Vishay Precision Group, Inc. (VPG) Q1 2016 Earnings Report, Transcript and Summary

Good morning. And welcome to the VPG First Quarter Fiscal 2016 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 note this event is being recorded. I would now like to turn the conference over to Wendy Wilson. Please go ahead.

Thank you, Danielle. Good morning, everyone and welcome to our 2016 first quarter 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 should have all 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 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 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 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 our operations, please refer to our SEC filings, especially the Form 10-K for the year ended December 31 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. First quarter revenues came in at $56.6 million, flat with the $56.6 million first quarter revenues in the prior year period. The overall negative impact of foreign exchange rates to revenues in the quarter was $1.2 million compared to the first quarter of 2015. Adjusted diluted earnings per share were $0.13 versus $0.07 in the first quarter of fiscal 2015. From a new product perspective, our advanced sensors' revenues grew approximately 95% in the first quarter 2016 from the first quarter of 2015, and approximately 42% from the fourth quarter 2015. As you already know we closed our Pacific Instruments acquisition in the second quarter and our results reported today include a full quarter of Stress-Tek's results. Ziv will talk some more about this in his comments. We are setting our second quarter revenue guidance range at $57 million to $62 million and our fiscal year of 2016 adjusted diluted earnings per share is reaffirmed in the range of $0.80 to $1 at a constant exchange range as of the first quarter of 2016. Moving on to Slide 4. The year-over-year decrease in adjusted gross margin of Q1 2016 is attributable to the negative effect of exchange rate of $500,000, inventory reduction of $400,000 and labor inefficiencies of $300,000. Selling, general and administrative expenses for the quarter were $18.1million, or 31.9% of revenues as compared to $18.7 million, or 33% for last year's first quarter. This decrease is primarily due to saving related to our previously announced cost reduction program, mainly lower headcount of $500,000, the positive impact of foreign exchange rates of $400,000, lower cost of $400,000 mainly fees offset by $600,000 of additional selling and general expenses cost associated with the acquisition of Stress-Tek. Looking at operating margin on an adjusted basis, without restructuring costs and other acquisition cost, you can see that is at 3.6%, a decrease from 3.9% in the first quarter last year. Included in other income and expense in our press release this morning was $400,000 of foreign exchange gains primarily Canadian dollar during the first quarter of 2016 as compared to $1 million of foreign exchange losses in the first quarter of 2015. Our operational tax rate was 22% in the first quarter of 2016. For the 2016 fiscal year, we expect it to be in the range of 22% to 25%. Adjusted net earnings for the first quarter of 2016 were $1.7 million or $0.13 per diluted share versus adjusted net earnings attributable to VPG stockholders of $900,000 or $0.07 per diluted share for the comparable prior year period. Cash generated from operations for the first quarter of 2016 was $700,000 compared to a negative $2.3 million in the first quarter of 2015. Capital expenditures were $2.2 million in the first quarter compared to $2.8 million in first quarter of last year. Depreciation and amortization for the first quarter of 2016 was $2.7 million compared to $2.8 million in the first quarter last year. We define total free cash flow as the amount of cash generated from operations which was $700,000 in the first quarter of 2016, in excess of capital expenditures which were $2.2 million in the first quarter of 2016, and net of proceed if any from the sale of assets. Our total free cash flow was a negative $1.5 million in the first quarter of 2016 as compared to $5.1 million negative in the first quarter of 2015. On 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 on this 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 line continues 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 95% in the first quarter of 2016 versus the 2015 first quarter and approximately 42% from the fourth quarter of 2015. I'm 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 continue to focus on optimizing the profitability of the Company despite the global conditions that have created challenging environment for us and our customers such as the strong U.S. dollar, low oil and gas prices, low commodity prices and China economic slowdown and the very low steel capacity utilization at the end of 2015, the lowest since 2009. According to the most recent global steel industry report, the average steel capacity utilization at the end of March 2016 was 70.5%, up from 64.6% at the end of 2015, but