Vishay Intertechnology, Inc.

Good morning and welcome to Vishay Intertechnology's first quarter 2020 conference call. With me today are Dr. Paul, Vishay's President and Chief Executive Officer, and Laurie Lipkeman, our Executive Vice President and Chief Financial Officer. As usual, we start today's call with the CFO who will review Bichet's first quarter 2020 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.pichet.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 risk and uncertainties that could cause actual results to differ from the forward-looking statements. For discussion of factors that could cause results to differ, please see today's press release and Fichet'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 8K 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 first quarter 2020 financial information, containing some of the operational metrics Dr. Paul will be discussing. Now, I turn the call over to Chief Financial Officer, Laurie Zipkerman.

Thank you, Peter. Good morning, everyone. Good morning, Peter. Thank you, Peter. Good morning, everyone. I am sure that most of you have had a chance to review our earnings press release. I will focus on some highlights and key metrics. Vishay reported revenues for Q1 of $613 million. EPS was $0.19 for the quarter. Adjusted EPS was $0.21 for the quarter. We have identified certain COVID-19-related charges, Net of Certain Subsidies, which are incremental to and separable from normal operations. Approximately $3.1 million of these costs are included in cost of goods sold, and $0.3 million of these costs are included in selling general and administrative expenses. These items and their related tax effects are added back when calculating our non-GAAP adjusted EPS. Also during the quarter, we repurchased 14.3 million principal amount of our convertible debentures and recognized a U.S. gap loss on extinguishment. I will elaborate on these transactions in a few moments. COVID-19 has had an impact on our business. Some of our facilities had been or are temporarily closed, and some are operating at levels less than full capacity. For Q1, the impact on our financial results has generally been limited, as most of our manufacturing facilities have been able to continue operating. As I stated in the introduction, we have identified certain COVID-19 related charges, incurred net of certain subsidies, which are incremental to and separable from normal operations. This includes wages paid to manufacturing employees during government mandated shutdowns, additional wages and hardship allowances for working during lockdown periods, costs of cleaning and disinfecting facilities, costs of additional safety equipment for employees, and temporary housing for employees due to travel restrictions. The quantified COVID impacts I just described only include costs directly attributable to the outbreak and exclude indirect impacts such as higher shipping costs due to reduced shipping capacity, and estimated missing revenues during the crisis. Dr. Paul will elaborate further on the impact of COVID-19 on our operations and on our expectations for future results in a few moments. Revenues in the quarter were $613 million, up by 0.5% from previous quarter and down by 17.8% compared to prior year. Gross margin was 24.0%. Adjusted gross margin, excluding the COVID costs, was 24.5%. Adjusted operating margin was 7.7%. Adjusted operating margin, excluding COVID costs, was 8.3%. EPS was 19 cents. Adjusted EPS was 21 cents. EBITDA was 84 million, or 13.8%. Adjusted EBITDA was $91 million or 14.8%. Reconciling versus prior quarter adjusted operating income Q1 2020 compared to adjusted operating income for prior quarter based on $3 million higher sales or $4 million excluding X rate impacts operating income increased by $10 million to $51 million in Q1 2020 from 41 million in Q4 2019. The main elements were average selling prices had a negative impact of 7 million, representing a 1.1% ASP decline. Volume increased with a positive impact of 7 million, equivalent to a 1.6% increase in volume. Variable costs decreased with a positive impact of 8 million, primarily due to normal manufacturing efficiencies, cost reduction, and lower material prices, which more than offset increased labor costs and metal prices. Fixed costs increased with a negative impact of $7 million, primarily due to higher personnel costs related to the cycling of incentive compensation, more working days in Q1, and wage increases, partially offset by lower travel costs. Inventory impacts had a positive effect of $8 million. Reconciling versus prior year, adjusted operating income Q1 2020 compared to operating income in Q1 2019 based on 132 million lower sales or 126 million lower excluding exchange rate impacts. Adjusted operating income decreased by $57 million to 51 million in Q1 2020 from 108 million in Q1 2019. The main elements were average selling prices had a negative impact of 18 million, representing a 2.9% ASP decline. Volume decreased with a negative impact of 47 million, representing a 15.0% decrease. Variable costs decreased with a positive impact of 2 million, Increases in labor costs