Sypris Solutions Inc (SYPR) 2011 Q1 法說會逐字稿

Good day and welcome to the Sypris Solutions conference call.

Today's call is being recorded.

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

Jeffrey Gill.

Please go ahead, sir.

Thank you, Tricia, 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 Company's financial results for the first quarter of 2011.

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.

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'd now like to proceed with the business discussion.

Please advance to slide 3.

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 2 business segments.

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

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

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

Revenue increased 20.5% to $75.8 million during the period, up from $62.9 million in the first quarter of 2010 and up 12.8% sequentially from the fourth quarter of last year.

Gross profit rose 41.3% to $8.1 million, up from $5.8 million in the first quarter of last year, while gross margin expanded to 10.7%, up from just over 9% for the prior year quarter.

Profit conversion on incremental revenue growth for our Industrial Group exceeded 17% on a year over year basis and 27% sequentially.

The Company reported earnings of $0.10 per diluted share for the quarter, compared to a loss of $0.13 per share for the prior year period.

We announced a new long-term supply agreement to supply drive train components to Meritor in Brazil, and extended 2 existing supply agreements with Meritor in the US.

And subsequent to quarter end, the Company entered into a new long-term credit facility to lower its borrowing cost, increase its liquidity and extend loan maturities into 2016.

So in summary then, the quarter certainly represented another period of substantial progress across a wide range of fronts for the Company.

Now let's take a moment and dive into our 2 business segments, if you'll advance to slide 5, we'll start with the Aerospace & Defense segment.

Revenue declined slightly during the period from prior year levels, as a result of funding shortfalls associated with the delayed approval of the 2011 Defense Appropriations Bill and the restrictions that were imposed by the Continuing Resolution during the interim period of time.

With the recent approval and signing of the 2011 federal budget in April, we expect to see the eventual recovery of this market as funds are allocated through the various departments and agencies for program use.

Gross profit declined along with revenue, albeit at a reduced rate, due the increase in gross margin to 18.5%, up from 17.6% for the same period in 2010.

We continue to invest in R&D, albeit at a somewhat lower rate than we did in the fourth quarter of 2010, but we can expect the full year investment in research and development to be in the range of 5% to 6% of revenue.

As we discussed briefly during our last call, we announced a formation of Sypris Europe which is based in Copenhagen, Denmark, to serve the information assurance and cyber security markets in Europe, Asia and the Middle East.

More specifically, we expect Sypris Europe to play an integral role in the development and management of our new International Cyber Range.

We also expect it to be responsible for partnering activities to access foreign information assurance markets, and to identify leading edge technologies that can be utilized in the US market.

Please advance to slide 6.

We continue to make important progress on our contract with the Department of Energy to develop a centralized cryptographic key management system to protect the Smart Grid and our nation's critical infrastructure from cyber attacks.

We are moving forward with various government agencies and our strategic partner Cassidian to receive approval for the first high assurance voice over Internet protocol network encryption product to be marketed in the US.

We plan to announce the introduction of an interesting new product during the coming months, an application-based secure hand-held device that will integrate many commonly used data functions and mission tools into a single lightweight unit for use by the war fighter.

We remain on track to file at least 12 patent applications this year, which represents an important building block in our effort to develop a much deeper portfolio of products and intellectual property during the coming years.

Request for proposal activity continue to be quite active, with outstanding engineering service proposal currently exceeding 25 in number, a new record for the Company.

Now, let me pause here for a moment because I think it's worth elaborating on this last bullet point.

We believe that this is meaningful data for a couple of reasons.

To begin with, it is indicative of one of the many ways in which our team is working to utilize our intellectual assets across a number of new emerging markets.

Secondly, while these opportunities are typically small in nature and may not have a material impact on the Company's financial results for some time, they do facilitate partnering activities such as those with Purdue, Carnegie Mellon and Georgia Tech that would not otherwise exist but in themselves foster further learning and development.

And finally, our cyber lab and cyber collaboration center are now active.

We will be hosting a National Capture the Flag event in July using our cyber ranges to platform with teams participating from around the country.

Now let's take a moment and turn to slide 7 and we'll take a quick look at the Industrial Group.

Revenue increased 35% during the quarter when compared to the prior year period, and rose 24.7% sequentially from the fourth quarter of 2010, driven by the continued recovery of the commercial vehicle and trailer markets.

Gross profit increased 109% and 166% on a year over year and sequential basis respectively, reflecting the positive conversion on incremental sales growth and the greatly improved cost profile of the business.

Gross margin expanded to 8.6%, up from 5.6% in the first quarter of 2010 and up from 4% sequentially from the fourth quarter of 2010.

