Vishay Precision Group - Q2 2024

Transcript

Operator (participant)

Good morning, all, and thank you for joining us for VPG's Second Quarter Fiscal 2024 Earnings Call. My name is Carly, and I'll be the call coordinator for today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad, and to remove yourself from that line of questioning, it's star followed by two. I'll now hand over to your host, Steve Cantor, Senior Director of Investor Relations, to begin. Steve, please go ahead.

Steve Cantor (Senior Director of Investor Relations)

Thank you, Carly, and good morning, everyone. Welcome to VPG's 2024 Second Quarter Earnings Conference Call. Our Q2 press release and accompanying slides have been posted on the VPG 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. 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, 2023, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and President, and Bill Clancy, CFO. Now I'll turn the call to Ziv for some prepared remarks.

Ziv Shoshani (CEO and President)

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 about the quarter and our outlook for the third quarter of 2024. Moving to slide three. Overall, our second quarter was as follows: Sales trends continue to reflect a mixed market environment. Revenues grew sequentially in some of our markets, while other markets remained soft. Similarly, order trends were mixed, with sequential growth in the measurement systems offset by lower orders in sensors and weighing solutions. We achieved a solid gross margin in light of our revenue levels as we adjusted our operations effectively to current revenue levels and expanded our cost reduction programs. Customer engagement remains high as we continue our focus on our business development initiatives.

Our strong balance sheet and solid free cash flow provides a good foundation for organic and inorganic growth. We expect the macro environment to be stable through the end of 2024, with mixed trends continuing in our markets. Moving to slide four. Looking at the second quarter results in detail. We reported sales of $77.4 million, which were 14.8% lower than a year ago and 4.2% lower sequentially. Orders of $73.5 million softened modestly from $75.3 million in the first quarter. Our book-to-bill ratio improved slightly to 0.95. We are seeing mixed trends in our markets. Bookings were soft in the test and measurement, avionics, military, and space, and industrial weighing. However, orders grew for consumer-related applications and in our transportation and steel markets.

Regarding our strategic business development initiatives, we are seeing the early results of these efforts in terms of design wins and initial orders with new customers and additional applications and projects with existing ones. Our gross margin of 41.9% declined from a record of 43.4% in the first quarter, reflecting lower sales in the second quarter. We generated $10.2 million of adjusted EBITDA, $7.5 million of cash from operations, and $4.9 million of adjusted free cash flow, which supports our capital allocation strategy to grow stockholders' value. I'll now review our business segment performance for the second quarter. Moving to slide five. Beginning with our sensor segment, second quarter revenue of $28.9 million declined 20.4% from a year ago and was 1.9% lower sequentially.

Compared to the first quarter, sales growth in Advanced Sensors products was offset by lower sales of our Precision Resistors. Sales of Advanced Sensors and related strain gage products grew 17% from Q1 on the strength in consumer applications. Sales of Precision Resistors to the test and measurement market were softer, particularly in Asia. While second quarter orders for sensors of $26.1 million were slightly lower sequentially, bookings for Advanced Sensors grew 20%. Orders for our resistor products were soft, particularly in the test and measurement market in Asia. Strategically, in the Advanced Sensors, we continued to address additional opportunities in both high-end road bikes and e-bikes with European and Asian bike makers.... These applications use our sensors to precisely measure the force of every pedal stroke. This helps professional and high-end bike riders train more efficiently.

In addition, we received a substantial R&D order for a developer of robotics for medical applications. Our project with a leading developer of a humanoid robot continues to progress well, as we recorded revenue related to prototypes for this project. This customer expects to deploy several thousands of these robots in its factories by the end of 2025. Book-to-bill ratio for sensors was 0.9. Moving to slide six. Turning to our Weighing Solutions segment, second quarter sales of $27.4 million were 12.2% lower than a year ago and 4.8% below the first quarter of 2024. Sequentially, the decline reflected lower revenue in the transportation market, while revenue in our industrial market was roughly flat. The book-to-bill ratio for Weighing Solutions was 0.93. Orders of $25.5 million declined 7.3% from the first quarter.

The lower orders were primarily in the transportation market for process weighing and onboard weighing systems. In terms of business development initiatives for Weighing Solutions, we are developing a variety of solutions and applications for existing and new customers in the medical and lab automation, construction, and transportation markets. Moving to slide seven. Turning to our Measurement Systems segment, second quarter revenue of $21 million declined 9.6% from a year ago and 6.6% sequentially. The sequential decline was driven by lower sales of DTS safety testing products in AMS and the transportation end markets. Book-to-bill ratio for Measurement Systems was 1.04, as orders of $21.9 million improved 3.8% from the first quarter.

Sequentially, orders grew for the DSI comprehensive tools for the development of new metal alloys, while bookings for the DTS and KELK steel productivity systems were softer. As we have discussed, order pattern can fluctuate quarter to quarter due to the timing of customer projects and the long lead times of these products. We continue to be encouraged by our business development activity in the measurement systems. In the current quarter, we expect to have the first aluminum manufacturing customer evaluation of our KELK optimization system using our optical technology. As we have discussed, the industrial aluminum manufacturing is a new potential adjacent market for us. We believe our solution can offer important cost savings for these customers in terms of reduced downtime and waste.

For DSI, we expanded our offering of our Gleeble thermal-mechanical physical simulation tool for developing new metal alloys with modules that can efficiently test smaller sample size. This capability opens a new market for DSI in the additive material manufacturing equipment market for applications such as commercial 3D metal printers. Moving to slide eight. Before turning the call to Bill, I want to comment on our capital allocation strategy. Given our balance sheet and the free cash flow generation, we believe that we can create stockholders' value through organic growth, successful M&A, and as warranted, stock repurchases. During the quarter, we repurchased $3.1 million of our stock, or 97,000 shares. In closing, we continue to focus on our strategic initiatives in both business development activities and cost reduction programs.

These actions are positioning VPG to realize the significant long-term earnings power embedded in our business model. I will now turn it over to Bill Clancy for additional financial details. Bill?

Bill Clancy (EVP and CFO)

Thanks, Ziv. Referring to slide nine and the reconciliation tables of the slide deck, our second quarter revenues declined 4.2% from the first quarter and were 14.8% below the second quarter a year ago. Adjusted gross margin in the second quarter of 41.9% compared to 43.4% in the first quarter, due to lower volume and unfavorable product mix. By segment, gross margin for the sensor segment of 38.3% improved sequentially, primarily due to improved efficiencies. The Weighing Solutions gross margin of 37.6% was lower than the first quarter, primarily due to lower volume. Measurement Systems gross margin of 52.4% declined sequentially, reflecting lower volume with an unfavorable product mix.

Total selling, general, and administrative expenses for the second quarter were $26.5 million, or 34.3% of revenues, as compared to $27.4 million, or 33.9% of revenues for the first quarter of 2024. The sequential decrease in SG&A of $900,000 was mainly attributable to a reduction of bonus reserve accruals. Operating margin was 7.6% as compared to 8.6% for the first quarter. The adjusted operating margin in the second quarter was 7.6% as compared to 10% in the first quarter of 2024, primarily reflecting the lower revenue.

The adjusted net earnings for the second quarter were $4.2 million, or $0.31 per diluted share, which compared to $5.7 million, or $0.42 per diluted share in the first quarter of 2024. Adjusted EBITDA was $10.2 million, or 13.2% of revenue, compared to $12.3 million, or 15.3% in the first quarter of 2024. Purchase CapEx in the second quarter was $2.6 million. For the full fiscal year of 2024, we expect purchase CapEx to be in a range of $10-$12 million, which is significantly lower than the levels we have spent over the past few years. Adjusted Free Cash Flow was $4.9 million, which increased from $4.2 million for the first quarter.

We define adjusted free cash flow as cash from operating activities of $7.5 million, less capital expenditures of $2.6 million. The GAAP tax rate in the second quarter was 33.3%, as compared to 28.4% in the first quarter of 2024, primarily reflecting a higher proportion of income and higher tax rate jurisdictions. The second quarter operational tax rate was 27%. We are assuming an operational tax rate in the range of 26%-28% for the full year of 2024. Moving to slide 10. We ended the second quarter with $84.1 million of cash and cash equivalents, and total debt of $31.9 million, which was classified as a current liability.

I want to note that we have realized approximately $900,000 in net interest savings through the first half of 2024 as a result of our debt paydown in 2023. Regarding the outlook, for the third fiscal quarter, given the current market conditions and our backlog, we expect net revenues to be in a range of $70-$78 million at constant second fiscal quarter 2024 exchange rates. In summary, we've adjusted our operations effectively to current revenue levels. We've generated solid cash flow and continued to repurchase our common stock, and we continue our focus on strategic business development and cost savings initiatives. With that, let's open the lines for questions. Thank you.

