威世科技 (VSH) 2017 Q4 法說會逐字稿

Good morning, and welcome to Vishay Intertechnology's Fourth Quarter and Year 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 fourth quarter and year 2017 financial results. Dr. Gerald Paul will then give an overview of our business and discuss operational performance as well as segment results in more detail. Finally, we will reserve time for questions and answers.

This call is being webcast from the Investor Relations section of our website at ir.vishay.com. The replay for this call will be publicly available for approximately 30 days. You should be aware that in today's conference call, we will be making certain forward-looking statements that discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements. For a discussion of factors that could cause results to differ, please see today's press release and Vishay's Form 10-K and Form 10-Q filings with the SEC. 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 fourth 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 Q4 of $674 million. Our GAAP results reflect a significant effect of the U.S. Tax Cuts and Jobs Act, and we report a GAAP net loss for the quarter of $1.23 per share due to a $235 million charge related to the U.S. tax reform. Adjusted EPS was $0.37 for the quarter. The fourth quarter includes restructuring charges totaling $6.1 million and a gain related to the favorable resolution of contingencies associated with our sale of an equity affiliate in Q1.

During the fourth quarter, we repurchased approximately 120,000 shares of our common stock for approximately $3 million, pursuant to the $150 million share repurchase program announced in August 2017. Since year-end, we have not purchased any additional shares pursuant to this program. The stock repurchase program does not obligate the company to acquire any particular amount of common stock.

Revenues in the quarter were $674 million, down by 0.5% from previous quarter and up by 18.2% compared to prior year. Gross margin was 26.2%. Operating margin was 10.8%. Adjusted operating margin was 11.7%. EPS was a loss of $1.23. Adjusted EPS was $0.37. EBITDA was $114 million or 16.9%. Adjusted EBITDA was $119 million or 17.7%.

For the full year 2017, revenues were $2,604,000,000, up by 12% compared to prior year. Gross margin was 26.9%. Operating margin was 12.0%. Adjusted operating margin was 12.4%. EPS was a loss of $0.14. Adjusted EPS was $1.43. EBITDA was $464 million or 17.8%. Adjusted EBITDA was $481 million or 18.5%.

Reconciling versus prior quarter, adjusted operating income quarter 4 2017 compared to adjusted operating income for prior quarter, based on $3 million lower sales or $4 million lower excluding exchange rate impacts. Adjusted operating income decreased by $17 million to $79 million in Q4, 2017, from $96 million in Q3 2017. The main elements were: Average selling prices had a negative impact of $2 million, representing a 0.2% ASP decline; volume decreased for the negative impact of $3 million, equivalent to a 0.4% decline of volume in total; and a negative impact due to a mix shift in our businesses.

Variable cost increased for the negative impact of $2 million due to higher wages over time and some manufacturing inefficiencies.

Fixed cost increased with a negative impact of $6 million, primarily due to environmental remediation expenses and higher depreciation. Inventory impacts had a negative effect of $4 million. Versus prior year, adjusted operating income quarter 4, 2017 compared to prior year based on $104 million higher sales or $86 million higher excluding exchange rate impacts. Adjusted operating income increased by $38 million to $79 million in quarter 4 2017 from $41 million in Q4 2016. The main elements were: Average selling prices had a negative impact of $16 million, representing a 2.3% ASP decline; volume increased with a positive impact of $47 million, representing a 17.7% increase; variable cost decreased with a positive impact of $10 million, primarily due to cost reduction efforts, which more than offset the increase of our labor costs and metal prices.

2017 versus 2016 full year, adjusted operating income for year 2017 compared to prior year based on $280 million higher sales or $264 million higher excluding exchange rate impacts. Adjusted operating income increased by $121 million to $323 million in -- for 2017 from $202 million for 2016. The main elements were: Average selling prices had a negative impact of $71 million, representing a 2.6% ASP decline; volume increased with a positive impact of $162 million, equivalent to a 14.8% increase; variable costs decreased with a positive impact of $30 million, primarily due to cost reduction efforts, efficiencies, lower metal and material prices, which more than offset the increase of labor cost.

Fixed cost increased with a negative impact of $11 million, mainly due to higher incentive compensation. Inventory increases had a positive impact of $17 million and exchange rate effects had a negative impact of $7 million. Selling and general and administrative expenses for the quarter were $98 million, higher-than-expected due to environmental remediation expenses.

