Vishay Precision Group Inc (VPG) 2011 Q4 法說會逐字稿

Good morning and welcome to the Vishay Precision Group Fourth Quarter Results Conference Call. 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 Mike Sheaffer, Investor Relations. Please go ahead.

Thank you, Andrew. Good morning, everyone. Welcome to Vishay Precision Group's Fourth Quarter 2011 and Full Year 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 and year ended December 31, 2011 represents six fiscal quarters of operations for VPG as an independent company after its spinoff from Vishay Intertechnology. The results of operations and earning 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 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 for the year ended December 31, 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 Mr. 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 of 2011. We reported revenues of $56.4 million for the fourth quarter, a 2.9% increase over the prior year period and a 6% decline from the third quarter of 2011. The increase in our revenues from the prior year quarter is coming from the Weighing modules and Control Systems segment. The decrease in the fourth quarter relative to the third quarter of 2011 reflect the reduction in revenues the company pre-announced.

Our consolidated gross margin for the fourth quarter of 2011 was 33.4%, compared to 38.2% for the fourth quarter of 2010, and 35.3% for the third quarter of 2011. Ziv Shoshani will give you the details of the segments in his presentation.

Selling, general, and administrative expenses for this quarter were $16.9 million, or 30% of revenues, compared to $15.9 million, or 29% for last year's fourth quarter, and $16.5 million, or 27.5% of revenues for the third quarter of 2011. The increase of $1.0 million from the prior year is primarily due to an increase of $500,000 for Sarbanes-Oxley fees, $300,000 for wages, and the rest for other fees. The increase of $400,000 from the third quarter of 2011 is mainly due to an increase of $200,000 for a bad debt expense, and $200,000 for trade shows and ERP implementation.

Included in other income and expenses was $526,000 of foreign exchange losses during the fourth quarter, compared to $685,000 of foreign exchange losses in the third quarter of 2011. The exchange losses for the fourth quarter were offset by interest income of $373,000.

The tax rate for the year ended December 31, 2011 was 28.5% which was comparable to the first nine months tax rate of 28.9%. This compares to the 2010 full-year tax rate of 36.6%.

Net earnings for the fourth fiscal quarter of 2011 were $1.2 million, or $0.09 per diluted shares versus net earnings of $3.3 million, or $0.24 per diluted shares for the comparable prior year period. Diluted earnings per share for the fourth quarter of $0.09, compared to $0.24 per share for the fourth quarter of 2010, and $0.24 per share in the third quarter of 2011.

Capital expenditures for the quarter were $5.9 million, compared to $2.9 million in the fourth quarter of 2010, and $5.2 million in the third quarter of 2011. Depreciation and amortization for the fourth quarter of 2011 was $2.9 million compared to $2.8 million in the third quarter of 2011.

Now turning to the results for the twelve months of 2011. We reported revenues of $238.1 million, or 14.7% higher than the $207.5 million reported in the twelve months of 2010. Our consolidated gross margin for the twelve months was 34.9%, as compared to 37.2% for the twelve months of 2010. The results for the first six months of 2010 were reported under Vishay Intertechnology Inc's before the actual spinoff of becoming a publicly-held company.

Selling, general, and administrative expenses for the twelve months were $66.8 million, or 28.1% of revenues, compared to $57.3 million, or 27.6% of revenues for the twelve months of 2010. The increase of $9.5 million from the prior year is primarily due to an increase of $4.2 million in divisional G&A, which includes $1.4 million related to exchange rates, and the increase is mainly due to wages, IT costs, travel, and commissions in the twelve months of 2011 versus 2010, and an increase of $5.4 million, which includes $700,000 for exchange rates for adding personnel and carrying fees of functioning as an independent publicly-traded company.

Net earnings for the twelve months were $10.8 million, or $0.78 per diluted share versus earnings of $11.7 million, or $0.85 per diluted share the comparable prior year period. Capital expenditures for the twelve months were $16.3 million, compared to $8.4 million in the twelve months of 2010.

Of the $16.3 million invested in 2011, $10 million is related to our two key initiatives to lower our manufacturing costs, and expand our product portfolio. We have approximately $4 million of capital spending remaining for these two projects that will carry over to 2012. Including the carryover, we expect capital spending for 2012 to be in the range of $10 million to $14 million.

Depreciation and amortization for the twelve months was $11.3 million, compared to $10.6 million in the twelve months of 2010. Moving to the balance sheet, VPG had a total long-term debt balance of $11.5 million as of December 31, 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 as share price of $22.56.

As of December 31, 2011 we had cash and cash equivalents of $80.8 million, compared to $82.2 million as of December 31, 2010. Cash generated from operations was $5.9 million for the fourth quarter of 2011, compared to $1.7 million for the fourth quarter of 2010, and $9.4 million in the third quarter of 2011.

Total free cash flow for the fourth quarter was zero compared to a negative $1.2 million the fourth quarter of 2010, and $4.2 million in the third 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 details about the fourth quarter compared to the third quarter regarding market conditions for the company, and the reporting segments. I will conclude my remarks with a brief overview of our top strategic initiatives for Vishay Precision Group in 2012.

Let's start with the fourth quarter. Market demand in the US and Asia remained fairly stable. However, European demand dropped significantly from the third quarter, which resulted in lower revenues in the fourth quarter mainly for the WMCS segment. We completed the quarter with revenues coming in below the low end of our revenue guidance. I will provide the segment details in a moment.

The overall revenue decline for the company was primarily from a decrease of $3.6 million from OEM customers, and a decrease of $1 million from end users, offset by an increase of $900,000, mainly from distributors.

The regional sales breakdown as compared to Q3 was a decrease in European revenues of $3.2 million, a decrease of $300,000 in the Americas, and a decrease of $100,000 in Asian revenues. Our backlog for Q4 was at 2.3 months which is unchanged from the backlog of 2.3 months from Q3. Inventory turns were at 3.0 compared to 3.1 in the third quarter.

I will now provide some details about the two reporting segments. The Foil Technology Products, or FTP revenues decreased by $1.8 million to $26.6 million, or 6.5% less than the third quarter. While European revenues for FTP decreased $1.1 million, or 11.5%, mainly from scale manufacturers, and OEM in the Force Measurement market sector. The decline in revenues was also the result of capacity issues resulting from lower yield associated with raw materials, which is still being analyzed.

The FTP gross margin was 40.5% for Q4, compared to 43.1% in Q3. The decline in the gross margin from Q3 is primarily due to lower volume and cost associated with the capacity issues mentioned above. The FTP segment backlog was 2.5 months, compared to 2.5 months in the prior quarter.

The FTP segment had the book-to-bill ratio of 0.95 for Q4, compared to 0.97 for Q3 in 2011. In the segment, demand declined by 7% compared to Q3 of 2011, while European orders declined by 19%. Foil Technology Products inventory turns were 3.5 for Q4, compared to 3.6 for Q3.

Looking at the Weighing Modules and Control Systems Segment, or WMCS, revenues decreased by $1.8 million to $29.9 million, or 5.6% less than prior quarter. While you will see the revenues for WMCS decrease by $2.1 million or 13%, the decline in revenues came mainly from scale manufacturers, OEM customers, and from the end user customers in the process weighing markets by [mailing yules].

The WMCS gross margin was 27.1% compared to 28.3% in Q3. The decrease in the gross margin from Q3 2011 was mainly due to lower volume, product mix, and start-up cost in the new facility. The WMCS segment backlog remained stable at 2.0 months, compared to 2.1 months in the prior quarter.

The book-to-bill ratio was 0.94 for Q4, compared to 0.97 for prior quarter. In this segment, demand declined by 8% compared to Q3 of 2011, while European orders declined by 15%. WMCS inventory turns were 2.7 in Q4, compared to 2.8 in Q3. The book-to-bill ratio of 0.95 for the total company in Q4 indicates lower order rates. Total decline in demand was 8%, compared to Q3 of 2011, while total European orders declined by 16%.

As we noted in today's earnings release, we intend to divide the WMCS segment into two reporting segments, one of which will be reported as Force Sensors, and the second as Weighing and Control Systems. Beginning with the filing of our Annual Report on Form 10-K, this change is primarily due to recognizing the differences between the products in the current aggregation of the WMCS segment. We expect this move to create reporting segments will provide more clarity about our financial results and market trends going forward in 2012.

Looking forward, we are seeing some stability in our end markets for the first quarter of 2012. We believe anticipated business for the first quarter will result in an overall revenues in the range of $53 million to $58 million.

Finally, I would like to provide an overview of our budget that support our top strategic initiatives for 2012. The first initiative is to organically grow our core business by introducing to the markets new products that have been released in 2011.

First, the FTP segments new intellectual properties expected to generate growth from our next-generation products. In addition, we have also introduced high-temperature precision resistors for down hole applications winning the best electronic design award in 2011 from Electronic Design magazine.

Our WMCS segment has introduced a new truck weigh system for overload protection that is expected to grow. Second, our FTP and WMCS segments are expect to continue to enhance the design win activity by our technical market group at the customer's R&D and engineering departments. We also to expect to enhance our focus on strategic acquisitions in 2012. And with that, we will open the lines for questions. Thank you.

We will now begin the question and answer session.

(Operator Instructions)

The first question comes from Larry Solow of CJS Securities. Please go ahead.

Hi, good morning.

Good morning.

I'm wondering if you could just discuss, and I realize it's early in the year, but in general terms your gross margin outlook. I know your Foil Tech segment has been under some pressure with less overhead absorption. This quarter was remarkably low because of the [IP at one timer]. So do you expect, looking first at the first segment first. Your margins, even in the beginning of the first half of 2011 were sort of in the 44% or 46% range, and that was with the ongoing project. Is that a number you can at least get back to if your sales sort of stay in that high twenties range in revenues?

Concerning the first segment gross margins, if we are going to, as you know, this is very much volume dependent.

Right.

If we are going to stabilize with the same level of revenues, and once we have processed all those capacity-related issues, we do expect to get back to those historical first half of the year 2011 gross margin percentage levels. Yes.

Because that first half 2011 number was already -- was impacted already by the new line there. So, I'm not saying -- I imagine in order to get back to the high forties or fifty-percent range that you were a couple of years -- you know in 2010, you'll need to get some orders on that line. But, I'm just sort of saying, can you at least get back to where you were in the beginning of last year when you were already being impacted, and I guess the answer is yes, then? Is that --

Good morning.

Once we finalize our existing issues and we get back to last year volume, absolutely.

And you mentioned that some of the issues -- an order pushed out into Q1, I guess, of this year, right. Was that related to the yield on some of your raw materials, or was that a separate issue?

No, this was part of the problem. The issue was the following, that we have realized some changes in our process control. We decided to take a very conservative approach not to compromise on quality, so we have tightened the control processes, which have slowed dramatically the output, the outflow of products from the line. Therefore, we had to push out some orders that were supposed to be shipped in Q4 into the following quarter.

Got you. And then looking out on Weigh Module, obviously, I know there you moved into a new facility, or you will put up a new facility, and I guess some product has been moved into there. Is that something, I imagine it's over a longer term that you'll start seeing margin improvement, but is there any sort of near-term, one, two quarter improvement you expect as you're double expensing in two facilities subsides, you get some yield improvements?

The transition to the new facility has been -- well, is in process, has been pretty much finalized already in the beginning of the year. This is why we have realized start-up cost in Q4. We are emptying out slowly already in Q1 in the new facility, and we're supposed to realize, of course, already some of the saving this year, while there is an ongoing transition, and an ongoing to consolidation beyond the original plan in 2011, also in this year and next year. So we do expect to realize further savings as we move on with the new facility.

Last question, I'll move on, I'll let someone else. You guys have some benefit, I guess, sort of the middle of the year in terms of foreign [contail] at least on your revenue, I guess with the Euro is a little bit, had been doing better year-over-year. Now it's obviously come in a good amount, so your comps for 2012 are not as easy on your revenue basis. But just remind me, does this normally most of this flow through and negate itself on the cost side?

Yes, Larry. If we're showing an increase in revenues, for the most part, that would also then show an increase in your costs.

Okay.

So it would kind of flow through all of your lines in your income statement.

Okay. So the weaker Euro shouldn't necessarily hurt your overall results.

No.

Got you. Excellent. Great. Thanks a lot.

You're welcome, Larry.

The next question comes from John Franzreb of Sidoti & Company. Please go ahead.

Good morning, gentlemen.

Good morning.

Back to that $2 million in deferred orders. Is that sale going to occur entirely in the first quarter? And if it is, should we be thinking about the first quarter's underlying, call it, organic revenue profile may be that $2 million lighter than that going forward?

The issue is the [foreign], you're absolutely correct. The initial thought was that those $2 million that -- the additional $2 million will flow into Q1, but since we are still in the process of working out those issues. Since we have [slown] down the output from our manufacturing process, I don't believe we should expect to see an upside of $2 million in the first segment.

Okay. And in regards to what you're seeing as far as order trends, you pointed out that Europe has been the weak part of this picture here. You cited scale manufacturers, and if I heard correctly, the process weighing markets. Not just on a market basis, but has the falloff in the order book, has it been consistent or did it happen in one specific timing in the quarter that you could call out? Any kind of color there would be helpful.

Concerning the drop of orders intake, or drop of demand in Q4 for both segments, I would say it started mostly in the second month in Q4, and it was pretty consistent until the rest of the quarter. Since then, generally, we have seen a stabilization of the European order intakes.

Okay.

So, at this point in time, we don't expect order to further decline in Europe, so far, at least from the indication we have since the beginning of the year.

Okay. Perfect. So, to follow up, I guess, on Larry's question, with the manufacturing put in place sometime this year, and at the current volume levels, how much margin improvement would you expect just on manufacturing production basis in 2012, all else being equal?

If we are speaking about what type of savings we may realize by moving to the new facility, we are looking for at least a minimum of $1.5 million of savings that we should realize this year by moving to the new facility --

Excellent --

Only from what has been moved last year at --

At current volume levels.

And, of course, it's very volume dependent.

So, at the current volume levels, you'd still expect that $1.5 million.

This is correct.

And one last question. You kind of threw out there the potential of M&A activity in 2012. Do some color as to what kind of candidates you're looking at out there? What are you thinking about, or what are you hearing about as far as multiples of -- have they gotten better or are worse? Just a little color on your M&A thoughts for the year ahead.

Yes, John. Basically, we're looking for potential acquisitions that would have very good technology. Basically use the four resistor as the basis and the foundation. Like we've always mentioned, we're looking for acquisitions that have revenues between $10 million and [$60 million]; EBITDA of 15% to 20%. Obviously, from a purchase price perspective, we would probably look at paying some type of EBITDA multiple, depending on the situation. Obviously, we loved to pay as minimal as possible, but we're seeing -- we're hearing transactions that are maybe five, six times EBITDA.

We are looking at the [Baird] Report. We have seen what type of transaction has been done during the year in the industrial market with very similar type of companies as we do. So this give us a certain notion, a certain reference point.

Great. Thank you very much guys.

You're welcome.

The next question comes from Liam Burke of Janney Capital Markets. Please go ahead.

Thank you. Good morning Ziv, good morning Bill.

Good morning, Liam.

Bill, on the working capital front, it seems that it's progressing nicely, management has been doing better. Is this an evolutionary process or is there something, as you go forward, you're actively, I mean, obviously, you're going to work towards improving working capital management. Is this something, as you become a public company, you're actively working on?

Well, I mean Liam, we're always actively looking to improve our working capital. We've been working on it for the past couple of years. I think it's a continuation that we'll see in 2012. We should begin to see much more free cash being generated. In 2011, we had the big capital expending, which, except for the carryover from $4 million this year, should not occur. So, going forward we should see relatively very good cash -- free cash flow being generated in the upcoming years.

Great. And Ziv, you've spoken on the next generation of foil technology products being smaller or power efficient, and therefore, more cost effective, opening it up for new applications that typically didn't make economic sense for the user. As you're introducing this new product, are there any applications that are jumping out that are new that didn't exist prior to the new release?

Since we have some key customers that we have signed NDA concerning new proprietary application, I cannot speak about some new pressure -- precision pressure measurements type of application. I could speak about precision force measurement type of application. Unfortunately, I cannot be too specific, but we are looking at generating at least $1 million from those new projects in the upcoming year.

Great. Thank you.

This concludes our question and answer session. I would like to turn the conference over to Mike Sheaffer for any closing remarks.

Thanks, Andrew. 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. We are currently scheduled to present at the Sidoti Conference in New York on March 19. You should watch for an updated presentation to be posted on our website at that time. Thanks again, and have a great day, everyone.

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