Sypris Solutions Inc (SYPR) 2010 Q1 法說會逐字稿

Good day everyone and welcome to the Sypris Solutions earnings call.

Today's call is being recorded.

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

Jeffrey Gill.

Please go ahead, sir.

Thank you, Operator, 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 result for the first quarter of 2010.

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

And in compliance with regulation G, you can access our website at www.sypris.

com to review the definitions of any non-GAAP financial measures that may be discussed during the 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, 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.

Now let's begin with an overview on slide four.

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

Gross profit increased to $6 million, or 9.6% of revenue, up from 0.8% for the prior year and up sequentially from 8.8% in Q4 of 2009.

Our Aerospace and Defense gross margins increased to 18.9%, up from 10.8% for the prior-year quarter, despite lower than expected revenue due to the delay in government program shipments.

Our Industrial gross margins increased to 5.6%, up from a loss of 7.2% for the prior-year quarter and up from 1.4% sequentially, reflecting the impact of fixed-cost reductions and increased efficiencies.

The Company entered into teaming arrangements with Booz Allen and Khaki to pursue new certification and accreditation opportunities for the systems security controls of our government and various international organizations.

The quarter saw some surprising incremental improvement in the demand for commercial vehicles and trailers, perhaps an early, but positive, sign of things to come.

Now, let's take a brief look at each of our business segments, advancing to slide five.

Revenue for our Industrial group increased 18% when compared to the first quarter of 2009, and increased 9% sequentially, climbing to $44 million during the quarter.

Of particular note was the 420 basis points sequential expansion of gross margins during the quarter on a 9% increase in revenue.

This was clearly a positive sign of the potential for this business, now that it's fixed-costs have been dramatically reduced.

As we look forward, we expect to benefit from continued margin expansion on incremental revenue, associated with recovery of commercial vehicle and trailer production.

Our team continues to manage the business effectively in preparation for the upturn.

For the quarter, inventory was reduced by 22% on a year-over-year basis, despite an 18% increase in revenue, and inventory turns continued to improve.

Important metrics for quality and delivery continued to achieve world class levels, with PPMs of 74 and on time delivery in the mid-90s for the quarter.

As we've mentioned before, the business continues to experience high levels of quoting activity for new business, as customers appear to be consolidating purchases with proven suppliers with strong balance sheets.

As a result, we believe that we'll have an excellent opportunity to extend our market share gains further during 2010.

Turning to slide six, on our last call, we noted that ACT was forecasting the beginning of a nacent 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.

The most recent ACT report for trailers shows a slight increase in volume for the year, rising to 111,000 units from 108,000 units in the prior report, basically reflecting the impact of a stronger Q1 than was originally expected.

Internally, we continue to see signs of improvements from customer order boards, but we remain cautious with regards to sustainability.

With regard to Class 8, the full-year outlook remains unchanged, but with some smoothing of the forecast taking place between Q2 and Q3, thereby all but eliminating the previously forecasted decline in production from Q1 to Q2, and shifting the increase from Q3 to Q4.

The multi-year outlook remains robust, with our organization focused on preparing for strong double-digit growth during the coming years.

We will see.

Turning to slide seven, let's take a moment to review our A&D business.

During the quarter, were asked to suspend shipments of a secure communications product due to an intermittent performance issue that had arisen under certain operating conditions.

Since that time, a proposed technical solution has been developed and undergone extensive testing to validate its effectiveness.

Absent any last minute surprises, we expect to be back in full production during Q3, much to the relief of the armed services.

During prior calls, we have discussed the award of the $200 million IDIQ contract for the RASKL electronic key fill device.

As you may recall, this product was developed internally and is expected to be adopted widely by the military services.

The unexpected good news is that we received certification for it's use by NATO countries as well, thereby opening up substantial new markets for development.

We are currently evaluating teaming opportunities for this purpose, which if successful, could result in additional sales in 2011 and beyond.

Turning to slide eight, we continue to make substantial progress in the area of cyber.

During the quarter, we were selected by both Booz Allen and Khaki to serve as a partner in each of their respective efforts to provide additional services to the government and certain international organizations.

Our role will be to assess the vulnerability of specific secure network systems and provide third-party certification of those systems prior to their being placed in service.

These teaming activities represent an important advancement for Sypris in the cyber arena.

If successful, our available market will be substantially increased from our traditional customer base.

In addition to the teaming arrangements with Booz Allen and Khaki, we were requested by the Navy's Office of Naval Research to develop and submit proposals for two specific technical areas for computer network defense.

Our teaming efforts with major universities are beginning to bear important results, with four patent applications underway to unique technological solutions for identity authentication and management in secure communications networks.

We have also kicked off discussions with Georgia Tech to further our efforts in the development of Trusted Architecture.

And finally, on slide nine, our quality and delivery continue to achieve outstanding levels of performance as evidenced by performance ratings of platinum L-3, gold at Boeing, silver at Northrop Grumman at 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.

