Vishay Intertechnology Inc

NYSE:VSH

Earnings Call Transcript 2020-Q1

[Peter Henrici]

Good morning, and welcome to Vishay Intertechnology’s First Quarter 2020 Conference Call. With me today, are Dr. 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 first quarter 2020 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 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 that provides useful information about the operating performance of our businesses and should be considered by investors in conjunction with GAAP measures that we also provide.

This morning, we filed a Form 8-K that outlines the various variables that impact the diluted earnings per share computation. On the Investor Relations section of our website, you can find the presentation of the first quarter 2020 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]

Thank you, Peter. Good morning, everyone.

[Peter Henrici]

Lori?

[Lori Lipcaman]

Good morning, Peter, or – excuse me, thank you, Peter. Good morning, everyone. I’m 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 Q1 of $613 million. EPS was $0.19 for the quarter. Adjusted EPS was $0.21 for the quarter.

We have identified certain COVID-19-related charges net of certain subsidies, which are incremental to and separable from normal operations. Approximately $3.1 million of these costs are included in cost of goods sold and $0.3 million of these costs are included in selling, general and administrative expenses. These items and their related tax effects are added back when calculating our non-GAAP adjusted EPS.

Also, during the quarter, we repurchased $14.3 million principal amount of our convertible debentures and recognized a U.S. GAAP loss on extinguishment. I will elaborate on these transactions in a few moments.

COVID-19 has had an impact on our business. Some of our facilities had been or are temporarily closed and some are operating at levels less than full capacity. For Q1, the impact on our financial results has generally been limited, as most of our manufacturing facilities have been able to continue operating.

As I stated in the introduction, we have identified certain COVID-19-related charges, incurred net of certain subsidies, which are incremental to and separable from normal operations. This includes wages paid to manufacturing employees during government-mandated shutdowns, additional wages and hardship allowances for working during lockdown periods, cost of cleaning and disinfecting facilities, cost of additional safety equipment for our employees and temporary housing for employees due to travel restrictions.

The quantified COVID impacts I just described only include costs directly attributable to the outbreak and exclude indirect impacts, such as higher shipping costs, due to reduced shipping capacity and estimated missing revenues during the crisis. Dr. Paul will elaborate further on the impact of COVID-19 on our operations and on our expectations for future results in a few moments.

Revenues in this quarter were $613 million, up by 0.5% from previous quarter and down by 17.8% compared to prior year. Gross margin was 24.0%. Adjusted gross margin, excluding the COVID costs, was 24.5%. Adjusted margin – operating margin was 7.7%. Adjusted operating margin, excluding COVID costs, was 8.3%. EPS was $0.19. Adjusted EPS was $0.21. EBITDA was $84 million, or 13.8%. Adjusted EBITDA was $91 million, or 14.8%.

Reconciling versus prior quarter, adjusted operating income Q1 2020, compared to adjusted operating income for prior quarter based on $3 million higher sales, or $4 million, excluding ex rate impacts. Operating income increased by $10 million to $51 million in Q1 2020 from $41 million in Q4 2019.

The main elements were average selling prices had a negative impact of $7 million, representing a 1.1% ASP decline. Volume increased with a positive impact of $7 million, equivalent to a 1.6% increase in volume. Variable costs decreased with a positive impact of $8 million, primarily due to normal manufacturing efficiencies, cost reductions and lower material prices, which more than offset increased labor costs and metal prices.

Fixed costs increased with a negative impact of $7 million, primarily due to higher personnel costs related to the cycling of incentive compensation, more working days in Q1, and wage increases, partially offset by lower travel costs. Inventory impacts had a positive effect of $8 million.

Reconciling versus prior year, adjusted operating income Q1 2020 compared to operating income in Q1 2019, based on $132 million lower sales, or $126 million lower, excluding exchange rate impacts. Adjusted operating income decreased by $57 million to $51 million in Q1 2020 from $108 million in Q1 2019.

The main elements were, average selling prices had a negative impact of $18 million, representing a 2.9% ASP decline. Volume decreased with a negative impact of $47 million, representing a 16.0% decrease. Variable costs decreased with a positive impact of $2 million, increases in labor costs and metal prices were more than offset by cost reduction and lower material prices.

