Good day, and thank you for standing by. Welcome to the Vishay Intertechnology Q2 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Peter Henrici, Investor Relations. Please go ahead.

Thank you, Jill. Good morning, and welcome to Vishay Intertechnology's second quarter 2024 earnings conference call. Joel Smejkal, our President and Chief Executive Officer; and Dave McConnell, our Chief Financial Officer, will join me today. This morning, we reported results for our second 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. We will be referring to a slide presentation during the call, which we also posted at ir.vishay.com. You should be aware that in today's conference call, we will be making forward-looking statements discussing 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. We are including information on various GAAP and non-GAAP measures in our press release and on this conference call. We have included a full GAAP to non-GAAP reconciliation in our press release and in the presentation posted on ir.vishay.com, which we believe you 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. Thank you for joining our second quarter 2024 conference call. I'll start my remarks with a review of our revenue for the second quarter by end market, channel and region. Then Dave will take you through a review of the second quarter financial results and our guidance for the third quarter. After that, I'll give you a progress report on our 2024 initiatives under our five year strategic plan to answer any of your questions. For the second quarter, we are reporting results in line with our revenue, gross profit margin and SG&A guidance. Revenue of $741.2 million was essentially flat versus the first quarter, impacted negatively by lower volume pulls from automotive customers and from industrial customer destocking. The revenue was impacted positively by an additional revenue of $13.1 million from our Newport acquisition and also sparks from China and Taiwan related to AI server demand, notebooks and consumer devices. Distribution revenue was up quarter-on-quarter, a testament to our intensified customer reengagement initiative, supported by the capacity that has come online over the last 12 months. We are making good progress in executing Vishay 3.0. As we expected, the inventory digestion continued into the second quarter. Some of the customers are still carrying a high level of semiconductor inventory from some of their suppliers. Nevertheless, we are starting to see indications of inventory rebalancing and bookings are steadily improving, particularly from automotive and industrial customers. We've also started to see replenishment activities from the distributor channel and on certain passive product lines, higher consumption rates for semiconductors as demand ramps up for AI servers and vehicle computing. Let's take a closer look now at the second quarter revenue, starting with a review of revenue by end market on Slide 3. Automotive revenue declined…

Thank you, Joel. Good morning, everyone. Let's start our review of the second quarter results with the highlights on Slide 6. Second quarter revenues were $741.2 million, including $16 million attributed to our Newport acquisition and within the range of our guidance. Revenues decreased 0.7% compared to the first quarter, reflecting a 0.7% reduction in ASPs and a 1.1% decrease in volume, partially offset by an increase in Newport revenues. The slight decrease in volume reflects primarily rebalancing of inventory by automotive Tier 1s and the slight reduction in ASPs reflects price alignments in distribution channels, primarily for passives. By reportable business segment, the $5 million decrease in revenues was mainly attributable to an $8.7 million decrease in resistors and a $4.6 million decrease in capacitors. These declines were partially offset by a $5.4 million increase in inductors and a $3.8 million increase in Opto. MOSFETs revenue was flat when including the $13 million increase of the Newport revenue. Compared to the second quarter last year, revenues were down 16.9%, reflecting a volume decrease, net of Newport of 13.6% and a 3.9% reduction in ASPs. Book-to-bill for the quarter was 0.86 comprised of 0.82 for semis and 0.90 for passives. Backlog decreased to 4.6 months compared to 5.0 months at the end of quarter one. By product category, backlog for semis decreased to 4.4 months from 5.0 and backlog for passives decreased to 4.9 months from 5.1. Moving on to the next slide, presenting the income statement highlights. Gross profit, which includes the addition of Newport for a full quarter, was $162.9 million. Gross margin was 22.0% and included a negative impact from Newport of approximately 170 basis points. Compared to the first quarter, gross margin was 80 basis points lower, primarily due to the inclusion of Newport for the…

Thank you, Dave. Please turn to Slide 11, which displays the eight growth levers we are pulling to execute our five year strategic plan. This plan is designed to meet our commitments to scale capacity for our customers, best positioned Vishay for the megatrends of e-mobility and sustainability, accelerate revenue growth and drive greater returns through expansion of our addressable markets and our product portfolio. In 2024, we are focusing primarily on expanding capacity both internally and externally and on innovation. We had originally planned to spend $435 million in CapEx in 2024. However, at the midyear point of this year, the industry recovery is slower than we expected. We have, therefore, decided to adjust our timetable of investments for Itzehoe beyond 2024 and now plan to spend a total CapEx between $360 million and $390 million in 2024. This adjustment does not alter our commitment to spending a total of $2.6 billion between 2023 and 2028. We can do this and still meet our customer commitments because we now have intermediate capacity from the qualification of SK keyfoundries in Korea and the recent acquisition of the Newport wafer fab in South Wales UK. Let's turn to Slide 12 for a progress report on these levers. First with Newport, we are currently on target to complete qualification of four of the technology transfers by the end of the year and with the fifth technology transfer on schedule to complete qualification in the first quarter of 2025. We're also on schedule to ramp up production of the industrial technologies in the first quarter of 2025 and the qualification of automotive-grade technologies in the second quarter of 2025. The Newport colleagues are doing a great job with process optimization to qualify the new technologies with high yield. I thank them for the…

