Q4 2020 Sypris Solutions Inc Earnings Call
[music].
Good day and welcome to the Cypress 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 grant and good morning, everyone.
Alan and I.
I would like to work in the to this call. This morning the.
The purpose of which is to review the company's financial results for the fourth quarter and full year 2020.
For those of you have access to our Powerpoint presentation. This morning, please advance to slide two and now.
The always begin these calls of the note that some.
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 the zone of several factors.
These factors are included and the company's filings with the Securities and exchange.
And in compliance with regulation G and access our website Cypress Dot 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 through the first half of our presentation. This morning, starting with an overview of the highlights for the year to.
To be followed by an update on the outlook for each of our primary markets.
Tony will then provide you with the more detailed review of our financial results for the quarter and year.
Okay.
But before we get started I'd like to take just a moment to thank our employees and their families for their support and dedication during this past year.
2020 was the year unlike any other.
Presenting unique physical psychological and personal concerns for everyone.
The unwavering commitment of our people enabled our company not only to meet the needs of our customers, but to do so while increasing its margins expanding its profitability and.
And generating positive growing cash flow and the same time.
Within the accounts.
Q1 and all.
Now, let's begin with the overview on slide four.
Gross margin for the full year 2020 increased 280 basis points to 14% despite.
Despite the six 3% decrease and revenue during the year.
The year over year change and revenue reflected the impact of the 30% reduction and the topline that we experienced during the second quarter.
As customers and the economy shutdown and response to the pandemic.
Gross profit for the full year improved 17% from 2019 and.
And when combined with lower spend per SG&A contributed to 102% increase and operating income.
Despite the cost and margin compression imposed by the impact of the virus.
EPS for the full year increased to <unk> <unk> per share.
Paired to the loss of <unk> 19 per share for the prior year.
While cash generation from operations increased significantly.
Raising from a use of 2019 to of meaningful generation in 2020.
We believe these results to be significant.
Especially in light of the unique challenges that were presented during the year.
Revenue per Cypress electronics increased 41, 3% year over year, reflecting the continued strong demand from customers and defense and communications market of.
Growing multiyear backlog and improved component availability.
Gross margin for Cypress electronics benefited from the growth and the top line and improved operational performance.
And 1420 basis points to 14, 6%.
We believe these margins and reflective of the vast improvements that have been achieved operationally.
As well as the improved the mix that reflects the diversification and that's taken place in recent years.
We believe that there is room for further margin expansion as our markets continue to recover going forward.
And what a year what a difference of the year makes the momentum and each of our major markets appears to be very positive. While a number of recently announced contract awards are expected to layer in additional top line growth.
The combination of these two very positive events is forecast to fuel the 20% increase and revenue per 2021.
Of 200 to 300 basis point expansion of margins and strong double digit percentage growth and cash flow from operations.
So let's take a moment to review each of these important underlying factors that provide the source for our optimism for the coming year, starting with our most recent contract awards on slide five.
At Cypress Electronics, we recently announced the follow on award from the U S. Dod Prime contractor and.
Manufacturing test of electronic power supply of modules from mission critical long range precision guidance guided anti ship missiles system with.
And with production set to begin during 2021.
The program is designed to meet the needs of the U S Navy and Air Force Warfighters.
System provides range survivability and technology that no. Other current system provides according to news sources.
More specifically the missile system employees precision routing and guidance day or night.
And all weather conditions and is designed to detect and destroy specific targets within the groups of ships.
By employing advanced technologies that reduce dependence on intelligence surveillance and reconnaissance platforms.
Net worth links and GPS navigation and contested environments.
This most recent contract award follows on the back of two New Awards, we received and reviewed during our last call, which included an initial contract award from Leonardo Drs Naval Electronics and manufacturing test electronic assemblies for naval radar tracking.
Item.
We also discuss contract awards to manufacturer of variety of electronic assemblies for mission critical airborne munition dispensing systems with production slated to begin during the second quarter of 2021.
We expect the momentum of new contract wins to continue during 2021.
And we remain very optimistic about the potential for future program and revenue growth as we move forward.
With backlog now extending into 2023.
At Cypress technologies, we recently announced an agreement to extend our long term contract with the leading commercial vehicle Oems.
The new contract continues our existing product lines and includes the award of two additional model lines to be produced by Cypress beginning in 2021.
And perhaps just as importantly, the.
And the new agreement provides for the conversion of an existing high volume axle shaft model and line to adopt certain features of the patented cypress Ultra series axle shaft from Si.
The patented Cypress Ultra series light weight axle shaft reduces the weight of drive axle assemblies by an estimated 16 pounds for the typical class eight commercial vehicle.
This is important and weight savings is believed to contribute to shorter braking distances and greater of fuel efficiency for the fleet owner.
It is also believed that by reducing the weight of these shifts more horsepower and may be transferred to the pavement.
