Vishay Precision Group Inc (VPG) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to the Vishay Precision Group second-quarter earnings conference call. (Operator Instructions). Please also note today's event is being recorded.

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

Thank you, Jamie. Good morning, everyone. Welcome to our second-quarter fiscal 2014 earnings conference call. An audio recording will be made of the conference call today, including any questions or comments that you may contribute.

By now, you all should have received the earnings press release, and we hope you have taken the time to read through it as it does contain important information. You can find it including our relevant non-GAAP reconciliations on our website. An audio recording will be available on the Internet for a limited time and can be accessed on the VPG website.

The content of this conference call is owned by VPG 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 our written permission.

Today's slides 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 our operations, please refer to our SEC filings, especially Form 10-K for the year ended December 31, 2013 and our other recent SEC filings.

And now it's my pleasure to introduce the hosts 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'd like to start by reviewing some highlights this quarter and then summarizing the financials. Following that, Ziv will provide his view of the year. Overall, I'd say the second quarter was a good one with revenues at the high-end of our guidance and adjusted diluted earnings-per-share of $0.25 for the 2014 second quarter versus $0.22 per adjusted diluted earnings-per-share in the same period last year.

Our net revenues came in at $65.2 million. Adjusted gross margin was comparable year over year at 37.9%, but was up from 36.2% in the first quarter of 2014. Our bookings for the first six months of 2014 at $130.5 million are 8.4% higher than last year's six-month bookings. With our six month book-to-bill ratio of 1.03, we have a solid backlog.

In light of the continued market demand, we expect net revenues in the range of $61 million to $66 million for the third quarter of 2014, despite the normal seasonal slowdown that is inclined to occur during this period.

For a brief review of the financial results, let's start at the top. For the second quarter, we reported revenues of $65.2 million, a 3.7% increase from $62.8 million for the prior year period. The consolidated adjusted gross margin for the second quarter of 2014 and 2013 were 37.9%. The consolidated adjusted gross margin for the second quarter of 2013 excludes the $2.3 million of Kelk acquisition purchase accounting adjustments.

Selling, general and administrative expenses for the quarter were $19.9 million or 30.6% of revenues compared to $18.6 million or 29.5% for last year's second quarter. Of the $1.3 million increase, $400,000 relates to headcount, $300,000 relates to wage increases, $200,000 of travel costs and $400,000 of other fees.

Looking at our operating margin on an adjusted basis without acquisition and restructuring costs, you can see that it is at 7.3%, a decrease from 8.4% in the second quarter last year and an increase from 5.5% sequentially. Included in other income and expense in our press release this morning was $10,000 of foreign exchange gains during the second quarter of 2014 compared to $800,000 of foreign exchange losses in the second quarter of 2013.

We also recorded interest expense of $236,000 in the second quarter of 2014 compared to interest expense of $298,000 for the same period last year. The GAAP tax rate for the second quarter of 2014 is 21.3% compared to 18.5% for the second quarter last year. We expect our operational tax rate to be in the range of 21% to 23% for the year 2014.

GAAP net earnings attributable to VPG's stockholders in the second quarter of 2014 were $3.5 million or $0.25 per diluted share compared to GAAP net earnings attributable to VPG's stockholders for the second quarter of 2013 of $1.3 million or $0.09 per diluted share. Adjusted net earnings for the second quarter of 2014 were $3.5 million or $0.25 per diluted share versus adjusted net earnings of $3.1 million or $0.22 per diluted share for the comparable prior year period. The overall impact of foreign exchange rates for the second quarter of 2014 as compared to the prior year period had a positive impact on pretax income of $1.3 million or $0.07 per diluted share.

Capital expenditures in the second quarter of 2014 were $1.6 million compared to [$1.0] million in the second quarter of 2013. Depreciation and amortization for the second quarter of 2014 was $2.9 million compared to $3 million in the second quarter of 2013. Total long-term debt as of June 28, 2014 and December 31, 2013 was $20.4 million and $22.9 million respectively. Cash provided by operations was $2.8 million for the second quarter of 2014 compared to $5.3 million for the second quarter of 2013.

We refer to the amount of cash generated from operations of $2.8 million in excess of our capital expenditure needs, which was $1.6 million, and proceeds from the sale of equipment as free cash. Total free cash flow for the second quarter of 2014 was $1.3 million compared to $4.4 million in the second quarter of 2013.

We remain focused on our strategy of growing the top line through organic growth and pursuing 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. As Bill mentioned, our focus remains on our strategy, which will over time create increased value to our shareholders. There is evidence that we have gained traction from our new application development platform. Over the past 12 months, the revenues from those projects in advanced sensors, truck VanWeigh overload protection systems, and crane overload weighing systems has increased by 88% from the second quarter of 2014 compared to the second quarter of 2013.

In WCS, our second quarter in 2014 revenue run rate from our new truck and VanWeigh weighing overload protection systems continued their positive trend, up 60% year over year and up 34% sequentially. And our offshore crane overload weighing systems revenue have increased 84% year over year and 41% sequentially.

In the FTP segment, our advanced sensor platform revenue, which have developed two years ago, is up by 167% year over year and grew 24% sequentially.

We continue to see generally positive global economic indicators, which is supported by positive industrial production indexes, primarily in the United States and in Europe, with some contraction in Japan. Additionally, PMI indicators show that expansion has continued with particular strength in the United States and in the euro zone.

According to the World Steel Association, the world cold steel production from the 65 countries reporting was 137 million tons in June of 2014, a decrease of 1.0% compared to June of 2013. Capacity utilization has decreased to 78.3% in June from 79.0% in March. Global steel prices are at their lowest level since August last year and not far off from the 3.5 years low reached last June.

The price declines have come, despite increased demand in the Western economies. Growth in the steel output is exceeding growth in demand and is adding to the global surplus. Raw material costs like iron ore has coming down -- are coming down. Chinese exports of steel, including stainless steel, hits 8.07 million tons in May, the highest ever level and an annual increase of 41.5% year to date. The pressure on steelmakers margins is being mitigated. However, the 32% fall in iron ore prices this year is outpacing the fall in the steel prices. Based on the above-mentioned indicators, we see some softening in 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 0.98 in the second quarter of 2014 compared to 0.98 last year and 1.09 in the first quarter of 2014. Total orders for the second quarter of 2014 were $64.1 million, up 3.7% from $61.8 million last year and down 3.5% from $66.4 million in the first quarter of 2014.

Some details on our reporting segments. The FTP segment had a book to bill ratio of 1.01 for the second quarter of 2014 compared to 1.05 for the second quarter of 2013 and 1.12 for the first quarter of 2014.

Sequentially, orders decreased by $700,000 or 2.5% from the first quarter of 2014, reflecting decreases primarily in Europe. The FTP gross margin was 40.2% for Q2, up from 38.1% in Q2 last year and up from 37.9% in the first quarter of 2014. The FTP gross margin increased from the comparable prior year period and was due primarily to $2.2 million of increased volume, partially offset by $300,000 of wage and headcount increases.

The sequential increase in gross margin was due to $1.1 million of increased volume and $300,000 of labor efficiencies. The FTP segment backlog was 3.1 months compared to 2.6 months last year and 3.3 months in the prior quarter.

Looking at the force sensors segment, the book to bill ratio was 0.95 for Q2 compared to 1.04 in the second quarter of last year and 1.04 for the first quarter of 2014. Sequential orders decreased by $1 million or 5.8%. This decrease came primarily from Asia. The gross margin for the segment was 21.9% in the second quarter of 2014 versus 20.5% in the second quarter of 2013 and 21.3% in the first quarter of 2014. The gross margin for the quarter increased from the comparable prior year period, primarily due to $300,000 positive exchange-rate impact and $100,000 of higher volume. The sequential gross margin improved due to $200,000 of higher volumes. The force sensors segment backlog was 2.2 months compared to 2.5 months in the prior year and 2.5 months in Q1.

For weighing and control system segment, orders increased by $300,000 or 1.6% compared to Q2 of 2013, primarily from Asia. Sequentially, orders decreased by $500,000 or 2.5%, primarily from steel. The adjusted gross margin for the segment was 48.2% versus 50.2%, excluding Kelk acquisition purchase accounting in the second quarter of 2013 and 46.9% in the first quarter of 2014. The year-over-year reduction in adjusted gross margin is primarily due to $2 million of lower volume and unfavorable product mix, offset by $200,000 of exchange rate impact and $200,000 of cost reduction. The sequential increase in adjusted gross margin is due to $700,000 of higher volume. The book to bill ratio was 0.98 for Q2 compared to 0.87 in the second quarter last year and 1.09 in the prior quarter.

