Q3 2020 Vishay Intertechnology Inc Earnings Call
[music], ladies and gentlemen, thank you for standing by and welcome to the Vishay <unk> third quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.
You ask a question during the session you'll need to press star one on your telephone. Please be advised that todays conference is being recorded I would now like to end the conference over to Peter Henrici head of Investor Relations. Please go ahead Sir.
Thank you Regina good morning, and welcome to Vishay Intertechnology Spark water Twentytwenty 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'll start today's call with the CFO, who will review Vishays third quarter Twentytwenty 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.
Yes.
This call is being webcast from the Investor Relations section of our website at IR Dot Vishay Dot com three.
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 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 entry shapes forms 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, but 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 for the third quarter Twentytwenty financial information containing some of the operational metrics Dr. Paul will be discussing.
Now I turn the call over to Chief Financial Officer, Lori Lipcaman.
Thank you Peter good morning, everyone.
I am sure that most of you have had a chance to review our earnings press release.
I would focus on some highlights and key metrics.
Vishay reported revenues for Q3 of 640 million significantly higher than our original expectations. That's preannounced on a couple of quick.
EPS was 23 cents for the quarter.
Adjusted EPS was 25 cents for the quarter.
During the quarter, we repurchased another 59 million principal amount that convertible notes due 2025.
And recognized a U.S. GAAP loss on extinguishment I.
I will elaborate on these transactions in a few moments.
On October 1st 2020, we completed the acquisition of the worldwide business, the pipe and tube products.
This nice acquisition will complement our existing thin film business and strengthen our competitiveness in this market.
Due to the timing of the acquisition at the end of the fiscal quarter ATP had no impact on Q3 results.
The macroeconomic effects of COVID-19 continued to impact our business and our financial results.
Similar to Q1 and Q2, we have identified certain COVID-19 related charges net of certain subsidies, which are directly attributable to the COVID-19, Oh sorry.
These items were insignificant Q2, and Q3 result.
But are added back when calculating our non-GAAP adjusted EPS for comparability.
Such measures exclude indirect impacts such as general macroeconomic effect, probably 19 on our business and higher shipping costs due to reduced shipping capacity.
Revenues in the quarter were 640 million.
By 10% versus previous quarter, and up by 1.9% compared to prior year.
Gross margin was 23.7%.
Adjusted gross margin, excluding called <unk> was also 23.7%.
Operating margin was 9.6%.
Adjusted operating margin, excluding corporate cost was also 9.6%.
EPS was 23 cents.
Adjusted EPS was 25 cents.
EBITDA was 94 million or 14.7%.
Adjusted EBITDA was 97 million.
18.2%.
Reconciling versus prior quarter.
Adjusted operating income quarter, three 2020 compared to adjusted operating income for prior quarter.
Based on 8 million higher sales were 47 million, excluding exchange rate impacts a.
Adjusted operating income increased by 20 million.
To 61 million in Q3, 2020 from 42 million in Q2 2020.
The main elements where.
Average selling prices had a negative impact of 7 million, representing a 1.1% ASP decline.
Volume increased with a positive impact of 24 million, representing a 9.4% increase.
Variable cost decreased with a positive impact of 6 million, primarily due to volume related efficiencies.
Inventory impact had a negative effect 3 million.
Reconciling versus prior year adjusted operating income Q3, 2020 compared to operating income in Q3 2019.
Based on 12 million higher sales were 3 million excluding exchange rate impacts.
Adjusted operating income increased by 3 million.
To 61 million in Q3, 2020 from 58 million in Q3 2019.
The main elements where.
Average selling prices had a negative impact of 18 million, representing a 2.7% ASP decline.
Volume increased with a positive impact of 7 million, representing a 3.4% increase.
Variable costs decreased with a positive impact of 13 million.
Manufacturing efficiencies cost reductions and lower material prices more than offset increases in metal prices labor costs.
Fixed cost decrease the positive impact of 3 million, primarily due to lower <unk> lower travel costs.
Selling general and administrative expenses for the quarter were 90 million, which includes a net benefit of 0.4 million subsidies in excess of identified corporate costs.
For Q4 2020, our expectations are approximately 94 million of <unk> expenses at constant exchange rate.
[noise] during the quarter, we weren't able to repurchase 59 million principal amount our outstanding convertible notes due 2025.
Year to date, we have repurchased 165 million principal amount of the convertible notes due 2025.
The year to date average repurchase price with the notes was 95.3% of face value.
The U.S. GAAP loss on extinguishment, primarily due to reduced market interest rates since the initial issuances, which is a key assumption in bifurcated between the debt and equity atrophy.
By reducing our fixed term debt repurchase of the convertible notes, but the future flexibility to better utilize our revolver to adjust our debt levels as necessary.
We continue to be authorized by our board of directors to repurchase up to an additional 65 million of convertible notes due 2025 as well as the remaining 3 million of convertible dentures debentures subject to market and business conditions legal requirements and other factors.
We had total liquidity of 1.4 billion at quarter end.
Cash and short term investments comprised 712 million and the usable capacity on the credit facility is approximately 672 million.
[noise] or debt at quarter end comprised of the convertible notes due 2025.
And the remaining convertible debentures due in 2000 42041.
The principal amount or face value of the converts.
468 million.
465 million related to the notes due 2025.
Three <unk> 3 million related to the remaining debentures the.
The current value of 392 million net of unamortized discount.
And debt issuance costs.
There were no one else outstanding on a revolving credit facility at the end of Q3.
However, we did utilize revolved from time to time during Q3 to meet short term financing needs and expect to continue to do so in the future.
No principal payments are due until 2020 times.
And revolving credit facility expires in June 2024.
We expect interest expense for Q4 to be approximately 7 million, excluding the impact of any additional convertible note repurchases in Q4.
As announced last year, we are implementing global cost reduction programs, which are expected to be fully implemented by the end of 2020.
The programs are intended to provide management rejuvenation.
To lower cost by approximately 15 million annually when fully implemented.
The year to date effective tax rate on a GAAP basis. It was approximately 23%.
The year to date normalized tax rate was approximately 24%.
For the quarter. This mathematically deals the tax rate of approximately 26% for both GAAP and normalized.
Our year to date GAAP tax rate includes the unusual tax benefit related to the settlement some of the convertible debentures in Q1.
Our year to date normalized rate excludes the unusual tax items as well as the tax effects the pre tax loss on extinguishment of debt.
The identified comic con and the Q2 restructuring charge.
Our consolidated effective tax rate is based on an assumed level and mix of income among our various taxing jurisdictions.
The shift in income could result in significantly different results.
We expect our normalized effective tax rate for 2020 to be between 23 and 25%.
Total shares outstanding at quarter end were 145 million.
The expected share count for EPS purposes for the fourth quarter 2020 is approximately 145 million.
For a full explanation about EPS share count and variables that impact the calculation. Please refer to the 8-K filed.
Cash from operations for the quarter was 64 million.
Capital expenditures for the quarter were 22 million.
Free cash for the quarter was 42 million.
For the trailing 12 month cash from operations was 274 million.
Capital expenditures for 127 million.
Split approximately for expansion 87 million for cost reduction 7 million for.
For maintenance of business 33 million.
Free cash generation for the trailing 12 month period was 147 million.
The trailing 12 month period includes 16 million cash taxes paid related to the cash repatriation.
Just 15 million cash taxes paid for the current year installment of the U.S. tax reform transition.
He has consistently generated an excess of 100 million.
Cash flows from operations each of the past 25 years and greater than 200 million for the last 18 months.
[noise] backlog at the end of quarter three was at 928 million or 4.3 months of sales.
Inventories decreased quarter over quarter by 15 million, excluding exchange rate impacts.
Days of inventory outstanding were 83 days.
Days sales outstanding for the quarter were 45 days.
Decent payables outstanding for the quarter were 29 days.
Resulting in a cash conversion cycle of 99 days.
Now I will turn the call over to our Chief Executive Officer, Dr. Gerald Paul.
Thank you Lori and good morning, everybody.
Despite ongoing negative impact so stupid they make wishes to build my business into Citi quota, it's even a better than expected.
I've done this study could drop in particular on the automotive segment in the second quarter, we experienced a strong recovery in the third quarter.
Having a bip did close in manufacturing capacities during the second quarter, we understood. The quota enjoyed to the full impact of the economic upturn, we achieved a gross margin.
23.7% of sales.
Operating margin was 9.6% of sales earnings.
Earnings per share of 23 cents and adjusted earnings per share of 25 cents.
The generational freakishly, maintaining a good little 42 million in the fourth.
Let me describe the economic environment as we see it.
Indeed, as I said, its economic and vitamin D understood what the improved substantially mainly driven by this unexpected the abrupt recovery off the automotive sector, but also by continued strong Asian markets.
The seals and what is picking up steam you'll tediously total base looks remained virtually flat on a high level.
15 week backlogs on the other hand, but increasing steadily and of course, if the border which is a principally encouraging sign.
Lead times start to stretch out in general, but no do you shortages of supply of visibility yet.
Cancellations have dropped to a normal level and we see quite normally play, especially in Chile.
Let me come to the regions yes.
The Americas have experienced a significant recovery off the automotive market, but at the same time, a cold weather related disruption of the commission if <unk> production.
For U.S. and P. ways seals into media Metrix Hospital bust.
Asia continued its strong recovery in particular, China.
There's been improvement that virtually all market segments, especially for computers influencing what do you need to put us.
Into high demand in Asia helped to build distribution inventories.
In Europe after he starting to disruption in the second quarter European automotive markets recovered steeply Judy <unk> water.
Industrial markets stabilize driven by growth in smart home automation.
And Youd alternative energy projects.
Like in the United States to commercial aircraft into see also in Europe. So CCB.
Some comments on distribution.
No the distribution improve seals into since quarter by 8%. This is playing out for the remaining slightly below prior year by 2%.
Pos increased versus prior quarter in the Americas, but trust person.
In Asia up by 10% and didn't you don't by 4%.
Inventories at distributors into stood for that decreased by 18 million. After an increase of 29 billion in the second quarter.
Inventory turns in distribution improved to 2.8 from 2.7 in Q2 and from 2.4 in prior year.
In the Americas, we have seen 1.5 turns off the 1.4 in Q2 and 1.5 in prior year.
In Asia, our full points he turns after 4.1 and see points see in play here.
In Europe, 3.0 turns to see missing for that too.
And in comparison to 2.9 insight yet.
I think you can see that Asian distribution year over year is in a substantially better inventory position now.
And all in all distribution remains quite confidence.
Let me comment on the most important industry segments.
After a massive decline in the second quarter automotive markets recovered strongly in the third quarter beyond our expectations.
The supply chain of weakness appears to be depleted electric vehicles continue to show high gross.
A mixed picture, we perceive for the broad industrial markets home do you need to take another cheese benefit, whereas poets since mission and other large government project. So far at this point the delays.
Factory automation remain strong.
As the oil and gas sector does not show yet signs oforty comedy.
The more concerning and work from home that ice tea mounting notebooks and service.
Five cheap to come start to support the demand for fixed telecom equipment smartphone sales continue to be depressed.
Overall, maybe could continue strong.
Military markets remain positive, but commercial avionics you sit in the substantial crises speech me last for some time.
And have you hope surface substantial ramp up or air conditioning production and gaming.
[noise], let me comment on Vishays business development into the water.
As indicated to the third quarter sales, excluding exchange rate impacts exceeded our initial guidance significantly.
Mostly due to a fall to a faster than expected recovery of the automotive sector, but also due to relatively stable sales to distribution.
We achieved sales of 640 million. This is 582 billion in say a quota.
In 628 million in play here.
Excluding exchange rate impacts sales in the third quarter were up by 47 billion or 8%. This is probably a quota.
And.
This is a year by 3 million 1.5%.
The book to Bill the issue in Q3 was point 99 as compared two point 82 in the second quarter.
Point 99 foot distribution.
The point 75 for the second quarter.
1.14, Oems Seph to point 93.
Point 98 for semiconductors, that's the point 81 in the second quarter.
1.0 passive stuff to point 80 city.
When 92 for the Americas, that's the point 81 in Q2.
1.44, Isheriff the point 86.
One point or one for Europe off the point 78.
The backlog in the third quarter decreased to a still historically high level of 4.3 months from 4.7 month for putting three months in semi send 4.4 months in passives.
It wasn't normally play, especially in Gen <unk> minus 1.1% versus prior quarter minus 2.7% versus prior year.
Some acceleration a.
For semiconductors minus 1.2% versus prior quarter minus 4.1%. This is try to you.
And quite normal price decline for the passives minus 8.9%, so probably a quarter versus prior quarter minus 1.3%. That's just play here.
Some highlights of operations.
In the third quarter, we again, the able to offset the norm and they get these impacts on t. country put as much in Israel is temporarily increased logistics close.
Despite qunar virtually all the time, so fussy into said wouldn't be able to operate in a normal session.
Adjusted is she M&A costs in the third quarter came in at 91 billion very close to our expectations.
And you're taking fixed costs in the third quarter, where it won 27 billion also according to our expectations.
Total employment three shape at the end of the third quarter was 21000 seek so five 6.5% down from prior year.
Excluding exchange rate impacts inventories in the quarter decreased by 15 million raw material supply 5 million and and finished goods, but 10 million.
And this includes the additional inventory so far away acquisition ATP three medium.
Inventory turns into to quarterly trends through a good level of 4.4.
Of the 3.9 in quarter two.
Capital spending in the third quarter was 22 million versus 30 million into your 15 billion for expansion to median for cost reduction and 5 million for the maintenance of the business.
So 2020, we continue to expect Capex of approximately 110 billion quite enough questions. We do we see requirements well Mike.
We generated cash from operations of 274 million on a trailing 12 months basis, including 16 billion cash taxes paid with cash repatriation.
And be generated free cash of 147 billion on a trailing 12 month basis again, including 16 billion cash taxes cash should it pick fish.
Let me comment on our major product lines into us that out this always for three systems.
With resistance, we enjoy a very strong positioning do you all to industrial we didn't make too much at six months into the offer virtually all resistant technologies.
Vishays traditional and traditionally growing business in the second quarter itself quite substantially from the weakness of the automotive market sector, but.
Well just now in process to recover.
Sales in the third quarter was 45 million, which.
Which is up by 6 million or 5% versus play a quota.
Down by 11 billion was 7% still this is probably a year or do seeks excluding exchange rate impacts.
Book to Bill in the quarter was 1.06 of the point 73 in Q2.
Best look into quarterly remained at the high level of 4.4 months.
Gross margin for systems in the quarter improved to 24% of sales.
Up from 23% in play a quota and all this despite some inventory reduction in Q3.
Inventory turns in Q3, you, but at a satisfactory level of 4.1 left to 3.7 in prior quarter.
We saw normal price decline.
But some temporary impact of customer mix mindless, 0.7% versus prior quarter minus 2.5%. This is Craig yes.
In Q3, we completed the acquisition of ATP avail established in financially successful producer of specialty thin film substrates with annual sales of about 20 million.
The acquisition further strengthens vishays position in specialty these systems.
We continue to see significant opportunities to further expand the assisted business into the future.
Coming to indicate this.
The business consists of power inductors since we get Ics.
The only thing the growing need for ends up this in general to be she developed a platform multiple bust and efficient power inductors and leads to Mike technically.
With my colleagues, we are very well positioned in specialty business is showing steady growth since he is.
After Schwartz slowed down in the second quarter and stuff that's already in to see the effect was the impressive long term growth plus.
Sales of industries in Q3 was 79 million up by 14 billion, what 21% versus prior quarter and up by probably a yet by 5 million was 7% excluding exchange rate impacts.
Book to Bill into took what else went up this was point 96 on the live in the prior quarter.
Yes look into through the quarter has come down to a still high 4.3 months from when not sufficient spiky, but no five points for the month and try a quota.
As a result of higher volume gross margin in the third quarter improved further to 33% of sales from 31% in prior quarter.
Inventory turns into quota improved sharply.
To 4.9 to 3.8 in prior quarter.
There is no longer plastic thing you over here a place to kind of 2.5% VW paying for it to be so some impact of customer mix. We had done a plastic time, he said, he probably a quarter or 2.5%.
Indicators continue to carry our highest confidence for growth well into passive split for you.
[noise] capacitors.
Our business with capacity. This 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 poets IND submission endopredict through costs, namely in Asia, respectively in China.
Also capacities and also capacity is it faced a weak second quarter, but started to recover into the city.
Sales seem to see of capacitors, it's 90 city medium.
7 billion <unk>, 8% above prior quarter.
About 7 billion was 7% below prior year, which excludes exchange rate effects.
Book to Bill in the third quarter was <unk> point 95 of the 0.9 I accord.
Backlog decreased slightly into a still high levels of footprint four months down from 5.2 months the second quarter.
Mostly due to higher volume goes much into the third quarter improved to 20% of sales from 18% in play a quota.
Inventory turns into quarter improved to 3.7 from low 3.3 in the second quarter.
We have seen stable increasing selling prices, 0.1% plus this is probably a quota in two person plus for us.
This place yet.
We will continue to benefit from strong meters markets and the ongoing need for grid the expenses, namely in China.
Coming to the Opto line.
She is business.
Opto products consists of sensus infer that the Mrs receivers couplers and indeed these for automotive applications.
Sales in the quarter was 65 medium.
29% above prior quarter, and 25% above prior year, which excludes exchange rate impacts really steep recovery.
Book to Bill in the third quarter was point 97 of the point 96 in prior quarter backlog has reduced to a still high level of 4.6 month.
The 6.1 month to see what huh.
Driven by better volume better efficiencies in the better product mix gross margin in the quarter Spike to 33% of sales coming up from 24% goes much insider sport.
Yes, good inventory turns were 5.4.
In Q3 as compared to 4.9 in Q2 price decline will slow minus 8.2% versus prior quarter minus 8.6%. This is crazy.
Do you have confidence that opto products going forward, but will contribute noticeably to LCOS.
Beyond the process, you know to modernize and expand our hydrocodone set in Germany.
Yes.
I would say for vishay represents a broad commodity business well be out there not just supply a real divide.
Vishay office virtually all technologies as well as the most complete product portfolio.
The business has a very strong position in the automotive and industrial market segments, and just kept growing steadily and profitably over years.
Diodes since a few quarters had suffered from too much inventory in the supply chain and from the weakness of its main markets.
Apparently the business now approaches a phase of the company.
Sales in the quarter of a 124 million down by 2% versus prior quarter and down by 1% versus prior year, excluding exchange rate effects.
Book to Bill in the quarter was 1.25 as compared to <unk> point 61 in the second quarter.
Backlog increased to 4.7 months up from 4.5 month in play a quota.
It's me out on a historical high.
Gross margin in the quarter reduced to 17% of sales from 20% in the sea water.
Temporarily increased price pressure in combination with some inefficiencies related to the startup of the new Taiwanese plans, but the results in the quarter.
Inventory turns improved to 4.4 after four point to the second quarter.
Some acceleration in price decline of minus 1.9% versus prior quarter minus 4.5% versus play here.
We expect the profitability off the table its line to return to more historical levels its volume normalizing.
Last but not least the mosfets line.
We chase the bottom of the market leaders in most fit since this is a this most fits we enjoy a strong and growing market position in automotive, which one do you have an increasing use of most fits in automotive build to fight the successful future.
Sales in the quarter up at 134 million, 11% above prior quarter and 5% above prior year.
Floating exchange rate effects.
The book to Bill the issue was point 93 in the quarter up the point 97 in Q2.
Backlog, but healthy 3.7 months as compared to 4.4 months in Q2.
Gross margin in the quarter was at 22% of sales slightly below Q2 at 23%.
Besides versus play a quota that burdened by a temporary ideally less beneficial product and customer mix the impact of inventory reduction and higher metal prices.
Inventory turns into caught up with 4.4 as compared to 3.7 into second quarter price decline for the most fits was normal minus 1.2% versus player quota.
And minus 5.7% versus prior year.
Oh feels the most fits remain key for vicious growth.
Going forward.
Let me summarize.
See unprecedented condemning continues to impact very many segments of the village economy.
Nevertheless, electronics, apparently is on the way to recover in a broader way from a very difficult second quarter.
Because nobody principally has been expected for the third quarter, but it happened faster and more steeply than anticipated.
Obviously, the very positive fundamentals of electronic growth Peafiel for another time.
Vishay.
Like shooting for much economic downturns has reacted quickly and professionally by controlling fixed costs and inventories and by adapting manufacturing capacities and we are ready to exploit and out the next upturn to the full extent.
Our business model has not changed and continues to be successful.
We will continue to focus on profitability and cash generation.
Well, neither neglecting our essential long term strategic as they did she is no of course safe guarding the health and well being of our employees.
Well no remains under good control in our plants and offices.
For the fourth quarter, we guide to a sales range of 620 to 660 million at a close matching of 23.9% plus minus 70 basis points.
Thank you Peter.
[noise]. Thank you Dr., Paul we'll now open the call to questions.
Gina Please take the first question.
Our first question will come from the line of Ruplu Bhattacharya with Bank of America. Please go ahead hi.
Hi, Thanks for taking my questions.
Dr., Paul and in the past you've talked about some excess inventory in the in the distribution channel. This quarter. You saw reduction I think you said of $18 million worth of inventory so with that would you characterize the <unk>.
<unk> distribution as normal and overall when you look at supply demand in the industry.
How would you characterize that.
I think really it isn't going to do a deficit distribution have come down and the Vista Bill to a normal everything that would even saying deviation built we would expect some restocking submit effect you know how long it took to get there since a long time and I would dare to say that you never know it completely but I would dare to say.
The inventory the supply chain is fairly normal at this point okay.
Okay, and then maybe on the margin side Opto saw it really good margins. This quarter, how should we think that that level of margins can persist going forward and the same question for diodes. I think you had some you know gross margins came in at 17%. So how would you how would you see those margins progressing.
[laughter] I use but my bets carefully in open to us it spiked to 33% and you hit the same discussion before I believe you Trust, we confirmed our optimism for the nine what is sustainable at these levels of sales is the high end of that of the Twentys to 33%. Both also some luck included.
Concerning product mix is a little thing, but I think he said, which is a nice development. He said the last two years I would see sustainable it placed in service that was concerning the diodes little disappointing, but its a pure gain before you you can calculate if you went back if you could be expected to do so to vote.
Human speech be hit before really realistically when you when you go one and a half years ago, you would return to gross merchants like say, 23% of sales and this was always our expectation for this commodity line, which grows.
Got it and maybe just for my last question can you maybe talk about your capital allocation priorities as we sit here.
You think about reinvesting in the business forces further M&A and buybacks and any thoughts on the dividend.
Well. So we we have always all these possibilities it might be we invest in the business of the already we increased the capital spending just make our plans for next year.
Do not misused because the funding of equipment that at this point in time, you never know all the details on that but principally invested enough.
We paid a dividend. So all this is of course a decision of the board lets you continue to pay the dividend.
And we also evaluate all kinds of other uses so the produce kish so no change.
Okay. Thanks for taking my questions and congrats on the strong results in the quarter.
Thank you.
And we will come from the line of Karl Ackerman with Cowen. Please go ahead.
Yes, hi, Thank you I have two questions if I may.
I guess Dr., Paul you know, it's encouraging to see the implementation of your M&A strategy, especially in the current environment.
Could you explain the deal rationale for the thin film products business, and then perhaps any synergies with your portfolio or customer base and is there potential for more deal activity in the near term given what appears to be a stabilizing backlog.
Mhm kilo stands with yen, so anyways, absolutely two wouldn't be said it before we continuously look for specialty business is not necessarily only to systems, but also to assist us and I think this is an intelligent way and into the future. So we will try to continue of course it depends on the opportunities.
Let's see I'm looking continuously for that and in the case of ATP I think I'm very happy that we acquired the company you know we ought to lead into the system and we offer but pays it every quarter or two ago dishes seamless systems. So this one just added very nicely to our oh, the cheap basis it.
Complements other parts of the shape, which we already have one important she can see looks nice to see if it's I think there will be a very strong he will become very strong offerings in film substrates on the markets I'm very happy about that.
And it's profitable quite profitable, it's north of 35% goes.
Understood. Thank you for.
For my follow up the supply chain has flexed considerably on demand degradation in the June quarter, and now on a very strong sequential improvement in the third quarter.
First why shouldn't pricing improve for your products, if the supply chain remain stretched and backlog has come down considerably from the earlier part of the year second how has escalating trade friction and a rebound in end demand changed if at all your view on supply chain consolidation. Thank you.
Oh, well truthfully, if lead times stretch out its absolutely to be expected to deploy especially especially on commodity product will go down you know in all our specialty products. If you do not see I'm not exposed to the same kind of price pressures as we have it for the commodity products. It's here, but of course, it's true.
It's a increasing demands and stretching out lead times I would suspect also book what did you put up some.
Some of this price decline as we go forward and we hit examples that in the past.
Such a decline, which we have seen partially this year.
If you go back to history would not be the first time that such a decline will be followed by a nice upturn, which bits of cost in some positive impacts on to pricing amongst others.
Basically yes.
But what's the second part of the question.
Really.
Yes, Justin how you see the escalating trade friction and perhaps a.
A rebound in end demand change your view if at all on supply chain consolidation.
I think it doesn't change it fundamentally.
You do have some negatives, but the very limited, but no principal change for us.
Thank you.
Your next question comes from the line of Alvin Alvin Park with Stifel. Please go ahead.
Yes, hi, Thank you for taking the quick.
Graduation, solid results and guide I, just want to follow up on the automotive and.
And segment.
For the December quarter, and beyond I'm, just wondering if you see Q4 as kind of a peaking levels, where theres still generally positive momentum going into the March quarter. If there is any insight into fiscal year. The early part of fiscal year 2001.
[noise] first of all you basically said it yourself.
It wasn't such a spike as you may have expected did in quarter three quarter four months at least at the same level this quarter four in locomotive plus.
And as a matter of fact, I'm also quite optimistic for automotive for the year to come because you know electrification electronification helps a lot.
It's a middle factory I was always our picture that if the.
Sales units of cost so it would go down by 10% would more or less mean constancy elsewhere. So when you see there's a major impact they'll still be classification.
I think of course everything depends on the development of stability Clinton, we clear, but I'm confident that or just what we see now what sort of the company and not to spike.
I see thank you.
A follow up question if I may.
Capacitors the S.P. it was actually a very strong positive turn increase of 1% were correctly, 2% year over year and Belgium. Once two years ago, there was a huge uptick and pricing as well.
That shouldn't be times due to high Keysight and Lccs do you have any updates on how you're seeing that industry currently and if we might see similar spikes in similar constraints. Its first lead times into disc or 21 is the industrial automation automotives where to heat up.
If you refer especially to capacitors, yes, if unless it's bill.
Well, we she is not typically in capacity as you know we are nice businesses is a middle thing India for relatively high shield, especially to pull that's yeah not so much in the main better field of commodities. There we've used to from the M. excludes reasons I believe historically so we are not typical so you <unk> yeah, we are not the reflection of what's happened.
Into mass market those capacitors I would see principally speaking we book correcting some prices and submit effect. There was some customer mix change also in capacitors in order to get it helped the capacitors are to improve their profitability as it might affect but I wouldn't go further okay.
Thank you very much.
Your next question comes from the line of Shawn Harrison with loop capital. Please go ahead.
Hi, everybody.
Dr. Paul My first question is more on I think that the raw material and competitive environment. We've seen kind of commentary that supplies are tightening up a little bit is maybe competitors in asia or pre buying or the market pre buying some capacity, but what are you seeing in terms of just raw material availability any issues.
There for you and kind of are you seeing lead times of competitors stretch out that could potentially you know maybe shift some share to the shape those products are more difficult to get.
Well I can't give a simple answer we at this point in time I'm not a wheelchair teaches students at all material supply what has come up and this is why compared the little about it in the most fits in particular some of them are Tito submittals nobody metals came up substantially but this is price had not availability.
Concerning availability I don't see.
Shortage at this point you know.
Okay and.
And then Laurie I have a question for you kind of a two parter. The first thing on the puts and takes as we head into 2021 in terms of both you know cost inflation you might see on the Opex line because it's temporary measures that were implemented this year versus cost savings from.
Some of the efforts that $15 million at your role and how how do you think that should net out let's say in the first half was 21 and then second just on.
The tax rate if you could remind me what happened when the tax reform came in in 2018 that if there is a change in the administration how that might impact. She is corporate taxes go up in the U.S.
Okay, and so starting with the operating expenses at this point in time, it's a little bit early in our budgeting process.
So we'd have to give you an estimate but at the moment it's of course the.
Cost reduction program should approximately offset inflation in terms of wages.
Both in operating expenses and in the manufacturing side on the other hand travel expenses were severely curtailed and 2019 two difficult thing.
And the.
Incentive compensation or whatever whatever were diminished.
We would expect an increase as the economy would return back to normal but.
But it between the first half and the second half at this point in time, there seems to be the flare up in the coated cases around the world, which means the first half is likely to be somewhat lower than the second half, but we'd expect probably about a 6% increase in opera.
<unk> expenses.
Next year.
Okay. That's helpful. And then just the second part being the tax dynamic of trying.
Trying to remember.
There's a lot of there's a lot of moving pieces I guess in 28, there were a lot of moving pieces and interpretation has come through I'm, a little bit in the past two years about some of those rules and regulations.
Vishay, our Texas, Didnt actually come down in any extreme manner. When the tax regulations were announced at the end of 2017.
And the recent decline it before tax rate was more related to the mix of income in our different taxing jurisdictions.
So our tax rate has come down since a year ago.
Based on the mix of earnings.
Again, I don't know all the details projections up like what would be implemented depending on the white.
My house turns over to Democrats or not but we would certainly have to take into consideration that there could be.
To be sure, but I don't know what that would be yes.
Very helpful. Thank you.
Your next question comes from the line of Harlan sur with JP Morgan. Please go ahead.
Good morning, good to see the strong recovery in the third quarter and into the fourth.
Typically the March quarter is a seasonally stronger quarter for the chain you know up low to mid single digits sequentially up.
Dr., Paul given you know the expanding global economic outlook your backlog coverage I know you get some forecasting a consignment customers.
Are you anticipating positive seasonality in Q1.
[noise] principally speaking it's you have said it yourself code of what came out a better than we'd come out as we guide Q4 better than seasonal so quarter. One may not be the same difference a quarter four but listen I believe if the economy. If it is condemning feely eased.
He says it's pain somehow unless I think we can have a good year next year really.
Yes, I mean, if this helps statement.
Yeah. Thank you for that and then on the ATP acquisition on the rationale I can see the application to your thin film resistors and capacitor product families but.
Let's take this company's main focus was complex in film circuits substrate fabrication for.
Applications like communications Aerospace optical so is this an expansion of your strategy to now include full infield circuits substrate versus just they'll be hidden someone else.
We said it before and VEBA trust acquiring another smaller companies sometime ago Ultra source and this baby bring together three or four months I think are quite nice division out of that there are some synergies between the three elements one be hit before one brief acquiring last year and this one via quiet now so altogether.
We form a nice profitable, especially TV sister Division and its I was asked before if this idea to acquire especially two businesses.
We lived larger also is definitely maintains to p. I was pretty cheap so middle thing.
Yeah. Thank you for that just one last question so were.
Looking sort of longer term. So we're obviously hearing more and more about silicon carbide based power transistors and components for things like easy industrial clean energy applications. I know vishay has some silicon carbide based power transistors and diodes are you guys starting to put more focus on silicon carbide and maybe other.
Wide bandgap technologies, such as Galileo and actually not.
Not in our four is not in our focus we deal with it we have some programs, but it's not enough for you know a focus.
Okay. Thank you Dr. Paul.
Our next question comes from the line of David O'connor with exam BNP Paribas. Please go ahead.
Great. Thanks for taking my questions, one or two from my side, maybe first see Dr. Paul swing back to common previously on the 10 point outperformance you mentioned you know through versus your sales for 2020 versus I guess, the a b units.
How much of that is volume in the b versus constant groups for for you guys.
Any characterization around basketball performance would be helpful. And then is that is that's 10 points is that sustainable into 2021.
So the auto outperformance and they have a follow up for Laurie.
No first of all electric to cause a very promising for us they contain many more components then hit the noma 'cause, including the electrification, but from a share standpoint, it's still a small impact so when I talk about this it's not science by the way just 10% a difference, but but approximately this.
Suppose our opinion the pitch. We also set a few quarters ago. This is really driven by the electrification in dome it cost us a bit of acting on electric system.
But on the other hand, if we need them to move there was a move towards electric because this would be beneficial for us and of course, our competitors itself. They they are definitely more electrical components in electric cars, then into traditional cost as little thing. So we but I'm just not talking about electric vehicles.
I really you said this ongoing trend, which we observed since quite some time the cost because it contained wouldn't more electrical aspects as a mental thing.
Which I think is promising.
Understood. Thanks for that and then maybe a quick follow up for Laurie at the cost savings on the manufacturing side and is there any real impact on that in the fall through on the kind of the next upcycle I got it.
Any impact on the contribution margin, we should bear in mind.
As we go into that 2021. Thanks.
Oh no.
<unk> reduction program with based on Uh Huh so.
So there wouldn't be a mixing and matching that kind of gross margin, but it's approximately offset a place inflation.
It's an avoidance of a further increase in terms of wages, but.
Got it understood and maybe last last question for Dr. Paul on the you spoke about in your prepared remarks, some acceleration price decline in Sami's I think could you just elaborate a bit on that imports that drove that thank you.
Well, we have seen basically a mix. It this is temporary shift in customers, we shipped so much to automotive and relative to that reality flats to distribution.
And this of course had some impact which is temporary on the customer mix. Among the prices. Therefore, we believe all this is to be temporary in fact, if lead times stretch out and I would expect a some kind of a mitigation of the place and going forward even though.
Got it thanks, so much.
I'll now turn the conference back over to management for any concluding remarks.
[noise]. Thank you.
This concludes our third quarter conference call. Thank you for your interest in Vishay.
That's it for me.
Ladies and gentlemen that will conclude today's call. Thank you all for joining and you may now disconnect.
[music].