Good day. My name it Shelby and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2018 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. Mr. Peter Henrici, you may begin your conference.

Thank you, Shelby. Good morning and welcome to Vishay Intertechnology's Q2 2018 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 second 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. Additional factors are described in our earnings release for second quarter of 2018. Our estimates may change and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions, or other factors except as required by law. 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 specific second quarter 2018 information the CEO and CFO will be discussing on the call. Now, I turn the call over to Chief Financial Officer, Lori Lipcaman.

Thank you, Peter. Good morning everyone. I am sure that most of you have had a chance to review our earnings press release. I will focus on some highlights and key metrics. Vishay reported revenues for Q2 of $761 million. EPS was $0.65 for the quarter. Adjusted EPS was $0.54 for the quarter. During the quarter, we executed certain transactions in response to U.S. tax reform. First, we issued new convertible notes and used the proceeds to repurchase some of our outstanding convertible debentures, which were no longer tax efficient under the new U.S. tax law. Additionally, we began to repatriate some of our foreign earnings to the United States. All of the reconciling items between GAAP EPS and adjusted EPS are related to these transactions, or tax reform generally. There were no reconciling items impacting gross or operating margins. The repatriation transactions resulted in the payment of $92 million of foreign withholding and other taxes. Additionally, we made the first transition tax payment of $14 million as required under U.S. tax reform. These taxes have been accrued at the enactment of the U.S. tax reform in Q4 2017. The payment of these taxes is reflected as an operating cash flow on the statement of cash flows. I will elaborate on these transactions in a few moments. Revenues in the quarter were $761 million, up by 6.2% from previous quarter and up by 18.3% compared to prior year. Gross margin was 29.9%. Operating margin was 16.2%. There were no reconciling items to read -- right at adjusted operating margin. EPS was $0.65. Adjusted EPS was $0.54. EBITDA was $144 million or 18.9%. Adjusted EBITDA was $161 million or 21.2%. Reconciling versus prior quarter, operating income quarter two 2018 compared to operating income from prior quarter, based on a $44 million…

Thank you, Lori and good morning everybody. First of all, there is no change to prior quarters. Vishay continues to enjoy very excellent business conditions in virtually all of its markets and there is no sign of a slowdown. Record volume and good efficiencies supported the further substantial increase of revenues and of profitability. As we continue expanding critical manufacturing capacities. Vishay, in the second quarter, achieved a gross margin of 30% of sales, an operating margin of 16% of sales, GAAP EPS of $0.65, and adjusted EPS of $0.54. And we continue to be a reliable generator of free cash. However, the year 2018, will be burdened by approximately $164 million of foreign cash taxes related to our announced cash repatriation. Let me talk about the economic environment. The economic environment in the second quarter continue to be very friendly in practically all aspects. In particular, our key markets, automotive and industrial, keep growing fast. The market demand continues to exceed available manufacturing capacities in several product areas, leading to shortages of supply. High order levels continue to be driven by distribution in all regions. The economic environment allows more stable pricing, also selective price increase. Commenting on the regions. In fact, all regions continue to do very well. In the Americas, the economic outlook is strong and looks favorable for the quarters to come. Many industrial segments like robotics, lighting, and energy metering continue to enjoy healthy growth. The European market remains very strong and continues to be driven by the automotive and industrial segments. We also see very strong Asian markets for industrial equipment, energy infrastructure, and automotive electronic equipment. Concerning distribution, worldwide distribution also in the second quarter enjoyed quite excellent business conditions. PoS increased by 1% quarter-over-quarter, but by 14% year-over-year. Despite an inventory increase…

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

Your first question comes from Ruplu Bhattacharya from Bank of America. Please go ahead.

All right. Thanks for taking my questions and congrats on the strong quarter and guide. Dr. Paul, I wanted to ask you, you're guiding the 3Q revenues to be sequentially up 2%. Given that -- and given that this is a supply-constrained environment, how should we think about the seasonality of fiscal 4Q?

Seasonality exists, of course. We -- on the other hand, we are adding capacities through the year and the outcome of both elements is this 2% more, which we guide for. The seasonality principal continues to exist, of course, especially in Europe, but we add more equipment.

Okay. Okay, that's helpful. And then just an overall question on industry supply and demand. Given that you are adding capacity and probably some of your competitors are adding capacity, when are you seeing overall supply/demand comes into balance? Is it this year, or do you think it's well into 2019 before supply comes into balance with demand?

Well, I think I said it -- presently, and believe me if you look carefully, we see no tangible signs for any cooling off. That means we are in a cyclical business. Sooner or later, we are going to see a cycle, but at this point in time, we absolutely see nothing. Also, when nothing, which looks like a downturn. Also, if you look at the supply chain, I think the terms in distribution are very normal, very normal, even good. So, basically, at this point in time, it's hard to say. At least, we cannot see anything. This is my comment.

