威世科技 (VSH) 2009 Q3 法說會逐字稿

Good morning, my name is Darla and I will be your conference operator today. At this time, I would like to welcome everyone to Vishay's third quarter 2009 earnings results 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, Dr. Lior Yahalomi, you may begin your conference.

Good morning. This is Lior Yahalomi, Vishay's Chief Financial Officer. Good morning, ladies and gentlemen and welcome to Vishay's third quarter 2009 earnings call. On the line with me today are Dr. Felix Zandman, Vishay's Executive Chairman and Chief Technology and Business Development Officer; Dr. Gerald Paul, Vishay's President and Chief Executive Officer; and Lori Lipcaman, Vishay's Executive Vice President and Chief Accounting Officer.

Before I start, Bill Clancy, Vishay's Senior VP 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 risks and uncertainties that could cause actual results to differ from the forward-looking statement. 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, Bill. I will make summary remarks. Dr. Paul will add a more detailed analysis of our third quarter and year to date 2009, and finally, Dr. Zandman will update our R&D and mergers and acquisitions activities including comments on the spinoff of the Vishay Precision Group, and will make summary remarks.

For the third quarter of 2009, Vishay reported revenues of $525 million, 14% higher than the second quarter of 2009, and 29% lower than the third quarter of 2008. The decline in our revenues from the prior year quarter is attributed to the significant and rapid downturn in all of Vishay's end markets starting in the fourth quarter of 2008. The improvement in the third quarter of 2009 relative to the second quarter of 2009 reflects a continuous recovery from this global economic downturn. On a GAAP basis, our consolidated gross margin for the quarter was 19.9%, as compared to 17.1% for the second quarter of 2009, and 21.6% for the third quarter of 2008. The increase compared to the second quarter of 2009 reflects the sales recovery, higher efficiencies, and the cost reduction initiatives implemented by the Company.

Selling, general and administrative expenses for the third quarter were $89.7 million, or 17.1% of revenues, compared to $83.8 million, or 18.2% of revenues for the second quarter 2009, and $112.8 million or 15.3% for last year's third quarter. The decrease of $23 million from the prior year is the result of the Company's cost reduction initiatives. The increase of $6 million quarter over quarter is mainly due to accelerated depreciation and exchange rate effects. Restructuring and severance costs in our third quarter were $3.5 million, total cash paid out for restructuring during the third quarter of 2009 was $11 million. Other income and expense for the third quarter of 2009 consists mainly of $0.9 million of interest income and $0.4 million of foreign exchange losses.

The Company recorded high effective tax rate for the third quarter. This is attributable to the fact that losses occurred in low tax jurisdictions where we recognized no substantial benefits. When we return to more normal earnings across our global business segments, we expect the tax rate to return to the mid to high 20s. Capital expenditures for the quarter were $8 million, compared to $7 million in our second quarter of 2009, and $41 million in the third quarter of 2008. Depreciation and amortization for the quarter was $59 million, compared to $56 million in the second quarter of 2009, and $56 million in the third quarter of 2008.

As announced in our press release, Vishay reported earnings attributable to Vishay stockholders of $0.01 per diluted share for the third quarter of 2009. The net earnings attributable to Vishay's stockholders for the fiscal quarter ended September 2009 was impacted by pre-tax charges for restructuring and severance costs of $3.5 million. This item and its related tax effect had a $0.02 per share effect on the net earnings attributable to Vishay's stockholders. The adjusted net earnings is $0.03 for the third quarter of 2009, as compared to adjusted net loss per share of $0.10 for the second quarter of 2009, and adjusted net earnings per diluted share of $0.17 for the third quarter of 2008.

For the first nine months of 2009, Vishay reported revenues of $1.435 billion, approximately 36% lower than the first nine months of 2008. On a GAAP basis, our consolidated gross margins for the first nine months of 2009 were 17.5%, as compared to 22.8% for the first nine months of 2008. Selling, general, administrative expenses for the first nine months of 2009 were $260.9 million, or 18.2% of revenues compared to $352.9 million, or 15.7% of revenues for the first nine months of 2008. Restructuring and severance costs in the first nine months of 2009 were $34.5 million. Total cash, paid out for the restructuring during the first nine months of 2009 was $41 million.

Other income and expense for the first nine months of 2009 consists mainly of $2.7 million interest income, and $5.2 million of foreign exchange gains. The Company incurred significant pre-tax losses in low tax rate jurisdictions during the first nine months of 2009, which means we would not benefit from the losses, and this led to a negative effective tax rate. We expect this to be a temporary problem.

