Vishay Precision Group, Inc. Q2 FY2025 Earnings Call

Hello, everyone, and welcome to the VPG Second Quarter 2025 Earnings Call. My name is Ezra, and I will be your coordinator today. I will now hand you over to our host, Steve Cantor, Senior Director of Investor Relations, to begin. Please go ahead.

Thank you, Ezra, and good morning, everyone. Welcome to VPG's 2025 Second Quarter Earnings Call. Our Q2 press release and slides have been posted on our website at vpgsensors.com. An audio recording of today's call will be available on the Internet for a limited time and also can 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, 2024, 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. Ziv?

Thank you, Steve. I will begin with some commentary on our results and trends for the second quarter. Bill will then provide financial details about the quarter and our outlook for the third quarter of 2025. Moving to Slide 3. Beginning with revenue. Second quarter revenue of $75.2 million grew 4.8% from the first quarter. We are pleased to report continued positive bookings trends across several key markets, reflecting a moderately improved business environment. Our consolidated orders grew 7.5% sequentially, making the third consecutive quarter of sequential growth. This resulted in a consolidated book-to-bill of 1.06 with Measurement Systems and Sensors segments reporting a book-to-bill of 1.2 and 1.12, respectively. Adjusted gross margin improved to 41.0%, driven by sequentially stronger performance across all three business segments. I want to highlight the Weighing Solutions segment, in particular, which delivered a record quarterly adjusted gross margin. We continue to advance our business development and cost optimization initiatives. Our operational execution translated into solid cash generation with $6.0 million in cash from operations and $4.7 million in adjusted free cash flow. Before reviewing our sales and orders performance by division segment, I want to comment on the impact of tariffs on our second quarter results. Tariff changes impacted our gross margin negatively by approximately $500,000 due to the timing of our offsetting price increases. We expect this gap to narrow in the third quarter as our price adjustments become effective. While tariff policies continue to change and are difficult to predict, we are confident in our ability to respond given our manufacturing footprint, geographical distribution, and our deep customer relationships. Moving to Slide 4. Beginning with our Sensors segment, second quarter revenue decreased 1.8% sequentially, reflecting mixed trends across its market as higher sales of strain gages products were offset by lower sales for precision resistors. Sensors booking rose 3.7% sequentially, reaching the highest level in six quarters and resulting in a book-to-bill of 1.12. The bookings growth was driven by higher orders in the test and measurement for precision resistors and higher demand for strain gage sensors in AMS and industrial weighing, which was partially offset by lower orders for the test and measurement. For precision resistors, we recorded a $1.5 million order for fiber optics data center application, and we expect an additional order in Q3. Regarding humanoid robots, from April 2025 through July, we received approximately $1.5 million in follow-on orders from our initial humanoid customer. The humanoid robot market is still in its infancy, and the initial real-world deployment of these robots is expected now in 2026. As the technology and use case continues to develop, we are optimistic about the long-term potential for this market for VPG, as we focus on the high-precision, high-performing segment of this rapidly evolving market. Moving to Slide 5. Turning to our Weighing Solutions segment. Second quarter sales increased 11.3% from the first quarter. The increase was driven primarily by higher sales in the transportation and industrial weighing markets and in our other markets for medical and precision agriculture applications. Weighing Solutions orders grew 3.6% sequentially to $27.2 million, resulting in a book-to-bill of 0.92. Higher orders for precision agriculture and medical applications and in industrial weighing offset lower orders in transportation and general industrial. Moving to Slide 6. Turning to our Measurement Systems segment. Revenue in the second quarter of $19.2 million increased 5.1% sequentially. The increase reflected higher sales of DTS data acquisition modules in the AMS market, which offset lower sales to the transportation and steel markets. Second quarter Measurement Systems orders of $23.0 million increased 18.1% sequentially and resulted in a book-to-bill of 1.2. Bookings reflected higher demand primarily in the AMS and steel markets. In the current quarter, we expect to complete the beta installation at the University of Alabama of our new UHTC system. This system is designed to perform band testing on nonconductive materials such as ceramics, which are used in critical high-performance applications, such as for hypersonic missiles in aerospace as well as in avionics, energy, and industrial applications. We believe our differentiated solution can increase test throughput by tenfold while testing materials at ultra-high temperatures of around 2,000 degrees Celsius that are required for these advanced applications. We are now in discussions with the second university regarding beta testing for this system. Moving to Slide 7. I would like to provide a brief update on our three top strategic priorities for 2025. First, we are encouraged by our business development initiatives, which generated orders of approximately $17 million through the first half of this year. This puts us on track to achieve our goal for 2025 of securing $30 million of orders from either new customers or new applications with existing customers. What is significant is not only the magnitude of these orders, but the breadth, which runs across our businesses. To support these initiatives, we are continuing to improve our sales processes and systems as well as our use of digital marketing channels. Second, we continue to reduce costs and increase operational efficiencies through product relocation and efficiency improvements. The measures we have taken through the first half of 2025 put us on course to reduce fixed costs by about $5 million for the full 2025 compared to the prior year, excluding inflation. These measures entail mainly the consolidation of production and shared services to lower-cost countries. Third, we continue to pursue high-quality acquisitions to build scale and expand our cash flow. We remain disciplined and patient in our search for the right opportunity. In summary, we are pleased with the positive order trends, which have continued for the third consecutive quarter and our ongoing progress with our growth and cost initiatives. Global economic activity has remained stable in 2025 and improved modestly in several areas despite the ongoing macro uncertainties due to tariffs, trade policies, and geopolitical tensions. I will now turn it over to Bill Clancy.

