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Vishay Intertechnology, Inc. (NYSE:VSH)

Q1 2008 Earnings Call Transcript

April 29, 2008 10:00 am ET

Executives

Richard Grubb – CFO, EVP and Treasurer

Bill Clancy – SVP and Corporate Controller

Gerald Paul – President, CEO and COO

Felix Zandman – Executive Chairman and CTO

Analysts

Jim Suva – Citigroup

Ingrid Aja – Merrill Lynch

Steve Smigie – Raymond James

Kevin Kessel – Bear, Stearns & Co.

Matt Sheerin – Thomas Weisel Partners

Shawn Harrison – Longbow Research

Andrew Wang – CIBC World Markets

Operator

Good morning. My name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the Vishay's first quarter 2008 earnings results conference 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)

At this time, I would like to turn the conference over to Mr. Richard Grubb, Vishay's Chief Financial Officer. Please go ahead, sir.

Richard Grubb

Good morning and thank you for joining us for today's conference call. As usual, Dr. Gerald Paul, our CEO; and Dr. Felix Zandman, Vishay's Executive Chairman and Chief Technical Officer, are also on the phone. But before I start, Bill Clancy, Vishay's Senior Vice President and Corporate Controller, will read our customary opening statement.

Bill Clancy

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 SEC.

Richard Grubb

Thanks, Bill. Normally, as is normal, I will make some summary comments and Dr. Paul will add a more detailed evaluation of the results of this first quarter of 2008. And finally Dr. Zandman will update us on R&D and acquisition activities.

As announced this morning in our press release, Vishay reported $0.19 operating earnings per share as compared to $0.26 for last year's first quarter and $0.19 for the fourth quarter of 2007. The operational results for the first quarter 2008 exclude any losses incurred by the automobile business unit acquired as part of the IRPCS business. As you know, this business has been sold to a private equity firm, resulting in a net loss of $42.1 million. This amount of $42.1 million includes a net loss for the first quarter of $6.5 million, so the sale loss is somewhere around $35 million as we estimated in our 8-K we filed in early March.

The reported GAAP earnings per share include restructuring and severance costs of $22.4 million. These items and the related tax consequences had a negative $0.10 per share effect against operating earnings. The overall GAAP loss was $25 million or $0.13 per share for the first quarter of 2008.

In addition, the continuing weakening of the U.S. dollar amounted to $10 million pretax effect for the quarter. I want to elaborate on this effect of the dollar and its weakness it has to us at Vishay. If I apply the effects of this $10 million back as if it didn't happen, the 23.5% gross profits that we present operational basis would have be 24.2%, and more importantly, the $0.19 of operating earnings per share that we report would have been $0.23 per share. So it has a significant effect on the earnings of Vishay for this quarter as it has for the last six months of last year also. Revenues for the first quarter of $733 million were approximately 11% higher than last year's first quarter and flat as compared to the fourth quarter of 2007. The increase in revenues compared to last year's first quarter was primarily due to the IR PCS acquisition.

Now, let's go to revenues by segment. Our semiconductor activities produced 52% of revenues, our passives 47%. Gross margins for the quarter as I said before were 23.5% as compared to 22.9% for the immediately preceding quarter. Gross margins by segment for the quarter were; our semiconductor business slightly improved to 22.9% from 22.5% in the last quarter and our passives products slightly improved to 24.3% from 23.3% in the last quarter.

As I said before, Dr. Paul will discuss the operating results in more detail, but as a general overall view, selling, general and administrative expenses for this quarter were 16.2% of revenues as compared to 15.5% for the fourth quarter of 2007. I want to note that this amount includes approximately $5 million of negative FX and some large legal fees concerning patent infringements. Other income consists mainly of income, interest income and foreign exchange losses. The effective adjusted operational tax rate for the year as projected back in January is 24%.

Some other items, capital expenditures for the quarter were $26 million, depreciation and amortization $54 million. The total headcount at quarter end was 28,000 employees, of which 75% are in low cost areas. Cash and short-term investments at quarter end was $572 million. Total debt, again substantially all of which is convertibles, equaled $607 million.

Total inventory at quarter end was $580 million and working capital was $1.2 billion. Bookings for the quarter are $759 million for a book-to-bill ratio of 1.04 to 1 for this quarter. Backlog at quarter end is $697 million and cash generated from operations was $38 million for the first quarter of 2008 as compared to $25 million to last year's first quarter.

Free cash flow was $13 million for this quarter as compared to a negative $3 million in the first quarter of 2007. As announced in our press release, we expect the second quarter revenues to be in the $730 million to $750 million range with continued improved margins.

That's all I have. Dr. Paul, it is up to you.

Gerald Paul

Thank you, Dick. Well, as you understood, the first quarter with adjusted earnings per share of $0.19 generated a good free cash flow and you also understood that the historical weakness of the U.S. dollar against practically all relevant currencies has threatened earnings in a major way. On the other hand, Vishay continues to operate in a reasonably good economic environment, and based on an ongoing strong book-to-bill ratio, we are confident also for the second quarter.

