SMTC Corp
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the SMTC First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to turn the conference over to Sushil Dhiman. Sir, please begin.

[Sushil Dhiman:]

Thank you, Anisie. Welcome and good morning, ladies and gentlemen. I’m Sushil Dhiman, SMTC’s President and Chief Executive Officer. On this call with me today is Roger Dunfield, SMTC’s Chief Financial Officer; and Greg Gaba, Vice President of Finance. Before we begin the call, I would like to remind everybody that the presentation includes 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 various factors that may affect future results is contained in the company’s Annual Report on Form 10-K, on Form 10-Q and subsequent reports on Form 8-K and other filings with the Securities and Exchange Commission. First of all, I would like to remind you of the comment I made in the last call related to sequentially lower revenue in Q1 2016. Our low revenue of $41.9 million in this quarter was primarily due to seasonality and product ramp delays for two of our new customers. We expect full-year revenue to be lower by 3% to 6% compared to 2015. During the quarter, we won two new customers, one in the area of smart power and other representing highly engineered embedded products. Total revenue from these product lines is expected to ramp to $10 million to $12 million annually in next 12 to 15 months. As you may recall, we launched the NPI Tech Center in fourth quarter of 2014. During the last six quarters, new product introduction has continued to build momentum related to the – this service offering. During the second-half of the year, we plan to invest in another surface mount line, which will improve our capabilities and support further growth. Our goal is to continue to provide engineering solutions to our customers in the early stages of the product design and help them reduce time-to-market. We continue to make progress in managing working capital and our net debt improved by $3.4 million compared to a year ago, resulting in decreased invest of $0.1 million. I will now hand over the call to Roger to review financial details.

[Roger Dunfield:]

Thanks, Sushil. Revenue for the first quarter was $41.9 million, with adjusted EBITDA of $1.4 million and net income of $1 million, compared to revenue in the first quarter of 2015 of $48.7 million, $1.49 million in adjusted EBITDA, and a net loss of $0.4 million. Gross profit for the first quarter was $4.9 million, or 11.6%, compared to $3.6 million, or 7.4% in the first quarter of 2015. Adjusted gross profit, which excludes the effect of the unrealized portion of foreign exchange gains or losses on unsettled derivative financial instruments was $3.8 million, or 9.1%, compared to $3.9 million, or 8% in the fourth quarter of the prior year. Debt net of cash was $13.1 million, a decrease was $3.4 million, or 20% from the first quarter in 2015. During the quarter, an amendment was executed with our lender PNC. The amendment resulted in $5 million of our revolving credit facility being converted into long-term debt for which the current portion is $1 million. In addition, this also included in interest rate reduction. I’ll now turn it back to Sushil, to provide some closing remarks.

[Sushil Dhiman:]

Thanks, Roger. In summary, we continue to invest in business with the new NPI Tech Center line and are continuing to build a strong customer funnel. While we expect our year-over-year revenue to decrease, we expect our revenue to grow sequentially and exit the year with a significant higher quarterly run rate. We expect that as a result of managing labor costs, improving utilization, and favorable product mix, our full-year EBITDA will increase year-over-year. Finally, I want to thank our customers for their trust in SMTC, thank our shareholders for their continued investment in our company, and thank all employees across the globe for their hard work and dedication. We will now open the lines for questions.

[Operator:]

[Operator Instructions] Our first question will come from the line of private investor, Anthony Dillof [ph]. Your line is open.

[Unidentified Analyst:]

Hey, good morning, guys.

[Sushil Dhiman:]

Good morning, Tony. ‘

[Unidentified Analyst:]

Can you give us an idea of what the fourth quarter might look like for 2016, obviously, your 2016 guidance is affected by the soft first quarter. Is it possible to hit 4% to 5% EBITDA margins and get back to the $50 million, $60 million revenue run rate by the end of the year?

[Sushil Dhiman:]

Good question, Tony. Thank you. As I made the statement in the call, our revenue is expected to grow sequentially throughout this year and ending the year with a significantly higher run rate than we have in Q1. And significantly higher to us means somewhere in the range of 20% to 30% – 25% to 35% higher than where we currently are. With our increase in the revenue and utilization and maintenance of the cost, we expect to exit the year in that 4% to 5% EBITDA that we have guided and yes, that’s possible.

