TechPrecision Corp (TPCS) 2013 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the TechPrecision Corporation first quarter 2013 earnings call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be for questions. (Operator instructions). I would now like to turn the conference over to our host, Jeff Stanlis with Hayden IR.

Thank you. Welcome to everyone joining us today. On the call with us are Jim Molinaro, TechPrecision's Chief Executive Officer; and Rich Fitzgerald, Chief Financial Officer. I would like to mention this call is being simulcast on the Internet through our website at www.TechPrecision.com, along with the slide presentation. If you have not already done so, now would be a good time for you to go to the website and download the slide presentation. In addition, the presentation should be available on today's webcast.

If you will turn to slide two, before we begin, may I remind our listeners that management's remarks may contain forward-looking statements which are subject to risks and uncertainty, and management may make additional forward looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements as contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore, we refer you to a more detailed discussion of risks and uncertainties in the Company's financial filings with the SEC. In addition, projections as to the Company's future performance represent management's estimate as of today, August 14, 2012. TechPrecision Corporation assumes no obligation to revise or update these forward-looking statements.

With that out of the way, I would like to turn the call over to Jim Molinaro, TechPrecision's CEO, to provide opening remarks. Jim?

Thanks, Jeff. Good day, everyone, and thank you for joining us. It has been less than a month since our year-end earnings call which was held on July 16, so for this Q1 fiscal 2013 earnings call, we will provide updates to the key points discussed during our last call. On the call today, we will follow an agenda that will include a brief overview of our first quarter. Rich Fitzgerald will then detail our Q1 fiscal 2013 financial results. I will follow up with operational and business updates at our Ranor and WCMC divisions and close with updates to our expected fiscal 2013 pipeline and outlook.

If you'd please turn to slide 4, the fiscal first quarter of fiscal 2013 included many positive milestones. We are expecting the second quarter to represent the turning point for our Company and the Ranor transition, and expect to be profitable for the second half of this year. As previously mentioned in our recent Q4 call, our Ranor division experienced heavy volumes of complicated first article or prototype projects throughout fiscal 2012 and early part of Q1 fiscal 2013, as we move to offset Ranor's largest customers' migrating solar production from domestic sources to our WCMC facility production capabilities in China so they could be closer to their customers. The prototyping and specifically pricing of the prototypes adversely impacted our revenue mix, gross margin, operating margin and net income over the last several quarters.

One milestone during the quarter was that most of the remaining prototype projects shipped during Q1 of fiscal 2013, and we believe we have turned the corner on contract losses at the Ranor division. As most of you know, we brought in new leadership at our Ranor division in Bob Francis, the new President and General manager of Ranor, has now completed the transition of his senior management team with the implementation and new management for the sales, engineering, production planning and finance departments at Ranor. Mr. Francis and his new team are now positioned to turn the prototype opportunities into significant profitable production opportunities along with ongoing performance improvements during 2013, which is another milestone for the Company.

Customers have reacted favorably to our changes at the Ranor division and feedback continues to be very positive. We continue to be optimistic for significant growth in the medical, nuclear and defense sectors. And this is further supported by achieving one of the largest backlogs in the last five quarters. As of July 31, our backlog has reached $32.4 million. As significant as this backlog number is, it is noteworthy that only $4.5 million of this backlog comes from our largest historical customer. This demonstrates our ongoing success at diversifying the customer base beyond alternative energy, and specifically beyond solar. Our backlog and pipeline support our fiscal 2013 strategic plan to return this Company to profitability and growth and is further evidence that we are turning the Company around going into the final three quarters of fiscal 2013.

Another positive note for Q1 fiscal 2013 is that our WCMC division in Wuxi, China began production of sapphire chambers and production volume shipments have commenced during fiscal Q2 2013.

Please turn to slide 5. Historically, revenue fluctuations have been a major part of our business as there has been too much dependence on just a few major customers and products. When viewing this slide of our product mix by market segment, you can see a significant portion of our business historically was generated by a small number of major customers, the largest being our solar customer. The balance of our business consists of discrete projects for numerous other customers. Our largest customer since fiscal 2008 was the leader in solar energy space, enabling high-quality multicrystalline wafer production. This customer accounted for 34% of our net sales in fiscal 2012 compared to 55% of our net sales for fiscal 2011. Fiscal year 2011 sales to this customer were exclusively through our Ranor division, while in fiscal 2012 we generated over $4 million in sales from our WCMC division in China.

