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

Thank you, Regina. Good morning and welcome to Vishay Intertechnology's fourth quarter and year 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 Vishay's fourth quarter and year 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 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 the presentation of the fourth quarter 2019 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 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's reported revenues for Q4 of $610 million. EPS was $0.10 for the quarter. Adjusted EPS was $0.13 for the quarter. During the quarter, we recorded restructuring charges of $17 million related to the cost reduction program we announced in July. Also during the quarter, we repurchased $3.95 million principal amount of our convertible debentures and recognized a US GAAP loss on extinguishment. I will elaborate on these transactions in a few moments. Revenues in the quarter were $610 million, down by 3% from previous quarter and down by 21.4% compared to prior year. Gross margin was 22.2%. Operating margin was 4.0%. Adjusted operating margin was 6.7%. EPS was $0.10. Adjusted EPS was $0.13. EBITDA was $60 million or 9.9%. Adjusted EBITDA was $78 million or 12.8%. Revenues in the year were $2,688 million, down by 12.1% compared to prior year. Gross margin was 25.2%. Operating margin was 9.8%. Adjusted operating margin was 10.7%. EPS was $1.13. Adjusted EPS was $1.26. EBITDA was $416 million or 15.6%. Adjusted EBITDA was $442 million or 16.6%. Reconciling versus prior quarter, adjusted operating income quarter four 2019 compared to adjusted operating income for prior quarter, based on $19 million lower sales, or $17 million excluding exchange rate impacts. Adjusted operating income decreased by $17 million to $41 million in Q4 2019 from $58 million in Q3 2019. The main elements were, average selling prices had a negative impact of $5 million representing a 0.8% ASP decrease. Volume decreased with a negative impact of $6 million, equivalent to a 1.8% decrease in volume, including a negative mix shift. Fixed costs increased with…

Thank you, Lori, and good morning everybody. 2019 for Vishay is for the business it's an Electronic components in general has been a year of correction. Volumes were up sharply vis a vis the strong years 2017 and in particular 2018 as a consequence of the required reduction of inflated inventory levels in the supply chain. Furthermore, quite drastically reduced manufacturing volumes had a strong negative impact on our profitability. Additionally, there were temporary inefficiencies coming from the adaptation of manufacturing capacities downward quickly and massively. Vishay in 2019 achieved a gross margin of 25% of sales versus 29% in 2018. The GAAP operating margin of 10% of sales versus 16% of sales in 2018. And adjusted operating margin of 11% of sales versus 16% in prior year. GAAP earnings per share of $1.13 versus $2.24 last year and adjusted earnings per share of $1.26 versus $2.12 in 2018. The generation of free cash also in 2019 remained on a quite excellent level. We in 2019 generated free cash of $140 million, which includes taxes paid for cash repatriation of $38 million. Quarter four clearly has been disappointing. The impact of an unfavorable product mix and of various negative singularities in variable costs, led to a lower than normal contributive margin. Furthermore, other income was lower than anticipated due to exchange rates. And our normalized tax rate for 2019 was higher than expected impacting also fourth quarter. Vishay in the fourth quarter achieved a gross margin of 22% of sales, GAAP operating margin of 4% of sales, adjusted operating margin of 7% of sales, GAAP earnings per share of $0.10 and adjusted earnings per share of $0.13. Let me talk about the economic environment. The economic conditions for our industry in the course of 2019 deteriorated very substantially, driven by…

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

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

Hi, good morning. This is Gausia Chowdhury on for Shawn Harrison. With regard to book-to-bill they look -- there looks like there's been some improvement, which is good, but how are they looking in January?

Well, approximately one. It's really relatively early in the year, but all the trends of recovery seem to continue at this point. I think you really have seen the worst in quarter four.

Okay, great. And then is there an estimate about how much inventory will come out in the March quarter? You know, do you see any need for restocking occurring even if it's beyond the March quarter?

Ironically, yes, distribution, despite having relatively high inventories. I would guess 70, 80 million, too high still approximately, which will be worked down in the course of the year, no question, but obviously a distribution needs product because it was really interesting to see that the orders from distribution, despite these relatively high inventories increased sharply in the fourth quarter and just continues.

