Hello, and welcome to the VPG Second Quarter Fiscal 2020 Earnings Call. My name is Elliot, and I will be coordinating your call today. [Operator Instructions] I'd now like to hand over to Steve Cantor, Senior Director of Investor Relations. Floor is yours, please go ahead.

Thank you, Elliot. Good morning, everyone. Welcome to VPG's second quarter of 2023 earnings conference call. Our Q2 press release and slides have been posted on our website at vpgsensors.com. An audio recording of today's call will be available 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, 2022, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and President; and Bill Clancy, CFO. And I'll now turn the call to Ziv for some prepared remarks. Please refer to slide three of the presentation. Ziv?

Thank you, Steve. I will begin with some commentary on VPG's consolidated financial consolidated financial and sales trends for the second quarter. Bill will provide financial details about the quarter and our outlook for the third quarter of 2023. Moving to slide three. We achieved another strong quarter for VPG. We grew revenue year-over-year and sequentially. We performed well financially as we increased adjusted gross margin, adjusted operating margin and adjusted diluted EPS from Q1. We generated $16 million of adjusted EBITDA, $9.8 million of cash from operations, and $6.4 million of adjusted free cash flow, which supports our capital allocation strategy to grow stockholder value. Orders grew sequentially, and we have a solid outlook for the third quarter, driven by our backlog. Customer engagement remains high as we continue to extend on long-term strategic growth initiatives to capture expanding and broadening opportunities for our precision measurement and sensing technologies. Moving to slide four. Looking at the second quarter results in detail. We reported sales of $90.8 million, which was 2.5% higher than a year ago and 2.2% higher sequentially. Orders of $85.6 million grew 3% from the first quarter. This reflected higher sequential bookings for all three business segments and resulted in a book-to-bill ratio of 0.94. In the current macro environment, our customers are maintaining lower inventory levels. Nevertheless, given the custom nature of our products, we anticipate we will see bookings improvements approximately in Q4 of this year to early 2024. As I indicated, we improved our adjusted gross margin to 42.7% from 41.9% in the first quarter, driven by higher sales, higher selling prices and a favorable impact of FX. This was partially offset by unfavorable product mix in our Measurement Systems segment. Our supply chain continued to improve compared to a year ago. We incurred…

Thanks Steve. Referring to slide nine and the reconciliation table of the slide deck, in the second quarter of 2023, we achieved revenues of $90.8 million, gross profit of $38.7 million or 42.6% of sales, operating income of $11.8 million or 13% of revenue and diluted net earnings per share of $0.60. On an adjusted basis, our gross profit was $38.8 million or 42.7% of sales, operating income was $12 million or 13.2% of sales, and diluted net earnings per share was $0.58. Our second quarter revenues increased 2.2% compared to $88.9 million in the first quarter of 2023 and were 2.5% above the second quarter a year ago. Changes in foreign currency rates reduced our total second quarter revenue by $700,000 compared to a year ago and had a favorable $200,000 impact compared to the first quarter. Gross margin in the second quarter was 42.6% as compared to 41.9% in the first quarter of 2023, which benefited from higher volume, higher average selling prices and favorable foreign exchange rates. On an adjusted basis, second quarter gross margin was 42.7% as compared to 41.9% in the first quarter of 2023. Our operating margin was 13% for the second quarter. Adjusted operating margin in the second quarter was 13.2% as compared to 11.4% in the first quarter of 2023. Selling, general and administrative expenses for the second quarter were $26.8 million or 29.5% of revenues as compared to $25.9 million or 29.2% of revenues for the second quarter of 2022. The increase in SG&A of $900,000 was mainly attributable to $700,000 for wage increases, $300,000 for travel, $300,000 of commissions and $100,000 of other costs, partially offset by $500,000 of positive foreign exchange rates. The adjusted net earnings for the second quarter were $8 million or $0.58 per diluted share compared…

Thank you. [Operator Instructions] Our first question comes from John Franzreb with Sidoti. Your line is open.

Good morning guys, and congratulations on a great quarter. I'd like to start with the really good results coming out of Weighing, the gross margin fairly impressive. Can you talk a little bit about the mix that you're seeing there and the cost reductions and the sustainability of a gross margin at that level?

Good morning, John. Regarding the gross margin for Weighing Solutions, the adjusted gross margin reflected a favorable product mix between our four sensors on board weighing, we have seen more sales on the TruckWeigh and VanWeigh. Sales has increased by 27.9% sequentially for TruckWeigh and VanWeigh. This is regarding the mix. And also, we have seen also an increased selling prices to offset the additional material cost reduction. In addition to that, we are continuing to execute on our operational excellence plan, which we will -- we are continuing to relocate products from higher labor cost locations to a lower labor cost location. So, I would say the result of the gross margin is reflected in a few factors. It is the favorable product mix, is the selling prices, the ASPs increased as well as the cost reduction initiatives.

So, Ziv, do you think that, that means you reset the Weighing Solutions margin profile permanently higher?

So, I would say that I think that we have reached a record level. And I think that this range is sustainable going forward at a constant business environment.

Excellent. You also touched on this in your prepared remarks, but there was a big jump in 2Q versus 1Q in your steel sales. What are you hearing from the steel customers? I know it's a lumpy business, but how does it look for the balance of the year?

In the second quarter, we have recorded, I think, record steel bookings. Steel business is still very, very strong. I think it's still premature to say how the rest of the year is going to look like. But at this point in time, it looks like a very robust business. In the second quarter, we had strong bookings.

Got it. And in your advanced sensor line, you mentioned that consumer business in the advanced sensor was still down versus a year ago. But how is total volume look in advanced sensor? Is it flat year-over-year? Just can you give us a sense how it's performing on a relative basis, all-in?

Sure. Advanced sensors revenues were flat in the second quarter compared to the first quarter. Order for consumer applications continue to recover, while orders for industrial applications were softer, especially in Europe as customers continue to deplete their inventory levels and adjust their production schedules. So, going back to the comment regarding consumer, consumer business has improved quarter-over-quarter. And at this point in time, we see a more stable environment going forward for consumer, but we are not back to the pre -- to the 2022 levels -- to the peak 2022 levels.

Okay. And just one last question on the tax rate, significantly higher than what I was looking for. Is that a certain business driving that or sales or certain geography driving that? Can you just talk a little bit about that?

Yeah. John, so the higher tax rate for this quarter is truly driven on the mix of the income, where the income is being earned and -- obviously is being earned in higher tax rate jurisdictions than it was a year ago. So that's truly a mix of where the earnings are being recorded.

Okay. Thanks Bill. I'll get back in the queue, guys. Thank you.

[Operator Instructions] We now turn to Griffin Boss with B. Riley Securities, Inc. Your line is open.

Hi, thanks. Good morning, guys. So, I wanted to dig into something that Ziv talked about in terms of leveraging the KELK technology, applying that to the aluminum market. Are you speaking with existing customers who have demand for your products in that market? Or would you be targeting a new customer base? And similarly, when would you expect to make inroads here? Is this a longer term opportunity? Or are you working on that in the near term?

Sure. So, historically, the legacy business for KELK is in the steel market. We have identified a similar opportunity in the aluminum steel -- at aluminum steel mills. Now, we are working with some customers in order to modify our systems, so we would be able to provide a similar -- I would say, similar performance. At this point in time, the discussion is fairly in the early stage, but I believe that once you establish a platform, the scalability is going to be fairly quickly. But we are in the design phase and in discussion with those customers.

Great. Okay. That's helpful. Thanks Ziv. And then, just looking at Q3 currently, I just want to get a sense of how, to the extent you could talk about it, orders are trending sort of into the back half of the year. Are they -- do you see orders picking up right now from the Q2 levels?

Sure. So, in the second quarter, we have reported orders going up in all three segments. If we drill down to the different reporting segments, we will see that in Sensors, we had a few quarters of very soft test and measurement, mainly semiconductor test and measurement business. We believe that through the end of the year, orders will start to rebound in general, industrial and avionic military and space, distributors and EMS are still very, very cautious in regard to the supply chain, given the macro environment. For Weighing Solutions, which is mainly driven by general industrial, we have seen also softening of orders in respect to few quarters ago. Still, quarter-over-quarter, there is a stability. And the expectation is going forward to the second half of the year, is that we should expect to see a stable environment in the second half of the year. In Measurement Systems, as I mentioned, two strong quarters of book-to-bill above one, cyclical demand coming from the steel market. And we still have to see how this is going to result, but the overall vibe is that looking -- moving into the second half of the year, we should see a stable business environment in respect to the second quarter.

Okay. Great. Yeah. And then, Ziv, just towards the end of your prepared remarks, I just want to make sure I heard you correctly. Did you -- along the same lines, so you expected Q4 to be sort of similar levels as Q3, given the business environment?

We were speaking about stable business environment. All-in-all, in respect to the second quarter. At this point in time, the projection is in respect to the second quarter.

Okay. All right. Sure. And then maybe just last one for me, for Bill, regarding the CapEx. Is this going to be sort of a similar level in Q3 and Q4? Or should we sort of expect the CapEx level to increase more in the fourth quarter?

Griffin, yeah, so we said we would spend about $18 million to $20 million for the full year. We're at roughly, what $7.8 million or about $7 million now. So, you will see more of the capital spending in the second half. I think, Ziv, in his remarks -- when we finalize the expansion in India, Japan, so we'll be paying the majority of that, probably late third quarter, early fourth quarter. But overall, it will be close to the $18 million to $20 million number for the year.

Perfect. Okay. Super helpful. Thanks guys.

We now turn to John Franzreb with Sidoti. Your line is open.

Hey, guys. Just a quick update on your thoughts about the M&A environment that I maybe recall hearing that in the prepared remarks.

