Hello everyone and welcome to the VPG's Third Quarter Fiscal 2024 Earnings Call. My name is Ezra, and I will be your coordinator today. [Operator Instructions]. I will now hand you over to your host Steve Cantor, Senior Director of Investor Relations to begin. Steve, please go ahead.

Thank you, Ezra and good morning everyone. Welcome to our third quarter 2024 earnings call. Our Q3 release and slides have been posted on our 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 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, 2023 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. Ziv?

Thank you, Steve. I will begin with some commentary on our results and trends for the third quarter. Bill will provide financial details about the quarter, and our outlook for the fourth quarter of 2024. Moving to Slide 3, overall third quarter was as follows. Total sales were mostly stable sequentially. The business environment continues to be mixed as higher demand in some markets was offset by weakness in others. We continue to focus on broadening our funnel of new business opportunities. We are streamlining operations mainly in the Sensors and Weighing Solutions segments. The recent acquisition of Nokra expand our product offering in the steel market. Moving to Slide 4. Looking at the third quarter results in details, we reported sales of $75.7 million, which was above the mid-range of our guidance. Orders of $68.6 million declined from $73.5 million in the second quarter resulting in a book-to-bill ratio of 0.91. Trends continued to be mixed in our markets, as orders generally represented customers' ongoing replenishment of inventories. The majority of bookings decline related to certain cyclical markets including steel and consumer. This contrasted with higher orders in the Test and Measurement and AMS, which remains well below peak levels. Operationally, we reduced our manufacturing operations to align with near-term revenue trends. These steps resulted in temporary labor inefficiencies, primarily in our Sensors segment. Combined with the impact of sequentially lower revenues, these inefficiencies contributed to a gross margin of 40% in the third quarter. We do not expect these labor inefficiencies to continue in the fourth quarter. As we continue our growth focused investments in business development, marketing and R&D, we are streamlining our operating cost, and implementing our long-term cost reduction plans. Over the past few years, these programs have improved our gross margin, and going forward…

Thanks, Ziv. Referring to Slide 10, and the reconciliation tables of the slide deck, our third quarter revenues were $75.7 million. Gross margin in the third quarter was 40%, as compared to 41.9% in the second quarter. By segment, gross margin for the Sensors segment of 31% declined sequentially, primarily due to lower revenue and temporary operational and labor inefficiencies. The Weighing Solutions gross margin of 35.1% was lower than in the second quarter, primarily due to lower volume, and unfavorable product mix. Measurement Systems gross margin of 56.8% improved sequentially, reflecting higher volume and favorable product mix. Total selling, general and administrative expenses for the third quarter of $26.3 million, or 34.8% of revenue, declined slightly from $26.5 million or 34.3% in the second quarter. Operational margin was 5.1%, as compared to 7.6% for the second quarter, primarily reflecting the lower revenue. On a GAAP basis, we recorded a loss per diluted share of $0.10. This includes the impact of unrealized foreign exchange loss of $2.9 million, a restructuring charge of $82,000, and discrete tax items of $839,000. Excluding those items, adjusted net earnings per diluted share for the third quarter was $0.19, which compared to $0.31 in the second quarter. Adjusted EBITDA was $8.1 million, or 10.7% of revenue, as compared to $10.2 million or 13.2% in the second quarter. Purchase CapEx in the third quarter was $1.8 million. For the full fiscal year of 2024, we expect the purchase CapEx to be in the range of $10 million to $12 million, which is significantly lower than the levels we have spent in the past few years. Adjusted free cash flow was a negative $2.3 million, which compared to $4.9 million for the second quarter. The third quarter cash flow included $3 million of one-time tax payments, and…

Thank you very much. [Operator Instructions] Our first question comes from Griffin Boss with B. Riley Securities. Griffin, your line is now open. Please go ahead.

Hi, good morning. Thanks for taking my questions. So first, I just want to be clear, the labor inefficiencies that you discussed in the Sensors segment. So those were completely behind you when you entered the fourth quarter, did I hear that correctly?

Yes. Already in the beginning of the fourth quarter we have seen a significant improvement regarding the inefficiencies that we have booked in the third quarter. So that is correct, Griffin.

Okay, great. And then, just when I'm looking at the free cash flow for the quarter, it looks like DSOs stepped up to a relative high, slightly higher than what they've been historically, at least over the past three years. Is there anything to read into there as it relates to certain customers, or that just kind of a one-time step up this quarter?

No, Griffin, I would say it's probably a one-time. We had, I would say, some sales that happened in the last week of the third quarter. We truly believe this is one-time. And as I mentioned on the call, speaking about cash flows, we did have over like, $3 million one-time tax payments, and $1.4 million related to our insurance program renewals. So our anticipation would be back in the fourth quarter to be a positive free cash flow.

Okay, great. Thanks Bill. And then just switching to new projects. You mentioned humanoid robots, you got the second customer there. Is that, can we think about that as a similar size to the first customer? I think you mentioned on the last call, maybe a few hundred thousand dollars for the prototype stage. Just yes, curious the size of that second customer?

Sure. So as I've indicated in earlier calls, we have been working very diligently with the sizable humanoid robots. We already are expecting to book significant revenues for this year. At this point in time, given the discussion and the forward-looking projection from this customer, we are expecting revenues to double for 2025 and this is still not a full production, this is still on a pre-production level. Regarding the second humanoid customer, we are still in early stages of design. We believe that the potential size of the customer, could be very similar to the initial one. But we are very earlier in the design stage. But we are already working with them. But they have also a very, I would say, a sizable potential upside, once it comes to a full blown production.

