威世科技 (VSH) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. I would like to welcome everyone to the Q1 2015 earnings conference call.

I would now like to turn the call over to Peter Henrici. Please go ahead.

Thank you, Terry. Good morning, and welcome to Vishay Intertechnology's first-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 first-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 questions and answers.

This call is being webcast from the investor relations section of our website at IR. Vishay.com. The replay for this call will be publicly available for approximately 30 days.

You should be aware that in today's conference call, we will be making certain forward-looking statements that discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements. For a discussion of factors that could cause results to differ, please see today's press release and Vishay's Form 10-K and Form 10-Q filings with the Securities and Exchange Commission.

In addition, during this call we may refer to adjusted 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 Q1 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.

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

Vishay reported revenues for Q1 of $593 million, within the range of our guidance. Exchange rates negatively impacted the top line by $19 million quarter over quarter.

GAAP EPS for the quarter was $0.20. Adjusted EPS was $0.21 for the quarter. The first quarter includes pre-tax charges of $1.4 million related to our previously announced cost-reduction programs. Revenues in the quarter of $593 million, down by 2.8% from previous quarter, and down by 1.5% compared to prior year.

Gross margin was 24.4%. Operating margin was 8.0%. Adjusted operating margin was 8.3%. EBITDA was $95 million, or 16.0%. Adjusted EBITDA was $97 million, or 16.3%.

Reconciling versus prior quarter, adjusted operating income quarter-one 2015 compared to adjusted operating income for prior quarter, based on $17 million lower sales, or $2 million higher excluding exchange rate impacts, adjusted operating income increased by $4 million to $49 million in Q1 2015 from $45 million in Q4 2014. The main elements were: average selling prices had a negative impact of $5 million, representing a 0.9% ASP decline; volume increased with a positive impact of $5 million; fixed costs increased with a negative impact of $5 million; and inventory increases had a positive impact of $9 million. Although significant to individual line items, exchange rates had no net impact on the adjusted operating income quarter over quarter.

Versus prior year, adjusted operating income quarter-one 2015 compared to prior year, based on $9 million lower sales, or $29 million higher excluding exchange rate impacts, adjusted operating income remained at the same level of $49 million. The main elements were: average selling prices had a negative impact of $13 million, representing a 2.1% ASP decline; volume increased with a positive impact of $20 million, representing a 7.5% increase, with $12 million coming from acquisitions; variable costs decreased with a positive impact of $6 million, primarily due to cost-reduction efforts, efficiencies, and lower material and metal prices, which more than offset the increase of labor costs.

Fixed costs increased with a negative impact of $14 million. This increase includes: from acquisitions, $6 million; from inflation, $6 million; reduced by cost reduction $2 million; a higher number of working days versus Q1 of 2014 for $2 million; and severance of a European rep for $1 million. Although significant to individual line items, exchange rates had only a $1-million favorable net impact on the adjusted operating income versus prior year.

Selling, general and administrative expenses for the quarter were $96 million. This includes a positive impact of $5 million due to [ex rate] impacts quarter over quarter. For quarter-two 2015, our expectations are approximately $96 million of SG&A expenses, assuming a $1.10 to EUR1 exchange rate; and for the full year, $384 million.

An overview of our cost-reduction programs -- our previously announced cost-reduction programs continue to be on track. Substantially all of the $1.4 million of restructuring expense for Q1 2015 is related to our MOSFETs enhanced competitiveness program, which will occur in steps through Q1 2016. As we have discussed previously, the long implementation is primarily due to automotive qualification complexities.

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. As announced, our voluntary retirement program and our minor diodes segment activities are substantially complete, and the anticipated benefits have been fully realized in Q1.

Both our GAAP and normalized tax rate for Q1 2015 was approximately 31%, equal to our expected tax rate for the full-year 2015. This expected tax rate is based on an assumed level and mix of income among our various taxing jurisdictions. A shift in income could result in significantly different results.

