Vishay Intertechnology (VSH) Q1 2019 Earnings Call Transcript

Vishay Intertechnology (VSH 2.57%)
Q1 2019 Earnings Call
May. 09, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Peter Henrici

Good morning and welcome to Vishay Intertechnology's first-quarter 2019 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 first-quarter 2019 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 Form 10-K and Form 10-Q filings with the Securities and Exchange Commission.

In addition, during this call, we may refer to adjusted and other financial measures that are not prepared according to generally accepted accounting principles. We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses and should be considered by investors in conjunction with GAAP measures 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 first-quarter 2019 financials and metrics.

Johan Vandoorn, executive vice president and chief technical officer and deputy to the CEO will be presenting on May 29 at the Cowen Technology, Media and Telecom Conference in New York, and on June 12 at the Stifel Cross Sector Conference in Boston. Now, I'll turn the call over to Chief Financial Officer Lori Lipcaman.

Lori Lipcaman -- Executive Vice President and Chief Financial Officer

Thank you, Peter. Good morning, everyone. I am sure that most of you have had a chance to review our earnings press release. I will focus on some highlights and key metrics.

Vishay reported revenues for Q1 of $745 million, EPS was $0.52 for the quarter. Adjusted EPS was $0.51 for the quarter. During the quarter, we continued to execute transactions in response to U.S. tax reform.

We completed additional open market repurchases to retire some of our outstanding convertible debentures, which were no longer tax efficient under the new U.S. tax law. Only $21 million of such debentures remain outstanding at this point. All of the reconciling items between GAAP EPS and adjusted EPS are related to this early extinguishment of debt transaction or tax-related items.

There were no reconciling items impacting gross or operating margins. I will elaborate on these transactions in a few moments. Yesterday, Vishay announced an increase of the quarterly dividend of 12% to $0.095 per share or $0.38 annualized. The significant increase demonstrates our commitment to return capital to Vishay's stockholders and shows confidence in the strength of Vishay's ongoing cash flows.

Revenues in the quarter were $745 million, down by 4% versus previous quarter, but up by 4% compared to prior year. Gross margin was 28.3%. Operating margin was 14.5%. There were no reconciling items to arrive at adjusted operating margin.

EPS was $0.52. Adjusted EPS was $0.51. EBITDA was $147 million or 19.7%. Adjusted EBITDA was $148 million or 19.8%.

Reconciling versus prior quarter, operating income Quarter 1 2019 compared to operating income for prior quarter based on $31 million lower sales or $30 million, excluding exchange rate impacts, operating income decreased by $12 million to $108 million in Q1 2019 from $120 million in Q4 2018. The main elements were: Average selling prices had a negative impact of $3 million, representing a 0.4% ASP decline, which includes U.S. tariffs passed through to the customers. Volume decrease was a negative impact of $10 million, equivalent to a 3.4% decrease in volume.

Reconciling versus prior year, operating income Q1 2019 compared to operating income in Q1 2018 based on $28 million higher sales, were $48 million higher excluding exchange rate impacts, adjusted operating income increased by $4 million to $108 million in Q1 2019 from $104 million in Q1 2018. The main elements were: average selling prices had a positive impact of $6 million, representing a 0.8% ASP increase, which includes U.S. tariffs passed through to customers; volume increased with a positive impact of $23 million, representing a 6% increase; variable costs increased with a negative impact of $10 million, primarily due to U.S. tariffs; other variable cost inflation was virtually offset by cost reduction and manufacturing efficiencies; fixed costs increase was a negative impact of $16 million, primarily due to wage and other inflationary costs, as well as additions in headcount and the recruitment costs, higher depreciation, acquisitions and higher R&D costs.

Selling, general and administrative expenses for the quarter were $103 million in line with expectations. For Q2 2019, our expectations are approximately $103 million of SG&A expenses and approximately $405 million for the full year at constant exchange rates. The company did not repatriate any additional cash to the U.S. during Q1.

Recall that while such amounts are no longer subject to U.S. federal taxes due to U.S. tax reform, they are subject to foreign withholding and other taxes and some state income taxes. There are approximately $300 million of additional earnings available for repatriation with taxes accrued.

We had total liquidity of $1.4 billion at quarter end. Cash and short-term investments comprised $758 million, and there are no amounts outstanding on our $640 million credit facility. We are continuing to evaluate the timing and uses of future repatriation of cash to the U.S. and how to most efficiently utilize the revolving credit facility.

