Ladies and gentlemen, thank you for standing by and welcome to the Vishay Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Peter Henrici, Head of Investor Relations. Please go ahead, sir.

Thank you, Regina. Good morning and welcome to Vishay Intertechnology's third quarter 2020 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 Vishay's third quarter 2020 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 Form 8-K that outlines 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 third quarter 2020 financial information, containing some of the operational metrics Dr. Paul will be discussing. 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 Q3 of $640 million, significantly higher than our original expectation as pre-announced on October 14. EPS was $0.23 for the quarter. Adjusted EPS was $0.25 for the quarter. During the quarter, we repurchased another $59 million principal amount of our convertible notes due 2025 and recognized a U.S. GAAP loss on extinguishment. I will elaborate on these transactions in a few moments. On October 1, 2020, we completed the acquisition of the worldwide business of Applied Thin-Film Products. This niche acquisition will compliment our existing thin-film business and strengthen our competitiveness in this market. Due to the timing of the acquisition at the end of the fiscal quarter, ATP had no impact on Q3 results. The macroeconomic effects of COVID-19 continue to impact our business and our financial results. Similar to Q1 and Q2, we have identified certain COVID-19 related charges, net of certain subsidies, which are directly attributable to the COVID-19 outbreak. These items were insignificant to Q2 and Q3 results, but are added back when calculating our non-GAAP adjusted EPS for comparability. Such measures exclude indirect impacts such as general macroeconomic effects of COVID-19 on our business and higher shipping costs due to reduced shipping capacity. Revenues in the quarter were $640 million, up by 10% versus previous quarter and up by 1.9% compared to prior year. Gross margin was 23.7%. Adjusted gross margin, excluding COVID costs, was also 23.7%. Operating margin was 9.6%. Adjusted operating margin, excluding COVID costs, was also 9.6%. EPS was $0.23. Adjusted EPS was $0.25. EBITDA was $94 million or 14.7%. Adjusted EBITDA was $97 million or…

Thank you, Lori and good morning, everybody. Despite ongoing negative impact of the pandemic Vishay's worldwide business in the third quarter has developed better than expected. After an historical drop in particular of the automotive segment in the second quarter, we experienced a strong recovery in the third quarter. Having adapted costs and manufacturing capacities during the second quarter, we in the third quarter enjoyed to the full impact of the economic upturn. We achieved the gross margin of 23.7% of sales and operating margin of 9.6% of sales, earnings per share of $0.23 and adjusted earnings per share of $0.25. The generation of free cash remained on a good level of $42 million in the quarter. Let me describe the economic environment as we see it. Indeed, as I said, the economic environment in the third quarter improved substantially, mainly driven by this unexpectedly abrupt recovery of the automotive sector, but also by continued strong Asian markets. With sales and orders picking up simultaneously, total backlogs remained virtually flat on a high level. 13-week backlogs on the other hand were increasing steadily in the cause of the quarter, which is a principally encouraging sign. Lead times start to stretch out in general, but no real shortages of supply or visibility yet. Cancellations have dropped to a normal level and we see quite normal price pressure in general. Let me come to the regions. The Americas have experienced a significant recovery of the automotive market, but at the same time, COVID related disruption of the commercial aircraft production. POS and POA sales in the Americas were robust. Asia continued its strong recovery, in particular China. There has been improvement of virtually all market segments, especially for computers and consumer related products and the high demand in Asia helped to burn…

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

Our first question will come from the line of Ruplu Bhattacharya with Bank of America. Please go ahead.

Hi. Thank you for taking my questions. Dr. Paul, in the past, you've talked about some excess inventory in the distribution channel. This quarter, you saw reduction. I think you said of $18 million worth of inventory. So, with that, would you characterize the inventory at distribution as normal? And overall, when you look at supply demand in the industry, how would you characterize that?

I think really the inventory levels at distribution have come down in the western world to a normal level. And I would even say in the Asian world, we would expect some restocking as a matter of fact. You know how long it took to get there, since long time. And I would dare to say that you never know it completely, but I would dare to say that the inventory -- the supply chain is very normal at this point.

Okay. And then maybe on the margin side, Opto saw really good margins this quarter. Should we think that that level of margins can persist going forward? And the same question for diodes. I think you had some -- gross margins came in at 17%. So, how would you see those margins progressing?