Thank you. [Operator Instructions] Our first question today comes from Matt Sheerin with Stifel. Your line is open.

Yes, thank you. Good morning, everyone. First question, Joel, just regarding the capacity expansion. It sounds like you're still on track, except for the Germany expansion, still sticking to your plans to expand across the different product sets that you talked about. And one area was MOSFET you said 12% capacity expansion. Yet if you look at that business, if you take out Newport, it looks like you were down like 30%-plus year-on-year. So it sounds like that correction is still going on. So I guess the question is what's the capacity utilization? And do you have confidence that you can fill that capacity as you bring it on next year?

Yes. Hi Matt, thanks for the question. The capacity utilization for the semiconductors is [63%] (ph) for MOSFETs specifically, it's 79% today, 79% capacity utilization. We are confident that we are seeing the computer business beginning to increase for the low-voltage MOSFETs. The automotive, we saw a rebalancing of the polls in Q2 by the automotive customer. They give us schedule agreements. And in Q2, they rebalanced some things and pulled less than what they had intended originally on the schedule agreement. So yes, the capacity investment, we're confident in what we're doing. Adding key foundries is going to help us out with intermediate capacity. Itzehoe is still a very important project for our capacity expansion to a 12 volt -- excuse me, to a 12 inch fab -- very important. But as we have seen the continued softness sideways market for another quarter or two longer than we expected, we decided to make just a slight delay with the Itzehoe capital, just a slight delay.

Got it. Okay. Thanks for that. And your commentary on auto weakness, obviously, you're not the only supplier that's been seeing that. But it sounds like you're starting to see at least some green shoots in terms of orders. You're guiding the overall company flat revenue sequentially. Do you expect auto to be flat or will that be down again?

We have decided to guide it flat even though we see scheduling agreements with increasing demand in Q3. We saw what happened in Q2. We had Q2 with a positive move from auto in their schedule agreements and they readjusted. So the week-by-week demand pulls that are forecasted would show a positive Q3 over Q2 for auto. But at this point, we've decided to guide it flat, fewer workdays in Q3 seasonal holidays in Europe, seeing automotive car count declining a bit. We decided to go flat even though the signals from the auto customers are a bit up.

Okay. Thanks. And just lastly, you had some positive commentary about the data center and AI opportunity. I know that's a relatively small percentage of your revenue, but it sounds like it's growing. So could you give us maybe some metrics around the content opportunity in AI servers versus traditional servers and your share opportunity and where you're going there?

Yes. We have positioned on some initial reference designs, the NVIDIA Blackwell. We have MOSFETs on those designs. Also, we see current sense resistor opportunities, the inductor, the IHLP-style power inductor is there, diodes as well. So the content increase is higher. The teardowns that we've seen, Vishay content on the bill of materials is around $50 per AI server. So we're excited about what we've seen as a first look. We're designing closely with many companies in Taiwan and China to make sure more of the Vishay product is on the bill of materials. You're right. The overall quantities of servers is small and the PCs is small, but we're positioning hard. Our Asia team is working very hard to make sure we're attached to the right chipset reference designs, both in the Asia and the Americas region, working with the chipset companies as well as following through with the design company. So we're optimistic in what we can do. We're putting the capacity in place. As you said, the overall quantity of AI devices is still yet quite small.

Okay. Thanks a lot.

Thanks, Matt.

Thank you. Our next question comes from Joshua Buchalter from TD Cowen. Your line is open.

Hey guys. Thank you for taking my questions. Maybe to follow-up on Matt. I wanted to ask about the auto market. I mean directionally, a lot of the things you mentioned are in line with what we've heard throughout this earnings season. But looking into the third quarter, and I understand the conservatism on the guide, do you feel like inventory levels at Tier 1s and your customers, is that the point where there's still work that needs to be done or do you think you're shipping to end demand at this point and taking more of an agnostic view on what that demand looks like? Thank you.

