Ladies and gentlemen, thank you for standing by, and welcome to the CPS Technologies Corp. Second Quarter Investor Conference Call. At this time, all the participants are in a listen-only mode.

After the speakers' presentation, there will be a question-and-answer session [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Griffith. Please go ahead, sir..

Thank you, operator, and good afternoon, everyone. I'm joined today by Grant Bennett, our President and CEO.

Before we begin the business portion of the call, I would like to point out to all of you that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in CPS' operations and environment.

These uncertainties include the impact of COVID-19, economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statements. Now I'll turn the call over to Grant to offer his perspectives on the second quarter's results..

Thank you, Chuck, and welcome to the call, everyone. We are pleased to report revenues for the second quarter of $5.8 million with an operating profit of $331,000. Revenues and operating income were down from Q1 of this year, which was our highest revenue quarter in our history.

But both revenues and operating income were very similar to Q4 of last year, which was our last pre-pandemic quarter.

The predominant factor in lower Q2 revenue compared to Q1 is that a large customer increased inventory in Q1, pulling in shipments originally scheduled for Q2 into Q1 to build a larger safety inventory given concerns about COVID-19 impacting the supply and logistics chain.

In Q2, they reduced deliveries to begin to bring inventories back down to a more appropriate level. Let me parenthetically comment, I used the term supply and logistic chain to highlight that one somewhat unanticipated impact of COVID-19 is the impact, the shutdown of passenger air travel has on airfreight.

International airfreight costs are up very sharply because there are very few passenger planes flying between the U.S. and Europe, and many freight forwarders primarily use excess capacity on passenger planes rather than dedicated freighters for air freight.

Moving from the revenue to the income side, we're very pleased with the very significant improvement in operating profit. For the 6-month period just ended, operating profits were $952,000 compared to an operating loss of $486,000 for the same period a year ago. This positive swing of over $1.4 million comes even though revenues were up only $633,000.

This improvement reflects the pricing, product mix and operational improvements as well as the major customer contracts that we've discussed in previous quarters. And these improvements, we believe, will continue to bear fruit in future quarters. As indicated in our press release, we've been open and operating throughout the pandemic.

To date, most of our customers remain open and operational. We saw in Q2 and now expect to see in near-term future quarters, increased volatility in short-term demand as individual customers address pandemic-related issues such as managing inventories up and down, addressing shortages of other components, in some cases, having short-term shutdowns.

And in some cases, we found customers have longer approval cycles given that many employees are working from home. CPS continues to operate and follow CDC and OSHA guidance. Among the things we're doing is employees' temperatures are taken at the beginning of each shift. Shifts have been staggered to reduce employee overlap.

Workstations have been rearranged to ensure social distancing. All employees are using face masks, et cetera. To our knowledge, there has been no transmission of COVID-19 between employees at CPS. I've commented over the last several quarters that we have a focus on more deeply penetrating the U.S. defense and aerospace markets.

Most applications in these markets require high reliability and high performance. At CPS, we're delighted and proud that we have been able to contribute to the NASA 2020 Mars Perseverance rover, which is scheduled to launch tomorrow morning, in just about 15 hours to be exact. The Perseverance rover contains an AlSiC module produced by CPS.

We'll be issuing a press release with additional information after it's been approved by appropriate channels at the jet propulsion laboratory. I mentioned freight costs earlier. With a smile on my face, let me just say I'm glad the customer is paying the freight cost to get the rover to its ultimate destination, not the suppliers.

With that, let me turn the time to Chuck for additional details on the second quarter financial performance..

Thank you, Grant. So revenues for the quarter, again, totaled $5.8 million. This was a 10% decrease compared to $6.4 million in Q2 of last year. This decrease was due mainly to just product mix. Gross margin for the quarter amounted to 21% of sales compared to 18% in the second quarter last year.

The largest factor affecting this percentage was new contracts with our 3 largest customers, which we've already discussed. Selling, general and administrative costs totaled $853,000 compared to last year's $917,000. Sales commissions were down because of the decrease in sales volumes.

