Sep 3, 2008
Executives
Jill Bertotti - Investor Relations, Allen & Caron Dan Coker - President and Chief Executive Officer Bud Marx - Chairman Barry Steele - Chief Financial Officer
Analysts
Brandon Ferro - KeyBanc Capital Market Steve Denault - Northland Securities Steven Dyer - Craig-Hallum Capital Richard Hoss - Roth Capital Partners, LLC Joe Amaturo - Buckingham Research Group Analyst for Frank Gristina - MicroCapital Walter Ramsley - Walrus Partners Richard Holt - Wealth Monitors Incorporated Chris Lippincott - Systematic Financial Management Bob Momere - Arbor Capital Management
Operator
Welcome to the Amerigon Inc. 2008 second quarter and six month results conference call.
(Operator Instructions) And now I would like to turn the conference over to Jill Bertotti with Allen & Caron.
Jill Bertotti
Before we start this morning's call, there are a few items I would like to cover with you. First, in addition to disseminating through peer newswire this morning's news release announcing Amerigon's results for its second quarter and six month ended June 30, 2008, an email 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 may download a copy from either the Amerigon website, at www.amerigon.com, or the Allen & Caron website, at www.allencaron.com. Additionally, a replay of this conference call will be available via a link provided on the events page of the Investors section of Amerigon's website.
Finally, I have been asked to make the following statement. Certain matters discussed on this conference call are forward-looking statements that involve risks and uncertainties and actual results may be different.
Important factors that could cause the Company's actual 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 price 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, included but not limited to its Form 10-Q for the period ending June 30, 2008 and its Form 10-K for the year ended December 31, 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 would now like to turn the call over to Dan.
Good morning, Dan.
Dan Coker
It is a beautiful day here in Detroit. Bud usually gives us a weather report from Laguna Beach, so I thought to let everybody know it is a bright sunny day here.
Despite the economic forecast, things are looking okay. I have never listened to Jill's statements as intently as I did this morning when all of the things that she warned up had 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 bid of the stress but we still see a 10% to 20% revenue growth opportunity for our Company based upon the new platforms that we have seen coming.
During the second quarter, we had a couple of oddly enough, a couple of highlights. We had our 4 million seats set shipped in the seven; almost eight years since we have began shipping revenue.
So, we are quite pleased with that development. We have also had several new models come in to play even as late as yesterday.
We had three new models announced; one Nissan and two Infiniti platforms came on board. So, we are quite pleased with that development plus we have had some good progress being made at our BSST technology group and we have been also been allowed to announce today that we are working with the leader of the bedding industry, a company called Sealy.
Sealy and Amerigon have joined together to try to develop 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 view a few of the metrics of the quarter and then we would ask Bud to give us an update on the BSST activities and we will follow the floor open for questions.
So, Barry would you lead us through the numbers?
Barry Steele
Our revenue for the second quarter 2008 was $16.8 million that represents the increase of $1.7 million or 12% year-over-year. For the full six months, it was 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 margins and some are others and as those changed as overall mix, that will impact our percentage of margin that is what happened this quarter. 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 sort of a higher expenditure rate for the R&D that is in the range of $400,000 to $500,000 per quarter starting in the third quarter of 2008 and that is primarily associated with the increasing activity that BSST and opportunities that we are taking advantage of. The increase for the second quarter is more driven by the automotive products, automotive side and new automotive launches that we are doing throughout this year.
There are quite a few. Our 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 $0.16 per share which is equal to the prior year.
A couple of other things, operating cash flow for the quarter were $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 is now $13.6 million; it was only $1.2 million in the first quarter.
You may recall us discussing 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 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 will have additional redemptions occur in the second half of the year. We are 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 in the balance sheet.
That is all I have at the moment. We will look forward to your question.
I will turn it back over to Dan.
Dan Coker
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 an update on the BSST activities for the quarter.
Bud Marx
Well I would first say that the weather report is blaringly beautiful. So, I was in Detroit, actually the weather was great there.
I think it is fair to say that we are seeing the positive effect of the wrenching changes that you have 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 are positioned, we see this as playing clearly to the strengths of our development of the technology.
The second thing that happened which occurred in the second quarter, we have been spending money to develop materials because of our frustration that the pace of materials and academia and other research institutions were perhaps slow and some of you have noted in it, 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 the high temperature, the efficiency of materials with different attitude and different approach and we were one of the significant sponsors of that material development program. So, that is not in production.
