威世科技 (VSH) 2007 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Vishay first quarter 2007 financial results conference call. (OPERATOR INSTRUCTIONS) Thank you. At this time I would like to turn the call over to Mr. Richard Grubb, Chief Financial Officer. Sir, you may begin.

Thank you very much. Thank you for dialing in today for today's first quarter's financial call. On the line with me today is Dr. Gerald Paul, Vishay's President and Chief Executive Officer and also Dr. Felix Zandman, Vishay's Chairman, Chief Technology Officer, and Business Development Officer. Before I start, Bill Clancy, Vishay's Senior Vice President and Corporate Controller will read our customary opening statements.

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

Okay. I will start with some summary comments and then Dr. Paul will add a more detailed evaluation of the results for the quarter. Finally, Dr. Zandman will update our R&D and our most active -- acquisition activities that have been taking place since last quarter. For this quarter, Vishay reported $0.26 operating earnings per share as compared to $0.25 from last year's first quarter and compared to $0.19 for the fourth quarter of 2006. This represents a 37% increase in sequential earnings per share on a 3.6% increase in net revenues. The reported GAAP earnings per share include restructuring and severance costs of $2 million. These charges amounted to a negative $0.01 per share against operating earnings.

Revenues for the first quarter of $658 million were approximately 4% higher than last year's first quarter and last year's fourth quarter also. Revenues by segments were Semiconductor, 49%; passives, 51%. Consolidated gross margins for the quarter were 26.6% as compared to 24.5% for the immediately-proceeding quarter. Gross margins by segments for the quarter were Semiconductors, 25.4 compared to 24.1 in last quarter's earnings; passives, 27.8 compared to 25% in the last quarter's earnings. Selling, general, and administrative expenses for this quarter were $107 million, an $11 million increase over last year's first quarter due mainly to $4 million increased salaries and wages, $4 million increase do to foreign currency exchange affects, and a $1.6 million cost of training and transitions related to the acquired PCS business as of April 1, of this year. Other income consists mainly of interest income.

The effective adjusted tax rate for this year is down a little bit. We expect approximately 24.5% annual effective tax rate for 2007. Also, in January 1, of 2007, we had to adopt what they refer to at FIN 48, having to do with income taxes around the world and we had a negative $2.1 million adjustment to retained earnings, as expected. Capital expenditures for the quarter were $31 million while depreciation and amortization was at $50 million. Total head count at quarter end was 27,000 people of which 74% are in low-cost areas. Some other key amounts for the quarter were cash and short-term investments at quarter end was $333 million. At quarter end we had recorded a $330 million reclassification of class -- of stock cash into long-term assets. This reflects the purchase price of $290 million for PCS business and $43 million for the PM Group Onboard.

Total bips substantially all of which is convertible equals $608 million. Total inventory at quarter end was $548 million. Working capital at the quarter end was $946 million. Bookings for the quarter were $656 million. And our backlog is at $587 million. Cash generated from operations for the first quarter of 2007 was $41 million. As announced in our press release, we expect the second quarter revenues to be in the $730 to $750 million range. Thank you. Dr. Paul?

Thank you, Dick. Indeed, Vishay had a good start into 2007 no question, and the start was better than we anticipated. Based on much stronger orders and on strong sales performance in general. We also prepared in the first quarter the successful integration of the IR acquisition and we completed a small but strategically important acquisition, as Dick mentioned, PM Onboard. I will talk more about it. And we look into the current quarter optimistically.

Let me be a little bit more in the detail. Let me talk first about the economic environment. The first quarter 2007 showed a continuation of the friendly business climate that we have seen throughout 2006. As compared to the previous quarter, there was even quite a nice upturn, which was stronger than we anticipated and it came from practically all regions and market segments. Inventory turns of worldwide distribution recovered from 3.9 to 4.1 due to better sales of distribution, but also to a slight inventory reduction. Book-to-bill of our distributors were close to 1. Also, no change, all markets remain strong except U.S. automotive and the lead times also did not show any difference to the quarter before. We see four to seven weeks for the passives and six to nine weeks for discreets. So altogether, I think I'm happy to report that our impression is that the end customer demand is healthy, continues healthy.

