Wendy Wilson - IR Bill Clancy - EVP and CFO Ziv Shoshani - President and CEO.

John Franzreb - Sidoti & Company.

Good morning and welcome to VPG Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Wendy Wilson.

Please go ahead..

Thank you, operator. Good morning, everybody. Welcome to our 2014 fiscal year earnings conference call. An audio recording will be made of the conference call today, including any questions or comments that you may contribute.

By now you should have all received the earnings release and we hope you have taken the time to read through it as it does contain important information. You can find it including relevant non-GAAP reconciliations on our website, www.vpgsensors.com.

An audio recording will be available on the Internet for a limited time and it can be accessed on our Web site. The content of this conference call is owned by VPG and is protected by U.S. and International Copyright Law.

You may not make any recordings or other copies of this call and you may not reproduce, distribute, adapt, transmit, display or perform the contents of this call. Today’s remarks are governed by the Safe Harbor provisions of the 1995 Private Securities Litigation Reform Act.

Actual results may turn out significantly better or worse than indicated by any forward-looking statements that we may make today. For a more complete discussion of the risks associated with VPG’s operations, please refer to our SEC filings, especially the Form 10-K for the year ended December 31, 2014 and our other SEC filings.

And now, it’s my pleasure to introduce the host for today’s call, Ziv Shoshani, CEO and President and Bill Clancy, CFO.

Bill?.

Thanks, Wendy. Good morning everyone and thank you for joining us on our call today. I would like to start by reviewing some highlights and then summarizing the financials. Following that Ziv will provide his view of results and the global business environment.

Starting at the top, full year revenues came in at $250.8 million and revenues in 2014 fourth quarter were $61.2 million within our guidance range. Revenues were lower than our midpoint of guidance due to the strengthening of the U.S. dollar compared predominantly to the euro as well as British pound and the Japanese yen.

Fiscal year 2014 adjusted diluted earnings per share increased to $0.74 versus $0.62 in fiscal 2013, an increase of 19%. Cash generated from operations for the fourth quarter were $11.4 million and free cash flow was $7.3 million, giving us fiscal year cash generated from operations of $24 million and fiscal year free cash flow of $14.3 million.

So for a review of our financial results, net earnings attributable to VPG stockholders for the fourth quarter of 2014 included $20,000 of purchase accounting adjustments, $200,000 of restructuring cost and $3.3 million of impairment of goodwill and in definitely the intangible assets and related tax effects and discreet tax items versus $500,000 of purchase accounting adjustments, which impacted cost of goods sold, $50,000 of restructuring cost, $20,000 of acquisition cost and related tax effects and discreet tax items in the fourth quarter of 2013.

Net earnings attributable to VPG stockholders for the 2014 fiscal year include $100,000 of KELK acquisition purchase accounting adjustments which impacted cost of goods sold, $700,000 of restructuring cost, $3.3 million of impairment of goodwill, an indefinite-lived intangible assets and the related tax effects and discrete tax items versus approximately $4.9 million of KELK acquisition purchasing accounting adjustments which impacted cost of goods sold, $800,000 of acquisition costs, $500,000 of restructuring and the related tax effects and discrete tax items for fiscal year 2013.

As a result of our review of goodwill and indefinite-lived intangible assets that we conduct during the fourth quarter of each year, we recorded a $3.3 million pre-tax non-cash impairment charge to reduce the carrying value of the goodwill and indefinite-lived intangible assets related to our steel business.

Adjusted gross margins for the 2014 fourth quarter was 35.3%, down from 37.8% in the fourth quarter of 2013. The decrease in gross margin is coming from $600,000 of inventory adjustments, $800,000 of negative foreign currency effects and $200,000 of product mix. Our book-to-bill ratio of 1 was equal to our 1.0 book-to-bill ratio last year.

The backlog was 2.9 versus 2.9 last year. We expect net revenues in the range of $59 million to $64 million for the first quarter of 2015. For the fourth quarter, we reported net revenues of $61.2 million, a 1.7% decrease from $62.2 million for the prior year period.

Net revenues were negatively impacted by the effect of foreign exchange rates of $1.9 million as compared to the fourth quarter of 2013 and were negatively impacted by the effect of foreign exchange rates of $1.6 million as compared to the third quarter of 2014.

