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Edited Transcript of VSH earnings conference call or presentation 30-Jul-19 1:00pm GMT

Q2 2019 Vishay Intertechnology Inc Earnings Call

Malvern Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Vishay Intertechnology Inc earnings conference call or presentation Tuesday, July 30, 2019 at 1:00:00pm 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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* Harlan Sur

JP Morgan Chase & Co, Research Division - Senior 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

* Shawn Matthew Harrison

Longbow Research LLC - Senior Research Analyst

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Presentation

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Operator [1]

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Hello. My name is Zaytinya, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vishay Q2 2019 Earnings Conference Call. (Operator Instructions) I would now like to turn the call over to Mr. Peter Henrici. Sir, you may begin your conference.

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

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Thank you, Zaytinya. Good morning and welcome to Vishay Intertechnology's Second Quarter 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 our second quarter 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 a presentation of the second quarter 2019 financials and metrics.

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 Q2 of $685 million. EPS was $0.31 for the quarter. Adjusted EPS was $0.36 for the quarter. During the quarter, we successfully renegotiated our credit facility. The new facility increases capacity to $750 million at similar interest rates on drawn amounts with a slight improvement in the commitment we paid on undrawn amounts. Additionally, the new credit facility has improved covenants that allow for greater operational and financial flexibility.

Also during the quarter, we continued our cash repatriation program. We repatriated $74 million to the United States and paid withholding and foreign taxes of $20 million. We also made the second payment of the transition tax of $15 million. These taxes have been accrued upon enactment of the U.S. tax reform in 2017. The payment of these taxes is reflected as an operating cash flow on the statement of cash flows. All of the reconciling items between GAAP EPS and adjusted EPS are tax-related items. There were no reconciling items impacting gross or operating margins. I will elaborate on these transactions in a few moments.

Revenues in the quarter were $685 million, down 8.0% from previous quarter and down by 10.0% compared to prior year. Gross margin was 25.5%. Operating margin was 11.6%. There were no reconciling items to arrive at adjusted operating margin. EPS was $0.31, adjusted EPS was $0.36. EBITDA was $118 million or 17.2%. There were no reconciling items to arrive at adjusted EBITDA.

Reconciling versus prior quarter, operating income quarter 2 2019 compared to operating income for prior quarter based on $60 million lower sales or $57 million excluding exchange rate impacts, operating income decreased by $28 million to $79 million in Q2 2019 from $108 million in Q1 2019.

The main elements were: Average selling prices had a negative impact of $6 million, representing a 0.9% ASP decline, which includes U.S. tariffs passed through to customers; volume decreased with a negative impact of $23 million, equivalent to a 7.0% decrease in volume.

Reconciling versus prior year, operating income quarter 2 2019 compared to operating income in Q2 2018, based on $76 million lower sales or $62 million lower excluding exchange rate impacts, adjusted operating income decreased by $44 million to $79 million in Q2 2019 from $123 million in Q2 2018.

The main elements were: Average selling prices had a negative impact of $4 million, representing a 0.6% ASP decline, which again includes U.S. tariffs passed through to customers; volume decreased with a negative impact of $24 million, representing a 7.6% decrease; variable cost increased with a negative impact of $16 million, primarily due to U.S. tariffs, raw material prices and some manufacturing inefficiencies, other variable cost inflation was virtually offset by cost reduction; fixed costs decreased with a positive impact of $3 million, primarily due to realignment of the incentive compensation accruals for the period year-to-date June.

Selling, general and administrative expenses for the quarter were $95 million, lower than expected due to adjustments to incentive compensation accruals for the period year-to-date June. For Q3 2019, our expectations are approximately $98 million of SG&A expenses and approximately $395 million for the full year at constant exchange rates.

During the second quarter, we began the process of repatriation, which included movement of cash from some second- and third-tier subsidiaries to higher-tier subsidiaries. We received $74 million in the United States and paid withholding and foreign taxes of $20 million. In Q3, we expect to repatriate an additional $104 million, net of foreign withholding taxes of about $15 million.

Substantially, all of these amounts have been or are slated to be utilized to settle certain intercompany debt, to finance capital expansion projects and to pay the tax reform transition tax.

Recall that while such amounts are no longer subject to U.S. federal taxes due to U.S. tax reform, they are subject to foreign withholding and other taxes and some state income taxes. There are approximately $100 million of additional earnings available for repatriation with taxes accrued.

