SMTC Corp
Q3 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Good day, ladies and gentlemen. And welcome to the SMTC Corporation Schedules Release of Q3 2014 Results. 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 call is being recorded. I would now like to turn the call over to Mr. Sushil Dhiman. You may begin.

[Sushil Dhiman:]

Thank you, Michelle. Good morning, ladies and gentlemen and thank you for joining the call this morning. I’m 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 this 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. As its stated in the prior calls, our 2014 plan focused on cost reductions, organic growth and developing a plan for inorganic growth via acquisitions. I’m pleased to announce that, we are continuing to deliver improvement to our gross margin in the third quarter, compared to the prior quarter despite lower demand from one of our customers. Our 2014 cost reduction plan, productivity improvement initiatives and implementation of lean manufacturing principles are qualitatively contributing to margin expansion. This is third straight quarter that adjusted EBITDA have increased. And I mentioned in prior calls, we plan to focus on the organic growth during the latter half of 2014. And I’m pleased to announce that we’re making sound progress on that front. During the third quarter, we added three new customers to our new product introduction tech center, which was launched at the end of last quarter. We were also awarded two new programs from our existing customers. These new customer and program wins are expected to contribute $10 million in revenue during 2015. Our new customer acquisition pipeline continues to be healthy, and with the recent addition of two experienced business development managers, we expect to accelerate the new customer wins. During the quarter, we successfully completed qualification builds for a significant customer, whose addition we announced in the second quarter. Production ramp for this customer is expected to begin in December 2014 as per plan. And we believe over time, this should become one of our largest customers. I will now hand it over to Jim Currie, he will present financial results. Jim?

[Jim Currie:]

Thanks Sushil. Revenue for the second quarter was $55.5 million down 4.3% from revenues recorded in the prior quarter. This was mainly attributable to lower demand from one of our large customers. While our revenues were down versus the prior quarter, our gross profit excluding unrealized foreign exchange improved to 9.9%, compared to 8.6% in the prior quarter reflecting continued reductions in our cost structure. Our adjusted EBITDA was $2 million or 3.3% of revenues, during the third quarter as compared to $1.5 million or 2.5% of revenue in the prior quarter. For the quarter, we reported a net loss of $588,000 compared to a net income of $33,000 reported for the prior quarter. This was mainly due to the unrealized foreign exchange loss recognized in the quarter of $753,000, compared to a gain of $796,000 in the prior quarter. Excluding unrealized foreign exchange, our net income was a $165,000 during the quarter, compared to a net of $764,000 in the prior quarter. In line with our goals, total debt levels decreased slightly during the – slightly compared to the prior quarter. During the quarter, SMTC and certain of its subsidiaries entered into the 7th amendment of its revolving credit and security agreement with PNC Bank. The 7th amendment extends the term of the revolving credit facility to January 2, 2018, reduces the applicable interest rate by 50 basis points and provides for a further potential reduction in interest rates, depending on our consolidated fixed charge coverage ratio. We greatly value our relationship with PNC and thank them for their continued confidence in SMTC. As Sushil indicated, our cost reduction initiatives for 2014 are ahead of plan and that contributed favorably to our third quarter and the year-to-date results. We expect these efficiencies, improvement efforts to continue for the balance of the year, as we focus on the management working capital. I will now hand it back to Sushil to provide some closing comments. Sushil Dhiman. Thank you, Jim. Once again our 2014 plan consisting of cost reduction, efficiency improvements, organic and inorganic growth in paying dividends. During the first nine months of this year, we continues to improve profitability and as a result of this plan. The fourth quarter will benefit by cost reductions, however further improvement will through higher volumes. As a part of our organic growth strategy, we are continuing to add additional channels of service offerings, such as the launch of our new production introduction tech center in San Jose, California in the second quarter. And the additional of precision machining capability in our Chihuahua, Mexico facility. These incremental services provide our customers access to a wide range of fast-track prototyping solutions for printed circuit board assembly, system level assembly, sheet metal fabrication and precision machining. These service offerings not only position us to gain new product introduction revenue during the design phase, but also longer term program revenues. We expect 2014 to be an exciting year. We focus on organic growth and acquisitions. I want to thank you for joining the call today and for your continued trust in SMTC. We will now open our lines to your questions. Michelle?

