Jeffrey Gill - Chairman, CEO and President Anthony Allen - CFO and VP.

Joel Cahill - Jameson Companies.

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

Thank you, Amelia 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 2017. 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 to the first half of our presentation, starting with an overview of the highlights for the quarter, to be followed by an update on the status of our transition plan implementation and our new business awards.

Tony will then provide you with a more detailed review of our financial results for the quarter as well as to walk you through the significant savings we expect to realize in 2017 and in 2018, when compared to the year just completed. Now let's begin with the overview on Slide 4.

Revenue for the quarter came in at the lower end of our expectations, primarily as a result of moving a large planned shipment for the quarter into Q2 at the request of our customer. As a result, Q2 will now benefit from this move.

Cash flow from operations improved significantly on both the sequential and on a year-over-year basis, despite incurring transition expenses and a need to invest in inventory during the period to support the relocation of production from the Broadway Plant and to support higher shipments at Sypris Electronics.

When combined with the proceeds from the sale of idle equipment during the quarter, our total cash position increased close to 9% during the period from year-end.

We're confirming our guidance for both the first and second halves of 2017, with a major lift in gross margin taking place once the completion of the transition plan initiatives have been completed later this month. We're pleased to confirm that we're both ahead of schedule and under budget with regard to these activities.

We now expect to conclude these initiatives by the end of May, after which all actions required to achieve the $18.2 million of expense savings in 2017 and $8.1 million of additional expense savings in 2018 will have been completed. Tony will provide you with a more detailed update of this data shortly.

Needless to say, we have a lot of people to thank for this tremendous effort. Our people at the Broadway Plant have done a fantastic job under very challenging circumstances. Year-to-date quality stands at just 8 PPMs, while on-time delivery is at 97%. And as you might imagine, our customers are extremely pleased with this result.

Our team in Toluca has been working around the clock to install equipment and otherwise prepare for production, both of which were to be transferred from Broadway Plant, but also for those new programs that we will discuss later this morning. Thank you, one and all.

And finally, we're pleased to report that we received or have been notified of a number of new multiyear program awards that can be expected to contribute to the growth for Sypris for years to come.

The combined impact of both the awarded and the associated follow-on business is expected to exceed $20 million in 2018 and close to $25 million in 2019 based upon current market volumes.

We will review this information with you in greater detail shortly, but the combination of the significant reduction in our expense profile with the now anticipated increase of sales in future years can be expected to open a new very positive chapter in our journey here at Sypris.

Now let's turn to Slide 5 and I'll bring you up-to-date on the status of our transition activities. As we discussed on our last conference call, we established a clear set of objectives for ourselves when we first embarked upon the plan.

We wanted to significantly improve our cost competitiveness on a sustained basis which meant that we needed to address both the past utilization and fixed and variable costs. It also meant that we needed to make a decision with regard to the direction and concentration of our business.

We wanted to establish and maintain a highly liquid balance sheet, so that we could fund the completion of our transition out of internally generated funds. We wanted to diversify the company's book of business, both in terms of customers and markets served.

This would help to reduce the impacts of cyclicality and the risk associated with the completion of the program and/or the loss of a customer in the future. And finally, we wanted to build shareholder value through a focus on innovation, growth and a culture based upon continuous improvement. The progress has been impressive. Turning to Slide 6.

During 2016, we generated $12 million of proceeds through the sale and leaseback of our campus in Toluca, Mexico which was less than 50% occupied. We divested our CSS business for $42 million which owned some very interesting groundbreaking technology, though we clearly did not have the resources to realize its potential in a timely manner.

We used the proceeds from these transactions to eliminate 100% of our high-cost commercial debt which has resulted in a $5.5 million savings on interest expense and other debt-related costs in 2016.

We relocated the operations of Sypris Electronics less the CSS portion of the business into a modern 50,000 square foot facility, thereby reducing the overall footprint by over 250,000 square feet and saving $1.7 million in annual operating cost.

We've reduced salaried headcount by $2.7 million and initiated the transfer of certain forging and machining operations from the Broadway Plant to other Sypris locations. And as I mentioned a moment ago, we were successful in securing new orders to boost shipments for 2018 and beyond. During our last call, I mentioned that we had yet more to do.