still below 71.8% at the end of the first quarter in 2015. It's an encouraging sequential trend that we will continue to monitor. The economic recovery in Europe continues, but the global context is less conducive than it was. The external risk for the European economy caused by the possibility of slower growth in China and other emerging economies, worsening geopolitical tensions and abrupt moves in oil prices weigh on a rebound. The increased risk associated with the domestic EU development including uncertainty ahead of the British Referendum in June also delays prospect for recovery. Outside of the EU, U.S. Manufacturing PMI is to its lowest level over 6.5 years in April, and production volume was close to stagnation, amid the renewed slowdown in the new business growth. 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 1.03 in the first quarter of 2016 compared to 1.05 in the first quarter last year and 0.95 in the fourth quarter of 2015. Total orders for the first quarter of 2016 were $58.6 million, down $0.8 million or 1.3% from $59.3 million in the first quarter of last year and up $2.4 million or 4.3% from $56.2 million in the fourth quarter of 2015. Some details on our reporting segment, the FTP segment had the book-to-bill ratio of 0.98 for the first quarter of 2016 compared to 1.12 for the first quarter of 2015 and 0.97 for the fourth quarter of 2015. Sequentially, orders increased by $0.3 million or 1.0% from the fourth quarter of 2015. The FTP gross margin was 42.3% for Q1, up from 41.4% in Q1 last year and up from 36.5% in the fourth quarter of 2015. The FTP gross margin increases from the comparable prior year period was due primarily to $0.9 million of higher volume coming mainly from distribution and OEMs in the Americas and Europe. servicing the test and measurements and avionic, military and space end markets. The sequential gross margin increase was primarily due to $0.5 million of saving from our previously announced cost reduction programs and $0.4 million of fourth quarter adjustment. The FTP segment backlog was 2.6 months compared to 3.4 months last year and 2.6 months in the prior quarter. Looking at the Force Sensor segment, the book-to-bill ratio was 1.06 for Q1 compared to 0.98 in the first quarter last year and 1.0 for the fourth quarter of 2015. Sequential orders increased by $0.2 million or 1.3%. This increase came from the Americas and Asia, partially offset by Europe. The gross margin for the segment was 18.4% in the first quarter of 2016 versus 21.8% in the first quarter of 2015 and 20.2% in the fourth quarter of 2015. The gross margin for the quarter decreased from the comparable prior year period primarily due to $0.7 million reduction in inventory. The sequential gross margin decreased mainly due to $0.3 million of lower volume from distribution in the Americas for precision weighing end market. The Force Sensor segment backlog was 2.5 months compared to 2.3 months in the prior year period and 2.2 months in Q4. For Weighing and Control System, the book-to-bill ratio was 1.11 for Q1 compared to 1.0 in the first quarter last year and 0.89 for the fourth quarter. Sequentially, orders increased $2.0 million or 13.1% coming from the Americas and Europe, partially offset by Asia. The adjusted gross margin for the segment was 40.2% in the first quarter of 2016 versus 44.6% in the first quarter of 2015 and 47.8% in the fourth quarter of 2015. The year-over-year decrease in gross margin is primarily due to $0.6 million of unfavorable product mix and $0.4 million of negative effects of foreign exchange rate. Sequentially, gross margin decreased due to $1.4 million of lower volume mainly from reduction of revenues of $2.3 million from steel, mainly in Asia, $0.9 million from process weighing in Europe and $0.8 million from onboard weighing in the U.S., partially offset by the acquisition of Stress-Tek which contributed $2.1 million of revenue in the Americas. In addition, there was $0.3 million of higher obsolesce recorded as compared to the fourth quarter of 2015. The segment backlog was 3.3 months compared to 3.5 months in the last year first quarter and 2.6 months in the fourth quarter. Moving to Slide 8. From an organic performance perspective we are focused on new product development to improve our top-line and continue our initiatives to cut cost and improve efficiency. Based on the actions taken to-date, we are expecting to see improved performance. We have realized $1.4 million in savings in the first quarter of this year versus the first quarter of 2015 and we expect to achieve our $6.7 million in savings in this fiscal year. In light of the global economic conditions and the continued strength of the U.S. dollar versus other currencies, we expect net revenues in the range of $57 million to $62 million for the second quarter of 2016. Our expectations for fiscal year 2016 remains the same with adjusted diluted earnings per share to be in the range of $0.80 to $1.0 at constant EPS at constant exchange rate of the first quarter of 2016. With that, let's open the line for questions. Thank you.

