Ladies and gentlemen, thank you for standing-by. And welcome to Vishay Q3 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. I would now like to hand the conference over to your speaker for today, Peter Henrici. Thank you. Please go ahead.

Thank you, Stephanie. Good morning, and welcome to Vishay Intertechnology's third quarter 2019 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 2019 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 2019 financials and metrics. 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 quarter three of $628 million. EPS was $0.21 for the quarter. Adjusted EPS was $0.26 for the quarter. During the quarter, we continued our cash repatriation program. We repatriated $115 million to the United States, and paid withholding and foreign taxes of $18 million. These taxes have been accrued upon enactment of U.S. tax reform in 2017. The payment of these taxes is reflected as an operating cash flow on the statement of cash flows. Also, during the quarter, we recorded restructuring charges of $7 million, related to the cost reduction program we announced in July. I will elaborate on these transactions in a few moments. Revenues in the quarter were $628 million, down by 8.3% from previous quarter, and down by 19.5% compared to prior year. Gross margin was 9%, operating margin was 8.1%, adjusted operating margin was 9.3%. EPS was $0.21, adjusted EPS was $0.26. EBITDA was $91 million, or 14.5%. Adjusted EBITDA down was $99 million or 15.7%. Reconciling versus prior quarter, adjusted operating income quarter three 2019, compared to operating income for prior quarter, based on $57 million lower sales, or $55 million excluding exchange rate impacts. Adjusted operating income decreased by $21 million to $58 million in Q3 2019 from $79 million in Q2 2019. The main elements were average selling prices had a negative impact of $7 million representing 1.1% ASP decrease. Volume decreased with a negative impact $22 million, equivalent to a 7.1% decrease in volume. Variable costs decreased with a positive impact of $4 million, primarily due to improve manufacturing efficiencies and cost reductions, which more…

Thank you, Lori and good morning, everybody. As expected, Vishay’s financial performance also in the third quarter has been negatively impacted by a lower demand predominantly from distribution. Still high inventory levels in the supply chain keep burning orders and revenues. Manufacturing capacities had to be further reduced, causing temporary inefficiencies for some product lines. Vishay in the third quarter achieved the gross margin of 24% of sales and GAAP operating margin of 8% and adjusted operating margin of 9% of sales, GAAP earnings per share of $0.21 and adjusted earnings per share of $0.26. We continue to show a strong generation of free cash, which was $46 million in the quarter and this includes the taxes paid for cash repatriation of $18 million. Let me talk about the economic environment as we see it. Also, in the third quarter, global economy for electronic components remained on a reasonable level in general but continued to show areas of relative weakness like automotive globally and industrial in China. Inventories in the supply chain after having reached a record high into second quarter, started come down noticeably. Lead times for most of the product times have normalized. Backlogs remain high at this point but are underway to come down to more historical levels, book-to-bill ratios remain substantially below 1, actually 0.72 in the third quarter. The price decline for commodity products has returned to normal rates which of course is no surprise. Commenting on the regions, geographically markets also in the third quarter continued to develop rather differently. Economic conditions in the United States continued to be favorable supported by strong industrial, military and also automotive sectors and the POS remains at high levels. Europe is weakening, impacted mainly by a softening of the automotive and industrial market segments. Generally, there is…

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

[Operator instructions] Our first question comes from the line of Matt Sheerin with Stifel.

Yes, thank you and good morning, Dr. Paul, in terms of the bookings or the backlog and in semiconductors versus passive, it looks like the passive component side of the business is holding up a little bit better. Is that because that seems to be lagging the semiconductors which got hit earlier does it have to do with end market exposure. Could you just talk about that?

Yes, I believe that the share of commodity products in semiconductors in the case of Vishay is much higher than in the case of passive. Our passive business consists of quite a nice share of specialty products we have backlogs never went out so much. The nervousness of getting these Specialty Products was not as high as we have seen that in the other lines in the low commodity-oriented lines, and so they passive really behave differently. It's not that they lack, it never - the reason is much less to do that. That's the answer.

Understood, and it also looks like the pricing is starting to get hidden SMEs and not on the passive side. Are you expecting as you get into the new year, particularly with new OEM contracts that you're going to see more normal price declines in both areas of the business?

As you know, our main price decline happens at the commodity components really and this is predominantly semiconductors. We are in midst of negotiations for the next year and I can tell you, yes, there will be some concessions to be made, but nothing special. So, it's just the return of normal conditions as we see it.

Okay, and the capacity expansion sounds like you're pulling back on some production areas, but you're also continuing to add capacity. Could you tell us areas where you are adding capacity what product lines?

Yes, there are quite a few even. So, it's a matter of fact, I don't want to go through all my lines, but predominantly inductors. They have a major success in the market, which really is independent from this economic cycle at the moment and we can hardly add capacity fast enough power a power inductor that's the most prominent example. But they also have to think of most of that. We believe that the growth in automotive with our MOSFETs will be tried substantially going forward, and we have to take care of capacities, inside capacities as well as outside capacities. I think these two segments, they represent the places so to speak where we continue to look for more volume, otherwise we are in a good position, we have invested a lot in the last two years.

Okay. Thank you very much.

Your next question comes from the line of Harlan Sur with JP Morgan.

Good morning. Thanks for taking my question. On your broad-based segments, specifically industry and automotive, I know that these businesses are depressed levels, but off of a low based these two businesses are typically up sequentially in Q1. But you still have some inventory worked out and so, if we look at your backlog visibility for Q1 and maybe for three- and six-months customer forecast, do you think you’ll get some positive seasonality in Q1 of next year?

Well, we feel that in Q1, really everything is determined by the inventory burn off these space right. As a matter of fact, we see the inventory coming down which was good news as a matter of fact in the third quarter, and this will continue in the fourth quarter and we do believe also the first quarter will still be impacted. To the extent, the future it all depends also the development of POS. we believe that, we will see a real change of the direction in quarter two.

Got it, thank you for that. Thanks for the insights there. And then SG&A, your prior view I think on Q4 SG&A was $98 million, now you’re anticipating 95. Is that just continued discipline and belt tightening or are you getting some acceleration of the global cost reduction program sooner and - go ahead.

It will be cost reduction program, it’s still innocent for that so to speak. We’re just batting to different mix of defining. It’s not an impact, so we just save money to save clearly. We have seen sales coming down and the company’s disciplined that we started to save money as a matter of fact that we continue to do so.

And do you have an initial view on SG&A for 2020?

Yes, we do, we do. We will have less than the inflation, but we may want to, somebody helps me, so as a matter of fact, we believe SG&A in the area of 400 and this includes the inflation and the annual rates increase.

Got it, thanks and this is my last question.

Yes, we don’t have a finalized portion yet, this is the direction approximately.

Got it, okay. Appreciate that. And my last question, if I look back at the cyclical downturn let’s say 2015-2016, your current diode and Opto revenue run rates are bottoming, probably about those same levels as the last cycle but gross margins for diodes just like they’re above 400, 500 basis points lower Opto gross margins about 600, 700 basis points lower versus last cycle. What is the biggest difference is it just that utilization in this cycle are just much lower as customers' burn off inventories?

As a matter of fact, on MOSFETs, you have not mentioned MOFSETs because MOSFETs have changed to the other direction they are -.

That’s right.

Opto is a special case. Diodes I cannot see that, I believe Diodes principally speaking, it’s a specialty included, we had to reduce people this quarter and this cost money, similar effect and this is part of the P&L. diodes, we are very-very confident, they also improve their earnings power substantially over the years and continue to do so. We are, I am not satisfied with really what, I'm not satisfied with the development at our Opto lines. They suffered from lower volume, but also, they suffered more than they should have. They are focused very much on China and had some specific problems in China there. We believe that this line will turn down as we go, because they are forcing now motor sensors and coupler area, and on the way down the way to do that. So, they suffered more is no question, but this is the only line I would say that they suffered more historically.

Okay, great. Thank you, Dr. Paul.

Your next question comes from the line of Karl Ackerman with Cowen

Hey good afternoon everyone. Thanks for taking my question. A few if I may, Dr. Paul if we were too fast forward a few quarters ahead in which thence you could get some sort of distribution quarters will be at equilibrium, should we expect ASP to stabilize or increase from thence? I guess what should we expect from an ended market mix or specific product growth initiatives that's driving upward inflection and margins notices.

Sorry, I may not have understood completely acoustically. So, what was it, so as soon as the dust will be down, you said, right? It was some. Sorry, go ahead.

As we work through this inventory, challenge our distribution partners, what's your indication for ASP and margin for this will be beyond the beyond the simplicity of walking down at doors. What do you think the end market midst or specific product growth initiatives as you're driving up our complex?

I see no reasons that the mechanics after this normalization will be different from the mechanics which were there before this upturn which was partially leading to higher inventories. I believe that we are going to see very stable pricing in the wide field of our specialty products and you already see that happening now, like it always happened in the past is of is quite constant. And then of course, you will see some price decline on the commodity side, which also is starting to show. And this price decline we are used to, we are able since many, many years we show it even discuss it quite often that our variable margin remains constant, we can defend it, despite this price decline despite inflation backed by cost reduction and innovation. So, I see, I'm not concerned at all, we return to normal conditions and we are used to these conditions of course.

Thank you. I know your outlook calls for us, of course will decline in our fourth quarter, but do you expect any in markets to be up sequentially in the fourth quarter. And in addition to that some of your peers in supply chain has spoken about modest improvements in actually China automotive driven on the paper side as well as how power devices, industrial systems and servers. Just hoping, if you could describe what you're experiencing in those areas, and also what you're seeing across network infrastructure, specifically as we're looking at fourth quarter Q1? Thank you.

You are talking China in particular or...

For automotive, broadly, but China Automotive in particular, yes.

Okay. Well, in particular, automotive in general, from a standpoint of peak is produced is down in China to my understanding is down especially much. On the other hand, it's the old story bodies down in terms of pieces in terms of pieces of automotive cars produced does not mean necessarily for the electronic supplier, that he sees the same downtown. This has always been the case and also now we you see we would be to quite well in automotive and this of course, is the consequence of the fact that more and more electrification takes place in automotive and this is true for China also. In particular as I believe even in particularly in China because I believe this local suppliers that is relatively small models and want to become more sophisticated so I am not concerned I think this growing electrical constant context or the content will help us also to do quite well despite the production rates of automotive may not grow every year and maybe they are stagnating for the next years which is the common belief. China is not doing very well at the moment in total, but also this doesn't have to stay the same way. You can be also modestly optimistic that they come back to higher growth rates. Okay, this so -- I'm not concerned about automotive neither in China nor globally, it really continued to be our area of strengths obviously.

Thanks. Sorry, just a clarification on - curious of what you're saying with regard to network infrastructure and in addition to server as some of your peers had called out? Thank you.

Thank you.

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

Dr. Paul, do you think that once the inventory positions at distribution normalize be it the first quarter or sometime thereafter that you'll also see your backlog get back to that normal 2.5 to 3 months level. Is there anything I guess the question is that we should be going from distribution versus trend versus your backlog normalizing?

There was a never doubt on that. During the last two years we're boomed, we knew from the very beginning from the time we started to grow quite heavily in the year 2017, we from day one knew and not only Vishay everybody knew that this was partially driven by nervousness, not getting and not being able to get enough products. There is absolutely no doubt that this business which always typically has a three months backlog will go back to this level of three months backlog when the element is fierce out in the lead times as they have done it already have normalized. No question about it, the backlogs will go back to normal.

And I guess a larger picture question. Then the concern looming out there is kind of this made in China components initiative. And there's general theories on whether they tried to start more at the high end of the market, mid end, more commodity products and obviously a risk for semiconductor and components suppliers but what -- maybe you could talk about that risks that you see out there and whether there is any potential threats to the business over the next 12 months or a couple years from growing Chinese competition -- domestic Chinese competition.

We are Chinese also. So, as a matter of fact, if you refer - I must have a bad connection today. If you refer to our competitiveness in China vis-à-vis local suppliers and this is what I understood. We are also producing in China is a matter of fact. So, I'm not concerned there also, at the moment we go together with all the suppliers to China. We see the negative so far of an economy that doesn't grow so much anymore as it used to be. But I think there are also reasons why it's not so growing so much these days. And I believe part of the reasons may go away. And we will prove us China remains to be a center of our efforts in sales. It's the biggest market that exists for us. So, we will continue to go there, and we are quite optimistic and confident that we can compete in future

Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Your line is open.

Hi, can you hear me now?

Yes.

Hi. Thank you for taking my question. Dr. Paul, you mentioned that there's about two quarters worth of inventory that needs to be burned off. Did I understand correctly that most of that inventory is in Europe or is it geographically equally distributed across the region?

No. This is a broad distribution of too much inventory. No, no, it's not the case. So, it's broad.

And then did I understand correctly that pricing is getting more stable. And you see that continuing because if you still have two quarters of inventory, would that not put more downward pressure on pricing?

Now, first of all the prices on specialty products stable like they always have been, the pricing for commodity products which were rather stable in during the last two years of kind of shortage, they now start to go down like they always do. There is a continuous price decline on commodity products. And we see it now returning. But we have learned to cope with that as a matter of fact. At the times of inventory decrease is does not necessarily mean that there's more price pressure as a matter of fact.

Okay, and for my last question, do you have a view on industry supply versus demand? I mean, your competitors have always added capacity. So, do you have a view of how much total capacity exists now in the in the system and how does that compare demand? And would that impact pricing or the next six months or year?

You refer to the high capacity increases so far in our industry of the last two years, I suspect right. Of course, there is a lot of capacity put being put in place, no question about it. And we-- and Vishay is one of the ones. But I believe, and I was always the policy to be ahead of the demand at any point in time. We have to serve our markets when the markets want to have the volume. And I believe that the economy will turn up. I think we will need this capacity in a very foreseeable future, and this is true for my competition of course also. I do not see a direct connection. Of course, theoretically, it should exist, but I do not see a direct connection between the machine capacity available in the price pressure. I admit you can argue, but property I would -- no, I have not seen that. You can always find cases where somebody wants to finish line and we are also not innocent sometimes, but overall, this is not the driving momentum now.

Okay. All right. Thank you for taking my questions.

Thank you. There no additional questions at this time. I'll turn it back over to management for closing remarks.

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

Thank you. This concludes today's conference call. You may now disconnect.