Q2 2022 Sypris Solutions Inc Earnings Call
[music].
Good day and welcome it is hyper solutions incorporated conference call today's call is being recorded.
At this time for opening remarks, I'd like to turn the call over to President and Chief Executive Officer, Mr. Jeffrey Gill. Please go ahead Sir.
Thank you Nick and good morning, everyone.
Tony Allen and I would like to work them into this call.
Purpose of which is to review the company's financial results for the second quarter of 2022.
For those of you have access to our Powerpoint presentation. This morning, please advance to slide two now.
We always begin these calls with a note that 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 as a result of several factors.
These factors are included in the company's filings with the Securities and Exchange Commission.
In compliance with regulation G. You can access our website cypress dot com <unk>.
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.
These 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 quarter.
Now, let's begin with the overview on slide four.
We are pleased to report that revenue for the quarter increased 12% year over year, driven by a 26% increase for Cypress electronics, and a 5% increase for Cypress technologies.
We're also pleased to note. This top line performance was achieved despite the impact of material shortages and supply chain issues that continue to challenge our business.
The headline for the quarter, however resides with the amount of business commitments. The company received during the period in the form of New contract awards and expanded releases under existing agreements.
Orders increased 360% year over year, and 169% sequentially drew.
Driven by a series of wins at Cypress electronics, where orders increased 524% year over year.
240% year to date.
The balance of our business also continued to show important strength with orders for our proprietary engineered products raising over 13% during the period, while demand from our altering commercial vehicle and specialty automotive customers remained solid.
As a result backlog for the company jumped 77% year over year and increased 70% year to date.
Reflecting the highest levels, we have reported in more than 10 years.
Backlog for Cypress Electronics is now up 84% year over year, and 73% year to date with orders on the books now extending well into 2024.
We expect this rapidly growing backlog to provide important support for higher levels of shipments beginning later this year.
Before rising further during 2023.
Gross margin for the company decreased 360 basis points year over year, reflecting the impact of several short term issues as we work to adjust production schedules to accommodate changing material deliveries launch new programs and support capacity improvements.
We expect these issues to be substantially behind us within the next few months. The result of which is forecast to support a 400 to 500 basis point expansion of gross margin by the fourth quarter of this year.
Up from levels reported for the current period.
Turning now to slide five we have been pleased to announce several additional new contract awards and expanded releases under existing agreements during the period.
More specifically in Cyprus electronics in May we announced the receipt of a multimillion dollar follow on contract awards from our global defense contractor.
To produce modules to be incorporated into an advanced integrated electronic warfare and communications avionics system.
For one of the largest programs of the department of defense.
The program is for an American family of single seat single engine, all weather stealth multi role combat aircraft.
That is intended to perform both air superiority and strike missions.
The aircraft is also able to provide electronic warfare and intelligence surveillance and reconnaissance capabilities.
According to news sources the U S plans to purchase versions of the aircrafts through the year 2044.
And the aircraft is projected to operate until 2017.
The first operational supersonic short take off and vertical landing stealth fighter.
The aircraft emphasizes low observables advanced avionics and sensor fusion that enables a high level of situational awareness and long range lethality.
U S Air Force considers the aircraft to be its primary strike fighter for conducting the suppression of enemy air defense missions owning to its advanced sensors and mission systems.
Cypress will produce and test the advanced integrated electronic AVR avionics system modules for the communications navigation and identification suite of the aircraft.
This system supports the simultaneous operation of multiple critical functions, such as identification of friend or foe precision navigation and various secure voice and data communications.
<unk> is expected to begin in 2022.
In early June we announced the receipt of a multi year follow on award from the U S. Dod contractor to produce and test multiple power supply modules for the upgrade of an electronic warfare suite of another important U S fighter aircraft program.
The power supplies to be produced by Cypress will be incorporated into a suite that will replace the functionally obsolete so protection system of existing aircraft.
