威世科技 (VSH) 2006 Q1 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the Vishay first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]

I would now like the turn the call over to Mr. Richard Grubb, Vishay's Chief Financial Officer. Sir, you may begin your conference.

Thank you. Thank you for dialing in for today's first quarter financial conference call. With me today from Germany is Dr. Gerald Paul, President and CEO, and Dr. Felix Zandman, Vishay's Chairman and Chief Technical Officer and Business Development Officer. He's with us from Israel. Before I start, Bill Clancy, Vishay's Senior Vice President and 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 statement 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. As usual I will go over some summary facts and results and Dr. Paul will elaborate in finer -- much more detail and, finally, Dr. Zandman will update us on R&D and acquisition activities over the last month -- quarter. As stated in our press release, Vishay reported $0.25 operational earnings per share as compared to $0.06 for last year's first quarter and $0.17 for the fourth quarter of 2005, which is a 47% increase over earnings per share over last quarter. The net after-tax effect from earnings per share of a loss of $3.3 million a long-term purchase commitment, also a $8.2 million write-down of inventory, and restructuring charges related to about $800,000 amounted to a negative $0.05 per share against operating earnings for the reported earnings per share $0.20 for GAAP. My comments going forward will exclude any of these items in the particular details.

Revenues for the first quarter of $631 million were approximately 14% higher than last year's first quarter and 6% higher than the fourth quarter of 2005. Revenues by segment were semiconductors accounted for 48% of our revenues and passive electronic products accounted for 52% of our revenues. Consolidated gross margins for the quarter were 26.6% as compared to 23.5% for the immediately preceding quarter. Gross margins by segments for the quarter were as follows: Our semiconductor division 27.4% as compared to 25.5% in last quarter. As far as passive products were concerned, they contributed margins of 25.9% as compared to 21.4% in last quarter, and Dr. Paul will elaborate on the details of those passive components. Selling, general and administrative expenses of $96 million equaled 15.2% of our revenues and is coming down each quarter-by-quarter. Other income consists mainly of interest income due to the large amount of cash accumulation Vishay has at the end of the year and during the end of this quarter.

The effective adjusted operational tax rate for the year is approximately 26%, exactly what we predicted it would be at the end of the year 2005. Capital expenditures for the quarter were $36 million, while depreciation and amortization was $47 million. Total head count at quarter-end was 26,000 people, of which 73% are in low areas. Some other key amounts the balance sheet, cash now stands at $656 million. Total debt outstanding remains approximately $755 million. However, as we announced back in the beginning April of this year, the lines, which has about $138 million of puts to Vishay in June of this year is shown as short-term, because we intend to, as announced, pay this particular debt off with cash on June 4, 2006. Total inventory at quarter-end was $510 million. Working capital at quarter-end remains at $1.1 billion. Bookings for the quarter were $715 million and backlog at March 31st stands at $600 million. Cash generated from operations for the quarter were $53 million.

And as announced in our press release, we expect the second quarter revenues to increase, again, over this quarter and to be in the $650 to $670 million range, with continued increases in profitability. Our long range outlook is we expect 2006 to be our best year since the year 2000.

Now I turn it over to Dr. Paul for more details. Gerald?

Thank you, Dick. Now let me talk about the economic environment first and, in general, we can say that the optimism for 2006 seems to be very well justified. Our industry enjoys an excellent business climate. All regions and practically all market segments are prospering. Very important also that, in the pipeline and the supply chain, we still see the inventories at a low level. Worldwide distribution is now at greater 4.5 turns, and also, at OEM's and EMS, we, at least, cannot see any accumulation of inventories. The quarter one order impact from distribution is definitely supported by their increased business level. The lead times in our industry continue to stretch out in the quarter for most of the time product lines, and we see some shortages of supply. The price pressure, on the other hand, mitigates, in general, and there are opportunities for price increases.

