Hello, and welcome to the VPG Second Quarter Fiscal 2020 Earnings Call. My name is Elliot, and I will be coordinating your call today. I would now like to hand over to Steve Cantor, Senior Director of Investor Relations. The floor is yours, please go ahead.

Thank you, Elliot. Good morning, everyone. Welcome to VPG's second quarter of 2023 earnings conference call. Our Q2 press release and slides have been posted on our website at vpgsensors.com. An audio recording of today's call will be available 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 31, 2022, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and President; and Bill Clancy, CFO. And I'll now turn the call to Ziv for some prepared remarks. Please refer to slide three of the presentation. Ziv?

Thank you, Steve. I will begin with some commentary on VPG's consolidated financial and sales trends for the second quarter. Bill will provide financial details about the quarter and our outlook for the third quarter of 2023. Moving to slide three. We achieved another strong quarter for VPG. We grew revenue year-over-year and sequentially. We performed well financially as we increased adjusted gross margin, adjusted operating margin and adjusted diluted EPS from Q1. We generated $16 million of adjusted EBITDA, $9.8 million of cash from operations, and $6.4 million of adjusted free cash flow, which supports our capital allocation strategy to grow stockholder value. Orders grew sequentially, and we have a solid outlook for the third quarter, driven by our backlog. Customer engagement remains high as we continue to extend on long-term strategic growth initiatives to capture expanding and broadening opportunities for our precision measurement and sensing technologies. Moving to slide four. Looking at the second quarter results in detail. We reported sales of $90.8 million, which was 2.5% higher than a year ago and 2.2% higher sequentially. Orders of $85.6 million grew 3% from the first quarter. This reflected higher sequential bookings for all three business segments and resulted in a book-to-bill ratio of 0.94. In the current macro environment, our customers are maintaining lower inventory levels. Nevertheless, given the custom nature of our products, we anticipate we will see booking improvements approximately in Q4 of this year to early 2024. As I indicated, we improved our adjusted gross margin to 42.7% from 41.9% in the first quarter, driven by higher sales, higher selling prices and a favorable impact of foreign exchange. This was partially offset by unfavorable product mix in our Measurement Systems segment. Our supply chain continued to improve compared to a year ago. We incurred higher material costs, which we were able to offset with higher selling prices. The redesign of one of our DTS products due to insufficient availability of a key component is complete, and we are on track to ship the redesigned product in the fourth quarter. In terms of our organic growth strategies, we continued our focus on key strategic initiatives to capture emerging opportunities for our precision measurement and sensing technologies. As we have discussed before, we have seen broadening of emerging opportunities in new markets and applications that can benefit from our high performance, high precision solutions. During the second quarter, we continued to expand our engagement with existing customers as well as develop innovative products to meet their emerging requirements. These engagements span a range of markets, including industrial automation, robotics, space and defense, precision agriculture, fiber optics data center networks, medical equipment and consumer. We made progress in many of these markets over the past few years, and we are optimistic about their potential to contribute to our long-term organic growth. I'll touch on some of these initiatives as I now review our business segments' performance for the second quarter. Moving to slide five. Beginning with our Sensor segment. Second quarter revenue of $36.3 million declined 10% from a year ago and was 1.3% lower sequentially. Compared to the first quarter, sales of our precision resistors were slightly lower as sales for this product to the test and measurement market were flat and sales to the advanced measurement solutions market were lower as customers continue to work down inventories. Sales of advanced sensors were flat compared to the first quarter. Orders for sensors of $30.6 million were 2.3% higher sequentially, which resulted in a book-to-bill of 0.84. For precision resistors, orders were flat to the semiconductor test market, while orders to the advanced measurement solutions market were soft in the second quarter, as our distributors continue to be cautious in their ordering pattern, given the macro environment. Strategically, we have made progress in the second quarter with our initiatives to secure designs for new applications for our precision resistors. For example, our products were specified into a number of new space and missile defense projects. In addition, we are gaining traction with key fiber optics equipment makers with new products that provide long life stability that can contribute to a more robust network performance. Orders for advanced sensors to the consumer market improved in Q2, but have not yet returned to the 2022 peak levels. We continue to get further traction with additional applications for advanced sensors in several emerging markets, including robotics for industrial and medical applications. In terms of operating results for sensors, the adjusted gross margin of 40.1% declined sequentially from 41.2%, primarily due to lower volume, partially offset by favorable foreign currency rates. Moving to slide six. Turning to our Weighing Solutions segment. Second quarter sales of $31.3 million were 9.8% higher than a year ago and 1.9% lower compared to the first quarter of 2023. Sequentially, higher sales in the industrial weighing market were offset by lower sales for precision agriculture and construction applications. The book-to-bill for Weighing Solutions was 0.97, with orders of $30.3 million growing 5.7% from the first quarter. Orders grew in the transportation market for our onboard weighing products for trucks and vans and for construction equipment. This offset weaker demand in Europe for some legacy industrial weighing applications. We continue to be pleased with our initiatives to expand our OEM sales for weighing solutions in a number of markets, including precision agriculture, construction, medical and consumer. Through the first half of 2023, our OEM sales grew 58% from the same period a year ago. OEM applications for precision agriculture have been among the most rapidly growing areas for the Weighing Solutions, in part due to the increasing precision technology being embedded in the next generation of agriculture equipment and our strong brand and market position. We have also been successful in penetrating consumer applications, including both high-end road bikes and e-bikes. Weighing Solutions gross margin of 38.7% reached an all-time high and grew from 34.9% in the first quarter. The sequential increase was primarily due to favorable product mix, increasing selling prices, and cost reduction programs. Moving to slide seven. Turning to our Measurement Systems segment. Second quarter revenue of $23.3 million grew 17.1% from a year ago and increased 14.8% sequentially. The sequential increase was driven by higher revenue of products in the steel market. I mentioned earlier that we expect the redesign of DTS products to begin shipping in the fourth quarter. The impact on sales of the redesign for Measurement Systems in Q2 was approximately $1 million, which we expect to recover in Q4. The book-to-bill ratio for Measurement Systems was 1.06, as orders of $24.7 million were essentially even with the first quarter. Sequentially, orders for our KELK steel productivity system were strong. As we have discussed, order patterns can fluctuate quarter-to-quarter due to the timing of customer projects and the long lead times for these products. One of the existing strategic opportunities in the Measurement Systems is an initiative to leverage KELK technology and market leadership in the whole force measurement solutions used in the steelmaking process to aluminum manufacturing. This would represent a new market for our products. Adjusted gross margin in the second quarter for Measurement Systems softened sequentially to 52% from 54.1%, primarily reflecting the impact of approximately $1 million from unfavorable product mix. Moving to slide eight. Before turning the call to Bill, I want to highlight our strong cash flow in the quarter. We generated $16 million of adjusted EBITDA, and an adjusted EBITDA margin of 17.6%. Our adjusted free cash flow during the quarter was $6.4 million, and we grew cash on our balance sheet to nearly $100 million, which reflects our strong operating model. With the completion of our two infrastructure-related projects in India and Japan, expected later this year, we are in a position to see our free cash flow grow further in 2024. Given our balance sheet and ample liquidity, we can continue to support a capital allocation strategy that creates stockholder value through organic growth, successful M&A, and awarded stock repurchases. In closing, I am pleased with our financial performance this quarter and our high-level of designing activity with customers. Our outlook for the third quarter is solid, and we expect Q4 of 2023 revenues to be in the same level as Q3, 2023 given a similar business environment. I will now turn it over to Bill Clancy for additional financial details. Bill?

