Sypris Solutions Inc (SYPR) 2011 Q4 法說會逐字稿

Good day everyone, and welcome to the Sypris Solutions 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, Jenny, 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 fourth quarter and full year 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 in the results 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 would 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 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 2011.

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

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

Revenue increased 24% to $83.6 million for the fourth quarter, up from $67.2 million in the fourth quarter of the prior-year period, driven primarily by a 51% increase in revenue for our industrial segment.

Gross profit increased 19% to $8.7 million, up from $7.3 million in the fourth quarter of last year, reflecting the impact of increased volumes and the benefits of our lean continuous improvement efforts.

Net income improved to $1.3 million or $0.07 per diluted share for the quarter, up from a loss of $1.6 million or $0.09 per share for the prior-year period.

Cash flow from operations increased to $7.8 million for the quarter, up from $1.9 million for the prior year, while free cash flow for the quarter increased to $4.8 million or $0.25 per share, up from $0.7 million or $0.04 per share for the fourth quarter of last year.

Net cash increased to $11.2 million in the fourth quarter, up almost $15 million from the prior-year position.

And finally, key balance sheet productivity metrics continue to improve with inventory turns and working capital turns improving on a year-over-year and sequential basis.

So in summary for the quarter, it was a good quarter.

It could have been a very, very good quarter had some shipments in our A&E segment not slipped from the fourth quarter of last year into the first quarter of this year.

But needless to say, we'll talk about that in a minute.

But it was a good quarter for the company.

Turning to slide 5, looking at the full year 2011, operating results for the year improved dramatically when compared to 2010, despite the headwinds in our A&E segment.

More specifically, revenue increased almost 26% to $335.6 million, up almost $70 million from the prior year.

Gross profit increased 41.5% to $35.2 million, up from $24.9 million in 2010, while gross margin expanded 120 basis points to 10.5%.

Net income increased to $7.9 million, reflecting an $18.1 million improvement over 2010, and resulted in earnings per diluted share of $0.40 for the year compared to a loss of $0.55 per share for 2010.

Cash flow from operations increased to $17 million, up from $1.7 million for 2010, while free cash flow increased to $10 million or $0.53 per share.

EBITDA increased to $27 million, up $8.4 million for 2010, while profit conversion on incremental revenue for our industrial group exceeded 22% on a year-over-year basis.

Turning to slide 6 we have a couple things we'd like to talk about in terms of non-financial accomplishments for 2011 that did -- were important in positioning the company for additional growth in 2012.

Beginning with our Industrial Group we entered into new multiyear supply contracts with Dana, Eaton, Meritor, Sisamex and others to add an estimated $30 million annually to the company's top line, beginning in 2012, thereby positioning the business to grow faster than the markets it serves.

Our Electronics Group added new programs during the year with ITT, L3 Communications, Tyco, Lockheed Martin and Northrop Grumman that should provide some important offset to the reduced funding we have seen from our traditional government customers.

We continue to invest to support the futures of both segments.

We invested extensively during the year in robotics to drive improvements in quality, reliability, cycle time and efficiency for our Industrial Group.

We also invested in additional capacity to ensure our ability to meet the growing needs of our customers for driveline components during 2012 and beyond.

Advancing to slide 7, we continued to invest in R&D to further the development of a centralized cryptographic key management system to protect the smartgrid from cyber attacks at the Department of Energy.

And we invested in the continued development of advanced prototypes for an application-based secure handheld device that will integrate secure data functions and mission tools utilizing an Android architecture.

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

We continued to invigorate and promote employee awareness on healthcare and wellness, contributing to a 17% reduction in health care costs on a year-over-year basis.

And finally, our people simply did an excellent job in executing on a wide range of challenging fronts to restore our company's profitability.

Now let's take a moment and dive into the individual segments of our business beginning on slide 8 with the Aerospace and Defense Group.

Revenue declined to $11.4 million for the quarter, a level that was $3.4 million below our internal projections and $8.1 million less than the prior-year period.

The shortfall to our internal outlook was driven by delays in product certification and customer witness testing at year end.

These products have since been approved and shipped in the first quarter of 2012.

The shortfall resulted in $3 million less in profit than anticipated as revenue and overhead absorption fell below breakeven levels.

Gross margin was 4.5% for the quarter compared to 27.6% for the prior-year period and 18% for the third quarter of 2011.

Adjustments have been made to realign our cost structure to remain profitable in this dynamic environment.

It is important to note that these changes did not impact our investments in R&D which we plan to increase by 35% in 2012.

Despite the difficult quarter financially, orders for this segment increased 23% when compared to the prior-year quarter, thereby providing important support for an improved 2012.

