威世科技 (VSH) 2006 Q3 法說會逐字稿

Good morning. My name is Kevin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vishay's third quarter 2006 earnings conference call.

[OPERATOR INSTRUCTIONS]

Thank you.

At this time, I would like to turn the conference over to Mr. Richard Grubb Vishay's Chief Financial Officer. Sir, you may begin.

Thank you. Thank you for calling in to today's conference call. With me today from Germany is Dr. Gerald Paul, Vishay's President and CEO, and in Hong Kong is Dr. Felix Zandman, Vishay's Chairman, Chief Technical and Business Development Officer. Before I start, Bill Clancy Vishay's Senior Vice President and Corporate Controller will read our customary opening statement. Bill?

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 risk and uncertainty 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 later on in the call. And finally, Dr. Zandman will update our R&D and acquisition activities.

As stated in today's press release, Vishay reported a $0.27 operational earnings per share as compared to $0.14 for last year's third quarter, and $0.28 for this year's second quarter. The reported non-operational earnings per share include a loss of $741,000 on a long-term purchase commitment, restructuring and certain severance costs of $19 million, asset write-downs and related inventory obsolescence charges for discontinued products totaling $4.1 million and a $2.8 million charge to settle past product quality issues. All of these charges amounted to a negative $0.10 per share against operational earnings.

Revenues for the third quarter of $654 million were 16% higher than last year's third quarter, and slightly lower than this year's second quarter and were in line with our previous guidance.

Revenues by segment. 52% of our revenues consist of semiconductor products, 48% passive electronic components. Solid gross margins for the quarter were 26.4%, as compared to 27.4% for the immediately-preceding quarter. Gross margins by segment for the quarter were semiconductors, 27%, compared to 27.8% in the last quarter. Passive products, 25.7%, compared to 26.9% in the last quarter, and as I said, Dr. Paul will elaborate on these margins later.

Selling, general and administrative expenses of $99 million, 15.1% of revenues and are in line with our expectations. Other income of approximately $5.8 million consists mainly of interest income on the large cash balances that we have invested around the world. The effective tax rate for the year remains at 25% for operational earnings. Capital expenditures for the quarter were $45 million. Depreciation and amortization for the quarter was $49 million.

Total head count at quarter end was 27% -- 27 million -- 27,000 people of which 74% are in low cost areas. Other key amounts of interest are cash and short-term investments at quarter end, were $613 million. Total inventories at quarter end was $538 million, and working capital at quarter end $1.2 billion. Bookings for the quarter were $602 million, and backlog at quarter end is $610 million, and in cash generated from operations for the quarter was $98 million. And as announced in our press release, we expect the fourth quarter revenues to be in the 620 to $640 million range.

Now, Dr. Paul will give us a little more detail.

Thank you, Dick.

Let me start out talking about the economic environment we are seeing in the third quarter. Clearly, I think we can say that we continue to enjoy a friendly environment. The OEMs and EMSs continue to order at high rates, and there is a steady development of the business of our distributors. I'm talking about the POS and the orders taken from their customers. On the other hand, there have been lower orders from distribution on us, due to increased inventory levels there, worldwide distribution at the end of September was down to 3.9 turns as far as we can judge it from our distributors.

The U.S. distributor is down to 3.0, Europe, to 3.8, and Asia, slightly up to 5.2. Absolutely speaking, this is not a disaster, but obviously, it was time for action and I think it is good news that distribution this time in contrast to 2004 they stopped early enough to order and we have seen the consequence through lower orders from distribution in the third quarter.

All geographic markets continued strong, and also there are no major changes versus the prior quarter concerning the various market segments. All of them are quite strong at the moment except the well known exception of automotive in the U.S. Lead times have normalized and still we see a relatively low level of price pressure, which of course may increase going forward, but this is really only a more general statement and not so much a concrete forecast. So altogether, we continue to see a friendly solid business climate.

Talking about Vishay's development of business, in quarter three, I believe we developed solidly, according to our expectations. We achieved sales of 654 million in the quarter, versus 661 million in prior quarter, and 566 million prior year. Sales to OEMs and EMSs grew by 3% versus prior quarter while sales to distribution went down by 6%. I would like to highlight the strong sales to Asian OEMs which is up in the quarter by 12% vis-a-vis prior quarter.

