Vishay Precision Group, Inc. (VPG) Q2 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the VPG Second Quarter Fiscal 2019 Earnings Conference Call. [Operator instructions] Please note that this event is being recorded. I'd now like to turn the conference over to Reynee Tung. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to VPG's 2019 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've taken the time to read through it as it contains important information. You can find it on VPG's website at vpgsensors.com. An audio recording of today's call 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, performance or achievements may turn out significantly better or worse than indicated by any forward-looking statements that we may 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, 2018, and our other recent SEC filings. And now it's my pleasure to introduce the hosts 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'd 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. Referring to Page 3 of the slide deck, we had a solid second quarter of 2019, with revenues up $70.9 million, operating income of $8.1 million or 11.4% of revenues, adjusted operating margin of $8.7 million or 12.3% of revenues, net earnings per diluted share of $0.41 and adjusted net earnings per diluted share of $0.45. On Slide 4. Our second quarter 2019 revenues decreased by 4.5% to 70.5 -- $70.9 million, down $3.4 million, compared to $74.2 million of revenues in the second quarter of 2018. The negative impact of foreign exchange rates to revenues for the second quarter of 2019 as compared to the second quarter of 2018 was $1.8 million. Our gross profit margin decreased to 40.4% in comparison to 42.3% in the second quarter of 2018. The decrease in gross profit of $2.8 million for the second quarter of 2019 as compared to the second quarter of 2018 was primarily attributable to a decrease in volume of $800,000, manufacturing costs of $800,000, wages of $600,000, a one-time charge of $300,000 and the negative impact from foreign currency rates of $300,000. Selling, general and administrative expenses for the second quarter of 2019 were $19.9 million or 28.1% of revenues, compared to $20.0 million or 26.9% for the second quarter of 2018. The decrease in selling, general and administrative expense was related to $500,000 of positive impact of foreign exchange rates mainly offset by $400,000 of wage increases. The adjusted net earnings attributable to VPG's stockholders for the second quarter of 2019 were $6.2 million or $0.45 per diluted share, compared to $7.7 million or $0.57 per diluted share in the second quarter of 2018. Foreign currency exchange rate for the second quarter of 2019 as compared to the second quarter of 2018 decreased net earnings by $200,000 or $0.02 per diluted share. We generated free cash flow of $6.7 million for the second quarter of 2019 as compared to $3.8 million for the second quarter of 2018. We defined free cash flow as the amount of cash generated from operations, which was $8.9 million for the second quarter of 2019, less capital expenditure, which was $2.4 million for the second quarter of 2019, net of proceeds from the sale of assets, which was $200,000 in the second quarter of 2019. Our GAAP tax rate for the quarter ended June 29, 2019, was 26.4%. We anticipate that the operational tax rate for the year will be in the range of 27% to 29%. On Slide 5. We've remained focused on the execution of our core strategy, which we believe will be very effective in achieving the goal outlined on Slide 5. 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 offering. A great example of this is our advanced sensor line, which continues to gain adoption. We developed this platform as part of our Foil Technology Product segment and it has grown nicely as more customers included in the product design. We saw our advanced sensor revenues increase approximately 28% in the second quarter of 2019 versus the second quarter of 2018. We are pleased with the continued acceptance of this new sensor platform and are proud to provide enhanced performance to customers. A second example is in our Weighing and Control Systems segment. Our TruckWeigh and VanWeigh on-board weighing business revenues has increased 77% in the second quarter of 2019 as compared to the second quarter of 2018. Moving to our end markets and beginning with demand for avionic, military and space. Positive sentiment for defense supply is expected to continue. The treasury outlays for defense investments, spending were up 27% in Q1 of 2019 over Q1 of 2018. The increase in spending is likely to continue in the third quarter of 2019. In the semiconductor capital equipment end market, near-term demand dynamics remain muted as memory product limit capital expenditure, while logic and foundry producers spend on advanced notes. The projection for fab equipment demand to fall 18% this year. However, the expectation is to increase demand by 6% as