Sypris Solutions, Inc.
Q4 2018 Earnings Call Transcript

Published: 28 Mar 2019

[Operator:]

Good day and welcome to the Sypris Solutions Inc., Conference Call. Today's call is being recorded. At this time for opening remarks, I would like to turn the call over to the President and Chief Executive Officer, Mr. Jeff Gill. Please go ahead sir.

[Jeff Gill:]

Thank you, Aaron, and good morning everyone. Tony Allen and I would like to welcome you to this call, the purpose of which is to review the company's financial results for the fourth quarter of 2018. For those of you, who have access to our PowerPoint presentation this morning; please advance to Slide 2 now. We always begin these calls with a note that some of what we might discuss here today may include projections and other forward-looking statements. No assurance can be given that these projections and statements will be achieved and actual results could differ materially from those projected as a result of several factors.

[Tony Allen:]

Thanks Jeff. Good morning everyone. I'd like to discuss with you some of the highlights of our fourth quarter and full year 2018 financial results. Please advance to Slide 11. Q4 consolidated revenue closed at $24 million, an increase of $2.5 million over the prior year period and at the lower end of our Q4 revenue target. The revenue split between Sypris Technologies and Sypris Electronics was $15.1 million, an $8.8 million respectively. Both segments reported an increase over the prior year fourth quarter with Sypris Technologies up $600,000; the Sypris Electronics up $1.9 million. With the fourth quarter increase, Sypris Technologies closed out 2018 with revenue growth in each quarterly period over the prior year, which reflects favorable market conditions during the year and price increases on certain programs. Our gross profit for Q4 was $1.4 million, which was just below the $1.5 million reported in the prior year period. This was well short of our expectations as an improvement for Sypris Technologies during the fourth quarter was offset by a reduction for Sypris Electronics during the period. Consolidated gross margin for the quarter a 5.9% was 110 basis points below the prior year. Margins for Sypris Technologies rebounded sequentially from the third quarter of 2018 to 14.3% which was 300 basis points above the prior year period. The results for Sypris Technologies reflect operational improvements to drive labor productivity higher and controls over spend and consumption in our variable cost line items to increase profitability and cash flow. The disappointment for the quarter was with the performance of Sypris Electronics. We encountered challenges on two programs during the quarter that had greater than expected impacts on profitability. The first was the ramp up on a new program on which we initially experienced some constraints due to material availability. As we resolved these constraints and increased production rates, our manufacturing processes required higher levels of engineering resources to achieve a steady rate of production flow from our STM line through the final inspection of the board's.

[Operator:]

Thank you, gentlemen. We'll go first to Jim Ricchiuti with Needham & Company.

[Jim Ricchiuti:]

Hi. Good morning.

[Jeff Gill:]

Good morning, Jim.

[Tony Allen:]

Good morning, Jim.

[Jim Ricchiuti:]

It sounds like in Sypris Technologies you had to -- you potentially could have shipped a little bit more product into the energy market. And I'm wondering if there is -- if you can quantify that? And I assume that you expect to see a pickup in that area in Q1, it sounds like?

[Jeff Gill:]

Yes, Jim. That would be correct. We do expect to catch up with those shipments that were missed in Q4.

[Jim Ricchiuti:]

Any way you are sizing it, Jeff? And I assume that also it would - that being higher margin business looks like your margins could have even been a little bit better in the ST business as good as they were.

[Jeff Gill:]

You bet. I think we're looking at something of a neighborhood of three quarters of million dollars type of thing that held up in Q4. And certainly, this is the highest mix business that we have in terms of margins. So yes, you're correct.

[Jim Ricchiuti:]

Okay. And then just looking at the Q1, it sounds like there are some puts and takes with respect to some of the shipment delays on the electronic side of the business, and then, this pickup that you're seeing in other areas including the energy market. In the past, we've seen a sequential decline in rent revenues in the -- I guess mid high single-digit sequential decline from Q4 to Q1. Is that the way we should think about the year potentially starting for you guys?

[Tony Allen:]

Is your question, Jim, specific to the electronics segment or are you looking overall?

[Jim Ricchiuti:]

No, Tony. I'm sorry, I should have been a little clearer. No, I'm talking about the business overall. I mean it does sound like there's some puts and takes in both business segments in Q1. And I'm just wondering, if we look at the business as a whole, should we see the same kind of seasonality that we've seen in past years or is where we see that kind of sequential decline from Q4 to Q1. Sorry.

[Tony Allen:]

Yes. I think overall that's a fair assessment because what we've talked about is that the electronics business, this will drop off. It will be again as we pointed out that the lower quarter for the year. But we see a little strength on the technology side. So, you will see that kind of reduction sequentially from Q4 to Q1.