Turning to Slide 7. I'm pleased to report that we're currently on plan with regard to each of the remaining initiatives that we need to complete. Customer approvals and product testing have gone well to date, with no issues having been surfaced.

We remain on plan with regard to the production launch on each of these programs that will have been transferred to Toluca, but much work remains. We're on plan with regard to the implementation of our new ERP platform which will ensure that each of our operations will be on the same system for the first time in the history of our company.

Our target is to go live later this fall. The transition from the Broadway Plant will be substantially complete by the end of May. We will continue producing products for delivery in the U.S.

on a limited scale for the foreseeable future, if only to make certain that we're dual-sourced for customers and have plenty of capacity, should there be an unexpected increase in demand.

We must continue the orderly liquidation of idle and underutilized noncore assets, both to eliminate the financial drag and to supplement the liquidity of our balance sheet to support future potential investments. We must also continue to operate effectively.

We have several large orders in backlog that must be shipped on time and under budget, so that we continue to please our customers. The coming quarters will serve as the measure of our progress and performance in this area.

As I mentioned a moment ago, we now expect the cost-saving initiatives to be substantially complete by the end of this month, with the resulting savings of $18.2 million in 2017 and an additional $8.1 million in 2018. As a result, we expect to benefit from the significant expansion in margins beginning in the second half of this year.

Turning now to Slide 8. I had mentioned during our previous call that our orders and backlog at year-end had increased substantially on a year-over-year basis.

In fact, during the past 9 months, we have received a number of new multiyear awards that in the aggregate are expected to generate new revenue of $12.5 million in 2018 and $12.9 million in 2019 based upon current market conditions. The terms of the awards range from 2 to 7 years with an average term of 4-plus years.

In addition, certain of these awards are for governmental programs which tend to fund on an annual basis due to federal budgeting parameters. With each new annual budget cycle, follow-on orders are then placed for the coming year for many of these programs that will otherwise have a 7- to 10-year life and sometimes much longer.

In our case, the anticipated follow-on orders from our new government contracts are expected to contribute an additional $8.2 million of revenue in 2018 and $11.9 million in 2019 based upon current market conditions.

In total then, we expect to benefit from an estimated $20.7 million of new sales in 2018 and $24.8 million of new sales in 2019, based upon the awards we have received to date. The good news is that we believe that we can do even better, since we have the time and opportunity to further build upon the 2018 and 2019 sales backlog.

Advancing to Slide 9, let's take a look at the break down for some of these new awards. For Sypris Technologies, we have been awarded new business for the production of transmission shafts for a large European heavy truck OEM, axle shafts for U.S. automobile production and gear sets for an ATV program.

We've also received a significant order for 168 closures and related components for a large oilfield project in Kazakhstan which is not represented here on this table. The balance of these awards across many market segments is important to us, as we're varying -- as are the varying durations of the specific programs.

Our objective is to make certain that we avoid the concentration of customers, markets and program maturities that we experienced in the past. With some programs extending through 2024 and 2025, we're off to a very good start with a solid opportunity to do much more. Turning now to Slide 10.

For Sypris Electronics, we have been awarded a development contract to manufacture and test electronic hardware for a new radar system, a contract for the production of circuit card assemblies for a major missile program and orders for production and assembly of medical devices among others.

With the exception of the medical devices, each of these awards is for programs that are large, strategic, long term platforms for our nation's armed services. The work is complex and requires a high degree of traceability, since the cost of failure is immeasurable. Our backlog remains strong and the outlook remains quite positive.

Advancing to Slide 11, I'd like to conclude this portion of our presentation this morning with the following observations. At Sypris Technologies, we will now have a globally competitive platform from which to serve our customers.

We have lowered our variable cost, eliminated redundant fixed overhead and capital requirements and increased capacity utilization. We have retained important human talent and we assigned these individuals to new locations to accelerate product development, improve production processes and drive continuous improvement activities. Moving to Slide 12.

