威世科技 (VSH) 2011 Q1 法說會逐字稿

Good morning and welcome to the Vishay Intertechnology first-quarter 2011 earnings call. My name is Melissa and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

I will now turn the call over to Dr. Yahalomi to begin.

Thank you, Melissa.

This is Lior Yahalomi, Vishay's Chief Financial Officer. Good morning, ladies and gentlemen, and welcome to Vishay's first-quarter 2011 earnings call. On the line with me today are Dr. Felix Zandman, Vishay's Executive Chairman and Chief Technical and Business Development Officer; Dr. Gerald Paul, Vishay's President and Chief Executive Officer; Marc Zandman, Vishay's Vice Chairman and Chief Administrative Officer; Lori Lipcaman, Vishay's Executive Vice President and Chief Accounting Officer; and, David Tomlinson, Vishay's Senior Vice President, Corporate Controller. Before I start, Dave Tomlinson will read our customary opening statement.

Dave?

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 Securities and Exchange Commission.

Thank you, Dave.

I will summarize our US GAAP results; Dr. Paul will provide a detailed analysis of our first quarter 2011 with comparisons to prior periods for our business, excluding the spun-off Vishay Precision Group; and, Dr. Zandman will update our R&D and acquisition activities and will make summary remarks.

As you are aware on July 6, 2010, we completed the spin off of Vishay Precision Group or VPG into an independent publicly traded company. Although VPG is an independent company, due to certain continuing involvement such as common Board members, limited supply agreements and leases, and trademark licenses, we did not restate prior financial statements to present VPG as a discontinued operation for US GAAP purposes. To assist in the analysis of Vishay, including and excluding VPG, we realigned our US GAAP reportable segments segregating VPG into its own segment. Consolidated results for the first quarter of 2010 include VPG.

Quarterly results, for the first quarter of 2011, Vishay reported revenues of $695.2 million, 0.9% higher than the fourth quarter of 2010 and 8.5% higher than the first quarter of 2010. We reported earnings of treatable -- attributable to Vishay's stockholders of $75.3 million, compared to $147.2 million for the fourth quarter of 2010 and $45.4 million for the first quarter of 2010. On an adjusted basis, net earnings for quarter one, 2011 were $85.3 million compared to $87.7 million for the fourth quarter of 2010 at $45.4 million for the first quarter of 2010. Our consolidated gross margin for the quarter was 30.9% compared to 30.7% for the fourth quarter of 2010 and 26.1% for the first quarter of 2010. SG&A expenses for this quarter were $92.5 million or 13.3% of revenues compared to $90.9 million or 13.2% of revenues for the fourth quarter of 2010 and $101.9 million or 15.9% for last year's first quarter. Other income and expense for the first quarter of 2011 consist mainly of $4.1 million of interest expense, $1.5 million in interest income and $1.9 million in exchange rates losses.

The effective tax rate for the first quarter of 2011 was approximately 36% which includes $10 million of the one-time tax expense due to the write down of deferred tax assets following the change in Israeli tax rate. Excluding this item the effective tax rate was approximately 27% which is our expected normalized tax rate for the year. Capital expenditures for the quarter were $18.6 million compared to $65.3 million in our fourth quarter of 2010 and $18.1 million in the first quarter of 2010. Depreciation and amortization for the quarter was $45.4 million compared to $46.9 million in the fourth quarter of 2010 and $50.5 million in the first quarter of 2010. As announced in our press release, Vishay reported earnings attributable to Vishay stockholders of $0.43 per diluted share for the first quarter of 2011. Adjusted diluted earnings per share excluding the one-time items -- tax item, were $0.49 compared to adjusted net earnings per diluted share of $0.48 for the fourth quarter of 2010 and adjusted net earnings per diluted share of $0.24 for the first quarter of 2010.

Share count, as you may know, on November 9, 2010, we repurchased $21.72 million of our own shares, using $275 million proceeds of the new convertible debt instrument. We purchased our shares at an average stock price of $12.66. Using convertible debt at an annual fixed rate of 2.25% over 30 years was economical to finance our share buyback because the convertible included a contingent interest feature in which Vishay can take tax deductions at its comparable straight debt rate of 8%. On April 2, 2011, we had approximately 152 million common shares and 13.5 million of Class B shares outstanding. The adjusted rate of average shares for Q1 2011 for diluted EPS calculation were approximately $175.7 million. We filed the Form 8-K this morning detailing how certain variables impact our share count for EPS calculations.