Capital expenditures for the first nine months of 2009 were $26 million, as compared to $99 million in the first nine months of 2008. Depreciation and amortization for the first nine months of 2009 was $170 million, compared to $168 million in the first nine months of 2008. As announced in our press release, Vishay reported a loss attributable to Vishay stockholders of $0.46 per diluted share for the first nine months of 2009. The net loss attributable to Vishay stockholders for the first nine fiscal months ended 2009, September 2009, was impacted by pre-tax charges for restructuring and severance costs of $34.5 million, and for an amended executive employment agreement of $57.8 million. Partially offset by a gain of $28.2 million on settlement of matters related to the acquisition of International Rectifiers Power Control Systems business. These items and their related tax effect had a $0.31 per share effect on the net loss attributable to Vishay stockholders. The adjusted net loss is $0.15 negative for the first nine months of 2009, as compared to adjusted net earnings per diluted share of $0.52 for the first nine months of 2008.

As previously disclosed, Vishay was required to adopt two new accounting standards on January 1, 2009, which required retrospective adjustment of previously issued financial statements. The retrospective application of FSP-APB 14-1 decreased the previously reported loss from continuing operations by $11.5 million, or $0.06 per diluted share, for the third quarter of 2008, and increased the previously reported loss from continuing operations by $0.8 million, with a $0.01 effect on earnings per diluted share for the year to date period.

Vishay's liquidity. Vishay had a total debt of $349 million as of September 26, 2009. The debt consists predominantly of the following four segments. $105 million of long-term notes with 93 years maturity, due on December 12, 2012 with interest rate of 90-day LIBOR plus 0%. $100 million of long term loan maturing on July 1, 2011, with payments spread over the next two years, with interest rate of 30-day LIBOR plus 2.5%. $250 million revolving credit facility, maturing on April 20, 2012, with an interest rate of 30-day LIBOR plus 1.4%, $125 million of which was unused on September 26, 2009. And finally, a $15 million of long-term loan maturing January 27, 2014, with payments spread over five years, with interest rate of 30-day LIBOR plus 3.45%.

As of September 26, 2009, Vishay had cash and cash equivalents of $508 million. Total available credit line, including the $125 million unused revolver in the US was $168 million, at September 26 of 2009. Vishay's total available liquidity measured by cash plus all available credit lines as of September 26, 2009, was $676 million, while our total debt payable over the next five years is only $244 million.

Some other key summary financials are total inventory at quarter end was $448 million, working capital at quarter end was $965 million, free cash flow was $103 million for the third quarter of 2009 as compared to the $9 million for the second quarter of 2009, and $54 million for the third quarter of 2008. We expect the continued generation of free cash flow of over $150 million for 2009. Vishay's total liquidity is $676 million, and our continuous focus in generating free cash will further improve our liquidity throughout 2009.

I will now turn the call to Dr. Paul, our President and Chief Executive Officer. Gerald? Gerald?

Good morning, everybody and thank you. I think it is no doubt that Vishay's business in the third quarter clearly has entered the phase of recovery from the historical global economic crisis which really started a year ago. Due to better sales, tight cost management, and better efficiencies, operating profits improved noticeably, compared to the first half. Vishay in quarter three came back to profitability. Vishay's generation of free cash continues to be quite excellent, I think. And fixed costs have been lowered by 20%, versus prior year. Inventories were brought down ahead of plan.

Let me start to talk about the economic environment as we see it. The world economy, and also electronics in quarter three continued to came back. It came back across all geographies, all markets and all sales channels. There is a substantial upturn in Asia, driven by consumer products like netbooks, and smart phones, as well as power supplies. Industrial in the United States and Europe, after having bottomed out in the second quarter, is in the first phase of a recovery, which is supported by lower inventories. Automotive applications for small cars in Europe and the US showed a substantial turnaround beyond our expects, leading Vishay already to shortages of supply.

Military and medical continue strong and we believe also foreseeably. Distribution inventories were reduced further during the quarter, again by 10%. Inventory turns virtually are now back to normal. We see a worldwide inventory turn of 3.7 after a 3.1, in the second quarter. The Americas at 2.8, as compared to 2.3 in the second quarter. Europe, at 3.3, as compared to 2.8 in the second quarter. Asia, at 5.3 vis-a-vis, 4.1.

The book to bill ratio of our distributors above one, quite strong in all regions, drives strong orders under suppliers. There are growing shortages of supply which obviously moderate the price decline at least currently.

Talking about the business development of Vishay, after a deep crisis, the sales level of Vishay in the third quarter started to go up again. Which was principally according to our expectations. We achieved sales of $525 million in the quarter, versus $460 million in prior quarter, and versus $739 million last year. Excluding exchange rate effects, sales versus prior quarter were up by $57 million, or 12%, but still down versus prior year, by $205 million or 28%.

Our book to bill ratio was strong in all regions, it was at 1.11 in the quarter is compared to 1.06 in quarter two. Some details of the book to bill ratio. 1.17 for distribution, 1.06 for OEM's. 1.13 for the actives, and 1.09 for the passives. 1.12 for the Americas, 1.10 for Europe and 1.12 for Asia.

And so in summary, what we see at the moment, what we've seen in quarter three is a very broad recovery of the business. Our backlog is at 2.8 months, which supports our anticipated further sales increase. There is moderate price decline for the actives, and price stability for the passives. For Vishay, prices went down versus prior quarter by 0.8%, and versus prior year, by 2.8%. For the passives, prices have been down, but just by 0.1%, versus prior quarter, and are up by 0.6%, versus prior year. Active prices are down by 1.4%, versus prior quarter, and down by 5.6% versus prior year.

Let me talk about our operational results and reconcile to prior quarter first. Based on $65 million higher sales, $57 million higher excluding exchange rate impacts, the adjusted operating margin increased by $20 million from minus $5 million, to plus $15 million. The main elements of this development were a negative impact of ASPs of $4 million, a positive impact of increased volume of $29 million, variable costs were better by $4 million, fixed costs higher by $6 million, but this contains $4 million of accelerated depreciation as Lior indicated. And we are seeing a negative impact of the exchange rates versus the second quarter, $3 million predominantly through a strengthening of (inaudible).

Now let me reconcile the quarterly results versus the third quarter. Last year, we see that based on $214 million lower sales, $205 million lower excluding exchange rate impacts, the adjusted operating margin decreased by $32 million, namely from $47 million to $15 million. Main elements again, ASPs had a negative impact of $15 million, and volume down vis-a-vis the prior year, $80 million negative impact. Variable costs better by $18 million. Fixed costs better by $39 million. You see again the quite substantial fixed cost reduction which we have managed to achieve.

Some comments on operations. Despite the sales increase we continue to reduce inventories ahead of plan. Excluding exchange rate effect, the inventories in the quarter decreased by $34 million, by $11 million in raw material, and by $23 million in finished goods and in process. Inventory turns increased to 3.5. We can expect further improvements with growing sales at constant inventories. Capital spending in the quarter remained on a dramatically reduced level of $8 million versus $7 million in prior quarter and versus $41 million in prior year. We continue to expect for 2009 spending at about $55 million, versus $152 million last year.

During the quarter, employment increased by 380 heads in total due to higher capacity demand, mainly in actives. Fixed cost personnel as part of this total continued to decrease though by 110 heads in the quarter. So since the beginning of the crisis, end of September last year, 20% of all employees and 15% of all fixed heads at Vishay have been reduced.

We closed successfully in quarter three the film capacity of the plant in Shanghai and the volume, as you will recall, will be produced on existing equipment in India. We expect annualized savings of $4 million from this move. And we continue to consolidate opto packaging in Asia and we expect a finalization of this measure by the end of the year.

We had an excellent quarter in terms of free cash generation, cash generation in general. We generated $110 million cash from operations in the quarter, as compared to $16 million in prior quarter, and $89 million in prior year. We generated $103 million free cash in the quarter as compared to $9 million in prior quarter, and to $54 million in prior year. For 2009, we continued to expect a very significant generation of free cash of more than $150 million.

Coming to the overview of our restructuring and right-sizing measures for this year, you will remember, we wanted to reduce inventories by $50 million to $100 million. Year to date, September, we already have reduced $103 million. Our outlook is to be slightly above $100 million. We are going to have approximately stable inventories going forward now. We wanted to reduce capital spending to below $70 million. We have spent $26 million year to date September. And we expect to be at approximately $55 million capital spending this year.

Our target was also to reduce all fixed costs by $150 million year-over-year. Year to date, we have achieved $173 million already, so we continue to expect to reduce about $200 million this year, year-over-year in terms of fixed costs. Our target was to limit cost cash costs for restructuring to $50 million of year spend, year to date $41 million, and our full cost remains at less than $50 million total spending.

Let me talk now about the main businesses we have and I will start with resistance and inductors. This traditional and successful business during the crisis suffered substantial volume but defended a decent level of profitability. It is recovering now which is very important for Vishay. Sales in the quarter were $150 million, 4% above prior quarter. Still 29% below prior year. There was a strong book to bill ratio for the resistors and inductors of 1.13. Backlog has grown to three months. Despite still quite low volume, gross margin has improved to a fairly satisfactory level of 24%. We had good product mix. We achieved better efficiencies. And we continue to manage our fixed costs tightly.

ASPs recently prior year and priority year are practically constant. Inventory returns improved to 4.2. And we see at resistors and inductors some shortages of our specialty products already, predominantly in Asia but recently also from automotive mainly in Europe.

Talking about capacitors, also the business with capacitors has felt the economic crisis. Good product mix , fixed cost reduction, and selective price increases defended our profitability. Also, this business now starts to recover. We see strong demand, for instance, from European automotive. Sales in the quarter were $101 million, up by 8% versus prior quarter, and down by 22% versus prior year still. Book to bill ratio improved to 1.07. The backlog, capacitors, is at 3.5 months.

