Hello, everyone, and welcome to the VPG's Third Quarter Fiscal 2023 Earnings Call. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Steve Cantor, Senior Director of Investor Relations, to begin. Steve, please go ahead.

Thank you, Nadia. Good morning, everyone. Welcome to our third quarter earnings conference call today. Our third 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 be accessed through 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. I'll now turn the call to Ziv for some prepared remarks. Please refer to Slide 3 of the quarterly presentation.

Thank you, Steve. I will begin with some comments on VPG's consolidated financial results and sales trends for the third quarter. Bill will provide financial details about the quarter and our outlook for the fourth quarter. Moving to Slide 3. To summarize the quarter results, we achieved revenue at the low-end of our guidance as the macroeconomic environment was challenging. Orders softened sequentially, primarily due to lower orders in our steel and industrial markets as trends were mixed across our businesses. Our cash flow remained solid, and we deployed capital to pay down debt as well as repurchase shares. We continue to execute on long-term growth and cost reduction initiatives. Moving to Slide 4, looking at the third quarter results in detail. We reported sales of $85.9 million, which declined 4.7% from the year ago, and 5.4% from the second quarter of 2023. Sequentially, revenue trends across our three segments were mixed as higher sales of Measurement Systems were offset by lower sales in the Sensors and Weighing Solutions segments. Our cash flow was solid as we generated $13.7 million of adjusted EBITDA, and adjusted EBITDA margin of 16.0%, and adjusted free cash flow of $6 million. Bookings in the third quarter of $76.9 million were 10.2% lower sequentially, resulting in a book-to-bill ratio of 0.9. The majority of the decline, $6.3 million, related to lower steel orders. Order trends overall reflected customers' cautious order patterns across most of our end markets and the timing of large orders in the Sensor segment, which offset higher demand in avionic, military and space market. Given our visibility and our backlog, we continue to see mixed bookings trends with some markets stabilizing and improving and some markets continuing to be soft. I'll now review our performance by segment. Moving to Slide 5. Beginning…

Thanks, Ziv. Referring to Slide 9 and the reconciliation tables of the slide deck, in the third quarter of 2023, we achieved revenues of $85.9 million; gross profit of $35.9 million, or 41.9% of sales; operating income of $8.2 million, or 9.6% of revenues; and diluted net earnings per share of $0.46. On an adjusted basis, our gross profit was $36.1 million, or 42.1% of sales; operating income was $9.6 million, or 11.2% of sales; and diluted net earnings per share was $0.47. Our third quarter revenues declined 5.4% compared to the $90.8 million in the second quarter of 2023, and were 4.7% below the third quarter a year ago. Changes in foreign currency rates had a positive effect of $500,000 as compared to a year ago, but had an unfavorable $400,000 impact compared to the second quarter of 2023. Gross margin in the third quarter was 41.9% compared to 42.6% in the second quarter of 2023, mainly reflecting lower volume. On an adjusted basis, third quarter gross margin was 42.1%, as compared to 42.7% in the second quarter of 2023. Our operating margin was 9.6% for the third quarter. Adjusted operating margin in the third quarter was 11.2% as compared to 13.2% in the second quarter of 2023. Selling, general and administrative expenses for the third quarter were $26.6 million or 30.9% of revenues as compared to $25.3 million or 28.1% of revenues for the third quarter of 2022. The increase in SG&A of $1.3 million was mainly attributable to $1.2 million for wage and headcount increases, $300,000 for travel, $200,000 of commissions, and $300,000 of other costs, partially offset by $500,000 of bonus reserve adjustments and $200,000 of positive foreign exchange rate effects. The third quarter results included a $1.2 million charge related to the relocation of production…

Thank you. [Operator Instructions] And our first question goes to John Franzreb of Sidoti & Company. John, please go ahead. Your line is open.

Good morning, everybody, and thanks for taking the questions. Ziv, I'd like to start in the Sensors segment. The AMS portion of that business was not only unusually weak in the quarter, but if I heard you correctly, the order bookings were also weak in AMS. Can you talk a little bit about what's going on there? That seems counterintuitive to me.

