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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

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 with our Sensors segment, third quarter revenue of $32.5 million declined 14.1% from a year ago, and 10.3% compared to the second quarter. Sequentially, the decrease primarily reflected lower revenue of precision resistors in the AMS and test and measurement end markets, and lower sales of strain gages in the general industrial end market. Overall, sales of advanced sensors were stable -- were at stable levels comparable with the second quarter. Orders for sensors of $27.2 million were 11.3% lower sequentially, which resulted in a book-to-bill of 0.83. Booking for precision resistors to the semiconductor test market and the AMS market were soft in the third quarter, which offset higher demand for medical applications. In general, our distributors and OEM customers were cautious with their orders as they continue to work down their inventory levels. We are pleased with the progress with advanced sensors of both the ongoing and the new OEM engagements. We continue to be well-positioned with our consumer electronic customers. In addition, as part of our strategic initiative to expand our business in robotics, we achieved a key design win with the maker of humanoid robots, which is currently in a beta phase. In terms of operating results for Sensors, adjusted gross margin of 35.9% declined sequentially from 40.1%, primarily due to lower volume and temporary labor inefficiencies due to lower production levels. Moving to Slide 6. Turning to our Weighing Solutions segment, third quarter sales of $29.0 million were 7.7% lower than a year ago, and 7.3% lower than the second quarter of 2023. Sequentially, higher sales in the transportation market were offset by lower OEM sales for precision agriculture and construction application and in the industrial weighing market. Book-to-bill for Weighing Solutions was 0.89. Orders of $25.9 million declined 14.6% from the second quarter, reflecting lower bookings in the transportation and industrial weighing markets, as well as softness in our other markets for the medical equipment. We are progressing with key growth initiatives in Weighing Solutions, and we expect to see revenue for our new vLite load cell products in 2024. Weighing Solutions gross margin of 38.7% was flat, with all-time high in the second quarter of 2023 as lower operating costs offset by the impact of the lower volume. As part of our ongoing cost reductions, we took steps to downsize the Weighing Solution manufacturing operation in China, and consolidated the manufacturing of those products in our facility in India. We expect to complete this production relocation in the fourth quarter. Moving to Slide 7. Turning to our Measurement Systems segment, third quarter revenue of $24.4 million grew 17.2% from a year ago, and increased 4.6% sequentially. The sequential increase was driven by higher revenue of DTS products in the AMS and transportation markets, partially offset by lower sales in the steel market. Book-to-bill ratio for Measurement Systems was 0.98, as orders of $23.8 million declined 3.5% from the second quarter. Sequentially, orders for DTS products grew to a record level, which offset a $6.3 million decline in orders for our KELK and DSI steel-related products. For KELK, the decline from a near-record quarter in Q2 primarily reflected a general slowdown in the steel market in part due to the slower activity in China. On the technology capabilities for DTS is in the testing of new avionics platforms and systems. This includes supporting the development of missile programs as well as other commercial aviation platforms, such as new prototypes of electric-powered aircraft known as eVTOLs. While these new avionics platforms are still in the R&D stage, we benefit from the development stages of these platform since DTS products are used in the testing phase. Adjusted gross margin in the third quarter for Measurement Systems improved sequentially to 54.5% from 52%, primarily reflecting the higher volume. Moving to Slide 8. Our diversified set of end markets, the high value of our innovative solutions, and our deep customer relationships are among our core strength that provides a steady foundation across cycles. Despite the uncertainties currently in the global economy, our priorities are clear and unchanged. We are continuing to focus on long-term growth initiatives in a broadening set of applications that offer higher volume, long-term growth potential. These applications are in addition to our traditional industrial ones. As part of these initiatives, we have stepped up actions to grow our OEM business, which leverage the strength of our technical sales teams and our engineer-to-engineer solutions selling mindset. At the same time, we are continuing to execute on our cost reductions, operational excellence initiatives to maximize our long-term operating leverage. The success we achieved in our Weighing Solutions segment to substantially grow our margin is just one example of these efforts which we have begun several years ago. These programs entail the consolidation and migration of manufacturing from a smaller operating to lower-cost center of manufacturing excellence, as well as introduction of a more automated equipment processes. Also, we are continuing to implement our balanced allocation strategy that creates stockholder value to organic growth, successful M&A and, as warranted, stock repurchases. We continue to look for attractive and value-creating acquisition opportunities. In addition, in the third quarter, we paid down $7 million of our debt, which will reduce our interest expense. We also continue to repurchase stock in the third quarter and we have repurchased $1.2 million of stock during the first nine months of the year. Before turning the call to Bill for additional financial details, I would like to add the following point. As a global company, VPG operates facilities in North America, Asia, Europe, as well as Israel. We have a long history of operating in Israel and understand the challenges and uncertainties that can arise, and have implemented contingency plans to contend with them. We are proud to say that there has not been a break in production or supply chain over many years. VPG's Israeli-based hubs have continued to operate at near-normal levels and to deliver products to our customers on schedule. I want to thank VPG's employees in Israel for their daily commitment and contribution in light of the recent events there. Their safety and well-being is our top priority, and we have taken the proper measure to assure that. I will now turn it over to Bill Clancy for additional financial details. Bill?

Thanks,

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.

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,

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

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,

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,

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.