Good day, and thank you for standing by. Welcome to the Vishay Q3 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 one of your speakers today, Mr. Peter Henrici. Please go ahead.

Thank you, Vic. Good morning, and welcome to Vishay Intertechnology's Third 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 third 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 a presentation of the third 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 Q3 of $814 million. EPS was $0.67 for the quarter. Adjusted EPS was $0.63 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 $814 million, down by 0.7% from previous quarter and up by 27.1% compared to prior year. Gross margin was 27.7%. Operating margin was 15.2%. There were no reconciling items to arrive at adjusted operating margin. EPS was $0.67, adjusted EPS was $0.63. EBITDA was $162 million or 19.9%. There were no reconciling items to arrive at adjusted EBITDA. Reconciling versus prior quarter, operating income quarter 3 2021 compared to operating income for prior quarter based on $5 million lower sales or flat sales, excluding exchange rate impacts, operating income decreased by $2 million to $124 million in Q3 2021 from $125 million in Q2 2021. The main elements were: Average selling prices had a positive impact of $10 million, representing a 1.3% ASP increase; volume decreased with a negative impact of $4 million, equivalent to a 1.3% decrease in volume. Variable costs increased with a negative impact of $12 million, primarily due to increases in metal prices as well as materials and services and not completely offset by cost reductions. Fixed costs decreased with a positive impact of $4 million, in line with our guidance. Reconciling versus prior year, operating income quarter 3 2021 compared to adjusted operating income in quarter 3 2020, based on $174 million higher sales, or $172 million excluding exchange rate impacts, adjusted operating income…

Thank you, Lori, and good morning, everyone. Also in the third quarter, we operated under quite excellent economic conditions characterized by extremely high backlogs. We continue to expand critical manufacturing capacities in order to prepare ourselves for further growth. During the quarter, we did experience some localized shortages of labor impacting the manufacturing output. There were strong financial third quarter results. We had a gross margin of 27.7% of sales and operating margin of 15.2% of sales. Earnings per share were $0.67 and adjusted earnings per share, $0.63. Vishay in the third quarter generated $79 million of free cash, and we do expect another good year of cash generation. As I said, the economic environment for electronic components remains exceptionally good with backlogs at a historical high. Except for automotive, all markets continue to be in excellent shape and sales are basically limited by the manufacturing capacities. The automotive sector is expected to accelerate again over the next quarters with current supply problems getting resolved step by step. The supply chain continues to be rather depleted in general. We see extremely long lead times and shortages of supply. Price increases are being implemented in general also to offset increased inflationary costs for metals and for transportation. Concerning the various regions, not so many differences. All regions remained exceptionally strong. POS in all regions remains close or above all-time highs, and distribution in all regions remains hungry for products every year, no change. Talking about distribution. Global distribution continues to get overwhelmed with orders. POS in the third quarter continued on a record level of the second quarter, running 34% over prior year. POS increased versus Q2 by 5% in the Americas and by 3% in Europe. Asia was slightly down by 2%. Americas and Europe are at an all-time high.…

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

Your first question comes from the line of Karl Ackerman.

I wanted to first begin with your gross margin guide. I was hoping you could discuss the variables to your gross margin guide. I understand the higher depreciation impact. But are there any end-market impacts that may be impacting your outlook? I ask because favorable pricing and your cost reduction efforts in your MOSFET business appear to be supporting improved profitability.

Yes. In fact, it's all happening, as you say. We have nice volume, which leads to good efficiencies. We are raising prices accordingly, of course, within the contracts we have, of course. And on the other hand, we do see inflationary impacts on our materials and the transportation, which is not new, but the third quarter was another increase vis-a-vis the second quarter in these costs. And in that sense, the variable margin in the third quarter has suffered a little vis-a-vis the second quarter. We will increase prices further as we go forward. And of course, we continue to work further on cost reduction efficiencies. So going forward, I see that we can offset or better than that, the inflationary impacts. Concerning manufacturing fixed cost, there's nothing to report. We came in better than we thought. And also depreciation was not a surprise whatsoever. Of course, we invest more, so there's a slow increase of depreciation. Did this answer your question?

It does. For my follow-up, it's nice to see the growing backlog despite, I think, general investor fears of the moderation in end demand. I'm curious if you could distinguish whether the growth in backlog is coming from OEMs or if it's tied more toward distribution? I ask because I'm trying to understand whether the mix toward OEMs may be less likely to get pushed out or canceled for those who are worried about the growth rate as you look out into 2022?

