Vishay Precision Group, Inc.

Good morning and welcome to the VPG fourth quarter 2021 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. 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, Operator, and good morning, everyone. Welcome to VPG's 2021 Fourth Quarter Earnings Conference Call. In addition to our Q4 press release and accompanying slides that have been posted on our website, vpgsensors.com, yesterday, We also issued a press release announcing a change in our strategy and business segmentation. We will be discussing both on today's call. 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. And now I'll turn the call to Ziv for some prepared remarks. please refer to slide three of the quarterly presentation. Steve?

Thank you, Steve. I am pleased to report we delivered another strong quarter, which capped a successful year for VPG. 2021 was one of the best years in VPG history. As we grew our sales by 17.8%, achieved an adjusted diluted EPS of $1.87 and improved our adjusted EBITDA margin to 15.7% from 14.1% recorded in the prior year. Moving to slide four, before providing more color about our financial results, I'm excited to announce today some important changes for VPG which we believe will bring us into our next phase of growth and profitability. This is a momentous time for VPG. We are a leader in precision measurement sensing technologies, focusing on an expanding array of applications in which accuracy, reliability, and repeatability makes the difference. Our deep engineering and application expertise help our customers to make their product safer, smarter, and more productive. Moving to slide five, over the past several years, we have seen the need for precision measurement sensing solutions evolve and expand into new markets and applications requiring levels of precision that were not needed before. These trends have converged with our own core competencies, such as technology, innovation, and market presence, as well as investments we have made over the past few years. The result is the emergence of new applications for VPG's product beyond our traditional focus on legacy markets, such as industrial, processing, avionics, military and space, and steel production. Compared to five years ago, we believe we are much better positioned to address these new promising opportunities. In fact, greater portion of our 2021 sales were in new or expanded areas. For example, our precision resistors are used in more semiconductor test and production equipment to meet the global demand for increasingly complex generation of microchips. Our load cells are helping new precision agriculture equipment optimize seed planting depth to produce higher crop yields. Our overload monitoring systems are keeping our roads safe by enabling trucks and vans operators and drivers to stay within load limits and regulations. Our miniaturized data acquisition systems and data loggers are used in safety testing of new cars and vans. We've seen growing number of applications emerge in consumer markets, an area we did not address just a few years ago. We are addressing these new consumer applications not only with our advanced sensor business, but in our other businesses as well. Moving to slide six, I am pleased to announce the next phase of VPG's evolution. In the first phase of our journey as an independent public company from 2010 to 2016, we focused on streamlining our organization and operations and instituted vertical integration structure and strategy for our products and technology. In the second phase from 2017 to 2021, we made critical investments leveraging our vertical integration structure in operational excellence and several growth initiatives, including our advanced sensors and truck runway. Today, we are moving into a new phase of our growth. As the need for precision measurement technologies continues to accelerate and transform, driven by the development of higher functionality in our customers and products, we are changing our operating strategy, and business reporting segments. In order to capitalize on the expanding market opportunities and our strong competencies, we are applying strategy and structure that we believe will accelerate our long-term organic growth and optimize our operating leverage as well as to acquire additional high-value businesses. Moving to slide 7. As a fundamental part of this evolution, we have moved from a strategy of vertical integration to an operationally diversified company. That is to say, one structure built around three distinct business pillars. Sensors, weighing solutions, and measurement systems. This structure will enable us to create value in our businesses by leveraging our strong corporate competencies, shared resources, investments, and organizational culture. Each segment pillar has its individual growth strategies built on complementary operational technology and competitive capabilities to address the expanded market opportunities and customers' growing needs. Moving to