Vishay Intertechnology, Inc.
Q3 2015 Earnings Call Transcript

Published: 3 Nov 2015

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome everyone to the Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there would be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the conference over to Mr. Peter Henrici. Sir, you may begin your conference.

[Peter Henrici:]

Thank you, Paula. Good morning, and welcome to Vishay Intertechnology's third quarter 2015 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 third quarter 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 question-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 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 section of our website, you can find a presentation of the third quarter 2015 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 Q3 of $561 million. GAAP EPS for the quarter was a loss of $0.19. Adjusted EPS was $0.17 for the quarter. In light of a sustained decline in market capitalization for Vishay and its peer group companies and other factors. We determined that interim goodwill and indefinite lived impairment test were necessary. Prior to completing the goodwill assessment, we also performed a recoverability test of certain depreciable and amortizable long-lived assets, as required by US GAAP. The Capella business acquired in 2014 has not performed as expected. We still believe that the addition of Capella will in the mid and long-term add considerable value to our entire optoelectronic components business, to the addition of in-house design capabilities. However, we also concluded that the depreciable and amortizable assets of the Capella business primarily customer relationships were not recoverable and recorded the impairment charges of $57.6 million to write-down the related assets to their fair values. We also concluded that the goodwill associated with the capacitors business unit totalling $5.4 million was impaired. No impairment with identified for the other reporting units and asset groups tested for impairment. As previously announced, an explosion occurred in the Port of Tianjin, China on August 12. Vishay owns and operates a diodes manufacturing facility near the port and the shockwave of the explosion caused a temporary shutdown. The Tianjin plant was fully operational again by September 8. We estimate that the temporary shutdown resulted in loss revenue of $20 million during the quarter. Additionally, the results for Q3 include a charge of $5.4 million related to the explosion recorded in the line other expenses. We believe, we have valid claims for property damage and business interruption, but will not record any of those announced until all contingencies are resolved. As we announced in the second quarter, we've begun the process of terminating and settling our US Qualified Pension plan. All planned participants will have their benefits either converted into a lump sum cash payment on annuity contract placed with an insurance carrier. The process is continuing as expected. The completion of the process is contingent upon the receipt of a favorable determination letter from the IRS and meeting certain IRS and PDGC requirements. The completion is not expected to occur before Q3, 2016. There are no significant accounting consequences until final settlement occurs. Revenues in the quarter were $561 million down by 5.0% from previous quarter and down by 12.2% compared to prior year. Gross margin was 23.2%. Operating margin was negative 4.3%. Adjusted operating margin was 7.3%. EBITDA was $17 million or 3.0%. Adjusted EBITDA was $87 million or 15.6%. Reconciling versus prior quarter, adjusted operating income quarter three 2015 compared to adjusted operating income for prior quarter, based on $30 million lower sales or $31 million lower excluding exchange rate impacts. Adjusted operating income decreased by $9 million to $41 million in Q3, 2015 from $50 million in Q2 2015. The main elements were; average selling prices had a negative impact of $7 million, representing a 1.2% ASP decline; volume decreased with negative impact of $11 million. Variable costs decreased with a positive impact of $3 million primarily due to cost reduction efforts, efficiencies and lower metal and material prices. Fixed costs decreased with a positive impact of $6 million, primarily due to cost reduction and belt-tightening efforts some of which are temporary. Reconciling versus prior year, adjusted operating income quarter three, 2015 compared to prior year based on $78 million lower sales or $45 million lower excluding exchange rate impacts. Adjusted operating income decreased by $23 million. The main elements were; average selling prices had a negative impact