Good morning, and welcome to the VPG 2018 Fourth Quarter and Full Year Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Reynee Tung, Director, Global Marketing Communications. Please go ahead.

Thank you, Operator. Good morning, everyone. Welcome to VPG's 2018 Fourth Quarter Earnings Conference Call. An audio recording will be made of the conference call today, including any questions or comments that participants may contribute. By now you all should have received the earnings press release, and we hope you've taken the time to read through it as it contains important information. You can find it, including relevant non-GAAP reconciliations, on VPG's website at vpgsensors.com. An audio recording of today's call will be available on the Internet for a limited time and can be accessed on the VPG website. The content of this conference call is owned by VPG and is protected by U.S. and International Copyright Law. You may not make any recordings or other copies of this conference call, and you may not reproduce, distribute, adapt, transmit, display or perform the contents of this conference call in whole or in part without our written permission. Today's remarks are governed by the safe harbor provisions of the 1995 Private Securities Litigation Reform Act. Actual results, performance or achievements may turn out significantly better or worse than indicated by any forward-looking statements that we may make today. For a more complete discussion of the risks associated with VPG's operations, please refer to our SEC filings, especially the Form 10-K for the year ended December 31, 2017, and our other recent SEC filings. And now, it's my pleasure to introduce the host for today's call, Ziv Shoshani, CEO and President; and Bill Clancy, CFO. Bill?

Thanks, Reynee. Good morning, everyone, and thank you for joining us on our call today. I would like to start by reviewing a few highlights and then summarizing the financials. Following that, Ziv will provide his view of the results and the global business environment. Referring to Page 3 of the slide deck, we had a good fourth quarter of 2018 with revenues of $77 million, adjusted operating income of $9.9 million, adjusted operating margin of 12.9% and adjusted earnings per diluted share of $0.54. We're pleased with our quarterly performance and also with our fourth quarter cash from operations of $17.4 million and free cash flow of $12.8 million. On Slide 4, we grew our fourth quarter 2018 revenues by 10.9% to $77.0 million, up $7.5 million compared to $69.4 million of revenues in the fourth quarter of 2017. The negative impact of foreign exchange rates to revenues for the fourth quarter of 2018 as compared to the fourth quarter of 2017 was $1.3 million. We increased our gross profit margins to 40.0% in comparison to 38.5% in the fourth quarter of 2017. The increase in gross profit of $4.1 million for the fourth quarter of 2018 as compared to the fourth quarter of 2017 was primarily attributable to an increase in volumes of $5.7 million, partially offset by $1 million related to wage increases, $500,000 for supplies and tooling and repairs and maintenance and $200,000 related to the U.S. imposition of tariffs on goods from China. Selling, general and administrative expenses for the fourth quarter of 2018 were $20.9 million or 27.2% of revenues as compared to $18.8 million or 27.1% for the fourth quarter of 2017. The increase in selling, general and administrative expenses was related to $500,000 of wage increases, $400,000 in bonus reserve adjustments, another…

Thank you, Bill. An important part of our strategy is to grow by developing new product offering. A great example of this is our advance sensor line, which continues to gain adoption. We developed this platform as part of our Foil Technology Products segment, and it has grown nicely as more customers include it in their product design. We saw our advance sensor revenues increase approximately 37% in the fourth quarter of 2018 versus fourth quarter of 2017. And the revenue increase was approximately 59% for the 12 months ended December 31, 2018, as compared to the prior year period. We are pleased with the continued acceptance of this new sensor platform and are proud to provide enhanced performance to customers. We are also pleased to be manufacturing on an efficient platform. A second example of our innovation is our value-added OEM transducer business, part of our Force Sensors segment. For the year ended December 31, 2018, its revenues increased by 73% compared to the prior year period. The revenue for the OEM transducer business was slightly down in the fourth quarter for 2018 compared to the fourth quarter of 2017. A final example is in our Weighing and Control Systems segment. Our TruckWeigh and VanWeigh on-board weighing business revenues increased by 65% in the fourth quarter of 2018 as compared to the fourth quarter of 2017. For the year ended December 31, 2018, the revenues increase was approximately 78% as compared to the comparable prior year period. We see trends continuing in some important end markets for our business. In particular, I'll note aerospace and defense, steel and semiconductor equipment for testing and measurement. Turning to our end markets. Aerospace continues to see positive demand growth, driven by increasing production rates. In the defense end market, noise related to…

[Operator Instructions]. And our first question will come from John Franzreb of Sidoti & Company.

