威世科技 (VSH) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Vishay second quarter fiscal year 2004 earnings conference call. At this time, all participants are in 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 the call, please press star, then 0. As a reminder, this conference is being recorded.

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

Good morning. Thank you for joining us for the second conference call of the earnings for 2004. Before we begin, Bill Clancy, our Corporate Controller, will read our customary opening statement.

You should be aware that in today's conference call, we will be making certain forward-looking statements that discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements. For a discussion of factors that could cause results to differ, please see today's press release, and Vishay's Form 10-K, and Form 10-Q filings with the SEC.

Thanks, Bill. Dr. Felix Zandman is here with me today, the Chairman and CEO of Vishay. And Dr. Gerald Paul is with us on the line from Germany. I will first, go over summary information about our second quarter. And later Dr. Zandman and Dr. Paul will elaborate.

Today Vishay reported second quarter earnings per share that were in line with our guidance back in April of 2004. Net sales of 647 million dollars represents a 20% increase over the second quarter of last year, and a 1% increase over our first quarter of 2004. Earnings per share before restructuring charge of 1 cent was 23 cents a share, and represents more than a 200% increase over the second quarter of 2003, and a 15% increase over the first quarter of this year. Revenues by major product lines were: the Actives $321 million; the Passives, $326 million, approximately 50/50 split between total revenues. Consolidated gross margins of 26.1% were up over 6% when compared to this year's first quarter, and over 37% when compared to last year's second quarter. Gross margins improved in both or Actives and Passives over the first quarter. Active's gross margins for the second quarter were 29.2%, up from 27.3% in the first quarter. Passives were 23.1%, up from 22.6% in the first quarter.

Selling, general, and administrative expenses were 15.4% as a percentage of sales. This consistent rate was achieved despite increased costs associated with Sarbanes-Oxley compliances. Interest expense of $9 million for the quarter is consistent with the first quarter, and about $700 thousand less when compared to last year's second quarter, mainly due to reduced interest rates. The effective tax break for the year remains at 30%. Our cash balance at the end of the second quarter was at $639 million, a $57 million increase for the quarter. Our long-term debt has decreased over $100 million from last quarter, due to the issuance of shares of common stock to settle a portion of our lines convertible at the first put-date of June 4th, 2002. Long-term debt, now, at the end of the quarter was $737 million, of which all are convertible.

Total inventory at the end of the quarter was $537 million, essentially flat from the first quarter. Working capital at the end of the quarter was $1.2 billion. Bookings for the quarter were $636 million. Backlog at the end of the quarter was $607 million. Cash generated from operations for the quarter are $80 million. Capital expenditures for the quarter were $33 million, and are still expected to total $175 million for the year. Depreciation and amortization for the quarter was $49 million.

Total headcount for Vishay's employees is 27 thousand, of which 71% are now in low-cost areas. And as stated in our earnings release, our guidance for the third quarter is basically flat. We do not expect to see any significant increases in earnings and revenues into the fourth quarter of this year.

Dr. Paul will now go over some of the operating results. Gerald?

Thank you, Dick. Let me, first of all, talk about the economic environment which we have seen in the second quarter. Well, first of all, we must say that the friendly market economy worldwide, which we have seen already in the first quarter, principally also continued to exist in the second quarter. And this supported the good business climate, of course, also, for electronics. Relatively high backlogs for the end of quarter 1 were leading to sales increases in quarter 2. This is true for Vishay, and true for the industry.

Also what is true for the industry is that since May, we have seen some slowdown -- modest slowdown, but slowdown -- of the orders across the board. We believe that this is not the introduction of a down turn, but it's more likely a reflection of shortening lead times in combination with some seasonal effects which we see. What has really happened is that mainly Asian and European distributors have corrected the backlogs downward. We talked to OEMs and to EMS and we have to state that they all remain optimistic. The maturity of these people remain optimistic. In fact, we see a good forward load in general.

On the other hand, there are no shortages of supply anymore, and there's limited potential for further price increases. Telecommunication, networks, as well as mobile phones, are strong in Asia and Europe; automotive, across the board, shows steady growth; industrial is strong in Asia and there's a solid development in Europe and the United States. Consumer continues to be strong in Asia and relatively weak in Europe. Laptops are principally down versus the first quarter, but they expect a recovery for the rest of the year.

Talking about the business development of Vishay, sales in the quarter increased somewhat less than expected, due to declining orders since mid-May. Sales selectives, to a large extent still are limited by capacities. In the quarter, we achieved record sales. Record sales since the first quarter '01. 640 million is the indicated, vis-a-vis 641 million the prior quarter, and 538 million prior year. Excluding exchange rates, this is an increase of 2% versus prior quarter, and of 17% versus prior year.

