Q4 2023 Vishay Precision Group Inc Earnings Call
Participants
Steve Cantor; Senior Director of Investor Relations; Vishay Precision Group Inc
Ziv Shoshani; CEO and President; Vishay Precision Group Inc
William Clancy; EVP and CFO; Vishay Precision Group Inc
Griffin Boss; Analyst; B. Riley Securities FBR
John Franzreb; Analyst; Sidoti & Company
Presentation
Operator
Thank you for your patience, everyone, that VPT. Q4 and FY 2023 earnings call will begin shortly during the presentation, if you will have the opportunity to ask a question by pressing star, 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 Chad, 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 followed by two. I will now hand you over to Steve Cantor, Senior Director of Investor Relations. To begin. Steve, please go ahead.
Steve Cantor
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, VPG. sensors.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 10-K for the year ended December 31st, 2022, and our other recent SEC filings on the call today are Ziv Shoshani, CEO and President and William Clancy, CFO.
And now I'll turn the call to Ziv for some prepared remarks. Please refer to slide 3 of the quarterly presentation.
Ziv Shoshani
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 EBITDA and EBITDA 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 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 4.3% 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 Solutions 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 EBITDA 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 5, beginning with our Sensors 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 OAMS.
Moving to slide 6, turning to our weighing Solutions segment. Fourth quarter sales of $30.4 million increased 5.1% from $29.0 million in the third quarter, but we're 8.0% lower than a year ago. Sequentially. The increase was driven by higher OEM sales for precision ag and construction applications and higher sales in general industrial, which offset lower sales in the transportation markets.
Wing 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 7, turning to our measurement systems 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 EMS market. The decline in book-to-bill reflects the timing of customers' projects in the fourth quarter. Still 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's specific opportunities with new products such as our development of coke solution for aluminum manufacturing In addition, we are addressing opportunities in the Indian market, which is currently small, but is expected to grow at double digit over the next several years. We have added local sales and service support capabilities to meet this growing potential.
Moving to Slide 8. 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 its internal investments, we completed growth focus and operational capability and automation projects in 2023. For example, we have increased 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 more historical levels 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 day-to-day.
William Clancy
Referring to slide 9 and a reconciliation table of the slide that our fourth quarter 2023 revenue 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 (inaudible) $1.560 million of restructuring costs.
Selling, general and 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 $0.61 per diluted share compared to $6.4 million or $0.47 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 revenue for 2024.
We are budgeting $14million to $15 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 you 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 or 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 revolving bank debt by $29 million, which we estimate will result in net interest savings of approximately[ $1 million] in 2024, assuming no additional borrowings.
Moving to Slide 10. We ended the fourth quarter with $84 million of cash and cash equivalents and total outstanding long-term debt of $31.9 million which reflects the paydown 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.
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 materials development with our high value, precision measurement and sensing products for our customers. With that, let's open the lines for questions. Thank you.
Question and Answer Session
Operator
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 from the parent. To ask a question. Please ensure your phone is unmuted locally.
Our first question today comes from Griffin Boss B. Riley Securities FBR Securities. Please go.
Griffin Boss
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.
William Clancy
Good morning. And I think that given the our sales guidance and the level of investments CapEx, but we are planning to hold that we intend to invest in 2024. And I would say that it's quite sustainable there. Q4 performance, naturally, the cash generation will also depends on the receivable on the accounts receivable and payable. You know, I would say fluctuation or working capital fluctuations, but all in all, the Q4 performance are our sustainable given that the level of revenue as we move into 2024. Okay.
Griffin Boss
Yes. Great crazy. Thanks for that. And then on just shifting gears, in terms of order flow like you said it's sort of a mixed bag on measurement systems. Seems that soft, while there could be some green shoots in 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, you know, you're positioning for a return to growth in the back half of the year?
William Clancy
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 going mid-singles on the test and measurement, we see an upside of 6.3% still upsides, industrial weighing upside, general industrial and upside. And given the improved business environment, which is, which is the outcome of lower inventory in the pipeline in the last in the last, I would say, four quarters.
And we also and we also see some other market 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 improvement and the improvement in order intake in Q4 of 2023 in the sensors and in the weighing Solutions segment.
We believe that all, as I indicated, has bottom up In sum, 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 in 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 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 cylinder intake improvement.
Griffin Boss
Great. Yes, 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 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?
William Clancy
Well, I would say that we, as I indicated in our last call. We have been in dialogue with few companies. Some of the projects has been moving forward. While others, we are still in discussions, you know, this is a period quite a bit of uncertainty. Therefore, some of the companies are still contemplating regarding deposits. But all in all, the Q level of M&A potential is increasing. And we are and we are very positive about that, but so far and I have nothing to report. I have not no nothing tangible to report, but this activity takes a very high priority for the Company.
Griffin Boss
Great. Okay. Fair enough. Thanks for taking my questions. Appreciate it.
