,: I will now hand you over to Steve Cantor, Senior Director of Investor Relations to begin. Steve, please go ahead.

Thank you, Chach, and good morning, everyone. Welcome to VPG's 2023 fourth quarter earnings conference call. Our Q4 and full-year press release and accompanying slides have been posted on our 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, 2022, 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. Please refer to Slide 3 of the quarterly presentation.

Thank you, Steve. We delivered a solid quarter and the second best year ever for VPG despite a challenging macro environment mainly in the second half of the year. Beginning with our 2023 performance as shown in more detail in the accompanying slides. For the full-year, we achieved revenue of $355 million and adjusted diluted net EPS of $2.17, and we improved our adjusted gross margin to 42.4%. We generated $60.4 million in adjusted EBITDA and EBITDA margin of 17.0% and a record $30.8 million of adjusted free cash flow. We deployed our cash to repurchase stock and to pay down our revolving debt in order to provide value to our stockholders. We completed infrastructure expansion projects in India and Japan and have accelerated our business development activities to capture new opportunities for our precision sensing and measurement solutions. Moving to Slide 4. Turning to the fourth quarter of 2023. We achieved revenue of $89.5 million, which was above the high-end of our guidance, and 4.3% higher than the third quarter. We delivered adjusted diluted EPS of $0.61. Order trends were mixed sequentially as growth in our Sensors and Weighing Solutions segments was offset by lower measurement systems bookings due to the timing of customers’ projects. We generated record level adjusted free cash flow of $13.5 million, adjusted EBITDA of $16.5 million and achieved an adjusted EBITDA margin of 18.5%. We deployed capital to pay down bank debt as well as to repurchase shares. We continue to execute on our long-term organic growth initiatives in terms of new product development and expanding our engagement with customers in larger markets. We are also continuing our cost reduction efforts to move production to lower cost locations, investing in automation and reducing material costs. I will now review our performance by business segment…

Thank you, Steve. Referring to Slide 9 and the reconciliation tables of the slide deck, our fourth quarter 2023 revenues were at $89.5 million. Adjusted gross margin of 43% in the fourth quarter as compared to 42.1% in the third quarter of 2023. Our operating margin was 13.4% for the fourth quarter of 2023. Our fourth quarter adjusted operating margin was 13.6%, excluding $130,000 of restructuring costs. Selling, general and administrative expense for the fourth quarter of 2023 was $26.4 million or 29.4% of revenues as compared to $26.6 million or 30.9% of revenues for the third quarter of 2023. The GAAP tax rate for the full-year of 2023 was 32.3%, primarily reflecting the geographic mix of income. We are assuming an operational tax rate of approximately 27% for the full-year of 2024. The adjusted net earnings for the fourth quarter of 2023 were $8.2 million or $0.61 per diluted share compared to $6.4 million or $0.47 per diluted share in the third quarter of 2023. Adjusted EBITDA was $16.5 million or 18.5% of revenues, which is 20.3% higher than the $13.7 million or 16% of revenue in the third quarter of 2023. CapEx in the fourth quarter was $5.3 million. Total CapEx for 2023 was $15.2 million or 4.3% of revenues. For 2024, we are budgeting $14 million to $16 million for capital expenditures. We generated adjusted free cash flow of $13.5 million for the fourth quarter of 2023 as compared to $6 million for the third quarter of 2023. We define adjusted free cash flow as cash from operating activities, less capital expenditures, plus the sale of fixed assets. As Ziv indicated, in the fourth quarter, we repurchased $4.7 million of our stock for 153,000 shares. For the full-year of 2023, we repurchased $5.9 million of common stock…

Thank you, Bill. [Operator Instructions] Our first question today comes from Griffin Boss from B. Riley Securities. Please go ahead.

Hi. Thanks for taking my question. So first, it's great to see the profitability and cash flow improvements, $13.5 million free cash flow, 82% free cash flow conversion. Can you just speak to how sustainable that might be moving forward now that you are obviously starting to see the benefits of the investments you made in optimizing your operating expenses?

