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Edited Transcript of VSH earnings conference call or presentation 4-Feb-20 2:00pm GMT

Q4 2019 Vishay Intertechnology Inc Earnings Call

Malvern Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Vishay Intertechnology Inc earnings conference call or presentation Tuesday, February 4, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gerald Paul

Vishay Intertechnology, Inc. - CEO, President & Director

* Lori Lipcaman

Vishay Intertechnology, Inc. - Executive VP & CFO

* Peter G. Henrici

Vishay Intertechnology, Inc. - Senior VP of Corporate Communications & Corporate Secretary

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Conference Call Participants

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* David O'Connor

Exane BNP Paribas, Research Division - Analyst of IT Hardware and Semiconductors

* Gausia Fatima Chowdhury

Longbow Research LLC - Associate Analyst

* Karl Fredrick Ackerman

Cowen and Company, LLC, Research Division - Director & Senior Research Analyst

* Matthew John Sheerin

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Ruplu Bhattacharya

BofA Merrill Lynch, Research Division - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Vishay Fourth Quarter 2019 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. Please go ahead, sir.

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Peter G. Henrici, Vishay Intertechnology, Inc. - Senior VP of Corporate Communications & Corporate Secretary [2]

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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 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.

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.

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Lori Lipcaman, Vishay Intertechnology, Inc. - Executive VP & CFO [3]

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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 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 we recognized a U.S. 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 billion, 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 4 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 cost increased with a negative impact of $4 million as expected due to individually immaterial items. Versus prior year, adjusted operating income quarter 4 2019 compared to adjusted operating income in quarter 4 2018, based on $166 million lower sales or $160 million lower excluding exchange rate impacts. Adjusted operating income decreased by $79 million to $41 million in Q4 2019 from $120 million in Q4 2018.

The main elements were: average selling prices had a negative impact of $19 million, representing a 3% ASP decline. Volume decreased with the negative impact of $64 million representing an 18.6% decrease. For the full year, adjusted operating income for the year 2019 compared to adjusted operating income for the year 2018 based on $366 million lower sales or $318 million lower excluding exchange rate impacts, adjusted operating income decreased by $199 million to $287 million in 2019 from $485 million in 2018.

The main elements were: average selling prices had a negative impact of $29 million, representing a 1.1% ASP decrease, which includes U.S. tariffs passed through to customers. Volume decreased with a negative impact of $124 million, representing a 9.7% decrease. Variable costs increased with a negative impact of $31 million, primarily due to manufacturing inefficiencies, U.S. tariffs and higher metal prices.

Wage and other variable cost inflation were compensated by cost reduction. Inventory effects had a negative impact of $13 million.

Selling, general and administrative expenses for the quarter were $95 million, sequentially higher by $2 million due to individually immaterial items and slightly lower than expected, primarily due to general belt-tightening measures.

For the year, selling, general and administrative expenses were $385 million versus $403 million in 2018. 2.1% lower, excluding exchange rate impacts, primarily due to incentive compensation expenses and general belt-tightening measures.

For Q1 2020, our expectations are approximately $102 million of SG&A expenses and approximately $400 million for the full year at constant exchange rates. The company did not repatriate any additional cash to the U.S. during Q4. But as you know, we did repatriate approximately $189 million net of taxes during the earlier periods of 2019 and $724 million net of taxes during 2018.

Substantially, all of these amounts have been utilized to pay down the revolver to settle certain intercompany debt to finance capital expansion projects and to pay for the tax reform transition tax. Recall that while such amounts are no longer subject to federal taxes due to U.S. tax reform, they are subject to foreign withholding and other taxes and some state income taxes.

There's approximately $100 million of additional earnings available for repatriation with taxes accrued. We are still evaluating the timing of such repatriation. We had total liquidity of $1.6 billion at quarter end. Cash and short-term investments comprised $803 million and no amounts were outstanding on our revolving credit facility.

During the quarter, we were able to repurchase $3.95 million principal amount of our outstanding convertible debt instruments. This is part of the programs we have undertaken over the past 2 years to retire the convertible debentures, which have certain tax attributes, which were no longer efficient after U.S. tax reform. Of the principal $575 million amount of the convertible debentures that was outstanding at the beginning of 2018, only $17 million or 3% remain outstanding at the end of 2019.

