Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Vishay Precision Group, Inc. (NYSE:VPG)

Q2 2014 Earnings Conference Call

August 5, 2014 10:00 AM ET

Executives

Ziv Shoshani - CEO

Bill Clancy - CFO

Analysts

John Franzreb - Sidoti & Company

Andrew Fleming - Heartland Advisors

Jim Schwartz - Harvey Partners

Operator

Good day everyone and welcome to the Vishay Precision Group’s Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). Please also note today’s event is being recorded.

I would now like to turn the conference over to Ms. Wendy Wilson. Ma’am please go ahead.

Wendy Wilson

Thank you, Jamie. Good morning everyone. Welcome to our second quarter fiscal 2014 earnings conference call. An audio recording will be made of the conference call today including any questions or comments that you may contribute. By now you all should have received the earnings press release and we hope you have taken time to read through it as it does contain important information. You can find it including our relevant non-GAAP reconciliations on our Web site. An audio recording will be available on the Internet for a limited time and can be accessed on the VPG Web site.

The content of this conference call is owned by VPG and is protected by U.S. and International Copyright Law. You may not make any recordings or other copies of this conference call, and you may not reproduce, distribute, adapt, transmit, display or perform the contents of this conference call in whole or in-part without our written permission.

Today’s slides 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 our operations, please refer to our SEC filings, especially Form 10-K for the year ended December 31, 2013 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

Thank you, Wendy. Good morning everyone and thank you for joining us on our call today. I’d like to start by reviewing some highlights this quarter and then summarizing the financials. Following that Ziv will provide his view of the year. Overall, I’d say the second quarter was a good one with revenues at the high end of our guidance and adjusted diluted earnings per share of $0.25 for the 2014 second quarter versus $0.22 per adjusted diluted earnings per share in the same period of last year.

Our net revenues came in at 65.2 million. Adjusted gross margin was comparable year-over-year at 37.9% but was up from 36.2% in the first quarter of 2014. Our bookings for the first six months of 2014 at 130.5 million, are 8.4% higher than last year’s six months bookings. With our six month book-to-bill ratio of 1.03, we have a solid backlog. In light of the continued market demand, we expect net revenues in the range of 61 million to 66 million for the third quarter of 2014, despite the normal seasonal slowdown that is inclined to incur during this period.

For a brief review of the financial results, let’s start at the top. For the second quarter, we reported revenues of 65.2 million, a 3.7% increase from 62.8 million for the prior year period. The consolidated adjusted gross margin for the second quarter of 2014 and 2013 was 37.9%. The consolidated adjusted gross margin for the second quarter of 2013 excludes the 2.3 million of KELK acquisition purchase accounting adjustments.

Selling, general and administrative expenses for the quarter were 19.9 million or 30.6% of revenues compared to 18.6 million or 29.5% for the last year’s second quarter. Of the 1.3 million increase, 400,000 relates to headcount, 300,000 relates to wage increases, 200,000 of travel cost and 400,000 of other fees.

Looking at our operating margin on an adjusted basis without acquisition and restructuring cost, you can see that it is at 7.3%, a decrease from 8.4% in the second quarter of last year and an increase from 5.5% sequentially. Included in other income and expense in our press release this morning, was 10,000 of foreign exchange gains during the second quarter of 2014 compared to $800,000 of foreign exchange losses in the second quarter of 2013.

We also recorded interest expense of 236,000 in the second quarter of 2014 compared to interest expense of 298,000 for the same period last year. The GAAP tax rate for the second quarter of 2014 is 21.3% compared to 18.5% for the second quarter of year last. We expect our operational tax rate to be in the range of 21% to 23% for the year 2014. GAAP net earnings attributable to VPG’s stockholders in the second quarter of 2014 were $3.5 million or $0.25 per diluted share compared to GAAP net earnings attributable to VPG’s stockholders for the second quarter of 2013 of $1.3 million or $0.09 per diluted share.

Adjusted net earnings for the second quarter of 2014 were $3.5 million or $0.25 per diluted share versus adjusted net earnings of $3.1 million or $0.22 per diluted share for the comparable prior year period. The overall impact of foreign exchange rates for the second quarter of 2014 as compared to the prior year period had a positive impact to pre-tax income of $1.3 million or $0.07 per diluted share. Capital expenditures in the second quarter of 2014 were $1.6 million compared to $1 million in the second quarter of 2013. Depreciation and amortization for the second quarter of 2014 was $2.9 million compared to $3 million in the second quarter of 2013.

Total long-term debt as of June 28, 2014 and December 31, 2013 was $20.4 million and $22.9 million respectively. Cash provided by operations was $2.8 million for the second quarter of 2014 compared to $5.3 million for the second quarter of 2013. We referred to the amount of cash generated from operations of $2.8 million in excess of our capital expenditure needs which was $1.6 million and proceeds from the sale of equipment, as free cash. Total free cash flow for the second quarter of 2014 was $1.3 million compared to $4.4 million in the second quarter of 2013.