of $19 million, representing a 3.3% ASP decline. Volume decreased for the positive impact of $11 million, variable cost decreased with a positive impact of $5 million primarily due to cost reduction efforts efficiencies, lower metal and material prices, which more than offset the increase of labor cost. Fixed cost increase for the negative impact of $2 million, $3 million coming from acquisition and exchange rates had a positive net impact of $3 million. Selling, general and administrative expenses for the quarter were $89 million. Low than our expectations, primarily due to cost reduction and belt-tightening efforts some of which are temporary. As well as positive impact from the realignment of incentive compensation accruals. For the fourth quarter of 2015, the SG&A expenses are expected to remain unchanged assuming the current Euro exchange rate. I'd like to give an overview of our cost reduction programs. As announced, we're implementing global cost reductions programs intended to lower cost by approximately $35 million annually, when fully implemented at a cash cost of approximately $30 million. These programs include a plan to reduce SG&A by $17 million to be implemented by the end of 2016. We also plan to streamline and consolidate production of certain product lines, which we expect to reduce cost and product 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. Some of these projects have already started by in most cases, our strategy is the first phase to seek volunteers to accept a voluntary separation/early retirement offer. Accordingly, the amount of restructuring expenses recorded for these programs during Q3 is only $0.9 million or $5.6 million year-to-date. Our previously announced program in the MOSFET segment continues as planned. An additionally, $1.4 million of restructuring expenses was recorded in Q3 for a total $3.7 million year-to-date. As discussed previously, this program will be implemented in steps through Q1, 2016. Meaningful cost savings are not expected until the program is nearly completed. But are expected to be approximately $23 million per year, when fully implemented. Restructuring charges are recognized ratably during the implementation period. The GAAP tax rate year-to-date Q3 was approximately 41% including the special items and as always is on our expectations for the full year. Our normalized tax rate for 2015 is expected to be approximately 32%. The normalized tax rate for Q3 was approximately 30% and for Q4 will be derived mathematically. This expected tax rate is based on an assumed level and mix of income among our various taxing jurisdictions. As shift in income could result in significantly different results. Total shares outstanding at quarter end were 148 million. The expected share count for EPS purposes for the fourth quarter 2015 based on the same average stock price as the third quarter is approximately 151 million shares. 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 $61 million. Capital expenditures for the quarter were $37 million. Free cash for the quarter was $24 million. For the trailing 12 months cash from operations was $254 million. Capital expenditures were $153 million, split approximately for expansion $71 million, for cost reduction $16 million, for maintenance of business $66 million. Proceeds trailing 12 months from the sales of property and equipment were $2 million. Free cash generation was $103 million. Vishay has consistently generated an excess of $100 million free cash in each of the past nine years. Cash flows from operations were greater than $100 million for the last 20 years and greater than $200 million for the last 13 years. Backlog at the end of quarter three was at $536 million or 2.9 months of sales. Inventories increased quarter-over-quarter by $5 million excluding exchange rate impacts. We expect the reduction in Q4. Days of inventory outstanding were 94 days. Days of sales outstanding for the quarter were 47 days. Days of payables outstanding for the quarter were 33 days, resulting in a cash conversion cycle of 108 days. We had a total liquidity of $1.5 billion at quarter end. Cash and short-term investments comprised $1.079 billion and unused capacity on the credit facility was $460 million. The breakdown of our debt of $432 million was; $173 million outstanding on our credit facility, $39 million of exchangeable unsecured notes due in 88 years, $220 million of convertible debentures net of unamortized discount issued in three tranches and due in 26, 27, and 28 years, respectively. The principal amount of face value of the converts is $575 million. No principal payments are due until 2018. Now, I will turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

