威世科技 (VSH) 2014 Q3 法說會逐字稿

Good morning and welcome to the Vishay Intertechnology third quarter earnings conference call. My name is Crystal, and I will be your conference moderator today.

(Operator Instructions)

I will now turn the conference over to meet Mr Peter Henrici, Senior Vice President Corporate Communications. Thank you. You may begin your conference, sir.

Thank you, Crystal. Good morning and welcome to Vishay Intertechnology's third quarter 2014 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 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 will reserve time for questions and answers. This call is being webcast from the Investor Relations section of our website at www.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 Q3 2014 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 Tuesday, November 18 at the Mizuho conference in New York. Now I 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 Q3 of $638 million, within the range of our guidance. Exchange rates negatively impacted the top line by $6 million quarter-over-quarter.

GAAP EPS for the quarter was $0.17. The third quarter includes charges of $3.5 million related to our previously announced cost reduction program and $15.6 million related to our US pension settlement charges. Excluding the effect these items and the related tax impact, adjusted EPS was $0.26 for the quarter.

During quarter three, we completed two partial settlement transactions related to our US qualified pension plan. We settled the obligations approximating $59 million funded entirely with plan assets. The primary purpose of these actions were to reduce investment and interest-rate risk associated with our pension plans, although we do expect some future cost savings as a result of the successful completion of these transactions. As a direct result of these actions, in Q3 we recorded a non-cash special charge of $15.6 million representing previously unrecognized actuarial items.

In September we acquired 88.95% interest in Capella Microsystems through a successful tender offer. Capella is a fabulous IC design company specializing in opto-electronic sensors that is listed on the Taiwan stock exchange. We expect to acquire the remaining shares by a merger vote of share holders and expected to be completed by January 2015. We funded the acquisition with $53 million of borrowings on our revolving credit facility and $127 million of cash on hand.

The borrowing on our revolving credit facility allowed us to achieve a legal entity structure which provides optimal future flexibility. The planned acquisition of the remaining 11% through merger vote will be funded with approximately $22 million of cash on hand. Capella had cash and short-term investments of approximately $60 million on the date of acquisition. The total acquisition price net of cash is figure to be $152 million.

Capella has been included in Vishay's consolidated financial statement since the completion of the tender offer with the 11.05% interest that we do not own presented as non-controlling interest. Our consolidated balance sheet reflects our preliminary purchase accounting which will be refined during the fourth quarter. A significant value has been ascribed to amortizable intangible assets.

Based on the preliminary purchase accounting allocation, we expect the yearly amortization cost to be approximately $10 million. Capella contributed approximately $3 million of revenues to the quarter for the period subsequent to the successful tender offer. The EPS impact was negligible.

Revenues in the quarter were $638 million down by 0.6% from previous quarter and up by 5.9% compared to prior year. Gross margin was 24.8%; operating margin was 7.1%; adjusted operating margin was 10.1%. EPS was $0.17; adjusted EPS was $0.26, [EBITDA] was $89 million or 14.0%. Adjusted EBITDA was $108 million or 17.0%.

Reconciling versus prior quarter, adjusted operating income in Q3 2014 compared to adjusted operating income for prior quarter based on $4 million lower sales or $2 million higher excluding exchange rate impacts including acquisitions of $5 million, adjusted operating income decreased by $2 million to $65 million in Q3 2014 from $67 million in Q2 2014. The main elements were average selling prices had a negative impact of $6 million representing a 0.9% ASP decline.

Volume increased with a positive impact of $3 million. Reconciling versus prior year, adjusted operating income quarter 3, 2014 compared to prior year based on $35 million higher sales were $34 million higher excluding exchange rate impacts including acquisitions of $5 million, adjusted operating income increased by $12 million to $65 million in quarter three, 2014 from $53 million in quarter three, 2013.

The main elements were average selling prices had a negative impact of $17 million representing a 2.6% ASP decline, volume increased with a positive impact of $25 million representing an 8.7% increase. Variable cost decreased with a positive impact of $13 million primarily due to cost reduction efforts, efficiencies and lower metal and material prices which more than offset the increase of labor costs. Fixed costs increased with a negative impact of $9 million.

