威世科技 (VSH) 2007 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Vishay second quarter 2007 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. Mr. Grubb, you may begin the conference.

Thank you. My name is Richard Grubb. I'm Vishay's Chief Financial Officer. I want to welcome everybody to our second quarter financial conference call. Today with me is Dr. Gerald Paul in Germany, our CEO and President; Dr. Zandman is here with me in Malvern, PA, he's our Chairman and Chief Technical Development Officer. Before I start, Bill Clancy, Vishay's Senior Vice President and Corporate Controller, will read our statement.

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

Thank you. As usual, I will make some summary comments and Dr. Paul will add a more detailed evaluation of the runs. Finally, Dr. Zandman will update our R&D activities and acquisition activities. As stated in our press release, Vishay reported $0.26 operating earnings per share as compared to $0.28 for last year's second quarter and $0.26 for the first quarter of 2007. The operational results of the second quarter of 2007 exclude the automotive business unit acquired as part of the PCS business. The Company had announced previously its intention to sell this business during the last month.

The reported GAAP earnings per share include restructuring and severance costs of $3.9 million. These items and their related tax consequences, plus additional tax expense for changes in uncertain tax positions as required by FIN 48 are $3.4 million, and a negative $0.04 effect on earnings per share. Revenues for the second quarter of $716 million were approximately 8% higher than last year's and in line with our previous guidance, and also 9% higher than the first quarter of 2007. All of the increases in revenues were due to the acquisitions during the first quarter. Revenues by segment were semiconductors, 53%. Acids, 47%. Consolidated gross margins for the quarter were 24.9% as compared to 26.6% for the immediately preceding quarter.

Gross margins by segments for the quarter were semiconductors 24.1%, compared to 25.4% in the last quarter, and excluding the PCS business, the gross margins for the second quarter of 2007 for semiconductors is 24.9%. Acid products, 25.7 as compared to 27.7 in the last quarter. As I said before, Dr. Paul will go into more details on these margins. Selling, general, and administrative expenses for the quarter were $113 million, a $9 million increase over last year's second quarter, all of which relate primarily to the recent acquisitions. Other income consists mainly of interest income and is lower this quarter due to the $290 million cash acquisition of the PCS business.

The effective adjusted tax rate for the year is approximately 23%. Capital expenditures for the quarter were $42 million. Depreciation and amortization was $53 million. And the total headcount at quarter end of employees was 28,000, of which 73% are now in low-cost centers. Some other key amounts, cash and short term investments at quarter end was $387 million. Total debt substantially all of which is convertibles, equals $608 million. Inventory at quarter end was $565 million, and working capital at the quarter end was $1 billion. Bookings for the quarter were $718 million for a book-to-bill ratio of one to one for the second quarter. Backlog at quarter end is $677 million. Cash generated from operations for the second quarter of 2007 without the acquisitions was $107 million. Cash generated from operations for the second quarter, including all acquisitions, [$69] million. As announced in our press release we expect third quarter revenues to be in the 710 million to $730 million range. Dr. Paul.

Thank you, Dick. Good morning, everybody. Well, Vishay I think had a solid quarter with earnings per quarter of $0.26, whereby sales were somewhat below our expectations. On the other hand, the integration of the IR discretes progressed according to plan, and they were already accretive by $0.01 cent in the second quarter as anticipated. More so there's a promising outlook for this acquisition for the business development and also for the profit development, and we are proud of a very strong cash flow this quarter.

Let me talk about the economic environment we have seen. The friendly and firm business environment really continued through the second quarter. The POS of distribution continued on a high level. The inventory returns of distributors virtually stayed unchanged. We see 4.0 inventory turns for all distribution, Americas at 3.2, Europe at 4 inventory turns, and Asia at 4.8. Book to bill of our distributors were 0.96 whereby the Asian and the U.S. distributors were above 1 in terms of book to bill, where as Europe was weaker below 1 after an excellent first quarter.

Lead times on the market remain short. We believe it was four to seven weeks for the passives and six to eight weeks for the actives. We have seen the quite moderate price pressure to continue. Market conditions did not change in general. Our EMS business was stable. There were some weakness in mobile phones. On the other hand, we start to see the seasonal ramp-up in Asia.

