Good day and welcome to the VPG 2020 First Quarter Results Conference Call. [Operator instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Steve Cantor, Senior Director of Investor Relations. Please go ahead, sir.

Thank you, operator. And good morning, everyone. Welcome to VPG's 2020 first quarter earnings conference call. Our Q1 press release and accompanying slides have been posted on the VPG's website, 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, 2019, 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. Please refer to slide 3 of the quarterly presentation. Ziv?

Thank you, Steve. I will begin with some commentary on VPG's consolidated financial results and sales trends, the impact of the COVID-19 pandemic on our business, and the strategy and actions we have taken to mitigate that impact. Bill will provide financial details in the second quarter 2020 outlook. Moving to Slide 3. I'd like to begin my remarks by commending that VPG's team around the world for their hard work and for their dedication during these challenging times as they adjusted quickly to local restrictions and extraordinary working conditions. Their commitment to meeting the needs of our customers has been truly exemplary. Moving to Slide 4. Giving in the rapidly changing market conditions over the past few months, we are satisfied with our financial and operating performance in the first quarter. We have ended the quarter with a positive book-to-bill of 1.08 and grew our total orders 4.4% from the same quarter a year ago. Moving to Slide 5. I'll discuss the operational and EH&S impacts on VPG from COVID-19. As the pandemic begin to unfold around the world, we took steps to keep our employees and customers safe. These measures included suspending business travel and enabling employees whose functions allowed to work from home effectively. We also implemented workplace distancing and increased sanitizing common areas, as well as adjusting our work shifts to minimize contact with other employees. We know of four employees who tested positive for the virus. Of these, two have tested negative after the required quarantine period and two are currently under quarantine. As countries, states, and local jurisdictions around the world implemented stay-at-home orders, we quickly made adjustments to maintain the continuity of our operations while complying with those regulations. While the majority of VPG's facilities were able to continue operations due to the…

Thanks, Ziv. Refer to Page 7 of the slide deck. In the first quarter of 2020, we achieved revenues of $67.7 million, operating income of $4.6 million or 6.9% of revenues, and net earnings per diluted share of $0.24. On an adjusted basis, which excludes $515,000 of acquisition purchase accounting adjustments related to the DSI acquisition in November of 2019 and $130,000 of restructuring costs, our adjusted operating income was $5.3 million or 7.8% of sales and our adjusted net earnings per diluted share was $0.29. Our first quarter 2020 revenue declined 2.1%, compared to 69.1% -- $69.1 million in fourth quarter and were down 11.5% as compared to $76.5 million in the first quarter a year ago, which was the historical high quarter for VPG. Foreign exchange negatively affected revenues by $600,000 for the first quarter of 2020 compared to a year ago and had no impact as compared to the Q4 of 2019. Our gross margin in the first quarter was 37%. Our gross margin on an adjusted basis was 37.8%, which improved from 36.8% in the fourth quarter of 2019. Our operating margin was 6.9% for the first quarter of 2020. Excluding the above-mentioned purchase accounting adjustments and restructuring charges, our first quarter adjusted operating margin was 7.8%, which increased from 7.5% we reported in the fourth quarter of 2019. Selling, general, and administrative expenses for the first quarter of 2020 were $20.3 million or 30% of revenues. This compared to $20.4 million or 26.7% for the first quarter of last year and $20.2 million or 29.2% in the fourth quarter of 2019. The sequential SG&A in the first quarter reflected the inclusion of a full quarter of SG&A expenses for DSI. The adjusted net earnings for the first quarter of 2020 were $3.9 million or $0.29…

[Operator instructions]. Our first question will come from John Franzreb with Sidoti & Company. Please go ahead.

First question is regarding the reduction in CapEx. Can you kind of put a number around what you expect the capital spending will be for the full year? And could you also discuss a little bit about how that's impacting the advanced sensor product line? Now, what are your expectations on incremental revenue contribution, the timing of completing of the project? Little bit more detail there would be helpful. Thank you.

So, John, initially, we have stated that the expected capital spending for 2020 is going to be around $33 million. During those times, we have decided to push out around 30%, which would reduce the capital spending to the low 20 numbers. The capital spending that has been pushed out was more equipment related, which was related for expansion for some product lines where our customers has pushed out the launch for those products, as well as the India second flow expansion. We have not -- all the capital spending, which are related to advanced sensors in respect to the construction and the transition to the new building in addition to all the capacity and the equipment that is expected to be put in place are all on plan. At this point in time, we don't see any delays in transitioning to the new building, which is expected to be early in Q3 of this year, and we don't expect any delays in expansion or in cost reduction for all the major initiatives of the company for 2020.

