威世科技 (VSH) 2012 Q4 法說會逐字稿

Good morning, my name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Vishay Q4 2012 earnings 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)

Mr. Henrici, you may begin your conference.

Thank you, Melissa. Good morning, and welcome to Vishay Intertechnology's fourth quarter 2012 conference call. With me today our 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 2012 financial results. Dr. 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 and 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 businesses 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 a presentation of the Q4 2012 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 am sure that most of you have had a chance to review our earnings press release. I will focus on some highlights and key metrics. Vishay reported revenues for Q4 of $531 million, slightly above the midpoint of our guidance. Revenues for the year were $2.2 billion, with an operating margin of 8.5% and an adjusted operating margin of 7.9%, excluding the gain on the sale of a property in Belgium, vacated as part of our past restructuring activities. Our operating income was as we would expect at these low revenue levels according to our business model.

EPS for quarter four of $0.14 included a one-time tax benefit of $4 million. Adjusted EPS for quarter four was $0.11. EPS for the year was $0.79, and adjusted EPS was $0.71. Vishay generated free cash of $40 million in the quarter, and $147 million in the year. Revenues in the quarter were $531 million, down by 7.4% from previous quarter and down by 3.8% compared to prior year. Gross margin was 20.5%, operating margin was 4.1%, EPS was $0.14, adjusted EPS was $0.11. In quarter four we recorded a one-time tax benefit of $4 million related to the release of a valuation allowance on a deferred tax asset in Israel. A merger of several of our wholly owned subsidiaries in Israel will allow us for the realization of these tax benefits that likely otherwise would have been foregone.

Reconciling versus prior quarter, operating income quarter four 2012, compared to operating income for prior quarter based on $42 million lower sales or $48 million lower excluding exchange rate impacts, operating income decreased by $23 million from $45 million in quarter three 2012 to $22 million in quarter four 2012. 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 $17 million, and lower fixed cost had a positive impact of $2 million. Versus prior year, operating income quarter four, 2012 compared to prior-year adjusted, based on $21 million lower sales or $14 million lower excluding exchange rate impacts, operating income decreased by $12 million from $34 million in quarter four, 2011 to $22 million in quarter four, 2012. The main elements were average selling prices, which had a negative impact of $29 million, representing a 5.4% ASP decline. Volume increased with a positive impact of $14 million, $7 million coming from our HiRel acquisition, variable costs decreased with a positive impact of $4 million, $3 million coming from lower metal prices. The fixed cost reduction of $6 million was offset by the acquisition related fixed costs.

Comparing 2012 versus 2011, adjusted operating income for the year 2012, based on $364 million lower sales or $309 million lower excluding exchange rate impacts, operating income decreased by $175 million from $352 million in 2011 to $177 million in 2012. The main elements were average selling prices which had a negative impact of $82 million representing a 3.7% ASP decline. Volume decreased with a negative impact of $99 million, $129 million excluding acquisitions, the fixed cost reductions of $23 million was offset by the acquisition related fixed costs, and exchange rates had a positive impact of $9 million. Selling general and administrative expenses for the quarter were $87 million, and $350 million for the year. This compares to $368 million in 2011.

Acquisition related increases were offset by favorable exchange rate impacts while we reduced our existing base by $17 million. For the first quarter of 2013 our expectations are approximately $90 million of SG&A expenses. The tax rate for the year, excluding unusual items, was 29.4%. Due to exchange rate impacts, this is lower than the rate used year-to-date September. The related catch-up resulted in a quarter four tax rate of negative 2.6%. The GAAP tax rate, which includes the tax impact of the gain on the sale of a property and the release of a deferred tax asset allowance was 27.4% for the year and a negative 26.8% for quarter four. We expect our tax rate for 2013 to be approximately 30%. This rate is based on an assumed mix of income among our various taxing jurisdictions, and a shift in income could result in significantly different results.

