威世科技 (VSH) 2013 Q4 法說會逐字稿

Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Vishay fourth quarter and year-end 2013 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. I will now turn the conference over to Mr. Peter Henrici, Senior Vice President of Corporate Communications. Please go ahead, sir.

Thank you, Jennifer. Good morning. 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 will start today's call with the CFO, who will review our fourth-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 will 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 the 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 the presentation of the Q4 2013 financial information, containing some of the operational metrics Dr. Paul will be discussing. Johan Vandoorn, our Executive Vice President and Chief Technical Officer, will be presenting next week on Tuesday, February 11, at the Stifel Technology, Internet & Media Conference in San Francisco.

Now I'll turn the discussion over to Chief Financial Officer, 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 $616 million, above the high end of our guidance and 2.2% above Q3. Revenues in the quarter benefited from positive exchange rate impacts, both compared to our guidance and to quarter 3.

GAAP EPS for the quarter was $0.20. The fourth quarter includes a charge of $2.8 million related to our previously announced restructuring programs. Excluding the effect of this item and the related tax impact, adjusted EPS was $0.21 for the quarter.

Yesterday, Vishay's Board of Directors decided to initiate a quarterly cash dividend, the first-ever cash dividend of the Company. A dividend of $0.06 is payable on March 27, 2014, to holders of common stock as of the close of business on March 3, 2014. At approximately 147 million common stock outstanding, the annual payments will be approximately $35 million; future dividends will be subject to Board approval.

Revenues in the quarter were $616 million, up by 2.2% from previous quarter and up by 16.1% compared to prior year. Gross margin was 23.4%. Operating margin was 7.6%. Adjusted operating margin was 8.1%. EPS was $0.20. Adjusted EPS was $0.21.

During the fourth quarter, we recorded $2.8 million of restructuring expenses related to the programs we announced in late October. We will continue to record charges relating to these programs as they progress. The longest of these projects relates to our MOSFETs segment and is expected to be completed in Q1 2016.

Looking at the reconciliations, adjusted operating income in quarter four 2013 compared to operating income for prior quarter, based on $13 million higher sales, or $8 million higher excluding exchange rate impacts, adjusted operating income decreased by $3 million to $50 million in Q4 2013 from $53 million in Q3 2013.

The main elements were: average selling prices had a negative impact of $4 million, representing a 0.7% ASP decline; volume increased with a positive impact of $4 million; variable costs had a positive impact of $5 million, primarily due to lower material prices; fixed costs increased with a negative impact of $6 million, this includes the non-repetition of the realignment of incentive compensation accruals in Q3 for $2 million; environmental remediation activities for $2 million; additional depreciation expense related to our MOSFET restructuring for $2 million. The additional depreciation is expected to continue until the finalization of the restructuring program in Q1 2016. Inventory reduction had a negative impact at $1 million.

Adjusted operating income quarter four 2013 compared to prior year, based on $86 million higher sales, or $79 million higher excluding the ex-rate impacts, operating income increased by $28 million to $50 million in Q4 2013 from $22 million in Q4 2012. The main elements were: average selling prices had a negative impact of $16 million, representing a 2.6% ASP decline; volume increased with a positive impact of $43 million, representing 18.2% increase; $4 million coming from acquisitions based on $9 million in sales; variable costs decreased with a positive impact of $14 million, primarily related to material prices and volume-related efficiencies.

Fixed costs increased with a negative impact of $12 million. This includes from acquisitions, $3 million; environmental remediation activities, [$2 million], and additional depreciation expense related to our restructuring programs for $2 million.

Adjusted operating income for the full year 2013 compared to prior year, based on $141 million higher sales, or $124 million higher excluding exchange rate impacts, operating income increased by $22 million, or $30 million excluding ex-rate impacts. The main elements were: average selling prices had a negative impact of $75 million, representing a 3.1% ASP decline; volume increased with a positive impact of $94 million, representing a 9.1% increase; $8 million coming from acquisitions based on $20 million in sales.