Hi, good morning, John. Regarding the orders for Sensors, the order for Sensors, as we indicated, were soft in the semi market as well as in the AMS. But given the AMS cyclical demand, we do expect to see much higher order intake coming in the next quarter. So this is, in effect, a timing issue. Regarding the semiconductor business and the other emerging markets, the indication is that as they are working down their inventory levels, the expectation is to see -- and given the discussion we had with customers, is to see orders coming back beginning of, I would say, first half of 2024, while deliveries would be around the second half of next year. But just reiterating the AMS, this is just a cyclical order intake. We do expect to see higher order intake in the coming quarter.

Okay. So, is that impact on the gross margin, just the mix of AMS dropping off in the quarter? Because from what I recall, semiconductor has been weak for a while for you guys. So, I would assume that's the only difference on a sequential basis, is the AMS mix impact on gross margin. Or am I misunderstanding that?

So, the gross margin decline was primarily due to volume and temporary labor inefficiencies due to lower production levels. Partially, it's due to the lower AMS, but we also have identified a slower or softer demand in the industrial market. So, it's both related to AMS and industrial piece of the business.

Okay. Got it. And it seemed like the -- you kind of called out the weakness in steel for the quarter. But the book-to-bill profile was only 0.98. So, it looks to me like DTS kind of offset that. And is that the demand that we're kind of expecting to come through with the DTS redesign? And would that be sufficient to kind of offset maybe what's going on in Weighing [for not only] (ph) the September quarter, but the December quarter?

Yes, you are correct. The DTS redesign has -- the completion of the redesign of the DTS [SLICE 6] (ph) model has supported higher bookings. In addition to that, we have booked much higher orders in DTS in related to the AMS business. So, the decline in steel market was offset by higher AMS orders for DTS.

Okay. And one last question, and I'll get back into queue. Regarding your production in Israel, I'm certain everybody hopes for the best, you did talk about you have plans in place. Will you try to build up inventory in your facilities there or your product lines there, just in case? Or are you just going to operate as normal until there is any reason not to?

Sure. So, while Israel represents a relatively small market for our products, we operate in two production facilities in the central part of Israel. We are operating -- we are currently operating at near normal levels as we are meeting customers' deliveries schedule with no delays. At this point in time, given our -- as I indicated on the call, given our history of operating in Israel, we understand the challenges and the uncertainties, and we put in place contingency plans. Those contingency plans includes: securing of raw material, shipping finished goods in advance to our regional distribution centers, working with our freight forwarders to assure delivery, and to minimize any potential business interruptions, and there are others. So at this point in time, yes, to a certain degree, there is, I would say, a fairly or a small build of raw material in additional to other steps in order to assure the supply of product to our customers.

Perfect, Ziv. Thank you. I'll get back into queue.

Thank you. The next question goes to Griffin Boss of B. Riley. Griffin, please go ahead. Your line is open.

Hi, thanks for taking my questions. So, just to start off, I wanted to build on that last question. So, you increased your three- to five-year targets back in February 2022. And since then, we've seen the geopolitical conflict in Russia and now Israel. I'm just curious, is there any risk that you see of potentially prolonged conflict that could affect your three- to five-year targets that you implemented in February 2022, or are those still good benchmarks that you're aiming for?

Griffin, the three to five years are definitely still a good benchmark. At this point in time, the biggest effect on our business is really the slowdown in the economy, the high interest rates, and, to a certain degree, the slowdown in China, which affects mainly our industrial and steel business. As I indicated, AMS is still growing strong, and we have a very good indication from our customers and our distributors that the semiconductor market as well as the consumer market will -- is expected to pick up next year. So, the three- to five-years plan is definitely valid.

Okay. Great. Thank you. And just speaking of AMS, you talked about the DTS, the orders were strong there. Can you just clarify, was there still that $1 million headwind for the redesign in the third quarter? Or were you implying that shipments had already started in the third quarter, and that was what helped with the strength in Measurement Systems?

