Sypris Solutions Inc (SYPR) 2009 Q4 法說會逐字稿

Good day and welcome to the Sypris Solutions Incorporated conference call.

Today's call is being recorded.

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

Jeffrey Gill.

Please go ahead, sir.

Thank you, Donny, and good morning.

Brian Lutes, Tony Allen and I would like to welcome to you this call, the purpose of which is to review the trends reflected in the Company's financial results for the fourth quarter and full year 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 would 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'd now 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 an overview of the highlights for the quarter and year to be followed by a brief discussion of each of our two business segments.

Brian will then provide you with a more detailed review of our financial results for the quarter and full year 2009.

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 to $5.8 million or 8.8% of revenue continuing the important trend of improvements in quarterly profit on both a year over year and on a sequential basis.

Aerospace and Defense gross margins increased to 20.4%, up from 1% for the prior year period and up from 20% sequentially from the third quarter of 2009 on stable revenue.

Industrial gross margins increased as well, reflecting the impact of cost reductions and increased efficiencies rising to 1.4% during the quarter which was up 4.9 percentage points from the fourth quarter of last year and up 1.1 percentage points on a sequential basis.

As we mentioned during our last call the Company's capital structure was strengthened significantly in late October when we raised $60 million through the sale of the Test and Measurement Segment and the liquidation of marketable securities that had increased in value significantly during the course of the year.

We recognized a $31 million pretax gain as a result of these transactions and net debt was reduced to $4.6 million or 6.5% of total capital by year end.

As a result interest expense going forward is expected to be reduced by $4 million to $5 million annually.

The financial impact of these transactions was significant on the quarter and the year.

Turning to slide five the Company reported net income from continuing operations of $14.8 million or $0.73 per share which included the gain on the sale of the securities.

The Company also recognized a gain on the sale of the Test and Measurement segment of $7.8 million or $0.42 per share which was classified as discontinued operations.

Other items of note during the quarter, the Company received a five-year, $200 million IDIQ contract from the Department of Defense for a new product developed by Sypris for use in the global key management market.

We mentioned this during our last call and we will provide you an update on the status of this shortly.

The quarter also saw some improvement in the production of commercial vehicles, though the uptick is likely to be temporary reflecting a small prebuy ahead of the 2010 emissions mandate.

In summary, then for the quarter, our operations continued to report significant improvements on both a quarter over quarter and on a sequential basis while several important milestones were achieved in terms of strengthening the Company.

For a look at the full year, let's advance to slide six.

In many respects the year 2009 turned out to be even more challenging than we had originally expected with the rapid deterioration of the automotive, housing and credit markets having the significant impact on the economy and on Sypris.

We responded by accelerating initiatives at each of our operations to eliminate unnecessary waste, reduced fixed overhead, accelerate integration efficiencies and evaluate the future of any major program if it inhibited consolidation savings.

Our objectives were simple.

We wanted to significantly improve operating margins on a sustained basis and reduce the volatility of future earnings.

To achieve these outcomes we worked hard to implement a number of important initiatives.

We closed facilities in California, Florida, Ohio and Texas, relocating production to other Sypris facilities.

We reduced headcount by 23% on a year over year basis excluding the sale of the Test and Measurement segment.

We redesigned products resulting in $3.7 million of savings during the year and we modified our healthcare plans to provide more choice and individual incentives contributing to savings of 19% per employee versus 2008.

We worked closely with our workforce to improve safety which resulted in a significant decline in the cost of Workers' Compensation claims per hour worked.

Now we accelerated our investment in continuous improvement programs.

The initiatives listed here among the many, both large and small, that were implemented across the Company during 2009 by dedicated employees at all levels of the organization.

The early results are worth noting.

On slide seven you will see that EBITDAR increased by $9.2 million during the fourth quarter of 2009 compared to the prior year quarter.

Gross margins increased to 8.8% for the fourth quarter of 2009, up from 0.8% in the first quarter.

Net working capital declined by 43% or $11.7 million during the year, while working capital turns increased 32% to 17.4 times.