Okay. Fair enough. And, Ziv, regarding India -- so I guess two questions. One, what's your confidence level that you're going to be up on that -- the time line that you're talking about, mid-month? And secondly, do you expect to recover the lost orders there next quarter or would be kind of playing out of over a couple of quarters or do you assume maybe some of that volume is just permanently lost?

Okay. Very good. So maybe we will start with the level of uncertainty we have in respect to reopening the plant on May 17. As you know, John, we don't have a crystal ball, but what we hear in the field is that there is a high likelihood that our facility will be -- our facility and the whole industrial zone will be back on track on May 17. And the reason is that if we look at the initial shutdown that the Indian government has implemented, as of late March until May 4, it was pretty much nationwide. Then the Indian government were looking at certain pockets where you have higher infection rates and lower infection rates. Fortunately, our facility and the industrial zone we are in, in Chennai, is marked in yellow, which is not -- which is considered as an infection rate, but not really to the highest degree, like a red zone, which other parts of India are marked like that. Therefore, we do believe that on one hand, this is a yellow zone, which means the infection rate is not so high. And given the situation and the measures that the Indian government takes, we do feel that there is a high probability that they will reopen the complete industrial zone and to a full production as of May 17.

And? Go ahead, the second half of that question?

Regarding -- yes, the second half. Regarding looking, reviewing the current backlog of force sensors customer-by-customer, we have identified that the majority of the customers are an OEM customers. If you can recall, OEM customers is a sticky business. It's a design-in win customers, where we have a unique position where we provide value-added to our customers. Therefore, we believe that the likelihood for being able to ship the product off -- to produce and to ship the product to our customers is extremely high at this point in time. We are -- and given the fact that we also have ongoing discussions with the customers, some of the volume, whatever we can, will be transitioned to our Chinese facility. But given the fact that India represents 80% of the segment capacity, of force sensors' capacity and the fact that we have an open dialogue with our customers, we believe that there is a very high likelihood that the majority of the backlog, would we -- we'll be able to deliver to our customers. Now regarding the timing, it really depends how quickly we would be able to ramp up and to catch up. So I don't believe we would be able, the complete backlog or the complete -- we would be able to offset or ship the complete backlog within a quarter, but I do believe that there is a very high likelihood that most of the catch-up could be done within two quarters given the fact, again, that we would be able to reopen the facility on May 17 into a full production.

Perfect. That's exactly what I was looking for. And lastly -- I apologize if I missed this, did you mention anything about order tempo company-wide in April, how that looked compared to March?

No, John. We didn't give any in the script; we did not give any guidance or refer to that at all.

[Operator instructions]. Our next question will come from Sarkis Sherbetchyan from B. Riley FBR. Please go ahead.

So first question is on the force sensors, kind of the revenue being down $5 million to $7 million in the second quarter. Is that sequentially from Q1 or is that year-over-year?

No, this is sequentially from Q1, given current backlog and given current market conditions.

Okay. And that's -- the same goes for the $3.5 million to operating profit, correct?

The $3.5 million operating profit pretty much consists of the majority of the shortfall of contribution margin we would not be able to get due to the fact that we are not -- we will not be able to ship the product and the fact that we will have to also continue to pay the employees during the shutdown time and smaller additional logistics costs.

Got it. And in the FTP segment, you mentioned significant orders for advanced sensors. Obviously, the build out continues. So, I guess, is there the ability to maybe quantify that or help us give kind of somewhat of a flavor of what that means?

We did say -- we did indicate that the quarter-over-quarter advanced sensors' revenues are flat. And the fact is that on one hand, our traditional markets, which are general industrial weighing, for example, under that falls also oil and gas and industrial automation are way, way down. On the other hand, we have a very nice uptick in regards to consumer and medical. So those two end-markets were able to offset the significant drop in the other end-markets, which are very much depressed in this environment.

Okay. And sorry if I missed this, but what were the revenues for advanced sensors?

We did not disclose it the revenues for advanced sensors, but we said that this is already -- I think in prior quarters we said it's already in the double-digit area, but we have never provided a precise number.

Okay. I guess you can appreciate saying revenues for advanced sensors are flat, but not having the number attached to it makes it kind of hard for us to understand, looking under the hood, what that means. And as we think about consumer and medical being strong in that area, can you maybe talk about what type of application it might be hitting so that we can get a better sense for whether this is a unit volume growth story or whether you're taking market share? Just kind of help us understand that.