Shipments already started in Q3, while the redesign has been completed at the end of Q2. But I would say, more important, new, or, I would say, higher bookings we have seen for DTS for the AMS business, and this is for new features or new crash dummies that we developed for -- I would say, for defense applications. And every project, those are higher ASP items. So, we do expect the AMS business to continue to be strong for DTS also in the coming future due to those new designs being developed.

Got it. Are those the WIAMan dummies that you're talking about, or is this new features just in general?

You are correct, WIAMan is definitely part of that. But in addition to that, we have new features that has been developed, but WIAMan is part of those programs.

Okay. Great. All right. And then, so shifting gears, it was nice to see the debt pay down this quarter. Just going forward, wondering if you could just give some more color about how you're prioritizing capital allocation. I know you have the three-prongs of paying down that revolver, share repurchases and M&A, but just curious how you're prioritizing it now that we're seeing you pay down some debt. And along those lines, too, if you could just talk about what you're seeing in the M&A market right now? Just how multiples have been trending and what you're seeing there?

Sure. So, maybe I will start with the M&A, and then Bill will provide more color regarding our capital allocation. Regarding M&A, we do see many more opportunities as interest rate continues to be high, more opportunities regarding higher-quality companies that we do believe could fit VPG's portfolio in terms of the financial structure, in terms of the product structure, in terms of the growth rate. So far, we have been in dialogue with few companies. But at this point in time, nothing came to fruition. But no doubt, there is much more activity. And to an extent, we do see that valuations are going down slowly, but they are still going down. Bill, can you take, please, the capital allocation question?

Sure. So, Griffin, like as Ziv mentioned, the M&A, obviously, is our top priority. But besides that, we're always looking for a way to utilize the cash the best. And we had an opportunity during the quarter to bring back over $7 million to pay down our third-party debt. And we are also, at this point in time, continuing to buy back our stock through the authorization that -- from the Board of Directors. So, all in all, I think M&A is the top priority, organic growth, and then also looking at buybacks and opportunities to pay down debt as and when possible.

Okay, great. Bill, thanks. Steve, thanks. Appreciate it. I'll jump back in the queue.

Thank you. [Operator Instructions] And we have a follow-up from John Franzreb of Sidoti & Company. John, please go ahead. Your line is open.

Yeah. Just I want to go back to what's going on in steel and in the MS sector -- segment. Do you think that, that's reflective of the UAW strike and the interruption of production in the month of October, or do you think it's something different? I'd like to hear your thoughts on what's impacting the steel market for you.

Well, as you indicated, John, the issues we have in October is part of that, but we are looking at the big picture. And the big picture is, how do we manage the funnel, how do we manage the opportunities. Looking at future opportunities, while China has more than the world -- more than 50% of the world's steel capacity, we are looking at the number of new projects and new developments in China as well as other parts of the world. And given the China economy slowdown and the other projects, we do see that there is a kind of a softening in the market regarding new projects and new opportunities. And this is how we are concluding that -- to an extent that this end market is kind of softening.

Fair enough. Thank you, Ziv. And since you've pointed out China, just could you give us a little bit more color on what you're seeing on a geographic basis, if anything else is standing out either positive or negative? And that's collectively across the whole company.

Yeah. Collectively across the whole company, I would say that, well, it's a little bit of a mixed bag. On one hand, we have China where we sell more industrial products, and this is where we see the slowdown. On the other hand, we have Japan where we are selling much more semi -- where we are selling much more semiconductor precision resistors. We do expect to see a rebound, as I indicated, in 2024. I think in America, AMS is strong. Industrial is kind of flattish. While we are also looking at -- I would say, at the semiconductor equipment, which same applies as well as Asia, the trend is that they are starting or they are preparing to start to place orders again. Consumer, we have started to see an indication of an increasing order intake. Regarding Europe, I would say that Europe, we see kind of a softening in respect to the general industrial market, while AMS and the semiconductor test -- AMS is still very strong. And test and measurement, we are projecting an increase in order intake in the beginning of next year.

Perfect. Thank you, Ziv. And again, good luck.

Thank you.

Thank you. We have no further questions. And I'll hand back to Steve for any closing comments.

Thank you all for joining our call today, and we look forward to updating you in our next call next quarter. Thank you.

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.