Our quality improved substantially as did our on time delivery.

In short, the Company's fixed costs were dramatically lowered while at the same time its operating performance and efficiency were dramatically improved.

When combined with results of a vastly improved capital structure Sypris not only survived the challenging economic conditions and events of 2009, but we exited the year a much stronger, healthier company, well prepared to support the profitable growth of our core businesses.

Now let's take a brief look at each of our business segments starting with the industrial group on slide eight.

The significant decline in shipments to commercial vehicle customers that started during 2008 continued during 2009 with revenue declining by $92 million or 38% on a year over year basis for this segment.

Our management team did a terrific job under these extremely challenging circumstances.

Despite the material decline in the top line, the operational performance of the business improved significantly during the year.

Inventory fell by 43% and inventory turns improved by 17% which, combined with other measures to drive a dramatic improvement in working capital turns.

Four-year metrics for quality and delivery achieved their highest ratings in the history of the business.

The performance by our team was all the more notable since these improvements occurred concurrently with the restructuring of the business, which included the closure of manufacturing facilities and the relocation of production programs to other Sypris plants.

The results of our restructuring efforts began to impact the financial results of the business almost immediately with gross margins increasing on a sequential basis throughout the year.

With the consolidation of operations now largely complete, the Company expects to benefit from a substantial reduction in facilities and overhead and a 20% reduction in the cost of labor.

The business continues to experience high levels of quoting activity as customers appear to be consolidating purchases with proven suppliers with strong balance sheets.

Recently we've entered into new contracts with Dana, Eaton and American Axle.

We also entered into a contract extension with Arvin Meritor.

As a result we remain optimistic about the potential for further markets share gains during 2010.

Looking to the future ACT's quarterly outlook for the production of trucks and trailers is reflected in the upper table on page eight.

As you can see from this table, ACT's forecasting the beginning of a nascent recovery starting in the second quarter with a 27% sequential increase in the production of trailers leading a 24% sequential increase in the production of trucks by roughly three months.

Our order boards for trailer components has seen some recent increases of this nature though we have no way of knowing if this recent increase in demand will be sustained.

Clearly it is too early to tell and we are not yet convinced that the economy will support the current forecasted recovery.

For the full year, as depicted in the lower table, ACT is forecasting a 20% increase in demand to be followed by further significant increases in both 2011 and 2012 as the economy and the industry recover from recessionary levels.

Only time will tell and we remain cautious in our outlook.

In the interim, we will continue to focus on continuous improvement initiatives and operational preparedness so that when the recovery starts to take hold we will benefit from the conversion.

Let's turn to slide ten and take a quick look at our Aerospace and Defense segment.

As many of you know, our Aerospace and Defense segment is focused on providing secured communications, global key management and cyber security solutions among other services and products for a variety of agencies of the US Government, its armed forces and our allies.

In the area of global key management we recently received certification for our new key load product for which we announced a $200 million, five-year IDIQ contract the last time we talked.

This product is designed to be used in the secured communications networks of our government and defense agencies and with the certification now in hand we are expecting shipments to be targeted to begin in the second quarter of 2010.

During 2009 our Sypris security group continued to provide critical certification and accreditation services to the Army and other Department of Defense customers.

As only one of 15 organizations in the country authorized to perform these services for the Army, Sypris certified the systems security controls for the Army Reserve Deployment System, the Global Broadcasting System, the Intelligent Munitions System, the Joint Land Attack Cruise Missile Defense Elevated Net Sensor System, the Joint Tactical Radio System, the War Fighter Information Network Tactical System and the Distributed Common Grounds System among others.

We also drifted our first prototype containing multilevel biometric solutions for certain secure communication networks during the fourth quarter.

Turning to slide 11, in order to further expand our services in this important area we entered into partnerships with Purdue University's Center for Education and Research and information assurance and security and Carnegie Mellon's Cy lab to focus on the development of trusted architecture for secure systems.

We also entered with California Institute of Technology to develop biometric solutions for identity authentication and management.

