Vishay Precision Group - Q4 2023

Transcript

Operator (participant)

Good morning everyone, and welcome to the VPG fourth quarter and FY 2023 earnings call. My name is Chad, and I'll be the coordinator for your call today. During the presentation, you can register to ask a question by pressing star one on your telephone keypad. If you change your mind, please press star followed by two. I will now hand you over to Steve Cantor, Senior Director of Investor Relations, to begin. Steve, please go ahead.

Steve Cantor (Senior Director of Investor Relations)

Thank you, Chad, and good morning everyone. Welcome to VPG's 2023 fourth quarter earnings conference call. Our Q4 and full-year press release and accompanying slides have been posted on our website, vpgsensors.com. An audio recording of today's call will be available on the internet for a limited time and can also be accessed on our website. Today's remarks are governed by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. 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, 2022, 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.

Please refer to slide three of the quarterly presentation.

Ziv Shoshani (CEO and President)

Thank you, Steve. We delivered a solid quarter and the second best year ever for VPG, despite a challenging macro environment mainly in the second half of the year, beginning with our 2023 performance as shown in more detail in the accompanying slides. For the full year, we achieved revenue of $355 million and adjusted diluted net EPS of $2.17, and we improved our adjusted gross margin to 42.4%. We generated $60.4 million in adjusted EBITDA, an EBITDA margin of 17.0%, and a record $30.8 million of adjusted free cash flow. We deployed our cash to repurchase stock and to pay down our revolving debt in order to provide value to our stockholders. We completed infrastructure expansion projects in India and Japan and have accelerated our business development activities to capture new opportunities for our precision sensing and measurement solutions.

Moving to slide four, turning to the fourth quarter of 2023. We achieved revenue of $89.5 million, which was above the high end of our guidance and 4.3% higher than the third quarter. We delivered adjusted diluted EPS of $0.61. Other trends were mixed sequentially as growth in our sensors and weighing solution segments was offset by lower measurement systems bookings due to the timing of customers' projects. We generated record-level adjusted free cash flow of $13.5 million, adjusted EBITDA of $16.5 million, and achieved an adjusted EBITDA margin of 18.5%. We deployed capital to pay down bank debt as well as to repurchase shares. We continue to execute on our long-term organic growth initiatives in terms of new product development and expanding our engagement with customers in larger markets.

We are also continuing our cost reduction efforts to move production to lower-cost locations, investing in automation and reducing material costs. I'll now review our performance by business segment for the fourth quarter. Moving to slide five, beginning with our sensor segment, fourth quarter revenue of $34.3 million grew 5.3% sequentially but was 5.7% lower than a year ago. The sequential growth was driven by higher sales of precision resistors in the test and measurement, as sales related to semiconductor test and production applications improved from the third quarter. Revenue trends for the rest of our markets, including consumer-for-advance sensors, were stable. We continued our strategic initiatives to secure design wins in new emerging markets in data centers and fiber optics equipment, as well as robotics and industrial automation systems.

In terms of operating results for sensors, gross margin of 40.2% improved sequentially from 35.9%, primarily due to higher volume and improved manufacturing efficiencies. Book-to-Bill for sensors was 0.85, which was modestly up from the third quarter as orders grew 7.8% sequentially. This reflected stronger demand in test and measurement and higher customer project-related orders in avionics, military and space, or AMS. Moving to slide six, turning to our weighing solutions segment, fourth quarter sales of $30.4 million increased 5.1% from $29.0 million in the third quarter but were 8.0% lower than a year ago. Sequentially, the increase was driven by higher OEM sales for precision agriculture and construction applications, and higher sales in general industrial, which offset lower sales in the transportation market.

Weighing solutions' adjusted gross margin of 35.6% in the fourth quarter declined from 38.7% in the third quarter, primarily due to a reduction in inventory and unfavorable product mix, partially offset by higher volume. Book-to-bill for weighing solutions of 0.91 in the fourth quarter improved modestly from the third quarter. Orders of $27.7 million grew 7.2% due to higher bookings for industrial weighing and transportation applications. Moving to slide seven, turning to our measurement system segment, revenue in the fourth quarter of $24.8 million increased 2.0% sequentially but was 7.5% lower year-over-year. The sequential growth reflected higher DTS sales for AMS applications, which offset lower sales for our steel-related businesses. Adjusted gross margin in the fourth quarter for measurement systems was 56.1%, which compared to 54.5% in the third quarter of 2023.

The higher adjusted gross profit margin in the fourth quarter of 2023 reflected the higher volume and favorable product mix. Book-to-bill for measurement systems of 0.73 declined from 0.98 in the third quarter, which had included record orders for DTS in the AMS market. The decline in book-to-bill reflects the timing of customers' projects. In the fourth quarter, steel-related orders grew sequentially, while orders in AMS were down from a record level. We see positive trends for DTS with our AMS customers. Despite the muted near-term outlook for the steel market, we are pursuing VPG-specific opportunities with new products such as our development of KELK solution for aluminum manufacturing. In addition, we are addressing opportunities in the Indian market, which is currently small but is expected to grow a double-digit over the next several years. We have added local sales and service support capabilities to meet this growing potential.

Moving to slide eight, as I indicated, we were pleased with our cash generation both for the fourth quarter and for 2023, which included record adjusted free cash flow. We continue to deploy cash as part of our capital allocation strategy, which prioritizes internal investment, M&A, stock repurchase, and paying down our revolving credit facility. In terms of internal investments, we completed growth focus and operational capability and automation projects in 2023. For example, we have increased the automation in our India facility to support higher volume businesses. In addition, we are continuing to consolidate production to this location. As such, we expect capital spending to return in 2024 to a more historical level of approximately 4% of revenue. Regarding M&A, we continue to look for attractive high-quality businesses that meet our stringent requirements for strategic fit, financial returns, and value creation.

We are currently seeing a more favorable M&A environment. Before turning the call to Bill for additional comments, I would like to thank our employees and our customers around the world for their continued commitment and dedication. I will now turn it over to Bill Clancy. Bill?

Bill Clancy (CFO)

Thank you, Ziv. Referring to slide nine and the reconciliation tables of the slide deck, our fourth quarter 2023 revenues were $89.5 million, adjusted gross margin of 43% in the fourth quarter as compared to 42.1% in the third quarter of 2023. Our operating margin was 13.4% for the fourth quarter of 2023. Our fourth quarter adjusted operating margin was 13.6%, excluding $130,000 of restructuring costs. Selling, general and administrative expense for the fourth quarter of 2023 was $26.4 million, or 29.4% of revenues, as compared to $26.6 million, or 30.9% of revenues, for the third quarter of 2023. The GAAP tax rate for the full year of 2023 was 32.3%, primarily reflecting the geographic mix of income. We are assuming an operational tax rate of approximately 27% for the full year of 2024.

The adjusted net earnings for the fourth quarter of 2023 were $8.2 million, or $0.61 per diluted share, compared to $6.4 million, or $0.47 per diluted share, in the third quarter of 2023. Adjusted EBITDA was $16.5 million, or 18.5% of revenues, which is 20.3% higher than the $13.7 million, or 16% of revenue, in the third quarter of 2023. CapEx in the fourth quarter was $5.3 million. Total CapEx for 2023 was $15.2 million, or 4.3% of revenues. For 2024, we are budgeting $14-$16 million for capital expenditures. We generated adjusted free cash flow of $13.5 million for the fourth quarter of 2023 as compared to $6 million for the third quarter of 2023. We define adjusted free cash flow as cash from operating activities less capital expenditures plus the sale of fixed assets.

As Ziv indicated, in the fourth quarter, we repurchased $4.7 million of our stock, or 153,000 shares. For the full year of 2023, we repurchased $5.9 million of common stock, or 188,000 shares. In addition, during the fourth quarter, we paid down $22 million of our revolving bank debt. For the full year, we reduced our outstanding revolving bank debt by $29 million, which we estimate will result in net interest savings of approximately $1 million in 2024, assuming no additional borrowing. Moving to slide 10, we ended the fourth quarter with $84 million of cash and cash equivalents and total outstanding long-term debt of $31.9 million, which reflects the paydown of the revolver and the stock repurchases during the quarter. We believe that we have a strong balance sheet and ample liquidity to support our business requirements and to fund additional M&A opportunities.

Regarding the outlook, for the first fiscal quarter of 2024 at constant fourth fiscal quarter 2023 exchange rates, we expect net revenue to be in the range of $80 million-$90 million. In summary, we achieved fourth quarter sales above the highs of our guidance. We generated record-level cash flow, which we are deploying to pay down our revolving bank debt and to repurchase shares. We are excited about the potential in emerging market and applications in consumer, industrial automation, medical, and material development with our high-value precision measurement and sensing products for our customers. With that, let's open the lines for questions. Thank you.

Operator (participant)

Thank you, Bill. If you'd like to ask a question, please press star one one on your telephone keypad now. If you change your mind, please press star two. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question today comes from Griffin Boss from B. Riley Securities. Please go ahead.

Griffin Boss (Equity Research Analyst)

Hi. Thanks for taking my question. So first, it's great to see the profitability and cash flow improvements: $13.5 million free cash flow, 82% free cash flow conversion. Can you just speak to how sustainable that might be moving forward now that you're obviously starting to see the benefits of the investments you made in optimizing your operating expenses?

Ziv Shoshani (CEO and President)

Good morning, Griffin. I think that given our sales guidance and the level of investments, CapEx, that we are planning to or that we intend to invest in 2024, I would say that it's quite sustainable, the Q4 performance. Naturally, the cash generation will also depend on the accounts receivable and payable, I would say, fluctuation or working capital fluctuations. But all in all, the Q4 performance are sustainable given the level of revenue as we move into 2024.

Griffin Boss (Equity Research Analyst)

Okay. Yeah. Great. Great, Ziv. Thanks for that. And then, so shifting gears in terms of order flow, like you said, it's sort of a mixed bag. Measurement systems seem a bit soft, while there could be some green shoots in sensors and weighing solutions. So, I mean, obviously, you've seen this type of environment before in the past. So with that context, can you just talk more about what you're seeing generally with distributor inventory levels and potential need for and timing of restocking events? And then more generally, just your high-level thoughts on 2024, potential inflection points, and maybe your positioning for a return to growth in the back half of the year.

Ziv Shoshani (CEO and President)

Yes. Absolutely. Orders for Q4 have declined 2.2% sequentially but grew 2.2% from prior year. As we indicated, there is a mixed bag or a mixed signal. On test and measurement, we see an upside of 6.3%, still upsides industrial, weighing upside general industrial, an upside given the improved business environment, which is the outcome of lower inventory in the pipeline in the last, I would say, four quarters. We also see some other end markets which are still not improved yet. Overall, we believe that near-term order trends have reached the bottom in most of our end markets. We expect order trends to modestly improve in the first half of the year and strengthen in the second half of 2024.

Based on customer feedback and the improvements in order intake in Q4 of 2023 in the sensors and in the weighing solutions segment, we believe that orders, as I indicated, have bottomed up in some of our key markets. But in the first half of 2024, we expect to see a modest growth in avionics, military and space, semiconductor testing, and consumer, while orders for industrial OEM applications such as precision agriculture, construction, transportation, and a portion of the steel market is expected to continue to be flat, which means, in a way, soft. But those end markets, or we expect that the order intake run rate is expected to improve for those end markets and applications in the second half of 2024.

So all in all, just to summarize, we are looking at a modest increase already in the first half, while this increase should be accelerated in the second half of the yea. In respect to order intake improvement.

Griffin Boss (Equity Research Analyst)

Excellent. Great. Yeah. That's great context. Thanks for the detail there. Just last one for me, and then I'll turn it over. You mentioned you're seeing a more favorable M&A environment. Obviously, that's a top capital allocation priority for you. Just curious, last call, you mentioned you were in some early dialogues with a few companies, nothing really bearing fruit. But just curious if any of those discussions have advanced or if that list of companies you're talking to has grown in the last quarter?

Ziv Shoshani (CEO and President)

Well, I would say that, as I indicated in our last call, we have been in dialogue with few companies. Some of the projects have been moving forward, while others, we are still in discussions. This is a period of quite a bit of uncertainty. Therefore, some of the companies are still contemplating regarding the process. But all in all, the Q level of M&A potential is increasing, and we are very positive about that. But so far, I have nothing to report. I have nothing tangible to report. But this activity takes a very high priority for the company.

Griffin Boss (Equity Research Analyst)

Great. Okay. Yeah. Fair enough. Thanks for taking my questions. Appreciate it.

Operator (participant)

The next question on the line is from John Franzreb from Sidoti & Company. Please go ahead.

John Franzreb (Senior Equity Analyst)

Good morning, guys, and thanks for taking the questions. Ziv, I'd like to start with your commentary on the measurement systems business and the deferral of some project activity. Is that entirely surrounding the KELK side of that business, or is there something more that we should be cognizant of?

Ziv Shoshani (CEO and President)

Okay. So good morning, John. So measurement systems book-to-bill for the quarter was 0.73, which declined from 0.98 in the third quarter. Please bear in mind that the decline also includes a record order for DTS in the avionics, military and space business in the prior quarter. And the decline in the book-to-bill reflects also the timing. Given the project nature, it's the timing of customers' projects. In Q4, steel-related orders grew sequentially. And while orders in avionics, military and space were down from the record level, we expect business environment improvements for the avionics, military and space going forward. And this is based on our business development funnel and the projects that are expected to get finalized in the coming quarters and turn into orders.

Despite the fact that we have seen a specific decline in avionics, military, and space, given the project nature of the business or the timing project nature of the business, we do see a very positive trend also on this end market in 2024.

John Franzreb (Senior Equity Analyst)

Okay. Right. So KELK is up a little bit sequentially. DTS, that was down a lot because they had a big order flow in Q3, and that should pretty much stabilize in the first half. Is that what we're looking at there?

Ziv Shoshani (CEO and President)

Is expected to modestly improve and improve much more in the second half of the year.

John Franzreb (Senior Equity Analyst)

Excellent. Excellent. I'm curious, what's driving the higher tax rate these days? It seems to be ticking up a lot.

Bill Clancy (CFO)

Yeah. So, John, so good morning. So the higher tax rate, predominantly, we have a geographic mix of income. So depending upon where our income is being generated, right now, it's being generated in higher tax rates than we've seen in the past. We've also, within this GAAP tax rate this year, had some one-time costs for tax positions. But as we mentioned, we're going to participate 27% operationally in 2024.

John Franzreb (Senior Equity Analyst)

Okay. By my reckoning, this is the most aggressive share repurchase quarter, I think, since the company went public. Can you just kind of walk through the decision process there and why you're so aggressive on repurchasing stock?

Bill Clancy (CFO)

Well, John, as you recall, and I think we've talked about this, as part of our capital allocation, we've always listed as internal growth, M&A. The buyback of the stock was always one of the top parameters for capital allocation. We will continue to incorporate all of those attributes in the capital allocation, and we'll continue to and we're continuing to be very active in the market today.

John Franzreb (Senior Equity Analyst)

Okay. One last question on revenue growth. Ziv, you mentioned a couple, I don't know, potential items when you went through the segment presentations, data centers, and new product development in MS. If we were going to look at near-term revenue catalyst opportunities, especially new ones, which are the most viable near-term revenue opportunities for the company?

Ziv Shoshani (CEO and President)

Okay. So if we are looking at 2024, we are looking in two verticals. One is the vertical of the macro improvement, macroeconomy improvement, given the fact that we have seen inventory is being depleted in the Q. And I would say that part of that would run the improvement would be test and measurement for semiconductor equipment for the sensor piece, in addition to the general industrial that is also expected to improve. The other piece is our business development activity in respect to new applications, selling to new applications, and new products that we have developed. In that case, I could give, as an example, what I did mention regarding the aluminum-based systems, that that's a completely new market for us. And we have just started to provide the systems in order to enter into a new market.

In addition to that, as I mentioned, I think in the prior call, is the humanoid application, where we are at the very final design stage. But once the prototype phase is going to take off, the expectation is, over time, that it's also going to gain more volume. And then, for example, I have on the weighing solution side that we have developed a very cost-competitive product, which we have applied for a patent, and we believe it's also going to gain momentum. So there are really two verticals for the potential upside of revenue. One is the macroeconomy change, and the other piece is our business development activities to capture new business.

John Franzreb (Senior Equity Analyst)

Perfect. With that, actually, I'll get back into queue and let somebody have some questions. Thank you, Ziv.

Operator (participant)

Thank you. As a reminder, to ask any further questions, please press star followed by one on your telephone keypad now. We have a follow-up question from John Franzreb. Please go ahead.

John Franzreb (Senior Equity Analyst)

Well, I have to ask about the 3-5-year long-term targets. Do you still think they're viable given the protracted downdraft we've had in the booking order profile?

Ziv Shoshani (CEO and President)

Well, I would say, John, if you can recall, we put our three-year plan in respect to revenues, the 45%, if I can recall, gross margin. And then we also set an OMD. As you could see, despite the so-called, in a way, mixed business environment, the company has achieved in Q4 a record gross margin of 43%, which means we are working on optimizing our top-line growth in terms of business development activities. We continue to look at or we have a longer-term plan regarding operational excellence in respect to efficiency improvement, product relocation, sourcing cheaper materials, which, in combination with the top-line revenue, is going to. I think there is a high level of confidence that we are going to meet the 4%-5% gross margin, which will also assure the profitability target.

Despite the so-called current mixed in, I would say, mixed business environment, I am quite confident that the plan that we have laid out, the 3-5-year plan, is very viable.

John Franzreb (Senior Equity Analyst)

Okay. Excellent. That's good to hear. Just one last question. Any update on production capabilities in Israel? Has it still been a non-factor? I think it'd be prudent to brush up on that topic.

Ziv Shoshani (CEO and President)

Sure. So I would say, as you know, we have two operations in Israel. They are located in the center of Israel. We are operating in Israel at the normal levels. The actions that we have taken in prior quarters in respect to securing raw material, shipping finished goods in advance, and working with our freight forwarders still applies. There is no issue whatsoever with our operations. We are working with full efficiency and at optimum capacity. So our operations in Israel are operating intact, working at a normal level.

John Franzreb (Senior Equity Analyst)

That's great to hear. Thanks for the update, Ziv.

Operator (participant)

This concludes the Q&A session. I'll now hand over to Ziv to conclude.

Ziv Shoshani (CEO and President)

Thank you. Before concluding, I want to note that VPG will be presenting at the Sidoti Small Cap Conference on March 13th and 14th. We will be posting details regarding our webcast of our presentation on our website, so please check that for details. And with that, thank you all for joining our call. We look forward to updating you next quarter.

Operator (participant)

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