Good morning. My name is Andrea and I will be your conference operator today. At this time, I would like to welcome everyone to the quarter two 2017 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will a question-and-answer session. [Operator Instructions]. I would like to now turn the call over to your host, Mr. Peter Henrici. You may begin.

Thank you Andrea. Good morning and welcome to Vishay Intertechnology's second quarter 2017 conference call. With me today are Dr. Gerald Paul, Vishay's President and Chief Executive Officer and Lori Lipcaman, our Executive Vice President and Chief Financial Officer. As usual, we will start today's call with the CFO, who will review our second 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 will reserve time for questions and answers. This call is being webcast from the Investor Relations section of our website at ir.vishay.com. The replay for this call will be publicly available for approximately 30 days. You should be aware that in today's conference call, we will be making certain forward-looking statements that discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements. For a discussion of factors that could cause results to differ, please see today's press release and Vishay's Form 10-K and Form 10-Q filings with the 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 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 second quarter 2017 financial information containing some of the operational metrics Dr. Paul will be discussing. On September 7, Johan Vandoorn, Executive Vice President, Chief Technical Officer and Deputy to the CEO will present at the Citi Global Technology Conference in New York. We will also be presenting on August 29 at the Jefferies Semiconductors, Hardware & Communications Infrastructure Summit in Chicago and on September 13, at the Credit Suisse HOLT conference in Boston. Now I turn the call over to Chief Financial Officer, Lori Lipcaman.

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 Q2 of $645 million, above the mid-point of our guidance. GAAP net income for the quarter was $0.36 per share. Adjusted EPS was also $0.36 for the quarter. The second quarter includes restructuring charges totaling $0.5 million. Through the end of the second quarter we did not repurchase any additional shares of our common stock. The program announced in May 2016 has since expired. Yesterday, we announced a new share repurchase program of $150 million, which is expected to be implemented over the next year. This stock repurchase program does not obligate the company to acquire any particular amount of common stock. Revenues in the quarter were $645 million, up by 6.4% from previous quarter and up by 9.3% compared to prior year. Gross margin was 26.8%. Operating margin was 12.7%. Adjusted operating margin was 12.8%. EPS was $0.36. Adjusted EPS was also $0.36. EBITDA was $121 million or 18.8%. Adjusted EBITDA was $122 million or 18.9%. Reconciling versus prior quarter, adjusted operating income, quarter two 2017 compared to adjusted operating income for prior quarter, based on $39 million higher sales or $32 million higher excluding exchange rate impacts, adjusted operating income increased by $16 million to $83 million in Q2 2017 from $66 million in Q1 2017. The main elements were average selling prices had a negative impact of $4 million representing a 0.7% ASP decline, volume increase had a positive impact of $18 million equivalent to a 6.0% increase, lower inventory build had a negative impact of $3 million and lower and variable fixed costs had a positive impact of $6…

Thank you Lori and good morning everybody. Well, we are living in good times. After a very successful first quarter, the second quarter results for Vishay showed further substantial improvements in terms of sales and profits. We continue to be carried by a very high level of demand while maintaining good efficiencies across the board. Vishay achieved a gross margin of 27% of sales in the quarter, adjusted operating margin of 13% of sales, GAAP earnings per share of $0.36 and adjusted earnings per share also of $0.36 and we continue to generate free cash on a very high level. Let me talk about the economic environment in general. Historically, high order rates also characterize the second quarter and virtually all markets are concerned. Again, the high order level was driven by distribution, in particular, in Asia and in Europe. Tangible shortages of supply and long lead times still raise concerns. Semiconductors continued to be more concerned than passives but the lack of manufacturing capacity is also visible for several passive lines. Talking about the regions. The American market keeps recovering with moderate growth across industrial and avionics, space, military segments. The weakness in oil and gas seems to be behind us. In Europe, business conditions remain strong driven by automotive and industrial markets. Asia continues to be strong reflecting the strength of global automotive and industrial segments and there are good opportunities in power transmission and in e-mobility. Distribution in particular in Asia and Europe continues to drive our high order rates. At the same time, also POS increased further in the Americas plus 4% versus prior quarter, in Asia plus 15% versus prior quarter, which is the best since the decade, in Europe just 0.1% versus prior quarter but in quarter one there was an increase of 28%…

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

[Operator Instructions]. Your first question comes from the line of Harlan Sur with JPMorgan.

Good morning and thank you for taking my question and congratulations on a good quarterly execution. Given that the second half demand profile is typically, seasonally down, right, especially in automotive and industrial and combined with the team's efforts to try to expand some output capacity, Dr. Paul, do you think this is going to give you guys an opportunity to work down some of your backlog and potentially reduce lead times a bit in the second half of the year?

