Greetings, and welcome to Vishay's Second Quarter 2022 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I would now turn the conference over to Peter Henrici, Senior Vice President and Corporate Communications. Thank you. You may begin.

Thank you, Sherry. Good morning, and welcome to Vishay Intertechnology's second quarter 2022 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 second quarter 2022 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 discussion of factors that could cause results to defer, 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. On the investor relations section of our website, you can find a presentation of the second quarter 2022 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 Q2 of $864 million, a quarterly record despite a temporary closure of two key facilities in Shanghai, China for over two months. EPS was $0.78 for the quarter, adjusted EPS was $0.82 for the quarter. We have identified certain charges for the COVID related shutdowns of our facilities in China during Q2. The cost of these government mandated shutdowns in China are incremental too and separable from normal operations. These items impacted cost of goods sold by $6.7 million and selling, general and administrative expenses by $0.5 million and are added that net of tax when calculating our non-GAAP adjusted EPS. We do not include in this amount indirect costs of the pandemic, which are normal cost of doing business in 2022. During the quarter, we repatriated cash from Israel as part of a program we initiated in response to a change in Israeli tax law. We repatriated $81 million to the United States net have paid withholding and foreign taxes of $13 million. We also paid Israeli claw-back tax of $12 million. These taxes had been accrued in Q4 2021 when the new tax law was enacted. The payment of these taxes is reflected in operating cash flow on the statement of cash flows. The repatriated cash is used to fund our stockholder return policy. As we announced in February, Vishay has adopted a stockholder return policy, which calls for us to return at least 70% of annual free cash to stockholders, directly in the form of dividends, or indirectly in the form of stock repurchases. For 2022, we intend to return at…

Thank you, Lori and good morning, everybody. Despite the pandemic and further accelerating rate of inflation globally, the second quarter for Vishay has been even more successful than Q1 that had been one of our best quarters ever. Following the increasing market demand we steadily expand critical manufacturing capacities. In Q2, we achieved quite excellent results in the quarter in Q2 gross margin of 30.3% on the level of Q1. Adjusted gross margin of 31.0% versus 30.3% in Q1, operating margin of 17.5% of sales, versus 17.1% in Q1, adjusted operating margin of 18.3% versus 17.1%, earnings per share of $0.78 versus $0.71 in Q1 and adjusted earnings per share of $0.82 versus $0.71 in Q1. Due to some temporary increase of receivables and inventories in the context of the Shanghai shutdown, free cash generation in the quarter still has been modest $15 million. For the entire year, we again expect a solid performance concerning free cash. Vishay continues to operate under extraordinarily good economic conditions, orders and backlogs at historically high levels. All regions remain principally strong with a currently not transparent situation of the Chinese market. Most of the market segments do very well whereby there is an exception computers and smartphones. Major shortages of supply continue to exist for many product lines. In view of increased inflationary pressures on the cost of manufactures the market continues to accept price increases. Global distribution overall remains in good shape. Their midterm business outlook continues to be strong. POS in the quarter was 13% below Q1 that clearly represented a spike and 2% below prior year. POS in all regions declined from a quite extreme first quarter. Global inventories in the second quarter increased $54 million or by 10% versus Q1, and were 28% above prior year that had been…

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

[Operator Instructions] Our first question is from Ruplu Bhattacharya with Bank of America.

Hi, good morning. Thank you for taking my questions. Hi, Dr. Paul. I wanted to ask first on gross margins. Obviously, they came in better than your guidance. And you talked a little bit about the inventory build. I was wondering of the 70 basis points sequential improvement between 1Q and 2Q, how much of that was related to the inventory build? And if you can just talk a little bit more about what this inventory build was? Is it all in distribution? And how do you think -- and how soon do you think that normalizes? And then when we look at the third quarter, you're guiding to 20% to 29%, which is lower than the 31% you reported. But that's on $20 million higher revenues. So just what are the dynamics playing between in gross margins between 2Q and 3Q?

Yes, the inventory build, not only but by far for the most part happened in MOSFETs. Because this was the place when our plant was shut down for eight weeks during the quarter. And you can imagine the primary is in the Western Hemisphere, they produced and were not able to package for the large extent. So this increase happened at MOSFETs not a distribution in-house really in our house, because our supply chain, the internal supply chain had been distorted. We are going to work this down, of course, but the quarter of course, benefited from financially from this inventory build to the extent of $8 million approximately. In the third quarter, the opposite will happen by nature. So we are going to start working this inventory down with objectively than a negative effect of the same magnitude on the results. These are the dynamics.

So sorry, just that 200 basis points of gross margin compression. So how much of that is because of the inventory work down? And how much of that is because of other factors?

It's calculated, the impact quarter-over-quarter is $10 million, if you compare the two quarters $10 million divided by $900 million sales approximately [0.22 point], right.

I see. Okay. Understood. And then maybe can I ask on diode. The margins on the gross margins on the diodes have been trending higher, and they were 28%, which seems very high. Can you just elaborate what is driving the higher margins? And is this level sustainable going forward? Because we typically think of diodes as commodity products. Bu just your thoughts on that.

It's -- it was, first of all, we had better prices, this is number one reason in diodes, better prices, and we had higher volume also. So all this together, including some good deficiencies, which we had gave the 28%, which I agree for a commodity product is not bad. I see if volume remained and prices remained. This, of course can be defended in future. This was no spike. But we will see, but 28% indeed was a good result through.

Understood. And then just for my last question, you repatriated $81 million from Israel. What is the plan for that cash? I mean, do you -- should we expecting any more increased buybacks or is there any thought for a dividend increase? Or increased M&A? So just share thoughts on how you plan to use that $81 million?

Yes, this is Lori speaking. So we identified that we would fund our stockholder return program using this repatriated cash from Israel. And as we announced we plan to return 70% of free cash or minimum of $100 million in either case and we would continue along that same route.

Our next question is from Joshua Buchalter with Cowen and Company.

Hey, team. Thanks for taking my questions and congrats on a pretty stellar set of results in a tough macro backdrop and navigating China issues. My first question, you guys have previously, guided discussed exchange rate to grow roughly 5% this year. And even with FX headwinds, given the print and guide, I think that implies a pretty sharp de-sale in sequential growth in the fourth quarter. Any particular reason why we should be expecting that given the still strong environment? And I guess any changes to that growth expectation for the year? Thank you.

So if I understood you, right, you doubting the outlook of the fourth quarter and ask whether there could be the danger of a downturn, if I understood you, right?

Well, it was more what's the assumption baked in and should we felt it about –

Yes, as a matter of fact, we believe that the year will pull through very nicely. And the deepest reason is, so first of all our responses from customers. But also, if you look at the backlog, the backlog is still sky high. And we have all reasons to believe that this will become a very good year, record sales year for Vishay.

Understand, thank you. And then you maintain the $325 million of CaPex expectations, which also implies sharp uptick.

I recall from the $325 million.

Yes, so I guess it implies some higher spending in the second half. Have you had any troubles in the first half procure --?

Oh, no. As a matter of fact, we do have a cycle, the capital spending in Vishay is always by far higher in the second half than in the first half. And this would not be a difference to a normal procedure, so to speak, in Vishay. Now, we do have I think we can confirm the $325 million CapEx.

Got it. And then given what you're still saying is very strong demand, particularly for your MOSFETs I would imagine. Should we still expect you to have elevated spending in 2023, compared to prior years just for [Inaudible]?

Yes, at the moment, it's not only MOSFETs, it's broader, but MOSFETs for sure, is the hottest demand at the moment of all our products shows the hottest demand in. And what we hear from the market is a further acceleration of the requirements for MOSFETs for the years to come. It's like that, and we are going to prepare ourselves, going forward, we are going to build an additional capacity in Germany in order to follow the lead and to keep balance between own production and purchases from founders. We believe you need to keep a balance there. And we are going to have extra CaPex in the years to come of course. But Vishay’s strong, the cash flow is also strong.

[Operator Instructions] Our next question is from Matt Sheerin with Stifel.

Yes, thank you. Good morning. Dr. Paul, I wanted to just double check some of the numbers that you gave initially on the distribution of POS. I think you said it was down year-over-year and quarter-on-quarter. Could you give me those numbers again?

Sure. Just for a second, I don't know them by heart, obviously. Takes another two minutes.

Yes, and the question there is, sounds like the POS was down, inventories were up a little bit but the book-to-bill was still significantly positive.

Yes. So my papers, you are talking POS?

Yes.

Okay, I have it. The POS for this is book-to-bill what I see here. Here we go. Okay. POS inventory turns. I have inventory turns.

I thought you gave a POS number at the beginning.

This was it. No way. I haven't, it wasn’t in the text, and POS in the quarter was 13% below the first quarter. But the first quarter represented a spike and it was 2% below prior year. So 13% below the first quarter and 2% below prior year. Here you see, this was much closer to prior year, the first quarter was abnormal. They were –

I am just wondering why the book-to-bill was positive if it sounds like the demand from the distributors stabilized or was even down.

But book-to-bill was for distribution 1.05, was 1.05.

Yes, that's right, that I'm trying to figure disconnect there between the positive book-to-bill and the negative sell out.

They are two different comparisons. One compares for the same quarter book-to-bill and the other one with a quarter before.

Okay, but so in other words, you're not seeing any signs of weakness from distribution in terms of orders and backlog?

Well, as a matter of fact, distribution is 1.05. But it's true that Asia at the moment shows some weakness. But this can be attributed to an extraordinarily strong first quarter. And I understand that there were many pull-ins really in the first quarter out of certain uncertainties they had. So altogether, we expect for the third quarter for POS in Asia, an increase vis-à-vis the second quarter, so an increase into, we expect that.

Got it, okay. And then on the pricing, which obviously is benefiting you. Are you done yet? Is are – are there still ASP increases that you're pulling through in any of your areas?

Yes, well, we expect some further price increases but at a slower rate. But it's also true if inflation accelerated, we will increase also our price increases again, but there will be price increases also in the third quarter at a lower rate than we had them in the second quarter.

Okay, I wanted to get back to the previous question just about outlook for the December quarter. Typically, you're up in North America or down. And there's some seasonality obviously, in Asia. Are you looking ahead? Obviously, you've got very strong backlog, your lead times are 50 weeks out. So do you have visibility into December quarter and do you expect it to be more or less seasonal?

No, it's better than the seasonal obviously, the backlog will make it non seasonal. This is our conviction. We do not hear signs from any customer that they want to slowdown ordering or shipments. They don't want to slow down everywhere, ever we -- in our main we are talking automotive in reality, in Vishay, we are talking industrial. These are the two major areas and we do not hear sounds of weakness. In fact, automotive insists on their higher forecast. So and we are adding capacity. So the backlog is there, capacity will be even higher in the fourth quarter and no signs from the customer, I expect from first quarter.

Okay, and then on gross margin, you talked about why it would be down, it still sounds conservative as you look forward and given your expectation for further growth. Can we -- can you get back to that 30% plus gross margin, a number sustainably?

Principally, yes, it's a Meta volume and we are investing in capacities, these are Meta volume. We are not raising fixed, we are not famous for raising fixed costs dramatically. So if the volume comes up, you automatically get to better gross margins, but the 30% which we have shown or 31% even in quarter before this was of course favored by inventory build. And now we see the opposite because we keep our eye on inventory levels so we will reduce them. So it has – which has then quarter-over-quarter disaffect.

Okay, and just lastly for me, Dr. Paul, I know there's a major management transition going on in the next couple of quarters as you pass the baton on and I'm just wondering if you could give us any idea in terms of planning there in the expectation for any significant change in the company's strategy or use of capital or anything else?

I know on all the new people so to speak very well and since many years, I have full trust in all of them. I do not expect that Vishay will change its direction. What we are going to do, we will lay even more emphasis on growth going forward and I believe the markets which we mainly deliver too, makes us very -- can make us optimistic that we are not wrong in this expectation. And I guess I expect guess is too little. I am sure that the expansion of capacities will become a major subject even more than they have been in recent years going forward. This is the direction but principally speaking, we are -- we will follow the track, no question.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Thank you for joining us on today's call. And for your interest in Vishay Intertechnology.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.