Good day, and welcome to the VPG Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Steven Cantor. Please go ahead.

Thank you, and good morning, everyone. Welcome to VPG’s 2021 second quarter earnings conference call. Our Q2 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 the VPG 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 31, 2020, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and President; and Bill Clancy, Chief Financial Officer. And now I’ll turn the call to Ziv for some prepared remarks. Please refer to Slide 3 of the quarterly presentation.

Thank you, Steve. I will begin with some commentary on VPG’s consolidated financial results and sales trends for the second quarter. Bill will provide financial details and our outlook for the third quarter of 2021. We are pleased with our results for the second quarter. We achieved solid sales performance of $75.3 million. We ended the quarter with a book-to-bill of 1.4, as we grew our orders 23.3% sequentially to $105.4 million, reflecting strength across our businesses and end markets, as well as the inclusion of DTS backlog. We executed well operationally and grew adjusted gross margin to 42.3%, adjusted operating margin to 12.2%, and our adjusted EPS to $0.49. We also generated strong cash flow and adjusted EBITDA margin of 16.6%. We are excited about the acquisition of DTS, which we completed in June. Moving to Slide 4; looking at the second quarter sales results in more detail. Sales grew 27.4% from a year ago and 6.7% from the first quarter. On a sequential basis, business trends were positive, and we ended the second quarter with the book-to-bill above 1.2 in all three reporting segments. The individual end markets performed as follows. In the test and measurement market, sales grew 12.9%. Demand in this market remains at strong levels as orders were at sustained levels compared to Q1, reflecting ongoing strength related to semiconductor process control and test equipment. Sales rose 24.9% in the transportation market, and orders increased 45.3% due to the inclusion of the DTS backlog. Sales to the steel market grew 8.6% sequentially, reflecting increased customer activity and improved project-driven demand. Steel-related orders continued to rebound and grew 21.4%. While sales in general industrial were up modestly, orders grew 40.2% driven by oil and gas and general tooling. Sales and orders to the industrial weighing were flat. In the Avionics, Military, and Space market, sales declined by 2.6%, while orders grew 85% from Q1, which included approximately $3 million from DTS backlog. The net result of this trend was a book-to-bill of 1.4 for the second quarter, and a backlog of $130.9 million, an increase of $30.2 million from the first quarter of 2021, which includes $7.1 million of backlog from DTS. Moving to Slide 5, turning to the results by segments. Foil Technology Products' second quarter sales of $33.3 million were 1.8% higher sequentially, primarily due to higher sales of precision foil resistors and Pacific Instrument system. Compared to a year ago, FTP sales grew 4.8% primarily driven by advanced sensors. While advanced sensors second quarter sales were 22.6% higher than a year ago, revenue moderated from Q1 due to the transition to the new manufacturing facility. We incurred $1.2 million of startup costs related to this transition in the second quarter. We expect the transition impact on revenue to extend to Q3 as we anticipate completing the move to our new facility in the third quarter. Demand for those products continued to grow, increasing approximately 19% sequentially. Backlog for advanced sensors grew more than 16% sequentially, which positions us for a good post-transition run rate. Adjusted gross margin for FTP was 42.6%, increasing from 40.4% in the first quarter as the result of higher volume, manufacturing efficiencies, and higher inventory levels. The Force Sensors segment reported another quarter of strong performance, as it continued to manage well to COVID-related challenges facing India. Second quarter sales of $17.2 million improved 1.7% from the first quarter and were 93.1% higher than a year ago. Recall that in the second quarter of 2020, this segment was adversely affected by COVID-related production limitations at our facility in India. While COVID infection rates remain an ongoing issue across many parts of India, we continue to operate at full capacity, given our exemption from COVID restrictions due to the critical nature of our products. The strategic growth initiatives to expand the Force Sensors OEM business continue to perform well, with OEM revenue growing 7.5% sequentially. Financially, Force Sensors adjusted gross margin of 35.4% in the second quarter declined modestly from a high level of 36% in the first quarter, but improved significantly from 19.6% a year ago. The sequential decline was primarily due to unfavorable foreign exchanges, partially offset by higher inventories and volume. As we discussed in May, we expect gross margin for Force Sensors at comparable revenue levels and product mix to be 30% or above, given higher costs related to expanding our China manufacturing and the expected impact of tariffs for our China production products. At levels of 30% plus, this reflects step function improvements over the average margins we recorded for this business over the last several years. The book-to-bill for Force Sensors of 1.23 reflects order momentum in our other markets, mainly precision agriculture and consumer. Sales of Weighing and Control Systems in the second quarter of $24.8 million increased 18.5% sequentially and 34.5% from a year ago. Sequentially, the higher sales reflected the addition of approximately $3 million of sales from DTS, as well as higher sales of process weighing solutions and KELK products. Sales from our TruckWeigh and VanWeigh initiatives grew 123.7% from a year ago but softened 9.5% sequentially, reflecting slower industry production of trucks and vans due to shortages of IC components. We have seen increased customer interest in our solution since EU overloading regulations went into effect in May 2021, and we expect this interest to translate into orders as the availability of new vehicles improves, and EU countries continue to ramp up their enforcement of the new regulations. Adjusted gross margin in the second quarter for WCS was 46.6%, which includes adjustments for acquisition-related costs as well as COVID impacts, and improved from 44.3% in the first quarter, mainly due to the addition of DTS and higher revenue of WCS products. In terms of order trends in the WCS segment, orders grew 41.3% sequentially, reflecting the addition of DTS as well as continued demand recovery for our steel-related products. As we have discussed previously, orders for KELK and DSI are generally driven by customer CapEx projects which, in the case of KELK, typically have a two-quarter lag relative to inflection in the steel market. With regards to the steel market, the combined book-to-bill for KELK and DSI was 1.72, which is a positive indicator for revenue in the second half of this year and in 2022. The result of this WCS order trend in the second quarter was a book-to-bill of 1.56. Before turning the call to Bill, I will make a few additional comments. In terms of COVID, all our facilities are currently open and operational. Given the rise in COVID cases around the world, we continue to be proactive in taking measures where needed to protect our employees and our customers. On behalf of the Board and our management team, I want to thank all of VPG’s employees for their dedication and customer focus during this current wave of the pandemic. I also want to comment on one of the key highlights for the quarter, the acquisition of DTS on June 1. DTS is a leading manufacturer of data acquisition systems and sensors for product and safety testing. It is an established niche market leader with a strong brand in superior technology, as well as a talented management team with deep business and technical knowledge. DTS not only adds complementary technology to our platform, but it brings unique engineering capabilities centered on miniaturization, data acquisition, and system integration with sensor technology for critical testing applications. As a major supplier of embedded data acquisition and logging capabilities for crash test dummies, DTS will give us a presence in the automotive market, as well as add to our offering in the avionics military and defense market. We believe DTS will continue to benefit from the global need for specialized safety testing technology that is expanding from the automotive and avionics sectors to sports applications. Over the next 12 months, we believe DTS has the potential to generate $30 million or more in revenue, with an adjusted EBITDA margin over 20%. We are continuing to look for attractive acquisition opportunities that will further accelerate our growth and profitability.

