Vishay Precision Group Inc (VPG) 2012 Q2 法說會逐字稿

Good morning, and welcome to the Vishay Precision Group's second-quarter earnings conference call. All participants will be in listen-only mode. (Operator Instructions). Please note that this event is being recorded.

I would now like to turn the conference over to Mr. Joseph DeSimone, Manager of Investor Relations. Please go ahead.

Good morning, everyone. Welcome to the Vishay Precision Group second-quarter 2012 earnings conference call. An audio recording will be made of the entire conference today, including any questions or comments that participants may contribute.

By now, you should all have received the second-quarter earnings press release and we hope you take the time to read through it, as it does contain important information. An audio recording will be available on the Internet for a limited time and may be accessed from VPG website, WW.Vishay.com.

The content of this call is owned by Vishay Precision Group and is protected by the 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 content of this conference call in whole or in part without written permission of VPG.

Today's remarks are governed by the Safe Harbor provision of 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 operation of Vishay Precision Group, please refer to our SEC filings, especially Form 10-K for the year ended December 31, 2011 and our other recent SEC filings.

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

Thanks, Joe. Good morning, everyone, and thank you for joining us on our call today. My remarks today will focus on the second quarter and year-over-year comparison. I would like to start by summarizing the financials, and then Ziv will provide a more detailed analysis of the second quarter of 2012.

For the second quarter, we reported revenues of $55.3 million, an 11% decrease over the prior-year period and a 1% decline from the first quarter of 2012. The consolidated gross margin for the second quarter of 2012 improved to 35.9% compared to 35.6% for the second quarter of 2011 and 33.8% for the first quarter of 2012. Ziv Shoshani will give you the details of the segments in his presentation.

Selling, general and administrative expenses for the quarter were $15.8 million, or 28.5% of revenues, compared to $17.1 million, or 27.5%, for last year's second quarter and $16.5 million, or 29.6% of revenues for the first quarter of 2012. The decrease of $1.3 million from the prior year is primarily due to a reduction of $700,000 coming from exchange rates, $800,000 reduction in total fees and travel, offset by wage increase of $200,000.

The decrease of $700,000 from the first quarter of 2012 is due to a net reduction of $200,000 in travel, $300,000 in total fees and $200,000 on the loss of disposal of fixed assets, which occurred in the first quarter of 2012.

Included in other income and expense was $41,000 of foreign exchange losses during the second quarter of 2012 compared to $27,000 of foreign exchange gains in the first quarter of 2012 and $224,000 of foreign exchange losses in the second quarter of 2011.

We also recorded interest income of $140,000 in the second quarter of 2012 compared to interest income of $93,000 for the same prior-year period and interest income of $193,000 in the first quarter of 2012.

The effective tax rate for this quarter ended June 30, 2012 was 27.2% compared to 36.8% for the second quarter of 2011. Net earnings for the second quarter of 2012 were $3 million, or $.21 per diluted share, versus net earnings of $3 million, or $0.22 per diluted share, for the comparable prior-year period, and net earnings of $1.6 million, or $0.12 per share, in the first quarter of 2012.

Capital expenditures for the second quarter of 2012 were $1.6 million compared to $2.2 million in the second quarter of 2011 and $2.6 million in the first quarter of 2012.

Depreciation and amortization for the second quarter of 2012 was $2.9 million compared to $2.8 million in the second quarter of 2011.

Now turning to the results for the first six months of 2012, we reported revenues of $111.2 million, an 8.6% decrease from the $121.7 million reported in the first six months of 2011. Consolidated gross margins for the first six months were 34.8% as compared to 35.4% for the prior-year period.

Selling, general and administrative expenses were $32.3 million or 29% of revenues compared to $33.4 million or 27.5% of revenues for the six months of 2011. The improvement of SG&A cost is due to reduction of $900,000 coming from exchange rate, $300,000 coming in total fees, $400,000 in various adjustments, offset by wage increases of $500,000.

Capital expenditures for the first six months were $4.2 million compared to $5.1 million for the first six months of 2011. Depreciation and amortization for the six months of 2012 was $5.9 million compared to $5.6 million for the first six months of 2011.

Taking a look at the balance sheet, the Company had total long-term debt as of June 30, 2012 and December 31, 2011 of $11.3 million and $11.5 million, respectively. As I have mentioned in previous calls, $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 June 30, 2012, we had cash and cash equivalents of $82.1 million compared to $80.8 million as of December 31, 2011.

A few final items to point out. Cash generated from operations was $2.1 million for the second quarter of 2012 compared to $2.6 million for the second quarter of 2011 and $4.1 million for the first quarter of 2012. Total free cash for the second quarter of 2012 was $500,000 compared to $500,000 in the second quarter of 2011 and $1.7 million for the first quarter of 2012.

With that, I'd now like to 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 second quarter of 2012 compared to the first quarter of 2012 regarding market conditions for the Company and the reporting segments. I will conclude my remarks with a brief overview of our top strategic initiatives of the Vishay Precision Group in 2012.

The Company's overall book-to-bill was 1.02 for the second quarter. Total orders were relatively flat compared to the previous three months of 2012, with European orders decreasing by 7.9%, America's orders improving by 3.3% and the Asian orders improving by 10.9%. I will provide the segment and the market details in a moment.

The overall revenues decline $500,000 from the prior quarter was due to a decline in revenues exclusively from Europe, driven by avionics, military and space sector in the OEM channel and end users. The sales channel breakdown shows an increase of $400,000 from distributors, an increase of $600,000 from EMS, a decrease of $300,000 from end users and a decrease of $1.2 million from OEM customers.

The regional sales breakdown as compared to Q1 of 2012 shows an increase in Asian revenues of $200,000 and an increase of $900,000 in the Americas, revenues offset by a decrease of $1.6 million in European revenues.

Total backlog for the second quarter was 2.4 months, which is slightly up from a backlog of 2.3 months for Q1. Inventory turns for the second quarter was 2.9 compared to 3.0 in the first quarter.

Total revenue decline of $500,000 compared to the first quarter of 2012 was due to a reduction of $300,000 related to exchange rate and a $200,000 in volume-product mix, which consists of the following. FTP decreased by $1 million, offset by an increase in the volume-product mix of $700,000 in the Force Sensors and an increase in volume of $200,000 in the Weighing and Control Systems.

I will now provide some details about the three reporting segments, FTP, Force Sensors and Weighing and Control Systems. Firstly, the FTP revenues decreased by $1.2 million to $26.6 million or 4.4% decline from the first quarter of 2012. The FTP segment had a book-to-bill ratio of 1.04 for the second quarter of 2012 compared to a 0.97 for the first quarter of 2012.

In this segment, orders increased by $700,000 or 2.4% compared to the first three months of 2012. The regional breakdown shows European revenues for FTP decreased by $1.6 million or 16.4%; America's revenues increased by $200,000 or 1.4%; and Asian revenues improved by $200,000 or 2.7%.

The main decline in Europe was due to OEM and end-user sales channels in the avionics, military and space market sector and in the process weighing market sector, offset by modest increases in both the Americas and Asia in the Test & Measurement market sector.

The FTP gross margin improvement was 42.6% for Q2 compared to 40.7% in Q1. Despite a volume reduction of $600,000, the increasing gross margin in the second quarter of 2012 is due to manufacturing efficiencies of $400,000 and the elimination of one-time effects, which incurred in Q1 of 2012 of $300,000. The FTP segment backlog was 2.5 months compared to 2.3 months in the prior quarter.

Looking at the Force Sensors segment, revenues increased by $600,000 to $17.2 million, or 3.5% gain compared to the first quarter of 2012. The book-to-bill ratio was 0.96 for the second quarter compared to 1.06 for the first quarter of 2012. In this segment, orders decreased by $1.1 million or 6.4% compared to Q1 of 2012.

The regional breakdown shows an increase in America's revenues of $200,000 or 3.1%; an increase of $200,000 or 7.4% in Asia; and an increase in the European revenues of $200,000 or 2.4%. The improvement in revenues is mainly coming from an increase in a distribution channel, primarily from the process weighing and the force measurement market sectors.

In the Force Sensors gross margin -- the Force Sensors gross margin was 21.5% compared to 17.9% in Q1. The increase in the gross margin is due to a favorable $500,000 volume-product mix and a $200,000 in savings related to the new Indian facility. The Force Sensors segment backlog was 2.4 months compared to 2.6 months in the prior quarter. Force Sensors inventory turns were unchanged from 2.2 in Q1.

Looking at the Weighing and Control Systems segment, revenues improved by $200,000 to $11.6 million or 1.1% compared to the first quarter of 2012. The book-to-bill ratio was 1.05 for the second quarter compared to 1.03 for the prior quarter. In this segment, orders increased $400,000 or 3.2% compared to Q1 of 2012.

The regional breakdown shows the America's revenues improved by $600,000 or 18.3%; European revenues decreased by $200,000 or 3.1%; and a decline of $200,000 in the Asian revenues. The increase in the America's revenues is coming from the process weighing. The European revenues decreased by a net of $200,000, which consists of two elements, an increase of $300,000 in the process weighing, offset by a decrease of $500,000 in the onboard weighing market. In Asia, the decrease in revenues is coming from the process weighing market sector.

The Weighing and Control Systems gross margin was 41.7% in Q2 of 2012 compared to 40.0% in Q1 of 2012. The increase in the gross margin from Q1 of 2012 was mainly due to a favorable volume-product mix. The Weighing and Control Systems segment backlog was a 2.0 months compared to 1.9 months in the prior quarter. Weighing and Control Systems inventory turns were 3.9 in Q2 of 2012 compared to 4.2 in Q1 of 2012.

Europe currently represents approximately 41% of our total revenues, and we typically experience a slowdown in that region during the third quarter. We anticipate with the current market conditions that overall revenues for the third quarter will be in the range of $52 million to $57 million.

Now, I will update you on the main activities we have set for ourselves for 2012. One, India. As planned, we should continue to realize savings as volume increases. Second one, FTP, we continue to resolve issues related to manufacturing inefficiencies and expect to see continuous improvements going forward.

Third, miniature sensors. The product line is improving, samples to existing and new customers has been sent. The qualification/evaluation period varies by customers and application; therefore, some customers already qualified and have placed initial orders, while other customers are at advanced stages of testing. To date, we have received very positive feedback concerning the quality and specification of the product. We anticipate more customers to qualify our new sensors on their design boards in the upcoming quarter.

Fourth, M&A. As we said in previous calls, we are diligently pursuing potential companies that fit our strategic growth plan.

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

(Operator Instructions) Lawrence Solow, CJS Securities.

I was wondering if you can -- you briefly touched on a couple of the big initiatives on the manufacturing side and the relocation of the -- or the buildout of the new facility. I was wondering if your outlook for the back half of 2012 and even as you go into 2013, are you going to need volume growth to drive gross margin expansion. Or is there some low-hanging fruit that should come just from the ramp at the facility and some improvement in efficiencies in the first segment?

Concerning our Indian offshore facility, at this point in time, as we started production only in Q1 of this year, so therefore we have incurred some startup costs. As we move forward, we did expect, as we are realized in the second quarter, more savings coming from the existing volume by improving efficiency in the existing plant.

Moving forward to the second half of the year, we do expect to see further improvement, but definitely, as volume would increase, a much bigger savings would be realized.

Okay. Is it fair to say -- it just seems like your outlook, your customers, are they -- obviously cautious, but it seems relatively stable. Things haven't really changed too much in the various geographic locations. And obviously, a little bit of a slowdown maybe in Q3 is seasonal more than anything else. Is that fair to say?

Larry, to first statement, I think at this point in time, as we have already seen the decline in European demand in the last two quarters, and we do know and realize the seasonality effect, from a customer sentiment standpoint, we do not expect further changes, and we do see stable business environment.

Great. Okay, thank you.

John Franzreb, Sidoti & Company.

Back to the gross margin issue, you said manufacturing issues in FTP hurt results. By what magnitude did that impact second-quarter results? And when do you expect the manufacturing issues to be resolved?

The manufacturing efficiencies I've been discussing -- manufacturing efficiencies, related issues in the first segment already for the last two quarters.

In the second -- in the second quarter, we have seen an improvement in the manufacturing efficiencies in the magnitude of $200,000 per quarter. And we do expect to see further improvements going forward. So though these issues are being resolved, we have realized savings this quarter and we expect to realize further savings going forward.

When do you think you will have it behind you, Ziv?

I would say that we do expect that by year-end we should go back to historical levels, if not better than that.

Okay. Regarding customer demand, can you talk a little bit about what customer inventory levels are like across the three segments, what kind of feedback you are getting from customers about their expectations into the second half of the year, above and beyond, say, the normal seasonal trends?

If we start with the first segment, which is the FTP segment, in this segment we have -- to a large extent, we sell by distribution. Therefore, we see and we know what is their inventory levels. In this case, some of the effect that we have seen slowdown in demand is due to the fact that distribution is [holding] inventory.

All in all, for the first segment, we have not seen a major, major slowdown. It is only, I would say, kind of an inventory correction from our distribution.

The second, the Force Sensors, as well as the Weighing and Control Systems, are much -- are selling very little if any by distribution, at least for Europe. So in that sense, I would say we are more addressing an end-user business. In this case, the market condition in Europe concerning capital expenditure and municipality spending would affect our demand coming from the Weighing and Control Systems, mainly.

So to that extent, I cannot say that at this point there is too much -- there is too much inventory; therefore, we see a slower demand. It is really due to the fact that the demand is down.

Right, okay. And if I heard you correctly, you said there was a cash outflow in the second quarter despite the higher income level. What was the drop in operating cash flow? What was driving that?

John, you are correct. We still generated free cash flow of $500,000, but the biggest driver was a reduction in our accounts payable, which was about $2 million to $3 million. So normally, if we didn't have that reduction, free cash flow would improve -- or additionally by another $2 million to $3 million.

That's helpful. Okay. Thank you very much, guys.

Michael Broudo, Miller Tabak.

Good morning. Thanks for taking my question. Ziv, when I look at your stock, I think it has been about two years since the anniversary -- since the IPO. And I think we appreciate the amount that you've accomplished and the amount of moving pieces. But the stock continues to trade at distressed levels for whatever reason, something like 3.5 to 3.8 times EBITDA and 0.5 times revenue.

And I just wonder, given the fact that you have net cash and given the fact that the balance sheet is overcapitalized, despite the fact that we know that you're going to use the cash for M&A, I just wonder if there is anything that prevents you from doing a buyback at these levels, if you would consider issuing some debt to buy back stock, something like $20 million of debt to buy back stock, and if you would consider eliminating the dual class of shares. Because I just think that it is preventing corporate activity at these levels. Thank you.

Good morning, Michael. First, let's talk about the stock price level. I think you are absolutely correct. This is now two years since the IPO, and I think we have reached a peak level of -- we reached a level -- we peaked a level of close to $20, while the stock now is way, way below that.

I don't see Vishay Precision Group stock behaving very different than I would say most of the stock market. We are -- the fact that the stock is distressed is no different than many other stocks in the same macroeconomic conditions. So I don't see us behaving very, very differently than the rest of the market.

Concerning a buyback of stock, this is definitely something that should be considered and will be considered and will be brought to the Board of Directors as one of the options. At this point in time, the Company's strategic priority is to acquire companies that would fit our portfolio and would fit our growth engines, Vishay Precision Group growth engines for the future.

Concerning the dual class and the Class B shares, I believe that at this point in time, the Class B holder does not have any interest to sell.

Ziv, just one follow-up. Do you think M&A will happen this year? And is there a point at which you will say there is nothing that has met our criteria and we will go ahead with the buyback?

I think we were expecting M&A I think sooner than it has happened. And if something is imminent, I think that is great. And I know the targets you've set for yourself, but I just wonder if you will say, if nothing has happened by next July or January 2013, then maybe the buyback is the better use of cash.

The information I can provide at this point in time is that we are -- we are in preliminary discussions with viable candidates and with interested parties concerning potential M&As. I cannot disclose more than that at this point in time.

Would we have a transaction completed this year? I cannot disclose -- this is very, very premature, but we still don't have any tangible information that I can provide at this point in time. But this is -- but the M&A activity that we have started, it is not -- we have moved to the next level, and we are looking at companies and there are some discussions.

All in all, concerning a stock buyback, this is something -- and again, this is something that the Board of Directors will have to decide and will be brought up to them, but this is another venue of good use of the cash company.

Thank you very much.

I am showing no additional questions in the queue. This will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Joseph DeSimone for any closing remarks.

Thank you, Sue. I want 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. Thanks again, and have a great day.

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