Conference Transcript - VPG 2025-08-27

Operator

Good afternoon and thank you for joining us for our next Midwest Ideas Conference presentation. Presenting next is Vishay Precision Group, which trades on the New York Stock Exchange under the symbol VPG. Representing the company today is Senior Director, Investor Relations, Steve Cantor.

Ziv Shoshani, CEO

Steve? Thank you. I also want to introduce my colleague, Bill Clancy, who's the CFO. First, it's a real pleasure to be here today and tell you about VPG. I first have to compliment the three-part advisors team and for their conference, I think this is really one of the best organized and run conferences and certainly, hopefully, it's productive for you as well. With that, just to introduce VPG, First Safe Harbor, we will be making some forward-looking statements, so please understand the risks and uncertainties of those statements and read our SEC filings carefully. So for those of you who are not familiar with VPG, at our core, we're a sensor company. As you may know, the sensor market is quite large globally, some estimated to be upwards of $350 billion. We play in a corner of that market, really around sensing technologies and precision measurement technologies that are focused on measuring weight and force and torque and current. Our value proposition within that market is really to focus on the most demanding applications. So we generally address niches within our market segment that provide customers with enhanced safety, productivity, and also help make their products and systems smarter. And we do that really by providing the most high-performance products within that category. We've been doing this for a while. We became public in 2010. We have a global footprint, and we address Fortune 1000 customers really around the world. We have what we think is one of the most diverse set of end markets, certainly for a sensor company of our size. And in many of these markets, we are number one or number two in terms of our position. And as I said, again, these are niche markets really focused on high-performance solutions. And you can see the diversity here on this slide. Just to give you a flavor, there's markets that we address which we think of as more tech-driven, such as the test and measurement market, where we have plays in semiconductor equipment. I'll talk a little bit more about that in a moment. We also address, I would say, our traditional industrial-type markets where we are involved with things like weighing of ingredients or weighing parts of the manufacturing process. And then we are addressing what we think of as more cyclical markets such as steel and within that other category that you see here on the screen, precision ag, construction, well as medical and consumer. We operate in three business segments, as I'm showing here on this slide, sensors, weighing solutions, and measurement systems. I think of these as sensors being components, weighing solutions being modules, and measurement systems being standalone or application-specific solutions. Each of these has a slightly different business and operating model and growth rate, which we think combined gives us a nice blend of growth and resilience and profitability. Sensors, for example, we think that business can grow in the mid single to high single digits with gross margins of 40 percent and low 40 percent. Bing solutions, we think grows more in line with GDP plus, but with growth, gross margins now approaching the sensors segment. So we just actually achieved our record gross margin in the second quarter for this segment. And then measurement systems, we think that grows in the mid-single digits with our highest gross margins across the company of 50% plus. So all that, we think, again, provides a blend of growth and profitability. This slide shows on the right-hand slide of the slide, shows our long-term targets based on growth in the low teens, which is a combination of organic and inorganic, about half and half. Our goal is to deliver 45 percent gross margins, adjusted operating margins of 18 percent and EBITDA margins of 22 percent. What's new about these targets is now, given the work that we've done over the last several years in terms of operational excellence, consolidation of our manufacturing footprint, moving manufacturing from high cost to low cost centers and other cost controls, we think that we can actually get to these numbers at revenue levels much lower than we thought when we first put this model together. So we think that is certainly something that is new and probably not as well understood as it should be by the market. So the fundamental strategy of the company, we've been doing this, as I mentioned, for a while, is really to expand from these niches into larger, faster-growing markets. And we think now, given both what's been going on externally to us in terms of some megatrends and technology trends, and also our ability to now address these in ways we couldn't before, we think that we're now at an important convergence point. And I'll explain a little bit more about what some of these external drivers are and then talk a little bit about why we think we're better positioned to really go after some of these today. So first, the external trends. So none of these should be new to you, but we've highlighted four of them here. These are long-term trends, including electrification, digital transformation, and industrial automation, as well as defense and space technology. I'll talk a little bit about each one of these. So first, electrification. So for