Vishay Precision Group, Inc. Q1 FY2023 Earnings Call

Good morning. And thank you for attending today's VPG First Quarter 2023 Earnings Conference Call. My name is Danielle, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. It is now my pleasure to hand the conference over to our host, Steve Cantor, Senior Director of Investor Relations. Steve, the floor is yours.

Thank you, Danielle, and good morning, everyone. Welcome to VPG's first quarter 2023 earnings conference call. Our Q1 press release and 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 through our website. Next slide, Safe Harbor Statement. 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 read our SEC filings, including the Form 10-K for the year ended December 31, 2022, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and President; and Bill Clancy, CFO. And now I will 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 about the quarter and the outlook for the second quarter of 2023. Moving to Slide 3. We achieved another solid quarter for VPG. We recorded revenue in line with our expectations. We increased our gross margin sequentially and year-over-year. Order trends improved in the first quarter as orders grew 13% from the fourth quarter. We generated $8.4 million of cash from operations and $4.9 million of free cash flow, which supports our capital allocation strategy to grow shareholders’ value. Moving to Slide 4. Looking at the first quarter results in detail, we reported sales of $88.9 million, which was 1.4% higher than a year ago and 7.7% lower sequentially. Changes in foreign currency rates impacted our revenues. FX reduced our total Q1 revenues by $2.4 million compared to a year ago, but had a favorable $1.7 million impact compared to the fourth quarter. Orders of $83.1 million grew 13.1% sequentially and strengthened through the quarter. Orders rose in all three reporting segments, growing 8.2%, 6.2%, and 30% for the sensors, weighing solutions, and measurement systems respectively. The sequential growth was seen in the majority of end markets, indicating an improved business environment due to the timing of project-driven orders and the depletion of inventories by customers. This contributed to a book-to-bill ratio of 0.94. As I indicated, we improved our adjusted gross margin. In particular, adjusted gross margin for our sensors segment was 41.2%, up from 37.6% in the fourth quarter, which had been impacted by temporary manufacturing inefficiencies. In terms of our supply chain, over the past two years, we have done a good job navigating through global challenges and shortages. While our supply chain has improved from a year ago, it is still not fully back to pre-pandemic levels as we are still experiencing isolated shortages of components, particularly in our measurement systems segment. For example, shortages of key microchip components led us to redesign a DTS product in the first quarter to improve our supply chain availability, while we estimate these shortages will delay approximately $1.5 million of revenue per quarter. For the next two quarters, we expect to ship the majority of the delayed shipments by Q4 of this year. In addition, we continue to experience higher costs for some materials. In the first quarter, we were impacted by $700,000 of higher costs compared to the fourth quarter, mainly in our Weighing Solutions and Measurement Systems segments, which we offset with higher selling prices and our ongoing cost reduction programs. All in all, in the first quarter, we generated an adjusted EBITDA margin of 15.9% and adjusted diluted net earnings per share of $0.52. I'll now review our business segment performance in the first quarter. Moving to Slide 5. Beginning with our Sensors segment, first quarter revenue of $36.7 million declined 2.7% from a year ago and was 1.1% higher sequentially. The growth from Q4 of 2022 primarily reflected higher sales of precision resistors in the avionic, military, and space market. The sequential growth for precision resistors offset lower sales of advanced sensors in the consumer market as our customers continue to work down inventory levels. While book-to-bill for sensors was 0.82, orders of $29.9 million grew 8.2% sequentially as we grew orders for precision resistors in test and measurement by 22% and in AMS by 95%. As we have discussed before, the timing of large orders can fluctuate from quarter to quarter based on customer schedules. Orders for advanced sensors were soft in the consumer market for Q1, but we expect demand to improve gradually in the second quarter. As part of our strategic initiatives to secure design wins in emerging applications for our precision resistors, we are seeing growing customer interest in our solutions in data center fiber optics and EV battery management. In both of these new applications, we believe our precision resistors add value in terms of consistency, reliability, and performance for our customers' equipment. In addition, we are very optimistic about the long-term prospects for advanced sensors in several emerging markets, including robotics for industrial applications and medical applications. In terms of operating results for sensors, the adjusted gross margin of 41.2% improved sequentially