Okay. Hi Josh. Thanks for the question. When we look at our automotive annual agreements with customers, a portion of that is in consignment. So we have consignment inventory that we're placing and they pull as they need it. So we would say there the inventory is at a more of a normal position. Sometimes we have four weeks of inventory consignment, sometimes it's up to seven or eight, but it's not excessive and requiring severe months of digestion. The others, which are not in consignment, there still is some inventory out there. It's not excessive. We see passives, book-to-bills moving more positively first. Semis, there's still some inventory to digest. I won't necessarily say its Vishay inventory. We didn't have the ability to stuff. Last year, we didn't have short lead times and excess capacity. We were on allocation with our auto MOSFET. So this is where I've said in past calls, we've got to work around our competitors' inventory and gain more share for Vishay. This is a top initiative for our sales team to get us positioned and not have to wait for the digestion of our peers.

All right. Thank you for the color there, Joel. The follow-up, distribution grew meaningfully more than -- the total company. I know that's been an area of focus with the SKU count expansion and representing Vishay more broadly at distributors. Can you -- I apologize if I missed it, but can you share where your distribution inventory levels are right now? And then comfort with them given, in particular, it's been an area of volatility across the semiconductors and, to a lesser extent, passive space, in particular this quarter? Thank you.

Yes. The inventory by weeks, and this is based on current POS in Q2 POS, we are at 26 weeks of inventory worldwide. We were at 26 weeks in Q1. In Asia, we had 20 weeks of inventory in Q1. We're down to 18.6. The Asia POS is starting to pick up. So we're glad we have the product in the channel so we can react to the customer. In the Americas, in Q2, the inventory was at 47 weeks. Catalog distributor is a big part of that, if you remember, in Q1 was 47 weeks. Q2 is 48. And in Europe, with softer POS there. In Q1, the inventory was 18.7 weeks and Q2 20.7, softer POS but also adding SKUs in the Americas and in Europe. So you see the number of weeks of inventory going up a little bit. In the Americas and Europe, that's the SKU count adds we talked about -- in part because we're really positioning to participate in part numbers that we previously didn't even have in the distributor's computer system. It wasn't a recognized part number by Vishay. So we're really widening our ability to compete and participate and gain market share.

Okay. And in those levels, in particular, in Americas and Europe, I mean, are those levels that you're comfortable with and you're trying to grow them further or are you trying to bring them down right now? Thank you.

We're trying to bring them down. POS is going to help us. But as we continue to add more part numbers, the POS is going to consume the inventory we have, but then division-by-division, business units that go to the distributors, they do their pricing reviews for alignment, they do their part number comparisons. We will continue to add part numbers quarter-on-quarter. So we'll have a consumption level of inventory and then we'll have the Vishay positioning additional inventory that's added. So I think you're going to see in the next two quarters, inventory is going to be about where it's at from a top-level view as we participate in more POS and add further part numbers.

Got it. Thank you, Joel.

Thanks, Josh.

Thank you. Our next question is from Ruplu Bhattacharya, my apologies if I mispronounced that from Bank of America. Your line is open.

Hi. Thanks for taking my questions. My first question is on the guidance for fiscal 3Q. It looks like on relatively flat revenue sequentially, the guide is for 100 bps lower gross margin. And then looking into that, I thought the Newport fab headwind was expected to be 170 bps in 3Q, but now it's more 175 bps to 200 bps. So can you just double click on that, what's driving the higher impact? And Joel, if you can also weave in any expectation for the pricing environment? How is that trending? And any other impacts that are -- any other factors that are impacting gross margin sequentially between 2Q and 3Q?

Okay. Hi Ruplu. So a significant portion of the 2022 to 2021. This may have a couple of components. There's a couple of puts and takes. But the significant part is pricing on the semi side, we have 2% ASPs built into that forecast, okay? The Newport impact is a little higher in Q3, an additional another 20 basis points from the 2020 to the 2021, okay? So the sales of Newport was approximately $15 million, $16 million this quarter and next quarter going down to the $5 million to $8 million range. So when you asked about the increase in Newport impact, that's part of the reason because of the volumes decrease of the sales of the legacy product. Yes. Go ahead.

No, I was just going to ask on the overall pricing environment in terms of like-for-like pricing, if you can comment on that.