Total shares outstanding at quarter end were 143 million, the same as at the end of quarter three. The expected share count for EPS purposes for the first quarter 2013, based on average stock price of below $12, is approximately 150 million shares. For a full explanation of our EPS share count and variables to impact the calculation please refer to the 8-K we filed this morning. Cash flow from operations for the year was $287 million. Capital expenditures for the year were $150 million, split approximately $77 million for expansion, $17 million for cost reduction, and $56 million for maintenance of business. Proceeds from the sales of property and equipment were $10 million, free cash generation was $147 million, this compares to $210 million prior year.

Vishay's consistently generated in excess of $100 million free cash in each of the past 7 years, cash flows from operations for greater than $100 million for the last 18 years, and greater than $200 million for the last 11 years. Backlog at the end of quarter four was at $506 million, or 2.9 months of sales, historically a very normal level for Vishay. Inventories decreased quarter over quarter by $21 million, or by $24 million excluding exchange rate impacts. Days of inventory outstanding were 90 days, days of sales outstanding for the quarter were 45 days, days of payables outstanding for the quarter were 31 days, resulting in a cash conversion cycle of 104 days. We had a total liquidity of $1.4 billion at quarter end. Cash and short-term investments comprised $993 million and unused capacity on the credit facility was $431 million.

The breakdown of our debt of $393 million was $89 million outstanding on our credit facility, $95 million of exchangeable unsecured notes due in 90 years, $209 million of convertible debentures, net of unamortized discount, issued in three tranches and due in 28, 29 and 30 years respectively. The principal amount, or face value of the converts, is $575 million. 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.

The year 2012 for Vishay, like for the entire electronic components industry, has been around a difficult year due to a substantially deteriorated market conditions in the second half. We achieved, in 2012, a gross margin of 24% of sales, and adjusted operating margin of 8% of sales, adjusted earnings per share of $0.71, and GAAP earnings per share of $0.79. We generated, as Ms. Lipcaman said, $147 million free cash, and I think we can state that we continued our good performance of many years. The fourth quarter, as foreseen, turned out to be the weakest quarter of the year. We reached a gross margin of 21% of sales, operating margin of 4% of sales, adjusted earnings per share of $0.11, and GAAP earnings per share of $0.14.

Let me talk about the economic environment. After our quite promising start, the year 2012 after June suffered from a negative outlook, especially in Asia. Asian distributors have backend view of unanticipated weakness in the consumer markets like television, notebooks, handsets, and gaming. Following Asia, in the course of the third quarter, most of our other markets started to decline. There were broad anxieties for the macro economy in view of unresolved problems concerning the euro and a weak growth perspectives, in particular for Europe. All this had a substantial impact on the European industrial market segment, whereas automotive, in general, remained relatively strong. In contrast to Europe and Asia, the US market in 2012 remained fairly stable.

The distribution turns in the fourth quarter decreased slightly, from -- to 3.2 on a worldwide basis vis-a-vis 3.4 in the third quarter, to 2.3 in the Americas versus 2.4, to 3.1 in Europe as compared to 3.5, to 4.5 in Asia versus 4.7. All this despite the fact that POS was down by 9% versus Q3. Distribution inventories continued to reduce by 5% versus the third quarter. And, book to bill of distributors during quarter four turned to positive. The continued strength of automotive, decent inventory levels in the supply chain, and the higher degree of confidence at distributors may indicate an upcoming turnaround. We have seen orders in the fourth quarter exceed orders of prior quarter and of prior year and, let me emphasize, generally was quite promising with a book to bill of 1.14.

Our business development sales came in well within our guidance. We achieved sales in the fourth quarter of $531 million vis-a-vis $573 million in prior quarter, and $551 million in prior year when you exclude HiRel, our acquisition. Excluding exchange and defects, sales were down versus prior quarter by $48 million, or by 8%, and versus prior year by $14 million or by 3%. Sales in 2012 were $2.22 billion versus $2.59 billion in 2011 which is $14 billion below prior year excluding exchange rate effects and acquisitions. Book to bill in the quarter was 0.95, 1.0 for distribution, 0.9 for OEMs, 0.97 for actives, and 0.93 for passives, 1.02 for the Americas, 0.91 for Asia, and 0.96 for Europe.

