CPS Technologies Corp (CPSH) 2019 Q1 法說會逐字稿

Good afternoon.

My name is Heather, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the CPS Technologies First Quarter 2019 Conference Call.

(Operator Instructions) Thank you.

Now it's my pleasure to turn today's call over to our host, Mr. Ralph Norwood, Chief Financial Officer.

You may begin.

Thank you, operator, and good afternoon.

I'm joined today by Grant Bennett, our President and CEO; and Tom Breen, our Senior Vice President for Sales and Marketing.

Before we begin the business portion of the call, I would like to point out to all of you that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in CPS' operations and environment.

These uncertainties include economic conditions, market demands and competitive factors.

Such factors could cause actual results to differ materially from those in any forward-looking statement.

Now I will turn the call over to Grant to offer his perspectives on the first quarter's results.

Thank you, Ralph, and welcome, everyone.

Ralph indicated that joining the call today are Tom Breen, our Senior Vice President of Sales and Marketing and myself.

Also with us today as an observer is Chuck Griffith.

As previously announced, Chuck will become our Chief Financial Officer on May 6, this coming Monday, succeeding Ralph Norwood, who is retiring.

I begin this afternoon by thanking Ralph for his tremendous contributions over the last 7 years and by welcoming Chuck.

Although Chuck officially takes the reins on May 6, there will be a period of overlap between Chuck and Ralph to ensure the transition is smooth and complete.

Now onto the first quarter's results.

Revenues in the first quarter of 2019 increased by 27% to $5.3 million compared with the same period a year ago.

However, sequentially, revenues decreased by 13% from the fourth quarter of 2018.

And although we don't publish our annual operating plan, revenues for the first quarter of 2019 came in below our plan.

The reasons revenues came in below our plan and below Q4 2018 is that demand from one of our largest customers was unexpectedly constrained by supply issues caused by other suppliers.

Our customer was not able to source enough other components in order to meet their production schedule.

Our customer has placed their customers on allocation and is aggressively addressing this constraint.

This demand shortfall in Q1 has not disappeared.

The demand shortfall is simply -- or the demand represented by the shortfall has been moved into future quarters.

Other than this constraint on demand from a large customer, demand from other customers, and in particular, hermetic package customers, was up and remains strong and growing.

We incurred an operating loss of $744,000 in the first quarter of 2019, slightly less but essentially the same as Q1 2018.

Our gross margins in Q1 2019 and Q1 2018 were also essentially the same.

There are several reasons why we didn't generate the more typical flow-through of margin on the additional $1 million in revenue.

One could call this constellation of reasons somewhat of a perfect storm.

But most importantly, most of these reasons are nonrecurring and most have been resolved.

The reasons include operating inefficiencies.

The yields and labor productivity were lower than expected primarily because of some technical challenges with some new product introductions and because of costs of hiring and training.

In addition, plant maintenance and repair was also higher than in Q4.

A second reason we didn't generate the more typical flow-through of margin on the additional revenues was product mix.

Margins do vary by product.

They vary somewhat by where products are in the product life cycle, and they vary by customer.

In Q1, the product mix shifted towards some newer products.

And as mentioned, there were some technical challenges with these new product introductions where we incurred higher material, labor and plating costs than will normally be the case as these products move into production.

But these products will generate revenue for many quarters.

Demand does remain strong, and in our product families, the underlying market is growing.

Shortages of components at our customers is an issue that will come and go, but our experience is it's a short-term constraint that is usually resolved in 1 to 2 quarters.

Our internal forecast for 2019 revenue remains the same even though the Q1 revenue came in below plan as explained.

Moving to a slightly higher elevation.

We continue to make excellent progress in the first quarter on 2 of our strategic thrusts: deeper penetration into the U.S. defense and space industries and increasing sales in Asia, particularly sales of baseplates in Japan.

I -- Both Tom and I recently returned just 2 weeks ago from Japan and China where we have entered into a program with a defined schedule for qualification and production volumes of baseplates at a key customer in Japan.

We also made some shipments, small volume but initial shipments on some critical new programs in the defense and space industries in Q1, programs that will over time generate meaningful revenue.

With that, let me turn it to Ralph for additional detail on the results.

Thank you, Grant.

I will quickly move to gross margin.

Grant did a great job of explaining that revenues are up 27%, but gross margin is flat for a variety of reasons which we believe are largely nonrecurring and have been addressed.

Moving from the gross margin line, I'll go to selling, general and administrative costs which were also flat against last year, although we did have increased spending in general marketing areas, offset by lower sales commissions.

So as a result, our net loss for the -- operating loss was $744,000.

