Hello. My name is Zatania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vishay’s Q2 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 would now like to turn the call over to Mr. Peter Henrici. Sir, you may begin your conference.

Thank you, Zatania. Good morning, and welcome to Vishay Intertechnology's second 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 second 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 second quarter 2019 financials and metrics. Now, I turn the call over to Chief Financial Officer, Lori Lipcaman.

Thank you, Peter. 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 $685 million. EPS was $0.31 for the quarter. Adjusted EPS was $0.36 for the quarter. During the quarter, we successfully renegotiated our credit facility. The new facility increases capacity to $750 million at similar interest rates on drawn amounts with a slight improvement in the commitment we paid on undrawn amounts. Additionally, the new credit facility has improved covenants that allow for greater operational and financial flexibility. Also during the quarter, we continued our cash repatriation program. We repatriated $74 million to the United States and paid withholding and foreign taxes of $20 million. We also made the second payment of the transition tax of $15 million. These taxes have been accrued upon enactment of the U.S. tax reform in 2017. The payment of these taxes is reflected as an operating cash flow on the statement of cash flows. All of the reconciling items between GAAP EPS and adjusted EPS are 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 $685 million, down 8.0% from pervious quarter and down by 10.0% compared to prior year. Gross margin was 25.5%. Operating margin was 11.6%. There were no reconciling items to arrive at adjusted operating margin. EPS was $0.31. Adjusted EPS was $0.36. EBITDA was $118 million or 17.2%. There were no reconciling items to arrive at adjusted EBITDA. Reconciling versus prior quarter, operating income quarter two 2019 compared to operating income for prior quarter based on $60 million lower sales or $57 million excluding exchange…

Thank you, Lori, and good morning, everybody. Well, in the second quarter, Vishay’s financial performance has been negatively impacted by a lower-than-expected demand, predominantly from distribution. Despite a still relatively robust overall economic environment, high inventory levels in the supply chain burdened orders and also revenues. Manufacturing capacities in the course of the quarter had to be adapted to the lower demand, causing temporary manufacturing inefficiencies at some product lines. Vishay, in the second quarter, achieved a gross margin of 25.5% of sales and operating margin of 12% of sales, GAAP earnings per share of $0.31 and adjusted earnings per share of $0.36. We continued to show a strong generation of free cash. It was $23 million in the quarter, which includes the taxes paid for cash repatriation of $20 million. Let me talk about the economic environment as we see it. Also in the second quarter, global economy for electronic components remained principally healthy in general but started to show certain areas of slowdown, like automotive. Inventories in the supply chain have reached a record high during the quarter and started to reduce slowly. POS, despite still strong, has not been strong enough to drive a greater inventory burn. Lead times for most of the product lines have come down to normal levels. Consequently, also backlogs continued to normalize with book-to-bill ratios substantially below 1. The price decline for commodity products has restarted. Coming to the regions. Geographically, the markets in the second quarter continued to develop rather differently. We have seen good economic conditions in the U.S., maybe not quite as strong as in previous quarters. Europe was weakening, impacted by softening automotive and industrial markets. Asia developed flat on levels substantially below prior year, but recently, there were some signs of a recovery. Let me comment on…

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

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

Hi everybody. Dr. Paul, last quarter, I think you spoke about maybe, I know this was a guess, $100 million of excess channel inventory sitting out there. How much do you think that, that excess channel inventory is now? I'm guessing it's a bit larger given the weaker sales outlook?

I must agree. I would say it's between $100 million and $150 somewhere. You never know exactly. But it is – I think it's between $100 million to $150 million.

And how long would you guess that would take to burn off? Is that something that could happen by the end of the calendar year or does that bleed into early 2020?

It all depends very much on a few assumptions, of course. First of all, you must assume what – which inventory turns our distributors have as a target. Secondly, you have to take some assumptions on the development of POS. Of course, we did that. And I would say, it's about three quarters from now, beginning now, three quarters is our best guess. But again, this contains a few assumptions.

And then you mentioned POS. What was point of purchase for your distribution partners for you this quarter?

You mean POA?

Yes. POA, yes.

POA. POA was down, you know that. We want the percentage substantially down. Let me see, give me a minute. POA, well, we sold three –you want to know the sales to distribution in reality, right?

Yes, please.

$368 million. Yes, $368 million.

Okay. And then lastly, if I may. You said almost all product lead times are back to normal. Do you have any products with extended lead times right now? I'm guessing it may be more niche applications or something specific.

Absolutely. Precisely. I wouldn't name any commodity product which has longer lead times at this point. We have normalized some niches for sure, but this has nothing to do with the normalization phase we are in. This is quite normal and depends on the productivity. Otherwise, we are down to normal in the broad form.

