Good day, and welcome to the VPG Third Quarter 2020 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would like now to turn the conference over to Steve Cantor, Senior Director of Investor Relations. Please go ahead.

Thank you, Matt, and thank you, everyone, for joining our call today. Welcome to VPG's 2020 Third Quarter Earnings Conference Call. Our Q3 press release and accompanying slides have been posted on our website at vpgsensors.com. An audio recording of today's call will also be available on the Internet for a limited time and can be also 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, 2019 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. You can 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 Q3 and an update of the impact of the COVID-19 pandemic on our business. Bill will provide financial details and our fourth quarter outlook. Moving to Slide 3, third quarter financial highlights. I am pleased with our performance in Q3. As we continue to execute our long-term strategies while managing the challenges of the global pandemic. We achieved growth in sales, operating margin and earnings per share compared to the second quarter and the third quarter a year ago. We generated a positive adjusted free cash flow and continued our investments in our new advanced sensors manufacturing facility. And we are now manufacturing at full capacity levels at our India facility for full sensors. Moving to Slide 4, consolidated results and market trends. We achieved third quarter sales of $67.5 million, above the high end of our guidance, which was 14.2% higher than the second quarter and about flat with a year ago. In terms of our business trends, many of our diversified end markets in the third quarter continued to show modest signs of recovery from the pandemic lows earlier in the year. Consolidated orders grew $7.7 million or 13.7% from the second quarter, while we are encouraged by this growth the sequential trends across these markets show different level of strength. On the positive side, strong demand for consumer application and precision agriculture was partially offset by lower orders for medical and construction. In the steel-related market, orders were stronger for Dynamic Systems, Inc. or DSI while KELK orders remained flat. Orders in the avionic, military and space and test and measurement market were strong. However, trends in some end markets were mixed. In the transportation market, orders rebounded from…

Thank you, Ziv. Moving to Slide 7, our financial results. Referring to Page 7 of the slide deck. In the third quarter of 2020, a we achieved revenues of $67.5 million, gross profit of $27.3 million or 40.5% of sales, operating income of $8.1 million or 12.0% of revenues and net earnings per diluted share of $0.41. On an adjusted basis, which primarily excludes a $320,000 net credit mainly related to a COVID-related subsidy from the Canadian government and an $84,000 restructuring charge, our gross profit was $27.3 million or 40.5% of sales. Operating income was $7.9 million or 11.7% of sales and net earnings per diluted share was $0.40. Our third quarter 2020 revenues increased 14.2% compared to $59.1 million in the second quarter and were slightly above the third quarter a year ago. Foreign exchange for the third quarter of 2020 had a positive effect on revenues by $700,000 compared to a year ago and $1.1 million as compared to second quarter of 2020. Our gross margin improved in the third quarter to 40.5% from 39.1% in the second quarter. On an adjusted basis, our third quarter gross margin of 40.5% grew from 40.1% in the second quarter of 2020. Our operating margin was 12% for the third quarter of 2020. Excluding the above-mentioned restructuring charge and the COVID-19 subsidy, our third quarter adjusted operating margin was 11.7%, which increased from the 8.4% we recorded in the second quarter of 2020. Selling, general and administrative expenses for the third quarter of 2020 were $19.1 million or 28.4% of revenues. In dollar terms, as a percentage of revenues, this was essentially flat with the third quarter of 2019 and compared to $18.6 million and 31.5% of revenues in the second quarter of 2020. The sequential increase in SG&A of…

[Operator Instructions] Our first question comes from Sarkis Sherbetchyan with B. Riley Securities.

So first on the fourth quarter sales outlook. I think it's pretty impressive that you guys have guided to sales and sequentially better at that. So I just wanted to kind of pick away and understand what end markets are driving the quarter-on-quarter 4Q growth assumptions? And then which segments are the biggest beneficiaries of your assumptions? Just kind of looking at the metrics relative to the third quarter here?

Okay. So Sarkis, so when we are projecting Q4 sales revenues, we are looking at a few factors. First of all, the dynamic of the company is such that -- and historically, is the same thing, the 2/3 of the revenues are already in the backlog and are expected to be shipped in the following quarter with firmed -- with firm delivery dates to customers. 1/4 are orders that are expected to be booked and shipped within the same quarter. And in addition to that, we are cycling the project-driven product lines like a DSI and like KELK, like Pacific instruments that has a specific delivery date, which is not which is not homogeneously across quarters. So if we take into account the $90.8 million of the number of working days and the expectation, the 2/3 is expected to be delivered, given the current environment, including the project-driven cycle product lines. We do believe that this guidance is to -- support that level of revenues. On a high level, we already provided more color regarding the order intake on Q3, which is expected to be delivered in Q4 regarding the different markets, And as we said, consumer -- on FTP consumer is quite strong. AMS is quite strong. We have seen some modest decline on OEM medical for sensors industrial weighing is much softer. And the other product lines are better than the first half of the year, but still fairly flat in respect to prepandemic levels [technical difficulty] in Q4 of last year, it was a prepandemic where we took into account certain infrastructure related projects like building, expanding the India building in order to support more capacity and also expanding other product lines on the infrastructure one. One, once the pandemic came in and the situation became much more fluid given the uncertainty, and we had to deal with the lockdown in India and in other places, we had to change priorities in order to support current demand, and this is where we shifted capital from product lines that did not show enough that the demand did not support the level of growth. In addition to the India infrastructure, we shifted that for adding more capacity on FTP predominantly for advanced sensors in order to support the additional growth that we have seen during the COVID period. So it was just a change of priorities given the situation and the uncertainty.