This increase includes from acquisitions $3 million, including the amortization of intangibles, additional depreciation related to our MOSFET restructuring program, $2 million. This additional depreciation -- depreciation is expected to continue until the finalization of the restructuring program end of Q1 2016, and from compensation related expenses $2 million. Selling, general and administrative expenses for the quarter were $94 million, slightly lower than expected primarily due to exchange rate impacts.

For quarter four, 2014 our expectations are approximately $98 million of SG&A expenses at constant exchange rates and including a full quarter of the Capella acquisition and it's related amortization of intangibles of $2.5 million. I'd like to give you an overview of our cost reduction programs. As we announced last October, we are implementing some targeted cost reduction programs.

The first is our MOSFET enhanced competitiveness program which will have cast costs of $16 million with annualized savings of $23 million at current volumes when fully implemented. The program will occur in steps through Q1 2016. The long implementation is primarily due to automotive qualification complexities. Meaningful savings are not expected until the program is nearly completed.

The restructuring charges are recognized ratably during the implementation period. Q3, 2014 includes $1.5 million of severance related to this program. The second is our voluntary early retirement program. All of the voluntary participants have been identified and have left or will leave the Company in the next few months. The total charges related to this program were $12.7 million.

We expect this program to have annualized savings of $10 million. We achieved savings of approximately $2 million in quarter three. The benefits of the program are expected to be fully realized by quarter four, meaning $2.5 million per quarter. The savings are expected to be split been cost goods sold and SG&A approximately 35% and 65%.

The third program, our minor activities within our diode segment. We recorded approximately $2 million of severance costs in quarter three related to this program. Total costs are expected to be approximately $3 million with annualized savings of $3 million. These activities are expected to be completed in Q1 2015. We expect our normalized tax rate for 2014 to be approximately 31%. Compared to the amounts recorded for the first six months, the variation for anticipated normalized rate is less than 25 basis points.

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. The GAAP tax rate for quarter three which includes the tax impact of the charges related to our restructuring program and US pension transactions was also approximately 31%.

Total shares outstanding at quarter end were 148 million. The expected share count for EPS purposes for the fourth quarter 2014 based on the average stock price fourth quarter to date is approximately 152 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 $98 million; capital expenditures for the quarter were $37 million; proceeds from sale of assets were $1 million; free cash generation for the quarter was $61 million. For the trailing 12 months, cash from operations was $310 million; capital expenditures were $152 million, split approximately for expansion $68 million, for cost reduction $21 million, for maintenance of business $63 million. Proceeds trailing 12 months from the sales of property and equipment were $3 million. Free cash generation was $161 million.

Vishay has consistently generated in excess of $100 million 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 three was at $598 million or 2.8 months of sales.

Inventories decreased quarter-over-quarter by $2 million excluding exchange rate impacts and the acquisition of Capella. Days of inventory outstanding were 86 days; days of sales outstanding for the quarter were 43 days; days of payables outstanding for the quarter were 30 days, resulting in a cash conversion cycle of 99 days.

We had total liquidity of $1.6 billion at quarter end; cash and short-term investments comprised $1.113 billion and unused capacity on the credit facility was $445 million. The breakdown of our debt of $441 million was $187 million outstanding on our credit facility, $39 million of exchangeable unsecured notes due in 88 years, $215 million of convertible debentures net of unamortized discount issued in three tranches and due in 27 -- 26, 27 and 28 years respectively.

The principal amount or face value of the converts is $575 million. No principal payments are due until 2018, however, the convertible debentures may be redeemed if certain stock price specials are met. At the end of quarter three, the convertible debentures due in 2042 are redeemable for the next quarter. Accordingly we have reclassified the difference between the carrying value and the principal amount for these debentures from stockholders' equity to a separate line between liabilities and equity on our consolidated balance sheet.

If the debentures are converted we would fund the principal my with borrowings on our revolving credit facility and net share settle 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.

Thank you, Lori, and good morning, everybody. The third quarter for Vishay has been a fairly solid one. Operational results stabilized on the good level of the second quarter whereby in particular contributive margins held up nicely. We in a considerable way generated cash, and we started to integrate the [respectiverly] closed two strategically important acquisitions quite in line with our growth when.

