Jeffrey Gill - President & CEO Tony Allen - CFO.

Brad Mas - Needham & Company Alan Weber - Robotti & Company Justin Putnam - Talanta Investment Group.

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

Thank you, Noah. Welcome everyone. Tony Allen and I would like to welcome you to this call, the purpose of which is to review the trends reflected in the company's financial results for the first quarter of 2015. 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 would 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 year to be followed by a brief discussion of each of our two business segments.

Tony will then lead you with a more detailed review of our financial results for the quarter.

Now let's begin with the overview on slide 4, as we mentioned in our last call and in our annual report to stockholders for the year 2014 the discontinuation of the long term supply agreement with Dana at year-end was expected to have a material impact on the future outlook for our business since Dana represented approximately 59% of consolidated net revenue in 2014.

We noted that the brunt of the financial impact was expected to be felt during the first half of 2015 after which the combined contribution from reduced cost and new program launches was anticipated to have an increasingly positive impact on the company's cash flow from operations and bottom line results.

The first quarter met expectations and was in fact quite challenging from both an operational and financial standpoint as Tony will review with you shortly in some detail.

In response to this outcome, the company reduced headcount by an estimated 33% at Sypris Technologies, implemented a wage freeze, lowered executive compensation, reduced managerial salaries and scheduled hours of plans impacted by the change and arranged for additional financing to support the company's short term needs as it transitions to life after Dana.

The team did an outstanding job managing manpower, working capital and most importantly morale as we adjusted to the lower levels of demand. We estimate some decisions that were designed to protect the strategic core of Sypris Technologies by not reducing head count to the extent current volume would otherwise have dictated.

In the short term we deployed these valuable people to prepare our plans for new programs, expand our TPS and 5S initiatives, and perform preventive maintenance on all material pieces of equipment. It was money well-spent.

We made important progress during the quarter with regard to the acquisition of the company that we had discussed during previous calls. The transaction still remain subject to the closing of financing among other items which Tony will review with you shortly but we’re targeting the completion of both the financing and the acquisition by quarter end.

So to summarize the first quarter results met our expectations in terms of difficulty and challenge but with a cost reductions in place new revenue in the process of coming online and with the pending acquisition close at hand, the transition to our new future is well underway.

The change is clearly taxed our organization in many, many ways but the outlook for the balance of year is now much brighter as a result of the hard work and dedication of so many. To those of you listening today who have been involved or lent a helping hand. Thank you.

Much hard work certainly remains and I'm certain that there will be many bumps in the journey ahead but we have an excellent team and we are off to a solid start. Turning now to slide 5, revenue for Sypris electronics increased 6% to $8.9 million from the same period in 2014 and increased 27% sequentially from the fourth quarter of last year.

Gross profit and gross margin increased materially on both the year-over-year and on a sequential basis as a result of the increased volume and improved mix. The first quarter continued on a positive note for EMS sales to customers with applications in severe environment including Northrop Grumman, Lockheed Martin [indiscernible].

Business activity continue to grow in this area supporting our expectations for strong double digit growth in 2015. We conducted multiple demonstrations and entered into advanced discussions during the quarter with a number of potential customers for the latest version of our Cyber Range.

Our team remains quite optimistic about the future prospects for this leading edge capability and response training product. The installation of the Cyber Range for the Ministry of Home Affairs in Singapore continues to progress on schedule with a commissioning of this important installation scheduled for the second quarter of this year.

The Cyber Security Lab that we are constructing with NEC Asia-Pacific of which the range is an integral component is quite impressive and is served as a key demonstration site for us as we discuss potential installations with prospective customers in Asia and Europe.

The quarter was also notable for the latest advancements that were made to SIOMETRICS identity software which is now fully plug and play and backward compatible with existing public key identity systems that are currently used in most commercial security applications.

We continue to hold discussions with potential integrates of this unique software spec as well as with venture capital and other investment firms as a means for facilitating the early roll-out and adoption of this new technology.

We have now filed more than a dozen patent applications to protect the unique features of this software which we believe has the potential to dramatically reduce exposure to cyber-attacks. And turning to slide 6, as we have said on many occasions.

