Marc Zandman - Chairman
Barry Abelson - Pepper Hamilton LLP
Timothy Talbert - Director
Saul Reibstein - Director
Samuel Broydo - Director
Ziv Shoshani - President & CEO
Vishay Precision Group, Inc. (VPG) Annual Meeting of Shareholders Conference Call May 21, 2013 9:30 AM ET
Good morning. It is my pleasure to welcome all of you to our Annual Stockholder Meeting. In accordance with our notice of the meeting it is now 09:30 and this meeting will come to order. I am Marc Zandman, Chairman of the board of directors and I will act as the Chairman of this meeting. Mr. Roland Desilets, the Corporate Secretary, Senior Director, Legal Services of the company will act as the Secretary of this meeting. Barry Abelson of Pepper Hamilton has been designated as inspector of elections and balloting for this meeting and has been subscribed and sworn on to his oath. If you have not done so already please register your attendance before you leave by signing the register book at the door. If you are a visitor please sign in using the visitor registration book.
Before proceeding to the business of the meeting I would like to introduce the nominees for election to the board of directors of Vishay Precision Group, Inc. and other members of the VPG management team who are present at the meeting. Mr. Ziv Shoshani, President and CEO of the company; Dr. Samuel Broydo, Mr. Saul Reibstein and Mr. Timothy Talbert and I are the nominees for election as directors for terms of one year expiring at the 2014 annual meeting.
Also present today is William Clancy, Executive Vice President and Chief Financial Officer and Steven Klausner, Vice President and Treasurer. In addition a representative from Ernst & Young, VPG’s external auditors is here in attendance. Also a representative of our outside legal counsel Pepper Hamilton is here.
A copy of the notice of the annual meeting of stockholders together with the attached proxy statement and related materials were posted on the designated website on April 10, 2013 and a copy of the notice was mailed to stockholders of record on or about April 10, 2013. The Secretary has an affidavit showing due notification of such proxy materials of stockholders entitled to vote. I direct the Secretary to file such oath with the records of the meeting. A copy of the notice and the affidavit will be attached to the records of this meeting.
Since April 3, 2013 was fixed by the Board of Directors as a record date for the purpose of determining the stockholders entitled to vote at the annual meeting only stockholders whose names appeared on the certified list of stockholders as of that date are entitled to vote at the meeting. According to the certified list of stockholders there are outstanding 12,361,636 shares of common stock entitled to one vote each and 1,025,176 shares of Class B common stock each of which is entitled to 10 votes with respect to each matter to be voted at this meeting. A list of stockholders entitled to vote at this meeting has been available at VPG’s headquarters for the past 10 days and will be open for inspection by any stockholder for the duration of this meeting.
All proxies should be filed with the inspector so that he may determine the number of shares present for the purpose of a quorum. All stockholders present in person who have not filed or mailed the proxy should please give their names and the number of shares held by them to the inspector. May we now have the report of the inspector of elections.
Thank you. On the basis of report of the inspector a quorum is in attendance and the meeting is duly convened. There are three proposals before the stockholders today. First, we will proceed to move each of the proposals for a vote. Following the balloting, we will hear from the inspector of the election on the voting results. After the formal portion of the meeting is adjourned, we will follow with the report on VPG’s business strategy and operations. And lastly a question and answer section will follow the presentation. Management will be available after the meeting at the reception.
The first matter to be acted upon by shareholders is the election of all five directors for a term expiring at the annual meeting of the stockholders in 2014 and until their successors are duly elected and qualified. This proposal requires the plurality of the votes of the shares of common stock and Class B common stock voting together as a single class; voting on the election of directors. The board’s nominees for election are listed on the 2013 proxy statement on pages 11 and 12.
I would like to call Mr. Timothy Talbert, Chairman of our nominating and governance committee for the recommendation of the Board of Directors in this matter. Tim?
