Reynee Tung - Investor Relations William Clancy - Executive Vice President and Chief Financial Officer Ziv Shoshani - President and Chief Executive Officer.

Sarkis Sherbetchyan - B. Riley FBR, Inc..

Good day, and welcome to the VPG second quarter results conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Reynee Tung. Please go ahead..

Thank you, operator. Good morning, everyone. Welcome to VPG's 2018 Second Quarter Earnings Conference Call. An audio recording will be made of the conference call today, including any questions or comments that participants may contribute.

By now, you all should have received the earnings press release, and we hope you've taken time to read through it as it contains important information. You can find it, including relevant non-GAAP reconciliations, 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 on the VPG website. 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 conference call, and you may not reproduce, distribute, adapt, transmit, display or perform the contents of this conference call in whole or in part without a written permission. Today's remarks are governed by the safe harbor provisions of the 1995 Private Securities Litigation Reform Act.

Actual results, performance or achievements 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, 2017, and our other recent 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, Reynee. Good morning, everyone, and thank you for joining us on our call today. I would like to start by reviewing a few highlights and then summarizing the financials. Following that, Ziv will provide his view of the results and the global business environment. Referring to Page 3 of the slide deck.

We had a good second quarter of 2018 with revenues of $74.2 million, gross margins of 42.3%, operating income of $11.3 million, operating margin of 15.2% and earnings per diluted share of $0.57. We are pleased with our quarterly performance and with our Q2 book-to-bill of 1.13, a good indication that the near-term business environment remains solid.

On Slide 4. We grew our second quarter of 2018 revenues by 19.1% to $74.2 million, up $11.9 million compared to $62.3 million of revenues in the second quarter of 2017. The positive impact of foreign exchange rates to revenues for the second quarter of 2018 as compared to the second quarter of 2017 was $1.9 million.

We increased our gross profit margin to 42.3% in comparison to 39.7% in the second quarter of 2017.

The increase in gross profit of $6.6 million for the second quarter of 2018 as compared to the second quarter of 2017 was primarily attributable to an increase in volumes of $5.4 million, $1 million related to labor and manufacturing efficiencies and a positive exchange rate impact of $400,000.

Selling, general and administrative expenses for the quarter were $20.0 million or 27% of revenues as compared to $18.6 million or 29.8% for the second quarter of 2017.

The increase in selling, general and administrative expense was related to $800,000 in wage and incentive compensation increases in addition to a negative exchange rate impact of $400,000.

Looking at operating income on adjusted basis, we increased our adjusted operating margin by 83% to $11.4 million or 15.3% as compared to $6.2 million or 9.9% in the second quarter last year.

The adjusted net earnings attributable to VPG stockholders for the quarter increased 97% to $7.7 million or $0.57 per diluted share as compared to $3.9 million or $0.29 per diluted share in the second quarter of 2017.

Foreign currency exchange rates for the second quarter of 2018 as compared to the second quarter of 2017 had a small positive impact on net income of $200,000 or $0.01 per diluted share. We generated free cash flow of $3.8 million for the second quarter of 2018 as compared to $3.4 million for the second quarter of 2017.

We define free cash flow as the amount of cash generated from operations, which was $5.6 million for the second quarter of 2018, less capital expenditures, which was $1.8 million for the second quarter of 2018, net of any proceeds from the sale of assets, which was de minimis for the second quarter of 2018.

Our GAAP tax rate for the 6 fiscal months ended June 30, 2018, was 28.4%. We anticipate that the operational tax rate for the year will be in a range of 28% to 30%. We are closely monitoring the developments relating to the U.S. imposition of tariffs and trade regulations and the response by other countries related to the U.S. tariffs.

In mid-July the tariffs went into effect. We estimate that the negative impact on operating profit to be approximately $600,000 for the second half of 2018.

For those products that are impacted, we're committed to working closely with our customers to minimize the impact, and we are proactively looking at a combination of actions, including further optimizing current supply chains and implementing surcharges to customers. On Slide 5. Our improved operating performance reflects a number of factors.

First, we have been driving to create efficiencies and reduce costs. We have accomplished this through a variety of initiatives, both through our restructuring activities and also from our adoption of a continuous improvement culture. Our improved performance is also the result of strong end markets and global demand for our products.