Okay. Well, that makes sense. And in my last question is, I think you mentioned that you're going to repatriate a net of $450 million of U.S. dollars in the third quarter. How should we think about the use of that cash and I will you restart the buyback at all?

Well, as you noticed, we are bringing back substantial monies to the U.S., which creates different position, we have concerning the liquidity in the United States. And we currently are in process to evaluate options to use it, this new liquidity beneficially for the shareholders. It's a new situation, we will address the situation. And this will take some time, but we are in process to do so.

Okay. Thanks again and congrats again on the quarter.

Your next question comes from Shawn Harrison of Longbow.

Hi everybody. My congratulations as well.

Thank you.

First question, just the substantial rise in the book-to-bill for the capacitor's business. Is that a function of demand? Or are you seeing some substitution related demand, maybe from ceramics versus more of your tantalum-focused business that's occurring as well, because that was a sharp increase in the book-to-bill ratio, sequentially?

No, these are more or less longer term orders which we see. I guess, you refer to the present shortage of MLCCs equity merger, right, which we can see on the market. If so, it is not us. Our MLCCs are not exactly the same product, a mass product, which is short of supply these days. We, since a long time have withdrawn to a specialty business on MLCCs, which in fact has a different technology, so it's a niche business. But we see strong interesting capacitors also, but this is not really MLCCs in our case. It's our broad spectrum of specialties, which we have.

Okay. And there is a follow-up, were there any singularities in the June quarter that boosted gross margin? Because at the midpoint, the guide is for gross margin to decline a little bit sequentially on higher sequential revenues?

You mean incremental performance, I guess, right?

Correct. And into the September quarter.

So, as a matter of fact, in quarter two, we have, basically seen the necessity to raise some fixed costs. We are running this company really at the edge of its capacity possibilities and this raises some fixed costs. The fixed cost in such a situation is not really constant, as a matter of fact. And this is really burdening a little bit the incremental performance. Also, in the second quarter, we had to raise the incentive accruals for the incentive payments. But I guess, you talked about the third quarter also, you asked about the third quarter? And what is your observation for the third quarter, sorry?

Yes, on higher incremental sales, the guidance for gross margin is down a little bit. And so I guess, it appears, you are continuing to add fixed cost, because, as you mentioned, you're running at the edge of capacity?

Yes, that's right. Basically, yes.

And then lastly, I know you've addressed this in the past, but you mentioned that backlog is beginning to normalize in semis, and a lot of that backlog is from longer term orders. Do you expect backlog to be canceled? Or does this just kind of level out the sales growth you would see in the semi's business for a quarter or two?

I added the information of July and in July, we are substantially above one, again it's 1.11 for the whole company. As it matter -- as it relates to semiconductors, partially it's our own doing. We are managing our backlog together with our customers. So, it's not really strong sign for normalization, in particular as July is strong again. So, again, I can only repeat, we do not see any signs, really for a downturn. Not even the normalization is partially based on a cooperation with our customers. And looking now, July was strong again.

Thank you.

Your next question comes from Matt Sheerin of Stifel.

Yes, thanks. Good morning everyone. Dr. Paul, the pricing environment, obviously, is better now. You talked about some selective price increases, which is impacting the numbers. Are we -- are you still -- I mean, we're hearing from other suppliers that they're just having discussions, particularly auto and the larger industrial customers going into next year. So, do you see the pricing environment continuing to get better, which could drive a better contribution margin for you over the next few quarters?

Right, indeed we started big negations now. And it's true that our position in these negotiations are better than in previous year. There's no question about it. But of course, it's a matter of negotiation and especially, when it comes down to these larger automotive accounts, we want to, also to defend our share there. We want to grow our share, we want to be heavily in designing involved. So, there are -- it's a give-and-take situation, but it's very true what you say, our position is better than it was.

Okay, and you talked about -- we saw the book-to-bill come down in a few of your segments, particularly the MOSFETs, which is negative and I -- but the backlog is still very strong and you talked about shortages. Is that a function of some supply coming online? So, some of that lead-times have gone from whatever 30 weeks to 20, so some of that backlog goes away, so we shouldn't read that much into it? And as you add more capacity in other segments, will we see a negative book-to-bill at some point? And should that be a red flag to investors? Or just a sign of more normalization?

Two comments. Number one, when I wrote this still true, of course. I haven't known July yet and July is stronger again, so we will take it with a kilogram of salt the whole thing. It's very true. This is not a warning signal whatsoever. This 0.98 book-to-bill on the MOSFETs was a part our own doing, as I tried to say before. Managing the backlog between us and optimize the backlog between us and customers. So at this point in time, Matt, we don't see anything. It's very strong, it continues strong. But, of course, at the end -- at a point in time in future, backlog will normalize and mathematically, you can -- and you know it like me, you can only normalize a backlog with a certain point -- a certain period of book-to-bill's below one. This is mathematically the case. So, sooner or later, yes, but not now.

Okay. All right. That's it from me. Thanks so much.

Thank you.

Your next question comes from Harlan Sur of JPMorgan.

Good morning. Thanks for taking my question. Obviously, demand continues to be quite strong. You guys came in right at the midpoint of guidance on revenues. I would've thought, Dr. Paul, that the team would have tried bringing up a bit more revenue capacity to try and bring the backlog down a bit and I also noticed that your CapEx was lower, at least, than what I was expecting. Did the team have issues procuring more equipment to expand capacity in Q2? I'm just trying to figure out, what if thought maybe revenues would have been better, and CapEx would've been a bit higher?

Well, it's not a matter of spending the money. You are absolutely right. There are lead-times on the equipment. But this not related to the second quarter, we don't see a special second quarter effect. In general, the lead-times of equipment, not only for Vishay, but for all of us has gone out, but to the latest related to the sales output of a quarter, I would not go so far. It's just the maximum we could produce with the pieces of equipment we had installed. The company's booked out at this point and of course, we are going to add capacity further, but it was not so that there were unexpected delays in bringing on capacities in the second quarter, it wasn't so.

Great. I appreciate the commentary there. Were you able to stabilize your lead-times in line with your stable backlog trends in Q2? Or are they still going up? And maybe if you can just help us of articulating some of the lead-times by product category, resistors, inductors, capacitors, MOSFETs, diodes, et cetera?

Most of the commodity products have very long lead-times, nearly unheard of long lead-times. But this is the situation, but you shouldn't forget that the larger customers have an ongoing allocation that an ongoing -- it's not so that everybody -- but if a person -- if a company comes new to Vishay, he has to wait a long time for most of the products at this point. And we can only add capacities, as you said before, as the people are ready to supply us the equipment and we can find and train people to operate them. So, we do our absolute maximum, but it's true that customers overwhelm us with orders, and not only us.

Thanks for that. And then my last question on the Asia/China growth initiatives. I think the metric that you guide throughout there, as you've grown your Asia, primarily China at an 18% CAGR over the past five years. I assume you're expanding above this CAGR rate now, maybe you can just help us quantify what China is growing at on a run-rate basis? And where you guys seen the biggest areas of growth? Is it China Auto, China Industrial, what applications? Thank you.

First of all I don't have a new number, but it's a very strong growth there, very strong. And it is limited not by us finding customers, it's limited by our capacity again, as a matter of fact. And the areas of the strongest growth are clearly the -- our strong areas anyway, which is automotive and industrial, as you said. There is no question. If I had more capacity, I could sell more to Asia, no question. But this is also true for Europe and this is also true for the U.S. at this point. But I don't want to mislead you. Asia continues to be especially in these two market segments, our basic trust we have in the future for growth, no question, but at the moment, everything in that sense equalized by enormous demand from all markets or geographies.

Thank you, Dr. Paul.

Thank you.

[Operator Instructions] Your next question comes from Jim Suva of Citi.

Thank you very much. its Jim Suva and all the details have been appreciated so far. Dr. Paul, is it fair to assume that many of your customers are on kind of longer term contracts and since the tightness in supply has happened, for say, six months now or pretty much year-to-date, that there are still multiple, multiple quarters left of quite favorable pricing because those contracts renew at different times?

Okay. The price pressure has not disappeared completely for sure, because especially with these large customer we are dealing with and they put their trust in us for long-term and we do the same vis-à-vis. There will be also price decline going forward, but I think we are in a much better position to negotiate today than we have been before. Where you really see a change of the price pressure, it's obviously in distribution, which is 50% of our total sales, approximately. In this case, it's very true, we can be more opportunistic and we are. But principally speaking, coming back to your point, of course, we also foresee, for a longer period, especially in automotive and I guess also in industrial, a major demand, which automatically will put us into a better position for also in future for price negotiations, this is also my opinion.

Great. And just to confirm, the automotive and industrial, many of those contracts are still being discussed or to negotiate and have not already been recognized in the most recent quarter to a favorable pricing?

No, it's absolutely true. These are running contracts.

Thank you so much for your details and clarification. That's greatly appreciated.

Thank you, Jim.

There are no other questions in queue.

Thank you. This concludes our second quarter conference call. Thank you for your interest in Vishay Intertechnology.