TechPrecision Corp (TPCS) 2010 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the TechPrecision Corporation third-quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is been recorded. It is now my pleasure to introduce your host, Brett Moss for Hayden IR. Thank you, you may begin.

Thank you, and welcome to TechPrecision's third fiscal quarter 2010 conference call. Joining us today on the call are Lou Winoski, TechPrecision's Chief Executive Officer, and Richard Fitzgerald, Chief Financial Officer.

This conference call contains forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks, uncertainties and assumptions described from time to time in registration statements and reports and other periodic reports the Company files with the Securities and Exchange Commission.

All statements and other statements of historical facts which address the Company's expectations for its future with respect to financial performance or operating strategy can be identified as forward-looking statements. These statements are based upon the current beliefs and expectations of the Company's management and are subject to significant risks and uncertainties.

Actual results may differ from those described in the forward-looking statements. Those forward-looking statements involve certain risks and uncertainties that are subject to change based on various factors, many of which are beyond the Company's control. We caution investors that these forward-looking statements speak only as of today's date, February 11, 2010.

The Company hereby expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statements to reflect any change in the Company's expectations or change of events, conditions or circumstances on which these statements were based. I would now like to turn over the call to Mr. Lou Winoski, TechPrecision's CEO to provide opening remarks. Lou?

Thank you, Brett. Good afternoon and thank you all for joining us today. I'll start by providing a brief overview of our accomplishments for the third fiscal quarter of 2010 and nine-month period and then turn it over to Rich for a review of the financial results. I'll then make closing comments and open the call up for questions.

As expected our third quarter was impacted by the curtailment of orders from our largest customer, GT Solar, earlier in the year. This was particularly evident in our revenues and gross margins. Third-quarter revenues were down year over year to $5.2 million from $8.5 million in the year ago period and, as compared to approximately $6.1 million when normalized our third to second fiscal quarter 2010, if we exclude the $8.9 million nonrecurring material sale of inventory to GT Solar in August 2009.

However, revenues were up approximately 68% or $3.1 million in our first fiscal quarter 2010. Gross margin of 19% for the third fiscal quarter was down 31% in the year ago period which again reflected the impact of the lower sales and working off the inventory sale I referenced earlier.

However, a number of events and macroeconomic trends have given us confidence that things are beginning to improve. TechPrecision remains one of the few companies in its market space that can fulfill demand for the manufacture of large scale, high precision machined metal fabrications. This remains a competitive advantage for us. While the last few quarters have been challenging we believe we have made tangible progress in our efforts to position TechPrecision for long-term sustainable growth.

We have seen now steady improvements throughout the industries we serve and increased activity including requests for proposals and expanded sales activity. This is a direct result of our recent commitment of financial and human capital to increase and focus our business development activities on the markets we serve and customer opportunities that present the greatest potential for long-term production programs.

Those of you who listened to the GT Solar conference call on February 2, heard them state that PV order activity is growing and they expect to book several significant new orders during their fourth fiscal quarter. They further commented that they are seeing significant interest from new as well as existing customers. As a result we received a $3.8 million order from GT Solar during January 2010.

In addition, we have seen increased activity from our Tier 1 customers in the new clear industry. Our pipeline it is at a higher capacity than it has ever been and we're carefully considering the right mix of margin and production as we pursue new business. While we're optimistic this activity will translate into revenue growth in the coming quarters, sales cycles remain long and extended forward visibility continues to be more limited than it was prior to the economic downturn.

The progress we have made has encouraged us and has begun to manifest in our backlog which increased to $15.7 million at the end of our third fiscal quarter on December 31, 2009. This was the first net seven-figure increase in three or four quarters and it validates our confidence in improving market conditions. Moreover, by the end of January 2010 our backlog had increased to $18.1 million; by the end of our fiscal year in March we expect backlog to build above $21 million. Things are definitely moving in the right direction.

Most of the sectors in which we operate -- defense, nuclear industry, aerospace, alternative energy and our newest market, medical devices -- have access to public and private capital and should have access to this capital for the long-term.

