威世科技 (VSH) 2002 Q3 法說會逐字稿

Thank you for standing by, and welcome to the Vishay Q3 2002 conference call.

At this time, all lines are on a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during this call, please press zero then star.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Chief Financial Officer Mr. Richard Grubb. Please go ahead, sir.

Good morning and welcome to Vishay's third quarter 2002 financial conference call. With me on the phone today, is Dr. Felix Zandman from Paris, Dr. Paul, who's in Holland, Avi Eden, who's in New York and myself; I'm here in Malvern, Pennsylvania.

Let me give a brief summary of our results and Dr. Paul and Dr. Zandman will elaborate later. Revenues for the quarter $471 million, a 3-percent increase over last quarter's revenues and in line with our guidance. It also represents a 42 percent increase over the last year's same quarter. Net earnings, before restructuring charge of $2.6 million, were $15 million or 9 cents a share as compared to earnings before restructuring charge of the last quarter were a total $17 million or 11 cents per share. So we had a 2 cents per share differential in the earnings for this quarter versus the last.

Revenues by major product lines were as follows. The active product line represented $274 million of revenues or a 1 percent increase over the second, whereas the passives at $197 million revenues represented a 5 percent increase over the last quarter's revenues. Gross margins for the actives were 29 percent, which is a 1 percent decrease from last quarter. Passives at 14 percent gross margin were approximately the same as they were last quarter. So overall, our gross margins decreased by 0.8 percent from last quarter.

Selling, general and administrative expenses as a percentage of net sales was 16.6 percent, about the same as it was the last quarter. Interest expense for the quarter remained consistent with that of the last quarter. The estimated effective tax rate for the year is now at 27 percent, an increase from the last quarter due to a shift in geographical earnings. This had a negative impact of 1 cent in earnings per share for this quarter.

Some other items for your information are as follows: Our tax balance at September 30th 2002 was $408 million. Long term debt at September 30th 2002 was $485 million as compared to $605 million at the end of the year, a decrease of approximately $120 million so far this year. Our net debt, therefore, is debt minus cash $77 million (inaudible). Backlog on September 30th of $379 million. Cash generated from operation was approximately $71 million for the quarter. Expenditures for the quarter, $4.4 million, whereas depreciation and amortization for the same quarter was $46 million.

If there are any questions about our other balance sheet items, we will answer them during the question and answer period in this call. Now -- and Dr. Paul now will give us more detail on the quarter -- Dr. Paul.

Thank you, Rich. Let me discuss some operational issues of the quarter.

No doubt, the weak world economy impacted electronics. There is general lack of confidence of consumers as well as investors around the world. The market conditions in electronics remains to be difficult. The expected broader upturns did not take place, unfortunately.

In the third quarter, we saw quite a disappointing business environment. There was no further improvement in North America and in Europe, and even we saw some slowdown in Asia, which maybe through a turn, but nevertheless it was there. There is relative stability in automotive. We saw some slowdown in PCs and in consumer, and there is weakness in telecommunications and capital goods. Our distributors across the board still suffer from slight low inventory turns; hence, the price pressure at commodity products is strong. Vishay sales increased (inaudible) versus prior quarter and versus prior year.

We achieved 471 million in the quarter. We saw the 458 in the prior quarter and 332 in prior year. This was all strongly driven by acquisition. If you eliminated the impact of acquisition, the third quarter would have been technically on the level of the second quarter, but still 10 percent above the third quarter of last year. Book to bill came in at a relatively disappointing 0.9. The actives fell back to 0.85. The passives remained slightly under one, actually at 0.96. The backlog decreased to 2.4 months or 379 million, which is still relatively comfortable. The rate of ASP decline for Vishay continued to slow down 7 percent versus prior year and only 1 percent versus prior quarter.

Let me now come to the results of the quarter and compare it to the results of the prior quarter. Based on a sales increase of 30 million, the operating margin was reduced by 3 million. The basic reason for this, at a first glance, bad incremental performance was that the sales increase just came from exchange rates and from acquisitions, which increased also the costs.

The main element of the development were a price decline of 3 million, a volume increase of 4 million, additional fixed and SG&A costs through the acquisition of 7 million, on the other hand, a cost reduction vis-à-vis the prior quarter of 3 million. If you compare the results of the quarter with the quarter of the prior year, you see the following.