Vishay's liquidity, as of April 2, 2011, Vishay had cash and cash equivalents of $668.6 million and short-term investments of $339.4 million for a total of [one thousand and eight million dollars]. In the first quarter of 2011, we used to $339.4 million of our cash on hand to invest in highly liquid, high-quality instruments with the maturities greater than 90 days, but less than 270 days. The interest rates on these instruments averaged 1.8% and are approximately 120 basis points higher than interest rates on our cash accounts. Vishay had total debt of $432 million as of April 2, 2011. The debt consists of the following three components. We have $95 million of long-term note with 91 years maturity due on December 12 , 2102, with an interest rate of 90-day LIBOR plus 0%; $97 million carrying amount of convertible senior debt debentures due on 2040, which have a face amount of $275 million. These debentures were issued during the fourth quarter of 2010 with an interest rate of 2.25% of the face amount. The face amount is reduced by approximately $178 million of unamortized discount which will be amortized as known cash interest over the term of the debentures.

We also have $240 million outstanding on our revolving credit facility, which we entered into during the fourth quarter of 2010 and matures on December 1, 2015, with an interest rate of 30 day LIBOR plus 1.65%. Total capacity under the revolver is $450 million, and thus $210 million is available as of the end of the first quarter. Total available credit line, including the $210 million end use revolver in the US was $222 million at April 2, 2011. Vishay's total available liquidity, thus measured by cash and short-term investments plus all available credit line is $1.23 billion. There are no principal payments due on our debt until the revolver expires on December of 2015.

Other summary financials, total inventory at quarter end was $460.4 million compared to $427.8 million at the end of Q4 2010. Working capital at quarter end was approximately $1.4 billion compared to $1.3 billion at the end of Q4 2010. Free cash flow was $80.4 million for the first quarter of 2011 as compared to $141.3 million for the fourth quarter of 2010 and $50.3 million for the first quarter 2010. We had another strong quarter with gross margin of 30.9%, operating margin of 17.6%, and adjusted EPS of $0.49. We expect to file our Form 10-Q this afternoon after the closing of the markets.

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

Thank you and good morning everybody.

As you could hear from Lior, quarter one was quite in line with the expectations and Vishay really continued its strong performance of the year 2010. The first quarter has practically been the repetition of the previous quarter with gross margin at 31% of sales, operating margin of 18% of sales, and earnings per share adjusted being at $0.49. Also the generation of free cash remained on traditionally higher levels; it was $80 million in the quarter. All of this is a good start into another promising year, which is underlined by high and stable backlogs and by strong orders which are recovering -- which were recovering more quickly than anticipated.

Let me talk about the economic environment. Also in the first quarter as well as in April, business conditions remained very friendly in general. The face of backlog consolidation and adjustment, which was quite obvious in the fourth quarter, appears to be finalized. Orders in the first quarter came back to sales, leaving backlogs at quite unusually high levels. Most markets continue to be very strong, especially automotive and the industrial segment. Going forward, we will benefit additionally from renewable energy. Inventories at distribution continue to increase, but at a much reduced rate; it was by 3% in the quarter. POS increased by 8% to a seven-year's high, which leaves inventory turns at healthy levels in general -- 4.2 turns worldwide, 2.8 in Americas, somewhat low, 5.2 in Asia, I would say this is normal, and 5.0 in Europe, which is high. Most importantly I think, OEMs and EMS are confident for the year.

