Sypris Solutions, Inc.
Q4 2019 Earnings Call Transcript

Published: 19 Mar 2020

[Operator:]

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

[Jeffrey Gill:]

Thank you, 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 and full year 2019. 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. These factors are included in the company's filings with the Securities and Exchange Commission. And in compliance with Regulation G, you can access our website, sypris.com, to review the definitions of any non-GAAP financial measures that may be discussed during this call.

[Tony Allen:]

Thanks, Jeff, and good morning, everyone. I will be discussing with you some of the highlights of our fourth quarter and full year financial results. Please advance to Slide 8. Q4 consolidated revenue was $21.6 million, a decrease of 9.7% from the fourth quarter of last year. Although revenue declined, Q4 consolidated gross profit increased $1.3 million or 92.7% over the prior year period and $0.4 million or 16.4%, sequentially. Consolidated gross margin was 12.5% for the fourth quarter, up 660 basis points from a year ago and 200 basis points sequentially from Q3.

[Operator:]

Thank you. We can take our first question from Jim Ricchiuti of Needham & Company. Please go ahead. Your line is open.

[Jim Ricchiuti:]

Hi, thank you. Good morning.

[Jeffrey Gill:]

Good morning, Jim.

[Tony Allen:]

Good morning, Jim.

[Jim Ricchiuti:]

Good to hear guys that your employees and family are – had not been impacted thus far. What is – what are you seeing in the Toluca area? Have there been cases that have begun to crop up? And in general, what – I would assume that just steps you’re taking in your facilities, not just in Mexico, but in the U.S. is also driving up costs as well. And how much of an impact do you think that’s going to be additional impact on gross margins for some of these steps you’ve had to take?

[Jeffrey Gill:]

Jim, this is Jeff. In Toluca, we have not seen any impact to COVID-19 yet. And we’re not familiar with any outbreaks in the area. In fact it seems to be relatively quiet compared to the U.S. I’m sure that’ll change as time goes by. But up to this point, we’ve been very, very fortunate. The steps that we’ve been taking are primarily ones of education review, personal responsibility, all the spacing, limited supplier visits, limited travel, those types of things. We’ve increased the cleaning, the hygiene, separated tables in the cafeteria. We’re in the process of setting up a secure websites. So that all the communications that we’re making with our employees regularly can be accessed from home by spouses and other family members. We’re setting up hotlines where employees or their families can call in with suggestions or questions or just wish to discuss proper behavior or different things of that nature. So all of the things that we’ve been doing to secure the workplace and just as importantly to help employees adjust their habits when they’re not at work, really have been not investment type things. And so even in our other plants, we have some people working from home, but those are typically engineering technical type people who can work from home and be just as effective. And the spacing that we have in our plants is viewed as being very positive by the professionals and therefore reducing the risks. So until we see a material change in potential volume, we don’t anticipate these activities will have a negative impact on our market.

[Jim Ricchiuti:]

Got it. And then as we look at the forecast for the heavy vehicle market, yes, a 25% decline. Given what we’re anticipating, at least the hit that the U.S. economy appears to be taking in the June quarter that seems conservative. And I’m just wondering what you’re hearing of late. I would assume that 25% number that kind of decline in Class 8 could be worse. And I’m wondering you know what, you have a different business in that area now, but certainly that’s going to pose a bigger headwind, isn’t it?

[Jeffrey Gill:]

Well, certainly in the COVID-19 spiral is creating a great deal of uncertainty for everybody. As of today, our order boards on the commercial vehicle side of the business, every moment constant. But in two weeks that could change. And so I think your point of is there the potential for near-term reductions from our current run rate? I’d say the probability is yes, there certainly is. And longer-term we’ll just have to see how it plays.

[Jim Ricchiuti:]

And then that that internal component is your material issue that you describe Tony, is there a way to size that from a revenue standpoint or a gross margin hit that you might have taken from that in the electronics business?

[Tony Allen:]

It’s on one specific program, that issue in particular affected one specific program. And I would estimate that the margin, the revenue margin impact of that it would have a quantified exactly as a pro forma what does with and without, but I would say that something under $1 million in top line would have been the difference.

[Jim Ricchiuti:]

It’s surprising that you still – and I am hearing this from some other companies that there are some still some component shortages. What specifically are we talking about? Are these kind of unique type components for your defense customers?

[Tony Allen:]

They are the typically the specific sourced items that we can’t, where our ability to move that to other suppliers or substitute components in is extremely limited, if not impossible. And in those cases it requires customer approval. So it's not the general market items, components that we're seeing, right now. It's really more isolated than it has been in the past.

[Jim Ricchiuti:]

Got it. The defense business, the electronics business, sounds like you're assuming it's going to be a little bit more from a revenue standpoint spread a little bit more evenly, in the past it's often been very backend loaded, is that the way you're viewing the business going into the year?

[Tony Allen:]

As we built our plan for the year and even our more recent forecast again, absent any impact of COVID-19, the way that our backlog is structured today, the launch date of programs and the flow of those programs during the year does provide us with a more stable run rate for 2019, which is good for many reasons. So that will be – as always, there'll be some give and take as things go day-to-day and week-to-week, some programs may shift from period-to-period, but the good thing is we have a little more volume across different programs to play with to help those to offset items as they develop.

[Jim Ricchiuti:]

Got it. Thank you.

[Operator:]

Thank you. We can take our next question from Joel Cahill from The Jameson Company. Please go ahead. Your line is open.

[Joel Cahill:]

Yes. Hey, good morning Jeff and Tony. Thanks for the call.

[Tony Allen:]

Hey, Joe. Good morning.

[Joel Cahill:]

So I want to switch a little bit away from kind of the fundamentals. We're kind of facing again I mean, we keep getting to this NASDAQ delisting warning. I'm interested what would take for you guys to see an indication that you would want to buy back stock, if there is anything that you're looking at whether from a valuation standpoint or from a financial metrics, the balance sheet metrics?

[Jeffrey Gill:]

Well, I think all those things are an option, Joel, and you bring up a good point. And we'll do whatever we can obviously to avoid having a problem with NASDAQ and the COVID-19 activity recently probably makes that yet another challenge, but it certainly has our attention and we're looking at all the potential levers and options that we have.

[Joel Cahill:]

Okay. And so does that mean that there – I mean, is this something that you guys will discuss actively? I mean, given that we're down at such a remarkably low level in the stock now?

[Jeffrey Gill:]

Right. Well, we were certainly reviewing these things internally. We don't have anything at this point to talk about externally.

[Joel Cahill:]

Tony, on the – you mentioned the 2020 outlook you've affirmed and would you just remind me again what you guys are looking at on top line in that regard?

[Tony Allen:]

Well, what we've said Joe this morning is that, we provided an outlook in November and that our performance in the first two months of the year has been tracking to that outlook, where we've stopped short is providing an outlook for – an updated outlook for 2020 in light of COVID-19 would just not be something that we're prepared to do this morning. Too many uncertainties that are floating around as you might imagine.

[Joel Cahill:]

Sure. Yes, absolutely. And is there a way that you guys going to kind of bring – it seems like there's been, obviously there's been a lot of transition in the business, but, and previously it's been heavily in – heavy in aerospace and defense, but really in the heavy trucking, is there a way that you can kind of tie together what it is that you're doing when it's now, whether it's undersea or in space or oil and gas, what does it – is it just purely enclosures or is there something that kind of more broadly pulls together what the core business is at this point, particularly on the FT side?

[Tony Allen:]

Okay, sure. What we've targeted is we've gone about our diversification Joe, is to try to be in segments where there are unique requirements, where there's a high cost of failure, where there's a high engineering content. And that type of thing is a way of distinguishing ourselves from more of a commodity type player. And so when you look at the closures we do in the energy field, and particularly for natural gas transmission and that type of thing, some of these closures are 70 inches to 80 inches in diameter and weigh up to 34,000 pounds a piece. And they're going into large natural gas fields in places like Kazakhstan and other places around the world. On the electronic side, whether it's deep sea, whether it's the Orion Spacecraft or Deep-Space these types of applications all have a very, very high cost of failure. So the electronics that we build for them tend to be in smaller quantities, but much higher price. And I think that is a distinguishing factor in the – what used to be basically our commercial vehicle segment. We've now moved into a much higher precision transmission components and doing that both for the new dual-clutch transmission that's going into sports car as well as the components for the all terrain vehicle. And so more value-add, so materials will have smaller component of the overall content and really working to distinguish ourselves. So that's the theme, that's kind of running through our business at the moment.

[Joel Cahill:]

Okay, understood. That's helpful. I don't have any other questions. Thank you, guys.

[Tony Allen:]

Okay, thank you.

[Operator:]

Thank you. It appears there are no further questions in the telephone queue, Mr. Gill, I'll pass it back to you for any additional closing or additional remarks.

[Jeffrey Gill:]

Okay. Thank you very much. Tony and I would like to thank you for joining us for this call. We welcome your continued interest and, of course your questions about our business. Thank you and have a great day.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.