up. Good strength in the industrial space, which is usually what happens in our second quarter, and good -- I think good progress on gross margins. We improved gross margins, improved operating margins back into the 30% range. So everything looked pretty good. We also did take inventory down, which if you go back to last year this time, there was kind of similar trajectory. One thing we did was we built inventory last year. This time -- this year, we decided to actually keep inventory relatively lean and as things pick up, we'll get the leverage when that happens. This quarter, I would say bookings in general, over the quarter, were very solid. But certainly, strengthened through the quarter and exited the quarter with very strong bookings. They were -- both our bookings as we measure it on us, which is basically our OEMs plus what the distributors order. And the orders, if you combine OEM and what the -- and customers order on distributors of our parts, both of those were up double digits. So that -- those are all good positive signs indicating some momentum. So as we kind of thought about our guidance, we thought given all those things and particularly we saw strength in industrial, we felt like there's a reasonable opportunity yet towards the higher end of the range we gave, which was kind of, we gave essentially flat to up 4%. So we thought that, that's as a reasonable scenario, which would indicate we'd be kind of closer to the top in the range. I think as we thought about the bottom end of the range, what kind of entered our mind was last year. Everything felt almost exactly the same last year and we worked hard a bit off-guard as things really started to slow down particularly in July. And we certainly get industrial data points but the thing that we really hang our guidance on is really bookings and how bookings are transpiring. And the difficulty we have is, we have very short lead times and so right now, customers are booking mainly for deliveries in June not into July. In July, it becomes this kind of like unknown entity out there that where we're not really sure how things are going to go. So we thought well if a scenario transpire, which is momentum continues and at some point in anticipation of summer shutdowns or what have you, July really weakens. We ought to have that as that be our kind of our downside scenario and that's what kind of led us into this kind of flattish on the downside. At this point, there's not any evidence to suggest that, that's going to happen but out of abundance precaution more than anything, that was why we gave that kind of range.

Blayne Curtis - Barclays Capital, Research Division

It is a clearly the data if you look at your guidance up almost 2%. And if you look back historical trends, it does seem more seasonal than not, or more normal than not, and I guess when you look at the remainder of the year, seasonality industrial is weaker in Q4 and better in the first half. The big debate is this year, normal or is this the new level or are we seeing something different this year? And I mean, do you have any indications that other end markets, and I think that most of you will get to networking but I think if you're hopeful. What will make this different than last?

David A. Zinsner

Well I think if you guide -- under our guide where the midpoint is kind of up 2%, that I think you're right. That is kind of normal seasonality although quite honestly, that's an average of 5 years of things going really gangbusters or not or going into the toilet. So there's been only I think one year where we actually did do up 2%. I think that was last year. So I think on the industrial side, we -- assuming that the macro doesn't fall apart on us. I think we have a pretty good deal that there's some momentum. Having said that, I wouldn't call it kind of a recovery momentum. I'd call it, our customers are being very cautious but demand is picking up modestly and so they're ordering very modestly, it's that kind of scenario for industrial. Hopefully, at some point, we get kind of a real robustness. People start spending capital for factories and buy industrial equipment and so forth. And those things really start to kind of pull the industrial business up and that would be the kind of the characteristics of a real recovery. On the comp side, as you point out, we guided flat communications and although we kind of hang out a little carried, which was orders in the last couple of weeks for comps did tick up. And I think trying to take 2 weeks and extrapolate that out and say, Okay, that things are back to the rate they probably -- we've done that many times internally and that usually ends up being a disaster. I think at this point now there's limited to no visibility as to how carriers are going to deploy equipment and what's going to happen to our OEMs and thus what's going to happen to us, in terms of deliveries and comp space. But I think that's still pretty much a wait-and-see game for us and at this point, there's no indications that it's going to do anything but be flat in the third quarter. Consumer, we thought would be flat as well but that business is generally kind of flattish in the third quarter. I also would expect, hopefully, that seasonality will play in the fourth quarter and that business starts to recover. But with that again, we don't have any orders or any firm indications that, that's going to happen but that's the going planning assumption at this point. And then on the auto space, which had a great quarter this quarter, in fact, it exceeded our expectations and was at a level now where it's pretty much as high or are we right in close to a tie? That business, we thought would be flat. Normally, it's seasonalities in auto is okay but it starts to fall off a little bit in our fiscal third quarter and then it starts to recover in the fourth quarter. Yes that one could surprise us again. It's kind of hard to tell. And there's certain -- we pull all these like little data points out. What the U.S. automakers are going to do in terms of shutdowns. Seems like they're not going to do as much shutdown activity, if any, through the summer. That could be positive. We think their inventory is in relatively good condition. We're designed, or rather our registrations are up in certain countries and in Europe. So there might be some opportunity there to start to see some growth. I think fundamentally though that business has a dollar content story that's been going on. It's been growing double digits for 5 years. So I would assume that even if the end unit volumes of autos is not that robust, there might be some bouncing around depending on the quarter but I think in general that business is going to grow quite well because of the dollar content.

