Sypris Solutions Inc (SYPR) 2009 Q3 法說會逐字稿

Good day and welcome to the Sypris Solutions Inc.

conference call.

Today's call is being recorded.

For opening remarks, I would turn the call over to the President and Chief Executive Officer, Mr.

Jeffrey Gill.

Please go ahead, sir.

Thank you, Matt, and good morning, everyone.

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 financial results for the third quarter of 2009.

For those of you who have access to our PowerPoint presentation this morning, please advance to slide two 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 included in the Company's filings with the Securities and Exchange Commission and 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 like to proceed with the business discussion.

Please advance to slide three.

I will lead you through the first half of our presentation this morning starting with a brief overview of the quarter to be followed by a review of two important events that occurred subsequent to quarter end and some perspective on each of our two 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 slide four.

We are pleased to report that the Company continued to make important progress during the quarter.

Gross profit increased 48% on a year-over-year basis and 17.5% sequentially with gross margins more than doubling to 8.3% of revenue.

The improvement was led by our Aerospace & Defense segment where gross margins increased to 20% during the quarter up from 11.5% for the same period last year and up from 18.7% sequentially.

The Company's focus on working capital continued to pay dividends with turns increasing to 14.5 times up from 5.3 times during the third quarter of 2008 and up from 13.2 times sequentially.

The continued expansion of margins and working capital productivity once again enabled the Company to generate free cash flow even after funding our restructuring activities.

Subsequent to quarter end we raised $60 million through the sale of the Test & Measurement segment and the liquidation of certain marketable securities.

We expect to recognize $31 million pre-tax gain as a result of these actions which will be reported in the fourth quarter.

The proceeds were used to repay $55 million of debt with maturities of the remaining facilities extended into 2012.

The net result served to reduce net debt to less than 10% of total capital.

The combined actions are expected to be accretive to earnings going forward with interest savings alone expected to approximate $4 million to $5 million per year.

In addition, we recently announced the receipt of a $200 million IDIQ contract with the Department of Defense for the production of a new [key load] device that was developed by Sypris and will be used in the government secure communications networks.

In summary, important accomplishments were made during the quarter reflecting the hard work and dedication of many.

We are not yet in a position to claim victory and clearly much work remains, but the ball continues to be advanced in a positive direction.

Please advance to slide five.

On October 26, we completed the sale of our Test & Measurement segment to Tektronix.

For years we had partnered with Tektronix providing calibration services for Tektronix and other OEM equipment.

The fit was apparent to all and, as a result, the benefits are expected to be substantial for all stakeholders.

From the standpoint of Sypris, the transaction enabled us to dramatically strengthen our balance sheet so that we can take advantage of future growth opportunities.

It will enable us to concentrate our resources and focus on two highly scalable platforms, our Aerospace & Defense and industrial segments.

From an employee and customer standpoint, our Test & Measurement segment will now be even more closely aligned with an excellent company and has the potential to serve as a strategic platform for the expansion of the services business should Tektronix choose to do so.

With regard to the sale of the marketable securities, we took advantage of the recent strength in the securities markets to take some gains off the table and increase operational liquidity.

In all, we divested approximately $21 million of marketable securities and report an $18.3 million pre-tax gain in the fourth quarter of this year.

These actions further strengthened our balance sheet which is now in great shape.

In summary then, the continued improvement of the Company's operating performance when combined with these two liquidity events subsequent to the quarter end positioned the Company to support future growth especially in the areas of global key management and cyber warfare which we will discuss further in a few minutes.

Turning to page six, let's take a quick look at our industrial segment.

When it's all said and done, the 2009 market will be remembered as one of the most challenging in memory.

At this time last year the full extent of the credit crisis and the contraction in the economy were not yet fully appreciated by most.

ACT as forecasting the production of 222,000 units for class 8, 168,000 units for class 5 through 7, and 134,000 units for trailers in 2009.

The actual results are likely to be 40% to 50% less than ACT had predicted, a degree of variation that would have been incomprehensible at the time.

To put knit perspective, the current outlook for trailer production was last seen in 1963.

Needless to say, the ACT forecast for the remainder of 2009 and for the full year 2010 contained some improvement but continues to be dynamic.

In the upper part of the table, you'll see that the outlook for 2009 appears to have strengthened somewhat from the time of the August report while 2010 has seen some change in mix with medium duty improving at the expense of heavy duty and trailers.

Longer term, most sources agree that we are in for a period of sustained growth but at what rate only time will tell.

Ultimate demand will be tied to the recovery of the economy, the availability of credit, the production of automobiles and the construction industry each an important driver of transportation.

Turning to slide seven, we will continue to focus on the operational aspects of reducing costs, improving efficiencies and driving waste out of the system.

Our team has clearly done a terrific job during very challenging times.

We have now completed the closure of two plants in Ohio which represented approximately 40% of our rooftops in this business.

Inventory during the third quarter was reduced to 11% sequentially and 44% from year end.

Inventory days fell to 29 days despite the lower volumes and higher mix, and our productivity is improving as plant relocations are absorbed by the host plant.

In other areas we were successful in recruiting Dana's Paul Larochelle to head this business for us.

Paul is a former vice president responsible for the structural products business at Dana and was also a member of Dana's executive committee.

We believe that Paul is off to a good start and will be a great fit with our team and certainly has the background to support the continued implementation of our strategic plan in this side of our business.

In short, we'll continue to focus on productivity and efficiencies as I've just said along with the implementation of lean tools throughout the system to further reduce our cost profile, increase our efficiency, and prepare for profitable growth.

On page eight you'll see that our Aerospace & Defense segment continues to make important progress as well where we recently announced the award of a $200 million IDIQ contract with the Department of Defense.

We touched on this contract briefly during our last call but only recently did we receive approval from the government to issue an official release.

This contract is important for a number of reasons other than its sheer size and the five-year term.

First, it was designed by Sypris so we own the intellectual property and, therefore, we'll have the opportunity to deploy both the product and the technology in other applications.

Second, we will be first to market which we hope will translate into valuable market share gains and, thirdly, if we are able to achieve early adoption by the user community, the demand for the product could increase further.

We'll just have to wait and see.

In the area of identity authentication, we have scheduled demonstration of our first biometrics solution for secured communication networks later in this quarter.

If all goes well, we hope that it will lead to further development and production opportunities with the Department of Defense.

In the area of cyber warfare our activities continue to increase.

As an illustration we recently fulfilled a contract to assess certainly vulnerabilities in the mobile computing platforms for the Department of Defense at a very high levels.

As a result of the work that we did for the DOD, we came up with a series of proposed counter measures and solutions to issues that our people found.

This is a rapidly growing segment in the macro sense and we believe that we are uniquely positioned to benefit from the growth of this market.

Overall, the outlook for this important segment of our business continues to be positive as we have discussed previously.

On slide nine our quoting activity remains brisk especially in the areas of space, satellite and similar applications.

Increasingly we are being recognized as a proven systems integrator for network security, the specific focus on global key management, secure communications, identity authentication and cyber warfare.

We continue to recruit proven talent to support these initiatives with recent additions from L3, Honeywell, Harris and other leaders in the industry.

And finally, our expectations are for continue progress in this segment during 2010 as new programs replace aging contracts and old technology.

It is now my pleasure to turn the balance of the presentation over to Brian Lutes.

Great.

Thanks, Jeff.

Good morning, everyone.

I'd like to discuss with you briefly the highlights of our third quarter financial results and take some time to touch upon some of the key highlights you heard Jeff talk to related to the restructuring program we announced during the fourth quarter of last year.

Please advance to slide 10.

For today's discussion, the results of Sypris Test & Measurement segment which was divested on October 26 have been excluded from both current and historical results in accordance with FAS 144 and reclassified as discontinued operations.

For the quarter, consolidated revenues were $62.7 million, down 27% from the prior year period as market conditions for commercial vehicles and trailers remain depressed.

Gross profit was $5.2 million, up 47.5% or $1.7 million from the prior year period driven in part by the expansion of margins in our Aerospace & Defense segment as well as the extensive restructuring actions undertaken by our Industrial Group.

Earlier in the year, we discussed the importance of measuring our EBITDAR performance as a result of the significant restructuring cost we would incur as well as legacy cost like depreciation.

For the quarter, EBITDAR was $1.4 million, up 200% or $2.7 million from the prior year period.

It also marked the second consecutive quarter for positive EBITDAR.

Please advance to slide 11.

Our Aerospace & Defense segment posted yet another strong quarter.

Revenues were $25.6 million, down 9.1% from the prior year period as it did realize completion of several mature lower margin products.

Despite the revenue decline, gross profit increased 58% on a comparable period basis reflecting expansion of gross margins of 20% of revenue compared to 11.5% for the prior year period.

EBITDAR has improved to $2.6 million from $805,000 loss during the prior year quarter.

It's important to highlight the progress made by John Walsh and his team utilizing six sigma and lean to drive improvements in quality, cost and delivery.

These tools will also enable A&D to deepen their existing customer relationship as well as to expand to new ones.

All of this positions this segment for a very exciting future.

Please advance to slide 12.

Our Industrial Group segment revenues for the quarter were $37.2 million, down 36% from the prior year period.

However, when viewed on a sequential basis, the third quarter was up slightly over the second quarter showing signs that we possibly reached the market bottom.

Gross profit of 104,000 was driven by lower revenues and pricing as compared to the prior year periods.

EBITDAR, an important measurement for the third quarter, was approximately $1.1 million, exceeding break-even despite the revenues for the quarter that are 60% of the quarterly volumes we were experiencing in the 2006 time frame of quarterly run rates at unprecedented highs.

This performance highlights the leverage potential for positive impact in our Industrial Group as volumes recover in the future.

Please advance to slide 13.

Improvements made by the Industrial Group showed important signs of stabilizing as we've discussed during this quarter, holding steady for the third consecutive quarter in the range of $36 million to $37 million while gross profit increased $1.7 million on a sequential basis from the second quarter of 2009.

EBITDAR for the quarter, as I mentioned earlier, was positive at $1.1 million for the first time since the second quarter of 2008, reflecting the increasingly positive impact of the restructuring actions completed earlier this year as well as the cost containment actions we put into effect.

As a result, we would expect margins to expand commensurate with increases in volume determinant of course on both market and industry recovery.

Please advance to slide 14.

When we take our consolidated results and look at our sequential performance since the fourth quarter of last year, it's apparent our efforts are yielding real benefits.

Within our Aerospace & Defense segment, restructuring efforts have improved operational performance against customers requirements as well have improved dramatically and are allowing us to deepen our partnership across both existing as well as developing platform opportunities.

As a result, the Aerospace & Defense team has increased gross margins to 20% from 11.5% in the prior year period.

Through the accelerated plant closures of both our Kenton and Marion plant facilities, we've been able to be cash flow neutral at these very low markets.

Finally, our sequentially EBITDAR performance on a consolidated basis shows considerable improvement even as revenues begin to stabilize and underscores the potential for improved financial results when we return to normal volume levels in our Industrial Group.

Please advance to slide 15.

While we've spent considerable time discussing the results generated by our industrial and Aerospace & Defense operating segments, it's also important to note subsequent to the quarter we completed a series of transactions that mark another important milestone for Sypris that allows us to strengthen our balance sheet and support future growth.

As a result of the Sypris Test & Measurement divestiture, we placed a strong business team that has long term profitable contracts and a scalable business platform with Tektronix, a wholly owned subsidiary of [Danaher] and yielded $39 million of cash proceeds.

The transaction will generate a $13 million pre-tax gain in Q4.

Strategically, this divestiture will enable us to support the exciting growth opportunities in our Aerospace & Defense segment, especially those related to secure communications, identity, authentication and other global key management opportunities.

Secondly, we liquidated our marketable securities to take advantage of the recent market appreciation resulting in approximately $21 million of proceeds that would generate an $18 million pre-tax gain in Q4.

Overall liquidity on a pro forma basis reflecting these transactions increases nearly 100% to over $25 million while the maturity dates for all the facilities were extended into 2012.

In addition, as you heard Jeff mention, our interest expense is expected to be reduced by an estimated $4 million to $5 million on an annual basis, positively impacting future cash flow.

These two great important milestones dramatically strengthen our balance sheet and provide us greater flexibility to respond to the growth opportunities we see as the economy starts its recovery.

Let me close our call today by summarizing our key accomplishments outlined on slide 15, and before I get to the results, let me talk about our sequential results.

With respect to the Q3 summary outlined on slide 16, our sequential results reflect nearly $6 million improvement EBITDAR since Q1 on stable revenue despite the continuance of a very tough environment within our Industrial Group.

Aerospace & Defense gross margins increased to 20%, up from 11.5% from the prior year quarter and up almost 19% sequentially.

Gross profit increased 48% on a comparable basis despite the 27% decline in revenue reflecting the impact of the extensive restructuring initiatives in the specific actions we put into place to address this very tough environment.

Our sequential results demonstrate the impact of our restructuring and cost actions and positions us for even a stronger level of performance as the economy rebounds and volumes recover.

We continue to generate positive free cash flow, resulting from the restructuring efforts and the specific cost containment actions undertaken.

And as Jeff highlighted, through the sale of our Sypris Test & Measurement and the liquidation of marketable securities we raised nearly $60 million used to repay $55 million of debt.

We extended the Company's credit facilities into 2012.

We expect interest expense to be reduced in the range of $4 million to $5 million annually and net debt now represents less than 10% of total capital.

These combined actions will be accretive to our fourth quarter earnings and we expect a $31 million pre-tax gain to be reported.

This concludes our third quarter investor call and at this time we would be happy to take any questions you might have.

Thank you, sir.

(Operator Instructions) Gentlemen, we have no questions.

I would turn the call back to you for any additional or closing comments.

Thank you, everyone, for joining us this morning.

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

So have a great day.

That does conclude the call.

Thank you for your participation.