Fixed costs decreased for the pricing [Technical Difficulty] slightly higher personnel costs in total were more than offset by lower travel, repair and maintenance costs and other individually immaterial costs. Inventory impacts had a positive impact of $4 million.

Selling, general and administrative expenses for the quarter were $100 million, which includes $0.3 million of identified COVID costs. SG&A, excluding COVID, was lower than expectations, primarily due to reduced travel cost. For Q2 2020, our expectations are approximately $94 million of SG&A expenses and approximately $380 million for the full-year at constant exchange rates.

The company did not repatriate any additional cash to the U.S. during Q1. Recall that while such amounts are no longer subject to U.S. federal taxes due to U.S. tax reform, they’re subject to foreign withholding and other taxes and some state income taxes. We expect to repatriate about $100 million during Q2, which will complete this program that we initiated in response to U.S. tax reform.

We had total liquidity of $1.4 billion at quarter-end, cash and short-term investments comprised $821 million and usable capacity on the credit facility is approximately $619 million.

During the quarter, we were able to repurchase $14.3 million principal amount of our outstanding convertible debt instruments. This part of the programs we have undertaken over the past few years to retire the convertible debentures, which have certain tax attributes which are no longer efficient at US tax reform. Of the $575 million principal amount of the convertible debentures that was outstanding at the beginning of 2018, only $3 million or less than 1% remain outstanding at the end of Q1 2020.

We continue to be authorized by our Board of Directors to repurchase the remaining convertible debentures, subject to market and business conditions, legal requirements and other factors.

The carrying value of our debt of $552 million is net of the unamortized issuance cost of $16 million and includes $54 million outstanding on our credit facility, $514 million of convertible debt instruments. The principal amount or face value of the converts totaled $603 million, $600 million related to the convertible notes due in 2025 and the remaining convertible debentures due in 2040 and 2041. No principal payments are due until the expiration of the revolving credit facility in June 2024.

Our U.S. GAAP tax rate for Q1 was approximately 24%. Our GAAP tax rate includes the unusual tax benefit related to the settlement of some of the convertible debentures. Our normalized effective tax rate, which excludes these unusual tax items and the tax effects of the COVID costs and early extinguishment of debt was approximately 27% for the quarter. We expect our normalized effective tax rate for 2020 to be between 28% and 29%.

We continue to evaluate the provisions of the U.S. tax law, particularly aspects of the GILTI and BEAT taxes. Generally, at lower levels of pre-tax income, GILTI and BEAT have a larger proportional effect and thus increase our effective tax rate.

Our consolidated effective tax rate is based on an assumed level and mix of income among various taxing jurisdictions. A shift in income could result in significantly different results. Total shares outstanding at quarter-end were $145 million. The expected share count for EPS purposes for the second quarter 2020 is approximately $145 million.

For a full explanation of our EPS share count and variables that impact the calculation, please refer to the 8-K we filed this morning.

Cash flow from operations for the quarter was $34 million. Capital expenditures for the quarter were $24 million. Free cash for the quarter was $10 million. For the trailing 12 months, cash from operations was $251 million. Capital expenditures were $145 million, split approximately for expansion, $90 million; for cost reduction, $10 million; for maintenance of business, $45 million.

Proceeds from sales of property and equipment for the trailing 12 months were less than $1 million. Free cash generation for the trailing 12-month period was $107 million. The trailing 12-month period includes $53 million cash taxes paid related to cash repatriation, $38 million; and U.S. tax reform, $15 million. Vishay has consistently generated in excess of $100 million cash flows from operations in each of the past 25 years and greater than $200 million for the last 18 years.

Backlog at the end of quarter one was at $1.005 billion, or 4.9 months of sales. Inventories increased quarter-over-quarter by $27 million, excluding exchange rate impacts. Days of inventory outstanding were 87 days. Days of sales outstanding for the quarter were 48 days. Days payables outstanding for the quarter were 32 days, resulting in a cash conversion cycle of 103 days.

Now, I’ll turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

[Gerald Paul, President and Chief Executive Officer]

Thank you, Lori, and good morning, everyone. As expected, the first quarter has proven to be the quarter of a beginning recovery from a rather depressed second-half of 2019. Despite imposed plant shutdowns, mainly in China in the context of the coronavirus pandemic, we achieved sales close and profits better than expectations.

Strong orders, in particular, from global distribution and from Asia, as well as continuously normalizing inventories in the supply chain completed the impression of an economic turnaround in our industry.

Vishay in the first quarter achieved a GAAP gross margin of 24.0% of sales, adjusted gross margin of 24.5% of sales, GAAP operating margin of 7.7% of sales, and adjusted operating margin of 8.3% of sales, GAAP EPS of $0.19 and adjusted EPS of $0.21. We in the quarter generated $10 million of free cash.

Let me talk about the economic environment. The development of the global economy for electronic components in the first quarter created ambivalent feelings. On the one hand, strong orders in general, a strong rebound of Asia and a widely normalized supply chain. On the other hand, a rather weak automotive sector and growing concerns for the midterm due to the lockdown of more and more economies around the world, driven by a pandemic.

Backlogs and lead times have normalized in general. The price decline remains, on average, at least on quite normal levels. Some temporary delivery problems due to plant shutdowns were existing – in existence, but no real shortages to be observed. But some nervousness exists of customers after COVID-19 started to impact manufacturing in China.

Let me come to the regions, Americas. We have seen a strong mill, medical and telecom, as well as computing segments, partially driven by corona, driven by the demand for working from home. There was weakness in oil and gas, avionics and partially also in the industrial markets. We have seen distributors starting to restock.

In Europe, there’s a continued weakness of the automotive sector. The demand holds in telecom, medical and in the industrial markets. We have seen as well as in America, this is starting to restock, but also the increase of safety stocks at some OEMs.

In Asia, I think, Asia is ready for a strong rebound after it was definitely ready for a strong rebound after a difficult 2019. In the long time, this is delayed by corona. But I believe that as soon as COVID-19 will subside, Asia is going to lead a global upturn.

Coming to distribution. Global distribution started to recover in the first quarter, with POS up by 12% versus prior quarter, but still 5% below prior year. We have seen a strong POS increase versus prior quarter in the Americas by 18% and in Europe by 16%. POS was also up in Asia by 4%, despite the coronavirus.

The inventory levels continue to normalize noticeably a reduction of $63 million in the first quarter after a reduction of $37 million in Q4 and $36 million in Q3. In Q1, inventory turns in distribution increased to 2.9 from 2.4 in quarter four and 2.7 in prior year. In the Americas, inventory turns were at 1.8 after 1.4 in quarter four and 1.7 in prior year. In Asia, the turns were 3.8 after 3.3 and 3.1. In Europe 3.7 after 2.9 in quarter four and 3.5 in prior year.

Coming to the industry segments. First of all, automotive. We believes that the corona crisis multiplies the problems of an already weakened automotive market. We do expect to see a decline between 20% to 25% in the production of light vehicles that cannot be offset by electronic content increases. The market acceptance of electric vehicles remains limited.

Industrial, it’s a very mixed picture. We have very weak oil and gas sectors and also transportation, quite strong on the other hand, and promising industrial automation. Concerning computing, the remote learning work needs should help laptop and peripheral equipment volume. Server markets are slow. Telecommunication, fixed income is up, supported by needs during the corona crisis. Again, 5G progresses, but slowly.

Consumer white goods grow after corona in China has subsided, TVs are slow. Medical continues to be good to very good. EMS and military. Military remains strong, based on existing and new programs. Commercial avionics is down also due to a major reduction of global air travel.

Coming to Vishay’s business development. Quarter one sales, excluding exchange rate impacts, came in slightly below the midpoint of our guidance, achieved sales of $613 million versus $610 million in prior quarter and $745 million in prior year. Excluding exchange rate effects, sales in Q1 were up by $4 million, or 0.7% versus prior quarter and down versus prior year by $126 million, or 17%.

Book-to-bill in the first quarter recovered to 1.17 from 0.94 in the fourth quarter, mainly driven by distribution, semis and Asia. In some detail, book-to-bill was 1.30 for distribution after 0.94 in the fourth quarter, was 1.04 for OEMs after 0.95, was 1.27 for semis after 0.95 in the fourth quarter, was 1.08 for passives after 0.94 in quarter four. And 1.08 book-to-bill for the Americas after 1.03 in Q4, 1.29 for Asia after 0.96 in quarter four, 1.13 for Europe after 0.88 in the fourth quarter.

The backlog in the first quarter increased to 4.9 months from 4.5 months, 5.3 months in semis and 4.5 months in passives. It’s the effect of an increase of safety stocks to an extent at several OEMs.

There is now a normal level of order cancellations. The price decline in total, I think, is more or less on normal rates, minus 1.1% versus prior quarter, minus 2.9% versus prior year. Semis, in this case, the price decline is somewhat accelerating. We have minus 1.3% versus prior quarter and minus 5% versus prior year. Passives are on a normal level of price decline, minus 1% versus prior quarter, minus 0.9% versus prior year.

Let me come to the highlights of our operations. In the first quarter, we more than offset the normal negative impact on the contributive margin as expected plants, after a phase of adaptation to lower volumes, regained the normal efficiency levels, may I say, as expected.

SG&A costs in the first quarter came in at $100 million, slightly below expectations, when excluding ex rate impacts. Manufacturing fixed costs in the first quarter came in at $128 million also below expectations, again, when excluding exchange rate impacts.

Total employment at Vishay at the end of the first quarter was $22,080, 1.4% down from prior quarter when we had 22,400 employees. Excluding exchange rate impacts, inventories in the quarter increased by $27 million, raw materials by $8 million and WIP and finished goods by $19 million.

Inventory turns in the first quarter remained on a good level 4.2 turns versus 4.3 in prior quarter. Capital spending in the first quarter was $24 million versus $36 million in prior year, $19 million for expansion, $1 million for cost reduction and 4 million for maintenance of business. For the year 2020, we expect CapEx of approximately $110 million in accordance with requirements of the markets.

Concerning cash flow. We generated cash from operations of $251 million on a trailing 12-month basis, including $38 million cash taxes for cash repatriation, and we generated free cash of $107 million on a trailing 12 months basis again, including $38 million cash taxes for cash repatriations.

Coming to our product lines, and first of all, to resistors. With resistors, we enjoy a very strong position in the auto industrial, mill and medical market segments and we do offer virtually all resistor technologies. Vishay’s traditional and, since many years, steadily growing business recovered from low volumes due to recent inventory corrections in the supply chain.

Sales in the – in quarter one were $159 million, up by $13 million, or 9% versus prior quarter and down by $23 million, or 13% versus prior year, always excluding exchange rate impacts. Book-to-bill in the quarter was 1.05 after 0.95 in prior quarter. Backlog in the quarter decreased slightly from 4.7 to 4.4 months, very high still.

Gross margin in the quarter came in at 28% of sales after 24% in prior quarter, which was negatively impacted by low volume and inefficiencies. We see the potential for further improvements of resistors based on more normal volumes.

Inventory turns in the first quarter remained at good level – at a good level of 4.2 after 4.1 in the fourth quarter. We see for resistors modest price decline on a normal level of minus 0.6% versus prior quarter and minus 1.0% versus prior year. Altogether, we continue to see significant opportunities to further expand our traditional business with resistors.

Coming to inductors. The business consists of power inductors and magnetic. Exploiting the growing need for inductors, in general, Vishay developed a platform of robust and efficient power inductor and leads the market technically. With magnetic, we are very well positioned in specialty businesses, demonstrating steady growth since years.

Our since years fast-growing business with inductors represents one of the greatest success stories of Vishay. It presently experiences a temporary slowdown of growth due to the weakness of the auto sector.

Sales of inductors in the first quarter were $74 million, down by $3 million, or 4% versus prior quarter, but up versus prior year by $3 million, or by 4%, again, excluding exchange rate impacts.

Book-to-bill for quarter one was 0.98 after 1.05 in prior quarter. Backlog remains at a high level of 4.8 months, very close to prior quarter, which was at 4.7 months. Gross margin in the quarter was at 31% of sales, somewhat down from a quite exceptional fourth quarter at 34%.

Inventory turns in the quarter were at 4.6 after 4.8 in Q4. We see some increasing price pressure for inductors, minus 2.6% versus prior quarter, minus 2.7% versus prior year. Inductors continue to carry our highest confidence for growth within the passives portfolio.

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 continue to enjoy increasing opportunities in the field of power transmission and of electric cars, namely in Asia, especially in China.

Sales in the first quarter were at $93 million, 1% below prior quarter and 21% below prior year, which excludes extra exchange rate effects. Book-to-bill for capacitors increased in the quarter to a strong level of 1.2 after 0.84 in the fourth quarter. Backlogs increased to a high level of 4.6 months, up from 4.1 months in Q4.

Gross margin in Q1 increased to 22% of sales after a low 18% in prior quarter. A more normal product mix and some inventory build helped the results in the first quarter vis-à-vis in the fourth quarter.

Inventory turns in the quarter remained at an acceptable level of 3.6, as compared to 3.7 in Q4. Stable prices in capacitors, minus 0.6% versus prior quarter and plus 8% versus prior year. We continue to benefit in capacitors from strong mill markets and from the ongoing need of grid expansions, mainly in China.

Coming to opto products, Vishay’s business with opto products consists of infrared emitters, receivers, sensors, and couplers, as well as of LEDs for automotive applications. Sales in the quarter were $54 million, 6% above prior quarter, but 10% below prior year, which excludes ex rate impacts.

Book-to-bill in the first quarter was 1.4 after 1.11 in prior quarter, principally indicating a strong turnaround of the business after very problematic year 2019. We like to see growth there, especially in specialty products like in sensors. Presently, extended lead times, influenced by plant shutdowns in Asia, backlog is at a very high level of 4.6 – 5.6 months, excuse me, after 4.7 months in the fourth quarter.

Gross margin in the quarter was at 27% of sales, after disappointing 20% in the fourth quarter. We had better efficiencies, a more normal product mix and some inventory build, all that helped return to a more normal profitability level.

Inventory turns were very high at 5.7 in the first quarter, as compared to even higher 6.0 in the fourth quarter. Price decline was normal for opto products, minus 0.8% versus prior quarter, minus 2.2% versus prior year. We are confident that going forward, opto products again will contribute noticeably to our growth. We are in the process to modernize and expand our Heilbronn fab in Germany.

Diodes. Diodes for Vishay represents 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 since years.

After two record years, volume in diodes during 2019 suffered the most of all divisions from inventory reductions in the supply chain. Q1, to a degree, has still been impacted by that. Sales in the quarter were $115 million, down by 6% versus prior quarter and by 31% below prior year, which excludes exchange rate effect again.

Book-to-bill in the first quarter was 1.36 after 0.88 in Q4, which principally indicates a turnaround. Backlog increased to a very high level of six months from 4.7 months in prior quarter. This was influenced also by temporary plant shutdowns in China.

The gross margin of diodes in Q1 remained on the low level of 17% of sales, as compared to 16% in Q4. with higher volumes, the division, without any doubt, will return to higher profitability levels.

Inventory turns remained at a good level of 4.1 after 4.4 in Q4. The ASP decline currently runs above traditional levels, minus 2.5% versus prior quarter and minus 5.6% versus prior year. But we do expect normalization again in the course of a market recovery.

Last but not least, the MOSFETs. Vishay continues to be one of the market leaders in MOSFETs transistors. MOSFETs over the last years developed a strong and growing position in automotive, which will provide the successful future for this product line. MOSFETs in the first quarter still have experienced some impact of the destocking activities worldwide.

Sales in the quarter were $117 million, 0.7% above prior quarter, but 15% below prior year without exchange rate impacts. Book-to-bill ratio in the quarter was 1.12 after 0.94 in Q4. Backlogs remain high at 4.5 months, as compared to 4.2 months in the fourth quarter.

