Vishay Precision Group, Inc.

Good morning. Thank you for attending today's BPG first quarter 2022 earnings call. My name is Hannah and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Steve Cantor, Senior Director of Investor Relations. Please go ahead.

Thank you, Hannah, and good morning, everyone. Welcome to VPG's 2022 First Quarter Earnings Conference Call. Our Q1 press release and accompanying slides have been posted on our website, and an audio recording of today's call will be available on the internet for a limited time and can also be accessed on the VPG 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, 2021, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and President, and Bill Clancy, CFO. And now I'll turn the call to Ziv for some prepared remarks. Please refer to slide three of the quarterly presentation. Ziv? ZIV SHOSHANI, CEO, President, And Bill Clancy, CFO, And now I'll turn the call to Ziv for some prepared remarks. Please refer to slide three of the quarterly presentation. Ziv? ZIV SHOSHANI, CEO, President, And Bill Clancy, CFO, Thank you, Steve.

I will begin with some commentary on VPG's consolidated financial results and sales trends for the first quarter. Bill will provide financial details and our outlook for the second quarter of 2022. Moving to slide three, I am pleased to report that VPG achieved solid performance in the first quarter, which included record orders and backlog as we navigated well to the supply chain and labor challenges impacting companies around the world. Before providing additional color, on the Q1 results, I want to review the long-term strategy and priorities we laid out in February, which we believe will accelerate our long-term growth and profitability. As a leader in precision measurement sensing technologies, we are focusing on an expanding array of applications in which accuracy, reliability, and repeatability makes the difference. Our deep engineering and application expertise enable our customers to make their product safer, smarter, and more productive. The need for precision measurement sensing solutions is evolving and expanding into new markets and applications requiring level of precision that were not needed before. Moving to slide four, In the first quarter of 2022, we reported sales of $87.7 million, which was 24.2% higher than a year ago. In the third quarter of 2021, sales declined 2.6% as lower measurement systems revenue offset growth in our sensors and weighing solution segments. The decline in measurement systems revenue was expected due to the timing of shipments for these project-driven systems. Record orders of 109.6 million grew 15.3% sequentially, reflecting growth across all three segments. The strong order performance contributed to our book-to-bill of 1.25 and a record backlog of 170.6 million. This represents a strong start and underscores the strength of our business model and our strategy. We improved our adjusted gross margin to 41.0%, as compared to the fourth quarter adjusted gross margin of 40.3% and generated an adjusted EBDA margin of 14.4% and adjusted earnings per diluted share of 49 cents, which was in line with our quarterly target model. Operationally, we performed well. Given the ongoing global supply chain challenges, Labor availability and surge in COVID-19 cases in some parts of the world in the first half of the quarter, we have filled the majority of our open positions, and we expect improved operating efficiencies in the sensor segment going forward as new hires climb the learning curve. Year over year, we realized 1.6 million from price increases, which we have put in place to mitigate higher labor, materials, and logistics costs. And we expect these increases to contribute 6 to 8 million of incremental revenue in 2022. Looking at our business segment performance in the first quarter, all three businesses segments reported positive order trends and book-to-bill ratios of over one. Moving to slide five, beginning with our sensor segment, which is comprised of our advanced sensors product and our precision resistors, first quarter revenue of $37.7 million grew 18.7% from a year ago and was 10.5% higher sequentially. The sequential growth was driven by advanced sensors, which grew 41.5% sequentially to a 50 million annualized run rate, as we benefited from the expanded capacity we've put in place. The increase in advanced sensors revenue was mainly for consumer and medical applications and in our general industrial market. Total orders for the sensor segment grew 26.5% sequentially, resulting in a book-to-bill of 1.27. Order growth was driven by strong bookings in the test and measurement for precision resistors, resulting from continued robust demand for front-end and back-end semiconductor . We are efforts to address future applications for our precision resistors in EV battery management and in 5G data systems where the reliability and stability of our solutions provide key performance advantages. We also had continued high demand for advanced sensors as orders grew approximately 9% sequentially and were 50% higher than a year ago, resulting in a book-to-bill of 1.09. In addition to the traction of advanced sensors for consumer and consumer electronics applications, we are achieving design-in wins in medical equipment such as infusion pumps. In terms of operating results for sensors, the adjusted gross margin in the first quarter was adjusted to exclude $200,000 of startup cost for the new advanced sensor facility and $100,000 related to COVID. The first quarter Adjusted gross margin improved to 38.6% as compared to 34.8% in the fourth quarter of 2021, reflecting higher revenue and favorable product mix, which was partially offset by wage increases. Moving to slide six, turning to our weighing solution segment, which is comprised of our four sensors, onboard weighing, and process weighing businesses. First quarter sales of 32 million increased 2.2% from 32.1 million from the fourth quarter of 2021. The sales growth was primarily due to higher shipments of our onboard weighing products for heavy trucks. Orders for weighing solutions were 10.9% higher then in the fourth quarter, resulting in a book-to-bill ratio of 1.06, reflecting positive trends in transportation as well as for OEM precision agriculture equipment. Wang Solutions' gross margin of 36.9% in the first quarter increased from 34.0% in the fourth quarter, driven by higher volume, higher selling prices, and favorable product mix offset by higher material costs. Moving to slide seven, turning to our measurement system segment, revenue in the first quarter of $17.1 million declined 27.9% sequentially, reflecting primarily lower sales due to the steel market, as I indicated earlier, demand for these products is largely project-driven, as these products generally have longer selling and delivery cycles. CALC reported strong bookings in the first quarter, reflecting good demand for its productivity systems for hot strip meals. As part of its development plan, KELC is expected to launch new cumbers solution that provides additional features for the steel manufacturers for productivity enhancement. Total measurement system orders grew by 2%, resulting in a book of 1.56, reflecting sequential order growth in steel. Adjusted gross margin in the first quarter for measurement systems was 54.1%, adjusted for purchase accounting related to the DTS acquisition, and declined from 56.8% in the fourth quarter, mainly due to lower revenue and unfavorable product mix. Before turning the call to Bill, I'll make a few additional comments. In terms of COVID, all our facilities are currently open and operating normally. And finally, our priorities for deploying our capital continue to be on funding internal growth-oriented investments that are intended to accelerate our top-line and bottom-line growth. In addition, our solid balance sheet supports M&A activity to expand our market product portfolio and generate attractive returns. I will now turn it over to Bill Clancy for additional financial details. Bill?

Bill Clancy Thanks, Yves. Referring to slide eight and the reconciliation tables of the slide deck, in the first quarter of 2022, we achieved revenues of $87.7 million, gross profit of 35.3 million, or 40.2 percent of sales, operating income of 8.3 million, or 9.5 percent of revenues, and diluted net earnings per share of 46 cents. On an adjusted basis, our gross profit was 35.9 million, or 41.0 percent of sales, operating income was 9.2 million, or 10.5 percent of sales, and diluted net earnings per share was 49 cents. Our first quarter 2022 revenues decreased 2.6 percent compared to 90 million in the fourth quarter of 2021, and we're 24.2 percent above the first quarter a year ago. Foreign exchange for the first quarter of 2022 negatively impacted revenues by 1.5 million compared to a year ago, and negatively impacted revenues by $500,000 as compared to the fourth quarter of 2021. Gross margin in the first quarter was 40.2% compared to 38.7% in the fourth quarter, which benefited from higher inventory and higher selling prices offset by lower volume, higher material costs, and manufacturing inefficiencies related to new higher learning curve. On an adjusted basis, first quarter gross margin was 41% as compared to 40.3% in the fourth quarter of 2021 and exclude $400,000 of acquisition purchase accounting adjustments, $200,000 of facility startup costs for advanced sensors, and $138,000 of COVID-19 related costs. Our operating margin was 9.5% for the first quarter of 2022. Our first quarter adjusted operating margin was 10.5% and excluded the adjustments I just mentioned. Selling, general, and administrative expenses for the first quarter of 2022 were $26.7 million, or 30.4% of revenues, as compared to $22.2 million, with 31.4% of revenues for the first quarter of 2021. The increase in SG&A of $4.5 million mainly relates to $4 million for the DTS acquisition, $300,000 of wage increases, and $200,000 of other costs. The adjusted net earnings for the first quarter of 2022 were $6.6 million, or 49 cents per diluted share, compared to $4.2 million, or 31 cents per diluted share, in the first quarter of 2021. Adjusted EBITDA was $12.6 million, or 14.4% of revenues compared to 9.5 million or 13.5% a year ago. CapEx in the first quarter of 2022 was 4.3 million, the majority of which reflect equipment purchases and related infrastructure. For fiscal 2022, we expect CapEx to be in the range of 30 million, the highest level in our history. Approximately 10 million of that CAPEX is a carryover from 2021, which has been pushed out due to covert-related matters. Approximately half of our purchases are infrastructure-related to support additional capacity expansions for growth initiatives for precision resistors in the sensor segment and for sensors in the weighing solution segment. The other 50% of CAPEX is mainly for equipment for expansion and cost efficiencies in the sensor segment. Free cash flow is a negative 4.6 million as compared to a negative 120,000 for the first quarter of 2021. We define adjusted free cash flow as cash from operating activities, less capital expenditures, plus any sale of fixed assets. Cash flow is impacted in the first quarter due to working capital needs from our high backlog as well as performance-linked incentive compensation. We expect to return to positive free cash flow in the second quarter of 2022. The GAAP tax rate in the first quarter was 20.7 percent as compared to 26.3 percent in the first quarter of 2021. We are assuming an operational tax rate in the range of 21 to 23 percent for the full year of 2022. Moving to slide nine, We ended the first quarter with $78.2 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. Moving to the outlook. For the second fiscal quarter, we expect net revenues to grow sequentially and be in the range of $88 million to $96 million, at constant first fiscal quarter 2022 exchange rates. And in summary, we achieved another strong quarter of results. Record orders contributed to a record backlog, which underscores the strength of our business model and strategy. And finally, we continue to execute on our long-term initiatives to accelerate growth of sales and profits. With that, let's open the line for questions. Thank you.

