SMTC Corp
Q4 2012 Earnings Call Transcript

Published: 14 Mar 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the SMTC quarter four 2012 financial results conference call. At this time, all participants are in the listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) Today’s conference is being recorded. I would now like to turn the call over to Alex Walker. Please go ahead, sir.

[Alex Walker:]

Thanks, (Jamie). Good afternoon. I’d like to welcome everyone to SMTC’s fourth quarter earnings call. Joining me today is my co-Chief Executive Officer, Claude Germain. I would like to remind everybody that this 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 perceives. Discussion of the various factors that may affect future events are contained in the company’s annual report on Form 10-K on Form 10-Q and subsequent reports on Form 8-K and our other filings with the Securities and Exchange Commissioner (inaudible). Our agenda today will first cover our fourth quarter results, our 2012 full-year results and 2013 guidance. We will provide closing comments which will then be followed by a question-and-answer period. Revenue for the quarter was $73.2 million, a slight increase over fourth quarter 2011 and a slight decrease over third quarter 2012 revenue. Adjusted EBITDA was $1.8 million. However, after removing the effects of unrealized foreign exchange contract, adjusted EBITDA was $2.3 million. This compares with $1.4 million in the third quarter. Gross margins were 8.6% compared to 6.5% in the third quarter. Adjusted EPS for the quarter was $0.17, which included a benefit of $0.15 from an income tax adjustment related to the expected usage of tax loss carry-forwards. This compares to adjusted EPS of $0.08 in the third quarter of 2012 and $0.17 in the fourth quarter of 2011. Total debt net of cash decreased at $18.2 million from $32.3 million in the third quarter. Revenue for the years was $296 million, a 35% increase over 2011 revenue of $220 million. Adjusted EBITDA was $13 million or $12.3 million when factoring out unrealized foreign exchange gains. This was a 32% increase over 2011 adjusted EBITDA of $9.3 million. Adjusted EPS for 2012 was $0.60, including a $0.15 benefit from the expected future usage of tax loss carry-forwards, a significant increase over the 2011 adjusted EPS of $0.24. Working capital levels improved during the year. Inventory levels decreased during the quarter to $55 million from $56 million last quarter. Accounts receivable’s level decreased during the quarter to $36 million from $42 million last quarter and accounts payable were $49 million at the end of the quarter, an increase from $43 million last quarter. Capital investments were $2.3 million in the quarter, up from $0.5 million in the previous quarter. Bank debt net of cash decreased by $13.6 million to $15.3 million from $28.9 million in the third quarter due to better working capital performance in the quarter. As described in our 8-K and our earnings release, which will be filed today, as a result of a technical accounting requirement, the company will be reclassifying its outstanding revolver balance with PMC from a long-term liability to a current liability. We’ll be also restating prior periods back to the signing of the loan agreement, September 22, 2011. This reclassification and subsequent restatements will have no affect on the company’s income statement or statements of cash flow. Note that this reclassification is not a result of any breech of the company’s obligations pursuant to its agreements with PMC, has no affect on the maturity date of the loan and does not affect the company’s ability to draw on the loan. The company will be filing its 10-K shortly as well as any other required quarterly comparative analysis and disclosure. With that, I now turn the call over to my co-Chief Executive Officer, Claude Germain.

[Claude Germain:]

