Vishay Precision Group Inc (VPG) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2010 Vishay Precision Group Earnings Conference Call. My name is Michael, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Mr. Michael Sheaffer, Senior Manager of Investor Relations. Please proceed.

Good morning, everyone. Welcome to Vishay Precision Group's fourth quarter and full year earnings conference call. An audio recording will be made from the entire conference call today, including any questions or comments that participants may contribute. The audio recording will also be available on the internet for a limited time, and may be accessed from the VPG website at www.vishaypg.com.

The financial results and earnings data for the quarter and year ended December 31st, 2010, represent two full fiscal quarters of operations for VPG as an independent company after its spin-off from Vishay Intertechnology. The results of operations and earnings data from the comparative periods prior to July 2010 were derived in whole or in part from the historical consolidated financial statements of Vishay Intertechnology, and those results may not be indicative of the actual operating results that would have been realized had the company operated as an independent, publicly traded company.

The content of this conference call is owned by Vishay Precision Group and is protected by US copyright law and international treaty. You may not make any recordings or other copies of this conference call, and you may not reproduce, distribute, adapt, transmit, display, or perform the contents of this conference call, in whole or in part, without the written permission of VPG.

Today's remarks are governed by the Safe Harbor provisions of the 1995 Private Securities Litigation Reform Act. Actual results may turn out significantly better or worse than indicated by any forward-looking statements that we may make today. For a more complete discussion of the risks associated with the operations of Vishay Precision Group, please refer to our SEC filings, especially the form 10, as filed on June 22nd, 2010, and our other recent SEC filings.

And now it is my pleasure to introduce the host for today's call, Ziv Shoshani, CEO and President, and Bill Clancy, CFO. Bill?

Thanks, Mike. First I will summarize the financials, and then Ziv will provide a more detailed analysis of our fourth quarter and year-to-date 2010 results.

Beginning with the fourth fiscal quarter for 2010, we reported revenues of $54.8 million, a 17% increase over the prior year period, and a 6.2% increase over the third quarter of 2010. The fourth quarter revenues were in line with the high end of our revenue guidance given in our November earnings release.

The increase in our revenues from the prior year quarter is primarily attributable to a significant market recovery in the foil technology products segment and an improving market recovery in the weighing modules and control systems segment. The increase in the fourth quarter relative to the third quarter of 2010 reflects an increase in both segments.

Our consolidated gross margin for the fourth quarter was 38.2%, as compared to 32.0% for the fourth quarter of 2009 and 37.1% for the third quarter of 2010. The increase compared to the fourth quarter of 2009 reflects higher volume, higher efficiencies, and the cost-reduction initiatives implemented by the company. The increase in gross margin compared to the third quarter of 2010 is coming from both segments. Ziv will give you the details of these segments in his presentation.

Selling, general, and administrative expenses for this quarter were $15.9 million, or 29% of revenues, compared to $14.4 million, or 27.9% of revenues, for the third quarter of 2010, and $11.9 million, or 25.4%, for last year's fourth quarter. The increase of $1.5 million from the prior quarter is due in part to an increase in divisional G&A, which was mainly due to travel costs and foreign currency exchange of $700,000.

The other increase in G&A includes approximately $500,000 related to one-time fees which occurred in the fourth quarter and will not repeat going forward. The other remaining $300,000 of expenses relate to an increase in stock-based compensation and other fees.

The increase of $4 million from the prior year is primarily due to increased costs and fees of functioning as an independent, publicly traded company. Costs have also increased in 2010 due to the resumption of employee wage increases and bonus programs that were suspended in 2009 due to the recession.

Included in other income and expense was $580,000 of foreign exchange losses during the fourth quarter of 2010, compared to $400,000 of foreign exchange losses in the third quarter of 2010. The exchange losses for both periods are due to the US dollar versus the Israeli shekel and the euro.

The company's effective tax rate for the year was 36.5%. Therefore, the fourth quarter tax rate comes out to be 27.4%.

Diluted earnings per share for the fourth quarter were $0.24, compared to $0.05 per share for the fourth quarter of 2009. The earnings and share account presented on our financial statements are derived from the consolidated statements of Vishay Intertechnology, Inc., and reflect the impact of the spin-off from Vishay Intertechnology.

The footnote in our earnings release explains why the diluted shares outstanding for the period ended December 31st, 2009, is the same as the basic shares outstanding, since the convertible debt was not on the books of VPG as of December 31st, 2009. As part of the spin-off, VPG recorded $10 million of exchangeable notes maturing on December 12th, 2102. The debt has interest recorded at LIBOR, and is only due in 92 years. The exchangeable notes can be converted into 442 shares of VPG common stock at an exercise price of $22.56. These shares are part of the diluted shares outstanding for the quarter ended December 31st, 2010.

Capital expenditures for the quarter were $2.9 million, compared to $1.6 million our third quarter of 2010 and $900,000 in the fourth quarter of 2009.

Turning to the results for the 12 months of 2010, we reported revenues of $207.5 million, a 20.7% increase over the 12 months of 2009. Our consolidated gross margin for the 12 months was 37.2%, as compared to 30.6% for the 12 months of 2009.

Selling, general, and administrative expense for the 12 months were $57.3 million, or 27.6% of revenues, compared to %43.4 million, or 25.2% of revenues, for the 12 months of 2009. Once again, the increase in the SG&A of costs as compared to the prior year period is primarily due to the increased costs and fees functioning as an independent, publicly traded company. Costs have also increased in 2010 due to the resumption of employee wage increases and bonus programs that were suspended in 2009 due to the recession.

There were $2 million of restructuring and severance costs in the 12 month period of 2009. As I mentioned, the company recorded an effective tax rate of 36.5% for the year. The high tax rate is attributable to the fact that losses incurred in low tax-rate jurisdictions, where we recognize no substantial benefit. As the weighing modules and control systems business has further recoveries, we should expect the annual tax rate to return to approximately 30%.

Diluted earnings per share for the year ended December 31st, 2010, were $0.85, compared to $0.13 per share for the year ended December 31st, 2009.

Capital expenditures for the year 2010 were $8.4 million, compared to $2.2 million in the 12 months of 2009. Of the $8.4 million spent year end 2010, $4 million was related to the spin-off from Vishay Intertechnology, Inc.

Depreciation and amortization for the year 2010 was $10.6 million, compared to $11.5 million in 2009.

Moving to the balance sheet, VPG had a total debt of $11.7 million as of December 31st, 2010. As I mentioned earlier, $10 million of that debt is recorded as exchangeable notes due in 92 years with a conversion feature at a share price of $22.56.

As of December 31st, 2010, we had cash and cash equivalents of $82.2 million, compared to $63.2 million as of December 31st, 2009.

And a few items to point out. Working capital at quarter end was $136 million, compared to $121 million at December 31st, 2009, without the net payable to Vishay. Free cash flow would have been $5 million for the fourth quarter of 2010, as compared to $9 million for the third quarter of 2010, and $12 million for the fourth quarter of 2009. Included in the cash flow computation for the fourth quarter of 2010 was a $4 million payment to Vishay to complete the spin-off transaction, which basically netted us $1 million of free cash flow for the quarter.

Free cash flows were $15.8 million for the year ended December 31st, 2010, compared to $29.3 million for the year ended December 31st, 2009.

I will now turn the call over to Ziv Shoshani, our CEO and President. Ziv?

Thank you, Bill. I am going to start today by providing some details about the fourth quarter and our end of year results. Then I will move on to our market conditions, and, finally, our strategies and plans for the future of Vishay Precision Group.

Let me start by recognizing the significance of completing our first fiscal year. Since July, we have been primarily focused on running the business as a stand-alone operation and as a public company. This activity has been critical to the success of the company as we set the financials and operational foundations that we will build upon as we go forward.

Now let me take a few minutes to add some details about the fourth quarter. We continued to see a stable business environment in the fourth quarter of 2010. The revenues were near the high end of our revenues guidance, as we experienced revenue growth compared to the third quarter of 2010 in both segments. The increases were predominantly coming from the process weighing, on-board weighing, and force measurements markets.

The regional sales breakdown as compared to Q3 was an increase in the European revenues of $2.9 million, an increase in the Americas of $1.4 million, offset by a decrease of $900,000 in Asia.

The increased revenue in Europe was partially due to a seasonal recovery from Q3, but also a positive indicator for our weighing modules and control systems segment, and we believe our market sectors in Europe are beginning to show some signs of recovery. Our backlog for Q4 was 2.2 months, compared to a backlog of 2.5 months for Q3. There was no change to the average selling price in the fourth quarter, compared to prior quarter. Inventory turns were at 3.0, compared to 2.9 in Q3 and 2.5 in prior year quarter.

During the fourth quarter, employment has increased by 78 for a total head count of 2,351 personnel. Most of the increase is in direct labor due to the expansion of manufacturing capacities in both of our product segments.

I will now provide some details about the two product segments. The foil technology segment revenue has increased by $1 million, or 3.8%, over the third quarter. We experienced increased revenues in the precision instruments and avionic military and space markets, offset by a slowdown in automatic testing equipment mainly in Japan. The foil technology gross margin was 46.6% for Q4, compared to 45.2% in Q3 and 48.0% in prior year. The increase in gross margin from Q3 is due to higher revenues, but mainly from one-time fixed costs.

The segment backlog has decreased to 2.3 months at Q4 from 2.5 months in prior quarter. The foil technology segment had a book-to-bill ratio of 0.98 in Q4, compared to 1.04 in Q3. The segment has already reached its pre-recession levels. Foil technology inventory terms were 3.6 as of Q4, compared to 3.7 in Q3 and 3.2 in Q4 of last year.

As we discussed last quarter, there is an ongoing effort to add capacity, and we are still incurring lower manufacturing efficiencies.

Looking at the second segment, the weighing modules and control systems segment, revenues have increased by $2.3 million, or 8.7%, compared to prior quarter. The increasing revenues came from the force measurement on both weighing and process weighing markets. The gross margin has improved to a better level of 30.4%, compared to 29.2% in Q3 and 20.4% in Q4 of last year. The improvements in Q4 versus the prior year quarter were due to volume increase and operational efficiencies improvements that were realized.

The segment backlog is 2.1 months, compared to 2.4 months in the prior quarter. The book-to-bill ratio was 0.97 in Q4, compared to 1.04 in the prior quarter, due to a strong shipment. Inventory terms were at 2.5 in Q4, compared to 2.4 in Q3 and 2.4 in prior year quarter. Despite the negative book-to-bill ratios in Q4, we expect higher order end in Q1 of 2011 in the weighing modules and control systems segment, mainly for process weighing and transducers for weighing applications.

On the other hand, revenues for foil technology segment are expected to decline slightly in Q1 of this year as a result of a reduction in the order intake in Q4 for the automatic testing equipment and precision instruments market. We believe this anticipated shift in our segment will result in overall revenues for Q1 in the range of $52.5 million and $56.5 million.

Within the revenue range, we are planning for a lower gross margin in Q1 compared to prior quarter. We expect to incur over $1 million in additional costs related to new and lower manufacturing standards in Q1, as well a return to a normal obsolescence (inaudible).

Looking at the total year for 2011, we have major strategies and plans to be implemented, which will set the foundation for future improvements. We have previously discussed a number of these plans, but I believe this is a good opportunity to describe our priorities for the next 12 months. In general, our first priority involves investing significant capital into our business in 2011 to enhance organic growth by expanding our product portfolio and lowering our cost base for 2012 and beyond.

The anticipated capital spending required to accomplish these goals will clearly exceed our normal capital spending budget in 2011. We estimate the total cost to be in the range of $16 million to $20 million, with the majority of the cash being spent in the first half of the year. This means our free cash flow may be close to break-even or slightly negative in the first two quarters. However, our target is to generate positive cash flow for the full year of 2011.

Our plans for the weighing modules and control systems segment in 2011 are as follows. First, we have started construction of a large manufacturing facility in Asia. During the first quarter, we expect the construction to be completed, and commence manufacturing in the fourth quarter of this year. The new facility will allow us to expand our capacity based on market demand and also allow further consolidation of manufacturing locations. Second, additional engineering resources will be added to the weighing modules and control systems segment to achieve design wins for OEM customers.

Our foil technology segment plans include the introduction of a new sensor product platform in 2011 that provides a smaller product size with a lower power consumption. A few customers have already sampled these new products and responded very favorably with anticipated future orders. In addition, we will establish a new manufacturing line to produce these new products. Finally, the new technology will also be applied to our existing production lines.

Our second priority is growth by acquisitions. This activity is expected to be at a much lower level than the projects I've just described. However, we will remain diligent at looking for opportunities that would fit into our overall growth strategy. Potential acquisitions would be companies that expand our product portfolio within our vertical integration framework, using our core technology. We believe that our strong balance sheet and cash position, combined with our existing line of credit, could support external growth.

In conclusion, we are confident about investing in our future and about implementing these plans in 2011, which will begin yielding positive results already next year. And with that, we will open the lines for questions. Thank you.

(Operator Instructions.). And your first question comes from the line of Larry Solow of CJS Securities. You may proceed.

Hi. Good morning, guys. Can you maybe -- in the foil technologies segment, you expect a little bit of a contraction, at least on a sequential basis, and that sort of shows up in your book-to-bill. And I realize the segment has certainly recovered back to pre-recession levels. Looking out over the full year, do you expect sort of a flat full year revenue, and most of your growth to come from the other segment? Any color on that would be really helpful.

Larry, this is correct. On a year-over-year basis, we are looking at this point at the flat growth, vis-a-vis prior year, and most of the growth will come from the second segment. That is correct.

Okay. And remind me -- your business -- there's not much seasonality. I know the third quarter generally slows down a little bit relative to second, but your quarters -- there's not really a lot of seasonality, right? In terms of revenues.

As we have discussed in prior earnings calls, the seasonality that we see is based on our geographical distribution, and this is based due to -- since we have a large presence, or a large share of our sales are in Europe, we are looking always at the lower revenue during Q3.

Right. Okay, and then, in terms of the gross margin, could you maybe discuss that a little bit more? I guess the impact on the foil technology as you're adding this new manufacturing line, you expect that to be able to come down. Is that on a year-over-year basis, or do you expect some contraction sequentially as well?

Concerning the foil technology, as I mentioned, now we are setting the manufacturing lines with the new sensor product portfolio. So in that sense, we are adding more resources and we have a very positive outlook. Once we do that, there is an initial investment that should somehow -- would add cost into that. But going forward, we do definitely expect to see a further improvement of this segment, performance vis-a-vis prior yields.

Right. And then, so how do you think the sort of transition period is? So I guess you've had a couple quarters now where you've been down in the mid-40s, and, you know, historically, you've been running in the -- I guess when the segment was at its peak, sort of in the high 40s. Do you think it takes a couple of -- is it a full-year process to get back to that historical high? Or is it --

Okay, I would say it will take between 12 to 18 months. Now, I would like to emphasize, if I may, another point. Since we have already mentioned here that we still realize some inefficiencies, the fact is that, as we are adding capacities already for a couple of quarters, we should incur more revenues. But since our model is based on vertical integration strategy, we should understand that the output that is coming from that segment is supporting the growth of the other segment. So the volume has increased, and it does support the revenue increase of the other segment.

Okay. So it sounds like the gross profit -- you could hopefully start seeing some of these benefits in calendar '12, I guess, in that segment. Is that a fair statement?

This is correct.

Okay. Great. And then, the weighing modules segment, you know, you talked about some process weighing and then the load sell business, I know that's been showing some improvement the last few quarters. How about in terms of the project systems activity and some of your larger projects, like the onboard weighing or reoptimizing for paper mills or any other sort of project activity that I guess had been sort of the slower part of the business to recover. Any signs of recovery there?

Since in Q4 we already realized some improvements in the business environment for onboard weighing and process weighing, we have -- there are some signs of continuous improvement. We are adding all the engineering resources and R&D resources to enhance future designs. But we are living in a certain business climate. Unfortunately, US has seen some recovery, but in Europe, some of the countries are still in a situation where they don't enjoy such a good business environment.

In the systems segment, our presence is very dominant -- the revenue presence is very dominant in Europe. Over 50% of the revenues are in Europe. Therefore, once beyond our engineering resources, we are looking for a better business environment in order to realize much more revenue.

Okay. And then, in terms of the gross profit net segment, which obviously that 30% number is the number you've thrown out. Is that sort of a good base to build on, or do you see -- as you're bringing on this plant in India, would you see some temporary inefficiencies there, or do you think you can still sort of grow from this sort of low-30s number as revenue grows?

The low-30s number, this is a number I believe we have mentioned. This is a good base. In the next few quarters we are going to realize lower gross margin in that segment. The main effect would be as we move to a lower standard cost base. This is more for an evaluation of our existing inventory, because our cost base would be lower. But once the Indian facility is up and running, which should be in the second half of this year, we should look at the 30% as a base. From there we are going to move to a better gross margin level.

Got you. So your outlook is sort of some downward pressure in the next couple quarters, and then, hopefully, in the back half of the year, you're at that 30% number and, with revenues growing, you should be at an even higher number. Is that sort of a fair assessment?

This is correct.

Okay. Excellent. Thank you very much.

(Operator Instructions.). Your next question comes from the line of Liam Burke of Janney Capital Markets. You may proceed.

Good morning, Ziv. Good morning, Bill. Ziv, you talked about Asia being down year-over-year, and then you went into a little more detail about Japan. Are there any other markets that are doing better or worse than Japan in Asia?

Well, Liam, in Japan I was speaking about a specific market sector. That's automatic testing equipment for semiconductors, which we have seen in the last quarter a significant slowdown -- slowdown in other intake by our Japanese customers. In that respect, we have not seen any slowdown in any other market sectors.

Okay, so you did report that Asia was down. Is that -- I mean, is the Japan semiconductor business the reason? Or are there other things involved there?

That's mainly the reason. This is the Japanese semiconductor automatic testing equipment product, yes.

Okay. And you are stepping up CapEx to about $16 million next year. You talked about the first half of the year and the capacity increase in Asia. Are there any major projects in there as well?

The two major projects which would draw our attention to capital spending would be the Indian facility for the first half of the year, as well as setting the new manufacturing line for the new sensor product portfolio.

Great. Thank you very much.

Thank you, Liam.

Your next question comes from the line of John Reilly of ACK Asset Partners. You may proceed.

Good morning, Bill, Ziv. Hey, nice quarter. Just following up on the SG&A, kind of what sounds like (inaudible - background noise) impacts in the quarter. So you said $0.5 million in SG&A from FX. That's one time. Is that correct?

No, John, it was $0.5 million of one-time fees that won't repeat in the fourth quarter, and then we also had an additional $200,000 impact just on the foreign currency exchange rates.

Got it. Okay. So $500,000 in one-time fees $200,000 from -- got it. Okay. Normal is 300 CapEx. And then when I look at the other income, there were $580,000 of other FX charges also?

Yes. Those are like unrealized losses at the moment. You know, it's the changes on your balance sheet, especially with the shekel and the euro.

Got it. Okay, good. And it sounds like we're, you know, kind of priming the pump for a couple of areas of some pretty good growth. Just walk through -- what kind of potential on this revenue CapEx -- I'm sorry, on the increased CapEx. What kind of revenue potential can we associate with some of these? You know, how much capacity is being added here?

Concerning the CapEx, I would say that close to 50% of the expected capital spending. This is to allow a capacity increase of at least, I would say, 50% to 80% of our existing capacity, given the fact that we -- this will also allow us to further continue our manufacturing consolidation in order to reduce fixed costs.

The other part of the capital spending is related for launching the new product line, which should develop a new market for us, as well as applying this new technology to some of our existing lines in order to reduce the cost base. So it's a combination of lowering existing cost base, as well as development of new products for new markets.

That's great. And then, you also -- you know, this is the first time, obviously, you've said some comments about the acquisitions. And while, obviously, it doesn't sound like there's a lot front-burner, is there a kind of size that you're targeting, or return on capital, or a type of multiple? How should we kind of think about the acquisition opportunities here?

As we said, John, since you have seen, we have significant amount of capital spending that we are planning to invest next year, and we have plans that we should realize the acquisition strategy takes second order effect in that respect.

Looking at companies, I would say that the target companies would be between $10 million to $60 million of revenue. This would be a targeted size.

Great. All right, great. I really appreciate it. Thank you very much.

And there are no further questions at this time. I would now like to turn the call over to Michael Sheaffer for closing remarks.

Thanks, Michael. I'd like to thank everyone for participating today in the conference call. Looking at our upcoming investor relations calendar, we have no conferences coming up in Q1. However, next Tuesday, February 22nd, we will be ringing the opening bell for the New York Stock Exchange, and we're quite pleased to be doing that as part of our initial spin-off. We're very excited.

So that concludes today's call. We thank everyone, and have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.