Good day, and welcome to the VPG 2019 Fourth Quarter Results Conference Call. All participants will be in listen-mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Steven Cantor, Senior Director of Investor Relations, VPG. Please go ahead.

Thank you, Andrew and good morning everyone. Welcome to VPG's 2019 fourth quarter earnings conference call. Our fourth quarter press release and accompanying slides have been posted 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 also be accessed on the VPG website. Turning to slide 2. 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 and the Form 10-K for the year ended December 31, 2018 and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and President and Bill Clancy, CFO. And now, I'll turn the call to Ziv for some prepared remarks. Please refer to Slide three of the quarterly presentation. Ziv?

Thank you, Steve. I will begin with some commentary on VPG's consolidated results and our sales trends and operational highlights by segment. Bill will provide financial details and then our Q1 2020 outlook. Moving to slide 3. The fourth quarter capped the second best year in VPG's history in terms of revenue and profitability. In spite of some macro headwinds, after beginning the year, in Q1 with one of our strongest quarters ever, business trends and our revenue slowed in the second half of the year, reflecting a global economic slowdown that impacted many of our end markets. Despite the headwinds, we achieved solid results for fiscal 2019 with sales of $284 million and adjusted operating margin of 11.7% and adjusted EPS of $1.69 and $20.4 million of adjusted free cash flow. Moving to slide 4. For the fourth quarter, sales of $69.1 million were at the high end of our expectations and grew 2.6% sequentially. Bookings were strong as total orders for the fourth quarter of $79.8 million grew 24.0% from the third quarter and reflected growth in all three segments. The result was an overall book-to-bill of 1.15 in the fourth quarter, an improvement from 0.96 in Q3. Looking at our fourth quarter business trends by market. In test and measurement, demand for our precision resistors in semiconductor test applications rebounded. In the general industrial market, we saw continuous softness in oil and gas and in industrial process applications. In transportation, where we focus on track in one market, orders for our VPG onboard weighing solutions were solid in both the avionics military and space market or AMS and steel market, trends continue to be directionally positive, but our orders reflected the project-driven nature of our products. In the industrial, weighing, and other markets which includes precision, agriculture,…

Thank you, Ziv. On slide 7 of the slide deck. In the fourth quarter of 2019, we achieved revenues of $69.1 million, operating income of $1.8 million or 2.5% of revenues and net earnings per diluted share of $0.28. On an adjusted basis, which exclude $1.7 million of costs and purchase accounting adjustments related to the DSI acquisition and $1.7 million of restructuring costs, our adjusted operating margin was $5.2 million or 7.5% of sales and adjusted net earnings per diluted share was $0.27. Continuing on slide 7. Our fourth quarter 2019 revenue of $69.1 million increased by 2.6% as compared to $67.4 million in the third quarter and we were down 10.2% as compared to $77.0 million in the fourth quarter a year ago. Foreign exchange negatively impacted revenues by $500,000 for the fourth quarter of 2019 as compared to a year ago and had no impact as compared to the third quarter of 2019. Our gross margin in the fourth quarter was 35.0%. Excluding $1.3 million related to purchase accounting adjustments for the DSI acquisition, our gross margin on adjusted basis was 36.8%, which declined from 38.3% in the third quarter. Our operating margin was 2.5% for the fourth quarter of 2019. If we exclude the above-mentioned purchase accounting adjustments acquisition cost of $400,000 and restructuring expense of $1.7 million related to the facility closures and downsizing as Ziv mentioned, our fourth quarter adjusted operating margin was 7.5% as compared to 10% in the third quarter of 2019. The adjusted gross margin for the fourth quarter of 2019 included approximately $1.1 million of inventory reductions and inventory-related adjustments, which are not expected to reoccur. Excluding these inventory-related factors, adjusted gross margin would have been 38.5% above the 38.3% we reported in the third quarter of 2019. Selling, general…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from John Franzreb of Sidoti & Company. Please go ahead.

Good morning guys. How are you doing?

Good morning.

Good morning, John.

Okay. I actually want to start with the gross margin. Embedded in the adjusted gross margin is money allocated for the inventory reduction and something else. Can you kind of just; A, kind of parse out how much is embedded there? And B, would those costs continue into the first quarter of this year?

John so the inventory reduction, which is mainly driven by Force Sensors, the amount is around $600,000. This is part of our long-term program to improve our working capital as we intentionally reduced our inventory levels. And this is the effect of reducing the inventory, which affects the balance sheet. We did reduce it substantially. We do believe that the inventory will still be continually be monitored and we would expect to further reduce that, but definitely not to this dramatic effect, which means the effect of the inventory reduction should be slowed down or should be almost diminished. Regarding the other effect, which is around $400,000 this is the one-time inventory adjustment, we annually conduct physical count of our inventory. And typically the impact of those -- of this process is negligible. Because of the manufacturing relocations and system implementations, we had a number of negative, singularities which individually were not material, but in aggregate added to a more significant number which is the $400,000. We don't expect this unusual situation to reoccur.

Got it. Okay. And the transition of the $0.04 manufacturing to India and China how far along are we on that process? And I guess we'll just – from that just discuss maybe China how your facilities in China are acting or reacting to the coronavirus shutdown.

Okay. Good. So regarding the relocation we are well ahead with our relocation programs. At the end of 2019, at the end of last year, we were able to move production from the U.K. to close our facility in Israel for Force Sensors and to move more production from China to India where there are still more restructuring to come in the coming years, but as I indicated before we should expect to realize as we move forward at least $1.6 million of savings in Force Sensors net of inflation. Regarding the Chinese situation, it has two aspects. One we have still a fairly small manufacturing facility in Tianjin in China, which we were allowed to go back to work two days ago on February 2017. We are trying to – we have seen high level of attendees and we are trying to catch up with the deliveries. Naturally, there are still some restrictions regarding moving goods in and out of China depending on the situation but – and we may have to change shift. But al-in-all, we are back to work. On the other hand, we have quite a few Chinese customers in respect to servicing our FTP Force Sensors and WCS mainly in the steel market. Some of them have been allowed to go back to work. Others are still – it's still pending. We are monitoring the situation on a daily basis. And at this point in time, we are optimistic and we do believe that they may get the approval to go back to work. It's still in a way a little bit vague to put our hands around the magnitude, but we don't believe – given the progress they are making in China we don't believe at this point in time, it should be a significant effect.

Okay. When you say it might have to be a significant effect when you think about the guidance for the first quarter the $63 million to $70 million has there been any kind of revenue reduction as a result of the coronavirus in that number? Or is that not affected by your end – your customers or anything?

Our guidance exclude any effect coming from the coronavirus situation.

Okay. Thanks. I will get back into queue. Thank you.

The next question comes from Sarkis Sherbetchyan of B. Riley FBR.

Thanks for taking my question here. So each segment's book-to-bill ratio has rebounded to a nice growth. Can you maybe give us some more granularity on the metric for each segment? And how that relates to your sales outlook?

Okay. So each segment's book-to-bill ratio has rebounded to a nice growth. Can you maybe give us some more granularity on the metric for each segment? And how that relates to your sales outlook?

Okay. So maybe starting on a high level, as being indicated, the sales guidance reflects definitely a portion of -- in a way of some of our customers' project-driven business, which is mainly the timing effect of our Pacific Instruments KELK and DSI, which in a way, it's -- in spite of the very positive market conditions, is how those orders has been timed. In addition to that, since you -- the book-to-bill ratio mainly for FTP was extremely strong. We have booked longer lead time orders that are expected to ship in the quarter -- that are expected to ship in the quarter and assumes constant fourth quarter exchange rate. But since those has been booked, I would say, that we would expect to ship some of them beyond Q1. All in all, some of the end markets has recovered quite nicely, especially in FTP when it comes to test and measurement, automatic testing equipment for semiconductor, AMS still has a positive momentum, very positive momentum, but at the same time still the general industrial in regards to oil and gas, in regards to equipment automation, in regards to other end markets is still fairly soft. As I believe, it was stated, we are in a destocking situation, where we believe, given the discussions we had with customers that we have reached the bottom and we do expect things to change and orders to flow through in the next quarter or so.

Was there a follow-up sir?

Yes, yes. I'm sorry. I was just putting myself off mute. Can you maybe talk about the sales and earnings contribution from the acquisition for the quarter? And then, after that if you can maybe touch on your expectations for sales and earnings contribution from DSI for the full year?

For the quarter, I could say that we had DSI for two months. Revenues for DSI were $4.1 million. Gross margin was over 50%. And adjusted operating margin was $800,000 close to 19.1% for the quarter and a book to -- and a very strong book-to-bill of 2.26. At this point in time, we don't give complete guidance or full year guidance for DSI, but we are still running on a very strong momentum. As I just indicated, the book-to-bill of 2.26. And we -- I mean, the integration process is going very well and we do expect it to be on target per our internal expectation.

