With that said, gentlemen, thank you for being here. The floor is yours.
Thank you, John, and I want to thank Sidoti for the opportunity to present today and tell you about VPG. Bill and I are very excited about what lies ahead for the company. Before telling you some high-level points around VPG, I just want to remind everyone that we will be making forward-looking statements, and you should read our SEC filings carefully to understand any risks associated with those statements. So fundamentally, we're a sensor company. I don't need to tell you, sensors are everywhere. They continue to proliferate. They're in our homes, our cars, our offices, our factories, and we think this trend has a long way to go and has a lot of legs. And so we'll see even more sensors being deployed over the next several years. So it's a good space to be in.
What we do and the value that we create for our customers is really to provide products that help their products and their processes become safer, smarter, and more productive, and the way we do that is really to focus on the highest-performing products in our categories, and so in terms of precision, reliability, consistency, these are all key factors of why customers come to us, and the way to think about that, maybe in a different term, is what's called the data value stream, so the data value stream is simply the process in which real-world information, like temperature, force, weight, pressure, those are all things that we measure, are digitized, and then that data then becomes analyzed or moves downstream to perform a certain function.
So for a critical application, such as safety, where precision and reliability is really important, if you don't get that first step right, everything downstream can be a problem. So what we do is really important to our customers. So we've been doing this for a while. We became a public company in 2010. Many of our businesses were actually operating and serving customers well before that, with predecessor companies. So very well established and have very broad, well-regarded brand recognition from our customers. We operate globally, and we serve a broad cross-section and markets, as we show on this slide. We think we're probably one of the most diversified sensor companies, certainly of our size, given our end markets.
Some of these are what I consider to be more industrial kinds of markets that we've been serving for many years, such as industrial weighing, as an example. In that market, we're selling products that are used to weigh ingredients in a whole variety of manufacturing environments, whether it's for pharmaceuticals or chemicals or food and beverage. We're also involved in part of the steelmaking process, but our other markets are clearly more tech-driven, such as test and measurement, where we serve the semiconductor market with leading-edge components for leading-edge test equipment and also in scientific equipment. In that category, you also find in our other category, you'll find markets such as medical, consumer, and other kinds of tech-driven markets.
So it's really this diversity that works to our advantage long term, and we're not reliant on a single market. We do this in three business segments, as I'm showing on this slide. Sensors, Weighing Solutions, and Measurement Systems, and the way you can think about that is Sensors are components, Weighing Solutions are modules that have some additional componentry as part of the product, and then Measurement Systems are really standalone kind of application systems that do one thing and address one set of applications, but they do that really well. We think that these business segments give us a nice blend of growth and profitability. Each of them have their own go-to-market strategies, product technology strategies, manufacturing strategies.
And so, for instance, the Sensors segment, we think long term can grow in the mid to high single digits, with gross margins of around 40%. Weighing Solutions can grow a bit slower since they're more industrially focused, growing at GDP plus, but with gross margins now approaching that of sensors. In fact, that's a really good story because just a few years ago, the gross margins of Weighing Solutions were about half of what they are now. And that's through some actions that we've taken, which I'll talk about in a few minutes. And then Measurement Systems grows more in the mid single digits, but with the highest gross margins of our company at 50% plus. So it's a nice blend of growth and profitability.
We just came off our second-best year in the company's history in 2023. That followed the best year in our company's history in 2022. But thus far in 2024, we have seen a slower year, certainly slower than we had anticipated going into it. That's really due to a variety of factors, including the general economic slowdown. Some of the cyclical markets that we address, such as semiconductor equipment and steel, have moved from the bottom end of their cycle, but have not quite fully recovered. And then we're also seeing increased cautiousness in a part of our, some of our distributors. But really, what's important here is on the right-hand side of the slide, which is the 3 to 5 year targets for the company.
We wanna grow the business in the low teens, which is a combination of both organic and inorganic. It's about half and half, if you wanna use some sort of growth measure. And if we do that, we think we can deliver on these financial targets in terms of gross margin, operating margin, EBITDA margin, all of which we think compare quite favorably to other sensor companies. In fact, we were asked just on our last earnings call, whether or not these targets are still valid, and the answer is absolutely yes. And I think we have a clear path to getting to them. Clearly, we need some additional revenue, but we've done a lot of work on the cost side, which we think sets us up to really deliver increased profitability as our revenues recover. In the big picture, so how do we expect to grow organically?
And it's really captured on this slide. So historically, we've focused primarily on niche markets, which are really good markets where we have number one and number two positions. But as we think about what's going on externally with some of the key trends that are driving demand for new types of sensors, we've been doing a lot of work inside the company in terms of developing new products and new customers and new markets. And so we're really shifting our focus to really go after larger and faster-growing markets and moving beyond our niche markets. So this slide, I think captures, really, how we're going about delivering on these opportunities. On one side, you can see what's going on externally.
I've already mentioned the fact that sensors are proliferating, but there are a number of key trends that I'll talk about in a minute, which are driving our long-term opportunities. So externally, we think the opportunity long term is very positive for us. But internally, at the same time, we've been doing a lot of work to put in place capabilities to not only meet those larger and faster-growing markets that I mentioned we're going after, in terms of our ability to make product at higher volumes, but we've also been expanding our efforts on business development, and we've been streamlining the R&D process to make sure we're delivering prototypes to customers faster. And so, as we continue to focus on operational excellence, we think we can deliver product in higher quantities, but also deliver them.
We can produce product in higher quantities, but we can deliver them efficiently, and so at a relatively high gross margin. The external trends that I mentioned are highlighted here. You're all very familiar with them, electrification, digital transformation, industrial automation, and defense and space technology. I'll talk a little bit more about each of these in terms of what we're currently doing. Beginning with electrification, for VPG, it's not just about EVs, although we do have some play related to EVs, such as the safety testing of electric vehicles, and also the testing of EV batteries. But really, it goes beyond that to new kinds of products that are now relying on electric power, where previously they didn't.
So to give you an example, our products are used in safety testing of new vehicles I mentioned. It's our products go into the crash test dummy that's actually collecting data during the test. But it's not just for EVs, it's also for electric aircraft, what are called eVTOLs, electric vertical take-off and landing systems. There are a number of different prototypes being developed by a number of different companies. Whether or not you see them flying around over your homes and offices anytime soon remains to be seen. But I assure you that these are real products that are being tested, and in fact, they've the testing of these have generated a few millions of dollars of business for us just in the last, I'd say, a year to test them.
But we're also on e-bikes with products that help extend the range of the batteries on those bikes. So there's a lot of opportunities outside of the electric vehicle that are really, we believe will require our technology. So the second trend is industrial automation. It's not a new trend, but it's one that we believe is accelerating for a number of reasons, not the least of which is the pain the world experienced coming out of the pandemic and the supply chain shortages that have really put front and center in terms of a lot of businesses that need to make sure that they have sufficient capability to produce product, even when there's labor shortages. So we're seeing this ongoing trend towards automation. We ourselves are participating in that in terms of our own factories, incorporating more and more automation.
I've highlighted two examples of what we do for customers here. Certainly, one is robotics, not just for industrial robots, but medical robots, and now even robots that come in new form factors, such as humanoid robots, and I'll talk a little bit more about that in a minute. But we've also been involved with precision agricultural equipment, which is also becoming increasingly automated. The third trend is not a trend per se, defense and space, but it's certainly one that's growing in terms of technical development, especially given the conflicts that we're seeing around the world today, and also the increased focus that many countries have on space. We're involved in a number of these areas related to defense and space. In terms of space itself, our products are used in the command and control of satellites.
We're also involved in the testing of different space rocket systems, as this re-entry system that I showed here on this slide. The second picture to the right, which shows what looks like to be crash test dummies, these are actually specialized mannequins that we developed for the U.S. Army to help them come up with better ways to protect our soldiers during combat. And we're also involved in a number of missile defense systems, as well as the development and design of commercial and military drones, both air, sea, and land. And the last trend, just to cover, briefly, is what we call digital transformation, and it's really the process where we're applying digital technologies to a product or process that may not have needed it before. So consumer electronics is an area that's fairly new to us.
If you look at the company five years ago, we did almost zero in consumer. Now, it's been over the last several years, one of the most rapidly growing areas for us. We're also involved in semiconductor equipment, as I mentioned, both on the test side as well as on the front-end equipment side. And we're involved with supplying products for data center and fiber optics equipment, which is growing quite rapidly, you know, in terms of being able to support demand from AI applications. So hopefully, I've given you some flavor of the larger macro trends which are driving our opportunities long term. But what we're doing ourselves in terms of how we're capitalizing on it and what the metrics that we're using to really determine how successful are really shown on that slide.
On the left-hand side, you can see in that wheel are a number of core competencies that we continue to invest in and develop, such as our innovation and using our deep technical expertise to differentiate ourselves and service our customers. A lot of our sales are technical sales, which are done on an engineer-to-engineer basis, and so we continue to leverage that. And we continue to look for M&A. We've done a number of successful deals. We continue to look for more, and we think we have the right platform and certainly the right balance sheet to do that as we continue to, of course, focus on our operational excellence. But really, what's important here is on the right-hand side. These are the metrics that we really use to assess how successful we are in deploying and leveraging these different competencies.
It's really about revenue growth, operating leverage, and cash flow. And if we believe and we believe that if we're successful, and we continue to grow these metrics, that, in turn, will create a lot of value for our shareholders. We have two really near-term priorities as we implement our strategies. One is focused on organic top-line growth, which I'm showing on this slide, some of our key growth initiatives. These are just a portion of the ones that we have ongoing. And if I were to aggregate the potential in terms of long-term revenue for the company, incremental revenue, we think that these could contribute in the low double digits of millions of dollars of incremental revenue over the next few years.
I wanna talk about a couple of these, and certainly, I could spend the whole time in the presentation going into each one of them, but just to hit a, a couple of them. I mentioned robotics as a key opportunity for us. We're currently working with a leading developer of a humanoid form factor robot. We've already generated several hundred thousand dollars in this year alone in terms of revenue for prototypes from that customer for that project, and that's a new customer to us. That customer has publicly said that they intend to deploy thousands of these robots in their factory by the end of 2025. So if that comes to fruition, and as we finalize the bill of materials, this certainly represents a very significant potential growth rate for us, that would be very exciting.
We also just recently had a design- in with a medical robotic company for surgical robots. That's a market we think has a lot of legs. And then one more example, which is further down on the list, but one for long term, is ceramics testing. So in our measurement systems business, we have, we sell a very sophisticated high-end tool that's used by R&D engineers and metallurgists to develop new metal alloys. We've been working to expand the capability of that tool to now test ceramics. That's an entirely new market for us, adjacent to our current market, but which could represent a significant amount of revenue potential for us in the long term.
As we think about these in terms of near-term revenue, we probably will see modest amounts of revenue this year in 2024 , but we should see that growing as we move through 2025 , and then really accelerating in 2026 . The other key priority is really around what we've been doing in terms of our cost structure. Over the last 5 years, we've made major strides in streamlining our operations, our manufacturing, improving our process yields, increasing our productivity. I'd say the proof point of that really is in that chart to the right, which shows that we achieved a record gross margin in the first quarter of this year.
Really, what's even more significant than the fact that it was a record, it was that we achieved it on more muted revenue, and certainly revenue levels that were well below what we achieved in terms of peak quarterly revenue in 2022, 2023. We think the setup here is really in place for VPG as revenues begin to recover and accelerate, and for us to then deliver really significant amounts of operating leverage that will flow to the bottom line. Hopefully, I've given you a little bit of flavor for VPG, and certainly the opportunities that we have, the drivers that are driving our business. I gave you some examples of some of the key growth opportunities that are already in place and are starting to begin to deliver revenue.
We have a very solid balance sheet. We're in a net cash position, so we really have a great platform, and are very excited about what's ahead for the company. Strong business model, solid cash flow, proven financial performance, and with that, Bill and I will take any questions you have about VPG.
Thank you, Ziv. If you have a question, please enter it in the Q and A box, and I'll address it to management. Ziv, I'd like to start off with the growth initiatives targeted at larger sensor markets. Can you give us some examples of what those larger markets are? And is there any concern as you go into those larger markets, there may be gross margin pressure?
I think I listed a few of them. Certainly what we're doing in robotics represents a larger market that we currently address. We've had it demonstrated; we've been able to do that in terms of consumer. But I would say some of these others, such as ceramics, clearly is a large market that is currently unaddressed by VPG.
And—
In terms of market pressure. Go ahead. Go ahead, Bill.
Yeah, and John, I can add to that, in talking about the profitability. For those larger opportunities, whether it's the humanoids or those ceramics, they would be at gross margins that are higher than what we're running today. So they would be great opportunities and a great tailwind for VPG.
Okay, fair enough. Let's go to the audience here. First question, I guess, can you elaborate on the key factors driving your operating margins from 12% to 18%?
Okay, yeah, John, it's a very good question. Yeah, so basically, it's getting to our 3 to 5 -year target of 18%. You know, and like Ziv mentioned, over the last, you know, year or so, we've been working extremely hard with cost reduction, basically improving the gross margins up to record levels, despite the lower volume or lower revenues. And as we know, as you know, hopefully, the market will stabilize going into 2025. With higher revenues plus some M&A opportunities, we feel extremely confident that that operating margin at 12% can go all the way to the 18%. Because basically, for us, every incremental dollar of revenue, about 35%, 40% will go down to the operating margin, and this is the strength and power of what we'll see in the future at VPG.
Fair enough. Can you talk about pricing trends across your businesses, not only in recent periods, but how do you think about them on long-term pricing?
