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Vishay Intertechnology Inc. (NYSE:VSH)

Q2 2008 Earnings Call

July 29, 2008 10:00 am ET

Executives

Gerald Paul - CEO

Felix Zandman - Executive Chairman, CTO and BDO

Richard Grubb - CFO and EVP

Bill Clancy - SVP and Corporate Controller

Analysts

Steve Smigie - Raymond James

Kevin Kessel - JPMorgan

Jim Suva - Citigroup

Shawn Harrison - Longbow Research

Matt Sheerin - Thomas Weisel Partners

Andrew Huang - American Technology Research

Ingrid Aja - Merrill Lynch

Operator

Good morning. My name is Beth, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vishay's second quarter 2008 earnings release. (Operator Instructions).

Thank you. Mr. Grubb, you may begin your conference.

Richard Grubb

Thank you. Thank you for calling in for today's conference call. Here with me today are Dr. Gerald Paul, Vishay's CEO and Dr. Felix Zandman, Vishay's Executive Chairman, Chief Technical and Business Development Officer. 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. Thank you.

Richard Grubb

As usual, I will make some summary comments and Dr. Paul will add a more detail evaluation of the quarter and finally Dr. Zandman will update our research and development and acquisition activities, after which we will have a Q&A.

As announced in our press release today, Vishay reported a goodwill impairment of $800 million. In light of a sustained decline in market capitalization for Vishay and its peer group companies and other factors, Vishay determines that an interim impairment test was necessary as at the end of the second quarter. The charge is non-cash in nature and will not affect Vishay's liquidity, cash flows from operation activities or debt covenants, or have any impact on future operations, except for some positive tax benefits for tax deductible goodwill.

As announced in our press release, Vishay reported $0.23 operational earnings per share, as compared to $0.26 for last year's second quarter and $0.19 for the first quarter of 2008 and were in line with estimates. The reported GAAP earnings per share include the goodwill impairments of $800 million and restructuring and severance costs of almost $9 million. These items and the related tax consequences had a negative effect of $4.21 per share against our operating earnings. In addition, the continuing weakening of the US dollar amounted to $6 million negative pre-tax effect for this quarter.

Revenues for the second quarter of $774 million were approximately 8% higher than last year's second quarter and 6% higher than the first quarter of 2008. The increase in revenues compared to last year's second quarter was primarily due to foreign currency effects.

Revenues by segment were Semiconductor, 53%; Passives, 47%; consolidated gross margins for the quarter were 23.2% as compared to 23.5% for the immediately preceding quarter. Gross margins by segment for the quarter were: Semiconductor slightly decreased to 22.5% from 22.9% in the last quarter, while Passives also slightly decreased to 24% from 24.3% in the last quarter. As I said before, Dr. Paul will discuss the operations in more detail after this.

Selling, general and administrative expenses for the quarter were 15.6% of revenue, compared to 16.2% for the first quarter of 2008. This quarter amount includes approximately $3 million of legal fees related to a settlement of a patent infringement.

Other income consists mainly of interest income and foreign exchange losses. The effective adjusted operational tax rate for the year is 24%, as it was in the first quarter and we estimate it to be for the continuation of the year.

Capital expenditures for the quarter were $32 million, depreciation and amortization for the quarter was $56 million, and total headcount at quarter end was 28,000 employees, of which 75% are in low cost areas. Some other key amounts, cash and short-term investments at quarter end was $585 million. Total debt, substantially all of which convertible, equals $607 million. We anticipate that the bondholders will put (inaudible) 3 5/8 bond to us, which is due to take shape by the end of business day today.

The payment of the bonds is due August 1, 2008. We have reclassified $250 million of the bonds as current, which we intend to use this amount of our cash in addition to drawing on our credit lines to retire these bonds.

Total inventories at quarter end was $589 million and working capital remains at $1 billion at quarter end. Bookings for the quarter were $776 million for a book-to-bill ratio of one-to-one for the second quarter. Backlog at quarter end is $696 million.

Cash generated from operations is $65 million for the second quarter of 2008, compared to $69 million in the second quarter of 2007. Free cash flow was $35 million for the second quarter of 2008, as compared to $26 million for the second quarter of 2007. As announced in our press release, we expect the third quarter revenues to be in the $750 million to $770 million range. Thank you and Dr. Paul?

Gerald Paul

Thank you, Dick. Well in essence, Vishay showed strong sales performance in the second quarter with improved operation results. On the other hand, the historical weakness of the US dollar again (inaudible) earnings in quite a major way. In the case of Israel, this is true in particular for the Israeli shekel. As Dick said before we continue to show a strong free cash flow and despite major macroeconomic concerns, we continue to be confident for the development of the business near term.

