SYPR - NASDAQ

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

Thank you, Chad, 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 Second 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. We are pleased to report that revenue increased 51% year-over-year and 30% sequentially. The year-over-year improvement was driven by Sypris Technologies with revenue for the period exceeding all quarterly results reported during the past five years. On a sequential basis each of our markets contributed to the strong double-digit growth of our consolidated results, thereby, providing an important barometer for the future performance of our business. Gross profit increased 103% year-over-year and 137% sequentially, while gross margin expanded to 16.6% of sales, up 420 basis points year-over-year and up 750 basis points sequentially with both business segments reporting margin expansion. Earnings rose to $0.17 per diluted share, up from a loss of $0.02 per share for the prior year period, reflecting the positive impact of strong revenue growth expanding margins and the forgiveness of the PPP loan from the SBA during the period, which Tony will address in greater detail shortly. Orders remained robust during the quarter with backlog up 29% year-over-year for Sypris Electronics and up 52% year-to-date. The order board from truck and all-terrain customers for Sypris Technologies continued to increase significantly, while backlog from energy-related customers increased 56% year-over-year and 32% year-to-date. The combination of new contract awards continued market strength and positive outlook for the US economy provide us with the confidence to increase our outlook for the second time in recent months. We now believe that revenue for 2021 will increase 30% to 35% year-over-year, up from our prior forecast of 25% to 30% this past May and up further from our original estimate of 20% that we provided in March. Additionally, we believe that the company's financial performance will accelerate further during the second half of 2021 with the resulting gross margin for the period expanding 300 to 400 basis points when compared to the second half of 2020. In short, the second quarter of 2021 proved to be the inflection point that we have discussed in the past, reflecting the ongoing strength of new contract awards and the positive market dynamics across our business. Turning now to slide 5. We've been pleased to announce several additional new awards since we last spoke in May. More specifically at Sypris Electronics, we announced a follow-on award from a US DoD prime contractor to manufacture and test electronic assemblies for a government deep space program with production scheduled to begin in 2021. The spacecraft will serve as the exploration vehicle that will carry their crew into space, provide emergency board capability, sustain missions and provide safe reentry from deep space return velocities. The spacecraft will utilize advances in propulsion, communications, life support, structural design navigation and power, according to news releases. We announced an agreement to produce electronic power supply modules for multiple subsea communication networks, with production expected to begin in 2021 and continue into 2022. These next-generation high-capacity, high-speed systems, span thousands of kilometers undersea and are being constructed to support the growth in digital services and data consumption. We received a full-rate production award to manufacture and test multiple electronic modules for a large mission-critical US Navy program, with production scheduled to begin during the second half of 2021. The program is an electronic warfare improvement program for Navy ships. The upgrade will provide the capability to actively jam incoming missiles that threaten the warship, queue decoys and adapt rapidly to evolving threats. The system is software-defined, meaning that unlike analog radars of the past, the transmitters and receivers can easily adjust to send and receive different waveforms. The system's game-changing capability for non-kinetic electronic attack options has the potential to do much more. According to the US Naval Institute, the multifunction applications of the system will provide enhanced emission capabilities, while presenting opportunities for future reductions in cost, size, weight and power. And subsequent to quarter end, we announced the award to build embedded circuit card assemblies that will perform certain cryptographic functions for the Army Key Management System or AKMS, with production expected to start in 2021. The AKMS is a fielded system that consists of three subsystems, local communications management software, automated communications engineering software and the simple key load device. The embedded circuit card assemblies to be produced by Sypris, will perform the cryptographic functions for a ruggedized, portable, handheld, simple key load device, that will be used to securely receive, store and transfer data between compatible cryptographic and communications equipment. Turning now to Sypris Technologies. We announced the receipt of two orders for specialty high-pressure closures for two large projects, the Golden Pass LNG Export project and the Cherry Point Refinery Renewable Diesel Optimization project. Shipment for both programs, are supposed to be expected to take place this year. The closures for Golden Pass, which will be used in filtration systems protecting three compressor stations, will be up to 56 inches in diameter, weigh up to eight tons each and will be rated to a pressure of just under 1,500 psi. In a similar fashion, the closures for the Cherry Point Refinery will be used in filtration systems to upgrade the refinery. These closures will be 60 inches in diameter, weigh approximately 4.3 tons each and will be well overlaid with 316 stainless steel to prevent corrosion. Each of these contracts are representative of the high cost of failure applications for which Sypris is well known. 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. Now, let's advance to Slide 6 to review the outlook for each of our major markets. According to ACT Research, all indicators we use to 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 US economy housing strength, manufacturing prosperity, carrier profitability, the acceleration of the transition to 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. As a result, ACT is now forecasting a 35% increase in demand for 2021 to be followed by an additional 25% expansion in 2022. It should be noted that this forecast represents a reduction for the current year from its previous outlook due to the inability of OEMs to ramp up production to meet demand. Shortages of semiconductor chips steel and other key components are serving to hold back even higher levels of production. OEM Class eight backlog is currently up 187% to an estimated 257,000 units on a year-over-year basis. So despite these short-term issues the outlook remains extremely healthy. 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 transportation and processing of crude oil. Oil prices have increased significantly over the past year with a price for West Texas Intermediate up 75% from August of 2020. Brent is up 64% for the same period. The outlook for the second half of 2021 is $72 per barrel which reflects a 39% or more increase from year-end 2020. Total rig count is up to just under 500 rigs or up 93% year-over-year and is up 101% since falling to a record low of 244 rigs last August. Our sense is that the continued strong expansion of the US economy will eventually result in higher prices for all forms of energy which in turn will bode well for capital projects as providers adjust to meet increased levels of demand. Our backlog is up 56% year-over-year and is up 32% year-to-date which is perhaps a good sign of things to come. As you'll 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 very high priority. Our backlog of future business is up 52% year-to-date and is up 29% year-over-year with firm orders extending well into 2022. We're very pleased with the level of new business momentum with orders up 28% year-to-date. We are optimistic that this important momentum will continue going forward. 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 30% to 35% for 2021 our market mix remains fairly well balanced despite the significant growth forecast for commercial vehicles. 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 that 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 a 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. New contract awards when combined with the strength of our markets is expected to fuel a 30% to 35% growth in the top line a 300 to 400 basis point expansion in margins year-over-year during the second half of 2021 and strong double-digit 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 and 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 Allen, 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 second quarter financial results. Please advance to slide 12. Q2 consolidated revenue was $26 million, an increase of $8.8 million or 51.4% from the second quarter of last year. The year-over-year increase in revenue contributed to consolidated gross profit of $4.3 million for the quarter, more than double, the $2.1 million reported in the prior year period. Consolidated gross margin was 16.6% for the second quarter, up 420 basis points from the prior year with both segments reporting margin improvements for the quarter. Revenue for Sypris Technologies increased, 130% to $17.1 million from $7.4 million a year ago, while gross profit increased $2.3 million and gross margin improved 1,150 basis points to 14.6% in Q2. The COVID-19 pandemic had a significant impact on this segment of our business in the second quarter of 2020. And the year-over-year comparisons highlight the turnaround in demand, for our commercial vehicle, automotive and off-road components that started in the second half of 2020 and further accelerated in the first half of 2021. With the benefit of an expanding economy and the diversification, we've achieved with new programs, Q2 revenue for Sypris Technologies surpassed the pre-pandemic quarterly levels, reached during 2019 and Q1 of 2020, to report our highest revenue since Q1 of 2016. Based on industry forecasts, we expect to see commercial vehicle demand continue to increase in the second half of 2021 and further, into 2022. Our current customer order boards are falling in line with these forecasts. And we are developing and executing our business plans to capitalize on this surge in demand. Our energy product shipments improved in the second quarter from a low-Q1 and posted a slight increase in revenue year-over-year. The pace of the recovery for our customers in this market is lagging that of the commercial vehicle market. However, with oil prices and natural gas prices up and a growing economy, we expect to see customer demand continue to increase, during the second half of the year. While the majority of the year-over-year improvement in gross margin was driven by volume for Sypris Technologies, the sequential improvement in gross margin from 8.9% to 14.6% further reflects favorable cost variances, as labor productivity improved and equipment maintenance and repair costs declined. During our call last quarter, we discussed the efforts we were undertaking to meet the surge in demand from the commercial vehicle market during 2021 and 2022, including additional headcount and training as well as repairs, upgrades and preventive maintenance projects to improve overall equipment uptime, as demand rises. While these efforts continued in Q2, and will be ongoing as the market demand peaks, the amount of spend in Q2 was down sequentially from Q1, as specific projects were completed. We also had a slightly higher mix of energy product revenue in Q2, as compared to Q1, which had a favorable impact on gross margin. Revenue for Sypris Electronics was $8.8 million in Q2, a decrease of 9% from the prior year. And gross profit dropped $100,000, while gross margin improved 90 basis points to 20.4% for the quarter. Although, revenue was down from the prior year, our Q2 revenue was up sequentially from Q1 and was in line with our expectations. One of our larger programs is transitioning from limited rate to full rate production and we expect to resume shipments on this program again during the fourth quarter of this year. We expect revenue to increase sequentially again in Q3, before full rate production on this program launches, which is expected to drive revenue even higher in Q4. The 90 basis point gross margin improvement for Sypris Electronics on lower revenue reflects a change in mix and improved efficiencies in our operation. The sequential change in margin for Sypris Electronics is even more notable with a 1,090 basis point improvement, as revenue increased 30% over Q1. Our consolidated SG&A expense was $3.4 million for Q2, an increase of approximately $400,000 year-over-year. SG&A as a percent of revenue decreased to 13.2% in Q2 from 17.4% a year ago. Operating income for Q2 was $900,000 compared to a loss of $900,000 in Q2 of 2020, reflecting the increase in consolidated gross profit partially offset by higher SG&A spend. On July 1 of this year, we filed a Form 8-K with the SEC to report that we received notice that our application for forgiveness of our Paycheck Protection Program loan was approved by the SBA. As you recall, we received a PPP loan in the second quarter of 2020 in the amount of $3,558 million. Proceeds from the PPP loan were used to fund payroll costs and allowed us to successfully retain our domestic workforce during the pandemic. Accrued interest expense on the PPP loan of approximately $41,000 was also forgiven. The forgiveness resulted in the recognition of a gain of $3.6 million in the quarter and contributed to our pre-tax income of $4.1 million and net income of $3.8 million or $0.17 per diluted share. Please advance to slide 13. Consolidated revenue for the first half was $46 million, an increase of $6.4 million, or 16.1% from the first half of last year. The year-over-year increase in revenue was followed by an increase in consolidated gross profit of $0.3 million. Consolidated gross margin was 13.3% for the first half, down 150 basis points from the prior year. Gross margin improved 750 basis points sequentially from Q1 to Q2. However, on a year-to-date basis, we weren't able to fully close the gap created in Q1. Our outlook improves in the second half with consolidated margin expected to increase 300 basis points to 400 basis points from the comparable period of 2020. Revenue for Sypris Technologies increased 43.3% to $30.3 million from $21.2 million a year ago, while gross profit increased $1 million and gross margin was down 80 basis points to 12.1%. Revenue for Sypris Electronics was $15.6 million for the first half, a decrease of 15.2% from the prior year. And gross profit dropped $0.7 million, while gross margin declined 130 basis points to 15.7% for the period. With our updated revenue and margin outlook for the second half of this year, we expect these year-to-date comparisons will swing favorable in both operating segments, as we exit Q3 and finish the year. Our consolidated SG&A expense was $6.3 million for the first half, which is flat with the prior year. SG&A as a percent of revenue decreased to 13.7% from 16.2% a year ago. We are slightly negative with an operating loss of $0.2 million in the quarter. However, with the gain on the PPP loan forgiveness, we are reporting net income for the first half of $2.2 million, or $0.10 per diluted share. Please advance to slide 14. On this slide, we show our trend of consolidated gross margin over the most recent five years along with the performance expected for 2021. Our Q2 results pushed us closer to our expectations for consolidated gross margin, as we posted a 750 basis point improvement over Q1 and a 420 basis point improvement year-over-year. Our outlook for the second half calls for a year-over-year gross margin improvement of 300 to 400 basis points over the second half of 2020. The improved gross margin for Q2 and the expected improvement in the second half will more than offset the margin shortfall we experienced in Q1 and drive us to a full year increase over 2020. Revenue is expected to increase in the second half for both segments. And gains in labor productivity and cost efficiencies from continuous improvement actions are also expected to contribute to margin expansion. Our revenue for the -- revenue outlook for the full year 2021, now reflects 30% to 35% growth over 2020, which is supported by the strength we see in our markets currently and the growth in our order backlog since the beginning of the year. As we look beyond 2021, we will continue our efforts to diversify our markets served and our customer base and to deliver more value-added services to our customers, which we believe can provide further upside to our current margin levels. Please advance to Slide 15. We were pleased with our operating results for Q2 as consolidated revenue increased 51.4% and gross margin increased 420 basis points compared to the same quarter a year ago. Additionally, the forgiveness of our PPP loan was recognized in Q2 and included in our consolidated net income of $3.8 million or $0.17 per diluted share for the quarter. Sypris Electronics ended the quarter with backlog up 29.3% from Q2 of 2020 and 51.9% since the beginning of the year. The backlog growth has been driven by strong performance in new orders for the first half. And with the positive long-term outlook for defense spending, we are excited about the potential for this business to continue to grow beyond 2021. Current industry forecasts show Class A commercial vehicle demand increasing 34.6% for the full year 2021 over last year and an additional 24.6% in 2022 thereby providing Sypris Technologies with a strong base for demand over the next 18 months. Our backlog for energy products is up 56.4% over the prior year and 32.3% since the beginning of the year. Our outlook in this market is improving as transmission, conversion and export spending are expected to benefit from higher oil and natural gas prices. A combination of new contract awards, positive market conditions and market diversification support our consolidated revenue growth targets and further margin expansion in 2021. Our updated outlook calls for 30% to 35% growth in revenue for the full year over the prior year. Revenue increased 30% sequentially from Q1 to Q2. And we expect to drive sequential and year-over-year top line and margin improvements for the balance of 2021. During the second half of 2021, we expect to achieve a 300 to 400 basis point increase in gross margin over the second half of last year. Cash flow from operations for 2021 is expected to improve over last year 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 2021 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. We are looking forward to a year of double-digit growth expanding margins and increased profitability. And please note we certainly appreciate your continued interest in our business. Thank you and have a good day.