We established a Senior Advisory Board to assist with the acceleration of the development and implementation of solutions to our nations growing cyber and information security needs.

The Senior Advisory Board is comprised of distinguished leaders from the armed forces, government agencies and private sector organizations, each of whom was recruited because of the situation specific knowledge, senior level experience and ability to offer targeted insight necessary to address our nation's security issues.

Needless to say we expect this Board to play a meaningful role in the development of the business going forward.

We continued to make important progress in manufacturing services as well.

Advancing to slide 12.

During 2009 the production of electronic assemblies for use in the Apache helicopter, the F-16 Fighting Falcon, the Cobra Judy ship based radar missile detection suite and the Viper multiband infrared missile defense laser continue.

While 2009 is expected to benefit from the recent award of the F-35 Lightning Two Joint Strike Fighter program, the follow on award for the F-16, and increased demand for electronic assemblies for use in commercial and government satellite systems.

Quality and delivery continued to achieve outstanding levels of performance as evidenced by performance ratings of platinum at L-3.

gold at Boeing, silver at Northrop Grumman and purple at Raytheon, each at or among the highest ratings available.

The market outlook remains positive, quoting activity continues to be strong, especially in the areas of spacecraft, satellite and other high cost of failure applications.

And we have high expectations for continued progress in 2010 as new programs replace aging contracts and technology.

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

Great, thank you, Jeff.

Good morning.

I'd like to continue with discussing our fourth quarter and full year 2009 financial results and highlight some of the progress Jeff has talked about related to the restructuring initiatives that we discussed with you back in December of 2008.

As a reminder the results of Sypris' Test and Measurements segment which was divested on October 26 during our fourth quarter have been excluded from both current and historical results and reclassified as Discontinued Ops At this time please advance to slide 13.

For the quarter, consolidated revenues from continuing operations were $66.1 million, down 18%, or $14.6 million from the prior year period as market conditions for the commercial vehicles and trailers remained depressed as well as a reduction in sales of certain older programs within A&D.

Gross profit for the quarter was $5.8 million, up $7.1 million from the prior year period driven by the expansion of margins in both our industrial and aerospace and defense segments, once again resulting from the restructuring and the continuous improvement initiatives across those segments.

Earlier in the year we discussed the importance of measuring earnings before interest, taxes, depreciation, amortization and restructuring charges, or EBITDAR as a result of the restructuring costs we would incur.

For the quarter EBITDAR was $21 million, up $27.5 million from the prior year period driven by the liquidation of marketable securities during the quarter.

However, it's important to note that excluding the gain on the sale of the securities, EBITDAR was $2.8 million or up $9.2 million from the prior year period and this marked the fifth consecutive quarter of increasing EBITDAR, once again reflecting the impact of the cost reductions and increased efficiencies you heard Jeff talk about earlier.

At this time advance to slide 14.

Revenue for our industrial segment was $40.4 million in the fourth quarter compared to $47.3 million for the prior year period, again as a result of the decline in the commercial vehicle and trailer markets, but note it increased 8.8% on a sequential basis from the third quarter of 2009.

Gross profit for the quarter was $567,000, compared to a loss of $1.6 million for the same period in 2008, again driven by the restructuring savings and cost controls.

Equally impressive for the industrial segment was the improvement in EBITDAR for the fourth quarter.

On revenues that were $6.9 million lower or down 14.5% in the prior year period, EBITDAR improved $5.8 million to $1.9 million compared to a $3.9 million loss for the prior year period when the gain of the securities is excluded.

The operational teams deserve recognition in responding to the unprecedented economic turmoil and responding swiftly by executing the necessary plant closures and aggressive cost containment efforts with no impact whatsoever on our customers.

As you can note these actions have dramatically improved the financial results and position us with great momentum when market volumes rebound.

Continuing on, if you will, please advance to slide 15 and I'll briefly discuss aerospace and defense.

Revenue for our A&D segment was $25.7 million in the fourth quarter compared to $33.4 million in the prior year period, primarily as a result of a reduction in sales of certain older programs but was comparable on a sequential basis to the third quarter of 2009 performance.

