Good morning, and welcome to the VPG First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Steve Cantor, Senior Director of Investor Relations. Please go ahead..

Thank you, Kate, and good morning, everyone. Welcome to VPG's 2021 First Quarter Earnings Conference Call. Our Q1 press release and accompanying slides have been posted on VPG's website, 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, 2020, 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.

Please refer to Slide 3 of the quarterly presentation.

Ziv?.

Thank you, Steve. I will begin with some commentary on VPG's consolidated financial results and sales trends for the first quarter. Bill will provide financial details and our outlook for the second quarter of 2021. Moving to Slide 3, first quarter highlights. The first quarter results marked a good start to the year.

We achieved sales of $70.6 million, which was slightly above the high end of our guidance. We ended the quarter with a book-to-bill of 1.21 as we grew our orders 22% sequentially to $85.5 million, reflecting strength across our businesses and end markets. Advanced sensor reported another strong quarter and continued to broaden its customer pipeline.

We executed well operationally, growing our gross margin and achieving an adjusted operating margin of 8.7% and adjusted EPS of $0.31, which were within our target model. Moving to Slide 4, consolidated results and market trends. Looking at the first quarter sales results in more detail.

Sales grew 4.3% from a year ago and declined 6.4% from the fourth quarter. Sequentially, business trends were generally positive, and we ended the first quarter with a book-to-bill above 1.1 in all the 3 reporting segments. In each of our end markets, we had the book-to-bill above 1, with the exception of the avionic, military and space market.

In the test and measurement market, sales grew 8.3%. Demand in this market grew 41.1% sequentially, driven by continued strength related to semiconductor test equipment. Sales sequentially to the industrial weighing transportation and general industrial end markets grew 2.7%, 7.2% and 3.7%, respectively.

Other trends reflected strength in the transportation market, which grew 29.4%. In the avionic, military and space and steel markets, in which our sales are driven by the timing of customer projects, sales were softer, as we communicated last quarter.

However, orders in the steel market grew 59.1% sequentially, reflecting increased customer activity and improved project-driven demand. Orders in avionic, military and space, or AMS, grew 13.1%.

While sales in our other markets were essentially flat, orders grew 23.5% sequentially, driven by strong demand in consumer, medical, construction and precision ag. The net result of these trends was a book-to-bill of 1.21 for the first quarter and a backlog of $100.7 million. Moving to Slide 5, turning to the results by segment.

Foil Technology Products first quarter sales of $32.7 million were 10.3% lower sequentially, primarily due to lower sales of Pacific Instruments. Compared to a year ago, FTP sales grew 7.3%, driven by strong performance in advanced sensors and precision foil resistors.

Advanced sensor first quarter sales grew 80.7% year-over-year and 4.5% sequentially to an annualized level approaching the $40 million range. We continue to operate at a maximum capacity, and we expect to complete the transition of our new manufacturing facility in the third quarter of this year.

Adjusted gross margin for FTP was 40.4% in the first quarter of 2021, increasing from 38.9% in the fourth quarter of 2020 as a result of favorable product mix, manufacturing efficiencies and onetime inventory adjustment in Q1 of '21, which will not reoccur, which were partially offset by lower revenue.

The book-to-bill for FTP was 1.19 in the first quarter, which reflected a 26.2% sequential increase in orders. The strength in demand was driven by applications for our precision foil resistors in the test and measurement market, mainly for the semiconductor test application and in AMS.

Demand for advanced sensors remain strong as we continue to broaden our customer base for this product across a range of end markets. For the Force Sensors segment, it was a quarter of strong performance. First quarter sales of $16.9 million, improved 4.2% from the fourth quarter of 2020 and were 15.2% higher than a year ago.

The OEM businesses of Force Sensors continues to perform well as its revenue grew 16.6% from a year ago. Financially, Force Sensors' adjusted gross margin of 36% in the first quarter improved from 29.6% in the fourth quarter and 24.3% a year ago. The sequential improvement was driven primarily by higher revenue and manufacturing efficiencies.

This results in part demonstrate the cost reduction, product quality and efficiency improvements we have made over the past several years. The book-to-bill for Force Sensors of 1.14 reflected continued order strength.

For the medical and precision agriculture applications, to help meet demand, we are expanding the capacity of our China facility regarding the India facility, where we produce the majority of the Force Sensors products, we are currently fully operational at this facility as we maintain COVID protection measures to protect our employees.

Sales of Weighing and Control Systems the first quarter of $20.9 million declined 7.8% sequentially and were 7.0% lower than a year ago, reflecting lower project-driven sales in our steel market. Sequentially, we had higher sales of our onboard weighing solutions for trucks in Europe.

Sales of our TruckWeigh, VanWeigh products, which helps fleet operators to maximize truckloads while minimizing risk of fines due to overloading, continues to rebound and grew 5.8% from the fourth quarter. We are optimistic for continued growth in 2021, in part is EU regulation-driven aftermarket opportunities emerge in the second half of this year.

Adjusted gross margin in the first quarter for WCS was 44.3%, adjusted for COVID impacts and improved from 42.5% in the fourth quarter, mainly due to favorable product mix and an increase in inventory, partially offset by lower revenue.

In terms of order trends in WCS segment, orders grew 36.2% sequentially, reflecting higher demand for our steel, transportation and general industrial applications. With regard to the steel market, the book-to-bill for KELK and DSI were 1.37 and 1.74, respectively.

As we have discussed previously, orders for KELK and DSI are generally driven by customer CapEx projects, which is in the case of KELK, typically have a 2-quarter lag relative to inflection in the steel market. The result of these WCS orders trends in the first quarter was a book-to-bill of 1.3.

Before turning the call to Bill, I'll make a few additional comments. In terms of COVID, all our facilities are currently open and operational, and many of our employees who had been working remotely have returned to working on site.

Looking forward, we are continuing our long-term strategic initiatives, including deploying our capital prudently to build long-term stockholders' value. For 2021, these initiatives include completing the manufacturing transition and capacity increase of our advanced sensor product line.

We also are looking at the expansion of our Japanese precision resistor manufacturing facility in addition to deploying more automation projects for our resistor product line. As such, we expect capital spending to be approximately $22 million to $25 million for 2021.

We are also continuing to look for attractive acquisitions opportunities to add addition -- adding high-quality strategic businesses to the VPG platform that will further accelerate our growth and profitability. I will now turn it over to Bill Clancy for additional financial details.

Bill?.

Thanks, Ziv. Referring to Page 7 of the slide deck, in the first quarter of 2021, we achieved revenues of $70.6 million, gross profit of $28.6 million or 40.5% of sales, operating income of $6.4 million or 9.1% of revenues and net earnings per diluted share of $0.36.

On an adjusted basis, which we lay out in our reconciliation table in the press release, our gross profit was $28.6 million or 40.5% of sales, operating income was $6.1 million or 8.7% of sales and net earnings per diluted share was $0.31.

Our first quarter 2021 revenues declined 6.4% compared to $75.4 million in the fourth quarter and were 4.3% above the first quarter a year ago. Foreign exchange for the first quarter of 2021 had a positive effect on revenues by $2.1 million compared to a year ago and $700,000 as compared to the fourth quarter of 2020.

Our gross margin improved in the first quarter to 40.5% from 38.1% in the fourth quarter. On an adjusted basis, first quarter gross margin of 40.5% grew from the 38.0% in the fourth quarter of 2020. Our operating margin was 9.1% for the first quarter of 2021.

Excluding some start-up costs for advanced sensors and receiving COVID-19 subsidies, our first quarter adjusted operating margin was 8.7%, which decreased from the 10.7% we recorded in the fourth quarter of 2020.

Selling, general and administrative expenses for the first quarter of 2021 were $22.2 million or 31.4% of revenues compared to $20.3 million or 30.0% of revenues for the first quarter of 2020.

The increase in SG&A of $1.9 million mainly relates to $800,000 for foreign exchange rate impact, $300,000 wage increases, $300,000 of rent and $500,000 of other costs. The adjusted net earnings for the first quarter of 2021 were $4.2 million or $0.31 per diluted share compared to $3.3 million or $0.24 per diluted share in the first quarter of 2020.

Adjusted EBITDA was $9.5 million as compared to $8.3 million a year ago. Capital spending was $5.7 million, the majority of which reflects purchases and related infrastructure for the new advanced sensors facility.

As a result of these investments, we generated adjusted free cash flow of a negative $100,000 for the first quarter of 2021 as compared to $3 million for the first quarter of 2020. We define adjusted free cash flow as cash from operating activities, less capital expenditures plus sale of fixed assets. The GAAP tax rate in the first quarter was 26.3%.

