Vishay Intertechnology, Inc.
Q2 2017 Earnings Call Transcript

Published: 6 Aug 2017

[Operator:]

Good morning. My name is Andrea and I will be your conference operator today. At this time, I would like to welcome everyone to the quarter two 2017 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will a question-and-answer session. [Operator Instructions]. I would like to now turn the call over to your host, Mr. Peter Henrici. You may begin.

[Peter Henrici:]

Thank you Andrea. Good morning and welcome to Vishay Intertechnology's second quarter 2017 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 will start today's call with the CFO, who will review our second quarter 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 will 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. 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 and Vishay's 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 2017 financial information containing some of the operational metrics Dr. Paul will be discussing. On September 7, Johan Vandoorn, Executive Vice President, Chief Technical Officer and Deputy to the CEO will present at the Citi Global Technology Conference in New York. We will also be presenting on August 29 at the Jefferies Semiconductors, Hardware & Communications Infrastructure Summit in Chicago and on September 13, at the Credit Suisse HOLT conference in Boston. Now I turn the call over to Chief Financial Officer, Lori Lipcaman.

[Lori Lipcaman:]

Thank you Peter and 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 Q2 of $645 million, above the mid-point of our guidance. GAAP net income for the quarter was $0.36 per share. Adjusted EPS was also $0.36 for the quarter. The second quarter includes restructuring charges totaling $0.5 million. Through the end of the second quarter we did not repurchase any additional shares of our common stock. The program announced in May 2016 has since expired. Yesterday, we announced a new share repurchase program of $150 million, which is expected to be implemented over the next year. This stock repurchase program does not obligate the company to acquire any particular amount of common stock. Revenues in the quarter were $645 million, up by 6.4% from previous quarter and up by 9.3% compared to prior year. Gross margin was 26.8%. Operating margin was 12.7%. Adjusted operating margin was 12.8%. EPS was $0.36. Adjusted EPS was also $0.36. EBITDA was $121 million or 18.8%. Adjusted EBITDA was $122 million or 18.9%. Reconciling versus prior quarter, adjusted operating income, quarter two 2017 compared to adjusted operating income for prior quarter, based on $39 million higher sales or $32 million higher excluding exchange rate impacts, adjusted operating income increased by $16 million to $83 million in Q2 2017 from $66 million in Q1 2017. The main elements were average selling prices had a negative impact of $4 million representing a 0.7% ASP decline, volume increase had a positive impact of $18 million equivalent to a 6.0% increase, lower inventory build had a negative impact of $3 million and lower and variable fixed costs had a positive impact of $6 million. Reconciling versus prior year, adjusted operating income quarter two 2017 compared to prior year based on $55 million higher sales or $61 million higher excluding exchange rate impacts, adjusted operating income increased by $29 million to $83 million in Q2 2017 from $54 million in Q2 2016. The main elements were average selling prices had a negative impact of $19 million representing a 2.8% ASP decline, volume increase had a positive impact of $40 million representing a 14.0% increase, variable cost decrease with a positive impact of $6 million primarily due to cost reduction efforts and efficiencies which more than offset the increase of labor cost and metal prices. Selling, general and administrative expenses for the quarter were $90 million, lower than anticipated due to several individually immaterial factors. For quarter three 2017, our expectations are approximately $92 million of SG&A expenses and approximately $370 million for the full year at quarter two exchange rates. I would like to give you an overview of our cost reduction programs. Our previously announced ongoing global cost reduction programs are progressing as planned. These programs include the extended MOSFETs Enhanced Competitiveness restructuring program announced in November. This program is expected to result in additional cost savings of approximately $8 million to $9 million when fully implemented in 2017. These programs also include a global cost reduction program pursuant to which we intend to lower cost by