TechPrecision Corp (TPCS) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the TechPrecision Corporation fourth-quarter 2010 and year-end earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Wednesday, June 23, 2010. I would now like to turn the conference over to Jeff Stanlis, with Hayden IR. Please go ahead.

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

Before we begin let me remind you that this call is being broadcast over the Internet and that a recording of the call and the text to our prepared remarks will be available on our website. I would also like to direct listeners' attention to the Safe Harbor statements contained in today's press release and posted with these prepared remarks, both of which apply to the content of this call.

I would now like to turn the call over to Mr. Lou Winoski, TechPrecision's CEO, to provide opening remarks. Lou?

Thank you, Jeff. Good afternoon and thank you all for joining us today. I'll start by providing a brief overview of our accomplishments for the fourth fiscal quarter and full year period ended March 31, 2010, 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.

Third-quarter shows that we're moving in the right direction and our core markets are beginning to recover from the challenging economy we've faced for most of the last year. We made considerable progress in our efforts to positioned TechPrecision for long-term sustainable growth.

We've seen three consecutive quarters of 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 to increase and focus our business development activities on customer opportunities that present the greatest potential for long-term production progress.

For the fourth quarter we grew revenue when compared to the prior-year fourth quarter. More importantly, we continued to expand our backlog reaching $25.7 million as of the end of May. At December 31, 2009 we reported a backlog of $15.7 million, therefore we've added a net $10 million or 63% built backlog over the last six months, which speaks cautiously to the beginnings of a global and domestic economic recovery in our markets.

Fourth-quarter fiscal 2010 revenues increased 8.9% to $4.7 million from $4.3 million in the year ago period. In addition gross profit increased to $1.9 million, or 40.3% gross margin from $1.1 million, or 25.8% gross margin in the year ago period. I'm pleased we were able to increase our revenue compared to the fourth quarter last year, especially considering we were missing a portion of revenue, albeit at lower margins, related to the procurement of raw materials for GT Solar.

As many of you know, in August of last year we transferred materials to GT Solar resulting in a significant one-time gain for us during the second quarter of this year. We continue to store this inventory and, now that this business is beginning its recovery, we're working off this inventory and only recognizing processing or service revenue.

This will continue until the previously transferred inventory is extinguished, but the good news in this regard is twofold. First, the GT Solar business is recovering and that's obviously important. Secondly, the service-related business is higher margin, so we're reporting higher gross margins versus previous periods. On a normalized basis, however, after we work off the transferred inventory our revenues should increase our margins should return to more historical levels as we shift back the historical mix of services and revenue.

We invested significant time in developing a strategic plan as well as marketing and sales strategy to move our company forward. We now have a much deeper understanding of the customers that we already serve and where opportunities will potentially lead us as we take that greater understanding of lever to current position into a more strategic partnering relationship with them.

We targeted new opportunities and are seeing great receptivity in the marketplace with our more sophisticated integrated partnering approach with our customers and prospective customers. This type of value selling is resulting in a more robust pipeline that should yield incremental orders on backlog moving forward.

We believe that rising energy demands along with increasing environmental concerns are likely to continue to drive demand in the alternative energy industry, particularly the solar, wind and nuclear power industries. Because of our capabilities, and the nature of the equipment required by companies in the alternative energy industries, we intend to focus our services in this sector. We also expect to market up our services for medical device applications where customer requirements demand strict tolerances and an ability to manufacture complex heavy equipment.

Related to that, we were excited to announce that our customer, Still River Systems, Inc., has successfully extracted a critical beam from the first production unit of the world's smallest high energy proton therapy accelerator. This paves the way for the first installation of the Monarch250 proton beam radiotherapy system at the Siteman Cancer Center at Barnes-Jewish Hospital Washington University School of Medicine in St. Louis, Missouri.

Our subsidiary Ranor has been working in close collaboration with Still River Systems over the past two and a half years to develop an efficient manufacturing process to produce the system. Ranor has an exclusive manufacturing and supply agreement with Still River Systems to manufacture key components of the Monarch250 proton beam radiotherapy system. Following FDA clearance of the Monarch250, this could generate approximately $30 million in revenue to Ranor over the subsequent three years.

