威世科技 (VSH) 2015 Q3 法說會逐字稿

Welcome to the third-quarter earnings call.

(Operator Instructions)

I would now like to turn the conference over to Mr. Peter Henrici. Sir, you may begin your conference.

Thank you, Paula. Good morning and welcome to Vishay Intertechnology's third-quarter 2015 conference call. With me today are Dr. Gerald Paul, Vishay's President and Chief Executive Officer, and Lori Lipcaman, our Executive Vice President and Chief Financial Officer.

As usual we will start today's call with the CFO who will review our third-quarter financial results. Dr. Gerald Paul will then give an overview of our business and discuss operational performance as well as segment results in more detail. Finally we'll reserve time for 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 third-quarter 2015 financial information containing some of the operational metrics Dr. Paul will be discussing. Now I turn the discussion over to Chief Financial Officer Lori Lipcaman.

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

Vishay reported revenues for Q3 of $561 million. GAAP EPS for the quarter was a loss of $0.19. Adjusted EPS was $0.17 for the quarter.

In light of a sustained decline in market capitalization for Vishay and its peer group companies and other factors, we determined that interim goodwill and indefinite live impairment tests were necessary. Prior to completing the goodwill assessment, we also performed a recoverability test of certain depreciable and amortizable long-lived assets as required by US GAAP.

The Capella business, acquired in 2014, has not performed as expected. We still believe that the addition of Capella will in the mid- and long-term add considerable value to our entire optoelectronic components business through the addition of in-house design capabilities.

However, we also concluded that the depreciable and amortizable assets of the Capella business, primarily customer relationships, were not recoverable and recorded the impairment charges of $57.6 million to write down the related assets to their fair values. We also concluded that the goodwill associated with the capacitors business unit totaling $5.4 million was impaired.

No impairment was identified for the other reporting units in asset groups tested for impairment. As previously announced an explosion occurred in the port of Tianjin, China on August 12.

Vishay owns and operates a diodes manufacturing facility near the port and the shock wave of the explosion caused a temporary shutdown. The Tianjin plant was fully operational again by September 8.

We estimate that the temporary shutdown resulted in lost revenue of $20 million during the quarter. Additionally the results for Q3 include a charge of $5.4 million related to the explosion recorded in the line other expenses.

We believe we have valid claims for property damage and business interruption, but will not record any of those amounts until all contingencies are resolved. As we announced in the second quarter, we have begun the process of terminating and settling our US qualified pension plan.

All plan participants will have their benefits either converted into a lump sum cash payment or an annuity contract placed with an insurance carrier. The process is continuing as expected.

The completion of the process is contingent upon the receipt of a favorable determination letter from the IRS and meeting certain IRS and PBGC requirements. The completion is not expected to occur before Q3 2016.

There are no significant accounting consequences until final settlement occurs. Revenues in the quarter were $561 million, down by 5.0% from previous quarter and down by 12.2% compared to prior year.

Gross margin was 23.2%; operating margin was negative 4.3%; adjusted operating margin was 7.3%. EBITDA was $17 million, or 3.0%; adjusted EBITDA was $87 million, or 15.6%. Reconciling versus prior quarter, adjusted operating income quarter three 2015 compared to adjusted operating income for prior quarter based on $30 million lower sales, or $31 million lower excluding exchange rate impacts, adjusted operating income decreased by $9 million to $41 million in Q3 2015 from $50 million in Q2 2015.

The main elements were average selling prices had a negative impact of $7 million, representing a 1.2% ASP decline; volume decreased with a negative impact of $11 million; variable costs decreased with a positive impact of $3 million primarily due to cost reduction efforts, efficiencies, and lower metal and material prices; fixed costs decreased with a positive impact of $6 million primarily due to cost reduction and belt-tightening efforts some of which are temporary.

Reconciling versus prior year, adjusted operating income quarter three 2015 compared to prior year based on $78 million in lower sales, or $45 million lower excluding exchange rate impacts, adjusted operating income decreased by $23 million. The main elements were average selling prices had a negative impact of $19 million, representing a 3.3% ASP decline; volume decreased with a negative impact of $11 million; variable costs decreased with a positive impact of $5 million, primarily due to cost reduction efforts, efficiencies, lower metal and material prices which more than offset the increase of labor cost; fixed costs increased with a negative impact of $2 million, $3 million coming from acquisitions; and exchange rates had a positive net impact of $3 million.

Selling, general and administrative expenses for the quarter were $89 million, lower than our expectations primarily due to cost reduction and belt-tightening efforts, some of which are temporary, as well as a positive impact on the realignment of incentive compensation accruals. For the fourth quarter of 2015 the SG&A expenses are expected to remain unchanged, assuming the current euro exchange rate.

I'd like to give you an overview of our cost reduction programs. As announced, we are implementing global cost reduction programs intended to lower costs by approximately $35 million annually when fully implemented at a cash cost of approximately $30 million. These programs include a plan to reduce SG&A by $17 million to be implemented by the end of 2016.

We also plan to streamline and consolidate production of certain product lines, which we expect reduced cost of products sold by approximately $18 million annually split 50/50 between variable and fixed cost. These production transfers will be completed in steps by the end of 2017.

Some of these projects have already started, but in most cases our strategy is in the first phase: to seek volunteers to accept a voluntary separation/early retirement offer. Accordingly the amount of restructuring expenses recorded for these programs during Q3 is only $0.9 million, or $5.6 million year to date.

Our previously announced program in the MOSFET segment continues as planned. An additional $1.4 million of restructuring expenses was recorded in Q3 for a total of $3.7 million year to date.

As discussed previously, this program will be implemented in steps through Q1 2016. Meaningful cost savings are not expected until the program is nearly completed, but are expected to be approximately $23 million per year when fully implemented.

Restructuring charges are recognized ratably during the implementation period. The GAAP tax rate year-to-date Q3 was approximately 41%, including the special items, and as always based on our expectations for the full year.

Our normalized tax rate for 2015 is expected to be approximately 32%. The normalized tax rate per Q3 was approximately 30% and for Q4 will be derived mathematically.

This expected tax rate is based on an assumed level and mix of income among our various taxing jurisdictions. 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 fourth quarter 2015 based on the same average stock price as the third quarter is approximately 151 million shares.

For a full explanation of our EPS share count and variables that impact the calculation, please refer to the 8-K we filed this morning. Cash from operations for the quarter was $61 million; capital expenditures for the quarter were $37 million; free cash for the quarter was $24 million.

For the trailing 12 months cash from operations was $254 million; capital expenditures were $153 million split approximately for expansion of $71 million, for a cost reduction of $16 million, for maintenance of business at $66 million. Proceeds trailing 12 months from the sales of property and equipment were $2 million; free cash generation was $103 million.

Vishay has consistently generated in excess of $100 million free cash in each of the past nine years. Cash flows from operations were greater than $100 million for the last 20 years and greater than $200 million for the last 13 years.

Backlog at the end of quarter three was at $536 million, or 2.9 months of sales. Inventories increased quarter over quarter by $5 million, excluding exchange rate impacts. We expect a reduction in Q4.

Days of inventory outstanding were 94 days; days of sales outstanding for the quarter were 47 days; days with payables outstanding for the quarter were 33 days, resulting in a cash conversion cycle of 108 days. We had a total liquidity of $1.5 billion at quarter end; cash and short-term investments comprised [1079 million] (corrected by Company after the call); and unused capacity on the credit facility was $460 million.

The breakdown of our debt of $432 million was $173 million outstanding on our credit facility, $39 million of exchangeable unsecured notes due in 88 years, $220 million of convertible debentures net of unamortized discount issued in three tranches and due in 26, 27, and 28 years respectively. The 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. In the third quarter the overall economic conditions were not favorable in general as we expected it to be.

Additionally, our top line and our financial results suffered from the well-known severe accident in the harbor of Tianjin which temporarily interrupted the output of one of our larger plants. And also this has been the reason for not reaching our projected midpoint of sales.

I believe that we nevertheless achieved respectable results given the circumstances, with a gross margin of 23% of sales, an adjusted operating margin of 7% of sales, adjusted earnings per share of $0.17, and GAAP earnings per share of minus $0.19 due to impairment charges. For the year we continue to expect the generation of substantially over $100 million free cash.

Let me talk about the economic environment. After the reasonably strong first quarter and signs of weakening in Q2, the economic environment in the third quarter did not recover.

Asia continued to face headwinds, with soft microeconomic conditions in China impacting negatively the entire region. Domestic Chinese consumption has suffered also, influenced by real estate and stock declines.

In the Americas we continued to see a severe weakness in the oil and gas sector and relative stability otherwise. Europe remained stable, with automotive and industrial exports continuing strong.

