Earnings Call Transcript - VSH Q3 2021

Operator, Operator

Good day, and thank you for standing by. Welcome to the Vishay Q3 2021 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to one of your speakers today, Mr. Peter Henrici. Please go ahead.

Peter Henrici, Speaker

Thank you, Vic. Good morning, and welcome to Vishay Intertechnology's Third Quarter 2021 Conference Call. With me today are Dr. Gerald Paul, Vishay's President and Chief Executive Officer; and Lori Lipcaman, our Executive Vice President and Chief Financial Officer. As usual, we'll start today's call with the CFO, who will review Vishay's third quarter 2021 financial results. Dr. Gerald Paul will then give an overview of our business and discuss operational performance as well as segment results in more detail. Finally, we'll reserve time for questions and answers. This call is being webcast from the Investor Relations section of our website at ir.vishay.com. The replay for this call will be publicly available for approximately 30 days. You should be aware that in today's conference call, we will be making certain forward-looking statements that discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements. For 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. 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 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. On the Investor Relations section of our website, you can find a presentation of the third quarter 2021 financial information containing some of the operational metrics Dr. Paul will be discussing. Now I turn the call over to Chief Financial Officer, Lori Lipcaman.

Lori Lipcaman, CFO

Thank you, Peter. Good morning, everyone. I am sure that most of you have had a chance to review our earnings press release. I will focus on some highlights and key metrics. Vishay reported revenues for Q3 of $814 million. EPS was $0.67 for the quarter. Adjusted EPS was $0.63 for the quarter. The only reconciling items between GAAP EPS and adjusted EPS are tax-related. There were no reconciling items impacting gross or operating margins. Revenues in the quarter were $814 million, down by 0.7% from the previous quarter and up by 27.1% compared to the prior year. Gross margin was 27.7%. Operating margin was 15.2%. There were no reconciling items to arrive at adjusted operating margin. EPS was $0.67, and adjusted EPS was $0.63. EBITDA was $162 million or 19.9%. There were no reconciling items to arrive at adjusted EBITDA. Reconciling versus the prior quarter, operating income for Q3 2021 compared to operating income for the prior quarter based on $5 million lower sales or flat sales, excluding exchange rate impacts, operating income decreased by $2 million to $124 million in Q3 2021 from $125 million in Q2 2021. The main elements were: Average selling prices had a positive impact of $10 million, representing a 1.3% ASP increase; volume decreased with a negative impact of $4 million, equivalent to a 1.3% decrease in volume. Variable costs increased with a negative impact of $12 million, primarily due to increases in metal prices as well as materials and services, and not completely offset by cost reductions. Fixed costs decreased with a positive impact of $4 million, in line with our guidance. Reconciling versus prior year, operating income in Q3 2021 compared to adjusted operating income in Q3 2020, based on $174 million higher sales or $172 million excluding exchange rate impacts, adjusted operating income increased by $62 million to $124 million in Q3 2021, from $61 million in Q3 2020. The main elements were: Average selling prices had a positive impact of $18 million, representing a 2.2% ASP increase; volume increased with a positive impact of $70 million, representing a 23.2% increase. Variable costs increased with a negative impact of $8 million. Volume-related manufacturing efficiencies and cost reduction efforts did not completely offset higher metal prices, annual wage increases and higher tariffs. Fixed costs increased with a negative impact of $17 million, primarily due to annual wage increases and higher incentive compensation costs, only partially offset by our restructuring programs. Inventory impacts had a positive impact of $9 million. Exchange rates had a negative effect of $9 million. Selling, general and administrative expenses for the quarter were $102 million, in line with our guidance, excluding exchange rate impacts. For Q4 2021, our expectations are approximately $104 million of SG&A expenses at current exchange rates. The debt shown on the face of our balance sheet at quarter end is comprised of the convertible notes due 2025, net of debt issuance costs. There were no amounts outstanding on our revolving credit facility at the end of the quarter. However, we did use the revolver from time to time during Q3 to meet short-term financing needs and expect to continue to do so in the future. No principal payments are due until 2025, and the revolving credit facility expires in June 2024. We had total liquidity of $1.7 billion at quarter end. Cash and short-term investments comprised $916 million, and there are no amounts outstanding on our $750 million credit facility. Total shares outstanding at quarter end were 145 million. The expected share count for EPS purposes for Q4 2021 is approximately 145.6 million. Our convertible debt repurchase activity over the past three years, together with the adoption of the new convertible debt standard significantly reduces the variability of our EPS to share count. Our U.S. GAAP tax rate year-to-date was approximately 18%, which mathematically yields a rate of 17% for Q3. In Q3, we recorded a tax benefit of $5.7 million due to the reversal of deferred tax valuation allowances in certain jurisdictions. We also recorded benefits of $8.3 million year-to-date due to changes in tax regulations. Our normalized effective tax rate, which excludes the unusual tax items, was approximately 22% for the quarter, and 23% for the year-to-date period. We expect our normalized effective tax rate for the full year 2021 to be between 22% and 24%. Our consolidated effective tax rate is based on an assumed level and mix of income among our various taxing jurisdictions. A shift in income could result in significantly different results. Also a significant change in U.S. tax laws or regulations could result in significantly different results. Cash from operations for the quarter was $136 million. Capital expenditures for the quarter were $57 million. Free cash for the quarter was $79 million. For the trailing 12 months, cash from operations was $436 million, capital expenditures were $171 million, split approximately for expansion, $113 million; for cost reduction, $9 million; for maintenance of business, $49 million. Free cash generation for the trailing 12-month period was $267 million. The trailing 12-month period includes $15 million cash taxes paid for the 2021 installment of the U.S. tax reform transition tax. Vishay has consistently generated in excess of $100 million cash flows from operations in each of the past 26 years and greater than $200 million for the past 19 years. Backlog at the end of Q3 was at $2.244 billion or 8.3 months of sales. Inventories increased quarter-over-quarter by $30 million excluding exchange rate impacts. Days of inventory outstanding were 81 days. Days of sales outstanding for the quarter were 43 days. Days of payables outstanding for the quarter were 35 days, resulting in a cash conversion cycle of 89 days. Now I will turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