Well, let's have a look first of all at the economic environment. No doubt that the first quarter showed a slight economic decline versus the prior year, but the overall situation remained healthy. Mobile phones and customer and consumer in total remained weak, which is partially seasonal. This continued strength of the industrial markets, automotive in Europe, and aviation, military and space, and we have seen in the quarter encouraging signs from notebooks.

There has been a quite strong POS performance of American and European distributors. Asian distributors are seasonally down versus prior quarter. We have seen distribution having reduced its inventory by 3% overall and the strong POS helped to improve the inventory turns of our distributors on average. They went from 3.8 to 4.1 on a worldwide basis, in the Americas from 3.0 to 3.2, in Europe a major jump from 3.5 to 4.4, Asia down from 4.9 to 4.5, but this is to a large degree seasonal.

On the other hand, book-to-bill of distribution the first quarter was below 1. In general, there are short lead times on the market, and as I said before, despite ongoing concerns for the macro economy, the second quarter looks solid.

Vishay's first quarter as we indicated were in line with our guidance of sales between $720 million to $740 million. We actually achieved sales of $733 million in the quarter, which compares to $730 million in prior quarter and $658 million in prior year.

The IR and PM acquisitions contributed $68 million in the quarter. Excluding exchange rate effects, sales versus prior quarter were down by $4 million, practically flat therefore. Versus prior year, on an apples-to-apples basis, sales were down by $23 million or 3%. This excludes the impact of acquisitions and exchange rates.

Book-to-bill in the quarter was relatively strong, 1.04, and this was carried by the Americas and Europe. Some more details, book-to-bill of 1.05 from distribution, 1.04 for the OEMs, 1.03 for actives and 1.05 for the passives. For the Americas, 1.07; same number for Europe, 1.07; 1.0 for Asia. The backlog remained at a comfortable level and grew to 2.9 months. Despite somewhat deteriorated market conditions, the modest price decline in general continued. Vishay in total has seen 0.4% price decline versus prior quarter and 2.9% price decline versus prior year. At this 0.4% decline versus prior quarter and 4.6% versus prior year, practically no price decline for the passives, 0.4% versus prior quarter and only 1.1% versus prior year.

Let's have a look at the results of the quarter and compare them with the prior quarter. Based on $4 million higher sales, $4 million lower as I said before excluding exchange rate impacts, the adjusted operating margin decreased by $1 million from $55 million to $54 million. The main elements were selling prices with a negative impact of $3 million; volume and mix, a positive impact of $6 million; manufacturing costs, a positive impact of $5 million, which includes a negative impact for metals of $2 million. SG&A costs up by $4 million which is predominantly due to legal fees concerning patent infringement for singularity and the negative impact of the exchange rates on the results of $5 million vis-a-vis prior quarter. And when I say exchange rate, I don't mean the euro, I mean in particular in our case, the Israeli shekel, the Chinese renminbi, and the Czech koruna. These are currencies where Vishay has costs but no sales.

Now, let's look at the results vis-a-vis a year ago first quarter '07. Based on $7 million higher sales for the core business first, $23 million actually lower excluding exchange rate impacts. The adjusted operating margin decreased by $18 million from $68 million to $50 million. The main elements came first of all from ASPs, a negative $20 million. Volume better by $2 million, the costs better by $3 million which contains a negative impact of $3 million from materials, especially metals, and the negative impact of $5 million from the exchange rates. This was for the core business, vis-a-vis last year. The acquisitions in the first quarter '08 contributed $68 million in sales and $4 million in operating margin.

Some highlights from our operations. The inventory turns in the first quarter were practically on the level of the previous quarter. They came out at 3.7. Excluding exchange rate effects, inventories in the quarter remained constant. The comments on inventories include $27 million of tantalum classified as other assets, which is down from $36 million as of December 2007.

Capital spending in the quarter was $26 million as compared to $94 million in prior quarter and $31 million in prior year. Depreciation was $49 million. We expect capital spending in 2008 of about $170 million, somewhat below last year, mostly for capacity expansion and cost reduction again.

During the quarter, the share of employment in high labor countries decreased from 25.4% to 25.2%. Total employment decreased slightly by 140 people. We have seen a good capacity load in virtually all commodity lines. Our lead times unchanged at four to eight weeks.

We generated cash from operations of $38 million in the quarter as compared to $25 million prior year. We generated $13 million free cash in the quarter as compared to minus $3 million in the prior year. So we foresee another good year, as I said before, of cash generation at Vishay.

We decided to expand our program for restructuring and manufacturing in view of potential macro economic slowdowns. We will close the factories in Roeselare, Belgium; in Breda, Holland; and in Recife in Brazil; and the production of these facilities will be moved mainly to China and India in the course of this year. The $22 million charge in the quarter already represents the major part of the expected costs for the entire year. The payback of these projects are about two years and we expect significant cash proceeds from the sale of real estate in Belgium of about $20 million.

