Q1 2020 Earnings Call
[music].
Please standby lots of again.
Good day and welcome to this site for solutions Inc. Conference call.
Today's call is being recorded.
At this time for opening remarks, I would like to turn the call over to the President and Chief Executive Officer Mr. Jeffrey Gill. Please go ahead.
Thank you Kt and good morning, everyone.
Tony element I would like to working to choose call. The purpose switches to review the Companys financial results for the first quarter 2020.
Those of you have access to our Powerpoint presentation. This morning, please advance to slide two now.
We always begin these calls with a note so what we might discuss your day. They 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 results of several factors.
These factors are included in the company's filings with Securities and Exchange Commission.
And in compliance and regulation G., you can access our website Cypress Dot com to review the definitions of these non-GAAP financial measures that may be discussed during this call.
Well these qualifications in mind, we'd now like to proceed with the business discussion. Please advance to slide three.
I would lead you through the first half of our presentations 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 more detailed review of our financial results for the quarter.
Before we begin on slide four however, I'd like to take just a moment to discuss our current environment.
Especially in light of the public and private activities being taken to address the cobot 19 virus and the potential impact of these actions on Cyprus.
I'm very pleased to be able to say that as of this state.
We do not have any employees for their family members, who have contracted the virus.
We've taken a number steps to ensure safe work environment. Many of which include best practices recommended by the center for disease control Osha and others.
We have onsite medical professional professionals at our largest campus to both be of service to our employees and to check any incoming visitors before admitting them into our facilities.
Travel has been limited spacing has been increased gathering sizes have been reduced and hygiene has been and continues to be emphasized both at work and at home.
We are providing employees with regular updates while requesting their feedback and suggestions with regard to additional steps that we might tick.
We are discussing the importance of personal responsibility recognizing that the majority of their day actually occurs outside the confines of Cyprus.
We're also providing special consideration printing specific employee who happens to be of an age or with underlying respiratory pulmonary or other such conditions that would otherwise place the individual substantial risk should he or she contract the virus.
We continue to monitor the situation with both our customers and our suppliers on a daily basis.
During the months of April may we that certain commercial vehicle and automotive customers closed for weeks at a time Andrew reduce their demand.
One of their defense in energy markets have remains solid.
Our senses the trough is behind us, but the environment is certainly dynamic and circumstances may change rapidly.
We will continue to focus on meeting the commitments, we have made to our customers while working to provide safe work environment for our employees and their families.
Now, let's begin with the overview on slide four.
The first quarter of 2020 reflected the continued advancement of our operating performance with both business units once again posting substantial improvements.
Revenue increased 14.6% year over year, and 3.7% sequentially as shipments from new programs in both segments of our business contributed to the company's topline.
Gross margin increased to 16% of revenue up from 4.4% in the first quarter last year and up 350 basis points sequentially.
Operating income for the period this positive reflecting the substantial increase in gross profit and a decrease in this Phoenix SG any expense during the quarter.
In short it was a solid performance for the company in its employees and we had been even in would've been even better had the pandemic not impacted the economy in the latter part of March.
Subsequent to quarter end in April we completed the sale of our 90 year old former manufacturing facility in Louisville, Kentucky.
The plant was situated on approximately 20 acres and have been closed since November of 2017.
The sale generated $1.7 million of cash and we'll have the added benefit of reducing the company's operating expenses going forward.
In May we secured $3.6 million of financing under the Paycheck protection program with the carriers that.
This funding was vital to preserving many skilled jobs the details of which Tony will review with you shortly.
Now, let's take a look at the performance of each of our business units, starting with Sypris technologies on slide five.
Revenue declined 15% when compared to the prior year quarter, reflecting the expected reduction in demand from commercial vehicle customers lower energy shipments and a reduction of orders during the last few weeks of the period as result of the economic impact of the virus.
Shipments increased 5.4% sequentially. However.
Driven in part by the new programs, we have discussed on prior calls.
More specifically the long term contracts to produce components for Newell dual clutch sports car transmission and for the transmission of a leading altering vehicle.