Talking about the development of the Vishay's business, quarter one sales came in completely as expected. We achieved sales of $695 million in the quarter versus $689 million in prior quarters and $592 million in prior year without VPG. Excluding exchange rate effects, sales versus prior quarter were up by $7 million or 1% and up versus prior year by $106 million or 18%. A book-to-bill ratio of 1.01 in the quarter and still high backlogs represents a very encouraging sign for 2011. Some details, book to bill for distribution was 0.99; for OEMs, 1.04; for actives, 1.05; for passives 0.97; 1.0 for the Americas; 1.04 for Asia; and, 1.0 for Europe. You see a very similar development in all reported segments. As I mentioned before, the backlog remains at high 3.9 months; 4.3 months for actives; and, 3.5 months for the passives. The selling prices after some increases in the year 2010 overall remains stable, minus 0.2% versus prior quarter, plus 5.1% in comparison to prior year. The actives are back to a normal ASP decline, minus 1.9% versus prior quarter, plus 4.1% versus prior year, and there are increases still in passives, plus 1.6% versus prior quarter and plus 6.3% versus prior year.

Some highlights of operations, inventory turns in the quarter remained at satisfactory level of 4.4. Excluding exchange rate effects, inventories increased by $24 million, by $10 million in raw materials, and by $14 million in VPG and finished goods. There was some buffering for raw materials as well as some price increases for purchases. Capital spending in the first quarter was $19 million versus $65 million in prior quarter and $16 million in the prior year, again without VPG. For 2011, we expect CapEx of about $175 million, approximately $95 million will be for expansion, $25 million for cost reduction, and $55 million for the maintenance of the business. The focus of our capacity expansion will be a MOSFETs, Trench diodes, power capacitors, and inductors. We are going to exploit the market potentials for new and innovative products reconciled in vis-a-vis prior quarter. Our employment was virtually constant in the quarter at a level of 22,790 people. We do not expect any material restructuring costs in the year 2011. We generated $98 million cash from operations in the quarter compared to $63 million in prior year, again without VPG. As Lior mentioned we generated, in the first quarter, free cash of $80 million as compared to $47 million in prior year without VPG.

Let me talk about the results of the first quarter and reconcile them with the prior quarter. Based on $7 million higher sales, $7 million also higher excluding exchange rate impacts, the adjusted operating margin increased by $1 million from $121 million to $122 million. The changes were small. Selling prices gave a negative of $2 million; volume had a positive impact of $4 million; the costs were better by $1 million; and, the combined exchange rate impact had a negative impact of $2 million.

Now comparing the first quarter results to prior-year, bigger changes based on $103 million higher sales, $106 million higher, excluding exchange rate impact. The adjusted operating margin increased by $61 million, from $61 million to $122 million. Again, the main elements -- selling prices had a positive impact of $34 million; volume a positive impact of $43 million; costs reversed by $9 million, higher by $9 million mainly from volume-related fixed costs; and, exchange rates had a negative impact of $7 million.

Now let me go to the main product lines, as usual, and I would like to start with resistors and inductors. Supported by continued strong demand from automotive and industrial segment, Vishay's traditional, and I would say, most successful business had another excellent quarter. Of course, our strong position, especially in Europe, helped. The sales in the quarter were $172 million, which was 3% above prior quarter and 17% above prior year, again excluding exchange rate effects. Some normalization of backlog of resistors and inductors continues. The book-to-bill ratio was 0.94. The backlog is still high, was at 3 months.

The gross margin came out very nicely at 35% of sales, which is nothing, but the continuation of the excellent performance of resistors-inductors of the previous quarters. Selling prices grew stable. We had a slight decline of 0.9 -- excuse me 0.1% versus prior quarter, but prices were up by 0.4% versus prior year. The inventory turns are at excellent 4.9, and we do expect a strong continuation of this business, also in the second quarter.

Coming to capacitors, the business at Vishay is based on a broad range of technologies with a strong position in European and American market niches. It benefits from the present strength of our European auto and industrial applications, and we are also well positioned in capacitors, mainly in renewable energy. Sales in the quarter were $162 million, which is up by 4% versus prior quarter and up by 40% versus prior year. The backlog is stable. Capacitors have a very high level of 4.1 a month. Book-to-bill ratio in the quarter was 1.0.

Selected price increases and a favorable product mix led to a record profitability of a gross margin of 34% of sales. The quarter has benefited additionally from some one-time effects. Selling prices continue to increase by 3.4% versus prior quarter and by 13.3% versus prior year. Inventory turns were 3.3. There was some buffering of raw materials, and especially in capacitors we have seen the effect of increased purchase prices on the inventory. We expect a good and solid second quarter for capacitors.

Coming to Opto products, Vishay's Opto business consists of infrared sensors, couplers, and LEDs and we are the largest supplier of infrared products worldwide. The business contains a high share of customer designed products. Sales in the quarter were $58 million, which is 8% above the prior quarter and 1% below prior year. Strong bookings in the first quarter increased the backlog further to a record level of 4.2 months, book to bill in the quarter was 1.13 for Opto product. Gross margin of Opto came back to 34% of sales based on higher volume vis-a-vis prior quarter. Inventory turns are quite excellent; they are at 5.5. Selling prices in Opto were relatively stable with minus 1.8% versus prior quarter, but 0.1% up versus prior year. Also for Opto we expect a continuation of the strong performance we had in quarter one also for quarter two.

Coming to diodes, diodes represent a broad commodity business at Vishay where we are the large supplier worldwide. We offer virtually all technologies as well as the most complete product portfolio and we are leading in particular in power applications. After a phase of harmonization of orders during the second half of 2010, backlog in the first quarter stabilized on a high level. Sales in the quarter were $159 million, which is 8% above the prior quarter and 14% above the prior year, backlog high at 4.4 months. Book to bill in the quarter was 1.0, and based on higher volume, the gross margin came back to 25% of sales, inventory turns quite excellent at 5.2. Also in diodes, we see the return of a relatively normal plastic line, minus 1.3% versus prior quarter, but up 5.3% versus prior year. Second quarter will be a good quarter, stronger than the first quarter.

Last but not least, the MOSFETs. We are a market leader in low-voltage MOSFETs. After a completely overheated upturn in the first half of 2010, followed by a phase of normalization of backlogs, the orders in the first quarter increased substantially. Sales in the quarter were $143 million, which is down seasonally by 13% versus prior quarter, but up by 12% versus prior year. The book-to-bill ratio in quarter one was 1.07 for the MOSFETs. Backlog is very high at 4.3 months. Gross margins were at the solid level of 28% of sales. The inventory turns were 4.0; similar to diodes the business of MOSFETs is back to a normal ASP development, minus 2.4% versus prior quarter, plus 4.4% versus prior year, and we do expect a stronger second quarter with higher sales.

Let me summarize. Vishay, we believe, has delivered another very satisfactory set of quarterly results. Proving again the positive and, let me emphasize the sustainable, consequences of our deep restructuring of 2009. Gross margin of above 30%; operating margin of 18%; earnings per share $0.49; and free cash of $80 million, I think speak for themselves. With annualized sales close to $2.8 billion, we follow the opportunities of healthy and growing markets worldwide. We are very confident that Vishay, with its broad product portfolio of technically leading products, very often designed also for specific customer needs, and based on it's very strong position in industrial and automotive markets, will be able to do even better in the future. Given the challenges of our industrial societies, the need for professional electronic solutions requiring professional components undoubtedly will continue to grow. We, therefore, see the opportunity for an accelerated rate of internal growth going forward. Vishay is in the position to outgrow the market, and we are in the process to prepare ourselves for this challenge. For the near term, we expect a good second quarter, in fact, with a sales range between $695 million and $735 million, and similar gross margins.

Thank you and I would like to turn over to Dr. Zandman.

Good morning.

There's really very little to add. It was an excellent quarter, another good quarter with net earnings of $85 million, earnings per share $0.49, and free cash, one of the most important measures which we use in the Company, up slightly over $80 million. And the next quarter looks also quite promising.

VPG functions completely independently and its separation from Vishay Intertechnology, I think is functioning seamlessly. No problems there. As you know, we have repurchased 21.72 million shares for to $275 million at the price of $12.66 per share. This OIC share buyback will continue and whenever appropriate, we shall do the same again. We believe very strongly that this move enhances shareholder value and therefore we will continue in this direction.

Our R&D programs are progressing as planned. We continue to look for small and midsize acquisitions as in the past. That's all I have to say; it was a very good quarter, and we hope for the next coming quarters something similar.

Thank you, and now to Lior.

Thank you. Thank you Dr. Zandman. Melissa, we are ready for questions now.

(Operator Instructions) We will pause for just a moment to compile the Q&A roster.

Shawn Harrison.

Hi. Good morning, everybody.

Morning.

The first question just has to do the pricing environment. With it, to your commentary normalizing a bit, particularly on the active side, could you talk about the environment for gross margin potential compression as you get a little bit more pricing pressures as the year goes on or do you expect to see any more pricing pressure? I know there had been talk about the model over earning itself a little bit, but based upon your guidance, it appears that you're forecasting, at least for the near term, still very, very strong gross margin performance.

Yes, we do. The pressure really does not come from the pricing, if you want to put it like that. This is some material price increases; this really impacts more, but this is compensated by higher volume which we expect for the second quarter.

Concerning the price decline, which only hits us as you said perfectly right, basically only in actives. It's nothing abnormal. We do have cost reduction programs and we were able to keep the variable contributive margins constant despite some price decline also in the past, and I have no doubt that we will succeed also in the future. So, it's more normal, and for passives as you see, we have not only stability in prices based on prior actions even continue to grow up to a degree.

Okay.

So, I guess too that commentary -- if volume growth is seasonal, we shouldn't expect any degradation in the gross margin going -- going?

No.

Okay.

And then on the passive side, with at least the capacitors, you did a nice benefit this quarter from some pricing actions and a few one-time benefits. Should we expect the gross margin to pullback a little bit going into the June quarter?

Not dramatically, for sure. It will stay above the 30% level.

And then just -- I'll hop back into queue -- but one follow-up question. The all-in interested expense/income number for the second quarter -- just expectations based upon now the short-term investments?

Lior, do you want to answer?

Yes, Gerald. 1 second, please.

To answer your question, we do --

Sorry, the interest income for the quarter is $2.5 million and interest expense is $4 million, approximately.

Okay.

You could assume that for the year it'll be 4 times in each case.

Okay.

Were there any -- within the interest expense number in the March quarter, was there any kind of FX impact or anything in there?

No. Nothing to speak of, no.

Thank you very much. I will hop back in the queue and congratulations on the results.

Matt Sheerin.

Yes, thanks.

So, I just wanted to ask you a question regarding Japan. You obviously have a lot of automotive exposure. Sounds like auto has been strong, and sounds your outlook continues to be strong there. There other suppliers into the automotive business, even those that don't have a lot of exposure to Japanese automotive per se, that have brought numbers down because of supply-chain issues. What are you seeing there, Dr. Paul, and what your expectations for auto in the next couple of quarters?

Must admit that having heard about Japan, beside the human catastrophe, I was shocked also for the economics, but I have to tell you, it didn't come out like that. There were very limited supply issues for Vishay. We have no facilities in Japan, and our sales share in Japan is small; it is below 5%.

Of course, as you mentioned, there can be something -- principally that our customer is not getting enough parts from Japan, may slow down production. This was my next fear, but from today's perspective, I must tell you that it's not severe. It's not severe. We will find out, of course, as we go, but we are quite confident as you have seen for the second quarter; the impact is very limited for Vishay.

Okay.

And are there any instances where you may be benefiting from competitors, Japanese competitors, either on the passive side or active side, that may have production difficulties, and you're seeing an up tick in orders for customers that are looking for second sources?

It would be an indirect thing; that means that I could imagine that European American cars are gaining share and as we are better positioned here than Japanese customers, we may benefit even indirectly.

But even outside of auto, are you seeing that at all?

I would not lay my hands on it, but it would not be illogical, especially in the industrial segment where Europe could gain some share, especially with the Japanese suppliers, but you know it's a speculation.

Okay.

And then, your comment on distribution sounds like that inventory correction played out. Inventory was up, but the sell through at sounds like it's very strong and -- was that primarily industrial markets where you were seeing that strength that you can tell?

Industrial was extremely strong in this case, but it's across the board. The strength of POS, I would not limit it, so it's really strong, but you are right. Industrial was a strong portion of it.

Okay.

And my last question, just regarding strategy with the cash and the buyback, could you tell us how much cash resides in North America and what is your strategy regarding buyback versus bringing cash back here to do that?

Lior?