Thereby further enhancing the performance of the vehicle.
We also recently announced the receipt of orders for specialty closures for use and high pressure oil and gas applications.
Including the anchor field development project and the Gulf of Mexico.
And the planned upgrade of the natural gas pipeline system in the North America.
For the anchor fueled project.
We will provide specialty high pressure closures that are rated up to 4885 Psi.
And used inconel alloy 625.
The nickel based superalloy that possesses high strength properties and resistance to elevated temperatures.
For the natural gas pipeline system.
We will provide closures from a multiple compressor system upgrade.
As part of and EPA program to reduce harmful emissions from aging equipment.
These closures will be 72 inches in diameter.
Way of 11, two five tons each.
And we will be rated two of pressure of 1200 Psi.
During our last call, we announced the award of New orders for closures from projects located in Brazil and Canada.
And the case of the Libra oilfield and Brazil. The project is one of the world's largest ultra deepwater oil discoveries at over 6600 feet deep.
And containing between seven nine and 15 billion barrels of oil.
The project is expected to produce up to one 4 million barrels of oil per day to.
And with an estimated development cost of $80 billion.
We will be providing specialty closures for this project that can handle pressure approximating 10000 Psi.
And Canada, the Trans Mountain pipeline and expect the expansion project will add 609 miles of 42 inch pipeline.
Transport and 590000 barrels of oil per day.
Canada's West coast, the shipment to world markets.
The project is estimated to cost of $12 $6 billion.
We will be providing closures ranging in size from 30 inches to 48 inches in diameter that will be automated with ease of opening.
We also announced the contract for the delivery of a 58 inch <unk> closure.
And five five tons each for use in the Alberta, Xpress gas project, which will expand transmission capacity from Manitoba to delivery locations and the Midwestern and southern U S.
These.
<unk> serve as excellent examples of the type of work, we do per demanding high cost of failure of applications around the world.
Now, let's advance the slide six to review the outlook for each of our major markets.
According to the Acte research and it's March 10, 2021 publication.
All of the indicators, we use to track the heavy duty truck market point.
Two extraordinarily strong market conditions.
And so much so that sales metrics on the year will be determined by the supply side.
By the ability of the manufacturers to keep up with customer and customer demand for the product.
There are a number of factors that are having a positive influence on the demand for transportation.
As the economy begins to expand at a 5% to 6% annualized rate.
Housing strength manufacturing prosperity.
Carrier profitability relatively low fuel prices and the acceleration of the transition to e-commerce and fiscal stimulus are combining to drive demand per freight to new highs.
OEM backlog at the end of February was estimated to be up 144% from August 2020.
A period during which fleets ordered more vehicles and the combined total of the previous 18 months.
As a result, acte's forecasting of 41% increase and demand for 2021 to be followed by an additional 15% expansion in 2022.
ACP concludes the further upside to the outlook exists subject to supply chain performance and its ability to meet the oem's needs.
The outlook presumes that the first quarter of 2021 will be about even with the fourth quarter of 2020.
After which the year over year and sequential comparisons for demand escalate rapidly.
And short the outlook for this part of our business appears to be extremely positive.
Turning now to slide seven the market for transportation and use of natural gas is key to cypress.
To be followed by the market the transportation and processing of crude oil.
According to a February 2021 reported by Mckinsey.
138 metric tons of LNG capacity is currently under construction.
And with an additional 100 metric tons of capacity needed in the future to meet forecasted demand.
Oil prices have increased significantly over the past year with the price of West, Texas intermediate of 129% from March 16th of 2020 to March 12 of 2021.
Brent is up 118% from the same period.
The outlook for year and the $75 per barrel.
Which would reflect the 75% increase from the prior year.
Rig count has increased by 64% over the past six months and is forecast to increase and additional 45% by year end.
Our sense is that the economics are now such the capital investment that was suspended during the pandemic will increasingly find its way into projects to meet the needs of an expanding economy. The.
Signals are certainly increasingly positive.
As you will see from the chart on slide eight.
The long term market for defense spending remains positive.
And within the overall budgetary allocations spending per technology upgrades on strategic platforms continues to be of very high priority.
Our backlog of future business now extends into 2023, and we are very pleased with the level of new business momentum as we enter 2021.
Yeah.
And in previous calls we discussed the changes that have taken place and our market mix over the past several years.
Turning now to slide nine.
Please note that while revenue is forecast to increased 20% during 2021.
Our market mix remains fairly well balanced despite the significant growth forecast for commercial vehicles.
The mix is maintained as the result of the expected continued expansion of defense electronics specialty automotive and energy.
We believe this to be quite an achievement and.
And it certainly represents a big change from our increasingly distant past on commercial vehicle represented 70% of the business and the sales were concentrated with two customers.
We are of much more balanced business today, both in terms of market served and customer concentration the.
