Vishay Precision Group, Inc. (VPG) Q4 2015 Earnings Report, Transcript and Summary

Good morning. And welcome to the VPG Full Year and Fourth Quarter Fiscal 2015 Conference Call and Webcast. 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 note this event is being recorded. I would now like to turn the conference over to Wendy Wilson, Investor Relations. Please go ahead.

Thank you. And good morning, everybody. Welcome to our yearend and fourth quarter 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 some time to read through it, as it does contain important information. You can find it including relevant non-GAAP reconciliations on our website at www.vpgsensors.com. An audio recording will be available on the Internet for a limited time and can be accessed on our 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 call and you may not produce, distribute, adapt, transmit, display or perform the contents of this conference call in whole or in part without our written permission. 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 complete discussion of the risks associated with our operations, please refer to our SEC filings, especially the Form 10-K for the year ended December 31, 2014 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?

Thanks, Wendy. Good morning, everyone, and thank you for joining us on our call today. I'd like to start out by reviewing a few highlights, and then summarizing the financials. Following that, Ziv will provide his view of results, our recent acquisition, revenues from new products and the global business environment. Fourth quarter revenues came in at $58.9 million, a $1.3 million or a 2.2% decrease from $60.2 million for the prior year period. The overall negative impact of foreign exchange rates to revenues in the quarter was $3.6 million compared to the fourth quarter of 2014. Adjusted diluted earnings per share were $0.20 versus $0.10 in the fourth quarter of fiscal 2014. The overall negative impact of foreign exchange rates to net income for the quarter as compared to the fourth quarter of 2014 was $1 million or $0.07 per diluted share. Revenues for the year are $232.3 million, a $17.9 million or 7.1% decrease from the $250 million for the prior year period which is primarily from the impact of exchange rate. The overall negative impact of the foreign exchange rates to the revenues for the year is $17.5 million compared to fiscal 2014. Adjusted net earnings for the year were $7.7 million or $0.57 per diluted share versus adjusted net earnings attributable to VPG stockholders of $9.8 million or $0.70 per diluted share for fiscal 2014. Foreign exchange rates for the fiscal 2015 as compared to the prior year period had a negative impact to net income of $2 million or $0.15 per diluted share. Fourth quarter cash generation from operations was $8.6 million, free cash flow was $6.1 million. We define our free cash flow as the amount of cash generated from operations which was $8.6 million for the fourth quarter of 2015 in excess of our capital expenditures of $2.5 million for the fourth quarter of 2015, and any net of proceed from sale of assets which was zero in the fourth quarter 2015. We also announced a global cost reduction program during the fourth quarter of 2015; we should expect savings of approximately $6 million pretax income from this action resulting in a significant 2016 increase in net earnings and EPS in 2016. The restructuring cost of $3.6 million was partially paid in 2015 and should continue through the third quarter of 2016. As you already know, we announced and close our Stress-Tek acquisition in the fourth quarter. Ziv will talk some more about that in his comments. And finally in the quarter as part of the Stress-Tek acquisition, we secured $25 million in term loan and $30 million available revolving credit facility jointly with JPMorgan, Citizens Bank and Wells Fargo. Now in Slide 4, moving on to some additional consolidated financial results. The year-over-year increase and adjusted gross margin for the fourth quarter of 2015 is attributable to higher volume of $1.5 million, $700,000 of cost reduction programs offset by negative effect of exchange rate of $1.9 million. Selling, general and administrative expenses for the quarter were $16.4 million, or 27.9% of revenues as compared to $18.3 million, a 30.4% for last year's fourth quarter. This decrease is primarily due to the positive impact of foreign exchange rates of $800,000 and $1.1 million of lower headcount and other cost. Looking at operating income on adjusted basis, without restructuring costs and acquisition cost, you can see that a 7.7% an increase from 3.6% in the fourth quarter last year. Included in other income and expense in our press release this morning was $500,000 of foreign exchange losses primarily to Canadian dollar during the fourth quarter of 2015 compared to $300,000 of foreign exchange losses in the fourth quarter of 2014. The operational tax rate was 30% in the fourth quarter of 2015, for the 2016 fiscal year; we expect the operational tax rate to be in a range of 25% to 27%. The company recorded a $12.4 million non-cash income tax charge related to evaluation allowance recorded against certain deferred tax assets. This contributed to our net GAAP loss for the fourth quarter of $13.4 million, or $1.02 per diluted share, compared to a net GAAP loss attributable to VPG stockholders for the fourth quarter 2014, a $4.9 million or $0.36 per diluted share. Adjusted net earnings for the fourth quarter of 2015 were $2.7 million or $0.20 per diluted share versus adjusted net earnings attributable to VPG stockholders of $1.4 million or $0.10 per diluted share for the comparable prior year period. Capital expenditures were $2.5 million in the fourth quarter compared to $3.5 million in fourth quarter of last year. Depreciation and amortization for the fourth quarter 2015 was $2.8 million compared to $3 million in the fourth quarter last year. We spent $8.7 million for our share repurchase program in the year 2015. Moving on to Slide 5, we remained focused on our strategy of growing the top-line through organic growth and pursuing additional acquisitions as well as improving profitability by increasing efficiencies and reducing cost. With this focus and execution, we should be able to achieve the milestones in the slide within three years. With that, let me pass for other comments on to Ziv.