There has been, as I indicated before, a substantial slow-down of orders, 14% really versus prior quarter, but this is exclusively due to distribution, managing the inventory levels, and is not triggered by the end markets. Book-to-bill ratio in the quarter in Vishay was 0.92, 0.81 from distribution, 1.01 for OEMs and EMSs. You see again the influence of distribution, but also, that the direct business continued strong. 0.87 book to bill for actives, and 0.98 for passives. 0.83 for Asia, 0.91 for the Americas, and 1.03 for Europe which is relatively strong for a summer quarter in Europe.

Backlog in Vishay has been reduced to a more normal level of 2.8 months. In particular, Siliconix we have seen a normalization. I would remind you that especially in Siliconix, we had very high backlogs in the quarter before. Price decline at Vishay slowed down further. We are close to price stability. We had minus 0 .1% versus prior quarter, practically stable, and minus 2.5% versus prior-year price decline.

We are approaching really price stability for the passives, which is the consequence of defined programs we have. We had the price increase of 0.6% versus prior quarter, and the price decline of just 0.3% versus prior year. Also, our discretes business benefited from selective price increases. We have 0.7% price decline versus prior quarter, and just 4.5% versus prior year, which is a low number.

Good news is also that book to bill started to recover in October, so I think we can say we continue to see a good business level, but we have to state that there are some inventory corrections at distribution which by definition are temporary.

Now, let me talk a little bit about the reconciliation of results versus prior quarter first. Based on 6 million lower sales which actually excluding exchange rates were 9 million lower. The adjusted operating margin decreased by 6 million from 80 million to 74 million. The main elements of this development was a volume decrease which had a negative impact of 1 million, the ASP erosion, another negative 1 million, and 3 million came from inventory impacts mainly from the fact that we billed less inventory in quarter three than we did in quarter two.

Now, the same procedure vis-a-vis prior year. Based on 88 million higher sales, actually 81 excluding the ex-rate impact, the adjusted operating margin improved from 33 million from 41 million to 74 million. Main elements were the impact, the positive impact of the volume of 52 million vis-a-vis a negative impact of the ASP erosion 17 million down.

Let me highlight some -- let me give some highlights on the operations. The inventory turns in the third quarter declined slightly to 3.3, coming from 3.4. The inventories again excluding ex-rate impacts went up by 7 million, about half happened in raw materials. But this represents a normal fluctuation, and is principally related to the production output.

We spent capital in the quarter of 45 million, as compared to 34 million in prior quarter. Depreciation was at 46 million. Excluding acquisitions, the head count was practically constant at about, as Dick said, 27,000 people. The levels of fixed and variable personnel both were unchanged. The employment in high labor countries continues to go down, and is now at 25.8%, down from 26.3% in the prior quarter.

We have reached substantial improvement, I believe, in terms of cash generation, which also I believe is a good sign for the discipline in Vishay. We generated cash from operations of 98 million in the quarter, as compared to 77 million in prior quarter, and 70 million prior year. I think the numbers are even more impressive if you look at the year-to-date performance. Year to date, September in 2006, we generated from operations 228 million, vis-a-vis 114, just half of it last year.

Concerning free cash, the picture is similar. We generated free cash of 56 million in the quarter, as compared to 46 million prior quarter, and 40 million prior year. Again, the accumulated number since September were 121 million generated -- generational free cash this year, vis-a-vis 42 generation free cash last year.

We continued to restructure the company according to our plans. I have already discussed our measures in Germany, Belgium and Holland, which continue according to plan. In the third quarter, we have announced another restructuring project. We are going to close a packaging factory in Hungary, and we will move all of this production to existing Vishay facilities in China and also in Hungary. So, I think we can say and summarize that Vishay continues to optimize its structure while generating substantial cash.