Nobody should rush to expect that in the next three or six months but the material breakthroughs that we have been pressing for, seem to be quite a bit more tangible at this point and so this for us was quite a good news and it lead 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 consort with first tier end OEM automotive partners and others perhaps because if the material comes, the path 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 is a long-winded explanation for we think the increase in R&D is very much merited by the business case that we are seeing and by the high interest of potential customers. So, we have a buzz of activity in our window.
I guess I would say that and that is the report from Laguna Beach.
Dan Coker
I think that 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 are ready to answer questions.
Operator
(Operator's instruction) Your first question comes from Brandon Ferro - KeyBanc Capital Market.
Brandon Ferro - KeyBanc Capital Market
Dan, can you just tell what your revenue growth guidance for 2008? Can you give me a sense of what that is actually based on?
Is that based on CSM forecast or purely automaker schedules? What should I look for as being the base assumption if we get incremental production cuts?
Dan Coker
It is primarily based upon industry data that we receive not only the CSM data but also the release data from the current customers, the P&L data. We get information from other sources as well but it is basically a kind of homogenization of all the information available but we do use the CSM data for the 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.
Bud Marx
But it is fair to say we do not just simply write down the forecast from the automotive companies especially in a circumstance like this because we know it is important. We step back and try to really rely on the let us say the most knowledgeable and most recent, because the situation has been changing sources in developing this guidance.
Brandon Ferro - KeyBanc Capital Market
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 whereas other automaker customers give that responsibility to you?
Can you help me understand what actually impacts growth margins from a mix shift standpoint?
Dan Coker
Well, there are a lot of complexities that are involved in that. It is really, it is pretty much what you have just described.
Each of the OEMs allows 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 there is a shift of margins as our business mix is from quarter to quarter.
I do not want to get into too much detail but that is essentially we do see a swing of bottom line margins as we get higher concentrations of business from one group of customers to the other.
Brandon Ferro - KeyBanc Capital Market
Okay, is it fair to assume now as you source some more complete CCS unit meaning stuff outside of your core technology as well as the core from the electric stuff that more of it becomes pass through and therefore gross margin should be lower?
Dan Coker
Not necessarily, our target gross margin is in the low 30s for all of our activity.
Brandon Ferro - KeyBanc Capital Market
Okay, can you kind of give me a sense of how incremental growth in the back half of 2008 and then maybe 2009 might impact gross margins from a mix standpoint?
Dan Coker
The growth itself, I do not think they are going to impact gross margins and we have not given any serious look at 2009 in terms of revenue growth yet at all. We are still trying to survive 2008 at the moment but I do not think that the top line revenue growth is going to affect our margins.
Barry Steele
I would remind you that we are a very highly variable cost structure here because and by outsourcing of production and so as we grow on the long term, we can take advantage of fix cost of our suppliers but in a short term, gross margins vary as our revenue vary.
Brandon Ferro - KeyBanc Capital Market
Okay, it is fair to assume the target is still on the low 30% range, correct?
Dan Coker
It is our target, yes.
Bud Marx
It is still fair to observe that the second quarter of 2007 was unusually high for the same reasons that we have described so 34 was a bit of an outlier as well.
Brandon Ferro - KeyBanc Capital Market
Okay. Then you stated that you have not given any indication what you see in terms of revenue growth in 2009.
I know the target was 25% on average there to 2010 to the extent that you are 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 in the 2009, is it safe to assume that the 25% may not be feasible anymore?
Dan Coker
I would certainly say that the 25% is open for review at this time.
Bud Marx
But I would not draw any conclusions one way or another. It is just too…
Dan Coker
We really, I mean Brandon I am not trying to be evasive, we really have not look that far into the future yet based on where we are today.
Brandon Ferro - KeyBanc Capital Market
Yes, I totally understand and then I think the press release called out average unit selling price as being up in the quarter. As far as I can tell, it looked like they were down.
Am I missing something?
Barry Steele
On a year-to-date basis, they were slightly up. Before, they are slightly down, that is correct.
Brandon Ferro - KeyBanc Capital Market
I just wanted to clarify that and then can you just finally help me understand second half 2008 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 spread there in fourth quarter evenly?