[Gerald Paul:]

Thank you, Lori, and good morning, everybody. In the third quarter, the overall economy conditions were not favorable in general, as we expected it to be. Additionally, our top line and our financial results suffered from the well-known severe accident in the harbor of Tianjin, which temporarily interrupted the output of one of our large plants. And also, this has been the reason for not reaching our projected midpoint of sales. I believe, that we nevertheless achieved respectable results given the circumstances with a gross margin of 23% of sales and adjusted operating margin of 7% of sales. Adjusted earnings per share of $0.17 and GAAP earnings per share of minus $0.19 due to impairment charges. For the year, we continue to expect the generation of substantially over $100 million free cash. Let me talk about the economic environment, after a reasonably strong first quarter. In signs of weakening in Q2, economic environment in the third quarter did not recover. Asia continued to face headwinds with soft microeconomic conditions in China impacting negatively the entire region. Domestic Chinese consumption has suffered also influence by real estate and stock decline. In the Americas, we continue see a severe weakness in the oil and gas sector and relative stability otherwise. Europe remained stable with automotive and industrial exports continuing strongly. Some concerns exists related to a potential drop of exports to China. Distribution became rather cautious focus on the inventory levels. In the quarter reduction of 2% has been reported. Inventory turns at distribution in the quarter remained at principally reasonable level of 3.3, in particular in the Americas 2.2 turns after 2.3 in the second quarter. In Asia, 4.4 turns after 4.6 and in Europe 3.5 turns after 3.8. The POS of worldwide distribution dropped further by 3% quarter-over-quarter after 2% drop in the previous quarter. Industrial markets continue to present a mixed picture with continued strength in Europe. Solidity in the US except for the energy sector and the slowdown in Asia. Automotive remains strong in Europe and in the US, but worldwide vehicle production shows the reduced rate of growth. Computing continues to be very disappointing with the global PC market expected to drop by 8% year-over-year and also tablets being under pressure. We see unbroken growth in mobile phones. Supported by increased sales in the emerging markets, fixed telecom on the other hand remains soft. In consumer, wearables continue to grow fast. Whereas most of the other segment suffer from relatively higher inventory levels. Medical markets continue to show growth, whereas military was flat. Let me comment on our business development in the third quarter. Sales in the quarter were may I say handicapped by the Tianjin disaster and came in at the low end of our guidance. We achieved sales of $561 million in the quarter versus $590 million in prior quarter and $638 million in prior year. Excluding the exchange rate effects. Sales were $31 million or 5.2% below prior quarter and down versus prior year by $52 million or by 8.6% again excluding exchange rate effect and acquisitions. Book-to-bill ratio in the third quarter was 0.96 versus 0.99 in prior quarter, some details. 0.96 for distribution after 0.98 in the second quarter, 0.96 also for the OEMs after 1.0, 0.98 for the actives after 1.01 in Q2. 0.94 for passives after 0.96. 0.92 for the Americas after 0.93. 0.99 for Asia after 1.01. 0.96 for Europe after 1.01. In general, at the end of the third quarter a less optimistic picture than after the second quarter. Likely indicating a soft end of the year. The backlog continued at a normal level of 2.9 months, 2.9 month in the active sector and 2.8 months in passives. Order cancellations remain at a low level. The price decline in Q3 was not this similar to the picture of the second quarter. We have seen minus 1.2% versus prior quarter and minus 3.3% versus prior year. For the actives, it was price decline of 1.9% versus prior quarter and 4.2% versus prior year. For the passives we have seen minus 0.4% versus prior quarter and minus 2.3% versus prior year. Some highlights of operations, our contributed margin in the third quarter remain slightly below our traditional range of between 46% and 48% of sales. The SG&A cost in the quarter decreased further to $89 million, which is lower than expected mostly due to belt-tightening as well as to realignment of incentive compensation. Also manufacturing fixed cost in the quarter continued to decrease quarter-over-quarter to $121 million in the third quarter as compared to $125 million in Q2. Total headcount increased pretty slightly from 22,600 to 22.650. whereby the fixed headcount in the quarter remains stable. First, noticeable headcount reduction in the fixed area be expect at the end of fourth quarter based on our announced fixed cost reduction program. The inventory turns in the third quarter suffered from a lower level of cost of goods sold and came in at 3.8. excluding the impact of exchange rates inventories in the third quarter increased slightly by $5 million. Raw materials were up by $1 million and WIP and finished goods were up by $4 million, due basically the letters due to requirement build-up of safety stock in the context of the MOSFET restructuring project, which will amount to $20 million. Capital spending in the quarter was $37 million compared to the $37 million also in prior year. $21 million for expansion, $3 million for cost reduction and $13 million for maintenance of business. For the year, we expect capital expenditures of approximately $145 million. We generated in the third quarter cash from operations of $61 million versus $98 million in prior year, $254 million on a trailing 12-month basis. And we generated free cash in the third quarter of $25 million versus $61 million in prior year, $1.03 million for the trailing 12-month. We do expect to generate substantially over $100 million free cash in the year as I said. Let me talk about the product lines and I start with resistors and inductors. Vishay is traditionally most profitable business basically continues on a good level, but currently also experiences a weakening of the economy. With resistors and inductors, we enjoy a very strong position in the industrial auto and mill markets and HiRel our acquisition you remember, is very well positioned in the medical segment. We continue to see opportunities for substantial growth in the Asia predominantly Chinese industrial market regardless some present cooling of the economy there. Sales in the quarter were $173 million, 3.5% below prior quarter and 2% below prior year, when excluding exchange rate effects. Book-to-bill in the quarter was 0.95 after 0.99 in the prior quarter. The backlog is at 2.8 months. Gross margin in the quarter were at a satisfactory level of 29% of sales, after 30% in the second quarter. Gross margin was impacted negatively by lower volume. Some price decline exists for resistor and inductors 0.5% decline versus prior quarter and 2.5% versus prior year. The inventory turns at 4.2. our acquisitions in this area Huntington, HiRel and MCB continued to be successful with a sales run rate of about $100 million and the gross margin level of 26% to 27% slightly improving from the previous quarter. The majority of the production moves envisioned for MCB will be finalized in the course of this year. 