Vishay Intertechnology, Inc.
Q1 2021 Earnings Call Transcript

Published: 4 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Vishay Intertechnology Q1 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Peter Henrici, Head of Investor Relations. Thank you. You may begin.

[Peter Henrici:]

Thank you, Dorothy. Good morning and welcome to Vishay Intertechnology's first quarter 2021 conference call. With me today are Dr. Gerald Paul, Vishay's President and Chief Executive Officer; and Lori Lipcaman, our Executive Vice President and Chief Financial Officer.

[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. Vishay reported revenues for Q1 of $765 million. EPS was $0.49 for the quarter. Adjusted EPS was $0.46 for the quarter. The only reconciling items between GAAP EPS and adjusted EPS are tax related. There were no reconciling items impacting gross or operating margins. Revenues in the quarter were $765 million, up by 14.6% from previous quarter and up by 24.8% compared to prior quarter -- the prior year. Gross margin was 26.5%. Operating margin was 12.7%. There were no reconciling items to arrive at adjusted operating margin. EPS was $0.49 and adjusted EPS was $0.46. EBITDA was $133 million, or 17.4%. There were no reconciling items to arrive at adjusted EBITDA. Reconciling versus prior quarter, operating income Q1 2021 compared to adjusted operating income for prior quarter based on $97 million higher sales, or $94 million higher excluding exchange rate impacts, adjusted operating income increased by $38 million to $97 million in Q1 2021 from $60 million in Q4 2020. The main elements were

[Gerald Paul:]

Thank you, Lori, and good morning, everybody. In the first quarter, the steep upturn of our business visible since October of last year accelerated even further. A sharp and effective ramp-up of critical manufacturing capacities allowed Vishay to exceed expected sales for the quarter. Quite excellent plant efficiencies and our traditional discipline in fixed costs in combination with high sales led to good financial results. Vishay in the first quarter achieved a gross margin of 26.5% of sales, operating margin of 12.7% of sales, earnings per share of $0.49 and adjusted earnings per share of $0.46. We in Q1 generated $29 million of free cash, which I believe is a good start into another solid year of cash generation. Let me talk about the economic environment we are in. The economic environment for the electronics business continues to be exceptional with sales orders and backlog in the – virtually all markets are in excellent shape, and supply chains have become rather depleted. Despite all efforts to expand manufacturing capacities quickly, lead times for many product lines have stretched out rapidly and massively. We like our competitors try to keep up delivery service to the best we can, but shortages continue to grow. By nature, price pressure presently is fairly low and further reducing. Sales in the second quarter very often will be limited, mainly by the available manufacturing capacities. All regions enjoyed substantial growth in the quarter. Distribution in all hemispheres is extremely hungry for product. There is a continued strong performance in Asia in general automotive and computing section driving the demand. Shortages allow for premium pricing opportunities. There's a further accelerating business in Europe, driven by automotive, but also by a sharp improvement of the industrial sector. We see a rebound of the business in the Americas, despite ongoing weakness of oil and gas and commercial avionics. Global distribution currently gets overwhelmed. They are at a record high since, I would say, it's 15 years. Global distribution expects really an excellent year. POS in the first quarter was 23% over prior quarter and 21% over prior year.

[Peter Henrici:]

Thank you, Dr. Paul. We'll now open the call to questions. Dorothy, please take the first question.

[Operator:]

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

[Ruplu Bhattacharya:]

Hi, thank you for taking my questions. Dr. Paul the book-to-bill remains pretty high and the backlog is increasing. Can you let us know what steps you're taking to mitigate any double ordering? How do you filter that out? And what steps are you taking to counteract that?

[Gerald Paul:]

Honestly and I said this before in situations like that there is practically no way to filter out double ordering. But on the other hand given the situation of today with this high backlog, the problem of that is very low. We have to accept it. It happens. And honestly there's not much to be done unfortunately.

[Ruplu Bhattacharya:]

Okay. Okay. No that's fine. Can I ask you on the CapEx? I think you raised your guidance for this year's CapEx to $225 million. Can you give us some details on which regions and which product lines you're adding capacity? And when do you think that will be fully utilized?

[Gerald Paul:]

These are always the same lines really. It's going to the MOSFETs to the diodes to the power inductors to resistor chips to power wirewound. And we invest -- continue to invest in the Opto set. And also it means that power -- that means in power film capacitors. As a matter of fact this will be available in steps of course. Fully implemented, I would say by the end of next year.

[Ruplu Bhattacharya:]

Okay.

[Gerald Paul:]

And a little bit also on the delivery times of the equipment.

[Ruplu Bhattacharya:]

Okay. Got it. And then lastly, can I ask you about, the priorities for cash in this environment? Do you see any opportunities for inorganic growth either on the passive side or the active side? And then, how should we think about buybacks and any dividend increases, just your thoughts on prioritizing use of cash. Thank you.

[Gerald Paul:]

Well, as a matter of fact, we are looking for acquisitions always. We just acquired a specialty company. You know that ATP. We are looking always for further opportunities. And of course, we completely look at further opportunities also. And of course, I can say, and I think, I reconfirmed that, we have considerations here, for approval. Either dividend or cash or stock buyback, we consider that and our Board evaluates all possibilities at this point.

[Ruplu Bhattacharya:]

Okay. Thanks for all the details.

[Operator:]

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

[Karl Ackerman:]

Hi. Good morning. Thank for taking my question. I guess first question, Dr. Paul, given the record bookings, is your outlook for June fully booked today, or will the June quarter require turns business? And I was hoping, you could provide, your view on which end-markets are seeing the most extended lead times at distribution.

[Gerald Paul:]

Well, first of all, I don't check it on a daily basis but don't be worried. There's always some turns business required, but the back -- the short-term backlog is quite overwhelming. What really is important in the quarter is how much we can manufacture. That is the -- the emphasis will be on manufacturing the challenge. So I'm not concerned. Really manufacturing whatever we can produce, we can practically sell at this point in time. It's a little sloppy said. But nevertheless, it's really not a matter of the backlog. We have enough, so no issue. And concerning the lead times, it's very broad. We have in that sense our service in -- like our -- service of our competitors is not so good, in MOSFETs, in inductors. In many places our lead times are very long and tend to get long these days. So the build continues to be also in April. It continued to be substantially above one. It was at 1.5. I don't know, whether I answered your question.

[Karl Ackerman:]

No. That's helpful. Maybe as a follow-up, Dr. Paul, I'd like to hear your perspective on, where you think we are in the semis cycle. Your outlook for June implies a record level of sales. Distributor inventories are low. Pricing pressure is easing. At the same time, we are increasing CapEx by 10% this year. So I guess given the fact -- given these factors, what are your thoughts on the sustainability of demand in the second half? Do you think second half demand could be as strong as the first half? Thank you.

[Gerald Paul:]

We have no reason to doubt that. Talking to our customers there's ongoing optimism. And of course the quarters have a certain history. Some quarters are not as -- do not have as many working days, as others. But principally speaking, I see at this point in time, no change of the trend, which at a point in time as it always is, it's a cyclical business, will of course come. But at this point in time, I think we are early still in the cycle.

[Karl Ackerman:]

Thank you.

[Operator:]

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

[Matt Sheerin:]

Yes. Thank you. Good morning. Dr. Paul, I wanted to ask about the strong distribution point of sales or sell-through that you talked about up 23% quarter-on-quarter. Are you getting a sense -- well number one is that the traditional distribution customer are you starting to see your OEM and EMS customers who traditionally buy more direct are also using distribution? And are you getting a sense that the distribution customers are trying to or are building inventory and at some point we see a correction there?

[Gerald Paul:]

Matt, we are here since a long time. Sooner or later there will be again the pipeline will be filled. But at this point in time there's really tangible facts that inventories go up in the supply chain. I'm not aware of any. Of course, we don't know everything. And you can ask whether OEMs for instance build some inventory, which you can never completely exclude. But overall, I would say, the pipeline, the supply chain is really relatively empty. People are extremely hungry for product. So I cannot see it. This is why I said before, I think it's still early in the cycle. I believe the supply chain is relatively empty. Matt, what was the second part of your question? Excuse me. I…

[Matt Sheerin:]

Yes, it was just in terms of -- I mean are you starting to see your direct customers maybe can't get part? Are they going -- are they using distribution more than normal, which we've seen in prior cycles?

[Gerald Paul:]

I cannot exclude it, but this is not a driving thing I believe. I don't – sorry, it can happen of course. And these times speak -- it can happen especially in such times, but I don't see a momentum here no.

[Matt Sheerin:]

Okay. And then in the release this morning you talked about the long-term drivers of content growth for Vishay, including 5G EV and other. Could you be maybe more specific about in terms of the content growth what the content opportunity is in EV versus traditional combustible engine and then 5G other examples that we can get comfortable with that capacity add that you're talking about?

[Gerald Paul:]

Yes. Especially on EV side, I have a number even ready. Normally we -- the electrical content electronic content in a normal car is about $200 opportunity for us. In an electro vehicle this is $700 according to what we analyzed and this does not include the charging stations. So just to give you that example we are quite excited about it of course. And the share of electronic -- of electric cars increases obviously. So this is a major opportunity. And for 5G this is a really broad application and we are a broad liner. It's a nice opportunity for us. So well we have analyzed the needs going forward and we are quite convinced that our capacity expansions are the right decision.

[Matt Sheerin:]

Okay. And then just lastly, in terms of the guidance for up sequentially does that contemplate some inventory build at distribution? And does that also factor in ASP increases?

[Gerald Paul:]

Both there will be some -- the inventory at distribution is low, especially, in Asia. So we would -- I would expect some increases of inventory at distribution, which would be healthy at this point in time. Also some first impacts of price increases are included.

[Matt Sheerin:]

Okay. All right. Thank you very much.

[Matt Sheerin:]

Thank you.

[Operator:]

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

[Harlan Sur:]

Good morning and congratulations on the strong results and execution. Dr. Paul, on the team's outlook for higher growth rates over the next few years on rising dollar content and electrification, how should we think about the target growth rate relative to your prior view of 3% to 6% revenue growth and 10% to 20% net income growth?

[Gerald Paul:]

Where do you take the 6% from? I mean 6% is -- the market itself grows by about 2% to 3% historically. We indeed believe now and this can be doubled. That is true.

[Harlan Sur:]

Double the higher targeted growth rate?

[Gerald Paul:]

Yes. There are -- as I said, there are lots of opportunities that are ahead of us, ahead of this industry of electronic components. I think we can be very confident for the future. And concerning the EPS growth, let's say, concerning the operating margin growth, you see our variable margin, our contributive margin, is around 45%. And you see the impact of such an increase at relatively constant fixed cost relatively. Of course, you have inflation. You see you can calculate immediately what this means for our results.

[Harlan Sur:]

Yes, exactly. And on that topic of contribution margins, and I asked this question last quarter too, but your -- the team is still below the 46% level that you guys were driving back in 2018. And you're pretty close to 45%, it feels like in Q1 and Q2, but still slightly below that. So given the continued pricing improvements, would you anticipate contribution margins moving more towards 45% or better as you move through the second half of the year?

[Gerald Paul:]

I believe what we are going to see is the impact of some price increases. I can hardly speculate on logistics costs, which holds us back at this point in time, not only us, also others. You would assume that with improving situation of the pandemic, there will be more flights and the freight rates will go down again. So there are some positive aspects for the variable margin in the second half I think. True.

[Harlan Sur:]

Okay. And then, maybe just my last question. Given the strong backlog and I'm assuming lead times are still extending so, it feels like you guys have very good visibility for the second half. And I assume that given the demand environment that second half is shaping up to grow over the first half. Number one is that fair? And given your manufacturing capacity expansion plans, can the team support revenues at or above $850 million per quarter in the second half?

[Gerald Paul:]

Yes, principally it can. But you may remember last session, when I called our machine capacity, the max capacity at 3.2. And at the moment, we are in process to add. But of course, we have -- the faster we add the more sales we can bring home, no question, at least during such a period like today. We will do our best, but we depend also on equipment manufacturers as you can imagine.

[Harlan Sur:]

Yes. Okay. Thank you.

[Gerald Paul:]

Thank you.

[Operator:]

At this time, I'll turn the call back over to our speakers for closing remarks. Please go ahead. Are there any closing remarks?

[End of Q&A:]

[Gerald Paul:]

Peter?

[Peter Henrici:]

I'm sorry. I was muted. Thank you, for joining us on today's call and for your interest in Vishay Intertechnology.

[Operator:]

Thank you, ladies and gentlemen. That does conclude today's conference call. Thank you for your participation and may I ask that you please disconnect your lines.