Thanks for that. I guess if we were to kind of backtrack into what you communicated from a financial profile on the last call, would we kind of still expect it to be in line with those financial metrics or better?

I would say that we could definitely -- it could definitely be in line with the financial metrics we have provided before.

Great. And then, if we step back and look at the CapEx outlook for this year and the remaining kind of spend for the manufacturing facility built, can you maybe talk about what shifted out of fiscal 2019 and goes into fiscal 2020? And on top of that just kind of what the balance of your maybe maintenance CapEx would be for the year?

Sure. So, regarding capital spending in fiscal 2019, we have under spent in respect to what we have projected to spend in regards to planned CapEx and this is mainly due to project timing as some of our planned CapEx has shifted from Q4 to Q1 and this is mainly the Modi'in project. We are still on track, but there was a timing effect. We are anticipating capital spending to be approximately for 2020 to be in the range of $30 million to $33 million, the majority of which relates to infrastructure and building related around 20 million, which would encompass the Modi'in project the second floor in India and some expansion of our Japanese facility for precision resistors, while the rest of the CapEx would be on the equipment side. This is -- this will definitely be a fairly unusual year from a CapEx standpoint. And once we close 2020, we should go back to the more capital spending run rate, which should be around 4% to 5% of sales, and maybe just another indication that 75% of the old capital support expansion and cost reduction in respect to maintenance of business.

Got it. Thanks for that. And just one more for me and I'll hop back in. You mentioned for advanced sensors that product line grew 20% versus 2018. Would that suggest now the product line's annual sales range is maybe in the mid $20 million range. Can you maybe help us kind of understand where it stands today?

I'm not sure we did provide a rough number regarding advanced sensors, but it's definitely -- I would say that we are in the double-digit million dollar revenue level. A level -- a rough number would be -- let's say, approximately your estimation within a range would be correct but we never provided a clear indication regarding the specific number.

Thanks. I’ll hop back in the queue.

[Operator Instructions] The next question comes from Patrick Ho of Stifel. Please go ahead.

Thank you very much. Ziv, maybe as a follow-up to the coronavirus question earlier you talked about the customers and your manufacturing. Are there any impacts on the supply chain that may cause some uncertainty in terms of the revenue line?

If we speak about the supply chain in regards to supporting our own manufacturing, which again it's not a sizable one, we may have a certain effect. But at this point in time, I'm considering that as a second effect, because we had some inventory to support our production there in China. So it really depends how long it would take them to ease up the conditions, so we would be able to provide essential or key raw materials. But I don't think this is in that sense a significant risk for our revenues. Since anyhow our manufacturing base is not sizable in China.

Great. That's helpful. Maybe and as my follow-up question, in terms of some of the markets that you participate in, you had a very good defense and aerospace year over the last -- in 2019. How does that market look like for you as you look forward in 2020 given that those are very project related?

So given this -- regarding the AMS I think that -- I would say that part of the significant increase in order intake in Q4 was in respect to the AMS end market. So in that case we can -- we still see a continuation of a similar dynamic in 2019 moving into 2020. And in some cases, we see even a further enhancement of investments. So we do expect AMS to continue to be strong or even stronger moving into 2020.

So in terms of the longer-term gross margin outlook you set a goal of 45%. You're near 40% today on a pro forma basis. What are the key variables over the next couple of years that'll drive that incremental 500 to 600 basis points that still need to be made up? Is it more just revenue growth absorption? Or are there additional cost structure moves that can be made to I guess narrow that gap.

Regarding our 3 years projection which I still believe, it's viable and we can make it. First, we will continue to take out cost out of the business as we did before. We did had in this specific quarter few singularities which we have reported and a significant inventory reduction which we are not expecting to repeat itself. And only those two effects by themselves are over $1 million reaching when -- in Q1 of 2019 when we have exceeded those targets, we were at the revenue level of around about let's say, 10% to 12% higher than the current run rate. So definitely in order to reach those targets we will have to be at a much higher volume as well.

Great. Thank you very much.

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

Thank you. To summarize, for Q4 we were pleased with our book-to-bill, the performance of DSI which is our newest addition to VPG and the milestones we are achieving in our manufacturing and cost-optimization initiatives. I also want to note that in March we'll be at the Sidoti Conference in New York. I want to thank you for joining our call today and we look forward to updating you on our next earnings call in May. Thank you very much.

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