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spk03: 4 by 1 on your telephone keypad. Good morning everyone and welcome to the VPG fourth quarter and FY 2023 earnings call. My name is Chach and I'll be the coordinator for your call today. During the presentation you can register to ask a question by pressing star 1 on your telephone keypad. If you change your mind please press star 4 by 2. I will now hand you over to Steve Cantor, senior director of investor relations to begin. Steve please go ahead.
spk04: Thank you Chach 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 our website, vpgcensors.com. An audio recording of today's call will be available on the internet for a limited time and can also be accessed on our website. Today's remarks are governed by the Safe Harbor provisions of the 1995 Private Securities Litigation Reform Act. Our actual results may vary from forward-looking statements. For a discussion of the risks associated with VPG's operations we encourage you to refer to our SEC filings especially the form 10K for the year ended December 31, 2022 and our other recent SEC filings. On the call today are Zeve Shoshani, CEO and president and Bill Clancy, CFO. And now I'll turn the call to Zeve for some prepared remarks. Please refer to slide 3 of the quarterly presentation.
spk02: 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 EBDA and EBDA margin of .0% and a record 30.8 million of adjusted free cash flow. We deployed our cash to repurchase stock and to pay down our evolving debt in order to provide value to our stockholders. We completed infrastructure expansion projects in India and Japan and have accelerated our business development to capture new opportunities for our precision sensing and measurement solutions. Moving to slide 4. Turning to the fourth quarter of 2023. We achieved revenue of 89.5 million which was above the high end of our guidance and .3% higher than the third quarter. We delivered adjusted diluted EPS of $0.61. All the 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 EBDA of 16.5 million and achieved an adjusted EBDA 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. Slide 5. Moving to slide 5. Beginning with our sensor segment, fourth quarter revenue of 34.3 million grew .3% sequentially but was .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 advanced 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 .2% improved sequentially from .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 .8% sequentially. This reflected stronger demand in test and measurement and higher customer project related orders in avionic military and space or AMS. Moving to slide 6. Turning to our weighing solution segment, fourth quarter sales of 30.4 million increased .1% from 29.0 million in the third quarter but were .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 .6% in the fourth quarter declined from .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 .2% due to higher bookings for industrial weighing and transportation applications. Moving to slide 7. Turning to our measurement system segment, revenue in the fourth quarter of 24.8 million increased .0% sequentially but was .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 .1% which compared to .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 calc 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 prioritized internal investment, M&A, stock repurchase and paying down our evolving 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 levels of approximately four percent of revenue. Regarding M&A we continue to look for attractive high quality businesses that meets 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?
spk05: Thank you Zeke. Referring to slide nine and the reconciliation tables of the slide deck our fourth quarter 2023 revenues were 89.5 million dollars. Adjusted gross margin of 43 percent in the fourth quarter as compared to 42.1 percent in the third quarter of 2023. Our operating margin was 13.4 percent for the fourth quarter of 2023. Our fourth quarter adjusted operating margin was 13.6 percent excluding 130 thousand dollars of restructuring costs. Selling general administrative expense for the fourth quarter of 2023 was 26.4 million dollars for 29.4 percent of revenues as compared to 26.6 million dollars for 30.9 percent of revenues for the third quarter of 2023. The GAAP tax rate for the full year of 2023 was 32.3 percent primarily reflecting the geographic mix of income. We are assuming an operational tax rate of approximately 27 percent for the full year of 2024. The adjusted net earnings for the fourth quarter of 2023 were 8.2 million dollars for 61 cents per diluted share compared to 6.4 million dollars or 47 cents per diluted share in the third quarter of 2023. Adjusted EBITDA was 16.5 million dollars or 18.5 percent of revenues which is 20.3 percent higher than the 13.7 million dollars or 16 percent of revenue in the third quarter of 2023. CapEx in the fourth quarter was 5.3 million dollars. Total CapEx for 2023 was 15.2 million dollars or 4.3 percent of revenue. For 2024 we are budgeting 14 to 16 million dollars for capital expenditures. We generated adjusted free cash flow of 13.5 million dollars for the fourth quarter of 2023 as compared to 6 million dollars 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 he's indicated in the fourth quarter we repurchased 4.7 million dollars of our stock for 153,000 shares. For the full year of 2023 we repurchased 5.9 million dollars of common stock for 188,000 shares. In addition during the fourth quarter we paid down 22 million dollars of our revolving bank debt. For the full year we reduced our outstanding revolving bank debt by 29 million dollars which we estimate will result in net interest saving of approximately 1 million dollars in 2024 assuming no additional borrowing. Moving to slide 10 we ended the fourth quarter with 84 million dollars of cash and cash equivalents and total outstanding long-term debt of 31.9 million dollars which reflects the pay down 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 to 90 million dollars. In summary we achieved fourth quarter sales above the height 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 customers. With that let's open the lines for questions. Thank you.
spk03: Thank you Bill. If you'd like to ask a question please press star followed by one on your telephone keypad now. If you change your mind please press star followed by two. When preparing to ask your question please ensure your phone is unmuted locally. Our first question today comes from Griffin Boss from the Riley Securities. Please go ahead.
spk01: Hi thanks for taking my question. So first it's great to see the profitability and cash flow improvements 13 and a half million free cash flow 82 percent 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?
spk02: Good morning Griffin. I think that given our sales guidance and the level of investment 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 account receivable and payable you know I would say fluctuation or working capital fluctuations but all in all the Q4 performance are sustainable as given the level of revenue as we move into 2024.
spk01: Okay yeah great Grazy thanks for that. And then the shifting gears in terms of order flow like you said it's sort of a mixed bag measurement system seems a bit soft while there could be some green shoots and 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 stocking events and then more generally just your high level thoughts on 2024 potential inflection points and maybe you know your positioning for a return to growth in the back half of the year?
spk02: Yes absolutely. Orders for Q4 has declined .2% sequentially but grew .2% from prior year. As we indicated there is a mixed bag or a mixed signal on the test and measurement we see an upside of .3% still upside industrial weighing upside general industrial and upside given the improved business environment which is the outcome of lower inventory in the pipeline in the last I would say four quarters. And we also see some other end markets which are 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 improvement and the improvements in order intake in Q4 of 2023 in the sensors and in the weighing solution segment we believe that all as I indicated has bottom up in some of our key markets but in the first half of 2024 we expect to see a modest growth in avionic military and space semiconductor testing and consumer while orders for industrial OEM application such as precision agriculture transportation and the portion of the steel market is expected to continue to be flat which means in a way soft but those end markets we expect to do 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 the modest increase already in the first half while this increase should be accelerated in the second half of the year in respect to the intake improvement.
spk01: Great yeah that's great context thanks for the detail there. And just last one for me and then I'll turn it over you mentioned you know 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?
spk02: Well I would say that we as I indicated in our last call we have been in dialogue with a few companies some of the projects have been moving forward while others we are still in discussions you know 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. Nothing tangible to report but this activity takes a very high priority for the company.
spk01: Great okay yeah fair enough thanks for taking my questions appreciate it.
spk03: The next question on the line is from John Franz that's from Sudoti and Company please go ahead.
spk06: Good morning guys and thanks for taking the questions. I'd like to start with the commentary on the measurement systems business and the deferral of some project activity is that entirely surrounding the calc side of that business or is there something more that we should be cognizant of?
spk02: Okay so good morning the Q4 was 0.73 which declined from 0.98 in the third quarter please bear in mind that the decline also include a record record orders for DTS in the avionic military and space business in the prior quarter and the decline in the book to bill reflect 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 avionic military and space were down from the record level we expect business environment improvements for the avionic 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 so despite the fact that we have seen a specific decline in avionic 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. Okay so
spk06: right so so Calc is up a little bit sequentially DTS down 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?
spk02: And is expected to modestly improve and improve much more in the
spk06: higher tax rate these days seems to be ticking up a lot.
spk05: Yeah so John so good morning so the higher tax rate predominantly we have a geographic you know mix of income so depending upon where our income are being generated you know right now it's being generated in higher tax rates than we the past. We've also within this gap tax rate this year had some one-time cost for tax positions but as we mentioned you know we're going to participate 27 operationally in 2024.
spk06: Okay and 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?
spk05: Well John as you recall and I think we've talked about this it's you know as part of our you know capital allocation you know we've always listed as you know internal growth M&A and the buyback the stock was always one of the the top parameters for capital allocation and you know we will continue to incorporate all of those attributes and the capital allocation and and we'll continue to and we're continuing to be very active in the market today.
spk06: Okay and one last question on on revenue growth. You mentioned a couple I don't know potential items and when you went through the segment you know presentations you know data centers and a new product development in MS. If we were going to look at like near-term revenue catalyst opportunities especially new ones which are the most viable near-term revenue opportunities for the company?
spk02: Okay so if we are looking at 2024 we are looking in in two verticals. One is the vertical of the macro macro improvement macro economy improvement given the fact that we have seen inventory is being depleted in the queue and and I would say that part of that would that would run the improvement would be test and measurement for semiconductor equipment for for the sensor piece in addition to the 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 base systems that that's a new completely new market for us and we have just started to to provide the systems in order to enter into a new market. In addition to that as I mentioned I think in the 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 is it's also going to gain more volume and then for example I have on the weighing solution side that we have developed a new cost 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 macro economy change and the other piece is our business development activities to capture new business.
spk06: Perfect and with that actually I'll get back into the queue and let somebody have some questions. Thank you Steve.
spk03: Thank you as a reminder to ask any further questions please press star four by one on your telephone keypad now. We have a follow-up question from John Franzi please go ahead.
spk06: Well I have to ask about the three to five year long-term targets. Do you still think they're viable given the protracted downdraft we've had in the booking order profile?
spk02: Well I would say John if you can recall we put our three years plan in respect to revenues the 45 percent if I can recall gross margin and then we also set an OMB. 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 percent 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 is going 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 45 percent gross margin which will also assure the profitability target. So despite the so-called the current mixed business environment I am quite confident that the plan that we have laid out the three five-year plan is very viable.
spk06: Okay excellent that's good to hear and just one last question any update on production capabilities in Israel has it still been a non-factor just I think we could into brush up on that topic.
spk02: Sure so the 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 a normal level the actions that we have taken in prior quarters in respect to securing raw materials 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 the normal level.
spk06: That's great to hear thanks for the update.
spk03: This concludes the Q&A session so I'll now hand over to Steve to conclude.
spk04: Thank you before concluding I want to note that BPG will be presenting at the SIDOTI small cap conference on March 13 and 14. 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.
spk03: Thank you everyone this concludes today's call thank you for joining you may now disconnect your line.
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