Dan Coker
We are going to see more activity in the fourth quarter. There are some program delays that have pushed some programs that normally would launch in July and August out into September.
So, you will see a little bit more activity in the fourth quarter as to the third.
Operator
Your next question comes from Steve Denault - Northland Securities.
Steve Denault - Northland Securities
Barry, you had made reference to what SG&A should look like over the balance of 2008 and I missed it.
Barry Steele
Well, we expect to be slightly up over our current run rate, nothing dramatic.
Steve Denault - Northland Securities
Did you say up a $100,000 or something at that nature?
Barry Steele
It could be on that order of magnitude, yes.
Steve Denault - Northland Securities
Okay, 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 to $500,000 incremental over the balance of this year relative to the run rate in the first half.
Barry Steele
Yes, we think that that will be a pretty quick ramp up where we like to spend money sometimes is a little bit slow in order to get resources to bear so you might not see on the third quarter, maybe you will but certainly all in the fourth quarter.
Steve Denault - Northland Securities
Okay and then, would there be an incremental ramp likely in 2009?
Barry Steele
I think that is yet to be seen.
Steve Denault - Northland Securities
The Sealy relationship, what is the timing of that and what are the Sealy's initial thoughts in terms of pricing in the bed?
Dan Coker
Well, I do not really know. That is 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 temperature as the sources of the bed for all, not all of their customers but for our full line of products as they will bring into the marketplace.
We are currently involved in that process and we have not completed it but I would expect that we will be making announcements fairly soon as to the progress of the program. We are very excited about it and we think it demonstrates the benefits of the thermoelectric device for delivering in a compact and kind of convenient way, heating and cooling, in many of the areas where people will need it in the future and frankly, this is one of those kind of ideas that everybody slaps themselves in the forehead when they hear about it.
I mean it is a great idea. Typically, you are in bed and you would like to have a little cooler, a little warmer, you can flip the switch and you can 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 is a great device. I think it is going to be a big hit.
Steve Denault - Northland Securities
So, they have essentially have allowed you to say you are in development on a product, not necessarily something that it is going to be commercially available yet this year?
Dan Coker
We had not said that at all.
Bud Marx
Either way.
Dan Coker
We did not say that either way. We are not commenting on the product's availability.
That really depends upon our partner's efforts to get ready and get the product in place and get ready to move into the market on their schedule.
Operator
Your next question comes from Steve Dyer - Craig-Hallum.
Steven Dyer - Craig-Hallum Capital
Just I want to make sure I am clear on the R&D ramp up in the back half of the year, so would you expect $400,000 to $500,000 additional each of the last two quarters as opposed to stepping up $400,000 or $500,000 in Q3 and then $400,000 or $500,000 in Q4?
Barry Steele
I think, Steve, we are going to over $2 million run rate, if you will and that will be likely a run rate for the second half of the year for each quarter, we are maybe not quite there in Q3 but we are trying.
Steven Dyer - Craig-Hallum Capital
Barry, what was stock comp for Q2?
Barry Steele
I do not have that, for the six months, I do have it. It is $435,000.
You could try back end into it…
Steven Dyer - Craig-Hallum Capital
…back in the Q2. Interesting.
Dan Coker
Sounds like the dogs have gotten Bud.
Steven Dyer - Craig-Hallum Capital
I guess so. Just curious I guess in terms of program delays, I am familiar with the F-150.
What else has been pushed out?
Dan Coker
Well, the other programs are not really like as dramatic as the F-150 has been but there is what I would call gaps in the schedule. They have launched on schedule but they also are building in schedule reductions with the timeout 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 they are also building two and three week shutdowns during the second half.
So, the biggest and most dramatic I would say deferral has been the F-150 series that is now schedule to not even go into production until late September. So, that is the biggest deferral.
The others are just very dramatic slowdowns as they attempt to absorb the inventory out of the market.
Steven Dyer - Craig-Hallum Capital
Are you able at this point to talk about the GMT-900, what is optional and what standard on the platforms that you announced today?
Dan Coker
No, I am not and frankly, I do not think it is standard on any of the GMT-900 programs. I think it is an optional feature on all.
Steven Dyer - Craig-Hallum Capital
Okay, front seats only?
Dan Coker
Yes, sir.
