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Operator
Good afternoon, ladies and gentlemen, and welcome to the ON semiconductor second quarter earnings release conference call.
At this time all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time.
If anyone should require assistance during the conference call, please press star and then zero on your touchtone telephone.
As a reminder, this conference call is being recorded.
I would now like to turn your conference over to your host, Mr. Ken Rizvi.
Mr. Rizvi, you may begin.
Ken Rizvi - Investor Relations
Great, thank you, Shawn.
Good afternoon and thank you for joining ON Semiconductor's second quarter 2004 conference call.
I am joined today by Keith Jackson, our CEO, and Donald Colvin, our CFO.
This call is being simultaneously webcast on the Investor Relations section of our website at www.onsemi.com and will be available on our website for approximately 30 days, along with our earnings release for the second quarter of 2004.
Our earnings release in this presentation includes certain non-GAAP financial measures.
Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are in our earnings release and posted on our website in the Investor Relations section under the heading, "Annual Reports and Financial Releases."
Now I would like to highlight our upcoming event calendar.
We will be presenting at the Schwab Soundview Semiconductor Conference August 12th in San Francisco.
During the course of this call we will make projections or other forward-looking statements regarding future events or the future financial performance of the company.
The words "estimate," "intend," "expect," "plan," or similar expressions are intended to identify forward-looking statements.
We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially.
Important factors relating to our business including factors that could cause actual results to differ from our forward-looking statements are described in our Form 10-K and other filings with the SEC.
The company assumes no obligation to update forward-looking statements to reflect actual results or change assumptions for other factors.
Now let's hear from our CFO, Donald Colvin, who will provide an overview of the second quarter.
Donald Colvin - CFO
Thank you, Ken, and thanks to everyone for joining us today.
ON Semiconductor Corporation today announced that total revenues in the second quarter of 2004 were $333.5m, an increase of 8% from the first quarter of 2004.
During the second quarter of 2004, the company reported a net worth of $3.5m or 2 cents per share.
This was included restructuring, asset impairment, and other charges of $0.9 million and a loss on debt prepayment of $27.4m, or 11 cents per share.
During the first quarter of 2004, the company reported a net loss of $47.6m, or 23 cents per share.
That included a net loss of $13.1m, or 6 cents per share for restructuring, asset impairments, and other charges, and a loss on debt prepayment of $33m, or 14 cents per share.
On a mix-adjusted basis, average selling prices in the second quarter went up approximately 2% from the first quarter of 2004.
The company's gross margin was 33.7%, an increase of approximately 260 basis points as compared to the first quarter of 2004, due to a combination of increased average selling prices, increased unit volume, and cost reductions.
EBITDA for the second quarter of 2004 was $46.1m and included restructuring, asset impairments, and other charges of $0.9m and a $27.4m loss on debt prepayment.
EBITDA for the first quarter of 2004 was $14.2m and included the net loss of $13.1m from restructuring, asset impairment, and other charges, and a $33m loss on debt prepayment.
A full reconciliation of this non-GAAP financial measure to the company's net loss and the net cash provided by operating activities prepared in accordance with U.S.
GAAP is included on our website, and [background noise] and the related 8-K filed with the SEC today.
The $0.9m in restructuring, asset impairment, and other charges for the second quarter of 2004 included approximately $2.5m of cash charges, primarily for severance and the reversal of approximately $1.6m of cash charges primarily for severance reserved in the fourth quarter of 2002.
Total cash charges included $2.5m primarily for employee severance related to overhead reductions in Roznov Czech facilities.
The reversal of $1.6m as charges reserved for in the fourth quarter of 2002 is due to lower-than-expected severance and other associated costs.
Including the second quarter, cash and cash equivalents increased by $36.3m from the end of the first quarter of 2004 to $257.7m.
At the end of the second quarter, day sales outstanding decreased to 44 days from 45 days at the end of the first quarter, and inventory increased slightly to 81 days.
Capital expenditures during the second quarter were $18m compared with $31m in the first quarter.
Distributor weeks of inventories at the end of the quarter remained relatively flat, below 12 weeks, as we proactively managed our distribution inventory.
Now I would like to turn it over to Keith Jackson, our CEO, for additional comments on the business environment.
