Executives
Dennis Bunday – CFO
Pat Cavanagh – CEO
Analysts
John Nobile – Taglich Brothers
Paul Johnson – Nicusa Capital
Michael Taglich – Taglich Brothers
Scott Mackey – AAD Capital
Williams Controls, Inc. (WMCO) F2Q2011 Earnings Call Transcript May 9, 2011 4:15 PM ET
Operator
Good afternoon, my name is Jonathan and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Williams Controls, Inc. second fiscal quarter 2011 results conference call. (Operator instructions) After the speakers’ remark, there will be a question-and-answer session. (Operator instructions) Thank you. Mr. Dennis Bunday, Chief Financial Officer will begin the conference.
Dennis Bunday
Good afternoon, everyone. Welcome to our second quarter fiscal 2011 conference call. Before we begin, you should note that the following discussions and responses to questions reflect management's views as of today, May 9, 2011, and may include forward-looking statements.
Actual results may differ materially from those projected in the forward-looking statements. Information concerning risk factors and other factors that could cause actual results to differ materially is included in our filings with the SEC, including our 2010 annual report on Form 10-K, our fiscal 2011 quarterly reports on Form 10-Q, and our fiscal 2011 current reports on Form 8-K.
Specific factors that may cause such a difference include, but are not limited to, availability of adequate working capital, domestic and international competitive pressures, increased governmental regulation, increased costs of materials and labor, and general economic conditions in the United States and abroad.
I will now turn the call over to our CEO, Pat Cavanagh, for his comments on the quarter.
Pat Cavanagh
Thank you, Dennis. Good afternoon everyone, and welcome to our fiscal second quarter investor conference call. This morning, as you know, we released our financial results for the second quarter of fiscal 2011.
The sales for the second fiscal quarter were $14.8 million, up 16.9% over the same quarter last year. Sales for the first six months of fiscal 2011 increased (inaudible) or 16.3%, to 28.3 million from the comparable period last year. Our net income in the second quarter was 224,000, or $0.03 per diluted share compared to a net loss of 432,000, or $0.06 per diluted share in the corresponding quarter of fiscal 2010.
Net income for the six months ended March 31, 2011 was $868,000 or $0.12 per diluted share compared to a net loss of $37,000 or $0.01 per diluted share for the same six month period ended in 2010. The results for both the quarter and six-month periods were impacted by one-time expenses for banking and legal expenses related to an acquisition that was terminated in due diligence, resolution of a long-standing legal issue related to a former employee and India start-up costs. Dennis is going to discuss these in detail later in our call.
From a revenue standpoint compared to the first six months of later year, our Asian sales were up 23%, our European sales were up 43%, and our North American sales were up 7%. Within Asia, China was up 15% and India sales were up 240% from a small base, but we believe sales there will exceed $1 million this fiscal year in India.
In Europe, truck sales were up 79% from the same period last year. And, in North America, our truck sales were also up by 24%, while our service business is down slightly between the six-month periods. Our global off-highway sales were also up 12% from a record year last year. Military sales, however, were down 50% compared to last year with the completion of a couple of key programs. Going forward, we’ve been selected for a new program, but the ramp-up will be later in this year.
With over 25% of our business tied to the North American heavy truck market, I thought it would be helpful to make some comments about the outlook in this market. The last three years, I’ve been talking about the weakness in this segment of our business, its impact on Williams and when is it expected to recover. With an improving freight picture, easier credit, higher used truck prices, an aging fleet and an improving economy, fleets have the confidence to place orders for new trucks to modernize their fleets.
At this point, we believe the recovery in the North American market is well under way. Net truck orders in March totalled 28,900 units and it was the fifth straight month of a strong quartering pattern. The backlog at the end of March was over a 100,000 units and this backlog is a 150% higher than at the same time last year. It is at levels not seen since 2006.
In addition, early indications for April show orders at over 35,000 units, which will add to this backlog of trucks. All of our North American customers are working very hard to accelerate the build rate from the current levels, but this process takes time and there are some reported component shortages that are slowing down this ramp up.
We’re seeing improved volumes this quarter over the last two quarters, but I expect the second-half of this calendar year will show marked improvements over the first-half build rates. You might know that slightly under 50,000 trucks were built in the first calendar quarter of this year and, the yearly projections are for the build of 230,000 to 250,000 units. This is up from a 154,000 units in calendar year 2010. In calendar year 2012, the industry is projected to build between 290,000 and 310,000 units.
I will now turn the call over to Dennis Bunday to discuss our financial performance in the quarter. Dennis?
