Good morning, and welcome to the VPG 2019 Q3 Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Steven Cantor, Senior Director of Investor Relations. Please go ahead.

Thank you, Danielle, and good morning, everyone. Welcome to VPG's 2019 Third Quarter Earnings Conference Call. An audio recording will be made of the conference call today, including any questions or comments that participants may contribute. Our Q3 press release and accompanying slides have been posted on our website, vpgsensors.com, and 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. I also want to note that yesterday, we issued a release announcing the acquisition of DSI. You can find that press release and presentation 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, 2018, and our other recent SEC filings. And now, I'll turn the call to Ziv Shoshani, CEO and President; and Bill Clancy, CFO. Bill will begin.

Thanks, Steve. Good morning, everyone, and thank you for joining us on our call today. I will start by reviewing a few highlights and then summarizing the financials. Following that, Ziv will provide color on the results by segment, the acquisition of DSI and the Q4 outlook. Referring to Page 3 of the slide deck. In the third quarter of 2019, we achieved revenues of $67.4 million. Operating income was $6.2 million or 9.2% of revenues, adjusted operating margin of $6.7 million or 10% of revenues, net earnings per diluted share of $0.33 and adjusted net earnings per diluted share of $0.37. Moving on to Slide 4. Our third quarter 2019 revenues decreased by 10.7% to $67.4 million, down $8.1 million compared to $75.5 million of revenue in the third quarter of 2018. Foreign exchange negatively impacted revenues by $800,000 for the third quarter of 2019 compared to a year ago. Our gross margin decreased to 38.3% in comparison to 40.5% in the third quarter of 2018. The year-over-year decrease of $4.8 million was primarily attributable to lower sales volume of $4.6 million and a negative impact from foreign currency rates of $400,000, which was partially offset by an increase in export grant of $500,000. Selling, general and administrative expenses for the third quarter of 2019 were $19.1 million or 28.3% of revenues as compared to $19.7 million or 26.1% for the third quarter of 2018. The decrease in SG&A related to a reduction in bonus reserves of $1.3 million and a reduction in commissions of $400,000, which was partially offset by increase in wages of $500,000 and in other costs of $500,000. The adjusted net earnings for the third quarter of 2019 were $5 million or $0.37 per diluted share compared to $7.5 million or $0.57 per diluted share…

Thank you, Bill. The company's overall book-to-bill was 0.96 in the third quarter compared to 0.94 in the second quarter of 2018 and 0.98 in the third quarter of 2018. Total orders for the third quarter were $64.4 million, down from $66.7 million in the second quarter and $74.0 million in the third quarter a year ago. Our backlog at September 28, 2019 decreased to $79.3 million from $83.4 million in the second quarter. Overall, our Q3 sales and orders reflected weaker macro industrial trend globally as well as impact from ongoing trade uncertainty, decelerating demand trends and channel destocking. For our Foil Technology Products segment, our market trends were mixed. There are signs and sentiment that the semi equipment market is turning positive, which we expect will result in a pickup in demand for our products in the second half of 2020. The aerospace, military and space market continues to be positive for FTP, driven by strong defense spending, while our general industrial markets, we saw some destocking of FTP products, particularly in Europe. For our Force Sensors segment, sales to OEM customers continue to reflect lower demand from general industrial customers and precision agriculture and construction equipment makers. For our Weighing and Control Systems segment, we saw some order push-outs in the U.K. for our onboard weighing products for transportation market, which we believe is related to the political uncertainty from Brexit. In the U.S., order rates for our process weighing solutions reflected slowing capital investments, while demand in Europe remains solid. Our products for the steel industry continue to perform very well. Moving to Slide 6. Looking at our reporting segment in details. The Foil Technology Products segment declined by 10.6% from the third quarter last year and was 2.7% lower sequentially. Even as we saw continued…

[Operator Instructions]. The first question comes from Sarkis Sherbetchyan of B. Riley FBR.

I just want to start first on the acquisition. So congrats on that. It seems like an interesting acquisition here. In regards to the purchase price paid plus the earn-out, I think on the documents filed yesterday, I saw an EBITDA range of between $4.3 million and $5.6 million to get the earn-out. Can you kind of maybe describe what you'd expect the business to generate from an EBITDA perspective?

Sarkis, the business for the last three years was running at a low-20s EBITDA margin range, and we would expect that to continue going forward and to continue going forward. So we are looking at low-20s -- low- to mid-20s, margin-wise.