And our costs for travel and sales conferences were also down due to the COVID-19 pandemic. The company experienced an operating profit for the quarter of $331,000, which compared to an operating profit in the second quarter of 2019 of $258,000. Turning to the balance sheet.

We ended the quarter with about $117,000 of cash and $1.03 million of borrowings against our line of credit. This net cash of minus $910,000 is an improvement in our cash position from the end of the first quarter when the net cash was minus $1.46 million, so about $500,000 improvement.

Accounts receivable at June 27, 2020, totaled $5 million compared with $4.1 million at June 29, 2019. Our days sales outstanding totaled 78 days at the end of the quarter compared to 58 days at the end of the second quarter in 2019.

This increase is due to the elimination of the prompt pay discount and significantly increased sales from 2 of our largest customers, respectively. Inventories totaled $3.9 million at June 27, 2020, compared to $3.1 million at June 29, 2019.

The inventory turnover in the most recent 4 quarters was 5.5x compared to 6.2x for the 4 quarters ended June 29, 2019. This decrease in turns is directly related to the decrease in purchases from our largest customer, as Grant previously discussed. Turning to the liability side, you'll see the $1 million drawn on our $3 million line of credit.

Payables and accruals totaled $2.7 million at June 27, 2020, up slightly from $2.5 million at June 29, 2019. You'll also see the inclusion of a notes payable not in last year's liabilities. This was due to the financing of a new QA or quality assurance equipment in the first quarter of this year.

And for further discussion, I would like to turn the call back over to Grant..

Thank you, Chuck. Before opening the call for questions, let me comment on 2 questions that several investors have asked recently. The first question is what is our current and anticipated future participation in the electric vehicle and hybrid electric vehicle markets. As most of you know, our largest product line is baseplates for power modules.

Power modules consist of insulated gate bipolar transistors, known as IGBTs, which are very high-speed, high-efficiency switches that convert the electricity stored in the battery into the right form for use by the motor. Most automotive OEMs purchase power modules from a module producer. A small number of OEMs produce some of their own modules.

Our baseplates today are being used in modules for some specialty EV and HEV applications, for example, in some military trucks and in some race cars. CPS is very active with most major - with most major module makers, primarily in Europe but also in Asia and the United States.

We're providing prototypes for new product development, and CPS has been chosen by some module makers as the vendor for some modules for which the development has been completed, and the module makers are now marketing the module to automotive OEMs.

We can't predict how successful any specific module will be in the marketplace, but we do believe that over time, modules containing CPS baseplates will be used in some mainstream automobiles, particularly for higher performance vehicles.

Most of you know that in the past, we've supplied hundreds of thousands of automotive baseplates to Continental Automotive, a European module maker. And those modules, in turn, are now in automobiles on the road made by Audi, Mercedes, Renault and Smart car.

Although this specific program has ended, the success of this program demonstrated both to module makers and automotive OEMs that AlSiC is the highest reliability and highest performance baseplate material. It is, however, higher cost than the lower-reliability and lower-performance materials.

The automotive market, in general, is very cost driven, but there certainly is a performance and reliability driven segment. And it is in this segment that we believe modules containing our baseplates will primarily be used.

There's a great deal of press regarding EVs and HEVs, and there's a tremendous amount of development activity ongoing, both at the OEMs and the module makers, but they are still a very tiny part of the market. In other words, the unit growth, the volume growth is still to come.

The second question regards the penetration of silicon carbide die into power modules and what this means for CPS. Silicon carbide IGBTs operate at higher temperatures and are more efficient than silicon-based IGBTs. They switch the power with less loss than silicon IGBTs. They are, however, much more expensive today than silicon-based IGBTs.

Because they do operate at higher temperatures, thermal management is even more important, and that is where AlSiC provides real advantages. Today, silicon carbide IGBT modules are beginning to penetrate niche applications where the increased performance justifies the higher cost.

Revenues to date from this segment have primarily been revenues from prototype purchases of AlSiC baseplates by module manufacturers. Our customers are now introducing the modules that contain our baseplates into the marketplace and starting to book orders.