It is important to note that this customer represents just $2.3 million of our June 30, 2012 backlog, even though the backlog has grown to its highest level in three years. This compares to the historical backlog levels from our GT [AT] of $10 million to $16 million. Also evident on this chart is the increasing contribution from nuclear and medical customers. We continue to focus on strategic imperatives and expect to see significant growth in the medical, nuclear and defense sectors for Ranor over the balance of fiscal 2013 and beyond, positioning us for a much greater revenue diversity as we move forward.

Now I'll turn the call over to Rich for a more in-depth review of our financials. Rich?

Thank you, Jim. Please turn to slide 6, if you would. For the three months ended June 30, 2012, revenue was $7.1 million compared to $9.2 million in the same fiscal quarter one year ago. The primary reason for the $2 million, or 22% year-over-year decline in revenue, was the complexity of a heavy mix of prototype and first article projects, primarily at Ranor in Massachusetts. Also, our WCMC subsidiary spent most of the quarter preparing to transition from solar furnace manufacturing to sapphire furnaces. As a result, the revenue base at WCMC was largely limited to field service upgrades and repairs, resulting in a revenue contribution for Q1 of $400,000 or $0.4 million. As WCMC migrates into volume production over the balance of 2013, and specifically in Q2 that begins, we look for its revenue and margin contribution to become more significant over the balance of fiscal 2013.

From the perspective of sales mix, within the first quarter of fiscal 2012, reported revenue from alternative energy customers was $1.7 million or 24% of total Q1 2013 revenue. This compares with $5.3 million or 57% of total revenue reported during the comparable first quarter of fiscal 2012, one year ago. Q1 fiscal 2013 sales to customers in the commercial/industrial sector amounted to $0.5 million or 7% of consolidated Q1 sales, while revenues to customers in the defense and aerospace sector during the quarter totaled $3.4 million or 48% of the quarterly revenue.

During the quarter ended June 30, 2013, sales to the nuclear power sector were $0.6 million or 9% and sales from medical device sector were approximately $0.8 million or 12% of the total quarterly revenue figure.

Gross profit for the quarter ended June 30, 2012 was approximately $1.1 million or 15% of sales compared to a gross profit of $2.4 million or 26.4% of sales for the first fiscal quarter of last year. Contract losses of $0.3 million incurred during the first quarter of fiscal 2013 on US production resulted in significant gross margin erosion within the quarter. As Ranor transitions away from this heavy volume of prototyping and first article production back to a mix of business that features repeat production work, margins should rebound to historical levels over the balance of 2013. We expect Ranor's mix of business to shift back to featuring a greater percentage of repeat production as we migrate through fiscal 2013.

Turning to expenses, selling, general and administrative expenses for the first quarter were $2 million, which compares to $1.7 million of SG&A expense in the year-ago first quarter of June 30, 2012. This reflects an increase of $0.3 million or 15%. The majority of the year-over-year increase is attributed to higher staffing levels and payroll-related costs of $0.2 million in the US and China. The Company also incurred approximately $0.1 million of consulting and professional fees within the quarter.

Net loss for the quarter ended June 30, 2012 was $0.7 million or $0.04 per share basic and fully diluted based on 18.4 million shares basic and fully diluted shares outstanding. Due to the loss position in the first quarter, all common stock equivalents were deemed anti-dilutive for the quarter ended June 30, 2012. This compares with net income of $381,000 or $0.02 per share basic and $0.01 per share fully diluted, based on 15.5 million basic shares outstanding and 24.2 million fully diluted weighted shares outstanding in the prior-year Q1 period.