Concerning IR, as we indicated already, we succeeded to sell the IR automotive systems business, stopping really ongoing cash losses. As I have said before, this business is not strategic at all to Vishay and we have found no potential for synergies and for further improvements. The business with the IR discretes continue at a rate of $240 million sales per year, generating 7% incremental operating margin. We continue to expect further improvements of profitability as a consequence of moving manufacturing out of the IR facilities.

Let me come to the different lines, product lines, and I would start with resistors and inductors. Resistors and inductors at Vishay, as you know, is a healthy business with many specialty products. Sales in the quarter were $169 million which is 2% above prior quarter, but 3% below prior year. On the other hand, there was a strong book-to-bill ratio of 1.06. The backlog is at comfortable 2.7 months which is slightly increased. Gross margin recovered to 28% of sales, right as projected. We expect a further improvement of the gross margin in the second quarter. The selling prices were stable versus prior quarter and prior year. No surprise, I would say, for these products. Inventory turns remained at a quite excellent level of 4.5.

Coming to capacitors, the business has been stabilized and repositioned. It now contains a high share of specialty products. Sales in the quarter were $125 million, down by 1% versus prior quarter and down by 6% versus prior year. Book-to-bill was at 1.04; backlog is strong at 3.5 months. The increase of the backlog is driven primarily by power capacitors and tantalum capacitors. Gross margin remained at 16% of sales. The expected improvement really materialized, but was offset especially in this product line by exchange rate impact, especially from the Israeli shekel. We project improved gross margin for the second quarter based on higher sales and the benefits of restructuring. Modest price decline for capacitors continues. We have seen 0.7% price decline versus prior quarter and 2.5% versus prior year. The manufacturing inventory turns of capacitors improved further to 2.6 and we expect to reach 3 turns run rate by year-end. The inventory went down by $8 million in the quarter and we are in process to expand our power caps manufacturing capacity in the Czech Republic and in India by all together 40% in steps until year-end.

Coming to the measurements group, which is principally a stable business with strain gages, load scales, and weighing systems, which is very different and in fact very separate from the mainstream components business. Sales in the quarter were $51 million as compared to $54 million in prior quarter and to $44 million in the prior year. The increase versus the prior year really is due to the PM acquisition. Book-to-bill of 1.03 and backlog of 2.3 months in this product line. As projected, gross margin returned to a more normal level of 33% of sales coming from a down of 30% in prior quarter. The inventory turns of 2.8 in the quarter still require improvements.

Coming to semiconductors and I would like to start with semiconductors without Siliconix, which now contains the diodes and varistor business from IR. It is a stable and solid business mainly with diodes and infrared components and we do enjoy a leading market position in many segments. Sales in the quarter were $217 million, 1% above the prior quarter and 2% below prior year, excluding the acquisition. Book-to-bill was at 1.02. The backlog is at a normal level of 2.6 months. The gross margin was at 22% of sales, which is the lower end of the normal range for the gross margin for this product group. We expect to improve gross margin up to a point in the second quarter due to higher sales and due to cost reduction. The product group showed another time excellent inventory turns of 4.5. We have seen also a slightly accelerated price decline at 1.5% versus prior quarter and 4.2% versus prior year. This was driven by standard diodes. The new portfolio of Trench diodes is developing very nicely. It is above our expectations.

Last but really not least, Siliconix. Siliconix is the market leader in low-voltage MOSFETs and now through the IR acquisition moves into also high voltage, the high-voltage market segment of MOSFETS. Sales in the quarter were $171 million, down 3% versus prior quarter, down 2% versus prior year, again without the acquisition. Book-to-bill in the quarter was 1.04 and this was a strong recovery from the prior quarter when book-to-bill was just at 0.87. Backlog at Siliconix normal, three months. Gross margin, happy to report that, gross margin improved to 24% from a low level of 22% of sales as projected. The improvement, again as projected, was mainly driven by a better product mix in low-voltage MOSFETs.

For the second quarter, we expect sales and gross margins on the same level as in the first quarter, but we continue to anticipate further profitability improvements in the second half of this year based on higher sales and manufacturing cost reduction. Price level at Siliconix continued on a low level. No price decline versus prior quarter and 5.2% price decline versus prior year. Inventory turns were at an acceptable level of 4.1 and we do continue to increase the share of sales with $300 million sales density in 8-inch technology. The reduced die size is crucial for cost reduction and for the product performance.

Let me summarize. In the first quarter '08, we met our projections for sales and gross margin. The adjusted earnings per share of $0.19 were burdened by exchange rate impacts of $5 million at the operating margin level and by another additional $5 million in other income as Dick explained. This is equivalent to $0.03. We generated $13 million free cash in the quarter and expect another excellent year of free cash generation for the year 2008. At constant economic environment, Vishay projects improving gross margins throughout the year. For the current quarter, we guide sales to a range between $730 million and $750 million at slightly improved gross margins. Thank you. And may I pass on to Felix.

