Vishay Intertechnology, Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Feb 2021

[Peter Henrici:]

Good morning, and welcome to Vishay Intertechnology’s Fourth Quarter and Year 2020 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. As usual, we start today’s call with the CFO, who will review Vishay’s fourth quarter and year 2020 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.vishay.com. The replay for this call will be publicly available for approximately 30 days.

[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 Q4 of $667 million, higher than our original expectations, partially due to foreign currency effects. EPS was $0.26 for the quarter, adjusted EPS was $0.28 for the quarter. During the quarter, we repurchased $2.6 million principal amount of our convertible debentures due 2041 and recognized the U.S. GAAP loss on extinguishment. I will elaborate on these transactions in a few moments. COVID-19 continues to have an impact on our business. We see strong signs of recovery during Q4. Similar to the first 3 quarters of 2020, we have identified certain COVID-19-related charges, net of certain subsidies, which are directly attributable to the COVID-19 outbreak. These items were insignificant to Q2, Q3 and Q4 results, but are added back when calculating our non-GAAP adjusted EPS for comparability. Such measures exclude indirect impacts, such as general macroeconomic effects of COVID-19 on our business and higher shipping costs due to reduced shipping capacity. Revenues in the quarter were $667 million, up by 4.2% from previous quarter and up by 9.4% compared to prior year. Gross margin was 22.8%. Adjusted gross margin, excluding COVID costs, was 22.9%. Operating margin was 9.0%. Adjusted operating margin, excluding COVID costs, was 8.9%. EPS was $0.26, adjusted EPS was $0.28. EBITDA was $95.0 million or 14.4%, adjusted EBITDA was $96.2 million or 14.4%. Revenues in 2020 were $2,502 million, down by 6.2% from previous year. Gross margin was 23.3%. Adjusted gross margin, excluding COVID costs, was 23.4%. Operating margin was 8.4%. Adjusted operating margin, excluding COVID costs, was 8.5%. EPS was $0.85. Adjusted EPS was $0.92. EBITDA was $352 million or 14.1%. Adjusted EBITDA was $364 million or 14.6%. Reconciling versus prior quarter, adjusted operating income of quarter four 2020 compared to adjusted operating income for prior quarter, based on $27 million higher sales or $23 million higher excluding exchange rate impacts, adjusted operating income decreased by $2 million to $60 million in Q4 2020 from $61 million in Q3 2020.

[Dr. Gerald Paul:]

Thank you, Lori, and good morning, everybody. The year 2020 for Vishay and its business partners has been overshadowed by a completely new experience, a global pandemic. During the year, there were several phases of the pandemic impacting our business in very different ways. From numerous plant shutdowns, mainly in Asia and temporary shortages of supply in the early part of year, over drastic negative reactions of many customers, in particular, in the automotive segment in the second quarter, to an extremely steep and broad recovery of orders since October. Vishay managed to adapt to a fast-changing economic environment fairly well, keeping up efficiencies, minimizing fixed costs, controlling inventories and CapEx. Vishay in 2020 achieved a gross margin of 23.3% of sales versus 25.2% in 2019. An adjusted gross margin of 23.4% of sales versus 25.2%. Operating margin of 8.4% of sales versus 9.8% in 2019. And adjusted operating margin of 8.5% versus 10.7% in 2019.

[Peter Henrici:]

Thank you, Dr. Paul. We will now open the call to questions. Shelby, please take the first question.

[Operator:]

Absolutely. Your first question is from Karl Ackerman of Cowen.

[Karl Ackerman:]

My first question is on inventory. Could you characterize the health of channel inventory, given one of the strongest book-to-bill metrics you’ve had on record? I guess are you discounting the $200 million plus in excess bookings above your revenue guide given signs of double ordering? Or is your outlook based simply on what you can ship at the moment?

[Dr. Gerald Paul:]

That is the latter. As a matter of fact, you know that for quite some time, inventory distribution was a concern a year ago or so. And it worked -- and we worked down this inventory level at distribution over this time span of nearly a year. In the meantime, I must say, really in Asia, inventory is low, very low and people yearn for more. Can I exclude double booking? Not really, not exactly. But the book-to-bill is quite overwhelming 1.6. And really, as you said, clearly, we base our guidance on what we can ship.

[Karl Ackerman:]

Understood. I appreciate that. I guess as a follow-up, the last time you exceeded $700 million of revenue, you were able to generate gross margins in the high 20s. I guess what would prevent you from achieving that range over the next few quarters given several cost realignment initiatives you’ve enacted in this 2018? And then, I guess, in addition to that, are you able to achieve $800 million or more of revenue a quarter based upon your existing manufacturing capacity, in the context of your -- and I guess, how that frames your view for CapEx for 2021?

