Sypris Solutions Inc (SYPR) 2011 Q2 法說會逐字稿

Welcome to the Sypris Solutions Incorporated Conference Call.

Today's call is being recorded.

At this time, I would like to turn the conference over to the President and Chief Executive Officer, Mr.

Jeffrey Gill.

Please go ahead, sir.

Thank you, Gwen, 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 second quarter of 2011.

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

We begin these calls with a note that some of what we discuss here today may include projections and 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 & 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 3.

I will lead you to 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 of slide 4.

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

Revenue increased 35% from the prior year quarter driven by a 48% increase in sales for our industrial group.

Gross profit increased 77% from the prior year period reflecting a 210% increase in gross profit for our industrial group.

Profit conversion on incremental revenue growth for or industrial group exceeded 21% on a year-over-year basis and 20% sequentially.

The Company entered into a new long-term credit facility, as many of you know, earlier in the quarter, to lower its borrowing costs, increase its liquidity and extend loan maturities into 2016.

We announced the opening of a new state-of-the-art Cyber Collaboration Center to serve as a training ground and test bed for Security Engineers to develop best practices in ethical hacking and defense tactics.

Subsequent to quarter end, the Company entered into a new long-term supply agreement to provide drive train components to Cecemex in Mexico.

Now, let's move on to our aerospace and defense segment on Slide 5 where you can see revenue declined slightly from the prior year levels reflecting the delay in the approval of a 2011 Defense Appropriations Bill.

The approval of the fiscal year 2011 Federal Budget in April, shifted the timing of anticipated US Government Agency customer orders to the second half of 2011.

The good news is that we began to see some recovery of this market as order flow increased in June.

Gross profit declined on both comparable period and sequential basis, as a result of unfavorable mix in the short-term impact of additional engineering costs that were incurred for performance capability and life enhancements on certain of the Company's products.

During the period we formalized a strategic partner with Blackridge Technologies to develop a centralized key-management solution for the Blackridge family of network security products.

We also agreed to partner with a leading global security company to pursue the development of inner operable network security applications for both domestic and international markets.

Turning to slide 6, you will see that we continued to fund efforts to support existing and new business opportunities, including the development of the centralized crypto graphic key management system, to protect the smart grid from cyber attacks for the Department of Energy.

We invested in the development of advanced prototypes for an application-based security hand-held device that will integrate many commonly used data functions, into a light-weight unit for use by the war fighter.

We hosted a two-week cyber training program, including a nationwide ethical hacking capture the flag event, with participants from BYU, Berkeley, University of Southern California and the University of Texas, as well as participants from private industry.

We also collaborated with CTEF to develop an ISC squared certified cyber training course for use in our Nation's high schools.

In summary, business development opportunities remain quite active across the segment's portfolio, despite the short-term impact of government funding issues.

Turning to slide 7, let's take a look at the industrial group where you will see that revenue increased 48% during the quarter when compared to the prior year period and rose 16% sequentially from the first quarter, driven by the continued expansion of the commercial vehicle and trailer markets.

Gross profit increased 210% and 38% on a year-over-year and sequential basis, reflecting the positive conversion on incremental sales growth and the greatly improved cost profile of the business.

Gross margin exceeded 10% of revenue, up from less than 5% in the second quarter of 2010, and up from less than 9% sequentially from the first quarter of this year, reflecting the increased volume, lower cost profile, and positive results from continuous improvement initiatives.

The team continued to do an excellent job managing the growth and demand, with solid performance reflected in certain key non-financial metrics, where inventory terms improved 11% on a year-over-year basis, and important measures for quality, on-time delivery and productivity remained positive.

Subsequent to quarter end, as we mentioned a moment ago, we did enter into a new long-term supply agreement with Cecemex.

We will be providing this product for Cecemex for its use in Mexico.

Now, turning to Slide 8.

You will see that the fundamentals of the commercial vehicle market remain favorable.