Felix Zandman

Good morning. While our operational earnings of $0.19 per share were in line with last quarter, which was also $0.19 per share, and in line with our budget, the disposition of the (inaudible) units called ASBU, part of the IR acquisition, produced a loss based on GAAP accounting. The sale of this unit was due to the fact that while initially we thought we could have earnings from ASBU, it turned out that IR projections given to us were highly exaggerated and misleading. We continue to explore large and small acquisitions with an accent on specialty products in both actives and passives components areas.

We are continually introducing new products. For example, the introduction of Trench Schottky diodes, a new Vishay diode technology, was very successful with sales already running at a $30 million rate annually. A new miniature tantalum capacitor, another product, called MAP with advanced ESR and CV characteristics recently introduced generates already a sales rate of $10 million. These are but two examples.

Many new products are being introduced with the results that our share of new products as part of total sales continues to increase. All in all, Vishay continues successfully to implement its strategy of acquisitions strategy to have a very broad line of active and passive components to implement the concept of one-stop shop and focus on new products and new technologies.

Thank you. Dick?

Richard Grubb

Now, we will go for questions.

Question-and-Answer Session

Operator

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

Jim Suva – Citigroup

Thank you very much. Quick question on the legal litigation for the patents, is that just one-time for the March quarter or does some of it flow into the June?

Gerald Paul

No, it is a singularity, clearly a singularity.

Jim Suva – Citigroup

Okay. As such then, if we were to assume the world continues as it is today, would that then kind of take your SG&A closer to the $115 million run rate as opposed to the $119 million run rate?

Gerald Paul

You are exactly right.

Jim Suva – Citigroup

Okay, great. And then, last follow up question, on the IR you mentioned about the highly exaggerated projections and misleading projections. Do you have any type of legal or financial recourse there or how should we, or is it just a thing in the past and we should just move on?

Gerald Paul

No, we think so. We think so. We think that we have a legal recourse.

Jim Suva – Citigroup

And can you walk us through a timeline or expectations?

Gerald Paul

No. We can't talk about it at this point. It is a possibility of course because we got the information which was misleading as we said, exaggerated, and that is being considered now.

Jim Suva – Citigroup

Great. Thank you very much, gentlemen.

Operator

Your next question comes from the line of Ingrid Aja.

Ingrid Aja – Merrill Lynch

Can you talk a little bit about how your order rate linearity at distribution OEM customers were during the quarter? Did you see any falloff in the back half of March?

Gerald Paul

You mean of our distributors or to our distributors?

Ingrid Aja – Merrill Lynch

To your distributors.

Gerald Paul

It was strong as I said before, it is – if I remember right, 1.04 or 1.05. Let me just look it up. It was 1.05 book-to-bill, so it was strong.

Ingrid Aja – Merrill Lynch

Throughout the quarter?

Gerald Paul

Yes. And by the way, book-to-bill altogether is good performance continued in April.

Ingrid Aja – Merrill Lynch

Okay, great. And then I was wondering are you seeing your industrial customers in Europe finding it anymore difficult to compete due to the strong euro, have you seen anything at all?

Gerald Paul

This is what you would anticipate, but we have seen in Europe, and this is really Germany very much, we have not seen a decline. It really depends on the products, I would say. I would have expected the same thing, but we don't see it.

Ingrid Aja – Merrill Lynch

Okay, great. And then just one last thing, in terms of your auto sales, are you seeing those grow in line with your customers or faster due to the increasing electronic content, and if so by how much?

Gerald Paul

Well, our share with automotive over the years is approximately the same in our portfolio, so it goes together.

Ingrid Aja – Merrill Lynch

Approximately the same. Okay, great. Thank you very much.

Gerald Paul

Thank you.

Operator

Your next question cops from the line of Steve Smigie.

Steve Smigie – Raymond James

Great, thanks. It seems like pricing was not a huge issue throughout the course of the year.

Gerald Paul

No.

Steve Smigie – Raymond James

But, so I would guess units may have been the issue. What does it take to really get some more significant unit growth in 2008?

Gerald Paul

It is first of all, the whole thing is impacted by economy, no question about it. What we can do is to generate new products and we do that and secondly to reduce costs for competitiveness and also this is happening. So, this is basically what we do but like with for all our competitors, the economic environment is of course the first priority in that.

Steve Smigie – Raymond James

Okay. And you guys are taking some actions to reduce costs in terms of closing down some facilities. Can you talk a little more about how the timing of that works, what's the benefit?

Gerald Paul

Yes, these restructuring efforts basically happen in Europe. As you see one in Brazil and the other is in Europe. They all will happen in the course of this year and the payback of these measures are around two years. So basically, the benefits will flow to the capacitors and also to the measurements group. Some to passives and measurement group.

Steve Smigie – Raymond James

And when would I expect to see impacts then on gross margin?

Gerald Paul

We will have finalized these projects by year-end for sure in the closing steps. So you would see in the second half, first indications of how to say that first start of the benefit and then full implementation by year-end.

Steve Smigie – Raymond James

And the last question then, just how does it work with – obviously, it is difficult to close facilities in Europe. How do you manage that process?

Gerald Paul

This is not first time, we have to say. So we are experienced. As a matter of fact, all this has been announced and we have social plans negotiated. So we are in a peaceful situation with the labor union, which is not always easy in Europe, but I can assure you these closings will happen smoothly.

Steve Smigie – Raymond James

Okay. Thank you.

Operator

Your next question comes from the line of Kevin Kessel.

Kevin Kessel – Bear, Stearns & Co.

Morning.

Gerald Paul

Morning.

Kevin Kessel – Bear, Stearns & Co.

So my question on SG&A – I heard on the call that you mentioned $5 million of the $10 million increase was the result of foreign currency and you also mentioned legal fees.

Gerald Paul

No, $10 million was the negative impact on the quarter, on the results of the quarter, and we had $10 million negative impact of exchanges versus prior quarter, $5 million on the operating margin and $5 million below the line.

Kevin Kessel – Bear, Stearns & Co.

Below the line, so none on the gross margin. It was just on the SG&A.

Gerald Paul

No, $5 million was down to operating margin which is partially gross margin and partially SG&A and another $5 million was below the line.

Kevin Kessel – Bear, Stearns & Co.

Okay. So if we just isolate SG&A on a quarter-to-quarter basis and look at that change, it was almost $10 million, a little bit closer to $9.5 million. Legal fees were a part of that, which appear to be a one-time event.

Gerald Paul

Well, the SG&A is up by $6 million from quarter four to quarter one, from $113 million to $119 million and as I said before, I expect it to be back to $115 million given the same exchange rates, of course, in the second quarter.

Kevin Kessel – Bear, Stearns & Co.

Okay. I will have to maybe take that offline and figure what happened.

Gerald Paul

It is $6 million up, a portion of it comes directly from the exchange rate vis-a-vis prior quarter and then you have the singularity the legal cases.

Kevin Kessel – Bear, Stearns & Co.

Did you quantify those legal cases or can you?

Gerald Paul

Out of this increase, we have about $2 million to $3 million from the exchange rate, and the remainder comes clearly from the legal expense.

Kevin Kessel – Bear, Stearns & Co.

Okay. Now, turning to IRF and the synergies there, you mentioned that so far it is still on a run rate of $240 million.

Gerald Paul

Yes.

Kevin Kessel – Bear, Stearns & Co.

With a 7% operating margin or incremental margin.

Gerald Paul

Yes.

Kevin Kessel – Bear, Stearns & Co.

So then when I look at what you guys have continued to state as the goal, which I believe is 18% incremental margin.

Gerald Paul

That is true.

Kevin Kessel – Bear, Stearns & Co.

That was 18 months after close. So, initially, it was supposed to be for this quarter which is 12 months and now it is supposed to be I assume for third quarter, third calendar quarter, which would be 18 months out to reach or to target that $18 million run rate?

Gerald Paul

As I said already, last time, we expect delays. The move out of manufacturing took substantially longer than we anticipated at the beginning. We are in the process to move out packaging already, and we will start to move out in a major way next quarter also the fabs. And when all of this is implemented and we expect this to, in the first quarter next year, then we will see in steps again from now to then, improved results.

Kevin Kessel – Bear, Stearns & Co.

Okay. So you are saying that you will move out a lot of it, the packaging next quarter. So that would be –

Gerald Paul

The packaging is already underway and the packaging we will finalize in the course of the third quarter. Then we have the fabs, the primary, which we just start in a major way next quarter and this will take us until first quarter next year.

Kevin Kessel – Bear, Stearns & Co.

And then how many more quarters do you think before you actually could approach the target and once you have all that done?

Gerald Paul

Well, the cost reduction which we anticipate will be there in the second quarter, at the latest depends on which starting problems we will have in manufacturing, the latest in the third quarter next year. And then we expect to be in the range of what we said.

Kevin Kessel – Bear, Stearns & Co.

Okay. Because as I understand that timeline and I am thinking in terms of actual dollars, I don't know if there's think way to quantify, but in the past you had said there were some transition service agreements which I think have wound down?

Gerald Paul

We still had in the quarter $600,000.

Kevin Kessel – Bear, Stearns & Co.

Okay. So there was $600,000. But what is the possibility in terms of dollar savings from manufacturing. Is it $5 million a quarter that can be saved for manufacturing? Is it less, is it more?

Gerald Paul

I would say it is close to that, it is close to that. So basically, we have (inaudible) $60 million sales about and the idea is to come approximately 10 points up, approximately 10 points up, that's exactly the number. And I would reconfirm the $5 million for sure. As I said before, we also expect going forward somewhat more sales. This is supposed to be our [ph] our anticipation.

Kevin Kessel – Bear, Stearns & Co.

Okay. Just the last thing – I might have missed it. I heard distributor and OEM book-to-bills. Don't you typically also give an EMS book-to-bill?

