Q4 2019 Earnings Call
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Good day, and welcome to the vpg 2019 fourth-quarter results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference bridge 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 * then 1 on a touch-tone phone to withdraw your question, please press * then two, please note this event is being recorded. I would now like to turn the conference over to mister Steven Kann Mich senior director of investor relations vpg, please go ahead.
Thank you, Andrew and good morning everyone. Welcome to VP. Jeez, 2019 fourth-quarter earnings conference call our fourth-quarter, press release and accompanying slides posted on our website at vpg sensors, an audio recording of today's call will be available on the internet for a limited time and can also be accessed on the vpg website turning to slide to today's remarks are governed by the Safe Harbor provisions of the nineteen, ninety. Five. Private Securities litigation Reform Act. Our actual results May Vary from forward-looking statements for a discussion of the risks associated with these operations. We encourage you to refer to RSVP filings and the form 10-K for the year ended December Thirty One Two thousand eighteen and our other recent SEC filings.
On the call today.
RZ shoshani CEO and president and Bill Clancy CFO, and now I'll turn the call to Z for some prepared remarks. Please refer to slide three of the quarterly presentation a z
Thank you, Steve.
I will begin with some commentary on vpg Consolidated results and our sales Trends and operational highlights by segment bill will provide Financial details and in our queue 12020 Outlook moving to slide three the fourth quarter capped the second best year long history in terms of Revenue and profitability in spite of some macro headwinds after beginning the Year in q1 with one of our strongest quarters ever business Trends in our Revenue slowed in the second half of the Year reflecting a global economic slowdown that impacted many of our end markets.
despite
The head Wings we achieved solid results for fiscal 2019 with sales of 284 million and adjusted operating margin of 11.7% and adjusted EPS or $5.69 and 20.4 million of an of adjusted free cash flow moving to slide for.
So the fourth quarter sales of 69.1 million, we're at the high end of our expectations and go 2.6% sequentially off bookings will strong as total orders for the fourth quarter of 79.8 million Grew 24.0% From the third month in reflected growth in all three segments. The result was an overall book-to-bill of 1.15 in the fourth quarter home improvement from .96 in Q3.
Looking at our fourth quarter business Trends by market in test and measurement demand for our Precision resistors in semiconductor test applications rebounded in the general industrial Market. We so continued softness in oil and gas and in industrial process applications in transportation where we focus on track and one in in one market orders for our VP on both Wings Solutions will solid in both of Unix military and space Market or AMS and steel market trends continue to be directionally positive. But I am orders reflected the project driven nature of our products in the industrial wing and other markets which includes Precision agriculture construction wage.
SQL applications, we saw signs of bottoming
His customers replenished their inventories Foreman operation and financial perspective our profits in the fourth quarter were impacted by a number of factors first. Our results includes included one point seven million of an acquisition related charges and cost associated with the ignition of dynamic. Dynamic Systems Inc, or DSi in November of 2019.
Second we recorded the restructuring charge of 1.7 million which primarily relates to the closing and downsizing of facilities as part of our ongoing strategic initiative to align and consolidate our manufacturing operations. Third. Our margins will further affected by approximately 1.1 million related to inventory reductions as well as one-time inventory adjustments mainly for manufacturing relocations wage and system implementations.
Is also these factors was an operating income in the fourth quarter of one point eight million or 2.5% of revenues and adjusted operating income was 5.2 million or 7.5% of revenues fourth quarter earnings per diluted share was $0.28 and adjusted earnings per diluted share was twenty-seven cents.
moving to slide five
looking at our reporting segments in detail sales of Technology products of 29.6 million declined 7.7% sequentially and we'll 19.3% lower than the fourth quarter a year ago. The quarter-to-quarter decline. I do to lower sales of precision resistors in the test and measurement Market. However orders for this products grew up mostly in the fourth quarter of 2019 for both tests and measurements and AMS customers is they Place their semi-annual and annual the result was a book-to-bill ratio of 1.18 for foil technology products in the fourth quarter, which was up significantly birth.
0.91 in the
Bill quote
gross margin for technology products of 34.9% declined from 37.3% for the third quarter due to low volume of 1.5 million unfavorable product mix of three hundred thousand and one time inventory adjustment of $200,000, which was partially offset by a reduction in manufacturing cost of seven hundred thousand.
Looking at the four sensors segment says in the fourth quarter of 15.1 million declined 7.1% sequentially and we'll down 11.4% from the forequarter of 2018. The sequential decline was primarily due to OEM unlocking in the Precision weighing and force measurement measurement markets book-to-bill for four sensors was 1.1 104.9 four in the third quarter of 2019.
Both quarters gross profit margin for four sensors of 24.2% decrease from 30.4% in the third quarter of 2019 the lowest sequential gross profit reflected lower volume of six hundred thousand approximately 400,000 related to invite deductions in 200,000 of one-time inventory adjustments.
For the warning and control system segment four quarter sales of 24.4 million increased 28.1% from the third quarter off and will 5.2% higher than the fourth quarter a year ago. The sequential growth in Revenue was primarily attributable to the addition of 2 months of sales and continued good performance in both our process wearing business in Europe in our life steal business book-to-bill for weighing and controls was 1.15 which compared to one point zero four in the third quarter of 2019.
The full quote that was gross profit margin for or 41.6% or 46.8% excluding the purchase accounting adjustments of 1.3 million for the DSi acquisition was in line with file quarters profit margins.
moving to slide six
before turning the call to bill for some additional Financial details for the quarter. I would like to provide an update on a few of our part of this strategic initiatives that they are key elements of value creation strategy.
Turning to slide six first.
I would like to elaborate on the progress. We are making two we aligned our manufacturing footprint. I already referenced facility closure downsizing in the forequarter of 2019 which relate to transition of manufacturing or four sensors to India and China. We expect these seem to yield approximately 1.6 million of cost Savings in twenty-twenty excluding normal inflation and wage increases in addition. I would consolidation project in Modi'in Israel is on track and we expect to start the relocation in the third quarter of 2020 and took complete the transition as we enter twenty Twenty-One as we have discussed before this is a major initiative that not only gives us wage.
additional capacity we need
To support the future growth of our Advanced sense of business, but also consolidate certain Legacy operations, which will provide manufacturing efficiencies is the facility ramps production in 2021.
We expect to incur up approximately two million dollars of start-up cost in the second half of this year as we complete the transition.
Second we are pushing forward on a number of vpg specific initiatives. We continue to have a good customer engagement with respect to our pencils is we grew sales of these products 20% in 2019 compared to 2018 as we have described before the unique design capabilities in cost-effective manufacturing platform of the advanced sense of business are enabling us to pursue higher volume of opportunities, which we will not be able to address before another key initiative relates to our truck Way and Van way overload protection technology which grew 30% in 2019 from the file year.
we expect
Demand for these products to be further driven by adoption of new regulations in the EU that will require all trucks in advance with load capacity. Well more than three and half tons to have this capability while the regulation are still being finalized. They are expected to go into effect in the first half of 2021. We believe we are in a in the leading position in terms of our products capability is reliability in business and we are already working with all the large oems to develop solutions that meet the new regulations.
Does a monkey strategic highlights for the Quattro was the acquisition of dynamic systems in which was a creative in the fourth quarter?
Size a great example of a bolt on m&a opportunity We Believe will create value for vpg shareholders.
It is an established highly profitable company with a great novel technology that complement our existing footprint in the steel industry. We believe we have a great place and a solid balance sheet to support value-creating. M&a.
And we hope to make additional Acquisitions in 2020.
I'll now turn turn it over to Bill Clancy for additional Financial details.
Thank you see on slide seven of the slide deck in the fourth quarter of 2019. We achieved revenues of 69.1 million hours of operating income of 1.8 million or 2.5% of revenues and earnings per diluted share of $0.28 on an adjusted basis, which exclude one point seven million of costs and purchase accounting adjustments related to the acquisition and one point seven million of restructuring costs. Our adjusted operating wage was five point two million or 7.5% of sales and adjusted net earnings per diluted share with $0.27.
continue
flight seven
our fourth quarter 2019 revenue of 69.1 million increased by 2.6% as compared to sixty seven point four million in the third quarter off. We were down 10.2% as compared to seventy seven point zero million in the fourth quarter a year ago.
Foreign exchange negatively impact revenues by $500,000 for the fourth quarter of 2019 as compared to a year ago and had no impact took it to the third quarter of 2019.
Our gross margin in the fourth quarter was 35.0%
Excluding 1.3 million related to purchase accounting adjustments for the DSi acquisition our gross margin and adjusted basis was 36.8% off which declined from 38.3% in the third quarter.
Our operating margin was 2.5% for the fourth quarter of 2019.
If we
exclude the above-mentioned purchase accounting adjustments
acquisition cost of $400,000 and restructuring expensive one point seven million related to the facility closures and downsizing that deep mentioned.
Our fourth quarter adjusted operating margin was 7.5% as compared to 10% a third quarter of 2019.
The adjusted gross margin for the fourth quarter of 2019 included approximately 1.1 million of inventory reductions and inventory related jobs, which are not expected to reoccur excluding these inventory related factors adjusted gross. Margin would have been 38.5% above the the eight point three percent. We reported in the third quarter of 2019.
Selling General and administrative expenses for the fourth quarter of 2019 or Twenty point two million or 29.2% of revenues.
This is
Compared to twenty point nine million or 27.2% for the fourth quarter last year and 19.1 million or 28.3% in the third quarter.
The higher sequential sg&a in the fourth quarter reflected the inclusion of two months of sg&a expenses for DSI, which were partially offset by a reduction in a reserves the adjusted net earnings for the fourth quarter of 2019 or 3.7 million or $0.27 per diluted Sheriff office. To 5.0 million, but $0.37 per diluted share in the third quarter of 2019.
While impact the foreign exchange rates for the fourth quarter was modest compared to the third quarter. It had a much bigger effect compared to the fourth quarter year ago impacting that earnings by nine hundred thousand six or seven cents per diluted share.
We generated adjusted free cash flow of 4.1 million for the fourth quarter of 2019 as compared to 4.8 million the third quarter of 2019.
We Define free cash flow as cash generated from operations, which was six point three million for the fourth quarter of 2019 less Capital expenditures of 2.6 million month and sell fixed assets a $4,000.
We recorded a tax benefit of three point four million in the fourth quarter of 2019 related to the acquisition of DSi, utilizing our deferred tax liabilities against the fair tax office. We are assuming an operational tax rate in the range of 27 to 29% for our 20 20 planning purposes.
Reflecting the Forty point five million pay for DSI. We end at the fourth quarter with 86.9 million of cash and cash equivalents and total long-term debt of 44.5 million months with a net leverage ratio of about 1 time. We believe that our balance sheet remains very strong and we have ample liquidity to support our business requirements and the fund additional m&a opportunities.
Is there any to our Outlook?
Why we see signs of bottoming and some of our industrial markets there continues to be a number of uncertainties in the macroeconomic environment, including the potential spread of the coronavirus Thursday. We currently expect net revenues in the range of 63 million to 70 million for the first fiscal quarter of 2020, which reflect the portions of our project driven business office and customers longer lead-time orders that are expected to ship in the quarter and assumes constant fourth quarter 2019 exchange rates.
in summary
our sales for the fourth quarter of the high end of our expectations and we answer quarter with a very strong book-to-bill.
Our manufacturing consolidation projects are on track for on schedule completion.
And we believe we had the long-term growth and cost strategies in place to achieve are 3 or financial targets with that that's open the lines for questions. Thank you.
we will now be
In the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at anytime your question has been addressed and you would like to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
The first question comes from John friends robbed of sidoti & Company, please go ahead.
Good morning, guys. How you doing?
Okay, actually start the gross margin embedded in the adjusted gross margin is money down to the inventory reduction and something else. Can you kind of just a kind of parcel out? How much is embedded there and be with those costs continue into the first quarter of this year?
Cool Joe and so the inventory reduction which is mainly driven by four by four sensors. The amount is around 600,000. This is part of our long-term program to improve our working capital as we intentionally reduced our inventory levels. And this this is the effect of you know, reducing the inventory which package which affect the the balancing we we did reduce it. Substantially. We we do believe that the inventory will still be continuously may be monitored and we we would expect to further reduce that but definitely not to this automatic effect, which which means the effect of inventory reduction should be should be slowed down or should be almost diminished regarding the other effect, which is around 400,000. This is the one-time inventory adjustment. We annually conduct fishing.
account
Will follow inventory and typically the impact of those of this process is negligible because of the manufacturing relocations in system implementations. We had a phone number of negative singularities, which individually will not which individual individually were not material but in aggregate added to a more significant number which is the for how long we don't expect this unusual situation to occur.
Got it. Okay, and the transition of the $0.04 manufacturing to India and China how far along are we on that process? And I guess we'll just wage from that just discuss maybe China how you facilities in China are acting or reacting to the coronavirus shut down.
Okay good. So so regarding the location we are well ahead with our relocation programs at the end of 2019 at the end of last year. We were able to move that sent from the UK to close our facility in Israel for four sensors and to move more production from China to India with are still more restructuring to come in coming years. But as I indicated before we should expect to realize as we move forward at least one point six million dollar of savings in for sensitive nipples inflation regarding the Chinese situation. It has two aspects one. We have still a fairly small manufacturing facilities. Yep, China which which we were allowed to go back to work two days ago on February 17th. We are trying to we have seen high-level.
Captain D's and we are trying.
To catch up with the deliveries. Naturally. There are still some restrictions regarding moving Goods in and out of China depending on the situation, but and we may have to change shifts. But all in all we are back to work on the other hand. We have quite a few Chinese customers.
In respect to servicing our FTP for sensors and and W C S mainly in the steel Market. Some of them have been allowed to go back to work. How does still it's still pending? We are monitoring the situation on a daily basis and and at this point in time, we we we are optimistic and we do believe that they may get the the approval to go back to work. It's still in in in a way a little bit vague our hands around the the magnitude but we don't believe given the the progress they are making in China. We don't believe at this point in time. It should be a significant effect.
Okay, when you say significant effect, when you think about the guidance for the first quarter of the sixty-three and seventy million dollars is it hasn't been any kind of Revenue reductions off as a result of the coronavirus in that number or is that not affected by your customers or anything?
I was guidance exclude any any effect coming from the corner from the coronavirus situation.
Okay through us know what I'll get back into Q. Thank you.
The next question comes from a circus sure vachan of FBR, please. Go ahead.
Thanks for taking my question here. So each segment's book-to-bill ratio is rebounded to nice growth. Can you maybe give us some more granularity on on the metric for each segment and how that relates to you know, your sales Outlook.
Okay, so maybe starting on on a high level as as Bill indicated the sales guidance reflects. Definitely a portion of in a way of Summer. Our country's most logically been business, which is mainly the timing effect of our Pacific instrument Kal Kan Basi which in a way it it's in spite of the of the very positive market conditions is how those orders has been timed in addition to that since you you the book-to-bill ratio, mainly for if the P was extremely strong we have booked longer lead-time orders that are expected to ship in the quarter at the time expect it to ship in the quarter and assumes constant for saltwater exchange rate. But but since those has been booked, I would say that wage.
We would expect to ship some of them Beyond you.
One all-in-all some of the End Market has recovered quite nicely, especially in FTP when it comes to test and measurement automatic testing equipment for Semiconductor. AMS still has a a positive momentum very positive momentum. But at the same time still the general Industrial in regards to oil and gas in in regards to equipment information in regards to other end markets is still fairly soft. As I as I said, I believe it was stated. We are in Addis talking situation where we believe given the discussions we had with customers that we have reached the bottom and we do age six things to change and all those two to flow to in the next quarter or so.
Was there a follow-up sir? Yeah. Yeah. I'm sorry. I was putting myself off mute. Can you maybe talk about the sales and earnings contribution from the acquisition off for the quarter? And then after that if you can maybe touch on your expectations for sales and earnings contribution from DSi for the full year.
For the quarter, I could say that we we we had the aside for two months revenues for the four point 1 million gross margin was over 50% and adjusted operating margin.
Was the 800,000 close to 19.1% for the quarter and the book 2 and a very strong book-to-bill of 2.2 $6 at this point in time. We we don't give you know, complete guidance or full-year guidance for the guy but we are still running on a very strong momentum as I just indicated to be love to point to 6 and we and we I mean the integration process is going very well and we do expect it to happen on On Target our internal expectation.
But thanks for that. I guess if if we were to kind of backtrack into what you communicated from a financial profile on the last call would we kind of still expect it to be in line with them Financial metrics or better?
I would say that we could definitely it could definitely be in line with the financial metrics. We we we have provided before.
Great, and then if we step back and look at the the capex outlook for this year and the remaining kind of spend for the manufacturing facility built. Can you maybe talk about what ship out of fiscal nineteen and and goes into fiscal twenty and and on top of that just kind of you know, what the balance of your maybe maintenance capex would be for the air.