For the year, general -- selling, general and administrative expenses were $377 million. For Q1 2018, our expectations are approximately $100 million of SG&A expenses and approximately $400 million for the full year. These expectations for our 2018 SG&A expenses were on a comparable basis to 2017. We will adapt new accounting standards effective January 2018, which will result in the reclassification of a small portion of this amount to other lines on the P&L. Once the new accounting standards are adopted, we will retrospectively recast prior periods.

During quarter 4, we recorded approximately $6.1 million of restructuring expenses related to our previously announced restructuring programs. These programs are now substantially implemented. Total cash restructuring payments in Q4 2017 were approximately $3 million and approximately $15 million for the full year.

The Tax Cuts and Jobs Act will have a significant impact on Vishay. As permitted by the SEC, we have recorded the impact of these this change in tax law based on reasonable estimates and these provisional amounts may be refined during the defined measurement period as additional analysis is completed. Generally speaking, U.S. tax reform will likely have limited impact on our manufacturing operations but could have a significant impact on how on we finance those operations. Like most companies with significant non-U. S. operations, we will be required to pay a large transition tax on undistributed foreign earnings but will benefit from the ability to repatriate cash in the future without further U.S. taxes. The future repatriation of foreign earnings will still be subject to incremental foreign taxes. We have changed our permanent reinvestment assertion regarding unremitted earnings in certain key countries, which totaled approximately $1.1 billion at current exchange rates and have accrued appropriate incremental foreign taxes to repatriate those amounts. This new repatriation plan replaces our previously discussed $300 million 2015 repatriation plan. Even though the taxes accrued, the actual repatriation of those amounts will be at a measured pace. We recorded a total charge of $235 million related to U.S. tax reform. This is primarily comprised of: A benefit of $75 million to reduce our net deferred tax liabilities, based on the lower 21% statutory U.S. tax rate; a charge of $216 million on the transition tax related to undistributed foreign earnings; a benefit of $119 million due to the cancellation of our 2015 cash repatriation plan; and a charge of $213 million of foreign taxes related to the new repatriation plan. To reiterate, these amounts are considered provisional as permitted by SEC Staff Accounting Bulletin 118 and may be adjusted in future periods as additional analysis is completed. The year-to-date normalized tax rate, excluding the unusual items, was approximately 24.1%. Over the quarter, this mathematically yields and a normalized tax rate of approximately 16.7% for quarter 4. We are not yet able to provide specific quantitative guidance regarding our future tax rate. We are still evaluating several aspects of the new tax law. Our current expectation is that our consolidated tax rate for 2018 will be in the high 20s. Our Form 10-K, when it is filed, will include some additional qualitative discussion about our expectations for the effect of the tax reform on our consolidated tax rate. Our consolidated effective 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 144 million. The expected share count for EPS purposes for the first quarter 2018, based on the same average stock price as for the fourth quarter, is approximately 161 million shares. This does not reflect the impact of any share repurchases during Q1. 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 $123 million. Capital expenditures for the quarter were $86 million. Free cash generated for the quarter was $37 million. For the year, cash from operations was $369 million. Capital expenditures were $170 million, split approximately for expansion, $85 million; for cost reduction, $18 million; for maintenance of business, $67 million. Proceeds from the sales of property and equipment were $2 million in 2017. Free cash generation was $200 million in 2017. Vishay has consistently generated in excess of $100 million free cash in each of the past 12 years. Cash flows from operations were greater than $100 million for the last 23 years and greater than $200 million for the last 16 years. Backlog at the end of quarter 4 was at $1,320,000,000 or 5.9 months of sales. Inventories decreased quarter-over-quarter by $4 million excluding exchange rate impacts. Days of inventory outstanding were 80 days. Days of sales outstanding for the quarter were 45 days. Days of payables outstanding for the quarter were 37 days, resulting in a cash conversion cycle of 88 days.