Gerald Paul

No, we don't. We don't have it, at least not by heart. So this is part of the OEM number in our case.

Kevin Kessel – Bear, Stearns & Co.

So it has been folded into that?

Gerald Paul

Yes.

Kevin Kessel – Bear, Stearns & Co.

Okay. Thank you.

Gerald Paul

Thank you.

Operator

Your next question comes from the line of Matt Sheerin.

Matt Sheerin – Thomas Weisel Partners

Yes, thank you. Just one numbers question that I didn't get and that's your sales breakdown by geography. I am not sure you gave that.

Gerald Paul

We didn't. I don't have it here at hand. Okay. We have it, just a second. We have it. In the first quarter, out of the $733 million, we sold to Asia $268 million, to the Americas $170 million, and to Europe $295 million, should give the total.

Matt Sheerin – Thomas Weisel Partners

Okay. And were they all generally seasonal or was one worse or better than the others?

Gerald Paul

We found Europe quite strong, principally speaking, and otherwise we would call it seasonal. It was foreseen. So, as a matter of fact, we were right within our guidance, so the first quarter saleswise – not exchange ratewise but saleswise – was no surprise for us.

Matt Sheerin – Thomas Weisel Partners

Okay. Some of your distribution customers have been talking about seeing weakness in Europe, particularly on bookings with negative book-to-bill and that's of course in local currency. Why do you think there's a disconnect between what they're seeing and what you are seeing?

Gerald Paul

Well, we saw Europe – first of all, Europe decreased its inventory quite substantially, which is principally a good sign, principally as a good basis going forward. Otherwise we see Europe economy wise, I cannot close the problem. I cannot close the contradiction that's on it. I think the distributors we deal with, they're not talking about super year 2008, but absolutely solid. I am talking to these people.

Matt Sheerin – Thomas Weisel Partners

Okay. And then in terms of your profitability prospects going forward, you have talked about gross margin being up a little bit in June on the revenue range that you gave, and then also SG&A down. So it looks like you should be back to the high-single digit operating margin. Is it achievable in this kind of low growth environment to get to double-digit operating margin in the next few quarters?

Gerald Paul

Well, as we said, if the economic environment prevails, then we will show better gross margins throughout the year. This is what we predict. But for quarter two, we guide this way. That means we have a backlog and we have certain programs, so, yes, we will also provide on the projection with the gross margin for the first quarter.

Matt Sheerin – Thomas Weisel Partners

Okay. And then my last question, just a couple of quarters out, there's been some talk from other suppliers' customers in advance of the Olympics in Beijing, in August, are going to be asking for a little bit of an inventory buffer building. I am just wondering whether you are seeing that from customers or do you expect any disruptions at all in August when is obviously a busy time for you because of the Olympics?

Gerald Paul

Well, concerning potential shutdowns of facilities, I talked to our local people there. It doesn't appear that Vishay's plans around Beijing would be concerned. Concerning freight forwarders, of cause I cannot – I don't know exactly, but we do not expect major disruption in any respect.

Matt Sheerin – Thomas Weisel Partners

Okay. Thank you.

Operator

Your next question comes from the line of Shawn Harrison.

Shawn Harrison – Longbow Research

Hi, good morning. Just a below the line item, what should we expect other income to rebound to in the second quarter given that there was an FX effect this quarter?

Richard Grubb

Well, I don't know whether I can project what the FX effect is going be on the second quarter, but if it hadn't been as much as it was this quarter, it would have been a positive $0.5 million.

Shawn Harrison – Longbow Research

So if foreign exchange is stable quarter-to-quarter, it would be a $4.5 million contributor?

Richard Grubb

It would be a positive, yes, that's correct.

Shawn Harrison – Longbow Research

Secondly, just looking at other cost cutting measures – I think it was touched on last quarter, maybe going back to the operating expense line and looking for cost reductions there, any update on those plans?

Gerald Paul

Well, as a matter of fact, we expect to go back after this spike, may I say, to more normal levels in operating margin. So what we can achieve this year, we really offset the inflation. We have increased inflation around the world. Wage increases were higher in recent years and also traveling costs, hospitality, what have you, all these costs are quite dramatically inflated. And what Vishay can do in the next quarter is to offset the influences of this increased inflation vis-a-vis prior year. So we expect on an apples-to-apples basis, that means also the same exchange rates of course, despite this inflation to be at the level of prior year.

Shawn Harrison – Longbow Research

Okay. I am guessing maybe just kind of the levers behind that, is that through lay offs involved or other, what costs?

Gerald Paul

Yes, it is all kinds of things, it's layoffs, it's belt tightening. In SG&A, you cannot get around some belt tightening measures also.

Shawn Harrison – Longbow Research

Okay. Do you expect any other, either on the fixed cost or kind of the variable cost side?

Gerald Paul

Yes, as I said, we have revitalized in a way manufacturing restructuring and there are three plants which I named which we decided to close in the course of the year and move the production into existing facilities. Of course, there is a cost reduction involved, which doesn't kick in immediately but mostly after the full implementation and we go in steps from now to the end of the year. So looking at the first quarter next year, we will see also, and this is mostly manufacturing of course, partially fixed, partially variable cost reduction.

Shawn Harrison – Longbow Research

Okay. Getting back to Siliconix, it was mentioned that there was a sequential mix improvement made quarter-to-quarter. Was that tied to less desktop PC business and is that mix improvement sustainable?

Gerald Paul

Yes, it is. What we expect – I think I guided for the second quarter at the same sales and same gross margin levels as we had now in the first quarter. But for the second half and I said this also three months ago, we expect Siliconix to improve further, or was it at constant economic environment of course, to continue further mostly based on cost reduction on the variable side.

Shawn Harrison – Longbow Research

Okay. Are you winning market share within the handset market with other players right now?

Gerald Paul

Siliconix did in the last two years gain market share, no question about it.

Shawn Harrison – Longbow Research

Okay. That would –

Gerald Paul

But you know, we had the specific U.S. mobile phone customer which didn't have the best year so to speak. And Siliconix was burdened [ph]. But I am happy to see that we have made up for this loss at other phone customers.

Shawn Harrison – Longbow Research

Okay. And finally just on metal prices, you mentioned that during your prepared commentary, I guess, what are your expectations for that going into the second quarter and how are you able to offset that if at all?

Gerald Paul

At the moment, it's hard to say, it's hard to predict. I wouldn't make resistance if I knew how to do that. But anyway, we expect in many segments that this hike which we have seen since two years is behind us really. So we hope principally but we don't know, that this increase is especially in metal prices will somehow come down.

Shawn Harrison – Longbow Research

Okay. Thank you.

Operator

(Operator instructions) Your next question comes from the line of Andrew Wang.

Andrew Wang – CIBC World Markets

Good morning. Can you hear me okay?

Richard Grubb

Yes.

Gerald Paul

Yes.

Andrew Wang – CIBC World Markets

For the March quarter, it looks like Asia was seasonally weak and Europe was maybe a little bit stronger than seasonal.

Gerald Paul

That is correct.

Andrew Wang – CIBC World Markets

I am just curious, based on what you have seen so far, would you expect Asia to rebound a little bit in the June quarter and I am curious what you are thinking for Europe?

Gerald Paul

Asia, we are pretty sure it will rebound in the second quarter, which is also seasonal as a matter of fact. Europe continues strong, at least as far as I can judge it based on April.

Andrew Wang – CIBC World Markets

Okay, great. And then I think in your prepared remarks you mentioned that you would expect I think excluding the effect of currency translation, gross margins to improve sequentially through the end of year?

Gerald Paul

Yes.

Andrew Wang – CIBC World Markets

Is that just based on your cost cutting initiatives that are coming into place?

Gerald Paul

It is basically cost cutting, further work on the mix in Siliconix. This is a quite an effort through all the areas of the company, going through all of the segments of the company. We expect, as I said, at comparable exchange rates and at comparable economic conditions of course also, we expect a sequentially improvement quarter after quarter in the course of this year of gross margin.

Andrew Wang – CIBC World Markets

Okay. And may I ask what you are factoring in for ASP erosion? Is it kind of is historical average, below average or more than average?

Gerald Paul

It is somewhat more than last year, than we had last year, which was really low.

Andrew Wang – CIBC World Markets

Thank you very much.

Operator

Your next question comes from the line of Steve Smigie.

Steve Smigie – Raymond James

In terms of Siliconix gross margin, what will it look like now that you are adding in some of the IR business both the lower on a secular basis do you think?

Gerald Paul

So the number I gave you was including the IR piece, this 24%.

Steve Smigie – Raymond James

Okay. Traditionally, Siliconix has had somewhat better gross margin than 24%. Can we get back to that mid-30s level at some point?

Gerald Paul

Yes, as I said, mid-30s is unrealistic. But what we said and I stick to my statement, we can come back to 27% in the course of the year.

Steve Smigie – Raymond James

And on the non-Siliconix semiconductor business, where could that get to say in a positive economic environment?

Gerald Paul

We have seen gross margins of 24% there also. But this is closer to normal range. It is a commodity business. It is quite reliable. The fluctuations of gross margin in this business are smaller than for instance in Siliconix. So we expect a normal range, I would say between – 22% really at the low end, between 22% and say 25%, somewhere in between.

Steve Smigie – Raymond James

Is there anything you could do there in terms of say packaging, how much of that packaging for that business is in-house versus outsourced? Is there anything you can do in terms of that?

Gerald Paul

I don't know by heart. But there is a higher share in-house in this business than at Siliconix. This is a more traditional business. The swings of mix are also less dramatic than at Siliconix, also concerning packages. But in this case, we have continued very disciplined cost reduction and we have some ideas, at least ideas what to do maybe next year. So, I think it is a solid dependable business in this range between, can I say, 23% to 25% gross margin, but close.

