Sypris Solutions Inc. Q1 2023 Earnings Call
Hope this most survey 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 President and Chief Executive Officer, Mr. Jeffrey Gill. Please go ahead Sir.
Thank you and good morning, everyone.
Davis and I would like to welcome it to this call. The purpose of which is to review the company's financial results for the first quarter of 2023.
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.
And actual results could differ materially from those projected as rich as a result of several factors.
These factors are included in the company's filings with the Securities and Exchange Commission.
And in compliance with regulation G. You can access our website at Cypress Dot com.
To review any 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 quarter to be followed by an update on the outlook for each of our primary markets.
Rich will then provide you with a more detailed review of our financial results for the period.
Now, let's begin with an overview on slide four.
We're pleased to report that revenue for the quarter increased 23, 4% year over year, and eight 7% sequentially, reflecting continued strength across each of our business segments with revenue rising 42% for Cypress electronics and 13, 7% for Cypress.
Acknowledges on a year over year basis.
Orders for the quarter were up 73, 6% year over year, driven by a 91, 4% increase in Cyprus electronics, and a 25, 7% increase for the energy products Cypress technologies.
Our backlog increased accordingly raised.
121% on a consolidated basis.
Backlog for Cypress electronics increased 125% to $131 $6 million at the end of the quarter.
Up $73 million from the prior year period.
In a similar fashion backlog for the energy products Cypress technologies increased 61% year over year, reflecting positive global demand for the segments highly engineered products.
On a consolidated basis backlog has now increased for 11 consecutive quarters on a year over year basis.
With an average quarterly increase of 53%.
In fact over the past 17 quarters going back more than four years backlog has increased in all but two periods. The second of which was a nine 4% decline for the second quarter of 2020.
This reflected the impact of customer shutdowns at the onslaughts over kind of like.
As many of you may remember we mentioned previously that we were entering the inflection point.
We're rapidly rising demand was intersecting with the increasing availability of material.
We believe that the pace of conversion of our backlog into revenue, we will continue to accelerate as we now ramp up new programs to full rate production.
Turning now to slide five we have been pleased to announce several additional new contract awards during the quarter.
More specifically at Cypress Electronics in February we announced an award to produce and test electronic interface modules for department of defense weapons system.
That is an important part of the Dod is ongoing modernization efforts.
The result of the program will be to increase the strategic and tactical capabilities for a variety of aircraft platforms.
Production on this program is expected to begin in late 2023.
And shortly after quarter end in April we announced the receipt of additional releases under a multiyear production contract that was first announced in 2022.
The work provides for the manufacturing test electronic assemblies for an additional four systems to be supplied to U S Department of defense contractor.
The modules to be produced by Cypress will be integrated into an electronic warfare improvement program.
According to news sources, the upgrade will provide the capability to actively jam incoming missiles that threaten or shift.
Q decoys and adapt quickly to evolving threats.
Production on this program is scheduled to begin later this year with deliveries expected to begin in late 2023.
Turning now to slide six Cypress technologies announced in March that it has entered into an amendment to its current supply agreement.
With Detroit Diesel Corporation.
Subsidiary of Daimler truck North America.
Daimler truck North America itself, the subsidiary of Daimler truck holding AG, one of the world's largest commercial vehicle manufacturers.
The amendment adds a new series of part numbers to the agreement with DTC for drivetrain components used in Bdcs Detroit branded drive axles.
<unk> to be produced by Cypress will be essential to the performance of the drive axles are freight liners heavy duty vehicles.
Production of these additional part numbers seemed to be amended contract are expected to commence in 2023.
And shortly after quarter end in April we announced the award of a new program to supply drivetrain components for use in the production of a new model of side by side all terrain vehicles.
The New program award 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.
All training vehicle market is forecast to expand at a compound annual growth rate of 16, 8%.
Between 2020 and 2025.
According to technology research.
Production is expected to begin in 2024.
Each of these 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 the year and we remain very optimistic about the potential for future program and revenue growth as we move forward.
In summary, then we are pleased with the substantial progress that continues to be made across our business.
Apply chain challenges are continuing to abate and our focus is clearly on meeting the growing demand of our customers.
Now, let's advance to slide seven to review the outlook for each of our major markets.
According to ACP research the demand for the production of class eight heavy vehicles increased 19% in 2022.
As expected to remain essentially flat at this elevated level during 2023.
There are many factors that it.
That are having a positive influence on the demand for transportation.
Unfilled demand from 2022.
