Vishay's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: Vishay Precision (VPG)

Vishay Precision Group, Inc. (NYSE:VPG)

Q2 2013 Results Earnings Call

August 6 2013 10:00 AM ET

Executives

Wendy Wilson - Senior Director Investor Relations and Corporate Communications

Ziv Shoshani - President and CEO

Bill Clancy - Chief Financial Officer

Analysts

John Franzreb - Sidoti & Company

Operator

Good morning. And welcome to the Vishay Precision Group’s Second Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions)

Please note this event is being recoded. I would now like to turn the conference over to Wendy Wilson. Please go ahead.

Wendy Wilson

Thank you, Laura. Good morning, everyone. Welcome to VPG’s fiscal 2013 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 should have received the second quarter earnings press release and we hope you take the time to read through it as it does contain important information. An audio recording will be available on the Internet for a limited time and you can access it on our website.

The content of this conference call is owned by Vishay Precision Group and is protected by U.S. Copyright Law and International Law. You may not make any recordings or other copies of this conference call and you may not reproduce, distribute, 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 the operations of Vishay Precision Group, please refer to our SEC filings, especially the Form 10-K 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?

Bill Clancy

Thanks, Wendy. Good morning, everyone, and thank you for joining us on our call today. I’d like to start out by reviewing some second quarter highlights and then summarizing the financials. Following that Ziv will provide his view of the second quarter results.

Overall, I’d say we had a very good quarter. Sales increased 9.2% sequentially and 13.6% over the second quarter of 2012, and we reported a year-over-year and sequential improvement in adjusted gross margin and adjusted operating margin.

Excluding the Kelk business, our consolidated book-to-bill has grown to 1.04 and market demand continues to improve in most of our segments. We had a good quarter for cash generation and free cash flow in the quarter and are setting our third quarter guidance in the range of $58 million to $63 million, due to factors that Ziv will review later on the call.

For a brief review of the financial results, let’s start at the top. For the second quarter, we reported revenues of $62.8 million, a 13.6% increase, compared to $55.3 million for the prior year period.

The updated valuation reports of the Kelk acquisition resulted in the company recording fair market valuation adjustments associated with purchase accounting. These adjustments increase cost of product sold by $2.3 million and $3.5 million for the fiscal quarter and six fiscal months ended June 29, 2013, respectively. The impact of this adjustment on the first quarter of 2013 was $1.2 million and therefore, the first quarter has been recast to reflect that adjustment.

The consolidated adjusted gross margin for the second quarter increased to 37.9%, compared to 35.9% for the second quarter of 2012, due primarily to the impact of three months of Kelk’s results in the second quarter of 2013. Year-over-year, the effect of foreign exchange rates had a negative impact of $700,000 at the gross margin level.

Selling, general and administrative expenses for the quarter were $18.6 million or 29.6% of revenues, compared to $15.8 million or 28.6% for last year’s second quarter. The increase of $2.8 million from the prior year is primarily due to the inclusion of three months of Kelk’s SG&A of $3.1 million.

During the second quarter of 2013, VPG reported $200,000 of acquisition costs incurred with the acquisition of Kelk. The costs are mainly legal and accounting fees.

Looking at operating margin on an adjusted basis, without the fair market valuation and the acquisition costs, you can see that is now at 8.4%, up from 7.4% in the second quarter last year and 5.9%, sequentially.

Included in other income expense was $803,000 of foreign exchange losses during the quarter, compared to $38,000 of foreign exchange losses in the second quarter of 2012. The change in foreign exchange losses is due substantially to the exposure to currency fluctuations with the Canadian dollar in connection with the Kelk acquisition.

We also recorded interest expense of $298,000 in the second quarter of 2013, compared to interest expense of $69,000 for the same period last year, again primarily related to debt associated with the Kelk acquisition.

The GAAP tax rate year-to-date is 25%, compared to 30% for the first half of last year. A primary change in the effective tax rate for both periods presented is a result in the geographic mix of pre-tax earnings. Our expected tax rate in 2013 is anticipated to be in the 26% to 28% tax range.

GAAP net earnings attributable to VPG’s stockholders in the second quarter were $1.3 million or $0.09 per diluted share, compared to GAAP net earnings attributable to VPG stockholders for the second quarter of 2012 of $3 million or $0.21 per diluted share, and compared to $0.03 per diluted share for the recast net earnings for first quarter 2013.

Adjusted net earnings for the second quarter of 2013 were $3.1 million or $0.22 per diluted share versus net earnings of $3 million or $0.21 per diluted share for the comparable prior year period and $1.9 million or $0.14 per diluted share for the first quarter of 2013.

The overall impact of foreign exchange rates for the second quarter of 2013 as compared to the prior year period had a negative impact to pre-tax income of $1.5 million or $0.08 per diluted share. The overall impact of the foreign exchange rates for the second quarter of 2013 as compared to the first quarter of 2013 had a negative impact to pre-tax income of $700,000 or $0.04 per diluted share.

Capital expenditures in the second quarter of 2013 were $1 million, compared to $1.6 million in the second quarter of 2012. Depreciation and amortization for the second quarter of 2013 was $3 million, compared to $2.9 million in the second quarter of 2012.

Total long-term debt as of June 29, 2013 and December 31, 2012 was $30.9 million and $11.1 million, respectively. The increase being attributable to the debt added for the Kelk acquisition.

Cash provided by operations was $5.3 million for the second quarter of 2013, compared to cash provided by operations of $2.1 for the second quarter of 2012. Total free cash flow for the second quarter of 2013 was $4.4 million, compared to $500,000 in the second quarter of 2012. We anticipate we will generate positive cash flow for the year.

On slide five, you can see that despite lower quarterly revenues last year, we were able to maintain our gross margin percentage through the year end as a result of our focus on improving operational efficiencies and reducing our costs. With the increase in revenues in the first and second quarter this year, our consolidated gross margin percentage has increased with the inclusion of Kelk.

With that, I would now like to turn the call over to Ziv Shoshani, our CEO and President. Ziv?

Ziv Shoshani

Thank you, Bill. I’d like to start by mentioning that the integration of Kelk, our recent acquisition is on plan and should be completed by the end of this fiscal year. We see sequential improvements in the macroeconomic indicators in the United States and Europe, in capital equipment spending, GDP and industrial production output. In the EU, manufacturing PMI in June was at the 24-months high led by Germany with a strong automotive production.

In the U.S., improved economic fundamentals are driven by an improved housing market and the growing household wealth. In China, the manufacturing PMI indicates a slowdown in the manufacturing sector due to lower demand.

Looking at the global steel outlook for 2013, the World Steel Association which is the largest association in the industry reports that the world good steel production for the first six months of this year indicates an interest of 2.0% from last year. Asia is up by 5.5% while other regions shows negative growth in 2013.

Globally, mill utilization is running at around 79% which indicates a modestly positive outlook. Based on the above mentioned indicators, we project the market demand to be stable with a potential upside for the second half 2013.

Moving to the operational trends, let’s start by comparing consolidated year-over-year and sequential results. The company’s overall book-to-bill was 0.98 in the second quarter of 2013 compared to 1.02 last year and 1.02 in the first quarter of 2013.

Without the effect of KELK business, the book-to-bill was 1.04 in the quarter, which has improved on a year-over-year and sequential basis. We believe excluding KELK from this ratio is relevant because KELK operates in a project-type business model with a very long cycle time from an order to delivery of approximately six to nine months.

This means that the quarterly book-to-bill is not relevant -- is not the relevant indicator to analyze the business trends which could misrepresent the underlying VPG business trends. In addition, excluding KELK backlog in the months and inventory returns remain relatively constant for all periods.

Total orders were $61.8 million, up by 10.0% from $56.2 million last year and up by 5.5% from the first quarter of 2013. The year-over-year and sequential increases were driven by strength in Europe and Asia orders.

With the acquisition of KELK, the Asian ratio increased from the 17% to 25% range for VPG’s total sales and the sales ratio of end-users grew from 20% to the 32% range of total sales. Our new steel market sector which is comprised of KELK and Nobel will represent approximately 18% of revenues.

Some details on our reporting segments. The FTP segment had a book-to-bill ratio of 1.05 for the second quarter of 2013 compared to 1.04 for the second quarter of 2012 and 1.06 for the first quarter of 2013.

Sequentially orders decreased by $200,000 or 0.7% from the first quarter of 2013 down in Europe, offset by an increase in Asia. The FTP gross margin was 38.1% for Q2 down from 42.6% in Q2 last year and 37.6% in the first quarter of 2013. The year-over-year decrease in gross margin is primarily due to $800,000 of lower volume, $700,000 from the effects of exchange rates and approximately $300,000 increases in other cost.

The sequential increase in the gross margin was due to labor efficiencies. The FTP segment backlog was 2.6 months, up from 2.5 months last year and 2.6 months in the prior quarter.

Looking at the Force Sensors segment the book-to-bill ratio was 1.04 for Q2, compared to 0.96 in the second quarter last year, and 1.04 for the first quarter of 2013. Sequential orders decreased by $300,000 or 2.0%, compared to Q1 of 2013, coming primarily from the Americas with an offset from Europe, both in precision weighing.

The gross margin for the segment was 20.5% in the second quarter of 2013 versus 21.5% in the second quarter of 2012 and 26.8% in the first quarter of 2013. The year-over-year decrease is primarily due to $600,000 in volume offset by ongoing cost reduction.

The sequential decrease in gross margin is mainly due to $400,000 of one-time positive effect in the first quarter of 2013 and $600,000 of exchange rate effect and inventory reduction. The Force Sensors segment backlog was 2.5 months compared to 2.4 months in the prior quarter and inventory turns were 2.0 compared to 1.9 in Q1.

For the Weighing and Control Systems segment, orders increased by $7.3 million or 60.3% compared to Q2 of 2012 primarily from Asia. The year-over-year improvement is primarily due to the inclusion of three months of KELK results in the segment. The gross margin for the segment was 50.2%, excluding the KELK acquisition purchase accounting in the second quarter of 2013 versus 41.7% in the second quarter of 2012 and 45.8%, excluding the KELK acquisition purchase accounting in the first quarter of 2013.

The book-to-bill ratio was 0.87 for Q2 compared to 1.05 in the second quarter of last year and 0.94 for the prior quarter. Segment backlog was at 3.3 months compared to 2.0 months in last year’s second quarter and 5.3 months in the prior quarter.

Inventory turns were 3.7 in Q2 compared to 3.9 in Q2 of last year and 3.6 in Q1 of 2013. We expect net revenues in the range of $58 million to $63 million for the third quarter of 2013 due to normal seasonality in the business, particularly strong revenues at KELK in the second quarter of 2013 which may not be sustainable, due to the project nature of the business.

An additional factor influencing the guidance for the third quarter includes an enterprise resource planning, ERP, implementation in our Foil Technology Products segment, which could temporarily reduce our efficiency in that segment.

And with that, we will open the line for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from John Franzreb of Sidoti & Company.

John Franzreb - Sidoti & Company

Good morning everybody.

Bill Clancy

Good morning John.

Ziv Shoshani

Good morning John.

John Franzreb - Sidoti & Company

First, I’d like to start with the guidance. You said that there’s some seasonality in the KELK business. And you also mentioned some deferrals or concerns about maybe some deferrals from some of the large project nature of the business. Could you talk about how that seasonality looks in 4Q versus 3Q, is there a bounce back effect, can you just kind of give us some color on that bit seasonal trends there?

Ziv Shoshani

Regarding the seasonality, it’s not necessary on the KELK business, this is on the overall VPG business due to the nature of the business whereby close to 40% of our revenues goes to Europe, we have less working days in Q3 versus Q2 by close to between 6% to 8% less working days.

So in that regard, we would expect to generate less revenues in Q3, which should be bounce back in Q4. In regard to specifically to KELK, we did recorded fairly high revenue for KELK in the second quarter, which we believe we might not repeat it in the third quarter, but all in all the seasonality we should bounce back in Q4.

John Franzreb - Sidoti & Company

Okay. And the ERP rollout, has that process begun and when do you expect it to end and can you quantify the impact on margins of that rollout?

Ziv Shoshani

Sure. The ERP implementation already started 12 months ago. And we have been incurring cost due to that process. The reason we have mentioned that is that we went live beginning of Q3. Therefore once we went live, we would expect to have certain learning curve from the people’s standpoint until we get the system up and running.

John Franzreb - Sidoti & Company

Right.

Ziv Shoshani

So the influence should be only for matter of few weeks, which should be reflected at the end by lower revenues due to this learning curve. And on the other hand, having some inefficiencies from the fact that people will have to be more competent running the system. So this is a temporary matter, which would take a few weeks which effects only the first segment but we have incurred all the cost and now we went live. So this is pretty much the end of the ERP implementation. This is -- and moving forward, we will start to realize all the benefits.

John Franzreb - Sidoti & Company

Okay. And once Kelk’s fully integrated, what kind of margin benefit would you expect from that integration process?

Ziv Shoshani

At that time, we did project to realize on the first year, on the first year around a $1 million of potential savings and going forward, we do expect to enhance by putting Kelk team and our team together to enhance revenues. So on the cost side, it is a $1 million for this year and on the revenue side we would expect to see an increase going forward.

John Franzreb - Sidoti & Company

Okay. And one point of clarification, I saw in your prepared remarks you said the FX was $0.03 for the quarter. But I have -- in the press release as $0.08 or $1.5 million? I just want to make sure I have the right number there?

Bill Clancy

Yeah. John, when you compare the overall impacts over the prior year, so the second quarter of 2012, your impact would have been $1.5 million pre-tax or $0.08.

John Franzreb - Sidoti & Company

Right.

Bill Clancy

…but it is compared sequentially to the first quarter of 2013.

John Franzreb - Sidoti & Company

Okay.

Bill Clancy

… we’re impacted from a pre-tax perspective is $700,000 or $0.04 per share.

John Franzreb - Sidoti & Company

Okay. That’s perfect. And do we actually have a contribution number for Kelk in the quarter, what the EPS impact was?

Bill Clancy

I mean, we haven’t stated it, but I could tell you, I mean, the revenues were $10.5 million for the second quarter and it had a, I would say, soon get influence to the overall EPS.

John Franzreb - Sidoti & Company

Given the margin profile I would expect so. Okay. Thank you, guys. I’ll get back into queue.

Bill Clancy

Thank you.

Operator

(Operator Instruction) I’m showing no further questions. I’d like to turn the conference back over to Ziv Shoshani for any closing remarks. Mr. Shoshani, did you have any closing remarks?

Ziv Shoshani

No. No. Wendy, would you be kind enough to final remarks please.

Wendy Wilson

Sure. Sure. Thank you everyone for dialing in today and listening to the call. Since we don’t have any other questions, we will be available for any questions you might have and we look forward to meeting with everyone soon. Thanks again.

Operator

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

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