Some concerns exist related to a potential drop of exports to China. Distribution became rather cautious, focusing on their inventory levels. In the quarter reduction of 2% has been reported.

Inventory turns and distribution in the quarter remained at the principally reasonable level of 3.3. In particular in the Americas 2.2 turns after 2.3 in the second quarter, in Asia 4.4 turns after 4.6, and in Europe 3.5 turns after 3.8.

The POS of worldwide distribution dropped further by 3% quarter over quarter after a 2% drop in the previous quarter. Industrial markets continued to present a mixed picture with continued strength in Europe, solidity in the US except for the energy sector, and a slowdown in Asia.

Automotive remains strong in Europe and in the US, but worldwide vehicle production shows a reduced rate of growth. Computing continues to be very disappointing with a global PC market expected to drop by 8% year over year and also tablets being under pressure.

We see unbroken growth in mobile phones supported by increased sales in the emerging markets. Fixed telecom, on the other hand, remains soft. In consumer wearables continue to grow fast whereas most of the other segments suffer from relatively high inventory levels.

Medical markets continued to show growth whereas military was flat. Let me comment on our business development in the third quarter.

Sales in the quarter were may I say handicapped by the Tianjin disaster and came in at the low end of our guidance. We achieved sales of $561 million in the quarter versus $590 million in prior quarter and $638 million in prior year.

Excluding exchange rate effects, sales were $31 million or 5.2% below prior quarter, and down versus prior year by $52 million, or by 8.6%, again excluding exchange rate effect and acquisitions. Book-to-bill ratio in the third quarter was 0.96 versus 0.99 in prior quarter.

Some details: 0.96 for distribution after 0.98 in the second quarter, 0.96 also for the OEMs after 1.0, 0.98 for the actives after 1.01 in Q2, 0.94 for passives after 0.96, 0.92 for the Americas after 0.93, 0.99 for Asia after 1.01, 0.96 for Europe after 1.01. In general at the end of the third quarter, a less optimistic picture than after the second quarter likely indicating a soft end of the year.

The backlog continued at the normal level of 2.9 months; 2.9 months in the active sector and 2.8 months in passives. Order cancellations remained at a low level.

The price decline in Q3 was not dissimilar to the picture of the second quarter. We have seen minus 1.2% versus prior quarter and minus 3.3% versus prior year. For the actives, it was a drastic line of 1.9% versus prior quarter and 4.2% versus prior year.

For the passives we have seen minus 0.4% versus prior quarter and minus 2.3% versus prior year. Some highlights of operations: our contributive margin in the third quarter remained slightly below our traditional range of between 46% and 48% of sales.

The SG&A costs in the quarter decreased further to $89 million, which is lower than expected mostly due to belt tightening as well as to a realignment of incentive compensation. Also manufacturing fixed costs in the quarter continued to decrease quarter over quarter to $121 million in the third quarter as compared to $125 million in Q2.

Total headcount increased slightly from 22,600 to 22,650, whereby the fixed headcount in the quarter remained stable. First, noticeable headcount reduction in the fixed area we expect at the end of the fourth quarter based on our announced fixed cost reduction program.

The inventory turns in the third quarter suffered from a lower level of cost of goods sold and came in at 3.8. Excluding the impact of exchange rates, inventories in the third quarter increased slightly by $5 million, raw materials were up by $1 million, and WIP and finished goods were up by $4 million due basically the letters due to the required build up of safety stock in the context of the MOSFET restructuring project which will amount to $20 million.

Capital spending in the quarter was $37 million compared to $37 million also in prior year, $21 million for expansion, $3 million for cost reduction, and $13 million for maintenance of business. For the year we expect capital expenditures of approximately $145 million.

We generated in the third quarter cash from operations of $61 million versus $98 million in prior year, $254 million on a trailing 12-month basis. And we generated free cash in the third quarter of $25 million versus $61 million in prior year, $103 million for a trailing 12 month.

We do expect to generate substantially over $100 million free cash in the year as I said. Let me talk about the product lines, and I start with resistors and inductors.

Vishay's traditional most profitable business basically continues on a good level, but currently also experiences a weakening of the economy. With resistors and inductors we enjoy a very strong position in the industrial auto and mil markets. And HiRel, our acquisition you remember, is very well-positioned in the medical segment.

