Vishay Precision Group, Inc. (VPG) Q2 2016 Earnings Report, Transcript and Summary

Good morning. And welcome to the VPG Second Quarter Fiscal 2016 Conference Call. All participants will be in 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'd now like to turn the conference over to Rene [Indiscernible]. Please go ahead.

Thank you, operator. Good morning everyone. Welcome to VPG's 2016 second 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 all should have received the earnings press release and we hope you have taken time to read through it, as it contains 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 a 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 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 31st, 2015 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 Rene. Good everyone and thank you for joining us on our call today. I'd like to start by reviewing a few highlights and then summarizing the financials. Following that Ziv will provide his view of results from new products and the global business environment. Second quarter revenues came in at $58.0 million, down $1.5 million compared to $59.5 million of revenues in the prior year. The adjusted gross profit margin increased to 37.4% as compared to 35.4% in the second quarter 2015, validating the effectiveness of our restructuring efforts. The adjusted diluted earnings per share were $0.15 compared to $0.13 in the second quarter of 2015. The Force Sensor segment achieved gross margin of 29% in the second quarter of 2016 as compared to 19% in the second quarter of 2015. We are setting our third quarter revenue guidance in the range of $55 million to $60 million and updating our fiscal year 2016 adjusted diluted earnings per share guidance in the range of $0.70 to $0.80 at constant exchange rates as of the second quarter of 2016. On slide four, the increase in adjusted gross margin of $600,000 for the second quarter of 2016 as compared to the second quarter of 2015 is attributable to the savings and cost reduction programs of $1.3 million, the positive effect of exchange rates of $500,000, which were offset by a reduction in volume of $900,000. Selling, general, and administrative expenses for the quarter were $18.4 million, or 31.8% of revenue as compared $18.4 million or 30.9% to last year's second quarter. SG&A remained flat due to savings of $700,000 from cost reduction programs, mainly lower headcount and $600,000 in lower fees, which were totally offset by additional SG&A cost of $1.3 million associated with the acquisitions of Stress-Tek and Pacific Instruments. Looking at operating margin on an adjusted basis, without restructuring cost and the acquisition cost, you see that it's at [ph] 5.6%, an increase from 4.5% in the second quarter last year and from 3.6% in the first quarter of 2016. Included in other income expense is $100,000 of foreign exchange gains during the second quarter of 2016 compared to $300,000 of foreign exchange losses in the second quarter of 2015. The lower GAAP tax rate in the fiscal quarters and six months ended July 2nd, 2016 is primarily attributable to a $1.6 million release of a valuation allowance established with respect to U.S. deferred tax assets. The reduction in valuation allowance is related to deferred tax liabilities established in connection with the acquisition of Pacific Instruments. For the 2016 fiscal year, we expect the operational tax rate to be in the range of 26% to 28%. Adjusted net earnings for the quarter of 2016 were $2 million or $0.15 per diluted share as compared to adjusted net earnings attributable to VPG's stockholders of $1.8 million or $0.13 per diluted share for the comparable prior year. Cash generated from operations for the second quarter of 2016 was a negative $500,000 compared to a positive $2.3 million in the second quarter of 2015. The decrease was mainly attributable to $1.7 million in cash restructuring payments, $4,000 in acquisition costs, and $4,000 in estimated tax payments associated with Pacific Instruments, and $200,000 in higher interest payments due to the increased borrowings for the acquisitions. Capital expenditures were $2.2 million in the second quarter, flat with the second quarter last year. Depreciation and amortization for the second quarter of 2016 was $2.9 million compared to $2.7 million in the second quarter of last year. We define total free cash flow as the amount of cash generated from operation, which is negative $500,000 for the second quarter of 2016, in excess of our capital expenditures which is $2.2 million for the second quarter 2016, and net of any proceed from the sale of assets, which were $200,000 in the second quarter of 2016. Total free cash flow was a negative $2.5 million for the second quarter of 2016 as compared to a positive $200,000 in the second quarter of 2015. On slide five, we remained focused on our strategy of growing the topline through organic growth and pursuing additional acquisitions as well as improving profitability by increasing efficiencies and reducing costs. This is exemplified by the Pacific acquisition, our second acquisition in the past eight months and by our improving gross margin. With the focus and execution, we should be owed 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. While the Advanced Sensor line is reporting revenues increases of 58% in the second quarter of 2016 versus 2015 second quarter, there is a reduction of 17% in revenues as compared to the first quarter of 2016. The low volume, the FTP segment for the second quarter of 2016, came in below expectations, mainly with the Micro-measurement products. I will elaborate on this performance in the FTP segment overview. We will continue to focus on optimizing the profitability of the company despite the global economic uncertainties that continues to create a challenging environment for us and for our customers. We continue to closely monitor the steel market and note that China's steel demand is cooling down as its government's short-term stimulus policy affects sales [ph]. With rising supply, steel average selling prices are under downside pressure. China's export price declined to $345 per metric ton, which is below the breakeven point for many companies around the world. Export prices in the CIS Zone, which has a large impact on global prices declined as well. The increased risk associated with domestic EU developments, including uncertainty with Brexit, also dampens prospect for rapid recovery. Outside of the EU, we have cautious optimism due to the U.S. manufacturing PMI, which experienced the sharpen rise [ph] in the U.S. manufacturing production since November of 2015. In spite of a strong dollar, the ongoing energy sector downturn and the political uncertainty due to the upcoming presidential election, the July data signals a rebound in business conditions across the U.S. manufacturing sector. It is too early to say if this is a start of a stronger upturn, but we will monitor the trend. On slide six, 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 1.98 in the second quarter of 2016 compared to 1.91 in the second quarter last year and 1.03 in the first quarter of 2016. Total orders for the second quarter of 2016 were $56.5 million, up $2.2 million or 4.1% from $54.3 million in the second quarter last year and down $2.1 million or 3.5% from $58.6 million in the first quarter of 2016. Moving to slide seven, some details on our reporting segment. The Foil Technology Products segment had a book-to-bill ratio of 1.01 for the second quarter of 2016 compared 0.90 for the second quarter of 2015, and 0.98 for the first quarter of 2016. Sequentially orders decreased by $200,000 or 0.8% from the first quarter of 2016. The FTP adjusted gross profit margin was 37.0% for the second quarter, down from 39.6% in Q2 last year and down from 42.3% in the first quarter of 2016. The FTP adjusted gross profit margin decreased from the comparable prior year period was due primarily to $900,000 of lower volume from Micro-measurement product in the test and measurements end markets in Europe and in the America and $0.300 million in labor inefficiencies offset by $200,000 of realization of cost savings from our previously announced cost reduction programs. The sequential adjusted gross profit margin decreased from the 2016 first quarter was due primarily to $900,000 of lower volume for foil resistors in the test and measurements and in the avionic, military, and space end markets via distribution in the Europe and in the Americas. $400,000 in labor inefficiencies related to the closure of our Costa Rica facility and transition of manufacturing to other facilities during the second quarter of 2016, and inventory related charges of $400,000. The FTP segment backlog was 2.8 months compared to 3.0 months last year, and 2.6 months in the prior quarter. Looking at the Force Sensors segment, the book-to-bill ratio was 0.97 for Q2 compared to 0.98 in the second quarter last year and 1.06 for the first quarter of 2016. Sequential orders decreased by $900,000 or 5.6%. This decrease came mainly from the Americas in the process weighing and OEM medical end markets. The gross profit margin for the segment was 29.0% in the second quarter of 2016 versus 19.0% in the second quarter of 2015, and 18.4% in the first quarter of 2016. The gross profit margin increases from the comparable prior year period is primarily due to $1.0 million in savings from cost reduction programs and $600,000 related to positive foreign currency exchange rate. The sequential gross profit margin increased from the end of 2016 first quarter, primarily due to $200,000 related to increased volume, $300,000 in savings from cost reduction programs, and $600,000 in inventory increase to support ongoing manufacturing of our consolidation plan, and $300,000 related to positive foreign currency exchange rates. We completed the Beijing facility closure in the second quarter of 2016. In July 2016, the company signed an agreement to sell its Karmiel, Israel facility and also agreed to lease the portion of the facility back from the buyer. This will give us further cost reduction savings going forward. The sale is expected to close no later during November of 2016. The Force Sensors segment backlog was 2.3 months compared to 2.2 months in the prior year period and 2.5 months in Q1 of 2016. For the Weighing and Control systems segment, the book-to-bill ratio was 0.94 for Q2 compared to 0.88 in the second quarter of last year and 1.11 for the first quarter. Sequentially, orders decreased by $1.0 million or 5.6% mainly in Europe for our process weighing and onboard weighing for the client. The adjusted gross profit margin for the segment was 45.6% in the second quarter of 2016 versus 43.7% in the second quarter of 2015 and 40.2% in the first quarter of 2016. The volume for the second quarter of 2016 was flat compared to the second quarter of 2016 due to further reductions of process weighing in Europe and the steel business, offset by an increase in onboard weighing in Europe and the acquisition of Stress-Tek. The adjusted gross profit margin for the quarter increased from the comparable prior year period, primarily due to the realization of cost savings from our previously announced cost reduction programs. Sequentially, adjusted gross profit margin increased due to $1.3 million of higher volume, primarily related to steel mainly in Europe. The Weighing and Control systems backlog at 2.8 months compared to 2.9 months in last year's second quarter and 3.3 months in the first quarter. On slide eight, from an organic performance perspective, we're focused on new product development to improve our topline and continue our initiatives to cut costs and improve efficiency. Based on the actions taken to-date, we are expecting to see improved performance, we have realized $2.7 million in savings in the first six months of the year and we expect to achieve our $6.7 million in savings for this fiscal year. In light of the global economic conditions, the continued strength of the U.S. dollar versus other currencies and the normal seasonality of our business, we expect net revenues in the range of $55 million to $60 million for the third quarter of 2016. Our expectation for fiscal year 2016 has been updated with adjusted earnings guidance of $0.70 to $0.80 fully diluted share at constant exchange rates as for the second quarter of 2016. With that, let's open the lines for questions. Thank you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ben Terk of Active Owners Fund. Please go ahead.

Good morning. Thanks for taking my call. Quick question on the guidance that you gave, you gave a range of $0.70 to $0.80, can you translate that into a rough range of EBITDA for us? Thank you.

Okay, Ben, from $0.70 to $0.80, I would say, we're probably looking at EBITDA in the mid to high $20 range.

Great. Thank you. That's all.

Our next question comes from Sarkis Sherbetchyan of B. Riley & Company. Please go ahead.

Yes, good morning guys. So, a couple of questions here as it relates to the margins. For FTP, margins were down year-over-year, so are the labor inefficiencies related to closing the facility over and should we expect margins to start trending higher in this? And then I have follow-ups.

Okay. In regards to the FTP, the inefficiencies that has been created in the second quarter as I've indicated earlier; one is the -- I would say the bigger portion in the related to the closure of the Costa Rica line and the learning curve in Israel and in the United States and I would say that we may expect some more inefficiencies in the third quarter which are not related to the Costa Rica closure, but are related processes introduction at the Advanced Sensors, while we are -- while we may see that more on the yield side. So, the inefficiencies will be reduced substantially, but we may have some yield related matters in the third quarter while we introduce those new processes.

Yes. Thanks for that. And then you did mention a little bit of -- sounded like disappointment from the Micro-measurements, maybe can you touch a little bit upon what's going on that side of the business?

Yes, yes, of course. I will -- I just want to state that in general the reason the company has changed its guidance and -- in regards to EPS and also in regards of -- to revenues and it's important to know is that we built-in our model at certain -- I would say improved business environment where we're going to see much higher revenues in the third and fourth quarter. Unfortunately, at this point in time, the macro economy is such that we see more stabilization in the marketplace rather an improved environment, therefore, we have -- we're focusing more flat revenue second quarter vis-à-vis first quarter only a small increase, therefore, the EPS and the sales guidance has been revised. Now regarding Micro-measurement, I think that -- in the Micro-measurement part and may be more related to Advanced Sensors, we have been building a certain capacity in order to support the customers. For certain customers, we do get, I would say, very frequently updating regarding to their demand. We have seen a much, much -- we have seen softening of the business environment, we have seen slower demand from our customers, and in fact, this is the first quarter that we do report lower revenues in Advanced Sensors in the second quarter vis-à-vis the first quarter and I've indicated it's around 17%. So, the disappointment was in regard to the fact that our customers have reduced their demand in a very sharp and -- in a very short notice in the second quarter. Therefore, we had to cut back on capacity in order to adopt our workforce to the new loading.

Understood. And then I guess moving onto Force Sensors, here, gross margin obviously higher, can you give us a sense if these levels are sustainable going forward?

