Vishay Precision Group, Inc. Q2 FY2022 Earnings Call

Hello, and welcome to VPG's Second Quarter 2022 Earnings Call. My name is Alex, and I'll be coordinating the call today. I will now hand over to your host, Steve Cantor, Senior Director of Investor Relations. Steve, over to you.

Thank you, Alex, and good morning, everyone. Welcome to VPG's 2022 second quarter earnings conference call. Our Q2 press release and accompanying slides have been posted on our website at 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. And 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, 2021, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and President; and Bill Clancy, CFO. And 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 second quarter. Bill will provide financial details and our outlook for the third quarter of 2022. The second quarter marked one of the best quarters in VPG's history as we continue to execute well. We achieved a number of quarterly financial milestones, including record adjusted diluted net earnings per share, adjusted EBITDA and backlog. These results are a reflection of our diversified business model and market, our strong VPG teams around the world, as well as the growth and the cost savings initiatives and investments across our businesses. Our record backlog positions us well for the rest of the year and supports our outlook for continued growth in the third quarter. We continue to implement our new operating strategy as we focus on solid and consistent long-term opportunities in expanding precision measurement sensing applications. As a reflection of our financial and operating performance, our Board of Directors has authorized a stock repurchase program. Moving to Slide four. Looking at the second quarter results in detail, we reported sales of $88.6 million, which was 17.6% higher than a year ago, and 1.1% above the first quarter of 2022. Excluding foreign exchange rate impact, revenues grew 24.2% from prior year and 3.4% sequentially. We achieved another strong quarter of orders of $95.9 million and a positive book-to-bill of 1.08. This is the sixth sequential quarter of reporting book-to-bill above 1. We improved our adjusted gross margin to 42.9%, as compared to the first quarter adjusted gross profit margin of 41.0%, and generated an adjusted EBITDA margin of 17.8%, and a record adjusted diluted net earnings per share of $0.68. These results reflect the steps we continue to take to realize the operating profit leverage embedded in our model. We continue to manage the impact of the global supply chain challenges. In some areas, we continue to make strategic purchases of materials, and in other instances, we have redesigned our products to manage the supply chain constraints, mainly for microchips. Through the first half of 2022, we realized approximately $3.7 million from price increases, compared to the same time frame a year ago. We are on track for these increases to contribute to our target of $6 million to $8 million for incremental revenue in 2022, which we expect will offset higher pandemic-driven costs for direct labor, materials and logistics. I'll now review our business segment performance in the second quarter. Moving to Slide five. Beginning with our Sensor segment, which is comprised of our advanced sensor products and our precision resistors. Second quarter revenue of $40.3 million grew 29.2% from a year ago, and was 6.7% higher sequentially. Excluding foreign exchange rate impact, Q2 revenues grew 9.9% sequentially and were up 38.3% from a year ago. The sequential growth was mainly driven by higher sales of precision resistors in the test and measurements market and higher sales of advanced sensors for consumer and medical applications. For the second consecutive quarter, advanced sensors revenues were above an annual $50 million run rate. Book-to-bill for sensors was 1.17, reflecting solid orders of $47.1 million, which were up 9.1% from a year ago, but down 2.0% sequentially. Bookings continue to be strong for precision resistors in the test and measurement for front-end and back-end semiconductor equipment, as well as for Avionics, Military and Space or AMS markets. While orders slowed for advanced sensors for general industrial and AMS markets, a portion of which relates to the timing of semiannual orders. We continue to see good customer engagement and sales opportunities in consumer and medical applications. In terms of operating results for sensors, the adjusted gross margin of 44.3% increased from 38.6% in the first quarter of 2022, reflecting higher revenue and labor efficiencies. Moving to Slide six. Turning to our Weighing Solutions segment, which is comprised of our Force Sensors onboard weighing and process weighing businesses. Second quarter sales were $28.5 million, a 13.1% sequential decline, reflecting lower sales of OEM Force Sensors in our precision agriculture and construction markets and lower sales of onboard weighing products to the transportation market. Our sales of OEM Force Sensors reflected a redesign of electronic boards to improve supply chain availability. We expect the redesigned products to ship in the second half of the year. In terms of our onboard weighing solutions, which are sold in the aftermarket, our sales continue to be impacted by long lead times industry-wide for new trucks and vans. Book-to-bill for Weighing Solutions was 1.03. Orders of $29.3 million declined by $5.6 million or 16% from the first quarter due to softer demand for Force Sensors in other markets and for process weighing applications. Weighing Solutions gross margin of 33.7% in the second quarter declined from 36.9% in the first quarter due to lower volume, unfavorable foreign exchange rates and unfavorable product mix. Moving to Slide seven. Turning to our Measurement Systems segment, revenues in the second quarter of $19.9 million increased 15.9% sequentially, reflecting higher sales of project-driven solutions to the steel market. Excluding foreign exchange rates impact, Q2 revenues increased 16.7% sequentially. After record quarterly orders in the first quarter, orders declined 26.9% due to the timing of customer projects. Book-to-bill was 0.98. Adjusted gross margin in the second quarter for Measurement Systems was 53.3%, adjusted for purchase accounting related to the DTS acquisition, and declined modestly from 54.1% in the first quarter as higher volume was offset by unfavorable product mix and a reduction in inventory. Before turning the call to Bill, I would like to comment on our announcement today of the stock repurchase authorization. As I mentioned earlier, in the second quarter, we generated $15.8 million of adjusted EBITDA and an adjusted EBITDA margin of 17.8%. We believe that we have a strong balance sheet and ample liquidity to support our capital allocation strategy to fund organic growth, M&A opportunities and stock repurchases. Accordingly, the Board has authorized a stock repurchase program to buy back up to 600,000 shares of our outstanding common stock. Finally, I want to make a comment on VPG's ESG program. In August last year, we launched a 3-year ESG plan. As part of the plan, this past quarter, we posted new ESG-related content on our website. We are proud that VPG and its products are playing a role in making the world safer, smarter and more productive. I will now turn it over to Bill Clancy for additional financial details. Bill?

