威世科技 (VSH) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to Mr. Peter Henrici, head of Investor Relations. Please go ahead, sir.

Thank you, Paula. Good morning, and welcome to Vishay Intertechnology's Third Quarter 2017 Conference Call. With me today are Dr. Gerald Paul, Vishay's President and Chief Executive Officer; and Lori Lipcaman, our Executive Vice President and Chief Financial Officer.

As usual, we'll start today's call with the CFO, who will review our third quarter financial results. Dr. Gerald Paul will then give an overview of our business and discuss operational performance as well as segment results in more detail. Finally, we'll reserve time for 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 2017 financial information containing some of the operational metrics Dr. Paul will be discussing.

Now, I turn the call 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 Quarter 3 of $678 million, at the upper end of our guidance when adjusted for exchange impacts. The euro appreciated 6.4% versus the US dollar during Quarter 3, increasing Vishay's revenues by approximately $14 million. GAAP net income for the quarter was $0.41 per share. Adjusted EPS was $0.42 for the quarter. The second quarter includes restructuring charges totaling $3.2 million.

During the third quarter, we repurchased approximately 2.1 million shares of our common stock, for approximately $37.6 million, pursuant to the 150 million share repurchase program announced in August. Since quarter end, we have purchased another approximately 120,000 shares of common stock, pursuant to this program. This stock repurchase program does not obligate the company to acquire any particular amount of common stock.

Revenues in the quarter were $678 million, up by 5.1% from previous quarter and up by 14.5% compared to prior year.

Gross margin was 27.9%. Operating margin was 13.6%. Adjusted operating margin was 14.1%. EPS was $0.41. Adjusted EPS was $0.42. EBITDA was $132 million or 19.5%. Adjusted EBITDA was $136 million or 20.0%.

Reconciling versus prior quarter, adjusted operating income Quarter 3 2017 compared to adjusted operating income for prior quarter, based on $33 million higher sales or $19 million higher excluding exchange rate impacts. Adjusted operating income increased by $13 million to $96 million in Quarter 3 2017 from $83 million in Q2 2017. The main elements were volume increased with a positive impact of $7 million, equivalent to a 3.1% increase; lower variable and fixed costs had a positive impact of $3 million.

Reconciling versus prior year, adjusted operating income Quarter 3 2017 compared to prior year based on $86 million higher sales or $76 million higher excluding exchange rate impacts, adjusted operating income increased by $36 million to $96 million in Quarter 3 2017 from $60 million in Quarter 3 2016. The main elements were average selling prices had a negative impact of $17 million, representing a 2.4% ASP decline; volume increased with a positive impact of $44 million, representing a 15.9% increase; variable cost decreased with a positive impact of $5 million, primarily due to cost reduction efforts and efficiencies which more than offset the increase of labor costs and material prices.

Selling, general, and administrative expenses for the quarter were $94 million, in line with expectations when adjusting for exchange rates. For Quarter 4 2017, our expectations are approximately $96 million of SG&A expenses and approximately $375 million for the full year.

I'd like to give you an update of our cost reduction programs. During Quarter 3, we recorded approximately $2.4 million in restructuring expense related to our previously announced extended MOSFETs Enhanced Competitiveness restructuring program announced in November last year. This program is expected to result in additional cost savings of approximately $8 million to $9 million when fully implemented. Savings were practically realized already in Q3.

Our other previously announced ongoing global cost reduction programs are progressing as planned and are nearing completion. The amount of restructuring expense recorded for the global program during Q3 was $0.8 million, or $26.0 million for the programs to date. Total cash restructuring payments in Q3 2017 were approximately $4 million and approximately $12 million year-to-date.