Understood. And so it seems like it's going to be accretive out of the gate. Is that the right way to think about it?

Yes, Sarkis. I would say, obviously, like there's only two months left in 2019, which probably won't be as material. But looking at 2020, and given just we talked about the historical EBITDA levels, we would expect to be meaningfully accretive to the EPS in 2020.

And then as far as just kind of why you guys chose to purchase this business, what kind of was very attractive about it? Is there an opportunity to also sell consumables and, therefore, kind of leverage your expertise in some of the other lines of business? Just kind of help me understand why you guys are a better owner of this asset?

Sarkis, we expect DSI to enhance our system capabilities for steel applications, for new developments, and we see room for further enhancements of our product portfolio in the steel market. In addition to KELK, both KELK and DSI are the leaders by far in their own systems and applications within their own markets. Like KELK, DSI's another very strong brand within a similar end market as well as -- within a similar end market. Joining VPG, we believe, would allow DSI to develop other products for similar end markets to VPG, which would be more limited in scope, but more price-effective, which would open potentially more opportunities for current customer base and for new customers.

Understood. That's helpful. And I guess, if I can kind of touch on the sales outlook here. I know you mentioned two months of the acquisition's included. Can you maybe just talk about what you're seeing real time in the macro environment for the 3 segments?

Regarding the macro environment, we -- the market, at least the way we see that for Q3, the trends were mixed. Our Q3 -- the headwinds would include weakness in the semi-test equipment, a slower general industrial demand, particularly in Europe, the transportation market mainly for our onboard weighing due to the Brexit uncertainty. On the other hand, we see some tailwinds in regards to aerospace and defense -- in the aerospace and defense market. And also, the steel market is going very strong. Specifically, the headwinds would include destocking of precision resistors for the test and measurements market, specifically in the semi test market. Orders were weaker in the last few quarters due to customer overstocking. However, we are seeing positive signals in terms of increased customer orders for these products for shipments to be delivered mid of 2020. On the MM business, we have seen a negatively impacted economic slowdown, particularly in Europe and mainly in Germany. Force Sensors, we -- I did mention before, this is mainly the general industrial market. And our onboard weighing orders has been -- we have seen OEM order intake softer due to the -- mainly due to the political uncertainty of the Brexit. On the process weighing, it's more of a seasonality effect, and we would expect to see certain rebound in the following quarter. Specifically, the tailwinds in the Foil Technologies, the aerospace, defense, going very strong, very strong order intake for our PI products in the third quarter, and still continues to be very solid, very strong for us. KELK business continued to perform well, reflecting continued strength in the steel market, and also good order intake in the third quarter. We expect some of the headwinds to begin to stabilize in the fourth quarter as orders for precision resistors and for semi test would expect to rebound next year. And hopefully, the political uncertainty related to the Brexit may be resolved in the coming quarters.

[Operator Instructions]. The next question comes from John Franzreb of Sidoti & Company.

I guess I want to go back to DSI first. You mentioned that there's potential synergies. Could you just tell us what those synergies are that you're looking for?

Okay. When we are looking at the synergies from the DSI acquisition, we don't expect to see any cost synergies. Rather, all of the synergies will be used to leverage revenue. This is not a new concept for us. The technology for our KELK business fit our vertical integration with a different business model. In that way, the synergies came on the revenue side back in 2013, which is similar to KELK. Now, 6 years later, we are in the same situation, integrating DSI into VPG. We expect that DSI will follow the same successful integration trend that our KELK acquisition did 6 years ago.

Okay. But from what I remember with the KELK acquisition, you had a very similar product line and KELK was the dominant player. That's not the case with DSI, though, is it?

No, it is a very similar case. When we have acquired KELK back in 2013, KELK was a dominant player in the hot strip steel mill processes. They had and they still have a wide range of optical measurement as well as roll force. VPG did not have any of these product lines. We had other product lines for weighing application coming from our Swedish Nobel subsidiary. So, to that extent, there were not -- we did not have any cost synergies for the KELK. DSI and KELK was a leading brand in its own market. This is a very similar situation. Well, we don't carry a similar portfolio to DSI. Therefore, we cannot realize any cost synergies, but DSI is definitely a leader in their own market, and we would expect to enhance their position in order to develop further products to their end markets, including helping them to -- or I would say, enhancing our sales channels in order to leverage DSI new opportunities -- for new opportunities as well as the synergies we would expect on the customer -- on the steel mill customers that are currently joint customers between DSI and KELK.