Thanks, Ziv. Referring to Slide eight and the reconciliation tables of the slide deck. In the second quarter of 2022, we achieved revenues of $88.6 million, gross profit of $37.3 million, or 42.1% of sales, operating income of $10.6 million, or 11.9% of revenues and diluted net earnings per share of $0.79. On an adjusted basis, our gross profit was $38 million or 42.9% of sales, operating income was $12.1 million or 13.7% of sales, and diluted net earnings per share was $0.68. Our second quarter 2022 revenues increased 1.1%, compared to $87.7 million in the first quarter of 2022 and were 17.6% above the second quarter a year ago. Foreign exchange for the second quarter of 2022 negatively impacted revenues by $4 million compared to a year ago and negatively impacted revenues by $2 million as compared to the first quarter of 2022. Gross margin in the second quarter was 42.1%, compared to 40.2% in the first quarter, which benefited from higher volume and labor efficiencies, partially offset by unfavorable foreign exchange rates. On an adjusted basis, second quarter gross margin was 42.9%, as compared to 41% in the first quarter of 2022 and excludes $700,000 of acquisition purchase accounting adjustments. Our operating margin was 11.9% for the second quarter of 2022. Our second quarter adjusted operating margin was 13.7% and excludes the adjustments I just mentioned, as well as $900,000 of restructuring costs. Selling, general and administrative expenses for the second quarter of 2022 were $25.9 million or 29.2% of revenues, compared to $22.5 million or 29.8% of revenues for the second quarter of 2021. The increase in SG&A of $3.4 million mainly relates to $2.3 million, reflecting a full quarter of DTS expenses, $400,000 for travel, $400,000 of wage increases and $300,000 related to sales commissions. The adjusted net earnings for the second quarter of 2022 were $9.3 million or $0.68 per diluted share, compared to $6.7 million or $0.49 per diluted share in the second quarter of 2021. Adjusted EBITDA was $15.8 million or 17.8% of revenue, compared to $12.5 million or 16.6% a year ago. Purchase CapEx in the second quarter of 2022 was $6.3 million, the majority of which reflects equipment purchases and related infrastructure. For fiscal 2022, we expect purchase CapEx to be approximately $30 million. Approximately half of our purchases are related to infrastructure to support additional capacity expansions for growth initiatives for precision resistors in the Sensors segment and Force Sensors in the Weighing Solutions segment. The other 50% of CapEx is mainly for equipment for expansion and cost efficiencies in the Sensors segment. Adjusted free cash flow was $4.9 million for the second quarter of 2022, as compared to $4.2 million for the second quarter of 2021. We define adjusted free cash flow as cash from operating activities, which was $9 million, less capital expenditures of $4.5 million, plus the sale of fixed assets, which was $400,000. The GAAP tax rate in the second quarter was 19.2%, as compared to 6.1% in the second quarter of 2021. If you recall, in the prior year, our tax rate reflected a one-time tax benefit of approximately $1 million associated with the DTS acquisition. We are assuming an operational tax rate in the range of 20% to 22% for the full-year of 2022. In terms of our target model, we outperformed in the second quarter as we benefited from the positive effects of currency, higher inventory, lower-than-planned spending and the lower tax rate. Without these factors, our performance was in line with our model. Moving to Slide nine. We ended the second quarter with $79.4 million of cash and cash equivalents and total long-term debt of $60.8 million. Regarding the outlook, for the third fiscal quarter, we expect net revenues to grow sequentially and be in the range of $90 million to $100 million at constant second fiscal quarter of 2022 exchange rates. In summary, the second quarter marked one of the best quarters in VPG's history. Solid orders contributed to a record backlog, which underscores the strength of our business model and strategy, and we continue to execute on our long-term initiatives to accelerate growth of sales and profits. With that, let's open the line for questions. Thank you.

Thank you. Our first question comes from John Franzreb from Sidoti & Company. John, your line is now open.

Good morning, guys. Thanks for taking the questions. Congratulations on a great quarter. I want to start with the quarter in and of itself. On a sequential basis, revenue was up only $1 million, but adjusted operating income was up an amazing $3 million. Can you talk and walk me through the key puts and takes of that?

Yes, absolutely, John. As you mentioned, we saw a $1 million increase in revenue and nearly $3 million growth in adjusted operating income. To break it down for the previous quarter, of the $2.9 million increase, $500,000 came from favorable exchange rates. Additionally, volume and higher average selling prices contributed a positive $1.8 million, while the remaining $600,000 was due to lower fixed costs, primarily in utilities and repairs and maintenance. It's important to note that we experienced a $2 million negative impact from foreign exchange rates quarter-over-quarter on the revenue side. Overall, the net change is $1 million, but it incorporates a $2 million negative foreign exchange impact at the revenue level.

Right, right. Got it. And when you think about DTS, you've had it for about a year now. Two things: firstly, if you said this, I apologize if I missed it, what was the DTS revenue contribution in the quarter? And can you just give us like a what your thoughts are about having a business for a year versus when you first acquired it?

Right around $7 million, Ziv.

Yes, $7 million. As we finalize the integration of DTS following its acquisition, the programs we implemented are now in phases where the current run rate is approximately double-digit higher than it was before the acquisition. At this stage, we are progressing well with the integration plan and are optimistic about the business outlook for DTS, especially in automotive and AMS applications.

Got it. Congratulations on the successful acquisition. It seems like you are implementing price increases, which hasn't always been the case. Are you increasing prices in specific segments or product lines that you feel are necessary? And what kind of pushback are you encountering regarding these price increases?

We have mentioned in previous quarters that we have started to increase prices for customers this year compared to last year. So far, we have generated $3.7 million in the first six months, and we expect to reach between $6 million and $8 million in price increases to cover additional COVID-related costs. We have been discussing these price adjustments with our customers, and we are confident that we have managed to implement them without harming our relationships. It's worth noting that we are not the only ones raising prices in our markets; many of our suppliers have done the same. The key priority for us remains maintaining strong customer relationships, which I believe we have achieved successfully so far.

I have one last question before I return to the queue. It seems many people are worried about supply chain issues and are likely ordering more in advance than they usually would. Do you think your customers are doing the same thing, which is contributing to the strong backlog and booking profile? Or do you believe they are ordering based on the current situation without building up inventory?

I would say that the current environment has changed significantly compared to six months ago. The situation has stabilized, and we believe that the current order intake reflects genuine demand. At this moment, we do not see any double bookings based on the order intake, especially as we are selling more customized products related to commodity products. In our view, the current order run rate represents the real market demand.

Okay, great, Ziv. Thanks for taking my questions. I’ll get back in the queue.

Thank you. Our next question comes from Bill Dezellem from Tieton Capital. Bill, your line is now open.

Thank you. Absolutely great quarter. Congratulations. So my apologies for asking a negative question here. But would you please talk about the onboard weighing and the other weighing solutions revenues and the impact that you saw? And what were the dynamics behind the scenes, please?

Sure, let me start with the Force Sensor product line within Weighing Solutions. The revenues from the Force Sensor product line have been affected by the timing of our electronic board redesigns, which were delayed due to microchip shortages. We have completed redesigning and qualifying the new board with our customers, and we anticipate a recovery in those revenues in the second half of the year. Some of our key OEMs have held off on placing orders until the redesigns are qualified. Thus, we expect to see an increase in sensor revenues in the upcoming quarters. Regarding onboard weighing, some of the demand is driven by the installation of runway and trackway systems on vehicles. However, the recovery in vehicle production has not been as strong as we hoped, largely due to vehicle manufacturers facing microchip shortages. This has led to lower demand, which we expect to bounce back soon, primarily affecting our order intake and revenues in onboard weighing. The main issue here is the supply chain constraints impacting vehicles.

