威世科技 (VSH) 2011 Q4 法說會逐字稿

Good morning and welcome to the Vishay Intertechnology fourth-quarter and year 2011 earnings call. My name is Melissa and I will be your conference moderator 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.

(Operator Instructions)

I will now turn the call over to Peter Henrici, Senior Vice President, Corporate Communications. You may begin.

Thank you, Melissa. Good morning, and welcome to Vishay Intertechnology's fourth-quarter 2011 conference call. With me today are Dr. Gerald Paul, Vishay's President and Chief Executive Officer; and Lori Lipcaman, our Executive Vice President and Chief Financial Officer. As usual, we'll start today's call with the CFO, who will review our fourth-quarter and year-end financial results. Dr. Gerald Paul will then give an overview of our business and discuss operational performance as well as segment results in more detail. Finally, we'll reserve time for questions and answers. This call is being webcast from the Investor Relations section of our website at ir.vishay.com. The replay for this call will be publicly available for approximately 30 days.

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 in Vishay's Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. In addition, during this call, we may refer to adjusted or other financial measures that are not prepared according to Generally Accepted Accounting Principles.

We use non-GAAP measures because we believe they provide useful information about the operating performance of our business and should be considered by investors in conjunction with GAAP measures that we also provide. This morning, we filed a Form 8-K that outlines the various variables that impact the diluted earnings-per-share computation. On the Investor Relations section of our website, you can find the presentation of the Q4 2011 financial information containing some of the operational metrics Dr. Paul will be discussing, as well as a presentation on Vishay's growth plan. Now, I turn the discussion over to Chief Financial Officer, Lori Lipcaman.

Thank you, Peter. Good morning, everyone. I'm sure that most of you have had a chance to review our earnings press release. I will focus on some highlights and key metrics. As you have seen, revenues were down significantly quarter over quarter, but within the lower range of our guidance excluding exchange rate effects. The weaker euro impacted revenues by approximately $8 million. Margins for the quarter reflected the lower volumes. Revenues for the year were $2.6 billion, and for quarter four, $551 million. EPS for 2011 was $1.42, and for quarter four, $0.19. Adjusted EPS for 2011 was $1.46, and for quarter four, $0.15. Cash from operations for 2011 was $376 million.

On January 13, we acquired HiRel Systems, a leading supplier of high reliability magnetics product. The purchase price was approximately $85 million, including repayment of HiRel debt and subject to customary post-closing adjustments. It will be reported in our Resistors and Inductors segment. This niche acquisition fits well into our recently announced growth plan. We expect it to be accretive immediately. We expect a payback of less than eight years. You will hear more about HiRel later.

Looking at the P&L, revenues in the quarter were $551 million, down by 13.5% from previous quarter, and down by 19.9% compared to prior year. Gross margin was 22.8%; operating margin was 6.1%; EPS was $0.19. Our adjusted EPS was $0.15. Adjusted EPS excludes one-time tax benefits totaling $6.5 million, primarily related to the release of deferred tax valuation allowances in various jurisdictions. Revenues for the year 2011 were $2.594 billion, down by 1.1% from previous year, excluding a spin-off of Vishay Precision Group. Gross margin was 27.8%; operating margin was 13.4%; adjusted operating margin was 13.6%; EPS was $1.42; our adjusted EPS was $1.46.

Our adjusted operating margin for the year excludes pre-tax charges totaling $5.8 million related to costs recognized upon the passing of our Founder and Former Chairman, Dr. Felix Zandman, and the resignation of our former Chief Financial Officer, Dr. Lior Yahalomi. Our adjusted EPS excludes the after-tax effect of these charges as well as one-time tax expense of $10 million recorded in Q1, and one-time tax benefit of $6.5 million recorded in quarter four. In our press release, we have included a table which reconciles GAAP EPS to adjusted EPS.

Let me reconcile operating income for quarter four 2011, compared to adjusted operating income for prior quarter. Based on $86 million lower sales, or $78 million lower excluding exchange rate impacts, the adjusted operating income decreased by $44 million, from $77 million in quarter three 2011 to $34 million in Q4 2011. The main elements were average selling prices, which had a negative impact of $3 million, representing 0.5% ASP decline, and volume decreased with a negative impact of $37 million. Reconciling the operating income for quarter four 2011 compared to prior year, based on $137 million lower sales, or $136 million lower excluding exchange rate impacts, the operating income decreased by $87 million from $121 million in Q4 2010, to $34 million in Q4 2011. The main elements were -- average selling prices, which had a negative impact of $9 million, representing a 1.6% ASP decline; volume decreased with a negative impact of $68 million; and variable costs increased for a negative impact of $10 million, $9 million of which were related to metal prices.