Talking about economic environment, there's a lot of skepticism around. Nevertheless, the electronic market remains basically healthy in the second quarter. Most of the business trends which we saw in the market were seasonal trends. We have seen a continued strength of industrial automotive in Europe and aerospace military. We have seen also that obviously the upturn of the Asian market for notebooks and mobile phones seems to start.

Again, we are seeing a strong POS performance of our worldwide distributors with quite satisfactory inventory turns. They had on a worldwide basis 4.1 turns after 4.0 in the first quarter. The Americas remain at a turn rate of 3.2. In Europe, last quarter the first quarter was really a spike and this went down to 4.4, this went down to a very normal number of 3.9 turns, nothing to be skeptical about. And Asia came up from 4.5 turns to 4.6 turns. Also, the book-to-bill of our distributors was almost one, so we have to assume that things are in good order there. The inventories at EMS appear normal and all together quarter three '08 looks solid, despite some ongoing macroeconomic concerns.

Talking about the business development of Vishay in the second quarter, we had a strong sales performance and exceeded sales guidance substantially, naturally also because of exchange rate impact, but not only. We achieved sales of $774 million in the quarter as compared to $733 million in the prior quarter and $716 million in the prior year. When excluding exchange rate effects, sales versus prior quarter were up by $28 million or 4%, vis-à-vis prior year sales were up by $21 million or 3%.

Book-to-bill in the quarter was at one. If you segment the book-to-bill, into segment into areas you see that for distribution book-to-bill was 1.01 in the quarter for OEMs, 1.0, very similar. For Actives 1.01, for Passives, 0.99, again, very similar. And regionally, you see for the Americas 0.94, for Europe 0.97, and for Asia 1.07. The only soft spot we see therefore, is the Americas, but all the other parts of the world are quite promising.

The backlog is at a comfortable level of 2.7 months and the modest price decline which we have seen since a few quarters already continue. All together, Vishay lost prices of 0.9% vis-à-vis prior quarter, 3.1% versus prior year. Actives had a price decline of 1.4% versus prior quarter and 4.7% versus prior year. The passives as nearly always practically had no price decline, 0.3% versus prior quarter and 1.1% versus prior year.

Let me talk about the results of the second quarter and let me reconcile them vis-à-vis the prior quarter. Based on 41 million higher sales, which is 28 million higher when excluding the exchange rate effect. The adjusted operating margin increased by 5 million, mainly from 54 million to 59 million.

The main elements of this development were an ASP decline, which had an impact of $7 million negative. On the other hand, volume came up by $14 million. Variable cost of course were burdened by higher metal costs, but became better vis-à-vis first quarter by $7 million.

We have seen a negative inventory impact of $4 million mostly due to additional obsolescence in the context of restructuring and the exchange rate burdened our results by $4 million vis-à-vis the first quarter.

When looking and comparing the second quarter results to the second quarter last year, you'll see the following: Based on $59 million higher sales, which excluding exchange rate effects were $21 million more. The adjusted operating margin decreased by $6 million, from $65 million to $59 million.

The main elements of this development where the sales prices had a negative impact of $25 million, volume a positive impact of $22 million, variable costs were better by $7 million, but of course burdened by higher costs for [raw materials], higher costs for wages, energy, freight. In all, inflation is quite strong these days. The exchange rate impact had a negative of $10 million vis-à-vis prior year, very substantial, mostly the Israeli shekel.

Some highlights from operations. The inventory turns in the second quarter improved to 3.9. When excluding exchange rate effects, the inventory in the quarter were practically constant. Capital spending was $32 million as compared to $26 million in prior quarter and to $42 million in the prior year. This compares to a depreciation of $51 million. For 2008, we expect capital spending of about $170 million, mostly as usual for capacity expansion and cost reduction.

During the quarter, the share of employment in high labor countries decreased from 25.2% to 24.5%. Total employment went up slightly whereas the fixed cost portion of this employment went down.

We see continued good capacity load in virtually all commodity lines. Lead times are quite normal these days. They are between four to eight weeks. As Dick indicated, we generated $65 million cash from operations in the quarter as compared to $38 million in prior quarter and to $69 million in the prior year. We generated $36 million of free cash as compared to $13 million in prior quarter and to $26 million in prior year.

