LGL Group Inc (LGL) 2012 Q2 法說會逐字稿

Good morning, everyone, and welcome to the LGL Group Q2 2012 investors conference call. (Operator Instructions). It is now my pleasure to turn the conference over to the Company's Chief Accounting Officer, Mr. LaDuane Clifton.

Good morning, everyone, and thank you for joining the call. I have a number of people today with me. Greg Anderson, our CEO, he will be our host, and then also I have Paul Dechen, Vice President of Sales for our Mil/Aero group; Dick Thompson, Vice President of Sales for our Internet Communications Technology Group; and Phil Smith, our Director of Marketing.

We have prepared a slide presentation today for your reference that may be viewed as part of the Web conference. The presentation materials are also available at our website, lglgroup.com. We ask that you locate these and use them as a reference for today's call.

This call will be recorded and will be available for playback later on our website. Other financial information and recent press releases are also posted there, and please note that today's comments are covered by the Safe Harbor statement. If any time you need assistance, you may press star zero for the operator and someone will help you.

And so at this time, I will introduce Greg Anderson, our CEO.

Good morning and thank you for joining our second-quarter call. Just to begin, a backdrop reminder of our overall Company. LGL, we go to market under the brand of MtronPTI. We have got $32 million of our -- is our trailing 12 months revenue. About half of that comes from overseas or international. The stock price is $5.60 as of yesterday. The market cap is modest at $14.6 million, and we really service a specialty electronics market that is over $2 billion.

Essentially our brand and our products are essential to high, I will call them communications applications, and our markets are really diverse between Internet Communications, as well as Mil/Aero and Instrumentation. Our overall demand is balanced. We believe we are in the growth industries of Internet Communications, and that is about half of our revenue, and the other half comes from the Mil/Aero and Instrumentation sector.

Our IT is really a long history of being a fundamental precision timing supplier using quartz technology. We also have a nice complement of filters. All of those are needed for the precise and precision in high-performance communication industries.

A number of enabling efficiencies, we like to think of ourselves as the big/small company. We have got multiple US sites with the distributed engineering model. We have got manufacturing locations around the world to service our customers. We have got good margins, and the way that we protect those really is to stay in the performance end, the custom end, the specialty end, the specialty end of harsh environments and tough performance specs. We got a strong base and supply base to service our customers as we bring our products to market.

Our growth opportunities are fairly simple. We are going to stay attached to some wonderful big B2B clients that we have. Essentially they are industry leaders, and we believe that we are positioned to gain share at those respective accounts. And, as we go through today's presentation, I will touch on some of our engineering investments and the markets themselves and why we think we are positioned for growth.

So Q2 results themselves, revenue was $7.6 million -- certainly a modest quarter by our previous standards in 2010 and early 2011. Down notably compared to second-quarter 2011, but if there is a great bright spot, up almost 6% as compared to the first quarter of this year.

Gross margins were 26.5%. Sequentially that is up 4.2%. Really we had some notable improvements in what we call variable cost, which is nice to see, and certainly any of the small increase in revenue that we have between Q1 and Q2 also helped the gross margin performance.

Earnings per share was a loss, but notably improved over the first quarter.

Just to speak clearly about our markets and their performance, our Internet Communications market really remains soft in the second quarter. We did see some what we would call notable improvements in what we call the Mil/Aero space and avionics segment. We had a nice new quarter of bookings there, and really that's what drove our backlog up. So our backlog was up 7% sequentially. It is now at $9.5 million, and so it showed at least some positive movement in what is a pretty tough economy out there.

During the quarter, we really held all of our positions at our major clients. Actually, frankly, continue to press hard to gain positions. Our engineering backlog was very good for the first half, and it remains quite active. We did see some pull in activity, and what that means is we have got a backlog and our customers asked for that earlier, and we saw that fairly notable in what we will call the Mil/Aero and Instrumentation market.

So the overall factors affecting our business, we are really in a down cycle, and we are not the only ones attacked that way. Our customers are that way. They are reporting softness in their hardware pieces, and so we are no different than they are.

So our major clients, they are just not spending the money as they had predicted. In a lot of cases, newer technologies like 4G that we believe we are positioned to grow in, those kinds of investments are not happening as fast as we had earlier predicted. Our competition is impacted as well. We know that, and we believe it's a nice time to remain targeted to try and gain share in a down market.

The semiconductor folks are talking about some growth in the second half at single digits, but nevertheless it is some positive news out there that can be a leading indicator for our market. We don't obviously participate in all that, but it can be a leading indicator as communications demand goes up.

If we take a look at where we are engineering today and specifically where we're making those kinds of investments, there is the obvious front-end aspects of 4G and LTE as they roll out, but in the backhaul aspect, there is a significant amount of engineering and investment going into what is called IEEE 1588 Protocol. And essentially it takes precision-timing devices and they are essentially needed as we get to this heterogeneous network that allows for voice, data, video, all of those things to traffic through the same lines. And just to speak clearly, we believe for just the frequency control piece we believe that that TAM is just under $100 million as we look at it this year. We believe it is growing more than double-digit and could double in a few years. Our engineering is focused on a performance kind of product called an OCXO, and essentially it feeds all of these IEEE 1588 applications.

The two pie charts I had you can see on the screen is sort of the left one, if you will, is where we have made those investments, and you can see in the future as we view that to turn into the, we will call them new orders and eventual revenue stream opportunities, it is also the majority of our engineering on the timing device side of our business.

On the filtering side of our business, a good portion of our engineering today investments are going into what we call the software defined radio market. And we have some content in that market today, but most notably we are bringing forward a new piece of technology called a tunable filter. And it is used in the software defined radios. It is, we will call it an upmarket kind of component with the number of complexities and a number of performance attributes that are needed as radios go to move away from fixed bandwidth to multiband kinds of applications.

So today we are doing the engineering -- that is the yellow sliver, if you will, of the left pie chart, and as we move that over to the right and turn that into bookings, we think that that will, I will call it outperform the other product lines where we are doing engineering investments today. We just think that that could be a very nice growth driver for us.

Today we view that opportunity for that market that we can see with our customers at about $30 million, and we believe that that is growing at, we will just say 10%. Those are internal estimates.

Today we are new to that market, so we really, when it comes to the tunable filter aspects, that is all upside for us. To give our investors a feel for what I would call the expected return on those kind of investments, I would expect gross margins from the software defined radio and specifically the tunable filter projects to be richer than our historical gross margins, which makes contribution margin better than that. So even if we could bring on a few million dollars worth of revenue in the next couple of years, I think that would have a nice bottom-line effect to earnings.

This slide, again, is our quarterly income trend. You can see the past 12 quarters the improvements in gross margins, as well as a modest improvement in revenue, so, again, $26.5 million for gross margins, $7.6 million in revenue. It has got a trend line that says we are pointing back towards green and changing the color, and that is our initiative. Some listings on our assets at the bottom of our capital position. We remain very strong from a balance sheet perspective.

How are we positioned for growth? Capital is strong. We are bringing a value-added component to our major clients systems. We've got very strong customer positions. The majority of our customers are big B2B. Probably two-thirds of our revenue gets driven through eight or so very large companies. And so we are positioned well with our clients and in some cases gaining share.

Our backlog, we reported, is at $9.5 million, and as a quarterly trend, you can see at the bottom of slide 10 that we are showing some incremental improvement.

Slide 11 is our GAAP to non-GAAP, and I will let you look that over. So, as we work through this business cycle, clearly our major clients are reporting softness like we are. We see repeat orders just really off of what we would call contract norms, so they are pretty sluggish. Things just are not happening as fast, and the capital is not being spent at the rate that it was predicted.

The positives, we are starting to see some improvements in our backlog. Our working capital position is very strong, especially as we compare it to companies and some of our competitors that may be our size or even slightly larger. Our backlog for engineering, I talked about the two areas where we are doing the most engineering investment. We think those are growth engines for us, and as the market returns and those companies look to make those kinds of capital spends, we expect to participate in that.

The semiconductor industry is making, I will call them frequent announcements now that they are in single digit growth for the second half for the year.

So we are working through the cycle. LGF is in. LGL is in a strong position of capital and a very experienced management team. We continue to pursue M&A and JV opportunities. In the past, we -- in several months, we have been a finalist in a couple of those. For valuation reasons, really chose not to participate. We are actively looking for companies that we think will be nice tuck-ins and really fit our valuation expectations as well.

The brand remains strong for all these reasons -- lots of experience, blue chip clients, diverse markets. We have got a worldwide platform, and we are known as an industry leader and have got the kind of reliability and the longevity, if you will, in a tough market like this that our customers and our clients know that we are not going away.

So, at this time, myself, as well as my colleagues here, would be happy to field any questions that you may have.

(Operator Instructions). Hendi Susanto, Gabelli & Co.

Good morning, Greg. You mentioned the pricing pressure in Q2 was tough. How was pricing pressure in Q2 in July relative to historical patterns?

I would say pricing pressure in -- primarily in the ICT sector is notable. And I'm not sure that -- largely we work off of contracts, so we are, I will call it mid-contact cycle, we don't feel as many of those pressures as when we roll over our contracts into the next annual cycle, and that process is actually taking place today. So we don't really know the outcome of that, but certainly in a softer market pricing pressures are more fierce.

When it comes to off-contract bids, I would say that it is notable. It is at least single digit kind of pressure across primarily our ICT market, but the Mil/Aero market also feels its pressures.

And then you mentioned about contract. Could you remind us again how long average contract is?

Well, the majority of our contracts are annual, and they essentially have fixed pricing in terms. We have a couple of contracts with our big B2Bs that are two-year.

For the most part, they are done annually, and we get a pretty good look at what our position is going to be sometime probably around mid fourth quarter. So we have probably got about three months before we have a real clear view of our contract positions, and really mostly that is from a repeat order sense.

When it comes to new engineering opportunities, sometimes we -- most of the time we get into those mid-contract cycles and frankly they are sort of, what would I say, opportunistic and usually find their way onto a contract the following year.

I would just add to that -- this is LaDuane -- when we talk about contracts, we are talking about set terms and pricing for that period. And then the customer gives us a forecast of their expected demand.

So I would say there is still some uncertainty around what they will actually buy, but we -- and there is limited visibility from our customers in that regard. But I just wanted to make sure to clarify that.

But it is the strongest indication of our upcoming business level.

And then how does pricing work in the contract? Is it based on, let's say, like tier volume?

Yes, and the answer is volume and performance aspects of the part, certainly the competitive landscape. In some cases, it is us and one more. Sometimes it is us and a couple more. In some cases, it is only us, and obviously sole-source positions we favor nicely.

Greg, you also reported that repeat orders from existing contracts are sluggish. When do you expect to see the recovery of those orders?

I wish I knew.

Fair enough.

Our visibility is pretty limited. Our two sales VPs are sitting next to me, and we go through that discussion often. Frankly, our sentiment for second half is to improve. I'm not going to give you a number, and I'm probably not going to stay committed to that, but we do see it. The quote activity is solid, and the engineering activity is very good.

Thank you.

(Operator Instructions). I'm showing no further questions at this time.

Okay. Well, I would like, again, to thank all of you for joining the call this morning. It is nice to see a little bit of movement in the business fundamentals for the second quarter. Certainly we remain optimistic. We are not going away. Our capital position is strong. We still see opportunities to grow. We continue to invest in the platform organically, as well as looking for these inorganic types of investments as well that fit our profile and our valuation expectations.

So, thanks for joining our call, and we will look forward to next quarter.

And this ends the LGL Group's Q2 2012 investors conference call. If you have any further questions, please send an e-mail to Greg Anderson at ganderson@lglgroup.com or to LaDuane Clifton at lclifton@lglgroup.com.