slide eight, as you can see on slide eight, each of the new segments has its own growth and margin profile and capital requirement to support its growth strategies. We believe the combination of these businesses will continue to provide both resilience and accelerated growth. The sensor segment is comprised of two businesses, precision resistors and stringages, which include our advanced sensors. The sensor segment had in 2021 sales of 127.9 million. Our weighing solution segment is comprised of four sensors, overload monitoring solutions for trucks and other vehicles, and process weighing solutions for specialized weighing systems. In 2021, this segment had sales of $125.4 million. The measurement system segment is comprised of four businesses. KELX, highly specialized measurement systems for steel production, DSI, metal alloy development tools, Pacific Instruments, data acquisition systems, and DTS safety testing solutions. Each of these businesses has strong established brands and have built reputation for providing the highest performing products in their categories. The measurement system segment recorded 64.7 million of sales in 2021. Beginning today with Q4 and 2021 results, and going forward, we are reporting our financial results based on our new reporting segments. Investors can find eight quarters of sales and gross margin data for the new reporting segments in the appendix of today's presentation slides and on our website. Moving to slide nine. As we embrace this next phase in our evolution, the underlying foundation will continue to leverage our corporate competencies to create value. We will continue to drive operational excellence across all our businesses as well as to build strong brands and management teams. Apply manufacturing focus and innovation expand our relationship with top-tier Fortune 1000 customers and allocate capital to seek maximum returns. Most importantly, we believe this framework will enable us to build our growth and profitability, which can result in a long-term target of revenue growth in the low double-digit, including M&A, an adjusted gross margin of 45%, an adjusted operating margin of 18%, and an adjusted EBDA margin of 22%. Moving to slide 10, turning to the fourth quarter of 2021, we reported record sales of 90 million, which increased 9.8% from the third quarter of 2021. and delivered an adjusted earning per diluted share of 56 cents. Book to bill was 1.06, reflecting sustained strength in order patterns across the majority of our markets. Operationally, during the quarter, we made significant progress in addressing the labor challenges we experienced in the third quarter. While the majority of our open positions have been filled, our operating performance in the sensor segment was impacted by inefficiencies as the new employees were brought on board and trained. In terms of other global supply chain constraints, we are continuing to effectively manage the supply of key components, although this continues to require close attention. We are implementing price increases to mitigate higher labor costs, higher material prices, and logistics costs. Looking at our business segment performance, we grew revenue in the fourth quarter across all three business segments as we continued our focus on accelerating long-term growth across the company. Moving to slide 11, Beginning with our sensor segment, which is comprised of our advanced sensors products and our precision resistors, fourth quarter revenue of $34.1 million grew 11.2% sequentially and 7.1% from a year ago. The sensor segment had a book-to-bill of 1.11% as sequentially higher orders in consumer and general industrial markets were offset mainly by the timing of orders in the test and measurements. I'm pleased to report that we continue to make progress in our strategic growth initiatives in the sensor segment. In the fourth quarter, advanced sensors revenues and orders grew 10% and 30% respectively from the third quarter, resulting in a book-to-bill of 1.41. We continue to engage new customers for this product in the range of new applications, including consumer and PC board testing. For our precision resistors product line, we are pursuing several new opportunities, beyond our traditional applications in such areas as EV battery testing and the testing of optical data network to support 5G infrastructure, among others. To support this growth, we are expanding manufacturing capacity, new automated processes for precision resistors. Similar to the approach with advanced sensors, we believe this additional capacity, which is anticipated to be ready by the end of this year, will allow us to address new higher volume opportunities. In terms of operating results for sensors, the adjusted gross margin in the fourth quarter of 34.8% included approximately 1.2 million of negative impacts from three factors, unfavorable foreign exchange, labor inefficiencies, and wage increases. The weaker dollar continues to be a significant headwind to margin, impacting censors results by 600,000 compared to the third quarter and 1.4 million compared to a year ago. Labor inefficiencies, which resulting from the hiring and training of new employees, had a $400,000 impact versus Q3. And lastly, COVID-related wage increases, which we put in place to fill open positions, increased our expenses by $200,000 sequentially and $500,000 compared to a year ago. While we don't control the exchange rate, we believe... the labor inefficiencies are temporarily. If we adjust for the exchange rate and the labor inefficiencies, gross margin for sensors would have been approximately 40%. Moving to slide 12, turning to our weighing solution segment, which is comprised of our four sensors on both weighing and process weighing businesses. Fourth quarter sales of $32.1 million increased 4.5% from $30.7 million from the third quarter of 2021. We are pleased with our four sensors OEM initiatives as OEM revenue grew approximately 35% on a sequential basis as well as 16% on a year-over-year basis. The weighing solution segment had a book-to-bill ratio of 0.98 in the fourth quarter of 2021. Our strategic priorities in the weighing solution segment includes expanding our OEM sales of four sensors and growing our sales of onboard weighing solutions to enable truck and van operators to meet vehicle overloading regulation in Europe. For force sensors, we continue to address new applications beyond our industrial ones. In such areas as consumer and medical. As an example, our force sensors are now being used in electric bikes by sensing how hard a rider is pedaling these sensors to improve battery efficiency in the new generation of electric bikes by providing real-time feedback to the motor. In spite of these successes, our truck-way, van-way products continue to be impacted by the lack of availability of new trucks and vans in Europe due to the global semiconductor shortage. While demand for our solutions for the large trucks has improved, we are currently estimating that the supply shortages of the new vehicles will start to ease in the second half of this year. Weighing Solutions adjusted gross margin of 34.0% in the fourth quarter, declined from 37.6% in the third quarter. The sequential decline in adjusted gross margin was primarily due to unfavorable product mix, reduction of inventory, and higher material costs partially offset by an increase in volume and price increases. Moving to slide 13, turning to our measurement system segment, which is comprised of our calc, DSI, DTS and Pacific Instrument businesses. Revenue in the fourth quarter of $23.8 million increased 15.6% sequentially, reflecting higher CELC and DTS sales. The increase in sales year-over-year was 69.7%, primarily due to the acquisition of DTS in June of 2021. Book-to-bill for measurement systems was 1.08, reflecting sequential order growth in steel, avionic military and space, and consumer, which offset lower orders in transportation. Our measurement systems businesses are strong market leaders in their respective niches, Demand in these businesses is largely project-driven, as these systems generally have a longer selling and delivery cycle and higher ASPs. Within these niches, there are a number of attractive avenues for growth. For example, DTS is working on NFL-related projects in sports safety. In addition to its core applications, in the auto and military safety. DSI is expanding its market opportunity for its metal alloy development tool by introducing new configuration of its market leading systems. KELC is augmented in its products offering for its productivity systems used in steel manufacturing. Adjusted gross margin in the fourth quarter for measurement systems was 56.8%, adjusted for purchase accounting related to the DTS acquisition, and declined from 59.2% in the third quarter, mainly due to unfavorable product mix and inventory reduction, partially offset by higher volume. At our priorities for our capital deployment for VPG as a whole, we intend to continue making investments to support growth and margin expansion and to acquire additional high quality businesses. For fiscal 2022, we expect CAPEX to be in the range of 30 to 33 million, the highest level in our history. Approximately $10 million is a carryover from 2021, which had been pushed out due to COVID-related matters. Approximately half of our purchases are infrastructure-related to support additional capacity expansion for growth initiatives for precision resistors in the sensor segment and for sensors in the weighing solution segment. The other 50% CAPEX is mainly for equipment for expansion and cost reduction, mainly in the sensor segment. Before turning the call to Bill for additional financial detail, I want to thank our employees and our customers around the world for making 2021 a successful year for VPG. The passion, dedication, and focus of VPG team on our customers are the engine of our success. I will now turn it over to Bill Clancy for more details. Bill?