Now let me go briefly through the markets. In consumer, we saw a very favorable development which, by nature, impacts mainly the Asian business. The MP3 players and the LCD TV sets are really booming. Also, laptops go strong, and we did not see the cyclical downturn in quarter one of mobile phones, did not takes place. Therefore, we expect an excellent year also for mobile phones, and this will be supported by infrastructure expansion due to the [Chief 3] introduction. Industrial, which was good already last year, continued to get stronger on a worldwide basis. Automotive is stable, up in Europe, down in the U.S. AMS and medical in excellent shape. So, altogether, we enjoy very strong markets and there are no signs of weakening.

Talking about our business development in Vishay, we can say that the strong backlog at the end of the prior quarter, in combination with quite fast accelerating orders during the quarter, led to a higher-than-expected increase in revenue. We achieved sales of $631 million in the quarter versus $594 million prior quarter, 10% increase from distribution, 5% increase from OEMs. If you compare to prior year, this was $554 million. The exchange rates increased sales by just $1 million versus prior quarter, and decreased sales by $20 million versus prior year. The orders were up by 16% versus prior quarter. We have seen a very strong increase from European and American distributors, but as I said before, this did not lead to any increased inventory at distributors they needed. Book-to-bill ratio climbed to 1.14 in the quarter, indicating growth also in the quarter to come. We have seen 1.25 book-to-bill from distribution and 1.04 from OEMs and EMS, Then regionally we saw 1.19 book-to-bill from the Americas, 1.14 from for Europe and 1.08 for Asia. If you want to split between actives and passives, you see a book-to-bill of 1.21 for actives and 1.07 for passives.

Backlog is at a very comfortable level of 2.9 months now. The lead times are quite long, especially for power [inaudible]. As expected, the ASP decline slowed down quite dramatically and sequentially, and versus prior year, recently prior quarter, we have practically no price decline at 0.2% and vis-a-vis prior year, we are at a very low level of 2.4%. For actives, we saw see a [inaudible] slowdown of the price decline also, 0.7% versus prior quarter, 4% versus prior year. And in the passives we are close to price stability. We have even a slight increase versus prior quarter and minus 0.8% only versus prior year. So all of this is quite encouraging and reconfirms our optimism, our confidence for the current year.

Talking about the results and a little reconciliation of results versus prior quarter first, based on $37 million higher sales, 36 without the impact of the exchange rate, the adjusted operating margin improved by $23 million from $49 million to $72 million, which is an increase, as Dick said, of 47%. Of course, volume was the main driver of it, but also better costs and other impacts played a role, but the main driver was clearly volume increase. Vis-a-vis prior year, we can say that based on $77 million higher sales, $96 million without, again, the impact of the exchange rate, the adjusted operating margin improved by $49 million from $23 million to $72 million. Again, volume pushed this development. $56 million positive from volume, ASP decline minus $15 million, and better cost in some inventory impact improved the situation by $8 million.

Well, some highlights from operations. The inventory turns in the quarter were stable at 3.3. Excluding the impact of exchange rate, the inventories went up slightly by 13, $13 million in the quarter, all happened in VIP and finished goods. But, all this is in line with the increased production output. Fixed costs personnel in the quarter remained practically constant. High labor employment remained at 26.7%. Capital spending in the quarter was $36 million as compared to $42 million depreciation. This year we expect to spend approximately $180 million. About 60% of this amount is for expansion programs, predominantly at actives; for instance at Siliconix. The cash provided from operations -- this is what Dick pointed out also -- in the quarter was $53 million as compared to a loss of $2 million last year.

Talking about restructuring, I think we have successfully completed the broad 2005 fixed cost reduction programs of $50 million, you remember. We'll now focus on under-performing divisions. With an annualized impact of $50 million, we expect $20 million each in the years '06 and '07 and $10 million to kick in of these programs in '08. We have announced a closing of all film capacitor operations in [Avery] in Belgium, except for a depositioning, which is quite a high tech operation, which will remain in Belgium; not very labor intensive. We have also announced the closing of all aluminum cap operations in Schwallie Holland, except for the etching process. Again, the same story, this is relatively hi-tech and will remain in Holland to have over advantage to competition there. We have announced a major restructuring program for non-linear resistors Avery in Belgium and the production of all of that will be moved predominately to India and China. So you see, we continue -- despite the good times, we continue, I think quite consequently, our restructuring efforts.

