Good day and welcome to the VPG 2019 First Quarter Results Conference Call and Webcast. All participants will be in 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 Ms.

Reynee Tung, Director of Global Marketing Communications. Please go ahead..

Thank you, operator. Good morning, everyone. Welcome to VPG's 2019 First 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 the time to read through it, as it contains important information. You can find it 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, 2018, and our other recent SEC filings. And now it is 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 first quarter of 2019 with revenues of $76.5 million, operating income of $12.6 million, operating margin of 16.5%, and earnings per diluted share of $0.61.

We are pleased with our quarterly performance and with our first quarter of 2019 cash from operations of $8.1 million and free cash flow of $4.8 million. Moving on to Slide 4. We grew our first quarter 2019 revenues by 4.7% to $76.5 million, up $3.4 million compared to $73.1 million of revenues in the first quarter of 2018.

The negative impact of foreign exchange rates to revenues for the first quarter of 2019 as compared to the first quarter of 2018 was $2.5 million. We increased our gross profit margin to 43.2% in comparison to 39% in the first quarter of 2018.

The increase in gross profit of $4.5 million for the first quarter of 2019 as compared to the first quarter of 2018 was primarily attributable to an increase in volume of $4 million, freight savings of $400,000 and $300,000 of export grants in India partially offset by $300,000 of negative impact from foreign exchange rates.

Selling, general and administrative expenses for the first quarter of 2019 were $20.4 million or 26.7% of revenues compared to $20.3 million or 27.8% for the first quarter of 2018.

The increase in selling, general and administrative expense was related to $500,000 of head count and wage increases and $500,000 mainly of fees and commissions partially offset by $900,000 of positive impact of foreign exchange rates.

The net earnings attributable to VPG's stockholders for the first quarter of 2019 increased 65.3% to $8.2 million or $0.61 per diluted share compared to $5 million or $0.37 per diluted share in the first quarter of 2018.

Foreign currency exchange rates for the first quarter of 2019 as compared to the first quarter of 2018 increased net earnings by $300,000 or $0.02 per diluted share. We generated free cash flow of $4.8 million for the first quarter of 2019 as compared to a negative $2.4 million for the first quarter of 2018.

We define free cash flow as the amount of cash generated from operations, which was $8.1 million for the first quarter of 2019 less capital expenditures which was $3.3 million for the first quarter of 2019, net of any proceeds and sale of assets, which was de minimis for the first quarter of 2019.

Our GAAP tax rate for the quarter ended March 30, 2019 was 27.2%. We anticipate that the operational tax rate for the year will be in the range of 27% to 29%. Moving onto Slide 5. We remain focused on the execution of our core strategy, which continues to prove very effective in achieving these goals outlined on Slide 5.

With that, let me pass further comments on to Ziv..

Thank you, Bill. An important part of our strategy is to grow 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 Product segment, and it has been grown nicely as more customers include it in their design.

We saw our advanced sensor revenue increase approximately by 32% in the first quarter of 2019 versus the first quarter of 2018. We are pleased with the continued acceptance of this new sensor platform and are proud to provide enhanced performance to customers. The second example is our Weighing and Control Systems segment.

Our TruckWeigh and VanWeigh onboard weighing business revenues increased by 53% in the first quarter of 2019 as compared to the first quarter of 2018. Moving to our end markets and beginning with demand for avionic, military and space. Macro trends remain positive for demand in defense fueled by major modernization programs and precision products.

Commercial aerospace aftermarket should continue to be strong due to a favorable fleet dynamics and for business jets, the new product launches and low young used inventory to drive delivery growth. In the semiconductor capital equipment end market, we see deceleration in the rate of decline from the wafer fab equipment spending.

The expectation is, that trough in this cycle is close with rebounding incremental growth in the second half of 2019. The majority of the cuts have been coming for memory as well as weakness in premium smartphone market while increased demand for logic spending. The expectation is that memory demand will rebound to the end of the year and in 2020.

Finally turning to the steel market. In 2019 and 2020, global steel demand is expected to continue to remain positive, growing at 1.4% globally in 2019. Global steel demand bolstered by a recovery in investment activities in developed economies and the improved performance of emerging economies.

By region, steel demand in developed countries is expected to be healthy but growth to be moderate. China faces deceleration in demand growth. End market growth should be positive but moderate given the industry uncertainty.

In summary, after several years of rapid growth, we continue to see positive signs of momentum in the end markets we serve, although a more moderate pace of overall growth. Moving to Slide 6. The company's overall book to bill was 0.92 in the first quarter of 2019 compared to 1.05 in the first quarter of 2018 and 0.93 in the fourth quarter of 2018.

Total orders for the first quarter of 2019 were $70.2 million, a decrease of $6.9 million or 8.9% from $77.1 million in the first quarter of 2018. And a decrease of $1.5 million or 2.1% from $71.7 million in the fourth quarter of 2018.

This sequential decrease in orders is primarily attributable to 4 sensor products in the precision weighing market, in the Americas and Pacific instruments product within the avionic, military and space end market in the Americas, partially offset by an increase in orders for precision resistors products in the test and measurement market in the Americas.

Our backlog at March 30, 2019 decreased to $87.1 million compared to $93.4 million at December 31, 2018 and to $93.9 million at March 31, 2018. On Slide 7, some details on our reporting segments.

The Foil Technology Products segment had the book-to-bill ratio of 0.88 for the first quarter of 2019 compared to 1.01 for the first quarter of 2018, and 0.88 for the fourth quarter of 2018. Sequentially, orders increased slightly by $0.2 million or 0.8% from the fourth quarter of 2018.

The Foil Technology Products segment gross profit margin was 44.7% for the first quarter of 2019, up from 42.8% in the first quarter of 2018 and up from 42.0% in the fourth quarter of 2018.

The year-over-year gross profit increase of $2 million was primarily due to the increase in volume of $1.8 million and $0.6 million in the manufacturing-related efficiencies partially offset by an increase in head count and in wages of $400,000.

The increase in volume primarily came from the Pacific Instruments product within the avionic, military and space end market and also an increase in the advanced sensor products in the test and measurements market in Asia and force measurement market in the Americas.

Sequentially, gross profit margin increased by $1.2 million primarily due to $1 million in manufacturing efficiencies and an increase in volume of $300,000. The Foil Technology Products segment backlog was 3.6 months compared to 4.2 months last year and 4.0 months in the prior quarter.

Looking at the Force Sensors segment, the book-to-bill ratio was 0.98 for the first quarter of 2019 compared to 0.91 in the first quarter of 2018 and 1.05 for the fourth quarter of 2018.

Sequentially, orders decreased by $1.4 million or 8.1% primarily as a result of the company receiving a semiannual orders within the precision weighing end market in the fourth quarter of 2018.

The gross profit margin for this segment was 30.2% in the first quarter of 2019, up from 27.3% in the first quarter of 2018 and up from 26.6% in the fourth quarter of 2018.

The gross profit decrease of $200,000 compared to the first quarter of 2018 was due to a decrease in volume of $1 million related to force measurement market in the Americas partially offset by freight savings of $500,000 and $300,000 of export grants in India.

The gross profit increased by $0.5 million compared to the fourth quarter of 2018 due to $0.4 million of export grants in India and $0.3 million positive exchange rate impact partially offset by a decrease in volume of $0.3 million. The Force Sensors segment backlog was 3.1 months for all periods being presented.

For the Weighing and Control Systems segment, the book-to-bill ratio was 0.93 for the first quarter of 2019 compared to 1.28 in the first quarter of 2018 and 0.92 for the fourth quarter of 2018. Sequentially, orders decreased by $0.3 million or 1.6%.

Gross profit margin for this segment was 50.2% in the first quarter of 2019 versus 43.9% in the first quarter of 2018 and 46.8% in the fourth quarter of 2018.

Weighing and Control Systems gross profit increased by $2.8 million from the first quarter of 2018 due to an increase in volume of $3.3 million for steel products in all regions partially offset by $0.5 million negative exchange rate impact.

Sequential gross profit increase of $0.5 million compared to the fourth quarter of 2018 was due to manufacturing efficiencies. The Weighing and Control System backlog was 3.4 months compared to 4.0 months in the first quarter of 2018 and 3.5 months in the fourth quarter of 2018. On Slide 8.

Given the current business environment and our most recent order intake at a constant first fiscal quarter 2019 exchange rates, we expect net revenues in the range of $70 million to $76 million for the second fiscal quarter of 2019. With that, let's open the lines for questions. Thank you..

[Operator Instructions] Our first question comes from John Franzreb of Sidoti & Company..

Okay. I guess I want to start with some of the good gross margin profile we've seen in the quarter. Notably, you could actually pick it. In foil technology, we had essentially flat revenue with - compared to December quarter but a sizable pickup in the gross margin profile.

Can you tell us what's going on in FTP on the gross margin line first?.

Yes, John. On the gross margin level, revenue and product mix were fairly similar to prior quarter where we have seen a very nice pickup in gross margin is mainly delivered by the label inefficiencies and improvement of yield. All in all, for the company, it was $1.5 million for the complete company.

But I have to say that a significant part of that came to the Foil Technology Products..

Okay. And similarly, in weighing, big jump in the gross margin profile relative to the fourth quarter on lower revenue.

What's going on there? Is there a -- I guess, there is a mix issue there, but can you just kind of give us some color on what's going on in weighing?.

Regarding the weighing, we do see a favorable product mix at the effect of $500,000. And in addition to that, we did realize around another $500,000 of savings on the valuable side also delivering by freight savings mostly..

Okay. Given your answers to those 2 questions, it sounds like you think the gross margin profile would be sustainable because both of them kind of like savings that are something you can continue to draw upon in upcoming quarters.

Is that a fair assessment?.

You are correct. From a manufacturing standpoint, we should continue to be very efficient. And since we are running on the same platform, we realized already some of the savings and some improvements that had been -- that has been made installed in the past. Regarding the complete gross margin, it also takes into account the product mix.

And in the last few quarters, we had, I have to say, a quite -- I have to say, a nice back wind from a favorable product mix, especially coming from particularly instruments and steel sales..

Okay, that makes sense. One last question in Force Sensors. In the first half of last year that business was running at a $19 million in change level. The second half of last year kind of settled into a $17 million level and now it's dipped below that.

What's going on in Force Sensors that, that revenue growth is just hard to -- revenue near $19 million is hard to maintain?.

Okay. So if you can recall, John, in prior quarters, I did report that we had significant orders from some of our precision Ag OEM customers. And there was, I have to say, to an extent, also some large orders from our construction OEMs. They have built their inventory, and now they are in a process where they are depleting their inventory levels.

They have been installing our sensors for new designs as well as current designs. So at this point in time, the gap between the $17 million run rate to the prior quarter's '19 or prior year $19 million run rate is really the gap of how quickly they will start replenishing their inventory.

And we know that they are running -- their business is running quite well, so this is just a matter of time. And I have to say that on top of that, we keep on having more and more designs in the queue for OEMs. But for OEMs as well as the business for the general industrial weighing is quite solid..

Our next question comes from Sarkis Sherbetchyan, B. Riley FBR..

So Ziv, you've mentioned the outlook on sales in the range of $70 million to $76 million for the second quarter. And I think you talked a little bit more about the current environment, right, in the prepared remarks.

Can you maybe help us understand what you're seeing in terms of current industrial activity? And maybe give us a sense for the near-term order rates? And it sounded like you're expecting some order rates to recover in the back half of this year. Just more color, please..

Okay, sure. So the book to bill for the complete company was 0.92. And in a way, this is the third consecutive quarter which we have reported below 1. We have to take into account that the first quarter of this year and prior quarter, we featured record high revenues.

So in absolute book to bill, this does not imply a drastic reduction in the overall trend. If I drill down to the different product lines, I have to say that starting with the FTP that - and maybe moving to the micro measurements product line, all in all, the micro-measurement business is running quite well.

We had, from a book to bill standpoint, an anomaly this quarter due to the fact that we have projected significant multimillion orders to be placed for AMS, for Pacific Instruments, which you know is an end market cyclical business. Those order has not - has been pushed out to the second quarter.

Therefore, the book to bill for Pacific Instruments was fairly soft. If I would exclude, and the orders will be placed before this quarter, if I would exclude this effect, micro measurements would be running at 1.03 book to bill, which continues in a very solid environment.

On the foil resistors side, I think that the biggest impact, as I did indicate before, is really the macroeconomic condition of wafer fab equipment capacity and the drop in memory.

So this was, to an extent, softening some of our demand on the precision resistors side, the indication from a macro standpoint that this business has a high likelihood to recover in the second half of the year. Regarding Force Sensors, I already provided some color following John's questions.

And when we are moving to WCS, I think that we see that the steel business, as I did indicate before, is still running in a very solid environment.

The fact that we had, I would say, record revenues in the last two quarters for steel only indicate - and the fact that the book to bill is still okay, only indicate that we - that the expectation is that for steel business, we should expect to see a very solid environment, where we may have seen, and this could be a second order effect, some softening is on our onboard weighing business, which is mostly for forestry in North America which relates to the construction business in the United States.

So all in all, from a macro level, AMS, I think, is solid. On the energy, oil and gas, still running quite good.

I did indicate that the wafer fab or the semi camp, some of our onboard weighing forestry and the general industrial is a little bit spiky, but we don't see any overall major trends that could - or major impact that could already indicate a change in the moving up or down from a demand standpoint.

So overall, for us, it's considered as a solid business environment..

That's super helpful. And then I just want to move on for maybe advanced sensors. I think you mentioned in the prepared comments, revenues increased 32% year-on-year.

Would you have the liberty to disclose what the revenues were during the quarter?.

I have to say, Sarkis, that this is not an information that we have provided in the past. The information that we have provided was a general sense for the annual overall advanced sensors. And we said it has been moving already to the -- around the $20 million range. But unfortunately, we have not provided quarterly information..

That's fair. And maybe if you can help us understand some more detail on wire expanding advanced sensor capacity by 5x. I mean the target you laid was over $100 million in sales once you expand the capacity.

So just give us a sense for what type of visibility do you have, right? Is it an end market that gets you excited? Is it a few kind of products, just whatever you can share there?.

Absolutely. So regarding advanced sensors, we have a lot of opportunities.

So far we have been -- the advanced sensor product was developed on one hand to generate new revenues for new customers in new application in conjunction with transitioning legacy business into the new platform, while being much more efficient but also providing an enhanced performance to our customers at a much lower cost base.

We have been - so we have started with - in a way, with an OEM business with OEM products, with products which are being delivered to OEMs. And so far, the success rate is as such that more than 50% of the revenues has been generated by new customers/new applications that the company never had in the past.

I would say, the uniqueness about this technology is that with the manufacturing platform and design capabilities, we are able to produce miniature sensors with potentially very high resistance and other complicated geometries that so far from a technology standpoint, there was nobody who was able to fill that gap.

So on one hand, if you - just give you an example, if you take battery-operated applications where energy consumption is very critical, as the higher resistance is, the lower energy those sensors would consume.

In other areas, mainly in regards to pressure and force applications, there are many new applications, some of them are highly proprietary, and we have signed very tight NDA with our customers that this platform can offer and so far we have been delivering to our customers while no other platform with - at the similar technology can achieve that.

But this was only, as I said, products which are sold to OEM customers. We have not even - we were not - so far, we are not even captured the complete the potential, and there are more and more designs every month, every quarter for new application in conjunction with transitioning legacy to the new platform. But this is only one dimension.

Another dimension, which we are on the verge of launching the product only this year, which has another great potential of upside, those are products which are sold to end users for testing of structures. It could be in the PC board market and it could be at other end markets.

The ASPs, our average selling prices, are much, much higher, and here we have also a clear advantage in regards to performance and cost. And this is where we are starting only to launch those products this year. And we would expect that this momentum is going to further accelerate the growth of advanced sensors.

So all in all, we do believe that placing the infrastructure for future growth, we have a great potential to gain revenues in order to fill the capacity, and this is the right thing from a strategy standpoint..

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

Thank you, Nicole. And thanks, everybody, for dialing in and participating on the call today. Also I'd like to let you know that VPG will be presenting and participating at the B. Riley conference in Beverly Hills in California on Thursday, May 23, and also at the Cowen conference the following Wednesday in New York on May 29.

So appreciate the information very much and look forward to talking to you soon. Thank you..

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