威世科技 (VSH) 2014 Q1 法說會逐字稿

Welcome to the Vishay first quarter 2014 earnings conference call.

(Operator Instructions)

I will now turn the conference over to Mr Peter Henrici. Please go ahead sir. -- Senior Vice President of the Corporate Communications.

Thank you, Crystal. Good morning. Welcome to Vishay Intertechnology's first quarter 2014 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 will start today's call with the CFO, who will review our first quarter 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 will 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 Relation section of our website, you can find a presentation of the Q1 2014 financial information containing some of the operational metrics Dr Paul will be discussing. 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 quarter one of $602 million in line with the guidance. GAAP EPS for the quarter was $0.17. The first quarter includes a charge of $6.4 million related to our previously announced cost reduction programs. Excluding the effect of this item and the related tax impacts, adjusted EPS was $0.20 for the quarter. The revenues in the quarter of $602 million were down by 2.2% from previous quarter and up by 8.7% compared to prior year. Gross margin was 24.1%. Operating margin was 7.1%. Adjusted operating margin was 8.1%. EPS was $0.17. Adjusted EPS was $0.20.

Looking at the reconciliations. Versus prior quarter, adjusted operating income quarter one 2014 compared to operating income for prior quarter, based on $14 million lower sales or $15 million lower excluding exchange rate impacts, adjusted operating income decreased by $1 million to $49 million in Q1 2014 from $50 million in Q4 2013. The main elements were: Average selling prices had a negative impact of $6 million, representing a 1.0% ASP decline; Volume decreased with a negative impact of $2 million; Variable costs had a positive impact of $3 million, primarily due to cost reduction efforts and lower material prices which more than offset annual wage increases; Fixed costs increased with a negative impact of $3 million, primarily due to salary increases and incentive compensation expenses; Inventory build had a positive impact of $5 million. This inventory build is not expected to repeat in Q2.

Versus prior year, adjusted operating income quarter one 2014 compared to prior year, based on $48 million higher sales or $43 million higher excluding exchange rate impacts, adjusted operating income increased by $3 million to $49 million in Q1 2014 from $46 million in Q1 2013. The main elements were: Average selling prices had a negative impact of $17 million, representing a 2.8% ASP decline; Volume increased with a positive impact of $27 million, representing an 11.1% increase; $4 million coming from acquisitions based on $9 million in sales; Variable costs decreased with a positive impact of $4 million, primarily due to cost reduction efforts and lower metal and material prices; Fixed costs increased with a negative impact of $13 million, this increase includes from acquisitions $2 million.

Additional depreciation expense related to our MOSFETs restructuring program were $2 million. This additional depreciation is expected to continue until the finalization of the restructuring programs at the end of Q1 2016. From compensation and related expenses, $4 million, primarily bonuses and stock compensation. From a non-repetition of temporary cost containment measures, $5 million, primarily the one quarter delay in the annual wage increases and general belt-tightening efforts. Selling, general and administrative expenses for the quarter were $96 million as anticipated. For Q2 2014, our expectations are approximately $95 million of SG&A expenses at constant exchange rates.

Let me give you an overview and timing of our cost reduction programs. As we announced in late October, we are implementing some targeted cost reduction programs. The first is our MOSFETs enhanced competitiveness program, which will have cash costs of $16 million, with analyzed savings of $23 million at current volumes when fully implemented. The program will occur in steps through Q1 2016. The long implementation is primarily due to automotive qualification complexities. Meaningful savings are not expected until the program is nearly completed. Restructuring charges are recognized ratably during the implementation period. Q1 2014 includes $1.7 million of severance expense related to this program. The second is our voluntary early retirement program which will have cash costs of $13 million with analyzed savings of $10 million.

We had several volunteers for whom we did not execute agreements in Q1, so we have extended the deadline for responses. During Q1, we recorded a charge of $4.7 million related to this program. We still expect to achieve our analyzed cost savings goal for this program. We expect to realize savings for approximately $1 million in quarter two, $2 million in quarter three and fully realized by Q4. The third program are minor activities within our diodes segment which are currently in development. Cash costs are expected to be approximately $3 million with analyzed savings of $3 million. These activities are expected to be implemented in the latter half of the year or early 2015.

The expected normalized tax rate for the year excluding unusual items is approximately 32%. The GAAP tax rate, which includes the tax impact with a charge of $6.4 million related to our previously announced cost reduction programs was approximately 32% for the quarter. We expect our normalized tax rate for 2014 to be approximately 32%. This rate is based on an assumed mix of income among our various taxing jurisdictions. A shift in income could result in significantly different results. Total shares outstanding at quarter end were 148 million. The expected share count for EPS purposes for the second quarter 2014 based on the same average stock prices in quarter one is approximately 153 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.

