Vishay Intertechnology, Inc.
Q4 2016 Earnings Call Transcript

Published: 7 Feb 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Mr. Peter Henrici, Senior Vice President, Investor Relations. Please go ahead, sir.

[Peter Henrici:]

Thank you, Paula. Good morning and welcome to Vishay Intertechnology's fourth quarter and year 2016 conference call. With me today are Dr. Gerald Paul, Vishay's President and Chief Executive Officer; and Lori Lipcaman, our Executive Vice President and Chief Financial Officer. As usual we'll start today's call with the CFO, who will review our fourth quarter and year 2016 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 discussions of factors that could cause results to differ, please see today's press release and Vishay's Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. In addition, during this call we may refer to adjusted or other financial measures that are not prepared according to Generally Accepted Accounting Principles. We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses, and should be considered by investors in conjunction with GAAP measures that we also provide. This morning we filed a Form 8-K that outlines the various variables that impact the diluted earnings per share computation. On the Investor Relations sections of our website you find a presentation of the fourth quarter and year 2016 financial information containing some of the operational metrics Dr. Paul will be discussing. Now, I turn the discussion over to Chief Financial Officer, Lori Lipcaman.

[Lori Lipcaman:]

Thank you, Peter. Good morning, everyone. I am sure that most of you have had a chance to review our earnings press release. I will focus on some highlights and key metrics. Vishay reported revenues for Q4 of $571 million. GAAP net loss for the quarter was $0.33 per share. Adjusted EPS was $0.18 for the quarter. The fourth quarter includes a non-cash pretax pension settling charge of $79.3 million, a gain on settlement of the Tianjin explosion insurance claim of $8.8 million, restructuring charges totaling $7.1 million and various unusual tax items. During the fourth quarter, we purchased approximately 400,000 shares of our common stock for approximately $6.2 million, pursuant to the $100 million share repurchase program announced in May. This brings the total for the program to date to 1.75 million shares for $23.2 million. Since quarter end, we have not purchased any additional shares of common stock pursuant to this program. We successfully completed the termination and settlement of our qualified U.S. pension plan in December through the purchase of annuity contracts for participants or the payment of lumpsum settlements for eligible participants who selected this option. The settlement required no additional company contributions. As a result of the settlement, we recorded a pretax non-cash charge of $79.3 million to write off all unrecognized actuarial items that had been recorded and accumulated other comprehensive income. The termination settlement will permanently reduce annual pension expense by about $5 million per year and significantly reduce our risk by removing this obligation, which had been over $250 million and had been over $300 million before the partial settlement transaction we completed in 2014. Also during the quarter we reached final agreement on the Tianjin explosion insurance claim and recognized a gain of $8.8 million. Total cash proceeds were about $13 million which are segregated between operating and investing cash flows on the statement of cash flows. Revenues in the quarter were $571 million down by 3.6% from previous quarter and up by 2.7% compared to prior year. Gross margin was 23.2%. Operating margin was negative 8.0%. Adjusted operating margin was 7.2%. EPS was a loss of $0.33. Adjusted EPS was $0.18. EBITDA was $5 million or 0.8%. Adjusted EBITDA was $82 million or 14.4%. Revenues in the year were $2,323 million up by 1% compared to prior year. Gross margin was 24.5%. Operating margin was 4.4%. Adjusted operating margin was 8.7%. EPS was $0.32. Adjusted EPS was $0.85. EBITDA was $275 million or 11.8%. Adjusted EBITDA was $362 million or 15.6%. Reconciling versus prior quarter, adjusted operating income quarter four 2016, compared to adjusted operating income for prior quarter, based on $21 million lower sales or $16 million lower excluding exchange rate impacts, adjusted operating income decreased by $19 million to $41 million in Q4 2016 from $60 million in Q3 2016. The main elements were average selling prices had a negative impact of $21 million, representing a 3.6% ASP decline. Volume increased with a positive impact of $19 million, representing a 7.1% increase. Variable cost decreased with a positive impact of $10 million, primarily due to cost reduction efforts, which more than offset the increase of labor cost. Fixed cost increased with a negative impact of $7 million, primarily due to higher incentive compensation and higher R&D project cost. Reconciling the full year 2016 versus 2015, adjusted operating income for the year 2016, based on $23 million higher sales or $22 million higher excluding exchange rate impacts, adjusted operating income increased by $22 million to $202 million for 2016 from $180 million for 2015. The main elements were average selling prices had a negative impact of $74 million, representing a 3.1% ASP decline. Volume increased with a positive impact of $48 million, equivalent to 4.3% increase. Variable cost decreased with a positive impact of $41 million, primarily due to cost reduction efforts, efficiencies, lower metal and material prices, which more than offset the increase of labor cost. Fixed cost decreased with a positive impact of $5 million, mainly due to a non-reputation of accelerated depreciation at MOSFETs and lower