Q3 2020 Vishay Precision Group Inc Earnings Call
Good day and welcome to the VPG third quarter 2020 earnings call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the Star then zero.
After todays presentation, there will be an opportunity to ask questions. You may ask us to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would like now to turn the conference over to Steve Kantar Senior director of Investor Relations. Please go ahead.
Thank you, Matt and thank you everyone for joining our call today.
Welcome to Vpgs, 2023rd quarter earnings Conference call, our Q3 press release and accompanying slides have been posted on our website at PPG sensors Dot com.
An audio recording of today's call will also be available on the Internet for a limited time and can be also accessed on our website.
Today's remarks are governed by the safe Harbor provisions of the Nike 95, Private Securities Litigation Reform Act. Our actual results may vary from forward looking statements for a discussion of the risks associated with Vpgs operations, we encourage you to refer to our.
Seifi filings, especially the form 10-K for the year ended December 31, 2019, and our other recent FCC filings on the call today are ziv, Shoshani, CEO and President and Bill Clancy CFO I'll now turn the call to see first some prepared remarks.
You can refer to slide three of the quarterly presentation. So you.
Thank you, Steve I will begin with with some commentary on VPG is consolidated financial results.
And sales trends for Q3.
And and an update of.
Well for the impact of the COVID-19 pandemic on our business.
Bill will provide financial details and our fourth quarter outlook.
Moving to slide three they'll quartile financial highlights.
I'm pleased with our performance in Q3.
As we continue to execute our long term strategies, while managing the challenges of the global pandemic.
We achieved growth in sales operating margin and earnings both true compared to the second quarter and the sales quoted a year ago, we generated positive adjusted free cash flow and continued our investment in our new advanced sensors manufacturing facilities.
And we all know many fracturing it's for capacity levels, It's our India facility full force pencils.
Moving to slide pool consolidated results and market trends.
We achieved so what they'll say Oh 67.5 million above the high end of our guidance, which was 14.2% higher than the second quarter and about flat with a year ago.
In terms of our business trends many of our diversified end markets in the so called sales continued to show modest signs of recovery from the pandemic lows earlier in the year.
Consolidated all those grew 7.7 million <unk>, 13.7% from.
On the second quartile why we are in college to buy these gold the sequential trends across the small good shows.
Show different level of strength.
On the positive side, the strong demand for consumer applications and precision agriculture was partially offset by lower all those for medical and construction.
In the steel related market for those with strong go full dynamic systems Inc. would be a site while cattle coal does remain flat.
Oh dosing Davee, oneq military and space and test and measurement market was strong.
However will trend in some end markets will mix.
In the transportation market orders rebounded from the depressed level in the second quarter.
But we'll still below the peak pandemics levels into apply all year.
Oh, those in the general industrial markets recover, possibly but the men you'd be smoke it tends to move in line with general economic aboard the GDP trends we.
Which remain muted in many of our geography.
The net result of these friends was the book to Bill <unk> 0.95 for the third quarter.
Moving to slide five segment trends.
We achieved sequential growth across all three business segments.
<unk> technology Board, that's the cost.
Cost of sales of 32.9 million grew 3.5% sequentially and 2.5% from a year ago.
We were pleased with the performance off Invensense soles, which grew sales by 22% from Q2.
And by 59% from Q3 of 2019.
The strength in advanced sensors was complemented by higher shipments.
Specific instruments data acquisition systems.
Why did say itself with season importantly, this those were soft still for the test and measurement applications.
Adjusted gross profit.
Adjusted gross margin for FTP was 41.6%.
Which was about flat with the second quarter and improved from 37.3% in the third quarter of 2019.
Due to manufacturing efficiencies and cost one pool.
Book to beautiful FTP was one point or one in that they'll walk though.
Driven by another consecutive quarter of significant orders for advanced sensor sales mainly for consumer applications.
We continue to get Quinn customer interest for additional applications of our advanced sensor technology that benefits from the flexible designs smaller size and lower power consumption consumption.
Including for consumer applications, such as in the bicycle and Endo exercised market.
As well as for medical applications.
Why did we are currently operating at the maximum capacity for advanced pencils.
We are able to keep up with Italian demand.
With regards to our new facility project. The building infrastructure has been finished and we have been completed the move of that.
Oh, how it has many state the offices.
As we move and installed the production equipment in stages, we expect to be fully transitioned into the new facility.