Steven Dyer - Craig-Hallum Capital
Okay, curious to your thoughts of the recent prices of your input cost particularly tellurium and what you are seeing there, what that may do to your gross margins overtime?
Dan Coker
Well, as we reported last quarter, the tellurium market along with many other markets in the raw commodity, in the base metals have gone a bit insane during this year. I think they peek into somewhere in the $350 key low range in the April timeframe.
Today, they are down to below $200 in many cases but they are still at record levels but they are also continuing to soften. Our first and second quarters were not impacted directly by this market trend.
The third and fourth quarter really subject to cost pressures and we are working on programs to try to number one, shop smarter, 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 and we have to deal with them and they will be impacting us in the second half.
Steven Dyer - Craig-Hallum Capital
Are you able to quantify that at all as it relates to gross margin? I mean, does this take you below 30?
Are you still on your lower 30s? How should we think about this?
Dan Coker
Well, as you see, we are in the low 30s right now and we have not 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 proceeds in terms of gross margin.
We do not really know where it is going to wind up but there is certainly the auto industry is not in a mood to accept price increases and so we are trying to deal with that in terms of the cost and cost avoidance process.
Steven Dyer - Craig-Hallum Capital
Okay, so have you done any, I am just to try to get obviously a little bit more color on this if you have to buy a year out today sort of where would you gross margin shake out as a result?
Dan Coker
We would not buy that a year out today because the cost had been dropping. So, we would certainly continue our pattern of buying strategically and picking up material as we see the market advantages.
So, we are not trying to establish any long term commitments based on this current price level. We believe the price level will continue to go down.
Bud Marx
I think it is fair to say and let couple of people that when we talk about this last quarter and make the same observation that we have been pretty resourceful about finding ways to attain our low 30s gross margin target and that if there is an impact that we have the design flexibility and the capability overtime to offset that so we may have an impact. We do not know at this point how pronounced it will be but our intention over the period of time we are talking about which would be through 2009 is to achieve our margin target.
That is fair statement, Dan?
Dan Coker
Yes, absolutely it is 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 try to get in position to react to the cost of the market and we have been working on those ever since the, in particular the tellurium phenomenon occur. So, yes we are under pressure.
There is a chance that our margins will be impacted exactly, pretty sure they will be but we do not know how, to what extent or how long.
Steven Dyer - Craig-Hallum Capital
Okay, good and then I guess finally and I will hop back in the queue, additional BSST non-auto related projects. Is the bed our last for the year or would we expect potentially something else yet this year?
Dan Coker
No, I think there is a good a chance we will see something else come out of our non-automotive efforts in the calendar 2008.
Operator
Your next question comes from Rick Hoss - Roth Capital Partners.
Richard Hoss - Roth Capital Partners, LLC
Bud, what were the BSST expenses for the quarter if you have that?
Barry Steele
The net numbers for BSST was $684,000 that is compared to $695,000 for the prior year second quarter.
Richard Hoss - Roth Capital Partners, LLC
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.
Dan Coker
Well, philosophically they are untouched field for us. We have no current business announced that Chrysler or that we are in Germany.
We are working with several Chrysler teams. We are 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.
Richard Hoss - Roth Capital Partners, LLC
Okay and how much would say the sense of nationalism play into the decision-making process or say some of the German manufacturers? Is that a significant roadblock that is difficult to overcome?
Dan Coker
As they turn the dogs on us, it is a problem for us as an American Company base to do business in Germany because we do not have a physical presence there. We have one engineer who helps us try to gain entrance into a huge market so he is a very busy fellow.
It would be easier if we were headquartered in Stuttgart or in Munich but for us really, I do not think that there is any direct regional prejudice against using American companies. I think it is difficult for us to get over there and make our story clear and have the type of support that they are usually getting from their local domestic suppliers.
So, we recognize this. We are working on it.
We are trying to increase our presence there and we are trying to increase our activity levels to penetrate that market.
Richard Hoss - Roth Capital Partners, LLC
So, as we look at potential platform penetration activity in say 2009, probably not in the order of magnitude that we have seen this year. I think we had seen some pretty substantial penetration specifically in the GM product line but just taking a look at what is out there and potential manufacturers that are out there, just any sense of what is left?
Dan Coker
Yes, there is a whole lot of market left. We think we have less than 5% of the total available market that we would be targeting and we are working and we are trying to get new customers where we have some customers for 2009.
We know who they are. We have been working with them for several years.
It is again our common strengths. We are very strong in the Asian marketplace as we are continuing to gain penetration and market share there and we continue to press here in North America.
I do not anticipate any German business falling in our lap for 2009 but we are continuing to work for future down road programs.
Bud Marx
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 for us 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 are in those segments are now falling down into what I will call the mid-range vehicles, are not interested in abandoning their creature comforts. So, we are seeing that is opening another set of doors for us that, we knew were there, but had been slower to develop where the hidden cool seats are now I would say both a profit improvement and a significant demand item on customer's list.
So, that is for the next two or three years should I think quite a good opportunity.
Operator
Your next question comes from Joe Amaturo - Buckingham Research.
Joe Amaturo - Buckingham Research Group
I am assuming that the current revenue guidance does not include any Sealy related revenue, is that correct?
Dan Coker
It will be correct.
Joe Amaturo - Buckingham Research Group
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?
Dan Coker
I think the Euro/Asian sales get up above; I think we actually mentioned it in the press release…
Barry Steele
In the second quarter, they are above 50%.
Dan Coker
Yes, they are approaching 60% and our total revenues for the second quarter so…
Joe Amaturo - Buckingham Research Group
Right, understood but I mean going forward; I got to imagine that GMT-900 is going to represent a larger percentage of future revenue bases.
Dan Coker
Market, it should comeback to near strength. It will certainly resurge and be more than 40% of our total market demand.
So, in the future we suspect that the domestic markets will come back although we continue to have growth in the Asian and European market as well.
Joe Amaturo - Buckingham Research Group
Okay, and then lastly, could you just give us a sense of what production level you are expecting for the GMT-900 and F-150 when you arrived at your guidance for 2008, your revenue guidance?
Dan Coker
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 is about the numbers that we have decided to use on our forward-looking projections.
Joe Amaturo - Buckingham Research Group
Okay and what type of deviation from the current expectation would, I mean is that why you have such a wide range or..?
Dan Coker
Yes, we really do not know what is going to happen. If you look at the immediate future, this has been a very drastic and very dramatic drop in the consumer market.
Actually the consumer has not bought cars in the months of May and June and those lack of sales to 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 2009 levels and we are not really sure how August is going to go in terms of the retail effort for the car companies and how it looks like petroleum prices are falling and that is good news for the consumer and it should be a good news for the OEMs and for the car companies in general worldwide.
Operator
Your next question comes from Analyst for Frank Gristina - MicroCapital.
Analyst for Frank Gristina - MicroCapital
I was interested to see the announcement for the first sale you have made on heated and ventilated seats then 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 you think is in terms of expectations and adoption and also what sort of target margin you would have in volume for that product?
Dan Coker
We have actually announced and we have made small shipments 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 our specially designed air movement fans and equipments. Our customer there is the Asian marketplace particularly in the developing countries, China being the biggest target.
These are markets where the cost of petroleum has always been extremely high and many cars do not have air conditioning and the presence of a seat ventilator or a seat cooler is a big advantage. They also has small engine that do not have a 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 have identified, the Nissan Tiana, it is only sold in Japan, China and in Russia and in some of the Asian some smaller markets.
So, you will never see one in the US but you will 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 type of margins in this product all over ASPs or lower, something in the $50 range as oppose to a $70 range but the gross margins for us are in the same range in the low 30.
Analyst for Frank Gristina - MicroCapital
Okay and I mean going back some years, my enthusiasm for CCS adoption was based on take rates. Do you have any take rate data yet on heated and ventilated yet?
Dan Coker
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 market and entry level market so the take rates are a little lower but they are still quite significant and quite appealing to us.
Operator
Your next question comes from Walter Ramsley - Walrus Partners.
Walter Ramsley - Walrus Partners
Couple of questions about those take rates, can you just kind of breakdown what the take rates are historically maybe between the SUVs, the trucks and the sedans? Are they different?
Dan Coker
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 and accept a 70% on over all of the vehicles that we have. I think really rather than breaking it out by segment of the market, it is really targeted more toward the price range of the market.
If the market 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 and 40s on entry level or mid-market vehicle and that trend has not changed.
Walter Ramsley - Walrus Partners
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 rates should be the same?
Dan Coker
That is what we have seen so far in early indication.
