Vishay Precision Group, Inc.

Good day and welcome to the VPG second quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Stephen Cantor. Please go ahead.

Thank you, Betsy, and good morning, everyone. Welcome to VPG's 2021 Second Quarter Earnings Conference Call. Our Q2 press release and accompanying slides have been posted on our website. An audio recording of today's call will also be available on the Internet for a limited time and can be accessed on the VPG website. 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 our 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, 2020, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and President, and Bill Clancy, Chief Financial Officer. And now I'll turn the call to Ziv for some prepared remarks. Please refer to slide three 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 second quarter. Bill will provide financial details and our outlook for the third quarter of 2021. Slide three, we are pleased with our results for the second quarter. We achieved solid sales performance of 75.3 million. We ended the quarter with a book to bill of 1.4 as we grew our orders 23.3% sequentially to 105.4 million reflecting strength across our businesses and end markets and the inclusion of DTS backlog. We executed well operationally and grew adjusted gross margin to 42.3%, adjusted operating margin to 12.2%, and our adjusted EPS to 49 cents. We also generated strong cash flow and adjusted EBITDA margin of 16.6%. We are excited about the acquisition of DTS, which we completed in June. And we are in the final stages of completing the move of advanced sensors manufacturing to our new facility. Moving to slide four, looking at the second quarter sales results in more detail. Sales grew 27.4% from a year ago and 6.7% from the first quarter. On a sequential basis, business trends were positive, and we ended the second quarter with a book-to-bill above 1.2 in all three reporting segments. In each of our end markets, we had a book-to-bill above 1%, and with the exception of industrial weighing, all the end markets were at 1.3 or higher. The individual end markets performed as follows. In the test and measurement market, sales grew 12.9%, demand in this market remained at strong levels, as orders were at sustained levels compared to Q1, which reflected ongoing strength related to the semiconductor process control and test equipment. Sales rose 24.9% in the transportation market, and orders increased 45.3% due to the inclusion of the DTS backlog. Sales to the steel market grew 8.6% sequentially, reflecting increased customer activity and improved project-driven demand. Steel-related orders continued to rebound and grew 21.4%. While sales in general industrial was up modestly, orders grew 40.2% driven by oil and gas and general tooling. Sales and orders to the industrial wing were flat. In the avionics, military, and space market, sales declined by 2.6%, while orders grew 85% from Q1, which included approximately 3 million from DTS backlog. The net result of these trends was a book-to-bill of 1.4 for the second quarter and a backlog of 130.9 million, an increase of 30.2 million from the first quarter of 2021, which includes 7.1 million of backlog from DTS. Moving to slide five, turning to the results by segment. Foil technology product second quarter sales of 33.3 million were 1.8% higher sequentially, primarily due to higher sales of precision foil resistors and pacific instrument systems. Compared to a year ago, FTP sales grew 4.8%, primarily driven by advanced sensors. While advanced sensor second quarter sales were 22.6% higher than a year ago, revenue moderated from Q1 due to the transition to the new manufacturing facility. we incurred $1.2 million of startup costs related to this transition in the second quarter. We expect the transition impact on revenue to extend to Q3 as we anticipate completing the move to our new facility in the third quarter. Demand for those products continued to grow, increasing approximately 19% sequentially. Backlog for advanced sensors grew more than 16% sequentially, which positions us for a good post-transition run rate. Adjusted gross margin for FTP was 42.6%, increasing from 40.4% in the first quarter as a result of higher volume manufacturing efficiencies and higher inventory levels. Book-to-bill for FTP was 1.37 in the second quarter, which reflected a 17.5% sequential increase in orders. The strength in demand was driven by precision foil resistors for AMS as well as for advanced sensors. The four sensors segment reported another quarter of strong performance. as it continued to manage well through COVID-related challenges facing India. Second quarter sales of 17.2 million improved 1.7% from the first quarter and were 93.1% higher than a year ago. Recall that in the second quarter of 2020, this segment was adversely affected by COVID-related production limitations at our facility in India. While COVID infection rates remain an ongoing issue across many parts of India, we continue to operate at full capacity given our exemption from COVID restrictions due to the critical nature of our product. The strategic growth initiatives to expand Foresensor's OEM business continues to perform well as its OEM revenue grew 7.5% sequentially. Financially, Foresensor's adjusted gross margin of 35.4% in the second quarter declined modestly from a high level of 36% in the first quarter but improved significantly from 19.6% a year ago. The sequential decline was primarily due to unfavorable foreign exchanges, partially offset by higher inventories and volume. As we discussed in May, we expect gross margin for four sensors at comparable revenue levels and product mix to be 30% or above given higher costs related to expanding our China manufacturing and the expected impact of tariffs for our China production products. At levels of 30% plus, this is a step function improvement over the average margins we recorded for this business over the last several years. The book-to-bill for four sensors of 1.223 reflects order momentum in our other markets, mainly precision agriculture and consumer. Sales of weighing and control systems in the second quarter of 24.8 million increased 18.5% sequentially and 34.5% from a year ago. Sequentially, the higher sales reflected the addition of approximately 3 million of sales from DTS, as well as higher sales of process weighing solutions and calc products. Sales from our truck weigh and van weigh initiatives grew 123.7% from a year ago, but softened 9.5% sequentially, reflecting slower industry production of trucks and vans due to IC and component shortages. We have seen increased customer interest in our solution since new EU overloading regulations went into effect in May of 2021. And we expect this interest to translate in orders as the availability of new vehicles improves. and the EU countries continue to ramp up their enforcement of the new regulations. Adjusted gross margin in the second quarter for WCS was 46.6%, which includes adjustments for acquisition-related costs as well as COVID impacts, and improved from 44.3% in the first quarter, mainly due to the addition of DTS and higher revenue of WCS products. In terms of order trends in the WCS segment, orders grew 41.3% sequentially, reflecting the addition of DTS as well as continued demand recovery for our steel-related products. As we have discussed previously, orders for KELT and DSI are generally driven by customer CAPEX projects, which in case of kelk, typically have a two-quarter lag relative to inflection in the steel market. With regards to the steel market, the book-to-bill combined for kelk and DSI was 1.72, which is a positive indicator for revenue in the second half of this year and in 2022. The result of this WCS order trend in the second quarter was a book to bill of 1.56. Moving to slide six, before turning the call to bill, I will make a few additional comments. In terms of COVID, all our facilities are currently open and operational. Given the rise in COVID cases around the world, we continue to be proactive in taking measures where needed to protect our employees and our customers. On behalf of the Board and our management team, I want to thank all of VPG's employees for their dedication and customer focus during this current wave of the pandemic. I also want to comment on one of the key highlights for the quarter the acquisition of DTS on June 1st. DTS is a leading manufacturer of data acquisition systems and sensors for product and safety testing. It is an established niche market leader with a strong brand and superior technology, as well as talented management team with a deep business and technical knowledge. DTS not only adds complementary technology to our platform, but it brings unique engineering capabilities centered on miniaturization, data acquisition, and system integration with sensor technology for critical testing applications. As a major supplier of embedded data acquisition and logging capabilities for crash test dummies, DTS will give us a presence in the automotive market as well as add to our offering in the avionic military and defense market, we believe DTS will continue to benefit from the global need for specialized safety testing technology that is expanding from the automotive and avionic sectors to sports applications. Over the next 12 months, we believe that DTS has the potential to generate $30 million or more in revenue with an adjusted EBITDA margin over We are continuing to look for attractive acquisitions, opportunities that will further accelerate our growth and profitability. I will now turn it over to Bill Clancy for additional financial details. Bill?