Operator
The next question from the line is from John Franzreb - Sidoti & Company
John Franzreb
Good morning, guys, and thanks for taking the questions. And David, I'd like to start with the usual commentary on the measurement systems business and the deferral of some project activity. Is that entirely surrounding the counter side of that business? Or is there something more that we should be cognizant of?
William Clancy
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 include a record of record orders for DTS. in the avionic military and space business in the prior quarter. The decline if the book-to-bill reflects 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 embryonic military and space were down from the record level, we expect business environment improvement for the avionic, military and space going forward. And this is based on our business development funnel and the projects that are the projects that are expected two to get finalized in the coming quarters and turn into orders. So despite the fact and 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 March in 2020 locations.
John Franzreb
So right, so so was up a little bit sequentially. DTS. that was down a lot because they had a big order flow in Q3 and that should stabilize in the first half.
William Clancy
Is that what we're looking at there and it is expected to modestly improve and improve much more in the second half of the year,
John Franzreb
absent Xome? And I'm curious with what's driving the higher tax rate. These days seems to be ticking up a lot.
Steve Cantor
Yes. So John, so good morning. So, the higher tax rate is predominantly we have a geographic mix of income. So depending upon where our income are being generated right now, it's being generated in higher tax rates than we've seen in the past. And we've also within this GAAP tax rate this year had some one-time costs were for tax positions. But as we mentioned, you know, we're going to participate 27% operationally in 2024.
John Franzreb
By my reckoning, this is the most aggressive share repurchase quarter. I think since the Company went public on. Can you just kind of walk through the decision process there and why you so aggressive on repurchasing stock?
Steve Cantor
Well, John, as you recall, and I think we've talked about this as part of our capital allocation. We've always listed as new internal growth M&A and the buyback of the stock was always one of the top parameters for our capital allocation, and we will continue to incorporate all of those attributes and the capital allocation. And we'll continue to and we're continuing to be very active in the market today.
John Franzreb
Okay. And one last question on revenue growth. You mentioned that a couple of potential items in new into the segment presentations and data centers and a new product development in MS. If you then look at like near term revenue catalysts opportunities, especially new ones, which are the most viable near-term revenue opportunities for the Company.
William Clancy
So if we are looking at 2024 we are looking in in two verticals. One is the vertical of the macro macro improvements, macro economy improvement, given the fact that we have seen our inventory is being depleted in the queue. And I would say that part of that would the that would run the improvement would be test and measurement for semiconductor equipment for for the sensor piece in addition to the ERM, in addition to the general industrial that is also expected to improve.
The other piece is our business development EBIT in respect to new applications and selling to new applications and new products that we have developed. In that case, I could give an example. And what I did mention regarding the aluminum based systems, that's a new completely new market for us. And we have just it started 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 human ID application where we are at the very final design stage. But once the prototype, if the prototype phase is going to take off the expectation is over time the go, it's also going to gain more volume. And then for example, I have on the weighing solution side that we have developed and you have cost very cost competitive product, which we have applied for patent, and we believe it's also going to gain momentum so that 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 capture new business.
John Franzreb
Perfect. And with that, actually, I'll get back in queue and let somebody have some questions. Thank you, sir.
Operator
Thank you. As a reminder, to ask any further questions, please press star followed by one on your telephone keypad.
John Franzreb
Now we have a follow-up question from John Franzreb. Please go ahead. Well, I have to ask about the three-to-five-year long-term targets. Do you still think are viable given the protracted downdraft we've had in the booking order profile?
William Clancy
Well, I would say, John, if you can recall, we put out three years' plan in respect to revenues 45%. If I can recall, gross margin and then we also said in RMB, as you could see, despite the 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 we continue to look at all. We have a longer-term plan regarding operational excellence with respect to efficiency, improvement for the relocation sourcing, cheaper materials, which is growing, which in which in combination with the top line revenue is going through in items where we are and there a high level of confidence that we are going to meet the 45%, the gross margin, which will also issue new profitability target so so why the mix so called the current mix mixed in, I would say, mixed business environment. I am quite confident that the plan that we have laid out of the three five-year plan is very viable.
John Franzreb
Okay, excellent. That's good to hear. And just one last question. Any update on production, our capabilities in Israel? Has it still been a non-factor? I think be prudent to push up on that topic?
William Clancy
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 normal levels there actions that we have taken in prior quarters in respect to securing raw material shipping finished goods in advance and working with our freight forwarders still applies. There is no issue whatsoever with our operation that we are working with full efficiency and at optimum capacity. So our operations in Israel, a lot of the operating impact working at a normal level.
John Franzreb
That's great to hear. Thanks for the update.
Operator
This concludes the Q&A session. So, I'll now hand over to Steve to conclude. Thank you.
Steve Cantor
Before concluding, I want to note that PPG 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, I thank you all for joining our call, and we look forward to updating you next quarter.
Operator
Thank you, everyone. This concludes today's call. Thank you for joining. You may now disconnect your lines may now.
