Ladies and gentlemen, thank you for standing by, and welcome to the Vishay Q2 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Peter Henrici. Thank you, please go ahead, sir.

Thank you, Ashley. Good morning, and welcome to Vishay Intertechnology's Second Quarter 2021 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 second quarter 2021 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. On the Investor Relations section of our website, you can find the presentation of the second quarter 2021 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 reported revenues for Q2 of $819 million, a quarterly record. Our EPS was $0.64 for the quarter. Adjusted EPS was $0.61 for the quarter. The only reconciling items between GAAP EPS and adjusted EPS are tax related. There were no reconciling items impacting gross or operating margins. Revenues in the quarter were $819 million, up by 7.1% from previous quarter and up by 40.8% compared to prior year. Gross margin was 28%. Operating margin was 15.3%. There were no reconciling items to arrive at adjusted operating margin. EPS was $0.64. Adjusted EPS was $0.61. EBITDA was $163 million or 19.9%. There were no reconciling items to arrive at adjusted EBITDA. Reconciling versus prior quarter, operating income quarter 2 2021 compared to operating income for prior quarter, based on $54 million higher sales or $55 million higher excluding exchange rate impacts, operating income increased by $28 million to $125 million in Q2 2021 from $97 million in Q1 2021. The main elements were: average selling prices had a positive impact of $8 million, representing a 1.0% ASP increase. The volume increased with a positive impact of $22 million, equivalent to a 6.1% increase in volume; variable costs remained flat in total; cost reductions and volume-related efficiencies offset increases in materials, services and metal prices; fixed costs remained flat in total, in line with our guidance. Reconciling versus prior year, operating income quarter 2 2021 compared to adjusted operating income in quarter 2 2020 based on $237 million higher sales or $215 million excluding exchange rate impacts, adjusted operating income increased by $84 million to $125 million in Q2…

Thank you, Lori, and good morning, everybody. Also in the second quarter, the steep upturn of our business visible since October of last year continued. We keep ramping up critical manufacturing capacities, increasing revenues and profits further. Quite excellent plant efficiencies, the impact of price increases and our traditional discipline in fixed costs support the financial results. Vishay, in the second quarter, achieved a gross margin of 28% of sales, an operating margin of 15.3% of sales, earnings per share of $0.64 and adjusted earnings per share of $0.61. We, in the second quarter, generated $85 million of free cash, and we do expect another solid year of cash generation. The economic environment for the electronics business continues to be exceptional with sales and backlogs at a historical high. Virtually all markets currently are in excellent shape, and supply chains continue to be rather depleted. Despite all efforts to expand manufacturing capacities quickly, lead times for many product lines have stretched out rapidly and massively. Price pressure presently is very low, and selected price increases are being implemented, partially required to offset increased costs for metals and transportation. Commenting on the regions. We see a continued strong performance in Asia and in the Americas. Europe is somewhat lagging due to temporary supply problems in the automotive sector caused by a lack of ICs. The Industrial segment drives demand in all the regions. Distribution in all hemispheres continues to be extremely hungry for product. Talking about distribution, global distribution continues to get overwhelmed with orders. We see a record high since at least 15 years. POS in the second quarter was 5% over prior quarter and a remarkable 45% over prior year. After massive increases in the first quarter, POS increased further in all regions, by 3% in the Americas, by…

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

[Operator Instructions] And your first question comes from Karl Ackerman with Cowen.

Dr. Paul, maybe a question for you first. One of your peers last week at an Analyst Day articulated they will deemphasize discrete products that could expand your TAM, I think, in excess of $500 million. Does your third quarter outlook include some initial benefit from that opportunity? And if not, what sort of engagements have you had that might allow you to gain a stronger foothold as your industry peer deemphasizes areas of overlap for you?

First of all, we live in times when the market opportunities do not really determine the sales level. At the moment, it is indeed the manufacturing capability that determines the sales level. This is really the case at the moment. It's not always so. But in this phase of our business, that's clearly the case. So really, it's manufacturing that determines the level. Of course, we are a broad liner, as you know, and we are also proud to be in practically all relevant market sectors present. And I think I said it, we are going to increase further our technical representation there. So we are going to add engineers in the field, which we have done so a couple of times. It's not new. But we want to increase further in order to participate in all these various programs, in all these industry segments, but we are very well represented in automotive especially. I think we are very close to the pulse of the industry. And I think we are well positioned. So whatever happens will benefit with Vishay.

I appreciate that. For my follow-up question, you indicated that you would be spending a little bit more on capacity expansion. I think rightfully so, given backlog is extending closer to 9 months for at least your diodes and Opto products. At the same time, you've got nearly a record level of cash on the balance sheet. I also believe, the last call, you had indicated you would be firming up your capital allocation strategy around this time frame. And so I was hoping you might address that today whether -- how are you thinking about share buybacks and/or perhaps dividend, just given the record amount of cash that you have today as well as what appears to be a very strong outlook, not just for the third quarter, but in the interim period as well.

Okay. Well, first of all, this is not the answer to your question really, but just to lay the groundwork, this higher CapEx, which we are showing this year, is very likely to continue for a few years as a matter of effect. So we have to spend more capital exploiting the chances which we, I think, undoubtedly have in the future, undoubtedly. Concerning what you said, what we want to do with all the cash produced, which still will be left over, of course, no question. And you are not mistaken. We are indeed in midst of a discussion how to return more to the shareholders as a matter of fact. A final decision has not been taken in which way we are going to do it. But the Board, in particular, will deal with that in a very foreseeable future. Cannot say more at this point in time.