[Jim Ricchiuti:]

Okay. That's helpful. I'll jump back in the queue. Thank you.

[Tony Allen:]

Okay. Thanks.

[Operator:]

We'll go next to Joel Cahill with the Jameson Companies.

[Joel Cahill:]

Good morning, Jeff and Tony.

[Jeff Gill:]

Good morning, Joel.

[Tony Allen:]

Good morning, Joel.

[Joel Cahill:]

Hi, guys. Thanks for the call. Can we just talk a little bit on the profitability then we've got kind of within a hair of a flat line at the -- in Q4, talking a hundred plus revenue for this year. How do you anticipate that profitability playing out as we go quarter-to-quarter Jim was just talking about sequential decline or just that the expected decline in revenues for Q1? But what's our outlook for the year on profitability? And then, really what kind of cash do we -- can we produce out of that?

[Tony Allen:]

For the year, Joel, I think that what we would -- what we're laying out is the margins that we see are in our 14% to 16% range. Our G&A is coming in 11% to 13%. That'll put us overall for the year in a profitable position. I think for the year on a cash basis those numbers we expect to be cash flow positive. From operations we’ll have say a normal amount of capital expenditures somewhere in the, I'll call it 3 plus percent of revenue. We're still working on asset divestitures. We're not sure where that number is going to come out and the timing of that. So there are different variables in play, but overall, we're looking at a profitable year and for the year -- full year positive cash flow.

[Joel Cahill:]

And on the SG&A side that 11% to 13%, are you able to get more clarity into this year already, so that that can stay kind of at or below that ceiling?

[Tony Allen:]

Yes. I think that we don't expect a lot of variability there in terms of the SG&A movement. I mean we had the thing in the fourth quarter of this year that we're not going to see that kind of blip again. But, I think the numbers that we have out for '19, we should stay within that range.

[Joel Cahill:]

And then, you mentioned a couple of deals that you're working toward, this revenue range of 100 to 110 would potentially be affected if these deals that are in the works to become -- are come favorably or would that be a 2020 opportunity?

[Tony Allen:]

No. Some of these do affect our '19 numbers. So things we need to close out on these opportunities and begin shipment on these opportunities. So some of that's baked into '19. It would have -- these are longer term programs, so it would have incremental impact in '20 over '19. But they are included in our numbers for '19.

[Joel Cahill:]

Okay. Thanks guys. That's all I have for now.

[Tony Allen:]

Thank you.

[Operator:]

And we'll take a follow up from Jim Ricchiuti with Needham & Company.

[Jim Ricchiuti:]

Jeff, I was wondering if there's any way to give us some flavor as to the incremental potential from that long-term agreement on the Sisamex portion of the business. It sounds like there is some incremental revenue that you're expecting. And I'm just wondering how we should think about that either this year or looking out to next year?

[Jeff Gill:]

As we look at that part of the business, Jim, we're actually launching seven programs this year that will contribute incrementally to 2019. And then, provide additional full year lift in 2020. And I think if you are looking in the neighborhood of something in the range of 10% to 15% for 2019 that would probably be a good range.

[Jim Ricchiuti:]

Okay. That's helpful. I'm surprised to hear that at least, it sounds like you're hearing from your customers in the automotive area to expect demand to remain fairly solid. I understand the strength in the -- I think the commercial vehicle market, but I'm a little surprised that your customers sound is relatively optimistic on the auto side of the business. Just in light of what we're seeing in some of the headlines about the weakness in the market.

[Jeff Gill:]

We're not big in automotive and where we do play and where we'll be playing a larger role in the future is more in specialty vehicle. And so I don't think that's the subject to the normal cyclicality of the broader market.

[Jim Ricchiuti:]

Got it. Okay. That makes sense. And just with respect to the data that you're seeing on the Class A market and what you're hearing from your customers. Looks like you've got pretty good visibility looking out over the course of the year. Is that a fair way to characterize it?

[Jeff Gill:]

Yes. I mean to put it in perspective, one of our customers who has the largest market share in North America has said that even after cleansing their order book to try to get rid of place holders is that their entire backlog is filled for 2019. And so, any orders they are taking now are really for 2020.

[Jim Ricchiuti:]

Got it. Great. Thank you. Good luck on the year.

[Jeff Gill:]

Yes. Thank you.

[Operator:]

And with no further questions in queue, Mr. Gill, Mr. Allen, I would like to turn it back to you gentlemen for any additional or closing remarks.

[Jeff Gill:]

Okay. Thank you, Aaron. Tony and I like to thank you for joining us for the call and certainly welcome your continued interest, and of course, your questions about our business. So, we thank you and hope you have a great day.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.