The gross margin improved quite drastically to a good level of 20% of sales, despite still quite low volume. There is ongoing fixed cost reduction, and there are better efficiencies. The ASPs continue stable to slightly up. Vis-a-vis prior quarter, prices have come down by j0.4%, but versus prior year, prices have come up by 1.4%. We continue to reduce inventories at capacitors. In the quarter, by 7 million. The inventory turns improved to 2.7.

Measurements group. Measurements group is still impacted quite severely by the downturn. Sales in the quarter were $33 million, backlog was at 2.2 months, and the book to bill ratio was at 1.02. Despite very low volume, gross margin has improved to 32% of sales. We had better variable and fixed costs. The inventory turns are still quite low at 2.0.

Coming to diodes and opto products, as you will remember, the business, especially this business, like the economy also, has suffered extremely from the weakness of Asian customers and European automotive. There was a certain recovery which we've seen happening in early July in Asia. And this recovery has now reached Europe automotive. We see in this recovery mostly for SMD rectifiers, including in particular also our new trench line. And we already have some capacity constraints there. So we are expanding or continue to expand. Sales in the quarter were $154 million, 15% above the prior quarter, but still, 27% below prior year. There was a strong book to bill ratio of 1.14, improved from 1.03 in the second quarter.

Backlog, we had 2.5 months. Despite still low volume, gross margin increased to 18% of sales, based on substantially reduced fixed costs. The inventory turns of this line are quite excellent. They are 4.4. There is, as I can say, normal price pressure on ASPs. 2% versus prior quarter, and 4.6% versus prior year. As I indicated before, we are in the process to concentrate opto packaging in Malaysia and in the Philippines, moving out of the Shanghai plant there. And we are moving on the other hand diodes from subcontractors into the Shanghai plant.

Trench power diodes, as I indicated, continue to grow fast. We expect a 40% increase in 2010. We are still alone in the market with this product.

Coming to Siliconix, the market leader in low voltage, MOSFETs, suffered the most of all businesses of Vishay. It is showing a very strong recovery now, mainly from mobile phones and from netbooks. We have seen stretching out lead times. There are capacity constraints on the market. Sales in the quarter were $123 million, up by 28% versus prior quarter, down by 32% still versus prior year. Book to bill ratio in the quarter was strong at 1.13. Backlog has grown to 2.9 months. The gross margin of Siliconix improved to 15% of sales, but was still burdened by accelerated depreciation and the impact of inventory reduction. Looking ahead, we believe that at normal, at historical sales levels, Siliconix will come back to gross margin in the high 20s.

Long lead times for power MOS really moderate the price decline currently. We have seen 0.6% price decline versus prior quarter and 6.8% price decline versus prior year. The inventory turns were at 3.7, and they will naturally improve with growing volume. We decided to expand our plant Itzehoe, Germany, wafer plant which produces 8-inch high density wafers, in order to balance better between internal and external sources going forward.

Let me summarize. Thanks to quick reaction and discipline, Vishay has come through the crisis fairly well. In the last 12 months, we have reduced all fixed cost by 20%, most of it permanently, have generated $184 million of free cash and have regained profitability. We in the third quarter achieved adjusted earnings per share of $0.03. Vishay looks ahead with great confidence. We are recognized as a market leader. We are more than net debt free. We have lowered our break-even point by $500 million. We are well positioned to participate in the upturn, generating better results than before the crisis.

As a proven generator of free cash, we will be able to return to our strategy of synergistic acquisitions. The intended spinoff of the precision group, and you will hear more about, will virtually not impact Vishay's financial performance. However, it will enable this specialty noncore business of Vishay to better pursue its strategy.

For quarter four, we guide to sales of between $530 million and $570 million at further improved results.

Thank you very much. And I would like to pass on to Dr.

Hi, I'm Felix Zandman, Executive Chairman of the Board, and Technical and Development Officer. Quarter three is a definite turn towards recovery. Our bookings and sales show steady week by week growth. The operations became profitable. As we see in next quarter and beyond as continuing improvement. We are seeing the same pattern as in the previous recessions.

The first to decline were semiconductors, followed by passives and measurements group last. The recovery shows the same pattern again. Semiconductors are recovering first, followed by passives, and measurements. As stated by Dr. Paul, all businesses, all geographies, all product lines are up. Dr. Paul has guided Vishay superbly during the recession. Our free cash generation continues unabated, $100 million free cash in the third quarter, which improves our balance sheet and provides Vishay with capital, premier acquisitions and R&D investments.

We would like now to take a few moments to address our second announcement of the day. The decision by Vishay Intertechnology to spin off what we are calling the precision business, which consists of measurements and full resistor business into separate, independent, publicly-traded companies, with the name Vishay Precision Group. These businesses accounted for 10% of Vishay Intertechnology's revenue during the 12 months ended September 30, 2009. As discussed in the press release, the spinoff is expected to take the form of a tax-free subdivision to Vishay stockholders. And it is anticipated that holders of Vishay common stock will receive common stock of Vishay Precision Group and holders of the Vishay Class B common stock will receive Class B common stock of Vishay Precision Group.