Total shares outstanding at quarter end were 148 million. The expected share count for EPS purposes for the second-quarter 2015, based on the same average stock price as the first quarter, is approximately 153 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 $13 million. Capital expenditures for the quarter were $20 million. Free cash for the quarter was minus $6 million.

For the trailing 12 months, cash from operations was $281 million. Capital expenditures were $157 million, split approximately for expansion of $71 million; for cost reduction at $16 million; for maintenance of business, $70 million. Proceeds trailing 12 months from the sales of property and equipment were $2 million. Free cash generation was $126 million.

Vishay has consistently generated in excess of $100 million free cash in each of the past nine years. Cash flow from operations were greater than $100 million for the last 20 years, and greater than $200 million for the last 13 years. Despite the slow start to the year, we still expect to generate cash in line with our history.

Backlog at the end of quarter one was at $560 million, or 2.8 months of sales. Inventories increased quarter over quarter by $16 million, excluding exchange rate impacts. 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 33 days, resulting in a cash conversion cycle of 96 days.

We had a total liquidity of $1.5 billion at quarter end. Cash and short-term investments comprised $1.056 billion, and unused capacity on the credit facility was $417 million.

The breakdown of our debt of $471 million was $215 million outstanding on our credit facility; $39 million of exchangeable unsecured notes due in 88 years; $217 million of convertible debentures net of unamortized discount issued in three tranches, and due in 26, 27 and 28 years, respectively. The principle amount or 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.

Thank you, Lori, and good morning, everybody.

Despite recent substantial shifts of worldwide exchange rates with the strengthening US dollar and the softening euro, Vishay had a promising start into 2015. Naturally, our top line suffered from a weak euro, but profitability was maintained, and expectations were met.

Vishay in the first quarter achieved a gross margin of 24% of sales, an adjusted operating margin of 8% of sales, adjusted earnings per share of $0.21, and GAAP earnings per share of $0.20. We also expect another good year of cash generation, maintaining a trend of well over $100 million free cash.

Let me talk about the economic environment. The end markets in the first quarter remained generally stable, considering normal seasonality and exchange rate effects. POS of distributors in the quarter increased slightly, about 2%, and distribution inventory continued to go down by 3%, excluding, again, exchange rate effects.

Inventory turns at distribution remained at 3.4. In the Americas, we have seen turns of 2.3, after 2.4 in prior quarter; in Asia, 4.4, same as in prior quarter; in Europe, 3.9, vis-a-vis 3.4 in prior quarter. Distributors in general are fairly confident for the quarters to come.

US markets remain fairly strong, with increasing customer confidence driving, in particular, automotive- and construction-related sectors. Asian markets grow at a somewhat reduced pace, with some concerns existing for China. The weakened euro has the potential to boost the business of European exporters, mainly in industrial and in automotive. Automotive growth continues in all regions relating to vehicle production itself, as well as to a growing electronic content. Industrial markets after a euro-driven recovery in Europe, expect a strong year in general, with a somewhat mixed picture in Asia.

Computers continue to be soft. Mobile telephones expect a good year, with strong overall growth. Base stations and other network telecom products see some pressure. In consumer, strong growth in variables should compensate to a degree for declining sales in games and cameras. AMS markets have stabilized due to military spending improving, and the robust demand in commercial aerospace. We see a steady growth in medical devices.

Talking about Vishay's business development, sales in the quarter came in within the range of our guidance, but, like in the fourth quarter, a strengthening US dollar impacted our top line negatively. We achieved sales of $593 million in the quarter versus $611 million in prior quarter and $602 million in prior year. Excluding exchange rate effects, sales were marginally up versus prior quarter by $2 million or by 0.3%, and up versus prior year by $17 million or by 3%, again, excluding exchange rates, but also acquisitions.