Let me now run you through the various lines we have and I start out, as usual ,with Resistors and inductors. There was a stronger than expected upturn in the business driven by almost all markets. Sale in the quarter were $155 million, which is up by 15% versus prior quarter and by 21% versus prior year. Book-to-bill ratio continued strong in resistors at 1.06. Backlog was stable at 2.5 months. Gross margin, happy to report that was at record level of 33% of sales. You may remember that I talked about some manufacturing issues, some singularities in the past quarter. They are behind us as I told you already then, and the gross margin shows it, I belief. There was also some favorable mix shift.

We are approaches price stability in resistors. We had only 0.3% price decline versus prior quarter, and 1.5% versus prior year. The inventory turns are at a quite satisfactory level of 4.1. There are further increases of the capacity load. We have 80 to 100% loaded for SMD product and 60 to 80% for leaded products. We are in the process of raising capacities for SMD wraparounds for thin film resistors and for special inductors. We have just finalized a move of PTC resistors from Avery in Belgium to [Domshui] in China. And this already substantially improved our variable margin for all non-linear resistors. We have seen vis-a-vis prior quarter an improvement of variable margin of nine points by substantial. And for resistors there's more restructuring to come. So altogether for the resistors, which is really a very good line for us, a good economy, consequence restructuring efforts and successful products lets this product line achieve record profits in quarter one.

Talking about capacitors, also in capacitors we have seen an unexpected strong and broad upturn in the quarter, dominated, in our case, by tantalum capacitors and we have seen quite a strong demand from distribution. Sales in the quarter were $132 million, 12% above prior quarter, and 15% above prior year. A strong book-to-bill ratio of 1.07 indicates a continuation of the up-swing also for capacitors. Backlog is stable and quite okay at comfortable levels of 2.5 months. Gross margin improved to 17% of sales. Higher volume, our cost reduction efforts and optimized pricing helped to achieve this goal. If you remember, it took us quite some time to get to 15; now we are at 17 and look ahead in order to improve this level further. Selective price increases start to show. Prices were higher versus prior quarter by 1% and 0.3% higher versus prior year. Inventory turns improved slightly to 2.0.

There is a further increase of capacity utilization of capacitors. We are now between 75 and 90% for volume production. We are in process to move all tantalum [inaudible] caps finishing to China. We have announced the closing of all film caps manufacturing in Belgium. We move to India. We have substantial improvements in the MLCC profitability through marketing programs and our selective price increases. And we have growing success with power capacitors in India and with new ceramic safety caps in Asia. So we are proud to say that capacitors really are also now a serious contributor to our profitability.

Talking measurements group, a stable business. Sales in the quarter were $39 million which is 4% above prior quarter and 26% above prior year. But the growth for the prior year virtually is due to the SI acquisition, which we had. Book-to-bill is at 1.1, and this improved the backlog to 2.2 months. Gross margin recovered to an excellent level of 34% of sales and inventory turns improved to 2.7. There is ongoing restructuring and streamlining, together with high volume. This will improve our profitability further. And we are in process to raise prices selectively, mainly for low seals. Altogether, measurements group no change as a reliable contributor to Vishay's profits, which has more potential.

Let me come to semiconductors and let me talk about lines without Siliconix. The consumer market and distribution have driven, in the first quarter, a strong recovery of orders, where by mainly the rectifiers from channel semi benefited. Sales in the quarter were quite flat, $173 million, 1% below prior quarter, but 10% above prior year. But book-to-bill of 1.14 increased backlog to a comfortable level of 2.5 months, and this indicates, clearly, that revenue will grow in the current quarter. Gross margin improved to a quite satisfactory level of 24% of sales and growing volume will yield clearly further improvement. Price decline slowed down, also, in this group of product. Sequentially we are down 1.1% versus prior quarter and 5.5% versus prior year.