VPG, it's not really about EVs, although we do have plays in EV technology, both in terms of the safety testing of new EV models as well as the production of EV batteries. But it's really beyond that. We have addressed some opportunities related to what are called eVTOLs, so the development of electric vertical takeoff and landing aircraft, such as with Ajobi. And so we've been involved with the safety testing and the performance testing of those aircraft. And while a couple years ago they seem more like science fiction, I think today these are real. In fact, there's plans to have these used in the upcoming Olympics in LA to bring people from venue to venue. And we're also involved with other kinds of electrified products such as e-bikes. Industrial automation, so this is a really important trend. It's not a new trend, but it's one that we think is accelerating for some pretty good reasons. Certainly coming out of the pandemic, I think the world saw the constraints of both labor as well as materials. And so the key solution I think to that as well as to some of the current trends that we're seeing in reshoring manufacturing both the US and other changes around the world in terms of global manufacturing, industrial automation has to play a key role. So we have some plays in that currently and it's an important market opportunity for us first in robotics, both for industrial as well as surgical robots. Our core technology has been used for many years in manufacturing automation. One of the applications that we have, as I mentioned, is in terms of weighing ingredients as they enter a manufacturing process, such as with chemicals or pharma or even food and beverage manufacturing. And then of course we have a play in precision ag, that's been a good market for us. In terms of defense in space, this of course is not a trend, it's more of a need, but it's a need that given the geopolitical instabilities that we see around the world is becoming greater and greater, we play in this, I think most of what we do in this area is space related, so either it's testing new space systems like this parachute reentry system that I'm showing here on this slide, or satellite command and control systems or missile systems, both in the development and testing as well as in the command and control and, of course, in the testing of drones, air, sea, and land. So this is a market that we think continues to have legs. And then digital transformation, I mean, our definition is it's probably a broad category of different applications, but in essence, it's using digital technology in ways that we haven't seen before, and so as part of that, certainly semiconductor production is a key market for us. We sell to both front-end and back-end semiconductor equipment makers, and then certainly in consumer electronics we have a play, and as well as in the data center fiber optic market. That's actually a new market for us, not a new market per se, but for us a new market where we've been successful in penetrating with our precision resistors. So as you think about the external drivers, I'd say the important piece as I mentioned in terms of the convergence of opportunity for VPG is being unlocked by internal investments and focus. And what I'm showing here on this slide is, on the left, some core competencies that we believe VPG does better than many companies, and it's around innovation, technical, using our technical expertise. So a lot of what we do is customized for customers. In fact, that's one of the reasons why we think we win and retain businesses, that engineer to engineer development. We also are focused, and one of the things I think we do better than a lot of companies is around operational expertise and excellence, and in fact, what you see on the right-hand side is just some examples of what that has meant for VPG. Over the last few years, we've invested $53 million of capex in operational excellence. This is both in terms of building new capacity as well as consolidating and migrating manufacturing. And we believe we're already seeing the results of these investments. We achieved a record gross margin for the company in the first quarter last year on revenues which were at much lower levels than even the nearest record in the company's history. And even in the past quarter, in the second quarter, we achieved record gross margin for our weighing solutions business. We have additional cost reduction programs underway, although I think that the heavy lifting is certainly behind us, but we continue to find ways to further streamline our operations. The second piece really is around business development, and I would say this is an area where we have stepped up our focus in the last two years, and this is really to enable us to go after market opportunities in ways we didn't before. And so we've increased, we've sustained our R&D investments, we have implemented some changes in our sales and go-to-market strategies, and all these are really aimed at capturing new customers and certainly new applications with existing ones. And then the third piece of, I'd say, the value creation strategy is around M&A. We've completed six bolt-on acquisitions to date. We think we have a high-quality balance sheet that would enable us to add a high-value asset to the company and one where we could add some synergies, particularly around leveraging some of these core competencies. So I mentioned the business development part of the strategy. We currently have what we call business development initiatives around the company that we think can yield $100 