Q3 2019 Earnings Call
Good morning, and welcome to the VPG 2019, Q3 results conference call.
Just events will be in all this and only mode should you need assistance. Please call for specialists by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one I touched on some.
Withdraw your question. Please press Star then too.
Please note. This event is being recorded I would now like to kinda converts over to Steven Cantor Senior director of Investor Relations. Please go ahead.
Thank you Danielle and good morning, everyone. Welcome to Vpgs 2019 third quarter earnings Conference call.
An audio recording will be made at the conference call today, including any questions or comments that participants may contribute.
Our Q3 press release, an accompanying slides have been posted on our website.
VPG sensors dot com.
An audio recording of today's call will be available on the Internet for our limited time and can be accessed on that VPG website.
I also want to know that yesterday, we issued a release announcing the acquisition of de aside.
You can find that press release and presentation on our website.
Today's remarks are governed by the Safe Harbor provisions provisions of the 1995 Private Securities Litigation Reform Act. Our actual results may vary from forward looking statement.
Discussion of the risks associated with Vpgs operation.
We encourage you to refer to our S. T SEC filings, especially the Form 10-K for the year ended December 31, 2018, and our other recent FCC filings and now I'll turn the call to Ziv, Shoshani CEO and President Bill Clancy CFO Bill will begin.
Thanks, Steve Good morning, everyone and thank you for joining us on our call today.
I will start by reviewing a few highlights and then summarizing the financials.
Following that.
He will provide color on the results by segment the acquisition of B.S. die and the Q4 outlook.
Referring to pay three of the slide deck in the third quarter 2019, we achieved revenues of 67.4 billion.
Operating income of 6.2 million or 9.2% our revenues.
Adjusted operating margin of 6.7 million or Tempur satellite revenues.
Net earnings per diluted share with 33 sites.
Adjusted net earnings per diluted share a 37 cents.
Moving on to slide four.
Third quarter 2019 revenues decreased by 10.7% 67.4 billion.
At 8.1 million compared to 75.5 billion of revenue in the third quarter upon gate.
Foreign exchange negatively impacted revenues by 800000 hours for the third quarter 2019, compared to a year ago.
Our gross margin decreased 38.3% in comparison to 40.5%.
Third quarter 28 tea.
The every year a decrease of $4.8 million was primarily attributable to lower sales volume a $4.6 million.
Negative impact from foreign currency rate of $4000, which was partially offset by an increase in export grant a $500000.
Selling general and administrative expenses for the third quarter, 2019, or 19.1 million or 28.3% or revenues as compared to 19.7 million or 26.1% <unk> third quarter of 28 team.
The decrease in S. DNA relating to a reduction in both reserves of one point Threemillion had a reduction in commissions $4000.
Which was partially offset by increasing wages, a 500000 added other costs of 500000.
The adjusted net earnings for the third quarter, 2019, EUR $5 billion.37 per diluted share compared to $7.5 million or 57 cents per diluted share.
Third quarter 2018.
Foreign exchange rates for the third quarter as compared to the third quarter 2018 decreased earnings by $300000 or three cents per diluted share.
We generated free cash flow of $4.8 million with a third quarter 2019, that's compared to $6.8 million for the third quarter Twentyeighty.
We define free cash flow I think that a cash generated from operations.
Which was 7.6 million for the third quarter 2019, less capital expenditure, which was 2.9 million for the third quarter 2019.
Got a proceeds from the sale of assets, which was $200000 the third quarter of 29 team.
Our GAAP tax rate for the quarter ended September 28 2019.
29.3%.
We anticipate that the operational tax rate for the year well be in a range of 20 729 per se.
We ended the third quarter with what <unk> point $3 million of cash and cash equivalents, which increased 2.6 million from the second quarter up 2019.
Total long term debt was 23.7, <unk> as compared to 24.8 million in the second quarter.
Subsequent to the end of third quarter the acquisition at the site, which closed on November 1st 2019 reduced our cash balance by approximately 21 million and increased our total long term debt by approximately 20 million.
Even with these impacts from the Dxi transaction, we believe that our balance sheet remains very strong and provides us with ample liquidity to support our business requirements and to find additional M&A opportunities.
With that let me pass further comments on disease.
Thank you Bill.
The company's all the order book to Bill was <unk> 0.96 in the third quartile compared to 2.9 full into second quarter of 28, Dean and 0.98 into filled Quartiles 20 <unk>.