Let me talk about Vishay's business in the second quarter, how it developed. Excluding acquisitions Vishay reported virtually flat sales following a very strong quarter one. This was, as I said, slightly below our expectations, which really can be attributed to the European business but also to the market segments in Asia, phones, and computers, which developed weaker than we thought. We achieved sales without acquisitions of 658 million in the quarter, versus the same amount in prior quarter, and 661 million in the prior year. Exchange rate had an impact to increased sales by 7 million versus the prior quarter, and by 15 million versus the prior year.

The acquisitions performed quite in line with our expectations. We achieved sales of 52 million for IR, for the IR acquisition without automotive modules, and 6 million sales for PM Onboard. The orders for the Company remain firm, book to bill in the quarter was 1.0. For more detail about book to bill, it was 1.0 for distribution and 0.99 for OEMs. Was 0.99 for actives and 1.0 for the passives. Was quite strong in Asia, 1.06, as I said before, and 1.0 for the Americas. Europe, relatively weak, 0.93 in this quarter. The backlog was stable at a solid 2.8 months. There was very little price decline. We have seen 0.6% versus prior quarter, and 0.1% price decline versus the prior year. For passives, we see continued price stability. We lost 0.3% on price versus prior quarter but prices were up by 0.5% versus prior year. We also have seen quite moderate price decline for the actives, . 0.9% price decline versus prior quarter and 0.7% price decline versus prior year.

Inventory turns of Vishay improved to 3.4. Inventories excluding the impacts of the exchange rate went down by 32 million in the quarter. Again, without acquisitions. They went down by 22 million in raw materials and by 10 million in WHIP and finished goods. Capital spending in the quarter was 42 million as compared to 31 million in prior quarter and to 34 million in the prior year. This compares to a depreciation of 48 million. We continue to expect capital expenditures of about 250 million in 2007, 25 million out of this 215 will be spent for IR, in particular for expanding manufacturing capacities and for integrating IT. The headcount of Vishay in the quarter increased by 1,300 people, 1490 people were integrated in this context due to the acquisitions. So the traditional part of Vishay went down in headcount, in variable and to a degree in fixed headcount.

Employment in high-level countries was at 27% without acquisitions this would have been 25.6. Again, slightly down from previous -- from the previous quarter. Improvements of this number can be expected from the full implementation of our announced programs, mainly in Belgium and in Holland. We generated cash from operations of 107 million in the quarter without acquisitions, and this compares to 41 million in the prior quarter and to 77 million the prior year. As I said in the beginning we are quite proud of the discipline to generate cash. Free cash in the quarter was 68 million without acquisition, as compared to 13 million in the prior quarter and to 46 million in prior year. So we do expect another quite strong year of cash generation.

Let me talk about the results and compare the results to the prior quarter. Based on the same level of sales, but actually 7 million lower, excluding exchange rate impacts, the adjusted operating margin decreased by 7 million from 86 -- from 68, excuse me to 61 million. The main elements were lower volume and less favorable mix which contributed 4 million negative and inventory impacts 2 million negative. The cost reduction offsets the price decline.

Now let me compare the results to last year second quarter. Based on 2 million lower sales, again, 17 million lower actually if you exclude exchange rate impacts, the adjusted operating margin decreased by 19 million from 80 million to 61 million. The main elements were lower volume and price attributing together 6 million negative whereby lower volume was by far the strongest impact. Costs are up by 9 million, whereby we have a quite dramatic increase of material costs, and inventory impacts increased the cost by 3 million.

Now I would like to talk a little more about our recent large acquisition, the IR acquisition. We reached sales in the quarter of 67 million which is in line of our projection. 52 million we achieved sales for the IR discretes, and 15 million for the automotive modules. There was a slow beginning in April due to several transition related problems as expected but through the quarter there was a steady improvement also as expected. And we can say that May and June sales run rate without automotive modules is at 240 million, quite according to our expectation. There's a quite strong book-to-bill ratio for these product. 1.13, 1.13 in the quarter. We can say that the integration of all relevant functions is completed to a large extent. Still we need support from IR, mainly in IT and in planning. But there are transition service agreements in place which cost us in quarter two 1.6 million. They will gradually go down, and they will end in the first quarter '08, all according to plan.

There are manufacturing projects that have been started to move the front end and the packaging out of IR facilities. We expect full implementation by the first quarter '09, and in steps this will yield substantial savings. The decision has been taken to mention to sell the automotive modules business with annualized sales of approximately 80 million. We studied it and we found that this business business is not really complementary to Vishay's business. We also believe that we would have been too small in this market. This is the only business of this kind we would have had, so we decided to sell it.