Talking about the business development at Vishay, we had stronger -- as I said before, stronger than anticipated orders in combination with available capacities they were leading to a better than projected sales. We achieved sales of $658 million in the quarter vis-a-vis $636 million in prior quarter and $631 in prior year. Looking back what I think quarter four '06 really proved to be an inflection point for the orders. You remember starting in the second, third quarter last year, orders went down. Already in the fourth quarter we saw that this order decrease did not continue, but now in quarter one '07, we see a turnaround. Orders for Vishay are up 10% vis-a-vis prior quarter and all regions contributed. Book-to-bill ratio improved from 0.94 to 1.0 for Vishay, 1.0 for distribution, but also 1.0 for the OEMs. 0.97 for actives and 1.03 for the passives. 0.97 for Asia, 1.02 for the Americas, and 1.01 from Europe. The backlog was stable at 2.7 months, which is above the long-term average for Vishay. We continue to see very little price decline. We had price decline vis-a-vis prior quarter of 0.7% and also 0.7% vis-a-vis prior year.

For passives, we can really talk about price stability. We had a price decline of 0.3% versus prior quarter, but prices were up by 0.4% versus prior year. Also, for the actives, for our discreets, the price decline was low. We have seen 1% price decline vis-a-vis prior quarter and 1.8% versus prior year. As I have tried to indicate before, the current quarter promises to be good. April book-to-bill is at 1.03.

Let me talk a little about operations. The inventory turns were stable at 3.2. The inventories, excluding the exchange rate impacts, went up slightly by $2 million. Raw materials started to decrease as indicated as expected and finished goods will follow starting this quarter. Capital spending was $31 million as compared to $68 million in the prior quarter and to $36 million prior year. This compares to a depreciation of $46 million. For 2007, we expect total capital expenditures of approximately [$215] million whereby $25 million will have to be spent for our International Rectifier acquisition for the increase of capacities, but also for the integration of IT. Head count was reduced again in the quarter by 270 hits. We continued to adapt our manufacturing capacities, but also enjoyed better efficiencies.

The employment in high labor countries remains at 25.8%, further improvements will materialize in the context of the full implementation of our announced restructuring project in Belgium and in Holland. We generated cash from operations, as Dick indicated of $41 million in the quarter, as compared to $121 million in prior quarter and $53 million prior year. And we generated free cash of $13 million in the quarter as compared to $54 million prior quarter and $19 million prior year. The free cash generation in the quarter has been burnt by a relatively high payouts for restructuring measures that were expensed already in the year 2006. So we continue to anticipate another year of excellent cash generation, which will be supported by strong operational results and by a reduction of inventories which will start now.

Let me talk about the reconciliation of results of the first quarter vis-a-vis the fourth quarter last year. Based on $23 million higher sales, that means $18 million excluding the affect of exchange rates, the adjusted operating margin increased by $17 million from 51 to $68 million. The main elements were positive impact from volume, especially from mix this time, $15 million; price decline negative $4 million; and better costs of $6 million, as we expected it to happen.

If you compare quarter one results with the first quarter '06, it looks as follows based on $27 million higher sales excluding exchange rate, just $9 million higher sales, the adjusted operating margin decreased by $4 million from 72 to $68 million. Main elements were volume mix, positive $11 million, ASPs a negative impact of $5 million, and fixed costs came up by $11 million, which is the consequence of -- most of it is the sequence of exchange rates, but also of our acquisitions.

May I talk about our IR acquisition at this point and how it stands. As you will note, the deal was closed on April 1, 2007. My organization has worked quite diligently in the first quarter to make this transition smooth. IR helped us a lot. We must say that. And I'm happy to report that this carve out business is now up and running within Vishay. The organization has been integrated for the entry, planning, shipping, invoicing, functioning, the transfer service agreements are implemented and customer vendor transitions are completed. We expect this acquisition to be slightly accretive already in the second quarter '07 as we said before. And we also reconfirm a contribution from this acquisition of $14 million in the first quarter '08. All this is quite in accordance with previous statements. From now to then, we expect quarter over quarter improvements of the profitability due to a normalization of the sales and due to lower costs related to the transfer service agreements.

