Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to, Mr. Peter Henrici, Head of Investor Relations. Please go ahead, sir.

Thank you, Paula. Good morning and welcome to Vishay Intertechnology’s third quarter 2017 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’ll start today’s call with the CFO, who will review our third quarter 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 a Form 8-K that outlines the 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 2017 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’m 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 quarter three of $678 million at the upper-end of our guidance when adjusted for exchange impacts. The euro appreciated 6.4% versus the U.S. dollar during quarter three, increasing Vishay’s revenues by approximately $14 million. GAAP net income for the quarter was $0.41 per share. Adjusted EPS was $0.42 for the quarter. The second quarter includes restructuring charges totaling $3.2 million. During the third quarter, we repurchased approximately 2.1 million shares of our common stock for approximately $37.6 million, pursuant to the 150 million share repurchase program announced in August. Since quarter-end, we have purchased another approximately 120,000 shares of common stock pursuant to this program. This stock repurchase program does not obligate the company to acquire any particular amount of common stock. Revenues in the quarter were $678 million, up by 5.1% from previous quarter and up by 14.5% compared to prior year. Gross margin was 27.9%. Operating margin was 13.6%, Adjusted operating margin was 14.1%. EPS was $0.41. Adjusted EPS was $0.42. EBITDA was $132 million, or 19.5%. Adjusted EBITDA was $136 million, or 20.0%. Reconciling versus prior quarter, adjusted operating income, quarter three 2017 compared to adjusted operating income for prior quarter, based on $33 million higher sales, or $19 million higher, excluding exchange rate impacts. Adjusted operating income increased by $13 million to $96 million in quarter three 2017 from $86 million in Q2 2017. The main elements were, volume increased with a positive impact of $7 million equipment to a 3.1% increase, lower variable and fixed costs had a positive impact of $3 million. Reconciling versus prior year, adjusted operating income,…

Thank you, Lori, and good morning, everybody. Well, after a very successful first-half and very successful second quarter, Vishay in the third quarter showed further improvements of sales and profits. Also in the third quarter, we were carried by an unprompted [ph] high level of demand in virtually all market segments. We keep increasing manufacturing capacities and output for our key product lines, while maintaining good efficiencies across the Board. Vishay in Q3 achieved a gross margin of 28% of sales, adjusted operating margin of 14% of sales, GAAP earnings per share of $0.41, and adjusted earnings per share of $0.42, and we continue to generate free cash on a very high level. Let me talk about the economic environment. In general, the economic environment principally did not change much since the second quarter. Historically, high order rates and still growing backlogs characterize also in the third quarter. Virtually all markets continue to do well, in particular automotive and industrial, and customers remain very confident across the Board. Again, the high order level was driven by distribution mainly in Asia and Europe. The components industry in general is in process to increase its manufacturing output, but still they’re longer lead times and even shortages of supply. Like for the entire year 2017, semiconductors continue to be more affected than capacitors. Let me come to the details. Continuous improvement of business conditions in the American markets can be observed, driven by healthy macroeconomics. We see moderate growth in the Industrial segment. Strong military sector and automotive is picking up recently. Ongoing robustness of the European business can be reported. Central European manufacturers capitalized on their traditional strength in Automotive and Industrial segments. Their strong growth in Eastern Europe in particular and also the western part of Europe starts to recover. In…

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

Your first question comes from the line of Ruplu Bhattacharya of Bank of America Merrill Lynch.

Hi. Thank you for taking my questions. Dr. Paul, the first question for you more on supply and demand, really both on in the industry level, as well as at Vishay. When talking about diode, you said perceived shortage of supply. So really, I guess, my question is, when you look at your supply and what’s coming online, A, do you think, you have enough capacity to meet the demand? And then more importantly, using the demand that you’re seeing and your book-to-bill at distributors is very high and your months of backlog are also high in diodes and market MOSFETs. How much of that do you think is real, and how much of that do you think is backward – double ordering?

First of all, we do not have enough capacity now, as I indicated. We are going to continue to invest. But as I said, we continue to invest. We invested in this capacity since years. The demand has taken another step of acceleration. And at the moment, we do not have enough machines. Whatever we intend to buy now will be sufficient to satisfy present needs, but we will continue even after that to invest in this line. We are very competitive there, and the markets automotive and industrial are our key markets where we always have been strong. Concerning the backlog, this of course, question is always to be asked in such situations. I see in – if the right answers – I think the right answer should be looking through all the numbers I have available for Vishay. And believe me, if you look carefully, we currently do not see any sign of weakening of the business. I guess, this is the underlying question you have, right?

Right, right. No, that’s very helpful. Thanks. And then in terms of adding capacity, I mean, which product lines are you adding capacity? And how should we think about CapEx in the next fiscal year?

I would say, CapEx will be above the $165 million, which we announced or expect for 2017, and there are basically quite a few products. We have to expand capacity besides diodes, will be in the MOSFETs, will be in Surface Mount Resistors, especially also in inductors, where we have to put definitive more equipment in. I would – don’t want to make it. At this point, we’re in the budget process, but it will be above the $165 million of this year.

Okay. And then maybe the last one for me, when we look at your MOSFETs margins, the gross margin is now at 2011 levels and opto gross margin is probably the highest that has been since 2004. So just your thoughts on that how should we think about the progression in margins going forward? What can drive it up? What can drive it down?

Well, I mean, you know, gross margin is a game between the variable – the prices, variable costs and volume in reality. Concerning the – let me start out with the MOSFETs. I indicated that this MOSFETs margin has been supported to a degree by a one-time effect, still we’re running very good. And I believe also something like 24% gross margin at present volumes can’t be supported also mid-term, which is more than we originally anticipated when we had – and started to implement our plan to few of this line, you may remember we talked about 22% or so, 21%, 22%. Now I think we’re more successful than we ourselves thought at a point than we are running, I think, sustainably at this volume of cost on a level of, say, 24%. On opto was was one-time effect, a few one-time effects. So – but opto is very profitable, and you know, we had quarters in the past of 35%, 36%. Now it was 38%. I mean, 35%, for sure, is sustainable to think, again at this volume.

Okay.

What can happen to us, the both – the biggest danger for our profitability like for every companies if volume drops by nature.

Right. Okay, thank you so much for taking my questions.

Your next question comes from the line of Shawn Harrison of Longbow Research.

Hey, good morning. This is Gausia Chowdhury on behalf of Shawn. Just wanted to clarify then about the MOSFETs gross margin comments. So now that we are above that target that you had initially laid out, and understandably again because of the volumes. Is there a new target that we should consider going into 2018, or is it that 24% we should be thinking about?

I think, the 24% is the sustainable number, as I try to say. We had a positive singularity last time buy which was profitable so to speak and this helped the quarter. But 24% is pocket at present volumes, which is sustainable, I think.

Okay. Thank you. And then SG&A of $375 million for the year, I think, that’s a little bit higher than you are initially guiding to last quarter. Can you maybe discuss why the step up and how we should think about next year?

Well, I’m not aware that this is some – this is much more than – it must be minor deviation. In SG&A, you cannot forget the imprint of exchange rates, of course. And the euro is strong at the moment, indeed the part of our SG&A are third of the total in Europe being paid in euros. And as soon as the euro comes up, then of course, you see that there’s an increase in reality, it’s not an increase, it’s a consequence of the exchange rate. For next year, we must – we will see the inflation, I would say, approximately the rate of inflation, but this – again, we’re in process to define our budget.

Okay, great. And one last one for me, just circling back to a prior question, so the book-to-bills are still very strong and you said that you’re not seeing any kind of slowdown. Yesterday, one of your peers did mention a gradual traction in backlog. Are there maybe any segments that we should consider? I mean, the book-to-bill has did sound below one in some areas. So are you seeing a normalizing of funds within those market?

I suspect that I have to correct something. What is really strong still at the orders, the backlog growth you still see in our case, but of course, the backlog growth has slowed down, no question. But orders and sales are both on a very high level. Backlogs don’t grow forever by nature of things really. So – but we have a continuous strong backlog, which even grows even at this extremely high level, continues to grow slightly. But orders continue to be very strong. This is the same statement. Backlogs are up, therefore, orders must exceed sales, at least, a bit.

All right. Thank you.

Your next question comes from the line of Matt Sheerin of Stifel.