Gross margin in the quarter was $10 million or 19% of sales. If you excluded automotive, the operating margin was 3.7 million, or 7%. As I said in the beginning, it was -- the acquisition was already accretive in quarter two by $0.01. We expect improved profitability in the third quarter because of higher sales, because of lower costs for the transition service agreements, and, of course, we expect better efficiencies. There will be no repetition of our start, our problems.

Let me come to the traditional lines of Vishay, and I start with resistors and inductors. There was a decrease of the sales volume after a very excellent first quarter. Sales in the quarter were 161 million which is 4% below the prior quarter and 2% below prior year. Book to bill was at 0.98. Backlog was stable at 2.6 months. Despite lower volume, gross margin remained at a quite satisfactory level of 31%. The positive ASP trend for resistors and inductors continued. We saw a price decline of 0.3% versus prior quarter but a price increase of 0.5% versus prior year. Inventory turns were at the satisfactory level of 4.1. We had continued strong business with thin film chips, SMD wire rounds, and chip inductors and we continued to expand our manufacturing capacities.

Talking about capacitors, the business indeed has stabilized after a successful implementation of our new pricing strategy. There's a promising increase at power capacitors which offsets some erosion but still exists at low-margin film capacitors. So we do expect within capacitors a positive mix impact going forward. Sales in the quarter were at 126 million, which is down by 9% versus prior year, but only by 1% versus prior quarter. Book to bill was at 1.03. Backlog is quite comfortable at three months. Gross margin of 16% of sales was negatively impacted by a less favorable product mix as compared to the first quarter by inventory reduction and other inventory related items. There was price stability also for capacitors. There was a price decline by 0.4% versus prior quarter but a price increase by 0.5% versus prior year. The inventory turns at capacitors start to improve as in particular pant and powder and fire inventory levels decreased.

Turns in the quarter were at 2.1. The turns excluding the access powder were at 3.8. Inventories went down by 18 million in the quarter, by 11 million in raw materials, and by 7 million in WHIP and finished goods. The already announced restructuring projects are on schedule which will give us positive P&L impact in the year 2008. The decision has been taken to develop tantalum chips for the tools in so called (inaudible) technology. This is a special technology for miniaturization.

Let me come to the measurements group. The latest acquisition of PM Onboard in the U.K. complements the business and will add approximately 30 million of sales. Sales in the quarter were 49 million, including 6 million already from PM Onboard. This compares to 44 million in prior quarter and to 42 million in the prior year. Book to bill was at 1.0. Backlog at 2.3 months. And the gross margin remains at an excellent level of 34% of sales. Also PM Onboard the acquisition was already accretive in the second quarter. The inventory turns were at 2.7. There was a positive impact in inventory turns from PM Onboard. Restructuring measures are being evaluated for our new acquisition.

Now to semiconductors. Like to talk about our semiconductors without Siliconix first. Strong orders, and I also exclude in this display the impact of IR, the IR acquisition. There were strong orders in the prior quarter and this led to an increase of revenues as expected for all product lines. Sales in the quarter were 187 million, which is 4% above prior quarter but 2% below prior year. Book to bill was at 0.99. The backlog of this business was at 2.3 months. The gross margin remained at the level of 23% of sales. There is a steady and very reliable performance of this product group to be noted. The ASP decline remained moderate, minus 1.4% -- I mean, 1.4% decline versus prior quarter and 1.4% decline also versus prior year. This product group shows quite excellent inventory turns of 4.5. They have been noticeably improved versus prior quarter.

We continue to convert products in our German fab from four-inch to six-inch technology, quite important for us for mid and long-term cost reduction. We are also growing the business with new -- the new advanced short key rectifiers, sales already is at the run rate of [15] million per year, we are the technical market leader. We are on the way to expand our manufacturing capacity for these new products in Taipei.

A new division based on IR rectifiers and ITTP modules has been established. The run rate of sales of this segment of the business is expected to be 130 million per year. There's also promising potential for this group for improvements in approach to market, in product development and in cost reduction. We are quite excited about the potential in particular of this product group.

Let me come to Siliconix. The business continues to grow year-over-year. It was up by 5% for the first half of -- vis-a-vis the first half of '06, which has been a record year. The sales in the quarter were $141 million, down by 3% versus prior quarter but up by 1% versus prior year. This Siliconix business indeed developed somewhat below our expectations but there's no doubt in our minds that Siliconix has the potential to grow faster than the market going forward. Book to bill has recovered further to 0.99 after 0.88 in the first quarter and 0.79 in the fourth quarter '06. There's a comfortable backlog of three months which supports the expectation of continued growth in the second half. The gross margins remained at the level of 28% of sales. There was no price decline versus prior quarter and prior year.

We have established additional manufacturing capacity for Siliconix in order to participate in future market upturns. The inventory turns declined slightly to 3.7. We have initiated a program to reduce inventories by 10% by year end. Based on the IR acquisition we have established with Siliconix a new division for high-voltage MOSFETs. The present sales run rate is 110 million. The business at this point in time is still burdened by relatively high inventory levels at distribution but contains a very promising potential going forward. We will move manufacturing out of the IR sites within the next 18 months.

Let me summarize after so much detail. I think Vishay has stabilized on a solid performance level in terms of P&L and cash generation. Expecting a continuation of the present friendly market conditions before seeing another successful year which will be further enhanced by our recent acquisitions. The adjusted earnings per share of $0.26 represents stability, integration of the acquisitions, namely of IR is well underway and performs as anticipated. Including acquisitions, we, for the current quarter, guide Vishay to a sales range between 710 million and 730 million. Thank you. Can I transfer to Dr.

Hello. I'm the Chairman of the Board and Chief Technical and Business Development Officer of Vishay. To summarize a few numbers, earnings per share, $0.26, net profit approximately $50 million. Cash generated, $107 million. Free cash $60 million. IR and PM acquisitions accretive in the first quarter of their operations.

As Gerald said, everything is on plan, and now I'm going to speak a little bit about the other issues concerning acquisitions and R&D. We're integrating successfully the power control system division of IR while divesting the modest system business of IR as announced previously. This divestiture is due to the fact that after a very careful analysis and consideration we came to the conclusion that this business will not fit properly with Vishay. It's not for us. There's not enough synergies with Vishay, components, small dollar value of Vishay components in the system, customer base has to be served with a completely different sales force, and market is very narrow and somewhat unknown to us. That's one of the main reasons why we decided to divest ourself from this business. However, the power control business of IR, $240 million run rate, is doing well and is on target, as you heard.

Our acquisition of PM Onboard, a $30 million company, is in the midst of restructuring and is being absorbed by Vishay as planned. This business is a complement to our measuring group system and will provide additional strength to our growth in Europe and potential to expand into U.S. and Asia. What is PM? PM is a sophisticated specialist in Onboard weighing such as weighing trucks while the trucks are moving, while they're transporting all kinds of cargo. Lately the U.K. Parliament approved a recommendation to introduce a low to weigh all domestic waste and send the (inaudible) with information for billing as done already in Ireland and some other countries. This would be a introduction of a major growth to the business unit for PM. We count on it, and we know this will happen. If this goes through fast or slower, we don't know, but this represents a major, I mean, major increase potential for PM.

R&D in all Vishay divisions is proceeding as planned. We intend to increase our present 26% of new products, as a percentage of Vishay sales to a level of 36% in 2010. In our business model we believe that we should have an average of 40 to 45% of new products in the pipeline. New products will represent a growing proportion of our sales in the future. Acquisitions are always a part of our strategy, and we continue to investigate opportunities in this area. We are now open for questions. Thank you.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Shawn Harrison.

Hi, good morning. I was hoping first you could just provide the sales in the other semiconductor business as well as gross margins for both other semis and Siliconix, including the PCS acquisition?

The sales of Siliconix including this portion which goes under Siliconix, you said?

Yes, as well as the corresponding gross margin. So the aggregate numbers.

Well, we would have to add this together. I will have to come back. We didn't split it that way, but I can give you the sales -- but this is approximately, plus, minus 2 million approximately. It's 141, which I said about Siliconix, then it must be around 27, 26 for the IR portion for the -- for the high voltage, MOSFETS, but we didn't split it like that for this presentation. But of course we can bring this number.

Okay. My second question just has to deal with the weakness you witnessed in Europe. If you could just comment on just what end marks in particular that was and kind of the outlook here in the third quarter, maybe breaking out what is seasonally soft versus maybe the underlying weakness that could be out there.

There is for sure some seasonality there, but normally the seasonality is seen in the current quarter. We have seen it this time earlier, and it couldn't be nailed down to a specific area in the industry. We tried so, but it's across the board. Also distribution was relatively weaker in Europe than it was, especially in the first quarter. Very strong in the first quarter. Now dropping off to a degree. But it's broad and it's over most of the products. In Europe, particularly strong in the passives, so it was particularly seen in the passives.

Okay. Just final question. You had mentioned inventory is a head wind to EBIT margin expansion this quarter. I was just wondering if you to expound upon that a little bit and whether that's going to be a drag in the third quarter as well.

Well, we continue to reduce inventory but you have seen a major part of the inventory reduction going forward will come, of course, from just raw materials, which is this, of course, has no impact by definition. So major part of the reduction we expect to come from raw materials.

All right, thank you.

Your next question comes from line of Steve Smigie.

I wonder if you could talk a little bit about the timing for the sale of the IR piece, the automotive piece.

Well, we announced last week, I guess last month that the sale was going to take place. We are engaged in conversation with interested parties. We hope to by the end of the year have some type of a deal.

Okay. And then just generally on gross margin, I was hoping you could talk -- there's a lot of moving parts. Just give some general color for the coming quarter and the next several quarters what you're sort of anticipating on an aggregate basis?

Well, we don't forecast gross margin, but I can comment, of course, what has happened in the second quarter, try to say that. In resistors, we have seen the impact really of lower sales, first of all, and we have seen the impact of course, of the reduction of inventories. In capacitors, as I mentioned after the first quarter, we have seen in the first quarter a very favorable mix in general, and this is a more normal mix we have seen, maybe even on the lower side, on the more negative side. Also, in capacitors we have seen the impact of inventory reduction. So we feel that this quarter, in passives, we had a relatively low gross margin.

Okay. Great. Thank you.

Your next question comes from Steven Fox.

Hi, it's [Ingrid Tillman] in for Steven Fox. Just a couple of questions. On that gross margin that you just spoke about, do you expect that we're going to see any improvement over the next couple of quarters?

As I tried to say just now, the gross margins in this quarter, in the second quarter, were impacted negatively by the reduction of inventories, by inventory-related issues, and were impacted negatively by some mix change, unfavorable mix change, from a very positive first quarter to a relatively negative second quarter. I think you can draw the conclusion. We feel that the gross margin of passives in the second quarter were relatively low.

I was wondering if you could just give me a little bit better idea if you would review the time line for realizing the accretion from the acquisition?

It is already accretive. Both acquisitions, IR, the large acquisition, as well as PM Onboard, the small acquisition have been accretive already in the first quarter under Vishay as we anticipated and forecasted. IR was accretive by $0.01.

But going forward?

It is going to be better according to plan. You know there's a projection which indicates substantial improvements for the quarters to come. We are going to follow our projection.

Okay, great. Lastly, in terms of Siliconix, where are you at the capacity expansion, and?

Well, we put capacity into Siliconix, which enables us to above 600 million sales per year. But we have seen in this quarter some weakness in the main markets, that means in Asia, in particular mobile phones. So we have from a capacity standpoint we are in good shape. You remember we wanted to put additional capacity in in order to exploit future up-turns a bit, in a better form than we did in the past. So the manufacturing capacity is there but in the second quarter we have seen a downturn -- another downturn. We have seen a relatively weak market. But we already foresee for the coming quarter an improved situation.

And your competitors ere they adding capacity? Is there anything alarming, or are they underinvesting there?

Don't know exactly each competitor, but I think Vishay had to add capacity the others have added earlier.

Thank you very much.

Your next question comes from Matt Sheerin.

Yes, from Thomas Weisel Partners. Just to follow-up on the previous question regarding gross margin and not just in passives, sounds like you had some both volume-related but also internal inventory et cetera reasons why margins were a little depressed. I guess the question going forward, do you expect margins to stabilize here in the third quarter, or will product mix still work against you, particularly as Europe is going to be weaker and Asia is going to be stronger what should we expect in general for margins?

Matt, we believe that the product mix in capacitors was really unfavorable in the second quarter. To the same degree as in the first quarter, as I said, was very favorable for us. So what we have seen in the second quarter is maybe the other extreme.

Okay. And how are things trending this quarter, then?

Cannot comment on that. But I think I answered it. We feel that in the second quarter we have been on the low side of the product mix impact. On the inventory story, going forward, we are really reducing most of the inventory, or a major share of the inventory from raw materials.

