Vishay Precision Group, Inc. (VPG) Q4 2011 Earnings Report, Transcript and Summary

Good morning and welcome to the Vishay Precision Group Fourth Quarter Results Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mike Sheaffer, Investor Relations. Please go ahead.

Thank you, Andrew. Good morning everyone. Welcome to Vishay Precision Group’s Fourth Quarter of 2011 and Full Year Earnings Conference Call. An audio recording will be made of the entire conference call today, including any questions or comments that participants may contribute. The audio recording will also be available on the Internet for a limited time and may be accessed from the VPG website at www.vishaypg.com. The financial results and earnings data for the quarter and year ended December 31, 2011 represent 6 fiscal quarters of operations for VPG as an independent company after a spin-off from Vishay Intertechnology. The results of operations and earnings data for the comparative periods prior to July 2010 were derived in part from the historical consolidated financial statements of Vishay Intertechnology. And those results may not be indicative of the actual operating results that would have been realized if the company had operated as an independent publicly traded company. The content of this conference call is owned by Vishay Precision Group and is protected by U.S. copyright laws and international treaty. 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 parts without the written permission of VPG. 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 for the year ended December 31, 2010 and our other recent SEC filings. And now it is my pleasure to introduce the hosts for today’s call Ziv Shoshani, CEO and President and Mr. Bill Clancy, CFO. Bill?

Thank you, Mike. First, I will summarize the financials and then Ziv will provide a more detailed analysis of our fourth quarter of 2011. We reported revenues of $56.4 million for the fourth quarter, a 2.9% increase over the prior year period and a 6% decline from the third quarter of 2011. The increase in our revenues from the prior year quarter is coming from the Weighing Modules and Control Systems segment. The decrease in the fourth quarter relative to the third quarter of 2011 reflects a reduction in revenues the company pre-announced. Our consolidated gross margin for the fourth quarter of 2011 was 33.4% compared to 38.2% for the fourth quarter of 2010 and 35.3% for the third quarter of 2011. Ziv Shoshani will give you the detail of the segments in his presentation. Selling, general and administrative expenses for this quarter were $16.9 million or 30% of revenues, compared to $15.9 million or 29% for last year’s fourth quarter and $16.5 million or 27.5% of revenues for the third quarter of 2011. The increase of $1 million from the prior year is primarily due to an increase of $500,000 for Sarbanes-Oxley fees, $300,000 for wages and the rest for other fees. The increase of $400,000 from the third quarter of 2011 is mainly due to an increase of $200,000 for bad debt expense and $200,000 for trade shows and ERP implementation. Included in other income and expense was $526,000 of foreign exchange losses during the fourth quarter compared to $685,000 of foreign exchange losses in the third quarter of 2011. The exchange losses for the fourth quarter were offset by interest income of $373,000. The tax rate for the year ended December 31, 2011 was 28.5%, which was comparable to the first nine months tax rate of 28.9%. This compares to the 2010 full year tax rate of 36.6%. Net earnings for the fourth fiscal quarter of 2011 were $1.2 million or $0.09 per diluted shares versus net earnings of $3.3 million or $0.24 per diluted shares for the comparable prior year period. Diluted earnings per share for the fourth quarter were at $0.09 compared to $0.24 per share for the fourth quarter of 2010 and $0.24 per share in the third quarter of 2011. Capital expenditures for the quarter of $5.9 million compared to $2.9 million in the fourth quarter of 2010, and $5.2 million in the third quarter of 2011. Depreciation and amortization for the fourth quarter of 2011 was $2.9 million compared to $2.8 million in the third quarter of 2011. Now turning to the results for the 12 months of 2011. We reported revenues of $238.1 million or 14.7% higher than the $207.5 million reported in the 12 months of 2010. Our consolidated gross margin for the 12 months was 34.9% as compared to 37.2% for the 12 months of 2010. The results for the first 6 months of 2010 were recorded under Vishay Intertechnology Inc. before the actual spin-off of becoming a publicly held company. Selling, general and administrative expenses for the 12 months were $66.8 million or 28.1% of revenues, compared to $57.3 million or 27.6% of revenues for the 12 months of 2010. The increase of $9.5 million from the prior year is primarily due to an increase of $4.2 million in divisional G&A, which includes $1.4 million related to exchange rates. And the increase is mainly due to wages, IT costs, travel and commissions in the 12 months of 2011 versus 2010 and an increase of $5.4 million, which includes $700,000 for exchange rates for adding personnel and carrying fees of functioning as an independent publicly traded company. Net earnings for the 12 months were $10.8 million or $0.78 per diluted share versus earnings of $11.7 million or $0.85 per diluted share with the comparable prior year period. Capital expenditures for the 12 months were $16.3 million compared to $8.4 million in the 12 months of 2010. Of the $16.3 million invested in 2011, $10 million is related to our two key initiatives to lower our manufacturing costs and expand our product portfolio. We have approximately $4 million of capital spending remaining for these 2 projects that will carry over to 2012. Including the carryover, we expect capital spending for 2012 to be in the range of $10 million to $14 million. Depreciation and amortization for the 12 months was $11.3 million compared to $10.6 million in the 12 months of 2010. Moving to the balance sheet, VPG had a total long-term debt balance of $11.5 million as of December 31, 2011 and $11.7 million as of December 31, 2010. As a reminder, $10 million of that debt is recorded as exchangeable notes due in the year 2102 with the conversion feature as share price of $22.56. As of December 31, 2011, we had cash and cash equivalents of $80.8 million compared to $82.2 million as of December 31, 2010. Cash generated from operations was $5.9 million for the fourth quarter of 2011 compared to $1.7 million for the fourth quarter of 2010 and $9.4 million in the third quarter of 2011. Total free cash flow for the fourth quarter was zero compared to a negative $1.2 million in the fourth quarter of 2010 and $4.2 million in the third quarter of 2011. I would now turn the call over to Ziv Shoshani, our CEO and President. Ziv?

Thank you, Bill. I will begin my comments today by providing some details about the fourth quarter compared to the third quarter, regarding market conditions for the company and the reporting segments. I will conclude my remarks with a brief overview of our top strategic initiatives for Vishay Precision Group in 2012. Let’s start with the fourth quarter. Market demand in the U.S. and Asia remained fairly stable. However, European demand dropped significantly from the third quarter, which resulted in lower revenues for the fourth quarter, mainly for the WMCS segment. We completed the quarter with revenues coming in below the low end of our revenue guidance. I will provide the segment details in a moment. The overall revenue decline for the company was primarily from a decrease of $3.6 million from OEM customers and a decrease of $1 million from end users, offset by an increase of $900,000 mainly from distributors. The regional sales breakdown as compared to Q3 was a decrease in European revenues of $3.2 million, a decrease of $300,000 in the Americas and a decrease of $100,000 in Asian revenues. Our backlog for Q4 was at 2.3 months, which is unchanged from the backlog of 2.3 months from Q3. Inventory turns were at 3.0 compared to 3.1 in the third quarter. I will now provide some details about the 2 reporting segments. The Foil Technology Products or FTP revenues decreased by $1.8 million to $26.6 million or 6.5% less than the third quarter. While European revenues for FTP decreased $1.1 million or 11.5%, mainly from scale manufacturers and OEM in the force measurement market sector. The decline in revenues was also the result of capacity issues resulting from lower yield associated with raw materials, which is still being analyzed. The FTP gross margin was 40.5% for Q4 compared to 43.1% in Q3. The decline in the gross margin from Q3 is primarily due to lower volume and cost associated with the capacity issues mentioned above. The FTP segment backlog was 2.5 months compared to 2.5 months in the prior quarter. The FTP segment had a book-to-bill ratio of 0.95 for Q4 compared to 0.97 for Q3 in 2011. In the segment, demand declined by 7% compared to Q3 of 2011 while European orders declined by 19%. Foil Technology Products inventory turns were 3.5 for Q4 compared to 3.6 for Q3. Looking at the Weighing Modules and Control Systems segment or WMCS revenues decreased by $1.8 million to $29.9 million or 5.6% less than prior quarter while European revenues for WMCS decreased by $2.1 million or 13%. The decline in revenues came mainly from scale manufacturers, OEM customers and from end user customers in the process weighing markets, primarily in Europe. The WMCS gross margin was 27.1% compared to 28.3% in Q3. The decrease in the gross margin from Q3 2011 was mainly due to lower volume product mix and start-up costs in the new facility. The WMCS segment backlog remained stable at 2.0 months compared to 2.1 months in the prior quarter. The book-to-bill ratio was 0.94 for Q4 compared to 0.97 for prior quarter. In this segment, demand declined by 8% compared to Q3 of 2011 while European orders declined by 15%. WMCS inventory turns were 2.7 in Q4 compared to 2.8 in Q3. The book-to-bill ratio of 0.95 for the total company in Q4 indicates lower order rates. Total decline in demand was 8% compared to Q3 of 2011 while total European orders declined by 16%. As we noted in today’s earnings release, we intend to divide the WMCS segment into 2 reporting segments, one of which will be reported as Force Sensors and the second as Weighing and Control Systems. Beginning the filing of our annual report on Form 10-K, this change is primarily due to recognizing the differences between the products in the current aggregation of the WMCS segment, we expect this move to three reporting segments will provide more clarity about our financial results and market trends going forward in 2012. Looking forward, we are seeing some stability in our end markets for the first quarter of 2012. We believe the anticipated business for the first quarter will result in overall revenues in the range of $53 million to $58 million. Finally, I would like to provide an overview of our projects that support our top strategic initiatives for 2012. The first initiative is to organically grow our core business by introducing to the market’s new products that have been released in 2011. First, the FTP segment’s new intellectual property is expected to generate growth from our next generation products. In addition, we have also introduced high temperature precision resistors for down-hole applications, winning the Best Electronic Design award in 2011 from Electronic Design magazine. Our WMCS segment has introduced a new track weight system for overload protection that will -- that is expected to grow. Second, our FTP and WMCS segments are expected to continue to enhance the design win activity by our Technical Market group at the Customers R&D and Engineering departments. We also expect to enhance our focus on strategic acquisitions in 2012. And with that, we will open the line for questions. Thank you.