We are assuming an operational tax rate in the range of 26% to 28% for the full year of 2021. Referring to Slide 7. We ended the first quarter with $96.2 million of cash and cash equivalents and total long-term debt of $40.6 million.

We believe that we have a strong balance sheet and ample liquidity to support our business environments and to fund additional M&A opportunities. The outlook. We expect net revenues to grow sequentially and be in the range of $71 million to $77 million for the second fiscal quarter of 2021 at constant first fiscal quarter 2021 exchange rates.

In summary, we achieved sales slightly above the high end of our guidance. We had strong orders across our business and our book-to-bill of 1.21. We achieved financial results within our targeted model. With that, let's open the lines for questions. Thank you..

[Operator Instructions] The first question comes from Dick Ryan of Colliers..

Good job on the gross margins. What -- I think in the fourth quarter, you talked about some increased logistic costs.

Did you see any more supply chain constraints leading to higher costs? Or what's your view of the supply chain? And how should we look for gross margins for the next couple of quarters?.

Okay. Dick, regarding the logistics cost, as we have indicated in the last quarter, there is an increase in logistics cost due to limited air and sea capacity. We have not seen further increases as of last quarter. Therefore, at this point in time, we should expect to see a continuation of the cost, and we don't expect any increase.

What we had -- maybe an item that should be indicated, we had -- on the gross profit side, we are looking at -- as we indicated, at a favorable impact of approximately $800,000, coming as a onetime effect related to an inventory adjustment in Q1, which should not repeat itself.

In addition to that, we -- as we are going to expand our Chinese facility in order to support further demand for Force Sensors, we should expect to see slightly higher cost since our China cost -- our labor cost in China is higher than India.

And in addition to that, the fact that we would expand the Chinese facility will also imply that we will incur tariff cost as we are going to export those products to the United States.

So all in all, for the second quarter -- if we are looking at the second quarter, based on the guidance, we are looking at the gross profit margin to be flat in respect to Q1, given the onetime effect and the higher labor cost in China, including the tariff cost..

I appreciate that color. So Ziv, what's -- you indicated your India facility was up and running, and you can hear some of the horror stories how COVID is spreading over there.

What are you guys seeing? And has there been any impact? Or do you anticipate any impact -- revenue impact from that facility?.

Okay. At this point in time, there was -- in the state where we are, there was -- the government has announced a lockdown for 2 weeks, until May 24. VPG has been classified already a year ago as an essential business due to the fact that we are selling to the medical and agricultural market.

Therefore, we have a special waiver to continue and operate our facilities during those lockdown. I'm -- we are much, much better prepared in India than a year ago. Since we were in a shutdown situation a year ago, we have all the proper protections in place already in India for our own employees.

So I have to say, given the environment, the company is much, much better prepared to protect its employees in addition to the waiver that we have received. Therefore, at this point in time, we are fully operational and we have not -- and we -- and at this point, we are not expecting any interruption in manufacturing for our India facility..

Okay.

So the expansion in China, will that -- I mean, where will that feed product to? Is that to just augment what India is producing? Or is the demand not strong?.

This is correct. We have several product lines as the book-to-bill for Force Sensors continues to be strong. We have added capacity in India. And at the same time, we are increasing the capacity in China, mostly for weighing application. So this is correct.

This is augmenting the India facility and increasing the capacity in order to support the demand, the current demand..

Great. Congratulations on the strong execution..

Thank you..

[Operator Instructions] The next question is from Sarkis Sherbetchyan of B. Riley Securities..

Ziv, you mentioned advanced sensors demand remains strong. I think you said in the prepared comments, 80% year-on-year growth and that's supporting a level approaching $40 million in sales annualized. Just wanted to kind of see if you can maybe discuss the comments on broadening the customer base for the product and across end markets.

Any color that you can share with us there?.

Okay. Regarding advanced sensors, so you -- as you indicated, revenue has increased by 80.7% year-over-year and 4.5% sequentially since we are running really at the maximum capacity. At the same time, I have to say that given the strict nondisclosure agreements we have with most of our customers, I cannot comment on the specific customers.

However, we will -- we have continued to broaden the customer base. Among this, we were pleased to add more significant customers. But unfortunately, I will not be able to provide more details.

But I would like to say that regarding the transition, we are on time and the fact that once we would finalize the transition in Q3, it's not only that we will be fully operational in the new facility, but also at the same time we are adding more capacity.

So once we complete the transition, we would be able to support much higher volume and as it seems -- given the strong environment, it seems that this capacity will be required and will be fully operational this year..