Variable costs decreased with a positive impact of $37 million, primarily material prices and volume-related efficiencies. Fixed costs increased with a negative impact of $34 million. This increase includes: from acquisitions, $6 million; environmental remediation activities, $3 million; additional depreciation expense related to our restructuring programs, $2 million; and incentive compensation, $4 million.

Selling, general and administrative expenses for the quarter were $95 million, higher than guided, mainly due to additional environmental remediation expenses of $2 million. For quarter one 2014, our expectations are approximately $96 million of SG&A expenses and constant exchange rates. The increase is mainly due to salary inflation, only partially offset by the non-repetition of environmental remediation expenses.

As we announced in late October, our cost reduction activities include a voluntary separation/early retirement program. Voluntary separation plan activity was very limited in quarter four, but we still expect the total program with costs to be approximately $13 million, an annualized savings of approximately $10 million when fully implemented. We expect most of the expense related to these programs to be recorded in the first half of 2014 with the benefits beginning to be realized in the second quarter of 2014.

The normalized tax rate for the year, excluding unusual items, was approximately 32%; this compares favorably to the previously expected 34%. Our full-year tax rate is based on the mix of income among our various taxing jurisdictions.

The GAAP tax rate for the year was approximately 30%. This also compares favorably to the previously expected 31% and includes several discrete items not included in our normalized rate. The one-time $1.3 million benefit recorded in Q1 as well as the impact of the change in Israeli tax law enacted in Q3 of $2.9 million. We expect our normalized tax rate for 2014 to be approximately 32%. This rate is based on an assumed 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 147 million. The expected share count for EPS purposes for the first quarter 2014 based on the same average stock prices in quarter four 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 $113 million. Capital expenditures for the quarter were $61 million. Proceeds from the sale of assets, $1 million. Free cash generation for the quarter was $52 million. For the year 2013, cash from operations was $292 million. Capital expenditures were $153 million, split approximately for expansion, $74 million; cost reduction, $20 million; for maintenance and business, $59 million.

Proceeds for the year 2013 from the sales of property and equipment were $5 million. Free cash generation was $144 million. Vishay has consistently generated in excess of $100 million in free cash in each of the past eight years. Cash flows from operations were greater than $100 million for the last 19 years and greater than $200 million for the last 12 years.

Backlog at the end of quarter four was at $611 million, or 3.0 months of sales. Inventories decreased quarter over quarter by $16 million, or decreased by $18 million excluding exchange rate impacts. Days of inventory outstanding were 85 days. Days of sales outstanding for the quarter were 41 days. Days of payables outstanding for the quarter were 31 days, resulting in a cash conversion cycle of 95 days.

We had a total liquidity of $1.7 billion at quarter end. Cash and short-term investments comprised of $1.152 billion, and unused capacity on the credit facility was $518 million.

The breakdown of debt of $365 million was: $114 million outstanding on our credit facility; $39 million of exchangeable unsecured notes due in 90 years; $212 million of convertible debentures, net of unamortized discounts, issued in three tranches and due in 27, 28, and 29 years, respectively. The principal amount, or face value of the converts, is $575 million. No principal payments are due until 2018. Now I will turn call over to our Chief Executive Officer, Dr. Gerald Paul.

Thank you, Lori, and good morning, everybody. 2013 for Vishay, like for the entire electronic components industry, has been a year of rather mixed economic exposures as they relate to very different developments in some relevant market segments. Vishay, in 2013, achieved a gross margin of 24% of sales and adjusted operating margin of 8% of sales, adjusted earnings per share of $7.79, GAAP earnings-per-share of $0.81.

We generated $144 million free cash and continued our good performance of so many years. And in the fourth-quarter results were substantially better than in 2012. We had a gross margin of 23% of sales, adjusted operating margin of 8% of sales, adjusted earnings per share of $0.21, and GAAP earnings per share of $0.20.

Let me talk about the economic environment. After a very weak fourth quarter 2012, economy recovered through the first half of the year of 2013, initially driven by the restocking of distributors and in the second phase by improving end customer demand. After a disappointing third quarter, burdened by a sudden drop of orders from distribution, quarter four indicated a return of confidence in most of the market segments, and in particular, at distribution.