approximately $35 million annually when fully implemented at a cash cost of approximately $30 million. These global programs include a plan to reduce SG&A by $17 million, substantially implemented at the end of 2016. We also plan to streamline and consolidate production of certain product lines, which we expect to reduce cost of products sold by approximately $18 million annually. The majority of these transitions have been completed by the end of Q2 2017, with increasingly positive impacts on the margins. We continue to expect full completion by the end of 2017. The amount of restructuring expense recorded for the global program during Q2 was $0.5 million or $25.2 million for the programs to-date. Total cash restructuring payments in Q2 2017 were approximately $3 million and approximately $8 million year-to-date. The year-to-date effective tax rate on a GAAP basis was approximately 26%. The year-to-date normalized tax rate was also approximately 26%. For the quarter, this mathematically yields a GAAP tax rate of approximately 25.5% for quarter two and a normalized rate of approximately 27%. The normalized tax rate includes the quarterly re-measurement of the cash repatriation deferred taxes, a benefit of $1.2 million for quarter two and $2.2 million year-to-date and considers the tax effects of the restructuring charges. The year-to-date normalized rate also reflects the non-deductibility of the loss on disposal of the equity affiliate. We expect our normalized tax rate for 2017 to be approximately 27%, slightly higher than the rate year-to-date due to the non-deductibility of the Q1 loss on disposal of the equity affiliate. This 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 146 million. The expected share count for EPS purposes for the third quarter 2017, based on the same average stock price as the second quarter, is approximately 155 million shares. 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 $85 million. Capital expenditures for the quarter was $32 million. Free cash generation for the quarter was $53 million. For the trailing 12-months, cash from operations was $329 million. Capital expenditures were $133 million, split approximately for expansion $66 million, for cost reduction $14 million, for maintenance of business $53 million. Proceeds from the sales of property and equipment were $7 million for the trailing 12-months. Free cash generation was $204 million for the trailing 12-months. Proceeds from the sale of property and equipment includes insurance proceeds for the assets destroyed in the Tianjin explosion. Vishay has consistently generated an excess of $100 million free cash in each of the past 11 years. Cash flows from operations were greater than $100 million for the last 22 years and greater than $200 million for the last 15 years. Backlog at the end of quarter two was at $1,034 million or approximately 4.8 months of sales. Inventories increased quarter-over-quarter by $10 million, excluding exchange rate impacts. Days of inventory outstanding were 79 days. Days of sales outstanding for the quarter were 45 days. Days of payables outstanding for the quarter were 34 days, resulting in a cash conversion cycle of 90 days. We had total liquidity of $1.7 billion at quarter-end. Cash and short-term investments comprised $1.2 billion and unused capacity on the credit facility was $500 million. The carrying value of our debt of $350 million is net of the unamortized issuance cost of $10 million and includes $133 million outstanding on our credit facility and $227 million of convertible debentures, net of unamortized discount, issued in three tranches and due in 23, 24 and 25 years, respectively. The principal amount or face value of the converts is $575 million. No principal payments are due until 2020. However, the convertible debentures may be redeemed if certain stock price thresholds are met. At the end of quarter four 2016 and continuing through the end of Q2 2017, the convertible debentures due 2042 are redeemable for the next quarter. Accordingly, we have reclassified the difference between the carrying value and the principal amount for those debentures from stockholders' equity to a separate line between liabilities and equity on our consolidated balance sheet. If the debentures are converted, we would fund the principal amount with borrowings on our revolving credit facility and net share settle amounts in addition to the principal amount. This criteria is measured quarterly and the amounts presented as temporary equity will revert to regular equity if the criteria are not met. Now I will turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

[Gerald Paul:]

