Vishay Intertechnology, Inc.
Q2 2016 Earnings Call Transcript

Published: 3 Aug 2016

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2016 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Peter Henrici. Please go ahead, sir.

[Peter Henrici:]

Thank you, Paula. Good morning and welcome to Vishay Intertechnology's second quarter 2016 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'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. 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 discussions 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 accepting accounting principles. We use non-GAAP measures because we believe that providing full 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 sections of our website you find a presentation of the Q2 2016 financial information containing some of the operational metrics that the call will be discussing. Now, I turn the discussion over to Chief Financial Officer Lori Lipcaman.

[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 Q2 of 590 million. GAAP EPS for the quarter was $0.22. Adjusted EPS was $0.23 for the quarter. The second quarter includes a gain on early extinguishment of debt of 1 million and restructuring charges totaling 4.5 million. During the second quarter we repurchased approximately 500,000 shares of our common stock for approximately $6.1 million, pursuant to the 100 million share repurchase program announced in May. Since quarter end, we have purchased another approximately 300,000 shares of common stock pursuant to this program. As previously announced, we repurchased the remaining exchangeable notes in a privately negotiated transaction for approximately 11.4 million. The notes repurchased had been exchangeable for approximately 0.8 million shares of common stock and had been reported on our balance sheet and long term debt for the amount of approximately $12.4 million. In quarter two Vishay paid cash dividends to stockholders in the amount of $9.2 million. During the second quarter, we repatriated approximately $46 million of cash to divest as planned. The proceeds were primarily used to pay down our revolving credit facility balance. Revenues in the quarter were 590 million, up by 3.4% from previous quarter and down by 0.1% compared to prior year. Gross margin was 24.8%. Operating margin was 8.4%. Adjusted operating margin was 9.1%. EBITDA was 91 million or 15.4%. Adjusted EBITDA was 94 million or 16.0%. Reconciling versus prior quarter, adjusted operating income quarter two, 2016 compared to adjusted operating income for prior quarter, based on 19 million higher sales or 15 million excluding exchange rate impacts. Adjusted operating income increased by 7 million to 54 million in Q2 2016 from 47 million in Q1 of 2016. The main elements were average selling prices had a negative impact of 4 million, representing a 0.7% ASP decline. Volume increased with a positive impact of 10 million, equivalent to 3.3% increase. Variable cost decreased with a positive impact of 4 million, primarily due to cost reduction efforts and lower metal material prices. Fixed costs decreased with a positive impact of 2 million, primarily coming from our announced cost reduction programs and lower depreciation. Inventory effects had a negative impact of 3 million, due to inventory reductions, primarily at MOSFETs, and exchange rate effects had a negative impact of 1 million. Reconciling versus prior year. Adjusted operating income quarter two, 2016 compared to prior year based on flat sales were 5 million lower excluding the exchange rate impacts. Adjusted operating income increased by 4 million to 54 million in Q2 2016 from 50 million in Q2 2015. The main elements were, average selling prices had a negative impact of 15 million, representing a 2.5% ASP decline. Volume increase was a positive impact of 5 million, improvement to a 1.7% increase. Variable cost decreased with a positive impact of 10 million, primarily due to cost reduction efforts, lower metal and material prices, which more than offset the increase of labor cost. In terms of fixed cost, our announced cost reduction programs offset selling rate increases, and lower amortization of intangibles and lower depreciation had a positive impact of 5 million. Inventory effects had a negative impact of 7 million caused by an inventory reduction in 2016 versus an inventory built in prior year, primarily at MOSFETs. Exchange rates had a positive impact of 7 million. Selling, general and administrative expenses through the quarter were 92 million, slightly higher than expected primarily due to exchange rate effects. For quarter three, 2016, our expectations are approximately 92 million of SG&A expenses at current U.S. dollar to euro exchange rates. For the year 2016, we expect approximately 365 million. I would like to give you an overview of our cost reduction programs. As announced we are implementing global cost reduction programs intended to lower costs by approximately 35 million annually when fully implemented at a cash cost of approximately 30 million. These programs include a plan to reduce SG&A by 17 million to be implemented by the end of 2016. The final run rate will only be achieved by end of Q4. The annualized run rate of quarter two was 9 million. 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, split 50-50 between variable and fixed costs. These production transfers will be completed in steps by the end of 2017. The amount of restructuring expense recorded for these programs during Q2 was 3.4 million or 19.7 million for the programs to date. More will follow in 2016. Our other previously announced program in the MOSFET segment has been completed. Going forward we expect annualized cost savings of approximately 23 million per year beginning in Q3. In total, we made approximately 8.8 million of cash restructuring payments during quarter 2. We will continue to monitor the performance of certain divisions for potential cost reduction opportunities. The year to date effective tax rate on a GAAP basis was approximately 28%. The normalized rate was approximately 30%. For the quarter, mathematically yields a GAAP tax rate of approximately 28%, and a normalized rate of approximately 31%. The normalized rate excludes the tax effects of the restructuring charges and the gain on early extinguishment of debt, and also includes the re-measurement of the deferred tax liability recorded with cash repatriation program announced in Q4 2015 of $1.2 million for the quarter and 2.3 million for year to date. We expect our normalized rate for the year to be approximately 30%, the same as our normalized year to date rate. This rate was based on an assumed level and mix of income among various taxing jurisdictions. A shift in income could result in significantly different results. The timing of the completion of the pending risk pension plans settlement, which is contingent upon the suitable favorable IRS determination letter, will result in significant noncash pretax charges, which could in turn result in a significant change in the effective tax rate. Total shares outstanding at quarter end were 147 million. The expected share count for EPS purposes for the third quarter 2016, based on the same average stock price as the second quarter, was approximately 149 million shares, which reflects the reduction in potentially diluted shares after repurchase of exchangeable notes on June 28. Share repurchases during quarter 3 under our stock repurchase program would reduce this estimate. 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 were 75 million. Capital expenditures for the quarter were 31 million. Free cash generation for the quarter was 44 million. For the trailing 12 months, cash from operations was 248 million. Capital expenditures were 149 million, split approximately