Inventory turns were at 4.5, which is very satisfactory. Inventories went up vis-a-vis prior quarter by $12 million, mostly in group and finished goods. Again, as I said, in general for Vishay, this is needed for higher outputs in Q2 '06, the current quarter. Capacity load has improved. Power products are between 85 and 100% loaded, low power between 75 and 85% and optimal [inaudible] products between 70 and 85%. In the meantime, we have achieved the automotive qualification for rectifiers in China, and we are going to continue to move now from Taipeh to China. We also decided even for more moves than originally anticipated from Taiwan to China. We would continue on that route. All capacity expansion plans are on plan on track. So we believe that the strong market upturn has now also reached the standard [inaudible], which we can see clearly from the book-to-bill and the sales outlook.

Talking about Siliconix, business heated up really further. There is a very strong demand, especially for the new high seal density products. Sales in the quarter were $132 million, 1% above prior quarter, but 29% above prior year. Book-to-bill is really escalating. 1.3 in the quarter, very strong orders from distribution. The inventory at American and European distributors. nevertheless. are flat. Up by 4% in Asia, in anticipation of the second and third quarter demand. The situation in distribution altogether is really different from two years ago, when you can remember inventories piled up at distribution and caused downturn in the third quarter. At this time, inventories are very lean across the board.

Siliconix gross margin is back to a good level of 32% of sales, largely because of profits at higher seal density products, and we expect further improvements with growing capacity, which is on the way, as inventory turns are at a solid level of 4.3. Also, the price decline has slowed down. There was no price decline versus prior quarter and price decline vis-a-vis prior year for Siliconix products came down 2%, very low number historically. The internal capacity practically fully utilize. Further increases can be expected on the way from foundries and subcons. Our $300 million seal density at product is now produced also at foundries and in our [inaudible]. We will continue to rais capacities at Siliconix according to plan and we will be at 20% increase year-over-year. There is an extremely strong demand for Siliconix products and this makes, definitely, capacity expansion at Siliconix our first priority.

So let me summarize. I think Vishay had a very good quarter, no doubt about this. We increased sales sequentially by 6% and net earnings by 47% from $0.17 per share in quarter four '05 to $0.25 per share now. Our controlled expansion and restructuring programs are on track and will continue to show results. We continue to push new products and technologies, the economic environment is friendly, and there are no signs for a slow-down. In fact, a strong book-to-bill ratio that held up nicely also in April indicates even higher sales and margins in the second quarter. As Dick said before, we are quite confident to enjoy a good year; in fact, the best since the year 2000.

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

Good morning. I don't want to repeat what Gerald said already. Q1 was a very good quarter with $0.25 per share, as opposed to $0.17 for the prior quarter, and, of course, much, much better performance than last year. Our R&D programs are online, including vertical integration. For example, we developed our wireless technology. as I told you that before, for our sensors, such as [inaudible], current sensors and [inaudible]. The first application of this wireless technology is for [inaudible] use for aircraft weighing. To weigh a cargo airplane, the plane's landing gear are placed on three platforms containing load cells. The load cells are connected via cables to an instrument which measures the load on each landing gear. Cables laying on the tarmac are a danger and inconvenience.

That's a way towards today the introduction of the wireless technology eliminated cables. The measurements are used to calculate the center of gravity and, hence, place the cargo properly. Our RF units to wireless unit does not have any cables. The instrument is handheld and via software it gives all the data, such as weight, center of gravity, image of the cargo space, where to move the cargo, et cetera. We will use this approach to all our other sensors, sensor products such as [strangigus] and other type of sensors. I will mention it a little bit farther. The wireless unit were shown in Dallas during an aircraft show and enjoyed great interest. This approach will be used on mobile cranes by placing strangigus and load cells in the appropriate areas and getting rid of cables on mobile cranes, which are a danger and use some inaccuracies. It will be used on structural stress testing and other type of applications.