As of July 31, the Company's backlog was $32.4 million, as referenced by Jim earlier in this call, which is up from $26.3 million in the quarter ended June 30, 2011 one year ago. The fiscal 2013 backlog includes approximately $2.3 million in open purchase orders from the Company's largest customer, while the Company's backlog at June 30, 2011 included $6.5 million in purchase orders from the same customer. Backlog at June 30, 2012 included $2.3 million of open purchase orders issued under a $9.5 million purchase agreement executed back in February of 2012. We expect to receive additional purchase orders for the balance of the $9.5 million purchase agreement over the remainder of fiscal 2013.

Turning back to March 31, 2011, the last time we had a backlog of this magnitude, which was $32.5 million, it included $10.8 million of open purchase orders from our largest customers. Again, the significance of our July 31, 2012 backlog is that we have reestablished this threshold of backlog, but with lower customer concentration and better diversification within the backlog.

Please turn to slide 7. Turning to our liquidity and balance sheet at June 30, 2012, we had $4.4 million in cash and cash equivalents and net working capital of $9.6 million as compared to net working capital of $10.2 million back on March 31, 2012. This represents a decrease of $0.6 million or 6% during the first quarter of 2013. Cash provided by operations was $1.9 million as compared to cash provided by operations in Q1 of the prior year of $1.3 million.

Cash flows from operations during Q1 2013 were benefited by the receipt of $0.6 million in accelerated tax refunds and also a higher volume of advance payments from customers on open projects in Q1 2013.

Turning to long-term debt, total debt outstanding decreased by $342,000 within the quarter to $6.8 million total debt outstanding as of June 30, 2012, and this is a reduction from the base we had back at March 31, 2012.

With that brief financial recap, I'd now like to turn the call back over to Jim for some additional remarks. Jim?

Thanks, Rich. If you would, please turn to slide 8. As we discussed (technical difficulty) fiscal year-end conference call, we received information from several customers which reinforces our outlook for growth in fiscal 2013 and should expand Ranor's capacity for specialized production volumes, allowing us to migrate away from a heavy mix of prototyping. Several of these opportunities were described in the shareholder letter which was issued on August 2, and I wanted to take this time to highlight a few.

Mevion received FDA 510(k) clearance for its S250 proton therapy system in June of this year. TechPrecision has been providing exclusive manufacturing services to Mevion for the Mevion S250, a first-of-its-kind single-room proton therapy system in the United States, and this regulatory clearance sets the stage for significant growth. As of July 31, our backlog for the medical sector stood at over $6 million. This is a significant increase compared to the $1 million we shipped for this sector in all the entire fiscal year 2012. Subsequent to the end of June quarter, Mevion shipped its second Proton Beam cancer treatment system, this time to Robert Wood Johnson University Hospital in New Brunswick, New Jersey, the flagship cancer hospital of the Cancer Institute of New Jersey and the principal teaching hospital of the Robert Wood Johnson Medical School. This is the second system delivered in the past nine months by Mevion.

In addition, our key customer Alpha-Omega Systems received its NRC approval during first quarter and we expect increased business from the production of transport casks to facilitate this customer's efforts. These isotope transport casks have been submitted for fissile material transport, which is expected by second quarter of calendar 2013, creating further demand for the transport cask. TechPrecision's Ranor division passed the NRC manufacturing process and quality audit for the cask production in March of 2012.

In addition, last week, we announced a $1.5 million incremental order to produce these nuclear isotope transfer casks for Alpha-Omega Systems, which as of July 31 puts our cask backlog at over $3 million. We look forward to additional growth opportunities as this market discontinues the use of the older casks that do not meet current NRC requirements.

The defense and aerospace sectors also continue to grow and as of July 31 our backlog in these sectors was over $12 million. Regarding the alternative energy sector, as of July 31, our sapphire products accounted for over $4.5 million of the current backlog.

Please turn to slide 9. Our current strong backlog of products in the medical, nuclear, defense and sapphire sectors validates our strategy to expand our business into areas that have shown increasing demand and which we believe can generate higher margins of -- in which we believe can generate higher margins. The positive responses we have had from customers in these sectors reflect our ongoing ability to maintain, develop and expand relationships within these specific industries for long-term growth.

We look forward to continuing quarter-on-quarter improvements in revenue and bottom-line results.

With that, I'll turn the call over to the operator for a question-and-answer session. Operator?

(Operator instructions) Greg Garner, Singular Research.