Based on the sales increase of 139 million, the operating margin grew by 67 million. The main elements again were ASP decline of 28 million. Volume increase on the other hand of 75 million. No repetition of the tantalum and palladium write-down, which we had a year ago of 32 million. Additional fixed and SG&A cost through the acquisition since then by 32 million and 21 million cost deductions since last year which were quite thorough.

Some operational highlights. The inventory turns remains at the level of 2.7, which is substantially better than prior year which -- where we had 2.0 (ph). Still there is some room for improvement, you know, our (inaudible) too much better in terms of inventory turns than the past, and we had some programs on the way to improve our performance in passage (ph). There was some inventory increase due to the acquisitions by nature and to the tantalum powder.

We continue to reduce our fixed overheads in the quarter by 50 heads. The share of the headcount in low-labor countries remained at 65 percent. We expect improvements -- further improvement in the fourth quarter. The on-time delivery was okay. It remained well above 90 percent. We continue to control our capital spending in IT.

As Dick indicated, we have 24 million spending vis-à-vis depreciations of 44 million. The capacities in passage show a low utilization, only 30 to 45 percent for commodities and 40 to 70 for our specialty products. In that case, the picture is pleasant (ph) capacities are utilized between 60 and 90 percent. And what I wanted to highlight is the fact that we started to build in China, we are moving General Semi from Taiwan to that factory in Tianjin. Now, let me come to the various product lines we have, first of all 26 percent inductors. I think we can say that this business as per some recovery has stabilized unfortunately on a relatively low level.

We achieved sales of 82 million in the quarter, which is 1 percent up vis-à-vis the prior quarter and practically on the level of the prior year. The book to bill ratio was 0.95 in this quarter. The backlog is at 2.5 months. Very nice is the fact that the price decline practically has stopped. The high shield specialty product as I indicated before especially in this business of resistors and inductors helps us that this is the case. The gross margin of the lines remained at 21 percent of sales after a substantial recovery from a level of 16 percent, which we had for a few quarters.

The inventory turn back continuously improving yet now at 2.6, which of course is notifying the answer we want to improve here. We decided also to move the products to China. Coming to capacitors, the business continues to suffer from a bad economy and from over capacities worldwide. In the quarter, we achieved sales of 85 million, which is 8 percent below the prior quarter and 11 percent below prior year. In terms of book to bill, which was at 0.99, we see some stabilization. The backlog is at 2.7 months. There is still substantial price decline in capacitors of 4 percent versus prior quarter and 12 percent versus prior year.

And naturally, it is mainly the commodity products that suffer. The gross margins as per our plan is not satisfactory. It continues at a rate of approximately 3 percent of sales. The inventory turns in capacitors were at 1.5 only. And they suffered from a high level of tantalum powder. They have major restructuring underway for capacitors. We will minimize the manufacturing drastically, in North America and in Germany. We'll also move to China. We are in process to move all remaining production of Infineon Tech (ph) from Germany to the Czech Republic and we plan to consolidate two locations in Germany. Coming to semiconductors excluding Siliconix (ph), this is Telefunken (ph) small signal, Telefunken opto (ph) and power diodes, technically formally General Semi. The sales in the quarter continued to grow slightly. Altogether, this product line had quite a good business year.

Also, we see some drop in the orders in the third quarter. Sales closed at 175 million, which is 1 percent over prior quarter and 131 percent over prior year. Without acquisitions, the sale over prior year would be 21 percent. Book to bill was at 0.83, the backlog is at 2.3 million. Mainly General Semi suffered in terms of orders, which indicates some slowdown in Asia where General Semi is strong in particular. The price decline has been strongly reduced also in this product line to 2 percent versus prior quarter and 7 percent versus prior year. The gross margin continued at a very satisfactory level of 28 percent of sales. Inventory turns in this line are quite excellent. They're under 4.5.

