Vishay Precision Group, Inc. Q1 FY2021 Earnings Call

Good morning, and welcome to the VPG First Quarter 2021 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Steve Cantor, Senior Director of Investor Relations. Please go ahead.

Thank you, Kate, and good morning, everyone. Welcome to VPG's 2021 First Quarter Earnings Conference Call. Our Q1 press release and accompanying slides have been posted on VPG's website, vpgsensors.com. An audio recording of today's call will be available on the Internet for a limited time and can also be accessed on our website. Today's remarks are governed by the safe harbor provisions of the 1995 Private Securities Litigation Reform Act. Our actual results may vary from forward-looking statements. For a discussion of the risks associated with VPG's operations, we encourage you to refer to our SEC filings, especially the Form 10-K for the year ended December 31, 2020, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and President; and Bill Clancy, CFO. I'll now turn the call to Ziv for some prepared remarks. Please refer to Slide 3 of the quarterly presentation. Ziv?

Thank you, Steve. I will begin with some commentary on VPG's consolidated financial results and sales trends for the first quarter. Bill will provide financial details and our outlook for the second quarter of 2021. Moving to Slide 3, first quarter highlights. The first quarter results marked a good start to the year. We achieved sales of $70.6 million, which was slightly above the high end of our guidance. We ended the quarter with a book-to-bill of 1.21 as we grew our orders 22% sequentially to $85.5 million, reflecting strength across our businesses and end markets. Advanced sensor reported another strong quarter and continued to broaden its customer pipeline. We executed well operationally, growing our gross margin and achieving an adjusted operating margin of 8.7% and adjusted EPS of $0.31, which were within our target model. Moving to Slide 4, consolidated results and market trends. Looking at the first quarter sales results in more detail. Sales grew 4.3% from a year ago and declined 6.4% from the fourth quarter. Sequentially, business trends were generally positive, and we ended the first quarter with a book-to-bill above 1.1 in all the three reporting segments. In each of our end markets, we had the book-to-bill above 1, with the exception of the avionic, military and space market. In the test and measurement market, sales grew 8.3%. Demand in this market grew 41.1% sequentially, driven by continued strength related to semiconductor test equipment. Sales sequentially to the industrial weighing transportation and general industrial end markets grew 2.7%, 7.2% and 3.7%, respectively. Other trends reflected strength in the transportation market, which grew 29.4%. In the avionic, military and space and steel markets, in which our sales are driven by the timing of customer projects, sales were softer, as we communicated last quarter. However, orders in the steel market grew 59.1% sequentially, reflecting increased customer activity and improved project-driven demand. Orders in avionic, military and space, or AMS, grew 13.1%. While sales in our other markets were essentially flat, orders grew 23.5% sequentially, driven by strong demand in consumer, medical, construction, and precision agriculture. The net result of these trends was a book-to-bill of 1.21 for the first quarter and a backlog of $100.7 million. Moving to Slide 5, turning to the results by segment. Foil Technology Products first quarter sales of $32.7 million were 10.3% lower sequentially, primarily due to lower sales of Pacific Instruments. Compared to a year ago, FTP sales grew 7.3%, driven by strong performance in advanced sensors and precision foil resistors. Advanced sensor first quarter sales grew 80.7% year-over-year and 4.5% sequentially to an annualized level approaching the $40 million range. We continue to operate at a maximum capacity, and we expect to complete the transition of our new manufacturing facility in the third quarter of this year. Adjusted gross margin for FTP was 40.4% in the first quarter of 2021, increasing from 38.9% in the fourth quarter of 2020 as a result of favorable product mix, manufacturing efficiencies, and one-time inventory adjustment in Q1 of '21, which will not reoccur, and was partially offset by lower revenue. The book-to-bill for FTP was 1.19 in the first quarter, which reflected a 26.2% sequential increase in orders. The strength in demand was driven by applications for our precision foil resistors in the test and measurement market, mainly for semiconductor test applications and in AMS. Demand for advanced sensors remains strong as we continue to broaden our customer base for this product across a range of end markets. For the Force Sensors segment, it was a quarter of strong performance. First quarter sales of $16.9 million improved 4.2% from the fourth quarter of 2020 and were 15.2% higher than a year ago. The OEM businesses of Force Sensors continues to perform well as its revenue grew 16.6% from a year ago. Financially, Force Sensors' adjusted gross margin of 36% in the first quarter improved from 29.6% in the fourth quarter and 24.3% a year ago. The sequential improvement was driven primarily by higher revenue and manufacturing efficiencies. This result demonstrates the cost reduction, product quality, and efficiency improvements we have made over the past several years. The book-to-bill for Force Sensors of 1.14 reflected continued order strength. For the medical and precision agriculture applications, to help meet demand, we are expanding the capacity of our China facility. Regarding the India facility, where we produce the majority of the Force Sensors products, we are currently fully operational at this facility as we maintain COVID protection measures to protect our employees. Sales of Weighing and Control Systems the first quarter of $20.9 million declined 7.8% sequentially and were 7.0% lower than a year ago, reflecting lower project-driven sales in our steel market. Sequentially, we had higher sales of our onboard weighing solutions for trucks in Europe. Sales of our TruckWeigh, VanWeigh products, which help fleet operators maximize truckloads while minimizing the risk of fines due to overloading, continue to rebound and grew 5.8% from the fourth quarter. We are optimistic for continued growth in 2021, in part as EU regulation-driven aftermarket opportunities emerge in the second half of this year. Adjusted gross margin in the first quarter for WCS was 44.3%, adjusted for COVID impacts, and improved from 42.5% in the fourth quarter, mainly due to favorable product mix and an increase in inventory, partially offset by lower revenue. In terms of order trends in the WCS segment, orders grew 36.2% sequentially, reflecting higher demand for our steel, transportation, and general industrial applications. With regard to the steel market, the book-to-bill for KELK and DSI were 1.37 and 1.74, respectively. As we have discussed previously, orders for KELK and DSI are generally driven by customer CAPEX projects, which in the case of KELK typically have a two-quarter lag relative to inflection in the steel market. The result of these WCS orders trends in the first quarter was a book-to-bill of 1.3. Before turning the call to Bill, I'll make a few additional comments. In terms of COVID, all our facilities are currently open and operational, and many of our employees who had been working remotely have returned to working on-site. Looking forward, we are continuing our long-term strategic initiatives, including deploying our capital prudently to build long-term stockholders' value. For 2021, these initiatives include completing the manufacturing transition and capacity increase of our advanced sensor product line. We are also looking at the expansion of our Japanese precision resistor manufacturing facility in addition to deploying more automation projects for our resistor product line. As such, we expect capital spending to be approximately $22 million to $25 million for 2021. We are also continuing to look for attractive acquisition opportunities to add high-quality strategic businesses to the VPG platform that will further accelerate our growth and profitability. I will now turn it over to Bill Clancy for additional financial details.