As we move to slide 9, we expect that in hindsight, the fourth quarter of 2011 will turn out to be the trough for this segment of our business.

For 2012 we expect to see sequential growth from this low point as we move throughout the year.

We continue to see a number of opportunities that give us reason to be optimistic.

For example, our recently developed cyber-range test bed and related training services are receiving a great deal of interest from countries in Southeast Asia and the Middle East.

We have received certification as a trusted source manufacturer, which further consolidates our high assurance pedigree for key EDMS customers such as Lockheed Martin, Northrop Grumman, BAE and others.

We are making important progress with the development of an agile key management system for the Department of Energy to be used in the protection of the smart grid, as we mentioned a few moments ago.

And we believe that the upcoming rationalization of defense spending will result in more opportunities for products that offer common platforms and that will also lead to a reallocation of resource into cyber-defense and the modernization efforts to extend the life of currently deployed equipment.

So in summary, it was a challenging quarter and year for this segment of our business.

The shift in the fourth quarter -- I guess the positive would be it lead to some support for the first quarter of this year.

And as we look at it overall we believe that the opportunities exceed the risks for this part of our business.

Now advancing to slide 10, let's take a brief moment to look at the Industrial Group.

Revenue increased 51% to $72.2 million for the quarter, up from $47.7 million for the prior-year period, driven by the continued recovery of the commercial vehicle and trailer markets.

Gross profit increased to $8.2 million from $1.9 million in the fourth quarter of 2011, reflecting a rate of profit conversion on incremental growth of 25.6%.

Gross margin expanded to 11.4% of revenue, which was more than double the gross margin of the prior-year period, reflecting higher sales volumes, cost structure improvements and productivity improvements.

Investments in preventive maintenance, equipment repair and training continued to pay dividends as key metrics for equipment uptime, quality, on-time delivery and inventory turns exceeded expectations.

We initiated investments in additional capacity that when completed in 2012 will help to ensure that we can continue to meet the needs for our growing customer base smoothly and effectively.

On slide 11, I'll take a look at the market.

The outlook for heavy-duty vehicle and trailer production continues to be positively impacted by a number of factors, including a favorable freight environment; the age of the fleets; healthy fleet profitability; rising used equipment valuations; improved credit availability; and new regulatory factors.

The outlook for heavy duty production 2012 currently assumes a level loading of production from the fourth quarter of 2011 through the fourth quarter of 2012, thereby providing the potential for manufacturing stability and potential margin expansion.

The average outlook as provided by ACT and FTR is forecasting almost an 11% increase for medium duty trucks in 2012, almost 14.5% for heavy duty, and over 18% year-over-year growth for the trailer segment.

And finally our quoting activity for new business remains brisk, with the opportunity to layer in additional organic growth for 2013 and beyond.

So if we might summarize for this segment, all metrics are green.

The market outlook remains positive.

Our team is doing an outstanding job, and we believe that there are additional growth opportunities for this business above and beyond the market metrics.

So with that it's my pleasure to turn the balance of our presentation over to Brian Lutes.

Great.

Thanks, Jeff.

Good morning, everyone.

What I'd like to do now is discuss some of the highlights of our fourth-quarter and full-year 2011 financial results, and I'll start off with our Aerospace & Defense segment and ask you to advance to slide 12.

Revenue for A&D declined $11.4 million for the quarter compared to $19.5 million, or $8 million less than the prior-year period.

Part of this was driven by the delays in product certification and the customer witness testing you heard Jeff discuss earlier, as well as some lower revenues associated with products that did not repeat from the prior-year period.

Gross profit for the quarter decreased $4.9 million to $507,000, and again was a result of the decline in revenue and the changes in mix.

At this time on the consolidated basis I'll ask you to advance to slide 13.

As Jeff noted revenue decreased $13.2 million, down to $62.3 million in 2011 and was due in part again to the completion of certain manufacturing programs and engineering service programs as well as changes in mix and the delays in the certification.

Gross profit decreased $8 million as a result, down to $7.9 million for the full-year period, and again was driven principally by the revenue decline.

As it relates to our Industrial segment for the fourth quarter, advancing to slide 14, again, an extremely strong quarter for our Industrial Group.

Revenue was $72.2 million in the fourth quarter compared to $47.7 million or a 51.3% increase from the prior-year period, as volumes from the commercial vehicle and the trailer markets both continued their strong momentum.

On the gross profit line for the quarter this came in at $8.2 million compared to $1.9 million, again reflecting an increase of 325% from the same period in 2010 and driven mostly by the 26% profit conversion on the incremental revenue growth, so again, an extremely strong quarter.

But equally impressive for our Industrial segment was their improvement in EBITDA; for the fourth quarter on revenues that were $72.3 million or up 51% over the prior-year period, EBITDA improved $6.3 million to $9.2 million, or just over a 200% increase over the prior-year period.

Shifting gears to looking at industrial, I'd ask you to advance to slide 15 and look at this on a consolidated basis.

Revenue in the Industrial segment increased $82.2 million or 43%, reflecting the market upturn.

Again this was across Class V through VII, Class VIII trucks as well as increased trailer demand you heard Jeff speak to.

Gross profit increased $18.3 million to $27.3 million for the full-year period, and this $18 million -- just over $18 million increase on $82 million of incremental volume essentially yielded us a profit conversion of 22%, reflecting the benefit of our supply chain's lower cost structure and its ability to convert on increased volume.

Finally, on the EBITDA performance, again a very, very strong year and advancement for the Industrial segment in that the industrial EBITDA performance came in at $39.2 million or essentially $27 million higher than the prior-year period.

It certainly provides a basis for continued earnings leverage, and as you heard Jeff speak to testimonial to the team's great work in preparing for the market upturn.

On a consolidated view, let me speak briefly to that by asking you to advance to slide 16.

The consolidated revenues from continuing operations for the company were $83.6 million, up 24% from the prior-year period, again, all attributable to the upturn in our Industrial segment.

And that of course helped offset some of the difficulties faced within our Electronics Group segment.

On the gross profit we came in for the quarter at $8.7 million.

This was up $1.4 million from the prior-year period and, again, driven by the strong conversion on increased revenue.

And EBITDA came in at $4.6 million.

This was up $2.2 million for the prior-year period, but again below our expectations as a result of the challenges we discussed.

In terms of the full-year consolidated performance of Sypris Solutions, I would ask you to advance to slide 17.

Revenues from continuing operations were $335.6 million or almost $69 million higher than the prior-year period, again driven largely by our Industrial Group and partially offset by the challenges in the Electronics Group.

Gross profit increased $10.3 million or 41.5% over the prior year to $35.2 million and, again, highlights yet again the impact of the strong conversion on increased revenues, and certainly the call structure improvements and productivity savings we've been talking about over the past 18 months.

And finally consolidated EBITDA for the full year came in at $27 million, again, reflecting an increase of almost $19 million or 222%, and again highlights the potential and the momentum for continued leverage in our Industrial Group, especially as we're into 2012.

As Jeff mentioned, we believe we had a very strong year, and as a result, in terms of the summary on page 18, slide 18, let me just touch on a few things in summary.

Revenue and gross profit for 2011 increased 26% and 42%, respectively, from the prior year.

Again, reflecting the strong conversion in the cost structure that we have now put in place.

Earnings for the year, a very, very important measurement for us on a go-forward basis, increased to $0.40 per diluted share.

This is up from a loss of $0.55 per share for 2010.

Cash flow from operations increased to $17 million during the year, up from $1.7 million for 2010 while the free cash flow increased $10.1 million or $0.53 per diluted share.

As you heard Jeff mention, our Industrial Group is well positioned for continued double-digit growth in 2012.

While we do expect, based on everything we are hearing from our team, in Electronics, they expect a progressive recovery throughout 2012.

Another important metric in terms of research and development funding to our Aerospace and Defense division for those of you new to our call, we will continue to invest in the investment in R&D as well as engineering support by 35% in 2012 to continue the development of several focused high assurance information security solutions, all in order to address the rapidly expanding global cyber challenge.

And finally, our teams, both Aerospace and Defense and the Industrial Group remain focused on profitability and profit conversion, thereby driving further margin expansion, and presumably increased earnings in 2012.

At this time this concludes the highlights of our fourth-quarter and full-year 2011 results, and at this time I'll turn it back over to Jenny to open it up for questions.

(Operator Instructions).

Jim Ricchiuti, Needham & Company.

Good morning.

To be clear, the product, the delay that you experienced, the certification delay, was that on one program -- or that $3.4 million?

Jim, the $3.4 million, it was comprised of one program which was delayed because of certification.

Right.

And then we also had some other products that were delayed because of lack of an inspector available to sign off.

Okay.

Can you size that, Jeff?

Let us get back to you on that.

I don't have the detail.

Okay.

But it's -- yes.

The vast majority of it was the lack of certification.

Got it.

And Brian, what would the gross margins have looked like?

Would they have looked more like the Q3 levels?

Yes.

Okay.

Okay.

Now you've talked about sequential improvement over the course of 2012 in the Electronics business.

Just given the funding environment in the aerospace and defense market, how challenging is it going to be for the revenues to be up year over year in the early part of the year?

Well, on a year-over-year basis it will be a challenge, Jim.

We see it as sequential growth from the fourth quarter of 2011.