Dennis Bunday
Thank you, Pat. Net income for the quarter was $224,000 or $0.03 per diluted share compared to a loss of $432,000 or $0.06 per share in the second quarter of 2010 and $644,000 or $0.09 per share in the first quarter of 2011. There were one-time unusual charges in the first and second quarter fiscal 2011 and in the second quarter of 2010.
The 2011 second quarter included after-tax charges of approximately $290,000 or $0.04 per share related to a potential acquisition that we decided to terminate while in due diligence and a legal settlement of a long outstanding claim against the company. Although the acquisition was potentially attractive, we concluded that based on some issues uncovered in due diligence, it was a not in the company’s or the shareholders’ best interest to complete this transaction. We’re still committed to finding strategic properly-priced opportunities, but they have to be right for the company.
The 2010 second quarter included an after-tax charge of approximately $485,000 or $0.07 per share for settlement of the Cuesta class action lawsuit. Excluding these one-time charges, the 2011 second quarter net income would have been $514,000 or $0.07 per share and the 2010 second quarter would have generated a small profit of $53,000 or $0.01 per share.
Comparing the second quarter of 2011 to the first quarter of 2011, the majority of the earnings decline was due to the one-time items, variances in the tax provision, the India start-up and normal timing expenses during the year. Changes in the tax rate due in part to establishing a tax valuation reserve on the India losses, contributed approximately $0.03 per share to the lower results. India start-up costs were approximately $0.01 per share higher in the second quarter.
For the first six months of fiscal 2011, net income was $868,000 or $0.12 per share compared to a net loss of $37,000 or $0.01 per share in the first half of last year. The same one-time items that impacted the second fiscal quarters of 2011, and 2010, of course, impacted the six-month results. The after-tax impact of the potential acquisition expense and legal settlement for the first six months of 2011 was approximately $410,000 or $0.06 per share.
For the quarter, the basic EPS share count was 7,293,187 and the diluted EPS share count was 7,465,390. At quarter-end, we had 7,293,309 shares outstanding. Second quarter 2011 gross profits were $4.4 million, a 32% improvement over last year’s second quarter gross profits of $3.4 million. For this year’s second quarter, gross margins were 29.9% compared to 26.5% in the second quarter of last year.
For the first six months, gross profits improved $8.7 million or a 30.7% gross margin on $28.3 million of sales compared to $6.9 million or 28.5% on $24.4 million of sales for the first six months of 2010, with largely the same variances as in the quarters. The margin improvements for both the second quarter and first six months was largely due to higher sales volumes to distribute fixed overhead costs. Freight and warranty costs were also lower in 2011.
You may recall, last year, we were incurring higher freight costs as some suppliers had difficulty meeting accelerated delivery schedules. Those issues have largely been resolved this year and although sales volumes have increased, freight costs have decreased slightly on a quarter-over-quarter and year-to-date basis. Warranty cost decreased $300,000 and $375,000 respectively for the second quarter and first six months of 2011, as the corresponding periods in 2010 included higher warranty costs related to warranty claims with one customer. We’re also starting to see some pricing pressure on raw materials which had a small impact in the quarter.
Overhead increased for both the second quarter and first six months of 2011. In addition to directly variable overhead items increasing, such as shipping and production supplies and volume related business interruption insurance premiums, India start-up expenses and the higher wage related expenses to fill positions left vacant during the economic downturn contributed to the increase. Health insurance premiums are also higher than last as those costs continue to increase at an escalating rate. Overall, overhead expenses were up on a dollar-for-dollar basis for the quarter and six months of 2011, but were lower in each period on a percentage of sales basis.
Excluding one-time charges in the second quarter of fiscal 2011, engineering, sales and administrative expenses were up $97,000 from the second quarter of fiscal 2010. The second quarter increase also included start up costs for our India facility and higher wage related expense to fill open positions that were left vacated during the economic downturn.
For the first six months, operating expenses were $262,000 compared to 2010 after excluding the one-time charges for essentially the same reasons that were in the second quarter. For the second quarter, the effective tax rate was 53% compared to an effective tax rate of 41% for the second quarter of fiscal 2010. The rate increase in this quarter is primarily the result of recording a valuation allowance against our deferred tax assets related to our India subsidiary.
In addition, the effective rate will fluctuate based on the tax jurisdictions in which the pre-tax income or losses earned and the income tax rate differences between domestic and foreign jurisdictions. The effective tax rate for the first six months of fiscal 2011 was 33.7% compared to a rate of 82.3% for the comparable period in fiscal 2010. Overall, we should have normalized tax rates in the mid 30% ranges.
