SMTC Corp
Q2 2018 Earnings Call Transcript

Published: 8 Aug 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the SMTC Second Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Blair McInnis, Vice President of Finance. Sir, you may begin.

[Blair McInnis:]

Thank you. Before we begin the call, I'd like to remind everybody that the presentation will include 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 company currently foresees. Discussion of the various factors that may affect future results is contained in the company's annual report on Form 10-K, on form 10-Q, and on 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. This conference call will also be available for audio replay in the Investor Relations section of SMTC's website at www.smtc.com. I will now pass the call over to Eddie Smith, the Company's President and Chief Executive Officer.

[Eddie Smith:]

Thank you, Blair. Welcome, and good morning. Ladies and gentlemen, I'm Eddie Smith, SMTC's President and Chief Executive Officer. On this call with me today is Steve Waszak SMTC's CFO; and Richard Fitzgerald, our COO. I am pleased to report that we are exceeding our business plan and our focus is now on accelerating our growth. After the close of the market yesterday, we reported results for our second quarter of 2018, at the high-end of our preannouncement on July 23. We finished the quarter with $44.5 million in revenue, up 34.8% from comparable quarter last year and 19.8% from the prior quarter. Adjusted gross margin improved from 9.5% to 9.8%, while adjusted EBITDA was $1.6 million, which was $5.2 million higher compared to the second quarter of 2017. The past year has been important for us as the team here has clearly made significant progress in achieving a higher level of operational and financial performance from the top to bottom line. In addition to announcing terms of our Rights Offering in a press release two weeks ago, we provided financial guidance for the remaining quarters of 2018. While we do not intend to provide forward guidance on an ongoing basis, we wanted to ensure that Stockholders considering participating in the Rights Offering had that information. Steve will provide the specifics of that guidance later in the call but let me just say we believe we have sufficient visibility and confidence in our ability to achieve that guidance with our current plant capacity. During the second quarter, we added two new customers and further expanded programs with existing customers. We continue to see strong demand from both existing and new customers with growth in our semiconductor, test/measurement and medical business lines. Our backlog barring any further tightening of the supply chain by electronic component suppliers should support revenue growth in excess of 25% for the full year in 2018 over 2017, and positive year-over-year trends for our adjusted gross margins and EBITDA metrics. We remain intensely focused on crisp execution of our business plan with detailed attention to our operational excellence, industry-leading quality metrics and superior customer on-time delivery. Our Fremont and China sites earned a profit for the first time in seven quarters collectively. Both sites have won new clients, while improving their efficiencies. Our Chihuahua Mexico site continues to be a showcase, especially in light to the 301 tariff concerns, which we are carefully monitoring, and the leveling of the playing field against China specifically, with labor rates continuing to increase in China rapidly. Our supply chain and operations teams are continuing to drive further improvements to meet our customers' commitments despite reports of industry challenges resulting from increasing demands for certain components, including MLCCs or multi-layer ceramic capacitors. We now support the needs of 17 customers using some version of a kan-ban, which is a highly-efficient, lean, just-in-time manufacturing program. While we are pleased with our progress to-date, we have much more to do to capitalize on the opportunities I see for SMTC. To achieve our vision, we're continuing to seek additional programs at our existing customers as well as continuing to secure new customers. And we are on track to achieve our AS9100 accreditation in our Fremont facility this quarter, which will provide an opportunity for us to expand into the Avionics, Aerospace, and Defense markets. We will also explore M&A opportunities that provide synergistic benefits or high-value end markets to accelerate our growth and enhanced shareholder value. I'll now hand the call over to Steve to review the financial details, and then come back with some additional comments. Welcome, Steve

[Steve Waszak:]