Your next question comes from Ruplu Bhattacharya with Bank of America.

My first question is on gross margins. Can you help us quantify the 150 basis points of improvement that you saw in the second quarter? How much of that was volumes? How much of that was mix or FX or commodity costs? If you can just help us quantify like what are the different impacts that you've had that helped the 150 basis points?

As a matter of fact, the biggest impact in our case is always volume, that's principally the case. On top of that, I think we also had additional efficiency gains that helps to offset costs, which are high at the moment in metals and grew further and in also transportation, which are on a high level. These are the major issues. I think this is basically -- the prices, of course, helped. We were increasing some prices. You know our industry is the industry of price decline in a way, and our cost reduction must be faster than that, which normally is, at least compensating that. As soon as the price declined -- the pressure of price decline mitigates and this is the time where we can see that as announced, then of course, the cost reduction wins, so to speak. And you see a better performance overall. So I believe it's the volume, it's the prices and the efficiencies.

Yes. That makes sense, Dr. Paul. I just have a couple of quick follow-ups. On -- in response to one of the prior questions, I think you said CapEx should also remain high in the next couple of years, given you want to add capacity and take advantage of that. So I think you guided $250 million for fiscal '21. Should we expect the same level in fiscal '22?

I would say on our base business, as a matter of fact, we would be -- we would expect it to be on the same level. We have not finalized any budget in this case. But I would suspect if we didn't do any special project on top of everything, I believe the $250 million is a good guess for Vishay next year also.

Okay. And if I look at this year, so far, you've done about $60 million of CapEx. And so the $250 million for the full year, like you said, is an acceleration in 3Q and 4Q. How should we -- when do you think that CapEx comes in? When do you think that will be complete, that capacity?

We -- first of all, this is always a disease that during the year, the CapEx really is more towards the end of the year, we know the effect. It's always the same every year. But I'm pretty sure that we are going to spend this. And I think for turning capacity, we are adding capacity. I think we will go into the new year for all Vishay with a 5% higher capacity, and we will go a year later into the year '23 than with a 15% to 18% higher capacity.

Okay. That's helpful. Appreciate that. And just for my last question, if I can ask about price increases. It's encouraging, after many quarters, you've had sequential price increase this quarter. Do you think that can sustain in the September and the December quarter? Do you think prices continue to go up?

Yes, we do. We clearly do. I would suspect that what happened in Q2 will also happen in Q3 again.

And is that a response to cost increases, or is that because the end market demand is higher? Or both?

The possibility, of course, comes from the demand, but also is driven and required partially by higher costs, in particular on the metals and also on transportation as a matter of fact.

[Operator Instructions] And your next question comes from Matt Sheerin with Stifel.

Dr. Paul, I wanted to ask about the strong distribution sales, both in the point of sale and sell-through in distribution. I guess one question is, it looks like distribution inventories are still lean, but do you have a sense of the distributor customers' inventories? Whether they're starting to build inventory or that's flushing through in terms of their end products?

Well, you know very well, Matt, we don't have a reporting there. So it's our impression at best. Inventory is very lean, as you indicated. So lean as I personally cannot really remember having seen it like that. Concerning the end customers, I can only give you our impression, of course, we are discussing that. Is there a hidden inventory built somewhere? And really, we don't see it. We don't see it. As a matter of fact, in automotive, in particular, we have 50% of everything through consignment stocks and the temptation to build in-house inventories, therefore, is much lower. But even in the other product lines, we are not under the impression that inventory builds at OEMs as a matter of fact at this point.

Okay. And then I saw that your automotive segment was down roughly 5% sequentially, in line with some of your peers. Is that just a function of the issues you talked about in terms of production? And as you look into the rest of the year, do you see that picking up as sort of June marks the bottom, if you will, and you expect revenue there to pick up?

Well, it exactly concerns us to. So we had some discussions with the large customers. And as a matter of fact, we let me reconfirm it is clearly and only the lack of ICs, which they haven't. As a matter of fact, the demand for cars is there. The lead times are long, and they really wait for a better supply in ICs. So it's as simple as that. And we do expect that all these cars that are on order will have to be built in as soon as this shortage is over. When this will be, I don't know. We expected it to be already better in the second quarter -- in the course of the second quarter, third quarter. But obviously, it's another delay. I would suspect this will track into quarter 4 at least.

Okay. And just lastly, I'm concerning your commentary about book-to-bill and backlog. It looks like backlog in most of your product areas are at record highs, yet the book-to-bill is coming in a little bit. Is that just a function of the higher sales levels that you're at? Or is there anything to read into that?

I think the lead times have come to a point that it's quite useless to put on top of that orders with a book to -- creating a book-to-bill of close to 2, 1.5 to 2. It's just a normal effect of really full capacities, I believe. The business is as hot as it was. It was kind of misleading in a way.

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

Thank you for joining us on today's call and for your interest in Vishay Intertechnology. This concludes our second quarter 2021 call.

That concludes today's conference. Thank you for your participation. You may disconnect.