Okay, great. And then just the last one for me. Gross margin was particularly weak in capacitors and diodes, and I think it took down another step down actually in diodes. How quickly do those come back just for the course of 2020? Any color would be appreciated. Thank you.

Yes, we are quite confident to get back to historical levels for sure, just by getting the volume problem behind us and be on the way. And secondly, for the quarter four, as I tried to say was really burdened by some singularities which will not repeat themselves for instance not in quarter one.

Your next question will come from the line of Ruplu Bhattacharya with Bank of America.

Good morning thank you for taking my questions. Dr Paul your guidance for gross margins for the first quarter has a range which is a slightly higher than what you typically guide instead of a 100 bps. I think it's like 140 bps. You said there were some one-time items that impacted gross margins in the fourth quarter. Are some of those continuing in the first quarter? Why is there, what are some of the things that are causing that higher range of gross margins?

First of all, I think it's the same range. We have, we always have plus minus $20 million in sales and both resulted in 24% gross margin. So it's, I don't see a deviation from -- from previous quarters maybe. But again, yes, the fourth quarter was the singularities and most of them, absolutely, most of them will go away in the first quarter, we are very confident. Will not repeat itself was very, very specific. So we can pinpoint what has happened a quite a number of these cases and we are really confident that this will not happen again in the first quarter.

Okay, thanks for that. My comment on the range was on the gross margins because I think you're saying 24% plus minus 70 basis points, whereas there's like, typically you -- you guide for a 100 basis points range. But anyway, I mean that's, that's fine. A one thing you mentioned on -- on the diodes, you said that ASPs were pressured in the fourth quarter. Do you see ASPs improving in that segment as well as overall? Do you think that the first quarter ASPs will be better?

I think the 7% is not typical for diodes, but the normal price decline historically for diodes is more like 3% -- 3.5% but we enjoy it two years of practically no price decline or a very little price decline. And this is all in the phase of a restart kind of. I believe diodes who has no question for me that this will enter into the same historical range of 30% per year price decline, which we are always able to offset by cost reduction and innovation.

And the last one from me, if you can just, given the environment -- the economic environment, what are your thoughts on your priorities for use of cash versus in terms of buybacks versus paying down debt versus any acquisitions. If you can give us your thoughts on -- on that as well. Thank you.

Yes. As a matter of fact, we have raised dividends substantially last year. And we at the moment, substantially was 12% I believe, 12% up. And on the other hand, we are continuously looking for acquisitions and we may be successful doing so, so to speak. So these, this is the -- the center of our interest at the moment.

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

Hey, thanks. Thanks, Dr Paul and Lori appreciate the questions, two if I may. First question is just on kind of on the competitive environment. So I think, some of your capacitor peers, are in the process of being consolidated. Do you view consolidation as a good thing for the industry with regard to pricing? Or do you view it as a bad thing? Given a Taiwanese an US provider combined would seem to become a bit more formidable competitor, in industrial capacitors, resistors and inductors? And I have a follow-up.

Could imagine that for the purchasing departments of the customers, this is not a good development, but for us, for Vishay it's absolutely harmless because especially in capacitors we are practically exclusively in niche businesses and this has absolutely no impact this concentration in this case, maybe not in all the cases, but in capacitors in particular, this has absolutely no consequence for our business.

Appreciate that. With regard to pricing it seems pricing clients are more in line with historical rates. However does your March quarter outlook imply an improvement in pricing from passive components following the volcano in the Philippines that is perceived to have an impact? I mean global electronics supply chain?

Yes. I think on the Philippines we are back to normal was always very low priced decline historically because of the high share of specialty products in all our passives, really, not only in capacitors but in all the passives. More critical of course is commodity products in this predominantly is diodes and MOSFETs. And in this case it's very true we have seen quite heavy price decline in the fourth quarter, which I believe is the starting effect of things getting normal. I believe there's no reason why this would not end up in a trend, which we have seen since years, which is about 3% for diodes and say 5% for the MOSFETs. I'm quite confident that this will come to that point, whether this will be exactly in quarter one or a little later, but we have cost reduction anyway we have cost reduction efforts on going so we can cope with that. But long term, I do believe that the old trend, which is, as I said, approximately 3% for diodes, say 5% maybe a little more for MOSFETs would come back.

