Vishay Precision Group Q3 2024 Earnings Call Transcript

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November 5, 2024

There are 7 speakers on the call.

Operator

Hello, everyone, and welcome to the VPG's 3rd Quarter Fiscal 20 24 Earnings Call. My name is Ezra, and I will be your coordinator today. I will now hand you over to your host, Steve Kanter, Senior Director of Investor Relations to begin.

Operator

Steve, please go ahead.

Speaker 1

Thank you, Ezra, and good morning, everyone. Welcome to our Q3 2024 earnings call. Our Q3 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 on our website. Today's remarks are governed by the Safe Harbor provisions of the 1995 Private Securities Litigation Reform Act.

Speaker 1

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 ks 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. I'll now turn the call to Ziv for some prepared remarks. Ziv?

Speaker 2

Thank you, Steve. I will begin with some commentary on our results and trends for the Q3. Bill will provide financial details about the quarter and our outlook for the Q4 of 2024. Moving to Slide 3. Overall, Q3 was as follows.

Speaker 2

Total sales were mostly stable sequentially. The business environment continues to be mixed as higher demand in some markets was offset by weakness in others. We continue to focus on broadening our funnel of new business opportunities. We are streamlining operations, mainly in the Sensors and Weighing Solutions segments. The recent acquisition of Nokra expand our product offering in the steel market.

Speaker 2

Moving to Slide 4. Looking at the 3rd quarter results in details. We reported sales of $75,700,000 which was above the mid range of our guidance. Orders of $68,600,000 declined from $73,500,000 in the 2nd quarter, resulting in a book to bill ratio of 0.91. Trends continued to be mixed in our markets as orders generally represented customers' ongoing replenishment of inventories.

Speaker 2

The majority of bookings decline related to certain cyclical markets, including steel and consumer. This contrasted with higher orders in the test and measurement and AMS, which remains well below peak levels. Operationally, we reduced our manufacturing operations to align with near term revenue trends. These steps resulted in temporary labor inefficiencies, primarily in our Sensor segment. Combined with the impact of sequentially lower revenues, these inefficiencies contributed to a gross margin of 40% in the 3rd quarter.

Speaker 2

We do not expect these labor inefficiencies to continue in the Q4. As we continue our growth focus investments in business development, marketing and R and D, we are streamlining our operating cost and implementing our long term cost reduction plans. Over the past few years, these programs have improved our gross margin and going forward will position us to realize potential operating leverage as our revenue recover. I'll now review our business segment performance for the Q3. Moving to Slide 5.

Speaker 2

Beginning with our Sensor segment, 3rd quarter revenue was $28,200,000 down 13.3% from a year ago and 2.3% sequentially. Compared to the 2nd quarter, sales of precision resistors, primarily in the test and measurement and AMS, were higher, but were offset by lower sales of advanced sensors, mainly for consumer applications. Book to bill for sensors was 0.89 as the 3rd quarter orders for sensors of $25,100,000 softened sequentially, primarily due to lower bookings for consumer related applications. This offset higher orders in the test and measurement and AMS, while semiconductor equipment manufacturers customers have placed semi annual orders to replenish their inventories. The semiconductor market remains cyclicality soft.

Speaker 2

Regarding business development activities, we continued our focus on expanding our precision resistors in fiber optics equipment. During the Q3, we achieved design qualification for our resistor products in telecommunications market, as well as recording an order from a supplier of source laser used in fiber optics equipment. For advanced sensors, we continued our progress with a project with a leading developer of humanoid robots and are now in discussion with the 2nd maker of such robots. In Consumer, we received initial orders from a large global bicycle accessory company and in medical we achieved a key design win with the maker of infusion pumps. Moving to Slide 6.

Speaker 2

In the weighing solutions segment, 3rd quarter sales were 25,200,000 a decline of 13.1% from a year ago and 8.3% from the 2nd quarter. Sequentially, the decline was mainly due to lower sales in the industrial weighing, transportation and in other markets. Book to bill for weighing solutions was 1.0. Orders of $25,200,000 were essentially even with the 2nd quarter as lower orders in the transportation market offset higher bookings in the industrial weighing and other markets. Overall, slowing industrial production and cattle spending around the world continues to be a headwind.

Speaker 2

In our other markets, we have seen modest improvement in precision ag, while construction and medical remains slow. As a key area of business development focus for weighing solutions continues to be on expanding our content with OEM customers in precision agriculture, construction equipment and medical equipment. Moving to Slide 7. Turning to our Measurement Systems segment. 3rd quarter revenue was 22,400,000 dollars down 8.2% year over year, but up 6.2% sequentially.

Speaker 2

The sequential growth was mainly due to higher sales of DTS products in the AMS and transportation markets, which offset declines in our other markets and in steel. Book to bill ratio for measurement systems was 0.82, reflecting orders of 18,200,000 dollars This was a decline of 16.9 percent from the 2nd quarter, primarily due to lower bookings in steel and transportation. While the steel market in China remains soft, we are expanding our business in India, which is one of the fastest growing markets globally for steel production. In transportation, orders softened for our DTS crash test data recorders due primarily to project timing. Moving to Slide 8.

Speaker 2

We were pleased to announce the acquisition of Nokra, a German niche supplier for laser based measurement systems, which strategically expand our product offering to the steel and metal processing market. Nokra Precision Laser Based Systems provide an effective alternative for measuring the thickness and flatness of metal sheets during production. In 2025, we expect to grow Nokka revenues as we leverage Kelc's strong brand sales channels and existing customer base. We financed the transaction with cash and expect it to be immediately accretive. Given our strong balance sheet, our capital allocation strategy, prioritize internal investments and funding additional M and A opportunities that add high quality businesses to the VPG platform.

Speaker 2

Moving to Slide 9. Before turning the call to Bill, I want to highlight the release of our initial sustainability report. This report marks a significant milestone in VPG's sustainability journey. We take great pride on how VPG contributes to a more sustainable world by helping to make our customers, products and processes safer, smarter and more productive to deliver long term value creation globally. We look forward to sharing more milestone in the future.

Speaker 2

I will now turn it over to Bill Clancy for additional financial details. Bill?

Speaker 3

Thanks, Zeef. Referring to Slide 10 and the reconciliation tables of the slide deck, our 3rd quarter revenues were $75,700,000 Gross margin in the 3rd quarter was 40% as compared to 41.9% in the 2nd quarter. By segment, gross margin for the Sensors segment of 31% declined sequentially, primarily due to lower revenue and temporary operational and labor inefficiency. The Weighing Solutions gross margin of 35.1% was lower than in the 2nd quarter primarily due to lower volume and unfavorable product mix. Measurement Systems gross margin of 56.8 percent improved sequentially reflecting higher volume and favorable product mix.

Speaker 3

Total selling, general and administrative expenses for the Q3 of $26,300,000 or 34.8 percent of revenues declined slightly from $26,500,000 with 34.3% in the 2nd quarter. Operational margin was 5.1% as compared to 7.6% for the 2nd quarter, primarily reflecting the lower revenue. On a GAAP basis, we recorded a loss per diluted share of $0.10 This includes the impact of unrealized foreign exchange loss of $2,900,000 a restructuring charge of 82,000 dollars and discrete tax items of $839,000 Excluding those items, adjusted net earnings per diluted share for the Q3 was $0.19 which compares to $0.31 in the 2nd quarter. Adjusted EBITDA was $8,100,000 or 10.7 percent of revenue as compared to $10,200,000 or 13.2% in the 2nd quarter. Purchase CapEx in the Q3 was $1,800,000 For the full fiscal year of 2024, we expect the purchase CapEx to be in the range of $10,000,000 to $12,000,000 which is significantly lower than the levels we have spent in the past few years.

Speaker 3

Adjusted free cash flow was a negative $2,300,000 which compared to $4,900,000 for the 2nd quarter. The 3rd quarter cash flow included $3,000,000 of one time tax payments and $1,400,000 related to global insurance renewals. We define adjusted free cash flow as cash from operating activities of a negative $831,000 less CapEx of $1,800,000 plus proceeds from the sale of assets of $300,000 During the quarter, we repurchased $1,900,000 of stock. The 3rd quarter operational tax rate was 30%, reflecting the income earned in higher tax rate jurisdictions. We are assuming an operational tax rate of 30% for the full year of 2024.

Speaker 3

Moving to Slide 11. We ended the 3rd quarter with $81,100,000 of cash and cash equivalents and total debt of $31,600,000 During the Q3, we amended and restated our $75,000,000 credit facility that will mature in August of 2029. This provides us with ample liquidity for our operational needs as well as to support our capital allocation strategy. Regarding the outlook, for the 4th fiscal quarter, given the current market conditions in our backlog, we expect net revenues to be in the range of $70,000,000 to $78,000,000 at constant third fiscal quarter 2024 exchange rates. In summary, the business environment remains challenging as our cyclical markets were soft.

Speaker 3

We remain focused on our business development initiatives and we believe we are positioned to realize significant incremental operating leverage as revenues improve. With that, let's open the lines for questions. Thank you.

Operator

Thank you very much. Our first question comes from Griffin Bose with B. Riley Securities. Griffin, your line is now open. Please go ahead.

Speaker 4

Hi, good morning. Thanks for taking my questions. So first, I just want to be clear. The labor inefficiencies that you discussed in the Sensors segment, so those were completely behind you when you entered the Q4? Did I hear that correctly?

Speaker 2

Yes. Already in the beginning of Q4, we have seen a significant improvement regarding the inefficiencies that we have booked in the Q3. So that is correct, Stephen.

Speaker 4

Okay, great. And then just when I'm looking at the free cash flow for the quarter, it looks like DSOs stepped up to a relative high, slightly higher than what they've been historically, at least over the past 3 years. Is there anything to read into there as it relates to certain customers? Or is that just kind of a one time step up this quarter?

Speaker 3

No, Griffin, I would say it's probably a one time. We had, I would say, some sales that happened in the last week of Q3. We truly believe this is one time. And as I mentioned on the call, speaking about cash flows, we did have over like $3,000,000 one time tax payments and $1,400,000 related to our insurance program renewals. So our anticipation would be back in the Q4 to be a positive free cash flow.

Speaker 4

Okay, great. Thanks, Bill. And then just switching to new projects. You mentioned humanoid robots. You got the 2nd customer there.

Speaker 4

Is that can we think about that as a similar size to the first customer? I think you mentioned on the last call maybe a few $100,000 for the prototype stage. Just yes, curious the size of that second customer.

Speaker 2

Sure. So as I've indicated in earlier calls, we have been working very diligently with the sizable humanoid robots. We already are expecting to book significant revenues for this year. At this point in time, given the discussion and the forward looking projection from this customer, we are expecting revenues to double for 2025 and this is still not the full production. This is still on a preproduction level.

Speaker 2

Regarding the 2nd humanoid customer, we are still in early stages of designs. We believe that the potential size of the customer could be very similar to the initial one, but we are very earlier in the design stage, but we are already working with them. But they have also a very, I would say, sizable potential upside once it comes to a full blown production.

Speaker 4

Excellent. Got it. Thank you, Steve. And just maybe last one for me. It's nice to see the M and A, Nokura.

Speaker 4

You mentioned you expect to grow revenues in 2025, and I understand it's a relatively small business. But how much of that growth would you expect is organic versus coming from being integrated into the broader kelp business with those distribution channels?

Speaker 2

The Nokra product line, we with Nokra, we purchased the technology for an adjacent product portfolio, which will broaden our kelp. We believe that leveraging on kelp sales channels and existing customers, we can increase Nokla revenue, I would say, significantly in 2025. We have not provided the run rate, but I could say that we are looking at around about, I would say, mid single digit revenues for Nokra, which would be almost doubling their revenue in respect to 2024. All in all, we have seen some headwinds, as I've indicated earlier in the steel business, mainly due to the China soft business and soft construction business. But for us the main driver at this point in time is the India investments.

Speaker 2

India is the 2nd largest steel manufacturer and they are investing I would say quite significantly in their infrastructure. So all in all between the Nokra acquisition and the India I would say investments, we believe that going forward we would be more optimistic regarding steel.

Speaker 4

Okay, great color. Thanks for taking my questions. Appreciate it.

Speaker 3

Thanks, Griffin.

Operator

Our next question is from John Franzreb with Sidoti. John, your line is now open. Please go ahead.

Speaker 5

Good morning, everyone, and thanks for taking the questions. I guess I'd like to consider the end market mix and how you view it today versus how you viewed it 3 months ago. Ziv, are you seeing any notable changes that weren't maybe something you were expecting when we move toward the Q2 results?

Speaker 2

Sure. Absolutely. So first, I think, John, it would be important to say that we that the biggest drop in Q3 in order intake was in the measurement systems. We had some few large projects that had been pushed out their bookings from the Q3 to the Q4. So if we speak about the business environment, we are expecting in Q4 to be back to the mid $70,000,000 range in terms of bookings.

Speaker 2

Now going to the different end markets and the dynamics, I would say that initially when we had discussions with some large customers for example in the semiconductor market or in the general industrial market, there was more a little bit optimism regarding a potential upside. On the other hand, at the test and some other test and measurement customers we have seen that their stock levels have gone down and they started to place order in order to replenish their stock level, which means there is we have not seen or we do not expect to see yet a larger potential upside coming from an additional demand, but at this point it's coming from the stock replenishment order pattern. On the other hand, Europe and especially U. K. Given the economy is still fairly soft.

Speaker 2

And at the end of the day, I would like also to say that on precision agriculture, we have seen more optimism as they have increased their order intake in Q3. So all in all, it's a mixed environment. We have a certain confidence level talking to our customers based on their projection. But I would say that a little bit on the longer term, the initial interest rates cuts and the expected and the expectation for more cuts gives us a much, I would say, stronger feel to be optimistic regarding a real recovery in the next few quarters, given the fact that many of our customers are in the capital spending related business.

Speaker 5

Okay. Against that backdrop, can you kind of update us on potential leverage you could pull to reduce operating costs that are under consideration? Or do you think that given the current environment that you're happy with the manufacturing footprint and the operational expense footprint as currently constituted?

Speaker 2

So regarding operational cost reduction beyond the continued investments capital investments in automation and in process improvements, we continue to streamline our operations. The expectation is I mean, we are already in the further relocations of products from high labor countries to our India facility from various locations in North America, in Europe and in other places. Naturally, I cannot share detailed information given HR related issues, but the expectation is that once those projects are expected to realize multimillion dollar savings as we continue to consolidate operations into our large India based operation and they are not only necessarily regarding the initial load sales base. We have decided also to streamline more activities on the operational side and also in other staff based functions.

Speaker 5

Understood. And then I guess lastly regarding M and A, was Milka a customer of yours? Can you talk a little bit about the development of that purchase? And in addition, when we think about other near term M and A targets, is it more the smaller highly profitable ones that you're looking at? Or are you looking at larger revenue contributions?

Speaker 2

Nokra was not a customer. We knew Nokra given the fact that when we had discussions with customers, our current customer base, they wanted us to provide them with a wider and a larger product portfolio, which we did not had to which we didn't had to which we couldn't offer. We have identified Nokra as a technology as a small technology company that could provide or that could fit within the Kelk portfolio. And given the fact that we have the sales channel, we believe that it would be fairly easy to realize those business synergies and to leverage and to and I would say and to grow Nokra revenues in a fairly quick way. Regarding other M and A, in fact, we are looking at similar businesses like Nokra, but also we are looking at other businesses that could realize operational synergies if those businesses are within our own current portfolio or could add an adjacent sensing technology servicing our customer base.

Speaker 2

But it would vary from a smaller potential customers to a much larger potential customers.

Speaker 5

Understood. Thanks. You can take my questions. I'll get back into queue.

Operator

Thank you. Our next question is from Geoffrey Cohen with Mulholland Capital Management. Geoffrey, your line is now open. Please go ahead.

Speaker 6

Yes, good morning. I apologize, I got onto the call late. But I'm just wondering, it looks like you repurchased some stock this last quarter. Is that right?

Speaker 3

Yes, we did, Jeffrey. We repurchased $1,900,000 of stock during the Q3.

Speaker 6

Okay. And just, I'm just kind of curious how you think about, in terms of M and A relative to where your own stock is selling at this point, how do you think about that?

Speaker 2

From a sorry, go ahead.

Speaker 3

Go ahead, Deep. Go ahead. Sorry.

Speaker 2

So from a capital allocation standpoint, we believe that our balance sheet could provide us supporting a stock buyback, acquiring companies and also continue to invest to support organic growth. Therefore, that's really we do have all the means to support all three capital allocation strategies and this is how we operate. Naturally, we first is investing in the company to enhance organic growth, but M and A and stock buyback also considered and this is why we have been doing that. Okay. Thank you.

Operator

Thank you very much. That ends our Q and A session. I will now hand back over to Steve for any closing remarks.

Speaker 1

Thank you all for joining our call today. We look forward to updating you on VPG and our strategy for growth in the coming quarters. Have a great day.

Operator

Thank you very much everyone for joining. That concludes today's call. You may now disconnect your lines.

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Vishay Precision Group Q3 2024
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