[Unidentified Analyst:]

Okay, that’s excellent. What are you seeing with your new customer ramps? I guess, there has been some push outs, maybe some softness in the economy, CapEx, industrial issues, had – any of them started ramping it or is that going to be pushed out you think to Q3?

[Sushil Dhiman:]

What I’d like to mention is with our continued customer diversification and as we are bringing in these new customers, our revenue – quality of revenue has continued to improve, number one. Number two is, any impact in a particular sector, or a given customer had less of an impact on overall because of diversification, we path – we’ve been on for last year, year-and-a-half now. Overall, we believe that the customer revenue funnel momentum has continued to build, as a result of NPI Tech Center, but as you know in many cases these programs to ramp through production cycle and take somewhere 12 to 18 months. And we have customers in that funnel in varying stages of product lifecycle and the business lifecycle.

[Unidentified Analyst:]

Excellent. And you’re still seeing some strength at the top of the sales funnel to – you’re still active in quoting and bidding?

[Sushil Dhiman:]

That is correct. Our overall – not only the new product, but also the mature product cycle, customer funnel, which we go out and source and – in our FQ cycle, or the initial assessment of – looking at a manufacturing solutions, that funnel is healthy as well.

[Unidentified Analyst:]

Okay, great. Thank you and excellent progress year-over-year.

[Sushil Dhiman:]

Thanks, Tony.

[Operator:]

Thank you. Our next question will come from the line of Nelson Obus from Wynnefield. Your line is open.

[Nelson Obus:]

Yes, just, I know that it’s the right size and right quality of acquisition came along, you take a look at it. I’m just wondering from an industry perspective, what kind of a deal flow the industry is seeing in terms of, I guess, you call consolidation or whatever and your assessment of – your ability over a period of time to find something that would be compatible with what you’re doing?

[Sushil Dhiman:]

Good morning, Nelson. As we’ve mentioned previously in the calls, M&A is a part of our charter and we keep a very close eye on what is available in the industry. We talked to our folks in the mid-market would do at this level of business offerings and matching. And currently, M&A of a smaller company size what we’re looking at $30 million to $50 million a year type are not that many OE [ph] impact as of current time. There is no such offering available, but we’re keeping our name out there and communicating to these folks and continuing to look.

[Nelson Obus:]

How many companies are out there of your size? And do they need niches in order to survive?

[Sushil Dhiman:]

So in our peer group, there are seven to eight additional company from $150 million to $400 million type, or $150 million to $300 million type. We look at the industry, if anybody else maybe coming into that group, currently, there are nothing known to be in that revenue size group, Nelson.

[Nelson Obus:]

And are they public companies or they owned by private equity firms, or they family firms, or they all over the place?

[Sushil Dhiman:]

The eight we are tracking are all public companies. In addition to that, we go for additional two to three companies, which are in $100 million to $200 million range, and private equity owned.

[Nelson Obus:]

Okay. It sounds like you have your radar on, okay.

[Sushil Dhiman:]

Definitely, the radar is definitely on. We’re continuing to add. We have shown in our balance sheet – continue to improve our balance sheet. So that have been a good acquisition comes around and it makes synergistic sense that will be ready to pursue.

[Nelson Obus:]

Yes. I mean, we all know that a lot of acquisitions aren’t trying out not to be so good as they look like initially, or shouldn’t be look at to begin with, but I – I’m glad, at least, your – maybe the right one will come along. Thanks.

[Sushil Dhiman:]

That’s correct. Thank you, Nelson.

[Operator:]

Thank you [Operator Instructions]. Thank you. At this time, I’m showing no further questions. I would like to turn the call back over to Sushil Dhiman for any closing remarks.

[Sushil Dhiman:]

Thank you all for joining the call and your continued support of our company. We expect our next earning call to take place during the first week of August, and look forward to talking to you then. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes your program. You may now disconnect. Everyone have a great day.