Vishay Intertechnology, Inc.

Good morning and welcome to Vishay Intertechnology's fourth quarter 2022 earnings conference call. I am joined today by Joel Smakel, our president and chief executive officer, and by Laurie Lipkeman, our chief financial officer. This morning, we reported results for our fourth quarter. A copy of our earnings release is available in the investor relations section of our website at This call is being broadcast live over the web and can be accessed through our website. In addition, today's call is being recorded and will be available via replay on our website. During the call, we will be referring to the slide presentation, which we also posted at ir.vichet.com. 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 Vichay's Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. We are including information in our press release and on this conference call on various GAAP and non-GAAP measures. We have included the full GAAP to non-GAAP reconciliation in our press release as well as in the presentation posted on ir.vca.com. which we believe you will find useful when comparing our GAAP and non-GAAP results. 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. Now, I turn the call over to President and Chief Executive Officer Joel Smakel.

Thank you, Peter. Good morning, everyone. I'm Joel Smakel, and it is my pleasure to be speaking with you today on my inaugural call as Bichet's new Chief Executive Officer. On today's call, I'm going to open with some brief remarks about my background and my assessment of the company today. Then I'll turn the call over to our CFO, Lori Lipkeman, who will go over our financial results for the fourth quarter, and then the first quarter guidance. After that, I'll share with you our ambitions for the company in the future and our plans for 2023. Let's begin with slide number three. Over the course of my career at Vichy, in my positions in engineering, marketing, sales, operation, and business development, I have worked with colleagues throughout the organization to identify new business opportunities, develop next generation products, and to broaden Vishay's participation across its market segments and business channels, always with a mindset to enable our customers to be successful. From my engineering, marketing, and operational roles, I have worked inside the Vishay organization and gained an understanding of the internal dynamics of the company. In my sales and business development roles, I have seen Vishay from the outside in. I have seen Bichet from the eyes of the customer. Behind the scenes, I have been working to guide a shift at Bichet towards growth, to influence an increase in capacity, to push us forward in our product innovation, the investment in silicon carbide, and to broaden our attention to serving new customers. As such, I have a unique background to lead Bichet in my new position as CEO. to see with a clear view where we have missed opportunities, where we've underperformed, and what we need to do to unleash the potential of Bichet. The customers clearly expect more from Bichet. What else do I see? Bichet is a financially strong company with a broad product portfolio of discrete semiconductors and passive components. Bichet has strong operational disciplines, and a terrific, hardworking, and smart workforce. We have a pristine balance sheet that gives us stability, but also the capability to grow at greater rates. We have a global manufacturing footprint with multiple manufacturing locations for a number of product lines that positions us to meet our customers' need for supply in their region of consumption. And we are a supplier to all market segments with strong technology positions in automotive, industrial, military, avionics, and medical. Supporting the megatrends of electrification, data storage, and wireless communications are critical to our future success. In automotive, where EV and electronic content and new sensing features are rapidly growing, In industrial, where factory automation, renewable energy collection, and energy transmission are propelling greater electronic component demand. In military, where governments are increasing the funding on defense programs and customers are developing more advanced radar systems and missile guidance systems. To commercial aerospace, where dollars are flowing into satellite communications and flight systems and in medical technology where companies are innovating new medical diagnostic equipment, instruments, and implantable devices. One might say that Bechet is a sleeping giant, often capacity constrained with long lead times. We have underinvested in CapEx and technical resources. We have to change and reshape the company to drive growth. and optimize returns and shareholder value. Under my leadership, we're going to reorient Buche. We're going to reorient from an operations focused company to a customer and market focused company. From a cash flow managed business to a P&L driven company while upholding our capital return policy. From a company that fulfills customer orders to one that anticipates customer need and is ready to support, from a company focused on the present to one that is forward-looking, and from a proficient organization to one that's dynamic and rewards risk-taking. In the months leading up to my taking control as the CEO, I spent a great deal of time with Vishay's new leadership team, so that we could collectively hit the ground running on January 1st. It's critical that we start immediately. Externally, I've met with key customers, both distributors and OEMs, to dig deeper into their needs and share where Bechet will be going in this new era. Internally, I've met with nearly 70 senior leaders one-on-one to hear their views on our opportunities to grow and the operational gaps that we must close. I have been injecting new ideas and changes to our business processes using multiple employee communications to start creating a business-minded organization. I've stressed that in order to propel our growth and meet the increasing demand for our products, we must shift our mindset to think customer first in everything we do. I'll provide more detail about what we have planned for the future after Lori has completed her review of the financial results. Lori, please proceed.

Thank you, Joel. Good morning, everyone. I'll start my review of our fourth quarter results on slide four. Revenues for the fourth quarter were $855 million. slightly below the low end of our guidance, reflecting in part the impact of COVID-related absences at our plants in China, and in part lower than expected sales to distribution, reflecting the start of an inventory correction. Distribution inventory at quarter end was 19 weeks compared to 16 weeks for the third quarter. Revenues decreased 7.5% versus the third quarter, Reflecting stable relatively stable pricing and eight point zero percent decline in volume As expected volumes came down from the spike in the third quarter When we were catching up on MOSFET shipments after the shutdown in Shanghai during the second quarter Revenues were 1.5 percent higher than fourth quarter last year on pricing offset by flat volumes EPS was 51 cents per share and Adjusted EPS was 69 cents per share compared to 98 cents per share and 93 cents per share respectively for the third quarter. Adjusted earnings for these two quarters reflect differences in tax expense. I will elaborate further on these items in a few moments. Both the bill for consolidated VCHE was 0.94. Backlog, a quarter end with 7.8 months for passives and 8.3 months for cents. CapEx for the year increased $106.9 million or 49% versus 2021 to $325.3 million in line with our expectation of spending $325 million. nearly all of the increase related to capacity expansion outside of China. We returned a total of $140.2 million to shareholders, well above the target of 70% of free cash flow and well above the 100 million that we anticipated at the time we announced our new stockholder return policy last February. Slide five presents a breakdown of revenues by sales channel and end markets. I want to call your attention to a few data points. Sales to distribution decreased 12.4% from the third quarter. As mentioned earlier, we have started to see indications of an inventory correction. For our two largest markets by revenues, revenues from the automotive market decreased 6.4% versus the third quarter. primarily reflecting the third quarter catch-up in MOSFET's volume out of our Shanghai facility. In addition, automotive OEMs pulled less inventory as they focused on consuming inventory by year-end. Compared to the fourth quarter of 2021, automotive revenues were up 7.1%. Revenues from industrial customers decreased 10.0% versus the third quarter, along with a decrease in distribution revenues. On slide six, you can see the revenue breakdown for the fourth quarter by business segment and by region. Although revenue in Asia declined by 12.8%, TOS in the region declined modestly. Please turn to slide seven. Gross profit was $249.1 million for a margin of 29.1% compared to 31.3% for the third quarter reflecting lower volumes. Compared to our guidance of 30%, plus or minus 50 basis points, gross profit margin was impacted by lower than expected volumes and some input cost inflation. Operating expenses were 113.8 million, above quarter operating expenses of 106.4 million, primarily reflecting the addition of max power. As a result of the reduction in gross profit and higher operating expenses, operating income decreased by $47.8 million to $135.3 million versus the third quarter. Operating income increased 13.7 million or 11.2% over 4Q 2021. Operating margin was 15.8% compared to 19.8% for the third quarter and 14.4% for the fourth quarter of 2021. EBITDA was 171.0 million for an EBITDA margin of 20.0%. During 4Q, we made the determination that substantially all unremitted earnings in Germany are no longer indefinitely reinvested. As a result, we recorded additional tax expense of $60 million. Changing the indefinite reinvestment assertion will provide greater access to the company's offshore cash balances and enable us to sustainably fund our growth plan and our stockholder return policy. With the change in assertion, while the change in assertion provides access to these foreign cash balances, these amounts will be repatriated only as needed. Also during 4Q, we recognized a tax benefit of $34 million upon the release of evaluation allowance. Our U.S. tax rate for the year includes these unusual items and was approximately 28%, which mathematically yields a rate of 46% for 4Q. Our normalized effective tax rate, which includes these unusual items, and for full year 2022 excludes the tax effect of the COVID costs in China in 2Q was approximately 23% for the quarter and 24% for the year. The change in indefinite reinvestment assertion also impacts our assertion on future earnings. Our consolidated effective tax rate is based on an assumed level and mix of income among the various taxing jurisdictions. We expect a normalized effective tax rate for full year 2023 of approximately 30%. On slide eight, we present cash conversion psychometrics. DSOs were 45 days compared to 42 days for the third quarter, as we received payments from several of our customers in Asia shortly after quarter end. Inventory was $618.9 million at quarter end. essentially flat versus third quarter primarily due to exchange rate impacts. Inventory days outstanding were 93 days compared to 90 days for the third quarter. DPOs were 31 days compared to 33 days for the third quarter, bringing the cash conversion cycle for the fourth quarter to 107 days. Turning to slide nine, You can see that VCS continued its track record strong cash flow generation. Cash from operations for the quarter was $165.5 million. CapEx was $153.1 million for the quarter, with $101.5 million invested in capacity expansion, primarily in Mexico. And bringing the total CapEx for expansion in 2022 to $214.6 million, an increase of 52% compared to 2021. Full year total CapEx was 9.3% of revenues compared to 6.7% for 2021. Pre-cash flow for the quarter was $14.1 million, and for the full year was $160.2 million. Under our stockholder return policy, we have committed to return at least 70% of annual free cash flow to stockholders directly in the form of dividends or indirectly in the form of stock repurchases. We announced the policy in February of 2022. We set an expectation to return at least $100 million in 2022. For the fourth quarter, our stockholder return amounted to $42.4 million, consisting of $14.1 million for our quarterly dividend and $28.3 million for share repurchases. We purchased a total of 4.2 million shares at an average price of $19.57 during the year. This brings the total stockholder returns for 2022 to $140.2 million, or 87.5% of annual free cash flow. Total liquidity at quarter end was $1.6 billion, including cash and short-term investments of $916.1 million and $707.1 million availability on a revolving credit facility. As mentioned on past earnings calls, we use the revolver from time to time to meet short-term financing needs. Turning to slide 10 for our guidance, for the first quarter of 2023, revenues are expected to be between $825 million and $865 million, reflecting ongoing inventory correction and stable pricing. Gross profit margin is expected to be in the range of 28.0%, plus or minus 50 basis points. Operating expenses are expected to be between $116 million and $119 million for the quarter, and between $475 million and $485 million for the full year at current exchange rates. For 2023, as mentioned earlier, we expect a normalized effective tax rate of approximately 30%. Consistent with our stockholder return policy, we plan to distribute at least 70% of our free cash flow to shareholders in the form of dividends and stock for purchases. For 2023, we expect to return at least $100 million. And I'll turn the call back to Joel.