Yes. Pricing, there was some ASP decline in the quarter. When we look at the contractual agreements, those prices are fixed for the calendar year, so it wasn't there. It wasn't with the big automotive guys. Where we see the pricing down is we're doing these alignments at the distributor. If our book pricing was high and the actual POS net price was lower, on paper, we're reducing that, and there is some price protection that we have to give to the distributors, which is an ASP impact. So these are pricing alignment moves in part with the price pressure that we're seeing. And as always, there -- when there's large opportunities, people do request a quotation. So on large spot opportunities, we have to be aggressive. I would say for passives, the pricing environment is generally stable. MOSFETs because suppliers have lower capacity utilization, we said, ours is 79%. Other suppliers are lower, 50%, 60% utilization. They become more aggressive here and there. So we've had to make some adjustments in price, not significant, but we've had to continue to maintain our position with the capacity coming on board, we got to make sure we're present at these customers that give us growth opportunities. So there is some spot price pressure here and there.

Got it. For my next question, maybe I'll ask you, Dave. Can you remind us of your capital allocation priorities? And if CapEx spend is less this fiscal year, does that afford more opportunity for potential M&A or more buybacks? And how should we think about the possibility of a dividend? And also if you can even -- your expectation for free cash flow in fiscal 2024. Vishay's always had pretty good free cash flow even in down years. But how should we think about that in fiscal 2024?

So I think for the free cash flow -- let's start the free cash flow, Ruplu. I think on our Investor Day, we showed a fairly substantial minus number for 2024 on the graph. So we'll be negative, okay? Maybe not so much more than we are today. In terms of the dividend -- the capital allocation -- I'm sorry, the capital allocation strategy. So I think we're going to go back to Joel's comments about the one of the reasons we're pushing out. We're not pushing out, sorry, but push out is the right word -- a couple of quarters, our spending for Itzehoe it is because of the recovery hasn't happened as quick and our free cash is impacted by the recovery, okay? So I think those go hand in hand. We already have had two acquisitions this year. We've already had Newport, and we've already had Ametherm. So we're continuing to pursue the M&A strategy. We're continuing to spend CapEx, $360 million, and we're continuing to return up to $100 million to the shareholder. But given the existing free cash, I think that's the plan.

Okay. Thanks for the details there. Maybe for the last question. Joel, again, I'll ask you a higher level question. So overall, when you look at the operating environment, with respect to inventory correction or destocking that's happening in the channel, how many more quarters of that do you think it will take to flesh out any excess inventory, there is? And then just piggy backing on a prior question, you've been working with the distributors, and you've been increasing SKU count. What innings are we in with respect to that effort? And can your share gains be a meaningful driver for growth and -- or continue to be a meaningful driver for revenue growth at distribution. Thanks. Thanks for all the details.

Okay. Thanks, Ruplu. How many quarters on inventory? It's in part passive discussion and semiconductor -- so let's start with passives first. The passive inventory was really never stuffed. It wasn't overextended. So the passives are becoming more normalized quickly. Already seeing it in Q2, the orders that we're seeing in late Q2 are near parity. And customers are saying here's my demand, getting a little better visibility on passives. So into Q3, I think one more quarter of passives and will be at a normalized level. Semiconductors is a little different, and it also depends on the market segments, but semis overall, as I talk to our distributors, as I talk to EMS, they're still looking at to the end of the year. It's going to take two quarters and maybe a touch into Q1 of next year for digestion of inventory that's out there. And again, I'll say the Vishay inventory days are not to the level of others. So we have to get ahead of this and can't sit and wait. So inventory end of this year is what we see on semis, the next quarter on passives. What inning are we in with distribution? I'll say we're in the early middle innings. We've had our divisions, our business units traveling to the distributors. They had initial meetings last year. Many of the divisions have had second meetings and the intelligence about our business, where we were underperforming is moving forward really well. Sometimes we walk away from that distributor meeting, learning that we need to develop a product. We don't have a product that's fitting a large size of the market. So those things will take a little time. But as far as product that we have technology and creating part numbers, that's shorter time. So I will say we're in the middle innings. POS is expected to increase in 2025. We think we're going to enjoy a greater percent of POS going forward because we're adding these part numbers. These part numbers just aren't at the large distributors. It's also a catalog where we're populating more print position. So we're looking forward to 2025 when the market finally makes its move, we feel Vishay's going to be better positioned at the distributors with the part numbers upfront to participate in more, the capacity that we're adding to support the distributor's POS and be seen as a reliable supplier, where in the past, we didn't have the capacity to support the upturn.

Okay. Thank you for all the details. Appreciate it.

Thanks, Ruplu.

And we are showing no further questions at this time. So I would like to turn it back to Joel Smejkal for closing remarks.

Great. Jill, thank you. Thank you for everyone in joining our Q2 earnings call. We'll see you again in November. Thank you again for your questions and your interest in Vishay. Have a good day.

This does conclude our program. You may now disconnect.