SYPR - NASDAQ

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

Thank you, Chuck, 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 first quarter of 2021. 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 at sypris.com to review the definitions of any non-GAAP financial measures that may be discussed during this call. With these qualifications in mind, we'd now like to proceed with the business discussion. Please advance to Slide 3. I will lead you through the first half of our presentation this morning, starting with an overview of the highlights for the quarter to be followed by an update on the outlook for each of our primary markets. Tony will then provide you with a more detailed review of our financial results for the quarter. Now let's begin with the overview on Slide 4. The company's financial performance for the quarter which was impacted by late material receipts and customer releases, sales mix, and the costs incurred ramp up production significantly was not and should not be the highlight for the quarter. The most important takeaway for the first quarter of 2021 is a significant and ongoing increase in business that is taking place that will drive our results for the balance of the year and beyond. Orders for Sypris Electronics increased 70% during the period on a year-over-year basis, resulting in a 36% increase in backlog on a year-over-year basis and a 56% increase in backlog sequentially. In a similar fashion backlog in our energy business is up 38% year-over-year and is up 75% sequentially from year-end. Our order board from commercial vehicle customers continue to expand dramatically, negatively impacting our short term results in Q1 as we added shifts, train new hires, and installed equipment in response to our customers forecasted needs. The benefits of these actions, however, are expected to be realized beginning in the second quarter of this year, and continue through the balance of the year. In short, we're clearly now the inflection point for Sypris. The significant growth in orders and new contract awards, when combined with the underlying strength of our markets, is expected to have a material impact on the financial results of the company beginning in the second quarter of 2021. As a result, we have increased our outlook for 2021 with revenue now expected to increase 25% to 30% year-over-year, up from our prior guidance of 20%. We're also pleased to reaffirm our margin and cash flow expectations for the year, with margins expected to expand 200 to 300 basis points over 2020 levels but cash flow from operations is forecast to post strong double digit percentage growth. So let's take a moment to review each of these important underlying factors that provide the source for our optimism for the coming year starting with our most recent contract awards on Slide 5. At Sypris Electronics, we recently announced a follow on award from a U.S. DoD prime contractor to manufacturing test electronic power supply modules for a mission critical long range precision guided anti ship missile system with production set to begin during 2021. The program is designed to meet the needs of the U.S. Navy and Air Force war fighters. The system provides range, survivability and technology that no other current system provides according to news sources. More specifically, the missile system employs precision routing and guidance day or night in all weather conditions, and is designed to detect and destroy specific targets within groups of ships by employing advanced technologies that reduce dependence on intelligence, surveillance, and reconnaissant platforms, network links, and GPS navigation in contested environments. Subsequent to quarter end, we announced a follow on award from a U.S. DoD prime contractor to manufacture and test electronic assemblies for government spacecraft program with production schedule to begin in 2021. The spacecraft will serve as the exploration vehicle that will carry the crew to space, provide emergency aboard capability, sustain missions and provide safe reentry from deep space return velocity. The spacecraft will utilize advances in propulsion, communications, life support, structural design, navigation, and power according to news releases. With destinations including Near-Earth asteroids, the Moon, the Moons of Mars, and eventually Mars itself, the spacecraft will carry astronauts into a new era of exploration. We expect the momentum of new contract wins to continue during 2021 and we remain very optimistic about the potential for future program and revenue growth as we move forward with backlog now extending well into 2023. At Sypris Technologies, we recently announced an agreement to extend our long term contract to the leading commercial vehicle OEM. The new contract continues our existing product lines and includes the award of two additional model lines to be produced by Sypris beginning in 2021. And perhaps just as importantly, the new agreement provides for the conversion of an existing high volume axle shaft model one to adapt certain features of the patented Sypris Ultra series axle shaft design. The patented Sypris Ultra series lightweight axle shaft reduces the weight of the drive axle assemblies by an estimated 16 pounds for the typical Class 8 commercial vehicle. This important weight savings is believed to contribute to shorter braking distances and greater fuel efficiency for the fleet owner. There is also belief that the reduced in weight of the shafts, more horsepower may be transferred to the pavement, thereby further enhancing the performance of the vehicle. We also recently announced the receipt of orders for specialty closures for use of high pressure oil and gas applications, including the anchor field development project in the Gulf of Mexico and the planned upgrade of a natural gas pipeline system in North America. For the Anchor Field project we will provide specialty high pressure closures that are rated up to 4,885 psi and use Inconel Alloy 625 and nickel based super alloys that possesses high strength properties and resistance to elevated temperatures. For the natural gas pipeline system, we will provide closures for multiple compressor system upgrade as part of an EPA program to reduce harmful emissions from ageing equipment. Disclosures will be 72 inches in diameter, weigh 11.25 tons and will be rated to a pressure of 1,200 psi. These projects serve as excellent examples of the type of work we do for demanding high cost of failure applications around the world. Now let's advance the Slide 6 to review the outlook for each of our major markets. According to ACT research, and its May 10, 2021 publication, all indicators we track, the heavy duty truck market point to extraordinarily strong market conditions so much so that the sales metrics on the year will be determined by the supply side by the ability of manufacturers to keep up with customer demand for the product. There are a number of factors that are having a positive influence on the demand for transportation as the economy begins to expand at a 5% to 6% annualized rate in 2021. An increasingly strong U.S. economy, housing strength, manufacturing prosperity, carrier profitability, the acceleration of the transition e-commerce, and fiscal stimulus are combining to drive demand for freight to high levels. In short, freight demand currently appears to be overwhelming capacity. Orders for Class 8 commercial vehicles were up 153% year-over-year during the past six months. As a result, ACT is forecasting a 43% increase in demand for 2021 to be followed by an additional 18% expansion in 2022. ACT concludes that further upside to the outlook exists subject to supply chain performance and its ability to meet the OEMs needs. The outlook presumes that the start to the year overview about even with the fourth quarter of 2020, after which the year-over-year and sequential comparisons for demand escalate rapidly. In short, the outlook for this part of our business appears to be extremely positive. Turning now to Slide 7, the market for the transportation and use of natural gas is key for Sypris to be followed by the market for the transportation and processing of crude oil. Oil prices have increased significantly over the past year with the price of West Texas Intermediate up 176% from May 7 of 2020 to May 7 of 2021. Rent is up 132% for the same period. The outlook for this summer is $80 per barrel, which would reflect a 54% or more increase from year-end 2020. Rig count is increased by 20% over the past year, and is forecast to increase further by year-end. Our sense is that the economics are now such, the capital investment that was suspended during the pandemic, will increasingly find its way into projects to meet the needs of an expanding economy. The signals are certainly increasingly positive. As you will see from the chart on Slide 8, the long-term market for defense spending remains positive and within the overall budgetary allocations, spending for technology upgrades on strategic platforms continues to be a high priority. Our backlog of future business was up 56% sequentially and now extends into 2023. We are very pleased with the level of new business momentum with orders up 70% year-over-year during the first quarter alone. We are optimistic that this important momentum will continue throughout the coming year. During previous calls, we discussed the changes that have taken place in our market mix over the past several years. Turning now to Slide 9, please note that while revenue is now forecast to increase 25% to 30% during 2021, our market mix remains fairly well balanced despite the significant growth forecast for commercial vehicle. The mix is maintained as a result of the expected continued expansion of defense electronics, specialty automotive and energy. We believe this to be quite an achievement and it certainly represents a big change from our increasingly distant past when commercial vehicle represented 70% of the business, and these sales were concentrated with two customers. We have much more balanced business today, both in terms of market served and customer concentration. This diversification has served us well during the pandemic, both in terms of volume and margin. Looking forward, we expect margins to expand further, reflecting increased value-add and technical requirements, while continuing to move away from commodity products and services. We believe that additional opportunity exists to further diversify our business, and we will continue to aggressively pursue this outcome. Now let's turn to Slide 10 for a brief summary. The strength of our markets, when combined with the positive leverage of new contract awards, is expected to fuel a 25% to 30% growth in the top line, a 200 to 300 basis point expansion in margins, and a strong double-digit percentage growth in cash flow from operations for the year. The wind is clearly at our back. So our focus must and will be on execution. There will be surprises and most assuredly, challenges. But this is always the case, and the issues associated with growth will be much appreciated when weighed against the severity of the surprises we faced during the previous year in the pandemic. Quite simply, we are really looking forward to the task of building the business profitably during the coming year and beyond. Turning now to Slide 11, Tony will lead you through the balance of our presentation this morning. Tony?

Thanks, Jeff, and good morning everyone. I'd like to discuss with you some of the highlights of our first quarter financial results. Q1 consolidated revenue was $20 million and a decrease of 10.9% from the first quarter of last year. The year-over-year decrease in revenue of $2.4 million was followed by a decrease in consolidated gross profit of $1.9 million, as labor and other variable spend remained high during Q1 to support the expected top line growth with forecasts beginning in the second quarter. Consolidated gross margin was 9.1% for the first quarter, down 750 basis points from the prior year. Revenue for Sypris Technologies decreased 3.8% to $13.2 million from $13.7 million a year ago, while gross profit decreased $1.2 million and gross margin dropped 930 basis points to 8.9% in Q1. The reduction in revenue for ST reflects lower energy product sales in the quarter partially offset by growth in sales into the commercial vehicle market. Energy products sales were down year-over-year and sequentially as lower orders in Q4 of 2020 and early in Q1 impacted shipments. In addition to lower demand, a customer change order on a large project shifted a shipment out of Q1 until later in 2021. Although we will benefit from incremental revenue later in the year associated with the change order, the immediate impact was unfavorable to our Q1 results. Our order flow has started to improve in Q2, and we expect energy shipments to rebound in Q2 and the second half of the year. Jeff discussed the extraordinarily strong market conditions that are expected to drive growth and the heavy duty truck market during 2021. We are excited about this opportunity and are taking the steps necessary to capitalize on what should be a very hot market for the next several quarters. Shipments to our primary customers in this market increased year-over-year and our customer order boards support higher levels shipments in the coming months. Material costs as a percentage of revenue in this segment increased less than 1% year-over-year, but conversion costs increased at a higher rate driving the reduction in gross margin, Labor, suppliers and equipment maintenance expense were the leading factors and the cost increase, including costs incurred to support the surge in demand expected for the balance of 2021 and then to 2022. Jeff mentioned the addition of headcount and related training expenses associated with increasing capacity. We also invested in a number of repairs, upgrades and preventative maintenance projects to improve overall equipment uptime as demand rises. We plan to continue to invest in both human and capital resources as needed, and believe the additional costs incurred in Q1 will benefit our performance in the coming quarters. We're also pleased to report that the number of our employees impacted by COVID-19 decreased considerably in the first quarter, particularly in Mexico. A number of our senior employees with considerable experience that previously were not allowed in the facility due to local statutory provisions were allowed to return to work during the quarter, and we welcome this group back with open arms. Revenue for Sypris Electronics was $6.8 million in Q1, a decrease of 22% from the prior year, and gross profit dropped $0.6 million resulting in gross margin of 9.5% for the quarter. There were two main elements that drove the reduction in revenue and gross profit for the quarter. The first related to delayed releases for production on one of our defense programs after the customer identified performance issues in the field that required our customer to specify change in certain components incorporated on the boards we manufacture. While the performance matter was not related to our manufacturing process, we had to await delivery of the new components to resume production. We began to receive the new components at the end of the quarter, but too late to allow us to offset the lost production time. The second element was lower orders from one of our commercial communication customers during the quarter. Program orders for this customer have increased significantly early in Q2, and should support our revenue stream for this customer over the balance of the year. Our consolidated SG&A expense was $2.9 million for Q1, a decrease of approximately $0.6 million year-over-year. The decrease in Q1 SG&A reflects the continuance of actions by management to reduce discretionary spin in response to the COVID-19 pandemic. We are starting to travel more as the economy reopens and we look forward to seeing our customers - seeing our customers more in both our facilities and at their locations in the coming months. We plan to continue to monitor our SG&A spend in the near term and maintain discipline in this area as our business performance improves. Please advance to Slide 13 On this slide we show our trend of consolidated gross margin over the most recent five years, along with the performance expected for 2021. The strong order backlog and favorable market conditions across our business provide us with the opportunity to offset the slower than expected start to 2021 and still meet our targeted margin improvement of 200 to 300 basis points on a year-over-year basis. Meeting this target is going to require management to stay focused every hour of every day on our internal execution to meet our commitments to our customers. We will need to drive our gross margin into the upper teens over the remaining three quarters of the year to achieve this target and our team is optimistic we can deliver on this challenge. Conversion of our existing backlog supports the SE revenue growth that is anticipated to drive margin improvement for 2021 in this segment. We discussed that the softness experienced in Q4 and Q1 in our energy markets is expected to improve and in turn allow the contribution from this market to increase in particular during the second half of the year. In addition to the booming Class 8 market, we expect strong demand from our specialty automotive and off highway markets to further enable the ST segment to drive 2021 gross margin above current levels. Please advance to Slide 14. We will continue to be focused on executing our plans daily at each location to support the robust favorable business conditions that are forecast for the balance of 2021. Orders for Sypris Electronics during Q1 increased 70% year-over-year having backlog for this segment to its highest level since 2010. Our order backlog extends beyond 2021 into 2022 and 2023 as the long term outlook for defense spending remains positive. The heavy truck market is very strong, with Class 8 demand expected to increase 43% in 2021 and an additional 18% in 2022. The energy product outlook is improving as transmission, conversion and export spending are expected to benefit from an oil price recovery and we expect orders will increase in Q2 leading to sequential and year-over-year revenue growth in the second half of 2021. The combination of new contract awards, positive market conditions, and market diversification support our consolidated revenue growth targets and further margin expansion in 2021. Our revised outlook calls for 25% to 30% growth in revenue for the full year 2021 over the prior year. Revenue is expected to ramp from the current level beginning in Q2 to drive sequential and year-over-year top line and margin improvements for the balance of the year. We also maintain our target to achieve a 200 to 300 basis point increase in gross margin year-over-year. Cash flow from operations is expected to improve as revenue and profitability increase and through our collective efforts to manage working capital efficiently. With a strong backlog and recovering markets, we look forward to the remainder of the year with a great deal of optimism. Thank you for your continued support and interest in our business. And I'd like to turn it over to Jeff for closing remarks.

Thank you, Tony. We'd like to thank you for joining us on the call this morning. As Tony said, looking forward to your double digit growth, expanding margins and increased profitability. And please know, we certainly appreciate your continued interest in our business. Thank you and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.