威世科技 (VSH) 2004 Q4 法說會逐字稿

Ladies andgentlemen, thank you for standing by. And welcome to the Vishay fourth quarter and year-end earnings conference. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for questions. Instructions will be given that the time. If you should require assistance during the call, please press star then zero and as a reminder, this conference is being recorded. I would now like to turn the conference over to Chief Financial Officer Richard Grubb. Please go ahead, sir.

Thank you, and thank you for joining us here for our year-end conference call on the financial results of Vishay. 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 10K and form 10Q filings with the SEC.

Thank you. Joining me on this conference call today is Dr. Felix Zandman, Chairman, Chief Technical Officer and Business Development Officer of Vishay and our newly-appointed Chief Executive Officer, Dr. Gerald Paul. I will make some brief remarks on our results for the fourth quarter and full year. Dr. Paul will go into much more detail about our operations and as usual, Dr. Zandman will comment on M&A activities and our strategies for the future.

If you read our current earnings release, it has a lot of details in it. I want to go over some charges that were -- what we call beyond normal operations. The major charges that included in this year earnings and quarter-year earnings are as following: For the quarter, we incurred restructuring charges of $40.2 million and for the year, the total was $47.3 million. This was basically because of a pre-announced restructuring closing of a plant in Kolmar, France and also some operations in our European activities.

We also had some asset writedowns for the quarter of $27.3 million, which was the same for the year. During the fourth quarter of this year, we had made some decisions to rid ourselves of some factories that were closed in previous years and to accept reduced offers on the sale of those buildings and we wrote these assets down to a net realizable value.

In addition, we had some equipment that was earmarked for capacitor expansion in China. We tried to do away with that project, and we had some equipment associated with that that we took a loss for, also.

Most of you previously have known about a previously-existing [talon inflating] contracts that we had that were long-term. We've adjusted those contracts as we had over the last two years to represent what we think are the future, negative unfavorable amounts will be affecting the earnings.

So, we took a charge of $16.6 million for the year. Which was taken in the fourth quarter. The effect of these charges and the related tax effects, also net of a favorable tax settlement, would have increased earnings per share for the quarter from a loss of 0.33 to a profit of 0.01. And for the year, from a profit of 0.27 to a profit of 0.59.

Net sales for the fourth quarter did decrease approximately 5 percent from last year's fourth quarter and over 7 percent from the third quarter of this year. The decrease for the quarter is a result of a continued drop in distribution sales, a decline in direct business, and a decrease in average selling prices across all major product lines. Gross margins for the quarter also suffered because of the reduced sales and the decrease in the average selling prices.

On a consolidated basis, the gross margins for the quarter were 18.9 percent compared to 24.1 percent for the third quarter of this year, a 5.2 percentage point decrease. Approximately one-third of this decrease was due to reduced average selling prices while the remainder was due to volume and inventory reductions.

Gross margins for the year were 23.7 percent, compared to last year's gross margins of 22.4 percent. This improvement was achieved due to the increases in volume during the first nine months of this year, which offset all the effects of a 3 percent decrease in average selling prices.

As you can see, there is a great deal of margin sensitivity to volume and Dr. Paul will discuss our outlook into 2005 later.

By product line gross margins for the quarter were: Actives are 22.3 percent, versus last quarter of 27.8 percent. Passives were 15.5 percent versus last quarter's 20.4 percent. And for the year, the actives had a--gross margins of 26.8 percent versus prior year's of 26.1 percent and we had also seen an improvement in the Passive area, where gross margins for the year were 20.6 and the prior year was 18.8.

Selling in general and administrative expenses on a year-over-year basis decreased from 17.5 percent of net sales to 16 percent of net sales. Mainly as a result of increased sales. Interest expense of approximately $8 million remained consistent and constant over all four quarters due to our fixed cost debt. Other expenses for the year is mainly due to interest income and foreign exchange losses.

Now, the tax rate on a pro forma basis was 30 percent. By that I mean is that if you acquire about all the unfavorable and our extraordinary items that we had, we would have ran about the projected 30 percent for the year. We anticipate running 30 percent for the year 2005, also.

But the actual tax expense was affected by, A: a favorable tax settlement in the fourth quarter and non-benefited losses due to restructuring, or asset, write-offs.

The cash balance at year-end was $638 million, an $82 million increase in the year. Long-term debt at year-end was $752 million, substantially all of which are convertibles. Total inventory at year-end was $518 million. Working capital at year-end was $1.2 billion. Bookings for the quarter were $487 million. Bookings at -- backlog at year-end is $440 million, from $34 million less than from the beginning the quarter.

Cash generated from operations for the total year was $238 million; capital expenditures for the year were $159 million, while depreciation and amortization was $197 million. Total head count at year-end was 25,800 employees, of which 72 percent are in low-cost areas.

I stated in the earnings release, our book-to-bill for January was very well at 1.1. For 2005 to be -- [ inaudible ] -- for the fourth quarter of 2004. Dr. Paul will go into more detail. Gerald?

Thank you very much, Dick.

Well, I think it's clear that Vishay had a very good 2004 but a difficult fourth quarter. The economic conditions on our markets were clearly worse than we had expected. And all this despite a relatively friendly market economy in most of the countries we operate in. The fourth quarter was still determined overall by a reduction of inventories in the various supply channels we have.

Distribution continued to reduce its inventory, which is a process that has been started already mid of the year. The reduction, which took place, really happened mainly in the U.S. and in Europe. Asia did not reduce as much, I guess this is going to come still, but America and Europe have reduced and in this case, we already see improved orders, which, altogether, brought book-to-bill of distribution substantially up.

On the other hand,. [ indiscernible ] Business has suffered across the board in all regions in this quarter, but fortunately this seems to be a temporary effect. The start into 2005 was promising. We have the book-to-bill of more than 1.1 and this is a broad thing, you see. It's not only focused on one line, this happened in virtually all the lines we have.

Naturally, the lead times in the fourth quarter have come down further and consequently, the pressure on the selling prices has increased. This happened mainly for the factors as we see it.

Now, let's talk a little bit about the various markets and the environment on the markets. Now, first of all, the Industrial market segment, worldwide continued strong, was strong all over 2004, no exception for the fourth quarter, strong. Automotive was solid in Europe and in Asia, but relatively weak in the United States. Consumer was disappointing worldwide. There are inventories. Networks was softer than expected in general. Chiefly, seems to be delayed somewhat in Europe. Mobile phones were strong in Europe but were softening in Asia and some were disappointing in the United States. Computers, there are some indications for two high inventories still in the pipeline, basically in desktops. Avionics, Military and Space were strong in the U.S. and in Europe.

Well, altogether, the outlook for 2005 is good. There is optimism on the market and to start into 2005 seems to justify that.

Now let's talk about the business development of Vishay. The low order level of the third quarter led to disappointing sales in the quarter. Also the expected turn-around of quarters for the fourth quarter did not materialize. We achieved sales of 542 million in the quarter, versus 584 in the prior quarter and 567 million in prior year.

And beyond that, the exchange rates even helped the quarter by 10 million versus prior quarter and by $15 million, 1-5 million, versus prior year. So, it was a substantial drop in sales. And the sales drop came basically from distribution.

Book-to-bill improved slightly versus prior quarter from .84 to .90. Mainly, it was .86 for Actives and .94 for Passives. There was a recovery of book-to-bill for distribution from a very low .65 in the third quarter, to .94. On the other hand, the [Dietic] business has suffered in the quarter and the book-to-bill went from 1.03 to .87 and as I said before, all regions were concerned.

The bank note at the end of the quarter was at 2.4 months. There was quite abrupt return of the price decline. We have seen 2.5 percent decline versus prior quarter, which is a high number, but only 3 percent versus prior year. What was under pressure really were the Actives. We had 3.9 percent versus prior quarter and 3 percent versus prior year. The passives continued at a modest rate of decline. We have seen minus 1 percent versus prior quarter and a 3 percent decline versus prior year.

Now, some highlights of Operations. Inventory returns were kept stable at the level of 3.3, despite the lower sales. We achieved that by reducing rip and finished goods inventory by $14 million in the quarter, but if you exclude the -- the exchange rate effect, really, the reduction was $26 million, quite substantial. And $27 million vis-a-vis in the whole year, vis-a-vis the end of 2003.

Of course, this inventory reduction has hurt our P&L as I will say later on. But on the other hand, it has improved the cash flow. It is our policy to keep tight controls over inventories. Namely in finished goods and process. Inventory in raw materials increased by 12 million in the quarter. If you, again, exclude the exchange rate, it was 8 million. And all of this came from -- [ indiscernible ].

Overall, the fixed costs decreased by 5 million in the quarter. We have continued to reduce fixed personnel in the quarter by 120 heads. We continue to decrease the employment in high-labor countries and -- in the quarter we went from 28.7 percent to 28.2 percent. In the year, we came down from 31.3 percent to 28.2 percent. If you look to absolute numbers, we reduced 630 people in high-labor countries in the year 2004.

The ratios could be better, but we had to adapt capacities at the end of the year and this mainly took place in low-labor countries, otherwise the percentage points to high labor would have been even lower, but we continue on this very important cost reduction programs, we have ongoing programs.

The on-time delivery performance of Vishay was stable at a level better than 93 percent. I am very happy to be able to report that we have closed the Kolmar facility, that's a factory in France, which will start in major savings in the year 2005, and I'm very happy to report that all of this went smoothly, which is not always the case when you do something in France. All our other restructuring efforts are in line with the plan and we have started to integrate the MRC acquisition.

Capital spending in the quarter was 70 million, versus a depreciation of 50 million, all according to our plans. For the total year, we have spent capital of 159 million versus a depreciation of 188 million.

Very important for us, in December we have decided for another major program to cut fixed costs. Our target is to cut 5-0, 50 million, fixed cost annualized and we have defined all steps, we're already in the process to implement it. We implement it in steps during 2005. Impact to be seen soon.

Now, let's talk about the results and the reconciliation of the securities results versus prior quarter. Based on 43 million lower sales, actually 52, again, excluding the exchange rate, the operating margin decreased by 36 million. It went down from 45 to 9 million. The main elements of that were the volume decrease, which contributed negative 22 million. Selling price decrease, 13 million negative. Then altogether, the reduction of inventories, the minus 4 million on the other hand, the fixed costs were better by 5 million. Basically, also, not only the volume and the selling prices contributed to this decrease of results, we also had inefficiencies caused by the volume drop that were offsetting cost reduction.

Altogether, the negative impact of our inventory reduction on the quarter was about 6 to 8 million, if you take on top of the volume absorption--the lacking volume absorption, also the inefficiencies. But this, as I said before, our policy to control fixed inventories and then process tightly.

It was definitely a difficult quarter. With non-satisfactory results. [Inaudible] by low volume, by a strong price decline but also by the consequences of our capacity decreases, but, after all, we decreased the inventories and did not raise it -- raise them.

Now, if you compare the results versus prior year, we can say that based on 26 million lower sales, 40 million lower without the exchange rate again, the operating margin decreased by 20 million. From 29 million to 9 million. The main elements were volume, again, contributed to negative 14 million, price a negative 17. Inventories helped by 8 million. We had less [inaudible] and the fixed costs were better by 3 million. Basically, the same mechanism. The variable cost reductions were offset by the inefficiencies which we incurred in the last quarter.

Now, if you compare the years 2003 to 2004, of course, the picture is much nicer. Based on 243 higher sales, 162, again, higher without the impact of the exchange rate, the operating margin improved by $80 million, from 106 to 186 million, in fact, really, 2004 was our second best year operationally ever. Main elements were volume increase, contributed 142 positive. ASP decline, 110 million negative. Inventory lower obsolescence 18 million; positive fixed costs higher by 7 million which came only from depreciation. And we had better variable costs by 32 million.

Now, let me go through the major product lines and I'd like to start as usual with resistors and inductors. Well, the weak orders of the third quarter have led to a substantial deduction of the sales volume in resistors and inductors. The sales in the quarter were 125 million. Which is down 8 percent versus prior quarter and 4 percent versus prior year.

Book-to-Bill for the system inductors improved from .94 to .94 from .87 in the last quarter. Which indicates some stabilization. [Hecklock] is at 2.3 months at the end of last year. Gross margin has reduced to 22 percent of sales, mainly due to the lower volume and to the inventory reduction.

Price decline in resistors was low, continued low. Level of prior quarter, 1 percent decline versus prior quarter; 2 percent decline only versus prior year. There is some increased price pressure for fixed film resistor chips, but this is only a smaller part of our sales in the resistors. We have defended the inventory terms, I think, at a very acceptable level of 3.8 yb adapting capacities quickly.

Capacities are utilized lower than in the previous quarter, 60 to 70 percent for a standard SMP product; 90 percent for [ fin fill ] resistors; about 50 percent for leaded resistors. We have established thin film resistor chip capacity in Israel and we are ready for shipment to customers in the first quarter '05 now.

MIC integration, this has been started, I said it already. Based on synergies we expect to have 3 million savings annualized as we go. There is progress for our new product family, the SMD fuses. We see they're quite a substantial opportunity midterm. And all our restructuring efforts in resistors continue according to plan. Resistors and inductors continue to be a solid and profitable business, which currently, like other businesses, suffers from lower demand. But a turn-around, which we have seen in January, is also true and is visible for resistors. We are optimistic for this very profitable line.

Capacitors were also impacted in the fourth quarter by the overall weak demand. Sales in the quarter were 116 million, down 11 percent versus prior quarter and down 10 percent versus prior year. Book-to-bill was at .93 in the fourth quarter, which recovered -- which is a slight recovery from the .90 of the third quarter. Backlog was -- is at 2.5 months. Gross margins reduced to only 3 percent of sales. Again, the same reasons, literally the same reasons as for resistors. Lower volume and inventory reduction.

Price decline continued at the low rate for capacitors, also. 1 percent down versus prior quarter and 4 percent down versus prior year. Capacity load was lower in the fourth quarter than in the third quarter, approximately 50 percent, 5-0 percent. Inventory turns improved for capacitors to 2.4, despite the low sales volume. We have reduced [inaudible] process and finished goods in the quarter by 7 million. Again, if you exclude the exchange rate impact. Tantilum powder and wire inventory, on the other hand, increased by 8 million, as I said, in the quarter due to the lower production rates.

Restructuring efforts in film capacitors, they continue. We have started to close all facilities in Germany and the Czech Republic and we are in process to move to China and to India. We also have decided in the context of our program, our new program, to reduce fixed costs to further streamline and concentrate intantilum capacitors. Regarding capacitors, we continue to work to reduce costs and we are very critical with inventories, we manage them tightly.

Measurements Group has showed more stability in the quarter than the other businesses -- well, as I said before, they have a different business cycle. Sales were 31 million in the quarter, practically on the level of prior quarter; 2 percent below prior year. Book-to-bill was at .94. Backlog was at 1.9 months. It's the nature of the business somewhat thought, with backlog. Slight -- there was a slight drop of the gross margin, to still excellent 33 percent of sales. We had a one-time effect of inventory evaluation. Inventory turns improved to 2.5. The integration of the five [inaudible] acquisitions continues, the relocation of production is virtually finalized. We now work more on the overhead there.

Potential -- there is potential, quite a potential for another acquisition in the field of transducers, SI technologies and if this came on board and we count on it, this should enhance noticeably the profitability of transducers through synergies. Just to emphasize that, Vishay within three years has built a profitable niche business, helping to stabilize its financial performance. The Measurements Group is a very important part of Vishay.

Coming to the Actives and to Siliconix, it was quite a disappointing quarter. I have to admit, for our most innovative divisions. There was -- the very low order intake in the third quarter has led to a substantial reduction in sales in the fourth quarter. The low shipments really came from Asian -- to Asian distributors was continued problem for Siliconix. Sales in the quarter were 107 million, 10 percent below prior quarter and 5 percent below prior year. The book-to-bill continued at the low level, .79 in the quarter, versus .68 versus -- excuse me, .79 in the quarter. Versus .68 versus in the prior quarter. The backlog is at 3.1 months. Gross margin dropped to 23 percent of sales. Mainly driven by lower volumes and prior strong price erosion. Inventory turns were at excellent 4.7. Price decline, unfortunately, has come back quite abruptly, minus 5 percent versus prior quarter on the other hand, 0. Stability versus prior year. Lead times, very short. Capacity utilization in Siliconix, down by about 5 percent.

The expansion programs, which I already explained the past, are on the way and will position Siliconix for the next upturn. It is very important for us because it also enables us to migrate to the eight-inch technology. Also in this context, I can report that we will get a $15 million grant from -- in Germany, from the government for establishing the 8-inch technology in the German facility of Siliconix.

So, we believe that Siliconix continues to have a very high potential for the future but it's through at the moment. There is a lack of volume. But we're pretty sure that with a turn around of the business, this will help Siliconix tremendously. The variable margins are good.

Talking about the other semiconductors. The business continued to suffer from the weakness in distribution, especially in Asia. Sales in the quarter were 163 million, which is 9 percent below prior quarter and prior year. Book-to-bill recovered slightly to .90, after .87 in the prior quarter. Backlog is stable at 2.1 months. The cross-margin has dropped to 22 percent of sales. Lower volume, the reduction of inventories and increased price pressure also for these semiconductors burdened the quarter. Price pressure has restarted, we have 3 percent price decline versus prior quarter. And the 5 percent decline versus prior year.

The inventory turns were defended, I believe, at an excellent level of 3.9. We have reduced inventories in the fourth quarter, despite the low volume, by 11 million, when you exclude the exchange rate. Very short lead times for these products, also. Capacity load has decreased in the fourth quarter to 60 percent, for low power diodes and 60 to 75 percent for the infrared product.

Power diodes, on the other hand, and SMD LED's run quite high with a capacity utilization of 80 to 90 percent. We have closed, as I said before, the Kolmar plant and we are moving the production already---have moved the production to China and to Hungary. All of this went very smoothly.

The China move of power diodes has been implemented by approximately 25 percent and it will be finalized in steps in 2005. The Kolmar and China move together, and I said this before, that Kolmar and China move together will lower our costs by more than 20 million annualized, quite substantial improvement.

We also announced the smallest packages for power diodes, just recently to smallest on the market. Altogether, like Siliconix, we are very comfortable with these product lines. It's a profit of a growing business. Which suffers at the moment, temporarily, as we believe. But the upturn, as we also believe, is visible already.

Now summarizing and looking ahead, I think Vishay for sure had a quite disappointing quarter in terms of revenues and profits. We suffered from low volume, coming from lower-than-expected sales in combination with our envision to further reduce inventories. In addition, selling prices went down more than we had expected and all divisions were concerned.

On the other hand, the year 2004 in total was very successful for Vishay, actually as we pointed out. The second best in our history, operationally. We increased sales by 11 percent. Profits from operations more than doubled vis-a-vis 2003 and we generated free cash flow of 79 million as Dick indicated.

We continue to shape the Company for the future, by starting to expand critical capacities, by continuing cost reduction across the board, and by introducing new products and processes. I do believe that Vishay continues to be on the right track. We are looking ahead with confidence. The worst on the market seems to be behind us. As I said before, orders in China show a substantial increase--- and this increase even without Asia clearly having started again. And the market economy in the -- in the countries we work in seems to remain healthy.

Furthermore, we are in process to implement an aggressive plan for cutting 50 million of fixed costs annualized, which will start to bear fruit soon. All of this on top, of course, of our other cost reduction efforts like the closing of Kolmar and the move of general semi-packaging to China.

For the first quarter, we expect sales approximately on the level of the fourth quarter '04. But margins should improve due to lower costs but also due to a slowdown of the inventory reduction, which we had in the fourth quarter.

Thank you very much, and I would like to pass on to Dr. Zandman.

Thank you, Gerald. As you know, I would like just to make a few comments. First, to repeat again it was a disappointing quarter. We can't hide that. However, the January outlook looks much better as the book-to-bill is 1.1. Also, the restructuring of about $75 million, and other charges positions, us -- the Company quite well for the year 2005. Gerald talked about it and also in addition to that is a $50 million reduction of overheads and some $30 million plus reduction due to closing of Kolmar and other facilities would help a spot.

The future presently looks much better than the last quarter. We generated free cash of about $80 million, which is important. It is one of the gross of Vishay, it's a major goal for us, to create continuously free cash. This helps us for the future when you have to make a large acquisition, we have a good cash position and we can move very fast. Now, a few words about the new management.

Dr. Paul is our new CEO. You all know him. He is eminently qualified and has my full trust and full support. He's just terrific and will do a very, very good job as a CEO. This has been a planned succession since many years. I have been grooming Dr. Paul. We have been working as colleagues and then step by step I was passing to him more and more responsibility and time came for him to become the CEO.

The next layer of management, after Dr. Paul will resign, will retire in 10 years from now, something like that, he is in place and is being trained by Dr. Paul and myself. My position has not changed as concerns the Chairman of the Board. I am still the Chairman of the Board and intend to stay like that. Until I don't know when. I don't intend to retire. But in addition to that, because I let a lot of responsibility to Dr. Paul and a lot of work as a CEO, which was passed to him now, I will pass a lot of time in -- as a CTO, Chief Technical Officer and Chief Business Development Officer. You notice, I have been working in those areas for quite a time.

On the beginning, as a matter of fact, Vishay started those technical inventions which I have made in the [Field] of Resistors and developed this way. I also contributed here and there with my technical contributions but I plan to pass to -- plan to spend tremendous amount of my time now as a CTO and as in the past, for business development with acquisitions.

What I will be involved in: First, coordination and supervision all R&D projects and to streamline it and focus stronger. B: synergies in existing R&D groups. A one group helping the other.

As you know, Vishay acquired many companies and each company had its own very strong engineering background. Unfortunately we were not able to harmonize it and put one group helping the other so that you would get more synergies in the engineering areas. This would, as a result, produce new products -- new combined products, like putting some products together. And a much faster and better R&D output.

In addition to that, I will be working to help -- to vertically integrate the Company and for special projects. Vertical integration means putting many Vishay products in one package, like we tried on the DC to DC converter to do it recently, quite successfully, as a matter of fact; selling quite well and growing now. Already the sales are close to a million dollars in the first year and we hope that it will be much more in the future, lots of design wins and lots of samples have been placed of this product.

Furthermore, also we developed a new capacitor based on silicon, sub strait, this has been never been done. It is a completely new approach. Much better product in terms of frequency response. The business mostly starting there. Very big interest in that. Many, many samples placed and many designings already.

And we are working now in Tantilum on completing new products. I hope this type of approach will be very fruitful.

There, the second part in vertical integration is Measurements Group. We started with a group of trainees just making only $40 million a year. We added to that through acquisitions this time, not development, just acquisitions. Transducers, instruments and systems and already we have, in this group, over $120 million. And the [ SIA ] acquisition which we hope will pass to us somewhere in a few months or so, besides the contracts already on that, this is a question of SEC rules and things like that. And this group, FNG from $40 million will be soon $160 million.