producers begin to recover from the under investments. Finally, turning to the steel market. The focus is that 2019 and 2020 global steel demand was expected to continue to grow, but growth rate would moderate in tandem with slowing global economy. However, uncertainty over trade environment and volatility in the financial markets continue and could potentially pose downside risks to this focus. In summary, after several years of very rapid growth, we see stability in our end markets we serve. Moving to Slide 6. The company's overall book-to-bill was 0.94 in the second quarter of 2019, compared to 1.13 in the second quarter of 2018 and 0.92 in the first quarter of 2019. Total orders for the second quarter of 2019 were $66.7 million, a decrease of $17.3 million or 20.6% from $84.0 million in the second quarter of 2018 and a decrease of $3.5 million or 5% from $70.2 million in the first quarter of 2019. The sequential decrease in orders is primarily attributable to precision resistor products in the test and measurements market in Europe and in Asia. Also saw a decrease in Force Sensors products with OEM customers in force measurement end markets mainly in the Americas and Europe. Finally, we saw a decrease in the demand for steel product in Asia and Europe. Our backlog at June 29, 2019, decreased to $83.4 million, compared to $101.0 million at June 30, 2018, and $87.1 million at March 30, 2019. Moving to Slide 7. Some details on our reporting segment. The Foil Technology Product segment had the book-to-bill ratio of 0.93 for the second quarter of 2019, compared to 1.24 for the second quarter of 2018 and 0.88 for the first quarter of 2019. Sequentially, orders decreased by $1.9 million or 6% from the first quarter of 2019. The Foil Technology Product segment gross profit margin was 43.6% for the second quarter of 2019, down from 46.1% in the second quarter of 2018 and 44.7% in the first quarter of 2019. The year-over-year gross profit decrease of $1.4 million was primarily due to the increase in manufacturing cost of $400,000, negative impact of foreign currency rate of $400,000, increase in wages of $200,000 and a decrease in volume of $300,000. The decrease in volume primarily came from the Pacific Instruments product within the avionic, military and space end market in the Americas and strain gage product in the test and measurement and force measurement end markets primarily in the Americas. Sequentially, gross profit margin decreased by $2.2 million primarily due to a decrease in volume of $2.5 million. The Foil Technology Product segment backlog was 3.8 months, compared to 4.8 months last year and 3.6 months in the prior quarter. Looking at the Force Sensors segment. The book-to-bill ratio was 0.95 for the second quarter of 2019, compared to 0.88 in the second quarter of 2018 and 0.98 for the first quarter of 2019. Sequentially, orders decreased by $900,000 or 5.6%. The gross profit margin for this segment was 26.9% in the second quarter of 2019, down from 29.4% in the second quarter of 2018 and down from 30.2% in the first quarter of 2019. The gross profit decrease of $1.3 million compared to the second quarter of 2018 was due to a decrease in volume of $1.2 million related to OEM customers in the Force Measurement market in the Americas. Sequentially, the gross profit decreased by $700,000 compared to the first quarter of 2019 due to a decrease in volume of $200,000, negative exchange rate impact of $200,000 and a one-time charge of $300,000. The Force Sensor segment backlog was 3.0 months, compared to 2.7 months last year and 3.1 months in the prior quarter. For the Weighing and Control Systems segment, the book-to-bill ratio was 0.95 for the second quarter of 2019, compared to 1.18 for the second quarter of 2018 and 0.93 for the first quarter of 2019. Sequentially, orders decreased by $600,000 or 3%.The gross profit margin for the segment was 45.6% in the second quarter of 2019 versus 48% in the second quarter of 2018 and 50.2% in the first quarter of 2019. Weighing and Control System gross profit decreased by $100,000 from the second quarter of 2018 due to an increase in manufacturing costs of $300,000, wage increase of $200,000 and a negative impact of foreign currency of $200,000, mostly offset by an increase in volume of $800,000 with an unfavorable product mix. Sequential gross profit decrease of $1.6 million compared to the first quarter of 2019 was mainly due to the reduction in volume of $1.3 million with an unfavorable product mix. The Weighing and Control System backlog was 3.5 months, compared to 4.2 months in the second quarter of 2018 and 3.4 months in the first quarter of 2019. Moving to Slide 8. Given the current business environment and our most recent order intake at constant second fiscal quarter 2019 exchange rates, we expect net revenues in the range of $67 million to $73 million for the third quarter of 2019. With that, let's open the lines for questions. Thank you.

[Operator instructions] The first question comes from Sarkis Sherbetchyan with B. Riley FBR. Please go ahead.

Hey, good morning and thanks for taking my question here.

Good morning, Sarkis.

Good morning.

So just wanted to touch first on the sales outlook. Ziv, I know you mentioned in the prepared comments some of the puts and takes regarding the end markets. Can you maybe help us understand what you're seeing as far as, kind of, current order rates from the various end markets? What are the areas of strength? What are the areas of weakness? I will start with there.

Sure. I would be happy to provide the general overview regarding the -- our reporting segments and the end markets we’re serving. Starting maybe with FTP, given the current business environment, 65% of the decline of order intake quarter over a similar quarter a year-ago is coming from precision resistors, as well as a one-time one large annual order for Pacific Instruments. The quarter-over-quarter declines, I would say, 55% of the order decline is coming from precision resistors. So, all-in all, the main weakness in -- or softening of -- we see coming from precision resistors. In precision resistors, we’re serving different end markets. I think the -- by far, the largest one is test and measurements. And the biggest impact we’ve seen in Asia and in the American -- and in the Americas is the fact that the semiconductor equipment manufacturers has slowed down dramatically the demand for putting in place new equipment. We’re looking -- we’re speaking about front-end, which is fab equipment as back -- as well as back-end, which is IC or chip testing. So the biggest drop is -- for precision resistors is coming from the semiconductor side. And as I indicated, there's -- we do believe that based on the macro environment and the different inputs that we’ve received, the expectation is to see certain uptick toward the end of the year, given the very, very low investments in capital equipment which is currently happening. On precision resistors, we also see in a way, slightly lower demand in regard to some of the, I'd say, more for general industrial end markets. But I believe in that sense, we’ve reached the plateau. For the Micro-Measurement or the strain gage part, the bigger fluctuation is really coming from the and/or for the project-driven nature of Pacific Instruments. A year-ago, similar quarter -- a year-ago, there was an extremely large order that has been placed on an annual basis. This -- we don't see a similar phenomenon this year, but still as avionic, military and space is a very, very solid end market, pretty much for all our product lines, including precision resistors, we do see the incoming order intake for this specific product. So, all in all, for FTP, the biggest effect is the test and measurement semiconductor equipment, and to a lower extent, general industrial market, which we believe already reached the plateau. Moving to the Force Sensors. In the Force Sensors -- for the Force Sensors segment, we’ve seen some decline coming from our large OEMs in regards to the three end markets we serve: Construction, precision ag, medical, as well as some general industrial in respect to servicing the weighing industry. We -- I believe that we have reached, in a way, a plateau in that for this reporting segment, and we should expect, based on the information we’ve received from our customers, mainly the one we serve for the construction end market, as well as the medical and general industrial in the Americas, we should expect to see orders picking up as of this -- as of Q3 onwards. Weighing and Control Systems segment, here we’re serving very different markets. The biggest change that we identify from one quarter to another quarter is really still similar to Pacific Instruments due to the end-user project nature. There are large fluctuations from quarters to quarters. So far this year, despite the general environment this year, the order intake for steel was strong, also in the second quarter, maybe was not as strong, but we’re still running at high record level for steel. And I would say that we should expect to continue in a similar -- well, maybe it should be slightly lower, but it should be in a very similar way also in the second half of this year. Some general industrial where we see slightly softening is on the European side for our process weighing side, where capital investments is more required. But on the other hand, the construction business, which is also being serviced by the -- our on-board weighing business in North America is running strong. So, all-in all, we should expect, from a reporting segment, we’re in a kind of a wash regarding the different end markets.

Got it. Thanks for all the color there. And if I can touch on the Advanced Sensors segment. I think you mentioned, for this quarter there was some good growth, I think it was in the high-20s range year-on-year, about 28%?

Yes. Yes.

Is there anything incremental you can help us with in regards to that product line?

I think that -- I did believe, I shared in prior earnings that in 2019, despite the fact that we’re not expecting to realize significant revenues, but we’ve introduced a new product line in the advanced sensors for stress analysis applications, which we already started to deliver samples and orders to customers. The acceptance level is very, very good and we continue to make inroads in regards to this new applications and new product that we have developed. We do expect this -- the revenue to significantly go up as we move into 2020. But from a -- but our service level, the quality, and we continue to develop new product going into new end markets and new applications.

Got it. That’s helpful. And I think related to that, for this year and I think next as well, you had mentioned in previous calls that you would like to do about $30 million of CapEx and that included the advanced sensor facility build and some spend for Force Sensors as well. Is that still on plan for this year or does that get shifted a little bit into 2020?

Okay. That’s an excellent question. Despite the fact that on the capital spending, we're a little bit light in the first half of the year. This was all planned given the nature of those projects, given that 50% of the $30 million are infrastructure related. So I can report that on the so-called the Modi'in project, which is the new facility that we're putting in place for advanced sensors, we’re on time. The plan is, as it was at the very beginning to transition the management part. I'd say, sometimes early second quarter of next year to start transitioning the manufacturing early Q3 and to finalize the transition at the end of next year. So we're on time regarding this project, budget wise and timing wise. Regarding India expansion, we’re also on time and we expect to finalize this project, end of the second quarter next year.