This data as I indicated before to expense the P&G operations of General Semi for further cost reductions, you will remember that I said already that we're planning midterm to move 800 people from Taiwan to China. Altogether, I think we are quite happy to state that this organization of Telefunken basically and General Semi is a very steadily detective (ph) one, this tight control of service inventories and processes (ph). We are also in process to pick some capacity for the mix, which we have especially in General Semi as well in primary as in secondary. Last but really not least is electronics products, which in my presentation includes power MOS from General Semi. Sales in the quarter continued to grow slightly, but orders indicate some slowdown, at least short term. October looks better.

Sales, we achieved over 100 million in the quarter, 2 percent over the prior quarter, up 48 percent over prior year. Book to bill was at 0.89 and the backlog is at 2.2 million. Based on the orders slowdown as I indicated in the quarter coming from Asia, in particular from PCs. The gross margin of Siliconix continues on a very satisfactory level of 38 percent of sales, which has strongly improved versus prior year where it was 22 percent. The price decline in Siliconix has been reduced drastically. There was practically no decline versus prior quarter and approximately 10 percent versus prior year. Like in Telefunken and General Semi the inventory returns in Siliconix are excellent. They are on at 3.9.

We are very pleased, also in this case about very innovative organization controlling all operation parameters tightly, now they also focus very much on cost reduction. And also in the case of Siliconix, we worked on our capacity total mix, in expectation of the curve. I think there is no doubt that electronics are living through difficult times. It's also a little up and little down. We cannot say when the true upturns will take place. But I think what we can say is that Vishay is a strong company. We are focused on our operational goals, and we are very confident that we'll survive this downturn successfully getting out of the downturn stronger than we were when we entered into it. Thank you.

Okay, this is Felix Zandman here. I'm the chairman and the CEO. I would like to recap what Dick said and Gerald just in a few words. The sales are 471 million up 42 percent in respect to last year mainly due to acquisitions. What we saw with the acquisitions we had also upturn of 10 percent in respect to last year. It's moving a little bit in the right direction.

Cash flow $71 million, cash balance $408 million. All the debts, which we have are convertibles long term, and our net debt is a long-term debt minus cash is 77 million. In fact we have $408 million cash available for whatever we need to do with acquisitions or whatever. Earnings per share, only 9 cents per share. Times are not very good, we just hope for better in the future. A few issues concerning strategy, Vishay will continue to push in the direction to be the broadest manufacturer of discrete components. This means passives and actives, we have some areas, which we did not explore yet and we would be looking there for acquisitions.

We continue also to reinforce our measurements group by acquisitions of transducers. I would like to say a few words about it because it's quiet new. As you may know some of you at least, I'm sure, the business of the Vishay started in '62 by dislocation of a foil (ph) technology, which I developed and which consist in making further (ph) resistors, that's one base and Jim Spires my colleague developed further strain gauges.

The resistors grew very strongly to a position of couple billion dollars, which is our position today in all components. However, the measurements group, which was making foil strain gauges, sensors did not grow very much because the market is small, the sensor market in itself is maybe $70 million, $80 million. We have 40 million of it, and by far, the strongest in the world, and this stagnated. The management there did not want to expand. I didn't have time really to look into it. And now I decided to start to use talents of this group, which are very, very good.

We have excellent technical people, and to grow it vertically it needs (ph) -- how is the strain gauge used or what is the end product and then to integrate it. The strain gauge itself is a small sensor, it's a logistic sensor, which tells you -- which gives you the value of the strain or stress when your stress the structure or when you put weight on something. Two markets, the stress analysis markets, this is airplanes and cars, quite stable but small. The market, which is quite large for those gauges is the transducer market.

Scales, every scale in the world today is a digital scale, and it is operated because it has a transducer inside, which has four strain gauges amended (ph) to it. A transducer is a metal structure, especially designed to receive strain gauges. We were only in the strain gauge business. Now, we decided to make the first step to enter the transducer market. It means to deliver to the customers not only the gauge but the final transducer, added value. The market of transducers is about $500 million a year, and the next step after the transducer business is -- transducer in itself is not used either.

The next step is an instrument a passive transducer or a system where a simple system could be a scale or could be systems such as a -- for example, a rolling mill would use transducers to control very tightly the thickness of the paper going through the mill or it would very precisely measure the weight of chemicals when you make a chemical components or pharmaceuticals. This system business is quite large. We estimate it at about between $2 billion and $3 billion a year. We decided to move into that as well. So to do that, the company acquired five small companies. Three in the pure transducer business and two in the instrument and system business.