And as you will note, when we lose money or make money these days, there's no tax provision, either a credit in the case of losses or a provision in the case of profits.

And that is due to the fact that we established a 100% valuation reserve for our $3 million-plus of tax credits.

As a -- in fact, there'll be no tax credits and no provisions this year, probably for the next several quarters, until we demonstrate that we have a profitable situation long term and that we will utilize those tax credits.

By the way, most of them expire in 2030.

So frankly, I'm quite confident we will use them.

Turning now to the balance sheet.

We ended the year -- or the quarter with just over $200,000 of cash offset by $200,000 of borrowing on our line of credit.

So the net cash was $31,000 which represents a substantial reduction from the over $600,000 of cash that existed at the beginning of the quarter.

The decrease was due to the loss from operations partially offset by a decrease in working capital.

Accounts receivable at the end of March totaled $3.2 million compared with $3.1 million at the beginning of the year.

And our day sales outstanding totaled 54 days for the quarter which is consistent with historical ranges and does not represent any change in aging or terms.

Inventory was also flat at $3.1 million against $3.2 million at the beginning of the quarter.

And the inventory turnover over the last 4 quarters is $5.9 million; that compares with $6.0 million for all of 2018.

You'll also note a new line item on our balance sheet called right-of-use lease asset.

This has arisen as a result of the new accounting pronouncement that all companies, public companies and even private companies that subscribe to GAAP, need to incorporate.

Essentially, the $276,000 as an asset represents the present value of lease payments with a life of greater than 1 year.

In that case, since this is the first time you've seen this, I'd like to make 2 points.

The first is the $276,000 of present value of future lease payments is offset in the -- by 100% by liabilities which are split between current and long term.

Second point and perhaps the most important is the new accounting pronouncement has no effect on the profit and loss statement.

Lease expenses haven't changed.

This is simply a balance sheet recognition of capitalizing future lease payments.

Finally, you'll also note that our plant, property and equipment was down slightly from year-end, reflecting the fact that we spent less in capital expenditures than depreciation in the quarter.

Turning to the liability side.

You'll see that we have drawn $200,000 down on our $1.5 million line of credit, and payables and accruals totaled $2.7 million which is flat with the same at year-end.

And you'll also see that the new lease liability, the current and long-term portions, equal to $276,000 on the asset side.

Finally, at the end of the quarter, our current ratio was over 2.1x, and our debt to equity was 0.6x.

At this point, operator, we'd like to turn the call over to you to take questions from the participants.

(Operator Instructions) Your first question comes from the line of [Michael Estheim], shareholder.

Could we get a little review?

I wasn't able to attend the annual meeting.

Could we get a review of what occurred there, any information that was disseminated at that time?

This is Ralph.

Let me say, we were unable to achieve a quorum.

We have extended the voting for 2 weeks.

Nonetheless, we had a small group, and we proceeded for an hour or so.

We -- Grant gave a presentation similar to the one that he had given in Florida in January, and then we took a number of questions and answers.

And there were no controversial issues as you know in the proxy.

And to date, we had 45% voted and all of the directors had somewhere north of 95% voted in favor as well as the compensation percentage.

So really not a lot happening, to tell the truth, but we will convene the final meeting on May 13.

At that time, we will have a quorum.

The electors -- the directors will be reelected, and we'll move forward.

And we'll put out a -- an 8-K filing at that time.

I wonder if I could ask for everyone's help on 1 item.

We believe some shareholders didn't get their proxy statement, and we're simply trying to trace down why that was the case.

So if you are a shareholder and didn't get the proxy statement and proxy ballot, if you would give us a call or shoot us an e-mail, we would appreciate it.

(Operator Instructions) Your next question comes from the line of [Lenny Don].

I have a great deal of faith in what you do and how it will work out.

But it was -- this was disappointing as I'm sure it was to you, but will we have a lot of this resolved in the current quarter?

The short answer is yes on every element of your question.

We -- the results are disappointing to us and the current -- many of the issues are resolved in the current quarter.

And again, we don't publish our annual plan, but we -- it's a very helpful guide internally.

And we came in below plan in Q1 due entirely to this one factor, and we see no reason to change our annual plan.

So I guess what I'm really saying is that we believe we'll see a recovery in this quarter and in the second half of the year.

Your next question comes from the line of [Michael Estheim], shareholder.

Okay.

Gentlemen, I have another question.

A number of years ago, we had a proxy contest.

And at that time, I thought we would see faster or more rapid product development and faster growth.

We had a number of contracts like Raytheon, let me get some -- Raytheon and some Navy prototypes.

We spent a lot of money on Japan patents which I think we won.

We had a possibility of getting some big orders out of China.

None of these things to my knowledge have transpired.

We've had -- we didn't make any acquisitions to advance the company into a status that would be accepted more by the marketplace.

They usually look for a $100 million as a minimum threshold.

We're trucking along, and maybe it's in the low 20s as far as the annual revenue and not profitable.

I mean I can't believe that we're not able to grow this company faster.

What is management doing to get to that point?

We certainly have had some frustrations and disappointments as you describe.

Nonetheless, the growth path -- let me use the word, the -- is an old-fashioned path of getting a purchase order and shipping on that purchase order.

And the key element of getting a purchase order is the design win.

And design wins come from the sales and marketing cycle.

And some programs are big, some are small.

And in the component business where programs begin and end, there'll always be some lumpiness.

But we see a clear path within the current 3 broad product families that we have for this company to grow and depending what time period you want to take, grow at an accelerating rate compared to what we've done historically.

The -- so we're moving forward and certainly some markets are slower to move than we would hope and armor is in that category.

And the growth is accelerating in some other segments.

So for example, the motor control module really is in a growth mode at the moment.

Your next question comes from the line of [Warren Silver].

When you gave the Noble Capital Markets speech, it was very well presented and everything.

But I believe that there's a severe credibility cap -- gap here because the guy went to the meeting after the next day, he's talking to the investment committee, and they're talking about the growth of the market, the electrical market is expanding with the automobiles and everything.

And then all of a sudden one analyst said, "But boss, for 26 years, 30 years, these guys are only doing $26 million." That's a credibility gap in my opinion.

And what are we doing about it?

We have assets on our books.

We have all of the [quick clear facility] injection molding process.

We have stacks of information concerning thermal conductivity and expansion of metals and everything.

And you mention that we're active in pyrotechnic graphic inserts, and you also say that our methodology could be used on other metals and everything.

Gentlemen, I appreciate your dedication, but we are definitely suffering a lack of capital here.

What is being done to increase our capital base?

I sent a letter -- I spoke to Ralph recently and I pointed out a $500 million -- [500 club company] in the billion-dollar class, and they have a big component of their business roughly $5 billion or $10 billion in electronics, automotive and advanced materials.

And they specifically said, that The Wall Street Journal called out in the last couple of months, that they want to get into the electric car business and -- where this company thinks that the investments could generate biggest returns.

And the company expects research expanding in these areas to increase four- or fivefold.

We're behind the eight ball here.

And everyone says that there's a tectonic crack movement here into the electronics, into heat control and what are we doing about it?

I'd like the answer to that question.

Tough question.

The question of capital, we certainly believe that there are opportunities which, as we seek to better understand the timing, there indeed may be the need and the opportunity to raise capital and race after those.

But let me be completely realistic here.

If you look at the actual growth of EVs compared to what everyone said they would be 5 years ago, they're still -- I don't have a number in front of me, but I think well less than 1% of car production.

And the -- we are working with the right players and participating in that market.

And now another trend that we're aggressively working with the right players in is the use of silicon carbide dye.

And yet again, that's a very small percent of the market.

So the question of when one invests -- at what level one invests in order to capture the market growth -- you get that right and you're very successful, you get it wrong and you may be out of business.

So let me just say that we -- our first priority is to be working with the right players on the right future products.

And as the timing associated with some of those becomes clearer, we clearly agree that we're going to need to generate some real capital, if some of those take off like they could take off.

Your next question comes from the line of [Michael Estheim], shareholder.

Gentlemen, I'm -- just a few more questions here.

Do we have an investment banker looking for some tuck-in acquisitions or some product line purchases that we can make to accelerate our growth?

And if not, why not?

We -- as you might suspect, we get probably a dozen calls -- maybe half a dozen calls each quarter from investment banks, and we tell them all kind of the same thing.

If we like some, we'll invite them to come and see us which many have done.

And we've indicated that, yes, anytime you see something that might be a good fit, let us know.

That doesn't happen a lot, but it's happened a couple of times in the -- within the last year.

So there's none -- I mean in many ways, they work for us part-time, but there's none that's suddenly going to spend 100% of the time with us without seeing a meaningful transaction where they can earn fees.

So we have quite a bit of interest.

And as Grant said, if we had the right fit and we felt that it clearly made sense to add value to the company and we needed financing, we do have a shelf registration, and we think we could move pretty quickly.

It's not our prime focus.

Our prime focus is organic growth.

But we're keeping an eye open in the other areas as well, Michael.

Your next question comes from the line of [Len Don].

This is [Lenny Don].

I hope that's who she meant.

Okay.

Yes.

I have a couple of things.

I am not really interested in seeing you guys expand the number of shares of this level.

I don't think it makes a great deal of sense.

And I'm all for you expanding sales, and I think you have a reasonable portfolio of patents.

And I'm not sure what it's going to take to get some of these deals, particularly in defense or in rail car done, but I would hope they start getting done now because I thought you done in the second half of last year already.

But am I being overly optimistic in what you feel you can do with your present portfolio?

We clearly see a path.

We're not going to give a -- we're not going to publish a time frame, but we clearly see a path to double the size of the company within the framework of the current product offerings that we have.

And the -- we're marching down that path to execute on it.

I think the -- what we do find is that it's very easy to underestimate, use the term sales cycle, but what we're really talking about is for a customer to really take advantage of the material properties of our composite, very, very rarely -- maybe only 3% or 4% or 5% of the time -- is a direct substitution for another material.

In almost every case, to take advantage of the properties and to -- allowing a reduction in the size or an improvement in the performance or an increase in the reliability, whatever it is we're going into, it's a new design of the whole system.

And so what we find, I look back and I look at the record, and we began operating -- for example, we've talked over the years with a program of continental automotive in hybrid vehicles and we began shipping prototypes 5 years before that part went into production.

And that's a little longer than typical, but I think the key point again is that it isn't a case of going out and making a sale today that will generate significant revenue tomorrow.

What is required is you make a sale today, and that is a design win as customers are working on putting together a new product.

And they may take a year to introduce it, and then it may take another year or 2 for those revenues to accelerate.

Now obviously, the more familiar a customer is with our material, the shorter that cycle can be.

But let me just say that I think if you looked at -- at every product that we're selling that generated -- let me pick a number, that generates more than $0.5 million in revenue, and you looked at when the design win occurred and when the revenue reached $0.5 million, I think you'd find it was 3 or 4 years.

So that's the nature of the advanced material component business.

The good news is that in general, once you're in, you're in for the life of that system.

And in many cases, you're in for the life of the succeeding systems.

But said another way, the growth that you'll see the rest of this year comes from design wins that occurred 2 and 3 years ago, or it comes from increased demand of products that are already in production.

Your next question comes from the line of [Warren Silver].

Grant, in response to my previous question, you said that the company doesn't want to take a risk because it could blow up the whole company.

Every business has a risk.

On the [all apparent storage], we took a risk on the other business that we had with -- to harness that [premium] age group, that the balls for the oil business and everything, and it didn't work out.

Now you mentioned at the Noble Capital this spring that you thought at the very end when someone asked you about the armor business, you thought that it had the potential to be bigger than our electronics business.

And yet, that business is only being funded by the profit from our electronics business.

As Ralph pointed out, it was combined the R&D expense that we're spending on the armor.

And I really believe that a company has to take chances.

And that there's venture capital money involved here, and I think we should raise it because the opportunity exists now.

The electronics revolution is here with the automobiles.

And when you spoke about that the electronics are operating at higher speeds and smaller sales -- smaller size, the thermal expansion, the conductivity, everything is coming to a head here, and I'm afraid that someone is going to pass us by.

Do you have a response to that?

Well, I very much appreciate your insight and your view.

And let me just say we're listening very carefully.

And both as a sales and marketing team, as a management team and as a Board of Directors, we certainly are not only looking at, but again, pursuing a number of new areas.

And I simply comment that the -- you -- we need to identify the opportunity and identify what we need to do to achieve it, and then we need to fund that.

And that's the path that we're looking to do.

And in some areas, that path indeed may involve being much more aggressive at one level or another.

But again, I just encourage you to look at some of the markets that you're talking about and recognize the -- what's really happening in those markets.

To be real candid, for example, the effort the military is spending on next-generation armor is going down.

That doesn't mean that the market isn't very, very significant.

It simply means that we need to be very focused in what the programs that we're targeting if we want to get on those vehicles.

And -- so I hear what you're -- I hear -- I hear what you're saying, and I don't disagree.

The devil is in identifying exactly where one is spending their time and effort and focus on.

And let me just say that we're taking the collective expertise and insights of the whole team, and we welcome any insights from those outside.

Your next question comes from the line of [Michael Estheim], shareholder.

I want to thank Ralph for his great service to the company.

I have to admit I find he's direct, his points are always on, and he takes the calls and answers the question very well.

So I want to say thank you, Ralph.

I assume this is your last conference call.

I hope you train your successor to be of the same quality that you have performed for your shareholders.

Also, another point I'm making is we are losing market interest in the company because we're not growing.

I hear -- I don't hear one broker on the call, I don't hear of anybody looking to buy the stock or be interested in visiting the company or expanding -- presenting ideas to how we can grow faster.

I think management should be aware of that, and it's a major risk in my opinion that you're going to fall by the wayside.

I know that you get the proxies because I would assume almost half the votes are in 2 hands.

But I think for the long-term benefit of the company, there has to be a better plan.

It's not being the balls to grow the company, to see this company in a much faster growth rate and be profitable.

This is not being addressed in my opinion.

It seems like in many quarters, we have the same discussion.

It's going to be in the future or it's in the plan.

And we have to wake up the sales team, the engineering team and then the market will follow because of the results.

Thank you.

Thank you, Michael.

Your next question comes from the line of [Lenny Don].

A couple of things.

I echo the previous caller in thanking the retiree CFO and feeling he's always been very honest.

So we appreciate that.

But betting the farm, which the other caller wants you to do, on something that is not in your area of expertise or your primary area of expertise, would be folly.

You have to stick with what you know best.

And I believe that you have the potential to double sales as you've been stating, but you have to -- and I guess, maybe we -- it takes a more aggressive sales force, or maybe it's just been bad luck, but that has to improve.

And the other thing is if you want the share price to rise, you have to introduce new people to the shares and the NOBLE, not the NOBEL, NOBLE Conference was a start, but you need more of those.

And [in the end], I think you should do 3 or 4 a year minimum and get your name out there so we have some visibility.

And we own a lot of shares, but we need people besides us to buy the shares and you need more people involved.

And I don't think it would be that difficult to do 3 or 4 conferences a year.

And you have a good story to tell, and particularly now this next quarter should look pretty good because we'll pick up what we lost in this quarter.

But anyhow, that's my three-cents worth.

Thank you, [Lenny].

As we've said before, we did look at a significant conference in this quarter, but that didn't work out for a variety of travel reasons, frankly.

We're now looking at Sidoti on September 26 in New York, as probably the next one.

And then, very possibly one in the fourth quarter as well.

Your next question comes from the line of [Warren Silver].

Grant, last time you also mentioned at that Noble Capital that the other business was expanding.

And I thought these high-rise buildings all over the world, a hundred of these buildings, has anything been done on that?

I mean the major companies there are Thyssen, Schneider Electric, Kone in Helsinki and Otis in America, and it seems like we should have a read there because this is a high temperature thing up to 2000 or 3000.

Are there any sales being made in this area?

Is anyone being contacted?

So the -- where we fit into that market again is in the power module or the motor control module, the electronics that stand between the -- coming into the building and the electric motor that runs the elevator.

So we don't have any say on who Thyssen or Otis buys those modules from, but they are buying modules from our customers.

And so when we talk about the power module market growing, that's one of the applications.

Very similar with wind turbines that -- that's why the wind turbine market is growing and again, we don't -- we're 1 level removed from influencing the architect or the designer of a building or even for that matter, the manufacturer of the elevator.

But we're a component in the motor control modules that are used in those applications.

And again, we really do believe -- let me be a little bit stronger, we're 100% certain, based on our own knowledge and our interaction with customers and our ongoing review of various market research sources that the -- that what's referred to as the power module market, is going to be growing for a number of years, and we certainly are going to capture that growth.

There are no further questions from the phones.

Operator, would you poll the participants one more time just to be sure everyone's had an opportunity to speak?

(Operator Instructions) And your next question comes from the line of [Greg Weaver].

Just reading your press release here.

You comment about stronger second half compared to first half.

That implies to me that Q2 is -- the current quarter is looking pretty flat versus Q1?

No.

Q2 will be better than Q1.

To be a little bit more specific, this issue of our primary customer being supply-constrained, we're -- frankly, we're getting updates every single week from that customer.

But that issue isn't yet fully resolved, but is -- they're making good progress.

But in short, Q2 will definitely be better than Q1, and the second half will be better than the first half.

And there are no more questions from the phones.

Thank you very much.

And let me thank you not only for joining the call, but thank you for your insights, your challenges, your encouragement and your wisdom.

And I'm very anxious to indicate that we are listening and that please keep those -- your -- we do work for you and your input is greatly appreciated.

We are very bullish as we look forward.

We're very bullish in the short term.

We're very bullish in the intermediate term, and we're very bullish in the long term.

And we indicate there will be quarter-to-quarter volatility, but we are projecting meaningful significant growth this calendar year compared to last year.

And we believe in spite of some challenges here in Q1 that we're on that path.

Let me -- as we always do, if any of you are in the Boston area, we invite you to come and we'd love to take you on a tour, show you some of the products that we're making and give you a first-hand understanding of what we do.

With that, let me thank you again and sign off.

Goodbye.

This concludes today's conference call.

You may now disconnect.