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 see increasing opportunities also in Asia in particular with power capacitors. The capacitor business presently suffer severely from a decline of the oil and gas sector, the weakness in computers and the general economic softening in Asia. Sales in Q3 were at $84 million, 10% below prior quarter and 16% below prior year, which excludes exchange rate effect. Book-to-bill in the quarter continue to be disappointing by 0.93 after 0.92 in the previous quarter. Backlog is at three month gross margin for capacitors declined 16% of sales from 19% in the second quarter due to lower volume. Overall for capacitors, we have seen a normal price decline practically stability versus prior quarter and minus 1.9% versus prior year. For the mid-term, we remained confident for capacitors in view of our opportunities in Asia and of Holy Stone's technology which will enable us to penetrate the polymer tantalum market. Coming to line of opto products, Vishay's business with opto products consists of infrared emitters, receivers, sensors, and couplers, as well as of LEDs for automotive applications. It contains a substantial and growing share of customer designed products. The business with infrared opto products represents one of Vishay's opportunities for growth, especially the segments of high performance couplers and of sensors. Our recent acquisition of Capella, a design house for chips used in opto electronic sensors will strengthen our position and our potential for expanding this promising business further, by having own competence in the field of chip design. However, the traditional Capella business predominantly focused on Asia smartphones does not perform as expected. Sales in the quarter were $70 million, 4% below prior quarter and 2% below prior year excluding exchange rate impacts as well as the Capella acquisition. Book-to-bill in the Q3 was 0.95 after 1.02 in prior quarter and the backlog was at 2.9 months. Gross margin for opto products remained at a satisfactory level of 33% of sales, the inventory turns quite excellent at 5.2. price decline normal, 2.1% negative versus prior quarter and 2.8% versus prior year. The newly created subdivision sensors does well, with sales in the quarter of $35 million and further improved gross margin of 34% and Capella is part of this subdivision. Coming to Diodes. Diodes represent a broad and growing commodity business, where we are large supplier worldwide. Vishay offers virtually all technologies, as well as the most complete product portfolio. We, in particular, are leading in power applications. And the business grows profitably. Sales in the quarter were heavily handicapped by the Tianjin accident and sales only reached $124 million, which is 11% below prior quarter and 15% below prior year, again excluding exchange rate impacts. Without the accident however, sales would have been above prior quarter in close to prior year. Book-to-bill in the quarter was 1.05 after 0.97 in prior quarter. The backlog is at three months, gross margin was down slightly from prior quarter at 22% after 23%. The inventory turns were 3.9 and they suffered from lower volume. Price decline was normal minus 1.2% versus prior quarter and minus 3.6% versus prior year. The production in the Tianjin factory has been restored completely and we are in process to work down the higher than normal backlog. For the business with diodes, we continue to expect organic growth based on our competitive cost structure and the high rate of innovation. Coming to the MOSFETs. Vishay continues to be one of the market leaders in MOSFET transistors. The business continues to suffer from the weakness of the computers segment and of the Asian economy in general. Distributors are reducing inventory. MOSFETs currently undergo a major cost reduction program that will enhance profitability quite dramatically, while lowering manufacturing cost. Sales in the quarter were $109 million, 3% above prior quarter but 8% below prior year excluding exchange rate impacts. Book-to-bill was at 0.91 in the quarter, after 1.04 in the second quarter, which indicates a relatively soft fourth quarter for the MOSFETs. The backlog is at 2.8 months, the gross margin improved to 15% of sales from 14% in prior quarter mainly due to lower fixed cost. Inventory turns were at 3.3. we do see some acceleration of price decline minus 2.5% versus prior quarter and minus 5.7% versus prior year, mainly due to deteriorated market conditions. Our cost reduction program continues to be on target and we too expect full implementation by the end of the first quarter 2016 and this should enable us to reach gross margins in the area of 20% of sales. Let me summarize, No question that the electronic industry currently faces headwinds. In Asia, but not only in Asia. Vishay is a major supplier to the electronic industry by nature experiences the consequences of the situation. The business with electronic components clearly keeps it cyclical nature and we all know that. What is important for us beyond economic cycles is to continue working diligently for achieving over operational targets. To permanently improve efficiencies and to control fixed cost tightly. To further strengthen our design in efforts in markets, where we are still underrepresented like an industrial in Asia. To offer sufficient manufacturing capacities in the next economic upturn for our key product lines. To exploit the full potential of our technologically oriented acquisitions Capella and Holy Stone and to continue acquiring businesses either synergetic or strategic. Our most important programs, the announced fixed cost reduction project and the rationalization in MOSFETs are on plan and will support Vishay's results noticeably in future independent of the economic environment. We do believe in a cyclical rebound of the economy in the course of next year, but we do have to expect relatively soft fourth quarter. For the fourth quarter, we guide to a sales range between $540 million and $580 million at current exchange rates. Gross margin is expected between 21% and 23% of sales, which includes a plant inventory reduction. 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:]