Our next question comes from John Franzreb with Sidoti.

I guess, I want to start with the cost side of the equation. Can you talk a little bit about the temporary costs that you might have put in place? Are they all now back as part of the P&L? Where do we stand on that front?

Well, there are two types of cost measures. We have the strategic ones, which are a multiyear project, and we have -- and we did discuss that in Q4, like closing facilities, relocation of products, changing warehouse location. This is all part of a much bigger plan, which we have continuing to execute our multiyear program in addition to the short-term cost-related -- cost-related measures that we took during the COVID environment as an example. All we have abandoned travel and we have minimized all other nonrelated cost, which is supposed to support extra projects, which we may have -- which we have pushed out some of them. So which we have pushed out some of the projects into next year given the pandemic. So this is really a mixed bag of those short term, like travel, which could result in a significant amount of money. In addition, if you can recall, in addition to the salary freeze that we have implemented earlier in the year with the longer-term projects, which are more of a strategic nature of moving product to India or transitioning some of the legacy production into advanced sensors, those type of projects. So it's really a combination. But it's all now flows into 2020 P&L.

So in aggregate, you're saying that most of the temporary costs is still in place, such as the salary freeze and we shouldn't expect them to materialize to 2021 at the earliest. Is that a fair assumption?

Well, I have to say that we don't really know how the world is going to change going forward as post-pandemic when a vaccine will be found and distributed. So I would assume that we would increase the level of travel, but I don't think that -- I do believe that there are some changes in the fundamental to the postpandemic and we will not see the same level or the same cost of traveling. And we did find that there are ways how to communicate in a fairly effective way via electronic media. So there would be an increase of cost, but I don't think that to the same level as prepandemic, this is one. Regarding our strategic initiatives, we have not finalized our multiyear plan, and there are more projects to be delivered in 2021 and onwards and after that. And we are going to provide that information once we get closer to the execution. But we do have more strategic projects, cost reduction projects to be delivered.

Got it. Understood. And regarding Europe, Ziv, I'm kind of interested in your take about what's happening over there? And how much you've baked into the outlook being, I don't know, worse than expected in your guidance for the fourth quarter.

I'm sorry, John. I couldn't hear the question clearly. Would you -- can you repeat it, please? regarding Q4 range?

I'm curious about your outlook and in regards to How much have you -- how much you've paid -- what you've considered as part of the conditions in Europe in the fourth quarter outlook.

Okay. So as I indicated before, 2/3 of the revenues, that 2/3 of the revenues that we are expecting to deliver in Q4 are already baked in into the backlog. So we are really looking at 1/3 of the revenues given the cycle of the end of those -- end of those and end-user projects like DSI and steel. I think that like everybody else is Europe moving into another lockdown, there are always a certain -- I would say, a factor of uncertainty. But I have to say that given our estimation and the assumptions that we did put in place, I do believe that this is a very low risk for us in respect to the guidance that we have provided. Of course, there is a certain fluidity as the situation keeps on changing. But I think that the guide -- I believe that the guidance we have provided is within those tolerance. So I feel comfortable with the guidance.

Okay. And I guess 1 last thing. Has there been any problems with your supply chain at all? Any issues getting what you need?

Well, initially, as everyone -- initially, when the pandemic just started, we were looking to identify all the key suppliers and to assure that we will not be in a situation where we potentially could be in a line shutdown. And as of today, we have -- we were able to identify and to build those safety stock and there is no risk for the company to be in a line down situation. We are secure from a supply chain standpoint. Yes.

[Operator Instructions] Our next question comes from Patrick Ho from Stifel. Patrick, your line might be muted. Are you able to hear us?

I'm sorry about that. And congrats on the nice quarter and outlook. Maybe first off, in terms of the Force Sensors business, you talked about -- you talked about it being back at full production. Do you see the margin gains in that business segment being sustainable?

Okay. Since, Patrick since we did came with a significant cost reduction over the years moving all to India. At this point in time, the margins are quite sustainable, given the volume, which means with a similar level of volumes, we should definitely keep the same level of margins and if we would expect even further improvement on the margins as the volume is -- will pick up as we will continue to to exercise our strategy from a design-in wins regarding the OEMs. But to make the long story -- the long answer short, those margins are sustainable with the level of volume we are running today, yes.

Great. That's helpful. And maybe as my follow-up question, 1 of the secular growth trends that I cover closely is and the rollout globally that we're starting to see in that marketplace. Can you discuss any of the opportunities in that segment for you both near term as well as over the next several years?

Okay. The only product line that the only product line that we are exploring opportunities regarding 5G is precision resistors, which is part of. We were -- we did engage with some large OEMs. And the potential design is within those base stations at this point in time. We have not disclosed the level of opportunity, but we are -- we have made initial contacts, and we are in a designing win phase regarding those. But again, I have to say it's exclusively related only to precision resistors and not relevant for the rest of the product lines.

This concludes our question-and-answer session. I would like to turn the conference back over to Steve Cantor, Senior Director of Investor Relations for any closing remarks.

Thank you all for joining our call. We look forward to updating you next quarter, and have a great day.

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