Let me reconcile adjusted income for the year 2011 compared to operating income for prior year, excluding the spin-off of Vishay Precision Group. Based on $30 million lower sales, or $71 million lower excluding exchange rate impacts, the operating income decreased by $56 million, from $408 million in 2010, to $352 million in 2011. The main elements were -- average selling prices had a positive impact of $28 million, representing a 1.1% ASP increase; volume decreased with a negative impact of $41 million; variable costs increased with a negative impact of $27 million, $44 million coming from higher metal prices; and exchange rates had a negative impact of $14 million. Selling, general and administrative expenses for the quarter were $92 million. This was in line with our expectation, but it also included the impact of non-repeatable items that netted to a negative $2 million. SG&A costs for the full year were $368 million.

The tax rate for the year, excluding unusual items, was 26.6%, which is slightly lower than the approximately 27% rate used for booking year-to-date taxes through the end of quarter three. The related catch-up resulted in a Q4 tax rate of 20%. The GAAP tax rate, which includes the unusual items, was 27.5% for the year, and negative 1.3% for the quarter. We expect our tax rate for 2012 to be approximately 27%. This rate is based on an assumed mix of our income among our various taxing jurisdictions. A shift in income could result in significantly different results. Total shares outstanding at year-end 2011 were $157 million, the expected share count for EPS purposes for the first quarter based on an average stock price of below $15 is approximately 164 million shares. For a full explanation of our EPS share count and variables that impact the calculation, please refer to the 8-K we filed this morning.

Let's review some select other key metrics we use to evaluate our performance at Vishay. As already mentioned, cash from operations for 2011 was $376 million. Capital expenditures for the year were $169 million -- approximately $95 million for expansion, $20 million for cost reduction, and $54 million for maintenance and business. Proceeds from the sales of property and equipment were $2 million, for a free cash generation of $210 million. This compares to $395 million in prior year, excluding the spin-off of Vishay Precision Group. Vishay has consistently generated in excess of $100 million free cash in each of the past six years, and more than $200 million free cash for the last three years.

Cash flow from operations were greater than $100 million for the last 17 years, and greater than $200 million for the last 10 years. Backlog at the end of quarter four was at $530 million, or 2.9 months of sales. Inventories decreased quarter over quarter by $40 million, or $31 million excluding exchange rate impacts. DIO, days of inventory outstanding, were 93 days. DSO, days of sales outstanding for the quarter, were 47 days. DPO, days of payables outstanding for the quarter, were 33 days, resulting in a cash conversion cycle of 107 days.

Wrapping up with a look at our liquidity index, we had a total liquidity of $1.3 billion at quarter end, cash and short-term investments comprised just under $1 billion, and unused capacity on a credit facility was $287 million. We paid down our credit facility by $85 million in [2011] from $240 million at year end; $110 million to $155 million at year end 2011. The breakdown of our debt of $399 million was -- $155 million outstanding on our credit facility; $95 million of exchangeable unsecured notes, due in 90 years; and $149 million of convertible debentures, net of unamortized discount and due in 28, respectively, 29 years. The principal amount, or face value of the converts, is $425 million. I would like to remind you that no principal payments are due until 2015. Now, I will turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

Thank you, Lori, and good morning, everybody. 2011 for Vishay has been a successful year. Actually, it has been the second best since 10 years in terms of net profits. We achieved gross margin of 28% of sales; adjusted operating margin of 14% of sales; adjusted earnings per share of $1.46; GAAP earnings per share of $1.42. And, as Lori indicated, we generated $210 million free cash and, therefore, we are continuing our strong performance of many years. 2011 has been a year with two very different faces, yet; after a very strong first half, in particular the fourth quarter suffered from inventory reduction at distributors and some general weakening of the economy. In the fourth quarter, we reached a gross margin of 23% of sales, operating margin of 6% of sales, adjusted earnings per share of $0.15, and GAAP earnings per share of $0.19.