Concerning acquisitions we continue to look for acquisitions, large and small. We acquired recently a small Japanese specialty components company and just are just about to acquire a Brazilian specialty component company. This will allow us to better penetrate the Japanese and Brazilian market by producing a -- locally. Our outlook for next quarter and for the remainder of 2006 looks good. We hope to be able to continue our growth through acquisitions, market share growth and R&D, as usual. And we are quite optimistic for the future.

Thank you. We are now open for questions.

[OPERATOR INSTRUCTIONS] Your first question is from Michael Walker with Credit Suisse.

Thanks. Good morning.

Morning.

A couple questions just on the margins. You talked about margins going to be up in June sequentially. I wonder if you can give some color around that? If I look at it from a contribution perspective, you had a pretty big increase in contribution margins in March versus December, and I'm wondering if you think margins kind of continue to increase at the same level or do we start to see the increases taper off?

Well, for sure volume, Mike, helps us. We have a nice contributive margin, and we see strength in all product lines. That means what we are going to see as incremental volume will be the same statistics as we see, per se. That means we will see a nice increment, also, from these incremental sales. On the other hand, let's also see that, as I said, I remind you of our quarter four '05 conference, there have been negatives in the fourth quarter in manufacturing, which have been straightened out, which I announced at that point in time. And this additionally, of course, has helped the incremental performance in quarter one if you compare it to quarter four. But overall, we expect a nice contribution also from this incremental sales to come.

Okay. I guess you just addressed the second question I have, which is can you give us an idea of what the back-end component constraining environment looks like now? Are you having to outsource a fair amount? Is that hurting your margins right now still?

We are increasing, of course, a share of foundries which, from the foundry standpoint does not really hurt us. From a subcon standpoint, if to the extent we need it from the outside, will to a degree hurt us, but this will not influence the overall performance of Vishay.

Do you expect not to have to be using subcons and foundries by a certain time, say the second half of '06, with the capacity coming online?

Well, for selected products we will have. But Vishay is very broad and we need foundries, in reality, especially for Siliconix products. For most of our other lines, we don't need foundries. There's enough capacity.

Okay. And then my last question is just you talked a little bit about book-to-bills between distribution and going direct to the EMS and OEM channel. I am wondering if you could tell us what the revenue growth was sequentially ,going into distribution versus going into OEM's?

From quarter four to quarter one, right?

Right.

Distribution came up by 10%, and OEMs came up by 5%.

Okay. But despite that, you're really not seeing any kind inventory increase in distribution?

In fact, distribution inventory went down in the quarter.

Thank you very much.

Thank you.

Your next question is from Kevin Kessel.

Hi, good morning, guys.

Morning.

Just wanted to ask you, in terms of Siliconix's capacity, you've obviously spoken now about the transition to 300 million cell densities on track. What about the transition from 6" to 8" wafers? What --

Oh, it's on the way. It's also on the way.

When would you expect that to be in production?

We will start to produce on a regular basis in the second half in [inaudible], this product. You know, it is a cost reduction measure. It is not technological step. It is just lower cost which helps, but this is not a technological break through. The technological break through is the 300 million seal product, and this is on the way. It is being produced, but 12 -- the 8" -- sorry -- the 8" is definitely on the way, and we are going to have regular production starting middle of the year.

Okay. Would you estimate the cost reduction in terms of that transition from six to eight, what would you ballpark it at?

Depends really on the case. For sure, in terms of variable costs, and we can only talk variable cost, I would expect 20%.

Okay. So that's something that conceivably could actually further help your gross contribution margin?

Yes.

Alright. Now what about when we look at cash flow from operations, it was very strong in the quarter, $53 million. What would be the outlook, based on the current and what you guys currently believe your working capital requirements will be and the outlook for '06? What would you think cash flow from operations, ballpark, could be? You've spoken about CapEx being, I think, 180.

180, and we have 36 in the quarter, so the quarter was a little bit below the average of 180. This is not a major -- it is not a major difference. We expect cash flow out of operations to continue to be strong this year.

But would you say that Q1 was stronger than typical, or would you say that -- I mean, if you analyze Q1, your $200 million cash flow for the year, is that feasible?