We're receiving increasing recognitions as a system integrator for network security in the areas of global key management, secure communications, identity authentication, and of course, cyber warfare.

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

In summary then for the quarter, we continue to make important progress across all fronts.

Margin expansion, operating efficiency, technology introduction and meaningful conversion on incremental revenue remain our key focus.

The year is expected to be challenging, but we are sowing the seeds for a much stronger, successful 2011.

It's now my pleasure to introduce Brian Lutes to you, he will lead you through the balance of or presentation.

Great.

Thanks Jeff.

Good morning, everyone.

I'd like to discuss with you briefly the first quarter financial results as well as highlight some of the key areas of progress.

We'll start with slide ten.

On the consolidated revenues, we came in at $62.9 million, down 7%, or about $4.8 million, from the prior year quarter, as a result of the lower than expected revenue within A&D that you heard Jeff talk about earlier, but partially offset by increased volume in our Industrial group.

Gross profit for the quarter was $6 million, up $5.5 million from the prior year quarter, driven by the expansion of margins in both segments.

Gross margin came in at 9.6%, reflecting an 8.8% expansion over the prior-year quarter, highlighting again the impact that the restructuring and the lean in continuous improvement initiatives in our A&D division, as well as improved mix.

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 $2.5 million, or up $7 million from the prior-year quarter.

Again reflecting the benefits of the increased efficiencies.

Let me now discuss our individual segment results and ask you to advance to slide 11.

Our Industrial group revenues increased $6.6 million, or 17.6% to $44.1 million versus the prior-year quarter, as volumes for both heavy-duty commercial trucks and light trucks showed modest improvements.

Gross profit for the quarter was $2.5 million, compared to a loss of $2.7 million for the prior-year quarter, driven by the increased volumes, the restructurings, as well as various targeted cost reduction programs.

Our Industrial segment showed continued improvement in EBITDAR with Q1 coming in at $2.8 million, or a $5.5 million increase over the prior year.

Let me expand briefly on our Industrial group and ask you to advance to slide 12.

As discussed over many of the calls the last six quarters, meaningful and lasting changes have been implemented within our Industrial group, concurrent with the onset of the tough economic conditions.

As a result, it's important to look at the Industrial group sequential results to put into perspective just how these actions are impacting their operational results.

Revenues continued to strengthen, improving nearly $3.7 million, or just over 9% to $44.1 million from the fourth quarter period.

In addition, gross margins increased from 1.4% to 5.6%, driven in part by the slight volume increase, but equally by the benefits of a restructured, far more efficient supply chain.

And finally EBITDAR improved $948,000, or 50%, from the fourth quarter 2009 period, reaffirming the impact our team's efforts have had across its operations.

Touching on our Aerospace and Defense segment on slide 13, revenue in our A&D segment declined 37.8%, or just over $11 million, from the prior-year quarter, primarily related to the delay Jeff spoke about, as well as the completion of certain older programs and the reduction of data recording product sales that are being phased out.

Despite lower revenues, gross profit increased $304,000 from the prior-year quarter, primarily due to product mix and the results of the extensive lean and continuous improvement initiatives that have been underway the past 18 months.

The A&D segment also experienced increase sales on its higher margin space business during the quarter, which also helped offset the margin on lower sales.

Gross margin increased to 18.9%, as compared to 10.8% in the prior-year quarter, despite lower revenues.

Again, highlighting the greatly improved efficiencies across their supply chain.

And finally, EBITDAR continued to show substantial improvement, increasing $1.3 million from the same period in 2009 despite the decrease in revenue.

Let me conclude our call with a brief summary around our first quarter results and ask you to advance to slide 14.

On a consolidated basis, again the gross margins increased 9 -- to 9.6% of revenue, up 0.8% from the prior-year period, and up from 8.8% sequentially for the fourth quarter of 2009.

Again, driven by strong results in both segments.

The Industrial group gross margin increased to 5.6% of revenue, up from the loss of 7.2% for the prior year quarter, and up 420 basis points sequentially from 1.4% on a 9% revenue growth.

Despite the delay in program shipments, our Aerospace and Defense gross margin increased to 18.9% of revenue, again, this is up from just under 11% from the prior-year quarter.

Sequential improvement in our quarterly EBITDAR results demonstrate the impact of the reduction we've had on our fixed overhead, as well as the increased operating efficiencies on margins, and the result of which positions us for even stronger performance as volumes recover.

Finally, as Jeff mentioned, leading indicators increasingly support a case for cautious optimism regarding the eventual recovery of commercial vehicle and trailer production within our Industrial Group segment.

While our Aerospace and Defense activities, underway with Booz Allen and Khaki, hold very interesting potential for further expansion of our A&D certification and accreditation services.

So all in all, a very strong start to the year.

At this time, we'd like to turn the call over to the Operator to open it up for questions you might have.

(Operator Instructions).

And we'll go first to Jim Ricciuti, Needham & Company.

Hi, good morning.

I was wondering if you might elaborate on the issue that cropped up on the secure communications product and maybe just give us some sense as to when you'd expect the shipments to begin?