The business climate, after six to eight quarters of very strong demand, extended even by the Japanese disaster, deteriorated abruptly in August last year, when distributors decided to reduce the inventory levels in view of a weakening point of sales. The slowdown, as so often, started in Asia mainly as a reaction to softer-than-expected sales to the consumer segment. It spread to European and US distributors, despite industrial applications remain fairly strong in general. Green energy applications currently suffer from reductions of governmental support and too much inventory in the pipeline, mainly at solar. Fixed telecom like military, space, avionics remain stable.

Distribution inventories have started to come down in the quarter, by 4%, which was slowed down by declining POS. POS was 15% below prior quarter, and 20% below the level of the first half of 2011. Therefore, the reduction to normal inventory turns could be a lengthy process unless POS will pick up. Distribution inventories turns in the fourth quarter were 2.8 worldwide versus 3.3 in prior quarter; 2.1 in the Americas versus 2.4 last quarter; 3.0 in Europe versus 3.7; 3.5 in Asia versus 4.1 in prior quarter. We do expect successively improving business conditions through 2012, with distribution inventories being worked down.

Our development of the business was impacted in the quarter by a dramatically low demand from distribution; excluding exchange of defects, sales came in at the low end of our guidance. We achieved sales of $551 million in the quarter versus $638 million in prior quarter, and $689 million in prior year. Excluding exchange of defects, sales were down versus prior quarter by $78 million, or by 12%, and versus prior year, by $136 million, or by 20%. Sales in 2011 were $2.6 billion, 3% below prior year excluding exchange of defects and the VPG spin-off. Book-to-bill in quarter four was 0.80; 0.77 for distribution; 0.83 for OEMs; 0.77 for actives; and 0.83 for passives; 0.83 for the Americas; 0.78 for Asia; and 0.79 for Europe.

Backlog has been reduced to 2.9 months, which does not indicate the recovery of sales already in the first quarter. Backlog was -- is 2.9 months in actives, and 2.8 months in passives, very similar. The order cancellations, on the other hand, were substantially reduced. We are back to a lower-than-normal level. The decline of the selling prices has returned in a moderate way. We have lower selling prices versus prior quarter of 0.5%, and we are below prior-year selling prices by 1.6%. Actives as part of (inaudible) are back to a normal ASP decline, I would say, negative 0.9% versus prior quarter and negative 4.5% versus prior year. Passives, on the other hand, are stable on an increased level, zero percent price decline versus prior quarter, and higher prices of 1.8% versus prior year.

Some highlights of operations. Through cost reduction and product innovation, we, in 2011, again were able to offset pressures on the contributive margin coming from cost inflation and pricing. Contributive margin remained well within our traditional range of between 46% and 48%. SG&A costs continue to be well under control, $92 million in the quarter, as we expected it to be, $368 million in 2011, on the level of prior year, excluding VPG. Over the year, total employment at Vishay came down by 7.5%, to 20,900, which of course, is the consequence of a lower capacity load in general. But we do plan to keep our trained workforce even at lower activity levels by using plant shutdowns, short work and the lower utilization of subcons and foundries for a faster ramp up when we will need it. Due to lower cost of goods sold, inventory turns in the quarter came down to 3.9. For the year 2011, we reached quite satisfactory 4.1 turns. Excluding exchange rate impacts, inventories in the fourth quarter reduced by $31 million -- by $16 million in raw materials and by $15 million in WIP and finished goods. In 2011, inventories net of exchange rate impacts decreased slightly.

Capital spending in 2011 was $169 million; we spent $95 million for expansion, $20 million for cost reduction, and $54 million for maintenance of business in [EHS]. Our main expansion projects were for MOSFETs, Trench styles, metal strip resistors, power inductors, and film capacitors. For 2012, we expect capital expenditures of around $150 million with a very similar split. We generated, in 2011, $376 million cash from operations versus $536 million in 2010, and $261 million in 2009, again, excluding VPG. We generated, in 2011, $210 million free cash versus $395 million in 2010 was the absolute record year, and $219 million in 2009, excluding VPG. So you see, Vishay remains a very reliable generator of free cash of $200 million to $300 million per year.

Now, let me come to the various product lines we have, and I start, as always, with resistors and inductors. Vishay's traditional business is negatively impacted by the economic slowdown, but continues to demonstrate its high earnings power. We enjoy a very strong position in the industrial automotive and military markets, and we also start now to penetrate medical very intensively. Sales in the quarter were $140 billion, 8% below prior quarter and 16% below prior year. Book-to-bill ratio for resistors and inductors in the quarter were 0.90, which brings backlog down to a quite normal level for this product line of 2.7 months. Gross margin were at 30% of sales, down by 3% from prior quarter due to the lower volume. ASPs were stable. We had 0.2% higher prices than in the prior quarter and 0.3 lower prices than in prior year.