I use my words carefully and Opto assets spiked to 33%. And we had the same discussion before. I believe we just reconfirmed our optimism for the line. What is sustainable at these levels of sales is the high-end -- up to 20s. The 33% was also some luck included concerning product mix as a matter of fact, but high 20s, which is a nice development vis-à-vis the last two years I would say sustainable, at present sales levels. Concerning the diodes, little disappointing, but it's a pure game of volume. You can calculate. If you went back, and we expect to do so -- the volumes, which we had before really realistically, only one year ago, one and a half years ago, you would return to gross margins, like say 23% of sales. And this was always our expectation for this commodity line, which grows.

Got it. And maybe just for my last question, can you maybe talk about your capital allocation priorities as we sit here? How do you think about reinvesting in the business versus further M&A and buybacks, and any thoughts on the dividend?

We have always all these possibilities in mind. We invest in the business. We -- already we increased the capital spending, which make our plans for next year. We do not miss sales because of a lack of equipment. At this point in time, you never know all the details on that, but principally we invest enough. We pay the dividends, and all this is, of course, a decision of the Board, but we continue to pay the dividends. And we also evaluate all kinds of other uses of the produce cash. So, no change.

Okay. Thanks for taking my questions and congrats on the strong results in the quarter.

Thank you.

Our next question will come from the line of Karl Ackerman with Cowen. Please go ahead.

Yes. Hi. Thank you. Two questions, if I may. I guess, Dr. Paul, it's encouraging to see the implementation of your M&A strategy, especially in the current environment. Could you explain the deal rationale for the thin-film products business? And then perhaps any synergies with your portfolio or customer base? And is there potential for more deal activity in the near-term, given what appears to be a stabilizing backlog?

Can I start with the end? So, anyway, it's absolutely true. And we said it before we continuously look for specialty businesses, not necessarily only resistors, but also the resistors. And I think this is an intelligent way into the future. So, we will try to continue. Of course, it depends on the opportunities, but we are looking continuously for that. And in the case of ATP, I think I'm very happy that we acquire that company. We are a leader in resistors. And we offer by place it every quarter, all the technologies in resistor. So, this one just added very nicely to our technology basis. It compliments other parts of Vishay, which we already have on board, and we can synergize the efforts. I think we will be a very strong -- we will become very strong in offerings in film substrates on the market. I'm very happy about the whole move. And it's profitable, quite profitable. It's north of 35% gross.

Understood. Thank you. For my follow-up, the supply chain has flexed considerably on demand degradation in the June quarter, and now on a very strong sequential improvement in the third quarter. First, why shouldn't pricing improve for your products, if the supply chain remains stretched and backlog has come down considerably from the earlier part of the year? Second, how has escalating trade friction and a rebound and end demand changed if at all, your view on supply chain consolidation? Thank you.

Well, true. If lead time stretch out, it's absolutely to be expected that the price pressure, especially on commodity product will go down. In all our specialty products, we do not see -- we are not exposed to same kind of price pressures as we have it for the commodity products. It's clear. But, of course, it's true. This increasing demand and stretching out lead times, I would suspect also for commodity products, some less price decline as we go forward. And we had examples that in the past. Such a decline, which we are seeing partially this year, if you go back to history, would not be the first time that such a decline will be followed by a nice upturn, bit of cost and some positive impacts on the pricing amongst others. Basically, yes. What was the second part of the question? Sorry.

Yes. Just and how you see the escalating trade friction and perhaps a rebound and end demand changed your view if at all on supply chain consolidation.

I think, it doesn't change it fundamentally. We do have some negatives, but they are very limited, but no principal change for us.

Thank you.

Your next question comes from the line of Alvin Park with Stifel. Please go ahead.

Yes. Hi. Thank you for taking the question, and congratulations on a solid result and guide. Just want to follow-up on the automotive end segment for the December quarter and beyond. I'm just wondering if you see Q4 as kind of peaking levels or if there's still generally positive momentum going into the March quarter, if there's any insight into fiscal year -- the early part of fiscal year 2021?

