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Vishay Intertechnology Inc  (NYSE:VSH)
Q3 2018 Earnings Conference Call
Oct. 30, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q3, 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I will now turn the conference over to Mr. Peter Henrici. Please go ahead.

Peter Henrici -- Senior Vice President Corporate Communications

Thank you, Crystal. Good morning, and welcome to Vishay Intertechnology's third quarter 2018 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.

Additional factors are described in our earnings release for third quarter of 2018. Our estimates may change and the Company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions, or other factors except as required by law. 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 specific third quarter 2018 information the CEO and CFO will be discussing on the call.

Now, I turn the call over to Chief Financial Officer, Lori Lipcaman.

Lori Lipcaman -- Executive Vice President & Chief Financial Officer

Thank you, Peter, and 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 three of $781 million. EPS was $0.51 for the quarter. Adjusted EPS was $0.60 for the quarter. All of the reconciling items between GAAP EPS and adjusted EPS are tax related, primarily due to the continuing evolution of our accounting for US tax reform, as permitted by SEC Staff Accounting Bulletin 118. There were no reconciling items impacting gross margin or operating margin.

During the quarter, we continued to execute transactions in response to US tax reform. We completed the second phase of our program to repatriate some of our foreign earnings to the United States. The repatriation transactions resulted in the payment of $65 million of foreign withholding and other taxes during the quarter, on top of the amounts paid in Q2. These taxes have been accrued at the enactment of US tax reform in Q4, 2017. The payment of these taxes is reflected as an ongoing -- as an operating cash flow on the statement of cash flows. I will elaborate on these transactions in a few moments.

Revenues in the quarter were $781 million, up by 2.6% from previous quarter and up by 15.2% compared to prior year. Gross margin was 30.3%. Operating margin was 17.7%. There were no reconciling items to arrive at adjusted operating margin. EPS was $0.51. Adjusted EPS was $0.60. EBITDA was $175 million or 22.4%. There were no reconciling items to arrive at adjusted EBITDA.

Reconciling versus prior quarter, operating income quarter three 2018, compared to operating income for prior quarter based on $20 million higher sales or $27 million higher excluding the exchange rate impacts, operating income increased by $15 million to $138 million in Q3, 2018, from $123 million in Q2, 2018. The main elements were average selling prices had a positive impact of $4 million, representing a 0.6% ASP increase; volume increased with a positive impact of $11 million, equivalent to a 3.1% increase in volume; variable and fixed cost increased with a negative impact of of $3 million; exchange rates had a positive impact of $5 million.

Versus prior year, operating income quarter three 2018 compared to adjusted operating income in the prior year based on $103 million higher sales, or $105 million excluding exchange rate impacts, adjusted operating income increased by $39 million to $138 million in Q3, 2018 from $99 million in Q3, 2017. The main elements were average selling prices had a positive impact of $4 million, representing a 0.5% ASP increase; volume increased with a positive impact of $53 million, representing a 15.1% increase, including the UltraSource contribution; variable costs increased with a negative impact of $5 million; fixed cost increased with a negative impact of $13 million, primarily due to wage increases, incentive compensation, legal and other fees, acquisitions and R&D expenses.

Selling, general, and administrative expenses for the quarter were $98 million, lower than expected due to exchange rate impacts, lower legal and other fees. For quarter four, 2018, our expectations are approximately $101 million of SG&A expenses and approximately $404 million for the full year at constant exchange rates.

As mentioned in my opening remarks, during the third quarter, we continued the process of cash repatriation to the US. Recall that while such amounts are no longer subject to US federal taxes, they are subject to foreign withholding and other taxes, and some state income taxes. We have accrued about $232 million of taxes on approximately $1.2 billion of foreign earnings available for eventual repatriation, most of which was accrued upon enactment of US tax reform in the fourth quarter of 2017. In total, we received approximately $450 million for the quarter and approximately $724 million year-to-date in the United States.

We utilized much of these amounts to reduce the outstanding balance of our credit facility to zero and to repay certain intercompany indebtedness. As a result of these transactions, we paid approximately $65 million for quarter three and $157 million year-to-date of foreign withholding and other taxes. Additionally, in Q2, we paid the first installment of the US transition tax of $14 million. These tax payments are reflected as operating cash flows on our statement of cash flows, thus explaining the negative free cash per year-to-date. This leaves about $300 million of cash available for repatriation with taxes accrued. We are still evaluating the time of such repatriation, but do not expect it to be in 2018.