Thank you, Zev. Referring to slide 14 and the reconciliation tables of the slide deck, in the fourth quarter of 2021, we achieved record revenues of $90.0 million gross margin of 38.7%, operating margin of 9.7%, and diluted earnings per share of 44 cents. On an adjusted basis, which we lay out in our reconciliation table in the press release, our gross margin was 40.3%, operating margin was 11.4% of sales, and diluted earnings per share was 56 cents. Our fourth quarter of 2021 revenues grew 19.3% as compared to $75.4 million in the fourth quarter a year ago, and we're 9.8% above the third quarter of 2021. Foreign exchange for the fourth quarter of 2021 had a negative impact on revenues of $500,000 compared to a year ago, and a negative impact of $700,000 as compared to the third quarter of 2021. The gross margin in the fourth quarter was 38.7% compared to 38.8% in the third quarter. On an adjusted basis, fourth quarter gross margin of 40.3% compared to 41.8% in the third quarter of 2021. excluding $916,000 of facility startup costs for advanced sensors and $516,000 of acquisition purchase accounting adjustments. Our operating margin was 9.7% for the fourth quarter of 2021. Our fourth quarter adjusted operating margin was 11.4%, excluding $76,000 of restructuring costs and the adjustments I just mentioned above. Selling general and administrative expenses for the fourth quarter of 2021 were $26.1 million, or 28.9% of revenues, compared to $24.6 million, or 30% of revenues for the third quarter of 2021. The increase in SG&A of $1.5 million mainly relates to $600,000 for stock compensation expense, $500,000 for increase in working days, and $400,000 of travel and commissions. The adjusted net earnings for the fourth quarter of 2021 were $7.7 million or $0.56 per diluted share compared to $7.1 million or $0.52 per diluted share in the third quarter of 2021. Adjusted EBITDA was $14.2 million or 15.7% of revenue and grew 28% compared to 11.1 million or 14.6% a year ago. CapEx in the fourth quarter was 5.9 million, the majority of which reflects purchases and related infrastructure for the new advanced sensor facility. We generated adjusted free cash flow of 9.6 million for the fourth quarter of 2021 as compared to 3 million for the third quarter of 2021. We defined adjusted free cash flow as cash from operating activities, less capital expenditures, plus sale of fixed assets. Total capex for 2021 was $17.1 million, or 5.4% of revenues, mainly due to the growth-related investments in our advanced sensor facility. The GAAP tax rate in the fourth quarter was 23%. We are assuming an operational tax rate in the range of 25% to 27% for the full year of 2022. Moving to slide 15. We ended the fourth quarter with $84.3 million of cash and cash equivalents and total long-term debt of $60.7 million. We believe that we have a strong balance sheet and ample liquidity to support our business requirements and to fund additional M&A opportunities. Moving to the outlook. For the first fiscal quarter of 2022, at constant fourth fiscal quarter 2021 exchange rates, we expect net revenue to be in the range of $83 million to $91 million. In summary, 2021 was one of the most successful years in VPG's history. We are excited about this next evolutionary step for VPG and the path for faster growth and operating leverage it provides. As a leader in precision measurement technologies, our change in strategy and structure will enable us to pursue emerging opportunities driven by the development of higher functionality in our customers and products. And with that, let's open the lines for questions. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question today comes from John Francerab with Sidoti. Please go ahead.