Segment backlog was 3.5 months compared to 3.3 months in last year's second quarter and 3.8 months in the prior quarter.

In light of the continued market demand, we expect net revenues in the range of $61 million to $66 million for the third quarter of 2014, despite the normal seasonal slowdown that is inclined to occur during this period.

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

John Franzreb, Sidoti & Company.

Listen, I'd like to start with the relative strength in foil technologies in the quarter. Fairly impressive. I wonder if you could just talk a little bit about what drove that strength? Was it new products? Was it new expansion geographically or just underlying demand? A little bit more color there would be helpful.

John, you are looking at the orders in the second quarter of 2014?

No, I'm actually looking at the revenue number for foil (multiple speakers)

Oh, the revenue number. Okay. The revenue number for the FTP segment in the second quarter has been driven on the resistor side by a strong demand from the EMS test and measurements, which is driven by the backend test and measurement manufacturers, and on the (inaudible) side is being driven by, again, by the Americas test and measurements and the AMS OEMs.

Okay. Is this a restocking scenario with the EMS customers, or is this a sustainable demand platform?

Regarding the EMS which we are working with, they do carry very little stock in weight. We have put in place, I would say, very various programs in order to provide them with a short lead time. So in that regard, it does reflect a true demand and not just a restocking and not just replenishing of inventory.

Okay. Well, you mentioned the relative benefits from two new product categories. One of them was up over 100%, and one of them was up 88%. Where did those benefits really flow through in the quarter?

Regarding the advanced sensors where we have seen an increase of 160%, it does fall under -- it does fall under the first reporting segment, and it is in the test and measurements and AMS OEM demand in the United States.

It's part of that sale. Okay. Last quarter we talked about some shipping expectations that we should have in WCS that would put some of that revenue into the latter half of the year. Is that still the case, or are some of those orders deliveries being moved forward?

This is still the case. We -- as you may know, the steel business is a project-driven business whereby customers may push out deliveries due to their own timing.

So, in that regard, we do expect to record further revenues in the second half of the year. The rest of the product lines are doing quite well in the WCS segment, and we have seen a nice increase in the OEM business, primarily in Europe.

Okay. So then just walk me through the relative strength that we are expecting in the third quarter. It's been quite some time since we've had such a relatively good outlook in a seasonally weak quarter. What's driving that strength?

Okay. All-in-all and especially regarding the WCS segment, which is -- which I would say at least close to 40% to 45% of the revenues are in Europe, we do expect higher revenues, mainly due to the fact and despite of the seasonal slowdown because we do expect to record more steel business revenues in that quarter, which has been pushed out from the second to the third quarter.

Okay. So revenues that were moving in the first half are starting to flow through in the beginning of the second half. Okay. And is there still the delivery expectations that the fourth quarter will be better than the third quarter in WCS?

As you know, John, we are providing only a quarterly guidance. I think it's a little bit premature to provide information how the fourth quarter is going to look. At this point, the only thing I could say that we still see a very solid demand in all our reporting segments. And the third quarter looks good since the book to bill is and especially on the WCS side it's fairly low. We don't have, I would say, the visibility regarding Q4 is still fairly vague, but we are confident that it will continue to be solid based on the information -- based on today's information.

Okay. And you rolled out some added some personnel to address some new marketplaces. Are we starting to see any traction from this sales initiative?

John, you're talking about the increase in G&A year over year, correct?

Correct.

Yes, we are starting to see some of the traction that basically the personnel is mostly R&D people, and this is what Ziv has been talking about that year over year we are seeing -- we are starting to see traction on the new growth engine. So that is absolutely correct.

Okay. Guys. Thanks. I'll get back into queue.

Andrew Fleming, Heartland Advisors.

Congrats on a solid quarter. Bill, if we could start off talking about foil tech, FTC. I'm just curious, is the gross profit margin there sustainable going forward, and is that a function of just moving past the ERP implementation?

Do you want to take it?

Yes, Andrew, for FTP, we don't have to -- the fact that we didn't mention anything about the ERP means everything has been completely -- we're way past that, and based on the current revenue run rate, we can maintain the 40% gross margin in FTP. At this point, it's volume. It is volume driven.

Okay. It sounds like second half should be stronger than first half on the FTC side as well?

Well, we've only given the visibility for like the next quarter or so, and like Ziv had mentioned that things still look quite strong. We can't look out beyond the third quarter at this point in time.

Andrew, we should state that regarding the overall guidance range, we do expect as we stated in the Company -- the Company's expectation is $61 million to $66 million. But in regards to the first reporting segment due to the seasonal effect, we do expect to see a certain slowdown as we have seen historically in regards to shipments.

Okay. That's helpful, but just sticking with that segment, FTC has been a bit of a headwind over the past 12 months, and it sounds like now that we've moved past ERP, that headwind has been lifted, and bookings are picking up nicely.

This is (multiple speakers)

That is correct.

This is correct, and one of the main projects that we have been reporting in the last few earnings calls is the advanced sensors in the progress of the revenues and the resources and the funding that we have been providing, and we do have big expectation regarding further revenues and more cost reduction associated with this new platform, which we had developed two years ago.

Okay. And moving on to the force sensors, it appears to be the most stable segment. Would you expect that stability going forward kind of hovering between that $16 million to $17 million in quarterly revenue and gross profit margin, slightly above $20 million?

Andrew, you are correct. This is the most solid segment in weight. If you can recall, this is the segment where we have established our offshore India facility in order to consolidate further production and to realize further savings, and we are in the process of doing that. The fact that we have reached 21% based on existing revenues, it's definitely sustainable, and we do expect to realize further savings as we will continue the consolidation in the upcoming two years.

In addition to that, we are investing and looking at further realizing or I would say further expansion of revenues, mainly in the OEM market construction, agricultural and medical where we are designing our new platforms. So once we realize further more sales while we continue to reduce costs, we should expect over time to see improved margins.

Okay. So the margin expansion in force sensors is more a function of cost savings as opposed to improve the (multiple speakers)

And volume. And volume. I should say that. Mainly volume and also to an extent cost reduction, yes.

Okay. And then finally on weighting control systems, have we now moved past the purchase accounting issue that were kind of clouding at the gross profit margin?

Yes, Andrew. We are beyond that. For example, we only recorded just like only the reconciliation table is $2000. So we are past that now.

Okay. So that 48% gross profit margin in the segment is a good run rate to think of going forward?

Well, it all depends on -- it all depends on the product mix. We have -- there are -- we have different product groups in that segment, and the makeup of the volume, the makeup of the revenues we have today, we would maintain that 48% gross margin. It also depends on the mix.

Okay. (multiple speakers)

But it should be still a relatively very high gross margin for WCS.

Okay. And this most recent quarter was not an outlier? There's nothing one time in nature that caused an elevated margin in the quarter?

No, not at all. It's just a very solid quarter in that segment.

Okay. Okay thanks. That's all I have.

(Operator Instructions). Jim Schwartz, Harvey Partners.

Hey, guys. Nice job. You know, just curious, so in the business model for every $1 million above $245 million, there's a 50% contribution margin to EBITDA, right?

Yes, that is correct, Jim.

Okay. So now from $245 million to $260 million, which is sort of the run rate, you know, it sort of annualizes at $37.5 million of EBITDA, and you look at your enterprise value, you guys trade under 4 times EBITDA with a 19.5% free cash flow yield for a business that is not cyclical, and you are either sole-sourced or dual-sourced in almost everything you do. And you look at the landscape, and you've got the acquisitions out there, and the peers are 11 times EBITDA. Why wouldn't you guys just tender back your shares at 4 times EBITDA? I mean it just doesn't make sense from a capital structure perspective. You're so undervalued relative to the market.

Jim, currently obviously we are exploring all opportunities, all potential, be it our number one goal obviously is acquisitions. But, as we are working on that, we are exploring other opportunities to deploy our capital.

Okay. You guys keep generating cash. Your free cash flow yield is nearing 20% right now. So it's probably more accretive to buy back your own shares as opposed to buy sort of the unknown at 11 times EBITDA, you know?

No, we are looking at all facets of our capital at the moment.

Okay. Anyway, great job, guys. You have got nice execution. Thanks.

And ladies and gentlemen, at this time I'm showing no additional questions. I'd like to turn the conference call back over for any closing remarks.

Thank you, operator, and thank you for dialing in today. We would be happy to talk to you if you have further questions, and we will see you next quarter. Thanks much.

Ladies and gentlemen, that concludes today's conference call. We do thank you for attending today's presentation. You may now disconnect your telephone lines.