We remain focused on our strategy of growing the top-line through organic growth and pursing additional acquisitions as well as improving profitability by increasing efficiencies and reducing costs. With that, I would now like to turn the call to over Ziv Shoshani, our CEO and President. Ziv?

Ziv Shoshani

Thank you. As Bill mentioned, our focus remains on our strategy which will overtime creates increased value to our shareholders. There is evidence that we have gained traction from our new application development platform. Over the past 12 months, the revenues from those projects in advanced sensors, truck VanWeigh overload protection systems and crane overload weighing systems has increased by 88% from the second quarter of 2014 compared to the second quarter of 2013.

In WCS, our second quarter 2014 revenue run rate from our new truck and VanWeigh weighing overload protection systems continued their positive trend, up 60% year-over-year and up 34% sequentially. And our offshore crane overload weighing systems revenue have increased 84% year-over-year and 41% sequentially.

In the FTP segment, our advanced sensor platform revenue which have developed two years ago is up by 167% year-over-year and grew 24% sequentially. We continue to see generally positive global economic indicators, which is supported by positive industrial production indexes primarily in United State and in Europe with some contraction in Japan. Additionally, EMI indicators show that expansion has continued with particular strength in the United Stated and in the Euro Zone. According to the World Steel Association, the world crude steel production from the 65 countries reporting was 137 million tons in June of 2014, a decrease of 1.0% compared to June of 2013.

Capacity utilization has decreased to 78.3 in June from 79.0 in March. Global steel prices are at the lowest level since August last year and not far off from the 3.5 years low reached last June. The price decline have come despite the increased demand in the Western economies. Growth in the steel output is exceeding growth in demand and is adding to the global surplus.

Raw material cost like iron ore has coming down. Chinese exports of steel including stainless steel hits 8.07 million tons in May, the highest ever level and an annual increase of 41.5% year-to-date. The pressure on steel makers’ margins is being mitigated, however the 32% fall in iron ore prices this year is outpacing the fall in the steel prices. Based on the above mentioned indicators, we see some softening in demand for our steel market products.

Moving on to 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 2014 compared to 0.98 last year and 1.09 in the first quarter of 2014. Total orders for the second quarter of 2014 were 64.1 million, up 3.7% from 61.8 million last year and down 3.5% from 66.4 million in the first quarter of 2014.

Some details on our reporting segments. The FTP segment had a book-to-bill ratio of 1.01 for the second quarter of 2014 compared to 1.05 for the second quarter of 2013 and 1.12 for the first quarter of 2014. Sequentially, orders decreased by 700,000 or 2.5% from the first quarter of 2014, reflecting decreases primarily in Europe.

The FTP gross margin was 40.2% for Q2, up from 38.1% in Q2 last year and up from 37.9% in the first quarter of 2014. The FTP gross margin increase from the comparable prior year period, was due primarily to 2.2 million of increased volume partially offset by 300,000 of wage and headcount increases. The sequential increase in gross margin was due to 1.1 million of increased volume and 300,000 of labor efficiencies. The FTP segment backlog was 3.1 months compared to 2.6 months last year and 3.3 months in the prior quarter.

Looking at the Force Sensors segment, the book-to-bill ratio was 0.95 for Q2 compared to 1.04 in the second quarter of last year and 1.04 for the first quarter of 2014. Sequential orders decreased by $1 million or 5.8%. This decrease came primarily from Asia. The gross margin for the segment was 21.9% in the second quarter of 2014 versus 20.5% in the second quarter of 2013 and 21.3% in the first quarter of 2014. The gross margin for the quarter increased from the comparable prior year period, primarily due to 300,000 positive exchange rate impact and $100,000 of higher volume. The sequential gross margin improved due to 200,000 of higher volume.

The Force Sensors segment backlog was 2.2 months compared to 2.5 months in the prior year and 2.5 months in Q1. For Weighing and Control Systems segment, orders increased by 300,000 or 1.6% compared to Q2 of 2013, primarily from Asia. Sequentially, orders decreased by 500,000 or 2.5% primarily from steel. The adjusted gross margin for the segment was 48.2% versus 50.2% excluding KELK acquisition purchase accounting in the second quarter of 2013 and 46.9% in the first quarter of 2014. The year-over-year reduction in adjusted gross margin is primarily due to 2 million of lower volume and unfavorable product mix offset by 200,000 of exchange rate impact and 200,000 of cost reduction.