The backlog is on a comfortable level of 2.8 months, book-to-bill in the quarter was .98, with Actives at 1.02 and Passives at .95. Approximately two-thirds of the backlog is shippable within three months. We still see a very low level of order cancellations. The price decline for all Vishay products has slowed down further versus prior year. We have experienced a 5% drop in the quarter, vis-a-vis prior year, which means 4% for Actives and 5% for Passives. Versus prior quarter, the prices stayed virtually constant, slightly down between 0 to 1%. Altogether we believe that the business is in the phase of a stabilization and a comfortable level, and everybody continues to be optimistic, as we see, for the mid-term future.

Talking a little about the results which we achieved, and giving some background. If you compare to prior quarter, we see that based on 6 million higher sales, the operating margin has improved by 8 million, namely from 62 to 70 million. The main elements were a volume increase with an impact of class 11 million, and price decrease, still slight price decrease, of 5 million. If you compare the results to prior year, you see that based on 109 million higher sales, the operating margin improved by 43 million, from 27 million to 70 million. The main elements again, volume increase, improved results by 66 million, price decline brought it down by 32 million. And we have seen the results of our cost reduction, especially on the variable costs of 10 million, plus, vis-a-vis prior year.

Let me talk about another few highlights in operations. We have kept the inventory turns at 3.5. Within the quarter, as Dick said before, the inventory stayed virtually constant, which is individually true for raw materials, [Inaudible - highly accented language] process and finished goods. We continued to reduce the share of employment in high-labor countries from 30% to 28.8% in the quarter. Long-term target, no change. It remains at 20 to 25%, and we are gradely approaching that.

Despite strong capacity load, we continued to choose our fixed headcount slightly, 11 people in the quarter, 26 people, year-to-date Delivery performance has kept at a level better than 93%. The lead times were reducing in the quarter, with a capacity's increasing slowly and the orders somewhat weaker than in the first quarter. The capacities are mostly loaded in Actives, and we are in process to expand. The capacity load for Passives has stabilized, but in no major expansion of equipment is needed. We spent 33 million of capital in the quarter, versus a depreciation of 46 million, but you will ramp up in the quarters to come, mainly for capacity increases in Actives. We continue to restructure the Company according to our plans. Our target is 27% only in high-labor countries at the end of the year, and you have seen we are on the way.

Now let me talk a little about the product lines. Let me talk about resistors and inductors first. The business continued to grow on a high level, and virtually all of the resistor lines run well. Sales in the quarter were 151 million, which is up by 4% versus prior quarter, and up by 15% versus prior year. Again, when eliminating the impact of the exchange rate. Book-to-bill was at .97, which in reality, indicates stability. Backlog was at a comfortable level of 2.3 months, and the gross margins remained at the very satisfactory level of 32% of sales. Inventory turns improved to 4.1, and we see a solid financial performance, practically across all lines, in particular, also, for the low-end product, which is the commercial thick film chip.

The real high performance in resistors are the SMD Wire Wounds, the foil resistors, the MELF resistors, and the thin film resistors. We also see first impacts of our restructuring efforts in the non-linear resistors, which was part of our BCC acquisition at the end of 2002. The gross margin has grown here to greater than 18%, in the meantime, and we will continue to improve.

Our major projects are ongoing, and I named them. The MELF move to [Inaudible - highly accented language] resistor move to Israel, thin film expansion in Israel, the move of non-linear resistors to China, the move of Dale Resistors to Mexico, and the move of Sfernice Transducers from France to the Czech Republic. So all together, very successful line, and we are very confident for this growing and profitable business.

Talking to Passives, which in the last year was the most problematic part of our product portfolio, and we have seen some recovery in the quarter. Sales were 143 million, up 4% versus prior quarter, and 15% versus prior year. Book-to-bill was at .92, backlog at 2.5 months. The reduced order levels basically came from tantalum commodity capacitors, which only had a comparatively small impact on the P&L. The gross margin improved to a level of 10% of sales, but the improvement mainly at this point, came from our specialty resistors, which really start to see the impact from our restructuring projects.