Based on customer-provided forecast, we expect revenues from recurring manufacturing of silicon carbide-based modules to come soon, again, initially from niche applications, but certainly, over time, as the cost of the die come down, we're confident that silicon carbide-based IGBTs will penetrate higher-volume applications such as automotive applications.

Let me now open the call to questions from others..

[Operator Instructions] And we have our first question from a Mr. Lenny Dunn..

Grant, I understand that this is not a quarter you can look at as typical, even though your customers and you weren't directly affected by the COVID. I know you said the one customer, in you release, took extra to in the first quarter in order to make sure that they were properly supplied in the second.

But would you say now that things are kind of imbalanced with the orders that you're getting compared to what you normally would get?.

Very good question. And let me answer the question this way. We - we're very pleased with the underlying order book, and the delivery schedules are more volatile than they've ever been. And they are changing more quickly than they've ever been. And as we dig into this, it's simply very clear that it's all the uncertainty relating to COVID.

And so we don't believe - we, of course, can't predict when a vaccine will be available or a therapy. But our crisp summary is that things are going to bounce up and down. Literally, kind of for the first time in our histories, customers may call up and say, don't ship. Don't ship this, we can't get another component for the next two months.

Or in one or two cases, they may call up and say, Can you ship this early. But - so it's volatile. And so - and as we look back on this, although our customer did not inform us in Q1 that they were building safety stock. Only after they - and I - only after they reduced their schedule did they tell us that's what's going on.

But short - just more short term changes. But from our perspective, we don't see - this is short term, it's not fundamental..

And with the supply chains being disrupted from time to time, and you're doing international business, are you having any trouble on that end?.

So we have had no trouble getting materials, but most of the products we sell need to be nickel-plated, and we have multiple plating vendors, but generally, although we try and have dual sources for each product, there are some products where only one plater is qualified.

And we had one plating vendor closed for several weeks due to a large number of employees with COVID. And that impacted our delivery schedules short term. I did mention - I highlighted freight, more in the spirit of this kind of was really unexpected. But our freight costs have gone up, but we anticipate that will be relatively short term.

There's now no problem in getting our product to our customers..

And the automotive, again, sounds like exciting to me because it sounds like that could be a very large market for you even though you're a small component of what goes in there.

When would you anticipate it starting to ramp up?.

So we also believe that there'll be a role for us. We are - we are hesitant to give more specific information. I'm not going to give more specific information that is more specific than our customers are giving us. And in other words, I don't want to state unambiguously, for example, that we are the qualified vendor.

We've gone through the - all the development cycles of an automotive IGBT module that looks to us like it will be successful but the module maker has not yet firmly booked orders with the automotive OEM. And until they do that, I'm hesitant to project..

Well, from somebody who doesn't know the industry as carefully as you do, it would appear to be that because this is not a very expensive portion what goes into the car, that the dependability of it would count very heavily because they're not going to save a nickel and dime thing in orders they have some risk warranty problems later..

I certainly would think that's the case. And the reality is, in most cases, the automotive industry shaves pennies. But we clearly believe, and I don't want to get too philosophical here, but you have to look at the total systems cost.

And there are absolutely situations where if you use our material, even though you pay more for the baseplate, you pay less for other components, and the total systems cost is lower. And that - it is that observation that gives us confidence that there's opportunities for us in this marketplace..

This brings me back to my original question, in what time frame would you anticipate assuming that this works? Would you anticipate some ramp up?.

Well, again, I'm not going to get ahead of our customers. Even the OEMs are postponing things. I've had my eye on the Ford Mach-E Mustang, and Ford has delayed the introduction of that. So what I will - what I can say definitively is that modules that the module maker has completely finished development on and is now marketing specify our baseplate..

Okay. So I guess you don't want to commit, but it does sound like within the next 6 months, just my speculation and what you're saying, we could start seeing some ramp up. Well, all things....

Yes..

I understand..