We expect the impact of DoD funding related to continue to affect our business until such time new programs, products and cyber related services achieve sufficient traction to offset these issues. The good news is we’re making progress.

Our outlook for the second quarter of this year reflects this progress with revenue, gross profit and EBITDA each targeted to increase materially on both a year-over-year and on a sequential basis.

These improvements reflect the positive impact of the cost reduction initiatives that were implemented late last year increased product shipments and the commissioning of the cyber range in Singapore and perhaps just as importantly we expect this progress to carry over into the balance of 2015 as we work to further improve our portfolio mix with additional cyber range commitments.

Now let's take a quick look in Sypris Technologies beginning with slide 7, as I mentioned a few moments ago, the cessation in shipments to Dana after year-end had a material effect on our business and negatively impacted all important financial metrics.

As a result we reduced headcount by an estimated 33% implemented a wage freeze, lower executive compensation, reduced managerial salaries and scheduled hours at the two plants impacted by the change. The team did an excellent job managing the down scoping of operations in both North Carolina and in Mexico.

The two primary locations affected by the reduced levels of business. The inventory levels we watched closely, but quality and delivery to customers remained at world class levels, no mean feat during this period of change and disruption.

We made the decision to retain key technical and operational skills or capabilities that would prove to be essential to build our business on a go-forward basis.

During the quarter we utilized many of these people to accelerate TPS and 5S projects as well as form preventive maintenance on key pieces of equipment all in an effort to further improve our operations and prepare for new business.

Our investments and process improvements and the results from our partnering with Toyota are paying real dividends in terms of increasing manufacturing efficiencies and improving equipment uptime while simultaneously reducing cycle times and scrap [ph].

We received experienced yet another great milestone, setup times for our machine cylinder energy business were reduced from an average of 105 minutes to 1 minute and 38 seconds. New program launches are currently underway with more to follow in each of our facilities.

As you will see on slide 8 we are in the process of ramping up or we will soon begin to ramp up the production of Carriers, Knuckles, I-Beams and Axle Shafts for use in the commercial vehicle market. We will also be producing Full Float Tubes for the light truck market and heavy industrial use components for use in the off highway market.

These program is important for us since they serve as the foundation that will put our technical talent back to work and absorb the workforce that we preserved for the future. Coding activity is extremely active and our team remains optimistic that the demand for high quality, reliable products from our customers will bode well for our future.

The ultra-series light weight Axle Shaft successfully completed testing with one customer during the quarter and is now undergoing test with yet another.

We are preparing our plans in Kentucky and Mexico for the production of this breakthrough product which is lighter, stronger and most costly to produce than other Axle Shafts currently on the market.

We hope to be in production later this year, the potential benefits are meaningful in terms of material savings for the customer and weight savings for the end user who will benefit from fuel savings and or greater load capacity.

We continue to make progress on the acquisition and joint venture front during the quarter, we had substantially completed due diligence with regard to the purchase of the company we have discussed on recent calls with a closing targeted to take place at the end of the second quarter in conjunction with the completion of our new long term credit facilities.

We also have a team in India this week with the objective to complete and enter into the definitive agreements required to form a joint venture for the production of Axle Shafts for the light truck market in India. We’re very excited about this project which will enable us to put to use some under-utilized equipment with a very experienced partner.

Turning now to slide 9, the outlooks for the market served by Sypris Technology remain positive. The commercial vehicle market for Class 5 through 8 trucks continues to expand with production expected to climb 9% in 2015 while the forecast for light truck, trailer, off-high and agricultural markets remain solid.

Our outlook for the second quarter reflects in part the robust nature of our markets and the results that we expect to generate in the new program launches mentioned earlier.

More specifically we expect to benefit from strong sequential top growth during the quarter fueled by these program launches, and the backlog of shipment scheduled for our energy customers. The combination of higher revenue, lower cost, and improved product mix is targeted to have a very positive impact on margins going forward.

The outlook is for EBITDA to improve significantly during the quarter and return to profitability for the second half of 2015. Turning now to slide 10, Tony will lead you to the balance of our presentation this morning.

Tony?.

I would like to take you through the highlights of our financial results for the first quarter of 2015 and I will begin with our consolidated results and ask you to advance to slide 11. Q1 consolidated revenue totaled 37 million down 47.2 million compared to the prior year.

The decline in revenue reflects the discontinuation of shipments to Dana effective January 1. Dana accounted for 59% of Q1 and full year revenue in 2014 and although we’re currently shipping some small quantities of components to Dana, our outlook for the balance of 2015 does not include any significant volume from this customer.

Gross profit decreased to a loss of 3.2 million in the quarter from 10.6 million in the prior year period. The profit and cash flow metrics highlighted on this slide are primarily impacted by the Dana event which outweighs the year-over-year comparison of metrics in both segments.

However we’re pleased to announce that Sypris Electronics reported gross profit of just under $1 million for the quarter on revenue of 8.9 million for a gross margin of 10.6%.

Workforce reductions by Sypris Technologies in response to the decline in revenue gave rest to severance cost of approximately 300,000 which has been classified as a separate line item in our income statement.

Legal fees incurred for litigation proceedings are included in selling, general and administrative expense and further impacted EBITDA during the quarter. Our free cash flow for the first quarter includes a working capital reduction which provided a source of cash in Q1 and lower spend on capital expenditures compared to the prior year period.

The impact of these two items partially offset the year-over-year decline in EBITDA. Please advance to slide 12, and I will discuss EBITDA for the comparable first quarter periods. The most significant item in the walk from Q1 of 2014 to the current year quarter is again related to the decrease in revenue.

The occurrence of [indiscernible] associated with a loss of a single customer accounting for 59% of revenue touched every aspect of our business. Although we took immediate strategic actions to adjust to the new reality, certain of our initiatives did not materially reduce cost during the quarter.

Additionally as we look to the future we recognize the importance of our employees in the achievement of our recovery plan. So we have and will continue to balance our cost reduction initiatives between the short term conditions we are facing today and our long term objectives to rebuilt the business.

Our labor productivity and fixed overhead absorption reflect the decline in revenue but we anticipate these metrics will improve sequentially as we move into the second quarter and bring new programs online. Effective December 31, of 2014 the amortization of deferred revenue for claim related to Dana's bankruptcy in 2006 ended.

The end of this revenue amortization would have occurred regardless of whether our relationship with Dana continued into 2015 or not and there has been included in all of our internal projections as a component of our EBITDA walk for 2015.

Legal cost incurred on the arbitration and legal proceedings with Dana during the first quarter of 2015 increased over the prior year. However we anticipate that all subsequent quarters of 2015 will show significantly less legal expense than the prior year periods.

The workforce reductions in Q1 accounted for severance expense of approximately 300,000 and we expect additional severance cost maybe incurred in the second quarter primarily subject to the timing and amount of new program launches within Sypris Technologies.

And finally the net impact of changes in SG&A, research and development, foreign currency translation, among other items net to a positive $100,000 in Q1. The bottom-line is negative EBITDA for the quarter of 10.5 million compared to 5.7 million in the prior year.

This result was in-line with our expectations and as we will discuss later we are targeting a significant sequential improvement in this metric during the second quarter when our path toward achieving positive EBITDA again in the second half of 2015.

Please advance to slide 13 and I will discuss our free cash for the quarter, we start with our net loss for Q1 of 13 million and add back net capital spend of 1.9 million. Our depreciation and amortization of 2.2 million is partially offset by CapEx of 300,000 for the quarter resulting in the add back of 1.9 million.

The ramp up of sizeable EDMS program for Sypris Electronics in the first quarter generated a reduction in deferred revenue of 2.2 million. You may remember prior discussions on this program which had been delayed due to technical issues between our customer and the end user.

Due to the length of the delay and the fact that we had acquired the inventory for this program in accordance with the original delivery schedule, the customer agreed to pay us approximately 4 million for the inventory in late 2013 and early 2014 prior to our shipping the product.