Thank you, Eddie, and good morning, everyone. Thank you for joining us this morning. As Eddie commented, revenues for the second quarter were $44.5 million compared to $33 million for the same quarter in 2017. $1.3 million of this revenue reported in the second quarter of 2018 was due to the impact of a new revenue accounting recognition standards of ASC 606. The remainder of our 35% same quarter year-over-year growth was a result of increased orders from existing and new customers added over the last three quarters. With our expanding revenues, the company has three 10% customers, accounting for 34.8% of total revenues. We saw year-over-year increases in customers in industrial, power, energy, electronic payment processing and medical industry sectors. Revenues from customers at networking and communications sectors saw slight declines over the same period a year ago. Gross profit for the second quarter was $4.3 million or 9.6% of revenue compared to $1.4 million or 4.3% of revenues in the same quarter in 2017. That said, adjusted gross profits in the second quarter, which excludes the impacts of unrealized foreign currency gains or losses, was $4.4 million or 9.8% as a percentage of revenues compared to $1.1 million or 3.4% for the same quarter in 2017. Operating expenses, which is comprised of selling, general and administrative costs, were $3.6 million in the second quarter of 2018, $463,000 or 11.3% lower than the $4.1 million we recorded in the same quarter of 2017. Further, the company reported a net loss of $97,000 for the second quarter compared to a net loss of $6 million in the same period a year ago. Adjusted EBITDA was positive in the second quarter of 2018 compared to [a negative - later added by the company] $3.6 million in the quarter a year ago. The increase in the second quarter compared to the same period in the prior year was due to improvements in adjusted gross profit from higher revenues and improved margins and cost-reduction efforts. In addition, the second quarter of 2017 included were certain impairment and increased bad debt and inventory associated with the company’s restructuring that are not reoccurred in the second quarter of 2018. Now before I return the call back to Eddie, I'd like to comment on the balance sheet item, talk about the third quarter opportunities for us and comment on the Rights Offering which we recently announced. As of the end of the second quarter, we had $2.0 million in cash; we had $19.7 million in net debt with $10.5 million of available to borrow under our credit line with PNC. $2.7 million was utilized in cash flows from operations in the quarter, this is primarily due to support working capital growth for accounts receivable and inventory for both expanding revenues in the current quarter and preparing for the future quarters as well. Our cash-to-cash cycle was 61 days, compared to 63 days in the prior quarter, with DSOs of 61 days and DPOs of 74 days. Inventory turnover on annualized basis was 5.0 times in the second quarter of 2018. On July 23, we issued a press release that announced the terms of our $13 million Rights Offering to holders of our common stock of record at the close of business on that date. Stockholders should carefully read the Prospectus Supplement, which can be found on our or the SEC’s website, www.sec.gov. as it contains important information, including timing on how to exercise and pay for those rights. Unless the Company extends the offering period, all rights will expire now at the close of business 4

[Eddie Smith:]

Thanks, Steve. Let me conclude by saying the global demand trends remain strong and we believe we are taking market share at existing customers and are poised to win over new customers. Our focus on operational excellence is paying off and is allowing us to mitigate the impacts thus far from component shortages that others may have reported. In short, we remain on track with our strategic goals, and are, in fact, exceeding our annual business plan. We had a strong Q2, with year-over-year growth in revenue, adjusted gross margin and adjusted EBITDA. The outlook for the balance of the year looks strong and we expect to achieve revenue growth in excess of 25% for the full year of 2018 over 2017, barring any unforeseen disruptions in the supply chain or impacts from tariffs. I look forward to reporting on future earnings call our continued progress towards making SMTC a stronger company that delights its customers with superior service and rewards its stockholders with enhanced shareholder value. With that, let's take questions from those on the call.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Lucas Davenport, a Private Investor. Your line is now open.

[Lucas Davenport:]

Hi, good morning. Good, great quarter.

[Eddie Smith:]

Thank you, Lucas.

[Lucas Davenport:]

A couple of questions. Can you – I’m sorry, if I missed this? Because I listen to the call, I started listening to once it already started. Could you say the two new customers are that – were mentioned in the release?

[Eddie Smith:]

Yes, we don’t disclose our customers name so unless they let us to. And so far we have not put out our release on any new customers. But all we can say is we have two new customers and at some point we may start disclosing and putting out press release for a new customer. But that has not been what we do.

[Lucas Davenport:]

Okay, understood. And I just want to make sure I understood this correctly, roughly 8% of the revenue, the growth from this – year-over-year quarter was due to accounting, correct?

[Steve Waszak:]

No, no. Only $1.3 million of the increase was due to the accounting, all the remainder was due to increased shipments revenue to customers.

[Lucas Davenport:]

Okay, sorry, I thought you said 8% maybe I was wrong, maybe my calculation is wrong. Are this – is there going to be a future, the share offerings just like the ones that were done in July 23?