We see it on both sides. But distribution, in this case, also leads, it’s clear. As a matter of fact, distribution, I tried to say it in my words, is still very hungry for products, and they are running very well. In fact – so it’s both, to summarize again, but the distribution is stronger, in that sense.

Your next question comes from the line of Ruplu Bhattacharya.

Maybe just to follow up on the last question, Dr. Paul. I wanted to ask about inventory in the channel. Some component suppliers have talked about a buildup of inventory. So in automotive, maybe at the OEMs and in industrial, maybe in the channel. Are you seeing any build above inventory in the channel? What are your thoughts on channel inventory? And how do you see that trending over the next couple of quarters?

Ruplu, there is a certain slight buildup of the inventory in the distribution channel, which is partially just from the price side, determined by the price side and not necessarily by more pieces. Concerning the OEMs, you never know exactly. But as a matter of fact their reaction in better terms on big customers, how they react on shortages, how they escalate cases, does not really support the idea that there's a lot of hidden inventory. So my opinion is that also this channel is relatively empty still.

Okay. You mentioned your revenues were impacted because of labor shortages. What was the impact -- what was the negative impact to your revenues from labor shortages this quarter? And do you expect any impact in the 4Q?

Approximately $20 million, approximately. And of course, there are certain points where it hits hard. One of them was Malaysia. And I said, hopefully, this was understood. People are now vaccinated completely in this plant, so this one will not repeat itself. But we have labor shortages in other places also. We work on it. You can never exclude completely that it happens again, but we work on it. And I think we are in better shape now.

Okay. Got it. And just for my last question. Can you talk about your priorities for cash? How -- do you see any opportunities for inorganic growth in this environment, either on the passive side or on the active side? And how should we think about buybacks and dividend, going forward?

Well, first off, yes, Ruplu, I think I said it. We have decided for a major project. This is for the MOSFET internal capacity. It's a big project. And besides that, Vishay is strong, we can definitely handle that, staying cash positive and nothing has changed. We are evaluating and driving at buyback of shares as a decision of the Board. In fact, the decision will be taken beyond the way, so to speak, finally, right?

And M&A, any thoughts on inorganic growth?

Well, we always look around. And there may be opportunities, we see some opportunities, and we are also working on some opportunities. But they are not in a situation that I would like to talk completely about them.

Your next question comes from the line of Matt Sheerin.

Dr. Paul, I just wanted to talk -- just ask about the guidance that you have for the fourth quarter, that range. What gets you to the low end or the high end? Is that really contingent on your ability to staff and to improve the labor issues that you're seeing? Is that really -- is it really just your production capabilities as opposed to end demand?

No, it's really only and exclusively, only and exclusively our ability to manufacture. It's really -- we are together since a long time, Matt. This is such a clear situation. I've hardly ever seen such a clear situation. If I had a magic wand and could produce more, I rightly could sell it immediately and people would love me for that. But there are limitations and there are labor shortages. As I said, we are working on it. Partially, it's COVID-related. In this case, I think in Malaysia, we were able to resolve the situation. But in other plants, you have just local situations, which makes it difficult to get the amount of people in. I think we are getting in better shape as we go. But to be honest, we were missing people in quarter three, no question. But as you're -- answering your question again, it's just the availability of labor, at this point.

Okay. And from where you stand now, are you confident that in terms of the midpoint of that guidance that you should be able to deliver?

Yes. Yes. Well, we were, of course, also convinced otherwise you wouldn't have said it in the quarter three. But as a matter of fact, I think in certain cases, and I'm repeating Malaysia, which was always a pending thing. This is resolved now. So, there are -- it's not everywhere, but in certain places, you have the tendency to be short on labor, but we are working on it. And I believe we are in a better shape in quarter four.

Got it. As you look to Q1, and I know it's hard to look beyond the quarter here given all the various issues going on. But typically, I know you're up sequentially in Europe and in North America. I'm just wondering, is there more capacity coming online? Or do you have the ability to actually fulfill that demand and be up sequentially in the first quarter of next year?

Matt, we expect higher sales in quarter 1 than in quarter 4. Does this answer your question? Short answer, yes, there will be more capacity and also, I think we can progress in staffing, but also more capacity. So we do expect higher sales in the first quarter than we forecasted and guiding to in the fourth quarter.

