Hello everyone and welcome to the VPG's Fourth Quarter Fiscal 2022 Earnings Call. My name is Bruno and I will be operating your call today. [Operator Instructions] I will now hand over to your host Mr. Steve Cantor, Senior Director of Investor Relations. Mr. Cantor please go ahead.

Thank you, Bruno and good morning everyone. Welcome to VPG's 2022 fourth quarter earnings conference call. Our Q4 and full year press release and accompanying slides have been posted on our 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 the VPG 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, 2021 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 three of the quarterly presentation. Ziv?

Thank you, Steve. I am pleased to report we delivered another very successful quarter and year for VPG. Beginning with our 2022 performance, 2022 was the best year in VPG's history in terms of growth and profitability. We grew our revenue by 14%. Excluding the unfavorable impact of foreign exchange, we grew revenue by 20.1%. We increased our adjusted diluted net EPS by 40.1% to $2.62. We generated $62 million in adjusted EBITDA and improved our adjusted EBITDA margin to 17.1% from 15.7% recorded in prior year. We launched a new operating strategy and structure built on operational diversification, which we believe will leverage our strong corporate competencies and accelerate our long-term growth potential. We believe these strong results demonstrate the increasing importance of our precision sensing and measurement solutions, the power of our business model and our growth strategy. It is important to note that our 2022 performance is a continuation of the results we have delivered over the past several years, and puts us closer to achieving our three to five-year financial targets. Moving to slide four. Turning to the fourth quarter of 2022. We reported sales of $96.2 million, which was 6.9% higher than both a year ago and the third quarter 2022. Our sales performance continued to be negatively impacted by foreign exchange, particularly in our Sensors and Weighing Solutions segments. FX impacted our total fourth quarter revenues by $5.3 million compared to a year ago and by $800,000 when compared to the third quarter. Thus, excluding FX impact, revenue grew 13.6% from prior year and 7.9% sequentially. We realized record adjusted diluted net EPS of $0.76 in the fourth quarter. We successfully passed on price increases to mitigate higher material costs. Through 2022 compared to a year ago, we realized $8.8 million from price increases,…

Thank you, Ziv. Referring to slide nine and the reconciliation tables of the slide deck. Our fourth quarter 2022 revenues grew 6.9% compared to the $90.1 million in the fourth quarter a year ago, and were 6.9% above the third quarter of 2022. Foreign exchange for the fourth quarter of 2022 had a negative impact on revenues of $5.3 million compared to a year ago and a negative impact of $800,000 as compared to the third quarter of 2022. The gross margin in the fourth quarter was 41.2% compared to 38.7% in the third quarter. On an adjusted basis, excluding $200,000 of acquisition purchase accounting adjustments, our fourth quarter gross margin of 41.5% compared to 41.7% in the third quarter of 2022. Our operating margin was 13.6% for the fourth quarter of 2022. Our fourth quarter adjusted operating margin was 14%, excluding $200,000 of restructuring costs and the adjustment I just mentioned above. Selling, general, and administrative expenses for the fourth quarter of 2022 were $26.5 million or 27.5% of revenues compared to $25.3 million or 28.1% of revenues for the third quarter of 2022. The sequential increase in SG&A of $1.2 million mainly relates to $600,000 for commissions, $300,000 for travel, and $300,000 for other expenses. The adjusted net earnings for the fourth quarter of 2022 were $10.4million or $0.76 per diluted share compared to $9.5 million or $0.69 per diluted share in the third quarter of 2022. Adjusted EBITDA was $17.5 million or 18.2% of revenue and grew 23.3% compared to $14.2 million or15.7% of revenue a year ago. Our purchase CapEx in the fourth quarter was $6.8 million, the majority of which reflects purchases and related infrastructure for the Sensors reporting segment. Total purchase CapEx for 2022 was $20 million or 5.5% of revenues. For 2023, we…

[Operator Instructions] Our first question is from John Franzreb from Sidoti. John, your line is now open. Please go ahead.

Good morning everyone and thanks for taking the questions. Great quarter. Listen, I actually want to drill down into the book-to-bill ratio. It's been quite some time since we've seen such a low reported number. And it seems like there's an awful lot of factors that are involved here. Ziv, I wonder if you can kind of talk about which ones you think are the most temporary in nature, and which ones maybe are you eyeballing with a little bit more concern on a go-forward basis?

Sure. Absolutely. So, first of all, the book-to-bill represents record revenues which somehow increase the magnitude of the book-to-bill. When we are looking at the order changes, it's around three segments -- three end markets, three segments. It's around Test and Measurement for semiconductor equipment, mainly at our EMS and to an extent also a distributor for process automation, for precision resistors. This represents a certain easing of the supply chain, and based on the discussions we had with customers, we are already expecting to see an improvement in Q1 of this year. The second piece is regarding consumer electronics, which has affected micro measurement given the supply chain and some of the manufacturing constraints on our customer side, we are now based on the latest projection we have received from them, to the -- we are expecting in the second quarter to see already orders coming back to a normalized level. The other piece is the transportation market. The transportation market is, to an extent, has been affected by the availability of microprocessors mainly for our onboard weighing business in the UK. And the expectations as well in the coming quarters we are expecting to see an improvement or availability of microchips. Therefore, the demand is expected to return. So, all-in-all, it's around three specific end markets. And we are already -- as we indicated earlier, we are already expecting to see an improved order rate already in Q1, which is expected to improve further along 2023.

And given your guidance, putting revenue of $85 million to $95 million, it certainly suggests that you have ample bookings in the backlog to kind of endure this temporary pause in the order book. Is that fair? And does that booking profile extend into the second quarter? Or does the orders have to come back before it becomes more problematic for the second quarter?

So, historically, the backlog, which represents our customers' desire to deliver product at a given time, slightly represents over 50% of the -- slightly over 50% of backlog, which is expected to be delivered within the following quarter. So, when we speak about the guidance, we are looking at our current backlog, given customer expectations to get the products and what we expect to be booked and built within a given quarter. That's the way we build our, let's say, forecast -- sales forecast model. We don't expect Q1 to be impacted by the so-called lower order intake in Q4, Q1 deliveries.

Okay and I guess -- perfect. And 1 last question, and then I'll get back into queue is regarding the revenue mix. The revenue mix was very beneficial in Q4. How would you expect the revenue mix to play out in Q1 versus Q4?

The revenue mix was favorable in a way, in Q1, given the fact that we have -- that there was higher mix for Measurement Systems at a higher gross margin in respect to Weighing Solutions at a lower gross margin. As you know, we don't give any guidance regarding the gross margin. But all-in-all, we should expect similar level -- I would say, similar level of gross margin in Q1, given the order mix and some changes in the business, the gross margin.

So, maybe Sensors, I think you indicated you expect a better sensor gross margin sequentially, right? So that would be beneficial also.

That is correct.

Okay. Thank you, Ziv. I'll get back in the queue.

Our next question is from Bill Dezellem from Tieton Capital. Bill, your line is now open. Please go ahead.

Thank you. A couple of different questions. First of all, would you please talk to the ag and construction market despite the comments in the release, it sounds like there may be something interesting happening within that industry within the Weighing segment.

Sure, absolutely. Regarding Precision Ag, we had a very, very large customer who placed a very large order in Q3 that has been delivered in Q4, they had to retrofit all their field equipment, and they had to do it pretty fast. This is why we have received a very large order, this business at this point in time is running in a very stable way. Regarding the Construction business, we also received I would say, a midsized order from one of those larger equipment construction companies who are buying our low [Indiscernible]. And at this point in time, we -- I mean we don't see any changes at least given our visibility within the next quarter for large spikes, but the fact that they have placed a large order implied that they had a certain requirement to go and change or to modify x amount of equipment units in the field. But this is a very stable business for us, i.e., the increase in the OEM business, which was quite impressive year-over-year of 52% and even quarter-over-quarter, implies that there is stability and strength on the OEM piece as we move forward in the year.

Thank you for that. And is this a customer that you are winning market share from a competitor? Or -- and why that 50% strength at the OEM level? Because that sounds like that's different from the retrofit that you referenced?

Sure. So this -- the type of OEM business, the OEM -- the Force Sensors OEM business is a very sticky business. In most cases, given the qualification cost they select one supplier. I mean this is not an exchangeable given the -- again, the nature of qualification and the custom spec, which is required for our products to fit the equipment. Therefore, once you have been designed in, you have been designed in for the product life cycle. And now itis based on our customer demand changes that will trigger the order intake. And the product life cycle of those equipment could be 10 to 15 years. But we -- once you have designed, you have been designed, you are there. as a sole supplier. That's the way they operate.

Great. Thank you. And then relative to the acquisition pipeline, I think your opening comments, you inferred that there are favorable developments with discussions taking place there. Would you talk broadly to what's changing and why the pipeline seems to be larger today? And to what degree do the questions about the global economic activity create an opportunity for you.

Sure. Of course. I believe that as once exchange rates went up even in a dramatic way, the -- we see many more opportunities for M&A. We see many more deals that are -- and many more companies that are putting companies on the shelf. Some of them are privately held companies, while others are being held by VCs or financial institutions. I could have guessed that, to an extent, those companies were operating with a nice tailwind in the last couple of years, and they would like to take advantage of the, I would say, improved operational performance in order to optimize the selling price given the economic environment, which they may see and also the higher interest rate environment. Therefore, we do see many more opportunities, which we have not seen a couple of quarters ago.

Great. Thank you for the perspective.

[Operator Instructions] Our next question is from Hendi Susanto from Gabelli Funds. Hendi, your line is now open. Please go ahead.

Good morning, Ziv, Bill, and Steve.

Good morning.

Bill, may I ask questions, how should we think about gross margin in 2023, if you look at 2022 gross margin? How sustainable is gross margin at around 41%? It's higher than like recent historical levels.

Yes, Hendi, I think as Ziv mentioned on the call, especially even going in because we don't really give guidance on gross margins, but yet I think given the product mix, I think we mentioned that we would see similar levels in the first quarter of 2023. And then obviously, as we go out the year, like I said, we don't give guidance, but we feel quite confident of the levels that we're achieving today and the possibilities with increased volume to increase.

Thank you. And then Ziv may I ask about inventory levels. And then when orders return, like how quickly can they turn into like sales in general?

Well, our current backlog is around our current backlog is around 4.8 months of sales, which is above the historical trends of 3.5 months. At this point in time, we don't have any product which is on allocation in any -- we don't have any product which is on allocation. Therefore, we could -- I would say, respond to any potential market uptick fairly fast. Since we have invested in equipment and in infrastructure, we are ready to take any potential volume upside. Naturally, we will have to hire more people, but I believe that this would be -- we would be able to do fairly quickly. So, once additional volume would come, we would be able to turn it into revenues, I would say, within a quarter or two.

Okay. Yes. And Ziv, I think it is great to see advanced sensors like grew to $50 million in 2022. What can we expect in advance sensor in 2023? Are there like new sensor applications that you are pursuing? And in terms of your manufacturing capacity of advanced sensors, should we continue to see the capacity to ramp up meaningfully higher in 2023?

So, advanced sensors today, we do have equipment capacity to support any potential volume upside which may turn into 2020 -- which may come in 2023. In addition to that, we are still servicing our current portfolio, including the -- some very large customers, and we diligently continue our designing wins at existing customers and with new customers. I did mention on the call and this is very -- it's fairly on the early stages, that we are even -- that we have reached out and engaged customers, large customers beyond our consumer electronics, which are in electric vehicles, the design cycle of the nature of the product is that the design cycle is around 12 to 24 months before we run on a full production run rate. So, while we continue to manage the capacity, the equipment, and improving the process, our team members continuously are looking at new opportunities for designing wins in order to assure the growth of advanced sensors in the coming quarters and in the coming years. Sorry please.

And then Ziv, if you are able to share, would you be able to share where can be the footprint of advanced sensors in EVs?

Since those are very early leads and discussions, I would be happy to share it once we would have more advanced steps with our customers. But at this point, it's still in the early stages.

Okay. That is understandable, yes. Okay. Thank you so much, Ziv, Bill and Steve.

Thank you.

Thank you.

Our next question is from John Franzreb from Sidoti. John, your line is now open. Please go ahead.

Fortunately, a lot of my follow-ups have been addressed, but I do want to ask a little bit about the labor inefficiency that you cited in the Sensors segment, Ziv. What was that? And has that been fully rectified?

Yes, the labor inefficiencies that we have incurred in Q4 is mainly due to the fact that we had to adjust our headcount to the volume drop mainly for micro measurement. This is a temporary effect that we don't expect to be repeated this in Q1 of 2023, but we had to make very quick adjustments. And it does include also some severance. So, it's -- you can think of that mostly as a one-time effect.

Okay, fair enough. And regarding price increases, I think you realized just under $9 million in 2022. I'm just curious about the timing of you instituting those price increases? Will there be more benefit coming in 2023 based on the timing? Or would there be necessary to be another round of price increases in 2023 as you continue to battle the inflationary curve.

Sure, the $9 million are the price increases that the company has applied between 2021 to 2022. As we move into 2023, we do see a continuation of material cost increase, not only for microprocessors, but also some other parts due to supply chain and higher inflation costs. This is why the company has initiated another round of price increases from 2022, which should take into effect in 2023 in order to mitigate the material prices that the company is expected to see in 2023, which are naturally beyond the $9 million that has been applied before.

Okay, that’s it for me. Thank you very much guys.

We currently have no further questions. I will now hand back to our speaker for final comments, Mr. Steve Cantor. Please go ahead.

Before concluding, I want to let investors know that we will be participating in the Sidoti Conference in March. And with that, thank you all for joining our call and have a good day.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.