Keith.
Keith Jackson - CEO
Thanks, Don.
A breakdown of our second quarter revenues of $333.5m by end market showed some changes from the previous quarter.
Computing increased from 20% to 23% of sales, and wireless increased from 14% to 15% of sales in the second quarter.
Consumer and industrial remain flat as a percentage of sales, with consumer at 18% and industrial at 17%.
Automotive and networking fell slightly as a percentage of sales with automotive decreasing from 23% to 20% and networking decreasing from 8% to 7% of sales.
During the quarter, sales to our largest OEM customer, Motorola, increased to $26.7m, or approximately 8% of revenues from $24m, or approximately 8% of revenues in the first quarter of 2004.
This growth appears to reflect the continued strength that Motorola has shown in their handset business.
Reflecting the strength in the computing and wireless arena, our top five customers, excluding distributors, for the second quarter were Flextronics, Intel, Motorola, Siemens, and Selectron.
On a geographic basis, our contribution this quarter from sales in Asia, excluding Japan, increased by 300 basis points to 49%, reflecting the increased strength we are seeing in our computing business.
Our sales in Europe and Japan remain relatively flat at 17% and 6% of sales, respectively.
Sales in the Americas decreased by 300 basis points 28% based on the seasonality in the automotive market.
Our channel breakout has also changed from the previous quarter.
Looking across the channels, direct sales to OEMs accounted for 41% of our revenue compared to 43% last quarter and was offset by distribution, which accounted for 48% of our revenue compared to 45% last quarter.
This is consistent with the strength we are experiencing in Asia.
The MS channel was down 100 basis points to 11%.
Now I would like to provide you with some details on the progress we've made in several markets.
In portable and wireless, our product activity was a key factor to the financial performance we delivered in the second quarter.
Consumers are demanding more than just portability in their handsets, MP3 players, and portable game systems.
They also want quality audio capabilities and significant memory storage in the small form factor.
We are delivering devices to meet their needs.
To improve audio quality while decreasing size, component count, and cost, we introduced an audio power amplifier that enables engineers to deliver differentiated products for video gaming, music playback, and wireless communications.
In the second quarter we also introduced the industry's first high-speed, sub 1-volt logic gate devices.
We offer these devices in industry-standard packaging with expanded features enabling designers to deliver more functionality with less board space and without having to invest in new equipment or processes required for assembly and inspection.
We continue to build on our strength in the computing market with our high-performance products and world-class delivery. "Electronic Design and Application World," a leading industry publication in China, presented its Best Product Design awards to one of our multiphase controller, the NCP-5331.
This award highlights the power management performance that we deliver to the computing market as well as our increasing visibility with the multinational and indigenous manufacturers in China.
In the telecommunications and networking space, we introduced a comprehensive multi-product solution that eases the design process for meeting the advanced telecom computing architecture.
A growing technical standard used by the industry to standardize the important subsystems found in today's high-performance telecommunication equipment.
During the SuperComm trade show last month, we introduced the industry's first integrated MOSFET capable of meeting several power management functions inside the equipment that delivers multi-service telecommunication access to homes and businesses.
These integrated devices can help simplify telecommunications equipment design and reduce the costs of these systems.
As a highlight to our increasing strength in working with the electronic service manufacturing space, Flextronics presented us with its Global Supplier Performance Award.
Flextronics presents this award to suppliers who provide world-class support in the areas of quality, total cost, global account management, and design.
We certainly are proud of this accomplishment, which represents our continued focus on quality, service, and support.
Now I'd like to turn it back over to Donald for our forward-looking guidance.
Donald.
Donald Colvin - CFO
Thank you, Keith.
Third quarter outlook -- based upon booking trends, backlog levels, and estimated [tons] levels, we anticipate that our total revenues will grow by 2% to 5% sequentially in the third quarter.
Backlog levels [background noise] third quarter of 2004 were up from backlog levels at the beginning of the second quarter of 2004 and [background noise] 90% of our anticipated third quarter revenues.
We expect the average selling prices will be slightly up for the third quarter of 2004 and that gross margins will increase by 50 to 100 basis points.
For the 2004 calendar year, we expect cash capital expenditures to increase slightly over previous estimates by approximately $5m to $10m to $85m to $90m for the total year.
