Vishay Precision Group Inc (VPG) 2011 Q2 法說會逐字稿

Good morning and welcome to the Vishay Precision Group's second-quarter earnings conference call. At this time, I would like to turn conference call over to Mr. Mike Sheaffer, Investor Relations. Mr. Sheaffer, please go ahead.

Thanks, Jimmy. Good morning, everyone. Welcome to Vishay Precision Group's second-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 July 2, 2011 represent four 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 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 second quarter of 2011.

Beginning with this quarter, we reported revenues of $62.1 million, a 17.4% increase over the prior year period and a 4.4% increase over the first quarter of 2011.

The increase in our revenues from the prior year quarter is primarily attributed to the improving market conditions and design wins in the Foil Technology Products segment and the Weighing Modules and Control Systems segment. The increase in the second quarter relative to the first quarter of 2011 also reflects an increase in both segments.

Our consolidated gross margin for the second quarter of 2011 was 35.6%, compared to 37.8% for the second quarter of 2010 and 35.3% for the first quarter of 2011.

The gross margin for the second quarter of 2011, as compared to the first quarter of 2011, was relatively unchanged. Ziv Shoshani will give you the details of the segment in his presentation.

Selling, general and administrative expenses for this quarter were $17.1 million or 27.5% of revenues, compared to $13.8 million or 26.1% for last year's second quarter and $16.3 million or 27.4% of revenues for the first quarter of 2011.

The increase of $3.3 million from the prior year is primarily due to adding personnel and accounting fees of functioning as an independent, publicly traded company. The increase of $800,000 from the prior quarter is due to $400,000 related to foreign currency, $200,000 related to marketing communications, and approximately $200,000 related to Sarbanes-Oxley fees. We expect total SG&A for 2011 to be about $66 million excluding the foreign currency changes.

Included in other income and expense was $224,000 of foreign exchange losses during the second quarter as compared to $141,000 of foreign exchange gain in the first quarter of 2011. The exchange gains/losses for both periods are due to the movement of the US dollar versus the Israeli shekel and the euro.

The tax rate for the first 6 months was 33.8%, which was higher than the first-quarter rate due to a shift in income mix. This caused the tax rate to be 36.6% in the second quarter. The Company's tax rate for the full year is expected to be about 33%, compared to the 2010 full tax year rate of 36.6%.

Net earnings for the second fiscal quarter of 2011 were $3 million or $0.22 per diluted share versus net earnings of $4 million or $0.30 per diluted share for the comparable prior year period. The change in net earnings largely reflects an increase in SG&A expenses associated with operating as an independent, publicly traded company with global operations.

The diluted earnings per share for the second quarter, as I mentioned, were $0.22 compared to $0.30 per share for the second quarter of 2010 and $0.24 per share for the first quarter of 2011. The earnings and share count 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 diluted shares outstanding for the period ended July 3, 2010 is the same as the basic shares outstanding.

Capital expenditures for the quarter were $2.2 million, compared to $2 million in the second quarter of 2010 and $2.9 million in the first quarter of 2011. Depreciation and amortization for the second quarter of 2011 was $2.8 million, compared to the same $2.8 million in the first quarter of 2011.

Turning to the results for the first 6 months of 2011. We reported revenues of $121.7 million, a 20.3% increase than the $101.1 million reported in the first 6 months of 2010. Our consolidated gross margins for the first 6 months were 35.4% as compared to 36.6% to the first 6 months of 2010.

Selling, general and administrative expenses for the first 6 months were $33.4 million or 27.8 -- 27.4% of revenues compared to $27 million or 26.7% of revenues for the first 6 months of 2010. Once again, the increase in the SG&A cost as compared to the prior year period was primarily due to increased costs and fees functioning as an independent, publicly traded company.

Net earnings for the 6 fiscal months were $6.3 million or $0.46 per diluted share versus net earnings of $5.8 million or $0.44 per diluted share for the comparable prior year period.

Capital expenditures for the first 6 months were $5.1 million, compared to $3.9 million in the first 6 months of 2010. Of the $5.1 million spent year to date in 2011, $3.3 million is related to our two key initiatives to lower our cost and expand our product portfolio.

Depreciation and amortization for the first 6 months was $5.6 million, compared to $6 million in the first 6 months of 2010.

Now moving to the balance sheet. VPG has a total long-term debt balance of [$11.5 million] as of July 2, 2011, compared to $11.7 million as of December 31, 2010. As a reminder, $10 million of our debt is recorded as exchangeable notes due in the year 2102 with the conversion feature at share price of [$22.56].

As of July 2, 2011, we had cash and cash equivalents of $79.9 million, compared to $82.2 million as of December 31, 2010. Cash generated from operations was $2.6 million for the second quarter of 2011, compared to $4.5 million for the second quarter of 2010 and a negative $2.4 million for the first quarter of 2011.

Total free cash flow for the second quarter was $500,000, compared to $2.6 million for the second quarter of 2010 and a negative $5.2 million in the first quarter of 2011.

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

Thank you, Bill. Good morning. I will begin my comments today by providing some details about the second quarter, and then I will move on to our market conditions. Finally, I will provide a brief status on our key initiatives for Vishay Precision Group.

Let's start with the second quarter. We completed the quarter with revenues coming in [near to high end] of our revenue guidance, with growth in both segments compared to the first quarter of 2011. The growth was primarily from OEM customers increasing by 2.5 million and an increase of 700,000 from end users, offset by a decline of 600,000 from distributors and EMS customers.

The regional sales breakdown, as compared to Q1, was an increase in European revenues of $1.5 million, an increase of $800,000 in the Americas, and a small increase of $300,000 in Asian revenues. Our backlog for Q2 was at 2.3 months, compared to a backlog of 2.4 months for Q1.

ASP erosion was approximately $100,000 in the second quarter, compared to the prior quarter. Inventory turns were at 3.3, compared to 3.2 in the first quarter. During the second quarter, employment was relatively unchanged with a total headcount of 2,401.

I will now provide some details about the two product segments. The Foil Technology Product segment, or FTP, revenues increased to $29 million or 3% over the first quarter. We experienced increased revenues from OEM producing automatic testing equipment for semiconductors in the United States and in Asia and precision instruments primarily in Europe.

The FTP gross margin was 46% for Q2, compared to 44.3% in Q1. The improvements in the gross margins from Q1 is primarily due to better process yields and improving manufacturing efficiencies. The segment backlog remained stable at 2.6 months, compared to 2.6 months in the prior quarter.

The FTP segment had a positive book-to-bill ratio of 1.01 for Q2, compared to 1.13 for Q1. Foil Technology Product inventory turns were 3.6 for Q2, compared to 3.7 for Q1.

Looking at the second segment, the Weighing Modules and Control Systems segment, or WMCS, revenues increased to $33.1 million or 5.6% over prior quarter. The increasing revenues came mainly from process weighing systems and force measurements applications.

The WMCS gross margin was 26.4%, compared to 27.2% in Q1. The change in gross margin from Q1 was mainly due to unfavorable product mix and start-up costs in our offshore facility.

The WMCS segment backlog remained stable at 2.1 months, compared to 2.1 months in the prior quarter. The book-to-bill ratio was 1.02 for Q2, compared to 1.06 for the prior quarter. WMCS inventory turns improved to 3.1 in Q2, compared to 2.9 in Q1.

The positive book-to-bill ratio for both segments in the second quarter indicates that we are maintaining a strong order rate across all of our product lines, although some orders are being booked for Q4. We expect the demand in shipments for our products in Q3 will be seasonally lower.

Europe currently represents approximately 45% of our total revenues and we typically experienced a slowdown in that region during the third quarter. We believe that the anticipated business for our two segments will result in overall revenue for Q3 in the range of $57 million to $61 million.

Finally, as we have mentioned in previous calls, I would like to provide a short update on our key initiatives for 2011. As Bill mentioned earlier, our year-to-date cap spending had only been $5.1 million. However, we are still confident that we will meet our targeted spending of $16 million to $20 million which will allow us to achieve our planned initiatives this year.

The first project will expand the FTP segment product portfolio and will provide organic growth. These initiatives create a new strain gauge product that will be manufactured on a completely new production line. The first shipments of the new product have been already completed as customers place their initial orders this quarter. Revenues for the new products are expected to slowly ramp up over the next 3 to 4 quarters.

The second project is the construction of our major manufacturing facility in Asia. This plant will support the WMCS segment by providing a low-cost manufacturing base for our transducer products. The construction is expected to be completed by the end of this year. With production beginning there next year, this facility is expected to improve our WMCS gross margins as our manufacturing is transferred from our existing higher cost facility into the new plant.

And with that, we will open the line for questions. Thank you.

Larry Solow, CJS Securities.

Good morning.

Good morning.

Just quickly, the book to bill is sort of sequential drop, is that mostly just seasonality of -- you have less orders coming in Q3 or is there anything more we should look into that because (inaudible) on what your book to bill (inaudible) whether you book this quarter, when would that normally on average be delivered and is that just carrying [along with a book to bill] is sort of decline sequentially or is it just seasonality?

From our experience, Larry, this is seasonality. As I mentioned, approximately 45% of our sales are coming from Europe and since Europe, especially during the months of July and August, many of our customers are not working, are taking vacations. We do see a significant drop in order intake while we are already -- we have been experiencing a pickup already in September. But all in all, this quarter always present a lower order intake.

And it shows the majority of orders that you would take in, normally in Q2 for shipment in Q3 --

Not necessarily so. I would say that somehow our customers are recycling their older intakes so as such that some of the orders are being placed in Q2 and some of them will be placed later on in Q4. I think they are planning their manufacturing ahead of -- they're planning their manufacturing so, I think, as such we have seen somehow the order intake being split between Q4 and Q2.

Got you. Okay. So you don't think it's -- obviously, (inaudible) but you still think that you could see -- your Q3 guidance is actually a solid number. So just trying to (inaudible) just to make sure that you haven't seen any real slowdown or anything in your business, and then the book to bill is more a timing issue than anything else.

And I would like to emphasize, so far, we have not seen any slowdown in all the intake. And so far, we don't have any indication from any of our customers of any slowdown in the market -- expected in the marketplace.

Got it. That's very helpful. And then on the gross margin in the two segments, so that the Foil segment actually have a pretty nice improvement sequentially and you cited some improved manufacturing efficiency and whatnot. So does that mean that you're already starting to see -- maybe not some of the benefits of the new capacity expansion, but you're starting to always reverse some of the short-term negative and you should continuously or at least this number can stabilize well before you start getting improvement, or is this number or the sequential improvement maybe not a full good gauge of what may happen in the next couple of quarters?

Larry, I believe I've mentioned in earlier calls, we were discussing about some inefficiencies being incurred due to the long learning curve in the first segment. I think that this quarter, we have seen that we have realized efficiency improvement due to the fact that we caught up with the learning curve. I would say that we should not expect to see a drop in the gross margin with the sustainable level of sales. Meaning, we should continue to see -- I would say, a very solid gross margin on this segment.

Okay. So you're saying that actually this number is a good base with improvement going forward, so you've had a nice --

That is correct.

Okay. And in terms of the sales ramp that you talked about over the next 3 or 4 quarters, can you maybe talk about what those numbers might look like or what you think the potential for this new product could inevitably be or this new production line? And I know you talked about some of these [strain-gages], it opens up new opportunities. Any further detail or any color you can share?

Yes. As you may know, this is a new product line and a new design that we are now -- that we have already introduced to the marketplace some time ago. Now, we are in the stage of setting the pilot line and later on we will be fit to make it a much more or a much bigger production line. As we have discussed in the past, I would say that the design time or the design cycle for such a new product line and in your product platform that does not exist today in the marketplace is around 12 to 18 months. Therefore, we should expect to realize much higher revenues in the future. What I could say concerning the existing product line is that even this year, once we send samples to customers and we have received positive feedback, we will be realized few hundred thousands of sales already this year. But in the upcoming quarters, we are looking in realizing a few million dollars of revenues already for this new product line.

Got it. Okay, great. And then my last question just on the Weighing Modules and Control, the margin sort of help and went down a little bit, but pretty close to flat. And I realized there's some good impact from the ramp up or the build out of the facility in India. When do you -- do you see this margin continuing to go down? Do you see it flattening out and then starting to recover next year or -- honestly, I know mix has some impact on that, too. But I'm saying assuming mix stays sort of that level.

In the second segment, we have seen a much higher order intake. As you may know, we have this already a certain plan this year to relocate product from high labor countries to low labor countries due to the fact that we have seen a much bigger increase in demand in the marketplace. First of all, our first priority was to meet the demand to stay competitive with lead times to gain market share.

Having said that, this has pushed back a little bit some of the relocation project from the high to the low cost areas due to the effect of the high demand for our product lines. In that respect, our offshore facilities in the second segment has realized over 30% higher volume than in the second quarter vis-a-vis the first quarter, which did create some inefficiencies and additional start-up costs. We do expect once the new facility is up and running, we do expect to see a much better gross margins. Going forward, given the fact that sales would stay flat, I don't think we should expect to see a further deterioration of the gross margin in the second segment.

Okay. Excellent. Thanks a lot.

Thank you, Larry.

(Operator Instructions). Liam Burke, Janney Capital Markets.

Thank you. Good morning, Ziv. Good morning, Bill.

Hi. Good morning, Liam.

Hi, Liam.

Ziv, could you sort of elaborate on the discussion on the Weighing Modules and how your strategies were taking share in that space obviously with production volumes ramping next year? You'll see a cost -- you should see a lower cost. How do you go to market? Do you just add functionality or is there going to be a cost advantage in 2012?

The main objective of setting the new facility is on one hand to stay extremely competitive from a cost base given the fact that we have to, I would say, that we would like even to gain market share in some products that today we are still competitive with lower margins, but we would be much more competitive with much higher margins. In addition to that, this will allow us to produce products which are currently more for design driven or more OEM driven in a much more inexpensive way. And by doing that, to do it on an incremental basis and by doing that to increase our margins, and of course this offshore manufacturing base will also give us the option if we want to take market share based on, I would say, cost advantage vis-a-vis some of our competitors currently which we are not able to do so.

Okay. And on the FTP area, are you -- with your next generation of products, are you getting a lot of inquiries for new applications that you normally didn't see in the past?

This is a very good question. Concerning the new application, first, we do get many quotes for, I would say, new -- our customers have developed new applications; therefore, we do see a much more increased demand for, I would say, let me put it that way -- we do see a much more demand for new applications, but also from existing application to make it much more inexpensive to our customers, so this is a combination between new applications and existing applications.

Okay. Great. Thank you.

(Operator Instructions). At this time, I'm showing no additional questions. I would like to turn the conference call back over to management for any closing remarks.

Thank you. I think there's a question from Michael Broudo.

Yes, sir. We do have Michael Broudo who has just shown in the queue. Please go ahead with your questions.

Yes, thanks for the question. Two questions on the second initiative that you mentioned. Number 1, when will that facility be fully operational? And number 2, we're all trying to figure out what the gross margin potential is, so can you help us just think about maybe some sort of future target or how would you think about the gross margin potential for -- once that second initiative, second project is fully operational. Thank you.

The facility should be completed by the end of this year and be fully operational in Q1 of next year. Once all the product has been transferred and the production has been stabilized, we are looking in the second segment and the gross margin of, I would say, [high 20s] at a 30% level.

Okay. Thank you.

Adam Hamill, Gates Capital Management.

Hi, guys. Can you just give us a little bit color on volume and pricing by segment?

Yes. Let's start with the first segment. The first segment, we have been reporting a price, I would say, a price erosion of $100,000, which is a very, I would say, very, very typical, almost flat. In this case, we do not expect to see further erosion. This ASP erosion came up from the fact that we had just structured few contracts with our key customers for the next few years, so this was part of the package deal, I would say, closing the volume for the next 2 years with our key customers.

In the second segment where we have realized a bigger drop of $300,000, most of it is related to unfavorable product mix. Our business is such that the pricing structure is not done on a global basis. We do have regional policies, and not only regional, it could be even by -- per certain country. This is a very typical to this type of business. Once the mix change between the different regions, while the pricing is different, it does create a negative effect in terms of unfavorable product mix. We have seen that here, we have realized more revenues coming from Asia, from similar product lines at a lower price vis-a-vis prior quarter similar to other products coming from other regions of the world. So in this case, it's more of an unfavorable mix rather than through ASP erosion.

Okay. Thank you.

And at this time, I'm showing no additional questions. I'd like to turn the conference call back over to Mr. Sheaffer.

Thank you, Jimmy. I'd like to thank everyone for participating in today's call. As always, we appreciate your interest in VPG, and we look forward to your continued involvement. There are no upcoming conferences or roadshows currently scheduled in Q3. Have a great day, everyone.

And that concludes today's teleconference. We thank you for joining today's call. You may now disconnect your telephone lines.