Our convertible debentures had certain tax attributes, which were no longer efficient after the U.S. tax reform. During 2018, we executed transactions to repurchase and replace a significant portion of these instruments. During Q1, we continued our convertible debenture repurchase program.

We retired debentures with a principal amount of approximately $16 million, which resulted in a pre-tax extinguishment loss of $1 million and also resulted in the recognition of a tax benefit of $1 million reflecting the reduction in deferred tax liabilities related to special tax attributes of the debentures. We continue to be authorized by our board of directors to repurchase additional convertible debt instruments and open market repurchases or through privately negotiated transactions, subject to market and business conditions, legal requirements and other factors. Our debt at quarter end is comprised of the convertible notes, due in 2025 and the remaining convertible debentures due in 2040 and 2041. The principal amount or face value of the converts totaled $621 million, $600 million related to the new notes and $21 million related to the remaining debentures.

The carrying value of $493 million is net of unamortized discounts and debt issuance costs. As I said, there were no amounts outstanding on our revolving credit facility during Q1, but we expect to utilize the revolver to some degree in 2019. No principal payments are due until 2025. Additionally, the company adopted the new U.S.

GAAP leasing standard effective January 1, 2019. The balance sheet at the end of Q1 includes approximately $101 million of lease obligations and $96 million of related right-of-use assets reported on separate lines. As part of the adoption of the new U.S. GAAP leasing standard, the company was required to reassess the accounting for the sale and leaseback of its former manufacturing site in Santa Clara, California.

The transaction did not meet the requirements of a completed sale under previous GAAP but did meet such requirements under the new standard. Accordingly, the company recorded a cumulative effect adjustment to retained earnings to recognize sale as of the date of adoption and derecognize the land and buildings and accumulated related deferred proceeds. Our U.S. GAAP tax rate for Q1 was approximately 24%.

Our GAAP tax rate includes the unusual tax benefit related to the settlement of some of the convertible debentures and adjustments to remeasure the deferred tax liability related to incremental foreign taxes payable upon repatriation, such as foreign currency effects. A similar remeasurement will occur quarterly until such amounts have been repatriated. These items were tax benefits of $1.3 million and $0.6 million, respectively, for Q1. Our normalized effective tax rate, which excludes these unusual items, was slightly above 26% for the quarter.

Approximately equal to our expected normalized effective tax rate for 2019. We continue to evaluate the provisions of the U.S. tax law, particularly, tax of the GILTI and BEAT taxes. Our consolidated effective tax rate is based on an assumed level mix of income among our various taxing jurisdictions.

A shift in income could result in significantly different results. Total shares outstanding at quarter end were 144 million. The expected share count for EPS purposes for the second-quarter 2019 is approximately 145 million. For a full explanation of our EPS share count and variables that impact the calculation, please refer to the 8-K we filed this morning.

Cash from operations for the quarter was $80 million. Capital expenditures for the quarter were $36 million. Free cash for the quarter was $44 million. For the trailing 12 months, cash from operations was $291 million.

Capital expenditures were $238 million, split approximately for expansion, $141 million; for cost reduction, $29 million; for maintenance of business, $68 million. Proceeds from the sales of property and equipment for the trailing 12 months were $56 million, which primarily represents the sale of our former manufacturing facility in Santa Clara, California. We have leased back the property under a short-term arrangement to raze the buildings. Free cash generation for the trailing 12-month period was $109 million.

The trailing 12-month period includes $172 million cash taxes paid related to cash repatriation, $157 million and U.S. tax reform, $15 million. Vishay has consistently generated in excess of $100 million cash flows from operations in each of the past 24 years and greater than $200 million for the last 17 years. Backlog at the end of quarter 1 was at $1.332 billion or 5.4 months of sales, still very high compared to our historical average of approximately three months.

Inventories increased quarter over quarter by $4 million, excluding exchange rate impacts. Days of inventory outstanding were 82 days. Days of sales outstanding for the quarter were 48 days. Days of payables outstanding for the quarter were 42 days, resulting in a cash conversion cycle of 88 days.

Now let me turn the call over to our Chief Executive Officer Dr. Gerald Paul.

Gerald Paul -- Chief Executive Officer

Thank you, Lori, and good morning, everybody. In the first quarter, Vishay showed continued financial success, which was quite in line with the exceptional year 2018. The economic environment remained healthy for most of our end markets, but there is a substantial increase of inventory in the supply chain. Vishay in the first quarter achieved a gross margin of 28% of sales and operating margin of 15% of sales, GAAP earnings per share of $0.52 and adjusted earnings per share of $0.51.