and metal prices were more than offset by cost reduction and lower material prices. Fixed costs decreased with a positive impact of $4 million. Slightly higher personnel costs in total were more than offset by lower travel, repair and maintenance costs, and other individually immaterial costs. Inventory impacts had a positive impact of $4 million. Selling general and administrative expenses for the quarter were $100 million, which includes $0.3 million of identified COVID costs. SG&A excluding COVID was lower than expectations primarily due to reduced travel costs. For Q2 2020, our expectations are approximately $94 million of SG&A expenses, and approximately $380 million for the full year at constant exchange rates. The company did not repatriate any additional cash to the U.S. during Q1. Recall that while such amounts are no longer subject to U.S. federal taxes due to U.S. tax reform, they are subject to foreign withholding and other taxes and some state income taxes. We expect to repatriate about $100 million during Q2 which would complete this program that we initiated in response to U.S. tax reform. We had total liquidity of $1.4 billion at quarter end. Cash and short-term investments comprised $821 million and usable capacity on the credit facility is approximately $619 million. During the quarter, we were able to repurchase $14.3 million principal amount of our outstanding convertible debt instruments. This is part of the programs we have undertaken over the past few years to retire the convertible debentures, which have certain tax attributes which are no longer efficient after U.S. tax reform. Of the $575 million principal amount of the convertible debentures that was outstanding at the beginning of 2018, only $3 million, or less than 1%, remain outstanding at the end of Q1 2020. We continue to be authorized by our Board of Directors to repurchase the remaining convertible debentures subject to market and business conditions, legal requirements, and other factors. The carrying value of our debt of $552 million is net of the unamortized issuance cost of $16 million and includes $54 million outstanding on our credit facility, $514 million of convertible debt instruments. The principal amount or face value of the converts total $603 million, $600 million related to the convertible notes due in 2025, and the remaining convertible ventures due in 2040 and 41. No principal payments are due until the expiration of the revolving credit facility in June 2024. Our U.S. GAAP tax rate for Q1 was approximately 24%. Our GAAP tax rate includes the unusual tax benefit related to the settlement of some of the convertible debentures. Our normalized effective tax rate, which includes these unusual tax items and the tax effects of the COVID costs and early extinguishment of debt, was approximately 27% for the quarter. We expect our normalized effective tax rate for 2020 to be between 28% and 29%. We continue to evaluate the provisions of the U.S. tax law, particularly aspects of the GILTI and BEAT taxes. Generally, at lower levels of pre-tax income, GILTI and BEAT have a larger proportional effect and thus increase 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 $145 million. The expected share count for EPS purposes for the second quarter 2020 is approximately $145 million. For a full explanation of our EPS share count and variables that impact the calculation, please refer to the 8K we filed this morning. Cash flow from operations for the quarter was $34 million. Capital expenditures for the quarter were $24 million. Free cash for the quarter was $10 million. For the trailing 12 months, cash from operations was $251 million. Capital expenditures were $145 million. Split approximately for expansion, $90 million. For cost reduction, $10 million. For maintenance of business, $45 million. Proceeds from the sales of property and equipment for the trailing 12 months were less than $1 million. Free cash generation for the trailing 12-month period was $107 million. The trailing 12-month period includes $53 million cash taxes paid related to cash repatriation, $38 million, and U.S. tax reform, $15 million. BCS consistently generated in excess of $100 million cash flows from operations in each of the past 25 years. and greater than $200 million for the last 18 years. Backlog at the end of quarter one was at $1.5 billion, or 4.9 months of sales. Inventories increased quarter over quarter by $27 million, excluding exchange rate impacts. Days of inventory outstanding were 87 days. Days of sales outstanding for the quarter were 48 days. These payables outstanding for the quarter were 32 days, resulting in a cash conversion cycle of 103 days. Now I'll turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

Thank you, Laurie, and good morning, everyone. As expected, the first quarter has proven to be the quarter of a beginning recovery from a rather depressed second half of 2019. Despite imposed plant shutdowns mainly in China in the context of the coronavirus pandemic, we achieved sales close and profits better than expectations. Strong orders, in particular from global distribution and from Asia, as well as continuously normalizing inventories in the supply chain, completed the impression of an economic turnaround in our industry. Vishay in the first quarter achieved a GAAP gross margin of 24.0% of sales, adjusted gross margin of 24.5% of sales, GAAP operating margin of 7.7% of sales, an adjusted operating margin of 8.3% of sales, GAAP EPS of 19 cents, and adjusted EPS of 21 cents. We in the quarter generated 10 million of free cash. Let me talk about the economic environment. The development of the global economy for electronic components in the first quarter created ambivalent feelings. On the one hand, strong orders in general, a strong rebound of Asia, and a widely normalized supply chain. On the other hand, a rather weak automotive sector, and growing concerns for the mid-term due to the lockdown of more and more economies around the world driven by a pandemic. Backlocks and lead times have normalized in general. The price decline remains, on average at least, on quite normal levels. Some temporary delivery problems due to planned shutdowns were in existence, but no real shortages are to be observed. But some nervousness exists of customers after COVID-19 started to impact manufacturing in China. Let me come to the regions, Americas. We have seen a strong mill, medical, and telecom, as well as computing segments, partially driven by corona, driven by the demand for working from home. There was weakness in oil and gas, avionics, and partially also in industrial markets. We have seen distributors starting to restock. In Europe, there's a continued weakness of the automotive sector. The demand holds in telecom, medical, and in the industrial markets. We have seen, as well as in America, this is starting to restock, but also the increase of safety stocks at some OEMs. In Asia, I think, Asia is ready for a strong rebound after it was definitely ready for a strong rebound after a difficult 2019. In the meantime, all this is delayed by Corona. But I believe that as soon as COVID-19 will subside, Asia is going to lead a global upturn. Coming to distribution. Global distribution started to recover in the first quarter with POS up by 12% versus prior quarter, but still 5% below prior year. We have seen a strong POS increase versus prior quarter in the Americas by 18% and in Europe by 16%. POS was also up in Asia by 4% despite the coronavirus. The inventory levels continue to normalize noticeably. A reduction of 63 million in the first quarter after a reduction of 37 million in Q4 and 36 million in Q3. In Q1, inventory returns in distribution increased to 2.9 from 2.4 in Q4 and 2.7 in prior year. In the Americas, inventory returns were at 1.8 after 1.4 in Q4 and 1.7 in prior year. In Asia, the turns were 3.8 after 3.3 and 3.1. In Europe, 3.7 after 2.9 in quarter four and 3.5 in prior year. Coming to the industry segments, first of all automotive, we believe that the Corona crisis multiplies The problems of an already weakened automotive market. We do expect this year a decline between 20 to 25% in the production of light vehicles that cannot be offset by electronic content increases. The market acceptance of electrical vehicles remains limited. Industrial, it's a very mixed picture. We have very weak oil and gas sectors and also transportation. Quite strong, on the other hand, and promising industrial automation. Concerning computing, the remote learning work needs should help laptop and peripheral equipment volume. Server markets are slow. Telecommunication, fixed telecom is up, supported by needs during the corona crisis again. 5G progresses, but slowly. Consumer white goods grow after Corona in China has subsided. TVs are slow. Medical continues to be good to very good. AMS and military, military remains strong based on existing and new programs. Commercial avionics is down, also due to a major reduction of global air travel. Coming to Vishay's business development, Q1 sales, excluding exchange rate impacts, came in slightly below the midpoint of our guidance, achieved sales of $613 million versus $610 million in prior quarter and $745 million in prior year. Excluding exchange rate effects, sales in Q1 were up by 4 million or 0.7% versus prior quarter, and down versus prior year by 126 million or 17%. Book-to-bill in the first quarter recovered to 1.17 from 0.94 in the fourth quarter, mainly driven by distribution, semis and Asia. In some detail, book-to-bill was 1.30 for distribution after 0.94 in the fourth quarter. was 1.04 for OEMs after 0.95, was 1.27 for semis after 0.95 in the fourth quarter, was 1.08 for passives after 0.94 in quarter four. In 1.08 book to build for the Americas after 1.03 in Q4, 1.29 for Asia after 0.96 in quarter four, 1.13 for Europe after 0.88 in the fourth quarter. The backlog in the first quarter increased to 4.9 months from 4.5 months, 5.3 months in semis and 4.5 months in passives. It's the effect of an increase of safety stocks to an extent at several OEMs. There is now a normal level of order cancellations. The price decline in total, I think, is more or less on normal rates, minus 1.1% versus prior quarter, minus 2.9% versus prior year. Semis, in this case, the