Blayne Curtis - Barclays Capital, Research Division

You mentioned your lead times in the fairly low and I would say and maybe you can go by, I mean when you're competing for business, I'm assuming everybody else's lead times are fairly or maybe outside of 1 or 2 companies [indiscernible] extending. Since like for the industry, most people have ample capacity and low lead times. You mentioned that you're not really ramping up the fabs and I think going out slow, are you built to fly, and you feel comfortable and is that why the inventory [indiscernible] . So can you just talk about -- is there any real catalyst for 1 year customers who are stocking to for lead times to extend?

David A. Zinsner

Yes. I think -- well I think, first of all, we have 115 days of inventory I think as of the last quarter. That's plenty of inventory, again, through any starting pickup and demand. By the time we start to deplete that level of inventory, we'll be in a place where we can build up. And a lot of stuff is sitting in finished goods are in a dye bank anyway and it can be moved through the finished goods in a relatively quick period. So I'd say right now, the way we're structured in almost any scenario of demand, at least for the foreseeable future, we should be okay in terms of being able to supply. I mean it will obviously, pull the factory up but we have enough cushion in between, plus we have inventory at distribution for that -- those customers. So that's another cushion for us to see pickup and demand. I think from a lead time perspective, when does that stretch out? We actually was just somewhat different than some company strategies. We actually try our best to keep that lead time constrain no matter what, to fix tweaks that kind of maxed maybe a few parts going into the 8-week range but for the most part, we try to keep lead times short. As much as possible, we'll build to make sure that we're meeting demand. One is hopefully capture some upside. But two, I think it's one of the things that differentiates us from our customers, that we're always there. We're always able to deliver. If you have a sudden [indiscernible] orders, we're going to have the parts there for you. And I think customers generally value it. Having said that, at some point, somebody will be short on some part. And when that happens and assuming it's a fairly meaningful part, then that customer begins to panic about every other part they buy from everyone else and they start to think about their inventory levels, which I think are relatively lean-and-go, maybe I do need to bring it back up, it will at least [indiscernible] Will what have averaged over a longer period of time. And the -- and maybe in some cases even order more than that. And then that starts to kind of permeate through the whole supply chain and then everybody starts to worry about it. And so that will happen, I'm sure. Every time somebody says we've got this all figured out and that's not going to happen, it happens. So we'll -- that's definitely not the situation I think most of us are in at this point but at some point, it's likely to happen.

Blayne Curtis - Barclays Capital, Research Division

It's just maybe a refresher when you look back to last year, in the July volume falling off, you just said you had visibility into June now, what were the timing of when you saw that fall off, was it literally none for July and then by segment was there any sort of or geography any sort of we've particular weakness that may or may not repeat?

