Vishay Intertechnology Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 9, 2023

There are 5 speakers on the call.

Operator

Welcome to the Vishay Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Peter Henrici, Investor Relations.

Operator

Thank you, Mr. Henrici. You may begin.

Speaker 1

Thank you, Devin. Good morning, and welcome to Vishay Intertechnology's 2nd Quarter 2023 Earnings Conference Call. I am joined today by Joel Smical, our President and Chief Executive Officer and by Laurie Lipkerman, our Chief Financial Officer. This morning, we reported results for our Q2. A copy of our earnings release is available in the Investor Relations section of our website atir.vishay.com.

Speaker 1

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 referring to a slide presentation, which we also posted at irpiche.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 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 ks 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.

Speaker 1

We have included a full GAAP And non GAAP reconciliation in our press release as well as in the presentation posted on ir.bichai.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, Joe McCall.

Speaker 2

Thank you, Peter. Good morning, everyone. I'll start my remarks on Slide 3 with a review of the demand trends for The Q2 and then Laurie 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 questions. So let's go to Slide 3.

Speaker 2

For the Q2, Vishay delivered solid results with the revenue of US892 point US1 $1,000,000 near the top side of our guidance range and EPS of $0.68 also near the top side of our guidance range. Revenue increased both quarter over quarter and year over year driven by growth in automotive. Looking at our revenue mix, 1st by end markets. Automotive, which accounted for 35% of total revenue, Grew 9% versus the Q1 and 22% versus the Q2 last year. We're seeing sustained demand in all regions for Products that support increased electronic content, ADAS features, EV and hybrid vehicles, Along with improved order flow for legacy automotive programs as the supply chain bottlenecks have eased.

Speaker 2

Industrial, representing 37% of total revenue, was flat quarter over quarter And 7% below last year as many of the customers are normalizing their inventory positions now that the pandemic and supply chain constraints In addition, demand in China is sluggish as the country's economic recovery It's taking longer than we expected. Nevertheless, we continue to see the strong design activity in the area of the electric grid And EV charging infrastructure globally. In Aerospace Defense, one of our rapidly growing end markets, Revenue grew 11% versus the 1st quarter and 23% versus the 2nd quarter last year On strong orders from commercial aviation, along with increased government spending on weapons systems in Europe and the United States. Revenue from medical customers, another promising end market for Vishay, was down 5% versus the 1st quarter due to the timing of orders and mix, but up 22% year over year. Based on the strong demand we saw during the quarter, especially for medical diagnostic equipment and implantable devices, Book to bill at quarter end was 1.3, and we expect revenue to increase sequentially in the 3rd quarter.

Speaker 2

Finally, in the other market segments, revenue declined 7% versus the 1st quarter Due to some price pressure on some products sold to distribution customers in Asia and ongoing weak consumer demand. In terms of channel sales, we're focused on reengaging with distributors to regain POS share we lost After 2017, due to many years of capacity constraints. We're also engaging more closely with EMS customers in volume based business as well as at their EMS design activity centers. This way, we're supporting all channels while maximizing the profitability of each one. During the quarter, distribution revenue grew 4% compared to the Q1 and was down 6% compared to the Q2 last year Due to improved delivery of allocated products to automotive, industrial and aerospace defense customers.

Speaker 2

Distribution inventory at quarter end was 21 weeks versus 19 weeks last quarter, which increased in most regions. POS decreased 5%, weighed down by softer demand for telecom and computing in Asia. We are collaborating with each of our distributor partners to ensure the inventory at each of them includes a greater quantity of high running part numbers. OEM revenue grew 1% quarter over quarter and 19% year over year, Primarily reflecting continued strong demand for our automotive customers as they continue to replenish inventory, particularly in the Americas. EMS grew 1% quarter over quarter as healthier supply chains allowed for improved pull In Automotive and Industrial Markets, particularly in the Americas and Asia, which more than offset weak demand, primarily in Consumer Computing and Telecom Market segments in Asia.