Steve Smigie – Raymond James

And on Siliconix, what do you see the mix of business being as I guess year – does mobile start to increase, what category, what end market do you think will be stronger for Siliconix as you go throughout the year?

Gerald Paul

Siliconix is active really only in two markets mainly, these are the handsets and the laptops really. So, principally, Siliconix is just building up another business which is automotive in a major way, but it takes some time. There will not be a major mix shift going forward.

Steve Smigie – Raymond James

Okay. All right. Thank you very much.

Gerald Paul

Thank you.

Operator

Your final question comes from the line of Kevin Kessel.

Kevin Kessel – Bear, Stearns & Co.

Just a follow-up. So we have talked a lot about currency fluctuations as well as metals. Can you just remind us in terms of hedging activities if you currently have any underway or you plan at some point to potentially put some in place to try to alleviate that?

Gerald Paul

(inaudible) the answer. So, between the euro and the dollar, we have kind of a natural hedge. In fact, our distribution of costs is equal to our distribution of sales. So in this sense, we are in a way hedged, but Dick I relate to you.

Richard Grubb

Yes, normally, we are hedged what we call netting around the world. There has been an unusual increase or deterioration of dollar against the Israeli shekel and some other foreign currencies in India. That tends to be something that is a first-time event for us. We are studying the situation now and if we think it warrants any type of hedging, we will apply that. But, in the past, we have typically not hedged currencies. We may have hedged some type of commodities that we are buying, but not currency.

Kevin Kessel – Bear, Stearns & Co.

So I mean to that point, then what about on the commodities like in metals that you are using a lot of and the changes there?

Gerald Paul

We do not really hedge. We go with the market. Of course we have – we buy ahead sometimes in a way. So we fix (inaudible) but only if a very limited form. We decided to go mostly with the market, which is a philosophy.

Kevin Kessel – Bear, Stearns & Co.

Okay. So that is the philosophy now and at least for the time being that's what you expect us to stick with?

Gerald Paul

Yes.

Kevin Kessel – Bear, Stearns & Co.

And then when I heard you mention tantalum on the call in prepared remarks, can you just review again what you had said? I wasn't 100% clear there.

Gerald Paul

Remember, we had major inventory as a consequence of contract which dates several years back. And we are working down this inventory, which of course also helps the cash flow. And we are working this down step by step and the year 2008 will still benefit from a cash standpoint from this reduction of about $30 million to $35 million.

Kevin Kessel – Bear, Stearns & Co.

You are saying that's what you are reducing per year or that's what is left?

Gerald Paul

This is what we are going to reduce this year and then we are not completely, but close, to a normal level of inventory.

Kevin Kessel – Bear, Stearns & Co.

How much tantalum do you have still on hand?

Gerald Paul

I would have to look it up – must be around $55 million approximately because $20 million (inaudible) approximately.

Kevin Kessel – Bear, Stearns & Co.

So give or take $55 million at this point?

Gerald Paul

We can look it up, no problem. Approximately right.

Kevin Kessel – Bear, Stearns & Co.

Approximately. It could approximately last you until fiscal '09 assuming you get that mix of orders?

Gerald Paul

Yes. There's no inventory risk.

Kevin Kessel – Bear, Stearns & Co.

Okay. And then from a restructuring point of view, is this it for the year, the $18 million? It sounds like the charge is all taken in the quarter for the $0.03 you mentioned.

Gerald Paul

Not everything, I said a major portion of the restructuring is taken in the first quarter.

Kevin Kessel – Bear, Stearns & Co.

Okay, so there might be more to come. The asset write-down of $4.2 million, was that at all applicable to tantalum or not?

Richard Grubb

It was Brazil.

Gerald Paul

This was in the context of closing and receiving Brazil.

Kevin Kessel – Bear, Stearns & Co.

Great. And the last thing, you mentioned the notebook market, you saw some encouraging signs. If you could just expand on that, that would be great.

Gerald Paul

We were surprised it was good. Cannot explain more, I just wanted to get across that we had a good quarter order wise across the board in especially (inaudible).

Kevin Kessel – Bear, Stearns & Co.

When you say you are surprised, it was good that was in the March quarter or is that in the month of April or is that both?

Gerald Paul

It was in the March quarter.

Kevin Kessel – Bear, Stearns & Co.

In the March quarter, and this is primarily on the Siliconix side for low-power MOSFET or –?

Gerald Paul

Yes.

Kevin Kessel – Bear, Stearns & Co.

As opposed to the passive?

Gerald Paul

Right.

Kevin Kessel – Bear, Stearns & Co.

Okay. Thanks so much.

Gerald Paul

Thank you.

Richard Grubb

Okay. I want to thank you for joining us for our first quarter financial call, and your attention and questions during this period. We look forward to again getting together in July of this year. Thank you very much.

Operator

This concludes today's Vishay's first quarter 2008 earnings results conference call. You may now disconnect.

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Source: Vishay Intertechnology, Inc. Q1 2008 Earnings Call Transcript
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