David A. Zinsner

Yes, well I think it was mainly in what the most noticeable thing that happened was in the industrial space. It was in the kind of U.S. and European markets for the most part, which is where most of that revenue finds its way to. Now ultimately, their end application might now go into Asia, but, who we're selling to or who we're designing with is generally in the U.S. and Europe. It's one -- the difficult thing about the business like ADI is that runs somewhat on trends and it's difficult to know whether you're in a trend until you have like 12 weeks of data and you go, "Oh my gosh, yes, of course, we were down". When you're sitting in the middle of it, you go, "Oh, maybe this was an off week. And maybe they're was a vacation in Indonesia that caused this to happen. And so we have a difficulty figuring out exactly what hard details as to whether we're in the midst of something different or not. But when you look back on that period, that whole thing with sequestration and on top of the issues around Europe, I think it's just -- it turned a switch off for almost any CEO of an industrial Company to go, "You know what, we're going to defer capital spending, I'm just very unsure about the world. And we'll come back next year and hope that the world is still alive and we'll worry about capital spending then". And that then permeates back through, through to us and we start to see inventories start to come down and demands start to follow. And that's really what happens. And it's anybody's guess whether that happens again. At this point there's no clear indication that, that is happening. But that's why we've operate cautiously through the summer and just not take risk with our manufacturing strategy, with our operating expenses or what have you and we just carefully manage through this and when we do see a really sustained kind of level of recovery, we'll start to think about what we do in those areas.

Blayne Curtis - Barclays Capital, Research Division

Excellent. Maybe the auto business was trying across board for every company in Q1 and most are seeing some moderation in Q2. Obviously, a low point in Q4 so I think some of it was supply chain rebalancing included the end markets data point and it's actually fairly decent scenarios. But just curious on what you think is going around the supply chain and by being flat in Q2 is that kind of now were caught up and if the auto market continues to do well then you can drop that base or..

David A. Zinsner

So we're talking calendar Q2, right?

Blayne Curtis - Barclays Capital, Research Division

Sorry, yes, calendar for April.

David A. Zinsner

Yes, yes. So the -- yes, I think for autos, I think this period is actually -- it's hard to notice seasonality in autos right now because I thought there's been a lot of dollar content gains and also all these stuff around the cycles has really masked what is typically this quarter coming up is actually kind of a seasonally weaker quarter for autos. But I don't think there's anything systemic going on there. Did they build a little more inventory last quarter, they may have, but I'd say if they did it was relatively modest. I just think this is like a seasonal pause that you normally have and then the next quarter you start to have a new platform of course, coming out and at that point, it starts to ramp back again. I still think there is absolutely a dollar content story going on for anybody that serves the auto space. So much electronics are going in to make the systems within a car safer, to make them more energy efficient, to provide more information to the driver and what have you. And that trend, which started probably at the high-end and works its way down to the more mainstream cars is still going on. I think it's got a lot of legs to it.

Blayne Curtis - Barclays Capital, Research Division

It looks like you're beaten I mean, it's [indiscernible] you're seeing a lot of impressive issues as far as reduce of pockets or pricing and autos is just the one area that actually seems -- it's going to be a good time for a while, obviously, it's attracting a lot of attention. Maybe if you could talk about where you're positioned best and what kind of growth do you see for the auto team [ph] .

David A. Zinsner

Well okay. So before I go into that subcategories, the one thing I would say is just suddenly waking up tomorrow and saying, "I'm getting into the auto business" is pretty hard to do. There are certifications that are required obviously, to supply to the automakers and they take those very seriously, the bait in auto I think is 0 to 1 parts per million that you can have in terms of failure. So your test platforms have to be pretty robust to make sure that you can deliver the quality levels that they expect and they generally, if you slip off that generally don't go back to you again. So it's a high-risk gain. So I think, although some companies might have aspirations to be in that, might be just trying to design parts into it to actually be there in volume is a whole another order and I think they're highly unlikely that somebody's going to actually enter that as they have entered already. We service 3 different subcategories within automotive: One is in Infotainment, which I talked about. This is delivering audio and video and what have you. I'd say it's the one that gets probably the most attention from everyone, because it's a kin to consumer. Parts in [indiscernible], people understand it and can see it. That's been a good business for us. It continues to be a good business. But I actually think the other 2 areas are probably have -- they probably have even more potential. One is safety systems. Safety systems at the beginning were more just figuring out ways to fire airbags but increasingly these systems are moving towards active safety systems, which actually do something to the car to make it safer in the event something's happens, antiskid, stability, control, identifying objects in the road and it's doing something with breaks so what have you moving the car in some way to make sure you're not going to hit it. Those systems are starting to permeate into the high-end of the automotive fuel space but eventually, these things are just going to be mandated across-the-board and your carmakers will need to meet safety standards and when that happens, this will be significantly pervasive through most of the automobile market. And then lastly, we serviced the powertrain market, that also gone through a transition. Powertrain was not that interesting for a while but now in an effort to make these automobiles more energy-efficient, suddenly it's got a resurgence. So this includes hybrid electric vehicles, electric vehicles, some of the many things that you need not to worry about in terms of the battery and something was going on. It also includes start stop battery, which I think [indiscernible] been in Europe, they know of, it's not tremendously pervasive in the U.S. market but will be. I mean this allows radio your standard combustible engines to be more energy-efficient by an order of magnitude and my guess is that, this will be mandated by most countries over the course of the next few years. And to do that kind of start stop technology, it requires a good amount of signal processing to make that happen. So we are very well-positioned. We get a lot of parts in there and I mean one of the parts we do in the safety side is a MEMs-based technology, which quite honestly not a lot of semiconductor companies can do, most of that competing technology is actually in module manufacturers like a Bosch or somebody. So we're one of the few semiconductor companies that supplies to the auto space with MEMS technology because it's just really hard to do and then meet the quality standard that the automakers really want.

Blayne Curtis - Barclays Capital, Research Division

[indiscernible] into Networking, you mentioned that you give a little tease that had perked up a little bit, I think everybody's been hopeful and we've had many companies [indiscernible] that market, I think there's a big sense that it's really taking up the time but maybe he's on the look where you're seeing any particular strength and is there any -- I think there's a lot of but maybe you can talk about that in broader.

David A. Zinsner

So we're relatively agnostic to which carriers are going to deploy, which regions are going to deploy. Clearly, as things move from 2G to 2.5G to 3G to LTE, we -- there's been a pickup in dollar content that we've been able to garner in each kind of evolution. And so as things move from 3G, which is predominantly what we sell today, to 4G or LTE that's going to be very helpful to that business there on top of just an additional rash of deployment to improve the bandwidth. I think right now the best I can say is that the OEMs believe that it's going to happen at some point obviously. We think that just in talking into the OEMs and our own understanding network is, the other networks do need to move to higher bandwidth, higher speed systems to be able to support video and the massive amount of data rates that are going to be required to support LTE phones or 4G phones. So that in of itself is absolutely going to happen. The question has always been, when does it happen. What [indiscernible] It's been one of this that the carriers have kind of pushed off as much as they can but I think they're at the point now where they really do have to strategy kind of deploying these things. It looks like they're ramping capital spending today is more about the footprint and once that's kind of done, real estate that transitions towards the -- towards speed and bandwidth. So I think we're in the phase of footprint and we transition to bandwidth. The question is when do that happen and I don't know. And the guys that tell you they know, they have a better crystal ball than the ones that we have at ADI because the OEMs at this point although in some weeks, the orders have picked up. I don't think it's been at a sustainable level to indicate that there's significant deployment imminently going to happen and so we'll just have kind of have to wait and see. At this point now we've read the same press releases from our market analysis that everyone else reads and our hopeful and we'll just kind of wait and see.

Blayne Curtis - Barclays Capital, Research Division

[indiscernible] like consumer and I give you a hard time in areas called about being selective I think for my thing obviously, there's been a lot of analog companies who have essentially the insights consumer mobile given the it doesn't fit the exact profile the rest of your business. But I guess I understand that I guess, where do you see opportunities still in consumer to really get paid for what you deliver?