We decided to close the epitaxy plant in Westbury, New York. We'll move manufacturing to subcons, expect annualized savings of $3 million starting in steps by Q4 '08. All together we expect from this restructuring measure a payback of approximately one year.

Now let me come to the various product lines as always and I would like to start with resistors and inductors. You will remember it is quite a healthy business for Vishay of many specialty products and it continued on a good level.

Sales in the quarter were $177 million which was 2% above prior quarter and prior year when eliminating the effect of exchange rates. Book-to-bill was at 0.97 which is really a seasonal effect that is below one.

Backlog was at 2.5 months. Gross margin remained at a level of 28% of sales, which was slightly below our expectations. We have experienced also in resistance, the negative impact of the exchange rate. For the third quarter, we expect to maintain gross margin levels at seasonally to slightly lower sales.

The selling prices were stable in resistors versus prior quarter and versus prior year, as always. Inventory turns were at an excellent level of 4.6 and I think we can say and we can observe that we are gaining share in resistors, very often due to better product quality.

Coming to capacitors, this business after a phase of repositioning has clearly been stabilized and now contains a growing share of specialty products. Sales in the quarter were $136 million which was up by 6% versus prior quarter and by 2% versus prior year.

Book-to-bill was strong at 1.01. Strong backlog, we can report of 3.3 months for capacitors. Gross margin remained at 17% of sales, which was according to our expectations, despite the exposure to the exchange rates.

For the third quarter, we expect gross margins for capacitors slightly down at seasonally lower sales. The modest price decline for capacitors continued. We had 0.6% price decline versus prior quarter and 3.1% price decline versus prior year. Inventory turns still on a relatively low level but improved now to 2.8. We target at three turns run rate by year-end. The inventory went down in capacitors by six million in the quarter, mostly by reducing raw materials.

We did regain substantial share of tantalum business at the large North American hardware supplier, good news in the quarter for sure, as we continued the growth, strong growth, in power caps and also in specialty tantalum sales.

Measurements Group is the next product group I want to report on. It's a principally stable business with strain gauges, load sales and weighing systems which is very different from our mainstream components business.

Sales in the quarter were $53 million, as compared to $51 million in prior quarter and to $49 million prior year. Book-to-bill was at 1.01 and the backlog of quite normal 2.2 months. Strong gross margin at 32% of sales but it has to be stated that for this product group, the related SG&A costs are above the company average. The inventory turns of 3.25, you see we are in process to improve there.

Coming to the solid and stable business, we have in diodes and infrared components where we have leading market positions in many segments. Sales in the quarter were $234 million, which is 6% above prior quarter and 3% above prior year, book-to-bill at 0.98. Backlog, we are seeing at a normal level of 2.4 months.

Gross margin remains at 22% of sales, which is the lower end of the normal range and also we came out slightly below expectations. For quarter three, we expect to maintain gross margin levels for this product group at marginally lower sales. Inventory turns were quite excellent at 4.8. For this product group, we returned in the quarter to relatively low ASP decline rates, minus 0.3% versus prior quarter, and 3.3% lower prices versus prior year.

We have extended our portfolio with Trench diodes, our new product group and extended it towards higher voltages. For this group we expect growth this year of more than 60% versus prior year, quite successful. We also are making inroads into new applications with photo modules and laptops.

Siliconix, the next product group, is the market leader in low voltage MOSFET which now through the IR acquisition extends into the high voltage segment. Sales in the quarter were $174 million, which is up by 1% vis-à-vis prior quarter and by 3% versus prior year. Book-to-bill was at 1.05, which is seasonal.

Backlog at three months, gross margins were at 23% of sales, slightly below expectations but you can calculate that if we would have remained at 24% gross margin as we projected, if the exchange rate had been the same as in the first quarter. For the third quarter, we expect similar gross margins as in the second quarter at slightly higher sales.

We have seen quite a noticeable price decline versus prior quarter for Siliconix, which on the other hand showed a remarkably low price decline, 2.9% price decline vis-à-vis prior quarter, 6.6% versus prior year. You see the price decline year-over-year is still on a normal level.

Inventory turns at Siliconix were at an acceptable level of 3.9. The transfer from the IR facilities proceeds according to plan and also the move out of the packaging facility of IR is on plan and will be finalized towards the end of the year.

We also continue to increase our share of sales with 300 million sales density in 8-inch technology. As you will remember, to reduce the die size is really crucial for cost reduction on one side or for the product performance on the other.

Let me summarize. Vishay in the second quarter of this year has exceeded our guidance for sales and also the orders continue to be strong. The adjusted earnings per share of $0.23 met consensus, despite having been burdened by exchange rate impact of $6 million pre-tax, equivalent to about $0.02.