At Sypris Electronics, we now have a singular strategic vision. We manufactured complex, high-cost-of-failure electronic hardware where certifications, registrations and traceability standards are important elements of our customers' requirement.

In this instance, we've also greatly reduced fixed overhead and SG&A, thereby substantially improving our overhead rates and competitiveness. And on a consolidated basis, we will have a cost-competitive platform that is positioned for profitable growth.

The actions required to achieve over $26 million of savings will have been substantially completed by the end of this month.

Recent multiyear program awards and the anticipated follow-on business to those awards are expected to provide over $20 million of new sales in 2018 and close to $25 million of sales in 2019, with the opportunity yet remaining to build further upon these figures.

Our balance sheet is solid and our margins are expected to expand materially in both 2017 and in 2018, as a result of all the activities we have discussed here this morning.

The combination of the much improved expense profile with the expected growth in future revenue provides important support for the meaningful increase in the company's profitability during the coming year. Much work clearly remains, but we have a solid footing from which to further build the business going forward.

Now turning to Slide 13, Tony Allen will lead you to the balance of our presentation this morning.

Tony?.

Thanks, Jeff. Good morning, everyone. I'd like to discuss with you some of the highlights of our first quarter financial results and provide an update on the transition plan and related cost-reduction initiatives, we discussed on our call at the end of March. Please advance to Slide 14.

Q1 consolidated revenue closed at $18.2 million, falling at the lower end of our expectations, as certain customer deliveries shifted out of the quarter. This is purely a timing issue rather than cluster demand or the receipt of an order. So as we look forward, our view for the first half of the year hasn't changed in our 2 segments.

The revenue split between Sypris Technologies and Sypris Electronics was $12.8 million and $5.4 million, respectively. Sequentially, this reflects an increase in revenue for Sypris Electronics, as they were fully operational in their new facility during the first quarter, following the relocation activities prior to year-end.

I know we discussed this during our Q4 call, but the remarkable effort put forth by our team in Tampa to execute the transfer of all production on an aggressive schedule prior to the end of the year and to maintain our high standards of quality and on-time delivery for our customer base deserves another mention.

Thanks, again, to all of those involved at Sypris Electronics for a job well done. Revenue for Sypris Technologies declined sequentially, as we ramped up production on a couple of customer programs in the heavy truck market and continued our progress on the transition of operations from our Broadway Plant.

Our performance to date on the transition activity has been favorable to plan with the credit for this belonging to the entire team at Broadway, but most notably to the hourly workforce that has been responsible for continuing to meet customer delivery schedules, while achieving some of the best quality ratings in the plant's history.

The workforce has remained largely intact with low attrition rates contributing to the successful transition. Our cost of sales in Q1 includes the financial impact of premium pay and performance incentives that were built into our transition plan to compensate the team for their effort.

While this impacted our gross margin during the quarter, the investment was easily justified by the results. We also recognized severance and equipment relocation costs during the first quarter of approximately $1 million for the Broadway Plant transition.

The majority of the severance payments will be made in the second quarter, while the equipment relocation will be ongoing through the balance of the year. The reduction in SG&A expense we outlined during our last call has started to flow through the results in the first quarter.

SG&A expense decreased sequentially by $1.4 million to $3.4 million in Q1 which is a 30% drop from Q4. We will continue to explore opportunities to control spend in this category and expect to keep SG&A expense as a percent of revenue within the ranges we discussed for the first and second halves of 2017.

Our adjusted EBITDA which excludes the severance and equipment relocation costs, was negative $1.1 million for the first quarter, an improvement of $1.4 million from Q4 of last year.

The sequential comparison to Q4 includes an unfavorable swing of approximately $900,000 from translation losses due to a stronger dollar in Q4 and a weaker dollar in Q1 compared to the peso. On Slide 15, I will present an update to the cost-reduction goals we disclosed in March.

We're pleased to report that we remain on track on our initiatives to drive an expected $26 million cost reduction over the next 2 years as compared to 2016. We still have some work ahead of us to bring these reductions across the finish line, but the outlook is positive.

In particular, the items related to the transition of operations at the Broadway Plant which carried the highest degree of risk among these initiatives. We're now scheduled to substantially complete the transition in May which is ahead of our initial date for this milestone.

