Vishay Precision Group, Inc.
Q1 2013 Earnings Call Transcript

Published: 7 May 2013

[Operator:]

Good morning, and welcome to the Vishay Precision Group’s First Quarter 2013 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) I would now like to turn the conference over to Wendy Wilson. Please go ahead.

[Wendy Wilson:]

Thank you, operator. Good morning, everyone. Welcome to VPG’s fiscal 2013 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 first quarter earnings press release and we hope you will take time to read through it as it does contain important information. The audio recording will be available on the Internet for a limited time and can be accessed from the VPG website. The content of this conference call is owned by Vishay Precision Group and is protected by U.S. Copyright Law and International 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 and or in part without the written permission of VPG. 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 may make today. For a more complete discussion of the risks associated with the operations of Vishay Precision Group, please refer to our SEC filings, especially the Form 10-K for the year ended December 31, 2012 and our other recent SEC filings. I would like to also add that our CEO, Ziv Shoshani has laryngitis today and will not be able to speak. So, Bill Clancy, our CFO will be giving the presentation this morning. Bill would you like to start?

[Bill Clancy:]

Yes, thanks Wendy. Good morning, everyone, and thank you for joining us on our call today. I like to start by reviewing some first quarter highlights and then summarize on the financials. Overall, I’d say we had a good quarter. Sales increased 12.6% sequentially and 2.9% over the first quarter of 2012. And we reported a year-over-year and sequential improvement in the gross margins and operating margins a benefit of acquiring the Kelk business which has higher margins than ours. Excluding the Kelk business our consolidated book-to-bill has grown to 1.04 and market demand continues to improve in all segments. Based on these factors we are providing second quarter guidance of $60 million to $65 million. For a brief review of the financial results let’s start at the top. For the first quarter we reported revenues of $57.5 million, a 2.9% increase compared to $55.8 million for the prior year period. The consolidated gross margin for the first quarter increased to 36.9% compared to 33.8% for the first quarter of 2012 due primarily to the impact of two months of Kelk’s results in the first quarter and improved gross margin in our Force Sensors segment. Selling, general and administrative expenses for the quarter were $17.8 million or 31% of revenues compared to $16.5 million or 29.6% for last year’s first quarter. The increase of $1.3 million from the prior year is primarily due to the inclusion of two months of Kelk’s results of $1.7 million offset by $200,000 on a loss on sale of fixed assets which occurred in the first quarter of 2012 and $200,000 of savings in travel. In March of 2013, we record a restructuring cost of $400,000. This is comprised of downsizing cost in our subsidiary in Japan. This is a rare event in Japan for us since the culture is to advocate long term employment. It is anticipated that restructuring cost will be paid in the second quarter of 2013. During the first quarter of 2013, VPG record a $500,000 of acquisition cost incurred with the acquisition of Kelk. The costs were mainly legal and accounting fees. Looking at operating margin on an adjusted basis without acquisition and restructuring costs you can see that is at 5.9% up from 4.2% in the first quarter last year and 3.5% sequentially. Included in other income expense was $386,000 of foreign exchange losses during the quarter compared to $36,000 of foreign exchange gains in the first quarter of 2012. We also recorded interest income of $73,000 in the first quarter of 2013 compared to interest income of $193,000 for the same period last year. The tax rate in the quarter was 31.5% compared to 34.5% for the first quarter last year. The primary change in the effective tax rate for both periods presented is the result and the geographic mix of pretax earnings. Our expected tax rate in 2013 is anticipated to be in the 27% to 28% range. Net earnings attributable to VPG’s stockholders in the first quarter were $1.3 million or $0.09 per diluted share compared to net earnings attributable to VPG’s stockholders for the first quarter of 2012 of $1.6 million or $0.12 per diluted share. Net earnings for the first quarter included $900,000 of acquisition and restructuring costs, which affect comparability as listed on the attached reconciliation table to our earnings release. Adjusted net earnings for the first quarter of 2013 were $1.9 million or $0.14 per diluted share versus the net earnings of $1.6 million or $0.12 per diluted share for the comparable prior year period. Capital expenditures in the first quarter were $800,000 compared to $2.6 million in the first quarter of 2012. Depreciation and amortization for the first quarter of 2013 was $3 million compared to $2.9 million in the first quarter of 2012. Total long-term debt as of March 30, 2013 and December 31, 2012 was $32.2 million and $11.1 million respectively. The increase being attributable to the debt added for the Kelk acquisition. Cash used in operations was a negative $1.4 million for the first quarter of 2013 compared to cash generation from operations of $4.1 million for the first quarter of 2012. Total free cash flow for the first quarter of 2013 was a negative $2.2 million compared to $1.7 million in the first quarter of 2012. We anticipate we will generate positive cash flow for the year 2013. On slide five, you can see that despite lower revenues last year, we have been able to maintain our gross margin percentage over the past year as a result of our focus on improving operational efficiencies and reducing our costs. And with the increase in revenues in the first quarter this year, our consolidated gross margin percentage has increased with the inclusion of the higher margin Kelk business and higher volumes. I would like