Q2 2019 Earnings Call
Good morning, and well welcome to the VPG second quarter fiscal 2019 earnings conference call. All participants will be in listen only mode. So you need assistance. Please signal a conference specialist by pressing the star key followed by zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note that this event is being recorded I would now like to turn the conference over to Renee Tong. Please go ahead.
Thank you operator, good morning, everyone. Welcome the DPG 2019 second quarter earnings Conference call.
An audio recording will be made at the conference call today, including any questions or comments that participants may contribute.
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And now it's my pleasure to introduce the host for today's call, Steve Shoshani, CEO , and President and Bill Clancy CFO Bill.
Thanks Renee.
Good morning, everyone and thank you for joining us on our call today.
I'd like to start by reviewing a few highlights and then summarizing the financials.
Following that Ziv will provide his view of the results and the global business environment.
Referring to page three of the slide deck, we had a solid second quarter 2019 with revenues of $70.9 million.
Operating income of 8.1 million or 11.4% of revenues adjusted operating margin of $8.7 million or 12.3% of revenues.
Net earnings per diluted share of 41 cents and adjusted net earnings per diluted share of 45 cents.
On slide four.
Our second quarter 2019 revenues decreased by 4.5% to 70.5 $70.9 million down 3.4 million.
Compared to 74.2 million our revenues in the second quarter of 2018.
The negative impact of foreign exchange rates to revenues for the second quarter of 2019.
As compared to the second quarter of 2018 was $1.8 million.
Our gross profit margin decreased to 40.4% in comparison to 42.3% in the second quarter of 2018.
The decrease in gross profit of $2.8 million for the second quarter of 2019.
As compared to the second quarter of 2018.
Was primarily attributable to a decrease in volume of $800000.
Manufacturing costs of $800000 wages of $600000, a onetime charge of $300000.
And the negative impact from foreign currency rates of $300000.
Selling general and administrative expenses for the second quarter of 2019.
Were $19.9 million or 28.1% of revenues compared to $20.0 million or 26.9% for the second quarter of 2018.
The decrease in central selling general administrative expense was related to $500000 of positive impact of foreign exchange rates.
Mainly offset by $400000 of wage increases.
The adjusted net earnings attributable to VPG stockholders for the second quarter of 2019.
Were $6.2 million or 45 cents per diluted share compared to $7.7 million or 57 cents per diluted share in the second quarter of 2018.
Foreign currency exchange rates for the second quarter of 2019 as compared to the second quarter of 2018 decreased net earnings by $200000 or two cents per diluted share.
We generated free cash flow of $6.7 million for the second quarter of 2019 as compared to $3.8 million for the second quarter of 2018.
We define free cash flow as the amount of cash generated from operations, which was $8.9 million for the second quarter of 2019.
Less capital expenditure, which was $2.4 million for the second quarter of 2019.
Net of proceeds from the sale of assets, which was $200000 in the second quarter of 2019.
Our GAAP tax rate for the quarter ended June 29, 2019 was 26.4%.
We anticipate that the operational tax rate for the year will be in the range of 27% to 29%.
On slide five.
We remain focused on the execution of our core strategy.
Which we believe will be very effective in achieving the goals outlined on slide five.
With that let me pass for other comments on disease.
Thank you Bill.
An important part of our strategy is to grow by developing new product offerings.
A great example of these is our advance and so line, which continues to gain adoption.
We develop these platform is performing for technology products segments.
And he has grown nicely as more customers include in bill for the design.
We saw our advanced sensor revenues increase.
Approximately 28% in the second quarter of 2019 versus the second quarter of 2018.
We are pleased with the continued the acceptance of these new central platform in Oklahoma.
Enhanced performance to customers.
Second example, using our weighing and control systems segment.
Our truck way and Vanweigh onboard weighing business revenues has increased 77% in the second quarter of 2019 as compared to the second quarter of 28.
Moving to our end markets and beginning we'd be men for beyond the military and space.
Positive sentiment for defense supply is expected to continue.
The treasury outlays for defense investments.
Spending was up 27% in Q1 29 theme overall Q1 was 28.
The increase in spending is likely to continue.
In the third quarter to 2019.
In the semiconductor capital equipment end markets.
Neil Neil term demand dynamics remain muted as minimally.
For the limits capital capital expenditure why logic and foundry.
Reducing spend on advance nodes.
The projection for fab equipment demand to fall, 18% this year.
However, the expectation is to increase the men by 6%.
As we do sales begin to recover from the ongoing investments.
Finally, turning to the steel market. The focus is that 2019 and 2020 global steel demand was expected to continue to grow but the growth rate would moderate in the tent intend them, we'd slowing global economy. However, the uncertainty over create environments in volatility.
In the financial markets continue and could potentially pose downside risks for these folks focus.
