Vishay Precision Group Inc (VPG) 2012 Q4 法說會逐字稿

I would now like to turn the conference over to Ms. Wendy Wilson. Ms. Wilson, please go ahead.

Thank you, Amy. Good morning, everyone. Welcome to the call. An audio recording will be made of the entire conference call today, including any questions or comments that participants may contribute. By now, you all should have received the fourth-quarter earnings 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 can be accessed from the VPG website.

The content of this conference call is owned by Vishay Precision Group and is protected by US copyright law and international law. You may not make any recordings or other copies of this conference call and you may not reproduce, distribute, (technical difficulty), transmit, display or perform the content 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 complete discussion of the risks associated with the operations of Vishay Precision Group, please refer to our SEC filings, especially the Form 10-K 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?

Thank you, Wendy. Good morning, everyone and thank you for joining us on our call today. My remarks today will focus on the fourth 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 fourth quarter of 2012.

For the fourth quarter, we reported revenues of $51.0 million, a 9.6% decrease compared to $56.4 million for the prior-year period and down 8% from the third quarter of 2012. The consolidated gross margin for the fourth quarter increased to 34.4% as compared to 33.4% for the fourth quarter of 2011 and 33.8% for the third quarter of 2012. Ziv will give you the detail of the segments in his presentation.

Selling, general and administrative expenses for the quarter were $15.7 million, or 30.6% of revenues compared to $16.9 million, or 30% for last year's fourth quarter and $15.6 million, or 28.2%, of revenues for the third quarter of 2012. The decrease of $1.2 million from the prior year is primarily due to a reduction of $600,000 coming from various adjustments, $400,000 in total fees and $200,000 from exchange rates.

In addition, the Company incurred $300,000 of expenses related to the acquisition of KELK. The increase of $100,000 in the third quarter of 2012 is mainly due to foreign exchange rates. Included in other income and expense was $85,000 of foreign exchange losses during the fourth quarter of 2012 as compared to $526,000 of foreign exchange losses in the fourth quarter of 2011 and $206,000 of foreign exchange losses in the third quarter of 2012.

We also recorded interest income of $136,000 in the fourth quarter of 2012 as compared to interest income of $373,000 for the same prior-year period and interest income of $163,000 in the third quarter of 2012.

The tax rate for the year ended December 31, 2012 was a negative 11.8% compared to 28.6% for the full fiscal year in 2011. Included in this tax rate are unusual benefits. These adjustments were primarily related to tax assets that resulted from a favorable ruling by the Israeli tax authority that we received during the fourth quarter of 2012 concerning a simplification of our legal structure. We had previously disclosed we requested this ruling and we had expected to receive it before year-end.

The tax benefits include releasing valuation allowances. Exclusive of these benefits, the operational tax rate for the year 2012 would have been 22%. This has generated an operational tax benefit in the fourth quarter of 2012 since we had recorded a tax rate of 30% for the first nine months of 2012. Our expected tax rate for 2013, including the acquisition of KELK, is anticipated to be in the mid-20% range.

Net earnings for the fourth quarter were $5.2 million, or $0.37 per diluted share, compared to net earnings for the fourth quarter of 2011 of $1.2 million, or $0.09 per diluted share. Net earnings for the full year 2012 were $11.7 million, or $0.84 per diluted share, compared to $10.8 million, or $0.78 per diluted share for the prior-year period.

Based on the tax adjustments previously mentioned, adjusted net earnings for the fourth quarter of 2012 were $2 million, or $0.15 per diluted share, versus net earnings of $1.2 million, or $0.09 per diluted share for the comparable prior-year period and net earnings of $1.9 million or $0.14 per share in the third quarter of 2012.

Capital expenditures for the fourth quarter of 2012 were $2.5 million compared to $5.9 million in the fourth quarter of 2011 and $1.6 million in the third quarter of 2012. Depreciation and amortization for the fourth quarter of 2012 was $2.9 million compared to $2.9 million in the fourth quarter of 2011.

Turning to the results for the full year of 2012, we reported revenues of $217.6 million, an 8.6% decrease from the $238.1 million we reported in the 12 months of 2011. Consolidated gross margins for the year were 34.5% compared to 34.9% for the prior-year period. Selling, general and administrative expenses were $63.7 million, or 29.2% of revenues, as compared to $66.8 million, or 28.1% of revenues for the year in 2011. The improvement of $3.1 million of SG&A cost is due to a reduction of $1.8 million coming from exchange rates, $1.5 million in total fee and $800,000 of various adjustments offset by wage increases of $900,000.

Capital expenditures for the full year were $8.3 million compared to $16.3 million for the year in 2011. Depreciation and amortization for the year was $11.7 million as compared to $11.3 million in 2011.

Now taking a look at the balance sheet, the Company had total long-term debt as of December 31, 2012 and December 31, 2011 of $11.2 million and $11.5 million respectively. Again, as I have mentioned in previous calls, $10 million of that debt is recorded as exchangeable notes due in the year 2102 (sic) with a conversion feature at a share price of $22.56. As of December 31, 2012, we had cash and cash equivalents of $93.9 million compared to $80.8 million as of December 31, 2011.

And a few final items to point out. Cash generated from operations was $7.6 million for the fourth quarter of 2012 compared to $5.9 million for the fourth quarter of 2011 and $7.3 million in the third quarter of 2012. Total free cash flow for the fourth quarter of 2012 was $5.2 million compared to zero in the fourth quarter of 2011 and $5.8 million for the third quarter of 2012. With that, I would now like to turn the call over to Ziv Shoshani, our CEO and President.

Thank you, Bill. I would like to start with the progress we made in recent months executing on our strategy. As you are aware, we are focused on organic growth, manufacturing efficiency improvements and growth through acquisitions so that we can continue to deliver profitable growth and increased shareholder returns.

We are pleased to recently have completed the KELK acquisition, our first as an independent company, to support one of the key drivers of our strategy. The KELK business is a natural fit for us and we expect it to be a key to our future success. We expect the KELK asset purchase to be accretive in 2013 and you should note that it fits comfortably within our internal rate of return goal for acquisitions.

KELK has extensive knowledge of the metal measurement processing industry and a valuable proprietary technology. The business delivers a strong potential growth profile with attractive economics and expands our geographical and end market strength in the metal measurement processing market through a combination of intellectual property, engineering talent and new products in the Weighing and Control Systems segment.

KELK has established a leading global brand name with a 60-year legacy for quality and value. We expect to deploy the KELK brand name technology to gain greater marketshare and customer recognition for VPG products on a global basis. This acquisition will be included in our Weighing and Control Systems segment. Within that segment, we will add a new steel market sector, which will consist of VPG steel application for force measurement and precision market sectors and KELK's force measurement and optical measurement business for the steel processing industry.

As far as integrating the business into VPG, we plan for the existing KELK team to stay and to drive postacquisition synergies and to continue to take an active role in leading the combined business. KELK's existing locations will also remain unchanged as we invest to grow our global coverage in the steel mill product applications.

Switching gears now and looking at our operational trends, let's start by comparing the market conditions that have affected sequential results from the third quarter of 2012 to the fourth quarter for the Company and the reporting segments.

The Company's overall book-to-bill was 0.96 in the fourth quarter. The total orders were down by 4.2% compared to the third quarter of 2012 with Americas orders decreasing by 10% and the Asian orders decreasing by 10.9%, offset by European orders increasing by 4.9%. I will provide the segment and the market detail in a moment.

Compared to the third quarter of 2012, the overall revenue decreased to $4.4 million. That was due to lower revenues in all of the regions and most of the market segments. The sales channel breakdown shows a decrease of $700,000 from distributors, a decrease of $800,000 for EMS and a decrease of $2.3 million from end users, and a decrease of $600,000 for OEM customers. The regional sales breakdown shows a decrease in Asian revenues of $1.5 million, a decrease of $1.8 million in the Americas revenues and a decrease of $1.2 million in European revenues.

Total backlog for Q4 was at 2.3 months, which is up slightly from the backlog of 2.2 months for Q3. Inventory turns for Q4 were 2.7 compared to 2.9 in the third quarter. The total revenue decrease of $4.4 million from the third quarter of 2012 was due to $5 million in lower volume offset by an increase of approximately $500,000 in foreign exchange, which consists with the following -- a FTP volume decrease of $1.9 million, a volume decrease of $1.2 million in Force Sensors and a decrease in volume of $1.9 million in the Weighing and Control Systems sector.

Some details on those reporting segments. First, FTP revenues decreased by $1.8 million, or 6.8%, to $24.5 million from the third quarter of 2012. The FTP segment had a book-to-bill ratio of 0.96 for the fourth quarter of 2012 compared to 0.93 for the third quarter of 2012. In this segment, orders decreased by 1 million or 3.9% from the third quarter of 2012, primarily in Asia. The regional breakdown shows European revenues for FTP decreased by $400,000 or 4.8%. Americas revenue decreased by $300,000 or 2.8%. And Asia decreased by $1.1 million, or 15.9%.

The main declines in the sales channel were primarily in the EMS with a decline at the sector level in the test and measurement. The FTP gross margin was 40.6% for Q4, up from 38.9% in Q3. The increase in gross margin in the fourth quarter of 2012 is primarily due to improved manufacturing efficiencies and nonrecurring items. The FTP segment backlog was 2.4 months, flat with the 2.4 months in the prior quarter.

Looking at the Force Sensors segment, revenues decreased by $1 million, or 6.1%, to $15.5 million from the third quarter of 2012. The book-to-bill ratio was 0.94 for Q4 of 2012 compared to 0.97 for the third quarter of 2012. Orders decreased by $1.5 million, or 9%, from Q3 of 2012 coming (technical difficulty). Regional breakdown shows the decrease in the Americas revenues by $1 million or 13.1% (technical difficulty) $300,000 or 4.5% in Europe and a decrease in Asia revenues of $200,000 or 7.3%. The decrease in revenues is mainly coming from the OEM channel and from the precision [weighing] market sector.

The Force Sensors gross margin was 22.5% for Q4 2012 compared to 20.2% in Q3. The increase in gross margin is due to manufacturing efficiencies despite the 6.1% revenue reduction. The Force Sensors segment backlog was 2.4 months flat on 2.4 months in the prior quarter. Force Sensors inventory turns were 2.0 down from 2.1 in (technical difficulty).

Looking at the Weighing and Control Systems segment, revenues decreased by $1.6 million, or 12.9%, to $11 million as compared to the third quarter of 2012. The book-to-bill ratio was 0.99 for Q4 of 2012 compared to 0.85 for the prior quarter. Orders increased by $200,000, or 2.3%, compared to Q3 of 2012 primarily from Europe. The regional breakdown shows the Americas revenues decreased by $400,000 or 10.9%. European revenues decreased by $1 million or 12.6% and a decrease of $200,000 in Asia (technical difficulty) in the Asian revenue.

The main decline in the sales channel were in end user with declines at the sector level in precision weighing. The Weighing and Control Systems gross margin was 37.6% in Q4 of 2012 compared to 40.9% in Q3 of 2012. The reduction in gross margin percentage is due primarily to lower volume in Europe and the Weighing and Control Systems segment backlog was 1.9 months compared to 1.4 months in prior quarter. The Weighing and Control Systems inventory turns were 4.0 in Q4 of 2012 compared to 4.4 in Q3 of 2012.

Based on third-party macroeconomic data trends and validated by our own recent demand trends, we see initial signs of recovery in Europe, Japan and the United States. Based on this information and looking forward to our first-quarter results, which will include two months of the KELK, we anticipate overall revenue in the range of $54 million to $59 million for the quarter. And with that, we will open the lines for questions.

(Operator Instructions). John Franzreb, Sidoti & Company.

Good morning, Ziv and Bill. I guess I actually want to start with one of your closing comments. You said you are seeing recovery in Europe, Japan and the US. What you left out there was the rest of Asia. Could you elaborate a little why that is the case and what is going on in Asia for you?

Well, in the rest of Asia -- the revenues for the rest of Asia is mainly driven by our Japanese precision resistor company, as well as demand coming from US companies, which the design is done in the United States, while the manufacturing is done by EMS companies in Asia.

When I was speaking about an increasing demand in the US, it does apply for US companies, which are using subcontractors in Asia. So in that respect, we should expect to see also a recovery in Asia mainly for test and measurement.

Concerning our Japanese subsidiary, at this point in time, we have not seen -- we have seen some signs of recovery in Japan coming mainly from Japanese customers, but beyond that, as I mentioned before, most of our demand for Asia customers, excluding Japan, are being driven by US companies.

Okay, last quarter, when we talked about the drop in the order book in the Americas, you called out the avionics market as the principal reason. We have another, I believe you said, 10% drop in orders in the Americas this quarter. Is avionics still the culprit or is there something else going on there?

At this point in time, I would say that the drop in the Americas is almost exclusively in the Force Sensors and it is driven by distribution coming from the, I would say, the precision weighing market sector. And at this point in time, we have seen some preliminary indication of a reverse trend in the beginning of the year. Meaning the slowdown of the demand coming from US distributors is changing and we see the demand coming back.

Got it, got it. Now if I back out your guidance, excluding the revenue contribution from KELK, looking at a marginally down sequential organic growth profile, do you -- when do you see the organic growth profile starting to turn as you look through the balance of 2013?

We are investing quite significantly in R&D and in new products that have been designed at European and US-based customers. We are in contact with many of our customers concerning the release of their new product portfolio. At this point in time, many of them are very, very hesitant launching new products based on the macroeconomic environment. I think that as we see more solidity and more optimism going through the year, which already started in the beginning of Q1, I would expect them to release their new products, new releases in the second half of 2013.

Okay. And one last question. You have had a chance to look around KELK. You said you are going to let it run mostly as a stand-alone. Any sense of what the EBIT contribution will be for KELK this year?

John, we are still obviously reviewing and having some meetings and consulting with them. All I can say at this point in time what we release in our earnings call when we announced that we are still seeing that their EBITDA margins are relatively close on a full-year basis.

Okay, thank you much, Bill. I will get back into queue.

Larry Solow, CJS Securities.

Hi, good morning or good afternoon. Could you just give us a little more discussion on KELK just qualitatively, quantitatively? Has the business been growing over the last few years and is there opportunities for them to get into other markets besides just steel mill, which I guess is predominantly all their revenues? And are there synergies, I imagine, you haven't discussed anything, cost synergies, maybe some immediate and then maybe longer-term revenue synergies? Thanks.

KELK -- hi, Larry. Good morning. Concerning KELK, KELK, as you may know, they have been a privately held company so far; therefore, the level of spending was very selectively being done. They were growing, I would say, in a fairly modest way. We should remember that KELK had and still has the lion's marketshare. So they are the market leader.

In that respect, since by putting the two companies together beyond widening our product portfolio, we are also looking at putting -- and as you may know, we do have similar application and products, which are addressing the steel market. So once we put our product with the new KELK company product, we are looking at leveraging -- we are looking at VPG scale of economy related to reducing logistics, cost purchasing, manufacturing cost and other type of costs associated by putting the two companies. I would say that this might be quite a significant cost reduction only from a cost standpoint, but the main driver of the growth should be by providing a much wider product portfolio addressing the steel market and opening more direct channels and spending more in R&D cost at KELK.

So it is not only that -- I would say that the cost reduction we would expect to see as a second-quarter effect. The bigger effect should be a revenue increase by going direct and offering a much wider product portfolio and enhancing R&D and engineering activities of both our companies.

Okay and just for clarification, on your Q1 estimate, your guidance, is that about $5 million in KELK? Is that a good round number to use?

Yes, Larry, there is a range between $4 million and $5 million. Remember, it's only two months.

Right, exactly. So it's 30 divided by four and then divide that again. And is KELK -- do you expect that to grow this year or that business itself is sort of similar trends to your overall business?

So far, looking at our steel business and having extensive discussions with the KELK experienced team, they don't see on one hand any seasonality in the steel market. On the other hand, they don't see any decline from prior year. So we would expect, so far, I would say, to have a flat -- without taking any extra steps we would expect from a macroeconomical standpoint a flat revenue year versus 2012.

Okay, thank you.

(Operator Instructions). John Franzreb, Sidoti & Company.

Hi, guys. Regarding the gross margin, revenues are down 10%, but the gross margin was up 100 bps year-over-year. Fairly impressive. I wonder if you could just elaborate on some of the cost reductions that you've put in place, what remains? Just talk a little bit about the margin profile going forward?

Okay. So if we look at the gross margin level, vis-a-vis prior quarters, as you may recall, we have mentioned that there were some one nonrecurring items in Q3, like severance costs, like plant shutdowns. So those have been a negative one-time effect that has not repeated themselves in Q4. But beyond that, and much more important than that, I think that we said all along that, from a manufacturing efficiency standpoint, there are two market segments that we (technical difficulty) focus.

One is the Force Sensors and this relates to our new India facility. As most of the, I would say, all the startup cost is behind us and we start to pick up volume, we are starting to realize more and more savings and this is beyond our standard cost-savings programs concerning materials and new processing reductions. So in that regard related to the Force Sensors, we will continue to see an ongoing improvement also in the upcoming years because this was only the first phase of the volume pickup in India.

Concerning the first segment, the Foil Technology Products where we have been discussing some inefficiencies in the past, I believe that, in that regard, we have been introducing new processes, new technologies and we are starting to realize and to harvest the benefits. So we will continue to see in this segment as well more and more, I would say, a better utilization of our equipment on one hand and continuous manufacturing efficiencies.

Beyond that still in this segment, we still have the miniature sensors, which was -- which, in the beginning of 2012, we were again in a pilot line starting mode. Volume has picked up. It is still a fairly small -- I would say we are still running in a fairly small volume, low volume, but much of the starting cost is behind us. Therefore, we see better margin.

Related to the Weighing and Control Systems, which had very little manufacturing, this is more engineering-based, I would say that the gross margin is really being driven by product mix and mainly by volume. So in that regard, the drop here in Q4 versus prior quarter is really exclusively due to volume almost.

Are there any more restructuring actions that you plan in 2013 or are you happy with the operational profile of the firm?

Concerning restructuring, yes, we will continue to consolidate and to move more products, which are currently not manufactured in India, to India in order to realize more savings and we will continue to invest in new process improvements also in the FTP line. So this will be an ongoing effort for the upcoming years.

Got it, got it. And just one last question. Can you give me an estimate of your CapEx budget for 2013 and what you are looking for in regards to depreciation and amortization expense this year?

Concerning CapEx, this deal we have finished at $8.3 million, which we are looking at -- I would say, for next year, we are looking at $9.4 million whereby $2.3 million would be carryover from this year. Around $200,000 would be related to the new KELK acquisition and the other bulk of capital spending, close to $4 million, would be related to the FTP segment continuous investments in process improvements and new product introductions.

Okay. A D&A estimate?

A D&A estimate, I look at it just from a VPG perspective, it is probably without the KELK acquisition, we are probably looking around about a total of about $12 million, similar to where we were for 2012. Like Ziv mentioned, the capital spending is not much in KELK. The depreciation is no more than $300,000. We are still finalizing the amortization of intangibles and the valuations at KELK. They can range anywhere from a five-year to a ten-year period but that we are still trying to finalize. I should have that done relatively soon.

Okay, fair enough. Thank you very much, Bill.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back to management for any closing remarks.

Thank you, everybody, for joining the call today. And we hope you have a great week and we look forward to you calling in next quarter.

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