Nice sequential improvement, gentlemen. At the Ranor facility, this shifting away from or improvement in the pricing for the prototype and first article -- does this also mean that volume is decreasing as we are moving into 2013, or we are really talking more the shift of the pricing for those?

If we are to enter into large-scale prototype projects, I assure you that Bob and his new team will make sure it's priced correctly. And so, I think what we are saying is the prototypings have wound down, and those were the prototypes that were not priced correctly. And, again, Bob and his team are -- have the right processes in place to make sure that doesn't repeat itself.

So we are being mindful that we really -- our strategy is not to do one-of-a-kinds and build the Company around one-of-a-kinds. Our strategy is, as reflected in slide 8, is to build the Company around repeat products that have the technical advantages that we can serve both electrical/mechanical parts and, more importantly, predictable and expandable volumes. So that's the model we want, is continued products versus one-of-a-kind.

In order to expand and bring on more products that are repeat, you do have to take on prototypes, but you don't build your company around that.

Okay, and the comedy that, Rich, you had about gross margin coming back to prior levels during the year -- I guess I'm trying to understand when does the prior pricing item totally work their way through so that we can see those higher margins? Is that still (multiple speakers) how far in the future is that?

That will continue to build quarter over quarter. Right now, I can tell you that two-thirds of our projects closed in this quarter were at an appropriate mark. The rest of it was prototyping at a breakeven or, in some cases, a contract loss. So, as we bleed out these projects that have a high degree of risk and also contract loss risk and get into production volumes both at WCMC and at Ranor, you see those margin start to return to our targeted levels, which are 28% to 32%.

So we are still talking a couple quarters until that happens, then?

No, I wouldn't say that. I would say that most -- the majority of the prototyping, the heavy volume has ended at Ranor.

Okay.

We've got a little bit that bleeds out into July, but it's nowhere near the pricing issue or the contract loss issues that we encountered in Q4 and a little bit in the front end of Q1.

Okay.

So we think the storm has passed, to a large extent, on these. And we've got Jim and Bob and the whole business development team focused on making sure we price for whatever prototyping risk we might have going forward. And again, as I look at the mix of business in Q2/Q3, I see it migrating towards much more of repeat production -- you know, volume production orders which give us more visibility and, certainly, the ability to attain and maintain a better margin.

Okay.

So it's really a mix issue, Greg, and the mix is shifting in the right traction. It's been shifting in a difficult direction the last nine months.

And a shift to the nuclear -- on the isotope transport casks, with $3 million in the backlog, how many units is that?

Greg, I'm going to respectfully request to stay away from ASPs on these things. Just a sensitivity to Alpha-Omega and when they're pricing for their customers. They all carry a six-digit handle on them, and we are very pleased with that business. And it's just starting now that the NRC has approved it. And what is happening is customers or universities and nuclear companies -- or isotope companies are going out, filing permits with the NRC to do a transport and are being told no, you can't, unless you have this cask. So I'm really excited about this.

As to farther on, usually, the question I get is, well, how many of these old ones are out there? And the reality is no one has a handle on it, but I was given a range of no less than 500, and most people believe to be more than 1000 of these casks. So there's a tremendous opportunity for us as the NRC keeps telling people not to use the old ones.

These old ones -- the permits for the original NRC requirements are over 30 years old. So they have changed significantly.

Okay, I understand the sensitivity for the ASP on that. I just, I guess, want to get a sense for -- I know you mentioned like 500 to potentially 1500 of these are needed over, I guess, over a couple years time, whenever the replacement time occurs. But might that be in the backlog, we already delivered 30 of them, or is it (multiple speakers)?

No, no. It's under 10. How about that? Does that help?

Okay, that's helpful, sure, sure. And a quick question on the medical, and I'll let somebody else (multiple speakers) -- I'm sorry, go ahead.

No, that's a good way to put it, Jim.

Okay, a quick question on the medical, and I'll go into the queue. So, nice backlog on the medical. What's the delivery time on that? Is that --

It's starting to come in pretty heavy in Q3/Q4, where this is tailing out. The backlog being reported about $6 million is all shipping in fiscal 2013. There's none of it eking into 2014 at this point.