from 37.6%, primarily due to manufacturing efficiencies and favorable foreign currency exchange rates. Moving to Slide 6. Turning to our Weighing Solutions segment, first quarter sales of $31.9 million was 2.8% lower than a year ago and 3.7% lower compared to the fourth quarter. The sequential decrease in revenue was attributable to lower sales in the industrial weighing market, partially offset by higher revenues in the transportation market. We continue to be pleased with our OEM sales to precision ag and construction equipment markets. While this was modestly lower sequentially, it grew 42% from a year ago. Book-to-bill for Weighing Solutions was 0.9. Orders of $28.7 million were 6.2% higher than in the fourth quarter, mainly due to stronger demand for our onboard weighing products. We continue to move forward with growth initiatives for our Weighing Solutions business with new, innovative solutions. We are now in the final testing of a new line for off-the-shelf load cell sensors called vLite, which we expect to formally launch later this year. This technology is lighter and more compact than our previous version that provides the same high-level accuracy and reliability. Customer feedback for this product has been positive, and we believe this technology can give us a competitive edge to gain share in our traditional weighing market, particularly for legal trade retail applications such as supermarket checkouts, scales, and portable medical equipment such as incubators for premature babies, infant scales, and hospital beds. Weighing Solutions gross margin of 34.9% compared to 33.4% in the fourth quarter. The sequential increase in adjusted gross profit margin was primarily due to favorable foreign currency exchange rates, partially offset by lower volume. Moving to Slide 7. Turning to our Measurement Systems segment. Revenue in the first quarter of $20.3 million grew 18.3% from a year ago but declined 24.4% sequentially. The sequential decline reflected lower revenue of products in the steel market and our diversified technical systems, DTS products in the transportation market. Adjusted gross margin in the first quarter for Measurement Systems softened sequentially to 54.1% from 56.8%, primarily reflecting lower volume and higher material costs, offset by higher selling prices. Book-to-bill ratio for Measurement Systems was 1.21 as orders of $24.5 million grew 30% sequentially, driven by a 49.4% increase in steel-related bookings. Order patterns can fluctuate quarter to quarter due to the timing of customer projects and long lead times for these products. As I indicated, a redesign of one DTS product will delay approximately $1.5 million of revenue for each of the next two quarters. We expect to recover the majority of these revenues in the fourth quarter. Despite this short-term challenge, we continue to be excited about key growth opportunities and development milestones for measurement systems. For instance, we were pleased that a sports safety project was extended for DTS, which involves using their technology to improve the safety of football players by developing new methodologies for helmet-to-helmet concussion testing. Our miniaturized flexible data loggers are embedded inside the mouth guards and can measure acceleration, rotation, and direction. The data can then be used to develop safer equipment, including helmets, more effectively. While this project is relatively small in terms of revenue for VPG, it does represent the potential of our technology to address real-world safety challenges. Another DTS initiative we are excited about is the WIAMan project, in which we have developed a test dummy for the U.S. Army to assess potential injuries for soldiers exposed to underbody blasts. While the main partner for this project was the U.S. Army, we recently received approval to market this technology to U.S. allies around the world, and we are already seeing interest from potential new customers. Moving to Slide 8. Before turning the call to Bill, I want to comment on our strategy for growth and for allocating our capital to increase stockholders' value. There are many reasons to be excited about the long-term potential for VPG. Over the past several years, we have seen applications for our high-performance sensors and precision measurement solutions broaden into new areas and markets beyond our traditional markets as both exciting and new OEM customers seek to differentiate their products. At the same time, we have been investing in our technology and operational capabilities to position us to capture growing shares of these emerging opportunities. I believe it is this convergence between the expansion of market opportunities and our ability to address them that has been one of the key drivers of our growth over the past several years, while also continuing our cost reduction and operational excellence initiatives around the company. As we continue to drive this strategy, we are confident that our strong balance sheet and ample liquidity can continue to support a capital allocation strategy that creates shareholder value through organic growth, successful M&A, and stock repurchases. I will now turn it over to Bill Clancy for additional financial details. Bill?

Thanks, Steve. Moving to Slide 9, referring to the slide and the reconciliation tables of the slide deck. In the first quarter of 2023, we achieved revenues of $88.9 million, gross profit of $37.2 million or 41.9% of sales, operating income of $9.9 million or 11.2% of revenues, and diluted net earnings per share of $0.51. On an adjusted basis, our gross profit was $37.2 million or 41.9% of sales. Operating income was $10.1 million or 11.4% of sales, and our diluted net earnings per share was $0.52. Our first quarter revenue decreased 7.7% compared to $96.2 million in the fourth quarter of 2022 and was 1.4% above the first quarter a year ago. Foreign exchange for the first quarter has negatively impacted revenues by $2.4 million compared to a year ago and positively impacted revenues by $1.7 million compared to the fourth quarter of 2022. Gross margin in the first quarter was 41.9% as compared to 41.2% in the fourth quarter of 2022, which benefited from favorable foreign exchange rates and manufacturing efficiencies, partially offset by lower volume, higher material costs, and wage increases. On an adjusted basis, our first quarter gross margin was 41.9% as compared to 41.5% in the fourth quarter of 2022. Our operating margin was 11.2% for the first quarter. Adjusted operating margin in the first quarter was 11.4% as compared to 14% in the fourth quarter of 2022. Selling, general, and administrative expenses for the first quarter were $27.2 million or 30.6% of revenues as compared to $26.7 million or 30.4% of revenues for the first quarter of 2022. The increase in SG&A of $500,000 mainly relates to $500,000 for headcount and wage increases, $500,000 for travel, and $300,000 of commissions, partially offset by $900,000 of positive foreign exchange rates. The adjusted net earnings for the first quarter were $7 million or $0.52 per diluted share compared to $6.6 million or $0.49 per diluted share in the first quarter of 2022. Adjusted EBITDA was $14.1 million or 15.9% of revenue compared to $12.6 million or 14.4% of revenue a year ago. Purchase CapEx in the first quarter of 2023 was $2.6 million, the majority of which reflects equipment purchases and related infrastructure. For fiscal 2023, we expect purchase CapEx to be in the range of $18 million to $20 million, which includes approximately $7 million in carryover spending from 2022. Our adjusted free cash flow was $4.9 million for the first quarter of 2023 as compared to a negative $4.6 million for the first quarter of 2022. We define adjusted free cash flow as cash from operating activities of $8.4 million less capital expenditures of $3.5 million. The GAAP tax rate in the first quarter was 24.1% as compared to 20.7% in the first quarter of 2022. We are assuming an operational tax rate in the range of 23% to 25% for the full year of 2023. Moving to Slide 10. We ended the first quarter with $93.3 million of cash and cash equivalents and total long-term debt of $60.8 million. Regarding the outlook, for the second fiscal quarter, we expect net revenue to be in the range of $83 million to $93 million at constant first fiscal quarter 2023 exchange rates. In summary, we have achieved solid performance in the first quarter of 2023. We grew our orders in the quarter, which underscores the strength of our business model and strategy, and we continue to implement a balanced capital allocation strategy aimed at increasing our long-term shareholder value. With that, let's open the lines for questions. Thank you.

Certainly. The first question comes from the line of John Franzreb of Sidoti Company. Please proceed.

Good morning, Ziv and David. And thanks for taking the questions. Ziv, I'd like to start with the discussion around the redesign of the DTS product line. Could you give us a little bit of color about what you did to redesign the product? And when you talk about the deferred revenue of $1.5 million per quarter, does that mean revenue in the Measurement Systems business will be lower in Q2 by $1.5 million versus Q1? Or is there some other backfill that will offset that?

Good morning, John. Regarding the redesign of the DTS product, this is one of the products that DTS has launched. Our product for DTS, as you know, DTS is a business where they are producing electronic system solutions. Our product uses various components and microchips. The supply for some of these have been challenging due to the pandemic while we have secured inventory. A critical microchip component very recently, the supplier stopped supporting that and therefore, we had to redesign the system around a different microchip. While we know that the new microchip has availability, of course with the new supplier, we expect that orders or bookings and shipments that were expected to be delivered for this specific system in the second and third quarter will be pushed out to the fourth quarter. Now, in order to mitigate the effect, we have several similar systems, there are a few generations of systems, and we are trying to promote, I would say, a similar product with similar specs to mitigate the revenue effect. For those customers that would specifically require this system's performance, the expectation is that once the system is redesigned with a new component, we would be able to provide the deliveries, and the expectation is it would happen in Q4.

Okay. So you have the orders for the new system. It needs to be, I guess, re-qualified, produced, and you expect to recover about $3 million in Q4 that was lost in Q2 and 3. Is that correct to say that properly?

Naturally, for those types of products, the delivery lead time is very short. Therefore, in most cases, we deliver out of stock. Currently, based on the discussions with customers, we don't have the bookings, but the expectations are that once the bookings would be made, we would be able to deliver them. Given the fact that we have announced that this product is not available currently, we do not expect to get the bookings. So, as I said, alternatively, we are trying to push to get the bookings for a similar product with similar systems with similar performance.

Got it. That helps. That helps a lot, Ziv. Thank you. And then just shifting to the Sensor segment. Another quarter of weak book-to-bill, although it sounds like the order cadence picked up. As you look at the year and maybe the cadence of the revenue profile in light of the bookings and orders, are we probably looking at a year where the sensor segment is probably down year-over-year? Or is there something else, maybe inventory reset or something else that's going on in sensors that gives you confidence that the second half revenue will be better than the first half?

Given our visibility, as you saw, Q1 has a higher bookings in the Sensor segment in respect to the prior quarter. There are two moving parts. For precision resistors, we do continue to see very strong bookings in the test and measurement for semiconductor, for fiber optics, data centers, and for avionic, military, and space, while on the sensor side, on the gauges side, on the advanced sensor side, the big softening came from the consumer part. Our consumer customers are already, we believe, through the end of the cycle in depleting their inventory. The expectation is that we will already see in the second quarter higher bookings. So I would say that the business environments we are expecting to see in the second quarter are expected to improve relative to the first quarter, and we expect to continue to see that further during the year. So all in all, we have very positive prospects regarding the business climate concerning sensors as we move along the year.

And I guess one last question, and I'll get back in the queue. You mentioned higher costs in the quarter and maybe I didn't quite understand this properly, but it sounded like there was a net $700,000 of adverse cost recovery, but you did mention also that you are implementing higher prices. I wonder, a, if I understand that properly; and b, when do you expect to get to a price cost equilibrium given your pricing actions to date?

So when we speak about costs, there are a few aspects. One aspect is that if you can recall in Q4, we discussed some temporary inefficiencies in the Sensors segment, which we have recovered in Q1. The second piece is the material cost. We continue to see material cost increase in Q1 of $800,000 relative to Q4 and $1.2 million up in respect to Q1 of last year. This is mostly in the Weighing Solutions and Measurement Systems, and it's mainly for various electronic components. We continue to pass those higher costs in the form of price increases. For example, year-over-year, the average selling price increase is $1.1 million, which offsets the material cost increase. Compared to the prior quarter, we have increased prices by $400,000, and we were also able to offset higher costs by additional cost reduction. The company is expected to increase prices or implement even higher prices as we move along this year. If you can recall, last year, the company realized approximately $9 million from higher selling prices, which essentially offset higher material and labor costs. The intention is to continue to do this also this year while applying more price increases on selective product lines in addition to the cost reduction projects.

Got it. Thanks, Ziv. I'll get back in the queue.

Thank you. The next question comes from the line of Griffin Boss of B. Riley Securities. You may proceed.

Hi, good morning. Thanks for taking my questions. So I'm glad to see the increasing book-to-bill across the board. Measurement Systems was obviously a standout on that front. So two questions for me on that one. First, is steel the only factor that's driving the strong book-to-bill in Measurement Systems? Or are you seeing positive demand trends in other end markets? And then second related, what is driving that strong growth in steel? Is that primarily the timing of any orders? Or are you seeing any new customer wins there?