We have additional efforts focused on the development and fabrication of medical isotope storage transportation solutions in addition to components for the Still River machine. Significant tax incentives related to the American Recovery and Reinvestment Act of 2009 could drive increased demand on the part of some customers and we're already seeing this in additional orders we've received to date from GT Solar.

In addition, as a result of the increased price of oil and volatility of natural gas pricing along with greenhouse gas emissions, nuclear power may become an increasingly important source of energy. In January 2010 the Obama administration increased the level of government-backed debt guarantees from $18 billion to $56 billion as an incentive to support the construction of new nuclear plants within the US.

Because of our manufacturing capabilities, our nuclear certifications from the American Society of Mechanical Engineers and our historic relationships with suppliers in the nuclear power industry, we believe we are well positioned to benefit from any increased activity in the nuclear sector.

In January the Company issued a purchase order for a large-scale gantry mill which represents an investment necessary to refresh and upgrade the Company's fleet of manufacturing equipment and capabilities to increase and strengthen our manufacturing, marketing, product development, and customer diversification.

Our pipeline 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. The challenge with our business model and our business development focus is to diversify our production programs and customer mix.

I'd like to reiterate that 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 from, 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 longer-term production deployment.

However, as we transition to this more robust and predictable cost and profitability profile for a long-term business model, we may still experience decreased order visibility, long product lead-times and long supply lead-times, all of which may continue to make our financial metrics choppy from quarter to quarter. With this review concluded I'll now turn the call over to Rich Fitzgerald for a review of our three- and 12-month financial activity.

Thank you, Lou. For the three months ended March 31, 2010, as Lou indicated, sales increased to $4.65 million, up 8.9%, from $4.27 million in the fourth quarter of our fiscal year 2009. Net sales were positively impacted by the resumption of orders from our largest customer, GT Solar, for the first time since canceling the majority of their open purchase orders back in April of 2009. However, most of this impact occurred during the backend of the fourth quarter.

Gross margin for the fiscal fourth quarter and 2010 was 40.3%, or $1.29 million compared with a gross margin of 25.8%, or $1.1 million in the fourth quarter of fiscal year 2009. The gross margin increase was primarily attributable to better utilization of capacity and the mix of completed projects. As Lou mentioned, our revenue is weighted towards services as we aren't currently recognizing materials procurement revenue for GT Solar and we are experiencing higher margins as a result of this and the improved capacity utilization.

Total operating expenses for the quarter ended March 31, 2010 were $921,000 as compared to $755,000 in the same quarter ended March 31, 2009. This reflects an increase in payroll and related costs, professional fees, public company expenses and additional consulting fees.

Net income for the quarter ended March 31, 2010 was $656,000, or $0.05 per share basic and $0.03 per share fully diluted for the quarter. And this compares to net income of $868,000, or $0.06 per share basic and $0.04 per share fully diluted in the same quarter ended March 31, 2009.

Turning to year-to-date results for our fiscal year 2010, revenues for the year decreased 26% to $28.3 million from $38.1 million of the prior year. A significant portion of this decrease resulted from $7.1 million in lower sales volume with our largest customer, GT Solar, during fiscal year 2010. Also the global economic downturn adversely impacted our business during much of the last 12 months.

Gross margin for the year was 22%, or $6.1 million. Our gross profit compared to gross margin of 32% and $12.1 million in the prior year. The gross margin decline is attributed to costs associated with underutilized capacity during the year, a lower mix of manufacturing services on completed projects during the period and lower margin on inventory that was transferred to GT Solar back in August of 2009.

The operating expenses for the year were $3.3 million as compared to $2.5 million of the prior year, reflecting an increase in professional fees, public company expenses and additional consulting fees as well as bad debt expense and costs related to the Company's first annual shareholder meeting in October of 2009.

In addition, we invested heavily during our fiscal year in our business development activities. This was an additional consulting for market research and competitive intelligence as we reposition the Company to take advantage of the opportunities we know are out there and the market sectors we serve.

Net income was $2 million, or $0.15 per share basic and $0.10 per share fully diluted for the current year compared to $5.9 million, or $0.43 per share basic and $0.23 per share fully diluted for the prior year. At March 31, 2010 TechPrecision had net working capital of $13.3 million as compared with net working capital of $12.6 million in the prior year. This represents an increase of $2.1 million, or 19% during the past 12 months.

