Vishay Precision Group, Inc.

Hello everyone and welcome to the VPGA's third quarter VSCO 2024 Earning School. My name is Ezra and I will be your coordinator today. I would like, if you would 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. I will now hand you over to your host, Steve Cantor, Senior Director of Investor Relations to begin. Steve, please go ahead.

Thank you, Ezra, and good morning, everyone. Welcome to our third quarter 2024 earnings call. Our Q3 release and slides have been posted on our website at 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 Security Litigation Reform Act. Our actual results may vary from forward-looking statements. For 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, 2023, and our other recent SEC filings. On the call today are Zeve Shoshani, CEO and President, and Bill Clancy, CFO. I'll now turn the call to Zeve for some prepared remarks.

Zeve.

Thank you, Steve. I will begin with some commentary on our results and trends for the third quarter. Bill will provide financial details about the quarter and our outlook for the fourth quarter of 2024. Moving to slide three, overall third quarter was as follows. Total sales were mostly stable sequentially. The business environment continues to be mixed as higher demand in some markets was offset by weakness in others. We continue to focus on broadening our funnel of new business opportunities. We are streamlining operations, mainly in the sensors and weighing solution segments. The recent acquisition of Nokra expand our product offering in the steel market. Moving to slide four, looking at the third quarter results in details, we reported sales of 75.7 million, which was above the mid-range of our guidance. Orders of 68.6 million declined from 73.5 million in the second quarter, resulting in a book to bill ratio of 0.91. Trends continue to be mixed in our markets as orders generally represented customers' ongoing replenishment of inventories. The majority of bookings decline related to certain cyclical markets, including steel and consumer. This contrasted with higher orders in the test and measurement and AMS, which remains well below peak levels. Operationally, we reduced our manufacturing operations to align with near term revenue trends. These steps resulted in temporary labor inefficiencies, primarily in our sensor segment. Combined with the impact of sequentially lower revenues, these inefficiencies contributed to a gross margin of 40% in the third quarter. We do not expect this labor inefficiencies to continue in the fourth quarter. As we continue our growth focus investments in business development, marketing, and R&D, we are streamlining our operating costs and implementing our long-term cost reduction plans. Over the past few years, these programs have improved our gross margin and going forward will position us to realize potential operating leverage as our revenue recover. I'll now review our business segment performance for the third quarter. Moving to slide five, beginning with our sensor segment, third quarter revenue was 28.2 million, down .3% from a year ago and .3% sequentially. Compared to the second quarter, sales of precision resistors, primarily in the test and measurement and AMS, were higher, but were offset by lower sales of advanced sensors, mainly for consumer applications. Book to bill for sensors was 0.89, as the third quarter orders for sensors of 25.1 million softened sequentially, primarily due to lower bookings for consumer related applications. This offset higher orders in the test and measurement and AMS, while semiconductor equipment manufacturers, customers have placed semi-annual orders to replenish their inventories. The semiconductor market remains cyclically soft. Regarding business development activities, we continued our focus on expanding our precision resistors in fiber optics equipment. During the third quarter, we achieved design qualification for our resistor products in telecommunications market, as well as recording an order from a supplier of source laser used in fiber optics equipment. For advanced sensors, we continued our progress with a project with a leading developer of humanoid robots, and are now in discussion with the second maker of such robots. In consumer, we received initial orders from a large global bicycle accessory company, and in medical, we achieved a key design win with a maker of infusion pumps. Moving to slide six, in the weighing solution segment, third quarter sales were 25.2 million, a decline of .1% from a year ago, and .3% from the second quarter. Sequentially, the decline was mainly due to lower sales in the industrial weighing transportation and in other markets. Book to bill for weighing solutions was 1.0, orders of 25.2 million were essentially even with the second quarter as lower orders in the transportation market offset higher bookings in the industrial weighing and other markets. Overall, slowing industrial production and capital spending around the world continues to be a headwind. In our other markets, we have seen modest improvement in precision ag, while construction and medical remain slow. As a key area of business development focus for weighing solutions continues to be on expanding our content with OEM customers in precision agriculture, construction equipment, and medical equipment. Moving to slide seven, turning to our measurement system segment, third quarter revenue was 22.4 million, down .2% year over year, but up .2% sequentially. The sequential growth was mainly due to higher sales of DTS products in the AMS and transportation markets, which offset declines in our other markets and in steel. Book to bill ratio for measurement systems was 0.82, reflecting orders of 18.2 million. This was a decline of .9% from the second quarter, primarily due to lower bookings in steel and transportation. While the steel market in China remains soft, we are expanding our business in India, which is one of the fastest going markets globally for steel production. In transportation, orders soften for our DTS crash test data recorders, due primarily to project timing. Moving to slide eight, we were pleased to announce the acquisition of Nokra, a German niche supplier for laser-based measurement systems, which strategically expand our product offering to the steel and metal processing market. Nokra precision laser-based systems provide an effective alternative for measuring the thickness and flatness of metal sheets during production. In 2025, we expect to grow Nokra revenues as we leverage Kelk strong brand sales channels and existing customer base. We financed the transaction with cash and expect it to be immediately accretive. Given our strong balance sheet, our capital allocation strategy prioritize internal investments and funding additional M&A opportunities that add high quality businesses to the VPG platform. Moving to slide nine, before turning the call to Bill, I want to highlight the release of our initial sustainability report. This report marks a significant milestone in VPG sustainability journey. We take great pride on how VPG contributes to a more sustainable world by helping to make our customers, products and processes safer, smarter and more productive to deliver long-term value creation globally. We look forward to sharing more milestones in the future. I will now turn it over to Bill Clancy for additional financial details. Bill.