Okay.

And the delivery on that, our piece of it is much more scalable in when and how we can deliver. It's the synchrocyclotron that's built by another party over in Europe for them that's the more sophisticated and troublesome time line piece of that (multiple speakers). That's more on the critical path than our timing, Greg. We can scale to their needs as long as that other vendor can equally scale.

Okay, great, thanks, I'll jump back into the queue, thank you.

(Operator instructions) Walter Schenker, MAZ Partners.

In looking at slide 9, while there's a few moving pieces, one of which is the sapphire pipeline -- and I take that just to mean -- I'm talking about three months ago -- that you are just taking a little longer to get into production. Witness no sales in the first quarter, so I think I understand that one.

The nuclear is also off a fair amount versus the number you were looking for three months ago. Is it a slower ramp in casks, or is something else happening in nuclear that is pushing volume out?

Walter, let me comment on Sapphire first. I have a slide. And just sapphire first, I think we haircut sapphire from the low end of 7 to the low end of 6. And the only concern we had is our customer had an earnings call and they announced a negative book-to-bill. And so that gives me concern to where I want to be careful. And while we have a purchase agreement in place, that's wonderful. But anytime I see a customer with a negative book-to-bill, it's worth being conservative. Okay?

Regarding the nuclear, I'm not sure what the previous range was. I thought it had the low-end range of 6 or 7, so I thought it was okay.

Okay, I may not be looking at the last one, but I have April 2012 in front of me.

Okay.

Which I'm not sure is the last one, but it's about three months ago.

Yes, the last one would have been to July, at the end of -- yes, the earnings call we did on July 16.

Oh, okay. Then maybe I'm being -- I'm probably being unfair.

Yes, I actually think that's pretty good. That really hasn't changed. I think the only thing that changed is we haircut sapphire down $1 million, but we increased commercial/industrial up $1 million because we had a nice little commercial contract that makes us feel bullish on that line and (technical difficulty). But I think that's the only change.

Okay, and I apologize for looking at April and not July. But then to go back to the only other question that was asked, which is most relevant at this point, which is margins. I know you answered it, but I'll ask it again and will probably keep asking it every time we speak to you.

You should (laughter).

Which -- because that's really -- at this point, volume is there, the backlog is there. Much of Bob's changes in personnel have occurred and most of the prototyping is behind you. What is -- therefore, and you sort of addressed it but I'm going to make you do again -- what would stand between you and meeting your target not this quarter -- so I'll give you some running room -- but in the December quarter?

Not much that I can think of standing in our way. He's giving us this to December --

Sapphire markets stay strong all the way through there and we see the sapphire market as far as our backlog staying strong through the second quarter and into the third. If it stays deep all the way through the third, which you will be able to see as we announce orders, that keeps our China division firing along at an appropriate rate.

And then, with regard to your comment, we do not yet have Ranor in this trailing quarter back to its revenue bogey. So we should have -- we should be getting near to a 10 quarter, not a 7.1 or an 8 quarter. That's where we need to migrate, Walter.

And what that does, when you migrate -- when you are hitting that 10 number or 10-plus number, your direct labor or your absorption is extremely high for your workforce. Right? So your absorptions are favorable. That kicks the margin up a little. So those are key. So there is the absorption factor in there as well.

Okay. But again, I'm being repetitive. You would expect to be at that level, to what you see today in your forecasts?

We see no (multiple speakers) -- yes, we see no reason not to be at that level, given our current forecast.

Okay, thank you.

(Operator instructions) Greg Garner.

Just a question on the Chinese facility, WCMC. Is there any sense for what kind of utilization rate you are running at right now and --

Pretty high right now. What we want to do with the China division throughout fiscal 2013 is, great, we have the solar momentum and now we are starting to ship solar production furnaces, but we want to start incrementally adding to the other production customers that are qualified and to further build that out. So they are pretty busy now, but there's even more we can do over there now.

Yes, and they are busy now in Q2, doing sapphire volume production. They were not that busy -- the capacity wasn't as loaded as we would like to be in Q1.

Yes, that was primarily doing just upgrades and repairs --

Right.

-- to get the efficiencies up.

And preparation to cut over from one product line to the other. We have pretty -- because we run a sourcing model over there, we are pretty scalable and we've identified multiple subcontractors who can do the work. Getting them qualified with the customers takes a little bit of time and effort on our part, but we are pretty scalable in our capacity there, whereas it tends to be bricks and mortar and CapEx budget limited when we are in the states and we own everything, soup to nuts.

And as I recall, you have two facilities over there that are qualified. Is that right?

Yes, that is correct.

And are you working on both of them right now?

Yes, correct. Yes, we are working on both of them.

(multiple speakers) go ahead.

We had products qualified for solar; it was two sapphire customers, a Russian company and a German company. And the products are mixed between those facilities today.

Did I hear that right? You are serving two sapphire customers right now?

Yes.

And I know you've had some other conversations and qualifications with other sapphire manufacturers, or customers, I should say. Any sense for those customers turning on the order flow?

Well, we talked about our largest US customer, and they announced earnings results. They are still getting their feet up pretty big because their model is not to sell equipment like GT's model; their model is just to sell sapphire. And they're trying to sell sapphire to customers, particularly in Asia, who are buying furnaces from a company like GT to do it themselves. So I'm not so sure that this domestic customer is going to have much demand going forward.

But in Asia there's a state-owned sapphire company that is going through production qualification now, and we sit on the edge of the chair waiting to see their results. That is state-owned organic consumption, and they would ramp their production lines accordingly. So we are waiting for the results.

Okay, and I remember in the past, you've mentioned, Jim, something about how if all the interest were to come through for sapphire production, that there would be -- well, it would be an oversupply. So now that those customers are being qualified but they are coming back now to actually place the hard orders, I'm wondering how you see that right now, the sapphire market.

Well, I think China very quickly got to an oversupply level when it comes to just the LED configuration. People worry about making sapphire and cutting 1-millimeter squares out of sapphire for an LED light bulb. The excitement in the sapphire market, and I think that if you look at [GTE/AT's] presentation material, is focusing primarily on the smartphone and tablet replacements, where customers like Apple are working very hard to qualify sapphire to replace Gorilla Glass. If you start getting smartphone manufacturers and tablet manufacturers to use sapphire versus Gorilla Glass, that's a new ball game. And I think that's the importance to make sapphire huge. If it just remains LED light bulbs, it can be saturated very quickly.

And how long does it take to -- well, I guess really, what's the pricing difference for the smartphone manufacturers to buy whatever glass you are using now versus an LED glass?

The current Sapphire prices are lower than Gorilla Glass; that's why they are looking at it.

Oh, okay.

So you get the durability -- you wouldn't have had this discussion 18 months ago with sapphire prices. Right? And that's why a lot of sapphire companies' stock was 5X what it was today. But now, when you look at the sapphire becoming more of a commodity material with the physical properties to take on Gorilla Glass, now it becomes attractive. So this is not a performance, well, sapphire is better than Gorilla Glass. No, sapphire is cheaper. And that's what people are getting excited about.

And the performance is the same, I presume?

Performance is the same. I'm not a Corning guy to give you the Gorilla Glass comparison. I'm sure they are going to say theirs is better, but sapphire for durability has been used for years, particularly in the high end watch market like Movado. They have used it forever, but it's also why they charged a lot of money for their watches, because of the sapphire face. It was extremely durable; that part is proven. It just was a cost issue. Now all of a sudden, it's being made cheap.

Yes, okay, that sounds like a significant opportunity there if that switch happens.

And that switch happens, and then I will accommodate Walter's question and start raising the sapphire number in the pipeline part of it. But we are keeping an eye on that very closely.

Okay, all right, great, thank you.

There are no further questions at this time.

Okay, again, in closing, ladies and gentlemen, thank you for joining us and thank you for supporting our strategy to diversify TechPrecision. We are (technical difficulty) that's the trend we are going to keep striving for throughout fiscal 2013. So again, have a good evening and we look forward to talking with you again during our next call.

Ladies and gentlemen, this concludes the TechPrecision Corporation first quarter 2013 earnings call. Thank you for your participation. You may now disconnect.