Thank you, Bill. An important part of our strategy is to grow by developing new product offering and our advanced sensors continued to gain traction. This platform which is part of our FTP segment in which we developed a few years ago is reporting revenue increase of 44% for the full year of 2015 versus 2014. Beside the slowdown in oil and gas and exchange rate of bank, I'm very pleased with the continued acceptance of this new sensor platform as it offers enhanced performance to customers in conjunction with an efficient manufacturing platform. We enhance product innovation in 2015 with the intention of extending existing product line based on customer demand. Such as precision current sensors in transductive for OEM customers. In addition to organic product innovation, we announced and completed our acquisition of Stress-Tek recently. We are an excellent treat for our onboard weighing products line and they are well respected in the industries they serve, predominately in North America. Stress-Tek offers an extensive line of load cells and they design and manufacture the electronic integrates with the load cell and sensors to produce complete onboard weighing measurement solutions. With expected cost synergy, we anticipate that Stress-Tek's annual EBITDA will increase to approximately $3 million over two years. To support our scalable business model and make significant progress, our cost structure we announced global restructuring plan late in the year. While we incur the restructuring charge of $3.6 million which impacted the fourth fiscal quarter 2015, we expect that our actions will improve the overall efficiency by lowering operating cost by approximately $6 million annually. All-in-all, we have taken positive, definitive actions in 2015 to grow the top-line and improve efficiency despite the global conditions that have created a challenging environment for us, our customers such as a strong US dollar, low oil and gas prices, low commodity prices, China economic slowdown and very low steel capacity utilization, the lowest since 2009. Following the most recent global industry report the average capacity utilization in 2015 was 69.7%. In Q4 of 2015, the utilization was at 64.6% compared to an annual average of 73.4% in 2014. All the major steel mill around the world has cut back their capacity by 3% to 7% except India. In 2016, according to JPMorgan economic research, the world will continue to be divided by region and by sector. We developed economies doing better than emerging ones. And within each country service sector, business is generally doing better than manufacturing. The key source of uncertainty in the outlook is China, which saw significant slowdown in their core industrial side of its economy in 2015. And conditions have the significant this inflationary effect on the global economy. We do expect a slow global recovery to continue but until robust demand environment emerges, we will continue to focus on driving top-line results through innovation and acquisitions and focus on increasing efficiency and cutting cost. Moving to Slide 6. Moving on to the operational trends. Let's start by comparing consolidated year-over-year and sequential results. The company's overall book to bill was 0.95 in the fourth quarter of 2015 compared to 1.0 last year and 0.97 in the third quarter of 2015. Total orders for the fourth quarter of 2015 were $56.2 million, down $4.3 million or 7.1% from $60.5 million last year and up $0.5 million or 0.9% from $55.7 million in the third quarter of 2015. Moving to Slide 7, some details on our reporting segment, the FTP segment had the book to bill ratio of 0.97 for the fourth quarter of 2015 compared to 1.02 for the fourth quarter of 2014 and 0.9 for the third quarter of 2015. Sequentially orders increased by $1.1 million or 4.4% from the third quarter of 2015, reflecting an increasing the Americas and Europe partially offset by decreasing Asia. The FTP gross margin was 36.5% for Q4, down from 37.3% in Q4 last year and down from 42% in the third quarter of 2015. The FTP gross margin decreased from a comparable prior year period was due primarily to $0.7 million of negative exchange rate, offset by a volume increase of $500,000. The sequential gross profit margin decrease was due primarily to lower volume of $0.7 million, $0.5 million of additional cost for expansion of our advanced sensor platform and other one time cost of $400,000. The FTP segment backlog was 2.6 months compared to 3.0 months last year and 2.6 months in the prior quarter. Looking at the Force Sensor segment, the book to bill ratio was 1.0 for Q4 compared to 0.97 in the fourth quarter last year and 1.03 for the third quarter of 2015. Sequential orders increased by $0.6 million or 3.9%. This increase came from all regions, Asia, the Americas and Europe. The gross margin for the segment was 20.2% in the fourth quarter of 2015 versus 21.9% in the fourth quarter of 2014 and 21% in the third quarter of 2015. The gross margin for the quarter decreased from the comparable prior year period primarily due to $600,000 of lower volume. Despite increasing revenues, the sequential gross margin percentage decreased due to reduction of inventory of $1.8 million. The Force Sensor segment backlog was 2.2 months compared to 2.1 months in the prior year and 2.4 months in Q3. For Weighing and Control System, the book to bill ratio was 0.89 for Q4 compared to 1.01 in the fourth quarter last year and 1.05 for the third quarter. Sequentially orders decreased by $1.2 million or 7.1% primarily from Europe and Asia, partially offset by the Americas. The adjusted gross margin for the segment was 47.8% in the fourth quarter of 2015 versus 41.7% in the fourth quarter of 2014 and 45.4% in the third quarter of 2015. The year-over-year and sequential increase in gross margin are primarily due to higher volume for steel and process weighing end user business in Europe. Segment backlog was 2.6 months compared to 3.7 months in last year's fourth quarter and 3.3 months in the third quarter. Finally, our inventory at year end includes $1.7 million of Stress-Tek in the fourth quarter due to the fact that the acquisition was completed on December 30, 2015. Moving to Slide 8, as you already know that we announced and closed the Stress-Tek acquisition in the fourth quarter. Acquisitions continued to be a focus of the company growth strategy and as I mentioned, we are actively looking for opportunities. From an organic performance perspective, we will continue to focus on new product development to improve our top-line and continue our initiatives to cut cost and improve efficiencies. Based on the actions taken to date, we are expecting to see improved performance even given our current global market conditions. In light of the global economic forecasts and continued strengthening of the U.S. dollar versus other currencies, we expect net revenues in the range of $56 million to $61 million for the first quarter of 2016. Our expectation for fiscal year 2016 is for adjusted diluted earnings per share to be in the range of $0.80 to $1, at constant exchange rates. The annual EPS guidance includes the following. Constant exchange rate at an average of the second half of 2015 in a fairly stable business environment versus the second half of 2015. Some top-line assumptions excluding Stress-Tek, we account for a modest volume increase in 2016, low to mid single digit versus 2015. We are looking cost realization of our global restructuring plan. With that, let's open the line for questions. Thank you.

