Hello everyone and welcome to VPG's Third Quarter Fiscal 2024 Earnings Call. My name is Ezra, and I will be your coordinator today. 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 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 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, 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. Ziv?

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. Overall, the 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 Solutions segments. The recent acquisition of Nokra expands our product offering in the steel market. Moving to the details of our third quarter results, 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 continued 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 remain well below peak levels. Operationally, we reduced our manufacturing operations to align with near-term revenue trends. These steps resulted in temporary labor inefficiencies, primarily in our Sensors 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 these labor inefficiencies to continue in the fourth quarter. As we continue our growth-focused investments in business development, marketing and R&D, we are streamlining our operating costs 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 as our revenue recovers. I'll now review our business segment performance for the third quarter. Beginning with our Sensors 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 softened sequentially, primarily due to lower bookings for consumer-related applications. This offset higher orders in the Test and Measurement and AMS, while semiconductor equipment manufacturers placed semiannual 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 the telecommunications market, as well as recording an order from a supplier of source lasers used in fiber optics equipment. For advanced sensors, we continued our progress with a project with a leading developer of humanoid robots and are now in discussions with a 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 a maker of infusion pumps. In the Weighing Solutions segment, third quarter sales were $25.2 million, a decline of 13.1% from a year ago and 8.3% from the second quarter. The decline was mainly due to lower sales in the Industrial Weighing and Transportation markets. Book-to-bill for Weighing Solutions was 1.0. Orders were essentially even with the second quarter as lower orders in the Transportation market offset higher bookings in the Industrial Weighing and other markets. Overall slowing industrial production and capital spending around the world continues to be a headwind. We have seen modest improvement in precision agriculture while construction and medical remain slow. Our 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. Turning to our Measurement Systems segment, third quarter revenue was $22.4 million, down 8.2% year-over-year, but up 6.2% sequentially. This growth resulted mainly from 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, a decline of 16.9% from the second quarter, primarily due to lower bookings in steel and transportation. While the steel market in China remained soft, we are expanding our business in India, which is one of the fastest growing markets globally for steel production. In Transportation, orders softened for our DTS crash test data recorders, primarily due to project timing. We were pleased to announce the acquisition of Nokra, a German niche supplier for laser-based measurement systems, which strategically expands 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's strong brand sales channels and 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 prioritizes internal investments and funding additional M&A opportunities that add high-quality businesses to the VPG platform. Finally, I want to highlight the release of our initial Sustainability Report. This report marks a significant milestone in VPG's sustainability journey. We take great pride in 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 milestones in the future. I will now turn it over to Bill Clancy for additional financial details. Bill?

Thanks, Ziv. 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%, compared to 41.9% in the second quarter. By segment, gross margin for the Sensors segment was 31%, which 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 Systems gross margin of 56.8% improved sequentially, reflecting higher volume and favorable product mix. Total selling, general and administrative expenses for the third quarter were $26.3 million, or 34.8% of revenue, declining slightly from $26.5 million or 34.3% in the second quarter. Operational margin was 5.1%, 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 were $0.19, compared to $0.31 in the second quarter. Adjusted EBITDA was $8.1 million, or 10.7% of revenue, compared to $10.2 million or 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 the purchase CapEx to be in the range of $10 million to $12 million, significantly lower than the levels we have spent in the past few years. Adjusted free cash flow was a negative $2.3 million, compared to $4.9 million for the second quarter. The third quarter cash flow included $3 million of one-time tax payments and $1.4 million related to global insurance renewals. We define adjusted 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 income earned in higher tax rate jurisdictions. We are assuming an operational tax rate of 30% for the full year of 2024. At the end of the third quarter, we had $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 and 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 very much. Our first question comes from Griffin Boss with B. Riley Securities. Griffin, your line is now open. Please go ahead.

Hi, good morning. Thanks for taking my questions. So 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?

Yes. Already at the beginning of the fourth quarter, we have seen a significant improvement regarding the inefficiencies that we booked in the third quarter. So that is correct, Griffin.

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 relative high, slightly higher than 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 step up this quarter?

No, Griffin, I would say it's probably a one-time. We had 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 about $3 million in 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.

Okay, great. Thanks Bill. And then just switching to new projects. You mentioned humanoid robots, you got the second customer there. Can we think about that as a similar size to the first customer? I think you mentioned on the last call, maybe a few hundred thousand dollars for the prototype stage. Just yes, curious about the size of that second customer?

Sure. As I've indicated in earlier calls, we have been working diligently with a sizable humanoid robot project. We are already expecting to book significant revenues for this year. At this point in time, given the discussions and the forward-looking projections from this customer, we are expecting revenues to double for 2025, and this is still not full production; this is still at the 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 early in the design stage. However, we are already working with them, and there appears to be a sizable potential upside, once it comes to full-blown production.

Excellent. Got it. Thanks Ziv. And just maybe last one for me. It's nice to see 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 to be organic versus coming from being integrated into the broader KELK business, with those distribution channels?

With Nokra, we purchased the technology for an adjacent product portfolio, which would broaden our KELK offerings. We believe that leveraging KELK sales channels and existing customers can significantly increase Nokra revenue in 2025. We have not provided the run rate, but I could say that we are looking at mid-single digit revenues for Nokra, which would almost double their revenue in respect to 2024. All-in-all, we have seen some headwinds, as I've indicated earlier, mainly due to soft business in China and the soft construction business. However, the main driver at this point is our investments in India, which is the second-largest steel manufacturer, and they are investing quite significantly in their infrastructure. Therefore, we believe that going forward we will be more optimistic regarding the steel market.

Okay. Great color. Thanks for taking my questions. Appreciate it.

Thanks, Griffin.

Our next question is from John Franzreb with Sidoti. John, your line is now open. Please go ahead.

Good morning everyone. And thanks for taking the questions. I'd like to consider the end market mix and how you view it today, versus how you viewed it three months ago. Ziv, are you seeing any notable changes that weren't maybe something you were expecting when we reported second-quarter results?

Sure, absolutely. First, I think John, it’s important to state that the biggest drop in third quarter order intake was in the Measurement Systems. We had some large projects that had their bookings pushed from the third quarter to the fourth quarter. Regarding the business environment, we expect in Q4 to see a return to the mid-$70 million range in bookings. In terms of different end markets and their dynamics, initially, when we spoke with large customers in the semiconductor market or in the general industrial market, there was a bit more optimism regarding potential upside. On the other hand, we are seeing that Test and Measurement customers are starting to place orders to replenish their stock levels. Therefore, we do not expect to see a larger demand increase just yet, but orders are coming from replenishment procedures. Regarding Europe, especially the U.K., the economy appears to be fairly soft. I would also add that we have seen more optimism in precision agriculture as we've increased our order intake in Q3. Overall, it's a mixed environment. Our confidence levels in discussions with customers reflect their projections, but, on a longer-term basis, the initial interest rate cuts and expectations for further cuts give us a stronger feeling to be optimistic regarding a real recovery in the next few quarters, especially as many of our customers are involved in capital spending.

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 are happy with the manufacturing footprint and the operational expense footprint as currently constituted?

Regarding operational cost reductions, beyond the continuous investments, we are in the process of relocating products from high labor countries to our India facility from various locations in North America, Europe, and other places. Naturally, I cannot share further details due to HR-related issues. However, we expect these projects to realize multimillion-dollar savings as we continue to consolidate operations into our large India-based operation. We are streamlining not only the initial sales base but also more activities on the operational side and other staff-based functions.

Understood. And then, lastly regarding M&A, was Nokra a customer of yours? Can you talk a little bit about the development of that purchase? And when we 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?

Nokra was not a customer. We were aware of Nokra because our current customer base expressed interest in a wider and larger product portfolio, which we currently couldn't offer. We identified Nokra as a small technology company that fits well into the KELK portfolio. Given that we have the sales channel, we believe it will be relatively easy to achieve business synergies and grow Nokra revenues quickly. Regarding other potential M&A targets, we are looking at similar businesses to Nokra but also other companies that could realize operational synergies if they align with our current portfolio or could add adjacent sensing technologies that serve our customer base. This could include smaller profitable companies as well as larger ones.

Understood. Thank you for taking my questions. I'll get back into the queue.

Thank you. Our next question is from Jeffrey Cohen with Mulholland Capital Management. Jeffrey, your line is now open. Please go ahead.

Yes, good morning. I apologize for getting onto the call late. I'm just wondering, it looks like you repurchased some stock this last quarter, is that right?

Yes, we did, Jeffrey. We repurchased $1.9 million of stock during the third quarter.

Okay. I’m just kind of curious how you think about M&A relative to where your own stock is selling at this point. How do you think about that?

From a capital allocation standpoint, we believe that our balance sheet provides us the ability to support stock buybacks, acquire companies, and continue to invest in organic growth. We have the means to support all three strategies, and this is how we operate. Naturally, our first priority is investing in the company to enhance organic growth, but we also consider M&A and stock buybacks, which is why we have been doing that.

Okay. Thank you.

Thank you very much. That ends our Q&A session. I will now hand back over to Steve for any closing remarks.

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.

Thank you very much, everyone for joining. That concludes today's call. You may now disconnect your lines.