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Vishay Intertechnology, Inc. (NYSE:VSH)

Q4 2011 Earnings Call

February 7, 2012 09:00 am ET

Executives

Peter Henrici – Senior Vice President, Corporate Communications

Lori Lipcaman – Executive Vice President and Chief Financial Officer

Gerald Paul – President and Chief Executive Officer

Analysts

Jim Suva – Citigroup

Matthew Sheerin – Stifel Nicolaus

Steven J. O’Brien – J.P.Morgan

Shawn Harrison – Longbow Research

Steve Smigie – Raymond James

Operator

Good morning and welcome to the Vishay Intertechnology Fourth Quarter and Year 2012 Earnings Call. My name is Melissa and I will be your conference moderator today. (Operator Instructions) After the speakers’ remarks, there will be a question and answer session.

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

Peter Henrici

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 and Vishay’s from 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 a 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.

Lori Lipcaman

Thank you, Peter. Good morning, everyone. I’m sure that most of you have had the 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 million, 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 from 2011 was $376 million.

On January 13, we acquired HiRel Systems, a leading supplier of high reliability magnetics products. 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 inductive segment. This recent acquisition sits 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&M, 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 $2,594,000,000, down by 1.1% from previous year, excluding a spinoff 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 pretax 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 a one-time tax expense of $10 million recorded in Q1 and one-time tax benefit of $6.5 million recorded in Q4. In our press release, we’ve included a table which reconciles GAAP EPS into adjusted EPS.

Let me reconcile operating income for Q4 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 Q3 2011 and $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 Q4 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, $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 cost increased for a negative impact of $10 million, nine of which were related to metal prices.

Let me reconcile adjusted income for the year 2011 compared to operating income for the prior year excluding the spinoff Vishay Precision Group. Based on $30 million lower sales or $71 million lower exchange rate impacts, the operating income decreased by $56 million from $408 million in 2010, $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 cost 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. SGNA 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 Q3. The related catch-up results 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.

Global 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 8K 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 for expansion, 20 for cost reduction and 54 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 prior year, excluding a spinoff 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 flows 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 Q4 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 our liquidity in debt, we had a total liquidity of $1.3 billion at quarter end. Cash in short term investments comprised just under $1 billion and unused capacity on the 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 expenditures 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.

Gerald Paul

Thank you, Lori, and good morning, everybody. 2011 we say has been a successful year. Actually, it has been the second best since ten years in terms of net profit. 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 strong first half, in particular, the fourth quarter suffered from inventory reduction in 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 consumer segments. It spread to European and US distributors, despite industrial applications, remain fairly strong in general. Real energy applications currently suffer from reductions of governmental support and too much inventory in the pipeline, mainly its order.

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 terms could be a lengthy process unless POS will pick up.

Distribution inventory returns 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 out. Our development of the business was impacted in the quarter by a dramatically low demand from distribution. Excluding exchange and effects, 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 and effects, 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 and effects and the VPG spinoff.

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 is 2.9 month in actives and 2.9 month 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 that, are back to a normal ASP decline, I would say, minus 0.9% versus prior quarter and minus 4.5% versus prior year. Passives, on the other hand, are stable on an increased level, 0% 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 offset pressures on the contributive margin coming from cost inflation and pricing. Contributive margin remains well within our traditional range of between 46% and 48%.

SGNA 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 or 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 trade work force even at lower activity levels by using plant shutdowns, short work and the lower utilization of sub costs and foundries for a faster ramp up when we will need it.

Due to lower cost of goods sold, inventory terms in the quarter came down to 3.9. For the year 2011, we reached five satisfactory 4.1 terms. Excluding exchange and impact inventories in the fourth quarter, reduced by $31 million, by $16 million in raw materials and by $15 million in [whip] and finished goods.

In 2011, inventories net of the exchange rate impact 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 and EHS.

Our main expansion projects were for MOSFETs, branch 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 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. Opto bin ratio for resistors, 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 margins 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 before, a major share of specialty products in this product group stabilizes. Inventory terms were at excellent 4.4 and we are strengthening the business with selected acquisitions in the field of specialty products. We have reported about hunting and for power resistors and we have now to report the 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, all together, I think I can say it fits quite perfectly into Vishay’s announced growth plan.

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 of 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. Opto bin 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 remain stable at a substantially increased level versus prior quarter. We had the same selling prices and we are up vis-à-vis prior year by 4.3%. Inventory terms were 3.0 and we remain very confident for the midterm in view of increasing power in 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 the 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. Opto bill was 0.91, which leads to a backlog of normal three month. Gross margin continues at a satisfactory level of 30% of sales. Inventory terms 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. Opto bill was at 0.70, which brought backlog down to, I’ll say it again, quite normal three month.