amortization intangibles, which more than offset increases in incentive compensation, R&D projects and environmental remediation cost. Inventory reductions had a negative impact of $18 million and exchange rate effects had a positive impact of $19 million. Selling, general and administrative expenses for the quarter were $92 million, in line with expectations. For the year selling, general and administrative expenses were $368 million. For Q1 2017, our expectations are approximately $95 million of SG&A expenses and approximately $370 million for the full year. I would like to give you an overview of our cost reduction programs. During quarter four, we recorded approximately $4 million of restructuring expenses related to the extended MOSFETs enhanced competitiveness restructuring program announced in November. This program is expected to result in additional cost savings of approximately $8 million to $9 million when fully implemented in 2017. Our other previously announced ongoing global cost reduction programs are progressing as planned. As part of these programs, we intend to lower cost by approximately $35 million annually, when fully implemented and a cash cost of approximately $30 million. These global programs include a plan to reduce SG&A by $17 million, substantially implemented at the end of 2016. We also plan to streamline and consolidate production of certain product lines, which we expect to reduce cost of products sold by approximately $18 million annually, split 50-50 between variable and fixed cost. These production transfers will be completed in steps by the end of 2017. The amount of restructuring expense recorded for these programs during Q4 was $3 million or $23.6 million for the programs to date. Total cash restructuring in 2016 was approximately $33 million. The year-to-date effective tax rate on a GAAP basis was approximately 48%. This tax rate includes some unusual tax items. The recognition of $35 million of additional tax expense from accumulated other comprehensive income as a result of the extinguishment of the U.S. qualified pension plan, a benefit for the release of $9 million of provisions for uncertain tax positions due to lapse of the statute of limitations the quarterly re-measurement of the cash repatriation deferred taxes, a benefit of $4 million for the year. All of these unusual items resulted in negative tax rate that is GAAP tax expense on a GAAP loss of approximately 18% for quarter four. The year-to-date normalized tax rate, which excludes these unusual tax items and the tax effects of the pension settlement charge, restructuring expense, impairment charge, the gains on the Tianjin explosion and the early extinguishment of debt was approximately 29%, slightly lower than the year-to-date rate to Q3. This mathematically yields a normalized rate of approximately 24% for Q4. We expect our normalized tax rate for 2017 to be approximately 28%. This rate is based on an assumed level and 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 146 million. The expected share count for EPS purposes for the first quarter 2017 based on the same average stock price as the fourth quarter is approximately 153 million shares. For 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 $83 million. Capital expenditures for the quarter were $53 million. Free cash generation for the quarter was $35 million. For the year, cash from operations was $296 million. Capital expenditures were $135 million, split approximately for expansion of $68 million; for cost reduction, $15 million, for maintenance of business $52 million. Proceeds from the sales of property and equipment were $6 million. Free cash generation was $167 million. Proceeds from the sale of property and equipment includes insurance proceeds for assets destroyed in the Tianjin explosion. Vishay has consistently generated in excess of $100 million free cash in each of the past 11 years. Cash flows from operations were greater than $100 million for the last 22 years and greater than $200 million for the last 15 years. Backlog at the end of quarter four was at $653 million or 3.4 months of sales. Inventories decreased quarter-over quarter by $19 million, excluding exchange rate impacts. Days of inventory outstanding were 82 days. Days of sales outstanding for the quarter were 45 days. Days of payables outstanding for the quarter were 35 days, resulting in a cash conversion cycle of 92 days. We had a total liquidity of $1.6 billion at quarter end. Cash and short-term investments comprised $1.1 billion and unused capacity on our credit facility was $490 million. The carrying value of our debt of $357 is net of the unamortized issuance cost of $11 million and includes $143 million outstanding on our credit facility and $225 million of convertible debentures, net of unamortized discount issued in three tranches and due in 24, 25, and 26 years respectively. The principal amount or face value of the converts is $575 million. No principal payments are due until 2020. However, the convertible dentures may be redeemed if certain stock price thresholds are met. At the end of quarter four, the convertible dentures due 2042 are redeemable for the next quarter. Accordingly, we have reclassified the difference between the carrying value in the principal amount for those dentures from stockholder's equity to a separate line between liabilities and equity on our consolidated balance sheet. If the debentures are converted, we would fund the principal amount with variance on our revolving credit facility and net share subtle amounts in addition to the principal amount. This criteria is measured quarterly and the amounts presented as temporary equity will revert to regular equity if the criteria are not met. Now I'll turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