Gross profit for the quarter increased $4.9 million to $5.2 million compared to $327,000 for the same period in 2008.

And while gross margins expanded to 20.4% from 1% for the prior year period, again as a result of improved mix and significantly lower operating cost.

Equally impressive, EBITDAR increased $6.5 million to $2.9 million compared to a loss of $3.6 million for the same period in 2008.

Our turn around efforts in Tampa are well under way and appear to be generating not only significantly improved financial performance but yielding tangible improvements in quality, cost, delivery and deepened customer satisfaction across their customer base, and we believe they are positioned for continued success.

Moving along if you would, advance to slide 16 and I'll talk consolidated results.

For the full year ended December 31, consolidated revenues from continuing operations were $265.9 million, down $90.2 million or 25% from the prior year, driven by the tough economy and its impact on our medium and heavy truck market customers.

Gross profit declined $3.6 million from the prior year period to $16 million or 18.4%.

However, gross margin grew 0.5% despite the 25% reduction in our overall revenue, highlighting once again the impact of the restructuring actions undertaken by our industrial segment and A&D's integration of its Sypris data system business unit as well as realized cost reductions driven by lean and Six Sigma.

On a consolidated basis, EBITDAR for the year was $452,000, or a $3.2 million decrease from the prior year, driven by the 25% year over year revenue decline.

Despite the revenue decline the overall impact was greatly minimized as a result of our actions and highlight the potential leverage that exists when volumes recover.

Moving along in covering industrial on slide 17, their net revenue declined $92.2 million, or 38%, to $152 million, again as a result of the depressed market conditions that battered heavy, medium and light trucks as well as volumes for trailer axles.

The gross profit decreased $14.5 million to a loss of $3.7 million as a result of this decrease in sales volume as well as lower revenue from contractual settlements and combined with higher utility rates.

However, the decreases in gross profit were partially offset by productivity improvements yielded from the restructuring activities as well as some favorable exchange rates experienced during the year.

Industrial groups EBITDAR for the year was a loss of $156,000 or $8.9 million lower than the prior year when the gain on the sale of marketable securities is excluded.

However, it's important to point out the increasing quarterly EBITDAR within this segment which again reflects the results of the restructuring and the cost containment initiatives started in late 2008 and dramatically accelerated during the first quarter of 2009.

Rounding out with our Aerospace and Defense segment on slide 18, net revenue in that segment increased $2 million to $113.9 million, primarily related to shipments of new electronic circuit card assemblies for the Bradley Combat System, partially offsetting this increase was a reduction in sales of legacy programs that included certain data recording and encryption products.

Gross profit increased $10.9 million to $19.7 million in 2009, reflecting a 9.4% improvement in gross margin driven by the redesign of a secure communication products, changes in product mix, as well as significant productivity improvement yielded throughout the year.

Finally, EBITDAR showed substantial year over year improvement in this segment coming in at $8.7 million or $15.5 million better than the prior year.

Once again, attributable to the dramatic productivity improvements and changes in product mix mentioned earlier.

Let me conclude with some key points before we take your questions.

On slide 19, as you review the prior year, we made dramatic improvement in our capital structure, net debt reduced down to 6.5% of total capital, more importantly we made very difficult decisions.

We responded to the deteriorating economy and we carried out the necessary steps to make meaningful lasting changes to our cost structure.

And as Jeff mentioned earlier, this is symbolic by the fact that we had to reduce our headcount by 23% on a year over year basis.

Improvement in sequential quarterly EBITDAR demonstrate the impact of our restructuring and cost actions and we believe positions us for even stronger performance when the economy rebounds and volumes recover especially within our industrial group markets.

Gross margin, it increased 8.8%, or increased 8.8% of revenue up from a negative 1.6% in the fourth quarter a year ago.

Our net working capital declined by 43% or $11.7 million during the year while working capital turns increased 32% to 17.4 times.

We improved excellence in quality and on time delivery across both segments.

And while significant progress was made during 2009, much work remains.

We are well-positioned to support profitable growth in our core businesses going forward.

In summary, the difficult environment brought on by the economic crisis that began in the late fourth quarter of 2008 and continued throughout 2009 has transformed Sypris and we are positioned to capitalize on the recovery.

This concludes our highlights of the fourth quarter and full year 2009 results and at this time Jeff, Tony and I would be happy to take any questions you might have.

Donny?

Thank you.

(Operator Instructions) We are go to our first question, Jim Ricchiuti with Needham and Company.

Hi, good morning.

Good morning, Jim.

A few questions on the defense and industrial business, first on the defense business, I was wondering if you might be able to provide any bookings or backlog .

Let us get that for you, Jim.

We don't have that, sorry.

I'm just curious, what I'm wondering is if in Q4 with some of the delays we saw in the defense budget being approved if there was, were orders a little slower to come in and have you seen a pick up perhaps thus far this year?

I would say, in answer to your question, that the rate of orders in recent months has been higher than they were at the end of the year.

Okay.

Can you say if, it sounds like you're expecting some production orders to be released against the IDIQ for [RasCal.] I'm wondering how you see that ramp over the course of the second half of the year.

It sounds like you're expecting some activity shipments in Q2.

Does that start off gradually and then pick up in the second half?

Yes, I would expect the shipments to begin in the latter half of Q2, and we would expect to see increased shipments as we move through the year.

And the margins in the business look to be at levels that I don't think we've seen before at least I don't recall, certainly in the near term, recent past, where do you see the margins in the defense business going from here.

Well, we hope that they will continue to creep but I think the safe thing to say is that we feel comfortable that we will continue to be in and about 20% plus on a go forward basis.

Okay.

And was wondering also your R&D level in the quarter was lower than expected.

And is there any contract R&D that may have benefited to some extent on your gross margin?

No.

Okay.

On the industrial business, it looks like ACT has dialed back where they were a few months ago in terms of their forecast for 2010, 2011, I'm just curious how does this latest forecast that they have, how does it compare with what you are hearing from some of your customers.

Are you speaking about 2010, Jim, or the out years?

Well, 2010, it looks like they've scaled back a little bit versus a few months ago.

I think I would characterize the range of forecasts for class eight any way to be in the range of the low end from our customers is 120, the high-end is 150.

Okay.

And.

Yes this is a tough one but I was just curious, you alluded to a little bit of a pick up and you characterized it, I guess,as temporary related to the prebuy.

Do you have any sense as to how temporary?

I mean, do you see this continuing over the next couple of quarters and then it's going to depend on the economy in the second half of the year?

I think the rhythm that's reflected in the tables that we presented for 2010 by ACT.

is reflective of the general rhythm that's the industry is expecting.

I think which says more specifically that Q1 is expected to be roughly on par with Q4 of last year.

And that Q2 is expected to be the low point and that the rate of ramp coming out of Q2 is going to be subject to the economy, to credit, fuel prices, et cetera.

And then just a thing , a note, Jim, is if you are looking for an early indicator, typically trailers in the industry are viewed as being a leading indicator and so if trailer volume remains-- at the outlook for trailer volume remains positive in Q2, then that would at least give you some indication that may be the back half of the year in tractors is going to be

Okay.

That's helpful.

Okay.

Thanks a lot.

Yes, thank you.

(Operator Instructions) And, we'll go again to Mr.

Ricchiuti.

Please go ahead.

I did have one other question, Jeff, Brian.

What is your CapEx in 2010.

CapEx in 2010 we expect that to go up slightly from 2009 in the range of $8 million or higher.

Just in terms of the debt levels going forward should we assume much change there?

I would think it's going to move around during the course of the year, Jim, but I think our forecast is for it not to change materially in either direction.

Terrific, thanks a lot.

guys.

Alright.

Thanks, Jim.

(Operator Instructions) At this time we have no further questions.

Oh, thank you, Donny.

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

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

Thank you and have a great day.

This does conclude today's call.

We thank you for your participation .