In some of the.
The civil views of really rapid growth, we see stability.
<unk> end markets we serve.
Moving to slide six.
The company's overall book to Bill was <unk> 0.9 full in the second quarter of 2019.
Compared to 1.13 in the second quarter was 2018 and 0.92 in the first quarter of 2019.
Total orders for the second quarter of 2019, with 66.7 million a decrease of 17.3 million or 20.6% from 84 point Onemillion in the second quarter of 2018.
And a decrease of 3.5 million or 5.0%.
From 70.2 million.
In the first quarter of 2019.
The sequential decrease in all do is primarily attributable to Precisions is this still.
For that in the test and measurements market in Europe and in Asia.
Also saw a decrease in full since those four ducs with OEM customers in Folsom measurement end markets, mainly in the Americas in Europe .
Finally, we saw a decrease in the demand for steel for the Oh, that's in Asia and Europe .
Our backlog.
At June 29, 2019 decreased to $83.4 million.
Compared to 110, one point Onemillion at June Thirtyth, 2018, and 87.1 million at March 30, 29 theme.
Moving to slide seven.
Some details on our reporting segments. The full technology for that segment had the book to be <unk> 0.93 for the second quarter of 2019 compared to 1.2 full for the second quarter of 2000 18.8 for the first quarter of 29.
Sequentially orders decreased by $1.9 million or 6% from the first quarter of 29%.
The full technology for that segment gross profit margin was 43.6% for the second quarter of 2019 down from 46.1% in the second quarter of 2018, and 44.7% in the first quarter or 29%.
The year over year gross profit decreased $1.4 million was by my early view.
To the increasing manufacturing cost of 400000 negative impact of foreign currency rate of 400000.
Increase in wages of 200000, and a decrease in volume of 300000.
The decrease in volume primarily came from the Pacific instruments that we deemed to have your oneq military and space end market.
In the Americas and strain gauge for that in the test and measurement.
And false measurement end markets, primarily in the Americas.
Sequentially gross profit margin decreased by $2.2 million, primarily do you.
Two a decrease in volume of 2.5 million.
The fall in technology for the segment backlog was 3.8 months compared to 4.8 months last year and 3.6 months in the final quarter.
Looking at the force sensors segment the book to Bill of the show was <unk> 0.95 for the second quarter 2019, compared to <unk> 0.88 in the second quarter of 2018 and 0.98 for the first quarter of 2019.
Sequentially orders decreased.
By 900000 or 5.6%.
The gross profit margin for the segment.
Was 26.9% in the second quarter of 2019.
Down from 29.4% in the second quarter of 2018 and down from 30.2% in the first quarter of 2019.
The gross profit decrease of $1.3 million compared to the second quarter of 20 team was due to a decrease in volume of $1.2 million related to OEM customers in the force measurement markets in the Americas.
Sequentially the gross profit decreased.
By 700000 compared to the first quarter of 2019 due to a decrease in volume or 200000 negative exchange rate impact of 200000 in a one time charge of 300000.
The four cents. So segment backlog was 3.0 months compared to 2.7 months last year and 3.1 months in the in the bio fulfilled.
For the weighing and control systems segment. The book to Bill ratio was <unk> 0.95 for the full for the second quarter of 2019 compared to 1.18 for the second quarter of 2018.
And 0.93 for the first quarter of 2019.
Sequentially orders decreased by 600000 or 3%.
The gross profit margin for the segment was 45.6% in the second quarter of 2019 versus 48.0% in the second quarter of 28 team.
And 50.2% in the first quarter of 2019.
Weighing and control system gross profit decreased by 100000 for the second quarter of 2018 due to an increase in manufacturing cost of 300000.
Wage increase of 200000 in a negative impact of foreign currency of 200000.
Mostly offset by an increase in volume of 800000.
With an unfavorable for the mix.
Sequential gross profit decrease of 1.6 million compared to the first quarter of 29 theme was mainly due to the reduction in volume.
Of $1.3 million with an unfavorable product mix.
The weighing and control system backlog.
Was 3.5 months compared to 4.2 months in the second quarter of 2018.
And 3.4 months in the first quarter of 29 pm.
Moving to slide eight.
Given the current business environment and our most recent order intake at constant.
Second fiscal quarter 2019 exchange rates, we expect net revenues in the range of $67 million.
To $73 million for the third quarter of 2019.
With that let's open the lines for questions. Thank you.
We will now begin the question and answer session.
To actually a question you May press Star and then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys. If anytime. Your question has been addressed and you will like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Sarkis sure Beta Hong with B. Riley FBR. Please go ahead.
Hey, good morning, and thanks for taking my question here.
Morning Sartini.