The price development was somewhat disappointing. We had a 10% decline versus prior year, and a 2% decline versus prior quarter, so the price decline was slowing down, but still it's remarkable. All this is driven, basically, by tantalum molded capacitors, and to a lesser extent, by MLCCs The inventory turns of capacitors improved slightly to 2.3. Tantalum and powder and wire inventory now is stable. Capacities in tantalum capacitors are utilized to approximately 65%, and our restructuring projects are ongoing. We moved film caps to China, and also tantalum caps to China. Well, let me reconfirm at this point in time, the potential of 15% gross margin for this business, as soon as all the restructuring projects are implemented.

Measurements group continued successfully. Sales in the quarter over 32 million, which was 7% below prior quarter, and 2% below prior year. But on the other hand, we saw a book-to-bill at 1.06, which already indicates some improvements, say, around the corner. The backlog was at 2.4 months. Inventory turns at 2.4, and the gross margins remained at quite an excellent level of 38% of sales. We continue our efforts to restructure, and we are confident to see even better results for the time to come.

Siliconics, very successful division, continued its high order intake in the quarter, and especially the high order intake in the previous quarter led to record sales and backlog, which now approached year 2000 levels. And we are still limited in siliconics by our capacity [Inaudible - highly accented language,] but for the second, for sure, we have been still limited. Sales in the quarter were 122 million, which was 2% over prior quarter, and 34% over prior year. Book-to-bill continued very strong at 1.17. And this led to a very high backlog of 4.2 months, and naturally still long lead times.

Gross margin has improved to 31% of sales, mainly driven by the lower usage of subcontractors. We are expending our in-house packaging capacity. Inventory turns of 5.1. The price decline has been virtually stopped versus prior quarter, and substantially been reduced versus prior year. We have seen a 3% decline versus prior year in a 1% decline versus prior quarter. To increase the capacities remains the first priority in siliconics, and some impacts will already be seen in the course of '04. There's an unbroken strength in this business and we expect further improvements of sales and profitability for siliconics.

Now, the broad portfolio of other semiconductors in Vishay, which comprises, general semi, small signal from Telefunken, and opto-Telefunken. The business continued in the second quarter at record levels, and it further improved profitability. The sales in the quarter were 199 million, which was 1% over prior quarter, and 14% over prior year. Book-to-bill was at .92, basically because of distribution adjusting the backlogs, especially in Asia. Backlog, on the other hand, is at comfortable 2.6 months. Gross margin is improved to a level of 28% of sales, now. There's a further slowdown of the price decline, also, in these products. We had no price decline versus prior quarter, and 4% price decline versus prior year.

We did implement in the second quarter, some selective price increases, especially for power diodes. The inventory turns were at 4.8, the capacities are virtually fully loaded. In particular at rectifiers and photo modules. The lead times have been reduced, somewhat, to more normal levels of 8 to 10 weeks. As I indicated before, we are on the way to increase the capacity in channel semi, that means, for power diodes by 20%, annualized by the fourth quarter this year, and we are going to increase the capacity for modules at SMD LEDs, also in the course of the year by 10 to 20%, annualized.

Summarizing, this broad product line is a very nice and very broad business, high potential for higher sales and profits mid-term. May I summarize the whole situation? Can do it very shortly. There's no question that we continue to live in good times, and Vishay definitely's preparing for further growth. Okay. May I pass on to Dr. Zandman?

Thank you, Gerald. We had a good quarter. You heard the numbers from Dick and Gerald, so I won't repeat it. I will address some issues concerning strategies at Vishay.

Number one, the importance of bill of materials. We started to push very strongly the issue of putting Vishay on as many bill of materials as possible. Why is this important? Very simple, if the name Vishay, or a certain product of Vishay, is not on a bill of material, then there will be no request for quotation, and therefore no possibilities to get an order. Therefore it is paramount for Vishay to get on as many bill of materials as possible, not only for new products, or future sales, but also for most of the past sales, which represent, like, 90% of the market. Because of our introduction of a free sample service, the results have been so good, and so stronger appreciation by the market, that many engineers request that the purchasing departments to include Vishay into bill of materials where Vishay was not there yet.

Other results, we were swamped, really swamped this request to put Vishay on bill of materials. Today we have 5 engineers working on crossing line items, and we have, like, 1 thousand -- 1 thousand line items per day crossed from competition to Vishay on a bill of materials. I am confident and sure that with time, this will produce more and more requests for quotations from Vishay, and therefore a stronger penetration and possibility of getting more market share. So that's one issue which we'll continue to push, and we're going to start now in Asia, and later on begin Europe.

