Q1 2022 Sypris Solutions Inc Earnings Call
Thank you Keith and good morning, everyone.
Tony Allen and I would like to welcome you to this call.
The purpose of which is to review the company's financial results for the first quarter of 2022.
For those of you who have access to our Powerpoint presentation. This morning, Please advance to slide two now.
We always begin these calls with a note some of what we might discuss here today may include projections and other forward looking statements.
Assurance can be given that these projections and statements will be achieved.
Actual results could differ materially from those projected as a result of several factors.
Factors are included in the company's filings with the Securities and Exchange Commission.
Okay.
And in compliance with regulation G. You can access our website at 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 session.
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.
He will then provide you with a more detailed review of our financial results for the quarter.
Now, let's begin with the overview on slide four.
We are pleased to report that revenue for the quarter increased 31% year over year, driven by a 33% increase for Cypress electronics, and a 30% increase for Cypress technologies.
We're also pleased to note that this top line performance was achieved despite the impact of material shortages and supply chain issues that continue to challenge our business.
Gross profit for the quarter increased by 148% year over year supported by a 113% expansion for Cypress electronics, and a 167% increase for Cypress technologies.
Gross margin for the company expanded by 810 basis points year over year, resulting in a consolidated gross margin of 17% for the quarter.
This positive achievement was supported by both units with gross margin for Cypress electronics, increasing 580 basis points to 15%, while gross margin for Cypress technologies Rose 940 basis points to 18% of revenue for the period.
The combination of strong revenue growth and expanding margins resulted in a 113% increase in earnings per share for the quarter.
Increasing the <unk> per share.
Up from the prior year loss of <unk> eight per share.
We concluded the quarter with backlog up an additional 12% from the prior year period for Cypress electronics, while our backlog for energy products increased 30% from year end.
The order board from truck can all train customers for Cypress technologies continued to remain strong.
It only by OEM supply chain constraints.
Turning now to slide five we have been pleased to announce several additional contract awards since year end.
More specifically at Cypress electronics.
In early February we announced the receipt of a multi year follow on contract with a U S. D O D Prime contractor.
To produce and test electronic power supply modules for a large mission critical Navy platform.
The award is for an electronic warfare improvement program Yep.
The upgrade will provide the ability to actively jam incoming missiles that threatened to worship and adapt quickly to evolving threats.
The improvements to the electronic attack portion will provide integrated countermeasures and extended frequency range coverage. According to the Navy.
The system is software defined.
Unlike analog radars in the past the transmitters and receivers can easily adjust to send and receive different waveforms, allowing the system to be more flexible.
The adaptability for electronic attack comes as foreign aggressors or simultaneously developing several new classes of missiles at a significant rate.
Systems like this program and new directed energy weapons are part of the Navy's efforts to enhance the useful life of existing systems.
The contract calls for a significant increase in production volume from existing levels beginning in 2022.
Okay.
Also in February we announced the receipt of a follow on award from a USD D. O D prime contractor to produce and test electronic power supply modules for mission critical long range precision guided anti ship missiles system.
The program is designed to meet the needs of the Navy and Air Force War fighters.
The missile system employees sophisticated precision routing and guidance capabilities.
It is designed to detect and destroy specific targets within groups of ships by employing advanced technologies that reduce dependence on intelligence surveillance and reconnaissance platforms in contested environments.
According to news releases the system is designed to operate in severe weather and environmental conditions and provides range survivability and the technology that no. Other current system offers.
The contract calls for a material increase in production volume from existing levels beginning this year.
Yeah.
Cypress technologies, we announced the receipt of a long term sole source contract extension to provide drivetrain components for use in the production of medium and heavy duty commercial vehicles.
In addition, the company was awarded a new program to supply components for use in the production of side by side all terrain vehicles.
The components produced by Cypress for use in the drivetrain in medium and heavy duty trucks are essential to the performance of both the drive and steer axles for the vehicles.
The award of the contract extension is timely.
The commercial vehicle market is in the middle of a multiyear expansion.