Dr. Gerald Paul, CEO

Thank you, Lori, and good morning, everyone. Also in the third quarter, we operated under quite excellent economic conditions characterized by extremely high backlogs. We continue to expand critical manufacturing capacities in order to prepare ourselves for further growth. During the quarter, we did experience some localized shortages of labor impacting the manufacturing output. There were strong financial third quarter results. We had a gross margin of 27.7% of sales and operating margin of 15.2% of sales. Earnings per share were $0.67 and adjusted earnings per share, $0.63. Vishay in the third quarter generated $79 million of free cash, and we do expect another good year of cash generation. As I said, the economic environment for electronic components remains exceptionally good with backlogs at a historical high. Except for automotive, all markets continue to be in excellent shape and sales are basically limited by the manufacturing capacities. The automotive sector is expected to accelerate again over the next quarters with current supply problems getting resolved step by step. The supply chain continues to be rather depleted in general. We see extremely long lead times and shortages of supply. Price increases are being implemented in general also to offset increased inflationary costs for metals and for transportation. Concerning the various regions, not so many differences. All regions remained exceptionally strong. Point of Sale in all regions remains close or above all-time highs, and distribution in all regions remains hungry for products every year, no change. Talking about distribution. Global distribution continues to get overwhelmed with orders. POS in the third quarter continued on a record level of the second quarter, running 34% over prior year. POS increased versus Q2 by 5% in the Americas and by 3% in Europe. Asia was slightly down by 2%. Americas and Europe are at an all-time high. Inventory turns of global distribution in Q3 was at 4.2 turns, started to normalize from quite extreme 4.4 turns in the second quarter. In the Americas, 2.2 turns after 2.1 turns in the second quarter and 1.5 turns in prior year. In Asia, 6.1 turns after 7.4 turns in Q2 and 4.3 turns in prior year. And in Europe, 4.5 turns in the quarter after 4.6 turns in the second quarter and 3.2 turns in prior year. Coming to the various industry segments we serve. Sales to the automotive market remain dampened by customers' inability to secure integrated circuits. The situation is expected to improve step by step. And as the demand for cars remains on a very high level, you can see that there's money in the bank for 2022. Industrial markets continued strong in all regions; factory automation, alternative energy, and power transmission are driving the growth. After record levels in 2020, personal computing shows signs of normalization, but server markets continue growing. Proliferation of 5G technology continues to drive sales in fixed telecom. Military spending remains stable. Commercial aerospace starts to recover slowly. Medical markets are steady, with focus being more and more shifted back to normal hospital procedures. White goods, air conditioning, and gaming remains strong and profitable. Coming to Vishay's business development in Q3. Due to local labor shortages, third quarter sales, excluding exchange rate impacts came in below the midpoint of our guidance. We achieved sales of $814 million versus $819 million in the prior quarter and versus $640 million in the prior year. Excluding exchange rate effects, sales in Q3 were flat versus the prior quarter and up by $172 million or by 27% versus prior year. Book-to-bill in the quarter has remained on an extraordinarily high level of 1.26 after 1.38 in the prior quarter; 1.29 book-to-bill for distribution after 1.41 in quarter two; 1.23 for OEMs after 1.34 in the second quarter; 1.27 for semiconductors after 1.41 in Q2; 1.26 for passives after 1.35; 1.30 for the Americas after 1.33 in Q2; 1.14 for Asia after 1.29; 1.41 for Europe after 1.54. I think we can speak of a broad continuation of an excellent economic environment. Our backlog in the third quarter has climbed to another record high of 8.3 months after 7.5 in the second quarter; 8.9 months in semis after 8.4 months in Q2 and 7.6 months in passives after 6.7 months in Q2. Price increases become visible in our broad form. We have seen a 1.3% price increase versus the prior quarter and 2.2% versus the prior year. For the semiconductors, it was a 2.2% increase versus the prior quarter and 3.8% versus the prior year. For the passives, a 0.3% increase versus the prior quarter and 0.5% versus the prior year. Some highlights of operations. Despite the continued good level of plant efficiencies, our contributive margin in the third quarter has suffered from inflationary impacts, in particular as it relates to metals and to transportation. SG&A costs in Q3 came in at $102 million according to expectations when excluding exchange rate impacts. Manufacturing fixed costs in the quarter came in at $137 million, below our expectations when excluding exchange rate impacts. Total employment at the end of the third quarter was 22,730, a 1% increase from the prior quarter. Excluding exchange rate impacts, inventories in the quarter increased by $30 million, $13 million in raw materials and $17 million in work-in-progress and finished goods. Inventory turns in the third quarter remained at a very high level of 4.5 after 4.8 in Q2. Capital spending in the quarter was $57 million versus $22 million in the prior year; $41 million for expansion, $2 million for cost reduction, and $14 million for the maintenance of business. We continue to expect for the year 2021 capital expenditures of approximately $250 million, for the most part, of course, for expansion projects. In the third quarter, we generated cash from operations of $436 million on a trailing 12-month basis. And also, on a 12-month basis, we generated $267 million free cash. Despite increased capital expenditure, we also for the current year expect a solid generation of free cash, quite in line with our provision. Coming to our main product lines, starting with resistors. With resistors, we enjoy a very strong position in the auto, industrial, military, and medical market segments. We offer virtually all resistor technologies and are globally known as a reliable high-quality supplier of the broadest product range. Vishay's traditional and historically growing business has returned to record levels. Sales in the quarter were $181 million, down by $12 million or 6% from the previous quarter, but up by $35 million or 24% versus the prior year, all excluding exchange rate impacts. In the third quarter, in particular, some shortages of labor and limited sales. The book-to-bill ratio in the quarter continued strong at 1.26 after 1.39 in the second quarter. The backlog increased further to 7.8 months from 6.6 months in the prior quarter. Gross margin in the quarter decreased to 27% of sales, down from a peak of 30% in Q2. Main reasons were lower volume and higher metal and logistics costs. Inventory turns in the quarter remained at a very high level of 4.7 after 5.1 in Q2. Selling prices continued to increase, plus 0.5% versus the prior quarter and plus 0.7% versus prior year. We are in the process of raising critical manufacturing capacities mainly for resistor chips and power wirewounds. And of course, we focus on hiring in the critical places. We expect a very successful year for resistors. Coming to inductors. The business consists of power inductors and magnetics. For years, our fast-growing business with inductors has represented one of the greatest success stories of our company. Exploiting the growing need for inductors in general, which had developed a platform of robust and efficient power inductors and leads the market technically. With magnetics, we are very well positioned in specialty businesses, demonstrating steady growth there. Sales of inductors in the third quarter were $85 million, flat versus the prior quarter and up by $5 million or by 7% versus the prior year, excluding exchange rate effects. The book-to-bill ratio in the third quarter was 1.11 after 1.21 in the prior quarter. The backlog for inductors grew further to 5.4 months from 5.1 in the second quarter. Gross margin continued to run at an excellent level of 32% of sales, slightly down from a peak of 34% in the prior quarter. Inventory turns were at 4.6, practically flat versus the prior quarter. There is a substantially reduced price decline at inductors, a slight price increase of 0.2% versus the prior quarter and minus 1% versus the prior year. We are accelerating the next steps of capacity expansion for power inductors in order to get ahead of the demand curve. Coming to capacitors. Our business with capacitors is based on a broad range of technologies with a strong position in American and European market niches. We enjoy increasing opportunities in the fields of power transmission and of ECAs, namely in Asia and China. Sales in the third quarter were $116 million, 3% below the prior quarter but 25% above the prior year, which excludes exchange rate impacts. Shortages of labor, also in the case of capacitors, limited manufacturing output and sales. The book-to-bill in the third quarter for capacitors remained at a very strong 1.7 on the level of the prior quarter. Backlog increased to an absolute record of 8.9 months, up from 7.7 months in the second quarter. Gross margin in the third quarter reduced to 21% of sales from 24% in the second quarter. Lower volume meant further increased costs for metals, which worsened the results. Inventory turns in the quarter remained on a healthy level of 3.5 after 3.9 in the prior quarter. We are steadily increasing selling prices, 0.1% plus versus the prior quarter and 1.3% plus versus the prior year. We expect a solid year for capacitors with growing opportunities in the future. We remain confident for capacitors for the midterm in light of the increasing designed wins that we see. Coming to Opto products. Vishay's business with Opto products consists of infrared emitters, receivers, sensors and couplers. Also in Opto, we see a strong acceleration of demand. Sales in the quarter were $71 million, 6% below the prior quarter, but 9% above the prior year, which excludes exchange rate impacts. We experienced quite substantial losses of manufacturing output due to COVID-related restrictions in Malaysia. This situation should be resolved since all the workforce is now vaccinated and will not repeat itself. Book-to-bill in the third quarter continued strong at 1.36 after an extreme 1.69 in the second quarter. Backlog continued to grow to another record high of 10.9 months after 9.3 months in the prior quarter. Gross margin in the third quarter improved further to 34% of sales after 32% in the prior quarter. I think we can say Opto continues to perform exceptionally well. We have seen now more normal inventory turns of 5.0 in the quarter after 5.8 in the second quarter. The selling prices are going up, plus 1.9% versus the prior quarter and plus 5.0% versus the prior year. We modernized and expanded our Heilbronn wafer fab, and the production should start in the course of Q4, partially Q1 next year. Opto products continue to be a very relevant factor for Vishay's growth. Coming to diodes. Diodes for Vishay represent a broad commodity business where we are the largest supplier worldwide. Vishay offers virtually all technologies as well as the most complete product portfolio. The business has a very strong position in the automotive and industrial market segments and keeps growing steadily and profitably for years. Sales in the quarter were $185 million, up by $12 million or by 7% versus the prior quarter, and up by $61 million or 49% versus the prior year without exchange rate effects. We see a continued strong book-to-bill ratio of 1.31 in the quarter after 1.45 in Q2. Backlog climbed to an extreme high of 8.9 months from 8.5 months in the prior quarter. With growing volume, gross margin continued to improve to 25% of sales as compared to 24% in Q2. Inventory turns were at 4.5 after 4.7 in the prior quarter. Selling prices keep increasing by 2.9% versus the prior quarter and by 5.1% versus the prior year. We have started to expand our fab in Taipei, introducing the 8-inch technology there. The business with diodes starts to exceed pre-pandemic levels. Finally, to MOSFETs. Vishay is one of the market leaders in MOSFET transistors. With MOSFETs, we enjoy a strong and growing market position, particularly in automotive, which, in view of the increasing use of MOSFETs, will provide a very successful future for this product line. The demand has reached quite extreme levels and continues to increase further. Sales in the quarter were $176 million, 5% above the prior quarter and 31% above the prior year, excluding exchange rate impacts. Book-to-bill ratio in Q3 was 1.19 after 1.26 in the second quarter. Backlog has grown further to an extreme level of 8.1 months as compared to 7.9 in the second quarter. Higher volume, better selling prices, and good efficiencies allowed gross margin to increase further to 31% of sales, up from 28% in the second quarter. Inventory turns in the quarter were at 5.1, virtually flat versus the prior quarter. We are implementing price increases, plus 1.5% versus the prior quarter and plus 2.2% versus the prior year. MOSFETs remain absolutely key for Vishay's growth going forward. We intend to keep a proper balance between in-house manufacturing of wafers and purchases from foundries. In this regard, we decided to build a 12-inch wafer fab in Itzehoe in Germany, adjacent to our existing 8-inch fab, which will increase our in-house wafer capacity by 70% over the next 3 to 4 years. Let me summarize and emphasize the following: Clearly, we, since a few years, enjoy very favorable economic conditions, and the end of the positive phase of the current cycle is not in sight. But more importantly, beyond all short-term speculations, the longer-term outlook for electronics and also for components is remarkably bright. We expect noticeably higher growth rates for our products going forward than we have seen in the past. Vishay is definitely in a good position to benefit from this favorable trend. We enjoy a very broad and strong market position. We are a broad liner, and we are financially solid and therefore in the position to take the right steps. Results for the fourth quarter look promising as well. We guide to a sales range between $805 million and $845 million at a gross margin of 27.7%. Thank you. Over to you, Peter.

Peter Henrici, Speaker

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

Operator, Operator

Your first question comes from the line of Karl Ackerman.

Karl Ackerman, Analyst

I wanted to first begin with your gross margin guide. I was hoping you could discuss the variables to your gross margin guide. I understand the higher depreciation impact. But are there any end-market impacts that may be impacting your outlook? I ask because favorable pricing and your cost reduction efforts in your MOSFET business appear to be supporting improved profitability.

Dr. Gerald Paul, CEO

Yes. In fact, it's all happening, as you say. We have nice volume, which leads to good efficiencies. We are raising prices accordingly, of course, within the contracts we have. On the other hand, we do see inflationary impacts on our materials and the transportation, which is not new, but the third quarter was another increase vis-a-vis the second quarter in these costs. In that sense, the variable margin in the third quarter has suffered a little vis-a-vis the second quarter. We will increase prices further as we go forward. And of course, we continue to work further on cost reduction efficiencies. So going forward, I see that we can offset or even better than that, the inflationary impacts. Concerning manufacturing fixed costs, there's nothing to report. We came in better than we thought. And also depreciation was not a surprise whatsoever. Of course, we invest more, so there's a slow increase of depreciation. Did this answer your question?

Karl Ackerman, Analyst

It does. For my follow-up, it's nice to see the growing backlog despite, I think, general investor fears of the moderation in end demand. I'm curious if you could distinguish whether the growth in backlog is coming from OEMs or if it's tied more towards distribution? I ask because I'm trying to understand whether the mix toward OEMs may be less likely to get pushed out or canceled for those who are worried about the growth rate as you look out into 2022?

Dr. Gerald Paul, CEO

We see it on both sides. But distribution, in this case, also leads, it’s clear. As a matter of fact, distribution, I tried to say it in my words, is still very hungry for products, and they are running very well. In fact, so it’s both, to summarize again, but the distribution is stronger, in that sense.

Operator, Operator

Your next question comes from the line of Ruplu Bhattacharya.

Ruplu Bhattacharya, Analyst

Maybe just to follow up on the last question, Dr. Paul. I wanted to ask about inventory in the channel. Some component suppliers have talked about a buildup of inventory. So in automotive, maybe at the OEMs and in industrial, maybe in the channel. Are you seeing any build above inventory in the channel? What are your thoughts on channel inventory? And how do you see that trending over the next couple of quarters?

Dr. Gerald Paul, CEO

Ruplu, there is a certain slight buildup of the inventory in the distribution channel, which is partially just from the price side, determined by the price side and not necessarily by more pieces. Concerning the OEMs, you never know exactly. But as a matter of fact, their reaction in better terms on big customers, how they react on shortages, how they escalate cases, does not really support the idea that there's a lot of hidden inventory. So my opinion is that also this channel is relatively empty still.

Ruplu Bhattacharya, Analyst

You mentioned that labor shortages affected your revenues. What was the negative impact on your revenues from these labor shortages this quarter? And do you anticipate any impact in the fourth quarter?

Dr. Gerald Paul, CEO

Approximately $20 million, approximately. And of course, there are certain points where it hits hard. One of them was Malaysia. And I said, hopefully, this was understood. People are now vaccinated completely in this plant; so this one will not repeat itself. But we have labor shortages in other places also. We work on it. You can never exclude completely that it happens again, but we work on it. And I think we are in better shape now.

Ruplu Bhattacharya, Analyst

Okay, I understand. For my last question, could you discuss your cash priorities? Do you see any opportunities for inorganic growth in the current environment, whether on the passive or active side? Additionally, how should we approach buybacks and dividends moving forward?

Dr. Gerald Paul, CEO

Well, first off, yes, Ruplu, I think I said it. We have decided on a major project. This is for the MOSFET internal capacity. It's a big project. And besides that, Vishay is strong, we can definitely handle that, staying cash positive and nothing has changed. We are evaluating and driving a buyback of shares as a decision of the Board. In fact, the decision will be taken beyond the way, so to speak, finally, right?

Ruplu Bhattacharya, Analyst

And M&A, any thoughts on inorganic growth?

Dr. Gerald Paul, CEO

Well, we always look around. And there may be opportunities; we see some opportunities, and we are also working on some opportunities. But they are not in a situation that I would like to talk completely about them.

Operator, Operator

Your next question comes from the line of Matt Sheerin.

Matt Sheerin, Analyst

Dr. Paul, I wanted to ask about the guidance you have for the fourth quarter. What factors would lead you to the low end or the high end of that range? Is it dependent on your ability to address labor issues, or is it more about your production capabilities versus demand?

Dr. Gerald Paul, CEO

No, it's really only and exclusively our ability to manufacture. We have been working together for a long time, Matt. This is such a clear situation. I've hardly ever seen such a clear situation. If I had a magic wand and could produce more, I could sell it immediately and people would appreciate that. But there are limitations and labor shortages. We are working on it. Partially, it's related to COVID. In Malaysia, we have been able to resolve the situation. However, in other plants, local issues make it difficult to get enough people in. I believe we are improving as we progress. But to be honest, we were short on staff in Q3, no question. To clarify, it's just the availability of labor at this point.

Matt Sheerin, Analyst

Okay. And from where you stand now, are you confident that in terms of the midpoint of that guidance that you should be able to deliver?

Dr. Gerald Paul, CEO

Yes, we were certainly convinced otherwise we wouldn't have mentioned it in the third quarter. However, I believe that in some cases, like in Malaysia, which had been pending, this issue has now been resolved. It's not a universal problem, but in certain areas, we are experiencing a shortage of labor, and we are addressing it. I think we are in a better position as we move into the fourth quarter.

Matt Sheerin, Analyst

Got it. As you look to Q1, and I know it's hard to look beyond the quarter here given all the various issues going on. But typically, I know you're up sequentially in Europe and in North America. I'm just wondering, is there more capacity coming online? Or do you have the ability to actually fulfill that demand and be up sequentially in the first quarter of next year?

Dr. Gerald Paul, CEO

Matt, we expect higher sales in Q1 than in Q4. Does this answer your question? Short answer, yes, there will be more capacity and also, I think we can progress in staffing, but also more capacity. So we do expect higher sales in the first quarter than we forecasted and guided to in the fourth quarter.

Matt Sheerin, Analyst

Got it. And just lastly, I know someone just asked about your capital allocation, particularly share repurchases, and I know that's been a big issue with some of your investors. It sounds like you've got a plan in place. So any timeline in terms of when you'll share that?

Dr. Gerald Paul, CEO

Well, we are working on it Matt. Save me from a concrete answer; we are working on it. The Board will decide in the foreseeable future.

Operator, Operator

Your next question comes from the line of David O'Connor.

David O'Connor, Analyst

Maybe one or two questions from my side. Firstly, you mentioned that the metal price has affected some of your costs, which impacted the gross margin. How well can you pass through the price increases you’re experiencing from your metal suppliers? It seems you've been increasing prices, but is it just a timing issue that you're still seeing this as a challenge? Will this change as we progress through Q4? That’s my first question. Secondly, regarding the 12-inch fab in Germany, can you provide an overview of the overall capital expenditure required for that? What is the annual revenue potential that this manufacturing facility could generate? I'm interested in understanding the return on invested capital for this aspect and how you view it.

Dr. Gerald Paul, CEO

We have already raised prices in the second quarter compared to the first, and we are continuing to do so in the third quarter relative to the second. This is an ongoing process, as we have customer contracts that we do not break. Additionally, we have a diverse product portfolio, which can sometimes slow the process down. However, we are actively working on this issue and will keep increasing prices due to significant inflationary pressures, particularly in metals and transportation. We will maintain this pace similar to what you have seen over the past two quarters, which will benefit us. Simultaneously, we are also focusing on cost reduction efforts. Did this address the first part of your question?

David O'Connor, Analyst

Yes, that's very helpful.

Dr. Gerald Paul, CEO

The wafer fabrication facility is crucial for our operations, particularly in the automotive sector where we have a strong presence. Our automotive clients expect a degree of independence from foundries. While we are currently independent, the significant growth in MOSFETs for automotive applications, which we anticipate and which are forecasted realistically, compels us to expand. We are expanding to Itzehoe because we have a skilled team and an established operation there. The expansion will cost roughly between $250 million to $260 million over three to four years, though the exact figure should be viewed flexibly. Vishay is currently a dependable provider of free cash flow, and we expect to remain cash positive each year, which allows us to undertake this project. This expansion is essential for sustaining our fast-growing automotive MOSFET business. As evidenced in this quarter, we've achieved over a 30% gross margin, indicating this is a profitable venture. This decision was made with those considerations in mind. However, building the fabrication facility will take time and the required capital expenditure is significant but manageable for us. It is crucial for continuing our most promising line of business. Did this address the second part of your question?

Operator, Operator

Presenters, there are no further questions at this time. Please continue.