For the third quarter, we expect SG&A expenses to range from 11% to 12% of sales, and R&D expenses to range from 7% to 8% of sales.
We also expect common shares outstanding to be approximately 254 million shares and preferred shares maybe convertible into approximately 45 million additional shares.
Further details on our share count and EPS calculations are provided regularly in our 10-Qs and Ks.
With that, I would like to start the Q&A session.
Thank you, and please open the lines for questions.
Operator
[operator instructions]
Our first question comes from Michael Masdea.
Michael Masdea - Analyst
Yeah, thanks a lot.
Congratulations, nice quarter and guidance, guys.
I guess the first question is the only thing that didn't look as good was the deferred income on the distributors.
You said distributor inventories were keeping around 12 weeks, but could you just walk us through that, Donald?
Donald Colvin - CFO
Sure.
The deferred income to distributors, actually, I think looked pretty good.
I disagree with you there, Michael, because that's a reserve account, and it's not really what you'd call a liability with your reverse [inaudible].
You get a credit to your P&L.
And included in that, it's not only the inventory but also the reserves we have for non-value returns, et cetera.
So the absolute inventory in our distribution channel increased by less than the delta in that reserve account.
The absolute inventories increased by something like $13m where, if you do the calculation on our sales growth, we came in, I think, at 11.8 weeks, which is under 12 weeks, exactly similar to what we had at the end of the first quarter.
And, as I stated in my comments, we proactively managed our distribution inventories throughout the whole month of June.
Our distributors would have taken substantially more product, but we decided that there was no point in increasing distributor inventories beyond this 12 weeks, so we did not ship products, even although we could have shipped them and received cash for them.
And I would remind all listeners that ON Semiconductor only recognizes revenue on a sell-through basis.
We do not recognize revenue on a sell-end basis.
So any shipments to distributors are neutral to us on a revenue basis.
Michael Masdea - Analyst
Great, that helps a lot.
I guess the next question is just the supply chain dynamics going on out there.
You guys sound a little bit more optimistic than some of the other people that have reported.
Can you just walk us through what you're seeing?
I mean -- and the lead time front, inventory front?
Kind of what customer orders versus what their forecasts are looking like?
Keith Jackson - CEO
This is Keith Jackson.
I'll walk you through some of that.
From a backlog perspective, it did strengthen, quarter-over-quarter, which is a good sign.
Our ability to deliver against that, as measured by lead times, have stayed pretty much stable.
As we've added the capacity, we are basically adding it at a pace that's consistent with the increased demand, so we still have a 10- to 12-week lead-time scenario for us.
Relative to outlooks, as we've mentioned several times in the past, typically the consumer and computing sectors do strengthen, as we approach September and, again, the outlook from our customers is very consistent with that over the second quarter.
Michael Masdea - Analyst
So there's nothing special in product cycles that's benefiting you guys necessarily?
Or are there certain things you want to highlight, like branch sale or anything else?
Keith Jackson - CEO
Yeah, you know, branch sale clearly is a good thing for us -- lots more of the MOSFET content.
We're certainly seeing good gains there and expect again as September approaches, that to be a contributor to our growth, quarter-on-quarter.
Michael Madea
Thanks a lot.
Good quarter.
Keith Jackson - CEO
Okay, thanks.
Operator
Our next question comes from Mark Edelstone.
Mark Edelstone - Analyst
Good afternoon, guys, very nice-looking quarter.
I have two questions, if I could.
The first one is you talked about on a weighted mixed basis, your ASPs were up 2% in the quarter.
If you took a look at that and looked at just your backlog, what kind of increase in ASPs are we seeing there, and then I've got a follow-up for you as well.
Keith Jackson - CEO
Yes, the anticipation for the third quarter based on backlog looks to be up slightly, certainly less than 2% we recorded in Q2, but something that should still be in the positive range.
Mark Edelstone - Analyst
And, Keith, if you just look at your orders as you went through the second quarter, can you just talk about what the trends were like that you saw there?
Did you see the same type of slowdown in order momentum that others saw in the month of June, for example?
Keith Jackson - CEO
You know, we really didn't see a significant slowdown in June, nor do we see, again, significant cancellations or shuffling as we went through the quarter.