The Automotive segment in 2013 was historically strong, driven by two factors: first of all, an increasing electronic content in vehicles, in particular, with regards to infotainment systems, and secondly, a healthy vehicle production, especially for markets in Asia and the United States. Further growth is anticipated for the current year.

The Industrial segment regained strength in the United States and now appears to recover also in Europe; Asia continues to grow at very decent rates.

In computing, tablets continued to gain market share with an unfavorable impact on component volume; notebook shipments weakened over 2013, but apparently, there were some stabilization of demand at the end of the year. Smartphones continue to see growth, driven by the shift to 4G systems and increasing penetration in developing markets. Fixed telecom recovered year over year, which is likely to continue.

The Consumer segment in 2013 developed [excitement] in general with gaming, Ultra HD TV, and 3D printing showing growth. Its high reliability and improving demand in medical offsets some weakness in military.

Distribution currently appears in good shape, with strong orders in the fourth quarter, book-to-bill of 1.04, and acceptable inventory turns. We have seen inventory turns of 3.5 turns worldwide versus 3.6 in the third quarter, 2.2 in the Americas versus 2.3, 5.3 in Asia vis-a-vis 5.2, 3.3 in Europe vis-a-vis 3.6. All in all, I think there is confidence for the upcoming year.

Let's talk about business development at Vishay. Excluding the impact of a stronger euro, sales came in at the upper end of our guidance. We achieved sales of $616 million in the quarter versus $603 million in prior quarter and $531 million in prior year.

Excluding exchange rate effects, sales were up versus prior quarter by $8 million, or by 1% and up versus prior year by $17 million, or by 13%, excluding the impact of acquisitions. Sales in 2013 were $2.37 billion versus $2.23 billion in 2012, an increase of 5% excluding exchange rate effects and acquisitions.

Book-to-bill was 0.99 in the quarter, 0.98 for distribution, 0.99 for OEMs, 0.98 for our Active products, 0.99 for Passives, 0.95 for the Americas, 1.0 for Asia, and 0.99 for Europe. The backlog has reduced to three months, 3.1 in Actives and 2.9 Passives.

Order cancellations remain at a normal level. Price pressure has normalized. We have seen 0.7% price decline versus prior quarter and 2.6% price decline versus prior year. We see at the moment relatively no price decline in Actives, in particular, quarter over quarter, which was a price decline of 0.6%, 3.2%, we have seen price decline versus prior year. For Passives, there is moderate price decline, 0.7% versus prior quarter, and 1.9% versus prior year.

Let me talk about our operations. In 2013, cost reduction and product innovation were not completely able to offset inflation and price decline. Our contributive margin, as a consequence, shifted slightly below the lower end of our traditional range of between 46% and 48%.

SG&A costs in the quarter came in at $94 million, negatively impacted by a one-time environmental expense of $2 million. The CFO has mentioned that. SG&A costs for the year were at $369 million, $12 million or 3% above prior year at constant exchange rates and excluding acquisitions.

Manufacturing fixed costs for the year were $499 million, an increase of $14 million, or 2% versus prior year at constant exchange rates and again, excluding acquisitions. Costs include $2 million for additional depreciation at MOSFETs due to our restructuring program.

Total employment at Vishay at the end of 2013 was 22,535, practically on the level of prior quarter and 4% above prior year. Our fixed headcount in 2013 came down slightly when excluding the impact of the MCB acquisition. We do expect further reductions of the fixed headcount going forward in the context of our announced voluntary retirement program.

Since December 2009, on the other hand, we have increased the technical staff by 12%, right in line with our growth plan. We expanded in 2013 our sales organization in Asia, mainly in China, for intensifying our design efforts in the Industrial segment, which I think is a very promising activity.

Inventory turns in the quarter as well as in the year reached as a satisfactory level of 4.2. According to expectations, inventories in the fourth quarter were reduced by $18 million, when excluding exchange rate impacts, $10 million reductions in raw materials, and $8 million in WIP and finished goods.

Capital spending in 2013 was $153 million versus $150 million in prior year, $74 million for expenses, $20 million for cost reduction, and $59 million for maintenance of business and EHS. The main expansion projects were innovative as the [de-packages] for diodes, power inductors, [new] products and infrared sensors, and metal strip resistors. For 2014, we expect capital expenditures of approximately $170 million, following the midterm requirements of our growth plan. We generated crash from operations of $292 million versus $288 million in 2012.

We generated free cash of $144 million versus $147 million in 2012. I think we can really say Vishay remains a very reliable generator of free cash.

Coming to our major product lines, as always, I start with resistors and inductors. Vishay's traditional and most profitable business after a recovery in the first quarter continues on a good level. We enjoy a very strong position in the industrial and [middle] markets, and we are intensively penetrating the medical segment and focus on gaining share in Asian industrial markets.

Sales in the quarter were at $189 million, 6% above prior quarter and 22% above prior year, 17% above prior year when excluding the MCB acquisition. The book-to-bill ratio of 9 -- we saw a book-to-bill ratio of 0.95, like in prior quarter, which keeps the backlog at a quite normal level of 2.8 months.

Gross margin was at 32% of sales, up by 2 points versus prior quarter, mostly due to higher volume. Price decline in resistors and inductors was modest. We have seen 0.5% price decline versus prior quarter and 1.8% price decline versus prior year. Some acceleration is there year over year due to the impact of 80 new customers, for instance, in Asia.

Inventory turns were at excellent 4.6. Our acquisitions in the field of specialty products, Huntington, Hi-Rel, [ENT, Langley], MCB, continue to be successful. We achieved in 2013, $81 million in sales at a gross margin of 27% and third quarter for run rate of these acquisitions is $100 million of sales.

Coming to capacitors. This business is based on our broad range of technologies, with a strong position in European and American market niches. The business in 2013 has suffered from some economic slowdown, in particular, in the renewable energies and from partially still high inventory levels of distribution. It now experiences some signs of recovery. Like in resistors, we start to focus on Asia, China, mainly for power applications. Sales in the quarter were $110 million, 3% below prior quarter but 2% above prior year.

Book-to-bill in the quarter was 1.07 after 0.93 in prior quarter. This increases the backlog to a normal level of 3.1 months. Gross margin was at 20% of sales, up by 1% versus prior quarter. The selling prices remained fairly stable. The price decline was minus 1% in -- versus prior quarter and minus 2.1% versus prior year. The inventory turns improved to 3.5. We remain confident in view of increasing power and midterm also, including energy applications. We see, first, tangible success in China, with power capacitors in locomotives and energy transmission.

Coming to Opto products. Vishay's Opto business consists of infrared emitters, receivers, sensors, couplers, as well as LEDs for automotive applications. It contains a substantial share of customer design products, mainly sold to automotive and industrial markets. This financially very successful business has demonstrated robustness also in economically more difficult times. It represents one of Vishay's growth opportunities, especially in the area of sensors and high-performance couplers.

Sales in the quarter were $57 million, 1% below prior quarter but 11% above prior year. Book-to-bill was 1.05, after 1.03 in prior quarter. Backlog is at a normal level of 2.8 months. Gross margin came in at 31% of sales after an exceptional 36% in prior quarter, impacted by a reduction of inventories and a less favorable product mix. Quite excellent inventory turns in this division of 5.5. There is modest price decline, 0.2% versus prior quarter, very stable, and minus 1.8% versus prior year. We continue to increase our technical staff in order to support growth.

Diodes. Diodes represent a broad commodity business where we are the largest supplier worldwide. Vishay offers virtually all technologies as well as the most complete product portfolio. We are leading, in particular, in power applications. The business presently is a stable situation. Sales in the quarter were $141 million, at the level of the prior quarter but 20% above prior year. Book-to-bill was 0.98 after a 1.01 in prior quarter; the backlog is at a solid level of 3.2 months.

Gross margins in diodes was 21% after 23% in prior quarter, again, negatively impacted by a reduction of inventories. Inventory turns at, were at excellent 4.6. Price decline, relatively modest these days, minus 1.2% versus prior quarter, minus 1.9% versus prior year.

The announced restructuring programs are in process and implementation and these two programs were the move of modules assemblies from Italy to Asian subcons and the integration of external wafer supply for thyristors and large diodes. Savings are expected to begin middle of the year.

Coming to MOSFETs. Vishay continues to be one of the market leaders in the segment of low-voltage MOSFETs and [diode and wafers] to complete our product offering also in high-voltage products. The originally predominant Asian business with customers in computers and phones over the years has been expanded successfully to automotive, which now helps to balance the decline in laptops and PCs.

Sales in the quarter were $118 million, 2% above prior quarter and 13% above prior year. The book-to-bill ratio of 0.96 -- was 0.96 versus 0.90 in prior quarter. Backlog in MOSFETs has had a solid level of 3.1 months. Gross margin was 12% of sales, impacted negatively by a reduction of inventories and by additional depreciation as a consequence of the announced restructuring program. Without these effects, the gross margin would have been at 15% of sales.

There are good inventory turns at MOSFETs at 3.9; price decline has slowed 0.2% versus prior quarter and 5.3% price decline versus prior year. We started to implement a major restructuring program, which targets the move of substantial volume, from a 6-inch to an 8-inch fab and will be fully implemented by the first quarter 2016.

Let me summarize. For the electronic industry in general and for the manufacturers of components in particular, the year 2013 has not been bad. Vishay's results were decent, and the ongoing strong generation of free cash added another time to our solidity and financial flexibility.

But unfortunately, like the year before, 2013 did not provide the amount of tailwind most of us had hoped for. What has to be highlighted though is the substantially growth confidence across the board -- growing confidence across the board at the beginning of 2014, vis-a-vis the last two years.

I believe that Vishay, in case of a real upturn, will be very well-positioned, by increased machine capacities in critical lines enabling a faster reaction to higher demands, by being better positioned in Asia and China, by increased technical resources, and an improved potential for organic growth, by our broad and innovative product portfolio, and by our strong position in worldwide distribution.

We practically have defended the level of contributive margin during recent years and also kept increases in fixed costs low by adding technical resources. There are plans for further cost reduction.

We therefore can be expected to benefit largely from a real upturn, and so will our shareholders by better earnings per share, by the newly introduced quarterly cash dividends. The programs of stock repurchase in recent years also underline our commitment to the shareholders. On top of everything, Vishay remains committed to outgrow the market, also by further acquisitions, preferably of specialty businesses like Hi-Rel in 2012 and MCB in 2013.

All in all, I expect a good year, 2014, which starts promising. For the first quarter, guide to a sales range of between $580 million and $620 million, 7% above prior year with margins in line with this volume. Thank you very much.

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

(Operator Instructions)

Shawn Harrison.

Good morning, or good afternoon. Just the gross margin guidance, to be clear. Is that -- are you saying flat sequentially ex the environmental -- or ex any one-time charges, or are we looking for a different gross margin percent number? I was a little bit confused. I apologize.

Well, it's a normal procedure. So you take the different volume times the variable margin and assume, make some assumptions on the fixed costs. So it's equivalent, basically, given the volume. I don't normalize for the volume.

Okay. And then two brief follow-ups. Just the restructuring savings amounts. I know there's a lot of moving pieces, but is there an actual dollar amount of restructuring savings that we should anticipate benefiting Vishay in the second half of this calendar year?

I know when everything is implemented, we have annualized savings of $36 million exactly. This will come in pieces, obviously. The first savings start [middle] of the year, but the major program related to MOSFETs will only kick in to the full extent then after the first quarter of 2016.

Okay. And then just your commentary on distribution. That book-to-bill being above parity, was that for the month of January?

No, this was for the fourth quarter. We have seen book-to-bill -- our distributors with our products, obviously, have seen a book-to-bill of 1.4 in their business, which is promising.

Okay. I guess following up on that, and I know January can be a little bit cloudy because of the holiday in China, but what have you seen in terms of the sale experience so far in the quarter? Any anomalies, I guess, is the question?

Okay. January is not perfect month, especially not at this year, because, as you said, because of the anomalies. But I would say looking at the business in January, no surprise. It's according to what we think.

Okay. Thanks much and congratulations on the quarter as well as the dividend announcement.

Ruplu Bhattacharya.

Just following up on the last question. Now that you have the dividend, how does that change your preference for M&A versus share buybacks?

It depends. Now, first of all, we have our plans to grow. The first priority and we wouldn't have gone to a cash dividend if we felt -- if we had felt that our plans -- M&A plans would have been impacted negatively. So rest assured, this is independent, both are independent. Concerning another stock buyback, there's no real consequence, no real connection either. But in the first approximation, it's an independent step.

That make sense. And then when we -- talking about distribution, in terms of orders that you got, was there relative strength in one region versus the other? Was Asia -- Asian distributors, were they stronger than Europe? And is that trend continuing?

It's obviously the same in reality. The surprise always comes from Asian distribution, to be honest. Our negative surprises like positive surprises. The oscillation is in Asia. The strongest, it is a systematic thing. Again, it happens like that. You are right. It came from Asia distributions in a strong way. But not only; it's in general, but Asian distribution, of course, given the decision there, had the biggest impact.

And then just looking at the various end product lines, can you give us a sense for which product line in the March quarter currently you are seeing strengthen versus which ones are weaker?

Well, as a matter of fact, the first quarter normally, we have some seasonality. In the first quarter, it's always more dominated by Europe vis-a-vis the others. The last quarter is normally dominated by Asia. So as we are especially strong with Passives in Europe, I would suspect that the Passives will do the best in the first half -- in the first quarter, may I say, as always.

Okay, all right. That's all I had. Thank you again, and congrats on the good quarter.

Steve Smigie.

Great. Thank you. I just wanted to follow-up -- sorry if I missed this, but -- so what should we be thinking about operating expense for in the March quarter?

$96 million, we said, yes.

$96 million, okay, sorry about that. And then it sounded like the restructuring efforts were a little bit slower maybe than expected in the fourth quarter, if I understand that correctly. And how should we be taking cost out over the course of 2014, do you think? Based on how you've seen the things that [build up] so far?

It's a misunderstanding. There was no disappointment in the fourth quarter. We didn't anticipate much in the fourth quarter. We announced [a brief delay] in the quarter. I have no doubts that everything will work at least according to plan. I believe that most of it, as we said at the last conference, will be implemented by middle of the year.

Okay. And then how should we think about gross margin going forward? As the volumes pick up, should we expect you guys could get to maybe 27% gross margin or something like that, I think you said in the calendar year?

I didn't calculate it, but it's the same business model. You can -- our contributive margin is not a secret. It's around 45%, 46%, in between. And then you're really -- in fixed costs exposed to inflation, with some cost reduction on top. I think 27% is a stretch. I didn't make the calculation. It needs a lot of volume to get there. But 25%-plus, yes, sure, possible.

Okay, great. And then your overall tone sounds pretty decent in terms of trends overall. Is it a particular region as we look out over the next year that's giving you some of the confidence, or is it more Europe stabilized and you do a lot of business in Europe and that's what's better?

That for us, industrial is important. It's automotive, but in particular, industrial, that is important for Vishay. Okay, we sell to everything but this is the heart of the business. As you said, especially in Europe, industrial was not doing well in the last two years. There are signs of improvement, especially since in Europe, there for us, the most biggest part of the business. So this is really what carries our hope in particular.

But let's not forget, we try, we try really, seriously to get into China and the industrial markets. We have people on the ground. We have substantially increased our sales efforts there, so I do have to count, and I do expect some improvements also from China.

Okay. I guess if we look at what's happening in some emerging markets, Turkey, Argentina having issues and the equity markets have been somewhat troubled by that, I'm just curious your thoughts as boots on the ground. What do you see in terms of some of those markets, would that necessarily impact you overall, and do you think that we can see you sustainable?

