CPS Technologies Corp (CPSH) 2019 Q4 法說會逐字稿

Good afternoon.

My name is Catherine, and I will be your conference operator today.

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

(Operator Instructions) Mr. Griffith, you may begin your conference.

Thank you, Catherine, and good afternoon, everyone.

I'm joined today by Grant Bennett, our President and CEO.

And before we begin the business portion of the call, I'd 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 Ligation Reform Act of 1995 and should be considered as subject to 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 statements.

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

Thank you, Chuck, and thanks to each of you for joining us.

As indicated in our press release, revenues for the fourth quarter were $5.4 million, with an operating profit of $369,000.

This compares with revenues of $6.1 million and an operating profit of $209,000 for the same quarter a year ago.

For the 12 months ended December 28, 2019, our fiscal 2019 revenues were $21.5 million with an operating loss of $597,000.

This compares with the 12 -- the -- our fiscal 2018 revenues were $21.6 million with an operating loss of $901,000.

Looking at 2019 as a whole, our revenues were essentially flat compared to the previous year, but the operating loss narrowed.

Although revenues in the fourth quarter were down compared to the same period a year ago, very importantly, they were up significantly compared to the third quarter of 2019.

In the press release we issued in our third quarter -- with our third quarter results, we mentioned several achievements and developments and indicated that we expect that these would have a positive impact going forward.

We're beginning to see those benefits -- I should say, we began to saw -- to see some of those benefits in the fourth quarter results, and that we expect these benefits will increase in the next few quarters.

Let me highlight 4 items.

The first is contracts with our 3 largest customers.

In Q3 2019, we entered into contracts with our 3 largest customers.

And in each case, the contracts included higher prices and higher volumes.

Due simply to the time needed for scale up, the size of the existing backlog at the time the contracts were signed, the level of customer held inventory, et cetera, the improved pricing and increased volumes are being realized or come into effect over a 3-quarter period, beginning with the fourth quarter of 2019 and extending through the first 2 quarters of this year.

And this is what I mean when I refer to the benefits from these contracts will be -- we expect they'll be increasing in this quarter and the second quarter compared to the fourth quarter.

One of these contracts with our top 3 customers is a 1-year contract, and 2 of them are 2-year contracts.

The second item I want to mention and highlight is product mix improvements.

We are a custom manufacturer.

Over the course of the year, we ship tens and tens of different products to approximately 80 customers.

We are actively adjusting our product mix to focus on those products, where our material itself, aluminum, silicon carbide and/or the way we do business, our responsiveness, our technical support, our on-time delivery, generate significant value, focusing on those applications where the material properties or our responsiveness, support and delivery generate significant value, and we're adjusting our prices to capture more of that value.

In short, our margins are improving.

We're a declining business where the margins are below an acceptable level, and we're seeing meaningful improvement.

This is an ongoing process because the full value of what we bring may not be fully knowable initially.

And on the other side of the coin, with each new custom part, initial cost estimation may not be perfect, but we're actually getting better at both of these important skills.

But the product mix is being managed with the effect of improving margins.

Third item is ongoing success in penetrating the U.S. aerospace and defense electronics markets.

Our sales and marketing team is performing well in achieving new design wins and new bookings in the U.S. aerospace and defense electronics sectors.

Although the lead times are long in this area, we are seeing what I call a virtuous upward cycle.

As one engineering group after another in some of the large aerospace and defense OEMs becomes familiar with AlSiC as a material, the number of potential opportunities where it can be used is -- the number of opportunities where it could be used are being identified in greater numbers.

And just lastly, more purely on the financial side, our new line of credit of 2.5 -- with a cap of $2.5 million has allowed us to stop providing discounts for early payment of our invoices.

This has been particularly an issue in Europe and Asia, where payment terms tend to be much longer than the U.S. We have for a number of years been providing discounts for early payment.

But by financing that extended payment terms, so to speak, the added revenue resulting from discontinuing a discount flows right to the top line and the bottom line, offset partially by the increased interest expense.

But in total, very much a material benefit on both the top and bottom line.

We're -- let me simply say for our largest European customers, the -- we're now using that credit line for that purpose and beginning to realize the benefits from that.

Let me turn the time back to Chuck for a more thorough review of our financial performance.

Thank you, Grant.

Revenues for the quarter totaled $5.4 million.

This represents a 10% decrease versus the fourth quarter of last year.

This decrease was due to reduced sales of AlSiC products, in particular, the end-of-life for 2 parts, which had made up a significant part of our sales prior to 2019.

Gross margin for the quarter amounted to 18% of sales compared to 20% in the quarter last year, and the largest factor affecting this percentage was sales volume, reduced volumes or -- sales volumes are needed to cover fixed manufacturing costs.

And so the lower volumes result in increase or an increased percentage for manufacturing costs.

Selling, general and administrative costs totaled $614,000.

This was significantly less than last year's $991,000.

A reduction in sales commissions, both due to reduced sales volumes and reduced commission rates accounted for the bulk of that change.

In addition, we reduced our use of outside professionals, and we did eliminate a vice president position within the company, which also had a significant impact on the reduction of selling, general and administrative expenses.

The company experienced an operating profit for the quarter of $369,000, which compared to an operating profit in quarter 4 of 2018 of $209,000.

Turning to the balance sheet.

We ended the quarter with about $134,000 of cash and $1.25 million of borrowings against our line of credit.

This net cash of minus $1.12 million reflects the elimination of the prompt pay discount that we referred to with our largest customer.

This increased our outstanding accounts receivable, which were financed through the additional borrowing.

Accounts receivable at December 28, 2019, totaled $4.1 million compared with $3.1 million at December 29, 2018.

Our days sales outstanding totaled 68 days at the end of the quarter compared to 45 days at the end of the quarter a year ago.

Sales in Q4 2018 were front-loaded, which resulted in an abnormally low DSO at the end of 2018, while changes in our terms for largest customers increased DSO at the end of 2019.

Inventories totaled $3.1 million at December 28, 2019, compared to $3.2 million at the end of 2018.

Inventory turnover for the most recent 4 quarters was 6.2x compared to 6.0x for the 4 quarters ended December 29, 2018.

Finally, you'll note that our net property plant and equipment was down slightly from last year, which reflects the fact that we spent -- we had less spending for capital expenditures than we incurred in depreciation during the year.

Turning to the liability side, you'll see that the $1.25 million drawn on our new $2.5 million line of credit, you'll see payables and accruals totaled $2.3 million, down from $2.7 million at the end of 2018.

And finally, at the end of the quarter, our current ratio was 2.0, a very solid number.

I'd also like to mention and a sort of a non-financial thing, that this is my fourth time on this quarterly call.

And so far, we've had a -- we've had discouraging results coupled with a promising forecast in 1 quarter.

We then had encouraging results with a troublesome forecast in the next quarter.

We followed that up with another quarter of discouraging results with a promising forecast and this quarter, we've had encouraging results.

But we finally broken the cycle, and we've been talking about a very promising forecast going forward.

So I'm really happy that we can say that this is the case.

And with more on that, I'm going to turn the call back over to Grant, and he can continue.

Thank you, Chuck.

You get a sense for why it's enjoyable to work with Chuck.

Let me just preempt a question by commenting on the coronavirus, which other than the election is probably consuming more news time than any other topic.

And it seems to hang in the air, both literally and metaphorically.

To date, it has not affected our supply chain nor has it reduced demand from our customers.

We source very, very few items from China and those that we do source, we have an alternate source in the U.S. So we don't see any impact on our supply chain.

However, as we quiz our customers and to the extent possible our customers' customers, though there has been no impact on demand to date, there's certainly the possibility of a reduction in demand due to coronavirus in the future depending on the extent and duration of the epidemic.

As you're aware, our largest single end market is the so-called traction market or high-speed trains.

Although the coronavirus is wreaking havoc on air and train travel currently, so far, it has not affected the very long manufacturing cycle of train manufacturing.

And if it resolves -- if the epidemic resolves itself reasonably quickly, we don't think it will have any impact.

On the other hand, if it continues to linger, there would be some impact.

Internally, we're following CDC guidance regarding travel restrictions.

In particular, we're not going to Asia at the moment.

And we're taking the other actions that probably all of you are taking to protect yourself and your colleagues or employees.

At this point, could we turn to questions, Catherine?

Can we give you a minute to tally those?

And we'd love to entertain any questions you have.

(Operator Instructions) Our first question comes from the line of Lenny Dunn.

Hope you understand me okay.

Happen to come down with a cold.

So...

We can hear you clearly.

Okay, good.

I'm very pleased that you are running this as a business rather than just a scientific adventure and that you are now finally realizing that you could only run the business by just doing what's profitable.

So it does seems to be working very well, and I'm very pleased with that.

I've had some question marks on the last few calls about your salespeople.

Are you finally getting salespeople that bring in business because I noticed the drop-off in sales.

And I certainly understood that you're attributing some of that to the fact that you are no longer taking unprofitable work.

But does the pipeline look good is what I'm asking?

Excellent question.

And the answer to both, is our sales force booking new business and do we feel we have the right individuals in the sales force?

The answer is yes.

And as I've mentioned before, about 1.5 years ago, a very experienced, very capable salesman joined us, living in Orange County in the L.A. area with a particular mission and charge from us to focus in the aerospace and defense electronics, and he has done a wonderful job, and we're delighted to have him on board.