Speaker 2

Before turning the call over to Laurie for a review of our financial results, I want to thank our employees for embracing our change. Their dedication and commitment to excellence is visible every day. We're becoming a business minded organization and making the right decisions to act on the value of putting our customers first. We're pushing forward together to seize opportunities created by the megatrends of connectivity, mobility and sustainability and to drive faster revenue growth and higher returns. Laurie, I'll now pass it over to you for the financial results.

Speaker 3

Thank you, Jill. Good morning, everyone. I will start my review of our Q2 results on Slide 4. Revenues for the Q2 were $893,100,000 Compared to the Q1, revenues increased 2.4%, reflecting a 2.6% increase in volume, slightly offset by a 0.7% reduction in pricing. By reportable business segment, revenue growth was driven by MOSFET volume gains, partially offset by lower pricing and by inductors volume increases and higher pricing.

Speaker 3

Compared to the Q2 last year, revenues grew 3.3%, reflecting a volume increase of 1.4% and 1.1% increase in pricing. At quarter end, book to bill for consolidated Vishay was 0.69 and backlog at quarter end was 6.4 months compared to 7.5 months at the end of the prior quarter as lead times continue coming down for all product segments. We returned a total of $34,200,000 to shareholders comprised of dividends of $13,900,000 and stock repurchases

Speaker 4

of $20,200,000 The

Speaker 3

next slide presents income statement highlights. Gross profit was $257,500,000 for a margin of 28.9 percent compared to 32.0 percent for the Q1 and in line with our guidance. Compared to the Q1, Gross margin decreased and lower fixed cost absorption based on flat inventory, inflationary labor and material costs, partially offset by lower logistics and freight costs. SG and A expenses were $122,900,000 $2,800,000 higher than the Q1, in line with our guidance. Operating income decreased $24,000,000 versus the Q1 on lower gross profit.

Speaker 3

Adjusted operating income decreased $23,400,000 versus the prior year due to higher SG and A expenses, primarily reflecting annual salary increases, general inflation and equity incentive compensation. Operating margin was 15.1% compared to 18.2% for the Q1 and 18.3% on an adjusted basis for the Q2 of 2022. EBITDA was $178,000,000 for an EBITDA margin of 19.9%. Our normalized effective tax rate was 28.5% for both the quarter year to date period, the same as our GAAP effective tax rate for those periods. EPS was $0.68 per share compared to $0.79 per share for the Q1.

Speaker 3

For your convenience, we have included in the body of the presentation a chart depicting revenue, gross margin and book to bill ratios for each of our reportable business segments. Turning to Slide 7, we present cash conversion cycle metrics. DSOs were 46 days, one day higher than the Q1 and DPOs were unchanged at 32 days. Inventory was $660,000,000 atquarterend, essentially flat compared to $656,700,000 as of the end of Q1. Inventory days outstanding were 94 days compared to 98 days for the Q1, Bringing the cash conversion cycle for the Q2 to 108 days.

Speaker 3

On Slide 8, you can see that cash flow from operations of $107,200,000 for the 2nd quarter was lower than the Q1, primarily reflecting the annual installment of the transition tax. Total CapEx was $71,700,000 for the quarter, With $44,800,000 of the total invested in capacity expansion, compared to $37,600,000 last year, an increase of 19.1%. On a trailing 12 month basis, total CapEx was 9.6% of revenue compared to 7.5% for the same period last year. Free cash flow for the quarter was $36,300,000 compared to $84,600,000 for the Q1 due to higher CapEx, the annual installment of the transition tax. Stockholder returns for the Q2 amounted to $34,200,000 consisting of $13,900,000 for our quarterly dividend and $20,200,000 for share repurchases.

Speaker 3

We repurchased 800,000 shares at an average price of 0.2 Total liquidity at quarter end was $1,700,000,000 including cash and short term investments of $1,100,000,000 and availability on our revolving credit facility of $564,000,000 As mentioned on past earnings calls, we use the revolver from time to time to meet short term financing needs. Turning to Slide 9 for our guidance. For the Q3 of 2023, Revenues are expected to be between $840,000,000 $880,000,000 reflecting a return to normal seasonality. Gross profit margin is expected to be in the range of 27.7 percent, plus or minus 50 basis points. We still expect full year gross profit margin to be in the range of 29%, plus or minus 50 basis points.

