Good morning, and welcome to the VPG Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Steve Cantor, Senior Director of Investor Relations. Please go ahead.

Thank you, Carrie, and good morning, everyone. Welcome to VPG's 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 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, CFO. I'll now return the call to Ziv for some prepared remarks. Please refer to Slide 3 of the quarterly presentation. Ziv?

Thank you, Steve. I will begin with some commentary on VPG's consolidated financial results and sales trends for the third quarter. Bill will provide financial details and our outlook for the fourth quarter of 2021. Slide 3. We are pleased with our results for the third quarter. We achieved solid sales performance of $82.0 million. We ended the quarter with a book-to-bill of 1.21 and a record backlog of $146.7 million, which supports our positive outlook in the fourth quarter. We achieved an adjusted gross margin of 41.8%, adjusted operating margin of 11.8% and adjusted EPS of $0.52. We also generated solid cash flow and adjusted EBITDA margin of 16.8%. The integrations of DTS, which we acquired in June, is proceeding smoothly, and we completed the move of advanced sensors manufacturing to our new facility. Moving to Slide 4. Looking at the third quarter sales results in more details. Sales grew 21.4% from a year ago and 8.8% 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 labor availability at our facilities around the world had constrained our ability to translate our strong order intake of $98.9 million into revenue. We estimate that the impact of revenue from the hiring challenges was approximately $4 million to $5 million in the third quarter related to FTP. The book-to-bill was above 1 in all three reporting segments and in each of our end markets. In terms of sales trends by market, we grew sales from the second quarter across the majority of our end markets, including transportation and avionics, military and space, which increased 14.6% and 28.4%, respectively, driven mainly by the addition of a full quarter of DTS. Sales to the steel market rebounded 47%, reflecting the timing of shipments of project-driven orders. In terms of orders, test and measurement grew 9.1%, reflecting continued strong demand, and transportation was up 5.1%. Orders were lower sequentially in our other markets, primarily for our Force Sensors OEM business as well as due to the timing of a semi-annual order from foil resistor customers, which had been placed in the second quarter of 2021. The net result of these trends was a book-to-bill of 1.21 for the third quarter and a record backlog of $146.7 million, which increased $15.8 million from the second quarter of 2021. Moving to Slide 5. Turning to the results by segment. Foil Technology Products third quarter sales of $32.8 million were 1.6% lower sequentially and were essentially even with a year ago. Sales of precision foil resistors remained at a sustained level sequentially, driven by continued good demand from semiconductor test equipment. Advanced sensors achieved another solid quarter as we completed the transition to the new facility. As expected, AS 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 across our FTP operation in Israel and the U.S. also 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 in 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% compared with 42.6% in the second quarter, was impacted by approximately $2.4 million of factors, including labor inefficiencies, a reduction in inventory and unfavorable product mix, lower volume and unfavorable exchange rates. In the fourth quarter, we expect gross margin for FTP to recover to close to 40% based on expected volume and inventory levels, and as we make progress in filling open positions and train the new staff. Book-to-bill for FTP was 1.38 in the third quarter and the backlog grew 19.7% sequentially, which reflected an increase across 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 AS to achieve sequential growth in the fourth quarter. The Force Sensors segment reported another quarter of strong performance. Third quarter sales of $17.7 million improved 2.8% from the second quarter and were 27.7% higher than a year ago. We continue to be pleased with our initiatives to expand Force Sensors OEM business as OEM revenues grew 43.8% for the first nine months of 2021 compared to the same period a year ago. Financially, Force Sensors continued to execute well, achieving an adjusted gross margin of 35.1% in the third quarter. This declined slightly from 35.4% in the second quarter, but improved from 31.2% a year ago due to higher sales, a book-to-bill for Force Sensors of 1.01. 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. Sequentially, the higher sales in the third quarter reflected the addition of a full quarter of sales for DTS as well as higher sales of DSI and KELK products. In the first full quarter, with us, DTS performed well, both in terms of sales and profits. With the integration going smoothly, we are even more encouraged about DTS long-term growth prospects as it should continue to benefit from a secular trend in safety testing for automotive and military applications. As expected, third quarter sales from our TruckWeigh, VanWeigh initiatives were negatively impacted by approximately $300,000 due to a 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 $500,000 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 KELK and DSI products and favorable product mix. In terms of order trends in WCS segment, orders declined 7.3% sequentially, while book-to-bill was 1.14. Our project-driven steel-related product reflected a cyclical pattern as higher orders for KELK were offset by lower orders for DSI. Book-to-bill combined for KELK and DSI was 1.07, 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 where needed to protect our employees and our customers. We believe that our operational focus on excellence and the strategic investments in our businesses 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 with additional acquisitions of high-quality businesses to our portfolio, which will expand our markets and generate attractive returns. I will now turn it over to Bill Clancy for additional financial details.