Of course, as I said it before, a major share of specialty products in this product group stabilizes. Inventory turns were at excellent 4.4, and we are strengthening the business with selected acquisitions in the field of specialty products. We have reported about Huntington for power resistors and we have now to report HiRel acquisition for magnetics and power supplies. HiRel expands our very successful inductors division by about 50%. It has a complementary product portfolio, and is very strong in medical and military. It is nicely profitable before integration, so we can afford, may I say, a soft integration there. And it has substantial potential for further growth and, altogether, I think I can say it fits quite perfectly into Vishay's announced growth trend.

Coming to capacitors, this business is based on a broad range of technologies with a strong position in European and American market niches. It currently suffers from still high inventory levels at distribution, in combination, of course, with some economic slowdown, in particular in green energy. Sales in the quarter were $120 million, which was 14% below prior quarter and 23% below prior year. Book-to-bill ratio for capacitors was 0.75, which brings backlog down to a normal level of three months. Gross margin of capacitors were 22% of sales, down by 3% versus prior quarter, due to lower volume. Selling prices remained stable at a substantially increased level versus prior quarter, we had the same selling prices, and we are up vis-a-vis prior year by 4.3%. Inventory turns were 3.0, and we remain very confident for the midterm review of increasing power and green energy applications.

Opto products, Vishay's opto business consists of infrared sensors, couplers, and LEDs mainly for automotive applications. It contains a substantial share of customer-designed products that are mainly sold to automotive and industrial applications. After some inventory corrections in the consumer pipeline, the business demonstrates relative stability. Sales in the quarter were $52 million, which was 5% below prior quarter and just 2% below prior year. Book-to-bill was 0.91, which leads to a backlog of normal three months. Gross margin continues at a satisfactory level of 30% of sales. Inventory turns were quite excellent, 5.7, and the price decline after a peak in the third quarter returned to normal. Prices were up versus prior quarter by 0.6%, and down versus prior year by 2.4%.

Coming to diodes; diodes represent a broad commodity business where we are the largest supplier worldwide. Vishay offers virtually all technologies as well as the most complete product portfolio, and we are leading in particular in power applications. The business also in the fourth quarter suffered substantially from still too high inventories at distributors, mainly in Asia. Sales in the quarter were $128 million, which is 15% below prior quarter and 14% below prior year. Book-to-bill was at 0.70, which brought backlog down to, I'll say it again, quite normal three months. Gross margin was at 20% of sales, after 24% in prior quarter, volume driven again. Inventory turns were at excellent 4.4 and price decline is back to normal. We have seen 1.3% lower prices with every prior quarter and 3.3%, I repeat, 3.3% below prior year.

MOSFETs, Vishay continues to be one of the market leaders there, especially in the segment of low-voltage MOSFETs. This predominantly Asian business, with customers in computers and phones, continues to be hurt the most by the economic slowdown and by too-high distribution inventories. Sales in the quarter were $110 million, which is 16% below prior quarter and 33% below prior year. This is all quite weak, but book-to-bill is improving. We have seen 0.77 in the quarter. Backlog is down to still normal 2.9 months. Gross margin is reduced to 15% of sales, predominantly in this case to lower volume. Inventory turns were at 3.5. Selling prices declined at normal rates. We have seen 1.2% versus prior quarter and 6.7% below prior year. We are starting our volume production of new and competitive high-voltage MOSFETs in the first quarter 2012, right as planned.

Let me summarize. 2011 has been a year full of challenges for Vishay, no question. But 2011 has also been a year Vishay was able to prove itself in many ways, I think. First of all, we have demonstrated full continuity after the passing of our Founder, Dr. Felix Zandman. We have continued to demonstrate our doubled earnings potential after the restructuring of 2008 and '09. And, we have demonstrated again our fast reaction to a weakening economy with tight management of manufacturing capacities, inventories, efficiencies, and fixed costs.

And, last but not least, we continue to be an excellent and reliable generator of free cash. We have reemphasized our commitment to shareholder value through increasing earnings per share and stock buyback programs. The improvement of earnings per share will be driven by an ambitious plan for accelerated growth organically and based on prudent smaller to mid-sized specialty acquisitions, like recently Huntington and HiRel. Our market environment presently is not friendly, but we know that this is temporary. In fact, the worst appears to be over. The first and possibly also the second quarter of 2012, nevertheless, will still be impacted by too-high inventories in distribution; but, as usual, we are likely to see a substantial recovery after that phase, as always. Based on current order trends, we, for quarter one, expect similar sales and slightly improved gross margins. Thank you very much. I'll pass back to Peter Henrici.

Thank you, Dr. Paul. We now open the call to questions. Melissa, please take the first question.

(Operator Instructions) Jim Suva.

Thank you everyone. Happy New Year. I wanted to ask you a question. When we look at your guidance and compare it to seasonality, plus a softer than expected Q4 that was just reported and layer on the acquisition. Then fold that into understanding that you're making an acquisition and the additional layer from that, it just seems like, I can't tell if the guidance is really conservative, or just doesn't appear consistent with a book-to-bill greater than 1 in inventory resolution and seasonality. It seems like there's something still going on in Q1.

Well, Jim, as I tried to say before, distribution inventory is clearly still high. As a matter of fact, this is the main reason for, you call it, a certain conservativism. Okay. Distribution inventory is high, as I said, but it's also [through of] cost that's starting in January, we have seen better orders, definitely. Better orders, substantially better. Question is now, how much of these better orders will materialize in the first quarter of sales? So this is our best outlook for the first quarter. Basically, I don't think it's a contradiction to what I've said before.

Okay. Then a quick clarification. Can you remind me us of the company you bought, a couple metrics such as the sales level, the margin profile compared to Vishay, and are you going to have to do any restructuring or moving of plants or assets?

Okay. At the moment, the company is around -- I give you round numbers, $50 million sales, and has before restructuring already an operating margin of around 15%. There will be some restructuring but as I called it, soft restructuring, I think we can afford that. The benefit of this acquisition for Vishay does not so much lie in the fact that we can or cannot call its [squeezed] cost out; this was never the target. It brings us in a very nice way into medical, military and we see potential growth there, quite potential growth. So this is a nice fit to what we wanted to do.

Thank you, and we're looking forward to a good 2012.

Matt Sheerin, Stifel Nicolaus.

Yes, thank you. Good morning. So a couple of questions. Dr. Paul, on the Siliconix business, which was down, I think you said 30% or 33% year over year. I know there was a lot of exposure to markets that have been very tough, including computing and cell phones. But it looks like that's a worse than market year over year decline. Do you have any sense of any market share losses at all with Siliconix or is that just all end market and distribution related?

I think, Matt, clearly speaking, we built too much inventory at distribution. We didn't do it, distributors built too much inventory and we paid a price for it. The way out for us is clearly, as we have announced, that before that we will focus very much on the high-voltage part of this business going forward, which will bring us more into the industrial segment. We at Vishay principally are strong but up to now in MOSFETs couldn't participate. We didn't have the product. We are now starting to sell these products and I think this will also reduce our dependency on these markets like phones and computers. I think it's a distribution inventory thing that we are living through at the moment but we see orders picking sales also.

Okay. And when you talked about a positive book-to-bill in the month of January, is that across all your businesses, and is that significantly above 1, or just moving in the right direction?

I could say now it's above 1, and I'm right. It's above 1, for sure. But of course, it has to be stated that the sales started slow in January, so you have to put things into perspective. I think in absolute numbers, we can say the following that in January, really, the orders in absolute numbers went up by between 15% and 20%, and that this is more tangible than book-to-bill, I think.

Okay. Your commentary on distribution inventories, it sounded like you said we have another quarter to go but do you think you'll see some replenishment or at least a return to distribution orders at the same rate as their sell out in the June quarter, or could it be a little longer than that?

It all depends, of course, on the POS (inaudible). It all depends on that. My personal recollection and my personal opinion and my recollection is it always takes a little longer than you think. I think first quarter will, for sure, be impacted. This reflects also our guidance, and second quarter can still be impacted. Beyond that, I think we would have to be pessimistic in order to see that.

Sure. Then just lastly on SG&A, it doesn't sound like you've got any big cost cutting measures in place across the Company, given that you expect that the second half of the year to recover. So, or should we be modeling about the same SG&A rate for the first quarter, or differently?