I would - again, the automotive time lines, they would have had to be taking delivery of product now if it's - well, I won't go into details if - the time lines can be fairly long. But we're in that pipeline..

Yes.

Are there any other pipelines that we're in that we haven't been in before?.

Well, I mentioned - I mentioned the silicon carbide modules. And one of the things that gets me excited is that it's U.S. module producers that are very active in this area.

And we're now getting some forecasts where next year, possibly even as soon as fourth quarter, we believe that a silicon carbide module that we've been qualified as the baseplate supplier will start to generate material revenue..

Okay. And the thing that I've always urged you to do is go to these conferences to present so we're not a hidden company. But at the same time, clearly, the in-person conferences, at least in the near term, aren't happening. So - but at the same time, the other side of that is the virtual conference is probably easier for you to attend.

So have you looked into that?.

He's talking about investor conferences..

Yes. We're - we anticipate in-person or virtually participating in a conference certainly before the end of the year..

Good because that was the plan before. And with this COVID thing, and I've really tried to stay on top of it, it's beginning to look like we're going to have vaccines that are somewhat similar to flu vaccines, and that they're not permanent, but you get one and then you have to get a booster maybe 3 months later.

And then the following year, you may have to get another one for the next season. But by that time, because you're looking now at late 2021 for this second time around, you could very easily have a combo vaccine that gives you both your flu and your COVID at the same time. But it does look like there is light at the end of the tunnel finally.

So I'm encouraged by that. So we'll see..

Yes. I am, too. I am, too..

And we have our next question from Mr. Mike Hyde..

Grant, may I ask a favor, and I don't mean to be rude to anyone. But honestly, I think there's probably more than me on this conference call. And whether it's somebody who owns 100 shares, 1 million shares or 10 million shares, it just seems like we ought to be able to move along and get different people who want to ask different questions.

I'm sorry, that has to come from the top down. I can't make it happen or the operator can't make it happen. Anyway, quickly, on your website, you've got three electrification applications in the images right in the front of the website, electric trains, satellites, and a row of electric vehicles at a charger - at a charging station, a charging row.

And where is that? And what are those vehicles? And which of them have CPS stuff?.

You're talking about which....

On your website..

Yes. Okay, I don't have that right in front of me, but I think it's a generic vehicle. But to answer your question specifically, where are CPS baseplates today? They're in the Audi A6, they're in the Audi Q5. They're in the Mercedes-Benz S Class. They're in the Smart car all-electric vehicle.

That particular program, they're also, by the way, in virtually every Formula 1 car. The Formula 1 world is very confidential, but they're located - our AlSiC baseplates are in those automobiles..

I've seen some of those photos, yes. Anyway, my suggestion is change the photo on the website to really be updated to whatever you regard as the most interesting high-performance applications..

Okay. Very good..

All right. Second, there's all kinds of buzz about whether it's BMW or other folks, including names you've named. And it seems like 2022 seems to be the magic year when everybody is expecting bigger volume.

For example, Fisker says late '22, although - 2022 although they're going to be fabless, I believe, and using a VW plant - VW plant somewhere for their EV stuff. BMW says 500,000 electric vehicles by the end of 2022.

Looking out, without forecasting future demand because you don't know until you know, does that sound right?.

I've certainly seen those articles and you've said many of them too, which we appreciate. And yes, yes. The answer is that those are the plans. And I also see tremendous variability or differences in aggressiveness between automotive OEMs. Nissan, claimed to be the first entrant and claimed that they would be the dominant player.

And it now looks like they're a very, very small player in the grand scheme of things compared to some of these other auto companies if the projections are true. But it - I'm just going to say - yes, I think you're right that the, if you want to call it, tipping point or inflection point is still ahead of us, not behind us.

Tesla has opened the market opened everyone's eyes. And now the BMWs of the world are - they've got the existential fear and existential motivation that Tesla has created..

Right. Here's my last thing and let's get some other questions. My comment would be that with all the buzz about the EVs and big volume forecast probably somewhere in the neighborhood of 1.5, 2 years and so on ahead of us. But boy, when that change comes, it's going to be really huge, and it's going to be customer-driven.

