Vishay Precision Group Inc (VPG) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Vishay Precision Group Earnings Conference Call. My name is Ann and I will be your coordinator for today's call.

As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. (Operator Instructions). We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Mr. Bill Clancy, Vishay Precision Group Chief Financial Officer. Please proceed, sir.

Thank you, Ann. Good morning, ladies and gentlemen, and welcome to Vishay Precision Group's Second Quarter 2010 Earnings Call. This is the first time we are presenting to you the financial results on a carve-out basis of VPG for the fiscal quarter ended July 3, 2010.

Before we get started, I just want to give you just some background of my experience. I'm a CPA. I was with Vishay for over 21 years, working in the corporate office, with my last position for the last five years being Senior Vice President, Corporate Controller, and Secretary of the Company.

With me today in Malvern, Pennsylvania is Ziv Shoshani, Vishay Precision Group President and Chief Executive Officer.

Before I get started, I will read our Safe Harbor language. 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 risk 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 Precision Group's Form 10 filings with the SEC.

I will now make some summary remarks and then afterwards Mr. Shoshani will comment on the spin-off of VPG and he'll add a more detailed analysis of our second quarter and year-to-date results.

For the second quarter of 2010, VPG reported revenues of $53 million, a 28% increase over the prior-year period and a 10% increase over the first quarter of 2010. The increase in our revenues from the prior-year quarter is primarily attributable to the significant recovery in our first segment, the Foil Technology [Products] Group, and an improving recovery in the Weighing Modules and Control Systems segment. The improvement in the second quarter of 2010 relative to the first quarter of 2010 reflects a continuous recovery from the economy.

Our consolidated gross margin for the fiscal second quarter of 2010 was 37.8% as compared to 26.6% for the second quarter of 2009 and 35.4% for the first quarter of 2010. The increase, compared to the second quarter of 2009, reflects a sales recovery, higher efficiencies, and a cost reduction initiative implemented by the Company.

Selling, general and administrative expenses for this quarter were $13.8 million, or 26.1% of revenues, compared to $13.2 million, or 27.5% of revenues, for the first quarter of 2010 and $10.1 million, or 24.5%, for last year's second quarter. The increase of $3.7 million from the prior year is primarily due to the increased personnel costs as we prepare to function as an independent, publicly traded Company.

Personnel costs have also increased in 2010 due to the resumption of employee bonus programs and salary increases that were suspended in 2009 due to the recession. We had restructuring and severance costs in the second quarter of 2009 of $1.4 million.

The Company has recorded an effective tax rate of 40% for the year. The high tax rate is still attributable to the fact that losses incurred in low tax jurisdictions where we recognized no substantial tax benefit. When we return to a more normal earnings across our global business and segments, we expect the tax rate to return to approximately 30%.

Capital spending for the quarter were $2 million, compared to $2 million in our first quarter of 2010 and $200,000 in the second quarter of 2009.

Now, some results for the six months. For the first six months of 2010, VPG reported revenues of $100.1 million, at 19% higher than the first six months of 2009. Our consolidated gross margins for the first six months of 2010 were 36.6% as compared to 29.4% for the first six months of 2009.

SG&A administrative expenses for the first six months of 2010 were $27 million, or 26.7% of revenues, compared to $21.2 million, or 24.9% of revenues, for the first six months of 2009. Once again, the increase in the SG&A cost as compared to the prior-year period is primarily due to increased personnel costs as we prepared to function as an independent, publicly traded company and also the personnel costs increased in 2010, once again, due to the resumption of employee bonus programs, salary increases, that were suspended in 2009 due to the recession.

Restructuring and severance costs in the first six of 2009 were $1.9 million. Capital expenditures for the first six months of 2010 were $3.9 million, compared to $1.1 million in the first six months of 2009. Depreciation and amortization for the first six months of 2010 were $6 million, compared to $5.6 million in the first six months of 2009.

Talking about some of our liquidity. VPG has a total debt of $1.6 million as of July 3, 2010. And as part of the spin-off from Vishay on July 6, we will inherit a $10 million of exchangeable notes which mature on December 12, the year 2102. The debt has interest recorded at LIBOR -- and I'd [like to say] once again, it's payable in 92 years.

As of July 3, 2010, VPG had cash and cash equivalents of approximately $71 million. We are currently working on finalizing a worldwide credit facility of around $40 million and it should be completed shortly.

Other key financial summaries. Total inventory at quarter end was $44 million. Inventory balance has remained constant despite the sales increase in the first six months of 2010. Working capital at the quarter end was $111 million. If you back out the net payable to affiliates of Vishay, it would be $130 million.

Free cash flow was $3 million for the second quarter of 2010 as compared to $3 million for the first quarter of 2010 and $6 million for the second quarter of 2009. We expect a continuous generation of free cash flow for the year 2010.

As we stated in our press release, for the fiscal third quarter of 2010, the Company expects to report revenues between $47 million to $51 million, reflecting the seasonally slower fiscal third quarter.

I would now like to turn the call over to Ziv Shoshani, our President and Chief Executive Officer.

Good morning. I'm sorry we were disconnected. I would like to start from the very beginning. Before I start, I would like to provide you with a brief background of myself. I have a physics degree, Master's in Microelectronics, and an MBA from [Kalo Ketanati]. I have been with Vishay, including VPG, since 1995 in different operational and business positions.

I am now going to present VPG, its strategy, our positions in the market, and the product applications. VPG is a global manufacturer of resistive sensor as well as sensor-based systems. The Company provides vertically integrated products as well as solutions for multiple growing markets in the areas of stress measurements, weighing modules, and process control systems.

Technology heritage and product leadership could be traced back to founding of Vishay in 1962, further development by a series of acquisitions between 2002 and 2008. Our headquarters is in Malvern, Pennsylvania, several miles away from Vishay Intertechnology.

VPG is a global manufacturing operations with a presence in 11 countries. We are the inventor and the world leader in resistive foil technology. Because of developments and mastering certain resistive materials, sensors such as [strain gages], resistive current sensors, and ultra-precision foil resistors became insensitive to temperature changes and provides long-term stability, which developed new product lines and markets as precision instrumentations and sensor-based control systems.

In 2002, VPG, a division of Vishay, decided to enter the transducer market by acquiring leading brand in the transducer field. This was our first step in the upward chain. The next step was to provide instrumentation line for transducers and [strain gages] to internal development and acquisitions. The third step was entering through the process control and on-board weighing system market integrating our transducers, instrumentation, and software mainly by acquisitions.

To sum it up, from the strain gage and the current sensor to transducers and precision instruments, from transducers, instruments, and software to on-board weighing and process control systems -- all company-controlled technology. This is important because we will be able to produce systems which have superior specifications than competition by controlling the performance of the sensor in the system.

No company has VPG's breadth of products from the sensor to the system level. One of many long-term growth engines is in the on-board weighing application, which is driven by state regulations. Our on-board weighing systems for vans are used to prevent overloading in vehicles in order to reduce accidents, liabilities, maintenance costs, and overloading fines.

A patent system of sensors and electronic [features] on a commercial van display monitors and warns of overloading. The system can be installed on a van production line or fitted as a retrofit to the after-market vehicle.

We are looking at the potential of 2.4 million commercial vans, up to 7.5 tons, and produced per year in Europe with an estimated of over 10 million vans in the after-markets. The average selling price of this system is $700.00.

Another example of a long-term growth engine in the force measurement applications would be the reel optimizing system for paper mills. We developed a retrofit to install on existing machines to measure and optimize web tension for efficiency improvements. VPG's solution reduced scrap generation on the end reel of the paper machine. The approximated savings is $3 million per year for our customers.

The market opportunities are $220 million if we look at 5% of the worldwide machines which may require retrofit. The average selling price of such a system is $550,000 including the installation.

All in all, we are uniquely and strategically positioned in an exciting and growing market which we intend to future pioneer and develop technically and commercially to grow while differentiating ourselves from present and future competitors.

Next, I would like to go and discuss the quarter results for VPG. Vishay Precision Group in Q2 experienced better business conditions worldwide. Orders for the Foil Technology product segment have stabilized above pre-crisis level, but the Weighing Modules and Control Systems segment is still approximately 30% below pre-crisis level.

Although we have not reached the pre-crisis level with shipments, we were able to report this quarter a gross margin of 37.8% as well as an operating margin of 11.7%. We have generated net income of $4 million for this quarter and a free cash generation of $5.6 million free cash year-to-date.

A very solid book-to-bill rate indicates an ongoing recovery. Certain market sectors have continued to improve in Q2. Strong upturn in revenue is primarily in the United States. The Foil Technology segment continues to have a strong recovery during this Q2 of this year, fueled by the avionics, military, and aerospace market sector, and as well as Stress Analysis Application and Precision Instruments.

The Weighing Modules and Control Systems segment realized improvement in the process weighing sector as well as in the scale industry. The on-board weighing market sector is still depressed.

The [sales] level in Q2 improved by 10% over the first quarter of 2010. We have achieved sales of $52.9 million in the quarter, versus $48.2 million in prior quarter, versus $41.3 million in prior year. Excluding exchange rate effect, sales versus prior quarter were up by $6.4 million, or 14%, and were up versus prior-year quarter by $12.1 million, or 30%.

Continued positive book-to-bill ratio of 1.06 as compared to 1.12 in Q1 2010 and 1.06 in Q4 of last year. Book-to-bill details -- 1.05 for Foil Technology Products and 1.07 for Weighing Modules and Control Systems. Our backlog is 2.2 months, which is close to historical levels. Our price decline is very minimal.

Highlights for this quarter. Inventory turns increased to 3.0 from 2.7 in the first quarter of this year and 2.2 in prior quarter of last year. Inventories slightly decreased during the second quarter of 2010 in spite of increase in revenues.

Capital spending in the quarter was $2 million versus $1.9 million in prior quarter and $200,000 in prior year. We continue to expect 2010 capital spending at about $10 million -- $4 million related to the spin-off and $2 million for the expansion of our new facility in India.

During the quarter, employment increased by 66 heads to a total of 2,162. The increase is in direct label due to the expansion of manufacturing capacities as well as few G&A personnel related to the spin-off. In spite of the revenue increase, fixed cost personnel remains constant.

We have generated $4.5 million cash from operations in the quarter as compared to $4.9 million in prior quarter and $5.5 million in prior year. We have generated $2.6 million of free cash in the quarter as compared to $3.1 million in prior quarter and $6.2 million in prior year.

Some comments concerning the first segment, Foil Technology Products. Our core products, which are the foundation of the vertical integration strategy, are dominant and market leaders. We have regained the pre-crisis [space] level with a strong demand for avionic, military and space, force measurements market sector, and precision instruments.

The sales for the quarter were $25.6 million, 7% above prior quarter and 51.5% above prior year. Positive book-to-build ratio of 1.05 and a backlog of 2.3 months. The gross margin was 42. 9% -- excuse me 49.2% for the second quarter of 2010, compared to 49.9% in prior quarter and 38.7% in prior year. Inventory turns improved to 3.7 as of Q2 2010, compared to 3.6 in Q1 2010 and 3.1 in Q2 of '09.

Comments concerning the second segment, Weighing Modules and Control Systems. The business is based on diversified technologies. This segment begins to show some signs of recovery in the quarter two of this year in the process weighing sector as well as scale industry.

On-board weighing is still depressed market for us in the United States as well as the United Kingdom. The segment had a revenue increase of 12.6% compared to the first quarter of 2010 and further efficiency improvements were realized during the quarter.

Sales in the quarter were $27.3 million, up by 12.6% versus prior quarter and 11.8% versus prior year. Book-to-bill ratio of 1.07 and a backlog of 2.1 months. Gross margin improved to a better level of 27.1%, compared to 21.1% in prior quarter and 18.2% in prior year.

Continued reduction of inventories by 1.5 million and 11 million versus Q1 2010 and Q2 2009 in spite of higher sales. Inventory turns improved to 2.6 in Q2 of 2010, compared to 2.4 in Q1 2010 and 1.9 prior year.

In summary, a good performance by the Foil Technology segment and a recovery from the Weighing Modules and Control System has produced a gross margin of 38%. Since our average contribution margin is in excess of 50%, we are well positioned to participate in the recovery and generate a better result in the future.

As announced in our press release for Q3 2010, we guide to a sales range of between $47 million and $51 million. Thank you. We are open for questions.

Thank you. (Operator Instructions). And our first question is from the line of Mike Broudo with Miller Tabak. Please proceed.

Hi, good morning. Thanks for taking my question. I'm not sure if you mentioned this and if I missed it, but could you talk about the operating margins by divisions in both the Weigh Modules and the Foil Technologies business? Thank you.

Michael, we gave the gross margins for the first sector, the Foil Technology Products gross margin is 37 - I mean the gross margins were 49.2 and the second segment was 27.1. We did not give out any other additional information at this time.

Okay, thank you.

(Inaudible).

That's it? Going to wrap up?

Yes.

Okay. That seems to be all of the questions. I'd like to thank everybody again for you time and participating on the call. Obviously, this is an exciting time for us and we appreciate you interest. We are committed to VPG's future and delivering value to all of our shareholders. We look forward to talking to everyone in the near future. Thank you again very much and have a good day.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.