The business cycle has been strong, and we have captured growth and the scale-related margin opportunity that accompany that growth. Our scalable business model has been successful, yielding gross margin and operating margin results above our previous targets for these metrics that we are raising our targets for these measures.

Based upon our current results, we are raising our three-year targets to achieve gross margin of 45% and operating margin of 15%. We remain focused on the execution of our basic strategy, which continues to prove very effective in achieving these goals. With that, let me pass further comments on to Ziv..

Thank you, Bill. An important part of our strategy is to go by developing new product offering. A great example of this is our advanced sensor line, which continues to gain adoption. We developed this platform as part of our Foil Technology Products segment, and it has grown nicely as more customers include it in their product design.

We saw our advanced sensor revenues increased approximately 48% in the second quarter of 2018 versus the second quarter of 2017. We are pleased with the continued acceptance of this new sensor platform and are proud to provide enhanced performance to customers. We are also pleased to be manufacturing on an efficient platform.

A second example of our innovation is our value-added OEM transducers business, part of our Force Sensors segment. For the second quarter of 2018, its revenues increased by 142% compared to the second quarter of 2017. A final example is in our Weighing and Control Systems segment.

Our TruckWeigh and VanWeigh onboard weighing business revenues increased by 95% in the second quarter of 2018 as compared to the second quarter of 2017. We are pleased to see healthy trends continuing in some important end markets for our business, in particular, I note aerospace and defense, steel and test and measurements.

In the commercial aircraft aftermarket, the industry focus is for 10% growth in 2018 as out-of-warranty flight hour growth, which the analyst views as the primarily driver for the aftermarket, comes to account for an increasing proportion of total flights hours.

The aftermarket should also benefit from a strong initial provisioning on new aircraft types, along with improved trends in freight traffic. In the U.S. defense market, the analyst sees the overall defense budget has grown by 20% to 25% off the bottom in 2013.

Based on current estimates and assuming mid-single-digit international growth, thereby implies 9% to 10% revenues compounded annual growth rate from 2006 to '18 for defense. In the energy sector, the analyst expects global upstream CapEx spending to increase [indiscernible] in 2018. The U.S.

continues to lead the recovery with projected 16% in CapEx increase in 2018. Despite the increase in new fracking capacity and in basin sand mines over the past year, pressure pumping equipment and pressure pumping consumables ranked first and third, respectively, as the service product line is in the tighter supply.

Major factor driving growth of global automated testing equipment market is increasing adoption of automated test equipment by semiconductor, automotive and aerospace industries. In addition, miniaturization of products and device has further boosted demand for automated test equipment across various applications, industries in the global market.

This factor is expected to further fuel growth of the target market and is also expected to drive growth of global market to a significant extent over the focused period. Finally, turning to the steel market, the short-range outlook for the next 18 months suggests 2018 growth of 1.8%, followed by 0.7% in 2019.

Steel demand is benefiting from the broad and favorable global economic momentum effecting both the developed and the developing world at the same time.

The World Steel program in the automotive, construction, packaging and rail sectors all aim to maintain the role of steel as a versatile product, without which modern society cannot remain sustainable. The World Steel capacity utilization was 78.5% as of June 2018, which is 3.8% higher than June 2017 and 9.1% higher than December of 2017.

These are all good indicators for the major end markets within our business and gives us ongoing confidence. Moving to Slide 8. The company's overall book-to-bill was 1.13 in the second quarter of 2018 compared to 1.08 in the second quarter of 2017 and 1.05 in the first quarter of 2018.

We believe this reflects a sustained strong business environment in our markets as well as our own focus on execution.

Total orders for the second quarter of 2018 were $84.0 million, an increase of $16.7 million or 24.9% from $67.3 million in the second quarter of 2017 and an increase of $6.9 million or 9.0% from $77.1 million in the first quarter of 2018.

The sequential increase in orders is primarily attributable to the Pacific Instruments product line, which is project-oriented businesses and recently secured orders from some large projects, as well as precision resistance product line. Our backlog at June 30, 2018, increased to $101.0 million compared to $93.9 million at March 31, 2018.