[Operator Instructions] The first question comes from Larry Solow of CJS Securities.

Wondering if you could discuss -- I realize it’s early in the year, but just in general terms sort of your gross margin outlook. I know your Foil Tech segment obviously has been under some pressure with the less overhead absorption. This quarter was remarkably low because of the other one-time. So do you expect, looking at first, at the first segment first, your margins even the beginning of the first half of ’11 were sort of in the 44%, 46% range, and that was with the ongoing project. I mean, is that a number you can at least get back to, if your sales sort of stay in that high 20s range in revenues?

Larry, concerning the first segment gross margins, if we are going to -- as you know, this is very much volume dependent. If we are going to stabilize with the same level of revenues and once we have processed all those capacities related issues, we do expect to get back to those -- historical first half of the year of 2011 gross margin percentage levels, yes.

Because that first half ’11 number was already -- was impacted already by the new line. So I am not saying, I imagine in order to get back to the high 40s or 50% range that you were a couple of years in 2010, you will need to start -- you get some orders on that line. But I am just sort of saying, can you at least get back to where you were in the beginning of last year when you were already being impacted? I guess the answer is yes, then, is that -- real volume improvement?

The answer is yes, once we finalize our existing issues and we get back to last year volume, absolutely.

And you mentioned, I guess some of the issues -- there was an order pushed out into Q1, I guess, of this year, right? Was that related to the yield on some of your raw materials, or was that a separate issue?

No, this was part of the problem. The issue was the following: that we have realized changes in our process control, we decided to take a very conservative approach not to compromise on quality. So we have tightened the control processes which have slowed dramatically the output -- the outflow of products from the line. Therefore we had to push out some orders that was supposed to shipped in Q4 into the following quarter.

And then looking out on weighing modules, obviously, I know there you’re moving to a new facility, you’ve opened up a new facility and I guess some products have been moved into there. Is that something -- I imagine it's over a longer term that you will start seeing margin improvement, but is there any sort of near term, 1, 2 quarter improvement you expect as you’re sort of double expensing in 2 facilities subsides and you get some yield improvements.

The transition to the new facility has been -- well, is in process has been very much finalized already in the beginning of the year. This is why we have realized a start-up cost in Q4. We are ramping up slowly already in Q1 in the new facility and we suppose to realize, of course, already some of the savings this year, while there is an ongoing transition and an ongoing to consolidation beyond the original plan in 2011, also in this year and in the next year. So we do expect to realize further savings as we move on with the new facility.

Last question and then I will move on, let someone else. I think you guys had some benefit, I guess, sort of in the middle of the year in terms of foreign currency at least on your revenue, I guess, with the euro was a little bit -- have been doing better year over year. Now it’s obviously coming in good amount, so your comps in -- for ’12 are not as easy, on your revenue basis. But just remind me, does this normally most of this flow-through and to get itself on the cost side?

Yes, Larry, if you haven’t -- if we are showing an increase in revenues for the most part, that would also then show an increase in your cost. So it would kind of flow through all of your lines in the income statement.

