Vishay Precision Group, Inc. (VPG) Q1 2017 Earnings Report, Transcript and Summary

Good day and welcome to the VPG Q1 Fiscal 2017 Earnings Conference Call. [Operator Instructions] Please note this call is not recorded. I would now like to turn the conference call over to Ms. Reynee Tung. Ms. Tung, the floor is yours, ma’am.

Thank you, operator. Good morning, everyone. Welcome to VPG’s 2017 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 all should have received the earnings press release and we hope you have 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 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 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 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, 2016 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, Renyee. 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 solid first quarter of 2017, with revenues of $59.8 million, diluted earnings per share $0.15, adjusted net earnings of $0.19 per diluted share, cash generated from operations of $2.9 million and a book-to-bill of 1.06, an indication of an improved business environment. On Slide 4, we raised first quarter revenues by 5.6% to $59.8 million, up $3.2 million compared to $56.6 million of revenues in the prior year period. The negative impact of foreign exchange rates to revenues for the quarter was $1.1 million. Our adjusted gross profit margin increased to 37.7% in comparison to 35.4% in the first quarter of 2016. The increase in adjusted gross profit of $2.4 million for the first quarter of 2017, in comparison to the first quarter of 2016 is attributable to increase in volumes of $2.9 million, which includes $600,000 related to the specific instruments acquisition and also $500,000 in cost savings from our previously announced cost reduction programs offset by a negative exchange rate impact of $600,000 and a reduction in inventory of $300,000. Selling, general and administrative expenses for the quarter were $18.2 million or 30.5% of revenues as compared to $18 million or 31.9% for last year’s first quarter. The improvement in SG&A as a percentage of revenues is primarily a result of our successful cost reduction initiatives. The increase in dollars is related to the $600,000 in additional compensation and other expenses resulting from the acquisition of Pacific Instruments and also $300,000 related to wage increases partially offset by cost savings mainly in the form of headcount reductions of $600,000. Looking at the operating income on an adjusted basis, you can see that our margin has doubled to 7.2% as compared to 3.6% in the first quarter last year. Adjusted net earnings attributable to VPG’s stockholders for the quarter was $2.5 million or $0.19 per diluted share compared to $1.7 million or $0.13 per diluted share in the first quarter of 2016. Foreign currency exchange rates for the first quarter of 2017 as compared to the prior year had a negative impact on net income of $900,000 or $0.07 per diluted share. The foreign currency exchange rates for the first quarter of ‘17 as compared to the fourth quarter of 2016 had a negative impact on net income of $500,000 or $0.04 per diluted share. Total free cash flow was $1.1 million for the first quarter of 2017 as compared to a negative $1.4 million for the first quarter of 2016. We define total free cash flow as net of cash generated from operations, which was $2.9 million for the first quarter of 2017 less capital expenditures, which were $2 million for the first quarter of 2016, net of proceeds in the sale of assets, which were $200,000 in the first quarter of 2017. Our GAAP tax rate for three fiscal months ended April 1, 2017 was 32.4%. For the 2017 fiscal year, we expect our operational tax rate to be in the range of 28% to 30%. On Slide 5, our strategy is to drive growth both organically and through acquisition enabling us to make good progress on the first quarter of top line. Driving efficiencies and reducing costs helped us to double our adjusted operating margin relative to last year. We remain focused on execution and with an improved business environment, we are confident that we can achieve the milestones on Slide 5 of mid to single-digit sales growth, gross margin of 40% and adjusted operating margin of 10% within 3 years. With that, let me pass further comments on to Ziv.