million of business over the next three to four years. It's a fairly extensive list of projects. If you looked at the current business development orders, which we have achieved thus far this year, which is about 17 million or so, 17, 18 million, we think we can get that to 30 million. At least that's our target this year. And that would be 2X what we did last year. And there's really a number of projects that are driving it. a couple larger ones which i'd like to to spend a couple minutes talking about so the first is humanoid robots now these sound like science fiction but actually there's a lot of investment going on at some fairly high profile businesses around the world and there's some good reason because if you think about again the the constraints coming out of the pandemic and And also what needs to happen in order for, for example, in certain sectors, the US to become competitive from a manufacturing point of view, we need to have innovative solutions. The humanoid form factor actually can provide that. We believe that, and many others do as well, simply because the efficiency of a humanoid robot, the flexibility of a humanoid robot, we're often asked, like, why humanoid, right? There's robotics have existed now for decades. Why do we need a humanoid one? Well, the answer is pretty simple in that a human is incredibly flexible in terms of the tasks they can do. So one minute within a manufacturing environment, a human can be, you know, assembling a particular part and another moment could be going and getting something from the inventory cage. And so the flexibility a humanoid can provide plus the fact of its reliability and you don't have to pay all the human HR cost is making it very, very attractive. We're currently involved with two humanoid developers right now. The first one we've been working with for close to two years, and we've already generated close to $4 million of orders for prototypes, which for us is quite large. And the second one we think is further behind, but we also received some prototypes and we expect to get an additional prototype order. And we think that as this moves to real-world deployment, and obviously there's some people in the industry who think that we could be seeing hundreds of thousands of these robots running around, even some have said a million robots in five years. So this opportunity could be quite big. Currently, with the customer number one, we've said publicly that we estimate we have somewhere between $500 to $1,200 of content on the robot. So we expect, of course, that to come down as volumes to ramp, but it's a significant opportunity and one which we feel like we're in a good position. We're sole-sourced, designed in, at least that's our view right now. The second opportunity I'd like to talk about is in materials testing. So this one, maybe not as large in terms of potential as humanoid, but one which would add a significant amount of incremental revenue as it emerges. So we've been involved with the testing of new metal alloys for a number of years. We have, I think, one of the most comprehensive tools that is available for testing new metal alloys. It's called a Gleibel, and you can look it up. And if you're in that world, you know what a Gleibel is. And if you don't have one, you probably would love to get your hands on one. But now we've added the capability with a new version of a Gleibel that tests ceramics or non-conductive materials. That's a market application that we don't currently address today. And so this is actually interesting for a couple reasons. First, the use cases for ceramics, particularly at high temperatures, is expanding in the areas of aerospace and energy as well as in space. So there's a lot of development work going on today in developing these new kinds of ceramics, particularly ones that can withstand high degrees of temperature. So our tool can test up to 2,000 degrees Celsius, but the real innovation is our ability to increase the throughput of tests using some unique technology. And so we think we can enable a research lab to do 10 times the amount of tests in the time it takes to do one test currently, which is a huge, huge step function advancement. We've announced a beta that should be starting soon with the University of Alabama, which happens to be in an area where there's a lot of aerospace research going on. And then there's a second university, which we're hopefully going to be announcing a second beta in the next few weeks here. So there's a lot of interest in this tool, and we think that there is a path, although A lot of things have to go right, but there is a path that we may see the initial production orders for these products beginning as soon as the end of 2026. So the last thing I want to leave you with is just sort of some of the near-term trends. We announced our second quarter results, which showed continued improvement in demand. And so this is our third consecutive quarter of sequential order growth, as you can see in the chart on the lower chart on the right-hand side of this slide. I mentioned we achieved record gross margin for our weighing solutions segment and overall improved our gross margin from the first quarter and generated some good cash flow, cash from operations 6 million and adjusted free cash flow was close to 5 million. So it was another step, improvement for the business and sort of another step towards beginning to unlock the value that I described in terms of our long-term financial goals. And so with that, happy to take any questions you might have. Yes, yes. Yes.