The strong growth in steel is coming from increasing steel prices, mainly in Q1. China, which produces more than 50% of the world's steel output, saw the volume go up by 6.1% year-over-year. Additionally, India, which is the second largest producer, has initiated a nationwide program to invest in steel production to become more industrialized. Therefore, there are major steel investments in India aimed at adding more steel capacity and acquiring more sophisticated equipment at universities and research centers to develop lighter and stronger alloys, positively impacting our steel business in Measurement Systems. That's regarding steel production. The other trend, as I indicated, is the precision resistors, which is driven by semiconductor test equipment as well as avionic, military, and space demand. We are also seeing consumer electronics coming back as they reach the point of needing to replenish their inventories. These are the key drivers for the higher demand going forward.

That's great. Thanks for the color. I appreciate it. And then maybe one for Bill here. Can you give us some more color on the cadence for CapEx? Because Q1 came in much lighter than we modeled. I know you reiterated the $18 million to $20 million for the year. I'm just curious, is it picking up in the back half of the year? Or should we just expect higher CapEx in 2Q through to 4Q?

Yeah, Griffin. So you saw that the capital spending was $3.5 million. Yes, we do expect to have more of the capital spending in the back end of the second half of the year, but still within that $18 million to $20 million target for the full year.

Okay, good. Thanks. And then just another sort of housekeeping one. So I guess you guys repurchased $2.7 million worth of stock in the quarter. Can you just remind us how many shares are left under that authorization?

So I just want to reiterate your point, I mean the stock repurchase during the first quarter of 2023 was zero. We still have approximately 515,000 shares within that program to be warranted.

Sorry. I misread. Through 1Q, '23, I thought that's through 1Q, '23. Okay, I appreciate. That's it for me. Thanks.

Thank you. The next question comes from the line of Hendi Susanto of Gabelli Funds. You may proceed.

Good morning, Ziv, Bill, and Steve.

Good morning.

Okay. My first question is, I think this time management mentioned about advanced sensors for avionics, military and space. Would you be able to share more color on what your advanced sensor products footprint in avionics, military, and space?

The avionics, military and space applications are more relevant for precision resistors. The consumer electronics and the robotics for industrial and medical applications are more relevant for advanced sensors. We are not selling into the avionics, military, and space advanced sensors. This was maybe a misunderstanding on my part, but only precision resistors we are selling to that end market.

I noticed that in the press release. It might just be a wording issue. Additionally, Ziv, you mentioned that a price increase is expected later in 2022. You also referenced that last year there was $9 million in revenue due to higher selling prices. Do you have an estimate on whether the price increase will be in the low single-digit percentage range? Any insight on that would be appreciated.

If I can recall, the $9 million last year was around low to mid-single digits. The expectation probably is to do the same order of magnitude this year from an overall company perspective.

Okay. Regarding the timing of the price increase, can you apply price increases to the existing backlog, or do they only apply to new orders?

Given our backlog, any price increase can only be applied to new orders, not on existing backlog. We anticipate about a one-quarter delay because of this backlog. Therefore, when I mention future price increases, I am referring to those that have already been implemented on previous orders, and we expect to see these reflected in the P&L in the coming quarters, similar to what we observed in Q1.

That's helpful. Last question for Bill. Bill, you mentioned that the tax rate will be 22% to 25% for this year's estimate. That is lower than the past few years. May I inquire about the main drivers for the lower tax rate? And I'm wondering what is the baseline for the tax rate going forward?

Yeah. So the tax rate is always based upon the mix of income where it's earned in the various jurisdictions. So, yeah, we should be in that range of like 23% to 24%. And that's where we have been over the last few years, constantly looking at ways to lower our tax rate as much as possible, but given where the mix of income is being earned, that's where the tax rate is coming out today.

Thank you, Bill. Thank you, Ziv.

Thank you. The next question is a follow-up from John Franzreb of Sidoti Company. You may proceed.

Yeah. Just curious about your thoughts on debt repayment versus share repurchase going forward?

John, we evaluate our capital allocation strategies from a cash generation perspective to decide the best way to pay down debt. At the same time, we are generating significant interest income with our cash, and importantly, our strategy for cash repurchases aligns with what the board has established.