The federal budget for defense and homeland security, for example, both industries which we serve, were the only two sectors that did not sustain recent budget cuts by Congress. Annual spending for new Navy ships to maintain the 313 ship fleet target is approximately $25 billion per year and annual spending on new ships between 2003 and 2008 has been $11.1 billion per year.

Recent statements by elected federal officials have given us increased optimism in the nuclear energy side of our business. The federal government's commitment in the form of debt guarantees to support the construction of new nuclear energy plants has been increased from $18 billion to $56 billion.

The total procurement spending for the 104 existing nuclear plants is estimated at $13.29 billion annually and the cost of a new nuclear plant in 2010 ranges from $9 billion to $14 billion per plant. President Obama in his State of the Union address made bullish statements about investing in nuclear energy as a critical component of the nation's overall energy policy, giving us even more optimism for this sector.

In the alternative energy sector market the size for wind and solar was approximately $30 billion annually in 2006 and is expected to grow to $140 billion by 2016. While we have witnessed the impact of the global recession on this sector during 2009, it is beginning to make a comeback.

The medical devices market is our latest entry and its size in 2006 globally was estimated at $200 billion plus and in the US alone was estimated at $86 billion. It's within this industry we have partnered with Still River Systems to provide components and assemblies as for their cutting edge proton beam radiotherapy machine that will treat cancer with less potential damage to neighboring tissue and fewer side effects than current radiation approaches.

Still River Systems is poised to conduct the initial testing on its device and stage the first clinical deployment of the device over the course of the next two quarters. These efforts when successful will position Still River Systems for 510K clearance from the FDA leading to broader market access and demand for their novel proton beam technology.

In anticipation of their success we've recently purchased a $2.3 million piece of equipment so that when Still River's PBRT machine is approved we can seamlessly go into efficient production mode. We expect that this product will generate in excess of $30 million for us when Still River obtains FDA clearance and it goes into production. I'd like to also note that we will be utilizing this new equipment for other projects beyond its intended support for future Still River Systems production.

Our challenge with our new business model and our focus on our business development activities is to diversify our production programs. We're targeting diversification of approximately 25% of revenues from within each sector and to achieve production modality on 75% of our total capacity.

This should substantially diversify away as much as possible the boom bust cycle the Company experienced between 2006 and 2009. This will allow us to convert more of our capacity from job shop to production deployment and garners a more robust and predictable cost and profitability profile to a long-term business model.

With this review concluded I'll now turn to the call over to Rich Fitzgerald for a review of our three- and nine-month financial activity.

Think you, Lou. For the three months ended December 31, 2009 sales decreased to $5.2 million, were down 39% from $8.6 million in the third quarter of our fiscal 2009. Net sales were negatively impacted by the global recession and downturn within the solar industry which affected orders from TechPrecision's largest customer, GT Solar.

Subsequent to the end of the quarter GT Solar requested TechPrecision to expand production for the first time since canceling the majority of its open purchase orders back in April of 2009. Gross margin for the quarter was 19% or $1 million, compared with a gross margin of 31% or $2.6 million in the same third quarter of fiscal year 2009. Gross margin decline was attributable to costs associated with underutilized capacity and a mix of fewer manufacturing services on completed projects this quarter versus the same quarter in the prior year.

Total operating expenses for the quarter ended December 31, 2009 were $990,000 as compared to $539,000 for the same quarter ended December 31, 2008. This reflects an increase in employee compensation, professional fees (inaudible) company expenses and additional consulting fees as well as bad debt expense of $235,000 during the third quarter ended December 30, 2009.

We invested heavily over the last six months in our business development activities and additional consulting for market research and competitive intelligence as we repositioned the Company to take advantage of the opportunities we know are out there and in the market sectors we serve. In addition, we incurred some one-off expenses related to our first annual shareholder meeting which was held back in the mid-October 2009 timeframe.