price decline is somewhat accelerating. We have minus 1.3% versus prior quarter and minus 5% versus prior year. Passives are on a normal level of price decline, minus 1% versus prior quarter, minus 0.9% versus prior year. Let me come to the highlights of our operations. In the first quarter, we more than offset the normal negative impact on the contributive margin as expected. Plans, after a phase of adaptation to lower volumes, regained Their normal efficiency levels, may I say, as expected. SG&A costs in the first quarter came in at $100 million, slightly below expectations when excluding X rate impacts. Manufacturing fixed costs in the first quarter came in at $128 million, also below expectations, again, when excluding exchange rate impacts. Total employment at Vishay at the end of the first quarter was 22,080, 1.4% down from prior quarter when we had 22,400 employees. Excluding exchange rate impacts, inventories in the quarter increased by 27 million, raw materials by 8 million, and whip and finish goods by 19 million. Inventory turns in the first quarter remained on a good level, 4.2 turns versus 4.3 in prior quarter. Capital spending in the first quarter was 24 million versus 36 million in prior year, 19 million for expansion, 1 million for cost reduction, and 4 million for maintenance of business. For the year 2020, we expect capex of approximately 110 million in accordance with requirements of the markets. Concerning cash flow, we generated cash from operations of 251 million on a trailing 12-month basis, including 38 million cash taxes for cash repatriation. and we generated free cash of 107 million on a trailing 12-month basis again including 38 million cash taxes for cash repatriation. Coming to our product lines and first of all to resistors. With resistors, we enjoy a very strong position in the auto-industrial, mill and medical market segments and we do offer virtually all resistor technologies. Vishay's traditional and since many years steadily growing business recovered from low volumes due to recent inventory corrections in the supply chain. Sales in quarter one were 159 million, up by 13 million or 9% versus prior quarter, and down by 23 million or 13% versus prior year, always excluding exchange rate impacts. Book-to-bill in the quarter was 1.05 after 0.95 in prior quarter. Backlog in the quarter decreased slightly from 4.7 to 4.4 months, very high still. Gross margin in the quarter came in at 28% of sales after 24% in prior quarter, which was negatively impacted by low volume and inefficiencies. We see the potential for further improvements of resistors based on more normal volumes. Inventory returns in the first quarter remained at a good level of 4.2 after 4.1 in the fourth quarter. We see for resistors modest price decline on a normal level, minus 0.6% versus prior quarter and minus 1.0% versus prior year. All together, we continue to see significant opportunities to further expand our traditional business with resistors. Coming to inductors, the business consists of power inductors and magnetics. Exploiting the growing need for inductors in general, we should develop the platform of robust and efficient power inductor and lead the market technically. We are very well positioned in specialty businesses demonstrating steady growth since years. Our since years fast growing business with inductors represents one of the greatest success stories of Vichy. It presently experiences a temporary slowdown of growth due to the weakness of the auto sector. Sales of inductors in the first quarter were 74 million. down by 3 million or 4% versus prior quarter, but up versus prior year by 3 million or by 4%, again, excluding exchange rate impacts. Book to bill for quarter one was 0.98 after 1.05 in prior quarter. Backlog remains at a high level of 4.8 months, very close to prior quarter, which was at 4.7 months. Gross margin in the quarter was at 31% of sales, somewhat down from a quite exceptional fourth quarter at 34%. Inventory returns in the quarter were at 4.6% after 4.8% in Q4. We see some increasing price pressure for inductors, minus 2.6% versus prior quarter, minus 2.7% versus prior year. and that does continue to carry our highest confidence for growth within the PACIFS portfolio. 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 continue to enjoy increasing opportunities in the field of power transmission, and of electrocars, namely in Asia, especially in China. Sales in the first quarter were at 93 million, 1% below prior quarter and 21% below prior year, which excludes exchange rate effects. Book-to-bill for capacitors increased in the quarter to a strong level of 1.2 after 0.84 in the fourth quarter. Backlogs. increased to a high level of 4.6 months up from 4.1 months in Q4. Gross margin in Q1 increased to 22% of sales after a low 18% in prior quarter. A more normal product mix and some inventory build helped the results in the first quarter, vis-a-vis the fourth quarter. Inventory returns in the quarter remained at an acceptable level of 3.6 as compared to 3.7 in Q4. Stable prices in capacitors minus 0.6% versus prior quarter and plus 8% versus prior year. We continue