Cash from operations for the quarter was $30 million. Capital expenditures for the quarter were $19 million. Proceeds from the sale of assets $1 million. Free cash generation for the quarter was $12 million. For the trailing 12 months, cash from operations was $299 million. Capital expenditures were $152 million, split approximately: for expansion, $69 million; for cost reduction, $23 million; for maintenance of business, $60 million. Proceeds for the trailing 12 months from sales of property and equipment were $5 million. Free cash generation was $152 million. These shifts consistently generated an excess of $100 million free cash in each the past eight years.

Cash flow from operations were greater than $100 million for the last 19 years and greater than $200 million for the last 12 years. Backlog at the end of quarter one was $664 million or 3.3 months of sales. Inventories increased quarter-over-quarter by $19 million, as already mentioned, not expected to repeat in Q2. Days of inventory outstanding were 88 days. Days of sales outstanding for the quarter were 43 days. Days of payables outstanding for the quarter were 32 days, resulting in a cash conversion cycle of 99 days. We had a total liquidity of $1.7 billion at quarter end.

Cash and short-term investments comprised $1.150 billion. Unused capacity on the credit facility was $522 million. The break down of our debt of $362 million was: $110 million outstanding on our credit facility; $39 million of exchangeable unsecured notes due in 90 years; $213 million of convertible debentures net of unamortized discount, issued in three tranches and due in 26, 27 and 28 years respectively. The principal amount or face value of the converts is $575 million. No principal payments are due until 2018. Now, I will turn the call over to our Chief Executive Officer, Dr Gerald Paul.

Thank you, Lori. Good morning, everybody. I think the first quarter for Vishay has been a promising start into 2014. Our results were better than expected. The strong order intake indicates further improvements to come. As Lori Lipcaman said, Vishay in the first quarter achieved: gross margin of 24% of sales; adjusted operating margin of 8% of sales; adjusted earnings per share of $0.20; and GAAP earnings per share of $0.17. We generated free cash of $12 million, which is better than in prior year. I think we can say that we remain a very reliable generator of free cash.

Let me talk about the economic environment. In the first quarter, we saw continued economic improvement with fairly healthy business conditions in almost all market segments and a positive outlook across the board. Distribution in general built inventory in expectation of a continued upturn. POS was up by 6% quarter-over-quarter. Inventory levels, on the other hand, remained reasonable with overall turns of 3.6 versus 3.5 in prior quarter. Some regional detail: the Americas 2.3 turns after 2.2 in quarter one; Europe 3.9 after 3.3; Asia 4.9 after 5.3. Recovery is gaining momentum now, also in Europe, with strong orders in particular from industrial. Asia grows steadily. In the Americas, the business is stable.

Automotive continues to do well with growth driven by healthy vehicle sales in Asia and America. There is now also recovery in Europe. In computers, the decline of the laptops to a degree is offset by new opportunities in service. Consumer looks promising with continued success of gaming and high resolution products. Smartphones are solid and fixed telecom benefits from growth in 4G and broadband metrics. AMS for the midterm future could suffer due to constraints in military spending, but we are quite optimistic, on the other hand, for the medical segment.

Let me talk about Vishay's business development in Q1. Sales in the first quarter came in according to our guidance. We achieved sales of $602 million in the quarter versus $616 million in prior quarter and $554 million in prior year. Excluding exchange and FX, sales were down versus a surprisingly strong fourth quarter 2013 by $15 million or by 2%, but up versus prior year by $34 million or by 6%. Again, excluding exchange and FX and the impact of acquisitions.

We have experienced the strong book-to-bill ratio of: 1.09 in the first quarter; 1.10 for our distribution; 1.08 for OEMs; 1.12 for Actives; 1.06 for Passives. 0.99 for the Americas; 1.14 for Asia; and 1.10 for Europe. I think it is worth a fairly broad upswing which we have experienced. Backlog increased to 3.3 months, 3.4 months in Actives and 3.1 in Passives. Lead times are slowly increasing mainly at Actives but overall they are well under control. Order cancellations remain at a low level. The price pressure remains normal with minus 1% versus prior quarter, and minus 2.8% versus prior year. We have seen a somewhat increased price decline in Actives minus 1.6% versus prior quarter and minus 4% versus prior year. The price decline in Passives is moderate, minus 0.4% versus prior quarter and minus 1.4% versus prior year.