Ours stayed pretty consistent.
My expectation is that most of that shuffling was seen by people who are on a sell-in basis to distribution.
And so with our methods here, frankly, we did not see very much of a [inaudible] in June at all.
Mark Edelstone - Analyst
And can I assume it stayed relatively on the same trend line here in July as well?
Keith Jackson - CEO
Yes, it's continued to be strong, as we've gone into the third quarter.
Mark Edelstone - Analyst
Great, thanks a lot, guys.
Keith Jackson - CEO
Okay.
Operator
Our next question comes from Ramesh Misra.
Ramesh Misra - Analyst
Hi, guys, congratulations, good numbers.
Could you just briefly talk about fab utilization rates -- where they are, where do you think they will be headed to?
Keith Jackson - CEO
Yeah, again, our plan all year has been to increase capacity at pretty much the pace that we're increasing the revenues, keeping those numbers in the low 90s and, certainly, we've been fairly successful at making that happen.
So, again, overall type numbers in the low to mid 90s.
Ramesh Misra - Analyst
Okay, and in terms of pricing, can you provide a little more clarity between, say, the discrete products and your analog products -- but any discernible differences between the two?
Keith Jackson - CEO
You know, there are differences on specific products, where demand significantly exceeds supply, but it's not on a sector basis.
So in other words, within analog and within discretes, et cetera, there are certain devices where demand still exceeds supply on a strong basis and in those areas the ASP increases were stronger, as you might suspect.
But there's not really a broad division level kind of picture I could paint for you.
Ramesh Misra - Analyst
Okay, and then, finally, Keith, in terms of the different end markets, now, automotive tends to be a little stronger for you in Q3.
Could you also talk about some of the other end markets?
I know it's kind of early in the quarter, but what kind of order trends are you seeing in the different markets?
Keith Jackson - CEO
Typically, we see the biggest increase in computing and consumer segments for the third quarter.
We do see some slight strengthening in automotive, as you said, but it's really not substantial.
The bigger pop for automotive is Q4, Q1 timeframe.
And industrial, again, not a big change quarter-on-quarter, and wireless, right now, has continued to be very strong all year, and we see that continuing into Q3.
Ramesh Misra - Analyst
Okay.
All right, thanks very much, Keith.
Take care.
Keith Jackson - CEO
Thanks.
Operator
Our next question comes from Lee Zeltser.
Lee Zeltser - Analyst
A follow-up on the previous question -- as you look at your product mix, can you talk about growth in revenues overall?
Was it weighted more heavily in discrete versus analog or was it pretty uniform relative to the corporate average?
Keith Jackson - CEO
It was stronger in our power lines, both the MOSFETs and the analog sector than it was in the standard products arena.
So, very clearly, significantly more growth in analog and MOSFETs than there was in standard products.
Lee Zeltser - Analyst
Okay.
And then you talked about utilization levels and lead times -- are they tighter in MOSFETs than maybe some of your other products at this point?
Or have you had the necessary capacity?
Keith Jackson - CEO
Within MOSFETs there are some devices there that are in very tight situations that would be in excess of that 10 to 12 weeks that I mentioned, but that's, as I mentioned earlier, true in each of our product families.
In the small signal arena, there are some of those devices, and in analog there are some of those devices.
So it's really hard to categorize it as one area.
It's really much more of a fab package combination that leads to the areas that are a little tighter.
Lee Zeltser - Analyst
Okay, understood.
The sequential growth that you had in the second quarter seemed to be a little bit stronger than some of your competitors.
Do you feel there were some share gains there -- just your response on that.
Keith Jackson - CEO
Yeah, I mean, we don't have the data for the second quarter at this point, and first quarter we believe we did gain share, and as we went through the second quarter, the early indicators are that we may be gaining shares while in the second quarter.
And, again, it would be mostly in computing and wireless.
Lee Zeltser - Analyst
Okay.
And then with regard to the TPG stake, were they sellers at all in the second quarter?
Keith Jackson - CEO
They are not sellers at all, and, of course, you have to get things directly from them, but what they've told us they're not anticipating any sales at these prices.
Lee Zeltser - Analyst
Okay, fair enough.
Thanks very much.
