Operator: Good morning all, and thank you for joining us for VPG’s Second Quarter Fiscal 2024 Earnings Call. My name is Carly, and I’ll be the call coordinator for today. [Operator Instructions] I would now hand over to your host Steve Cantor, Senior Director of Investor Relations to begin. Steve, please go ahead.

Steve Cantor: Thank you, Carly and good morning, everyone. Welcome to VPG’s 2024 second quarter earnings conference call. Our Q2 press release and accompanying slides have been posted on the VPG website at vpgsensors.com and 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, 2023, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and President; and Bill Clancy, CFO. And now I’ll turn the call to Ziv for some prepared remarks.

Ziv Shoshani: Thank you, Steve. I will begin with some commentary on VPG’s consolidated financial results, and sales trends for the second quarter. Bill will provide financial details about the quarter, and our outlook for the third quarter of 2024. Moving to Slide 3, overall our second quarter was as follows: sales trends continue to reflect a mixed market environment. Revenues grew sequentially in some of our markets, while other markets remained soft. Similarly, order trends were mixed with sequentially growth in the Measurement Systems offset by lower orders in sensors, and Weighing Solutions. We achieved a solid gross margin in light of our revenue levels, as we adjusted our operations effectively to current revenue levels, and expanded our cost reduction programs.

Customer engagement remains high as we continue our focus on our business development initiatives. Our strong balance sheet and solid free cash flow, provides a good foundation for organic and inorganic growth. We expect the macro environment to be stable to the end of 2024, with mixed trends continuing in our markets. Moving to Slide 4, looking at the second quarter results in detail. We reported sales of $77.4 million, which were 14.8% lower than a year ago, and 4.2% lower sequentially. Orders of $73.5 million softened modestly from $75.3 million in the first quarter. Our book-to-bill ratio improved slightly to 0.95. We are seeing mixed trends in our markets. Bookings were soft in the test and measurement, avionic military and space, and industrial weighing.

However, orders grew for consumer-related applications and in our transportation and steel markets. Regarding our strategic business development initiatives, we are seeing the early results of these efforts in terms of design wins, and initial orders with new customers and additional applications, and projects with existing ones. Our gross margin of 41.9%, declined from a record of 43.4% in the first quarter, reflecting lower sales in the second quarter. We generated $10.2 million of adjusted EBITDA, $7.5 million of cash from operations, and $4.9 million of adjusted free cash flow, which supports our capital allocation strategy to grow stockholders’ value. I’ll now review our business segment performance for the second quarter. Moving to Slide 5.

Beginning with our Sensors segment, second quarter revenue of $28.9 million declined 20.4% from a year ago, and was 1.9% lower sequentially. Compared to the first quarter, sales growth in advanced sensors products was offset, by lower sales of our precision resistors. Sales of advanced sensors and related strain gauge products grew 17% from Q1 on the strength in consumer applications. Sales of precision resistors to the test and measurement market were softer, particularly in Asia. While second quarter orders for sensors of $26.1 million, were slightly lower sequentially, bookings for advanced sensors grew 20%. Orders for our resistor products were soft, particularly in the test and measurement market in Asia. Strategically, in the advanced sensors, we continue to address additional opportunities in both high-end road bikes and e-bikes with European and Asian bike makers.

These applications use our sensors to precisely measure the force of every pedal stroke. This helps professional and high-end bike riders train more efficiently. In addition, we received a substantial R&D order, for a developer of robotics for medical applications. Our project with a leading developer of a humanoid robot, continues to progress well as we recorded revenue related to prototypes for this project. This customer expects to deploy several thousands of these robots in its factories, by the end of 2025. Book-to-bill ratio for sensors was 0.9. Moving to Slide 6, turning to our Weighing Solutions segment, second quarter sales of $27.4 million were 12.2% lower than a year ago, and 4.8% below the first quarter of 2024. Sequentially, the decline reflected lower revenue in the transportation market while revenue in our industrial market was roughly flat.