Operator (participant)

Thank you. If you'd like to ask a question, please press star, followed by one on your telephone keypad now, and if you'd like to remove yourself from that line of questioning, you can press star followed by two. Our first question comes from Griffin Boss of B. Riley. Griffin, your line is now open.

Griffin Boss (Equity Research Analyst)

Hi, good morning, Ziv, Bill. Thanks for taking my questions. So first for me, you laid out your, your three- to five-year targets for revenue growth and margin expansion back in February of 2022. Now that we're about six months from the front end of that range and, and macro uncertainty remains and, perhaps is even growing, how, how viable do you see those targets today?

Ziv Shoshani (CEO and President)

Good morning, Griffin. When we developed the 3-5 year plans back in 2022, naturally, we have not foreseen the downturn in the marketplace, I would say.

Nevertheless, I still believe that the plan we have provided is very much viable, given the fact that, based on the discussions that we had with our large OEM customers and the, the outlook, and the initial outlook that we have been looking for, an initial recovery, in the second half of 2024, which at this point in time, we are looking, moving, the initial recovery, based on the discussion we had with our large OEMs and, and their, earnings release as well, the correlation with their earnings release, we, we foresee the recovery starting as of 2025, in addition to our extensive business development activities, which should generate, new. I would say, we would expect it to generate significant revenue with new projects.

I do believe that the plan we have laid back in 2022 is still viable, and the plan for the company is still to meet that.

Griffin Boss (Equity Research Analyst)

Okay, great. Thanks, thanks for the colors, Ziv. And on that note, too, the revenue growth targets obviously implied meaningful inorganic contribution. Can you just discuss a little bit more what you're seeing on the M&A front, how that process has progressed throughout the year?

Ziv Shoshani (CEO and President)

On the M&A front, it was, I would say that on the M&A front, we, we still have seen deals with some lower multiples. We have been in, I would say, in discussion with few companies. At this point in time, unfortunately, I have nothing to report, but I do feel that the M&A landscape is going to be more, I would say, more reasonable at a much better, I would say, at a much better closing, or, or I would say, at a much better deals as we move forward. So I'm, I would say that unfortunately, we were not able to execute, but I do think that we are, we are going to be much more optimistic about M&A as we move forward.

Griffin Boss (Equity Research Analyst)

Okay, great. Makes sense. Thanks, Steve. And just turning to a model question here. The gross margin, SG&A, both came in below our expectations, obviously, gross margin, because of the lower volume. SG&A, the ongoing cost reduction initiatives, which is great to see. Is it fair to assume that those trends are gonna continue into the back half of the year, just given the expectation for Q3 top line?

Ziv Shoshani (CEO and President)

The gross margin, we are looking at a similar revenue level at a similar exchange rate. The gross margin is sustainable, and the SG&A, Bill will provide more color regarding the SG&A.

Bill Clancy (EVP and CFO)

Yeah, so Griffin, on the SG&A, yeah, we were at $26.5 million for Q2, you know, which included some bonus adjustments. It'd only be slightly higher for Q3. So trending similar to where we were, slightly higher.

Griffin Boss (Equity Research Analyst)

Okay, great. All right, thanks. Thanks. And then just last for me, I guess more broadly, obviously, the past 12 months have been tough. I think the company's been navigating the environment very well. But just looking forward, but aside from the ongoing cost reduction initiatives, what gets you most excited, for the future in terms of trends or business opportunities?

Ziv Shoshani (CEO and President)

What gets me most excited is our business development initiatives. We are working very diligently, and we have enhanced our business development resources, and I would say each of the reporting segments is working with some, I would say, with some key OEMs in order to develop high volume revenues. As I've indicated during the call, we have the... On the sensor side, we have the humanoid projects, we have some medical robotics applications, we have the consumer electric bike and high-end bikes. We have inventory management on the weighing solutions. We have some large OEM construction designs on the measurement systems. On the DSI, we have the additive production, ceramic-based testing.

So all those projects, which are in an initial design cycle, should generate a substantial amount of revenue in the future, and this is what I'm really excited about. The improvement and the acceleration of organic growth for the company in the coming years.

Griffin Boss (Equity Research Analyst)

Great. That's, that's excellent. Thanks, Steve, and, and thank you for taking my questions.

Ziv Shoshani (CEO and President)

Thank you.

Operator (participant)

Our next question comes from Fran, excuse me, John Franzreb of Sidoti & Company. John, your line is now open.