Keith Jackson - CEO
All right, thank you.
Operator
Our next question comes from Vernon Essi.
Vernon Essi - Analyst
Thank you.
I was just wondering, Donald, if you could give a point of clarification here on the capital expenditures.
There was a lot of static in the background.
What was the number you gave us for the quarter?
Donald Colvin - CFO
We had, I think the number we said for the quarter was 20 -- $18m, just under $20m.
And we had previously guided to approximately $80m for the whole year, and we took that guidance up to $85m to $90m with approximately $20m for the third quarter.
Vernon Essi - Analyst
Okay, and can you give us an idea of how units -- how unit growth in the quarter -- sort of how it's laid out?
Donald Colvin - CFO
Sure.
Quarter-on-quarter unit growth was just under 4%.
Vernon Essi - Analyst
And then just on the, sort of, follow-on to the last question -- can you give us any more color on the mix thereof?
How things might have grown sequentially in analog relative to the discrete side of your business?
Keith Jackson - CEO
Yeah, I don't mind helping a little bit more with that.
The high-frequency business was relatively flat.
As we have seen, wired telecom kind of plateaued as we went into the second quarter.
So that portion didn't move much.
We saw good, strong movement in the power portions of both the analog portfolio and in the MOSFET portfolio, you know, numbers that were as much as twice the overall average.
And then the discrete and standard product portfolio was less than that, so that the blended average ended up being 8%.
Vernon Essi - Analyst
Okay.
And just, lastly, on the opex side, you're holding the -- I guess -- the guidance pretty much in line with where you were last quarter.
Help us understand, as we model your company, going forward, how you're going to play out your R&D expenses, for instance, the 7% to 8% range -- when are we going to start to see some more leverage on that as the revenue growth.
Keith Jackson - CEO
Yes, I think as the company grows, you will see that move from closer to 8% to closer to 7%.
On a long-term basis, I'd like to be 6.5% to 7%, but we're definitely going to do that by growing as opposed to managing those costs down right now.
Vernon Essi - Analyst
Okay.
All right, thank you.
Operator
Our next question comes from Chris Danely.
Chris Danely - Analyst
Great, thanks, guys.
Just a couple of quick clarifications -- can you give us the exact breakout by products?
Keith Jackson - CEO
We have not been giving the exact breakout by products in these calls.
We can give you some flavor for that, if you'd like, if you've got some specifics, Chris.
Chris Danely - Analyst
No, I just wanted to know, sort of, which was up and which was down between the standard products, the analog, and the power MOS.
Keith Jackson - CEO
Basically, nothing was down.
So we'll start there.
And, as I mentioned a couple of times, the analog and MOSFETs were up the most -- standard products up but not quite as fast, and then the high-frequency business was basically flat.
Chris Danely - Analyst
Okay, and do you guys track sell-in versus sell-through?
It sounds like it, but it was kind of flat or even?
Keith Jackson - CEO
Yes, actually, you can see that with the increase in inventory.
The sell-in, if you will, was about $11m, which the sell-through, of course, went up over $20m quarter-on-quarter.
So the weeks of supply was not increasing.
Chris Danely - Analyst
What exactly was the book to bill?
Keith Jackson - CEO
We don't give the exact numbers of that, but it was still nicely positive in the last quarter.
Chris Danely - Analyst
Sure.
And then on the automotive business, was that a little worse than expected or was that pretty much normal seasonality?
Keith Jackson - CEO
For us, it's a very normal seasonality.
We tend to peak in the first quarter, go down a bit in the second, and then up a bit in the third, and then up a little bit more in the fourth.
So typically during the second and third quarters are weaker for automotive, and the fourth and first are stronger for us.
Chris Danely - Analyst
Great.
Last question -- obviously, you guys are doing well.
What are you seeing out of the competitors?
Do you see any of them pricing irrationally?
Ramping capacity?
Or does everybody seem to be sort of moving according to plan out there?
Keith Jackson - CEO
Yeah, I would say it seems to be a fairly orderly growth pattern there, from a capacity perspective, and the pricing environment I would describe as stable.
It was certainly much stronger last quarter, as you saw from the 2% up, but we're not seeing any signs of people dumping prices, because we really don't believe there have been significant excess capacities being built.
