Q3 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Vishay Q3, 2019 earnings Conference call. At this time, all participants are and they listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you need depressed stop start one on your telephone if you require any firm.

There are assistance press Star Zero I would now like to hand, the conference over to your speaker for today Peter Henrici. Thank you. Please go ahead.

Thank you Stephanie.

Good morning, and welcome to Vishay into technologies third quarter 2019 conference call.

With me today are Dr., Gerald Paul Vishays, President and Chief Executive Officer, and Lori Lipcaman, Our executive Vice President and Chief Financial Officer.

As usual, we start todays call with the CFO , who will review our third 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 reserve time for questions and answers.

This call is being webcast from the Investor Relations section of our website at <unk> IR doxey shape Dot 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 Vishays Form 10-K , and Form 10-Q filings with the Securities and Exchange Commission.

In addition, during this call we may refer to adjusted.

Other financial measures that I'm 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 third quarter 2019 financial financials and metrics.

Now I turn the call over to Chief Financial Officer, Lori Lipcaman.

Thank you Peter good morning, everyone.

I'm sure that most of you have had a chance to review our earnings press release.

I will focus on some highlights key metrics.

He reported revenues for quarter, three 620 million.

<unk> was 21 cents for the quarter.

Adjusted EPS was 26 cents for the quarter.

During the quarter, we continued our cash repatriation program, we repatriated $115 million, United States and paid with holding in foreign taxes of $18 million.

These taxes had been accrued upon enactment of U.S. tax reform in 2017.

The payment of these taxes is reflected as an operating cash flow on the statement of cash flows.

Also during the quarter, we recorded restructuring charges of $7 million related to the cost reduction program, we announced in July .

I will elaborate on these transactions in a few moments.

Revenues in the quarter was 628 million down by 8.3% from previous quarter.

And down by 19.5 per cent compared to prior year.

Gross margin was.

9%.

Operating margin was 8.1%.

Adjusted operating margin was 9.3%.

S was 21 cents.

Adjusted D. P. S was 26 cents.

EBITDA was 91 million.

Were 14.5%.

Adjusted EBITDA was 99 million or 15.7%.

[noise] reconciling versus prior quarter.

Adjusted operating income quarter, three 2019 compared to operating income for prior quarter.

Based on 57 million lower sales or 55 million, excluding exchange rate impacts.

Adjusted operating income decreased by 21 million.

To 58 million in Q3, 2019 come 79 million in Q2 2019.

The main elements where.

Average selling prices had a negative impact for 7 million.

Representing 1.1% ASP decreased.

Volume decreased with a negative impact of 22 million.

Equivalent to a 7.1 per cent decrease in volume.

[noise] variable cost decreased with a positive impact 4 million.

Primarily due to improved manufacturing efficiencies and cost reductions, which more than offset cost to adapt direct labor and foundry capacities to near term volume expectations.

[noise] fixed cost decreased with a positive impact of 4 million.

Primarily due to general belt tightening measures as well as the realignment of incentive compensation accruals for the period here to date September .

[noise] reconciling versus prior year, adjusted operating income quarter, three to <unk> 2019, compared to operating income in Q3 2018.

Based on 153 million lower sales.

Were 144 million lower excluding exchange rate impacts.

Adjusted operating income decreased by 80 million to 58 million in Q3 2019 from 138 million in Q3 2018.

The main elements where.

Average selling prices had a negative impact of 12 million.

Represented 1.9% ASP decline.

Volume decreased with a negative impact 59 million, representing a 17.4% decreased.

[noise] variable costs increased with the negative impact of 7 million.

Primarily due to temporary manufacturing inefficiencies and cost to adapt direct labor in foundry capacities to near term volume expectations.

Other variable cost inflation was virtually offset by cost reduction.

[noise] fixed cost decreased where the positive impact of 4 million.

Primarily due to general belt tightening measures.

As well as the realignment of the incentive compensation accruals for the period year to date September which more than offset inflation.

Inventory effects had a negative impact of 5 million.

Selling general and administrative expenses for the quarter were 92 million.

Lower than expected, primarily due to belt tightening measures.

Realignment of in some incentive compensation accruals for you to September and other individually immaterial items.