The upgrade is intended to significantly improve the aircraft's capability to detect identify and locate radio frequency threats automatically.
Updating the electronic warfare suite is critical to the aircraft, which is scheduled to be in service through the year 2040.
According to new sources, the system will deliver a fully integrated radar warning situational awareness geo location and self protection capabilities to maximize mission effectiveness and survivability of the aircraft in highly contested environments.
This advanced all digital system enables deeper penetration against monitor integrated defense systems and provides rapid response capabilities designed to protect the aircrew.
This program is expected to transition to full rate production beginning in 2022 as well.
And in late June we announced the receipt of releases under a new multi year production contract that was first announced in February of this year.
Order, which provides for cypress to begin full rate production beginning in 2022.
Calls for the manufacturing tests to power supplies for an initial five systems to be supplied to a U S. Dod contractor.
The module is produced by Cypress will be integrated into an electronic warfare improvement program for the U S. Navy.
According to new sources, the upgrade will provide the capability to actively jam incoming missiles threaten our worship.
Q decoys and adapt quickly to evolving threats.
The improvements to the electronic attack portion will provide integrated countermeasure against radiofrequency guided threats.
An extended frequency range covering coverage according to the U S Navy.
The systems capability for non kinetic electronic attack options can be further deployed an additional critical areas from.
From advanced communications to multi role waveforms, the multi function applications of this system will provide enhanced mission capabilities to the U S. Navy fleet, while presenting opportunities for future reductions in cost size weight and power. According to the U S Naval Institute.
The contract calls for significant increase in production volume from existing levels beginning this year.
Turning now to slide six at Cypress technologies, we announced the receipt of a multiyear contract extension in April to provide drivetrain components for use in the production of medium and heavy duty commercial vehicles with a leading global commercial vehicle original equipment manufacturer.
The components produced by Cypress for use in the drivetrain in medium and heavy duty trucks are essential to the performance the drive axle other vehicles.
The award of the contract extension is timely for.
For the commercial vehicle market is in the middle of a multiyear expansion.
The production of heavy duty vehicles increased 23% in 2021, while the outlook for 2022 anticipates, a further 17% increase in demand according to <unk> research.
These recent contracts are representative of the high cost of failure applications for which cypress is well known.
We expect momentum of new contract wins to continue during 2022, and we remain very optimistic about the potential for future program and revenue growth as we move forward.
In summary.
We are pleased with the progress that continues to be made across our business. The strong trend line for orders and backlog expansion is very positive and provide solid support for topline growth of 25% to 30% in 2022.
Our outlook for gross margin accretion has been tempered to 25% to 50 basis points for the year, reflecting the near term impact to supply chain disruptions and costs incurred to support capacity improvements.
Cash flow from operations is expected to increase materially for the year, driven by increased profitability and working capital improvements.
Now, let's advance to slide seven to review the outlook for each of our major markets.
According to <unk> research the production of class eight heavy vehicles as expected and increased 17, 2% in 2022 before softening somewhat in 2023 as the economy cycles down.
There are many factors that are having a positive influence on the demand for transportation.
Pent up demand from the period of the pandemic manufacturing prosperity carrier profitability and the acceleration of the transition to E. Commerce are combining to drive demand for freight to high levels.
Shortages of semiconductor chips steel and other key components are serving to hold back even higher levels of production.
Effectively pushing the market peak in the second half of 2022.
Turning now to slide eight the market for the transportation and the use of natural gas is key for cypress to be followed by the market to the transportation and processing of crude oil.
U S natural gas prices have increased significantly over the past year the spot prices rising to $7 70 per million Btu up from $3 26 at this time last year.
Oil prices have increased significantly over the past year with the price of West, Texas Intermediate up 36% from July of 2021.
Brent is up 37% for the same period.
Yes, the current outlook for oil prices to remain in the range of $90 to $100 per barrel for the remainder of the year.
Yes.
Although the outlook for the energy market is somewhat uncertain our backlog through June of this year is up 20% year to date, which is perhaps a positive sign of things to come.