We had total liquidity of $1.5 billion at quarter end. Cash and short-term investments comprised $790 million and unused capacity on the new larger credit facility was $720 million.

During the quarter, we did not repurchase any of our

outstanding convertible debt instruments. 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 quarter end of $520 million is net of the unamortized issuance cost of $18 million and includes $28 million outstanding on our credit facility and $510 million carrying value of convertible debt instruments net of unamortized discount. The principal amount or face value of the converts totals $621 million, $600 million related to new notes and $21 million related to remaining debentures. No principal payments are due until the expiration of the revolving credit facility in June 2024.

The year-to-date effective tax rate on a GAAP basis was approximately 30%. The year-to-date normalized tax rate was approximately 26%. For the quarter, this mathematically yields a GAAP tax rate of approximately 37% for quarter 2 and a normalized rate of approximately 26%. Our GAAP tax rate includes: The unusual tax benefit related to the settlement of some of the convertible debentures from Q1; tax expense on a tax basis foreign exchange gain resulting from payment of an intercompany loan previously deemed permanent of $8 million; and adjustments to remeasure the deferred tax liability related to incremental foreign taxes payable upon repatriation, such as foreign currency effects.

A similar remeasurement will occur quarterly until such amounts have been repatriated. The remeasurement adjustment was negligible benefit for the quarter and a net benefit of $0.6 million year-to-date. 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 quarter end were 144 million. The expected share count for EPS purposes for the third quarter 2019 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.

Cash from operations for the quarter was $56 million. Capital expenditures for the quarter were $34 million. Free cash for the quarter was $23 million. For the trailing 12 months, cash from operations was $356 million. Capital expenditures were $223 million, split approximately: for expansion, $126 million; for cost reduction, $26 million; for maintenance of business, $71 million.

Proceeds from the sales of property and equipment for the trailing 12 months were $48 million, which primarily represents the sale of our former manufacturing facility in Santa Clara, California. We have leased back the property under a short-term arrangement to raze the buildings. Free cash generation for the trailing 12-month period was $180 million. The trailing 12-month period includes $100 million cash taxes paid related to: Cash repatriation, $85 million; and U.S. tax reform, $15 million. Vishay has consistently generated in excess of $100 million cash flows from operations in each of the past 24 years and greater than $200 million in the last 17 years.

Backlog at the end of quarter 2 was at $1.127 billion or 4.9 months of sales, still very high compared to our historical average of approximately 3 months. Inventories decreased quarter-over-quarter by $19 million, excluding exchange rate impacts. Days of inventory outstanding were 84 days; days of sales outstanding for the quarter were 50 days; days of payables outstanding for the quarter were 31 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. Well, in the second quarter, Vishay's financial performance has been negatively impacted by a lower-than-expected demand, predominantly from distribution.

Despite a still relatively robust overall economic environment, high inventory levels in the supply chain burdened orders and also revenues. Manufacturing capacities in the course of the quarter had to be adapted to the lower demand, causing temporary manufacturing inefficiencies at some product lines. Vishay, in the second quarter, achieved a gross margin of 25.5% of sales and operating margin of 12% of sales, GAAP earnings per share of $0.31 and adjusted earnings per share of $0.36. We continued to show a strong generation of free cash. It was $23 million in the quarter, which includes the taxes paid for cash repatriation of $20 million.

Let me talk about the economic environment as we see it. Also in the second quarter, global economy for electronic components remained principally healthy in general but started to show certain areas of slowdown, like automotive. Inventories in the supply chain have reached a record high during the quarter and started to reduce slowly. POS, despite still strong, has not been strong enough to drive a greater inventory burn. Lead times for most of the product lines have come down to normal levels. Consequently, also backlogs continued to normalize with book-to-bill ratios substantially below 1. The price decline for commodity products has restarted.

Coming to the regions. Geographically, the markets in the second quarter continued to develop rather differently. We have seen good economic conditions in the U.S, maybe not quite as strong as in previous quarters. Europe was weakening, impacted by softening automotive and industrial markets. Asia developed flat on levels substantially below prior year, but recently, there were some signs of a recovery.

Let me comment on distribution. Global distribution in the second quarter continued at principally good POS levels, somewhat lower than prior quarter by 4% and more down versus prior year by 10%, mainly influenced by Asia. Versus the first quarter, POS reduced in the U.S. and in Europe but started to recover in Asia by 5%, as I mentioned before.

