Good morning. Welcome to the 27th Annual Needham & Company Growth Conference. We're going to kick off today's schedule with a presentation from Vishay Precision Group. So Vishay manufactures precision measurement and sensing products. My name is Jim Ricchiuti, Senior Analyst in the Equity Research Department at Needham & Company. We're pleased to have from the company's management, the CFO, Bill Clancy, and Senior Director of Investor Relations, Steve Cantor. Steve.
Thank you, Jim. Good morning, everyone. It's great to be back at Needham. It's an important conference for us, and it's a great opportunity to tell you about VPG and why we're excited about what's ahead. Before I do, though, I just want to remind you of our Safe Harbor statement. So our core, VPG, is a sensor company. And I don't need to tell you that sensors are everywhere. They're in our cars, our homes, our offices, our factories, and they continue to proliferate. In fact, I saw one research report that estimates that the global sensor market will double in the next 10 years. So clearly, there's a lot more room to grow, and it's a great space to be in. What we do in that large market is to play in a corner of it where precision, reliability, accuracy really matter.
It's really about making our customers' products safer, smarter, and more productive. The way you can think about that is in terms of what's called the data value stream. That's simply the process in which data is acquired: real-world data like pressure, force, weight, temperature. These are all things that our products measure. For critical applications where that precision and high performance is needed, if you don't get that first step right, then everything downstream doesn't work. Particularly when you think about applications where safety is involved, certainly you don't want to have any degradation in the accuracy of that information. We've been doing this for a while. We went public in 2010, but many of our businesses actually were operating and serving customers long before that as predecessor companies.
And we've been serving the Fortune 1000 customers really around the world, a whole wide array of end markets. In fact, as I'm showing here on this slide, we think we have perhaps the broadest array of end markets for a sensor company, certainly our size. And you can see them on the right-hand side. It's a blend of both technology-driven and industrial-focused businesses and markets, beginning with test and measurement, where we play in a whole variety of different test instruments, as well as semiconductor equipment, both front-end and back-end. We also are in the transportation market in making products that measure and track overloading of heavy-use vehicles like mining equipment, forestry vehicles, waste management, as well as in the testing of new automobile models. We are in the avionics, military, and space market.
We also have a play in the steel market, really in two ways: one where our products are used to increase the productivity in the hot strip part of the steelmaking process, where they're rolling the steel into sheets, as well as in the development of new metal alloys. We serve and have been serving a number of industrial markets. A lot of these are related to manufacturing for things like pharmaceuticals and chemicals, as well as food and beverage, and then in that other category, that includes things like construction equipment, medical equipment, precision ag equipment, as well as consumer, which is a new area for us and one that has been very successful for the company.
We operate in three segments: sensors, weighing solutions, and measurement systems, and the way I think about these is sensors are components, weighing solutions are modules, and measurement systems are application-specific systems. Essentially, they're doing one specific thing for one set of applications. The blend of these three, we think, gives us a balance of both growth and profitability. Each of these has their own market strategies, R&D strategies, manufacturing strategies. And they also have different growth and profit profiles, beginning with sensors, which we think can grow in the mid- to high single digits long term and deliver gross margins of 40% plus. Weighing solutions, which serves many of our industrial markets, we expect it will grow a bit slower, more like GDP plus, but with margins now approaching that of sensors.
And that actually is a great story for VPG in that if you looked at that business just a few years ago, that gross margin was almost half of what it is now. And we've been able to improve that through a number of manufacturing efficiency initiatives, and those we have been applying now to other parts of the business. In the measurement systems segment, we think that grows in the mid-single digits, but it has the highest gross margin for our company, gross margins of 50% plus. So it's a nice blend of both growth and profitability. We have yet to report our fiscal 2024 results, but fiscal 2023 was our second best year in the company's history, and that followed our best year in 2022. Thus, through the first three months, first three quarters of 2024, it has been a bit of a challenging year for VPG and certainly, given where we thought the year would be, it's certainly been slower than that.
And that's been impacted by continued slowdown in the industrial parts of the economy, particularly in Europe, as well as some of our cyclical markets, the ones I mentioned just a moment ago, such as semiconductor and steel, have come off the bottom of the cycle, but certainly haven't recovered the way we thought they would at the beginning of the year. But really, what's important here is on the right-hand side of the slide, and that's our three- to five-year targets. We are working to grow this business in the low teens. That's a combination of both organic and inorganic, about half of half each. And if we do that, we think that we can deliver these financial results that I'm showing here in terms of gross margin, operating margin, and EBITDA margin.
One of the reasons why we are confident that we can get there, that this is within reach, is the fact that we were able to achieve a record-level gross margin in the Q1 of this year on revenue levels that were significantly below the peak levels that we had in 2022 and 2023. That is, again, an outcome of the manufacturing focus and initiatives that we have implemented across the company. How do we get to that growth? It's really around a strategic shift in our focus. We've been serving niche markets now for many decades, even before we were public. We've been seeing some trends that are actually creating new opportunities for us, some external trends. Our focus now has shifted beyond those niches to really go after, in a much more aggressive way, larger markets that are faster growing.
Really, it's this slide, which I think reflects the setup that we have ahead of us. We have these external drivers that I'll talk a little bit more about in a moment. On one side, and then the other side, we have those things that we've been doing inside the company to really expand our capabilities to really capture those opportunities. It's really this convergence that we now see happening. Let me talk a little bit about the external trends. I have showing four here on this slide: electrification, digital transformation, industrial automation, and defense and space technology. I'll talk a little bit about each of these. Beginning with electrification. For VPG, it's more than EVs.
Even though we do have a play in electric vehicles, we're involved in the safety testing of new electric vehicle models, as well as in the production and quality control of battery production for those vehicles. But it's actually beyond that. We're now addressing some emerging technologies, such as electric aircraft, which are now called Evtols. These are systems or aircraft that will be totally powered by electric power. And the idea is that these will serve as air taxis that will maybe take you from Manhattan to wherever you need to go. It's still unclear when we'll see these things flying around, but for VPG, we're already generating revenue from the safety and performance testing of these systems, upwards of a few million dollars. So there's a lot of good things going on with electrification that we're involved with. Industrial automation, this is a trend that is accelerating.
In part, we think because of the pain that the world experienced coming out of the pandemic in terms of supply chain constraints and labor shortages, I think that was a wake-up call for many management teams around the world. So it's really this acceleration of an existing trend. I'm showing two applications here on this slide. One is in robotics. So the robotics is a market that we've addressed now for some time, but we're now seeing that accelerate. In fact, I've seen some research that says that the global robotics market will grow in about 12% annually over the next several years. But the humanoid form factor robot, which is the opportunity that we're now addressing, will grow 50% over that period of time. So that's a really exciting place to be.
We've been working with a leading developer of a humanoid form factor robot now for the last year and a half. That company has stated publicly that they want to see thousands of these robots in their factories by the end of 2025. And, even though the design of that robot has not been fully finalized, we've already generated upwards of $1 million of prototype revenue, which is an indicator of the seriousness and the investment that is being put into these robots. We've now broadened our exposure to this new application with engagement with a second humanoid robot manufacturer. And there are others behind that. And we think that this could be an opportunity that generates over time $10s of millions for VPG. So it's very exciting for us.
On the other side, precision agricultural equipment has been an area where we've seen increased automation. I know John Deere, which is one of our leading customers, was featuring at the CES show this month. They were featuring increased technology that's going to enable greater autonomy of these combines and tractors. And so we have a play in that, and that should be an exciting market long term. Right now, it's in a bit of a slowdown as a result of the decline in crop prices, which is a big driver of demand for new equipment, but we think that comes back and will be a great market for us. Defense and space, it's not a market trend. It's more of a market need.
But given the conflicts in the world now, given the increased spending on the part of many countries on defense, we think that there is growth here. Currently, we have a number of plays in defense and space. We are on command and control systems for satellites. We're involved in the testing of various rocket equipment and programs like this reentry parachute system that I'm showing here. To the right of that are a series of, they look to be like mannequins. These are advanced testing mannequins that we developed with the U.S. Army so that they can develop better ways to defend and protect our soldiers in combat. Each one of these costs as much as $1.5 million apiece. So these are very sophisticated dummies, so to speak.
We're designed in on a variety of missile systems, including hypersonic systems, both being developed in Europe and in the US, and we're involved in the testing of various drones, both air, sea, and land. Digital transformation is more of a catch-all. I mean, we think of it as applying digital technologies in new ways. We have a product in consumer electronics platform. That's a new market for us, relatively new. If you looked at the company, say, five years ago, we did almost zero in consumer, and today, that's a sizable business, anywhere between 5% and 10% of the total revenue. I mentioned the test and measurement market, and the key component of that for us is semiconductor equipment. And so our product is on various semiconductor test sets, as well as front-end equipment, and then data centers and fiber optics. This is an interesting area.
It's smaller for us than the other two that I'm showing, but it's one that has a lot of potential where we're starting to get some traction. And let me just explain a little bit about the application so you understand, maybe it illustrates the point I'm making about how some of these trends are coming toward us and creating opportunities. So one of the features of our products, particularly our precision resistors, is that they perform the same way, delivering the same accuracy through all different types of environments and changes in that environment. So if you think about a data center, it's one of the most tightly controlled environments in terms of temperature and humidity. And any change, even a minute change, can affect the performance of the equipment.
So our approach, and we've had a number of recent design wins, is if you use our resistor, you can reduce the frequency of calibration of some of this equipment and also the replacement cycle. So it does have real economic value and helps these customers deliver the level of quality of service that they need to. So hopefully, I've given you a sense of some of the external drivers. I want to take a moment and talk to you about what we've been doing internally to enable us to capture a greater share of these opportunities. And that's really on the left. These are core competencies that we've been either investing in or expanding or really focusing on. So beginning with innovation.
One of the things that VPG does, perhaps as well as any company that you can think of, is to really adapt our technology for a specific customer application. That involves an engineer-to-engineer engagement, which is something that we have always prided ourselves on and now are expanding. We also are focused on adding additional businesses to our platform. We have a great balance sheet in which to do that, a proven track record for M&A. We just completed a small deal, which I'll talk about in a moment. We continue to look for additional opportunities. Then operational excellence. This is really something that is in the DNA of our company. The example I gave about how we've improved the margin at our weighing solutions segment really is the poster child of how we think about this.
It's not only about moving manufacturing and consolidating manufacturing. It's about adding additional automation, something that we ourselves are doing, as well as our customers. Then the strong sustainability policy or practice. We just released our first sustainability report in the fall, which we're very proud of. Then enabling business development capabilities. In fact, this is probably one of the highest priorities in terms of focus for the company. I'm showing here a list of just a partial list of some of the business development projects that we're working on. In many of these, we already have design wins. I talked a little bit about the humanoid robot, but we also have design wins with medical robots. We just closed a deal with a surgical robot company.
But there are a couple of ones I do want to highlight here on this slide, which are really greenfield opportunities for VPG. So these are things that applications which we do not currently address, which are adjacent, but which could provide meaningful incremental revenue long term. They're still early stage, but they have a lot, a lot of potential. So one is ceramics testing. We supply perhaps the most sophisticated tool that's used to test and develop new metal alloys. So we're now expanding that capability to test non-conductive material like ceramics. And the ceramics market is much bigger than the new metal alloy market. So that could be an enormous home run as we continue to work on that project. We're just finalizing our first prototype of that system, and we expect to have that out to a customer evaluation sometime this year, if all goes well.