Thanks, Steve. Referring to slide nine and the reconciliation table of the slide deck, in the second quarter of 2023, we achieved revenues of $90.8 million, gross profit of $38.7 million or 42.6% of sales, operating income of $11.8 million or 13% of revenue and diluted net earnings per share of $0.60. On an adjusted basis, our gross profit was $38.8 million or 42.7% of sales, operating income was $12 million or 13.2% of sales, and diluted net earnings per share was $0.58. Our second quarter revenues increased 2.2% compared to $88.9 million in the first quarter of 2023 and were 2.5% above the second quarter a year ago. Changes in foreign currency rates reduced our total second quarter revenue by $700,000 compared to a year ago and had a favorable $200,000 impact compared to the first quarter. Gross margin in the second quarter was 42.6% as compared to 41.9% in the first quarter of 2023, which benefited from higher volume, higher average selling prices and favorable foreign exchange rates. On an adjusted basis, second quarter gross margin was 42.7% as compared to 41.9% in the first quarter of 2023. Our operating margin was 13% for the second quarter. Adjusted operating margin in the second quarter was 13.2% as compared to 11.4% in the first quarter of 2023. Selling, general and administrative expenses for the second quarter were $26.8 million or 29.5% of revenues as compared to $25.9 million or 29.2% of revenues for the second quarter of 2022. The increase in SG&A of $900,000 was mainly attributable to $700,000 for wage increases, $300,000 for travel, $300,000 of commissions and $100,000 of other costs, partially offset by $500,000 of positive foreign exchange rates. The adjusted net earnings for the second quarter were $8 million or $0.58 per diluted share compared to $9.3 million or $0.68 per diluted share in the second quarter of 2022. Adjusted EBITDA was $16 million or 17.6% of revenue as compared to $15.8 million or 17.8% a year ago. Purchase CapEx in the first six months of 2023 was $6.9 million, the majority of which reflects equipment purchases and related infrastructure. For fiscal 2023, we expect purchase CapEx to be in the range of $18 million to $20 million, which includes approximately $7 million in carryover spending from 2022. During the second quarter, we purchased $420,000 of our stock. Since we announced the stock repurchase obligation last August, we have repurchased $3.1 million of stock. We are pleased to announce that our Board has extended its authorization for our stock repurchase plan for another year. Adjusted free cash flow was $6.4 million for the second quarter of 2023 as compared to $4.9 million for the second quarter of 2022. We define adjusted free cash flow as cash from operating activities of $9.8 million less capital expenditures, which were $3.4 million. The GAAP tax rate in the second quarter of 2023 was 28.8% as compared to 19.2% in the second quarter of 2022. We are assuming an operational tax rate in the range of 25% to 27% for the full year of 2023. Moving to slide 10. We ended the second quarter with $98.5 million of cash and cash equivalents and total long-term debt of $60.8 million. Regarding the outlook, for the third fiscal quarter, given our backlog of $139.7 million, we expect net revenue to be in the range of $85 million to $95 million at constant second fiscal quarter of 2023 exchange rates. In summary, we've achieved solid performance in the second quarter. We performed well financially as we increased adjusted gross margin, adjusted operating margin, and adjusted diluted EPS from the first quarter, and we continue to execute on our strategic growth initiatives. With that, let's open the lines for questions. Thank you.

