Good morning, and welcome to the VPG Second Quarter Fiscal 2019 Earnings Conference Call. [Operator instructions] Please note that this event is being recorded. I'd now like to turn the conference over to Reynee Tung. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to VPG's 2019 second 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 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 a 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, 2018, and our other recent SEC filings. And now it's my pleasure to introduce the hosts 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'd 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 solid second quarter of 2019, with revenues up $70.9 million, operating income of $8.1 million or 11.4% of revenues, adjusted operating margin of $8.7 million or 12.3% of revenues, net earnings per diluted share of $0.41 and adjusted net earnings per diluted share of $0.45. On Slide 4. Our second quarter 2019 revenues decreased by 4.5% to 70.5 -- $70.9 million, down $3.4 million, compared to $74.2 million of revenues in the second quarter of 2018. The negative impact of foreign exchange rates to revenues for the second quarter of 2019 as compared to the second quarter of 2018 was $1.8 million. Our gross profit margin decreased to 40.4% in comparison to 42.3% in the second quarter of 2018. The decrease in gross profit of $2.8 million for the second quarter of 2019 as compared to the second quarter of 2018 was primarily attributable to a decrease in volume of $800,000, manufacturing costs of $800,000, wages of $600,000, a one-time charge of $300,000 and the negative impact from foreign currency rates of $300,000. Selling, general and administrative expenses for the second quarter of 2019 were $19.9 million or 28.1% of revenues, compared to $20.0 million or 26.9% for the second quarter of 2018. The decrease in selling, general and administrative expense was related to $500,000 of positive impact of foreign exchange rates mainly offset by $400,000 of wage increases. The adjusted net earnings attributable to VPG's stockholders for the second quarter of 2019 were $6.2 million or $0.45 per diluted share, compared to $7.7 million or $0.57 per diluted share in the second quarter of 2018. Foreign currency exchange rate for the second quarter of 2019 as compared to the second quarter of 2018 decreased net earnings by $200,000 or $0.02 per diluted share. We generated free cash flow of $6.7 million for the second quarter of 2019 as compared to $3.8 million for the second quarter of 2018. We defined free cash flow as the amount of cash generated from operations, which was $8.9 million for the second quarter of 2019, less capital expenditure, which was $2.4 million for the second quarter of 2019, net of proceeds from the sale of assets, which was $200,000 in the second quarter of 2019. Our GAAP tax rate for the quarter ended June 29, 2019, was 26.4%. We anticipate that the operational tax rate for the year will be in the range of 27% to 29%. On Slide 5. We've remained focused on the execution of our core strategy, which we believe will be very effective in achieving the goal outlined on Slide 5. With that, let me pass further comments on to Ziv.

Thank you, Bill. An important part of our strategy is to grow by developing new product offering. A great example of this is our advanced sensor line, which continues to gain adoption. We developed this platform as part of our Foil Technology Product segment and it has grown nicely as more customers included in the product design. We saw our advanced sensor revenues increase approximately 28% in the second quarter of 2019 versus the second quarter of 2018. We are pleased with the continued acceptance of this new sensor platform and are proud to provide enhanced performance to customers. A second example is in our Weighing and Control Systems segment. Our TruckWeigh and VanWeigh on-board weighing business revenues has increased 77% in the second quarter of 2019 as compared to the second quarter of 2018. Moving to our end markets and beginning with demand for avionic, military and space. Positive sentiment for defense supply is expected to continue. The treasury outlays for defense investments, spending were up 27% in Q1 of 2019 over Q1 of 2018. The increase in spending is likely to continue in the third quarter of 2019. In the semiconductor capital equipment end market, near-term demand dynamics remain muted as memory product limit capital expenditure, while logic and foundry producers spend on advanced notes. The projection for fab equipment demand to fall 18% this year. However, the expectation is to increase demand by 6% as producers begin to recover from the under investments. Finally, turning to the steel market. The focus is that 2019 and 2020 global steel demand was expected to continue to grow, but growth rate would moderate in tandem with slowing global economy. However, uncertainty over trade environment and volatility in the financial markets continue and could potentially pose downside risks to this focus.…

[Operator instructions] The first question comes from Sarkis Sherbetchyan with B. Riley FBR. Please go ahead.