Thank you. Good morning, everyone. Few questions for me and sort of follow-ups, if I may. Just looking at your various markets segments – your product segments, where you talked about lead time issues and adding capacity. At what point do you expect to see capacity meet demand with these additions that you have going on and maybe by category, diodes, resistors, MOSFETs?

We have to say, it depends on the overall development of the market, of course. But my personal opinion is that in diodes, we will just continue – we take at the moment and acceleration in adding capacity. But even then, we expect this market, our sales there to grow. So it’s just an acceleration of an ongoing increase in capacity at the investment. So I don’t see a point where we really we’ll catch up to the demand. I think we follow closely the demand. In the case of MOSFETs I would suspect what we have now we have to increase to a degree and this will make it for next year, I believe personally. On the passives, it depends really on the line. We are very diversified in the line. Like with diodes, a little even more steep, we continue to invest since years into power inductors, it’s the same thing. We continue to invest. We just continue to work what we’ve done since many years. So we’ll see an ongoing demand and we’re gaining share in the automotive. I see a bright future and of course capital requirements. I don’t see this to catch up so easily. We just grow with our business. In this case, we just go ahead as we have done. Then of course, we have the traditional product. In the traditional products, we have clearly enough capacity. We are focused on seeing resistor chips. Resistor chips is also an area where we are surprised by our, I mean, I’d say, own success. In this case, I think, major step, which we have to do next year should make it then, I believe for sometime.

Okay. So – okay, and you’ve obviously been through several cycles where you have seen shortages and then capacity adds and then an inventory build and a correction. Do you see that same cycle playing out, or you think we see more of a soft landing versus different this time?

Mat, we have a long history together. There was only one time in my long time, when we invested too much. And this was in the year 2000 for emergency, you may or may not remember, otherwise our business grows. That means, even if I did too fast, if – which I don’t believe in this case by the way. Even if I did too much at a time, half a year later, a year later you needed anyway.

Okay, fair enough. And then just a question on the converts. Lori, you talked about a certain percentage being redeemable this quarter, given the share price. What are the plans there for the converts? Do you have concrete plans and what does that mean to interest expense and other things?

So at the moment, the redeemable theoretically or the redeemable, I should say, only for the coming quarter for the current quarter and the way we measure at the end of every period. So they may or may not be redeemable in the following quarter. And we don’t actually expect that they will be redeemed. It’s not very probable, because they trade in the separate market and it’s market activity. So holder conceivably would make more profits quicker by selling it into this market as opposed to coming to us to redeem them. Second of all, in terms of the instruments themselves, at this point in time, we don’t plan to change anything and effectively are holding these debentures. It would be premature, we need to evaluate potentially future tax and applications from President Trump, which are not clear yet. And so, at the moment, we don’t have any plans to do anything with those instruments other then to committed to hold them.

Okay, great. Thanks so much.

Your next question comes from the line of Harlan Sur of JPMorgan.

Good morning, Dr. Paul and Lori, and congratulations on the solid quarterly execution and strong free cash flow generation. You guys have done a great job on expanding the margins in semiconductors. And looking at the trends on the passives, resistors and inductors have been sort of flattish through the first nine months of this year, kind of in a little bit of a slight downward trajectory in capacitors, despite what is a pretty healthy volume shipment environment and constructive ASP environment. And I would also think that you guys are seeing some of the early benefits of the global cost reduction initiatives. So maybe, you can just help us understand kind of the gross margin dynamics in passives here?

Somehow we expected the question somehow – anyway. So a concerning resistors, I believe what has to be stated is, what has not grown is the percent. What has grown obviously is the dollars in terms of gross margin. And I believe, we commented on that before, we want to expand this good business we have, resistors. And in order to expand that we go to Asia and have some success there. But here you add customers that are still – provide you with a profitable business, but maybe not as profitable, but this is incremental and not as profitable as your base business. But we want to continue, because in the end of – at the end of the day, you need the dollars and not the percent, right, as matter of fact at all, yes. Secondly, in inductors, I think, they are variable, so their percentage did grow as a matter of fact. Of course, the depreciation grows together with the sales, because we have to invest, we can grow happily. So as a matter of fact, I don’t think there will be miracles in percent, but even more than in resistors, the dollars grow substantially, because we are taking share in automotive space, right. And this is a nice area of continuous growth. Capacitors is a different story. In capacitors, the volume increase did not take place, right? But if you look at our business with capacitors, this is a different beast, because only a relatively modest share of this capacitor business is of commodity nature. And what in such times like these, the commodity products go through the roof and not necessarily to specialty products. This is my experience since a long time. And our capacitor business is in principal for the main part a specialty business. I believe on the other hand, specialty businesses in the exciting times of decline also are not so vulnerable as commodity businesses. So we have to be more patient with our capacitors. It is 20%, it’s okay. But of course, we expect more on mid-term, we want to grow there. And I believe, in the case of capacitors, we simply need more volume and this we’re very much we’re in Asia active in order to find niches, because these are niche – technical niche product for this product line.

Great. Thank you for the insights there. And then there’s a similar question to perhaps last quarter. But I think still kind of relevant given the environment that we’re in. As you mentioned, the backlog continues to rise, but it’s – it grows a little bit right relative to the prior quarters. You’ve got some initiatives to increase capacity. You combine that with typically what is a little bit more seasonally weaker kind of second-half of the year. I would think that that would give the Vishay team a bit more horsepower to kind of catch up, as it relate to the supply demand imbalances. Do you feel like the team is making progress on stabilizing order lead times, as we get kind of closer to the end of this year?

Well, unfortunately, for our customers and ourselves, we want to safe our customers obviously well, as the backlog is not reducing, even growing slightly, even in October, it grew slightly.

Yes.

Not at the same degree as it did before, of course. The lead time situation has not become much better, obviously, because the backlog is about the same. So – but we work on it. I mean, we work on it, there’s no question. We’re adding capacities further.

Thank you.

And done already so.

Yes. Thank you, Dr. Paul.

Pleasure.

Your final question comes from the line of Jim Suva of Citi.

Thank you very much. I have a couple of questions. First, you’ve mentioned on your prepared comments a couple of times about some one-time purchases. Were those like end of product manufacturing purchases, or expedited purchases, or why won’t they occur again or what was unique about them?

No, as a matter of fact, this last time buy, I mentioned once, and this is in the MOSFET arena. In the MOSFETs, indeed, we discontinued and we announced that sometime ago a certain product line and there was a last time buy in the third quarter, which had a favorable impact on the results on the gross margins of this line. And you remember, we were at a very high – we came to a very high level and becomes gross margin, just wanted to be clear about it, this is not a sustainable level. But the 24%, which exhibits, which would have been there without this effect, I think, is sustainable at this volume. But this was the only time I mentioned last time buy.

Okay, I understood. And then it looks like your average selling prices across some of your different products are better than your guidance range, let’s say, 3% to 5%. So is that, you just want to stick with the historical of down 3% to 5%, I think it was down 2.7% in semis this quarter, like why not change your guidance range from that? Are you seeing that ASPs or expect them to revert to a more normal range next year?

Sooner or later, they will, there is no question about it. Soon – as demand may or may get not as high as it is today then you in commodity products, I mean, the experience tells us then the price pressure will get higher, but this is nothing, but natural.

Okay, I understood. My last question is – go ahead.

I said, we’re used to it, I wanted to say, and then we can cope at the time it comes, because we have ongoing cost reduction.

Okay. And my last question is, on your capacity expansions whether it be additional capital expenditures or ramping of your equipment of getting yield up higher. Can you walk us through the timing of that? Is that gradual? Is it all of a sudden in a couple of quarters you’re going to have a lot more capacity come on, or how should we think about the timing of your throughput?

It’s gradual, there’s no question. And the lines, I think I have mentioned. We want to do something on the diodes. We want to do something on the MOSFETs. We’re going to continue to do something like we have done and for many years in the power inductor arena, in the resistor arena, in resistor chips and in low WSL resistor types. This is basically where we focus on and this is a broad type of our offering. From a timing standpoint, disclose increments and this is – it depends very much on lead time. So I think we are going to continuously get these machines in, and of course, already as we talk, we have a couple of pieces of equipment underway. So it’s a continuous process.

Thank you so much for your details.

Thank you.

This concludes today question-and-answer session. I will now turn the floor back over for any additional or closing remarks.

Thank you. This concludes our third quarter conference call. Paula?