Thanks, Ziv. Referring to Page 7 of the slide deck, in the first quarter of 2021, we achieved revenues of $70.6 million, gross profit of $28.6 million or 40.5% of sales, operating income of $6.4 million or 9.1% of revenues and net earnings per diluted share of $0.36. On an adjusted basis, which we lay out in our reconciliation table in the press release, our gross profit was $28.6 million or 40.5% of sales, operating income was $6.1 million or 8.7% of sales, and net earnings per diluted share was $0.31. Our first quarter 2021 revenues declined 6.4% compared to $75.4 million in the fourth quarter and were 4.3% above the first quarter a year ago. Foreign exchange for the first quarter of 2021 had a positive effect on revenues by $2.1 million compared to a year ago and $700,000 as compared to the fourth quarter of 2020. Our gross margin improved in the first quarter to 40.5% from 38.1% in the fourth quarter. On an adjusted basis, first quarter gross margin of 40.5% grew from the 38.0% in the fourth quarter of 2020. Our operating margin was 9.1% for the first quarter of 2021. Excluding some start-up costs for advanced sensors and receiving COVID-19 subsidies, our first quarter adjusted operating margin was 8.7%, which decreased from the 10.7% we recorded in the fourth quarter of 2020. Selling, general and administrative expenses for the first quarter of 2021 were $22.2 million or 31.4% of revenues compared to $20.3 million or 30.0% of revenues for the first quarter of 2020. The increase in SG&A of $1.9 million mainly relates to $800,000 for foreign exchange rate impact, $300,000 wage increases, $300,000 of rent, and $500,000 of other costs. The adjusted net earnings for the first quarter of 2021 were $4.2 million or $0.31 per diluted share compared to $3.3 million or $0.24 per diluted share in the first quarter of 2020. Adjusted EBITDA was $9.5 million as compared to $8.3 million a year ago. Capital spending was $5.7 million, the majority of which reflects purchases and related infrastructure for the new advanced sensors facility. As a result of these investments, we generated adjusted free cash flow of a negative $100,000 for the first quarter of 2021 as compared to $3 million for the first quarter of 2020. We define adjusted free cash flow as cash from operating activities, less capital expenditures plus sale of fixed assets. The GAAP tax rate in the first quarter was 26.3%. We are assuming an operational tax rate in the range of 26% to 28% for the full year of 2021. Referring to Slide 7. We ended the first quarter with $96.2 million of cash and cash equivalents and total long-term debt of $40.6 million. We believe that we have a strong balance sheet and ample liquidity to support our business environments and to fund additional M&A opportunities. The outlook. We expect net revenues to grow sequentially and be in the range of $71 million to $77 million for the second fiscal quarter of 2021 at constant first fiscal quarter 2021 exchange rates. In summary, we achieved sales slightly above the high end of our guidance. We had strong orders across our business and our book-to-bill of 1.21. We achieved financial results within our targeted model. With that, let's open the lines for questions. Thank you.