Thank you, Steve. Referring to Slide 8 and the reconciliation tables of the slide deck, our second quarter 2025 revenues were $75.2 million. Adjusted gross margin of 41% in the second quarter increased by 270 basis points from 38.3% in the first quarter, reflecting higher volume, favorable product mix, and favorable exchange rates, which offset net tariff costs. Sequentially by segment, adjusted gross margin for sensors of 32.2% increased due to an increase in inventories and favorable foreign exchange rates, which offset the impact of lower volume and net tariff costs. Weighing Solutions adjusted gross margin of 40.2% increased from the first quarter and reached an all-time record, primarily due to higher volume and favorable foreign exchange rates, which offset the impact of net tariff costs. Gross margin for Measurement Systems of 54.6% increased from the first quarter due to higher volume and favorable product mix. Moving to Slide 9. Our adjusted operating margin of 4.8%, which excluded start-up and restructuring costs amounting to $885,000, improved from 1.1% in the first quarter of 2025. Selling, general, and administrative expense for the second quarter was $27.7 million or 36.9% of revenues, which increased from $26.7 million or 34.5% of revenues for the first quarter of 2025. On an adjusted basis, second quarter 2025 SG&A was approximately $27.1 million or 36% of sales, excluding approximately $500,000 of severance costs. The increase in SG&A is mainly due to unfavorable foreign exchange rates. The operational tax rate in the second quarter was 31%. For the full year of 2025, we are forecasting an operational tax rate of approximately 28%. We reported net earnings of $248,000 or $0.02 per diluted share. Adjusting for manufacturing start-up costs, restructuring, severance costs, and foreign currency exchange losses, adjusted net earnings for the second quarter was $2.3 million or $0.17 per diluted share compared to $468,000 or $0.04 per diluted share in the first quarter of 2025. Moving to Slide 10. Adjusted EBITDA was $7.9 million or 10.5% of revenue compared to $5.1 million or 7.2% of revenue in the first quarter. Capital expenditures in the second quarter was $1.3 million. For 2025, we are forecasting $10 million to $12 million for capital expenditures. We generated adjusted free cash flow of $4.7 million for the second quarter, which compared to $3.7 million in the first quarter. As of the end of the second quarter, our cash position was $90.3 million, an increase of $6.4 million from the first quarter. As part of our ongoing cost reduction and efficiency initiatives, in July 2025, we completed the sale of a building, which generated approximately $11 million in net proceeds. We used these proceeds to reduce our outstanding bank revolver balance, which will reduce our annual interest expense by about $700,000. Regarding the outlook, for the third fiscal quarter of 2025 at constant second fiscal quarter of 2025 exchange rates, we expect net revenues to be in the range of $73 million to $81 million. In summary, bookings of $79.9 million grew sequentially for the third straight quarter, resulting in a book-to-bill of 1.06. Our business development initiatives continue to advance, and we generated solid cash flow as we continue to implement our cost reduction programs. With that, let's open the lines for questions. Thank you.

Our first question comes from Josh Nichols with B. Riley.

Great to see the continued trend in improving business activity. Just want to touch on for a minute, I think you mentioned you've received $17 million of business development revenue. You have a goal of getting to $30 million this year. Presumably, do you expect some additional revenue from humanoid robot, some of your humanoid robotics customers later this year? And then you mentioned one customer is expected to move into production next year. How do you expect the size of those orders would change relative to what you're getting today, assuming that customer does move into production versus earlier stage demo today orders that you guys are doing?

Regarding the humanoid robotics project, as we indicated, we have received a $1.5 million order from April to July. We are pleased with the progress of this customer and our design position on their robot. At the same time, we have to continue and support the production schedule, which is still changing by our customers. So we may expect to get more orders. At this point in time, the customer continues to evaluate based on their schedule. But potentially, we could see an order; it really depends on the customer. This is regarding the first humanoid customer. The second humanoid customer, I did indicate in prior calls that we did provide an initial prototype and the feedback was good. We are expecting to provide another; we are expecting to see a larger order in the near future. Regarding 2026, we, Vishay Precision Group, are set to support our customers regardless of the volume. We are ready regarding the infrastructure. And once the customer is ready to ramp up on higher volume, the company is ready to support their production. So based on prior discussions that we had with the customer, once and if there are changes in volume, we are prepared to support those customers. We do hope to see those higher volume orders coming in 2026, but it really depends on the customer schedule.