Good morning, Stephen, Bill. How are you doing today?

Good morning, John.

I guess I'm going to start with the advanced sensor business. A couple questions there. Firstly, how much revenue did that business contribute for the four-year fiscal 2021? And secondly, were there any startup-related issues in the fourth quarter, and are you fully satisfied with the tooling effort, and are you done tooling it for now?

Okay. Good morning, John. We never gave the complete number for 2021, but as we indicated, the roundabout number is at the level of $40 million. It's important to state, and I already indicated that in advance, due to the direct labor shortages, we were in a certain situation where we had to apply wage increases in, I would say, around November timeframe, we started to fill in and to hire more people. So we are in a ramp-up situation. In Q1, we should still expect to see some residual inefficiencies in a way in respect to a learning curve and hiring more people. I would say Starting Q2, things should stabilize. We are fully, I would say, there is some equipment that is on the way that has been delayed during COVID, but at this point in time, it does not limit our operational capabilities to deliver more. It was mainly more personnel-related, as I indicated, which we have addressed. And I would say that... I believe that we have booked in Q4 around $3 million of startup costs related to advanced sensors, which should dramatically go down in Q1, and we should not have anything as of Q2.

Perfect. Thank you, Z. And regarding the price increases, can you talk about the timing of the impact of those increases? Are you starting to see the benefit? Is there a delayed timing to receive those benefits offsetting those higher input costs? And when do you expect to reach equilibrium?

Okay. So in regard to price increases, as we have seen already a couple of quarters ago, you know, given the the environment, higher logistics costs, and already there was a certain sense that we will have to take steps in order to increase wages and also material costs. I would say that we have selectively went to each of the product lines and looking at where we can increase prices, but at the same time, not to jeopardize the relationship with the customers. From a price increase standpoint, In this quarter, we are reporting around $800,000 of price increase in respect to prior quarter and around $1.1 million in respect to Q4 of a year ago. So price increase already start to take an effect already this quarter, and we will see a bigger momentum increase.

moving into this year okay uh and just one last question if i can the capacity expansions you've kind of referenced in precision resistors and force sensors um what's driving that is there a particular end market that you think there's opportunity in those two businesses that you want to capture are the customers coming to you and asking you uh for something and you're just addressing those needs can just a little bit more color about driving that big increase in the spend

Yes, absolutely. I think it's coming on both ends. On one hand, as we said, there is a higher functionality. We see more and more potential due to the higher functionality from a customer standpoint in respect to precision application, while our R&D teams are developing newer products. Once those two vectors are meeting each other, we see higher demand. Therefore, One indication that we mentioned here during the call for precision resistor was 5G high-end infrastructure, which we see much more need, and we already started to get more and more design into that. And on the full sensor side, we indicated more and more consumer application, which we never had before, like the electric bikes. So we see more and more opportunities, and we believe we have to capitalize on that. And this is definitely the biggest trigger also for the change in the business strategy for the company.

Great. Thanks for the collesive and congratulations on the good quarter. I'll get back into queue.

And if you'd like to ask a question, it is star then one. Our next question will come from Dick Ryan with Colliers. Please go ahead. Dick, your line may be here.

Thank you. Yep. No, thank you. Say, Ziv, you talked about some easing in the European market for trucks and vans for your onboard weighing systems. Can you give us a little more color? I mean, has demand... Is demand still there being driven by regulations? And how do you think that it's going to flow? You kind of mentioned second half of the year, but can you give us a little more specifics on the rebound in that market?

Absolutely, Dick. So on one hand, we have our own, let's call it standard business, which we have developed for, I would say, since a while ago. And this is where we have seen certain shortages, which the effect is around $900,000 of potential revenue, which we will not be able to book. I mean, because we didn't get the orders because our customers had lack of microchips. So this is only referring to the standard business. In addition to that, there is a potential in respect to if you which you indicated, and this is the regulation that has been effective as of May regarding the onboard weighing. We have been proactively, I would say that we have been proactively promoting that, but given the situation and the constraints of microchip, we there is a certain, I would say, delay in respect to the acceptance of our customers to move with the regulation given the shortage. So we are looking at two effects that one, once, and we do believe that in the second half of the year the availability of components would improve, we should definitely see an upside in respect to order intake coming from those two potential vectors.

Okay, thank you. So when you look at the supply chain, you have had some revenue pushes in previous quarters. Have you caught up with that, and was there any revenue pushing from Q4 into Q1?

Excellent. So you are absolutely correct, Dick. In the last quarter, we did report challenges and around pushing out of $4 to $5 million of revenue from Q3. This quarter, we were able to capture approximately half of that, and there is still another 50%, which is around $2 to $2.5 million, which is the remaining we are expecting to capture in Q1 this quarter.

Okay. Okay. One last one. When you look at the longer-term perspective you laid out in one of the slides, kind of the low double-digit growth, you're combining both organic and acquisitions in that perspective. Can you parse the two? What are you kind of looking at for organic growth, and how should we view your M&A activity going forward?

