Vishay Intertechnology, Inc.

Good morning and welcome to Vishay Intertechnology's second quarter 2020 conference call. With me today are Dr. Gerald Paul, Vishay's President and Chief Executive Officer, and Laurie Lipkeman, our Executive Vice President and Chief Financial Officer. As usual, we'll start today's call with the CFO who will review Vishay's second 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.vca.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 Cressley and Deshaies 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-GET measures because we believe they provide useful information about the operating performance of our businesses and should be considered by investors in conjunction with gap measures that we also provide. This morning, we filed 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 second 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 Lipkeman. Laurie Lipkeman Thank you, Peter.

Good morning, everyone. I assure that most of you have had a chance to view our earnings press release. I will focus on some highlights and key metrics. Fisher reported revenues for Q2 of $582 million. EPS was 17 cents for the quarter. Adjusted EPS was 18 cents for the quarter. During the quarter we completed the cash repatriation program we initiated in response to U.S. tax reform. We repatriated $104 million to the United States and paid withholding and foreign taxes of $16 million. These taxes had been accrued upon enactment of U.S. tax reform in 2017. The payment of these taxes is reflected as an operating cash flow on the statement of cash flows. During the quarter, we repurchased 75.8 million principal amount of our convertible notes due in 2025 using some of the repatriated cash and recognize the US GAAP loss on extinguishment. Similar to Q1, we have identified certain COVID-19 related charges, net of certain subsidies, which are incremental to and separable from normal operations. These items were insignificant to Q2, that are added back from calculating our non-GAAP adjusted EPS for comparability purposes with Q1. I will elaborate on these transactions in a few moments. COVID-19 continues to have an impact on our business. While some of our factories had been temporarily closed and some are operating at levels less than full capacity, substantially all of our manufacturing facilities have been able to continue operating. However, the overall macroeconomic effects of the pandemic have burdened our financial results. As I stated in the introduction, we've identified certain COVID-19 related charges, 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, cost of cleaning and disinfecting facilities, cost of additional safety equipment for our 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 general macroeconomic effects of COVID-19 on our business and higher shipping costs due to reduced shipping capacity. Dr. Pong will elaborate further on the impact of COVID-19 on our operations and on our expectations for future results in a few moments. Revenants in the quarter were $582 million, down by 5.1% from previous quarter and down by 15.1% compared to prior year. Growth margin was 22.5%. Adjusted growth margin, excluding COVID costs, with 22.6%. Operating margin was 7.0%. Adjusted operating margin excluding COVID costs and restructuring was 7.2%. EPS was 17 cents. Adjusted EPS was 18 cents. EB Dow was 78 million or 13.4%. Adjusted EB Dow was 80 million or 13.7%. Reconciling versus prior quarter adjusted operating income quarter two 2020 compared to adjusted operating income for prior quarter based on 31 million lower sales or 31 million excluding exchange rate impacts operating income decreased by 9 million to 42 million in Q2 2020 from 51 million in Q1 2020. The main elements were volume decreased with a negative impact of 17 million present to a 5.2% decrease in volume. Fixed costs decreased with a causal impact of $13 million, primarily due to lower personnel and travel costs. Inventory impacts with a negative effect of $6 million. Reconciling versus prior year. Adjusted operating income quarter to 2020 compared to operating income quarter to 2019. Based on $104 million lower sales, or 100 million lower excluding exchange rate and tax. Adjusted operating income decreased by 38 million to 42 million in Q2 2020 and 79 million in Q2 2019. The main elements were average selling prices had a negative impact of 16 million representing a 2.7% ESP decline. Volume decreased with a negative impact of 39 million representing a 12.7% decrease. Variable costs decreased with a positive impact of $9 million. Increases in labor and logistics costs and metal prices were more than offset by cost reduction and lower material prices. Fixed costs decreased with a positive impact of $6 million, primarily due to lower travel costs. Selling general and administrative expenses for the