Vishay Precision Group Inc (VPG) 2013 Q4 法說會逐字稿

Good day, and welcome to the Vishay Precision Group fourth-quarter earnings conference call and webcast. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ms. Wendy Wilson, Investor Relations. Ms. Wilson, the floor is yours, ma'am.

Thank you, operator. Good morning, everyone. Thank you for joining our call. I just want to remind you that the content of this conference call is owned by Vishay Precision Group, and is protected by US and international copyright law. 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 have made today. For a more complete discussion of the risks associated with the operations of the Vishay Precision Group, please refer to our SEC filings, especially the Form 10-K for the year ended December 31, 2012, and our other recent SEC filings.

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. I would like to start by revealing some fourth-quarter highlights and then summarizing the financials. Following that, Ziv will provide his view of the year.

Overall, I'd say the fourth quarter was a good one, and the full-year results ended on an uptick. Net revenues were up 22% year over year for the fourth quarter, and up 10.4% for the fiscal year. Fourth-quarter consolidated adjusted gross margin was 37.8%, as compared to 34.4% for the fourth quarter of 2012.

The cash generated from operations was $8.4 million and free cash flow was $5.6 million, respectively, for the fourth quarter of 2013. Our consolidated book to bill of 1.0 shows that market demand continues to be stable. For those reasons, we are setting our first-quarter guidance in a range of $59 million to $64 million, due to factors that Ziv will review later on the call.

For a brief review of the financial results, let's start at the top. For the fourth quarter we reported revenues of $62.2 million, a 22% increase from $51.0 million for the prior-year period. An updated valuation report for the KELK acquisition resulted in the Company recording fair market value adjustments associated with purchase accounting that include approximately $454,000 of KELK acquisition purchase accounting adjustments which impacted cost of goods sold, $42,000 of acquisition costs, and $51,000 of restructuring which affected comparability.

For the 2013 full year, the adjustments included approximately $4.9 million of KELK acquisition purchase accounting adjustments which impacted cost of goods sold, $794,000 of acquisition costs, and $538,000 of restructuring costs which affect comparability.

The consolidated adjusted gross margin for the fourth quarter increased to 37.8%, compared to 34.4% for the fourth quarter of 2012, due to the inclusion of KELK's results this year.

Selling, general and administrative expenses for the quarter were $19.7 million or 31.6% of revenues, compared to $15.7 million or 30.9% for last year's fourth quarter. The increase of $4 million from the prior year is primarily due to the inclusion of KELK's business, which added $3 million of expense. We also had increases of $700,000, primarily in wages and headcount, and a foreign currency impact of $300,000.

Looking at adjusted -- looking at operating margin on an adjusted basis without the fair valuation and acquisition and restructuring costs, you can see that it is 6.2%, an increase from 3.6% in the fourth quarter last year and 2.9% sequentially. The operating margin improvement is a result of higher volume as compared to prior year and prior quarter.

Included in other income and expense on our press release this morning was $662,000 of foreign exchange losses during the quarter, compared to $85,000 of foreign exchange losses in the fourth quarter of 2012. We also recorded interest expense of $251,000 in the fourth quarter of 2013, compared to interest expense of $50,000 for the same period last year, again primarily related to debt associated with the KELK acquisition.

For the year, the GAAP tax rate is 19.5% compared to a negative 11.8% for the year last year. GAAP net earnings attributable to VPG stockholders in the fourth quarter were $1.1 million or $0.08 per diluted share, compared to GAAP net earnings attributable to VPG stockholders for the fourth quarter of 2012 of $5.2 million or $0.37 per diluted share.

Adjusted net earnings for the fourth quarter of 2013 were $2.5 million or $0.18 per diluted share, versus adjusted net earnings of $2 million or $0.15 per diluted share for the comparable prior year.

The overall impact of foreign exchange rates for the fourth quarter of 2013, as compared to the prior year period, had a negative impact to pretax income of $562,000 or $0.03 per diluted share. And for the year had a negative impact to pretax income of $2.9 million or $0.15 per diluted share.

Capital expenditures in the fourth quarter of 2013 were $2.8 million compared to $2.5 million in the fourth quarter of 2012. Depreciation and amortization for the fourth quarter of 2013 was $3 million, compared to $2.9 million in the fourth quarter of 2012.

Total long-term debt as of December 31, 2013 and December 31, 2012 was $22.9 million and $11.2 million, respectively; the increase being attributable to the debt added for the KELK acquisition. Cash provided by operations was $8.4 million for the fourth quarter of 2013, compared to cash provided by operations of $7.6 million for the fourth quarter of 2012.

We referred to the amount of cash generated from operations of $8.4 million in excess of our capital expenditures of $2.8 million, and proceeds of the sale of equipment as free cash. Total free cash for the fourth quarter of 2013 was $5.6 million, compared to $5.1 million in the fourth quarter of 2012.

On slide 5 you can see that with the acquisition of KELK, we have been able to increase our revenues and gross margins. We remain focused on our strategy of growing the top line through developing new application platforms and completing additional acquisitions, as well as improving profitability by increasing efficiencies and reducing costs.

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

Thank you, Bill. Despite the weak start to 2013, from a macroeconomic perspective we see continued improvement, which is supported by positive industrial production index in the US, Europe and Japan. Additionally, PMI indicators show that expansion has continued in Q4, with particular strength in the euro zone in Japan.

According to the World Steel Association, global steel output for 2013 increased by 3.5% from 2012. China is up 7.5%, showing some improvements from 2012. Globally, [militarization] declined to around 74%, down from 79% in the third quarter and up from 72% from last year. Capacity utilization has decreased in the second half of 2013, which could indicate a softening outlook. Based on the above-mentioned indicators, we project a slower market demand for our steel market products.

Moving on to operational trends, let's start by comparing consolidated year over year and sequential results. The Company's overall book to bill was 1.0 in the fourth quarter of 2013, compared to 0.96 last year and 1.01 in the third quarter of 2013. Without the effect of the KELK business, the book to bill was 1.04 in the quarter, which is consistent with the third quarter.

We believe excluding KELK from this ratio is relevant because KELK operates in a project type business model. Beginning in our next quarter's results, we will report only the Company's combined book to bill ratio, as KELK is now consolidated into our results.

Total orders for the fourth quarter were $62.4 million, up by 27.2% from $49 million last year, and up 6.9% from the third quarter of 2013. The year-over-year increase is across all regions and reporting segments, with 50% of the increase coming from KELK.

Some details on our reporting segments. The FTP segment had a book to bill ratio of 1.07 for the fourth quarter of 2013, compared to 0.96 for the fourth quarter of 2012, and 1.1 for the third quarter of 2013. Sequentially, orders increased by $2.9 million or 11.7% from the third quarter of 2013, reflecting increases primarily in Asia and in the Americas.

The FTP gross margin was 40.5% for Q4, relatively flat with 40.6% in Q4 last year, and up from 36.7% in the third quarter of 2013. Despite increasing revenues when comparing the fourth quarter of 2012, the gross margin remains constant, primarily due to unfavorable foreign exchange rates and additional start-up costs to support the enterprise resource planning system.

The sequential increase in gross margin was primarily due to higher volume. The FTP backlog was 3.0 months compared to 2.4 months last year and 3.2 months in the prior quarter.

Looking at the Force Sensors segment, the book to bill ratio was 1.01 for Q4, compared to 0.94 in the fourth quarter last year and 0.92 for the third quarter of 2013. Sequential orders increased by $1 million or 6.3%. This increase came primarily from Asia and Europe.

The gross margin for the segment was 21.5% in the fourth quarter of 2013, versus 22.5% in the fourth quarter of 2012, and 17.6% in the third quarter of 2013. The year-over-year gross margin decrease is primarily due to unfavorable product mix and wage increases, offset by favorable foreign-exchange input. The sequential increase in gross margin is mainly due to cost reduction savings and favorable foreign exchange.

The Force Sensors segment backlog was 2.4 months compared to 2.4 months in the prior year and 2.3 months in Q3.

For Weighing and Control Systems segment, orders increased $7.7 million or 70.8%, compared to Q4 of 2012, primarily from Asia. Excluding KELK, orders have improved 24.8% or $2.7 million, mainly in Europe. Sequentially, orders increased $200,000.

The gross margin for the segment was 47.1%, excluding the KELK acquisition purchase accounting in 2013, versus 37.6% in the fourth quarter of 2012 and 47.8%, excluding the KELK acquisition purchase accounting in the third quarter of 2013.

The year-over-year increase in adjusted gross margin is due primarily to KELK. Despite the increase in revenues compared to the third quarter of 2013, the sequential adjusted gross margin decrease is due to unfavorable product mix.

The book to bill ratio was 0.91 for Q4 compared to 0.99 in the fourth quarter of last year and 0.98 for the prior quarter. Segment backlog was at 3.2 months, compared to 1.9 months in last year's fourth quarter and 3.9 months in prior quarters.

Based on third-party macroeconomic data and supported by our own recent demand trend, we see a stable environment in Europe, Japan and the United States. Based on this information, we anticipate overall net revenues in the range of $59 million to $64 million for the first quarter of 2014.

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

(Operator Instructions) John Franzreb, Sidoti & Company.

Good morning, everybody. It sounds to me that the FTP business had an exceedingly strong book to bill ratio, 1.07. Could you just talk a little bit about what is driving that demand in FTP?

The demand in the FTP is driven by the European and the US economy. We are looking at a few different segments. First, if we look at the sub segments, in Europe we have seen an increase of, I would say, around 8% versus prior quarter in orders, while in Europe also around 10%. The main increase is coming -- at the FTP is coming from distribution on the resistor side, being driven by AMS market sectors and test and measurements, as well as end-user business for stress analysis for the gauges, also coming from Europe and the United States.

Great, great. And in Force Sensors, I realize you'll be trying to migrate more of your customer base or your sales base to an OEM type sale. Could you talk a little bit about how Force Sensors maybe finished the year or the quarter, whichever data you may have, as far as how much of that is an OEM customer now and what your expectations are in continuing to migrate that sales mix?

The intention -- as you may know, the intention was to move more to a design in wind type of concept, driven by OEM customers. Due to the fairly length, this product design cycle at the OEM, it takes I would say between 18 to 24 months. It takes time to create this momentum.

At this point in time, the ratio between OEMs and generic product is around 30%, and this ratio still applied for Q4.

Moving to next year, we see that -- we believe that the OEM will take a higher share. The target would be, if it would reach to [335], hopefully, maybe 40% of the total revenues, depending on the macroeconomic environment which will drive our customers to release their new platforms. The OEM customer base is mainly in Europe and in North America.

Got it, got it. And it seems to me that KELK is really weighing on results in Weighing and Control. And you pointed out that a lot of it is based on the steel market. I was wondering if you have a sense of when you expect that business to turn around, or is it just going to be easier comps year over year? Can you give us a sense of what your feel is for KELK going forward?

John, as we said, excluding KELK we did see an increase of 25% in our own core business.

Right.

In the WCS. Regarding the dynamics in the steel market, there are different, I would say, views on that. The fact that Asia is still in an overcapacity situation and many Asian companies, mainly Chinese, are losing money at today's crude steel prices, nevertheless US and Europe have moved to a more special type of steel.

The fact that there is some indication that due to the old mill structure which creates a lot of pollution, the Chinese government may force some of the bigger companies to close old mills and to open new mills, which are more efficient and are more, I would say, environmental friendly.

In this case, despite the fact that the macroeconomic is that the reason overcapacity, the upside may be that we may enjoy part of being able to equip the new mills in China.

Okay. Any sense of the timing on that?

We will have a better understanding how Asia and mainly the Chinese government, which way they are going to go. I would say it should be through the second half of this year.

Okay. And one last question and I will get back into queue, and maybe this is more for you, Bill. The SG&A line was up over $1 million sequentially.

Right.

And was even above what the similar revenue number was in the second quarter, which also had KELK. So I am kind of wondering, it is kind of a big move there. What happened on the SG&A line?

Sure, John, I mean most of that, the increase of that $1 million sequentially, $900,000 comes from divisions which is primarily we added some headcount; we also had some wage increases. The rest of the G&A was basically flat.

So it really came from the divisions adding some headcount, helping to grow the business like Ziv has discussed. I think, John, going forward this is probably a more accurate run rate for our total G&A.

Okay. All right, thanks, guys. I will get back into queue.

Mr. Franzreb.

Yes.

If you will hold on one moment. I'm just going to give the instructions again. (Operator Instructions) Mr. Franzreb, you can go ahead and proceed, Sir, with additional questioning if you do have any.

Okay. If that is the case, could you just really talk about the tax rate? It has kind of been all over the board. What should we use for modeling purposes going forward? Can you just discuss that maybe a little bit in length, Bill?

Sure, John. The operational tax rate for the year 2013 came in at about 25%. So I would say for next year, given the same -- it all depends upon your makeup of your income, and where it is made. But we would expect the operational tax rate next year to be between like 25% and 26%.

Okay. And maybe we could have a little bit of a discussion on M&A going forward. It certainly sounds to me that multiples are, call it, frothy out there. What is your expectations on mergers and acquisitions in 2014? Will you be active, or do you also see that the environment is maybe a little bit rich?

Regarding acquisitions, and you have seen our investor presentation, we have a few highlights which we are looking at which figure; we are looking at acquiring a Company. I think that as we've said in the past, we are looking in a proactive way -- and we are looking in a proactive way to acquire companies.

Of course, it will depend on the end price, but nevertheless if we would be able to achieve a similar deal to the KELK one, we will move forward. So you are correct, the environment did become rich, but we are still looking in a proactive way to acquire a company this year.

Okay, that is it for me, guys. Thank you very much.

Ross DeMont, Midwood Capital.

Congratulations on a good quarter and a good close to the year. Just wanted to ask about where EBITDA margins might normalize over time. I mean we used to do sort of mid-teens EBITDA margins, admittedly as a division of a larger company. If we use sort of $250 million of revenue as a proxy, I mean what kind of EBITDA margins can we drive through that today?

Good question. I mean for the EBITDA margin, to answer your question, if we get to I think the $250 million revenue, which is only $10 million more than what we have today, you are probably looking like in the low teens from an EBITDA margin percentage of revenue.

Okay, that would be great. Actually, that was my only question. It would be great to see that.

Okay, thank you.

(Operator Instructions) It appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session.

I would now like to turn the conference back over to management for any closing remarks.

Thank you, operator, and thank you, everyone, for dialing in today. We look forward to speaking with you all in the future. And for any of you who will be going to the Sidoti conference in March, we will be there and we look forward to seeing you. Thanks a lot.

We thank you, Ms. Wilson, and gentlemen, for your time. The conference call is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you, and take care, everyone.