First of all, you basically said it yourself. It wasn't such a spike as you may have expected it in quarter three, quarter four runs at least at the same level as quarter four in automotive for us. And as a matter of fact, I'm also quite optimistic for automotive for the year to come, because electrification -- electronification helps a lot. As a matter of fact, I -- it was always our picture that if the car sales -- units of cars sold would go down by 10% would more or less mean constant sales for us. So, you see there's a major impact of the electronification. I think, of course, everything depends on the development of the world economy clear, but I'm confident that this -- what we see now was a recovery and not a spike.

Okay. Thank you. A follow-up question, if I may. Capacitors, the ASP was actually very strong, positive turn increase of 1% quarter-over-quarter, I believe and 2% year-over-year, and about one to two years ago, there was a huge uptick in pricing as well as extension of lead times due to high case size and LCC [ph]. Do you have any updates on how you're seeing that industry currently? And if we might see similar spikes and similar constraints and stretch lead times into fiscal 2021, if the industrial and automotives were to heat up for the...

You refer especially to capacitors.

Yeah.

Well, Vishay is not typically in capacitors. We are in niche businesses as a matter of thing, and we have a relatively high share of specialty products. We are not so much in the main battlefield of commodities there. We read through from there with good reasons, I believe, historically. So, we are not typical. So, you -- we are not a reflection of what happens in the mass market of capacitors, I would say. Principally speaking, we were correcting some prices as a matter of fact. There was some customer mix exchange also on capacitors and altogether, it helped capacitors to improve their profitability as a matter fact. But I wouldn't go further. Okay?

Thank you very much.

Your next question comes from the line of Shawn Harrison with Loop Capital. Please go ahead.

Hi, everybody. Dr. Paul, my first question is more on, I think, the raw material and competitive environment we've seen kind of commentary that. Supplies are tightening up a little bit as maybe competitors in Asia are pre-buying -- the market pre-buying some capacity. But what are you seeing in terms of just raw material availability, any issues there for you? And kind of are you seeing lead times of competitors stretch out that could potentially -- maybe shift some share to Vishay if those products are more difficult to get?

Well, I can't give a simple answer via at this point in time. I know that we have shortages in raw materials supply. What has come up, and this is why I complained a little about it in the MOSFETs in particular, there's some raw material, some metals, noble metals came up substantially. But this is price and availability. Concerning availability, I don't see shortages at this point, really not.

Okay. And then Lori, I have a question for you kind of a two-parter. The first being on the puts and takes as we head into 2021, in terms of both cost inflation, you might see on the OpEx line because it's temporary measures that were implemented this year versus cost savings from some of the efforts that $15 million that you roll in. How do you think that should net out, let's say in the first half of 2021? And then second, just on the tax rate. If you could remind me what happened when the tax reform came in, in 2018, that if there is a change in the administration, how that might impact Vishay if corporate taxes go up in the U.S.?

Okay. So, starting with the operating expenses, at this point in time, it's a little bit early in our budgeting process. So, we'd have to give you an estimate. But at the moment, of course, the cost reduction program should approximately offset inflation in terms of wages both in operating expenses and in the manufacturing side. On the other hand, travel expenses were severely curtailed in 2019 due to the COVID and the incentive compensation and whatever were diminished. So, we would expect an increase as the economy would return back to normal. We split it between the first half and the second half. At this point in time, there seems to be a big flare up in the COVID cases around the world, which means the first half is likely to be somewhat lower than the second half, but we'd expect probably about a 6% increase in operating expenses next year.

That's helpful. And then just the second part being the tax dynamic, trying to remember. There was a lot of moving pieces, I guess, in 2018.

There were a lot of moving pieces. And the interpretation has come through. And it had been the past few years about some of those rules and regulations. So Vishay, our taxes didn't -- actually come down in an extreme manner when the tax regulations were announced at the end of 2017. And the recent decline in the Vishay tax rate was more related to the mix of income and our different taxing jurisdictions. So, our tax rate has come down since a year ago, based on the mix of the earnings. Again, I don't know all the details of the projections of what would be implemented depending on if the Whitehouse turns over to the Democrats or not. But we would certainly have to take into consideration that there could be an impact on Vishay, but I don't know what that would be yet.

Very helpful. Thank you.