I would say differently. I would say quarter one last year was not, for us, untypical and it was low. Normally, we are producing every quarter. Normally are producing by -- we are providing cash by operations every quarter. I think the quarter one was a typical quarter.

It was a typical --

Kevin, you should keep in mind, also, that as this Cabot contract wears down during this year, that'll have a major contribution to cash generation.

Right, and --

This year and next year.

And if I'm correct, that essentially winds down in the June quarter and that should be incremental --

No, no, no. That probably -- finals out to the end of the year.

It runs to the end of the year?

Yes.

So, it's not going to help cash flow so much in '06 but --

It starts to help this year, but the major impact for cash flow will happen next year.

And that -- based on your filings, to me, looks like $60 million odd in terms of what you're currently committed to spending?

Approximately.

That would be a positive to '07 potentially?

Yes.

But these write downs continue to happen because the price of tantalum, I assume, continues to drop?

Yes, this is what's the reason.

And when I look at the -- when I take a look at your restructuring that you mentioned, Dr. Paul, you said $50 million is the new program now that you're focused on. Was I correct in interpreting what you said about $20 million benefit this year, $20 million next year and $10 million in '08?

You're absolutely right. Last time I talked about these programs, we were at $40 million savings. Now we sharpened the pencil a little and added a few things and now we can do this $50 million with $10 million impact in '08.

So essentially what you're saying is there's a three-year pay back in the restructuring you're about to do?

No, it kicks in time-wise. You cannot do everything at the same time. You also spent the money later for it, so you go step by step. And you cannot close everything down immediately; you have to go in steps. This is what's going to happen.

I see. And then last question on the [inaudible] option that you've already communicated you're buying with cash. That's supposed to happen on June the fourth in terms of the settlement date there. And I guess, post that -- first of all, do I understand correctly that essentially the bondholders, for the most part, have to tender or is it still their option, because there's another put further out?

No, it's their option. They have an option to put it. But on the other hand, after June 5th or 6th, I think we have a call feature associated with that, also. But all indications are is that the bondholders will put it to us.

So, you'll -- those'll be gone from the capital structure? You'll pay cash for those and then, essentially, we should see a corresponding effect on your interest -- interest expense --

Not only interest, but also the earnings per share computations, because these'll be revenue shares that will not included in the EPS computation, going forward.

Do you still plan to file your 8-K for -- at least for how it stands today in terms of the share count versus interest income?

We plan to eventually file an 8-K updating that computation, yes, once we have more foresight on what's going to happen.

Was there any royalty revenue in the quarter?

Yes, $2 million.

$2 million. Can you tell me what it was last quarter?

Approximately the same.

About the same, yes.

That's related to trench or --

Basically Siliconix

Okay. Thank you very much, guys.

Thank you.

Your next question comes from Matt Sheerin with Thomas Weisel Partners.

Yes, thanks. Just a quick question regarding distribution. What was it as a percentage of sales?

In our case, total 45%, approximately.

40 -- so it was up a little bit. Okay. And you talked, Dr. Paul, about distribution inventories being lean and that not being a concern here. It sounds like you're at the sweet spot of the cycle here. What concerns or challenges do you see ahead? Sounds like things are firing on an all cylinders here. What can go wrong and what yellow flags, red flags will you be looking at as we go through the cycle here?

We are personally convinced, also, based on our bad experiences of the year 2004 that the level of distribution inventory in our industry is an indicator -- the indicator. This is the only quantitative number you can really get from our perspective. We are watching it very carefully, and in fact, as I said, it's not so -- it's really different to 2004. In 2004 at this point in time in April, we already should have seen the -- all of us, the increase in inventory at distribution. Didn't see it. Now we look and it is not there. Over 4.5 turns on a worldwide mix basis, this is very high. I wouldn't dare to say record high, but on the very high side. So, really, these people are in the way in the spend and place -- and cause also orders to get it, but it cannot sell too much. They don't get the inventory up.

And on the price increases, is that primarily through distribution or are you having success at your direct customers as well?

We are principally respecting contracts, so you absolutely right. What you can do is primarily in distribution at EMS, which have quarterly negotiations, this is the way what you can do.