quarter were 89 million, which includes a net benefit of 0.7 million for subsidies in excess of identified COVID costs. SG&A costs came in lower than our expectations, primarily due to continuing lower travel costs related to the pandemic. For Q3 2020, our expectations are approximately 92 million of SG&A expenses, and approximately $375 million for the full year using the current exchange rate of one USD equals 0.87 Euro for the second half of 2020. During the quarter we completed the cash repatriation program we initiated in response to U.S. tax reform. We repatriated $104 million to the United States, net of withholding and foreign taxes of $16 million. Substantially, all of these amounts have been utilized to pay down a revolving credit facility to zero and to repurchase $75.8 million of convertible notes. Since the enactment of U.S. tax reform, we have repatriated over $1 billion net to the U.S. at a cash tax cost of approximately $211 million. Substantially, all amounts have been allocated or utilized to pay down the outstanding balance on a revolving credit facility to zero Repurchase convertible debt instruments, settle intercompany debts, fund certain capital expansion projects, and pay the U.S. transition tax. During the quarter, we were able to repurchase $75.8 million principal amount of our outstanding convertible notes due in 2025. We were able to repurchase the notes at an average of 93% of base value. The U.S. GAAP loss on extinguishment is primarily due to the write-off of un-amortized issuance costs. By reducing our fixed-term debt, the repurchase of the convertible notes provides us with future flexibility to better utilize our revolver and to adjust our debt levels as necessary. We continue to be authorized by our Board of Directors to repurchase up to an additional 124 million of convertible notes due 2025. as well as the remaining $3 million of convertible debentures subject to market and business conditions, legal requirements, and other factors. We had total liquidity of $1.4 billion at quarter end, cash and short-term investments comprised $757 million, and the usable capacity on the credit facility is approximately $620 million. Our debt at quarter end is comprised of the convertible notes due in 2025 and the remaining convertible debentures due in 2040 and 2041. The principal amount or face value of the converts totals $527 million, $524 million related to the notes due in 2025, and $3 million related to the remaining debentures. The carrying value of 438 and many more. There were no amounts outstanding on our revolving credit facility at the end of Q2. However, we do expect to utilize Revolver in Q3 and from time to time, including for additional repurchase of convertible notes and the payment of the next installment of the U.S. Tax Reform Transition Tax in Q3. No principal payments are due until 2025. and the revolving credit facility expires in June 2024. We expect interest for Q3 to be approximately $7.7 million, excluding the impact of any additional convertible note repurchases in Q3. As announced last year, we are implementing global cost reduction programs. A small adjustment to the amounts recorded in Q3 and Q4 in 2019 was recorded in June 2, 2020. All participants in the programs are now identified. The programs are intended to provide management rejuvenation and lower costs by approximately $15 million annually when fully implemented by the end of 2020. The year-to-date effective tax rate on a GAAP basis was approximately 21%. The year-to-date normalized tax rate was approximately 23%. For the quarter, this mathematically yields a GAAP tax rate of approximately 16% and a normalized rate of approximately 18%. Our GAAP tax rate includes the unusual tax benefit related to the settlement of some of the convertible debentures. Our normalized rate excludes the unusual tax items as well as the tax effects of the identified COVID costs and a pre-tax loss on the extinguishment debt. 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. We now expect our normalized effective tax rate for 2020 to be between 23% and 25%. Our assumed mix of income in lower tax rate jurisdictions versus higher tax rate jurisdictions is proportionally higher than we assumed at the end of Q1. 