Good morning, Griffin. I think that given the – our sales guidance and the level of investments CapEx that we are planning to – or that we intend to invest in 2024. I would say that it's quite sustainable Q4 performance. Naturally the cash generation will also depends on the account receivable and payable, I would say fluctuation or working capital fluctuations. But all-in-all, the Q4 performance are sustainable given the level of revenue as we move into 2024.

Okay. Yes. Great. Thanks for that. And then – so shifting gears in terms of order flow, like you said, it's sort of a mixed bag. Measurement Systems seems a bit soft while there could be some green shoots and sensors and weighing solutions. So I mean, obviously you've seen this type of environment before in the past. So with that context, can you just talk more about what you're seeing generally with distributor inventory levels and potential need for and timing of restocking events? And then more generally just your high level thoughts on 2024 potential inflection points and maybe your positioning for return to growth in the back half of the year?

Yes. Absolutely. Orders for Q4 has declined 2.2% sequentially, but grew 2.2% from prior year. As we indicated there is a mixed bag or a mixed signal. On the Test and Measurement, we see an upside of 6.3%. Steel upside, industrial weighing upside, general industrial upside, given the improved business environment, which is the outcome of flow inventory in the pipeline in the last, I would say four quarters. And we also see some other end markets, which are still not improved yet. Overall, we believe that near-term order trends have reached the bottom in most of our end markets. We expect order trends to modestly improve in the first half of the year and strengthen in the second half of 2024. Based on customer feedback and the improvement in order intake in Q4 of 2023 in the sensors and in the Weighing Solutions segment, we believe that – as I indicated, has bottom up in some of our key markets. But in the first half of 2024, we expect to see a modest growth in Avionics, Military and Space, semiconductor testing and consumer, while orders for industrial OEM application such as precision agriculture, construction, transportation, and a portion of the steel market is expected to continue to be flat, which means in a way soft. But those end markets or we expect that the order intake run rate is expected to improve for those end markets and applications in the second half of 2024. So all-in-all, just to summarize, we are looking at the modest increase already in the first half while this increase should be accelerated in the second half of the year in respect to the intake improvement.

Great. Yes. That's great context. Thanks for the detail there. And just last one for me and then I'll turn it over to you. You mentioned you're seeing a more favorable M&A environment, obviously, that's a top capital allocation priority for you. Just curious, last call you mentioned you were in some early dialogues with a few companies, nothing really bearing fruit. But just curious if any of those discussions have advanced or if that list of companies you're talking to has grown in the last quarter?

Well, I would say that – as I indicated in our last call, we have been in dialogue with few companies. Some of the projects has been moving forward, while others, we are still in discussions. This is a period of quite a bit of uncertainty, therefore, some of the companies are still contemplating regarding the process. But all-in-all, the Q level of M&A potential is increasing and we are very positive about that. But so far I have nothing to report. I have nothing tangible to report. But this activity takes a very high priority for the company.

Great. Okay. Yes. Fair enough. Thanks for taking my questions. Appreciate it.

The next question on the line is from John Franzreb from Sidoti & Company. Please go ahead.

Good morning, guys, and thanks for taking the questions. Ziv, I'd like to start with the – you have a commentary on the Measurement Systems business and the deferral of some project activity. Is that entirely surrounding the KELK side of that business or is there something more that we should be cognizant of?

Okay. So good morning, John. So Measurement Systems book-to-bill for the quarter was 0.73, which declined from 0.98 in the third quarter. Please bear in mind that the decline also include a record orders for DTS in the Avionics, Military and Space business in the prior quarter. And the decline in the book-to-bill reflect also the timing given the project nature, it's the timing of customers projects. In Q4, steel-related orders grew sequentially and while orders in Avionics, Military and Space were down from the record level, we expect business environment improvements for the Avionics, Military and Space going forward. And this is based on our business development funnel and the projects that are expected to get finalized in the coming quarters and turn into orders. So despite the fact that we have seen a specific decline in Avionics, Military and Space, given the project nature of the business or the timing project nature of the business, we do see a very positive trend also on this end market in 2024.

Okay. So KELK was up a little bit sequentially. DTS was down a lot because they had a big order flow in Q3, and that should pretty much stabilize in the first half. Is that what we're looking at there?

And is expected to modestly improve and improve much more in the second half of the year.

Excellent. I'm curious what's driving the higher tax rate these days? It seems to be ticking up a lot.