Let me come back to the first quarter and let me come back to Vishay to the product lines and let me start with resistors and inductors. In the quarter , we had strong bookings and this led to higher than expected sales. All the product lines in resistors and inductors are doing well. Sales in the quarter were $165 million, which is 5% above prior quarter and 2% above prior year. A book-to-bill rate in quarter one -- of 1.03 indicates an unbroke momentum of this important product line. The backlog was stable at 2.6 months and as we expected, gross margin recovered to 31% of sales. You may remember that in the fourth quarter we had a few single areas which brought gross margin down to 29%, we are back on track. The positive is trend for transistors and conductors continued. Really this is the impact of our pricing strategy I believe. We had no price decline vis-a-vis prior quarter in the 0.5% price increase versus prior year.

Due to higher volume and lower inventories, the inventory turns improved to 4.1. Very strong and to be highlighted our business in automotive in Europe with resistors and in S&D syn fuel in general. Coming to capacitors, the business obviously stabilizes after successful implementation of our new pricing strategy. Sales in the quarter were $126 million, which is down by 8% vis-a-vis prior year, but is up by 9% vis-a-vis prior quarter. Book-to-bill in the quarter was 1.0. The backlog is at 2.9 months.

We have seen a very strong improvement of gross margin due to higher volume and a very favorable product mix. Gross margin came up quarter over quarter from 16% of sales to 21% of sales. It has to be stated that the share of specialty tantalum capacitors, which was high this quarter, really supported the results. We are close to price stability, also for capacitors. We have seen 6 points -- excuse me, 0.6% price increase versus prior quarter and also a 0.6% price increase versus prior year.

The inventory turns of capacitors are still low, 1.9, but raw materials started to decrease as our tantalum purchase commitment has expired at the end of '06 and I'm sure that we will improve the turns for capacitors substantially going forward. Restructuring projects are in the final stages of implementation and we expect from them additional positive impacts on the P&L that are still to come. Let me highlight also that our Easter power capacitors, field power capacitors, are expanding nicely in India. Looking at capacitors and without overinterpreting a single quarter, let me state that the performance of capacitors really has been steadily improved over the last two years thanks to consequent cost reduction, but also to a better pricing strategy.

Talking about measurements group, the business will grow based on new applications and targeted acquisitions. We trust the [Inaudible) PM onboard in the United Kingdom, with '06 sales of approximately $30 million. PM Onboard is an established manufacturer of systems for the way industries mainly active in Europe. Measurements group had sales in the first quarter of $44 million, which is up by 5% versus prior quarter and up by 8% versus prior year. And book-to-bill is very promising. It was in the first quarter of 1.09. Backlog has grown therefore to 2.4 months and gross margins remain at an excellent level of 35% of sales. What is not quite satisfactory yet are the inventory turns of 2.5, but we are working on it.

Coming to semiconductors, without Siliconix, I'm going to comment on Siliconix separately, the business was stable. Orders are picking up across the board, on the other hand. Sales in the quarter were $179 million, which is on the same level as prior quarter and prior year. Book-to-bill in the quarter was 1.04. Backlog at 2.5 months and like at resistors, we have seen a recovery of the gross margin there. We also had some singularities in the fourth quarter. Gross margin came up from 21% in the fourth quarter to 23% of sales in the first quarter.

The ASP declines remains at a low level. There was no price decline vis-a-vis prior quarter and approximately 1% price decline versus prior year. The inventory turns are satisfactory. They are at 4.2. The closing of the plants in Freiburg, in Germany and [Tingangesh] in Hungary have been finalized. Volume has -- the volume has been transferred, you will remember, to factories in China, Hungary, and Germany. We have started to convert further products from 4 inch to 6 inch in [Inaudible] that's important for our cost reduction and we have also started to expand our Fab in Taipei in order to cope with the expected growth of our Trench Rectifiers, new development of our [Inaudible] acquisition. We are adopting, we are integrating power diode [transistors] and IQPT molecules from the IR acquisition into this business and we are forming, already have formed a new division within this business with sales of about $130 million.

Coming to Siliconix, the business continues to grow year over year. Sales in the quarter were $144 million, which is down by 1% versus prior quarter, but up by 9% versus prior year. Book-to-bill continues to recover. You will remember that Siliconix since two quarters had relatively low orders, but had a tremendously high backlog. Also, the orders come back 0.88 book-to-bill in quarter one as compared to 0.79 in the previous quarter. March alone was at 0.92. Backlog reduced to still comfortable three months. Gross margin remained at 29% of sales. There was the expected improvement in the variable margin, but it was offset by higher manufacturing fixed costs as we had planned it. The price decline year over year remained low, 3.4% and the price decline versus prior quarter was at 2.2%. You will remember that we are prepared for a 20% higher manufacturing volume in '07.

Also, the share of the new products of Siliconix, high sale density products is growing steadily. And we also have integrated a portion of IR into Siliconix. These were in this case the high voltage MOSFETs. They will complement very nicely Siliconix for that portfolio and we have created within Siliconix a new division for these products with sales of also $130 million.

Let me summarize. Vishay had a strong start into the year 2007. Vis-a-vis prior quarter, sales grew by 3.6%, orders even increased by 10%. The customer's outlook for 2007 remains optimistic in general. The adjusted gross margin, as Dick said before, recovered from 26.6% from a disappointing level of 24.5% in quarter 4 '06. The adjusted earnings per share were at $0.26, which presents a major improvement from prior quarter and let me say it like that, it puts us back on track. We expect another successful year in terms of profitability and cash generation. We guide Vishay for the current quarter without the IR and PM Onboard acquisitions to a sales range of 660 and $680 million, which is another increase. And please keep in mind the IR acquisition in particular will further enhance our performance.

So let me say we are confident. Thank you very much. Can I transfer to Dr. Zandman. Dr.

Good morning. I am speaking to you from Japan. As you heard, we had a good first quarter with earnings per share for consecutive quarters increasing from $0.19 to $0.26 per share or 37% increase on a sales increase of 3.6%. Orders have increased 10% and the present quarter looks also quite promising. The integration of IR's PCS business into Vishay is proceeding as planned and we expect the rate of earnings as of this quarter, $14 million for the quarter as Gerald just told you, the estimated $40 million net profit the rate during the next 12 months and $50 million rated thereafter is also as expected. This should result is a respectable return on invested capital, just to remind that the cost of acquisition was $285 million.

We have also acquired during this quarter PM Onboard, a small UK Company with sales of $30 million and costs of $26 million. The Company specializes in transducer system, systems used in the [inaudible] industry.

This should also solidify our measurements growth in Europe and also provide an opportunity to introduce this proprietary high-tech systems into the United States and Asia. As we continue to look for further acquisitions, small and large, to position Vishay as a broad component manufacturer involved passive and active semiconductor components areas with emphases on profitable niche markets.

Our R&D programs are proceeding well. We plan to increase our new product content from 26% to 36% within the next four years or from 6 to $8 million for 2006 to $1.1 billion on $3 billion assumed sales for 2010, assuming no acquisitions. This is not a projection, it is just an assumption of a certain average growth, internal growth. Our definition of new products is any product which was introduced during the last five years is considered as new. It takes about five years for products to mature from the sample area to the prototype first production area until it really flies. We believe a five-year period is the right period to see how products troll.

I would like to mention that we have signed lately royalty agreements, with two large Japanese companies for our new patented power resistor and inductor products. Lately, patents on just products we believe have been infringed by many of our competitors. For example, one product line, 22 other companies, competitor companies have copied us and we believe that we will be able so sign a royalty agreement with them. All in all the quarter was good and we expect a better present quarter. Thank you.

Summer, would you set it up for questions, please?

[OPERATOR INSTRUCTIONS] Your first question comes from Tom Dinges.

Good morning, everybody. Dr. Paul, I had a quick question for you. As I read through the organics on the revenue side and the cost side. This quarter, you had said that compared to the year ago, you had some FX translation, some costs that hurt the operating margin. If I roughly run through the revenue number that you gave of 660 to 680, it implies that some of that is probably still there in the next quarter, at least by my back-of-the-envelope math, here, and I was hoping you could help--?

Sorry, I didn't understand, you are referring to the projected sales--?