Speaker 3

SG and A expenses are expected to be between $125,000,000 plus or minus $2,000,000 for the quarter $495,000,000 plus or minus $4,000,000 for the full year at current exchange rates. Reflecting higher than expected marketing expenses, refined long term incentive plan accruals and additional analysis of the data. For 2023, we expect a normalized effective tax rate of approximately 28.5%. Finally, we remain committed to distributing at least 70% of our free cash flow to shareholders in the form of dividends and stock repurchase In accordance with our stockholder return policy, for 2023, we expect to return at least $100,000,000 Now I'll turn the call back to Joe.

Speaker 2

Thank you, Laurie. Let's turn to Slide 10 for a review of our key near term initiatives As a reminder, when I first talked to you on the Q4 call, I detailed the initiatives we're focused on That are laying the foundation for accelerated revenue growth and improved returns and positioning the company to take full advantage of the next phase of the megatrends In connectivity, mobility and sustainability, I also talked about the importance of creating a business minded organization, One that is more responsive to customers, about changing Vishay from being a cash flow driven company to a P and L driven company And from a company that fulfills customer orders to one that anticipates and meets the customer needs, Building on Vishay's strong operational disciplines and talented and dedicated workforce. We started immediately at the beginning of January and are pushing forward with a sense of urgency. I am pleased on our progress To date in shifting the mindset of everyone at Vishay to think customer first and placing a priority of having a business minded focus in everything we do. Our teams are embracing the changes and are dedicated to supercharging our growth.

Speaker 2

We're making progress in increasing capacity internally and externally in support of our higher growth and highest return product lines, consistent with our plans at the beginning of the year. These 30 key product lines, which serve multiple market segments, applications And business channels best position us for the exponential end market demand coming in the near future driven by the megatrends. To be ready for the next phase, we are investing $1,200,000,000 between 2023 2025. 2023 is a staging year, and we are committed to investing approximately $385,000,000 about 2 thirds of which is to be spent on expansion projects. This investment And expanding capacity is expected to come online in late 2024 2025.

Speaker 2

The incremental capacity we invested in last year is coming online this year and through 2024. By the end of the second quarter, we had landed an annualized Capacity increase of nearly 2%, particularly for power inductors, resistors and capacitors Compared to the annualized capacity at the end of the Q1, volume from this incremental capacity will be available as we complete site and customer qualifications. During the Q2, we continued to advance Construction on fabs located in Germany, Taiwan and Italy to meet the growing demand for our automotive and industrial customers. We broke ground on the new MOSFET 12 inches Fab in Itseho, Germany during the quarter. We also continue to install equipment At our 2 new facilities in Mexico, one located in Juarez for power metal strip resistors And the other located in La Laguna for power inductors.

Speaker 2

We expect this investment will double our capacity for these product lines over the next 2 to 3 years. We have qualified some resistors at our Juarez facility, and we expect to begin shipping in the Q3. At our La Laguna Inductor Facility, we are planning to qualify new products in the second half of this year and Expect first shipments in the Q1 of 2024. At this facility, we're also planning to establish a campus, bringing together product lines from other Vishay Business segments. In addition to internal capacity expansions, We're continuing to work on identifying additional semiconductor foundries.

Speaker 2

Our top priority is to increase our MOSFET capacity to support growing demand From our automotive, industrial and distribution customers, while in parallel, we form at a new 12 inches foundry partner. We also reached an agreement to increase wafer supply with 2 of our existing foundry partners. As a result, we will increase our annualized automotive capacity by 10% in 2024, up to 30% in 2026. We're also working on negotiating an agreement with another foundry to support expanded capacity for our industrial customers and even more capacity for our automotive customers. During the Q3, we have also started to Expand our low cost Krubong Malaysia assembly site, where we are currently only manufacturing opto products.

Speaker 2

We expand here to address the increased demand in the automotive and industrial market segments. Like our plan to establish a campus in La Laguna, We are going to expand the back end of KRU Bong with MOSFETs and diodes, while also addressing our customers' Country of origin requirements. Phase 1 of this Malaysia expansion will increase our manufacturing floor space by 65% and will be completed in the Q3 of 2024. To create incremental capacity In support of our higher growth and higher return products even further, we have also been looking externally to qualify subcontractors As I mentioned in the Q1, we have qualified 1 subcontractor for non automotive Resistors and have started shipping these products. During the Q2, we also started qualification of We're continuing to engage in developing with more than 20 other subcontractors of various sizes and still expect to have qualified and signed agreements with a number of them by year end.

Speaker 2

As an example, we're qualifying subcontractors for many new inductor products by the end of this year. We're continuing to fill gaps in technology and market coverage on silicon carbide. We're placing a priority to onboard technical resources to support silicon carbide and GaN product developments, And we've continued to add FAEs to engage our customers. As for Max Power, the acquisition of the Q4 of last year, Our development of silicon carbide technology, we're on track to have samples of 1200 volt plan our technology MOSFETs available to customers in the Q3 and release them into production in the Q4. We're continuing to advance the development of our 650 volt planter technology and also the 1200 volt trench technology.

Speaker 2

In addition to investing heavily this year in CapEx and engineering talent, we have been working to introduce Vishay's solutions That more fully leverage our broad portfolio of discrete semiconductors and passives. As a reminder, Shai Semiconductors and Passives can populate greater than 80% of the components on the circuit board for many power applications. For the past months, we have been building a number of automotive reference designs for customer engineers to evaluate. This quarter, we released one of them. The first one is a High voltage intelligent battery sensor.

Speaker 2

These boards are available through our catalog distributors for customer engineers to test. We also have in the queue additional designs, including a 48 volt resettable circuit breaker, a bi Directional 48 volt, 12 volt DC to DC converter. We also continue work on onboard charger and traction inverters designed for low speed electric We work together with a Tier 1 customer. Lastly, To institute organizational and cultural change, we redesigned our long term incentive plan to align the performance of 1,000 key employees To accelerate our company growth and profitability objectives and also shareholder interests. Having a long term incentive program for 1,000 employees is new at Vishay.

Speaker 2

This new incentive plan was approved by our shareholders at our 2022 Annual Meeting This past May, we're also revising our short term incentive program for 2024 to reward risk taking and growth. Let's turn to Slide 11 for a recap of the goals we have set for ourselves for 2023. In terms of expanding capacity, we're on pace to have qualified and signed agreements with a number of subcontractors by the end of this year and to have completed our evaluation of where to build Vishay's next manufacturing facility. We're adding incremental capacity to support growth in 30 key product lines and developing go to market strategies for each of them. We're on track to have samples of the 1200 volt planter Technology MOSFETs available and are making progress in the development of the 6 50 volt planter technology.

Speaker 2

Finally, we remain committed to holding an Analyst Day in early 2024 and sharing with you our 3 year business plan And targets for revenue growth, profitability and return on invested capital. With that, I'll turn the call back to the operator

Operator

One moment please while we poll for questions. Our first question comes from the line of Ruplu Bhattacharya with Bank of America, please proceed with your question.

Speaker 4

Hi, thanks for taking my questions and thanks for all the details on the call. Joel, one of the initiatives you've talked about is enhancing channel management. Over the last couple of months, Since you've taken over, as you've spoken to your distribution partners as well as other customers, what feedback have you gotten in terms of what Avishai is doing well and what areas need improvement. So can you give us your thoughts on how you what are some of the things You plan to do in terms of enhancing that channel management. And related to that, today about 54% of your revenue comes From distribution, but as you think about the secular growth drivers that are driving your 2 large end markets, automotive and industrial, As you get more EVs in the mix versus traditional combustion engines, do you still think that you'll be going through the Tier 1s Or do you think that you can have a direct relationship or more of a direct relationship with the auto OEMs?

Speaker 4

And similarly, as Renewable energy becomes a greater part of industrial. Do you think that your revenues through distribution that mix can change over the next couple of years?

Speaker 2

Okay. I'll Ruplu, thanks for the question. I will address the second question in the answer first. We are working directly with many automotive Tier 1s. So this is very important for us because we need to be in line with their technology roadmaps and where they're going with new products.