Certainly. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of John Franred with Sidati and Company. Please proceed.

Good morning, Ziv and Bill. Thanks for taking the questions. I'd like to start with the revenue profile on the quarter. Could you talk a little bit about which end markets were the biggest drivers on a year-over-year basis overall for the quarter?

If we are looking... On a year-over-year basis for the quarter, the largest increase came from precision resistors as test and measurement mainly for semiconductor is a very strong market, then followed by micromeasurement, which is headed by advanced sensors, also consumer electronics and consumer goods. In fact, I have to say that in addition to the DTS acquisitions that we have not accounted for a year ago, we have seen increase in volume in all our reporting segments.

Okay. And as we pivot and look at the June quarter, okay, are there any new markets that you expect to improve or do you expect these existing markets to continue to be the drivers in June versus March quarter?

I would say at this point in time we see a very, I would say a solid and strong tailwind in respect to demand since we are also running at record backlog in all our reporting segments. So I would say that we may see some inventory in the industrial weighing part of the four And as you know, we already indicated that in the prior quarters, due to the lack of microchips in the market, there was a slowdown which already started a few quarters ago in respect to the transportation. But all in all, I would say we see a continuation of the good momentum moving forward.

Okay. And how much did DTS contribute to revenue in the quarter and profitability, either on a gross or up income line?

DTS revenues for the first quarter was around, DTS revenues for the quarter were $7.7 million. And with a gross margin over 50%.

And then just shifting to the advanced sensor business, I think you mentioned it's running at a 50 million annual run rate. Bill mentioned that CapEx was going to go up sizably this year. But I don't think I heard him say that any of it's being targeted towards the advanced sensor line. Do you have ample capacity in the advanced sensor business right now? And also, last quarter we had some inefficiency costs of $3 million. To what impact was inefficiency on the advanced sensor in the quarter?

Yes, John. So as we indicated this quarter, the $900,000 of startup costs, which we have booked in prior quarter for advanced sensors due to the learning curve and moving to the new facility, has dropped to $200,000. in Q1 and is expected to drop to a very, I would say, sub-100,000 in the coming quarter. And then there will be no start. So we see the decline in a quick way. In regards to the capital spending, as Bill indicated, 50% of the expected investment is expected to go for precision resistors. And our facility in India, in order to support or to optimize the cost structure for weighing solutions in addition to support future designs now the other part which is equipment related mostly related to the sensor segment and in the sensor segment it's a combination of precision resistors and advanced sensors so there is further investments equipment which we are intending to make this year for for expanding further advanced sensor capacity.

Got it, got it. And one last question, I'll get back into queue. Can you just talk a bit about your exposure to China and the impact the shutdowns may or may not be having on you?

Sure, absolutely. So as we indicated in the past, the strategy was, I mean, okay, let me take a step back. Our operational footprint in China is extremely, is fairly limited. We had in prior years three facilities. We have shut down two facilities, consolidated to India, and we are left with one facility, a fairly smaller facility in Tianjin, China, just for four sensors. So our operational capacity, operational footprint is very limited in China. Fortunately, we have not seen, due to the very recent lockdown, it did not happen in our vicinity. Therefore, we have not been impacted. But if something would come, we would expect fairly limited exposure.

Okay. All right. I'll get back to you.

Thanks for taking my question, Z. Thank you, Mr. Francis. Once again, to ask a question, press star 1. There are no additional questions waiting at this time, so I will turn the call back over to Steve Cantor for closing remarks.

Before closing the call, I want to note that we will be participating in the B. Reilly Conference this month and the Stiefel Conference in June. And with that, thank you for joining our call this morning, and have a great day.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.