Bill Clancy, CFO

Yeah, so Bill, it's a very good question. Obviously in looking at our three to five year targets when we set that up a year or two ago, it was at a much higher revenue rate. But given where we were with all of our cost reduction programs, cost initiatives, savings, we feel that we get to that 90, 92 million of revenue per quarter, which is on par or average of where we were back in 2022, we will hit that 45% gross margin and we will hit that EBITDA target of 22%. And Bill, following up with that, Anything beyond that, beyond that 92 million, say, per quarter would just add more incremental profitability and there's no reason why it would be in the high 40% gross margin and even a stronger EBITDA margin. Now I appreciate it. It's a lot of work. The company has gone through a lot of stress over the last few years, but I think given the last three quarters of a book to build greater than one, but more importantly, the order, the order intake, you know, in dollars improving every quarter. Now we're running at close to 80 million per quarter and, you know, cautiously knowing that we should see increases going forward. We're definitely going in the right direction and to achieve these targets, you know, we get some type of tailwind. You know, the feds, you know, they do cut the rates and we see more capital equipment opportunities. We will have the ability to achieve these targets a few years. Yes, sir.

Ziv Shoshani, CEO

I'm specifically talking about the ceramics testing tool. So maybe the best way to answer that is our current tool, which is testing new metal alloys. There are other ways to do that. Right now you can do that with multiple tools, and I believe there may be one other company which doesn't have as much share as we have, certainly, with a comprehensive tool. But we are absolutely well-known, really strong brand within that world. And part of that is not only the technology that's built into it, but it's that we have a unique solution which actually integrates a number of different functions, which are mostly done by discrete tools right now.

Bill Clancy, CFO

Do I have a follow-up question?

Steve Cantor, Head of Investor Relations

One of the slides is a reference that's currently a $1.6 billion market. Just in my mind, I can't grasp where $1.6 billion is at. Well, first of all, it's not our number, and I've seen numbers that are

Ziv Shoshani, CEO

larger than that and certainly if you do the math the easy math and you say you know a million robots running around in five years just for one company you can you can see the potential there I would say the you know I think that's a fair question and I would say part of the answer is that nobody really knows yet that, because we have not seen a real-world deployment of robots on any scale that are providing value. We believe that changes in 2026. And so I'd say the world will know a lot more once we see that. And the other thing that, again, that gives us confidence that this actually may happen is that you have a lot of companies or not a lot but you have a number of companies that are putting real money to this in a very aggressive way and even some that have stated that this is part of the cornerstone of their strategy. So that's one piece that sort of says this looks like it will be real. The other is that the pace of innovation is so fast And that's something that we have not seen in certainly our established markets. It's something that you would see more

Steve Cantor, Head of Investor Relations

in a emerging or disruptive technology market.

Ziv Shoshani, CEO

Yeah, that's what we believe. Obviously, we don't know 100%. And of course, both customers are keeping their both development plans, their sourcing as well as their production timelines very close to the vest. But you have to imagine that given again the level of investment, the criticality of this to some of those developers strategy that if they don't get there in 2026

Operator

that's not gonna be a good thing for them, right?

Ziv Shoshani, CEO

Yeah, I'd say, you know, our belief about that is based on sort of the, you know, numerous interactions that we have with the customer and the fact that, you know, we believe we are sole source right now. Ultimately, we think they'll be second sources, but right now we are. And also the unique nature of this particular design. design we've been working with customer number one as I mentioned for two years iterating incredibly rapidly and they we believe they've seen us as a as an engineering partner in terms of this particular solution and it's not it's not an easy one right the technical challenges that would need to be solved and that are being developed right now or solutions that are being developed to solve them are immense. This is really space age stuff. But we think that, again, that these customers will get there and that we hope to play a part of it and if it materializes the way we hope it will, it could be absolutely transformational for VPG.

Operator

Yeah, I know, it's an excellent question.

Bill Clancy, CFO

Look, we've been working, you know, as everybody you've heard, working with customer number one, you know, extensively for over two years. We were ready to go at the end of this year, as was the original thought. Things have changed, but yet, you know, we're working closely with the customer, weekly calls, R&D, engineering. We have the capacity. We have the capabilities. We are all ready to go. We've been working hand in hand with this customer. So when they're ready to go to market, we'll be ready to go to market as well. Obviously, they need to give us some lead time to ramp and get ready, but we will not be the bottleneck. We are perfectly ready now. We have the capacity. We have the personnel. We're set to go.

Ziv Shoshani, CEO

And the only thing I'd otherwise add to that is customer number one specifically has spent some time and effort in visiting our facility and really kicking the tires. And so because these sensors are so critical to their development and to their robot, we think that they wouldn't be working with us if they felt we couldn't deliver. And the last thing I'd add is kind of bring it full circle is a lot of those investments that I described in our manufacturing footprint and our operational excellence have really been about how do we make products in higher volumes more consistently and more profitably. And that's been the driving goal behind these investments.

Bill Clancy, CFO

Any other questions? If not, thank you very much. We appreciate your time and thanks for being here today.

Operator

Thank you. Thank you.

Bill Clancy, CFO

I like.