Okay, so let's talk about organic growth. When we speak about organic growth, we are looking at a few factors. One is each of the reporting segments, potential, and then we are looking at what – With an M&A, what would be the expectation, at least from what we may have seen in the past? So coming back to the respective reporting segments, I think that, as far as I know, we did say that we are looking at... high single digit on the sensor side, giving those consumer opportunities. In the weighing systems, since it's a blend of different product lines, the higher end growth would come from trackway, vanway, and OEM4 sensors, while the lower or slower pace would come from the process weighing or more of the general weighing. And on the measurement systems, we are still also looking at the high single digit. Historically, and it's on one of our slides, we have reported for the last five years 7% top line growth, which I would say it's the highest, it's one of the highest in our industry now, in the industrial tech. 7% over five years from 2017 to 2021. So given the The expectation and the acquisitions that we are looking at, some of them are bolt-on. Some of them may be a little bit larger. I do believe that a low double-digit can be achieved. This is a three- to five-year target, and this is something that I do believe can be achieved.

Okay, great. Thanks, Yves, and congratulations on the strong execution here.

Our next question will come from Sarkis Sherbetian with E-Reilly Securities.

Please go ahead. Hi. Thank you for taking my question here. I just want to go back to the growth and profitability slide, slide nine, with the three- to five-year targets. More specifically, you know, just kind of focusing on your margin profile. If I look at adjusted gross margin targets of 45%, adjusted operating margin of 18%, Relative to what you guys posted here for fiscal 21, what does kind of the glide path look like to expand the margins? And it sounds like you're able to get some nice drop throughs where your operating margins would accelerate faster, given kind of the top line growth. Can you maybe speak to the glide path of the margins from here to that three to five year target?

Yes, absolutely. So when we are looking from a margin perspective, we have few moving parts. First of all, we are looking at current exchange rate and given the fact that the level inefficiencies which we have recorded on one hand are a temporary effect which is expecting to go away in the second quarter, we are looking at wage increase in material prices, but on the other hand, we are looking at price increases to customers. So in order to meet that, we should expect what we need is additional volume, I would say around 10% volume, in order to improve our operating efficiencies or to improve the operating efficiencies which would trigger more cost reduction and as we expect with this I would say low double digit growth we should be able to achieve with the additional volume we should be able to achieve those financial targets in respect to adjusted gross margin adjusted EBDA as well as adjusted operating margin.

Understood. And I think if I go back to the top slide, slide eight, where you're laying out the segment reclassification and kind of the growth and margin highlights, it looks like for sensors and measurement systems, that's the area that you're looking for potential M&A opportunities. And then for the weighing solution segment, you're just kind of relying more on organic growth. Can you maybe delineate the potential for M&A and then perhaps the pace of M&A that you're anticipating for the two respective segments?

Okay, on one hand, as you know, the M&A environment in the last few years was quite challenging due to the low interest rates and the amount of cash that has been laid around in the market. the inflationary environment is getting... is continuing. We would expect to see the valuations becoming more reasonable. Therefore, we would expect to see more opportunities. It's not the fact that we have not seen opportunities before, but we were, as always, extremely selective and extremely disciplined to pay the right price for the right company. So the number of opportunities... were more limited. Looking forward, given the environment today, we do believe that we should expect to see many more opportunities. Therefore, I do believe that our M&A transaction is expected to be accelerated. I'm sorry, what was your other question?

So if you can kind of talk to sensors versus measurement systems in the slide deck, it seems like those are the two respective areas for M&A. So maybe size or anything to that effect.

Yes, absolutely. So as you know, let's start on the sensor side. On the sensor side, we have two unique technologies. One is precision resistors. where we have really a unique technology. We do have competitors, but the competition is with a different technology. But in respect to our technology, we do have a proprietary, unique technology which nobody else has in the world. On the other hand, therefore, the value proposition is very, very high, and the prospective opportunities are even moving from mission-critical to non-mission-critical applications, higher volume. The projection is also, I would say, there is a higher probability to materialize on that. In advanced sensors, again, it's the technology. This is an evolution or a next step. or next generation technology from our legacy, but again, the products we are able to produce at existing cost has a unique value proposition. I do believe that as we are going to expand our precision sensors, we would continue to buy, or we would expect to buy, companies at similar attributes at an adjacent and adjacent sensors technologies, which we believe can support the growth on one hand, but can also bring a similar value proposition to our customers. In the measurement systems, on the other hand, we are market leaders in all our niches. Very strong brands, again, very high value propositions, So, we believe that those two segments, we can expand much faster than the weighing solution, which is mostly based on load cells-based technology, which is also very, I would say, very strong, but the potential for expansion moving out of the load cell strain gauge-based technology or the probability to expand and to develop that is much higher on the sensor side than on the measurement system side.

Great. Thank you. That's all for me.

Our next question comes from Bill DeZellum with and capital. Please go ahead.

Thank you. Let me start by picking up on something you mentioned on the conference or on your opening remarks relative to the increased number of new applications versus five years ago. What percentage of revenues are in those new applications versus where you would have characterized it five years ago?

We have never reported the number, but currently we are selling, for example, to consumer and to other applications which did not exist five years ago, it's in the tens of millions of dollars. But we have not disclosed the exact percentage. Since some of those applications, we have strict NDAs around them. But we are speaking about tens of millions of dollars, which we... which we did not have five years ago.

And given what you've been describing today, Ziv, would you anticipate that if that same question were posed five years from now and five years after that, that the number continues to be larger and larger or the dynamics different than that?

Okay. Look, I think it's... If we look at the macro picture, I think it's quite clear where the world is heading, where our customers is heading in respect to functionality, in respect to precision, in respect to data collection. Therefore, we would only expect to see more and more sensing applications in various pieces of equipment which... which has never been part of that potential customer base or potential ecosystem. So I would say that we are looking really in a way in a mega trend. Therefore, I do believe that we should expect to see more and more opportunities coming in the future from current customers and potentially new customers because that's, as I said, that's a mega trend. Trying collecting more data And one of the ways to collect more data is via sensors, applying more and more sensing applications.

That's very helpful. Thank you. And then before your opening remarks, a question that was going through my mind was whether at the end of the calendar quarter that your advanced sensor plant was kind of at the fully efficient, mature level. And you noted that it is not as a result of labor. But given the strength that you see in the advanced sensor applications and the fact that you're going to, it sounds like, be in a constant mode of ramping that facility up to accommodate additional demand, do you believe it will I mean, ever achieve kind of fully efficient and mature level, or will you always be in some level of inefficiency as you're ramping that plant up? Of course, until you reach the fully tooled and, you know, no more expansion in the four walls possible.

Sure, sure, sure. Okay, that's a very good question. I will tell you, the fact that we went into tremendous, I would say, inefficiency, and I speak about the inefficiency, not the startup cost, which is part of a normal transition, starting a new manufacturing facility, especially if you are running full steam ahead. The learning curve, or so-called inefficiency, due to hiring more people and a learning curve, this is a cause of the COVID, as you know, the big resignation and the fact that now it's harder to get direct labor hiring are much more challenging around the world. We were able to address that in November of last year. So once this has been resolved, and how did we do that? Of course, we had to increase the pay, the base pay. So we did that, and now we are in a hiring mode. From an equipment standpoint, we were slightly behind due to COVID and due to the fact that there were travel restrictions. and the fact that manufacturers had long lead time of equipment suppliers. The long lead time of equipment, the equipment has been ordered and it's on the way. So we should be in a good shape by mid-year. But at this point in time, equipment is not the constraint. Once the people are hired, and as I indicated, at the end of Q1, We should be fully staffed. We will have excess equipment capacity. I would say that originally when we have been looking at advanced sensors, we wanted to assure that at any given point in time, we have 20% excess equipment capacity to capitalize on any upside we would see from a business standpoint. So we would reach that position already this year for advanced sensors. So I would expect that the inefficiencies as well as any potential equipment capacity limitation would be resolved this year given the investments we made on the equipment side and and on the personnel side. So I don't expect it to continue next year. Or even I would dare to say that to the end of this year we should be in good shape in advanced sensors, also in respect to inefficiencies.

