Vishay Intertechnology, Inc. (VSH) Earnings Call Transcript & Summary

Good morning, and welcome to the Vishay Intertechnology. Inc. Annual Meeting of Shareholders. I would now like to introduce the first presenter, Marc Zandman.

Good morning, ladies and gentlemen, and welcome to the 2021 Annual Meeting of Vishay Intertechnology. I am Marc Zandman, Executive Chair of the Board, Chief Business Development Officer and Vishay Israel President, and I will act as the Chair of this meeting. Before we begin the formal portion of this meeting, I would like to say a few words on the global virus pandemic. First of all, I would like to express my appreciation to all the health care professionals, first responders and other essential workers around the world, who are saving lives daily and fighting to contain the virus. In addition, I sincerely thank all our Vishay colleagues and recognize the tremendous efforts being made to keep our business running smoothly during a time when we are all focused on the health, safety and well-being of ourselves, our families and those around us. On behalf of our entire Board of Directors and the Vishay executive team, I wish to say a special thank you to our global Vishay family, who continues tirelessly in a challenging work and personal environment to keep our business up and running. We will continue to do our part to protect the health and safety of our colleagues, customers and suppliers globally. Now on to our meeting. I would like to introduce Peter Henrici, the Corporate Secretary of the company, to conduct the business portion of today's proceedings. Peter?

Good morning, ladies and gentlemen, and thank you for virtually attending the 2021 Annual Meeting of Vishay Intertechnology. Let's begin by addressing a few formalities. We have adopted an agenda that will govern the order of business and the rules of order for the meeting. Copies of the agenda and the rules are available on the virtual meeting site. We ask that participants abide by these rules. [Operator Instructions] We will post summaries of pertinent questions that comply with the rules of order and our answers to those questions on our Investor Relations website following the meeting. The polls are open and will close after the presentation of our business matters. Stockholders may cast votes online while the polls are open. I would like to introduce the Directors of the company in addition to Mr. Zandman, who are in attendance through the remote access today: Dr. Gerald Paul, Mrs. Ruta Zandman, Mr. Michael Cody, Dr. Abraham Ludomirski, Mr. Ziv Shoshani, Mr. Timothy V. Talbert, Mr. Jeffrey H. Vanneste, Mr. Thomas C. Wertheimer, Mr. Raanan Zilberman. Further, representatives of Ernst & Young, the company's external auditor, and Troutman Pepper Hamilton Sanders LLP, the company's counsel, are present through remote access. We also have with us today Mr. Michael O'Sullivan, our Senior Vice President and Corporate General Counsel, who has agreed to serve as our Inspector of Election. I now call our 2021 Annual Meeting of Stockholders officially to order. Mr. O'Sullivan will act as the Inspector of Election, and he has taken the oath of office as required by law. I have been informed by the inspector that proxies representing 93.13% of the total votes eligible to be cast at the meeting by Vishay's total issued and outstanding common stock and Class B common stock entitled to vote have been received and that a quorum is present at this meeting, authorizing the conduct of business. The polls will continue to be open at this meeting while all eligible matters for stockholder action are introduced. Each of the director candidates has been duly nominated. And each of the other matters to be voted on at this meeting as listed in the order of business are considered to have already been moved and seconded and open to a stockholder vote. First, we will proceed to move each of the proposals for a vote. Following the balloting, we will present the voting results. The first item of business is the election of Directors. The Board has nominated the following persons to serve as Class 3 directors until the 2024 Annual Meeting of Stockholders: Mr. Marc Zandman, Mrs. Ruta Zandman, Mr. Ziv Shoshani, Mr. Jeffrey H. Vanneste. I would like to move for the approval of the election of these nominees as Directors. The second item of business is the ratification of the appointment of Ernst & Young as the company's independent registered public accounting firm for the fiscal year ending December 31, 2021. I would like to move for such ratification. The third item of business is the advisory vote on the executive compensation structure. I would like to move for the approval on an advisory basis of the company's current executive compensation structure. [Voting]

We have not received notice of any other business to be presented at this meeting. The polls are now closed. I will now share with you the preliminary voting tabulation. Any votes that were cast at the meeting have not yet been included in this preliminary voting tabulation, but they will be included in the final report of the Inspector of Elections and in our published voting results. First, with respect to the election of the 4 persons who were nominated for the position of Director to serve until the 2024 Annual Meeting of Stockholders. Each has been elected by a plurality of the votes of the shares of common stock and Class B common stock, voting together as a single class present or represented by proxy. Accordingly, the 4 nominees for Directors have been duly elected. Second, 2021, the proposal has passed with the affirmative vote of a majority of the votes of the shares of common stock and Class B common stock, voting together as a single class present or represented by proxy and voted on this proposal. Accordingly, the appointment of Ernst & Young '21 has been duly ratified. Third, with respect to the advisory vote on the company's current executive compensation structure, the proposal has passed on an advisory basis with the affirmative vote of a majority of the votes of the shares of common stock and Class B common stock, voting together as a single class present or represented by proxy and voted on this proposal. Accordingly, the company's current executive compensation structure has been duly approved on an advisory basis. We will post the results of all of these matters on our Investor Relations website and file a Form 8-K with the Securities and Exchange Commission to report these results. The final report of the Inspector of Election will be added to the minutes of this meeting. Ladies and gentlemen, that completes the business portion of our 2021 Annual Meeting.

Thank you, Peter. I declare the meeting adjourned. I would like to now introduce Dr. Gerald Paul, Vishay's President and Chief Executive Officer, to provide some remarks about Vishay's business and operational performance for the year ended 2020 and outlook for 2021. Before Dr. Paul's remarks, Peter has some reminders for us. Peter?

Thank you, Marc. Please be aware that in his remarks, Dr. Paul will be making certain forward-looking statements to 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 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, including adjusted operating margin, adjusted EPS and free cash 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. A reconciliation and definition of these terms are provided on our website. Dr. Paul, the floor is yours.

Thank you, Peter. Let me first of all talk about the business year 2020, which clearly has been overshadowed by something which we have never seen, a global pandemic. There were numerous plant shutdowns in Asia in the early part of the year then afterwards in the second part, mainly very drastic reactions by many of our customers especially in automotive. And then more or less after October, we have seen a very steep and broad recovery of orders, which continue until today. Basically coming -- going through the region -- regions, you can say that in Americas and Europe, we suffered heavily in the first half of the year. And recovery took place in the second half really driven by automotive and distribution. Asia behaved differently. After a weaker first quarter, the Asian markets continued very strong throughout the year. And in fact, towards the end of the year, they really heated up. Very promising for the future, I believe, is the fact that global inventories in the supply chain remained low throughout the year. Coming to the industrial segments. I already indicated automotive, which suffered heavily in the first half, mainly in the second quarter, but then afterwards, again, step-by-step, became again the driver of our business. And this was really also first time pushed forward by more and more electro-vehicles that were sold and which contain a lot more components than normal cars. The industrial markets recovered towards the end of the year, and they remain strong until now. Mobile phones and computers really benefited in a way from the crisis. And work from home, be more at home, learn at home really drove the sales of our components. Fixed telecom started to see first positive impacts of the introduction of 5G. Medical, military and space markets were solid. And everybody knows commercial avionics continues to be in a deep crisis. Some data. Sales versus prior year -- versus 2019 was down by $166 million or 6.2%. If you exclude exchange rate effects, down by 6.7%. Book-to-bill was at 1.12. Volume vis-à-vis 2019 was down by 4.2%. And the selling prices were down vis-à-vis 2019 by 2.8%, which is kind of a normal price decline. When you look at the development of sales orders and backlog, the first you see is the enormous increase in backlog, which we have experienced since the third quarter of 2020, caused by enormously higher orders on a record level in the meantime. And sales follows, of course, the orders. And sales these days is limited basically by the availability of manufacturing capacity only. You see the same ones more, the sales development at constant exchange rates. And you see we are approaching historical levels. You know our guidance for the second quarter, which will be the highest quarter ever. Selling prices, you see the year 2020, as I said, was more in line -- was more or less in line with our history. 2021, as I will say more about it, will be a lower price decline with shortages of supply. Profitability. The adjusted operating profit in 2020 was $214 million or 8.5% of sales. It's a decrease versus prior year of $73 million or 25.5%. The main influences were a loss in selling prices of $71 million, lower volume with an impact of $53 million. On the other hand, better variable cost with a positive impact of $32 million and lower fixed costs with an impact of $15 million positive. The adjusted earnings per share in 2020 were $0.92 versus $1.26 the year before. Here, you see the historical development of the adjusted operating margin, which is basically driven by volume when looking back. I mean 2020 was not our record year for sure. But given the crisis we went through, I believe we mastered the year quite okay, quite well. The same is true for the breakeven point. You see nothing specific with the breakeven point. It's around $2 billion. Concerning cash, we generated $300 million -- in 2020, $315 million cash from operations. And you have to include $16 million cash taxes for cash repatriation, which we paid. And we generated $192 million of free cash, again, including $16 million cash taxes paid for cash repatriation. We spent capital of $124 million, $83 million for expansion, $9 million for cost reduction and $32 million for the maintenance of business. The inventory turns were reasonable at 4.3. Cash provided by operations, you see, and we are proud of that. I don't want to deny that we have a very steady performance in many, many years. And I think this is even more clear when you look at the free cash flow. Over the last 5 years, we practically generated on average $200 million per year. You have to add back the cash taxes paid for repatriation. This was a voluntary decision. Inventory turns, quite strong, getting stronger even at the moment. In this case, it's not the more, the better. It has to be -- around 4.5 is ideal, and we are not so far away from that. Capital spending, lower in 2020. We took into account the problems and the crisis. But this year, we are going to spend substantially more, will be in the area of $225 million. We have to expand critical production capacities. Cash conversion cycle, everything is well under control. As you can see, we have low inventories at the moment. Headcount, basically relatively stable. Fixed headcount really stable. Now I think this concludes 2020. Let's have a look at the current year 2021. What we have seen is a further accelerating recovery despite the fact that the pandemic is still in existence. We have at the moment, and you have seen the graph before already, historically high backlogs of 7 months with book-to-bill ratios in the year above 1.5. We have very low inventory levels at distribution mainly in Asia, really shortages, which, of course, on the other hand, makes us confident for the quarters to come. Price decline is declining. There are shortages. And there are opportunities for selected price increases. Looking at the first quarter, which is already behind us. The first quarter has been fairly successful, I believe, better than our guidance. The gross margin in the first quarter was 26.5% of sales; operating margin, 12.7% of sales; and earnings per share, $0.49. And the guidance for the second quarter is -- exceeds the results of the first quarter based on higher sales, good production efficiencies and further reduced price decline. I think we can say that we expect a successful year in terms of profitability and free cash flow. And we -- at the moment, this is the main task we have. We are in process to expand manufacturing capacities of key product lines substantially. Let me end with the sentence, I always say electronics is a good market. It's a good place to be. Thank you very much, Marc. This is what I had to say.

Thank you, Gerald. Thank you, everyone, for joining us today at Vishay's 2021 Annual Meeting of Stockholders. Please enjoy the rest of your day.