In early second half of the 2021.
Which will give us the needed capacity to accommodate future growth.
Well the four cents all segments.
It was a quarter of continued continued recovery.
Phil what those sales of 13.9 billion improved by 55.5% from the second quarter sales 2020.
Driven by our backlog.
And the return of our India facility to full capacity late in the sales <unk> <unk> <unk>.
As we discussed in the past walk that India has been.
I think Hillary.
Oh, hey by the pandemic and no major facility, Yeah has been contending with our local government coal.
Colby restrictions, which will fully lifted beginning in July.
I want to I.
I want to commend our.
Well for sensor sales team for the hard work and dedication.
Ramping up production even.
Is that region faced ongoing pandemic challenges.
In the third quarter, we estimate.
Due to the pandemic full stencils revenue as well that develops sleep impacted by approximately two and a half million form a normalized <unk> called <unk> run rate levels.
And its operating income was impacted by approximately 1 million.
Hi, mainly due to lower revenue is there.
The pandemic has impacted for sensus revenue in aggregate.
For the first nine months of plenty plenty by approximately 10 million and by approximately 4 million in sound Sophie operating income from a normalized run rate.
In terms of OEM specific four cents, so spoiled that.
Which is one of our key growth initiatives sales grew by 94% sequentially, but will be low fleet pandemic remedy.
Financially for Sensus performed well achieving an adjusted gross margin of 31.2% in the third quarter, which compares to 19.6% in the second quarter and 30.4% in the field well till 2019.
This performance reflects both short term cost savings measures.
And the long term structural cost savings initiatives that we have implemented over the past four years.
Including the mood of the majority of the four cents those manufacturing to India.
Compared to the second quarter, the sequential increase in adjusted.
Gross margin was primarily due to higher volume.
Book to Bill for census was 0.9.
It's all the fault genetic weighing up vacations and OEM for that hopefully decision not to be called true well how are you.
This was offset by lower all those four OEM related products, mainly in the medical.
Sales of the weighing and control systems into fill fulfill.
20.8 million increased 12.5% sequentially and 8.8% higher than a year ago.
Sequentially higher sales of de aside and I will onboard weighing solutions offset lower sales of Kelk systems.
Sales of truck truck weight, and Vanweigh rebound that 60% from.
From the second quarter.
But we'll still be low and normalized run rate in the third quarter of 29 pm.
We continue to capture aftermarket demand for truck, where you find ways.
And we expect additional sales opportunities to emerge because then you you regulations become effective in meet the 2021.
Adjusted gross margin in the Phil well go full WCS was 44.9% adjusted for Cobiz impact and.
<unk> declined from 47.3% in the second quarter.
Mainly due to unfavorable product mix and the reduction of inventory, partially offset by higher volume.
In terms of sequential trends in WCS segment.
<unk> site and onboard weighing well high you why kelk all those will flat.
And remain below bleep pandemic levels.
The results of these WCS oldest friends in the third quarter was the book to Bill of <unk> 0.88.
Moving to slide six VPG strategy.
<unk> content, we COVID-19 impacts on its business.
In terms of impact from Colby all our businesses are now operating normally although we are continuing with measures to protect the health.
Well file with employees and our customers. These measures include the restrictions on travel and maintaining safe work place distancing and providing transportation assistance give.
Given the ongoing economic uncertainty.
Uncertainties presented by the pandemic.
And and increase in infection rates around the world. We are continuing to maintain tight control of our cost. Nonetheless, we are continuing our long term strategic initiatives, including deploying our capital prudently to be to build long term stock.
Stockholders' value.
As such we now expect capital spending to be approximately 25 million full 2020 of which 15.8 million has been invested.
The first nine months.
We are also continuing to look for opportunities to build additional stockholder value to attractive M&A.
Before beautiful Wides more details on our third quarter financials, I would like to take the thing.
The vpgs employees around the world for their dedication and customer focus during these challenging times.
In summary, our business environment is currently more positive.
Then in the first half of the year, but many of our markets have still not be cobbled poorly to bleep pandemic levels.
I will now turn it over to Bill Clancy for additional.
Financial details Bill.
Thank you, Dave moving to slide seven our financial results.
Referring to page seven of the slide deck in the third quarter up 2020, we achieved revenue of 67.5 million gross profit up 27.3 million or 40.5% of sales.
Operating income of 8.1 million or 12.0% <unk> revenue and net earnings per diluted share of 41 cents.
