Vishay Precision Group, Inc. (VPG) Q1 2014 Earnings Report, Transcript and Summary

Hello, and welcome to the Vishay Precision Group First Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. Now, I would like to turn the conference over to Ms. Wendy Wilson, IR. Ms. Wilson, please go ahead.

Thank you, Keith. Good morning, everyone. Welcome to VPG's First Quarter Fiscal 2014 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 all should have received the earnings release and we hope you take the time to read through it, as it does contain important information. You can find it, including relevant non-GAAP reconciliations, on VPG’s website at www.vpgsensors.com. An audio recording will be available on the Internet for a limited time and can be accessed on the VPG website. 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 written permission from 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 VPG's operations, please refer to our SEC filings, especially the 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 hosts for today’s call, Ziv Shoshani, CEO and President; and Bill Clancy, CFO. Bill?

Thanks, Wendy. Good morning, everyone, and thank you for joining us on our call today. I would like to start by reviewing some highlights this quarter and then summarizing the financials. Following that, Ziv will provide a review of the year. Overall, I think the first quarter was on plan with a 6.2% year-over-year revenue increase. GAAP consolidated gross margin increased to 36.1% and a higher book-to-bill of 1.09. While the GAAP gross margin was up year-over-year, first quarter consolidated adjusted gross margin was 36.2% in 2014, compared to 36.9% for the first quarter of 2013. Our consolidated book-to-bill, 1.09, shows that market demand is recovering, and we are experiencing encouraging market acceptance for some of our new application platforms in 2 of our segments which Ziv will address later in the call. For those reasons, we are setting our second quarter guidance in a range of $60 million to $65 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 first quarter, we reported revenues of $61.0 million, a 6.2% increase from $57.5 million for the prior-year period. The consolidated adjusted gross margin for the first quarter of 2014 was 36.2%, compared to 36.9% for the first quarter of 2013. The consolidated adjusted gross margin decrease was due to a $300,000 exchange rate impact, $300,000 of overtime cost due to weather disruptions in the U.S. in our FTP segment. And one-time positive effects in the first quarter of 2013 that did not repeat this year in our Force Sensors segment. Selling, general, and administrative expenses for the quarter were $18.7 million or 30.6% of revenues, compared to $17.8 million or 31.0% from last year's first quarter. On the $900,000 increase, $600,000 of the increase relates to having 1 additional month of KELK business in 2014. Looking at operating margin on an adjusted basis without the fair market valuation and acquisition restructuring cost, you can see that it is at 5.5%, a decrease from 5.9% in the first quarter of last year and 6.2% sequentially. Included in other income and expense in our press release this morning, was $531,000 of foreign exchange losses during the quarter, compared to $386,000 of foreign exchange losses in the first quarter of 2013. We also recorded interest expense of $212,000 in the first quarter of 2014, compared to interest expense of $197,000 for the same period last year primarily related to debt associated with the KELK acquisition. Our GAAP tax rate is 21.9%, compared to 39.8% for the first quarter of last year. GAAP net earnings attributable to VPG stockholders in the first quarter were $1.7 million or $0.12 per diluted share, compared to GAAP net earnings attributable to VPG stockholders for the first quarter of 2013 of $400,000 or $0.03 per diluted share. Adjusted net earnings for the first quarter of 2014 were $2 million or $0.14 per diluted share versus adjusted net earnings of $1.8 million or $0.13 per diluted share for the comparable prior-year period. The overall impact of foreign exchange rates for the first quarter of 2014 as compared to the prior year period had a negative impact of pretax income of $345,000 or $0.02 per diluted share. More importantly, the overall impact of foreign exchange rates for the first quarter of 2014 as compared to the fourth quarter of 2013 had a negative impact to pretax income of $600,000 or $0.035 per diluted share, and the major contributor to this reduction is the Indian rupee. Capital expenditures in the first quarter of 2014 were $1.9 million, compared to $800,000 in the first quarter of 2013. Depreciation and amortization for the first quarter of 2014 was $2.9 million, compared to $3.0 million in the first quarter of 2013. Total long-term debt as of March 29, 2014 and December 31, 2013 was $21.7 million and $22.2 million, respectively. Cash provided by operations was $2 million for the first quarter of 2014, compared to cash used in operations of $1.4 million for the first quarter of 2013. We refer to the amount of cash generated from operations of $2 million in excess of our capital expenditure needs of $1.9 million and proceeds from the sale of equipment as free cash. Total free cash flow for the first quarter of 2014 was $200,000, compared to a negative $2.2 million in the first quarter of 2013. We remain focused on our strategy of growing the top line through developing new application platforms and completing additional acquisitions, as well as improving profitability by increasing efficiencies and reducing costs. With that, I would now like to turn the call to Ziv Shoshani, our CEO and President. Ziv?

Thank you, Bill. As Bill mentioned, our focus remains on our strategy which should over time create increased value to our shareholders. Recent success to drive organic growth to a new application platform can be found in our Weighing and Control segment. In WCS, third quarter revenue run rate for our new truck weighing system is dramatically higher than in fiscal 2013. Revenues in the first quarter are approximately 50% of the total revenues for the full year of 2013. As well, we are experiencing a similar trend in our FTP segment with our advanced sensor platforms which we developed 2 years ago. The expectation is for revenues to double by the end of fiscal 2014. Based on this growth, we are considering expanding capacity for this product line soon in order to serve demand from our existing and future customers. We see an improving global macroeconomic environment, which is supported by a positive industrial production indexes primarily in Europe and in Japan. Additionally, PMI indicators show that expansion has continued, with particular strength in the U.S. and in the Eurozone. According to the World Steel Association, world coal steel production for the 65 countries reporting was 141 million tons in March of 2014, had an increase of 2.7% compared to March 2013. Capacity utilization has increased to 79% in March, which puts it in the highest level in the year. Based on the above-mentioned indicators, we see some improvement 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 1.09 in the third quarter of 2014, compared to 1.02 last year, and 1.0 in the fourth quarter of 2013. Total orders for the first quarter was 66.4 million up by 13.3% from 58.6 million last year and up 6.4% from 62.4 million in the fourth quarter of 2013. Some details on our reporting segments. The FTP segment had a book-to-bill ratio of 1.12 for the first quarter of 2014, compared to 1.06 for the first quarter of 2013, and 1.07 for the fourth quarter of 2013. Sequentially, orders increased by 1.4 million or 5.1% from the fourth quarter of 2013, reflecting increases primarily in the Americas and in Europe. The FTP gross margin was 37.9% for Q1, up from 37.6% in Q1 last year, and down from 40.5% in the fourth quarter of 2013. Despite the increase in revenues, compared to the first quarter of 2013, the year-over-year gross margin remained relatively constant primarily due to $300,000 impact on exchange rate, and $300,000 of overtime cost due to weather disruption in the United States. The sequential decrease in gross margin was due to $200,000 impact of product mix and $200,000 of exchange rates effect. The FTP segment backlog was 3.3 months, compared to 2.6 months last year and 3.0 months in the prior quarter. Looking at the Force Sensors segment. The book-to-bill ratio was 1.04 for Q1, compared to 1.04 in the first quarter of last year and 1.01 for the fourth quarter of 2013. Sequential orders increased by 1 million or 6.3%. This increase came primarily from Europe. The adjusted gross margin for the segment was 21.3% in the first quarter of 2014 versus 26.8% in the first quarter of 2013 and 21.5% in the fourth quarter of 2013. While sequential gross margin is flat, the year-over-year gross margin has decreased mainly due to 200,000 of product mix and a one-time positive effect in the first quarter of 2013 that did not repeat this year. The Force Sensors segment backlog was 2.5 months, compared to 2.4 months in the prior year and 2.4 months in Q4. For Weighing and Control Systems segment, orders increased by 4.5 million or 28.7%, compared to Q1 of 2013 primarily from Asia and Europe. Sequentially, orders increased 1.6 million or 8.4%. The adjusted gross margin for this segment was 46.9%, excluding the KELK acquisition purchase accounting in the first quarter of 2014 versus 45.8%, excluding the KELK acquisition purchase accounting in the first quarter of 2013, and 47.1%, excluding the KELK acquisition purchase accounting in the fourth quarter of 2013. The year-over-year improvement in adjusted gross margin is primarily due to higher volume. The sequential decrease in adjusted gross margin is due to lower volume. The book-to-bill ratio was 1.09 for Q1, compared to 0.94 in the first quarter last year and 0.91 for the prior quarter. Segment backlog was at 3.8 months, compared to 5.3 months in last year first quarter, and 3.2 months in prior quarter. Based on third-party microeconomic data trends and supported by our own recent demand trends, we see an improving environment in Europe, Japan, and the United States. Based on this information, we anticipate overall net revenues in the range of $60 million to $65 million for the second quarter of 2014. With that, we will open the line for questions.

[Operator Instructions] And the first question comes from the line of John Franzreb with Sidoti & Company.

I'd actually like to start with the book-to-bill ratio and the implied outlook. 1.09 is still impressive. It seems like it's largely driven by FTP. Why is it that the sequential increase in your revenue outlook isn't more aggressive at the midpoint?

Well, John, I think this, it seems positive or higher than one book-to-bill in all reporting segments. As you may know, in some of our reporting segments, especially WCS, which is a project base, some of the bookings may not materialize, or I would say, shipping dates may not materialize in the following quarter. Some of them may be delivered Q3 and even Q4 within the year. Therefore, the fact that we have projected $60 to million to $65 million, we took the aged backlog and based on that we have estimated how much, we believe, we will be able to deliver in the second quarter of this year.

Okay. So it's a timing issue here.

It is a timing issue.

Got it. You mentioned that you may that -- based on the acceptance of the new, I guess, product line in FTP not only that the revenue may double this year but you may be required to increase production capacity. Could you just talk a little bit about that, Ziv?

Yes, of course. If you can recall, John, initially when we set the pilot line, it was for x amount of pieces, which would probably support few million dollars. As I stated earlier, Q1 revenues are close to or even more than 50% of last year revenues within this product line. The expectation is that we are going to least double the revenues of last year. Therefore, we will have to increase capacity on specific bottlenecking -- bottlenecks in order to support better our customers and -- to support better our customers with decent lead times.

And how much of cap -- how much of money are you looking to spend here?

The money that we are going to spend is still within our year projection. Initially, when we have said that we are going to spend this year around $10 million, this is within the spending. We should not expect exceeding the spending that we have -- we had announced in the prior quarter.

Okay. And just sticking with the FTP theme here, the overtime cost due to weather, that was only incurred in FTP and none of the other segments?

It was in terms only in the FTP in our U.S. operations. Yes, we had 9 to 10 days of shut down due to weather. Yes.

Okay. One last question, I'll get into queue. You've rolled out a new ERP system, I'm wondering if you can kind of just look back on that rollout and talk a little bit about what kind of benefits you're getting from the new ERP system and how do you expect those benefits maybe to impact the margin profile going forward?

As you may recall, John, we went live on August 3rd of last year, and this is -- this was our -- we were short in revenue in this specific segment. Since then -- and I've also announced in the last quarter, we do expect to finish all learning curve and all associated expense in result to the ERP at the end of Q2. You already have seen that the product line that has been associated with the ERP implementation is almost back to prior ERP implementation revenues. Meaning, we have exceeded the $12 million, we are already at 90% of prior level. Now, we have incurred very little cost this quarter in regard to the implementation. The benefit that we are starting to see is, on one hand and I've stated that before, we would be able to shorten the supply chain in order to deliver faster to our customers. And in addition to that we have better visibility into our operations. So we will -- so we are starting to identify weaknesses within our quarters in addition to that mastering better the operation. So I would say that within 1 or 2 quarters, not only that we should see a shorter lead times and better service, we should also [indiscernible] lower costs for this specific product line.

And the next question comes from Adam Hamill from Gates Capital Management.

I was wondering if you can provide pricing and volume by segment.

Adam, if you can recall in regard to pricing or to ASP, average selling price erosion, which we do track, this is a very -- it's a second or third order effect in our business. We don't see that as a significant matter, and the strategy was never to be the price leader to that extent. So the price erosion is insignificant regarding our business. If you speak about volume changes, excluding exchange rates, we are looking at 1 point [ph] pure volume Q1 versus prior quarter, excluding exchange rate -- of the order and standpoint -- just 1 minute, please. I have this -- You would like to have it in percentages, I think I have it in dollars.

It looks like an add on. We file our 10-Q, shortly here all the details of the volume of that will be explaining by segment also.

Okay. So, maybe just if we probably look, Adam, at Q1 of this year versus prior quarter on a pure volume basis, we are looking at 900,000 down, which is equivalent to 1.5%. And versus the same quarter of prior year, we are looking at an increase of 8.9 million which is equivalent to 6.8%.

Okay, so...

But as Bill stated, you will have it in the 10-Q.

Yes.

And that includes the acquisition, correct?

But the acquisition is integrated in the company therefore it includes the acquisition of course .

Okay, and could you give us a little more detail. You mentioned that -- what is the new product in the Weighing and Control Systems, and what's the amount of revenue that, that's going to run at for this year?

The new product for the WCS, it's called the track way system. It's a system whereby we have a patent. It is -- it's installed on the chassis of those big trucks and trailers. And the intention -- the main application is overload protection. In order to monitor and to make sure that the truck driver or the fleet manager will not overload those trucks. The revenues -- I will give you approximately -- in approximated numbers since we have not reported. The approximated numbers are close to $1 million only for Q1 of this year.

Okay. And you said that was 50% of what they did for all of '13?

This is correct, and we -- and the trend is that we should expect more. Most of the revenues, historically, had been in Europe. And since the last 4, 5 months, we have started to attend shows and to have interest with U.S. customers. So the focus, this year, in addition to Europe is of course, North America, the United States, and Canada. North America.

Okay. And then for the second quarter, you said that FTP has some timing issues. Is that the main driver of kind of the flat revenue guidance? Because it sounds like the other segments should have -- have pretty good order increases?

The timing issue is mainly on our project-based product, which mainly results to WCS -- to the third reporting segment not to the first one, not to FTP.

Okay.

FTP is very little influenced. By -- nevertheless, nevertheless, I should state that some of our key customers are used to place annual orders in Q1. This is why I said it very carefully, that most of the project-driven business, the delivery dates are a little bit further in the future while few customers, while few key customers are placing annual orders in Q1 with scheduled deliveries. So some of it will be delivered in the second quarter, and some other orders will be delivered later on in the third and fourth quarter.

[Operator Instructions] And we do have a follow-up question from John Franzreb with Sidoti & Company.

I guess, this question well may dovetail into the other here. But last quarter, you mentioned you are adding sales reps to increase some market penetration that also impacted your SG&A line. So could you talk a little bit of the progress you're making with the new overhead? And then also the sequential -- you had a nice sequential drop actually in SG&A. Can you kind of address that also and what that should look like going forward?

Sure, John, I can handle that. Yes we did add headcount in the fourth quarter for various new products, new projects that are progressing at the moment. With these project-driven bases you hire the people today to do the work and work with the OEM customers. And then, those projects will turn to revenues in the future. We actually did see a sequential decrease in G&A and it's primarily coming from where we had some reductions and commissions and other like -- we have incurred more cost of marketing and communication in the fourth quarter compared to the first quarter. But John, overall, I mean, we're probably looking at a range of like $19 million to $80.5 million from where we were to be a much better run rate going forward.

19. Okay, got it.

Yes, about it. Yes.

All right. Okay. And we've got KELK now in the fold. M&A is something that you've always talked about. Can you give us an update on what the environment looks like today? Are you finding multiples unattractive or attractive and maybe a little bit on a deal size, what are you looking at out there?

Sure. I mean, I can take that, Ziv. John, we've had been -- we've been quite aggressive and even more aggressive than we were in the fourth quarter of 2013 as far as looking at companies. As far as pricing, I think it all depends. Each deal is completely different. But I would say overall there's nothing that, that would scare us from a size perspective. We're looking at anywhere from say, it could be like $5 million up to like $60 million of revenue. I don't know if Ziv would like to add anything else to that.

Well, I would like to add that John may insinuate that the needs go up. Many of the sensor companies are going quite well. Therefore, the numbers may be a little bit more challenging from a mathematical standpoint. But at the end of the day, we will have to deliver a good IRR and a very proper return on investment. So at any company that we are looking and any deal, of course, is different. We have to see what type of synergies that it provides to VPG and what is the proper return on investment. And based on that we are making our decisions.

And there are no more questions at this present time. So I would like to turn the call back over to the management for any closing remarks.

Thank you, Steve and thanks, everyone, for calling in today. If you have further questions, please reach out, we'll be available to talk to you. You could call my line at area code (919) 374-5501. Thanks, again. And talk to you next quarter.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a nice day.