Now, we have announced previously that Vishay is get involved in start ups. In fact, we have acquired, now, one company in Israel called RF Waves. It's a wireless company. It has 12 designers in the area of digital and analog competent RF designers. They have their own product of chip sets for audios, computers, and games and they're selling those products already to a tune of about $2 million a year, just up-starting situation. The potential there is enormous, and as soon as we announce inside the Company that something like that is starting at Vishay, there are many, many other items, other markets, rather, opened up for possibilities in this area. It is a very large emerging market, but it will be not only used for, by RF technology, but, also, by infrared. As you know, we are quite strong in infrared, but yet, a lot of development is required there. We are quite confident that this RF Waves company which we acquired will be quite successful. We are quite excited about it, and you start to push, it is our first protege, and there will be more acquisitions in this area.

The general strategy of Vishay is as before, R&D and acquisitions. The start-up will put Vishay core business in the forefront of new markets. We therefore, we continue to have R&D in each division separately to push the division's products, which we have, actually, which we are, actually, every division has its own R&D group producing new products in their own competence, and pushing their own market. But in addition to that, complimentary we'll have new R&D, which our divisions are not involved in. This is the first effort, now, by us, by acquiring this RF Waves to put Vishay into this direction. I'm quite optimistic for the future of the Company. I see that the markets will continue to expand. Our role is to make sure that our core business is strong, and we advance in our core business, which is Active and Passive discrete components. And now, by adding some additional R&D from areas which we did not have competence, like wireless, will help us very much to grow further.

Thank you very much.

Now, we'll have -- open to the questions, please.

Thank you, ladies and gentlemen. If you wish to ask a question, please press star, then 1 on your touch-tone phone. You will hear a tone indicating that you've been placed in queue. You may remove yourself from the queue at any time by pressing the pound key. Once again, if you wish to ask a question, please press star, then 1 at this time. One moment for our first question.

And we have a question from Patrick Parr from UBS. Please go ahead.

Hi, guys. This is Ben Luke, for Patrick. Dr. Paul, can you talk about when you began to see the slowdown in the quarter, and whether that was spread evenly across different geographies? I know you also talked about how the trend has continued into July, but has the order flow, so far in the September quarter, improved versus June, or has it stabilized? And when do you expect that to pick up again?

Well, basically, we've seen it at the second half of May, really. And it came from, basically, it's very strong from distribution. And in this case, from Asia, first of all, and from Europe. And we interpreted this, it, and I still stick to that, as a backlog correction. People have built up a lot of backlog in the first quarter. And basically, they corrected that. That is my opinion. Basically, July is no further decline. It's basically at the same level as we seen in June, altogether, which is not abnormal. I do not know the future. I don't know when things will turn back, but we are not talking low levels, really. Understand, it's only relative to a very strong first quarter. Nevertheless, our turning point, normally, is September, and I think we are not alone in expecting that.

But you expect August to also be flat versus July?

August is August. I mean, August is never a record month, as a matter of fact, throughout the world. We believe that maybe depending on the area, end of August, in the far east more, and in Europe in the first half of September, things normally turn.

But if July was flat versus June and August, is roughly similar, then you need a really big turn around in September for the quarter, for the entire quarter to be flat versus Q2.

Well, don't forget our backlog.

Okay. Then, the last question for you is, is there any need to accelerate your capacity extension at Siliconix? You guys only spent 33 million in CapEx this quarter. You still have, you know, a lot less --

It's not a mater that we don't want to do, it or slow it down. It's a matter of delivery times, really.

And there's the issue of getting the equipment from your suppliers.

Yes, it's equipment and building foundries. There's a time constant in the whole thing. We would like to build up faster.

Right.

But there is a time we cannot overcome.

Okay. Great. Thanks.

Thank you.

Thank you. We have a question from the line of David Pescherine from Smith Barney. Please go ahead.

Good morning. Dr. Paul, maybe on the Siliconix, just a little bit, can you just give us an idea of how much capacity was actually added in this past quarter?

The past quarter not much was added, really. Not much. It's really what you expect is, and I said this before, that in steps during '04, we are going still to expand on an annualized basis by 20%, and we plan to increase by another 25% in steps, again, annualized in the next year.

Okay. So we should expect by December there's going to be, you know, another 5 or 10% additional upside possible from the revenue standpoint?

As I said, we do our utmost to bring up the Siliconix capacity.

Right. So then, the nice improvement in the gross margins then in Siliconix, can you just help us understand that just a richer of business there?

Very simple. Very simple. It's practically constant. Fixed cost is very disciplined as an organization. Basically, what we have seen is better variable margins. Variable margins on the costs, due to the costs, we have a much low are utilization of subcontractors, which brought our margins down in the first quarter.

Right. Just on the pricing fronts, it sounds as though the pricing environment was, although it was better than last year, not as good as you had anticipated coming into the quarter. It sounds like we're still seeing quarter-over-quarter declines when you -- where maybe, actually, expecting to see things being flat, to up. So can we expect that pricing will actually improve later in the year, or could improve into next year? Or are we kind of in a mode where pricing is now settling back into the, kind of, 5 to 7% year-over-year declines, and we should expect sequential declines, going forward?

I believe improvements as we go come from the volume, not from the pricing, because indeed, the whole industry's building capacity, and this is, of course, there are limited chances to bring up prices further. But what I'm convinced that these enormous drops in prices which we have seen, 2001, 2002, '03, they are not in the -- they are not foreseeable at this point. It's a normalization on a more normal price decline for Vishay. This will be something between, say, 4% per year, 5% per year, depending on the economy.

And, then just one final question, Dr. Paul, just on the seasonality question. If you can just clarify, kind of, what the normal seasonality is for Vishay over the entire year, because I think last quarter, someone had asked what the seasonality may be coming into September and at the end of the year, and you indicated that you don't normally see very much seasonality at all, and now we're saying that seasonality is impacting us through the September quarter. So just generally, what should we expect, kind of, throughout the year, how the seasonality should play out?

I like to underline that indeed Vishay is not seeing a big seasonality from quarter-to-quarter. But, of course, which you talk orders, in particular, we talk sales basically, right?

Mm-hmm.

So throughout -- through a quarter, where the orders are relatively weaker. You have a backlog to live from, normally, right? We are talking in sales only minor variances. We are talking 1, 2, 3% or so. And this, of course, is not covered by my statement, which I think I did, that the seasonality doesn't play a big role. But it's not so that one of our quarters is 20% down or 15 vis-a-vis the others out of seasonal reasons. This is what you would have if you adjusted Europe, for instance --

Mm-hmm.

-- or France, but we are worldwide. But there is some seasonality, of course, some. And normally, the summer quarter, in terms of orders, is not -- only in the second half of the summer quarter, the orders normally get stronger.

Great. Thank you, very much.

Thank you. We have a question from the line of Steven Fox with Merrill Lynch. Please go ahead.

Hi. Good morning. Couple questions. First of all, from the standpoint of the summer, what's the risk that the summer quarter could be down slightly, given the 30%, or so, of your sales is in Europe? How slow is Europe going to be, I guess, is my basic question?

Basically, we only have a third of our business in Europe. So the summer quarter is always, in terms of sales, relatively slow in Europe. So basically, I think I don't know how much we can really elaborate on the third quarter.

I don't think you can say anything more than we already said, as far as the flatness as is anticipated.

And then in terms of the restructuring, Dr. Paul, if you looked at it over the next 2 to 4 quarters, I've lost track a little bit of what's been completed and what's not. What are the savings opportunities that are still ahead of the Company and how would it play out over the next 2 to 4 quarters, please?

Well, we are going to continue to establish our programs. I didn't update the numbers but we have not changed any of our plans. That means, especially as I name them, we are working especially in resistors and capacitors. On semiconductors, there is only limited potential, maybe some work on the finishing portion in Europe. But, altogether, let me see, the total impact was an annualized 50 million, roughly, out of this, for sure, half of it is still open.

Thank you very much.

Thank you. We have a question from the line of Michael Walker with First Boston. Please go ahead.

Thanks a lot. Good morning. Still trying to process, kind of, what came in on the top-line versus what you had been expecting before. Considering it was all in the second half of May, it almost feels like the second half of may really took a dive. And I guess my question is: How much of it is your sense was fundamental-end demand versus the distributor inventory corrections you talked about in Europe and Asia? Do you think the inventory accounted for all of it, or do you think there was a genuine softening in demand relative to what you had expected?

Okay. I believe also distribution has seen, not necessarily a decline in POS, but they also may have seen some decline in the order rate. But I believe most of it -- of this decline in orders came, really, from a correction of their commitment. They didn't want to commit that much because, I think, they over-committed a little after the first quarter.

Okay. So do you think that they have worked through that over-commitment by this point or at least by the end of Q3, so that we don't have to, kind of, worry about that being a potential issue in Q4?

Normally as I said, our whole business, the turning point in the year of the business, and this is what not only what Vishay thinks, I think it's basic in the industry, a basic expectation in the industry, that in the course of the third quarter, say by starting midway in August until September, things will go back to a growth pattern.

