Vishay Precision Group, Inc. (VPG) Q4 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the VPG Full Year and Q4 Fiscal 2017 Earnings Call and Webcast. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Reynee Tung, Investor Relations. Ms. Tung, the floor is yours, ma'am.

Thank you, operator. Good morning, everyone. Welcome to VPG's 2017 fourth 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'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 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, 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, Reynee. 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 2017, with revenues of $69.4 million, adjusted operating margin of 11.1%, diluted earnings per share of $0.33, adjusted net earnings of $0.39 per diluted share and free cash flow of $5.4 million. We're very pleased with this quarterly performance and with our year-end book-to-bill ratio of 1.18, a good indication that the near-term business environment remains robust. On Slide 4. We grew our fourth quarter of 2017 revenues by 24.4% to $69.4 million, up $13.6 million compared to $55.8 million of revenues in the prior year period. The positive impact of foreign exchange rates to revenues for the fourth quarter of 2017 as compared to the prior year period was $1.8 million. We increased our adjusted gross profit margin to 38.6% in comparison to 38.2% in the fourth quarter of 2016. The increase in adjusted gross profit of $5.5 million for the fourth quarter of 2017 as compared to the fourth quarter of 2016 was attributable to the increase in volumes of $6.7 million, partially offset by inventory adjustments of $500,000, an increase in fixed manufacturing cost of $500,000 and $200,000 in wage increases. Selling, general and administrative expenses for the quarter were $19.1 million or 27.5% of revenues as compared to $15.5 million or 27.8% for last year's fourth quarter. The increase of $3.5 million in SG&A expense is related to $1.6 million of incentive compensation increase incurred during Q4 2017 when comparing the fourth quarter of 2017 performance to the fourth quarter 2016 performance. We also had a onetime $800,000 gain on the sale of a building recorded in the fourth quarter of 2016. And also in the fourth quarter of 2017, $400,000 wage increase and $700,000 of negative exchange rate impact. Looking at the operating income on an adjusted basis, you can see that we increased our margin to 11.1% as compared to 9.4% in the fourth quarter last year. We grew adjusted net earnings attributable to VPG stockholders for the quarter to $5.3 million or $0.39 per diluted share compared to $3.4 million or $0.26 per diluted share in the fourth quarter of 2016. Foreign currency exchange rates for the fourth quarter of 2017 as compared to the prior year had a negative impact on net earnings of $700,000 or $0.05 per diluted share. We generated free cash flow of $5.4 million for the fourth quarter of 2017 as compared to $4.7 million for the fourth quarter of 2016. We define free cash flow as the amount of cash generated from operations, which was $7.9 million for the fourth quarter of 2017, less capital expenditures, which was $2.6 million for the fourth quarter of 2017, net of proceeds and sale of assets, which was $100,000 in the fourth quarter of 2017. Our GAAP tax rate for the 12 fiscal months ended December 31, 2017, was 30%. Including the tax expense for the 12 fiscal months ended December 31, 2017, was $1.5 million related to the enactment of the U.S. Tax Cuts and Jobs Act. This tax expense is offset by a foreign currency benefit at a foreign subsidiary that utilizes the U.S. dollar as its functional currency. The operational tax rate for the year was 28%. On Slide 5. Our drive to create efficiencies and reduce cost in addition to an improved business climate has resulted in improved operating performance. We remain focused on the execution of our strategy. With that, let me pass further comments on to Ziv.