Thanks, Steve. Referring to page 7 and the reconciliation tables of the slide deck, In the second quarter of 2021, we achieved revenues of $75.3 million, gross profit of $29.8 million, or 39.6% of sales, operating income of $4.9 million, or 6.5% of revenues, and net earnings per diluted share of 29 cents. On an adjusted basis, which we lay out in our reconciliation table in the press release, our gross profit was $31.9 million, or 42.3% of sales, operating income was 9.2 million, or 12.2% of sales, and net earnings by diluted share was 49 cents. Our second quarter of 2021 revenues grew 6.7% compared to 70.6 million in the first quarter, and were 27.4% above the second quarter a year ago. Foreign exchange for the second quarter of 2021 positively impacted revenues by 2.8 million compared to a year ago and $200,000 as compared to the first quarter of 2021. The gross margin in the second quarter was 39.6% compared to 40.5% in the first quarter. On an adjusted basis, second quarter gross margin of 42.3% grew from the 40.5% in the first quarter of 2021. Our operating margin was 6.5% for the second quarter of 2021. Our second quarter adjusted operating margin was 12.2%, excluding acquisition and personal accounting adjustments, facility startup costs or advanced sensors, acquisition costs, goodwill impairment charges related to Pacific Instrument and COVID-19 related subsidies. This represents an increase from the 8.7% we recorded in the first quarter of 2021. Selling, general, and administrative expenses for the second quarter of 2021 were 22.5 million, or 29.8% of revenues, compared to 18.6 million, or 31% of revenues for the second quarter of 2020. The increase in SG&A of 3.9 million mainly relates to 1.1 million for foreign exchange rate impact, $1 million for bonus accruals, $900,000 related to the DTS acquisition, $300,000 of wage increases, and $600,000 of other costs. The adjusted net earnings for the second quarter of 2021 were $6.7 million, or 49 cents per diluted share, compared to $3.6 million, or 27 cents per diluted share, in the second quarter of 2020. Adjusted EBITDA was $12.5 million, or 16.6% of revenue, as compared to $8 million, or 13.5% of revenue a year ago. Capital expenditures was $2.6 million, the majority of which reflects purchases and related infrastructure for the new advanced sensor facility. As a result of these investments, we generated free cash flow of $4.2 million, for the second quarter of 2021 as compared to $3.1 million for the second quarter of 2020. We define adjusted free cash flow as cash from operating activities, less capital expenditures, plus sale of fixed assets. We currently expect CapEx to be in the range of $20 million to $23 million for the full fiscal 2021, which includes anticipated costs related to the new Advanced Central Facility as well as manufacturing expansion and enhancement projects for precision four resistors. The GAAP tax rate in the second quarter was 6.1%, which includes a one-time tax benefit of approximately $1 million associated with the DTS acquisition. We are assuming an operational tax rate in the range of 25 to 27% for the full year of 2021. Moving to slide eight, we ended the second quarter with $73.5 million of cash and cash equivalents and total long-term debt of $60.7 million. We believe that we have a strong balance sheet and ample liquidity to support our business requirements and to fund additional M&A opportunities. At the outlook, given our order flow and backlog, we are optimistic about the second half of 2021 and beyond. For the third fiscal quarter, we expect net revenues to grow sequentially and be in the range of $81 million to $87 million at constant second fiscal quarter 2021 exchange rates. In summary, we performed well in the second quarter, growing our margins and adjusted EPS and generating good cash flow. We had strong orders of $105.4 million across our business and a book-to-bill ratio of 1.4. We are pleased with the addition of DTS and what they bring to VPG going forward. With that, let's open up the lines for questions. Thank you.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from John Fransreb with Sidoti and Company. Please go ahead.

Good morning, everybody, and thanks for taking the questions. Ziv, I want to start with some of the end markets here, particularly with your commentary on the steel market. It's a flattish business, but if I heard you correctly, you said the book to build in steel is 1.72. I wonder if you could talk a little bit about that. What's the duration of the delivery times in that business? Can you put it into context for us?