Our backlog is stable at 2.9 months, equally for actives and passives. Order cancellation rates remained at a very normal level. We have seen substantial price pressure in the commodity part of our business in Q4, minus 1.6% versus prior quarter, and minus 5.4% versus prior year. In particular this happened at actives, minus 2.4% versus prior quarter, and minus 8.3% versus prior year. We also have seen some impact at passives, minus 0.7% versus prior quarter, and minus 2% versus prior year. Some highlights in terms of operations, in 2012 our cost reduction and product innovation were not completely able to offset the increased pricing pressure. The contributive margin shifted to the lower end of our traditional range, between 46% and 48%. SG&A costs continue to be well under control, $87 million in the quarter as expected, $350 million in 2012. Which is $17 million below prior year at constant exchange rates and excluding acquisitions. Manufacturing fixed cost in 2012 were $473 million, a reduction of $7 million year-over-year at constant exchange rates and excluding acquisitions.

The total employment at Vishay at the end of 2012 was 21,650 people, which is a reduction of 1% in the quarter and of 2% during the year, excluding the effects of acquisitions. Our fixed cost personnel, as part of it was slightly up but exclusively due to our increased efforts in engineering. Since December 2009, we have increased our technical staff by 17%, according to our growth plan. We are in process to expand our sales organization in Asia, namely in China, we have hired approximately 50% of the targeted additional headcount.

Inventory turns in the quarter, respectively in the year, reached 4.0 respectively 3.9. Excluding exchange rate impacts, inventories in quarter four were reduced by $24 million, by $11 million in raw material and by $13 million in [whip] and finished goods. In 2012, inventories net of exchange and impacts decreased by $13 million, for the most part in raw materials. Our capital spending in 2012 was $150 million, $77 million for expansion, $17 million for cost reduction, and $56 million for the maintenance of business and EHS. Main expansion projects were for leading products like MOSFETs trench diodes, metal strip resistors, power inductors, and film power capacitors. For 2013 we expect capital expenditures of approximately $165 million, following the midterm requirements of our growth plan. We generated, in 2012, cash from operations of $287 million versus $376 million in 2011. We generated, in 2012, free cash of $147 million versus $210 million in 2011. I think we can say that Vishay remains a very reliable generator of free cash, also in economically more difficult times despite a fairly stable level of CapEx for the benefit of internal growth.

I'd like to come to our most important product lines, I will start with resistors and inductors. Vishay's traditional and most profitable business continued to be negatively impacted by the economic slowdown, mainly in Europe. We enjoy a very strong position in the industrial and mill markets and start to intensively penetrate the medical segment. Sales in the quarter were $152 million, which is 7% below the prior quarter and 10% above prior year. When excluding the impact of HiRel, it was 1% above prior year. Book to bill ratio -- the big book to bill ratio was 0.94 like in prior quarter, which kept backlog at the quite normal level of 2.8 months.

Gross margin was at 29% of sales, which is down by 3% from prior quarter, mostly due to larger -- to lower volumes, sorry. We have seen modest price decline, 0.7% versus prior quarter and 2.5% decline versus prior year. We have seen some price erosion from an unfavorable customer mix. Inventory turns for resistors and inductors were at quite excellent, 4.5. Acquisitions in the field of specialty products, Huntington and HiRel continue to be successful. We had, in 2012, sales of $62 million at a gross margin of 31%. And, we do have confidence in further growth potential and also in our ability to acquire further specialty companies.

