Vishay Precision Group, Inc. (NYSE:VPG) Q1 2023 Earnings Call Transcript

Vishay Precision Group, Inc. (NYSE:VPG) Q1 2023 Earnings Call Transcript May 14, 2023

Operator: 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 liens will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] 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.

Steve Cantor: 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?

Ziv Shoshani: 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 to 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 1 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 this — 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 the global challenges and shortages. While our supply chain is 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 component 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 shipment 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 cost 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 the 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 the 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 in Q1, but we expect demand to improve gradually in the second quarter. As part of our strategic initiatives to secure design wins in new 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 a number of emerging markets, including robotics for industrial applications and medical applications. In terms of operating results for sensors, 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 the 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 a stronger demand in 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 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. Customers’ feedback for this product have been positive, and we believe this technology can give us competitive edge to gain share in our traditional weighing market.

Particularly for legal, for trade retail applications such as supermarket checkouts, scales as well as 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 reflected a lower volume and higher material cost, 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 49.4% increase for 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 of 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 is 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 interests 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 broadened 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 seen investing in our technology and operational capabilities to position us to capture growing share 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, at the same time, 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 to organic growth, successful M&A and as warrant stock repurchases. I will now turn it over to Bill Clancy for additional financial details. Bill?

Bill Clancy : 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 were 1.4% above the first quarter a year ago. Foreign exchange for the first quarter have negatively impacted revenues by $2.4 million compared to a year ago and positively impacted revenues by $1.7 million as 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 rate 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 a 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.

Q&A Session

Operator: Certainly. [Operator Instructions] The first question comes from the line of John Franzreb of Sidoti Company. Please proceed.

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

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

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

Operator: Thank you. The next question is a question from Bill Dezellem of Tieton Capital. Please proceed.

Operator: 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.

Steve Cantor: 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.