Thanks, Alex. 2012 was both a very successful and challenging year for SMTC. Where we succeeded on the commercial front and largely on the financial front, we had our challenges operationally. We started the year strong but our operational problems hit us hard in the third quarter. While our operational performance improved in the fourth quarter, our summer review is that as good as 2012 was, it could have been an even better year. And so because of this, we characterize our turnaround as being partially complete. Breaking the year down further, revenues grew 35% year-over-year or 28% when factoring out the effects of M&A. These were our highest revenue levels in over a decade and the market’s perception of our brand have turned around, allowing us to attract better quality targets. Our strong revenue growth is due to three factors. One is achieving our organic growth, a target of 5% year-over-year coming from these customers while we added eight new customers in 2012. Two is increased share of wallet gains of existing customers and three is new revenues as a result of M&A activities in San Jose and China. With our acquisitions as well as asset purchases, we positioned San Jose and China as ongoing platforms of growth. Both markets have high strategic value for SMTC. Another point for the year, our gross margins, when stripping out the accounting effect of our unrealized foreign exchange contracts declined year-over-year from 9.7% to 8.6%. In large part, this is due to our inability to turn around the financial performance in (inaudible) and sustainability issues in (inaudible) due to the onboarding of a record number of new programs that inherently have lower margins at first. And lastly for the year, other financial metrics worth mentioning point to a (inaudible) successful 2012. A, our adjusted EBITDA grew 40% year-over-year from $9.3 million in 2011 to $13 million in 2012. B, our adjusted EPS grew significantly from $0.24 in 2011 to $0.60 in 2012, although, as Alex mentioned, 2012 revenue grew about $0.15 (one-time) income tax adjustment related to the expected future usage of certain tax laws carried forward. C, our book value grew 23% year-over-year from $35 million in 2011 to $43 million in 2012. And D, lastly, our total net debt – our total debt net of cash declined from $20 million in 2011 to $18 million in 2012. Note that when we describe total net debt this also includes capital leases. Over the long term, we reiterate that we are aiming to deliver average top line growth rates of 10%, gross margins of 10% to 11% and adjusted EBITDA margins of 5% to 6%. So looking forward to 2013, the major theme for SMTC is that moderated growth and improved returns on the business. Our strategy is to deliver continued and diversified organic revenue growth, growth margin improvement and improved operating cash flow. We’ve already taken major steps on improving return to the business line, A, closing down the (mark) and manufacturing operations now scheduled for the end of Q2; B, integrating the assets required (inaudible) company; and C, initiating a comprehensive lean manufacturing transformation of our business starting with our (inaudible) operations. For 2013, we are guiding for revenues of between $270 million to $285 million, which is a mid to high-single digit year-over-year growth when factoring out the closing of our (Marcum) operations. We are guiding for adjusted EBITDA for $14 million to $15 million and adjusted EPS of $45 million to $55 million and total debt net of cash of between $15 million to $16 million. I will now turn the call back to Alex.

[Alex Walker:]

Thanks, Claude. And with that, I will open the call for any questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Fang Li – Baleen Capital.

[Fang Li:]

A couple of questions; first, could you talk about it seems like your revenue was in line with your guidance but your EBITDA missed? Could you talk about what drove that missed?

[Alex Walker:]

Largely, Fang, it was driven by the financial performance in (Chihuahua). We had hoped to achieve better operating efficiencies in a quicker transition, as (inaudible) put it to our lean manufacturing environment than we were able to. It was a little bit effective, as well, on the EBITDA basis by our (Marcum) operations, which obviously continue to be unprofitable. So between the two of those – and most of that EBITDA can probably be traced up to the gross margin line.

[Fang Li:]

And looking into your 2013 guidance, how much do you expect to (lure) the market in the first two quarters before you close it?

[Claude Germain:]

(inaudible). You can see 2012, the contribution loss of our (Marcum) operation is approximately $2 million. I will say that in the guidance going forward in 2013 we just don’t break out in out guidance individual plant operations. But I guess what we can safely say is that we expect continued operating losses so that once our plant is closed at the end of Q2, we should obviously, therefore, see an improvement in our overall bottom line performance, which, to some extent, lies, regarding to an increased adjusted EBITDA in 2013 over what we delivered in 2012.

[Fang Li:]

So the guidance includes some losses in the first six months and then I guess improvement in operations in the second half of the year.

[Claude Germain:]

Yes. (inaudible). There (inaudible) in Q2 to discontinue operations (inaudible) Q1 (inaudible).

[Fang Li:]

And then (inaudible), with (inaudible) manufacturing, my understanding is that you soudl be able to reduce your inventory and improve inventory in terms of working capital. But I’m surprised that your net debt actually you’re guiding to flat year-over-year in net debt. Could you comment a little bit on that?

[Alex Walker:]

We are guiding to roughly flat net debt. There’s a lot of cash uses that are expected to happen during 2013. One is we do need to pay off the remainder of our (NYSEARCA

[Claude Germain:]

I will speak to something. We’ve got $20 million in total debt net of cash with $20 million in 2011. It was $18 million in 2012. And we’re guiding for an improvement to $15 million to $16 million despite having a (inaudible) to pay for some cash (the) closing of the (Marcum) operations. (Inaudilbe). That improvement does, in fact, come from a number of different things, which is related to the transformation of operations in large part.

[Alex Walker:]

Yes, Fang, we could talk about it separately if you want but if you back off our taxes and interest and look at what our actual task flow from operations would be in 2013 net off what I outlined there but it gets pretty close to there has to be some improvement in our network capital position in order for us to (inaudible).