The team clearly continued to do an excellent job across the board, managing the accelerating increases in demand with key non-financial metrics also improving.

Inventory turns improved almost 18% and 23% on a year over year and sequential basis respectively, while important measures for quality, on-time delivery and productivity exceeded plan for the quarter.

I think it's worth pausing here as well for just a moment because as many of you know, our team has been preparing over the past 14 to 15 months for the return of the commercial vehicle and trailer markets from what was very severely depressed levels of 2009 and 2010.

Investments were made in people, training, systems, maintenance and repairs.

Extensive capacity analysis was performed which led to additional investments in equipment and automation.

The early returns are certainly positive, and also reflect the additional benefits resulting from significant reduction in cost profile that has been achieved over the past 2 years.

Having said this, however, we are now just entering the second inning of a game that very well could go into extra innings.

So we have much work to do before we can declare victory, but we are off to a very good start as these numbers indicate.

The team successfully resolved a long running contractual issue with a customer, entered into our first long-term supply agreement to provide Meritor with product for the growing Brazilian commercial vehicle market from our operations in Mexico, and completed a multi-year extension with Dana for steer axle components in North America.

Quoting activity for new business remains brisk and we certainly expect to be in a position to add additional contracts during the balance of this year.

Taking a quick look at the marketplace in specifics, let's turn to slide 8.

The commercial vehicle market appears to be benefiting from a positive convergence of economic and market forces that are having a significant impact on the current demand for new vehicles.

The most important of which is that GDP growth continues to drive an increase in freight tonnage.

Freight volumes in fact have now been on the increase for almost 18 months and as a result have increased the confidence of the freight companies that the tonnage will continue to grow on a go-forward basis.

In addition to GDP growth and the increasing confidence that is associated with that, active truck capacity is tight and getting tighter, as is the availability of drivers.

The average age of the fleet is old, while the new engines are proving to be more fuel efficient.

The availability of credit is increasing and the cost of money remains low.

And finally, truck tariffs are positive, helped by the tight capacity, increasing fleet profitability.

As a result of these items, the annualized order rate for Class 8 trucks has increased from 287,000 units in February to 345,000 units in March to 456,000 units in April, compared to actual truck production of 154,000 units for all of 2010.

Now, these order rates are not believed to be sustainable on a full-year basis and over the long term, new truck demand will align with freight growth and orders can be expected to follow lower but sustainable positive rates.

And finally on slide 9, ACT is forecasting robust demand for the next several years across all segments.

Though it should be noted that 2011 Class 8 volumes remain only slightly above historical replacement requirements of plus or minus 240,000 units.

Ultimately, demand in the near term will be governed by supply chain considerations including the availability of steel, tires and vendor capacity, among others.

Our focus will remain on execution.

People, systems and processes to manage demand, to make certain that we meet our customers' needs.

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

Great.

Thank you, Jeff, good morning, everyone.

I'd like to discuss with you the results of our first quarter and as well as highlight some of the areas of our progress and we'll do so by advancing to slide 10.

We'll start for the first quarter, consolidate revenue from continuing operations was $75.8 million, up $12.9 million, or 20.5% from the prior year period, as market conditions for commercial vehicles and trailers continued strengthening.

Gross profit for the quarter was $8.1 million, up $2.4 million, or 41.3% from the prior year period.

This was driven by the positive conversion on the increased industrial sales tied to both commercial vehicle and trailer markets, the impact of our vastly improved cost structure and increased productivity, all of this while the demand was accelerating throughout the quarter.

In addition, despite slightly lower revenue within our Aerospace & Defense segment, their gross profit remained rather strong.

For the quarter, EBITDA was $7.3 million, up $5.2 million from the prior year period, and was driven in part by the Industrial Group's conversion on the incremental sales we've talked about, as well as the resolution of a contractual customer issue.

Please advance to slide 11 and we'll briefly go through the A&D segment.

Revenue for the quarter was $16.3 million compared to $18.8 million in the prior year period, again, attributable to the shortfalls related to the delayed approval of the 2011 Defense Appropriations Bill you heard Jeff reference earlier.

Again, despite the slight revenue decline, gross profit showed strength coming in at 18.5% versus 17.6% for the prior year period.

Another interesting note to point out is that the closest similar revenue period, which was in Q2 of 2010 on similar revenues, gross margin was approximately 14% for the quarter, so again, attributable to the effort and the efforts that have been placed down in Tampa in reconfiguring their supply chain and driving a more profitable mix.

Overall EBITDA decreased to $576,000, or $1 million lower from the prior year period, again, as a result of the Continuing Resolution and its impact on planned orders in the quarter.