Now, turning to the balance sheet and cash flow, our net cash position was essentially at breakeven at the end of the second quarter with cash of $1.2 million offset by a similar amount outstanding on our revolver. EBITDA which consists of our operating income, depreciation and the non-cash charge for stock option expense contributed $2.4 million in the first six months of fiscal 2011.
Cash usage included increases in accounts receivables and inventories, payments to our pension plans and capital expenditures. Accounts receivable increased $1 million, primarily due to higher sales volumes and timing of sales and collections within the quarter. Inventories increased 1.1 million during the first six months of fiscal 2011. We’ve built $376,000 of inventory at our India facility ahead of the start of production. Based on the strength we’re seeing in the market for new trucks, we’re selectively increasing crucial inventory items to ensure continuity of deliveries to our customers as orders ramp up.
Trade payables and accrued expenses were down from the end of fiscal 2010 due to the timing of payments of accounts payable and payment of our previously accrued warranty item with one customer. Depreciation and amortization for the second quarter was $549,000 and non-cash stock option expense was $252,000. CapEx for the quarter was $826,000 and $1.7 million year to date.
We anticipate our capital spending will be approximately in the 3.5 to $4 million range for the full-year of 2011 which is higher than we’ve spent in prior years as we continue to expand test and development facilities, develop tooling for several new projects, and invest in our new India facility. This concludes our formal comments. We would now like to turn the meeting over to questions.
Question-and-Answer Session
Operator
(Operator instructions) Your first question comes from the line of John Nobile from Taglich Brothers. Your line is now open.
John Nobile – Taglich Brothers
Hi good afternoon.
Pat Cavanagh
Good afternoon John.
Dennis Bunday
Hi, John.
John Nobile – Taglich Brothers
Hi. I just would like to know exactly where the $290 million after-tax charge shows up in your income statement?
Dennis Bunday
Well, John, it’s only 290,000, fortunately.
John Nobile – Taglich Brothers
Did I say $290 million?
Dennis Bunday
Yes, that’d be a big number for us.
John Nobile – Taglich Brothers
Sorry about that.
Dennis Bunday
That shows up in our admin line, and, that’s an after-tax number. So, the pre –
John Nobile – Taglich Brothers
What is pre-tax?
Dennis Bunday
The pre-tax number would be about 450,000.
John Nobile – Taglich Brothers
450,000 pre-tax.
Dennis Bunday
Yes.
John Nobile – Taglich Brothers
And let’s see the military applications, how much did that contribute to sales in the quarter and what do you anticipate the replacement program would contribute to sales?
Dennis Bunday
You’re asking in the first six months?
John Nobile – Taglich Brothers
Actually, I’m asking for the quarter, but I’ll take both for the quarter and six months for the military applications, because there was a drop in those sales, so I just wanted to get a feel for how much?
Pat Cavanagh
John, that’s not something that we normally talk about. That number is not out there in the public. And, on the new program, I’ll tell you that we’re looking for the increases in that program to begin ramping in the fourth calendar quarter of this year.
John Nobile – Taglich Brothers
Fourth calendar quarter.
Pat Cavanagh
Yes.
John Nobile – Taglich Brothers
No, you can’t quantify that?
Pat Cavanagh
I don’t want to talk about the specific program, but I will tell you there’s a program and it will ramp up in the starting of the quarter.
John Nobile – Taglich Brothers
Okay. The 10-Q would not put out anything in regard to –?
Pat Cavanagh
We don’t breakout our military sales.
John Nobile – Taglich Brothers
Okay. And you had mentioned that you anticipate in the second half the build rates would be significantly higher than the first half, obviously that we are fortunate [ph]?
Pat Cavanagh
Yes, it’s trending that way.
John Nobile – Taglich Brothers
Okay. What I wanted to find out was, what specifically are you seeing in regard to part shortages being satisfied that you feel that you are going to make – kind of make up what the build rates should have been?
Pat Cavanagh
I know – I was clear enough on this. We are not affected neither by the Japanese earthquake no any other shortages. We invested in our supply base even during the downturn and continue to do so. And we are fully capable of making deliveries required of us and we have a very, very high rating on on-time delivery with all of the OEMs. It’s not us that is slowing down, it’s some of the other suppliers for some items. There is just – it’s just really hard for them to ramp up from the low levels they are at which restricts the OEMs from building as many cars as they’d like to build. With the backlog, we – go ahead, John.
John Nobile – Taglich Brothers
I mean, I understand that, but other parts manufacturers haven’t been able to keep with the rate of building freeze maybe, they didn’t anticipate, but I’m just curious as to that slowing you down because they are not being able to building the entire truck, so they are hold off on electronic throttle controls so they get everything in or – they would take your –?
Pat Cavanagh
Yes, they don’t take our parts ahead of time. This is a JIT situation. We are delivering – our products are typically going on the trucks within a week of delivery. So when they are not going to – they schedule their build-out weeks at a time, and they know how many trucks they are going to build and they don’t want to part – parts they can get. And we actually change our delivery quantities within a week in some cases.
John Nobile – Taglich Brothers
Okay. So, till they get the actual or tires, till the product is almost completely built and ordered for, then they will see or you will see an order for the electronic throttle control, so that’s where maybe the first half of this year is a little bit slow –?
Pat Cavanagh
John, you got a picture of that, it is not correct. The OEMs are constantly feeding us their bill schedules and they do that for every manufacturer. The restrictions that they have, and we get the same lead time as their suppliers do in most cases. But what they are seeing is a restriction in the ramp-up of some components, so they can only forecast such a build – they can only forecast a build rate that they think that they can sustain. So, until that they get an indication from some of the vendors that are causing some of the restricted ramp-up – until they get that kind of information from them, we won’t get any, we won’t see any increases in build rate and there is no like one big order that we get. We get orders every day from these OEMs updating their schedules two to three to four weeks out.
John Nobile – Taglich Brothers
Okay.
Pat Cavanagh
Is that more clear?
John Nobile – Taglich Brothers
That helps. Yes, I just wanted to get an indication of why feel the second half, what are seeing now turn the case at – these – more tests may pick up?
Pat Cavanagh
Well, I think, John, the most – the clearest indication is that there is a backlog of unbilled trucks of over a 100,000 units and these OEMs would like to build those trucks and ship them. And so, they are doing everything within their means to be able to ramp up their supply base to be able to supply their kind of build rate. And we are seeing it in this quarter and it’s very obvious the OEMs are doing their very best to ramp this rate to fulfil the need.
John Nobile – Taglich Brothers
Okay. And that backlog in general is about, did you say about a 150,000 units?
Pat Cavanagh
No, no, it is 100,000 units – with a 100,000 units at the end of March.
John Nobile – Taglich Brothers
A 100,000, that compares to last year’s – you had said that – mentioned early in the call –?
Pat Cavanagh
It’s a 150% of last year, I believe, at the same time.
John Nobile – Taglich Brothers
Okay. So, right now, you have about 150,000 or OEMs have about a 100,000 unit backlog?
Pat Cavanagh
Right. And my indication, John, – the number hasn’t been published yet, but my – the indications that I have is that they, the OEMs took orders for over 30,000 units in April which will add to that backlog.
John Nobile – Taglich Brothers
Okay. And that should obviously put a lot of pressure on the suppliers that maybe have that shortage and obviously I would –?
Pat Cavanagh
Right. I want to be very clear, we do not have a shortage at Williams-Controls.
John Nobile – Taglich Brothers
No, I understand that. I just want to do – okay, all right. Thank you.
Pat Cavanagh
Thanks, John.
Operator
Your next question comes from the line of John Bond with Nicusa Capital. Your line is now open.
Paul Johnson – Nicusa Capital
Hi, Pat. This is actually Paul. We are saving you money by calling in on one line.
Dennis Bunday
Hi, Paul.
Pat Cavanagh
Hi, Paul. How are you?
Paul Johnson – Nicusa Capital
I’m well. How are you?
Pat Cavanagh
Good.
Paul Johnson – Nicusa Capital
Just I had a couple of questions, I wanted to follow up on John’s question. You’ve said a couple of times you do not have a supply constraint at Williams, is that – the throttle control, you are going to ship it to them. If, in fact, the bottleneck at either the actual supplier or perhaps the tire supplier, those current bottlenecks starts to alleviate themselves in the next couple of months which is certainly the hope and to some degree, the plan, and we start to ship against backlog of over a 100,000 units, because they took in orders for 30,000 in the month of April, you know the backlog, because they didn’t build 30,000 units in the month of April. If that’s so, can you meet demand, if it starts to accelerate in the second half?
Pat Cavanagh
Yes, we’ve already – we, as a regular process in our manufacturing environment, we look at what our capacity is, what it could be, what we think we are going to need. We actually get down to by part number kind of forecasting. And we have every indication at this point in time that we can meet the demand. I will tell you we met the demand when it was 360,000 units a year and we have more capacity today than we did then.
Dennis Bunday
And Paul, this is Dennis. We have been building inventories of some of our crucial inventory components, so we don’t get parts shortage – perfect on that, but we’ve been building that, we continue to build it and we monitor that. And so, we can – definitely the challenges, of course, is just that the OEMs have a supply base, we do too. So they need to make sure those guys are ready to go and we’ve been working with them for the last several months to make sure that we will have the supplies in. So, hopefully, we won’t get caught short on any shortages.
Paul Johnson – Nicusa Capital
Unlike – you have to deliver (inaudible) to a lot of your customers
Dennis Bunday
Correct.
Paul Johnson – Nicusa Capital
And some of your perennial components, you do not want to rely on JIT from your suppliers?
Dennis Bunday
Correct. We normally try to keep it as close to JIT as we can. But we don’t know how quick these shortages and these bottlenecks are going to be resolved and so we want to be ready for that. So our inventories today, for example, are higher than you would probably normally see it for this level of sales.
Pat Cavanagh
For instance, Paul, when there is chip shortage, it started about six months ago, we went out and bought all the chips we can get our hands. We had the cash and we just went out and bought all the chips, we just did not want to take a chance. So, I’ve got chips that we are using, but we were not shorted and we did not short any of customers on delivery. But those are the kind of things that you’re constantly monitoring.
Paul Johnson – Nicusa Capital
And the key is that there is strong demand for trucks and the OEMs can’t meet that demand and they are frustrated.
Pat Cavanagh
They would certainly like to ship more.
Paul Johnson – Nicusa Capital
And you would be happy to help them with your components.
Pat Cavanagh
What I say and I say kind of tongue and cheek is, in this industry you don’t want to be the slowest gazelle.
Paul Johnson – Nicusa Capital
Yes, because you are competitors will happily ship the truck if you can’t.
Pat Cavanagh
Yes. Well, I’m talking about the supplier base for the customers, because the OEMs – when you can’t deliver, they are not a happy bunch and I think –
Paul Johnson – Nicusa Capital
And they are happy to express that with –
Pat Cavanagh
They call me directly.
Paul Johnson – Nicusa Capital
I know North America is one of – if, in fact, that you didn’t have the supply constraints for other components to build the truck. The production volumes there would be higher, it’s that simple.
Pat Cavanagh
Yes, I think that’s right.
Paul Johnson – Nicusa Capital
If you didn’t have production –. China is a little bit different. China is a little bit about a market developing. Can you flesh that out? I know when you were in New York last week, you talked a little bit about some of the regulations coming down from the government. They were certainly getting closer to predict exactly what they would be a bit of a fool’s game, but you are clearly getting closer; however, once they slip, the market develops very quickly?
Pat Cavanagh
Right. And I’ve seen it with components in China. What – the indication that we have right now is that the regulations in China are indicating that they – the truck manufacturers will need to move to fully electronic engines to meet the emission regulations on January 1, 2012. This is the latest information I have. And sometimes, it’s different. Our belief – it may be – they may be able to do it, but our belief is that not all of the kind of pigs [ph] are aligned at this point and it may be a little bit later, may be mid next – mid 2012 before this can happen. And I think it might have something to do with the low sulphur fuel being available in all locations.
So, you might even see something or certain regions have this changeover, but at that point in time, the engines are going to from mostly mechanical throttles to electronic throttles. And we have the capacity and supply chain in China that’s been well developed over the last three or four years to be able to meet the demand for our customers over there and we have a couple of very large truck customers in China. And that’s very, very a significant market for us and we are looking forward to joining some of the effort .
One of the other areas that we are seeing in China is we are seeing a lot of demand for our products used in off-road equipment that’s being shipped outside of China. And one of our biggest customers is an off-road customer right now and it’s because the demand that he has is for export shipments. And the engines that they put in those off-road equipment, cranes and wheel orders and so on, are required to be fully electronic to meet the emission standards in Europe and the United States and elsewhere. So that’s kind of what’s going on.
We are anxiously waiting the kind of the change in business and it should be good. And it’s going to be an interesting kind of development in China, I think. I think I have said many times that the operations that we have in China and India and United States all look alike. If you walked in the factory, I’ve had a number of the executives that if some of our customers walk into factories and they say, Pat, they all look alike, and it’s because we use the processes, the same safety kind of requirements, the same folks – the same five apps [ph], all the processes or quality processes are the same. So, it’s easy for us to run these businesses and make we do everything that’s possible to make quality products at kind of volumes that we need to make them at.
Our competitors for the most part in China are local kind of homegrown companies and we do not underestimate them. There are many, they always seem to be cheaper than we are. But I would tell you that the day of reckoning becomes, it’s not when you have to make 50 and submit them a sample; it’s when you have to make a 1000 of them and you have to make them every day and they all have to be right and the quality has to be spot on, because people’s lives are at stake and I think that’s going to be the real test, so who ultimately wins that market in the long run. And I think we feel like we are pretty well positioned.
Paul Johnson – Nicusa Capital
You guys have done a lot on the supply chain side in China over the last three or four years, you’ve done a lot to build the customer base in China over the last three or four years. If, in fact, the regulation starts to come down and I suspect it’s going to be regional first, certain regions will be pushed forward first and other regions after that. What happens to demand for electronic throttle controls?
Pat Cavanagh
Well, they’ll be – I mean, I think over six ton they build, I think their build rate this year is 700,000 or something like that?
Paul Johnson – Nicusa Capital
Significantly bigger than North America.
Pat Cavanagh
Significantly bigger, significantly bigger and probably the biggest market in the world, I think everybody has said that. It will be an interesting phenomenon to see what happens. But one of things that you have to realize there is that the average selling price of the product over there is significantly less than it is in other parts of the world, because – and it’s not because the products are cheaper or we sell them for less or anything like that. It’s the fact that the requirements and the specifications on the trucks over there; in some cases, they are the specs that we have in North America or they are not the specs that we developed in Europe, or even in some other markets, is not to say, they are all out that way, but many of the trucks are a little bit lighter duty and have a shorter life span and don’t require sometimes the kind of $20 million cycle reliability that’s part of a US truck.
Paul Johnson – Nicusa Capital
Is that true of the Chinese exports on the off-road?
Pat Cavanagh
I don’t know. I don’t think that’s particularly the case. I don’t think it’s applicable there. If you have talked about the – if you spend some time in the Chinese truck market, the trucks are typically overloaded and beaten which then end their lives in a short period of time and they are traded in about two years or so, or three years and they are kind of exhausted. So, I mean, the off- road equipment, I haven’t had any indication from any customers that it’s less or more reliable than anything else out there. I’m sure it has its place and we’ll see how it develops. I mean, it’s kind of where – yes, go ahead.
Paul Johnson – Nicusa Capital
The third big market opportunity obviously is India, and that’s different than North America, it’s different than China, there is some similarities between all three, could you just talk about how that fleshes out over the next 18, 24 months?
Pat Cavanagh
Well, it’s a little bit different in India from the standpoint that in India, there is three or four – it’s a smaller market, there is three or four major players as opposed to China which – there is probably eight or ten. And so – and there is two really large players in the Indian market, TATA and Ashok Leyland and then there is a selection of smaller parts, but the lion’s share of the heavy truck market is dominated by TATA and Ashok Leyland. And they are also moving progressively towards electronic engines to meet the emission standards and that – some of that is already taking place right now, we are seeing it. And so, it may develop for us, based on the way they move, somewhat faster than the Chinese market.
Paul Johnson – Nicusa Capital
A final question, if you look at 2012, not a forecast, but just the environment, it looks like North America will be ramping up dramatically, China could be turning on as it moves to electronic engines and India is going to start to develop stronger?
Pat Cavanagh
Yes, I mean that’s fair enough. I mean that’s exactly what we are discussing in some of our internal meetings here is, how do we make sure we are prepared to be able to meet that kind of demand and at the same time, fully staff our engineering department to take care of all of the new opportunities we are seeing. And so, it’s a push, pull kind prioritization for resources. So, it’s kind of a higher level problem, but it’s problem all in its own in making sure that you do the right thing by the customers and the market and the business and the investors.
Paul Johnson – Nicusa Capital
Thank you.
Pat Cavanagh
Okay, Paul.
Operator
Your next question comes from the line of Michael Taglich with Taglich
Brothers. Your line is now open.
Michael Taglich – Taglich Brothers
Hi, guys.
Pat Cavanagh
Hi, Mike. How are you?
Michael Taglich – Taglich Brothers
Looks like north of 350,000 trucks in North America moving up is boring you [ph]. I just have to follow up on a couple of these questions that were answered before. The European market at recovery is how much bigger than it was this past quarter, the (inaudible)?
Pat Cavanagh
It’s hard to tell, Mike, it’s been a little bit chaotic in Europe. There was a huge ramp-up and then a huge drop-off, it’s kind of coming back to some place on equilibrium, and we are not quite sure where it is to be honest with you. But I think to grow from where it’s at right now, but there is a little bit of recovery. I mean that market got shutdown for, boy; it was – of course, it’s the biggest growing market right now, but it was also the highest – the biggest market that was depressed when the economy got bad, I mean it was terrible. And it’s coming back towards equilibrium. And does it have a little room to grow? My guess is yes.
Michael Taglich – Taglich Brothers
All right. I guess the cut that chase you some inherently at least in light of where you are expecting the beginning to get into China and the tailwind we are going to with the recovery in the US, what sort of revenue levels this company going to be when the world is running at replacement value, if you will, and you’ve got the adoption of pedals in India and China at the level these should be?
Pat Cavanagh
Mike, I’m sorry that we just don’t give any kind of – that kind of guidance. It’s not a question that we can answer. And obviously, it’s going to be better, but we don’t give guidance.
Michael Taglich – Taglich Brothers
Well, what is the global ETC market if you had to do it that way – well, how do you see the global ETC market to Europe now?
Pat Cavanagh
Well, I see it like this, Mike, the market in Europe –
Michael Taglich – Taglich Brothers
Non-automotive, I should say.
Pat Cavanagh
No, not the non-automotive. The ETC market in general which I can easily talk about, the US market – anything over 70 horsepower in the off-road or truck is going to have an ETS, that’s pretty much given; almost the same thing in Europe, over 100 horsepower, whether it’s off-road or truck, it’s going to have the ETC or electronic throttle of some sort. My guess, if you are out five years, the same is going to be true pretty much in maybe, not to the lowest horsepower levels, but the same thing is going to be pretty much true in India and China. And all of those markets are going to be subject to what the economy is, I mean, what’s the build rate in trucks and off-road equipment. Even Russia – I mean, as you know Mike, we are selling our product into Russia on a regular basis and they went to ETCs over there. And so – the Brazilian market is also using, or the South American market, including Brazil, are using ETCs. So, I mean, the tailwinds from a penetration standpoint is with us, I mean, it’s pushing ETCs forward. It’s going to be how well we manage that, the market share and how well we do and how innovative we are against our competitors.
Michael Taglich – Taglich Brothers
Right. I mean, that’s a global ETC market, non-automotive into US is how big?
Dennis Bunday
Well, Mike, I have to sit down and do that on these. I don’t think – there is a wild mix of products, I mean, you have ETCs that are in the $12, $13 range and you have ones that are in the $200 range and what that mix is and how it lays out, that is kind of a complicated equation, just I can’t give you something that’s even reasonable at this point.
Michael Taglich – Taglich Brothers
Okay. One more question, that innovative gas pedal or the throttles that you –?
Pat Cavanagh
The four speed, the four speed deck pedal?
Michael Taglich – Taglich Brothers
Right. With the feedback
Pat Cavanagh
Right.
Michael Taglich – Taglich Brothers
What initial vehicles is that going on?
Pat Cavanagh
I can’t give the name of the manufacturer, Mike.
Michael Taglich – Taglich Brothers
But you have all the patents around that, I own all the IP?
Pat Cavanagh
We own IP on ours. I mean it’s not to say that it couldn’t be done in a different way, but we think we have a very good solution to the problem.
Michael Taglich – Taglich Brothers
Alright. And when will we know whether we are going somewhere with that new product offering?
Pat Cavanagh
Well, Mike, I have not built any in production, but are building products for test at this point. I think it’s highly that this is going to be the future of ETCs, especially on like the Class A trucks. I would be very surprise if it was not.
Michael Taglich – Taglich Brothers
And why do you say that?
Pat Cavanagh
I say this because it’s a product that is similar in – when people came out with anti-light – I mean, it was kind of an option for a little while, I don’t think you can buy a vehicle today without it. And when you are talking about people driving the speed breaks down the highway, they want every safety and fuel economy improvements that they can get in those vehicles, especially today with the cost of fuel. And this is one thing that enhances those aspects of the vehicle.
Michael Taglich – Taglich Brothers
Well, you think that, you don’t have clinical [ph] data, if you will, that shows that having a pedal that tells one when they should be in the gas or not gives somebody better gas mileage, well, intuitively, it should?
Pat Cavanagh
Mike, with some of the things that are happening, they are going to be able to – this is a coaching aid for drivers to encourage them to get better fuel economy and they are going to be – ultimately in the end, I think that the sweeps are going to go to rewarding these drivers or incentizing them to get better fuel economy. This is one way they can do it, because this data is going to be available the fleet on how well the driver’s eyes, and how good he is on fuel economy and he safe is and all these other kinds of things. So, I mean I don’t have any clinical data that says it. I will tell you that the manufacturers of heavy trucks are very interested in a product like this right now.
Michael Taglich – Taglich Brothers
Well, it sounds a lot. But, how quickly could that penetrate market place. I mean, you are selling it for a lot more than your existing pedals?
Pat Cavanagh
Well, like anything like this. It’s probably a year off.
Michael Taglich – Taglich Brothers
Okay
Pat Cavanagh
I would be really surprised if in 18 months we’re not in production for some manufacturer.