Speaker 2

So the European Automotive, the U. S. Automotive, the Asian Automotive were in direct discussion. The business will continue to be direct with the automotive accounts. They are driving new technology And they prefer to be very closely connected to the manufacturer, the manufacturer of components because there's a lot of new technology needs As we move forward in hybrid and electric vehicles, solutions are yet to be discovered.

Speaker 2

So these close contacts Of the manufacturer's technology and the OEM continue to be a necessity. So we'll continue that. Jumping back to your first question about visiting the Leaders of the distributors, yes, I've done that. We've had multiple conversations. They're excited about where Vishay is going.

Speaker 2

Vishay was somewhat away from the distributor channel. We did have products. We did have it as part of 50% or greater of our total sales, but the growth of distribution required more from Vishay. So we talk about capacity and we talk about The business minded direction of Vishay and organizing to have sufficient capacity for the channel of distribution. They're excited about it.

Speaker 2

Vishay, they see on many bill of materials. So having the supply of product Makes the distributor even more valuable to their end customer because they don't have to cross or find another supplier if Vishay can support the demand. EMS is the same. I've met with a number of the EMS leaders. Same story.

Speaker 2

Vishay is prevalent on bill of materials. They'd like to buy Vishay. If Vishay's lead time can be reasonably in line, they see more opportunity for us to grow our business. So covering all of that, you're right. There's going to be some accelerated growth at the OEMs.

Speaker 2

But where we're going is to have sufficient capacity to support the business through distribution, support the business direct To the OEM as well as support the business through EMS, we need to have the capacity to support all business channels.

Speaker 4

Okay. Thank you for the details there. For my follow-up, if I can ask, as you look out over the next 2, 3 years and you look at the growth In the secular trends that are happening in EVs and in industrial, how much of the growth for Vishay do you think comes From organic growth versus needing to do M and A. And can you give us your thoughts on capital return and uses of cash? How do you prioritize further M and A?

Speaker 4

And do you see that more in the semiconductor side or on the passive side versus maybe reducing debt versus share buybacks. Thanks.

Speaker 2

Okay. With a number of our products, We have the right technologies in discrete semiconductors as well as passives. But as we have these technology discussions with the OEM, There is need for Vishay to expand our portfolio. We have a list of M and A Targets that we're looking at. M and A needs to be a greater part of our inorganic growth Plan, it will help us to be a better supplier with broader product portfolio.

Speaker 2

So yes, M and A is going to be a greater part of our Growth plan going forward, this will be in semiconductors as we did with Max Power and the silicon carbide technology Last quarter, in the Q4 of 2023, it will also be in passives. When we look at the electric vehicle, The growth in semis is often talked about as 7 times the amount of semis in electric vehicle or maybe 10 times. But passives is right alongside that. The growth of passives is equal to those numbers. So this is a strength of Vishay being able to offer semis and passives To the EV, to the hybrid vehicle as the electronic content grows even further.

Speaker 2

We can do it through Our own manufacturer, we can grow through Subcon qualification under the Vishay product recipe and will also grow through M and A.

Speaker 4

So just in terms of prioritizing the use of cash, like how would you rank order M and A versus delevering versus returning

Speaker 2

We will still in our capital allocation meet the requirements that we have for The cash to shareholders, that's still very important. The dividend, the share buybacks is still a priority. M and A is at that same level of priority. We're a technology company. We need to stay abreast.

Speaker 2

So it will be a priority, a higher priority of M and A.

Speaker 4

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

Speaker 2

Thank you

Speaker 3

very much.

Operator

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Joel Schmecko for closing comments.

Speaker 2

All right. Thank you very much. Thank you all for attending the call and joining us today. In closing, we are committed to making the necessary investments in capacity, customer facing resources and innovation to make Vishay Ready to take full advantage of the next phase of our market growth for the megatrends of connectivity, mobility and sustainability. We're making good progress, and I look forward to giving you the next update when we report the Q3 results in early November.

Speaker 2

Thank you very much for attending today.

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Vishay Intertechnology Q2 2023
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