So chip supply problems with your customers with the onboard weighing and the chip supply problem with your own products for the other Weighing Solutions. If you look out at your customers that have been weighing for you to redesign the chips, what's the magnitude of that potential book of orders that could be released here this quarter?

We are looking for Force Sensors. We are looking at a potential upside of $2 million to $2.5 million of higher revenues as those electronic boards being qualified by our customers.

Once again, congratulations. And look forward to next quarter.

Thank you. Our next question comes from Hendi Susanto from Gabelli Funds. Hendi, your line is now open.

Good morning, Ziv, Bill, and Steve. Yes, given the macro concern, there have been multiple challenges for your customers.

At this point in time, we do not see any fundamental sequential slowdown in demand, and we observe more solid stabilized order trends. Our diversified end markets and the high-value nature of our product have provided us with stability and consistency throughout the business cycle. We believe there is some upside as microchip shortages ease, and we know that we have a solid backlog. We do not see the panic effect that affected some end markets two to three quarters ago. The ongoing demand, in my opinion, reflects the true demand that the market requires, considering the inventory and the queues that our customers had.

So how would you describe your customers' inventory levels? Are they running unusually low, above optimal, or higher than usual?

We believe that the inventory levels at our customers are at the appropriate level. A testament to this is our record backlog, which is based on customer requirements. Approximately 50% of the backlog is expected to be shipped in the upcoming quarter, indicating that there are orders placed by customers that are also anticipated to ship in Q4 and, to a lesser extent, in Q1. Therefore, we are confident that the backlog is strong and the inventory levels at our customers are likely where they have determined is suitable.

I see. And then with regard to the selective price increase, is it still ongoing?

No. We have initiated the price increase that I mentioned a few quarters ago, and we are now beginning to see the effects. When we decided to raise prices, we could not apply it to the current backlog, only to new orders. This has created a timing issue as new orders with the updated pricing are added to the backlog. What we are observing now is the complete impact of the timing of these price increases being reflected in the backlog and in our financial reports.

Great. And then Ziv, how should we think about advanced sensors capacity expansion and investment going forward? Would you be able to show what the next milestone of advanced sensors annual sales target?

Sure. Advanced sensors have seen a revenue increase of 3.4% quarter-over-quarter. This marks the second consecutive quarter where we are exceeding a $50 million annual run rate. At this time, we have filled all the direct labor positions for advanced sensors. We did not incur any start-up costs, indicating that the transition to the new facility is complete. We are fully prepared to support the current demand run rate. If necessary, we have the capacity to accommodate higher demand, but currently, based on the existing demand, revenues are expected to be consistent with what we achieved in Q2. We do not require any additional equipment to support increased volume given the present demand. Our current focus is on reducing customer lead times and enhancing product availability and service as we complete the transition.

Yes. And then this is a question for Bill. Bill, our gross margin was strong in Q2. Now that there is no more advanced sensor facility transition start-up costs, how should we think about the gross margin model of Sensor segments furthermore? Any guess on how should we think about the overall gross margin will be helpful as there is some benefit from the selective price increase?

So Hendi, I would say for the Sensors segment, the gross margin, so if we maintain the current product mix and constant exchange rate, which is very important, given that structure, we can continue to perform at the gross margin level where we are today. I would say, and that would also reflect the overall gross margin level at a constant exchange rate and the current product mix, given that we have seen some efficiencies. Given that structure, we should see similar, if not slightly better gross margins going forward.

I would like to clarify the extent of the impact of the chip shortage in the second quarter. Ziv mentioned an increase of $2 million to $2.5 million. Can you confirm if that reflects the overall impact of the chip shortage in that quarter?

Yes, this is correct in respect to our OEM customers for the Force Sensors. We have not quantified how many orders we would receive from our customers for the onboard weighing applications once the production of vehicles would get to a more normalized pre-pandemic level.

Okay. Thank you so much, Ziv, Bill.

Thank you, Hendi.

Thank you. We have a follow-up question from John Franzreb from Sidoti & Company. John, your line is now open.

Yes, I guess just to follow-up on one of Hendi's questions. Maybe it would be helpful if we just kind of talk about the puts and takes on currency, our business as a whole where it would be you deem the upside or downside risks on a currency basis.

All right. So John, as we mentioned on the call, like we had exchange rate negatively impacting the revenue sequentially by $2 million. Yet overall, at the operating margin level, we had a positive $0.5 million. So you could see basically the impact to the revenues, the gross margin had a negative $0.5 million impact, but yes, we saw savings come through G&A. So it does have significant swings through all of the lines themselves. But the bottom line is sequentially, we had a $0.5 million positive exchange rate impact sequentially on the results.