Today, all this together with Measurements Group, we have like $120 million dollar business. A small business, but it will grow. It shows already, the cost variable margin of about 50 percent but it has a potential total after restructuring zone to be in the area of 20 percent operating margins, very, very good business. The five acquisitions, which we made one, is in China. So we have right now a base in China where we can transfer products immediately. So all the four other acquisitions have transducer products, which will be transferred to China. Some of it will be left over just for service, but most of the production will be in China.

In addition to that, however, the strain gauge business itself is a sensor business, which is a high tech business, which will continue to stay in the United States. Specialty products in this area will be produced in Israel, in Germany, in France, and in the United States, and in England. Wherever the customers are, some small specialty products will be produced; but the mass production will be in China. And this should give us a tremendous possibility of improving profits and to be the low cost manufacturer to be able to penetrate the market.

The market is quite large, but there are a lot of very small companies. All of them are in the area of $5 million, $10 million, $15 million, $20 million; and the same thing with systems, except for a few very big ones, which -- who also are driving (ph) that, such as Siemens, for example. They also are in systems. I don't think we'll compete with them; but in the area in between, we will enter and try to tap into this $2 billion market. We are exploiting the technical knowledge in the company -- the technical strength in the measurements is driving this area. We, in fact, have trained people how to -- or show people on how to make transducers.

But today, we entered into this market, and already we are of course there. This will be a nice addition to our traditional component business. In the component area, we continue, of course, with acquisitions. Time is now very good for that. Many companies are available at good prices, and we are very underlined -- very actively looking at it presently. So I hope that some acquisitions in the passive or active areas will come online soon. In conclusion, the company is strong management-wise. I think we have excellent management in terms of execution, planning and so on.

Balance sheet in a good shape. Cash is strong. We just have to pass the recession. During that time, we are reducing our overheads and absorbing acquisitions. For example, our General Semi acquisition and Infineon on the IR -- infrared systems on Infineon, which we acquired -- are doing very well. The acquisitions have been well adjusted; and synergies obtained are both planned and some more underway, as explained by Dr. Paul. I still believe the future is fine. There is nothing, which will stop electronics to grow.

But when? That's the main question. We don't know when the upturn will come. But in meantime, we have to do what we have to do to reduce cost, produce profits. And we used this area -- this time of low activities to acquire and digest the acquisitions. And thank you very much. I think we are now open for questions.

Ladies and gentlemen, if you wish to ask a question, please press the 1 on your touch-tone phone. At this -- at that time you'll hear a tone indicating your line has been placed in queue and you may remove yourself from queue at anytime by pressing the pound key.

And our first question comes from the line of Jerry Labowitz, Merrill Lynch, please go ahead.

Yes, thanks. You told us about how much incremental sales acquisition over the past year in the quarter, can you also describe to us what these acquisitions would have added on the bottom line?

Most of the increased sales -- most of the increase came from General Semi and from Infineon and the incremental performance of that is better than 15 percent operating margin.

So, they would have been a poor contributors to the 9 cents in the quarter?

I would say, yes.

Okay. Thanks.

Our next question comes from the line of Patrick Parr with UBS Warburg, please go ahead.

Good morning. You mentioned in the press release that price was a (inaudible) gross margin and I'm curious where you saw the most disappointment in the outlook for price in September quarter?

Well, as I had tried to indicate that resistors and also semiconductors showed relatively good picture. Resistors have no price decline anymore and semiconductors (inaudible) a quarter, the price decline respectively also come to a stop. Just a price increase really, which created it.

Okay. And so, much as you can have an outlook of the future, what would you expect to see in each of these products based on the fourth quarter?

I think -- we said that in our press release that the fourth quarter revenues would be flat or down slightly, and we don't make any predictions as far as the earnings or for the gross margins yet are concerned.

Okay. Second question regarding the SG&A -- how much should the recent acquisitions add to SG&A, and again, what's the outlook for that on moving ahead?

Gerald, I will take that.

I didn't hear the question. I'm sorry.

What he asked, whether -- how much was the acquisitions added to SG&A. In real dollars, I think, it's somewhere around $4 million in total and it added sales almost a comparable position to that. SG&A as a total percentage of sale only remained 16.6 percent.