David A. Zinsner

Well we have, in some ways, deemphasized consumer but we also I think just more sharpen our focus on the areas that we think we can participate in. We're ADI does really well is when there is some new need from the OEMs that is particularly difficult to solve technologically. And where we have the resources and some ability to solve those problems. And where we don't do well is when 17 different suppliers can do the exact same thing and just change the part number and there you go. And because we are not going to be the absolute lowest cost 20% gross margin kind of play. So we've been, what we tried to do is be careful, invest where we think we can, put the investment in, there is a benefit to being in consumer in that things that happen in the consumer space in some cases kind of move over to automotive and military and industrial. So I think we do get some cross-pollination of understanding of the technology that actually helps drive the growth rate in the other segments as well. I say that's the area that we are most focused on is the portable space. Having said that, we're not trying to be in the handset that sells 45 million units with like 7 different chips. I think what we try to do is find that 1 application, that 1 solution that maybe it goes broadly into a smartphone or maybe it goes into certain higher-end type portable application, but does something really unique and interesting that really makes a difference for their and they value and give us return. What I think Den[ph] Said in the call is no matter how well we do sometimes, the transitions happen fast and we're in and we're out. I think we always go in recognizing that, that's going to be the case. And we only put the resources in to make the ROI work for us and that's been the model. So I think we've run rate now about 15% of revenue in consumer. I'd say that's probably about what will run give or take plus or minus couple of points, which on relative basis to many of our competitors. That's actually quite low.

Blayne Curtis - Barclays Capital, Research Division

Dave, I wanted to ask you and as you roll the entire business I think in the last -- you just on earnings call and it's a hard question answer but if you look at your overall business, it has been down year-over-year for several quarters then there's a lot of moving pieces within that, I'm assuming that you still feel like you've been maintaining share, you've been share in some of your core markets. I don't think you're going to say the sunny market that this market has been growing. So maybe if you can walk through some of the moving pieces.

David A. Zinsner

Well I think in general, the semiconductor market has had good years and not so good years and we just came off a year, which the semiconductor order was not good. We're in a period of time that stretches since 2009 that like from a macroeconomic standpoint we haven't seen since 1930s. So it's if -- I think it's reasonable to expect we're going to have some volatility as people figure out the what the real level of GDP is and how much inventory they should hold and how much they can trust the suppliers to meet the demand when the demand shows up and I think we're kind of working through that process. And so 2010 was a big year, 2011 was a big year, 2012 not so good. It start now a little slow for 2013. But I think systemically, this business does grow. Once it grows, it probably grows faster than GDP, though I think it's on average over years and years and years that it grows 15%, now, probably doesn't anymore. [indiscernible] we are mid to high-single digits I think that is probably a reasonable expectation for the market. So we're in one of those periods where it depends on what upcycles, where as soon as one of these cycle starts, everybody is convinced that it's now negative. I don't think that's where we're at, and I think that, that's just a cycle and if things happen it will go the other direction and then everybody will think we're back to growing 20% a year. So -- but on average I'd say it's probably like mid-to high single-digits.

Blayne Curtis - Barclays Capital, Research Division

And then one thing that you, I mean, maybe if you drove me maybe when you agree that the growth profile has matured, but I think you have seen you would agree, companies act like more mature industries as far as returning cash, you guys have raised your targets there, maybe you could talk about that and then you're committed to buying back more stock, what would be the real trigger there. I think you said be opportunistic and how you think about.

David A. Zinsner

Okay and so we talked about moving the -- what we have been averaging over the last few years is about 60% of our free cash flow, going back to investors but the predominant amount of that was dividends, I think going forward, we still are committed to the dividend and we still want to try to drive that dividend up over time. Having said that, to kind of move it from 60% to 80%, probably more of incrementals is going to come from buybacks. So we kind of built a model over 5 years that we thought was reasonable for us, given almost in the economic scenario that we could kind of maintain, a kind of 80% level, although having said that, which is why I talked about in the call, was some quarters is going to be less than that some quarters will be more than that and that will mainly be around buyback. The way we kind of run our buyback program is we tried to be, as you point out opportunistic or disciplined around the buybacks of the stock but that doesn't necessarily mean I have some crystal ball as to when the stock is low or when it's not, I [indiscernible] that I don't. So basically we take a pretty orderly look at this and kind of look at kind of a -- not really a long term but kind of a near-term average on a stock price. And as if that stock happens to be below that or kind of on top of that, the buybacks will kind of start to trigger if it's kind of -- for the stock has that's gone progressively running up, it won't execute during those periods of time. So we won't get below from the low per se but I think we'll get on average of price that is lower than what we're averaging. And that hopefully, buyback a little bit more stock than ordinarily. What happened under one that's more systematic that happens every quarter. But I feel fairly confident that although it may not happen in every quarter, it may not happen consistently, it will definitely average this 80%, once we look back at it over a 5-year period or even like a couple-of-year period, we'll see it average around 80%.