Book to bill in the first quarter was 1.05 versus 0.95 in prior quarter. We have seen 1.04 for distribution, after 0.93 in the first quarter; 1.06 for OEMs, after 0.96; 1.02 for actives, after 0.91 in quarter four; 1.09 for passives, after 0.99; 1.07 for the Americas, after 0.93; 1.03 for Asia, after 0.91; 1.06 for Europe, after 1.0. All in all, this is a broad and partially, of course, seasonal improvement of orders, which will lead to higher sales in the second quarter.

The backlog recovered to 2.8 month, 2.9 in actives, and 2.8 in passives. Order cancellations remain at the low level. In quarter one, we have experienced a comparatively low ASP decline of 0.9% versus prior quarter, and 2.1% versus prior year. Really low decline for actives of 0.6% versus prior quarter, and 3.1% versus prior year. Quite normal for passives year over year -- it was minus 1.1% versus prior quarter, and 1.1 minus versus prior year.

Some highlights about operations: [Complete with this] margin in the first quarter was impacted negatively by the weakening euro, but came close to our traditional range of between 46% and 48% of sales. SG&A costs in the quarter decreased to $96 million, according to expectations, when excluding exchange rate effects. Manufacturing fixed costs in the quarter decreased to $126 million, again, according to expectations, when excluding exchange rate effects.

Total headcount increased slightly from 22,555 to 22,685 heads, reflecting higher production rates. Fixed headcount was down quarter over quarter slightly by 26 heads.

Inventory turns in the quarter remained at a satisfactory level of 4.2. Excluding the impact of exchange rates, inventories in quarter one increased by $16 million -- $3 million for raw materials and $13 million in [work in process] and finished goods, again, a consequence of increasing production rates.

Capital spending in the quarter was $20 million versus $19 million in prior year -- $9 million for expansion, $1 million for cost reduction, and $10 million for maintenance of business and EHS. For the year, we expect capital expenditures of about $160 million, adapted to current exchange rates, of course.

We generated, in the first quarter, cash from operations of $13 million, versus $13 million in prior year, $281 million on a trailing 12-month basis. Free cash in quarter one was minus $6 million versus plus $12 million in prior year, and $126 million for a trailing 12 month. Despite a somewhat slow start, we do expect another good year of free cash generation, as I said at the beginning.

Let me come to resistors and inductors. Vishay's traditional and most profitable business continues on a good level, whereby, in particular, inductors grow steadily. True for our traditional business with power inductors, as well as for the acquisition, HiRel, which is active in the field of magnetics.

With resistors and inductors, we enjoy a very strong position in the industrial, auto and [re] markets; HiRel is very well positioned in the medical segment. We continue to see opportunities for substantial growth in the Asian, predominantly Chinese, industrial market, and are increasingly successful with thin film and thick film power resistors there. Power inductors [in geis] grow nicely in Asia. Sales in the quarter were $187 million, 5% above prior quarter, and 8% above prior year, when excluding exchange rate effects.

Book to bill in the quarter was 1.05, which indicates a strong continuation of the business. Backlog was stable at 2.7 months.

Gross margin in the first quarter was at a very satisfactory level of 31% of sales, impacted negatively by exchange rates. Some price decline for resistors and inductors we saw -- minus 1% versus prior quarter; minus 1.7% versus prior year. The price decline is caused by aiding customers in Asia for thin film resistors, as well as for power inductors. Inventory turns of resistors and inductors were quite excellent at 4.5.

Our acquisitions -- Huntington, HiRel and MCB -- continue to be successful at a sales run rate of about $100 million, and a gross margin of 26%. In particular, the integration of MCB continues on plan; the majority of the production moves envisioned 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 sometimes suffers from a slowdown in renewable energies [and amin] markets.

Sales in the first quarter were at $94 million, which is 3% below prior quarter, and 6% below prior year. Again, this excludes exchange rate effect, and the impact of our recent acquisition, Holy Stone. Book to bill for capacitors in the first quarter recovered substantially, to 1.15 from 0.94 in prior quarter. Back log increased to 3.0 months.

Gross margin for capacitors recovered to 22% of sales, from 19% in the fourth quarter. We did benefit from better efficiencies and lower metal prices. We continue to see, in capacitors, a low ASP decline of minus 1.3% versus prior quarter, and a plus 0.3% versus prior year. We remain confident for capacitors, in view of our opportunities in Asia, and the impact of a weaker euro will have on European exporters. For the mid-term, we, based on Holy Stone's technology, will be able to penetrate the polymer tantalum market.

Coming to opto: Vishay's business with opto products consists of infrared emitters, receivers, sensors and couplers, as well as LEDs for the automotive application. It contains a substantial and growing share of customers' designed products. The business with infrared opto products represents one of Vishay's opportunities for growth, especially in the segments of high-performance couplers and of sensors. Our recent acquisition of Capella will strengthen our position and our potential for expanding this promising business mid-term in our traditional markets, auto and industrial, as well as in mobile phones, which, up until now, is Capella's primary focus.

Sales in the quarter were $69 million, 2% above prior quarter, and 12% above prior year, excluding exchange rate impact, as well as the Capella acquisition. Book to bill in the first quarter was 1.09, after 0.99 in prior quarter. The backlog is at 3 months.

Gross margin for the opto products remained at a very satisfactory level of 32% of sales, despite some negative impact from the exchange rates. Opto has quite excellent turns of 5.6. We have seen normal ASP decline of 0.6% versus prior quarter, and 3.1% versus prior year.

The newly created subdivision, sensors, achieved sales in the first quarter of $32 million at a gross margin of 30%, an area of accelerated organic growth in the past, and even more so in the future with Capella now. We have started to work on joint projects for industrial and automotive applications between Capella and the opto division, but also between Capella and other divisions, active and sensors within Vishay.

Coming to diodes: Diodes represent a broad and steadily growing commodity business, where we are largest supplier worldwide. Vishay offers virtually all technologies, as well as the most complete product portfolio, and we, in particular, 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, and in retrospective, a good decision.

Sales in the quarter were $137 million, 1% below prior quarter, but 5% above prior year, which excludes exchange rate impacts. Book to bill for diodes in the quarter was 1.01, a distribution-driven recovery from 0.83 in the fourth quarter. The backlog remains at 2.7 months.

Gross margin for diodes, like in the prior quarter, was a solid 22% of sales. Inventory turns were at excellent 4.5. Quite a low price decline we have seen in the quarter -- minus 1.1% versus prior quarter, and minus 2.1% versus prior year. And we do expect a good second quarter for diodes.

Coming to MOSFETs: Vishay continues to be one of the market leaders in MOSFET transistors. The originally predominant Asian business, with customers in computers and phones, has been expanded to automotive and industrial. Sales in the quarter were $107 million, 3% below prior quarter, and 3% below prior year at the same exchange rates. Book-to-bill ratio was 0.99 in the quarter, after 0.95 in the fourth quarter. The backlog remained at 3 months.

Gross margin for MOSFETs improved to 13% of sales from 10% in prior quarter, supported by some inventory built. Inventory turns were at 3.7. Also for MOSFETs, a relatively low price decline, the same low price decline versus prior quarter, and minus 4.3% versus prior year.

As you will remember, we are on the way to implement a major restructuring program, which targeted the move of substantial volume from a 6-inch to an 8-inch fab, including major disruptions by reductions of fixed costs. We continue to expect full implementation by the first quarter of 2016, and all this should enable us to reach a gross margin in the area of 20% of sales.

Let me summarize. I think Vishay started well into 2015, once more demonstrating the stabilizing strength of its business model of a broad approach to products, markets and geographies. Exchange rate shifts between the two major currencies only have a [secondary] effect on our bottom line, and our relative strength in Europe, in times of a weakening euro, should become even advantageous with European exporters benefiting. We permanently think of programs to improve efficiencies in variable, as well as in fixed costs, and I think we tend to implement well, and we are proud of that.

We follow our growth plan focusing on new products and technologies on the Asian markets, as well as on acquisitions, either synergetic acquisitions or strategic ones. And we actually grew by about 5% per year since 2012, at constant exchange rates. 25% of the growth came from acquisitions, and 75% was achieved organically. And all that happened overproportionally in Asia, quite according to our expectations.

We do expect a good second quarter, and guide to a sales range of between $600 million and $640 million at an exchange rate of $1.10 to the euro, representing an increase quarter over quarter of about 6%, again, at the same exchange rate. Gross margin is expected between 24% and 26% of sales.

Thank you very much. I'll pass it back to Peter.

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

Thank you. Your first question comes from the line of Matt Sheerin.

Yes, good morning, everyone. Dr. Paul, it sounds like looking into Q2, FX aside, it sounds like you got positive book-to-bill in all your regions and all your end markets. In particularly distribution, is your sense that distribution has bottomed in terms of the inventory correction that's been going on and that point of sale looks good and that you should see them resume their normal buying patterns, or are they still pretty cautious here?

I think they are quite optimistic now, and the whole thing happened according to our expectations. I can recall our conversation about that. It really happened in the way we thought. The correction happened again at the end of last year, and now they seem having this behind themselves and ordering in a normal fashion again. So we are quite confident also for distribution.

And we're hearing from companies like Arrow that they're selectively building some inventory in Europe, and there's also some signs that point to ASP increases from component manufacturers. It doesn't sound like you're seeing any ASP increases but are you seeing distribution orders pick up in Europe?

Well, all together, Europe is doing very well these days. This weak euro, which we have now, seems really to support the major countries, at least the countries we are strong in. And all together, distribution, inventory, I don't think comes up at the moment. Increasing prices, honestly speaking I cannot see at the moment. But price decline, as I tried to point out, has slowed down quite substantially, in practically all the lines.

And regarding the MOSFET restructuring, with the manufacturing shift, do you plan to or will there be a need to build inventory at any point at the end of the year?

Yes, there will be. There will be some inventory for the last time by which we will put in gradually through the year. This is part of the normal procedure when you want to change location as an automotive supplier. Indeed, you are right.

Okay. All right. Thanks very much.

Thank you.

Thank you. Your next question comes from the line of Jim Suva.

Thank you, and congratulations to your team at Vishay.

Thank you.

A follow up question regarding when you're looking at changing the manufacturing footprint a little bit. Definitely I agree with the inventory build. Can you help us understand the cost of what we should typically see there? Is there like a build up of cost also associated with that for a quarter or two and then it comes down? And [how do you think about that] for margins?

Okay. Concerning costs, effective costs over -- integrated over time, we don't expect any. In fact, as long as for the time we build inventory is a positive impact to the P&L, and when we afterwards to reduce it again, and this is what we count on and we are in agreement with the customer that he takes it afterwards, then of course in the context of an inventory reduction, it will be a negative impact but I guess you would refer to the integral of both phases. No, we do not expect any residual costs.

Okay. And why longer term would not be gross margins or impact be a little bit more profitable than before the change.

Well, it will be. It will be. Because we are going to, first of all, we are going from a -- to a much more effective wafer fab, which we have. And secondly, we are also in this context are able to cut substantial fixed costs. So all together, talking out of memory, this will be approximately $37 million to the bottom line, to the gross margin line, which will bring us from presently unsatisfactory 13% or so to 20%.

Great, yes, that's what I was kind of getting at. I thought we would see that positive move.

Yes.

And then my follow up question, given the currency volatility basically globally around the world, is that changing your M&A pipeline and cadence of which you look at mergers and acquisitions?

No, not really. You understand mergers and acquisitions as activity is somewhat opportunistic, so you have to analyze the company, and exchange rates change as we know, and it would be, I think it would be not wise to direct our activities according to these exchange rates which change anyway going forward is not the case.

Thank you, and congratulations again to you and your team.

Thank you.

The next question is from the line of Steve Smigie.

Thanks a lot guys. I wanted to ask, and I hope I'm looking at the book-to-bill data correctly here, but it seems like the OEM book-to-bill is somewhat stronger than the distributor. Is that something you could talk about why you think that is?