The first question comes from Dick Ryan of Colliers.

Good job on the gross margins. In the fourth quarter, you mentioned some increased logistics costs. Did you experience additional supply chain constraints that led to higher costs? What is your perspective on the supply chain? How should we expect gross margins to look over the next few quarters?

Okay. Dick, regarding logistics costs, as we mentioned in the last quarter, there has been an increase in logistics costs due to limited air and sea capacity. We have not experienced any further increases since last quarter. Therefore, we should expect the current costs to continue without any anticipated rise. One item to note is that on the gross profit side, we expect a favorable impact of about $800,000, stemming from a one-time inventory adjustment in the first quarter, which is not expected to recur. Additionally, as we expand our facility in China to support the increasing demand for Force Sensors, we anticipate slightly higher costs due to higher labor expenses in China compared to India. Furthermore, expanding the Chinese facility will lead to tariff costs as we export those products to the United States. Overall, for the second quarter, based on our guidance, we expect the gross profit margin to remain flat compared to the first quarter, considering the one-time effect and the higher labor and tariff costs in China.

I appreciate that insight. Ziv, you mentioned that your facility in India is operational, and we’ve heard concerning reports about the spread of COVID there. What are you experiencing? Have you noticed any impact, or do you expect any revenue effects from that facility?

At this moment, the government has declared a lockdown for two weeks, until May 24. VPG has been designated as an essential business because we provide services to the medical and agricultural sectors. As a result, we have a special waiver that allows us to keep operating our facilities during the lockdown. We are significantly better prepared in India than we were a year ago. Last year, we faced shutdowns, but now we have adequate protections in place for our employees. Given the current situation, the company is much more equipped to safeguard its staff, alongside the waiver we have obtained. Consequently, we are fully operational, and we do not expect any interruptions in manufacturing at our India facility.

Okay. So regarding the expansion in China, will that serve to complement what India is producing? Or is the demand not strong?

This is correct. We have several product lines as the book-to-bill for Force Sensors continues to be strong. We have added capacity in India. And at the same time, we are increasing the capacity in China, mostly for weighing applications. So this is correct. This is augmenting the India facility and increasing the capacity in order to support the current demand.

Great. Congratulations on the strong execution.

Thank you.

The next question is from Sarkis Sherbetchyan of B. Riley Securities.

Ziv, you mentioned advanced sensors demand remains strong. I think you said in the prepared comments, 80% year-on-year growth, and that's supporting a level approaching $40 million in sales annualized. Just wanted to see if you can maybe discuss the comments on broadening the customer base for the product across end markets. Any color that you can share with us there?

Regarding advanced sensors, revenue has increased by 80.7% year-over-year and 4.5% sequentially as we are operating at maximum capacity. Unfortunately, due to strict nondisclosure agreements with most of our customers, I cannot comment on specific clients. However, we have continued to expand our customer base, adding more significant customers. I cannot provide further details, but I want to emphasize that we are on track with our transition. Once we complete the transition in Q3, we will not only be fully operational in the new facility but will also add more capacity. This will allow us to support much higher volumes, which appears necessary given the strong market environment, and we expect to have this capacity fully operational within the year.