We also had a strong start into the year in terms of free cash we generated in the first quarter, $44 million. Let me talk about the economic environment. The global economy for electronic components in the first quarter remained, principally healthy and the selling prices continued to be stable. But supply, in general, has caught up to market demand and lead times keep reducing.

As a direct consequence backlogs continue to normalize with book-to-bill ratios now substantially below one. The inventories in the supply chain have reached very high levels. Talking about the regions geographically, markets in the first quarter developed differently. We have seen ongoing strengths in the U.S., with POS at record levels.

Strengths also in Europe carried by industrial and by automotive. We have also seen a general weakening in Asia in continuation of the fourth quarter of last year. Global distribution in the first quarter continued to do principally well, with POS growing by 2% quarter over quarter. There was a strong POS in the U.S.

and in Europe. Asia was weakening, which was also impacted to a degree by the U.S. tariffs. Inventory levels at distribution have grown to record levels, which makes a significant burnoff unavoidable.

In the first quarter, inventory turns at distributors reduced to 2.7 as compared to 2.9 in the first quarter and to 3.8 in prior year. In the Americas, turns were 1.7 in the quarter after 1.9 in Quarter 4 last year and 2.2 in prior year. In Asia, the returns were 3.1 after 3.7 and 5.1 in prior year. In Europe, turns were 3.5 after, also 3.5 in prior quarter and 4.5 in prior year.

Automotive business conditions due to electrification remain positive despite some softening of the vehicle production. Advanced driver-assist systems, 48-volt electric vehicles charging systems are driving the demand. On the other hand, we see some pressures on the traditional diesel systems. There is relative stability of the industrial markets supported by factory automation, Internet of Things, smart metering power transmission programs.

Military and avionics remain promising, also due to governmental programs in several countries. Medical markets show continued and accelerating growth. Fixed telecom is expected to grow substantially this year driven by 5G product releases. Mobile phones continue to be flat at best, computers were weak in the quarter, but we expect some seasonal recovery.

Consumer markets present a scattered picture. TVs and gaming is weak, right goods, in particular, air conditioning, as well as variables is growing. Let me talk about our business. In the first quarter, excluding the change that impacts, we came in close to the midpoint of our guidance.

We achieved sales of $745 million versus $776 million in prior quarter and versus $717 million in prior year. Excluding exchange effects sales in Q1 were down by $30 million or by 4% versus prior quarter, but up versus prior year by $48 million or by 7%. The book-to-bill ratio in Q1 was 0.79, 0.54 for distribution after 0.90 in the fourth quarter, 1.1 for OEMs after 0.98, 0.74 for the actives after 0.91, 0.84 for passives after 0.96, 0.75 for the Americas after 0.76, 0.73 for Asia after 0.09, 0.89 for Europe after 1.11. The normalization of backlogs for distribution now has started in the broad form, but the OEM business keeps doing well and is growing.

Backlog in the first quarter decreased to a still very high level of 5.4 months coming from 5.8 months in the fourth quarter, 5.9 months in actives and 4.9 months in passives. Our historical level of backlog is approximately three months. Prices were stable for now, minus 0.4% versus prior quarter, plus 0.8% versus prior year. Tariff errors are included.

For actives, minus 0.8% versus prior quarter, and plus 0.7% versus prior year. For passives, same level as prior quarter plus 0.9% versus prior year. Some highlights from operations. In the first quarter we, again, were able to more than offset the negative impacts on the contributive margin by cost reduction and by innovation.

SG&A costs in the first quarter came in at $103 million quite in line with our expectations. Manufacturing fixed costs in the first quarter were $131 million also in line with our expectations. Total employment at the end of the first quarter was 24,140 people, virtually no change vis a vis prior quarter. Excluding exchange rate impacts inventories in the quarter increased by $4 million, raw materials went down by $1 million and WIP and finished goods increased by $5 million.

Inventory turns in the first quarter remained at a good level of 4.3. Capital spending in the first quarter was $36 million versus $28 million in prior year, $25 million for expansion, $6 million for cost reduction and $5 million for maintenance of business. For the year 2019, we now expect capex of approximately $165 million, which represents an adoption related to the short-term market requirements. We generated in the first quarter cash from operations of $80 million versus $47 million in prior year.