Chris Danely - Analyst
Great, thanks, guys.
Nice quarter.
Keith Jackson - CEO
Thanks.
Operator
Our next -- ladies and gentlemen, if you do have a question, please press the 1 key on your touchtone telephone.
If you wish to remove yourself from the queue, please press the pound key.
Our next question comes from Tim Luke.
Tim Luke - Analyst
Thank you.
If you could clarify -- first -- good quarter -- second, could you clarify whether you're still outsourcing some of the capacities and the percentage that you've been outsourcing.
I think last question it was around 30%.
Keith Jackson - CEO
Yes, it -- we continue to outsource.
It's actually down just a tad to around 29%, but, again, that's within our pretty normal range -- between 28 and 30 between quarters.
So I'd say it's relatively stable.
Tim Luke - Analyst
And could you also just clarify within the wireless area -- you talked about Motorola's strength, and you talked about expectations that that would remain fairly robust into the third quarter.
Could you give a sense -- Motorola -- you'd continue to expect to be a solid contributor in the third quarter and would you expect wireless to continue to edge up with a percentage of the mix?
Keith Jackson - CEO
We do expect wireless to continue strong without question.
We are seeing good growth across the spectrum of customers there.
I think the expectations they have for total unit shipments are edging up a bit toward $600m or so.
So we do expect that to continue to grow.
In the third quarter, it might grow marginally.
Again, typically, there's a lot more growth in computing and consumer, but there certainly could be a little bit more growth there, but I would not expect to see significant moves in the second half.
Tim Luke - Analyst
Thank you.
Operator
Our next question comes from Steve Smigie.
Steve Smigie - Analyst
Great, thank you.
I was wondering if you might be able to give us an update on any debt reduction plans or interest expense reduction plans?
Donald Colvin - CFO
Well, Steve, we have been active on that since the beginning of the year, having undertaken four transactions -- an equity offering, tender offering, a replacing, and a convertible offering.
But I think it will be a secret to no one that with the stock price where it's been trading recently a lot of equity and convert options are pretty restricted.
Hopefully, tomorrow the stock price will reflect our good results, and we can start thinking again about being active in the market.
It's obvious that we do have some low-hanging fruit.
We have over $300m of bonds with an average interest rate of close to 13%, which make up just under 50% of our total interest expense.
So we would be very interested in trying to take care them.
And our analysis says that with the stock price north of $6, it starts to be accretive to look at some transactions.
But it's obvious that the market is going through a depressed cycle.
Hopefully, on the back of the good news that we show and what we cover, so I think you can be sure that we have that on our desk every day, and that we have shown our ability to act rapidly to market opportunities.
But I must be honest to say that with the stock price the way it is today, our options are less than I would like them to be.
Steve Smigie - Analyst
Okay.
If you could talk a little bit about your pricing.
I think you had argued in the past, perhaps, that your pricing had suffered worse than some of the others, and so you've had the opportunity for greater price appreciation here, and I was wondering if that is, indeed, what you're seeing, and what sort of pricing you're seeing relative to where you think we are in the cycle?
Would you have expected more pricing power at this point in the cycle?
Keith Jackson - CEO
Yeah -- this is Keith -- give you a couple of pieces of feedback.
I think based on the public reports we've seen, our pricing is up more than the competition.
We're seeing numbers that are less than 1% from most of them for the last quarter.
So I do think we've recovered a little bit of that back.
Relative to the cycle, I think it's a little too early to call a complete cycle.
In Q3 we've heard many reports of particularly in distribution some inventories being built.
So, clearly, the price pressures are going to ease off a bit.
We'll see as we get into Q4 whether that is a cyclical thing or if it returns back to a healthy environment.
Donald Colvin - CFO
A couple of points just to add to that -- it's been very important for us is to stop price erosion, and unlike some other sectors of the semiconductor industry, we have not really enjoyed much price increases.
I think we announced just about 1% sequentially in the first quarter and 2% in the second quarter, where we grew 8% -- much more than that -- 8% and 11% sequentially.
So we've only really enjoyed a 3% price increase approximately since the beginning of the year.
And most of our revenue increases has been driven by favorable mix and by units.