Okay. And then on your SG&A line overall, are there some -- still some more cuts that you can make with IRF, or what should we be expecting around SG&A in the third quarter? Kind of flattish?

In IR, we took on very little SG&A to start with. So we will review it going forward, but we started already low. The improvements on IRs are going to come from the manufacturing side, obviously. April, the first month, was, of course, a difficult one, as you can imagine.

Okay. But in terms of your overall operation are you looking to take any more costs -- costs out of SG&A?

At this point in time we are studying it. I don't think there will be a major impact on SG&A. I don't think so. It was very low to start with. And my final question just regarding Siliconix, I know there's a good bit exposure to handsets and specifically a large handset maker that's been having some difficulties. Was that a reason for the kind of stable margins and the book to bill, and what is the outlook there for handsets and notebooks and PCs, which is also strong for Siliconix? First of all, you're absolutely right, your suspicion is correct. Was not only this one, we saw it in general, but we also have seen book to bill for Asia coming up in the second quarter which makes us believe, and I think positively believe, that the quarter to come already will show a better performance of Siliconix.

Thank you.

Can I add -- I forgot on SG&A, you should remember that we did include some transition service agreement costs into our SG&A because they are included in the SG&A costs, and these costs will go down by nature. Hello?

Next, please.

Your next question from the line of Kevin Kessel.

Thanks, good morning, guys.

Good morning.

So in terms of these transition service agreements that you mentioned, do you foresee them declining in a linear fashion for the first quarter?

Not strictly linear, but they will go away in the first quarter '08, and will reduce step by step in between.

Does that mean in the first quarter '08 they're still there, and then they're completely gone?

The first quarter, it's really minor.

So they start to decline towards the end of the year?

They go down quarter by quarter.

Each quarter? Okay. And then in terms of your cash flow and free cash flow, you mentioned, in the quarter it looked good, but at the same time, if we kind of look at it this year versus last year, based on what I have, you've generated 20 million in free cash flow in the first six months of this year but that compares to 60 million last year in the first six--.

You have to take out the acquisition. Dick, maybe you want to explain.

Kevin, the acquisition, we did not buy any -- the biggest item, we didn't buy any receivables, so that the $50 some odd million of sales that took place in this quarter were a drain on cash, and as it ended up being accounts receivable, period. That won't happen again.

Apples to apples, we have higher free cash generation than in prior year.

You're saying did you not acquire 50 million in receivables?

Did not acquire any in receivables, that's correct.

And so that had a negative effect on your working capital.

Sure.

So that would put you then at 70 million versus 60 million last year.

Approximately.

And what would be the expectation -- because, you've spoken in the past about the tantalum impact being favorable this year, by maybe on the order of--?

We had very strong cash flow last year. We expect this year to be better than last year.

But can we assume by more than 60 million? Given the tantalum boost that you should see?

It's in the area. You are not completely wrong in your estimate.

One last clarification here. When you talk about the $11 million in operating profit that you're expecting the first quarter from IRF, so that's 11 million a quarter, I assume, 44 million annualized.

Yes.

So that works out, first of all to like an operating margin of 18%, then secondly, my math says about a $0.04 bottom line tax affected impact to EPS. Does that sound accurate?

What rate did you use for tax?

I was using 25%.

I think it's close.

Okay. So then I guess in other words, it's basically you expect to be at your target level on a run rate basis by Q1 of '08.

We are very happy to see IR working according to our plan, and the first quarter is -- was the most difficult one from an operational standpoint and it is behind us, and it was accretive. The order intake is according to plan. The sales run rate is according to plan, so we are happy.

Okay. Then just housekeeping, I guess. What stick should we be modeling for tax rate going forward? I heard you say 23% effective this quarter. Is that a good rate to use going forward?

That's a good rate to use going forward.

What about interest expense? With the change in converts, I was expecting to see a decline in your interest expense in the quarter. But I don't think that happened.

The change in convert? What do you mean? I'm sorry.

I'm sorry, just accounting for your convertible.

It did have an impact but no interest expense-wise. There wasn't any reduction in the interest expense.

Should we be expecting one?

I would sure like to, but, I mean, until -- it has to be negotiated. If that's going to happen. It's at 3 5/8, that's the stated rate.

But I thought that when you saw a reduction in your share count you'd see a corresponding reduction in--?