Thank you. Our first question comes from John Franzreb with Sidoti. Your line is open.

Good morning guys, and congratulations on a great quarter. I'd like to start with the really good results coming out of Weighing, the gross margin is fairly impressive. Can you talk a little bit about the mix that you're seeing there and the cost reductions and the sustainability of a gross margin at that level?

Good morning, John. Regarding the gross margin for Weighing Solutions, the adjusted gross margin reflected a favorable product mix between our four sensors on board weighing. We have seen more sales on the TruckWeigh and VanWeigh. Sales have increased by 27.9% sequentially for TruckWeigh and VanWeigh. This is regarding the mix. And also, we have seen an increase in selling prices to offset the additional material cost reduction. In addition to that, we are continuing to execute on our operational excellence plan, through which we are relocating products from higher labor cost locations to lower labor cost locations. So, I would say the result of the gross margin is reflected in a few factors: it is the favorable product mix, the selling prices, and the ASPs increased as well as the cost reduction initiatives.

So, Ziv, do you think that means you reset the Weighing Solutions margin profile permanently higher?

So, I would say that I think we have reached a record level. I think this range is sustainable going forward at a constant business environment.

Excellent. You also touched on this in your prepared remarks, but there was a big jump in 2Q versus 1Q in your steel sales. What are you hearing from the steel customers? I know it's a lumpy business, but how does it look for the balance of the year?

In the second quarter, we have recorded what I think are record steel bookings. The steel business is still very, very strong. It's still premature to say how the rest of the year is going to look like. But at this point in time, it looks like a very robust business. In the second quarter, we had strong bookings.