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 opportunity exists to further diversify our business and we will continue to aggressively pursue this outcome.
Now, let's turn to slide 10 per breach summary.
The strength of our markets when combined with the positive leverage of new contract awards as.
And is expected to few of 20% growth and the top line.
Of 200 to 300 basis point expansion of margins.
And strong double digit percentage growth and cash flow from operations for the year.
The wind is clearly at our back to our focus must and will be on execution.
There will be surprises and most assuredly challenges but.
But this is always the case and the issues associated with growth will be much appreciated when weighed against the severity of the surprises we face during the previous year and the pandemic.
Quite simply.
We are really looking forward to the task of building the business profitably during the coming year.
Turning now to slide 11, and Tony will lead you through the balance of our presentation. This morning.
Thanks, Jeff and good morning, everyone I'd like to discuss with you some of the highlights of our fourth quarter financial results.
These advance the slide 12.
Q4, consolidated revenue was $26 million a decrease of four 7% from the fourth quarter of last year.
The reduction from the prior year was primarily driven by lower energy sales for Cypress technologies as short term demand and this market continued to be impacted by uncertainties related to the COVID-19 pandemic.
Partially offsetting the decline during Q4 were increased sales into the commercial vehicle market consistent with the levels reported for Q3 and about two five times debt reported for Q2 during the low point of the pandemic.
Revenue for the electronics segment in Q4 was in line with the prior year closing out 2020 with of 41, 3% increase over the full year 2019.
Consolidated gross margin was essentially flat at 12, 4% compared to Q4 of 2019.
Gross margin for Cypress technologies was 12, 7% during Q4 down.
Down 270 basis points from the prior year, reflecting the decline in revenue and the change in mix due to the lower energy product sales.
Gross margin for Cypress electronics of 11, 9% improved 370 basis points from the prior year.
Our consolidated SG&A expense was $2 7 million for Q4, a decrease of 21, 7% or $750000 from the prior year.
The decrease in Q4, SG&A, primarily reflects actions by management to reduce discretionary spend and response to the COVID-19 pandemic.
Cost reduction actions include reduced hiring activities.
Reduced compensation for our CEO and certain other senior leadership and corporate personnel.
And suspended fees paid to our board of directors.
Lower travel related spending and reductions and other areas of controllable cost.
With lower revenue and gross profit for the quarter, we fell short of our profit goal at the operating income line, but still made considerable improvement from the prior year loss.
We understand the importance of delivering consistent quarterly results and remain committed to.
And improving our operating results in the coming year.
Please advance to slide 13.
Consolidated revenue for the full year was $82 3 million a decrease of five 5 million or six 3% from 2019.
The year over year decline reflects the impact of the pandemic during the second quarter when consolidated revenue declined 30% from the prior year.
If you recall revenue for Cypress technologies for Q2 was down nine 4 million or 55, 9% from the prior year.
As we entered 2020, the commercial vehicle market was projected to decline from the record levels of 2019, and depending on mix impact only made debt curve steeper during the first half before rebounding in Q3.
As Jeff discussed earlier class eight demand is expected to increase 41% and 2021, which can provide substantial lift to our top line and the coming year.
Despite the decrease and consolidated revenue and 2020 gross margin improved 200 basis 200 basis points over 2019 to.
The margin improvement reflects the solid year for Cypress electronics improved mix with our diversification efforts and improved efficiencies driven by our continuous improvement initiatives.
Full year revenue from Cypress technologies was $45 3 million, which is $16 4 million or 26, 5% below the prior year.
Reflecting both the COVID-19 impact and the cyclical decline in the class eight commercial vehicle market.
The launch of new programs provided some boost to revenue for the year, but not enough to overcome the lower market demand.
We have also experienced some softening in our energy product or orders since the pandemic outbreak as customers have delayed projects or reduce spending as they navigate through these uncertain times.
The reduction in revenue drove drove gross margins lower for 2020.
Dropping 230 basis points to 13, 6% for the full year.
Full year revenue for Cypress Electronics was 37 million and increase of $10 8 million or 41, 3% above the prior year.
The material availability issues, we experienced in the prior year period have largely been resolved and our team has worked effectively with our customer base to successfully manage the routine production challenges, we face daily and deliver more consistent results and 2020.
Our team's confidence continues to grow and with our existing backlog of business and the new opportunities. We are pursuing our outlook for 2021 remains favorable.
Gross margin for this segment was 14, 6% for the year of.
Considerable improvement from the 0.4% reported for 2019.
Our consolidated SG&A expense was 11 4 million for the full year 2020, a decrease of $2 3 million or 17% from the prior year.
2020, SG&A expense represented 13, 8% of revenue.
Down 180 basis points from 2019.
Certain of the spending reductions discussed on the previous slide were implemented late in Q1, and the response to the Covid outbreak and.