Past the shortfalls in the supply chain.
Elevated carrier profitability and the continued transition to e-commerce among other factors.
Shortages of semi conductor chips steel and other key components of served a whole OEM production levels down pushing backlog well into 2023.
Yeah.
The current ACP outlook calls for medium and heavy duty truck production to remain at elevated levels before easing somewhat.
The second half of 2023.
Turning now to slide eight the market for transportation and use of natural gas is key for Cypress.
Become increasingly dynamic over this past year.
European countries boosted LNG imports by 60% from 2022.
To offset declining pipeline shipments from Russia.
As part of the strategic response to their former dependency on Russia for the reliable supply of natural gas.
Europe has embarked on an aggressive campaign to source its needs elsewhere.
D E F. A forecast that Europe will increase its LNG import capacity by 33% by the end of 2024 and that the global LNG market will see a tidal wave of projects come online starting in mid 2025.
The outlook projects at 64 million metric tons of annual liquefaction capacity will be added by 2026.
The U S is a major provider of LNG and became the world's largest exporter in 2022 with plans to do even more in the future.
The maps to the right to pick their various projects underway in the U S and Europe identifying those that are operational and under construction.
Proved and proposed.
The 61% growth in our energy products backlog year over year reflects the strong and growing demand to support these infrastructure programs.
We remain cautiously optimistic that this positive outlook will remain in effect for some time to come.
As you'll see from the chart on slide nine the long term market for defense spending remains positive and we.
Within the overall budgetary allocations spending for technology upgrades on strategic platforms continues to be a very high priority.
Our backlog of future business now stands at $131 $6 million.
It is up 125% or $73 $1 million year over year with firm orders extending into 2025.
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 2023 with shipments to our customers in defense related markets expected to increase significantly.
As a result defense electronics is forecast to represent 39% of consolidated sales in 2023.
Up from 28% in 2022.
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.
Yeah.
Yes.
Revenue for the quarter increased 23, 4% our backlog grew by 121%, providing a strong platform to support future growth in 2023.
Backlog at Cypress electronics, now stands at $131 $6 million, reflecting a 125% or $73 $1 million increase from the prior year yet.
In a similar fashion backlog for energy products is up more than 61% year over year.
Our consolidated backlog has now increased for 11 consecutive quarters on a year over year basis, and when combined with improved material availability will provide important support for the launch of our new program wins and the corresponding higher levels of forecasted revenue margin.
Chuck.
Our markets are in good shape defense spending continues to increase and we may yet feel some additional tailwind depending upon the future outcome of our current global Geo geopolitical situations.
As a result, we are pleased to confirm our outlook for 2023.
Revenue is expected to increase 25% to 30% year over year.
We expect gross margin followed suit extending 150 to 200 basis points from 2023, while cash flow from operations is forecast to remain strong supported by our outlook for earnings growth.
Quite simply we are looking forward to the task of building the business profitably during the coming year and beyond.
Now, let's turn to slide 12 for each day. This will lead you through the balance of our presentation. This morning.
Rich thanks, Jeff.
Good morning, everyone I'd like to discuss with you some of our highlights of our first quarter financial results.
Please advance to slide 13.
Yeah.
Q1 consolidated revenue was $32 3 million an increase of 23, 4% from the first quarter of last year.
And an increase of eight 7% sequentially as we continue to benefit from the abatement of the supply chain issues experienced in 2022.
Facilitating increased production, particularly at Cypress electronics.
Consolidated gross profit was $4 2 million for the quarter, a decrease of seven 7% from the prior year. Despite the growth in revenues over the prior year quarter.
Gross margin was off 430 basis points compared to the prior year quarter due to an unfavorable shift in mix <unk>.
Production ramp up costs raw material price pass throughs as zero margin and unfavorable foreign exchange rates.
Revenue for Cypress technologies increased 13, 7% year over year to $19 5 million for the quarter.
Gross margin was down 480 basis points from the prior year due to raw material price increases pass through to the customer without markup and unfavorable foreign exchange rates. However, gross margin was up 60 basis points from Q4 on increased shipments.
While our shipment volume went down in Q4 Cypress technologies as our commercial vehicle customers rebalanced their inventory levels at year end chip shipments subsequently returned to normal levels in Q1.
Lastly, demand finished 2022 with a 19, 6% increase over 2021 and is expected to increase nine tenths of a percent from that high level for 2023 with some decline in the second half.
First quarter orders in backlog for energy products increased 26% and 61% respectively year over year, which we expect will translate into higher revenue from these products in 2023.