[Operator Instructions] The first question comes from John Franzreb with Sidoti & Company. Please go ahead.

Good morning, everybody. Yes, first of all, I want applaud you on offering up guidance for the year, that's a great step. But I actually want to start with the end of 2015 is part of my questions. Firstly can you talk a little bit about the restructuring program, the timing of the realization, how we progressed on the year and when do you expect to be fully completed at the your optimal margin profile?

Okay. The restructuring program has -- if I -- three phases. Phase one has completed I would say at the latter part of Q4 of 2015. The second phase I would say has been already completed at the beginning of February. And we are looking for the completion of the third phase by the end of the second quarter. So based on this restructuring plan and I am not implying that they may not be more structuring plan coming into future, we should expect to see the full effect of the cost coming in Q4 of this year.

Got it, got it, perfect. And regarding the Stress-Tek's acquisition, can you talk a little bit about decision behind the purchase and what else you are seeing on the M&A front?

Okay. Regarding Stress-Tek, we have known Stress-Tek for a long time. They have been a competitor to our SI onboard business. We, Stress-Tek and asked -- we did serve a similar market. So by acquiring this company by definition we have enlarged our market share for onboard weighing business in North America mostly for the logging business but also to an extent for waste management. And the fact that we have also gained broader sales channel in order to introduce our truck and VanWeigh platform which originally has been developed in Europe. So in essence by acquiring Stress-Tek we have a much larger market share. We have broader sales channels to introduce new product in TruckWeigh and of course as it has been stated already earlier, we are looking also at cost synergies by consolidating all our onboard weighing operations in one location. So we should expect to see savings on the cost side as well.

Ziv, when do you expect that business to be accretive to EPS?

We believe that it should be accretive fairly quickly if not within the first three months definitely the first six months.

Perfect. Thanks Bill. I'll get back at queue.

The next question comes from Sarkis Sherbetchyan with B. Riley & Company. Please go ahead.

Yes, good morning. So just real quickly as well on Stress-Tek. The annual guidance that you provided also the Q1 guidance does that includes any contribution on either on the top-line or from the cost out from Stress-Tek?

The EPS guidance includes the total company's performance for 2016 which should include Stress-Tek financial role into VPG financials, yes. But please bear in mind that initially when we have reported Stress-Tek financial prior to the synergies, there were $1.1 million of EBITDA therefore the vast majority I would say predominately the EPS will be driven by the results for VPG.

Good. Understood. And I think the financials you had disclosed in the release, and I believe it was $9 million in sales and $1.1 million in EBITDA as you mentioned. And I think you mentioned $3 million in two years on the EBITDA side. Can you maybe talk about what the annual sales growth rate was for the company? And what do you expect going forward for Stress-Tek?

The annual sales growth for the company was fairly modest due to the fact that the smaller company, they were growing at GDP level, the fact that they were very small privately held company while -- with very limited resources, they were not able to invest, nor in new product or platforms or no in open -- neither in opening new sales channel beyond the United States. So we do expect the post acquisition beyond the cost synergies that with our sales worldwide sales channel we would be able to enhance the growth of the revenues of Stress-Tek by at least I would say 50% of their historical run rate.

And over what period of time?

Once we realized all the synergies, the cost synergies which will happen in the next two years, I'd expect that starting 2017 as we are going to roll out also the new platform into the US like the TruckWeigh which was initially came onboard, we should expect already in 2017 to see an enhanced growth, sales growth at Stress-Tek.

Very good. And just my final question before I hop back in the queue. Can you maybe talk about the business trends you are seeing here in Q1 to date and also how you expect the business segments to perform as we progress through the year? Thank you.

Okay. Looking at Q1 because we only provide guidance for Q1, we do expect to see a fairly stable business environment for the first two reporting segment in regards to FTP and in regards to Force Sensors. We haven't seen any dramatic changes despite the fact that there must be a nice --should indicate some good signs of recovery, good signs of better demand from the large OEMs in regards to Force Sensors. I should say that overall we do see fairly, still fairly stable business environment. Regarding the WCS, we unfortunately and based on the information that we all that I've indicated earlier in the call, we may see another or further slowdown in the steel market. So for the rest of the product line, I think that we should expect to see not necessarily in Q1 but as the yield moves on we should see a better business environment and we should and this is why I did indicated we should expect from a volume standpoint an increase to low to mid single digit. We do expect to see a volume increase except one singularity which is the steel market. This is the only market that we don't see any -- at this point any light at the end of the tunnel. And we made the further softening result.

The next question comes from Kyle Mori with Grizzly Rock Capital. Please go ahead.

Good morning and just want to commend management on the cost cutting initiatives and the organic growth in this environment. My question relates to acquisitions versus other use of cash. How do you consider your IRR for other usage of cash other than in organic acquisitions including share repurchases and what would cause to continue to acquire strategic asset at very high multiples similar to the Stress-Tek multiple?

Okay. Our capital allocation, I mean we are definitely as Ziv talked about, we are growing organic acquisitions play a key role and all then secondarily would be the stock buyback. Many acquisitions when you look at -- like for example if you look Stress-Tek, we basically paid without the real like $40 million worth of business that would generate, $3 million of EBITDA over two year period. So on that perception the buying at a 5x, 6x EBITDA is not bad. We firmly believe that by growing through acquisitions that will enhance our value which should enhance shareholder value going forward. I don't know Ziv; you want to add anything to that.

So my question is if you -- are you planning on selling that real estate?

No. No. At the moment like Ziv mentioned we are consolidating all of our onboard weighing into that one facility thereby saving cost elsewhere to add this.

I would like to indicate regarding the real estate, I understand that was not -- this was fairly unusual that we have acquired also the real estate beyond the business. The decision to acquire the real estate was fairly easy due to the fact that we had our appraisal in order to understand if how much, what is that expected lease cost that we would pay if we had to lease the building vis-à-vis occupy the building or even further on consolidate even more function and more operation into that building. And the fact of the matter that the lease cost were I would say slightly over 10% of the cost of the building, therefore this was from a cash standpoint a much better investment than to pay on an ongoing basis slightly over 10% of the building cost for the ongoing lease. So this was more for pure financial decision that did allow us to optimize the cash investment vis-à-vis paying lease cost. Regarding M&A I would like to indicate that during the last couple of years we've looked at many, many companies. And the fact that and we were even at the very late negotiation with few of them. The fact of the matter that we were very disciplined in not overpaying and meeting our internal rate of return and our ROI ratios. The intention is to continue to do that during the next -- the near future and we do believe that we would have opportunities to acquire companies at a very good EBITDA multiple which would meet our IRR and ROI ratios.