Okay, and then your revenue growth forecast for the June quarter, does that bake in any sort of blended ASP increase and what is that range?

This is our combined anticipation to [550 to 570]. Takes into account, most of it from the volume side,by nature.

Okay, but there's a little bit of pricing in there?

Of course.

And then, just lastly, on some of a bigger picture question regarding your acquisition strategy. You've talked about this in the last couple quarters. What -- could you just update on your plans there? Is there anything imminent, or are you focusing on the business now that things are going well?

Well, we don't discuss, really. We're looking all the time on large and small acquisitions worldwide in many, many places. We don't discuss details of that. You can assured that we are very active in this area and the assumption of property [inaudible], small or large.

Okay. Thanks very much.

Your next question is from Shawn Harrison with Longbow Research.

Hi, good morning.

Morning.

Just a point of clarification. The backlog number that you gave out initially company wide, what was that?

We have 2.9 -- let me see, 2.9 months now.

And in dollars?

We have the new presentation.

$600 million, Gerald.

Approximately, yes.

My second question just has to do with the capacitors business. Strong performance this quarter. I think you cited tantalum market being extremely strong. I was wondering if it was more larger case size tantalum capacitors, smaller case size, just any granularity you can provide in that market?

Look, you know capacitors in the last year not our most successful product line. You know that very well. And since years, we restructure and restructure everywhere. This increase, this improvement really came from. virtually. all of our capacitor lines. Because restructuring was touching all of -- practically all of the capacitors segments, and continues. Of course now, volume became better, and so the whole thing was even accelerated, And it's no secret that also for capacitors, the 17% gross is not the limit. Our ambition reaches further.

Looking ahead in terms of volume growth, what end markets are driving that at this point in time that you see?

It is easier question is which market the increase. At the moment -- really because most of the markets, practically all geographies and most of the markets do well, exception may be for -- exception is U.S. automotive, which is low. On the other hand, if this is low, other companies like Siemens, [Bosch], [Densil], they take the opportunity. So the overall volume world wide, also in automotive, is not bad. Only the U.S. segment of the business is, at the moment, weak. On the other hand, all the other markets, name them. They're all fine.

Okay. My final question just has to do on the updated restructuring program and the expected savings. I guess if you could -- with the progress you made to date, the waiting for the savings expected for '07 and '08, what business segments would you expect them to fall primarily into?

On the -- basically on the passive side. Some standard actives also -- some standard actives, but primarily on the actives. This is also where we have the highest share of production in high labor countries still. This is what you have to do.

Would that be more resistors or capacitors in terms of --

Both, both. Of course, principally more capacitors, you're right.

All right. Thank you.

Your next question comes from Thomas Dinges with JPMorgan.

Hi. Dr. Paul, how far out have the lead times extended with Siliconix now? You mentioned that was probably one that had extended a little bit further. And I have a pick quick follow-up for you on top of that.

Up to 16 weeks. One six weeks.

Last quarter you were around 12 to 14, somewhere around there, is that correct? Yes. And then, just looking at a lot of the moves that you're making on the restructuring side and trying to help with the cost alignment and so forth, you've seen some nice improvement in some of the margins and so forth there in a number of the areas, especially capacitors. Do you expect to have any further write-downs on the tantalum contract or is that fairly well behind you? And lastly, when you look at the inventory terms between the active side of the business and the passive size of the business, it seems as if there's a fairly sizable difference between those two. Once the moves are made in production going from both regions, do you think that you can get both of those types of turns where you get four turns out of passives as well as out of the actives?

Let me start to answer with the last one. Really, if you look at resistors this is more or less on the level of active for point one. The problem capacitors -- and this is a name, this is our tantalum contract, our tantalum inventory which we carry because of our contract we have. And this is going to end in the course of the year and we've said before, we are going to write this inventory down in the course of partially this year, partially next year and somewhat also the year after. Then I have no doubt, if you take this out -- if you took this out, also capacitors at 3.5 times. I think we do not have to have a big project on that. We just have to consume our excess tantalum powder. And by the way, we are moving production from A to B since a long time. This was never used as a reason for having low inventory turns. Really, the problem in passives is clearly the tantalum powder level and we are going to work it out. No question, there is no obsolescence. And concerning -- what was your other question.