Furthermore, we started to invest in start-ups. Why did we do that? We believe that new technologies which we don't have, such as chipsets, especially in the area of wireless technologies, will help us to prepare ourself for the future. For that effect, we have acquired higher waves, start-up from Israel with very eminent people, very competent people in this area. They have developed already some products, which have much less noise and less power consumption. For example, in Munich last November, not to recall in f I already told you that or not, we have made a very significant demonstration to the public, whereby we compared our product to competition and by turning on -- or off microwave oven, which was in the vicinity, competitive product would be very noisy. Ours will be just the same way. There will be no change in quality of the music.

That's just the first development in that and we have to continue in this area in a much stronger way.

This strategy of the company really didn't change except for investment in start-ups. So, broad line and well-positioning of the company, be No. 1, No. 2 or No. 3 with all of our customers and, in fact, most of our products are in this position. With our risks number two through sample deliveries at no cost, materials increase, 93 percent on time delivery and survey shows that our service is good and getting better. Furthermore, strong R&D reports which I talked to before, in the business and in new start-ups. Strong balance sheets, we have that. Strong free cash generation is one of our goals. And we will continue with acquisitions as in the past. And eventually I believe that in the future looks better than last quarter of course, and certainly good on a medium and long-term exist. I am optimistic for the future. Thank You.

[Caller Instructions] And our first question will come from Kevin Kessel with Bear Stearns. Please go ahead, sir.

Good morning.

Good morning.

In terms of the restructuring saving expected in 2005 of 23 million, do you expect to see the full quarter impact, I guess that would be 5.75 million or so in March?

You mean the -- the Kolmar closing and the move, or the new program?

No, not the new one, the one that you spoke about --

Kolmar you see immediately and the other one comes in steps during 2005.

Do you have an expectation for when it will begin to phase in? Will it be in the second quarter?

Well, continuously, because we're in the process to move lines. We have started already to have completed about 25 percent.

Okay.

And as we go now, principally we go line by line.

Okay.

So it will kick in. I think it should be over -- I think the plan is approximately third quarter it will be implemented completely by the end of the third quarter. And you can say it's linear.

I see. In terms of pricing pressure, your expectations for pricing pressure in the March quarter, it sounds like there's an expectation for less pricing pressure than there was in December. Would that be true? And can you quantify --

Many contracts negotiated at the beginning of the fourth quarter and we saw a major impact from there. I would see---- this was mainly for Actives, you know, Passives really continued at the low price decline rate, at least our Passives, where we are heavily in specialty products. I would anticipate that the price pressure for Actives would not continue at the same rate as we have seen between the third quarter and the fourth quarter.

Okay. And in terms of the -- the long-term goals, I guess, for margins, both gross and operating margins, I think, have dropped in this quarter, at the lowest level they've been at in almost a decade for some. Do you still look at 30 percent gross margin and 15 percent operating margin as achievable?

No question about it, but nothing has changed. It is as we said before. We have suffered in this quarter from low volume, from sales, and on top of that, we reduced inventory, which I thought was a wise decision. Because it doesn't affect the future in such a way. So, we are very careful with the inventories, but of course, even reduced now the rate of the inventory reduction.

Right. And on inventories, you mentioned obviously that the reduction in the U.S. and Europe, but not so much in Asia.

Yes.

Does Asia look like it might still take a couple more quarters before they return to normalized ordering patterns or?

We anticipate that it will take some time still in Asia, but it all depends on the P.U.S. If the P.U.S. comes up, then they look at their own inventories in a very different way.

I understand. And the last is a housekeeping question on the share accounts---expectation for next quarter, it appears that, think the [Li-ons] were probably anti-dilutive in December. Is there an expectation for what your account would be going forward into March or into '05?

Again, we -- we expect the quarter to be better than this quarter. Back on track. So, I mean in all likelihood, although I don't ---I have to go through the numbers when it happens, the lines would be dilutive.

I see, and they are at 3 percent, is that right?

That's correct.

Do you know the balance at end of the quarter?

Of the debt?

Yes.

The lines debt, about 133 million.

Great. Thank you very much.

You're welcome.

Thank you. We will now go to Steven Fox with Merrill Lynch. Please go ahead.

Hi, good morning. Could you talk a little bit about some of the underperforming businesses on the Passive side and what you would could do to get the gross margins to higher levels? Is there more restructuring that's needed? And would you consider a divestiture of any of those businesses?

Yes, Steven. The point is resistors did not really underperform. It's -- they were lacking volume. And on top of that, we have reduced some inventories there. So, I'm optimistic for resistors, we have continued restructuring, for instance we are building a thin-film resistor line in Israel and other things more ongoing.

France is moving to the Czech Republic, so, no, I don't want to comment too much on resistors. They are very well performing and will perform again as soon as the volume is better. But we continue to restructure on top of that.

Capacitors used to be our problem all along and not our---not only our problem, as a matter of fact. It's a difficult line. We were on the way to better than 10 percent gross margins before the fourth quarter, now came the fourth quarter with low volumes. The mechanism is the same as in resistors. We were losing volume. Sales were low and on top of that, basically we also reduced inventories there, but in capacitors, we are restructuring, we are moving Tantilum finishing to China, as a matter of fact.

We are moving film capacitors, not completely out of Europe, but a major part of film capacitors will go out of Europe. So, these are the two major things which we are doing. We are cutting fixed costs in the Tantilum line. We are concentrating facilities, etc. So, a couple of things just continuously going, but the fourth quarter, we have to watch the inventories.

And then just as a follow-up, Dr. Paul it sounds like you're still a little concerned about inventories in things like handsets and PCs. Does that mean that the orders that you're seeing in January are more related to industrial and military?