Thank you, Bill. We are pleased to see healthy trends continuing some important end markets for our business. I note steel, aerospace and defense and oil and gas in particular. The World Steel Association expects that steel demand will increase in 2017 by 1.3% versus 2016. Recovery is expected in the developed economies and acceleration in growth is expected in the emerging and developing economies. However, China which accounts for 45% of global steel demand is expected to return to a more subdued growth rate after its recent short uplift. For this reason, the overall growth momentum will remain modest. The word steel production in Q1 of 2017 is up 5.7% compared to the same period in 2016. Asia is up 5.4%, EU is up by 3.8% and North America is up by 7.1%, rest of the word is up by 4.0%. The global aerospace and defense sector is likely to experience stronger growth in 2017, but at a modest rate. The commercial aerospace sub-sector revenues see a marginal increase of 0.3% in 2017 versus 2016 while the increase in travel demand is driven by Asia and Middle East due to global demographics and wealth creation resulting in a significant order increase for new aircrafts. The defense sub-sector revenues are likely to grow much faster at 3.2% in 2017, versus 2016, in the U.S., supported by the new administration after a multi-year decline in defense budgets. The European aerospace and defense sector is expected to record a 2.5% year-over-year increase in revenues. The new administration is expected to be generally more favorable to the U.S. oil and gas industry as a whole, including less invasive regulations and general increase in fossil fuel investment. The U.S. oil and gas markets are expected to see significant growth over the next several years, driven by resurgence of capital investments by exploration and production companies on average because of all better commodity prices in 2017, capital spending budget is expected to be up by 50% to 100% relative to 2016. Natural gas prices are expected to remain weak driven by significant production growth in the new U.S. shale plays with limit demand and long lead times for major exports. On Slide 6, the company’s overall book to bill was $1.06 million in the first quarter of 2017, compared to $1.03 million in the first quarter last year and $1.16 million in the fourth quarter of 2016. We believe this represents a general improved business environment as well as our own good execution. Total orders for the first quarter of 2017 were $63.5 million, an increase of $4.9 million or 8.4% from $58.6 million in the first quarter last year last and a decrease of $1.0 million or 1.5% from $64.5 million in the fourth quarter of 2016. On Slide 7, some details on our reporting segment. The Foil Technology Products segment had the book to bill ratio of 1.06 for the first quarter of 2017, compared to 0.98 for the first quarter of 2016 and 1.26 for the fourth quarter of 2016. Sequentially, orders decreased by $2.5 million or 7.8% from the fourth quarter of 2016, primarily in Asia and the Americas. The decrease of orders in the America is predominantly in the avionic, military and space market coming from Pacific Instruments. The decrease of orders in Asia is coming from the test and measurement markets. The decreasing orders is attributable to the normal ebb and flow of the timing of project related works primarily in the U.S. for avionic, military and space and in Asia for the test and measurements markets. The underlying orders for non-project business are stable. The FTP adjusted gross profit margin was 41.4% for Q1, down from 42.3% in Q1 last year and up from 40.8% in the fourth quarter of 2016. The FTP adjusted gross profit increased of $400,000 from the comparable prior year period was due to increasing volume of $1.2 million mainly from foil resistors products in the test and measurements markets in Asia offset by $500,000 negative impact of foreign currencies and $0.3 million of inventory reductions. The sequential adjusted gross profit margin increased from the 2016 fourth quarter period by $1.2 million was due to the increase in volume of $1.5 million, mainly from foil resistors products in the test and measurements market in Europe and in Asia offset by $200,000 in inventory reductions. The FTP segment backlog was 3.4 months compared to 2.6 months last year and 3.4 months in the prior quarter. Looking at Force Sensors segment, the book to bill ratio was 1.06 for Q1 compared to 1.06 in the first quarter of last year and 1.08 for the fourth quarter of 2016. Sequential orders increased by $500,000 or 3.1% primarily related to Asia. The increase is mainly from Asia’s OEM customers in the precision weighing markets. The adjusted gross profit margin for the segment improved to 23.9% in the first quarter of 2017, versus 18.4% in the first quarter of 2016 and 25.3% in the fourth quarter of 2016. The adjusted gross profit increased of $1.0 million from the comparable prior year period is primarily due to the increasing volume of $400,000 related to OEM customers in the precision agriculture and construction end markets in the America and $600,000 in cost savings from our previously announced cost reduction programs. Sequentially, the adjusted gross profit was lower despite an increasing volume of $500,000 in the first quarter of 2017, offset by a production ramp up in related manufacturing costs of $500,000. The Force Sensors segment backlog was 2.7 months compared to 2.5 months in the prior year and 2.6 months in Q4 of 2016. For the Weighing and Control Systems segment the book to bill ratio was 1.06 for Q1 compared to 1.11 in the first quarter last year and 1.05 for the fourth quarter, sequentially orders increased by $1.0 million or 6.2% across all regions with the largest increase of $700,000 in Europe. The increase is mainly due to onboard weighing products. The adjusted gross profit margin for the segment was 44.3% in the first quarter of 2017 versus 40.2% in the first quarter of 2016 and 46.5% in the fourth quarter of 2016. The Weighing and Control Systems adjusted gross profit margin increased of $1.1 million from the comparable prior year was due to the increase in volume primarily related to the steel markets in Asia and favorable product mix of $1.1 million. The gross margin reduction from the fourth quarter of 2016 is attributable to a volume increase in the onboard weighing production line offset by an unfavorable product mix and to a lesser extent a reduction in inventory. The Weighing and Control Systems backlog was 2.9 months compared to 3.3 months in last year first quarter and 2.9 months in the fourth quarter. I would like to mention two additional highlights that have been completed at the end of first quarter of 2017. The first highlight is our completion of the Micro-Measurements instruments in Wendell, North Carolina relocation to our Pacific Instruments facility in Concord, California. The second highlight is our successful completion of an ELP implementation at our major UK facility for Force Sensors and Micro-Measurements product lines. On Slide 8, in light of an improved business environment and at constant first quarter 2017 exchange rates, we expect net revenues in the range of $58 million to $63 million for the second quarter of 2017. With that, let’s open the lines for questions. Thank you.

