Q3 2020 SMTC Corp Earnings Call

[music].

Okay and work into the S.P.C. headquartered 2020, <unk> financial results conference call well.

Well, let me back to the listen only mode should.

Should you need assistance. Please take note of confidence, especially stuff that's pressing the star keep sort of the buys you all.

After todays presentation, there will be an opportunity to ask a question.

That's good question you May Press Star then one.

Two recent or your question. Please press the Star then two.

Please note this event is being recorded.

I would like to turn the conference over to Glenn Macinnes, Vice President of Finance. Please go ahead.

Thank you before we begin the call I would like to remind everybody that the presentation includes statements about expected future events and financial results that are forward looking in nature and subject to risks and uncertainties. The company cautions that actual performance will be affected by a number of factors many of which are beyond the company's control and that future events and results may vary substantially from what the Cup.

They currently foresees discussion of the various factors that may affect future results is contained in the company's annual report on form 10-K quarterly reports on form 10-Q, and subsequent reports on form 8-K, and other filings with the Securities and Exchange Commission.

All forward looking statements are made as of the date of this call and except as required by law, we do not intend to update this information.

During the call. We will also reference certain non-GAAP measures, including adjusted gross profit adjusted net income EBITDA and adjusted EBITDA. Please refer to the press release, we issued yesterday for reconciliations between GAAP and adjusted results Matt.

Management believes that these non-GAAP financial measures when used in conjunction with GAAP financial measures provide useful information to investors about operating results enhances the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to the key metrics SMTC uses in its financial and operational decision making.

He's management believes that adjusting for the additional temporary costs attributable to the Tobin 19 pandemic allows for a better comparison of the company's performance to prior periods, which is consistent with the company's financial covenants in its financing financing agreements. These non-GAAP financial measures are used by management to manage and monitor stcs performance and frequently use.

By analysts investors and other interested parties to evaluate companies in SMTC as industry. The presentation of this financial information is not intended to be considered in isolation or as a substitute for or superior to financial information prepared and presented in accordance with GAAP and should not be construed as it has an influence that stcs future results.

It would be unaffected by any items adjusted for in these non-GAAP financial measures.

Finally, this conference call will be available on the Investor Relations section of S&P. She's website that includes the link in todays webcast at Www Dot SMTC Dot com.

Company has also posted a slide deck, which interested parties can find next to the link for todays webcast will be referring to the slides from time to time during our call. This morning.

I will now pass the call over to Ed Smith, SMTC, as President and Chief Executive Officer.

Thank you Blair welcome and good morning.

Ladies and gentlemen comedy Smith, <unk>, President and Chief Executive Officer on this call with me today is rich Fitzgerald, our Chief operating officer, and Steve was like our Chief Financial Officer.

As I did last quarter I want to thank the entire as some TCP and our supply chain partners for their hard work dedication has continued to operate our business.

With the added Charlie brought on by the global fight against the COVID-19 pandemic.

I'd also like to thank our stockholders for their continued patience and support getting these trying times.

Before I provide a quick financial recap I wonder, though that while we are pleased with our business execution across both facet of our operations in response to the challenges posed by the covert pandemic the fight isn't over yet.

Or covered my team prevention activities go beyond the basic requirements for the prescribed by the various governments and health care agencies.

As a result of these actions and our ability to remain focused arpus. So these remain open and then operation and we look forward to the day with a pandemic is behind us and when we expect to emerge as an even stronger and more profitable company.

As you can see on slide three revenue for third quarter was $99.5 million.

12.3% from the 80.7 million reported in the same quarter, a year ago and up 10.1% from the 90.4 reported in the prior quarter.

Customer demand during third quarter 2020 continues to track to our internal plans as we expanded our customer base and increase our market share.

We've been successful with.

We've been successful with.

Our end markets diversification dedication and putting the customer first and adapting our sales and onboarding processes to address the challenges posed by Copel made to Benjamin.

While these processes may be a little bit different than perhaps take a little longer acquired warmer ticket was planning, we expect that could skew continued to gain market share and grow ourselves for them.