Talking about capacitors, this business that Vishay is based on a broad range of technologies with a strong position in European and American market niches. It currently suffers from relatively high inventory levels at distribution in combination with some economic slowdown in particular in renewable energies. Sales in the quarter were $107 million, which were 6% below prior quarter, and 10% below prior year. The book to bill of capacitors in quarter four was 0.93 after 0.87 in the prior quarter. Which leaves the backlog at the normal level of three months. Gross margin in capacitors was at 18% of sales which is down by 4% versus prior quarter, due to lower volume and some temporary inefficiencies. Selling prices remain fairly stable at capacitors, down by 0.8% versus prior quarter, and down by 1.4% versus prior year. Inventory turns were 3.2. We do remain confident for the midterm in view of increasing power and green energy applications for our capacitor portfolio.

Talking about Opto, Vishay 's Opto business consists of infrared sensors, couplers, and LEDs mainly for automotive applications. It contains a substantial share of customer design products, mainly sold to automotive and industrial markets. The business shows stability. Sales in the quarter were $50 million, which is 1% below prior quarter, and 2% below prior year. Book to bill was 1.03 after 0.95 in the prior quarter. And, the backlog remained at normal, 3.1 months.

The gross margin improved by 2% to a very satisfactory level of 33% of sales, also due to a better product mix. Our inventory turns were quite excellent at 5.3. We have seen a somewhat accelerated price decline at Opto with 2.1% price decline versus prior quarter and 3.1% versus prior year. 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. Business also in the fourth quarter suffered from low sales in Asia, namely to distribution. Sales in the quarter were $117 million, which is 7% below the prior quarter, and 8% below prior year.

Book to bill at diodes was 1.01 in quarter four after 0.88 in the prior quarter. All this kept the backlog at a quite normal level of 2.8 months. It also seems to indicate some return of confidence, especially in distribution which we now feel is even stronger in the first quarter. The gross margin was at 17% of sales after 20% in prior quarter. It was negatively impacted by low volume and an inventory reduction. Inventory turns were at 4.4 and we have seen quite a normal price decline of 1% versus prior quarter and 3% versus prior year.

Last, but not least, the MOSFETs. Vishay continues to be one of the market leaders in the segment of low voltage MOSFETs. A predominantly Asian business with customers in computers and phones, continue to be hurt by the economic slowdown and too high distribution inventories. Sales in the quarter were $104 million, which is 16% below the prior quarter and 5% below prior year. The book to bill ratio was 0.9 versus 0.7 in the prior quarter, the backlog is at normal 2.8 months. Gross margin was at 10% of sales, 4 percentage points down from prior quarter mainly due to lower volume. The inventory turns were at 3.7. We have seen a very substantial price decline in MOSFETs, minus 4.1% versus prior quarter and minus 15.6% versus prior year. Our de-qualifications of our new generation of high-voltage MOSFETs are ongoing, they are received well by the market but the industrial segment is currently weak which does not help, of course. Still, we are very confident that this will be an interesting new segment for Siliconix.

Let me summarize. 2012 clearly has been a rough year for Vishay and our industry. We continue to be exposed in a major way through the ups and downs of the worldwide economy. On the other hand, Vishay also, in 2012, clearly pursued its targets. We have continued to demonstrate our double earnings potential after the major restructuring efforts in the years 2008 and '09. Our business model indeed works. We proved another time to be a reliable generator of free cash, reacting quickly and efficiently to changes of our environment. We have taken steps to implement our growth plan that targets at increasing earnings per share by expanding manufacturing capacities in critical lines, managing the lead times.

By continuing to strengthen our R&D and design efforts, developing and marketing more new products than ever, by expanding ourselves presence in Asia, mainly in China. We demonstrated our commitment to shareholder value also by implementing another stock buy-back program. We enter 2013 with full confidence in the strength of Vishay, expecting an improving economy through the year with the world economy becoming less erratic. Based on current order trends, we, for the first quarter 2013, guide to a range of sales of between $520 million to $560 million at higher gross margins.

Thank you, very much.

