Q2 2020 Sypris Solutions Inc Earnings Call
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Thank you Melissa good morning, everyone.
Joining me on and I would like to walk into the school.
The purpose of which is to review the Companys financial results for the second quarter of 2020.
For those of you have access to our Powerpoint presentation. This morning.
Please advance to slide two now.
We always begin these calls within those some of what we might discussed here today may include projections and other forward looking statements.
No assurance can be given that these projections and statements will be achieved an actual results could differ materially from those projected as 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 Cypress dot com to review the definitions of any non-GAAP financial measures that may be discussed during this call.
These qualifications in my we'd now like to proceed with the business discussion.
Please advance to slide three.
I will lead you through 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 court.
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.
We have taken a number steps to ensure a safe work environment. Many of which include best practices recommended by the center for disease control Osha and others.
We have on site medical professionals that are largest campus to both be a service to our employees and to check in incoming visitors before moving them into our facilities.
Travel has been limited spacing has been increased gathering sizes have been reduced and hygiene has become and continues to be emphasized booked at work and at home.
We are providing employees with regular updates flow requesting the feedback and suggestions with regard to additional steps that we might take.
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 over an underlying respiratory pulmonary or other such conditions that would otherwise placed the individual substantial risk should he or she contract the buyers.
We continue to monitor to the situation with both our customers and our suppliers on a daily basis.
During the months of April and May we've had certain commercial vehicle and automotive customers closed for weeks at a time and or reduce their demand.
While the defensive communication markets remained rock so.
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 a safe environment for our employees and their families.
Now, let's begin with the overview on slide four.
Revenue decreased 29.8% year over year, and 23.5% sequentially as result of the temporary closure of customer plants in April and May that served to reduce shipments for sypris technologies.
The success of our diversification diversification efforts played a major rule on softening what would otherwise have been.
Very challenging quarter.
Demand from customers in the fence communications and energy markets served to offset much lower purchases from from commercial vehicle and automotive customers.
Fortunately the month of June witness, the reopening of customer operations and the return of demand in these markets.
The current outlook for the second half of 2020 is much improved to a degree of caution is certainly warranted.
I have to wait and see how the pandemic plays out in the fall.
Revenue for Sypris electronics increased 28.3% year over year, and 11.5% sequentially during the period, reflecting the continued strong demand from customers in the defense and communication markets mentioned previously.
The strong sales performance by Sypris electronics was surpassed by the 73% increase in gross profit.
And the 470 basis point expansion in gross margin.
Our consolidated results benefit with gross margin for the quarter of 11.7%. Despite the decline in the topline during the period.
As we discussed during our last call 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 of land and had 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 or financing under the paycheck protection program with the cares Act.
This funding was vital to preserve many skilled jobs, which will review we will review with you shortly.
Subsequent to quarter end, we announced three new contract awards.
At Sypris Electronics, we announced the initial contract award to manufacturing test.
Electronic assemblies for enable radar tracking system for Leonardo Drs Naval electronics.
Work under this contract is scheduled to begin production during 2020.
At Sypris technologies, we announced the they received orders for its two turns branded ultra high pressured closures for use in the Libra oilfield in Brazil.
And for double book closures for use in the Trans Mountain pipeline expansion project in Western Canada.
We will talk more about these important awards momentarily.
Now, let's take a look at the performance of each of our business units, starting with Sypris electronics on slide five.
As I mentioned, a moment ago revenue for Sypris electronics increased 28.3% during the period from year ago levels increased 11.5% sequentially.
The company's strong backlog backlog of orders that the growth while the availability of components did not hinder the topline as it has periodically in the past.
Sales are up 67.6% year over year for the first half of 2020, while backlog has increased 22.5 percents since December of 2019.
Our book of business now extends well into 2021.
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.
Operating margin benefited as well from the leveraged provided by increased sales expanding to 10.6% during the quarter up 730 basis points year over year, and 590 basis points sequentially.
As I mentioned, a moment ago subsequent to quarter end Sypris electronics announced the receipt of an initial contract award from Leonardo Drs Naval electronics to manufacture and test electronic assemblies for ship floor.
Radar tracking system.
The unit Leonardo Drs as an industry leader Naval electronics, and we're certainly pleased to expand our relationship with this important customer.
In short it was a positive quarter for Sypris electronics, and almost all respects and we remain positive as we look to the future for this business.
And is an essential supplier to our customers in the defense and communication industries, we will continue to work hard to meet their vital made.