We had a total liquidity of $1.8 billion at quarter end. Cash and short-term investments comprised $1.3 billion and unused capacity on the credit facility was $486 million. The carrying value of our debt of $370 million is net of the unamortized issuance cost of $9 million and includes: $150 million outstanding on that credit facility and $229 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, 2017, the convertible debentures due in 2040 and 2042 are redeemable for the next quarter. Accordingly, for those tranches, we have reclassified the differences between the carrying value and the principal amount from stockholders' equity to a separate line between liabilities and equity on our consolidated balance sheet. If the debentures are converted, we would fund a principal amount for the borrowings on our revolving credit facility and net share settled amounts in addition to the principal amount. And 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. 2017 for Vishay has been a very successful year, showing an accelerated improvement of our financial performance. Throughout the year, we were carried by a very high level of demand in virtually all market segments. Historically high order rates, high backlogs and long lead times characterized the year as well as quarter 4 and the beginning of 2018. We keep increasing manufacturing capacities and output of our key product lines. Vishay in 2017 achieved a gross margin of 27% of sales, as compared to 25% in 2016, and adjusted operating margin of 12% of sales versus 9%. A GAAP EPS loss of $0.14 due to U.S. tax-reform-related changes versus a gain of $0.32 last year and adjusted earnings per share of $1.43 versus $0.85 in the year 2016.

We generated in 2017, free cash of $200 million, which is the best performance in 6 years. The fourth quarter was practically in line with our performance of the entire year. We achieved a gross margin of 26% of sales, adjusted operating margin of 12% of sales, a GAAP EPS loss of $1.23 and an adjusted earnings per share of $0.37.

Let me talk about the economic environment. The economic environment during 2017 has been fairly excellent, and exceeded our expectations substantially. This is in particular through for our key markets, automotive and industrial. Market demand exceeded, and continues to exceed, available capacity in several product areas, mainly in semiconductors, forcing continued allocation and creating some supply concerns with our customers. During the entire year, and in particular in the fourth quarter, high order levels are driven by distribution in all regions.

The economic environment offers the opportunity for more stable pricing. Let me talk about regions. All regions in 2017 did well. We have seen steady improvement of business conditions in the American market through the year, driven by healthy macroeconomics. We have seen ongoing strength of the European business. Central European manufacturers in automotive and industrial segments capitalize on their traditional strength, and we have seen a strong growth in Eastern Europe in particular. There were very strong Asian markets, mainly for industrial equipment, energy, infrastructure and automotive electronic equipment.

Let me come to distribution. Worldwide distribution in 2017 ensured quite excellent business conditions. Worldwide POS grew by 14% over prior year. Also in the fourth quarter, orders to distribution from end customers continue to be extremely strong. 24% above prior year after 28% above in the third quarter.

Despite an inventory increase of 10% in the year, inventory turns of distributors remained at a very healthy level of 3.6 in the fourth quarter as compared to 3.7 in prior quarter and to 3.3 in prior year. In the Americas, 2.1 turns after 2.2 in the third quarter, and 1.9 in prior year. In Asia, 4.9 turns after 5.1 in quarter 3, and 4.9 in prior year. And in Europe, 3.9 turns after 4.2 in Q4 and Q3 and 3.3 in prior year. There is unbroken confidence of distributors concerning the year 2018.

Let me comment on the various industry segments we serve. Automotive continues to be the main driver of growth in our industry. Customers expect further growth in the 10% range due to increasing electronic content, driver-assist systems, 48-volt projects, new LED technology and e-mobility, in general, are the main drivers. Also industrial markets remained strong across all regions. Drivers are factory automation, infrastructure programs, alternative energy and Internet of Things sensoring.

Computing has stabilized, offering for us nice business opportunities. There's a mixed picture concerning telecom, we see fierce competition amongst global telecom manufacturers. There are various opportunities in consumer markets, mainly in gaming systems, premium TVs and white goods. Avionics, military and space continue to be stable with program-specific business opportunities. Medical markets remained strong and are expecting to grow steadily.

Coming to the development of our business. In the fourth quarter, sales excluding exchange rate impacts, came in slightly above the midpoint of our guidance. We achieved sales of $674 million versus $678 million in prior quarter and $571 million in prior year. Excluding exchange rate effects, sales in the fourth quarter were down versus prior quarter slightly by $4 million or 0.6%, but up versus prior year by $86 million or 14.5%. Sales in the year 2017 were $2.60 billion versus $2.32 billion in 2016, an increase of 11%, excluding exchange rate effect.

Book-to-bill ratio of 1.28 in the fourth quarter was strong across the board. We have seen 1.40 for distribution after 1.15 in quarter 3; 1.13 for OEMs after 1.06 in quarter 3; 1.40 for actives after 1.13; 1.15 for passives after 1.09; 1.14 for the Americas after 1.04; 1.40 for Asia after 1.15; and 1.23 for Europe after 1.12. Backlog in the fourth quarter, again, increased quite dramatically to 5 point month from 5.0 month in the third quarter, 6.8 months in actives and 4.9 months in passives.