On the cost side, we continue to experience some of the inflationary pressures that are being felt across the economy.
Prices of consumable supplies and tooling of increases have utility rates.
We are working both internally and with our suppliers on cost effective solutions to control spend in these areas.
The price of steel has increased over the prior year and certain of our contract terms provide for sales price adjustments capacity increased costs onto our customers.
This material price adjustment is based on market prices and flows through as additional revenue and cost of goods sold while the impact of steel price adjustments preserves our gross profit.
Adjustments do reduce our gross margin percentage.
Our engineering and product development teams have also have initiatives underway to reduce steel consumption in both our forging and machining processes to improve our margins and deliver cost savings to our customers.
Revenue for Cypress Electronics was $12 8 million for the quarter, an increase of 42% year over year, and one 9% sequentially as the supply chain issues that impeded shipments throughout 2022, abated and we ramped up production for defense and communication customers in the quarter.
Gross margin was at 11, 9% a decrease of 340 basis points year over year on production ramp up costs and unfavorable mix and higher material cost on certain programs.
We're implementing an improved approach to lean manufacturing Cypress electronics, and we continue to expand its workforce to reinforce the team's efforts to execute the significant planned sequential quarterly increases in shipments in 2023.
We are also in the process of implementing additional automated production and especially in equipment to further improve our manufacturing efficiency.
We expect these efforts to boost manufacturing capacity to meet the planned increase.
As we increase production and continue to make manufacturing process improvements, we anticipate an improvement in labor productivity and overhead absorption, resulting in an improvement in margins as.
As programs mature, we also have the opportunity to reduce material costs by working together with our suppliers and customers to qualified components that lower our cost per unit.
Consolidated operating income for Q1 was $400000 down 63% from the prior year due principally principally to production ramp up costs on.
Unfavorable mix in foreign exchange rates as previously discussed.
Our operations teams are focused on execution and meeting our objectives for customer service and expanded volume levels, while also reducing cost per unit.
With strong backlog in place provides a solid foundation to support this growth through the remainder of 2023.
Please advance to slide 14.
On this slide we show our trend of consolidated gross margin for 2021, and 2022, along with performance expected for 2023.
<unk> 2022 decreased by 100 up 140 basis points from the prior year on production inefficiencies induced by the supply chain challenges and material price pass throughs without markup.
With the anticipated shipment volume increases supported by our record backlog, we expect revenue growth in the range of 25% to 30% in 2023.
We expect to deliver year over year margin improvement in the range of 150 to 200 basis points on these higher volumes, placing us at a 15, 3% margin at the midpoint of this range in 2023.
We want to again recognize the efforts of all of our teammates involved in pushing our backlog to a record level.
Also want to recognize and thank our reinforced cypress electronics team for its intense focused efforts to meet its customers' expectations.
Rising shipments in 2023, and Cypress technologies team for similar efforts to improve new programs for existing.
<unk> customers.
We will continue also continue our efforts to diversify our markets served in our customer base to.
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 15 for a quick summary of our comments.
A key highlight for the quarter was the significant increase in orders and backlog in both segments.
Backlog increased 120% for the period, marking the 11th consecutive quarter of year over year growth.
Cypress electronics orders were $25 8 million for Q1.
91% year over year, increasing its backlog to $131 6 million.
We expect shipments to arrive significantly in each quarter of 2023 is a function of the increase in backlog and increased production efficiency.
Cypress technologies has also augmented its energy product line and distribution resources to expand its energy presence in Europe Asia and the Middle East.
The outlook for Cypress technologies remains favorable with the current forecast for class eight demand in 2023, basically even with the high level of 2022 and further supported by planned increases in new programs with existing customers.
We expect both segments will generate double digit year over year top line growth in 2023 with.
With gross margin also increasing in 2023.
Based on our record backlog and momentum in orders, we are holding our outlook for a 25% to 30% growth in revenue.
Unfavorable foreign currency exchange rates impacting margins in the near term we have adjusted the gross margin guidance to a 150 to 200 basis point improvement over the prior year.
Thank you for your continued support and interest in our business now I'd like to turn it over to Jeff for closing remarks.
Thank you rich.
We would like to thank you for joining us on the call. This morning.
Looking forward to another year of double digit growth expanding margins and increased profitability.
I am. Please note. We appreciate your continued interest in our business. Thank you and have a good day.
The conference has now concluded. Thank you for your participation you may now disconnect.