Greetings. And welcome to the Vishay Intertechnology First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Peter Henrici, Investor Relations. Thank you sir. You may begin.

Thank you, Christine. Good morning and welcome to Vishay Intertechnology's first quarter 2023 earnings conference call. I am joined today by Joel Smejkal, our President and Chief Executive Officer; and by Lori Lipcaman, our Chief Financial Officer. This morning we reported results for our first quarter. A copy of our earnings release is available in the Investor Relations section of our website at ir.vishay.com. This call is being broadcast live over the web and can be accessed through our website. In addition today's call is being recorded and will be available via replay on our website. During the call, we will be referring to a slide presentation, which we also posted at ir.vishay.com. 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. We are including information in our press release and on this conference call on various GAAP and non-GAAP measures. We have included a full GAAP to non-GAAP reconciliation in our press release as well as in the presentation posted on ir.vishay.com, which we believe you will find useful when comparing our GAAP and non-GAAP results. 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. Now I turn the call over to President and Chief Executive Officer, Joel Smejkal.

Thank you, Peter. Good morning, everyone. Welcome to our first quarter conference call. I'll start my remarks on slide 3 of the presentation deck. Vishay delivered strong first quarter results with revenue of $871 million above our high end of the guidance range. We saw continued positive momentum in our sales to automotive, solid demand in industrial and all-time high sales of specialty products to both medical and aerospace defense market segments. Some details now about these end markets. Automotive, which represents 33% of our total revenue grew 6.2% versus the fourth quarter and 9.6% compared to the first quarter of 2022. OEMs in all regions replenished vehicle inventories now that the supply chain constraints are improving. We also saw continued demand for products in support of more electronic content, ADAS features and greater electric vehicle production. Industrial. This is our largest segment at 37% of total revenues. Sales here were flat versus the fourth quarter and below last year's first quarter. We saw a strong pull-through in Europe where we are supporting manufacturing automation and smart infrastructure plus renewable energy collection and transmission. Medical. Medical represents 5% of total revenues. This segment grew 21.4% over the fourth quarter and we're at an all-time high in Q1 and it is showing increasing promise, particularly in the areas of medical diagnostic equipment and implantable devices. Compared to the first quarter of 2022, medical revenues grew 29.6%. Aerospace and defense also at an all-time high in Q1, on growth of 10.9% over the fourth quarter and 33.6% over the first quarter last year. Demand for this market which constitutes 7% of total revenue is being driven by customers that are supporting many different applications such as advanced radar systems, missile guidance systems for the U.S. government and for its allies. We are…

Thank you, Joel. Good morning, everyone. I'll start my review of the first quarter results on slide 4. Revenues for the fourth quarter were $871.0 million above the high-end of our guidance. We benefited $15.4 million from exchange rates. Compared to the fourth quarter, revenues increased 1.8%, reflecting a 1.2% increase in pricing and a 1.5% decline in volume. Compared to the first quarter last year, revenues grew 2.0%, reflecting higher pricing that more than offset a 1.4% decline in volumes. At quarter end book-to-bill for consolidated Vishay was 0.84 and backlog was 7.5 months, compared to 8.0 months at the end of the prior quarter as lease time started coming down. We returned a total of $34.2 million to stockholders, comprised of dividends of $14.0 million and stock repurchases of $20.2 million. The next slide page 5, present income statement highlights. Gross profit was $278.7 million for a margin of 32.0%, compared to 29.1% for the fourth quarter and substantially above our forecast of a margin in the range of 28%. Compared to the fourth quarter margin increased on pricing, lower material and freight costs and improved manufacturing efficiencies and yields, partially offset by lower volume and inflationary labor and material costs. Compared to our guidance gross margin profits reflect the flow-through of better-than-expected pricing for MOSFETs lower-than-planned energy and logistics cost and higher-than-expected fixed cost absorption related to an inventory build. SG&A expenses were $120.1 million, $6.3 million higher than the $113.8 million, we reported for the fourth quarter, primarily reflecting annual salary increases and an accrual for equity incentive compensation. Operating income increased $23.3 million versus the fourth quarter on higher gross profit offset partially by higher operating expenses. Operating income increased $12.3 million or 8.4% over the first quarter of 2022. Operating margin was 18.2% compared…

