Vishay Precision Group Inc (VPG) 2011 Q3 法說會逐字稿

Good morning, and welcome to the Vishay Precision Group Third 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, this event is being recorded. I would now like to turn the conference over to Mr. Sheaffer of Investor Relations. Please go ahead.

Thank you, Emily. Good morning, everyone. Welcome to Vishay Precision Group's Third Quarter Earnings Conference Call. An audio recording will be made of the entire conference call today, including any questions or comments the 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 October 1, 2011 represent five 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 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 if the Company had operated as an independent publicly traded company.

The content of the 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 produce, distribute, adapt, transmit, display or perform the contents of the 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 10K 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 cal, 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 third quarter of 2011. Beginning with this quarter -- we've reported revenues of $60.0 million, a 16.3% increase over the prior-year period and a 3.4% seasonal decline from the second quarter of 2011. The increase in our revenues from the prior-year quarter is primarily attributed to the improving market conditions in the Weighing Modules and Control Systems segment.

The decrease in the third quarter relative to the second quarter of 2011 reflects the reduction in revenues the Company forecasted which was primarily due to the annual seasonal slowdown in Europe. Our consolidated gross margin for the third quarter of 2011 was 35.3% compared to 37.1% for the third quarter of 2010 and 35.6% for the second quarter of 2011. The gross margin for Q3 of 2011 compared to Q2 was relatively unchanged. Ziv Shoshani will give you the details of the segments in his presentation.

Selling, general and administrative expenses for this quarter were $16.5 million, or 27.5% of revenues, compared to $14.4 million, or 27.8%, for last year's third quarter; and $17.1 million, or 27.5% of revenues for the second quarter of 2011. The increase of $2.1 million from the prior year is primarily due to an increase of $600,000 in divisional G&A due to wage increases and travel costs, and an increase of $700,000 for Sarbanes-Oxley and other fees associated with functioning as an independent publicly traded company. The remaining $700,000 is related to exchange rates.

The decrease of $600,000 from the prior quarter is mainly due to a decrease in divisional G&A due to lower travel, commissions and other costs in the third quarter of 2011 due to the annual seasonal slowdown. We expect total SG&A for 2011 to be about $67 million, excluding foreign-currency changes.

Included in other income and expense was $685,000 of foreign-exchange losses during the third quarter, compared to $224,000 of foreign-exchange losses in the second quarter of 2011. The exchange losses for the third quarter are primarily due to the movement of the US dollar versus the Indian rupee, the new Taiwan dollar, and the Euro.

The tax rate for the first nine months was 29%, which was lower than the first six months' tax rate due to a shift in income mix. The Company's tax rate for the full year is expected to be about 30% compared to the 2012 full-year tax rate of 36.6%.

Net earnings for the third fiscal quarter of 2011 were $3.3 million, or $0.24 per diluted share versus net earnings of $2.6 million, or $0.19 per diluted share for the comparable prior-year period. Diluted earnings per share for the third quarter were $0.24 compared to $0.19 per share for the third quarter of 2010, and $0.22 per share in the second quarter of 2011.

Capital expenditures for the quarter were $5.2 million compared to $1.6 million in the third quarter of 2010, and $2.2 million in the second quarter of 2011. Depreciation and amortization for the third quarter of 2011 was $2.8 million compared to $2.8 million in the second quarter of 2011.

Now, turning to the results for the first nine months of 2011 -- we reported revenues of $181.7 million, or a 19% higher than the $152.7 million reported in the first nine months of 2010. Our consolidated gross margin for the first nine months was 35.4% as compared to 36.8% for the first nine months of 2010.

Selling, general and administrative expenses for the first nine months were $49.9 million, or 27.5% of revenues, compared to $41.4 million, or 27.1% of revenues for the first nine months of 2010. The increase of $8.5 million from the prior year is primarily due to an increase of $1.9 million in divisional G&A due to wage increases, travel, and commissions in the first nine months of 2011 versus 2010; and an increase of $4.6 million for adding personnel and incurring fees of functioning as an independent publicly traded company. The remaining $2 million is related to exchange rates.

Net earnings for the first nine months were $9.6 million, or $0.69 per diluted share, versus net earnings of $8.4 million, or $0.61 per diluted share for the comparable prior-year period. Capital expenditures for the first nine months were $10.3 million compared to $5.5 million in the first nine months of 2010. Of the $10.3 million spent year to date in 2011, $6.3 million is related to our two key initiatives to lower our costs and expand our product portfolio. Depreciation and amortization for the first nine months was $8.4 million compared to $7.8 million in the first nine months of 2010.

Moving to the balance sheet -- VPG had a total long-term debt balance of $11.5 million as of October 1, 2011, and $11.7 million as of December 31, 2010. As a reminder, $10 million of that debt is recorded as exchangeable notes due in the year [2102] with a conversion feature at a share price of $22.56. As of October 1, 2011, we had cash and cash equivalents of $83.3 million compared to $82.2 million as of December 31, 2010.

Cash generated from operations was $9.4 million for the third quarter of 2011 compared to $10.6 million for the third quarter of 2010 and $2.6 million in the second quarter of 2011. Total free-cash flow for the third quarter was $4.2 million compared to $9.0 million in the third quarter of 2010 and $500,000 in the second quarter of 2011. I will now turn the call over to Ziv Shoshani, our CEO and President. Ziv?

Thank you, Bill. I will begin my comments today by providing some detail about the third quarter, and then I will move on to our market conditions. Finally, I will provide a brief status of our top strategy initiatives for Vishay Precision Group.

Let's start with the third quarter. We completed the quarter with revenues coming in the near high end of our revenue guidance. Both segments declined from the second quarter as we had forecast. And I will provide the segment details in a moment.

The overall decline was primarily from the end users' decreasing $1.9 million and a decrease of $300,000 from distributors offset by an increase of $100,000 from OEM. The regional sales breakdown as compared to Q2 was a decrease in European revenues of $2.3 million; a decrease of $100,000 in the Americas, offset by an increase of $300,000 in Asian revenues.

Our backlog for Q3 was at 2.3 months, which is unchanged from the backlog of 2.3 months for Q2. Inventory turns were at 3.1 compared to 3.3 in the second quarter. During the third quarter, employment was relatively unchanged, with a total headcount of about 2,400 employees.

I will now provide some details about the two product segments. The Foil Technology segment, or FTP, revenues decreased slightly to $28.4 million or 2.1% less than the second quarter. The declining revenues was primarily from the Scale Manufacturing and the Precision Instruments market. The FTP gross margin was 43.1% for Q3 compared to 46.0% in Q2. The decline in the gross margin from Q2 is primarily due to lower volume, minimum wage increase, costs associated with plant shutdown for maintenance in August.

The FTP segment backlog was 2.5 months, compared to 2.6 months in the prior quarter. The FTP segment had a book-to-bill ratio of 0.97 for Q3 compared to 1.01 for Q2. Foil Technology Product inventory terms were 3.7 for Q3 compared to 3.6 for Q2.

Looking at the second segment, the Weighing Modules and Control Systems, or WMCS revenues, decreased to $31.6 million, or 4.4% less than prior quarter. The decline in revenues came mainly from process weighing systems and onboard weighing systems primarily in Europe. The WMCS gross margin was 28.3% compared to 26.4% in Q2. The increase in the gross margin from Q2 was mainly due to favorable product mix, improvements in viable cost and lower travel costs.

The WMCS segment backlog remains stable at 2.1 months compared to 2.1 months in the prior quarter. The book-to-bill ratio was 0.97 for Q3 compared to 1.02 for prior quarter. WMCS inventory terms were 2.8 in Q3 compared to 3.1 in Q2. The book-to-bill ratio, [near] 1 for both segments in Q3, indicates that we maintained a solid order rate across all of our product lines even though our shipments were near the high end of our outlook.

While we experienced an annual decline in European sales in August, the orders and shipments recovered to normal levels in September. We believe the anticipated business for our two segments will result in overall revenues for Q4 in the range of $59 million to $63 million.

Finally, as we have mentioned in previous calls, I would like to provide a short update on our projects that support our top strategies initiatives for 2011. Let's begin with the first initiative, optimizing our core businesses.

First, the FTP segment -- new pilot line -- optimizes our manufacturing process in two ways. It reduced the cost basis by automating many of the process steps and the new manufacturing equipment increased the process yields. So the combined effect is to reduce costs and manufacturing time while increasing capacity.

We expect the net effect will be a gradual increase of the FTP gross margins as the new pilot line transitions to a production line next year. Next, our new manufacturing facility in Asia will optimize the WMCS segment by providing a low-cost manufacturing base for our transducer products. The construction is progressing according to our plans, with an end-of-the-year completion expected. The actual manufacturing will begin in 2012 as our employees move into the new facility in Q1 of next year. The transition to the new site is in the foundation of the integration plan to reduce the cost basis for many of our transducer products in 2012.

Our second strategic initiative is creating organic growth. The new pilot line for the FTP segment is continuing to shape our next-generation [strategies] to customers. This quarter, we are beginning to see order quantities increase as the first customers or early adopters begin to transition their orders from evaluation samples to pre-production quantities. This new product portfolio is expected to enhance organic growth. The strategies that are now being produced have new properties and can be used in new applications. Revenues from the new product are expected to slowly ramp up over the next three to four quarters.

Finally, you have probably noticed several press releases that announced new VPG product types. These are a result of our engineering efforts to create value-added specialty products for our FTP and WMCS customers. These activities are all geared to the design in [wins] that you have heard me talk about in previous calls. The goal is to provide our customers with custom products that fit their specifications. We believe this design in wins will drive higher organic-growth rate as we enhance our product portfolio. And with that, we will open the lines for questions. Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

And our first question will come from Liam Burke of Janney Capital Markets. Please go ahead.

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

Good morning, Liam.

Hi. Good morning, Liam.

Ziv, the gross margin on FTP was flat or down slightly year over year. Are you seeing any progress on the new-product-manufacturing ramp, or will we see any this year? Or is that a 2012 event?

I believe that I have mentioned being (inaudible - microphone inaccessible). The main decline in the FTP market was our learning curve to support further volume growth in the second segment. It seems that we are -- we have already realized most of the learning-curve costs associated. And, in conjunction, as I said, we are launching the new product line.

Specifically, this quarter, we have realized lower gross margin due to a plant-maintenance shutdown. We do expect to see a recovery of gross margin, given fixed volume next quarter. But if we are looking at going back to prior quarters, gross-margin levels, this is -- definitely will come back next year, as the new IP is taking volume.

Okay. If I could just -- I'm sorry.

So, in principle, to ask to your question, we should expect to see much better gross margins next year.

Okay. So if I understand it, there was a two-step part to FTP. You had internal learning curve on supplying the second segment, which you're through; and then you had the ramp-up of the new-product introduction, which will be a 2012 event. Do I have that straight?

This is correct.

Okay. And, Bill, do you have a sense of what total CapEx will be for 2011? And is that -- are you through the projects or will you see any spill-over in 2012?

Liam, we expect that, for the full year 2011, to spend between $16 million and $20 million. So we should be able to, for both our projects, incur most of the capital spending in the year 2011; and then, in 2012, to get back to the more normal 3% of revenues.

Great. Well thank you, Ziv. Thank you, Bill.

Thank you.

Our next question comes from Larry Solow of CJS Securities. Please go ahead.

Good morning, gentlemen. Congratulations on a nice quarter.

Thank you. Good morning, Larry.

Thank you.

This is actually [Andrew Gavlin] in for Larry.

I wanted to ask a question following up on gross margins relating to the Weighing Module segment. You discussed that there would be manufacturing beginning in 2012. How would that impact gross margins around that?

As we are finalizing the construction of our plant in Asia, we are going to start moving production in Q1 of next year. Therefore, we should expect in 2012, overall -- we should enjoy better margins for the second segment due to the fact that we are moving more production to the new facility.

But that would be -- there would be a ramp there through 2012, correct?

This is correct, but once we stabilize the production level over the end of Q1, we should realize better margin Q2 and onwards. But you are correct. These should be a gradual [improvement].

Okay, great. And one follow-up question on revenue trends that you saw. You mentioned a press release that September was quite strong. Can you share any detail about how October -- and whether you're seeing some of that continued strength?

Well, unfortunately, we don't provide monthly updates or monthly revenue.

Yes, unfortunately -- I mean we just talk about what happened in the current quarter. And we have not given out any guidance since then.

Okay. All right, gentlemen. Thanks very much.

Thank you.

Our next question comes from Tim Hartch of Brown Brothers Harriman. Please go ahead.

Hi, Ziv. It sounds like the new strain-gauge technology and product is off to a good start, and I was wondering if you could just provide a little additional color on some of the potential applications and some of the progress to date.

Hi, good morning. As the applications -- we are looking at -- okay, the new IP -- we have stopped at producing on a [pilot plan] level, and we already realized fairly low level of revenues. The applications -- we are targeting existing customers at existing markets and also new markets and new application. I think that the disappointing time -- I can only say since we have signed NDA agreements with many of our new customers for new applications because -- new application -- I'm not sure how much information I will be able to share.

But I can say that the fact that the new strain gauge is way smaller than -- way smaller than the standard or the classical strain gauge -- and the fact that we can go to much higher resistance value -- it will allow us to consume much lower energy which, in many cases, may fit battery-operated types of application on one hand. And on the other hand, it will be able to be deployed in an -- areas where [strainers] so far couldn't fit from a physical standpoint. But more than that -- it will be hard to say at this point in time.

Okay, that's helpful. And on some of the design in wins that you referenced -- could you expand on those as well?

Concerning the design in wins, I think that we are -- well, as part of the strategy, we have always said that we are going to beef up our technical stuff concerning the technical marketing, [FAS] field-application engineers and R&D people.

So far, we were looking to develop more and more custom-type of products -- non-catalogue items. And I think that to that extent, we are now -- we have more and more new-design wins in our traditional markets. At this point, I cannot elaborate more on new markets, but with our existing customers, we have more design in with our -- I will say within our classical applications.

Thank you.

(Operator Instructions)

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Sheaffer for any closing remarks.

Thank you. I would 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. We're currently scheduling a road show for the end of November or beginning of December. And you should watch for an updated presentation to be posted on our Website if that scheduling takes place. Thanks again, and have a great day, everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.