Vishay Precision Group, Inc.

followed by one 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 one on your telephone keypad. If you change your mind, please press star four by two. I will now hand you over to Steve Cantor, Senior Director of Investor Relations to begin. Steve, please go ahead.

Thank you, Josh, and good morning, everyone. Welcome to VPG's 2023 fourth quarter earnings conference call. Our Q4 and full year press release and accompanying slides have been posted on our website, vpgsensors.com. An audio recording of today's call will be available on the internet for a limited time and can also be accessed on our website. Today's remarks are governed by the safe harbor provisions of the 1995 Private Securities Litigation Reform Act. Our actual results may vary from forward-looking statements. For a discussion of the risks associated with BPG's operations, we encourage you to refer to our SEC filings, especially the Form 10-K for the year ended December 31, 2022, and our other recent SEC filings. On the call today, are Ziv Shoshani, CEO and President, and Bill Clancy, CFO. And now I'll turn the call to Ziv for some prepared remarks. Please refer to slide three of the quarterly presentation.

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 an EBDA margin of 17.0% and a record $30.8 million of adjusted free cash flow. We deployed our cash to repurchase stock and to pay down our revolving debt in order to provide value to our stockholders. We completed infrastructure expansion projects in India and Japan and have accelerated our business development activities to capture new opportunities for our precision sensing and measurement solutions. Moving to slide four, turning to the fourth quarter of 2023, we achieved revenue of 89.5 million, which was above the high end of our guidance and 4.3% higher than the third quarter. We delivered adjusted diluted EPS of 61 cents. 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 EBITDA margin of 18.5%. We deployed capital to pay down bank debt as well as to repurchase shares. We continue to execute on our long-term organic growth initiatives in terms of new product development and expanding our engagement with customers in larger markets. We are also continuing our cost reduction efforts to move production to lower cost locations, investing in automation and reducing material costs. I will now review our performance by business segment for the fourth quarter. Moving to slide five. Beginning with our sensor segment, fourth quarter revenue of $34.3 million grew 5.3% sequentially, but was 5.7% lower than a year ago. The sequential growth was driven by higher sales of precision resistors in the test and measurement, as sales related to semiconductor test and production applications improved from the third quarter. Revenue trends for the rest of our markets, including consumer for 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 40.2% improved sequentially from 35.9%, primarily due to higher volume and improved manufacturing efficiencies. Book-to-bill for sensors was 0.85, which was modestly up from the third quarter as orders grew 7.8% sequentially. This reflected stronger demand in test and measurement and higher customer project related orders in avionic military and space or AMS. Moving to slide six, turning to our weighing solution segment, fourth quarter sales of 30.4 million increased 5.1% from 29.0 million in the third quarter, but were 8.0% lower than a year ago. Sequentially, The increase was driven by higher OEM sales for precision agriculture and construction applications, and higher sales in general industrial, which offset lower sales in the transportation market. Wang Solutions adjusted gross margin of 35.6% in the fourth quarter, declined from 38.7% in the third quarter, primarily due to a reduction in inventory and unfavorable product mix partially offset by higher volume. Book-to-bill for weighing solutions of 0.91 in the fourth quarter improved modestly from the third quarter. Orders of 27.7 million grew 7.2% due to higher bookings for industrial weighing and transportation applications. Moving to slide seven, Turning to our measurement system segment, revenue in the fourth quarter of $24.8 million increased 2.0% sequentially, but was 7.5% lower year over year. The sequential growth reflected higher DTS sales for AMS applications, which offset lower sales for our steel-related businesses. Adjusted gross margin in the fourth quarter for measurement systems was 56.1%, which compared to 54.5% in the third quarter of 2023. The higher adjusted gross profit margin in the fourth quarter of 2023 reflected the higher volume and favorable product mix. Book to bill for measurement systems of 0.73 declined from 0.98 in the third quarter, which had included record orders for DTS in the AMS market. The decline in book to bill reflects the timing of customers' projects. In the fourth quarter, steel-related orders grew sequentially, while orders in AMS were down from a record level. We see positive trends for DTS with our AMS customers. Despite the muted near-term outlook for the steel market, we are pursuing VPG specific opportunities with new products such as our development of 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 prioritize internal investment, M&A, stock repurchase, and paying down our revolving credit facility. In terms of internal investments, we completed growth focus and operational capability and automation projects in 2023. For example, we have increased the automation in our India facility to support higher volume businesses. In addition, we are continuing to consolidate production to this location. As such, we expect capital spending to return in 2024 to a more historical level of approximately 4% of revenue. Regarding M&A, we continue to look for attractive, high-quality businesses that meet our stringent requirements for strategic fit, financial returns, and value creation. We are currently seeing a more favorable M&A environment. Before turning the call to Bill for additional comments, I would like to thank our employees and our customers around the world for their continued commitment and dedication. I will now turn it over to Bill Clancy. Bill?