Thanks, Ziv. Referring to Page 7 and the reconciliation tables as shown in the slide deck, in the second quarter of 2021, we achieved revenues of $75.3 million, gross profit of $29.8 million, or 39.6% of sales, operating income of $4.9 million, or 6.5% of revenues, and net earnings per diluted share of $0.29. On an adjusted basis, which we lay out in a reconciliation table in the press release, our gross profit was $31.9 million or 42.3% of sales. Operating income was $9.2 million or 12.2% of sales, and net earnings per diluted share was $0.49. Our second quarter 2021 revenues grew 6.7% compared to $70.6 million in the first quarter and were 27.4% above the second quarter a year ago. Foreign exchange for the second quarter of 2021 positively impacted revenues by $2.8 million compared to a year ago and $200,000 compared to the first quarter of 2021. The gross margin in the second quarter was 39.6% compared to 40.5% in the first quarter. On an adjusted basis, second quarter gross margin of 42.3% grew from the 40.5% in the first quarter of 2021. Our operating margin was 6.5% in the second quarter of 2021. Our second quarter adjusted operating margin was 12.2%, excluding acquisition purchase accounting adjustments, facilities startup costs for advanced sensors acquisition, goodwill impairment charges related to Pacific Instrument, and COVID-19 related subsidies. This represents an increase from the 8.7% we recorded in the first quarter of 2021. Selling, general, and administrative expenses for the second quarter of 2021 were $22.5 million or 29.8% of revenues compared to $18.6 million, or 31% of revenues for the second quarter of 2020. The increase in SG&A of $3.9 million mainly relates to $1.1 million for foreign exchange rate impacts, $1 million for bonus accruals, $900,000 related to the DTS acquisition, $300,000 for wage increases, and $600,000 of other costs. The adjusted net earnings for the second quarter of 2021 were $6.7 million, or $0.49 per diluted share, compared to $3.6 million or $0.27 per diluted share in the second quarter of 2020. Adjusted EBITDA was $12.5 million or 16.6% of revenue as compared to $8 million or 13.5% of revenue a year ago. Capital expenditures were $2.6 million, the majority of which reflects purchases and related infrastructure for the new advanced sensor facility. As a result of these investments, we generated free cash flow of $4.2 million for the second quarter of 2021 as compared to $3.1 million for the second quarter of 2020. We define adjusted free cash flow as cash from operating activities, less capital expenditure, plus sale of fixed assets. We currently expect CapEx to be in the range of $20 million to $23 million for the full fiscal 2021, which includes anticipated costs related to the new advanced sensor facility, as well as manufacturing expansion and enhancement projects for precision foil resistors. The GAAP tax rate in the second quarter was 6.1%, which includes a one-time tax benefit of approximately $1 million associated with the DTS acquisition. We are assuming an operational tax rate in the range of 25% to 27% for the full year of 2021. Moving to Slide 8, we ended the second quarter with $73.5 million in cash and cash equivalents and total long-term debt of $60.7 million. We believe that we have a strong balance sheet and ample liquidity to support our business requirements and fund additional M&A opportunities. At the outlook, given our order flow and backlog, we are optimistic about the second half of 2021 and beyond. For the third fiscal quarter, we expect net revenues to grow sequentially in the range of $81 million to $87 million at constant second fiscal quarter of 2021 exchange rates. In summary, we performed well in the second quarter, growing our margins and adjusted EPS and generating good cash flow. We had strong orders of $105.4 million across our business at a book-to-bill ratio of 1.4. We are pleased with the addition of DTS and what they bring to VPG going forward. With that, let’s open the lines for questions.