It's also important to note that our Q1 EBITDA for the quarter did include R&D spending in the amount of just under $500,000 over the prior year period as we continue to invest in some of the areas Jeff discussed earlier.

Moving to our Industrial Group on slide 12, the Q1 revenue came in at $59.6 million compared to $44.1 million, or an increase of 35% from the prior year period, and up $11.8 million sequentially from Q4 as the volumes in both commercial vehicle and the trailer markets continued to show the acceleration.

Gross profit for the quarter was $5.1 million compared to $2.5 million for the same period in 2010, again, driven by the strength of manufacturing conversion.

EBITDA performance for the quarter was $8.8 million, or $6.4 million higher from the prior year period, again, attributable to the strength in manufacturing on the incremental revenues and income of $3 million in connection with the settlement of the customer dispute.

Absent of this one-time gain, however, our performance still improved $3.4 million from the prior year period, and once again provides a basis for continuing earnings leverage as the market continues its recovery.

Our entire Industrial Group team remains focused on successfully managing the accelerating increases in demand and driving continuous improvement in key operational areas, such as inventory turns, quality and on-time delivery.

These efforts and our Q1 results provide us with continuing momentum for the recovery in both Class 5 through 8 truck and the trailer markets.

In conclusion, if you would advance to slide 13, let me summarize what came out to be a very, very strong quarter for Sypris.

Our sales increased 20.5%, while gross profit rose 41.3% from the prior year period.

Again, reflecting the strength in our supply chain as well as the incremental revenue, driven by the cost structure that's been dramatically optimized.

Our Industrial Group gross margin expanded to 8.6% of revenue, up from 5.6% for the prior year quarter on a 35% increase in revenue.

Our A&D gross margin again rose to 18.5%, up from 17.6%, and again, highlights the efforts that are beginning to prove out over the past several years.

We expect to see eventual recovery in the defense market, now that the 2011 budget authorization has been enacted, although the timing is unclear.

Order activity in the commercial vehicle market has picked up significantly and should support strong year over year double-digit growth for our Industrial Group for the foreseeable future.

Subsequent to the quarter end, we entered into a new long-term credit facility to lower our borrowing cost, increase liquidity, extend our loan maturities into 2016.

And finally, our teams remain focused on delivering improved operational and financial results and do remain focused as well on generating positive earnings in 2011.

This concludes the highlights of our first quarter, and at this time we'll open it up for questions by turning it back over to Tricia.

Thank you, gentlemen.

(Operator Instructions) Jim Ricchiuti with Needham & Company.

Hi, good morning.

Good morning, Jim.

Good morning, Jim.

Congratulations on the quarter.

Question with respect to the Industrial business, Jeff, you mentioned that the order rates probably are not sustainable at these levels.

Is what we're seeing just initially some-- the pent-up demand and inventory build and how should we think about the year as a whole in terms of how we might see -- or what do you think might be a normal rate at this stage?

Well the current forecast by ACT, Jim, is for Class 8 is 255,000 units for the year.

And the rule of thumb is the normal replacement rate is around 240,000 units.

And so even at 255,000 this year, we're still kind of just at equilibrium.

But what we're referring to is the order rate in April came in over 4 -- at an annualized rate, came in at over 450,000 units.

And so I think the best way to think about this is the independent sources are saying a good range for this year is 250,000 to 260,000, a good range for next year is anywhere from 300,000 to 330,000.

Okay.

And your customers, what are they saying?

Is it consistent with what the market research is saying?

Very much so.

And in fact, during the quarter we spent some time with our customers', customers and in one case, anyway, they were in the process of planning to double their rate of production from April to November.

Okay.

And you had quite a swing in gross margin in this business, where do you see gross margins potentially going as we think about the year as a whole for this business?

Hello, Jim, it's Brian.

I think we're still achieving the-- looking at the 10% double digit for gross margins in this business, in this segment.

Okay.

And just switching gears for a second to the Aerospace & Defense business, it sounds like you feel a little bit better now that we've got some funding in place, but do you see any visibility in terms of shipments picking up in Q2 or is this more of a second half story for this part of the business?

I think in general, we're seeing signs that funding is beginning to trickle down, albeit I think for our products and services we're seeing timing more in the back of the second quarter into the second half.

Okay.

Thanks a lot.

Sure.

Yes, thank you, Jim.

(Operator Instructions) It appears we have no further questions in queue at this time.

Okay.

Well, thank you, Tricia.

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

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

Thank you and have a great day.

Thank you, ladies and gentlemen, for your participation.

This does conclude today's conference call.