Q2 2019 Earnings Call

At this time I would like to welcome everyone to the Vishay Q2, 2019 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question and answer session.

If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

If he would like to withdraw your question press the pound key.

Thank you I would now like to turn the call over to Mr. Peter on refi, Sir you May begin your conference.

[noise].

Thank you. Thank you so attain yeah, good morning, and welcome to Vishay Intertechnology second quarter 2019 conference call.

With 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 our second quarter 2019 financial results.

Dr. Gerald Paul will then give an overview of our business and discuss operational performance as well as segment results in more detail.

Finally, we'll reserve time for questions and answers.

This call is being webcast from the Investor Relations section of our website at IR Dot Vishay dotcom.

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 entry shades Form 10-K , and Form 10-Q filings.

With the Securities and Exchange Commission.

In addition, during this call we may refer to adjusted or other financial measures.

That are not prepared according to generally accepted accounting principles.

We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses.

And should be considered by investors in conjunction with GAAP measures that we also provide.

This morning, we filed a form 8-K that outlines the various variables that impact the diluted earnings per share computation.

On the Investor Relations section of our website you can find a presentation of the second quarter 2019 financials and metrics.

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

Thank you Peter good morning, everyone.

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

I will focus on some highlights and key metrics.

Do you see reported revenues for Q2 of 685 million.

S with 31 cents for the quarter.

Adjusted EPS was 36 cents for the quarter.

During the quarter, we successfully renegotiated our credit facility.

The new facility increases capacity to 750 million at similar interest rates undrawn amounts with a slight improvement in the commitment fee paid an undrawn amounts.

Additionally, the new credit facility has improved covenants allow for greater operational and financial flexibility.

Also during the quarter, we continued our cash repatriation program.

We repatriated $74 million to the United States and paid withholding and foreign taxes of 20 million.

We also made the second payment of the transition tax 15 million.

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

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

All of the reconciling items between GAAP, EPS and adjusted TPS, our tax related items.

There were no reconciling items impacting gross or operating margins.

I will elaborate on these transactions in a few moments.

Revenues in the quarter were 685 million.

Down 8.0% from previous quarter.

And down by 10.0% compared to prior year.

Gross margin was 25.5%.

Operating margin was 11.6%.

There were no reconciling items to arrive at adjusted operating margin.

EPS was 31 cents.

Adjusted EPS was 36 cents.

EBITDA was 118 million or 17.2%.

There were no reconciling items to arrive at adjusted EBITDA.

Reconciling versus prior quarter operating income quarter, two 2019 compared to operating income for prior quarter.

Based on 60 million lower sales.

Or 57 million, excluding exchange rate impacts.

Operating income decreased by 28 million.

To 79 million in Q2 2019.

From 108 million in Q1 2019.

The main elements where.

Average selling prices had a negative impact of 6 million, representing a 0.9% ASP decline.

Which include U.S. tariffs passed through to customers.

[noise] volume decreased with a negative impact of 23 million.

Equivalent to a 7.0% decrease in volume.

Reconciling versus prior year operating income quarter, two 2019 compared to operating income in Q2 2018.

Based on 76 million lower sales.

Our 62 million lower excluding exchange rate impacts.

Adjusted operating income decreased by 44 million.

To 79 million in Q2 2019.

From 123 million in Q2 2018.

The main elements where.

Representing a 0.6% ASP decline.

Which again includes U.S. tariffs pass through to customers.

Volume decreased with a negative impact of 24 million.

Representing a 7.6% decrease.

Variable cost increased with a negative impact of 16 million.

Primarily due to U.S. terrorists raw material prices and some manufacturing inefficiencies.

Other variable cost inflation was virtually offset by cost reduction.

Fixed costs decreased with a positive impact of 3 million.

Primarily due to realignment of the incentive compensation accruals for the period year to date June .

Selling general and administrative expenses for the quarter were 95 million.

Lower than expected due to adjustments to incentive compensation accruals for the period year to date June .

For Q3 2019, our expectations are approximately 98 million of SGN, a expenses and approximately 395 million for the full year at constant exchange rates.

During the second quarter, we began the process of repatriation.

Which included movement of cash from some second and third tier subsidiaries to higher tier subsidiaries.

We received 74 million in the United States and paid with holding in foreign taxes of 20 million.