Now, let me come to the various product families in Vishay, and let me start with resistors and inductors. The business of resistors and inductors continued in the third quarter on a high level. We achieved sales in the quarter of 154 million, which is down by 4% versus prior quarter, but up by 16% versus prior year. Book to bill was at 0.98. Backlog was stable at 2.6 months. Gross margin of resistors and inductors remained at an excellent level of 31% of sales, and there is price stability for resistors and conductors. There was a point full price increase versus prior quarter and only a 0.7% decline versus prior year.

Inventory turns were at a quite acceptable level of 3.8, and we are in process at the moment to integrate a smaller acquisition, Phoenix do Brazil which will add approximately 15 million of profitable sales, which will round out our resistor portfolio and most important, I believe, will strengthen our position in general in south America.

Capacitors, in the third quarter, we have seen two major influences on this business. First of all, we have seen the impact of a firmer pricing strategy implemented by sales, and of the distribution starting to reduce the inventories. Sales in the quarter were 120 million, which is 11% below prior quarter but 9% above prior year. Book to bill was at 0.94. The backlog remained at 2.8 months. Gross margin continued at the improved levels we obtained through the last quarters. We achieved 17% of sales.

We have reached, also, for Capacitors price, stability, we had 1% price increase, versus prior quarter, and 0.5% price increase versus prior year. The inventory turns at Capacitors are still at a dissatisfactory level of only 1.9, but this will improve drastically next year, as we then can start to consume our excess tantalum raw materials.

I'm happy to report that we have started to produce MAP tantalum capacitors MAP stands for multiple array package, which is a special technology for various small case sizes. We are quite optimistic for this technology to add sales and profits going forward.

Coming to the Michelins group, the business will continue to grow based on new applications which we find, and diligent cost reduction. Sales in the quarter were 42 million, which is 2% below prior quarter, but 7% above prior year. Book to bill, above 1, 1.05. Backlog has grown to 2.2 months, and gross margin remained at an excellent level of 36% of sales. Inventory turns, the measurements grew at 2.6, but this will improve after the finalization of our current restructuring efforts.

May I summarize our passives business as follows: I think we can say that Vishay's passives enjoy a good year, which is based on economy, but also on our cost reduction. There is no question that for Vishay, resistors really carried the passives, but also Capacitors in terms of profits have come a long way and measurements grew product as a percent nice and also profitable, better of growing performance. We are also quite optimistic concerning new specialty products in the area of passives that will support further growth and higher profits.

Let me come to discretes and let me start out with semiconductors, excluding Siliconix. The business maintained in the quarter at a good level. Sales were 187 million, which is the same as prior quarter, and 9% above prior year. Book to bill was at 0.97. Also, in this case, also in this segment, distribution has reduced its orders. Gross margin remained at a quite satisfactory level of 24% of sales. The ASP decline slowed down further after selective price increases especially at small sequent products. Vis-a-vis prior quarter, there was price stability, and vis-a-vis prior year, there was a decline of 3.2%.

Inventory turns were at a very satisfactory level of 4.4. Our move to [latch up wafers ] is underway. I discussed that before. We expect the finalization of this project by the end of this year.

Restructuring continues. I was talking before about the closing of the packaging plant in Hungary. Our new product family [Trans Schottky Diodes] start to grow. We achieve already 3.5 million sales per quarter, and we expect a nice increase for next year.

Siliconix achieved another record quarter in terms of sales. We had 152 million sales in the quarter, which is up by 10% versus prior quarter, and by 29% versus prior year. So all of our expansion projects bear fruit.

Due to low distribution ordering, especially in Asia, book to bill dropped to only 0.76 in the quarter, but this has recovered in October. It was a temporary effect. Backlog still is very high at 3.8 months. Gross margin declined slightly to a still very satisfactory level of 31% of sales. The incremental performance has been burdened by a temporary additional usage of subcons and by high material prices. Price decline continued lower than the historic leverage, we had price decline of 1.6%, versus prior quarter, and 6% versus prior year.

We currently prepare for another 20% volume increase in '07, and mainly for high sales density products with the positive impact on the product mix. We are going to continue to invest in Siliconix, excellent division. We also targeting this context at the reduction of the usage of subcons.

So, if you summarize our business with discretes, with actives, let me say that we continue to expand capacities, and drive technology in discretes. I think it is fair to say that any acquisition, especially in the area of discretes will generate lots of synergies, given the strength of our organization, especially in discretes.

Looking ahead and summarizing the quarter, for Vishay, I think we can say that we should continue on its way to reach higher levels of sustainable earnings power. With our sales lower by about 1%, we achieved earnings per share of $0.27, as compared to $0.28 per share in the prior quarter. Very close. So it is a record quarter. We continuously generate cash at a high level, even increased levels supporting our strategy of acquisitions. We experience and continue to experience strength in virtually all of our markets.

We expect the continuation of inventory adjustments at distribution for quarter four which will impact slightly our outlook for sales and profits we are guiding as Dick mentioned, to a sales range between 620 and 640 million, in the fourth quarter, which should be a solid basis for another good quarter.

Thank you. Felix?

Okay. This is Felix Zandman, Chairman of the Board speaking.

Just to summarize and add a few words of my own, concerning the quarter. The quarter operating results of $0.27 which you heard now are in line with what we had been expecting. The free cash flow, which means cash flow from operations, minus capital expenses, of $56 million for this quarter, we consider as excellent. And it is this measure, and after earnings per share, this is one of the most important measures for us, in other words of course, earnings per share is the most important, but after that, you look at the free cash generation, and I'm quite satisfied with what I see.

We continue to scout for acquisitions, small and large, as a part of our strategy of growth. Presently, of course, we would prefer to pay acquisitions with cash which we have on hand. Our policy is that each acquisition must meet specific goals of product depth, R&D capabilities, return on investment, earnings per share growth, et cetera. It must be accretive during the first 12 months of the acquisition, as it has been on each and every acquisition in the past.

Our R&D programs are on target. Already approximately 20% of our sales consists of new products. Which means products introduced to the market, within the last three years. The proportion of new products will grow with time and will generate a larger portion of our sales with higher gross margins. This is what we are pushing very hard presently.

A couple of examples of R&D programs for important markets, just a couple of examples. Number one, we are developing now electronic brake pedal for cars. No more hydraulics in cars in the future. This has been -- this will be done with -- for major -- we are working for a major car equipment manufacturer, for a brake, which has for reasons of safety, two independent technologies transfunctioning. One is a [strain lock cell] measuring force applied to the pedal. The other is a precision potentiometer measuring displacement of the pedal during braking. Both systems can work independently.

Vishay is the only, I repeat only company in the world mastering both technologies, and the leader in sales and performance of lock cells and precision potentiometer especially for the aircraft and the automotive industries.

The second example, wireless transducers for mobile trains, for airplane swaying, for stress measuring industry, which has been announced before, but now it has been introduced to the market, and we expect good sales coming up from this application.

The third one which has been introduced already is Chip Scale MOSFET, and Chip Scale Diodes which are on the way to being introduced. Now, what does it do for us? There will be no need for lead frames, no wire bonding, no molding, 70% reduction in size and 50% reduction in thickness. This is less expensive, better performing, less inductance, and smaller inducers and semiconductors. Some of these products already have been introduced to the market, and enjoy a major success.

We are building more and more capacity for this product, which has presently a rate of $50 million already, and growing. Just limited by capacity. This are just a few examples to give you a flavor of what is going on in various R&D. To summarize, Vishay continues to perform well and I look with optimism for the next -- for the future.

Thank you. We are now open for questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from Thomas Dinges.

Hi, good morning, guys. Dr. Paul, I guess a quick one, just simply, to kind of tie back some of the stuff you were talking about with end markets and some of the trends that you've seen, obviously in the semi business, especially Siliconix or book to bill had a pretty significant swing but you did say that it is recovered.

Has October specifically in that market bounced back at least close to parity or are you still running a little bit below parity? And in terms of the inventory reduction that you're seeing at the distributors, broadly speaking, what is kind of the expectation here as to how that runs its course? Do you think you get back to a bit more of a normalized run rate with those guys, by the first quarter of next year, the second quarter of next year? What is kind of the expectation?

Okay. First of all, let me say and I missed to said it my general speak speech, I can do it now, that the increase of the inventories which we follow closely, I can only talk for Vishay obviously, the increase of the inventories stopped already in August, so September already, at distribution, was a slight change of the trend, so that the inventories we watch at distribution went down already in September.

And basically, what we have seen at Siliconix in particular in October is still below one but it is substantially better than what we have seen for the third quarter. And as I said, I try to say before, we expected to be negative say below one in the fourth quarter. I do expect at this point, but all of this depends of course on the development of the overall business, but I'm optimistic for that. We presently internally expect it to be a one quarter effect.

Okay. And then just really a housekeeping item, distribution as a percent of sales this quarter?

Oh, this quarter? On average we have about 42%.

Okay.

The next question comes from Steven Fox.

Hi, good morning. First of all, on the charges, could you just go in a little detail on the product quality issues, what type of product it was, and how much restructuring charges you expect in the fourth quarter, please?

First of all, it was an aluminum capacitors and the and case dated back to the beginning of last year, basically, and it was a lengthy negotiation with our customer, it was a material related problem which is long behind us but out of settlement took place.

Okay. And the restructuring charges expected for Q4?

I don't have it in hand, Steven, but maybe we can separate that and give a separate call.

That's fine. And then looking out into next year, Dr. Paul, in terms of the initiatives to streamline further the cost, just could you update us on what type of cost savings we could expect in 2007 from those types of actions?

Well, you know we have just announced another closing. So all of these things we started this year will of course impact us next year, because if it comes in, it comes in steps, and not -- in most of the projects, the year 2006 did not benefit to the full extent.

For instance, now we announced the closing in Hungary which basically will have no cost impact this year but of course will show up as a saving next year and there is more to come. Basically in the area of manufacturing.

And lastly, just in terms of looking at demand, if you separated out some of your more mature product lines from your faster growing lines is, there any distinguishment in terms of demand on some of the older lines that you may have acquired in the last few years?

No. I would say -- well, see, you have seen, if you talk about the year, by far the best growing business at Vishay is Siliconix, by far. But also our other semis grow nicely. Capacitors are the ones that do relatively worse than the others but you know there has been much restructuring in capacitors at Vishay. Internally, but also externally concerning our pricing policy.

Great. Thank you.

Your next question is from Matt Sheerin.

Yes, thanks. Just another question on the inventories. Have you looked at the inventory situation at your EMS and OEM customers? I know it is harder if you had to get a read there but you could give us sort of what you're thinking or what customers there are telling you about demand in inventories?

Well, I know there is a concern out there of course, everybody talks about EMS at the moment and we discussed internally. I cannot agree with the concern. To the extent we know, but this is qualitative and not quantitative unfortunately. They continue to order at high rates and they talk about good business. We are not aware, but again, it is our subjective impression, and it is not backed up by a complete data, at that point, that EMS represents a problem in terms of inventory.

Okay.

We can only judge of course our segment and this for sure is not everything.

Okay. Great. And then just a follow-up on the automotive business which I know is a big market for you. You've seen some of your competitors and counterparts in other parts of the supply chain talking about seeing a slowdown in production orders and affecting overall demand trends. Could you tell us what you're seeing in automotive right now?

Not in Europe. In Europe, we see continued optimism, and I'm talking concrete, large suppliers in that field. You can name them. There are two major ones in Europe, and these people are optimistic.

In the U.S., the picture is different, but it has been different since quite some time.

So has it gotten any better or worse over the last quarter in terms of auto in the U.S., your demand?

Our opinion is no change to be reported in this quarter. Basically it is the same situation. That's how we see it.

Great. Thank you.

Your next question is from Kevin Kessel.

Thanks, good morning, guys. When you go back to last quarter, you were saying that were you entering the third quarter with a higher backlog and that you optimistic for the fourth quarter. So essentially what -- I think it is distribution that changed, but maybe you can explain what the changes were from three months ago till today?

Well, first of all, Kevin, I think we entered into our -- and within the window of sales we were forecasting, so it was -- this is why I said before, business developed according to expectations. So this is my expectation, our expectation, and this was the range we gave, and we ended up more or less in the middle of that range, so in that sense was no surprise.