So all those fulfilled quote, though we'll 64.4 million down from 66.7 million in the second quartile and 74.0 million in distilled quartile a year ago.
Our backlog at September 20, 829, <unk> decreased to 79.3 million for 83.4 million in the second quarter.
Overall.
I will Q3 sales in all those reflected we killed my core industrial trends globally as well its impact from ongoing create uncertainty decelerating demand trends and channel Destocking.
For our fourth technology for the segment our market trends will mix.
No signs and sentiment the semi equipment market he's done in positive.
Which we expect will result in a pickup in demand for our board that's in the second half of 2020.
Yeah, well spaced military and space market continues to be Posey before FTP.
Driven by strong defense spending while our general industrial markets. We saw some de stocking will 50 people products both equally both equally in Europe .
For our fourth Synsil segment seems to OEM customers continued to reflect lower demand from general industrial customers and let's see isn't a good cultural influence thoughtful and construction equipment makers.
For our weighing and control system segment, we saw some older push outs in the UK for our own bold wing pulled that.
<unk> transportation market, which we believe is related to the political uncertainty for legacy.
In the U.S. old busy.
For our process weighing solutions reflected slowing capital investment why did the men the new will remain sold.
Our products for the steel industry continued to perform very well.
Moving to slide six.
Looking at our reporting segment in beat days.
Fourth technology for the segment declined by 10.6% from the top quartile last year and was 2.7% lowest sequentially.
Even as we still continued go well fit then sensible products did decline was driven by lower sales or specific installments board that we didn't delbianco military and space in market in the Americas and strain Gage product in the test and measurement applications by maintaining the Americas.
Yes.
Book to be they show <unk> technology.
0.91, compared to 2.95 full distilled quartile of 20 team and 0.93 fold the second quartile of 29 pm.
Gross margin for <unk>.
Acknowledging 37.3 person for the filled quartile declined from 43.9% into filled wolf when he team and 43.6% in the second quartile for any 90.
Do you over the year gross Wolfie decrease was primarily due to lower sales volume of 2.5 million.
I mean precision manufacturing cost of 600000 and the negative impact.
Foreign exchange rate 600000.
Looking at the full Synsil segment sales declined by 7.9% deal with you and was essentially flat sequentially deal. You did decline was primarily due to lower volume related to OEM customers in domestic says.
The book to Bill for sensors was <unk> 0.9, full which compares 2.98 seem to still fulfill or 28, Dean and 0.95 for the second quartile Swinney 19.
Third quarter gross wolfowitz mild in full force insoles was 30.4% increased from 25.9% into <unk> when you team.
And an increase from 26.9% in the second quarter of 29 being.
The higher gross Wolfie reflected an increase in export rents were 500000.
Increased manufacturing efficiencies and positive impact of foreign exchange.
This was partially offset by an impossible flow assays vote.
Stateful, the weighing and control system segment, well from 19.1 million.
Declined 15.2% you over to you and 11.3% sequentially the yield will you be pretty.
Revenue was primarily attributable to the steel product line in you'll.
The own bold waiting for the scene, ULE and and Americas and deposits the swing bought up in the Americas in your <unk>.
Sequential decreasing revenue was primarily attributable to the softness in both the swing for the thing you'll.
And in on him onboard weighing all that's mainly in Europe and Americans.
Book to Bill for weighing and control for weighing and control was a positive one point or pool, which compares to one point or two in the field Wolf when he team and 0.95 for the second quarter of 29.
Despite the lowest saves the gross profit margin of 46.6 person for the segment was flat with 46.6% seem to fill the Waldorf 20, Dean and improved from 45.6% second Wolf when he 19.
Sequential gross profit margin increase was primarily due to manufacturing efficiencies, partially offset by lower volume.
Moving to slide seven.
In addition to capitalizing.
On our organic growth opportunities keep possible follow value creation strategy is to deploying our capital with while its strong profitable business that leverages the VPG platform.
I'm pleased to announce the acquisition of dynamic system, Inc. for 41 million and their potential and mouth.
Opt what additional 3 million via site is a well established high margin, but a meal manufacturer.
I'm, a mechanical stimulation equipment used to study materials and optimize manufacturing well she sees the acquisitions added an industry, leading high maoji niche markets manufacturers.
With that addresses the growing demand for high performance materials for multiple industries.
Moving to slide eight.
Based in New York deal size, Bleep align well for materials testing and simulation system system help universities research labs metal, we do so and manufacturers around the world.