So I'm just wanted to touch first on the sales outlook, Steve I know you mentioned in the prepared comments some of the puts and takes regarding the end markets.
Can you maybe help us understand what you're seeing as far as kind of current order rates from the various end markets. What are the areas of strength what are the areas of weakness start with there.
Sure I would be happy to provide a general overview regarding our reporting segments and the end markets. We are serving.
Starting with maybe with the FTP and given the given the current business environment.
65% of the decline of order intake calc too.
Although the similar quarter a year ago is coming from.
Decision that as these stores as well as the one time, one large annual although full Pacific installments.
The quarter over quarter decline I would say, 55% of the older. The decline is coming from precision, but as these tools. So all in all the the main weakness in a softening of we see coming from from precision resists those into decision is this those will serving different end markets I think that by far the largest one east test and measurements and the biggest impact we have seen in Asia and in the American ending the Americas is the fact that Tim semiconductor equipment manufacturers has slowed down dramatically and the demand for.
For putting in place new equipment.
We are looking we are speaking about.
Fontana, which is fab equipment as Beck as well as backend which is.
I see a cheap testing so the biggest drop.
He is a foot for precision resists those is coming from the semi conductor semiconductor side and as I indicated there is.
We do believe that based on the.
The macro environment and the different inputs that we have received.
The expectation is to see certain uptick.
Through the end of the year, given the very very low investments in capital equipment, which is currently.
Which is currently happening.
On a on precision that is on precision because this those we also see it.
In a way slightly lower demand in regards to some of the I would say more food in general industrial end markets, but I believe that in that sense, we have reached a plateau for them.
For the micro measurement of the strain gauge path that the biggest fluctuation is really coming from the.
And also for the project driven nature of Pacific instruments.
A year ago, similar quarterly <unk>, a year ago. There was an extremely large order that has been placed on it on an annual basis. At this we don't see a similar phenomenon this year, but still as a V. Oneq military and space is a very very solid end markets.
Pretty much for all our product lines, including precision that is this dose we do see the in coming order intake for this specific.
Product. So so all in all four FTP. The biggest effect is the test and measurement semiconductor equipment and to a lower extent general industrial markets, which we believe already reached a plateau moving to the four cents souls into four cents. So.
For the full sensors segment, we have seen some decline coming from our large Oems in regards to the three.
To the end markets, we serve construction precision AG.
Medical as well as some general industrial in respect to servicing the weighing in this study we I believe that we have reached the in a way a plateau in index.
For this reporting segment and we should expect based on the information we have received from our customers mainly the one we so for the construction end markets as well as the medical.
And in general industrial in the Americas, we should expect to see orders picking up as of this as of Q3.
Onwards.
Weighing and control systems segment here, we are serving very different markets. The biggest change that we identify from one quarter to another quarter is really still similar to Pacific installments due to the end user project nature about large fluctuation from quarter two quarters. So far this year. Despite the general environment. This year.
The order intake for steel was strong also in the second quarter, maybe was not as strong, but we'll still.
Turning it.
Hi, a record level for steel and I would say that we should expect to continue.
In a similar well maybe it should be slightly lower but it should be in a very similar way also in the second half of this year.
Some general industrial where we see slightly softening is is on the European side for our process.
Weighing side, where capital investments is more required but on the other hand, the construction business and which is also being serviced by the hour onboard weighing business in North America is running strong so all in all we should expect.
Former reporting segment, we are in a kind of a wash regarding the different end markets.
Got it thanks for all the color there and if I can.
Touch on the advanced sensors segment, I think you mentioned.
For this quarter there was some some good growth I think it was in the high Twentys range year on year at 28%. Yes is there anything incremental you can help us with and in regards to that.
Product line.
I I think that I believe I shared in bio earnings that in 2019. Despite the fact that we are not expecting to realize significant revenues, but we have introduced a new product line.
In the advanced sensors for stress analysis applications.
Which we already started to deliver samples and oldest customers. The acceptance level is very very good and we continue to make inroads in regards to this new.
Applications and new products that we have developed we do expect this the revenue to two significantly go up as we move into 2020, but but from a but our service level.
The.
Quality and we are we continue to develop new products going into new end markets and new applications.
Got it that's helpful and I think related to that.
For this year and I think next as well you had mentioned in previous calls that you'd like to do is about $30 million of Capex and that included the advance sensor facility build and some spend for force sensors as well is that still on plan for this year does that get shifted.
A little bit into 2020.
Okay.
That's an excellent question. Despite the fact that on the capital spending.
We are a little bit light in the first half of the year. This was all planned given the nature of of those project given that 50% of the 30 million now infrastructure related. So I can report that on the so called Modine project, which is the new facility that we are putting in place for advance sensors. We are on time.
The plan is.
As it was at the very beginning to transition the management path.