Inventories in the course of the quarter have grown to historically high levels and they have come -- they have started to come down very slowly. In the second quarter, inventory turns at distributors declined further to 2.5 as compared to 2.7 in prior quarter and to 3.7 in prior year.

Regional details. In America, it was 1.5 after 1.7 in the first quarter and 2.4 in prior year. In Asia, 3.2 turns after 3.1 turns in the first quarter and 4.7 turns last year. In Europe, 3 turns after 3.5 turns in Q1 and 4.3 turns in prior year.

Some comments on the industry segments we are active in. Automotive applications in view of progressing electrification remain to be a strong driver of growth for electronics going forward, but reduced sales rates for vehicles currently limit our potential. Industrial markets continued to show a mixed picture. Slowing factory expansion after several years of strong growth, the U.S. tariff activities definitely burned the business in China -- burdened the business in China, but bright spots in power transmission and locomotive projects in smart metering and in Internet of Things applications.

Military markets continue to develop strongly in several countries, mainly in the United States. Medical markets continue to grow steadily. Driven by 5G product releases, fixed telecom is expected to grow substantially. I'm convinced that this will become a driver for our business in the midterm.

The mobile phones sector continues to be under pressure. Computers slightly recovered, which partially is a seasonal effect. Finally, consumer markets present a scattered picture. TV sets show some potential in new models. We see weakened markets in air conditioning and gaming and variables are stable.

Let me talk about the business development of Vishay. In the second quarter, we came in below our guidance as the demand from distribution fell off sharply. We achieved sales of $685 million versus $745 million in prior quarter and $761 million in prior year. Excluding exchange rate effects, sales in the second quarter were down by $57 million or by 8% versus prior quarter and down versus prior year by $62 million or also 8%.

Book-to-bill ratio in the second quarter was 0.69. Some detail: 0.55 for distribution after 0.54 in Q1, 0.86 for OEMs after 1.10, 0.56 for actives after 0.74, 0.81 for passives after 0.84, 0.72 for the Americas after 0.75, 0.87 for Asia after 0.73, 0.79 for Europe after 0.89.

The normalization of backlogs at distribution continues in a broad way. Backlogs in the second quarter continued to shrink to a still high level of 4.9 months, down from 5.4 months in Q1, 5.2 months in semiconductors, 4.7 months in the passives. Just to remind you, historical levels of backlog in our business are around 3 months. Price decline has restarted, mainly in semiconductors, minus 0.9% versus prior quarter and minus 0.6% versus prior year. Thereby, the tariff errors are included. For semiconductors, it was minus 1.4% versus prior quarter and minus 1.9% versus prior year; for passives, minus 0.4% versus prior quarter and plus 0.6% versus prior year.

Some comments on operations. In the second quarter, we again were principally able to offset the negative impacts of the -- on the contributive margin by cost reduction and by innovation. However, there is some temporary negative impact of the adaptation of manufacturing capacities. SG&A costs in the second quarter came in at $95 million, which is below our expectations, primarily due to the adaptation of the bonuses. Manufacturing fixed costs in the second quarter were $127 million, also better than our expectations. Total employment at the end of the second quarter was 23,565, down by 2.4% versus prior quarter, naturally due to lower production output requirements.

Excluding exchange rate impacts, inventories in the quarter decreased by $19 million, by $10 million in raw materials and by $9 million in WIP and finished goods. Inventory turns in the second quarter remained at a good level of 4.3. Capital spending in the second quarter was $34 million versus $48 million in prior year, $18 million for expansion, $5 million for cost reduction and $11 million for maintenance of business. For 2019, we now expect CapEx of about $150 million, which reflects lower short-term market requirements.

In the second quarter, we generated cash from operations of $56 million versus a use of $9 million in prior year. The second quarter of last year was burdened by cash taxes paid for cash repatriation of $92 million, the second quarter of this year by $20 million. Generated cash from operations of $356 million on a trailing 12-month basis, including $85 million cash taxes paid for cash repatriation. We generated in the second quarter free cash of $23 million versus a use of $49 million in prior year. The second quarter of last year was burdened by cash taxes paid for cash repatriation of $92 million and the second quarter of this year by $20 million. We generated free cash of $181 million on a trailing 12-month basis, including $85 million cash taxes paid for cash repatriation. I think our generation of cash remains good.