[Gerald Paul:]

Thank you, Lori and good morning, everybody. 2016 for Vishay clearly has been a successful year, showing a major improvement of our financial performance. Vishay's key markets during the entire year performed well and strong orders in the fourth quarter, raised confidence also for 2017. Vishay in 2016 achieved a gross margin of 25% of sales versus 24% in 2015 and adjusted operating margin of 9% of sales versus 8% in 2015. GAAP earnings per share of $0.32 vis-à-vis a loss of $0.73 the year before and adjusted earnings per share of $0.85 versus $0.72 in 2015. We generated in 2016 free cash of $167 million, which represents the best performance since five years. The fourth quarter however came in as a disappointment. Results were negatively impacted by a higher than anticipated reduction of inventories by some temporary manufacturing inefficiencies in several divisions and by a less favorable product mix than expected. We achieved a gross margin of 23% of sales, adjusted operating margin of 7% of sales. GAAP earnings per share of -- were a loss of $0.33, adjusted earnings per share $0.18. Let me talk about the economic environment in general first. The economic environment during 2016 generally has been friendly, which in particular is true for our key markets, which are automotive and industrial. A relatively weak euro continues to support European manufacturers. Overall growth in Asia namely in China remained weaker than in previous years, but there are enough opportunities for accelerated growth. In the Americas, despite a reasonably strong general economy, the market for components was relatively weak. The U.S. continues to drive demand creation but outsourcing of production to Asia remains strong and the oil and gas segment was weak throughout the year. Talking about distribution now, in general distributors progressively gained confidence through the year. Worldwide POS in 2016 was 2% up versus prior year, but it was up by 6% in the second half and even by 14% in the second half in Asia. There were substantial regional differences. In the Americas, we have seen a reduction of 5%, in Asia, a growth of 6%, POS in Europe of 1%. Inventory turns of distributors continue to run at a reasonable level of 3.3 versus 3.2 in prior quarter. In the Americas, 1.9 turns after 2.0 in quarter three. In Asia 4.9 turns after 4.5. In Europe, 3.3 turns after 3.4. Book-to-bill of distributors in the fourth quarter has been very encouraging. We have seen 1.07 after 1.02 in the third quarter. Coming to the various industry segments, automotive remained strong throughout 2016 and there is confidence also for this year as the electronic content continues to grow. Also, electronic vehicles finally seem to take off especially in Asia. The industrial segment is generally strong in Europe, has stabilized in the U.S. and continues to be supported by governmental infrastructure programs in Asia. Computer is after a seasonal recovery in the second half, are expected to show some further decline in 2017. Fixed telecom remained steady with 4G installations continuing to drive the business. Traditional Western suppliers lose against low-cost Asian manufacturers. Mobile phones in 2016 were virtually stagnant. Traditional suppliers lose share against low-cost Chinese manufacturers. Avionics, military and space, continues to be relatively stable. Medical markets remained strong and are expected to grow steadily. In consumer, finally gaming provides market opportunities, variables grow, but at a lower pace than often anticipated. Coming to our business development, in the fourth quarter, sales excluding exchange impacts came in slightly below the midpoint of our guidance. We achieved sales of $571 million versus $592 million in prior quarter and $556 million in prior year. Excluding exchange rate effects, sales in the quarter were down versus prior quarter by $16 million or by 2.6%, but up versus prior year by $17 million or 3%. Sales in the year 2016 were at $2.32 billion versus $2.30 billion in 2015, an increase of 1% excluding exchange rate effects. Book-to-bill in the quarter was 1.11, quite strong across the Board. 1.16 for distribution after 1.10 in the third quarter, 1.04 for the OEMs after 0.98, 1.14 for actives after 1.03. 1.06 were passives, same in prior quarter. And geographically 1.03 for the Americas after 0.97, very strong 1.17 for Asia after 1.11, 1.08 for Europe after 1.02. Backlog increased substantially to 3.4 month, coming from 3.1 months in the third quarter, 3.5 for actives and 3.4 for passives. The level of order cancellations remains low. You've seen a normal overall price decline of 1.2 down versus prior quarter and 3.6% lower than in prior year. For the actives, the same numbers are minus 1.4% versus prior quarter and minus 4.9% versus prior year. For the passives 0.9% down versus prior quarter and 2% down versus prior year. Some highlights of operations, we in 2016 again were able to offset the negative impact of inflation and price decline on the contributive margin by cost reduction and