Not only are we ahead from a timing standpoint, but the team has delivered better-than-expected performance on our key operating metrics during the transition period which speaks to the quality of the individuals that are being impacted by this change.

Over the coming weeks, we will continue to counsel and assist our employees on job placement opportunities as they transition away from Sypris, some of whom have decided to use this opportunity and the available assistance programs to pursue new skills or education and in certain cases, to make career changes.

Our goal is to help all employees impacted by these actions to secure employment and further their career. We greatly appreciate the many years of service to Sypris and offer our support to these outstanding employees as they move forward in the careers.

We have remained focused during this process on achieving our cost target and exceeding customer expectations and will continue to emphasize cost, quality and delivery throughout our business.

As we emerge from these changes and move forward into the second half of 2017, the lower fixed overhead structure and reduced SG&A spend provides us with a cost profile that is much more competitive in our pursuit of new business opportunity.

We're excited about the opportunity to turn the page and move forward with our [indiscernible] toward expanding our customer base and growing the business. On Slide 16, we highlight the significant improvement that has occurred since 2014 in customer concentration. In 2014, our 2 largest customers accounted for 75% of our consolidated revenue.

In 2017, we expect our 2 largest customers to account for only a 1/4 of consolidated revenue. No single customer is expected to account for more than 15% of revenue and the diversification of our customer base has improved in both segments of our business.

As Jeff noted in his comments on new program awards, we're pursuing and adding customers across our market and look forward to proving to these customers they made the right choice in partnering with Sypris and to building long term relationships that benefit both party.

On Slide 17, we show the impact our diversification efforts are having on revenue mix. In 2014, approximately 83% of our revenue was from our top 3 markets. But nearly 70% was attributable to the heavy truck market, primarily with the 2 large customers noted on the previous slide.

In 2017, we expect these same top 3 markets to account for 84% of revenue. So there isn't a significant change in the total, but please note the distribution of revenue is now more evenly balanced between the heavy truck, energy and aerospace and defense market.

With less dependence on the heavy truck market, we expect less volatility in our top line as the market cycles in heavy truck will not have the significant impact in future years that they've had in the past.

Similar to the comments made regarding growing our customer base, we're looking to grow markets such as the all-terrain and all powerway market in Sypris Technologies and the communication, navigation and medical device market in Sypris Electronics.

We will continue to support and grow our primary market, but are eager to expand into new markets and further grow our business. We believe our cost-reduction programs align with our growth objectives and that we can be very competitive as we expand or enter these markets.

On Slide 18, we look at the impact that change in our revenue mix and the cost reductions are expected to have on gross margin. In this comparison, we will again use 2014 as a benchmark, as it basically reflects the old Sypris with the customer and market concentration we just reviewed.

You might recall at the time, our annual revenue was over $350 million with approximately 70% generated from sales to the heavy truck market. We were able to generate gross margin in 2014 of just under 11%, with a cost structure and footprint that were significantly greater than today's level.

As we move to the second half of 2017, following the completion of the Broadway Plant transition, we're expecting to generate gross margin in the range of 15% to 17%, representing an increase in gross margin of nearly 50% as compared to 2014.

While revenue on an annualized basis is expected to be 75% less than it was in 2014, our cost profile -- our lower-cost profile and a more balanced revenue mix is expected to drive the increased margin performance.

As we look beyond 2017, we expect to leverage our lower-cost profile with the new business awards and follow-on business opportunities to create further margin expansion opportunity. Please advance to Slide 19 and I will offer a key takeaways.

Our first quarter operating results with revenue of $18.2 million and adjusted EBITDA of negative $1.1 million include the ongoing transition activities for our Broadway Plant. We're on track with our cost-reduction goals and expect to be substantially complete with the Broadway initiatives by the end of this month.

We're confirming the outlook for the first and second halves of 2017 discussed in March, with revenue in the first half in the range of $38 million to $40 million and gross margin in the range of 5% to 7%. Revenue in the second half is projected to be in the range of $40 million to $42 million, with gross margin increasing to a range of 15% to 17%.

This gross margin target for the second half is nearly 50% above the full year 2014 results on significantly lower volume. Our SG&A expense in the first quarter was down 47% year-over-year and 30% sequentially.

The diversification of our customers, markets and products continue to improve, as a more -- resulting in a more balanced portfolio for the company. We plan to leverage our lower-cost structure to improve our competitive position, as we pursue new business awards. And we expect this to yield significant margin expansion opportunities in the future.

We expect growth in 2018 and 2019 to be driven by our pipeline of business opportunities, including new programs awarded to Sypris and follow-on business on existing programs. The potential revenue from these opportunities totals over $20 million in 2018 and nearly $25 million in 2019.

We believe we now have a cost-competitive platform in both segments of our business that is well positioned for profitable growth and we look forward to capitalizing on this opportunity. This concludes our call today and at this time, I'd like to turn it back over to Amelia to answer any questions that you might have for us at this time. Thank you..

[Operator Instructions]. And we'll take our first question from Joel Cahill from Jameson Companies..

Really happy to say, nice to have a common thread from call-to-call and you guys have done a great job on the transition. So I applaud that. On revenue, we're talking a lot about incremental growth. And it sounds like, sales have been doing a great job in bringing in some new business. But we've just been talking about the incremental growth.

Should we be looking at this $40 million for this year as a baseline or some kind of -- at least in some capacity for '18 and '19, so that we could be looking at what basically growth aggregate revenue trajectory for the next couple of years?.

Yes, Joel. This is Tony. So the first half and second half are going to be somewhat consistent. We're looking at $38 million to $40 million and then ramping to $40 million to $42 million. With the new program awards and some of the opportunities that we're looking at for '18, we're hoping to build on that as we move forward.

We believe we have the opportunities, the pipeline and some of the business already in backlog to support growth in 2018..

Okay.

And you're forecasting profitability for the end of 2017 and I'm assuming -- can we assume that that's what you're also expecting for 2018? I mean, the idea that we really turned the corner here and off into better place and looking up instead of looking down kind of thing?.

Yes, sir. We expect the trend that we were building on in -- in the second half of 2017 to continue into next year..

Excellent. One thing -- one pledge that I appreciate that you've made or not pledge but plan is for cash to at least be stable quarter-to quarter. And this year, obviously, the cash -- this quarter cash is a little bit higher, but a lot of that is from payables increasing.

Is that largely just attributable to orders moving from -- or sales moving from Q1 to Q2?.

Yes, if you look at the other side, Joe, you'll see that inventory was also up. So it's kind of a net working capital growth there that occurred in Q1. So that was -- it was more related to the inventory than purely a timing issue..

Okay. And in the report that you put out last week for the annual meeting which was great, really appreciate that. You discussed a lot on that GAAP. This project over in Kazakhstan, is this something that you expect -- I mean, you're talking about a lot of new pipeline capacity that's going to be brought online and a lot of new projects.

Is there something that you're pursuing hard? Is there -- and how do we measure -- what kind of revenue comes out of it? Is that -- are you be able to look at it based on either capacity or length of the pipeline?.

Joe, this is Jeff. Let's see if I can answer your question. So simply, the opportunities that we described during the stockholders' meeting and going through the various projects were really meant to illustrate the growing activity, particularly on the natural gas transmission side. And we're seeing strength in the price of natural gas.

I think it's up fairly significantly over the past 6 months. And some analysts are forecasting that by the end of the year, maybe in the $4, $5 range. And so this is leading to a lot of capital expenditure to put these pipelines in place.

Internally, we tend to look at these projects more as the length of the pipeline and therefore, the number of closures and insulated joints and other types of components that we saw that might be used. So -- and in Kazakhstan which is a joint effort between Chevron and Tengiz is a huge project.

I think we identified it during the stockholder meeting as the total project is $37 billion and they are going full steam ahead. So that's been a very positive thing for us..

[Operator Instructions]. Gentlemen, it appears we have no more questions at this time..

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

Ladies and gentlemen, this concludes our conference for today. Thank you so much for your participation. You may now disconnect..