Vishay Precision Group, Inc. (VPG) Earnings Call Transcript & Summary

Good morning, everyone. We are going to allow a few seconds for the rooms to populate. Our next presentation for today is Vishay Precision Group, ticker VPG. My name is John Franzreb. I'm the covering analyst here at Sidoti Company. For those who not familiar at Vishay, Vishay is a manufacturer of sensor and sensor-based systems that serve the various marketplaces. We are fortunate to have with us today, CFO, Bill Clancy; and Director of Investor Relations, Steve Cantor. Following the presentation, there will be time for Q&A, [Operator Instructions]. With that said, gentlemen, thank you for being with us today. The floor is yours.

Thank you, John. It's great to be here at Sidoti this morning and tell you about VPG. Before I do, I do need to remind everyone that we will be making forward-looking statements this morning, and our actual results can differ so we encourage all investors to review the risk factors in our SEC filings. So this is really an exciting time for VPG. Our sensing and precision measurement solutions are finding new, larger and faster-growing markets, such as in humanoid robots which are truly revolutionary and are requiring new levels of sensing technologies. These potential opportunities are being driven by major technology trends such as what's being called physical AI, and I'll talk more about that in a few minutes. And we've made some fundamental changes to our organization and strategy in the past few months, which are designed to accelerate our growth and to put us in a position to capture more of these opportunities as well as to scale effectively. And as we implement these changes, we continue to be very disciplined in our financial focus and in our -- both our organic and organic growth strategies. So for those who are not familiar with VPG, essentially, what we do is provide high-value precision sensing and precision measurement technologies. And we focus on the highest performing, the most premium solutions in those areas. And even so, we address a broad array of markets, it's really focused on providing the kind of high value to really make our customers' products and processes safer, smarter and more productive. VPG products are often at the first part of the data value chain where real-world data is acquired. And for applications such as those where safety is involved or which are mission critical, our products play a vital role. And while you may not see VPG in your daily life, I can assure you, you probably benefit from it in ways you can't even imagine. So let me walk through some recent highlights: First, we delivered five consecutive quarters of book-to-bill at or above 1, and that's a solid indicator of improving demand. Bookings trends in our Sensors segment have been especially strong, particularly in the semiconductor test equipment market as well as in general industrial, avionics, military and space markets. Sensors bookings reached levels not seen in 13 quarters. Second, we continue to see progress in the emerging humanoid market. We booked nearly $2 million of prototype orders from October '25 through January of this year, and it included an initial prototype order from a smaller third humanoid customer. And third, we strengthened our organizational structure with the introduction of two new C-suite roles: Chief Business Product Officer and Chief Operating Officer. These positions are directly tied to accelerating growth and improving our operational readiness. And finally, we continued our cost reduction initiatives, which yielded $4.5 million of savings in 2025, and also include $6 million of additional savings targeted for this year. And together, these elements, we believe, form a strong foundation for our next phase of growth. So one of our strengths as a company is the diversity of the markets we serve. Our end market mix spans traditional applications that you can see here on the left side of this slide, which includes industrial applications, steel manufacturing, agriculture and construction equipment. And on the other side, we are addressing emerging growth applications, including those in semiconductor test and avionics. And across these categories, we generally hold the #1 or #2 position in our specific niches, which speaks to the trust customers have placed in our technology over many years. And this balance across traditional and emerging applications, we believe, creates a resilience and a strong foundation for accelerating our growth. We operate in three segments: sensors, weighing solutions and measurement systems. I think of these as sensors being components, weighing solutions being modules, which in many cases, include our Strain Gauge Sensors. As well as measurement systems, which are application-specific products and systems that really essentially do one thing in one particular area and do it quite well. Each segment addresses a distinct set of customers but they share a common theme. They address applications where precision is critical. And across these areas, our value proposition is built on a combination of deep engineering expertise and the ability to customize or tailor our solutions for very specific customer requirements. I'll give you a quick snapshot and a few of the applications that we address. Humanoid robots is one of the fastest moving areas we're currently serving. We supplied torque and tactile sensors that are helping humanoid developers solve really fundamental engineering challenges around stability and dexterity, essentially turning a hunter metal into something that moves like the human and feels like a human. In semiconductors, our precision resistors are essential for ensuring consistent, accurate results in chip testing, a need which is only growing as AI drives more complex chips and architectures. And in the fiber optics market, we're seeing renewed interest in our components because they help improve the stability of tunable laser sources used in data centers and long-haul telecom applications. I've seen -- we've been discussing more and more with investors is physical which is essentially AI interacting with the real world through robotics and automated systems. And these systems require highly accurate real-time data to make safe and reliable decisions. And that's really the role our sensors play. And as these applications scale, the sensing layer becomes even more important, and that's an area where we performed very well, and we're well positioned. We think the world is really on the cusp of a fundamental revolution that will change a broad array of industries, including manufacturing and logistics, with the introduction of more autonomous solutions. Jensen Huang, the CEO of NVIDIA, said just this week that the next major demand way for compute is not coming from chatbots, but from robots and autonomous systems operating in the physical world. Jensen believes, as we do, that virtually every industry will adopt some form of physical AI-driven automation. So this is really a very exciting trend for VPG. In 2025, we took a major step in reshaping the organization to support the opportunities ahead. It's a combination of the steps that we've made and the changes we've made over the past several years, which has truly laid the foundation from what's ahead. The creation of the Chief Business Product Officer and Chief Operating Officer roles allows us to run a more unified commercial function and a more efficient operational platform. It also sets us up for future growth, both organic and inorganic by establishing consistent processes and cross-company coordination. And this is truly a foundational shift that strengthens our ability to scale and to grow. A cornerstone of that, as I mentioned, are these two new roles and two organizations. And I just want to highlight here the interaction between those and our operating model, there really are two sides of the same coin. On the commercial side, we're enhancing our business development processes refining our customer engagement model and building tools that support consistency and also very importantly, visibility. On the operational side, we're improving efficiencies through deploying more automation and optimizing our global footprint. And these improvements will not only help us deliver higher levels of cash flow and profitability but will also allow us to be price competitive as we go after these larger market opportunities. One of the focuses of the Chief Business and Product Officer organization is on our growth initiatives. These are engagements with new customers or new platforms with existing customers. In 2025, our business development initiatives delivered just under $38 million of orders ahead of our goal, and we're now targeting 20% growth from that level this year. This represents a broad array of initiatives. Each of our business units have their own specific initiatives. Most are on the smaller side, but a few are quite large, such as humanoid robotics, semiconductor tests, advanced material testing, defense systems and precision manufacturing. And each of these opportunities reflect a customer need for high-performance sensing or measurement that aligns well with our strengths. Humanoid robots just to highlight one of them, it represents perhaps one of the largest opportunities in our current BD funnel, Business Development funnel. And we've been working with three humanoid developer customers, two of which we've been working with for some time. And the third, we just started working with in the fourth quarter. Over the past year, we've made significant progress with our first humanoid customer moving from deep engineering collaboration and problem solving as well as providing multiple sensor prototypes, to now the final system setup and early alpha builds. We've already received initial orders covering a few dozen robots, each using roughly 20 to 30 sensors. And we expect a follow-on order for hundreds of units in the second quarter with the potential to ramp to hundreds of robots per week by the end of 2026, subject, of course, to our customers' time line. And with our second humanoid customer, we're also well advanced, recently receiving approximately $1.5 million of orders, primarily for tactile fencing, essentially given the fingers of the robot is sense touch and feel, and we expect clear volume visibility after their current prototype evaluations. In parallel, we've also begun engaging with a third humanoid customer supplying prototypes for several dozens of robots, and we believe there's broader industry momentum, which could accelerate development and production with additional humanoid developers. We believe that this year 2026 will be a pivotal one for the humanoid market, since a number of leading developers have indicated plans to move to production and early deployment by the end of the year. But the bigger picture here goes beyond humanoid themselves. This is really part of a broader shift towards what I described as physical AI, AI interacting directly with the physical world. And we think that we're just at the beginning of that trend, and it's going to create a whole wide range of platforms and not just human-shaped robots. In fact, we're already starting to see potential app opportunities in adjacencies. We've had early-stage conversations with customers regarding physical AI systems and logistics, which aren't humanoid per se, but rely on similar testing and control capabilities. So while the human market could take time to evolve, we believe we're only seeing the tip of the iceberg and that there will be many derivatives and new applications that will grow from this first wave. And from that standpoint, the long-term potential is significantly larger than what's physical today. As I mentioned, what we're doing on the operations side is wholly complementary to the business commercial side. This road map that I'm showing here on this slide outlines the three areas where we're focused on in terms of an operational standpoint: First is footprint optimization, which includes expanding our capabilities in India; Second, is operational excellence, which involves improvements in yields, productivity and automation; And third is procurement, where we're consolidating suppliers and streamlining our logistics. And together, these initiatives represent a path to $20 million of cost savings over the next 3 years, including 2026, and position us for stronger margin performance as well as, as I mentioned, to make us price competitive and able to scale. So to put everything together, the long-term thesis for VPG is clear. We're aligned with major technology and industry trends, automation, AI, advanced materials, semiconductor innovation. We've invested to build a stronger organization and a more efficient operating platform. and we're broadening our opportunity set through a disciplined business development. So from our perspective, the company is entering a period where our capabilities and market needs are increasingly aligned. And with that, we're happy to take your questions.

Thank you, Steve, for that expansive overview of Vishay. [Operator Instructions]. Bill, Steve. I guess the first question I really would like to address is the current events environment, you have production facilities in Israel. Can you talk about potential disruptions that investors should be aware of? What are you doing maybe to mitigate some of those potential disruptions? Maybe a little bit of a background and overview would be helpful.

Sure, John. I appreciate that. Thank you for the question regarding the facility that -- but most importantly, it's the employees, the people. Everybody in our facilities or at the moment are safe and housing. Obviously, we put all the measures in place to make absolutely sure all of our employees are safe, their well-being. And that is, by far, our priority #1. Regarding -- we've always had areas that we have prepared for and shipped and we always had the ability to produce with very little interruption to our business. I would say we're probably 90%, 95% back to normal. And having said all that, we believe that -- we do everything we possibly can to satisfy all of our customer needs and have truly minimize what the impact will be from a revenue perspective. For that -- and we've taken all the steps and measures, we prepared for this. We've always been quite ready for anything and truly have taken all the steps to ensure the safety and health of the employees and also the continuity and accountability for the business as well.

Got it. And with that, I'm going to move directly to the audience questions that seem to be coming in. First question is what needs to happen over the next few years for the physical AI to become a meaningful revenue contributor?

Well, I think it's already starting to be an important contributor, at least we expect this year to see growth in our revenue associated with humanoid robots. The real question, though, depends on the deployment of these robots in real-world scenarios and whether or not you're going to deliver the value that they're promised. So we'll learn a lot, I think, by -- about humanoid robots this year as a market. And then I think in parallel, the trend towards looking at some of these adjacent applications essentially using that same kind of physical AI technologies in manufacturing and logistics, as I mentioned, I think you'll start to see more and more solutions and investment from this year onwards. The real question, again, it has to -- there has to be an ROI associated with those investments. And so I think we'll see -- we'll know more about as we progress through this year.

That actually dovetails nice thing to the next question. How you're balancing R&D between the new sensing technologies and weighing solutions?

Yes. So we're very fortunate to have some of the best engineering talent related to what we do, which is around strain gate sensors and precision resistors as well as weighing solutions. And so our strength is really throughout our history and continues to be our ability to have very in-depth engineering discussions with our customers to really take our core technology and adapt and customize it to their specific needs. So that is something that we've continued to do and as we consider to be one of our strengths.

Next question. Can you talk about how your end market exposure has evolved, particularly with data centers and human robots?

Well, that's, I think, an important theme for VPG, which is that we've always been a niche supplier of high-performance products that we make. And in general, and I'm maybe oversimplifying this, but in many cases, our biggest competition is whether the customer chooses to use a lower performing product at a lower cost. But we think that there's some technology trends, and we certainly would argue that within the humanoid market where safety is probably going to be an important consideration you want to have the best performing product. And I'd say also the case in what we're doing in the data center fiber optics market is also a good example of that, where the importance and critical nature of the transmission of data from data centers or long-haul transmission is going to require a higher performing solution. And so we think that in that way, some of these opportunities are actually coming to us as opposed to us chasing them.

I just interject a question here. How much commonality is there in the sensing products that use between your three customers right now?

There's quite a bit. I mean there are different designs and each customer has a sell proprietary design, which are very different, different approaches. But the commonality of what we're doing for them really evolves from our core technology, which is around oil-based substrate material that is used in our strain gauges to really provide that level of performance and reliability and consistency over time. So that's the differentiation. That's essentially our secret sauce, but that runs across everything that we're now doing for or discussing with the senior customers.

Next question, can you expand on ordering patterns and lead times with the growing demand for physical AI? A lot of AI questions here today.

Well, I guess I would maybe clarify that question to say. This idea of physical AI, I think that's an important concept. It's one which we think is going to be a trend that has a lot of legs to it. It's going to interface with a lot of different parts of our world. But if you want to be more specific, I would say, the primary example that we're currently addressing within that realm of physical AI is the humanoid. And as we've discussed, we've already generated in the last couple of years, $5 million of orders just for prototypes related to humanoid. And so we are expecting this year to see a growth certainly compared to 2025 as those customers move to real production and deploy it.

But a more traditional question here. How much of total cost savings is expected to be realized in 2026?

So John, from that perspective, as we show our slide, we expect to have $6 million of savings, predominantly at the gross margin level compared to 2025 for cost savings. As Steve mentioned, it's a combination of factory consolidation, better automation, procurement savings and optimization. So in total, $6 million is projected for 2026.

Got it. Next question is, how scalable is the measurement systems business model compared to the other segments?

Well, from a scalability perspective, obviously, the measurement systems is our highest gross margin segment that we have today. It's in the low to mid 50%. So as we hopefully begin to see some tailwinds with steel and with AMS and the continuation with our craft test dummies and with ECS. I mean the scalability is as those revenues begin to increase, we could see incremental gross margins rising as well.

Something to that question, which is the measurement systems, as Bill mentioned, is our highest margin segment. But also it comprises our longer lead time businesses, and for example, within the steel market, it could take 9 months, if not longer, from the point when we start talking to a customer to the point where they place an order and another 9 months to customize, develop and install and test that system. So that's another difference. Generally, what we do in the Sensors and Weighing Solutions segment as much shorter lead times.

Makes sense. Thank you, both. Next question is in past presentations, you talked about hitting 22% EBITDA margins at a roughly $90 million quarterly run rate with new investments and cost-cutting initiatives. Can you give us a sense of your target margin profile at a similar run rate?

So John, it's an excellent question. We did have a 3- to 5-year plan we rolled out a couple of years ago. But given that with the announcement we made in November with the new structure with the CPO and the COO. We are in the process now of updating that 3- to 5-year model. And we intend to roll that out during our first quarter 2026 earnings call. Having said all that, I mean the expectation of giving a significant cost savings and a true mandate for mid- to high single-digit revenue growth each and every year. The expectation is we should be able to probably at least achieve or those original 3- to 5-year plans we had a few years ago. But all of that will be spelled out in our first quarter earnings call.

Something to look forward to, Bill. Great. Next question. Can you discuss how the new C-suite executives are integrating? Any early impact on revenue initiatives or corporate culture, sorry.

Yes. So I would say, I mean, it's only been a couple of months, John, since we had the announcement, but we had -- I think we've had -- we've seen a greater what do you say, accountability, execution, the culture changes, I think, have been implemented throughout the organization I think people are obviously taking this organizational structure in a very, very positive way. And we're even seeing early momentum this truly being a well-run organization, and the parts that we're adding, the personnel that we're adding much -- I think, are -- will reap benefits in the future for sure.

Just to maybe add one point to that, which is I think we don't want to front run our rollout of our new target model, which we expect to release in our first quarter earnings call in May. But I think you should expect -- investors should expect that our outlook and the model will be will reflect higher levels of growth than the previous ones organically. And that's in part a reflection of certainly the opportunities that we talked about today, but also in part, reflecting what we think will be the impact of this new organization.

Makes sense. A question about if you need to expand your production capacity, and what challenge do you face around personnel and engineering needs?

So from a capacity expansion perspective, given where we are today, I mean, we have the capacity available depending upon which region to add personnel could be fairly quickly. And to the extent that we receive significant large orders or opportunities that we'd be more than willing to add the equipment and with the personnel book, we definitely have the flexibility and the capacity to handle significant opportunities and meet all of our customers' demands.

Well, it's been a robust Q&A, and I'm going to ask the last question that didn't come up for some reason this time. Can you talk a little bit about the M&A environment and your appetite for acquisitions? And what do you see on the horizon?

So John, a very good question. Obviously, we've always been very M&A inquisitive. I think what we're working on at the moment is implementing and establishing the two new C-suite. And as we finalize that rollout continuing to look for M&A growth and opportunities could be in existing markets, could be in new markets, but we are -- continue to be very acquisitive, and I definitely look forward to, I think, greater opportunities down the road.

Fair enough. Any closing remarks, Bill or Steve?

Just again, thank you and Sidoti for the opportunity to be part of the conference and to tell you about VPG and look forward to updating you at future conferences.

Thank you for the expansive overview. We appreciate you being here today, and have a great day, everybody.

Thank you.

Thank you. Appreciate it. Thank you, everybody.