Earnings Labs

Sypris Solutions, Inc. (SYPR)

Q1 2018 Earnings Call· Tue, May 15, 2018

$3.60

+0.28%

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Transcript

Operator

Operator

Good day everyone and welcome to the Sypris Solutions, First Quarter Earnings Call. Today’s call is being recorded. At this time for opening remarks, I’d like to turn the call over to the President and Chief Executive Officer, Mr. Jeffrey Gill. Please go ahead sir.

Jeffrey Gill

Management

Thank you, Lori and good morning everyone. Tony Allen and I would like to welcome you to this call, the purpose of which is to review the company's financial results for the first 2018. For those of you, who have access to our PowerPoint presentation this morning, please advance to slide two now. We always begin these calls with a note that some of what we might discuss here today may include projections and other forward-looking statements. No assurance can be given that these projections and statements will be achieved and actual results could differ materially from those projected as a result of several factors. These factors are included in the company's filings with the Securities and Exchange Commission. And in compliance with Regulation G, you can access our website at sypris.com to review the definitions of any non-GAAP financial measures that may be discussed during this call. With these qualifications in mind, we'd now like to proceed with the business discussion. Please advance to slide three. I will lead you to the first half of our presentation this morning, starting with an overview of the highlights for the quarter, to be followed by an update on the outlook for each of our primary markets. Tony will then provide you with a more detailed review of our financial results for the quarter as well as a walk through our financial guidance for 2018. Now, let's begin with the overview on slide four. We are pleased to report that revenue for the quarter came in at just under $20 million which represented a 9.7% increase from the prior year period. Sypris Technologies led the way with shipments during the quarter increasing almost 14% on a year-over-year basis, driven by new contract awards and positive market conditions. Gross margin on a consolidated…

Tony Allen

Management

Thanks Jeff. Good morning, everyone. I’d like to discuss with you some of the highlights of our first quarter financial results. Please advance to slide eight. Q1 consolidated revenue was $19.9 million, an increase of 9.7% from the first quarter of last year. We are pleased with the year-over-year increase in revenue particularly given the headwinds faced by our electronic segment on component and availability. The revenue split between Sypris Technologies and Sypris Electronics was $14.5 million and $5.4 million respectively. On a segment basis, this represents an increase over the prior year period of 13.7% for Sypris Technologies while Sypris Electronics remained flat. The demand drivers for Sypris Technologies are primarily strong market conditions for our customers serving the commercial vehicle automotive and energy markets. The volumes in Q1 were comparable with those in Q4 of 2017 although with a slightly different mix in revenue. We see further upside in these markets as we entered the second quarter. As Jeff discussed earlier, the supply chain team for Sypris Electronics is working closely with our customer base to resolve the challenges of component availability in the market, that are impacting our programs, and we are beginning to see signs of improvement as we aggressively pursue solutions. By partnering with our customers, the momentum is starting to shift in our favor, however, component shortages are an industry wide problem, so we must remain persistent and keep everyone in our organization focused on problem solving and paying attention to details every day. We expect to see an improved flow of components for the second quarter, which will enable us to drive revenue back to the levels we reported in the last three quarters of 2017. Consolidated gross margin improved significantly in Q1 to 10.2% compared to negative 3% in Q1 of 2017.…

Operator

Operator

[Operator Instructions]. We'll turn first to Jim Ricchiuti with Needham & Company.

Jim Ricchiuti

Analyst

Hi, good morning. I was just wondering on the component shortages Jeff or Tony, are we talking about just capacitors, resistors or what type of components are we talking about?

Jeffrey Gill

Management

Primarily, Jim, and it's the capacitors and resistors, and particularly the legacy commodities where apparently a number of Japanese manufacturers have just decided to quit making them. And so one of the issues that's affected us has been the fact that a lot of times our source of supply and the components are specked in by our customers and lot of times can be sole-sourced. So we've been working to get that changed so that we can find alternative suppliers and/or alternative components to use in the manufacturing process.

Jim Ricchiuti

Analyst

Got it. So Jeff, in other words, you now have the ability to go to some alternative sources and that's why you think this issue is largely going to be behind you over the next couple of quarters?

Jeffrey Gill

Management

You're making me hopeful Jim, but I think this is where we'd characterize it is that we been working closely with our customers and a number of them as you can imagine have a lot more impact on getting allocation than we do. And so we've been working to classify or qualify new suppliers. We've been looking at alternative components. We've been using their leverage to get more allocation. And so as we look at the near term, we feel -- we've got the material in house to ramp back up, and -- but the outlook for the industry to put it directionally, I think that some of the sources see demand rising 12% to 15% per year and they're starting to add capacity and now at the rate of anywhere from 10% to 25% per year. But there is a lag in this. And so depending upon who you're talking to they see the situation is standing out 12 to 18 months. And so an answer to your question we want to -- we believe we have the material in-house to handle our current requirements and we just want to stay on this thing very closely with our customers to make sure that we don't have a situation arise somewhere during the balance of the year.

Jim Ricchiuti

Analyst

Okay. Now, that makes sense. That's a big increase in orders that you've highlighted in Sypris Electronics, up 84%. Is that concentrated -- you highlighted a few contracts, but is this concentrated with just a handful of contracts or is it more broadly based?