Thanks, Ziv. Referring to Page 6 and the reconciliation tables of the slide deck. In the third quarter of 2021, we achieved revenues of $82.0 million, gross profit of $31.8 million or 38.8% of sales, operating income of $7.3 million or 8.9% of revenues and diluted earnings per share of $0.39. On an adjusted basis, which we lay out in our 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 $0.52. Our third quarter 2021 revenues grew 8.8% 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 $900,000 compared to a year ago, and it negatively impacted revenues by $500,000 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 and $100,000 of COVID-19-related costs. Our operating margin was 8.9% for the third quarter of 2021. Our third quarter adjusted operating margin was 11.8%, excluding the adjustments I just mentioned above. 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, $800,000 for bonus accruals, $500,000 for foreign exchange rate impact, $200,000 of wage increases and $200,000 of other costs. The adjusted net earnings for the third quarter of 2021 were $7.1 million or $0.52 per diluted share compared to $5.3 million or $0.40 per diluted share in the third quarter of 2020. Adjusted EBITDA was $13.7 million or 16.8% of revenue compared 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 one-time tax benefit of approximately $600,000 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 7. We ended the third quarter with $75.5 million of 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 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 2021 exchange rates. 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.

The first question will come from John Franzreb of Sidoti & Company.

I'm going to start where you left off, Bill. In FTP and the revenue outlook, really strong quarterly guidance for the fourth quarter. But you mentioned earlier, Ziv, that there's about $4 million to $5 million, it sounds like of deferred revenue in FTP that's being pushed into the fourth quarter. So my question is, is the fourth quarter sustainable at those levels? Or is this pent-up demand, it's got to be addressed one time and then maybe will soften up as we enter into 2022?

At this point in time, we see a continuation of a very strong business environment in FTP. As I indicated before, John, the tight labor market, particularly in Israel and in the United States has made it more difficult to fill open positions and to minimize the employee turnover for advanced sensors and for precision resistors. We estimate that the labor availability challenges impacted in Q3 of $4 million to $5 million is going to change due to the fact that we have already started to make adjustments to the pay rates to become more competitive and more attractive in the current labor market, and we expect to see significant improvements already in Q4 to fill in all the open positions and to start to train the new staff. We expect to have the majority of all the open positions to be filled by the end of the first quarter. Please bear in mind that also the transition of advanced sensors to the new facility we had to slow down manufacturing capacity in order to complete the transition. So the expectation is that as we start to ramp up advanced sensors post-transition, we will increase the capacity by about 20% in Q4 compared 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 business environment in FTP and the strong backlog, the expectation is to continue and improve the revenues for this reporting segment.

Got it. Got it. So when I look at the adjusted gross margin profile in FTP in the quarter, the sequential 700-basis-point drop, it sounds like $1 million of it was due to the transition. What was the rest of it due for? Can you kind of walk me through that again? I might have missed that.

If we examine the adjusted gross margin for FTP, we note an impact of $2.4 million, which includes $500,000 from labor inefficiencies due to high turnover and production constraints from unfilled positions. Additionally, there is $600,000 related to inventory levels compared to the previous quarter, as well as $300,000 from exchange rates and $400,000 from an unfavorable product mix. Excluding the short-term impacts of the unfavorable product mix and considering that labor efficiencies are expected to improve along with inventory effects, we anticipate an improvement. This expectation is reinforced by the expected volume increase returning to the 40% range in FTP in Q4.

Got it. Perfect. And just shifting, I'm sorry, Ziv, I didn't mean to cut you off. Go ahead.

No, no. Adjusted gross margin of 40% in Q4.

Perfect. All right. And just switching over to DTS. Can you talk a little bit about how much integration you have that remains at DTS, the kind of the timeline you're talking about there? And what was the contribution in DTS on weighing control in the quarter?

All in all, DTS has contributed $7.6 million in the quarter with an adjusted gross margin of 68.7% and an adjusted EBITDA of 27.5%. So it was quite a sizable and powerful incremental contribution of DTS to WCS. As I indicated in the prior quarter and post-acquisition, the first six months, the integration is with VPG and with, let's call it, with the parent company's policies and standards and the integration with the IT systems and all the remaining group, while the core sales synergies would come in the next year. So at this point in time, the integration of DTS is with the systems and policies and being applied as part of DTS. 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?

The infrastructure bill is beneficial for us as we are supplying products to businesses related to infrastructure. We are selling advanced sensors, including strain gauges to companies that offer infrastructure services for things like building bridges and testing concrete structures. Additionally, we supply Force Sensors to first and second tier construction equipment companies. We anticipate that this will provide us with a boost as we expect to see increased investments in infrastructure across the United States.

The next question comes from Sarkis Sherbetchyan of B. Riley Securities.

Ziv, Bill, really strong book-to-bill and backlog here. I guess it sounds like the expectation is for the tailwinds to kind of continue here in the first part of '22. 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?

Let's discuss Force Sensors. Over the past few quarters, we have reported a gross margin in the mid-30% range with revenues between $17 million and $18 million, representing a significant improvement from previous years. Currently, we expect to maintain a gross margin of low 30% to mid-30% for Force Sensors, which is achievable based on our sales revenues. The additional tariff expenses from manufacturing in China and selling in the United States have been offset by price increases for our customers, making the mid-30% gross margin level sustainable. Now, regarding WCS, we are reporting gross margins exceeding 50% for the first time, specifically at 52.5%. This reflects the full impact of DTS. In terms of product mix for WCS, we have project-driven products like DSI, DTS, and KELK with gross margins above 30%, and our onboard weighing process is achieving margins over 40%. If our current revenue levels, supported by our backlog, continue, we anticipate that gross margins for this segment will remain in the high 40% to low 50% range moving forward.

Got it. That's very helpful. And then I guess if I kind of step back and think about the level of CapEx now that you've completed the advanced sensors facility, what would you say what would be your kind of normalized CapEx and inclusive of any potential positive NPV projects that you'd like to bring on, let's say, for the next year or so?

In the first quarter, we anticipated that our initial projects and prospects for the year would represent about 9% of revenue, which is relatively high due to several significant projects. As we aim to finish with a range of 15% to 17%, that aligns us with a more typical level of approximately 5% of revenue. Normally, the company should operate with capital expenditures between 4% to 5%. The delays caused by COVID-19 have postponed many automation projects for precision. One key project was the advanced sensors and the infrastructure required to support a 30% to 40% increase in capacity, which has now been completed. The next phase involves increasing the capacity for advanced sensors once we reach our capacity limits. Additionally, there was an important component in the 2021 plan for automation of precision resistors aimed at cost reduction. Regrettably, due to COVID, we weren't able to have our vendors travel, and lead times for manufacturing equipment have been significantly prolonged. Therefore, the originally planned 9% investment for this year, which promises a solid return on investment, will likely be deferred to 2022 while we work on getting the necessary equipment installed. Thankfully, the situation has improved in the United States and somewhat in Europe, enabling us to have vendors install the equipment and make it operational. This marks a transition from the current capital expenditures of 4.5% to 5% of revenue this year to an anticipated 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 increases to your customers? And how is that conversation going? Is it fairly easy? Is it difficult? Just kind of want to get a sense for that.