Thank you. And one final question. Your inventories in both the measurement systems and weighing solution segments were down. Were those declines as a function of the supply chain challenges, or were you all intentionally drawing inventories down and you can address it to part A, measurement systems, part B, weighing solutions?

Sure, sure, sure. So let's speak about measurement systems. Measurement system, what do we sell? We sell complete piece of equipment. So since we have a certain delivery date, And given the fact that Q4 was strong for measurement systems, we had those inventory waiting to be delivered, the finished goods. And this is where we have the highest value at the finished goods level. So as those finished goods that were ready to be delivered has been delivered to the customers, immediately you see a drop in inventory. So this is just part of the cycle of of building inventory to be shipped and then, since you are selling a complete system, then you see a drop in inventory while an increase in revenues. So this is the nature of measurement systems. In a way, weighing solutions has a combination of system-related product and selling product out of stock. since we have two large regional warehouses. So over there we just see a kind of a cycle of orders being sold more from inventory on the weighing systems. But there was no, there is no plan of inventory reduction or I would say on the other hand, excuse me, due to supply chain related matters having lack of inventory. This is just part of the COGS finished goods and sales cycle for both of the reporting segments, for both reporting segments.

Great. Thank you for taking all the questions.

Again, if you'd like to ask your question today, it is star then one, star then one to ask your question. Our next question comes from Brett Hendrickson with Nikomas Capital. Please go ahead.

Hey, guys. It's great to see advanced sensors moving forward. I think, Ziv, in your prepared remarks, I heard you say that the drivers for the growth in orders in advanced sensors was consumer and printed circuit boards. Could you expand on printed circuit board testing? Is that testing that's being done on the production line, or is that some kind of testing that's attached to the device permanently? Because I think people think of PC board testing, I think, is semi-cap equipment and relatively low value-added application. But I'm assuming it's a higher value-added application and maybe higher units. Because in the past, we've talked about getting the form factor and the cost down and advanced sensors to be able to do higher unit volumes.

Yes, you are correct, Brad. The PC board testing, this is not on the device itself. but it's on the production line. Our gauges, it's a special design of gauges are embedded in the testing line in order to assure the quality and the specification of the PC board. But this is on the testing line. And regarding the consumer, you know, it's... Sorry?

Oh, go ahead.

No, no. Regarding the consumer, since we have I cannot elaborate, but what I can say is that we do enjoy a very strong momentum, which we see this continues into next year. Okay.

And then on the PCB testing, is there – I don't know where the intellectual property resides. Hopefully it's with VPG. Does – Are you able to take that into, I mean, like I had, you know, there's print circuit boards that have issues. There's just so many print circuit boards. Like there's print circuit boards in irrigation systems. There's print circuit boards out in the field that have all sorts of pressure issues and the units are in the millions. Can you take that into various PCB applications or does the intellectual property reside with one or two customers?

Okay. So on the PCB side, On the PCB testing, we have, in a way, two types of products that we sell. On one hand, those are the gauges, but on the other hand, we do sell also some of our large data acquisition systems. So we do also sell that to the PCBoT industry. Now, regarding the application itself, since our gauges are highly engineered, I would say that for the simple PC boards, for the irrigation and other type of, if I may say, lower spec application, those designs are probably, our gauges are over-designed. Therefore, the use of our gauges are more for the complex PC board where you have multiple layers within those PC boards. The simpler ones so far have not been using those type of gauges. So this is something that probably we may have to, we may look to develop a much, much, if we can, a much more cost-effective product. But at this point in time, given the complexity and the nature of those products, they are designed only at a high layer or high, yes, more complex PC boards.

Okay. Well, thanks. Congrats, Vive, on growing this and we'll follow up afterwards. Thanks.

Ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference back over to Steve Cantor for any closing remarks.

Thank you. Before concluding, I want to Let investors know that we will be at the Sidoti conference in March, and we look forward to meeting with you then. In the meantime, thank you for joining the call, and have a great day.

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