We generated $36 million free cash in the quarter and do expect another good year of free cash generation. For the current quarter, we guide sales to a range between $750 million and $770 million at flat gross margins. So we continue to be confident for the development of our business.

Thank you very much. May I turn over to Dr. Zandman.

Felix Zandman

Good morning. Just a small summary. Again, Vishay reported $0.23 per share for the second quarter, as compared to $0.19 for the previous quarter, in line with consensus. The operations are performing quite well.

The impairment of goodwill by $800 million due to accounting regulations because of the depressed value of our shares and the depressed value of the shares of our competitors, these are non-cash events and will be somewhat tax beneficial. It will also improve our ROI.

Despite of the industrial slowdown or recession depending on the definition or outlook, Vishay shows good sales with relatively stable or slight price decline. In other words, at this time we don't see the recession. Our cash generation continues to be good.

To avoid dilution, we decided to buy back our convertible of 23.5 million shares for $500 million. This will take place to date. Our strategy of broadening our product pipeline through acquisitions and new product development, positions Vishay as a stable, quality oriented, strong and innovative company.

Our balance sheet is strong and we continuously look for suitable acquisitions, small and large. The R&D programs are in line. All our 18 divisions have programs for new products and in many instances new platforms, which focus on size reduction and increasing performance. In general, the company is performing as planned. Thank you.

Gerald Paul

We will have questions now.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from Steve Smigie.

Steve Smigie - Raymond James

Great. Thank you. Congratulations on getting a nice bump in revenue, in analytics some of it was based on currency. In any event, I was just curious if you could talk a little bit about what operating expenses might look like at September quarter, given the big jump in revenue here.

Gerald Paul

Well, we are going to have about the same SG&A expenses in the third quarter as we had in the second quarter, but looking ahead, we do expect a reduction in the fourth quarter.

Steve Smigie - Raymond James

All right and just with regard to the impairment, I was wondering if you could talk a little bit about what particular areas received the impairment?

Gerald Paul

Well, the impairment is the $800 million, an estimate that we made which will be refined over the next 90 days. It's basically broken into two parts. Approximately $250 million is associated with our passive business and about $550 million is associated with our semiconductor business.

Steve Smigie - Raymond James

Okay, within the semis, is the stuff related to international rectifier stuff or can you just give me some sense generally of what areas you guys were, and things are not quite as you had hoped?

Gerald Paul

Well, I think it's a combination of many things in that area, General Semiconductor in the past, which was a 2002 acquisition and, but I don't know if anything specifically is associated with the IR acquisition.

Steve Smigie - Raymond James

Lastly, could you just talk a little bit about what interest expense might look like in Q3 and going forward given the buyback here and issuance of debt, what rate you're getting there?

Gerald Paul

Yeah, the net effect on interest at the company with this new deal is about breakeven. So the interest expense before and after the utilization of cash and increasing our debt will be equivalent to the rates that we were paying in prior to the bond outstanding. So we won't see any significant movement in that.

Steve Smigie - Raymond James

Okay.

Gerald Paul

And that includes the loss of the interest income that would have been associated with the deposits that we have.

Steve Smigie - Raymond James

All right. Okay, great, thank you very much.

Operator

(Operator Instructions)

Your next question comes from Kevin Kessel.

Kevin Kessel - JPMorgan

Hi, there.

Gerald Paul

Hi.

Kevin Kessel - JPMorgan

I just wanted to go back to IRF and just understand essentially where we are right now with that acquisition in terms of what's left to do as well as what's already been realized. Based on, I think just prior comments to that you guys have made, it sounds like the target remains $11 million in quarterly profit on roughly $60 million I think in quarterly sales from that.

Gerald Paul

Okay.

Kevin Kessel - JPMorgan

And I believe that you were at, from a packaging standpoint in front end moving to foundries, the goal was to get about 50% of that moved by the first half of this year. And I just wanted to understand where you were and then also if you could update us on where the operating profit was in the quarter, I think last quarter it was 7% margin?

Richard Grubb

First of all, sales and profits were approximately like in the previous quarter. It means we have always continued on the run rate of $240 million in the year, at a 7% incremental operating margin level which is of course still below our expectations. We do believe, again as I just repeat myself what I've said before, that we expect from this manufacturing moves, noticeable improvement of our profitability which basically was to be expected mainly in the second half of the year.

Our move of packaging out of the Mexican IR plant is going on plan and also the move of the fabs, which basically will also happen in the second half of this year and in the first half of next year, is according to plan. At the present sales level, we will not quite meet our expectations, but you will see a noticeable improvement from the present incremental operating profit.

Kevin Kessel - JPMorgan

Dr. Paul, you expect that improvement to happen when? You say it's on plan, does that mean that you guys roughly did get to 50% of packaging in the front of renewals?

Gerald Paul

Yes, indeed. Yes, absolutely.

Kevin Kessel - JPMorgan

And so the remaining 50% is expected to be complete by the end of 2008?

Gerald Paul

By the end of 2008 as we said.

Kevin Kessel - JPMorgan

Okay, but it doesn't appear like any improvement that is necessarily showing up in the third quarter. That's what I'm trying to reconcile, in terms of margins or costs.

Gerald Paul

We didn't forecast it separately. We forecasted in the context of the much bigger Siliconix business.

Kevin Kessel - JPMorgan

Meaning as an offset?

Gerald Paul

What is that? Sorry.

Kevin Kessel - JPMorgan

I am sorry. Meaning that the Siliconix's business might be offsetting some of the improvements that you're getting.

Gerald Paul

Only a small share of the total Siliconix business, obviously. So even in the rounding, you understand. So we do expect better results for IR to stay precisely in the third quarter.

Kevin Kessel - JPMorgan

Okay, great. And then in terms of the foreign currency, just so I understand, you said it was overall it was a $6 million pre-tax negative impact on your net income?

Gerald Paul

Yes.

Kevin Kessel - JPMorgan

Or $0.02 and this is primarily being driven by the Israeli shekel.

Gerald Paul

Yes.

Kevin Kessel - JPMorgan

Which is an unhedged of your foreign currency exposure?

Gerald Paul

We don't hedge, but especially dollars are not the shekel. Shekel became very strong vis-à-vis dollar since the beginning of the year.

Kevin Kessel - JPMorgan

Now, is this $6 million, is this an incremental negative impact or is this what the FX impact was in the quarter, because I can't recall what it was in Q1?

Gerald Paul

This is over Q2. This is additional to Q2. Especially the shekel continues to strengthen in the course of the second quarter over the first quarter. And you remember we are not really exposed to the euro because in Europe, we have equivalent sales as we have costs. In the case of the shekel, we only have cost and this is why we are exposed.

Kevin Kessel - JPMorgan

Okay. And then in the third quarter, is there any assumption for FX in the third quarter in terms of whether or not it gets worse or stays the same or gets better?

Gerald Paul

All assumption, same thing, but it also appears to be like that. But you never know with currency exchange rates, right.

Kevin Kessel - JPMorgan

Okay, great.

Gerald Paul

It's really unusual that the shekel has --

Richard Grubb

First time.

Gerald Paul

First time ever in its history. It's always been associated and connected to the dollar. This is an unusual event that I don't think is going to be long-term.

Richard Grubb

Shekel was usually a press that's always divided.

Gerald Paul

Historically, we always were able to offset the inflation in Israel by a devaluation of the Israeli shekel. So this is history. But now indeed I think also temporarily it became stronger, but we assume for the third quarter the same average rate as for the second quarter.

Kevin Kessel - JPMorgan

And then the impact on sales was how much again?

Gerald Paul

On the Israel shekel, nothing, of course.

Kevin Kessel - JPMorgan

No, what I'm saying is the overall foreign currency impact on sales.

Richard Grubb

Just the second quarter, it was 20.

Gerald Paul

Something like $15 million over second quarter.

Kevin Kessel - JPMorgan

And the $13 million?

Gerald Paul

Over first quarter, sorry.

Kevin Kessel - JPMorgan

Okay. And then just housekeeping, Dick, I just didn't catch what you said for depreciation and amortization and then I believe also legal fees you had mentioned. I don't know if that was an incremental impact on SG&A or if you were quite…

Richard Grubb

The legal fees is a one-time increase to SG&A a $3.33 million.

Kevin Kessel - JPMorgan

No, I was just wondering, that's quarter-on-quarter, because last quarter I think was burdened by legal fees as well.

Richard Grubb

Yes, same thing, quarter-over-quarter.

Kevin Kessel - JPMorgan

There was $3 million more, so it wasn't actually one-time, it's first quarter and second quarter.

Richard Grubb

Right. That's the same suit, I am sorry maybe I'll see.

Kevin Kessel - JPMorgan

Same suit but it's impacted your first two quarters.