Moving to Slide 7. Some details on our reporting segments. The Foil Technology Products segment had the book-to-bill ratio of 1.24 for the second quarter of 2018 compared to 1.09 for the second quarter of 2017 and 1.01 for the first quarter of 2018.

Sequentially, orders increased by $8.1 million or 23.4% from the first quarter of 2018 across all regions, with the largest increase coming from the Pacific Instruments product line in the Americas within the avionic, military and space end market.

Additionally, we saw an increase in precision resistor product line, primarily in the test and measurement end market in Asia and Europe as well as increase in advanced sensor demand across all regions, mainly in force measurement applications.

The Foil Technology Products segment gross profit margin was 46.1% for the second quarter of 2018, up from 41.9% in the second quarter of 2017 and 42.8% in the first quarter of 2018. The year-over-year gross profit increase of $3.5 million was primarily due to the increase in volume of $2.4 million across all regions.

Our growth in Asia was primarily within the test and measurement market for precision resistors, in addition to the force measurement market for advanced sensor products. Our growth in Europe was primarily within the test and measurement market for precision resistors.

In America, growth was spread across multiple end markets, including avionic, military and space for precision resistors. The growth in the Americas was also within force measurement and test and measurement end markets for the strength gauge products.

In addition to the volume increase, there were labor and manufacturing efficiencies of $0.7 million and the positive foreign currency effect of $0.5 million. The sequential gross profit margin increase of $1.1 million compared to the 2018 first quarter period was primarily due to labor and manufacturing efficiencies of $0.8 million.

The Foil Technology Products segment backlog was 4.8 months compared to 3.5 months last year and 4.2 months in the prior quarter. Looking at the Force Sensors segment. The book-to-bill ratio was 0.88 for the second quarter of 2018 compared to 0.99 in the second quarter of 2017 and 0.91 for the first quarter of 2018.

Sequentially, orders decreased 400,000 or 2.2% in Europe within the precision weighing end market. The gross profit margin for the segment was 29.4% in the second quarter of 2018, up from 28.9% in the second quarter of 2017 and 27.3% in the first quarter of 2018.

The gross profit increase of $1.2 million compared to the second quarter of 2017 was directly due to the increase in volume of $1.8 million for precision weighing and force measurement customers, mainly in the Americas, offset by a negative exchange rate impact of $500,000.

The gross profit increase of $0.5 million compared to the first quarter of 2018 is due to volume increase of $0.3 million, mainly in the Americas within the precision weighing in market, partially offset by a decline in the precision weighing end market in Europe in addition to freight savings of $0.3 million.

The Force Sensors segment backlog was 2.7 months compared to 2.7 months in the second quarter of 2017 and 3.1 months in the first quarter of 2018. For the Weighing and Control Systems segment, the book-to-bill ratio was 1.18 for the second quarter of 2018 compared to 1.14 in the second quarter of 2017 and 1.28 for the first quarter of 2018.

Sequentially, orders decreased by $0.8 million or 3.0%. The decrease in orders is primarily attributable to the onboard weighing products in the Americas. The gross profit margin for the segment was 48.0% in the second quarter of 2018 versus 45.8% in the second quarter of 2017 and 43.9% in the first quarter of 2018.

The Weighing and Control Systems gross profit margin increased by $2.0 million from the second quarter of 2017 due to an increase in volume of $1.3 million, mainly for onboard weighing products in the Americas and Europe and for steel product in Europe.

Additionally, there were cost-reduction benefits of $0.2 million and a positive exchange rate impact of $0.3 million. The sequential gross profit margin increase of $1.3 million compared to the first quarter of 2018 was primarily due to an increase in volume of $1.3 million, mainly from the steel product line in Asia.

The Weighing and Control Systems backlog was at 4.2 months compared to 3.3 months in the second quarter of 2017 and 4.0 months in the first quarter of 2018. Moving to Slide 8.

In light of a continued solid business environment at constant second quarter fiscal 2018 exchange rates and taking into account the normal seasonality of our business, we expect net revenues in the range of $70 million to $77 million for the third fiscal quarter of 2018. With that, let's open the lines for questions. Thank you..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Sarkis Sherbetchyan with B. Riley Capital. Please go ahead..

Good morning and thanks for taking my question here..

Good morning, Sarkis..

It seems like you guys updated the target financial model over the next few years here.

Can you talk about the road map to get there? Maybe what levers you're proactively using to drive sales growth and also that margin expansion?.

Sure. As we look at the sales growth - let's start with the sales growth. Regarding the sales growth, we do provide information regarding our organic growth regarding the main platform, which has been an engine for our growth in the last couple of years in conjunction with the strong economy.

And we do believe that this growth is expected to continue and to get us to the projected strategy targets.

In regards to the margins, if we look at historical restructuring and future - and further restructuring, which are expected in the near- and in the longer-term future, in conjunction with the gaining momentum regarding those organic growth with the project that is gaining more and more momentum, we do believe that those new targets are feasible, and we should expect to achieve them.

I have to say that as we did in prior years, this strategy, of course, includes also M&A activities..

Got it. And I think you mentioned, Ziv, in your comments that advanced sensors were up 48% year-on-year.

Is that what contributed to the strong margins for the FTP segment? Can you maybe help us there?.

Yes, absolutely. If we look at the FTP segment, which had the, I would say, very strong margin level for this year, there are two main contributions. One is advanced sensors, but I would say even to a larger extent is higher sales in regards to Pacific Instruments, which we already reported has a very high gross margin level.

So it's a combination of - in respect to the prior quarter, it's a combination of Pacific Instruments revenues with more additional advanced sensor volumes..

Good. I'll hop back in the queue. Thank you..

Thank you..

[Operator Instructions] The next question is a follow-up from Sarkis Sherbetchyan with B. Riley Capital. Please go ahead..

All right. Thanks for taking the follow-up here. So one more.

With regards to the 3Q outlook, the range of $70 million to $77 million, can you maybe give us some puts and takes on what's required to get to the low end of the range versus the high end of the range?.

Okay. The consideration to provide the Q3 guidance was based on the fact that we have expected - we have due - we are expected to ship - around 60%, 61% of the current backlog is expected to be delivered by the end of the Q3.

We take into account the fact that we have 10% less working days in Israel, which plays a significant role in regards to manufacturing of the FTP, in conjunction with the fact that we know that in Europe, it's always softer.

So we do take into account that we would be able to sell less out of stock in Europe during the July-August time frame, given the current backlog..

That's certainly helpful. And then I think you mentioned in the prepared remarks that you're monitoring the tariffs and trade situation globally here. It sounds like mid-July, right, tariffs went into effect.

Can you maybe help us understand perhaps what products or product lines are impacted? And just kind of the idea of managing your supply chain or surcharges, et cetera?.

Yes, absolutely. As Bill indicated, we are expecting an additional cost of $600,000 for the second half of 2018. There is no impact in regards to FTP. The first reporting segment in regards to - I would say, it's is a 50-50 split between Force Sensors and Weighing and Control.

In regards to Force Sensors, these tariffs are applied on our products being manufactured in China and being shipped and sold into the United States.

Going forward, as we continue to streamline all our manufacturing activities in India, as we did in the prior years, the expectation is that the impact of the tariff is going to be diminished in the upcoming years as we move more production to India. The other part is regarding WCS. And here, we are looking at two subsets.

One is a sample that we currently buy from a third party in China, and we're selling into the United States. Here, we are looking at some alternative supply chain. How we may produce those products or we may take some of the product to our in-house production to our manufacturing facilities, which are out of China.

And also, we are having, as Bill indicated, some discussions with customers regarding applying a surcharge to those products which are now currently impacted by the tariffs. And to a much, much smaller degree, we have some products that we buy in the U.S. and sell into Canada.

But the biggest effect is coming from products which are made in China and delivered to the U.S. But we do expect to reduce and to mitigate the additional costs as we move forward..

Thanks. That's certainly helpful. That's all for me..

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

All right. Thank you, guys. I appreciate everybody for dialing in today and listening to our second quarter earnings call. We look forward to talking to you in the future. And also, just to let you know that Vishay Precision Group will be attending and presenting at the Jefferies Conference tomorrow in New York.

Once again, I appreciate you dialing in, and thanks for your support, and have a good day..

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