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

I'd like to start with the Weighing and Control segment. The gross margin profile was significantly lower than what I was expecting. Even at lower revenue number if I look historically in the third quarter of last year, you did roughly $15.5 million. The business had a 45% gross margin. Now the adjusted gross margin is down to 40%. Could you give us a little color what's going on there and maybe what your expectations are for that business in the coming quarter?

Absolutely John. You are absolutely correct from a mathematical standpoint. As you may know, the WCS reporting segments consist of three main product line, onboard weighing, process weighing and steel. Each of them has different margin levels. The most profitable business is steel. If you look from a revenue standpoint, if I look at this quarter revenue vis-à-vis the same quarter in prior years, the revenue dropped. It came predominantly from the steel section. From the KELK business, we dropped by sales volumes of $2.2 million. In fact since the WCS is a seasonal business, I may say that on the process weighing side, we were flat and on the onboard weighing side, we were slightly above. But the main drop came from the steel. If I look at quarter-over-quarter, by far steel again represents the biggest drop. Now let's talk about steel for a minute. This is already the third year we are having -- we are in a very, very deep recession and a very low capacity utilization in regards to steel. The revenues for our steel business which were $3.1 million this quarter were the lowest ever, therefore the margin impact was very, very significantly, because if you may recall, the gross margin level for this product line is above 50% vis-à-vis the other product lines which are at the low 40s. Therefore, we had the huge mix effect. Now, our expectation is that in the second quarter that we are going to ship around, and this is not the guidance, I would say around 50% to 60% more of what we have shipped this quarter in regards to steel, and I would say that the initial signs and I hope that this trend will continue. The initial signs that we may see a little bit recovery has been indicated only at the end of March coming from a steel utilization of mid-60s which is the lowest since many, many years back to the 70% mark, which I do hope will -- is a true indication that some things may change. I just have to note that regarding steel capacity most of the western world continues to reduce steel output due to the very low prices, only China indicated a small around 2% increase, and this -- and all-in-all we hope and we do expect that we may see some recovery, but the main -- again going to the -- just answering your question in a natural, the biggest drop in gross margin is the unfavorable mix due to a very, very low revenue level in for the steel product line.

Perfect. That's exactly what I was looking for, Ziv. You mentioned in your answer about the seasonality of the business. Could you just kind of review what other product line may have some significant seasonality we need to be aware of?

The seasonality is mainly -- when we speak about WCS and it's mainly in the onboard weighing. As you may know, our weakest revenues in onboard weighing, especially in the United States is in Q1, because the main end market is -- we are serving the logging industry. And always in Q1 due to the winter conditions, this is our lowest revenue level, while it continues to recover. The other part from a process weighing standpoint, we always expect a better second quarter and the other seasonality impact is the so-called the European slowdown during summer time. But again, the seasonality is mainly affecting WCS and to a much less extent FTP as well Force Sensors.

And in the prepared remarks, there was a mention of $300,000 of course of labor inefficiency. Can someone just enlighten me what that was?

Okay, very good. Let's talk about the labor inefficiencies. Let start with the first reporting segment. In the first reporting segment, we were speaking about two main projects. The first one was a very steep ramp up of advance sensors and you see of course the volume impact of 95% higher revenues quarter-over-quarter is 42% and the same quarter year-over-year is 95%, therefore we are in the huge ramp up and we had to hire, I would say significant amount of people in order to support the demand. By itself, such rapid increase in production is already -- we have incurred some inefficiencies due to the learning curve and due to the fact that we had to hire many people in a very short time, until we stabilized the operation. I think to a large extent it's behind us, because we are already at a much higher level of production which we can support at this point in time. The second effect regarding FTP is the Costa Rica closure which we have announced a couple of months ago. We had in our Costa Rica facility over 100 people and the decision has been made to close the facility within I would say four to five months. Such a big -- I would say reduction in such a -- I would say an aggressive step to close the plant and to relocate the product lines to another manufacturing plant in a very short time creates a lot of pressure and I would say a high learning curve on the accepting part which was in this case our facility in the United States and our secondary facility in Israel. So, I would say that since the expectation is to close the facility by the end of this month, by the end of May, we already incurred more than 50% of the inefficiency due to this I would say high learning curve. The other part of the inefficiency which is part of the $300,000 is the closure of our Beijing, our Force Sensor Beijing facility which we did finalize by the end of March. Again moving the product into India which have created a lot of -- again a lot of stress and we had to hire quite a lot of people within a short time. Again, it's around learning curve. So, all-in-all, all the inefficiencies we have reported, this quarter or we made I hope to a low extent may report further on are solely related to manufacturing location closure, except the advance sensor ramp up.

Perfect. I'll get back into queue and let somebody else ask question. Thank you.

[Operator Instructions] The next question comes from Sarkis Sherbetchyan of B. Riley & Company. Please go ahead.

Thanks for taking my questions. First, as it relates to the FTP segment, can you maybe talk about the strength in those FTP margins, and if you anticipate the strong level going forward?

Good Morning Sarkis. Let's talk about FTP. In regard to the FTP, if you look from a sales volume standpoint, quarter-over-quarter the sales volume is pretty much flat. We -- the FTP is really composed of two businesses, one is strain gages/data acquisition systems and the other one is the foil resistors. I think that we did indicate earlier on that in the foil resistors we do see a strong market in regards to avionic, military and space and test and measurements in Europe and in the United States, while on the Micro-measurement side of the business, this is where advanced sensors is being classified, we see a very, very stable environment servicing some avionic, military and space end markets, as well as force and precision weighing. We should bear in mind that this reporting segment has been impact already by the oil and gas recession. Many of the customers did not place any order this year for both product lines, but nevertheless, we were able to -- I would say to offset this potential loss by getting more business from the test and measurement and AMS market.

Then just moving on to Force Sensors, I mean you kind of touched upon this here in the prepared remarks, as was the earlier questions. But did you think that margins were below your internal plan in Force Sensors?

Absolutely, I would say that this margin for this quarter were, exceptionally very, very low, and it composed of two effects. One, this is the lowest revenues we have reported. And please correct me if I'm wrong, but if I look at the information which is available to me, $14.8 million of revenues, there was only one quarter which we have reported lower revenues and that -- and it was 14.6 million, which was the third quarter of 2015, but other than that, this is a very, very low revenue level which we believe by the way that will rebound next quarter and the main driving factor are -- is U.S. distribution for the precision weighing, they had enough inventory while they have been depleting the indication is that they are going to order more therefore we may project much higher sales. So this is one factor, the low revenues. The other factor I would say is from a cost standpoint on one hand we have incurred inefficiencies due to the Beijing closure. And we are going in the second quarter to close another facility in China which is our machine shop in Tianjin which is another very large city next by, next to Beijing. In addition to the fact that we have reduced inventories quite substantially and I think that the effect of the inventory reduction on cost was an additional $700,000 of course. So, as I have indicated our target for this reporting segment is mid-20s and starting next year high 20s, and at the end of the day is to get to -- reach to the 30% mark. So this quarter we did achieve an exceptionally very, very low gross margin levels for this reporting segment.

Then I guess moving on to the revenue outlook here. I think for this quarter you said Stress-Tek contributed about $2.1 million in revenue if I've not mistaken. What do you expect Stress-Tek to contribute for Q2 and also when you fold in Pacific Instruments into the next, what do you think Pacific Instruments would contribute in Q2 here?

Now let's talk about Stress-Tek. Stress-Tek book-to-bill we did not indicate that. The Stress-Tek book-to-bill was 1.2, 1.3 for the quarter. So, our indication would be and we have never provided quarterly guidance is that Stress-Tek will -- the revenues would be at least similar to Q1 if not higher in the second quarter, similar to Q1 if not higher due to the fact that we had book-to-bill above 1. Now regarding PI. PI finalized the fiscal year and at the end of January, and they have recorded at the end of January $10.8 million. In the first two months of February and March, prior to the acquisition of VPG, they have recorded $2.1 million or revenues. PI end market is very similar to KELK of course it's in a completely different end market, but it is really serving end users for big projects, therefore they are always discussions even and once the order has been placed, when would the customers accept the deliveries they would pull in or push out. At this point in time, due to the fact that they are really very, very large, mutli-million dollar pending orders, we -- at this point in time have not at least incorporated in our model more than a $1 million of PI in the upcoming quarter.

There's a follow-up question from John Franzreb. Please go ahead.

Actually, I just wanted to start where you just left off. So PI, is already experiencing push out from what customer base is it, is it steel customer bases or could you just expand upon that push out that you are seeing?

PI, I will just take a step back. If you recall, PI is in a completely different end market, it's not in steel, it's in government based business. At this point, of course our plan is to shift it also to open more market which we are in, but at this point in time, they are exclusive in avionic, military and space, government contracts business, pretty dominantly in the United States, but also in Asia and Europe. So, all the big contracts with all the main defense companies in the United States, they are working with PI. For many different end applications like wind tunnel, digital [ph] stress analysis, testing of construction measurements with wind tunnels, engine thrust measurement and other type of -- and I would say other type of military applications. That's 90% government based business, U.S. government based business.

So why would they be suffering from push outs. Are they tied to certain programs sort of being pushed back?

This is a little bit I would say here I have to be a little bit careful.

Okay.

In the government you have certain bids which companies are wining, there are some other companies that may appeal if another competitor may win. So there is some I don't know even how you may want to define -- a certain dynamic that only once those appeals are over then the order will be placed. So, we did win, but some of competition, not our competition. Our customers competition have appealed few times and those are very, very, very I would say multi-million projects, multi-million big, big military projects.

And regarding the restructuring actions with $6.7 million, could you just talk about how much you have realized of that $6.7 million and the timeline to get that former benefit.

So I did report earlier that in Q1 we have realized $1.4 million of the restructuring programs we have announced. And we do plan to achieve the $6.7 million. Now we have to bear in mind that this is not a linear, that the progression will not be linear, because some of the projects, some of the restructuring projects are related to the Costa Rica and the China restructuring plans while the closing of the plant, for example the Beijing one has happened only end of March, so the savings will be, we will start to realize the savings only from Q2 onwards. In regards to Costa Rica, the main savings, we will start to realize by the end of Q2 onwards. So, for Q1 we have realized $1.4 million and as we move on, we are going to realize more and more, and I do believe that we at least for a minimum, we would achieve the $6.7 million we have committed for.

That's all I have got. Thank you.

This concludes our question and answer session. I would now like to turn the conference back over to Wendy Wilson for closing remarks.

Thank you, Danielle, and thank you, everyone for dialing in today. If you happen to be in the New York Area this week, we will be at the Drexel Hamilton Conference on Thursday, and we're also going to be at the B. Riley Conference in Los Angeles on the 25th. So, we've got plenty of opportunities to get together with you if you are interested in speaking with us further. Hopefully, you will all dial in next quarter. And we'll talk to you soon. Thanks so much.

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