Gross profit increased 8.2% year over year, and 24.4% sequentially as program launch costs subsided and operating efficiencies improved significantly.
As a result gross margin increased 390 basis points year over year, and 280 basis points sequentially.
Operating income and operating margin follow these trends as well with each of these financial metrics posting substantial gains on both the year over year and on a sequential basis.
From a business development standpoint, we continued to experience a great deal of activity as companies look to increase their north American sourcing content.
In summary, it was a very positive quarter for Sypris technologies, when that would have been even stronger had it not been for the impact to the virus.
Now lets advance to slide six to review the performance of Sypris electronics during the quarter.
As many of you may recall shipments of Sypris electronics for disrupted during 2019 by periodic shortages of electronic components.
The availability of these components is now much improved in many cases with the help and support of our customers.
As a result revenue increased significantly on a year over year basis, when new programs and material on hand, leading the way.
Gross profit gross margin followed suit with each of these key financial metrics expanding significantly on both a year over year and on a sequential basis.
And as we and as we have reported on prior calls.
The markets, we serve in defense and telecommunications it remains solid even during the pandemic.
Orders increased 133% during the quarter why backlog increased 45% with book business now extending well into 2021.
During our last call we discussed our new contract awards from Collins Aerospace manufacturing test electronic assemblies for the power management.
Environmental control and life support systems of the deep space arranged spacecraft program.
We also mentioned that during the first quarter, we've received a new contract could be a systems to manufacture and test electronic power supply modules for a large mission critical military program.
Prediction for both of these customers is expected to commence during 2020.
In short it was a positive quarter for Sypris electronics, and almost all respects and we remain cautiously optimistic as we look to the future for this business.
I think that it may be helpful to pause for a moment and take a quick look at our business. How our business has changed in recent years from a market standpoint.
Please note on slide seven that in 2020.
We expect revenue from defense electronics to exceed 30% of our total sales.
Up from 22% last year.
Sales to commercial vehicle customers are expected to represent 25% of the business.
Down from 41% in 2019.
Some of you may even recall that in 2014 commercial vehicle represented fully 70% of revenue and these sales were highly concentrated with two customers.
We have much more balanced business today, both in terms of market served and customer concentration.
We expect margins to expand reflecting increased value add and technical requirements, while continuing to move away from commodity products and services.
We believe that additional opportunity exist further diversify our business and we will continue to aggressively pursue this outcome.
Now, let's turn to slide eight to review the outlook for each of our major markets.
North American demand for commercial vehicles reached an all time high during the past couple of years.
Driven by strong trade growth tight capacity and an expanding economy.
Pre pandemic customer demand was forecast to return to historical norms in 2020, which is accurate would have resulted in an estimated 25% year over year reduction in demand for class a trucks.
We now believe that estimate to be optimistic, but we also believe that the low point will be realized in the second quarter.
In the long term, we believe that the economy and trucking we're benefits significantly from the stimulus programs that have been implemented.
In recent months to benchmark price for crude oil has been extremely volatile. The result of which has raised a number of questions with regard to the near term outlook for this sector.
Within the broad energy market, however, the conversion to power generation to natural gas.
As well as the construction of pipelines in LNG terminals to support export activities continues to be a source of opportunity for Cyprus on both domestic and international front.
These spending continues to remain solid with us military spending expanding especially with regard to key long term strategic programs that are expected to run for many many years.
Our performance to start to new years from positive and in line with of our expectations and we believe that we're well positioned for future success. Once the economy begins to reopen.
In the interim we will continue to be responsive to the safety needs of our employees and their families. While working hard to meet the commitments, we have made to our customers.
We must and will remain agile and responsive to new data as it develops.
We are looking forward to moving past this virus and getting the economy back on its feet.
The sooner the better for all concerned.
Turning now to slide nine Tony Allen will lead you through the balance of our presentation. This morning Tony.
Thanks, Jeff Good morning, everyone.
I'd like to discuss with you some of the highlights of our first quarter financial results.
Q1, consolidated revenue was 22.4 million an increase of 14.6% through the first quarter last year.