For the first half, we have some additional fixed cost cuts in mind.

Okay. So it should be slightly lower then?

Yes.

Okay. Thanks very much.

Steve O'Brien.

Hi, thanks for taking my question. Dr. Paul, could you -- I know you gave us a great deal of color in your commentary but perhaps you could just enlighten us a little further in terms of which end markets, maybe by industry you see Vishay's inventory being leanest or most likely to experience an inflection point in terms of orders or demand as we progress through calendar 2012?

I think typically, automotive does not reduce distribution too much. Therefore by nature of things, inventories in this segment of the market is relatively low and normal. On top of everything automotive, (inaudible) may have peaked but [we can state] it runs beautifully at the moment still. So automotive, for sure, is one of the bright spots which we see. On the other hand, there are others like phones, computers, that use to a large extent also distribution. And in this case, we have to state that distribution inventories are still quite high. They'll work down now for sure, we'll take some time as I said, but in this case, distribution inventory has really impacted sales these days.

Great. Then on a geographic basis, do the demand levels near the industry for there stronger, such as industrial and automotive in Europe and in computing and phones in Asia? Or are you seeing any geographic areas of strength and weakness that are worth noting beyond those industry trends?

Well, Europe, let me start with Europe. I come from there. Europe is strong in automotive and continues to be strong. In industrial, we see no real weakening. Maybe there have been times in 2011 where the situation was even more overrated, but we still see very solid business in automotive Europe and in industrial. When I say Europe, excuse me, I do not mean Greece. I mean central Europe, predominantly, as a matter of fact and this is really where our business takes place. Southern Europe for us is not super important for Vishay, at least.

So the countries I'm talking about are solid and doing well. In the US, I see -- we, all of us see, I believe, a strengthening across-the-board, which is very encouraging. And also, in Asia, the typical industry, consumer industry seems to get better. So all in all, let me, I'd say if there were not distribution inventory levels, which are still high, we would definitely see an improved situation already, substantially improved even.

Great. Then perhaps one more on the margin front, if I could here. Gross margin improved slightly in Q1. Is there any benefit in the quarter as the year progresses from raw materials, or is this simply a function of mix?

No. It's a function of lower fixed costs. So we intend to bring down in quarter one, on a temporary basis at first and then we will see the fixed costs, and this will lead to better gross margins.

Great. Thank you.

Shawn Harrison.

Hi, good morning everyone. I guess the first question, pricing, it seems as if we're back to normal. Did you experience any odd pricing pressure in the quarter from competition, or do you think as we move through the first half of '12, we'll still be within this normalized environment?

Not more pressure than normal, I must say. So as a matter of fact on the passive side, I said it before very often, there is no real price pressure because of the nature of this business, which is predominantly specialty and you see it again and again since many years, we have no price declines there. In fact, we run at higher prices than in prior year. On the actives, this is really where the situation is the same for everybody, also for us, we see pricing declines returning. But we just have -- we have had quite a few negotiations, annual negotiations. It is very normal. So as a matter of fact, I can state that the level of competition for all of us is not worse than in normal times, very simple. So we have to counter that but we do not expect an acceleration.

Very good to hear. Second question, a follow-up, one of your competitors in the passive component world recently vertically integrated their raw materials supply chain for tantalum powder, or tried to at least a part of it. Do you see any need to go that route, or is supply still ample for you, particularly given your balance sheet?

I could be very short and say we do not see the need to do that, as a matter of fact. Of course, in the last 10 years, we also played from time to time with ideas like these, but we never came really to the conclusion that it's needed. And today, I would reconfirm our 10 years' decision, so to speak. So we don't see the necessity. Actually, I cannot really recall, maybe the only exception, the year 2000, and this was to an extent, not real, that the supply would not be enough.

Okay. Then finally, just the capital spending for 2012, how much of that is focused towards high-voltage MOSFETs or I guess maybe if you could -- within the CapEx focused in on growth, what product lines will you be focused in on?

We think it's the same for the clients we also invested in an expansion in 2011. It's of course the MOSFETs, altogether, in low voltage and especially also high-voltage. It's on the diode side, on power diodes, trench diodes, and it is in metal strip resistors in power inductors, as a matter of fact. Twin capacitors, I think we have enough capacity now. So as a matter of these products, really, on these products we concentrate ourselves in terms of expansion. Out of these $150 million, I would say approximately $80 million will be for expansion.