I would say sometimes early.
Early second quarter of next year to start transitioning the manufacturing.
Early Q3 and to finalize that transition.
At the end of next year. So we are on time regarding the sports direct budget wise and timing wise regarding India expansion. We are also on time and we expect.
To finalize this project to end of the second quarter of next year.
Good and so I guess from a.
Annual Capex perspective, more the spend would be I suppose in the back half of this year is that the right way to think about it.
This is correct and we and at this point, we do expect to meet the initial projection for for the 30 million, but youre absolutely correct. So.
Thanks, I'll hop back in the queue.
For others to ask questions.
The next question comes from Deforest Hinman with Walthausen Walthausen and company. Please go ahead.
Hi, Thanks for all the detail you can given the the acuity if I could just ask for a little further.
Color on some of these.
New applications that you're delivering product who is there any color you can give us in terms of end markets that that is being delivered to and.
I think in the past, we get given some numbers in terms of a revenue opportunity. There. Its escaping me can you can you just update us on what you think that opportunity as well.
We I have to be a little bit careful in regards to especially through these advanced sensor because we do have sleep and da's, we some of our key customers even in regards to the end up application they would like to keep it there.
Very very confidential, but whatever I can share is that a distressed analyses supposed to make these is is the.
Or is it potentially is going to open new markets. For example, as I stated before PC, both testing, which we currently do not have any product offering.
And the four most PC board manufacturers they do require.
Certainly I mean, those type of strain gages being applied on bill.
End application or in order to measure the stress, while while doing the testing why designing and testing of the PC. Both currently only competition serves this market and we and we believe it's a multi multi billion dollar market and we are planning to participate in that and since we have a very good product also a product for me cost price and performance standpoint, we do believe that we are going to take a significant market share and be a serious player in that end market, but similar to PC Board. We have PC. Both testing we are planning to move into other similar direction within this stress analysis field.
Okay.
And when we think about the investments, we're making in India.
In Israel, and we're seeing the.
The 28% growth in advanced sensors.
Is the completion of those facilities.
A gating factor in any way in terms of how that revenue is performing.
Before those facilities are are finished or would it be a step function on those those revenues just any color you can provide to be very helpful. Joking about how that revenue came about.
Sure absolutely that's a very good question. So currently it let me start with advance. So currently at all now in our current premises we have enough capacity.
We have enough capacity to support 2019.
I would say 2019 as well as 2020 projection. So we don't feel that we are going to release any potential revenue due to lack of space naturally as we complete the transition into the new facility is going to give us much larger opportunities if in order to support once those all those come will come in order to support much higher volume, but at this point in time, there is no risk in a missing opportunities given our current.
Premises in regards to India, which is.
Which is now part of the four cents so.
Segment.
We we currently already leased some external space. So we feel also in a similar way quite secure that fit within our current premises and some extra lease polemicist weaken so Paul.
All potential opportunities until middle of next year when the.
Expansion will be finalized so at this point in time, where we have the equipment in place and their manufacturing space and I don't see.
That we could be in a position where we may lose.
Revenues due to.
Certain due to space constrained if I'm missing.
Okay. Thank you and then a final group of questions on capital allocation strategy can you give us an update on.
M&A outlook pipeline valuation and then any thoughts on.
Share repurchases or dividends. Thank you.
Sure sure absolutely and from a capital allocation.
Yeah, we did provide some information similar to the past.
I think that the <unk> the company's first the priority is organic growth.
And the which is to support our own requirement for future expansion similar to the similar to the modine and similar to the India expansion as well as Catholic expansion the second priority.
Is the M&A.
We have been quite disciplined in the past not to take up on any opportunity. We do believe that despite the changes and even at the lower end and even with the most recent changes with the low interest rates, we we feel that the.
They environment is more supportive.
From an M&A in terms of more reasonable valuations and it's definitely high on our priority list and the company takes it to extremely serious and we are looking and we are in discussions of course, not there is nothing tangible to report, but but we have a we have I would say a very.
A very reasonable to you.
M&A opportunities, which we are constantly looking at.
As it comes to a bike purchase or buyback of stock and dividends. The board of directors and is always looking at all the opportunities.
And buyback and dividends, so part of that and they are open and.
They are looking at that as well as in as a viable option.
Okay. Thank you.
Thank you.
Again, if you have any questions. Please press star then one.
This concludes our question and answer session I would like to turn the conference back over to Bill Clancy for any closing remarks. Please go ahead.
Thank you operator, thank you everybody for joining on the conference call today, we look forward to talking to you in the near future.
I'd also like to let you know that Vishay precision group will be participating in the Jefferies Industrial conference, we'll be there all day Tomorrow in New York. So appreciate it very much and look forward to talking to you soon have a good day bye bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.