by innovation. SG&A cost in the quarter came in at $92 million in line with our expectations. SG&A costs for 2016 were at $368 million, $8 million or 2.2% above prior year at constant exchange rates. Manufacturing fixed costs for the year were at $473 million, $13 million or 2.7% below prior year, excluding again the impact of exchange rates. Vishay in 2016 was again able to compensate the negative effect of inflation on its total fixed cost by cost reduction programs. In fact, we have reduced our total fixed cost excluding exchange impact by $5 million. Total employment at the end of 2016 was 22,130, approximately 1% down from prior year when we employed 22,435 people. As a consequence of our cost reduction programs, fixed headcount went down by 179 hits in 2016. Excluding exchange rate impacts, inventories in the quarter were reduced by $19 million. Raw materials increased by $5 million. We're in process and finished goods went down by $24 million, driven by a shortage of supply of wafers. Inventory turns in the fourth quarter increased to 4.4. In 2016 inventories decreased by $36 million mainly by depleting the MOSFET safety stock required for the completed production move in 2015 and '16. Inventory turns for the year were at a satisfactory level of 4.2. Capital spending in 2016 was $135 million versus $147 million in prior year, $68 million for expansion, $15 million for cost reduction and $52 million for maintenance of business. For 2017, we expect CapEx of about $150 million in line with the requirements of our growth plan. We generated in 2016 cash from operations of $296 million versus $245 million in prior year. We generated in 2016 free cash of $167 million as a major improvement versus $100 million free cash in 2015. Coming to our main product lines, I start out as always with resistors and inductors, which is Vishay's traditional and since years most profitable business, which continues steadily on a good level. With resistors and inductors, we enjoy a very strong position in the industrial auto medical market segments. Since a few years, we have started to concentrate on the Asian predominantly Chinese industrial market, and we achieved an increase of this business by 55% in four years. Sales in the quarter were $184 million down by 2% versus prior quarter, but up by 12% versus prior year, again excluding exchange rate impacts. Year-over-year, resistors and inductors grew nicely from $704 million in 2015 to $750 million in 2016 by 6.5% excluding exchange rate impacts. Book-to-bill ratio in quarter four was 1.08 after 0.99 in prior quarter. The backlog increased to a good level of 3.2 months. Gross margin in the quarter was 28% of sales after 31% in prior quarter, mainly due to lower volume and related to that lower efficiencies. Gross margin for the year 2016 were at 30% of sales on the level of 2015. Inventory turns in the quarter were at a very satisfactory level of 4.5, as compared also to 4.5 for the entire year. We've seen normal price decline of 0.9% versus prior quarter and of 2.5% versus prior year. We continue to invest in increasing manufacturing capacities of power inductors, film resistors, and thin film resistors chips. Coming to capacitors, our business with capacitors is based on a broad range of technologies with a strong position in American and European market niches. We enjoy increasing opportunities in the field of power transmission and of electric cars, namely in Asia and entered the polymer tantalum capacitor market. Sales in the fourth quarter were at $80 million, 3.7% below prior quarter and 2.5% below prior year, without the impact of exchange rates. We expect to grow this business this year. Year-over-year capacitor sales decreased from $353 million in 2015 to $337 million in 2016 by 4.4%, excluding exchange rate impacts. The book-to-bill ratio in the quarter was 1.03 after 1.20 in previous quarter. You will remember Q3 in capacitors was influenced by major orders from film power caps for power transmission projects in China to be shift in the course of 2017. Backlog in the quarter increased further to 3.8 months. Gross margin in the quarter decreased to 17% of sales from 21% in the third quarter, mainly due to lower volume in the less favorable product mix. Gross margin for the year 2016 for capacitors was at 20% of sales as compared to 19% of sales in 2015 due to cost reduction and a better product mix for the year. Inventory turns in the quarter were at 3.7 as compared to 3.7 for the whole year. Low price decline in capacitors minus 1% decline versus prior year minus 0.8% versus prior year. We remain positive for the future growth of our capacitor business especially in view of opportunities that exist in Asia. Coming to our Opto line, Vishay's business with Opto products consists of infrared emitters, receivers, sensors and couplers, as well as LEDs for automotive applications. The business represents one of Vishay's opportunities for growth especially the segment of sensors. Sales in the quarter were $69 million, 5% below prior quarter and 1% above prior