Good day and thank you for standing by. Welcome to the Vishay Intertechnology Q3 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Peter Henrici, Investor Relations.

Thank you, Josh. Good morning and welcome to Vishay Intertechnology's third quarter 2023 earnings conference call. I am joined today by Joel Smejkal, our President and Chief Executive Officer; and by Lori Lipcaman, our Chief Financial Officer. This morning, we reported results for our third quarter. A copy of our earnings release is available in the Investor Relations section of our website at ir.vishay.com. This call is being broadcast live over the web and can be accessed through our website. In addition, today's call is being recorded and will be available via replay on our website. During the call, we will be reporting with slide presentation which we also posted at ir.vishay.com. 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 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 Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. We are including information in our press release and on this conference call on various GAAP and non-GAAP measures. We have included a full GAAP to non-GAAP reconciliation in our press release as well as in the presentation posted on ir.vishay.com which we believe we will find useful when comparing our GAAP and non-GAAP results. 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. Now, I turn the call over to President and Chief Executive Officer, Joel Smejkal.

Thank you, Peter. Good morning, everyone. I'll start my remarks on Slide 3 with a review of the demand trends for the third quarter and then Lori will take you through the highlights of our financial results. After that, I'll come back to give you a progress report on the near-term initiatives we're implementing to improve all customer-facing aspects of our business as we set the stage for faster top line growth and margin expansion. Then we'd be happy to answer any of your questions. Today for the third quarter, we are reporting revenue of $853.7 million which is within our guidance range of $840 million to $880 million. As expected, revenue declined both quarter-over-quarter and year-over-year due to inventory adjustments by our distribution and EMS partners in response to softened demand among industrial customers and also our contracting lead times. Looking at our revenue mix. First, by end market, automotive which accounted for 37% of total revenue was 2% higher than the second quarter and grew 10% versus the third quarter last year. Our sales supporting the further electronic content of internal combustion engine vehicles continues to be strong. Design activities related to increasing electronic content in EVs, hybrids and internal combustion engines are accelerating. Industrial, representing 35% of total revenue, declined 9% versus the second quarter and 18% from last year. Macroeconomic uncertainties and higher interest rates, curve demand [ph] in all regions and in China, the economic recovery has yet to find solid footing. As a result, channel and end customer inventories are at a higher level which will take longer to burn off. Nevertheless, design activity in the areas of industrial automation, smart grid infrastructure, EV charging infrastructure, among other applications has not slowed down. In addition, a shipment of our largest capacitors to support an…

Thank you, Joel. Good morning, everyone. I'll start with a review of our third quarter results on [indiscernible]. Revenues for the third quarter were $853.7 million. Compared to the second quarter, revenues decreased 4.3% reflecting a 3.2% decrease in volume and a 0.8% reduction in pricing. Pricing was essentially flat with our OEM, automotive and industrial customers under contract and impacted somewhat by price pressure on high inventory products, primarily in Asia, flow through distribution channels and to EMS to industrial end markets. By reportable business segment, revenues of MOSFETs, diodes, Opto [ph] and inductors were essentially stable. The decrease was mainly attributable to resistors and capacitors. Compared to the third quarter last year, revenues were down 7.7%, reflecting a volume decrease of 10.2%, primarily related to last year's spike in MOSFETs volumes following the Shanghai shutdown of quarter 2 and particularly -- and partially offset by 0.9% increase in pricing. At quarter end, book-to-bill for consolidated Vishay was 0.63 and backlog at quarter end was high 5.5 months compared to 6.4 months at the end of the prior quarter as lead times continue coming down in all product segments. We returned a total of $31.1 million to shareholders compared to -- comprised of dividends of $13.9 million and stock repurchases of $17.3 million. The next slide presents income statement highlights. Gross profit was $237.6 million [ph] or margin of 27.8% compared to 28.9% for the second quarter and in line with our guidance. Compared to the second quarter, gross margin decreased primarily due to lower volumes. SG&A expenses were $122.5 million, $0.4 million this [ph] quarter, slightly lower than our guidance due to foreign currency effects. Operating income decreased $19.5 million versus the second quarter on lower gross profit. Operating income decreased $68.0 million versus the prior year due…