Freight volumes continued to increase.

The price of diesel fuel has retreated.

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

Active truck capacity is tight, somewhere in the area of 90% of capacity, as is the availability of drivers.

Exports to Russia, Australia, the Middle East and South America remain strong.

According to FTR Associates, only 8700 class 8 billed slots remain open for the third quarter, while 31,500 build slots remain open for the fourth quarter.

With an average monthly order rate of 18,000 units, the balance of the year should be filled in the next several months, while the current backlog for trailers has most manufactures committed for the balance of the year.

ACT research is forecasting a 65% increase in the average daily build rate of class A trucks during the third quarter, when compared to the prior year period, and a 16% sequential increase from the second quarter of this year.

As a result of these factors, the outlook continues to remain positive.

Now, let's take a look at the table on Slide 9.

This table is from ACT's most recent outlook report in July and, as you can see, ACT continues to forecast meaningful growth in the third and fourth quarters, compared to the prior year period, where we are seeing medium duty trucks will be increasing 42% and 41% in the third and fourth quarter respectively, while class 8 or heavy duty trucks will be increasing 70% and 64% respectfully in the third and fourth quarter on a year-over-year basis.

Production is expected to accelerate further during the second half of 2011, with production increasing 13%, 23% and 18% for class 5 through 7, class 8 and for trailers respectively, when compared with the first half of 2011.

I think as you look at this table, the important thing to take away from it is if we look at Class 8 production forecast for the third quarter and fourth quarter of this year and taking the FTR discussions of the backlog situation, what this tells you is, of the 68,000 units forecast for Class A trucks in Q3, at the end of June, 60,000 were in backlog.

And in the fourth quarter of the 71,000 forecast for production at the end of June, 40,000 were in backlog.

So the preliminary estimate for July orders was 18,000-plus units and so if we take those numbers and apply the first 8,000 to the third quarter production, that would indicate that at the end of July, the third quarter production was fully booked.

And as we move towards the fourth quarter and apply the balance, that would say 30,000 build slots plus or minus remain open at the end of July for the fourth quarter.

So if order rates continue at their current rate, it would say by the end of the third quarter, the forecast for the fourth quarter should be fairly well locked in.

So from our standpoint, we believe that the third and fourth quarter for 2011 for the production of trucks, the outlook remains solid and we are starting to turn our attention towards the first part of 2012, where our customers and the industry analysts continue to forecast a 300,000 unit plus market for 2012, driven primarily on the strength of the need for replacement vehicles.

So with that, our team will continue to focus on execution and profitably converting our increased demand, and I would like to turn the balance of our presentation over to Brian.

Great.

Thanks, Jeff.

Good morning, everyone.

I would like to discuss with you briefly the results of our second quarter as well as highlight some of the key accomplishments for the quarter as well.

Our consolidated revenue from continuing operations was $85.1 million, up $22 million for almost 35% from the prior year period.

Again, attributable to the market conditions related to the commercial vehicle and trailer segment as they continue to strengthen.

Gross profit for the quarter was $8.1 million, up $3.5 million, or just short of 77% from the prior year period, driven not only by the increased industrial sales in these markets, but the very strong positive conversion led by our respective teammates in the plants.

In addition, as we have talked in past calls, the impact of our improved cost structure and increased productivity that we are realizing on the accelerated demand played great credit to the strength of the second quarter results.

For the quarter EBITDA came in at $3.6 million.

This was up $2.7 million from the prior year period.

And again, largely attributable to the strength and the performance of our industrial groups' performance.

Let me expand it to segment level and ask you to advance to Slide 11, revenue for our A&D segment was $16.2 million for the quarter compared to $16.5 million in the prior year period, and was attributable to the completion of several programs that did not repeat this year, certain delayed shipments during the last week of the quarter and finally, some mix.

We expected higher revenue, but we continued as we have discussed to be somewhat impacted by the delayed approval of the 2011 Defense Appropriations Bill as the funds had not been fully allocated through the various departments and agencies.