Got it. And who is DSI's main competitors?

DSI is by far the largest manufacturer in their own field. As I said, the installed base is $350 million, which is 4 -- at least more than 4x the combined -- all the combined competitors 4x more there. I cannot say that they have a large competitor. They have very small competitors, a fairly small company in Japan, a smaller company in China and one in Europe, which are more regionally, in nature, with a much more limited product line and a much limited footprint. So we could -- at this point in time, I cannot identify a second significant large competitor. All the others are way, way smaller companies to that extent.

Okay. And regarding financing the deal, if I heard you correctly, Bill, I think you said about $20 million on incremental debt. Is that the right number? What should we be thinking about as interest expense going forward? And -- or so what are your thoughts about debt repayment going forward?

Yes, John. I mean, we use a combination of 50% cash and 50% debt. The debt today, we're at a borrowing rate that's probably all-inclusive, about 4.5% interest rate for that debt going forward. And like you've heard and mentioned that it's very high EBITDA margins. This is all predominantly in the U.S. generating cash to pay down the debt.

Okay. And regarding the legacy operations, FTP had a significant drop in sequential gross margin from September to June on -- less than $1 million drop in sequential revenue. Could you just walk me through why that happened?

The drop in the sequential gross margin for FTP was one significant -- 50% of that was a significant drop in volume. And I have to say, to that volume, as you said, the volume effect was not so large. But within this volume, we have a very significant mix -- product mix effect, which means much more profit. We have seen much more profitable products, lower volume, in combination with less profitable products. So out of this 1.1 volume effect, $500,000 is unfavorable mix. In addition to that, we have inventory reduction quarter-over-quarter, which had an effect of $400,000. We have also a $300,000 negative exchange rate and also some manufacturing inefficiencies, which I would -- around $400,000, which I would assume that most of them are temporary and will not occur in the coming quarter. So we should expect the margins to improve.

Okay. So with that all said, I guess I want to pose the -- think about the outlook going forward a little bit. Ziv, how do you think about the depth and duration of this downturn? Do you feel like it's going to be short in duration? Or do you think it might drag a little longer? And if you think it drags, what are your thoughts about the rollout of new production in the advanced sensor line? Because I know that's a high-margin business for you, but that may suggest that you'll have some redundancies during a downturn. Just can you kind of walk us through your thoughts along those 2 lines?

Sure, absolutely. First, the FTP -- in the FTP, the largest impact is coming from precision resistors. As I've indicated before, the biggest end market slowdown was test and measurement and, more specifically, semi testing. Already, if you see some of the earnings report of the large equipment testing or semi testing manufacturers, you see that they are -- that their, I would say, projection is positive. To that extent, we have seen -- and as I said, we have seen overstocking mainly at distribution and EMS, which are the main sales channel to that end market. Based on the awards that -- and the negotiations that are currently running for 2020, we do believe that we should expect to see a rebound of that business in the second half of 2020. Generally speaking, since we are not selling commodity products, we are selling custom products, the cycle of the process cycle is not -- doesn't go more than 3 to 4 quarters. But we do expect that stocking levels will continue to go down, and we would expect to see an upturn, I would say, sometime in the first half of 2020. Now regarding advanced sensors, this is more of a strategic initiative to position the company running for -- with many, many design wins and also transitioning some legacy technology into the new technology. So in that respect, there is a certain slowdown. It's not dramatic. This is something that also we expect to be stabilized in the coming quarter. But in principle, the expectation that we will -- we are continuing on time with this project, which is very important for us, because we believe that some of the key designs could turn into a significant high volume in the near future. But all in all, we are optimistic looking forward.

[Operator Instructions]. There are no further questions. I would like to turn the conference back over to Mr. Shoshani for closing remarks.

Thank you. I would like to summarize the third quarter. Similar to other industrial tech companies, our business trends in the quarter reflect the general slowing in the global economy and the industrial sector as well as the impact of trade uncertainty. In spite of these headwinds, some of our markets continue to show some strength. For our Q4, we are seeing signs that our weaker markets may be bottoming as customers and distributors work through their inventories. The company's strategic initiatives are progressing on track, and we feel good about them. The excitement and the expectation around the DSI acquisition, we believe it will not only be immediately accretive, but will provide some growth factors in terms of some potential synergies. I would like to thank you for joining the call, and we are looking forward to updating you in the next quarter. Thank you.

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