Okay. Thank you.

Thank you.

Your next question comes from the line of Karl Ackerman with Cowen.

Hey, good morning everyone. Lori or Dr. Paul, you and your electronic component peers have spoken about an inventory overhang at distribution partners. And as I think, Shawn alluded to earlier, just – for some products like diodes and MOSFETs, I think lead time is extended as much as, I think, 52 weeks versus typical lead times of perhaps 2 to 10. Do you expect lead times to normalize by the end of the year that coincide with this inventory digestion cycle? And as a follow-up, as distributor inventories have begun to normalize as evidenced by the book-to-bill and distribution at 0.55 this quarter, is the restructuring effort you've announced today an indication that prices will also normalize vis-a-vis the 3% annual price declines.

Well, first of all, I believe, as I said before, that our lead times for commodity product in general in the broad form already have normalized. I must say that. And what we are talking is the reduction of the inventory, again, I repeat what I said before, I can't on – but this again assumes a few things. Of course, my best estimate based on these assumptions is that it will take to bring down the inventories to a reasonable level in distribution something like three quarters is my personal guess based on a few assumptions calculated. Concerning our restructuring program, which goes against the fixed cost, not against the variable adaptation as you will have realized. This is not an answer to price decline because price decline is answered, as we always do, by cost reduction in the manufacturing process. We did that in past quite successfully and have no doubt that we will be able to defend the variable margin just by these cost-reduction measures also in the future. Our manufacturing fixed cost program has two targets really. Target number one is, of course, to slow down, for some time, the inflation on the fixed cost, just to give us a little more time that the volume comes back at a point. And on the other hand, we want to use also the opportunity to further rejuvenate our organization. We have done that a few years before quite successfully, and I think it was good for Vishay, and we are preplanning to repeat that, but it's not an answer vis-a-vis price decline.

Understood. If I may ask another question. One of the larger investor questions today has been your ability to grow over and above end-market demand as opposed to being a – perhaps a restructuring story. So help us think about whether all or a portion of these restructuring savings will be funneled back into R&D as you contemplate your growth opportunity in the next 12 to 18 months. And as you think about the operating margin uplift going forward, how much of it will come from a richer mix of value-added products versus end-market demand growth? Thank you.

Well, first of all, I think we have grown substantially in the last years. And part of that, as we now realize, was really to build inventory, which I've said before. On the other hand, Vishay grows quite nicely anyway. We have continuously new products. We watch that carefully. We always watch the share of sales which we make with products younger than three years, five years, et cetera. So we look at it carefully. These cost savings program is not related to more or less expenditures in R&D. We never were saving money on R&D, and we will not do so going forward, disregarding the volume. So we just continue what we do. But of course, you can look at your fixed costs and the permanent pressure on fixed cost by inflation. And there is the idea to do two things, as I said before, at the same time, first of all, to save some of these fixed costs. It means to slow down just for optimizing results going forward to slow down the impact of inflation by reducing certain personnel while replacing a part of this by younger people that are also less expensive, at least in the beginning. So you give yourself some time at improved margins, but again, I emphasize, we never did, and will not save money in cutting down R&D or technical programs.

Thank you.

It's unrelated.

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

Hi. Good morning, thank you for taking my questions. Dr. Paul, just to follow-up on what you were talking about in terms of manufacturing capacity, in trying to defend the contribution margin of 45%, do you think that you have leverage to reduce cost more? Manufacturing fixed costs this quarter was $127 million. How should we think about that going forward?

Well, maybe I remind you of our history. We have a history of price decline and freely constant variable margins, right? That means that we were always able to defend ourselves against price decline and inflation, of course, in the past. And we do have programs and they were not impacted at all by this good phase of – which we have seen since 2016 in the market. So I have absolutely no doubt that we will be able to defend its variable margin going forward by just continuing what we always did and do at this point in time. We will, for sure, see price decline coming back, that's true. On the other hand, we are going to see, also, material costs being more moderate going forward. So I – again, to summarize, we are going to defend our variable margin, no question.

Okay. That's helpful. And then in terms of your total capacity, how much of it is currently down or offline?

This is how to say we have very many lines. On the other hand, you can say that all commodity products, at this point in time, are substantially on the max capacity, which on the other hand, gives us, of course, the time of normalization as you will appreciate. So definitely, also historically, times of normalization are sooner or later replaced by times of steep growth and it always has been the case, you remember that. We are equipped, of course for facing this challenge of an increasing demand because we have the machines in place. To give you a number depends really on the line, MOSFETs is quite well utilized – diodes is underutilized substantially. Can I pick a number 20% or something, but this is a vague number. I would have to check line by line.