The production of heavy duty vehicles increased 23, 4% in 2021, while the outlook for each of 2022 and 2023 forecasts additional growth according to Acte research.
Yeah.
The New program award for side by side, all terrain vehicles provides cypress with the opportunity for further growth in this burgeoning market.
The finished components produced by Cypress to exacting specifications will be incorporated into the differentials of these vehicles.
They're all trained vehicle market is set to grow at a compound annual rate of 16, 8% between 2020 and 2025.
Turning to technology research.
Production under this long term contract award is scheduled to begin in 2023.
And on April 19th we announced the receipt of a multi year contract extension from a leading global commercial vehicle OEM to provide drivetrain components for use in medium and heavy duty trucks.
These recent contracts are representative of the high cost of failure applications for which cypress as well now.
We expect the momentum of new contract wins to continue during 2022, and we remain very optimistic about the potential for future program and revenue growth as.
As we move forward.
In summary, then we are pleased with the substantial progress that continues to be made across our business.
As a result, we are pleased to confirm our full year outlook for 2022 with revenue expected to increase 25% to 30% year over year.
Gross margin is forecast to expand 200 to 250 basis points during the same period.
Cash flow from operations is expected to increase materially.
Now, let's advance to slide six to review the outlook for each of our major markets.
According to <unk> research the production of class eight heavy vehicles is expected to increase 11, 9% in 2022.
And an additional eight 7% in 2023.
There are many factors that are having a positive influence on the demand for transportation.
And increasingly strong U S economy housing strength.
Any factoring prosperity carrier profitability the acceleration of the transition to e-commerce and fiscal stimulus are combining to drive demand for freight to high levels.
Shortages of semiconductor ship chips steel and other key components are serving to hold back even higher levels of production effectively pushing 2022 orders into 2023.
OEM class eight backlog is currently estimated at 251000 units or 10 six months of build at current rates.
So despite these short term issues the outlook remains extremely healthy.
Turning now to slide seven the market for transportation and use of natural gas as key per cypress to be followed by the market for the transportation and processing of crude oil.
U S natural gas prices have increased significantly over the past year.
Spot prices rising to $6 60 per million Btu is up from $2 66 at this time last year.
Oil prices have increased significantly over the past year with the price of West, Texas Intermediate up 59% from April 2021.
Brent is up 51% for the same period.
The current outlook for oil prices to remain at or above $100 per barrel for the remainder of the year.
Our sense is that the continued expansion of the U S. Economy will eventually result in higher prices for all forms of energy.
Which in turn will bode well for capital projects as providers adjust to meet increased levels of demand.
Our energy product backlog through March of this year is up 30% from December of 2021.
Which is perhaps a positive sign of things to come.
As you'll see from the chart on slide eight long term market for defense spending remains positive.
And within the overall budgetary allocations spending for technology upgrades on our strategic platforms continues to be a very high priority.
Our backlog of future business is up 12% year over year with firm orders extending well into 2023.
We are very pleased with the level of new business momentum and we are optimistic that this important trend will continue going forward.
During previous calls we discussed the changes that have taken place in our market mix over the past several years.
Turning now to slide nine please.
Please note that revenues forecast increased 25% to 30% for 2022 with shipments to our customers in defense related markets expected to result in a 20% increase in overall mix rising to 36% of sales in 2022.
From 29% of sales in 2021.
We believe that additional opportunity exists to further diversify our business and we will continue to aggressively pursue this outcome.
Let's turn now to slide 10 for a brief summary.
The first quarter of 2022 was positive and is expected to serve as a solid foundation from which to support further growth during the year.
Revenue for the quarter increased 31%, while backlog grew 9%.
Gross profit for the quarter rose, 148%, while gross margin expanded by 810 basis points.
The rise in revenue and the growth in margins resulted in a 113% or <unk> <unk> per share improvement in year over year earnings.
Our markets are in good shape with a positive outlook for the economy expected to have a beneficial impact on the demand for commercial vehicles and energy consumption.
Defense spending is raising our backlog for this segment is up.
And the outlook for further strategic investment in this sector appears to be strengthening on a global basis.