The year-to-date effective tax rate on a GAAP basis was approximately 26%. The year-to-date normalized tax rate was approximately 27%. For the quarter, this mathematically yields a GAAP tax rate of approximately 25.1% for Quarter 3, and a normalized rate of approximately 26.8%. The normalized tax rate includes the quarterly remeasurement of the cash repatriation deferred taxes, a benefit of $0.9 million for Q3 and $3.1 million year-to-date, and considers the tax effects of the restructuring charges. The year-to-date normalized rate also reflects the nondeductibility of the loss on disposal of the equity affiliate. We expect our normalized tax rate for Q4 2017 and full year 2017 to be approximately 27%. This 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 are 144 million. The expected share count for EPS purposes for the fourth quarter 2017, based on the average stock price fourth quarter to date, is approximately 160 million shares. This does not reflect the impact of any share repurchases during Quarter 4. 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 $118 million. Capital expenditures for the quarter were $36 million. Free cash generation for the quarter was $82 million. For the trailing 12 months, cash from operations was $329 million. Capital expenditures were $138 million, split approximately for expansion, $68 million; for cost reduction, $14 million; for maintenance of business, $56 million.

Proceeds from the sales of property and equipment were $6 million for the trailing 12 months. Free cash generation was $197 million for the trailing 12 months. Proceeds from the sale of property and equipment includes insurance proceeds for assets destroyed in the Tianjin explosion.

Vishay has consistently generated an excess of $100 million free cash in each of the past 11 years. Cash flows from operations were greater than $100 million for the last 22 years and greater than $200 million for the last 15 years.

Backlog at the end of Quarter 3 was at $1,122,000,000 or 5.0 months of sales. Inventories increased quarter-over-quarter by $14 million, excluding exchange rate impacts. Days of inventory outstanding were 80 days. Days of sales outstanding for the quarter were 44 days. Payables outstanding for the quarter were 34 days, resulting in a cash conversion cycle of 90 days.

We had a total liquidity of $1.7 billion at quarter end. Cash and short-term investments comprised $1.2 billion, and unused capacity on the credit facility was at $495 million. The carrying value of our debt of $357 million is net of the unamortized issuance cost of $9 million and includes $138 million outstanding on our credit facility and $228 million of convertible debentures, net of unamortized discount, issued in 3 tranches, and due in 23, 24 and 25 years, respectively. The principal amount or face value of the converts is $575 million. No principal payments are due until 2020. However, the convertible debentures may be redeemed if certain stock price thresholds are met.

At the end of Quarter 4 2016 and continuing through the end of Quarter 3 2017, the convertible debentures due 2042 are redeemable for the next quarter. Additionally, the convertible debentures due 2040 are also now redeemable for the next quarter. Accordingly, we have reclassified the difference between the carrying value and the principal amount for those 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 amount with borrowings on our revolving credit facility and net share settled amounts in addition to the principal amount. This criteria is measured quarterly and measured separately for each tranche, and the amounts presented as temporary equity will revert to regular equity if the criteria are not met for that particular tranche of debentures. Now I will turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

Thank you, Lori, and good morning, everybody. Well, after successful first half and a very successful second quarter, Vishay in the third quarter showed improvements of sales and profits. Also, in the third quarter, we were carried by an unbroken high level of demand in virtually all market segments. We keep increasing manufacturing capacities and output for our key product lines while maintaining good deficiencies across the board. Vishay in Q3 achieved a gross margin of 28% of sales, adjusted operating margin of 14% of sales, GAAP earnings per share of $0.41, and adjusted earnings per share of $0.42, and we continue to generate free cash on a very high level.

Let me talk about the economic environment. In general, the economic environment principally did not change much since the second quarter. Historically high order rates and still growing backlogs characterized also the third quarter. Virtually all markets continue to do well, in particular automotive and industrial, and customers remain very confident across the board. Again, the high order level was driven by distribution mainly in Asia and Europe. The components industry in general is in process to increase its manufacturing output, but still there are longer lead times and even shortages of supply. Like for the entire year 2017, semiconductors continued to be more affected than the passives.

