Sypris Solutions Inc (SYPR) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Sypris Solutions second-quarter conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr.

Jeffrey Gill.

Please go ahead, sir.

Thank you and good morning.

Brian Lutes, Tony Allen and I would like to welcome you to this call, the purpose of which is to review the trends reflected in the Company's financial results for the second quarter of 2009.

For those of you who have access to our PowerPoint presentation this morning, please advance to slide 2 now.

We always begin these calls with a note that some of what we might discuss here today may include projections and other forward-looking statements.

No assurance can be given that these projections and statements will be achieved, and actual results could differ materially from those projected as a result of several factors.

These factors are included in the Company's filings with the Securities and Exchange Commission.

In compliance with regulation G, you can access our website at Sypris.com to review the definitions of any non-GAAP financial measures that may be discussed during this call.

With these qualifications in mind we would now like to proceed with the business discussion.

Please advance to slide 3.

I'll lead you through the first half of our presentation this morning, starting with a brief overview of the quarter to be followed by an update of our strategic restructuring initiatives and some perspective on each of our three business segments.

Brian will then provide you with a more detailed review of our financial results for the period.

Now let's begin with the overview on the slide 4.

The results for the second quarter, when compared to the same period last year, continue to reflect the impact of the contraction in our Industrial Group, where revenue declined 46% on a year-over-year basis.

The real story unfolds, however, when we look at the sequential performance of the Company, where on a sequential basis, revenue increased slightly to $82 million for the quarter, up from $87 million or excuse me, $81.7 million in the first quarter of this year, driven by continued growth in our Electronics Group and the stabilization of our Industrial Group.

Gross profit increased 75% to $7.6 million while gross margin increased to 9.3% from 5.3% in the first quarter, reflecting important traction from our restructuring initiatives.

Our working capital turns increased to 13.2 times, up from 11.2 times in the first quarter and up from 5.4 times from one year ago.

Our free cash flow before restructuring expenses exceeded $6 million during the period, reflecting the growth in gross profit and the increased efficiency of our balance sheet.

Our Electronics Group continued to perform extremely well.

Revenue increased 9.5% versus the second quarter of 2008 while gross profit increased 51%, reflecting an increase in gross margin to 20.5% for the quarter, up from 14.8% for the second quarter of last year and up from 16% in the first quarter of this year.

And in what we believe to be an important measure of productivity, revenue per employee increased 27% to $245,000 per employee, up from $192,000 last year and up from $229,000 in the first quarter of this year.

Our Electronics Group reached 55% of total Company revenue in the period, up from 37% for last year.

Within the group, the Aerospace & Defense segment clearly performed well.

On slide 5, you will see that revenue increased 20% from the second quarter of last year, growing to $32.4 million during the period from $27 million during the prior year.

Gross profit increased 158%, driven by improved product mix and increased productivity.

Gross margin increased 18.7% versus 8.7% for the second quarter of last year and 10.8% for the first quarter of 2009.

Our Test & Measurement segment experienced some softening in its results during the period, but we still [affect] the full-year income to record a record over the period of the prior year.

Our Industrial Group results improved on a sequential basis.

Revenue remained flat at $37 million, which, given the trend that we've had over the past several quarters, was quite a victory.

While our loss at gross profit improved 40% to $1.6 million, reflecting the impact of our restructuring initiatives.

Inventory turns increased to 11.4 times, which is significant given the low volumes, and we would expect further improvement as the market returns.

In short, our restructuring benefits are taking hold and beginning to be reflected in the Company's financial results.

Clearly, the quarter reflected a period of demonstrated progress, but we all know that much work remains so that we can achieve some form of lasting success.

Now let's advance to slide 6 to review the status of our restructuring activities.

As many of you know, during 2008, we developed a series of initiatives to eliminate unnecessary waste, reduce fixed overhead, accelerate where possible integration and efficiencies and eliminate roadblocks to consolidation of savings; and included the consolidation of three facilities into existing Sypris locations, the use of lean tools to drive operating efficiencies; the cost reduction of certain high-volume products; and a focus on quality to reduce scrap and rework.

The expected outcome in terms of savings and reduced earnings volatility was significant, and the results are beginning to take hold.

The material increase in gross profit during the second quarter on stable volume certainly provides us with some confidence of the results to come.

On slide 7, we have updated the status chart to give you a better sense of our progress.

Starting at the top, during the quarter, we closed three small facilities that were located in California, Florida, and Texas, but result in savings approaching $1.5 million per year.

We completed the environmental remediation and closure activities in Canton, Ohio, and we completed much of the transfer work from our Marion, Ohio operation, which is now expected to be finished with production in early September.

We're on plan with our operational efficiencies and we have achieved our quality objectives a full two quarters ahead of schedule.

In fact, we now expect to have completed all of our activities by the end of the current quarter which will clearly be a wonderful achievement for our team.

The results are expected to be significant and lasting.

On slide 8, we list the many benefits that we believe will come from this activity, but I would like to emphasize one for you during this call.

And that has to do with the cost competitiveness of our business model.

Our overhead rates are down significantly, which is beginning to show in our gross margins.

But it's also being reflected in the competitiveness of our quoting activities for new business.

And our quality has improved significantly, further reducing our costs.

To give you an example, our trailing six-month PPM's for a major customer of our Industrial Group were just 39 for the period ended June 30.

And this is across four plants and over 1,000 part numbers.

So it is real, we expect it to be lasting, and thank goodness we are ahead of schedule.

Now let's take a brief look at each of our business segments.

On slide 9, you will see that market conditions for our Industrial Group certainly remain challenging.

These numbers are provided by ACT Research and the outlook for a steady or progressive improvement in 2010 appears to be the current forecast.

But here's our take on it.

First, 2009 will clearly reflect the lowest point seen in the tractor and trailer market in decades.

Two, everyone, that means customers, OEMs, outside analysts, are reticent to forecast the timing of the recovery.

And three, the recovery when it does occur is likely to be flatter and longer than previous cycles, and therefore, easier on industry participants, which would be an unexpected benefit.

From our press release this morning, we discussed the outlook for this market in our outlook for the coming quarters.

And basically, what we are planning on is no change in this market for at least the next four quarters.

If it comes sooner than that, it will be a blessing.

At the end of the day, any recovery in this market is directly correlated to the state of the US economy and therefore, as the economy goes, so will the truck market.

So the key question is how will we handle the situation until the recovery takes hold?

On slide 10, you will see that we will continue to manage our operations very, very closely.

We've talked about the plant closures.

We'll have a 40% reduction in our rooftops.

Inventory management, a big element for us.

Inventory is reduced 15% sequentially in this group and 37% from the end of 2008, but even more importantly, inventory turns have been increasing despite the lower volumes and higher mix, which, in our view, is a real sign of progress.

We expect productivity to continue to improve as our plant relocations are absorbed and that one-time work comes to a close.

When we look at the industry in a little broader sense, we believe that there will likely continue to be a consolidation in the supply base.

We are seeing an increasing level of quotation activity across the board in this side of our business, and we believe it's because customers are making the decision to relocate to some of the stronger providers.

During the period we were awarded new business with Daimler and with Dana, and we would expect to be able to announce more award wins as we go forward.

As we go through this process, however, our focus will continue to be on the long-term versus short-term opportunistic relationships.

And quite frankly, our management team continues to do a terrific job under these very challenging circumstances.

Please advance to slide 11 so we might spend a few moments on the Electronics Group.

We've been fortunate during this year and much of last year that market conditions for this group have remained positive.

We are seeing an increasing number of opportunities in this group.

As noted at the beginning of the call, the Electronics Group now represents 55% of consolidated revenue.

In the Aerospace & Defense segment, our quoting activity continued to increase for spacecraft, satellite and other high cost of failure applications.

On the product side of our house, we are pleased to report that we are receiving increasing recognition as a systems integrator for network security applications within the US Government.