We have seen decreasing price decline in general. 0.2% decline versus prior quarter and 2.3% price decline versus prior year. For actives, semiconductors, there was no price decline versus prior quarter and 2.7% down versus prior year. For passives, 0.4% price decline versus prior quarter and 1.9% decline versus prior year.

Let me talk about our operations and give you some highlights. Also in 2017, we were able to offset the negative impact of inflation and price decline on the contributive margin by cost reduction and innovation. SG&A costs in Q4 came in at $98 million, slightly above expectations. SG&A costs for the year 2017 were at $377 million, $5 million or 1.4% above prior year at constant exchange rates. Manufacturing fixed costs in the fourth quarter came in at $124 million, slightly above expectations. Manufacturing fixed costs for the year 2017 were $485 million, $7 million or 1.5% above prior year, again at constant exchange rates.

All in all, Vishay in 2017, again, managed to compensate to a large extent the inflation on its total fixed cost by cost-reduction programs. Excluding exchange rate effects, total fixed costs year-over-year just increased by $12 million or 1.4%, virtually all coming from incentive compensation. Total employment at the end of 2017 was 23,015 people, approximately 4% up from prior year. Excluding exchange rate impacts, inventories in the quarter were reduced by $4 million, raw materials increased by $3 million, WI process and finished goods decreased by $7 million. Inventory turns in the fourth quarter remained at a very satisfactory level of 4.5. In the year 2017, inventories increased by $38 million, raw materials by $18 million and WIP and finished goods by $20 million. Inventory turns for the year 2017 were at a good level of 4.6.

Capital spending in 2017 was $170 million versus $135 million in prior year. We spent $85 million for expansion, $18 million for cost reduction and $67 million for maintenance of business. Extended lead times for equipments last year where leading to an increase carryover into this year. For 2018, we expect CapEx of about $210 million, in accordance with requirements of the markets, pulling in projects from our existing expansion plans.

Generated in 2017, cash from operations of $369 million versus $296 million in prior year. Generated in 2017, free cash of $200 million, a substantial improvement versus a good prior year when we had generated $168 million. Vishay another time has lived up to its reputation as an excellent and reliable producer of free cash.

Coming to our main product lines. I'd like to start 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 successfully concentrate on growing in the Asian, predominantly the Chinese industrial market. Bills in the fourth quarter were $260 million, virtually on the level of prior quarter but up versus prior year by 12%, excluding exchange rate impacts.

Year-over-year, resistors and inductors grew from $750 million in 2016 to $839 million in 2017 by 11%, excluding exchange rate impacts. The book-to-bill ratio in the fourth quarter was 1.19 after 1.15 in prior quarter. All this indicates continued growth. Backlog increased to an historical level of 5.2 months, reflecting quite extreme demand for SMD and fixed wirewound resistors as well as for power inductors.

Gross margin in the quarter came in at 29% of sales after 30% in prior quarter, impacted by inventory reduction. Gross margin for the year 2017 was 30% of sales, which is on the level of 2016. There was some impact, some negative impact of training requirements and overtime for additional production staff. Also somewhat higher repair, maintenance costs for really -- totally utilized capacities.

Inventory turns in the fourth quarter remained at a very satisfactory level of 4.5 as compared to 4.7 for the entire year. Low price decline for resistors and inductors, 0.1% down versus prior quarter, 1.7% down versus prior year. We continue to invest in manufacturing capacities of power inductors, metal strip resistors and thin film 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 power transmission and of e-cars, namely in Asia.

We entered in 2017, the Chinese power transmission market in a major way. Sales in the fourth quarter were at $106 million, 10% above prior quarter and 26% above prior year, which excludes exchange rate effects. Year-over-year capacitor sales increased significantly from $337 million in 2016 to $384 million in 2017, by 13% excluding exchange rate impacts.

The book-to-bill ratio in quarter 4 was 1.08 after 0.97 in previous quarter. Backlog remained at a high level of 4.3 months. Gross margin of capacitors in the quarter remained at 20% of sales. Gross margin for the year 2017 was at 20% of sales on the level of 2016, negatively impacted by a less favorable product and customer mix and by additional costs for over time in training of new personnel. Also the exchange rates for this line did not help.

