Good morning, and thank you for standing by. Welcome to the Vishay Intertechnology First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Peter Henrici, Head of Investor Relations. Please go ahead.

Thank you, Olivia. Good morning, and welcome to Vishay Intertechnology's First Quarter 2024 Earnings Call. I am joined today by Joel Smejkal, our President and Chief Executive Officer; and by Dave McConnell, 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. Thank you for joining our first quarter 2024 earnings call. I'll start my remarks on Slide 3 with a review of the demand trends for the first quarter by end market, channel and region. Then Dave will take us through the highlights of our financial results and guidance for the second quarter of 2024. After that, I'll wrap up with a review of our initiatives and goals for 2024, and then we'll be happy to answer any of your questions. For the first quarter, we are reporting revenue of $746.3 million, slightly above the midpoint of our guidance range of $715 million to $775 million. The inventory digestion that began to impact our demand last quarter, extended into the first quarter, and our revenue fell 5% sequentially. A greater proportion of this oversupply inventory is for semiconductor products compared to passives. However, as I mentioned last February, we expect some end markets to improve sooner, notably aerospace and defense, and that is, in fact, what happened with growth both year-over-year and quarter-over-quarter. Let's now look in more detail at the revenue by market segment on the left side of Slide 3. Automotive, which is still the largest contributor of total revenue, declined slightly by [indiscernible] and also due to the beginning of new annual contracts with OEMs and Tier 1s that went into effect on January 1. Demand from EV programs weakened in most regions, while orders for hybrids and internal combustion engines are steady to increasing. Regardless of our customers' powertrain mix, Vishay is well positioned to supply their needs. Compared to the first quarter of last year, our automotive revenue was up 1%. Design activity and design wins in automotive continued to increase and remain focused on ADAS and e-mobility, including battery…

Thank you, Joel. Good morning, everyone. Let's start our review of the first quarter results with the highlights on Slide 4. First quarter revenues were $746.3 million, including $3 million attributed to our recently computed Newport acquisition and within the range of our guidance. Revenues decreased 5% compared to the fourth quarter, reflecting a 3% decrease in volume and a 2.5% reduction in ASPs. Most of the volume and ASP reduction occurred in our semiconductor business segments reflecting ongoing soft demand in industrial end markets and continued pricing pressure in distribution and EMS channels. Our reportable business segment [indiscernible] decrease in revenues was mainly attributable to MOSFETs and diodes each of which decreased sequentially by approximately 9%. followed by Opto and Resistors, which declined 9% and 5%, respectively. These declines were slightly offset by increases in the revenues of Inductors and Capacitors. Compared to the first quarter last year, revenues were down 14.3%, reflecting a volume decrease of 11.8% and a 3.6% reduction in ASPs. At quarter end, book-to-bill for Vishay was 0.82 comprised of 0.73 for semis and 0.91 for passive. Backlog for total Vishay was 5.0 months compared to 5.3 months at the end of the prior quarter. Looking at the backlog quarter-over-quarter comparison by product category, backlog for semis was 5.0 months compared to 5.3 months and backlog for passives was 5.1 months compared to 5.4 months. Moving on to the next slide, presenting the income statement highlights. Gross profit which includes the impact of the Newport acquisition was $170.4 million. Gross margin was 22.8% and included the negative impact of 74 basis points related to Newport. The depreciation expense included in the gross profit for the quarter was $43.8 million. Compared to the fourth quarter, gross margin decreased primarily due to the previously mentioned impact of…

Thank you, Dave. At the Investor Day, we held on April 2, we talked about our need to scale our capacity to be a reliable supplier to more and more customers and also to attract new customers. From our travels and communication with customers, they clearly want more from Vishay. As we deepen our engagements with customers, our capacity expansions are one component for us to scale and support their growth. Second is our commitment to innovate and to supply products which support their technology direction and the megatrends of e-mobility and sustainability. To meet the commitments we are making to our customers, to accelerate revenue growth and drive greater returns and to more broadly serve our addressable market and expand our product portfolio, we are executing a 5-year strategic plan, pulling the 8 levers displayed on Slide 10. Expanding capacity is one cornerstone of our growth plan. During the first earnings conference call in February 2023, I shared that we are planning to invest $1.2 billion of CapEx over 3 years, 70% of which is earmarked for internal capacity expansion. With the Newport Fab acquisition for March 2024, we added $200 million to our 3-year CapEx plan. Then is Jeff Webster, our COO, detailed at the Investor Day, our 5-year strategic growth plan includes investing a total of $2.6 billion between 2023 and 2028. In 2024, we plan to invest $435 million in CapEx, of which around 7% will be spent on expansion projects, which are expected to come online in 2025. The investments we've made in capacity expansion in 2022 and 2023 have landed and are in qualification. I'd like to now share with you our progress on 5 of our expansion projects. The first is around internal capacity expansion. La Laguna, Mexico, we commercially qualified inductors and…

[Operator Instructions] And our first question coming from the line of Matt Sheerin with Stifel.

Yes. First question just regarding the gross margin guidance and how we should think about that as we get through the year and you start to see some sequential growth as the cycle recovers, you're typically at roughly 45% incremental margin contribution on volume growth, but you do have the headwinds of Newport and then also I'm thinking incremental capacity and more depreciation. So how should we think about gross margins, as we get through the next few quarters?

Matt, it's Dave. So I think we expect the second half to be better than the first half driven primarily from our demand for -- increased demand from aerospace, defense and automotive. We expect ASPs to be fairly stable for the rest of the year since the OEM contracts already in place in quarter 1. The issue is with everybody else as we have limited visibility on volume at the moment. .

Okay. But so ex the volume in terms of incremental other impacts like Newport, anything else there? Or is it really just now -- it's just a matter of volumes coming back?

Yes, just volume.

Okay. And then on the ASPs, it looked like ASP erosion was more significant this quarter. Could you be more specific about the MOSFETs in semis versus passives and what the expectation? It sounds like you're saying things are stable, but it looks like we're seeing more pricing pressure. .

Pricing pressure, yes, the inventory that's out in the channel. Whether it's the distributor, the EMS or the OEM, people are trying to move that inventory. Capacity utilization at ourselves and our peers is in the mid 50%, 60% from what we've seen. So there is a push to move inventory. There is some price pressure with ship and debits to move the inventory through. We do see that. The ASPs in the first quarter were around the contract -- the annual agreements that we have with many of our strategic accounts that also impacted the first quarter. But most of it was the price pressure on the semiconductor on MOSFETs and diodes.

Okay. And then why are you getting a sense that it's stable here? Is that based on the contracts that you're seeing from customers...

The contracts, their annual agreements, so those are in place. Don't expect anything to be adjusted further based on those large accounts that have annual agreements. The ship and debit activity could continue a bit more so for semiconductors, much less for passives. The inventory in the channel for passives is not excessive. So the passive is quite stable. There will be some spot pressures on semis, but we don't see it excessive.

Our next question coming from the line of Ruplu Bhattacharya with Bank of America.

Joel, the inventory at distribution was at 26 weeks. What do you think is the new normal for inventory weeks at distribution? I know you were trying to increase some of your product lines at distribution. And the second part of that question is, how many more quarters of inventory correction do you expect? I think you said that you expect some improvement in the second half, but is that more a 4Q expectation? I mean, do you think it's only another quarter of inventory correction? Or could it be extending into 3Q as well? .

Okay. 26 weeks is about where we see it. You may remember in the past calls, we were growing the inventory intentionally. We were adding SKUs, and we continue to do that. We kind of said we'd be around the 26 weeks as a high and that's where we sit. The distributors have adjusted their order rates. So the backlog is more of a just-in-time type of supply versus stocking. We are still adding SKUs. So I would say at this point, the 26 weeks is where we should be. As the POS increases, there is some concern that quickly the inventory is going to be depleted. The quarters of inventory correcting passives, I think we feel quite good. It's going to go through Q2 and then the second half of the year passes, we'll be trending to be more normalized. However, we expect POS to increase. On the semis, I think that will go in beyond Q2. It will go into Q3. And then we feel that Q4 can be that quarter where the semi inventory is digested, and we're more in par with the [indiscernible] at the OEMs, and this inventory digestion is done.

Okay. Let me ask Dave a couple of questions. Dave, nice to speak with you on the call. You mentioned an industrial win of $77 million. How should we think about the time frame for revenues coming in for that project? .

Actually I can comment on that. These are orders that we've now received in Q1. There's heavy materials here. The volume of business that we expect in 2024 is around EUR 18 million to EUR 20 million as the program begins. The peak years will be 2025 and 2026, quite excited about this project. This is an industrial smart grid design that we've been working on for a number of years, and now it's getting into production. So it's a good sign. We've all been waiting for industrial to start to move. And here's a very large industrial leader that has given us the purchase orders, and we're starting to plan to support them.

Okay. In terms of cash conversion cycle, how should we think about that and free cash flow both for the June quarter and the subsequent quarters. How do you see that trending? .

So I wouldn't expect any material changes to our cash conversion cycle. The inventory is fairly flat quarter-on-quarter already and Newport's added already to the quarter 1 number. In terms of the free cash generation, I think at our Investor Day, we presented a chart that had indicated a slightly negative number this year, and I think that's still our guidance.

Okay. Got it. Okay. Maybe my last question, Joel, is one of the strategic growth levers you're showing on Slide 10 is increasing the technical headcount. Can you talk about like are you done with that? Or is there more head count that you would like? And if so, which specific areas or geographies do you think that you would need to increase that? And how would that impact SG&A?

The engineering technical head count will continue. Through our just customer engagements, the customers are asking for closer technical assistance from Vishay. It could be the OEMs, it could be Tier 1s and could also be EMS. We mentioned in one of the last calls, we've been given early access to Jabil's design engineers, Flex as well. We're working with their technology teams. This is new for us. There's EMS customers which we've met and they're offering for us to come in and help their design teams move projects forward. So we're going back looking at the maps by Americas, in Europe and Asia, and we're starting to put the next steps in place, further engineering talent in the field. This will be coming the second half of the year, will be some increased in the SG&A expense, but I think the value of the engagement with the customer and driving their projects forward is going to pay off for us. It's -- these opportunities, which previously did not have. And I think the customer highlights this quite clearly, Vishay, because you're investing to scale. You're investing to scale now, we see it beneficial for [indiscernible] when the volume production increases, then you can report it.

And our next question coming from the line of Joshua Buchalter with TD Cowen.

Let me echo the welcome to Dave to the earnings call fun. To start, could you maybe provide some guidance on how long or the shape of the Newport gross margin headwinds? And is there sort of a revenue level that we need to get to, to have that start to abate? Or is it sort of fixed from here because of the foundry arrangement at least over the next couple of years?

I could start off with it and then Dave can echo. We have now a fab, which is partially full. And when I say it's partially full, the previous owner is exiting. Their volume that they committed to us will be declining quarter-on-quarter. The volume in the second quarter is in place, and we're building towards that. We start to see their volumes diminishing in Q3 and Q4. This is going to impact the margins, as we see lower production volumes and in parallel, we're expediting our technology transfers, which we mentioned will start to be qualified in Q4, and then production will begin in the first half of 2025. So we're trying to offset an exit of the previous owner, diminishing business there with then Vishay stepping in. So we're going to see second half impact. Dave, do you want to comment at all?

Yes, sure. Joshua, so for the second quarter, we're guiding the 160 basis points impact on the margin for Newport. That's $15 million approximately of sales. Q3 and Q4, that sales number is going to drop again to roughly $5 million. So it's negligible revenue. So the total impact on the margin, we think Q3 and Q4, is closer to 170 basis points, Josh.

And I'm showing no further questions in the queue at this time. I will now turn the call back over to Mr. Joel Smejkal for any closing.

Thank you, Olivia. Again, thank you, everyone, for joining us this morning and for a review of our first quarter performance. We look forward to talking to you in early August, and we will then report our second quarter results. Thank you again. Have a good day.

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation, and you may now disconnect.