Yes. Regarding the steel market, John, which is mainly represented by DSI and KELC products. The indication is that many companies, and as you see, the metal prices are going up, are starting to reinvest, increasing capacity and improving their cost reduction in the steel mills. We have seen a very strong demand of 172. Historically, the backlog or I would say the lead time for those project-driven are between, I would say, around four to five months. Therefore, the orders that we currently order intake, the strong order intake that we currently see, will be reflected in a much higher sales, as I indicated, in the second half of the year and move into the first half of 2022.

Got it. And I guess similarly in the avionics and defense and military business, what kind of order trends are you seeing in that marketplace? Are you seeing any kind of strength there? It's kind of also been kind of flattish.

Yes, we have seen an improvement on the AMS. The AMS book to bill for the company was... was 167 for the second quarter, and we have seen much stronger demand coming back from projects mainly for precision resistors and specific instruments, which a quarter ago was much softer. So we do see a rebound in demand.

And is that all deliverable this calendar year?

Yes, it is expected to be shipped. Yes, yes. The lead time for those type of products are expected to be more in line with our, you know, repeatable business. Therefore, it is expected to be shipped in the second half of this year.

Got it. And just on DTS, great contribution from the business from the get-go. I wonder if you could talk a little bit about how that revenue performance is today versus maybe their pre-COVID levels in 2019. Is it up to that level? Do they have some opportunity? Can you just put it in context for us?

Well, in fact, just to give you DTS, as we have reported, $3 million of revenue, just a gross margin of 60.4%. adjusted operating margin of 32.6%. In fact, the company, before we acquired them, when we looked at the historical numbers, we have not seen any significant impact due to COVID. And we do see a continuation in momentum for DTS business due to the fact that there is a continuation. Strength in the automotive business, testing, and introducing new car models. And this is really DTS core business. Automotive safety, in addition, it's 80% of its business, in addition to 20%, which is AMS safety, which is also a fairly strong, there is a strong demand. Therefore, DTS continues to go strong, and we have not seen any significant decline to prior COVID environment.

Okay. All right. Thanks for the call, Aziv. I'll actually get back into Q&A. Thank you.

Thank you. The next question is from Sarkis Sherbetin with B. Riley Securities. Please go ahead.

Hi. Good morning, and thank you for taking my question here. Good morning. Good morning, Sarkis. Hey, Aziv. I just wanted to touch on the outlook here. Pretty strong, right? $81 million to $87 million in third quarter sales. Obviously, DTS has folded into that. You're seeing strong book-to-bills across all your segments. Just to help me with my math here, if you're going to post, let's say, on the low in an $81 million quarter, shouldn't EBITDA kind of be in that, let's call it $14 to $15 million range on the low end. Help me understand if the contribution assumptions are correct, or should we see anything different from a profitability standpoint?

As you know, Sarkis, we don't give any guidance regarding profitability or margins for the next quarter. In this case, it's Q3, only sales guidance. The sales guidance of 81 to 87 which is, let's say, at the midpoint, it's around $9 million higher, we are looking, sequentially, we are looking at a favorable impact of the full quarter of DTS, which we would expect it to be another $5 million as a full quarter effect, in addition to another $4 million being delivered by our steel-related product, which is KELC and DSI. In FTP, We are looking at a few factors. On one hand, we have the AS transition in Q3, which is expected to be finalized, which we would expect to see some lower margins due to the fact that we are putting in place and qualifying the last piece of the equipment. Naturally, in Q4, we should see much higher revenues once the transition has been completed. in addition to the fact that historically in Q3 we had also a European seasonality effect coming from Europe, in addition to the fact that mainly FTP is being impacted by having less working days due to the Israeli national holidays, which are all in September for this year. So given all the ups and downs, we are looking all in all At the midpoint, it's around about, as I said, a $9 million upside in respect to the second quarter.