Net income for the quarter was $205,000 or $0.01 per share basic and $0.01 per share fully diluted for the quarter ended December 31, 2009. This compares to $1 million or $0.07 per share basic, $0.04 per share diluted for the same quarter ended December 31, 2008. The Company completed the quarter, as Lou alluded to earlier, with a backlog of $15.7 million. This is up from the $14.4 million metric we reported in backlog at the end of our last quarter, September 30, 2009.

Turning to our year-to-date results, revenues for the nine months ended December 31, 2009 decreased to $23.7 million or down 30% from $33.8 million during the first nine months of our last fiscal year. A significant portion of this decrease resulted from lower sales volumes with our largest customer, GT Solar; also the global economic downturn adversely impacted our business during much of the last nine months.

Gross margin for the nine months was 18% or $4.2 million compared to a gross margin of 33% or $11.1 million for the comparable period of the prior year. Gross margin decline is attributed to costs associated with underutilized capacity, a lower mix of manufacturing services on completed projects during the period, and lower -- and the lower margin inventory transferred to GT Solar in August of 2009.

Total operating expenses for the nine months ended December 31, 2009 were $2.4 million as compared to $1.7 million for the same period in 2008, reflecting an increase in professional fees, public company expenses and additional consulting fees, severance fees, bad debt expense and corporate travel. Net income was $1.4 million or $0.10 per share basic, $0.07 per share fully diluted in the nine months ended December 31, 2009, as compared to $5.1 million or $0.37 per share basis and $0.19 per share diluted for the same nine months ended December 31, 2008.

At December 31, 2009 TechPrecision had net working capital of $13 million as compared with net working capital of $11.1 million at March 31, 2009, representing an increase of $1.9 million during the nine months ended. Cash used in operations was $1.4 million for the nine months ended December 31, 2009 as compared to cash provided by operations of $4.3 million in the nine months ended December 31, 2008.

The decrease in operating cash flow was due to the net effect of a decrease in net profits, decrease in advanced payments from customers and payments of accounts payable and accrued expenses during the nine months ended December 31, 2009. As of December 31, 2009 the Company had $9.4 million in cash and cash equivalents, stockholders equity increased to $11.4 million compared with $10.1 million as of March 31, 2009.

Now I'd like to turn the call back over to Lou for some closing remarks. Lou?

Thank you, Rich. We spent the last three quarters re-positioning the Company to a point where it can more optimally pursue longer-term production programs in the main industries in which we operate. We brought in a new senior management -- we brought in new senior management and added Board members both with relevant industry experience, added focus, ongoing and senior level business development activities and right sized the operation to function as a leaner manufacturing entity all while maintaining profitability during a difficult economy. We believe we're building momentum.

Again, thank you for your interest in TechPrecision Corporation. We'd like to alert you to several upcoming investor conferences in which we'll participate. We'll be presenting at Piper Jaffray's 5th Annual Clean Technology and Renewables Conference at the Westin Times Square Hotel in New York City on February 23, 2010, at 3:30 p.m., and then at Kaufman Brothers' second annual Green Technology Conference to be held February 24, 2010 at the Boston Harbor Hotel, Boston.

We'll also participate in Roth Capital Partners' 22nd Annual OC Growth Stock Conference to be held at the Dana Point California Ritz Carlton March 15 through 17. We also anticipate starting to conduct non-deal roadshows through the year. We would welcome the opportunity to update you on the progress we're making as we position the Company for long-term sustainable growth. Thank you very much. Operator, we're now ready to begin the Q&A.

(Operator Instructions). Michael Potter, Monarch Capital Group LLC.

Congratulations on a tremendous amount of progress over the past year. Just had a couple questions. Can you go through a little bit with how the pipeline is looking with regards to I guess our three major industry areas of concentration on nuclear defense and then on the healthcare side and perhaps if there are new markets that we're going after as well?

Certainly, Michael, thank you. Rich, why don't I start and then you fill in? First of all, as you know, we've invested significantly in putting in place a strategic plan, a marketing and sales strategy and then staffing that up over the course of this past year to begin to move our company forward in terms of obtaining new business and positioning the Company for growth.