[Dr. Gerald Paul:]

The 800 -- first of all, the $800 million are achievable depends, of course, on the product mix as you can imagine. But in a normal mix, it’s achievable. Secondly, there are a few factors, which at the moment, are a burden vis-à-vis the times you were referring to. Number one, and this is, by far, the strongest. The U.S. dollar became relatively weak, not only vis-à-vis the euro, vis-à-vis the euro, it doesn’t matter because we have a natural hedge. We have costs in euro, and we have sales in Europe. So it balances kind of. But we are producing in many countries in the world, and practically, all of them became stronger vis-à-vis the U.S. dollar. This was also the reason why the incremental performance in quarter 4 was not as perfect as I would have liked it to see. But as a matter of fact, these are things we cannot really influence, but it plays a big role. Furthermore, transportation costs. This is COVID related. No question, transportation costs went through the roof. And of course, they will normalize again as soon as the situation around corona will normalize. And of course, there’s pricing. There has been price decline since the time. I believe there was some price pressure even on the way special price pressure, which I believe we now are in the position to correct a little. Did I answer your question?

[Karl Ackerman:]

Yes, you did.

[Operator:]

Your next question is from Ruplu Bhattacharya of Bank of America.

[Ruplu Bhattacharya:]

For the first question, I just wanted to follow up on the margin comments. Dr. Paul, in 4Q, the gross margin came in below your guidance. I think you mentioned 3 things

[Dr. Gerald Paul:]

Ruplu, we do not speculate on the U.S. dollar. So we really didn’t assume any change there. As a matter of fact, it’s not from there. We also did not expect transportation costs to come down significantly somewhat, yes, somewhat. But I believe what really can be stated is a combination of a couple of things. We believe we have reasons to believe that certain purchasing will become more attractive. And of course, for the most part, it’s higher volume, which plays the role. Volume is the key to that improvement.

[Ruplu Bhattacharya:]

Got it. For my second question, can you talk about uses of cash? So you’ve had 100 -- over $100 million of free cash flow over many years. How do you see your spend on buybacks versus dividend versus M&A at this point in the cycle? So can you talk a little bit about uses of cash at this point?

[Dr. Gerald Paul:]

Well, first of all, it’s, of course, up to our Board to decide in which direction we go. But I would suspect that we keep our eyes open in M&A. And we also will put -- foreseeably, we have to put more money into equipment going forward as it looks. We pay dividend. Whatever happens to the dividend in terms of increase or no increase, it’s not my decision, it’s the decision of the Board. But in reality, I have some pressure. We keep our eyes open in M&A. Yes.

[Ruplu Bhattacharya:]

Got it. And then sorry for the last question, if I can ask. I think you guided higher CapEx for fiscal ‘21 at $175 million. Which are the areas that you’re investing that CapEx in? And do you have any concern that you and if your competitors are also adding CapEx then at some point, the industry can have excess supply versus demand, at least, in the medium term? So your thoughts on industry CapEx as well as where your own CapEx is happening.

[Dr. Gerald Paul:]

Really, it’s an oscillating system. It’s -- I’m here since all times and looking back, there was always a time when the industry had invested somewhat too much. But this was always, always used at a very short time after. But I think in our case, in a situation we are in, you can hardly be wrong. We will put it into MOSFETs. We will put it into diodes, in Opto and especially inductors also. In our case, we have many product lines. The likelihood of being completely wrong in the short term is very little. And so it goes into the main product lines where we have shown growth over years.

[Operator:]

Your next question is from Matt Sheerin of Stifel.

[Matt Sheerin:]

Dr. Paul, I’d like to ask another question regarding the book-to-bill ratios, which as you’ve acknowledged, is very high in some areas. And that tends to spook investors, and we’re seeing your stock trade down, I think, on the concern that we may be at peak levels. And at some point, you’re going to see a correction. What’s different? And why should we not be concerned in terms of the booking and backlog? Are you seeing some orders being placed for 1 to 2 quarters out, which is one reason why the book-to-bill is inflated?

[Dr. Gerald Paul:]

I believe -- well, we are watching both. We are watching the shippable backlog and we are watching the total backlog by nature, by like. And there’s urgency in the expectations. The shippable backlog went up in the same form. That means really, people want the product. I believe partially, of course, it’s a catch-up situation. Partially, it’s a certain nervousness to get products. And there are limitations on the market. Certainly, the lead times are long these days. I can -- as I said, I can, of course, not exclude completely that there’s double ordering. In such a situation, there’s always double ordering. But it doesn’t affect, I believe, our sales expectation for the year, which is good.