Vishay in the third quarter achieved a gross margin of 25% of sales, adjusted operating margin of 10% of sales, adjusted earnings-per-share of $0.26, GAAP earnings-per-share of $0.17 and free cash of $61 million. Let me talk about the economic environment as we see it. In the third quarter the general climate in our market remained fairly friendly. Although some political and macroeconomic turbulences started to impact the high confidence levels [fared still] in July.

Distribution mainly in Asia, despite virtually flat POS levels, started to react in view of their increased inventory levels and produced orders to their suppliers. Inventory transit distribution reduced to 3.4 after 3.6 in prior quarter from regional detail in the Americas to 2.3 after 2.4 in the second quarter, in Asia 4.5 after 4.8 and in Europe, 3.5 after 3.8.

The US market presently appears relatively stable. Macroeconomic conditions in Europe indicate reduced growth. The Asian market continues to grow faster than Europe and the US with some pressures in selected areas.

Automotive remains strong in all regions, but the record growth rate of several recent quarters is likely to slow down to a degree. Industrial sees modest growth in the Americas, a mixed picture in Europe but continued strength in Asia.

Mobile phones are expected to be up by 20% year-over-year with the Chinese manufacturers gaining share. Notebooks for now seem to have stabilized. Fixed telecom driven by [for chili] continues to be a long-term growth market. The consumer segment remains soft in general but with growing opportunities in new product areas such as variables.

Depending on the program, military continues to be slow whereas medical remains solid. Business development of Vishay, sales in the quarter came in slightly below the midpoint of our guidance. A strengthening US dollar and lower than expected shipments for distribution impacted our topline. We achieved sales of $638 million in the quarter versus $642 million in prior quarter and $603 million in prior year.

Excluding exchange rate effects and acquisitions sales were marginally down over prior quarter by $2 million or 0.3% but up versus prior-year by $29 million or by 5%. Book-to-bill ratio in the third quarter was 0.91 versus 1.0 in the second quarter, 0.86 for distribution after 1.03 in the second quarter, 0.97 for OEMs same number last quarter, 0.88 for actives after 1.06 in the second quarter, 0.95 for passives after 0.94. 0.92 for the Americas after 1.05 in the second quarter, 0.87 for Asia after 1.01 and 0.95 for Europe after 0.97.

Looking at all these numbers again we see I would call it seasonal cautiousness of Asian distributors impacting predominantly our actives. Backlog during the third quarter decreased to 2.8 months, 3.0 month in actives and 2.6 in passives. Order cancellations remain at a low level.

The price pressure we are seeing in the third quarter was normal. We experienced ASP decline of 0.9% versus prior quarter and of 2.6% versus prior-year. There was a normal ASP decline for the actives with 1.4% versus prior quarter and 4.2% versus prior-year. And there was a low ASP decline for the passives with 0.3% versus prior quarter and 0.8% versus prior-year.

Let me give some highlights of our operations. Contributive margin in the quarter came in within our traditional range of between 46% and 48% of sales. SG&A costs in the quarter were at $94 million, according to our expectations when excluding exchange rate effects. Manufacturing fixed cost for the quarter were at $131 million like in the second quarter and according to our expectations.

Total employment at Vishay virtually remained unchanged despite the Cappella acquisition. Headcount reduced slightly to 23,060 heads from 23,080. Inventory turns in the quarter remained at a satisfactory level of 4.2.

Excluding the impact of exchange rates and of acquisition inventories in the third quarter reduced marginally by $2 million, capital spending in the quarter was $37 million versus $44 million in prior year, $18 million for expansion, $3 million for cost reduction, and $16 million for maintenance of business.

For the year we now expect capital expenditures of approximately $160 million. We generated in Q3 cash from operations of $98 million versus $86 million in prior-year, $310 million on a trailing 12 months basis. We generated in the third quarter free cash of $61 million versus $42 million in prior year, $161 million for the trailing 12 months. We expect another solid year of free cash generation, which has become kind of a tradition at Vishay.

Let me go through the product lines and they start as always with resistors and inductors. Vishay's traditional and most profitable business continues on a good level whereby in particular inductors grow steadily. Our traditional business with power inductors as well as the acquisition of HyRel which is active in the field of magnetics.