And then just to drill down into that a little bit. I think you previously mentioned somewhere in the range of like $500 to $1,200 per robot. Is that still what you're expecting? And is the margin profile for these customers relatively in line with the corporate average or a little bit better? Or how is that going to impact the businesses at scale?

Okay. I did provide a price range given the volume that has been discussed. Once higher volume would be discussed, we already understand that probably a different pricing model will have to be supported, and the company is prepared for that. Regarding the profit schedule, I think it's a little bit premature still to provide this type of information.

I appreciate the detailed response. I have one more question. Your business activity has been improving, and the company is coming off a long downturn, with signs of pickup. We've noticed a healthy increase in operating income, and you've maintained positive cash flow even in tough times. How do you view the scalability of the business in relation to EBITDA and operating margin as your sales increase next year, and how does that scalability affect margins?

As you know, our financial profile is such that for every incremental dollar of revenue, we expect it to be around $0.30 to $0.40 drop to the pretax level. So this model, we do expect to continue once we see an upturn in revenue. I should say that given all the cost initiatives that the company has taken during the last two years, we should be in a better cost position to capitalize on profitability once the volume rebounds. So if there was a certain schedule regarding the profitability improvements once the volume increased historically, we should be in a better position, meaning the profitability level should be accelerated in respect to the past once volume rebounds.

Our next question comes from John Franzreb with Sidoti & Company.

I'd like to start with the quarter that we just finished. Ziv, it seems like there is a fair amount of variability in the transportation market for you. Weighing Systems had some good revenue numbers flow through. Measurement Systems didn't. I wonder if you could just talk about what's going on? What are you seeing in the transportation side of your business?

Okay. Great. So regarding Transportation, let me start with Measurement Systems. The upside that we have seen this quarter is coming mainly in the steel, mainly the DSI, the project-related AMS and to an extent, also the DTS automotive business. What we can or what we have identified is kind of a slower demand in weighing solutions due to the fact that in the first quarter, there were very high orders of transportation for our onboard weighing, which did not repeat itself in the second quarter. So as a matter of fact, it's not that the business has been slowing down; it's just that we did not repeat those large orders in Q1.

So do you think that was just catch-up from delayed orders from '24 in Q1 and now they're at equilibrium? Any kind of greater thoughts?

The Q1 orders were considered to be 6 to 9 months' worth of customer orders placed in Q1, and sales are expected to continue in the coming months.

Got it. Got it. And can you talk a little bit also about the steel market? It seems like the order bookings in steel were weak, and I was kind of hopeful maybe that they'd be a little bit stronger given what we're seeing as far as the macro conditions.

Okay. So regarding steel, as you know, there are a few moving parts in steel. First, the global steel market as a whole continues to be soft, reflecting slow automotive production and demand and pushouts for some electric vehicle model production. Secondly, the tariffs, which are very high on steel and steel-related products also make a significant effect. Our orders that we have received for steel have not necessarily been on our KELK, which is in line or inline equipment inspection in steel mills, but it's more on the R&D for DSI product. So there is still a lot of tailwind once the steel business rebounds.

Got it. That helps. And in regards to the $5 million in cost savings, would that program be completed by the third quarter? Or is that going to take to the full year-end?

The $5 million are expected to end in Q4. I believe that for the first six months, we have captured $2.8 million out of the $5 million.

And just a little bit of thought about how July looks, the trends for the company overall compared to what you saw in June during the second quarter.

Regarding July, I would say that since we are already providing information about the third quarter, there are no surprises for us.

One last question. Should robotics begin production in 2026, at what point would you need to increase capacity to meet projections for 2030? I'm sure you have considered this, but could you share what the ramp-up would look like from your perspective?

As I indicated, the ramp-up schedule is very much dependent on our customers. We share with our customers our capacity, our equipment capacity, and our headcount, and we are working hand-in-hand to ensure that our capabilities and capacities align with their demand. To that extent, I think there is a very good collaboration between the two companies, and they would give us enough heads-up and information that we would be prepared with enough capacity to support them. We are not going to be the bottleneck. Now regarding the timing and the schedule, it's up to them. We do hope that it would be sooner rather than later.

I think he was finished. I think he was finished, John.

We currently have no further questions, so I will hand back over to Steve for any closing remarks.

Thank you. Before concluding our call today, I want to note that we will be participating in two upcoming investor conferences, the Three Part Advisors IDEAS Conference in Chicago on August 27 and the Jefferies Industrials Conference in New York on September 3. You can contact us for more information about them. And with that, thank you for joining our call today.

Thank you very much, Steve, and thank you, everyone, for joining. That concludes today's call. You may now disconnect your lines.