I think it would be superficial to say it doesn't impact us at all. There is always something, a little, but first approximation, maybe even second approximation, it doesn't impact us. Indirectly, maybe in the end, a little, but I don't know. It's really not the focus of our business. Our business is Americas, China, Germany, and [Asia].

Matt Sheerin.

Yes, thanks. Matt Sheerin from Stifel. So Dr. Paul, just on your guidance, it sounds -- you sounded relatively positive, but you're guiding down sequentially about 2%. I know seasonally, you're typically up in the Passives business in the low to mid single-digits on industrial picking up, more selling days in Europe, distribution picking up. Is that how we should think about that business and the semiconductor, the diodes, and the MOSFETs business will be down after what seemed like a little bit better quarter than you had expected there?

It's not so that I didn't expect the [quest], to be honest with you. As a matter of fact, our real comparison should be vis-a-vis the same quarter last year. In this case, you really see a difference and maybe a reason for my optimistic tone. We start into the year 2014 much better than in the year 2013. Now our sales is up, our backlog is up, both are up. The fact that we are guiding down somewhat vis-a-vis the fourth quarter was also, must -- I must state it openly, that the fourth quarter was exceptionally strong.

Of course, you can always be pleasantly surprised and you can call it somewhat conservative maybe, but this is our best opinion. We had no specific reason to guide down; it was basically vis-a-vis prior year. We started a stable and solid way up and vis-a-vis the fourth quarter, it was maybe a little conservative, maybe.

Okay, okay, so both segments would be down, just so we were flat but down, basically, is that how you're looking at it? Both segments?

Yes, basically.

Okay, okay. Then on the dividend, as you stated, $34 million -- or $35 million a year is still a fraction of what you plan to generate every year. So I would assume that this does not change your M&A strategy and your focus on that $50 million to $100 million type of tuck-in acquisition opportunity?

No, as I said before, it's growth, also through acquisitions, has a high priority. You would not have come to a dividend if you would have to fear that paying out a dividend would impact negatively our plans, our growth plans. So you are absolutely right. It will not impact our plans.

Okay. Just lastly, I know you sounded like you said the Asian distributors were willing to take a little bit more inventory, but other suppliers are talking about US and European distributors still relatively disciplined. And we've seen inventory fairly tight because as lead times are still short and they're still relatively cautious. Are you finding that as well or are they starting to open up?

Completely agree. The positive development I highlighted in one of the questions before Asia but it's -- but on the other hand, in quarter three, this was the disappointment really. But looking at the rest of distributors, it was also a very solid quarter, but of course, not the same amplitude. And you are right, people are very disciplined at the moment.

(Operator Instructions)

Jim Suva.

Congratulations to you and your team there at Vishay. A quick question. I think the dividend will be very welcomed by investors. Can you walk us through any type of capital allocation or methodology, are you going to peg this 2% of cash flow or net income or a certain percent that we should think about capital allocation?

Okay. I think I will turn over to the CFO, [Lori]?

Good morning, Jim. At this point in time, this was, as you know, our first ever cash dividend. And so at the moment, I don't think that I could comment directly on that strategy. It will be up to the Board to make that decision going forward. As I said in my prepared remarks, they will make that decision each quarter for the amount that will be distributed in that quarter. At this point in time, it was a best estimate also in discussion with the Board yesterday, but I couldn't comment further.

Okay. As a follow-up on a different topic, on the environmental item, is it now over or is there still some lingering exposure or expenses or how should we think about the environmental item?

The additional environmental charge was related to two ongoing remediation sites, and we do a periodic review, semi-annually. It was just something that came up that it turns out it's going to be slightly more expensive than originally anticipated. So it's not a new site. At the moment, we think it's fully covered.

Thank you, and congratulations to you and your team.

At this time, there are no further questions. I will now turn the conference back to Mr. Henrici.

Thank you for your interest in Vishay Technology -- Intertechnology and that concludes our call.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect your line.