Thanks, Zeke. Referring to slide 10 and the reconciliation tables of the slide deck, our third quarter revenues were $75.7 million. Gross margin in the third quarter was 40% as compared to .9% in the second quarter. By segment, gross margin for the semester segment of 31% declined sequentially, primarily due to lower revenue and temporary operational and labor inefficiency. The weighing solutions gross margin of .1% was lower than in the second quarter, primarily due to lower volume and unfavorable product mix. Measurement system gross margin of .8% improved sequentially, reflecting higher volume and favorable product mix. Total selling, general and administrative expenses for the third quarter of 26.3 million or .8% of revenues declined slightly from 26.5 million but .3% in the second quarter. Operational margin was .1% as compared to .6% for the second quarter, primarily reflecting the lower revenue. On a gap basis, we recorded a loss per diluted share of 10 cents. This includes the impact of unrealized foreign exchange loss of $2.9 million, a restructuring charge of 82,000 and discrete tax items of 839,000. Excluding those items, adjusted net earnings per diluted share for the third quarter was 19 cents. Which compared to 31 cents in the second quarter. Adjusted EBITDA was 8.1 million or .7% of revenue as compared to 10.2 million but .2% in the second quarter. Purchased CapEx in the third quarter was $1.8 million. For the full fiscal year of 2024, we expect the purchased CapEx to be in a range of 10 to $12 million, which is significantly lower than the levels we have spent in the past few years. Adjusted free cash flow was a negative $2.3 million, which compared to $4.9 million for the second quarter. The third quarter cash flow included $3 million of one-time tax payments and $1.4 million related to global insurance renewals. We define adjusted free cash flow as cash from operating activities of a negative $831,000, less CapEx of $1.8 million, plus proceeds from the sale of assets of $300,000. During the quarter, we repurchased 1.9 million of stock. The third quarter operational tax rate was 30% reflecting the income earned in higher tax rate jurisdictions. We are assuming an operational tax rate of 30% for the full year of 2024. Moving to slide 11, we ended the third quarter with 81.1 million of cash and cash equivalents and total debt of $31.6 million. During the third quarter, we amended and restated our $75 million credit facility that will mature in August of 2029. This provides us with ample liquidity for our operational needs, as well as to support our capital allocation strategy. Regarding the outlook, for the fourth fiscal quarter, given the current market conditions in our backlog, we expect net revenues to be in the range of $70 million to $78 million at constant third fiscal quarter 2024 exchange rates. In summary, the business environment remains challenging as our cyclical markets are soft. We remain focused on our business development initiatives and we believe we are positioned to realize significant incremental operating leverage as revenues improve. With that, let's open the lines for questions. Thank you.

Thank you very much. If you would like to ask a question, please press star followed by one on your telephone keypad now. Please ensure your device is unmuted locally. And if you change your mind, please press star followed by two. Our first question comes from Griffin Boss with B Riley Securities. Griffin, your line is now open. Please go ahead.

Hi, good morning. Thanks for taking my questions. The first, I just wanna be clear, the labor inefficiencies that you discussed in the sensor segment, so those were completely behind you when you entered the fourth quarter. Did I hear that correctly?

Yes, already in the beginning of the fourth quarter, we have seen a significant improvement regarding the inefficiencies that we have booked in the third quarter. So that is correct Griffin.

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

No Griffin, I would say it's probably a one time. We had, I would say some sales that happened in the last week of the third quarter. We truly believe this is one time. And as I mentioned on the call, speaking about cash flows, we did have over like three million dollars one time tax payments and 1.4 million related to our insurance programming rules. So our anticipation would be back in the fourth quarter to be a positive free cashflow.

Okay, great. Thanks Bill. And then just switching to new projects. You mentioned humanoid robots. You got the second customer there. Is that, can we think about that as a similar size to the first customer? I think you mentioned on the last call, maybe a few hundred thousand dollars for the prototype stage. Just, yeah, I'm curious the size of that second customer.

Sure, so as I've indicated in earlier calls, we have been working very diligently with the sizable humanoid robots. We already are expecting to book significant revenues for this year. At this point in time, given the discussion and the forward looking projection from this customer, we are expecting revenues to double for 2025. And this is still not the full production. This is still on a pre-production level. Regarding the second humanoid customer, we are still in early stages of design. We believe that the potential size of the customer could be very similar to the initial one, but we are very earlier in the design stage, but we are already working with them. But they have also a very, I would say, sizable potential upside once it comes to a full blown production.

Excellent, got it, thank you, Steve. And just maybe last one for me, it's nice to see the M&A, Nokra. You mentioned you expect to grow revenues in 25, and I understand it's a relatively small business, but how much of that growth would you expect is organic versus coming from being integrated into the broader kelk business with those distribution channels?

The Nokra product line, with Nokra we purchased the technology for an adjacent product portfolio which would broaden our kelk. We believe that leveraging on kelk sales channels and existing customers, we can increase Nokra revenue, I would say significantly in 2025. We have not provided the run rate, but I could say that we are looking at, we are looking at roundabout, I would say, mid-single digit revenues for Nokra, which would be almost doubling their revenue in respect to 2024. All in all, we have seen some headwinds, as I've indicated earlier in the steel business, mainly due to the China soft business and soft construction business, but for us, the main driver at this point in time is the India investments. India is the second largest steel manufacturers and they are investing, I would say, quite significantly in their infrastructure. So all in all, between the Nokra acquisition and the India, I would say, investments, we believe that going forward, we would be more optimistic regarding steel.

Okay, great, Keller, thanks for taking my questions. Appreciate it. Thanks, Griffin.

Our

next question is from John Franzrebb with Sudoti. John, your line is now open. Please go ahead.

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

Sure, absolutely. So first, I think, John, it would be important to say that the biggest drop in Q in the third quarter in all the intake was in the measurement system. We had some few large projects that had been pushed out. They're looking from the third quarter to the fourth quarter. So if we speak about the business environment, we are expecting in Q4 to be back to the mid $70 million range in terms of bookings. Now, going to the different end markets and the dynamics, I would say that initially when we had discussions with some large customers, for example, in the semiconductor market or in the general industrial market, there was more, a little bit optimism regarding a potential upside. On the other hand, at the test and some other test and measurement customers, we have seen that their stock levels have gone down and they started to place order in order to replenish their stock level, which means we have not seen or we do not expect to see yet a larger potential upside coming from an additional demand, but at this point it's coming from the stock replenishment order pattern. On the other hand, Europe and especially UK, given the economy is still fairly soft. And at the end of the day, I would like also to say that on precision agriculture, we have seen more optimism as they have increased their order intake in Q3. So all in all, it's a mixed environment. We have a certain confidence level talking to our customers based on their projection, but I would say that a little bit on the longer term, the initial interest rates cuts and the expected, and the expectation for more cuts gives us a much, I would say stronger field to be optimistic regarding a real recovery in the next few quarters, given the fact that many of our customers are in the capital spending related business.

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

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

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

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

So that's what we're looking at. Understood. Thanks, you can take my questions, I'll go back into Kiel.

Thank you. Just as a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad now, and please ensure your devices are muted locally. If you change your mind or if your question has been answered, please press star 2. Our next question is from Jeffrey Cohen with Mulholland Capital Management. Jeffrey, your line is now open. Please go ahead.

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

Yes, we did, Jeffrey. We repurchased $1.9 million of stock during the third quarter.

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

From a capital...

Sorry.

Go ahead, Zeke. Go ahead.

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

Okay. Thank

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