The consolidated adjusted gross margin for the fourth quarter of 2014 was 35.3% versus 37.8% for the fourth quarter of 2013. The consolidated adjusted gross margin for the fourth quarter of 2013 excluded $500,000 of KELK acquisition purchase accounting adjustments.

Selling, general and administrative expenses for the quarter were $19.1 million or 31.1% of revenues, compared to $19.7 million or 31.6% for last year’s fourth quarter. The decrease of $600,000 versus the prior year period is mainly due to a positive effect of exchange rates of $800,000, offset by $200,000 of fees.

Looking at operating margin on an adjusted basis, without the acquisition, restructuring cost and the impairment of goodwill and indefinite-lived intangible assets, you can see that it’s 4.2%, a decrease from 6.2% in the fourth quarter last year and a decrease from 6.5% sequentially.

Included in other income and expense in our press release this morning was $220,000 of foreign exchange losses during the fourth quarter of 2014 as compared to $662,000 of foreign exchange loss in the fourth quarter of 2013.

We also recorded interest expense of $208,000 in the fourth quarter of ’14 compared to interest expense of $251,000 for the same period last year. Our operational tax rate was 20% in 2014.

Our GAAP net loss attributable to VPG’s stockholders in the fourth quarter of 2014 was $2.5 million or $0.18 per diluted share, compared to GAAP net earnings attributable to VPG’s stockholders for the fourth quarter of 2013 of $1.1 million or $0.08 per diluted share.

Our adjusted net earnings for the fourth quarter of 2014 were $1.7 million or $0.12 per diluted share versus adjusted net earnings of $2.5 million or $0.18 per diluted share for the comparable prior year period. Capital expenditures in the fourth quarter of 2014 were $4.1 million as compared to $2.8 million in the fourth quarter of 2013.

Depreciation and amortization for the fourth quarter of 2014 was $2.9 million, as compared to $3 million in the fourth quarter of 2013. Total long term debt as of December 31, 2014 and December 31, 2013 was $17.7 million and $22.9 million respectively.

Cash provided by operations was $11.4 million for the fourth quarter of 2014, as compared to $8.4 million for the fourth quarter of 2013.

Our definition of free cash flow is the amount of cash generated from operations, which is $11.4 million, in excess of our capital expenditures $4.1 million for the fourth quarter of ’14 and net of any proceeds, if any from the sale of assets which was zero in the fourth quarter of 2014.

Total free cash flow for the fourth quarter of 2014 was $7.3 million, as compared to $5.6 million in the fourth quarter of 2013. We remain focused on our strategy of growing the top-line through organic growth and pursuing additional acquisitions, as well as improving profitability by increasing efficiency and reducing cost.

With that, I would now like to turn the call over to Ziv Shoshani, our CEO and President.

Ziv?.

Thank you, Bill. As Bill mentioned, our focus remains on our strategy and an important part of this is enhancing our organic growth. Over the past 12 months, the revenue from our advanced sensor platform, which is part of our FTP segment, and which we developed two years ago is up 145% year-over-year and grew 34.2% sequentially.

And from the WCS sector our truck VanWeigh systems revenues are up 12% year-over-year. Weaker growth and low inflation in the Eurozone, Japan and China are offsetting the positive global impact of the rebound in the U.S. economy. We continue to expect the U.S. economy to show strength in 2015, led by growth in manufacturing and industrial production.

While most global economic outlooks focus low 2015, growth in the Eurozone and Japan, recent PMI reports indicate a strong start to the year.

Based on January data, with a modest increase in the global economic expansion, although the headline index remained below its long run and 2014 average of around 54.0, by turning higher in January, it halted the sequence of a slowdown seen in the second half of last year. Excess capacity continues as the biggest threat to the steel sector.

Capacity utilization decreased to 72.7% in December of 2014, its lowest point since December of 2012, when it hit the low of 71.5%. In 2014 World Steel estimates the global production increased by 1.2%, with China accounting for about 50% of that production.

Average capacity utilization in 2014 was 76.7%, compared to 2013 average capacity utilization in 2013 of 78.4%. Both in the EU countries and in the U.S. increased output by 1.7%, while India increased output by 2.3% and China by 0.9%. Despite representing less than 5% of our business, the sharp drop in oil prices is changing the economic landscape.

Driven by weak demand and increased output, we may see lower demand for our sensors and systems to the oil and gas industry. Moving to operational trends, let's start by comparing consolidated year-over-year and sequential results.