With resistors and inductors, we enjoy a very strong position in the industrial, auto and [med] markets. HyRel has a very strong position in the medical segment. We continue to see opportunities for substantial growth in the Asian predominantly Chinese industrial markets and experienced first successes in thin film and thin film power resistors. Power inductors in [Diodes] grew nicely in Asia.

Sales in the quarter for this product group were $190 million, close to the level of prior quarter but 7% above prior-year when excluding exchange rate effects. Book-to-bill in the quarter was 0.98. The backlog reduced slightly to 2.6 months. Gross margin in the third quarter remained at a very satisfactory level of 31% of sales. The price decline for resistors and inductors continues low, 0.3% versus prior quarter and 2.2% down versus prior-year.

For the most part, the price decline in resistors and inductors is caused by adding customers in Asia. Inventory turns remained an excellent 4.4, our acquisitions of Huntington, HyRel and MCB continue to be successful with a run rate of sales over $100 million and growing, especially due to HyRel. And the integration process for MCB in France progresses.

Talking about capacitors now. Our business with capacitors is based on a broad range of technologies, with a strong position in American and European market niches. The business since last year suffers from a slowdown in the renewable energies in combination with quite slow (mean) markets. Also our expectations for the high power caps did not materialize to the full extent yet.

Successes in Asia have been partially offset by a presently low activity level in Europe. Sales in the third quarter were at $107 million. Sales were 5% below prior quarter and 7% below prior-year, which excludes our recent acquisition of Holy Stone and exchange rate effects. The book-to-bill ratio in the quarter was 0.9 after 0.88 in the prior quarter. The backlog decreased to 2.7 months.

Gross margin for capacitors decreased substantially to 19% of sales coming from 24% of sales in the second quarter due to lower volume, and less favorable product mix and the impact of inventory reduction. And we also had to absorb in the quarter start up costs related to the acquisition of Holy Stone. Selling prices are stable and better than in prior-year.

They were down by 0.3% versus prior quarter but up by 1.8% versus prior-year. We remain confident for this product group, especially in view of our opportunities in China and for the midterm based on Holy Stone's technology which will allow Vishay to penetrate the polymer tantalum market. Coming to our Opto business, Vishay's business with Opto products consists of infrared emitters, receivers, sensors, and couplers as well as LEDs for the 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 Cappella, a leading design house for chips used in IR sensors will strengthen our position and our potential for expanding this promising business return.

In our traditional markets, auto and industrial, as well as in mobile phones which up to now is Cappella's primary focus. Sales in the quarter for Opto increased further to $68 million, 3% above prior quarter and 14% above prior-year excluding exchange rate impacts as well as the Cappella acquisition. Book-to-bill in Q3 was 0.96 after 1.04 in prior quarter.

The backlog is at three months. Gross margin remains at an excellent level of 36% of sales. This product group shows quite excellent inventory turns of 5.0, and we are seeing normal ASP decline of 2.3% versus prior quarter and 2.2% versus prior-year. Beyond the Cappella acquisition we continue to increase our technical staff in order to support [Cove] working on an increasing number of design in projects.

Coming to 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, and we in particularly are leading in power applications. In the context of our growth plan, we have decided to invest in manufacturing capacities ahead of demand for our innovative SMD packages.

Sales in the quarter were at $151 million, 2% above Q2 and 7% above prior-year excluding exchange rate effects. The diodes business presently suffers from a temporary slowdown of orders from Asian distributors. Book-to-bill in the quarter was 0.89 after 1.07 in Q2. The picture is not unlike last year.

The backlog reduced to three months, gross margin increased further to 24% of sales after 23% in prior quarter. Inventory turns for diodes were at quite excellent 4.7, price decline was normal, a reduction of 0.8% versus prior quarter and of 3.2% versus prior-year.

MOSFETs, Vishay continues to be one of the market leaders in MOSFET transistors. The originally predominately Asian business with customers in computers and phones over years has been expanded successfully to automotive and recently to industrial.