John Franzreb (Senior Equity Analyst)

Good morning, guys, and thanks for taking the questions. You know, I'd actually like to take a step back and see, maybe talk about the beginning of the year to today. When you look back at the revenue profile, what business was far weaker than you thought now than you thought maybe in the beginning of the year?

Ziv Shoshani (CEO and President)

Okay, that's a great question, John. Our outlook going into the year was for an initial recovery in the second half of 2024, which was based on a more optimistic expectation from our customers. We have received indication from many of our OEM customers that their expectation for an upturn has been pushed from the second half of 2024-2025. We have seen this mainly in precision agriculture, industrial, construction, and also semiconductor, test and measurement. So those would be the main end markets where we have expected an upturn in the second half of this year, which at this point in time, based on the discussions with them, they are looking for a push out for 2025.

In terms of our outlook for the rest of the year, we expect orders to be flattish, reflecting continuing mixed trends in our end markets.

John Franzreb (Senior Equity Analyst)

Yeah, now some of those end markets that you just mentioned are interest rate sensitive. Would it be fair to assume that interest rate cuts would be certainly a positive for those end markets?

Ziv Shoshani (CEO and President)

Yes. Yes, this is correct, John. If we are looking at, you know, the large capital investment, like construction, definitely test and measurement. Those markets would be influenced by the interest rates, and once the interest rates are expected to drop, we would see, I would say, an improvement in their activity, in their business activity.

John Franzreb (Senior Equity Analyst)

It seemed to me, in your prepared remarks, there is an increased emphasis on the Advanced Sensors business again. Are, are you seeing more interest in that, in that product line? Can you just kind of elaborate why the increased verbiage on it?

Ziv Shoshani (CEO and President)

Yes. Okay. So one, we had a good positive sign of an increase of 21% in bookings, in terms of consumer electronics in respect to prior quarter. And I do believe that we are very, very excited, given the business development initiatives in Advanced Sensors. The fact that the business environment is soft only emphasize how important it is to continue and promote the business development activities in order to ensure the long-term growth, growth of the company. Projects like the humanoid projects, which this year should result in $hundreds of thousands of revenue only at the prototype level.

The large R&D order, a significant R&D order for medical robotics, and the e-bike are only an indication regarding customer engagement and the potential growth for high-value dollar accounts, and this is what the business is focusing on. So we understand that there is a short-term business environment, but the company is very much focused and driven on pushing those business development activities. And this is why the team and myself are very excited about, and this is only one platform, about Advanced Sensors. This is why we are discussing this product line.

Understood. And I guess if we kind of look at it, that so the business is slower than expected, but across the whole portfolio, if I wanted to, like, identify what business line would indicate things are starting to turn around, you know, the proverbial green shoots. When you look at your portfolio, where would you expect to see a turnaround first emerge?

If I'm looking, when we speak about turnaround, there are two verticals. One is the true demand in the market, while the other one is going to the end of the cycle of depletion of inventory. I do believe that one of the business segments that we should expect to see by the end of the year, a faster depletion of the inventory and an initial indication of recovery is test and measurement. During those discussions with customers, we understand that they are getting to the end of the cycle of the inventory level, and they would expect beginning of next year to start placing orders. As we have discussed earlier, other markets could be more dependent on interest rates. So once interest rates.

John Franzreb (Senior Equity Analyst)

Right.

Ziv Shoshani (CEO and President)

Or once there is an indication of a reduction of the interest rates, I think that customers would be more willing to start investing in big, big projects and start investing more in inventory. We should please also bear in mind that the inventory Q cycle at EMS and at distribution is very, very low, given the high interest rates and the cost of holding inventory. So I would expect that this would also change as interest rates would start to go down.

John Franzreb (Senior Equity Analyst)

Understood. Thank you, Ziv, for taking my questions. I got back a few.

Ziv Shoshani (CEO and President)

Thank you.

Operator (participant)

As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad, and to remove yourself from that line of questioning, please press star followed by two. It would appear we have no further questions, so I'll hand back to Steve Cantor, Senior Director of Investor Relations, for closing remarks.

Steve Cantor (Senior Director of Investor Relations)

Hey, thank you all for joining the call. I want to note that we will be participating in the Jefferies Conference on September fourth. You can check our website for additional details. Again, thank you all, and have a good day. Bye.

Operator (participant)

This concludes today's call. Thank you to everyone for joining. You may now disconnect your lines.