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

Steve Smigie.

Congratulations on some good numbers here in a tough environment. I was hoping you could talk a little bit about, the book to bill, as we look out here into January. Obviously, a very good number. Is this just billed ahead of Chinese New Year? Or do you think orders could have strength throughout the quarter?

First of all, it came in much stronger than we internally have anticipated. And, indeed it's quite broad. It's coming from everywhere, so to speak, not only from Asia. But, of course what you mention has some contribution to it, no question about it. We see, also, really improved order rates from distribution and from EMS. But, we have realized, especially in the last two to three weeks, two weeks more than three weeks, a substantially improved environment, relatively broad. But, as I said, driven by distribution and EMS.

Okay. And, is there -- are there particular end markets that are seeing strength?

Well, as I said, it's distribution. It's somewhat anonymous. So, it's in general a better situation, I think. There's more optimism, more confidence at the customers, that's for sure.

Right, but so, if it's distribution, that's generally going to be more industrial weighted. Where -- say you've got more orders for FETs, or something, that would be more direct from a --?

That is true, what you say, automotive always was strong throughout the year. So, it's really industrial for the most part, you're right.

Okay. Have you seen the Chinese buyer of the high-end automotive, high-end autos come back?

Not really. I do not have this information in detail at this point. So, it's not -- we have seen it predominantly, as I said, from distribution and EMS.

Okay, if I could just sneak one more in. In your presentation it looks like you tweaked some of your internal assumptions a little bit. R&D and engineering costs goes from 7% to 6%, G&A goes from 2% to 3%, fixed costs 4% to 3%. Could you go through those a little bit and what those changes mean?

You mean vis-a-vis our growth plan?

Yes.

It's somewhat small. As a matter of fact, it's not a new strategy which we follow here. It's just somehow different numbers, it's more rounding than anything else, as a matter-of-fact. This is not a change of direction, in fact, I feel that we really do what we say. This increase of technical personnel at the cost of administrative personnel was our plan and that is exactly what happened, but no change in direction.

Okay, great.

Nothing to interpret, really.

Okay thank you.

Chris Danely.

Hi, this is Sameer Kalucha calling in for Chris Danely. My question is on the inventory side of things. How does it compare with the bottom that you guys saw in 2008, '09 downturn? And then, extrapolating that, if this is like an inventory snapback, which is maybe pointing to order strength, do you see any signs of, or any potential for lead times extending over the next quarter or maybe over the summer?

If the order rate continues like that, we for sure will see longer lead times but we will do the best to minimize it. We have put in more capacity, as you know, as part of our growth plan. And, we will try to minimize it. Too long lead-times don't help anyone and especially for us it's also lost business. We will try to manage it, but it is normal.

If things should heat up too much then, by nature of things, we are going to see longer lead-times again. The inventory level today is not as low as it has been, according to my recollection, as low as it has been at the low point of lead crisis. So, it's still in a more regular form, but they have worked it down quite nicely. We have, at the moment, I think they will know what they do in order to order more -- ordering more.

Got it, thanks. And then, you mentioned pricing in Q4 was -- certainly saw a decline which was maybe a little bit more than normal. How do you expect pricing to evolve during the year? Do see it seeing more pressure or it stabilizes?

We're really talking about the MOSFETs in our case. They have really seen that, by far, the highest price decline. The past, it was just more customer mix related or something close to that. So, we are really talking to MOSFETs. Of course, the MOSFET situation on the market hasn't been very nice in quarter four. And, as, also here, orders are coming back, I would suspect that also the price pressure will go down as we go forward.

Got it. Thank you.

Shawn Harrison.

Hi, two questions. Just the incremental gross margin for the fourth quarter was, I guess, a little bit outside your range. Was that solely because of the pricing dynamics in the quarter or was there anything else at work?

