Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vishay Q4 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Peter Henrici, you may begin your conference.

Thank you, Amy. Good morning, and welcome to Vishay Intertechnology’s fourth 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 fourth quarter and year 2018 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. 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 fourth quarter 2018 financial information containing some of the operational metrics that Dr. Paul will be discussing. 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 Q4 of $776 million, completing a year in which revenues exceeded $3 billion for the first time in the company’s history. EPS was $0.69 for the quarter. Adjusted EPS was $0.58 for the quarter. During the quarter we continue to execute transactions in response to U.S. tax reform. We completed open market repurchases to retire a significant portion of our outstanding convertible debentures, which were no longer tax efficient under the new U.S. tax law. All of the reconciling items between GAAP EPS and adjusted EPS are related to this early extinguishment of debt transaction or tax related items. There were no reconciling items impacting gross or operating margins. I will elaborate on these transactions in a few moments. Revenues in the quarter were $776 million, down by 0.7% from previous quarter, but up by 15.2% compared to prior year. Gross margin was 28.3%, operating margin was 15.4%, there were no reconciling items to arrive at adjusted operating margin. EPS was $0.69, adjusted EPS was $0.58, EBITDA was $146.5 million or 18.9%, adjusted EBITDA was $155.8 million or 20.1%. Revenues in the year were $3,035 million up by 16.7% compared to prior year. Gross margin was 29.3%, operating margin was 16.0%, again, there were no reconciling items to arrive at adjusted operating margin. EPS was $2.24, adjusted EPS was $2.12, EBITDA was $603.4 million or 19.9%, adjusted EBITDA was $630.0 million or 20.8%. Reconciling versus prior quarter operating income quarter four 2018 compared to operating income for prior quarter based on $5 million lower sales or the same level excluding exchange rate impacts,…

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

Your first question comes from the line of Harlan Sur with JPMorgan. Harlan, your line is open.

Thank you. Good morning. Great job on the quarterly execution.

Good morning.

Good morning. And good job on the full year results as well. Dr. Paul, Q1 is typically a seasonally stronger quarter sequentially for the team. I know you are seeing a weakness in Asia and China like many of your peers, but is the sub-seasonal trend primarily focused on auto and industrial? And are there any other geographies or end markets which are showing some seasonal trends as well?

Well, we are projecting it either relatively strong quarter one, but your observation is right. It’s slightly below the fourth quarter. We do expect some normalization in – especially in Asian distribution based on the inventory level we see there.

Backlog coming down a little bit slightly, right? Probably because your lead times are maybe coming in a bit. I’m just wondering if you could just comment on the level of cancellations.

Yes, still as you said, backlogs are extremely high. For the history of our business, I’m – for a long time in this business, I practically have never seen such long – such high backlogs and such long lead times. But of course, as to be expected, as demand basically will be caught by the capacity sooner or later, and this is ongoing. You have to expect that for some time, there is a book-to-bill which is below 1 because the backlogs are – were partially inflated, there’s no question, which not necessarily has to do anything with the EBITDA sales we achieve. You know that the backlogs were partially artificially inflated. I think we discussed it all along.

Yes. Thank you for the insights. And just my last question, more on kind of a forward-looking basis. Strong results so far with your Asia growth and expansion plan. I think you guys highlighted a 19% CAGR over the past, I think, four or five years. What are the plans this year to increase either sales, marketing and engineering resources in these regions? And outside of auto, what are the other end markets that you guys are targeting in Asia?

Yes. For sure, automotive remains to be an important part of our activities. And I believe that we added a lot of resources there, local resources, and I believe that for the time being, it’s efficient, at least for the time being. Very important for us, of course, is also industrial. As a matter of fact, industrial for Vishay is the bigger market, which we serve. And we want to continue to serve the better. It’s a very much diversified market as you know. And we have to penetrate it even better in Asia. We’re on the way, there’s no question, we’re on the way. And by the way, in this regard, we didn’t – we shouldn’t disregard auto completely. We believe that especially MOSFETs have a great future in automotive, our MOSFETs. It’s one of our key programs for the years to come.

Thank you, Dr. Paul.

Your next question comes from the line of Shawn Harrison with Longbow Research. Shawn, your line is open.

Hi, everybody and my congratulations as well.

Thank you, Shawn.

Wanted to get into the book-to-bills a little bit and just particularly the Americas coming down substantially, probably a book-to-bill we haven’t seen in seven or eight years. And wondering if that was just backlog correction. Or is there something else going on in North America? Because typically, this earning season Asia spend really the weak point. We haven’t seen that type of, I guess, book-to-bill commentary out of the Americas for any companies.

Shawn, it’s my real conviction, what we see is the backlog correction. We haven’t seen such, maybe for a long time, such low book-to-bill ratios, but we have never seen, at least I cannot remember, so high backlogs – such high backlogs. So I think it is clearly a normalization. The POS runs nicely, theme is to runs nicely, especially in the United States.

Okay, that’s very helpful. Is there an expectation with the capacity you’re adding and maybe peers are adding that you’ll start to see these backlogs get to a more normalized level in the back half of 2019? Or do you think that you’ll still have some extended backlogs for the next 12 months?

I believe in the normalization of the backlog in the course of the year. But having said this, of course, we are. We were investing for more capacity, and we are continuing to invest for more capacity. We want to have the opportunity, also, going forward, to react to spikes of demand. And this nice growth, which we have seen since 2017, was eating up really our capacity reserve. So we have to do something in order to be a viable supplier also going forward. So we continue to invest but not across the board, we of invest, of course, in critical lines.