Listen, I guess, I want to start with the book-to-bill ratio. What should we infer from that it's been kind of flat for the last two quarters after nearly two years of growing book-to-bill? Is it a function of FX? Is it a function of change in geography? You've kind of pointed out Asia was weak. How should we think about analysis, shorter duration orders that are coming through the P&L. Can you just walk us through what we should think about the bookings number at this point?

Sure. The book-to-bill for this company, which the product line is -- as you know, our business is very diversified. And even of record high majority of products and given end markets, we still have a book-to-bill over 1. So the way to look at that is looking at the dynamics of the end market. I think that if I will start with the Foil Technology Products, which we have seen a book-to-bill of 0.8, it really reflects softing of the semiconductor testing equipment, which implies softer demand regarding memory supply, Big Data, smartphones, all of those -- the softening of that end market is mainly reflected on the precision resistors. In regards to the industrial end markets, we see a stable environment in the Americas. And in Europe, we don't sell much into the industrial market in Asia. So there's slowdown in Asia, which is mainly driven by the Chinese recession, is less affecting our demand in regards to the industrial sector. In the Force, in the FTP, well, we have seen a positive book-to-bill this quarter of 1.05. We see, I would say, a stable demand regarding precision weighing, while we should expect some softening on the precision agriculture equipment due to a depletion of inventory, but we do have new projects and new products with OEMs that are expected to offset the softening of the demand. So we fairly see a stable environment. Last but not least regarding Weighing and Control Systems, I think that one of the phenomenas is the steel demand, which, based on macro information, is expected to grow year-over-year in a more moderate manner, less in China, more in the developed countries. In regards to process weighing and on-board weighing, I would say process weighing, we should expect to see a stable environment in Europe and in the United States. And in the on-board weighing, we believe that the environment is still solid moving into 2019, despite some uncertainty regarding the Brexit situation, whereby, we have, I would say -- our British subsidiary is providing product to the domestic market. But all in all, beside the China slowdown and the semiconductor, for the complete company as we have a very diversified product line, which are reaching out to different end markets, we do expect to see stable business environment.

Exposure that you have to the semiconductor market, how much is it as a percent of sales overall or percent of FTP?

We don't provide the breakdown of the semi. It's part of the test and measurement end markets, which, I think, that for the FTP it could be around, 20% -- I would say around 20% of the FTP, roundabout. But which encompass more application than just semiconductor.

Okay. Fair enough. Also second with FTP while we're at it, the gross margin was down sequentially, some tooling and some manufacturing efficiencies. Are those issues behind you now?

Yes, this is correct. We had some inefficiency in Q4 and higher supply and tooling and repairs and maintenance due to the higher volume that those product lines were running. And during the year end, it was kind of a catch-up mode. But definitely, the effect should be behind us as we move forward into Q1.

Got it. And I guess, lastly, just on Pacific Instruments, the write-down there. What went wrong? Why was it need -- why did you need to take that write-down?

John, it's really -- it's an accounting exercise. And what you do, you go through and you look at your forecast versus your actual. And what we saw during 2018 was an unfavorable product mix, something that we don't forecast. But that could be positive in the future, but we just don't forecast any product mix. And due to the unfavorable mix that we had through this accounting exercise we took this noncash charge. But the business itself is strong and very good.

[Operator Instructions]. And our next question will come from Sarkis Sherbetchyan of B. Riley FBR.

So I want to touch on the new lease agreement. Know you filed the 8-K last night, and you touched upon it a little bit in this conference call. It seems like you're expanding the capacity for advance sensors. Maybe can you help us understand the amount of capacity you're planning to bring for advance sensors?

In the last few years, we have been reporting a dramatic increase year-over-year for advance sensor volume, which was -- which I would say was a high double digit. We -- as you know, the advance sensor line is used once to generate new applications and new revenues, which the company never had based on the technology and the new design in conjunction with streaming line -- with streamline of legacy business, which would enable us to provide better products at a lower cost to our customers. As we have been -- so, initially, we have been doing that in the first few years, and the momentum has been picking up very, very nicely. We are at a point now where our existing location is too small in order to support future expansion. Therefore, we went to the new lease agreement in order to allow advance sensor to expand its capacity, which I would say would be or is expected to be the potential capacity based on the new location, is expected to support at least, I would say, 7 to 8x of the revenues. And from a capacity standpoint, it should support at least 5, 6x more capacity, which would enable the company to drive revenues and margin much more substantially and capitalize on this new technology.