Hey, good morning and thanks for taking my question here.

Good morning, Sarkis.

Good morning.

So just wanted to touch first on the sales outlook. Ziv, I know you mentioned in the prepared comments some of the puts and takes regarding the end markets. Can you maybe help us understand what you're seeing as far as, kind of, current order rates from the various end markets? What are the areas of strength? What are the areas of weakness? I will start with there.

Sure. I would be happy to provide the general overview regarding the -- our reporting segments and the end markets we’re serving. Starting maybe with FTP, given the current business environment, 65% of the decline of order intake quarter over a similar quarter a year-ago is coming from precision resistors, as well as a one-time one large annual order for Pacific Instruments. The quarter-over-quarter declines, I would say, 55% of the order decline is coming from precision resistors. So, all-in all, the main weakness in -- or softening of -- we see coming from precision resistors. In precision resistors, we’re serving different end markets. I think the -- by far, the largest one is test and measurements. And the biggest impact we’ve seen in Asia and in the American -- and in the Americas is the fact that the semiconductor equipment manufacturers has slowed down dramatically the demand for putting in place new equipment. We’re looking -- we’re speaking about front-end, which is fab equipment as back -- as well as back-end, which is IC or chip testing. So the biggest drop is -- for precision resistors is coming from the semiconductor side. And as I indicated, there's -- we do believe that based on the macro environment and the different inputs that we’ve received, the expectation is to see certain uptick toward the end of the year, given the very, very low investments in capital equipment which is currently happening. On precision resistors, we also see in a way, slightly lower demand in regard to some of the, I'd say, more for general industrial end markets. But I believe in that sense, we’ve reached the plateau. For the Micro-Measurement or the strain gage part, the bigger fluctuation is really coming from the and/or for the project-driven nature of Pacific…

Got it. Thanks for all the color there. And if I can touch on the Advanced Sensors segment. I think you mentioned, for this quarter there was some good growth, I think it was in the high-20s range year-on-year, about 28%?

Yes. Yes.

Is there anything incremental you can help us with in regards to that product line?

I think that -- I did believe, I shared in prior earnings that in 2019, despite the fact that we’re not expecting to realize significant revenues, but we’ve introduced a new product line in the advanced sensors for stress analysis applications, which we already started to deliver samples and orders to customers. The acceptance level is very, very good and we continue to make inroads in regards to this new applications and new product that we have developed. We do expect this -- the revenue to significantly go up as we move into 2020. But from a -- but our service level, the quality, and we continue to develop new product going into new end markets and new applications.

Got it. That’s helpful. And I think related to that, for this year and I think next as well, you had mentioned in previous calls that you would like to do about $30 million of CapEx and that included the advanced sensor facility build and some spend for Force Sensors as well. Is that still on plan for this year or does that get shifted a little bit into 2020?

Okay. That’s an excellent question. Despite the fact that on the capital spending, we're a little bit light in the first half of the year. This was all planned given the nature of those projects, given that 50% of the $30 million are infrastructure related. So I can report that on the so-called the Modi'in project, which is the new facility that we're putting in place for advanced sensors, we’re on time. The plan is, as it was at the very beginning to transition the management part. I'd say, sometimes early second quarter of next year to start transitioning the manufacturing early Q3 and to finalize the transition at the end of next year. So we're on time regarding this project, budget wise and timing wise. Regarding India expansion, we’re also on time and we expect to finalize this project, end of the second quarter next year.

Good. And so I guess from annual CapEx perspective, more of the spend would be, I suppose, in the back half of this year? Is that the right way to think about it?

This is correct and we -- and at this point, we do expect to meet the initial projection for the $30 million. But you're absolutely correct, Sarkis.

Thanks. I will hop back in the queue for others to ask questions.

