Vishay Intertechnology, Inc. ($VSH)

Good morning. Welcome to the second day of JPMorgan's 54th Annual Technology and Media Communications Conference. My name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have the team from Vishay Intertechnology here with us today. Joel Smejkal, President and Chief Executive Officer. We have David McConnell, Executive Vice President and Chief Financial Officer; and Peter Henrici, Executive Vice President of Corporate Development. Joel is going to kick us off with a brief overview of Vishay and a presentation, and then we'll go ahead and kick off the Q&A. Thank you.

All right. Thank you very much. Nice to have a chance to present to each of you. I want to give you an overview of Vishay. Vishay has got a lot of change in it, and I thought it was appropriate to show you some slides as to what's different about this company, 60-year-old company. We're a new company. We call ourselves Vishay 3.0. Company name is Vishay Intertechnology, but there's a lot of change. We're in the third leadership of the 60 years. This began in 2023. We call ourselves a new company, capitalizing on a very large customer base that we underserved over the last decades because we were short on capacity. You're going to see a completely different business approach here. Vishay is different than all the other semiconductor companies that you might compare us to. We're a hybrid. We're a hybrid of semiconductors and passives. We can populate 80% of the components on a PC board in a power application. So it's resistors, it's capacitors, it's inductors, it's opto, MOSFETs and diodes. I just want to give you a quick glance. If you look at the right side of each one of these blocks, you see the year-on-year growth. I spoke in the last earnings call about our growth in all markets, 22% in Industrial, 26% in Other. Other is AI, Computer, Telecom and Consumer. Automotive, 11% growth year-on-year; Aerospace and Defense, 17% growth year-on-year; and Health Care, 11%. We've done a lot of change in Vishay. I'm going to explain it to you on a few slides in the middle of this presentation, what we're doing. If we look at the channel business, distribution for us is up 19%. EMS is up 22%. It's a big part of our focus that was not a focus of Vishay 2.0. OEM, up 14%. I also mentioned that all channels are positive for Vishay. If we look at regions, Europe is up 16% year-on-year, was up 15% quarter-on-quarter. America is up 18% year-on-year, 9% in the quarter. Asia up 18% year-on-year, minus 5% because of Chinese New Year, Lunar New Year in Q1. Book-to-bill for Vishay is 1.34. If you look at the chart on the right, this is our scale of revenue by quarter. We were as low as $715 million in Q1 of '25, and we're growing quickly quarter-on-quarter because of all of those market segments, because of the channels, because of how we're repositioning Vishay's business approach. Just a comment here. Our gross margin today is 21%. It was 19% a year ago. We are focused on taking the company's business to 30% gross margin with revenue of $5 billion. Annual revenue today is about $3.5 billion. What's different about the company? This is what's really important to understand. It's not the Vishay of old just enjoying the volume market as it comes up. Vishay 2.0, it was a company that stockpiled cash. We didn't invest the cash. We didn't go after M&A in any significance. We filled orders. We had limited capacity. We were often sold out. We were very internally focused. We weren't focused on the market. A small set of OEMs is what the capacity delivered. It was Tier 1 automotive primarily. And the last one was minimal R&D. We were late to the party with silicon carbide and wide-and gap products. If you go to the right of this slide, it's a completely different business perspective. Revenue growth and margin expansion. We're going to be connected to customers. We have a think business first strategy, which is accelerating that book-to-bill that you saw. The customers are looking for supply assurance. They're looking for customers that can scale -- suppliers that can scale with the customer. We're very business-minded in how we're going forward. The third bullet, reengage lost customers. There's many. That first slide I showed you, we're going to capitalize on a very large customer base. Customers design in Vishay. We're one of the top suppliers pulled through catalog distributors for engineers. We're on bill of materials. In the past, we couldn't support. So we've invested in capacity. We've reengaged with lost and underserved customers, and that substantiates the growth of the book-to-bill. Having the capacity to serve distribution and EMS, very important, those are high-margin channels. If our capacity historically was to OEMs, we missed out on the higher-margin business and the intensified and focused R&D, we've come out with silicon carbide, MOSFETs and diodes, -- we were 10 years behind 3 years ago. We're now technology parity with the competition. So we're releasing products to engineers to start creating a foothold for Vishay and wide-and gap. If you look at the line chart here, what's interesting, if you go to the far right, revenue is in red. The past up cycles were '21 and '22. You can see how long it took Vishay to recover or to actually support the business. It took us seven quarters historically to ship the demand that we had. We've accelerated our capacity investment, and we're reacting much faster with the customer. We've got eight growth levers that are going to serve the market. Internal capacity expansion, we've spent just under $1 billion in 3 years on CapEx. When the market was soft, we were in a trough, but we knew the customer needed our product, and we're seeing it now in the book-to-bill. External capacity expansion, this is subcontractor initiative. We've taken our commercial-grade products, and we've gone to subcontractors to have them build that product under our recipe rather than spending CapEx dollars on capacity for commercial products. Optimizing our global footprint. We've got a lot of factories around the world. We've got to get out of high-cost countries and move to low-cost countries. Increased technical headcount. It's a technical business. Engineers in front of the customer is what it's about, understanding the road map of the customer. We've got engineers positioned all over the globe that we didn't have historically. Enhanced channel management, I just talked about it, focusing on where the margin is, distribution, EMS and OEMs, key OEMs, not utilizing all of our capacity to some very large strategic accounts, which limits our ability to grow. Innovation, new products, R&D, silicon carbide, GaN plus many new custom magnetics, polymer tantalum, DC link capacitors, -- there's a lot the customer wants, and we're in those discussions today. Vishay Solutions, I showed you that slide in the beginning that said we can support 80% of the components on a board in a power application. We've created reference designs where we can give the engineer a heat pump design for the automotive. We can give them a traction inverter. We can give them a 48-volt to 12-volt DC to DC reference design. So they see all of the Vishay components on the board for quick use. And the last one is M&A. The company began with M&A in Vishay 1.0. There was not much M&A in 2.0. We're going to generate cash in this new program with Vishay, this new approach, and we're going to go after M&A in the next years. Talked about accelerating growth. We're doing it, expanding margins. It's moving upward and enhancing returns for the shareholders. That's a big priority, which we didn't have in 2.0. I talked about just under $1 billion in the last 3 years. It's on the floor, 70% increase in capacity expansion to go after that print position that we've had and we were never fulfilling. This year, we're looking at about $400 million to $440 million. We have a 12-inch fab that's being completed in Itzehoe Germany. That's the largest part of that $400 million. After that, the capital intensity starts to round off. We've got passive campuses in La Laguna, Mexico, we just opened. Juarez, Mexico has been there for years, and we're filling it. Sites in India, where we're adding more production. We're moving it from sites in high-cost countries to these lower-cost countries. The subcontractors I talked about, overall, a 23% increase in incremental capacity, which allows us to support the customers as they scale. The customer engagement I talked about being reengaged to win customers. It's been a great success. Customer count is up, distribution share gain as well, positive, driving innovation with new products. Those are the key initiatives that put us on a pace to grow. All right. We got marg -- we got revenue movement. We engaged more customers. Now it's the margin progression. What are we doing in Vishay? It's more than just riding the volume wave and ASP. We've got a fab that we bought in Newport, South Wales, U.K. That fab was bought from Nexperia. And over the last 2 years, we've been qualifying Vishay products. We want to fully utilize that campus and increase the capacity utilization. We're going through automotive customer calls now. So second half of the year, we're going to see more demand filling that fab. Ramp advanced MOSFET technologies at foundries. We started our silicon carbide designs using external foundries. That will be going into the Newport fab plus also increasing our ability to have capacity to support AI. 12-inch fab, Newport, Germany -- excuse me, Itzehoe, Germany, that's coming. That will be released and online in the middle of 2027. The equipment is landing today. This is going to give us a large amount of capacity in the 12-inch wafer, which puts us on par with our competitors, that are also using 12-inch, increased capacity utilization while driving speed. That's what the semiconductors is all about. We need to make Vishay relevant in the semiconductor space. We have the technology. We were lacking the capacity. This is coming in the next year and 2. Further gross margin progression, increase our volume and better product management. I talked about optimizing the footprint. We've got 60 factories -- 60 factories that we are going to, I call it restructuring, but people don't like hearing that word, capacity optimization. We're going to get out of high-cost countries and be shifting to lower-cost countries. That's going to generate margin on a lot of the passive products. And it's not a $300 million, $400 million, $500 million restructuring. It's not that big. It's not like a CapEx investment. We're going to build a back-end for semis. We have a number of locations that are doing back-end semi plus outsourcing. We're going to bring more of that internal, and we're working on a location for that. Volume efficiencies, we're getting that with the book-to-bill. Channel management, I talked about, making sure we're shipping the product to the higher-margin customers, product management, adjusting ASPs. We've adjusted ASPs over the last two quarters, and we're starting to see the ASP benefit in Q2, Q3 this year. And the last one is cost savings projects that every one of the 17 business units have to do. We've got a broad base here of raising the margin. Innovation it's about being technical in front of the customer. In 2.0, we were a company that just received orders, but we didn't drive demand. It's about having engineers in the field to help the customers see the solutions that we can provide. These are examples of some of the solutions, the reference designs that we put together, 80% of the parts on the board can be supported by Vishay. If the customer takes our reference design and uses it in their application, they've got a solution of high efficiency that they can quickly put into play. Developing an IC is the third one. We're going to develop a controller that we don't have. This is one of the gaps in our portfolio. We need the controller to match up with the MOSFETs. That is happening and will be released at the end of '27, early '28. Silicon carbide and GaN, I spoke about, other broadening of the passive portfolio, high-frequency applications with much of the optical communication that's starting to develop in GaN -- I mean in the AI servers. We need GaN products for semis. We also need thin-film precision passives for the optical communication in those servers. This was our Investor Day that we kicked off in April of 2024. We said we're going to go after sales. That's a $5 billion number, to go from $3.4 billion, it's going to take us to $5 billion. We are on pace to do that with the additions and the customer gains that we have and the product releases. The gross margin, we said we want to get to the low 30%. Today, we're at 21%. The gross margin progression that we're putting in place with the fabs plus the optimization of the factory footprint, we believe that's going to take us to the low 30s. Operating margin, you see EBITDA and the intensity on capital you see. This project was kicked off in '24. We said we targeted 2028 as the year. The timing may be a little later. When I say a little, it's because of inventory delay. The tariff caught us a little unexpected, and it pushed out the orders until the fourth quarter of 2025. There was also some inventory digestion that lasted a little longer. So we are pushing for $5 billion, the margins of 30% end of '28 into '29, it may be off about 6 months to a year, but it's still our plan. Our highest priority in everything we do in Vishay 3.0 is to grow revenue and increase margin. We're a completely different company. I just wanted to take this moment to show you we're a different company than a 60-year-old business because we've got a lot of strengths with product. We've got engagements with customers. We've got new technologies coming. We've got engineers that are in front to get us designed in. Customers are excited, customers count is going up. I'm going to pause there and sit with you, Harlan, and we'll take some questions.

Yes, absolutely. Why don't we -- before I kick things off, that was a great presentation. Thank you, Joel. Do we have any questions from the audience? If you do, please raise your hand, and we'll get a mic over to you. So we followed Vishay for quite some time, and we were very familiar with Vishay 2.0 and all of the characteristics associated with that. And I think you were spot on Vishay 3.0 focused on growth and profitability expansion. The good news is that the inflection curve in the cycle is turning positive. And so now the team is actually starting to see, I think, the benefits of Vishay 3.0 sort of kicking in. We'll talk about the footprint expansion in a little bit. But the key difference I feel like 3.0 versus 2.0 is strengthening customer relationships, right, offering more reliable capacity, focusing more on sort of higher performance, higher value-added solutions for your customers and focused on growth end markets. So can you discuss some of the benefits that you're seeing in terms of building customer relationships, maybe going back and repairing some of the old customer relationships? How is that coming along so far?

This is coming along very well. The repairing relationships, the first year as me as CEO in 2023, I went on a tour and I apologize to a lot of customers for how they were underserved. They appreciated that transparency. We have engaged each other to grow further. They're opening up their technical road maps to Vishay. They understand the investments we're making in capacity, and they realize that we're a supplier, we're a new supplier because of our investment, we can scale with them. I could talk about some of the strengths in the market segments. If you take Industrial, Industrial has always been a big part of Vishay's market segments, industrial. Industrial power is required now because of the need for data center power for EVs, the smart grids being completely redesigned. Because Vishay has invested in capacity on the passive side in this case, Customers like Siemens Energy, Hitachi, GE Vernova were sitting in the meetings about the smart grid designs that are going to happen between now and 2030, 2031. We're in those discussions. We know the programs that are going to be laid out. It could be North America projects it could be Europe, it could be Middle East, could be China. We've been winning a very large share of the capacitor business in these projects because we invested to scale.

And so if you -- those are great examples. And so as you focus on the broad portfolio, semiconductors versus passives, as you mentioned, I mean, in some cases, your opportunity includes 80% of the components on your customers' board. Vishay is approaching it from richening the mix of our portfolio, broadening our portfolio to solutions that customers want. And then there's the demand creation side of it. You talked about this, right, better strengthening channel relationships. Maybe it's more education of your direct sales force, but also what are you doing from a channel perspective? Are you incentivizing your channel partners for demand creation? And then you also brought up a third dynamic, which is extremely important is, well, our customers don't want to just buy components from us. In some cases, they want to buy a system solution for us. So we're focusing on reference platform. So talk to us about some of these demand creation initiatives.

This is about helping the customer faster. The old style data sheet cell was a product that they had to look at, decide how it fit into the circuit. With the strength of Vishay, semis to passives, we're able to use our mobility team. We have a design team that builds reference designs to already give the customer engineer a head start. Everybody is familiar with reference designs from TI, from ADI and many others. Vishay decided, you know what, we don't build the microprocessor. We don't build the chip, but we can populate around that with the discrete semiconductors and the passives to actually give the engineer the output of this particular application. They might choose to use it. Vishay is all over the bill of materials by doing that. So that's the help of accelerating the customer with the design. We take those solutions and we give them to our FAEs that are distributors. We also create reference design tools on the web. We're really about education because we know the engineers have to go into our customer and impact immediately, not just deliver some data, but get into the projects. So it's a training of our Vishay sales team, an upgrade being technical, the distributor FAEs with design registration projects, the tools of reference designs to quickly give the engineer everything they need to try Vishay in their lab and decide if it works.

I see. And -- as a part of all of this new product development, obviously, is extremely important. You set out and you articulated your long-term gross margin goals, right? A big part of it is the manufacturing efficiencies, optimizations, footprint optimizations and so on. But I'm curious, as you look at your portfolio of new design wins, I'm assuming you are going after more higher value-added solutions. And so as you think about your pipeline of new products and as you see those -- that pipeline and that pipeline turns into revenues, does the product gross margin continue to get better over time? So in other words, as you scale into these new product opportunities, does mix contribute to the gross margin uplift as well?

Mix surely does. Vishay has always been a technology-leading company. We want to lead with technology and be able to then support the rest of the program with the more commodity and commercial parts. We need to have enabling products when we go to the engineer. Silicon carbide, we were 10 years late. We were missing out on the automotive traction inverter designs. We made an acquisition at the end of 2022 to buy IP from a company called Max Power. We've got their intellectual property for the trench MOSFET in silicon carbide. We released that product in February of this year. Automotive engineers have looked at it. They say we're on par in performance. So Vishay has taken a 10-year gap and quickly released a technology that gets us in the meetings. We have to be in the meetings with the enabling technologies, so we know the projects that the engineers are developing, and then we bring in the rest of discrete semis to fill that board and the passives to fill that board. So being a technology leader, that's one example. We can talk about DC link capacitors. We could talk about custom magnetics. We look at the products that are enablers, which get us in the meetings early with the customer engineers.

And as you think about your journey from where you sit today from a gross margin perspective to where you want to be low 30s by that 2030-plus time frame, how much of that contribution is manufacturing efficiencies, utilization, filling up of your two new fabs versus mix? Is there any way to sort of help us understand how the team gets there from that perspective?

Well, there's a number of steps. The ASP is the short-term gain. We're raising prices because of metals. We passed that on to customers, so that's the first gain. The volume efficiencies that you're seeing to raise gross margin, we've got the book-to-bill of 1.2 in the fourth quarter, 1.34 in the first quarter, and the second quarter is still there or better. So we're seeing the demand from the customer to bring us to volume short term. Cost savings inside the factories, every one of the 17 business units has cost savings targets for the year. So those are things that are going to happen short term. Filling that Newport fab is going to take us from a fab that was running at very low utilization to much more efficient because of the volume and the mix. The 12-inch fab will be coming in 2027. That's going to put us on par with the competitors who also have a 12-inch fab. The cost benefit there is about 30% from a 12-inch -- from an 8-inch wafer going to a 12. Plus, if you look at what we're doing today, we're using a lot of foundries. We're using Tower and Vanguard and others where their margin is in between us and the customer. When we have our fabs qualified, we're going to get that margin gain. New products also, the mix of new products and technologies is going to lift our margin. New products start out at higher margins versus running legacy products that over time, the margins are not so accretive.

How do you manage your -- you've got your U.K. fab, which you're sort of -- you're starting to mix into now. Germany comes online sort of next year. Is it kind of the classical sort of I need -- once you start to build, you need to build that entire capacity out. And then obviously, the onus is on you to then quickly fill that, right? Or is the architecture of these new fabs such that you can modularize it and scale into the volume ramp as your business revenues continues to scale higher, right?

Very automated. -- highly automated fabs.

And are they scalable?

Yes. This 12-inch fab. We have a large manufacturing shell that we built. 1/3 of the fab will be running in the first quarter or early '27, and then we're expanding into the second phase and the third phase. So it's going to be a progression. The demand from customers how to fill it. We've had two automotive -- well, we have two automotive audits coming in the second quarter for Newport. We had four in Q1. We had four in Q4. So we'll be through 10 automotive site audits by the end of Q2. The automotive then has to decide which programs are going to be loaded to the fab. The BMW Platform 6 or the Volkswagen project. So that will all be coming in to fill that fab because of the work with the automotive. When we release the 12-inch fab, we're quickly going to go after nonautomotive first. We want to fill that fab with commercial, AI, industrial-grade products to start, knowing the automotive qualification is going to take 12 to 18 months. So we're being much smarter in how we launch a facility, what products are in there first, carry away cost with commercial and industrial products first. I will also say this, when you look at Vishay's semiconductor share in the MOSFETs, it's low. It's not low on the technology side. Engineers want our products. It's because we didn't have the capacity. So with these additions of these fabs, we're going to have the control of the foundry in-house, the wafer build in-house, which allows us to then go target a much greater part of the market where we're already designed in. It's a matter of then fulfilling it.

Yes. Any questions from the audience? We've got a question. Can we get a mic here?

All the strategic initiatives certainly make sense, and I know you can control what you control about the CapEx, et cetera. But this also sounds like a meaningful change in terms of culture. Just how do we get comfortable that you have some pretty good tailwinds now that can cover up a lot of things, but how do we know the organization has changed? I mean you've changed, I mean you like the top has changed, but how do we know that this isn't just a blip?

The excitement in the organization is at the highest level it's been. The motivation to take this company to a new direction is well entrenched. There was some pruning of old people in the first year that just couldn't change. They're stuck in the old ways. They couldn't see it. But the feedback we're bringing to the team, we have an executive and senior leadership meeting every 90 days. We've been doing this for 3.5 years. We all come together, and we're exchanging what's happening in the market based on everyone's responsibility. And that messaging is then being pushed down inside the organization. The culture change is here. It's done. People are excited. The excitement is really from the customer. The customer count increase and the volume of business that's coming in has really motivated the manufacturing sites. The sales team by having reference designs and in particular, having capacity, the sales team would tell you in Vishay 2.0, in '21 and '22, they stopped going to the customer because their toolbox was empty. It was hard to go to the customer with no capacity. So with the capacity expansion we've done, we've got 23% upside available. The salesmen are energized because they're in the customer and they believe they can succeed.

How much of this increase in revenue would you attribute to kind of the changes in the dynamics you described versus just broad-based price increases across a lot of these components we've seen and I know MLCCs aren't like a huge focus for you, but that's always in the news, pricing is going up a lot there. So yes, if you just talk about that?

I think the increase in volume that we're seeing is because of the change of Vishay 3.0. The ASP has been very, very recent. The ASP is going to fall in more so in Q2 and Q3. The work of the Vishay 3.0 people to excite the customer and increase the customer count, we've got 17 business leaders that are manufacturing leaders. They did not travel to distributors. And from the beginning of Vishay 3.0, the leaders of the operations had to go travel to distributors in Americas, Asia and Europe every quarter. They quickly understood when they met with a distributor where their rank was by supplier, where the price differential was and what they needed to work on, missing products. This was a tremendous eye-opener to the business units. They were seeing the market, and they were seeing the market they missed. So some divisions went off and they designed the products to replace or expand the portfolio. Some went to subcontractors to quickly qualify the Vishay equivalent with an outside source. We've expanded our portfolio. We expanded our inventory in the channel. It's really getting the leaders in the meeting rooms to have them see how the business develops. And I think that also goes back to the culture question by having the leaders in the room with the customer, they feel responsible, they feel accountable. They know they're going to go back to that customer and they got to deliver. So there's an intensity where people aren't sitting at their desk. People are in front of the business, and they're also making it move inside the factories.

As you look at the growth profile for 2026, you have quite a few Vishay-specific growth drivers, new automotive design wins, aerospace and defense pipeline getting better, smart grid infrastructure and AI, data center compute-related design wins. Can you just rank order these drivers by expected impact and share? And what gives you the most confidence when you look at the different end market growth drivers for this year?

Okay. This is a good way to segment passives and semis. The passives are really being driven by industrial and aerospace defense. Aerospace and defense, there's a lot of replenishment that has to happen. We all hear about the number of missiles that were shto off, the Patriots, the Tomahawk, Sidewinder, Spyro, all of that. We're in those guidance systems. We're waiting for the primes to place the orders. They haven't done it yet. That's a book-to-bill of bookings we haven't seen yet, which is going to come. So passives is industrial, aerospace, defense and automotive. Automotive is solid. It's car count is steady and the content continues to grow. If we look at semis, AI, for sure, AI, increasing our print position and capacity. Automotive, more electronic content. Aerospace defense, we're taking automotive-grade products to the military design customers. They like -- they think that's great. It's a certified product, that's how I rank it. Semis with AI and auto and growing in defense, industrial as well, but passives more on industrial and defense.

And then when we look at the cyclical aspects of where we are today, first phase of the cyclical recovery is shipments rising back to the level of your customers' consumption levels, right? Second phase is your customers getting confident. They're seeing their orders improving and then taking their inventories levels to what we call sort of restocking sort of base levels, that's sort of the next leg of growth, right? You've delivered above seasonal growth over the past several quarters and have discussed inventory replenishment among some customers. But how broad-based is that replenishment today? And -- where do inventory levels stand across your distribution channel and at your direct customers?

The inventory replenishment or buffering at the OEM is just beginning, just beginning. They are concerned about supply assurance. They see the increasing demand of industrial. When I say they, I'm talking about automotive in particular, they see industrial increase. They see aerospace defense coming. They know these products are all built on the same equipment, so they want to get ahead and start to buffer. When we look at inventory and distribution, we -- globally, we're 20 weeks. We've gone down from 26 weeks a year ago in the first quarter down to 20 weeks. Europe is down to 16 weeks of inventory. Asia is at 18 -- 14 weeks. We've got to replenish. We had POS sequential growth of 11% quarter-on-quarter, and we supplied only a 2% increase in POA. We saw the pull-through. The customers like our products. They like the brand. We have it on the shelf. We've got to replenish distribution now, so we can continue to support customer demand. We don't hold finished goods at Vishay. We use a distributor to do that. So that's all ahead of us is the replenishment.

Got it. Well, we are just about out of time, Joel. Vishay 3.0, a very sound strategy. Look forward to continuing to monitor the team's execution along Vishay 3.0. But thank you very much for participating.

Thanks, Harlan. Yes. I appreciate the time. Thank you. Thank you, everybody.