Let me give some highlights about our operations. The contributive margin in the first quarter improved quarter-over-quarter, but remained at the low end of our traditional range of between 46% and 48%. SG&A costs in the quarter came in at $96 million, quite as expected. Annual wage increases and bonus accruals were the reason for a slight increase of $2 million versus prior quarter. Manufacturing fixed costs for quarter one were $131 million, slightly increased also by $2 million versus prior quarter, mainly due to bonus accruals and wage increases. Total employment at Vishay increased to 22,990 heads or by 2% who were required for a higher manufacturing output in the second quarter.

Inventory trends in the quarter were a satisfactory 4.1. Due to increasing production outputs, inventories in quarter one went up by $19 million: $6 million in raw materials; and $13 million in -- processed and finished goods. Capital spending in the first quarter was $19 million versus $20 million in prior year: $8 million for expansion; $5 million for cost reduction; and $6 million for maintenance of business. For 2014, we continue to expect capital expenditures of about $170 million. We generated, in the first quarter, cash from operations of $30 million versus $23 million in prior year, $299 million for trailing trails months. We generated in the first quarter, free cash of $12 million versus $4 million in prior year, $152 million for trailing 12 months. As I said before, we expect another solid year of free cash generation.

Let me talk about our main product lines. I start out as always with the resistors and inductors. Vishay's traditional and most profitable business continues on a good level. With resistors and inductors, we enjoy a very strong position in industrial, auto and military markets. We are intensively penetrating the medical segment and focus on gaining share in Asian industrial markets, predominantly in China. We see good opportunities for thin film resistors, thick film power resistors and power inductor there. Sales in the quarter were $188 million, 1% below prior quarter, but 13% above prior year, 8% above prior year when excluding the impact of our acquisition of MCB in France.

A good order level in combination with a solid book-to-bill ratio of 1.04 after 0.95 last quarter increased backlogs to 2.9 months. Gross margin for resistors/inductors in the quarter came in at 32% of sales, which is at the same level as in prior quarter. The ASP decline remains modest. We have seen minus 1.1% versus prior quarter and minus 2% versus prior year. There is some acceleration of price decline versus to the impact of adding customers in Asia. The inventory turns are quite excellent at 4.5. Our acquisitions in the field of specialty products, Huntington, HiRel, MCB continue to be successful.

Coming to capacitors, this business is based on a broad range of technologies with a strong position in European and American market niches. The business last year has suffered from a slowdown in particular in the renewable energies and from generally high inventory levels at distribution. Some signs of recovery of orders, we have seen since the end of last year, but sales in the first quarter were still low. We achieved sales of $106 million in the quarter, which was 4% below prior quarter and 2% below prior year. On the other hand, the stronger book-to-bill ratio of 1.09 in the first quarter after 1.07 in previous quarter is encouraging. The backlog increased to a good level of 3.5 months. Gross margin for capacitors remained at 20% of sales. The ASPs are fairly stable. We have seen an increase of 0.9% versus prior quarter and a low decrease of 0.4% versus prior year. We certainly remain confident for this product group especially in view of opportunities in Asia.

Coming to our opto products, Vishay's opto business consists of infrared emitters, receivers, sensors, couplers as well as LEDs for automotive applications. It also contains a substantial and growing share of customer-designed products mainly sold to automotive and industrial markets. The business represents one of Vishay's growth opportunities, especially in the area of sensors and high performance couplers. Sales in the quarter were $58 million, 1% above prior quarter and prior year. We have seen a strong book-to-bill ratio of 1.16 after 1.05 in prior quarter. The backlog has grown to 3.3 months.

Gross margin for opto increased to an excellent 37% of sales from 31% in prior quarter due to exceptionally favorable product mix, good efficiencies and some inventory build. We have, in opto, quite excellent inventory turns of 5.1. Price decline was normal minus 0.8% versus prior quarter and minus 2.7% versus prior year. We continue to increase our technical staff in order to support growth, working on increasing -- on an increasing number of design projects. 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. We are leading, in particular, in power applications. The business enters into a phase of growth.

Book-to-bill was at 1.09 after 0.98 in quarter four. The backlog has grown to 3.6 months. Sales in the quarter were $137 million, which was 3% below a surprisingly strong fourth quarter, but 9% above prior year. Gross margin, diodes was as 22% of sales after 21% in the prior quarter. Inventory turns were at 4.4. The price decline was normal, minus 1.5% versus prior quarter and minus 3% versus prior year. We continue to expand manufacturing capacities in SMD packages and are in process to implement our announced restructuring projects. Savings will begin middle of the year as expected. Last but not least, MOSFETs. Vishay continues to be one of the market leaders in MOSFET transistors. The originally predominant Asian business with customers in computers and phones over the years has been expanded successfully to automotive and recently to industrial. This now helps to balance the decline in laptops and PCs, which recently has slowed down, though.