The Company’s overall book-to-bill was 1.0 in the fourth quarter of 2014, compared to 1.0 last year and 0.95 in the third quarter of 2014. Total orders for the fourth quarter of 2014 were $61.4 million, down 1.5% from $62.4 million last year and up 2.5% from $59.9 million in the third quarter of 2014.

Some details in our reporting segments, The FTP segment had a book-to-bill ratio of 1.02 for the fourth quarter of 2014, compared to 1.07 for the fourth quarter of 2013 and 0.94 for the third quarter of 2014. Sequentially orders increased by $1.5 million or 6.0% for the third quarter of 2014, reflecting an increase primarily in Asia and in Europe.

The FTP gross margin was 37.6% for Q4 down from 40.5% in Q4 last year and down from 41.4% in the third quarter of 2014.

The FTP gross margin decrease from the comparable prior year period was due primarily to $600,000 of inventory adjustments, $300,000 of product mix effect and $400,000 of additional cost as we move to expand our advanced sensor platform, offset by a $900,000 increase in volume.

This sequential decrease in gross margin was due to $600,000 of inventory adjustment and $400,000 of additional cost as we move to expand our advanced sensor platform. The FTP segment backlog was 3.0 months compared to 3.0 months last year and 2.9 months in the prior quarter.

Looking at the Force Sensors segment, the book-to-bill ratio was 0.97 for Q4, compared to 1.01 in the fourth quarter of last year and 1.02 for the third quarter of 2014. Sequential orders decreased by $800,000 or 4.7%. This decrease came primarily from distribution in the Americas.

The gross margin for this segment was 22.8% in the fourth quarter of 2014 versus 21.5% in the fourth quarter of 2013, and 22.5% in the third quarter of 2014.

The gross margin for the quarter increased from the comparable prior year period, primarily due to $800,000 of higher volume, $300,000 of cost reduction, partially offset by $600,000 of negative exchange range effects. The sequential gross margin remained constant between the two periods.

The Force Sensors segment backlog was 2.1 months compared to 2.4 months in the prior year and 2.2 months in Q3. For Weighing & Control Systems segment, the book-to-bill ratio was 1.01 for Q4, compared to 0.91 in the fourth quarter of last year and 0.89 in the third quarter.

Segment backlog was at 3.5 months compared to 3.2 months in last year fourth quarter and 3.4 months in the third quarter. Orders, orders decreased by $1.2 million or 6.7%, compared to Q4 of 2013, primarily due to [indiscernible] in on board and process weighing, partially offset [indiscernible] Americas.

Sequentially orders increased $800,000 or 4.8%, primarily from the Americas, offset by lower demand for steel products in Asia.

The adjusted gross margin for this segment was 44.3% in the fourth quarter of 2014, versus 44.9% in the fourth quarter of 2013, 47.1% excluding KELK acquisition purchase accounting adjustments of $500,000 and 45.9% in the third quarter of 2014.

The year-over-year and sequential decrease in adjusted gross margin is primarily due to lower volume for steel and our process weighing end user business in Asia and the U.S.

In light of the macroeconomic conditions and our backlog, we expect net revenues in the range of $59 million to $64 million for the first quarter of 2015, which includes a negative 1.5 exchange rate effect impact versus Q4 of 2014. With that we will open the lines for questions. Thank you..

Thank you. We will now begin the question-and-answer session (Operator Instructions). The first question comes from John Franzreb with Sidoti & Company. Please go ahead..

I guess that I’d like to start with your guidance for the coming quarter.

When I think about the three segments, which segment offers or gives us maybe the most upside or downside potential relative to the guidance?.

If we are looking at the three segments John, I would say that since -- the third segment, WCS, is very much project driven and we have seen already in Q4 of last year -- for example in the case of KELK, there were many projects that had been pushed out in the last minute due to delivery to the following quarter.

This is -- which is on a case by case basis, due to the fact that the customer has to release that, I would say that the third quarter should provide us biggest upside based on the nature of the business. The first two segments are more OEM related business which is more repeatable. So it will be easier to focus..

Okay.

Does that also explain the WCS’ rebound I guess in their book-to-bill to 101 from 0.91? Is that that push out effect, Ziv?.

You are absolutely correct. This is the reason..

Regarding any additional cost for the advanced sensor platform, are we through with absorbing those costs or will they also spill into Q1?.