First of all, yes, the share count compensation is something that takes place off this prime spacing, prime spacing lifts interest as it is.

Okay. And your other income, that's strictly down 3 million due to cash decline for the acquisitions?

We actually spent $300 million on -- $330 million against PMO.

Thanks, guys.

Your next question comes from the line of Jim Suva.

This is Jim Suva of Citigroup. Can you talk a little bit about, now that Q2 is over, and you've already had a full month of July behind you, a little bit about demand and mix trends as well as the European seasonal slowdown? Are you expecting it to be normal, a bit better, or a bit worse?

Well, first of all, concerning Europe, we have no reason to believe that it's worse than the normal situation with the third quarter. Secondly, July indeed has shown some good book to bill ratio so we are quite confident that our projection which we gave for the quarter will materialize.

As a quick follow-up, on your sales of 710 to 730 can you just remind me again, what amount of that is organic growth quarter over quarter and year-over-year versus acquisitive?

I can tell you what is included for IR. Approximately 60 million, 6,0, million is included for IR.

60 million, thank you.

Your next question comes from Tom Dinges.

This is Jason Gursky stepping in for Tom. Perhaps just another follow-up question on IR. Just looking back to some of your previous statements about the operating margin contribution I think last quarter you stated that in the first quarter of '08 it ought to be about 14 million. You're now saying it's going to be about 11 million, and it seems that the business that you're about to divest is losing money. Just wondering if you could walk us through perhaps what's changing?

From a margin standpoint, operating margin standpoint we have to expect at this level of sales a positive contribution. This is our acquisition plan, and what you see, the 11 million is exactly the same number which we have announced, only subtracting the impact of the automotive business. You see, we are not running at 80 million at this point in time annualized sales.

So the assumption previously was that the automotive business -- the automotive business lost money though this quarter, correct?

Operationally, yes, it was really low sales.

Okay, but the expectation was that it was going to be running at a 3 million positive?

Yes.

Okay. Great. That helps. And then secondly, just -- can you talk a little bit more in detail about trends with your distributors and perhaps what their weeks of inventory are at this point and what expectations are on stocking going forward?

Distribution inventory, let's face it, is on a relatively high level. On the other hand, they have reasons to be on a high level. The POS is unbroken. It's really strong, really strong. And book to bill of their business is principally, as I said, all together, it's 0.96, what we have seen for our product, but we may not forget that American and Asian distributors are above 1 in their book to bill. Only Europe I would say is a correction of an excellent first quarter was substantially below. So distribution is confident, no question about it. So they tolerate the relatively high inventory, its orderly turns could be higher, I guess, as they feel, but principally speaking they tolerate the situation, continue to order. Europe I think was kind of -- I would call it single areas are stronger but I think it was a correction vis-a-vis too strong first quarter.

(OPERATOR INSTRUCTIONS) Your next question comes from Andrew Huang.

Hello, can you hear me?

Hello, yes.

Oh, hi. So first, can you comment in general what the linearity is normally for the September quarter?

What do you mean by linearity?

Oh, like maybe the percentage of revenue on a month, month basis, like for I guess July, August, and September.

If we don't do it by month I could develop that. But, of course, in Vishay August is a relatively weak month because we have more than a third of our business in Europe, but unfortunately I'm not able to give you it by month. No. But take August is relatively low. It's not quite linear in the third quarter. July should be the average more or less, and September should be above average something.

Okay. And then maybe you could help me clarify something, because when I heard commentary from you and your kind of passive peers suggesting that DISCD POS is strong, but if you look at Arrow, they kind of guided down their revenue for the September quarter, and my checks are kind of suggesting that the POS may not be so strong.

They have a strong branch in Europe. It is not only the U.S. They have -- they are quite strong in Europe. Maybe they see some seasonal effects in Europe.

Okay, great.

But I'm not the one to comment on that, to be honest. It's only my opinion.

An then for clarification purposes, you said that for the September quarter you expect IR to contribute 60 million in revenue.

Yes.

And on an apples to apples base to the June quarter would that be compared to 67 or compared to 52?

Compared to 52.

Got it. Thank you very much.

Thank you.

Bye.

At this time we have no further questions. Gentlemen, do you have any closing remarks?

No. I would like to just say that we appreciate you tuning into our conference call. We look forward to getting together again sometime in late October, early November. Thank you very much.

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