Our recent contract awards are expected to provide further support for top line expansion during the year.
While we remain optimistic about the potential for yet additional contract wins and successes.
As a result, we have confirmed our outlook for 2022 with revenue expected to increase 25% to 30% year over year.
We expect gross margin to follow suit expanding 200 to 250 basis points in 2022, when compared to the prior year.
Cash flow from operations is forecast to increase materially year over year supported by strong earnings growth.
The wind is clearly at our backs, our focus must and will be on execution.
The almost daily supply chain trials will continue and there will always be surprises most assuredly challenges.
But this is always the case.
Quite simply we are really looking forward to the task of building the business profitably during the coming year and beyond.
Now turning to slide 11, Tony Allen will lead you through the balance of our presentation. This morning.
Tony.
Thanks, Jeff and good good.
Good morning, everyone I'd like to discuss with you some of the highlights of our first quarter financial results.
Please advance to slide 12 Q.
Q1, consolidated revenue was $26 2 million, an increase of 39% from the first quarter of last year.
The year over year increase in revenue of $6 2 million converted to an increase in consolidated gross profit of $2 7 million.
Consolidated gross margin was 17, 2% for the first quarter.
Nearly double that of the prior year for an increase of 810 basis points.
Revenue for Cypress technologies increased 31% to $17 2 million from $13 2 million a year ago with a gross profit increase of $2 million.
Most margin for <unk> improved 940 basis points to 18, 3% in Q1.
I'll break down the $4 million increase in revenue for <unk> into three categories.
First category reflects the favorable conditions in the class eight market.
S T revenue from components shipped to our customers serving the commercial vehicle market increased one 7 million over the prior year.
The Q1 increase for this market was in line with our expectations.
And with production and the overall class class eight market expected to grow nearly 12% this year.
We expect favorable year over year comparisons for the balance of the year.
Canoe from the automotive sport utility vehicle.
Off highway markets.
Drove the second major category of the increase these markets combined to account for $1 3 million increase over the prior year.
New programs and steady to growing demand at the end user level supports our forecasted revenue from these markets during 2022 with more potential upside in 2023.
The third and final category is energy product sales, which improved 1 million over the prior year.
Quarterly revenue from this market was up and down during 2021 in Q1 revenue fell about 15% sequentially from Q4 of 2021, although our order backlog in this market.
This increase from year end.
We expect energy product revenue to increase for the full year.
But the distribution distribution of revenue within the quarters could vary as it did last year based upon the timing of our larger shipments.
The gross profit improvement for S. T was primarily driven by the increase in revenue across all markets.
<unk> $1 4 million of the 2 million a $2 million profit increase was attributable to higher sales volume.
The balance of the increase reflects higher contribution margins on favorable revenue mix.
Comparison to the prior year also includes improved labor productivity in 2022, as Covid related absences decreased from a year ago.
We are closely monitoring the recent surge in Covid cases, and will adjust our protocols as needed to protect our workforce.
Revenue for Cypress electronics was $9 million in Q1, an increase of 32, 7% from the prior year and gross profit more than doubled to $1 4 million for Q1.
Gross margin for <unk> improved 580 basis points to 15, 3%.
The year over year improvements for SCE represent a step in the right direction for this business and we certainly want to acknowledge our team's effort to achieve these results.
However, our expectations for the quarter and our outlook for the year in this segment of our business are for higher levels of revenue and profitability.
We are on a number of important defense related programs and our performance in customer relationships have resulted in contract awards that has our backlog at a record level.
Revenue is expected to increase sequentially over the balance of year as production ramps in Q2.
We have opportunities on certain of these programs to double our volumes in 2023 from our estimated 2022 volumes.
Execution will be a key focus area and the management team is implementing processes to scale the business to support this growth.
The first quarter results for SC included upset from increased shipments to our primary customer in the communications market and backlog for that customer remains high.
On the downside we had to stop production on a high volume defense program during the first quarter, while the customer.
[noise] customer resolved a design issue.
We were able to resume production at the end of the first quarter, but it was too late to make up for the time lost during the redesign.
We also faced component availability challenge challenges on certain programs during the quarter, which is which is an ongoing challenge in this business our supply chain team works. This every day with the support of our vendors and customers and is generally successful with securing delivery dates.
For components that allow us to balance production among our programs there.
There are instances, however, in which the combined impact of the delays lower our production schedule below expectations in the first quarter was one of those.
Okay.
Gross margin for <unk> improved to 15, 3% from nine 5% a year ago.
With our outlook for higher volumes beginning in the second quarter, we expect overhead absorption and labor productivity to increase over the balance of the year from the levels reported for Q1 and contribute to improved gross margin for the balance of the year.
Our consolidated SG&A expense was $3 4 million for Q1, an increase of approximately a half a million year over year.
SG&A as a percent of revenue declined from 14, 4% to 13% and is expected to drop further because revenue grows during 2022.
Our operating income for the first quarter was $1 1 million compared to the loss reported a year ago of $1 1 million.
We are very pleased with the improved financial performance from the prior year and excited about our opportunities to build on this progress as we move forward into 2022.
We also note that Q1 marks our fourth consecutive quarter reporting positive numbers at the operating income line. Following the loss from a year ago, and we expect to continue that trend going forward.
Our net income of 237000 for the first quarter translates to EPS of <unk> <unk> per share compared to the net loss of $1 6 million and <unk> <unk> per share a year ago.
This is also the fourth consecutive quarter with positive net income and we expect earnings per share to improve considerably based upon our outlook for increased revenue and profitability over the balance of 2022.
Please advance to slide 13.
On this slide we show our trend of consolidated gross margin over the last five years and our expectation for 2022.
<unk> gross margin was 14, 9% for 2021, a 30 basis point improvement over 2020, and our outlook for 2022 includes an increase of 200 to 250 basis points over 2021.
At the midpoint of this range current year gross margin would land at 17, 1%.
Our first quarter consolidated gross margin of 17, 2% just above the midpoint of the range and shows a stable trend when compared to the last three quarters of 2021 on the right side of the slide.
We've had two consecutive quarters with gross margin at our 2022 midpoint and gross margin over the trailing 12 months of 16, 6%.
Our outlook for the balance of 2022.
Is to sustain our consolidated gross margin rate near the 17, 2% level, placing us well within our target range.
Please advance to slide 14, and I'll offer a few takeaways.
We are pleased to start 2022 on a positive note and continue our trend of profitability reported over our last four quarters.
Our year over year comparison is for revenue and profitability were favorable across the board.
Revenue increased 39% and gross prop gross profit was up nearly one and a half times to $4 5 million.
Gross margin nearly doubled.
Creasing 810 basis points to 17, 2%.
Operating income increased $2 2 million from a year ago.
And earnings per share for Q1 of <unk> represents a 9% improvement over the loss reported last year.
We've announced a number of new contracts for SC, which has our backlog at record levels and production is expected to begin to ramp in Q2.
The class eight market is expected to grow 12% this year and together with our recent contract renewals and the addition of new product lines, our outlook for <unk> remains positive.
Over the last four quarters, our revenue has been right at $26 million per quarter.
With both segments poised for growth considering the factors discussed today, our outlook calls for a double digit sequential quarterly growth rate over the last three quarters of the year.
The step up in revenue is similar to what we experienced as we as we grew from a $20 million quarterly run rate throughout 2020, and the first quarter of 'twenty one to the more recent $26 million run rate.
The additional volume is expected to have a further positive impact on profitability profitability much like what occurred over the course of last year.
And finally, we are holding to our outlook for a 25% to 30% gross growth in revenue.
And a 200 to 250 basis point improvement in gross margin for the full year 2022.
Thank you for your continued interest and support.
I'd like to turn it over to Jeff for closing remarks.
Thank you Tony we'd like to thank you for joining us on this call. This morning and were looking forward to a year of double digit growth expanding.
<unk> margins increased profitability.
And please know we certainly appreciate your continued interest in our business. Thank you and have a great day.
Yeah.