Projected sales, correct. And then looking at how much cost from prior acquisitions and FX you guys are still expecting.

Let me at first clarify the thing with the cost. Most of this fixed cost increase, practically 80% of that, comes from exchange rate. Because we have a major part of our organization in Europe and the euro, as you can see, as you know yourself, came up tremendously. So these costs which are now increased -- if you looked at the fixed cost alone, premium power fixed costs, but of course print on the other hand also up our sales. In fact, Vishay in terms of operating margin is not exposed from a profitability standpoint to these changes, but if you look at the cost segment alone, then you see of course an increase. This is what I tried to say before. The contribution of acquisitions since first quarter prior year to fixed cost is just 20% of the total increase, maybe 25% of the total increase. So really, what I tried to say before is not that our costs went out of line, the exchange rate brought us up mostly. This is what I try -- what I think I should try to correct this impression.

Okay, that helps.

Okay. On a sales side, our projection is another growth on a relatively high quarter one. We have exceeded quarter one projected sales. Orders came in very strong, was more than we anticipated. We had the capacities there so we could ship more. On top of that relatively high level, we project for the current quarter, another increase, so this is basically what I--.

Okay, that helps. Just one quick follow-up on the capacitor side. Can you talk a bit about the pricing strategy and the product mix strategy that you guys have? Because obviously the gross margin surprised a lot, and you mentioned volume helped some, but it sounded like a lot more mix--.

It's also mix. Let me go away for a second from this 21%, which of course is a good number for our capacitors, but really what it underlines is a positive development of the gross margin of capacitors, which you can see, we came from a very deep low. Over the last two years, step by step, it became better and better, now we ended at a 21%. Which, let's face it, was really impacted strongly by a very positive mix shift in the current quarter. But on the other hand, we work on this mix shift, it means our share of specialty products will grow step by step and this helps the gross margin and the mix. On the other hand, even on the cost reduction side, we are not at the end because fewer of our announced restructuring projects are not finalized yet. They will as they kick in on the course of this year, on the other hand, additionally help the cost. I think capacitors in Vishay came a long way and I do believe the gross margin level at which we approach now can be w something we can be somewhat proud of.

Thank you.

Your next question comes from Jim Suva.

Great. Thank you very much. I want to just clarify if I heard it correctly, a comment about working inventory down. Was that for Vishay or for the supply chain channel and customers or--?

Supply chain channel. I was talking about distribution inventories, at least our distributors came down to a degree in the first quarter. But the better terms which our distributors should reported back is also the consequence of higher sales of distributions. It's a combination of both.

Right. How much inventory should we build in for coming on for the IR acquisition?

Well, it's approximately 0.4, I should know better. They are about 4 inventory turns based on 320 a quarter, 82/40. Something like 4 inventory turns of cost of goods sold of approximately 240, 260 million, but I can look that up.

Great. One last follow-up question. The other nonoperating income line that was about $7 million this quarter was up from about $4 million last quarter. Can you let us know what that increase was? Was it interest rate-driven, or was there something else in there and what should we expect going forward?

It was definitely interest rate-driven for the quarter. Going forward it won't be as high because as of April 1, and during the month of April we have spent somewhere around $330 million of that cash on the acquisition. So it will be coming down in future quarters.

Okay, thank you.

Your next question comes from Matt Sheerin.

Yes, thanks. Good morning. You talked about broad-based strength across your various end markets. Could you talk about the areas that you saw specific or particular strength and then areas that have been weak and you expect to come back?

The picture's really the same, as we have reported in the fourth quarter. We didn't see a big change. That means really, if I had to highlight something, is really Passives European automotive very strong this quarter. In general -- most important for us, this industrial electronics, which was strong all over 2006 continues to be strong in 2007. U.S. automotive is an old store, by still true. U.S. automotive is weak, but the volume is picked up very much by Europeans at this point in time and we do have a good position at Bosch and at Siemens to name two of the most known in Europe. So all together, mobile phones are quite strong also. So all together, we see the market unchanged. Really, I know there there was pessimism around at the end of the fourth quarter concerning the first quarter. In the other sect we see it more positively and I think in this case was correct.

Great. On your overall gross margin operating margin which increased very nicely in the first quarter, do you expect to see continued strength, or as mix develops in some of those higher volume or markets where your margins are not as strong come back, will that offset some of that. Then just on general pricing, which has held up very well, do you see that continuing?

Well, on pricing, we see -- at least for the visible future, we see relative stability for our product mix. This is not a big miracle, because you know in passives, we were withdrawing in resistors earlier and capacitors recently, we are really withdrawing from the commodity business. Withdrawing is too hard. At least we are de-emphasizing it, which on the other hand gives you more price stability. On the passive side, I think what we have done is a combination between the restructuring and focusing on specialty products was the right thing to do. You see the gross margins.

I'm not worried going forward. There can always be a point up or point down or something and economy's really a crisis game, but this is not to be foreseen. Obviously we will see it also. But really we will not be hurt to a degree as a pure commodity maker would be hurt. But at the moment, let me emphasize, the sun is shining. So I see a bright outlook. On discreets it's more competitive. Also there, you see relative price stability. in this case on the other hand, we expect growth going forward, stronger growth, especially our hopes of Siliconix, as you know.

Okay. Just lastly, regarding gross margin, some of your competitors have talked about seeing materials -- raw materials prices rising and creating somewhat of a head wind going forward, what do you see there?

We have suffered from high raw material prices since more than a year. At the moment, they are high but we achieved our gross margin despite that. So I cannot speculate on raw materials. At the moment, there are some indications that it goes up a little, but I would not be super concerned on that one. We are on a very high level already.

Okay, thank you.

Your next question comes from Steven Fox.

Hi, good morning. First question on the organic gross margins. I was curious, you sound somewhat confident that you can hold the current levels for the next quarter or so if volumes were sort of flattish.

My visibility is three months. This is a quarter. Indeed for the three months, I'm very optimistic, yes.

Okay. Can you just sort of provide a little more detail on the IR acquisition in terms of where the gross margins for that business came in and how much cost carry over are there related to the IR business on the SG&A side?

Well, can I put it like -- first of all, we are in the midst of the first quarter. You know that. We have four weeks behind that and what I said and what I said before is that all operational functions are working. Which is maybe trivial, but this was a carveout and to integrate a carveout is never completely easy, but I can state, it works. Then we know the numbers from IR before and these are good product lines, very clearly. Concerning SG&A, I think it will lower Vishay's overall SG&A percent of sales by 1 point, by 1.0%.

Okay. Last question. Regarding the strength in the euro, any rough idea how much that helped sales in earnings quarter over quarter?

Not at all. Sales for sure. You see, we have approximately say per quarter, something like at the moment $180 million in euro, sales in euro $180 million and then you can calculate yourself. That goes straight into the sales line, but on the operating margin line, it's neutral. We really have the same sales distribution by chance. The same sales distribution as we have the cost distribution that means we are first approximation independent in our operating margin of swings between the euro and the dollar.

Okay. Thank you very much.

Thank you.

Your next question comes from Kevin Kessel.

Good afternoon. My question's on SG&A. If I'm not mistaken, last quarter you had like a $7 million charge in SG&A and I was just curious, why did SG&A go up as much as it did then, excluding that charge?

Well, obviously our sales. If you compare the first quarter was 7 and the fourth quarter was 6. We suffered from the exchange rates by approximately 1 million, from acquisitions by $2 million and from inflation that means really the wage increases across the board, which always kick in in the beginning of January by $3 million. This explains the difference.

Okay. The other question is on--?

Excuse me, may I add to that. There was no real fixed cost reduction program underway. Because in view of the IR acquisition, I really did not want to cut back my organization.

I understand. For Siliconix, what is the lead times currently at? And where is the expansion progressing right now?

Approximately 7 to -- 6 to 9 weeks depending on the products and expansion is really across the board. We are expanding the wafer fabs and we are expanding also packaging. We are equipped already for 20% more pieces than last year, but we're optimistic for the volume of Siliconix. We will continue to expand.

Okay. Thank you very much.

Thank you.

At this time we have no further questions.

Okay. That wraps up our conference call for the first quarter of 2007. I appreciate you calling in and look forward to doing this again at the end of the second quarter sometime in July or August. Thank you very much.

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