He's out there every day calling on these folks.

We've also just hired an additional technically very strong salesman.

Earlier in his career, who will be working out of our office here.

And in fact, he and Cheryl Olivera are calling on customers today in Long Island.

So -- and then in terms of new business, the answer is absolutely, absolutely.

We -- on the one hand, I almost hesitate to mention this figure because it can be a little hard to interpret.

But if we look back over 2019, we generated slightly more than 1 new product a week.

In other words, we tooled up, did the -- the order was booked earlier and we tooled up and made a new design at a rate of slightly more than 1 a week, more than 50 last year.

Now, in many cases, if it's a brand new customer, the design might go to -- go through 2 or 3 or 4 iterations before it goes into production.

So we're not implying that's going to translate into 50 new products that will generate recurring production, but many of those will and that's, frankly, an impressive pipeline from my point of view.

Okay.

I have 1 other question, which I just want reassurance on.

So please don't take it negatively.

But when you were giving people discount to pay more promptly, that made sense.

But in the current interest rate environment, it probably doesn't, but it does cause you to have to be very careful of the credit quality of the people that you're selling to.

So I assume that you have somebody that's capable of carefully vetting the standards there?

Well, not only that, but the major customers are large publicly traded companies from around the world.

So their information is available online.

But more importantly, we do have credit insurance on all of our foreign customers.

So worst-case scenario, if everything doesn't work out, then we do have the credit insurance company to fall back on.

So we do have that as well, and that provides us extra security.

And frankly, in terms of credit insurance, they can probably -- their underwriters do a lot better job than pretty much anybody else because that's their business.

And so the first thing that would worry me is if they came back to us and said, "Hey, we can't cover this guy anymore," then we'd have to take action.

But I think we're in pretty good shape on that front.

Okay.

I assume that, but wanted to go back where not to assume things.

That's why I asked.

Sure.

Absolutely.

(Operator Instructions) Our next question comes from [Mike Moussavi].

Good quarter.

I have a question for you regarding how we should kind of look at top line growth for next year.

You guys talked about your new products, which is great.

Your transition to higher-margin products and kind of getting away from those products that don't offer a lot of competitive advantage to your customers.

Combined with those product wins that you guys put out there at the end of January, I'm trying to get a feel for, how does -- those products are no longer selling or focusing on, does that offset all the kind of good stuff?

I mean, can we look -- can you expect any kind of top line growth, if all things being equal, corona and all that stuff, can you expect some top line growth this year versus your comp revenues for 2019?

This is Grant speaking.

Let me comment and then, Chuck, why don't you comment as well?

We say we don't give guidance, and we don't.

But occasionally, we do.

We give general direction, I guess.

And the short answer is, we -- yes, we see in 2020, from where we are today, we see both top line growth and bottom line growth.

And as Chuck alluded to, the decline in revenues between -- or comparing the fourth quarter of 2018 with the fourth quarter of 2019, a fairly large program came to end of life.

And so that does occur, of course.

But let me simply say, as we look at 2020 based on both increased volume and increased prices from our existing long-term customers and based on some of the new bookings, we believe that from a revenue point of view that will more than offset products that we declined to make because they're not profitable.

And so we see both top and bottom line growth.

Yes.

I don't really have much to add to that.

I think that's a very fair statement.

Yes.

We do expect some growth for sure.

Yes.

And again, both from existing customers and from new customers.

Okay.

And can I also ask you, where do you guys see the most traction as far as kind of breaking into new areas.

I know it's aerospace and the rail lines and all that.

Are you getting any other areas where this material is kind of being discovered as being more beneficial for your customers that could be a significant opportunity?

Anything out there that's kind of not what we would expect?

Well, let me comment on a couple of dimensions.

You alluded to 2 existing markets, again, what we call the traction market, which is our largest market.

And as we've talked about before, although the largest portion of the market is trains, these inverter modules that convert DC to AC are used increasingly in the electrical grid, for example, and they're also used in wind turbines.

And so we see growth in that market.

We absolutely see growth in the aerospace and defense market.

You drill down into that market more deeply, and it's a collection of different applications.

It isn't 1 single application.

But the underlying unifying threads there are high reliability, primarily coming from the properties of our material.

And then secondarily, the AlSiC is much lighter weight than other materials that potentially could offer similar properties.

But anyway, the aerospace area, we see growth.

In terms of new areas, the automotive electric vehicle area, we're shipping several products into specialty applications today.

And we are involved with the major module manufacturers.

And we're certainly known by and interacting with the automotive OEMs themselves.

And we've talked a lot about this.

In general, the automotive industry is extremely cost-sensitive and will drive to the lowest possible cost options that meets the requirements.

On the other hand, there is a high reliability, high-performance segment.

And we believe that we will be successful in that segment.

Maybe one way to think about that is, I bet if we took a poll of everyone on this call, 1 or 2 of you might drive a Tesla, 1 or 2 of you might drive a Chevy Bolt, but probably most of you are still driving cars with an internal combustion engine.

And to a certain extent, that's an accurate assessment of where we are.

And what I mean by that is, we're calling -- for that matter, we're calling on Tesla, we're calling on the companies that are doing the development for EVs.

And we're confident that we'll have success in some of those, but it's not generating significant revenue right now.

It is generating some revenue.

We're in some specialty trucks.

If you happen to be a Formula One driver, you probably use some of our parts in your cars, but we see opportunity in the HEV area.

Lastly, an area that we have not talked about for some time is the area of lightweight armor.

We've done a great deal of development work in this area.

And from our point of view, the technical development is done and we have continued to be involved in sales and marketing.

And what we propose -- what we offer is a pretty rattle departure from conventional solutions.

And we found that there are a number of barriers to entry.

But what we have done is, we've reduced the ongoing costs associated with maintaining that effort, focused our sales and marketing on what we believe will be the first opportunities, and we continue to believe that, that could be a very meaningful source of revenue long term.

And we can start up again very quickly.

Right.

And they're going to be -- look, to be real clear, we -- in our internal operating plan, we don't include revenue in this year from that product line.

But at the same time, we're tracking 2 specific opportunities, that at least 1 of them could occur this year.

Okay.

And then 1 last quick question.

On the telecom front, I know you guys have some telecom business.

I'm not sure how significant it is.

Is there anything on the 5G build-out that you're seeing any incremental business from?

Very good question, and the honest answer is, I don't know, and that's a little embarrassing to say, but the products that most likely are going -- could be going into 5G build-out would be our lids or heat spreaders for application-specific integrated circuits.

And I know where most of the end applications are, and they tend to be in high reliability computing applications, but some of them probably do go into the hardware that would be supporting the 5G build-out.

But I don't think the build-out in and of itself will be a significant source of revenue for us.

(Operator Instructions) Our next question comes from [Stephen Facey].

So I think if I remember this correctly, Bombardier recently announced the sale of their trains business?

There -- yes, Alstom in France is seeking to buy Bombardier.

And I know they attempted to do so a number of years ago and the European Antitrust Authority turned them down, but they've gone back, and I think it's likely to go through.

Okay.

And so then the question is, do you see that as positive, negative?

Or is it hard to tell?

Well, certainly not negative.

And we do know, we know something about our customers' customers.

And we know that Alstom is one of the major customers of our primary European customers.

And so to the extent that they expanded their business, that would be very positive.

On the other hand, we also know that our products end up in Bombardier's train sets as well.

So I don't think it will have an impact one way or another, but it certainly won't have a negative impact.

Okay.

And if I could ask 1 more quick question with caveat that I know you don't make forecast.

As Chuck alluded to in the beginning, results have sometimes been a bit lumpy.

And do you think there's any increase or decrease in that given your current product mix?

Excellent question.

And there always will be the potential for quarter-to-quarter volatility simply because programs start and stop.

And in some cases, they may be large long-running programs that stop.

In other cases, it may be a -- and we actually saw this last year, a defense aerospace program, where they may buy something in a given quarter and then not anything for 3 or 4 quarters, and then it comes back.

But nonetheless, having said that, as we diversify our customer base, and then let me see how I can articulate this.

But as we have deepened aggressively trying to really understand better the competitive environment and to quote Lenny, ensure we're running this as a business, I think we just have a little bit better ability to control the volatility on our major customers.

So in short, I think potential is where volatility is there.

But I think it will -- in revenue, it will decline and...

Volatility.

The volatility.

And on the -- so bottom line results, again, if you just do the math and if in the theoretical case of every single product was equally profitable, you, of course, would have the fixed cost impact.

But nonetheless, your bottom line would be a little more predictable.

And we believe that we're making progress towards that goal.

At this time, we have no further questions.

Okay.

We very much appreciate you joining the call.

A few of you have been to visit recently, and we thank you for doing that.

We extend the invitation to all of you to come see us in Norton, Massachusetts.

Let me just comment that we -- this is a wonderful time here internally.

We believe our fundamentals are stronger than they've ever been, actually.

And we're operating in growing markets.

We're identifying and gaining new design wins in new applications.

Internally, we've had some important hires in our manufacturing and engineering organization and are continuing to march down the path of continuous improvement.

So as Chuck indicated, we're excited at what we perceive to be a positive outlook.

And with that, we'll thank you and say good night.

Good night, everyone.

This concludes today's conference call.

You may now disconnect.