I will speak to this in some detail.

The gross margin came in at $1 million, or $1.3 million lower and it did not meet our expectations.

However, let me expand on the contributing facts to the gross margin.

First we took on additional costs to support both the production and the extension of current product lines and this, because they are programs subject to cost of goods sold.

We had an increase in our excess and obsolete inventory provision, which is discussed in our TQ over the prior year period.

The balance of this is attributed to a different volume in mix profile as a result of the completion of several of the programs that didn't repeat and, again, the delayed shipments that occurred in the last week of the quarter EBITDA was a loss of $1.9 million or $1.1 million lower from the prior year as a result, again, of these items, but I think it's also noteworthy to point out that we did spend an additional $600,000 over the prior year period to continue funding the important R&D efforts underway in Tampa.

With respect to our industrial group, I would ask you to advances to slide 12.

Revenue in that segment was, was $68.9 million compared to $46.6 million or an increase of 48% from the prior year period, and up $9.3 million sequentially from Q1 as volumes in the commercial vehicle and trailer markets continue to show improvement.

And strength in the recovery as well.

The gross profit for the quarter was $7.1 million compared to $2.3 million for the same period in 2010.

Again, not only driven by the incremental volumes, but the conversion or profit conversion on that volume, as well as the teams holding fast to maintaining strong operational effectiveness and productivity across the plans.

Once again, we feel strongly that the team and its highlight performance that they obtained, is highlighted by the impact of the supply chain restructuring that we undertook as well as the productivity improvements through the use of lien and Six Sigma.

Over all, their EBITDA performance for the quarter was $7.5 million or $3.9 million higher from the prior year period, and up $1.7 million sequentially from our first quarter.

Let me conclude today's discussion and ask you to advance to slide 13 with some closing comments.

For the quarter, our sales increased 35%, while gross profit rose 77% from the prior year period, again reflecting the strong conversion on the incremental revenue, partly driven by our reduced cost structure, as well as the sustained operational performance.

As a result, the industrial group gross margin exceeded 10% of revenue, up from less than 5% for the prior year quarter on a 48% increase in revenue.

For our A&D segment, gross margin was 6% of revenue, again, down 14% from the prior year quarter as we funded specific engineering costs for performance, capability, and life enhancements of our existing products.

We do expect to see an eventual recovery in the defense market now since the 2011 budget authorization was enacted in April, and we have begun to some recovery of this market as order flow did increase in June.

We continued and will continue to invest in our Aerospace and Defense segments R&D, and its various engineering support efforts to develop several focused, high-assurance information security solutions for introduction in 2012 as we confront the growing cyber market challenges.

As Jeff discussed earlier, the outlook for the commercial vehicle production remains solid.

All of the remaining build slots are expected to be committed within the next few months, and turning the focus to 2012, which is expected to benefit from a solid replacement market as well.

As we have concluded in all of our meetings, let us assure you that our team remains focused on delivering improved operational and financial results during the remainder of the year, and ensuring our readiness for the opportunities that await us in 2012.

At this time, this concludes the highlights of our second quarter and at this time, Jeff and I and Tony will be happy to take your questions, and we will turn it back over to Gwen.

Thank you.

(Operator Instructions).

We will go first to Jim Ricchiuti with Needham & Company.

Good morning.

Let me start off first with a few questions on the industrial business.

I am just trying to understand when you talk about the delivery, the build slots for Q3 being largely taken up, how does that match up against your deliveries?

We saw a pretty significant increase sequentially in Q2.

Are you delivering against that and, you know, as we think about Q4, and the volumes that the industry forecasts suggest, when would you be seeing deliveries against that?

Jim, this is Jeff.

The lead time on the orders coming to us versus the builds, the OEMs is very tight at the moment.

And so there is not a lot of lag between what's being produced and what we are producing.

And so I don't have the specific timeline for you.

But I would say it's in terms of weeks rather than months.

Okay.

Got it.

And I mean, the gross margins in the business, it looks like in the industrial are at a seven-year high.

Where do you see the margins going forward in this area?

Can you see much improvement over what you have here?

Yes.

Jim, this is Brian.

I think certainly, we feel strongly that the market recovery is sustainable within our industrial segment.

And our operational performance shows that as we discussed back with you the last quarter, that we were seeking to achieve double digit gross margins.

We think we are in the run rate basis to achieve that in the second half of the year.

Okay.

And just with respect to the Cecemex announcement, is there any way that you can give us some sense as to how meaningful that could be?

It sounds like you expect some deliveries, shipments toward the end of this year?

2012, is this going to be a meaningful contributor?

Jim, it will not be a big contributor at the end of Q4 but we believe between Cecemex and the Brazilian contract with Merator that we announced earlier, between those two things, you know, that's going to add 5% to 10% to us, I think, 5% would be nice .

In terms of your utilization, do you have any capacity constraints as you look out next year?

Well, it depends upon where the market goes, but in the case of Cecemex and in the case of Merator in Brazil, we are putting in additional equipment to handle those contractual requirements.

Quickly on the A&D business, did the order trends you saw in June, did that continue in July and August, it's pretty early in August.

But what was your experience in July bookings?

It was not as strong as June.

But we do expect unless there are more surprises we expect the third quarter and fourth quarter will continue to reflect a recovery in the order rate.

You know, you don't give a whole lot of color in terms of backlog in this business, and I am not sure how meaningful, just given the delays.

It seems like it's going to be challenging for the business to be flat this year.

Or do you still see an opportunity for a fairly good ramp in the second half of the year?

I think that the combination of the timing of the orders and the lead time on materials is going to make it a challenge to have this do something much more than what we've already experienced.

Okay.

Terrific.

I will jump back.

Thank you.

Sure.

Thank you.

(Operator Instructions)And we will go back to Jim Ricchiuti with Needham and Company.

Just on the margin, gross margin for the A&D business, Brian, you cited a couple of factors that contributed to the sequential decline, as we think about the second half of the year, how much of that goes away?

It obviously is going to be tough to get, I think, back to the margins you saw in Q1.

But where could we think of gross margins going as some of these issues possibly fall by the wayside?

I think first subject to, as Jeff mentioned or you may have highlighted around revenue being flat.

This business is certainly achieved 20 plus percent margins.

We would see the margins get back in a higher range subject to, you know, the run rate in the 16 plus revenue run rate.

The attempt is certainly to get as high as we can.

But again, some of this, we will continue some of those costs into the third quarter related to the extension of existing products.

Okay.

Are these issues behind you in Q4?

Yes.

They are.

Okay.

Okay.

Behind us we will continue funding through this third quarter but largely behind us.

Okay.

Looking out to 2012, just in light of the concerns people have about defense spending, how would you characterize the risk, maybe with respect to some of the larger programs you are working on, as we think about 2012?

I would say, Jim, from a positioning in the market that we are in a good position.

With the cyber communications security, network security, these types of things.

I think from a market standpoint, we are well positioned.

What is really difficult for us to forecast is what happens from a budgetary standpoint and more specifically, we all know that as we sit here, we don't have a 2012 budget yet so when I characterize it that way.

It's, when do the funds flow?

As opposed to, are they interested in funding what we do?

And it's a nuance, but I think we are well positioned.

I think we have some really unique things going on terms of the market, itself.

It's just going to be a matter of, you know, does Congress approve a budget in September, or do they wait until April of next year?

Got it.

Okay.

Thanks a lot, guys.

Yeah.

(Operator Instructions).

And there are no other questions at this time.

I would like to turn the conference back to our speakers for any closing remarks.

Okay.

Thank you, Gwen.

Brian, 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.

Thank you, everyone.

That does conclude today's conference.

We thank you for your participation.