Yes. As a matter of fact, the backlog is not typical, it's high. And of course, we want to increase our sales to the extent we can. On the other hand, this requires more equipment, which takes some time to be installed. We are going to invest more. We believe that the backlog going forward will normalize anyway. I would like to state that, without impacting the running sales level.

Great. Thank you for that. And then, good to see the overall gross margin expansion, but if I look at it by product category, interestingly enough, your passive products also are all sort of flattish or maybe a slight gross margin decline, this is quarter-over-quarter. Your semi products saw continued strong margin expansion. You have got the benefit of better pricing dynamics in passives. So can you just help us understand the margin dynamics for passives in Q2 as well as the expectation for passive gross margins going into Q3?

Yes. I mean quarter-over-quarter, the passives did not go up that much. And of course, especially in our line resistors and inductors, there was no further inventory build. So the previous quarter was somehow supported in the P&L by some inventory build, which didn't repeat itself. So obviously, we sold what we could as a matter of fact. Capacitors also relative flat in sales, but on a relatively good level, historically. 21% gross margin for our capacitor line is a good number, which doesn't mean it couldn't get better. We hope here for more volume especially from China and Asia and I believe we have the product for that. Coming, of course, to the semiconductors, I have to highlight again and I did it in my speech. I have to highlight a turnaround in MOSFETs. We are really coming from low in MOSFETs and back to a reasonable level, say, of 22%. And this was driving, especially the semiconductor numbers, of course from a profitability standpoint. But also, opto is steadily good. So relatively speaking, the best product line that we have. And Diodes is like a tanker. So as a matter of fact, the increase and bring home 26%, which historically, is also a good number, as a matter of fact. So this is how I see things.

Thank you Dr. Paul.

And your next question comes from the line of Shawn Harrison with Longbow Research.

Hi. Good morning. This is Gausia Chowdhury, on behalf of Shawn. Just talking a little bit more about the gross margins. So the leverage on a sequential basis was a little lower than typical and you discussed why. How should we think about the balance of the year?

Well, our visibility, first of all, the gross margins are determined by volume, as we all know. In terms of volume, you can say that our visibility reaches normally out for one quarter, see our guidance. But of course, the backlog is really high these days. So I also believe that the fourth quarter, we are relatively safe. So I believe the volume for these two quarters is mainly determined by our ability to ship and we are working on that. But of course, as I said, we still need more equipment and the lead time for equipment will take some time. But I think from a volume standpoint, things are stable. So I would also say results will be stable for the remainder of the year.

Okay. And just to clarify then, the incremental gross profit margin, do you see that improving as that occurs?

Well, we do have an incremental margin normally of around 46%, 47%, something like that. And I believe that this will stay typical for the remainder. And of course, just to repeat it once more, there will be naturally no inventory build in the remainder of the year which, of course, if you did so, you support your gross margins but, of course, we better sell, obviously.

Okay. And then just talking a little bit about the pricing trends in general. It looks like you were able to get a little bit better in this tighter inventory and lead time environment. Do you see that as sustainable for another quarter or two as well?

Well, you know, it was moderate changes on pricing. You see, all the OEM businesses are practically under contract and we are not contracts by nature. And on the distribution side, the specialty products are no candidates for price increases. So we are talking really distribution and we are talking commodity products. And I believe these favorable conditions, which have enabled us to slow down a little less in price will continue for the quarter three and I believe also for quarter four.

Great. Thank you.

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

Thank you very much. I have two questions. One for Dr. Paul and one for Lori. Yes, first on Dr. Paul. You mentioned the increase in inventory and distribution. Do you think that was due to demand or an increase in backlog in time to get the products? Or what's the logic behind that? And then second of all for Lori. On the convert, is it just simply a financial EPS accretion, dilution impact of whether you exercise the convert or not? Or are there other factors such as CapEx spending, cash flow that we should be mindful of, as far as thinking about exercising the convert or not? Thank you.

Jim, I think, this slight increase and we are talking really a slight increase of 3.5% in distribution inventory is really nearly negligible in view of the upturn of their business. I cannot really caliber that. I could imagine, maybe they got a little too much in vis-à-vis what they could ship at. Principally speaking, the turns are sky high at the moment. So inventory at this point in time, at least and distribution doesn't represent any concern to me. We have seen other times, I suppose, of us now. So I don't have a real explanation but I think with a higher level of activity, you automatically have to have somewhat more inventory.

All right. Great. Lori?

Okay. Now I turn over to Lori.

Hello Jim. So I think all of the details about the conditions that make these converts redeemable are disclosed in the 8-K that we filed this morning. So I think that would be the best place to get that detailed information. But I want to say it's up to the holders to redeem them, right? Vishay does not make the decision to redeem them. It would be the holders that make that choice. It's just that the conditions have been met so they would be permitted to make that choice.

Okay. Got you. Thanks so much for the clarification. And congratulations

Thank you. You are welcome.

Your next question comes from the line of Ruplu Bhattacharya with Bank of America.

Hi. Good morning. Thank you for taking my questions. The first one, Dr. Paul, maybe I just like to ask about total industry supply or capacity coming online. You mentioned some supply shortage in diodes and then possibly also in the passives. Based on your supply coming online and what you see for other competitors, how do you think the supply-demand balance on industry capacity trends over the next couple of quarters?

Yes. First of all, I just reconfirm what you said. There have been ongoing shortages in combination with long lead times for the diodes and the MOSFETs as we see it. We add capacity but of course it will take some time. It doesn't go overnight. So from our perspective and I believe, also in general, the shortage situation will not be turned around quickly, I believe. Normally high backlogs, as we have now on the other hand, do not survive forever, as you see. So we do expect normalization by lower orders and backlog. You have to see in order to make this normalize, you have to see book-to-bill ratios below one, obviously. Otherwise mathematically, it will not work. When this will happen, it's hard to say. I believe the strong economic conditions which we enjoy are foreseeably there. But there's no question that capacities will come up and at the point in time, there will be normalizations of the backlog. I believe it will happen without impacting the running sales, because at the moment we simply have too much. A part of these orders were also reservations of capacity obviously everywhere. Concerning our own activities. Well, we are going to spend this year more. You have seen or you have heard that we are going to increase capital spending this year to $165 million approximately. And we are, at the moment, in discussions about next year. I could imagine that this number will be exceeded next year. So we will prepare better, even better if you want, so for the future. And I believe, we will contribute of course to the fact that our customers get the products they want.

Okay. Thank you. That's helpful color on the supply. My next question is on gross margins. The opto margins were 35%, diodes were 26%. Given the fact that you have high book-to-bill in both of these segments, do you think that this level of gross margin can be supported? How should we think about gross margin in these two segments trending over the next couple of quarters?

I think I said it before. Gross margin, first of all, is a function of volume, first of all. Of course, then you have your variable cost deviations and your purchase prices, et cetera. But for such as short range, let's say a quarter, the volume is what counts. And as I believe, the volume is assured for the third quarter, you see our guidance. And I am also quite optimistic for the fourth quarter. I would say that also the gross margin percent are assured. Substantial increase of the gross margin percent would require more volume, as a matter of fact. Of course, the low price decline may help on the other side. But again, we are a little bit also victims of the exchange rates there, as a matter of fact. Anyway, I believe our performance really continue to exist depending on volume that seems to be there.

Okay. And one for Lori, if I might. On the buybacks, was there any authorization remaining from the last buyback authorization? And how should we think about the cadence of the buyback over the year? Should we think about it in equal chunks over the year? Or is it more front end loaded or back end loaded?

Ruplu, I must disappoint you. It's me, again.

Okay. Go ahead.

So I will try to answer. Because I think the question goes really to me. Yes, you are right. you can expect the intent to spend the money in equal portions over the year. And secondly, I believe this move of ours just underlines that we are confident for the further development of Vishay, as a matter of fact.

Okay. Great. And sorry, if I can ask just one more. So you talked about overall strength in auto continuing for several years. How about North American auto? Are you seeing any weakness there? And how should we think about your content, like your MOSFETs are increasing in auto. So overall, is Vishay content increasing in auto? And how should we think about that trend over the next couple of years?

That's exactly what I am talking about. I mean the number of cars, the car production, also historically if you look back, were sometimes more, sometimes less, better and worse. But, overall our sales to automotive, not our sales, I believe, our industry sales to automotive continued to go up, always the same, because of the increase of electronic content in the cars. There's no reason whatsoever to believe that this will change, disregarding somehow a slowdown of cars being produced in one area or the other. As a matter of fact, I believe, first of all, all this goes up and down. Secondly, the electronic content is going to grow. We believe really for the next years and these are statements of our main very well-known customers, you know them. These customers, they support the idea of 10% per year. But they ship not only to North America. They ship to all regions in the world, right?

Okay. Great. Thank you for taking my questions. I appreciate all the color.

Okay.

[Operator Instructions]. There are no questions at this time, sir.

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