SMTC Corp
Q1 2015 Earnings Call Transcript

Published: 29 Apr 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the SMTC Corporation First Quarter 2015 Results 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 call is being recorded. I would now like to turn the call over to Sushil Dhiman, President and CEO. Please begin.

[Sushil Dhiman:]

Thank you, LeToya. Welcome and good morning, ladies and gentlemen. I am Sushil Dhiman, SMTC’s President and Chief Executive Officer. On this call with me today is Jim Currie, SMTC’s Interim 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. Discussions 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 last year related to prior period comparisons. I mentioned that beginning in Q1 '15, we will start comparisons to the prior year and our reason for not providing prior year comparisons in 2014 was due to the fact that 2013 results had many unusual items. In this quarter’s earnings release and in the call today, we will not provide these prior years comparison. I’m pleased with our Q1 profits, despite the decline in revenue during this quarter. As I mentioned during the fourth quarter call, we had significant revenue challenges from two customers shifting to Tier 1 EMS. While they are still active customers, our 2015 revenue share from these two customers is lower when compared to their 2014 revenue contribution. Our first quarter was also impacted by design-related delays from one new customer and this volume shifted to second and third quarters. Despite the revenue declines mentioned above, we’re excited about our forward progress. During the quarter, we won five new projects from existing customers and we also won two new customers. These wins are expected to result in 8 million to 10 million in revenues in 2015. We generated 1.8 million of cash flow from operations during this quarter. Our intense focus on operational and financial metrics such as lean manufacturing principles, just-in-time inventory acquisition and spending control has contributed to paying down the debt. Our net-net of cash was $16.4 million representing the lowest level since the second quarter of 2011. Our current customers, suppliers and the bank recognized the progress we have made in 2014 in improving the financial health of the company. As a result of the proven track record of solid performance and with additions to our experienced sales team, we expect new customer wins to accelerate during the year via a strong and improving new customer pipeline. With cost under control and revenue, which are expected to improve, we expect to see stronger results for the balance of 2015. I will now hand over to Jim to review financial details.

[Jim Currie:]

Thanks, Sushil. Revenue for the first quarter was 48.7 million, down 16% from revenues recorded in the first quarter of the prior year. This was mainly attributable to reduced volumes from two of our longstanding customers and seasonality with some of our other customers. This was partially offset by increases in revenues from an existing customer and from one of our new customers. While our first quarter revenues were down versus the prior year, our gross profit excluding unrealized foreign exchange improved 8.1% compared to 7.7% in the prior year, reflecting the impact of our cost reduction initiatives during 2014. Our adjusted EBITDA also improved 1.4 million or 2.9% of revenues during the first quarter as compared to 1.2 million or 2.1% in the prior year. For the quarter, we reported a net loss of 0.4 million compared to a net loss of 0.8 million reported in the first quarter of the prior year. Gross margin shortfall due to volume decreases were offset by reductions in costs and manufacturing efficiencies. In addition, prior year first quarter results included a restructuring charge of 0.7 million. Excluding unrealized foreign exchange, our net loss was 0.1 million during this quarter compared to a net loss of 1 million in the prior year. In line with our goals, total debt levels decreased by over 1.5 million compared with to the prior quarter. In addition, we generated cash flow from operations of 1.8 million compared to 1.4 million in the prior year. As Sushil indicated, we continued to see the ramp up of revenues from our 2014 customer wins and we expect to continue to grow these revenues during the remainder of 2015, while also adding new customers. I will hand it back to Sushil to provide us with some closing remarks.

[Sushil Dhiman:]

Thanks, Jim. In summary, Q1 profits were in line with our expectations. I would like to commend our employees for the job well done in controlling costs and delivering improved profit over prior year in a challenging environment. Our focus remains on adding new revenues from existing customers and winning new customers in the product markets we participate in. Our late-stage customer pipeline has significantly improved year-over-year. We’re continuing to pursue suitable acquisition targets. Finally, I want to thank our customers for their trust in SMTC and thank our shareholders for their continued investment in SMTC. We will now open the lines for your questions.

[Operator:]

Thank you. [Operator Instructions]. I do show we have a question from Tony Dogof [ph], a private investor. Your line is open.

[Sushil Dhiman:]

Good morning, Tony.

[Unidentified Analyst:]

Good morning.

[Operator:]

Tony, please check to see if you’re line is on mute.

[Unidentified Analyst:]

No, it’s not.

[Sushil Dhiman:]

Do you have a question, Tony?

[Unidentified Analyst:]

Yes, I do. Can you hear me?

[Sushil Dhiman:]

Yes, I can hear you very well.

[Unidentified Analyst:]

Okay. Previously debt was only paid down when revenues fell and I mean that’s the main driver here of inventories falling due to revenues falling. When you start growing again, is the debt going to go back up or do you think you’ll be able to continue to pay it down as you grow in the back half of this year?

[Sushil Dhiman:]

Tony, at the current business level, this is the debt level we have. As we grow we expect some debt to grow. As we also mentioned in the fourth quarter, we generated 5 million of cash flow from operation last year. We also paid down the debt by 7, so from our continued improvements, we expect to pay down the debt as well during 2015 as those efficiencies give us additional contribution.

[Unidentified Analyst:]

Okay, great. Thank you.

[Sushil Dhiman:]

You’re welcome, Tony.

[Operator:]

Thank you. The next question is from Charles Neuhauser of Mainwall Investment. Your line is open.

[Charles Neuhauser:]

Hi. In the past you have made statements along the line of – your beliefs that the company is capable of generating industry normal or standard levels of profitability. Do you still think that’s the case? And if so, could you remind everyone of what you consider industry’s standard levels of profitability to be?

[Sushil Dhiman:]

Good question, Charles. So let me remind and I believe I made those statements a couple of times last year. Our industry standards for EBITDA is between 4% to 5%. At Q4, we were at 3.8% and in this year, as we add our revenue top line, which we expect in rest of the year continued to add to that revenue stream, we will exit the year between those performance standards.

[Charles Neuhauser:]

Well, that sounds good. Could you just give me an idea of what you would say the minimum – those couple [ph] of revenues on an annualized basis is that would enable you to run at 4% to 5% EBITDA rate?

[Sushil Dhiman:]

Yes, as I made the statement in the Q4 call, our expectations for 2015 will be a flat year compared to 2014. We also highlighted the reasons from our two major customers shifting revenues to the Tier 1. And we backfill that with a significant new customer win from 2014 which are adding revenues into 2015, and we are also continuing to add the customers currently, as I just stated, two new customers in Q1.

[Charles Neuhauser:]

Right. I mean I guess that wasn’t exactly my question. My question is what is the annual revenue run rate that you would feel comfortable saying to produce those 4% to 5% EBITDA margins?

[Sushil Dhiman:]

As again, Charles, as we said that 2015 will be a flat year compared to 2014 and we expect our margins to expand last year, as I mentioned, 3.8% exiting the year. And we expect this year to be between 4% to 5% at these revenue levels.

[Charles Neuhauser:]

Okay, maybe I misunderstood. I thought you said that exiting the year, meaning in the fourth quarter you’d be at the 4% to 5% EBITDA level but you’re anticipating that for the entire year?

[Sushil Dhiman:]

Yes, for the full year we are expecting to be between 4% to 5%.

[Charles Neuhauser:]

Thank you very much. I’m sorry, I did misunderstand that, but thank you for clearing that up.

[Operator:]

Thank you. [Operator Instructions].

[Sushil Dhiman:]

No other questions from the phone?

[Operator:]

At this time, I’m showing no further questions in queue.

[Sushil Dhiman:]

Thank you all for joining the call and your continued support of SMTC. We expect our next earnings call to be in end of July and we’ll talk to you then. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Good-day.