The book-to-bill ratio for Weighing Solutions was 0.93. Orders of 25.5 million declined 7.3% from the first quarter. The lower orders were primarily in the transportation market for process weighing and on-board weighing systems. In terms of business development initiatives for Weighing Solutions, we are developing a variety of solutions and applications for existing and new customers in the medical and lab automation, construction and transportation markets. Moving to Slide 7, turning to our Measurement System segment, second quarter revenue of $21 million declined 9.6% from a year ago and 6.6% sequentially. The sequential decline was driven by lower sales of DTS safety testing products in AMS and the transportation end markets. Book-to-bill ratio for Measurement Systems was 1.04, as orders of $21.9 million improved 3.8% from the first quarter.

Sequentially, orders grew for the DSI comprehensive tools for the development of new metal alloys, while bookings for the DTS and KELK steel productivity systems were softer. As we have discussed, order pattern can fluctuate quarter-to-quarter, due to the timing of customer projects and the long lead times of these products. We continue to be encouraged, by our business development activity in the Measurement Systems. In the current quarter, we expect to have the first aluminum manufacturing customer evaluation of our KELK optimization system, using our optical technology. As we have discussed, the industrial aluminum manufacturing is a new potential adjacent market for us. We believe our solution can offer important cost savings, for these customers in terms of reduced downtime and waste.

For DSI, we expanded our offering of our Gleeble thermal-mechanical physical simulation tool, for developing new metal alloys with modules that can efficiently test smaller sample size. This capability opens a new market for DSI in the additive material manufacturing equipment market, for applications such as commercial 3D metal printers. Moving to Slide 8. Before turning the call to Bill, I want to comment on our capital allocation strategy. Given our balance sheet and the free cash flow generation, we believe that we can create stockholders’ value to organic growth, successful M&A, and as warranted, stock repurchases. During the quarter, we repurchased $3.1 million of our stock, or 97,000 shares. In closing, we continue to focus on our strategic initiatives in both business development activities, and cost reduction programs.

These actions are positioning VPG, to realize the significant long-term earnings power, embedded in our business model. I will now turn it over to Bill Clancy for additional financial details. Bill?

Bill Clancy: Thanks, Ziv. Referring to Slide 9 and the reconciliation tables of the slide deck, our second quarter revenues declined 4.2% from the first quarter and were 14.8% below the second quarter a year ago. Adjusted gross margin in the second quarter of 41.9%, compared to 43.4% in the first quarter, due to lower volume and unfavorable product mix. By segment, gross margin for the Sensors segment of 38.3% improved sequentially, primarily due to improved efficiencies. The Weighing Solutions gross margin of 37.6% was lower than the first quarter, primarily due to lower volume. Measurement Systems and gross margin of 37.6% was lower than the first quarter, primarily due to lower volume. Measurement Systems gross margin of 52.4% declined sequentially, reflecting lower volume with an unfavorable product mix.

Total selling, general, and administrative expenses for the second quarter were $26.5 million, or 34.3% of revenues, as compared to $27.4 million, or 33.9% of revenues for the first quarter of 2024. The sequential decrease in SG&A of $900,000 was mainly attributable, to a reduction of bonus reserve accruals. Operating margin was 7.6%, as compared to 8.6% for the first quarter. The adjusted operating margin in the second quarter was 7.6%, as compared to 10% in the first quarter of 2024, primarily reflecting the lower revenue. The adjusted net earnings for the second quarter were $4.2 million, with $0.31 per diluted share, which compared to $5.7 million, or $0.42 per diluted share in the first quarter of 2024. Adjusted EBITDA was $10.2 million, but 13.2% of revenue, compared to $12.3 million, or 15.3% in the first quarter of 2024.

Purchased CapEx in the second quarter was $2.6 million. For the full fiscal year of 2024, we expect purchased CapEx to be in the range of $10 million to $12 million, which is significantly lower, than the levels we have spent over the past few years. Adjusted free cash flow was $4.9 million, which increased from $4.2 million for the first quarter. We define adjusted free cash flow as cash from operating activities of $7.5 million, less capital expenditures of $2.6 million. The GAAP tax rate in the second quarter was 33.3%, as compared to 28.4% in the first quarter of 2024, primarily reflecting a higher proportion of income, and higher tax rate jurisdictions. The second quarter operational tax rate was 27%. We are assuming an operational tax rate in the range of 26% to 28% for the full year of 2024.

Moving to Slide 10. We ended the second quarter with $84.1 million of cash and cash equivalents and total debt of $31.9 million, which was classified as a current liability. I want to note that we have realized approximately $900,000 in net interest savings, through the first half of 2024, as a result of our debt paydown in 2023. Regarding the outlook for the third fiscal quarter, given the current market conditions and our backlog, we expect net revenues to be in the range of $70 million to $78 million at constant second fiscal quarter 2024 exchange rates. In summary, we’ve adjusted our operations effectively to current revenue levels. We’ve generated solid cash flow and continue to repurchase our common stock. And we continue our focus on strategic business development, and cost savings initiatives.

With that, let’s open the lines for questions. Thank you.

Operator: Thank you. [Operator Instructions] Our first question comes from Griffin Boss of B. Riley. Griffin, your line is now open.

Griffin Boss: Hi. Good morning, Ziv, Bill. Thanks for taking my questions. So first from me, you laid out your three to five-year targets for revenue growth and margin expansion back in February of 2022. Now that we’re about six months from the front end of that range and macro uncertainty remains and perhaps is even growing, how viable do you see those targets today?

Ziv Shoshani: Good morning, Griffin. When we developed the three to five-year plan back in 2022, naturally we have not foreseen the downturn – I would say the downturn in the marketplace. Nevertheless, I still believe that the plan we have provided is very much viable, given the fact that based on the discussions that we had with our large OEMs and the initial outlook that we have been looking for an initial recovery in the second half of 2024, which, at this point in time, we are looking moving the initial recovery based on the discussion we had with our large OEMs and their earnings release as well. The correlation with the earnings release, we foresee the recovery starting as of 2025. In addition to our extensive business development activities, which should generate new, I would say, we would expect it to generate significant revenue with new projects.

I do believe – that the plan we have laid back in 2022 is still viable, and the plan for the company is still to meet that.

Griffin Boss: Okay. Great. Thanks for the colors, Ziv. On that note, the revenue growth targets obviously implied meaningful inorganic contribution. Can you just discuss a little bit more what you’re seeing on the M&A front, how that process has progressed throughout the year?

Ziv Shoshani: On the M&A front, it was, I would say that on the M&A front, we still have seen deals with some lower multiples. We have been in, I would say, in discussion with a few companies. At this point in time, unfortunately, I have nothing to report, but I do feel that the M&A landscape is going to be more. I would say, more reasonable at a much better, I would say, at a much better closing, or I would say at a much better deal as we move forward. So – I would say that, unfortunately, we were not able to execute, but I do think that we are going to be much more optimistic about M&A, as we move forward.

Griffin Boss: Okay. Great. Makes sense. Thanks, Ziv. And just turning to a model question here, the gross margin, SG&A, both came in below our expectations, obviously, gross margin because of the lower volume. SG&A, the ongoing cost reduction initiatives, which is great to see. Is it fair to assume that those trends, are going to continue into the back half of the year, just given the expectation for Q3 top line?

Ziv Shoshani: The gross margin, we are looking at a similar revenue level at a similar exchange rate. The gross margin is sustainable. And the SG&A Bill will provide more color regarding the SG&A.

Bill Clancy: Yes, so Griffin, on the SG&A, we were at $26.5 million for Q2, which included some bonus adjustments. It would only be slightly higher for Q3, so trending similar to where we were, slightly higher.

Griffin Boss: Okay. Great. All right. Thanks. And then just last from me, I guess more broadly, obviously, the past 12 months have been tough. I think the company has been navigating the environment very well. But just looking forward, aside from the ongoing cost reduction initiatives, what gets you most excited for the future in terms of trends, or business opportunities?

Ziv Shoshani: What gets me most excited, is our business development initiatives. We are working very diligently, and we have enhanced our business development resources. And I would say each of the reporting segments is working with some, I would say, with some key OEMs in order to develop high volume revenues. As I’ve indicated during the call, we have – on the sensors side, we have the humanoid projects. We have some medical robotics applications. We have the consumer electric bike and high-end bikes. We have inventory management on the Weighing Solutions. We have some – large OEM construction designs. On the Measurement Systems, we have the – on the DSI, we have the additive production ceramic-based testing. So all those projects, which are in an initial design cycle, should generate a substantial amount of revenue in the future. And this is what I’m really excited about, the improvement and the acceleration of organic growth, for the company in the coming years.