Gross margin in the quarter was at 24% of sales on the level of prior quarter. Inventory turns in Q4 were at acceptable 3.6, as compared to 3.7 in Q4. Price decline was normal, minus 0.2% versus prior quarter, minus 5.8% versus prior year. We believe that MOSFETs continue to be key for Vishay’s growth going forward.

Let me summarize. The first quarter for Vishay has been operationally fairly successful, despite quite severe headwinds for our plants in China. The expected turnaround of the business after the normalization of the supply chain, principally became visible for all product lines. We would be in the position to exploit it.

Unfortunately, our industry, like so many others, now is confronted with a completely unknown challenge, a global pandemic that leads to unforeseeable lockdowns of entire economies that frightens peoples personally. The end of the problem realistically cannot be forecasted at this point.

Vishay’s answer to the present challenges, nevertheless is the same as it has been in critical times before. Our plants will react quickly and professionally to changes in demand, trying to minimize inefficiencies and inventory build. Doing so, we naturally will take all necessary steps to safeguard health and safety of our employees around the world.

We will watch tightly all fixed costs and CapEx without jeopardizing our essential long-term strategies. We, in general, will focus on free cash generation, even more than we normally and quite successfully, I believe, too.

Vishay is financially very solid. And after all electronics – respectively electronic components for the mid and the long-term is a good place to be. For the second quarter, we despite substantial uncertainties, of course, guide to a sales range between $540 million and $580 million at a gross margin of between 21% and 22%.

Thank you. Peter, I give it back to you.

[Peter Henrici]

Thank you, Dr. Paul. We’ll now open the call to questions. Natalia, please take the first question.

[Operator]

[Operator Instructions] Your first question is from the line of Ruplu Bhattacharya with Bank of America.

[Ruplu Bhattacharya, Bank of America Merrill Lynch]

Hi, thank you for taking my questions. Dr. Paul, the first question at a high-level, you’re guiding pretty detailed for calendar 2Q. The revenue range is still $40 million, which you’ve used in the past couple of quarters as well. The gross margin range is a little bit higher at 90 bps plus, minus. So at a high-level, can you just talk about what is giving you confidence to give guidance for calendar 2Q with given all the uncertainty that there is in the macroeconomic environment? Thank you.

[Gerald Paul, President and Chief Executive Officer]

First of all, we are already within the second quarter. We have some picture of the second quarter. And I think we have figured in the uncertainties to an extent. Automotive will be especially weak this quarter, will very likely recover afterwards. So we – I think, we have included most of the effects we know. So we believe that we can still stay with our plus-minus 20 to the midpoint.

Concerning the variable margin, but concerning the gross margin spread, it’s a little more – a you observed properly, it’s a little broader than we normally do, because at such low levels, we had to anticipate, at very low volume, some impact on the contributive margin percent. That means a very low volume. It’s very difficult to keep the efficiency completely up. So this is why we – our spread is somewhat broader. Did that answer your question?

[Ruplu Bhattacharya, Bank of America Merrill Lynch]

Yes, it did. Thanks for that. For the second question, I’d like to ask about raw material prices. Price of base metals has come down, but some things like palladium are still high and we’re also hearing about tantalum prices starting to rise. So how do you see these raw material prices varying? And how do you think they impacted margins in calendar 1Q and how do you think they’re going to impact going forward?

[Gerald Paul, President and Chief Executive Officer]

We analyze that. In Q1, there was all together on materials, practically no impact vis-à-vis quarter four, practically no change. And also going forward, we don’t see major changes. There is some ups and some downs in the materials. But if you take our mix, taking also the contracts we have, we don’t expect major changes going forward for the next time at least.

[Ruplu Bhattacharya, Bank of America Merrill Lynch]

Okay. And my last question, I’d like to ask about inventory in the distribution channel. For the last couple of quarters, you’ve given us some estimate of how much excess inventory there has been of Vishay inventory in the channel. Do you think that has normalized? Or do you think there is still excess inventory in the channel that needs to be worked off? Thank you.

[Gerald Paul, President and Chief Executive Officer]

Honestly, I’m even proud a little our forecasting of that. It happened like forecasted, in fact. We have reduced since the beginning something like $130 million, and this is – was the number, if you can recall, which I said from the beginning is too much. I believe in that – in so many words that we’re back to quite normal.

[Ruplu Bhattacharya, Bank of America Merrill Lynch]

Okay. Thank you for all the details.

[Operator]

Your next question is from the line of Karl Ackerman with Cowen.

[Gerald Paul, President and Chief Executive Officer]

Hello?

[Operator]

Karl Ackerman, your line is open.

[Karl Ackerman, Cowen International Ltd.]

Yes. Yes, sorry. I had on mute. Apologize. Hey, good morning, everyone. Maybe just going back to the last question on distribution. You referenced that it’s at a “normal level today.” But do you think there was double ordering at distribution this quarter caused by uncertainty relating to COVID-19? Because while it’s great – it’s certainly great to see backlog improve about $100 million sequentially, your outlook seems at – a bit at odds with some of the bookings in backlog?

[Gerald Paul, President and Chief Executive Officer]

You can never exclude that. There was, as I said, the distribution in general trade, but in a modest form, I think, to restock, because you don’t have everything on stock what you need. So a part of that is, for sure, related to inventory increase in distribution, whether or not this was double ordering.

We never found the market so hot in the first quarter. Was that I never saw real shortages. Of course, there were plant closures here and there and competition, of course, suffered from the same. So there were some kind of nervousness to be seen at some buyers. But nevertheless, I think, overall, I do not believe in a broad double ordering in quarter one.

[Karl Ackerman, Cowen International Ltd.]

Got it. That’s helpful. Maybe just on your second quarter outlook, I guess, how are you thinking about the relative positioning of the end markets you serve in Q2? Clearly, automotive production is being impacted, but I guess I was a bit surprised to hear in your prepared comments that server markets are slowing and that networking infrastructure is slow. Could you just expand on what you’re seeing in those two markets, particularly as it relates to Q2? Thank you.

[Gerald Paul, President and Chief Executive Officer]

No, I think it was a misunderstanding. At least, I didn’t want to say that. I hope – anyway. We believe not a major change to the negatives here, no.

[Karl Ackerman, Cowen International Ltd.]

No, it’s – got it. Okay.

[Gerald Paul, President and Chief Executive Officer]

In fact, we will continue to be relatively strong, given the special needs of the situation around corona.

[Karl Ackerman, Cowen International Ltd.]

Got it.

[Gerald Paul, President and Chief Executive Officer]

5G I said. Oh, maybe this was the misunderstanding. I said 5G develops, but slowly, but this is effect.

[Karl Ackerman, Cowen International Ltd.]

Perfect. I’ll see the floor. Thank you.

[Gerald Paul, President and Chief Executive Officer]

Okay.

[Operator]

Your next question is from the line of Matt Sheerin with Stifel.

[Matthew Sheerin, Stifel Nicolaus]

Yes, thank you, and good morning, Dr. Paul. Just another question if I can regarding the booking trends and the very strong book-to-bill you saw not just in distribution, but in other markets. Could you tell us what the book-to-bill levels relatively are today versus at the end of the quarter?

[Gerald Paul, President and Chief Executive Officer]

April was at 1.01. So it doesn’t hold back, it was not such a pretty situation in quarter one, which again was – part of it was restocking. They gave orders for restocking. So this discontinued, but it’s 1 still April was 1.

[Matthew Sheerin, Stifel Nicolaus]

Right apparently. Okay. And then as you look at your order book now, are you starting to see cancellations and push-outs?

[Gerald Paul, President and Chief Executive Officer]

No, in reality, cancellations, which were quite high, say, half-a-year ago, nine months ago very high, which we expected to happen, given all the additional orders we got before. In the meantime, cancellations are quite normal. Absolutely normal. We watch that obviously.

[Matthew Sheerin, Stifel Nicolaus]

Okay. And I know that you don’t have much visibility beyond the next couple of months. But as you look to the September quarter, given the big slowdown in auto production, with all the geographies being affected, would you expect a bit of a spike in orders in the September quarter? Or is there a concern about just end demand being weak and production coming back at a much slower pace?

[Gerald Paul, President and Chief Executive Officer]

Well, when you listen to your automotive customers and, again, they will not tell us differently from competition. I believe that they expect the low point of the development in automotive would be quarter two. After that, they basically indicated that they – we will count on more normal volumes. So we would expect orders from automotive to restart already in Q2. So we will see what – how accurate their forecast is, but it was a very distinct statement not only by one customer.

[Matthew Sheerin, Stifel Nicolaus]

Okay. And just lastly, if you look at your margin outlook, it basically reflects your normal 45% to 50% margin contribution. And you haven’t – it doesn’t sound like you’ve implemented any incremental cost-cutting programs. Is that, because you do think that things will recover in the second-half? And is there a plan to implement additional cost-cutting if things don’t rebound?

[Gerald Paul, President and Chief Executive Officer]

It’s obvious as we’ve done in the past, Matt, as – if things really turn sour, there will be additional cost cutting in the fixed cost area. We will, on the other hand, be very careful not to destroy our plans, not to destroy, not to damage our most important projects. But we have done that in the past. We always react on fixed costs. But there are always ways to do it without destroying your structure, and we would, for sure.

[Matthew Sheerin, Stifel Nicolaus]

Okay. Thank you.

[Gerald Paul, President and Chief Executive Officer]

Thank you.

[Operator]

[Operator Instructions] Your next question is from the line of David O’Connor with BNP Paribas.

[David O’Connor, Exane BNP Paribas]

Great. Good morning, and thanks for letting me ask the question. Maybe one or two from my side. Dr. Paul, you mentioned through April, the book-to-bill was at parity at 1.0.

[Gerald Paul, President and Chief Executive Officer]

Yes.

[David O’Connor, Exane BNP Paribas]

Can you give us the breakdown on the geographical trend there? Have you started to see the recovery coming through in China already? And maybe if you can give us the book-to-bills for the U.S. and Europe as well?

[Gerald Paul, President and Chief Executive Officer]

Unfortunately, I don’t have the split available. But it’s obvious that Asia pulls the economy at the moment. It’s quite obvious that the strong input of quarter one and that this will not be a different picture in April came from Asia. Europe is relatively the weakest, I would say. But again, I don’t have the numbers precise.

[David O’Connor, Exane BNP Paribas]

Okay. No problem. Thanks for that. And maybe then on the server market, you talked on the server market as it was slow, I think, from your prepared remarks. When we look at some chip makers there reporting strength in that area, given the working from home trends. Can you talk us more about how you reconcile that or some people talking it stronger? Or is that your positioning within the server supply chain?

[Gerald Paul, President and Chief Executive Officer]

I think it was a misunderstanding, I said it before. I even said it was strong because of these needs, corona-driven. I said it was kind of misunderstood. What is relatively slow, but as I said is the fact is the development of 5G is, it goes slowly. But the remainder is relatively strong because of the effect with the reasons you were mentioning. So maybe it was a misunderstanding, I corrected it before.

[David O’Connor, Exane BNP Paribas]

Okay, got it. Thank you for that. Maybe as the last question. On the inventory side as distributors, do you think coming out of the corona crisis, that distributors will start to hold structurally more inventory? Or do you think this – that was as close as possible return to normal ordering patterns and inventory levels? Thank you.

[Gerald Paul, President and Chief Executive Officer]

Well, after any crisis I’ve seen in my relatively long career, there was always an unexpectedly fast and strong recovery and distribution orders, we’re always leading those things. So I would expect the same to happen again after corona, depending how fast it ends, kind of, but I think we will see a steep recovery after the corona crisis.

[David O’Connor, Exane BNP Paribas]

Very helpful. Thank you.

[Operator]

There are no further questions. Are there any closing remarks?

[Peter Henrici]

This concludes our first quarter conference call. Thank you for your interest in the Vishay Intertechnology.