Your first question comes from John Franzreb with Sidoti and Company. Please go ahead.

Good morning, everybody. And thanks for taking the questions. Ziv, I want to start with some of the end markets here, particularly your commentary in the steel market – this flattish business, but if I heard you correctly, the book-to-bill in steel is 1.72. I wanted to talk a little bit about that; what’s the duration of the delivery times in that business? Can I put it into context for us?

Yes. Regarding the steel market, John, mainly represented by DSI and KELK products, the indication is that many companies are starting to reinvest in increasing capacity and improving cost reductions in the steel mills as metal prices are going up. We have seen strong demand with a book-to-bill of 1.72. Historically, the backlog lead time for those projects is around four to five months. Therefore, the strong order intake we currently see will be reflected in much higher sales in the second half of the year and into the first half of 2022.

Got it. I guess similarly in the avionics and defense and military business. What kind of order trends are you seeing in that marketplace? Are you seeing any kind of strength there? It’s also been kind of flattish.

Yes. We have seen an improvement in the AMS book-to-bill, which is 1.67 for the second quarter. We have seen much stronger demand coming back from projects mainly for precision resistors and Pacific Instruments, which a quarter ago was much softer. We’ve got the rebound in demand.

And is that all deliverable this calendar year?

Yes. It is expected to be shipped. The lead time for those types of products is consistent with our repeatable business; therefore, it is expected to be shipped in the second half of this year.