Okay. Let me break up in just -- the advanced sensors line we have -- so far the infrastructure has been set for advanced sensor just for a pilot line. The last year we have accomplished $3.4 million of revenue, which is more than double than the prior year, which is more than quadruple of the two years ago.

The intention is to continue and double revenues in the next following years. Therefore we started with I would say heavy investment related to infrastructure, related to equipment, already in Q4, including all the overhead to support the additional capacity which would be required to support the high revenues.

We are in the midst of the process of adding this cost. We should expect to have the line be ready by the end of the second quarter this year, and we should expect to see the revenues to start picking up in the second half of this year. So, we have not accrued all the cost.

There will be a continuous cost increase also in the first-half of the year, which will support much greater revenue..

And what do you -- and sticking to the advanced sensor product line, what do you think the revenue potential of this business is?.

Based on our projection and calculation and the return on investment that we have been running, we are looking at a double-digit figure from a revenue perspective..

And I guess one last question, and I’ll get back into queue. You mentioned the oil and gas headwind. Never was much part of the pie chart when I looked at your end markets.

How much exposure do you have to the oil and gas market and how much is that down so far? Can you give us a sense of magnitude?.

Yes. As I stated in my script, we are slightly -- it's slightly below 5% of revenue. It's mainly applied to FTP and to our process -- and it start with our process weighing and it start with WCS with regards to the Nobel. So far I would say that we have seen some slowdown of all the intake in this and with those customers in this end market.

It was not dramatic. I would say around 10% down. And it is 10% down vis-à-vis by bookings. But the exposure is around 5%. At this point we don’t have further indication from our customers that they should expect to see further decline..

(Operator Instructions) We have a follow-up question from Mr. John Franzreb. Please go ahead..

I got a couple of them.

Could you talk a little bit about the impairment at KELK and why that was needed?.

This is Bill. Every fourth quarter we go through -- we have our annual impairment test. That’s required for our -- by GAAP. And you've heard Ziv talk throughout the year that the steel utilization capacity was going down, going down.

And as we went through our impairment testing, we realized that when the revenues that drops, that really year-over-year and based on projections that we had an impairment. So it was a two-step process. We went through and analyzed it and because of a reduction in the steel business, we took $3.3 million charge non-cash.

And we'll look at it every fourth quarter. Every year we look at our goodwill..

The inventory write-down that you had, was that related to KELK also? Or no?.

No, that was primarily in our FTP segment, which we attuned to be about -- like Ziv said $5,000 to $10,000. Without that FTP, it would have been at a gross profit of 39.5% and the overall gross margin would have been like 36.1%. So it should not repeat going into the first quarter of 2015..

What inventory was needed to written down?.

No. We just had overall I can book to physical adjustments and adjustments to the general ledger..

Okay, the CapEx number in 2015, I guess since you’re going to have additional cost related to the sensor platform, I'm not sure if you’re still tooling it or not.

But can you give us a rough estimate of what CapEx should be this year?.

Yes, I think for 2015 we’re probably looking in the range of -- I would say a range of $12 million to $14 million in total..

And you’re stepping it up again?.

But I would say that close to 50% of that capital spending is being dedicated for the Advanced Sensor line. So once this is being set, we should see -- going forward in 2016 we should see a dramatic reduction in cash and in the ongoing capital spending..

That’s helpful, Ziv. Okay.

Just also I'm doing the P&L stuff here and related stuff, the tax rate we should be thinking about in the year ahead, Bill?.

It's always based upon your income mix and where it’s being generated. We ended the year at 20. John you could use anywhere between -- I'd say to be between 23% to 25%..

And one last question.

I guess, Ziv, can you talk a little bit about the M&A environment? Have you seen multiples come down yet? An update on that front would be very helpful?.

As you know John, we have many discussions with many -- with I would say, and I can say many companies. The fact that the environment was as such that most of the EBITDA multiples were [north] [ph] to 12 and even 13 made the deal very, very challenging from a good and healthy IRR and an ROI perspective.

I would say that to an extent we may see a little bit cooling off of the M&A deals and the multiples going down. So far we were not able to identify a specific company, but all in all we do feel and based on market discussion that we may have very good opportunities in the future..

This concludes our question-and-answer session. I would like to turn the conference back over to Wendy Wilson for any closing remarks..

Thank you, Operator. And thank you everyone for joining the call today. We look forward to seeing you and speaking with you throughout the year this year and hopefully you will join our next call. Talk to you all soon..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..