Thank you, sir. [Operator Instructions] The first question we have comes from Sarkis Sherbetchyan of B. Riley & Company. Please go ahead.

Yes, good morning.

Good morning, Sarkis.

Good morning, Sarkis.

So first on the revenue guidance here, pretty nice range $58 million to $63 million. If I look at book-to-bill ratios for each of the segments, it seems like it’s fairly even for each at $1.06. Can you maybe talk about the puts and takes for revenues heading into Q2 here?

Yes. Regarding the revenues projection for the second quarter, reviewing the book-to-bill by product line, there are two types of business, the one which are project driven like Pacific Instruments like steel and the ongoing OEM. So on one hand we have identified that there are projects that we have recorded revenues in Q1 and in Q2 based on the cycle we should have less revenues and this – we will continue to record revenues in Q3. Also we have – and regarding most of the OEMs, we should expect to see higher revenues. I think it’s important also to state that in the second quarter, we have less working days in either close to, I would say close to 10% less working days, which predominantly impacts revenues in the FTP product line in the second quarter vis-à-vis the first quarter.

Understood. And can you maybe help me understand some of the gross margins items for each of the business segments. Obviously, given the amount of cost savings initiatives you have kind of deployed underway. Maybe if we can talk about the expectations for gross margins in each of the divisions?

Sure. If we are looking at the first reporting segment at FTP, we have reported over 40% gross margin based on existing revenues run-rate and the expectation is that we are going to increase the revenues and improve efficiencies. We should expect to see at least the similar level of gross margin if not higher going into the coming quarters. In FTP, we have a situation whereby we already reached the 30% couple of quarters ago. We already reached the 30% gross margin mark. And this in Q1, we had despite the increase in revenues we have recorded lower margin. The main reason for that is production ramp up costs mainly in India, the ELP implementation, which also there was, I would say, a significant expense went for the implementation and the fact that there were some inefficiencies related to that. I would say that with the similar revenue, we should expect to see Force Sensors going back to the 30% gross margins levels. In the case of WCS, it’s really more of a product mix between – in the WCS we have three sub-sectors. We have steel on-board weighing and process weighing. Steel has the highest margin followed by process weighing and on on-board weighing at the lowest level. So, at the end of the day given a constant volume, the gross margin level is a result of a certain sub-sector revenue mix.

Certainly helpful and understood there. I guess, one for me, you spend quite a bit of time this time around highlighting the steel recovery in the end-markets there as well as it sounds like some positive commentary on the oil and gas end market. Can you maybe shed some light as to what you are seeing in your business?

Yes. In regards to steel, we have seen a certain recovery and we do expect to have higher revenues as a result of that. In prior years most of the project we have been working on in the steel market were retrofit, were aftermarkets. This is the first year. We see some more significant investment, not necessarily in China, but in other countries like India, U.S., which we are involved in Greenfield projects which are by nature much larger projects of putting new infrastructure. So, we should expect as I indicated before, not a significant increase in business based on the environment, but an improved business environment, which would result in a much – in higher revenues for us. In terms of oil and gas based on the oil and gas prices and based on the current administration policy during the last few years, most of our oil and gas customers has depleted their inventory levels and went with a very, very low level of inventory just for maintenance cost. At this point in time since oil prices are now at $50 per barrel vis-à-vis $27 a year ago and the expectation is that they will stay at that range in addition to the fact that OPEC has signed an agreement to limit the production output. We have – due to that – the result of that we have seen – we have started to see orders coming on the sensor and the component side in the oil and gas for the OEM customers while building new equipment. We have not seen yet the larger order on the end users for complete systems, which are more related to our WCS. I do believe that as the trend – as the environment improves, we should expect to see also more capital investments, therefore we should see more business coming also on our systems and subsystems for the oil and gas end user customers.

Thanks for that. I will hop back in the queue.

[Operator Instructions] The next questioner we have will come from John Franzreb of Sidoti.

Good morning, guys. Can you just kind of look at things on a geographic basis for me and tell me if you are seeing any meaningful differences in your order trends based on geography?

Okay. Regarding geography, it’s important to state that historically and currently VPG higher revenues are coming from Europe and the United States. The fact that I have been discussing and providing much more color regarding Asia is that especially in regards to FTP, we have major EMS customers, content manufacturers who are buying components for U.S. companies, but the order is being placed in Asia. So all of our components and sensors which are sold into the semiconductor industry for automatic testing equipment front end and back end, the sourcing is done in Asia by those EMS. So we have seen the POA in Asia, but those are for U.S. customers. In regards to the Asian improvements in semiconductors, we do have also our Japanese subsidiary which sees an improved business environment for their Japanese customer base in semiconductor testing equipment.

Okay. And which is the demand profile been like in Europe overall?

In Europe, we have seen improvements, which I have reported mainly in the UK due to the improved economy mainly for onboard weighing and this is part of the WCS segment, so we have seen an improved business environment. In regards to FTP, also avionic, military and space, we have seen similar to the U.S. higher budgets have been allowed for some major countries and much more – and more resources have been spent for building more military and defense equipment. We have seen also better environment in Europe and generally for some of our weighing applications.

On the onboard weighing in the UK could that be some of the orders that were deferred from a year ago due to Brexit or the [indiscernible] a few quarters ago due to Brexit…?

Yes. There is a portion of that which is a little bit how to put our hands around that which we have seen a drop when the Brexit has been announced, I think that the atmosphere and the environment is much more friendly and they are now – and there is much less concern of releasing new projects, yes.

Okay, alright, got it. And I have been driven back and forth to conference calls, so if you have addressed to this already, I apologize. But there was a big jump in revenue and for technology, FTP, $1.1 million was attributed to specific in the quarter, could you just give me a frame of reference how much Pacific was last quarter and what’s driving that revenue increase, because I might have missed that?

Yes, it is true.

John, you are talking about fourth quarter of 2016?

Yes, because you don’t have them a year ago, right?

Yes. It was about $2.1 million, $2.2 million for Pacific in the fourth quarter.

It was $2.2 million and this quarter we may have reported $1.1 million.

That means it was a real big jump in organic at FTP, what was the driver there?

Okay. In Pacific the dynamic is pretty different it is very similar [indiscernible] this is a project driven business. We are working with all the major, as you know Pacific is exclusively avionic, military and space end market, predominantly in the U.S. We have some business in Asia, but it’s predominantly in the U.S. Those are multi-million dollar projects that we have been working very diligently with our customers. Our customers in general those are our longer term projects and those projects are being delivered based upon agreed schedule. So in that respect, you may see a spiky pattern in regards to revenues and order intake, but this is the nature of the business. I would say it’s very different than the OEM re-treatable business, it’s very similar to KELK. So to that extent, in order to measure the development and the growth, you have to look slightly over the time. And I did indicate I think in the last earnings call that we have seen much more spending, many more projects are being released and we are working with all the major U.S. military manufacturers.

Okay, got it. And one last question on the SG&A line, could you help me kind of understand the better – it seems like you have big numbers in the first half and lower in the second half, if I am using 2016 as a proxy, is there some specific reason to that or can you just provide us some color what’s going on in that line?

Yes. John, I can answer that. I mean what you saw in the third and fourth quarter of 2016, was due to the fact that we had significant reductions and bonus accruals and other compensation accruals. We are more now back on a more normalize level for 2017 and I think the run rate you see that we had in the first quarter, should be the run rate for the rest of the year. Those were unusual one-time reductions that you saw in the second half of the year, but going forward I think for this year, what we saw in the first quarter should be a guidance for the rest of the year.

Okay. Thank you, Bill. I will get back in the queue.

At this time we are showing no further questions. We will go ahead and conclude today’s question-and-answer session. I would like now to hand the conference back over to Mr. Bill Clancy for any closing remarks. Sir?

Thank you. So I appreciate everybody dialing in today. Thanks for your support. And just to let you know that Vishay Precision Group will be presenting at the B. Riley Conference in LA on Wednesday, May 24, and hopefully we will hit a few more conferences throughout this summer. Once again, thank you very much for participating and we look forward to talking to you soon. Thank you.

And we thank you sir and the rest of the management team also for your time today. The conference call is now ended. At this time you may disconnect your lines. Thank you again everyone. Take care and have a great day.