On the valuation of the tangibles.

Oh, yes. This really depends on the market price of tantalum, as a matter of fact. I personally -- but this is my personal opinion think this is now really low. I would suspect that this is a fair valuation, but you never know.

Okay. Thank you.

Your next question comes from Andrew Huang with American Technology Research.

Hi. Congratulations on the quarter. Quick question on the SG&A. It has been coming down as a percentage of sales for the past couple quarters, and I guess forward, do you see that trend continuing?

One thing is for sure, we are not aiding costs. That's for sure. It means with growing revenue, it should go down. This is our perception.

Okay. The percentage. So maybe you could comment -- can you give us a rough idea of how much of the SG&A is a fixed cost and how much is variable?

SG&A is -- you mean commissions basically?

Yes.

Practically everything -- practically everything is fixed, practically. It's $11 million which is commissions in this number for the year. That means it's really -- you can work from the assumption that practically everything is fixed.

Great. And can you comment on prices for raw tantalum powder?

We devalue it down down to perceived market prices now and we'll see. I cannot -- I cannot chart what goes on in future.

And then, for the CapEx for '06, you said you were going to spend roughly $180 million?

Yes.

And 60% is in actives, so --

60% is in expansion.

Expansion.

And I would say more than that is in actives, yes.

How much do you plan to spend on passives for capacity?

Very little. Very little. Don't have to the number exact. This is for sure out of -- this is now just out of my memory, I would say less than $10 million.

Okay. Great.

Most of it goes into actives, as you can imagine.

Okay. And I guess the last question is it seems like your comments suggest that end markets from your perspective are as strong-- like pretty broadly, but if you had to pick one that was the strongest, which one would it be?

At the moment, consumer, at the moment. If you average over a few quarters it is clearly industrial, the broad industrial basis will be said at least. At the moment, I would highlight consumer.

And -- oh, sorry, one more question if you don't mind. So your gross margin has been trending up pretty nicely. How much higher can it go?

May I answer like that, I would consider that margin is around 50%. It means volume helps.

Got it. Okay, thank you very much.

Thank you.

Your next question from from [Mark Hassenberg] with Dottingham Capital

Good morning.

Morning.

A number of conference call companies have been talking about some strengthening in Europe. You have a good window into that marketplace, particularly the automotive side. Can you bring us up to date on what you're seeing in Europe and how encouraging does the current situation look?

The general economic condition in Europe has proved this year even, in Germany, which really held Europe back for some time. And the same is true in France. More so in Germany, I believe. People are relatively optimistic again. Don't know how realistic this all is, but they are. This is how it looks. Consumer is better. Also consumer spending, which really was a problem in Europe for many quarters, has come up. The automotive industry is strong. It was always strong, but especially strong now. So principally speaking, Europe is a better place for our industry than it used to be.

Are you seeing improvements in profitable there, as well, and have your cost cutting --

Oh, you mean for [inaudible]. You see the prices in Europe are not lower than the prices in America or the prices in Asia. The problem is you can't manufacture everything there. This is why we constantly move out of Europe, but also out of the United States, depends on the line. As I tried to say before, when you have high tech operations like the positioning, like etching and aluminum capacitors, you prefer sometimes to stay in Europe. You have low labor content and you have the knowledge, so why not? The same is true for the United States. But principally speaking, Vishay will continue to move jobs off shore.

Thank you very much. Congratulations on the quarter.

Thank you.

Okay, there are no further questions at this time.

Thank you. That'll conclude our conference call for the first quarter of 2006. I would like to remind everybody on May 11th in Philadelphia, Pennsylvania, it is our annual meeting. All are invited to attend. We look forward to seeing you there, and again looking forward to a good year 2006. Thank you very much.

This concludes today's conference call. You may now disconnect.