Gross margin was at 20% of sales after 24% in prior quarter, volume-driven, again. Inventory terms were at excellent 4.4 and price decline is back to normal. We have seen 1.3% lower prices vis-à-vis prior quarter and 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 continues with customers in computer and phones and 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 opto bill is improving. We are seeing 0.77 in the quarter. Backlog is down to still normal 2.9 month. Gross margin is reduced to 15% of sales, predominantly, in this case, to lower volume. Inventory terms 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 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 2009 and we have demonstrated again our fast reaction to a weakening economy with tight management of manufacturing capacities, inventories, efficiencies and fixed costs.

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. Improvement of earnings per share will be driven by an ambitious plan of accelerated growth organically and based on proven smaller to midsize specialty acquisitions, like recently, Huntington and HiRel.

Our market environment presently is not friendly, but we know this is temporary. In fact, the worst appears to be over. But, 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.

Peter Henrici

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

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Jim Suva.

Jim Suva – Citigroup

Thank you, everyone, and Happy New Year. I wanted to ask 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, and fold that into understanding that you’re making an acquisition in the additional layer from that, it just seems like I can’t tell if the guidance is really conservative, or it just doesn’t appear consistent with a book-to-bill greater than one in inventory resolution and seasonality. It seems like there’s something still going on in Q1.

Gerald Paul

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 conservatism. Okay, distribution inventory is high, as I said, but it’s also true, of course, that starting in January, we have seen better orders. Definitely better orders, substantially better. The question is now how much of these better orders will materialize in the first quarter in 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.

Jim Suva – Citigroup

Okay, and then a quick clarification. Can you remind 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?

Gerald Paul

At the moment, the company’s round—I give you round numbers—$50 million sales, and as 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 and cannot call its clees costs 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.

Jim Suva – Citigroup

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

Gerald Paul

Thank you.

Operator

Your next question comes from Matt Sheerin.

Matthew Sheerin – Stifel Nicolaus

Yes, thank you. Good morning. 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’s 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 in market and distribution related?

Gerald Paul

I think, Matt, clearly speaking, we built too much inventory in distribution. We didn’t do it. Distributors built too much inventory and we paid the price for it. The way out for us is clearly, and we have announced it 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, as Vishay, principally are strong, but up to now, with MOSFETs, couldn’t participate. We didn’t have the products. 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 up there, also.

Matthew Sheerin – Stifel Nicolaus

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 one or just kind of moving in the right direction?

Gerald Paul

I could say now it’s above one and I’m right. It’s above one for sure, but of course, it has to be stated that the sales started slow in January, so we have to put things in 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%. This is more tangible than book-to-bill, I think.

Matthew Sheerin – Stifel Nicolaus

Okay, and your commentary on distribution inventory, it sounded like you said you 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 sellout in the June quarter, or could be a little longer than that?

Gerald Paul

It all depends, of course, on the POS trivial . It all depends on that. My personal recollection, my personal opinion and my recollection is that 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.

Matthew Sheerin – Stifel Nicolaus

Sure, and just lastly on SGNA, it doesn’t sound like you’ve had any big cost cutting measures in place across the company, given that you expect the second half of the year to recover, so should we be modeling about the same SGNA rate for the first quarter, or differently?

Gerald Paul

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

Matthew Sheerin – Stifel Nicolaus

Okay, so it should be slightly lower, then?

Gerald Paul

Yeah.

Matthew Sheerin – Stifel Nicolaus

Okay, thanks very much.

Gerald Paul

Thank you, Matt.

Operator

Your next question comes from Steve O’Brien.

Steven J. O’Brien – J.P.Morgan

Hi. Thanks for taking my questions. Dr. Paul, 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.

Gerald Paul

I think, typically, automotive does not use 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, people say 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 high, still quite high. They have worked down now, for sure. It will take some time, as I said, but in this case, distribution inventories really impact the sales these days.

Steven J. O’Brien – J.P.Morgan

Great, and then on a geographic basis, do the demand levels mirror the industries that are stronger, such as industrial and automotive in Europe and computing and phones in Asia, or are you seeing any geographic areas of strength and weakness that are worth noting beyond those industry trends?

Gerald Paul

Let me start with Europe. I come from there. Europe is strong in automotive and continues to be strong, and in industrial, we see no real weakening. Maybe there have been times in 2011 where the situation was even more overheated, 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, all of us see, a belief, 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, may I say, if there were not distribution inventory levels, which are still high, we would definitely see an improved situation already, substantially improved, even.