We're starting to see some significant effects of that activity, among which are a much deeper understanding of the customers that we already serve. And where those opportunities will potentially lead us as we take that greater understanding and leverage our current position into a more strategic partnering relationship with our customers.

So, when Rich and I listen to our marketing and sales folks talk to us, for example, about the nuclear industry, which is definitely seeing a renaissance. As you know, we provide products for the Westinghouse AP1000 nuclear reactor. A year ago we understood the parts that we made; today we understand exactly where they go into that system. And through a very deep now technical knowledge of the entire system are leveraging our position into new areas that are collateral to what we're doing today. And that type of activity extends really beyond the nuclear industry into the defense and the medical industries as an example.

Just talking about defense, we have a project underway that is evaluating all of our defense activities. And through intelligent marketing that is an outgrowth of our earlier planning we have targeted new opportunities and are seeing great receptivity in the marketplace for a much more sophisticated approach to our customers. This type of value selling is now a part of the fabric of the Company and is resulting in a pipeline that you're seeing manifest in the growing of the backlog that we have.

Certainly GT Solar represents a big part of that as it's rebounding. However, as we have begun to ramp up again and are pumping out the pressure vessels that we make for GT Solar, we are engaged in the design and fabrication of their next-generation pressure vessels and are very much acting as a partner there.

So, I'll let Rich talk a little bit about the numbers. But the approach that we take with our customers and our opportunities now is really a much more sophisticated and integrated partnering approach as opposed to simply a very capable contract manufacturer. Rich, do you want to add to that? Rich, are you there?

Mr. Fitzgerald, please make sure your line is not on mute.

Sorry, folks. I think I'm back on now, I hit a button. Can you hear me now?

Yes.

Perfect. Well, thank you, Lou, for providing that overview on how we've regeared the whole business development sales and marketing function. To give you some specifics, Michael, of where that effort is bearing fruit, Bill Hoganauer joined us back on October 8. We covered a nuclear conference on October 8 together.

From that conference and the contacts he got there, we received a phone call on a Friday night, one of the nuclear plants had an outage and the prime EPC who was managing that outage thought they were going to need a replacement part to put the plant back online in 30 days.

We spent the weekend putting a proposal together; we were selected as the most ideal person to manufacture that part on a tight time line. Fortunately for the plant and unfortunately for us, they were able to fix the problem and salvage the part that was challenged. But that said, the contact -- the types of contacts that we've building in the nuclear space at the engineering firms, the major nuclear operators now puts us high on the radar, we're very visible and we get those types of calls. And we certainly are going to maintain that dialogue so that they come.

On the defense side, Bill took a team down to a small business conference down in Baltimore and through one of the major defense contractors we were given an earmark for small business participation on a platform for their bidding. That proposal goes in in February; they've been very covetous of us as a small business partner on that platform as they pursue it. And if we're fortunate, they will be the prime on that particular defense program and we will ride their coattails as a small business subcontractor.

So, there is a lot of activity. I think we will see it over the coming quarters. Again, the sales cycles in this business are six to 12 months depending on the program and the [sectors]. And within the nuclear space Bill took over a consulting firm relationship that I had begun before he arrived and we've really been making the rounds meeting with all the major players in the existing nuclear plant arena who service those plants and manage their outages, etc., as well as being well positioned with Westinghouse, AREVA, General Electric.

Just last week Bill was down in North Carolina meeting with the folks at General Electric relative to their nuclear renaissance preparation. So I think in the space we play as an end stamp manufacturer, we have probably been out to touch more pieces of the market in the last six months as anybody who plays in our space. So we're going to continue to do that; we're going to be intelligent about focusing the business development and the marketing effort.

We've recently added another salesperson who has maritime and nuclear maritime background, so he's quite helpful on the team with Bill and we're going to continue to pursue things. But again, sales cycles are long and the production cycles are long on this. So you'll see it in the backlog first and as we get more precise in sorting our pipeline we'll look to report on that for you and how it transitions into backlog going forward. Is that helpful, Michael?

Yes, it is. Thanks, guys, I'll get back in queue.