We generated cash from operations of $291 million on a trailing 12-month basis, including $157 million cash taxes for cash repatriation. We generated in the first quarter fee cash of $44 million versus a free cash generation of $90 million in prior year, and we generated free cash of $109 million on a trailing 12-month basis, again, including $157 million cash taxes for cash repatriation. Let me come to our product lines. Talking first about resistors and inductors.

Vishay's traditional and since years, most profitable business, continues to grow steadily. With resistors and inductors, we enjoy a very strong position in the industrial, auto, military and medical market segments. Sales in the first quarter were $256 million, down by $6 million or by 2% versus prior quarter, but up by $19 million or 8% versus prior year. This excludes exchange rate impacts.

The book-to-bill ratio in the first quarter was 0.92 after 0.94 in prior quarter. Backlog decreased slightly from 5.0 months to 4.8 months, which is still very high. Gross margin in the quarter came in at very good 33% of sales after 32% in prior quarter. Inventory turns in the first quarter remained at a good level of 4.3.

We have seen price stability minus 0.3% versus prior quarter and plus 2% versus prior year. We continue to expand manufacturing capacities for power inductors, MELFs, and thin film resistor chips and our latest acquisition, UltraSource continues to perform very well with gross margins far exceeding the average of the business segment. Coming to capacitors. Our business with capacitors is based on a broad range of technologies with a strong position in America and European market niches.

We enjoy increasing opportunities in the fields of power transmission and of e-cars, namely in Asia. Sales in the first quarter were $119 million, 9% below prior quarter, but 17% above prior year, which excludes exchange rate effects. The book-to-bill ratio in the first quarter was 0.67 after 1.02 in previous quarter. In particular, tantalum caps currently experienced a phase of backlog normalization.

The backlog reduced to a still very high level of 5.1 months. Gross margin in the quarter remained at a satisfactory level of 25% of sales, the same as in prior quarter. We are benefiting from a favorable product mix. Inventory turns in the quarter for capacitors decreased to 3.5 from 3.8 turns in prior quarter.

Selling prices were up by 0.6% versus prior quarter and up 2.2% versus prior year. Capacitors keep benefiting from major governmental programs in China and from the ongoing strength of the military markets. Coming to Opto products. Vishay's business with Opto products consists of infrared emitters, receivers, sensors, and couplers, as well as of LEDs for automotive applications.

The business currently suffers from reduction of distribution inventories, but also from a temporarily unfavorable product mix. Sales in the quarter were $61 million, 8% below prior quarter and 14% below prior year, which excludes exchange rate impacts. The book-to-bill ratio in the first quarter was 0.83 after 0.75 in prior quarter. The backlog remained at a high level of 4.9 months.

Gross margin in the quarter came in at disappointing 26% of sales after 29% in the fourth quarter, mainly due to lower volume and the less favorable product mix. The line has good inventory turns of 5.1 in the quarter as compared to 4.9 in the fourth quarter. Price decline was normal, minus 2.1% versus prior quarter minus 2.3% versus prior year. We expect the business to be back to more historical performance levels in the second half due to the availability of higher manufacturing capacities in more profitable lines.

Of course, potentially tempered by inventory reduction in the supply chain. Coming to diodes. Diodes for Vishay represents a broad commodity business where we are the largest supplier worldwide. Vishay offers virtually all technologies, as well as the most complete product portfolio.

The business has a very strong position in the automotive and industrial market segments and keeps growing steadily and profitably since years. Sales in the quarter were $168 million, 5% below prior quarter, but 3% above prior year, which excludes exchange rate effects. The normalization of backlogs mainly at Asian distributors progresses and explains the weak book-to-bill ratio of 0.63 in the quarter after 0.83 in Quarter 4. The backlog for diodes reduced to a still very high level of 5.91 down from 6.7 up -- down from 6.7 months in prior quarter.

Like in the fourth quarter, gross margin came in at 26% of sales, a very respectable performance. Inventory turns remained on a satisfactory level of 4.5 as compared to 4.7 in prior quarter. We see price stability for now minus 0.6% versus prior quarter and plus 2.7% versus prior year, which includes the tariff errors. We expect diodes to continue their success story of recent years to the full extent after the normalization of the inventories in the supply chain.

And we continue to prepare ourselves for substantially higher volume demands in the mid-term. Finally, the MOSFETs. Vishay continues to be one of the market leaders in MOSFETs. MOSFETs, over the last years, developed a strong and growing position in automotive.