Two.
A few absolutely it would be the performance of new steel and aluminum alloys.
This allows customers to accelerate.
This time to market.
And to optimize production well Ccs for a wide range of industrial end markets, including automotive aerospace and LG and heavy industry.
Moving to slide nine.
Global should continue to benefit from a number of global Mckool friends facing these end markets demand for new lightweight high performing steel and aluminum alloys continues to go in order to meet increasing fuel efficiency target.
Full calls and trucks.
Goals to eat three D printing is expected to Dubai mythological at least surgical from materials used in the three D printing <unk>.
In addition, we should benefit from the competition between stealing I mean, you full system uses seems big Liebl systems I'll use the research both metal.
We expect the aside from take a meaningful portion of these opportunities since.
<unk> the clear market lead, though we moved them 350 installed system worldwide well in excess of all.
Competitors combined.
Moving to slide 10.
There are many reasons to be excited about what the acquisition means for both VPG, India side, we see opportunities to leverage Vpgs saves platform to expand your size sees.
As well as to expand our offering to steel customers, how does it by Vpgs Kelk business.
There is also a potential to develop new generation of the OSI systems.
Well, that's the blue Ocean opportunities.
Financially deck with additional via site. It key parts of our strategy to go Vpgs sales and earnings and to create value for our stakeholders.
Over the past two years decides achieved.
And average annual sales of 16 million.
Hi, <unk> genes.
Based on diesel resorts the purchase price multiples.
Approximately 10 times before synergies and excluding the potential and now.
For the fourth quartile, given calling business environment and our oldest trends.
Constant Phil <unk>, 29, <unk> exchange rates and including up walk approximately two months.
<unk> related to the acquisition of the aside.
We expect net revenues.
In the range of 63 million to 69 million full default fiscal <unk> 29.
Looking beyond the fourth quarter, though we expect to continue to achieve good the momentum in our strategic long long term goal initiatives, such as our advanced sensor products and our truck weight and fund we business.
These initiatives are leveraging our unique differentiated technology.
Customer relationships.
Our manufacturing consolidation project in Modine he needs like he is on track.
The project, which we targeted for completion at the end of plenty plenty is intended to increase our capacity to support I will go.
In addition to the company. In addition, the company is working on filled of cost reduction initiatives is part of our strategy to maximize our profitability and achieve our financial targets.
With that let's open the lines for questions. Thank you.
Well now begin the question and answer for session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up their handset before pressing the keys to.
To withdraw your question. Please press Star then tail.
At this time oppose LTACH assembled a roster.
The first question comes from Sarkies.
Sure that GE on M.B. Riley FBR. Please go ahead.
Good morning, and thanks for taking my question here.
I'm good morning, Turkey, just wanted to start first on the the acquisition. So congrats on that you know it seems like a an interesting acquisition here.
In regards to the purchase price price paid plus the earn out I think on the documents filed yesterday I saw on EBITDA range of between 4.3 million and 5.6 million to get the earn out can you kind of maybe describe what you'd expect the business to generate from an EBITDA perspective.
[noise] sucky the the business a for the last three years was running at the low twentys you'd be done margin range and we would expect that to continue going forward and to continue going forward. So so we're looking at low low twentys.
Low to mid Twentys margin wise.
Understood and so you know it seems like it's going to be accretive out the gate is that the right way to think about it.
Yeah, sorry, Keith I, what I would say, obviously like there's only two months left in 2019, which probably won't be as material, but looking at 2020 and given just we just talked about the historical EBITDA levels, we would expect to be meaningfully accretive to the E. P S and 2020.
Thanks for that and then.
As far as just kind of.
Why you guys chose to purchase this business you know what kind of was very attractive about it you know is there I'm an opportunity to also sold consumables, you know and therefore kind of leverage your expertise and in some of the other lines of business kind of help me understand why you guys are better owner of this asset.
Okay.
So Keith we expect the aside to enhance our system capabilities for steel applications for new developments and we see womb fulfilled the enhancements Oh boy that's <unk> in the steel markets. In addition to kill.
Both kill can de aside I would believe deals by fall in their own systems and applications within their own markets like Kelk decides another very strong brand, we didnt seem a little end markets as well as we didnt seem a little end markets joining VPG, we believe would be allowed.
Site to develop other products for seem a low end markets to VPG, which would be more limited in scope, but more life effective which would open and potentially more opportunities for fort Collins customer base and for new customers and.
Understood.
That's helpful and I guess, if I can kind of touch on the sales outlook here I know you mentioned two months of.
The acquisitions included can you maybe just talk about what you're seeing real time in the macro environment I'm for for the three segments.
So regarding the the macro environment, we <unk> the market. It it leads the way we see that for Q3.
The trends will mix.
Well Q3, the had headwinds would include weakness in the semi semitest equipment.
Slower general industrial demand, particularly in Europe it.
The transportation market, mainly for <unk> onboard weighing due to the begs the uncertainty.
On the other hand.
We see some tailwinds in regards to able space and defense in Dallas space and defense market.
And the also the steel market. These going very strong specifically the headwinds would include de stocking of precision disease those for the test and measurements markets specifically in the semi test market.
Oh, those will weaken in the last few quarters due to customer over Overstocking. However, we are seeing positive signals in terms of increased customer orders for these products for shipments to be delivered meet the 2020 on the M.M. business. The we have seen the negatively impact economic slowdown.
Particularly particularly in <unk> in Europe , and mainly in Germany.
Four cents tells me we I didn't mention before this is the main need the general industrial markets.
And our own bold Wayne.
Bill has been we've seen OEM.
Oh, the intake softgel due to the mainly due to the political uncertainty over the of the Blake.
On the process weighing it's more for seasonality effect and we would expect to see it doesn't rebound in the following <unk>, though.
Specifically the Tailwinds in the fourth technologies that it will speak the friends going very strong very strong order intake for our there <unk> products in the indeed in the field walk, though and steel.
Continues to be very solid really strong for us kelk business continued to perform well reflecting continued strength in the steel market. Then also and good order intake in that in that the wont, though we expect some of the headwinds to begin to stabilize in default cool too.
It was all those for precision because these schools and full Semitest would expect we bound next to you.
And hopefully the political uncertainty related to the Brexit may be resolved in the coming <unk> quartiles.
Thanks for that I'll hop back into the Q.
As a reminder, if you have the question probably please press Star then one.
The next question comes from John Franzreb Acidity and company. Please go ahead.
I'm good morning, everybody I guess I want to go back to de OSI first you mentioned that this.
Potential synergies could you just tell us what dose and she's also that you're looking for.
Okay. When the when we're looking gets to.
The synergies.
For the.
On the.
Hi acquisition, we don't see any casinos.
But I do all of the synergies will be used to leverage revenue. This is not in your phone step for us.
Technologies for hours Kelk business feet.
Integration.
The defense business model in that way synergies came.
On the revenue side.
Back in 20, 213, which is similar to kill CMLP seek seals late though we are in the same situation integrating via site into VPG. We expect the D. A site will follow the same successful integration trend.
Our kelk acquisition deed in six years ago.
Okay, but from what I remember with the Kelk acquisition you had this very similar product line and killed the dominant player.
That's not the case with de aside though isn't.
No. It's these are very similar case, when we have acquired Kelk backing 20.
20, tilting Kelk was a dominant player in the.
Oh.
Well, it's Steve Hey, Steven meal opposed to seize they had they had been they still have a wide range of optical measurement as well as old false VPG did not had any you'll be spoiled declines.
We had either for the Cline.
Hi, weighing up applications coming from our Swedish Nobel subsidiary.
So to that extent <unk> there were no. We did not had any cost synergies for the killed the aside and Kelk was a leading brand in its own markets.
This is very similar situation, where we don't carry is similar.
Portfolio to de aside bill for weekend not to realize any cost synergies but.
The aside easy.
Definitely a leader in the old market and we would expect.
To.
Enhance they'll positioning older to develop filled the products to the end markets.
And including helping them to Oh, I would say enhancing our sales channels in order to leverage.
Uh huh.
But the assigned new opportunities for new opportunities as well as the synergies we would expect on the customer on the steel meal customers that don't currently joint customers between <unk> and.
And killed.
Got it <unk>, who is de emphasize main competitors.
Yes, I used by fall below just to the largest manufacturing to own.
Field.
The as they said that installed base. These 350, we cheese for at least <unk> more than four times. The combined all the combined competitor those four times Modell I cannot say did they have been large competitor <unk>. They have very small compared he told it's fairly.
Small company in Japan, and smaller company in China, and one in Europe , which are more region regionally in nature.
With that much more limited product line.
And then much limited foot footballing.
So so we could don't we at this point in time I could don't I cannot identify second significant allows compatible all the others a way way smaller companies.
That extend.
Okay and regarding financing the deal I'm sure I heard you correctly Bill I think he says about $20 million on incremental debt.
At the right number what should we think be thinking about it.
As interest expense going forward and also what what are your thoughts about debt repayment going forward.
Yeah, John I mean, we usually is a combination of 50% cash and 50% debt.
You know the debt today, we're at a at a buyer rate that's probably all inclusive you know about 4.5% Oh interest rate for that for that that going forward and like like.
You have heard a nice and that it's very high EBITDA margins.
ER beds is all predominately in the U.S. generating cash to pay down the debt.
Okay.
And regarding the legacy operations.
FTP had a a significant drop in sequential gross margin.
Oh from September to June .
On you know that's $1 million drop in sequential revenue.
I could you just walk me food why why the happens.
That the all in the into sequentially gross margin for.
For full FTP was the one won a significant 50% of that was a significant dropping in vote in volume.
And I have to see it to death volume as you said the volume effect was not so large but we think this volume we have and <unk>. It is very significant mix product mix effect, which means.
Much more <unk>.
We have seen much more profitable products lower volume in combination with less profitable product. So out of the 1.1 volume effect 500000, <unk> I'm favorable mix in addition to death.
We have in inventory reduction quarter over quarter, though which had an effect of 400000.
We have also with 300000 negative exchange rate and also some manufacturing.
Some manufacturing at some manufacturing inefficiencies, which I would just get on 400000, which I would this you did most of them.
I will temper, our temporary and will not.
Occur in the coming quote though.
So we should expect the margins between pool.
Okay. So with that all said I guess I want to.
Pose the think about the outlook going forward a little bit zee.
How do you think about the depth and duration of this downturn do you feel like it's gonna be short in duration.
Or do you think it my drag a little longer.
And if you think it drags.
What are your thoughts about the rollout of new production in the advanced sensor lines I know that's a high margin business for you, but then they suggest that you'll have some redundancies during a downturn can you kind of walk us through your thoughts on those two launch.
Absolutely and supposed to FTP that depth in India FTP, the largest impact these coming from precision Lizzy sold as I've indicated before the biggest end markets <unk> and slowdown was test and measurement and most specifically <unk> semi testing holiday de <unk>. If you see some of the earnings we pulled off of the logic.
<unk> testing semi testing many factors you see that they.
The do all the they'll them I would say projection is positive to that extent, we have seen and and and as they said we have seen overstocking, mainly a distribution and yeah, Miss we child, the mainstays channel to death and market.
Based on their wallets that out and then negotiations that currently running full 2020, we do believe that we should expect to see a rebound of that business into second half of 2020 generally speaking.
Since we all know tending commodity products, we all sitting <unk>.
The custom products.
The cycle divorce the cycle is not the.
Doesn't go more than three to four quartiles.
But we do expect the we do expect it to the stocking levels. When we continue to go down and we would expect to see.
And up to on a.
I would tell you sometimes the in the first half of 2020 now regarding advance sensors. This is morphine strategic initiative to position. The company are running full with many many design means and also transitioning some you know legacy technology.
Into the new technology so so.
In that respect it that there is a sudden slow down it's not dramatic. This is something that also we expect it to be stabilized in the coming quarter, but but in principle is with the expectation, but we will we will continue on time, we disappointed if we choose very important for.
Just because we believe that some of the key designs put them into a significant a high volume in the new future.
But all in all.
We are very well optimistic looking looking forward.
Okay, great. Thanks, guys I'll get back into queue.
Thank you.
Again, if you have a question please press star one.
Seeing no further questions I like to turn the conference back over to Mr. shiny for closing remarks.
Thank you.
I would like to summarize the the top quartile.
It's similar to other industrial tech companies, our business trends in the cuoco reflect a general slowing.
In the global economy, and industrial sector, so as well as Inc. buckets of trade uncertainty in spite of these headwinds some of our markets continued to show some strength for our Q4, we are seeing signs.
That.
I will we kill markets, maybe bottoming as customers and they still but those work through the inventories the company's strategic initiatives, how focusing on track and we feel good about them.
The excitement and the expectation at home the de aside acquisition, we believe it will not only be immediately a treat these but will provide some growth factor in terms of some potential synergies.
I would like to thank you for joining the call and we're looking forward.
To updating you and into next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.