Viasystems Group Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 9.13 | About: Viasystems Group, (VIAS)

Viasystems Group (NASDAQ:VIAS)

Q1 2013 Earnings Call

May 09, 2013 11:00 am ET

Executives

Kelly E. Wetzler - Vice President of Corporate Development and Communications

David M. Sindelar - Chief Executive Officer, Director and Member of Executive Committee

Gerald G. Sax - Chief Financial Officer and Senior Vice President

Analysts

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Nick Farwell

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Viasystems Group Inc. First Quarter 2013 Earnings Conference Call. [Operator Instructions] This conference call is intended only for investors and those who have been invited to participate. If there are any members of the press on this call, you're not authorized to participate, and we ask that you disconnect. I would like to turn the call over to Kelly Wetzler, Senior Vice President of Corporate Development. Ma'am, please go ahead.

Kelly E. Wetzler

Thank you, Karen. I'd like to welcome everyone to today's call. If you need a copy of today's earnings press release, you'll find it at viasystems.com. We've also prepared some slides, which you will find on our website. Our presenters today are Viasystems' Chief Executive Officer, Dave Sindelar; and our Chief Financial Officer, Jerry Sax.

In the course of our discussion, we're likely to make forward-looking statements. I wish to remind you that any forward-looking information we provide is given in reliance upon the Safe Harbor provisions of the Securities Litigation Reform Act of 1995. The comments we will make today are management's best judgment based on information currently available. Our actual results could differ materially from any forward-looking statements that we might make. The company does not intend to update this information to reflect developments after today and disclaims any legal obligation to do so. Please review today's press release and the recent SEC filings for a more complete discussion of factors that could have an impact on the company's actual results.

Some of our discussion today will include non-GAAP measures, in particular, adjusted EBITDA and adjusted earnings per share. These non-GAAP measures are reconciled with our GAAP results in today's press release and in our slide presentation. Management believes these measures are useful for analytical purposes and to assist in comparing results over time and across companies. But I remind you that adjusted EBITDA and adjusted EPS exclude certain material items and are not a replacement for the reported results under Generally Accepted Accounting Principles.

I will now turn the call over to our CEO, Dave Sindelar.

David M. Sindelar

Thanks, Kelly, and good morning, everyone. I will begin with some highlights about our first quarter events and results, and then I'll comment on what we're seeing in each of our end markets. Following my remarks, Jerry will discuss the financial results for the quarter, and then we'll open it up for questions and answers.

I'm going to start with Slide 4 of the presentation. When we talked in mid-February, we indicated that we expected our first quarter of 2013 results to look very much like the fourth quarter of 2012, and in fact, our reported net sales gross margins, adjusted EBITDA and adjusted EPS were almost identical on a quarter-to-quarter basis. On a year-over-year GAAP basis, our incremental sales from the DDi acquisition were largely offset by the combined effects of the Guangzhou fire, our customers in-sourcing of the wind energy assemblies and the restart of automotive competitor's flooded factory in Thailand. So on a pro forma basis, we saw a 17.5% decline in sales.

Our reported $273 million of consolidated net sales in the first quarter was adversely impacted by the typical seasonality during the Chinese New Year holiday period. I'm going to put this in perspective, about 60% of our PCB sales and 80% of our E-M Solutions sales come from our Chinese factories. Offsetting the expected seasonal decline were both a modest improvement in shipments of our Guangzhou factory, as it continues to recover from the fire in September of last year, and a continued rebound in our automotive demand for our automotive products.

We achieved a positive book-to-bill in both our PCB and Assembly segments in the first quarter. In particular, I want to highlight that we have begun to see E-M Solutions product orders for programs that will ultimately replace some of the capacity we had formally dedicated to the wind energy products.

Gross margin was down slightly on a sequential basis to 19.7% in the first quarter. Factory shutdowns during the Chinese holiday typically result in lower cost absorption in the first quarter, but we were hoping to see that fully offset by the continued recovery of our Guangzhou operation. While we have replaced Guangzhou's fire damaged equipment, we still experience some start-up inefficiencies as we retrain employees on the new equipment sets and we -- as we work with suppliers to calibrate the equipment to our production requirements.

And we're also seeing some adverse margins effect caused by the relocation of our Anaheim operation. This was a project that was initiated by DDi prior to our acquisition 10 months ago. We now expect to have this relocation completed by the end of the second quarter or early in the third quarter.

The most significant activities in the quarter were related to the recovery from the September fire in our Guangzhou factory. The machine capacity limitations are now largely behind us, but we're still working on customer requalification of the new equipment and processes. Until we settle our insurance claim, we are expensing the related inefficiencies, which we estimate to be approximately $5 million in the first quarter.

Adjusted EBITDA of $29.5 million and adjusted EPS of a $0.39 loss for the first quarter do not reflect the add-backs of the start-up inefficiency costs incurred during our recovery from the Guangzhou fire. And as I look to the later quarters in 2013, I expect to see the results improve to our historical margin levels.

Moving to Slide 5. You will see our sales analysts' analysis for each of our end markets. Looking at the pie chart on the left, I will note that, sequentially, we experienced very little change in our end markets as automotive increased about 1% to 29% of our total in our first quarter sales. I&I decreased one point to 25% of our sales and all of the other ones remained constant.

Looking at the trend table on the right, I will repeat my comments from last quarter's call that our Guangzhou factory has historically served all of our end markets except military and aerospace. And you can see the mil/aero is the only market that is not adversely impacted on a pro forma basis year-over-year.

As I noted a few minutes ago, our automotive demand has begun to pick up again after a soft finish to 2012. Net sales were up 3% sequentially, and we have a solid first quarter book-to-bill ratio for this market. And in interim, we expect to continue to work around the temporary capacity limitations caused by the Guangzhou fire, the forced closure of our Huizhou facility and the labor shortages in China. As a side note, although I have been hearing reports in the market about competitors trying to enter the automotive space to deploy their otherwise idle capacity, we believe our proven capabilities in this space have us well positioned to hold onto the high reliability product mix, which remains the focus of our attention in this end market.

In our I&I market, a sequential increase in PCB product sales was more than offset by a reduction in Assembly segment sales, which resulted in lower Chinese market demand during the holiday and the continued customer in-sourcing of the wind power product that we've mentioned in the past. Net sales result was an approximate 2% decline of I&I sector sales for the fourth quarter 2012.

Computer and datacom sector had been growing -- had been a growing end market for us until the Guangzhou fire. While our Guangzhou sales to this end market began to improve again in the first quarter, demand from the -- from a high-end server manufacturer by one of our large customers in the Huiyang facility caused a reduction -- reduced demand in the related PCBs. This resulted in an approximate 2% decline to the computer/datacom sales in the first quarter compared to the immediate preceding quarter.

Telecom net sales declined just under 1% sequentially in the first quarter. Rebound in PCB sales produced by our Guangzhou factory was offset by seasonal demand decline for our E-M Solutions products during the Chinese holiday period.

In the mil/aero end market, I'm happy to report that sequestration has not yet impacted overall demand of this product. While this is still our smallest end market, it remains a key area of focus for market share gains.

Moving to Slide 6. I'll spend a minute or 2 on what we expect to see in the near term. While visibility continues to remain fairly limited, we're paying close attention to what we're hearing from customers and suppliers in order to set our own expectations. We're certain -- certainly, a level of caution expressed by everyone we talked to, but most are still expecting more market strength in the second half of this year.

Based on what we're seeing in the early part of this quarter, we now expect a gradual improvement during the second quarter in anticipation of the forecast of improved conditions in the second half. Our internal focus in the quarter will be -- will continue to be Guangzhou's recovery and on executing our E-M Solutions opportunity. Combining the external data points with our internal project focus, we look forward to modest improvements over the first quarter results.

With that, let me turn it over to Jerry to discuss the financials.

Gerald G. Sax

Thanks, Dave, and good morning, everyone. Our press release this morning included a summary of the financial results, and those results are also included in the presentation materials posted for today's call. You should be able to access our 10-Q filing later today or tomorrow.

Slide 7 shows our summary statement of operations for the first quarter compared to the fourth quarter of last year and compared to the first quarter of 2012. Results for the first quarter of last year do not include the operations of DDi, which was acquired at the end of May 2012.

Dave already talked about our net sales of $273 million and our 20% gross margin, so I'll begin my comments on our $27.7 million SG&A expense line. Excluding the $3 million of noncash stock compensation expense, which is included in our reported SG&A, our first quarter SG&A costs were $24.7 million. When we talked last quarter, I noted that we expected those cash SG&A costs to be in the range of $26 million to $27 million per quarter during 2013 and I continue to expect that level when operations return to normal levels.

Depreciation and amortization expenses were in line with post-acquisition results. Compared to the first quarter of 2012, the increases are primarily related to the intangible and fixed assets that we added in connection with the DDi acquisition.

In 2012, we undertook a number of restructuring activities related to the relocation of factories and the DDi acquisition. While we paid some of the previously accrued restructuring costs during the first quarter of 2013, we did not undertake any new restructuring activities, and so we reported no restructuring expense for the period. The resulting $2.6 million of operating income for the first quarter compares to the $29.5 million of adjusted EBITDA that Dave highlighted earlier, and those figures are reconciled in a table at the back of the presentation materials, as Kelly pointed out earlier.

Moving on to the nonoperating income and expense items. You'll note that interest expense and the related amortization are again consistent with post-acquisition results in the previous quarter. The $748,000 of other expense in the quarter relates primarily to changes in foreign exchange rates, principally the Chinese renminbi versus the U.S. dollar. Our income tax expense of $3.2 million for the first quarter continues to relate primarily to our profitable operations in China, and that figure is in line with the $15 million annual expense figure that I've talked about on previous calls.

Another table at the back of the materials reconciles our reported $0.67 loss per share on a GAAP basis to the adjusted EPS of $0.39 loss that Dave highlighted earlier.

Slide 8 reflects our March 2013 balance sheet. You'll note that there are only minor changes from our audited year-end balance sheet, so I'll move on to Slide 9 in our cash flow statement.

You can see here that we generated a solid $29.1 million of cash from operating results in the first quarter of 2013. Cash spent on CapEx was just $20 million in the first quarter of 2013, of which about $11 million is related to recurring or maintenance projects and the remaining $9 million related to special projects, such as factory relocations and replacement of the fire-damaged equipment in our Guangzhou factory.

Debt repayments of $302,000 in the first quarter relate to the mortgages on some of the rights acquired from DDi. Turning to second quarter, in addition to the normal mortgage payments, we'll also pay the final $900,000 of convertible bonds that we acquired with the Merix merger back in 2010.

Net result for the first quarter was an increase of almost $9 million of cash. And combined with our available credit facilities in the U.S. and China, our liquidity at the end of the first quarter was a very solid nearly $190 million.

That concludes my prepared remarks. So I'll give control of the call back to Dave at this point.

David M. Sindelar

Okay, Jerry, thanks. At this juncture, we'll open it up for questions and comments.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question come from the line of Matt Sheerin from Stifel.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

So on the E-M Solutions business, which was down significantly due to that wind power business, is that all the wind power -- is that all from that, or is there other parts of the business? And if you look at that business that went away, what's the revenue run rate? Is it -- it looks like it's in the $40 million to $50 million plus range annually, is that correct?

David M. Sindelar

Matt, that is correct. That was one of our largest customers, and it continues to be a very significant customer, but they decided to bring their wind power production back in-house and moved it from China to the United States, which is -- it was always a little curious to us, but people make corporate decisions. So -- but the majority of the decline related directly to the wind power. I mean, there are some minor offsets with some telecom programs kind of ups and downs and things of that nature. But as I mentioned in my opening comments, we have had a fair amount of success penetrating some new customers and expansions in existing customers. We have -- just interesting point, in fact, that the wind power customer, the full production in-house, we received approval, audited approval, and received orders in our Juarez facility for other divisions of that company. And we're starting to produce a product for them in Juarez. So while I can't say that I'm pleased that they made the decisions to in-source, I think the relationship with that customer continues to be strong and we continue to have some pretty strong prospects as we enter the second half of this year and starting to ramp up on these new programs.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

What other -- you talked about other opportunities within E-M Solutions, what other markets and if you look at the margin profile of those new business opportunities is in line with the margins that you've seen in the core business?

David M. Sindelar

Yes. The margin the margins are in line, and we're looking into -- there's power-type items, there's medical applications, there are some additional telecom opportunities, things, kind of, markets such as that.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And on the automotive business, which it sounds like it's starting to pickup, but on a year-over-year basis, it's down 24%. How much of that is due to fire-related issues? How much is it due to market share that you gave back to competitors that had lost share because of their own issues in Thailand? And how much is it due to the market?

David M. Sindelar

Yes, Matt -- and again, I have -- it's always difficult to kind of go in and get an exact slicing of why customers place orders and what we have and what we haven't. But my guess is it's about 1/3-1/3-1/3. And part of the issue that we're fighting right now or where the opportunities that we have in front of us and we're just trying to make sure that the market demand is what it is in where we're going is that when we shutdown our HZ facility and the automotive market kind of softened at the end of last year, we held off on some capacity and some capital expansions. So now we're looking to see where we need to do some potential capacity increases to meet the market demand. So as we look at the second half on the automotive side, our Zhongshan facility is essentially at capacity. We're doing some minor bottleneck improvements to kind of increase our capacity slightly. We do have some capacity in our Guangzhou facility, but we're kind of trying to balance the global -- or the capacity of the 2 facilities. But the fact is that when the market slowed last year, we slowed some of our capacity expansion, really capacity transferred from HZ, the Huizhou facility, to Zhongshan.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Great. In terms of your guidance, it sounds really conservative, given that you're typically up at least high single digits because of the increased selling days and production in China. And is some of that just because of the visibility issues at customers and also due to the qualification requirements at the facility where you had the fire?

David M. Sindelar

Yes. The -- it's kind of a combination of a couple of things. In our comments, we talked about a strong automotive market and we are seeing strong automotive bookings. But I have yet to see somebody come out and say that the computer/datacom market is screaming by any stretch of imagination. We've seen a lot of the customers do reports that their sales are down 15%, 20% quarter-over-quarter. We think that that's temporary. But I guess at this juncture, I'm a little hesitant to expect it just to snap back within a 3-month period. So that's one concern I have about the overall market. Now you look at what we've seen, military was strong, automotive was strong, telecom was consistent and has some sparks of brilliance, computer/datacom was pretty weak and some of the industrial accounts were weak. So as I kind of look at the economic tea leaves that I see, while I am hopeful that we're going to see about -- I'm not sure I'm willing to bet on the bounce in the second quarter. In addition to that, we mentioned we're going to be moving our Anaheim facility, kind of -- we've gone through -- for the last 8 or 9 months, they bought the building, we retrofitted it, we went and got it up earthquake standards because it's in Southern California and all those kind of things. And we're deciding when we wanted to shift, and it looks like the second quarter was the best time to shift. So we'll have that essentially done in the second quarter. It may dribble a little bit into July. But it's -- so that's another reason for our caution, I should say.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

On your outlook on the telecom infrastructure segment, is that in line with your outlook on datacom in general, just not seeing...

David M. Sindelar

The telecom sector, I would tell you that I think that it should be a good solid market for us for the rest of the year. And I am hopeful that we can -- in some of our -- I mentioned that if some of the program wins that we're -- hopefully will ramp throughout the second half of the year. I would hope that we could, as a company, outperform whatever telecom gives us, gives -- market gives us.

Operator

[Operator Instructions] Our next question comes from the line of Nick Farwell from The Arbor Group.

Nick Farwell

Just follow-up on the questions that were just asked. And that is, I want to make sure I understand, and that's included in your highlights, the adjusted EBITDA does not include the $5 million from the Guangzhou fire. Is that -- am I reading that correctly?

Gerald G. Sax

You are reading that correctly. That $5 million is not added back.

Nick Farwell

Right. And so could you clarify again what you think the impact is likely to be and how does it dissipate over time?

David M. Sindelar

If you -- the Guangzhou fire was September, so we've pretty much spent September, October, November, December, part of January. And January we felt like we had all the equipment put into place, and we were officially back fully in business. As you might expect, during that downtime, we weren't paying our employees over time and things of that nature, so we lost some. So we had rehiring, so we had retraining. Anytime you turn on a massive amount of equipment, everything needs to be dialed in, everything needs to be brought back up. Also, during that time, since we didn't have the capacity, we were balancing capacity from our other plants to make sure we made our -- we didn't shut any customers down. They undoubtedly went to other places to find the capacity they needed. And because print circuit board industry is a very qualification-intensive business, once we declared we're back in business, so to speak, a lot of customers had to come back in and requalify the plant, requalify the equipment, the processes and things of that nature. And as you do that and as you turn everything back on, the scrap levels were at historic highs. And so that takes capacity, and it's inefficient, everything else. So that was pretty much of the tale of the first quarter. As we mentioned, Guangzhou's bookings are picking up. So we're having customers come back, place orders, and we would expect that to continue during the second quarter, get the kinks out, get the scrap out and get the order and the run rate back in -- back where we were. So -- and at this juncture, I am hopeful that, that process is completed in the second quarter. But there's -- as you can imagine, there's a lot of moving parts. So it may -- some of those things may filter over into the July-August timeframe, but the internal plan is to get it -- kind of flush all that out in the second quarter.

Nick Farwell

So it sounds like the second quarter will still obviously be disrupted by the factors you just mentioned, plus the Anaheim transition. But that fades rather substantially, I presume, in the summer and fall quarters.

David M. Sindelar

Yes, yes.

Nick Farwell

Okay. And, Jerry, is it appropriate then to add back the $5 million to gross profit then to be reflective -- fully reflective of that impact? In other words, instead of -- I think it was $54.9 million or $55 million, add up -- so the gross profit was $60 million when adjusted for the $5 million of sort of expenses? I assume those are virtually all COGS.

Gerald G. Sax

Yes, they are substantially all COGS.

Nick Farwell

Yes. So really your gross profit margin was closer to 22%, which, frankly, historically, is a fairly robust number and certainly in the current environments.

Gerald G. Sax

Yes. It is...

Nick Farwell

I'm just looking back over the last 3 or 4 years, and...

Gerald G. Sax

Right. But I'd caution, you can't just add back the $5 million because you -- we would have had higher sales as well. So it's a little bit more hard than just adding back and recalculating the gross margin percent.

Nick Farwell

Okay. I guess at this particular point in time in this -- in the economic cycle, whatever the hell that means in this environment, but at this point in time, given the flat nature of revenues on a sequential and, to some extent, year-over-year, and given all the transition that's going on, most specifically in Anaheim and a major plant in China, whole gross margins have sort of historical -- at the upper end of your historical range, it actually sounds rather encouraging. There must be some factors in mix or other things that are contributing to that. You haven't even brought on the new plant.

David M. Sindelar

This is Dave. At the risk of agreeing with you, I think I would agree with you. There's a lots of -- the first -- anytime you have an event like a fire and the size of the fire we had, now the fourth quarter and the first quarter is very, very trying on the whole organization to get it back, because we basically was student body to Guangzhou to get it fixed. And with that said, I want to -- to your comments about the economic data coming out for the first quarter is pretty market mixed. And so at the risk of always wanting to do better and perform better, it was a whole lot of effort and focus to try to make this as good of a quarter and to kind of build on the momentum that hopefully we can see in the second half.

Nick Farwell

One last question, and that is given the loss of the wind power business to a major U.S. manufacturer, that I presume have put rather substantial pressure on you guys on pricing, was the fact that you didn't have that business one of the contributing factors that, at least, I assume helped gross margins?

David M. Sindelar

Actually, no.

Nick Farwell

Okay. Setting aside coverage, I'm setting aside the issue of covering overhead and fixed costs.

David M. Sindelar

No. It was -- we were very sad to see that business go.

Nick Farwell

Now I'm not suggesting you aren't sad to see the business go. But -- so what you're suggesting is that the gross margins in that business were at least comparable, if not, at the upper end of that segment's overall gross margin?

David M. Sindelar

That's probably an accurate statement.

Operator

[Operator Instructions] I see no additional questions in the queue at this time. I'd like to turn the conference back to Dave for any concluding remarks.

David M. Sindelar

Great. Thanks, everybody, for spending the time to get updated on Viasystems, and we look forward to talking to you all on the next quarter call. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.

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