Jeffrey Gill

Management

You know we're up generally, but there have been customers in particular where we had some nice awards recently. And so that's contributing to it. The activity that we're seeing generally is up fairly materially over a year ago, lot more coating [ph] activity, a lot more stuff being placed as you probably know Northrop Grumman and others are expanding their footprints and depending upon who you believe, there is sources that say that we could be looking at eight to 10 year run as the DoD side of things starts to reconfigure around technology and things of that nature.

Jim Ricchiuti

Analyst

Sure. You're building I assume just based on what you're saying your building backlog now into next year. Is there any way to characterize the extent to which your backlog is been expanding both – actually in both businesses, it sounds like you're building backlog also in Sypris on both sides of business?

Jeffrey Gill

Management

Well, the order rates has certainly been good, and so I'll say that we're looking for a good year in terms of topline performance this year and we see that continuing into 2019. And so it's really going to be a matter of execution, material availability and those types of things just to keep from stamping our toe.

Jim Ricchiuti

Analyst

Okay. And Tony, just question for you on the unusual equipment expense that you incurred in Toluca. Is there anyway to size the impact on that in gross margins?

Tony Allen

Management

I would say in the technology segment as we look at it at that level Jim, it's probably worth a point a half, two points of margin.

Jim Ricchiuti

Analyst

Okay, perfect. Thanks a lot.

Jeffrey Gill

Management

Thank you, Jim.

Operator

Operator

[Operator Instructions] Next we'll move Joel Cahill with the Jameson Companies.

Joel Cahill

Analyst

Good morning, guys.

Jeffrey Gill

Management

Hi, Joel.

Joel Cahill

Analyst

Thanks for the call. So I just want to – just a couple of quick questions off of Jim's questions regarding the supply chain issues. Are there competitive risks that start to come into play in the event that we're not able to get to source these components?

Jeffrey Gill

Management

Joel.

Joel Cahill

Analyst

I mean lots of the contract really?

Jeffrey Gill

Management

No. I don't think so, because this is an industry situation rather than a company specific situation. And so again since many of our components are specified as sole-sourced by a company other than getting our customers to help us qualify another supplier, we're really without choice in certain circumstance.

Joel Cahill

Analyst

Okay, sure. And then, just likely mean costs are going to be increase, and I think you suggest some of that. Does that come out of margins or are there adjustments that you are able to push through on contracts?

Jeffrey Gill

Management

No. So far our customers are been good to work with and we haven't seen inflation coming through our cost of goods sold. And we'd work to prevent that because we are on a fixed price basis, so -- but I think our customers get better at least so far they do.

Joel Cahill

Analyst

Okay. So, Tony, you mentioned some asset sales as a potential boost for cash flow into the end of the year. It looks like there was a $0.5 million taken for prepping Broadway facility. Last time we talked, you had said it's a good building but not necessarily going to generate a lot. Have you been able to put together some ideas on amounts that you could generate from asset sales?

Tony Allen

Management

We have some internal targets that we're working towards Joel. The first item on the agenda is going to incur and actually in June and we talked about the auction at our last call. So that would be for what I would say is the majority of the assets -- some of the smaller assets, manufacturing assets that we have in the Broadway facility that will be part of that auction. That will be completed in June and so we'll have the results of that in our Q2 call. In terms of building itself; no we haven't – we are taking actions today to start to look at alternatives as to how we prepare this property for sale but we haven't set any targets in terms of our expected proceeds on that yet.

Joel Cahill

Analyst

Okay. Got it. So now just looking at the two businesses side by side, the ST is obviously generating some really healthy margins off of much higher revenue, and I see is certainly being buffeted by some of these of department – the DoD spending. One, I was going to ask, you mentioned the 700 billion for fiscal year 2018, how does that compare to previous? And then next question is what do we see for ST, because low single digits margins are somewhat tricky to justify for the business, it still seems?

Tony Allen

Management

Well, on the margin question what we -- as we return Joel to, you know again we reference the run rates that we had in the last few quarters of 2017. And as we get back to those levels we expect to be into double figures, beginning in Q2 we're talking about 10% to 12%. And in the second half of the year we believe we have some upside in our revenue run rate that will get us back into the mid to upper teens for that business. So…

Joel Cahill

Analyst

Okay, great.

Tony Allen

Management

We don't see it as a single digit margin business. We see it is as a firm double-digit number, but the volume is certainly important to us as we move through the year and it certainly drives a lot of margin. You might recall to beginning of 2017 that we took a significant piece of the fix structure when we relocated to a new facility. So our leverage on revenue today is pretty significant. So as we move into the Q2 and the second half we see those numbers getting back up in the double figures.

Joel Cahill

Analyst

Okay. Excellent. And then just from the macro environment?

Jeffrey Gill

Management

Yes. We don't have the figures here with this, but directionally my memory is that the increase in spending year-over-year is somewhere in the $90 billion range. So I think 12%, 15% [Indiscernible].

Joel Cahill

Analyst

Okay. Certainly all encouraging, it's nice to have a lot of great tailwinds on top of better leverage. That's all I've got questions guys. Again thank you very much.

Jeffrey Gill

Management

Okay. Thank you, Joel.

Operator

Operator

[Operator Instructions] And gentlemen, it appears there are no further questions. I'll turn the conference back to you.

Jeffrey Gill

Management

Okay. Thank you, Laura. And Tony and I like to thank you guys for joining us on the call this morning. We welcome your continued interest and of course your questions about our business. So thank you and have a great day.

Operator

Operator

With that, we'll conclude today's conference. Thank you everyone for you participation.