to benefit in capacitors from strong mill markets and from the ongoing need of grid expansions mainly in China. Coming to Opto products, Vichay's business with OptoProducts consists of infrared emitters, receivers, sensors, and couplers, as well as of LEDs for automotive applications. Sales in the quarter were 54 million, 6% above prior quarter, but 10% below prior year, which excludes X-ray impacts. Book-to-bill in the first quarter was 1.4 after 1.11 in prior quarter principally indicating a strong turnaround of the business after a very problematic year, 2019. We like to see growth there, especially in specialty products like incentives. Presently, extended lead times influenced by planned shutdowns in Asia. Backlog is at a very high level of 5.6 months after 4.7 months in the fourth quarter. Gross margin in the quarter was at 27% of sales after disappointing 20% in the fourth quarter. We had better efficiencies, a more normal product mix, and some inventory built all that helped return to a more normal profitability level. Inventory returns were very high at 5.7 in the first quarter as compared to even higher 6.0 in the fourth quarter. Price decline was normal for opto products, minus 0.8% versus prior quarter, minus 2.2% versus prior year. We are confident that going forward, opto products again will contribute noticeably to our growth. We are in the process to modernize and expand our Heilbronn fab in Germany. Diodes. Diodes for Vichy. represents a broad commodity business where we are the largest supplier worldwide. Vishay offers virtually all technologies as well as the most complete product portfolio. The business has a very strong position in the automotive and industrial market segments and keeps growing steadily and profitably since years. After two record years, volume in diodes during 2019 suffered the most of all divisions from inventory reductions in the supply chain. Q1, to a degree, has still been impacted by that. Sales in the quarter were 115 million, down by 6% versus prior quarter, and by 31% below prior year, which excludes exchange rate effects again. Book-to-bill in the first quarter was 1.36%. after 0.88 in Q4, which principally indicates a turnaround. Backlog increased to a very high level of six months from 4.7 months in prior quarter. This was influenced also by temporary plant shutdowns in China. The gross margin of diodes in Q1 remained on a low level of 17% of sales as compared to 16% in Q4. With higher volumes, the division, without any doubt, will return to higher profitability levels. Inventory returns remained at a good level of 4.1 after 4.4 in Q4. The ASP decline currently runs above traditional levels, minus 2.5% versus prior quarter and minus 5.6% versus prior year, but we do expect normalization again in the course of a market recovery. 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 growing position in automotive, which will provide a successful future for this product line. MOSFETs in the first quarter still have experienced some impact of the destocking activities worldwide. Sales in the quarter were $117 million. .7% above prior quarter, but 15% below prior year without exchange rate impacts. Book-to-bill ratio in the quarter was 1.12 after .94 in Q4. Backlogs remain high at 4.5 months as compared to 4.2 months in the fourth quarter. Gross margin in the quarter was at 24% of sales on the level of prior quarter. Inventory returns in Q4 were at acceptable 3.6 as compared to 3.7 in Q4. Price decline was normal, minus 0.2% versus prior quarter, minus 5.8% versus prior year. We believe that MOSFETs continue to be key for Vichy's growth going forward. Let me summarize. The first quarter for Vishay has been operationally fairly successful, despite quite severe headwinds for our plants in China. The expected turnaround of the business after the normalization of the supply chain principally became visible for all product clients. We would be in the position to exploit it. Unfortunately, our industry, like so many others, now is confronted with a completely unknown challenge. A global pandemic that leads to unforeseeable lockdowns of entire economies that frightens people personally. The end of the problem realistically cannot be forecasted at this point. Vichy's answer to the present challenges nevertheless is the same as it has been in critical times before. Our plants will react quickly and professionally to changes in demand, trying to minimize inefficiencies and inventory build. Doing so, we naturally will take all necessary steps to safeguard health and safety of our employees around the world. We will watch tightly all fixed costs and capex without jeopardizing our essential long-term strategies. We in general will focus on free cash generation even more than we normally and quite successfully, I believe, do. Vishay is financially very solid and, after all, electronics, respectively electronic components, for the mid and the long term, is a good place to be. For the second quarter, we, despite substantial uncertainties, of course, guide to a sales range between $540 and $580 million at a gross margin of between 21% and 22%. Thank you. Peter?