year without the impact of exchange rates. Due to a slow start into the year, Opto sales year-over-year decreased slightly from $280 million to $272 million by 2.6% excluding exchange rate impacts, but we expect to be back on our growth trend this year. Book-to-bill in the quarter was 0.99 after 0.98 in prior quarter. The backlog increased slightly to 3.2 months from 3.1 months in prior quarter. Gross margin in the quarter was 32% of sales after 33% in prior quarter. Gross margin for the year 2016 for Opto came in at 32% of sales, which was at the same level as in the year before. Quite excellent inventory turns of 5.8 in the quarter as compared to 6.0 for the entire year. Normal price decline at Opto products 0.3% decline versus prior quarter and 3.4 versus prior year. We do remain confident for this line growing steadily and profitably. Coming to diodes. Diodes for Vishay represent a broad commodity business, where we are largest supplier worldwide. Vishay offers virtually all technologies, as well as the most complete product portfolio. We in particular are leading in power applications. The business has a strong position in the automotive and industrial market segments and keeps growing steadily and profitably since years. Sales in the quarter were $135 million, 3% below prior quarter and slightly above prior year, which excludes exchange rate effects. Year-over-year sales with diodes increased from $534 million to $554 million by 3.6% without exchange rate impacts. We expect no change of this nice trend for this year. Strong book-to-bill ratio of 1.22 after 1.06 in the third quarter. The backlog with diodes increased substantially to 3.7 months from 3.0 months in prior quarter, due to higher than normal orders in the fourth quarter. Gross margin in the quarter decreased to 21% from quite outstanding 26% in prior quarter mainly due to lower sales volume and the impact of inventory reduction. Gross margin in the year 2016 grew to fairly encouraging 24% of sales from 22% in 2015. Inventory turns were at very satisfactory 5.0 as compared to 4.7 for the whole year. Price decline was normal, minus 1.5% versus prior quarter, minus 4.2% versus prior year. Diodes over the years for Vishay have developed into a very relevant and reliable contributor to P&L as well as to free cash. MOSFETs, Vishay continues to be one of the market leaders in MOSFET transistors. MOSFET since a few years suffer from the weakness of the computer segment and from a slowdown in smartphones. Over the last years, we, on the other hand, developed a strong and growing position in automotive. Sales in the quarter were $102 million, on the level of prior quarter, but 2% below prior year, excluding exchange rate impacts. Sales in quarter four were handicapped by supply shortages of wafers. Year-over-year sales with MOSFETs declined from $427 million to $406 million by 4.9%, excluding exchange rate impacts. We have seen a strong book-to-bill ratio of 1.14 after 1.03 in the third quarter. Like for Diodes, strong orders from distribution in Asia were the reason. Backlog increased substantially from 3.0 months to 3.4 months. Gross margin in the quarter improved further to 17% of sales after 16% in prior quarter. Excluding the impact of inventory reduction, gross margin in the fourth quarter would have been 19%. Gross margin for the entire year came in at 14%. Just the second half really benefited to the full extent from the recent production move to our eight-inch fab in Germany. Inventory turns of 3.7 in the quarter as compared to 3.3 in the year. We see a continued ASP decline of 2.1% versus prior quarter and of 6.8% versus prior year. Going forward, we will continue implementing our announced extended restructuring program and will concentrate on expanding the business at automotive and industrial customers. Let me summarize, supported by a fairly friendly economic environment and based on our own efforts, Vishay enjoyed a successful year 2016. Financial results improved noticeably, vis-à-vis not very satisfying year 2015 and the generation of free cash was the highest since five years. I think I can say, we are back on track. Vishay, last year demonstrated again its operational strength in pursuing and completing major operational targets like tight control of fixed and variable costs as well as of inventory levels, but also and in particular a targeted expansion of the Asian business. The strong free cash flow enabled us to raise the cash dividend to establish a meaningful stock buyback program and to rejuvenate and to continuously upgrade our organization. We furthermore, remain in a position to growth through acquisitions and we continue to look for to evaluate opportunities. Building on its dedicated and forward-looking business approach, Vishay remains well-positioned to face upcoming opportunities and challenges in our markets. We do expect a good year 2017. For the first quarter, we guide to a sales range of between $575 million and $615 million and gross margin between 24% and 26% of sales. Thank you very much. Peter?

[Peter Henrici:]

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

[Operator:]

Your first question comes from Ruplu Bhattacharya of Bank of America Merrill Lynch.

[Ruplu Bhattacharya:]

Hi, thank you for taking my questions. The first question for Lori, could you just give us an idea of the rate at which you plan to repatriate cash into the U.S. especially since the Trump administration, if there is a tax break while doing so. I think in the past you've talked about over a three-year period, but cannot be faster and also can you talk about the rate of buybacks we should expect on a year -- going forward? Thank you.

[Lori Lipcaman:]

Okay. So, first of all as you can imagine, we're closely monitoring the discussions with the U.S. Congress and the American President, but of course nothing is really definitive yet. So, we would continue to monitor that and if it became favorable for us, we would certainly take advantage of it. At the moment, what I said in the past is that we're repatriating and it was going to take us three to five years to bring that cash back to America.

[Ruplu Bhattacharya:]

So how much cash do you bring back this year and how much was used for share buybacks?

[Lori Lipcaman:]

So, this year we brought back approximately $50 million based on the announcement of last year and on the share buybacks, just one moment, $23 million approximately was used for share buyback.

[Ruplu Bhattacharya:]

Okay. And Dr. Paul, just asking on the lead times, do you see any lead times extending and given the level of inventory in the channel, do you think there could be any significant inventory restocking in the near term?

[Gerald Paul:]

As a matter of fact, you're absolutely right. We see supply shortages even in certain places especially in semiconductors. There are many reasons for it I guess, but as a matter of fact we see exactly that. We have seen quite strong orders especially in the first quarter but more so in January. So, it's clear, it's true, I cannot see the pipeline replenishing at this point. There is a lot of request for products.

[Ruplu Bhattacharya:]

All right. And the last one for me, can you just quantify how much of your revenue is from the U.S.?

[Gerald Paul:]

All together the share of the U.S is we don’t know by heart exactly, 25% roughly, you can have the number better obviously. Peter is looking.

[Ruplu Bhattacharya:]

All right. Thank you so much.

[Peter Henrici:]

It was 23%.

[Gerald Paul:]

23%, now [you have three-year] number.

[Ruplu Bhattacharya:]

Thank you.

[Operator:]

Your next question comes from Shawn Harrison of Longbow Research,

[Gausia Chowdhury:]

Hi, good morning. This is Gausia Chowdhury on behalf of Shawn. My first question for you is with regards to the gross margin miss from the midpoint of guidance, was that all de-stocking within auto and MOSFET and what areas drive the margin rebound in the first quarter here?

[Gerald Paul:]

First of all, the biggest effect vis-à-vis our expectations came from two points. It was the variable margin that was disappointing and this comes from quite a few, but adding up inefficiencies in quite a few divisions, which have to do with lower volume. You have seen our inventory decrease in the fourth quarter, which is mainly in MOSFET, but also happened in a few other segments of the business. And then of course also we had less favorable product mix. We saw it in a way coming and I commented on it in the last telephone conference, but it turned out to be more severe this change to a more normal mix. You remember in Q3, we had an excellent mix and it normalized more than we thought. This was the main reason. Then of course we have inventory decline, inventory reduction, which was not planned. We had supply problems from really one of our suppliers didn’t help us very much. And then of course, we had the sales came in slightly below the consensus you have seen, which was our expectation also. These were the three major reasons.

[Gausia Chowdhury:]

Okay. And do you see those normalizing in the first quarter because you are…

[Gerald Paul:]

Yes.

