Hello, and good day. My name is Carmen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vishay Q1 2019 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. I will now turn the call over to Mr. Pete Henrici. Please go ahead.

Thank you, Carmen. Good morning, and welcome to Vishay Intertechnology's first quarter 2019 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 first quarter 2019 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 first quarter 2019 financials and metrics. Johan Vandoorn, Executive Vice President and Chief Technical Officer and Deputy to the CEO will be presenting on May 29th at the Cowen Technology Media and Telecom Conference in New York; and on June 12 at the Stifel Cross Sector Conference in Boston. Now, I turn the call over to Chief Financial Officer, Lori Lipcaman.

Thank you, Peter. Good morning, everyone. I'm 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 $745 million. EPS was $0.52 for the quarter. Adjusted EPS was $0.51 for the quarter. During the quarter, we continued to execute transactions in response to US tax reform. We completed additional open market repurchases to retire some of our outstanding convertible debentures, which were no longer tax efficient under the new US tax law. Only $21 million of such debentures remain outstanding at this point. 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. Yesterday, Vishay announced an increase of the quarterly dividend of 12% to $9.5 per share or $0.38 annualized. The significant increase demonstrates our commitment to return capital to -- to Vishay's stockholders and shows confidence in the strength of Vishay's ongoing cash flows. Revenues in the quarter were $745 million, down by 4.0% versus previous quarter, but up by 4.0% compared to prior year. Gross margin was 28.3%. Operating margin was 14.5%. There were no reconciling items to arrive at adjusted operating margin. EPS was $0.52. Adjusted EPS was $0.51. EBITDA was $147 million or 19.7%. Adjusted EBITDA was $148 million or 19.8%. Reconciling versus prior quarter, operating income quarter one 2019 compared to operating income for prior quarter based on $31 million lower sales or $30 million excluding exchange rate impacts, operating income decreased by $12 million to $108 million in Q1, 2019 from $120 million in Q4, 2018. The main elements were…

Thank you, Lori, and good morning to everybody. In the first quarter Vishay showed continued financial success, which was quite in line with the exceptional year 2018. The economic environment remained healthy for most of our end markets, but there is a substantial increase of inventory in the supply chain. Vishay in the first quarter achieved a gross margin of 28% of sales and operating margin of 15% of sales, GAAP earnings per share of $0.52 and adjusted earnings per share of $0.51. We also had a strong start into the year in terms of free cash, we generated in the first quarter $44 million. Let me talk about the economic environment. The global economy for electronic components in the first quarter remained principally healthy and the selling prices continue to be stable, but supply in general has caught up to market demand and lead times keep reducing. As a direct consequence, backlogs continue to normalize with book-to-bill ratios now substantially below 1. The inventories in the supply chain have reached very high levels. Talking about the regions geographically markets in the first quarter developed differently. We have seen ongoing strength in the US with POS at record levels. Strength also in Europe carried by industrial and by automotive. We have also seen a general weakening in Asia in continuation of the fourth quarter last year. Global distribution in the first quarter continued to do principally well, with POS growing by 2% quarter-over-quarter. There was a strong POS in the US and in Europe. Asia was weakening, which was also impacted to a degree by the US tariffs. Inventory levels at distribution have grown to record levels, which makes a significant burn off unavoidable. In the first quarter, inventory turns at distributors reduced to 2.7, as compared to 2.9 in…

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

Your first question comes from the line of Shawn Harrison with Longbow.

Hi, good morning. This is Gosia Chowdhury [ph] on behalf of Shawn. To begin with the inventory at distribution, can you talk about the access by region and just thoughts around it by region, please?

Inventory at distribution, if I understood right.

Yes, right.

There's too much inventory, I guess historically in most of the regions. In Asia, it may be -- according to their expectations relatively speaking the highest inventory, and we also see the correction their first of all and it's already ongoing.

And then in -- in terms of Vishay's internal inventory positioning…

This is quite normal.

Okay.

It is quite normal. You see we had 4.3 inventory turns in the quarter that's just fine.

And then, I know you aren't providing specific guidance beyond the second quarter, but if you could just give some comments on how the third quarter plays out in terms of will it be seasonal, less than seasonal and any color would be helpful? Thank you.