That's super helpful, Ziv. And I think you mentioned in the prepared comments the advance sensors were up 37% in 4Q year-over-year and 59% for fiscal '18. I'm not sure if you have the annual maybe revenue in hand that you can kind of share with us. Just trying to gauge how large the advance sensors business could be for your top line.

I would say that we have never provided numbers, but this is already in the double-digit millions of dollars. And I would say that with the new lease in place, once we move in, the potential or I would say the capacity potential would be able to support, I would say, close or north of $100 million business.

Okay. So close to or north of $100 million. And can you just help us understand maybe the cost of production or just what does the margin profile look like for advance sensors relative to, call it, the corporate average that we see today?

The advance sensor line from a contribution margin is, I would say, at least north of 5% of the average -- of the company's average.

And can you refresh us where you stand today on the incremental for the company average? I think before it was 50% pretax. Is that the right way to think about it?

Sarkis, are you talking about the -- our contribution margin in total or...?

Yes so, call it, contribution margin corporate average...

Yes. I think what we're seeing year-over-year, given all the -- somewhat increase in -- what we had in G&A, it's probably more like in the, I'd say, 40% to 45% at the moment down to the pretax.

Got it. And then if you add advance sensors and scale it up, it would be meaningfully above the 40% to 45% that you just stated?

This is correct, yes.

Yes, yes.

Okay. And just to kind of reiterate. So you could support at least 7 to 8x of the current revenue level, call it, a business that's about $100 million in top line. Can you maybe help us understand the pathway to that growth trajectory?

Okay. In the advance sensors, we have 2 platforms. One is what we are defining as a -- this is more for the large OEM type of business, which we have been designing products at different OEMs, and ones -- and some of the OEMs are running on a high volume projection, while other OEMs are running on a lower volume projection. So during -- let's take the current snapshot. The current snapshot is that more than 50%, I would say -- more than 50% of the revenue -- revenues are generated from new designs. We have a fairly, I would say, good queue of new designs with different OEMs, and the expectation is that the momentum will continue. This is one path. The second path is that this platform in 2019 will develop new product line, which will go into the end user application, mostly for testing of structures. We have not been doing that so far. The average selling prices are way, way higher, while the volume is slightly lower. So we are going to -- once those products will be -- well, those has been developed and already samples has been provided to different beta sites. We do expect to see also a nice -- I would say a nice upturn regarding those end user business for testing of structures. And just give you an example, one of the potential end market could be PC board testing, which is considered as a fairly sizable market, which we are planning to offer products to.

And next, we have a follow-up question from John Franzreb of Sidoti & Company.

Sure. I guess, this kind of dovetails into the previous question. CapEx was up a lot last year. It sounds like you're going to be tooling the new facility in 2020. Given how much bigger it is, can you kind of walk us through what the CapEx budget down is going to be in 2019, but how much it's going to pass to go up maybe incrementally in 2020 to tool up the new facility?

Well, in fact, the larger CapEx spending is expected to be in 2019 because we are planning already to spend money into the new facility, despite the fact that we are going only to move in at the mid of 2020. The expected capital spending for next year is roundabout as twice as much. For this year, while the incremental spending would be dedicated for 2 large projects, one is the Modi'in lease for advance sensors and the other one would be an expansion of our capacity in India to support further growth for Force Sensors.

So you're talking about CapEx in the $25 million to $30 million range. Is that the right number?

This is correct. It will -- it's close to $30 million. This is correct. 50% is related to those two projects, the Modi'in and India expansion.

Got it. And okay. That's fine for now. It's a lot more than I was expecting. Okay. And just a couple other kind of housekeeping type questions. I think you said there was $800,000 in professional service fees year-over-year in the quarter. What were they for and we should expect them continue on going forward?

Yes, John, most of them were related to fees associated with internal control costs, some consulting costs. And the majority of that has been expensed already this year. So we should see a reduction going into 2019.

Got it. And what should we be thinking about as far as a tax rate going forward? It's kind of been fluctuating over the past year. What are we thinking there, Bill?

Yes, Well, it's always tough, John. It's always based upon where the profitability is being generated. But I think, on an operational basis, I think, anywhere between take 28% to 30% would be a good use for a tax rate.

And this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Clancy for any closing remarks.

I appreciate it. Thank you, everyone, for joining on the call today and for the good questions. We will also be presenting at the Sidoti Conference in late March. So hope to see people there. I do appreciate everybody dialing in today. Thank you very much.

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