威世科技 (VSH) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Vishay Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Peter Henrici, Head of Investor Relations. Please go ahead, sir.

Thank you, Regina. Good morning, and welcome to Vishay Intertechnology's Third Quarter 2020 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 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 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.

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 a presentation of the third 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.

Thank you, Peter, and 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 $640 million, significantly higher than our original expectations, as preannounced on October 14. EPS was $0.23 for the quarter. Adjusted EPS was $0.25 for the quarter. During the quarter, we repurchased another $59 million principal amount of convertible notes due 2025 and recognized a U.S. GAAP loss on extinguishment. I will elaborate on these transactions in a few moments.

On October 1, 2020, we completed the acquisition of the worldwide business of Applied Thin-Film Products. This niche acquisition will complement our existing thin film business and strengthen our competitiveness in this market. Due to the timing of the acquisition at the end of the fiscal quarter, ATP had no impact on Q3 results.

The macroeconomic effects of COVID-19 continue to impact our business and our financial results. Similar to Q1 and Q2, we have identified certain COVID-19-related charges, net of certain subsidies, which are directly attributable to the COVID-19 outbreak. These items were insignificant to Q2 and Q3 results, but are added back when calculating our non-GAAP adjusted EPS for comparability. Such measures exclude indirect impacts, such as general macroeconomic effects of COVID-19 on our business and higher shipping costs due to reduced shipping capacity.

Revenues in the quarter were $640 million, up by 10% versus previous quarter and up by 1.9% compared to prior year. Gross margin was 23.7% and adjusted gross margin, excluding COVID costs, was also 23.7%.

Operating margin was 9.6%. Adjusted operating margin, excluding COVID costs, was also 9.6%. The EPS was $0.23, adjusted EPS was $0.25. EBITDA was $94 million or 14.7%, adjusted EBITDA was $97 million or 15.2%.

Reconciling versus prior quarter, adjusted operating income quarter 3 2020 compared to adjusted operating income for prior quarter, based on $58 million higher sales or $47 million excluding exchange rate impacts, adjusted operating income increased by $20 million to $61 million in Q3 2020 from $42 million in Q2 2020. 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 $24 million, representing a 9.4% increase. Variable costs decreased for the positive impact of $6 million, primarily due to volume-related efficiencies. Inventory impacts had a negative effect of $3 million.

Reconciling versus prior year, adjusted operating income Q3 2020 compared to operating income in Q3 2019, based on $12 million higher sales or $3 million excluding exchange rate impacts, adjusted operating income increased by $3 million to $61 million in Q3 2020 from $58 million in Q3 2019.

The main elements were average selling prices had a negative impact of $18 million, representing a 2.7% ASP decline. Volume increased with a positive impact of $7 million, representing a 3.4% increase. Variable cost decreased with a positive impact of $13 million. Manufacturing efficiencies, cost reductions and lower material prices more than offset increases in metal prices and labor costs.

Fixed cost decreased with a positive impact of $3 million, primarily due to lower travel costs. Selling, general and administrative expenses for the quarter were $90 million, which includes a net benefit of $0.4 million of subsidies in excess of identified COVID costs.

For Q4 2020, our expectations are approximately $94 million of SG&A expenses at constant exchange rates.

During the quarter, we were able to repurchase $59 million principal amount of our outstanding convertible notes due 2025. Year-to-date, we have repurchased $165 million principal amount of the convertible notes due 2025. The year-to-date average repurchase price for the notes was 95.3% of face value.

The U.S. GAAP loss on extinguishment was primarily due to reduced market interest rates since the initial issuances, which is a key assumption in bifurcating between the debt and equity attributes. By reducing our fixed-term debt, the repurchase of the convertible notes provides us with future flexibility to better utilize our revolver and to adjust our debt levels as necessary.

We continue to be authorized by our Board of Directors to repurchase up to an additional $65 million of convertible notes due 2025 as well as the remaining $3 million of convertible debentures subject to market and business conditions, legal requirements and other factors.

We had total liquidity of $1.4 billion at quarter end. Cash and short-term investments comprised $712 million and the usable capacity on credit facility is approximately $672 million. Our debt at quarter end is comprised of the convertible notes due 2025 and the remaining convertible debentures due in 2040 and 2041.

The principal amount or face value of the converts totaled $468 million, $465 million related to the notes due 2025 and $3 million related to the remaining debentures. The current value of $392 million is net of unamortized discounts and debt issuance costs. There were no amounts outstanding on our revolving credit facility at the end of Q3. However, we did utilize 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 expect interest expense for Q4 to be approximately $7 million, excluding the impact of any additional convertible note repurchases in Q4. As announced last year, we are implementing global cost reduction programs, which are expected to be fully implemented by the end of 2020.

The programs are intended to provide management rejuvenation and to lower costs by approximately $15 million annually when fully implemented.

The year-to-date effective tax rate on a GAAP basis was approximately 23%. The year-to-date normalized tax rate was approximately 24%. For the quarter, this mathematically yields a tax rate of approximately 26% for both GAAP and normalized. Our year-to-date GAAP tax rate includes the unusual tax benefit related to the settlement of some of the convertible debentures in Q1.

Our year-to-date normalized rate excludes the unusual tax items, as well as the tax effects of the pretax loss on extinguishment of debt, the identified COVID costs and the Q2 restructuring charge.

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. We expect our normalized effective tax rate for 2020 to be between 23% and 25%.

Total shares outstanding at quarter end were 145 million. The expected share count for EPS purposes for the fourth 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 filed this morning.

Cash from operations for the quarter was $64 million. Capital expenditures for the quarter were $22 million. Free cash for the quarter was $42 million. For the trailing 12 months, cash from operations was $274 million; capital expenditures were $127 million; split approximately for expansion, $87 million; for cost reduction, $7 million; for maintenance of business, $33 million.

Free cash generation for the trailing 12-month period was $147 million. The trailing 12-month period includes $16 million cash taxes paid related to the cash repatriation, plus $15 million cash taxes paid for the current year 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 25 years and greater than $200 million for the last 18 years.

Backlog at the end of quarter 3 was at $928 million or 4.3 months of sales. Inventories decreased quarter-over-quarter by $15 million, excluding exchange rate impacts. Days of inventory outstanding were 83 days, days of sales outstanding for the quarter were 45 days, days of payables outstanding for the quarter were 29 days, resulting in a cash conversion cycle of 99 days.

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

Thank you, Lori, and good morning, everybody.

Despite ongoing negative impacts of the pandemic Vishay's worldwide business in the third quarter has developed better than expected. After a historical drop, in particular, of the automotive segment in the second quarter, we experienced a strong recovery in the third quarter. Having adapted costs and manufacturing capacities during the second quarter, we, in the third quarter, enjoyed to the full impact of the economic upturn.

We achieved a gross margin of 23.7% of sales, an operating margin of 9.6% of sales, earnings per share of $0.23, and adjusted earnings per share of $0.25. The generation of free cash remained on a good level of $42 million in the quarter.

Let me describe the economic environment as we see it. Indeed, as I said, the economic environment in the third quarter improved substantially, mainly driven by this unexpectedly abrupt recovery of the automotive sector but also by continued strong Asian markets.

With sales and orders picking up simultaneously, total backlogs remained virtually flat on a high level. 13-week backlogs, on the other hand, were increasing steadily in the course of the quarter, which is a principally encouraging sign. Lead times start to stretch out in general, but no real shortages of supply are visible yet. Cancellations have dropped to a normal level, and we see quite normal price pressure in general.

Let me come to the regions. The Americas have experienced a significant recovery of the automotive market, but at the same time, a COVID-related disruption of the commercial aircraft production. POS and POA sales in the Americas were robust.

Asia continued its strong recovery, in particular, China. There has been improvement of virtually all market segments, especially for computers and consumer-related products, and the high demand in Asia helped to burn distribution inventories.

In Europe, after a historical disruption in the second quarter, European automotive markets recovered steeply during the third quarter. Industrial markets stabilized, driven by growth in smart home automation and new alternative energy projects. Like in the United States, the commercial aircraft industry also in Europe suffers extremely.

Some comments on distribution. Global distribution improved sales in the third quarter by 8% versus prior quarter, remaining slightly below prior year by 2%.

POS increased versus prior quarter in the Americas by 12%; in Asia, by 10%; and in Europe, by 4%. Inventories at distributors in the third quarter decreased by $18 million after an increase of $29 million in the second quarter.

Inventory returns and distribution improved to 2.8 from 2.7 in Q2 and from 2.4 in prior year. In the Americas, we have seen 1.5 turns after 1.4 in Q2 and 1.5 in prior year. In Asia, 4.3 turns after 4.1 and 3.3 in prior year. In Europe, 3.0 turns, the same as in quarter 2 and in comparison to 2.9 in prior year.

I think we can say that Asian distribution year-over-year is in a substantially better inventory position now. And all in all, distribution remains quite confident.

Let me comment on the most important industry segments. After a massive decline in the second quarter, automotive markets recovered strongly in the third quarter beyond our expectations. The supply chain of vehicles appears to be depleted. Electric vehicles continue to show high growth.

A mixed picture we perceive for the broad industrial markets. Home-related technologies benefit, whereas power transmission and other large government projects suffer at this point, there are delays.

Factory automation remains strong, whereas the oil and gas sector does not show yet signs of recovery. Remote learning and work from home drives demand in notebooks and service.

5G programs start to support the demand for fixed telecom equipment, whereas smartphone sales continue to be depressed.

Overall, medical continues strong. military markets remain positive, but commercial avionics is in a substantial crisis, which may last for some time. And we observed a substantial ramp-up of air conditioning production and gaming.

Let me comment on Vishay's business development in the third quarter. As indicated, the third quarter sales, excluding exchange rate impacts, exceeded our original guidance significantly, mostly due to a faster-than-expected recovery of the automotive sector, but also due to relatively stable sales to distribution.

We achieved sales of $640 million versus $582 million in prior quarter and $628 million in prior year. Excluding exchange rate impacts, sales in the third quarter were up by $47 million or 8% versus prior quarter and up versus prior year by $3 million or 0.5%.

The book-to-bill ratio in Q3 was 0.99 as compared to 0.82 in the second quarter. 0.99 for distribution after 0.75 in the second quarter, 1.1 for OEMs after 0.93. 0.98 for semiconductors after 0.81 in the second quarter, 1.0 for passives after 0.83. 0.92 for the Americas after 0.81 in Q2, 1.04 for Asia after 0.86. 1.01 for Europe after 0.78.

The backlog in the third quarter decreased to a still historically high level of 4.3 months from 4.7 months, 4.3 months in semis and 4.4 months in passives.

There was normal price pressure in general, minus 1.1% versus prior quarter and minus 2.7% versus prior year. Some acceleration for the semiconductors, minus 1.2% versus prior quarter, minus 4.1% versus prior year. And quite normal price decline for the passives, minus 0.9% for prior -- versus prior quarter and minus 1.3% versus prior year.

Some highlights of operations. In the third quarter, we again were able to offset the normal negative impacts on the contributive margin as well as temporarily increased logistics costs. Despite corona, virtually all plans of Vishay in the third quarter were able to operate in a normal fashion.

Adjusted SG&A costs in the third quarter came in at $91 million, very close to our expectations. Manufacturing fixed costs in the third quarter, were at $127 billion, also according to our expectations.

Total employment that we share at the end of the third quarter was 21,605, 6.5% down from prior year.

Excluding exchange rate impacts, inventories in the quarter decreased by $15 million, raw materials by $5 million and finished goods by $10 million. And this includes the additional inventories of our acquisition ATP of $3 million.

Inventory turns in the third quarter returned to a good level of 4.4 after the 3.9 in quarter 2. Capital spending in the third quarter was $22 million versus $30 million in prior year, $15 million for expansion, $2 million for cost reduction, and $5 million for the maintenance of the business.

For 2020, we continue to expect CapEx of approximately $110 million, quite in accordance with the requirements of our markets.

We generated cash from operations of $274 million on a trailing 12 months basis, including $16 million cash taxes paid for cash repatriation. And we generated free cash of $147 million on a trailing 12-month basis, again, including $16 million cash taxes for cash repatriation.

Let me comment on our major product lines, and I start out as always with resistors. With resistors, we enjoy a very strong position in the auto industrial, mil and medical market segments, and we offer virtually all resistor technologies.

Vishay is traditional, and traditionally growing business in the second quarter had suffered quite substantially from the weakness of the automotive market sector, but is now in process to recover.

Sales in the third quarter were $145 million, which is up by $6 million or 5% versus prior quarter, down by $11 million or 7% still versus prior year, all this is excluding exchange rate impacts.

Book-to-bill in the quarter was 1.06 after 0.73 in Q2. Backlog in the quarter remained at a high level of 4.4 months.

Gross margin of resistors in the quarter improved to 24% of sales, up from 23% in prior quarter. And all this despite some inventory reduction in Q3.

Inventory turns in Q3 were at a satisfactory level of 4.1 after 3.7 in prior quarter. We saw normal price decline but some temporary impact of customer mix, minus 0.7% versus prior quarter, minus 2.5% versus prior year.

In Q3, we completed the acquisition of ATP, a well-established and financially successful producer of specialty thin film substrates with annual sales of about $20 million. The acquisition further strengthens Vishay's position in specialty resistors. We continue to see significant opportunities to further expand the resistor business in the midterm.

Coming to inductors. The business consists of power inductors and magnetics. Exploiting the growing need for inductors in general, Vishay developed a platform of robust and efficient power inductors and leads the market technically. With magnetics, we are very well positioned, and specialty businesses is showing steady growth since years. After a short slowdown in the second quarter, inductors already, in Q3, were back to their impressive long-term growth path.

Sales of inductors in Q3 were $79 million, up by $14 million or 21% versus prior quarter and up by prior year by $5 million or 7%, excluding exchange rate impacts.

Book-to-bill in the third quarter for inductors was 0.96 on the level of prior quarter. Backlog in the third quarter has come down to a still high 4.3 months from an artificial spike even of 5.3 months in prior quarter.

As a result of higher volume, gross margin in the third quarter improved further to 33% of sales from 31% in prior quarter. Inventory turns in the quarter improved sharply to 4.9 after 3.8 in prior quarter. There is now a normal price decline year-over-year, a price decline of 2.5%. Vis--vis prior quarter, we saw some impact of customer mix. We had a price decline vis--vis prior quarter of 2.5%.

Inductors continue to carry our highest confidence for growth within the passives portfolio.

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 electrocars, namely in Asia, respectively in China. Also, capacity had faced a weak second quarter, but started to recover in Q3.

Sales in Q3 of capacitors were at $93 million, $7 million or 8% above prior quarter, but $7 million or 7% below prior year, which excludes exchange rate effects.

Book-to-bill in the third quarter was 0.95 after 0.9 in the prior quarter. Backlog decreased slightly to a still high level of 4.4 months, down from 5.0 months in the second quarter.

Mostly, due to higher volume, gross margin in the third quarter improved to 20% of sales from 18% in prior quarter. Inventory turns in the quarter improved to 3.7 from low 3.3 in the second quarter.

We have seen stable increasing selling prices, [0.1%] versus prior quarter and [2%] (corrected by company after the call) versus prior year. We will continue to benefit from strong mil markets and the ongoing need for grid expansions, mainly in China.

Coming to the Opto line. Business with Opto products consists of sensors, infrared emitters, receivers, couplers and LEDs for automotive applications. Sales in the quarter were $65 million, 29% above prior quarter and 25% above prior year, which excludes exchange rate impacts, a really steep recovery.

Book-to-bill in the third quarter was 0.97, up 0.96 in prior quarter. Backlog has reduced to a still high level of 4.6 months after 6.1 months in the segment quarter.

Driven by better volume, better efficiencies and a better product mix, gross margin in the quarter spiked to 33% of sales, coming up from 24% gross margin in prior quarter.

There were good inventory turns of 5.4 in Q3 as compared to 4.9 in Q2. Price decline was low, minus 0.2% versus prior quarter, minus 0.6% versus prior year. We are confident that Opto products going forward will contribute noticeably to our growth. We are in the process, as you know, 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 has kept growing steadily and profitably over years.

Diodes since a few quarters had suffered from too much inventory in the supply chain and from the weakness of its main markets. Apparently, the business now approaches a phase of recovery.

Sales in the quarter were $124 million, down by 2% versus prior quarter and down by 1% versus prior year, excluding exchange rate effects. Book-to-bill in the quarter was 1.05 as compared to 0.61 in the second quarter. Backlog increased to 4.7 months, up from 4.5 months in prior quarter. And we are on a historical high.

Gross margin in the quarter reduced to 17% of sales from 20% in the second quarter. Temporarily increased price pressure in combination with some inefficiencies related to the start-up of the new Taiwanese plant burdened results in the quarter.

Inventory turns improved to 4.4 after 4.2 in the second quarter. Some acceleration in price decline, minus 1.9% versus prior quarter, minus 4.5% versus prior year. We expect the profitability of the diodes line to return to more historical levels with volume normalizing.

Last but not least, the MOSFET line. Vishay is one of the market leaders in MOSFET transistors. And with MOSFETs, we enjoy a strong and growing market position in automotive, which in view of an increasing use of MOSFETs in automotive will provide a successful future.

Sales in the quarter were $134 million, 11% above prior quarter and 5% above prior year, excluding exchange rate effects. The book-to-bill ratio was 0.93 in the quarter after 0.97 in Q2. Backlog were at a healthy 3.7 months as compared to 4.4 months in Q2.

Gross margin in the quarter was at 22% of sales, slightly below Q2 at 23%. Results versus prior quarter were burdened by a temporarily less beneficial product and customer mix, the impact of inventory reduction and higher metal prices. Inventory turns in the quarter were at 4.4 as compared to 3.7 in the second quarter. Price decline for the MOSFETs was normal, minus 1.2% versus prior quarter and minus 5.7% versus prior year.

So it's obvious that MOSFETs remain key for Vishay's growth going forward.

Let me summarize. The unprecedented pandemic continues to impact very many segments of the world economy. Nevertheless, electronics apparently is on the way to recover in a broader way from a very difficult second quarter. Recovery, principally, has been expected for the third quarter, but it happened faster and more steeply than anticipated. Obviously, the very positive fundamentals of electronic growth prevail for another time.

Vishay, like during former economic downturns, has reacted quickly and professionally by controlling fixed costs and inventories and by adapting manufacturing capacities, and we are ready to exploit now the next upturn to the full extent. Our business model has not changed and continues to be successful. We will continue to focus on profitability and cash generation, while neither neglecting our essential long-term strategies nor, of course, safeguarding the health and well-being of our employees.

Corona remains under good control in our plants and offices. For the fourth quarter, we guide to a sales range of $620 million to $660 million and a gross margin of 23.9%, plus/minus 70 basis points.

Thank you. Peter?

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

Our first question will come from the line of Ruplu Bhattacharya with Bank of America.

Dr. Paul, in the past, you've talked about some excess inventory in the in the distribution channel. This quarter, you saw a reduction, I think you said of $18 million worth of inventory.

So with that, would you characterize the inventory at distribution as normal? And overall, when you look at supply/demand in the industry, how would you characterize that?

I think really, the inventory levels at distribution have come down in the rest of world to a normal level, and I would even say in the Asian world, we would expect some restocking, as a matter of fact. You know how long it took to get there since a long time. And I would dare to say that -- you never know it completely but I would dare to say that the inventory, the supply chain is very normal at this point.

Okay. And then maybe on the margin side, Optos are really good margins this quarter. Should we think that, that level of margin can persist going forward?

And the same question for diodes, I think you had some -- gross margins came in at 17%. So how would you see those margins progressing?

I used my words carefully in Opto I said spiked to 33%, and we had the same discussion before. I believe we just reconfirmed our optimism for the line. What is sustainable at these levels of sales is the high end of the 20s. The 33% was also some luck included concerning product mix, as a matter of fact. But high 20s and, which is a nice development vis-à-vis the last 2 years, I would say, is sustainable at present sales levels.

Concerning the diodes, a little disappointing, but it's a pure game of volume. You can calculate, if you went back, and we expect to do so -- to volumes, which we had before, very realistically, 1 year ago, 1.5 years ago, you would return to gross margins, like, say, 23% of sales. And this was always our expectation for this commodity line, which grows.

Got it. And maybe just for my last question. Can you maybe talk about your capital allocation priorities as we sit here? How do you think about reinvesting in the business versus further M&A and buybacks? And any thoughts on the dividend?

So we have always all these possibilities in mind. We invest in the business, we already, we increased the capital spending, which make our plans for next year. We do not miss sales because of a lack of equipment, but at this point in time, you never know all the details on that, but principally, we invest enough. We pay the dividends. And all this is, of course, a decision of the Board, but we continue to pay the dividends. And we also evaluate all kinds of other uses of the produced cash. So no change.

And congrats on the strong results in the quarter.

Thank you.

Our next question will come from the line of Karl Ackerman with Cowen.

Two questions, if I may. I guess, Dr. Paul, it's encouraging to see the implementation of your M&A strategy, especially in the current environment. Could you explain the deal rationale for the Thin-Film Products business? And then perhaps any synergies with your portfolio or customer base?

And is there potential for more deal activity in the near term, given what appears to be a stabilizing backlog?

Can I start with the end? So anyway, it's absolutely true, and we said it before. We continuously look for specialty businesses, not necessarily only resistors, but also resistors. And I think this is an intelligent way into the future. So we will try to continue. Of course, it depends on the opportunities, but we are looking continuously for that. And in the case of ATP, I think I'm very happy that we acquired the company. You know we are a leader in resistors, and we offer, and I praise it every quarter, all technologies in resistors. So this one just added very nicely to our technology basis. It complements other parts of Vishay, which we already have on board, and we can synergize the efforts. I think we will be a very strong -- we will become very strong in offering thin film substrates on the market. I'm very happy about the whole move. And it's profitable, quite profitable. It's north of 35% growth.

Understood. For my follow-up, the supply chain has flexed considerably on demand degradation in the June quarter and now on a very strong sequential improvement in the third quarter.

First, why shouldn't pricing improve for your products, if the supply chain remains stretched and backlog has come down considerably from the earlier part of the year? Second, how has escalating trade friction and a rebound in end demand changed, if at all, your view on supply chain consolidation?

Well, true, if lead times stretch out, it's absolutely to be expected that the price pressure, especially on commodity product, will go down.

In all our specialty products, we do not see -- we are not exposed to the same kind of price pressures as we have it for the commodity products. It's clear.

But of course, it's true, with increasing demand and stretching out lead times, I would suspect also for commodity products, some less price decline as we go forward, and we had examples of that in the past. Such a decline, which we have seen partially this year, if you go back to history, it would not be the first time that such a decline will be followed by a nice upturn, with, of course, there's some positive impact on the pricing, amongst others. Basically, yes.

What was the second part of the question? Sorry.

Yes. Just on how you see the escalating trade friction and perhaps a rebound in end demand changed your view, if at all, on supply chain consolidation?

I think it doesn't change it fundamentally. We do have some negatives, but they are very limited, but no principal change for us.

Our next question comes from the line of Alvin Park with Stifel.

Congratulations on a solid result and guide. I just want to follow-up on the automotive end segments for the December quarter and beyond. I'm just wondering if you see Q4 as kind of peaking levels, or if there's still generally positive momentum going into the March quarter, if there's any insight into fiscal year -- the early part of fiscal year '21?

First of all, you basically said it yourself, it wasn't such a spike, as you may have expected it in quarter 3. Quarter 4 runs at least at the same level as quarter 4 in automotive for us.

And as a matter of fact, I'm also quite optimistic for automotive for the year to come because electrification -- electronification helps a lot. As a matter of fact, I -- it was always our picture that if the car sales, the units of cars sold would go down by 10%, would more or less mean constant sales for us. So you see there's a major impact of the electronification.

I think, of course, everything depends on the development of the world economy, clear. But I'm confident that this, what we see now, was a recovery and not a spike.

And a follow-up question, if I may. Capacitors -- the ASP was actually a very strong positive turn, increase of 1% quarter-over-quarter, I believe, and 2% year-over-year. And about 1 to 2 years ago, there was a huge uptick in pricing as well as the extension of lead times due to high case size, MLCCs.

Do you have any updates on how you're seeing that industry currently? And if we might see similar spikes and similar constraints and stretched lead times into fiscal year '21, if the industrial and automotives were to heat up for the rest...

You refer especially to capacitors?

Yes. For capacitors.

Well, Vishay is not typical in capacitors. You know we are in niche businesses, as a matter of fact. And we have a relatively high share of specialty products. We are not so much in the main battlefield of commodities there. We withdrew from there with good reasons, I believe, historically, so we are not typical. So you -- we are not a reflection of what happens in the mass market of capacitors, I would say.

Principally speaking, we were correcting some prices. As a matter of fact, there was some customer mix change also on capacitors. And altogether, it helped capacitors to improve their profitability as a matter of fact. But I wouldn't go further.

Your next question comes from the line of Shawn Harrison with Loop Capital.

Dr. Paul, my first question is more on, I think, the raw material and competitive environment. We've seen kind of commentary that supplies are tightening up a little bit as maybe competitors in Asia are pre-buying in the market, pre-buying some capacity.

But what are you seeing in terms of just raw material availability, any issues there for you? And kind of are you seeing lead times of competitors stretch out that could potentially maybe shift some share to Vishay if those products are more difficult to get?

Well, I can't give a simple answer. We, at this point in time, are not aware of shortages in raw material supply. What has come up, and this is why I complained a little about it in the MOSFETs, in particular, some raw materials are metals, noble metals came up substantially. But this is price and not availability.

Concerning availability, I don't see shortage at this point, really not.

Okay. And then, Lori, I have a question for you, kind of a two-parter. The first being on the puts and takes as we head into 2021. In terms of both cost inflation you might see on the OpEx line because of the temporary measures that were implemented this year versus cost savings from some of the efforts of that $15 million that you roll in. How do you think that should net out, let's say, in the first half of '21?

And then second, just on the tax rate. If you could remind me what happened when the tax reform came in, in 2018, that if there is a change in the administration, how that might impact Vishay if corporate taxes go up in the U.S.?

Okay. So starting with the operating expenses. At this point in time, it's a little bit early in our budgeting process. So we'd have to give you an estimate. But at the moment, it's -- of course, the cost reduction program should approximately offset inflation in terms of wages, both in operating expenses and in the manufacturing side.

On the other hand, travel expenses were severely curtailed in 2019 due to the COVID, and the incentive compensation and whatever diminished. So we would expect an increase as the economy would return back to normal. We split it between the first half and the second half.

At this point in time, there seems to be a big flare-up in the COVID cases around the world, which means the first half is likely to be somewhat lower than the second half, but we'd expect probably about a 6% increase in operating expenses next year.

That's helpful. And then just the second part being the tax dynamic of trying to remember there was a lot of -- there was a lot of moving pieces, I guess, in 2018.

There were a lot of moving pieces, and the interpretation has come through in the past 2 years about some of those rules and regulations.

So Vishay, our taxes did not actually come down in any extreme manner when the tax regulations were announced at the end of 2017. And the recent decline in the Vishay tax rate was more related to the mix of income in our different taxing jurisdictions. So our tax rate has come down since a year ago based on the mix of the earnings.

Again, I don't know all the details of the projections of what would be implemented depending on if the White House turns over to Democrats or not. But we would certainly have to take into consideration that there could be an impact on Vishay, but I don't know what that would be yet.

Your next question comes from the line of Harlan Sur with JPMorgan.

Good to see the strong recovery in the third quarter and into the fourth. Typically, the March quarter is a seasonally stronger quarter for the team, up low mid-single digits sequentially.

Dr. Paul, given the expanding global economic outlook, your backlog coverage, I know you give some forecast on your consignment customers. Are you anticipating positive seasonality in Q1?

Principally speaking, as you have said it yourself, quarter 4 came out better than -- will come out, we guide Q4 better than seasonal. So quarter 1 may not be the same difference to quarter 4.

But listen, I believe if the economy, if this pandemic really eases its pains on us, I think we can have a good year next year, really, as a matter of fact, if this helps the statement.

Yes. And then on the ATP acquisition, on the rationale, I can see the applications to your thin film resistors and capacitor product companies, but it looks like this company's main focus was complex thin film circuit substrate fabrication for applications like communications, aerospace, optical. So is this an expansion of your strategy to now include full thin film circuit substrates versus just in some components?

Well, we had it before, and we were just acquiring another smaller company some time ago, UltraSource. And this we bring together reform and, I think, a quite nice division out of that. There are some synergies between the 3 elements: One, we had before, one we were acquiring last year, and this one we acquired now. So altogether, this will form a nice profitable specialty resistor division. And as I was asked before, this idea to acquire specialty businesses, maybe a little larger also, is definitely maintained to be our strategy, as a matter of fact.

Yes. Just one last question. So we're -- looking sort of longer term. So we're obviously hearing more and more about silicon carbide-based power transistors and components for things like EV, industrial, clean energy applications. I know Vishay has some silicon carbide-based power transistors and diodes. Are you guys starting to put more focus on silicon carbide and maybe other wide bandgap technologies such as gallium nitride?

No in our -- it's not in our focus. We deal with it, we have some programs, but it's not in our focus.

Our next question comes from the line of David O'Connor with Exane BNP Paribas.

One or 2 from my side. Maybe firstly, Dr. Paul, just going back to your comment previously on the 10 points outperformance you mentioned and also versus your sales for 2020, versus, I guess, the units. How much of that is volume in EV versus content growth for you guys? Any characterization around that kind of performance would be helpful.

And then is that -- 10 points, is that sustainable into 2021, in terms of the auto outperformance?

And I have a follow-up for Lori.

Well, first of all, electrical cars are very promising for us. They contain many more components than normal cars, including the electrification. But from a share standpoint, it's still a small impact.

So when I talk about it's not science, by the way, this 10% difference. But approximately, this was our opinion, which we also said a few quarters ago, this is really driven by the electrification in normal cars, as a matter of fact, the nonelectrical cars.

I -- but on the other hand, if we need the move -- there was a move towards electrical cars, this would be beneficial for us. And of course, our competitors as well. They -- definitely, there are more electrical components in electrical cars than in the traditional cars, as a matter of fact.

So we -- but I was not talking about electrical cars. I really said this ongoing trend, which we observed since quite some time that cars contain more and more electrical aspects, as a matter of fact, which I think is promising.

Understood. And then maybe as my follow-up for Lori. The cost savings on the manufacturing side, is there any real impact on that on the fall-through on the kind of the next up cycle? Any impact on the contribution margin we should bear in mind as we go into 2021?

The cost reduction program was based on fixed costs. So there would be, to some extent, impact on the gross margin, but it approximately offsets inflation. So it's an avoidance of a further increase in terms of wages. But...

Got it. Understood. And maybe last question for Dr. Paul. On the -- you spoke about, in your prepared remarks, some acceleration of price decline in semis, I think. Could you just elaborate a bit on that and what drove that?

Well, we have seen basically -- and this is temporary, a shift in customers. We shipped so much to automotive and relative to that relative less to distribution. And this, of course, had some impact, which is temporary on the customer mix and on the prices, therefore, we believe all this is very temporary. In fact, if lead times stretch out, then I would expect some kind of a mitigation of the price trend going forward, even.

I'll now turn the conference back over to management for any concluding remarks.

Thank you. This concludes our third quarter conference call. Thank you for your interest in Vishay.

Ladies and gentlemen, that will conclude today's call. Thank you all for joining, and you may now disconnect.