It is true the inventory build-up -- there was a suspicion that the inventory -- there was a momentum in the pipeline, because the orders, substantial orders in the second quarter, and there were -- there is always an inertia, but I think the good part of it is really that the inventory, at least according to our picture, is reporting our distribution reporting back, the inventory peaked already in August, and started to slow down.

Really it is a business decision of our distributors when to step on the brakes but I must tell you I am quite happy this time that they stepped on the brakes relatively earlier than in the year 2004.

And then in terms of just cancellations, have you guys been seeing a pickup in cancellations as a result?

There has been especially in Siliconix, there has been some cancellations. There have been practically no cancellations of course, in the first half of the third quarter we have seen more, but as I said before, we are still at 3.8 months backlog, this is principally speaking to high, for keeping up a good service, if you understand. So we are not suffering from lower backlogs.

So Siliconix, is 3.8?

Yes.

Okay. And then in terms of your gross margins in the quarter, I think I understood you saying that the 6 million in higher costs was 1 million pricing --

Yes, 1 million volume.

1 million volume, 3 million inventory?

That's right.

When you look at December, it sounds like you will draw down inventory again. Hopefully you will build less. But where do you kind of see the gross margin going from here? Do you think it will be stable as a result of stable pricing?

I cannot project, Kevin. You know that. I cannot project. We don't do that in that sense. So I expect a solid quarter, that the fourth quarter will be a solid quarter.

And then just lastly, housekeeping, what do you expect CapEx for '07 to be? And also, what do you expect cash flow from operations to be, especially given the tangible contracts pending?

Well, CapEx for the year, there is no change in expectations this year, it was around 180, approximately, but this is not binding at this point. We are just pulling together all of our projects at this point. It will be another time in the area of 180 or something like that. Approximately. And concerning -- what was the other question, Kevin?

Cash flow from operations in '07, given the tangible contracts pending.

This is all determined -- of course it will very much helped, very much supported by the reduction of Tantalum Powder Wire inventory but to which degree will come through and will -- and of course to which degree it will impact, it depends on the business conditions of course. The volume which we can sell. And I do expect a major contribution next from the reduction -- to cash flow from operations from the reduction of inventory Tantalum Powder Wire.

Would that be 60 million, or is that too high?

Kevin, that is the purchase of it. Are you talking about the utilization of the inventory, that doesn't need a cash expenditure. And on top of that, we're not having to buy large amounts of Tantalum under our contract.

Can you put a range around that?

I would say for the whole year, it's got to be somewhere between 40 and $60 million.

Thank you.

Depending very much on the business conditions, yes.

Thank you.

Your next question is from Jim Suva.

Great. Thank you very much. Just to clarify, I fully understand how distribution orders have really put on the brakes here, but just to clarify, am I correct at saying that thus far EMS you have not seen a slowdown in inventory? And then a follow-up to that --

In orders. In orders. Excuse me.

In orders yes. Right. And publicly, there is a lot out there about inventory build. Are we setting ourselves up for a Q4 put on the brakes by EMS or what type of confidence or visibility do you have there?

It is not our impression, but, of course, I must say that we don't have the same level of information. We do not know exactly. There is no report how much inventory is at EMSs. As a matter of fact, on the other hand, talking to these people, we were not under the impression. But this is a qualitative statement.

Okay. And as a housekeeping item, can you give us capacity utilization numbers for your different parts?

Really, it is unchanged vis-a-vis prior quarter. This is why I didn't go through that. It is basically the same picture as in a quarter ago. No change. And Siliconix is practically -- all semiconductors are practically full. And in the passives, really the specialty lines, it doesn't make much sense to define even a capacity utilization. We are very often in specialty products only in one shift, but first approximation, no change to prior quarter.

Okay. Thank you.

Thank you. That concludes our conference call for this quarter. We expect to report on our fourth quarter and full-year earnings during January of 2007. And of course, we will immediately update the public on any acquisitions in the meantime. Thank you for calling in. And look forward to the next call.

This concludes today's conference call.

You may now disconnect.