Sypris Solutions Inc (SYPR) 2011 Q3 法說會逐字稿

Good day, and welcome to the Sypris Solutions third quarter 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, Deanna, 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 third 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 this 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 4.

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

Revenue increased 24% from the prior year quarter, driven by a 38% increase in sales for our Industrial Group.

Gross profit increased 42% from the prior year period, reflecting a 197% increase in gross profit for our Industrial Group.

The Company reported earnings of $0.30 per diluted share, up from a loss of $0.10 per share for the prior year period, while free cash flow for the quarter increased to almost $7 million, or $0.36 per diluted share.

Other items of note, the Company hosted a two-week cyber training program down at our Aerospace & Defense headquarters in Tampa, Florida, and included a nationwide ethical hacking Capture the Flag event that was won by a team from Brigham Young University.

We also announced a new long-term supply agreement to provide drive train components to Sisamex in Mexico.

And subsequent to quarter end the Company entered into a new, multi-year agreement to increase the sales of heavy vehicle axle components to a customer in North America, with volumes expected to reach $10 million per year beginning in 2012.

So, all in, a good quarter for the Company.

There were clearly some things that went on that benefited both earnings and cash flow, most particularly items related to the liquidation of assets that were idled over the past several years as we relocated production to North Carolina and to Mexico.

And as we look at 2012 we think we'll have additional opportunities to convert idled assets into cash that can be used for generating far greater returns.

So now let's take a look at our business segments, beginning on Page 5 with the Aerospace & Defense segment.

Revenue for this area of our business declined slightly from prior year levels, reflecting the short-term impact on backlog as a result of the delayed approval of the 2011 Defense Appropriations Bill, which many of you may remember was finally signed into law in April of this year.

But revenue did increase 15% sequentially from the second quarter of this year, which we believe to be a good sign.

Gross profit improved 223% on a sequential basis, albeit from a level that we were not pleased with in the second quarter, but in any event a nice improvement sequentially, and this occurred as a result of a favorable mix and a reduction of product support costs as related programs move towards scheduled completion.

Q3 bookings volume showed some recovery, increasing 56% sequentially, demonstrating the ongoing recovery from the budget and continuing resolution challenges experienced during the first half of this year.

We continue to see strong growth in our Severe Environment and Space electronics design and manufacturing business line.

We are working to expand our capacity in this area and prepare to launch new programs with several new customers in this segment over the coming quarters.

The funding uncertainty that we experienced in 2011 seems to continue into 2012, as many of you will note that we have yet to have a budget for the coming fiscal year, and so we'll have to play this kind of by ear, but at this moment things still seem to be going, but clearly the uncertainty is increased by the lack of budgetary and fiscal process.

Let's continue on Slide 6.

We continue to make important progress in the area of development of several new products.

During the quarter we held some demonstrations of our new crypto prototype unit for the Army and received very, very positive reviews.

We met with the Singapore government regarding our Cyber Range and in fact will be having -- holding a demonstration for Singapore on the Range on the fourth quarter.

And business development opportunities generally remain quite active across the segment's portfolio as we move beyond the recent short-term impacts of government funding issues.

We continued to expand our presence internationally and in adjacent segments to reduce our dependence on the US Department of Defense, with efforts ongoing in Australia, New Zealand, Canada, Japan, Singapore and Europe.

And, finally, as we close out our comments on this segment, our sensitivity is that continuing resolutions may be a way of life in the DOD environment for the next several years, and so we're really doubling our efforts to move aggressively into adjacent markets so that we're less dependent on the smooth funding of DOD-related items, and so our work for the Department of Energy on the Smart Grid and similar other activities we have going on will be important to us in the long term.

Turning to Slide 7, let's take a look at our Industrial Group.

Revenue for this segment of our business increased 38% during the quarter when compared to the prior year period and rose 5% sequentially from the second quarter of this year, driven by the continued recovery of the commercial vehicle and trailer markets.

Gross profit increased 197% on a year-over-year basis, reflecting positive conversion on incremental sales growth and the cost structure improvements that were implemented over the past several years.

Gross margin was close to 10% of revenue, which was more than double the gross margin percentage of the third quarter of 2010, reflecting both higher sales volumes and cost structure improvements.

Investments in preventive maintenance, equipment repair and training were important factors during the quarter as this business continued to prepare for the future.

The team continues to do an excellent job managing the growth in demand, with solid performance reflected in certain key metrics such as inventory turns, on-time delivery and quality.

And, perhaps most importantly, our continuous improvement efforts continued to show year-over-year improvement in unit production cost for several products.

Now let's take a look on Slide 8 and follow up on some more things that have taken place.

The Company announced a new long-term supply agreement, as we mentioned a moment ago, for drive train components with Sisamex in Mexico, and subsequent to quarter end we entered into a new multi-year agreement to increase the sales of heavy vehicle axle components to a customer in North America, with volumes expected to reach $10 million per year beginning in 2012.

The recent contract announcements that we've made this year with Meritor, Sisamex, Dana and others are expected to add 5% to 6% to the top line of our Industrial Group during 2012, and we're also pleased to say that new business activity continues apace, and it seems that the number of opportunities for us to continue to add to our customer list and book of business, if you will, remains quite brisk.

The looming questions for 2012, of course, are what will happen with the US economy and what will be the resulting impact on the demand for commercial vehicles?

Well, according to FTR Associates, the potential for a weaker US economy is a growing concern, but even a low-growth economy will keep freight in positive territory.

The combination of market forces such as freight, fleet age and regulatory requirements should help to support the continued need for new vehicles.

In fact, the outlooks provided by both FTR and ACT assume that the economy will remain on a weak but positive trend.

On Slide 9, we have some numbers here to show you with regard to the outlook for the production of trucks and trailers according to ACT, and what you'll see is for the fourth quarter of 2011 is that essentially production levels are expected to remain even with those of Q3, maybe a little bit higher in some cases, reflecting a healthy market.

We've talked with some of the OEMs and they've said that essentially their fourth quarter is booked and orders that they're taking currently are for the first and second quarter of next year.

According to ACT, the first and second quarter of next year should show some sequential improvement in production above current levels.

ACT is currently forecasting 45,900 units in the Class 5 through 7 for Q1 and 47,000 units in Q2.

On Class 8, ACT is forecasting 73,900 units in Q1 and 71,900 units in Q2.

And for trailers they are forecasting a slight improvement, from 59,900 in Q4 to 61,100 in Q2 and 66,300 in Q2.

So, if we take a variety of sources and we look at the midpoint for 2012, we're coming up with roughly 276,000 units for Class 8, 172,000 units for Class 5 through 7 and 243,000 units for trailers.

I think an important data point to note is for October the Class 8 orders came in at 27,000 units for the month.

That was a 17% month-over-month increase and represented an annualized rate of 328,700 units, and this was the third consecutive month of increase in orders for this important barometer.

So, it appears that things are holding up.

According to ACT, 76% of demand in any given year represents replacement of equipment, and in going through some recent FTR information FTR basically says that we've been in a replacement market mode beginning in the fourth quarter of 2009, and they expect that to continue through the second quarter of 2012, after which they believe that we'll actually move into an expansion mode.

So, it will be interesting to see.

In any event, it appears that despite the psychology in the markets and things that this market for us will remain healthy for the foreseeable future, and if anything the leveling of the growth curve in the short term will place a premium on execution, productivity and efficiency and reduce the risk of material and capacity availability.

So, with that, I'd now like to turn the balance of our presentation over to Brian.

Great.

Thanks, Jeff.

Let me ask you at this time to advance to Slide 10.

I'd like to cover some of the financial highlights both at the consolidated level as well as for both of our Industrial and A&D segments.