Well, we are in midst of a phase of normalization. The question is of course how fast this inventory will be burned off in the second quarter. The current quarter will be impacted as you see from the guidance from this inventory burn off. And I believe also the third quarter to a degree will still be impacted. So there will be for sure -- I believe for sure some impact also on the third quarter. Fourth quarter can be that we are back to normal.

Perfect, thank you.

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

Good morning. Thank you for taking my questions. Dr. Paul, is there a way to quantify how much excess inventory there is in the supply chain maybe for example, in terms of weeks of inventory. I'm just trying to get a handle on what is excess versus what is the normal level of inventory?

This depends on two things: number one, what the POS is; and number two, what the expectation of the terms by the distributors is. Having said this of course, I have my opinion about that but it really depends on the development of the POS. I could imagine that we currently have in excess of $100 million too much for our business.

I see. Okay, that's helpful. And then on the…

But again, this is a relative statement, Ruplu. This is a relative statement based on my assumptions.

Okay, understood. Then on the pricing side; I think you mentioned that prices were relatively stable this quarter, given the inventory situation and distribution, how should we think about pricing going forward. Do you have contracts in place that can keep the prices stable? Or do you expect prices to be impacted in the second quarter?

On the OEM side, we mostly have contracts in place that reach out for the year normally, but 50% of our business is with distribution. And of course, these prices keep being negotiated on a more or less quarterly basis. And we may see some decline, but only on -- for the commodity products here, not for our specialty products. For the time being, we don't see it. But I think it could be possible at the end of all that burn off, at the end -- at the beginning of a -- of normal times if you want, so we are going to be in the -- in the traditional picture, where we see some -- some price decline for the commodity products and practically no price decline for the specialty products.

Okay, that's helpful. And then my last question is on the Opto margins and on the capacitor margins. I think on the Opto side, you mentioned volume and inventory reduction impacted that. But I mean do you think that going into the next second half, you talked about the mix improving, can Opto margins get back over 30%? And then on the capacitors side, you -- you had the opposite, you had a favorable mix this time. How should we think about these two segment margins, if -- if you can give us some thoughts on that?

Let me start with the nicer part. This is capacitors. I believe we will be able to defend the mid-20s, I believe. I think this mix to -- change to favorable mix is not just a spike. We are going to see a trend there, to go to more -- to less commodity products shares as a matter of fact. In terms of Opto, it was a surprise for us, I must admit that. There's also -- there is quite an adaptation problem of capacity there, it costs [ph] us variable cost. This is temporary of course. And on the other side, we are going to add capacity on the way in more profitable lines. So at the moment the line is beaten from two sides, I believe mid-term, longer term, I see no reason, why this line shouldn't go back to where it came from that means 30% plus gross margin.

Okay, all right. Thank you so much for taking my questions. Thanks.

Your next question comes from the line of Matt Sheerin with Stifel.

A question just on the gross margin for the company, you're guiding down roughly 200 basis points sequentially, which looks like a greater than normal margin, negative margin contribution. And if you look back at your margins before the whole supply chain got tightened, you saw lead times stretched, you were running in the 24% to 26%. So how should we expect you know, think about gross margin and operating margin, which will go down year-over-year, as we get through the year. It sounds like particularly if -- as you said pricing becomes tougher, as volumes come back that can impact margins as well?

First of all Matt, you're 100% right. The impact is bigger than you would normally expect from our business model based say on volume levels. We took into account the -- the bringing down of capacity, which of course for the temp -- on a temporary basis create some inefficiencies. And this is really what will burdened this quarter, but this is for the most part, a temporary thing. After the normalization, we will see the normal picture. There will be more price decline, and we will have cost reduction, as it always was in so many years. So what we've seen in the -- in the -- for the second quarter really is the consequence of slowing down capacities, which is never completely smooth.

And then you took down your CapEx for the year by $30 million or so; what areas are you pulling back in terms of capacity expansion? And what areas are you continuing to invest in?