And we believe that a last part of that can stick.
So we have not really tied to short-term high prices, and also I would encourage you to look at the comments of some of our competitors, particularly the European competitors active in our area, and they see, as Keith mentioned, a stability of prices, going forward.
So we remain optimistic that we can continue, as I said, in the guidance, to improve our gross margins going into the third quarter.
Steve Smigie - Analyst
Just one final question -- if you could talk about '05 outlook or maybe just the general cycle.
It seems you guys are maybe doing a little bit better than some of the other guys.
Keith Jackson - CEO
I don't think we're prepared to give you '05 guidance at this point.
It's a bit away, but certainly our backlog for Q4 continues to build with a strong pace, and we have no signs that things have changed from a directional perspective.
Steve Smigie - Analyst
All right, thank you very much.
Donald Colvin - CFO
Just one other anecdotal comment from Keith is that we do have, by shipping over 7 billion parts per quarter, and we exceeded that comfortably this quarter, we do have visibility into end markets, and, again, this has been a good indicator on the health of the end markets, and the evolution of our business and our backlog gives us confidence that end markets are not all that depressed.
Steve Smigie - Analyst
Thank you very much.
Operator
Our next question comes from Tristan Gerra.
Tristan Gerra - Analyst
Good afternoon.
Could you give us more color on the market share gains that you mentioned earlier in terms of what products are benefiting from that?
Is it more on the discrete side, given that some of your competitors are de-emphasizing a little bit some of the discrete market or standard products or is it more in the analog IC side?
Keith Jackson - CEO
We monitor that, Tristan, for each of the business units and, again, first quarter I think the answer was pretty much all of them were gaining.
And we don't have the second quarter data as of yet, but I think even against many of the analog competitors, they're pretty impressive results.
So I expect pretty much across the board to follow again.
Tristan Gerra - Analyst
Now, if we look at, you know, one of your main competitors, I can't understand, you know, the good Q3 guidance on the basis that you recognize revenues that sell through.
But if we look at the past few quarters, you have consistently out-performed some of your main competitors in the space, which goes beyond just the revenue recombination policy.
Is that attributable just to market share gains or is there anything else that we should be looking at as well?
Keith Jackson - CEO
Well, I think there are some market share gains there.
We have focused on really providing superior service.
We're also seeing gains from a lot of the new products we've been bringing out, and our focus into some of the faster-growing areas with those new products -- so, really, a combination of factors.
We do see for Q3, for example, with backlogs being stronger and Q3 typically being a better turns quarter; that we should have a little stronger performance than what some of the others have reported.
But, again, we always remain cautious in our guidance, but at this point I would just say that business has been healthy, and it's a combination of new products and superior service.
Tristan Gerra - Analyst
Great, thank you.
Keith Jackson - CEO
Thanks.
Operator
Our next question comes from John Barton.
John Barton - Analyst
Thank you very much.
Just back to the conversation of pricing and gross margin.
If I put together all your statements, I think what you're saying -- please correct me if I'm wrong -- is prices will go up on a mixed-adjusted basis in Q3, a little bit less than they did this quarter.
I'm surmising that most of that is from price increases that are now finding their way through the system.
The market is not such that you could go out and active raise prices for this quarter.
And then, depending on how demand unfolds as we go into Q4, we could potentially see more increases.
You are not anticipating any retrenchment or retracement of those prices.
Is that an accurate assessment?
Keith Jackson - CEO
Yes, that's a very good analysis, John.
John Barton - Analyst
Now, based upon that, you've given guidance for gross margin trends to be up in the third quarter.
If we assume a flat pricing environment as we look into Q4 and beyond, how should we think about gross margin, going forward?
How much leverage do you have left in the manufacturing facilities, et cetera?
Keith Jackson - CEO
Yes, we continue to drive the manufacturing gains.
I think, you know, we'll give more guidance on 2005 later, but we continue to have some significant gains.
For example, the announced closure of our Rhode Island factory will start kicking in early next year and provide some good gains.
The consolidation of our assembly from the Czech Republic into Malaysia will start to show some of those gains in the fourth quarter, et cetera.
So we actually do have quite a bit of steam left on the manufacturing front, even in a flat pricing environment.
John Barton - Analyst
Okay, and in all the comments, to date, I believe they've been on an ASP-adjusted -- excuse me -- a blend-adjusted basis.
How is the ASP tracked if you ignore mix?
I mean, how much are you getting out of a new product from a lift in ASPs?
Keith Jackson - CEO
Yes, I don't know that we have data that I can give you that tracks it by new products.
We just don't capture it quite that way.
Certainly, if you take the ASP increase and you look at our overall -- and the units out, and you look at the overall, the balance you get is mix, and the mix has definitely been strengthening, as Donald mentioned earlier -- and within that mix is the new products.
But, frankly, John, I don't have specific details on what portion of that mix was new products.
John Barton - Analyst
Great.
And just finally, if I could, Donald, you talked about the fact that you really can't address interest expense too much with the stock levels being where they are.
What are you actually anticipating for interest expense for Q3?
Would that vary if the stock does not move, going, at all, into Q4?
Donald Colvin - CFO
Oh, I should have update you.
I think the last conference call, we stayed at $23m expense for Q3 -- it's an omission on my part.
I should have mentioned that.
It hasn't changed since the last time, and we expect approximately $22m in Q4.
That is benefiting from the fruits of the actions that we have already taken, John.
John Barton - Analyst
Thank you very much.
Operator
Our next question comes from Dan Niles.
Dan Niles - Analyst
Keith, I think you've already touched on this a bit in one of your prior answers, but if you look out beyond this quarter into your December quarter and how backlog, et cetera, is filling in there, does it look any different than what you're seeing, you know, for the fill rates for the September quarter that you just went through -- sorry -- the June to September quarter changes on your backlog?
Keith Jackson - CEO
Yes, Dan, sequentially entering each quarter, our T+2 has been at a higher level, and that's still consistent with Q4.
So we actually -- at least at this stage of the game, see Q4 backlog building in a very healthy fashion.
Dan Niles - Analyst
Okay, just so I understand.
So the absolute dollar level of T+2, whether we were coming into this year looking at June or into September, et cetera, each one of those sequential T+2 backlogs has been higher than the one before?
Keith Jackson - CEO
Correct.
Dan Niles - Analyst
Oh, okay, great, thanks a lot.
Keith Jackson - CEO
All right, thanks.
Operator
Our final question comes from James Croom.
James Croom - Analyst
Good afternoon.
One quick question on cash flow -- do you expect to continue to generate positive cash flow from ops and free cash flow in the second half?
Donald Colvin - CFO
Sure.
I think the thing that's plagued us is we have had a lot of nonrecurring-type charges like tender premiums to pay off, restructuring charges, et cetera, and we are now seeing -- you know, getting these behind us.
The interest expense has been higher, but we're now getting that down.
As I answered the previous question, that's fallen to $23m.
Our interest expense is down just under that by a quarter -- just over 40% from the second quarter of last year.
So we are really seeing very good positive impact of all our actions -- improved margins, improved operating results, lower cost, and lower interest expense on our cash flow.
And if you exclude certain nonrecurring costs and look at our EBITDA this quarter and the way it's defined in our bank credit agreement, we came in at over $70m of EBITDA this quarter.
Our cash interest expense on a normalized basis is approximately $20m per quarter and, as I answered on the capital expenditure front, we are running about $20m in Q3 and Q4.
So with an over $70m EBITDA excluding nonrecurring exceptional costs and $20m in cash interest expense, $20m capital expenditures, the company's operations still continue to throw off reasonable amounts of cash.
James Croom - Analyst
And, Keith, in the past you guys have talked a little bit about the revenue contribution from new products, new being three years and younger.
Can you talk a little bit about that and the trends that you've seen sequentially?
Keith Jackson - CEO
Yes, sequentially, it's up a little bit -- a little less than 100 basis points on a quarterly basis but continues to move its way in the low to mid-20-percentage of the total for the company and, again, that's a number we do expect to see a steady rise, over time, across.
It's certainly higher than where it was year-ago levels and higher quarter-on-quarter.
James Croom - Analyst
Thank you.
Keith Jackson - CEO
Thanks.
Operator
Ladies and gentlemen, this concludes today's conference.
Thank you for your participation and have a wonderful day.
You may all disconnect.