Excellent. Got it. Thanks Ziv. And just maybe last one for me. It's nice to see the M&A, Nokra. You mentioned, you expect to grow revenues in '25 and I understand it's a relatively small business. But how much of that growth would you expect is organic versus coming from being integrated into the broader KELK business, with those distribution channels?

The Nokra product line -- with Nokra we purchased the technology for an adjacent product portfolio, which would broaden our KELK. We believe that leveraging on KELK sales channels, and existing customers, we can increase Nokra revenue, I would say, significantly in 2025. We have not provided the run rate, but I could say that we are looking at roundabout, I would say, mid-single digit revenues for Nokra, which would be almost doubling their revenue in respect to 2024. All-in-all, we have seen some headwinds, as I've indicated earlier in the steel business, mainly due to the China soft business and soft construction business. But for us, the main driver at this point in time is the India investments. India is the second largest steel manufacturer and they are investing, I would say, quite significantly in their infrastructure. So all-in-all, between the Nokra acquisition, and the India I would say investments, we are -- we believe that going forward we would be more optimistic regarding steel.

Okay. Great color. Thanks for taking my questions. Appreciate it.

Thanks, Griffin.

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

Good morning everyone. And thanks for taking the questions. I guess, I'd like to consider the end market mix and how you view it today, versus how you viewed it three months ago. Ziv, are you seeing any notable changes that weren't maybe something you were expecting, when we reported second quarter results?

Sure, absolutely. So first, I think John, it would be important to state that the biggest drop in the third quarter in order intake was in the Measurement Systems. We had some few large projects that had been pushed out their bookings from the third quarter to the fourth quarter. So if we speak about the business environment, we are expecting in Q4 to be back to the mid-$70 million range in terms of bookings. Now going to the different end markets and the dynamics, I would say that initially, when we had discussions with some large customers, for example in the semiconductor market, or in the general industrial market, there was more a little bit optimism regarding a potential upside. On the other hand, at the test and some other Test and Measurement customers, we have seen that their stock levels have gone down and they started to place order in order to replenish their stock level. Which means there is -- we have not seen or we do not expect to see yet a larger potential upside coming from an additional demand. But at this point it's coming from the stock replenishment order pattern. On the other hand, Europe and especially U.K., given the economy is still fairly soft. And at the end of the day, I would like also to say that, on precision agriculture we have seen more optimism as they have increased their order intake in Q3. So all-in-all it's a mixed environment. We have a certain confidence level talking to our customers based on their projection. But I would say that a little bit on the longer term, the initial interest rates cuts, and the expected and the expectation for more cuts gives us a much, I would say, stronger feel to be optimistic regarding a real recovery in the next few quarters, given the fact that many of our customers are in the capital spending related business.

Okay. Against that backdrop, can you kind of update us on potential levers you could pull to reduce operating costs that are under consideration or do you think that given the current environment that you're happy with the manufacturing footprint and the operational expense footprint as currently constituted?

So regarding operational cost reduction beyond the continuous investments Sis -- I mean we are already in further relocations of products from high labor countries to our India facility from various locations in North America, in Europe and in other places. Naturally, I cannot share detailed information given HR-related issues. But the expectation is that once those projects -- that those projects are expected to realize multimillion dollar savings as we continue to consolidate operations into our large India based operation. And they are not only necessarily regarding the initial low sales base, we have decided also to streamline more activities on the operational side and also in other staff-based functions.

Understood. And then I guess lastly regarding M&A, was Nokra a customer of yours? Can you talk a little bit about the development of that purchase? And in addition, when we think about other near term M&A targets, is it more the smaller, highly profitable ones that you're looking at or are you looking at larger revenue contributions?

Nokra was not a customer. We knew Nokra given the fact that when we had discussions with customers -- our current customer base, they wanted us to provide them with a wider and a larger product portfolio, which we did not had to -- which we didn't have to -- which we couldn't offer. We have identified Nokra as a technology, as a small technology company that could provide or that could fit within the KELK portfolio. And given the fact that we have the sales channel, we believe that it would be fairly easy to realize those business synergies and to leverage and I would say, and to grow Nokra revenues in a fairly quick way. Regarding other M&A, in fact, we are looking at similar businesses like Nokra. But also we are looking at other businesses that could realize operational synergies if those businesses are within our own current portfolio, or could add an adjacent sensing technology, servicing our customer base. But it would vary from a smaller potential customers to a much larger potential customers.

Understood. Thank you for taking my questions. I'll get back into queue.

Thank you. [Operator Instructions]. Our next question is from Jeffrey Cohen with Mulholland Capital Management. Jeffrey, your line is now open. Please go ahead.

Yes, good morning. I apologize to get onto the call late. I'm just wondering, it looks like you repurchased some stock this last quarter, is that right?

Yes, we did, Jeffrey. We repurchased $1.9 million of stock during the third quarter.

Okay. And just, I'm just kind of curious how you think about, in terms of M&A, relative to where your own stock is selling at this point, how do you think about that?

From a -- sorry, go ahead.

Go ahead, Ziv. Go ahead, sorry.

Sorry. From a capital allocation standpoint, we believe that our balance sheet could provide us supporting a stock buyback, acquiring companies and also continue to invest to support organic growth. Therefore, that's really -- we do have all the means to support all three capital allocation strategies and this is how we operate. Naturally, first is investing in the company to enhance organic growth. But M&A and stock buyback, are also are also considered. And this is why we have been doing that.

Okay. Thank you.

Thank you very much. That ends our Q&A session. I will now hand back over to Steve for any closing remarks.

Thank you all for joining our call today. We look forward to updating you on VPG, and our strategy for growth in the coming quarters. Have a great day.

Thank you very much, everyone for joining. That concludes today's call. You may now disconnect your lines.