In that $80 million expansion, is it one-for-one for $1, or do you get $2 of incremental revenue for each $1 of capacity, something of that --

Well, we go with -- in a different way, what counts for us is the payback. That means the variable margin, the contributed margin and the average first rule of thumb, the average of all of these expansion investments is a payback time of, say, a year or less. That means we really would get -- and then you can calculate that, we have about 50% variable margin, so that's basically our rule of thumb.

Okay. Thank you so much.

(Operator Instructions) Steve Smigie.

Great, thank you. Dr. Paul, I was wondering if you could comment a little bit on China impacts, given the fact I think a lot of your European business actually ends up in China. Have you seen any fluctuation in terms of overall customer outlook on China demand for autos as the Chinese government's gone through various stages of being more or less active in terms of controlling the liquidity of their financial system?

We, of course, hear about the fact that the China government subsidizes less alternative energy, green energy, et cetera. But first of all, I would say this is not the driving force at the moment in the total conglomerate of selling of Vishay. It's not that important at this point in time. We have great hopes for it, but it doesn't hurt us really, at this point. I think it's [rude] that people are cutting back there somehow the investments but this is for sure temporary also. Concerning the consumption of cars, et cetera, well, I'm living in Mercedes country as you know. (laughter) They, in fact -- they continue to export heavily. So I cannot say, from my perspective, out of my limited perspective, that the Chinese have really changed their behavior on spending.

Okay. And then just being based in Europe, can you -- any thoughts on, or feedback you're getting from customers on their ability to get financing from European banks? There's various reads on the stability of those banks. I was curious if they're saying they're finding it difficult to get financing like we saw in 2008?

I don't see that. Very clearly, I don't see that. I don't know how the situation is in southern Europe, but this for our business is not very relevant, I must admit that. But in the central countries like France, Germany, Austria, Netherlands, Scandinavia, if you have business, it's normal, and business is good.

Great. And then just in general, can you talk about how you see your typical recovery versus that of other guys? So for example, if you take other discrete manufacturers, I think you might have a little bit more of an industrial mix than some of those other guys? So as you look through your typical cycle, it's been my observation that you guys are -- maybe recover a quarter or so later, than other guys? Do think that's a fair analysis, and so do you think maybe you'll see a sharp [up turn] maybe a quarter later?

I think that it -- what really matters these days is the share of distribution sales. Indeed, Vishay has relatively high share of distribution sales. In that sense, we are more exposed maybe than others who may have less in distribution, but I think that the differences between us, all the other competitors in terms of distribution share are not so great. All of us have seen distribution worse or less of course but principally, all of us, too. But in that sense, through Vishay has a relatively high share of distribution. That sense may take a little longer, but it depends very much on the development of POS. It is exactly the same distributors at the moment that causes headache, that will be the first ones to want more and quickly. As soon as they see the business, the POS to pick up. They also accelerate the business after that.

Okay. With regard to your operating expenses, I think our previous call, question, you indicated that there were some cuts to come just in terms of magnitude. Should we be thinking that goes down something like $90 million or something like that for the March quarter and would the dollars stay flat through the year --

It will come down in the March quarter. It will come down.

Would that stay at a lower dollar level throughout the year, or you think that would come back up if revenue came back up?

First of all, I think we should talk about the first and the second quarter and then we'll see. We have quite an ambitious growth program but for the time being I think it's appropriate to save a little money, so to speak, and we are going to come in below this number of the fourth quarter, In the first quarter and very likely in the second.

Okay. Last question is just, as things recover, what magnitude of recovery do you think we can see? Is it a couple quarters of 10% sequential growth, something like that? Or is it going to be a less steep curve in terms of recovery?

Who knows that? (laughter) Who knows that? So as a matter of fact, I do believe, just believe, but we don't have the visibility, I stated that. The second quarter should be higher than the first quarter. Order of magnitude, I have to say if I had to guess, I would say between 5% and 10%, but don't take it for granted. Nobody knows it, really. Second half is completely open, but I think most of us anticipate and so do we, that [now] that business will be quite normal in the second half again, especially based on the reduced distribution inventory.

Okay. Great. Thanks again.

I will now turn the call back over to Mr. Henrici for closing remarks.

Thank you. Thank you, Melissa. Thank you for your interest in Vishay Intertechnology. This terminates our fourth quarter conference call.

You may now disconnect.