I guess just to poke around a little bit more. On this annualized sales level or number for this particular product line, is it one or two specific customers that you can't talk about? Or is there a particular segment that you're serving? That's pretty exciting, I guess. As I look at the revenue by market on Slide 4 of the presentation, the other markets are growing much more rapidly year-on-year. I'm assuming advanced sensors falls into, I guess, broadly speaking, that category regarding growth. Can you kind of help me out there?

You are correct, Sarkis. I won't be able to provide more details mostly regarding medical and consumer segments. We do have some specific test and measurement customers with highly proprietary applications, but those are the types of end markets involved. You are right that the growth in the other markets also falls under the advanced sensors product line.

Okay. And I guess if I kind of think about your guidance, clearly, I think it's fairly strong and nice sequential growth. Anything that you can share regarding just kind of the end market health real-time that you're either excited about or worried about that we should be mindful of?

Well, we have seen, I would say, a rebound pretty much in all end markets. The ones which we have seen some good indications and I did provide more details regarding the book-to-bill, are the steel-related product lines like KELK and DSI. Over there, we have seen a more modest increase in demand. We are still expecting or looking for a much stronger rebound. But in terms of all the other markets, test and measurements, AMS, industrial weighing, general industrial, we have seen a rebound in demand. And at this point in time, we still believe that there is much more room to grow from a demand standpoint. We do provide competitive lead time in all our product lines. We are not on allocations. Therefore, we do believe that once the demand increases, we would be able to deliver higher revenues.

Got it. Just one last one for me. Is the first quarter SG&A level kind of the right number to think about going forward on a run rate basis? I guess what's kind of the baseline going forward? And if there were any onetime things to consider as we look at the sequential trends of OpEx?

Yes. From the perspective of SG&A, the run rate or the actual figures you observed in Q1 of 2021 include the wage increases I mentioned, as well as adjustments for foreign exchange and fringe benefits. What we have recorded is likely our base number. As we progress through the year, we will review our accruals in the second half. However, the numbers recorded in Q1 will serve as a solid basis for our projections in Q2.

Okay. Got it. And does this assume the facility for FTP and advanced sensors, kind of, the costs are essentially kind of being realized today? Or do we have some more to think about as that facility comes online and is more fully realized in, I think, you mentioned in the third quarter of this year?

Most of the costs have been realized. Since we are already running in the facility, we may expect an incremental cost of some additional overhead supporting a larger operation at the level of $100,000 to $200,000 a quarter. But by far, most of the costs have been realized. The only thing which should be indicated is that we have booked so far in Q1, $130,000 of start-up costs. But since the transition has not been completed, we should expect to book further start-up costs until the transition is completed by the end of Q3. But those are onetime. Those have nothing to do with the ongoing costs to support the new facility.

The next question is from Bill Dezellem of Tieton Capital.

You had referenced in your remarks interest in acquisitions and have historically been active there. Does the rebound in economy, does that make acquisitions either any more difficult or easier to consummate? Or does it not have an impact at all in terms of ability to get deals done?

Regarding the M&A landscape, we have observed that the recent transactions involving large companies, such as Abaco Systems acquired by National Instruments and MTS, have been completed at high EBITDA multiples of around 16 to 17 times. This presents challenges, as lower debt or cash costs and extremely low interest rates are leading to these higher multiples compared to the past. As a company, we remain engaged in discussions with specific businesses, maintaining a disciplined approach towards valuation, return on investment, and internal rate of return targets necessary for any acquisition we consider. We still see opportunities despite the current conditions. Unfortunately, I do not have any updates to share at this moment, but we remain in continuous conversation with various companies and hope to finalize an acquisition soon. However, at this time, there are no new developments to report, but it remains a key focus for us, especially considering our strong balance sheet.

This concludes our question-and-answer session. I would like to turn the conference back over to Steve Cantor for closing remarks.

Thank you. Before we close, I want to let everyone know, we will be presenting at the Needham Conference on May 17 and also the Stifel Conference on June 10. Please see our website for more details. Thank you again for joining our call, and have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.