It was across the board. It was across the board and also come from distribution in aid -- in the U.S. and in Europe. Not so much -- it was broad.

Okay. Thank you very much.

Your next question comes from Patrick Parr with UBS. Please go ahead.

Good morning, guys. Regarding your capacity expansion plans at Siliconix, the -- I believe the goal was to add 50 percent capacity from, I think about the mid point of last year.

Correct.

Where about a quarter of that, or 25 percent of that 50 has been added already. With capacity utilization down a bit last quarter there, is the intention still to add an additional 25 percent in the next --

We continue to add this capacity because it's not only adding capacity. We can cut back foundries, by the way. So, we will have a cost reduction. Most importantly, we are introducing 8-inch technology, which we definitely want to out of cost reasons but also as a next step of the technological development of Siliconix. We did not slow down anything.

Okay. And then regarding your gross margin guidance, I guess I'd call it, for the March quarter, being up over -- over December, how much of that will come from cost cutting, how much of that will come from improved volume? And improved pricing? And, you know, even if -- without numeric details there, what could you tell us about the margin trend and some of the specific segments?

I'm not prepared to talk into detail, but one thing is for sure, we're talking approximately the same sales, not so much will come from the volumes side. Except for slower inventory reductions, so, we expect to be better in costs.

Okay. All right. Thanks.

Thanks.

Thank you. We now have a question from Andrew Huang with American Technology Research. Please go ahead.

Thanks. I just wanted to clarify the AFP erosion. Did you say for the December quarter, for the overall company, AFP erosion was 2.5 percent?

Yes.

And in Actives 3.9 percent.

Yes.

And Passives 1 percent?

Yes.

And then as for the March quarter, you're expecting it to be a little bit less than the 2.5 percent overall did because --

It shouldn't, but this is my anticipation, that Passives will continue approximately as it was, but Actives have shown a very high price decline quarter-over-quarter, which is not typical. I cannot think that this is typical for the future.

And then your comment on -- in the previous question about the unit volumes for the March quarter. If the -- your sales to the distributors are restocking and the inventory correction is pretty much done, wouldn't you expect an increase in volumes to those distributors?

Definitely yes, but overall we are expecting relatively flat sales. We gave a range between 540 and 560.

Right.

And, of course, there is some price decline and so the volume consequently will go up to this amount. At this rate, obviously, right?

Right.

But it's through -- but in Asia, the -- the stock reduction has not -- inventory reduction has not -- is not finalized, I believe. Where it has been finalized, I do believe, is in Europe and in the United States. And these people already start -- started ordering quite substantially in January.

Okay. And then just as a last question, can you comment on inventory levels at OEMs versus EMS versus distributors?

Don't overlook this completely. We overlook quite nicely the inventory levels at distribution, but we have no numbers, really, for OEMs and EMS. It is only our impression which we have by talking to these people.

And what's that impression? [ Laughter ]

On distribution, as I said, the average is 3.5 turns, really. 3.5 turns is practically the same in the U.S. and in Europe and in Asia. For the U.S. and Europe, this is just fine. And for Asia, this is relatively low, as a matter of fact.

Now, what we hear -- EMS we do not believe that there is substantial inventory around and in OEMs, it really depends what you talk about, with whom you talk. There are some inventories, we believe, in finished goods on the consumer segment. We also believe there are some inventories still but have declined, in computers. desktops, for instance, but this is our impression just talking to people. I cannot put a number to it.

Thank you very much.

We will now go to Shawn Severson with Raymond James. Go ahead, please.

Thank you, good morning.

Good morning, Shawn.

Dr. Paul, you still comfortable with, you know, looking at a 50 percent plus-type contribution margin right out of the gate here as revenue comes up? Or do you think because of the dramatic ASP erosion you had in the fourth quarter it may take, you know, a quarter or two to catch up as far as cost cutting to get back to the contribution margin?

Well, Shawn, at least -- if you compared the years 2003 and 2004 it was just another example that worked like that. We had an increase in sales, excluding exchange rate and you must take the exchange rate out of that. It is just sales and costs go up in the same way. We had 160 million more in sales and 80 million more operating profits. So, really from 2003 to 2004, worked according to the formula as a matter of fact. I have no doubt that this formula, which is true since many years, will also stay true in future because on average Vishay has cost reduction programs that offset [inaudible].

Wouldn't you say now, that maybe even compared to historical levels, you almost seem to have more cost cutting going on right now, at least a lot of transfer to China and the low cost areas. Would you say that, you know, part of '04 and '05, you might even be having more cost cutting initiatives than what you would have in an average year? Or do you consider it a normal --

On the fixed cost side, Shawn, I think on the fixed cost side, we do more. It's---it's a little bit like an acquisition. We normally have the acquisitions cut a lot in fixed costs, just by synergies. Now we just cut and this is a major program to cut costs. Bigger than what we have done in 2004 and also in 2003. On the variable cost side, this is the move and whatever -- what everybody does, better machines, pressure on -- on vendors, et cetera, we continue to do what we do. I do not see that it increases, but we continue at this rate. And on average for the last year, this was okay to offset the price decline.

Okay and then just another quick follow-up. You know, the pricing pressure that we've seen, you know, can you just kind of touch on what the competitive environment is? In the Actives? Is this being driven by kind of a universal, you know, price cutting by the suppliers? Or is this really, you know, being hammered out by, you know, by the buyers and distributions cutting the price? Just trying to get an understanding of what --

Well, I think -- well, it came -- it was kind of a surprise to us, I admit that. The price drop on the active side, we expected the increased price pressure in the fourth quarter, but it came down more than we thought. I would like to admit that. On the other hand, this is not typical. I think many things came together. There with were a couple of new negotiations at the point. So I think it's singularity, but on the other hand, everybody is hungry for volume. We just come out -- hopefully come out, this is how it looks, of a decline which lasts since May, June, as a matter of fact. I think everybody was eager to get contracts.

And most contracts are on a three-month basis, is that right?

No, annual -- annual contracts, really. Very much so. It depends on the case, on distribution it's quarterly, as you know, but even worse than that, but on the other hand, it goes both directions sometimes. Sometimes you can also increase, what we have done last year, practically. So, anyway, I believe people were hungry, I do not believe that the price decline which we have seen in Actives between the third and the fourth quarters is typical for the quarters to come.

So, it may have been more of a -- kind of a spot pricing and I guess what I'm trying to understand is that people didn't sign up 12 month with very aggressive ASP declines put in over a 12-month period as much as this might have been spot pricing on just the -- on a one quarter basis kind of a thing or maybe all the ESP decline, more aggressive in the early--- first half of the contract versus second half, just trying to understand what it means as we go out 6 to 12 months.

Even if it was for 12 months, then we have seen -- then we have seen the impact right away, you know? And it doesn't get much worse, so to speak, from quarter-to-quarter. But there will be price erosion as we go. I just believe that many things came together between the third and the fourth quarter. I'll say that.

Thank you.

Thank you.

Thank you. Our next question comes from Steve Smigie with Raymond James. Please go ahead.

Great, thank you. I was wondering if you could comment -- if your revenue guidance for overall for Vishay kind of applies to Siliconix. It seems there they had a little bit lower book-to-bill ratio and maybe you might see a little more weakness there in revenue.

Well, approximately half of Siliconix sales goes to distribution Asia. This is, of course, a singularity. It's historical and, of course, this where their market is. And the fact that the Asians distributors make a little in reducing inventory doesn't help Siliconix. Siliconix at this point in time, you'd be surprised if it was not so. That the relative reverse in book-to-bill then all Vishay, but we have seen it differently. Normally the Siliconix shoots up over quickly. So, it's just a reason. They are [inaudible] they have a very high sales in Asia and in particular distribution in Asia.

And if sales were to recover quickly, you -- would gross margins come back again with volumes?

But of course. They have a high variable margin.

And final question, you mentioned you did work on some D.C. to D.C. converters. I was just curious if that's, you know, you're designing a brick there or a point of load converter?

Felix, do you want to comment --

Yes. Well, the D.C. to D.C. converters are usually done directly on the D.C. board. People buy components and they make their own D.C. to D.C. converter. That's like 90 percent of cases.

What we have done, we took Vishay components and created a D.C. to D.C. convertor and backed down and which is smaller, thinner, and we believe cheaper, substantially cheaper than for somebody to buy components and to try to place it on the board. That's the reason it has a lot of success. Many, many people design it in.

Now, they are going to, for the time being, converters of low power and low voltage. Mostly directed toward hand or battery-operated components, battery-operated devices. Later, want to expand the line, but for the time being, we're trying out the line to what extent people accept it is a direct concept. Are the components properly displayed? Do we use the right pricing -- and so far it goes very well.

Thank you very much.

You're welcome.

We now have a question from Tom Dinges with JP Morgan, go ahead, please.

This is Jason [inaudible] subbing in for Tom. Just a couple of quick questions on the balance sheet, Dick, for you. Other assets was up about 100 million this quarter. I was wondering if you could just shed some detail on that?

Yeah, basically, of that increase we have -- because we have this talent purchase commitment, we have to reclassify inventory into long-term assets. That was about $40 million for the quarter. We also have some pension assets that came into the quarter, about $46 million. And other than that, we just have other deferred taxes that it actually increased.

Okay. And then have you gone ahead and done your goodwill test for the year or is that still yet to come?

No, we have completed our goodwill impairment test and there was no charges at all.

Okay. And then lastly, part of the asset writedown that you talked about for this quarter was for some equipment that was planned to go into China.

Yeah.

I was wondering if you could just shed a little more detail on, you know, perhaps what the reduction in your plans were there, why it was taken at this point since it is such a low-cost geography.

Basically this relates to the supplier of Automotive. We initially wanted to put automotive supply into China and base that with the duplicate equipment, equipment which we had duplicated and we changed our minds. It doesn't -- we felt that China in this case would not be the right place to produce it and so the equipment was idle and this was the consequence.

Okay. Thank you, gentlemen.

Your next question comes from Michael Ellis with Thomas Weisel. Please go ahead.

Good morning. I'm just calling in for Matt Sheerin today. I was wanting---just a couple of questions on your Passive business. I was wondering if you could have just shed a little bit more light on why you think the pricing there has held up better than on the Active side? Is that related to the fact that there's been little capacity added there? And just on the capacitor business, I was wondering what -- you know, with it continuing to suffer such low gross margins, I'm wondering if you could share with us what your target gross margin would be for that business?

Well, first of all it's obvious that the price decline in resistors in our case is historically low. So, this is just a continuation of the trend we have seen all along; a major share our business, as I said before, is on specialty products, which has no price decline. So, even in really bad years you've never seen our resistor price decline being above, say, 3 percent per year or something like that. So, it's really a very stable business because of we do have such a high share of specialty products.

Capacitor, this is true for a couple of products, but of course with Tantilum, we are right in the battlefield and, this case, we continue to have price decline, but also in capacitors we do have certain products, quite a few products, which have little price decline.

The real issue concerning gross margin, you know my target was to have 15 percent gross margin in the fourth quarter and this was to be 3 percent, which we have looked -- looks very ambitious now, you have to admit. On the other hand, if you look back to the third quarter, we already were on the way. We were at 10 percent already and we have all kinds of plans in place and continue to pursue them but then came the fourth quarter with very low volume and inventory reduction on top.

I think we just will continue to do our homework. We will cut variable costs and fixed costs. And just continue as we go. And there's no endless inventory reduction, also. So, my -- my target in capacitors remains at 15 percent.

I just -- oh, sorry. Just one follow-up question, was curious how you would view the inventories right now in Passives versus the inventory in Actives?

You mean on the market?

Yes, especially on the distribution channel.

I think basically if you talk Asia as being in my -- in my view, at least, the basic problem for -- in distribution, because the others have reduced the inventory substantially, I think Passives are more hurt than Actives. Actives -- excuse me, Actives are more hurt than Passives at this point. There must be more inventory on the Actives side still. But it's just a conclusion out of the situation of our book-to-bill.

Thank you.

We will now go to the line of Chris Lippincott with KeyBanc Capital Markets. Please go ahead.

Good morning, just as far as I think you were talking about the January book-to-bill being 1.1, I was wondering if you could share with us just in terms of the individual segments, i.e. Active and Passive, where we're seeing, perhaps, more of the -- the strength, if we go into the -- the first quarter and even into the second quarter. Especially if we're thinking that there's still less than Asian distribution, you know, correction to come.

You really gave the answer already. It's across the board. Except there is still -- it's relatively slow for Siliconix. And the reason is clear, it's the Asian distribution still.

And if -- will you expect that to perhaps last as long as we've seen with both of the other two geographies or would you expect that might be perhaps a little shorter but a little bit more --

It really depends on the POS of the [inaudible] and the economic environment. To have a certain level of inventory. If -- I don't have to tell you. If the POS was better, they would look at their level of inventory differently.

Can you remind us again of just the -- the percentage of -- as far as, you know, breaking on the the sales channel or the distributors versus the rec, et cetera.

In our case we have approximately 42 to 45 percent in distribution -- to distribution sales.

Okay. The balance being direct?

Yeah. And approximately 12 percent EMS and the remainder OEMs.

Okay. And just as far as the restructuring, would you expect that it would perhaps be evenly balanced between cost of goods and SG&A or where would you expect that perhaps the majority might come from?

I would say it's evenly balanced. I can't say exactly--- I have the numbers, but don't have it here. We're working on both sides, we are cutting manufacturing fees much in the same way we are cutting SG&A.

And I just want to make sure I heard it correctly, you're talking more of a -- of a linear progress, as a result of this for the year?

No, because we were talking about the other major projects. Where we have cost reduction, we have many cost reduction projects, but we were highlighting two of them. The closing of Kolmar, this was a packaging plant and semiconductor plant in France which we closed in November. We have the full impact of saving right away.

And then we were talking before about moving general semi packaging from Taiwan to China. We are on the way and this is was I said, is goes in a linear form and will be finalized in the third quarter this year. So, in this -- it kicks in on the linear way. But the 50 million, we go in steps and this is the fixed cost reduction. We go in steps and we -- it really kick in as we go through the year.

Thank you.

Thank you. And our final question will come from David Pescherene with Smith Barney. Go ahead, please.

Thank you, good afternoon, gentlemen. Dr. Paul, just the, I don't mean to beat a dead horse, but the commentary about the Asian distribution is a little perplexing, you know, I think if we go back to commentary coming out of the large Asian distributor in November, they seemed to be at least on the curve in terms of working down inventories and then when we met with -- with Siliconix management back in December, they also seem to be a little bit more upbeat about order patterns coming out of Asia. Has something changed in say the past six to eight weeks with Asian distribution that --

No --

-- that makes it weaker?

But we have now better numbers, we have numbers that really tell us the story. All the distributions really reports back. We had to discover, but this is an internal point for Vishay. We discovered the reporting issue is our distribution in Asia and now it is obvious that -- that the decline of inventory there is low, still.

And are you seeing any difference between indigenous Asian distributors and U.S. distributors in Asia, in terms of the order patterns?

I don't have the detail. Don't have the detail.

Okay. And then maybe just to switch gears, in the press release you talk about expecting greater M&A activity into 2005 and I think you've spoken about it quite a bit in the past year, but can you give us a sense as to what asset prices look like today, at least on the things that you folks are looking at?

I would like to pass this on -- to Dr. Zandman. Felix --

Unfortunately I didn't hear the question. Could you repeat the question?

Of course. You -- you were talking -- you've talked a lot about M&A activity in the press release. You said we should anticipate increased M&A activity in 2005?

Yes.

So I was just hoping to get a sense, how asset prices actually look today --

Well, I can't tell you that. The asset prices still look too high for us. We couldn't understand why -- why the market is down, the asset prices didn't go down proportionately. So, we kind of withdrew a little bit. We are waiting and also there was another issue.

We were after two very large acquisitions, each kind of operated and ready to move on that but they've operated, there was some board of directors in fighting over the comment to more, but they have operated. Those two large possible acquisitions may come back again to the market and we certainly will be ready to make a move. We prepared ourselves for that. So, maybe in 2005 they will come up.

Also, a -- you never know, things crop up from here and from there, even for large acquisitions. Presently there are still many large companies, which have passive components and discreet or not complicated IC components on their board and we know they want to get rid of them.

Usually what happens, in things like that, is when the market goes very fast and very well, they want to wait to caution us as much as they can, but then when the market drops abruptly, it's too late for them. So, they say well, let's wait for the next cycle and I think that this is what happened. We believe that 2005 could present some opportunities, but, you know, it's not like going to the supermarket. You can't predict it. People know you're there, you have the cash and the banking lines and ready to move.

So, then against that backdrop, Dr. Zandman, if the asset prices did not move lower through 2005, would -- would you be of the opinion that --

No, we buy only what makes sense. If it's too expensive, we back off.

Great, thank you very much.

You're welcome.

Okay, I want to thank everyone for joining us for this year-end closing conference. As you can see, as we go into 2005, things are a little bit more optimistic and with our cost savings we expect to have a better year. Thank you and see you next time.

Thank you. And Ladies and gentlemen, this conference will be available for replay after 2:30 p.m. today through midnight, Sunday, February 13. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 766862. International callers dial (320)365-3844 using the same access code, 766862. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.