We had a total liquidity of $1.7 billion at quarter end. Cash and short-term investments comprised $1.1 billion, and there are no amounts outstanding on our $640 million credit facility. For several years substantially, all of our cash and cash equivalents and short-term investments were held by subsidiaries outside of the United States. At the end of Q3, following these repatriation transactions, the uses of such cash described above, we have approximately $425 million of cash and cash equivalents and short-term investments in the United States. We are continuing to evaluate the future utilization of the remaining repatriated cash. The US parent company and our US operating subsidiaries have significant financing and operating cash needs.

Our Board of Directors has authorized us to repurchase certain convertible debt instruments in open market repurchases or through privately negotiated transactions subject to market and business conditions, legal requirements and other factors. Such authorization does not obligate us to acquire any particular amount of convertible debt instruments and would be terminated or suspended at any time at our discussion, in accordance with applicable laws and regulations. We expect to fund any repurchases through cash on hand, including the repatriated cash, and if necessary, borrowings under our revolving credit facility.

The carrying value of our debt of $588 million is net of the unamortized issuance cost of $18 million and includes $114 million remaining of the convertible debentures, net of unamortized discount issued in three tranches and due in 22, 23 and 24 years, respectively, and $492 million of the new convertible notes, net of unamortized discount due in 2025.

The principal amount or face value of the converts totaled $886 million, $600 million related to the new notes and $286 million related to the remaining debentures. As I said, no amount are outstanding on our revolving credit facility at the end of Q3. No principal payments are due until 2025. However, the convertible debentures may be redeemed if certain stock price thresholds are met.

At the end of Q3, 2018, the convertible debentures due 2040 and 2042 are redeemable for the next quarter. Accordingly, for those tranches, we have reclassified the difference 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 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.

As permitted by SEC Staff Accounting Bulletin 118, we continue to evaluate the impact of enactment of US tax reform. Based on additional analysis completed in the third quarter, we've recorded an additional $13 million of tax expense related to the enactment. This includes an approximately $7 million adjustment to the accrual for incremental foreign income taxes and withholding taxes payable to foreign jurisdictions related to our repatriation plans and an approximately $6 million adjustment to the transition tax obligation. These amounts related to the enactment of tax reform should still be considered provisional estimated by SAB 118, subject to finalization in Q4.

Additionally, our US GAAP tax expense for the quarter and year-to-date periods, include adjustments to remeasure the deferred tax liability related to those incremental foreign taxes payable upon repatriation, such as foreign currency effects. A similar remeasurement will occur quarterly until such amounts have been repatriated. That remeasurement adjustment with a $1 million expense for the third quarter and represents a benefit of about $7 million year-to-date.

Our GAAP tax rate for the year-to-date period, primarily due to unusual tax items recorded in Q2 and Q3 was approximately 23%. This mathematically yields a rate of approximately 38% for Q3.

Our normalized effective tax rate, which excludes the unusual tax items was approximately 28% for the year-to-date period. This mathematically yields a rate of 27% for quarter three. We expect our normalized effective tax rate for the year to be about 28%. We continue to be impacted by the new GILTI tax, the new BEAT tax and limitation on deductibility on some of our interest expense. We continue to evaluate the provisions of the new US tax law. We may further adjust our financial and capital structure to reduce our effective 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 fourth quarter 2018 based on the average stock price fourth quarter to-date is approximately $150 million. For a full explanation of our EPS share count and variables that impact that calculation, please refer to the 8-K we filed this morning.

Cash flow from operations for the quarter was $71 million. Capital expenditures for the quarter were $50 million. Free cash for the quarter was $21 million. For the trailing 12 months, cash from operations was $232 million. Capital expenditures were $212 million, split approximately for expansion, $122 million; for cost reduction, $24 million; for maintenance of business, $66 million. Proceeds from the sales of property and equipment were $9 million for the trailing 12 months. Free cash generation for the trailing 12 months was $28 million. Both the quarter and the trailing 12 months includes significant cash taxes related to US tax reform and cash repatriation.