Okay. Thanks. And my second question is just on the Passive side. You talked in the past about how you see your Passives business as being a delayed-cycle aspect of the model, and you saw, kind of, capacitors starting to kick in a little bit last quarter. I do see the gross margins were up a little bit. But I'm also seeing the book-to-bill, you know, falling back below 1, here. So I'm wondering if you think that the real -- the acceleration of Passives is ahead of us? Or have we started to play out on the Passives?

I believe it's clear that we are -- the Passives will be driven, basically, by our cost reductions programs. And this decline in orders, which we have seen slight decline in orders, basically came from commodity capacitors. These commodity capacitors do not impact the P&L to that degree. So we count, very much, on the implementation of our cost reduction project, as I said. And they're well on the way, move to China, basically.

Okay. Thanks.

Thank you.

Thank you. We have a question from the line of Steve Smigie with Raymond James. Please go ahead.

Great. Thank you. I was just curious. In terms of the capacity expansion you talked about with Siliconix, you had -- I do not believe you had included the Tower Semiconductor deal in that, and I was just wondering what the timing of capacity ramp with Tower Semi might be, and how much that expansion might be as a potential revenue if you give them together?

You mean -- did I understand right on the Tower Semi part?

Yes.

Okay. So basically, what we want to do is, we are going to increase general semi by 20% annualized in the course of this year. And we expect, let's say, on the other part of this other semiconductors, we are going, also, to expand in opto, the opto-products, also by 10 to 20% in the course of this year, annualized, always. 20% per year annualized by end of the year.

Okay. And then also on the Siliconix, you talked in the press release for them about the fact of doubling the capital investment relative to '03?

Yes.

I was wondering if that's different from previous expectation?

It's true. So, basically, we have to expect increased capital spending in Siliconix is under way for our projects. And this year, we are spending in Siliconix, don't know the number exactly, but around 50 million, which is substantially up vis-a-vis prior year.

Gerald, I think he wants to know, also, what the effect and when the effect of the Tower situation.

Well, well, clear. So, basically, I tried to say before, that we will see an increase in capacity by 20%,annualized in steps again, during the remainder of this year, and by another 25% in steps during next year.

Right. I understand that. My understanding was that Tower Semi was in addition to that, and I was trying to clarify that point.

Tower is part of it.

It's part of it? Okay, great. Thank you, very much.

We have a question from Lee Zeltser from Needham. Please go ahead.

Hey, guys. Couple of questions. First off, how much would you say on a weekly basis did inventory in the channel increase sequentially? Was it 2 to 3 weeks, a little higher than that, possibly?

Excuse me, did I not hear the beginning of the question.

Sure. With regard to inventories in the channel, how much would you say was the -- on a weekly basis a sequential increase? Was it 2 to 3 weeks. Was it something more substantive than that?

You mean in the channel -- in distribution, really?

Yes that's correct.

Basically, distribution increased during -- since the beginning of the year, I would say, altogether by approximately 8%. This is what I say. And most of it happened, of course, in the second half. So, but it's not a -- it's not a drama. I mean, normally with a POS increasing, if they have increased in the course of the year, the inventory increase at distribution is not substantial, as a matter of fact, according to my judgment. I do believe that they wanted to decrease their commitment, as a matter of fact. That means they just ordered less, as a matter of fact.

Understood. So 8% since December for both --

I would say approximately, yeah. I would say 8% over in half year, and most of it's happened in the second quarter. Judging it from our distributors, of course.

So essentially first half of '04, versus second half of '03?

Right.

Okay. The Active business was up about 2%, sequentially. Seemed like a about the bit of a lag relative to what some of your competitors posted for the second --

Capacities.

-- yeah, it's capacities? You were just not able to issue -- to ship out enough product?

You could have shipped much more, if we had had the capacity, but we are doing our utmost to build.

Okay. Okay. And you talked about the issue of being capacity constrained in the semi part of the business. I would think the price prospects would still be fairly strong going into the second half of the year. Can you talk about your expectations there?

Well, basically, we have seen, you know, historically, quite a price pressure also in semiconductors, at discretes, I mean, within the last three years. And this has slowed down dramatically in the meantime. You know, we do not have practically any [Inaudible - heavily accented language] anymore, quarter-over-quarter. And for sure, at the point the price decline will, to a degree, come back, but I do not expect a substantial price decline to happen this year, still. There is still not a shortage of supply, but still it's not a surplus of supply, either. It really is a quite a stable situation, so for the rest of the year, we'll expect price stability, really.

What would you say your lead times are at Siliconix?

Lead times are high. We are not really on a location, but we really -- really, de facto, have implemented a special consideration for our good customers, as a matter of fact. So I think we have for our normal customer that comes in between 12 and 16 weeks.

Okay. Okay. And last question, a quarter or two quarters ago, you talked about some gross margin targets, I believe, at about $2.7 billion revenue run-rate. I want to say something like in the order of 30% gross margins, 15% operating margins. Can you just review those targets, and talk about their feasibility, and when you feel can you get there?

Basically, I'm familiar with an operating margin target, really. And I think it has been stated, and this can be re-confirmed that at the level of 2.7 billion, Vishay is good for 15% operating margin.

When do you feel you can get there, in terms of the work that needs to be done?

Given the same economy and given enough capacity, it's a very foreseeable thing.

Okay. All right. Thank you, very much, guys.

Thank you, we have a question from the line of Chris Lippincott from KeyBanc Capital Markets. Please go ahead.

Good morning. I was wondering if you could break out, perhaps a little bit of for the September quarter what you're seeing in terms of some of the drivers vis-a-vis pricing versus volume? Are we seeing the pricing still, essentially, stable or, perhaps, starting to fall off again? Or is it more of a flatish volume? What are some of the drivers in, kind of, the mix there?

Well, basically, as I just said, I believe relative price stability on the Active side for the rest of the year. Depends really how the economy will develop, but this is all we can -- this is what I would expect here. Because we do expect a relatively good second half to say it, frankly. We do expect that business comes back in the course of the quarter. Well, it didn't go away, but to improve to even to higher levels. So I do expect price stability on the Active side. On the Passive side, really, we are only talking -- we are not so concerned about it, because Vishay, as we stated before, is to a high degree in specialty products. And on the specialty products, really, the price decline didn't really -- was not a relevant factor, even in the decline of the years 2001 and '02. Basically for the commodity part of the Passives, I would foresee price decline, also, for the second half of the year.

Okay. And then the second question that goes back to the distributors, although it sounds like they've certainly reduced their commitment, has there been any conversations you've had or heard relative to the end of the year that they would perhaps boost their commitments, yet again, to move that demand back to, sort of, a stable level again?

No, there has not been a discussion like that, but we talked, of course, to OEMs and CEMs, and the response we got was fairly optimistic. What they talk about is a nice, predictable forward load that means they are quite optimistic for the second half of the year.

Okay. Thank you.

Thank you. We have a question from the line of Andrew Hang from American Technology Research. Please go ahead.

Thank you. First, can you give me an idea of what percentage of sales is through distribution?

Approximately 45%.

And the next question, historically, is the March quarter down, sequentially, relative to the December quarter?

Well, as I said before, Vishay in terms of sales, does not see a big seasonality. The reason is clear. We are selling in all parts of the world, nearly equally strong, which doesn't mean that you won't see a 2%, 3% -- this is -- this is not what we refer to. In principal, there's not a big impact of seasonality. And it's true that in the second quarter, the orders normally tend to drop off and pick up in the second half, say, of the third quarter.

And then can you give us a sense of roughly how much closure you have on the automotive sector?

We are -- we sell to all the segments, but automotive is approximately 17% of all our sales.

Thank you.

Thank you.

Thank you. We have a question from the line of Thomas Dinges from J.P. Morgan. Please go ahead.

Hi. A couple of quick ones for you. Dr. Paul, what was the change in the amount of subcontractors that you used at the Siliconix division it quarter? It had been somewhere around 25 to 30%, did it change all that much this quarter at all?

Well, all our profits in variable margin, came from lower usage of subcontractors, so it was substantial. [Inaudible - highly accented language].

Did you use, you know, 10% less, or something like that? Is that about --

Maybe. Maybe. But I wouldn't really -- I would have to recalculate that, but it was a major contribution. So basically, the improvements of Siliconix results did not come from volume, did not come from fixed costs, not from price, came from the variable costs, and this really was subcontractors.

Okay. And then, secondly, just a couple of questions for Dick on the modeling going forward. The -- what's the expectation for share count over the next quarter, and what's the expectation for the interest add-back on the convertibles given where the stock is right now?

The details of the earnings per share computation are part of the press release. You can get it there, it's pretty well drawn out there. But the number of shares will be in the 200 million share range. Also, in the interest add-back will be continually in the, I guess, be 4 million, 5.

Okay. Thank you.

That's also drawn out for you in the press release.

Okay.

Thank you. We have a question from the line of David MacGregor from Longbow Research. Please go ahead.

Yes, Dr. Paul, could you just go back over the Passives, and talk a little about tantalum and ceramic market conditions. You went through that rather quickly, but I think you said that tantalum was weaker than ceramics.

Yes.

And I was just wondering if you could maybe elaborate.

Well, no. Basically what I said is the following: that we had a nice performance in our specialty capacitors. That means we had some restructuring projects on the ceramic disks, on the aluminum capacitors, and so on, and so on. So really, not in the main battlefield, which definitely is tantalum molded and MLCCs, really. So we had a success, and the progress we had, in terms of profits, came from the specialty side of the business at this point. Still, we are working quite heavily on restructuring on the commodity part of the business. We are moving molded tantalum capacitors to China, for instance, but this one will kick in as we go, only this is just a start. But it's true, the market conditions for tantalum molded did not develop completely as we had foreseen them. It was more heavy -- it was heavier price decline to be noticed there. To a degree, I believe, also in MLCCs, but we are not really participating in MLCCs in the commodity part of the market. We are more in commodities -- and, excuse me, in automotive. Sorry.

And just so I can understand. What is the percentage breakdown between your specialty and your commodity within your capacitor line?

We have approximately, let me count. If I count MLCCs as commodities, we would say approximately 50/50, 60 maybe commodity, 40 specialty, roughly.

And anything in the case size mix going on that's notable?

Not to my knowledge. We have not seen a major shift there.

And then, just finally, on Walson, if you could talk a little about your experience with that so far, and the extent to which that might be a positive contributor.

Well, we are just in the process to develop the resale business. You are talking Walson, right?

Yeah.

Yes. We are developing that [Inaudible - heavily accented language] interest at our customers. Not really an automotive in this case, we have our own manufactured products, but there are some others -- distribution for instance, and other customers, other OEMs that are interested in Walson, and it's a good product, and price competitive. But everything takes always a little longer than you think, so establishing such a resale project took a little longer than we thought. Despite that, we have doubled the sales this year, vis-a-vis the prior year.

Last question deals with acquisitions. Dr. Zandman, I guess, asset values are getting cheaper. What is your latest set of priorities and how imminent might acquisitions be?

Well, we usually don't discuss that. I can only tell you that we are active in that. We are looking all the time, and what we say is looking at are small and large acquisitions. If you look at Vishay's balance sheet, you wouldn'd be shy of acquiring a company of 1 or $2 billion sales. It's a possibility if the right target comes in line. If we don't, we can't discuss other things. So what I'm answering is yes, we are -- want to do that. We are very much interested in that, and, in fact, because the share values are lower and lower, the likelihood of a good acquisition to come along is good now.

With respect to Siliconix, does -- you're facing some capacity issues there that have been widely discussed here, and I'm just wondering to the extent you might be able to comment on this. Does it make sense for you to be looking at complimentary companies with small degrees of overlap, or do you just buy a fab from a larger company that's pulling back?

It's possible. You know that you made a contract with Tower, the subcontractor. We may buy some companies in this area. It depends on the price and the position of the company. We may. We might.

Okay, great. Thank you, very much.

Okay, we have time for one more question.

We'll go to the line of Mark Hessenburg with Nottingham Capital. Please go ahead.

Good morning.

Good morning.

You have some very good information coming from your electronic distributors, the key electronic distributors, in terms of what they're selling and what they're buying. So as you saw that slowdown occur in May, what can you tell us about their sell to and what kind of inventory reductions do you think you saw in the last [Inaudible - background noise] quarters.

Basically, I just have information including May, as a matter of fact. June is relatively fresh. I believe that the inventory increase was not dramatic in the course of the year at all, but the backlogs became high. And what we have seen is to a greater extent, a correction of the backlog than a correction of the inventory. This is what I think.

Backlog is declined or there were --

Well, the order level came down. This is exactly what we talk about since the second half of May, which was really driven strongly by distribution in Asia and Europe, and the interpretation which we have is really, which is also confirmed by some discussions, that the commitment had to come down to a degree.

So you're saying that the distribution business slowed down, not that they adjusted their inventories?

I believe that they really affected the backlog, which is a difference, right? But I think the [Inaudible - highly accented language] process to adapt the inventory to a degree more in Asia than in America, for instance, but this is not a big thing, as I believe.

Thank you, very much.

Okay. Thank you, very much for attending this conference call. As you know, if there are acquisitions that are coming up, Vishay is always obliged to announce that, and we will when it becomes apparent. Thanks, a lot.

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