[Operator Instructions] your first question comes from the line of Steve Smigie

[Steve Smigie:]

Dr. Paul, you mentioned potentially for cyclical recovery and I was hoping you could talk a little bit about what gives you some confidence there, what could potentially change that would make that not happen and what does this suggest you about your opportunity for 2016 top line growth?

[Gerald Paul:]

Well overall, you can say looking back historically unless there is a major change in the macro economy, this is the nature of the piece. This is the nature of our economy that within year, one and half year, the cycle changes. On the other hand, I have more in-depth reasons to believe it, when we look into our order situation in the fourth [ph] quarter, it's quite okay. It's above 1 and we're quite confident that we will not decline substantially. But it could be, the distribution continues to reduce, the inventories we even count on that, which will of course reduce our expectation for a growth tomorrow, for a change tomorrow directly. But for the next year, we do expect a change of the economy of the cycle.

[Steve Smigie:]

Okay, great and any thoughts on what your calendar 2016, growth could potentially be top line?

[Gerald Paul:]

Well, we do expect some growth vis-à-vis this year.

[Steve Smigie:]

Okay, great and just on some and market segments. I think you indicated that military was about flat and I was just wondering, I don't know if it's just rounding but if I just stick in what you guys said as a percentage last quarter versus this quarter looks like it will be down. Is that just rounding errors on that?

[Gerald Paul:]

I think it's rounding, it's practically rounding, yes I called it flat.

[Steve Smigie:]

Okay, great and then it does seem like consumer did fairly well. Can you talk a little bit about what's helping there?

[Gerald Paul:]

Well as I said, the wearables obviously are an area, which grows fast. Whereas I was not too positive on the other areas, they have inventory all across the board. The wearables pull the whole segment at the moment.

[Steve Smigie:]

Okay and then on Capella, is that more short-term issue related to customers or is there something else going on, that's making a little bit soften your term because it seems like you have self-confidence in intermediate long-term.

[Gerald Paul:]

In fact, the Capella acquisition obviously did not fulfil our short-term expectations in terms of their business, we've said it. On the other hand, when we look at the development of the business it's going upward, no question 2015 will be better than 2014 and for next year, we expect another substantial, well yes substantial growth it's only smaller number, substantial growth vis-à-vis this year. So I'm looking also over their project and they have an increasing number of projects they pursue, you may know that they have a very dependent, when we acquired them one major Asian telephone maker so to speak, right very dependent and this was also the reason one of the major reasons for the underperformance which we've seen in the first phase. I'm very happy to see that they're now broader, that the efforts are broad and I'm also happy to see that the echo operation with the opto division, this was the deepest reason, why we acquired Capella. It has not only started already see some results. So I'm quite optimistic disregarding of course, the disappointment concerning the impairment.

[Steve Smigie:]

Okay great and then last with that positive book-to-bill you're seeing so far in October, does that suggest March might be up sequentially from the December quarter and if that happens does that mean, you might see an uptick in gross margin Q1 over Q4.

[Gerald Paul:]

If it's an uptick in sale than gross margin for sure, we'll be better. Whether or not, this will be better it's too early to judge actually. But it would not be the first time, that the first quarter means recovery for our business. But again, against this speaks clearly the fact that our distributors continue to reduce inventory I believe and nobody knows exactly when they will stop to do that.

[Steve Smigie:]

Okay, great. Thanks a lot. I appreciate it.

[Operator:]

Your next question comes from Harlan Sur

[Harlan Sur:]

Dr. Paul, I think you said that distribution inventories declined about 2% sequentially in Q3. As you mentioned, your distribution partners are still taking down inventories in Q4. Do you have a rough sense sequentially on how much is the inventories are coming down in Q4 and maybe if you can also help us understand what the POS trends are going to be doing in Q4 as well.

