Viasystems Group's (VIAS) CEO David Sindelar on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: Viasystems Group, (VIAS)

Viasystems Group (NASDAQ:VIAS)

Q2 2014 Earnings Call

August 05, 2014 4:30 pm 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 & Company, Incorporated, Research Division

Prabhakar Gowrisankaran - Canaccord Genuity, Research Division

Operator

Good day, ladies and gentlemen, and welcome to Viasystems Group Second Quarter 2014 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like introduce Kelly Wetzler. Ms. Wetzler, you may begin.

Kelly E. Wetzler

Thank you, Olivia. I'd like to welcome everyone to the Viasystems investor conference call for the second quarter of 2014. If you need a copy of today's earnings press release, you'll find it at viasystems.com. We have 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 are 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 recent SEC filings for 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 EPS. 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'll now turn the call over to our CEO, Dave Sindelar.

David M. Sindelar

Thanks, Kelly, and good afternoon, everyone. I'll begin by referring to Slide 4 of the presentation material. Our net sales for the second quarter were just under $301 million or about 4. -- excuse me, 5.4% ahead of the second quarter last year. Sequentially, demand increased almost 2% from the first quarter this year. Overall book-to-bill ratio was 1:1 for the second quarter as it was for our first quarter. Demand for our PCB products has been solid with most of our 3.6% sequential growth coming in the PCB sector, as well as 9% year-over-year sales growth, which came primarily from our Asia sites.

On the other hand, demand for our E-M Solutions product continued to suffer significant swings following the project-based needs of our customers, resulting in a 9.5% sequential sales decline and a 13.9% year-over-year sales decline in our Assembly segment. Gross margin for the quarter was 19.5%, which was up 0.5 point from the first quarter, and almost a full point from the same period last year.

We're seeing the expected improvement in much of the PCB side of the business, but the E-M Solutions side of the business continued to struggle with the effect of inconsistent demand. I'll comment more on the E-M Solutions outlook in a few minutes.

Adjusted EBITDA for the second quarter improved to $35.2 million or 11.7% of net sales. As I indicated on our last call, we expected to see continued sequential increases in the coming quarters in terms of both dollars and percent of sales.

Moving on to Slide 5. I will provide some color on what we're seeing in each of our end markets. A quick glance at the table on the right will give you a feel for the mixed bag of trends that we see -- we saw in the quarter. Our automotive end markets expanded to just over 1/3 of our consolidated net sales for the second quarter. At $101 million, the second quarter billings is the highest level we've seen in the past 2 years. This end market was up approximately 8% sequentially and up 19% compared to the same quarter last year with positive book-to-bill ratios for both the second quarter and year-to-date. And with generally favorable automotive industry trends, I remain optimistic about the outlook for our automotive business.

Our I&I end market represents about 23% of our net sales for the second quarter. Net sales into this end market declined 6% sequentially and 10% year-over-year. Demand for the PCB products from customers in this end market has been steady for the past few quarters, and we saw little change in the most recent quarter whether measured sequentially or year-over-year basis. However, as I highlighted on our call on May 6th, very light first quarter bookings from a couple of our customers for the E-M Solutions product grow second quarter billings to near historic lows for this end market. And another modest booking results in our second quarter suggests continued softness in the second quarter -- excuse me, the second half of this year for I&I-related E-MS products.

Telecom sector represents 18% of our total sales in the second quarter with an 8% sequential sales growth and a 17% year-over-year sales growth. I need to look back more than 3 years to find a higher level of telecom sales than the $56 million we recorded in the most recent quarter. Second quarter sales from our PCB segment factories were stronger than our Assembly segment factories, but both segments grew sequentially. Positive book-to-bill ratio in the first half of 2014 suggests some stability for this market in the near term.

Our computer/datacom market continues to show broad-based weakness of shipments during the second quarter of 2014, sustaining the trend we discussed on our first quarter call. This end market has fallen to about 13% of our total net sales for the most recent quarter, representing just $40 million of our overall second quarter sales. With the Internet of Things and the proliferation of mobile devices, transacting in the cloud and the emergence of low-cost generic white boxes, we know that traditional makers of commercial products like high-end data storage devices, hubs, routers face a changing marketplace. These market changes have been impacting demand for our PCBs and E-M Solution products, which are sold to our traditional consumer -- commercial customer base. We did see a positive book to bill in both segments during the second quarter, so we are not expecting further deterioration in the near term, but long-term visibility remains low.

Our mil/aero end business -- end market business in the second quarter set a new quarterly sales level record for Viasystems with sequential growth and year-over-year growth each at about 13%. I don't believe we have yet achieved a sustainable step-change in this market, but after a very challenging year in 2013, I'm very happy to see our historical dedication to this market during the tough times now paying off. The sector has improved to about 12% over consolidated net sales for the most recent quarter and a solid first half book-to-bill ratio results in a stable outlook.

Moving to Slide 6. I'll summarize a couple of comments on what we are expecting for the coming quarter. Directionally, our overall outlook for the quarter has not changed from the last time we talked. Markets with positive momentum outweigh the packets of customers and sectors of softness, leading me to an expectation of third quarter sequential sales growth. Comparing year-over-year is difficult to see how current soft demand of our E-M Solution products would allow our Assembly segment to achieve the same level of sales as the third quarter last year, but I'd look for a sustained demand momentum in our PCB segment to make up the difference.

As I highlighted on previous calls, we're looking for our continued cost-reduction efforts to more than compensate for the labor-related cost inflation in China, and while we continue to battle both cost pressures on the supply side and competitive price pressures on the sales side, I look for another half point to full point of improvement in our gross margin, again, in the coming quarter. Some of that improvement is contingent on making more progress in our Assembly segment. Our Juarez site continues to suffer new factory growing pains, and our entire Assembly business continues to face inconsistent demand from newer customers that we have engaged in an attempt to backfill for reduced but more consistent wind power energy demand.

With that, let me turn it over to Jerry to discuss the rest of the financial results.

Gerald G. Sax

Thanks, Dave, and good afternoon, everyone. As Kelly noted, copies of our second quarter earnings release and presentation materials are available online. We're currently wrapping up the details for our second quarter 10-Q filing, and that should be available later this week.

Slide 7 of the presentation materials shows our summary income statement for the second quarter compared sequentially to the first quarter of this year and also compared year-over-year to the second quarter of last year. Dave already talked about our second quarter net sales of $300.9 million and our 19.5% gross margin, so let me focus your attention on our $25.4 million SG&A expense line.

Excluding about $1.8 million of non-cash stock compensation expense, which is included in our reported SG&A, our second quarter SG&A cash costs were just $23.6 million. As I've noted on prior calls, I continue to use a range of $25 million to $26 million per quarter in my projection models. The resulting $9.6 million of operating income in the quarter reconciles to the $35.2 million of adjusted EBITDA that Dave highlighted earlier. As Kelly also highlighted, as usual, we've provided that reconciliation in a separate table at the back of the presentation materials and in this afternoon's press release. You'll see from the table that the nature and amount of reconciling items are consistent both sequentially and year-over-year.

As I guided on last quarter's call, following the $50 million add-on to our senior secured notes, which we completed on April 15, our net interest expense increased both sequentially and year-over-year. You can see that our other net line item has netted to income during the past couple of quarters. This primarily reflects favorable trends in the exchange rate between the U.S. dollar and the Chinese RMB, but it's unclear how long that favorable trend might last given changes in the Chinese economy.

Our income tax expense of $2.1 million in the second quarter draws our year-to-date run rate back inside the expected annual $12 million to $15 million range, which continues to relate primarily to our operations in China. Primary and diluted loss per share were both trimmed to $0.19 for the second quarter. A supplementary table at the end of the presentation materials reconciles that reported EPS on a GAAP basis to our adjusted EPS, which was breakeven for the quarter.

Slide 8 reflects our June 2014 balance sheet compared with the year-end 2013 balance sheet. You'll note higher levels of working capital asset than we've historically carried, which reflects a couple of trends. First, as one favorable result of our added automotive capacity, we've been able to refill some of the customer inventory hubs, which had been running at the low end of customer comfort levels since the time of the Guangzhou fire. Notably, this helped us eliminate the supplemental airfreight charges that we were incurring at the same time last year. And second, with an increased proportion of our sales going to the PCB customers, we're seeing a trend toward customers with longer agreed payment terms.

Moving on to our summary cash flow statement on Slide 9. Year-to-date, you'll see that we've used about $13 million of cash to fund our operating results, most of which was used during the first quarter. Cash spent on CapEx was just $12.7 million in the second quarter, of which $11 million is related to recurring or maintenance-type projects. That draws our year-to-date total for those recurring or maintenance projects to $22.7 million for the first half of 2014.

Turning to second quarter. Our cash flows also benefited from a modest interim fire-related insurance payment from our insurance underwriter in China. Together with the proceeds of sales of some used equipment, you see an increase of cash year-to-date of $4 million.

In the financing section of the cash flow statement, you can see the positive cash flow effects from the bond add-on, which added $53.5 million inclusive of the issuance premium. Related to other loans, you can see that the incremental $10 million that we've borrowed on 1 of our Chinese credit facilities during the first quarter has now been partially offset by scheduled domestic mortgage payments, as well as about $400,000 of prepayments on those mortgages that we made during the second quarter. The $3.3 million of financing fees paid year-to-date includes the cost of both the bond add-on and our related domestic credit facility amendment and extension.

The net result for the second quarter of 2014 was an increase of $37.4 million of cash following our $15.7 million use of cash during the first quarter. Combining our cash available -- combining our cash and available credit facilities, our overall liquidity at the end of the second quarter was back up to nearly $170 million, which is comfortable for our business footprint.

With that, I'll turn it over to Dave again before we go to Q&A.

David M. Sindelar

Great. Thanks, Jerry. I don't have any additional comments, so we'll move directly into Q&A.

Question-and-Answer Session

Operator

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

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Just few questions from me if I can. Just starting on, Dave, on your commentary regarding demand and your guidance for September for it to be up modestly, in terms of end markets, are we expecting sequential growth? Does that include automotive and telecom, which both have been relatively strong? Because I know typically automotive has some seasonality worse typically flat to down. Is that better than normal this year?

David M. Sindelar

Yes, and as we enter into the third quarter, I think we feel pretty comfortable based on some of the book-to-bill information that I mentioned. But we should expect to see the automotive and telecom sector continuing to strengthen. And I think we saw some additional life on the consumer and datacom side, so that should help. But -- so sequentially, we should see some growth if we compare it to last year because the E-M Solutions business is a little weaker than we had hoped for. We probably won't see much year-over-year growth, but sequential growth will be there.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

And -- okay. And will you expect the I&I segment and the computer/datacom segments also to be flat to down sequentially?

David M. Sindelar

I think we're seeing pretty consistent demand on the I&I segment. At least, early signals would be flat to increasing computer/datacom sales.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. Okay, great. And if you look at the Assembly business, could you give us a rough breakdown of end markets, I&I versus telecom versus computer/datacom or other markets?

David M. Sindelar

The business is pretty much weighted towards I&I and telecom. Each 1 of those markets represent about probably 40% each. So that represents about 80%, and the rest is made up of -- we do a little on computer/datacom. We do a little bit in the automotive, a little bit in -- so that's very little, if any, in military. So it's primarily an I&I and telecom business.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. So I guess, you saw some strength in the Assembly from the telecom business. So I'm trying to figure out, given the big shift in the Assembly business down in the core PCB business up, I would have expected gross margin to expand a little bit greater even though, on a dollar basis, your revenue was up only $5 million or so. But the mix, I would have thought would have given you a more of a benefit on the gross margin side.

David M. Sindelar

Yes, and I think the -- if you break the revenue and profitability numbers out by segment, I think the PCB business did fairly well. And then our overall margin numbers were dampened by the E-M Solutions business, which was primarily our Juarez facility. And as I mentioned in my comments that we were kind of going through some the start-up of the new plants. We were expecting a fair amount of revenue from a wind power customer that they decided to bring that back in-house. And so we're putting in new programs. So we have a plant start-up, plus new program, start-up, all of which is -- puts a lot of pressure on the profitability of that new plant.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And when do you see some relief in terms of those incremental costs coming down?

David M. Sindelar

We've implemented several rounds of action, one towards the end of the second quarter, and we will have another round. And so we should see improvement in the third quarter and then continued improvement into the fourth quarter.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And I know that it had an operating loss. Do you expect that to get back to profitability in the next couple of quarters, Assembly?

David M. Sindelar

That is clearly our goal.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay, got you. And just last for me, Dave, on the -- just your take on the telecom infrastructure where we see from a number of suppliers up and down the food chain, most of them having very strong June quarters, particularly from customers building out the 4G infrastructure in China. Some have reported a little bit of a slowdown there because production was so fast and so strong but also concerned about some component shortages in other areas. So what is your take there? Are you still seeing very strong bookings there? Or has that slowed somewhat?

David M. Sindelar

I can't tell you that it's as strong as it was in the first -- from a book standpoint in the first and second quarter, but there's nothing that would indicate that our third quarter number should be off dramatically. I mean, the pace is slowing a little bit. I think domestically in North America, we've had a few large merger consolidation plays. That always has a little bit of a stutter step on demand, and we're hopeful that come the third -- end of the third, beginning the fourth, we'll start seeing some pickup there.

Operator

Our next question comes from Prab Gowrisankaran from Canaccord.

Prabhakar Gowrisankaran - Canaccord Genuity, Research Division

A couple of quick questions. One, on the auto segment, can you provide some color in the strength in terms of new designs, existing designs? And where do you see the trend for the rest of 2014?

David M. Sindelar

Yes. No, we ended the year with some pretty -- ended the first half with first half positive book to bill. We had positive book to bill in the first and second quarter, so we would expect to kind of continue the strength in that market. I don't have any specific new program wins, but we have -- each one of our customers, we have a strong position with. We continue to get new programs, revisions. So it's -- unfortunately -- Jerry, do you have any...

Gerald G. Sax

Just demand has probably been pent up. The fact that we've added capacity in that end market over the course of the last 6 or 8 months allows us to meet more of that demand. And it's not necessarily new part numbers but just additional demand for our existing part numbers.

Prabhakar Gowrisankaran - Canaccord Genuity, Research Division

Okay, great. And the other question I had was in terms of the Assembly segment, I know you had the loss from the wind customers. When do you see an inflection point where you kind of flatten out and kind of reverse the declines? Do you see it maybe in 2015 or maybe in Q4? If you can provide some color.

David M. Sindelar

From a top line standpoint, we believe we've kind of the bottomed out, so I think we should expect sequential -- fairly flat sequential sales because the third quarter of last year was -- before a lot of the changes occurred, we will probably -- we'll have a third quarter that doesn't look good year-over-year, but sequentially, we should be okay. That, coupled with the actions we put in place in the second quarter and hopefully, some additional actions here shortly, should help on the profitability side.

Prabhakar Gowrisankaran - Canaccord Genuity, Research Division

Okay. And the last question I had was just on the gross margin trajectory, just with the action that you've taken in the Assembly segment kind of bottoming out. Would you expect this to be the bottom and kind of move up -- upward trajectory from here. I know you talked about a half point to a point improvement in Q3.

David M. Sindelar

Yes -- no, that -- and obviously, some additional volume with the variable margin fall-through on the printed circuit boards side should help us. But the big piece, as I mentioned in my opening comments, are going to come from getting the cost under control in our E-M Solutions operations, specifically, the new plant.

Operator

[Operator Instructions] And I'm showing no further questions at this time. I'll now turn the call over to Dave Sindelar for closing remarks.

David M. Sindelar

Great. Thanks again, everybody, for participating on the call, and we look forward to talking to you at the end of next quarter. Thanks a lot. Bye-bye.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participation. You may now disconnect.

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Viasystems (NASDAQ:VIAS): Q2 EPS of $0 beats by $0.03. Revenue of $300.9M (-89.5% Y/Y) misses by $10.1M.