Measurement Specialties CEO Discusses F1Q 2014 Results - Earnings Call Transcript

Measurement Specialties, Inc. (NASDAQ:MEAS)

F1Q 2014 Earnings Call

August 8, 2013 11:00 AM ET

Executives

Frank Guidone - President and CEO

Mark Thomson - CFO

Analysts

John Franzreb - Sidoti & Company

Sean Hannan - Needham & Company

Operator

Greetings, and welcome to the Measurement Specialties First Quarter Fiscal Year 2014 Conference Call. (Operator instructions). It is now my pleasure to introduce your host, Mr. Frank Guidone. Thank you sir. You may begin.

Frank Guidone

Thank you, operator. Good morning everyone. Let me first remind everyone that today's conference call will contain time-sensitive information that is accurate only as of today's date and time. In addition, we may make forward-looking statements during this call that may differ materially from Measurement Specialties’ actual results. Please review our most recent SEC filings for a detailed presentation of our business and associated risks, including the risk factors described in our most recent Annual Report on Form 10-K for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements made during this conference call.

Additionally, during today's call, we will provide certain performance measures that do not conform to Generally Accepted Accounting Principles. We believe these non-GAAP measures enhance the understanding of our performance and we provide schedules that reconcile these non-GAAP measures with our earnings press release and reported results in our 10-Q filed with the SEC.

I'll start this morning with a few general comments on our first quarter and then turn the call over to Mark. We posted solid sales and bookings for the quarter. We broke the $100 million quarterly sales barrier posting $100.5 million in sales for the quarter, which include a partial quarter results from Spectrum which we completed mid-April. This puts us on a $400 million plus run rate, supporting our fiscal '14 guidance of $400 million to $405 million for the year in sales. We booked $102.8 million for the quarter, resulting in a three month book-to-bill of 1.02.

We had very strong bookings in July at $37.2 million and accordingly we believe we should see modest growth in the second quarter over the first on the order of 1% to 2%. Our press release said Q2 sales would be similar to Q1, but based on the most recent data we feel we should post modest gains, so call it flat with some upside.

The integration of Spectrum is going well, our immediate focus being the consolidation of their Juarez production to our Chengdu and Shenzhen facilities. We're currently building phase 1 parks. We've broken that transfer into three different phases. Phase 1 represents about 50% to 55% percent of the total production in Juarez and we remain on schedule to move all production by the end of the calendar year, which will be about a nine month consolidation or interaction timeline.

We made significant strides with respect to our REIT programs this quarter. We have nearly 30 million in when I call highly confident business that should deliver approximately $30 million by fiscal '17 and expect to close the remaining $20 million over the coming months to achieve our $50 million by '17 objective.

Our digital component business continues to progress well. We are in production of multiple consumer altitude applications, including some exciting fitness apps, as well as several opportunities for both barometric pressure and/or humidity sensors in printers, HVAC and consumer products including smartphones.

Overall we’re executing well against our long term plan of mid-teens growth fueled by 7% to 9% organic growth and complemented with strategic acquisitions. We think fiscal ’14 will be a representative year for that model. This is in despite of the Sensata sales decline which present some topline headwind that will result in overall improvement in margin of roughly 200 to 250 basis points over the next two to three years due to the sale of the mix shifts.

While we remain conscious given the calendar year-end weakness we experienced the last two years, at this time at least through July, the markets appeared stable. PMI numbers were strong in July, particularly in Europe where they recorded the first reading above 50 that signaled expansion since July 2011. North America posted its highest reading of the year in July at over 55. The strength in PMI is consistent with the stability we are seeing in our bookings which gives us confidence in terms of executing against our fiscal ’14 plan.

I will now turn the call over to Mark.

Mark Thomson

Thank you Frank. I’ll now cover the financial results for the three months ended June 30, 2013 in more detail. As Frank noted, we had a strong first quarter, an excellent start to fiscal 2014 in terms of bookings, sales, and earnings and cash flow.

Our net sales for the first quarter set a record high at $100.5 million, an increase of $11.9 million, or a 13.4%, over the first quarter of last year. Organic net sales for the quarter which exclude $9.7 million in sales from the RTD and Spectrum acquisitions increased $2.2 million or 2.5% over the same period last year.

Our gross margins in the first quarter were up slightly to 41.7%, as compared to 41.5% in Q1 last year. As we progress through fiscal 2014 and beyond, we expect improvements in gross margin largely driven by sales mix. We expect gross margins will range between 41% and 43% in fiscal 2014.

Selling, general, and administrative, or SG&A expenses for the first quarter increased $4.3 million to $29.4 million, as compared to the corresponding period last year, largely due to the incremental expenses associated with acquisitions. Excluding expenses tied to the acquisitions, organic SG&A increased by $2.1 million, driven largely by increases in wage, increases in stock compensation expense, increased investment in research and development cost, and restructuring charges associated with facility consolidations. We reported $1.1 million in stock compensation expense in the quarter and expect fiscal 2014 aggregate compensation expense to be roughly $7.9 million.

Amortization expense also increased during the quarter, as compared to the same period last year driven by recent acquisitions. We expect our consolidated amortization expense including spectrum to be approximately $10 million for fiscal 2014.

Income tax expense for Q1 decreased to $2.5 million from $2.6 million, as compared to the same period last year. A portion of the income tax expense decrease relates to a non-cash discreet income tax credit of approximately $0.2 million. As a result of this adjustment, the Company’s effective tax rate in the quarter was 21.7%, as compared 23% last year. The Company expect its overall effective tax rate excluding the discrete tax adjustments to be approximately 23.5% for full year fiscal ’14.

The Company’s operating cash more than doubled as compared to the same period last year. Company generated $13.5 million of cash from operating activities in the first quarter, an increase of $7.1 million driven largely by continued improvement in cash conversion of working capital elements including receivables, payables and inventory.

During the three months ended June 30th, 2013 the company invested approximately $0.7 million in the new Chainview Greenfield facility and $3.3 million in other capital projects. We expect the total investment in the Chainview facility to be roughly $6 million. The facility is on track to be completed in the first quarter of fiscal 2015.

Company generated free cash flow of $9.5 million in Q1, an increase of $6.9 million as compared to the same period last year. Our total indebtedness net of cash balances of $39 million at June 30th was approximately $102 million. Again we are pleased with our first quarter results and look forward to a solid fiscal 2014.

I’ll now turn the call back over to you, Frank.

Frank Guidone

Thank you, Mark. Operator, we will now open the line for some questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from the line of John Franzreb with Sidoti & Company. Please proceed with your question.

John Franzreb - Sidoti & Company

Frank, in your prepared remarks, I thought I heard you say the 7% to 9% organic number would be part of the fiscal 2014 model. Does that suggest that we are going to have an acceleration, that the order outlook has an acceleration in the organic delivery in the second half of the year, especially given the second quarter guidance?

Frank Guidone

No, because we had contraction in the back half of the year last year, even basically flat to slightly up performance on a run rate basis Q-over-Q from where we are now with the results around 8% to 9% organic growth in year over year.

John Franzreb - Sidoti & Company

All right. And Mark, I am trying to scramble on this second number that you said. In your prepared remarks you said the stock compensation in the quarter was $1.1 million, and it is going to be $7.9 million for the full year? Did I hear that correctly?

Mark Thomson

You did.

John Franzreb - Sidoti & Company

I am trying to find how that compares to previous years because it looks like a heck of a step up. What is going on there?

Mark Thomson

So if you go into our proxy filing, which we sent out a couple of weeks ago, we did a relatively large grant in July, restricted stocking to key employees and executives and because of the valuation of our current stock today, that's driving our overall stock compensation expense.

John Franzreb - Sidoti & Company

Okay. And are you going to use cash to maintain the current stock level or should we be thinking about a larger weighted average diluted number for the fiscal 2014?

Frank Guidone

Yes, I think if you study fourth quarter over first quarter shares outstanding, you will see that there was a step up went from 16, 259 to 1641. Largely that's driven by two factors, the first of which is employees are exercising stock options. So that's actually adding to issued shares and our ability through the treasury method to buyback, we're buying back fewer shares by virtue of the fact that the stock prices are at a higher value. So there is a little bit of head wind from that perspective. So you will see some increase in diluted shares outstanding throughout the year.

John Franzreb - Sidoti & Company

And one last question if I may. Frank, could you talk a little about conditions in Europe and particularly what are you seeing there? Any kind of color, be it product or regional would be helpful.

Frank Guidone

Sure. Right now I would say our European bookings have been reasonably solid. PMI while it has been below 50 up until July, it's been steadily improving month over month. So relative to year-over-year comps, it feels like its better and certainly that's what we have been seeing as well. The fact that we've finally kind of put through expansion in Europe, first time in two years I think an important milestone as well.

A lot of what we do in Europe is tied to the truck market and while the truck market isn't necessarily expanding as much as we're seeing the growth we're taking content and that's either in new programs or just taking share. And so that's helping us in Europe. So I would say Europe is stable to us. We're seeing our business grow there not quite as much as we’re seeing in North America, but more than we're seeing in Far East right now.

Operator

Our next question comes from the line of Sean Hannan with Needham & Company. Please proceed with your question.

Sean Hannan - Needham & Company

So for September when you are looking at your expectations in terms of mix for that business to come through, any color that can be derived in terms of potential impact to margins?

Frank Guidone

For the upcoming quarter?

Sean Hannan - Needham & Company

That's correct.

Frank Guidone

Yes, I would say the upcoming quarter should be similar to maybe slightly better than Q1.

Sean Hannan - Needham & Company

That is helpful. Now if we think about your current outlook on the year given that we also didn't have a full quarter of Spectrum, is there any real potential that we could be changing our outlook if current conditions persist that is ex-acquisitions or is there nothing really within your line of sight that would suggest something like that?

Frank Guidone

I would say we had a good July, both in terms of sales and bookings. I gave the bookings number. The 37 number obviously translates to a quarterly run rate that’s greater than what we’re projecting that would be 111 in 112. So more than what the sales numbers is suggesting the sales guidance. Clearly July was strong but we expect August to be weaker given that particularly in Europe there's a lot of shutdowns in August. So, there may have been some accelerated ordering in July to cover stocking for periods that (inaudible) in August.

So, overall I would say we are comfortably booked to the quarter. We also did a forecast and the bookings right now suggest it has a little bit of upside while forecast which why I said modestly up to Q1.

But it’s a good position. We've been in a position typically this point in the year in the last few years where we are having to really run hard at the end of the quarter in order to kind of meet the forecast guidance number and it feels that we have a little more strength behind our position where we're sitting now and looking out at least for Q2 and into Q3.

Sean Hannan – Needham & Company

That is great. On to the FCR. So based on the wins you have in hand, so of that $30 million it sounds like in a manner pricing is somewhat effectively set around how you would work with those programs. Can you comment on what you are expecting to realize in margins from that business at this point? What could change? And I'm looking for general context say versus what prior expectations were for you internally and versus say a blended EBITDA that you report today for corporate measurement specialties.

Frank Guidone

I do not think the expectations are different from what we had where we started. Right now it does appear that from a pricing perspective, we are fairly aggressive in the marketplace. We are generally a discount to the incumbents. So that is one of our angles in order to get people's attention and take business.

With that said, we still expect margins to be, if you look at our average today, our average includes a large slug that is being weighted down by Sensata. So certainly we expect the margins are going to be much better than that. It means the rest of our business is higher than the reported average. I would say I don’t expect this business to be at higher as general industrial but in the range of our reported average it is reasonable.

Sean Hannan – Needham & Company

And then lastly when you look at the vertical markets today in terms of mix, and as you consider new programs and where you focused your business development, you have mentioned certainly in quarters some more programs that are coming in related to consumer. Can you talk about how you expect your mix change over the next 12 to 18 months from a market standpoint? And then if you can also consider the impacts obviously of that Sensata wind down, that would be helpful. Just kind of framing the context of what defines you a year to a year and a half out?

Frank Guidone

Well, if we think about the Sensata line now, that's largely offset by Urea increase so, really more than offset. So the overall ENZ (ph) mix goes up a little bit but really what happens is we see a big shift out of auto and into truck. But overall ENZ doesn't become a dramatically greater slice because we're losing 45 or call it 40, 35-30, 35-40 depending on where we end up with Sensata and we're picking up 45-50 in the Urea program.

So we'll see some net increase in ENZ. We have some other ENZ program that adds to that. But it’s not as dramatic as it sounds when you talk about adding $50 million to the total, because of the shift with Sensata.

Consumer becomes larger plus in total we're talking about between pressure, humidity something on the order of say $15 million in new component business, that's largely tied to either consumer or white good applications, some printer and HVAC, which I put in general industrial but in the scheme of things, when you look at overall revenue at the time, that may only move it by less than 5%, right.

So we were talking about in aggregate over the next three years that moves closer to those 450 plus range. $10 million to $15 million, $15 million to $20 million in business is meaningful for us but it doesn't necessarily skew the overall mix.

Operator

(Operator Instructions). It appears there are no further questions at this time. I'd like to turn the floor back to management for any closing comments.

Frank Guidone

Thank you, Jen. In closing we're off to a good start this year and at this point Q2's holding up well. Our major new programs are progressing which should fuel organic growth over the next several years. This growth complemented by strategic acquisitions should continue to drive exciting improvement in overall shareholder value. We appreciate everyone's interest and continued support. And operator that will conclude today's call.

Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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