For the third quarter, the consolidated revenue from continuing operations was $91.2 million, up almost $18 million, or 24%, from the prior year period.

And this, of course, was driven by what came in as a 38% increase in sales for our Industrial Group as the momentum continued for commercial vehicles and trailers.

On the gross profit, that increased for the quarter prior-year period 42%, to $10.3 million, or right at 11.3% of revenue -- of revenues over the same period in 2010, reflective of the positive conversion associated with the increase in revenue as well as the ongoing productivity programs that we talked about over the last couple of years.

For the quarter, EBITDA came in at $11.5 million.

This is up $8.5 million from the prior year period and partly -- largely attributable to the positive conversion on the increased Industrial Group sales.

We also did recognize gains from sale of the idle assets that Jeff mentioned in our Industrial Group.

As well we did experience some upside in the foreign currency translation as well.

Shifting our attention to the A&D segment on Slide No.

11, the revenue for the quarter came in at $18.5 million, as compared to $20.7 million in the prior-year period, largely attributable to the completion of certain both electronic manufacturing and engineering service programs that were completed that did not repeat as well as the mix within our growing space manufacturing business.

Gross profit for the quarter was $3.3 million, or 18% of revenue, compared to $4.9 million, or about 24% of revenue, for the same period in 2010, but again impacted by lower revenue, the unfavorable mix, as well as some additional engineering cost that we pushed through to enrich and improve the qualities of some of our existing products.

However, as Jeff noted earlier, the revenue did increase 15% sequentially from Q2, and as a result the gross profit increased sequentially 223%.

On the EBITDA line for the quarter, this came in positive at right at $159,000.

This is $1.6 million lower from the prior-year period, but it's important to note that in context with the lower revenue from year over year we did, as we've talked about, continue the funding of R&D spending, and this was at least well over $600,000 from the prior-year period.

And, finally, if you move on to our Industrial Group on Slide 12, again, very, very strong performance turned in by the team on continued revenue increases.

This increased 38%, to almost $73 million, in the third quarter, compared to $52.7 million for the prior-year period, up $3.8 million, or almost 5% sequentially, from Q2, again, primarily as a result of the continuing demand that fuels both commercial vehicle and trailer demand.

On the gross profit, very strong performance for the quarter, increased 197%, to $6.9 million, or 9.5% of revenue, compared to $2.3 million, or 4% of revenue for the same period in 2010, again reflecting the conversion throughout our supply chain.

And, finally, on the EBITDA performance, the Industrial Group's performance for the quarter was $13.6 million, or right at $10.4 million higher from the prior-year period, again, driven by the positive conversion driven by the supply chains that have been dramatically restructured from three years ago as well as the sale of some idle assets and, finally, the gains on the foreign currency translation.

In terms of concluding, look, it was an extremely meaningful third quarter, and, as you see on Slide 13, these results are attributable to the team's hard work, the restructuring efforts that were undertaken everywhere throughout the Company following the rapid and chaotic market downturn in late 2008 and well into 2009.

As a result, the Industrial Group sales continued their momentum and certainly contributed to our consolidated 24% increase in revenue and 42% increase in gross profit from the prior-year period.

Of particular importance, and I think reflective of our operational improvements within our Industrial Group, a very important measurement that we looked at preceding the restructuring was gross margin, again, coming in at 9.5% of revenue.

This is up 4.4% from the prior-year quarter on a 38% increase in revenue.

Consequently, on our Electronics Group, again, the revenue up sequentially 15% from the second quarter, while gross profit increased 223% sequentially.

As Jeff mentioned earlier, based on the order activity during Q3 and the current quarter indicators we continue to be optimistic of the continuing recovery in the defense segment, especially once the 2012 budget authorization is enacted or more pressure is put about enactment.

As we discussed in both of our prior quarters, we have continued making the R&D investments within our Aerospace & Defense segment.

These are largely in support of several high-focused, or several focused, high-assurance information security solution products as we confront the growing cyber challenges that present an array of opportunities for us.

As you heard Jeff discuss earlier, the outlook on the commercial vehicle production remains very, very solid, with the remaining build slots for 2011 essentially being allocated, which should ensure continued benefit from an ongoing solid replacement market in 2012.

Look, we're working very, very hard to close out the year.

Both segments and their teams are already underway, well underway in preparing to ensure a strong start to 2012.

And at this time, as always, we appreciate the opportunity to discuss the quarterly highlights, and at this time we'd take any questions you might have by turning the call over to Deanna.

Thank you.

(Operator Instructions)

We'll take our first question from Jim Ricchiuti, from Needham & Company.

Good morning, Jeff.

Good morning, Brian.

Good morning, Jim.

Good morning.

A question on -- a couple of questions on the Industrial segment of the business.

Just given the demand that you're seeing, would you expect that business to be up sequentially in Q4?

Jim, this is Jeff.

I think we would expect to be in roughly the same range as what we had for Q3.

Okay.

And same question on the Electronics on the A&D business, just you had a nice sequential improvement from Q2 to Q3.

Q4 seasonally, that in the past has been a fairly strong quarter.

Would you expect it to be closer to Q4 -- to the Q3 level?

I would say no, Jim.

I would say we were going to see a little bit of up and down in that business for the next several quarters, that it won't be consistent.

But we expect margins to hang in there and that type of thing.

Okay.

Jeff, looking at the A&D business, where do you have more visibility?

Which areas of the business is there perhaps more uncertainty given the funding environment and the potential, I guess, for some other issues to surface as they go through the funding discussions?

I'd say the most visibility we have, Jim, is with regard to the space and that type of the manufacturing piece that we have.

And I also believe that as we go into 2012 we'll see some relatively consistent demand for some of the products that we have.

So, it could get lumpy in terms of some of the cyber and these types of things, which are more event-driven business-related items.

But we'll just have to see.

I think -- I can tell you our initial impression is that many of the agencies are doing a better job of managing their funding in the face of the continuing resolution that we're having now as opposed to a year ago.

We're seeing a more consistent order pattern than what we saw a year ago.

So, we'll see.

Okay.

And just switching gears for a second to the Industrial business, I'm trying to reconcile the order intake that you mentioned.

I think you said that we've seen three consecutive months of order increases.

And yet when I look at the presentation from the prior quarterly conference call it looks like the ACT data has gone down for a couple of segments, Class 8, trailer.

Is that just the psychology of the market, or are there some things happening?

What are your customers saying to you about just the outlook?

Well, what our customers are saying is that for the balance of this year is that some of the flattening of the outlook -- for example, I think the current Class 8 outlook for ACT for the fourth quarter is 69,100.

In our presentation last time I think it was 71,900.

So, essentially what we hear is that any production flattening, if you will, or adjustments, are really materials related, supply chain related.

And, for example, we talked with one of our customer's big OEMs last week, and what the OEM told us was is they're full for the fourth quarter, and so their orders that they're taking now are for Q1 and Q2 and beyond.

And so I think the adjustments you may be seeing, which are slight adjustments in ACT, aren't reflections of a decline in demand.

They're reflections of the ability to produce.

Got it.

Last question for me, Brian, just in tax rate, what should we assume, 25% for Q4, 2012, or could it be a little lower than that?

Probably in the 20 range, Jim.

In the 20 range.

So, ex the gains it looks like for Q3 you did about $0.06.

Yes, that's reasonable.

Yes, okay, thank you.

Yes, thank you, Jim.

(Operator Instructions)

And it appears that we have no further questions.

Okay.

Well, thank you, Deanna.

We'll wrap up.

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

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

Thank you, and have a good day.

Ladies and gentlemen, this does conclude today's conference call.

Thank you for your participation.

You may now disconnect.