Blayne Curtis - Barclays Capital, Research Division

Either half of it, accurately, [indiscernible] more mature industry is optimizing the balance sheet and coming in the '08, '09, I think.

David A. Zinsner

It's like a 4 letter word.

Blayne Curtis - Barclays Capital, Research Division

Yes, I think it's not coming from a full circle, where people are cheering for you to add more that. You just got a deal, why not add more when you look at other industries, industrials or into staples where they care more.

David A. Zinsner

Right. While we're -- I'd say partly, we're easing into it a little bit. We've done, this is now our third bond deal that we've done. we just completed yesterday we got great pricing. Really, we actually locked in the treasury rate a month ago. So our real cost of this financing was somewhere in the 2.7% range for 10 years, which is unheard of. So it was a $500 million deal, we were going to redeem our bonds from -- that was going to mature in 2014 but we did add another $100 million of cash and incremental debt to the balance sheet. Yes, I think part of the strategy of getting this 80% kind of level of free cash flow return is about, incrementally adding debt. The one thing I would tell you is that -- I'm not sure, not everyone is interested in the goings-on of the rating agencies but the rating agencies tends to look at us and tend to ignore the cash balance that we have or the net cash position we have, and they kind of take this look of just the basically the cash flow and they really have us manage the debt based on how we do on this cash flow basis and so at some point as you raised that even though on a net basis is not really increasing the debt, that starts to affect your rating and then subsequently starts to affect your cost of capital. And so over time, I think we'll start to see our cash flows go up and so that will allow us to do -- -- to provide more leverage and rating agencies may relax their posture on this a little bit more over time as well, as they get comfortable with the business model. And I think ultimately, we will be a company that has leverage like the S&P 500 in general has leverage to support that working capital and what have you.

Blayne Curtis - Barclays Capital, Research Division

I did want to give you audience opportunity, if there's any question, so we do that now. So keep going. Here's one.

Unknown Analyst

Just a follow up on your balance sheet, do you have a targeted bond rating or leveraged target?

David A. Zinsner

Yes, so we are rating as A-, so we've targeted to maintain that A rating, A- rating. Never say never that we could take it down to BBB but we've generally committed to the bondholders that we would kind of maintain this A- rating and so we're going to do that.

Blayne Curtis - Barclays Capital, Research Division

I wanted to ask about gross margins that we kind of hit in the [indiscernible] rate and doesn't seem like you're ramping up the fabs, you're hearing this amount of interim balance sheet, are there any kind of other drivers for that gross margin in the back half. And last year, you had a big consumer, driver and you expect seasonal or maybe the mix is different in [indiscernible] , what are the different factors?

David A. Zinsner

Well the biggest single factor for gross margins is got to be this utilization but a lot of we're deal -- the way we maintain utilization or why we maintain utilization is actually to bring inventory down. So utilization didn't start to creep up, even in kind of a not so robust improvement on the revenue side. So I think there is gross margin leverage to be had even at these kinds of level or maybe even just slightly above that. Mix, I don't think is going to be a big factor. I mean, it might be a modest factor but our gross margin's on a consumer business are actually quite good, they're not like your -- they're not your grandfather's gross margins. So I think the mix will kind of hang in there regardless of which end markets kind of moves around for the most part. We actually are consistently looking at ways to improve our cost structure for manufacturing our parts and I meet with 15 twice a quarter really to come up with something that we could do to further enhance our gross margin. So those things are progressing and I think we're making improvements there as well. So even under scenario with flattish utilization and the flattish mix, I'd still think we actually have some improvement to be had kind of modestly over the course of the next couple of years on the cost of manufacturing side.

Blayne Curtis - Barclays Capital, Research Division

Well thank you, David.

David A. Zinsner

All right. Thank you. Appreciate it.

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