Thank you, Lori. Let's go to slide 9. On our call last February, I introduced our near-term initiatives that we are advancing during 2023 as we drive revenue growth and margin expansion. We have identified 30 key product lines for growth across each business segment, most of which serve multiple market segments multiple applications and business channels that are aligned with the megatrends of connectivity, mobility and sustainability. To increase capacity to support them, and gain share of the highest growth and highest return opportunities, we are investing in capital expansion for a total CapEx of approximately $385 million this year $60 million more than 2022. Approximately two-thirds of this CapEx, is being spent on expansion projects. This continues the increase in CapEx that took place last year when we spent an additional $107 million, nearly all of which was earmarked for capacity expansion projects. That additional investment, will land throughout the quarters of 2023 and 2024, bringing down our lead times, and giving us incremental capacity to support our 30 key product lines. We are focused this year on investing in capacity expansion projects outside of China. Our customers tell us that they -- the value that they see in Vishay, being regionally located, the manufacturing footprint as they pursue onshoring or near-shoring efforts. Some of this capacity expansion is already allocated to our established customers, especially for MOSFETs and resistors, which still have long lead times. Some of it is strategically reserved, to serve new and emerging customers that are leaders in driving megatrend-related demand. This quarter, we put capital to work in a few ways: in fabs located in Germany, Taiwan and Italy geared primarily toward growth segments of automotive and industrial for our MOSFETs Diodes and Opto products. New factories in Mexico, for power metal strip…

Thank you. We will now be conducting a question-and-answer session [Operator Instructions] Thank you. Our first question comes from the line of Ruplu Bhattacharya with Bank of America. Please proceed with your question.

Hi. Thanks for taking my questions. Joel, fiscal 2Q is typically your strongest revenue growth quarter for the year, yet you're guiding just 1% sequential growth. Why is that given if this backlog is still high at 7.5 months? So why is the sequential growth just 1%? And then last quarter you talked about the beginning of a channel inventory correction. Can you update us on what you're seeing with respect to that in terms of the channel and how they're taking inventory?

Okay. Ruplu, thank you for the question. The first question about Q2 being up about 1%. We look at the contract business we have with many automotives. We see Q2 relatively flat versus Q1 from the automotive schedule agreements that we see. The medical and the military continues to show strength in Q2. So that's positive. We still look at the demand in the industrial segment, the inventory that's at the distributors. I'll kind of answer your second question combination here. The inventory – the health of our inventory at the distributors is quite good. I've met with the distributors, many of them and talk to about the health of inventory. The POS was a bit better than we expected. We did ship product to them. The inventory has been about 19 weeks and it stays at 19 weeks. We think that it will reduce somewhat in Q2, but the health of our inventory is good. The inventory that the customer has is primarily for MRP programs are available to sell – as the distributor is not so high. So overall, I think the inventory will be stable to slightly down. Automotive driving it, EMS looking at their inventory that they have in the queue will also impact the second quarter sales because EMS continues to use their local inventory before they draw in more for us.

Okay. Thanks for the details there. If I can ask a follow-up on the gross margin performance. So in 1Q, you had very strong gross margins of 32% on say 15 million, 16 million sequential growth in revenues. So what drove the outperformance versus your expectation? I think you had guided 28%. So it was 400 bps above your guidance. And then as we look into the second quarter, also if you can just give us your thoughts on gross margins because on $10 million higher revenue at the midpoint you're guiding for 300 million – sorry 300 bps sequential reduction. So just trying to understand the gross margin dynamics between 4Q 1Q and 2Q.

Ruplu, this is Lori. Perhaps I could help you with that question. So when we were giving guidance for the gross margin at the 28%, we had less pricing pressure than expected during Q1. We had lower energy costs related to a government subsidy and there were things that will not be able to repeat next year – next quarter. So we now expect more favorable margins with a floor of about 29% for the year. But in the second half we expect to have lower gross margins than in the first half due to some increases in labor that are still coming and some additional inflationary costs.

Okay. Well, thanks for the detail. If I can sneak one more in. Joel, in your initiatives you talked about filling gaps in technology and gap in market coverage. If you could just elaborate on those initiatives? I mean where do you think you would want to increase your market coverage? And what type of technology do you think Vishay laps today and would like to expand on?

The gap that we're working on quite aggressively now is being able to bring our silicon carbide technology forward. This we see as a first topic of conversation at customer engineers in high-voltage programs. It's very important with the samples that we intend to have available in the third quarter is going to help us. We will be able to get in those early discussions with engineers and then bring in the rest of the portfolio. It's really an advantage of Vishay the semiconductor versus passive holding of products. So filling that high-voltage wideband gap semiconductor space is a top priority. That's one. We also look at other areas like circuit protection or sensors that we do keep our eye on to further out on our portfolio. These come from conversations with customers. They see our wide portfolio and they ask Vishay can you also consider other technologies. So those are a few.

Thanks for all the details and congrats on the strong execution in a tough market.

Thank you very much. Appreciate your questions.

Our next question comes from the line of Matt Sheerin with Stifel. Please proceed with your question.

Yes. Thank you. I have a couple of quick questions on some of the metrics. Could you give us the book-to-bill by channel OEM and distribution? And then also on ASP trends year-over-year and quarter on -- quarter-over-quarter by segment?

I'll comment on the ASP. The ASP we have a large portion of our business which is in contracts -- customer contracts. These are quite firm for the year. Annual agreements with automotive accounts large OEMs, so that's pretty solid. We see the ASP quite stable there. ASP in the channel of distribution with some commodity products being on the shelf and the distributor having likely more inventory from a competitor than they do of Vishay, that will come down to someone making a price move and trying to move that inventory. At this moment, we do see a couple items maybe in diodes or in capacitors that might see a little price pressure. But generally we see it holding up okay. When we look at the constrained products like power semiconductors or the military products the pricing will be firm the -- could be some price increases as well depending on the product and the inflationary costs that go with it. Overall, I see pricing -- stable. Yes?

How is the MOSFET pricing holding up?

The MOSFET pricing is on the automotive is holding up quite well. The LVM, at this point is holding up well. We thought that we would see some price pressure earlier in Q1. We didn't see it. It's been about assurance of supply. MOSFETs continues to be -- the power semiconductors continue to be the number one constrained item out there when we talk to customers.

Okay. And then, maybe while you wait for the book-to-bill. Joel just a bigger picture question. The fundamentals at Vishay seemed to be holding up very well and much better than if you look at some of the broader semiconductor suppliers and passive suppliers out there. And so what are your thoughts on the cycle? Typically in past cycles Vishay, after these very big runs and margin expansion, there's a drop down both in margins and revenue. And we haven't really seen that in a big way yet. And it sounds like you still feel good about your backlog in your long-term prospects. So, what are your thoughts on the cycle and how Vishay gets through this one may be different than others?

Okay. That's -- the markets are changing. There used to be quite defined lines between automotive and industrial and telecom and computer. The markets are now starting to blend together, because of the technology that's moving into the automobile and the technology that's moving into industrial automation. So we look at Vishay's segments, we look at automotive not only car count but we look at the electronic content and the ADAS features that are coming. It's quite positive with the product portfolio that we have, many automotive grade qualified products. We look at industrial. There's industrial programs always looking towards better energy collection and energy distribution. Transmission lines have to be rebuilt. The grid is far from being in a suitable position to be able to provide us the electricity. We're all going to need for EV and other electric battery-powered products. So there's quite a promise there in that segment. Medical for Vishay, growing. The medical customers that we're talking to -- there's a lot of new activity and exciting programs coming forward that were delayed quite a bit because of the pandemic. So we're seeing that now building momentum. And then military defense, we all know what's happening in the world with the Ukraine and many countries are buying their own defense spending and ways to protect themselves. So you -- Matt when you put those four markets together, it's nearly 85% of Vishay. Automotive, industrial, medical and military. So they're quite solid market segments, but they're also bringing in contributions from computer and telecom to support those segments. So we're quite happy with the development of technology where it's going and we definitely want to position Vishay to be able to enjoy more of it.

Yeah. Okay, great. And then on gross margin, I think Lori you said that you expect gross margin to hold up around 29% for the year. That implies only modest downtick in the second half. So could you comment on the drivers behind that is just pricing? And just like you said these end markets holding up fairly well, so that margins won't be down that much?

We see that. We see the market is holding up well, having military and medical as growth markets with the percentages that I've changed is good. Vishay's QPL on military is the strongest, the biggest. We continue to put capacity in place to support that and that's a good margin business. We see it holding up at 29%. So we're pretty confident with that 29% because of the segments as we support. Matt, back to your backlog question that I didn't answer. We -- you look at the book-to-bill and we're adding capacity every quarter. So the book-to-bill is coming down because EMS customers, distributor customers, they're adjusting based on our lead times coming in. They may have had backlog in our system that was out into 2024 deliveries or maybe into 2025. So we're starting to see a more normalization of what their order patent should be not losing share but just adjusting based on our ability to deliver sooner. Lori, you have the book-to-bill here. You want to go ahead and give that to Matt?

End of the quarter, the book-to-bill for MOSFET is 0.95, diodes 0.71, OPTO 0.72, resistors 0.88, Inductors 1.04 and capacitors 0.70.

Super helpful. Thanks so much for your answers, Joel and Lori. Appreciate it.

Thanks, Matt. Have a good day.

Our next question comes from the line of Joshua Buchalter with TD Cowen. Please proceed with your question.

Hey, guys, thanks for taking my question. I apologize for hopping on this, but I did want to ask about inventory levels in the channel again. It sounds like a POS and sell-through are coming in better than expected and you mentioned you do want to take levels in the channel in the second quarter. Would you expect to be I guess at healthy levels exiting the second quarter? And then how should we think about visibility into the second half as levels normalize should we expect a roughly seasonal second half of the year as you stand now? And then I have a follow-up. Thank you.

Yeah, the inventory meeting with the distributors, Vishay is not on the heat map. Generally speaking our inventory is not in a slow and idle position. The inventory is healthy. It's supporting many of their program accounts to say it's going to decline. The POS is better than what we expected in Q1. It's holding up. We see that Asia POS should improve in Q2 and Q3 second half of the year. So generally, I think the inventory, there may be a slight reduction, but it won't be significant, because the product that we have on the shelf is good. It's healthy. The distributors like the mix. They say it's a good product. The second part of your question, help me remember?

Visibility into the second half. And I guess as we see it now, it's roughly seasonal the right way to think about it.

Seasonal, but automotive saying that they still are catching up in vehicle production. And electronics, the features that are coming in the cars continues to expand. New model years will be coming out in the second half again. So, automotive looks to be a bit better in the second half than the first. Industrial, we continue to see programs coming forward on electrical grid improvements and we're talking to many large OEMs about being involved in those projects. So -- the backlog I think we're confident in the backlog. We've seen the book-to-bill adjustment over the last couple of quarters. It's been below one, where people have been canceling not near-term, but they've been canceling further out orders. So, I think second half will be seasonal to a little better.

I appreciate all the color there. And then for my follow-up, you talked a lot about capacity expansion which totally makes sense, given the shortages in the past few years and the clear undersupply that you're seeing. The question we get asked a lot from investors is, given there are so many smaller facilities, are there opportunities to consolidate some of these sites that you no longer investing in as you rationalize the overall footprint, while also still expanding your capacity? Just being curious, how you're thinking about that. Thank you

Yes. We're always looking at the sites and the demand of the product coming from that site, expansion is quite important now and choosing the right locations for Vishay to be regionally located plus cost competitive is very important. Consolidation, we have it on the radar. We always look. But at this point, nothing definitive because the demand is quite strong across all of the product lines, no chance at this point to slow a factory down and start to move it somewhere else, because the demand is quite good and the backlog at 7.5 months is pretty broad across most of the product lines. We'll continue to take a look at it though.

Understood. Thank you.

Thank you, Josh.

Thank you. We have no further questions at this time. Mr. Smejkal, I would now like to turn the floor back over to you for closing comments.

Okay. Thank you, very much. Again, everyone, thank you for joining us on our first quarter earnings call. I look forward to sharing our results of the second quarter and our progress towards reaching our goals for 2023 with you in August. Thank you very much. Have a good day.