And carried through the last nine months of the year. Additionally.
Additionally, we incurred certain consulting fees related to the implementation of a new ERP system for Cypress electronics during 2019.
And those costs were not incurred and the current year.
Our consolidated operating income for 2020 ended in positive territory.
As we recovered from the Q2 setback from COVID-19.
This represents an improvement of $4 $4 million year over year, despite the six 3% decline and revenue.
Given the challenges posed by COVID-19, we are pleased with our performance for the year and look forward to driving further improvements and our operating results and 2021.
Please advance to slide 14, and we will take a look at our consolidated quarterly revenue trend over the last two years.
The class eight commercial vehicle market started its downturn and Q4 of last year, New program launches the Cypress technologies for automotive and sport utility components began contributing to revenue and the first quarter of 2020, partially offsetting some of the softness and the market.
Additionally, the electronics segment increased revenue as component availability improved and backlog remained healthy.
This allowed Q1 revenue to increase sequentially from Q4 before COVID-19 began affecting revenue and late March.
The impact of COVID-19 on Cypress technologies drove segment and consolidated revenue down significantly in Q2 before recovery and Q3.
Aside from Q2, our consolidated revenue and the other and the other three quarters was north of $20 million per quarter, averaging $21 7 million.
Q2 impact of COVID-19 on Cypress technologies proved.
Proved to be more than we could overcome and to generate growth and our consolidated revenue year over year. Despite the 41, 3% increase for Cypress electronics.
And this ties into the market diversification discussion, Jeff covered earlier, and our ongoing focus to expand our topline and all markets and deliver more consistent operating results.
As Jeff noted in his comments on market conditions are favorable as we look forward to 2021.
We expect revenue for Q1 will be in line with the 2023 quarter average of $21 7 million, just discussed and expect to show sequential quarterly and year over year of growth over the balance of the year to achieve the 20% growth target.
Please advance to slide 15.
On this slide we show our trend of consolidated gross margin over the last five years and our expectation for 2021.
Consolidated gross margin was 14% for 2020 and of 280 basis point improvement over 2019.
Driving the margin expansion for 2020 was the electronics segment with an increase of 1400 20 basis points over the prior year to 14, 6%.
The increase and margin for SCE demonstrates the leverage that we gained from the growth and revenue by the segment.
The contribution margin, we pick up on additional revenue converts to our gross margin.
Improved material availability also contribute contributed to the margin improvement.
Which enabled our management team to more efficiently balance production schedules and increased our overhead absorption.
Cypress technologies reported 13, 6% gross margin for 2020, which is 230 basis points below the prior year, but includes the second quarter debt was heavily impacted by COVID-19, and solid gross margin declined to only three 1%.
Similar to the revenue analysis, and which we carved out the second quarter. This segment's gross margin for the balance of 2020 was 15, 7%, which is in line with our expectations under more normal economic conditions.
Considering the revenue growth, we expect for 2021 and the anticipated results of continuous improvement initiatives that are underway. We expect further margin expansion in 2021 and the range of two hundreds of 300 basis points, resulting and 16, 5% consolidated gross margin at the <unk>.
Midpoint of that range.
Please advance the slide 16, and a well and will offer a few takeaways.
Consolidated revenue for 2020 was $82 3 million and decrease of six 3% primarily attributable to the impact of COVID-19 on the second quarter.
Gross margin improved 280 basis points to 14% for 2020 fueled by the top line growth and margin expansion of Cypress electronics.
Earnings per share for 2020 was <unk> <unk> per share compared to a loss of <unk> 19 per share and 2019.
And increase in operating income of $4 4 million and the release of the deferred tax asset valuation allowance contributed to net income of $1 7 million for the year.
Demand from our customers and the commercial vehicle market rebounded during the second half of 2020 as market conditions improved.
North America and class eight production is for Chris forecast to grow, 41% and 2021, and an additional 15% and 2022.
New contract awards positive market conditions, and market diversification and support revenue growth and margin expansion in 2021.
We are projecting of 20% growth and revenue for 2021 and expect gross margin to expand 200 to 300 basis points.
Revenue is expected to increase from our current run rate beginning in the second quarter of 2021, and we are expecting sequential and year over year improvements for the final three quarters of the year.
We also expect cash flow from operations to improve in 2021, driven by improved profitability and continuing to aggressively manage working capital.
We greatly appreciate the support of our employees customers and suppliers during a very challenging 2020, and we look forward to the coming year with the optimism.
Thank you for your continued support and interest and our business.
And I'd like to turn it over to Jeff for closing remarks.
Thank you Tony.
We're looking forward to the year of double digit growth.
Expanding margins and increase profitability.
And please note we certainly appreciate your continued interest and our business.
And have a good day.
[noise].
Conference has now concluded thank you for attending today's presentation.
May now disconnect.
[music].
[music].
[music].