Mr. Chairman, the nominating and governance committee has the responsibility of recommending nominees for the Board of Directors to the Board. The committee consists entirely of Directors who are independent corporate management. After due consideration, the committee recommended and the Board approved the nomination of Mr. Marc Zandman, Mr. Ziv Shoshani, Dr. Samuel Broydo, Mr. Saul Reibstein and Mr. Timothy Talbert to hold office as Directors of the company for a term expiring at the 2014 annual meeting of stockholders and until their successors are duly elected and qualified. I move for the election of these nominees as directors.
As there have been no other persons nominated in accordance with VPG’s Charter the nominations are closed. Is there a second?
I second the motion.
The next matter being submitted to shareholders for action is the ratification of the appointment by the Board of Directors of Ernst & Young as the company’s independent registered public accounting firm for the year ending December 31, 2013. This proposal requires the affirmative vote of a majority of the votes represented by the shares of common stock and Class B common stock voting together as a single-class passed on this proposal and is described in the 2013 proxy statement on pages 14, 15.
I would like to call Mr. Saul Reibstein, Chairman of the audit committee for the recommendation of the Board of Directors in this regard. Saul?
Mr. Chairman, the audit committee has the responsibility of appointing the independent registered public accounting firm of the company. The audit committee is seeking ratification of this appointment by stockholders. The audit committee consists entirely of directors who are independent of corporate management. It has direct access to both Ernst & Young and VPG’s accounting department. In its deliberations this year, the audit committee has work closely with regulators and regularly with Ernst & Young and it has had substantial opportunity to meet with them throughout the year to discuss relevant issues. I move for the ratification of the appointment of Ernst & Young LLP as VPG’s independent registered public accounting firm for the fiscal year ending December 31, 2013.
Do we have a second?
I second the motion.
The third matter being submitted to shareholders for action is the approval of the amended and restated Vishay Precision Group 2010 stock incentive program including an increase in the number of common shares available for issuance there under. This proposal requires the affirmative vote of a majority of the votes represented by the shares of common stock and Class B common stock voting together as a single class passed on this proposal and as described in the 2013 proxy statement on pages 16 to 20. I would like to call Dr. Samuel Broydo, Chairman of the compensation committee for the recommendation of the Board of Directors in this regard. Sam?
Mr. Chairman, the compensation committee has the responsibility of overseeing the compensation policies of the company including the company's stock incentive program and after due consideration the compensation committee recommended and the board approved the changes to the stock incentive program for the stockholder approval is now requested. I move for approval of the amended and the restated Vishay Precision Group, Inc., 2010 stock incentive program including an increase in the number of common shares available for issuance thereafter.
I second the motion.
Is there any discussion? If not then we shall proceed. I now call in the inspector to proceed to solicit any final votes on the floor before we close the polls.
Thank you. Most stockholders mailed or turned in their proxy card. If you are assigned the proxy card and do not wish to change your vote it is not necessary to complete a ballot. For those of you who hold your shares in your own name and if you have not yet submitted a proxy card or you now wish to vote your shares differently than you indicated on your proxy cards, please raise your hand and you will be given a ballot. For those of you who hold your shares in the name a third party such as a broker you must have a legal proxy and a letter from the name of stockholder if you wish to vote your shares today.
I now declare the polls closed. Inspector may I please have the inspector of elections report.
I'm pleased to report the results of the three proposals as follows: One, the election of Mr. Marc Zandman, Mr. Ziv Shoshani, Dr. Samuel Broydo, Mr. Saul Reibstein and Mr. Timothy Talbert to the Board of Directors to serve until the 2014 annual meeting of stockholders has been approved via plurality of votes cast to the appointment of Ernst & Young LLP as VPG’s independent registered public accounting firm for the fiscal year ending December 31, 2013 has been ratified by a majority of votes cast and three the amended and restated Vishay Precision Group, Inc. 2010 stock incentive program including an increase in the number of common shares available for issuance there under has been approved by a majority of the votes cast. I will prepare a certificate of my final tabulation for filing along with the original proxies, ballots and my reports for the minutes of this meeting.
The Secretary is directed to file with the records of the company for the purpose of reference the following additional papers. List of stockholders entitled to vote at this meeting, proxies presented at this meeting, notice of annual meeting of stockholders, ballots, annual reports to stockholders. Therefore our official business is concluded and I declare this meeting adjourned. And now we've come to the more interesting part of the program, providing presentation with highlight. One of corporate strategy and plans for growth and I would like to introduce to you VPG’s President and CEO, Ziv Shoshani.
Thank you, Marc. Good morning ladies and gentlemen. I would like to present the VPG, Vishay Precision Group, 2012, business aspect as well as some interesting new product innovation and outlook concerning Q1 and going forward for the rest of 2012. All in all, 2012 was not an easy year for Vishay Precision Group. As you may know, more than 40% of the revenues for Vishay Precision Group is coming from European customers. We have three reporting segments. The most influenced one I would say, the WCS, Weighing and Control Systems which two-third of the revenues are coming from European customers. So the fact that in 2012 Europe was in a situation whereby the debt crisis is still now unresolved, but there was a big uncertainty concerning the euro zone if it will far apart. The European Central bank was still under consideration concerning a monitory policy how to control the debt situation and the fact that the GDP for the euro zone has dropped by 0.6% negative vis-à-vis prior year staying minus 1.8 and even Germany did went down to positive 1.0. So all-in-all since our business significant revenue is coming from European customers, we have seen a significant drop in the revenue of around 8.6% for the total company mainly being driven by European customers.
The US economy has show some improvements in the macroeconomic indicators and we do follow the macroeconomic indicators as industrial production, equipment investments, GDP, consumer price index, and other indexes which has a very high correlation to the fact that we are selling products into the industrial market, where it's very much to an extend capital spending driven. In Japan, where it's mostly related to our first segment the foil technology products, the market there was fairly soft, so especially with automatic testing equipment for semiconductors, where they are the big customers of our precession foil resistor. So all-in-all, 2012 Vishay Precision Group revenue has dropped from 238.1 million to 217.6, which is a drop by 8.6% coming mainly from Europe.
It is important to state that the European situations started to deteriorate already in late 2011. But at that time it was mainly focused around the southern European countries whereby our business is much more limited. In 2012 effect did extend to the central part of Europe, the UK and the northern part of Europe where we have much bigger revenue coming from those countries. Despite the fact of the 8.6% drop in revenues, we were able to maintain the gross margin for the company from a 34.9% gross margin in 2011 to 34.5% in 2012. We have rolled out several innovative product and I will elaborate it further on. This is part of the strategy of Vishay Precision Group and we have a few slides dedicated for that. There was quite an extensive discussions with the company at that time for potential acquisition of KELK. We have closed and finalized the deal by the end of January this year, but last year we were in a very advanced negotiation.
Vishay Precision Group business model is such that we have a fairly high contribution margin which means that for every incremental dollar of sales, we should expect at least $0.50 drop into the pretax line. In that regard for 2012 since we have seen a big drop in the revenues, we should have expected a much bigger impact on the bottom line and on the gross margin line which we have seen that we were able to manage that and we will get to the details. But it’s also vice versa when the market will recover, we will expect to see for every incremental dollar of revenue much more money, much more I would say percentage wise and dollar wise drop into the pretax line.
Vishay Precision Group cash flow from operation for 2012 was $21.1 million. We had around $8 million of capital spending therefore the free cash flow for the total company last year was [$13.1 million]. Looking at the financials, we are able to see a drop in the revenues from $238 million to $217 million, and the fact that we have kept the gross margin almost intact. You do see also a drop in the selling, general and administrative expense and some cost $300,000 incurred due to KELK acquisition. All-in-all the operating income for 2012 was $11.1 million or 5.1%. It’s important to state that the tax level for 2011 was 28.6% which did result in $4.3 million while due these value holding and merging of the two legal entity we were able to achieve a negative tax of 11.8% in 2012 which resulted in a credit of $1.2 million. All-in-all we were able to achieve $0.84 EPS for the complete year.
Another chart that illustrates the financials quarter-over-quarter and the same quarter -- the same period of last year, and here we already see Q1 of this year. You may see that the sales have recovered. In this we should state that include two months of the newly acquired company, KELK. So we were able to achieve $57.5 million of revenue at 36.9% gross margin which I believe as an independent capital held company, I believe this is the highest gross margin we ever had so far and an adjusted operating margin of $3.4 million which is equivalent of 5.9%. We did book 900,000 of restructuring costs in Q1 of this year.
The development of revenues and gross margin over time starting Q1 of 2012, this is still when the sales were at the fairly higher level due to the European condition at that time. At that time, we were still at $56 million run rate and you may see a 34% gross margin, while over time as the European situation started to deteriorate, you may see it also affected our revenue line, dropping from $56 million to $51 million in Q4 of last year, while the gross margin has been maintained or has been I would say closely monitored.
Let me then few minutes concerning the strategy of Vishay Precision Group. If you may recall the business model for Vishay Precision Group is the product vertical integration and in that respect, we are looking at the Foil Technology that has been invented by the late Dr. Zandman. In the 60s [instance] has been developed quite a bit. Based on that, we have created or the company has created the Foil Technology Products product line which consists of foil resistors and strain gages.
The next step in developing integration are the force sensors, which already encompass on the electronic side of precision resistors as well as the strain gages growing up to the system side, which already encompass the complete system that sensor themselves, the electronics, the software and we sell complete system. This is very important to state because the way the business model structured is also I would see a reflection of our strategy. In that respect, we are looking at organic growth as well as acquisition.
Let’s talk about organic growth. Organic growth has two aspects; one is product innovation and introducing the products into the market. This strategy will allow for development of new products and at the same time enhancing our field application engineering team in the field in order to enhance designing. So this is the development of the product as well as introducing it to our customers.
The second part of the organic growth is allowing the company to have a very competitive cost structure and in order to do that, we in addition to the fact that we have continued cost reduction, process improvement we also did build a new facility I would say about a year and a half ago in India which did allow us to be much more competitive and to allow us I would say a much better cost structure.
So altogether if I speak about two initiatives around organic growth last year, I can state that on one hand concerning new product introduction we are speaking about the new sensor [IP] which did allow for new products as well as new process. The further this goes down hole application which I will elaborate in a minute as well as our smart sensors which we do also call it Force Sensors for OEM applications whereby our sensors and the sensing device also encompass electronics and software to allow us to be an integral part of our customer applications.
So this is for as a smart sensor, it’s not just a simple sensor and concerning the cost side the miniature sensor did allow us for much higher automation or much better process control. In that regard, it’s higher yield embedded quality and also the Indian facility did allow us for a much better cost structure.
And acquisitions; the first acquisition is a publicly held company, has been completed at the end of January of 2013, and this is KELK.
Let me just give few examples concerning product innovation and new product introduction for 2012. You may see this is a very interesting application. This is a high end racing bicycle. We are looking here at the design cycle of 18 to 24 months. The development cycle was also quite extensive. This is a miniature sensor, which is part of the FTP reporting segment. We are looking at the product at a strain gage which is extremely small on one had, therefore it could be applied in places where pace is a major consideration on one had.
On the other hand, due to the fact that we were not only able to make small, also the line we were extremely small we were able to get to much, much higher resistance value and in that regard when you apply as part of an electronic circuitry, it will reduce the energy consumption. This is a battery operated application whereby energy lays a significant toll. We're looking a decline. Few gauges, I would say four gauges is called spider, that’s there. This is well the chain, is rotating on the bicycle and it measure in an extremely sensitive way.
The force that is being applied on the bicycle, the rider applies on the bicycle. This is only one example of the project that can grow to $500,000 application with multiple customers. Our selling price a few $1 and once we applied few gages on one application. Our average selling price of [$10 plus] per bicycles, you can imagine that those bicycles are sold for thousands of dollars.
So in that regard, our cost or our price is irrelevant to the spec of the complete bicycle, but so far no one was able to find a better sensing solution and only with the miniature sensor strain gage, we were allowed – we provided a proper solution to our customers, to our customers who are building the complete module for those racing bikes.
Another two interesting application. One, let me start with one which is on the right hand side, this is the one which we have a patent for. This is a 3% resolution, non-legal for trade, safety overload protection system. It consists of four sensors that are connected to the axle of the truck, of the four axles of the truck. We are providing the complete software the connection to the ECU of the vehicle. This product is being sold less than $2000 for the complete system which is very, very competitive.
So far, we are able to measure, it’s a two axis, measurement we are able to measure acceleration as well as weight. Our major market was so far I would say end user retrofit for fleet managers starting in United Kingdom. We have also seen quite great interest of automotive manufacturers selling that to their aftermarket is another feature added value and the next page is that the truck manufacturers won’t add it as a feature for the online production. This product which have been introduced, I would say, around 18 months ago is already at $2 million level revenue and has very big prospects for growth and we do have a fact.
The other one, which is a bulk weight; this is a much more expensive one, with a much higher resolution and here we are providing a complete system. This is mainly, this application is mainly for the United Kingdom, when the truck turns to the right, there is a blind spot, so we are providing the camera, we are providing the weighing system, so at the same time the truck driver is able to see in order to prevent an accident if someone is coming on the side of the truck. The blind spot, at the same time if it turns and the turn is too quickly, we are, our systems are able to make sure that there will be appropriate system in order to allow him a certain alarming system so the truck will not flip over while it turns. This application which has been developed again around 12 to 18 months ago is already at the run rate of over $0.5 million of revenue, so far it’s mainly in the UK, but the intention is of course to transition that to other countries.
Some more product innovation for this year; we have foil precision resistors, which provide stability and precision from a sense of consistency and tight tolerance for the electronic measurement circuitry. This is a down-hole application where the temperature is much more extreme and other electronic components may provide different output due to the temperature, our resistors would stabilize the complete circuitry and would make sure that there is a consistent and precise measurement signal output. I would say most of the applications are around room temperature, but here we have to cope with more extreme temperature close to 250 degree centigrade due to the fact that this is a measurement system that goes into the downhole application measurement equipment and the revenues are way over $1 million.
Maybe a very interesting one would be part of our WCS or Nobel; you may see that on the right hand side. This is a crane load clean 200 kilo Newton to 600 mega Newton measurement just to give you a flavor, we are speaking about 600 tons of force being applied. It has varied our module diameter is less than an inch at this huge load (inaudible) that can sustain such major forces. It has self diagnostic, automatic calibration and so far if something would have gone wrong at the loading all other competitors have to stop the crane which would state or which would allow for a major, major down time at the major cost. We have developed this special ton (inaudible) whereby within 30 minutes we are able to identify what is the problem to make the change and to change the electronics if necessary. Again this is a new product mainly for downhole application very, very heavy at crane which will vary I would say significant forces and the revenues are way over $1 million.
Most of the applications in the product innovation that I showed so far was mainly to show you how much the company invests and will invest in regards to organic growth from a product innovation and from a field application, engineering and designing activities. The next part of the strategy of this company was acquisition. We have completed the acquisition of KELK. As I stated KELK is a very, very unique company in a way it has 60 years of legacy. It is considered their leading brand in the global steel industry. It had very, very good financial statement and it did fit our product portfolio. In that regard, they have been very strong in Asia and in the United States, South America and emerging markets while our steel application products due to the fact that they were part of Nobel, which is a Swedish company, most of our revenues came from the European side. So it was also an excellent fit from a geographical standpoint and also from a product standpoint because we have been both developing, I would say, different product for similar applications.
So in that regard, I would say, the good synergies, not only from a geographical standpoint but also from a product standpoint. The acquisition has been financed 50% by cash and 50% by debt. And the IRR is in the mid-teen. So it is a very good acquisition for us, the first acquisition and a very good one. The integration of this acquisition is growing very well. We have started to streamline this April between the KELK team and the Nobel steel application team. We have been leveraging on the operational side, the logistics operations, purchasing. We are now in the process of developing joint R&D in a project, and go-to-market approach as a new company, which has those two product lines. The integration is expected to be completed by the end of this year and so far everything is going according to the plan.
Some indication concerning 2013; for Q1 the macroeconomic indicator has improved vis-à-vis Q4 of last year. We have seen some improvement in the GDP in the UK, and in Germany and the fact that the European situation is more under control, I think that the European bank is buying quite a lot of bonds and to that extent didn’t allow euro zone to fall apart and it looks like that they have under very tight control the debt management. So there is a definitely a psychological affect in regards to Europe and to that extent companies are now feeling more I would say, they are more tolerating in regard to spending more money investing back and buying back more product and we do see that in our backlog and also in discussions with major OEMs and end user in Europe. All-in-all I would say that even in Japan the Japanese Central Bank has decided to take unique step after 20 years and started to take more debt in order to stimulate the Japanese economy as they have a target of 2% for inflation and we also see some more signs of recovery in our Japanese customer base. So all-in-all we have been providing a guidance of $60 million to $65 million for the second quarter which is an increase from the third quarter of this year. Thank you.
Thank you Ziv, just to add to that just a little bit because Ziv being as modest as he is that this KELK acquisition was fabulous acquisition and also being the first of its kind I mean being first acquisition since the spin-off is not something which you take very lightly and it was rather a large acquisition and so I must say that Ziv and his team have done an excellent job and again there was a fear factor and there was a lot of anxiety, there are a lot of things involved but it turned out very well and as Ziv portrayed already the margins are showing.
Okay. So now continuing, we have now come to that part of the agenda providing for general Q&A. So if you have any questions, please state your full name.
Okay. I see you paid $50 million for KELK, what were their annual sales in 2012?
So when you are projecting in the next quarter an increase of somewhere around $8 million in sales over last year, that's largely completely from the KELK acquisition.
Let me state that the KELK sales were around $32 million but KELK EBITDA was around 25% which is extremely important to state. In regards to the revenue improvements in Q1 versus Q2, we have accounted for $5.5 million of the KELK revenues, have been accounting in the results. There was volume increase all-in-all mainly coming from the onboard weighing market in Q1, but if I will take the large lion amount of share, it did come from the KELK acquisition. The fact that we have reported a positive book-to-bill order one in Q1 will also resulted in Q2 we will see revenues increasing from our core business excluding the KELK acquisition.
Do we have any other questions?
So I guess just a little clarity if you could. So, are you expecting non-KELK business to grow in 2013 over 2012?
We do expect the non-KELK business to grow slightly over 2013 over 2012. We have to realize that when you compare yield over yield, you compare averages, but in fact that way would be to look at the quarter-over-quarter because (inaudible) of last year at the rate $51 million excluding KELK. So in fact the extrapolation of $51 million would result in a $204 million, vis-à-vis 218.
So taking that under consideration, we do see a recovery in the core business. Otherwise, we would forecast to a [full] and not other than that. So we do see a recovery, but we have to understand 2012, we started from a high level in Q1 and I showed that quarter-over-quarter evolution of revenues, while Q4 we reached 51 and the expectation is to go back to that level by the end of this year, excluding the acquisition.
Charles, there is no doubt the main cake is coming in from KELK, part of your first question.
If by chance, you said, can we expect a 15% return on equity roughly from KELK, so on 50 million purchase you are thinking a $7.5 billion contribution, is that the thinking?
Our calculation for the price target for KELK was in IRR in the meeting, which I would say around 15%.
Okay. Any other questions? Okay then there appears to be no other business on our agenda for today. So I would like to express my sincere appreciation to the shareholders who attended the meeting as well as those who submitted their proxies, but we are not able to be pressed and pushed. Thank you to our shareholders and to everyone who has taken the effort to make this meeting possible. The meeting is adjourned.
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