Sales in the quarter were $137 million, 1% below prior quarter, but 9% above prior year, excluding exchange rate impacts. The book-to-bill ratio was at 0.84 after 1.08 in the fourth quarter. Supply of MOSFETs is now catching up with demand and the normalization of backlogs has started. Backlog is still at a very high level of 6.3 months after 6.7 months in prior quarter.

The gross margin in the quarter for MOSFETs was at 26% of sales like in the previous quarter. Very satisfactory inventory turns for the MOSFETs of 4.5 in the quarter as compared to 4.7 in Quarter 4. A low price decline minus 0.6% versus prior quarter, and minus 0.4% versus prior year. We continue to expand internal and foundry capacities for seeing very substantial increases of demand, in particularly, in automotive in the mid-term.

Let me summarize. And so, after two excellent years for our industry, the end markets, in general, continue to be friendly in the quarter. We currently seem to enter a not unexpected phase of normalization in terms of backlogs and also of distribution inventories. Inventory reductions by distributors, of course, will have a negative impact on our revenues in the short term, whereby the speed of such an inventory burnoff by nature will be determined by the development of POS of the distributors.

We will manage our production capacities tightly in accordance with the customer requirements as we always did it in the past. Vishay will remain profitable and cash generating also through such a phase. And we will be ready to participate to the full extent in the inevitable upturn of demand afterwards. No doubt, that the electronics will keep growing in the mid- and in the long term.

In so many words, we do trust our future and in this context please see the announced 12% increase of our quarterly cash dividend. For the second quarter, we guide to a sales range of between $700 million and $740 million at gross margins between 26% and 27%. Thank you. Peter?

Peter Henrici

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

Questions & Answers:

Operator

Your first question comes from the line of Shawn Harrison with Longbow.

Gausia Chowdhury -- Longbow Research -- Analyst

Hi. Good morning. This is Gausia Chowdhury on behalf of Shawn. To begin with the inventory at distribution, can you talk about access by region and the stats are around by region, please?

Gerald Paul -- Chief Executive Officer

Inventory at distribution if I understood, right?

Gausia Chowdhury -- Longbow Research -- Analyst

Yes.

Gerald Paul -- Chief Executive Officer

Right. There's too much inventories, I guess, historically in most of the regions. In Asia, it may be according to their expectations relatively speaking the highest inventory. And we also see the correction there, first of all, and it's already ongoing.

Gausia Chowdhury -- Longbow Research -- Analyst

OK. And then in terms of Vishay's internal inventory positioning [Inaudible]

Gerald Paul -- Chief Executive Officer

This is quite normal. It's quite normal. You see. we had 4.3 inventory turns in the quarter.

That's just fine.

Gausia Chowdhury -- Longbow Research -- Analyst

OK. All right. And then, I know you aren't providing specific guidance beyond the second quarter, but if you could just give some comments on how the third quarter plays out in terms of will it be seasonal, less than seasonal, and any color would be helpful. Thank you.

Gerald Paul -- Chief Executive Officer

Well, we are in midst of a phase of normalization. The question is, of course, how fast this inventory will be burned off. The second quarter, the current quarter will be impacted as you see from the guidance from this inventory burnoff. And I believe also the third quarter to a degree will still be impacted.

So there will be for sure -- I believe for sure some impact also in the third quarter. Fourth quarter can be that we are back to normal.

Gausia Chowdhury -- Longbow Research -- Analyst

Perfect. Thank you.

Operator

Your next question is from the line of Ruplu Bhattacharya with Bank of America.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Hi. Good morning. Thank you for taking my questions. Dr.

Paul, is there a way to quantify how much excess inventory there is in the supply chain maybe, for example, in terms of weeks of inventory? I'm just trying to get a handle on what is excess versus what is a normal level of inventory.

Gerald Paul -- Chief Executive Officer

This depends on two things. No. 1, what the POS is, and No. 2, what the expectation of the turns by the distributors is.

Having said this, of course, I have my opinion about it, but it really depends on the development of the POS. I could imagine that we currently have in excess of $100 million too much for our business.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

I see. OK. That's helpful. And then [Inaudible]

Gerald Paul -- Chief Executive Officer

But again, this is a relative statement, Ruplu. This is a relative statement based on my assumptions.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

OK. OK. Understood. Then on the pricing side, I think, you mentioned that prices were relatively stable this quarter. Given the inventory situation in distribution, how should we think about pricing going forward? Do you have contracts in place that can keep the prices stable? Or do you expect prices to be impacted in the second quarter?

Gerald Paul -- Chief Executive Officer

On the OEM side, we mostly have contracts in place that reach out for a year, normally. But 50% of our business is with distribution, and of course, these prices keep being negotiated on a more or less quarterly basis. And we may see some decline, but only on for the commodity products here, not for our specialty products. For the time being, we don't see it, but I think, it could be possible that at the end of all that burnoff, at the end -- at the beginning of normal times, if you want, so we are going to be in the traditional picture, where we see some price decline for the commodity products and practically no price decline for the specialty products.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

OK. OK. That's helpful. And then my last question is on the Opto margins and on the capacitor margins. I think on the Opto side, you mentioned volume and inventory reduction impacted that, but I mean, do you think that going into the next second half you talked about the mix improving.

Can Opto margins get back over 30%? And then on the capacitor side, you had the opposite, you had a favorable mix this time. How should we think about these two segment margins if you can give us some thoughts on that?

Gerald Paul -- Chief Executive Officer

Let me start with the nicer part. This is capacitors, I believe we will be able to defend the mid-20s, I believe. I think this mix -- change to favorable mix is not just a spike. We are going to see a trend there to go to more -- to less commodity product shares as a matter of fact.

In terms of Opto, it was a surprise for us. We must admit that. There's also -- there is quite -- and adaptation problem of capacity there. It costed us.

Variable cost, this is temporary, of course. And on the other side, we are going to add capacity beyond the way in more profitable lines. So at the moment, the line speed from two sides, I believe. Mid-term, longer term, I see no reason why this line shouldn't go back to where it came from.

That means 30% plus gross margin.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

OK. All right. Thank you so much for taking my questions.

Operator

Your next question comes from the line of Matt Sheerin with Stifel.

Matt Sheerin -- Stifel Financial Corp. -- Analyst

Yes, thank you and good morning, Dr. Paul. A question just on the gross margin for the company. You're guiding down roughly 200 basis point sequentially, which looks like a greater-than-normal margin, negative margin contribution.

And if you look back at your margins before the whole supply chain got tightened, you saw lead time stretched. You were running in the 24% to 26% range. So how should we expect -- think about gross margin and operating margin, which both are down year over year, as we get through the year. It sounds like, particularly, as you said, pricing becomes tougher as volumes come back and impact margins as well?

Gerald Paul -- Chief Executive Officer

First of all, Matt, you're 100% right. The impact is bigger than you would normally expect from our business model based share volume levels. We took into account the bringing down of capacity which, of course, on a temporary basis create some inefficiencies. And this is really what we'll burn this quarter, but this is for the most part a temporary thing.

After the normalization, we will see the normal picture. There we will be more price decline, and we will have cost reduction as it always was in so many years. So what we see in the -- for the second quarter, really is the consequence of slowing down capacities, which is never completely smooth.

Matt Sheerin -- Stifel Financial Corp. -- Analyst

OK. And you took down your capex for the year by $30 million or so. What areas are you pulling back in terms of capacity expansion and what areas are you continuing to invest in?

Gerald Paul -- Chief Executive Officer

The commodity products, every way are practically broad. But on the other hand, this does not, and I would like to emphasize that this is not a change of our strategy whatsoever. It's just a delay. We take into account the likelihood of an inventory reduction and just adjust our timing to the likely timing on the market.

Otherwise, it's no change. And whatever we cut back now is practically only a delay into the next year. We adapt to timing.

Matt Sheerin -- Stifel Financial Corp. -- Analyst

OK. And then I like to get your take. A little bit more details on automotive because you have a lot of exposure there in all markets. It sounds like you're still seeing the content growth, but negative production.

And I know that Asia sort of got hit first, particularly China. Are you starting to see orders stabilize in China and come back or is it still -- or is still visibility tough?

Gerald Paul -- Chief Executive Officer

Well, of course, we are concerned seeing the situation of automotive and people talking about potential decline there, but we have to be realistic. I believe electronics is an excellent situation. The electrification is not only lip service, it's a big thing. We made an estimate in house, and we believe that even at the decline of 10%, of the car production, this would leave the electronic supplies constant.