Sure, so regarding Capital spending in fiscal 2019.
We we have under spent in respect to what we have projected to spend in in regard to plant topics. And this is mainly due to a project timing is some of our topic has shifted from Q4 to q1. And this is mainly the Modine project. We are still on track but there was a month timing affect. We are we are we are anticipating Capital spending to be approximately 420 20 to be in the range of thirty-two thirty-three million the majority of which relates to to infrastructure and building related around twenty million, which would Encompass the Monday in Project the second month in India and some expansion of our Japanese facility for precision resistors.
while the rest of the topics would be
On the equipment side. This is this will definitely be a fairly unusual year for mechanics standpoint. And once we cost twenty twenty, we should go back to the office Capital spending run rate, which would be around four to five percent of sales.
And maybe just another indication that 75% of the Old Capitol should support expansion and cost reduction in respect to maintenance of business.
Got it. Thanks for that. And we just one more for me. I'll hop back in the queue you mentioned for advanced sensors that product line grew 20% versus 2018 month. Would that suggest now the the product lines annual sales range is maybe in the mid twenty million range. Can you maybe help us kind of understand where it stands today?
I I I'm not sure we we did provide an a rough number regarding Advanced sensors, but it's definitely I I would say that name.
We only in the in the double-digit million-dollar Avenue level a rough number would we let's say approximately how long you always Dimension within a range would be would be correct. But but we never provided, you know a clear indication regarding the specific number.
Thanks a lot back in thank you. Once again, if you have a question, please press * then 1 on a touch-tone phone. The next question comes from off of stifel, please go ahead.
Thank you very much. Maybe as a follow-up to the coronavirus question earlier, you talked about the customers and your manufacturing. Are there any impacts on the supply chain that may cause some uncertainty in terms of the revenue line?
If we speak about the supply chain in regards to supporting our own manufacturing which again, it's not a sizable one. We may have a certain effect that at this point in time. I'm I'm considering considering that as a second text because the because we had some some inventory to support I will production there in China. So I so it really depends how long it would take them to ease up the condition. So we would be able to provide, you know, a Thursday or materials, but but I don't think this is the in that sense a significant risk for our revenues since anyhow, the our manufacturing base is not applicable in China.
right
Shuffle maybe as my follow-up question in terms of some of the markets that you participated you had a very good defense and Aerospace, you know year off, you know over the last eight 2019. How does that market look like for you as you look forward in 2020 given that those are very project-related.
So I even given this regarding the I think that I would say that I am out of the significant increase in in order intake in you fall was in in respect to the End Market. So in that case we can we can we still see a continuation of of the of a similar dynamic in 2019 moving into twenty-twenty and in some cases. We see even a further enhancement of Investments. So we we do expect to continue to be strong or even stronger moving into 2012.
Well in terms of the longer term gross margin Outlet, you set a goal 45% you're near forty percent today on a pro-forma basis. What are the key variables over the next couple of years that'll drive that incremental, you know, five to six six hundred basis points that still need to be made up. Is it more just Revenue growth absorbed are there additional cost structure moves that can be made to I guess narrow that Gap.
Excuse me, regarding our 3 years projection, which I which I still believe it it's viable and and we can make it first. We will connect you to take out cost of cost out of the business as we did before we we did had in this specific quarter few singularities, which we have reported any signal inventory reduction, which we are not expecting to to repeat itself. And and only those two Effects by themselves are over a million dollar reaching when when in q1 of 2019 when we have exceeded those targets, we will return a new level of roundabout. Let's say ten or ten to twelve percent higher than the current run-rate. So so definitely in order to reach those targets.
we will have to
It's a much higher volume.
as well
great. Thank you very much.
This concludes our question-and-answer session. I would like to turn the conference back over to Bill Clancy for any closing remarks.
Thank you to summarize for Q4. We were pleased with our book-to-bill the performance of DSi, which is our newest addition to be b g and the Milestones are achieving in our manufacturing it cost optimization initiatives.
I also want to note that in March will be at the Sedona conference in New York. I want to thank you for joining our call today, and we look forward to updating you on our next earnings call in May. Thank you very much.
The conference has now concluded thank you for attending today's presentation. You may now disconnect.
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