We believe that our ability to bundle integrated solutions for global key management, secure communications, identity authentication and cyber warfare will prove to be both compelling and unique in the space.

And quite frankly, the excitement just continues to build for this business.

Please turn to the next slide.

Our continuous improvement activities have made a significant impact on the business in many respects.

But if you look at the measure of revenue per employee as a gauge of productivity, you will see that it is up 58% on a year-over-year basis to $350,000 per employee.

Over the past six to nine months, we've also kept you apprised of the progress we're making in the development of a new key load device for use within secure communication networks.

We've talked about this for some time, and I'm now pleased to report that the terms and conditions have been finalized with the US Government.

We are receiving a sole-source, five-year, $200 million IDIQ contract for this product.

We expect to have a formal announcement in the next 30 to 45 days, and certification is currently underway.

Shipments are expected to begin in early 2010.

We had hoped to reach this important milestone sooner, which would have enabled us to bring some product shipments into 2009 and, therefore, further support 2009.

That will not be the case, but we are still very, very pleased nonetheless.

In addition, it's also exciting to be able to talk about another new product that we are working on.

This is a product that will contain multi-level biometric solutions for secure communication networks.

Our current plan is to be able to introduce the prototype of this product to our customer in the fourth quarter, and if it is received as well as we think it will be, this will provide yet another important product platform for us going forward.

Please advance to slide 13.

In our Test & Measurement group, as I mentioned earlier, our revenue did soften for the quarter for the first time in several years, driven in part by a reduction in components testing services for commercial avionics and the summer shutdowns in the automotive industry.

We expect this pullback to be temporary with a gradual recovery taking place over the next couple of quarters.

In fact, many of the automotive plants are back in service already.

During the period, we received new contracts with Raytheon, Teradyne, Teledyne, Northrop Grumman and others, the revenue of which is expected to begin later this year and in early 2010.

Quoting activity for Test & Measurement remains quite strong.

It's up 30% on a year-over-year basis, especially for calibration and military aerospace components screening.

As mentioned before, the outlook remains positive, and we expect the income for this group to set another record during 2009.

In summary then, the momentum remains positive for the Electronics Group, and we expect further margin expansion as we go forward.

This concludes my portion of the presentation.

It's now my pleasure to turn the balance of it over to Brian.

Great.

Thank you, Jeff.

Good morning, everyone.

I would like to discuss with you briefly the highlights of our Q2 results, including the many efforts you heard Jeff talk about and their impact on our results.

Please advance to slide 14.

For the quarter, Sypris's consolidated revenues were $82.1 million, down 25.6% or $28.3 million from the prior-year period, as market conditions for commercial vehicles and trailers remain depressed.

The consolidated revenues by operating segment were as follows -- within our Industrial Group, segment revenues for Q2 were $36.9 million or down 46.5%, equivalent to $32.2 million from last year's Q2.

However, these Q2 results did reflect only a $557,000 or 2% drop from our Q1 results, and certainly marking the fourth sequential quarterly decline, albeit much less than the previous three quarters.

Our Electronics Group segment, comprised of Aerospace & Defense and our Test & Measurement segments, generated Q2 revenues of $45.2 million, up 9.5% or $3.9 million from last year's Q2, reflecting strong year-over-year growth.

At the segment level, revenue for the Aerospace & Defense increased $5.4 million or 20.1% to $32.4 million, reflecting strong year-over-year growth in our next-generation link encryption products and other data recording products.

Within the Test & Measurement, as Jeff mentioned, the segment revenue decreased slightly by $1.5 million or 10.7% to $12.7 million, and this was attributable to declines and frankly softness in our calibration services that serve general manufacturing and particularly avionics.

For the quarter, gross profit was $7.6 million, down $3.8 million or 33.5% from the prior-year period.

And this, again, was driven by the low volumes in our Sypris Industrial Group.

The gross profit performance by operating segment, let me talk about those briefly.

The Industrial Group profit -- gross profit decreased to a loss of $1.6 million compared to a profit of $5.3 million in Q2 of 2008.