Let me come to the various product lines. First of all, resistors and inductors. With resistors and inductors, we enjoy a very strong position in the industrial, auto, military and medical market segments. Vishay's traditional and since years, most profitable business, now also experiences the impact of high inventory at distributors. Sales in the second quarter were $242 million, down by $13 million or 5% versus prior quarter and down by $4 million or 2% versus prior year. All this excludes exchange rate impacts.

The book-to-bill ratio in the second quarter was 0.88 after 0.92 in prior quarter. Backlog remained at 4.8 months, which is still very high. Gross margin reduced to 29% of sales after 33% in prior quarter, mainly due to lower volume and some temporary inefficiencies in manufacturing caused by the adaptation to lower outputs. Inventory turns in the second quarter remained at a good level of 4.3. There's virtually price stability for this product line, minus 0.4% versus prior quarter and stable prices vis-à-vis prior year. We have slowed down the expansion of manufacturing capacities for MELFs and thin film resistor chips.

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. Sales in the second quarter were $111 million, 6% below prior quarter, but 2% above prior year, again without exchange rate effects. Book-to-bill ratio was 0.68 in Q2 after 0.67 in the previous quarter. In particular, commodity, tantalum capacitors continued to experience a phase of backlog normalization and of inventory reduction in the supply chain. The backlog reduced further to a still very high level of 4.5 months.

Gross margin in the quarter was at a satisfactory level of 24% of sales after 25% in prior quarter. Inventory turns in the quarter were at 3.5, same as in the first quarter.

Selling prices held up, in general. That was minus 0.4% versus prior quarter, but plus 1.9% versus prior year. Several capacitor lines keep benefiting from major governmental programs in China and from the ongoing strength of the military market in the United States.

Coming to the Opto line. Vishay's business with Opto products consists of infrared emitters, receivers, sensors and couplers as well as of LEDs for automotive applications. Also, the Opto business currently suffers from high distribution inventories, but also from a temporarily unfavorable product mix.

Sales in the quarter were $61 million, 1% above prior quarter, but 18% below prior year, which excludes exchange rate impacts. Book-to-bill in the second quarter for Opto was 0.7 after 0.83 in prior quarter. The backlog reduced further to a still high level of 4.1 months.

Gross margin in the quarter came in at 27% of sales after 26% in the first quarter. This is, of course, substantially below historical levels. In the end, this is all due to lower volume. We have seen good inventory turns of 5.6 in the quarter as compared to 5.1 in the first quarter. Price decline for Opto is normal, minus 0.1% versus prior quarter and minus 2.5% versus prior year. The results of this line will continue to be burdened by an ongoing inventory reduction of supply chain for 1 or 2 quarters, but we expect the business to come back to more historical levels of profitability after this normalization phase, also supported by quite tangible projects, mainly in the field of sensors and in couplers.

Coming to diodes. Diodes for Vishay represents a broad commodity business where we are 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 markets but currently suffers substantially from too high inventories at distributors.

Sales in the quarter were $142 million, 15%, 1-5, below prior quarter and 21% below prior year, which excludes exchange rate effects. The normalization of backlog progresses and explains the very weak book-to-bill ratio of 0.52 in the quarter after 0.63 in the first quarter. The backlog reduced to a still very high level of 5.5 months from 5.9 months in prior quarter.

Gross margin in the quarter came in at 20% of sales, quite a decline from 26% in the first quarter. A much lower sales volume in combination with some internal inventory reduction were the reason. Inventory turns remained at a good level of 4.3 as compared to 4.5 in prior quarter. We currently see the return of the pressure on selling prices in diodes, minus 2.4% versus prior quarter, minus 0.8% versus prior year. The tariff errors again are included. We expect diodes to continue their success story of recent years to the full extent after the normalization of the inventories in the supply chain will have been finalized.

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. Also, MOSFETs now starts to see the impact of inventory reductions in the supply chain. Sales in the quarter were $129 million, 6% below prior quarter and 5% below prior year, excluding exchange rate impacts. The book-to-bill ratio in the second quarter dropped to 0.54 after 0.84 in the first quarter. The normalization of backlogs continues. Backlog has reduced to a still high level of 5.3 months after 6.3 months in prior quarter.

The gross margin in the quarter came in at 25% of sales as compared to 26% in the first quarter. There were good inventory turns of 4.2 in the quarter as compared to 4.5 for the first quarter. Also for MOSFETs, we see the pressure on selling prices increase, minus 0.8% versus prior quarter and minus 2.8% versus prior year. We continue to expand internal and foundry capacities, preparing ourselves for substantial increases of demand, in particular in automotive, in the midterm.

Let me summarize. No doubt that the economic environment for our business has suffered increasingly in the course of the second quarter. Automotive and (inaudible) markets are less booming than in recent years and high inventory levels in the supply chain will, for some time, burden and moderate our growth.

On the other hand, there is no reason to doubt the growth potential of electronics in the mid and in the long term. Vishay, as a very well-established broad line supplier, will benefit from this development. We are managing the current slowdown professionally as we have done that before. We will adapt costs, capacities and CapEx, we'll reduce inventories in accordance to the sales volume and we'll continue to develop our market presence further.

Our manufacturing capabilities have been substantially expanded since the year 2016, and we are in a position to exploit the next market upturn to the full extent. We decided to establish a meaningful restructuring program, reducing our personnel fixed costs by $15 million per year at a cash cost of $25 million while, and I emphasize that, at the same time, optimizing the quality of our organization further. Having to expect an acceleration of the inventory burn-off in the channel, we, for the third quarter, guide to a sales range of $600 million to $640 million at gross margins between 24% and 25%.

Thank you. 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'll now open the call to questions. Zaytinya, please take the first question.

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Questions and Answers

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Operator [1]

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Your first question comes from the line of Shawn Harrison with Longbow Research.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [2]

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Going to Paul, last quarter, I think you spoke about maybe, I know this was a guess, $100 million of excess channel inventory sitting out there. How much do you think that, that excess channel inventory is now? I'm guessing it's a bit larger given the weaker sales outlook.

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

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I must agree. I would say it's between $100 million and $150 million, somewhere. You never know exactly. But it is -- I think it's between $100 million to $150 million.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [4]

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And how long would you guess that would take to burn off? Is that something that could happen by the end of the calendar year or does that bleed into early 2020?

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

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Yes. It all depends very much on a few assumptions, of course. First of all, you must assume what -- which inventory turns our distributors have as a target. Secondly, you have to take some assumptions on the development of POS. Of course, we did that. And I would say, it's about 3 quarters from now, beginning now, 3 quarters is our best guess. But again, this contains a few assumptions.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [6]

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And then you mentioned POS. What was point of purchase for your distribution partners for you this quarter?

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

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You mean POA?

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [8]

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POA, yes..

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [9]

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POA. POA was down, you know that. We want the percentage substantially down. Let me see, give me a minute. POA, well, we sold 3 -- you want to know the sales to distribution in reality, right?

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [10]

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Yes, please.

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [11]

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$368 million. Yes, $368 million.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [12]

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Okay. And then lastly, if I may. You said almost all product lead times are back to normal. Do you have any products with extended lead times right now? I'm guessing it may be more niche applications or something specific.

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [13]

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Absolutely. Precisely. I wouldn't name any commodity product which has longer lead times at this point. We have normalized some niches for sure, but this has nothing to do with the normalization phase we are in. This is quite normal and depends on the productivity. Otherwise, we are down to normal in the broad form.

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Operator [14]

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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 [15]

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Lori or Dr. Paul, you and your electronic component peers have spoken about an inventory overhang at distribution partners. And as I think, Shawn alluded to earlier, just -- for some products like diodes and MOSFETs, I think lead time is extended as much as, I think, 52 weeks versus typical lead times of perhaps 8 to 10. Do you expect lead times to normalize by the end of the year that coincide with this inventory digestion cycle? And as a follow-up. As distributor inventories have begun to normalize as evidenced by the book-to-bill and distribution at 0.55 this quarter, is the restructuring effort you've announced today an indication that prices will also normalize vis-à-vis the 3% annual price declines?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [16]

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Well, first of all, I believe, as I said before, that our lead times for commodity product in general in the broad form already have normalized. I must say that. And what we are talking is the reduction of the inventory, again, I repeat what I said before, I can't on -- but this again assumes a few things. Of course, my best estimate based on these assumptions is that it will take to bring down the inventories to a reasonable level in distribution something like 3 quarters is my personal guess based on a few assumptions calculated.

Concerning our restructuring program, which goes against the fixed cost, not against the variable adaptation as you will have realized. This is not an answer to price decline because price decline is answered, as we always do, by cost reduction in the manufacturing process. We did that in past quite successfully and have no doubt that we will be able to defend the variable margin just by these cost-reduction measures also in the future. Our manufacturing fixed cost program has 2 targets really. Target number one is, of course, to slow down, for some time, the inflation on the fixed cost, just to give us a little more time that the volume comes back at a point. And on the other hand, we want to use also the opportunity to further rejuvenate our organization. We have done that a few years before quite successfully, and I think it was good for Vishay, and we are preplanning to repeat that, but it's not an answer vis-à-vis price decline.

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - Director & Senior Research Analyst [17]

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Understood. If I may ask another question. One of the larger investor questions today has been your ability to grow over and above end-market demand as opposed to being a -- perhaps a restructuring story. So help us think about whether all or a portion of these restructuring savings will be funneled back into R&D as you contemplate your growth opportunity in the next 12 to 18 months. And as you think about the operating margin uplift going forward, how much of it will come from a richer mix of value-added products versus end-market demand growth?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [18]

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Well, first of all, I think we have grown substantially in the last years. And part of that, as we now realize, was really to build inventory, which I've said before. On the other hand, Vishay grows quite nicely anyway. We have continuously new products. We watch that carefully. We always watch the share of sales which we make with products younger than 3 years, 5 years, et cetera, so we look at it carefully. These cost savings program is not related to more or less expenditures in R&D. We never were saving money on R&D, and we will not do so going forward, disregarding the volume. So we just continue what we do. But of course, you can look at your fixed costs and the permanent pressure on fixed cost by inflation. And there is the idea to do 2 things, as I said before, at the same time, first of all, to save some of these fixed costs. It means to slow down just for optimizing results going forward to slow down the impact of inflation by reducing certain personnel while replacing a part of this by younger people that are also less expensive, at least in the beginning. So you give yourself some time at improved margins, but again, I emphasize, we never did, and will not save money in cutting down R&D or technical programs. It's unrelated.

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Operator [19]

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

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Ruplu Bhattacharya, BofA Merrill Lynch, Research Division - VP [20]

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Dr. Paul, just to follow-up on what you were talking about in terms of manufacturing capacity, in trying to defend the contribution margin of 45%, do you think that you have leverage to reduce cost more? Manufacturing fixed costs this quarter was $127 million. How should we think about that going forward?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [21]

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Well, maybe I remind you of our history. We have a history of price decline and freely constant variable margins, right? That means that we were always able to defend ourselves against price decline and inflation, of course, in the past. And we do have programs and they were not impacted at all by this good phase of -- which we have seen since 2016 in the market. So I have absolutely no doubt that Vishay will be able to defend its variable margin going forward by just continuing what we always did and do at this point in time. We will, for sure, see price decline coming back, that's true. On the other hand, we are going to see, also, material costs being more moderate going forward. So I -- again, to summarize, we are going to defend our variable margin, no question.

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Ruplu Bhattacharya, BofA Merrill Lynch, Research Division - VP [22]

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Okay. That's helpful. And then in terms of your total capacity, how much of it is currently down or offline?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [23]

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This is how to say we have very many lines. On the other hand, you can say that all commodity products, at this point in time, are substantially on the max capacity, which on the other hand, gives us, of course, the time of normalization as you will appreciate. So definitely, also historically, times of normalization are sooner or later replaced by times of steep growth and it always has been the case, you remember that. We are equipped, of course, for facing this challenge of an increasing demand because we have the machines in place. To give you a number depends really on the line, MOSFETs is quite well utilized -- diodes is underutilized substantially. Can I pick a number 20% or something, but this is a vague number. I would have to check line by line.

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Ruplu Bhattacharya, BofA Merrill Lynch, Research Division - VP [24]

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Okay. No, that's helpful. And then I think on your prepared remarks, you said that recently you saw some recovery in Asia, what drove that?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [25]

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Well, the POS -- we follow the POS number of our distributors to Asia and we have seen that this was relatively down. We've commented on that in quarter 4, quarter 1 and we have seen, on the lower level than it used to be, of course, but we see a turnaround of 4% between quarter 2 and quarter 1, which can lead you to some hope that the worse maybe is over there.

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Operator [26]

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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 [27]

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Dr. Paul, you talked a lot about the weakness in distribution and the inventory correction. I also noticed that your OEM, your book-to-bill has come well below 1 for the first time in several quarters, which obviously is a sign of weak demand. Have you get a sense is that just demand looking weaker? Or is there some inventory build within that customer base? And are you getting a sense that they are going to take as long for that to work off as distribution, which I think you're talking about 3 quarters or so?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [28]

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I believe the distribution case is definitely more severe in terms of inventory and it will also longer. My estimate, I repeat, was something like 3 quarters, under certain assumptions. It's very true what you're saying. We see in automotive, in our big automotive customers, a certain weakness at this point in time. I do -- these larger customers will not be inventory, I think we know that. But at smaller automotive customers, it can definitely be that this is also inventory at the customers. And even more so, in the industrial customers, it can definitely be the case. But unfortunately, there's no report. I have no firm number to reconfirm that, to prove that. But you cannot rule it out that this is a part of the issue at OEMs at the moment. But I must, of course, admit that in automotive, we see at the moment, really from the large customers, an unusual weakness, so to say that.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [29]

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Okay. And regarding your CapEx, I know you talked earlier about pulling back some capacity expansions in resistors. But could you remind us what the CapEx plans are now for the rest of the year relative to what it was a quarter or 2 ago?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [30]

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We went into the EBITDA plan of $190 million, 1-9-0, and now our outlook has been reduced to $150 million. Again, may I emphasize that none of the programs we had in mind at the beginning of the year were really canceled. We only pushed out. We still believe that we have -- whatever we wanted to do then, we will have to do so later. We only came to the conclusion we should optimize the timing, and this brought us down to the $150 million. No secret that I want to squeeze a little more, but since there are, of course, certain limitations.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [31]

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Yes. Fair enough. And I know, Lori gave the SG&A guide for the year. Backing in the December number, it looks like it's kind of be flat with September, around $98 million or so, with this restructuring program, will that impact SG&A going lower? Or is that primarily in the cost of goods?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [32]

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Matt, excuse me that I answer. Matt, it's as follows. It will impact next year. We are going to -- really the impact will be in quarter -- start in quarter 1 next year. And it will be as well in manufacturing fixed as well as in SG&A, about 50-50 approximately.

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Operator [33]

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Your next question comes from the line of Harlan Sur with JP Morgan.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [34]

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On the backlog now that lead times have come in, are you guys starting to see cancellations of some of the existing backlog? Or is that holding in relatively stable?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [35]

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No, no, we do see cancellations and since quite some time, I think, I commented on it. But of course, these cancellations, they have come up. But for us, this was never a problem because the backlog was so overwhelmingly high that this was just a normal thing to happen as a matter of fact. What is really new in that sense but also this was expected that inventories in the supply chain now appear to be high. And there are concrete actions to reduce the inventory, not just the backlog for cancellations.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [36]

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Yes. Got it, okay. And then on the China POS pickup, you saw in Q2, are you still seeing that here in Q3? And do you get a sense that this is just more inventory replenishment by end customer that had been very conservative? Or is there real demand pull? And any sense on which market segments in China are showing signs of potentially better demand trends?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [37]

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Well, we don't know precisely. We really don't. I don't want to pretend that we know. But of course, we have our picture and the picture is really -- I think that the industrial segment in China that was really down as a consequence partially of the trade war, let's name it, this one seems to recover a little. But again, who am I to predict that precisely. We only report a change, and of course, we have hope some that this will continue.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [38]

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From a geographical perspective, I'm talking more on a quarter-over-quarter basis, it looks like it's rough numbers, but looks like the Americas region sales-wise was the weakest region. Can you just maybe help us understand some of the dynamics and what you're seeing in the Americas region?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [39]

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Well, if you had asked which area suffered the most between the first and the second quarter, I would've never named Europe. I would have named Europe. And Asia came back and America was still strong for us, also, especially the strength in military, which is important for us. Maybe not the highest sales number, but it's a good business. It's good business, no question. So I think the weak spot between quarter 1 and 2 is Europe.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [40]

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And primarily automotive in Europe?

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Gerald Paul, Vishay Intertechnology, Inc. - CEO, President & Director [41]

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Yes. Yes.

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Operator [42]

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There are no further questions at this time.

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Peter G. Henrici, Vishay Intertechnology, Inc. - Senior VP of Corporate Communications & Corporate Secretary [43]

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

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Operator [44]

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Ladies and gentlemen, you may now disconnect.