SMTC Corp
Q4 2015 Earnings Call Transcript

Published: 17 Mar 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the SMTC Fourth Quarter and Fiscal Year 2015 Earnings 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 conference over to Sushil Dhiman, President and Chief Executive Officer. Please begin.

[Sushil Dhiman:]

Thank you, [indiscernible]. 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 Roger Dunfield, SMTC’s new 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. I am pleased with our Q4 revenue $60.7 million which is our highest quarter in the last two years. During the quarter, we added two new customers and won five programs from existing customers. These programs are expected to add revenue in the range of $10 million to 15 million during next 12 months. Our 2015 annual revenue was $220.6 million versus $228.6 million in 2014. The reduction in year-over-year revenue was primarily due to lower than expected demand realized from some of our customers in the industrial sector, partially offset by plans for new customers in the network and communications and power and energy sectors. Now I would like to update you on our 2015 initiatives of customer diversification, Lean Six Sigma manufacturing initiatives and working capital improvement. On the customer diversification front, we have made significant progress during the year. In 2015, revenue from top five customers was 51% versus 70% for the top five customers in 2014. Our top revenue customer in 2015 represented only 13.4% of total revenue versus 30.8% in the prior year. We are now entering 2016 with a more diverse customer base and our reliance on a single customer for a significant portion of the revenue has also been mitigated. During the year, we added a new power and energy sector. Customer wins in this sector represented 8% of our revenue in 2015. On our Lean Six Sigma manufacturing initiatives, we have completed implementation of several key projects and are ahead our two-year rollout across all factories and functional organizations. These initiatives are enhancing our manufacturing efficiencies, product quality and customer service excellence. With respect to the working capital, I am proud of the work our team has done. During the quarter, we achieved 8.6 inventory turns and for the full year average inventory turns were at 7.8 times. This represents an improvement of 1.2 turns over 2014 full year results of 6.6 inventory turns. This improvement in inventory turns coupled with strong management of our accounts payable and account receivable had helped us generate $4.2 million of cash flow from operations in the fourth quarter and $10.9 million for the full year compared to $5 million generated in 2014. During the year, we paid down $6.7 million of our debt. As a result, our net debt of $10.4 million is lowest net debt balance in over 10 years. Last quarter, we disclosed professional fees that we incurred in connection with mergers and acquisition activities. The particular transaction in which these fees were incurred will not proceed. However, we will continue to review potential acquisitions and believe M&A is an important part of our growth strategy. For the quarter, our adjusted gross profit was 7.6%, an improvement of 0.3% when compared to the prior quarter. As discussed in the last earning call, our goal is to return to gross profit range of 8% to 10% [ph] by second quarter 2016. I will now hand the call over to Roger to discuss financial results.

[Roger Dunfield:]

Thanks, Sushil. Revenue for the fourth quarter was $60.7 million with adjusted EBITDA of $1.5 million and a net income of $0.8 million compared to revenue in the fourth quarter of 2014 of $57 million, $2.3 million in adjusted EBITDA and a net loss of $2.4 million. Adjusted EBITDA in the fourth quarter 2015 would have been $2 million when excluding professional fees related to the merger and acquisition activity and others increased severance cost not incurred in prior year. Gross profit for the fourth quarter was $5.5 million or 9.1% compared to $3.8 million or 6.7% in the fourth quarter of 2014. Adjusted gross profit, which excludes the effect of the unrealized portion of foreign exchange gains or losses on unsettled derivative financial instrument was $4.6 million or 7.6% compared to $5.8 million or 10.2% in the fourth quarter of the prior year. Revenue for 2015 was $220.6 million. Net income was essentially breakeven compared to revenue of $228.6 million and net loss of $3.9 million in fiscal 2014. Adjusted EBITDA was $5.7 million in 2015 compared to $7.1 million in 2014. Adjusted EBITDA in 2015 included additional severance charges of $0.9 million and professional services of $0.6 million related to previously disclosed mergers and acquisitions activity that were not incurred in the prior year. Excluding these items, adjusted EBITDA would have been $7.2 million. Gross profit for 2015 was $17.7 million or 8.0% compared to $19 million or 8.3% in the prior year. Adjusted gross profit was $17.1 million or 7.8% in 2015 compared to $20.8 million or 9.1% in the prior year. Full year cash flow from operations was $10.9 million, up from $5 million in the prior year. Free cash flow improved to $8.2 million compared to $3 million in the prior year. Debt net of cash was $10.4 million, a decrease from $17.8 million in 2014. Subsequent to year-end, 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 quotient is $1 million. In addition, that is also included in interest rate reduction. I will now hand the call back to Sushil to provide some closing remarks.

[Sushil Dhiman:]

Thanks Roger, in summary despite revenue challenges we finished the year with significant improvement in inventory turns, generation of cash flow from operations and free cash flow, and customer diversification. Our goal in 2016 is to continue to improve labor efficiency, further diversify our customer base and grow revenue and increase factory utilization. All of these initiatives will help strengthen our operating margin and EBITDA increasing shareholder’s value. While we expect Q1 2016 revenue to be sequentially lower due to seasonality and product delays for two of our customers, our 2016 full-year revenue is expected to deliver growth 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 our employees across the globe for their hard work and dedication. We will now open the line for questions.

[Operator:]

[Operator Instructions] And the first question is from [indiscernible], a private investor. Your line is open.

[Unidentified Analyst:]

Awesome job firstly on revenue diversification and working capital.

[Sushil Dhiman:]

Thank you.

[Unidentified Analyst:]

How would you compare your pipeline right now compared to saw a year ago because obviously you won a lot of business last year to offset some of the legacy decline?

[Sushil Dhiman:]

Good question Tony. So last year this time, we were winning our customer at 30% of what we told, what we had pipelined. Our pipeline year over year compared to last year at the end of Q1 and currently around the end of Q1 is practically same if not slightly higher.

[Unidentified Analyst:]

So, I guess your gross margin when you take out the effects of favorable foreign exchange is lower than it's been historically when you've been at these revenue levels. Are you finding that you’re winning more business than you’ve done in the past because you had to price more reasonably than say in prior regimes?

[Sushil Dhiman:]

So similar to as I pointed out in earnings call in Q3, there are factors that we faced A, cost related to the NPI ramps during the second half of the year in 2015. Also, winning some customers where the margins were challenging, we were - we mentioned that in the Q3 call. As a result of those two items plus the mix change, our adjusted gross profit year-over-year declined, but I also mentioned in the call that we have put several initiatives in place where we expect to return to 8% to 10% gross margin range by Q2 of 2016 and in Q4, we made an improvement of 0.3% where we increased from Q3 numbers of 7.3% to a Q4 performance of 7.6%.

[Unidentified Analyst:]

Okay. Excellent. And so I guess when you changed - when you put some of your $5 million in debt in to the term loan from the revolver, does that have anything to do with your ongoing project Apache looking for acquisitions or was that just reduced interest rates?

[Sushil Dhiman:]

Our conversion of a current revolver that to a long term debt, it's strategic in nature from the fact that when credit ratings look at our quick ratios and how our grading is done, this improves those factors and our - that looks more stable. Overall, from a full revolver line perspective, there is no impact. It's a $35 million plus $5 million. So, this helps us with our liquidity.

[Unidentified Analyst:]

Okay. And then I guess with the acquisition strategy you have, so obviously you must have gotten pretty far or pretty close to closing a deal. But it didn't go through. I guess the $0.6 million that you've spent on that, is your M&A advisors, do they, is any of that that you've spent still unearned as far as like they're still going to be working for you based on what you've already paid?

[Sushil Dhiman:]

So after the due diligence process, we decided not to proceed with the deal and at this time, all advisor activity pertaining to a certain M&A activity is fully curtailed.

[Unidentified Analyst:]

Okay. All right. Thank you.

[Sushil Dhiman:]

Thanks, Tony.

[Operator:]

Thank you. [Operator Instructions] And I'm not showing any further questions in queue at this time.

[Sushil Dhiman:]

Thank you all for joining the call and your continued support of SMTC. We expect our next earnings call to take place during the first week of May and we look forward to speaking with you then. Thank you.

[Operator:]

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