Michael Taglich – Taglich Brothers
That’s good. Thanks a lot. That’s all I got.
Pat Cavanagh
Okay, Mike.
Operator
Your next question comes from the line of Scott Macky with AAD Capital. Your line is now open.
Scott Mackey – AAD Capital
Good afternoon, gentlemen. Thanks for taking my call.
Pat Cavanagh
Hi, Scott. How are you?
Scott Mackey – AAD Capital
Doing well. Hey, first just wanted to take a step back. I know this has been discussed in length on prior calls, but just to refresh my memory in kind of said expectations. Give me an idea of just the start-up cost over the course of the last year or so associated with plant in India and then the extend that you’re talking about it, maybe, the incremental revenue expectations over, call, the next year or so from that plant in India.
Dennis Bunday
Well, over the last year, you have capital and you have what goes through expense and everything, but I would say what is gone through – pumped through expense is probably in the 400,000 range. And, then there is capital on top of that. We probably have today 1.5 million in India somewhere in there between capital and expense.
Scott Mackey – AAD Capital
Okay, and then on the revenue side, just from an incremental revenue perspective, how should – I mean, is there a way you can manage my expectations if you’re not (inaudible).
Pat Cavanagh
I’d tell you in our first year – I tried to be very telling in my comments. We’re up 240% from last year at this point through six months. And, we expect to easily exceed $1 million in revenue this year and that’s on a with six months left to go.
Scott Mackey – AAD Capital
Thank you. That’s helpful. I appreciate it.
Pat Cavanagh
But, the potential is – we would not be there and we wouldn’t have spent the kind of money we spent. We did think there was a very significant potential for the company there.
Scott Mackey – AAD Capital
Understood. Thank you for that. Secondly, I just wanted to ask quickly on capital allocation. First, I just wanted to quickly step back to the one-time dividend form last year-end. And, I guess, just said thank you. That was one of the most shareholder friendly moves that I’d seen in my experience. And, then with the announcement today in not going forward with an acquisition because you did not feel it prudent. But, going forward with acquisitions on the table, I was hoping maybe you might set some expectations should the terms for the size of a deal that you might view the sort of leverage you might be willing to take in order to do a deal.
Pat Cavanagh
Well, I would say this. We would look at – obviously, there’s a preferred size, but we would look at acquisitions up to our size. We’re probably not big on leverage. We’d probably use stock and cash, some kind of an arrangement like that. Those would probably be our approaches, but we’re open to looking at anything. But, if the business has to be synergistic and we have to have the ability to use the platform we have with the entities in India and China to be able to leverage that business up and make it perform using our sales and engineering and manufacturing talent in India and China and here in the US. That’s what we really like. And, if we could find something that fit in those parameters, we’re very conservative. We’re not going to take on it on a debt do one of these deals. It’s got to be at the right multiple and there’s got to be synergies and the right kind of culture.
Yes, okay. We just try to be – we’re trying to be as professional as we possibly can from a manufacturing standpoint and we’re trying to produce the highest quality products possible and we think that it differentiates us in the marketplace. And, we need to be able to do that for an acquisition too.
Scott Mackey – AAD Capital
And, thank you for that. And, one kind of detail oriented question if I may just in terms of trying to understand. I know you can’t disclose the size of the military size that it looks like two particular platforms that there coming off or has been reduced and you’ve got one coming on. It sounds like in fiscal fourth quarter as replacement. I mean – sure, I think about that as being a wash. Will there be, when it all said and done, a step down in the military business? And, we really kind of talking about round year relative cost cycles anyway?
Pat Cavanagh
Well, it’s not absolutely a huge piece of our business, but it’s an important piece. And, we’ve been very successful over many years with the military. And, I don’t know the percentage, but I think we have a very high percentage in there, vehicles. There’s a high Williams pedals in those vehicles. Obviously, I think that we’re going to be subjected to the same thing a lot of these people like (inaudible) and others are going to see that the markets going to be down a little bit going forward because, I think, the military is going to be cutback of this. And, we’ll obviously enjoy the spare parts certainly. But, to the extent that the military cuts back on buying these vehicles, we’re going to be affected by it. But, it’s not the most important part of our business, but it is piece we like very well.
Scott Mackey – AAD Capital
Okay, thank you very much for answering my question. I appreciate your time.
Pat Cavanagh
Yes.
Operator
There are no further questions at this time. I turn the call back over to the presenters.
Dennis Bunday
Well, if there are no other questions, this concludes our second quarter conference call and I’d like to thank everyone for attending today. Bye.
Pat Cavanagh
Thank you.
Operator
This concludes today’s conference call. You may now disconnect.
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