Q2 2023 Vishay Intertechnology Inc Earnings Call
Greetings and welcome to the Vishay second quarter 2023 earnings Conference call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Peter Henry see Investor Relations. Thank you Mr. Henry you may begin.
Thank you Devin good morning, and Wildcards to Vishay into technologies second quarter 2023 earnings Conference call.
I'm joined today by Joe <unk> our.
Our president and Chief Executive Officer, and Laurie <unk>, Chief Financial Officer.
This morning, we reported results for our second quarter, a copy of our earnings release, it's available on the Investor Relations section of our website.
I arent dubbed Vishay Dot com.
This call is being broadcast live over the web and can be accessed through our website.
In addition, today's call is being recorded and will be available via replay on our website.
During the call, we won't be referring to a slide presentation, which we also posted.
At IR <unk> com.
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.
<unk> 10-K, and Form 10-Q filings with the Securities and Exchange Commission.
We are including information in our press release and on this conference call on various GAAP and non-GAAP measures.
We have included the full GAAP and non-GAAP reconciliation in our press release.
As well as in the presentation posted on our IR Dot shave Dot com, which we believe you will find useful when comparing our GAAP and non-GAAP results.
We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses.
And should be considered by investors in conjunction with GAAP measures.
Now I'll turn the call over to President and Chief Executive Officer, Joe Smith.
Thank you Peter good morning, everyone.
I'll start my remarks on slide three with a review of the demand trends for the second quarter.
And then Lori will take you through the highlights of our financial results.
After that I'll come back to give you a progress report on the near term initiatives, we're implementing to improve all customer facing aspects of our business as we set the stage for faster top line growth and margin expansion.
Then we'd be happy to answer any questions. So let's go to slide three.
Yeah.
For the second quarter Vishay delivered solid results with revenue of $892 1 million U S dollars Nir.
Near the top side of our guidance range.
And EPS of <unk> 68.
Also near the top side of our guidance range.
Revenue increased both quarter over quarter and year over year driven by growth in automotive.
Looking at our revenue mix first by end markets automotive, which accounted for 35% of total revenue grew 9% versus the first quarter and 22% versus the second quarter last year.
We're seeing sustained demand in all regions for products that support increased electronic content.
Das features EV and hybrid vehicles, along with improved order flow for legacy automotive programs as the supply chain bottlenecks have eased.
Industrial representing 37% of total revenue was flat quarter over quarter and 7% below last year as many of the customers are normalizing their inventory positions now that the pandemic and supply chain constraints are in the rearview mirror.
In addition demand in China.
As sluggish as the country's economic recovery is taking longer than we expected.
Nevertheless, we continue to see the strong design activity in the area of the electric grid and EV charging infrastructure globally.
Revenue grew at 11% versus the first quarter and 23% versus the second quarter last year on strong orders from commercial aviation.
Along with increased government spending on weapons systems in Europe , and the United States.
Revenue from medical customers, another promising end market for vishay.
<unk> was down 5% versus the first quarter due to the timing of orders and mix.
But up 22% year over year.
Based on the strong demand we saw during the quarter, especially for medical diagnostic equipment and implantable devices book.
Book to Bill at quarter end was one three and.
And we expect revenue to increase sequentially in the third quarter.
Finally in the other market segments revenue declined 7% versus the first quarter.
Due to some price pressure on some products sold to distribution customers in Asia.
And ongoing weak consumer demand.
In terms of channel sales, we're focused on re engaging with distributors to regain share Pls share. We lost after 2017 due to many years of capacity constraints.
We're also engaging more closely with EMS customers and volume based business as well as at their EMS design activity centers.
This way, we are supporting all channels, while maximizing the profitability of each one.
During the quarter distribution revenue grew 4% compared to the first quarter and was down 6% compared to the second quarter last year due to improved delivery of allocated products to automotive industrial and aerospace defense customers.
Distribution inventory at quarter end was 21 weeks versus 19 weeks last quarter.
Which increased in most regions.
POS decreased 5% weighed down by softer demand for telecom and computing in Asia.
We are collaborating with each of our distributor partners to ensure the inventory at each of them includes a greater quantity of high running part numbers.
OEM revenue grew 1% quarter over quarter, and 19% year over year.
Primarily.
Reflecting continued strong demand for our automotive customers as they continue to replenish inventory, particularly in the Americas.
Ams grew 1% quarter over quarter as healthier supply chain allowed for improved coal in automotive and industrial markets, particularly in the Americas and Asia.
Which more than offset weak demand <unk>.
Primarily in consumer computing and telecom market segments in Asia.
Before turning the call over to Laurie for a review of our financial results I want to thank our employees for embracing our change.
Their dedication and commitment to excellence is visible everyday.
We're becoming a business minded organization and making the right decisions to act on the value of putting our customers first.
We're pushing forward together to seize opportunities created by the Mega trends of connectivity and mobility and sustainability and to drive faster revenue growth and higher returns.
Laurie ill now pass it over to you for the financial results. Thank you Joe Good morning, everyone.
I'll start my review of our second quarter results on slide four.
Yeah.
Revenues for the second quarter were $890 million to $100 million.
Compared to the first quarter revenues increased two 4%, reflecting a two 6% increase in volume slightly offset by a 0.7% reduction pricing.
By reportable business segment revenue growth was driven by MOSFET volume gains, partially offset by lower pricing and by inductors volume increases and higher pricing.
Compared to the second quarter last year revenues grew three 3%, reflecting a volume increase of one 4% and one 1% increase in pricing.
At quarter end book to Bill for consolidated D. C was 0.69.
Backlog at quarter end was $6 four months compared to seven five months at the end of the prior quarter.
As lead times continue coming down for all product segments.
We returned a total of $34 $2 million to shareholders comprised of dividends of $13 9 million and stock repurchases of $22 million.
The next slide presents income statement highlights.
Gross profit was 257 $5 million for a margin of 28, 9%.
Third the 32% for the first quarter and in line with our guidance.
Third to the first quarter gross margin decreased and lower fixed cost absorption based on flat inventory inflationary labor and material costs.
Really offset by lower logistics and freight costs.
SG&A expenses were $122 $9 million.
$2 8 million higher than the first quarter in line with our guidance.
Operating income decreased $24 $7 million versus the first quarter and lower gross profit.
Adjusted operating income decreased $23 $4 million versus the prior year due to higher SG&A expenses, primarily reflecting annual salary increases general inflation and equity incentive compensation.
Operating margin was 15, 1% compared to 18, 2% for the first quarter.
And 18, 3% on an adjusted basis for the second quarter of 2022.
EBITDA was $178 million for an EBITDA margin of 19, 9%.
Our normalized effective tax rate was 28, 5% for both the quarter and year to date period the.
The same target GAAP effective tax rate for those periods.
Okay.
<unk> 68 per share compared to 79 per share for the first quarter.
Okay.
For your convenience we have included in the body of the presentation attack <unk> revenue gross margin and book to Bill ratios for each of our reportable business segments.
Turning to slide seven we present cash conversion cycle metrics.
Dsos were 46 days.
One day higher than the first quarter and Dps were unchanged at 32 days.
Inventory was $661 million at quarter end.
Essentially flat compared to $656 $7 million as of the end of Q1.
Inventory days outstanding were 94 days compared to 98 days for the first quarter.
Bringing the cash conversion cycle for the second quarter to 108 states.
On slide eight you can see that cash flow from operations of $107 2 million for the second quarter was lower than the first quarter.
Mainly reflecting the annual installment transition tax.
Yeah.
Total capex was $71 7 million for the quarter.
With $44 8 million of the total invested in capacity expansion.
Compared to $37 6 million last year.
An increase of 19, 1%.
On a trailing 12 month basis total Capex was nine 6% of revenue compared to seven 5% for the same period last year.
Free cash flow for the quarter was $36 3 million.
Compared to $84 6 million for the first quarter due.
Due to higher Capex, the annual installment of the transition tax.
Stockholder returns for the second quarter amounted to $34 $2 million.
<unk> of $13 $9 million for our quarterly dividend and $22 million for okay.
We repurchased 0.8 million shares at an average price of 20.
Okay.
Yes.
For the quarter.
During the quarter.
Total liquidity at quarter end was $1 7 billion, including cash and short term investments of $1 1 billion in availability on our revolving credit facility and $564 million.
As mentioned on past earnings calls, we use the revolver from time to time to meet short term financing needs.
Turning to slide nine for our guidance.
For the third quarter of 2023 revenues are expected to be between $840 million and $880 million, reflecting a return to normal seasonality.
Gross profit margin is expected to be in the range of 27, 7% plus or minus 50 basis points.
We still expect full year gross profit margin to be in the range of 29% plus or minus 50 basis points.
SG&A expenses are expected to be between $125 million.
Plus or minus $2 million for the quarter.
And $495 million, plus or minus $4 million for the full year at current exchange rates.
Collecting a higher than expected marketing expenses.
Find long term incentive plan accruals and additional analysis of the data.
For 2023, we expect a normalized effective tax rate of approximately 28, 5%.
Finally, we remain committed to distributing at least 70% of our free cash flow to shareholders in the form of dividends and stock repurchase.
According to <unk>.
In accordance with our stockholder return policy for 2023, we expect to return at least $100 million.
Yeah.
Now I'll turn the call back to John .
Thank you Laurie.
Let's turn to slide 10 for a review of our key near term initiatives for 2023.
As a reminder, when I first talked to you on the fourth quarter call I detailed the initiatives we're focused on.
That are laying the foundation for accelerated revenue growth and improved returns and positioning the company to take full advantage of the next phase of the Mega trends in connectivity mobility and sustainability.
I also talked about the importance of creating a business minded organization.
One that is more responsive to customers.
About changing boucher from being a cash flow driven company.
P&L driven company.
And from a company that fulfills customer orders to one that anticipates and meets the customer needs built.
Building on Vishay has strong operational disciplines and talented and dedicated workforce.
We started immediately after the beginning of January and are pushing forward with a sense of urgency.
I am pleased on our progress to date and shifting the mindset of everyone at Vishay to think customer first and placing a priority of having a business minded focus in everything we do.
Our teams are embracing the changes and are dedicated to supercharging our growth.
We're making progress in increasing capacity internally and externally in support of our higher growth and highest return product lines consistent with our plans at the beginning of the year.
These 30 key product lines, which serve multiple market segments and applications and business channels best position us for the exponential end market demand coming in the near future driven by the Megatrends.
To be ready for the next phase.
We are investing $1 $2 billion between 2023 and 2025.
2023, as a staging year and we are committed to investing approximately $385 million about two thirds of which is to be spent on expansion projects.
This investment in expanding capacity is expected to come online in late 2004 and 2025.
The incremental capacity, we invested in last year is coming online this year and through 2024.
By the end of the second quarter, we had landed.
And annualized.
<unk> increase of nearly 2%, particularly for power inductors resistors and capacitors.
Compared to the annualized capacity at the end of the first quarter.
Volume from this incremental capacity will be available as we complete site and customer qualifications.
During the second quarter, we continued to advance construction on Fabs located in Germany, Taiwan in Italy to meet the growing demand for our automotive and industrial customers.
We broke ground on the new MOSFET 12 inch fab and it's the whole Germany during the quarter.
We also continued to install equipment at our two new facilities in Mexico.
One located in Juarez, where power metal strip resistors and the other located in La Laguna for power Inductors. We expect this investment will double our capacity for these product lines over the next two to three years.
We have qualified some resistors at our Juarez facility and we expect to begin shipping in the third quarter.
At our La Laguna Inductor facility, we are planning to qualify new products in the second half of this year.
And expect first shipments in the first quarter of 2024.
At this facility. We're also planning to establish a campus, bringing together product lines from other vishay business segments.
In addition to internal capacity expansions, we're continuing to work on identifying additional semiconductor foundries.
Our top priority is to increase our MOSFET capacity to support growing demand from our automotive industrial and distribution customers.
While in parallel we are completing our new facility in Germany in 2026.
During the second quarter, we qualified our first commercial MOSFET platform at a new 12 inch foundry partner.
We also reached an agreement to increase wafer supply with two of our existing foundry partners.
As a result, we will increase our annualized automotive capacity by 10% in 2024.
<unk> to 30% in 2026.
We're also working on negotiating an agreement with another foundry to support expanded capacity for our industrial customers and even more capacity for our automotive customers.
During the third quarter. We have also started to expand our low cost through borrowing Malaysia Assembly site.
Where we are currently only manufacturing opto products.
We expand here to address the increased demand in the automotive and industrial market segments.
Like our plan to establish a campus in La Laguna Mexico.
We are going to expand the backend of crew bong with MOSFET and diode.
While also addressing our customers' country of origin requirements.
Phase one of this Malaysia expansion will increase our manufacturing floor space by 65%.
And we will completed be completed in the third quarter of 2024.
To create incremental capacity in support of our higher growth and higher return products, even further with <unk>.
<unk> also been looking externally to qualify subcontractors for some commodity products.
As I mentioned in the first quarter, we have qualified one subcontractor for non automotive resistors and have started shipping these products.
During the second quarter. We also started qualification of some automotive products with that same subcontractor.
We're continuing to engage in developing partnerships with more than 20 other subcontractors of various sizes and still expect to have qualified and signed agreements with a number of them by year end.
As an example, we're qualifying sub contractors for many new inductor products.
By the end of this year.
Yeah.
We're continuing to fill gaps in technology and market coverage on silicon carbide.
We're placing a priority to onboard technical resources to support Silicon carbide and Gan product developments.
And we've continued to add ftes to engage our customers.
As for Max power the acquisition of the fourth quarter of last year, our development of Silicon Carbide technology. We're on track to have samples of 1200 volt planner technology MOSFET available to customers in the third quarter.
Released them into production in the fourth quarter.
We're continuing to advance the development of our 650 volt planner technology and also the 200 volt trench technology.
In addition to investing heavily this year in Capex and engineering talent.
<unk> been working to introduce vishay solutions that more fully leverage our broad portfolio of discrete semiconductors and passives.
As a reminder, vishay semiconductors, and passives can populate greater than 80% of the components on the circuit board for many power applications.
For the past months, we have been building a number of automotive reference designs for customer engineers to evaluate.
This quarter, we released one of them. The first one is a high voltage intelligent battery sensor.
These boards are available through our catalog distributors for customer engineers to test.
We also have in the queue additional designs, including a 48 volt resettable circuit breaker.
A bi directional 48 volt 12 volt DC to DC converter.
We also continue work on onboard charger and traction Inverters designed for low speed electric vehicle marketplace.
We worked together with a tier one customer.
Lastly.
To institute organizational and cultural change.
We redesigned our long term incentive plan to align the performance of 1000 key employees to accelerate our company growth and profitability objectives and also shareholder interests.
Having a long term incentive program for a 1000 employees as new at Vishay.
This new incentive plan was approved by our shareholders at our 2022 annual meeting this past may.
We're also revising our short term incentive program for 2024 to reward risk taking and growth.
Let's turn to slide 11 for a recap of the goals we have set for ourselves for 2023.
In terms of expanding capacity, we are on pace to have qualified and signed agreements with a number of subcontractors by the end of this year.
And to have completed our evaluation of where to build Vishay is next manufacturing facility.
We're adding incremental capacity to support growth in our 30 key product lines and developing go to market strategies for each of them.
We're on track to have samples of the 1200 volt planner technology MOSFET is available and are making progress in the development of the 650 volt planner technology.
Finally, we remain committed to holding an analyst day in early 2024 and.
And sharing with you our three year business plan and targets for revenue growth profitability and return on invested capital.
With that I'll turn the call back to the operator to start the Q&A session.
Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.
From ancient tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from the line of <unk> <unk>.
Sharia with Bank of America. Please proceed with your question.
Hi, Thanks for taking my questions and thanks for all the details on the call.
Joel one of the initiate us you've talked about is enhancing channel management over the last couple of months.
Since you've taken over as you've spoken to that your distribution partners as well as other customers. What feedback have you gotten in terms of what vishay is doing well and what areas need improvement. So can you give us your thoughts on how you what are some of the things that you plan to do in terms of enhancing that channel management and.
And related to that.
Today about 54% of your revenue comes from distribution, but as you think about the secular growth drivers that are driving your two large end markets automotive and industrial.
As you get more evs in the mix versus traditional combustion engines.
Do you still think that you will be going through the tier ones or do you think that you can have a direct relationship or more of a direct relationship with the auto Oems and similarly renewable energy becomes.
A greater part of industrial you think that your revenues through distribution that mix can change over the next couple of years.
Okay, all right well thanks for the question I will.
Address the second question and the answer first we are working directly with many automotive tier ones.
So this is very important for us because we need to be in line with their technology, Roadmaps, and where theyre dealing with new products.
So the European Automotives the U S automotives.
Asia Automotives, where in the direct discussion the business will continue to be direct with the automotive accounts. They are driving new technology and they prefer to be very closely connected.
To the manufacturer.
The manufacturer of components, because theres a lot of new technology needs as we move forward in hybrid and electric vehicles solutions are yet to be discovered. So these close contacts of the manufacturer's technology in the OEM continued to be a necessity. So we'll continue that.
Jumping back to your first question about visiting the leaders of the distributors Ips I've done that we've had multiple conversations there.
We're excited about where vishay is going.
Vishay was somewhat.
Away from the distributor channel we did have products, we did have it as part of 50% or greater of our total sales, but the growth of distribution required more from vishay. So we talk about capacity and we talk about the business minded direction of vishay and organizing to have sufficient.
<unk> for the channel of distribution, they're excited about it.
They see on many bill of materials, so having the supply of product makes the distributor even more valuable to their end customer because they don't have to cross or find another supplier if the sheik and support the demand.
EMS is the same I've met with a number of the EMS leaders.
Same story Vishay is prevalent on bill of materials they'd like to buy Vishay. If vishay is lead time can be reasonably in line.
They see more opportunity for us to grow our business.
So covering all of that Youre right theres going to be some <unk>.
Accelerated growth at the Oems, but where we're going is to have sufficient capacity to support the business through distribution and support the business direct to the OEM as well as support the distribute business through EMS, we need to have the capacity to support all business channels.
Okay. Thank you for the details there.
For my follow up if I can ask as you look out over the next two to three years and you look at the growth in.
These secular trends trends that are happening in Evs and then industrial.
How much of the growth for Vishay do you think comes from organic growth versus <unk>.
Needing to do M&A and can you give us your thoughts on capital return and uses of cash.
How do you.
How do you prioritize.
Further M&A and do you see that more in the semiconductor side or on the passive side.
Versus maybe reducing debt versus share buybacks.
Thanks.
With a number of our product suite, we have the right technologies and discrete semiconductors as well as passives.
But as we have these technology discussions with the Oems there is need for vishay to expand our portfolio.
We have a list of M&A.
Targets that we're looking at M&A.
M&A needs to be a greater part of our inorganic growth plan it'll help us to be a better supplier with broader product portfolio. So yes, M&A is going to be a greater part of our <unk>.
Planned going forward this will be in semiconductors, as we did with Max power in the Silicon carbide technology last quarter and the fourth quarter of 2023. It will also be passed shifts.
When we look at the electric vehicle the growth in semis is often talked about as seven times the amount of semis and electric vehicle or maybe 10 times, but passives as right alongside that the growth of passive is equal to those numbers. So.
So this is a strength of vishay being able to offer semis and pass it to the EV to the hybrid vehicle as the electronic content grows even further.
We can do it through our own manufacturer, we can grow through sub con qualification.
Under the Vishay product recipe and will also grow through M&A.
So just in terms of prioritizing the use of cash like how would you rank quarter M&A versus.
Delevering versus returning cash to shareholders.
Buybacks.
We will still we will still in our capital allocation meet the requirements that we have for the cash to shareholders. That's still very important that the dividend the share buybacks is still a priority M&A is.
At that same level of priority.
We're a technology company, we need to stay abreast. So it will be a priority of higher priority of M&A.
Okay. Thank you for all the details appreciate it.
Okay. Thank you very much.
Thank you there are no further questions at this time I'd like to turn the floor back over to Josh Nichols for closing comments.
Alright, Thank you very much.
Thank you all for attending the call and joining us today in.
In closing, we are committed to making the necessary investments in capacity.
Customer facing resources and innovation to make vishay ready.
Ready to take full advantage of the next phase of our market growth for the Megatrends of connectivity mobility and sustainability.
We're making good progress and I look forward to giving you. The next update when we report the third quarter results in early November . Thank you very much for attending today.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Okay.
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Yes.
Uh huh.
Okay.
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