As you'll see from the chart on slide nine the long term market for defense spending remains positive.
Within the overall budgetary allocations spending for technology upgrades on strategic platforms continues to be a very high priority.
Our backlog of future business is up 84% year over year and 73% year to date.
With firm orders extending well into 2024.
We're 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 10. Please note that revenues forecast increased 25% to 30% for 2022 with shipments to our customers in defense related markets expected to rise to 34% of sales in 2022 up from 29% of sales in 2021.
John .
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 11 for a brief summary.
Revenue for the quarter increased 12% year over year, driven by the 26% increase in Cyprus electronics and despite the challenges presented by supply change disruptions across our business.
Our backlog rose dramatically during that period.
Raising 77% year over year, and 70% year to date, reflecting the impact of a 360% increase in orders year over year at 169% increase in orders since year end 2021.
Defense spending is rising our backlog for this segment is up 84% year over year, and 73% year to date and the outlook for further strategic investment in this sector appears to be strengthening.
On a global basis.
Yeah.
The energy sector should continue to benefit from our current global issues with the potential for increased capacity investments to support the export of LNG from North America to Europe .
Other locations rising in priority.
Our recent contract awards are expected to provide further support for topline expansion during the year, while we remain optimistic about the potential for yet additional contract wins and successes.
We have confirmed our revenue outlook for 2022 with the top line expected to increase 25% to 30% year over year.
We now expect gross margin to create 25 to 50 basis points in 2022.
While cash flow from operations is forecast to increase materially year over year supported by earnings growth and working capital improvements.
Our backlog is strong so our focus must and will be on execution.
He almost daily supply chain trials will continue and there will be surprises and 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 balance of this year and beyond.
Turning now to slide 12, Tony Allen will lead you through the balance of our presentation. This morning Tony.
Thanks, Jeff Good morning, everyone.
I'd like to discuss with you some of the highlights of our second quarter financial results.
Please advance to slide 13 Q.
Q2, consolidated revenue was $29 million, an increase of $3 1 million or 11, 8% from the second quarter of last year with both segments contributing to the year over year revenue growth.
Consolidated gross profit was $3 8 million for the quarter a decrease of 12, 3% from the prior year as gross margin was off 360 basis points at 13% for Q2.
Margins dropped in both segments as our revenue mix shifted inflationary cost pressures increased and additional costs were incurred to support our growing backlog and projected demand in the second half of this year and 2023.
Revenue for Cypress technologies increased four 7% to $18 million for the quarter and gross margin was at 11, 9%.
270 basis points from the prior year.
Production in the class eight market at the OEM level continues to be impacted by supply chain constraints unrelated to the availability of drive axle shafts and other components we manufacture.
This in turn has trickled down into our shipment volume as our customers adjust their inventory levels to align with demand from the Oems.
Current forecast for class eight production this year indicate a 17% increase over 2021.
Class eight backlog currently stretches into 2023, and well ongoing supply chain issues appear to be easing somewhat.
Oems seem to be cautious on opening order book order boards for 2023.
OEM daily build rates for the second half of 2022 are expected to increase approximately 11% from the first half of this year, which could ease some of the pressure on our customers' inventory levels.
On the cost side, we are also experiencing some of the inflationary pressures that are being felt across the economy.
Prices of consumer consumable supplies and tolling have increased as well as utility rates.
We have programs focused on identifying opportunities to reduce our supply consumption and we are working with our vendors on cost effective solutions to go throw spend in this area.
We also incurred additional costs during the second quarter to support new programs and the forecasted demand in the commercial vehicle market over the balance of 2022 and 2023.
The price of steel has increased over the prior year at certain of our contract terms provide for sales price adjustments to pass the increased costs onto our customers.
This material price adjustment.
Based on market prices it flows through as additional revenue and cost of goods sold.