The year over year increase in revenue of 2.9 million was followed by an increase in consolidated gross profit of 2.7 million.
A multiple of over three times, the prior year period, and an increase of 900000 or 32.6% sequentially.
Consolidated gross margin was 16% for the first quarter.
1100, 60 basis points from a year ago at 350 basis points sequentially from Q4.
Revenue for Sypris technologies decreased 15% to 13.7 million from 16.1 million a year ago.
However, gross profit increased nearly 200000.
And gross margin improved 390 basis points to 18.2% in Q1.
During the first two months at 2020, we saw commercial vehicle demand rebound sequentially from Q4, following the holiday shutdown.
However that changed in March as the impact of Kobin 19 began to impact North American production.
Thus far the highest impacted revenue for Sypris from Cowen 19 has been on our technology segment.
Primarily for our customers in the commercial vehicle and automotive markets.
Additionally, while energy product shipments decreased in Q1 about 15% on both a year over year and sequential basis.
We anticipate that opportunities with our natural gas products will offset the headwinds from lower demand for oil over the balance of the year.
As expected the launch of new programs and the automotive and sport utility markets contributed to revenue at a higher level in Q1 than in prior periods and served partially offset the lower demand and other markets.
The year over year improvement in gross margin for technologies reflects that continuous improvement initiatives implemented by our team, which are driving improvements in our internal operating metrics and our financial performance.
Revenue for Sypris Electronics was 8.7 million in Q1, an increase of over and over 150% from the prior year.
Gross profit improved 2.5 million to 1.1 million, resulting in gross margin of 12.6% for the quarter.
We experienced fewer issues with electronic component availability during the quarter, especially as compared to the prior year period in which our revenue dropped materially.
We have further increased our communications with suppliers in response to the cobot 19 outbreak to ensure we minimize any future potential disruptions that could impact our supply chain.
Our consolidated SGN, a expense was 3.2 million for Q1.
Decrease of approximately 250000 on both a sequential and year over year basis.
The decrease in Q1 SGN eight reflected some of the early actions by management to reduced discretionary spend in response to the cobot 19 pandemic.
These reductions and certain other actions are expected to lower SGN expense further in Q2.
We're pleased to report consolidated operating income of 300000 for Q1 and feel that the quarter was on track to meet our targets prior to the outbreak and was indicative of all of the hard work by our employees in recent periods.
We look forward to a safe reopening of the economy. So that we can resumed the progress shown during the first quarter.
As Jeff noted earlier and as disclosed in our form 8-K filed with the FCC on May six.
We secured a PPP loan after the end of Q1, and the principal amount of $3.558 million.
Our receipt of this song was critical to enable us to retain our workforce as a reduction in custard customer demand from the covered 19 outbreak began to impact our business in Q1 and deepened further in April and May.
We have implemented various cost reduction actions across our business in response to the pandemic to preserve our liquidity.
And this loan will serve to mitigate our domestic payroll cost incurred as we strive to retain need employees and TR Custer customer demand fully recovers.
The note was dated April Thirtyth has a two year term and bears interest at 1% per year.
Monthly payments of principal and interest our do beginning seven months from the date as a note.
We can apply for a portion or all of the loan to be forgiven subject to limitations and based on the use of the proceeds to fund payroll costs rent and utilities over the eight weeks following the receipt of proceeds.
Any forgiveness will be subject to the approval of the SB eight.
But no assurance can be provided that we we will obtain forgiveness in whole or in part.
Please advance to side 11.
We will take a quick look at our consolidated revenue trend for 2019.
And in Q1 of 2020.
As discussed our revenue of 22.4 million was up on both a year over year has sequential basis.
As the class eight commercial vehicle market started this downturn in Q4 last year.
New program launches for automotive fits sport utility components began contributing to revenue.
Additionally, the electronic segment increased revenue as component availability improved and backlog remained healthy.
Sypris electronics revenue for the last two quarters of 8.6, and 8.7 million compares favorably to the average of 5.9 million posted for the first three quarters of 2019.
Most defense electric electronics customers have remained open as essential businesses during the cobot 19 outbreak.