That's - and what I see is it isn't just the subsidies. There's, like, EUR 9,000 subsidies for buying an all-electric vehicle now. And then there's subsidies, I believe, in both Germany and France. But what's driving that isn't just subsidies, it's consumers. It's customer demand.

And forget Elon Musk, forget all of his nonsense, what's driven Tesla is incredible buzz and incredible demand from customers and consumers..

Right, right. And - I won't comment on Elon Musk, but if you drive a Tesla, it's a phenomenal car. It is a tremendous, tremendous car..

Well, we all remember, Tesla, 4, 5 years ago at a conference that we attended together. Let me get off and let other folks ask what they want to ask..

[Operator Instructions] And we have our next question from Mr. Warren Silver..

Happy with the report. Have a couple of questions to ask here. The dollar is very weak now. I think it's dropped over 4% or 5%, wouldn't that benefit our bottom line because the foreign companies are paying less for it, and that it should be advantageous to us..

That's exactly right, Warren. And in fact, we've been following that pretty closely. And not only are they paying less to us, but they're paying less to us relative to our competition in Japan. The dollars weakened more against the euro more than the yen has. So it's definitely something that should prove to be important for us in being able to....

Okay. Second question, there was an article about 2 weeks ago, if I pronounce the name correctly, a Chinese bus company, Zhengzhou, who uses the Cree power module, came an order for 1,000 buses.

And I'm wondering, I think they were 1,200 volts or higher, are we involved on that order? Or do we supply Cree at that level because I saw Delphi Technologies also was involved at 400 volt and 800 volt.

Are you able to comment on that?.

Are you referring to Cree, C-R-E-E?.

Cree, yes. C-R-E-E, yes..

Yes. Let me just say, yes, Cree is an important customer for us..

Are we involved on that Chinese order for the 1,000 buses? I mean they said specifically, they're using the Cree modules..

I don't - I'm not - we are the vendor for several Cree modules. I have not been told by Cree whether any of the modules that - for which we produce the baseplate have been sold to this bus company..

Okay. Last question. The PACCAR, Pacific Car & Foundry, Kenworth and Peterbilt, the trucks, they said they're building the electric trucks. And I understand that the buses and trucks have a problem with the temperature and they will use 1,200 volts or higher.

Are we getting any indications on the heavy truck market or bus market?.

We believe that - well, let me say, we have - our baseplates are used in some - they're primarily military heavy trucks today. And we - in short, we believe that we will be successful in that market for the very reasons you described, higher voltage, greater thermal cycling, greater need and ability to pay for reliability..

Okay. And the last question, Rivian, the in one Illinois, I think Ford owns a percentage of them, 25% or 27% of them. And they got a huge truck order, I believe it's from Amazon, I'm not sure. And they mentioned that we have a relationship with Ford, with Ford Mustang.

Are we involved with that new start-up, Rivian Electric, on the trucks?.

We are not. We know that at least one of our customers module manufacturers is calling on Rivian. But we're not directly interacting with Rivian..

Okay. Be safe because the C-19 is around everybody and I wish us well for the next 6 months to 9 months because it seems we're near first-and-goal on the 1-yard line..

We have no further questions at this time..

Okay. We appreciate all of you joining the call, and appreciate the suggestions made during the call. Let me - COVID is constantly in front of everyone, and I'm anxious to communicate that as important as it is, it's not dominating our business.

It is influencing in the short term some ups and downs, but we remain optimistic regarding our performance in 2020. We remain confident that many of the operational improvements resulting in the significantly improved bottom line will continue. Our product sales pipeline is strong, and our sales team continues to generate new business.

We - I know no one is traveling. And if you were to visit currently, you need to have your temperature taken and wear a mask. But we hope that as COVID resolves, those of you who might be interested in seeing what we do come and take a look. With that, let me sign off, and we look forward to chatting with you in 3 months. Thanks again..

Thanks, everybody. Bye-bye..

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect..