Q3 2021 Vishay Precision Group Inc Earnings Call
Good morning, and welcome to the V. P. G third quarter 2021 earnings conference call all participants will be in listen only mode. So do you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your touch Jonestown to withdraw your question. Please press Star then two please note. This event is being recorded.
I'd now like to turn the conference over to Steve Cantor Senior Director of Investor Relations. Please go ahead.
Okay.
Thank you Carrie and good morning, everyone welcome to <unk> 2021 third quarter earnings Conference call. Our Q3 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 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.
<unk> and the risks associated with <unk> 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 zee, shiny, CEO, and president and Bill Clancy CFO.
I'll now return the call to Zee for some prepared remarks, please refer to slide three of the quarterly presentation leave.
Thank you thank you Steve.
I will begin with some commentary on V P G's consolidated financial results.
And sales trends for the third quarter to.
Bill will provide financial details and our outlook for the fourth quarter of 2021.
Slide three.
We are pleased with our results for the third quarter.
We achieved solid sales performance of 82.1 million.
We ended the quarter with a book to Bill of 121, and a record backlog of $146 7 million.
Which supports our positive outlook in the fourth quarter.
We achieved an adjusted gross margin of 41 point to 8% adjusted operating margin of 11, 8% and adjusted EPS of <unk> 52 cents.
We also generated solid cash flow and adjusted EBITDA margin of 16, 8%.
The integrations of Dts, which we which we acquired in June is.
Seething smoothly.
And we completed the move of advanced sensor manufacturing to our new facility.
Moving to slide four.
Looking at the third quarter sales results in more details.
Sales grew 21, 4% for me a year ago, and eight 8% from the second quarter, reflecting the strength of the current business environment and the addition of Dts.
While we are pleased with our revenue performance as anticipated challenges with label if visibility at our facilities around the world.
Had constrained our ability to translate our strong orders intake of 98 9 million into revenue.
We estimate that the impact of revenue from the hiring challenges was approximately four to 5 million in the third quarter related to FTP.
The book to Bill was above one in all the three reporting segments.
In each of our end markets.
In terms of sales trends by market. We grew sales for the second quarter of course, the majority of our end markets, including transportation and avionics military and space.
Which increased 14, 6% and 28, 4% respectively.
And mainly.
By the addition of a full quarter of the P. S.
Sales to the steel market rebounded, 47%, reflecting the timing of shipments of the AV budget driven orders.
In terms of the test and measurement grew nine 1%, reflecting continued strong demand and transportation was up five 1%.
Orders were lower sequentially.
All other markets primarily.
For our full sensor OEM business as well as due to the timing of.
Semi annual order.
For my foil resistors customers, which had been placed in the second quarter of 2021.
The net result of these trends was the book to Bill of 121 for the third quarter and a record backlog of $146 7 million, which increased 15.8 million for my second quarter of 2021.
Moving to slide five.
Turning to the results by segment.
Technology products third quarter sales of $32 8 million were one 6% lower sequentially.
And were essentially even with a year ago.
Faith Ultra precision foil resistors remained at.
Sustained level sequentially driven by continued good demand from semiconductor test equipment.
<unk> achieved another solid quarter.
As we completed the transition to the new facility.
As expected.
Hey, yes revenue moderated from Q2 due to the facility transition and as a result of fewer working days in the quarter in Israel.
In addition.
Challenges with filling open positions of course, our FTP operation you need Israel and the U S.
Also it proved to be a headwind.
We are not alone in this respect as many companies have reported similar challenges in hiring.
We are making progress to filling these positions in the fourth quarter and we expect to have the remaining open positions filled in the first quarter of 2022.
Adjusted gross margin in FTP of 35, 1% was compared with 42, 6% in the second quarter.
It was impacted by approximately $2 4 million or factors.
Including labor inefficiencies.
The reduction of inventory and unfavorable unfavorable product mix.
Lower volume and unfavorable unfavorable exchange rates.
In the fourth quarter, we expect gross margin for FTP, we cover to close to 40% based on expected volume and inventory levels and as we make progress filling open positions and training the new stuff book.
Book to Bill for FTP was one point 38 in the third quarter.
And the backlog grew 19, 7% sequentially.
Which reflected an increase of course, the FTP product portfolio, including precision foil resistors and advanced sensors.
We are in the process of ramping up the new capacity for advanced sensors, and we expect a yes to achieve sequential growth in the fourth quarter.
The full sensor segment reported another quarter of strong performance.
Third quarter sales of 17, $717 7 million improved.
Two 8% from the second quarter.
And with 27.7% higher than a year ago.
We continue to be pleased with our initiatives to expand full sensor OEM business as OEM revenues grew 43, 8%.
For the first nine months of 2021 compared to the same period a year ago.
Financially for sensors continued to execute well achieving an adjusted gross margin of 35, 1% in the third quarter.
This decline slightly slightly from 35, 4% in the second quarter, but improved from 31, 2% a year ago due to higher sales.
Book to Bill for force sensors of one point or one.
Sales for weighing and control systems in the third quarter of $31 5 million increased 26, 9% sequentially and 51, 7% from a year ago.
Quench Lee the higher sales in the third quarter reflected the addition of a full quarter of sales for D. P. S.
As well as higher sales of DSI and kelp all of that.
In the first full quarter, we'd be with us.
T S performed well both in terms of sales and profits.
With the integration going smoothly.
We are even more encouraged about dps long term growth prospects as it should continue to benefit from secular trends in safety testing for automotive and military applications.
As expected there.
Third quarter sales from our truck way one way initiatives were negatively impacted by approximately 300000 due to lack of industry wide supply of new trucks and vans chassis and components.
We expect these shortages to continue to impact revenues and orders by approximately 500000 in the fourth quarter as we closely monitor.
Chassis and component shortages in Europe.
Adjusted gross margin in the third quarter for WCS was 52, 5%.
And improved from 46, 6% in the second quarter, mainly due to the addition of Dts.
Higher revenue of cattle can be a site for that.
And favorable product mix.
In terms of order trends in WCS segment.
Orders declined seven 3% sequentially.
While book to Bill was one one for our project driven steel related products reflected.
Little pattern as higher orders for killed were offset by lower orders for DSI.
Book to Bill combined full Kelton DSI was 1.17, which is a positive indicator for revenues for 2022.
Before turning the call to Bill.
I'll make a few additional comments in terms of Covid all our facilities are currently open and operational.
And we continue to be proactive in taking measures were needed to protect our employees and our customers.
We believe that our operational focus on excellence.
And the strategic investment.
Our businesses willing will enable us to accelerate our long term growth.
And given our solid cash flow and balance sheet. We believe we can add to that growth.
Additional acquisitions of high quality businesses.
Our portfolio, which will expand our market and generate attractive returns.
I will now turn it over to Bill Clancy for additional financial details Bill.
Thanks, Dave.
Referring to page six and the reconciliation tables of the slide deck in the third quarter of 2021, and we achieved revenues of 82.1 million gross profit was $31 8 million or 38, 8% of sales.
Operating income of $7 3 million or eight 9% of our revenues and diluted earnings per share of <unk> 39 cents.
On an adjusted basis, which we lay out in a reconciliation table in the press release, our gross profit was $34 3 million or 41, 8% of sales.
Operating income was $9 7 million or 11, 8% of sales and diluted net earnings per share was 52 cents.
Our third quarter 2021 revenues grew eight 8% compared to $75 3 million in the second quarter and were 27, 4% above the third quarter a year ago.
Foreign exchange for the third quarter of 2021 positively impacted revenues by 900000 compared to a year ago and negatively impacted revenues by 500000 as compared to the second quarter of 2021.
The gross margin in the third quarter was 38, 8% compared to 39, 6% in the second quarter.
On an adjusted basis.
Third quarter gross margin of 41, 8% as compared to 42, 3% in the second quarter of 2021.
Which is excluding $1 2 million of acquisition purchase accounting adjustments.
1 million of facility start up costs for advanced sensors.