[Gausia Chowdhury:]

Okay. And then second, how much of the book-to-bill strength that you saw, it seems like they were almost at record highs. How much of that was the earlier Chinese New Year?

[Gerald Paul:]

We have about 1.3 in January, 1.3.

[Gausia Chowdhury:]

Okay. All right. And that was because of the Chinese New Year, a lot of the impact was because of the earlier?

[Gerald Paul:]

Chinese is every year. It was really strong -- really strong and there are some shortages of supply in the market mainly at semiconductors.

[Gausia Chowdhury:]

Okay. Great. And the last question is just going back to buyback question, correct me if I am wrong, but I think the current buyback is set to expire in the summer of 2017. It seems like the pace of buyback has been pretty light so far. So what can we expect for the remainder of the year?

[Lori Lipcaman:]

So, the currently approved program by our Board of Directors run until May of 2017 and of course they would have to evaluate the situation and determine if they would like to prolong that.

[Gausia Chowdhury:]

Thank you.

[Lori Lipcaman:]

You're welcome.

[Operator:]

Your next question comes from Harlan Sur of JPMorgan.

[Harlan Sur:]

Good morning and thank you for taking my question. Book-to-bill in Asia even normalizing for the lower 4Q revenues was very strong, which was for two consecutive quarters. I am wondering if you can help us understand what end markets are strong? I assume one of them is automotive and transportation, maybe what about the industrial sector and how much of this is broad demand versus the momentum that you've captured to your Asia growth plan?

[Gerald Paul:]

I think it's both. It’s really across the Board for Vishay. Indeed, we had successes finally, I may say after trying for quite a few years measurable successes in the passives, which is mainly industrial, some automotive, but mainly both, industrial and automotive. Otherwise this broad demand for semiconductors, which we just have seen in the recent weeks, really weeks has to do with certain shortages, which I don't want to comment on. This came as a surprise to us and I would call this a very temporary situation as I see it.

[Harlan Sur:]

Great. Thank you, Dr. Paul. And then you indicated your views on growth this year in your capacitor and Opto businesses after declines in 2016. What's driving the confidence there and I apologize if I missed this, but do you expect your MOSFET business to grow this year as well?

[Gerald Paul:]

Yes. We do, but we're handicapped a little by supply problems at the moment. But this improves continuously and we believe the MOSFETs will grow vis-à-vis prior year this year. Concerning the capacitors, I think it's tangible. We already have orders especially in power caps received quite substantial orders in the third quarter of last year and they are shippable in the course of the year. It's a program a governmental program and it's quite sizable. Altogether it's around $30 million, which will be shipped this year, which we didn’t have in last year's shipment. So, I'm confident there. We also see film capacitors being quite strong across the Board in the context of the electro cars and then we are entering and hope to grow our places in the tantalum polymer market. So, I'm quite positive that 2017 we will see an increase also in capacitors. In Opto, I don't have to comment much. Opto has been growing since many years and last year, we had at the end an unexpected end of a few programs in the first quarter, you may remember. Since then, we are growing nicely, but the first quarter was not good and if you take the year then it comes out as a negative, but we already back on a growth track. So, I am quite optimistic on especially sensors.

[Harlan Sur:]

Great. Thank you very much.

[Operator:]

Your next question comes Jim Suva of Citi.

[Jim Suva:]

Thank you very much and for the details thus far. I have two questions now and I'll ask them at the same time. First, you mentioned the backlog and the bookings have improved and were quite strong. When we look at the ASP's, is it fair to assume that those bookings and backlogs could and should result in better or improving ASP's or is it like mix shift that really impacts that because if you're talking about some shortage and backlogs longer, I guess I would think that it would lead to stronger average selling price and then I'll ask my follow-up actually after that.

[Gerald Paul:]

Jim, I would hope. So, but on the other hand, it's as I said, we got displacement shortage as a temporary effect, plus most of the OEM contracts have been negotiated and we keep contracts obviously. As a matter of fact, of course if such a supply shortage would remain in place for say half a year or so, then inevitably the whole market will see less steep price decline, less of a price decline for sure. It always has been the case, but it takes some consistency in that before we see it.

[Jim Suva:]

Okay. That makes sense. Thanks for the details. Then my follow-up question is you mentioned that you have been seeing success in the sensor market, can you help us understand what end markets or type of products -- there's lots of sensors out there all the way from drive trains to optical to photo, to camera sensing, lots of them. Where is your strength and is this an area you continue to focus on and if so, would it be organically or do you think that do you need to make some acquisitions to go on into maybe some other technical areas that you may not be in today?