For quarter four 2019, our expectations are approximately 95 million of SGN expenses and approximately 385 million for the full year at constant exchange rates.

During the third quarter, we continued our cash repatriation programs, which included movement of cash from some second and third tier subsidiaries to higher tier subsidiaries.

During quarter, three we received $115 million in the United States and paid withholding and foreign taxes, the $18 million.

This brings the total so year to date to 189 million received in the United States with $38 million of withholding and foreign taxes paid.

Substantially all of these amounts have been utilized to pay down the revolver.

She was settled certain intercompany debt.

To finance capital expansion projects and to pay the tax reform transition tax.

We called them out such amounts are no longer subject to U.S. federal tax due to U.S. tax reform, they're subject to foreign withholding the other Texas and some state income taxes.

There are approximately $100 million of additional earnings available for repatriation with taxes accrued.

We're still evaluating the timing of such repatriation, but do not expected to be in 2019.

We had a total liquidity of one point <unk> liquidity of 1.5 billion at quarter end.

Cash and short term investments comprised 788 million.

No amounts outstanding on the revolving credit facility.

During the quarter, we did not repurchase any of our outstanding convertible debt instruments.

The authorization to repurchase additional convertible debt instruments will expire in a few days, but we expect it to be renewed by our board.

Such transactions would be made and open market repurchases or through privately negotiated transactions subject to market and business conditions legal requirements and other factors.

Our debt it and at quarter end is comprised of the convertible notes due in 2025 and remain on remaining convertible debentures due in 2040 in 2041.

The principal amount or face value of the converts totaled $621 million.

600 million related to the new notes and 21 million related to the remaining debentures.

The carrying value of 496 million is net of unamortized discounts and debt issuance costs.

As I said there were no amounts outstanding on our revolving credit facility at the end of quarter three.

No principal payments are due until 2025 and.

And the revolving credit facility expires in June 2024.

As announced in July we are implementing go global cost reduction programs intended to lower cost by approximately $15 million annually when fully implemented and provide management rejuvenation.

Some of these projects have already started but in most cases our strategy in the first phase.

As to seek volunteers to accept a voluntary separation early retirement offer.

Accordingly, the amount of restructuring expenses recorded for these programs during Q3, it's only $7 million.

We expect to incur restructuring charges related to some programs totaling $25 million.

I would expect the cost reductions to be fully achieved by December 2020.

The year to date effective tax rate on a GAAP basis was approximately 30%.

The year to date normalized tax rate was slightly above 26%.

For the quarter. This mathematically eads yields a GAAP tax rate of approximately 31% for Q3.

In a normalized rate of approximately 25%.

Our GAAP tax rate includes adjustments to re measured the deferred tax liability related to incremental foreign taxes.

Payable phone repatriation, such as foreign currency effects.

A similar remeasurement will occur quarterly until such amounts have been repatriated.

The Remeasurement adjustment was an expensive 2.6 million for the quarter.

An expense of 2.0 million year to date.

Our year to date GAAP tax rate also includes the unusual tax benefit related to the settlement of some of the convertible debentures from Q1.

And tax expense on a tax basis foreign exchange gain resulting from the payment of an intercompany loan previously deemed permanent in Q2.

We continue to evaluate the provisions of the U.S. tax law, particularly aspects of the guilty and beat Texas.

Our consolidated effective tax rate is based on an assumed level and mix of income among our various taxing jurisdictions.

Shifting income could result in significantly different yourself.

Total shares outstanding at quarter end or 144 million.

The expected share count for EPS purposes for the fourth quarter 2019 is approximately 145 million.

For full explanation of our NPS share count and variables that impact the calculation.

Please refer to eat K., we filed this morning.

Cash from operations for the quarter was 76 million.

Capital expenditures for the quarter were 30 million.

Free cash for the quarter was 46 million.

For the trailing 12 months cash from operations was 362 million.

Uh huh.

Spend or trends were 204 million.

But approximately four expansion 111 million.

For cost reduction 25 million.

For maintenance of business 68 million.

Proceeds from the sales of property equipment for the trailing 12 month were 48 million.

Which primarily represents a sale up our former manufacturing facility in Santa Clara, California.