In the Force, what the -- in regards to Force Sensors, I think that the big -- or a significant part of the margin improvements which we have indicated also in the past is related the cost reduction. You may see from an order intake as well as from a sales revenues, at this point in time, we don't think an improved business environment, but we don't see any deterioration. This is a pretty much, I would say, a solid environment with a potential upside. So, we do expect to sustain high 20s gross margin based on our cost reduction initiatives; the closure of Beijing, the selling of the Karmiel facility, and more consolidation that is being planned toward to the year end. So, I do think that those margins -- the high 20 margins are sustainable in this -- at this sales revenue level.

Good. And a final one for me. For Weighing and Control, it sounded like you mentioned may have been a quarterly -- quarter-on-quarter increase in the steel business, can you maybe talk about your expectations here for the steel end market, particularly, as it relates to the business on a go-forward basis?

The -- we did see an increased revenues in steel in the second quarter vis-à-vis the first quarter. And the steel revenues were $1.5 million vis-à-vis the first quarter. And this is really -- I would say trying to deliver existing backlog. I -- unfortunately, I don't have any good news regarding the steel as I've indicated. I think that the situation is in -- the situation is very -- is already at extremely low level. I think that what we have seen in the last couple of years which has been deteriorated in a way this year vis-à-vis prior year is extremely low prices, companies that are losing money. We are expecting big consolidation, at least, from our perspective. We do believe that we are already at an extremely low level and we hope or expect that the situation will not continue to deteriorate. But at this point in time, we are at the lowest level we ever had, or I think the steel market condition is in its lowest level since many, many, many years, or even many decades in regards to supply and demand situation.

Understood. I'll hop back into the queue.

[Operator Instructions] Our next question comes from Adam Hutt of Leviticus Partners. Please go ahead.

Hi, guys, I got late to the call, so I apologize if you covered this already. But can you address for me the potential opportunity in infrastructure, you know there has been -- the infrastructure stocks have been on a chair, companies that build bridges and highways, can you tell me what kind of potential there is in new products that you're working on, that you then talk about over the next two years in infrastructure?

Well, regarding infrastructure, I can say that our results have been impacted very, very much so by the infrastructure end markets since we are providing product in our WCS segment in regard to our Nobel brand -- European Nobel brand, our U.S. BLH brand, and also in regards to Micro-measurement strain gages. So, we have seen this significant decline, which so far we have not seen any upside. In regards to specific product, I would say that on the strain gages side, our products are widely used in various applications. And I cannot identify a specific product which has been developed for a given application, but they are widely used across, I would say many applications in regards to the infrastructure end markets. So, once this end market recovers, we should expect a very nice rebound in regards to our revenues.

Are bridge builders using more so than in the past sensors to detect for actual stress to get a better idea of when bridges need to be rebuilt because that's something -- is that represent a growth opportunity for you anecdotally speaking anyone?

Okay. In regard -- if you speak specifically about bridge applications, I know that in some of the more modern systems that we are not -- that our customers are developing, they may use more strain gages. But I'm not sure I have enough information to say if it's 10%, 20%, or double what they have been using before. But since I know this is a more critical applications and the tendency is definitely to be on the safe side and not to take any risk, they are using more, but I -- it is very hard for me to quantify how much or how many more.

What percentage of your business is in infrastructure, can you guess that?

In infrastructure if we look across all the company and I don't have -- I could -- may be say it's around -- because we don't track this specific end market. Our segmentation, our end market's expectation is done slightly different, but if I had to guess how much goes into infrastructure, I would say around 5%.

But you're not looking for any particular bump-up from the current legislation for highway spending bill and what not. It's not something that you guys talk about internally that should be a lead to a bump in demand for your sensors.

No, I would assume that our customers are part of these solutions. We don't have any direct -- we don't have any direct relationship with the changes in legislation.

I got you. Can you say [Technical Difficulty]?

Excuse me?

I got you. Can you say who your three business customers are that buy your sensors that -- and build them in?

In which end markets?

Bridges and highways, tunnels?

I'm sorry. Out of the -- top off my head, I don't have any --

Okay. That's fair.

I -- but -- I -- we can definitely go back to you and provide you with the name of the top three customers in these end markets, absolutely.

Yes, another time. No problem.

Top off my head, so sorry.

No problem. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Clancy for any closing remarks.

Thank you for your participation on the call today. We really appreciate it and we look toward to seeing you at the upcoming Investor conference call in the fall. Thank you once again, and have a good day.

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