Got it. And in your advanced sensor line, you mentioned that the consumer business in the advanced sensor was still down versus a year ago. But how is total volume looking in advanced sensors? Is it flat year-over-year? Can you just give us a sense of how it's performing on a relative basis, all-in?

Sure. Advanced sensors revenues were flat in the second quarter compared to the first quarter. Orders for consumer applications continue to recover, while orders for industrial applications were softer, especially in Europe as customers continue to deplete their inventory levels and adjust their production schedules. So, going back to the comment regarding consumer, consumer business has improved quarter-over-quarter. At this point in time, we see a more stable environment going forward for consumer, but we are not back to the peak 2022 levels.

Okay. Just one last question on the tax rate, significantly higher than what I was looking for. Is that a certain business driving that or sales or certain geography driving that? Can you just talk a little bit about that?

Yeah. John, so the higher tax rate for this quarter is truly driven by the mix of the income, where the income is being earned and obviously is being earned in higher tax rate jurisdictions than it was a year ago. So that's truly a mix of where the earnings are being recorded.

Okay. Thanks Bill. I'll get back in the queue, guys. Thank you.

We now turn to Griffin Boss with B. Riley Securities, Inc. Your line is open.

Hi, thanks. Good morning, guys. I wanted to dig into something that Ziv talked about in terms of leveraging the KELK technology, applying that to the aluminum market. Are you speaking with existing customers who have demand for your products in that market? Or would you be targeting a new customer base? And similarly, when would you expect to make inroads here? Is this a longer-term opportunity? Or are you working on that in the near term?

Sure. Historically, the legacy business for KELK is in the steel market. We have identified a similar opportunity in aluminum steel mills. Now, we are working with some customers to modify our systems, so we can provide similar performance. At this point in time, the discussion is fairly in the early stages, but I believe that once we establish a platform, the scalability is going to be fairly quick. But we are in the design phase and in discussion with those customers.

Great. That's helpful. Thanks, Ziv. Regarding Q3, I would like to understand how orders are trending as we approach the latter half of the year. Are you seeing an increase in orders compared to the levels from Q2?

Sure. In the second quarter, we reported orders going up in all three segments. If we drill down to the different reporting segments, we will see that in Sensors, we had a few quarters of very soft test and measurement, mainly in the semiconductor test and measurement business. We believe that through the end of the year, orders will start to rebound in general, industrial and avionic military and space. Distributors and EMS are still very, very cautious regarding the supply chain, given the macro environment. For Weighing Solutions, which is mainly driven by general industrial, we have seen also softening of orders compared to a few quarters ago. Still, quarter-over-quarter, there is stability. The expectation going into the second half of the year is that we should expect to see a stable environment. In Measurement Systems, as I mentioned, we had two strong quarters of book-to-bill above one, cyclical demand coming from the steel market. We still have to see how this is going to result, but the overall vibe moving into the second half of the year suggests we should see a stable business environment compared to the second quarter.

Okay. Great. Yeah. Ziv, towards the end of your prepared remarks, I want to ensure I heard you correctly. Did you expect Q4 to be at similar levels as Q3, considering the business environment?

We were speaking about a stable business environment. Overall, regarding the second quarter. At this point in time, the projection is in respect to the second quarter.

Okay. All right. Sure. And then maybe just last one for me, for Bill, regarding the CapEx. Is this going to be sort of a similar level in Q3 and Q4? Or should we sort of expect the CapEx level to increase more in the fourth quarter?

Griffin, yeah, so we said we would spend about $18 million to $20 million for the full year. We're at roughly $7.8 million or about $7 million now. So, you will see more of the capital spending in the second half. I think, Ziv, in his remarks, mentioned finalizing the expansion in India and Japan, so we'll be making the majority of those payments probably late third quarter, early fourth quarter. But overall, it will be close to the $18 million to $20 million number for the year.

Perfect. Okay. Super helpful. Thanks, guys.

We now turn to John Franzreb with Sidoti. Your line is open.

Hey, guys. Just a quick update on your thoughts about the M&A environment that I maybe recall hearing that in the prepared remarks.

Regarding the M&A environment, given our balance sheet, naturally, M&A is very high on our radar. At this point in time, we have been engaging with a few companies. Given the business environment and the higher interest rate, we expect deals or valuations to go down. But at this point in time, we have not seen real valuation drops. We still believe it's on the higher end, but we are exploring and in dialogue with a few options. At this point, nothing has materialized, but we believe that in the coming quarters, valuations would be more reasonable. Hopefully, we would be able to complete something.

Thank you, Ziv. I'm curious if there have been any changes to your three to five-year growth and profitability targets given the stagnant environment we are currently in. Are they still intact since they also include potential mergers and acquisitions?

At this point in time, we have not changed our three to five-year target.

Now turning to Hendi Susanto with Gabelli Funds. Your line is open.

Good morning, Ziv, Bill, and Steve.

Morning.

Ziv, I have a question. Currently, customers and distributors are being cautious with regard to inventories. When things normalize, when let's say, they have the comfort to start building inventories again, what are the likely paths toward that state?

Could you repeat that? I'm sorry, I didn't hear the last piece of your question.

So, let's say, in terms of anticipation of inventory build once there is less macro concern, let's say, no more excess inventories, what kind of signs should we look for? Do you think they will revamp inventory incrementally? Or could there be some step-up function like customers and distributors buying your products to step-up their inventories? What kind of path do you think might happen when there's more optimism on the state of the economy and customers and distributors start to build their inventories again?

Okay. Thank you. So first, there is a high level of customer engagement given our market leadership and the critical nature of our products. Therefore, we are not selling commodities; we are selling custom value-added products. I believe that once market conditions allow for less concern, we will see a much more robust order intake, looking at our product because, at the end of the day, our products are designed to provide unique value propositions. Therefore, we should see much more robust order patterns once market conditions change.

Thank you. And then one question for Bill. So, Bill, inventory is now at $89 million. That represents a working capital invested in inventories. If you look back, inventories were running at $62 million and $76 million in 2020 and 2021. Should we expect that inventory in absolute dollars would decline, meaning that you would be able to extract more cash from your working capital? And how soon do you think that can take place?

Yeah. Hendi, I mean, obviously, we have a very strong backlog and the inventory has been built for that backlog in the upcoming quarter or so. I would anticipate we would begin to see inventory levels drop to a more normalized level, which over time would add some more cash into our financial statements.

I see. Yeah. Okay. Thank you, Ziv. Thank you, Bill.

Our next question comes from Zach Herzl with Herzl Capital. Your line is open.

Hey, guys. Following up on the earlier question on the M&A. I've talked to a lot of bankers and product firms and other companies. I guess valuations haven't come down much like you guys thought they might. The good thing is the reverse, I'm confident through those conversations that VPG could get $50 to $60 a share if they were to sell. Is that something you guys would be interested in? And if so, I can put you in touch with the right people.

Well, Zach, I think that the Board is always exploring different opportunities at different times, and they're exploring all capital allocation options, including the ones that you have mentioned. Nevertheless, M&A is still high on our radar. We believe, given that we have been in contact and we are exploring a few opportunities, that once we complete even one or two of those acquisitions, we could generate stockholder value. But overall, the Board is always looking at all capital allocation options.

I hear that. The problem is that you guys have had $100 million in cash for 10 years. You've said for the last three, when I've been talking to you guys, that you were going to buy a company and I know there was an opportunity to sell for $50 to $60 a share two years ago and you didn't take it. I think about shareholders now, and I think they would rather take the $50 to $60 a share now than keep going with the promises that the Board says that either they would sell or the management team is going to grow by double digits and the stock price is going to get to $50 to $60 a share anyway. But it hasn't happened yet. The shareholders I talked to said that they would rather sell for the $50 to $60 a share now. Is that something I should go through the management team or the Board, or directly to shareholders, if that's something they want to do, how can we get that done?

Well, Zach, I would say there are channels, and you know as a shareholder how to communicate that. I definitely hear what you are saying, and I really appreciate your input. Of course, I respect your opinion and I hear you. So, I really thank you for your input.

This concludes our Q&A. I'll now hand back to Steve Cantor, Senior Director of Investor Relations, for closing remarks.

Great. Thank you for joining our call today. I do want to note that we will be participating in the Jefferies and Sidoti conferences in September. You can see our website for more information on that. And with that, I'd like to wish you all a good day and look forward to updating you next quarter.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your line.