Now, let's turn to slide six to review the performance of Sypris technologies during the quarter.
Revenue declined substantially on both the comparable period and on a sequential basis, reflecting the temporary closure of operations by customers in the commercial vehicle and specialty automotive markets. During the months of April may.
These customers seven subsequently deanery opening during June and have remained open sense.
Sales of our energy related products also softened during the period as customers around the world from the Permian Basin Kaz extend to southeast Asia.
Closed are substantially pared back their businesses in response to the pandemic.
At Cypress, we kept all of our locations operational and retained our workforce despite the reduction in customer demand.
We use the time to perform preventative maintenance and to train our people to improve and expand the ranges their skills and capabilities.
This was made possible by the care SEC.
The result has been very positive as you might imagine.
Since demand return from our customers our productivity has been up and morale is very positive.
The outlook going forward as much improved in our operations are performing well.
It was clearly the right thing to do and we're thankful that we had the ability to do it.
I think it is also worth noting that on a year to date basis.
Sypris technologies has remained profitable which is an incredible feet under the circumstances.
Our team in this business is simply done an outstanding job under very challenging circumstances.
From a business development standpoint, we continue to experience a great deal of activity as companies look to increase their north American sourcing content.
And as we evaluate these opportunities our focus continues to be on further diversifying our business both in terms of markets customers and technology.
It should also be noted that Sypris technologies has been designated as an essential supplier.
To our customers in the energy and transportation sectors and as such we will continue to take whatever steps are necessary to ensure that our customers are supplied with a critical products that they need.
Subsequent to quarter end, we announced the award of new orders for closures for projects located in Brazil in Canada.
In the cases, a LIBOR oilfield in Brazil. The project is one of the world's largest ultra deepwater oil discoveries at over 6600 feet deep.
And containing between 7.9 and 15 billion barrels of oil.
The project is expected to produce up to 1.4 million barrels of oil per day by 2021.
With an estimated development cost $80 billion.
We will be providing specialty closures for this project that can handle pressure approximating 10000 PXI.
In Canada, the Trans Mountain pipeline expansion project will add 609 miles of 42 inch pipeline.
To transport 590000 barrels of oil per day to Canada's west coast for shipment to world markets.
Project is estimated to cost $12.6 billion.
We will prove to be providing closures ranging in size from 30 inches to 48 inches in diameter that will be automated for ease of opening.
These two projects service excellent examples of the type work, we do for demanding high cost of failure applications around the world.
During our last call we discussed the changes have taken place in our market mix over the past several years.
Turning now to slide seven.
Please note that in 2020, we now expect revenue from defense electronics to exceed 35%, our total sales up from 22% last year.
Sales to commercial vehicle customers are expected to represent 23% to the business down from 41% in 2019.
Some of you may recall that in 2014 commercial vehicle represented 40, 70% of revenue and these sales were highly concentrated but to customers.
We have a much more balanced business today, both in terms of market served and customer concentration.
This diversification has served us well during the pandemic.
Both in terms of volume and margin.
Looking forward, we expect margins to expand further reflecting increased value add and technical requirements, while continuing to move away from commodity products and services.
We believe that additional opportunities exist to 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.
DRD 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 backlog has increased by 22.5% since year end and our margins have increased significantly with the growth in the top line.
Demand from commercial vehicle specialty automotive all trained in off highway customers resumed in June.
And the current outlet for the second half of 2020 has improved significantly.
A key question of course is will last or will there will be another shutdown of the economy.
Time will tell but we believe that we're well prepared in either.
In the long term, we believe that the economy in trucking will benefit significantly from the stimulus programs that have been implemented during this year.
In recent months benchmark price for crude oil has recovered materially but the near term outlook for oil producers in the sector remains somewhat uncertain.
Within the broad energy market. However, the conversion of power generation to natural gas as well as the construction of pipelines and LNG terminals to support export activities continues to be a source of opportunity for Cyprus on both the domestic and on an international front.
Our performance during the first half the 2020 has been solid, especially under the circumstances and we believe that we are well positioned for future success. Once the economy remains open on reliably state sustained basis.
In the interim we'll 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.
Turning now to slide nine Tony Allen will lead you through the balance of our presentations one Tony.
Thanks, Jeff and good morning, everyone.
I'd like to discuss with some of the highlights of our second quarter financial results.
Please advance aside 10.
Q2 consolidated revenue was 17.2 million a decrease of 29.8% from the second quarter of last year, and a decrease of 23.5% sequentially.
The comparative numbers for both periods reflect the impact covert 19 had on demand during Q2.
With the favor favorable results of Sypris electronics.
Paying off setback considerably lower revenue for Sypris technologies.
Consolidated gross profit drop 2 million from the prior year as a lower demand for Sypris technologies adversely impacted our profitability for the quarter.
Conversely, Sypris electronics reported a $750000 increase in gross profit with gross margin expanding 470 basis points to 18.3% in Q2.
While consolidated gross margin of 11.7% was down compared to the previous year end Q1.
The upside achieved by Sypris electronics and Q2.
Coupled with a rather impressive effort by the entire team at Sypris technologies to manage cost during a severe economic downturn gives us confidence we will get back on track for a return to profitability as the economy begins to recover.
Our consolidated SGN expense was 2.8 million for Q2, a decrease of approximately 400000 sequentially and 800000 from the prior year.
The decrease in Q2, SGN, a primarily reflects actions by management to reduce discretionary spend in response to the covered 19 pandemic.
Cost reduction actions include reducing hiring activities.
Reduced compensation for our CEO and setting and certain other senior leadership and corporate personnel.
Suspended fees paid to our board of directors.
Lower travel related spend and reductions in other areas of controllable costs.
The spending measures are expected to remain in place until we see the economy moving in the right direction and have better visibility to customer demand.
Consolidated operating income fell to a loss of 900000 for Q2, driven by the impact of Cobot 19 on the results of Sypris technologies.
However, after a difficult months in April and May This segment began to rebound and generated an operating profit for the month of June.
The demand outlook for this segment in Q3 is currently showing growth over Q2, which we expect will enable our consolidated business to return to profitability in the third quarter.
Please advance the side 11.
Consolidated revenue for the first half was 39.6 million a decrease of 4.4 million or 10% from the first half of 2019.
The comparison for the first half period follows the theme for the second quarter for Sypris electronics reporting an increase of 7.4 million.
That sypris technologies being down 11.9 million.
Despite the drop in revenue consolidated gross margin improved 310 basis points in the first half of 2020 over the prior year.
The margin improvement reflects favorable mix associated with our diversification efforts and improved efficiencies driven by our continuous improvement initiatives.
First half results for Sypris electronics include revenue growth of 67.6%.
And improvements in profitability at the gross profit and operating income line.
Driven by the strength of the Q2 results gross margin for this segment as at 15.6% for the first half of the year and is expected to stay in the mid teens for the balance of the year.
As we entered the year, we expected demand from our commercial vehicle market customers would drop as the class eight market had entered a period of cyclical decline.
However, covered 19 amplified this expected decline and hit our other markets for Sypris technologies as well during the second quarter.
Although revenue on a year to date basis as down nearly 36% from the prior year gross margin for this segment is at 12.9% for the first half and operating income is positive.
If demand rebound as expected in Q3, Sypris technologies is well positioned to expand margins from the first half's level and deliver quarterly operating margins in line with our pre cobot results from Q1.
Our consolidated SGN expense was 6.1 million for the first half of 2020, a decrease of 1 million from the prior year.
Certain of the spending reductions discussed on the previous side were implemented late in Q1 in response to the cobot outbreak with the full impact reflected in Q2.
Additionally, we incurred certain consulting fees related to the implementation of a new RP new ERP system.
For Sypris electronics during the first half of 2019 and those costs were not incurred in the current year.
Consolidated operating income for the first half is negative 600000 due to the key to set back from Cobot 19.
However, this represents an improvement of 1.8 billion year over year, despite the 10% decline in revenue.
Given the challenges impose back over 19 were pleased with our performance over the first half of the year, but remain driven and focused on achieving profitability for the business in 2020.
Please advance aside 12.
We will take a quick look at our consolidated quarterly revenue trend for 2019, and the first two quarters of 2020.
The class eight commercial vehicle market started its downturn in Q4 of last year.
And new program launches at Sypris technologies for automotive and sport utility component began contributing to revenue.
Additionally, the electronic segment increased revenue as component availability improved and backlog remained healthy.
This allowed Q1 revenue to increase sequentially from Q4 before Cobot night team began began impacting revenue in late March.
The impact of Coven 19 on Sypris technologies drove a 55.9% year over year decline in segment revenue.
The last four quarters of revenue for Sypris electronics have increased from 6.6 million in Q3 of 2019.
8.6 million to 8.7 million to 9.7 million in Q2 2020.
The second quarter for this segment represents the has revenues since 2015.
Sypris technologies sell demand start to rebound in June and at this point the outlook for the second half shows a considerable improvement from the Q2 volume.
Additionally, new program revenue is expected to contribute during the second half to partially offset the cyclical decline in the class eight market.
Please advance aside 13 on this side, we will show our trend of consolidated gross margin over the most recent four years along with the performance in the first two quarters of 2020.
The impact of Coven 19 contributed to a drop in margin from the 16% we reported in Q1 to 11.7% for Q2.
The Q2 margin is above the levels for the last four years, but well short of our target for the year.
As noted earlier our year to date gross margin is at 14.1% and we anticipate our full year margin can increase based upon our current outlook.
The electronic segment continued to show margin improvement in the quarter up from 12.6% in Q1 to 18.3% in Q2, which ranks as the best quarterly performance since 2012.
The increase in margin Foresi demonstrates the leverage that we gained from the growth in revenue by this segment.
The contribution margin, we pick up on additional revenue converts to higher gross margin and with the increase in backlog since year end, we anticipate FC can continue to maintain margins in the mid teen and the second half.
Improved material availability also contributed to the see margin improvement, which enabled our management team to more efficiently balanced production schedules and increased our overhead absorption.
We started to see some relief to the demand challenges impose back cobot 19 on Sypris technologies in June.
And with customer plans resuming production and the benefits from our continuous improvement initiatives.
We remain optimistic that this segment can deliver improved margins during the second half of the year.
Please advance to slide 14 are now will offer a few takeaways.
Consolidated revenue for Q2 was 17.2 million a decrease of 29.8% year over year, and 23.5% sequentially as coven 19 drove lower demand.
Gross profit for Q2 was impacted by the lower revenue volume and gross margin ended at 11.7 per cent for the quarter compared to the 16% margin reported in Q1.
Our gross margin for the first half is 14.1%.
310 basis points from the first half of 2019.
After saying very difficult months during April and May Sypris technologies began to see customer demand rebound in June as customers reserve resumed operations that their facilities.
Our outlook for Q3 is positive at this time, but certainly subject to changes driven back over 19.
Sypris electronics perform well commit the difficult economic conditions during the second quarter and the order backlog in place as we exit the quarter is up 22.5% from year end and positions US segment well for the second half of the year.
Revenue for the second quarter, and first half periods increased 28.3% and 67.6% respectively.
We recently announced three new contract awards, and we are optimistic our new business funnel will provide additional growth opportunities to support our business later this year and into 2021.
Both operating segments are profitable for the first half of 2020, which is no minor accomplishment given the challenges in post back cobot 19 on the global economy, and our end markets.
Our ability to increase our revenue and continue to pursue market diversification will provide us with the opportunity to further expand our margins as we leverage our current business model.
We we reduced SGN a beginning in March and we'll continue to manage our discretionary spending closely as we adjust for the impact as a pandemic.
And we are focusing on reducing our working capital investments to further optimize cash flow.
We received proceeds of 1.7 million in the second half from the set our second quarter.
From the sale of a manufacturing facility that had been closed since the fourth quarter of 2017.
And on May six we secured a PPP loan and the amount in the principal amount of $3.558 million.
Our receipt of this song was critical to enable us to retain our workforce as the reduction in customer demand from the covered 19 outbreak began to impact our business in Q1 and deepened further in April and May.
The extent and duration of the impacts of Coke and might 19 may have on our business are not known at this time and we will take every action possible to protect the health of all of our business associates and mitigate the impact to our business.
We greatly appreciate your continued support of our employees customers and suppliers during this uncertainty and challenging period.
This concludes our call today and at this time I'd like to turn it back over to a lesser to answer any questions you might have for us. Thank you.
Thank you we will now begin to question and answer session.
Ask your question you May Press Star, then one and you touched on some.
If you are you asked me speakerphone, please pick up your handset before passing the key to withdraw your question. Please press Star then queue.
At this time, we will pause momentarily to assemble the roster.
Okay.
Again, if you have a question. Please press Star then one.
Yeah No further questions at this time. This does conclude our question and answer session I would like to turn the conference back over to Mr. Jeffrey Gil for any closing remarks.
Thank you Melissa.
Tony and I'd like to thank you for joining us on the call. This morning.
We welcome your continued interest and of course your questions about our business. Thank you and have a great day.
The conference has now concluded. Thank you for intending today's presentation you may now disconnect.
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