Thank you, Lori. Let's turn to Slide 11 for a review of our key near-term initiatives. As you may recall on my first call as CEO of Vishay last February, I laid out the broad outline of our 3-year plan to expand capacity to support our highest growth and highest return product lines and to position Vishay to be ready for the next phase of the megatrends in e-mobility, sustainability and connectivity. 2023 is a staging year for this plan and all elements of the plan are for throughout the organization. To be ready for the next phase, we are investing a total of [indiscernible] between 2023 [ph] and 2025. Our plan was to invest approximately $385 million in 2023. For the first 9 months of the year, we spent [indiscernible] $113 million of which was spent on expansion projects. As Lori just reported, we have adjusted our planned CapEx for this year to $350 million due to some delays in installing equipment related to construction projects. We intend to carry over the remaining $35 million into 2024. During the third quarter, in addition to continuing our advanced work on fabs located [indiscernible] and our back-end semiconductor campus in Cruban [ph], to meet the growing demand of our automotive and industrial customers. We opened our 2 new facilities in Mexico. At the La Laguna campus, where initially, we will focus on mass production for power inductors, equipment and production lines have been set up, qualification of commercial products is underway and we have the ability to ship commercial products by the end of this year. We will qualify and begin producing automotive-grade products in 2024. The Vares [ph] facility is dedicated to increasing output of [indiscernible] and to meeting the growing demand for these products in all market segments but…

[Operator Instructions] Our first question comes from Joshua Buchalter with TD Cowen.

This is Sam [ph] on behalf of Josh. First and foremost, we wish the best for your Israel colleagues. We hope everyone and their families are safe. For my question, congratulations on the announcement of the Newport Fab transaction. Could you give us some details on the historical capacity of the fab or what kind of output Vishay can drive from it going forward? And is it exclusively compound semi focus for auto markets?

Sam, thank you. Nice to speak with you. At this point, we're not able to share the historical details of the fab until we get through the closing process. What's in the press release is what we're able to share at the moment, capacities and those things will be able to get into much more detail afterwards the close which we foresee in February.

Understood. And then as my follow-up, Lori, I think you mentioned that you had a comment about pricing but my [indiscernible] signal cut out. So historically, price erosion and competition has been limited to the commodity product wise that you have. Are these pricing pressures still contained to commodity SKUs in the quarter? Or are you seeing it expand to impact on the parts of your non-commodity portfolio that aren't anchored to long-term auto contracts, for example?

No, they remain with the commodity product line.

Our next question comes from Ruplu Bhattacharya with Bank of America.

My prayers are with the families in Israel as well. With respect to the Newport wafer fab that you're acquiring, can you give us some more details, like how many employees are you taking on? And how does this change your annual CapEx and OpEx spend. Is this part of the prior announced $1.2 billion over 3 years? Or is this in addition to that?

It is in addition to that $1.2 billion. It's been part of our strategy since the Max Power acquisition last October to bring in-house the capability of silicon carbide, as we've met with a number of automotive customers. This is a very important requirement that they're engaging suppliers that have the in-house capability of the process. So we like our technology for Max Power. We need to find a home for it and we see that this Nexperia fab, Newport is a great home for this with the universities that surround it. There's quite a technology group at 3 universities that develop wide band gap technologies. So we see this as quite a benefit for us going forward. The details of the fab, the employee count, the capacities, we're just not able to share at this moment. It is a working fab. It is in silicon technology today. It is an 8-inch fab. That is about as far as I can go with describing the fab. But we're quite excited quite excited in Vishay about what this is going to do to accelerate our silicon carbide product.

Okay. The press release said that you are intentionally increasing inventory with distribution partners as you broaden participation in this higher-margin channel. So I was just looking for some more details on that. Are you specifically partnering with new distributors? Or are you now selling more product lines through distribution or are you increasing the inventory of existing products at distribution? So if you can give us some details on what exactly this entails. And then in terms of implementing go-to-market strategies, do you think this is more or less done? Or do you think you'll be done by the end of '23? Or will this carry over into '24 as well?

Okay. With the distributors. It was always a large part of our business, about 55% of Vishay's annual sales. The distributors are asking more from Vishay as I travel to meet with distributors in all regions, they say, Joel, we need more product from Vishay. Now what is that product. We've had the standard part numbers. I say we provided them over the last 5 years through the last 2 upcycles that they put on the shelf. We had limited capacity, so we weren't able to really support a broader SKU mix. We had limited capacity which was allocated to automotive or other large direct customers. The distributors had to find other suppliers to take care of the customer base and the market. Part of our strategy was to reengage all business channels, distribution is one of them. So we are broadening our SKUs. We're adding part numbers. Each of the business units is traveling to the distributors in all regions, having product mix discussions to understand the part number demand that we were not supporting. So when I say intentional or this is by design, we are raising our inventory dollar at the distributor because we're adding part counts. One of the distributors that we have and working with, we've added 8,000 part numbers this year than we were not participating in. And we have more work to do with that distributor. That's just one example. So Vishay can be a much, much broader supplier. We have the technology. We have the print position. with the customer, the distributors see this print position but we didn't have the capacity or the part numbers in their system to support that demand. So that explains why we say it was intentional. It's part of our growth strategy and we expect to be an even bigger contributor to our distributors' customers.

