Vishay Precision Group Inc (VPG) 2011 Q1 法說會逐字稿

Hello, and welcome to the Vishay Precision Group First Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note that this event is being recorded.

I would now like to turn the conference over to Mike Sheaffer. Mr. Sheaffer, please go ahead.

Thank you. Good morning, everyone. Welcome to Vishay Precision Group's First Quarter Earnings Conference Call. An audio recording will be made of 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 ended April 2, 2011 represent three fiscal quarters of operations for VPG as an independent Company after its spinoff from Vishay Intertechnology.

The results of operations and earnings data for 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-K as filed on March 24, 2011 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 first quarter of 2011.

Beginning with this quarter, we reported revenues of $59.5 million, a 23.6% increase over the prior year period and an 8.6% increase over the fourth quarter of 2010. The first quarter revenues exceeded our revenue guidance given in our February 2011 earnings release.

The increase in our revenues from the prior year quarter is primarily attributable to the improving market recovery in the Foil Technology Products segment and a significant market recovery in the Weighing Modules & Control Systems segment. The increase in the first quarter relative to the fourth quarter of 2010 reflects an increase in both segments. Our consolidated gross margin for the first quarter of 2011 was 35.3%, as compared to 35.4% for the first quarter of 2010 and 38.2% for the fourth quarter of 2010.

The gross margin for Q1 of 2011, as compared to the fourth quarter of 2010, was mainly affected by year-end and other [accrual] adjustments, unfavorable product mix, and exchange rates. Ziv Shoshani will give you the details of the segments in his presentation.

Selling, general and administrative expenses for this quarter were $16.3 million, or 27.4% of revenues, as compared to $15.9 million, or 29% of revenues, for the fourth quarter of 2010 and $13.2 million, or 27.4%, for last year's first quarter.

The increase of $400,000 from the prior quarter is due in part to an increase in divisional G&A mainly due to year end and other accrual adjustments and also wage increases of $900,000. This is offset by a decrease in G&A of $500,000 compared to the prior quarter. The increase in SG&A of $3.1 million from the prior year is primarily due to adding personnel and incurring fees of functioning as an independent, publicly traded Company.

Included in other income expense for the first quarter of 2011 was $141,000 of foreign exchange gains during the first quarter as compared to $580,000 of foreign exchange losses in the fourth quarter of 2010. The exchange gains and losses for both periods are due to the movement of the dollar versus the Israeli shekel and the Euro.

The Company's tax rate for the year is expected to be 32%, compared to the 2010 full year tax rate of 36.6%.

As we look at earnings per share for the first quarter of 2011, we're $0.24 per diluted share, compared to $0.13 per share for the first quarter of 2010. The earnings and share count presented in our financial statements are derived from the consolidated statements of Vishay Intertechnology, Inc. and reflect the impact of the spinoff from Vishay Intertechnology. The footnote in our earnings release explains why the diluted shares outstanding for the period ended April 3, 2010 is the same as the basic shares outstanding.

Capital expenditures for the quarter were $2.9 million, compared to $2.9 million in our fourth quarter of 2010 and $1.9 million in the first quarter of 2010. Depreciation and amortization for the first quarter of 2011 was $2.8 million, compared to $2.5 million in the first quarter of 2010.

Now, moving to the balance sheet, VPG had a total debt of $11.7 million as of the end of the first quarter and also December 31, 2010. As of April 3, 2011, we had cash and cash equivalents of $79.1 million, compared to $82.2 million as of December 31, 2010.

Cash generated from operations was a negative $2.4 million for the first quarter of 2011. Included in these numbers were income tax payments of $4 million, bonus and profit sharing payments of $1.3 million, and an increase in accounts receivable due to our increase in revenues. Total free cash flow for the first quarter was a negative $5.2 million. The Company anticipates positive free cash flow for the full year of 2011.

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

Thank you, Bill. Good morning. Before I begin my commentary on the quarter, I would like to say a few words about the recent earthquake and tsunami in Japan. We have a sales office in Tokyo and a foil resistor manufacturing facility in Akita, Japan, which is approximately 100 miles northwest of Sendai. Our sales office did not sustain any damage, while our Akita facility did withstand some minor earthquake damages.

This site was shut down for a few days for cleanup and recalibration of our equipment. Our Japanese team needs to be commended for their efforts to get to the factory by carpooling due to the initial shortage of gasoline and began shipping products in spite of this terrible disaster. I would like to publicly thank them for their dedication and hard work to get through this difficult time with no significant effect on VPG. In fact, we are actually forecasting a slight year-over-year increase in shipments for 2011 for our Akita facility.

I am going to start today by providing some details about the first quarter, and then I will move on to our market conditions. Finally, I would like to provide a brief update on our key initiatives and plans for Vishay Precision Group.

Let's start with the first quarter. We begin the quarter with a stable business environment, with orders bookings at about the same rate that we recorded in the fourth quarter of 2010; however, we begin to see a rise in orders and demand across all of our product lines in the latter part of the quarter.

With revenues exceeding the high end of our revenue guidance, we experienced revenue growth compared to the fourth quarter of 2010 in both segments. The growth was primarily from OEM customers increasing by 2.5 million as well as increase of 1 million from distributors and 900,000 from our end user business.

Divisional sales breakdown, as compared to Q4, was an increase in European revenues of $3 million, an increase of $1.3 million in Asia, and a small increase in the Americas of $400,000. Our backlog for Q1 was at 2.4 months, compared to the backlog of 2.2 months for Q4 of last year.

Average sales price erosion was minimal in the first quarter, compared to prior quarter. Inventory turns were at 3.2, compared to 2.9 in Q4 of last year and 2.7 in prior year quarter.

During the first quarter, employment had increased by 46, for a total headcount of 2,394. All of the increase is in direct label due to the expansion of manufacturing capacities in our Foil Technology Products segment.

I will now provide some details about the two product segments. The Foil Technology Products segments, or FTP, revenues increased to $28.2 million, or 6.3% over the fourth quarter. We experienced increase revenues from scale manufacturers and automated test equipment for semiconductor manufacturers, primarily in Europe and Asia.

The FTP gross margin segment was 44.3% for Q1, compared to 46.6% in Q4 of last year and 49.9% in prior year quarter. The change in the gross margin from Q4 is primarily due to return to a normal obsolescence as well as year end and other accrual adjustments. The segment backlog has increased by 2.6 months at Q1, from 2.3 in prior quarter.

The Foil Technology Products segment had an increased book-to-bill ratio of 1.13 in Q1, compared to 0.98 in prior quarter. Foil Technology Product inventory turns has improved to 3.7 turns as of Q1, compared to 3.6 in Q4 and 3.6 in Q1 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 & Control Systems segment, or WMCS, revenues has increased to $31.3 million, or 10.7%, compared to the prior quarter. The increasing revenues came mainly from scale manufacturers and the on-board weighing markets in Europe.

The WMCS gross margin was 27.2%, compared to 30.4% in Q4 and 21.1% in the prior year quarter. The changes in the gross margin from Q4 was mainly due to unfavorable product mix as well as year end and other accrual adjustments. The WMCS segment backlog was stable at 2.1 months, compared to 2.1 months in prior quarter. The WMCS inventory turns has improved to 2.9 turns in Q1, compared to 2.5 turns in Q4 and 2.4 turns in prior year quarter.

The positive book-to-bill ratio for both segments in Q1 indicates a higher order rate across all of our product lines. Although some orders are being booked for Q3 and beyond, we expect the demand in shipments for products in Q2 will result in solid revenues for the quarter. We expect to see an improved business environment in process weighing and scale manufacturing for all WMCS segment. Meanwhile, revenues for the FTP segment we are expecting to stay solid.

We believe that anticipated business for our two segments will result in overall revenues for the second quarter in the range of $58 million and $63 million. Our key initiatives for 2011 involve investing $16 million to $20 million of capital in our two areas of our businesses. These initiatives are expected to enhance our organic growth by expanding our product portfolio and lowering our cost base for 2012 and beyond.

In conclusion, we are on track to complete our two key initiatives on time and we are feeling confident that our markets will continue to grow in 2011. And with that, we will open the lines for questions. Thank you.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And the first question comes from Liam Burke from Janney Capital Markets.

Good morning, Ziv. Good morning, Bill.

Good morning, Liam.

Good morning, Liam.

Ziv, the gross margins on Foil Technology were down year-over-year. Part of it was that there was a fair amount of product allocated in house to the weighing applications. How much did that affect gross margins at the end of the quarter?

We -- as I mentioned in the last call, the growth -- for the products to provide the growth for the second segment is being provided by the first segment. Therefore, what we are doing -- if I may say, we are not suffering from a lower gross margin. What we are doing is we are providing more products for the growth to support the vertical integration strategy to support the second segment as well as providing product for third-party customers for the first segment.

Okay. Bill, on the capital projects Ziv mentioned, will be about $16 million to $20 million this year?

Correct.

And you also said that despite that step up in capital expenditures it would be free cash flow positive for the full year?

That is correct, Liam.

Great, thank you.

Thank you.

Thank you. The next question comes from Larry Solow of CJS Securities.

Hi. Good morning. Just a couple of quick -- the gross margin, the quarter-over-quarter drop, wasn't there also going to be more impact from the two initiatives in this quarter than there was last quarter, or is that not necessarily the case?

Larry, this is Ziv. You are absolutely correct. We were looking at changing the valuation of the inventory due to a lower cost base.

Okay.

And since we have moved product from high cost labor countries to a lower cost labor countries.

Got it.

To that extent, the results reflect some of that valuation.

Okay, got you. And then in the price segment, I guess the increased capacity and the expansion and I guess the new ongoing line, did that already happen in Q4 or did that first happen in Q1 or has that not happened yet?

We were providing information about expanding existing capacities. Concerning the new line, which is one of the key initiatives for 2011, it should be realized by the end of this year and this is on plan.

Got you. Okay, great. Other questions I have for you --. It sounds like Europe, you're seeing some improvement there? I think you actually noted it looked like it was one of the strongest regions geographically, and I imagine that's helping the second segment. I know that's about two-thirds of revenues, so any comments on that?

We have seen a better environment in Europe for on-board weighing and for OEM business and scale manufacturing. In Europe, we have seen there is a better environment for capital spending and for expansion on the process weighing side, while the on-board weighing side, the municipalities are cutting back costs.

But the retrofit market, or the after-market, is improving. So while we sell less to the municipalities, we sell more to the after-market, the retrofits.

Okay. And then lastly, just on the tax rate. I know your long-term goals were to sort of draw this down, of course, to 30%, if you can, or below that maybe even. But I had thought that this year was still going to be sort of in the mid to even higher 30s. The 32%, is that because of some better than expected performance in some of these lower taxed regions or is there anything else behind that?

Larry, you're absolutely correct. We had much better performance in areas, the low cost areas, especially in that second segment. As that profitability continues to come on-board, we should expect to see the tax rate to come down; that's what we're seeing so far for 2011.

Got you. Okay, great. Thanks a lot.

Thank you.

Thank you. (Operator Instructions). Okay, there are no more questions at the present time; I would like to turn the call back over to management for any closing comments.

Okay. Thank you, Keith. First, I would like to remind everyone that we will be presenting at the Baird 2011 Growth Stock Conference at the Four Seasons Hotel in Chicago next Tuesday, May 10 at 3.00 Central Time. Second, we will hold our First Annual Shareholders Meeting at the Desmond Hotel and Conference Center in Malvern, PA on Thursday, June 2 at 10.00 Eastern Time. Both of these events will be accessible on our website at www.vishaypg.com.

Thanks to everyone for participating on the call today and have a great day.

Thank you. That concludes today's teleconference. You may disconnect your phone lines. Thank you for participating.