Got it. And just on DTS, great contribution from the business from the get-go. I wonder if you could talk a little bit about how that revenue performance is today versus maybe the pre-COVID levels in 2019. Is it up to that level to have some opportunity? Can you just put it in context for us?

DTS, as we have reported, realized $3 million of revenue, with an adjusted gross margin of 60.4% and an adjusted operating margin of 32.6%. Before we acquired them, we found that there had been no significant impact due to COVID. We see momentum for DTS business due to ongoing strength in the automotive sector, testing, and introducing new car models, which is really DTS's core business. In addition, 80% of its business is automotive safety, with also strong demand for AMS safety. Therefore, DTS continues to perform well with no significant decline from pre-COVID levels. Thank you.

The next question is from Sarkis Sherbetchyan with B. Riley Securities. Please go ahead.

Hi, good morning. And thank you for taking my question here.

Good morning.

Good morning, Sarkis.

Hi, Ziv. So, just wanted to touch on the outlook here. Pretty strong, right, $81 million to $87 million in third quarter sales. Obviously, DTS is folding into that; you’re seeing strong book-to-bill across all your segments. And just to help me with my math here, if you’re going to post let’s see, on the low end an $81 million quarter, shouldn’t EBITDA kind of be in that, let’s call it $14 million to $15 million range on the low end? Help me understand if the contribution assumptions are correct, or should we see anything different from a profitability standpoint.

As, Sarkis, we don’t give any guidance regarding profitability or margins for the next quarter. In this case, it’s Q3; only sales guidance is being provided. The sales guidance of $81 million to $87 million reflects a midpoint of $9 million higher, and we are looking at a favorable impact from the full quarter of DTS, which we would expect to be another $5 million in a full quarter effect. Additionally, we expect another $4 million to come from our steel-related products, which are KELK and DSI. In FTP, we are looking at a few factors; on one hand, we have the AS transition in Q3, which is expected to be finalized, and some lower margins may occur as we finalize the last piece of equipment. In Q4, we should see much higher revenues once the transition has been completed. Historically, Q3 is affected by seasonality in Europe, and we are also impacted by fewer working days due to Israeli national holidays in September this year. Overall, we anticipate the midpoint reflecting about a $9 million upside compared to the second quarter.

Yes, understood Ziv, and I think that kind of sets up for the next question. Regarding the order strengths, the September quarter is typically fairly seasonal for you guys. So, do you think the fourth quarter looks better than the third quarter you’ve outlined, or should we expect something in line with the guidance provided for the third quarter?

If I may say, Sarkis, we are expecting a strong second half year.

For advanced sensors, it sounds like some of the transition might have acted as a headwind to revenues in this quarter. You still expect to complete the move in the third quarter. Just wanted to get an understanding of I think you mentioned in the prepared remarks, backlog grew 16% Q-on-Q for advanced sensors. What would the run rate be for sales on an annualized basis for that product category?

So, in the second quarter, we realized $1.2 million of startup cost and we expect to incur around $700,000 to $800,000 in Q3. We are still qualifying some key equipment processes, which limits our capacity. Expectantly, by the end of Q3, once the transition has been completed, we will have an additional 25% of equipment capacity compared to Q1. Depending on the product mix and backlog, that additional capacity will support much higher revenue in Q4 once the transition is completed.

Thank you. I’ll hop back in the queue.

The next question comes from Dick Ryan with Colliers. Please go ahead.

Thank you. Ziv, with the broad end market exposure you have and the supply chain concerns we’ve heard about across the board, did you see any revenue pushed or deferred out of Q2? I know you’ve had logistic cost increases, but have there been any specific margin impacts due to the supply chain?

In regards to supply chain, we have seen increased logistics costs mainly for Force Sensors coming from Asia to Europe and the U.S.; we have been discussing with customers to increase prices or allow for additional logistic surcharges to offset this effect. Additionally, while there are discussions regarding chip shortages, we have not experienced significant impacts to our supply chain from the global chip shortage to date. Delivery lead times to our customers remain competitive, and we continue to monitor the situation closely. We are increasing inventories in some key IC components such as microprocessors where we identify a potential shortage, but we do not believe the additional costs will be significant in the third quarter. We estimated about $400,000 of additional revenue was pushed into the second quarter and likely into the third quarter, coming primarily from our own board weighing for clients, and these are the main supply chain concerns we've identified.