And this now helps to balance the decline in laptops and PCs which recently has slowed down. Sales in the quarter were $122 million, 2% below prior quarter but 6% above prior year excluding exchange rate impacts. The MOSFET business like diodes in the quarter suffered from low distribution orders in Asia. Book-to-bill ratio was 0.83 after 1.05 in the second quarter. Backlog reduced to 2.9 months.

Gross margin of MOSFET deteriorated slightly to 14% of sales from 15% in the prior quarter due to lower volume and continues to be impacted negatively by additional depreciation as a consequence of the announced restructuring until the first quarter of 2016.

Inventory turns were 3.9. Price decline was in the normal range of 1.6% down versus prior quarter and 6.4% below prior-year. We are on the way to implement a major restructuring program which targets the move of substantial volume from 6-inch to an 8-inch fab including major reductions of fixed costs. We continue to expect full implementation of the program by the first quarter of 2016, and all this should enable us to reach gross margins in the area of 20% of sales.

Let me summarize. Vishay despite some hesitations manly from Asian distribution has delivered a solid quarter. We continue to defend our competitiveness in terms of variable margin, we kept fixed costs and inventories under good control and continue to invest in critical manufacturing capacities as well as further strengthening our Asian market presence.

Our restructuring programs are successfully completed or on schedule. With our last acquisitions we integrate important know how assuring growth for the mid- and long-term, and we are excited for this potential. And we continue to be excited about the opportunities the electronic market will really provide us with going forward.

For the current quarter we see reasonable market conditions with some slowdown of shipments of distribution. For the fourth quarter we guide to a sales range between $600 million and $640 million at margins corresponding to this volume. Thank you, we are open for questions.

(Operator Instructions)

Your first question comes from the line of Shawn Harrison.

Hi, everyone, good morning and good afternoon. First question on the guidance, if we look back to last quarter you saw a dip in the book-to-bill ratio during July. You had some confidence at the time of the earnings call. And yet you saw a shortfall particularly in Asia exiting the quarter. What gives you the confidence in terms of the guidance for this quarter given the low book-to-bill ratios?

As a matter of fact we guild below the third quarter, and the picture's not dissimilar from last year altogether. And we do believe that distribution will continue to reduce some inventories but not endlessly so I do believe that the number we are guiding to is a realistic one.

I guess to that, how is the book-to-bill ratio track through most of October here relative to what you witnessed last year?

Better than on average of the third quarter.

Okay. Second question has to deal with Capella. Could you give us an update on both the revenue run rate of the business, where it is right now versus your expectation for 2015? And then also what you would expect for either dilution or accretion from the business on an earnings basis.

Okay. Capella in the fourth quarter is expected to be a $10 million sales. Altogether in 2014, it will be slightly under $40 million. So it is substantially below prime, yes. We have -- Capella achieved $63 million.

On the other hand the reason is clear their main customer has difficult times -- sales. We expect for next year an improvement and a recovery to $50 million to $60 million so close to the levels they have been in the year 2013. I think what we can say about Capella at this point, their breakeven point is relatively low. So they start to make money already above $25 million to $30 million so we do believe that they will contribute nicely.

Okay, so breakeven is $25 million to $30 million of revenues?

Yes.

Okay. That's it for me I will hop back in the queue. Thank you, Dr. Paul. Thank you.

Your next question comes from the line of Steve Smigie.

Thanks Dr. Paul. I was hoping you could give a little bit of color. If I'm looking at the math right it seems like consumer was somewhat weak, I think you touched on that a little bit, but [Calico] was a little bit strong. Can you give a little bit more color on each of those markets and what drove this?

The comments on the third quarter on the markets?

Yes for consumer and Calico.

Automotive as I expressed continues strong. I know that there is some hesitations around, but all the feedback we get is there is no reduction of automotive. We received continuously strong maybe this explosive growth over this last year say several quarters will not continue to the same extent, because we do not foresee a weakening really of automotive at all. Industrial is a different story. In America and especially in Asia it is going well. In Europe, so so.

It depends on the country, but the overall situation of industrial in Europe is definitely worse than at the beginning of the year. I think we have to state that. Mobile phones are running well. China takes share, Chinese manufacturers, Notebooks, not a good year of course but no end in (inaudible) as was feared for a year ago I think.

Fixed telecom is okay, it's fine, it's a growth market. Consumer is relatively weak which impacts Asia, but there are some opportunities as I said. Military is not really bad but relatively slow and medical is strong. This was our judgment.

Okay great and just to follow-up on Europe, so you guys overall probably have the best meaningful exposure of any of the companies I follow anyway and just given your strong relationships there, is it your feeling that this softness is more temporary? You've got obviously European Central Banks being pretty aggressive on liquidity. Do sense that the concerns around Ukraine and Russia are significant, or what are you feeling in terms of how long the softness may last?

That said I maybe not --I don't know the future itself. But as a matter fact you see Europe and industrial has two faces like in many other industries. We have a very strong position in central Europe, Germany, Scandinavia and a very weak situation in the southern countries of Europe. So what is slowing down at the moment unfortunately is the strong part of it, Germany, Central Europe, but still working on a high level so do not be misled.

Essentially European countries have nearly full employment and this would not be possible without reasonable, industrial industry situation. So what we are talking is a slowdown on a high-level. How long this will last (inaudible) for of course there is some impact of the turbulences which we see. On the other hand as far as I know, the Russian business is not so important for the Central European countries as somehow newspapers sometimes claim.

So I would say what we see, the fundamentals haven't changed. I would expect that this industrial in Europe will recover. If I had to give a time I don't know of course, but if I had to give a time in half a year looks different.

Okay thank you and certainly on the Asian distribution, it seems like that could be just a temporary issue there. Because you sound like your tone on Asia overall is pretty good and if you look to your OEM book-to-bill that's still pretty close to one, so just curious a little bit more detail on Asian distribution there.

Internally speaking we build it now into our budget cycle. It's now the third time in a row that it happens and there's always in the second half of the third quarter that Asian distribution becomes concerned about the inventories. They reduce the inventories in the fourth quarter and part of the first quarter, and then they restart ordering. This has been now the third time in a row, so I'm not concerned because as a matter fact, the POS of distribution is not bad. So it's an inventory correction which has obviously an end.

Great and last question is just on the currency. Obviously you've got some hit here, but assuming as you say Europe starts regaining traction in a few months, you in the past have typically also had a big pop to the upside as that gets recovered. Any reason to think we wouldn't see that currency tailwind as we get into better times?

I don't know. If I understood your question right. The currency changes, and we are talking dollar versus euro I guess, but currency changes only impact our top line and of course it's obvious because we are sending invoices in euros and US dollars. A weak euro reduces our top line but it reduces also our costs in Europe and it happens to be effectively in the first approximation operating margin in Vishay's independent of the euro dollar exchange rate.

Right and the question is on the top line. As -- if we were to see the euro strengthen again, as you say, since you invoice euros you would expect to see the revenue benefit from that.

But of course. But of course. Approximately one-third of all our sales, maybe 30% is in euros, so it's obvious.

Right, perfect. Okay, thank you.

Thank you.

Your next question comes from the line of Harlan Sur.

Thank you for taking my question. On the Asia [disti] in Q3, obviously as you've mentioned and several people have mentioned it looks exactly the same pattern you saw last year but similar to last year was Asia disti weakness more centered around Notebooks and consumer? Can you just help us understand what are the end markets that drove the inventory work down in the channel in Asia in Q3?

We never could -- it was Notebooks the year before it's true. But this time I would not put any emphasis on any of the segments, as a matter of fact. Notebooks again is part of it for sure, but it's a little general. There is no real focus as far as my judgment goes.

Okay. And then your guidance for revenue is down about 3% sequentially at the midpoint. Is it just more follow-through from disti work down in Asia or is there a bit of a broadening out of the weakness into other geographies?

I think the most important impact of our guidance is the expected lower shipments of distribution in Asia, again. Yes.

Okay. And then just my last question, I appreciate it. Despite the inventory work done in Asia I think you mentioned that POS was actually okay. As you've have tracked the quarter here through the first month of Q4, have the POS trends also remained about in line with what you would normally expect?

I am -- yes, not tracking that on a monthly basis really. But we have no reasons to assume it to be different. No reasons.

Okay, great, thank you very much.

Your next question comes from the line of Matt Sheerin.