[Gerald Paul:]

Jim, we historically grew and we've been talking many years. We grew in the automotive industry and in industrial industry quite well over years. I do not believe that we need a further acquisition, but I don't want to exclude it either. It depends -- it's an opportunistic business. So, if something came about census, but for sure would be an area where we would look to if there was a reasonable acquisition attempt, but I'm talking without acquisition, I believe in organic growth, which we will show again already this year. And it goes always to the same areas. It goes to automotive and it goes to industrial, which are our good markets, our traditional markets anyway and we do have a good position there.

[Jim Suva:]

Thank you so much for the details and clarifications. It's greatly appreciated. Thank you.

[Operator:]

Your next question comes from Matthew Sheerin of Stifel Nicolaus.

[Matt Sheerin:]

Yes thanks. Hi, everyone. Just a couple of questions here. On the SG&A, I think you're guiding to $95 million this quarter, which is up year over year and guiding up slightly for the year, but you've also got continuing cost-cutting restructuring program going on. So, trying to figure out whether those programs will be more of a benefit of your gross margin versus the OpEx and why OpEx is trending higher?

[Lori Lipcaman:]

Okay. So maybe I'll start first with the SG&A, so you're correctly guided to $95 million, which is slightly up compared to quarter four, because we had a gain on the disposal of some of the remaining fixed assets when we closed down our wafer fab in California. It does not repeat in Q1 nor in 2016 by nature. So, the estimate for the full year is only $370 million. It's not a supreme piece in essence and quarter one is the highest SG&A of the four quarters for 2017.

[Matt Sheerin:]

Okay. So exactly that's a trend down then through the year?

[Lori Lipcaman:]

Yes, correct.

[Matt Sheerin:]

Okay. And then on the MOSFET business, Dr. Paul you talked about some shortage of wafers, is that -- has that been alleviated now? My understanding why that's led to your big increase in bookings particularly from distribution, but do you expect…

[Gerald Paul:]

Gross margin. Sorry for that. It didn’t have the gross margin either obviously. So, I am sorry for that I interrupt.

[Matt Sheerin:]

No, sure, I'm just trying to figure out whether or not you can meet that demand this quarter and what that does to pricing and if you've got a big quarter here, is that going to drop down if demand or supply is more in line with demand and what does that do to your next quarter because obviously you're guiding a little bit better than seasonal for your overall revenue this quarter than you have last few years and I know that we've seen some change in seasonality due to the mix of your business and just the cycles in general, but just trying to figure out how you envision that playing out going into Q2?

[Gerald Paul:]

Realistically speaking, we will still be handicapped to a degree in the first quarter especially in MOSFET only, just in MOSFETs we are talking. The supply improves steadily, but you remember part of the sales, which we made in the fourth quarter was based on stock reduction, inventory deduction and this inventory is gone. So as a matter of fact, despite the fact that the supply is better now and hopefully is back to normal foreseeably, it will take a little time until these constraints will over and will lead to higher sales. So, I still see as was unexpected I must say that, this delivery problems, they were unexpected, but for the moment they are improving but in quarter one, we still are handicapped.

[Matt Sheerin:]

And in the products in question, is that specific to one end market or application or is that pretty much across because you talked about obviously you sell into PCs and consumer in the MOSFET business, but also you talked about growing the order, is that across the Board or just specific to one market?

[Gerald Paul:]

It's not across the Board. It's not in automotive, but it's in order more consumer oriented product. At the moment, the backlog increases much.

[Matt Sheerin:]

Okay. So, for automotive you produce your own wafers?

[Gerald Paul:]

Yes. We do.

[Matt Sheerin:]

That's the new German facility, right?

[Gerald Paul:]

Yes, exactly.

[Matt Sheerin:]

Yes. Okay. That's it for me. Thanks a lot.

[Gerald Paul:]

Thank you.

[Operator:]

At this time, there are no further questions. I will now turn the floor back over to Management for any additional or closing remarks.

[Gerald Paul:]

Thank you for your interest in Vishay Intertechnology. This concludes our Q4 call.

[Operator:]

Thank you. This does conclude today's conference. You may now disconnect.