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

Thank you. And good morning, just a question Dr. Paul. Looking past Q1 it sounds like, as you said, we certainly are at the bottom of the cycle here and starting to turn and obviously how end demand plays out is a big question. But as you look to the end of the year, particularly across your end markets do you think it's possible for Vishay be able to grow revenue year-over-year in Calendar '20?

Absolutely, but I believe it depends really -- may I say that directly, to which extent the Chinese development, which we currently see will hit the economic recovery, nobody knows that yet, so I also don't know. We believe in a good year, 2020 because we are bringing down manufacturing, you know what, what it means you can never be perfect and we had additional costs in the year, which by nature in a growing economy will not be -- will not reoccur. So I am confident whether we can be better in sales, depends of course on the environment, which is have to see at the moment forecast.

Yeah. And appreciate that you don't have a lot of granularity in terms of impact from the coronavirus on your business or the supply chain. But could you talk about your China manufacturing or what percentage of your revenue is derived from that? And have you seen in your own production facilities extended shutdowns just what you're doing to respond to that?

First of all, there is a share, a nice share. Really, it's for the most part in the semiconductors. There are also some lines, like, especially in the inductors, the passive side, but the, but the bulk of the business that comes from Chinese factories is in the semiconductors, in diodes but in particular also in the MOSFET. So this is a high share in both cases that come out of China, concerning the shutdown yes, the -- the plants currently are shut down, but that is a prediction and we are can believe it I think. This is our assumption that this will be reopened next week. But again we are in the hands of course of the officials, no question about it.

And if this issue is -- is extended, I know you've gotten MOSFET facilities in Europe. Is that something that, the other facilities will be able to pick up that slack if indeed the shutdowns are extended?

Well, we don't take the same. We have utilized our capacity worldwide in all cases to a large extent. Some mitigation can happen through the plants, especially in Taiwan, but, not to the full extent. But I believe that, at least this is what I know. Nobody knows exactly that China, they're many signs they're back -- on the way to normal.

Okay. And just a question regarding that incremental $15 million in costs that you expect to take out beginning next year. Lori, is that an OpEx or SG&A item? Or is that in COGS or a mix?

So it's about 50/50 between the cost of goods sold and the operating expenses. And again, that reminds you, we anticipate the full and back -- full impact only in Q1 of 2021 because many of the volunteers leave quite late in the year.

Got it. Okay. Thanks very much.

[Operator Instruction] Your next question will come from the line of David O'Connor with Exane BNP Paribas.

Great. Good morning. Thanks for taking my questions. Maybe two from my side. Dr. Paul, firstly your Q4 appears to be the bottom and orders into January above one. Could you still talk about $70 million to $80 million to come out with inventory? Just wondering, can we get back to from Q1 on, can we get back to a normal type of seasonality? That's my first question. And then maybe a question on the CapEx side of things for Lori. The 2020 CapEx, and you can split that out? And also you intend to spend that or -- and what areas within the -- the capacity expansion that you're investing in? Thanks.

Well, looking at -- in the future, in the inventory story, I think we do not have to change what we said last quarter. We expected things to get normal and after the mid of the year, maybe even in the course of the second quarter. But at the time we said it, of course, it depends really on the Chinese development must say that. I don't want to hide behind that, but I think, I want to reconfirm what we have said last quarter. We expect things to be normal from an inventory standpoint in the pipeline by mid of the year. And from a standpoint of the one that split me, I'll say that for the way, the -- the one for the CapEx for next year, it'll be split approximately like this year.

Understood, thank you.

And at the time, we have no further questions.

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

Ladies and gentlemen, this does conclude today's call. Thank you all for joining. And you may now disconnect.