101000 of COVID-19 related costs.
Our operating margin was eight 9% for the third quarter of 2021.
Our third quarter adjusted operating margin was 11, 8%.
Excluding the adjustments I just mentioned above.
Yeah.
Selling general and administrative expenses for the third quarter of 2021 were $24 6 million or 30% of revenues as compared to $19 1 million or 28, 3% of revenues for the third quarter of 2020.
The increase in SG&A of $5 5 million, mainly relates to $3 8 million for the Dts acquisition.
800000 for bonus accruals 500000 for foreign exchange rate impact.
200000 of wage increases and 200000 of other costs.
The adjusted net earnings for the third quarter of 2021, or seven 1 million or 52 cents per diluted share.
Compared to $5 3 million or <unk> 40 per diluted share in the third quarter of 2020.
Adjusted EBITDA was $13 7 million or 16, 8% of revenue.
<unk> to $10 6 million or 15, 8% a year ago.
Capex was $2 9 million, the majority of which reflects purchases and related infrastructure for the new advanced sensors facility.
As a result of these investments we generated free cash flow of $3 million for the third quarter of 2021 as compared to $1 4 million for the third 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 purchase capital expenditures to be in the range of 15 million to $17 million for the full fiscal year 2021.
The GAAP tax rate in the third quarter was 23, 4%, which includes a onetime tax benefit of approximately $600000 associated with the Dts acquisition.
We are assuming an operational tax rate.
In the range of 25%, 27% for the full year of 2021.
Moving to slide seven.
We ended the third quarter with $75 5 million of cash and cash equivalents.
Sort of long term debt of $67 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.
Regarding the outlook.
For the fourth fiscal quarter, we expect net revenues to grow sequentially and be in the range of 86 million to $94 million at constant third fiscal quarter of 2021 exchange rates.
Yeah.
In summary.
We achieved solid results in the third quarter in spite of the hiring challenges in FTP.
We've completed the manufacturing transition to our new advanced sensors facility.
The integration of Dts is going smoothly and they are performing well.
Given our strong backlog and book to Bill we are anticipating a strong fourth quarter and a good start for 2022.
With that let's open the lines for questions. Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speaker phone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question will come from John Friends Rab of Sidoti <unk> Company. Please go ahead.
Good morning is even bill how are you doing today.
Morning, John.
I can just start where you left off.
And S T P and the revenue outlook.
Really strong quarter quarterly guidance for the fourth quarter, but you mentioned earlier that is at about four to 5 million. It sounds like of deferred revenue in FTP, that's being pushed into the fourth quarter. So my question is.
<unk> is a fourth quarter sustainable at those levels or is this pent up demand. It's gotta be addressed one time, and then maybe will soften up as we enter into 2022.
Okay.
At this point in time, we see a continuation of a very strong business environment in FTP as I indicated before June the tight labor market, particularly in Israel and India in India. In eight states has made it more difficult to fill open positions and to minimize the employee.
Overall for advanced sensors, and full precision resistors, we estimate the labor labor availability challenges impacted.
In Q3, a full two 5 million is the is going to change due to the fact that we have already started to make adjusted to the pay rates to become more competitive and more attractive in those are.
And those come in at the current labor market and we expect to see it.
Significant improvements already in Q4.
Feeling all the open positions and to <unk>.
Start to train the new stuff we expect.
To have the majority of all the open positions to be filled by the end of first quarter. Please bear in mind that also with the transition of advanced sensors to the new facility has we had to slow down.
Any factory capacity.
In order to complete the transition so the expectation is that as we.
It could start to ramp up advanced sensors post transition, we will increase the capacity roundabout two through the end of Q4 by 20% in respect to Q3 and of course. This will continue to grow also in Q1 and as we fill in those positions. We are also expecting to ramp up so.
Given the solid the business environment in FTP, and the storms and the solid backlog.
The expectation is to continue and improve the revenues for this 46 reporting segments.
Got it got it so the so when I look at the adjusted gross margin profile in the FTP in the quarter, the sequential 700 basis point drop.
It sounds like a.
A million of it was due to the transition.
What was the rest of it to four can you kind of walk me through that again I made a mistake that.
Okay very good so if we look at the just the adjusted gross margin for FTP, we are looking at an impact of $2 $4 million.
Right 500 related related to labor inefficiencies due to a fairly high turnover, including constrains on production due to unfilled head count as I indicated before 600 right.
Okay.
And inventory levels in respect with the prior quarter, then we have an exchange rate of 300.
And for hundreds of unfavorable product mix. So if we exclude so called the singularity.
Short term single out a piece of the 400 unfavorable product mix.
And the fact that the labor efficiencies will start to improve and the inventory effect I think that you will see.
At least they need you.
You you will see an improvement and this is why we have indicated that we see an improvement given also the volume increase going back to the 40% range in FTP in Q4.
Got it perfect.
This shifting.
I'm, sorry, I didn't mean to cut you off go ahead.
No no no no go ahead I just had adjusted gross margin of 40% in Q4.
Perfect all right and just switching over to D. T. S. Can you talk a little bit about how much integration you have that remains at TTS, the kind of timeline, you're talking about there and what was the contribution in Dts.
On Wink fall in the quarter.
All in all of Dts has contributed $7 6 million during the quarter, we tend to adjust that.
With an adjusted gross margin of 68, 7% and then adjusted itself 27 of 27, 5%.
So it was quite sizable and powerful yes incremental contribution of Dts too to WCS.
As I indicated in the past quarter and post to.
Post acquisition, the first six months, the integration ease with PPG and with the let's call it with the parent companies.
Policies and standards and the integration with <unk>.
We with the with the IP systems and all the remaining group wide.
Core sales.
Oh Jeez would come.
In in the <unk>.
Into next year. So at this point in time.
The integration of Dts is with the systems and policies and.
<unk> being applied as part of the P. S. So we are on plan as we indicated before.
Okay. I guess, just one last question with the passage of the infrastructure Bill do you see that as a net benefit to your company or is it neutral.
Okay.
Okay.
The infrastructure will be well, we are selling we are selling.
We have some products that they'll being sold today to the infrastructure related business on one hand, we have advanced sensors, which is selling strain gauges to unseat tons do you. So based companies well providing infrastructure services if it's full.
Building bridges complete testing of structures on the other hand in force sensors as you may recall, the part of our OEM business goes to fell steel second tier construction equipment companies.
Sorry.
So the expectation is that it would provide us some tailwind.
When we are going to see.
Larger investments going into the infrastructure in the United States.
Okay, great. Thanks for taking my questions I'll get back into queue.
Again, if you have a question. Please press Star then one the next question comes from Sarkis <unk> of B Riley Securities. Please go ahead.
Hi, Thank you for taking my question here.
Bill really strong book to Bill and backlog here I guess it sounds like the expectation is for for the tailwind to kind of continue here.
The first part of 'twenty two.
Part and parcel to that can you maybe talk about the evolution of gross margin for each segment I think if we look at FTP.
You said.
Rebounding back to 40%, but I guess as I look at force sensors, and weighing and control systems.
Help me understand the evolution of gross margins, there, especially in light of the strong backlog and book to Bill ratios.
Okay. So.
Let's let's talk about full sensors, I think that well as you may have seen in full sensors already in the last few quarters, we have been reporting and meet 30% gross margin at the level of revenue.
17% to $18 million, which is a big change from prior years at this point in time given the dip.
Current revenues, we believe that and as we indicated in the past it.
To to support the low 30% to meet 30% gross margin for full sensor. It is feasible and that's the expectation going forward given.
Those sales revenues the additional tariff costs that we have incurred by our manufacturing in China and selling into the United States will offset by additional.
Price increases through to our customers so.
The load put 30 low 30% to mid 30% for force sensors is sustainable.
Moving to WCS.
WCS.
This is really a I mean, we are reporting good I believe for the first time gross margins of over 50% 50.
50, 52, 5% and I think this is the first time, we see the full effect of D. P. S.
You know at the end it at the end of the day.
The mix effect for WCS, we have the project driven products like DSI Dts killed.
Gross margin of over 30% very very strong.
In respect to our onboard weighing forces swing, which other over 40% so.
Those revenue levels.
Given the backlog all sustainable I think that <unk>.
Given the product mix.
Gross margin between and again it may vary between high forties to low 50% is feasible.
For this reporting segment going forward.
Got it that's very helpful. Thank you for that and then I guess, if I kind of step back and think about the level of Capex now that you've completed.
<unk> sensors facility what what.
Would you say would be your kind of normalized capex and inclusive of any of the potential positive NPV projects that you'd like to bring bring on let's say for the next year or so.
Okay.
So it keeps you may recall that in Q1, when we speak about our initial projects and prospects.
For this year it was around 99, 9% of revenue.
9% nine.
9% of revenue, which is fairly high due to some substantial projects.
And as we are going to finish as bill indicated between 15% to 17% it take us to a more normalized level of 5% revenue where the company in a normalized time should run between.
5% topics for 4.5% Capex. The fact that the Covid effect has pushed out many of the automation project for full precision I mean.
Okay, Let me take a step back one of the major projects was advanced sensors and these are the infrastructure and the capacity to support 30.
40% higher capacity and this has been completed the next step would be in order to once we reach the capacity limitation to increased advanced sensors capacity. In addition to that there was a big part in the original plan in 2021 of precision because this those automation.
In order to reduce the cost base. Unfortunately, much of those projects were pushed out due to the fact during COVID-19.
We were not able to get our vendors to travel and lead times for the equipment manufacturing has been extended significantly.
So I would say that.
All in all the 9% that initially we have been planning to invest this year, which.
All of them has very good return on investment probably will be pushed out into 2022 as we are in the process of getting this equipment are.
Being installed and now since the situation has been.
In a way improved.
In the United States and to some extent in Europe, we are able to get vendors.
Vendors installing the equipment and getting those equipment fully operational. So so this is gil shift from four and a half.
5% D C as topics of revenue into the 9% next year.
Great that's super helpful and one final one for me here.
As you think about the environment and as you think about potential headwinds from inflation or supply chain.
Situation.
Are you able to pass on any of these potential price hiccups to your customers and how is that conversation going is it fairly easy as it's difficult just kind of wanted to get a sense for that.
You know price increases he's never popular.
Never a popular subject with customers.
The fact that we have to make.
I would say.
Okay.
Some changes in the cost structure in order to hire or to filling those positions will require last week, which we already started to initiate before to make changes in order to maintain the gross margin that we have been used to so we were able in FTP I would.
Say two allowed you to at least a large extent we were able to.
Fly ash price increases, which we are going to see to some extent naturally we are not we cannot apply it on the backlog, but as new orders are being placed we will see already.
Some effect already in Q4 and they're in a much larger effect going into next year offsetting those wage wage increases on the other hand.
We are able to increase our price we were able to increase prices in order to.
Central to compensate the tariff costs. So we are so we are able to do it in a I would say.
In many of our product lines in some cases.
This will offset the cost the additional cost any and in other cases, we should just enjoy the benefit of those upsides, but no doubt that we see some old material.
<unk> increased its not significant at this point in time, which.
Which would affect the P&L and of course, the logistics cost increase which we already seen already in the last few quarters.
Great. Thank you Steve.
The next question comes from <expletive> Ryan of Colliers. Please go ahead.
Thank you.
Just to refresh on advanced sensors, you know prior to the expansion you're capacity constrained.
Now the you know the facilities online can you give us.
How what's your current capacity is there.
How much you're bumping up against that already.
And is this allowing you to you know.
Go to market, maybe a little bit more aggressively seeking new business opportunities.
Okay. So that's.
That's a that's a very good question.
So let me say that first of all the the advanced sensors. The book to Bill was one two so we can continue to see a very strong business environment for advanced sensors.
We have seen as expected Q3 shipments were negatively impacted by approximately 7% compared to the second quarter due to the manufacturing transition and the labor challenges I I've been discussing.
Yeah.
The intention is.
I mean, as we are as we all continue to ramp up and to hire more people and we are currently ramping up the expectation is to see by the end of this quarter of 20%.
All they do.
Revenue increased in respect to Q3.
And the expectation is to have to potentially have another 20% increase in Q1 at this point in time.
We have the backlog to support that increase.
We would expect to be back in Q4, as we finalize the transition and hire the people back.
For 40 40 million dollar annualized and as we move on we are going to we we have a potential capacity to produce a at this point in time $50 million in revenue annually.
As and when they needed basis, we are going to add equipment at the bottlenecks.
As in if needed given the given the backlog and the order intake.
Okay.
Thank you for that.
And just looking at your OEM business under four sensors have there been any new wins, there can you describe that pipeline of opportunity.
For the OEM in full sensors that we have seen.
As I indicated and increased for the first nine months, if I am looking quarter over quarter at this point in time most of the first steel customers has softened the demand for force sensors, which has been.
Oh, which has been balanced so offsets by our more generic thoughtful the weighing business. So are we are we are having a few opportunities at some new designs, but at this point in time.
We do not see it based.
Based on our based on the discussions we had with the large first steel Oems.
We have they have some inventory.
Therefore, they have reduced.
The bookings in.
In Q3.
Okay great.
We do not.
We do not see the same level of pressure as we have seen.
Two quarters ago, but we are pretty confident that once they will start to deplete their inventory levels, we're going to see the demand coming back, but we are ready with the capacity.
And in the.
To support them.
Okay I appreciate that thank you.
Yeah.
Once again, if you have a question. Please press Star then one the next question will come from Matt Dane of Teton Capital management.
Great. Thank you wanted to to ask a little bit further around the advanced sensors, a facility opening up and beyond the capacity expansion that that facility provide does that add additional capabilities around your manufacturing, where you can tweak the product say different ways and potentially address that.
Different customer needs in a way that you historically haven't been able to and an add add additional opportunities like that as you continue to go to market with its product line.
The advanced sensor with the fact that we are that we have opened that they.
We have finalized the transition of the advanced sensors facility does not allow us does not give us any more housing deal design capabilities that.
The advantages in the advanced sensors platform in respect to design cost base and complexity in terms of board that already came to fruition as we have developed.
And as these.
Form has been gaining momentum the main purpose for the new facility is really to meet future demand based on the final of those are in the project in order to support future volume.
As I may have indicated in the last quarter.
Consumer electronics was for example, part of that.
Part of this.
Improve the environment and we have added.
Another important customer for the.
For in the consumer electronic end markets. So as we continue.
Sure.
As we continue and ramp up and provide more I.
I would say capacity capabilities, we are going to see I believe more opportunities, becoming an materializing into revenues because now we have the.
The infrastructure equipment and as we move along also people in order to support those opportunities.
And D V. You highlighted a couple of consumer electronic opportunities are ones that you have that are getting rate ramp is that really an area of opportunity that you see as one of the bigger growth areas for advanced sensors going forward as consumer electronics and <unk>.
Opportunities in that state.
Consumer electronics historically is consider the high volume.
Applications. This is why it's a you know it's always.
Always an opportunity as we're looking from a revenue perspective, another opportunity that we have been working on a few medical opportunities which to that extent. They may not have the same volume type, but they have much higher selling price due to the complexity.
And the mission critical applications, but for me she'll dollar value. They could also turn into significant opportunities. So we have consumer we have automotive tooling equipment, we have medical and we have some other opportunities.
But once we laid down.
Once we lay out the infrastructure and as we hired the people.
I.
I truly believe that we would be much much quicker to be able to capitalize on those opportunities because we would have the capacity to support them.
Those customers.
Great. Thank you.
Okay.
This concludes our question and answer session I would now like to turn the conference back over to Steve Cantor for any closing remarks.
Thank you Carrie before closing I want to note that we will be presenting at the Needham conference in January and hope to see you there virtually.
Thank you all for joining our call today and have a great day. Thanks.
Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a great day.
[music].