Let me come to the regions. Continuous improvement of business conditions in the American markets can be observed, driven by healthy microeconomics. We see moderate growth in the industrial segment, a strong military sector, and automotive is picking up recently. Ongoing robustness of the European business can be reported. Central European manufacturers capitalize on their traditional strength in automotive and industrial segments. There's strong growth in Eastern Europe in particular, and also the western part of Europe starts to recover. In Asia, strong domestic and overseas demand resulted in a quick expansion of production, mainly for industrial equipment, energy infrastructure, and automotive electronic equipment.

Now coming to distribution, distribution in particular in Asia and Europe continues to enjoy really excellent business conditions. The worldwide POS remains on a remarkably high level. There's no change versus Q2. Despite a slight inventory increase of 5% in the quarter, inventory turns of distributors remain at an excellent level of 3.7 after a record level of 3.9 in prior quarter. In the Americas, 2.2 turns after 2.3 in Q2, and 2.0 in prior year. In Asia, 5.1 turns, after 5.3 in the second quarter and 4.5 in prior year. And in Europe, 4.2 turns after 4.3 in the second quarter and 3.4 turns in the prior year. Also, orders on distributors in Q3 continued to be extremely strong. They were 28% above prior year. And, after all, distribution remains confident for the quarters to come.

Let me comment on the most important industry segments. Automotive remains strong and continues to expect further growth in the 10% range due to increasing electronic content. Driver assistance systems, 48 volt projects, new LED technologies and E-mmobility in general will drive this growth.

Also, industrial markets remain strong in most areas. Drivers are factory automation, infrastructure programs, alternative energy and Internet of Things sensoring. Computing was stable to up in the third quarter. Mobile phones did well, with low cost Chinese suppliers further gaining share.

Various opportunities continue to exist in consumer markets. AMS markets remain healthy, both in military product areas and commercial avionics. Medical grows steadily, providing opportunities for high-end products.

Coming to Vishay's business development, due to a higher-than-expected manufacturing output, sales in the quarter came in at the upper end of the range from our guidance, and excluding exchange rate effects of $14 million. We achieved sales of $678 million in the quarter versus $645 million in prior quarter, and $592 million in prior year. Excluding exchange rate effect, sales in the quarter were up versus prior quarter by $19 million or 3%, and up versus prior year by $76 million or 13%. The book-to-bill ratio of 1.11 again was very strong across the board. It was 1.15 for distribution after 1.43 in Q2; 1.06 for OEMs after the same, 1.06 in Q2; 1.13 for actives after 1.35; 1.09 for passives after 1.20; 1.04 for the Americas after 1.19 in Q2; 1.15 for Asia after 1.38 in last quarter; 1.12 for Europe after 1.20.

After a quite dramatic increase of backlogs in the second quarter, there was further growth from 4.8 to 5.0 month in Q3, 5.3 months for actives and 4.5 in passives. This is a very unusual situation. We saw a continuation of decreasing price decline, with virtually stable prices quarter-over-quarter, minus 0.1% versus prior quarter and minus 2.4% versus prior year. For the actives, it was minus 0.3% versus prior quarter and minus 2.7% versus prior year. And for the passives, we saw a slight increase of 0.1% versus prior quarter, and minus 2.1% versus prior year.

Some highlights of operations. We, in the third quarter, again, were able to offset the negative impact of inflation and price decline on the contributive margin by cost reduction and innovation. SG&A cost in the quarter came in at $94 million, according to our expectations when adjusted for exchange rate effects. Manufacturing fixed costs in the quarter were $122 million, according to expectations when adjusted for exchange rate effects. Total employment at the end of Quarter 3 was 22,970 heads, like in prior quarter.

Due to increasing production levels, inventories in the third quarter increased slightly by $14 million, again excluding exchange rate effects. Raw materials went up by $10 million, and work in process and finished goods by $4 million. Inventory turns in the quarter remained on a very satisfactory level of 4.5. Capital spending in the third quarter was $36 million versus $30 million in prior year, $138 million on a trailing 12-month basis.

For 2017, we expect CapEx of approximately $165 million. We generated in the third quarter cash from operations of $118 million versus $108 million in prior year, $329 million on a trailing 12-month basis. We generated in the third quarter free cash of $82 million as compared to $88 million in prior year and $197 million on a trailing 12-month basis. I think we can continue to say that cash generation at Vishay remains to be excellent.

Coming to our most important product lines, and I start out as always with resistors and inductors. Vishay's traditional and, since years, most profitable business continues to grow steadily. With resistors and inductors, we enjoy a very strong position in the industrial, auto, mil, and medical market segments. Since a few years, we started to concentrate on the Asian -- predominantly on the Chinese -- industrial market, and we achieved an increase of this business by 55.0% in 4 years. Sales in the quarter were $216 million, up by 1% versus prior quarter and up by 11% versus prior year, excluding exchange rate effects. The book-to-bill ratio in Q3 was 1.15 after 1.23 in prior quarter. Backlog increased to 4.6 months. We see stretched lead times for many product lines, in particular for power inductors and resistor chips. Gross margin remained at a good level of 30% of sales.

Inventory turns in the quarter were at very satisfactory 4.6, after 4.8 in prior quarter. Price decline was low, just 0.3% decline versus prior quarter and 2.1% versus prior year. We -- accelerating investing for increasing manufacturing capacities in power inductors, metal strip resistors, and resistor chips.

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 enjoy increasing opportunities in the fields of electro-cars and of power transmission, namely in Asia -- China -- and entered the polymer tantalum capacitor market. Sales in the third quarter were $96 million, 2% above prior quarter and 12% above prior year, again, without exchange rate effects. The book-to-bill ratio for capacitors in the quarter was 0.97, after 1.14 in the second quarter.

Coming from a very high level of 4.6 months, backlog in the quarter decreased slightly to 4.3 months. Gross margin for Q3 was 20% of sales. Inventory turns in the quarter were at 3.7, after 3.8 in the second quarter. We see a further stabilization of prices, we saw an increase of prices of 1.1% versus prior quarter, and a decrease of 2.0% versus prior year. We continue to see numerous opportunities, especially in Asia for growing this business further.

Coming to Opto products. Vishay's business with Opto products consists of infrared emitters, receivers, sensors and couplers as well as LEDs for automotive applications. The business represents one of Vishay's best opportunities for long-term growth, especially the segment of sensors.

Sales in the quarter were $77 million, 2% above prior quarter and 4% above prior year, again, without exchange rate impacts. Book-to-bill in the quarter was 0.94 after 1.11 in the second quarter. Backlog is at 3.6 months after 3.8 in prior quarter. Gross margin reached a record level of 38% of sales after 35% in prior quarter, all of this supported also by some favorable cost singularities. Inventory turns remained at an excellent level of 5.3 after 5.5. Also, in this case we see a stabilization of selling prices, no price decline versus prior quarter and 2.1% price decline versus prior year. We remain confident for this profitable line to grow steadily also in future, especially sensors, who benefit from an increasing demand in the automotive and industrial segment.

Diodes. Diodes for Vishay represent a broad commodity business where we are largest supplier worldwide. Vishay offers virtually all technologies as well as the most complete product portfolio and we are in particular leading in power applications. The business has a strong position in the automotive and industrial market segments and keeps growing steadily and profitably since years. Sales in the quarter were $161 million, 2% above prior quarter and 13% above prior year without exchange rate effects. We continue to see a strong book-to-bill ratio of 1.18 after other extreme, 1.41 in prior quarter. Perceived shortages of supply continue to drive orders, especially from distribution, and a backlog keeps increasing further. We reached a very unusual high of 6.2 months coming from 5.8 months in prior quarter, lead times alone. Due to higher volume, gross margin increased to quite excellent 27% of sales after 26% in the second quarter. Inventory turns for this line remain at a very satisfactory level of 5.1, virtually at the same level as in the second quarter. There is a continuation of reduced rate of price decline, 0.6% decline versus prior quarter 3.3% decline versus prior year. We are expanding manufacturing capacities in all critical lines as fast as possible. Also, of course, in order to prepare the mid- and longer-term future of this very competitive line.

Coming to MOSFETs. Vishay continues to be one of the market leaders in MOSFET transistors. MOSFETs at Vishay over the last years developed a strong and growing position in automotive, which the business now benefits from. We currently see a strong upturn of the entire business, also supported by Vishay's improved cost structure. Sales in the quarter were $127 million, 10% above prior quarter and 24% above prior year. The backlog was -- the book-to-bill ratio in the quarter was 1.19 compared to 1.37 in the second quarter. It's a very similar picture to the diodes. Backlog has reached an unusually high level of 5.3 months, coming from 5.2 in Q2. Again, very similar to the diodes line. Gross margin in the third quarter continued to improve further in a substantial way to 26% of sales, after 22% of sales in prior quarter. Good efficiencies, high volume, and the favorable [last-time] buys support this profitability performance, and this is the best for MOSFETs since more than 5 years. Inventory turns increased to a good level of 4.3, coming from 4.1. We have seen substantially reduced price pressure, minus 0.1% versus prior quarter, minus 2.3% versus prior year. And we are in process to increase manufacturing volume at foundries and to maximize the output of our fab in Itzehoe.

Let me summarize. Supported by ongoing excellent business conditions in most of our markets and for most of our product lines and based on good efficiencies, Vishay enjoyed a very successful first half and an even better third quarter. We in particular are proud of having successfully turned around our business with MOSFETs, which for years has burdened Vishay's profitability. We now see a good future for this line. We currently work on maximizing the output of plants, foundries and subcontractors. We accelerate investing in critical manufacturing capacities, having in mind the large future market potential for our products in general, but especially in Asia. We expect another excellent year for the generation of free cash. We will further increase our efforts to even better penetrate automotive industrial markets in Asia. We expect strong growth in automotive markets for years to come, driven by e-mobility and sensoring. And we are well positioned in terms of product and regional sales representation. We continue to focus on shareholder value by returning cash to the shareholders. The decision was taken, as you know, to establish another stock buyback program for $150 million to be executed by June 2018, and the program is well on the way. Restricted to a degree by fewer working days in the Christmas quarter, we for 4Q guide to a sales range between $645 million and $685 million, with gross margins between 26% and 28% of sales at the second quarter exchange rates. Thank you very much.

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

(Operator Instructions) Your first question comes from the line of Ruplu Bhattacharya of Bank of America, Merrill Lynch.

Dr. Paul, the first question for you, more on supply and demand, really both in the industrial level as well as at Vishay. In talking about diodes, you said perceived shortage of supply. So really, I guess my question is, when you look at your supply and what's coming online, A, do you think you have enough capacity to meet the demand? And then more importantly, do you think the demands that you're seeing and your book-to-bill distributors is very high, and your months of backlog are also high in diodes and MOSFETs. How much of that do you think is real and how much of that do you think is double ordering?

First of all, we do not have enough capacity now, as I indicated. We are going to continue to invest, but as I said we continue to invest. We invested in this capacity since years. But the amount has taken another step of acceleration, and at the moment we do not have enough machines. Whatever we intend to buy now will be sufficient to satisfy present needs, but we will continue even after that to invest in this line. They are very competitive there, and the markets, automotive and industrial, are our key markets where we always have been strong.

Concerning the backlog, this, of course, question is always to be asked in such situations. I see in -- I think the right answer should be, looking through all the numbers I have available for Vishay, and believe me we look carefully, we currently do not see any sign of weakening of the business. I guess this is the underlying question you have, right?

Right. No, that's very helpful, thanks. And then in terms of adding capacity, which product lines are you adding capacity in and how should we think about CapEx in the next fiscal year?

I would say CapEx will be above the $165 million which we announce or expect for 2017, and there are basically quite a few products we have to expand capacity. Besides diodes, we'll be in the MOSFETs, we'll be in surface mount resistors, especially also in inductors where we have to put definitely more equipment in. I don't want to make it -- at this point, we're in the (inaudible) process, but it will be above the $165 million of this year.

Okay. And then maybe the last one from me. When we look at your MOSFET margins, the gross margin is now at 2011 levels, and Opto gross margin is probably the highest that it's been since 2004. So just your thoughts on that, how should we think about the progression in margins going forward, what can drive it up, what can drive it down.

Well, you know gross margin is a gain between the prices, variable costs, and the volume in reality. Let me start out with the MOSFETs. I indicated that this MOSFET margin has been supported to a degree by a one-time effect. Still, we are running very good. And I believe also something like a 24% gross margin at present volumes can be supported also (inaudible), which is more than we originally anticipated when we have started to implement our plan to (inaudible) this line. You may remember we talked about 22% or so, 21%, 22%.

Now, I think we are more successful than we ourselves thought at the point, and we are running, I think, sustainably at this volume, of course, on a level of, say, 24%. On Opto, was also one-time effect, a few one-time effects. But Opto is really profitable. And you know we had quarters in the past of 35%, 36%. Now it was 38%. I mean, 35% for sure is sustainable, again at this volume. The biggest danger for our profitability, like for every company, is if volume drops (inaudible).

Your next question comes from the line of Shawn Harrison of Longbow Research.

This is Gausia Chowdhury calling on behalf of Shawn. Just wanted to clarify, then, about the MOSFET gross margin comment. So now that we are above that target that you had initially laid out, and understandably again because of the volume, is there a new target that we should consider going into 2018, or is it that 24% that we should be thinking about?

I think the 24% is the sustainable number, as I tried to say. We had the positive singularity, a last-time buy which was profitable, so to speak, and this helped the quarter. But 24% is a target at present volumes, which is sustainable I think.

Okay, thank you. And then SG&A of $375 million for the year, I think that's a little bit higher than you were initially guiding to last quarter. Can you maybe discuss why the step up and how we should think about next year?

Well, I'm not aware that this is much more than -- it must be minor, the deviation. In SG&A, you cannot forget the impact of exchange rates, of course, and the euro is strong at the moment and we have a part of our SG&A, a third of the total in Europe, being paid in euros. And as soon as the euro comes up, then of course you see that as an increase. In reality, it's not an increase, it's a consequence of the exchange rate.

For next year, we will see the inflation, I would say, approximately, the rate of inflation. But this, again, we are in process to define our budget.

Okay, great. And one last one for me. Just circling back to a prior question, so the book-to-bills are still very strong, and you said that you're not seeing any kind of slowdown. Yesterday, one of your peers did mention a gradual correction in backlogs. Are there maybe any segments that we should consider? I mean, the book-to-bill has dipped down below one in some areas. So are you seeing a normalizing of trends within those markets?

I suspect I have to correct something. What is really strong still are the orders. The backlog growth is still there in our case, but of course the backlog growth has slowed down, there's no question. But orders and sales are both on a very high level. Backlogs don't grow forever, and it's by nature of things, really. So but we have a continuous strong backlog, which even grows even at this extremely high level, continues to grow slightly, but orders continue to be very strong. This is the same statement. The backlogs are up, therefore orders must exceed sales, at least a bit.

Your next question comes from the line of Matt Sheerin of Stifel.

Just a few questions for me and some follow-ups, if I may. Just looking at your various product segments, you talked about lead time issues and adding capacity. At what point do you expect to see capacity meet demand with these additions that you have going on, and maybe by category -- diodes, resistors, MOSFETs.

That's hard to say. Depends on the overall development of the market, of course. But my personal opinion is that in diodes, we will just -- we take it (inaudible) moment and acceleration and adding capacity. But even then, we expect this market, our sales there to grow. So it's just an acceleration of an ongoing increase in capacity and investment. So I don't see a point where we really catch up to demand. I think we follow closely the demand.

In the case of MOSFET, I would suspect what we have now, we have to increase to a degree and this will make it for next year, I believe personally. On the passives, it depends really on the line. You know, we are very diversified in the line. Like for the diodes a little even more steep, we continue to invest in (inaudible) into power inductors. It's the same thing. We continue to invest. We just continue what we have done since many years. So as we see an ongoing demand, and we are gaining share there in automotive. I see a bright future end, of course capital requirements.

I don't see this to catch up so easily. We just grow with our business. In this case, we just go ahead as we have done. Then, of course, we have the traditional products. The traditional products, we have clearly enough capacity. Oh, I forgot one thing. Resistor chips. Resistor chips is also an area where we are surprised by our, may I say, own success. In this case, I think a major step which we have to do next year should make it then, I believe, for some time.

Okay, and you've obviously been through several cycles where you have seen shortages and then capacity adds and then an inventory build in a correction. Do you see that same cycle playing out, or do you think we see more of a soft landing where it's different this time?

Matt, we have a long history together. There was only one time in my long time when we invested too much, and this was in the year 2000 for MLCCs. You may or may not remember. Otherwise, our business grows. That means even if I took a too-fast -- which I don't believe in this case, by the way -- even if I did too much at the time, half a year later, a year later, you need it anyway.

Okay, fair enough. And then just a question on the converts. Lori, you talked about a certain percentage being redeemable this quarter given the share price. What are the plans there for the converts? Do you have concrete plans, and what does that mean to interest expense and other things?

Okay, so at the moment they're redeemable theoretically, or they're redeemable, I should say, only for the coming quarter, so the current quarter, and then we remeasured at the end of every period, so they may or may not be redeemable in the following quarter. And we don't actually expect that they will be redeemed. It's not very probable, because they trade in a separate market when there's market activity. So a holder, conceivably, would make more profits quicker by selling it into this market as opposed to coming to us to redeem them.

Second of all, in terms of the instruments themselves, at this point in time we don't plan to change anything in the fact that we are holding these debentures. It would be premature. We need to evaluate potentially future tax modifications from President Trump, which are not clear yet. And so, at the moment we don't have any plans to do anything with those instruments other than to (inaudible).

Your next question comes from the line of Harlan Sur of JP Morgan.

Good morning, and congratulations on the solid quarterly execution and strong free cash flow generation. You know, you guys have done a great job on expanding the margins in semiconductors. And looking at the trends on the passes, resistors and inductors have been sort of flattish through the first 9 months of this year. Kind of in a little bit of a slight downward trajectory in capacitors, despite what is a pretty healthy volume shipment environment and constructive ASP environment. And I would also think that you guys are seeing some of the early benefits of the global cost reduction initiative. So maybe you could just help us understand the gross margin dynamics in passives.

Somehow, we expected the question. Anyway, so concerning resistors, I believe what has to be stated is what has not grown is the percent. What has grown, obviously, is the dollars in terms of gross margin. And I believe we commented on that before. We want to expand this good business we have, resistors. And in order to expand that, we go to Asia and have some success there. But here, you add customers that are still provide you with a profitable business but maybe not as profitable, but this is incremental. Not as profitable as your best business, but we want to continue because in the end, at the end of the day, you need the dollars and not the percent, right?

Secondly, inductors. I think they are variable, so their percentage, they grow. They grow, as a matter of fact. Of course, their depreciation grows together with the sales because we have to invest (inaudible). So as a matter of fact, I don't think that we'd be miracles in percent, but even more than in resistors the dollars grow substantially because we are taking share in automotive these days, right? And this is a nice area of continuous growth.

Capacitors is a different story. In capacitors, the volume increase did not take place. But if you look at our business with capacitors, this is a different beast, because only a relatively modest share of this capacitor business is of commodity nature. And in such times like these, the commodity products go through the roof, and not necessarily the specialty products. This is my experience since a long time. And our capacitor business is in principle, for the main part, a specialty business.

I believe, on the other hand, specialty business in times of decline also are not so vulnerable as a commodity business is. So we have to be more patient with our capacitors. This 20%, it's okay, but of course we expect more midterm. We want to grow there. And I believe in the case of capacitors, we simply need more volume, and this we are very much there in Asia, active in order to find niches because these are technical niche product for this product line.

Great. Thank you for the insights there. And then this is a similar question to what I asked last quarter, but I think it's still kind of relevant given the environment that we're in. As you mentioned, the backlog continues to rise, but it rolls a little bit relative to the prior quarters. You've got some initiatives to increase capacity, you combine that with typically what is a little bit more seasonally weaker kind of second half of the year. I would think that that would give the Vishay team a bit more cost power to kind of catch up as it relates to the supply-demand imbalances. Do you feel like the team is making progress on stabilizing order lead times as we get kind of closer to the end of this year?

Well, unfortunately for our customers and our sales -- we want to serve our customers, obviously, well -- if the backlog is not reducing, even growing slightly, even in October it grew slightly. Slightly. Not to the same degree as it did before, of course. The lead time situation has not become much better, obviously, because the backlog is about the same. So, but we work on it. I mean, we work on it. There's no question we are adding capacities further. We have some already.

Your final question comes from the line of Jim Suva of Citi.

I have a couple questions. First, you mentioned on your prepared comments a couple times about some one-time purchases. Were those like end of product manufacturing purchases or expedited purchases, or why won't that occur again or what was unique about them?

Well, as a matter of fact, this last time, buyer mentioned once, and this is in the MOSFET area. In the MOSFETs, indeed, we discontinued and we announced it some time ago, a certain product line and there was a last-time buy in the third quarter which had a favorable impact on the results, on the gross margins of this line. And you remember we came to a very high level in terms of gross margin just wanted to be clear about it. This is not a sustainable level. But the 24%, which would have been there without this effect, I think is sustainable at this volume. But this was the only time I mentioned last-time buy.

Okay, I understand. And then it looks like your average selling prices across some of your different products are better than your guidance range of say 3% to 5%. So is that -- you just want to stick with the historical of down 3% to 5%, because I think it was down 2.7% in semis this quarter. Why not change your guidance range from that, or are you seeing that ASPs are expecting to revert to a more normal range next year?

Sooner or later, they will. There's no question about it. As soon as demand may or may -- may get not as high as it is today, then you in commodity products -- I mean, the experience tells us then the price pressure will get higher, but this is nothing but natural. We are used to it. And then we can cope with that at the time it comes, because we have ongoing cost reduction.

And my last question is, on your capacity expansions, would there be additional capital expenditures or ramping of your equipment of getting the yield up higher? Can you walk us through the timing of that? Is that gradual, is it all of a sudden in a couple quarters you're going to have a lot more capacity come on, or how should we think about the timing of your throughput?

It's gradual, it's no question. And the lines, I think I've mentioned, we want to do something on the diodes, we want to do something on the MOSFETs. We are going to continue to do something like we have done for many years in the power inductor arena, in the resistor arenas, in resistor chips, and in (inaudible) WSL resistor types. This is basically where we focus on, and this is a broad path of our offering.

As a matter of -- from a timing standpoint, this goes in increments, and it depends very much on lead time. So I think we are going to continuously get these machines in, and of course already as we talk we have a couple of pieces of equipment on the way, so it's a continuous process.

This concludes today's question-and-answer session. I will now turn the floor back over for any additional or closing remarks.

Thank you. This concludes our Third Quarter Conference Call. Paula?

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's call. You may now disconnect.