Absolutely, you are right, it was the pricing. It was really not for the fixed cost, as you can imagine, it was for the pricing. And you know, we work our way back always through cost reduction and innovation. But, if prices drop such a -- in such a form then you see short-term an impact and then we fight it by cost reduction and innovation. Long-term, we were able for many years to hold the range between 48% and 46%.

And then, as a follow-up, I know last quarter you talked about looking at a potential transaction within Europe. Maybe if you could just discuss the M&A environment, in terms, I guess, of the primary use of your cash flow in '13 and maybe other things are looking at as well?

Nothing has changed, in fact we want to follow our strategy, and the strategy is to acquire specialty midsize, smaller company's. And, in that sense, indeed we are negotiating since quite some time in Europe with one specialty resistor house, smaller acquisition, midsize acquisition as you like. But, in Europe, it's slower here. Takes more time somehow. But, we are decided to go in this direction and for sure we will continue. The market itself, in an upturn normally is not as good as in a downturn. So, we see chances but this is the concrete one I was just talking about in Europe.

Great. Thanks, so much.

Thank you.

Jim Suva.

Thank you. It's Jim Suva from Citigroup, congratulations to you and your team. Dr. Paul, in your prepared comments, in the press release as well as in the conference call, you gave some very appreciated sales guidance. And then, you mentioned gross margins to improve.

Just so I can get that correct, I assume you mean improved quarter over quarter, but then my question is, if that is true, what about year over year? Because it looks like now you are getting back to the same year over year sales level. Should we be expecting gross margins to go back to that high-level? Or if not, why? Thank you.

Jim, it's really like that, it's a matter of volume. Our business model works, as soon as the volume comes up, we have not added fixed costs, as you know, and the variable margin will come back. It's very close to the range anyway, but it will improve as we put more innovation in. Fourth quarter was really a sudden drops of prices, it was not quite normal. So, we expect more stabilization and we believe that we are going to be back, given the volume, to the margins we had before.

Great, thank you. And again, congratulations to you and your team at Vishay.

Thank you.

(Operator Instructions)

Matt Sheerin.

Yes, thanks, and good morning, everyone. Most of the key questions were asked, Dr. Paul, but just again on distribution, you talked about point-of-sale being weak, I think down 9% sequentially. What was your sales into distribution on a sequential basis down in the fourth quarter?

It was substantially down, but I would have to look it up.

It was down more than the 9% then?

Yes. I would say so.

And the book, what's --.

I'll just get help. If you wait one second then I can tell you.

Okay.

No, we are looking still so maybe you ask your question.

In the book to bill, also in distribution, what is it now? Is it --.

It became positive -- in January it was -- it came up nicely, it came to the quite positively levels.

And, aside from that segment, which is obviously very big, are you seeing more stable orders from OEM and EMS customers?

It's too early to talk like that, I would say. It's really, mostly from EMS and distribution. The sequence distribution and EMS. Automotive, there's no change, they have been strong before. But, I think, as soon as -- I think one of the questions before was related to that, as soon as distribution comes up I think we can expect industrial to come back. Which would be very important for Vishay, as you know.

Yes, for sure. And on Siliconix, that gross margin levels numbers, obviously very weak, and I haven't seen it there in quite a while. And, I know some of the end markets that segment serves is weak. Do you expect just a gradual recovery in that business?

It goes with the volume -- it also goes with the volume. We all know that the notebook market at the moment is depressed and maybe remains depressed. But, you know our ambition is to be stronger in high-voltage, we are working on it. We expand our share in automotive. So, we are working against this negative of notebooks. And, I'm absolutely sure that Siliconix is going to come back to decent profitability levels. We are running at very low volumes at the moment.

Okay. Okay, that's terrific. And, if you can get that number to us, that would be great.

Okay, 11% down, I just got it.

11%. Thanks, a lot.

Thank you.

(Operator Instructions)

There our no further questions. I will now turn the call back over to Mr. Henrici for closing remarks.

Thank you for your interest in Vishay Intertechnology.

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