[Gerald Paul:]

Thank you, Lori, and good morning, everybody. In the second quarter, Vishay operated in overall friendly economic environment. The results continued to improve very much in line with expectations. This year achieved a gross margin of 25% of sales, adjusted operating margin of 9% of sales, adjusted earnings per share of $0.23 per share and GAAP earnings per share of $0.22 per share. Despite substantial cash payments for our own announced restructuring plans, we will continue to generate free cash on a good level. Let me comment on the economic environment. Generally, markets in the second quarter remained fairly friendly, with substantial variations between geographies and market segments. The trends of the first quarter to a large degree remained unchanged. Like in recent quarters, a weak euro supports European manufacturers, driving mainly the industrial and the automotive sectors. Asian markets continue to recover from a weak second half of 2015. The Americas continue to show flat results. The energy sector remains weak, but other sectors, in particular automotive, compensate. Worldwide distribution kept its confidence in Europe improving POS, up by 2.5%; and orders; up by 3%. Some regional detail on the POS of our distributors

[Peter Henrici:]

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

[Operator:]

Your first question comes from Harlan Sur of JPMorgan. Harlan Sur Good afternoon and nice job on the quarterly execution. Dr. Paul, you had anticipated a pickup in Asia POS within your distribution base in Q2. It looks like that came through with strong POS and good bookings. Can you just highlight what areas drove the strength and more importantly are you seeing continued demand follow through thus far here in the third quarter? Gerald Paul As you said the POS development was quite strong in Asia in particular. In this case automotive continues strong. We believe that the whole Chinese economy in particular really is on the upturn as you said. Americas, I tried to describe that this is handicapped still by a relatively weak energy sector. Europe is stable on a high level. In fact it showed 3% upturn of the POS but if you deduct the impact of the currency it was flat, but on a good level. Harlan Sur Great. And specifically within China have you seen more demand follow through thus far here in Q3? Gerald Paul In the current quarter. The orders especially from the far east continue quite strongly in July. Harlan Sur Great. Thank you and the maybe following on the Asia focus. Can you give us an update on the Asia growth plan to improve market penetration in China? You're seeing strong growth in your resistor and inductor segments in China, is this strength here an outcome of the Asia growth plan? And what is the team doing in China to drive more penetration of your capacitor product family? Gerald Paul Our growth program, which is in place since a few years had targeted industrial and automotive. Both segments were not our strength in China, but outside Asia this was historically our strength. So, we concluded that we could also be successful here. We are successful. We gained in the last four years in these two segments. Automotive and industrial and Asia about 120 million sales, quite substantial. But we had thought that this would be incremental to what we had anyway. But unfortunately the weakness in computers had an adverse effect. So really we needed to do it no question, but now it turns out that this is an equivalent for the decline in computers. I have no doubt that we will continue with the success. As a matter of fact for us quite a few areas are quite promising. Just to be named the e cars, the e car technology which is just picking up and we do have a product for that. We also have power capacitors. For electricity transportation within China, which is built up at the moment. So, all in all we believe that this move into which was an effort and continues to be an effort into industrial and automotive in Asia, especially in China of course, was very much worthwhile. And we can even do more of this nature, by putting more people on the ground, by hiring more distributors and working closely together. China is large so we have to take care that we cover the ground properly and I think that we do that. Harlan Sur Thank you Dr. Paul.

[Operator:]

Your next question comes from Ruplu Bhattacharya of Bank of America Merrill Lynch. Ruplu Bhattacharya Thanks for taking my questions. Dr. Paul, I just wanted to talk a little bit about the margins. Diodes margins seem to be strong. They were strong this quarter but also last quarter. Do think that there is something structurally going on here? I mean it is typically a commodity business but do you think that these margins can sustain going forward? Gerald Paul Our plan shows that we are in a good position there. We have new products and I'm quite positive for the continuation of this performance. As a matter of fact we also grow in diodes and keep our fixed costs in line, which automatically kind of improves the margin. Ruplu Bhattacharya So, this 26% margin do you think there's further growth possible from here? Because you haven't seen this type of margin in several years. Gerald Paul I mean 26% for this commodity line is high. And this can only be achieved by what I said, bringing all of these new products, keeping the fixed costs in line. I would not count on further relative improvements but absolutely, yes we will grow. Ruplu Bhattacharya And then on the MOSFET margin improvement, when do you think we can get to the 20% gross margin target? And is there any other cost cleanup costs or staffing adjustments and is the sale of inventory done in that segment? Gerald Paul First of all the inventory reduction is absolutely no surprise. This is why I tried to say in my speech that without this inventory reduction you understand there is inventory we have to put in as a safety net for our automotive customers. This had to be reduced for sure; that was clear from day one. As if you just ignore this temporary effect then we already would have been of 15%. It is relatively low sales level. This will grow foreseeably to 18% or 19% even at this low sales level. When I made the 20% promise or prediction, the sales were higher. So, I think just based on our cost reduction which is completely successful we will reach, we will come close to gross margin that I indicated even at lower sales levels. And you will see next quarter there will be actual improvements there. Ruplu Bhattacharya Okay. Great. Can you just talk a little bit but the cadence of buybacks, how should we think about that? And any further repatriation of cash, what is your plans for that? Gerald Paul I think I transfer to our CFO. Lori Lipcaman Okay. I will answer the second half of the question first. We announced a 300 million cash repatriation program in Q4. We brought back 46 million in Q2. And we think the program is anticipated to last between three years and five years before we bring that entire amount back to the U.S. Ruplu Bhattacharya So Lori, should we expect further cash repatriation this year, is that possible? Lori Lipcaman I would say it is definitely possible. But typically we would plan to do it once or twice per year. We don't need to bring it back every single quarter, because we have it scheduled out a little bit differently. But it's the need for it were to arise then we can think about that. In terms of the buyback it really depends on the stock price. So, I cannot give you a particular prediction on it. It is a program that has been approved by our Board of Directors, lasting one year and up to the 100 million. And we still have some space available to us depending on the stock price in the coming months. Ruplu Bhattacharya Okay. Thank you. Lori Lipcaman You're welcome.

[Operator:]

Your next question comes from Jim Suva of Citi. Jim Suva Thank you and congratulations to you and your team at Vishay. I have two questions. One is probably for CEO and the other one for CFO and I'll ask them at the same time. On the operations side can you give us some thoughts about Brexit, the order implication because I know you don't sell directly to the end consumer but you are selling in to the channel. How should we think about that? And my understanding is also that the month of August is particularly slower for much of Europe and so that may potentially mitigate some of that, but what are your thoughts on Brexit? And then overall auto trends about plateauing sales or even softening sales. And then outside of operations for the CFO, Lori if you could update us a little bit, it sounded like I think you said I think I heard you say 45 million for the cash payout for restructuring, could you confirm that? And I think that was for this year and could you give us any update for your cash payment that roll into next year also? And then I think I heard on the share count I think you gave some guidance on the share count of about 149 million. Am I correct, you mentioned that you already bought back some this quarter and does that include that or does that not include what you already did quarter to date? Thank you very much and congratulations. Lori Lipcaman I will start the share count that I indicated, the 149 million, includes the buybacks through the end of the quarter. So, it includes the 500,000 share buybacks. It does not anticipate what we would buy in quarter three. And I already announced that we had purchased 300,000 shares in quarter three so far, whatever comes into quarter three would reduce that number. Jim Suva In terms of restructuring? Lori Lipcaman In terms of the restructuring, I do confirm the estimated 45 million of cash to be paid out in 2016. I would have to get back to you I don't know the amount planned for 2017, but it would be much smaller because the year to date number is already programmed as I announced, 19.7 million. I would get back to you on that one, but less than 10 million. Gerald Paul I will try to answer your the first question concerning the UK and the Brexit. First of all, can only comment from our perspective by nature. England, the United Kingdom is not, for Vishay is not don't misunderstand, but for us it is a relatively small part of our sales. So, we would not expect to see something directly at least to any major degree. Concerning the indirect impact concerning the cash especially, we don't know exactly but also there we do not expect a major impact because we work from the assumption like many people do in Europe that Europe and the UK will come to friendly agreements, similar effects and I believe this is by far the most likely case. Jim Suva Great thank you so much for your clarification and details and congratulations and we will talk. Thank you.

[Operator:]

Your next question comes from Matt Sheerin of Stifel. Matt Sheerin Thanks and good morning everyone. Just a couple of quick follow ups from me regarding the MOSFET business. It looks like your book to bill was the weakest in that segment relative to the rest of the business. Does any of that have to do with inventory adjustments with the manufacturing transition or is that just seasonality in the business or specific end market weakness? Gerald Paul I do not believe that this has anything to do with the move of the production itself; it goes very smoothly. It is over, at least we supply from the new plant seamless, it is really quite there is no interruption for the customer, the customer has not suffered whatsoever. It was done properly. At the moment we do suffer from the weakness in computers there is no question because this is a traditional place. And we work on growing our automotive of part of the business. But I do admit that this by far, the others look very good, the other lines that this is still just performance. Matt Sheerin And you're guiding overall flattish Dr. Paul, and in recent years as you well know Q3 has been problematic for Vishay and other customers or other suppliers particularly Asia. Really it's inventory and seasonality. Do you have a little bit more confidence this year given that we are through an inventory correction and markets remain stable or are you still fairly cautious? Gerald Paul Matt, we compare naturally knowing the history that not only we have in the last years but of course we compare the performance vis a vis prior years. And the picture this year is definitely better than the prior years so we are confident to meet the projection in the third quarter. Matt Sheerin Lastly just regarding M&A, we haven't seen any significant activity in a while and I know that's part of your strategy is to do tuck in acquisitions, $50 million to $100 million I think a year, you have talked about. Could you talk about the strategy there and the pipeline? Gerald Paul As I said the strategy hasn't changed a bit. We're looking for reasonable acquisitions and continue to do so. But on the other hand they must be available so we are looking. We are looking across the board that means in all of our product lines and in all geographies. But it has to make sense and of course we have always a few candidates that are evaluated. But it is really too early to talk about these opportunities which may come. Matt Sheerin Okay. That is it for me. Thanks a lot. Gerald Paul Thank you.

[Operator:]

Your next question will come from Shawn Harrison of Longbow Research. Shawn Harrison Hello, good morning or good afternoon everybody. Dr. Paul on the PC commentary, do you feel like on a year over year basis those headwinds are bottoming or when would you maybe hazard a guess that market could bottom for you? Gerald Paul I think we all were right in anticipating a further decline. The decline has slowed down. There's no question about it, but still it declines. Not in a substantial form as it has been since quite some years but to see a recovery maybe for instance. I would not say that at all. Seasonally it has been stronger in the second quarter than before, but the real recovery is something else. Maybe it has bottomed out, but who knows. Many projections were too early in that sense it was quite a few years that expected to be bottoming out, and then it didn't happen. One thing is for sure that the decline became less steep, there is no question. Shawn Harrison And there is a follow up. The commentary you made on handsets or smart phone pressure in terms was that competitive pricing in the marketplace or were you speaking of greater ASP pressure for you? Gerald Paul No, not really to us. We are just observers. We do feel it not only us, we do feel that our customers have substantial price hikes at the moment which is just a plain statement I think. Shawn Harrison And then last for me. I am sorry if I didn't hear this. But POS versus distribution versus POA. What were those this quarter on a global basis? Gerald Paul You are talking distribution and POS divided by POA, right? Shawn Harrison Yes I guess what were the stats for those? Gerald Paul Approximately 1.02. Shawn Harrison So, I guess how much was the POS up quarter over quarter at distribution? Gerald Paul POS was up by 2.5%. And the orders on our distributors were up by 3%. Shawn Harrison So, it was slight restocking but would you care you would characterize that more as seasonal than anything? Gerald Paul Slight, very slight. Yes. Shawn Harrison Okay. Thank you so much and congratulations on the good results. Gerald Paul Thank you.

[Operator:]

This concludes the question and answer session of today's conference. I will now turn the floor back over to management for any additional or closing remarks.

[Peter Henrici:]

Thank you, Paula. Thank you for your interest in Vishay Intertechnology. I will turn the call back to you Paula.

[Operator:]

Thank you, this concludes your conference. You may now disconnect.