Richard Grubb

Yes. Then as far as depreciation it would be the same, 56 million depreciation and amortization this quarter.

Kevin Kessel - JPMorgan

I got it. But we should not expect legal to impact you negatively in the third quarter?

Richard Grubb

No, we don't anticipate it.

Kevin Kessel - JPMorgan

You don't anticipate it. Okay. Thanks so much.

Richard Grubb

This is over with this.

Gerald Paul

Concerning the Israeli shekel, the government is buying back $200 million of A dollars from America, quietly down, but it doesn't look like it's helping too much. Kevin?

Richard Grubb

I think it's a unique situation with the Israeli shekel, really. We are watching it in 20 years. I think it will not last but hard to predict of course.

Operator

Your next question is from Jim Suva.

Jim Suva - Citigroup

Great. Thank you very much. This is Jim Suva from Citigroup. Quickly, on the debt that you put into short-term of about 250, just curious, how come you didn't move the entire $500 million that you expect to be put to the company?

Richard Grubb

Well, because the $250 million of the debt is going to be paid off with new debt, long-term.

Jim Suva - Citigroup

Okay. That makes sense. And then can you remind us about, tantalum how much of it you still have warehoused or stock piled and when you would be going back to the market to have a need to replenish or buy more tantalum materials?

Gerald Paul

In fact we out of mixed reasons, big powder mix reasons, we already buy to a degree. Net, net we at the moment have something between one and one and a half years built at a decreased. You understand, just net-net.

Jim Suva - Citigroup

Great. And then as a quick follow-up to that legal fees, so $3 million this quarter but we also now have to remove the Q1 legal, so net-net how much should we expect basically SG&A dollars to go down or just SG&A dollars to be flat?

Gerald Paul

If you were to look at the quarter, $3 million in this quarter was a one-time thing. So that shouldn't repeat itself.

Jim Suva - Citigroup

Okay. So we're not backing out three plus something else for Q3, just three. Great. Thank you very much, everyone.

Gerald Paul

Thank you.

Operator

(Operator Instructions)

Your next question comes from Shawn Harrison.

Shawn Harrison - Longbow Research

Hi, good morning. First question, just getting back to Siliconix, the recovery and profitability at the IRF piece that was bought leads to some of the gross margin expansion expected in the second half. Where should we expect the remaining to come from? It doesn’t sound like a lot of it is going to be volume, is it just principally cost reduction initiatives?

Gerald Paul

Well, we expected, when we projected Siliconix up for the second half, we of course expected also the seasonal volume increase quite substantially, as to be stated. The remainder is cost reduction. Cost reduction in particular from the die size shrinkage, right from the end of the year starting lower cost from a new foundry, but of course also, cost reduction from the manufacturing project at the IR portion of the Siliconix business.

Shawn Harrison - Longbow Research

Okay and it sounds like we're still somewhat on track to reach that 28% gross margin target?

Gerald Paul

The biggest impact is clearly volume, of course, as you can imagine.

Shawn Harrison - Longbow Research

Okay and based upon the book-to-bill, it sounds like we're getting some of that volume?

Gerald Paul

Yes, it started absolutely seasonally into the third quarter and also the end of the second quarter showed good orders.

Shawn Harrison - Longbow Research

Okay. Secondly, I was hoping if you could just comment on what you're seeing as we head into the third quarter on incremental raw material costs, be it metal, be it fuel surcharges to you, anything else that could pressure gross margin sequentially?

Gerald Paul

Well, we have not seen in July additional burden at this point in time, so we assume really, but this is now really fresh in the quarter. We assume that the prices will be approximately the same.

Shawn Harrison - Longbow Research

For raw materials?

Gerald Paul

Yeah.

Shawn Harrison - Longbow Research

Okay, then what about the pricing decline that was witnessed here in the second quarter at Siliconix? You said that was a little bit abnormal.

Gerald Paul

A little, but I believe that this is a temporary thing because you have to see this in comparison to the first quarter price decline, which was absolutely low. I don't exactly recall the number, but it was absolutely low for Siliconix, practically flat. So you see this in context.

Shawn Harrison - Longbow Research

So it was essentially just maybe a catch up after abnormally low pricing in the first quarter?

Gerald Paul

Yes. Exactly.

Shawn Harrison - Longbow Research

Okay and then my final question just has to do with what you're seeing in terms of, you mentioned last quarter some recourse with the automotive business. Is there any update in terms of how that's progressing, the automotive business that was sold?

Gerald Paul

Which one?

