Vishay Intertechnology, Inc. (NYSE:VSH) Q1 2023 Earnings Call Transcript

Vishay Intertechnology, Inc. (NYSE:VSH) Q1 2023 Earnings Call Transcript May 10, 2023

Vishay Intertechnology, Inc. beats earnings expectations. Reported EPS is $0.79, expectations were $0.56.

Operator: Greetings. And welcome to the Vishay Intertechnology First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Peter Henrici, Investor Relations. Thank you sir. You may begin.

Peter Henrici: Thank you, Christine. Good morning and welcome to Vishay Intertechnology’s first quarter 2023 earnings conference call. I am joined today by Joel Smejkal, our President and Chief Executive Officer; and by Lori Lipcaman, our Chief Financial Officer. This morning we reported results for our first quarter. A copy of our earnings release is available in the Investor Relations section of our website at ir.vishay.com. This call is being broadcast live over the web and can be accessed through our website. In addition today’s call is being recorded and will be available via replay on our website. During the call, we will be referring to a slide presentation, which we also posted at ir.vishay.com. 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. We are including information in our press release and on this conference call on various GAAP and non-GAAP measures. We have included a full GAAP to non-GAAP reconciliation in our press release as well as in the presentation posted on ir.vishay.com, which we believe you will find useful when comparing our GAAP and non-GAAP results. 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.

Now I turn the call over to President and Chief Executive Officer, Joel Smejkal.

Joel Smejkal: Thank you, Peter. Good morning, everyone. Welcome to our first quarter conference call. I’ll start my remarks on slide 3 of the presentation deck. Vishay delivered strong first quarter results with revenue of $871 million above our high end of the guidance range. We saw continued positive momentum in our sales to automotive, solid demand in industrial and all-time high sales of specialty products to both medical and aerospace defense market segments. Some details now about these end markets. Automotive, which represents 33% of our total revenue grew 6.2% versus the fourth quarter and 9.6% compared to the first quarter of 2022. OEMs in all regions replenished vehicle inventories now that the supply chain constraints are improving.

We also saw continued demand for products in support of more electronic content, ADAS features and greater electric vehicle production. Industrial. This is our largest segment at 37% of total revenues. Sales here were flat versus the fourth quarter and below last year’s first quarter. We saw a strong pull-through in Europe where we are supporting manufacturing automation and smart infrastructure plus renewable energy collection and transmission. Medical. Medical represents 5% of total revenues. This segment grew 21.4% over the fourth quarter and we’re at an all-time high in Q1 and it is showing increasing promise, particularly in the areas of medical diagnostic equipment and implantable devices. Compared to the first quarter of 2022, medical revenues grew 29.6%.

Aerospace and defense also at an all-time high in Q1, on growth of 10.9% over the fourth quarter and 33.6% over the first quarter last year. Demand for this market which constitutes 7% of total revenue is being driven by customers that are supporting many different applications such as advanced radar systems, missile guidance systems for the U.S. government and for its allies. We are the leader in supplying passive components on the U.S. military qualified parts list. Looking at the chart in the middle of the slide displays revenue mix by sales channel. OEM revenues increased 6.1% driven by demand from automotive customers plus our industrial strategic accounts. Distribution revenues were flat. Quarter-over-quarter, however, POS did grow 6.2%, which was led by Europe.

There was a modest growth in the Americas, and slightly lower POS in Asia. Distributor inventory at quarter end remained at 19 weeks, with an increase in value. EMS revenues declined 7.4% due to some inventory rebalancing; particularly for consumer, computer and telecom markets although; automotive, industrial and aerospace defense as well medical the demand was strong. At the same time, inside Vishay, we collectively hit the ground running to make the needed changes to make full advantage of these mega trends in connectivity, mobility and sustainability that are creating new opportunities in our end-markets to drive growth and optimize our returns. Across all employees in all locations we begin to shift our mindset to, think customer first.