Good. And so I guess from annual CapEx perspective, more of the spend would be, I suppose, in the back half of this year? Is that the right way to think about it?

This is correct and we -- and at this point, we do expect to meet the initial projection for the $30 million. But you're absolutely correct, Sarkis.

Thanks. I will hop back in the queue for others to ask questions.

The next question comes from DeForest Hinman with Walthausen & Company. Please go ahead.

Hi. Thanks for all the detail you've been giving in the Q&A. If I could just ask for a little further color on some of these new applications that you are delivering product to. Is there any color you can give us in terms of end markets that that is being delivered to? And I think in the past, you’ve given some numbers in terms of the revenue opportunity there, it's escaping. Can you just update us what you think that opportunity is as well?

We -- I’ve to be a little bit careful in regards to -- specially to this advanced sensors, because we do have strict NDAs with some of our key customers even in regards to the end application. They would like to keep it very, very confidential. But whatever I can share is that this stress analysis opportunity is -- potentially is going to open new markets. For example, as I stated before, PC Board testing, which we currently do not have any product offering. And for most PC Board manufacturers, they do require certain -- I mean, those type of stain gages being applied on the end application in order to measure the stress while doing the testing, while designing and the testing of the PC Board currently. Only competitions serves this market and we believe it's a multimillion dollar market, and we’re planning to participate in that. And since we’ve a very good product -- also product from a cost price and performance standpoint, we do believe that we’re going to take a significant market share and be a serious player in that end market. But similar to PC Board, we’ve PC Board testing, we’re planning to move into other similar directions within the stress analysis field.

Okay. And when we think about investments we’re making in India and Israel and we’re seeing the 28% growth in advanced sensors, is the completion of those facilities a gating factor in any way in terms of how that revenue is performing before those facilities are finished, or would it be a step function on those revenues? Just any color that you can provide would be very helpful thinking about how that revenue cadence [indiscernible].

Sure. Sure. Absolutely, that’s a very good question. So currently -- let me start with advanced sensor, currently in our current premises, we’ve enough capacity to support 2019, I'd say 2019 as well as 2020 projection. So we don't feel that we're going to risk any potential revenue due to lack of space. Naturally, as we complete the transition into the new facility, it's going to give us much larger opportunities if -- in order to support once those orders come -- will come in order to support much higher volume. But at this point in time, there's no risk in missing opportunities given our current premises. In regards to India, which is now part of the Force Sensor segment, we currently already leased some external space, so we feel also in a similar way quite secure that within our current premises and some extra leased premises, we can support all potential opportunities until mid of next year when the expansion will be finalized. So at this point in time, we’ve the equipment in place and the manufacturing space, and I don't see that we could be in a position where we may lose revenues due to certain -- due to space constraints, if I may say.

Okay. Thank you. And then final group of questions on capital allocation strategy. Can you give us an update on M&A outlook, pipeline, valuation, and then any thoughts on share repurchases or dividends? Thank you.

Sure. Sure. Absolutely. From a capital allocation, we did provide some information similar to the past that I think that the company's first priority is organic growth and -- which is to support our own requirement for future expansion similar to the Modi'in and similar to the India expansion as well as capital expansion. The second priority is M&A. We’ve been quite disciplined in the past not to take up on any opportunity. We do believe that despite the changes and even at a lower -- and even with the most recent changes, with the lower interest rate, we feel that the environment is more supportive from an M&A in terms of more reasonable valuations and it's definitely high on our priority list and the company takes it extremely serious and we’re looking -- and we’re in discussion, of course, there's nothing tangible to report. But we have, I would say, a very reasonable queue of M&A opportunities, which we’re constantly looking at. As it comes to buy -- purchase or buyback of stock and dividends, the board of directors is always looking at all the opportunities and buyback -- and dividends are part of that. And they’re open in -- they’re looking at that, as well as in -- as a viable option.

Okay. Thank you.

Thank you.

[Operator instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Bill Clancy for any closing remarks. Please go ahead.

Thank you, operator. And thank you everybody for joining on the conference call today. We look forward to talking to you in the near future and also to let you know that Vishay Precision Group will be participating in the Jeffries' Industrial Conference. We will be there, all day tomorrow, in New York. So I appreciate it very much and look forward to talking to you soon. Have a good day. Bye-bye.