Regarding the M&A environment, given our balance sheet, naturally, John, M&A is very high on our radar. At this point in time, we have been interacting with a few companies. And given the business environment and the higher interest rate, deals or valuation should go down. But at this point in time, we have not seen real valuation drop. So, we still believe it's on the higher end, but we are exploring and in dialogue with few -- exploring a few options. At this point, it didn't come to fruition, but we believe that in the coming quarters, valuation would be more reasonable. And we -- hopefully, we would be able to complete.

Okay. Thank you, Ziv. And I'm just curious if there's been -- given the stagnant environment we are currently in, is there any changes to your three to five-year growth targets and profitability targets? Are they still intact, because I know they also encompass in potential M&A?

At this point in time, we have not changed our three to five years target.

Okay. Thank you for taking my follow-ups.

[Operator Instructions] Now turning to Hendi Susanto with Gabelli Funds. Your line is open.

Good morning, Ziv, Bill, and Steve.

Morning.

Ziv, I have a question. So, currently, customers and distributors are being cautious with regard to inventories. When things normalize, when -- let's say, they have comfort to start building inventories again, what are the likely path toward that state?

Could you repeat that? I'm sorry, I didn't hear the last piece of your question.

So, let's say, in terms of -- let's say -- anticipation of inventory build once there is less macro concerns, let's say, no more excess inventories, what kind of, let's say, like signs that we should see? Do you think they will revamp inventory like incrementally? Or could there be some step-up function like customers and distributors like buying your products to step-up their inventories? Like what kind of path do you think that may happen when there's no more -- there's -- when there is more optimism on the state of the economy and then customer and distributors start to buy -- start to build their inventories again.

Okay. Thank you. So, first, there is a high-level of customer engagement given our market leadership and the critical nature of our products. Therefore, we are not selling commodity. We are selling custom value-added products. I believe that once market conditions would allow we and customers would be less concerned -- if I may say, less hesitant, we will see a much more robust order intake looking at our product because at the end of the day, the products -- we have been designed that our OEM provides a unique value proposition. Therefore, we should see a much more robust order pattern once the market condition changes.

Thank you. And then one question for Bill. So, Bill, inventory is now at $89 million. That is -- I think that represents like a working capital invested in inventories. If you look back, like inventories was running at, that's like $62 million, $76 million in 2020 and 2021. Should we expect that the inventory in absolute dollars would decline, meaning that you would be able to extract more cash from your working capital? And how soon do you think that can take place?

Yeah. Hendi, I mean, obviously, we have a very, very strong backlog and the inventory has been built for that backlog in the upcoming quarter or so. I would anticipate we would begin to see the inventory levels to drop to a more normalized level, which over time, would add some more cash into our financial statements.

I see. Yeah. Okay. Thank you, Ziv. Thank you, Bill.

Our next question comes from Zach Herzl [ph] with Herzl Capital. Your line is open.

Hey, guys. Following up on the earlier question on the M&A. I've talked to a lot of bankers and product firms and other companies. And I guess valuations haven't come down much like you guys thought they might. And the good thing is the reverse, I'm confident through those conversations that VPG could get $50 to $60 a share if they were to sell. Is that something you guys would be interested in? And if so, I can put you in touch with the right people.

Well, Zach, I think that the Board is always exploring different opportunities at different times, and they're exploring all capital allocation options, including the ones that you have mentioned. Nevertheless, M&A is still high on our radar. And we believe, given the fact that we have been -- that we are in touch, and we are exploring a few opportunities that once we complete even one or two of those acquisitions, we could definitely generate stockholders' value. But all-in-all, the Board is always looking at all capital allocation options.

I hear that. The problem is that you guys have had $100 million in cash for 10 years. And you've said for the last three, when I've been talking to you guys that you were going to buy a company and I know that there was an opportunity to sell for -- or to get to $50 a share to sell two years ago and you didn't take it. And so, I think -- I talked to shareholders now, and I think they would rather take the $50 to $60 a share now than to keep going with the promises that the Board says that either they would sell or the management team is going to grow by double-digits and the stock price is going to get to $50 to $60 a share anyway. But it hasn't happened yet. And the shareholders, I talked to said that they would rather sell for the -- and get to $50 to $60 a share now. So, is that something should I go through the management team or the Board, or directly to shareholders, if that's something they want to do, how can we get that done?

Well, Zach, I would say that there are -- as you know, as a shareholder, you know the channels and there is a way how to -- given your opinion to whom you should communicate that? Definitely, I hear what you are saying, and I really appreciate your input. And of course, I respect very much your opinion, and I hear you. So, I really thank you for your input.

This concludes our Q&A. I'll now hand back to Steve Cantor, Senior Director of Investor Relations, for closing remarks. End of Q&A:

Great. Thank you for joining our call today. I do want to note that we will be participating in the Jefferies and Sidoti conferences in September. You can see our website for more information on that. And with that, I'd like to wish you all a good day, and look forward to updating you next quarter.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your line.