During the third quarter 2020, we continue to operate as a covert compliance safe workplace and incurred 1.3 million to protect our employees and their families did.

Good hearing could have health and safety action plans that we discussed in our previous conference calls and by carefully managing our expenses and business operations.

We were able to once again generate improving bottom line results, including adjusted EBITDA of 7.5 million or 7.6% of revenues that enabled us to report.

Earnings per share of four cents and adjusted earnings per share of 13 cents.

As noted on slide four.

I'm pleased by the trust of our customers have put us as our business development teams continue expand SMTC as market share and expand our sales funnel. We've been successful in security $46 million in New awards in bookings during the third quarter, primarily from five lead customers and one existing customers in the aerospace.

Fence and industrial Io to markets.

Let me quickly share with you just one example of why are winning new customers and expanding our business with our existing customers before Steve discusses the Q3 financial results and provides our outlook for the balance of the year and are issued initial expectations for 2021.

Recently after extensive supplier valuation process that involves dozens of him as providers and because of our track record of superior supply chain management were selected by a leading multi billion dollar a year international supplier of sophisticated hardware and software products.

As one of their two global preferred suppliers. This.

This customer who provides products for a variety of growth industries, including many we are targeting such as defense aerospace industrial LT custom measurement and medical safety.

Also values, our leadership teams ability and willingness to develop flexible innovative and strategic solutions to its complex by refresh requirements.

Manufacturing for this customer Workstar in Q2, 2012, and we'll continue with the 2021, but for all of our facilities in North America.

I want to thank Richard has decided to pursue other opportunities for his leadership and guidance over the past three and a half years.

Escalating 354000 toward toward thousands of non-cash amortization of intangibles recorded in connection with their acquisition of MCA Assembly 1.3 million of COVID-19 related costs at 261000 of non-cash unrealized foreign currency game on an unsettled foreign currency cause.

Tracks, the 1.3 million incremental costs incurred to address the COVID-19 issues includes temporary labor in lieu of at risk employs required to stay at home cleaning disinfecting and healthcare monitoring.

In comparison R. Q2, 2020, adjusted gross profit was $11.7 million or 13% of revenues.

Selling general administrative expenses for the third quarter of 2020 was six 7 million a reduction compared to 7.1 million report in the second quarter of 2020, the lower SG&A expense in Q3 relates to the to the prior quarter was primarily due to reduce professional services fees rendered in connection.

To our stocks compliance as a percent of revenues SG&A expenses decreased from 7.9% of revenues in the prior quarter to six 7% of revenues in the third quarter of 2020 in comparison SG&A was seven 4% of revenues in Q3 2019.

We reported net income of $1.2 million in the third quarter of 2020 compared to 995000 and the prior quarter and a net loss of five $7 million in the same quarter a year ago.

I just had an income in the third quarter of 2020 was three 8 million.

In comparison, we recorded adjusted net income of 2.4 million the prior quarter and adjusted net income of $2.1 million in the same quarter a year ago.

It just had EBIT in the third quarter of 2020 was seven $5 million or seven 6% of revenue compared to adjusted EBITDA of six $4 million or seven 1% of revenues in the prior quarter and $6.3 million or seven 1% of revenues in the same quarter a year ago.

Reconciliations of adjusted net income adjusted gross profit and adjusted EBITDA are included in the press release, we issued after the market closed yesterday.

Was 2.94, which is in line with our public company peers. We continue to expect that we will be able to further reduce our debt to EBITDA ratio exiting 2020.

Our financial priorities during the COVID-19 pandemic remain focused on tight controls over expenses carefully managing our working capital and leveraging fixed costs as revenues expand and managing strong relationships with our partners to ensure financial flexibility.

Quarter, our operations of supply chain team.

Can you to perform exceptionally well working around the challenges presented by COVID-19 pandemic.

If you are following along with our posted slides turning to slide seven I'm pleased that we're starting to see an acceleration of our customer programs moving through the customer certification process into.

Into the new product introduction phase and entering production that will continue to ramp in 2021.

Over the last two quarters, our engineering and production staff in Boston in Fremont successfully launched 11, new product introductions or Npis programs are.

Our business development sales teams continue to expand our business with $46 million in new customer multi year orders in Q3 from five existing customers and one of those customers.

As noted on slide eight we remain focused on growing our market share in key markets that play to our strengths, including industrial multi the regulated medical markets and markets of customer support in defense and aerospace industry.

During the third quarter continue to see robust strength with some defense and space programs, which offset softness in the commercial avionics. We also benefited from a rebound by our semiconductor customers. These markets provide a stable and solid base to profitably grow our business in the years ahead.

Orders, maybe even years and so this 176, let me refer to 179.

Some of that is replacing business that's gone away.

Same as you know in the payment system area, great people not going to restaurants in certain states.

Reduce capacity and that makes it where the payment systems have dropped off dramatically.

So I would say a normalized fear that would lead to two significant growth.

But because of the pandemic in certain markets being more effective than others. It's leading to you know, we're showing double digit growth but.

But it's not the 20 or 30% it could be if we didnt have covert.

Okay, Thanks that anymore.

If you had to prioritize between say expanding cash.

Cassidy a chihuahua.

On another facilities or adding manufacturing footprint in southeast Asia or pursuing.

External M&A.

You know what what would what seems most important at this point.

Yeah. So so because of some of these new warrants that you just referred to we will expand our.

Our footprint.

In Mexico in our current facilities, which we own.

You know we have 17 acres, we only build on eight of those we are looking at what we should do with those other eight acres or so then what type of expansion. So if you were to show up at our facility you'll see that there's some expansion going on now and you know.

Smaller way, but overtime that we will need to expand.

To expand your sales.

When we talk about ourselves next year, our facilities in Mexico next year could do over $250 million or more in Mexico. So first first number one priority would be to expand in Mexico.

Currently not being in southeast Asia and in Europe.

Is not where we want to be I'm not actively out looking for acquisitions today, but as we get through this cold it obviously I'd like to be there and.

Its market I'm, just trying to better understand.

That doesn't sound like.

Some of the businesses that have been weakened by Covid are going to improve next year in your opinion.

Yeah, Yeah. So.

What's the greatest question.

Most of that if not ninth.

90% of that growth will be new customers that we've obtained over the last.

Three four quarters.

Alright so.

We had announced that some point a large defense arrow.

And we've announced.

Different wins so.

Christian we're probably better backlog this year than any year since I've been here in terms of.

Take a look and see what's out there and see if there's something of value to us.

But right now that's that's really clearly defined Christian by organic growth, but I would say a couple of years out as we gain some pretty significant scale.

I don't think you to grow 20% or over $100 million without some sort of M&A somewhere along the way.

Great and then my last question has to do with the gross profit margins.

It is we are doing a material ramp.

New customer driven growth next year.

Right Yeah. Okay. Thanks, So I guess I do have one other question or I think I touched on this on the last call a ball if there was.

Any potential of losing any of you guys and knowledge now it sounds like we might be I don't know if I heard you right that we might be losing rich and I'm. Just wondering if you could elaborate on what plans we might have to.

No to replace him if that is what I heard I'm not sure if I heard that right.

No you heard that right rich for for personal reasons just decided to.

Or make a change you know this is a crossover said for me.

As rich had been together often on all three or four times over 20 years.

And so we have started a search for a new COO, which has been kind enough to say that he would stay through a Q1, which will get our customers Onboarded and a few other projects are done and so I appreciate that from rich but.

Life, a life changes mean, Richard been through this together like I said, we worked a four times together. So you know I hope in the future we get another chance to do that but which has made the decision to move out at this point. So Craig you know these things happen and we worked through I have listed.

You know if you want to use the old terminology at a rolodex that I went through and have made a list of people that we have started reaching out and talk to you too.

And we're hoping to have the research done by the end of Q1.

In that sector. So.

He will be with us through the entire first quarter.

It was <unk> at this point, yes.

So yes.

Okay.

Oh sure Hope that works all day [laughter].

I think in terms of a couple of questions. Since I've always says you know I'm gonna have a few of those let me turn a little bit to the balance sheet I knows Steve has talked a little bit about kind of the EBITDA numbers adjusted EBITDA leverage numbers, which I think are relevant I guess I'm trying to keep it on a couple of things one of the absolute that level.

And kind of free cash flow generation in terms of how we see that playing out and how does that dovetail and with some of the plans that you guys have talked about in Mexico. For example, and I know you haven't talked about specifics, but presumably that expansion is gonna cause some amount of money how does that tie in to kind of the some of the leverage ratio is going for.

And also our our desktop absolute that levels.

Yeah. So the status T. Once I. So as you saw the the absolute numbers and della was or about our constant across the last couple of quarters, which you know through covid into our increases in inventory as well as we've got about 2.1 million of covid costs to the year.

We've probably had.

More pressure on some of the cash and we've been able to keep that levels constant. So we've been working hard on that so we will continue to leverage.

That we watch it daily me do our 13 when cashflows.

You see as offering particular potential for you guys to target as we go out over the next year or two and where are we in how are you targeting those and do we have some things in the pipeline or.

What can you speak of purple color there.

Yes, so we have a pipeline and we really hope for three types of customers as a general rule, Steve highly regulated which aerospace defense medical all fall into the highly regulated markets and there's others and highly complex.

And.

We think that that's a market for us.

So so when you look at the industrial Iot power in Queen Pistology.

That will continue to grow and then the third one that is really giving us really good growth as a semiconductor capital equipment market and we've added.

Two new customers in.

In that market.

One one was the division of one of our existing customer. So we've landed expanded there once a brand new semiconductor capital equipment customer and.

That one is a pretty significant went too so.

We're pretty excited about next year and.

Then a new customers and the expansion in our customer base, but.

Clearly, we're expanding where we want to we are expanding into defense market, we're expanding if semiconductor capital equipment and then the power industrial out to market. So.

Okay. So at my my follow up on that as.

When one looks at those factors.

We're winning more business and taking market share.

Okay and then just.

Sort of a general industry question. This is my last question or not want to monopolize, but you know given that your execution.

Reasonably valued.

But we're not there and so I think it.

I'm, hoping that over a couple of quarters of performance and significant growth.

That that will happen, but clearly it's a little frustrating we've grown double digits every year organically other than this year, which is coded.

And even in a collaborative environment year on year, our growth will be 7% or so.

You know there's not much many companies would say one year. They grew 56% next year. They grew 28, seven and now we'll be back on the double digit growth next year.

And even then and so to get such a low multiple is a little bit frustrating, but clearly.

Clearly I think at some point the true value will come up.

Okay, well on the pension shareholder and I have confidence [laughter] I'll speak to that.

Thanks, David we would likely to happen tomorrow, but unfortunately, that's just not the way the world works.

[laughter].

Okay. Thank you.

Thanks.

We we drive on Capex split.

Split between new and maintenance Capex and then on the interest expense, we have about a 10.5% on the term b.

I mean on term may sorry on the termite term B has been retired so term is about 10, 10.5% and then the Aviol is in that range of 4% to 5% is LIBOR based so it's in that range of four to four and five so on a blended and a blended perspective.

Probably somewhere in that you know that eight eight and a half nine and then on top of that we assume or we have some leases that are at some higher rate. So that's that's typical we're in that range.

And we have been arranged for for a bad Theres will round. So until we re Fi, which we certainly look towards reshaping. This debt. We continue to look towards can we get it to a full abbeel.

My coma to asked me if for any closing remarks.

Great. Thank you operate it.

First of all in closing I want to thank rich for his dedication over the last couple of years and to let him know that he will be missed.

I Wanna once again, thank our employees leadership team business partners distributors and our stockholders for their continued support and look forward to reporting our progress to our various stakeholders as we go forward.

Thank you and have a great day.

I'm, calling from now concluded sanctify come into those to whom comes from them and they'll just come up.

[music].

Uh-huh.