Yeah, so I would say, John, even with pricing, pricing's never really been an issue. I mean, we've never. We've always had positive ASP increases, maybe ranging from 1% to 2%. So for us, you know, that's always a part of the business. I think more. It's more critical for the delivery, the performance, you know, the warranty, the excellent operational that we show. But we continue to have price increases, and we should even have that in the future as well.
Okay. Question on R&D. What is the R&D rate needed for investments into the new markets that you're looking at? And how should we think about a normalized R&D level once you are beyond that investment phase?
Yeah, John, so for a good question about the R&D run rate, obviously, a lot of the R&D run rate, the R&D is being spent on the business development and the funnels and the opportunities, and like the slide that Ziv showed, whether it's a humanoid or it's the, you know, whether the missile systems or ceramics or aluminum. We have been spending R&D, you know, even this year, knowing that some of those orders should come through in the fourth quarter to turn to revenues in 2025 . I would say, you know, going forward, our R&D spending is probably in the range of 5% to 5.5% of revenues going forward.
I do want to point out that the vast majority of our sales really are products that are customized for our customers, and that, you know, actually leads to a very favorable position. In many cases, we're sole source. So a lot of the R&D work is around coming up with new versions of our products that really fit what that customer needs. In some cases, we actually get, you know, non-recurring engineering revenue as part of that development, but I do want to point that out.
Got it. That dovetails nicely into the next question. Ziv, how much of your sensor business is mainly OE, and how much is aftermarket, and will that shift in time?
Yeah, so most of what we do is OEM driven. We're designed in, again, in many cases, sole sourced. And that's been an area, if you go back, you know, over the last five years, the OEM revenue has actually grown faster than the direct or distributor revenue, across the channels.
A couple questions here on capital deployment. Getting capital back to shareholders, potentially buying back stocks. What's the general position of the firm?
Yeah, so John, with that, you know, we've been, you know, we've been doing all. I mean, we've been buying back stock, we've been, you know, growing or, or investing organically within all three reporting segments, but then also just as important, extremely aggressive on the M&A opportunities. And we've been invited to many more opportunities to bid and go through data rooms. And even though we have nothing to disclose as of today, we have been very aggressive. I mean, the goal will be to grow organically and inorganically, and those were the parameters that were set to meet our 3 to 5 -year targets. So we continue to deploy our capital allocation as best as possible for the long-term value of shareholders.
A question on your capacity. What kind of capacity level you're running at? What are the potential capacity expansion needs?
John, I think, yeah, so it's a good question on capacity expansion. I think over the last few years, you know, we've spent much money internally on the growth. You know, we've expanded our precision film resistor in Japan. We've added, you know, space in our India facility. So we definitely, within the Sensors and Weighing Solutions, have the ability to take on large, you know, volume opportunities with very little capital investment, because we have the capital in place already. And within Measurement Systems, they're all project-based, so for that, that's never been an issue at all from a capacity perspective.
Let's see. You've addressed some of this question about how much these products are customized, but, the other half of the question is: Who are your major competitors? Can you talk about the competitive landscape a bit?
Yeah, so the competition is fairly fragmented, as you expand across, you know, different diversity of end markets. So we'll see companies like Spectris, which is a U.K. company, in terms of our advanced sensors and strain gauges. We'll see a company like TT, Susumu, for precision resistors. The weighing solutions products, you know, we'll see Mettler-Toledo, which is also a customer, among others. So it's really a very fragmented market of, I would say, you know, either smaller single-product companies or larger companies, small units of larger companies.
A question on—
I see, one question here, just to make sure we cover it, is: Do customers need to replenish inventories? That's been a frequently asked question that we've been getting, you know. Or another way of asking that, are customers done in terms of destocking? And I'd say, you know, our view is, in general, we think that destocking process is done, but what we're seeing currently is just a general cautiousness on the part of customers, you know, as they look at the macro or sector economic trends.
All right, and we'll take this one last question. We'll sneak it in. What would you be looking for in terms of M&A, would deals need to be immediately accretive?
Yeah, so John, I would say our parameter has always been that for deals, that they be accretive within the first year of acquisition. So whether first quarter or two, maybe break even, but by the end of the first year, they should be accretive.
Okay, gentlemen, we are out of time. Bill, Ziv, thanks for taking all those questions. There certainly was a host of them. Any closing remarks, gentlemen?
Again, I really appreciate the opportunity to tell you about VPG, and look forward to continuing our discussion with you in the future.
Great. All right, everybody, have a great day. Thank you for joining.
Bye. Thank you very much. Appreciate it.