Vishay Precision Group, Inc. (VPG) Q3 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the VPG Third 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 would now like to turn the conference over to Renee Tong [ph]. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to VPG’s 2016 third quarter earnings conference call. An audio recording will be made of the conference call today, including questions or comments that participants may contribute. By now you all should have received the earnings press release and we hope you’ve taken the 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 any 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 31, 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 morning, 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, revenues from new products and the global business environment. Third quarter revenues came in at $54.5 million, down $2.7 million, compared to $57.1 million of revenues in the prior-year period.

Pardon me. This is the conference operator. We appear to have lost the signal from the speakers’ location. We’ll just have to reconnect with them momentarily. Thank you. This is the conference operator. We’ve reconnected the speakers’ location. Please continue.

Okay, thank you very much. As I was saying the third quarter revenues came in at $54.5 million, down $2.7 million, compared to $57.1 million of revenues in the prior-year period. The adjusted gross profit margin decreased slightly to 37.3%, as compared to 37.5% in the third quarter of 2015. The adjusted diluted earnings per share were $0.21 compared to $0.18 in the third quarter of 2015. The Force Sensors segment achieved gross margin of 31% in the third quarter of 2016 as compared to 21% in the third quarter of 2015. We are setting our fourth quarter revenue guidance range at $55 million to $60 million and updating our fiscal year 2016 adjusted diluted earnings per share guidance in the range of $0.70 to $0.75 by constant exchange rate as of the third quarter of 2016. Going to Slide 4. The decline in adjusted gross margin of $1.2 million for the third quarter of 2016, as compared to the third quarter of 2015 is attributable to a reduction in volume of $1.8 million, offset by the savings from fixed cost reduction programs, mainly headcount of $600,000. The company is evaluating strategic alternatives to enhance shareholder value. Included within selling, general and administrative expenses for the third quarter of 2016 are $1.1 million of costs associated with this evaluation. These are material SG&A costs that are not in the ordinary course and are not results of our operations. Therefore, we have excluded these costs incurred in the reconciliation of diluted earnings per share. There are no assurances that the evaluation will result in any particular strategic alternatives. The company does not intend to comment on or disclose developments regarding the evaluation process unless it deems further disclosure is appropriate or required. Selling, general and administrative expensive for the quarter were $16.9 million, or 31% of revenues, as compared to $17.8 million, or 31.1% for last year’s third quarter. The decline in SG&A is related to 800,000 from cost reduction programs, mainly headcount, $1.6 million of bonus adjustments, $300,000 in lower fees, offset by $1.2 million associated with the acquisitions of Stress-Tek and Pacific Instruments and the $1.1 million related to the strategic alternative evaluation costs. Looking at operating margin on an adjusted basis, without restructuring costs, acquisition, evaluation costs, and impairment costs, you can see that the operating margin on an adjusted basis is 8.2%, an increase from 6.5% in the third quarter last year and from 5.6% in 2016 second quarter. Included in other income expense is $100,000 of foreign exchange losses during the third quarter of 2016, as compared to $400,000 of foreign exchange losses in the third quarter of 2015. The GAAP tax rate in the nine fiscal months that ended October 1, 2016 is 25.3%. 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 third quarter of 2016 were $2.9 million, or $0.21 per diluted share, compared to adjusted net earnings attributable to VPG stockholders of $2.4 million, or $0.18 per diluted, the comparable prior-year period. Cash generation from operations for the third quarter of 2016 was $6.3 million compared to $5.4 million in the third quarter of 2015. Capital expenditures were $1.8 million in the third quarter of 2016, as compared to $2.5 million for the third quarter of last year. Depreciation and amortization for the third quarter of 2016 was $2.8 million compared to $2.6 million in the third quarter of 2017. We define total free cash flow as the amount of cash generated from operations, which is $6.3 million for the third quarter of 2016 in excess of our capital expenditures, which is $1.8 million for the third quarter of 2016, and net of proceeds if any from the sale of assets was zero in the third quarter of 2016. Total free cash flow was $4.5 million for the third quarter of 2016, as compared to $2.9 million in the third quarter of 2015. On Slide 5, we remain focused on our strategy of growing the top line through organic growth and pursuing additional acquisitions, as well as improving profitability by increasing efficiencies on reducing costs. With focus and execution, we should be able to achieve the milestones on this slide within three years. With that, let me pass further comments on to Ziv.

Thank you, Bill. We continue to focus on optimizing the profitability of the company despite the global economic uncertainty. That continues to create a challenging environment for us and for our customers. We continue to closely monitor the global steel demand. The China state-owned steel enterprises, which represent less than 45% of the total steel capacity eliminated 40 million metric tons of steel capacity in the first nine months of 2016. Approaching 90% of fixed capacity caught gold [ph] which is 45 million metric tons for 2016 and 100 million to 150 million metric tons in five years, which represent 10% of the total capacity reduction. The gold in the short-term is to achieve productivity enhancements and average selling prices increases. Uncertainties in some of our key regions continued to play pressure on our business. We’re monitoring trends in Europe, including the continuing impact of Brexit and the rising corporate debt in China. On Slide 6, moving onto operational trends, let’s start by comparing consolidated year-over-year and sequential results. The company’s overall book-to-bill was 0.98 in the third quarter of 2016, compared to 0.97 in the third quarter last year, and 0.98 in the second quarter of 2016. Total orders for the third quarter of 2016 were $53.2 million, down $2.5 million, or 4.4% from $55.7 million in the third quarter last year, and down $3.3 million, or 5.9% from $56.5 million in the second quarter of 2016. On Slide 7, some details on our reporting segment. The Foil Technology Product segment had the book-to-bill ratio of 0.99 for the third quarter of 2016, compared to 0.90 for the third quarter of 2015 and 1.01 for the second quarter of 2016. Sequentially orders decreased by $2.0 million, or 7.9% from the second quarter of 2016, primarily in the Americas and Europe. The decrease is mainly in the Stress Analysis Gages, which are used in the oil and gas and in precision agriculture applications, which are order driven. The reduction in foil resistors compared to Q2 of 2016 is mainly due to seasonality of the business. The Foil Technology Products adjusted gross profit margin was 36.4% for Q3, down from 42.0% in Q3 last year and down from 37.0% in the second quarter of 2016. The FTP adjusted gross profit margin decreased from the comparable prior year period was due primarily to $2.5 million of lower volume for Micro-measurement products in the test and measurements and force measurements and market in the Americas and Europe. The sequential adjusted gross profit margin decreased from the 2016 second quarter period was due primarily to 0.8 million of lower volume for Micro-measurement products in the avionics, military and space and in the test and measurements end markets mainly in the Americas. The FTP segment backlog was 3.0 months compared to 2.6 months last year and 2.8 months in the prior quarter. Looking at the Force Sensors segment, the book-to-bill ratio was 1.02 for Q3 compared to 1.03 in the third quarter last year and 0.97 for the second quarter of 2016. Sequential orders increased by 0.7 million, or 4.5% mainly from the Americas construction OEM customers, offset by Europe’s medical customers. The adjusted gross profit margin for the segment was 31.0% in the third quarter of 2016 versus 21.0% in the third quarter of 2015 and 29.0% in the second quarter of 2016. The adjusted gross profit margin increased from the comparable prior-year period is primarily due to 0.6 million related to increased volume in the Americas related to OEM constructions and 0.8 million in savings from cost reduction programs. The sequential gross profit margin increase is due to 0.3 million of favorable volume product mix. The Force Sensors segment backlog was 2.4 months compared to 2.4 months in prior year period and 2.3 months in Q2 of 2016. For the Weighing and Control systems system the book-to-bill ratio was 0.92 for Q3 compared to 1.05 in the third quarter last year and 0.94 for the second quarter. Sequentially, orders decreased by $2.0 million, or 12.4%, mainly in the Americas due to steel and in Europe due to onboard weighing. The adjusted gross profit margin for the segment was 44.9% in the third quarter of 2016 versus 45.4% in the third quarter of 2015 and 45.6% in the second quarter of 2016. The Weighing and Control system adjusted gross profit margin decreased from the comparable prior year period was due primarily to a negative impact of foreign exchange rate of 0.2 million. Sequentially, adjusted gross profit margin decreased due to $1.1 million of lower volume in steel and onboard weighing in Europe. The Weighing and Control systems backlog was 2.9 months compared to 3.3 month in last year’s third quarter and 2.8 months in the second quarter. On Slide 8, based on actions taken to-date, we are expecting to see improved performance. We have realized $5.6 million of savings in the first nine months of the year and we expect to achieve our $6.7 million in savings this fiscal year. In light of the global economic conditions, the continued strength of the U.S. dollar compared to other currencies, we expect net revenues in the range of $55 million to $60 million for the fourth quarter of 2016. We are updating our expectations for the fiscal year 2016 adjusted diluted earnings per share to be in the range of 70% to 75% at constant exchange rates as of the third quarter of 2016. With that, I’d like to open the lines for questions. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from John Franzreb with Sidoti & Company. Please go ahead.

Good morning, everybody.

Good morning.

Good morning, John. ‘

I’d like to open up with the current revenue trends. It seems like a little bit lower than – do you expect it, say, six months ago, as Ziv kind of highlighted the continued weakness we see in the steel market. Is there anything else that you can call out that’s kind of surprised you that it was softer than you expected going into year end?

Okay. As we look into the year-end, there are few, I would say, there are few points that we have to look at. First, in regards to this specific quarter, we did report a fairly as – and as I indicated in prior earnings calls, there are two – there are mainly two product lines, which are end-user project driven. One is Pacific Instruments and the other one is the steel KELK business. For Q3, we have realized lower revenues and we do expect to see a certain, I would say, a certain recovery or higher revenues for Q4 based on the existing Q. Overall, in regards to the business environment, I think that I would like to emphasize that the – onboard weighing business in Europe has been affected quite heavily by the July Brexit announcement. I think that in essence, the construction business in the UK was almost standing still for two months and it did affect our revenues for the second quarter in regards to onboard weighing, at least, at the level of $500,000. In regards to the steel and the oil and gas, I don’t think that at this point in time, we have any indications regarding a real recovery. But there are signs that our mainly oil and gas customers have been depleting our stock for the last nine months and they’re ready to place orders despite the fact that it might be on the lower level, but they’re ready to place orders, which they didn’t do for the last three quarter in the, I would say, in the – in coming weeks. All in all, in regards to Micro-measurements, where we have seen a large volume decline, this is due to, one factor is stock adjustments at OEM customers and having less end-user project-driven mainly in the United States.

Okay, got it. And in regards to Force Sensors, the good margin profile you attributed some of the restructurings, but I’m also curious about the product that you attributed to product mix. I know you can try to gravitate more towards an OEM…

Exactly.

…type sale. How much of that benefit was that mix and where do we stand today relative to your 70-30 target?

Well, the 70-30 target is still further along. But as I indicated and we have been discussing that, there’s a significant cost savings coming from the restructuring and the consolidation of manufacturing. But also in this particular quarter, we have seen and we have reported a favorable product mix coming more form OEM value-added product vis-à-vis precision weighing semi-commodity product. I think that all in all, this effect did contribute for this specific quarter around couple of hundreds of thousands due to a favorable product mix.

Okay, great.

I would like to also add that we have seen a recovery in – we have – I’ve been reporting an increase in the United States and in the OEM construction business. And this is a very large, I would say, a very large deal that our U.S. customers has won in Asia, and this is why we do see an uptick in the demand.

Perfect. And regarding the strategic alternative cost that you took in the quarter, can you just talk to what led you to the decision to go down that avenue if you’re not going to give us any color on what you’re looking to do, but this – what started the process?

John, at this point in time, I think, we’re now – I’ve mentioned, we’re not going to comment or disclose any developments regarding this process until we have further information.

Okay. How about – do you expect to incur the costs again in the current quarter or in the December quarter?

John, unfortunately, I cannot comment as to the continuation of this process.

Okay. I’ll just – I’ll get back in the queue for now. Thank you, Bill.

All right. Thank you.

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

Yes. Good morning, guys, and thanks for taking my question here.

Good morning, Sarkis.

Good morning, Sarkis.

Yes. So with regards to just restructuring costs and initiatives, it seems like you’re nicely on the way with what you had communicated earlier. Do you see any room for additional costs out or cost areas that you can attack few or further increase margins?

Yes, absolutely. So far I can talk only regarding what we have announced, because there are some social plans and people, which are involved in the growth of the restructuring. But so far the restructurings have been in regard to the closure of the Beijing facility. Our Beijing facility for Force Sensors, we have reported also in the last quarter of selling the current – these early facility for Four Sensors, which we had a very low, I would say, utilization in regards to the space vis-à-vis the headcount. W are planning more restructuring programs to be realized by year end, which should show more cost savings for next year. And for next year itself, we are expecting more cost reduction programs, which should realize, I would say, much more money beyond what we have reported this year. But at this point, unfortunately, I cannot discuss may be just one more point that this was part of the restructuring that has been completed in Q3. All the operational – the Weighing and Control System operational team that has been residing in California has been consolidating by the end of the third quarter this year to the Stress-Tek operation in Seattle. So by now, all the WCS operations in the United States are in Seattle. This is also part of the cost savings program.

Good. That’s helpful. And so I presume you have more details as we kind of wrap up Q4 here and you’d communicate additional measures that you’d undertake, is that correct?

This is absolutely correct.

Okay. Thank you, I’ll hop back in.

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.

Okay, thank you very much and everybody I thank you for joining us on our earnings call today, and we look forward to talking to you and everybody else in the near future. Thank you very much.

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