to start with our Kelk acquisition. As we have mentioned in the past, Kelk with the strong presence in Asia and the Americas fits perfectly with our existing Nobel business, which sells mainly into Europe. We are beginning the integration of these businesses on a global basis. Key component of the integration should support our intention to grow the business and improve operating efficiencies. The element of this include streamlining and focusing the respective sales force into one combining and leveraging, purchasing and logistics functions, developing joint R&D functions and creating an improved go to market strategy. We should have all this completed by the end of this fiscal year. Looking at global steel outlook for 2013, the World Steel Association, which is the largest association in the industry, is forecasting global growth of 2.9% much improved from the 1.2% in 2012. If you look at it by region, steel use in China or Kelk has a large market presence is forecast to grow by 3.5%, which is fueled by the Chinese government’s measures to control investment and in effort to rebalance the economy. In the U.S. no utilization is running 80% which indicates a modest positive outlook. In the EU with signs of stabilization in the economy situation recovery is expected to lay in 2013. Considering the global outlook as we’re closing the Kelk acquisition and working to consolidate the business I would say that we remain confident about the business and are committed to growing our global coverage in steel mill product applications going forward. Moving on to the operational trends, let’s start by comparing consolidated year-over-year and sequential results. The company’s overall book-to-bill was 1.02 in the first quarter of 2013 compared to 1.01 last year and 0.96 in the fourth quarter of 2012. Without the effect of the Kelk business a book-to-bill was 1.04 in the quarter which is much improved on a sequential basis. We believe excluding Kelk in this ratio is relevant because Kelk operates in a project type business model with very long cycle times from order to delivery of approximately 6 to 9 months. This means that a quarterly book-to-bill is not relevant indicator to analyze business trends which could misrepresent the underlying VPG business trends. In addition, excluding Kelk the backlog in months and inventory returns remain constant for all periods. Total orders were $58.6 million up by 4.1% from $56.3 million last year and up 19.5% from the fourth quarter of 2012. The sequential increase was driven by America’s orders coupled with strength in Europe. With the acquisition of Kelk the Asian sales ratio will increase from the 17% to the 22% range of VPG’s total sales and the sales ratio and users will grow from the 20% to 25% range of total sales. Our new steel market sector which is comprised of Kelk and Nobel will represent approximately 15% of revenues. Now some details on our reporting segments. The FTP segment had a book-to-bill ratio of 1.06 for the first quarter compared to 0.97 for the first quarter of 2012 and 0.96 for the fourth quarter of 2012. Sequentially orders increased by $2 million or 16.8% from the fourth quarter of 2012 up in all regions led by Europe and the Americas with a slight increase in Asia. The FTP gross margin was 37.6% for Q1 down from 40.7% in Q1 last year and 40.6% in the fourth quarter. The year-over-year decrease in gross margin is primarily due to lower volume. The sequential decrease in gross margin was due to the impact of exchange rates reduction of productivity due to lower demand in Japan and a reduction in inventory. The FTP segment backlog was 2.6 months up from 2.3 months last year and 2.4 months in the prior quarter. Looking at the Force Sensors segment the book-to-bill ratio was 1.04 for Q1 compared to 1.06 in the first quarter last year and 0.94 for the fourth quarter of 2012. Sequential orders increased by $2.5 million or 16.9% compared to Q4, 2012 coming primarily from Europe. The gross margin for the segment was 26.8% in the first quarter of 2013 versus 17.9% in the first quarter of 2012 and 22.5% in the fourth quarter of 2012. The year-over-year improvement is primarily due to manufacturing cost reductions and one-time positive effects. The sequential increase in gross margin is mainly due to increased volume and a one-time positive effect. The Force Sensors segment backlog was 2.4 months compared with 2.4 months in the prior quarter and inventory turns were 1.9 down from the 2.0 in Q4. For the Weighing and Control Systems segment, including the Kelk results, orders increased $4.8 million or 43.9% compared to Q4 of 2012 primarily from Asia. The year-over-year improvement is primarily due to the inclusion of two months of Kelk results in the segment. The sequential increase in gross margin is due to two months of Kelk results and improvement in volume in the onboard weighing business. For the Weighing and Control Systems segment without Kelk, the book-to-bill ratio was 1.01 for Q1 compared to 1.03 in the first quarter last year and 0.99 for the prior quarter. Also without Kelk the Weighing and Control Systems segment backlog was at 1.8 months compared to 1.9 months in last year’s first quarter and in the prior quarter. Inventory turns were 3.8 in Q1 compared to 4.2 in Q1 last year and 4.0 in Q4 of 2012. Based on sequential improvement in the macroeconomic indicators across all regions and capital equipment spending, GDP and industrial production output supported by our OEM and end user customer trends at all of our reporting segment we are proving second quarter guidance of $60 million to $65 million. With that, I would turn the call back over to Wendy.

[Wendy Wilson:]

Thank you, Bill. Thank you everyone for calling in today. Because Ziv is unable to talk we are going to hold questions for our call today and if you do have any questions, please feel free to contact me and we will take care of them. Thanks again for dialing in and we hope to have you on the call next quarter.

[Operator:]

Thank you very much. The conference is now concluded. Thank you for attending today’s presentation. You may disconnect. [No Q&A session for this event]