On an adjusted basis, which primarily excludes a 320000 that credit mainly related to a covert related subsidy from the Canadian government.
And an 84000 restructuring charge.
Our gross profit was 27.3 million or 40.5% of sales.
Operating income by 7.9 million or 11.7% of sales.
Net earnings per diluted share was 40 cents.
Our third quarter 2020 revenue increased 14.2% compared.
Compared to 59.1 million in the second quarter and were slightly above the third quarter a year ago.
Foreign exchange for the third quarter of 2020 had a positive effect on revenue by $700000 compared to a year ago.
At 1.1 million as compared to second quarter of 2020.
Our gross margin improved in the third quarter to 40.5%.
39.1% in the second quarter.
On an adjusted basis, our third quarter gross margin of 40.5 per se grew from 40.1% in the second quarter of 2020.
Our operating margin was 12%.
The third quarter of 2020.
Excluding the above mentioned restructuring charge and the COVID-19 subsidy.
Third quarter adjusted operating margin was 11.7%, which increased from the 8.4 per se we recorded in the second quarter of 2020.
Selling general and administrative expenses for the third quarter of 2020 were 19.1 million or 28.4% of revenue.
In dollar terms as a percentage of revenue. This was essentially flat with the third quarter of 2019, and compared to 18.6 million and 31.5% of revenues in the second quarter of 2020.
The sequential increase as Jean day of $500000.
Mainly related to the impact of foreign exchange.
The adjusted net earnings for the third quarter of 2020, or 5.5 million or 40 cents per diluted share compared to 2.6 million or 19 cents per diluted share in the second quarter of 2020.
Foreign currency exchange rates for the third quarter of 2020 increase net income by $200000 or one cents per diluted share relative to the prior year period.
We generated adjusted free cash flow of 1.4 million for the third quarter of 2020 as compared to 4.8 million for the third quarter of 2019.
We define adjusted free cash flow as cash from operating activities.
Less capital expenditures plus they all fixed assets.
Our GAAP tax rate in the third quarter was 27.1%.
We are assuming it operational tax rate in the range of 26% to 28% for the full year of 2020.
Moving to slide eight our balance sheet strength.
We ended the third quarter with 89.8 million of cash and cash equivalents and total long term debt of 40.7 million.
We believe that we have a strong balance sheet and ample liquidity to support our business requirement.
To find additional M&A opportunities.
Regarding the outlook.
Despite the ongoing uncertainties and economic impact of the global pancreatic we expect net revenue to grow sequentially and being in the range of 69 million to 75 million for the fourth fiscal quarter a 2020.
Constant third fiscal quarter 2020 exchange rate.
In summary.
We achieved sequential sales growth across all three reporting segments.
We delivered solid Q3 margin performance and eat yeah.
And we continue to move forward with our growth initiatives and investments and to be ready to maximize our performance as conditions return to normal.
With that let's open the lines for questions. Thank.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question. That's been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Sarkis Sherbetchyan with B. Riley Securities. Please go ahead.
Good morning, and thanks for taking my question here.
Good morning, Jackie.
Good morning, So Keith.
So first on the fourth quarter sales outlook, Yeah, I think it's pretty impressive that you guys. It's it's got it to sales and you know sequentially better thought Oh. So just wanted to kind of pick away and understand what end markets are driving the quarter on quarter for Q growth assumptions, and then which segments are the big.
I guess beneficiaries of your assumptions just kind of looking at the.
The metrics relative to the third quarter here.
Okay. So sulky so when we are projecting good Q4 sales.
Sales revenues, we are looking at few few Foxholes festival the dynamic of the company or is it such that to any stoically is the same thing that took the two pillars of the revenues.
How will they be in the backlog and now expect it to be shipped in the following quarter, we filmed with from a delivery dates to customers.
One quick fill all those that don't expect it to be booked and shipped within the same quarter. In addition to death, we are cycling the project driven product lines like a d. aside and like like account like it Pacific instruments that that has a a spin.
Perfect delivery dates we choose not to which is not homogeneous fleet you know it cost quartile. So if we take into account.
They did $90.8 million of backlog the number of working days and expectation that utilities are expected to be delivered.
Given the current environment, including the project.
Do you have in cycle product line, we do believe that this guidance is is suppose he's supports to support that level of revenues.
On a high level, we will it be a provided more color. Let me go to the old the intake.
On Q3, which is which is expected to be delivered in Q4 regarding the different markets.
And as we said consumers eat on FTP consumer is quite strong A.O. Smith is quite strong we have seen some modest decline on OEM medical for sensors.
That's still waiting is much softer though.
And and the other for the clients are better than the first half of the yield but still fairly flat in that respect we believe pandemic levels.
Thanks for that Steve and I guess, if I were to kind of ask a little bit regarding the OEM medical and industrial waiting is that you know.
Something where you think the recovery kind of stretches out a little bit or anything you're seeing from a customer specific perspective that you can.
You know maybe give from one that could recover.
Sure. So so we don't think that the full sense those OEM medical customers.
The the shoes its photos when we enter into the pandemic, which was the <unk> football. He much earlier. This year there was a kind of a fairly panic mode for many for many Oems, especially the medical ones and they started to beef up the inventory levels and you know.
We we choose supporting the health care systems. So they have been placing significant amount of all those.
In the first half of the year why is now at this point in time, they have enough inventory and the information they had been providing us did they have to work down the inventory we.
Even though colleen production rate. So the expectation is that once they reach a certain level, we should expect to see it all does that rebounding again.
Good thanks for that and just kind of shifting gears here to advance sensors. I think you mentioned advanced sensor sales grew 22% over the prior quarter and you're kind of bumping up against manufacturing capacity I just wanted to get a sense for you know kind of the current run rate I think.
In previous calls you mentioned 30 million in annualized sales is that kind of still the the metric you're bumping up against a little bit better can you maybe frame up for us. So well. So you are absolutely correct to the information we have provided in the last call. If it was their own 30 million run rate.
And we have reported the owned about 22% to cool off the old book won't feel so now we are running a much higher than that $30 million on lights on an annual basis void when stencils <unk>. That's a that's a correct assumption yeah.
Yep, Thank you and and I think I noticed you mentioned capital spending would be brought down to the 25 million range from 30 million any you know any call outs on the differential there is that's spilling into next year.
Sure initially when we when we provided the guidance it was in Q4.
In Q4 last year. It was a bleep pandemic will wait a week took into account sales.
Sales and infrastructure related project like building expanding the India.
Building you know the two support to more capacity and also a expanding other product lines on the infrastructural one.
One once the pandemic came in you know in the situation became much more fluid given the uncertainty and we had to deal.
We did we the local down in India and in other places we had to change priorities in order to support Collyn B. men and this is where we shifted capital from from product lines that did not show enough. The demand did not support the level of growth.
Income in addition to the India infrastructure, we shifted that full adding more capacity on the FTP predominantly Floyd Venson sales in order to support the additional growth that we have seen during the <unk> period.
So it was just very single player with these even given the situation and the uncertainty.
Great. Thank you for that that's all for me.
Our next question comes from John Franzreb with Sidoti. Please go ahead.
Good morning, Bill how are you doing.
Good morning, John Forney.
Funny, John I guess I want to start with the cost side of the equation talk a little bit about temporary costs that might have put in place are they all now back part of the piano, where do we stand on that front.
Well, there's two types of cost measures, we have this strategic ones, which show at what we try to remove Te yield project, you know and we have and we did discuss that in Q4 like closing facilities. The at least the <unk> relocation afford that's changing you know warehouse locations. This is.
All part of a much bigger plan, which we have continuing to to execute I will move to yield full gum. In addition to the short term.
Cost related.
The cost related measures that we took during the probably the environment is an example.
All that we have abandoned travel and we have minimized all I believe you know.
Non.
Non related cost, which is supposed to support.
<unk> to support except for chicks, which we may have which we have pushed out some of them, so which we have pushed out some of the project into Nyx deal. It given the given the pandemic. So so this is really a mix bag of those short term.
Like travel, which could result in a significant.
Amount of money. In addition, a if you can recall in addition to the salary freeze that we have in implant.
Implemented earlier.
India you are with the longer term projects, we charge more for strategic nature or you know.
Moving.
Moving toward that.
To India or transitioning some of the legacy production into Invensense those those type of projects. So its really a combination but it's all no flows into.
To 2020 PNM.
So in aggregate you are saying that most of the temporary cost is still in place such as the salary freeze and we shouldn't expect them to materialize with 2021 of the earliest is that a fair assumption.
Well.
I I have to say that we don't really know how what the world is going to change going forward as for pandemic. One you know a vaccine will be will.
We'll be found and distribute that so so I would assume that we would be increased the level of travel, but I don't think that's to <unk> that I do believe that there are some changes in the fundamental to the you know post pandemic and we will not see.
The same level as the same coastal or traveling and we'd be fine you know.
The Dow ways, how to communicate in a fairly effective way via electronic media. So that would be an increase of course, but I don't think that to the same level as the fleet pandemic. This is juan regarding our strategic initiatives, we have not finalized our multi year plan and.
No more projects to be delivered in 2020 ones and onwards.
And and and after that and we are going to provide that information once we get.
Ah you know closer to the execution, but but we do have more strategic project cost reduction projects to be to be delivered.
Got it understood and regarding Europe, Xis I'm kind of interested in your take about what's happening over there and how much you've baked into the.
The outlook being I don't know.
Worse than expected in your in your guidance for the fourth quarter.
I I'm I'm I'm, sorry, John I I couldn't hear the question clearly would you can you repeat it please pick up your Q4.
You whole at.
Range.
I'm curious about outlook.
Your outlook and and in regards to Europe.
How much Oh youre.
How much you based on what you've considered.
Conditions in Europe before what alcohol.
Okay. So as I indicated before two codes of the revenues that had the two pillars of the revenue that we are expecting to deliver in Q4, Oh already baked in into a into the backlog. So we are really looking at one third of the revenues given the cycle of the N.
Of those and.
Of those and you know it and use the project.
Like like the OSI in steel.
I think that like everybody else is youre moving into a into another look down daily data always a.
It's something that I would say if we factor all of uncertainty, but they are but they have to say that given our estimation and the assumptions that we did put in place I do believe that.
This is it this is a very low risk for us in respect to the guidance that we have provided.
There is a certain there is a certain you know fluidity and as the situation keeps on changing what they think that the guy that I I believe that the guidance we have provided.
It is within those columns.
Well I feel comfortable.
We the guidance.
Okay, and I guess, one this thing has there been any problems with your supply chain at all any issues getting what you need.
Well initially as everyone. You know initially when the pandemic just started we were looking to identify all the key.
Well the key supplies into a true.
To assure that we will not be in a situation, where we potentially could be in a in a line shutdown and as of today. We have a we were able to identify and.
And to build those the safety spoken and doesn't always for the company to be in a line down situation, we will secure from a supply chain standpoint, yes.
Perfect. Thanks.
Actually I'll get back to you.
Okay.
As a reminder, if you have a question. Please press star then one to be joined into the queue. Our next question comes from Patrick Ho from Stifel. Please go ahead.
Sorry, Patrick your line might be muted are you able to hear us.
I'm, sorry about that Oh, thank you very much and congrats on the nice quarter and outlook.
Maybe first off in terms of the force sensors business you talked about.
You talked about it being back at Oh.
Coal production do you see the margin gains in that business segment being sustainable.
Okay since Pat.
Patrick since we did the same with the significant cost reduction or you know over the years moving all to India at this point in time, the the margins Oh.
Quite sustainable given the.
The volume, which means we have a similar level of volumes, we should definitely keep the same level of margins and if we would expect it even further improvements on the margins as the volume.
<unk>, we will pick up as we will continue to.
To exercise I will start to do for me designing wins, we've got to being the Oems, but but.
To make the the long story the long on social those margins are sustainable we with the with the with the level of volume it will running today, yes.
Great that's helpful and maybe as my follow up question, you know one of the secular growth trends that I covered closely in fiveg and the roll out globally that we're starting to see in that marketplace can you discuss any of the opportunities in that segment for you both near term.
Well <unk> as well as over the next several years.
Okay, the only product line.
To.
The only product line that we are exploring opportunities regarding fiveg is but decision the disease, those which is part of the FTP, we will that we'd need to engage with some you know large.
Large Oems and the.
The potential design, we use within those base stations at this point in time.
We we have not disclosed the level of opportunity, but we also we have made the initial contacts and we are in a design win.
When phase regarding those but but again I have to say its exclusive it's exclusively related only to precision. There's this those and not relevant for the rest of the product lines.
Great. Thank you very much.
This concludes our question and answer session I would like to turn the conference back over to Steve Kantar Senior director of Investor Relations for any closing remarks.
Thank you all for joining our call. We look forward to updating you next quarter and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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