[Matt Sheerin:]

And do you have any outlook of visibility beyond Q1 where you’re looking at above seasonal growth? Are you expecting the June quarter, which it typically is up for you to be up again? Or is it too early to tell?

[Dr. Gerald Paul:]

Well, normally, we should say it’s too early to tell, but I’m quite convinced that the second quarter will be above the first quarter.

[Matt Sheerin:]

Okay. That’s helpful. And just on the cost side, you talked about some of those headwinds and offsetting that with volume growth, and you’re guiding to a typical margin contribution. Could you talk about the pricing environment? You said ASPs are basically more stable, but you seem to be in a pretty strong position here in terms of leverage, particularly the distribution channels. So should we expect that to help margins as you get through the year as well, the ASPs?

[Dr. Gerald Paul:]

Yes, indeed. And you named it already. Of course, we are never breaking contracts, of course, not. But in the distribution channel, I could imagine that there can be some price increases already impacting -- starting to impact second quarter.

[Matt Sheerin:]

Okay. And then someone asked about your capacity ability right now. And I know you talked about lead times stretched out. But if there’s upside demand in the next 2 quarters, particularly in MOSFETs and diodes where things seem to be pretty tight, I mean, do you have capacity in place to meet that upside?

[Dr. Gerald Paul:]

It depends how big the upside is, but upside for sure. We have in a combination of own resources and foundries, I think we are well positioned.

[Operator:]

Your next question is from David Williams of Loop Capital.

[David Williams:]

I wanted to just kind of get back into the inductor segment and just kind of think about the strength that you had there and with your capacity that you have in other areas. How do you think about the capacity there? And have you been constrained at all, just given that demand?

[Dr. Gerald Paul:]

Well, you hit exactly the point where we have to accelerate, we have to accelerate expansion. We are expanding since many years and it’s never enough. Ironically, it’s never enough. And we are going to do something special also for, especially, this power capacitor line. We always sold out since many years and we never can catch up. But this time, I think we will have special efforts. It’s a big success.

[David Williams:]

Yes. That’s kind of big from that. Very good. And then maybe regionally, kind of thinking about North America and maybe the Americas region overall. But it’s been fairly soft. But just kind of curious if you’re seeing strength anywhere or maybe any bright spots that you’re looking forward to maybe in terms of growth for 2021?

[Dr. Gerald Paul:]

I think automotive has come around. Medical is steady. Military is strong. So I do not -- it’s Americas like Europe, by the way, is not as booming as Asia is at the moment. Asia drives the show at the moment. But I would say Americas, for us, at least based on our customers, has enough strong spots. We are also confident for the U.S.

[David Williams:]

Okay, great. And then maybe just one last one. If we’re thinking about lead times on orders, how have they stretched, I guess, in terms of what are you seeing now? Are you putting in the orders for 6 to 12 months? Or are you seeing just longer in terms of weeks, or maybe just anything of the magnitude of the stretch on the lead times every quarter?

[Dr. Gerald Paul:]

It depends very much on the product line, as you can imagine. But you have product lines with north of 2025, it’s the time for people that come new to us. You may even find some data at 30 weeks, but this is not the rule, but it happens.

[Operator:]

Your final question is from Harlan Sur of JP Morgan.

[Harlan Sur:]

On the gross margins, yes, it looks like the contributive margin for Q4 and implied in Q1 guidance is 43%. So it’s below your target of 45%. And then if we look back at the 2017-2018 time frame, you guys were driving about 46% contributive margins. So given some of the positive dynamics that you’ve talked about, do you see the team getting back to 45% contributive margins beyond Q1, assuming a continued strong demand environment?

[Dr. Gerald Paul:]

Of course. The 45% is our normal level of performance. And a couple of things, as I’ve tried to explain, came together in quarter 4. Some of them are really COVID related. Some of them is currency related. There’s not much to be done, but I would expect that, especially also in the combination of some pricing measures, we could -- our target is definitely to come back to the 45%.

[Harlan Sur:]

Got it. Okay. Book-to-bill, strong in Q4. As somebody mentioned, June quarter is typically seasonally stronger for the team. So first question is, are you still seeing positive book-to-bill trends so far here in Q1? And what end markets are you seeing the most strength?

[Dr. Gerald Paul:]

Generally, it’s like quarter 4. It’s a continuation of quarter 4. So it’s the same thing. It’s really high book-to-bill. Where does it come from? Automotive is strong, yes. But I think distribution is the major part of it. Distribution is a major part of it. And in Asia, if you look at the inventory levels, you understand that they order.

[Operator:]

There are no other questions in queue. Do you all have any closing remarks?

[Peter Henrici:]

No. This concludes our fourth quarter conference call. Thank you for your interest in Vishay Intertechnology.