The second one I want to mention or highlight is aluminum manufacturing. I talked a bit about our steel exposure, how we're involved with productivity systems for steel in the process in which that steel is rolled into sheets. We're now addressing the aluminum market, something that we haven't done before. We have a beta going on with aluminum manufacturers. So that could be also another key incremental opportunity for us. So I would say we probably have the fullest pipeline of opportunities that VPG has ever had in its history right now. We did acquire a small business back in the end of September. It's a German company called NOKRA. It uses lasers to precisely measure the thickness of the steel sheet as it's being manufactured. So this business dovetails really well with our existing product portfolio.
And also, we think that we can grow this business by virtue of leveraging our current sales infrastructure and customer relationships. In fact, our company brand, which is called KELK, is considered to be the best of breed in terms of the products that we sell in the market. So we're going to leverage that. So hopefully, I've given you a sense of some of the external drivers and how we plan to take advantage of those or capture those. This is an exciting time for VPG. And we think that we can, as we continue to execute this shift in strategic focus, we think that we can deliver some very attractive financial returns. We think the setup is in place. And so we're excited about what's ahead. And with that, I'll be happy Bill and I will be happy to take any questions.
Can you flip back to the slide that broke down the revenues of sensors? And I just had a couple of questions on that. But while you're doing that, on the consumer side, which I think you said it's about 5%-10% of total revenues, is that right?
Yes. Yeah, it's about right.
So what's the margin profile of that business, just given generally that's a tougher business?
Right. So for us, Jim, it's a good question. So where we have our consumer business, which is predominantly in our sensors, it is at a gross margin that is at least comparable to where we are on an overall basis, so around 40%. So it's not just your normal consumer. It has a little bit of a specialty to it that would generate that additional profitability.
On the humanoid robot opportunity, can you elaborate on the application, what the solution that you're bringing to that one customer? It sounds like you're working with the same.
Yeah, so our sensors are being used in essentially the joints of that robot in terms of being able to move and articulate those limbs, but very precisely. I don't know if you've seen videos of some of these prototype robots. They're amazing. I mean, they're just mind-blowing in terms of what they can do.
On the margin improvement that you demonstrated, I think this is why I was asking about this slide. Did more of the margin improvement come from the manufacturing efficiencies that you realized on the weighing solutions part of the business, or was it? The sensors business, I'm sure, has a pretty healthy margin profile. But maybe are you able to talk to the margin profile of each of these?
Right, so if we want to break it down by each of the reporting segments, so for sensors, it's a combination. I mean, overall, we continue to have product efficiencies, automation, operational excellence has always been a key factor at VPG, and we've continued to drive that in each of the three reporting segments. So yeah, so we're trying to be more automated, be more efficient, but also generate revenues because for sensors, it's also revenue volume-driven. So the more volume, this is when the gross margin will accelerate. For the weighing solutions, it's been more of we've had many operations around the world, and the majority of them now are being consolidated into India. If you recall, we built a brand new facility about 10 years ago, and this is when our margins were in the low teens.
But we've consolidated basically 90% of our manufacturing of load cells into India, been able to reduce, obviously, costs with more automation. And with other new technologies, we now have gross margins that are in the high 38%, slowly approaching 40%. So given there, I mean, we have the platform in place. As additional volume comes on, you'll begin to see those margins grow even further. And finally, with measurement systems, it's all highly specialized systems. We have gross margins that are in the mid-50% range. And even with the acquisition of NOKRA, although it was relatively small, with their volume, they had the same margin profile. So here for us, it's an opportunity as we grow, whether it's with steel. We talked about the WIM projects, NOKRA, untapped potential for the ceramics, for the aluminum and steel as well. For sure, we'll continue to maintain at least 55% gross margins.
Thank you.
Yep.
Questions?
When you speak of low teens growth model overall, should we now think of that as achievable all organic or as acquisition?
No, Bill, it's a good question. For us, I mean, our mid-teens growth is a combination of, say, 6% organic and then another 6% for M&A. So we do see an opportunity where our organic can grow much greater than GDP. And I think by listing all these growth engines, we just show I mean, we showed you six or seven of the top ones that have great potential. There are many more others in the funnel that are being worked on today that haven't reached that level yet. So organically, for sure, we can hit the 6-7%. And then M&A has always been another culture, DNA of VPG. We continue to look for M&A.
We've been extremely aggressive, but we're also very disciplined. We've been through a lot of opportunities where we've been down to the final few, but yet losing out to the companies buying it 15, 16 times, even though the multiple is just too much, so we've been disciplined, but also continue to be extremely aggressive in achieving those goals. Yes.
Can you talk to your exposure to the AI servers and sort of how you think about the product transition to Blackwell, for example? It's a very complex transition, right? So can you just talk to that and also sort of how you positioned it?
So in terms of that particular platform, we probably don't have a great deal of exposure. I mean, AI overall is going to be a driver of a number of these opportunities. I mean, one of the real interesting ones for us is in terms of automated maintenance, predictive maintenance. And if you think about where our products sit, whether it's in the manufacturing environment, whether it's in a piece of equipment like a construction equipment or precision ag, I mean, having that capability will drive another product cycle. So that's an important driver.
That's a huge product in DCS.
Yeah. Sure. Right.
Have you guys said what the revenues associated with the data center probably are today?
Yeah. I would say in terms of these newer opportunities, it's still pretty modest relative to the opportunities that we have, let's say, with humanoid robot. But I think the important thing is that this is really representing a new application or new way of applying our technology in a way that we haven't before that adds value. So for us, given AI, given the investment that we're now seeing in these data centers and all the ancillary equipment, I think having components that can deliver higher quality of service and reduce maintenance, we think has important value in that whole area.
And some of the demand challenges that you've experienced, which a lot of component companies have talked about over the past 12 months, is that at all related to product being accumulating at OEMs and in the distribution channels that has to be worked out? What specifically can you talk to where there's been pockets of softness and where are we in that process?
Yeah. Let me take that. Sure. Yeah. No, Jim. Yeah. I mean, I think what we saw was, I think like many other companies that are talking about it, in 2022, everybody overbought. Everybody overbought. Everybody needed the product desperately. Got to have it, got to have it. We made our deliveries, and we've been seeing through the last two years, especially when interest rates were much higher, that the carrying costs for them to hold a specific amount of inventory, they were more than willing to whittle it down to they met that reentry point. By now, I mean, I guess in the past, we would have had semi-annual orders already, but what we did see at the end of the Q3 , especially through distribution, as you mentioned, we're beginning to see the process where the inventory is now so low that the reorder is starting.
So I think we're starting to begin to see we're not back to where the demand was, but yet the reordering is starting to happen. We're beginning to see that. So I think that gives us, I think we feel confident that as we move into 2025, they may not order as much as they did in the past, but yet there'll be a continuing stream of orders to come through and then demand following behind that. Yeah. But just to add to what Bill was saying, I think even though we have seen some, I'd say, improvement in orders, if you look at our distribution channels, our distributors' partners are still very cautious.
I think that's the surprising thing to us as we think about 2024 because we would have thought that given where inventory levels were, that we would have seen a replenishment at least more aggressively than we have. So I think that as the economies sort of begin to grow, as we see maybe some improvement in Europe, that we would expect that cautiousness to kind of fade a little bit.
Obviously, a lot of talk about trade policies, tariffs. Are you guys affected? Are you monitoring that? Do you have any?
I mean, we're monitoring that, but obviously the biggest one, if it relates to China, I mean, we basically have 90% of our manufacturing in India. And we only manufacture in China for our local Chinese customers. So from that extent, I think we're well protected.
Did most of your customers benefit from tariffs last time? Are they mostly domestic?
Yeah. No, I'd say if you look at our footprint in terms of customers, it's really truly global. I'd say, so we're monitoring the potential impact of trade carefully, but I think in terms of our business, we're not anticipating any major impact. Well, yet to be seen. But for us, given our global footprint, where we manufacture, and the fact of the essential nature of our products, we don't think that that's necessarily a critical issue right now.