As we noticed, in the (inaudible) conversation is that restructuring in our salvations (ph) are -- will continue and these sales were just added during this quarter and we have not even started to - completed with our reduction, so we anticipate more reductions.

Quickly, I add the following. In terms of -- if you compare to last year, in terms of manufacturing, fixed and SG&A together, this number I have attained, all the acquisitions together added 32 million. Now, this includes additional manufacturing fixed costs.

Okay. Okay. Thanks.

Our next question comes from the line of Shawn Severson with Raymond James. Please go ahead.

Thank you. Good morning.

Morning.

First of all, on the ASP (ph) going forward, are you able to give any idea of whether we're going to see sort of a re-acceleration of ASP declines, or whether you think, based on current business trends, that we're going to be at the current level for the next quarter or two?

Okay. Maybe, I'll go by business on what I see. I believe that in resistors, the price decline really will not accelerate. A major portion of our products is specialty products. And I think we are quite confident that there's stability. In capacitors, unfortunately, we have to assume that the price decline for the commodity product, which is relatively high in sales (ph) of capacitors, will continue.

Whether it will drastically increase? I personally don't think so, but nobody knows really. I don't think it will continue. In semiconductors, we see the opposite trend. Since quarters, it seems that (ph) price decline from one quarter to the next is slowing down really.

Okay. In terms of the acquisition environment, have you seen a better -- you know, a better pricing environment in the past month or two, as business conditions have eroded or that there's enough time yet to make a material change there?

Yes, there is a better pricing environment -- quite better, yes.

You think that that's -- you know, if business conditions, like they are, does that mean that, in the next month - months, there are going to be a lot of things that will, kind of, be for sales if you want to look at that?

Well, that's the way it looks. We are seeing continuously companies, which are directly or indirectly trying to position themselves for a sale. Some large companies, like Phillips, decided to divest themselves from certain portion of the semiconductors, which we'd expected for sometime, and some smaller ones here and there. And I can't tell you more, because we are discussing it all the time. In acquisitions, in general, the pricing is good.

Yes.

It's better than it was, much better than it was.

Yes. And then, just lastly, on a flat revenue environment, can you at least give us some idea of what would happen with margins, you know, assuming pricing pressures, sort of, reaccelerate really just at the capacitor side? Is there any reason to think gross margins wouldn't be flat on flat revenue?

Okay. Normally on a flat development of the sales, we are able, under normal circumstances, to offset the price decline by cost reductions.

So he says, "Yes, flat."

Okay. Thank you.

And your next question comes from the line of Tom Smith with Standard & Poor's. Please go ahead.

Yes, good morning. I wondered first of all if you could repeat the depreciation number. There is a lot of echo on the phone. And also the tax rate went up because of some geographic differences in selling. I wonder how much of that will repeat?

Okay. The depreciation for the quarter was -- and amortization was $46 million, and the capital expenditures are 24.4. As far as the effective tax rate that is provided on a nine months basis of 27 percent, I anticipate that could be the effective rate for the year. For the fourth quarter it would be duplicated (ph) again.

Okay. Thanks very much.

Our next question comes from the line of Matt Sheerin with Thomas Weisel. Please go ahead.

Yes, thanks. Good morning. Could you talk about the savings that you expect to get from the shift of manufacturing to China and also to Eastern Europe in both the passive and the active business -- particularly, if you can give us a timetable, you know, when we would expect to see savings kick in?

It's quite complex because there are many projects ongoing business consolidated but as the rule of thumb, we would expect something like $20,000 to $25,000 per person moved roughly. And if you move for instance 800 people on General Semi your (inaudible) to multiply it's a major contribution. This will kick in. In this case, I have to plan directly in the memory. So I think this will kick in starting in the second quarter next year, and it will happen within, say, two to three quarters.

Okay. And in the passive business, you talked about expanding into China. Can you give us a timetable there?

Okay. We're working on that. Still, we have (inaudible) facilities we have to expand. This will kick in -- the continuous move for products that we have, and we have (inaudible) of approximately start mid of next year.

Okay. Okay, great. And then, also could you give us your inventory levels for the quarter?

Yes. Rich, you may have it at hand. Don't have the number at hand at the moment.

I have it. We have it, Gerald. It's 556 million in total.

Okay. Do you have a breakdown of raw materials versus work in process and finished goods?

We do, but we've never given that out. Can we deliver that later, afterwards?

Okay, and then one last related question. Did you take any (inaudible) during the quarter from Cabot?

Yes, we did.

You did.

Yes.

Okay. Thank you.

Our next question comes from the line of Ellen Chae with Prudential Securities. Please go ahead.

Good morning, Bob. I thought that you had said that you have about 65 percent of your headcount now in the low cost regions. And I was wondering if you could give us a sense of what that might look like by (inaudible)?

Well, we may add another 3 percent, roughly.

And is that your ultimate goal or could you give us a sense of...

It's higher than that. It's approximately 75.

Okay. And could you also tell us what you feel on your month into the quarter now? Have you seen anything different? You mentioned that Asia has slowed. And has that improved in the current quarter?

Well, October looks better than -- in Asia, in particular, in semiconductors than the third quarter.

Any differences by your industry segments?

Excuse me?

Was there any differences by product categories in terms of any changes from last quarter to current quarter?

Especially power MOS vendor (ph), Siliconix product.

Okay. Thank you.

Maybe, I can add the inventory split, which I just said, we had 172 in raw materials, 161 in the in-process, and 218 in finished goods. Okay.

Our next question comes from the line of Waheed Odzabian (ph) from Bear Stearns. Please go ahead.

Thanks. Is there a correlation between your capacity utilization and passive and also the price decline? And the question is moving forward, will you get to a certain percentage of capacity utilization where, you think, you'll see price stability there and perhaps, even leverage?

(inaudible). I don't understand the (inaudible). In fact, at the moment the utilization of the capacity is more, because we do not take all low price products by nature. So as soon as prices become reasonable -- and we have our cost reductions programs in place, of course, then by nature (inaudible) lower end in participating in additional businesses.

All right. And so far, in the month of the October, how has your PC business been looking like?

Recovered (ph).

And unless I missed this, but your SG&A guidance for December, moving forward -- did you provide that?

No, we did not.

Okay. Thanks.

Our next question comes from the line of Ted Kundtz of Needham & Company. Please go ahead.

Hello, everyone. A couple of questions. Gerald, could you talk about the gross margin situation at the capacitor levels? You mentioned 3 percent is what it was in the quarter, and I think it was about that in the last quarter. What is really hurting you there? (inaudible) pricing; is it the tantalum powder prices really hurting you margin?

No, (inaudible) much. It's a combination of (inaudible) of low volume, which we have, and the price decline. This is the basic -- these are the basic reasons for that -- for the margins drop. And if I had to rank between the prices and the volume, I would take the volume as being the major reason. But those are to make it (inaudible).

Okay. The other question I had, what kind of inventory levels do you see out there in the channels? Are inventory levels at your customers moving back up or are they pretty stable?

They are stable at the moment. I can only judge distribution because we have feedback. They are working -- they continue to work down. They started again to work down the inventory levels. It's not going up, it's going down but of course at the price of a relatively low order rate.

Okay. And Dick (ph) one question for you, what's the expected tax rate for next year?

I would say right now based on the conditions that exist today that we're probably looking somewhere at 27 to 28 percent range. But it all depends upon the transfer of jobs and the profitability that these jobs do in countries that have a lower tax rate and it's not all plain paying out but that number will greatly come down.

Okay, thanks.

Our last question comes from the line of Herve Francois from Credit Suisse First Boston. Please go ahead.

Yes. Thank you. Can you give us what your end market breakdown percentages were in the September quarter?

Well, we don't follow it by quarter. But I'm absolutely happy for the values. I don't know by quarter.

Can you kindly give us what you are seeing out there for the fourth quarter? Which kind of markets are you expecting to outperform versus others?

There is no style (ph) at this point for sure. But we see the highest stability in automotive. Automotive in our business was relatively the best.

Okay. Thank you.

Okay. I want to thank you for joining this conference this morning. We will be -- as I said the -- on tape after a couple of hours later. And I look forward to coming out of any new company guidance that we may be able to as the quarter progresses and get to you with any new answers. (ph). Thank you.

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