We continue to be authorized by our Board of Directors to repurchase additional convertible debt instruments in open market repurchases or through privately negotiated transactions, subject to market and business conditions, legal requirements and other factors. Our debt at year end is comprised of the convertible notes due 2025 and the remaining convertible debentures due in 2040 and 2041. The principal amount or face value of the converts totaled $617 million, $600 million related to the notes issued in 2018 and $17 million related to the remaining debentures. The carrying value of $499 million is net of unamortized discounts and debt issuance costs.

As I said, there are no amounts outstanding on our revolving credit facility at the end of quarter 4. No principal payments are due until 2025, and the revolving credit facility expires in June 2024. I'd like to give you an overview of the cost reduction program. As announced in July, we are implementing global cost reduction programs intended to lower costs by approximately $15 million annually when fully implemented and to provide management rejuvenation. Our strategy has been to seek volunteers to accept a voluntary separation early retirement offer, which has been generally successful.

During Q4, we recorded restructuring expenses of $17 million, bringing the total expense for the program to $24 million, in line with expectations. The expense was recognized when individuals accepted the offer. Due to applicable transition period, we will not fully achieve the cost savings until the end of December 2020. The full year effective tax rate on a GAAP basis was 27%. Our GAAP tax rate includes adjustments to remeasure deferred taxes related to the repatriation program, such as foreign currency effects and to consider certain corporate reorganizational activities that impact repatriation.

These adjustments were a benefit of $11.6 million for Q4 and $9.6 million for the full year 2019. Our full year GAAP tax rate also includes adjustments to uncertain tax provisions recorded in Q4, approximately $3.8 million. The unusual tax benefit related to settlement of some of the convertible debentures and the tax expense on a tax basis, foreign exchange gain, resulting from the payment of an intercompany loan previously deemed permanent in Q2.

Because of the unusual tax items, the U.S. GAAP effective tax rate for Q4 is negative, a tax benefit on pretax income. Our normalized tax rate excludes these unusual tax items as well as the tax effects of the restructuring and early debt extinguishment. The normalized tax rate for the full year was approximately 27% versus the 26% at year-to-date Q3.

Mathematically, this yields a normalized tax rate of 36% for Q4, impacted by the cumulative catch-up and low pretax earnings in Q4. We expect our normalized effective tax rate for 2020 to be approximately 26% to 27%. We continue to evaluate the provisions of the U.S. tax law, particularly aspects of the GILTI and BEAT taxes. Our consolidated effective tax rate is based on an assumed level and mix of income among our various taxing jurisdictions. A shift in income could result in significantly different results.

Total shares outstanding at year-end were 144 million. The expected share count for EPS purposes for the first quarter 2020 is approximately 145 million. For a full explanation of our EPS share count and variables that impact the calculation, please refer to the 8-K we filed this morning.

In our annual report on Form 10-K, we will change our U.S. GAAP segment reporting to separately disclose inductors and resistors. These 2 segments were previously combined. Prior period data presented in the annual report will be recast to reflect this new alignment. The 8-K we filed this morning also includes a summary of this recast to prior period data.

Dr. Paul's comments on the quarter and year 2019 in a few moments will also separately discuss inductors and resistors. Cash from operations for the quarter was $84 million. Capital expenditures for the quarter were $56 million. Free cash for the quarter was $28 million. For the year, cash from operations was $296 million. Capital expenditures were $157 million, split approximately for expansion, $96 million; for cost reduction, $16 million; for maintenance of business, $45 million. Free cash generation for the year was $140 million. The year includes $53 million cash taxes paid related to cash repatriation, $38 million and U.S. tax reform, $15 million.

Vishay has consistently generated an excess of $100 million cash flows from operation in each of the past now 25 years and greater than $200 million for the last now 18 years.

Backlog at the end of the quarter was -- at the end of quarter 4 was $911 million or 4.5 months of sales, still high compared to our historical average of approximately 3 months. Inventories decreased quarter-over-quarter by $17 million, excluding exchange rate impacts. Days of inventory outstanding were 84 days. Days of sales outstanding for the quarter were 49 days. Days of payables outstanding for the quarter were 30 days, resulting in a cash conversion cycle of 103 days.