Steven J. O’Brien – J.P.Morgan

Great, and perhaps one more on the margin front, if I could. Your 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?

Gerald Paul

No, it’s a function of lower fixed costs, so we intend to bring down in Q1, on a temporary basis at first, and then we will see, the fixed costs, and this will lead to better gross margins.

Steven J. O’Brien – J.P.Morgan

Great. Thank you.

Gerald Paul

Thank you.

Operator

Your next question comes from Shawn Harrison.

Shawn Harrison – Longbow Research

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?

Gerald Paul

Not more pressure than normal, I may 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 specialties, and you see it again and again. Since many years, we have no price decline 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 price declines returning but we just 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 count on that, but we do not expect an acceleration.

Shawn Harrison – Longbow Research

Very good to hear. Second question follow up, one of your competitors in the passive component world recently vertically integrated their raw material supply chain for panel and 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?

Gerald Paul

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 ten years, we also played, from time to time, with ideas like these, but we never came, really, to the conclusion that it’s needed.

Today I would reconfirm our ten years’ position, so to speak. We don’t see the necessity. Actually, I cannot really recall, maybe the only exception in the year 2000, and this was to an extent, not real, that the supply would not be enough.

Shawn Harrison – Longbow Research

Okay, and then finally, just the capital spending for 2012. How much of that is focused toward 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?

Gerald Paul

Basically, it’s the same for other 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. Then it is in metal strip resistors, in power inductors, as a matter of fact. Pin capacitors, I think there’s enough capacity now, so, as a matter of fact, these products, really, on these products, we concentrate our efforts in terms of expansion.

Out of this $150 million, I would say approximately $80 million will be for expansion.

Shawn Harrison – Longbow Research

In that $80 million expansion, is it one for one for dollar, or do you get $2 of incremental revenue for each dollar in capacity, something like that?

Gerald Paul

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

Shawn Harrison – Longbow Research

Okay, thank you so much.

Operator

(Operator Instructions) Your next question comes from Steve Smigie.

Steve Smigie – Raymond James

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 European business actually ends up in China. Have you seen any fluctuation in terms of overall customer outlook on China demand for autos as these Chinese government’s gone through various stages of being more or less active in terms of controlling the liquidity of their financial system?

Gerald Paul

Steve, of course you hear about the fact that the China government subsidizes less alternative energy, clean energy, et cetera, but first of all, I would say this is not the driving force at the moment in the total concernment 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 true the people are cutting back there, somehow, the investment. But, this is for sure temporary, also.

Concerning the consumption of cars, et cetera, well, I’m living in Mercedes country, as you know. They continue to export heavily, so I cannot say from my perspective, out of my limited perspective, that the Chinese really have changed their behavior and spending.

Steve Smigie – Raymond James

Okay, and just being based in Europe, any thoughts 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’m just curious if they’re saying they’re finding it difficult to get financing like we saw in 2008?

Gerald Paul

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

Steve Smigie – Raymond James

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 discreet manufacturers, I think you might have a little bit more of an industrial mix than other guys, so as you look through the typical cycle, it’s been my observation that you guys maybe recover a quarter or so later than other guys. Do you think that’s a fair analysis, and so do you think maybe you’ll see a sharper upturn maybe a quarter later?

Gerald Paul

I think that what really matters these days is the share of distribution sales. Indeed, Vishay has a 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 or the competitors in terms of distribution share are not so great. All of us use distribution, some more, some less, of course, but principally, all us do.

But, in that sense, it’s true. Vishay has a relatively high share of distribution. In that sense it may take a little longer, but it depends very much on the development of POS. It has exactly the same distributors at the moment. It causes headaches that we’ll 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.

Steve Smigie – Raymond James

Okay. With regard to your operating expenses, I think on a 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 dollar stay flat through a year?

Gerald Paul

We’ll come down in the March quarter. We’ll come down.

Steve Smigie – Raymond James

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

Gerald Paul

First of all, I think we should talk about the first and the second quarter and then we’ll see. You know we have acquired 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.

Steve Smigie – Raymond James

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

Gerald Paul

Who knows that? Who knows that? As a matter of fact, I do believe, personally, but we don’t have the visibility as they’ve had. The second quarter should be higher than the first quarter. What of magnitude? Hard to say. Hard 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 the normal business will be quite normal in the second half, again, especially based on the reduced distribution inventory.

Steve Smigie – Raymond James

Okay. Great. Thanks again.

Gerald Paul

Thank you.

Operator

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

Peter Henrici

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

Operator

You may now disconnect.

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