So the weaker euro shouldn’t necessarily hurt your overall profitability?

The overall results, no.

The next question comes from John Franzreb of Sidoti & Company.

Just back to that $2 million in deferred orders, is that sale going to occur entirely in the first quarter? And if it is, should we be thinking about the first quarter’s underlying, call it, organic revenue profile maybe by $2 million lighter than that going forward?

The issue is the following -- you are absolutely correct -- the initial thought was that those $2 million that -- the additional $2 million will flow into Q1. But since we are still in the process of working out those issues, since we have slowed down the output from our manufacturing process, I don’t believe we should expect to see an upside of $2 million in the first segment.

And in regards to what you are seeing as far as order trends, you pointed out that Europe has been the weak part of this picture here. You cited scale manufacturers and if I heard correctly, the process weighing markets. Not just on a market basis but has the fall off in the order book, has it been consistent or did it happen in one specific timing in the quarter that you could call out? Any kind of color there would be helpful.

Concerning the drop of orders intake or drop of demand in Q4 for both segments, I would say it started mostly in the second month in Q4 and it was pretty consistent for the rest -- and to the rest of the quarter. Since then in January, we have seen a stabilization of the European order intake. So at this point in time, we don’t expect order to further decline in Europe so far, at least from the indication we have since the beginning of the year.

So to follow up, I guess, on Larry’s question, with the manufacturing put in place some time this year and at the current volume levels, how much margin improvement would you expect just on a manufacturing production basis in 2012 all else being equal?

If we are speaking about what type of savings we may realize by moving to the new facility, we are looking for at least a minimum of $1.5 million of savings that we should realize this year by moving to the new facility, only from what has been moved last year, but [indiscernible]. And of course, it’s very volume dependent.

Right, so at the current volume levels, you still expect that $1.5 million.

This is correct.

And one last question, you kind of threw out there the potential of M&A activity in 2012. Just some color as to what kind of -- I don’t know, what kind of candidates you are looking at out there? What are you thinking about or what are you hearing about as far as multiples, have they gotten better or worse? Just little color on your M&A thoughts for the year ahead?

Yes, John, basically we are looking for the potential acquisitions that would have very good technology, basically use the foil resistor at the basis and the foundation. Like we have always mentioned, we are looking at acquisitions that have revenues between $10 million and $60 million, EBITDA of 15% to 20%. Obviously from a purchase price perspective, we would probably look at paying some type of EBITDA multiple, depending on the situation obviously we’d love to pay as minimal as possible. But we are seeing -- we are hearing transactions that are maybe 5x, 6x EBITDA.

We are looking at the build [ph] report we’ve seen what type of transaction has been done during the year in the industrial market with very similar type of companies as we do. So this gives us a certain notion, a certain reference point.

The next question comes from Liam Burke of Janney Capital Markets.

Bill, on the working capital front, it seems that it’s progressing nicely, management has been doing better. Is this an evolutionary process, or is there something as you go forward you’re actively -- obviously you’re going to work towards improving working capital management. Is this something as you’ve become a public company, been actively working on?

Liam, we are always obviously looking to improve our working capital. We have been working on it for the past couple of years. I think it’s a continuation that we will see in 2012. We should begin to see much more free cash being generated. In 2011, we had the Bay Capital expending, which except for the carryover for the $4 million this year, should not occur. So going forward, we should see relatively very good free cash flow being generated in the upcoming years.

Ziv, you’ve spoken on the next generation of Foil Technology Products being smaller, more power efficient and therefore more cost effective. Opening it up for new applications that typically didn’t make economic sense for the user. As you are introducing this new product, are there any applications that are jumping out that are new that didn’t exist prior to the new release?

Since we have some key customers that we have signed NDAs, concerning new proprietary applications I can speak about some new pressure -- precision pressure measurement type of application, I could speak about precision force measurement type of application. Unfortunately, I cannot be too specific but we are looking at generating at least $1 million from those new projects in the upcoming year. Operator This concludes our question and answer session. I would like to turn the conference back over to Mike Sheaffer for any closing remarks.

Thanks Andrew. I would like to thank everyone for participating in today’s call. As always, we appreciate your interest in VPG and we look forward to your continued involvement. We are currently scheduled to present at the Sidoti conference in New York on March 19. You should watch for an updated presentation to be posted on our website at that time. Thanks again and have a great day everyone.

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