Now I will turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [4]

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Thank you, Lori, and good morning, everybody. 2019 for Vishay is -- for the business with electronic components in general, has been a year of correction. Volumes dropped sharply vis-à-vis a strong year 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, a 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 4 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 third 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 the normalization of lead times and the subsequent major inventory reduction in the supply chain. This, for the most part, concerned distribution but also OEMs reduced inventories. The worldwide slowdown in automotive and ongoing political turbulences developed into an additional burden in the course of last year. Backlogs substantially inflated in the course of 2017 and 2018 continue to normalize with book-to-bill ratios much below 1.

Recently, we do see a recovery of orders. Selling prices for commodity products have restarted to decline. Considering the strong slowdown of order cancellations in the fourth quarter, another substantial reduction of inventories in the supply chain during the quarter and increasing orders also from distribution. We believe that the fourth quarter represented the low point of this phase of correction.

Let me talk about the regions. After a strong year, the American market softened in the fourth quarter. Sales to OEMs as well as POS of distribution were concerned, automotive and commercial aviation are weakening, whereas military spending remains robust and industrial markets remained stable overall. Inventories being burned off by our distributors.

The European business continues to be burdened by too high inventories in the supply chain as well as by a weakening of the automotive, in particular, of the diesel market. Despite continued destocking in Asia, we see signs of improvement in automotive and the stabilization of industrial and EMS segments. Asia, in fact, is expected to return to more normal business levels first, setting aside any impacts of the evolving coronavirus crisis, of course.

Talking about distribution, POS of global distribution ended the year 2019 weaker than expected. It declined by 7% versus prior quarter and was 13% below prior year. POS for the full year 2019 was down versus 2018 by 10%. POS in the fourth quarter was weak versus Q3 in all geographic regions, down in Europe by 6%, down in Asia by 5% and down in the Americas by 11%.

Nevertheless, distribution inventories during the fourth quarter came down again in a noticeable way by $37 million. We expect this trend to continue, maybe, to a lesser extent also in the first quarter. There was no further decline of inventory turns in distribution in the fourth quarter, turns remained at 2.4 as compared to 2.9 in prior year. The Americas showed 1.4 turns after 1.5 turns in the third quarter and 1.9 in prior year.

Asia, Asian distribution showed 3.3 turns after also 3.3 turns in Q3 and 3.7 turns in prior year. Europe had 2.9 turns after also 2.9 turns in Q3 and 3.3 turns in prior year. Orders from distribution in the fourth quarter picked up in all regions substantially, which naturally gives some confidence.

Let me comment on industry segments. There is continued weakness in vehicle production worldwide, in particular in Europe, and there's political resistance to the diesel technologies. Nevertheless, we expect improvements in the first quarter in automotive carried by traditional cars. The industrial segment continues to show growth, but high inventories in the supply chain remain to be a problem for 1 or for 2 quarters. Basically, positive developments exist in industrial automation, power transmission, robotics, oil and gas and in smart metering. In consumer, white goods set a strong quarter driven by air conditioning devices and also 2020 is expected to be positive.

Gaming should be strong due to the launch of the new Sony PlayStation in the course of this year. There is ongoing strength of the military and medical sectors, computing is expected to see a better year in 2020 driven by growth in service. 5G continues to be a major opportunity for strong growth starting in 2020.

Let me talk about Vishay's business development. Quarter 4 sales, excluding exchange rate impacts, came in slightly above the midpoint of our guidance. We achieved sales of $610 million versus $628 million in prior quarter and versus $776 million in prior year. Excluding exchange rate effects, sales in Q4 were down by $17 million or 3% versus prior quarter and down versus prior year by $160 million or by 21%. Sales in the year 2019 were $2.668 billion versus $3.035 billion in 2018, a decrease of 11%, excluding exchange rate effects.

Book-to-bill in the fourth quarter recovered to 0.94 from 0.72 in the third quarter mainly driven by distribution. Some detail, 0.94 for distribution after 0.55 in the third quarter, 0.95 for OEMs after 0.90, 0.95 book-to-bill for the actives after 0.6 in Q3, 0.94 for the passives after 0.83 in Q3. 1.03 book-to-bill for the Americas after 0.76 in the third quarter, 0.96 for Asia after 0.64, 0.88 in Europe after 0.78. Backlog in the fourth quarter was stable at 4.5 months, which relates to actives and to passives.

Cancellations were substantially reduced in Q4, and they now have a quite normal level. The price decline is back to historical rates. We had minus 0.8% versus prior quarter and minus 3% versus prior year. Actives semiconductors with a higher share of commodities set also a stronger price decline, as to be expected, minus 1.2% versus prior quarter, and minus 5.9% versus prior year. The passives with a higher share of specialty products at minus 0.3% price decline versus prior quarter and minus 0.2% price decline versus prior year.

Some comments on operations. In the year 2019, we were not completely able to offset the normal negative impact of -- on the contributive margin by cost reduction and by innovation. In particular, temporary plant inefficiencies due to capacity adaptations burdened the variable costs.

SG&A costs in Q4 came in at $94 million, slightly below expectations when excluding x-rate effects SG&A costs for the year 2019 were $385 million, $19 million or 2% below prior year at constant exchange rates, mainly due to lower incentive compensation.

Manufacturing fixed costs in the fourth quarter came in at $126 million, slightly above, maybe, $1 million above our expectations. Manufacturing fixed costs for the year 2019 were $509 million, $10 million or 2% above prior year at constant exchange rates impacted naturally by higher depreciation.

Total employment at the end of 2019 was 22,400, 7% down from prior year, which -- where then we were 24,115 all this, of course, the consequence of a broad capacity reduction. Excluding exchange rate impacts inventories in the quarter were reduced by $17 million, raw materials by $4 million and WIP and finished goods by $13 million.

Inventory turns in the fourth quarter slightly improved to 4.3 from 4.1 in prior quarter. In the year 2019, inventories decreased by $45 million, raw materials by $29 million and WIP and finished goods by $16 million. Inventory turns for the entire year 2019, were at a good level of 4.3 slightly down from 4.5 in 2018, excluding, again, exchange rates.

Capital spending in the year 2019 was $157 million versus $230 million in prior year, close to our expectations. We spent $96 million for expansion, $16 million for cost reduction and $45 million for maintenance of business. For the current year, we expect CapEx of approximately $140 million, quite in accordance with the requirements of our markets. We, in 2019, generated cash from operations of $296 million, including $38 million cash taxes for cash repatriation compared to $259 million cash from operations in 2018, including $157 million cash taxes for cash repatriation.

Generated last year in 2019, free cash of $140 million, including $38 million of cash taxes for cash repatriation compared to a free cash generation of $84 million in 2018, including $157 million cash taxes for cash repatriation. I think we can say, and I'm proud to say that every time, that Vishay are also in -- economically softer. [Yes], has lift up again to its reputation as an excellent and reliable producer of free cash.

Now I come to the product lines. And as Lori indicated, we are going to report separately resistors and inductors from now on. And I'll start with resistors. Vishay's traditional and, since many years, steadily growing business continues to be highly profitable, despite having been impacted negatively in 2019 by lower volume due to inventory corrections in the supply chain. With resistors, we enjoy a very strong position in the auto industrial, mil and medical market segments, and we do offer virtually all resistor technologies. Sales in Q4 were $146 million, down by $6 million or by 4% versus prior quarter, and down by $37 million or by 20% versus prior year, excluding exchange rate impacts.

Sales in 2019 of $648 million were down by $44 million or by 6% versus prior year, again, excluding exchange rate impacts. The book-to-bill ratio in quarter 4 was 0.95 after 0.82 in prior quarter. Backlog increased slightly from 4.7 to -- from 4.5, excuse me, to 4.7 months. Gross margin in the quarter came in at 24% of sales after 27% in prior quarter, low volume and efficiencies due to capacity adaptations were burdening the results temporarily. Gross margin for the year 2019 was at a fairly good level of 28% of sales, down from 33% of sales in 2018, which, on the other hand, was a record year, supported by an inventory build in the supply chain.

Inventory turns in the fourth quarter were at 4.1. Inventory turns for the full year were at a satisfactory level of 4.1 also. After price increases in 2018, the development of ASPs returned to normal trends we have seen for resistors, minus 1% versus prior quarter and also minus 1% versus prior year. With the inventory correction being over in a very foreseeable future, we expect the business to return to traditional profitability levels.

Coming to inductors. The business with inductors consists of power inductors and magnetics. Our fast-growing business with inductors represents one of the greatest success stories of Vishay. Exploiting the growing need for inductors in general, Vishay developed some years ago, a platform of robust and efficient power inductors and leads the market technically. With magnetics, we are very well positioned in specialty businesses, demonstrating steady growth since years. Sales of inductors in quarter 4 were $77 million, up by $3 million or 4% versus prior quarter and flat versus prior year, excluding exchange rate impacts. Year-over-year sales of $299 million was virtually flat versus prior year. Despite all economic headwinds in 2019, again, I comment without exchange rate impacts.

Book-to-bill in Q4 was 1.05 after 0.95 in prior quarter. Backlog for inductors was at 4.7 months, same as in the third quarter. The gross margin in the quarter was at quite excellent 34% of sales, up from prior quarter, which were at 32% of sales. Gross margin for the year 2019 was set, again, quite excellent 32% of sales, virtually on the same level as prior year. Inventory turns in the quarter were at 4.8 as compared to 4.6 for the whole year. There is only modest price pressure in inductors, minus 0.3% versus prior quarter and minus 1.8% versus prior year. We continuously and will do so also in the future, expand our manufacturing capacities, in particular, for power inductors.

Coming to capacitors. Our business with capacitors is based on a broad range of technologies with a strong position in American and European market niches. We enjoy increasing opportunities in the fields of power transmission and of e-cars, namely in Asia, China, in particular. Sales in the fourth quarter were $95 million, 4% below prior quarter and 27% below prior year, excluding exchange rate effects.

Year-over-year capacitor sales decreased from $466 million in 2018 to $423 million in 2019 or by 7%, again, excluding exchange rate impacts. Book-to-bill ratio in the fourth quarter for capacitors was 0.84 after 0.76 in previous quarter. Backlogs remained for capacitors at a high level of 4.1 months. The gross margin in the quarter decreased to 18% of sales after 22% in prior quarter, lower volume and an unfavorable product mix burdened the results temporarily. The gross margin for the year 2019 was at 22% of sales, down from 23% in 2018.

Inventory turns in the quarter increased to 3.7 as compared to 3.5 for the whole year. For capacitors, we had price increases 0.7% versus prior quarter and plus 2.5% versus prior year.

I come to our Opto line. Vishay's business with products -- with Opto products consists of infrared emitters, receivers, sensors and couplers as well as of LEDs for automotive applications. Sales in the quarter were $51 million, 1% above prior quarter, but 21% below prior year, which again excludes exchange rate impacts.

Year-over-year sales with Opto products went down from $290 million to $223 million, down by 22% year-over-year without exchange rate impacts. Opto was heavily burdened by inventory reductions in the supply chain. Book-to-bill in the fourth quarter was 1.11 after 0.86 in prior quarter, indicating we believe, a turnaround of the business. Backlog set a very high level of 4.7 months after 4.4 months in the third quarter.

Gross margin for Opto in the quarter was at 20% of sales after 22% in the third quarter. Gross margin for the year 2019 came in at 24% of sales as compared to 35%, again a record percent in prior year. As I said, a real record for this product line. A very high inventory turns of 6.0 in the fourth quarter as compared to 5.4 in the whole year.

In Opto, we have relatively stable prices vis-à-vis prior quarter, there were price increases of 2.3% vis-à-vis prior year, there was a price reduction of 1.7%. We remain to be confident for this line growing steadily and also profitably, mainly in the segment of sensors.

Coming to diodes. Diodes for Vishay represents a broad commodity business where we are the largest supplier worldwide. Vishay offers virtually all technologies as well as the most complete product portfolio. The business has a very strong position in the automotive and industrial market segments and keeps growing steadily and profitably since years. After 2 record years, the volume in diodes in 2019, suffered the most of all divisions from the inventory reduction in the supply chain. Sales in the quarter were $123 million on the level of prior quarter but 30% below prior year, which excludes exchange rate effects. Year-over-year sales, diode decreased from $713 million to $557 million, a decline of 21% without exchange rate impacts. The book-to-bill ratio of 0.88 in the quarter was a definite improvement of the 0.57, which we have seen in quarter 3, the worst appears to be behind us. The backlog reduced slightly to a still high level of 4.7 months from 4.9 months in prior quarter. The gross margin in the quarter came in at 16% of sales as compared to 17% in the third quarter. The gross margin in the year 2019 was at 20% of sales, down from 28% in prior year. A quite enormous drop of volume in combination, some manufacturing inefficiencies and a strong ASP decline, especially in the fourth quarter were the reason. Inventory turns remained at a very satisfactory level of 4.4 on the level of the whole year.

The ASP decline for diodes has accelerated in the fourth quarter, and we have seen minus 1.4% versus prior quarter and minus 7.3% versus prior year. We are confident that this important business for Vishay will come back to historical volumes and also profitabilities whenever the inventories in the supply chain will have reached normal levels, and this will be in the foreseeable future.

Coming finally to MOSFETs. Vishay continues to be one of the market leaders in MOSFET transistors. MOSFETs over the last years developed a strong and growing position in automotive, which is expected to provide a successful future for this product line. Also MOSFETs currently see some impact of the destocking activities worldwide, but in a milder form than other commodity products. Sales in the quarter were $116 million, 8% below prior quarter and 16% below prior year without exchange rate impacts. Year-over-year sales with MOSFETs decreased from $548 million to $509 million by 6% without exchange rates.

Book-to-bill ratio in quarter 4 was 0.94 after 0.54 in Q3. Apparently, the business is on the way back to normal. Backlogs continue to be on a high level at 4.2 months as compared to 4.0 months in the third quarter. Gross margin in the quarter was at 24% of sales, no change from prior quarter. The gross margin in the year 2019 came in at 25% of sales, a slight reduction from 27% in 2018 due to lower volume.

Inventory turns in the quarter were 3.7 as compared to 4.1 for the entire year. Price decline for MOSFETs had accelerated, minus 2.5% versus prior quarter and minus 6.1% versus prior year. We are confident to be -- we continue to be confident for the future of this line of MOSFETS, in particular driven by automotive applications, and we continue to expand internal and foundry capacities.

Let me summarize. After a record year 2018, our business in 2019 has entered a phase of massive correction, which principally was not a complete surprise, given the cyclical nature of electronics. Now there are clear signs that the downtrend of orders and sales is behind us, and we believe that Q4 has been the low point for our business. The inventory distribution is still relatively high and will moderate, therefore, the expected recovery for another quarter or 2. Whereas the automotive market segment globally still will need some time to get back to historical strength, we see other fields that are encouraging.

For the mid- and long term, there is no reason to doubt the growth potential of electronics. Vishay is a very well-established broad line supplier will benefit from all moves towards electrification going forward. Our increased machine capacities will enable us to participate in the next upturn to the full extent. We are implementing our announced restructuring and rejuvenation program and expect an annual reduction of personnel fixed costs by $15 million, when it will be fully implemented by the first quarter of the year 2021.

For the first quarter, we guide to a sales range of $605 million to $645 million at a gross margin of 24% of sales at the midpoint. The guidance excludes potential impacts from the rapidly evolving coronavirus crisis. Thank you very much. Peter?

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Peter G. Henrici, Vishay Intertechnology, Inc. - Senior VP of Corporate Communications & Corporate Secretary [5]

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

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Questions and Answers

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Operator [1]

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

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Gausia Fatima Chowdhury, Longbow Research LLC - Associate Analyst [2]

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

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [3]

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Well, approximately 1, approximately 1. It's really relatively early in the year, but all the trends of recovery seem to continue at this point. I think we really have seen the worst in quarter 4.

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Gausia Fatima Chowdhury, Longbow Research LLC - Associate Analyst [4]

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

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [5]

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

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Gausia Fatima Chowdhury, Longbow Research LLC - Associate Analyst [6]

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Okay. Great. And then just the last 1 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.

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [7]

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Yes. We are quite confident to get back to historic levels, for sure, just by getting the volume problem behind us, and we are underway. And secondly, for the quarter 4, as I tried to say, was really burdened by some singularities, which will not repeat themselves, for instance, not in quarter 1.

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Operator [8]

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

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Ruplu Bhattacharya, BofA Merrill Lynch, Research Division - VP [9]

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Dr. Paul, your guidance for gross margins for the first quarter has a range, which is slightly higher than what you typically guide instead of 100 bps, I think it's like 140 bps. You said there were some onetime 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?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [10]

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

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Ruplu Bhattacharya, BofA Merrill Lynch, Research Division - VP [11]

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Okay. My comment on the range was on the gross margins? Because I think you're saying 24% plus/minus 70 basis points versus, like, typically, you guide for 100 basis points range. But anyway, I mean, that's fine. One thing you mentioned 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?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [12]

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I think the 7% is not typical for diodes. The normal price decline historically for diodes is more like 3%, 3.5%. But we enjoyed 2 years of practically no price decline or a very little price decline. And this is all in the face of a restart, kind of. I believe diodes would -- there's no question for me that this will enter into the same historical range of 3% per year price decline, which we always are able to offset by cost reduction and innovation.

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Ruplu Bhattacharya, BofA Merrill Lynch, Research Division - VP [13]

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Got it. And the last one for 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 that as well?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [14]

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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 this is the center of our interest at the moment.

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Operator [15]

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

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - Director & Senior Research Analyst [16]

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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 the Taiwanese and U.S. provider, combined would seem to become a bit more formidable competitor in industrial capacitors, resistors and inductors? And I have a follow-up.

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [17]

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I 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 in this concentration, in this case. Maybe not in all the cases, but in capacitors, in particular, this has absolutely no consequence for our business.

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - Director & Senior Research Analyst [18]

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I appreciate that. With regard to pricing, it seems pricing declines 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 on the global electronic supply chain?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [19]

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Yes. I think on passives, we are back to normal. It was always very low price 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, and 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 the point. Whether this will be exactly in quarter 1 or a little later, but we have cost reduction anyway. We have cost reduction efforts ongoingly, 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, a 5%, maybe a little more for MOSFETs would come back.

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Operator [20]

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

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [21]

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Just -- a question, Dr. Paul. Looking past Q1, and 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 that Vishay will be able to grow revenue year-over-year in calendar '20?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [22]

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Hard to predict. But I believe it depends really to -- may I say that directly, to which extent the Chinese development, which we currently see will hinder the economic recovery, nobody knows that. So -- and I also don't know. We believe in a good year 2020 because we're bringing down manufacturing. You know 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'm confident whether we can be better in sales, depends, of course, on the environment, which is hard to see at the moment to forecast.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [23]

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Yes. And I 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, 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?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [24]

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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 inductors and the passives side. But the bulk of the business that comes from Chinese factories is in the semiconductors, in diodes, but in particular, also in the MOSFETs. So this is a high share in both cases that come out of China. Concerning the shutdowns, yes. The plants currently are shut down, but there is a prediction, and we 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.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [25]

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And if this issue is extended? I know you've got 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?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [26]

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Well, we don't have the same -- well, we utilize 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 -- there are many signs that are back to the -- on the way to normal.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [27]

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

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Lori Lipcaman, Vishay Intertechnology, Inc. - Executive VP & CFO [28]

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

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Operator [29]

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(Operator Instructions) Your next question will come from the line of David O'Connor with Exane BNP Paribas.

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David O'Connor, Exane BNP Paribas, Research Division - Analyst of IT Hardware and Semiconductors [30]

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Maybe 2 from my side. Dr. Paul, firstly, Q4 appears to be the bottom and orders into January, above 1. But you still talk about $70 million, $80 million to come out of inventory. Just wondering, can we get back to -- from Q1 onwards. 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, can you kind of split that out? And also you intend to spend that or if there is -- and what areas within the capacity expansion that you're investing in?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [31]

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Well, looking at -- in the future and the inventory story. I think we do not have to change what we said last quarter, we expected things to get normal 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. I 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. Was this okay? Clear?

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David O'Connor, Exane BNP Paribas, Research Division - Analyst of IT Hardware and Semiconductors [32]

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Yes, all clear.

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [33]

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Okay. And from a standpoint of the one that split, may I say that for Lori, the one for the CapEx for next year will be split approximately like this year -- excuse me like last year, I'm sorry.

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Operator [34]

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And at this time, we have no further questions.

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Peter G. Henrici, Vishay Intertechnology, Inc. - Senior VP of Corporate Communications & Corporate Secretary [35]

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

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Operator [36]

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