And we will continue to work closely with them to meet their demand.
Sypris technologies had a slight increase from Q4, primarily reflecting the ramp of new programs and the normal market conditions in North America through early March.
We expect a more material impact from cobot 19 in the second quarter as a number of our customers have been forced to temporarily close.
Each day, we are evaluating the dynamic effects of the volatility and demand and taking actions to mitigate the impact to our business.
We we believe we are now in the trough for this impact we sense that the momentum is beginning to turn for businesses to reopen and establish suit some form of a new normal for us all.
Please advance aside 12.
On this side, we show our trend of consolidated gross margin over the more most recent four years along with the performance in Q1 of 2020.
Hitting the 16% gross margin was a target we expected to meet as we exited 2019, but that was well before coven 19 was a part of our daily lives.
Looking back at 10 years of history. The consolidated gross margin of 16% was second only to Q2 of 29 team.
For the technology segment gross margin of 18.2% was our best over the last 10 years.
The technologies margin improvement reflects a shift in our revenue mix and favorable cost performance from continuous improvement initiatives.
The electronic segment also showed improvement in the quarter delivering 12.6% gross margin, which is the best for this segment since Q2 2019.
Improved material availability contributed to FC margin improvement, which enabled our eight our management team to more efficiently balanced production schedules and increased our overhead absorption.
Please advance aside 13, and I'll offer a few takeaways.
Consolidated revenue for Q1 was 22.4 million, an increase of 14.6% year over year and 3.7% sequentially.
Gross profit for Q1 improved to 3.6 million for our gross margin of 16%.
The revenue increase of 2.9 million converted to a 2.7 million increase in gross profit compared to the prior year period.
On a sequential basis revenue increased 800000, and gross profit improved over 900000.
Sypris technologies gross margin increased 390 basis points to 18.2% compared to the prior year quarter, Despite lower revenue coming from the cyclical decline in the commercial vehicle market, coupled with the impact of the cobot 19 pandemic.
Revenue for Sypris electronics increased to 154% over the prior year.
Reflecting the resolution of many of the electronic component component shortages experience during the prior year.
Sypris electronics has maintained a strong stable backlog that supports our expectation that this segment can perform consistently in 2020.
Absent an adverse impact of covert 19 audience on the essential business operations of the U.S. Deo de contractors, and our customer base or from disruptions in our supply chain.
We generated operating income of 300000 for the quarter and feel this was dampened late in the quarter as demand dropped for our technology segment.
The extent and duration of the impacts that Kobin 19 may have on our business are not known at this time and we will take every action possible to protect the health of our business associates and mitigate the impact to our business.
We greatly appreciate the continued support of our employees customers and suppliers during these uncertain and challenging period.
This concludes our call today and at this time I'd like to turn it back over to Katie to answer any questions you might have for us.
Thank you.
Thank you.
Like to ask a question please signal by pressing star one on your telephone keypad.
Please make sure your mute function is turned off to allow your signal to reach our equipment. Once again star one for questions, we'll pause for just a moment.
Well take a question from Joel Cahill Gemstone company.
Hey, good morning, guys. Thanks for the call.
Morning, Joel.
And Ah Hey.
Well I think one of things that was helpful was showing that revenue next I really do appreciate that and that seems like a very important steps to show really how are you guys have come and and.
That's remarkable I really love that.
Okay. Thanks so.
Just to like isolate so the TPP that that came Thats post quarter end and so is the Kentucky facility right.
It did come Corp, subsequent to quarter end and the sale of the property. The real estate was also subsequent to Q1.
Okay got it forward anything.
Now what we're just on that real quick there was a.
2 million dollar decline in the end teeny.
But that.
Would have been that wouldn't be that's the Kentucky facility it.
Am I wrong no.
You are not wrong.
What you're looking at on the balance sheet reflect some movement in the and the.
Translation.
Due to the Fedex or to the FX change I'm sorry.
Hey, Jeff.
Yeah, the peso moved up considerably and as we.
We're peso functional in Mexico, and so we have to re measure and.