Right. And your thoughts in light of that in a higher interest rate environment, why wouldn't more cash be used to reduce debt, I guess, that's what I'm wondering?

Our goal is to reduce the debt, but unfortunately, most of the cash is generated outside of the U.S. However, we remain focused on driving debt repayment to lower our interest expenses.

And maybe I just don't appreciate, of the $93 million in cash, how much of that is outside of the U.S.?

Approximately 94% is outside the U.S.

Okay. That helps a lot, though. Thank you, guys. Thanks for taking my follow-up.

Thank you. The next question comes from the line of Bill Dezellem of Tieton Capital. Please proceed.

Thank you, that's Tieton Capital. And your book-to-bill is directionally beginning to improve. What are you anticipating that the overall company book-to-bill will be above one? And with that in mind, as you look out over the various industries that you serve, where do you anticipate the most strength over the remainder of the year? And what are the dynamics that you're seeing that will lead to that?

I would say regarding bookings, we see an improvement. The bookings for Q1 have increased by $9.6 million compared to Q4. Given the solid demand for orders and the expectation for growth, we anticipate improved bookings in the second quarter relative to the first quarter. At the same time, we expect to maintain similar revenue levels as in the first quarter. It's difficult to predict when these two aspects will align, but the trend is certainly positive as we observe a better business environment. Regarding deliveries, we are currently shipping based on customer schedules. However, we remain optimistic; if the overall situation remains stable, we are quite positive about the outlook for the second half of the year. In terms of end markets, the test and measurement sector for semiconductor equipment and several emerging markets for precision resistors related to data center fiber optics equipment continue to demonstrate strong demand. The consumer electronics sector concerning strain gauges on advanced sensors is expected to improve as well. The avionics, military, and space sectors remain robust. In the Measurement Systems segment, we discussed the steel business and its driving demand. In terms of Weighing Solutions, considering the vLite and some of the developments discussed during the call, we should also expect potential growth in demand in the industrial market.

That's helpful. I want to confirm if I heard you correctly when you mentioned improving business conditions. Did I understand that right? If so, could you relate that to the ongoing macroeconomic discussions about the Fed aiming to slow down the U.S. economy? It seems to contrast with that perspective.

I would say that our insight regarding the improved business environment is based on our visibility and discussions with customers. At this point in time, we are looking at a few factors. One factor is the depletion of our inventories at our customers, as we see them continuing to deplete inventory and reaching a point where they will have to start replenishing that. So I assume that's a good sign. Given the macro environment, even outside the U.S., for example, developments in India, we believe this trend is expected to continue through the rest of the year. Naturally, nobody has a crystal ball, but at least based on indications today, we are more optimistic than pessimistic regarding coming quarters.

Great. Thank you. And then lastly, relative to advanced sensors. Would you share with us what the pipeline of prospective opportunities looks like there? That's a business that had been growing very rapidly, and we just haven't talked very specifically about it on this call.

Advanced sensors did grow very rapidly over the last few years. We are selling to various markets; however, the big prospects are still in consumer electronics. We are looking at potential new designs with existing and new customers. We're also looking at robotic applications, both for industrial and medical. The design cycle for our OEM customers is around two to two and a half years. However, we have already initiated many designs at various customers, and the expectation is that we will see many of these designs coming to fruition with significantly more volume getting to advanced sensors. At this point, from a macro standpoint, the biggest impact for advanced sensors was the fluctuation in supply and demand in consumer electronics, or I would say, the inventories in the queue. This is more about managing current designs rather than looking at future designs that are in the funnel, which should lead to future revenues. However, it's still one of our most promising product lines.

Thank you for the time.

Thank you. There are currently no additional questions registered at this time, so I will pass the conference back over to Steve Cantor for any closing remarks.

Thank you, Danielle. Before we conclude, I want to let everyone know that we will be participating in a couple of conferences coming up, the B. Riley Conference later in May and also the Sidoti Small-Cap Conference in June. I'm happy to share any additional information, and you can reach out to me directly. Thank you all again for joining the call, and have a great day.