[Eddie Smith:]

At this point, there is no plans about future share offerings, obviously it’s like anything. As we grow and we need capital or there is any other strategic opportunities to do that., we’ll take a look at what’s the best way to finance our business; but at this point, we haven’t gone past the Rights Offering, we still need to close that and then see where things go.

[Lucas Davenport:]

Okay. And my last – thank you, my last question is kind of built on that. So I believe on the call it was mentioned that there is roughly $10 million or so in borrowing capacity from the bank. So this – offering is going to raise approximately $13 million, right?

[Eddie Smith:]

Yes.

[Lucas Davenport:]

I was just curious as to why the bank borrowing was not utilized versus this offering. And the second part to that question is, I believe it is also mentioned regarding approximately over 200 million in sales that the factories can accommodate. How much more of this $13 million that was raised if that’s used to purchase additional equipment, how much more of that increase that 200 million by? Thank you.

[Steve Waszak:]

Sure. So the reason we went raise the money is for many different reasons that you can see in the press release we put them out for a different corporate purposes. Capital equipment and obviously other potential corporate needs. So I’ll answer your question, it was – the board thought there was an opportunity now as the business recovered that this would be a good time to raise some capital, potentially lowering the debt and so we decided to pull the trigger now. So we didn’t put it in – there is no thought about putting it all into equipment because obviously as we grow with customers who have inventory and other things that you need to also pay for. But at this point I would just say you need to refer to the press release on what we are going to use the funds for. As far as the growth over $200 million in our factories and the way our ABL [Asset Based Lending] works Lucas is as we grow and we have more assets, which is inventory receivables are actually availability from a bank also grows. So we have $10.5 million today at the end of the quarter but as we continue to grow that – that number may grow up or we may use that for inventory or other things. So, I want to tell you our capacity today as we look at capacity and if grow in a much more normalized state then big clumps. We are probably okay to grow and I’d say this one. If we could keep our cash to cash conversion below 60 and at the rate that we use money we could actually grow pretty significantly, I would say without rising anymore money. So, I don’t see, raising money, just to run the business as a viable option at this point for a very long time.

[Steve Waszak:]

And Lucas, this is Steve Waszak. Just to go back to your question on the RevRec and revenue on the accounting standards, if you look at Q1 of 2018 versus Q2, we grew revenues by about $7.359 million. Of that a $1.3 million was related to accounting revenue recognition standard. So $6 million of that number is all based on customer demand increases. As you can see here, there was substantial demand increase, just for clarity.

[Lucas Davenport:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Harry Venezia with HealthCare Capital. Your line is now open.

[Harry Venezia:]

Thank you. I really the appreciate the guidance that you give for the next few quarters. And the excellent performance in the second quarter. But my question has to do with just one thing as the company is poised to grow and I am sure that is the primary purpose of the rights offering. Can you give us some idea of how much working capital you expect the company to need over the next 12 months. I do see the $2.7 million was used in this just finished quarter.

[Steve Waszak:]

Thank you for the question. This is Steve Waszak here, the CFO. As we look towards our modeling and we show quarters that far exceed what we are showing for Q3 and Q4 outlooks. We see in the range of $4 million to $5 million of working capital requirements as we go forward. We did this quarter increase inventory beyond what we would normally do based on the supply chain. As we look at customers, they give us forecast that are somewhat from six to 12 months out. So with that and the tightening supply chain we did do a little more investment in inventory to make sure we had the supply we needed to fulfill that demand and never have a customer lying down and not be able to ship to them. So as we look forward we're going to have less growth in working capital as we grow the business. But if I look at my model here going out it's probably in the range of maximum of $5 million but maybe $3 million to $5 million somewhere in that range of this increase in working capital.

[Harry Venezia:]

Thank you very much

[Steve Waszak:]

Thank you. Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Mr. Eddie Smith for any closing remarks.

[Eddie Smith:]

Thank you. I would like to remind you that we will be participating at the Canaccord Genuity 38th Annual Growth Conference in Boston tomorrow. Information about this event is posted on the Investor Relations section of our website. In closing, I want to thank our employees, the leadership, business partners, our distributors and our investors for their support and look forward to reporting our progress over the next several quarters. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.