Yes good morning everyone. Couple of questions for me, Dr. Paul. Your commentary on the order book-to-bills in Asia, does that have anything to do with lead times? I know there was some stretching of lead times for certain products earlier in the year. Have they come in? Could you just broadly talk about lead times and how that might have been impacting order rates from distribution?

I'm not aware of significant longer lead times in the first half. We do have certain -- as a relates to Vishay, indeed we do have certain innovative packages in semiconductors SMD package mostly in diodes where our lead times are relatively long. But Matt I would not quote this as the reason for the present situation. It's again the same thing. Inventories came up too much for the taste of our partners and now they are correct. This is my picture.

It sounds like just talking about the fact that here we are three years in a row of missing your estimates for the third quarter based on Asia distribution and inventory, so is there just a different seasonal pattern and perhaps when you get your order book in Q2 you have to question what the true sell-through is going to be?

Yes. I do not disagree with you. It is really the third time in a row but you know, it doesn't have to be always the same. As a matter fact and our longer history indicated different stories, but now it's the third time in a row. Yes.

Got it. And regarding Capella, I know you've got a customer issue right now, but obviously the Company's got a lot of interesting design activity and footprint within the sensor market. Could you talk about Vishay's presence in sensors overall? I know in other parts of your business you've got sensor technology, so could you talk broadly about your strategy around sensors?

We have relatively successful Opto business, to say it modestly, it's one of our best businesses which comprises also of sensors. And in the last years we saw this segment of sensors growing nicely vis-a-vis other parts of the Opto business which to a degree came into a phase of more saturation. Sensors is a very broad and nice opportunity, but historically the acquisition we made to get into Opto did not have the possibility to design certain chips, this in a way hindered us also in expanding this business historically because our partner in this industry you can imagine very often -- also other priorities which is understandable to a degree.

And now we do believe and this is the major reason for me -- that Capella brings in to capability into Vishay which of course by nature of things will take some time to make these two parts work closely together. But I do believe this is the real future of our Opto business, to go in this direction, and we had to fix may I say this hole, and so we did.

Okay, thanks very much.

Your next question comes from the line of Jim Suva.

Thanks very much and congratulations. A couple questions on Capella. First did you say it was $10 million in the September quarter or December quarter?

This is the December quarter. And it is not dissimilar in the September quarter. It is about the same.

Okay and customer issue surrounding Capella. Were you aware of that at the time of acquisition that was built into the proceeds or the purchase price?

I cannot talk about names, but the fact that their main customer does not have a great year this was known to us, yes.

It was known to you correct?

Yes, very much so. As I tried to explain before, the Cappella acquisition is not an opportunistic acquisition for quick success. It's a very strategic acquisition which we had to make to support our best business and it is the Opto business after (inaudible) maybe. To support it in the relatively foreseeable future we had to do it. No question. The fact whether this major customer has good times or bad times does not impact -- would not and did not impact our decision.

And then can you help us about the SG&A operating expense outlook as you have Capella acquisition coming in you also have some restructuring going on as well as alignment. What should we expect for SG&A?

We are having $98 million -- we project $98 million for the fourth quarter. It is $98 million for the fourth quarter at present exchange rates of course. This has to be said always in the case of Vishay, because we do have substantial amounts of SG&A costs in euros. At present exchange it is $98 million, and for next year you have to take -- it's a combination, you have to take into account the inflation of course.

You have to take into account also the fact that we had some carryover from our cost reduction program, so I would suspect we did not budget it completely the whole thing, but it includes now Capella. We should be between -- in the year between $400 million and $410 million roughly including Capella and including also of course the amortization of intangibles of Capella.

Great. Last question on the distribution adjustment in Asia which has happened for the past several years, have those also added incremental pricing pressure on the Company?

No. It's a very good question. It's not the case simply. It's just a correction of [old] rates and then it entered to terms. Then you come to the beginning of February and the whole thing comes back and this will be the same thing. There was no impact on pricing.

I was going to say and also market share? Possibly no impact on market share?

No. Not to speak of. I think this present weakness of Asian distribution does not only to be seen at Vishay.

Great. Thank you for your time.

Thank you.

(Operator Instructions)

And your next question comes from the line of Ruplu Battacharya.