[Gerald Paul:]

Well, I have to see of course, it's not directly our business. But I do believe, that they continue because if you compare the situation. One quarter earlier, say after the first quarter this year with a situation after the third quarter. Actually, the inventory as we see it was relatively constant and I do believe this gives you enough reason for our partners in distributions to bring down inventory further. I would say, it would not drop more than what we've seen. I don't think it will accelerate, but I think it will continue. Concerning the POS, well this is the same business in the end. We are in, I believe basically they also like us. We'll see a rebound, but the question is when. Maybe they'll see it earlier than we do because of course we're subject to their decisions concerning inventory reductions.

[Harlan Sur:]

Great, thank you for that and then the team did a great job of reducing SG&A in Q3. Did you get some benefit from accelerating some of the SG&A restructuring program initiatives that you highlighted last quarter.

[Gerald Paul:]

Very small. In reality, the company reacted like in the past vis-à-vis weaker economy and this went to very smoothly I must say that. So the real impact of our programs will come later.

[Harlan Sur:]

Okay, great and then my last question. Again as I relates to kind of just the macro trends that you're seeing out there and the potential for more inventory work downs. Do you get a sense that more of bias towards the weakness is still sort of China focused or at this point, are you feeling like it's just broad based globally?

[Gerald Paul:]

I mean, Asia plays a role in that, of course. The cautiousness started in Asia this time, but we see also some cautiousness in the US as a matter of fact in certain segments and distribution and it's really hard to forecast, what their business decisions are, but again, they will not deplete the inventory completely. I do not believe that anyone at this point believes in the worldwide crisis of the economy. Which automatically will be the reason for continuation of the cycles which we know so well? So in the course of next year hopefully early, they will change the direction and whole business will change direction and then it goes the other way around. They will have want to build inventory again.

[Harlan Sur:]

Thank you, Dr. Paul and just my last question. On the Capella impairment obviously we all know that, China smartphone segment of the market has been weak. You guys have been making a concerted effort to drive the Capella technology into industrial and automotive applications. When do we start to see those revenues starting to add incrementally to your revenues?

[Gerald Paul:]

Well, I mean, sensors in general is a good place to be these days. And you see if you look at, this is why I started to report also the sales of this duly created sub-division we have sensors and it goes up and it's quite profitable. I can tell you that, Capella already partially works for this main business, but of course imagine automotive. It takes a time for qualification etc. So it doesn't go overnight. But there are already joint programs and already certain chip designs, which we in the past had to do outside and now made in-house. So we see successes. Despite this write-down, which we had to have. I'm really quite optimistic that this was a good decision to acquire Capella. You see a business you want to be to want to be in sensors and without the ability to design chips, we would not be super successful I fear. So it was right, I think.

[Harlan Sur:]

Thank you, Dr. Paul.

[Operator:]

Your next question comes from the line of Jim Suva.

[Jim Suva:]

I have two questions. The first question is regarding the China plant explosion and then the factory had to be shut down then it's back running again and you recovered very quickly from it. Can you help us understand the impact, if any, does that have to, the December quarter and then maybe post-December? I would imagine you may have work down some inventory during the weeks that was closed and you need to recoup the production from that facility that maybe, would that be helping December sales and gross margins by a certain amount or am I thinking of that incorrectly?

[Gerald Paul:]

I think Jim, it will not help us much. We have lost in the third quarter $20 million sales as we estimated, I think reasonably and these chances are gone, as a matter of fact. And so we're up and running in a regular form. I think we are in a steady state situation by now. I do not expect anything positive nor negative in the fourth quarter.

[Jim Suva:]

Okay, so am I correct - and that factory does not supply any inventory or have inventory that may have been absorbed in September?

[Gerald Paul:]

To a minor degree I would say, it's not and its few weeks have passed by, since we're fully operational. So a few things already have regulated very quickly.

[Jim Suva:]

Great, thank you and then my follow-up question is on the automotive sector. You talked about the European - US strength. Vishay has a very long and great history with the European auto makers especially, with the German OEMs as well as global autos OEMs. Most people are aware of the one German automaker is facing some challenges with its diesel engines. Can you talk us about, have you seen any change of production from that or are you expecting any change to - how should we think about that?