Inventory turns in the quarter were 4.0 as compared to 3.9 for the whole year. Price decline was normal, 1.1% down versus prior quarter and 2.4% down versus prior year, and we continue to see numerous opportunities for growing the capacitor business, especially in Asia.

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 opportunities for mid- and longer-term growth, especially, the segment of sensors. Sales in the quarter were $70 million, 9% below prior quarter and 1% below prior year, which excludes exchange rate impacts. Year-over-year, sales with Opto products increased from $272 million to $286 million by 5%, excluding exchange rate impacts. The book-to-bill ratio in the fourth quarter for Opto products was 1.21 after 0.94 in prior quarter. And the backlog increased substantially to 4.6 months from 3.6 months in the third quarter. Gross margin in the quarter came in at a somewhat disappointing 33.0% of sales after 38% in the third (inaudible) represented a record. The gross margin was impacted negatively by an inventory decrease as compared to an increase in prior quarter by a nonrepetition of Q3 positive singularities in manufacturing fixed costs.

Gross margin for the year 2017 came in at quite excellent 34% of sales as compared to 32% in prior year. By the excellent inventory turns of 5.6 in the fourth quarter as compared to 5.5 in the year 2017. Low price decline, 0.9% down versus prior quarter and 1.9% down versus prior year. We remain very confident for this line growing steadily and profitably also in future.

Diodes. Diodes for Vishay represents 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 at $160 million, 1% below prior quarter but 15% above prior year, which exclude exchange rate effects. Year-over-year sales with diodes increased from $554 million to $621 million, it means by 12% excluding exchange rate impacts. We have seen a very strong book-to-bill ratio of 1.34 in Q4 after 1.18 in Q3, mainly driven by distribution. The backlog for diodes increased to a record level of 7.3 months from 6.2 months in prior quarter. There are unusually long lead times in this product segment currently.

Gross margin in the quarter was at 26% of sales, slightly below Q3 at 27%, which has been a record. Gross margin in the year 2017 grew to a fairly excellent level of 26% of sales, coming from 24% in 2016. Inventory turns remained at very satisfactory -- at a very satisfactory level of 4.9 as compared to 5.0 for the full year. Substantially reduced price decline we see, an increase of 0.3% versus prior quarter and a decrease of 2.0% versus prior year. And we are expanding manufacturing capacities for all critical lines as fast as we can.

Finally, MOSFETs. Vishay continues to be one of the market leaders in MOSFET transistors. MOSFETs over the last years developed a strong and growing position in automotive, which really, the business now benefits from. Sales in the quarter were $122 million, 3% below prior quarter but 19% above prior year, excluding exchange rate impacts. Year-over-year sales with MOSFETs increased from $406 million to $468 million, it means by 15%, excluding exchange rate impacts. In Q4, there was a quite historic book-to-bill ratio of 1.59 after 1.19 in the third quarter. We have seen extremely strong orders, namely from automotive and from distribution. The backlog increased to a record level of 7.3 months coming from 5.3 months. Also in MOSFETs, we currently see unusually long lead times.

Gross margin in the quarter was stable at 26% of sales. Obviously, our fundamental restructuring program for the MOSFETs yielded quite sustainable improvements as we expected. Gross margin in the year 2017 grew to a very satisfactory level of 23% of sales coming from just 14% in 2016. Inventory turns of 4.3 in the quarter as compared to 4.2 in the year. Like for the diodes, we see price decline being substantially reduced. No price decline versus prior quarter, 3.9% price decline versus prior year. We are in process to increase manufacturing volume at foundries, hence to maximize the output of our fab in Itzehoe as fast as we can. We are very confident concerning future growth of this line, in particular in automotive.

Let me summarize. Supported by an excellent economic environment and based on own efforts, Vishay enjoyed a very successful year 2017. Financially sides improved noticeably vis-à-vis the year 2016, which already has been fairly satisfactory. The generation of free cash was the highest since 6 years. We are proud of this performance. Vishay, also in 2017, demonstrated its operational strength in pursuing and completing major operational targets, likely being disciplined in controlling tightly fixed costs also during a strong upturn or like pushing ahead in Asian, automotive and industrial markets. The strong free cash flow enables us again -- enabled us again to raise the cash dividend to continuously rejuvenate and upgrade our organization, also to invest in promising product lines in a major form. We currently evaluate the impact of the U.S. tax reform on our capital structure. We are decided, and already on the way to prepare ourselves for new and very positive challenges we likely will have to face in the context of an accelerating market growth, especially, in automotive, and especially, in industrial applications. We are excited about our opportunities going forward. For the first quarter, we guide to a sales range between $665 million to $705 million at gross margins of between 26% and 27% of sales.

Thank you very much. I'll turn the call back to Peter.

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

(Operator Instructions) Your first question is from the line of Jim Suva.

It's Jim Suva from Citi. When you gave the CapEx guidance for 2018, it looks like it's up pretty materially. Can you help us understand the timeline of what's being installed in the revenue contribution of that, and will there be a gross margin headwind as that CapEx is turned on or ramping or is it not going to be a gross margin challenge? Just kind of curious how the CapEx and revenues and margins fold in?

First of all, a part of this investment, we would have liked to make already in 2017. But the lead times of the equipments were long and stretched out, like the lead times of our products. Secondly, they come piece by piece, as a matter of fact. It goes over the whole year, and concerning gross margin, there's no concern on that. And also, what we invest is really covered by long-term plans. We just accelerate plans we had before. We do have products that go fast, and we accelerate that, driven by the market but concerning gross margins, we don't have to be concerned. Altogether, this will enable us, once more, to increase our capacity substantially, vis-à-vis 2017.

Great. And my follow-up is then that capacity since the lead time of equipment has extended, and you would have liked to come in, in 2017 or '18. Yes, when do the revenues really start to come on materially? Is it like mid-year? Is there a step function or is it folded in gradual?

No, no, it's a continuous increase vis-à-vis prior year. It goes not exactly at the same rate but you will see quarter-after-quarter always an increase versus prior year, which of course, was an increase in itself. So the first quarter 2017 was below the fourth quarter 2017, and we grow then continuously as the equipment are installed and people are hired.

Okay, and then my last question is, you'd mentioned this quarter had a gross margin challenge with a singularity. Was that like a work/shift change or like a product transition change or how can we have confidence the singularity doesn't come back again?

Jim, it was actually the nonrepetition of positive singularities in Q3, what Dr. Paul explained. Particularly for the...

Yes, okay. I understand. Got you. So Q3 had a positive one that didn't repeat in Q4 as opposed to a negative item in Q4.

Our next question line of Shawn Harrison.

This is Gausia Chowdhury on behalf of Shawn Harrison. The first question is just about the guidance. At the mid point, it still looks to be lower than seasonal but the book-to-bills keep pushing up. I understand there's capacity constraints but can you explain the disconnect if there's anything else we should be thinking about?

I don't think there's a disconnect. If you compare to the first quarter last year, it's a substantial increase and it's really the reflection also of the equipment available and the working days in the first quarter. So that's approximately what we can do.

Okay, great. And then the higher SG&A for the year, can you talk about the cadence of the year and any particular factors behind the step up, please?

Of the year 2017?

Yes. Sorry, for 2018, the guidance.

Approximately flat, we said $400 million, it's $100 million per quarter roughly.

And that's a step up from 2017, correct? So can you...

Yes, inflation. Yes, wage increases, really. The wage increases drives that as a matter of fact. You have 3% around the world, I would say as an average. And this is what drives the cost up.

Okay, all right. And lastly, just about the gross margin question, again. How much impacted -- I know there were singularities, positive ones in the third quarter, but looking forward, how much of an impact does it have on the guide just based on your guidance for the first quarter. Will you see that negative impact permanently throughout 2018 or how should we think about?

A part of the gross margin that -- the negative impact on the gross margin had some training issues of new people increase of capacity, to a degree as we continue to increase our capacity, you will continue to see it but at a lower rate, I would say. We have taken quite a few people in.

And your next question of the line of Ruplu Bhattacharya.

First of all, Vishay's capacity constraint, your adding capacity. The book-to-bill is still unusually high. I mean, at distribution I think you said 1.4. So -- and OEM book-to-bill is also high. So obviously, the two questions are, what's the danger of double ordering and once you've added your capacity and your competitors are adding capacity, what's the danger that the industry goes into an oversupply situation in the second half of '18? So just your thoughts on these 2 things.