So you see, we will see -- and this is not going to go down by 10% obviously. Worldwide, we still see nice growth in automotive going forward. And this, in particular, in the MOSFETs where we just came from nothing a few years ago. We have really -- we got into one of the big suppliers very nicely, and we are working on even bigger other supplier there.

So I'm quite optimistic on that. In automotive, in general, despite some problems around the world, and you're right, in Asia, we heard the same. But altogether, I'm not concerned about the growth.

Matt Sheerin -- Stifel Financial Corp. -- Analyst

OK. Thank you. And just lastly, regarding opex, you're guiding flat sequentially down and implying flat to down a little bit after that. Given the reduction in sales and gross margin, are you looking at taking any other measures to bring down costs?

Gerald Paul -- Chief Executive Officer

Well, we hit some internal, let's say, slight reduction measures in terms of fixed costs and going forward, we will evaluate the situation as we go. As a matter of fact, as we obviously did in the past.

Matt Sheerin -- Stifel Financial Corp. -- Analyst

Fair enough. Thanks. Thanks very much.

Operator

[Operator instructions] Your next question comes from the line of Harlan Sur with JP Morgan.

Harlan Sur -- J.P. Morgan -- Analyst

Good morning. Thank you for taking my questions. Dr. Paul, why it's such a big difference in the demand trends OEM versus distribution.

Looks like OEM revenues were actually up slightly sequentially, while disti was down 7%. There was also a pretty big delta in book-to-bill between those two segments, again, with OEM bookings, performance more constructive. I would have assumed that the trends of distribution of high inventories would to a certain degree also be the same case for OEMs, so can you help us resolve the differences? And do you anticipate your OEM business continuing to be a little bit better in the June quarter as well?

Gerald Paul -- Chief Executive Officer

No. As a matter of fact, we are absolutely not surprised about the fact that these twp segments behave so differently as they do currently. There was a lot of inventory build through the last two years at distribution. It accelerated in the course of last year.

And this comes back to normal to a degree, no question. Whereas, in the OEM, it shows the right picture. The correct picture of the market. I believe the inventory they have built as far as we, of course, they also built something, but not comparable, not comparable.

There is a lot of consignment stocks there and there was not even the chance for them to build so much inventory, I believe. So we see -- I believe that the OEM business represents the true situation, and we are not surprised at things, so much better there. And I can say altogether on average, the OEM business is very encouraging, continues to grow. And what we see at the moment is really an inventory correction, which we somehow also expected.

Harlan Sur -- J.P. Morgan -- Analyst

Yes. Thanks for the insights there. And then from a geographical perspective kind of the same line of question, which is Europe is holding up very low, right? I think revenues actually probably grew slightly sequentially. Is this tied to the better OEM performance in the quarter? Or is it just better auto exposure, which auto seems to be doing well as well, but I'm just trying to figure out why is Europe trending better, and again, do you expect this trend out of Europe to kind of continue to the June quarter?

Gerald Paul -- Chief Executive Officer

I believe the industrial and automotive portion is doing very well in Europe these days. And also, the distributors did not stock as much as in other hemisphere. So the need for correction is not exactly the same.

Harlan Sur -- J.P. Morgan -- Analyst

Great. And then my final question. And I appreciate that. On the revised capex, so what expansion programs have you pulled back on, and what programs are you still looking to build out more capacity?

Gerald Paul -- Chief Executive Officer

As I said before, there is absolutely, no change in our strategy. These commodities we were to expand continue to be our favorites and they do very well on the market. On the other hand, we have to see reality, which has timed the whole thing differently. There's no program, which we abandoned.

We just decided to push a little out because obviously in view of this inventory correction, the increases will come somewhat later, and we want to optimize what we do. There's nothing -- there's no real change in all that. Only the [Inaudible] that will be less.

Harlan Sur -- J.P. Morgan -- Analyst

Yes. Makes a lot of sense. That's very prudent. Thank you, Dr.

paul.

Gerald Paul -- Chief Executive Officer

Thank you.

Operator

And there are no other questions at this time.

Peter Henrici

Thank you. This concludes our first-quarter conference call. Thank you for interest in Vishay.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Peter Henrici

Lori Lipcaman -- Executive Vice President and Chief Financial Officer

Gerald Paul -- Chief Executive Officer

Gausia Chowdhury -- Longbow Research -- Analyst

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Matt Sheerin -- Stifel Financial Corp. -- Analyst

Harlan Sur -- J.P. Morgan -- Analyst

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