Thank you Lori and good morning everybody. Well, we are living in good times. After a very successful first quarter, the second quarter results for Vishay showed further substantial improvements in terms of sales and profits. We continue to be carried by a very high level of demand while maintaining good efficiencies across the board. Vishay achieved a gross margin of 27% of sales in the quarter, adjusted operating margin of 13% of sales, GAAP earnings per share of $0.36 and adjusted earnings per share also of $0.36 and we continue to generate free cash on a very high level. Let me talk about the economic environment in general. Historically, high order rates also characterize the second quarter and virtually all markets are concerned. Again, the high order level was driven by distribution, in particular, in Asia and in Europe. Tangible shortages of supply and long lead times still raise concerns. Semiconductors continued to be more concerned than passives but the lack of manufacturing capacity is also visible for several passive lines. Talking about the regions. The American market keeps recovering with moderate growth across industrial and avionics, space, military segments. The weakness in oil and gas seems to be behind us. In Europe, business conditions remain strong driven by automotive and industrial markets. Asia continues to be strong reflecting the strength of global automotive and industrial segments and there are good opportunities in power transmission and in e-mobility. Distribution in particular in Asia and Europe continues to drive our high order rates. At the same time, also POS increased further in the Americas plus 4% versus prior quarter, in Asia plus 15% versus prior quarter, which is the best since the decade, in Europe just 0.1% versus prior quarter but in quarter one there was an increase of 28% vis-à-vis quarter four. There was a modest inventory build at distribution worldwide during the quarter of 3.5%, we measured. The inventory turns at distributors worldwide climbed to an excellent level of 3.9 versus 3.6 in prior quarter. In the Americas to 2.3, after 2.2 in Q1 and 2.2 in the prior year. In Asia up to 5.3, after 4.9 in Q1 and 4.2 last year. And in Europe to 4.3, after 4.3 in the previous quarter and 3.8 in the prior year. Also the orders on distributors were extremely strong in the quarter, 11% above prior quarter and 23% above the prior year. Coming to the industry segments. Automotive remains strong and continues to expect further growth in the 10% range due to increasing electronic content, driver systems, 48-volt projects and in particular, e-mobility drive this segment. Industrial markets remained strong in most areas. Drivers are factory automation, infrastructure programs, alternative energy and Internet of Things sensoring. Computers remained weak in general but we do expect a reasonable seasonal growth in the third quarter. There are various opportunities in consumer markets. AMS markets remain strong, both in military product areas and in commercial avionics and medical continues to grow steadily. Talking about the development of our business. Due to a higher manufacturing output than anticipated, sales in the quarter came in slightly above the midpoint of our guidance. We achieved $645 million sales in the quarter versus $606 million in prior quarter and $590 million in prior year. Excluding exchange rate effects, sales in the quarter were up versus prior quarter by $32 million or by 5% and up versus prior year by $61 million or by 10%. Book-to-bill of 1.27, again, was exceptionally strong across the board, 1.43 for distribution same number as last quarter, 1.06 for OEMs after 1.11, 1.34 for actives after 1.36 in Q1, 1.20 for passives after 1.23, 1.19 for the Americas after 1.21 in the first quarter, 1.38 for Asia after 1.37, 1.20 for Europe after 1.25. Backlog continued to increase at a rather dramatic rate to 4.8 months from 4.1 month in the first quarter to 5.2 month in actives and to 4.4 months in passives. We have seen some decreasing price decline as we expected it, minus 0.7% versus prior quarter and minus 2.8% versus prior year, for actives minus 0.7% versus prior quarter and minus 3.4% versus prior year, for passives minus 0.6% versus prior quarter and minus 2.1% versus prior year. Let me give you some highlights of operations. In the second quarter, again, we are able to offset the negative impact of inflation and of price decline on the contributive margin by cost reduction and by innovation. SG&A cost in the quarter came in at $90 million, better than expectations due to lower legal costs, fringes and several other favorable one-time effects. Manufacturing fixed costs in the quarter were $121 million, higher than expected, also driven by measures to maximize our output. Total employment at the end of the second quarter was 22,970 heads, approximately 1.5% up from prior quarter, of course reflecting a higher manufacturing volume. Due to higher production levels, inventory in the second quarter increased slightly by $10 million, excluding exchange rate impacts. Raw materials increased by $2 million and WIP and finished goods by $8 million. Given the high level of sales, inventory turns in the quarter improved further to 4.6 from 4.5 in the first quarter. Capital spending in Q2 was $32 million versus $31 million in prior year and for 2017, we continue to expect CapEx of approximately $165 million with an acceleration of spending in the second half. We generated in Q2 cash from operations of $85 million versus $75 million in prior year, $329 million on a trailing 12-month basis. And we generated in the second quarter free cash of $53 million as compared to $44 million in prior year, $204 million on a trailing 12-month basis. I think we can say, cash generation at Vishay remains fairly excellent. Let me come to the product lines and as always, I would start with resistors and inductors. Vishay's traditional and since years, most profitable business continues to grow steadily. With resistors and inductors, we enjoy a very strong position in the industrial, auto, mill and medical market segments. Since a few years, we have started to concentrate on the Asian, predominantly Chinese, industrial market and achieved an increase of this business by 50.0% in four years. Sales in the quarter were $208 million, up by 3% versus prior quarter and up by 10% versus prior year, excluding exchange rate impacts. Book-to-bill ratio for resistors and inductors in Q2 