[Operator:]

[Operator Instructions]. Our first question comes from Steve Kohl, Mangrove. Your line is open.

[Steve Kohl:]

Good morning guys, how are you?

[Sushil Dhiman:]

Good morning Steve, how are you?

[Steve Kohl:]

Fine, thank you. Couple of questions, I’m going to apology Sushil, I may have been coming in and out here with the connection. I think you mentioned that, one of the large customers was coming up in volume, but your mentioned us sort of that you have some things ramping up in Q4 2015. Could you provide a little bit more color on how your backlog of these new customers looks like and what kind of visibility you have on some of that stuff in terms of what the ramp might look like?

[Sushil Dhiman:]

Sure I can, as its stated our significant new customer qualification builds are done during third quarter. We have pipelined the material in December this year. We will be on to the production volume for this customer. We have a full 12 month outlook for 2015 and as I mentioned in the call, we expect this customer to continue to grow in revenue for us and eventually become one of our largest revenue customers.

[Steve Kohl:]

Okay. So, do you expect when you look at your, I know your probably still working on your budget for next year. But, at what point do you expect to turn to positive year-over-year top-line comparisons in 2015?

[Sushil Dhiman:]

Expectation 2015 compared to 2014 will exhibit a customer and in a revenue growth as per our plan. And Steve, as you stated we are in final stages of finalizing our 2015 budget.

[Steve Kohl:]

Okay. And one other question, just in terms of your, I know you guys are focused on working capital. What are the, when you look at improvements and kind of where you’d like to get things over the next couple of quarters, maybe you can kind of thoughts on what your some of the thresholds that you’re looking for. So what are the targets for example, receivables and payables, I know we just had a little bit of shift in payable this quarter. But should we expect to see, what should we expect to see on the working capital on as we go throughout into 2015?

[Sushil Dhiman:]

Good, great question Steve. So, as we had previously mentioned, at AR we have done – our team as done phenomenal job in bringing that to the level, we have currently showing. And I believe based on my industry experience in account receivable we are at the best level we can be. On accounts payable from 2013 to 2014, we have made a significant improvement. So those two levels of working capital are as good as they can be. The area now we have to work on is inventory and we have made inventory returns improvement year-over-year. We have plans in place, where we are continuing to address that, and in 2015 make more improvements.

[Steve Kohl:]

Okay. And last question is, congratulations on by the way getting the bank, re-upped on the bank facility. What do you see, again trying to pay down avenue, like towards 2015 is not much of the focuses on generating free cash and working our facility down versus using capital for growth capital like on these on the business card forum?

[Sushil Dhiman:]

Okay, I mean I can address that in may be a slightly different terms. For first three quarters, our average debt with our bank has been declining quarter-over-quarter. So, we have made improvement in paying that debt as a result our debt facility service cost is beginning to go down. Having said that, generating cash flow from operation or free cash flow is a focus of ours in 2015 among other metrics, where we will start doing the year comparison. We will also start putting a number chart on what we generated from the free cash flow and that data; those could be a quarterly data available, okay.

[Steve Kohl:]

Very, good. Thank you very much guys.

[Sushil Dhiman:]

Thanks Steve.

[Operator:]

[Operator Instructions]. I’m showing no further questions. Please proceed with any further remarks.

[Sushil Dhiman:]

Thank you, Michelle. Ladies and gentlemen thank you all for joining the call and your continued support of SMTC. We look forward to our next call for, which will include our full year results in Q1 of – in March or April of next year. Thank you.

[Operator:]

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