Yes, so approximately $95 million of our cash and short-term investments are in the United States. And, if we decide to -- and the rest is outside of the United States, of course. If we decide, if the Board (inaudible) decides to further the repurchase of shares, it's very likely that we may use the same convertible debentures for tax benefits, of course, and in order to maintain strong liquidity in the US for future acquisitions. But, remember that we also have the $210 million additional in our credit line that we can use still in the US.

Okay, so you could tap the credit line? Okay.

Absolutely.

Okay, all right. Thank you.

Steve Smigie.

Great, thank you.

I was wondering if you could talk a little bit about how you are thinking about seasonality now without the VPG? Since we looked into September timeframe, how much seasonality is there? Normally, I might expect a decent amount, but you guys tend to be a little more industrial oriented so there is not much seasonality there. Any sort of color on how you see that?

You already gave the answer. That's exactly it. Vishay never has shown a major seasonality because of its diversification in the markets.

Of course, if you look deeper at the past, it is very strong in Europe, have a stronger first half, but on the other hand the actives have a stronger second half in Asia, so basically Vishay historically, including VPG, at the time had not a major seasonality and this did not change at all after the spin off at all. So, there is nothing in the first line, so to speak, there's nothing to be mentioned.

Great.

And just thinking about gross margin going forward, somebody asked the question, but you're seeing finally maybe normalization and pricing, although maybe it firms up again -- it doesn't seem like people are adding a lot of capacity out there in the space, but do you -- does it look like maybe you start to get gross margin's drifting back down over time close to more normal levels than you guys fixed up a lot of stuff? Or as you mentioned, are you taking cost out fast enough that -- ?

I think we can cope with the price decline on the actives and on the passives there is no price decline to speak of for Vishay historically since many years already. But, as I said on the actives, we have our programs and we are counting on a good economy also, so -- well, volume and volume, of course, helps you to see immediately already. Despite these high material costs, we will have the same gross before crossing guide to the same gross margins for the second quarter as we had in the first quarter, despite higher material costs.

Okay. Great.

And one last question, the tax rate, as you think about that, is it the 27% going forward as well?

Yes.

Yes, we expect that the 27% to be our ongoing tax rate for this year.

Thanks a lot, guys.

(Operator Instructions) Your next question comes from Jim Suva.

Thank you and congratulations to you and your team there at Vishay.

Quick question, I'm looking at the guidance, which if I do my math correctly, it looks like it's quarter over quarter flat to up 6%, so midpoint at about 3%, and historically, it looks like that's a few percentage points lower than normal. It looks like the last 5 and 10 years are up 5% to 6%, and since the economy should be improving and past history averages show some recession and problematic times , I guess I'm just wondering why is the guidance even below

Well, as a matter of fact, we started into the year quite substantially, especially when it comes down to the passives. We had a very good quarter in the passives, and we forecast some increase. Let's see what comes out in the end, but this is our best opinion, given the available capacities at this point in time. So, yes, adding, as I have mentioned before, in the selective form we are adding capacities, manufacturing capacities, at the moment. We don't have free capacity in all the lines at the point, at this point.

Okay.

So, you're not exiting any business or commodity, low-end line?

No. No. There is nothing like that.

Okay, great. Thank you. And, again congratulations to you and your team at Vishay.

Shawn Harrison.

Hi.

Hopefully 2 brief follow-ups. The expanded CapEx forecast for the year, is that going to be pretty linear in terms of how the capacity comes online or will it be more weighted in the September quarter?

It's more weighted for -- towards the second half. It's always the same. Yes, there's a time delay and the delivery times are relatively long still for equipment; and it is going to impact the second quarter, mainly.

Okay.

And then second, just on the raw materials price increases you're seeing, I guess, are you having any availability issues of finding raw materials? Or just inflation?

No. It is some inflation, so there is no shortage as I can --no shortage to speak of, which would limit our manufacturing capacities and levels, so it's just inflation.

Okay. Thank you so much.

(Operator Instructions) There are no further questions.

I will now turn the call back over to Dr. Yahalomi for closing remarks.

Thank you, Melissa.

Thank you for your participation in our call. As always, we appreciate your interest and we look forward for your continued interest in Vishay.

Thank you.

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