was 1.23 after 1.22 in prior quarter. I think this indicates continued strength of this important segment of our business. The backlog increased to 4.2 months. We see stretched out lead times for many product lines, in particular for power inductors. Gross margin remained at 30% of sales in the quarter. There was virtually no inventory build in the second quarter after some in the first quarter. Inventory turns in the quarter were at very satisfactory 4.8 after 4.7 in prior quarter. There was a reduced price decline minus 0.4% versus prior quarter, minus 2.2% versus prior year. We continue to invest for increasing manufacturing capacities at power inductors, metal strip resistors and resistor 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 e-cars and of power transmission, namely in Asia, especially in China and entered the polymer tantalum capacitor market. Sales in the second quarter were $92 million, 1% above prior quarter and 10% above prior year, again without exchange rate effects. Book-to-bill ratio in the quarter was 1.14 after 1.25 in the first quarter. Backlog in the second quarter increased substantially to 4.6 months from 4.2 months in the first quarter. Gross margin for capacitors in the second quarter remained at 21% of sales. Inventory turns in the quarter were at 3.8 after 3.9 in the first quarter. There was normal price decline minus 1.2% versus prior quarter and minus 1.9% versus prior year. For capacitors, we continue to see numerous opportunities, especially in Asia, for growing the business further. Coming to opto products. Vishay's business with opto products consists of infrared emitters, receivers, sensors and couplers as well as LEDs for automotive applications. The business represents one of Vishay's best opportunities for long term growth, especially the segment of sensors. Sales in the quarter were $74 million, 11% above prior quarter and 10% above prior year, again without exchange rate impacts. The book-to-bill in the quarter was 1.11 after 1.16 in the first quarter. Backlog is at 3.8 months after 3.9 in prior quarter. The gross margin in the quarter increased slightly to 35% of sales after 34% in prior quarter. We do have quite excellent inventory turns at opto of 5.5 in the quarter, same as in the first quarter. There was normal price decline, minus 1.2% versus prior quarter and minus 4.4% versus prior year. We remain very confident for this line growing steadily and profitably. Diodes. Diodes for Vishay represent a broad commodity business where we are largest supplier worldwide. Vishay offers virtually all technologies as well as the most complete product portfolio and we, in particular, are leading in power applications. The business has a strong position in the automotive and industrial market segments and keeps growing steadily and profitably since years. Sales in the quarter were $156 million, 7% above prior quarter and 11% above prior year without exchange rate effects. We continue to see for diodes a very strong book-to-bill ratio of 1.41 after 1.44 in the first quarter. There are perceived shortages of supply, which continues to drive orders, in particular, from distribution. The backlog keeps increasing drastically to now 5.8 months coming from 4.8 months in prior quarter. Gross margin in the quarter remained at quite excellent 26% of sales. Inventory turns increased slightly to 5.2 after 5.1 in the first quarter. We think that this is a very satisfactory level. There is reduced price decline as to be expected, minus 0.5% versus prior quarter and minus 3.4% versus prior year. We are expanding manufacturing capacities in all critical lines as fast as we can also in order, of course, to prepare the mid and long term future of the successful product line. Finally, MOSFETs. Vishay continues to be one of the market leaders in MOSFET transistors. MOSFETs, over the last years, developed a strong and growing position in automotive. The business has seen a very strong upturn recently, of course supported by the continued strength of automotive. Sales in the quarter were $114 million, 8% above prior quarter and 12% above prior year. There is a very strong book-to-bill ratio of 1.37, which is on the level of the first quarter. The picture in total, altogether, is quite similar to diodes. The backlog for MOSFETs continues to grow quite dramatically to now 5.2 months coming from 4.4 months in prior quarter. Again, the same picture as we see for the diodes. Gross margin in the quarter for MOSFETs improved to 22% of sales after 20% of sales in prior quarter. I think we reached the target set in the context of our restructuring program. I think also that we have established a solid and competitive cost basis for future growth of the MOSFETs. Inventory turns increased to a good level of 4.1, coming from 3.9. We have seen substantially reduced price pressure, again as to be expected under such economic conditions, minus 0.5% versus prior quarter, minus 2.7% versus prior year. And we are in process to increase manufacturing volume at foundries and to maximize the output of our fab in Itzehoe, Germany. Let me summarize. Supported by fairly excellent business conditions in most of our markets and for most of our product lines and based on good efficiencies, Vishay had a very successful second quarter and also a very successful first half. Financial results of the second quarter were substantially better than in prior year and also better than in the first quarter, which already has been a good quarter. In particular, we are proud of having successfully turned around our business with MOSFETs. We currently work on maximizing the output of our plants, foundries and subcontractors and we do continue to invest in critical manufacturing capacities. We expect another excellent year for the generation of free cash. We will further increase our efforts to even better penetrate automotive and industrial markets in Asia. We expect strong growth in automotive markets for years to come, driven by e-mobility and sensoring. And I think we, as a company, are well positioned there. We continue to focus on shareholder value by returning cash to the shareholders. The decision has been taken to establish another stock buyback program for $150 million to be executed by June 2018. For the third quarter, we guide to a sales range between $630 million and $670 million with gross margins between 26% and 28% of sales, all these at exchange rates of the second quarter. Thank you very much. Peter?

[Peter Henrici:]

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

[Operator:]

[Operator Instructions]. Your first question comes from the line of Harlan Sur with JPMorgan.

[Harlan Sur:]

Good morning and thank you for taking my question and congratulations on a good quarterly execution. Given that the second half demand profile is typically, seasonally down, right, especially in automotive and industrial and combined with the team's efforts to try to expand some output capacity, Dr. Paul, do you think this is going to give you guys an opportunity to work down some of your backlog and potentially reduce lead times a bit in the second half of the year?

[Gerald Paul:]

Yes. As a matter of fact, the backlog is not typical, it's high. And of course, we want to increase our sales to the extent we can. On the other hand, this requires more equipment, which takes some time to be installed. We are going to invest more. We believe that the backlog going forward will normalize anyway. I would like to state that, without impacting the running sales level.

[Harlan Sur:]

Great. Thank you for that. And then, good to see the overall gross margin expansion, but if I look at it by product category, interestingly enough, your passive products also are all sort of flattish or maybe a slight gross margin decline, this is quarter-over-quarter. Your semi products saw continued strong margin expansion. You have got the benefit of better pricing dynamics in passives. So can you just help us understand the margin dynamics for passives in Q2 as well as the expectation for passive gross margins going into Q3?

[Gerald Paul:]

Yes. I mean quarter-over-quarter, the passives did not go up that much. And of course, especially in our line resistors and inductors, there was no further inventory build. So the previous quarter was somehow supported in the P&L by some inventory build, which didn't repeat itself. So obviously, we sold what we could as a matter of fact. Capacitors also relative flat in sales, but on a relatively good level, historically. 21% gross margin for our capacitor line is a good number, which doesn't mean it couldn't get better. We hope here for more volume especially from China and Asia and I believe we have the product for that. Coming, of course, to the semiconductors, I have to highlight again and I did it in my speech. I have to highlight a turnaround in MOSFETs. We are really coming from low in MOSFETs and back to a reasonable level, say, of 22%. And this was driving, especially the semiconductor numbers, of course from a profitability standpoint. But also, opto is steadily good. So relatively speaking, the best product line that we have. And Diodes is like a tanker. So as a matter of fact, the increase and bring home 26%, which historically, is also a good number, as a matter of fact. So this is how I see things.

[Harlan Sur:]

Thank you Dr. Paul.

[Operator:]

And your next question comes from the line of Shawn Harrison with Longbow Research.