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

Good morning. Good to see the strong recovery in the third quarter and into the fourth. Typically, the March quarter is the seasoning stronger quarter for the team, up low, mid, single digit sequentially. But to plow, given the expanding global economic outlook, your backlog coverage, I know you get some forecast in your consignment customers. Are you anticipating positive seasonality in Q1?

Principally speaking as you have said yourself, quarter four came out a better than, will come out as you guide Q4 better than seasonal. So, quarter one may not be the same difference to quarter four, but listen, I believe if the economy -- if this pandemic really easiest its pain somehow on us, I think we can have a good year next year, really, as a matter of fact. If this helps statement.

Yeah. Thank you for that. And then on the ATP acquisition, on the rationale, and I can see the application to your thin-film resistors and capacitors product companies. But it looks like this company's main focus was complex in film circuit substrate fabrication for applications like communications, aerospace, obstacle. So is this an expansion of your strategy to now include full thin-film circuit substrate versus just in electronics [ph]?

We had it before and we were just acquiring another smaller company sometime ago UltraSource, and this maybe bring together thin-film, I think a quite nice division out of that. There are some synergies between the three elements, one we had before. One, we were acquiring last year and this one we acquired now. So, altogether, this reform a nice profitable specialty resistor division. And as I was asked before this idea to acquire specialty businesses, maybe a little larger also, is definitely maintains to be our strategy, as a matter of fact.

Yeah. Thank you for that. Just one last question. So, we're looking sort of longer term, so we're obviously, hearing more and more about silicon carbide based power transistors and components for things like EV, industrial, clean energy applications. I know Vishay has some sort of concurred based power transistors and diodes. Are you guys starting to put more focus on silicon carbide and maybe other wide band gap technologies such as gallium nitride?

Not in our -- it's not in our focus. We deal with it. We have some programs, but it's not in our focus.

Okay. Thank you, Dr. Paul.

Our next question comes from the line of David O'Connor with Exane BNP Paribas. Please go ahead.

Great. Thanks for taking my questions. One or two from my side. Maybe firstly, Dr. Paul, just going back to your comment previously on the 10 points outperformance you mentioned in auto versus your sales for 2020 versus I guess the units. How much of that is volume in EV versus content growth for you guys? Any characterization around the outperformance would be helpful. And then, is that -- is that's 10 points, is that sustainable into 2021 in terms of the auto outperformance? And I have a follow-up for Lori. Thanks.

Well, first of all, electrical cars are very promising for us. They contain many more components than the normal cars, including their electrification. But from a share standpoint, it's still a small impact. So, when I talk about this, it's not science by the way, the 10% difference. But approximately this was our opinion which we also said a few quarters ago. This is really driven by the electrification in normal classes, a matter of fact, the non-electrical classes. I -- but on the other hand, if we need to move -- there was a move towards electrical class, this would be beneficial for us. And, of course, our competitors as well. They -- definitely there are more electrical components in electric cars than in the traditional cars, as a matter of fact. So, we -- but I was not talking about electrical cars. I really said this ongoing trend, which we observed since quite some time, the cars contained more and more electrical aspects, as a matter of fact, which I think is promising.

Understood. Thanks for that. And then maybe as a follow-up for Lori. The cost savings on the manufacturing side, is there any real impact on that on the fall through on the kind of the next up-cycle, any impact on the contribution margin we should bear in mind as we go into 2021? Thanks.

The cost reduction program was based on fixed costs, so there would be a testament, in fact on the gross margin. But it approximately offsets inflation. So, it's an avoidance then a further increase in terms of wages.

Got it. Understood. And maybe last question for Dr. Paul. On the -- you spoke about in your prepared remarks, some acceleration, price decline in semis, I think. Could you just elaborate a bit on that and [indiscernible] best? Thank you.

Well, we have seen basically -- this is temporary shift in customers. We shipped so much to automotive and relative to that -- relative less to distribution. And this, of course, had some impact, which is temporary on the customer mix and on the price therefore. We believe all this is very temporary. In fact, if lead times stretch out and I would expect some kind of a mitigation of the price then going forward even.

Got it. Thanks so much.

I'll now turn the conference back over to management for any concluding remarks.

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

Ladies and gentlemen, that will conclude today's call. Thank you all for joining, and you may now disconnect.