Sales in the quarter were $113 million, 4% below prior quarter, but 12% above prior year. Book-to-bill ratio was 1.13 after 0.96 in quarter four. The backlog has grown to 3.6 months. The gross margin was at 11% of sales. It continues to be impacted negatively by additional depreciation as a consequence of the announced restructuring until the first quarter of 2016. We have seen good inventory turns of 4.0 and normal price decline of minus 2.1% versus prior quarter and minus 5.8% versus prior year. As Lori Lipcaman indicated, we are on the way to implement our major restructuring program which targets at the move of substantial volume from a 6-inch to an 8-inch fab, including major reductions of fixed costs. We continue to expect full implementation by the first quarter of 2016. This should enable us to reach gross margins in the area of 20% of sales.

Let me summarize. Quarter one has been a solid quarter in terms of results, still at the relatively low level of sales. A quarter in which we continued to do our homework: like the implementation of our announced restructuring programs; like working on a better penetration of the Asian industrial markets; like further expanding critical machine capacities. There are clear signs for a better second quarter. Vishay is in a position to exploit its opportunities. We expect for Q2 sales in the range of $620 million to $660 million at according improved gross margins. Thank you very much.

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

(Operator Instructions)

Steve Smigie.

Marcel Thomas being in for Steve. I was hoping if you could give a little color on the June quarter as far as which end markets you see being the lead drivers?

Basically the same that have been strong in the first quarter. I do not see dramatic changes there.

Automotive pulls us, no question about it. Industrial may be even stronger in the second quarter than it was in the first quarter. Otherwise, I see approximately the same picture, but overall, the order intake is strong at the moment -- continues to be strong.

Okay. Thank you. Then I was hoping you could talk a little about your manufacturing plans with Siliconix.

Sure. As a matter of fact, I explained it, I think. So we are moving volume from a 6-inch to an 8-inch fab that we have that exists, which results into major cost reduction on the variable costs but especially also on the fixed cost side. The point that limits the timing for all that is the qualifications required, we are talking automotive volume.

This qualification time leads to a lead time of the project, which I indicated, which will lead us through 2015. But then most of the savings or practically all the savings kick in at the end of the project. I think we are on time in what we do, but there is a time constraint.

Okay. Perfect. Thank you very much.

Thank you.

Matt Sheerin.

Just a few questions from me, Dr Paul. One, are you talking about, in terms of your guidance for the June quarter -- you're guiding up 7% or 8% sequentially at midpoint. You talked about gross margin going up. Should we expect the normal incremental margin contribution in the 45% to 48% range?

Yes.

Or would it lower because of the inventory build in Q1?

Okay. That's right. So the variable margin contribution, you can expect the same. But of course we will not continue to build inventory as we have done in the first quarter basically.

Okay. But it looks like then it should be up on a year over year basis. It should be up, as you said, in line with the normal leverage?

Yes.

Okay. You talked a lot about the Siliconix or the MOSFET business, diversifying into industrial and automotive. Can you give us a feel for what percentage of your sales at Siliconix comes from those two segments relative to Vishay overall?

About 20%, 25%.

Is industrial and automotive combined?

Yes. Automotive is much stronger than industrial.

Okay. In terms of the exposure to end markets in the quarter, was that similar to what you have seen in recent quarters? Or is automotive and industrial continuing to grow as a percentage of sales?

Well, as a matter of fact, they do well at the moment, no question. But there is some seasonality in it, of course. In the first quarter, industrial -- Europe is strong in the first quarter and being particularly strong in industrial. But overall there are not big swings through the year.

We only know -- we only see that automotive pulls us through. It has been good. It continues to be good for us.

Industrial, especially in Europe, is in the phase of recovery. So I wouldn't be surprised, as I said before, if the industrial sales in the second quarter would be even higher.

Okay. Then it sounds like your outlook is fairly promising. You sound encouraging about the year in general; although, if we look at the last two to three years, you've had very strong first half and then your numbers have fizzled in the second half. I think you missed or are at the low end of guidance in the September quarter in each of the last three years.

Do you have any visibility this year? Or are we still sort of in an environment where there is just not a lot of visibility?

You're absolutely right to remind me of our previous disappointments, Matt, certainly. (laughter) On the other hand, nobody has a crystal ball.

But overall, I think it is fair to say that the situation in the industry -- the industries which we deliver, especially in industrial, it's better this year than it has been last year. So we do have some confidence that things will not repeat themselves. I cannot exclude it, of course. Nobody can, actually.

The visibility is practically triggered by our backlog and the backlog is always a quarter approximately. I can only refer to the general responses we have from the market.

Okay. Thanks very much.

Thank you.

Ruplu Battacharya.

I just wanted to start by asking you a clarification on inventory in the channel. I think you said that your POS was good at 6% quarter-on-quarter.

But did inventory overall in the channel increase? If you can just comment on the regional trend inventory -- channel in Europe versus Asia?

So, as you said, the POS for this, the sales of our distributors came up by 6%. Looking at the inventory development which I did, is about 3% up. So in fact, the inventory went up more slowly than the POS at the sales.

On seasonality, I would not like to comment too much. It is very -- people react -- in distribution you react very quickly to perceived changes. I wouldn't talk about seasonality there.

Okay. Then, what is the current book-to-bill tracking at?

It is very solid, really solid. It is over 1.

Over 1. Okay. Then just on the dividend, do you think that either end of this year or by next year, do you think you can be cash break even in the US including the dividend?

I would say next year maybe yes, we have a chance, right.

Okay. Sorry, just the last quick one for me. I might have missed this. What was the turns in the capacitors?

I have to look it up. I think 3 or so, let me see. My colleagues are faster than me, maybe. No, I am faster. We have inventory turns of 3.3.

3.3. Just -- sorry. One more for me. You've added sales force and you've added engineers in China. Are they at full productivity now? Are they fully trained? Or will it still take a little bit more time?

This is not a black and white picture, of course. We were getting people over the last 12 months more or less.

Some people are fully trained and some are in the process of being trained. It is not completed at this point. But we have all the people on board we wanted to have.

Okay. So -- but we haven't seen the full benefit yet of them coming onboard?

No. (multiple speakers)

Great.

Takes time anyway, as you know.

Okay. Thank you so much.

Thank you.

(Operator Instructions)

Shawn Harrison.

Congratulations on the quarter.

Thank you.

I wanted to just get back to the prior question in terms of distribution. Last year, the issue was in Asia.

The book-to-bills this year seem much more normal. Is there anything you are seeing abnormal out of Asia distribution right now?

No. But it didn't happen in the first quarter as you will recall. Matt, certainly reminded me of that. It was middle of the year. It really was always Asian distribution, but not at this part in the year. As I said, I can not exclude it, but it appears more solid, the whole picture, than in the prior two years.

Okay. Then, I may have missed this, but point of sale was up 6% of distribution, point of purchase was only up 3%?

Yes.

Okay. You had mentioned lead times moving out in some products. Is there any certain area? Is it something that we should be watching at this point in time? Or is it just a little bit of the market seasonality right now?

Anyway, I didn't want to give this message. It goes -- that the emphasis of my sentence was -- goes out -- starts to increase slowly. It is fully under control. It is more in the Actives than in the Passives. There is no question about it. So we do have some packages, especially in diodes where our capacity still has to be increased.

Okay. I guess it would be a function tied to the auto and industrial demand?

Yes.

Okay. Then, finally, just a clarification. The early retirement savings of $10 million that you'll reach a full run rate in the fourth quarter, that will all be coming out of SG&A, am I correct?

No, about two-thirds out of SG&A and say, one-third out of manufacturing fixed.

Okay. Perfect. That's all for me. Thanks so much.

Thank you.

Jim Suva.

Congratulations to you and your team. With lead times starting to improve in some of the markets as you mentioned with the Actives and such, are you seeing any more favorable pricing? Or do you think that will come down the road? Or how should we think about the pricing that you're seeing -- your outlook for pricing?

I mean the pressure on the lead times is not big enough at this point, I would say, to impact pricing. We just -- it was an observation. It's kind of logical. We got great orders.

We could not exactly follow why our production capacities, but this will not convert immediately into lower price pressure. But as you may have heard from us, as a matter of fact, the price pressure at this point in time is not super high. We classified it as normal.

In certain areas, indeed, we have low price pressure. But I would not relate this at the moment to any lead time stretch out.

Great. Thank you. Congratulations to you and your team.

Thank you.

(Operator Instructions)

At this time, there are no further questions in queue. I will now turn the conference back over to Peter.

Thank you for your interest in Vishay Intertechnology. This concludes our call.

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