This decision is an exciting milestone for the Company, as the separation of our precision business into a standalone publicly-traded company is an important and natural transition for Vishay Intertechnology. We have made numerous acquisitions that have enabled the precision business to develop the critical mass and vertical products necessary to be a successful standalone company. With this separation, Vishay Precision Group is expected to have more autonomy and flexibility to deploy resources for its own future growth, while enabling investors to better understand the international market and business. Which have not been fully recognized as part of Vishay Intertechnology.

In turn, Vishay Intertechnology is continuing its focus on growing our core businesses and pursuing our strategic plan to strengthen our position as a global technology company in discrete semiconductors and passive components to the benefit of all shareholders. We're in the middle of the process. And many of the spinoff details are still in progress. But we wanted to take this opportunity to share with you what information we can. Vishay Intertechnology's board, together with independent international legal advisors, say that Vishay Precision Group is a noncore business, and as such, would have enhanced potential as a separate entity. The proposed spinoff will enable the management teams of both companies to better focus on the unique issues facing their respective businesses and markets, and each company to pursue its own operations and resource allocations and growth strategies. And also attract the best personnel to compensation which is more closely tied to the performance of each company.

The spinoff will be subject to final approval of Vishay Intertechnology's board of directors, favorable market conditions receipt of US and Israeli pretax ruling or opinions, satisfaction of US Securities, and Exchange Commission, and requirements and other customary conditions. And we expect to close during the second quarter of 2010. If the spinoff is completed, Vishay Intertechnology will be a pure play discrete electronic components business comprised of semiconductors and components which generated revenue of approximately $1.8 billion during the 12 months ended September 30, 2009. That's because of the recession, we had a major drop.

Vishay Intertechnology, we continue to be led by President and CEO Dr. Gerald Paul, and nearly all of its current management team will remain intact. I will continue as Executive Chairman of the Board and Chief Technical and Business Development Officer of Vishay. We anticipate that the spinoff will little to no impact on Vishay Intertechnology's business, as there is essentially no overlap, no overlap at all between the two entities.

Turning to the spinoff company, Vishay Precision Group is a leading designer, manufacturer, and marketer of ultra precision foil resistors, foil strain gages, sensors, weighing modules, and weighing systems, for a very wide variety of applications. Vishay generated approximately $179 million net revenues during the 12 months ended September 30, 2009. This business has grown from the original resistor foil sensor product line, such as foil resistors, strain gages, ultra precision foil resistors, and foil resistant current sensors through acquisitions to now include weighing modules and weighing systems. Vishay Precision Group's primary strategy will be to focus on growing its weighing and process control systems, and promoting its sophisticated digital weighing modules, in addition of growing its traditional foil resistant strain gages and associated instruments, ultra precision foil resistors and associated foil current sensors.

If the spinoff is completed, Ziv Shoshani, Vishay Technology's Executive Vice President, Chief Operating Officer and Head of Specialty Group will serve as President and Chief Executive Officer, the CEO, of the new Vishay Precision Group. At that time, Mr. Shoshani will resign from the board of directors of Vishay Intertechnology. He will resign from his duties as Chief Operating Officer of Vishay effective November 1, 2009, in order to focus completely on successfully completing the spinoff of Vishay Precision Group. I would like to underline that Ziv Shoshani has done a first class job, superb job restructuring the Precision Group, very difficult, complicated job for an organization of 10 very small acquisitions into a coherent and well functioning group. And I'm confident in his ability to grow Precision Group into a major player in its markets in the future.

Marc Zandman will serve as a non executive chairman of Vishay Precision Group board and he will also continue in his role as Vishay Intertechnology Vice Chairman of the Board and Chief Administrator Officer. And Bill Clancy, currently Vishay's Intertechnology Senior Vice President, Corporate Controller and Secretary will now serve as Chief Financial Officer of Vishay Precision Group as of November 1, 2009. Vishay Precision Group will be headquartered in (inaudible).

Under the proposed terms of the master transition services agreement between Vishay Intertechnology and Vishay Precision Group, for a fee, of course, Vishay Intertechnology will provide Vishay Precision Group specified support services for a period of up a to 18 months after the spinoff. Such services I expect to be minimal. More information on the agreements between Vishay Intertechnology and Vishay Precision Group will be available in the form 10-5.

That concludes my remarks. We will now open the call to questions.

(Operator Instructions) Your first question comes from the line of Steve Smigie.

Great. Thank you. Just some questions on the spinoff, and just curious a little bit, first of all, why you spin off your business at the highest gross margin.

The business has grown much. While we did have a diamond inside a big mountain, which had large gross profits, it was not visible. We never talked about it and we could not present is to you, to the shareholders and to the investment public, because it has a completely different direction, has different customers, different markets, a completely different approach to business, in terms of sales, marketing, and so on. So in fact what happens at Vishay, we had two units, one very large unit which was Vishay, we described properly and discussed, and presented to you, while the other part was never presented. Or almost never presented. So after analysis, we said if we take out this part, we spin it off, and of course, we give the spinoff as a dividend to the shareholders, so no shareholder will lose anything, it will have a possibility to grow much better, because it will be more visible and more flexible.

Felix, may I add the following if I can. That Vishay without, the measurements group will hardly lose any of its financial performance. We estimated the impact on operating margin to be below 0.3% of sales.

Can you talk a little bit about what the ownership will look like of the new company? What portion will be floating versus owned by existing management and trusts, et cetera?

We don't know about that at this point, but the shareholders, this will be our dividend to the shareholders.

Right. I'm just trying to understand what part, other than insiders, what part, what percentage will be floating freely?

Steve, this is Lior. 100% of it is going to be distributed to the shareholders on day one. We don't intend to do it in multiple steps.

Right, I'm just asking, what portion will be not in the hands of insiders currently or their trusts?

It is going to be exactly the same day one as it is today in Vishay Intertechnology. One to one.

As soon as it starts to trade there will be some changes but in the beginning, everybody will have the same shares.

Last question was just on the Siliconix business. Can you talk a little bit about how you might see the margin progression over the coming year? You mentioned it was going to hopefully get back to the high 20s. How does that take place, as utilization, more costs or the fact that you're ramping up the Germany facility?

Basically, we count on the higher volume. You know that Siliconix is still dramatically below, like most of the competitors, like all of the competitors, below historical sales levels. We have reduced fixed costs there during the crisis, and in the first approach, we are keeping it at this low level, this fixed costs, so what we enjoy will be the impact of the incremental business of the variable margin and you can definitely make a relation that brings you back at historical sales levels to the high 20s, as I try to say. And it all depends of course on the speed of the sales increase by nature.

Okay. Great. Thank you very much.

Your next question comes from the line of Matt Sheerin.

Yes, thank you, with Thomas Weisel Partners. So Dr. Paul, could you talk, I know you talked about the book to bill being up across your businesses for the September quarter. Could you talk about what it is looking like right now, or at the end of October, did it improve or come down a little bit?

It continued strong. We don't have October completed, obviously. It continued strong, as a matter of fact. So it is a consistent thing. September really, there were weeks in September which were higher, but taking the average, it continues strong. That's all I can say.

And are you concerned at all, in product areas where there is product shortages, of double ordering, or excess ordering that could come back and hurt you in the next couple of quarters or so?

It is a natural question. Every upturn drives this questions. It is a steep upturn after a steep downturn. So I fully understand. And of course we're asking the same question ourselves. On the other hand, I couldn't deny of course that there are double ordering, it would be foolish to deny that, the possibility. But if you have a closer look, I do not believe that this is the driving force, because we see increases in orders in sales also at product lines where there is absolutely no shortage. So we are quite confident that this is a real upturn.

Okay. And just on your long-term margin goals, I know you've talked about getting back to historical levels, but would that be a lower revenue run rate, given the fact that you've cut expenses so much?

As I said, we have permanently cut our break-even point by $500 million of sales.

What about getting back to let's say 10% operating margin? What kind of revenue run rate would you need?

I said it before, we will reach this one at about 2 points -- now, including MGF, but as I said before, the impact is not -- I'm talking in terms of all Vishay. Vishay as it is today. We will have the 10% approximately at 25 to 25.50.

Okay. Great thank you very much.

Your next question comes from the line of Joe Whitten.

Hi, good morning. This is Joe on the line for Shawn Harrison at Longbow. First question for you, you mentioned restructuring activities that are still happening right now. There's the Shanghai closure, there's the opto moves, but you also said restructuring was a factor behind the gross margin improvement. The question is just from a savings perspective. What is yet to come on restructuring and any details you can provide over the coming quarters would be helpful as well.

As a matter of fact, we, of course, accelerated all of our ideas quite dramatically as the business really decreased steeply. So what we have done is we brought down the SG&A costs, drastically, and we are going more or less to keep it on this low level, not completely, because there will be some inflation, some short work will come back, but more or less, it will stay on the lower level. And in manufacturing, fixed, we have done approximately the same, partially there was short work, partially there were plant shutdowns but partially they were constant consistent permanent reductions. Of course, on top of all of that, we have the longer term programs, the longer term programs like close the Shanghai film plant, move it to India, et cetera. These activities by nature will go down as we go, unless there will be a new acquisition. So you will see that our costs for restructuring going forward will come down quite dramatically.

Maybe I could ask it a different way. Would it be prudent in the near term, as these activities continue, to be modeling slightly outsized incremental margins going ahead?

Our target is -- maybe I misunderstand the question -- but our target is to have most of the incremental margin coming down to pre-tax also going forward.

Okay. Thanks. And then just as a quick follow-up, you had just mentioned --

Which means -- sorry to add to that -- which means we have at least offset the impact of inflation, of rate increases, et cetera So there will be some cost reduction also going forward, just to add to that.

Sure. Makes sense. And then the other question was on the SG&A line. You said there is some savings yet to come but regarding the soon to be divested business, or the planned divestiture, what is the SG&A profile of the Precision Group? Is it any different from the corporate average right now?

Well, as a matter of fact, it is higher. It also requires more in terms of -- it is a technically high level business. So this is why I said, you have said before, the group has said before, the gross margin is higher than the average of Vishay. It is. Then I said, and this is also correct, that we will not, practically not suffer in terms of operating margin, the Vishay. by losing, so to speak, Precision will not suffer in terms of operating margin, to any degree, it's below 0.3% of sales. A direct conclusion from that is that the SG&A costs of this business are higher than the average.

Thanks. And one more real quick one, if I could. Currency gave sales a slight boost during the September quarter. Does the December quarter sales guidance imply any boost in currency?

We have basically taken into account the current rates, and it changes anyway, so at current rates, so my increase takes into account maybe not the last two weeks, but the average of September, or something, on that level.

Thanks very much.

(Operator Instructions) . Your next question comes from the line of Jim

Great. Thanks very much. I first have a question regarding the spin business. Can you help me understand why you just didn't outright sell it, as it seems like monetizing it and using the revenues to reinvest into Vishay would have potentially been a better move? Was it just that you couldn't get a good price for it?

Lior, could you answer that?

Sure. We strongly believe that a spinoff of the Precision Group will create more value for stockholders than a sale for several reasons. First of all, given the substantial slowdown in the M&A activity due to the financial crisis, we think it is unlikely that we would be offered a price that would compensate stockholders for the long-term stand-alone value of the Precision Group. Especially when you consider the tax leakage that would be associated with a sale, relative to the spinoff. The second, we would be reluctant to run the risk of a sale process that would destabilize customers and other relationships that are important to Vishay's Precision Group business and will distract management and employees from executing the business plan. Now, we are very excited about this Precision Group, and its opportunity to grow and generate substantial profits, and cash flow, as an independent company. However, we announced it today, and if we receive the bonafide offer for Vishay Precision Group that we think could deliver more value for stockholders relative to the long term, of course the board will have seriously to consider it.

It just seems like you mentioned it was a completely discrete business, and so customer leakage and distraction, I would think would happen one way or the other, or it is completely irrelevant.

No, but I think the difference between, the question was, did we proactively decide to go out and try to pursue that, and that's the reason why, we didn't want to destabilize employees, customers. So we looked at this possibility, we evaluated it very thoroughly, of course, with the board decision, and we proactively didn't want to pursue it, but it is as of today, you're right, you're correct, as of today, we announced it to the market, and if there is any serious offer, we will have to -- we will consider it.

Okay. And then switching to a different topic, on the restructuring efforts, I think you said $173 million of cost reductions on the fixed costs have happened, and then I think I heard the number $200 million.

This was the year to date number, $173 million.

Is $200 million the total goal?

It is more than the goal. We wanted, you may remember, at the beginning of the crisis, at the end of last year, we announced that we want to save year-over-year $150 million. You may remember. And now, it looks that it will be around $200 million.

Great. Okay. Thank you very much, gentlemen.

And you do have a follow-up question from the line of Steve Smigie.

Great. Thank you. Could you just talk a little bit more about the timing of the spinout? I know you said 2010 but it seems like it must be pretty soon given when various people are going to be leaving the company.

Sure. I'm happy to. We started this process several months back. I would consider that we're in the middle of the process, with law firms and with JPMorgan helping us out in this process. Obviously, as you know, with the decision to make sure that this is tax-free, we have decided to require a pre-ruling from the IRS, and the Israeli authorities, and we expect it to be during the second quarter. The most realistic time will be the second quarter, notwithstanding market conditions.

Okay. And can you talk a little bit about how you view management in Vishay Intertechnology going forward? Normally I would consider the COO the heir-apparent, and obviously he is leaving, and so is there a new COO who gets put in place?

Most of management will stay with Vishay, as Dr. Zandman said from the beginning. Concerning the COO position, we are not going to fill it foreseeably. Vishay's organization has developed internally into passives and an actives group, and each of the two leaders are more or less, they don't have the title, but they are more or less acting as COOs. So we're not intending to fill the position at this point.

Okay. And could you, to the extent you're able, could you talk a little bit more about how the service agreement works out between the two companies after the spinoff? You said 18 months. Will that be manufacturing? Will the spinout have to develop its own manufacturing?