Vishay has consistently generating excess of $100 million cash flows from operations in each of the past 23 years and greater than $200 million for the last 16 years. Backlog at the end of quarter three was at $1,560,000,000 or 6.0 months of sales. Inventories increased quarter-over-quarter by $19 million, excluding exchange rate impacts. Days of inventory outstanding were 82 days. Days of sales outstanding for the quarter were 46 days. Days of payables outstanding for the quarter were 34 days, resulting in a cash conversion cycle of 94 days.

Now, I will turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

Gerald Paul -- President & Chief Executive Officer

Thank you, Lori, and good morning, everybody. Vishay also in the third quarter continued to enjoy excellent business conditions in virtually all of its markets. Inventories in the supply chain, in general show some increases, but there are no tangible signs of a slowdown in our industry. Record volume and good efficiency supported the further substantial increase of revenues and profitability.

Vishay in the third quarter achieved a gross margin of 30% of sales; operating margin of 18% of sales; GAAP earnings per share of $0.51; and adjusted earnings per share of $0.60. We continue to be a reliable generator of free cash. However, the year 2018 will be burdened by approximately $157 million of foreign cash taxes related to our announced cash repatriation.

Let me talk about the economic environment in general. The economic environment in the third quarter, as I said, continued to be very friendly. In particular, Vishay's key markets automotive and industrial do well. The manufacturing output of suppliers starts to catch up to market demand, but lead times still remain long in general. Distributors have started to clean up backlogs and inventories, mainly in Asia.

Coming to the regions, all regions also in the third quarter continue to do very well. The Americas show very robust economic conditions and then the exceptionally strong industrial market. Europe is still driven by strong automotive and industrial markets, we have seen some normal seasonality. Growth in Asia continues in particular, in automotive and industrial segments. There are some concerns starting to build in the market related to new US tariffs.

Distribution -- worldwide distribution continued strong also in the third quarter. There was another slight increase of POS quarter-over-quarter by 1%, but the major increase of 14% year-over-year, so POS remains very strong. Distributors continue to enjoy high order rates with book-to-bill substantially above one. Inventory at distributors increased by 9% in the quarter. Inventory turns of distributor slightly reduced to 3.5, as compared to 3.7 in prior quarter and to 3.7 also in prior year, but this is still a healthy situation. Some details by regions. In the Americas, inventory turns were 2.3 after 2.4 in the second quarter and 2.2 in prior year. In Asia, 4.5 turns vis-a-vis 4.7 in Q2 and 5.1 last year. In Europe, 3.8 turns after 4.3 and 4.2 in the prior year.

Coming to the industry segments. Automotive continues to be the main driver of growth in our industry, with general electrification of the vehicle driving new programs in several sectors. Also, industrial markets remained strong across all regions and across a wide range of product segments. Fixed telecom showed some signs of recovery, starting to be supporting by 5G projects. PCs and mobile phones on the other hand, remained relatively weak. AMS and medical continue to look positive, with steady growth expected for 2018 and beyond.

Let me comment on our business development in the third quarter. Sales in Q3, excluding exchange rate impacts came in at the midpoint of our guidance. We achieved sales of $781 million versus $761 million in prior quarter and $678 million in prior year. Excluding exchange rate effects, sales in the third quarter were up versus prior quarter by $27 million or by 3.6%, and up versus prior year by $105 million or 15.6%. We have seen a book-to-Bill ratio of 0.95 in the third quarter. 0.80 for distribution after 1.23 in the second quarter. 1.15 for OEMs after 1.08 in the second quarter. 0.87 for actives after 1.06 in the second quarter. 1.02 for passives after 1.29 in the second quarter. 1.06 for the Americas after 1.29. 0.69 for Asia after 1.09. 1.16 for Europe after 1.18. There has been a cleanup of backlogs, mainly by Asian distributors for semiconductor products.

Orders from OEMs on the other hand continue to be steady and strong. The backlog started to normalize, but is still at a very high level of six months, which is practically twice -- two times the normal situation historically. We have 6.3 months in actives and 5.7 months in passives. Selling prices continued to go up in general, 0.6% versus prior quarter and plus 0.5% versus prior year. For the actives, we see plus 0.4% versus prior quarter and plus 0.7% versus prior year. And for the passives, plus 0.7% versus prior quarter, and plus 0.2% versus prior year.