So how do you think about the value of your stock i.e. is repurchasing stock here accretive to your IRR and ROI ratios? Because when I look at the multiple paid and we can talk about real estate all we want, $1 million is on let's just call it 15 if you want a back up the real estate at 15x EBITDA multiple which is certainly dramatically higher than your stock. So how do you think about share repurchases versus inorganic acquisitions?

Okay. So our feel is as follows. We do believe that the existing or the current stock price is in a way undervalued and our EBITDA multiple is fairly low. Of course, one way to change that in the future is to increase our revenues as well as increasing our bottom line, our EPS. We already took steps and actions in order to -- at least from an organic standpoint to change that. We do believe that with acquisitions we would be able to change also the EBITDA multiple. The fact is that we are using cash and not equity implies that I do believe that this would be a way to change the EBITDA multiple for the company in the future, but I should also mention that we did the stock buyback this year and on an ongoing basis needed, this is also one of the ways we intent use our capital, also for stock buyback but all-in-all if you look at it this is not a complete strategy because stock buyback could take you so much if the expectation and the intention is to grow top-line and bottom line, it has to be done only by innovation, cost reduction and acquisition to accelerate growth.

[Operator Instructions]

The next question comes from John Franzreb, is a follow up for Sidoti & Company. Please go ahead.

Hey guys. Couple of quick questions. One, how much of your cash is here in the States versus overseas?

John at the end of the year probably approximately 10% to 12% of the cash is in the US. The remainder is outside the US.

Okay. Kind of -- got it, and when I am looking at your SG&A line in the fourth quarter, it kind of dropped noticeably both on the sequential and year-over-year basis. Could you just talk a little bit about that what's going on there?

Yes. I mean when you compare year-over-year, I mean the drop, I mean of the $1.8 million drop, half of that was primarily due to the foreign currency. We had lower headcount and some reductions in bonus accruals and legal fees. I think going forward when we look at -- I mean we understand G&A quite well. One more we realize including Stress-Tek, we are probably backed in about for annual basis of about $74 million a year.

Got it. And where do you stand now on the advanced sensors production relocation, where are you in the process?

Regarding advanced sensors, we have made significant investment this year and next year we are going even to increase our capital investment in regards to this product line. This year, if you may recall John the advanced sensors was a combination of transitioning existing product into the new platform as well as new applications. I should indicate that some of the new application took up very, very rapidly and very nicely. So we are in a full capacity at this point. So the only thing I can say is that if we have finalized 2015 closed to $5 million revenues in Q1, the run rate would be close to $8 million to $9 million and by the end of this year we should be over $15 million, $16 million, just for this product line. So it's coming up very, very rapidly. We are in a way if you want to call it sold out and we are adding -- we are adding more staff, we are adding more equipment and by the way some of the extra cost in the inefficiencies we have incurred in Q4 was due to the fact that we have hired many new people, we have installed many more equipment which to an extent reduced their inefficiency due to the learning curve. But this line is doing extremely well. And the expectation is to continue and to double revenue year-over-year.

So this business in of itself is about half of your organic growth for the -- in 2016?

You are correct. You are correct because we have to take into account the fall back or the further slowdown in the steel market.

And the balance of the organic growth, is it new contracts that are coming onboard. Can you kind of discuss the balance of the organic growth profile?

The balance of the organic growth is predominately coming from two growth engine. One is the TruckWeigh and VanWeigh which have discussed quite extensively in prior quarter. And the other one we do see some signs due to those OEM, if I -- and I go back to the Force Sensors reporting segment. That the Force Sensors OEM during those difficult times we have been designing more and more project. We do see many of them coming to fruition and we do expect to get many more order at those transductive OEM which we are it's also supplier.

The next question is a follow up from Kyle Mori with Grizzly Rock Capital. Please go ahead.

Yes. Thanks for taking my question. On the inorganic front, we would be supportive of the company changing the policy such that inorganic acquisitions are accretive on in EBITDA basis rather than an EPS basis. We are supporters of the business. We are shareholders in the business. We appreciate what the core business is and we just cannot support inorganic growth at the multiples that which have been recently done. Thanks for your time.

[Operator Instructions] With no further questions this concludes our question-and-answer session. I would like to turn the conference back over to Wendy Wilson for any closing remarks.

Thank you, Gary. And thanks everyone for tuning in this morning .We will be out on the road this year. So we hope that we'll have the chance to meet with all of you. And we will be at quite a few conferences as well. So we look forward to the conversation and hopefully we'll talk you so. Thanks so much.

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