Thank you, Bill. An important part of our strategy is to grow by developing new product offerings. A great example of this is our advanced sensor line, which continues to gain traction. We developed this platform as part of our FTP segment a few years ago. It has grown nicely, and we saw its revenues increased approximately 90% in the fourth quarter of 2017 versus 2016 fourth quarter and 62% for the 12 months ended December 31, 2017, as compared to the comparable prior year period. We are pleased with the continued acceptance of this new sensor platform and proud to have provided enhanced performance to customers. We are also pleased to be manufacturing on an efficient platform. Another good example is our innovation in our value-added OEM transducer business in the Force Sensors segment, which has been gaining momentum in the last year. For the fourth quarter of 2017, while still a modestly sized business, its revenues increased by 194% compared to the fourth quarter of 2016 and revenue more than doubled for the 12 months ended December 31, 2017, as compared to the prior year period. We are pleased to see healthy trends continue in some important end markets. For our business, there is optimism evident in most of our major end markets, including steel, aerospace and energy in particular. In the energy sector, the activity levels continue to increase with the strong onshore U.S. rig counts. Expectation -- expectations for 12% to 15% CapEx growth in 2018 in the oil and gas equipment sector gives us ongoing confidence in our related business. We also have confidence in the aerospace and defense sector, which continues to enjoy improved visibility on aircraft production rates, good aftermarket trends and the expectation of a positive term in the U.S. defense spending cycle. With respect to steel, with the broad-based upturn in the global economy, demand growth has been revised up for 2018, also a good indicator for our business. On Slide 6, the company's overall book-to-bill was 1.18 in the fourth quarter of 2017 compared to 1.16 in the fourth quarter last year and 1.12 in the third quarter of 2017. We believe this represents generally sustained business environment as well as our own execution. Total orders for the fourth quarter of 2017 were $81.8 million, an increase of $17.3 million or 26.8% from $64.5 million in the fourth quarter last year and an increase of $11.5 million or 16.3% from $70.3 million in the third quarter of 2017. On Slide 7, some details on our reporting segment. The Foil Technology Product segment had a book-to-bill ratio of 1.36 for the fourth quarter of 2017 compared to 1.26 for the fourth quarter of 2016 and 1.03 for the third quarter of 2017. Sequentially, orders increased by $10.6 million or 35.1% from the third quarter of 2017 across all regions. The increase in the Americas is primarily due to precision resistors in the test and measurements market. For Micro-Measurements, the increase is mainly due to energy and avionics, military and space markets. The increase in Europe is mainly due to precision resistors in the test and measurement and precision weighing market, while the increase of orders in Asia comes from precision resistors in the test and measurement end market and from our advanced sensor products in the force measurement end markets. The FTP adjusted gross profit margin was 39.5% for Q4, down from 40.8% in Q4 of last year and down from 41.9% in the third quarter of 2017. The FTP adjusted gross profit increase of $1.4 million from the comparable prior year period was primarily due to an increase in volume of $2.5 million in all regions. The growth in Asia was primarily within the test and measurements markets via EMF for precision resistors in addition to the force measurement markets for advanced sensor products. The growth in Europe was primarily within the test and measurements market for precision resistors and Micro-Measurements. In America, growth is mainly due to precision resistors in the test and measurements and AMS market. Partially offsetting by the increasing volume was $0.4 million in inventory adjustment, $0.3 million related to manufacturing fixed cost and $0.3 million negative impact of foreign currency. The sequential adjusted gross profit margin decrease of $0.5 million compared to the 2017 third quarter period was mainly due to inventory reduction of $0.7 million, wages and repairs and maintenance of $0.2 million, a negative impact of foreign currency of $0.1 million, partially offset by a volume increase of $0.5 million. The FTP segment backlog was 4.7 months compared to 3.4 months last year and 3.6 months in the prior quarter. Looking at the Force Sensors segment. The book-to-bill ratio was 1.18 for the fourth quarter of 2017 compared to 1.08 in the fourth quarter last year and 1.25 for the third quarter of 2017. Sequentially, orders increased slightly by $0.2 million. The adjusted gross profit margin for the segment was 29.5% in the fourth quarter of 2017, up from 25.3% in the fourth quarter of 2016 and up from 28.6% in the third quarter of 2017. The adjusted gross profit increase of $1.5 million compared to the fourth quarter of last year was directly due to the increase in volume related to OEM customers in the force measurement market in all regions. The OEM customers are mainly in the Americas and in Europe. The adjusted gross profit increase of $0.5 million compared to the third quarter was directly due to an increase in volume related to OEM customers in the force measurement market in the Americas. The Force Sensors segment backlog was 3.7 months compared to 2.6 months in the prior year and 3.3 months in Q3 of 2017. For Weighing and Control Systems segment, the book-to-bill ratio was 0.92 for Q4 compared to 1.05 in the fourth quarter last year and 1.15 for the third quarter. This reflects an extraordinary surge into the steel market, essentially a timing issue that helped our fourth quarter results. Sequentially, orders slightly increased by $0.7 million or 3.4%. The increase in orders is primarily attributable to the process weighing end market in the Americas and an increase in precision weighing product in Europe. The adjusted gross profit margin for the segment was 44.8% in the fourth quarter of 2017 versus 46.5% in the fourth quarter of 2016 and 43.1% in the third quarter of 2017. The Weighing and Control Systems adjusted gross profit margin increased by $2.5 million from the comparable prior year and from the third quarter of 2017 due to an increase in volume within the steel market in Asia and in Europe, in addition to onboard weighing products in the Americas and Europe. The Weighing and Control Systems backlog was 2.8 months compared to 2.9 months in last year's fourth quarter and 4.0 months in the third quarter. On Slide 8. In light of an improved business environment, excluding the cyclical nature of the project-driven end user steel market and the constant fourth quarter fiscal 2017 exchange rates, we expect net revenues in the range of $65 million to $70 million for the first fiscal quarter of 2018. With that, let's open the line for questions. Thank you.