Ruplu, I expected the question somehow, I must admit that. So as a matter of fact, it's very true what you say. We do have enormous orders. On the other hand, it's clear that there is some double ordering. Absolutely clear, has to be. Which does not mean that when things normalize we would see any impact really on our sales, as a matter of fact. And concerning the danger that we invest too much, that we expand too much and then afterwards suffer, its very unlikely. Because there is a price decline as the market grows anyway. So -- and we do invest in lines, which historically grow and continues, and we expect them to grow according to our plans also. We just accelerate programs, we don't invent new programs. We just accelerate programs, which we would have said anyway. And I believe the danger that we do too much depends, of course, if really the prices come it can happen for a short time. But principally speaking, there is no capacity that according to my recollection, that we invested in the last, say, 20 years or so, I even say it like that, that we couldn't use later on. So the danger is very low.

And I think on the call you mentioned, that there is a shortage in semiconductors. How about resistors, inductors and capacitors? Are you adding capacity there? Is there a shortage of capacity?

Also, yes. Okay it was -- I didn't say it's not in passives. It's also in passives. Only in semiconductors, it's stronger. In diodes and in MOSFETs it's really strong. It's -- I cannot remember such a demand which we see now. And in the passives, since you ask it, it's the same more or less, not quite the same but the same direction. In resistor chips, very conventional products, in resistor chips, in power inductors for instance, to a degree also in tantalum, as a matter of fact, also in passives you see the effect but not as strong as in semiconductors.

Okay. And then maybe just for my last question, switching to buybacks and repatriation. I think on the call, you talked about a measured pace of repatriation. Could you just remind us on what authorization, what amount of authorization is left and if you can give us any guidance on what that means in terms of measured pace like how should we think about how much or how soon you can bring back the cash and your plans for dividends increases our buybacks?

Well, Ruplu, it's early to answer. These changes are quite recent. And at a measured pace, really means mainly that we don't jump with both feet into something which we haven't analyzed before. And we are in process to analyze our new freedom which we have and it did exists, you are right, it exists. But, of course, this requires some discussion internally. So at this point in time, forgive me, I don't think I can give details. We have to discuss that internally. We have to talk to our board if it's clear enough and then we will come to conclusions. But you're right, we have a new degree of freedom which we are going to use.

Your next question comes from the line of Matt Sheerin.

This is Matt Sheerin with Stifel. So Dr. Paul, you've been pretty helpful here. But as you said, it looks like 60% to 70% of your product portfolio is in short supply, and we've seen lead times of 20 weeks, 30 weeks plus. So I guess the issue without you being specific about capacity, how much revenue capacity is coming online. It looks like you're pretty much capped here in terms of revenue, for at least the next 2 to 3 quarters. And then margins, obviously, there seems to be some incremental cost relative to ramping that revenue. So trying to figure out what could move the numbers here from where they are? It looks like your contribution margin year-over-year is going to be in the 30% range, which is below your 40-plus percent target. So just trying to figure out, is there a much more -- aside from the capacity you're bringing online, it looks like you're capped out here. Is that one way to look at it or?

Two remarks I would like to make. Number one, we take in new equipment and it comes in, as I said before, quarter-by-quarter. So altogether, if you really try to quantify, which is not completely easy, how much more sales we can generated based on this new investment, year-over-year, comparing 2017 and '18 you come to 8%.

8% for this year? Okay, okay.

Yes. So if you really calculate that, of course, it's not an exact calculation but it's a direction. I think it's a good guess, good estimate. And secondly, from a variable margin standpoint, this is what you referred to. We have on (inaudible) our variable margin, our contributive margin all along. Only there were some effects between quarter 3 and 4 partially because quarter 3 contains singularities, which did not repeat themselves in quarter 4 and we knew that, we said it. And secondly, you also have, of course, increased training needs. We had -- last year, we had to train a lot of people, as you can imagine. And there is, of course, some losses when you take in the people until they learn and when we are quite nicely ahead of our schedule. So we can expect some improvements there.

Okay. And then why are we not hearing about price increases of some of your competitors, both on the semi and the passive side, resistors, capacitors have put price increases through and it doesn't sound like you folks have, although you're seeing a less pronounced decline in ASPs. I know during the last cycle, you did have some price increases, particularly in the form of expedited shipments. So why are you not increasing prices or are you?

Matt, we actually do increase prices. The point is only 50% of our business roughly is with OEMs and most of them is based on contract -- longer-term contracts. We keep our contract. It means, in this case, in this contract you have price decrease anyway, right? And you cannot change that, you honor your contracts. And then on the -- and overall, we (inaudible) have any -- we have the whole price decline, or in some cases, you may have heard, it was even constant. That means we do have some price increases. Yes, we do. Otherwise the price decline overall wouldn't be explainable.