Thank you, Zeif. Referring to slide nine and the reconciliation tables of the slide deck, our fourth quarter of 2023 revenues were $89.5 million. Adjusted gross margin of 43% in the fourth quarter as compared to 42.1% in the third quarter of 2023. Our operating margin was 13.4% for the fourth quarter of 2023. Our fourth quarter adjusted operating margin was 13.6%, excluding $130,000 of restructuring costs. Selling general administrative expense for the fourth quarter of 2023 was $26.4 million, or 29.4% of revenues. as compared to $26.6 million or 30.9% of revenues for the third quarter of 2023. The GAAP tax rate for the full year of 2023 was 32.3%, primarily reflecting the geographic mix of income. We are assuming an operational tax rate of approximately 27% for the full year of 2024. The adjusted net earnings for the fourth quarter of 2023 were $8.2 million, or 61 cents per diluted share, compared to $6.4 million, or 47 cents per diluted share, in the third quarter of 2023. Adjusted EBITDA was $16.5 million, or 18.5% of revenues, which is 20.3% higher than the $13.7 million or 16% of revenue in the third quarter of 2023. CapEx in the fourth quarter was $5.3 million. Total CapEx for 2023 was $15.2 million or 4.3% of revenues. For 2024, we are budgeting $14 to $16 million for capital expenditures. We generated adjusted free cash flow of $13.5 million for the fourth quarter of 2023 as compared to $6 million for the third quarter of 2023. We define adjusted free cash flow as cash from operating activities, less capital expenditures, plus the sale of fixed assets. As he's indicated, in the fourth quarter, we repurchased $4.7 million of our stock for 153,000 shares. For the full year of 2023, we repurchased $5.9 million of common stock for 188,000 shares. In addition, during the fourth quarter, we paid down $22 million of our revolving bank debt. For the full year, we reduced our outstanding arriving bank debt by $29 million, which we estimate will result in net interest savings of approximately $1 million in 2024, assuming no additional borrowing. Moving to slide 10. We end the fourth quarter with $84 million of cash and cash equivalents and total outstanding long-term debt of $31.9 million. 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 rate, We expect net revenue to be in the range of $80 million to $90 million. In summary, we achieved fourth quarter sales above the high end of our guidance. We generated record level cash flow, which we are deploying to pay down our revolving bank debt and to repurchase shares. We are excited about the potential in emerging market and applications in consumer, industrial automation, medical, and material development with our high-value precision measurement and sensing products for our customers. With that, let's open the lines for questions. Thank you.

Thank you, Bill. If you'd like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, please press star followed by 2. When preparing to ask a question, please ensure your phone is unmuted locally. Our first question today comes from Griffin Boss from B Reilly Securities. Please go ahead.

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

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 performance 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.

Okay. Yeah, great. Crazy. 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 restocking events, and then more generally, just your high-level thoughts on 2024, potential inflection points, and maybe your positioning for a return to growth in the back half of the year?

Yes, absolutely. Orders for Q4 has declined 2.2% sequentially, but grew 2.2% 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 6.3%, 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... and we also see some other end markets which are still not improved yet. Overall, we believe that near-term order trends have reached the bottom in most of our end markets. We expect order trends to modestly improve in the first half of the year and strengthen in the second half of 2024. Based on customer feedback, and the improvement in order intake in Q4 of 2023 in the sensors and in the weighing solution segment, we believe that all, as I indicated, has bottomed 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 applications such as precision, agriculture, construction, transportation, and a portion of the steel market is expected to continue to be flat, which means in a way soft. But those end markets, we expect that the order intake run rate is expected to improve for those end markets and applications in the second half of 2024. So all in all, just to summarize, we are looking at a modest increase already in the first half, while this increase should be accelerated in the second half of the year in respect to the intake improvement.

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'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?

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. I have nothing tangible to report. But this activity takes a very high priority for the company.

Great. Okay, yeah, fair enough. Thanks for taking my questions. Appreciate it.

The next question on the line is from John Franzen from Sedoti and Company. Please go ahead.

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?

Okay, so good morning, John. So measurement systems book to bill for the quarter was 0.73, which declined from 0.98 in the third quarter. Please bear in mind that the decline also includes a record order for dts in the avionic military and space business in the prior quarter and the decline in the book to bill reflects also the timing given the the project nature it's the timing of customers projects in q4 still 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 right, so Calc is up a little bit sequentially. DTS was down a lot because it 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?

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

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

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

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 of the stock was always one of the top parameters for a 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 okay and one last question on on revenue growth you mentioned a couple i don't know um 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 gonna look at like near-term revenue catalyst opportunities, especially new ones, which are the most viable near-term revenue opportunities for the company?

Okay, so if we are looking at 2024, we are looking in two verticals. One is the vertical of the macro improvement macroeconomy improvement given the fact that we have seen inventory is being depleted in the queue. And I would say that part of that would run the improvement would be test and measurement for semiconductor equipment for the sensor piece in addition to the general industrial that is also expected to improve. The other piece is our business development activity in respect to new applications, selling to new applications, and new products that we have developed. In that case, I could give as an example what I did mention regarding the aluminum-based systems, that that's a completely new market for us, and we have just started to provide the systems in order to enter into a new market. In addition to that, as I mentioned, I think in the prior call, is the humanoid application, where we are at the very final design stage. But once the prototype phase is going to take off, the expectation is over time. 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 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.

Perfect. And with that, actually, I'll get back to you and let somebody ask some questions. Thank you, Zeed.

Thank you. As a reminder, to ask any further questions, please press Start 4x1 on your telephone keypad now. We have a follow-up question from John Franze. Please go ahead.

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?

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

Okay, excellent. That's good to hear. just one last question any update on um production capabilities in israel has it still been a non-factor just i think it'd be prudent to brush up on that topic sure so uh the 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 the normal levels 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 a normal level.

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

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

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

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