We are keeping our operational quality and product reliability disciplines, but we are placing a priority on having a business-minded focus in everything we do. A greater support to; customer design-ins, aggregating customer demand, a multiyear capacity planning approach, setting new business processes and fostering a change of culture all of which contribute to developing ambitious growth plans that are grounded in market-based intelligence. In meeting with distributors OEMs and EMS, initially many have said, Vishay you took your limited capacity and went off to support other customers or other channels. They have designed in Vishay products but could not get delivery to support their production. I’ve presented our plans to them to improve our customer engagement, improve our customer service and prepare our capacity expansions to support their demand.

Now they’re expressing heightened interest in Vishay, to bring this new approach to them quickly. Inside Vishay not only our senior leaders but all of our employees, are energetically embracing this change, accepting the challenge to figure out how to improve their operations, to how to improve their customer-facing activities, defining market opportunities and developing strategic plans to grow and the tactical steps to execute the plan. This way of change, the new era of Vishay, is spreading quickly throughout the organization. I want to specifically thank the Vishay employees, as they join me in this company-wide mission. Their steadfast commitment to excellence and now speed at Vishay is very much appreciated. On last quarter’s call I shared the broad outlines of our three-year plan, to drive greater growth and returns.

2023 continues to be a staging year, to lay the foundation for Vishay to realize our full potential. We’re busy implementing a number of initiatives, addressing the needed change in all customer-facing aspects of our business. I’ll give you a progress update on these initiatives, after Lori has shared our financial results for the first quarter. Lori?

Lori Lipcaman: Thank you, Joel. Good morning, everyone. I’ll start my review of the first quarter results on slide 4. Revenues for the fourth quarter were $871.0 million above the high-end of our guidance. We benefited $15.4 million from exchange rates. Compared to the fourth quarter, revenues increased 1.8%, reflecting a 1.2% increase in pricing and a 1.5% decline in volume. Compared to the first quarter last year, revenues grew 2.0%, reflecting higher pricing that more than offset a 1.4% decline in volumes. At quarter end book-to-bill for consolidated Vishay was 0.84 and backlog was 7.5 months, compared to 8.0 months at the end of the prior quarter as lease time started coming down. We returned a total of $34.2 million to stockholders, comprised of dividends of $14.0 million and stock repurchases of $20.2 million.

The next slide page 5, present income statement highlights. Gross profit was $278.7 million for a margin of 32.0%, compared to 29.1% for the fourth quarter and substantially above our forecast of a margin in the range of 28%. Compared to the fourth quarter margin increased on pricing, lower material and freight costs and improved manufacturing efficiencies and yields, partially offset by lower volume and inflationary labor and material costs. Compared to our guidance gross margin profits reflect the flow-through of better-than-expected pricing for MOSFETs lower-than-planned energy and logistics cost and higher-than-expected fixed cost absorption related to an inventory build. SG&A expenses were $120.1 million, $6.3 million higher than the $113.8 million, we reported for the fourth quarter, primarily reflecting annual salary increases and an accrual for equity incentive compensation.

Operating income increased $23.3 million versus the fourth quarter on higher gross profit offset partially by higher operating expenses. Operating income increased $12.3 million or 8.4% over the first quarter of 2022. Operating margin was 18.2% compared to 15.8% for the fourth quarter and 17.1% for the first quarter of 2022. EBITDA was $199.3 million for an EBITDA margin of 22.9%. Our normalized effective tax rate was 28.4% for the quarter, the same as our GAAP effective tax rate this quarter. EPS was $0.79 per share compared to $0.69 per share for the fourth quarter last year on an adjusted basis. On slide 6 we present cash conversion cycle metrics. DSOs were 45 days unchanged from the fourth quarter and DPOs were 32 days. Inventory was at $656.7 million at quarter end, a 6.1% increase compared to $618.9 million as of December 31, 2022 as we are ramping up in support of our resistors capacity expansion in Mexico and some customer projects in our capacitor segment.

Corresponding to the increase in inventory levels inventory days outstanding were 98 days compared to 93 days for the fourth quarter bringing the cash conversion cycle for the first quarter to 111 days. Turning to slide 7. You can see that the cash flow from operations of $129.9 million for the first quarter was lower than the fourth quarter, primarily reflecting the increase in inventory. Total CapEx was $45.6 million for the quarter with $30.2 million of the total invested in capacity expansion compared to $23.9 million last year, an increase of 26.4%. On a trailing 12-month basis, total CapEx was 9.5% of revenue compared to 6.7% for the same period last year. Free cash flow for the quarter was 800 — excuse me $84.6 million compared to $14.1 million for the fourth quarter and a negative $2.3 million last year.

Stockholder returns for the first quarter amounted to $34.2 million, consisting of $14.0 million for quarterly dividends and $20.2 million for stock repurchases. We repurchased 0.9 million shares at an average price of $22.02 per share during the quarter. Total liquidity was $1.7 billion, including cash and short-term investments of $1 billion and availability on a revolving credit facility of $642.2 million at quarter end. As mentioned on our earnings call, we use the revolver from time to time to meet short-term financing needs. On Monday, we entered into an amendment and extension of our $750 million revolving credit facility to May 2028 from June 2024. This amendment and extension provides us with more than ample financial and operating flexibility to execute our plans for growth.

Turning to slide 8 for our guidance. For the second quarter of 2023, revenues are expected to be between $860 million and $900 million. Gross margin is expected to be in the range of 29.0% plus or minus 50 basis points as the capitalized cost of the inventory build during the first quarter are worked down. SG&A expenses are expected to be between $123 million and $127 million for the quarter and still between $475 million and $485 million for the full year at current exchange rates. For 2023, we expect a normalized effective tax rate of approximately 28%. Finally, we remain committed to distributing at least 70% of our free cash flow to stockholders in the form of dividends and stock repurchases in accordance with our stockholder return policy.

For 2023, we expect to return at least $100 million. I’ll now turn the call back to Joel.

Joel Smejkal: Thank you, Lori. Let’s go to slide 9. On our call last February, I introduced our near-term initiatives that we are advancing during 2023 as we drive revenue growth and margin expansion. We have identified 30 key product lines for growth across each business segment, most of which serve multiple market segments multiple applications and business channels that are aligned with the megatrends of connectivity, mobility and sustainability. To increase capacity to support them, and gain share of the highest growth and highest return opportunities, we are investing in capital expansion for a total CapEx of approximately $385 million this year $60 million more than 2022. Approximately two-thirds of this CapEx, is being spent on expansion projects.

This continues the increase in CapEx that took place last year when we spent an additional $107 million, nearly all of which was earmarked for capacity expansion projects. That additional investment, will land throughout the quarters of 2023 and 2024, bringing down our lead times, and giving us incremental capacity to support our 30 key product lines. We are focused this year on investing in capacity expansion projects outside of China. Our customers tell us that they — the value that they see in Vishay, being regionally located, the manufacturing footprint as they pursue onshoring or near-shoring efforts. Some of this capacity expansion is already allocated to our established customers, especially for MOSFETs and resistors, which still have long lead times.

Some of it is strategically reserved, to serve new and emerging customers that are leaders in driving megatrend-related demand. This quarter, we put capital to work in a few ways: in fabs located in Germany, Taiwan and Italy geared primarily toward growth segments of automotive and industrial for our MOSFETs Diodes and Opto products. New factories in Mexico, for power metal strip resistors and power inductors. Custom magnetics is another part of the inductor portfolio that we invest in. In the Dominican Republic, we have increased the floor space by 50%, to better serve our aerospace defense and medical customers. This increases our overall custom magnetic capacity and floor space by 6%. At the same time, we are identifying external sources of commodity product production, which helps us create room for our higher growth and higher-margin opportunity product in 2024 and beyond.

At this point, we are actively engaged in developing partnerships with more than 20 subcontractors of various sizes. We have qualified one of these, and we will start shipping product to customers in Q3 of 2023. I also mentioned that we are going to identify additional semiconductor foundries, to alleviate the most constrained product lines. We are moving quickly on this front, and are in advanced discussions with one new partner. We are also investing internally in engineering talent to enhance customer engagement and advanced innovation. During the quarter, we placed additional FAEs in the Americas, Europe and Asia. We hired silicon carbide and GaN engineers to support R&D projects and to support customer-facing business development activity.

Last quarter, I talked about our expanding strategy to promote our broad product portfolio of discrete semiconductors and passives with solution selling. As a reminder, Vishay’s semiconductors and passives can populate 80% to 100% of the components on the circuit board, for many power applications. We are introducing Vishay reference designs, to fully leverage Vishay’s broad product portfolio. Customer engineers prefer suppliers who can provide support with solutions. We are building these reference boards, for the engineers to be able to test the Vishay solutions. These boards will be available in the third quarter of this year. We are also setting up an application lab, to support customer applications in the e-mobility space. With respect to MaxPower, and our development of silicon carbide technology, the 1200-volt planner technology MOSFET is progressing according to schedule.

We plan to have samples available to customers in the third quarter. We continue to work on the 650-volt planner technology MOSFET. Our development of the 1200-volt trench technology, is also moving forward and we have completed the process review and alignment, with our foundry partners. We made progress during this quarter, designing products to support automotive and industrial applications. Finally, the last initiative, instituting organizational and cultural change at Vishay is from my perspective, very critical. We are fostering collaboration internally and externally pushing decision-making down the organization and empowering risk-taking, all to foster a mindset of taking — of thinking about the customer first, in everything we do.

To ensure accountability and reward change, we designed a new long-term incentive plan that aligns the performance of key employees, with company growth and profitability targets. The Board approved the plan on March 24, and it now goes before the shareholders at our upcoming annual meeting on May 23. I can tell you the perceptions about Vishay are changing quickly both internally and externally. We are moving fast and deliberately. We’re making good progress on our near-term initiatives and setting the stage for substantial growth. Turning to Slide 10 now. I would like to remind you about the goals we have set for 2023. We are on track to achieve these goals, moving ahead according to our original plans. I mentioned earlier that we are in discussion with over 20 subcontractors and we still expect to have qualified and signed agreements with a number of them by the end of the year.

We also have and we’ll complete our evaluation on where to build Vishay’s next manufacturing facility. We are putting the finishing touches on our go-to-market strategies for each of the 30 new product lines by region and end market. Our development of silicon carbide 600-volt and 1200-volt planner technology MOSFET is progressing well. Finally, we remain committed to holding an Analyst Day in early 2024. At which time, we’ll share with you our three-year business plan and targets for revenue growth, profitability and returns on invested capital. In closing, I am pleased by the progress we are making and the pace of change. We are moving quickly in our day-to-day business practices, in our mindset to put the customer first and in our ambitions for growth to capture the opportunities created by the megatrends of connectivity, mobility and sustainability.

We have the right people. We have the right products and now we have the passion to do more and grow. We are now ready to begin the question-and-answer session.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session [Operator Instructions] Thank you. Our first question comes from the line of Ruplu Bhattacharya with Bank of America. Please proceed with your question.

Operator: Our next question comes from the line of Matt Sheerin with Stifel. Please proceed with your question.

Operator: Our next question comes from the line of Joshua Buchalter with TD Cowen. Please proceed with your question.

Operator: Thank you. We have no further questions at this time. Mr. Smejkal, I would now like to turn the floor back over to you for closing comments.

Joel Smejkal: Okay. Thank you, very much. Again, everyone, thank you for joining us on our first quarter earnings call. I look forward to sharing our results of the second quarter and our progress towards reaching our goals for 2023 with you in August. Thank you very much. Have a good day.