Which I guess you indicated beginning to get full production in Q3, would that be early Q3?

We hope so Jim.

yes.

In terms of he elaborating further on the issue, unfortunately we're really not in a position to do that.

This is a classified program, but I can tell you that we believe the technical solution has been identified.

We're hopefully just about finished with the extensive testing that has taken place to validate the solution, and everybody, the government, the armed services and ourselves, are looking forward to getting it back into production very, very quickly.

Okay.

And Jeff, when you say back into production, so there were some shipments early in the quarter and then this issue surfaced?

There were some shipments early in the quarter, but then as this issue surfaced, a lot of the shipments from the quarter were held back.

So there was some incremental shipments in the quarter earlier, but I wouldn't read a whole lot into that.

Okay.

And any sense as to the impact on margins from making whatever changes you might have had to make?

We don't believe that there will be any negative impact on margins once we go back into production.

Okay.

The change was a relatively minor change.

Okay.

And I wonder if you could talk a little bit about the opportunity for RASKL, you talked about certification by NATO countries.

Yes.

Have you been able to size the opportunity?

It's very interesting opportunity actually.

At the moment there is not a modern key fill device like RASKL being used by the NATO countries.

And so we're currently in talks with some of the bigger players over there about utilizing RASKL in those applications, and the initial response has been very positive and very enthusiastic.

And so if we are successful and RASKL is widely adopted by the NATO countries, the equivalent market opportunities would be close to that of what exists in the United States.

And maybe you can just remind us of that opportunity and how you see that rolling out over the second half?

I guess you expect those shipments to begin, right, second half?

No, no.

The shipments for -- we have the $200 million IDIQ.

Right.

Which is a five-year contract.

And so, as you're well aware, we don't know what the specific volumes will be, whether the whole IDIQ will be utilized, whether it will be front-loaded, whether it will be linear, so we just don't know at this point.

We're expecting shipments of this product to start in this quarter and then ramp up in Q3, and so we'll get a good idea of that.

But the fact that our government put in place a $200 million IDIQ, I think would be a good estimation, if you will, of kind of the relative size.

Okay.

I mean, as you look at the NATO opportunity, is it something that potentially you could see some revenues next year?

Yes.

Okay.

Yes.

Okay.

And then, this may be a tougher question to answer, but I'm just curious, I mean, you showed very nice margins in the Aerospace and Defense business.

What would those margins have looked like had you not had this issue crop up with the secure communications product.

Just over 21%.

Wow.

Okay.

And then if I could just -- quick question on the industrial business.

Sound like you're somewhat more optimistic about the outlook, sounds like you saw little better business in the quarter.

Do you get the sense that any of this is inventory rebuilding?

Is it real demand?

What's your sense -- and it sounds like your customers are telling you that things are improving.

My guess is that the answer to your question, Jim, is probably yes and yes.

That without knowing specifically, it makes sense that there's some inventory build going on because people are looking at the increase coming as being almost imminent and it's just a matter of timing.

At the same time, the general buzz seems to be that things are improving.

For example, our, our production rates are up in trailers and traditionally trailers serve as a leading indicator for tractors.

So what we don't know is if the increase in production rates is going to be sustained or if it's just a blip.

And so that's why we're remaining cautious, but the key thing for anyone in this industry at the moment, because we're operating at such low levels is really the preparedness for the, the coming recovery.

And so we're spending a great deal of time and energy on capacity evaluation, equipment readiness, sell readiness, training for employees and things of this nature so that we make sure that, as this thing starts and moves into a sustained level, that we're really able to convert on the incremental revenue.

Okay.

Terrific, thank you.

Okay.

Sure.

(Operator Instructions).

We have a follow-up from Jim Ricciuti from Needham & Company.

Yes, a question just with respect to the current quarter.

I mean is there any reason why, just given what you're seeing in terms of the demand in the industrial business and what you have in, in backlog playing out for the Aerospace and Defense business, any reason why your revenues wouldn't be up sequentially?

In Q2?

Yes.

I --

Jim, I think there's two components to that.

I think, one, we talked about on the industrial segment, in terms of to what extent it replenishment takes hold in Q1, and what will the revenue line be in our industrial business in Q2.

And the other challenge you heard us talk about in the A&D segment is the turn-back-on of the production in Q3.

But certainly the objective as we look forward, would hopefully be sequential revenue going forward, but I think we're still right here in the throes of Q2 with the unknowns of replenishment of the revenue profile in the industrial business as well as the turn-back-on electronics.

You had a -- I think you eluded to good sales of the space -- in the space business in Q1, is that something you see continuing in Q2?

Yes.

We do.

Yes.

Okay.

Terrific.

Thank you.

Okay.

Thanks, Jim.

And with that , we have no further questions in

Thank you, Operator, and Brian and Tony and I would like to thank you for joining us this morning.

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

Thank you and have a great day.

And that does conclude today's conference, ladies and gentlemen.

Again we appreciate everyone's participation today.