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. At higher levels of income in the U.S., reduce the amount of GILTI and BEAT taxes, which was the case in Q2. Total shares outstanding at quarter end were $145 million. The expected share count for EPS processes for the third 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 HCA we filed this morning. Cash on operations for the quarter was $90 million. Capital expenditures for the quarter were $25 million. Free cash for the quarter was $66 million. For the trailing 12 months, cash from operations was $286 million. Capital expenditures were $135 million, split approximately for expansion $90 million, for cost reduction $7 million, for maintenance of business $38 million. Free cash generation for the trailing 12-month period was $151 million. The trailing 12-month period includes $35 million cash taxes paid related to cash repatriation. The next installment of the U.S. tax reform transition tax of $15 million was deferred until Q3 as permitted for all companies by the IRS in response to COVID-19. ECI has 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 two was at 914 million, or 4.7 months of sales. Inventory has decreased quarter over quarter by 10 million, excluding exchange rate impacts. Days of inventory outstanding were 91 days, Days of sales outstanding for the quarter were 48 days. Days of payables outstanding for the quarter were 31 days, resulting in a cash conversion cycle of 108 days. Now we'll turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

Thank you, Lori, and good morning, everybody. Asia's worldwide business in the second quarter has been massively influenced by COVID-19. There were substantial restrictions for the citizens of many countries which burdened the global economy. We successfully adapted to this generally unfriendly environment by cutting production capacities and by substantial belt tightening in fixed costs. With sales at the high end of our guidance, we managed to beat expectations for the quarter. We achieved gross margin of 22.5% of sales Gross Margin Adjusted of 22.6% of Sales Operating Margin of 7.0% of Sales and Adjusted Operating Margin of 7.2% of Sales Earnings Per Share were $0.17 and Adjusted Earnings Per Share $0.18 By decreasing inventories and by reducing capex to the actual requirements quickly, we shall continue to generate free cash Also in this difficult quarter, we achieved 56 million, higher than in prior year. A few remarks concerning the economic environment. As indicated, global economy in the second quarter has been slowed down by COVID-19 remarkably, but market sectors suffer to a very different degree. In general, automotive has been hurt the most, whereas POA remains strong. Asia started to recover, whereas Europe and the U.S. were weak. Backlocks and lead times continue to normalize. There is no real shortage of supply. We see low price pressure in general. And we expect for the third quarter some weakening of POA, but also a noticeable recovery of the automotive sector. Going through the geographic regions, The recovery of Asian markets continues despite corona problems The fact that corona problems still exist. There was growth in automotive in China, and there's also tailwind for medical and computer equipment. The inventory built at Asian distribution apparently was a preparation for an expected better third quarter. Coming to distribution, global distribution suffered in the second quarter with POS declining by 12% versus prior quarter. and by 13% versus prior year. POS decreased versus prior quarter in the Americas by 25% and in Europe by 19%, whereas POS in Asia was flat versus prior quarter. Inventories at distributors in the second quarter increased by 29 million after a reduction of 63 million in the first quarter. In the second quarter, inventory returns and distribution decreased to 2.7 from 2.9 in the first quarter. 2.5 turns were achieved in prior year. In the Americas, there were 1.4 inventory turns after 1.8 turns in the first quarter and 1.5 turns in prior year. In Asia, 4.1 turns after 3.8 in Q1 and 3.2 in prior year in Europe 3.0 turns after 3.7 in Q1 and 3.0 in prior years. Let me comment on the industry segments. In the second quarter, the automotive industry in general and in particular in the Western Hemisphere due to COVID impacts experienced a historical drop of their business. A bright spot was Asia, namely China, where the business already came back in the course of the second quarter. With most plant closures now behind us, the industry clearly has started to recover. Also, the industrial segment suffered in the second quarter, but the picture is very different in the various sections of this broad business. Industrial equipment as well as oil and gas were weak, whereas power supplies, smart metering, and renewable energy performed reasonably well. The pandemic-related equipment provided an upside whereas government spending on power and transportation projects quite often is delayed. Remote learning and work at home continues to push the telecom and computer markets. The overall medical market continues strong and also military markets remain positive and steady but commercial avionics is in a substantial crisis. Let me talk about our business development. Q2 sales excluding X rate impacts came in at the high end of our guidance with POA stronger than expected. We achieved sales of $582 million versus $613 million in prior quarter and $685 million in prior year. Excluding exchange rate impacts, sales in the second quarter were down by 31 million or 5%, and others. Book-to-bill in the second quarter was 0.82 compared to 1.17 in the first quarter, driven like in the first quarter by distribution. Some detail, 0.75 book-to-bill for distribution after 1.3 in the first quarter 0.93 for OEMs after 1.04 in the first quarter 0.81 for semis after 1.27 in the first quarter 0.83 for passives after 1.08 0.81 for the Americas after 1.08 in the first quarter 0.86 for Asia after 1.29 0.78 for Europe after 1.13. Backlog in the second quarter decreased to 4.7 months from 4.9 months. 4.7 in semis and 4.8 in passives. We see low price pressure. There was no price decline versus prior quarter and minus 2.7% versus prior year. We see price decline slowing down for semis Minus 0.2% versus prior quarter and minus 4.5% versus prior year. There was virtually no price decline at passives. Slightly higher prices, 0.3% versus prior quarter and slightly lower prices, 0.9% versus prior year. Some comments on operations. In the second quarter, we again offset the normal negative impacts on the contributive margin, overcoming also the consequences of capacity cuts and increased logistics costs. With only minor exceptions, all V-shaped plants currently can operate in a normal fashion. Adjusted SG&A costs in the second quarter came in at $90 million, noticeably better than expectations, predominantly due to lower than anticipated travel costs. Manufacturing fixed costs in Q2 came in at 124 million, slightly below expectations also. Total employment at the end of the second quarter was 21,555 people, which is 2.4% down from prior year. Excluding exchange rate impact, inventories in the quarter decreased by 10 million, by 3 million in raw materials, and by 7 million in whip and finish goods. Inventory turns in the second quarter were at a satisfactory level of 3.9, down from 4.2 in prior quarter. Our target in turns remains at greater 4 turns. Capital spending in the second quarter was $25 million versus $34 million in prior year, close to expectations. $19 million for expansion, $1 million for cost reduction, and $5 million for the maintenance of the business. For 2020, we expect CapEx of approximately $110 million in accordance with the requirements of the markets. Concerning cash flow, we generated cash from operations of 286 million on a trailing 12-month basis, including 35 million cash taxes for cash repatriation. And we generated free cash of 151 million on a trailing 12-month basis, including the same 35 million cash taxes for cash repatriation, I think we can say. We remain to be a very reliable producer of free cash. Coming to the product lines, and I'll start with 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 historically growing business currently suffers in particular from the weakness of the automotive market sector. Sales in the quarter were 135 million, down by 24 million or by 15% versus prior quarter, and down by 28 million or 17% versus prior year, all excluding exchange rate impacts. Book-to-bill in the second quarter was 0.73 after 1.05 in prior quarter, which had been supported by strong orders from distribution. Backlog in the quarter remained flat at 4.4 months. Gross margin in the quarter declined to 23% of sales after 28% in prior quarter, practically due to lower volume. Inventory returns in Q2 were at 3.7 after 4.2 in prior quarter. Again, the expectation also for resistance remains to be We have seen low to normal price decline, low price decline versus prior quarter, and minus 2.1% versus prior year. We continue to see significant opportunities to further expand the resistor business in the midterm. 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 inductors, and we lead the market technically. With magnetics, we are very well positioned in specialty businesses, showing steady growth since years. Also in inductors, we currently experience a temporary slowdown, mostly driven by the present weakness of the automotive market. Sales of inductors in the second quarter were 65 million, down by 9 million or by 12% versus prior quarter, and down versus prior year by 12 million or by 15%, all excluding exchange rate impacts. Book-to-bill in the second quarter for inductors was 0.96 after 0.98 in prior quarter. Backlog in Q2 has grown significantly. to 5.3 months from 4.8 months in prior quarter. Gross margin in the second quarter remained at a very good level of 31% of sales, a better customer mix, and some limited inventory build helped. Inventory turns in the quarter reduced to 3.8 after 4.6 in prior quarter. The target also for inductors remains above 4 turns. We are seeing stable selling prices in inductors, an increase of 1.2% versus prior quarter and a slight decrease of 0.5% versus prior year. Inductors continue to carry our highest confidence for growth within the TASIFS portfolio. 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 field of power transmission and of electric cars, namely in Asia, respectively in China. Also, capacitors experience the present general market weakness. Sales in the second quarter were at 84 million, 10% below prior quarter and 24% below prior year without exchange rate effect. Book-to-bill in the second quarter was 0.90 after 1.2 in prior quarter. Backlogs increased to five months from 4.6 in the first quarter. Mostly due to lower volume and no more inventory built, gross margin in the second quarter decreased to 18% of sales after 22% in prior quarter. Inventory returns in the quarter dropped to 3.3 below acceptable levels. Stable and increasing selling prices we have seen, plus 0.1% versus prior quarter, plus 0.8% versus prior year. We will continue to benefit for capacitors from strong mill markets and the ongoing need for grid expansions, mainly in China. Opto wishes businesses with Opto products consists of sensors, infrared emitters, receivers, couplers and LEDs for automotive applications. Sales in the quarter were 49 million, 9% below prior quarter and 19% below prior year without exchange rate impacts. Book-to-bill in the quarter was 0.96 after 1.4 in prior quarter The backlog is at a very high level of 6.1 months after 5.6 in the first quarter. Cross-margin in the quarter was at 24% of sales after 27% in the first quarter. Lower volume and temporarily increased inefficiencies in the context of COVID-driven plant closings were the reasons. In fact, the opto-business in Q2 in terms of manufacturing suffered the most. Their finishing plans had been closed for weeks. There are good inventory returns at the Opto business of 4.9 in the second quarter as compared to 5.7 in quarter one. Price decline for Opto is normal. We have seen minus 0.3% versus prior quarter and minus 2.1% versus prior year. We are confident that Opto products going forward will contribute noticeably to our growth and we are in process to modernize and to expand our Heilbronn fab in Germany. Diodes? Diodes for WeShare represents a broad commodity business where we are largest supplier worldwide. WeShare 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 kept growing steadily and profitably since years. Presently, diodes suffer from the weakness of its main market and a relatively high inventory level in the supply chain. Sales in the quarter were $124 million, up by 8% versus prior quarter, but 12% below prior year. without exchange rate impacts. October was low in the quarter, 0.61, after 1.36 in Q1, all driven by distributions. Backlog decreased to 4.5 months from 6 months in prior quarters, but this is still high. Gross margin in the quarter improved to 20% of sales as compared to 17% in Q1, due to higher volume. Inventory returns remained at a good level of 4.2 after 4.1 in the first quarter. Price decline has normalized for diodes. We have seen higher prices of 0.9% versus prior quarter and a decline of 3.9% versus prior year. Last but not least, the MOSFETs. Vishay is one of the market leaders in MOSFET transistors. With MOSFETs, we enjoy a strong and a growing market position in automotive, which in view of an increasing use of MOSFETs in automotive will provide a successful future. Sales in the quarter were $119 million, 2% above prior quarter and 7% below prior year, excluding exchange rate effect. Book-to-bill ratio was 0.97 in the quarter after 1.12 in the first quarter. Backlog remains at 4.4 months as compared to 4.5 months in Q1. Gross margin in the quarter was at 23% of sales, slightly below Q1 at 24%. Inventory returns in the quarter were at 3.7 as compared to 3.6 in the first quarter. There's relatively normal price decline for MOSFETs, minus 1.3% versus prior quarter and minus 6.0% versus prior year. MOSFETs, without any doubt, remain key for VCH's growth going forward. Let me summarize. No doubt, this unprecedented pandemic currently impacts very many segments of the world economy, also electronics. However, there are clear reasons for confidence. First of all, we seemingly have reached the bottom and the fundamentals of electronic growth remain completely intact. Vishay has proven its ability in dealing with temporary economic downs numerous times and will master the challenges of this crisis as well. And I believe that the first half of 2020 has already shown that. We will continue to focus on profitability and cash generation while neither neglecting our essential long-term strategies nor, of course, safeguarding the health and well-being of our employees. For the third quarter, we, assuming an exchange rate of $1.15 to the euro, guide to a sales range of between 580 to 620 million at a gross margin of 22.8% plus minus 70 basis points. Thank you very much, Peter.