Walter Ramsley - Walrus Partners
Okay and then as far as the beds go, the technology being used is that pretty much the same thing as the cars?
Dan Coker
It is a convective system that uses a thermoelectric device with small fans that dry in the ambient air, heat and cool it and distribute it to the bed surface in a patent applied approach.
Walter Ramsley - Walrus Partners
So, the price would be about the same as the cars or..?
Dan Coker
Well, we have not actually disclosed what our target revenues are for these items but essentially thermoelectric is a thermoelectric. So, yes, it depends on how many we decide to use to achieve the comfort levels that they want.
Operator
Your next question comes from Richard Holt - Wealth Monitors Incorporated.
Richard Holt - Wealth Monitors Incorporated
I just wanted to follow up on 2009, do you have a timeframe when you are going to be comfortable speaking about 2009 as you think at the end of Q3 or will it be later on in the year?
Dan Coker
Probably, we will be most comfortable sometime around the end of 2009 but we have traditionally looked at the following year at the end of the third quarter. So, hopefully about 90 days from now, we will give an indication of what we think we see in the market for 2009.
Richard Holt - Wealth Monitors Incorporated
The BSST sales for the quarter which would be primarily Herman Miller, what were they?
Bud Marx
We were roughly $60,000 for the first half, weren’t they Barry?
Dan Coker
That is about the right range, they are very small.
Richard Holt - Wealth Monitors Incorporated
I think you had targeted two product announcements in the second half of BSST, I assume that the bed was one of them; I think there were something related to the electronics. Is that correct?
Bud Marx
We said so directly. So what Dan has said, I think, is about right that we expect something else to happen in 2008.
Operator
Your next question comes from Chris Lippincott - Systematic Financial Management.
Chris Lippincott - Systematic Financial Management
I was wondering what you were thinking might happen with inventory levels given the fact that we have seen business recent quarter alone about 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 kind of environment we are in.
Barry Steele
We were anticipating increasing our inventory levels with the number of new North American programs in particular and that is why you have seen an increase. I would point out that in the prior year, we quite significantly decreased our inventory levels so this mean a little bit shift towards sort of 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 for few opportunities with the lower volumes that we are seeing that will do so a little bit.
Chris Lippincott - Systematic Financial Management
So, you still think it is fairly inline with the production levels they are going forward?
Barry Steele
We probably are holding a little bit more now than we would have like because we order out like a couple months really in giving our supplier or contract manufacturers idea to what to build so we are probably a little ahead of ourselves at the moment and so that is why there are some opportunity now to send it out but I would see dramatically.
Chris Lippincott - Systematic Financial Management
And last, just the CapEx and G&A could you reiterate where you are expecting?
Barry Steele
I am not sure that we actually iterated anything in the past other than probably we expect a pretty higher run rate than last year. I think to-date were about a million two or something like that.
Chris Lippincott - Systematic Financial Management
I thought you had mentioned saying about CapEx might be flat and slightly up from 2007?
Barry Steele
That may have been the kind what we made in the past. There are some expenditure on the advance materials in the BSST program that will be pretty in place in relation to our lab and some of the activities we will be pursuing there.
So, that is probably a stale comment so I would see maybe a million in the second half of the year or something along those lines.
Operator
Your next question is a follow up from Brandon Ferro - KeyBanc Capital Market.
Brandon Ferro - KeyBanc Capital Market
Bud, can you talk about the Sealy development program? Can you give us an idea of what the revenue split might be and then secondly, is this technology going to be exclusive to Sealy?
Can you take that to other mattress companies?
Bud Marx
I think probably Dan should speak to that, more than I, because he has had the most direct conversations with the Sealy people but it is fair to say we are in the development process and I think therefore a bit premature to be disclosing or even projecting what I will call detailed financial splits. Go ahead Dan.
Dan Coker
That is a very good approach to it. Right now, there is a lot of enthusiasm for this product there.
Actually, we are conducting market studies right now to try to determine the exact size of the market. The people at Sealy are extremely good at doing this type of work and they are very good at marketing products into an area we have no knowledge of.
That is why we seek a partner like Sealy who is the world leader in this area and it is good to see them being excited about it but we do not really have any hard data that 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 were possible.
So, we do not really have a lot we can tell you other than we are working with Sealy. We are quite pleased with that.
The prospects for this product I think are very high.
Brandon Ferro - KeyBanc Capital Market
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?
Dan Coker
That would be fair, yes.
Brandon Ferro - KeyBanc Capital Market
Okay and then can you give me a sense of what, let see you guys do $80 million in revenue this year, what percentage of that is going to be North American light truck, best guess?
Dan Coker
Probably in the 35% to 40% range would be North American light truck.
Brandon Ferro - KeyBanc Capital Market
Okay, back half of the year, do you have any sense of what it might be relative to the first half?
Dan Coker
We have nothing in the first half.
Brandon Ferro - KeyBanc Capital Market
But I guess the way I was looking at it, I think 60% of the business was Ford and GM in 2007 and prior line share that were light truck and then a lot of the growth this year comes on light truck at Ford and GM. I was just assuming it might go up relative to last year.
Dan Coker
It is very possible. We have more platforms in theory buying.
Unfortunately, they are buying at lower levels.
Brandon Ferro - KeyBanc Capital Market
Okay and then I wanted to go with the heated and 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 do not understand is you have got higher volumes on heated ventilated versus CCS so you can offset the fix cost of 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?
Dan Coker
Well, the gross margins are quite simple on that. We have a cost to produce a 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 out on the market and then out in 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 it gives us a low 30 gross margin.
Brandon Ferro - KeyBanc Capital Market
I think you guys have said the overall heat market, heated ventilated, other and then CCS is prior $800 million this year, you guys roughly 10% of that market? I think you guys had always said you see it going to roughly a billion dollars by 2010.
Can you give us a sense of, on that incremental $200 million in revenue what you intend to capture in terms of market share? Is it going to be 10 as it is today?
Is it going to be 20? Can you just help me understand that?
Dan Coker
Well, I think the chalks have been kicked out from under our estimates of the overall market with the current shifts and the 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 market for both the heated/cooled and heated and ventilated product. It is not our intention 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 have selected to compete in that $200 million.
So, we expect to increase our market share as that goes forward to 2010 and beyond.
Operator
Your next question comes from Bob [Momere] - Arbor Capital Management.
Bob [Momere] - Arbor Capital Management
Could you please lay out a maybe a reasonable commercialization timeline for those materials coming on at Ohio state maybe starting with prototype device that a potential customer will be able to play with ending with maybe more commercialized production opportunity?
Bud Marx
I think probably that is the timeline that we are not ready to layout at this time. There are, I would say, a fair number of unknown share.
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 a million dollars. It is probably something less will be to put in metallizing capability and material characterization capability that will take this what I will call lump of raw material and begin to work and turn it into a module and when we get to module level that is when the customers will really get excited because we have the ability therefore to demonstrate hardware and to trade it and for that matter in Munich and Paris and so forth are hardware towns.
So, I think that is a process we are going to be going through over the next six to nine months and I think will be much better to quit 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.
Bob Momere - Arbor Capital Management
Are these activities being conducted within your own research lab facilities or is this something you are still working with certain with outside academic partners?
Bud Marx
Well I think what is going on is the work of the outside academic partners is continuing but what we are seeing is enough progress that we want to start ramping up to begin to create modules and product capability from that. So, that certainly means we will 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 system standpoint forward but it is definitely happening that we are putting more of our own capability in place because that is where our revenue comes from.
Bob Momere - Arbor Capital Management
Okay so suffice to say that sometime in 2009 hopefully if work progresses efficiently, we should be hearing about potential partner playing with some of these materials.
Bud Marx
Yes, I think the conversation about midyear could be very interesting, let us put it that way.
Operator
Thank you and at this time, there are no additional questions.
Dan Coker
Thank you very much for everyone taking the time out today and come in and listen to our story. It has been quite a convoluted story in the second quarter but we believe we have survived the second quarter and we are now toiling into the third and fourth.
We have a lot of good prospects, a lot of positive things are happening to our little Company. Fortunately, we are still in a position to be able to hold our heads up.
We are still cash positive. We do still have cash in the bank and we do have good solid prospects with lots of new opportunities and new products coming.
Some of them as we have 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 have all noted coming in 2009, 2010 and 2011 as well. So again we have had a very tough quarter as did the entire industry and frankly, I think the whole world had a tough quarter and we look forward to getting together again in about 90 days and hopefully talking about some more good news.
Thank you very much for your time and attention.