The sequential increase in adjusted gross margin is due to 700,000 of higher volume. The book-to-bill ratio was 0.98 for Q2 compared to 0.87 in the second quarter of last year and 1.09 for the prior quarter. Segment backlog was 3.5 months compared to 3.3 months in last year’s second quarter and 3.8 months in the prior quarter. In light of the continued market demand, we expect net revenues in the range of 61 million to 66 million for the third quarter of 2014, despite the normal seasonal slowdown that is inclined to occur during this period.

With that we will open the lines for questions. Thank you.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we’ll begin the question-and-answer session. (Operator Instructions). Our first question comes from John Franzreb from Sidoti & Company. Please go ahead with your question.

John Franzreb - Sidoti & Company

I’d like to start with the relative strength in foil technologies in the quarter, fairly impressive, I wonder if you could just talk a little bit about what drove that strength? Was it new products, was it new expansion geographically or just underlying demand? Little bit more color that would be very helpful.

Ziv Shoshani

Okay. John, you’re looking at the orders in the second quarter of…

John Franzreb - Sidoti & Company

No, I’m actually looking at the revenue number for foil.

Ziv Shoshani

Okay, the revenue number for the FTP segment in the second quarter has been driven on the resistor side by a strong demand from the EMS, test and measurements, which is driven by the backend test and measurements of manufacturers. And on the strain gages side, it’s been driven by again, by the Americas test and measurements and the EMS OEMs.

John Franzreb - Sidoti & Company

Okay. Is this a restocking scenario with the EMS customers or is this a sustainable demand platform?

Ziv Shoshani

Regarding the EMS which we are working with, they do carry very little stock in a way we have put in place, I would say various programs in order to provide then with the short lead time. So in that regard, it does reflect demand and not just restocking and not just replenishing of inventory.

John Franzreb - Sidoti & Company

Okay. Well, you mentioned the relative benefits from two new product categories, one of them was up over 100% and one of them was 88%. Where did those benefits really flow through in the quarter?

Ziv Shoshani

Regarding the advanced sensors where we have seen an increase of 150%, it does fall under the first reporting segment and it is in the test and measurements and EMS, OEM demand in the United States.

John Franzreb - Sidoti & Company

It’s part of that, Okay. Last quarter we talked about some shipping expectations that we should have in WCS that would put some of that revenue into the latter half of the year. Is that still the case or some of those orders deliveries being moved forward?

Ziv Shoshani

This is still the case, as you may know, the steel business is a project driven business whereby customers may push out deliveries due to their own timing. So, in that regard we do expect to record further revenues in the second half of the year. The rest of the product lines are doing quite well in the WCS segment and we have seen a nice increase in the OEM business primarily in Europe.

John Franzreb - Sidoti & Company

Okay. So then just walk me through the relative strength that we are expecting in the third quarter. It’s been quite some time since we’ve had such a relatively good outlook in a seasonally weak quarter, what’s driving that strength?

Ziv Shoshani

All-in-all and especially regarding the WCS segment which is I would say at least close to 40% to 45% of the revenues are in Europe, we do expect higher revenues mainly due to the fact and despite of the seasonal slowdown because we do expect to record more steel business revenues in that quarter which has been pushed out from the second to the third quarter.

John Franzreb - Sidoti & Company

Okay. So revenues that are moving in the first half is starting to flow through in the beginning of the second half, okay. And is it still the delivery expectations that the fourth quarter will be better than the third quarter in WCS?

Ziv Shoshani

As you know John, we are providing only a quarterly guidance. I think it’s a little bit premature to provide information how the fourth quarter is going to look. At this point the only thing I could say that we still see a very solid demand in all our reporting segments and the third quarter looks good. Since the book-to-bill and especially on the WCS side, is fairly low, we don’t have, I would say the visibility regarding Q4 is still fairly big. But we are confident that it will continue to be solid based on today’s information.

John Franzreb - Sidoti & Company

Okay. And you rolled out some, adding some personnel to address some new marketplaces, are we starting to see any traction from this sales initiative?

Bill Clancy

John, you’re talking about the increase in G&A year-over-year, correct?

John Franzreb - Sidoti & Company

Correct.

Bill Clancy

Yes, we are starting to see some of the traction and basically the personnel is mostly R&D people and this is what Ziv has been talking about that year-over-year we’re starting to see traction on the new growth engine. So, that is absolutely correct.

Operator

Our next question comes from Andrew Fleming from Heartland Advisors. Please go ahead with your question.

Andrew Fleming - Heartland Advisors

Bill, if we could start off talking about foil tech, FTC, I am just curious, is the gross profit margin there is sustainable going forward and is that a function of just moving past the ERP implementation?

Bill Clancy

For FTP, I mean the fact that we didn’t mention anything about the ERP means everything is turned completely, we’re way past that. And based on the current revenue run rate, we can maintain the 40% gross margin in FTP and at this point it’s volume driven.