Price increases are never a popular subject with customers. The fact that we have to make, I would say, some changes in the cost structure in order to hire or to fill in those positions will require us, 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, to a large extent, we were able to apply price increases, which we are going to see to some extent. Naturally, we cannot apply it on the backlog, but as new orders are being placed, we will see already some effect in Q4 and a much larger effect going into next year offsetting those wage increases. On the other hand, we have been able to increase prices in order to offset or to compensate the tariff cost. So we have been able to do it in, I would say, in many of our product lines. In some cases, this will offset additional costs. And in other cases, we should just enjoy the benefit of those upsides. But no doubt that we see some raw material price increases. It's not significant at this point in time, which would affect the P&L. And of course, logistics costs have increased, which we have already seen in the last few quarters.

The next question will come from Dick Ryan of Colliers.

Ziv, just to refresh on advanced sensors, prior to the expansion you were capacity constrained, now the facility is online, can you give us what your current capacity is there? How much you're bumping up against that already? And is this allowing you to go to market maybe a little bit more aggressively in seeking new business opportunities?

That's a great question, Dick. To start, the book-to-bill ratio for advanced sensors is 1.2, indicating a strong business environment. We did experience a roughly 7% decline in Q3 shipments compared to Q2 due to the ongoing manufacturing transition and labor challenges. As we continue to ramp up hiring, we expect a 20% increase in revenue by the end of this quarter compared to Q3, and another potential 20% increase in Q1. Currently, we have a backlog that supports this growth. We anticipate returning to $40 million in annualized revenue in Q4 as we complete the transition and hire additional staff. Moving forward, we have the potential to produce $50 million in annual revenue and will consider adding equipment to address bottlenecks if necessary, based on backlog and order intake.

And just looking at your OEM business under Force Sensors, have there been any new wins there? Or can you describe that pipeline of opportunity?

For the OEM in Force Sensors, we have seen an increase for the first nine months. However, looking at the quarter-over-quarter results, most of the first-year customers have reduced their demand for Force Sensors, which has been balanced out by our more generic part for the weighing business. While we have a few opportunities for new designs, we currently do not see an increase in bookings from the large first-tier OEMs in Q3 due to their existing inventory. We do not see the same level of pressure as we have seen two quarters ago. But we are very confident that once they will start to deplete their inventory levels, we are going to see the demand coming back. But we are ready with the capacity to support them.

The next question will come from Matt Dhane of Tieton Capital Management. We have new opportunities with some new designs; however, based on our discussions with the large first-tier OEMs, we see that they have reduced their bookings in Q3 due to existing inventory. We do not observe the same level of pressure as we did two quarters ago. Nevertheless, we are confident that as they begin to reduce their inventory levels, demand will return. We are prepared with the capacity to support them.

I wanted to ask a little bit further around the advanced sensors facility opening up, and beyond the capacity expansion that that facility provides, does that add additional capabilities around your manufacturing where you can tweak the product, say, in different ways and potentially address different customer needs in a way that you historically haven't been able to and add additional opportunities like that as you continue to go to market with this product line?

The opening of the advanced sensors facility does not enhance our R&D or design capabilities. The benefits of the advanced sensors platform regarding design, cost structure, and complexity have already been realized as we've developed this product, which has been gaining traction. The primary goal of the new facility is to meet future demand driven by a pipeline of R&D projects to support increased volume. As mentioned in the last quarter, consumer electronics has been part of this improved landscape, and we've secured another significant customer in that market. As we increase our capacity and capabilities, I believe we will see more opportunities arise and translate into revenues because we will have the necessary infrastructure, equipment, and personnel to support these opportunities.

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.