And is that mostly euro, Bill?

I would say the revenues could largely be attributed to the euro, Canadian dollar, and Japanese yen. The costs were likely mainly from the new Israeli shekel.

Right, okay. And then, Ziv, do you want to add something?

No, I just want to say that all in all, John, just from a high-level standpoint, 60% of the company's revenue are in U.S. dollars.

Okay.

And around, I would say, close to EUR15, EUR18, and the rest would be split between Japanese and British pound and Canadian dollar. So that's the top line effect.

Perfect. And another topic of conversation in a lot of the conference calls is concerns about a recession. In your business, where do you think you would see a recessionary indicator as far as your bookings?

In my opinion, the semiconductor sector continues to perform well, and the semiconductor equipment market remains strong due to ongoing chip shortages. I believe that if there were signs of a potential decline in bookings, it would likely be in the general industrial sector, which encompasses a wide range of applications. This could suggest an excess of inventory that needs to be reduced before new orders can be placed. Therefore, the general industrial sector might serve as an early indicator, given its diverse applications.

Got it. And one last question, if I could squeeze it in. The amount of new vehicle launches in the automotive market is sectorized from the mid-30s last year to the mid-50s this year and maybe into the mid-60s next year. Are you a beneficiary of that trend? Do you see that in your test business or no?

This is John, and I’m sorry, I couldn't hear you well. Are you asking about e-vehicles or general vehicles?

Just new vehicle platforms in and of themselves. The number is in the mid-30s last year. It's going to be in the mid-50s this year and probably the mid-60s next year, and probably state some sort of elevated level for the next two years after. But I was just wondering, if you see that as far as your testing products are concerned or no? Do you see that kind of a trend?

The application we are selling to those vehicle manufacturers would be potentially the onboard weighing platform. So I would say, given the fact that if there will be a certain potentially volume change up or down, it would affect our onboard weighing demand.

Also, this is Steve, John. I think our crash test business, or DTS, will be impacted. As you would expect, we will continue to benefit from the rollout of new models that need to undergo these crash tests. What you just described would definitely be a positive for us.

Okay. Great, guys. Thanks for taking my questions. And congratulations on a good quarter.

Thank you. Our final question for today is from Bill Dezellem from Tieton Capital. Bill, your line is now open.

Thank you. I'd actually like to follow up on the advanced sensor business, please. You went through several quarters of expansion and therefore, you were constrained on your ability to produce which we have perceived also constrained your customers' willingness or ability to place orders. So the question is, what are you now seeing in terms of order strength and really the design ramp that would be in anticipation of orders now that you are no longer supply constrained and do have your labor and factory completely built out.

We have observed some softening in the general industrial applications for advanced sensors, but the opportunities for new designs in consumer and medical sectors remain robust. Our larger volume prospects involve longer selling cycles, requiring extensive technical discussions with our clients. While demand has stabilized, we anticipate that potential opportunities will progress from pilot lines to full volume production, leading to an increase in the run rate of advanced sensors. Currently, we have the manufacturing capabilities to meet current demand, and we are continuously working on potential opportunities. It is challenging to predict when these products will be launched by our customers, but once both lower and higher volume opportunities translate into actual orders, we expect to see sales flowing through this platform.

And Ziv, I did hear what you just said that it's difficult to identify timing. But I am going to ask relative to your comment that once some of these higher volume pieces of business do come through that revenues could be meaningfully higher, what's your thought in terms of the timing? I mean, is that early of 2023? Is it 2024? What general help can you provide there?

At this point, those projects for our customers are very discrete, and we have limited visibility. They provide us with forecasts but only for about 10 to 12 weeks, and they tend to keep this information close to their chest. It would be just a guess on my part to determine whether these opportunities will materialize early next year or later in 2023. I don't think we should anticipate seeing any of them become real opportunities by the end of this year. Again, I can't predict if they will come early or later next year; I just don't know.

Thank you for that perspective.

Thank you. We have no further questions for today, so I will hand back to Steve Cantor for any further remarks.

Thank you. And before closing, I want to let investors know that we will be at the Jefferies Industrial Conference tomorrow and also participating in the Sidoti Virtual Conference in September. In addition, Stifel is organizing some meetings for us next week in Philadelphia. And with that, I'd like to thank everyone for joining our call today, and we look forward to updating you next quarter. Have a great day.

Thank you for joining today’s call. You may now disconnect your lines.