Yes. So John, so good morning. So the higher tax rate is predominantly, we have a geographic mix of income. So depending upon where our income's being generated, right now it's being generated in higher tax rates in, we've seen in the past. But then this tax rate this year had some one-time cost for tax positions. But as we mentioned, we're going to participate 27% operationally in 2024.

Okay. And by my reckoning, this was the most aggressive share repurchase quarter, I think since the company went public. Can you just kind of walk through the decision process there and why you're so aggressive on repurchasing stock?

Well, John, as you recall, and I think we've talked about this. As part of our capital allocation, we've always listed as internal growth M&A and the buyback of the stock was always one of the top parameters for a capital allocation. And we will continue to incorporate all of those attributes and the capital allocation and we'll continue to – and we're continuing to be very active in the market today.

Okay. And one last question on revenue growth. Ziv, you mentioned a couple, I don't know, potential items and went through the segment presentations, data centers and new product development and MS. If we were going to look at like near-term revenue catalyst opportunities, especially new ones, which are the most viable near term revenue opportunities for the company?

Okay. So if we are looking at 2024, we are looking in two verticals. One is the vertical of the macro improvement, macro economy improvement, given the fact that we have seen inventory is being depleted in the queue. And I would say that part of that would run the improvement would be Test and Measurement for semiconductor equipment for the sensor piece. In addition to the general industrial that is also expected to improve. The other piece is our business development activity in respect to new applications, selling to new applications and new product that we have developed. In that case, I could give as an example, what I did mention regarding the aluminum based systems, that's a new, completely new market for us. And we have just started to provide the systems in order to enter into a new market. In addition to that, as I mentioned, I think in the prior call is the humanoid application where we are at the very final design stage. But once the prototype phase is going to take off the expectation is over time that is – it's also going to gain more volume. And then, for example, I have on the Weighing Solution side that we have developed, a new cost – very cost competitive product, which we have applied for a patent and we believe it's also going to gain momentum. So there are really two verticals for the potential upside of revenue. One is the macro economy change, and the other piece is our business development activities to capture new business.

Perfect. And with that, actually, I'll get back into queue and let somebody ask some questions. Thank you, Ziv.

Thank you. [Operator Instructions] We have a follow-up question from John Franzreb. Please go ahead.

Well, I have to ask about the three to five-year long-term targets. Do you still think they're viable given the protracted downdraft we've had in the booking order profile?

Well, I would say, John, if you can recall, we put our three years plan in respect to revenues, the 45%, if I can recall, gross margin. And then we also set an OMD. As you could see, despite the so-called in a way mixed business environment. The company has achieved in Q4, a record gross margin of 43%, which means, we are working on optimizing our topline growth in terms of business development activities. We continue to look at – or we have a longer term plan regarding operational excellence in respect to efficiency improvement, product relocation, sourcing cheaper materials, which is going – which in combination with the topline revenue is going to, I think there is a – there is a high level of confidence that we are going to meet the 45% gross margin, which will also assure the profitability target. So by the mix, so-called the current mix, I would say mixed business environment. I am quite confident that the plan that we have laid out or the three, five year plan is very viable.

Okay. Excellent. That's good to hear. And just one last question. Any update on production capabilities in Israel? Has it still been a non-factor? Just I think it'd be prudent to brush up on that topic?

Sure. So I would say as you know, we have two operations in Israel. They're located in the center of Israel. We are operating in Israel at the normal levels. The actions that we have taken in prior quarters in respect to securing raw material, shipping, finished goods in advance and working with our freight forwarders [still applies]. There is no issue whatsoever with our operations. We are working with full efficiency and at optimum capacity. So our operations in Israel are operating intact working at the normal level.

That's great to hear. Thanks for the update Ziv.

This concludes the Q&A session, so I'll now hand over to Steve to conclude.

Thank you. Before concluding, I want to note that VPG will be presenting at the Sidoti Small-Cap Conference on March 13 and 14th. We will be posting details regarding our webcast of our presentation on our website. So please check that for details. And with that, thank you all for joining our call. We look forward to updating you next quarter.

Thank you, everyone. This concludes today's call. Thank you for joining. You may now disconnect your lines.