[Fang Li:]

My last question would be just in terms of the macro environment. I think one of your competitors talked about the tough macro. Can you talk about, in particular, I guess, if you’ve seen any pricing pressure from your competitors in manufacturing capacity?

[Claude Germain:]

The macro environment in 2012 was challenging for the year in that industry as a whole. The industry, if you read any trade magazine or even take a look at the large publicly traded American-based (NYSE

[Operator:]

Your next question comes from the line of (Jeremy Hellman – Abbott ET Fund).

[(Jeremy Hellman:]

Just a quick question (inaudible) this afternoon. Did you guys put out a press release with your earnings results yet or did you not? I haven’t been able to locate it anywhere.

[Alex Walker:]

It has gone out. I’m not sure if it hit the wire. It was released in time to obviously be released after the market closed. It should be out there.

[(Jeremy Hellman:]

So I can grab a couple of numbers since I logged on a couple of minutes late, what was the revenue number for the quarter, again, if you don’t mind?

[Alex Walker:]

It was $73.2 million.

[(Jeremy Hellman:]

And I think I heard something about this in there. You had a tax gain in there.

[Alex Walker:]

Yes, a deferred tax asset gain; the amount of the deferred tax asset gain was about $2.4 million.

[(Jeremy Hellman:]

You said the K was going to be filed, did you say this evening?

[Alex Walker:]

We have an 8-K being filed and we have our earnings release filed. The 10-K will probably be filed as fast as practically possible but thinking of sometime next week.

[Operator:]

At this time, I am showing no further questions. I would now like to turn the call back over to the presenters.

[Claude Germain:]

Let me just jump in and say (inaudible) wrap up. So probably the two messages for overall is (inaudible) which was 2012 was a successful and challenging year for SMTC. A lot of the things that we’re happy about, especially on the commercial front and things that we need to focus on operationally. Ultimately our strategy for 2013, a major theme, if you like, is moderated growth and improved returns on the business. Our strategy here is to deliver continued diversified, organic growth, gross margin improvements and improve operating cash flow. We could characterize our turnaround as being partially complete and there’s a lot of things that I mentioned here that can take us (inaudible) in terms of its momentum and (it’s quite active). But there’s other things that we really need to continue to work on that should continue drive value for our shareholders. Alex?

[Alex Walker:]

I think we’re showing another question, are we not?

[Operator:]

Your next question comes from the line of (Charles Newhoffer) – (inaudible) Investment.

[(Charles Newhoffer):]

I assume your guidance is a function of business that you either have in hand or that you can readily identify right now. Could you talk a little bit about new business possibilities in the coming 12 months?

[Claude Germain:]

Yes, the 2013 does include a portion – let me just actually make it really simple. The vast majority of the revenues we are guiding for are from business and customers that we have in hand. There is a (inaudible) is going to be from (inaudible) that we earned in 2013, so it’s across 2013 new customers that generate a few million dollars and so that’s essentially how we aligned up for guidance. We continue to, over the long term, aim for 10% compound, average 10% compound annual growth rate. Some years it’ll be higher; some years it’ll be lower and roughly half of that growth comes from new customers and half of that growth, net growth, if you like, comes from existing customers. So the short answer to your question is we continue to expect 2013 to deliver new customers and a weight similar to what we were able to deliver in 2012.

[(Charles Newhoffer):]

So with any luck, you would expect to get new business in excess of the op line guidance that you’ve offered. But of course, you can’t count on it, so you’re not putting it in the guidance.

[Claude Germain:]

No, no, the reason we (inaudible) customers coming in and (inaudible) volumes. But the (inaudible) timeline because (inaudible) customers (inaudible) where you’re really stealing somebody’s business. It’s a mature product. They’re coming in. You’re sick and tired of revenue forecasts. You’ve got a little bit (inaudible). And other new customers are customers coming in for new programs, new designs (inaudible). But the majority of our new business is the latter. And new designs (inaudible) and it’s just unpredictable and there’s a lot of lead time (inaudible) by the time we’ve actually (inaudible) the supply chain, get through (inaudible) pipeline, qualified our plan and we get acceptance to (inaudible). So there’s a lot of our (inaudible) numbers and how we (inaudible).

[Operator:]

I am showing no further questions.

[Alex Walker:]

Well, thank you, everybody, for getting on the call and we’re looking forward to a successful 2013 and giving you an update in another month or two in our Q1 earnings update.

[Operator:]

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation.