Good day, and thank you for standing by. Welcome to the Vishay Intertechnology Q2 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Peter Henrici, Investor Relations. Please go ahead.

Thank you, Jill. Good morning, and welcome to Vishay Intertechnology's second quarter 2024 earnings conference call. Joel Smejkal, our President and Chief Executive Officer; and Dave McConnell, our Chief Financial Officer, will join me today. This morning, we reported results for our second quarter. A copy of our earnings release is available in the Investor Relations section of our website. 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. We will be referring to a slide presentation during the call, which we also posted on our website. You should be aware that in today's conference call, we will be making forward-looking statements discussing 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 on various GAAP and non-GAAP measures in our press release and on this conference call. We have included a full GAAP to non-GAAP reconciliation in our press release and in the presentation posted, 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.

Thank you, Peter. Good morning, everyone. Thank you for joining our second quarter 2024 conference call. I'll start my remarks with a review of our revenue for the second quarter by end market, channel and region. Then Dave will take you through a review of the second quarter financial results and our guidance for the third quarter. After that, I'll give you a progress report on our 2024 initiatives under our five-year strategic plan to answer any of your questions. For the second quarter, we are reporting results in line with our revenue, gross profit margin, and SG&A guidance. Revenue of $741.2 million was essentially flat versus the first quarter, impacted negatively by lower volume pulls from automotive customers and from industrial customer destocking. The revenue was positively impacted by an additional revenue of $13.1 million from our Newport acquisition and also sparks from China and Taiwan related to AI server demand, notebooks, and consumer devices. Distribution revenue was up quarter-on-quarter, a testament to our intensified customer reengagement initiative, supported by the capacity that has come online over the last 12 months. We are making good progress in executing Vishay 3.0. As we expected, the inventory digestion continued into the second quarter. Some of the customers are still carrying a high level of semiconductor inventory from some of their suppliers. Nevertheless, we are starting to see indications of inventory rebalancing and bookings are steadily improving, particularly from automotive and industrial customers. We've also started to see replenishment activities from the distributor channel and on certain passive product lines, higher consumption rates for semiconductors as demand ramps up for AI servers and vehicle computing. Let's take a closer look now at the second quarter revenue, starting with a review of revenue by end market on Slide 3. Automotive revenue declined 6.7% from the first quarter and 13.6% compared to last year's second quarter as Tier 1 automotive customers pulled below their schedule agreement plans primarily in Europe. OEMs in North America and Europe pulled back on EV production and postponed some of their new EV platforms. Based on input from our customers in Europe and the Americas, we're seeing flat automotive demand tied to persistent high interest rates, driving consumers to look towards purchasing less expensive compact cars, containing less electronic content. Even though sales were lower, design activity continued on all automotive electronics, including battery management systems, ADAS and with the increasing discussion around AI chipsets. We also stepped up our engagement with automotive OEMs and Tier 1s. Because we are investing in capacity expansion, an automotive OEM signed an important first-time silicon MOSFET supply agreement with us. For our silicon carbide push, we held more technical meetings with existing and potential new customers around silicon carbide MOSFETs tied to traction inverter projects and assemblies and modules for onboard charging. These customer programs are planned for 2026 and 2027 launches. Our action item is to provide customer engineers with samples of both the Planar and the Trench silicon carbide technologies as we now move towards commercializing these products. Turning to industrial end markets, with customers continuing to destock inventory during the second quarter, overall demand remains sluggish. Excluding Newport, industrial revenue was essentially flat quarter-over-quarter. Late in the quarter, we started to see improved bookings in Asia for power meters, high-voltage DC applications and factory automation, including a first signal of improving orders in China. We also received sizable follow-on orders for high-voltage capacitors under a smart grid supply agreement with a European customer for a total of now approximately $113 million since the beginning of the year. Design activity remains focused on smart grid infrastructure, industrial automation, renewable energy and energy storage. Near-term, we expect industrial automation will continue to be a key driver of design activity while the government funding for EV charging networks and grid projects keeps getting pushed out. Revenue to aerospace and defense end markets declined 3.3% from the quarter and was 17.2% higher than last year's second quarter. Sales were down due to a temporary lull in orders pulls from key OEMs, both in the Americas and Europe related to their supply chain shortages and a directive also from the Turkish Government to not receive products made in Israel. Orders for applications around missile guidance systems and combat aircraft remain strong; demand from OEMs in the Americas remains solid with some of them pushing for master supply agreements to facilitate awarding contracts to Vishay as a preferred supplier. This is a direct result of our customer reengagement initiative. We are also supplying military materials to EMS to satisfy their contracts with aerospace and defense OEMs. As we look forward into the year, we expect to complete these supply agreements in the third quarter, setting us up for increased share of new contracts in Q4 and in 2025. Medical revenue increased 14.7% from the first quarter and was slightly below last year's second quarter. We delivered an all-time high of custom magnetics to our largest medical customer who has now resolved their supply chain issues. Because we see great growth potential in the medical end markets, we have hired a medical segment leader, a newly created role at Vishay, who is focused on deepening our engagement with existing customers and developing relationships with new customers, more fully leveraging the breadth of our product portfolio, similar to the steps we're taking with the distributor reengagement initiative. This medical leader will bring the appropriate technologies of Vishay into the discussions with these medical customers. While design activity remains focused on implantable devices and remote monitoring equipment, we also see activity in home patient monitoring and diagnostics as these applications have taken hold, along with the adoption of telemedicine that started during the pandemic. Revenue from the other categories included telecom, computing and consumer end markets was down 2.3% quarter-over-quarter and 37.3% versus the second quarter last year. We continue to see pockets of growth like orders for AI servers and server power projects as key manufacturers in China and Taiwan have now launched initial production. Orders related to notebook computers continue to grow in Asia as well. Design activity continued to increase in the areas of AI server power, AI chipsets, laptops, tablets, and storage networks. While we have a good initial position on AI reference designs, mainly with MOSFETs and diodes, we are designing in more of the Vishay portfolio to gain a greater percentage of Vishay components on those projects at key chipset makers in the emerging AI market. This is another example of the benefits of our Vishay 3.0 initiatives as we've increased our field application engineering resources and extended capacity; we're now positioning Vishay to fully participate in the AI market growth. Turning to channel sales on Slide 4. OEM revenue decreased 11.1% quarter-over-quarter and 19.1% year-over-year on lower volumes from industrial and automotive customers, primarily in the Americas and Europe. EMS revenue increased 1% versus Q1, 15.9% below prior year, with increasing order flow tied to improving customer demand and higher demand related to AI servers, particularly in China and Taiwan. In the Americas, EMS revenue, excluding military, was lower as end customers reduced forecast and lead times remain short, allowing customers to wait and be less visible about their future demand needs. Our EMS customers, which are focused on military end markets, are performing well and have positive outlooks. Distribution revenue increased 7.6% versus the first quarter and was down 15.5% versus last year. Our initiative to deepen engagement with our distribution customers is beginning to pay off. Part number and pricing reviews have resulted in increased SKU count on the distributor shelves. In Q2 2024, we've increased our SKU count at distribution by over 10,000 part numbers quarter-over-quarter. These positions help to position Vishay and win increased share of turns business. At the same time, we continue to meet with the distributors to expand our local coverage, particularly in Asia. Distribution inventory worldwide declined by $22.8 million, while we added approximately $14 million of inventory on the new SKUs. Inventory held steady quarter-over-quarter at 26 weeks. POS worldwide was 2.3% lower, with weakness in Europe and some softness in the Americas, while POS improved in Asia due to strong demand from the China EV customers, especially those who are increasing their focus on overseas markets for growth. Finally, let's turn to Slide 5 for a look at the revenue by region. Revenue in the Americas was slightly higher, up 1% on distribution and medical, while Asia revenue was steady with some bright spots developing on industrial and AI. Europe revenues were lower as its macroeconomic challenges continued to weaken demand. Before turning the call over to Dave, I'd like to express my appreciation to all Vishay employees for their continued dedication and commitment to implementing Vishay 3.0. Their focus to deepen our customer engagement, to drive internal cost controls and to become business-minded in everything we do aligns all of us to faster decision-making as well as driving towards greater financial outcomes. I'll now hand the call over to Dave with the financial review of Q2.

Thank you, Joel. Good morning, everyone. Let's start our review of the second quarter results with the highlights on Slide 6. Second quarter revenues were $741.2 million, including $16 million attributed to our Newport acquisition and within the range of our guidance. Revenues decreased 0.7% compared to the first quarter, reflecting a 0.7% reduction in ASPs and a 1.1% decrease in volume, partially offset by an increase in Newport revenues. The slight decrease in volume reflects primarily rebalancing of inventory by automotive Tier 1s and the slight reduction in ASPs reflects price alignments in distribution channels, primarily for passives. By reportable business segment, the $5 million decrease in revenues was mainly attributable to an $8.7 million decrease in resistors and a $4.6 million decrease in capacitors. These declines were partially offset by a $5.4 million increase in inductors and a $3.8 million increase in opto. MOSFETs revenue was flat when including the $13 million increase from Newport. Compared to the second quarter last year, revenues were down 16.9%, reflecting a volume decrease, net of Newport of 13.6%, and a 3.9% reduction in ASPs. Book-to-bill for the quarter was 0.86, comprised of 0.82 for semis and 0.90 for passives. Backlog decreased to 4.6 months compared to 5.0 months at the end of quarter one. By product category, the backlog for semis decreased to 4.4 months from 5.0 and backlog for passives decreased to 4.9 months from 5.1. Moving on to the next slide, presenting the income statement highlights. Gross profit, which includes the addition of Newport for a full quarter, was $162.9 million. Gross margin was 22.0% and included a negative impact from Newport of approximately 170 basis points. Compared to the first quarter, gross margin was 80 basis points lower, primarily due to the inclusion of Newport for the entire quarter. SG&A expenses were $125 million compared to $127.7 million for the first quarter, reflecting cost containment measures and lower than our guidance due primarily to lower bonus accruals. Depreciation expense was $49 million for the quarter, up from $47 million in quarter one and reflects the addition of the Newport fab. Operating margin decreased to 5.1% from 5.7% in the first quarter and 15.1% in the second quarter of 2023. EBITDA for the quarter was $88.4 million for an EBITDA margin of 11.9%, down slightly from the 12.2% in the first quarter. Our normalized effective tax rate for the year-to-date period was approximately 31%, which yields an effective tax rate of approximately 34% for the quarter. EPS was $0.17 per share compared to $0.22 per share in the first quarter and $0.68 per share for the second quarter of 2023. Proceeding to Slide 8, we present a table illustrating the revenue, gross margin, and book-to-bill ratios for each of our reportable business segments. Of note, for the second quarter, the results for Newport are reported entirely in the MOSFETs business segment, weighing on that segment's gross margin approximately 780 basis points. Turning to Slide 9 and our cash conversion cycle metrics; our DSO and DPO were flat at 51 and 31 days, respectively. Inventory was up slightly to $671 million, resulting in an inventory day sales outstanding of 105 days, up from 104 days in the first quarter. Total cash conversion cycle for the second quarter was 125 days. Continuing on to Slide 10, you can see we used $25 million in operating cash for the second quarter. The quarter included $53 million of tax payments related to cash repatriation and the latest installment of the U.S. transition tax. Total CapEx for the quarter was $63 million, including $43 million designated for capacity expansion projects. On a trailing 12-month basis, capital intensity was 10.5% compared to 9.8% for the same period last year. Due to the investments in capacity expansion projects and the aforementioned taxes paid, free cash flow for the quarter was a negative $87 million compared to a positive $28 million in the first quarter. Stockholder returns for the second quarter amounted to $26.3 million, consisting of $13.7 million for our quarterly dividend and $12.6 million for share repurchases. We repurchased 0.6 million shares during the quarter at an average price of $22.76 per share. For 2024, we still expect to return at least $100 million to stockholders. Cash and short-term investments decreased to $688 million at quarter-end as we continue to deploy cash to fund our strategic plan. At the end of the quarter, we have approximately $72 million of cash on hand in the U.S. As a reminder, we are required to fund cash dividends, share repurchases, and principal and interest payments using our cash on hand in the U.S., and we are using our U.S.-based cash to fund our Newport expansion and other strategic investments. To that end, during the quarter, we repatriated $105 million of accumulated earnings net of taxes from Israel to the U.S., primarily to fund the Ametherm acquisition and the Newport expansion. As a reminder, based on our planned investments at Newport and expected payments under our stockholder return policy, we expect to be free cash negative for the year and to draw on our revolver to fill the gap. The revolver also provides us with adequate liquidity to fund operations in the U.S. The remaining cash and short-term investments are held in our subsidiaries around the world outside the U.S. To repatriate accumulated earnings from these subsidiaries, we must pay foreign withholding taxes, and we have accrued for an estimated tax liability based on our expected timing of future repatriations from certain countries, most significantly Israel and Germany. At the end of the second quarter, we have approximately $72 million of cash in Israel and $73 million of cash in Germany. Our strategic plan requires significant local liquidity for our expansion projects in Germany. The remaining $471 million of cash and short-term investments are held in subsidiaries that are located in countries with restrictive regulations and high tax rates for repatriating cash. We have not accrued taxes to repatriate those earnings because we have deemed them indefinitely reinvested. Turning to Slide 11 for our guidance; for the third quarter of 2024, revenues are expected to be between $725 million and $765 million. Gross margin is expected to be in the range of 21%, plus or minus 50 basis points. Newport has an approximate 175 basis point to 200 basis point drag on that gross margin. Depreciation expense is expected to be approximately $52 million for the third quarter and $200 million for the full year. SG&A expenses are expected to be $127 million, plus or minus $2 million for the quarter and $507 million, plus or minus $5 million for the full year. Included in the SG&A guidance is the addition of approximately $13 million related to Newport, which is offset by adjustments to our planned 2024 spending, which includes lower headcount, freezes on hiring, and discretionary travel. For 2024, we still expect a normalized effective tax rate of approximately 31%. I'll now turn the call back to Joel.

Thank you, Dave. Please turn to Slide 11, which displays the eight growth levers we are pulling to execute our five-year strategic plan. This plan is designed to meet our commitments to scale capacity for our customers, best position Vishay for the megatrends of e-mobility and sustainability, accelerate revenue growth, and drive greater returns through the expansion of our addressable markets and our product portfolio. In 2024, we are focusing primarily on expanding capacity both internally and externally and on innovation. We had originally planned to spend $435 million in CapEx in 2024. However, at the midyear point of this year, the industry recovery is slower than we expected. We have therefore decided to adjust our timetable of investments for Itzehoe beyond 2024 and now plan to spend a total CapEx between $360 million and $390 million in 2024. This adjustment does not alter our commitment to spending a total of $2.6 billion between 2023 and 2028. We can do this and still meet our customer commitments because we now have intermediate capacity from the qualification of SK keyfoundries in Korea and the recent acquisition of the Newport wafer fab in South Wales UK. Let's turn to Slide 12 for a progress report on these levers. First with Newport, we are currently on target to complete qualification of four of the technology transfers by the end of the year and with the fifth technology transfer on schedule to complete qualification in the first quarter of 2025. We're also on schedule to ramp up production of the industrial technologies in the first quarter of 2025 and the qualification of automotive-grade technologies in the second quarter of 2025. The Newport colleagues are doing a great job with process optimization to qualify the new technologies with high yield. I thank them for the transition they are aggressively managing. With SK keyfoundries, our partner in Korea, we are planning to transfer seven product families by the end of the first quarter of 2025, three of which are automotive MOSFETs, four are commercial MOSFETs. We are planning to have engineering samples available in the fourth quarter and to complete qualification in the first quarter of 2025. A schedule of automotive customer audits is being developed. We expect to increase annualized capacity for MOSFETs by 12% in 2025 compared to 2024. In Itzehoe, our building of a 12-inch wafer fab is progressing well. In Q2, we had the roof closing ceremony. The Itzehoe colleagues have done very well to manage the output of more automotive MOSFETs in our current 8-inch fab and have collaborated very positively with the Newport colleagues in joint MOSFET process developments. Thank you also to our colleagues in Itzehoe and to our entire MOSFET team for executing this extremely large and aggressive number of technology transfers. Continuing with semiconductor products in Taipei, Taiwan, we are internally qualifying commercial and automotive diodes and expect to ship some volume of these products in the fourth quarter. We expect to increase annualized capacity by 5.5% in 2024 and to expand capacity of the constrained lines by 25% to 40%. The status of our expansion project in Turin, Italy has not changed. We still expect to ship commercially qualified diodes and to be completing automotive product qualification in early 2025. Now for passive components; at La Laguna, Mexico, we shipped commercially qualified inductors in Q2. This location provides customers with a nontariff supply location when looking at the competitive environment of this product technology. We are also on track to complete the automotive qualification in the second half of 2024. Automotive customers thereafter will visit the facility to qualify the site. We continue to expect annualized capacity to increase by approximately 15%. At our facility in Juarez, Mexico, we're shipping commercially qualified resistors and some automotive products. Volume for the first half were small. We continue to expand annualized capacity to increase capacity here by also 15% in 2024. We also continue to add subcontractors to outsource manufacturing on some of our commodity products. During the quarter, we added two subcontractors for diodes and two subcontractors for inductors. We have had just under 2,000 part numbers for diodes and over 1,100 part numbers for inductors for a Vishay total of over 5,400 part number additions in Q2. As a result, we have broadened our portfolio, positioning us to participate in markets we previously did not serve. In 2024, we set goals for use of external capacity on our path to achieving our 2028 targets. We expect to generate more than 4% revenue from outsourced passives in 2024 as we continue to qualify suppliers. We expect greater than 33% semiconductor production from outsourced wafer fabs in 2024. We expect greater than 20% semiconductor production from outside assembly in 2024. To further expand our portfolio during the quarter, we acquired an inrush current protection and thermistor company named Ametherm. Ametherm is a small company, which has products that can support the current market need for 800-volt DC in electric vehicles and in the future where the applications are even higher voltages, 1,500-volt DC for EVs in the precharged circuits. Also, Ametherm has products which support the current and future battery management system needs for temperature monitoring. Ametherm has the smallest inrush current limiter for the inverters needed to convert solar energy into electricity. Ametherm has the ability to produce various high-voltage solutions for precharged circuit needs in charging stations as well as for home use and EV chargers. Ametherm operates a facility located in Carson City, Nevada. Throughout the second half of this year, we are scaling Ametherm's volume by expanding manufacturing capacity into the La Laguna facility, an example of our campus strategy. We are glad to have the Ametherm team as part of the Vishay family. In terms of innovation and our silicon carbide strategy, we are on track with our plans to commercialize the 1,200-volt planar technology. We're planning to release nine part numbers throughout Q3 and Q4 to commercialize this product; three silicon carbide package types for each of the three different resistance and current capabilities. The development cycle time of the 1,200-volt trench technology, the 1,700-volt planar, and the 650-volt planar continues to be challenged by the capacity constraints of our foundry partners. The foundry partner is fully loaded and new product development cycle time has become extremely long. We are collaborating closely with them to expedite our product. Our current plan is to have the first 1,200-volt trench samples available for customers to test by the end of Q3 2024, with products released in Q1 of 2025. In the meantime, we're moving forward with our plans to develop these technologies at our Newport facility in 2025 and 2026. We still expect delivery of the silicon carbide equipment between the third quarter and into the first quarter of 2025 in order to meet our plans for production in late 2025. To wrap up now, although the industry recovery is taking longer than we'd like and is blunting revenue this year, it is providing us with a unique opportunity to aggressively push forward with Vishay 3.0. We're executing a long list of initiatives assigned to gain market share and to position Vishay to take full advantage of the upturn in demand, boosted by the megatrends in e-mobility and sustainability. We're reshaping Vishay's corporate culture and how we run the company and becoming laser-focused on the customer and operational excellence, all in order to drive faster revenue growth, improve profitability and expand returns. With the investments we've made in expanding capacity over the past two years, we are demonstrating to our customers that Vishay 3.0 is the supplier they can rely on, not only for technology differentiation, but also now to support their volumes when they scale. Our initiatives to deepen customer engagement are clearly working. In the second quarter alone, we've added 10,000 part numbers to our distributor SKUs, positioning Vishay to capture share of previously underserved markets. In automotive, we have signed a multiyear silicon MOSFET supply agreement with an established automotive OEM for the first time. In Aerospace-Defense, some of our OEM customers are discussing master supply agreements with us to facilitate awarding contracts to Vishay as a preferred supplier. And in Medical, we have hired a segment leader who is tasked with expanding Vishay from being a narrow technology supplier to one that delivers the full portfolio of Vishay's technologies. We're adding engineers to step up our design activity and adding products to our portfolio to increase the percent of Vishay on the bill of materials. I'm very pleased with the progress Vishay has made since I became CEO. We're delivering on the promise we made to our stockholders on our very first call with you, gaining traction and stepping up our game. In the second half of 2024, we will continue to work the list of initiatives, expanding capacity, driving greater customer engagement, and advancing our silicon carbide strategy while adapting to market conditions. Jill, let's start with the question-and-answer session.

Thank you. Our first question today comes from Matt Sheerin with Stifel. Your line is open.

Yes, thank you. Good morning, everyone. First question, Joel, just regarding the capacity expansion. It sounds like you're still on track, except for the Germany expansion, still sticking to your plans to expand across the different product sets that you talked about. And one area was MOSFET you said 12% capacity expansion. Yet if you look at that business, if you take out Newport, it looks like you were down like 30%-plus year-on-year. So it sounds like that correction is still going on. So I guess the question is what's the capacity utilization? And do you have confidence that you can fill that capacity as you bring it on next year?

Yes, hi Matt, thank you for your question. The capacity utilization for semiconductors is around 63%, and for MOSFETs specifically, it stands at 79% today. We are optimistic about the growth in the computer business for low-voltage MOSFETs. In the automotive sector, we noticed some adjustments in Q2 from our automotive customers. They provided us with schedule agreements, but in Q2, they adjusted their plans and pulled less than they had initially intended. We are confident in our capacity investment strategies. Adding key foundries will support our intermediate capacity. The Itzehoe project remains crucial for our capacity expansion into a 12-inch fab. However, given the prolonged softness in the market, we have opted for a slight delay in the Itzehoe capital investment.

Got it. Okay. Thanks for that. And your commentary on auto weakness, obviously, you're not the only supplier that's been seeing that. But it sounds like you're starting to see at least some green shoots in terms of orders. You're guiding the overall company flat revenue sequentially. Do you expect auto to be flat or will that be down again?

We have decided to guide it flat even though we see scheduling agreements with increasing demand in Q3. We saw what happened in Q2. We had Q2 with a positive move from auto in their schedule agreements and they readjusted. So the week-by-week demand pulls that are forecasted would show a positive Q3 over Q2 for auto. But at this point, we've decided to guide it flat, with fewer workdays in Q3 due to seasonal holidays in Europe, and with automotive car count declining a bit. We decided to go flat even though the signals from the auto customers are a bit up.

Okay. Thanks. And just lastly, you had some positive commentary about the data center and AI opportunity. I know that's a relatively small percentage of your revenue, but it sounds like it's growing. So could you give us maybe some metrics around the content opportunity in AI servers versus traditional servers and your share opportunity and where you're going there?

Yes. We have positioned on some initial reference designs, the NVIDIA Blackwell. We have MOSFETs on those designs. Also, we see current sense resistor opportunities, the inductor, the IHLP-style power inductor is there, diodes as well. So the content increase is higher. The teardowns that we've seen indicate that Vishay's content on the bill of materials is around $50 per AI server. So we're excited about what we've seen as a first look. We're designing closely with many companies in Taiwan and China to ensure that more of the Vishay product is on the bill of materials. You're right. The overall quantities of servers is small and the PCs is also small, but we're positioning hard. Our Asia team is working very hard to make sure we're connected to the right chipset reference designs, both in the Asia and the Americas region, working with the chipset companies as well as following through with the design company. So we're optimistic in what we can do. We're putting the capacity in place. As you said, the overall quantity of AI devices is still yet quite small.

Okay. Thanks a lot.

Thanks, Matt.

Thank you. Our next question comes from Joshua Buchalter from TD Cowen. Your line is open.

Hey guys. Thank you for taking my questions. Maybe to follow-up on Matt. I wanted to ask about the auto market. I mean, directionally, a lot of the things you mentioned are in line with what we've heard throughout this earnings season. But looking into the third quarter, and I understand the conservatism on the guide, do you feel like inventory levels at Tier 1s and your customers is at the point where there's still work that needs to be done or do you think you're shipping to end demand at this point and taking more of an agnostic view on what that demand looks like? Thank you.

Okay. Hi Josh. Thanks for the question. When we look at our automotive annual agreements with customers, a portion of that is in consignment. So we have consignment inventory that we're placing and they pull as they need it. So we would say the inventory is at a more of a normal position. Sometimes we have four weeks of inventory consignment, sometimes it's up to seven or eight, but it's not excessive and not requiring severe months of digestion. The others, which are not in consignment, there is still some inventory out there. It's not excessive. We see passives, book-to-bills moving more positively first. Semis, there's still some inventory to digest. I won't necessarily say it's Vishay inventory. We didn't have the ability to stuff. Last year, we didn't have short lead times and excess capacity. We were on allocation with our auto MOSFET. So this is where I've said in past calls, we've got to work around our competitors' inventory and gain more share for Vishay. This is a top initiative for our sales team to get us positioned and not have to wait for the digestion of our peers.

All right. Thank you for the color there, Joel. The follow-up, distribution grew meaningfully more than the total company. I know that's been an area of focus with the SKU count expansion and representing Vishay more broadly at distributors. Can you share where your distribution inventory levels are right now? And then comfort with them given, in particular, it's been an area of volatility across the semiconductors and, to a lesser extent, passive space, in particular this quarter? Thank you.

Yes. The inventory currently stands at 26 weeks globally based on the point of sale data in Q2, consistent with Q1. In Asia, we decreased from 20 weeks in Q1 to 18.6 weeks. The point of sale in Asia is starting to improve, so we are pleased to have product available to respond to customer demand. In the Americas, the inventory rose to 47 weeks in Q2, compared to 47 weeks in Q1, now at 48 weeks. In Europe, where point of sale is softer, we moved from 18.7 weeks of inventory in Q1 to 20.7 weeks in Q2. This increase in inventory reflects both softer sales and the addition of new stock-keeping units in the Americas and Europe. You can see the inventory weeks increasing slightly in these regions due to the new SKU additions we discussed, primarily because we are expanding our capacity to compete and capture market share with part numbers that were not previously recognized in the distributor's system.

Okay. And in those levels, in particular, in Americas and Europe, I mean, are those levels that you're comfortable with and you're trying to grow them further or are you trying to bring them down right now? Thank you.

We're trying to bring them down. POS is going to help us. But as we continue to add more part numbers, the POS is going to consume the inventory we have, but then division-by-division, business units that go to the distributors, they do their pricing reviews for alignment, they do their part number comparisons. We will continue to add part numbers quarter-on-quarter. So we'll have a consumption level of inventory and then we'll have the Vishay positioning of additional inventory that's added. So I think you're going to see in the next two quarters, inventory is going to be about where it's at from a top-level view as we participate in more POS and add further part numbers.

Got it. Thank you, Joel.

Thanks, Josh.

Thank you. Our next question is from Ruplu Bhattacharya from Bank of America. Your line is open.

Hi. Thanks for taking my questions. My first question is on the guidance for fiscal Q3. It looks like on relatively flat revenue sequentially, the guide is for 100 bps lower gross margin. And then looking into that, I thought the Newport fab headwind was expected to be 170 bps in Q3, but now it's more 175 bps to 200 bps. So can you just double-click on that, what's driving the higher impact? And Joel, if you can also weave in any expectation for the pricing environment? How is that trending? And any other impacts that are affecting gross margin sequentially between Q2 and Q3?

Okay. Hi Ruplu. So a significant portion of the decline from the previous year may have a couple of components. But the significant part is pricing on the semi side, we have 2% ASPs built into that forecast. The Newport impact is a little higher in Q3, an additional 20 basis points from the previous forecast. So the sales of Newport was approximately $15 million, $16 million this quarter and next quarter going down to the $5 million to $8 million range. So when you asked about the increase in Newport impact, that's part of the reason because of the volume decrease of the sales of the legacy product. Yes. Go ahead.

No, I was just going to ask on the overall pricing environment in terms of like-for-like pricing, if you can comment on that.

Yes. Pricing, there was some ASP decline in the quarter. When we look at the contractual agreements, those prices are fixed for the calendar year, so it wasn't there. It wasn't with the big automotive guys. Where we see the pricing down is we're doing these alignments at the distributor. If our book pricing was high and the actual POS net price was lower, on paper, we're reducing that, and there is some price protection that we have to give to the distributors, which is an ASP impact. So these are pricing alignment moves in part with the price pressure that we're seeing. And as always, when there's large opportunities, people do request quotations. So on large spot opportunities, we have to be aggressive. I would say for passives, the pricing environment is generally stable. MOSFETs because suppliers have lower capacity utilization; we said, ours is 79%. Other suppliers are lower, 50% and 60% utilization. They become more aggressive here and there. So we've had to make some adjustments in price, not significant, but we've had to continue to maintain our position as the capacity coming on board. We got to make sure we're present at these customers who offer us growth opportunities. So there is some spot price pressure here and there.

Got it. For my next question, maybe I'll ask you, Dave. Can you remind us of your capital allocation priorities? And if CapEx spend is less this fiscal year, does that afford more opportunity for potential M&A or more buybacks? And how should we think about the possibility of a dividend? And also if you can even your expectation for free cash flow in fiscal 2024. Vishay's always had pretty good free cash flow even in down years. But how should we think about that in fiscal 2024?

For free cash flow, let's start there. During our Investor Day, we indicated a significant negative forecast for 2024 on the graph. So we expect to be negative, although perhaps not much more than our current position. Regarding the capital allocation strategy, we're revisiting some of Joel's earlier comments. One reason for the delay in our spending for Itzehoe is that the recovery hasn't occurred as quickly as anticipated, which in turn affects our free cash flow. These factors are interconnected. This year, we have already completed two acquisitions, Newport and Ametherm, and we are committed to pursuing our M&A strategy. We continue to allocate $360 million in CapEx and plan to return up to $100 million to shareholders. However, with our current free cash situation, that outlines our plan.

Thank you for the information. I have one last question. Joel, I'll ask you a broader question. Considering the current operating environment and the inventory correction or destocking happening in the channel, how many more quarters do you anticipate it will take to clear any excess inventory? Additionally, building on a previous question, you've been collaborating with distributors and increasing the SKU count. What stage are we at in that process? Do you believe that your share gains can significantly contribute to growth and continue to drive revenue growth in distribution? Thank you.

Thanks, Ruplu. How many quarters do we expect to manage inventory? First, regarding passive components, the inventory was never excessive and is normalizing quickly. We've already started seeing this in the second quarter, with late-Q2 orders almost matching demand. Customers are gaining better visibility on passives. By the third quarter, I believe we'll only need one more quarter for passives to reach a normalized level. Semiconductors are different and vary by market segment, but conversations with our distributors and EMS indicate it will take about two quarters, possibly extending into the first quarter of next year, to digest the existing inventory. It's worth noting that Vishay’s inventory days are lower than others, so we must proactively address this rather than wait. We expect semiconductor inventory to stabilize by the end of this year and passives by the next quarter. Regarding our engagement with distributors, we're currently in the early middle phase. Our divisions have been meeting with distributors, and while initial meetings occurred last year, many divisions are now having follow-up discussions that are yielding insights into areas where we have underperformed. Sometimes these meetings highlight the need for new product development to serve a broader market, which will take time. However, for products we already have technology for, the process of creating part numbers is quicker. Therefore, I would say we are in the middle innings. We anticipate point of sale (POS) to increase in 2025, and we expect our percentage of POS to grow as we add more part numbers. These part numbers are not only being added with large distributors but also in our catalog, which enhances our visibility. We are optimistic about 2025 when the market begins to shift, as we believe Vishay will be better positioned with distributors to capitalize on this growth and support the upturn with the added capacity we are developing.

Okay. Thank you for all the details. Appreciate it.

Thanks, Ruplu.

And we are showing no further questions at this time. So I would like to turn it back to Joel Smejkal for closing remarks.

Great. Jill, thank you. Thank you for everyone in joining our Q2 earnings call. We'll see you again in November. Thank you again for your questions and your interest in Vishay. Have a good day.

This does conclude our program. You may now disconnect.