While the impact of the steel price adjustments do not have a direct impact to our contribution margin or gross profit the adjustments do serve to reduce our margin percentage.
Our engineering and product development teams have initiatives underway to reduce steel consumption in our forging and machining processes to improve our margins and deliver cost savings to our customers.
The decline in gross profit for the period also reflects a lower mix of our proprietary energy and higher value add products during the second quarter.
Recent orders quote activity for these products are improving and we expect revenue will increase in the second half for these products.
Revenue for Cypress Electronics was $11 1 million in Q2, an increase of 25, 6% from the prior year and gross margin was at 14, 9% a decrease of 550 basis points from the prior year.
The increase in revenue is primarily due to two follow on programs with one of our key customers. We are currently ramping to full production rates on these programs, which will continue over the second half of the year.
These programs are part of the record backlog. We currently have and are expected to contribute significantly to our top line growth later in the second half and continuing into 2023.
We are also in the manufacturing development phase of a recent new content New program Award that will continue into Q3 and transition first into limited rate production before entering a full rate build that is expected to continue for multiple years.
As we increased production and transition from limited rate to full rate build on our programs our margin rates typically increased during the life of the program as labor productivity improves and engineering resource requirements and rework declines.
As programs mature, we also have the opportunity to reduce material costs by working together with our vendors and customers to qualify components debt lower our cost per unit.
We expanded our second shift workforce in June at Cypress electronics to support the existing backlog focusing the production. During this shift on programs that have a higher than average run rate and require fewer manual assembly operations.
The first month of expanded operations for the second shift in Q2 was successful and will serve to increase capacity for the expected increase in volume over the balance of the year.
The additional volume from our backlog is also expected to further improve our manufacturing overhead absorption.
Material availability factors into this as well as it allows us to more efficiently plan, our operations ran longer build cycles and minimize changeovers.
Our consolidated SG&A expense was $3 7 million for Q2, an increase of nine 4% year over year as compensation reductions implemented in response to Covid, where phase it out over the last year and other other employment costs increased.
SG&A as a percent of revenue decreased to 12, 9% in Q2 from 13, 2% a year ago.
Operating income for.
For Q2 was just about breakeven and while this was below our expectations, we remain committed to driving profitable profitable growth for the business.
The record backlog in place provides a solid foundation to support this growth.
Our operations teams are focused on execution and meeting our objectives for cost quality delivery and service for our customers.
The comparison of net income for Q2 highlights the benefit recognized in 2021 on the forgiveness of the PPP loan for $3 6 million.
Please advance to slide 14.
Consolidated revenue for the first half was $55 2 million, an increase of $9 3 million or 21% from the first half of last year.
Consistent with Q2, both segments contributed to the year over year revenue growth.
Consolidated gross profit for the first half increased 35, 3% to $8 3 million.
Most margin also improved year over year by 170 basis points to 15%.
Revenue for Cypress technologies increased 15, 8% to $35 1 million.
Gross profit increased 43% to $5 3 million.
Gross margin increased 290 basis points to 15% for the period.
The revenue mix for the first half period for Cypress technologies was favorable compared to Q2 and the revenue from our proprietary energy and other high value add products, including automotive and sport utility components increased year over year driving driving an improvement in gross.
Margin.
Revenue for Cypress Electronics was $20 1 million, an increase of 28, 7% from the prior year.
Gross profit increased 23, 8% to $3 million.
Gross margin had a slight decline 60 basis points to 15, 1%.
In addition to the factors previously noted for Q2, the comparison of revenue and gross margin for Cypress electronics for the first half periods.
Reflects the material availability challenges we faced in the prior year, primarily during Q1 of 2021.
While certain programs continue to be impacted by material availability. During 2022, the impact has been less significant than in the prior year.
Our consolidated SG&A expense was $7 1 million for the first half an increase of 13, 1% over the prior year.
Fewer travel restrictions increased healthcare costs and the phase out of compensation reductions contributed to the increase.
SG&A as a percent of revenue decreased to 12, 9% from 13, 7% a year ago.
Our operating income for one was $1 2 million for the first half an increase of $1 3 million from the loss reported for the same period a year ago.
Please advance to slide 15.
On this slide we show our trend of consolidated gross margin over the most recent five years along with the performance expected for 2022.
While the revenue outlook remains unchanged our expected gross margin improvement for 2022 has been updated to a range of 25 to 50 basis points above last year.
Q2's margin performance factored into the margin adjustment as well as our expected revenue mix for the second half the impact of steel price adjustments on our margin percentage and inflationary pressures.
We expect gross margin to improve during Q4 Cypress electronics advances further into their full brake production cycle on our half and half volume.
Grams.
We want to recognize the efforts of all of our teammates involved in securing the orders received in the first half of the year to push out our backlog to a record level and we are excited about the opportunity. This provides to improve our margins and profitably grow our business.
The contract awards demonstrate their trust and confidence our customers have in our business.
We look forward to continuing to meet and exceed their expectations.
We will also continue our efforts efforts to diversify our markets served and our customer base and to deliver more value added services to our customers, which we believe can provide further upside to our current margin levels.
Please advance to slide 16 for a quick summary of our comments.
We are pleased to report year over year revenue growth at the consolidated level as well as within both segments.
Consolidated revenue increased 11, 8% for Q2 and 21, 21% for the first half.
Cypress Electronics was up 25, 6% for the quarter and 28, 7% year to date.
Revenue growth for Cypress technologies slowed to four 7% in the second quarter, but still shows double digit growth of 15, 8% for the first half.
Consolidated gross margin declined in the second quarter, but the first half comparison is favorable with an increase of 170 basis points to 15%.
Our year to date gross profit of $8 3 million as 35, 3% ahead of the prior year.
A key highlight for the quarter was a significant increase in orders and backlog primarily driven by recent contract awards for Cypress electronics.
Orders for the second quarter increased over five times for this segment contributing to a 360% increase in consolidated orders over the prior year and a 169% increase over Q1.
Our consolidated backlog increased 77% from Q2 of 2021, primarily on the strength of the Cypress electronic orders.
The outlook for Cypress technologies remains favorable as the current forecast for class eight production in 2022 shows a 17, 2% increase from the last year.
And OEM daily build rates are expected to increase 11% in the second half over the first six months of the year.
We expect both segments will generate double digit double digit year over year top line growth in the second half of this year with quarterly revenue increasing sequentially in Q3 and more significantly in Q4.
As we move closer to full rate production on our higher higher volume programs at Cypress electronics going into the fourth quarter. We expect the productivity initiatives. We are executing will gain traction and we will realize the benefits of more efficient production.
Scheduling in our operation.
Productivity on our recently expanded second shift at this location is also expected to improve over the next few months and contribute to our margin improvement target.
We expect some of the headwinds that contributed to our margin performance in the second quarter will limit our margin improvement. During Q3. However, we expect certain of these factors to subside over the next few months.
When combined with the volume increase and a more favorable revenue mix, we expect to generate an increase in consolidated gross margin in Q4 of four to 500 basis points from the current level, which will put our margin performance back in line with Q4 of 'twenty, one and Q1 of this year.
We are updating our outlook for 2022 with our revenue growth target remaining at 25% to 30%, while adjusting our full rate gross margin increased to 25 to 50 basis points over the prior year.
Our cash flow from operations is still expected to show solid double digit growth from last year, reflecting increased profit and cash generated by working capital improvements.
Thank you for your continued support and interest in our business and I'd like to turn it over to Jeff for closing remarks.
Tony and I would like to thank you for joining us on the call. This morning, we are looking forward to a year of double digit growth expanding margins and increased profitability.
I am pleased knows we certainly appreciate your continued interest in our business. Thank.
Thank you and have a great day.
Okay.
Vince will now concluded. Thank you for attending you may now disconnect.
Okay.