And that -- so that's primarily through distribution then, right?

Right.

Yes, okay. That's helpful. And then just as this capacity comes online, right? And lead times come in, in theory, that backlog -- that 6, 7-month backlog, which we've really never seen here from Vishay, a lot of that will just disappear, right? As lead times come in.

I could imagine that it has to be like that. They'll normalize. But it does not mean that we necessarily see an impact on the sales line. It's just -- there is double ordering in the market. No question about it and if this -- may I call it, flatfoot go away, this does not mean that our development as a company would suffer to any degree.

Okay. And just regarding -- I mean, you seem to have a good read on distribution sell-through or the POS, and are there signs that your OEM customers, which can get all the product they want from you, they're ordering from distribution and a concern there, that as they bring in more inventory that, that you would see cuts there, maybe later in the year?

I wouldn't -- reconfirmed it. Of course, we are watching the situation at distribution, especially as the lead times so long, especially as they order so much. So the inventory is very reasonable at this stage, it's very, that OEMs order more from distribution now. I cannot exclude it but I don't have tangible -- no tangible observations now.

Okay. And just last question for me, maybe for Lori. On the -- you said that the margin was impacted somewhat by incremental environmental cost or cleanup costs. Can you tell us what that was related to and how long that's going to be going on for?

So as you know, we've been downsizing our activity in Santa Clara. And as part of the cleanup as we are moving out of the facility, we had an additional environmental charge that we needed to take in quarter 4.

Okay. And that won't repeat this quarter?

At the moment we think we're fully accrued, but of course, we review it several times during the year, all of our sites. And so normally, at this point in time, we feel that we're appropriately accrued.

And your next question from the line of Harlan Sur.

Capacity revenues were up sequentially in Q4, which seemed sort of against sort of the normal seasonal trend for the business. Can you just help us understand some of the drivers there? Did you guys bring on some additional capacities, so were able to shift to the strong backlog or were there some end market strengths that drove the quarterly trends?

It was a good quarter in general but there was one real event. We shipped the major portion of power caps to China. I may -- I tried to say it indirectly, that we got a much stronger foothold in the energy transmission applications in China and there were large shipments in the fourth quarter.

Great, thanks for that. And then on the gross margin front, it seems like Opto, right? Was the big driver of the slightly lower-than-expected gross margins but they dropped pretty significantly. It was like about a 800 basis points dropped to 30% and that's a level that we haven't seen in like over 4 quarters and so, I want to make...

(inaudible) 8%, they're not normal. Opto is our -- from a relative profitability standpoint, the best line as you know. Very consistent, but 38% which we showed in quarter 3 was really driven by singularities, which we said at the time. And now it would have normalized anyway, and then on top of everything, they had some inventory movements. I can assure you that Opto, year-over-year, was a nice improvement and it will continue to improve next year. So as a matter of fact, we are not worried whatsoever. In that sense, quarter 4 came in, especially, in comparison to an excellent quarter 3 as a -- it's kind of disappointing, it's true, but this doesn't mean anything for the future.

So do you expect gross margins in Opto to start to grow, starting here in the March quarter?

Yes, yes. As a matter of fact, the 30% is low, was relatively low for Opto conditions. This is more like 32%, 34%. There is no reason why it wouldn't kind of go back.

And then my last question is, you think about the CapEx profile for this year and you layer on top of that equipment lead times, which I would agree are getting extended. Can you help us think about how you're going to prioritize adding capacity for the different product lines?

You mean with the time cycle or how it comes?

How are you going to prioritize the CapEx versus the different product categories and yes...

Because I can.

The timeline I'm bring that on?

Yes. I can not (inaudible) but approximately the center of our investments is clearly in diodes and in resistors, clearly. This is where the need's especially strong also MOSFETs, we'll get a portion of the investment, a strong portion of the investment. But in this case, we work through foundries, so not directly, so this is why it's not as big. But really the most part goes into diodes, which is the biggest line anyway and into resistors, where we see an enormous demand in the market for resistor chips and also inductors. So this is where we spend most of the capital. Of course, we could break it down further but that in real hasn't changed. So the focus of our investments over the last years hasn't changed. We just accelerate what we wanted to do in future anyway.

And there are no other questions at this time.

This concludes our Fourth Quarter Conference Call. Thank you for your interest in Vishay intra- technology.

This concludes today's conference call. You may now disconnect at this time.