That's what you're saying.
Okay got it so.
This is from just you're saying the decline in the in the peso since it has moved up to the 25 area.
Yes, correct. It moved up from close to 19 to closer to 24, it too fine Yeah December to March Yes, yes, yes, absolutely okay and.
And so just some aware is that something that you guys do any to any capable hedging on or is this no.
This new facility.
This is no we do not doing any hedging on that Joe I think what you're saying on the balance sheet is really a it's really a noncash event.
Yes.
On those assets so.
Okay, Yeah, I'm, sorry, I just wanted to be can answer that I understood.
And Oh, and so okay, great and then what we're on the the balance sheet to and I'm sorry. If this is just a oh my simple, but the Gil family note. It looks like there's two and half million that had moved it to current I don't recall with that with the current.
With the expertise on that would you just you need some inside yet it's it's three tranches of the first is April 21.
So thats, what you're saying.
Okay got it.
All right that's that's helpful.
Okay, great and ER.
When you when you were touching on margins. If we can just it back to that now you're saying, 60% consolidate and which is excellent do you see that there's upside opportunity. There is there do you believe that you can maintain after the year I mean, I know you're not getting guidance through the end the year right now other than just kind of.
Anecdotally, but where do you see that.
Well in the short term Joe No. We don't anticipate that we're going to maintain that.
We're going to need to see the recovery in the market.
Before we'll be able to.
To achieve that again so.
The impact a in particular, what we're saying in Q2.
Ah Onez is going to change that we need to see where the markets go in Q3 in Q4, we believe the you know the pieces in place are in place operationally certainly for when demand ramps that we will get back to that number.
We need a we're going to need to topline.
To move out before we can we can do that.
Okay, Great and Oh.
Ill jump back then if anybody has any questions and ill follow up if there is time.
Thank you.
As a reminder, star one for questions.
Well take a follow up from Joel Cahill Jameson company.
Okay, sorry, sorry, I just wanted to me can you talk again in any case, hey, So two two questions. You know roughly just kind of just for tracking balance sheet like for next quarter, roughly where the this building has been held on the balance sheet undepreciated basis that we're selling.
Sure. It was included in the assets held for sale.
Okay.
As of the ended the year and.
Not quite half of that number.
Okay. So we will people will we'll be reporting a gain on that in the second quarter.
Yeah, I think getting you can't get as much.
And then if I could just touch on on one of them then doesnt ones as far as the the NASDAQ reporting or that the NASDAQ issue with a.
Potential de listing it do you have anything that.
When you approach to that in any thoughts to share there.
Yeah, you know I don't know if you're aware if you followed it or not but they did.
NASDAQ implemented a tolling period due to the pandemic.
That was extended period of compliance for us about another 60 days from July 1st.
Okay. So we're going to have some additional time to cure that.
Due to regain compliance.
And so we'll be monitoring that as we go through the balance of Q2 and then.
In two.
Early Q3 to see if there's any any further actions required.
Okay. Yeah, that's great to now and then my last one Oh, Hi, Jeff You mentioned some some new markets are you opened to sharing any anything that did looking particularly interesting.
Well, it's it's.
I don't think I should talk specifically about a joe, but but the diversification has been.
Really working for us and and so our objective is to to continue to open new markets for for both of our segments and.
The expectation also has to move up to the value add chain, if you will and.
Take on more technically challenging more proprietary type work.
Because as Tony indicated we believe there's a nice opportunity to overtime continue to accrete or margins and and that's what we've been working on the last several years and this will continue to do.
Okay, great Yeah fully understood I'd, just just as interested if there were any share, but oh, yeah gentlemen, Thank you I I don't have any any other questions. So thank you very much.
Okay. Thank you Joe.
With no additional questions in the queue I'd like to turn the call over back over to Mr. Gil for any additional or closing remarks.
Thank you Acadia, Tony and I would like to thank you for joining us on the call. We welcome. Your continued interest in a push your questions about our business. Thank you and have a great day.
That concludes today's call. We appreciate your participation.
Thank you Kate.
[music].
[music].
[music].
[music].