Vishay Precision Group, Inc. (VPG) Q4 2016 Earnings Report, Transcript and Summary

Good day, and welcome to the VPG Fiscal Fourth Quarter Results Conference Call and Webcast. 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 that the event is being recorded. I would now like to turn the conference over to Ms. Renee Tong [ph] of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to VPG’s 2016 year-end 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 that 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 Web site at www.vpgsensors.com. An audio recording will be available on the Internet for a limited time and can be accessed on the VPG Web site. The content of this conference call is owned by VPG and is protected by U.S. and International Copyright Law. You may not make any recordings or other copies of this conference call and you may not reproduce, distribute, adapt, transmit, display, or perform the contents of this conference call in whole or in part without written permission. 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 would like to start by reviewing a few highlights and then summarizing the financials. Following that, Ziv will provide his view of the results and the global business environment. We had a strong fourth quarter of 2016 with adjusted net earnings of $0.26 per diluted share, cash generated from operations of 4.9 million and free cash flow of 4.7 million. Our fourth quarter book-to-bill was 1.16, an indication of an improved business environment. On Slide 4, fourth quarter revenues came in at 55.8 million, down 3.1 million compared to 58.9 million of revenues in the prior year period. The negative impact of foreign exchange rates to revenues for the quarter was $900,000. The adjusted gross profit margin increased to 38.2% as compared to 35.5% in the fourth quarter of 2015. The increase in adjusted gross profit of $400,000 for the fourth quarter of 2016 as compared to the fourth quarter of 2015 is attributable to 800,000 in variable cost savings from operating efficiencies and 800,000 in fixed cost savings from a previously announced cost reduction program, offset by a reduction in volume of 1.3 million. Selling, general and administrative expenses for the quarter was 15.5 million or 27.8% of revenues compared to 16.4 million or 27.8% to last year’s fourth quarter. The decline in SG&A is related to 1.2 million from cost reduction programs, mainly headcount; 800,000 related to a gain on the sale of our Karmiel facility, offset by 1.2 million associated with the acquisitions of Stress-Tek and Pacific Instruments. Looking at operating income on an adjusted basis, you can see that operating income is 9.4%, an increase from 7.7% in the fourth quarter last year. Adjusted net earnings attributable to VPG’s stockholders for the quarter was 3.4 million or $0.26 per diluted share compared to 2.7 million or $0.20 per diluted share in the fourth quarter of 2015. We define total free cash flow by the amount of cash generated from operations which is 4.9 million for the fourth quarter of 2016, an excess of our capital expenditures versus 4.2 million for the fourth quarter of 2016, net of any proceeds from the sale of assets which were 3.9 million in the fourth quarter of 2016. Total free cash flow was $4.7 million for the fourth quarter of 2016 as compared to 6.1 million in the fourth quarter of 2015. Revenues for the year were 224.9 million, down 7.2 million compared to 232.2 million of revenues in the prior year. The negative impact of foreign exchange rates to revenues for the year was 2.8 million. The adjusted gross profit margin increased to 37.1% as compared to 36.4% in the prior year. Selling, general and administrative expenses for the year were 68.9 million or 30.6% of revenues compared to 71.3 million or 30.7% of the prior year revenues. The decline in SG&A is related to 3.2 million from cost reduction programs, mainly headcount; 1.1 million for travel and commission savings; 800,000 for positive exchange rates; 800,000 related to the gain on the sale of the Karmiel facility; reduction of professional fees of 1 million; incentive compensation reduction of 1.1 million; offset by 4.2 million of cost associated with the acquisitions of Stress-Tek and Pacific Instruments; and 1.3 million related to the strategic alternative evaluation. Included with that SG&A for 2016, as mentioned, was 1.3 million of cost associated with the company’s evaluation of strategic alternatives. The evaluation process did not result in the adoption of any particular strategic alternative other than the company’s continued execution of its business plans. It is not expected that the cost associated with the evaluation which consisted principally of professional fees will be continuing at this time. We have excluded these costs in the reconciliation of diluted earnings per share. We will not be commenting further on the evaluation process. Operating income on an adjusted basis for the year was 6.7%, which is an increase from 5.7% for the prior year period. Adjusted net earnings attributable to VPG’s stockholders for the year were 9.9 million or $0.74 per diluted share compared to 7.7 million or $0.57 per diluted share for the comparable prior year period. A GAAP tax rate for the year ended December 31, 2016 was 33.3%. For the 2016 fiscal year, the operational tax rate was 28%. 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 and reducing costs. With focus on execution and with an improved business environment, 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. Good morning, everyone. We continue to monitor the global steel demand, which we estimate to increase year-over-year by 1.2% in 2017. China was able to achieve its capacity reduction target of 45 million tons as early as October 2016 and intends to cut between 100 million to 150 million tons by 2020. Supply restrictions in China and higher cost support strengthened global steel prices, so we estimate steel output in the USA to increase 2.9% in 2017. The total imports of steel producers are down 17% due to a number of grade measures by the U.S. to safeguard the domestic market industry from unfairly graded imports in the region. We also see an improved development in both civil aero and in defense at the start of 2017 in both Europe and the USA. On Slide 6, 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 1.16 in the fourth quarter of 2016 compared to 0.95 in the fourth quarter last year and 0.98 in the third quarter of 2016. Total orders for the fourth quarter of 2016 were 64.5 million, an increase of 8.3 million or 14.9% from 56.2 million in the fourth quarter of last year and an increase of 11.3 million or 21.8% from 58.2 million in the third quarter of 2016. On Slide 7, some details on our reporting segments. The Foil Technology Products segment had the book-to-bill ratio of 1.26 for the fourth quarter of 2016 compared to 0.97 for the fourth quarter of 2015 and 0.99 for the third quarter of 2016. Sequentially, orders increased by 8.5 million or 36.8% from the third quarter of 2016 across all regions with the largest increase in Asia and in the Americas. The increase of orders in the Americas is predominately in the avionics, military and space markets coming from Pacific Instruments. The increase of orders in Asia is coming from the test and measurements market. The FTP adjusted gross profit margin was 40.8% for Q4, up from 36.5% in Q4 last year and up from 36.4% in the third quarter of 2016. The FTP adjusted gross profit increased by 700,000 from the comparable prior year period was due to 500,000 in variable cost savings coming from operating efficiencies and 500,000 from fixed cost savings from our previously announced cost reduction programs, offset by lower volume of 500,000 mainly for Micro-measurement products in the test and measurements and force measurements end markets in the Americas and Europe. The sequential adjusted gross profit margin increased from the 2016 third quarter period by1.7 million and was due primarily to higher volume for Micro-measurement Pacific Instruments products of 700,000 in the avionics, military and space markets, mainly in the Americas, in addition to 800,000 in variable cost savings from operating efficiencies mainly at Pacific Instruments. The FTP segment backlog was 3.4 months compared to 2.6 months last year and 3.0 months in the prior quarter. Looking at the Force Sensors segment, the book-to-bill ratio was 1.08 for Q4 compared to 1.00 in the fourth quarter last year and 1.02 for the third quarter of 2016. Sequential orders increased by 400,000 or 2.8% primarily related to Europe. The increase is mainly from Europe’s OEM customers in the precision weighing markets. The adjusted gross profit margin for the segment was 25.8% in the fourth quarter of 2016 versus 20.2% in the fourth quarter of 2015 and 31.0% in the third quarter of 2016. The adjusted gross profit increase of 600,000 from the comparable prior-year period is primarily due to 300,000 in variable cost savings from operating efficiencies and 200,000 in fixed cost savings from our previously announced cost reduction programs. The sequential gross profit margin decline of 1 million was due to decrease of 400,000 in volume and product mix, 400,000 reduction in inventory and 200,000 of operating inefficiencies due to the closing of our Tianjin machining operations in Q4. The Force Sensors segment backlog was 2.6 months compared to 2.2 months in prior year period and 2.4 months in Q3 of 2016. For the Weighing and Control Systems segment, the book-to-bill ratio was 1.05 for Q4 compared to 0.89 in the fourth quarter last year and 0.92 for the third quarter. Sequentially, orders increased 2.3 million or 16.6% across all regions with the largest increase of 1.3 million in Asia. The increase is mainly due to steel. The adjusted gross profit margin for the segment was 46.5% in the fourth quarter of 2016 versus 47.8% in the fourth quarter of 2015 and 44.9% in the third quarter of 2016. The Weighing and Control Systems adjusted gross profit margin decreased from the comparable prior year period of 800,000 due to the decline of 2.8 million in volume across all regions and across all product lines, offset by 1.9 million of revenues from the Stress-Tek acquisition. Sequentially, the adjusted gross profit margin increase of 400,000 was primarily due to volume in Europe and Asia, primarily in the process weighing and the steel market. The Weighing and Control Systems backlog was 2.9 months compared to 2.6 months in last year’s fourth quarter and 2.9 months in the third quarter. On Slide 8, based on actions taken to-date regarding the announced cost reductions planned in November of 2015 and in March 2016, we have realized 7.3 million in savings in the 12 months of 2016 exceeding our expectation of 6.7 million savings this fiscal year. In light of the global economic conditions and at the constant fourth quarter exchange rate, we expect net revenues in the range of 55 million to 60 million for the first quarter of 2017. With that, let’s open the lines for questions. Thank you.

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

Good morning, guys.

Good morning.

Good morning, John.

I’d like to start where you just finished, Ziv. You’ve realized more unexpected on the cost saving absence. Are you now completed with all the actions or there’s still more that you have planned or that you’re still working on at this point?

Okay. Regarding the cost reductions, as some of the cost reduction measures has been taken in the middle of the year on an annual – on a full year basis we should expect the 2016 initiatives to fall into 2017 at the level of 1.7 million based on prior actions and there are more cost reduction programs that has been put in place into 2017 and onwards in order to continue the consolidation and improvement of the efficiencies within the organization. So there will be more to come.

Okay, got it. And on the book-to-bill of 1.16, it seems to be two things. One that the Foil Technology, it looks like you have some orders that are breathing [ph] from Q1 into Q2 but those just seem like the first time since having really good book-to-bill. Can you talk about why it was such a strong book-to-bill? Your revenue outlook doesn’t kind of reflect that [indiscernible] projects. Can you just address the disconnect there?

Sure. That’s an excellent question, John. Let’s start with FTP. The FTP book-to-bill ratio was very, very strong. In fact, we are seeing about 36.3% which is equivalent to 8.5 million. In regards to the resistor side, we have seen very dramatic increase in demand, especially from the automatic testing equipment in Asia and we have seen in Q4 some key customers have placed semiannual orders and some of them may even move into Q3. So the fact that we have received large orders with casual deliveries beyond the first quarter dictated the fact that there will be a spill off of revenues beyond Q1. In regards to Micro-measurement, the orders has been driven mainly by the avionics, military and space in the United States, predominately Pacific Instruments. And over there we have also identified projects to be delivered beyond Q1. Regarding Force Sensors, you’re absolutely correct. The book-to-bill is 1.08, again two large orders from two large customers in Europe which we know that those deliveries would be scheduled beyond Q1. Therefore, based upon the information and scheduled deliveries, we kept the guidance similar to Q4 but the fact is that we do see an improved business environment all-in-all.

Okay. The last thing you said, I want to touch on this. Especially on the resistor [ph] market, is it that there are – is the customer base carrying much inventory in the past and that’s why they – and assuming a better environment, that’s why they have an improved confidence level in booking beyond the first quarter. Can you just talk to that a little bit?

The information we have is really the demand is driven by EMS, by contract manufacturer and they are providing to their OEMs which are manufacturing testing equipment for IC, for chip memory testing. Therefore, the information we have received from our customers is that it’s not a matter of inventory adjustments, it’s a matter that there is an improvement to demand recovery for those products for testing of ICs. So they’re all building [ph] inventories through demand.

That’s great to hear. And one last thing and I’m going to get back into queue. You touched on it just a second ago about your guidance. You switched back to a revenue-only guidance. A year ago this time you gave revenue and for your EPS. Can you just walk us through why you switched – reverting back to the old way and why do you have lack of confidence maybe in providing EPS guidance now?

Sure. As you know last year for the first time, we tried and moved to slightly a different setup providing annual guidance. Based on the discussion that we had with very large holders and the fact that our visibility into the future regarding the backlog is around one quarter, the contenders between the large shareholder and the visibility that providing them with a full year EPS guidance is not provides much value added; therefore, we moved back to the concept that we have been using to 2016, which is on a quarterly basis.

Well, Ziv, then why don’t you provide EPS guidance just for one quarter ahead I guess?

We may consider doing that, John. But at this point this was not the main – based on the discussions we had, the information that the company wanted to receive from us was what we have been providing. But John, we might do that. We will have to consider that.

Okay. Fair enough, guys. Thank you. I’ll get back into queue.

Thank you.

The next questioner today is Sarkis Sherbetchyan with B. Riley & Co. Please go ahead.

Good morning, guys.

Good morning.

Good morning, Sarkis.

So I’m going to have to ask on this one, so the strategic alternatives process, obviously it sounds like it’s concluded. I think everyone on the call would appreciate some color around the process, so maybe if there were more than one interested party, if there was a disagreement on price. And then separately what inspires confidence in the Board and the management to just kind of go forward from a standalone business standpoint, right, and scale the business from this point forward? Thank you.

Sarkis, like I mentioned on the call we explained the process and at this point in time, I’m not going to be commenting any further on the process or any other information. What I prepared and what we’ve read and discussed is all we’re going to talk about today.

Okay. I had to ask because I’m sure most would appreciate some additional color. And then with regards to the book-to-bill as the previous caller asked, it sounds like it’s up nicely here. Do you see something that’s changed from a macro perspective that’s kind of lending to the acceleration in the business? And also do you see that continuing with the information you have today?

Sure. From a macro perspective, we do see an improved environment in regards to avionics, military and space. We see higher budgets for defense companies, mainly in Europe and in the U.S. and we see the demand by placing much higher orders. And we do expect that this will continue into 2017. At this point in time we did not see much more demand in regards to the oil and gas customers. We have identified that they have depleted their inventory to a low level, so would expect them to start placing orders not to – unfortunately not to the same level as the pre-recession but we will start to see some demand while we have not seen any demand in 2016. We also see an improved environment in regards to steel. We still don’t know and it will be very hard to guess how much it would result in regards to demand. But in that respect, we do see that. The fact that we had I have to say we – also in regards to onboard, we did have a good run for the first half of 2016. Unfortunately, when the Brexit had been announced there was a very, very sharp decline. This effect has been fading away going into 2017 and we do expect and we do see some recovery in the UK mainly for our onboard wins.

Understood. And then with respect to the mix perspective, just what you’re seeing in your book-to-bill? Do you see the mix accelerating the gross profit and expansion here or do you see that more of a function of the cost initiatives that you’ve outlined?

Okay. Historically, the highest gross margin segments were FTP and WCS and despite the significant improvements we made at Force Sensors, FTP and WCS are the leading. And the fact that the book-to-bill ratios are much higher and much more significant and those ratios should provide us with a more favorable mix which should affect the results going further into the following quarter in 2017. So you’re correct, we should see some positive mix effect due to the nature of the demand coming from FTP and WCS.

Correct. And I’m just trying to understand, right, given all the cost actions that we’ve seen come out of the business in those segments and the acceleration of the business. It sounds you may be on track to deliver some impressive gross profit contribution from those segments. Is that the right way to think about it?

I think that you’re absolutely correct, as we would have revenues to increase, the cost reduction that has been delivered should provide us with a much higher return, which means higher margins going into the future. But we would just have to get the revenues of course.

Understood. I’ll hop back in. Thank you.

Thank you.

Our next questioner today is Wes Cummins with Nokomis Capital. Please go ahead.

Hi, guys. Thanks for taking the question. So just following up on Sarkis’ questions on margin, you’ve had some pretty good operating margins in Q4, the cost reductions I assume are coming through. Assuming we have at least stable revenue, should we expect those margins, kind of 10% or better operating margins to continue on the bottom line?

Okay. Wes, let me say that there are two effects coming into 2017. On one hand as I’ve indicated before, we had the cost reductions that has been implemented in 2016 and a carryover of additional 1.7. On the other hand, we have wage increase and inflation offsetting the savings effect. We also have further cost savings going into the gross margin level, but we also believe that we would like to see more R&D and marketing people to support or to enhance organic growth in regard to the Force Sensors. So all-in-all, I would say it would be hard to say if we are going to earn at the same level of revenues given inflation and wage increases, we would cross the – we would reach the double-digit operating margin. But given the fact that we should expect to see some backwind in regards to volume increase due to the macro economy and a further cost reduction, we may be there as revenues should and hopefully will increase.

Okay. And two other quick questions, Ziv, maybe just an update on advanced sensors? And then Ziv or Bill, the CapEx was fairly high in Q4. What should we expect in 2017? Thanks.

Okay. In 2017, since I’ve indicated before that the demand for very large customers has dropped dramatically due to their end user and the fact that now we have capacity in place, the expectation is that the capital investment for advanced sensors moving into 2017 will be extremely limited just to support organic growth but we are not going to go into heavy investment due to the fact that we’ll have the capacity already in place. So it will be very, very limited.

Okay. Thanks.

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

Okay. I appreciate it very much and thanks everybody for dialing in and participating in the call today. Just to let you know that VPG will be presenting at the Sidoti conference at the end of March and at the B. Riley conference at the end of May. And once again, thank you and look forward to talking to you soon. Thank you.

The conference has now concluded. Thank you all for attending today’s presentation. You may now disconnect your lines.