In Q3, we expect to repatriate an additional 104 million net of foreign withholding taxes about 15 million.

Substantially all of these amounts have been or are slated to be utilized to settle certain intercompany debt.

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

Recall that while such amounts are no longer subject to U.S. federal taxes due to U.S. tax reform there are subject to foreign withholding than other taxes and some state income taxes.

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

[noise].

We had total liquidity of 1.5 billion at quarter end.

Cash and short term investments comprised 790 million.

And unused capacity on the new larger Chris <unk> credit facility was 720 million.

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

We continued to be authorized by our board of directors to repurchase purchase additional convertible debt instruments in open market repurchases or through privately negotiated transactions subject to market and business conditions legal requirements and other factors.

Our debt at quarter end of 520 million is net of the unamortized issuance cost of 18 million.

And includes 28 million outstanding on our credit facility.

And 510 million carrying value of convertible debt instruments not up on on on amortized discount.

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

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

No principal payments are due until the expiration of the revolving credit facility in June 2024.

[noise].

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

The year to date normalized tax rate was approximately 26%.

For the quarter. This mathematically yields a GAAP tax rate of approximately 37% for quarter two.

In a normalized rate of approximately 26%.

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

Tax expense on a tax basis foreign exchange gain resulting from payment of an intercompany loan previously deemed permanent of 8 million.

And adjustments to Remeasure, the deferred tax liability related to incremental foreign taxes payable upon repatriation.

Such as foreign currency effects.

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

The Remeasurement adjustment was negligible benefit for the quarter and a net benefit of 0.6 million year to date.

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

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

A shift in income could result in significantly different results.

Total shares outstanding at quarter end were 144 million.

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

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

Please refer to the 8-K, we filed this morning.

Cash from operations for the quarter was 56 million.

Capital expenditures for the quarter were 34 million.

Free cash for the quarter was 23 million.

For the trailing 12 months cash from operations was 356 million.

Capital expenditures were 223 million.

Split approximately for expansion 126 million.

For cost reduction 26 million.

For maintenance of business 71 million.

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

Which primarily represents the sale of our former manufacturing facility in Santa Clara, California.

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

Free cash generation for the trailing 12 month period was 180 million.

The trailing 12 month period includes a 100 million cash taxes paid related to cash repatriation 85 million and U.S. tax reform 15 million.

He has consistently generated in excess of 100 million cash flows from operations in each of the past 24 years and greater than 200 million in the last 17 years.

That backlog at the end of quarter, two was that 1.127 billion or 4.9 months it fails.

It's still very high compared to our historical average of approximately three months.

Inventories decreased quarter over quarter by 19 million, excluding exchange rate impacts.

Days of inventory outstanding were 84 days.

Days sales outstanding for the quarter were 50 days.

Days of payables outstanding for the quarter were 31 days.

Resulting in a cash conversion cycle of 103 days.

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

Thank you Lori and good morning, everybody.

Well in the second quarter reshape this financial performance has been negatively impacted by a lower than expected demand predominantly from distribution.

Despite a still relatively robust the overall economic environment.

Hi inventory level to Synta supply chain burdened orders and also revenues.

Mm manufacturing capacities in the course of the quarter head to be adapted to the lower demand, causing temporary manufacturing inefficiencies.

At some product lines.

Vishay in the second quarter achieved a gross margin of 25.5% of sales and operating margin of 12% of sales.

GAAP earnings per share of point $31 and adjusted earnings per share of putting $36.

We continue to show a strong generation of free cash.

It was 23 million in the quarter.

Which includes the tax is paid for cash repatriation of 20 million.

Let me talk about the economic environment as we see it.

Also in the second quarter global economy for electronic components remained principally healthy in general.

But started to show certain areas or slow down like automotive.

Inventories in the supply chain have reached a record high during the quarter and started to reduce slowly.

POS despite still strong has not been strong enough to drive a greater inventory burn.

Lead times for most of the product lines have come down to normal levels.

Consequently, also backlogs continue to normalize with book to Bill ratios substantially below one.

The price decline for commodity products has restarted.

Coming to the regions.

Geographically the markets in the second quarter continue to develop rather differently.

We have seen good economic conditions in the U.S.

Maybe not quite as strong as in previous quarters.

Europe was weakening.

Impacted by softening automotive and industrial markets.

Asia developed flat on levels substantially below prior year, but recently there were some signs of recovery.

Let me comment on distribution global distribution in the second quarter continued at principally good Pos levels somewhat lower than prior quarter by 4% and wore down versus prior year by 10% mainly influenced by Asia.

Versus the first quarter Pos reduced in the U.S. and in Europe , but started to recover in Asia by 5% as I mentioned before.

Inventories in the course of the quarter have grown to historically high levels and they have come they have started to come down very slowly.

In the second quarter inventory turns at distributors declined further to 2.5 as compared to 2.7 in prior quarter and two 3.7 in prior year.

Regional details in America. It was 1.5 after 1.7 in the first quarter and 2.4 in prior year.

In Asia 3.2 turns.

After 3.1 turns in the first quarter and 4.7 turns last year.

In Europe three turns after 3.5 turns in Q1 and 4.3 turns in prior year.

Some comments on the industry segments, we are active in.

Automotive applications in view of progressing electrification remain to be.

A strong driver of growth for electronics going forward.

But reduced sales rates for vehicles currently limit our potential.

Industrial markets continue to show a mixed picture.

Slowing factory expansion after several years of strong growth.

The U.S. tariff activities definitely burn the business in China are burdened the business in China.

But bright spots in power transmission and locomotive project in smart metering and in Internet of things applications.

Military markets continue to develop strongly in several countries mainly in the United States.

Medical markets continue to grow steadily.

Driven by five cheap product releases fixed telecom is expected to grow substantially.

I'm convinced that this will become a driver for our business in the mid term.

The mobile phone sector continues to be under pressure.

Computers slightly recovered, which partially is a seasonal effect.

Finally, consumer markets present, a scattered picture.

TV sets show some potential in new models.

I, we see we can markets in air conditioning.

And gaming and variables are stable.

Let me talk about the business development of Vishay.

In the second quarter, we came in below our guidance.

As the demand from distribution fell off sharply.

We achieved sales of 685 million.

Versus a 745 million in prior quarter.

And 761 million in prior year.

Excluding exchange rate effects sales in the second quarter were down by 57 million or by 8% versus prior quarter.

And down versus prior year by 62 million or also 8%.

Book to Bill ratio in the second quarter was point 69.

Some detail.

Point 55 for distribution after point 54 in Q in Q1.

Point 86 for Oems after one point 10.

Point 56 for actives after point 74.

Point 81 for Passives after point 84.

Point 72 for the Americas After point 75.

Point 87 for Asia After point 73.

Point 79 for Europe after point 89.

The normalization of backlogs at distribution continues in a broad way.

Backlog since the second quarter continue to shrink to a still a high level of 4.9 month down from 5.4 month in Q1.

5.2 months in semiconductors 4.7 months into passives.

Just to remind you historical levels of backlog in our business at around three months.

Price decline has restarted mainly in semiconductors.

Minus 8.9% versus prior quarter minus 8.6% versus prior year.

Whereby the Terry factors are included.

[noise] for semiconductors, it was minus 1.4% versus prior quarter and minus 1.9% versus prior year.

For passives minus 8.4% versus prior quarter, and plus 0.6% versus prior year.

Some comments on operations.

In the second quarter, we again were principally able to offset the negative impacts of the content on the country, but if margin by cost reduction and by innovation. However.

A there is some temporary negative impact of the adaptation of manufacturing capacities.

SNA costs in the second quarter came in at 95 million, which is below our expectations, primarily due to the adaptation of the bonuses.

Manufacturing fixed cost in the second quarter, we won 27 million also better than our expectations.

Total employment at the end of the second quarter.

It was 23565.

Down by 2.4% versus prior quarter.

And actually due to lower production output requirements.

Excluding exchange rate impacts inventories in the quarter decreased by 19 million.

By 10 billion in raw materials, and by 9 billion in Wip and finished goods.

Inventory turns in the second quarter remained at a good level of 4.3.

Capital spending in the second quarter was 34 million.

Versus 48 million in prior year.

18 million for expansion.

5 million for cost reduction and 11 billion for maintenance of business.

For 2019, we now expect Capex of about 150 million, which reflects lower short term market requirements.

In the second quarter, we generated cash from operations of 56 million.

Versus a use of 9 million in prior year.

The second quarter of last year was burdened by cash taxes paid for cash repatriation of 92 million.

The second quarter of this year by $20 million.

Generated cash from operations of 356 million on a trailing 12 month basis, including 85 million cash taxes paid for cash repatriation.

We generate we generated in the second quarter free cash of 23 million versus a use of 49 million in prior year.

The second quarter of last year was burdened by cash taxes paid for cash repatriation of 92 million.

At the second quarter of this year by 20 million.

The check we generated free cash of 181 million on a trailing 12 months basis, including 85 million cash taxes paid for cash repatriation I think our generation of cash remains good.

Let me come to the.

Various product lines first of all resistors and inductors.

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

Vishays traditional and since he is most profitable business now also experienced the impact of high inventory at distributors.

Sales in the second quarter were 242 million.

Down by 13 million or 5% versus prior quarter.

And down by 4 million or 2% versus prior year. All this excludes exchange rate impacts.

The book to Bill ratio in the second quarter was point 88 after point 92 in prior quarter.

Backlog remains at 4.8 months, which is still very high.

Gross margin reduced to 29% of sales after 33% in prior quarter.

Mainly due to lower volume and some temporary inefficiencies in manufacturing costs by the adaptation to lower outputs.

Inventory turns in the second quarter remained at a good level of 4.3.

There's virtually price stability for this product line minus 8.4% versus prior quarter and stable prices rysavy prior year.

We have slowed down the expansion of manufacturing capacities for males and thin film resistors chips.

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

We enjoy increasing opportunities in the fields of power transmission and the recast.

Sales in the second quarter were 111 billion.

6% below prior quarter, but 2% above prior year again without the exchange rate effects.

Book to Bill ratio was.

In a point 68 in Q2 after point 67 in the previous quarter.

In particular commodity tantalum capacitors continue to experience a phase of backlog normalization and of inventory reduction in the supply chain.

The backlog reduced further to a still very high level of 4.5 month.

Gross margin in the quarter was at a satisfactory level of 24% of sales after a 25% in prior quarter.

Inventory turns in the quarter.

Were at 3.5 same as in the first quarter.

Selling prices held up in general there was minus 8.4% versus prior quarter, but plus 1.9% versus prior year.

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

Coming to the operator line.

Vishays business with Opto products consists of infrared emitters receivers sensors, and couplers and spend less of elite these for automotive applications.

Also the opto business currently suffers from high distribution inventories, but also from a temporarily unfavorable product mix.

Sales in the quarter were 61 million.

1% above prior quarter, but 18% below prior year, which excludes exchange rate impacts.

Book to Bill in the second quarter for up to 1.7 after point 83 in prior quarter.

The backlog reduced further to a still high level of 4.1 months.

Gross margin in the quarter came in at 27% of sales after 26% in the first quarter.

This is of course not substantially below historical levels.

Indians. This is all due to lower volume.

Good.

We have seen good inventory turns were 5.6 in the quarter as compared to 5.1 in the first quarter.

Price decline at four up to its normal.

Minus 8.1% versus prior quarter minus 2.5% versus prior year.

The results of this line will continue to be burdened by an ongoing inventory reduction in the supply chain.

For one or two quarters, but we expect the business to come back to more historical levels of profitability. After this normalization face.

Also supported by quite tangible projects, mainly in the field of sensors and in Congress.

Coming to diodes.

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

Vishay offers virtually all technologies as well as the most complete product portfolio.

The business has a very strong position in the automotive and industrial markets, but currently suffer substantially from two high inventories at distributors.

Sales in the quarter were 142 million.

15, one 5% below prior quarter, and 21% below prior year, which excludes exchange rate effects.

The normalization of backlog.

Progresses and explains the very weak book to Bill ratio of point 52 in the quarter. After point 63 in the first quarter.

The backlog reduced to a still very high level of 5.5 months from 5.9 month in prior quarter.

Gross margin in the quarter came in at 20% of sales quite a decline from 26% in the fourth quarter.

A much lower sales volume in combination with some internal inventory reduction where the reason.

Inventory turns remained at a good level of 4.3.

As compared to 4.5 in prior quarter.

We currently see a return of the pressure on selling prices in diodes minus 2.4% versus prior quarter minus 8.8%.

Versus prior year, the tariffs had a second are included.

We expect diodes to continue their success story of recent years to the full extent after that the normalization of the inventories in the supply chain will have been finalized.

Coming finally to Mosfets vishay.

Continues to be one of the market leaders in MOSFET transistors.

Mosfets over the last he has developed a strong and growing position in automotive.

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

Sales in the quarter were 129 million 129 million, 6% below prior quarter and 5% below prior year, excluding exchange rate impacts.

The book to Bill ratio in the second quarter dropped two point 54 after point 84 in the first quarter.

The normalization of backlogs continues.

Backlog has reduced to a still high level of 5.3 month.

After 6.3 month in prior quarter.

The gross margin in the quarter came in at 25% of sales as compared to 26% in the first quarter.

They were good inventory turns of 4.2 in the quarter as compared to 4.5 for the first quarter.

Also for Mosfets, we see the pressure on selling prices increase minus 8.8% versus prior quarter and minus 2.8% versus prior year.

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

Let me summarize.

No doubt that the economic environment for our business has suffered increasingly in the course of the second quarter.

Automotive and face markets unless booming than in recent years and high inventory levels in the supply chain will for some time burden on moderate our growth.

On the other hand, there is no reason to doubt the growth potential of electronics intermittent in the long term.

Vishay is a very well established broad line supplier will benefit from this development.

We are managing the current slowdown professionally SP have done that before.

We will adapt costs capacities and capex.

We'll reduce inventories in accordance to the sales volume and will continue.

We decided to establish a meaningful restructuring program, reducing our personnel fixed costs by 15 million per year at a cash cost of 25 million, while and I emphasize that at the same time.

Optimizing the quality of our organization further.

Having to expect an acceleration of the inventory burn off in the channel.

Before the third quarter guide to a sales range of 600 to 640 million at gross margins between 24 and 25%.

Thank you Peter.

Yes.

Thank you Dr., Paul we will now open the call to questions.

The 10 year. Please take the first question.

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

Hi, everybody.

Dr. Paul last quarter, I think you spoke about maybe I know this is a I guess $100 million of excess channel inventories sitting out there.

How much do you think that that excess channel inventory is now I'm guessing, it's a bit larger given the weaker sales outlook.

I must agree I would say it's between 101 hundred 50 somebody or you never know exactly but it is I think it's between 100 to 150.

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

Well, it's all depends very much on a few assumptions of course fest afford you must assume what rich inventory turns our distributors have for its attack has a target say you have to take some assumptions on the development of Pos.

Of course, we did that and I would say, it's about three quarters from now on.

Beginning now see quarters is our best guess, but again this contains a few assumptions.

And then you mentioned Pos what was what was the point of purchase or your distribution partners for you this quarter.

Oh, you mean P. way Apio it yes.

<unk> PEO able us down you know that we went to the percent is substantially down let me see.

Uh huh.

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Well, we sold three you want to know to sales to distribution in reality right. Yes. Please.

368 million.

Yes 368 million.

Okay, and then lastly, if I may you said almost all product lead times are back to normal do you have any products with extended lead times right now I'm guessing it may be more niche applications or something I haven't said specific precisely I wouldn't name any commodity product, which has longer lead times at this point, we have normalized some niches for sure but this has nothing to do with it because the normalization face via in this is quite normal it depends on the productivity otherwise we are down to normal in abroad for him.

Okay. Thank you.

Thank you.

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

Hey, good morning, everyone.

Lawyer Dr. Paul.

You are in your electronic component peers have spoken about an inventory overhang at distributor partners.

And as I think Sean alluded to earlier, you know just for some products like diode in Mosfets I think lead times extended as much as you know I think 52 weeks versus typical lead times of.

Probably the 10.

Do you expect lead times to normalize by the end of the year that coincide with this inventory digestion cycle.

And as a follow up.

As distributor inventories have begun to normalize as evidenced by the book to Bill in distribution that.

0.55, this quarter is the restructuring effort you've announced today an indication that prices will also normalize vis-a-vis the 3% annual price declines.

Well first of all I believe as I said before that our lead times for commodity products in general in the broad form already have normalized.

I must say that.

And what we are talking is the reduction of the inventory again I'll repeat what I said before I count on but this is again assumes a few things and of course my best estimate based on these assumptions is that it will take to bring down the inventories to a reasonable level in distribution something like three quarters is my personal guess based on a few assumptions calculated.

Concerning our.

Restructuring program, which goes against the fixed cost not against the various adaptation as you will have realized this is not an answer to price decline because price declines and said as we always do by cost reduction in the manufacturing process. We did that in the past quite success are successfully and I have no doubt that we will be able to defend the variable margin just by these cost reduction measures also in the future.

Our manufacturing fixed cost program has two targets really.

Target number one is of course to slow down for some time to inflation on the fixed cost just to give us a little more time to your the volume comes back at a point and on the other hand, we want to use also the opportunity to further de juvenate.

Our organization.

We have done that a few years before quite successfully and I think it was good for Vishay and Europe , we plan to repeat it but it's not an answer because every price decline.

Understood if I if I may ask another question.

One of the larger investor questions today has been your ability to grow over and above end market demand as opposed to being a perhaps a restructuring story.

So help us think about whether all or a portion of these restructuring savings will be funneled back into R&D as you contemplate your growth opportunity in the next 12 to 18 months and then as you think about the operating margin uplift going forward.

How much of it will come from a richer mix of value added products versus end market demand growth. Thank you.

Tim.

Well first of all I think we have grown substantially in the last two years.

And part of that as we now realize was really to build inventory, which I have said before.

They'd be caught on the other hand vishay grows quite nicely anyway, we have continuously new products fee. We watched it carefully we always watch to share of sales, which we make this product younger than three years five years et cetera. So we look at it carefully.

These cost savings program is not related to more or less expenditures in R&D, we never we never saving money on R&D and we will not do so going forward. This regarding the volume. So we just continue what we do.

But of course, you can look at your fixed costs into permanent pressure on the fixed costs by inflation and there is the idea to do two things as I said before at the same time first of all to save some of these fixed cost it means to slow down just for optimizing results going forward to slow down the impact of inflation by reducing certain personnel vital replacing a part of this by younger people data also less expensive at least in the beginning.

Indeed, the of course at the end of it. So you you give yourself some time it improved margins, but a again I emphasize we never did and we're not.

Save money.

In cutting down R&D.

Technical.

Programs.

Thank you it's unrelated.

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

Hi, Good morning, Thank you for taking my questions.

Dr., Paul just a follow up on what you were talking about in terms of manufacturing capacity.

In trying to defend the contribution margin of 45%.

Do you think that you have levers to reduce costs more manufacturing fixed cost. This quarter was 127 million how should we think about that going forward.

Well.

Maybe I'll remind you of our history, we have a history of price decline into freely constant variable margins.

That means we were always able to defend.

Our sales against price decline and inflation of course in the past and we do have programs and they were not impacted at all by this good phase of which we have seen and since 2016 on the market. So I have absolutely no doubt that we will be able to defend its variable margin going forward by just continuing what we always did into at this point in time.

We will for sure see price decline coming back that's true on the other hand, we are going to see also material costs being.

More moderate going forward. So I again to summarize we are going to defend our variable margin question.

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

Our offline.

This is hard to say we have very many lines on the other hand, you can say that all commodity products at this point in time.

Not substantially on the on the Max capacity feature on the other hand gives us of course, if we are in a time of normalization as you will appreciate so it definitely also historically times of normalization.

Sooner or later replaced by times of steep growth and it always has been the case you remember that.

Via I clipped of course for facing to stay Lynch of 10, increasing.

Demand because we have to machines in place.

To give you a number yeah.

Depends really on the line Mosfets is quite well utilized diodes is under utilized substantially.

Can I pick a number 20% or something but this is of eight number.

I would have to check line by line. Okay. No. That's helpful. And then I think on the prepared remarks, you said that recently you saw some recovery in Asia what drove that.

Well the POS you follow the Pos number of our distributors to.

To Asia, and we have seen and this was relatively down V.. We have commented on that in quarter four quarter, one and if you have seen on a lower level than it used to be of course, but we see a turn around 4% between quarter, two and quarter, one which can lead you to some hope that the diverse babies over there.

Got it okay. Thank you so much thanks for the detail.

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

Yes. Thank you good morning.

Dr., Paul you talked a lot about the weakness in distribution in the inventory correction.

And also I noticed that your OEM your book to Bill has come in well below one for the first time in several quarters.

Which obviously is a sign of a weak demand you get a sense is that just the demand.

Looking weaker or is there some inventory build it within that customer base and are you getting a sense is it going to take as long term for that to work off as a distribution, which I think you're you're talking about three quarters or so.

I believe the distribution case is definitely more slowly in terms of inventory and will take also longer my estimate Eddie Pete was something like three quarters under certain assumption.

It's very true what you say, we see in automotive in our big automotive customers.

A certain weakness at this point in time.

I do know at these larger customers will not be inventory view I think we know that but it's small automotive customers. It can definitely be that this case also inventory at the customers and even more so in the industrial customers. It can definitely be the case, but unfortunately, there is no report I have no firm number two to reconfirm that to prove that but you cannot rule. It out that this is a part of the of the issue at Oems at the moment, but I must of course admit that in automotive.

We see at the moment really from the large customers.

Unusual weakness so to say that.

Okay and regarding your your your Capex.

Yeah, I know you talked earlier about pulling back some capacity expansion in resistors, but could you remind us what was the Capex plans are now for the rest of the year relative to what it was a quarter or two ago.

We went into the year with a plan of 190 million one I know and now outlook has been reduced to 150.

A million.

Again may I emphasize that none of the programs we had in mind at the beginning of the year, we really canceled the only pushed out we still believe that we have whatever we wanted to do then we will have to do so later, we only came to the conclusion that we should optimize the timing.

And this brought us down to the 150.

No Sir Okay did I want to squeeze a little more but this is they are of course.

[laughter] limitations.

Yes, yes, fair enough and I know a lorry gave they as gene a guide for the year.

Backing into the December number it looks like it's kind of be flat with September .

Around 98 million or so with this restructuring program will that impact the SG nay going lower or is that primarily in the cost of goods.

Excuse me did I answer.

Matt This is for those it up it will impact next year that we are going to really the impact will be in core to start in quarter. One next year.

And it will be a civilian manufacturing fixed as fearlessness Ginnie about 50 50 approximately.

Okay.

50 50, okay. Thank you thanks very much.

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

Good morning, Dr., Paul and Lori I'm on the backlog now that lead times have come in or are you guys starting to see cancellations or something you're seeing backlog or is that holding in relatively stable no. No. We do see cancellations and since quite some time I think I commented on it but of course. These cancellations they have come up but for US. This was never a problem because the backlog was so overwhelmingly high that this was just a normal thing to have them as a matter of fact, what <unk>. What is what is really new in that sense. But also this was expected that a inventories in the supply chain now appear to be high and there are concrete actions to reduce the inventory not just the backlog.

Cancellations.

Yeah got it Okay, and then on the China appeal. That's pickup we saw in Q2 are you still.

Seemed out here in Q3, and you get a sense that this is just more.

Inventory replenishment by end customer that had been very conservative or is there a real demand pull and any sense on which market segments in China.

Are showing signs of potentially better demand trends.

Well, we don't know precisely, but we really don't I don't want to pretend that we know but of course, we have our picture the picture is really.

I think that the industrial segment in China that was really down as a consequence, partially off to the trade world. Its name. It this and wellness seems to recover a little but again, who am I to predict precisely we only report a change and of course, we have some hope that this will continue.

From a from a geographical perspective, I'm talking more on a quarter on quarter over quarter basis. It looks like its rough numbers, but looks like the Americas region sales wise was the weakest region.

He just maybe help us understand some of the dynamics in.

What you're seeing in the Americas region.

Well.

If you had asked me rich rich area suffered the most between the first or second quarter I would have named Europe , I would assume to Europe .

Inter Asia came back in America.

Still it's still strong for us still strong for US also especially this strength in military which is important for us maybe not the highest sales number but it's good business.

Good business no question.

So I think the the weak spot between quarter, one and to Europe .

And primarily automotive in Europe .

Yes, yes.

Great. Thank you.

Thank you.

There are no further questions at this time.

This concludes our second quarter call.

Thank you for your interest in Vishay Intertechnology.

Ladies and gentlemen, you may now disconnect.

Thanks.