Got it, okay.

And then looking at the Industrial business, maybe you could remind me in terms of how you're thinking about your gross margins in that business.

It just -- it looks like you are tracking either at the upper end or above your prior expectations in that business.

Is that fair to say, or maybe I'm just not recalling?

No, Jim, I think you're right on.

As we discussed with you last year this time we talked about working towards double-digit margins.

And I think that's our extent is to place that business with the momentum that we have with the cost structure and the things you heard Jeff talk about that would put the gross margins in the range of 10% to 12% for this fiscal year 2012.

Okay.

And it sounds like based on the conversations, the orders you are seeing from your customers, that there is going to be an even flow of orders and shipments over the course of the year, and is that -- it sounds like that's also contributing to the margin expansion.

Yes.

When we look at the forecast, the full year for production in terms of our customer seems to be fairly level loaded.

And so there will always be some noise and stuff in the schedules, but in terms of material, in terms labor, in terms of production scheduling, that's probably the best set of circumstances that we can imagine.

Okay.

Jeff, in the past you've talked about the production slots and to the extent they are filling up based on what you are seeing from your customers.

How does that look over the next couple of quarters?

For the Industrial Group?

Yes, yes.

It looks very solid.

Okay.

I'll jump back in the queue.

Thanks.

(Operator Instructions).

Jim Ricchiuti, Needham & Co.

The R&D spend that you are looking at for 2012 -- how soon would you anticipate that beginning to impact you from a revenue standpoint?

Would you begin to -- would you anticipate seeing the revenue benefits from that in 2013?

In 2013, yes.

Okay.

And then going forward, is this a new level for R&D, just given the segments of the market that you are now going after in the aerospace defense?

Yes, I think so Jim.

I think as you listen to the headlines out there, both in terms of our installed base of products and the modernization efforts that are underway, combined with all the emphasis on cyber security, we think that investments in the 5% to 6% range on R&D is appropriate on a go-forward basis.

I don't recall if you've ever actually sized the revenues that you're seeing from cyber.

I assume it's fairly modest right now.

Was it at all meaningful in 2012?

No.

Okay, okay.

And then as you look out to 2013, would you be willing to talk about whether you see it being potentially a more meaningful part of your revenue in the electronics business?

I think it will become a portion of our revenue.

I don't think we can speak to the amount or the size yet.

Certainly we have a lot underway as we are talking about in the funding of R&D, both in 2011 as well as continuing in 2012.

But as we get greater visibility to it, and the maturity of the technology, we'll certainly start talking more about it.

And the margin profile on this business presumably would be higher than what you would see on other parts of the Electronics businesses?

It would be, Jim.

Okay, okay.

And then last question, just looking at the tax, how should we think about modeling the tax rate?

This is Tony.

Good morning.

The way I would look at that, if you look at our numbers this year, the majority of our tax expense is related to our foreign operations.

And when you get our 10-K you will have some additional exposure to that in our footnotes.

But if you look at the number from last year, it was roughly $2.6 million of primarily foreign again.

And Mexican -- the statutory rate in Mexico is approximately 30%.

We were a little under that in 2011 because we had some deferred tax benefits that we were able to recognize in 2011.

So I think as we go into 2012 you would again kind of model that to increase slightly because our revenues in our Mexican operation are expected to grow, which will drive some increase in our profitability in that operation.

And absent a similar deferred tax benefit to be recognized our effective tax rate will be a little bit higher next year in 2012 than it was in '11.

Got it.

There was actually -- there was one item in the P&L that I just wanted to get a little bit more color on.

It looked like you had a modest gain in the other income line.

What was that associated with?

Yes, principally two things, Jim -- the divestiture of idle assets and some upside on foreign exchange.

Okay.

And then again, looking out to the balance of this year, is there -- within the industrial business, you talked in the past about layering on some new organic growth.

To what extent do you see that contributing going forward?

Is the addition of new customers, new programs --

Yes, Jim, I think it's true components of that.

I think first as Jeff positioned and talked about the positioning of Sypris or the Industrial Group and $30 million of new incremental business, that combined with the increases that you are hearing will certainly tag on revenue growth in the Industrial business this year.

Are you constrained at all as you look at the opportunities out there?

Are there more opportunities than you can address, or you still feel that's fairly manageable?

We are certainly being selective.

Yes, okay.

Got it.

Okay.

Thanks very much.

Yes.

Thank you, Jim.

Thank you.

And with no further questions in the queue at this time I'd now like to turn the call back over to the presenters for any additional or closing remarks.

Okay.

Thank you, Jenny.

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

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

I want to thank you and hope you have a great day.

And again that does conclude today's call.

We thank you for your participation.