[Gausia Chowdhury:]

Hi. Good morning. This is Gausia Chowdhury, on behalf of Shawn. Just talking a little bit more about the gross margins. So the leverage on a sequential basis was a little lower than typical and you discussed why. How should we think about the balance of the year?

[Gerald Paul:]

Well, our visibility, first of all, the gross margins are determined by volume, as we all know. In terms of volume, you can say that our visibility reaches normally out for one quarter, see our guidance. But of course, the backlog is really high these days. So I also believe that the fourth quarter, we are relatively safe. So I believe the volume for these two quarters is mainly determined by our ability to ship and we are working on that. But of course, as I said, we still need more equipment and the lead time for equipment will take some time. But I think from a volume standpoint, things are stable. So I would also say results will be stable for the remainder of the year.

[Gausia Chowdhury:]

Okay. And just to clarify then, the incremental gross profit margin, do you see that improving as that occurs?

[Gerald Paul:]

Well, we do have an incremental margin normally of around 46%, 47%, something like that. And I believe that this will stay typical for the remainder. And of course, just to repeat it once more, there will be naturally no inventory build in the remainder of the year which, of course, if you did so, you support your gross margins but, of course, we better sell, obviously.

[Gausia Chowdhury:]

Okay. And then just talking a little bit about the pricing trends in general. It looks like you were able to get a little bit better in this tighter inventory and lead time environment. Do you see that as sustainable for another quarter or two as well?

[Gerald Paul:]

Well, you know, it was moderate changes on pricing. You see, all the OEM businesses are practically under contract and we are not contracts by nature. And on the distribution side, the specialty products are no candidates for price increases. So we are talking really distribution and we are talking commodity products. And I believe these favorable conditions, which have enabled us to slow down a little less in price will continue for the quarter three and I believe also for quarter four.

[Gausia Chowdhury:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Jim Suva with Citi.

[Jim Suva:]

Thank you very much. I have two questions. One for Dr. Paul and one for Lori. Yes, first on Dr. Paul. You mentioned the increase in inventory and distribution. Do you think that was due to demand or an increase in backlog in time to get the products? Or what's the logic behind that? And then second of all for Lori. On the convert, is it just simply a financial EPS accretion, dilution impact of whether you exercise the convert or not? Or are there other factors such as CapEx spending, cash flow that we should be mindful of, as far as thinking about exercising the convert or not? Thank you.

[Gerald Paul:]

Jim, I think, this slight increase and we are talking really a slight increase of 3.5% in distribution inventory is really nearly negligible in view of the upturn of their business. I cannot really caliber that. I could imagine, maybe they got a little too much in vis-à-vis what they could ship at. Principally speaking, the turns are sky high at the moment. So inventory at this point in time, at least and distribution doesn't represent any concern to me. We have seen other times, I suppose, of us now. So I don't have a real explanation but I think with a higher level of activity, you automatically have to have somewhat more inventory.

[Jim Suva:]

All right. Great. Lori?

[Gerald Paul:]

Okay. Now I turn over to Lori.

[Lori Lipcaman:]

Hello Jim. So I think all of the details about the conditions that make these converts redeemable are disclosed in the 8-K that we filed this morning. So I think that would be the best place to get that detailed information. But I want to say it's up to the holders to redeem them, right? Vishay does not make the decision to redeem them. It would be the holders that make that choice. It's just that the conditions have been met so they would be permitted to make that choice.

[Jim Suva:]

Okay. Got you. Thanks so much for the clarification. And congratulations

[Lori Lipcaman:]

Thank you. You are welcome.

[Operator:]

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

[Ruplu Bhattacharya:]

Hi. Good morning. Thank you for taking my questions. The first one, Dr. Paul, maybe I just like to ask about total industry supply or capacity coming online. You mentioned some supply shortage in diodes and then possibly also in the passives. Based on your supply coming online and what you see for other competitors, how do you think the supply-demand balance on industry capacity trends over the next couple of quarters?