I guess just to poke around a little bit more. On this annualized sales level or number for this particular product line, is it 1 or 2 specific customers that you can't talk about? Or is there a particular segments that you're serving? That's pretty exciting, I guess.

As I look at the revenue by market on Slide 4 of the presentation, the other markets are growing much more rapidly year-on-year. I'm assuming advanced sensors falls into, I guess, broadly speaking, that category regarding growth.

Can you kind of help me out there?.

You are correct, Sarkis. And part of the segments that we -- that I will not be able to provide more color is mostly regarding medical, consumer and -- mainly around medical and consumer.

To some extent, we have some specific test and measurement customers who had some highly proprietary, I would say, applications, but those are the type of end markets. But you are correct. The other markets, some -- the growth in the other markets falls also under the advanced sensors product line..

Okay. And I guess if I kind of think about your guidance, clearly, I think it's fairly strong and nice sequential growth.

Anything that you can share regarding just kind of the end market health real-time that you're either excited about or worried about that we should be mindful of?.

Well, we have seen, I would say, a rebound pretty much in all end markets. The ones which we have seen some good indications and I did provide more details regarding the book-to-bill, is the steel-related product lines like KELK and DSI. Over there, we have seen a more modest increase in demand.

We are still expecting or looking for a much stronger rebound. But in terms of all the other markets, test and measurements, AMS, industrial weighing, general industrial, we have seen a rebound of demand. And at this point in time, we still believe that there is much more room to grow from a demand standpoint.

We do provide competitive lead time in all our product lines. We are not on allocations. Therefore, we do believe that once the demand would increase, we would be able to deliver higher revenues..

Got it. Just one last one for me.

Is the first quarter SG&A level kind of the right number to think about going forward on a run rate basis? I guess what's kind of the baseline going forward? And if there were any onetime things to consider as we look at the sequential trends of OpEx?.

Yes. Sarkis, from the SG&A perspective, I mean the run rate -- or the actual that you saw in Q1 obviously, now, in 2021 has like the wage increases that I mentioned. There is, obviously, FX, fringe adjustments. What we have recorded is probably the base number.

I mean, obviously, as we roll out the year, we always look at and review our accruals in the second half of the year. But as far our base, what we have recorded so far in Q1 would be a good measure for Q2..

Okay. Got it.

And does this assume the facility for FTP and advanced sensors, kind of, the costs are essentially kind of being realized today? Or do we have some more to think about as that facility comes online and is more fully realized in, I think, you mentioned in the third quarter of this year?.

Most of the cost has been realized. Since we are already running in the facility, we may expect an incremental cost of some additional overhead supporting a larger operation at the level of $100,000 to $200,000 a quarter. But by far, most of the cost has been realized.

The only thing which should be indicated is that we have booked so far in Q1, $130,000 of start-up costs. But since the transition has not been completed, we should expect to book further start-up costs until the transition is completed by the end of Q3. But those are onetime. Those has nothing to do with the ongoing cost to support the new facility..

[Operator Instructions] The next question is from Bill Dezellem of Tieton Capital..

You had referenced in your remarks, interest in acquisitions and have historically been active there.

Does the rebound in economy, does that make acquisitions either any more difficult or easier to consummate? Or does it not have an impact at all in terms of ability to get deals done?.

Regarding the M&A landscape, we have seen -- and it has been published. The last few transactions of large companies, like Abaco Systems, by National Instruments and MTS, those has been finalized at the level of 16, 17x EBITDA.

I think that's one of the challenges that the M&A landscape has that debt or cash is fairly cheap and that the interest rates are extremely low. Therefore, companies or transactions are completed at a much higher multiple than they have been a while ago.

We still believe as a company that, despite this environment, we would -- we are looking and having always dialogues with specific companies we are -- as we have been for quite -- for all along, very, very disciplined in respect to the valuation, return on investment, IRR targets that the company has to achieve while completing an acquisition.

And we still believe that despite this environment, there are still opportunities. Unfortunately, I have nothing to report at this point in time, but we are in constant dialogues with companies. And hopefully, we would be able to complete an acquisition. But at this point in time, I have nothing to report.

But it's very high on our radar screen, on our mission to complete an acquisition given our strong balance sheet..

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

Thank you. Before we close, I want to let everyone know, we will be presenting at the Needham Conference on May 17 and also the Stifel Conference on June 10. Please see our website for more details. Thank you again for joining our call, and have a good day..

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