At the Electronics segment, gross profit was $9.2 million, up 51% or $3.1 million.

Within this Electronics Group, A&D segment gross profit increased $3.7 million, primarily due to increased revenues.

And as a percentage of revenue, the current quarter increased 8.7% in the prior year to 18.7%.

Test & Measurement gross profit decreased $600,000, and, again, due to lower revenues.

And gross profit as a percentage of revenues decreased 1.6% to a still very favorable 24.9%.

As we have done every quarter since we've started our restructuring efforts, we have outlined for you our non-recurring expenses.

These are related to our restructuring program Jeff spoke about earlier.

They do include the closure of the Industrial Group's Canton and Marion, Ohio facilities and the consolidation of Sypris Electronics and Sypris Data Systems into a single business unit within our Aerospace & Defense.

For the second quarter, we recorded $1.7 million of non-recurring costs related to these initiatives.

Of this amount, $1.5 million was related to the Industrial Group's restructuring efforts with the balance comprised of serving A&D.

A detailed summary of all of these related expenses will be contained within note 5 of our consolidated financial statements included in our Form 10-Q filing today.

At this time, if you would advance please to slide 15.

Let me talk briefly about the Q2 results when viewed sequentially against a very difficult Q1 backdrop.

Despite a very small revenue increase from Q1 to Q2 of only $405,000, we realized significant improvement in gross profit, up $3.3 million, driven by our restructuring efforts.

Headcount reduction since the end of 2008 totaled nearly 300 people along with substantial reductions in factory space or rooftop, all contributing significantly to the reductions in our cost of goods sold.

Even more important is the significant improvement in our EBIT performance, where we have reduced the quarter-over-quarter loss by $5.5 million on essentially flat revenue growth.

Viewing our results in the context of EBITDAR on a sequential basis is very important.

Given the dramatic restructuring actions we have undertaken over the past year, not only to cope with the turmoil in our Sypris Industrial Group segment, but also within Aerospace and delivery, where John Walsh and the team have focused relentlessly on improving on-time delivery and cost performance.

As a result, if you would advance to slide 16, you will see that the cumulative impact of our efforts showed significant EBITDAR performance from Q4 through both Q1 and Q2 despite a 13% revenue decline, looking back from Q4.

As Jeff mentioned, we accelerated the Marion plant closures from the back end of Q4 into the mid Q3 and we believe that our actions to improve profitability have positioned us well.

And certainly as volumes recover, we feel that there will be even greater leverage.

At this time if you would advance to slide 17.

Again, over the past several calls with Jeff, as well as since I began, we've discussed with you both the restructuring efforts and the focus on Lean and Six Sigma throughout our three segments.

We continue our emphasis on strong cash management in every segment.

We conduct thorough bottoms-up discussions weekly on A/P, A/R, and inventory and as you see have the balance aligned between A/P and A/R in light of stable revenues.

We continue progress in the area of inventory reduction as Jeff mentioned.

We've reduced it another 15, almost 15% through close customer and supplier collaboration.

And this has become central and parcel to how we operate our production strategy, and we will provide tremendous leverage again as the recovery ensues.

The value of our marketable securities have increased significantly, especially most recently.

This, in combination with our cash balance at the end of the quarter, where we landed at approximately $10 million versus $5 million from Q1 provides us stability.

We are in compliance with all of our credit covenants, and we are underway with the activities to put in place a longer-term credit facility that we expect to complete before year end.

Let me conclude our presentation by asking you to advance to slide 18.

We've completed another quarter of very important achievements, and they weren't possible without the collaboration and efforts of our employees, our suppliers, our customers, as well as our lending group.

You don't need to think back very far to Q1 when we were amidst the worst economic turbulence, and pessimism was rampant.

Tough situations make you stronger.

We are stronger, and we are executing and believe our results reflect our execution, but we are not satisfied.

So when put into the context in Q2 of what we deliver, again, sequential results reflect a 75% increase in gross profit on very stable revenue despite the continuance of the very tough environment within trucking and heavy trucking.

The strategic restructuring initiatives are well ahead of plan.

A great amount of accolades go out to that entire team and the plant managers.

As Jeff mentioned, we expect to be completed this year with 75% and most likely more of the benefits to be realized as early as 2010.

And we believe we are well positioned for, again, when volumes recover.

The Electronics Group gross profit increased 51%.

Gross margins increased to 20.5% from 14.8% for the prior-year period.

Lastly, John Walsh, our President of the Aerospace & Defense segment, has dramatically revamped their business model, as I mentioned through Six Sigma and Lean and deepening their customer collaboration.

That businesses has generated dramatic improvement, not only in gross margins, but driven the revenue per employee up to $350,000 in the quarter per employee.

All the more important, they are underway finalizing the terms of the $200 million IDIQ contract with the US Government.

And this will provide us even, more importantly, continued momentum in future years.

With that, that concludes the business overview and financial segment.

And at this time, Jeff, Tony and I would be happy to answer any questions you might have.

(Operator Instructions).

Jim Ricchiuti, Needham & Company.

First question is on the electronics business.

This may be a bit premature, but I'm wondering if you can talk a little bit about potential delivery orders against this $200 million IDIQ in 2010.

Is there any sense as to how that might contribute?

Well, I can tell you, Jim, that we know that the government agencies are already [mippering] money against the IDIQ even though it's not in place yet.

So we have positive expectations for it.

In terms of the magnitude of the revenue lift in 2010, I don't have clear guidance for you at this point.

Okay.

Jeff, any -- should we be concerned at all about -- as you do ramp this, and we don't know what kind of ramp we will see, but just startup-related expenses associated with this?

I would not expect to see significant expenses associated with that.

Okay.

And maybe just stepping back a little bit and looking at the Aerospace & Defense business, you clearly are seeing nice growth in this business.

Looks like you have good visibility over the second half of this year.

But can you give us any flavor for how 2010 is shaping up, maybe putting aside this IDIQ?

I think it's a little early to give you some something that's meaningful, Jim.

As we look forward, we think that the prospects are clearly positive, but really as we sit here in August, it's still a little bit early for next year.

Okay, fair enough.

And just on the Industrial side of the business, so if we assume that there's not going to be much in the way of change in revenues over the next few quarters, is there any way that you can give us some sense as to where we might see gross margins in this business, given the improvements and the restructuring that you are going through?

Well, we are working very hard to get it to where it is a breakeven proposition.

We're not there yet.

When we get the Marion facility closed here later this quarter, we will have a better indication of how this flows through.

And with the new business that we are quoting and starting to win, we hope that that will provide us with some additional lift and cushion against these low volumes.

Okay, thank you.

(Operator Instructions).

We'll go back to Jim Ricchiuti for a follow-up.

Yes.

Just a question on the interest expense.

It was a little higher than I was expecting.

Anything going on in that line, Brian?

And how should we think about your interest expense levels going forward?

No, nothing going on in that line, and we would expect future costs to stay consistent at least throughout the year.

Okay.

Just looking at the Test & Measurement business, it seems like you think there's going to be some improvement.

Is that -- are you just seeing some uptick in customer activity?

You alluded to some areas, but I'm just wondering, is that more GDP sensitive, Jeff?

And do you get any kind of read on how things are progressing in the broader economy from that business?

Well, you know, so far, it seems to have been fairly resilient.

And so clearly it wasn't as resilient as we thought it was, but we have some contracts starting in Q4.

We are also resuming shipment of some product that was going through a changeover, and the resumption of those shipments will start in October.

So we believe that as we look at Q3, it will be somewhere close to where we were in Q2, and then we will start to see some lift, and then we think we will be back on track.

Okay, thanks very much.

It appears we have no further questions at this time.

I'd like to turn the call back to our speakers for any additional or closing remarks.

Thank you.

Brian, Tony and I would like to thank you for joining us on this call.

We welcome your continued interest and of course your question about our business.

Thank you and have a good day.

Once again, that does conclude today's call.

We do appreciate your participation.