[Gerald Paul:]

Jim I expected, obviously the question. No, we have not seen anything. It's very true, really nothing at this point in time. Of course, we were also concerned in the beginning that is very true that the company, you talk about, the car companies, the major customer of our customers for sure. On the other had we supply to all kinds of OEMs. That means, if this specific company should lose market share, which is not the case yet right, then others will sell more and I think, as we're supplying to our OEM supply to all the care companies. If this is a specific car maker should sell this, which is not given others will sell more. So I feel relatively certain that this incident which is of course not very nice at all will not hurt, Vishay.

[Jim Suva:]

Great, thank you and congratulations to you and your team.

[Gerald Paul:]

Thank you.

[Operator:]

Your next question comes from Matt Sheerin

[Matt Sheerin:]

Just a couple of follow-up questions. Regarding the positive book-to-bill that you're seeing sounds like so far, I mean at least in October is that broad based and does that include distribution or is distribution still negative as the [indiscernible]?

[Gerald Paul:]

Well actually its distribution driven as a matter of fact, it's true. What we have seen better than expected picture from Asian distribution, I must say that in October. So really, you're right we have seen a better picture and of course this makes me more confident that this rebound which we're expecting will not last until Christmas of 2016, you understand. So it will come relatively fast I hope, but you never know.

[Matt Sheerin:]

But the expectations are that your quarter is more front-end loaded and that become three or four weeks you're going to see your customers particularly in Asia start to bring down inventory levels, right. Yes. It's true.

[Gerald Paul:]

Yes, it's true.

[Matt Sheerin:]

So the book-to-bill may flip the other way, as you get into January.

[Gerald Paul:]

You see, but it was nevertheless a nice change, this vis-à-vis the third quarter, which actually was a disappointing one.

[Matt Sheerin:]

Yes on the savings, $23 million in savings from the MOSFET manufacturing shift. When and I know you're looking at margins expanding there. When should we start to see that should have been in Q1 or you got the savings in Q1, so you will carry that into Q2?

[Gerald Paul:]

Actually nothing has changed from what we said in the past. These savings will kick in beginning of the second quarter of next year, likely we always have said, there is no change.

[Matt Sheerin:]

Okay, so Q2 and then beyond. Okay and then and just lastly and kind of bigger picture question there's been a lots of consolidation going on the component of semiconductor space including some of your competitors and the commodities semiconductor space or at least these rumors about consolidation. What is that you in terms of Vishay's picture as you're seeing more consolidation among your peer group? How does Vishay look in terms of that, when you've got much bigger competitors and competitors now offering more, one stop shop sort of offerings to their customers similar to what Vishay has been trying to do?

[Gerald Paul:]

Yes, first of all I think we're not very excited about it. I think we can be very confident. Normally, if bigger companies come together this is not what a normal buyer likes as a matter of fact. I believe that, if supplier gets too big, he not necessarily get the tailwind of the buyers, not necessarily. So I believe that Vishay will, we don't count on it directly but I would suspect if I had to choose between opportunity and disadvantage. I would take, call the whole thing more opportunity than a disadvantage for Vishay.

[Matt Sheerin:]

Okay, all right. Thanks a lot. Operator Your next question comes from Shawn Harrison

[Shawn Harrison:]

Couple clarifications as well. POA this quarter, was that down to 5% sequentially for the September quarter?

[Gerald Paul:]

No, but if we have to look it up. No it was less than that, but my colleagues looking up, I come back to that in a minute.

[Shawn Harrison:]

Okay and then going back to Capella. I believe the sales run rate was somewhere around $9 million to $10 million a quarter.

[Gerald Paul:]

Yes.

[Shawn Harrison:]

So it's growing off that.

[Gerald Paul:]

Yes and now it's between $10 million and $11 million. But we see a reason to believe, this can grow further. So there are enough projects in the pipeline. But you know project business is project business. You can be lucky or less lucky. But I do believe that there are lots of chances around. So I see a recovery, we already have seen a recovery of the Capella business not to the levels we hope for obviously, but it's going upward and the corporation with opto division goes really well.

[Shawn Harrison:]

And the recovery is not with the Asian handset manufactures, it's with the.

[Gerald Paul:]

Also, but broader but not only with the handset holders not. Not only.

[Shawn Harrison:]

Okay, the book-to-bill experience for the diodes business coming out of the September quarter, how much of that was tied to the explosion versus underlying demand improving to 1.05 book-to-bill if there is way to kind of parse out.