Okay. So regarding consumer, since -- as we indicated in the past, advanced sensors has unique features, whereby only with our design -- and we are the only one who have a certain capability and abilities to produce certain form factor at the given cost with certain functionality. Therefore, on the consumer part, we have a more unique position. Unfortunately, we are under disclosed NDA, so I will not be able to provide more information regarding the type of application. But regarding medical, we have many, many different new applications like infusion pumps and other applications, which are picking very nicely given the environment today.

Okay. Thanks for that. At least I tried. DSI --

Sarkis, this is Steve Cantor. Just want to add a little more color to what Ziv suggested. And just so it's clear, the book-to-bill in advanced sensors was a significant positive, so well over one in the first quarter. So that's including the puts and takes that Ziv described.

Thanks for that. Just moving on to the contribution from DSI in the first quarter, can you maybe help us understand what sales contribution were and maybe profit contribution?

Sure. The DSI contribution in the first quarter revenue-wise was $3.7 million. Adjusted EBITDA margin of 33.5%, which is $1.2 million and a gross margin level of 59%.

That's pretty good. Do you expect kind of that level of performance to continue or do you think you can extract some more synergies as you kind of integrate the business?

Well, DSI has been performing extremely well since we acquired them in Q4 of '19. As we move on, we have seen, and this is part of the nature of our business, some -- a little bit slower order intake, which was part of that. And we do believe that there will be a smaller effect in regards to some customers being -- we'll be pushing out deliveries due to the COVID-19 pandemic. So I do believe that the level of -- that the integration, the cost reduction are all in place, but the revenue will be a little bit -- will probably may change due to the COVID-19, which means some of the orders that we had expected to book already in this coming quarter may be pushed by a quarter or two.

Got it. And I guess if you can maybe provide some broader color on the end-markets, right? I mean you mentioned some of the more specific ones inside of the segments. But I guess if you step back and look at kind of the end-markets, whether it's avionics, military space, or test and measurement or just kind of industrial, like, what looks exciting, call it, in the next few quarters? What looks like there may be continued challenges? Just kind of want to hear what you're seeing real time.

Sure. So really from a high-level company-wide perspective, we do see a -- we have seen and we do see still a very strong demand in test and measurement, in particular, for semiconductor equipment testing. We do see a strong demand, as I mentioned, on the consumer, specifically for advanced sensors. Also, on the medical part, we have seen very good order intake. For precision ag and construction, still might be more flat, while the downside or the weaker order intake is on the industrial weighing and the general industrial, which consists of oil and gas, industrial automation, and tooling for automotive. So since VPG is highly diversified, we have some end-markets, which are not performing so well, but on the other hand, we have other end-markets which are performing very well. So on a high-level, one balance the other.

[Operator instructions] Our next question will come from Brett Hendrickson with Nokomis. Please go ahead.

Hey, guys. Good morning. This isn't why I was queuing up, but I just missed -- well, right before you said orders were flat in steel, what were the areas of strength, by the way, just because I missed it in my notes?

The strength part of the company, the -- for the balance sheet, test, and measurement?

--:

Test and measurement. We speak about AMS, avionic, military and space, consumer for advanced sensors, and medical all in all.

Okay. Good. And advanced sensors was, I guess, where my original question was. Can you remind us the new facility in Israel? You might probably rather talk about it on a unit basis. What's the capacity increase going to be versus your existing facility, when you get that fully up and running?

x, 7x: 50%:

Sorry, Ziv. So -- if I'm not following. So you're going to have five to seven times the space, and you could -- if you needed to, you could quickly fill up half of that space with equipment?

No. Currently, we are configuring the products that we are going to utilize the space in a very efficient way. Naturally, as we are going to put more and more equipment in place, there will be some internal reorganization where we would be able to provide more capacity as needed. Regarding -- there is a certain area where we may have an extra space, which we intend, at this point in time, to lease out in order to capture the revenue until the demand is going to be provided.

Okay. So to --

Summarize that, the complete facility is going to be utilized in an optimal way since day one.

Good. Good. And can you clarify what you said about the -- I know you don't want to give the exact amount in the quarter of advanced sensors revenue, but can you quantify what you said to Sarkis about the historical advanced sensors revenue?

I think that during the prior quarters, we have been speaking about some high teens. And since then, we are beyond that. But I have not provided more color on that.

And you're speaking on an annualized basis?

On an annualized basis, yes.

This concludes our question-and-answer session. I would like to turn the conference back over to Steve Cantor for any closing remarks. Please go ahead, sir.

Before closing, I want to let listeners know that we will be participating in Baird's Virtual Investor Conference on June 4. There'll be more information on that posted on our website. And with that, we'll now close the call. And thank you all for participating. Have a good day.

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