Yep, understood, Ziv. And I think that kind of sets up for the next question. So regarding kind of the order strength, and typically the September quarter for you guys is fairly seasonal. So do you think the fourth quarter of this year, at least from a top-line perspective, looks better in than the third quarter that you've outlined? Or should we expect something kind of in this zip code of the guidance you've provided for the third quarter?

Well, if I may say, Sarkis, now we are moving into the fourth quarter guidance. At least, you know, based on what we have indicated, we are expecting to have a second strong second half year.

Yep, no, understood. And then finally, for me, you know, for advanced sensors, it sounds like some of the transition might have acted as a headwind to revenues in this quarter, and you still expect to kind of complete the move in the third quarter here. Just wanted to get an understanding of, I think you mentioned in the prepared remarks, backlog grew 16% queue on queue for advanced sensors. So what would the run rate be for sales if you will, on an annualized basis for that product category.

So at this point in time, in the second quarter, since we realized $1.2 million of startup cost and the expectation would be also to be at around $700,000, $800,000 in the third quarter, we are still qualifying some key equipment processes. which to an extent does not allow us to get to the full capacity. The expectation is that by the end of the third quarter, once the transition has been completed, we would have in place an additional 25% of equipment capacity in respect to Q1. Depending on the product mix and the backlog, with the additional equipment capacity, we would be able to support much higher revenue in the fourth quarter once the transition has been completed.

Thank you. I'll hop back in the queue.

The next question comes from Dick Ryan with Colliers. Please go ahead.

Thank you. Ziv, with the, you know, the broad end market exposure you have and supply chain concerns that we've heard about kind of across the board with most companies, did you see any revenue pushed or deferred out of Q2? And was there, I know you've had logistic cost increases, but were there any specific margin impacts due to the supply chain?

Okay, so in regards to supply chain DIC, we have seen an increased logistics cost, mainly for four sensors coming from Asia to Europe and the United States, or I would say logistic surcharge. We have been discussing with customers to increase the prices or to allow for additional logistic surcharge in order to offset this effect. In addition to that, as you know, and there is some discussion regarding chip shortage, so in terms of sourcing components, we have not experienced any significant impact to date to our supply chain from the global chip shortage. Delivery lead time to our customers remains competitive, and we continue to monitor it very, very well. In some cases, We have seen higher components cost as we work to ensure the supply, and we are trying to pass it to our customers. We are also increasing inventories in some key IC components like microprocessors where we identified there is a potential shortage. But we do not believe that those additional costs will be significant in the third quarter. In the second quarter, and I did mention that before, there is an impact in new vehicles being introduced to the market due to component availability. We estimated these headwinds for approximately $400,000 of additional revenue in the second quarter and probably also in the third quarter coming mainly from our onboard weighing product line. But those would be probably the main supply chain concerns we have identified.

Okay, great. Thank you. And for sensors, I think you said there was a nice increase in the OEM business. I'm not sure if I caught the percent increase or if you gave the actual dollar amount. And is that business coming from existing customers, or are you seeing new wins there?

So I did identify that there is an upside for OEM business. It is coming from precision ag, but also from consumer customers coming from new applications. And I would say to an extent we had those customers, but the business has grown. Those have been designed in the that came to fruition, and now we're starting to realize the larger production volume, mainly, again, in precision act, but also in consumer for force sensors, which, while consumer, was a fairly smaller part of force sensors before.

Okay, thank you. On the end market test and measurement, you mentioned strong SEMI Are you seeing any kind of digestion period or kind of a consolidation period for your semi-business going through the second half of this year or are you still seeing some pretty strong underlying trends?

When I speak about our semi-business, which mainly relates to precision resistors, the demand we currently realize is coming from the OEM. If I look at the sales channel, At distributors, they still have a fairly low level of inventory. So at this point in time, we do believe that once those inventories will be depleted at our distributors and they have not placed any significant orders in the last six months of this year, we would expect to see an additional demand coming from distributors. But at this point in time, the main driving force for the demand are the OEM. Therefore, we do not expect at this point in time to see major changes as we move into the second half of this year.

Okay, thank you.

As a reminder, if you have a question, please press star then 1 to be joined into the queue. The next question comes from Bill DeZellum with Titan Capital. Please go ahead.

Thank you. A couple of questions. First of all, relative to Pacific Instruments and the fact they had sequential revenue growth and yet you did the goodwill write-off, would you kind of discuss that, those two contrasting aspects?

Yeah, Bill, I can handle that. I mean, Bill, basically this is, you know, the goodwill impairment test is always based on an accounting calculation. You look at what you presented or proposed to have a forecast from a year ago, and even though we've seen slight sequential increases in revenue for Pacific, as we've mentioned, for the full year, we still see a not hitting the targets. And just based on the accounting methodology running through the process, we took the impairment this quarter, and now for Pacific Instruments, all the goodwill has been completely written off.

Thank you. And then a totally different question. You have your revenue model that you have published in prior presentations. And with that, it would indicate that 75 million in revenues, that the EPS would be closer to 42 cents in that model. Why did you end up being above the revenue model?

Well, Bill, this is a very good question. The target model we have introduced in 2019 did not include at that time the acquisition of DPS and DSI. We also need to update it for the exchange rate, which also has been changed dramatically, mainly the Israeli shekel. And you, by the way, may see the you see the foreign exchange rate effect, which is 800 negative quarter over quarter, but also quarter a year ago. So we are in the process of updating that model and anticipate reintroducing it in the fourth quarter.

Great. Thank you. And the implication then, Ziv, would be for the third quarter that you would also end up with earnings that would be above what the what the model would otherwise indicate?

Given the two acquisitions that we have not accounted in the model, I would assume that you are correct. But please bear in mind that the model itself does encompass top line, but also profitability and cost-related targets. So once we would update the model based on integrating and updating the exchange rate, we would be able to provide, as we did before, a more comprehensive model which accounts for all those moving parts.

Well, that's very helpful. And so I'm just thinking in terms of the 62 to 87 cents of earnings that that model indicates at the 80 to 85 million of revenues, we can just recognize that the model is not entirely taking everything into account and the two acquisitions are accretive to that model. So that's just directionally the way to be thinking about it then it sounds like.

You're absolutely correct. The model at that time did account for pure organic growth, which would be, in a way, for every additional incremental of revenue, there will be a certain percentage dropping into the pre-tax level. Once we have accounts for those two acquisitions, we should account not only for the top-line revenue, but we should also account for the fixed costs and the SG&A cost associated with those companies. Therefore, the complete model has to be revised, and we will provide it shortly.

Great. Thank you, and thank you for having acquisitions that are accretive and beneficial to the model. Thank you.

Thank you.

The next question is a follow-up from John Franzrub with Sidoti & Company. Please go ahead.

Actually, it's very much along the lines of the last two questions. I was essentially going to ask, with the more creative acquisitions, how does it change that 30% to 50% incremental op margin? Is that your answer or not, depending on how you feel comfortable?

Well, John, as I said, we will have to revise the model. At this time, the model does not account for those acquisitions and also to update the exchange rate. Therefore, the top line revenue does not correlate to the bottom line profitability in respect to the model. We just have to revise the model.

Okay. That was my follow-up question, but revising it the way it sounds like is a good thing. Congratulations.

As a reminder, if you have a question, please press star then 1 to be joined into the queue. This concludes our question and answer session. I would like to turn the conference back over to Steve Cantor for any closing remarks.

Thank you. Before concluding, I want to note that we will be participating in a number of investor conferences in September, including the Sidoti, Colliers, and D.A. Davidson conferences, and we'll be posting some information about that on our website. With that, I'd like to thank you all for joining our call, and have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.