The commodity products everywhere practically brought. But on the other hand this does not and I would like to emphasize that this is not a change of our strategy whatsoever. It's just the delay. We take into account the likelihood of an inventory reduction and just adjust our timing to the likely timing on the market. Otherwise, it's no change. And whatever we -- we cut back now is practically only a delay into the next year. We adapt to timing.

And then, I'd like to get your take a little bit more details on automotive because you have a lot of exposure there in all -- in all markets. It sounds like you're still seeing good content growth, but negative production, and I know that Asia sort of got hit first, particularly China. Are you starting to see orders stabilize in China and come back? Or is it still -- there's still visibility tough [ph].

Well, of course we are concerned seeing the situation of automotive and talk -- and people are talking about potential decline there, but we have to be realistic. I believe electronics is an excellent situation. The electrification is not only lip service, it's a big thing. We made a -- an estimate in-house and we believe that even at a decline of 10% of the car production, this would leave the electronic supplies constant. So you'll see -- we will see and this is not going to go down by 10% obviously worldwide. We still see nice growth in automotive going forward. And this in particular, in the MOSFETs, where we just came from nothing a few years ago. We have freely, we got into one of the big suppliers very nicely, and we are working on the even bigger other supplier there. So I'm quite optimistic on that. In automotive in general, despite some problems around the world and you're right in Asia, you heard -- we heard the same. But all together, I am not concerned about the growth.

And just lastly, regarding OpEx, you're guiding flat to sequentially down implying flat to down a little bit after that given the -- the reduction in sales and in gross margin, are you looking at taking any other measures to bring down costs?

Well, we had some internal, let's say slight reduction measures in terms of fixed costs. And going forward, we will evaluate the situation, as we go. As a matter of fact as we always did in the past.

Fair enough. Thanks. Thanks very much.

Your next question comes from the line of Harlan Sur with JPMorgan.

Good morning. Thank you for taking my question. Dr. Paul, why it's such a big difference in the demand trends OEM versus distribution. It looks like OEM revenues were actually up slightly sequentially, while distri [ph] was down 7% and there was also a pretty big delta in book-to-bill between the two segments again with OEM bookings, performance more constructive. I would have assume that the trends at distribution of high inventories would to a certain degree also be the same case for OEM. So can you help us resolve the differences? And do you anticipate your OEM business continuing to do a little bit better in the June quarter as well?

As a matter of fact, we're absolutely not surprised about the fact that these two segments behave so differently, as they do currently. There was a lot of inventory build through the last two years at distribution. It accelerated in the course of last year, and this comes back to normal to a degree. No question. Whereas the OEM they -- it shows the right picture, the correct picture of the market. I believe the inventory they have built as far as we -- of course, they also built something but not compatible -- not compatible. There is a lot of consignment stocks there, and there was not even the chance for them to build so much inventory, I believe. So we see -- I believe that the OEM business represents the true situation and we are not surprised that things are so much better there. And I can say all together on average, the OEM business is very encouraging continues to grow. And what we see at the moment is really an inventory correction, which we somehow also expected.

Thanks for the insights there. And then from a geographical perspective, can I have the same line of question, which is Europe is holding up very well, but I think revenues actually probably grew slightly sequentially. Is this tied to the better OEM performance in the quarter or is it just better auto exposure, which auto seems to be doing well as well. But I'm just trying to figure out why is Europe trending better? And again, do you expect this trend out of Europe to kind of continue through the June quarter?

I believe the industrial and automotive portion is doing very well in Europe these days. And also the distributors did not stock as much as in other hemisphere. So the need for correction is not exactly the same.

And then my final question -- and I appreciate that. On the revised CapEx. So what expansion programs have you pulled back on? And what programs are you still looking to build out more capacity?

As I said before, there is absolutely no change in our strategy. These commodities we were to expand continue to be our favorites and they do very well on the market. On the other hand, we have to see reality, we just timed the whole thing differently. There's no -- there's no program, which we abandoned. We just decided to push a little out because obviously in view of this inventory correction, the increases will come somewhat later and we want to optimize what we do. There's nothing -- there's no real change in all that -- will be less.

Makes a lot of sense as we put it. Thank you, Dr. Paul.

And there are no other questions at this time.

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

Thank you, again for joining today's conference call. This concludes the call. You may now disconnect.