Vishay Precision Group Inc (VPG) 2017 Q3 法說會逐字稿

Good morning, and welcome to the VPG Q3 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 Third 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 that 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 www.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 is 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 third quarter of 2017 with revenues of $62.8 million, adjusted gross margin of 38.7%, adjusted operating margin of 9.2%, diluted earnings per share of $0.32, adjusted net earnings of $0.27 per diluted share, cash generated from operations of $7.5 million and a book-to-bill of 1.12, an indication of an improved business environment.

On Slide 4. Third quarter of 2017 revenues increased by 15.3% to $62.8 million, up $8.3 million compared to $54.5 million of revenues in the prior-year period. The positive impact of foreign exchange rates to revenues for the third quarter of 2017 as compared to the prior-year period was $600,000. Our gross profit margin increased to 38.6% in comparison to 37.2% in the third quarter of 2016. The increase in adjusted gross profit of $4 million for the third quarter of 2017 as compared to the third quarter of 2016 was attributable to the increase in volumes of $4.2 million and $1 million in manufacturing efficiencies, partially offset by negative exchange rate of $500,000 and $400,000 in wage increase.

Selling, general and administrative expenses for the quarter were $18.5 million or 29.5% of revenues, as compared to $16.9 million or 31% for last year's third quarter. The overall increase of $1.6 million in SG&A expense is related to a $1.8 million of incentive compensation reductions taken in the third quarter of 2016, which did not repeat in this quarter, $400,000 of wage increases, $300,000 of negative exchange rate impact, offset by a reduction of $1.1 million of strategic alternative evaluation costs, which was incurred in the third quarter of 2016. Looking at the operating income on an adjusted basis, you can see that our margin has increased to 9.2% as compared to 8.2% in the third quarter last year.

Included in other income and expense for the fiscal quarter ended September 30, 2017 is net proceeds of $1.5 million related to a onetime lease-termination payment at the company's Tianjin, People's Republic of China location. Adjusted net earnings attributable to VPG's stockholders for the quarter increased to $3.6 million or $0.27 per diluted share compared to $2.9 million or $0.21 per diluted share in the third quarter of 2016.

Foreign currency exchange rates for the third quarter of 2017 as compared to the prior year had a negative impact on net income of $400,000 or $0.03 per diluted share. Free cash flow was $6.4 million for the third quarter of 2017 as compared to $4.5 million for the third quarter of 2016. We defined free cash flow as the amount of cash generated from operations, which was $7.5 million for the third quarter of 2017, less capital expenditures, which were $1.2 million for the third quarter of 2017, net of proceeds from the sale of assets, which was $100,000 in the third quarter of 2017.

Our GAAP tax rate for the 9 fiscal months ended September 30, 2017 was 30.7%. For the 2017 fiscal year, we expect our operational tax rate to be in a range of 28% to 30%. 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 in addition to an improved business environment has 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 was part of our FTP segment and which we developed a few years ago, is reporting revenue increases of 133% in the third quarter of 2017 versus 2016's third quarter and 51% for the 9 months ended September 30, 2017. As compared -- the comparable prior-year period, I'm pleased with the continued acceptance of this new sensor platform and it offers enhanced performance to customers, in conjunction with an efficient manufacturing platform. Another product line, which is gaining momentum, is the value-added OEM transducers business in the Force Sensors segment. For the third quarter of 2017, revenues increased by 153% compared to the third quarter of 2016, while revenues increased by 103% for the 9 months ended September 30, 2017 as compared to the prior-year period.

We are pleased to see healthy trends continue in some important end markets for our business. I'll note, steel, aerospace and defense in particular. The World Steel Association reports for September 2017 that the world steel capacity utilization is at 73.5%, which is the highest utilization since January 2016. Progress in the global steel market this year to date has been encouraging. We have seen the cyclical upturn warning and firming throughout the year, leading to a better-than-expected performance for both developed and developing economy.

In 2018, we expect global growth to be moderate, mainly due to slower growth in China. Most geographic regions are expected to witness demand growth in 2018. According to the World Steel Association, as the producer of nearly half of the world's steel tonnage, China exerts a huge influence on industry dynamics and has been accused by other countries of dumping its excess output onto international markets at low bull prices. The analysts believes that China's steel production would stagnate in 2018, roughly in sync with domestic demand as Beijing pressed ahead with plans to shutter unneeded steel factories.

Steel is often viewed as an economic barometer because of its use in car making, construction and manufacturing. Across the industry, the outlook is decidedly improved in the jet business and commercial transport sectors with expectations still very confident in a steady improvement in the aerospace and defense market. Despite the crude oil prices below $55, we see an improved demand driven by the frac redeployment and more onshore projects being executed.

On Slide 6. The company's overall book-to-bill was 1.12 in the third quarter of 2017 compared to 0.98 in the third quarter last year and 1.08 in the second quarter of 2017. We believe this represents a general improved business environment as well as our own execution.

Total orders for the third quarter of 2017 were $70.3 million, an increase of $17.1 million or 32.2% from $53.2 million in the third quarter last year, and an increase of $3.1 million or 4.6% from $67.3 million in the second quarter of 2017.

On Slide 7. Some details on our reporting segments. The Foil Technology Products segment has a book-to-bill ratio of 1.03 for the third quarter of 2017 compared to 0.99 for the third quarter of 2016 and 1.09 for the second quarter of 2017. Sequentially, orders decreased by $1.9 million or 5.8% from the second quarter of 2017, mainly in the Americas, partially offset by an increase in Asia. The decrease of orders in the Americas is predominantly in the distribution sales channel for precision resistors, serving the test and measurements markets in the avionics, military and space markets. While the increase of orders in Asia is coming from the force measurement end markets for our advanced sensor platform. The FTP adjusted gross profit margin was 41.9% for Q3, up from 36.4% in Q3 last year and flat from 41.9% in the second quarter of 2017. The FTP adjusted gross profit increase of $3.6 million from the comparable prior-year period was due to the increase in volume of $3.3 million in all regions. The growth in Asia is primarily within the test and measurements markets for precision resistors in addition to force measurement markets for advanced sensor products. The growth in the U.S. is a result of an increase in revenue in the distribution sales channels of precision resistors in the test and measurement market and for Pacific Instruments products in the avionic, military, and space market, and growth in Europe is for distribution sales channel of precision resistors within the test and measurements market.

Additionally, there was $1.0 million improvements related to manufacturing efficiencies, partially offset by $400,000 negative impact to foreign currency and $0.2 million due to wage increases. The sequential adjusted gross profit margin was flat compared to the 2017 second quarter period.

The FTP segment backlog was 3.6 months compared to 3.0 months last year and 3.5 months in the prior quarter.

Looking at the Force Sensors segment, the book-to-bill ratio was 1.25 for the third quarter of 2017 compared to 1.02 in the third quarter last year and 0.99 for the second quarter of 2017. Sequential orders increased by $5.2 million or 33.5%, primarily related to the Americas. The increase is mainly from OEM customers in the force measurement markets for precision agriculture and construction applications. The adjusted gross profit margin for the segment was 28.6% in the third quarter of 2017, 31.0% in the third quarter of 2016 and 28.9% in the second quarter of 2017.

The adjusted gross profit decrease compared to the third quarter of last year is mainly due to $0.4 million of manufacturing inefficiencies related to the India plant ramp up and $0.2 million of negative exchange rate impact, offset by $0.6 million increase in volume. The third quarter 2017 gross margin of 28.6% is consistent with the second quarter of 2017. The Force Sensors segment backlog was 3.3 months compared to 2.4 months in the prior year and 2.7 months in the second quarter of 2017.

For the Weighing and Control Systems segment, the book-to-bill ratio was 1.15 for Q3 compared to 0.92 in the third quarter last year and 1.14 for the second quarter. Sequentially, orders slightly decreased by $0.3 million or 1.3%. The decreased orders are primarily attributable to the steel end markets in Asia and on-board weighing products in the Americas, partially offset by an increasing on-board weighing products in Europe. The adjusted gross profit margin for this segment was 43.1% in the third quarter of 2017 versus 44.9% in the third quarter of 2016 and 45.8% in the second quarter of 2017.

The Weighing and Control Systems' adjusted gross profit margin increased by $0.4 million from the comparable prior year due to an increase in volume within on-board weighing product in Europe. The adjusted gross margin decrease of $.7 million from the second quarter of 2017 is primarily attributable to a volume decrease in the steel business in Asia. The Weighing and Control Systems backlog was 4.0 months compared to 2.9 months in last year third quarter and 3.3 months in the second quarter.

On Slide 8. In light of an improved business environment, at a constant third quarter 2017 exchange rate, we expect net revenues in the range of $61.5 million to $66.5 million for the fourth quarter of 2017.

With that, let's open the lines for questions. Thank you.

(Operator Instructions) The first question will come from John Franzreb with Sidoti & Company.

I'd like to start with the revenue guidance for the fourth quarter. When you think about the high and the low end of the revenue expectations, what are the biggest swing factors between hitting the top and the bottom of that range?

Okay. That's a very good question, John. First, let me state that we are ramping up the volume and, given the fact that we have less working days, we expect to ship more. The 2 -- and of -- there is a certainty in 2 product lines, one of them is Pacific Instruments and the other one is KELK, the steel business. Historically, the nature of this product line, as you know, is project-driven. Therefore, there is a certain uncertainty when the product is being shipped, that the customer may have certain delays in regards to the shipment, which may move some revenues from one quarter to another quarter. So I would say that this probably is the biggest factor in regards to the guidance.

Got it, got it. And just kind of sticking with that, that theme about how the coming quarters are starting to look. It seems to me that the turnover in the backlog has been most pronounced in the Force Sensors and Weighing and Control, jumping virtually a month -- sizably in each one year-over-year. Is that because the shipping cycle has changed? Or are you -- or is it becoming a little bit tougher for you to meet some of the commitments on a timely basis?

Regarding the backlog in the shipments, I did indicate that in India, we are going to do a very massive ramp-up of hiring people and adding more capacity. And the expectation is that we are going to see higher revenues per day in Q4 in respect to Q3. So no doubt that the ramp-up in India will help dramatically in order to increase the shipments. In regards to WCS, I would say that at this point, the biggest -- the backlog and the stagnant backlog, probably from a product line standpoint is steel. And since I indicated that this is a very project-driven, here, the timing is dictated more by our customers. We still increase capacity, but customer timing or customer decision is the prime goal regarding deliveries within a given quarter.

Got it, got it. And then the Force Sensors business, the book-to-bill is the most pronounced at 1.25. I'm not sure if I actually heard you, Ziv, on what was the driver of the demand you're seeing in Force Sensors?

The overall economy is better, but the main driver for this force is our OEM business being headed by precision agriculture. Some of our designs have been coming to fruition and now, our customers are placing big orders. Precision ag.

(Operator Instructions) The next question will be from Sarkis Sherbetchyan with B. Riley.

Just sticking with the revenue guidance for 4Q, obviously, the midpoint is better here sequentially. With that regard, do you expect gross margin and EBITDA margin to be at or above the 3Q rate? I know you mentioned something about foreign currency. So just trying to understand that a little bit better.

Given the fact that if you may take the midpoint as reference and you know that the main driver for margin improvement is the volume, we should expect given meeting a certain revenue level to be as good as, if not, better from a profitability standpoint, from an earnings standpoint.

Understood. And to the previous speaker's point, the backlog is up nicely in months. I don't know if you can maybe talk a little bit more about, like the composition of that backlog. Maybe -- you mentioned about China markets are strong. But maybe if you could talk about the composition of the backlog.

Okay, the composition of the backlog, so we can go very quickly segment by segment. We are expecting -- I mean, we are expecting to deliver 80% of the backlog. In FTP, is expected to be delivered within the following quarter. Therefore, we are still very competitive in regards to lead time, and we have capacity in place in order to meet customer demand. In regard to Force Sensors, here, we -- there's slightly -- we are slightly in the mid-70s and the main factor here is driving capacity up in India in order to meet the demand. In regards to WCS, well, we see the backlog drop around the 60%. Steel is the main contribution and this, as I indicated before, the terms and conditions and the timing for shipment since it's a project-oriented product, is being dictated by our customers.

Got it. That's very helpful. And then you mentioned the strong improvement year-over-year in advanced sensors. Can you maybe talk about your expectations going forward. I mean, it's a very robust performance thus far year-to-date. But maybe what should we expect for that business on a run-rate basis and/or what should we expect for that business maybe into fiscal '18, if you can give comments around that.

Okay. We have never provided the detailed information regarding specific product lines within the company. But I can elaborate regarding historical performance of this product line. This product line has been increasing very, very nicely at a double-digit sales growth year-over-year in prior years. And without giving specific details, we are still in a very good momentum regarding new products and market acceptance.

Got it. Can you talk maybe about what it means to maybe your annual revenue rate from advanced sensors? I think in the past in investor conferences, you guys have mentioned the annual sales number.

In the past, we've mentioned it, now we are in the -- we were -- since this is a very new product line, we were in the first 2 years running on a fairly low level, and we just crossed the double-digit revenue level.

The next question will be a follow-up from John Franzreb with Sidoti & Company.

Yes, I guess, a couple of things. One, could you kind of update us on the M&A pipeline? On your presentation, you talked about how it's part of your growth strategy. What are you seeing out there?

John, as you know, M&A, we have always emphasized that M&A is a very important part of the company's strategy to enhance growth and shareholder value. Based on the dynamics in the last few quarters, what we have found is that still the dynamics are that it's very much a seller's market. Therefore, the multiples are still extremely high. And for every year, business -- there are many, many bidders. Therefore, it's still very, very high multiples, and I would say definitely, for sure, north of 11 or 12 from a (inaudible) standpoint.

Okay. And part of it -- that strategy, Slide 5, you talked about mid- to high single-digit sales growth. I'm assuming that means organic sales growth, but I'm not quite sure. If that's the case, what's the road map to get to the sustainable kind of mid- to high single-digit sales growth profile if you don't have opportunities on the M&A side of the business? Can you just talk to that a little bit?

Okay. First, the slide itself encompass M&A -- a situation of M&A deals as well. Nevertheless, from an organic standpoint, as you see and we did provide more lights regarding specific products that we consider as growth engines for the future, and we have provided regarding advanced sensors, regarding OEM transducer business that there is a very, I would say, very nice growth year-over-year and quarter-over-quarter.

Anything more on like the long term are looking at adjacent marketplaces, tapping into new customers somehow? Is there anything else you can provide?

Yes. Absolutely. This is a part of the M&A strategy. If -- we may acquire a company with a product line, which could round our portfolio, it would definitely could get us into new end markets and a completely different customer base. But this is part of our M&A strategy.

Okay, okay. And you mentioned, I think it was $1 million of cost savings in the quarter that was realized. Could you kind of update us where -- where you are as far as restructuring the business? I seem to recall at some point you put on hold one rationalization. So can you kind of give us kind of an update on that process?

From a cost reduction standpoint, this is more of a cultural mindset. We continue to drive cost in all aspects of the business regardless of the volume increase in order to assure our -- the cost base of our competitiveness for the future. Regarding major reallocation and restructuring, I did indicate that there was a certain, I would say, phase delay, especially in Force Sensors due to the volume increase in order to provide customers with the products on time. No doubt that cost reduction in regards to manufacturing and in regards to continuous of production sites, consolidation is part of the strategy of the company and is expected to continue and to be executed in the near-term future for this company.

Okay. All right. And if we allow for any kind of modest organic growth, again, I'm looking at Slide 5, you talked about an adjusted operating margin above 10%. The last 2 quarters, you hovered north of 9%. What do you think a longer-term reasonable goal is on an adjusted operating margin? It's clearly going to be above 10% if you have any kind of organic growth.

As you know -- okay, let me say this. At a given exchange rate, at a given flat exchange rate environment, which plays a significant role, and the fact that we should continue and realize more revenues based on our organic growth and based on our driving new product innovation. We would expect to meet those financial goals. Now as you said, in the last 2 quarters, we were very close to that. But as you know, the intention of the company to show that we can provide consistent financial and operational performance over time. So 2 quarters are good, but the intention is to deliver more quarters ahead. So those financial targets are sustainable and then to set the target for the next step.

Ladies and gentlemen, this conclude our question-and-answer session. I would like to turn the conference back over to Bill Clancy for any closing remarks.

I appreciate everybody dialing in and listening and participating on a very good earnings call. And looking forward to talking to everyone in the near future. Thank you very much, and have a good day.

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