You should understand that this is the beauty of the thing. That the two organizations already have been practically independent of each other, in daily business. From the start to the sales force to planning, to purchasing et cetera. There are certain areas though, and Lior, you might want to say more, but like IT for instance, IT typically, there will be a TSA in order to assure a smooth transition, and that the new company can build up its own IT department. So they have our full support in that, absolutely. Not only IT. You will remember, insurances. There are many issues, they are numerous but not so severe that the new company has to be supported for a limited time. Lior, I don't know if you want to add to that.

Dr. Paul, if I may add, as Dr. Paul indicated, first of all, from the manufacturing perspective, the Precision Group is relatively independent. We have a few, what I would call co-locations, it is almost like neighbors with a good Chinese wall. Obviously those co-locations will have a complete separation and within that time frame, shorter than 12 months, actually, and in a way, we may have some leases between the two companies, but again, it will be minimal in terms of number of employees impacted. However, as Dr. Paul indicated, there will be some TSAs for up to 18 months. We actually expect them to be minimal and actually probably even much shorter than the 18 months. Most of this operation is really stand-alone today, and we will of course share with you all of these details with the Form 10.

It should be understood that the manufacturing processes are completely different. The factories are completely separate. There is nothing in common. There is just two incidences only, out of 70 Vishay factories, that one group is occupying a small space in one factory, which is completely independent, anyhow, and vice versa, some Vishay group is occupying in Japan a small place in another factory. That's all. There is really nothing in common. Even the IT. Even the IT, most of the group is different. The SAP for IT for Vishay itself is mixed with foil resistors only, not with the remainder of the Precision Group. So there is no major issues really involved there, Minor situations.

Changing back a little bit, on the $200 million of cost cutting, based on the cutting that you've done so far, and anticipated to come, which of the business segments, by which I mean the resistors, inductors, versus capacitors, versus Siliconix, et cetera, do you expect to see the most benefit to costs going forward?

Basically if you look in the various segments, you can dice the whole cost cutting, of course, between SG&A and manufacturing fixed. And then you can dice it between the various businesses. This 20% which we cut across the board, applies more or less to each segment. This is how we built the whole project. You know how the situation evolves in the fourth quarter of last year. We were really, really, can I say frightened to a degree, and we have developed programs which were burdening the Company in that sense to the same degree everywhere.

Last question. Just in terms of end markets, can you talk a little bit more about the auto recovery and just general industrial recovery? Is that just that things are less bad now, people are less worried? Or is there actual capex pickups out there that are driving an industrial recovery? Do you anticipate more cars being sold or is it just replenishing inventory? Because it seems like the book to bill in distribution is quite high relative to OEM. I was hoping you could help me understand this.

Let me start like that. Our sales to distributors, and this is how we measure our book to bill to distribution, was higher than OEMs, that's true, but also fair book to bill, our distributor's book to bill, as we see it, was very substantially above one. So it makes sense. They have brought down inventory distributors dramatically, I think more than they initially wanted because they were also taken by a surprise by a relatively steep upturn. So we expect in the fourth quarter that this inventories of distribution, despite the high orders on us will stabilize. Will not go down more, but also will not go up.

Secondly, concerning industrial and automotive, this is my picture of the world, I think the development in these two segments have been very different in the third quarter. In the industrial, it was a steady development. They have come down. And I remember that in my comments in the second quarter, I said they have bottomed out, and start to recovery slowly. And this has happened in the third quarter. They recover slowly. Coming from a very deep low, a very deep level. So it is normal. I think it is genuine. I think it is so low that the overall economic recovery will take industrial, this broad industrial segment with it, so I am not surprised by that. Really not. Also as Dr. Zandman said, by the sequence of events which is very normal. This we have seen again and again in many up and down turns in the industry.

What was really for me personally, and I am from Europe so I should know better theoretically, was a big surprise, was the sudden upturn in automotive, especially in European automotive, which was really geared towards the smaller cars. This is not new, but the urgency they want products at the moment is a big surprise for all of us, I believe, but the stocks are empty. The stocks are very empty. I think what we have seen, this enormously depressed level in automotive since the beginning of the crisis was nothing but the consequence of a very hard reaction of our customers, maybe too hard, and this is now being corrected. I personally think that automotive which comes from an extremely low, will also recover, but they are not used to downturns like that. I think they over reacted. And now over reacted maybe also a little, maybe too soon, but principally speaking it is less steady than industrial but both segments are directed upwards.

And I apologize, I do have one more. If you could just provide some color on how you look at gross margin in the coming quarter, and I know you generally don't give out a specific number, but is it 50 basis points or is it more like essentially a couple hundred?

We don't guide for gross margin, but I told you that the fixed costs will be, our ambition is to keep the fixed costs low and I gave you a range of the sales. And you know our contributive margin.

Thank you very much.

There are no further questions at this time. Lior Yahalomi, are there any closing remarks?

Dr. Zandman?

No.

Dr. Paul? I do want to thank you for your participation in our third quarter earnings call. And we look forward to talking to you in the near future. Thank you.

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