Okay. Great. Thank you. In Force Sensors, I think you mentioned a nice increase in the OEM business. Can you remind me of the percent increase or if you gave the actual dollar amount, and is that business coming from existing customers or are you seeing new wins?

I did identify that the upside for OEM business comes from precision agriculture as well as consumers entering new applications. I would say that we had those customers, but the business has grown as they have been designed in and are now realizing larger production volumes, mainly in precision agriculture and consumer for Force Sensors.

Thank you. On the end market test and measurement, you mentioned strong semiconductors. Are you seeing any digestion or consolidation period for your semiconductor business going through the second half of this year, or are you still seeing some pretty strong underlying trends?

For the semi-business relating to precision resistors, the demand we are currently seeing is driven by OEMs. Distributors currently have low levels of inventory, and we believe that once those inventories are depleted, and they have not placed significant orders in the last six months, we will see additional demand coming from distributors. At this point, the main demand driver for us is from OEMs. Therefore, we do not expect major changes as we move into the second half of this year.

Okay, thank you.

Your next question comes from Bill Dezellem with Tieton Capital. Please go ahead.

Thank you. A couple of questions. Relative to Pacific Instruments, and the fact they had sequential revenue growth, and yet you did the goodwill write-off; could you discuss those contrasting aspects?

Yes, Bill, I can handle that. The goodwill impairment tax is based on an accounting calculation that looks at forecasted performance. Even though we saw slight sequential increases in revenue, we still see that we're not hitting forecasted targets. Therefore, following standard accounting methodology and running through the process, we took the impairment this quarter. All goodwill has been completely written off for Pacific Instruments.

Thank you. And then totally different question. You have your revenue model that you published in prior presentations; it suggests that for $75 million in revenues, the EPS would be closer to $0.42 in that model. Why did you end up being above the revenue model?

The target model introduced in 2019 did not include the acquisition of DTS and DSI. We also need to update it for significant changes in the foreign exchange rate, especially with the Israeli shekel. You may have noticed the foreign exchange rate effect, which is significant quarter-over-quarter and also year-over-year. We are in the process of updating our model and plan to introduce it in the fourth quarter.

Great, thank you. And the implication then for the third quarter is that earnings could also be above what the model indicates?

Given the two acquisitions that were not previously accounted for in the model, I would assume you are correct. However, please note that the model encompasses not only top-line revenue but also profitability and cost structures related to the targets. Once we update the model, we can provide a more comprehensive overview that accounts for all these moving parts.

That's very helpful. I'm thinking in terms of the $0.62 to $0.87 in earnings that the model indicates for $80 million to $85 million in revenues; we should recognize that the model isn't entirely considering everything, and the two acquisitions are accretive to that model. So, that's directionally the way to think about it?

You're correct. The model did account for organic growth only, which means for every additional incremental revenue, a set percentage drops into the pre-tax level. Once we incorporate those two acquisitions, we need to factor in not only top-line revenue but fixed costs and SG&A costs associated with those companies. Therefore, a revision is necessary and will be provided.

Great, thank you. And thank you for pursuing acquisitions that are accretive and beneficial to the model.

Thank you.

The next question is a follow-up from John Franzreb with Sidoti and Company. Please go ahead.

Actually, it’s very much along the lines of the last two questions. I was going to ask how the accretive acquisitions alter that 30% to 50% incremental operating margin. So, to answer or not depending on how you feel comfortable?

We will need to revise the model. Currently, it does not account for those acquisitions or the updated exchange rates. Therefore, the top-line revenue does not correlate to bottom-line profitability in respect to the model. We simply have to revise it.

Okay, that was my follow-up question. But the revision sounds like a good thing. Congratulations.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Steve Cantor for any closing remarks.

Thank you. Before concluding, I want to note that we will be participating in a number of investor conferences in September, including the Sidoti, Colliers, and D.A. Davidson conferences. We will be posting some information about that on our website. With that, I’d like to thank you all for joining our call and have a good day.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.