Okay. No, that's helpful. And then I think on your prepared remarks, you said that recently you saw some recovery in Asia, what drove that?

Well, the POS – we follow the POS number of our distributors to Asia and we have seen that this was relatively down. We've commented on that in quarter four, quarter one and we have seen, on the lower level than it used to be, of course, but we see a turnaround of 4% between quarter two and quarter one, which can lead you to some hope that the worse maybe is over there.

Got it. Okay, thank you so much. Thanks for the details.

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

Yes, thank you. Good morning. Dr. Paul, you talked a lot about the weakness in distribution and the inventory correction. I also noticed that your OEM, your book-to-bill has come well below 1 for the first time in several quarters, which obviously is a sign of weak demand. Have you get a sense is that just demand looking weaker? Or is there some inventory build within that customer base? And are you getting a sense that they are going to take as long for that to work off as distribution, which I think you're talking about three quarters or so?

I believe the distribution case is definitely more severe in terms of inventory and it will also longer. My estimate, I repeat, was something like three quarters, under certain assumptions. It's very true what you're saying. We see in automotive, in our big automotive customers, a certain weakness at this point in time. I do – these larger customers will not be inventory, I think we know that. But at smaller automotive customers, it can definitely be that this is also inventory at the customers. And even more so, in the industrial customers, it can definitely be the case. But unfortunately, there's no report. I have no firm number to reconfirm that, to prove that. But you cannot rule it out that this is a part of the issue at OEMs at the moment. But I must, of course, admit that in automotive, we see at the moment, really from the large customers, an unusual weakness, so to say that.

Okay. And regarding your CapEx, I know you talked earlier about pulling back some capacity expansions in resistors. But could you remind us what the CapEx plans are now for the rest of the year relative to what it was a quarter or two ago?

We went into the EBITDA plan of $190 million, 1-9-0, and now our outlook has been reduced to $150 million. Again, may I emphasize that none of the programs we had in mind at the beginning of the year were really canceled. We only pushed out. We still believe that we have – whatever we wanted to do then, we will have to do so later. We only came to the conclusion we should optimize the timing, and this brought us down to the $150 million.

Okay.

No secret that I want to squeeze a little more, but since there are, of course, certain limitations.

Yes. Fair enough. And I know, Lori gave the SG&A guide for the year. Backing in the December number, it looks like it's kind of be flat with September, around $98 million or so, with this restructuring program, will that impact SG&A going lower? Or is that primarily in the cost of goods?

Matt, excuse me that I answer. Matt, it's as follows. It will impact next year. We are going to – really the impact will be in quarter – start in quarter one next year. And it will be as well in manufacturing fixed as well as in SG&A, about 50-50 approximately, okay.

50-50, okay. Thank you, thanks very much.

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

Good morning, Dr. Paul and Lori. On the backlog now that lead times have come in, are you guys starting to see cancellations of some of the existing backlog? Or is that holding in relatively stable?

No, we do see cancellations and since quite some time, I think, I commented on it. But of course, these cancellations, they have come up. But for us, this was never a problem because the backlog was so overwhelmingly high that this was just a normal thing to happen as a matter of fact. What is really new in that sense but also this was expected that inventories in the supply chain now appear to be high. And there are concrete actions to reduce the inventory, not just the backlog for cancellations.

Yes, got it. Okay. And then on the China POS pickup, you saw in Q2, are you still seeing that here in Q3? And do you get a sense that this is just more inventory replenishment by end customer that had been very conservative? Or is there real demand pull? And any sense on which market segments in China are showing signs of potentially better demand trends?

Well, we don't know precisely. We really don’t – I don’t want to pretend that we know. But of course, we have our picture and the picture is really – I think that the industrial segment in China that was really down as a consequence partially of the trade war, let’s name it, this one seems to recover a little. But again, who am I to predict that precisely. We only report a change, and of course, we have hope some that this will continue.

From a geographical perspective, I'm talking more on a quarter-over-quarter basis, it looks like it's rough numbers, but looks like the Americas region sales-wise was the weakest region. Can you just maybe help us understand some of the dynamics and what you're seeing in the Americas region?

Well, if you had asked which area suffered the most between the first and the second quarter, I would've never named Europe. I would have named Europe. And Asia came back and America was still strong for us, also, especially the strength in military, which is important for us. Maybe not the highest sales number, but it's a good business. It's good business, no question. So I think the weak spot between quarter one and two is Europe.

And primarily automotive in Europe?

Yes.

Great. Thank you.

Thank you.

There are no further questions at this time.

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

Ladies and gentlemen, you may now disconnect.