[Gerald Paul:]

I think we can calculate it, we have lost $20 million of sales in the quarter. So I think we could calculate the order space on the sale and then take out the potential of $20 million sales obviously.

[Shawn Harrison:]

Okay and then I guess finally, last quarter. I believe the comment was made that you would look to take additional cost down of the business, if kind of a negative environment continue to persists. It doesn't seem like that's going to be case now given a slightly more positive outlook for 2016. Just I guess on whether any additional restructuring needs to be done given the current outlook or whether you think [indiscernible]?

[Gerald Paul:]

No, I believe, I believe we're set at the moment. But we're always ready as you know, we're always ready to react to further downturns, there's more severe downturns. But I believe what we're doing now make sense, it doesn't harm. It's very important, it reduces the cost but it's kind of organic. It means it doesn't harm what the company can do technically in particular. And also in terms of design in which I want to grow even going forward. I believe we are okay, but again if things turn out worse than I expected or more than I expressed, then we will react stronger than we did up to now.

[Shawn Harrison:]

Okay, were you able to find that POA number?

[Gerald Paul:]

The POA was 12% down.

[Shawn Harrison:]

In the distribution, well. Okay, thank you, Dr. Paul.

[Operator:]

[Operator Instructions] your next question comes from Ruplu Bhattacharya

[Ruplu Bhattacharya:]

Couple of questions. First on the MOSFET expected gross margins getting to 20% by 2Q, 2016. I just wanted to clarify, I mean given the computing as we, are you relying any on revenue expanding or is it just based on infrastructure?

[Gerald Paul:]

No, it's purely cost out.

[Ruplu Bhattacharya:]

Okay, all right good. And then, in terms of.

[Gerald Paul:]

Otherwise, I wouldn't dare to say that, so to speak, but not in our hands.

[Ruplu Bhattacharya:]

Right. And then you know it looks like you're able to contain SG&A to $89 million for the next quarter. Can you give us some expectations for SG&A going forward. I mean, what range do you expect that in the next couple of quarters, can you maintain that range?

[Gerald Paul:]

First of yes, basically this is what we intend to do because of course, we will have to impact of our cost reduction program on the one hand, on the other hand, you have inevitable impacts of inflation named salary increases. So our cost reduction program which is going to be implemented as indicated as promised will offset the wage increase of next year.

[Ruplu Bhattacharya:]

Okay, all right. Maybe just to clarify the gross margin impact in the next quarter. It looks like at the midpoint, the revenue is about flat with this quarter. It's about $560 million but then the gross margin guidance seems to be about a 100 basis points lower quarter-on-quarter. So what are some of the dynamics there, is it just I mean, what is impacting that 100 basis points down in gross margin?

[Gerald Paul:]

We have built inventory in the third quarter still land we're going to reduce inventory in the fourth quarter, so this makes the difference.

[Ruplu Bhattacharya:]

Okay and then maybe the last one from me. Just your general thoughts on share buybacks and dividend, do you think you can get to breakeven with the dividend in 2016 in the US?

[Gerald Paul:]

Well we're on the way to until it gets better, but at the moment, we're still negative on that. We're still cash wise in the US negative. But it's getting better.

[Ruplu Bhattacharya:]

And in terms of share buybacks, any thoughts on that?

[Gerald Paul:]

No thoughts at this point in time. At least nothing, which - we always talk about these things but there is nothing which is really kind of decision at all.

[Ruplu Bhattacharya:]

All right, thank you.

[Operator:]

Your final question comes from the line of [indiscernible].

[Unidentified Analyst:]

I've a follow-up related to the previous question. With the balance sheet, being so overcapitalized and the cash flow generation was steady. I was wondering if the company has considered alternatives to the current plan to create value for shareholder and what valuations does management think of buyback would make sense.

[Gerald Paul:]

Well we have done buybacks in the past. And this is obviously discussed with the Board by nature and decided by the Board and of course this stays on our agenda principally. But at the moment, we do not feel that this should be re-discussed but I cannot exclude that this will come up again. There are no firm rules, I believe it's an opportunistic thing.

[Unidentified Analyst:]

Great. Thank you.

[Operator:]

At this time, we have no further questions. I would now like to turn the floor back over to management for any additional or closing remark.

[Gerald Paul:]

Thank you, Paula. This would conclude our earnings call.

[Operator:]

Thank you. This concludes your conference. You may now disconnect.