Griffin Boss: Great. That’s excellent. Thanks, Ziv. And thank you for taking my questions.

Ziv Shoshani: Thanks.

Operator: Our next question comes from John Franzreb of Sidoti & Company. John, your line is now open.

John Franzreb: Good morning, guys, and thanks for taking the questions. I’d actually like to take a step back and Ziv, maybe talk about in the beginning of the year – till today. When you look back at the revenue profile, what business was far weaker than you thought now, than you thought maybe in the beginning of the year?

Ziv Shoshani: Okay. That’s a great question, John. Our outlook going into the year, was for an initial recovery in the second half of 2024, which was based on a more optimistic expectation from our customers. We have received indications from many of our OEM customers that, their expectation for an upturn has been pushed from the second half of 2024 to 2025. We have seen this mainly in precision agriculture, industrial, construction, and also semiconductor test and measurement. So those would be the main end markets, where we have expected an upturn in the second half of this year, which at this point in time, based on the discussions with them, they are looking for a push-up for 2025. In terms of our outlook for the rest of the year, we expect order to be flattish, reflecting continuing mixed trends in our end markets.

John Franzreb: Yes, some of those end markets that you just mentioned are interest rate sensitive. Would it be fair to assume that interest rate cuts would be certainly a positive for those end markets?

Ziv Shoshani: Yes. Yes, this is correct, John. If we are looking at the large capital investment like construction, like precision ag, definitely test and measurement. Those markets would be influenced by the interest rates. And once the interest rates are expected to drop, we would see, I would say, an improvement in – their business activity.

John Franzreb: And it seemed to me in your prepared remarks, there is an increased emphasis on the advanced sensor business again. Are you seeing more interest in that product line? Can you just kind of elaborate, why the increased verbiage on it?

Ziv Shoshani: Yes. Okay. So, one, we had a good positive sign of an increase of 21% in bookings in terms of consumer electronics in respect to prior quarter. And I do believe that we are very, very excited given the business development initiatives in advanced sensors. The fact that the business environment is soft, only emphasize how important it is to continue and promote the business development activities in order to assure the long-term growth of the company. A project like the humanoid project, which this year should result in hundreds of thousands of dollars of revenue only at the prototype level. The large R&D order, a significant R&D order for medical robotics and e-bike are only an indication regarding customer engagement, and the potential growth for high value dollar accounts.

And this is what the business is focusing on. So, we understand that there is a short-term business environment, but the company is very much focused and driven, on pushing those business development activities. And this is why, since the team and myself are very excited about, and this is only one platform, about advanced sensors, this is why we are discussing this product line.

John Franzreb: Understood. And I guess if we kind of look at it, that so the business is slower than expected, but across the whole portfolio, if I wanted to like identify what business line would indicate things are starting to turn around, the proverbial green shoots. When you look at your portfolio, where would you expect to see a turnaround first emerge [ph]?

Ziv Shoshani: If I’m looking, when we speak about turnaround, there are two verticals. One is a true demand in the market, while the other one is going to the end of the cycle of depletion of inventory. I do believe that one of the business segments that, we should expect to see by the end of the year, a faster depletion of the inventory and an initial indication of recovery, is test and measurement. During those discussions with customers, we have a – during the discussions we understand that they are getting to the end cycle of the inventory level, and they would expect, beginning of next year, to start placing orders. As we have discussed earlier, other markets could be more dependent on interest rates. So once interest rate – once there is an indication of a reduction of the interest rates.

I think that customers would be more willing to start investing in big projects and start investing more in inventory. We should – please also bear in mind that the inventory Q cycle at EMS and at distribution is very, very low, given the high interest rates and the cost of holding inventory. So, I would expect that this would also change, as interest rates would start to go down.

John Franzreb: Understood. Thank you, Ziv, for taking my questions. I’ll get back at the queue.

Ziv Shoshani:

Operator: [Operator Instructions] It would appear we have no further questions, so I will hand back to Steve Cantor, Senior Director of Investor Relations, for closing remarks.

Steve Cantor: Thank you all for joining the call. I want to note that we will be participating in the Jefferies Conference on September 4. You can check our website for additional details. Again, thank you all and have a good day. Bye.

Operator: This concludes today’s call. Thank you to everyone for joining. You may now disconnect your lines.

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