That's helpful. And maybe for my last question, if I can ask one of the near-term initiatives that you have is to fill gaps in technology and market coverage. So just if any details there, like what would you like to add in terms of technology and which markets? And would that be through internal investment? Or is this something that you would consider M&A for?

Okay. Filling gaps and technology, the silicon carbide, we had a gap. That technology was in development with many of our competitors for a decade. So Max Power is that first filling up the technology gap. GaN. GaN is a technology that we need. We're in development of GaN. We're talking to universities to help us create this technology for Vishay. We're also looking outside for M&A in GaN. Circuit protection is another technology we don't have in Vishay. So we look to broaden our portfolio by including circuit protection as we sit with customers, as we sit with engineers and with the distributors and EMS, they point Vishay directions. They say, Vishay, look this way, look to support this technology. So we appreciate those comments. And M&A will be a part of this for sure as well as our own internal R&D.

And our next question comes from Matt Sheerin with Stifel.

I have just a couple of near-term modeling questions. So you're guiding gross margin down. It looks like that incremental margin is 50%, 55%. And you're also modeling or guiding OpEx up a little bit. So just trying to figure out are we bottoming here in terms of margins look like your operating margin will be below 10% for the first time in several quarters. How should we think about as the cycle bottoms here, where margins may bottom? And are there any other cost-cutting initiatives in terms of OpEx or other costs that you may take out in order to keep margins at the higher levels.

Are we at a bottom? It's [indiscernible] are we at a bottom. We look at the discussions we're having with our channel partners, our automotive customers. Each segment has kind of a different move to it. On the top line, when we look at revenue, we're seeing the aerospace, defense moving up we're seeing automotive flat to continuing to move up. So positive on the top side that we can see some of those positive markets offset other markets which are flat to sideways. The margins. The margins we are working diligently to make sure that we can establish what we say as a track record for Vishay; [indiscernible] company. We believe that the margins will continue [indiscernible] through. We work with cost cutting, we work on rightsizing factories, we look at our cost or spending on OpEx and decide if we need it in the current quarter, if we can push it out a quarter. So we're quite diligent here. Lori, do you have any comments you'd like to make?

No, I think that's pretty much covered it.

Sorry, if I may add. So if you look at the book-to-bill, we disclosed, we -- the high incremental margin down is partially related to a negative product mix that in that the semiconductors, we assume semiconductors will be going down further in Q4 than the passives. So that drives the margins down and increases the incremental negative margin.

Okay. And is that true for the MOSFET business as well? I know -- I saw the book-to-bill was very low but I know you have a strong demand from auto customers. So the MOSFET business will be down again as well.

I would say sideways, Matt. The automotive polls, the schedule agreements we see continue to represent the demand. We were in allocation with [indiscernible]. We've come off of allocation for Automos [ph] in the third quarter and now we're engaging customers and distributors which we couldn't currently support with our capacities. So we're working to engage more customers to not say automotive products from MOSFETs are down but actually broaden our customer base and be able to support more. MOSFETs, as Peter said, is one of those higher-margin products but the inventory in the channel is high for semiconductors and we have opportunities through adding part numbers which would give us a greater play for the Automos [ph].

Our next question comes from Joshua Buchalter with TD Cowen.

It's Sam [ph] again. I just wanted to follow up on the distribution comments from earlier. I know your visibility is never 2020 but can you give us an update on how much work there is to do in restocking the channel with new and old products to target levels if you have any, given that is the inventory is 24 weeks now versus, I think, 21 weeks last quarter?

Yes. There's quite a bit of work to do. We have 16 divisions in Vishay business units. And at this point, 4 of them had [indiscernible] with the distributors in the region. There's meetings going on this week now in Europe for one of the divisions. So we are roughly 1/3, maybe 30% of what [indiscernible] here with the distributors. It's a true reengagement. We are showing the distributors of new Vishay. So we've got quite a bit of work here yet to do which is going to span into the early part of 2024.

Thank you. I would now like to turn the call over to Joel Smejkal for any closing remarks.

Thank you. Thank you, everyone, for joining our call today. At Vishay, we remain committed to making the necessary investments in capacity, customer-facing resources and our innovation to make sure Vishay is ready to take full advantage of the next phase of market growth. For the megatrends, we talk about e-mobility, sustainability and connectivity; we're moving forward with speed and conviction across the organization. I look forward to talking to you again in early February when we report our fourth quarter results. Thank you very much.

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