We've had a lot of questions on Asian distribution, but maybe I will ask it again. Dr. Paul, in the press release you talked about a temporary slowdown. I'm just trying to see when you say temporary do think its just that in the December quarter disti might -- in Asia might reduce their inventories, or do think this could also last into the first quarter?

If I take the last three years as an example then it will last during the fourth quarter and in January and then it will come back. And if you make a little calculation, what kind of terms they would like to have, our partners, and we can estimate always a constant POS how the inventory of distribution is likely then to go down then I think you come to the same conclusion. That it will last, say a quarter and a bit -- and a little bit and then it comes back. I think this was the picture of the last few years And I would not be surprised if it repeated itself again.

Okay and in 3Q if I understand correctly the POS was flat but inventory and distribution went down. At least in Asia in distribution is that correct?

Yes, (inaudible) go down. But really what we project is the fourth quarter, assuming constant POS and the sales levels to the POA which we expect, and then you come to certain reductions. And you can put this in relation to a potential target (inaudible) they have in terms and so you come to this consideration. But it would be normal in their own eyes after January say.

Okay, got it. Just a couple more quick questions. When we look at your manufacturing fixed costs, how should we think about that in 2015? What are some of the things that can drive it up or down?

First of all you have of course some inflationary impact. You have first of all will depreciation. Depreciation is more or less constant I would say, because we invest moe less on the same level. And this is out of the manufacturing fixed costs you have of course the depreciation portion, which is constant. And then on the people costs you have inflation.

The inflation is principally 3% per year approximately is an average -- is our average over the world, and then of course you do have some efficiency gains there. So I would not count on the full inflation. And then you have all the other fixed costs which is energy, supplies, et cetera. And then we also would expect to be a little bit low inflation. So you would expect an impact, say a slight increase as a matter of fact.

Okay. In terms of Capella you talked about $50 million to $60 million for the full year of 2015. Is there any seasonality to that business, or should we just take $10 million, $15 million per quarter?

No, there is seasonality. We start lower than that. No question. And it's a project business. We are not super experienced in this business, as a matter of fact. In this case in their bushiness it's a project business. It really depends on how these projects kick in, but I think it's not an unreasonable assumption that it grows through the year and we expect total between $50 million and $60 million.

Okay and then last one for me I think at a recent conference you or Johan spoke about a long term target growth of 5% year-on-year organically. I was just wondering if you can frame that in terms of what your expectation is for the market growth to be. And then I think related to that you also talked about including acquisitions. A growth of 6% to 8%. When you think about 2015 is Capella factored into that 6% to 8% or is that being counted as organic?

No. Capella is an acquisition. There is no question. Capella is an acquisition. You saw it because we used it for our existing Opto business. But this help to support for our existing Opto business does not take place overnight. We are working in automotives there very often, and this has qualification time, so even in the best case it will take two or three years until you see the impact of Capella on our traditional business. But we have to think long-term here I think.

Just to clarify what do you think the market is growing? Versus your 5% growth?

I would say probably between 3% and 4%.

Okay. And Capella would be that add-on in addition to your 5% growth, it will be factored into the 6% to 8% growth?

Yes, if you want so, yes, sure.

Okay. All right Thank you so much.

(Operator Instructions)

And your next question comes from the line of Shawn Harrison.

Two brief follow-ups. On a sequential basis how much of an impact is FX going to have on sales? For the fourth quarter?

I didn't catch that I'm sorry.

Euro depreciation. How much an impact on revenues will that have sequentially into the fourth quarter?

In the fourth quarter, we assume the same exchange rate as it has been in the third quarter. We always do it like that. But between the second quarter and the third quarter it was an impact of say $10 million or so and corrected $6 million -- $6 billion.

Okay and then just a clarification. The inventory correction in Asian distribution are you speaking solely of distributors based in Asia, or are you encompassing within that global distributor such as the [arrows] and [admins]

Also including those.

Thank you very much.

Thank you.

At this time there are no questions in queue. I will now turn the conference back over to the presenters.

Thank you very much for your interest in Vishay. This terminates our Q3 conference call. And I turn the call back to you, Crystal.

Thank you, sir. This concludes today's conference call. You may now disconnect.