Andrew Fleming - Heartland Advisors

Okay. It sounds like second half should be stronger than first half on the FTC side as well?

Bill Clancy

Given the visibility like for the next quarter and like Ziv have mentioned that things still are quite strong. We can’t look out beyond the third quarter at this point in time.

Ziv Shoshani

And Andrew, we should state that regarding the overall guidance range, we do expect as we stated the Company’s expectation 61 million to 66 million. But in regards to the first reporting segment due to the seasonal effect, we do expect to see a certain slowdown as we have seen historically in regards to shipments.

Andrew Fleming - Heartland Advisors

Okay that’s helpful but just sticking with that segment, I mean FTC has a bit of headwind over the past 12 months and it sounds like now that we’ve moved past ERP that headwind has been lifted and bookings are picking up nicely.

Ziv Shoshani

This is correct and one of the main projects that we’ve been reporting in the last few earnings call is the advanced sensors and the progress of the revenues and resources and funding that we have been providing. And we do have big expectation regarding further revenues and more cost reduction associated with this new platform which we have developed two years ago.

Andrew Fleming - Heartland Advisors

Okay and moving on to the Force Sensors. It appears to be the most stable segment, would you expect that stability going forward kind of hovering between that 16 million to 17 million in quarterly revenue and gross profit margin slightly above 20?

Ziv Shoshani

Andrew you are correct, this is the most solid segment in a way, if you can recall this is the segment where we have established our offshore India facility in order to consolidate further production and to realize further savings and we’re in the process of doing that. The fact that we have reached 21% based on existing revenues it’s definitely sustainable and we do expect to realize further savings as we will continue the consolidation in the upcoming two years.

In addition to that we are investing and looking at further realizing or I would say further expansion of revenues mainly in the OEM market, construction, agriculture and medical where we’re designing our new platforms. So, once we realized further more sales while we continue to reduce cost, we should expect overtime to see improved margins.

Andrew Fleming - Heartland Advisors

Okay, o the margin expansion in Force Sensors is more a function of cost savings as opposed to improvement?

Ziv Shoshani

And volume, I should say that mainly volume and also to an extent cost reduction, yes.

Andrew Fleming - Heartland Advisors

Okay and then finally on weighing and control systems. Have we now moved past the purchase accounting issues that were kind of clouding up the gross profit margin?

Bill Clancy

Yes Andrew, I mean we’re beyond that for example we don’t recorded like you saw in the reconciliation tables $2,000, so we’re past that now.

Andrew Fleming - Heartland Advisors

Okay, so that 48% gross profit margin in the segment is a good run rate to think of going forward?

Bill Clancy

It all depends on the product mix. We have product groups in that segment and the makeup of the revenues we have today, we would maintain that 48% gross margin but it also depends on the mix. But it should be still a relatively very high gross margin for WCS.

Andrew Fleming - Heartland Advisors

Okay. This most recent quarter was not about wire, there is nothing one-time in nature that caused that elevated margin in the quarter?

Bill Clancy

No not at all, very solid quarter in that segment.

Operator

(Operator Instructions). Our next question comes from Jim Schwartz from Harvey Partners. Please go ahead with your question.

Jim Schwartz - Harvey Partners

Just curious so in the business model for every $1 million above 245 million there is a 50% contribution margin to EBITDA, right?

Bill Clancy

Yes, that is correct Jim.

Jim Schwartz - Harvey Partners

Okay. So, now from 245 to 260 which is sort of the run rate, it sort of annualizes at 37.5 million of EBITDA and you look at your enterprise value, you guys trade under four times EBITDA with a 19.5% free cash flow yield for a business that is not cyclical. And you are either sole sourced or dual sourced in almost everything you do. And you look at the landscape and you’ve got the acquisitions out there and the peers are 11 times EBITDA. Why would you guys just like tender back your shares at four times EBITDA, I mean it just doesn’t make sense from a capital structure perspective, you’re so undervalued relative to the market.

Bill Clancy

Jim, currently obviously we’re exploring all opportunities, all potential be it. Our number one goal obviously is acquisitions but as we are working on that we’re exploring other opportunities to deploy our capital.

Jim Schwartz - Harvey Partners

Okay. As you guys keep generating cash, your free cash flow yield is nearing 20% right now, so just it’s more accretive to buyback your own shares as opposed to buy sort of the unknown at 11 times EBITDA.

Bill Clancy

No, we’re looking at all facets of our capital at the moment.

Operator

And ladies and gentlemen, at this time it’s showing no additional questions. I’d like to turn the conference call back over for any closing remarks.

Wendy Wilson

Thank you, operator and thank you for dialing in today. We would be happy to talk to you if you have further questions and we will see you in the next quarter. Thank you so much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Vishay Precision Group's (VPG) CEO Ziv Shoshani on Q2 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts