Ziv Shoshani; President, Chief Executive Officer, Director; Vishay Precision Group Inc
William Clancy; Chief Financial Officer, Executive Vice President; Vishay Precision Group Inc
Griffin Boss; Analyst; B. Riley Securities
Hello, everyone and welcome to the VPG third quarter, Fiscal 2024 earnings call. My name is Ezra and I will be your coordinator today. (Operator Instructions)
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 www.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 1,995 Private Security 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 31, 2023, and our other recent sec filings on the call today are Ziv Shoshani, CEO and President and Bill Clancy, CFO. I'll now turn the call to Ziv for some prepared remarks.
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 3 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 4 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 label inefficiencies primarily in our central 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 label 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 cost 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 is our revenue recover.
I'll now review our business segment performance for the third quarter. Moving to slide 5, beginning with our central segment third quarter revenue was $28.2 million down 13.3% from a year ago and 2.3% 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 soften sequentially, primarily due to lower bookings for consumer related applications, this offset higher orders in the test and measurement in 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 the 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 the maker of infusion pumps.
Moving to slide 6 in the way solution segment third quarter sales were $25.2 million a decline of 13.1% from a year ago and 8.3% 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.O.
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 wing 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 7 turning to our measurement system segment third quarter revenue was $22.4 million down 8.2% year over year but up 6.2% 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 16.9% 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 growing markets globally for steel production.
In transportation orders soften for our DTS crash test data recorders due primarily to project timing.
Moving to slide 8, we were pleased to announce the acquisition of NOKRA 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. In 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 9 before turning the call to Bill, I want to highlight the release of our initial sustainability report. This report marks a significant milestone in VPGs 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 milestone in the future.
I will now turn it over to Bill Clancy for additional financial details.
William Clancy
Thanks, 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 41.9% in the second quarter. By segment, gross margin for the censor segment of 31% declined sequentially, primarily due to lower revenue and temporary operational and labor inefficiencies.
The weighing solutions gross margin of 35.1% was lower than in the second quarter. Primarily due to lower volume and unfavorable product mix measurement system, gross margin of 56.8% improved sequentially reflecting higher volume and favorable product mix.
Total selling general and administrative expenses for the third quarter of $26.3 million or 34.8% of revenue declined slightly from $26.5 million but 34.3% in the second quarter, operational margin was 5.1% as compared to 7.6% for the second quarter primarily reflecting the lower revenue.
On a GAAP basis. We recorded a loss per diluted share of $0.10. 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 $0.19 which compared to $0.31 in the second quarter adjusted EBIDA was $8.1 million or 10.7% of revenue as compared to $10.2 million but 13.2% in the second quarter.
Purchase CapEx in the third quarter was $1.8 million for the full fiscal year of 2024 we expect to purchase CapEx to be in the range of $10million 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 at $1.4 million related to global insurance renewals. We define a just a 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 were 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.
Operator
(Operator Instructions)
Griffin Boss, B. Riley Securities.
Griffin Boss
Hi, good morning. Thanks for taking my questions. The first I just want to be clear the labor inefficiencies that you discussed in the sensors segment. So those were completely behind you when you entered the fourth quarter. Did I hear that correctly.
Unidentified Company representative
Yes. Already in the beginning of the fourth quarter, we have seen a significant improvement regarding the inefficiencies that we have booked in in the third quarter. So that is correct.
Griffin Boss
Okay, great. And then just when I'm looking at the free cash flow for the quarter, it looks like DSOs stepped up to a relatively high, slightly higher than what it, 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, one-time step up this quarter.
William Clancy
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 $3 million one-time tax payments and $1.4 million related to our insurance program renewals. So, our anticipation would be back in the fourth quarter to be a positive free cash flow.
Griffin Boss
Okay, great. Thanks Bill.
And then just switching to new projects you mentioned Humanoid robots, you got the second customer there. It 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 $100,000 for the prototype stage. Just yes, curious the size of that second customer.
Steve Canto
Sure. So as the 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 a sizable potential upside once it comes to a full-blown production.
Griffin Boss
Excellent. Got it. Thank you, Steve and just maybe last one for me. It's nice to see the, 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 CALC business with those distribution channels.
Steve Canto
The Nokra product line, we with Nokra we purchased the technology for an adjacent product portfolio which would broaden our KELK.
We believe that the leveraging on c 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 around about, I would say mid-single digit revenues for Nokra, which would be almost doubling the 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 India, I would say investments, we believe that the that going forward, we would be more optimistic regarding steel.
Griffin Boss
Okay, great color. Thanks for taking my questions. Appreciate it.
William Clancy
Thanks Griffin.
Operator
John Franzreb, Sidoti & Company.
John Franzreb
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 viewed it about three months ago.
Are you seeing any notable changes that weren't maybe something you were expecting when we move to the second quarter results.
Unidentified Company representative
Sure. Absolutely. So first, I think John it would be important to state that we that the biggest drop in the third quarter in order intake was in the measurement systems. We had some few large projects that has been pushed out the booking from the third quarter to the fourth quarter. So, if we speak of for 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 and I would say that initially, when we had discussions with some 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, and some other test and measurement customers, we have seen that their stock level have gone down, and they started to place order in order to replenish their stock level, which means there is 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, the stock replenishment order pattern.
On the other hand, Europe and, and especially UK given the economy is steel 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 in taking 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 rate cuts and the expected and the expectation for more cuts gives us a much I would say stronger feel 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.
John Franzreb
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.
Unidentified Company representative
So, regarding the operational cost reduction beyond the continuous investment capital investments in automation and in process improvements, we continue to streamline our operations. The expectation is, I mean we are already in a further relocations of products from high level countries to our India facility from various locations in North America, in Europe and in other places, naturally, I cannot share a detailed information given hr related issues but the expectation is that the that once those projects are those projects are expected to realize multi-million-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.
John Franzreb
Understood. And then I guess lastly regarding M&A was Nokra customer of yours. Can you talk a little bit about the development of that purchase. And in addition, when you 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.
Unidentified Company representative
Nokra was not a customer. We knew Nokra 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 couldn't offer.
We have identified Nokra as a technology as a small technology company that could provide or that could fit within the celt 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 grow and no revenues in a fairly quick way.
Regarding other M&A in fact, we are looking at similar businesses like Nokra, 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.
John Franzreb
Understood. Thanks, you could take my questions. I'll get back into queue.
Operator
(Operator instructions)
Jeffrey Cohen, Mulholland Capital Management.
Jeffrey Cohen
Yes, good morning. I apologize. I got on the call late, but I'm just wondering, it looks like you repurchased some stock this last quarter. Is that right.
William Clancy
Yes, we did. Jeffrey this, we repurchased $1.9 million of stock during the third quarter.
Jeffrey Cohen
Okay. And just I'm just kind of curious how you think about in terms of M&A relative to where your own stock is selling at this point. How do you think about that.
Unidentified Company representative
So, from a capital allocation standpoint, we believe that our balance sheet could provide us could provide us supporting a stock buyback, acquiring companies and also continue to invest to support organic growth. And therefore, that's really, 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 I also consider, and this is why we have been doing that.
Jeffrey Cohen
Okay. Thank you.
Operator
Thank you very much. That ends our Q&A session I will now hand back over to Steve for any closing remarks.
Steve Canto
Thank you all for joining our call today. We look forward to updating you on VPG and our strategy for growth in the coming quarters. Have a great day.
Operator
Thank you very much, everyone for joining that concludes today's call. You may now disconnect your lines.