All right. Thanks, Michael.

(Operator Instructions). Harry Grabel, private investor.

Good afternoon, gentlemen. The nuclear question has been out there for some time now and I don't disagree that it's getting a lot more attention now than almost any other time in the past 20 or 30 years. Given that a plant that's so capital-intensive to get it up and running, in the talks that you've been having with industry participants, what do you think is a -- that's not something I would certainly hold you to -- but what's a feasible timeline even to get to the point where you would put the shovel in the ground to get the first shovel full out of the way at the site? Realistically how long do you think you're talking just to get there?

I think, Gary, what you're seeing -- and those who are looking at where the first new plants will be built -- the new generation of plants will be built, initial ones will be built alongside the existing operating nuclear plants, so sites that were originally scaled for four units but only have two on them. Do shovels are already moving and allowing those sites to accept new build when anyone pulls the trigger.

What's really hurt us in some ways as this nuclear renaissance was percolating; we've had a collapse in electrical demand, particularly on the commercial and industrial sides. I'll give you an example. Some statistics I have through Exelon, one of my previous employers, is that the electricity demand in Chicago, because of its industrial and heavy commercial base, is down 25%.

So I think what we're seeing is with the electricity demand sliding down with the overall economy, those folks who were ready to pull the trigger earlier on the nuclear new build may be hedging their bets and staging things out over a long period of time. That said, with the Obama administration coming in and tripling the amount of debt guarantees that are available -- previously we only had $18 billion of debt guarantees and they went out to four companies -- meant to entice them to put shovels in the ground, steel in the grand and pull the trigger on new plants.

Many of these new plant will be built down in the Texas and south and southeast area where there is loading -- load demand and they can still plug these into rate base because they have haven't deregulated those markets. So from a risk profile, they'll have an easier time financing those and the debt guarantees from the government certainly backstop a lot of these projects. Does that help sort of frame it up for you, Gary?

Yes, it does. But kind of considerations are there going to be in the way of the grid which is already in third world condition? I know that that's going to be worked on over the years and a lot of money thrown at it. Do you see any problems there if and when this renaissance action begins to take shape?

No, I mean I think that certainly the grid getting more robust to move power around, one of the problems you have with nuclear plants, and the AP1000 is an example of it, they sized it to 1,000 megawatts, not 1,200 megawatts or 1,600 megawatts, but 1,000. So as you look to put these nuclear plants or any other type of generation on the grid you want to make sure you have transmission that can get you to as many power pools or as many markets as you might be able to serve from that site.

The existing nuclear sites or if you're going to be power an old pool site will have transmission and will have a place on the grid that can support them and get them to market. I think improving the grid can only help the nuclear plants which are base load; they run of 7x24 when they're up other than when they're refueling. And they want to be able to move that power around on the grid through trading and wholesale metrics.

So, I don't see -- certainly the grid needs to be reinvested in, and with electricity demand growing as it's projected to grow between now and 2030, redoing the grid is an important part of it. But we're going to need a lot of baseload to serve -- new baseload to serve the growing electricity demand between now and 2030.

All right, that helps a great deal. Thank you.

Sure.

Thank you, Gary.

Stephan Miskjian, Stat Investment Strategies.

Hello, gentlemen, first of all nice to see the turnaround developing in the Company. My question is regarding Hayden IR, and what precipitated the decision to hire them and what do you hope to accomplish out of the relationship? Thank you.

Why don't I start with this one, Rich? That's a very good question. When Rich and I took over about -- it's coming up on a year ago, we undertook a bottom to top and top to bottom review of the Company and development of a strategic plan. And in the course of doing that and setting the direction for the Company, Rich and I reviewed all of the professional relationships that we had and really against the backdrop of that new plan.

And the decision to go to Hayden IR was the result of a process that we engaged in that involved evaluating six potential IR firms. And over the course of that process, while interviewing and receiving proposals, we felt that Hayden IR was most optimally positioned to help us get out our message into the markets and the investor base that we wanted to attract. Therefore we decided to make that change. And it was really not a dissatisfaction with our previous IR relationship, but one that was a better alignment with the Company and its new strategic direction. Rich, what would you add to that?

I think I'd just amplify on the points -- that last point, it wasn't so much a dissatisfaction with any previous provider, but rather we've repositioned the Company, we're starting to ramp up on the IR campaign as we kept the turnaround going here. And we wanted to get fresh legs and a fresh approach. And having surveyed the landscape of folks who do a nice job and like to represent microcaps such as ourselves, we felt Hayden was going to give us a fresh start, a good look and some good positioning.

And so far so good. Although we've only been at it a couple of weeks, we've got a number of conferences we're going to cover together and Hayden certainly is thinking hard and starting to do some planning around roadshows we can do in the near term.

Thank you.

You're welcome.

(Operator Instructions). [Tony Pollack].

Good afternoon. Could you comment on both of your contracts, how long they're for and where they stand?

Yes, thank you, Tony. One -- I guess I'll start. As most of you I think know, I'm in an interim role that began the anniversary -- one-year anniversary will be March 31. And that interim role in our most recent Board meeting a couple of weeks ago has been extended into the middle of the summer while we complete the process of searching for a full-time CEO of which I'm a candidate during the search process.

The Board was expanded recently to include Admiral Phil Dur who has joined the compensation committee and has provided quite a lot of direction for us in the process that we're going through in making sure that we select the right person to take TechPrecision forward in the next phase of its life. And certainly the Company needs a full-time CEO and the right one as soon as we can go through that measured and disciplined process and have the individual vetted fully with the Board.

I'm committed to remain with the Company through the conclusion of that process and, regardless of the outcome, expect to continue as a member of the Board. That is my situation. With respect to Rich -- Rich, why don't you comment on yours and I can fill in where necessary?

Yes, sure, Tony. With regard to mine, I came to this situation back in March, primarily because I had experience in the nuclear industry as well as in the medical industry and I felt this would be an interesting opportunity from which to grow business and do some good things. Hiring Bill Hoganauer in the fall certainly reinvigorates me and it took a lot of work off my shoulders so I could focus on the CFO function and have business development handled by someone in good stead.

My agreement is as it was, I'll certainly look to stay with the Company and keep doing the things that we've been doing here. So I'm very supportive of getting the right CEO in here, certainly very comfortable with Lou, but also recognize this is a company that previously had a preordained executive suite and we want to be disciplined and professional at the Board level and the executive level as to how we fill the leadership rank here. Is that helpful, Tony?

Yes.

As to how our process will play out here?

Yes, thank you.

Great, thanks, Tony.

Thank you. Ladies and gentlemen, at this time I would like to turn the meeting back to management for any closing comments.

Thank you very much, Operator. We appreciate very much the support of our investor base. Part of what Rich and I have tried to do in repositioning the Company was -- one, to reestablish some confidence in us as a management team and in the Company in terms of its direction. We are optimistic, as we stated, about the direction we're taking now and are pleased with the results that are beginning to be demonstrated.

Certainly we're benefiting from some improving market conditions, but we also think that the actions that we've taken are contributing significantly. We expect to continue on this trajectory and we will continue to keep our investors, present investors and potentially new investors informed of what we're doing, aware of the good news in the business, aware of the developments as we're permitted to disclose them to the market. And again, appreciate very much your support and look forward to continuing to improve. Rich?

Yes, the only thing I'd point out, typically it's been our -- it's been the case that we would file our 10-Q ahead of these calls so that any investors who wanted to pull them down ahead of or trailing the call could do so. Unfortunately this storm that has disrupted most of the East Coast has the SEC closed today and perhaps even tomorrow.

So that will get filed -- our law firm was also, our SEC council was also closed today, they had no power at their office. As soon as the world and the East Coast gets back on its feet here and the SEC we will get that 10-Q filed and it will be available for those of you who need to pull that down and add it to your docket of information. Apologies for that, but mother nature is more to blame than anyone else.

Thanks, Rich. Operator, that will conclude our remarks.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you.