And then lastly, if I may. I know a lot of annual price discussions happen either late in the fourth quarter or during January. Do you expect the benign or even positive pricing environment you’ve seen for the past few quarters to persist throughout 2019 based upon your pricing discussions?

2019 is a long time for us. But as a matter of fact, I would say, going forward, at least foreseeably, I would see a relatively stable pricing to continue.

Okay. Thank you so much. And once again, my congrats.

Thank you.

Your next question comes from the line of Matt Sheerin with Stifel. Matt, your line is open.

Yes. Thank you and good morning. Dr. Paul, just questions relative to your commentary on inventories. The book to – the distribution of the inventories, sounds like they’re up somewhat. It was interesting that your book-to-bill and distribution actually went up from Q3 when it went down in all other areas except for semiconductors. So I want to kind of reconcile that. But do you think the distributors are now reacting to lead times and you will see a quarter or multi-quarter correction there?

I think we have to distinguish between cancellation of orders, which should have never been given that we are given out of – the reason was whether long lead times and real reduction of inventory. I believe the normalization of the backlogs has already started despite the orders we saw in Q4. I’m pretty sure that this normalization will simply continue. The question is, and this relates very much to the development of POS, obviously, what decisions will be take mainly by the Asian distributors to reduce maybe some inventory. We expect some inventory reduction, as I said, in the first quarter sales number we guided to.

And I appreciate that you – your visibility is probably somewhat limited, although you do have strong backlog. But as you look past this quarter, which looks like to be somewhat below seasonal, do you think it will come back to seasonal levels, where you’ll be up sequentially in the June quarter or is it too early to tell?

It’s early to tell but we don’t know to which extent. First of all, I think the environment remains friendly. This is our basic conviction. We do not see a slowdown in reality of the electronic applications. We believe in a good year 2019. The remainder is the question to which extent inventories will be really effect by distribution. They are relatively high, as you’ve seen, as you heard. The turns are not so high at this point. So that could be indeed that some inventory correction will take place beyond any correction of the orders only of the backlog. But I don’t think it will be very severe. I would suspect that the second half of the year will be very normal, would be good, and the first half not bad so to speak.

Okay, and your take on automotive market, where we’ve seen competitors talk about production down this year but still good content. So how do you think about those markets for Vishay?

Mainly, the major European suppliers, which are big customers of ours, they gave us annual contracts, which show substantially higher volumes. And they can be wrong, of course, but in the past have practically never been wrong since the year 2000. So just judging it from the demand, which we get from these two large customers, you know them, makes me confident that I will not see, at least based on the growing electronic content, which you said, I don’t see a breakdown of the electronic volume in automotive. In fact, it continues to grow.

Okay. Thank you very much.

Your final question comes from the line of Ruplu Bhattacharya with Bank of America. Ruplu, your line is open.

Hi. Thank you for taking my questions. Dr. Paul, maybe first on Opto. The margins were down this quarter, and you talked about some weakness in the China consumer market. But you also said that you expect some of that market to come back in the mid-2019 time frame. So – yes, go ahead.

Excuse me, sorry. I said, Opto will come back. In fact, we believe the weakness, which we have seen now in some consumer parts of the Chinese business, will remain to a degree. But other products will – which grow fast, sensors in particular, will then support the growth. The problem is, we have capacity shortages there. By mid of the year, the division forecasts to have enough capacity that these growing segments can really support the overall growth at that Opto. But we expect this consumer applications to remain relatively weak for some time. But overall, we believe that Opto will be – will come up again based on other products they already have, just based on capacity expansions in the second half of the year.

Got it, got it. And then maybe, just on – you have more cash now in the U.S. Can you talk about your priorities for use of cash by max versus – you’ve done an acquisition, but any more thoughts on M&A, just general use of cash going forward?

Good morning, Ruplu, this is Lori. First of all, we don’t have a great amount of cash in the U.S. I think I mentioned that we spent substantially all of the cash that we repatriated during the year 2018 in 2018.

And so the remaining $300 million that you have outstanding, do you plan to repatriate that within – in 2019? Or is there any time frame for that?

At this point in time, we haven’t established exactly when we will repatriate that. But we’re evaluating it. And we – yes, we don’t a final decision on exactly when we will bring that money back to the U.S.

Okay, and my last question is, overall there’s been a lot of discussion on the call on the backlog and on inventories normalizing and maybe having an inventory correction. Backlog still is like high overall at 5.8 months. In general, when you think about the quality of the backlog, I mean, are you confident that this backlog is real and versus how much double ordering is happening? Do you think that this backlog can sustain growth for the next couple of quarters?

Ruplu, I mean, if the backlog normalizes, it doesn’t help me, and no – it doesn’t hurt us, as a matter of fact. What but would hurt more is, of course, a major inventory correction. As a matter of fact, what we look at is the 13 weeks’ shippable backlog. This contains – of course, this doesn’t contain fluff normally. It can also be cantled theoretically, but this is much more solid. And I can assure you, for the next 13 weeks, I see no negative at all, no correction in our activity level required. So as a matter of fact, backlog normalization will take place, but this hasn’t, to be honest with you, nothing to do with the sales necessarily. But what would have impact on the sales is an inventory correction. But at this point in time, even I cannot see that. We are very careful for the first quarter. So – and there will be some but nothing major, I believe.

Okay, great. All right. Thank you for taking my questions. Appreciate.

There are no further questions. I will turn the call back over to the presenters for closing remarks.

Thank you, Amy. This concludes our fourth quarter conference call. Thank you for your interest in Vishay Intertechnology.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.