Got it. And just lastly, I know someone just asked about your capital allocation, particularly share repurchases, and I know that's been a big issue with some of your investors. It sounds like you've got a plan in place. So any time line in terms of when you'll share that?

Well, we are working on it Matt. Save me from a concrete answer, we are working on it. The Board will decide in the foreseeable future.

[Operator Instructions] Your next question comes from the line of David O'Connor.

Maybe one or two, Dr. Paul, on my side. Just firstly, on the -- you called out that the metal price impacted some of the -- of your costs, which fed into the gross margin. What is your ability to pass through greater price increases that you're seeing from your metal suppliers? Give it just -- it sounds like you have been increasing prices, but maybe it's just a timing thing that you're still seeing that as a headwind and is that going to turn as you go through Q4? That's my first question. And then maybe more longer-term, a question on the 12-inch fab in Germany. How should we -- can you help us understand the kind of the big -- the big picture level, what is the overall CapEx required for that? What is the annual revenue capacity that could, that manufacturing end could generate and then fully loaded. Just kind of with an eye on the return on invested capital of that side and how you think about that.

Okay. Well, concerning the price increases first. We have raised prices already in quarter 2 versus quarter 1, and we continue to do so in quarter 3 versus quarter 2. And we will continue like that. You're absolutely right. It's a process. It's a process because we are partially in -- we have contracts with the customers and we do not break contracts. We don't do that. And on the other hand, we have a broad product portfolio. Sometimes, the process could be a little faster. I must admit that. But as a matter of fact, we are underway. We will continue to raise prices and we are forced to do so, because the inflationary effects, especially on metals and transportation are quite substantial. So it will continue. We'll continue at a rate, as you said, approximately, as you have seen in the last 2 quarters, which will help us. Because in parallel to that, we have our efforts on cost reduction, which continue to take place. Was this answering the first part of your question?

Yes, that's very helpful.

Okay. Now to the wafer fab, very important for us. And in fact, our automotive customers, and we are particularly strong in automotive. They expect a certain independence of foundries. We are relatively independent now, but there's enormous growth rates, especially for MOSFETs in automotive, which we foresee and which are forecasted in a believable form, force us also to go to step. We go to Itzehoe because we have a good team there. We have an established operation there, and it will cost us approximately, don't nail me down on the $1 million, $250 million, $260 million over 3 to 4 years. Still, Vishay now is a quite reliable supplier of free cash. We will stay cash positive every year. we foresee we will stay cash -- free cash positive, so we can really afford it. very crucial for us to assure a fast-growing business in automotive MOSFETs. And as you've seen -- as you heard just in this quarter, we have reached over 30% gross. It's also a profitable business. So this was the reason why we took this decision. But to build the fab takes some time and CapEx required is remarkable, but affordable for us. And very important to continue our, I would say, most promising line. Does this answer the second part of your question?

Presenters, there are no further question at this time. Please continue. Actually, we have a question popped up in the queue, one moment. And that question will come from the line of [Lori Packer].

Yes. So I am a private investor, and you clearly are generating enough free cash flow to warrant dividend increases. Your dividend increase has been stable for 10 consecutive quarters now, and I applaud you during the pandemic for maintaining at that. But you clearly are generating enough cash flow to increase the dividend. When can we expect a dividend increase?

Well, as a matter of fact, it's the decision of the Board by nature. But we have increased dividends along the way, and I'm sure we will continue on this route. But in fact, the detail is a matter of the Board. But there is readiness to do so.

Well, you haven't increased it. It's been 2.5 years since you've increased it.

Well, but again, we have maybe for some time, we invested a lot, of course. But we -- there are considerations to do that, okay?

Because what it does, by not increasing the dividend, it's sending a message to your share owner that you don't have confidence that you can increase it and still maintain your CapEx program.

Well, we have -- honestly, we have been a very, very reliable cash producer for all times, so to speak. And we are increasing at the moment. We are talking about everything. We talk acquisitions. We are talking increases of dividends. We are talking stock buyback. And all this will be decided in the right form. But we will continue to generate substantial cash, that's a given.

But that's just lip service. And your stock price performance, frankly, compared to the general market overall, it's been pretty abysmal.

Yes, I understand your critique, but let's be assured that we are going to give money back to the shareholders. We do so, and we will improve that further as we go.

I will hold you to that.

Okay. You can. You can.

Presenters, there are no further questions, please continue.

Thank you. For joining us on today’s call and for your interest in Vishay Intertechnology. This concludes our call. Thank you.

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