The advance payment was recorded as deferred revenue part of which was recognized in Q1 with the balance to be recognized as we complete shipments of the related inventory which is expected to occur in the second quarter.

Earlier I mentioned the reduction in working capital which was a source of cash of 7.6 million in the first quarter primarily due to a reduction in accounts receivable. Free cash flow was negative 5.6 million for the quarter and our net debt increased to 16.5 million at the end of Q1 which represented 33% of total capital.

Related to our debt position I would also like to note that we successfully amended our credit facility in the first quarter to provide our business with the liquidity needed to execute our recovery plan and bridge our business to the future.

Let me now shift to segment performance and ask you to please advance to slide 14, Sypris Technologies reported 28.1 million in revenue, negative 4.1 million in gross profit and negative 7.3 million in EBITDA.

To avoid repetition in this discussion I will simply note that each of these metrics reflect a termination of the Dana contract and further note that our goal is to achieve steady sequential improvement in each category as we progress through 2015.

Sypris Electronics reported 8.9 million in revenue, 0.9 million in gross profit and negative 1.4 million in EBITDA. The ramp of the EDMS program previously discussed at a favorable mix of product revenue compared to the first quarter of 2014 resulted in a $1.5 million improvement year-over-year in gross profit.

A slight reduction in SG&A expense was offset by increased R&D spend resulting in a 1.4 million dollar improvement in EBITDA for the comparable quarterly periods. Please advance to slide 15 and I will preview our outlook for the second quarter of 2015.

As you know we typically do not provide specific guidance on earnings metrics during these calls or in other disclosures.

However given the extraordinary circumstances currently surrounding our business we’re making an exception to this practice which we hope will provide you with a directional sense of our goals and the improvement we anticipate as we move beyond the first quarter.

I will start by repeating just earlier reference to our Safe Harbor Disclosure on slide 2, and emphasize that all forward-looking statements are subject to the risk factors and uncertainties disclosed in this presentation and in our filings with the SEC.

The revenue, gross profit and EBITDA goal set forth on this slide are representative of our current forecast model and certain sensitivity analysis applied to that model.

While certain elements of our revenue stream are more consistent from period to period we also have some significant programs and products that from an accounting perspective are discreet events and therefore give rise to specific revenue and profit recognition impacting monthly or quarterly results.

Therefore delays or cancellations in projected shipments may occur which could materially impact the targets set forth in this outlook. And while these estimates reflect our current views we do not plan to provide updates or corrections to these estimates even when our internal assessments change significantly overtime.

We’re targeting a 15% to 30% sequential increase in revenue from Q1 to Q2 which would result in Q2 revenue in the range of 42 million to 48 million. We anticipate both segments will contribute to this growth with the strong commercial vehicle market and a ramp of new programs driving the top line growth for Sypris Technologies.

For Sypris Electronics we anticipate continued shipments on EDMS programs to be boosted by higher product sales and the commissioning of the Cyber Range in Singapore to contribute to sequential growth in Q2.

We anticipate our labor and overhead absorption will improve sequentially on the targeted revenue growth and combined with other cost reduction actions we’re targeting gross profit in the range of 5% to 9% of revenue.

Together with anticipated reductions and SG&A spend and legal expense in the second quarter we are targeting EBITDA for Q2 in the range of a negative 1.5 million, negative 4 million as compared to the negative 10.5 million reported for Q1.

If we prove to be successful in meeting these targets in Q2, we anticipate that this will position us to return to positive EBITDA levels in the second half of 2015. Let me now close with a brief summary and ask you to please advance to slide 16.

Our results of operations for the first quarter reflect our most challenging transition period with sequential quarterly improvements targeted for the balance of 2015. The variable cost reductions implemented for Sypris Technologies were appropriately timed but overshadowed by the immediate and significant drop in revenue from Dana.

We consider talent retention as a critical factor to our organic growth plan for new business and we strive to be proactive and transparent in our communications with employees to protect this valuable resource.

The ramp of a key EDMS program in Q1 and prior period cost reductions generated an improvement in Sypris Electronics operating results which we anticipate will continue into the second quarter. The completion of the loan amendment in Q1 was an important milestone and provided us with necessary liquidity to manage through this transition.

The synergistic acquisition opportunity Jeff discussed earlier is anticipated to close in the second quarter and is expected to be immediately accretive to earnings.

We recently executed a proposal letter and term sheet with a perspective lender or a five year credit agreement which would refinance our existing loans scheduled to mature in January 2016, fund the acquisition we discussed and increase liquidity.

The diligence process with the prospective lender is anticipate to be completed in the second quarter which would allow us to close and fund in Q2. We look forward to discussing this in more detail on our next quarterly call.

As noted earlier our outlook for Q2 improves when organic revenue growth, labor utilization, fixed overhead absorption and cost reductions among other factors. And finally we will continue to dedicate all resources to deliver results and build profitability.

This concludes our call today and at this time I would like to turn it back over to Noah so we can open it up for any questions you might have for us at this time. Thank you..

[Operator Instructions]. And we will take our first question from Brad Mas with Needham & Company..

Just first off, I think on the last call you guys talked about the shipments to Northrop and the Cyber Range in Singapore would generate about 8 million in the first half, just wondering if that’s their expectation and then what amount that would be in Q2 and then if you can provide any color on what you expect from the two in the second half?.

Yes we did commit shipments to Northrop in the first quarter and as Jeff discussed earlier I think I mentioned as well the Cyber Range is targeted for commissioning steel in the second quarter. So the large single program was Northrop - we have more than one program but the large program we discussed was shipped in Q1 and Q2.

It's not expected to have significant volume at this point in the back half of the year..

Okay.

And then regarding the Cyber Range I think you’ve talked about a potential pipeline in excess of 25 million, just wondering how many customers that would represent and then what some of the milestones that we can look for some of these potential awards?.

Yes we have a deep funnel on the business development side for the Cyber Range and I would say out of that 25 million there are 4 or 5 customers that are more advanced in our discussions than others and on average I would say, you would think of this being in the neighborhood of ranging from $1.5 million to $2.5 million per range depending upon configuration and complexity and features..

And with regard to the EMS business in 2015, how should we think about seasonality going forward for the rest of the year?.

Well we expect the EMS business to continue to grow as we go through the year and the activity there has been very positive and so we believe that by the time we get to the full year we will see strong double digit growth for that part of our business..

Okay. And then switching gears the joint venture in India do you still expect that to start in Q2 and then how should we think about the financial impact for the second half/.

We expect to hopefully finish the documentation, enter into the joint venture agreement and all of those things by the time we get through Q2. Then my sense is Brad that it would take us probably in the neighborhood of 12 to 15 months for the venture to ramp up in terms of installing the equipment and doing those types of things.

Our major contribution to this venture is in taking some mothballed equipment that we have here in Kentucky and taking over there it's profile perfectly for what the Indian market could use and we think that once we get up and going that the potential be to expand from the light truck market into the commercial vehicle market as well and so from a result standpoint on Sypris I don’t think we’re going to see anything until certainly mid to late 2016..

And then staying on the industrial business, just wondering either quantitatively or qualitatively what the utilizations were the in the quarter and how you see that in the Q2 in the second half?.

You talking about capacity utilization?.

Yes..

Well that is a difficult number to give you because the impact of the lost business affects two plants but not two other plants and so in the plants that were affected the utilization rate for the quarter was very, very low.

It also reflects the fact in Mexico in particular we believe we will be able to bring that utilization rate back up as we go through the year because our operation in Mexico is extremely competitive, we have a great workforce and it's situated in think in a really great geographic area.

So but as you can imagine the utilization during the first quarter was very low..

And then last one for me, just wondering if you can - how you would characterize the demand from the commercial vehicle customers and heavy duty in Class 4 through 7 versus what you guys thought at the end of 2014?.

I missed part of your question..

Just wondering how you would characterize the demand in heavy duty in Class 4 through 7 versus what you thought three months ago?.

In the medium duty it's remained steady from our standpoint, it hasn’t varied from expectations..

And then what about heavy duty?.

Heavy just as well. In talking with our customers they are very bullish on the outlook for the heavy duty market even several of these customers feel that the market will remain strong, well into '16 so we will see how that plays..

And our next question comes from Alan Weber with Robotti & Company..

I might have missed this part, but as you look out for the balance of the year, I think I first - what is the acquisition - what was the purchase price of the acquisition? And then what do you expect kind of free cash flow or the cash flow to be - just kind of general range in terms of as revenues ramp up in the second half of the year working capital required, there is much additional investment..

The acquisition hasn’t closed and therefore we haven't announced publically any details around the purchase price or any of the associated projects or historical performance of the business and not in a position today certainly to disclose anything related to the acquisition in terms of the quantitative aspects.

And as the second quarter numbers that we presented do not include any acquisition impact in our outlook.

Regarding free cash flow in the back half of the year, we expect sequential improvement as we move through the year, we expect to get anticipate achieving positive cash flow in the back half of the number, capital needs are less than the prior year and we will monitor that and adjust that view as we move through the year based upon new program launches and we have modeled some of that as we look to the back half of the year on new business that we have either under contract or that were close to awards and we think that the cap spend that we have is appropriate based upon those projects..

And we will take our next question from Justin Putnam with Talanta Investment Group..

First question, so it sounds like in the back half of the year your business is going to reach some kind of normalization and so does that mean that you still like, your cost structure is aligned with new volume business that you have in the back half of the year or do you feel like there is a lot more work to be done, even beyond 2015 towards that concern?.

Yes I think there is more work to be done Justin, I mean we have made appropriately adjustments to our cost structure but when you’re trying to back fill 60% of your revenue it doesn’t happen in one quarter, two quarters or three quarters.

So there is ongoing work as we move through the balance of the year from a most of the significant adjustments that we will have to make on the variable side will have been made by the time we get to that second half but there is still in the back half of the year there are still plenty of work ahead to really drive the top line improvements and improve the overhead absorption as we move through the year..

So for the lining of your cost structure with your new revenue levels, you feel like that stabilization will be occur like in the first part of 2016 or toward the end or when we’re going to reach a stable period I guess is what I'm asking..

We believe that our cost structural will be fundamentally in-line by the end of Q2..

Okay, that seemed to be a little bit different than what Tony was saying there..

Well I don’t know that it is different Justin, as what I Jeff is communication which is consistent with what I said is that from a variable cost side most of the significant changes will have occurred by the time we enter the second half.

When I say there is more work to be done and driving top line growth, obviously we’re not, our fixed overhead structure should still absorbing a loss in revenue of $200 million annual.

So that element of it in terms of overhead absorption will continue through 2015 and then into 2016 but the variable said - Jeff correct, and I hope it was consistent with what I said that majority of those changes will have occurred by the end of Q2..

Okay so I appreciate you providing the outlook for second quarter and some numbers around that, that’s very helpful as far as understanding your business.

Would you be willing to provide a little bit more either commentary or maybe some numbers around where you see your business as you reach that stable point where the impact half of the year into 2016, maybe just talking about the industrial business from a gross margin standpoint.

I mean we all know historically your business was low-teens, gross margin business, do you see with the new business and that business that you’ve now, do you see once everything aligned properly? Do you see something approaching that level or where do you see the business as we reach kind of a normalization base?.

We see the gross margin turning positive here shortly, we won't give back to the low-teens in 2015 but I think you should expect us to be in the mid to upper percentage single digits as we go through the second half of the year..

And that’s the reason of expectation for your business going forward, 2016, '17 so forth, that’s the type of business that you have?.

Well I think that as we roll into '16 that you should expect our margins to climb back to historical levels but we need to - as Tony indicated, we need to continue to bring in the volume that will support the absorption on that basis..

[Operator Instructions]. And we have no further questions at this time..

Okay. Thank you Noah, and thank you everyone. Tony and I want to thank you for joining us on the call this morning. We certainly welcome your interest and of course your questions about our business. So thank you and have a great day..

And this does conclude today's conference. Thank you for your participation..