We have a leased back the property under short term arrangements arrangement to raise the buildings.

Free cash generation for the trailing 12 month period was 205 million.

The trailing 12 month period includes 53 million cash taxes paid related to cash repatriation 38 million and U.S. tax reform 15 million.

The she has consistently generate in excess of 100 million cash flows from operations in each of the past 24 years and greater than 200 million for the last 17 years.

Backlog at the end of quarter, three was 1.127 billion or 4.5 months of sales still high compared to our historical average approximately three months.

Inventories decreased quarter over quarter by 12 million, excluding exchange rate impacts.

Days of inventory outstanding were 87 days.

Days sales outstanding for the quarter were 51 days.

As of payables outstanding for the quarter were 29 days, resulting in a cash conversion cycle of 109 days.

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

Thank you Laurie and good morning, everybody.

As expected to Vishays financial performance also into third quarter has been negatively impacted by a low demand predominantly from distribution.

Still high inventory levels in the supply chain keep threatening orders and revenues.

Manufacturing capacities hit to be further reduced causing temporary inefficiencies for some product lines.

Reshaping the third quarter achieved the gross margin of 24% of seals, a gift or pretty much in of each person an adjusted operating margin of 9% of seals GAAP earnings per share of 21 cents and adjusted earnings per share of three to six cents.

We continue to show a strong translational free cash.

Which was 46 million into quota and this includes the Texas paid for cash repatriation of 18 million.

Let me talk about economic environment. This we see it.

Also in the third quarter globally, Konami for electronic components remained on a reasonable level general.

But continue to show idiots, so for relative weakness.

Like automotive globally and industrial in China.

Inventories into supply chain enough the having reached a record high in the second quarter started to come down noticeably.

Lead times for most of the product lines have normalized.

Backlogs remain high at this point, but underway to come down to more historical levels book to bill issues remain substantially below one actually 0.7 to two into third quarter.

The price decline for commodity products has returned to normal rates, which of course, it's no surprise.

Commenting on the regions.

Geographically markets also into third quarter continue to develop rather differently.

[noise] economic conditions in the United States continue to be favorable.

Supported by strong industrial military and also automotive sectors and the Pos remains at high levels.

Europe is weakening impacted mainly by a softening of the automotive and industrial market segments.

Trends are generally there is too much inventory into supply chain in Europe .

Despite ongoing economic uncertainties Asia seems to have bottomed out with some signs Fortunately Cody.

Talking about distribution.

Pos of global distribution into third quarter declined by 4% versus prior quarter end was 14% below prior year.

Regionally, we see a rather different picture.

Sequentially in Europe .

<unk> has declined by 7%, reflecting a more difficult market situation Pos in the U.S. went down by 5%, but remained at a good level.

POS in Asia has stabilized.

Despite an overall weaker Pos inventories into third quarter came down noticeably and let me emphasize that in a broad away.

In Q3 inventory turns of distributors declined slightly to 2.4 is compared to 2.5 in prior quarter.

And to 3.5 in prior year.

India, Mary Kosovos 1.5 inventory turns off the 1.5 into second quarter and 2.3 in prior year.

In Asia 3.3 turns off to 3.2 in the second quarter and 4.5 in prior year.

In Europe 2.9, after 3.2 and 3.8 in prior year.

Let me come to the various industry segments first automotive.

Automotive customers predict VP of sales to decline this year and do not expect a major turnaround for 2020.

Nevertheless, our sales should remain healthy continuing to be driven by electrification and by the implementation of programs for Electromobility.

Industrial markets continue to show a mixed picture.

Industrial automation oil and gas power transmission sectors remain healthy and chenodal, whereas power supplies in lighting continues week.

Military and aerospace markets remain solid and growing.

They are supported by higher governmental spending in military mainly of course into United States Medical markets continue to grow steadily.

The introduction of five GE is expected to drive substantial growth in fixed telecom in the mid term.

This mobile phones remained weak.

Computing showed some improvement with an expected growth of 2% this year.

Consumer markets a weakening in general.

Rich in particular relates to the white goods sector.

Now, let me come to vision.

Business development into third quarter sales came in slightly above the midpoint of our guidance.

We achieved sales of Sixthree and <unk> million.

Versus 685 million in prior quarter, and 781 million in prior year.

Excluding exchange should you fix sales into third quarter were down by 55 million know by 8% versus prior quarter.

And down versus prior year by 144 million or 19%.

We have seen a book to bill issue of 0.7 to two into third quarter.

Point 55 foot distribution after the poor in 55 into second quarter.

0.9, all put 94 OEM stuff to point 86 into second quarter.

Putting 60 for actives after point 56.

Point 83, you put a passive stuff to point 81.

Point 76 would the Americas self supporting 72.

Forward and 64 for Asia have to point 57.

Point 78 for Europe . After point 79 in summary, the is a normalization of backlogs are in a broad for him and this continues.

Backlogs in the third quarter continue to shrink to a high level still hybrid it really high level of 4.5 months down from 4.9 months into second quarter.

4.4 months in semiconductors, and 4.5 and Passives, let me remind you that historical levels at approximately a three months.

Distribution inventories reduced by 36 million inter quarter by all regions and virtually all commodity product lines are concerned.

Price decline has restarted predominantly in semiconductors.

For all be shave, we have seen minus 1.1 prices versus prior quarter in minus 1.9 versus prior year.

Ted if it as our intuitive for semiconductors, this through a minus 2.1% versus prior quarter minus 4.3% versus prior year.

For the passives minus 0.1% versus prior quarter, and plus four and 5% versus prior year.

Some comments on operations.

In the third quarter be again, we're able to offset the negative impact on the conservative margin by cost reduction and by innovation.

Despite cost related to adaptation of static lever endo for near term foundry capacities.

As Ginny costs into third quarter came in at 92 million.

Which was below expectations, primarily due to trends with belt tightening and the adaptation of bonuses.

Manufacturing fixed costs in Q3, EBITDA 125 million.

Total employment at the end of to second quarter or was the end of the third quarter. So he was 23100.

Down by 2% versus prior quarter due to lower production output requirements.

Excluding exchange it impacts inventories in the quarter decreased by 12 million raw materials basically made that zero down by 12 million race Wip and finished goods reflects.

The inventory turns into third quarter remained at a fairly good level of 4.1.

Capital spending in Q3 was 30 million versus 50 million in prior year.

18 billion will spend for expansion 1 billion for cost reduction at 11 billion for the maintenance of the business.

For 2019, we continue to expect Capex of about 150 million.

Which reflects lower short term market requirements.

Concerning the cash flow.

We are in Q3 generated cash from operations of 76 million versus 71 million in prior year.

Q3 of last year was burdened by cash taxes paid for cash repatriation of 65 million.

Q3 of this year was burdened by 18 million.

We generated cash from operations of 362 million on a trailing 12 months basis.

Including 38 million cash takes is paid for cash repatriation.

We generated into third quarter free cash of 46 million versus 21 million in prior year Q3 of last year was burdened by cash takes is paid for cash repatriation of 65 million Q3 of this year by 18 billion.

We generated free cash of 205 chameleon on a trailing 12 months basis, ICSC, including 38 million cash taxes paid for cash repatriation.

Coming to the product lines and studying this resistors and inductors.

With resistors and inductors, we enjoy a very strong position in the industrial or 2 million medical market segments.

Vishays traditional and since use most profitable business also feeling the impact of high inventories at distributors.

Sales in the third quarter 227 billion down by 15 million or by 6% versus prior quarter in down by 23 million or by 9% versus prior year, all that inc., excluding exchange it impacts.

Book to Bill in the third quarter was point 86 of the point 88 in prior quarter.

Backlog remained at 4.6 months, which is still very high.

Gross margin for resistors and inductors remained at 29% of sales I.

Manufacturing capacities now out attempted to prisons requirements.

Inventory turns into third quarter remained at a good level of 4.2.

There's a low price decline in this product line minus 0.3% versus prior quarter minus 0.5% versus prior year.

We have slowed down the expansion of manufacturing capacities for male since in food just as the chips, but we remain ready for serving increasing market requirements into future.

Coming to capacitors, our business risk capacitors is based on a broad range of technologies with a strong position in American and European market niches.

We enjoy increasing opportunities into fields of power transmission and of electric cars.

Sales in the third quarter over 98 million.

11% below prior quota.

And 14% below prior year, which excludes exchange rate effects.

Book to Bill issue into third quarter was point 76 of the point 68 in prior quarter.

Also commodity capacitors see backlog normalization and inventory correction.

Backlog reduced further to a still high level of 4.3 months.

The gross margin in the quarter was a 22% of sales versus 24% in prior quarter as a result of lower volume.

Inventory turns into quota.

It's normal 3.4.

Selling prices increased reserves prior year entry sobi prior quarter.

By 0.6% versus prior quarter and by 2.8% versus prior year.

Separately capacitor lines keep benefiting from major governmental programs in China and from the ongoing strength of the military markets in the United States.

Opto.

Vishays business with Opto products consists of infrared emitters receivers census, encompass it's been lists of elite these for automotive applications.

The optical business since a few quarters suffered badly from high distribution inventories and unfavorable product mix and the general weakness of a main product line predominantly in Asia, but.

But we now believe that that business has bottomed.

Sales in the quarter below 51 million.

16% below prior quarter.

And 33% below prior year, which excludes exchange rate effects.

Book to Bill in the third quarter was point 86, after putting 70 in prior quarter.

The backlog increased to 4.4 months.

Gross margin in the quarter came in at 22% of sales after 27% into second quarter much below historical levels for the most part due to substantially lower volume.

The line is good inventory turns were 5.3 in the quarter as compared to 5.6 into second quarter.

Price decline is accelerating minus 2.7% versus prior quarter minus 6% versus prior year.

We expect the business to come back to more historical levels of profitability. After this normalization phase.

Coming to the dilutes.

Diodes for Vishay represents a broad commodity business, where we are larger supplier worldwide.

Vishay office virtually all technologies this whether it's the most complete product portfolio.

The business has a very strong position in the automotive and industrial market segments, but suffers very substantially from two high inventory.

At distributors.

Sales in the quarter over a 124 million.

13% below prior quarter, and 33% below prior year, which excludes exchange rate effects.

The normalization of backlog progresses and explains the very weak book to Bill the ratio of point 57 in the quota of poor after point 52 in the second quarter.

Backlog reduced to a still very high level of 4.9 months from 5.5 months in prior quarter.

Gross margin in the quarter came in at 17% of sales down from 20% into second quarter.

A further reduction of the sales volume in combination with costs to adapt direct labor burden the results.

Inventory turns remained at a good level of 4.2 as compared to 4.3 in prior quarter.

We are back to historical rates of price decline, we have seen minus 2.6% versus prior quarter minus 3.9% versus prior year, thereby Terry areas are included.

We definitely expect diodes to continue their success story at recent of recent years to the full extent after the normalization of the inventories into supply chain has been finalized.

Coming to Mosfets.

Vishay continues to be one of the market leaders in MOSFET transistors mosfets over the last year's developed a strong and growing position in automotive.

Also mosfets now see the impact of inventory reductions in the supply chain.

Sales in the quarter over 127 million, 2% below prior quarter.

And 12% below prior year, excluding exchange it impacts.

The book to Bill ratio into third quarter remained at point 54.

The normalization of backlogs also for the most fits continues.

Backlog has reduced to a still high level of 4.0 months after 5.3 month in prior quarter.

Gross margin in the quarter came in at 24% of sales as compared to 25% into second quarter.

Which includes costs for near term foundry capacities adaptation.

Fairly good inventory turns we have seen for most fits or 4.0 in the quarter as compared to 4.2 in the second quarter.

Price decline is at normal levels minus 1.5% versus prior quarter and minus 3.9% versus prior year.

We continue to expand internal and mid to long term foundry capacities preparing ourselves for substantial increases of demand in particular in automotive in the mid term.

Let me summarize.

After a record year 2018, our business continues to be interface of correction and normalization.

I have seen all this happening before.

The electronics industry business is meant to say notoriously cyclical.

Automotive and far east markets in general are less favorable than in recent years and still high inventory levels in the global supply chain should impact our business for another two quarters.

On the other hand, there is no reason to tout the growth potential for electronics the fundamentals if not changed at all.

Vishay is a very valid established product line supplier will benefit from all moves towards electrification going forward.

We currently are managing to slow down by adapting all operational parent meters is we have done this in the past.

On the other hand.

Our increased machine capacities will enable us to participate in the next economic upturn to the full extent.

We are well underway to implement our announced restructuring and retrieving nation program. It aims at an annual reduction of personal fixed costs of 15 million when fully implemented by Q1 2321.

Having to expect a continuation of the inventory burn off into channel.

Before the fourth quarter Guy to a sales range of 582, six only 20 billion.

Gross margins of between 23 and 24%.

Thank you very much Peter.

Thank you Dr., Paul we're now open the call two questions. Stephanie Please take the first question.

At this time, if he would like to ask a question. Please press star the number one and your telephone keypad. Our first question comes from the line have Matt Sheerin with Stifel.

Oh, yes, thank you and good morning.

Dr. Paul.

In terms of the the bookings in the this or the backlog in semiconductors versus passives. It looks like the passive components side of the business is holding up a little bit better.

Is that because that seems to be lagging semiconductors, which got hit earlier or does it have to do with.

End market exposure could you just talked about that.

I believe.

That.

That's the share of commodity products in semiconductors in that case appreciate as much higher than in the case of passive aggressive business consists of quite a nice she of specialty products to be a backlogs that went out so much the nervousness of getting these specialty products was not as high as we have seen that in.

The other lines into more commodity oriented clients and so the impressive really behave differently, it's not at the lake the it Theyve never the the reason is much less to do that that's the answer.

Understood and it also looks like the pricing it is starting to get hidden sami's and not on the passenger side are you expecting as you get into the new year, particularly with new OEM contracts that you're going to see more normal price declines in both areas of the business well as you know our main price.

You can happen as at the commodity components really and this is predominantly semiconductors, we I in the midst of negotiations for the next year and I can tell do yes, there will be some concessions to be made but nothing special. So it's just the return of normal conditions as we see it.

Okay, and only if the capital effect capacity expansion sounds like you're you're pulling back on some production areas, but you're also continuing to add capacity could you tell us areas, where you are adding capacity what product lines.

Hi, there quite a few even so as a matter of fact I don't want to go through all my lines, but predominantly inductors or they have a major success in the market, which really is independent from these economic cycle at the moment and we can hardly at capacity fast enough power power inductors. That's the most prominent example, but we also have.

To think of Mosfets, we believed that the growth in automotive with our Mosfets will be quite substantial going forward and we have to take care of capacities insight capacity as well as foundry capacity I think these two segments. They represent the the the places so to speak for every continue to look for more volume other.

Wise, we are in a good position we have invested a lot in the last two years.

Okay. Thank you very much thank you.

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

Good morning, Thanks for taking my question.

On your broad based segment, specifically industrial and automotive. Another these businesses are depressed levels, but off of a low base. These two businesses are typically up sequentially in Q1.

But you still have some disti inventory work downturn. So if you look at your backlog visibility for Q1, and maybe for three and six months customer forecasts do you think you'll get some positive seasonality in Q1 of next year.

Well, we feel that in Q1 really the everything is determined by the inventory burn off these days right.

It's a matter effect.

We see the inventory coming down which was worst could use as a matter of fact into third quarter and this will continue into fourth quarter and we do believe that also the first quarter will still be impacted.

To the extent you know the future. It all depends also on the development of POS we believe that you'll see a real change.

Of the Directionally in quarter two.

Got it thank you for that take for them. So it's there and then as cheap as Ginny. Your prior view I think on Q4 as she nail was 98 million now you're anticipating 95 is that just continued discipline and belt tightening or you're getting some acceleration of the global cost reduction program sooner and.

Global cost reduction program is still innocent for that so to speak we are just starting to defy gravity and bits of defining a it's not that impact. So we try to save money to say clearly we have seen sales coming down and the company's disciplined I believe we started to save money. It's a matter of fact, and we continue to do so.

And do you have an initial view on SGN Airport 2020.

Yes, we do we do we will have less than than the inflation, but we may want to.

<unk> somebody helps me so as a matter of fact, we believe it's you need to area of 400 and this includes the inflation do annual wage increase.

Got it thanks and just my last question is if you have we don't ever finalists budget. Yet this is the direction approximately.

Got it Okay. I appreciate the then my last question.

If I look back at the cyclical downturn, let's say 2015 2016, you Cry. Your current diode then opto revenue run rates are bottoming, probably about those same levels as the last cycle, but gross margins for dialed in this cycle. The above 400 500 basis points lower opto gross margins about it.

<unk> 700 basis basis points lower versus like last cycle. What are the biggest differences is it just a utilization at this cycle or just a much lower as customers brought up inventories.

As a matter of fact on Mosfets you have not mentioned most of its because most of its have changed in the other directionally, yes, that's right look better.

Two is the special case diodes, I cannot see that I believe diodes, principally speaking a date. It's a specialty included we have free to be had to reduce people this quarter and this costed money summit effect and this is part of the Pinedale diodes. We are very very confident they also improved editor earnings power substantially over.

For years and continue to do so we I am not satisfied with really what I'm not satisfied service is the is the development at our opt to line they suffered from lower volume, but it also does suffered more than they should have they are focused very much on China and had some specific problems in China. There we believed that this.

Line really turned around as we go because they are forcing now with the sensors and copper area and on the weighed on the way to do that so they suffered was no question, but this is the only line I would say that they suffered more historically.

Great. Thank you Dr. Paul.

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

Hey, good afternoon, everyone.

Thanks for taking my question.

Hi, Matt.

Dr., Paul if we were at a fast for two quarters ahead or which group.

Distribution partner will be at equilibrium.

We expect a stable ours or increase from here I.

I guess, what should we expect from an end market looks or specific product growth initiatives that will drive an upward and watch margins milliseconds.

Oh, sorry, I may not have understood completely acoustically. So what was it so as soon as the dust will be down you sit right.

Two quarters I had was something.

So it's just the correct.

Who works for your inventory.

Challenge that distribution partners.

What's your allocation for please mark I guess would.

Beyond these younger its imports itself.

Working down toward a I mean, what do you keep end market lets or is that part.

No more complex footwear.

I see no reasons that the mechanics. After this normalization will be different from the mechanics, which were there before this upturn, which was partially leading to higher inventories a I believe that we're going to see very stable pricing into white field of our specialty products and you already see that also happening now like it over.

In the past its always quite constant and then of course, you will see some price decline on the commodity side, which also is starting to to show and this price decline we are used to.

We are able to since many many years, we show it even discussing quite often a that our variable much in remains constant we can defend it. Despite this price decline. Despite a inflation picked by cost reduction that innovation. So I see I'm not concerned at all we returned to normal can.

Additions and we are used to these conditions of course.

That's it thank you I.

I know your outlook calls for a sequential decline in third or fourth quarter, but it's not only on markets to be up sequentially in the fourth quarter.

In addition to that you know sort of your business largely has spoken about modest improvements in actual China automotive absolutely on electric vehicle side as well, so that's where power devices.

Industrial systems in servers.

I was hoping you could describe what you're experiencing in those areas.

And also what you're seeing a cost melt infrastructure, specifically as we look <unk> fourth quarter Q1. Thank you you are talking China in particular or.

In terms of automotive or broadly, but but China automotives in particular, yes, okay, well in particular automotive in general from a from a standpoint of peak is produced is down and China to my understanding is down especially much.

On the other hand.

It's the old story, there what is down in terms of pieces in terms of pieces of automotive cars produced does not mean necessarily for the electronic supplier that he sees the same downturn. This has always been the case and also now we you see we'd be do quite well in automotive a and this of course is the consequence of the fact that more and.

More electrification takes place in automotive and this is too for China also.

In particular eyes, I believe even in particular in China, because I believe this local suppliers that with relatively small models and want to become more sophisticated so I'm not concerned I think this growing electrical constant contact or a context.

Content will help us also too to do quite well. Despite the production rates of automotive may not grow every year and maybe they are they a stagnating for the next years, which is the comment belief.

China is not doing very well at the moment in total but also this doesn't have to stay the same way you can be also modestly optimistic that they will come back to higher growth rates.

Okay. So I'm not concerned about automotive neither in in China, No new globally really continue to be our area of strength for vishay.

Hello, that's what I, just and start here are a clarification on either curious or you're saying with regard to.

Network infrastructure and in addition to.

Our server or has your peers at Calder. Thank you.

Thank you.

Oh.

Your next question comes from a line of Shawn Harrison with Longbow.

Hi afternoon, everybody.

Thank you Paul.

Once the inventory positions a distribution normalize be it the first or sometime after that we'll also see your backlog it back that normal.

After three months level is there anything I guess the question is that we should going from distribution versus you know trend versus your backlog normalizing.

There was never thought with them that during the last two years boom, we knew from the very beginning from the time with be started to to grow.

Quite heavily into year 2017 be from day, one you in not only vishay everybody knew that this was partially driven by nervousness get not getting and not being able to get enough products. There's absolutely no doubt that this business, which always typically has a three month backlog. We go back to this level of three months.

Backlog when do you live in this field is out in the lead times is to have done it already have normalized no question about it the backlogs, we'll go back to normal.

And I guess, a larger picture question and then the concern looming out there is a this made in China components initiatives and there's general theories on whether they.

They try to start more at the high end in the market that and what commodity products and obviously a list or.

Semiconductor component suppliers, one let me talk about that risk that you see out there and whether there's any.

Pencil threats to the business over the next 12 months or couple of years.

Falling Chinese competition domestic Chinese.

Well, we are Chinese also so as a as a matter of fact, if you refer and I must say prepared connection to their if you refer to our competitiveness in China vis a vis a vis local suppliers and this is what I understood. We are also producing in China is a middle effect. So I'm not concerned there also at the moment.

We go together with with with all the suppliers to China, we see the negative so far for an economy that doesn't grow so much anymore as it used to be but I think they are also reasons why it's not so growing so much these days and I believe part of the reasons May go away.

And we will provide us with China remains to be a center of our efforts in sales. It's the biggest market that exists for us. So we will continue to go there and we are quite optimistic and confident that we can compete deals in future.

Okay.

Yeah.

Your next question comes from the line every Blue bar try out with bank of America.

Your line is open.

Hello.

Hi can you hear me now, yes, hi, Thanks for taking my question Dr.. Paul you mentioned that there's about two quarters worth of inventory that needs to be burned off.

Did I understand correctly than most of that inventory is in Europe or is the geographical equally distributed across the reasonable. This is a broad distribution of too much inventory delano, it's not the case, so it's called <unk>.

Okay, and then did I understand correctly that pricing is getting more stable and you see that continuing because if you still have two quarters of inventory would that not put more downward pressure on pricing.

Yeah first of all these the prices are on the on on a specialty products a stable liked it always has been the pricing of come for commodity product, which we are rather stable in during the last two years of kind of shortage. They now start to the two could go down like they always do it's a basic.

Continuous price decline on commodity product and we see it now returning but we have learned to co presenters are met effect.

The times of inventory decrease is not in this is it does not necessarily mean that there's more price pressures and middle effect.

Okay and for my last question do you have a view on industry supply versus demand I mean, your competitors are both added capacity so deal having a view of how much total capacity exists now and in the.

In the system and how does that compare to demand and would that impact a impact pricing or the next to fix once a year.

Mm.

You refer to the high capacity increases so far in our industry over the last two years I suspect right region, which is of course, there is a lot of capacity put it being being put in place no question about it and we envision is one of the ones, but I believe and I was always the policy to be ahead of the demand it.

Any point in time, we have to serve our market spent the markets want to if the volume and I believe that the corner, we will be turn up I think we will need this capacity in a very foreseeable future and this is twofold. My competition of course also I do not see a direct connection of course theoretically should exist, but I do.

Not see a direct connection between the machine capacity available and the price pressure I admit you can argue but property I would now I've not seen that you can always find cases, where somebody wants to fill this line and we are also not innocent sometimes but overall this is not the driving momentum.

Okay. All right. Thank you for taking my question.

Okay. Thank you there no additional questions at this time I'll turn it back over to management for closing remarks.

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

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

[noise].