First of all, I wanted to emphasize really, that it is more or less the same. We have 1.04 for distribution, 1.06 for OEMs. You are absolutely right, it's stronger, but my message to you was exactly that it's broad. That [asware] distribution as OEMs have a positive book-to-bill, and I wanted to call it a general broad recovery. I would not find the reason really for -- that OEMs are somewhat stronger as you said than distribution.

Okay. Maybe I'm splitting hairs on this, too, but can you talk about the difference for the semiconductors versus the passive components, 1.02 versus 1.08?

We are discussing the first quarter and historically, the passives are stronger in the first quarter. It's the nature of the beast. Our passives are exceptionally strong in Europe, and we see the consequence of that. Over the year, there's no reason why they should be different from each other, obviously.

Okay. And if I just look at the book-to-bill ratios over the last three quarters it seems to bottom in Q3, improve in Q4, improved here again in Q1. Is that your sense, that we just continue to have improving business conditions out there?

Well, It was like that in the last years that we have some cycling as you see now again. It's true. In former years, it was more in the second half that the computers pulled us more, but the computers, as we all know, suffered in recent years. So our cycling has shifted somewhat, so our cycle has shifted in the way the second quarter, very often has turned out to be the best of our quarters during the year. I don't think in Vishay you can talk about a major seasonality, but again, if you want to go into the next level of approximation, it's true that the second quarter became somewhat the strongest.

Okay. And then you talked a little bit about some Asian headwinds, sounds more mixed, but what are some of the strengths, what are some of the weaknesses there in Asia that you're seeing?

Talking, really China, and I mentioned some general concerns for China, I think we are not alone to have these concerns. On the other hand, it's my personal conviction that with China, I'm not the expect about China overnight, but my personal opinion about these Chinese, a relative slow down, they still grow very fast, but this relative slow down is kind of a correction phase which they have chosen to go through, which I believe after all according to my unimportant judgment is a sound move on their side.

Again, as for us, this is more a philosophical discussion because our market share in China is regrettably low, and what we do at the moment is really to catch up, and seeing the situation, whether China for us, Vishay, it's not so important if China grows by 7% or 8% or 9%, for us it's a major opportunity, which obviously starts to pay off. I'm very happy about that.

Great. If I could sneak one more in. Just in terms of Capella opportunity, can you talk a little bit about -- and I'm pretty used to that kind of sensor being used on a hand set. What are some of the applications on the industrial side and maybe give us a three-year outlook on how this market grows. Seems like there's some decent potential there. I'm just curious how you see this panning out.

There are indeed, quite a lot of applications, we would be very proud to explain them. And we are in these applications since quite a few years, and you see you have seen, maybe you remember we had a growth through in my speech, I was quoting a growth rate without Capella of 12% year over year. It's quite successful overall, and this was for total opto part sensors in many equipment, pieces of equipment, grew faster than that.

So all together, but, we had this disadvantage that we didn't have the ability for our own chip construction, chip manufacture and design in the house, which Capella according to our plans is going to fix. It's very broad, you find a lots of projects in the cars and in industrial equipment, machines.

Okay. Great. Thank you.

Thank you your next question comes from the line of Harlan Sur.

Good morning. Thanks for taking my question. The team had a very constructive book-to-bill in Q1. Maybe you can just help us understand what your book-to-bill thus far in the June-quarter and any you can provide on order trends by end markets or products quarter to date. I just wanted to understand if our demand trends are setting up for more seasonal second half of the year as you just talked about previously.

I can only say that in April, all these trends of a good book-to-bill continued. In fact, in a way they accelerated. So we are quite optimistic for the second quarter. But naturally the visibility for the third quarter already is relatively limited, but we do expect also from two days' perspective if nothing happens, you never know, that also the third quarter will be a decent quarter. Concerning the fourth quarter, honestly speaking, there is zero visibility, so we just don't know. But all together, the year should be a good one for Vishay.

Great. Thank you for that color, Dr. Paul. Your telecom business was down double digits sequentially in Q1. If you can just help us understand some of the particular sub segments that were weaker than expected, and then can you just help us understand directionally here in Q2, how the telecom business is going to be trending?

Well, telecommunications per se suffered at this point in time, so we have seen a slow down, really, in the networking as a matter of fact, and we do believe, we fear when we see it like that, that this will continue in a way. It will continue to suffer. We do not expect a good year for telecommunications equipment. For mobile phones, on the other hand, it's good. We see some slowing down of the growth in the fourth generation base station systems we do, and we think that this is going to last somewhat.

Thank you, and then my final question, and I appreciate you breaking out the opto sensors subdivision. I think you mentioned in the last call, if you had included Capella, this division would have done about $120 million last year. I think you said you did about $32 million in this sub segment in Q1. I'm assuming that Capella still has strong traction at some of the smart phone players like Samsung and some of the other smart phone suppliers as well and maybe potentially some growing traction in wearables. The question for you is are you still expecting a strong growth in this sub segment this year, and is it primarily going to be driven by mobile devices?

We do expect -- Capella is relatively new to us, and I think I have said already that this is a project-driven business which contains by nature surprises in both directions. At the moment, Capella runs approximately somewhat above the level of the second half of last year, but this is really not the target. So we foresee at the moment approximately this year as I said between $40 million and $50 million sales of Capella, which is above last year, but I must admit below our original expectations.

But we work on it. They work on it. Most important for me is the following, and let me reemphasize that Capella, the reason for acquiring Capella was not only to be part of their traditional business; it's really not. It's okay but it was not the real target. The real target was to support our sensor business in industrial and automotive by an owned chip design capability, and I believe this has been achieved. We still have to prove it but it's underway. We already work on common projects.

Great, thanks Dr. Paul.

The next question comes from the line of Gausia Chowdhury

Gausia calling on behalf of Shawn Harrison. I was wondering, given the euro weakness and some of the weakness you're seeing in end markets such as PCs and that offsetting some of the restructuring phase, do you see the need for more fixed cost cuts in the future?

Well, it was not the first -- this program of last year was definitely not our first program to cut fixed costs. And of course there can be the necessity. We always think about efficiency improvements. There can be the necessity going forward for another program, which is not changing our direction whatsoever.

So we will continue to improve our market presence, our technical presence, but there is always some efficiencies to be gained in the administrative side. We are going, I don't want to announce it like that, but answering your question indeed, there can be a follow program, a following program.

Great. Thank you, and then a second question with just the lighter cash flow, could you just explain the dynamic behind the lighter free cash flow in the first quarter.

In the cash since many years we have a cycle, the years I can't say it in this forum. The year starts always slow historically, you can go to our history and then we come out with free cash of about $150 million, and this is also going to happen this year. There are some dynamics, some cash expenditures, heavy in the first quarter and less heavy in the second half, but there are many items, but they add up to such a cycle and it's always the same.

Okay. Thank you.

(Operator Instructions)

The next question comes from the line of Ruplu Battacharya.

Dr. Paul, I wanted to ask you about the market for high power capacitors, I think in the past you said that your expectations haven't yet been fully realized, so maybe if you can just talk about how Vishay's positioned in that, what is the size of the market, and what revenues can you expect longer term as a percent of your capacitor sales.

The verified power capacitor market is not an easy number to get. But let me say the following concerning the Far East, indeed we have successes there. On the other hand unfortunately for us, there's an offsetting momentum in Europe, our traditional market. In Europe there is a slow down of projects clearly, and also there is -- it's an economy driven reduction, so all together, if we add Asia and Europe together to get the full picture, it's okay but somewhat not quite the way we wanted it to be.

But we should took Asia alone, starting from little only for us it's a nice development. Again we have to go for projects, and not all the projects you try to get you really get obviously. But we see that broadening of the business in China and in India also, both cases. But this is not achieved overnight. This is a process, and I'm very happy on the other hand that we started it two years ago, really because again, Europe is going to be soft foreseeably for some time. That's what we feel.

Thanks for color on that. And then with respect to Holy Stone, is the integration complete, or is anything still to be done in that respect?

No, Holy Stone is integrated to the extent we wanted it to integrate. We want to keep them also independent -- to a degree they are good technologically and we bought this company, as you may remember, mainly out of technological reasons. They have the polymer capacitor capability which we, Vishay, did not have yet. They have it. They work together with our traditional plan, and they're on the way to design new products together based on the polymer technology. But asking integration, yes, we have done what we had to do, I think.

Okay, and the last one for me, just a follow up on one of the prior questions, the new opto sensor subdivision, I think in the past, you've -- and even today you have talked about that division having strong growth in sensors, you also mentioned a 12% rate. I couldn't exactly follow. I think that was for the whole opto division.

This was indeed for whole opto. But the sensors as part of it -- I don't have the number here at hand, is faster growing than the total. So indeed it's a very nice business to be in; and we do believe that competitive capability will even enhance that.

Sorry, the last one for me, in terms of areas of CapEx spend, can you just -- you mentioned $160 million. So what are some of the areas that you're spending CapEx on.

It's broad but very much goes into diodes. Diodes is a very important part of our activities. They have packages, quite innovative packages, and we have to create capacity for that. That's very strong in the whole thing. Naturally MOSFETs, and partially as a part of the move, but also generically to serve it. It's broad, but I think if I should highlight one area of capital spending it's the diodes.

Okay. Thank you so much.

The next question comes from the line of Shawn Harrison.

Hi, Dr. Paul, Sorry if this is duplicative. I just got on the call about 5 minutes ago, but two questions. One, just if you covered this, I apologize, but pricing in Europe, are you looking to adjust pricing higher here given the marketplace, are you seeing competitors do anything with pricing within Europe?

I have to admit that I expected this question. And I asked my people for that. We don't see it at this point in time. It would not been logical what you said, but we don't see it.

I guess why aren't you seeing it? Do you have any idea why pricing hasn't changed?

I don't want to call for it so to speak, but anyway, as a matter of fact, we do have longer term contracts with the OEMs, so this is not the area where it should happen. It would have to be with distribution obviously, but in this case, we, as I said, there's just nothing at the moment.

And then just exports out of Europe, once again if you touched on this I'm sorry, have you seen an increase in demand for products or end products that would be exported out of Europe given the weaker euro?

I think the consequence of the weaker euro if it stays that way, not there to the full extent yet, so it's a little early to speculate on the mechanics and when it starts. All of what you mention is clearly logical, but we don't see it yet. I have to -- unfortunately I cannot consider it much more than that. It's not fair. (multiple speakers) our judgment.

I came in right at the end of your response to my colleague's question on the restructuring, I guess what I was looking at or considering was the fact that with the euro being down, you do have -- while you're naturally hedged, you do have translational headwinds. If I'm looking at 2016, a decent chunk of the benefits you should see from restructuring Siliconix is going away. That's essentially that's why I was considering are you looking at other fixed cost reductions here in the very near term, not over multiple years, because you have to mitigate the translational headwind.

Well, first of all, I think the weaker euro we should even see a better situation because we changed dollar costs in Silicon Valley basically to euro costs in the northern part of Germany, so a weakening euro should even increase the impact of our cost reduction program. But, having said that, it's absolutely true what you say, this is not our last cost reduction project at Vishay.

In fact, we are thinking continuously about ways to be efficient or more efficient not only in the variable side with yield and productivity, but also the fixed side, and it's very true. It's very likely that there will be another fixed cost reduction program ahead of us. But I don't want to announce it now. We are thinking about a couple of things.

Very helpful. Thanks as always, Dr. Paul.

Okay.

And there are no further audio questions.

Thank you, Terry. That finalizes our Q1 call.

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