Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. I'll now turn the conference over to Mr. Peter Henrici, please go ahead.

Thank you, Krystal. Good morning. And welcome to Vishay Intertechnology's third quarter 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 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 Web site 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 third 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 Web site, you can find a presentation of the specific third quarter 2018 information that 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 highlight and key metrics; Vishay reported revenues for quarter three of $781 million; EPS was $0.51 for the quarter; adjusted EPS was $0.60 for the quarter. All of the reconciling items between GAAP EPS and adjusted EPS are tax related, primarily due to the continuing evolution of our accounting for U.S. tax reform as permitted by SEC staff accounting bulletin 118. There were no reconciling items impacting gross margin or operating margin. During the quarter, we continued to execute transactions in response to U.S. tax reform. We completed the second phase of our program to repatriate some of our foreign earnings to the United States. The repatriation transactions resulted in payment of $65 million of foreign withholding and other taxes during the quarter, on top of the amounts paid in Q2. These taxes have been accrued at the enactment of 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 $781 million, up by 2.6% from previous quarter and up by 16.2% compared to prior year: Gross margin was 30.3%; operating margin was 17.7%. There were no reconciling items to arrive at adjusted operating margin; EPS was $0.51; adjusted EPS was $0.60; EBITDA was $175 million or 22.4%. There were no reconciling items to arrive at adjusted EBITDA. Reconciling versus prior quarter; operating income quarter three 2018 compared to operating income for prior quarter based on $20 million higher sales, or $27 million higher, excluding exchange rates effects. Operating income increased by $15…

Thank you, Lori and good morning everybody. Vishay, also in third quarter, continued to enjoy excellent business conditions in virtually all of its markets. Inventories in the supply chain, in general, show some increases but there are no tangible signs of a slowdown in our industry. Record volume and good efficiencies supported the further substantial increase of revenues and profitability. Vishay, in the third quarter, achieved gross margin of 30% of sales, operating margin of 18% of sales, GAAP earnings per share of $0.51 and adjusted earnings per share of $0.60. We continue to be a reliable generator of free cash. However, the year 2018 will be burdened by approximately $157 million of foreign cash taxes related to our announced cash repatriation. Let me talk about the economic environment. In general, the economic environment in the third quarter, as I said, continue to be very friendly. In particular, Vishay's key markets, automotive and the industrial, do well. The manufacturing output of supplier starts to catch up to market demand, but lead times still remained long, in general. Distributors have started to clean up backlogs of inventories mainly in Asia. Coming to the regions, all regions also in the third quarter, continued to do very well. The Americas show very robust economic conditions and an exceptionally strong industrial market. Europe is still driven by strong automotive and industrial markets, we are seeing some normal seasonality. Growth in Asia continues in particular in automotive and industrial segments. There’re some concerns starting to build in the market related to new U.S. tariffs. Worldwide distribution continued strong also in the third quarter. There was another slight increase of POS quarter-over-quarter by 1%, but the major increase of 14% year-over-year. So POS remains very strong. Distributors continue to enjoy high order rates with book to…

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

Our first question comes from the line of Shawn Harrison with Longbow Research.

This is Gausia Chowdhury on for Shawn Harrison. So first of all, if you look at the book to bill, with Asia at 0.69 and distribution at 0.80, it's surprising that sales guidance is not weaker. So how should we consider this dynamic, is there’s more risk maybe for the first quarter to be much more versus seasonal and maybe you’re just not seeing it in the fourth quarter?

Well, the backlog was extremely high, to say it even unheard of. And we expected since a long time some normalization, some book keeping, if I may say, on the side of the distributor, and this is taking place now. We watch always the 13 weeks shippable backlog. This has no impact yet, really not. So, we don’t see a major change of the situation except for some corrections, which were expected.

And then can you give us more color on what you’re seeing in China specifically. If there’s any concern or pockets of weakness within any of the end markets, or any area?

Well, there’s some concerns in China, if that’s right to say, concerning the new U.S. tariffs there. But this may also come -- lead to some slowdown in automotive, which you’ve seen. On the other hand, the slowdown is in pieces of auto, of cars. On the other hand, there’s an increasing electrification in the cars and we see no decline at all in the demands of our automotive customers, which cover also China. So, obviously, this increase in electrification of sets some reduction of the car -- of new cars, as a matter of fact. We do not see for us major changes in the trend. And again, distributors normalize at the moment their backlogs and operation this is going on, which doesn’t mean at all that the end customers takes this.

And then just one more from me about the lead times, I think you said that they are pretty stable. Are there any pockets of change that you’ve seen or are they increasing in any areas?

Not that easy answer to give for us, because we have a very broad portfolio and the situation is different in different segments of our portfolio. In general, the lead times are decreasing, no question, but they’re still very high, even to the point that we do have problems with certain customers, as you can imagine. Customers are still very keen to get products. The lead times in certain cases has come down, as I’ve said, because we increased capacity. On the other hand, overall, I would say, in my long career I haven’t seen such a situation as we have it to-date, concerning long lead times. It’s even in array -- I still have the feeling we do not fulfill customers this is why we add capacity and continue to do so.

[Operator Instructions] And our next question comes from the line of Ruplu Bhattacharya with Bank of America Merrill Lynch.

Dr. Paul, I wanted to start by asking about margins. Opto margins were at 36% very high margins. Do you think this is a sustainable level of margins going forward based on the demand that you're seeing? And the same for resistors, even resistors margins were pretty high at 34%. So if you can just give us your thoughts on that?

So, neither is the margin for resistors, inductors nor the margins for Opto value. We were at this level quite often to say it frankly. It all depends on the volume. And as long as the volume holds and this looks that way, we also will hold this margin. So, there is no question. It's a volume game. And again, this was not a spike. Resistors were -- it’s a good margin also for resistors at 34% we know that, but very often we were above 30%. And for Opto, we were always around 33%, 35%. So it's not a spike in that sense. Yes, the answer is if the volume holds, we can hold these margins.

And then overall in terms of supply and demand, I think you have talked about supply catching up the demand and normalization of backlog. Overall, you're adding capacity, competitors are adding capacity. When do you think industry supply comes into balance with demand based on what you're seeing in the market?

Hard prediction, because I don’t know exactly of course what happens in the market, I don’t have the crystal ball. But for sure, we are in the process but it’s a slow process of normalization, a slow process as I see it. And the end markets are strong at least for the standpoint of the electronic component makers, they are strong. And we do not see a decline in our key markets in automotive and in industrial. In fact, we are in midst of negotiations with the major automotive customers as the demand goes up for next year. So, we are trying to optimistic that there's good situation between choice and nearly two years now will continue. Sooner or later, of course, there is no demand, which will not be fulfilled, that’s true. But I think it’s a slow process.

And then in terms of the capacity that you're adding, which areas are you getting capacity? And if you can give us any guidance on how should we think about CapEx in fiscal '19. Do you think it will be higher or lower than this year?

I'll start with the later. It'll be somewhat lower, will be between $180 million and $200 million as we see it at the moment. But which is absolutely required to fulfill the requirements of our customers, as a matter of fact. And not exactly the $220 million, but not too much below between $180 million and $200 million and really we put -- we have to expand diodes like MOSFETs, we have to expand resistors, we have to expand also certain lines in Opto. So, it’s a broad expansion but believe me we will not go overboard.

And the last question for me. With respect to your authorization for convert repurchase. Is there a limit? Is there a certain dollar amount that you can repurchase?

Well, as a matter of fact, this is a very flexible thing. We go ahead and in a certain way opportunistically buyback these converts. As a matter of fact, this is what I would like to state. It's a very important program, I believe. And we are going to start fast.

Our next question comes from the line of Jim Suva with Citi.

Can you talk a little bit about pricing versus normal trends currently and going forward? Because I believe a lot of your contracts may be like more than one quarter in nature and so, they may be coming up for renewals. And I guess it’d be fair to hopefully assume that maybe pricing, going forward, will continue to be stronger-than-expected. Is this correct or can you help correct me if not?

You’re absolutely right. We are in contract negotiations with large automotive customers. But on the other hand, there’re contract negotiations with others throughout the year. Still, the big automotive guys there really are on the schedule now. And the price pressure is always maybe not as higher as it used to be, because it’s still -- there’re still shortages, to say it. And major customers, they want to be safe and we feel less pressure than we historically have felt.

Our next question comes from the line of Harlan Sur with JPMorgan.

Can you help us understand what are the biggest drivers of the gross margin decline in the December quarter? Are fixed costs rising as you guys bring in more capacity?

It has less shipping days, first of all, so it’s a volume thing. So really, if you took just the sales, which we’ve to forecast, not because of the length of orders it’s because of the length of shipping days and manufacturing days in that sense as compared to the third quarter. This is the major driver of all that. Basically also there, we’ve a positive development in SG&A, which was a singularity which normalizes to an extent in the fourth quarter. This basically makes a difference, there’s also some on inventory. We’ve still the inventory in the third quarter, some inventory, we are going to reduce inventory in the fourth quarter. These are the major drivers of the gross margin.

And maybe similar to the last earnings call, I am just curious as we headed into the fourth quarter, as you mentioned, we’re continuing to hear about some slowdown in industrial, and Greater China and various other aspects of geography there. Maybe similar to last quarter, I am just curious. What is the book to bill that the team is currently seeing right now thus far here in the December quarter?

Above 1, it’s better than in the third quarter. So it’s 1.12. I expected the question somehow. [Multiple Speakers] By the way, just wanted to add, and this positive book to bill is equally existent for semi conductors and for capacitors now.

And so, as we think about normal seasonal trends for you guys, obviously, industrial/auto always tends to be, I think seasonally stronger in the first half of next year. And so given the trend that you’re seeing positive book to bill, sounds like you’re still anticipating normal seasonal trends as you enter 2019?

We see no tangible signs for the downturn.

Maybe just my last question. Obviously, you guys are leader in diodes. I am just curious you're adding more capacity there. Can you just help us understand, what are some of the subcategories within diodes that you're still seeing some tightness?

Well, it's all rectifiers are tighthers and we have delivery times, which I am embarrassed to talk about even its long and we work against these long delivery times. And it's really on the rectifier sector very strong, but we are leading in rectifiers, maybe we have a good position, especially in automotive.

[Operator Instructions] And at this time, there are no further questions.

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