We continue to see opportunities for substantial growth in the Asian predominantly Chinese industrial market regardless of some present cooling of the economy there. Sales in the quarter were $173 million, 3.5% below prior quarter and 2% below prior year when excluding exchange rate effects.

Book to bill in the quarter was 0.95 after 0.99 in the prior quarter. The backlog is at 2.8 months. Gross margin in the quarter was at a satisfactory level of 29% of sales after 30% in the second quarter. Gross margin was impacted negatively by lower volume.

Some price decline exists for resistors and inductors; 0.5% decline versus prior quarter and 2.5% versus prior year. The inventory turns were at 4.2.

Our acquisitions in this area, Huntington, HiRel, and MCB continued to be successful with a sales run rate of about $100 million and a gross margin level of 26% to 27%, slightly improving from the previous quarter. The majority of the production moves envisioned for MCB will be finalized in the course of this year.

Coming to capacitors, our business with capacitors is based on a broad range of technologies with a strong position in American and European market niches. We see increasing opportunities also in Asia in particular with power capacitors.

The capacitor business presently suffers severely from a decline of the oil and gas sector, the weakness in computers, and the general economic softening in Asia. Sales in Q3 were at $84 million, 10% below prior quarter and 16% below prior year, which excludes exchange rate effects.

Book to bill in the quarter continues to be disappointing; it was 0.93 after 0.92 in the previous quarter. Backlog is at three months; gross margin for capacitors declined to 16% of sales from 19% in the second quarter due to lower volume.

Overall for capacitors we have seen a normal price decline, practically stability versus prior quarter, and minus 1.9% versus prior year. For the mid-term we remain confident for capacitors in view of our opportunities in Asia and of Holy Stone's technology, which will enable us to penetrate the polymer tantalum market.

Coming to the line of opto products, Vishay's business with opto products consists of infrared emitters, receivers, sensors, and couplets as well as LEDs for automotive applications. It contains a substantial and growing share of customer designed products.

The business with infrared opto products represents one of Vishay's opportunities for growth, especially the segments of high-performance couplers and of sensors. Our recent acquisition of Capella, a design house for chips used in optoelectronic sensors, will strengthen our position and our potential for expanding this promising business further by having our own competence in the field of chip design.

However, the traditional Capella business predominantly focused on Asian smart phones has not performed as expected. Sales in the quarter were $70 million, 4% below prior quarter and 2% below prior year, excluding exchange rate impacts as well as the Capella acquisition.

Book to bill in Q3 was 0.95 after 1.02 in prior quarter, and the backlog was at 2.9 months. Gross margin for opto products remained at the very satisfactory level of 33% of sales, the inventory turns quite excellent at 5.2%, price decline normal, 2.1% negative versus prior quarter and 2.8% versus prior year.

The newly created subdivision sensors does well, with sales in the quarter of $35 million and further improved gross margin of 34%; and Capella is part of this up division. Coming to diodes, diodes represent a broad and growing commodity business where we are largest supplier worldwide.

Vishay offers virtually all technologies as well as the most complete product portfolio. We in particular are leading in power applications and the business grows profitably.

Sales in the quarter were heavily handicapped by the Tianjin accident, and sales only reached $124 million, which is 11% below prior quarter and 15% below prior year again excluding exchange rate impacts. Without the accident, however, sales would have been above prior quarter and closed to prior year.

Book to bill in the quarter was 1.05 after 0.97 in prior quarter, the backlog is at three months, gross margin was down slightly from prior quarter at 22% after 23%. The inventory turns were 3.9, and they suffered from lower volume.

Price decline was normal, minus 1.2% versus prior quarter and minus 3.6% versus prior year. The production in the Tianjin factory has been restored completely, and we are in process to work down the higher than normal backlog.

For the business with diodes, we continue to expect organic growth based on our competitive cost structure and a high rate of innovation. Coming to the MOSFETs, Vishay continues to be one of the market leaders in MOSFET transistors.

The business continues to suffer from the weakness of the computer segment and of the Asian economy in general. Distributors are reducing inventory.

MOSFETs currently undergo a major cost reduction program that will enhance profitability quite dramatically by lowering manufacturing costs. Sales in the quarter were $109 million, 3% above prior quarter but 8% below prior year excluding exchange rate impacts.

Book to bill was at 0.91 at the quarter after 1.04 in the second quarter which indicates a relatively soft fourth quarter for the MOSFETs. The backlog is at 2.8 months; the gross margin improved to 15% of sales from 14% in prior quarter mainly due to lower fixed costs.