The next question comes from DeForest Hinman with Walthausen & Company. Please go ahead.

Hi. Thanks for all the detail you've been giving in the Q&A. If I could just ask for a little further color on some of these new applications that you are delivering product to. Is there any color you can give us in terms of end markets that that is being delivered to? And I think in the past, you’ve given some numbers in terms of the revenue opportunity there, it's escaping. Can you just update us what you think that opportunity is as well?

We -- I’ve to be a little bit careful in regards to -- specially to this advanced sensors, because we do have strict NDAs with some of our key customers even in regards to the end application. They would like to keep it very, very confidential. But whatever I can share is that this stress analysis opportunity is -- potentially is going to open new markets. For example, as I stated before, PC Board testing, which we currently do not have any product offering. And for most PC Board manufacturers, they do require certain -- I mean, those type of stain gages being applied on the end application in order to measure the stress while doing the testing, while designing and the testing of the PC Board currently. Only competitions serves this market and we believe it's a multimillion dollar market, and we’re planning to participate in that. And since we’ve a very good product -- also product from a cost price and performance standpoint, we do believe that we’re going to take a significant market share and be a serious player in that end market. But similar to PC Board, we’ve PC Board testing, we’re planning to move into other similar directions within the stress analysis field.

Okay. And when we think about investments we’re making in India and Israel and we’re seeing the 28% growth in advanced sensors, is the completion of those facilities a gating factor in any way in terms of how that revenue is performing before those facilities are finished, or would it be a step function on those revenues? Just any color that you can provide would be very helpful thinking about how that revenue cadence [indiscernible].

Sure. Sure. Absolutely, that’s a very good question. So currently -- let me start with advanced sensor, currently in our current premises, we’ve enough capacity to support 2019, I'd say 2019 as well as 2020 projection. So we don't feel that we're going to risk any potential revenue due to lack of space. Naturally, as we complete the transition into the new facility, it's going to give us much larger opportunities if -- in order to support once those orders come -- will come in order to support much higher volume. But at this point in time, there's no risk in missing opportunities given our current premises. In regards to India, which is now part of the Force Sensor segment, we currently already leased some external space, so we feel also in a similar way quite secure that within our current premises and some extra leased premises, we can support all potential opportunities until mid of next year when the expansion will be finalized. So at this point in time, we’ve the equipment in place and the manufacturing space, and I don't see that we could be in a position where we may lose revenues due to certain -- due to space constraints, if I may say.

Okay. Thank you. And then final group of questions on capital allocation strategy. Can you give us an update on M&A outlook, pipeline, valuation, and then any thoughts on share repurchases or dividends? Thank you.

Sure. Sure. Absolutely. From a capital allocation, we did provide some information similar to the past that I think that the company's first priority is organic growth and -- which is to support our own requirement for future expansion similar to the Modi'in and similar to the India expansion as well as capital expansion. The second priority is M&A. We’ve been quite disciplined in the past not to take up on any opportunity. We do believe that despite the changes and even at a lower -- and even with the most recent changes, with the lower interest rate, we feel that the environment is more supportive from an M&A in terms of more reasonable valuations and it's definitely high on our priority list and the company takes it extremely serious and we’re looking -- and we’re in discussion, of course, there's nothing tangible to report. But we have, I would say, a very reasonable queue of M&A opportunities, which we’re constantly looking at. As it comes to buy -- purchase or buyback of stock and dividends, the board of directors is always looking at all the opportunities and buyback -- and dividends are part of that. And they’re open in -- they’re looking at that, as well as in -- as a viable option.

Okay. Thank you.

Thank you.

[Operator instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Bill Clancy for any closing remarks. Please go ahead.

Thank you, operator. And thank you everybody for joining on the conference call today. We look forward to talking to you in the near future and also to let you know that Vishay Precision Group will be participating in the Jeffries' Industrial Conference. We will be there, all day tomorrow, in New York. So I appreciate it very much and look forward to talking to you soon. Have a good day. Bye-bye.