Cash used in operations during the year was $1.4 million for the 12 months ended March 31, 2010 as compared to cash provided by operations of $9.3 million for the 12 months ended March 31, 2009. The decrease in operating cash flow was due to the net effect of a decrease in net profits, a decrease in advanced payments from customers due to lower sales volume, lower sales order volumes during the year, and payments of accounts payable and accrued expenses over the last 12 months ended March 31, 2010.

As of March 31, 2010 the Company had $8.8 million in cash and cash equivalents, stockholders equity increased to $12.1 million compared to $10.1 million as of March 31, 2009, an increase of $2 million or 20% over the last 12 months. With that recap, I'd now like to turn it back over to Lou for some closing remarks. Lou?

Thank you, Rich. We're pleased with the progress we made in fiscal 2010 to reposition the Company. In building momentum over the last several quarters as the economy recovers and we implement a more strategic and focused approach to generating new business, with existing customers as well as new ones. We understand our customers' requirements better and, due to our business development activities, we are now on the radar with many organizations where previously we had minimal or no visibility.

Our expanded sales and marketing activity has generated good contacts within our designated markets. This has resulted in more RFP activity, more relationships and more potential for business. For example, the types of contact we've been building in the nuclear space and engineering firms and major nuclear operators now puts us higher on their radar. We're more visible and have established dialogues so that as they secure business we will be in a position to talk contract with them.

In terms of our outlook, as we look into fiscal Q1 we expect a full quarter of benefit from resumed activity from GT Solar. This should result in continued year-over-year increases in revenue. Sequentially we expect a moderate improvement in gross profit and operating income due to higher capacity utilization as well as a higher mix of production-related revenue on our top line comparable with the fourth quarter just completed.

We expect to continue to rebuild our backlog as fiscal 2011 progresses. Over time we expect our business development efforts to help smooth the quarter-to-quarter volatility in our revenue and drive incremental profitability as we more effectively utilize our capacity.

We are optimistic about our new strategic direction which is reflected in our pipeline and resulting backlog. Certainly we're benefiting from some improving market conditions, but we also think that the actions we've taken are contributing to the positive activity.

We very much appreciate the support of our investor base during this exciting phase of our corporate development and look forward to updating you on our next conference call. Thank you very much. Operator, we're now ready to begin the Q&A.

(Operator Instructions). Michael Potter, Monarch Capital.

Hey guys, congratulations on another solid quarter and continued progress.

Thanks, Michael.

Lou, perhaps you can go into some of the business development side and a little bit more detail on the pipeline. Can you give us what the current dollar value is of the pipeline of the business that we're chasing and how that perhaps compares to the end of Q3 in this time last year?

I can give you some qualitative comments on that, Michael. Let me put it this way, last year at this time we had a dwindling pipeline. Today that pipeline is rather significantly growing. And factoring for probabilities today the pipeline is two to three times the current backlog that we currently have, okay.

So we have -- we're a company that makes large robust products. We've got a relatively long sales cycle. What we've seen over the course of the last year is, frankly, some of the things that we were working on before the downturn had come back to us and then an equal amount I would say of new opportunities that we've gone out and mined are now in that pipeline.

So we find ourselves in the fortunate position, Michael, right now of what we had hoped to do a year or so ago. That is become very selective about the opportunities that we have to take because, frankly, we will be stressing our capacity as the year goes forward. Is that helpful?

Yes, so currently your pipeline is about two to three times our current backlog as far as dollar value goes and about half of those opportunities are new relationships for the Company? Is that correct?

They're the result of our new strategic sales and marketing focus.

Okay, great. That's terrific. With regards to still River, we had finally some major news out of Still River and their progress I guess about a month or two ago. Have they started to move the first system to Barnes Hospital in St. Louis yet?

I'll take that, Lou, if that's all right. Yes, Michael, where that stands is they have been systematically preparing that site over time and while they were in testing we've been out to do some staging work. We've certainly been preparing shipments and making shipments so that site has been under construction. It is under project staging and that will be the next stage of positioning this technology for review and scrutiny by the FDA under 510(k) is that Barnes Jewish site at Site 1 for the Monarch250.