Inventory turns were at 3.3, reducing some acceleration of price decline minus 2.5% versus prior quarter and minus 5.7% versus prior year mainly due to deteriorated market conditions. Our cost reduction program continues to be on target and we do expect full implementation by the end of the first quarter 2016, and this should enable us to reach gross margins in the area of 20% of sales.

Let me summarize. No question that the electronic industry currently faces headwinds in Asia, but not only in Asia. Vishay is a major supplier to the electronics industry and by nature experiences the consequences of the situation.

The business with electronic components clearly keeps its cyclical nature, and we all know that. What is important for us beyond economic cycles is to continue working diligently for achieving our operational targets: to permanently improving efficiencies and to control fixed costs tightly; to further strengthen our design in efforts in markets where we are still underrepresented, like in industrial in Asia; to offer sufficient manufacturing capacities in the next economic upturn for our key product lines; to exploit the full potential of our technologically oriented acquisitions Capella and Holy Stone; and to continue acquiring businesses either synergetic or strategic.

Our most important programs, we announced fixed cost reduction project and the rationalization in MOSFETs are on plan, and will support Vishay's results noticeably in the future independent of the economic environment. We do believe in a cyclical rebound of the economy in the course of next year, but we do have to expect a relatively soft fourth quarter.

For the fourth quarter we guide to a sales range between $540 million and $580 million at current exchange rates. Gross margin is expected between 21% and 23% of sales, which includes a planned inventory reduction. Thank you very much.

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

Steve Smigie.

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

Well overall you can say looking back historically unless there's a major change in the market economy this is the nature of the piece. This is the nature of our economy that within 1 year or 1.5 years the cycle changes.

On the other hand I have more in-depth reasons to believe it; when we look into our order situation in the fourth quarter, it's quite okay. It's above one.

And we are quite confident that we will not decline substantially. But it could be that the solution continues to reduce their inventories, we even count on that, which will of course reduce our expectation for a change tomorrow directly. But for the next year we do expect the change of the economy of the cycle.

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

Well, we do expect some growth vis a vis this year.

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

I think it's rounding, particular rounding called it flat.

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

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

Okay. And then on Cappella, is that more a short-term issue related to customers, or is there something else going on that's making it a little bit soft near term? Because it seems like you still have confidence in intermediate and long term

In fact the Capella acquisition obviously did not fulfill our short-term expectations in terms of their business, we have said it. On the other hand when you look at the development of the business its going upwards, no question.

2015 will be better than 2014 and for next year we expect another substantial growth, yes substantial growth, it's only smaller numbers, substantial growth vis-a-vis this year. So I'm looking also over the project and they have an increasing number of projects they pursue.

You may know they were very dependent when we acquired them on one major Asian telephone maker, so to speak, very dependent. And this was also the reason, one of the major reasons, for the underperformance which we have seen in the first phase.

I'm very happy to see that they are now broader, that the efforts are broad and I am also happy to see that the cooperation with the opto division was the deepest reason why we acquired Capella. It has not only started, but we already see some results. So I'm quite optimistic, disregarding of course the disappointment concerning the impairment

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

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

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

Harlan Sur.

Good morning, thank you for taking my question. Dr. Paul I think you said that distribution inventories declined about 2% sequentially in Q3, and as you mentioned your distribution partners are still taking down inventories in Q4. Do you have a rough sense sequentially on how much these inventories are coming down in Q4, and maybe if you could also help us understand what their POS trends are going to be doing in Q4 as well

I have to say, of course, it is not directly our business. But I do believe that they continue because if you compare the situation one quarter earlier, say after the first quarter this year with a situation after the third quarter, actually the inventory as we see it was relatively constant.

And I do believe this gives enough reason for our partners in distribution to bring down inventory further. I would say it would not drop more than what we have seen.

I don't think it will accelerate, but I think it will continue. Concerning the POS, well this is the same business in the end we are in.

I believe basically that they also, like us, will see a rebound, but the question is when. Maybe they will see it earlier than we do, because of course we are subject to their decisions concerning inventory reductions

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

Very small.

Very small?

In reality the Company reacted like in the past vis a vis a weaker economy, and this went very smoothly, I must say that is true. The real impact of our programs will come later.

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

I mean Asia plays a role in that, of course. The cautiousness started in Asia this time, but we see also some cautiousness in the US, as a matter of fact, in certain segments in distribution.

And it's really hard to forecast what their business decisions are. But again they will not deplete the inventory completely.

I do not believe that anyone at this point believes in a worldwide crisis of the economy, which automatically will be the reason for a continuation of the cycles which we know so well. So in the course of next year, hopefully early, they will change the direction and the whole business will change direction. And it goes the other way around; they will want to build inventory again

Thank you, Dr. Paul. And then just my last question on the Capella impairment.

Obviously we all know that China's smartphone segment of the market has been weak, you guys have been making a concerted effort to drive the Capella technology into industrial and automotive applications. When do we start to see those revenues starting to add incrementally to your revenues?

Census in general is a good place to be these days. And you see if you look at -- this is why I started to report also the sales of this newly created subdivision we have: sensors.

And it goes up and it's quite profitable. I can tell you that Capella already partially works for this main business, but of course imagine automotive.

It takes some time for qualification of sensors. So it doesn't go overnight, but there are already joint programs and already certain chip designs which we in the past had to do outside that are now made in house.

So we see successes. Despite this write-down which we had to have, I'm really quite optimistic that this was a good decision to acquire Capella. We see a business we want to be in, like sensors, and without the ability to design chips we would not be super successful I fear. So it was right I think

Great, thank you, Dr. Paul.

Jim Suva.

Thank you and congratulations to you and your team. I have two questions. The first question is regarding the China plant explosion and then the factory had to be shut down, then it's back running again and you recovered very quickly from it.

Can you help us understand the impact, if any, does that have to the December quarter and then maybe post December? I would imagine you may have worked down some inventory during the weeks that it was closed. And did you recoup the production from that facility that may be -- would that be helping December sales and gross margins by a certain amount, or am I thinking of that incorrectly?

I think, Jim, it will not help as much. We have lost in the third quarter $20 million sales as we estimated I think reasonably, and the chances are gone as a matter fact.

And so we are up and running in regular form. I think we are in a steady-state situation by now; I do not expect anything positive nor negative in the fourth quarter.

Okay. So am I correct in that that factory does not supply any inventory or have inventory that may have been absorbed in September?

To a minor degree I would say. It's a few weeks already passed -- a few weeks have passed by since we are fully operational. So a few things already have regulated very quickly

Great, thank you. And then my follow-up question is on the automotive sector. You talked about the European and US strength.

Vishay had a very long and great history with the European auto makers, especially with the German OEMs as well as global autos OEMs. Most people are aware of the one German automaker is facing some challenges with it's diesel engines. Can you talk to us about have you seen any change of production from that, or are you expecting any change to -- how should we think about that?

Jim, I expected obviously that question. No, we have not seen anything. It's very true, really nothing at this point in time.

Of course we were also concerned in the beginning, it is very true, that the Company you talk about, the [copy car] company, is a major customer of our customers, for sure. On the other hand we supply to all kinds of OEMs.

It means if this specific company should lose market share, which is not the case yet right, then others will sell more. And I think as we are supplying to our OEM supply to all the car companies.

If this specific car maker should sell less, which is not a given, others will sell more. So I feel relatively certain that this incident, which is of course not very nice at all, will not hurt Vishay.

Thank you and congratulations to you and your team

Thank you

Matt Sheerin.

Yes, thanks. Good morning, just a couple of follow-up questions. Regarding the positive book to bill that you're seeing it sounds like so far, I mean at least in October. Is that broad-based and does that include distribution or is the distribution still negative as the (multiple speakers)?

Actually it's distribution driven, as a matter of fact, it's true. What we have seen is a better than expected picture from Asian distribution I must say that in October.

So really you are right. We have seen a better picture, and of course this makes me more confident that this rebound which we are expecting will not last until Christmas of 2016, you understand.

So it will become relatively fast I hope. But you never know, of course.

But the expectations are that your quarter is more front end loaded in that as you come -- three or four weeks you're going to see your customers, particularly in Asia, start to bring down inventory levels, right?

Yes, that's true.

So the book to bill may flip the other way as you get into January?

It was nevertheless a nice change vis a vis the third quarter, which actually was a disappointing one

And on the savings of $23 million in savings from the MOSFET manufacturing chip, when -- and I know you're looking at margins expanding there, when should we start to see that? Should it be in Q1 or you get the savings in Q1 so you'll carry that into Q2?

Actually nothing has changed from what we said in the past. The savings really kick in beginning of the first quarter, so no change -- of the second, excuse me, I really have to correct me. At the beginning of the second quarter of next year, like we always have said, there is no change

So Q2 and then beyond, okay. And then just lastly kind of a bigger picture question. There's been lots of consolidation going on in the component and semiconductor space, including some of your competitors in the commodity semiconductor space, or at least rumors about consolidation.

What does that do in terms of Vishay's picture as you're seeing more consolidation among your peer group? How does Vishay look in terms of that and when you've got much bigger competitors and competitors now offering more one-stop shops sort of offerings to their customers similar to what Vishay has been trying to do?

Yes. First of all I think we are not very excited about it. I think we can be very confident. Normally if bigger companies come together this is not what the normal buyer likes, as a matter fact.

I believe that if supplier gets too big he not necessarily gets the tailwind of the buyers, not necessarily. So I believe that Vishay will -- we don't count on it directly, but I would suspect if I had to choose between opportunity and disadvantage I would take -- call the whole thing more opportunity than a disadvantage for Vishay.

Okay, all right, thanks a lot.

Shawn Harrison.

Hi everyone. A couple of clarifications as well. POA this quarter, was that down 5% sequentially for the September quarter?

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

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

Yes

And so it's growing off that?

Now it's between $10 million and $11 million, but we see reason to believe this can grow further. So there are enough projects in the pipeline.

But you know project business is project business; you can be lucky or less lucky, but I do believe that there are lots of changes around. So I see a recovery we already have seen the recovery of the Capella business, not to the levels we hoped for obviously, but it's going upwards. And the cooperation with the opto division goes really well.

And the recovery is not with the Asian handset manufacturers?

Also, but broader. But not only with the handset holders now, not only

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

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

Okay. I'd guess then finally last quarter I believe the comment was made that you would look to take additional cost out of the business if a negative environment continued to persist. It doesn't seem like that's going to be the case now given a slightly more positive outlook for 2016. Just I guess clarification on whether any additional restructuring needs to be done given the current outlook or whether you think the cost structure (multiple speakers)?

I believe we are set at the moment, but we are always ready, as you know. We are always ready to react to further downturns, since mostly we have downturns. But I believe what we are doing now makes sense.

It doesn't harm, it's very important. It reduces the cost but it's kind of organic.

That means it doesn't harm what the Company can do technically in particular, and also in terms of design in which I want to grow even going forward. I believe we are okay, but again if things turn out worse than I expected or more than I expressed, then we will react stronger than we did up to now.

Okay. And were you able to find that POA number?

POA was 12% down.

In the distribution? Wow, okay. Thank you, Dr. Paul.

Thank you

(Operator Instructions)

Ruplu Battacharya.

Thanks, good morning, Dr. Paul. Couple of questions, first on the MOSFET, expected gross margins getting to 20% by 2Q 2016. I just wanted to clarify, given that computing is weak, are you relying any on revenue expanding? Or is it general --

No, no it's purely costs out. It's purely costs out.

Okay, all right, good. In terms of --

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

Right. And then it looks like you're able to contain SG&A to $89 million for the next quarter. Can you give us some expectations for SG&A going forward?

I mean what range do you expect that in the next couple of quarters? Can you maintain that range?

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

Okay, all right. Maybe just to clarify the gross margin impact in the next quarter, looks like at the midpoint the revenue is about flat with this quarter, it's about $550 million. But then the gross margin guidance seems to be about 100 basis points lower quarter on quarter.

So what are some of the dynamics there? Is it just I mean -- what is impacting that 100 basis points down in gross margin?

We have built inventory in the third quarter still and we are going to reduce inventory in the fourth quarter, so this makes a difference.

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

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

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

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

All right, thank you.

Thank you.

[Steve Cristal].

Hi, good morning. I have a follow up related to the previous question. With the balance sheet being so over capitalized and the cash flow generation so steady, I was wondering if the Company has considered alternatives to the current plan to create value for shareholders? And at what valuation does Management think a buyback would make sense?

Well we have done buybacks in the past, and this is always discussed with the Board by nature and decided by the Board. And of course this stays on our agenda principally, but at the moment we do not feel that this should be rediscussed.

But I cannot exclude that this will come up again. There are no firm rules, I believe. It's an opportunistic thing.

Okay, thank you.

Thank you.

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

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

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