[Gerald Paul:]

Yes. First of all, I just reconfirm what you said. There have been ongoing shortages in combination with long lead times for the diodes and the MOSFETs as we see it. We add capacity but of course it will take some time. It doesn't go overnight. So from our perspective and I believe, also in general, the shortage situation will not be turned around quickly, I believe. Normally high backlogs, as we have now on the other hand, do not survive forever, as you see. So we do expect normalization by lower orders and backlog. You have to see in order to make this normalize, you have to see book-to-bill ratios below one, obviously. Otherwise mathematically, it will not work. When this will happen, it's hard to say. I believe the strong economic conditions which we enjoy are foreseeably there. But there's no question that capacities will come up and at the point in time, there will be normalizations of the backlog. I believe it will happen without impacting the running sales, because at the moment we simply have too much. A part of these orders were also reservations of capacity obviously everywhere. Concerning our own activities. Well, we are going to spend this year more. You have seen or you have heard that we are going to increase capital spending this year to $165 million approximately. And we are, at the moment, in discussions about next year. I could imagine that this number will be exceeded next year. So we will prepare better, even better if you want, so for the future. And I believe, we will contribute of course to the fact that our customers get the products they want.

[Ruplu Bhattacharya:]

Okay. Thank you. That's helpful color on the supply. My next question is on gross margins. The opto margins were 35%, diodes were 26%. Given the fact that you have high book-to-bill in both of these segments, do you think that this level of gross margin can be supported? How should we think about gross margin in these two segments trending over the next couple of quarters?

[Gerald Paul:]

I think I said it before. Gross margin, first of all, is a function of volume, first of all. Of course, then you have your variable cost deviations and your purchase prices, et cetera. But for such as short range, let's say a quarter, the volume is what counts. And as I believe, the volume is assured for the third quarter, you see our guidance. And I am also quite optimistic for the fourth quarter. I would say that also the gross margin percent are assured. Substantial increase of the gross margin percent would require more volume, as a matter of fact. Of course, the low price decline may help on the other side. But again, we are a little bit also victims of the exchange rates there, as a matter of fact. Anyway, I believe our performance really continue to exist depending on volume that seems to be there.

[Ruplu Bhattacharya:]

Okay. And one for Lori, if I might. On the buybacks, was there any authorization remaining from the last buyback authorization? And how should we think about the cadence of the buyback over the year? Should we think about it in equal chunks over the year? Or is it more front end loaded or back end loaded?

[Gerald Paul:]

Ruplu, I must disappoint you. It's me, again.

[Ruplu Bhattacharya:]

Okay. Go ahead.

[Gerald Paul:]

So I will try to answer. Because I think the question goes really to me. Yes, you are right. you can expect the intent to spend the money in equal portions over the year. And secondly, I believe this move of ours just underlines that we are confident for the further development of Vishay, as a matter of fact.

[Ruplu Bhattacharya:]

Okay. Great. And sorry, if I can ask just one more. So you talked about overall strength in auto continuing for several years. How about North American auto? Are you seeing any weakness there? And how should we think about your content, like your MOSFETs are increasing in auto. So overall, is Vishay content increasing in auto? And how should we think about that trend over the next couple of years?

[Gerald Paul:]

That's exactly what I am talking about. I mean the number of cars, the car production, also historically if you look back, were sometimes more, sometimes less, better and worse. But, overall our sales to automotive, not our sales, I believe, our industry sales to automotive continued to go up, always the same, because of the increase of electronic content in the cars. There's no reason whatsoever to believe that this will change, disregarding somehow a slowdown of cars being produced in one area or the other. As a matter of fact, I believe, first of all, all this goes up and down. Secondly, the electronic content is going to grow. We believe really for the next years and these are statements of our main very well-known customers, you know them. These customers, they support the idea of 10% per year. But they ship not only to North America. They ship to all regions in the world, right?

[Ruplu Bhattacharya:]

Okay. Great. Thank you for taking my questions. I appreciate all the color.

[Gerald Paul:]

Okay.

[Operator:]

[Operator Instructions]. There are no questions at this time, sir.

[Peter Henrici:]

This concludes our second quarter conference call. Thank you for your interest in Vishay Intertechnology.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's conference. You may now disconnect.