Shawn Harrison - Longbow Research

That was purchased from IRF and sold, excuse me.

Gerald Paul

Well we sold it. So maybe I don't understand the question.

Shawn Harrison - Longbow Research

I think it was implied last quarter that you were looking for just potentially legal recourse following the purchase.

Gerald Paul

This was not stated like that.

Richard Grubb

Well, yeah.

Shawn Harrison - Longbow Research

Okay, so it's an ongoing situation, maybe the best way to describe it?

Gerald Paul

Yes.

Shawn Harrison - Longbow Research

Okay. Thank you.

Gerald Paul

Thank you.

Operator

Your next question is from Matt Sheerin.

Matt Sheerin - Thomas Weisel Partners

Yes, thanks. Some of your competitors have talked about seeing actually weaker bookings and sales trends at the end of June and then a pickup in July. It sounds like you've seen pretty much seasonal trends, both in June and then so far in July where you seeing some strength at Siliconix and in Asia, but general seasonal weakness in Europe and North America in some of your business. So, could you just elaborate on what you're seeing?

Gerald Paul

Matt, you've practically summarized the impression. We do not see any abnormal development on our markets. All the seasonal trends which you reasonably would expect are there. If you really want to be in a little bit more critical, then of course America does somewhat worse than we are used to and Europe does somewhat better than we are used to, Asia is really seasonal, it is absolutely seasonal. But in a nutshell, there is a very normal business development in our business, which is quite in contrast to the overall skepticism.

Matt Sheerin - Thomas Weisel Partners

Exactly and given the cost initiatives and if you continue to see seasonal trends through the rest of the year, would you expect gross margin then to improve again in December after being flattish this quarter?

Gerald Paul

This is our prediction, but I'm not guiding to the fourth quarter at this point.

Matt Sheerin - Thomas Weisel Partners

Got you, understand. Okay. And then, just lastly, it's been a few quarters since you did a sizeable acquisition. I know the balance sheet has changed a little bit, but I know you've got still significant liquidity. Given valuations that some peers have come down a lot and it's relatively depressed market. This is historically when Vishay tends to do deals, so could you tell us, just update us on your strategy for acquisitions and what you're seeing in terms of opportunities?

Gerald Paul

There are many opportunities presently, but we are looking at one after another very carefully, but we don't jump on it immediately. We are studying many situations presently. Sure the market is depressed and it's worth to look into it. We are in a very strong position to be able to do that, no question about it. Balance sheet is extremely strong and God willing maybe we'll earn something.

Matt Sheerin - Thomas Weisel Partners

And is there a preference, active versus passives or does it not matter?

Gerald Paul

It doesn't matter really, but we would prefer actives.

Matt Sheerin - Thomas Weisel Partners

Okay. Thank you.

Operator

Your next question is from Andrew Huang.

Andrew Huang - American Technology Research

Hello, can you hear me okay?

Gerald Paul

Yes, absolutely. Hi, Andrew.

Andrew Huang - American Technology Research

Hi. Can you just comment on your expectations for (inaudible) for Q3 compared to Q2?

Richard Grubb

Yes, we don't see a big difference. We don't see a big change. We are looking to Asia in particular of course, because this is the time of the year you have to be critical with Asia. You must see the pick up, which we see and if you look at the terms of the Asian distributors that I reported in my speech. They are quite normal. They became better vis-à-vis the second quarter. Inventories are high but vis-à-vis the POS obviously, right.

Andrew Huang - American Technology Research

So Dick, you have seen a pick-up in bookings out Asia so far through July.

Richard Grubb

Absolutely, yes.

Andrew Huang - American Technology Research

Excellent. And then I guess the next question is with respect to the gross margin, did you comment that based on your guidance of $750 million to $770 million, you expect gross margins to be flat sequentially?

Richard Grubb

Yes.

Andrew Huang - American Technology Research

If there is a pick-up in Asia, does that have a negative impact on your mix, or not really?

Richard Grubb

No, because I think Vishay in the first approximation does not show cycle because we are strong in Europe, as strong in Europe as in Asia and typically in the beginning of the year, Europe is relatively strong. In the latter part of the year, Asia is typically strong. And the contributed margins of Siliconix which is strong in the second half of the year vis-à-vis the passives, which are mostly strong in the first half and not so dissimilar.

Andrew Huang - American Technology Research

Okay. Thank you very much.

Richard Grubb

Thank you.

Operator

Your next question is from Ingrid Aja.

Ingrid Aja - Merrill Lynch

Good morning. If we go back to the margin question, so your sales outlook is for lower sales in Q2 but you're looking for similar gross margins, so if you could comment on how you get there, give me a little more color there, maybe?

Gerald Paul

It's really minor. Just to put things into perspective. We guide based on 760 something million per quarter, 10 million lower. It's really absolutely minor the sales decrease. And the impact on margin you can calculate yourself with a 50% variable margin approximately, that this does not really change the picture. It's a rounding thing. So approximately flat, at a little bit less sales, which may be also mostly seasonal. So we do not see, this is really the message. Just to guide down by 10 million on a level of 760 or something doesn't mean that we forecast a downturn.

Ingrid Aja - Merrill Lynch

Okay, great. And then I was wondering if you could talk a little bit about your automotive customers and how they're doing in Europe. It sounds like they're strong but are you making any progress in gaining content in new models?

Gerald Paul

We always do. We do have a very strong position, especially in Europe and all the relevant suppliers there, Bosch to name just one [that's capable]. There are many prominent suppliers in the larger that's just fit. We are in so many technical programs that are there ongoing, I would bore you if I were to talk too much about it. We are constantly since 30, 40 years bring always new products into these accounts and we grow together with them.

Ingrid Aja - Merrill Lynch

Okay, great. Thanks. And then you said the Siliconix, one of your competitors made comments that pricing was a little tougher on MOSFETs, but it doesn't sound like that's what you're seeing, if you could just comment?

Gerald Paul

As I said before, we have seen in the second quarter a higher price decline vis-à-vis the first quarter than a quarter before. But what I also said, the quarter before was for us at least very low price decline.

Ingrid Aja - Merrill Lynch

I see.

Gerald Paul

And you have to see both things in context.

Ingrid Aja - Merrill Lynch

Okay, great. Thanks for the clarification.

Operator

You have a follow-up question from Kevin Kessel.

Kevin Kessel - JPMorgan

Yes. Thank you very much. I'm just curious, are you expecting at all to be impacted one way or the other by the Beijing Olympics in the third quarter?

Gerald Paul

No, we don't. It would only be for the output of the factories, right. There are some restrictions but it doesn't make a…

Kevin Kessel - JPMorgan

And the same is true for the suppliers to you of raw materials and…

Gerald Paul

We do not expect a hiccup because of that.

Kevin Kessel - JPMorgan

Okay. And then in terms of your free cash flow or your cash flow from operations, when you look at the second half of this year, what's the expectation in terms of…

Gerald Paul

We are going to get to a very attractive cash flow, again free cash flow. Kevin, that if you look at our history, that the second half typically concerning free cash is much higher than the first half.

Kevin Kessel - JPMorgan

CapEx, so is it still expected to be about a $150million, $155 million or is that too high or too low?

Gerald Paul

I always say its $170 million, Kevin.

Kevin Kessel - JPMorgan

170, okay.

Gerald Paul

It continues to be 170.

Kevin Kessel - JPMorgan

And any thinking about next year in terms of CapEx or is there any…?

Gerald Paul

Not yet. It's a little early. We're in the midst of the budgeting process.

Kevin Kessel - JPMorgan

Got it.

Gerald Paul

That will not be surprisingly high, nor surprisingly low.

Kevin Kessel - JPMorgan

Okay, got it. And then the last question I had was in terms of the discussion again on margins, just based on the comments that you guys have given and as well as the release with flat gross margins and it sounds like SG&A dollars should be down as a result of just at least the legal fees dropping off, if not other cost reductions, operating margin therefore would be expected to be up. Is that right?

Gerald Paul

Well, what I said really is that we expect the operating expenses, the SG&A is down in the fourth quarter, which I said before.

Kevin Kessel - JPMorgan

Down in the fourth, but I thought in the third quarter we were looking at the $3 million in legal fees coming off.

Gerald Paul

This is fairly true but I foresee a singularity for the third quarter. This is why I say we are down in the fourth quarter.

Kevin Kessel - JPMorgan

Okay. So what you're saying is the third quarter legal expense could be offset by other --?

Gerald Paul

I'm not saying it's legal.

Kevin Kessel - JPMorgan

All right, thank you.

Gerald Paul

Mathematically the three comes off here.

Operator

(Operator Instructions)

At this time, there are no questions.

Richard Grubb

Okay. For the company I want to thank you for calling in and dialing in to, to listen to and ask your questions. We appreciate the interest in Vishay and look forward to a continued interest in the future. Thank you.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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Source: Vishay Intertechnology Inc. Q2 2008 Earnings Call Transcript
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