So have they started moving the unit from Boston to St. Louis yet?

Don't really know the status of that, Michael. Parts have been there. Some parts -- parts were installed months ago, so the bearing housings have been there and it's a construction site and components move.

Okay. And with regards to some of the earlier work that's been sitting on the shop floor for Still River, have we been moving forward with any of that work as of yet?

We're certainly in dialogue with them. We have Still River components for the prototyping still in our backlog and in our WIP. That's roughly three units to make sure that they can meet their initial commitment. Then we have the production which is post the FDA approval which is the $30 million exclusive contract we referenced. But we are still (multiple speakers).

But we haven't started -- sorry, go ahead, Richard.

We are still prototyping for them and making sure they have the components necessary to enable Barnes-Jewish to complete the site configuration.

So we haven't started work on those two additional units yet? Or restarted work I guess.

We've been doing work for them all along and we interfaced with them on their production requirements and when and how they want things staged, yes.

Okay. And you were talking about the American Recovery Reinvestment Act. Can you give us a little bit more specifics on what it exactly means to our company and perhaps what -- I'm assuming some of the work that we're going after from potential customers is contingent upon them getting some of this federal money?

I wouldn't necessarily say that. I think some of our customers are looking at that opportunistically and I think if they've got innovations that they believe need to matriculate to market ahead of any government funding pace that might be available, we certainly see our customers looking for funds where they're available. It's non-dilutive financing to them. Why wouldn't they look for that?

But we've also -- in our dialogues we found folks, customers who are willing to press forward. And if the funding spigot doesn't line up with their product timelines they'll keep moving forward. So I don't know that people are -- some customers may be waiting for that spigot to open. Others are hopeful that it's open, but we'll press forward without it. So it's really a sort of mixed bag, if you will. Is that helpful?

Yes, yes. And perhaps specifically on the nuclear maintenance side, can you tell us what kind of progress we've made on the business development side and some of the relationships that we've perhaps developed and where some of those projects stand in our pipeline?

The pipeline as it stands now, we have roughly 8% of the pipeline we referenced at the end of May is nuclear related. So I think that's not a bad piece of it. If you look at what's happening in the nuclear field today, and perhaps this is speculation on my part, we know we've got natural gas that's now -- the Henry Hub is down in the $4 to $5 range, it's been as high as $8 or $12 the last 24 to 36 months.

And I think I've heard some of the nuclear operators talk about $8 an Mcf Henry Hub being the price point at which you've got a strong build now signal for the nuclear plants. And I think that also drives them as to when they regird the equipment and pursue additional capacity and uprates. So that's out there and that is a market driver that I think drives the timing of this.

With regards to business development, we have been out with some industry experts over the last 12 months and we've been with all the players who influence and participate in both newbuild as well as the maintenance of the existing 104 nuclear plants that are on the grid. And I believe we've enhanced our visibility. We're getting ready now to go on a second campaign and revisit those folks and make sure we maintain that visibility.

So I think we've got the channel open, hopefully we'll get some flow from it. But it's very hard to predict and nuclear plants are fairly secretive. Other than when they're required to post their refueling outages and the like with the NRC, there's not a lot of forward visibility other than through their vendors.

Okay, terrific, guys. I'll get back in the queue.

(Operator Instructions). I'm not showing any further questions. I would now like to turn the conference back to Lou Winoski. Please go ahead, sir.

I'd like to say again thank you to everyone on the phone call, especially to our investors for your continued support. We as a management team are very confident in the course that we set a little bit over a year ago, regardless of the economic recovery which is certainly evident to us through our lenses. We believe that the things that we have undertaken, which some are quite fundamental frankly, are now affirmatively moving the Company in the right direction.

And we certainly look forward to this time three months from now, giving you another report on our activities which represents that continued trend. So we thank you very much and I'll turn it over to Jeff if there are any closing remarks from Hayden IR.

Thank you very much. We appreciate your participation. The Company will be participating at the Sidoti conference on Friday and we hope if you're in the city and attending the conference you'll come see the presentation.

We're at the 9.20 slot within the conference -- 9.20 a.m.

Thank you, Ladies and gentlemen, this concludes our conference for today.