[Operator Instructions]. The first question we have will come from John Franzreb of Sidoti & Company.

Just regarding the fourth quarter results, the adjusted gross margin in FTP of 39.5% was down somewhat meaningfully from what you did in the third quarter at 41.9% despite having higher revenue. Now could you just walk me through what was the impact on FTP on the gross margin profile so it was down so much sequentially?

Yes, John, I can pick that up. In the fourth quarter, we did have some inventory adjustments, both the physicals for our year-end and additional obsolescence that we had recorded in the fourth quarter as compared to the third quarter. All that now should be behind us, but these are the costs that we incurred that we did not have in the third quarter.

Okay. So that should revert back to a north of 40% number in the first quarter?

Yes.

Got it, got it. And regarding the mix, in general, you talked about the lumpiness of steel in weighing and control. Would you expect that the volume benefit that you're getting right now, 65 to 70, it's been quite some time since we've had an outlook like that, would it be enough to offset maybe some of the mix pressure that you're seeing with the absence of a large sale job in Q1? Or was it such an impact of the steel that you're not going to be able to offset it in Q1 versus Q4?

Well, John, since we don't give guidance for profitability regarding Q1, I cannot exactly provide if we would be able to offset. But no doubt that in Q4, the steel effect, due to the fact that we have realized the close to $8 million of revenues, was extremely high regarding the company results. But no doubt that the midpoint is, if you exclude one-time effect, we see an improved, I would say, that we may see higher revenues on the FTP side moving into Q1 while -- with higher-than-average margins.

Okay. And since you've opened this can here, I was actually going to ask you later, but why not go back to providing EPS guidance, Ziv? You did it a couple of years ago, and when things got rough, you pulled it. Things seem much better. Why not do quarter-ahead EPS guidance?

Well, I think that regarding the EPS guidance, we had a discussion with some -- with the sell-side analysts and with some of our shareholders. Given the fact that we have a fairly short visibility regarding the revenues moving into 1 quarter and given the fact that there are many moving parts in regards to the product mix and the exchange rate effect, which we have no effect on, we feel that providing -- we feel slightly uncomfortable with providing an EPS guidance based on that complexity.

Okay. And one last question regarding the change in the tax law. What kind of tax rates should we be assuming for the company on a go-forward basis?

John, I believe, like for next year, and probably -- I can give you a range, probably between like 28% to 30% would be a good rate to use for 2018.

Next, we have Sarkis Sherbetchyan of B. Riley.

So just wanted to actually touch upon the advanced sensors line, if you may, Ziv. I know you talked about you developed this line a few years ago. It's been growing nicely as evidenced by kind of the comments that you've just reference. I think you mentioned 62% year-over-year growth for the year. Do you mind providing maybe some more color on that particular business line? Maybe if you feel comfortable providing the level of annual revenues with regards to perhaps some end markets that it's exposed to? Just kind of any color around that line, please.

Okay. As you indicated, Sarkis, we have developed the line a few years ago, with the intention of developing a new product with a much more efficient platform. Given the fact that we have been trying to transition legacy products into this new platform quite successfully, in addition to that of developing new business at this point in time, we -- the information I can provide you that more than 50% for this product line is -- it's new business that the company never had before due to the fact that with this technology, we can develop smaller or more complex sensors that with the current technology, we were not able to do so. This platform has been doubling its revenue year-over-year in the last few years, and we do see a continuation of this growth moving forward. And maybe the only other thing that I can indicate is that we have close to $10 million revenue last year for this product line.

Got it. And then maybe help me understand, right, like what end markets is it exposed to? I mean, I understand maybe there's some sensitivity around customers, but is it like IoT, or is it some other interesting end market where maybe, before, you did not have a chance to sell into?

Historically, our legacy products are being sold into the industrial end market. In that respect, this platform continues and allowed us to even penetrate more into the industrial market. And I would say, even with new products, we did provide some color regarding the fact that also with this product line, we were able to sell into a new end market of consumer electronics, which we have not been providing more information due to the strict NDAs we are tied to. But regarding the industrial markets, we are able to sell into oil and energy, and we are able to sell into new applications in regards to high-end sports equipment and other type of products, which we did not have products before.

Understood. And if I can maybe poke around for the consumer electronics side, is that a high-volume application, or is that a lower-volume application?

Sarkis, unfortunately, but -- I will not be able to provide more information regarding that.

Understood. And then with respect to the incremental kind of gross margin, can you maybe talk about if there's a margin differential between your advanced sensors line versus kind of your more legacy products in FTP?

If we are speaking about the same -- well, it depends on the size of the products and the complexity of the product. But all in all, on average, we can be looking at, at least 10% to 20% difference in margin depending on the mix.

So 10% to 20% better, I'm assuming?

Better, minimum better. Yes, yes, sorry.

Understood. And then if I can move on to the OEM design wins that you had in Force Sensors, can you maybe talk about how that mix has evolved maybe year-over-year if you see more volumes kind of coming in from the OEM design wins versus kind of your more generic business? Any color around that, please?

Yes, absolutely. As we have been designing our products at various end markets, precision ag, construction and medical, we see more -- as the industry, the end markets have recovered and our customers have been releasing new products, we see a much greater stream of revenue as we expect it would come from the OEM customers at a better margin. At this point in time, the mix that we are selling, I would say, close to -- still over 50% of our legacy traditional business. But as we are moving forward, we see a much higher blend moving into this OEM business.

Understood. And then if I can step into just kind of the guidance that you provided. I think you mentioned in the comments and also in the press release, right, excluding the cyclical nature of a project-driven business, would that allude that should you gain product-driven kind of business in fiscal '18, that that would lead to upside to revenues? Can you help me understand that, please?

Okay. We wanted to maybe to provide more color regarding the high revenues we have booked in Q4 for steel, which was unusually high due to the fact that many customers wanted to get their products by year-end. So given those onetime effects, which is a sight -- which is a timing effect, we do expect to see still a very healthy market regarding steel, which would average on an annual basis. So therefore, it was just to provide specific color regarding the steel revenues in Q4.

Next, we have a follow-up from John Franzreb of Sidoti & Company.

You talked about $800,000 in restructuring charges in the quarter. Could you just talk about what those charges were for and if there's any more expected restructurings in the near term?

Yes, John, the restructuring was primarily -- we're basically closing 2 U.S. offices and just further consolidation that we've been discussing all along. As for further restructuring, I will let Ziv answer that one.

Thank you, Bill. As you know, John, restructuring was a major part of our strategy in the last few years in order to bring our cost base down and to improve profitability. We still -- we have not finalized the complete restructuring of the company and we still have a solid plan to continue that restructuring. Due to the fact that we are enjoying a business -- a good business environment, the priority is to ramp up production lines and to provide our customers with good lead times and very good service. Therefore, the restructuring project has been slightly pushed ahead, but it's definitely not completed. And as we are ramping up and bringing more capacity and getting the situation and getting our service -- a good service to our customers, I would say that we would expect to see further restructuring projects as we move forward.

Yes, that's good news. Pushing the restructuring is still right because your volume is better than expected. Ziv, it sounds to me like you're communicating that -- a previous question regarding the free cash flow, in part because the steel business, but you also have really good bookings trends. So should we think -- how should we think about sustainability of revenue in [indiscernible] beyond the first quarter to think that you need to see a better booking environment to see that kind of revenue profile? Or are you confident with some of the lead times that you could stay in that kind of a neighborhood?

I'm sorry, John, you were disconnected. I couldn't hear you completely if you were speaking only about regarding steel or about regarding the rest of the company as well.

The overall company.

Regarding the company, we do feel that we are in a good and solid business environment in discussion with our customers. We don't feel that they are building queue. There is a true demand behind that, and we feel that there is a good level that this business environment would continue, at least based on our visibility for the next quarter. Regarding steel itself, if I've heard the question correctly, the spike was in regards to the revenues. But at the end of the day, the bookings are the ones that dictates future revenues. In that respect, we still see a very good market conditions and, in fact, I would say that if the current administration recommendation would be accepted regarding putting high tariffs for steel, protecting local suppliers against cheap offshore steel, this should -- even -- since we are a North American company and our position is extremely strong with U.S. suppliers, we feel that this would even give us a higher level of confidence regarding the demand in steel.

Perfect. And one last question. Is that regards the repatriation of cash? Are you happy with the cash position as it's situated?

No, John. As part of this, the tax reform act, we have the ability and it's provisional, but we did book an accrual to actually bring a portion of the cash back into the U.S. And that could happen sometime during 2018.

We're showing no further questions. We will go ahead and conclude today's question-and-answer session. I would now like to turn the conference call back to Mr. Bill Clancy for any closing remarks. Sir?

Thank you, Mike. Thank you, everybody, for dialing in and participating on the conference call today. We appreciate it very much and your support, and looking forward to talking to you in the future. And we will be presenting at the Sidoti conference on March 29. So thank you very much for participating, and have a good day.

And we thank you, sir, also the rest of the management team for your time also today. Again, we thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you. Take care, and have a great day, everyone.