Some highlight of our operations. Also in Q3, we were able to offset the negative impact of inflation on the contributive margin by cost reduction and by innovation. SG&A costs in the quarter came in at $98 million lower than expectation, also due to ex-rate effects. Manufacturing fixed costs in the quarter were $126 million, lower than expectations also due to ex-rate impacts. Total employment at the end of the third quarter was 24,130 people, 1.7% up from prior quarter, naturally, the consequence of further increasing capacities for most of our product lines. Excluding exchange rate impacts, inventories in the quarter increased by $19 million, raw materials by $9 million, and we are in process and finished goods by $10 million.

Despite this inventory increase, inventory turns in the third quarter remained at a very satisfactory level of 4.4 after 4.6 in prior quarter. Capital spending in the quarter was $50 million versus $36 million in prior year, $34 million for expansion, $3 million for cost reduction, and $13 million for the maintenance of the business. For the year 2018, we continue to expect CapEx of approximately $220 million.

Concerning cash flow. We in the third quarter generated cash from operations of $71 million versus the generation of $118 million in prior year. Cash from operations in the third quarter was burdened by cash taxes paid related to cash repatriation of $65 million. We generated $232 million on a trailing 12-month basis. Cash from operations on a trailing 12-month basis was burdened by $157 million. We generated in the third quarter, free cash of $21 million versus the generation of $82 million in prior year. Free cash generation in the quarter was burdened by $65 million of cash taxes paid. We generated $29 million on a trailing 12-month basis, free cash generation on a trailing 12-month basis was burdened by $157 million.

Coming to our product lines, resistors and inductors first. Vishay's traditional, and since years, most profitable business grow steadily. With resistors and inductors, we enjoy a very strong position in the industrial, auto, mil, and and in the medical market segments worldwide. Sales in the third quarter were $253 million, up versus prior quarter by $4 million or by 1%, and up versus prior year by $37 million or by 17%, excluding exchange rate impacts.

Book-to-bill in the third quarter was 1.02 after 1.16 in prior quarter. Backlog was stable on a very high level of 5.4 months. Gross margin in the quarter remained at quite excellent 34% of sales. Inventory turns in the third quarter were at a very satisfactory level of 4.2, slightly down from prior quarter at 4.4. There were price increases, plus 0.4% versus prior quarter and plus 0.2% versus prior year. We continue to invest in manufacturing capacities of power inductors, metal strip resistors and thin film resistor chips, as well as MELF film resistors. Our new acquisition, UltraSource was solid and profitable at a gross margin of 40%.

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 electric cars (ph), namely in Asia, especially in China. Sales in third quarter were at $116 million, 5% above prior quarter and 22% above prior year, which again excludes exchange rate effects. Book-to-bill in the quarter was at 1.03 after a spike of 1.59 in previous quarter. Backlog was stable at a very high level of 6.3 months. Gross margin in the quarter increased to 23% of sales from 22% in the prior quarter.

Inventory turns in the quarter were at a satisfactory level of 3.5. Selling prices were increasing by 1.5% versus prior quarter and 0.4% versus prior year-end. We remain confident for the future of capacitors, in view of growing opportunities, in particular, in Asia.

Opto products. Vishay's business with Opto products consists of infrared emitters, receivers, sensors, and couplers, as well as LEDs for automotive applications. Sales in the quarter were $76 million, 2% above prior quarter and 1% above prior year, which excludes exchange rate impacts. Book-to-bill in quarter three was 0.88 after 1.20 in prior quarter. The backlog decreased to 5.0 months from 5.4 months in Q2, it's healthy, the situations, yeah. Gross margin in the quarter increased further to a quite excellent level of 36% of sales, after 35% in the second quarter. Inventory turns of 5.1, very good. Moderate price decline, we have seen of minus 1.1% versus prior quarter and minus 2.6% versus prior year. We do expect increasing opportunities in sensors going forward.

Coming to diodes. Diodes for Vishay represents a broad commodity business, where we're largest supplier worldwide. Vishay offers virtually all technologies, as well as the most complete product portfolio. 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 $187 million, 3% above prior quarter and 16% above prior year, excluding exchange rate effects.

Book-to-bill of 0.86 in the quarter, after 1.08 in the second quarter. The backlog for diodes has started to normalize. We are at 6.8 months, which is down from 7.4 months in prior quarter and still very high. Gross margin in the quarter defended its Q2 record level of 29% of sales. Inventory turns remained at a very satisfactory level of 4.7. Also for diodes, we have seen increasing prices 1.1% up versus prior quarter and 2.4% up versus prior year. And we do continue to expand critical manufacturing capacities.

Last, but not least the MOSFETs. Vishay continues to be one of the market leaders in MOSFET transistors. MOSFETs, over the last years, developed a strong and fast growing position in automotive. Sales in the quarter were $144 million, 6% above prior quarter and 14% above prior year, excluding exchange rate impacts. The book-to-bill for the MOSFETs was 0.88 in quarter three after 0.96 in the second quarter. And like for the diodes, we see a normalization of backlogs continuing 6.3 months now coming down from 7 months in the second quarter, like-for-diode still a extremely high backlog. Gross margin in the quarter was at 27% of sales, slightly below its record level of 28% in prior quarter, simple reason there was no further inventory build.

Inventory turns were very satisfactory at 4.9 turns. Selling prices continue to increase, plus 0.3% versus prior quarter and also plus 0.3% versus prior year. We are in process to expand manufacturing capacities in-house and at foundries.

Let me summarize, carried by a broad and enormously strong demand for most of our product lines, Vishay enjoys another very successful year. We presently see first signs of a normalization of inflated backlogs for commodity products, which is nothing, but normal when supply starts to catch up with demand. Most important overall consumption of OEMs continue strong and so does POS of distributors.

For the mid and long term, we trust in an accelerated growth trend of our key markets, automotive and industrial. In order to be prepared, we continue to raise critical manufacturing capacities, while remaining careful in adding operational fixed costs. Even in times of higher than normal capital expenditures, we remain to be a strong generator of free cash, working also on the optimization of our capital structure.

All in all, Vishay maintains to be financially successful, solid and predictable enterprise, selling innovative and competitive products to promising and growing markets. For the fourth quarter, we guide for a sales range between $745 million and $785 million, at gross margins of 28% to 29.5% of sales at the third quarter exchange rates.

Thank you very much. Peter?

Peter Henrici -- Senior Vice President Corporate Communications

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

Questions and Answers:

Operator

Our first question comes from the line of Shawn Harrison with Longbow Research.

Gausia Chowdhury -- Longbow Research -- Analyst

Good morning. This is Gausia Chowdhury on for Shawn Harrison. So first of all, if you look at the book-to-bill with Asia at 0.69% and distribution at 0.80%, it's surprising that sales guidance is not weaker. So how should we consider this dynamic, is there more risk maybe for the first quarter to be more -- much more versus seasonal, maybe you're just not seeing it in the fourth quarter?

Gerald Paul -- President & Chief Executive Officer

Well, the backlog was extremely high to say it even unheard off. And we expected since a long time some normalizations of bookkeeping, if I may say on the side of the distributors and this is taking place now. We watch always the 13 weeks shippable backlog, this has no impact yet, really not. So we don't see a major change of the situation except for some corrections, which were expected.

Gausia Chowdhury -- Longbow Research -- Analyst

Okay. And then can you give us more color on what you're seeing in China, specifically, if there's any concerns or pockets of weakness within any of the end markets or any areas?

Gerald Paul -- President & Chief Executive Officer

Well, there is some concerns in China, is that right to say concerning the new US tariffs there, but this may also come -- lead to some slowdown in automotive, which you've seen. On the other hand there, the slowdown is in pieces of auto -- of cars. On the other hand, there is an increasing electrification in the cars, and we see no decline at all in the demand of our automotive customers, which cover also China. So obviously, this increasing electrification offsets some reduction of the car -- of new cars, as a matter of fact. We do not see for us major changes in the trend. And again, the distributors normalize at the moment their backlogs, no question. This is going on, which doesn't mean at all that the end customers take less.

Gausia Chowdhury -- Longbow Research -- Analyst

Okay. Great. And then just one more from me about just the lead times. I think you said that they are pretty stable. Are there any pockets of change that you're seeing or are they increasing (ph) in any areas?

Gerald Paul -- President & Chief Executive Officer

Not an easy answer to give for us because we have a very broad portfolio and the situation is different, in different segments of our portfolio. In general, the lead times are decreasing, no question, but they are still very high, very high even to the point that we do have problems with certain customers, as you can imagine. Customers are still very keen to get product. The lead times in certain cases have come down, as I said because we increase capacity. On the other hand, overall, I would say in my long career, I haven't seen such a -- such a situation, as we have it today concerning long lead times. It's even -- it's even in Norway. I still have the feeling we do not fulfill customers' wishes, this is why we add capacity and continue to do so.

Okay. Thank you.

Operator

(Operator Instructions) And our next question comes from the line of Ruplu Bhattacharya with Bank of America Merrill Lynch.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Good morning. Thank you for taking my questions. Dr. Paul, I wanted to start by asking about margins. Opto margins were at 36%, very high margins, do you think this is a sustainable level of margins going forward based on the demand that you're seeing. And the same for resistors, even resistor margins were pretty high at 34%. So if you can -- if you can just give us your thoughts on that?

Gerald Paul -- President & Chief Executive Officer

Ruplu, neither the margin for resistors, inductors, nor the margins for Opto (inaudible) we were at this level quite often to say, it frankly. It all depends on the volume. And as long as the volume holds and this looks that way, we also will hold this margin. So there's no question. It's a volume game. And again, this was not a spike. Resistors were -- it's a good margin also for resistors 34% we know that, but very often, we were above 30%. And for Opto, we were always around 33%, 35%. So it's not a spike in that sense. Yes, the answer is if the volume holds, we can hold these margins.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Okay. Okay. And that's helpful. And then overall in terms of supply and demand, I think you've talked about supply catching up with demand and normalization of backlog. Overall, you're adding capacity, competitors are adding capacity, when do you think industry supply comes into balance with demand based on what you're seeing in the market?

Gerald Paul -- President & Chief Executive Officer

I have prediction because I don't know exactly, of course, what happens in the market, I don't have the crystal ball. But for sure, we're in the process, but it's a slow process of normalization, a slow process as I see it and the end markets are strong at least for the -- form a -- from the standpoint of electronic components makers, they are strong. And we do not see a decline in our key markets in automotive and in -- and in industrial. In fact, we're in midst of negotiations with the major automotive customers and the demand goes up for next year. So we're quite optimistic that this is good situation between choice since nearly two years, now will continue. Sooner or later, of course, there is no demand, which will not be fulfilled, its true, but I think it's a slow process.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Yeah. That makes sense. And then in terms of the capacity that you're adding, which areas are you adding capacity. And -- and if you can give us any guidance on how should we think about CapEx in fiscal '19. Do you think it will be higher or lower than this year?

Gerald Paul -- President & Chief Executive Officer

Okay. I'll start with the latter. We'll be somewhat lower. We'll be between $180 million and $200 million, as we see it at the moment, but which is absolutely required to fulfill the requirements of our customers, as a matter of fact. And not exactly to $220 million, but not too much below between $180 million and $200 million. And really, we put -- we put -- we have to expand diodes like MOSFETs, we have to expand resistors, we have to expand also certain lines in Opto, so it's a product expansion. But believe me, we'll not go overboard.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Okay. And the last question from me. With respect to your authorization for convert repurchase, is there a limit, is there a certain dollar amount that you can repurchase?

Gerald Paul -- President & Chief Executive Officer

Well, as a matter of fact this is a very flexible thing. We -- we go ahead and certainly, we opportunistically buyback these converts. As a matter of fact this is what I'd like to state. It's a very important program, I believe and we are going to start fast.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you so much for the details.

Operator

Our next question comes from the line of Jim Suva with Citi.

Jim Suva -- Citi -- Analyst

Thanks. Can you talk a little bit about pricing versus normal trends currently and going forward because I believe a lot of your contracts maybe like more than one quarter in nature and so they may be coming up for renewals. And I guess, it would be fair to hopefully assume that maybe pricing going forward will continue to be stronger than expected. Is this correct or can you help correct me if not?

Gerald Paul -- President & Chief Executive Officer

Yeah. You're absolutely right. We are in contract negotiations with large automotive customers, but on the other hand, there are contract negotiations with others throughout the year. Still the big automotive guys, they really are on the schedule now. And the -- there's price pressure, as always maybe not as hard as it used to be because its still -- there are shortages to say it. And major customers, they want to be safe and we feel less pressure than we historically have felt.

Jim Suva -- Citi -- Analyst

Thank you very much for your details.

Operator

Our next question comes from the line of Harlan Sur with JPMorgan.

Harlan Sur -- JPMorgan -- Analyst

Hi, good morning, Dr. Paul. Can you help us understand what are the biggest drivers of the gross margin declines in the December quarter or our fixed costs rising, as you guys bring on more capacity?

Gerald Paul -- President & Chief Executive Officer

Well, it has less shipping days first of all, so it's a volume thing. So really if you talked at (ph) just the sales, which we have to forecast are not because of a lack of orders, it's because of a lack of shipping days and manufacturing days in that sense, as compared to the third quarter. This is the major driver of -- of all that.

Basically also there, we had a positive development in SG&A, which was a singularity, which normalizes to an extent in the fourth quarter, and this basically makes the difference. Well, there's also some on inventory. We have built inventory in the third quarter. Some inventory we're going to reduce inventory in the fourth (ph) quarter. These are the major drivers of the gross margin.

Harlan Sur -- JPMorgan -- Analyst

I appreciate the commentary there. And maybe similar to the last earnings call, I'm just curious as we -- as we've headed into the fourth quarter, we -- as you mentioned, we're continuing to hear about some slowdown in industrial, in Greater China and white goods and various other aspects of the geography there. Maybe similar to last quarter, I'm just curious, what is the book-to-bill that -- that the team is currently seeing right now, thus far here in December quarter?

Gerald Paul -- President & Chief Executive Officer

I don't know above 1, it's better than in the third quarter. So it's 1.12. I expected the question somehow.

Harlan Sur -- JPMorgan -- Analyst

Okay.

Gerald Paul -- President & Chief Executive Officer

It's 1.12 in October.

Harlan Sur -- JPMorgan -- Analyst

Okay. So you --

Gerald Paul -- President & Chief Executive Officer

Yeah.

Harlan Sur -- JPMorgan -- Analyst

And then as you look -- and then as you look into, go ahead.

Gerald Paul -- President & Chief Executive Officer

By the way, I just wanted to add. And this positive book-to-bill is equally existing for semiconductors and for passives.

Harlan Sur -- JPMorgan -- Analyst

That makes sense. And so as we think about kind of normal seasonal trends for you guys, obviously industrial -- our industrial/auto always tends to be, I think seasonally stronger in the first half of next year (inaudible) given the business --

Gerald Paul -- President & Chief Executive Officer

(multiple speakers) it's true.

Harlan Sur -- JPMorgan -- Analyst

And so, given the turns (ph) that you're seeing positive book-to-bill, it sounds like you're still anticipating kind of normal seasonal trends, as you enter 2019.

Gerald Paul -- President & Chief Executive Officer

Yes. I try to (multiple speakers) We see no tangible signs for the -- for the downturn. No -- no change.

Harlan Sur -- JPMorgan -- Analyst

Okay. Great. And then maybe just -- maybe just my last question. Obviously, you guys are the leader in diodes, I'm just curious, you're adding more capacity there? Can you just help us understand whether what are some of the sub-categories within diodes that you're still seeing some tightness?

Gerald Paul -- President & Chief Executive Officer

Well, it's all over, all rectifiers are tightened. And we have delivery times, which -- which I'm embarrassed to talk about even it's long, and we work against these long delivery times. And it's really on the rectifier segment very strong, but we're leading in rectifiers, maybe we've a good position in -- especially in automotive. Yeah.

Harlan Sur -- JPMorgan -- Analyst

Okay. Great. Thank you, Dr. Paul.

Gerald Paul -- President & Chief Executive Officer

Thank you.

Operator

(Operator Instructions) And at this time, there are no further questions.

Peter Henrici -- Senior Vice President Corporate Communications

Thank you. This concludes our third quarter conference call. Thank you for your interest in Vishay Intertechnology.

Operator

Thank you. This concludes today's conference call. You may now disconnect and have a wonderful day.

Duration: 50 minutes

Call participants:

Peter Henrici -- Senior Vice President Corporate Communications

Lori Lipcaman -- Executive Vice President & Chief Financial Officer

Gerald Paul -- President & Chief Executive Officer

Gausia Chowdhury -- Longbow Research -- Analyst

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Jim Suva -- Citi -- Analyst

Harlan Sur -- JPMorgan -- Analyst

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