Vishay Precision Group Inc (VPG) 2017 Q2 法說會逐字稿

Good morning, and welcome to the VPG's Second Quarter Fiscal 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Reynee Tung. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to VPG's 2017 Second Quarter Earnings Conference Call. An audio recording will be made of the conference call today, including any questions or comments that participants may contribute. By now, you all should have received the earnings press release, and we hope you've taken the time to read through it as it contains important information. You can find it, including relevant non-GAAP reconciliations, on VPG's website at vpgsensors.com. 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 U.S. 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 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 VPG's operations, please refer to our SEC filings, especially the Form 10-K for the year ended December 31, 2016, and our other recent SEC filings.

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

Thanks, Reynee. Good morning, everyone, and thank you for joining us on our call today. I would like to start by reviewing a few highlights and then summarizing the financials. Following that, Ziv will provide his view of the results and the global business environment. We had a solid second quarter of 2017 with revenues of $62.3 million, adjusted gross margin of 39.7%, adjusted operating margin of 9.6%, diluted earnings per share of $0.27, adjusted net earnings of $0.29 per diluted share, cash generated from operations of $4.4 million and a book-to-bill ratio of 1.08, an indication of an improved business environment.

On Slide 4, second quarter of 2017 revenues increased by 7.5% to $62.3 million, up $4.3 million compared to $58.0 million of revenues in the prior-year period. The negative impact of foreign exchange rates to revenues for the second quarter of 2017 was $1.3 million. Our gross profit margin increased to 39.7% in comparison to 37.4% in the second quarter of 2016. The increase in adjusted gross profit of $3.1 million for the second quarter of 2017 as compared to the second quarter of 2016 was attributable to the increase in volume of $3.4 million and $900,000 million -- $900,000 in labor efficiencies, partially offset by negative exchange rate impact of $1 million and $500,000 in wage increases. Selling, general and administrative expenses for the quarter were $18.8 million or 30.2% of revenues as compared to $18.4 million or 31.8% for last year's second quarter. The increase of $400,000 is related to the increase in $200,000 in professional fees and $200,000 in travel and commissions.

Looking at the operating income on an adjusted basis, you can see that our margin has significantly increased to 9.6% compared to 5.6% in the second quarter of last year. Adjusted net earnings attributable to VPG's stockholders for the quarter nearly doubled to $3.9 million or $0.29 per diluted share compared to $2 million or $0.15 per diluted share in the second quarter of 2016. Foreign currency exchange rates for the second quarter of 2017 as compared to the prior year had a negative impact on net income of $800,000 or $0.06 per diluted share. Free cash flow was $3.4 million for the second quarter of 2017 as compared to a negative $2.5 million for the second quarter of 2016. We defined free cash flow as the amount of cash generated from operations, which was $4.4 million for the second quarter of 2017, less capital expenditures, which were $1.2 million for the second quarter of 2017, net of any proceeds from the sale of assets, which were $200,000 for the second quarter of 2017.

Our GAAP tax rate for the 6 fiscal months ended July 1, 2017, was 27.8%. For the 2017 fiscal year, we expect our operational tax rate to be in the range of 27% to 29%. The tax rate for the quarter was higher as compared to the prior year period due to a mix of earnings. On Slide 5. Driving efficiencies and reducing costs and in addition to an improved business climate have resulted in an improved operating performance. We remain focused on the execution of our strategy. With that, let me pass further comments on to Ziv.

Thank you, Bill. An important part of our strategy is to grow by developing new product offerings, and our advanced sensor line continues to gain traction. This platform, which is part of our FTP segment, and which we developed a few years ago, is reporting revenues increases of 61% in the second quarter of 2017 versus 2016 second quarter and 44% from the first quarter of 2017. I'm pleased with the continued acceptance of this new sensor platform as it offers enhanced performance to our customers in conjunction with an effecting manufacturing platform. Another product line, which is gaining momentum, is the value-added OEM transducer business in the Force Sensors segment. For the second quarter of 2017, revenues increased by 92% compared to the second quarter of 2016, while revenues increased by 54% from the first quarter of 2017. We're pleased to see healthy trends continue in some important end markets for our business. I will note still aerospace & defense and oil & gas in particular. The World Steel Association reports for June 2017 that the world steel capacity utilization is at 73.0%, which is the highest utilization since January, 2016. The Association believes that in 2017 and 2018, we will see cyclical upturn in steel demand with continuing recovery in the developed economies and accelerating growth momentum in the emerging and developing economies. We expect that Russia and Brazil will finally move out of their recessions. However, China is expected to return to a more modest growth rate after its recent short uplift. For this reason, the overall momentum will remain modest. The global aerospace & defense sector demand remains solid. The demand in commercial aerospace is fueled by 3 factors: The first factor is accelerating aftermarket growth, the second factor is incremental supply-chain challenges and the third factor is the new aircraft platforms that are being introduced by non-Western manufacturers. For the military sector, we identified increasing demand driven also by 3 factors: The first is the higher spending budgets for U.S. companies, the second is increasing demand by non-U. S. customers, and the third is new potential growth for new programs. The pickup in oil prices in 2016 helped the fiscal position of oil-producing countries. In 2017 and '18, oil prices are expected to show moderate gain, but any spike in oil prices to the levels seen in 2011, 2012, seems unlikely despite the recent OPEC agreement on oil production cuts, therefore, the potential for international and offshore projects is expected to remain flat. On Slide 6, the company's overall book-to-bill was 1.08 in the second quarter of 2017 compared to 0.98 in the second quarter last year and 1.06 in the first quarter of 2017. We believe this represents generally improved business environment as well as our own execution. Total orders for the second quarter of 2017 were $67.3 million, an increase of $10.7 million or 18.9% from $56.5 million in the second quarter last year and an increase of $3.7 million or 5.9% from $63.5 million in the first quarter of 2017.

Moving to Slide 7. Some details on our reporting segments. The Foil Technology Product segment had a book-to-bill ratio of 1.09 for the second quarter of 2017 compared to 1.01 for the second quarter of 2016 and 1.06 for the first quarter of 2017. Sequentially, orders increased by $2.5 million or 8.5% from the first quarter of 2017, across all regions. The increase of orders in the Americas is predominantly in the distribution sales channels for precision resistors serving the avionics military and space and the test & measurements markets. The increase of orders in Europe is coming from the Force Measurement market, while the increase of orders in Asia is coming from the precision weighing and force measurements end markets. The FTP-adjusted gross profit margin was 41.9% for the second quarter, up from 36.8% in Q2 last year and up from 41.4% in the first quarter of 2017. The FTP-adjusted gross profit increase of $2.9 million from the comparable prior-year period was due to the increase in volume of $2.8 million, mainly from the precision resistors growth in Asia within the test and measurements market along with mainly instrumentation growth in the U.S. within the avionics, military and space market from the Pacific Instruments product line. There was $1.0 million improvement related to labor efficiencies, partially offset by $0.6 million negative impact of foreign currencies and $0.2 million due to wage increases. The sequential adjusted gross profit margin increased from the 2017 first quarter period by $0.8 million was due to the increase in volume of $1.1 million, mainly from the Pacific Instruments product line in the avionics, military and space end markets in the U.S. offset by $0.3 million due to higher obsolescence. The FTP segment backlog was 3.5 months compared to 2.8 months last year, and 3.4 months in the prior quarter. Looking at Force Sensors segment. The book-to-bill ratio was 0.99 for the second quarter of 2017 compared to 0.97 in the second quarter last year, and 1.06 for the first quarter of 2017. Sequential orders decreased by $1.0 million or 6.0% primarily related to the Americas. The decrease is mainly from the OEM and distribution sales channels in the precision weighing markets. The adjusted gross profit margin for the segment was 28.9% in the second quarter of 2017, approximately flat from the 29.0% in the second quarter of 2016, but up significantly from the 23.9% margin reported in the first quarter of 2017. Sequentially, the adjusted gross profit increase of $0.8 million was primarily due to an increase in inventory. The Force Sensors segment backlog was 2.7 months compared to 2.3 months in the prior year and 2.7 months in Q1 of 2017.

For the Weighing and Control Systems segment, the book-to-bill ratio was 1.14 for Q2 compared to 0.94 in the second quarter last year and 1.06 for the first quarter. Sequentially, orders increased $2.2 million or 12.6%. The increased orders are primarily attributable to a stronger demand in steel end markets in the Americas and Asia. The adjusted gross profit margin for the segment was 45.8% in the second quarter of 2017 versus 45.6% in the second quarter of 2016 and 44.3% in the first quarter of 2017. The Weighing and Control Systems adjusted gross profit margin increased by $0.1 million from the comparable prior year with an increase in volume of $0.6 million, which was offset by $0.3 million of negative exchange rates and $0.2 million in wage increases and other costs. The adjusted gross margin increase of $0.7 million from the first quarter of 2017 is attributable to a volume increase in the steel business in Asia and the process weighing in the U.S., offset by a reduction in onboard weighing product lines. The Weighing and Control System backlog was 3.3 months compared to 2.8 months in last year's first quarter and 2.9 months in the first quarter.

Moving to Slide 8. In light of an improved business environment, at the constant second quarter of 2017 exchange rate and taking into account normal seasonality of our business, we expect net revenues in the range of $60 million to $65 million for the third quarter of 2017. With that, let's open the lines for questions. Thank you.

(Operator Instructions) Our first question will come from Sarkis Sherbetchyan of B. Riley & Co.

So the first thing that really sticks out for me is the accelerating kind of book-to-bill ratios here for both Foil Technology Products and the Weighing and Control Systems. So I guess, first if we can kind of touch on what you're seeing in the FTP segment as far as the book-to-bill increases? And then next you can kind of touch upon the Weighing and Control Systems segment and that's a pretty significant book-to-bill, 1.14, and then also the magnitude of the order increase there as well?

Okay. Sarkis. So let's start with, as you have indicated, with the FTP. The FTP book-to-bill for the second quarter was 1.09. The demand, as I stated earlier, came from the test and measurements and from -- the test & measurements and from the avionics, military and space market for 2 main product lines: The precision resistors as well as the Pacific Instruments product line. In that regard, we see a continuation of the demand going into Q3 and beyond. We feel very strong that the demand that we have been -- that has been identified by those end markets is expected to continue. In regards to Weighing and Control Systems, we had recorded a book-to-bill of 1.14 which the highest contribution is coming from the steel product line. The steel product line had a book-to-bill in the second quarter of 1.36. As I have been indicating in the past, this is a project-driven business and the fact that we had a significant book-to-bill is only supporting the fact that there is a general increase in the demand of the market, regarding which will be delivered, some of it in the third quarter and also in the fourth quarter. But just to wrap it up, the biggest -- the highest demand on the Weighing and Control is coming from the steel end market.

Very good. And then with regards to lead times. Any kind of difference that you see for those project lead times? I mean, is this something where it's, within the next quarter, it could be burned off? Is it more than a few quarters? Can you maybe give us a favor of that?

Our lead times, all in all, for most of our products has not been extended more than the normal 2, 3 weeks. At this point in time, we have been adding more capacity in order to support the demand. Given the fact the Pacific Instruments as well as KELK, those are project driven, therefore, the standard manufacturing lead time does not apply to them because we have to deliver the project within a much, much longer -- within a much longer lead time to our customers, which used to be like that because that's the practice we should not expect any extensive revenues moving from one quarter to another quarter due to extension of lead times. This for us, I would say, may be a second order effect at this point in time.

Great. And then 1 final one for me and I'll hop back in the queue. If I look at year-over-year delta in revenues, it's an incremental $4.3 million and then if I look at the incremental adjusted EBITDA you guys delivered, it's well above the 50% contribution you've quoted in the past. Can you maybe give us a flavor of has this been a result of the incremental cost efficiencies you gained, the incremental volumes? Just kind of the setup kind of going forward?

Absolutely. The fact that we now realized -- that now we realize higher profits, which is beyond the incremental volume, is coming from the significant restructuring we have done and the cost control in 2016 and the fact that we do see a continuation of labor efficiencies in our manufacturing. Yes, this is the main contribution for the higher margins.

I'm showing no further questions. I would like to turn the conference back over to Bill Clancy for any closing remarks.

Thank you, Laura. I appreciate everybody dialing in today. Thanks for your participation, and I look forward to seeing everyone at future conferences in the fall. Thank you very much.

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