Jeffrey Gill - President and CEO Tony Allen - VP and CFO.

Joel Cahill - The Jameson Companies, Inc..

Good day and welcome everyone 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 conference over to President and Chief Executive Officer, Mr. Jeffrey Gill. Please go ahead, sir..

Thank you, Cecilia, 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 third 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 Web site 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 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 2018, when compared to the year 2016. Now let’s begin with an overview on Slide 4.

During the quarter, we continue to make important progress across a number of fronts with a financial results for the period were clearly mixed with Sypris Electronics continuing to perform well, while we stumbled a bit at Sypris technologies for the first time since we began our $26 million improvement plan.

More specifically, we are pleased to report that revenue for the quarter came in at $21.4 million, which was essentially equal to that of the prior year, but reflected solid growth at Sypris Electronics and within certain sectors of Sypris Technologies.

Sypris Electronics led the way with shipments during the quarter increasing almost 19% on a year-over-year basis, while gross margin increased almost 20 points to 16.8%, up from a loss of 3% during the prior year.

Gross margin on a consolidated basis improved 570 basis points to 3.1% for the quarter, up from a loss of 2.6% for the prior year period, but was well below our forecast for the quarter driven by some unexpected challenges we encountered at Sypris Technologies during the period.

In the aggregate, we missed our targeted gross profit by $2.6 million, the single largest impact of which was caused by our customers decision to delay the shipment of a large specialty pipeline component order which is now scheduled to ship in the fourth quarter of this year and during the first quarter of next year quarter.

The quarter was also impacted by expenses associated with the launch of new programs in Toluca as well as the completion of the rebuild of certain manufacturing assets needed to support the increased volume in Toluca, which was up nearly 70% sequentially from the second quarter.

We experienced lower than planned labor productivity during the period partly due to employee hiring and training costs and we incurred excess over time and utilized contract labor to fill skill gaps. We substantially reduce these costs beginning in October as our workforce stabilized and the equipment was return to operation.

Our progress for these initiatives enabled us to pull forward the closure of our Broadway plant, which is now scheduled to conclude production this month rather than to continue to operate on a limited basis through 2018. The savings associated with doing so are expected to be material both in terms of expenses and capital support.

The company's improved cost profile was evident in SG&A where our expenses were 41% lower than the prior year period, reflecting the divestiture of the CSS business and the results of our cost improvement initiatives. Our new business development efforts continued to make important progress during the quarter.

Turning to Slide 5, we recently announced the receipt of four new contracts with Harris Corporation for the manufacture of mission-critical electronic assemblies for two weather satellite programs, a missile warning system, and the US military weapon system.

We also executed an extension of our contract with Volvo/Mack for the production of axle shafts through the year 2021. Volvo is an important long-term customer and we are honored to serve as its supplier for these drivetrain components.

We are pleased to report that all major actions required to achieve our 2-year $26.3 million cost improvement target have been completed as of this month, which includes the ahead of plan closure of our Broadway plant.

Needless to say, the finalization of these activities represents a significant accomplishment for the company and we have many people to thank. Our teammates at the Broadway plant have done a fantastic job under very challenging circumstances. Year-to-date quality stands at just five PPMs, while on-time delivery exceeds 98%.

Our team in Toluca has been working around the clock to install equipment and otherwise prepare for production both for work being transferred from the Broadway plant, but also for those new programs that we’ve discussed during prior calls.

Even with this extra work burden, however, year-to-date metrics for quality and delivery for Toluca mirror those of the Broadway plant. We can now look forward to reaping the benefits of this hard work in the form of expanding margins through the balance of 2017 and into 2018 as the full-year impact of these savings are realized.

Thank you one and all. We are pleased to confirm our revenue guidance for the fourth quarter and to provide an initial outlook at revenue for 2018, during which period we expect to mark the return to top line growth for the company.

From a gross margin standpoint, we expect to report a substantial improvement in gross margin during the fourth quarter albeit lower than our prior guidance due to the issues we’ve discussed here this morning.

For 2018, the midpoint of our guidance is 16%, which reflects the benefits of our improved cost profile and the growth of the company's top line.

In summary, the combination of revenue growth, improved mix, and the significant reduction in our expense profile is expected to open-up a new great positive chapter in our journey here at Sypris with a return to profitability in 2018.

Now let’s turn to Slide 6 and take a moment to review the purpose and components of our transition plan one last time. As we discussed during previous calls, 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 capacity 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 a 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.

Turning to Slide 7, many of you will recall that during 2016 we generated $12 million of proceeds through the sale and lease back of our campus in Toluca Mexico which was less than 50% occupied.

We divested our CSS business for $42 million, which shown some very interesting groundbreaking technology but we clearly did not have the resources to realize its potential in a timely manner.

We use the proceeds from this transactions to eliminate 100% of our high cost commercial debt, which is resulted in a $5.5 million savings on interest expense and other debt related costs incurred during 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 costs.

We reduced salaried headcount by $2.7 million and initiated the transfer of certain foraging 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 have yet more to do.

Turning to Slide 8, I am pleased to report that we're currently on plan with regard to each of the remaining initiatives that we need to complete. We received the required approvals from Daimler and have launched production for this important customer.

We have entered into the contract extension with Volvo/Mack and expect to launch production during the upcoming months. We are 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.

The transition from the Broadway plant is now substantially complete with production scheduled to ramp up later this month. We will continue the orderly liquidation of idle and underutilized non-core assets as we proceed through the balance of the year.

We will also continue to relocate certain production assets to our Toluca plant to support future growth opportunities. 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 can continue to please our customers.

The coming quarters will serve as the measure of our progress and performance in this area. In summary, the transition plan was both ambitious and necessary. We now look forward to growing the business further and benefiting from substantially higher gross margins.

Advancing to Slide 9, I’d like to conclude this portion of our presentation this morning with the following observations. At Sypris Technologies, we 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 reassign these individuals to new locations to accelerate product development, improve production processes, and drive continuous improvement activities.

Moving to Slide 10, 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 customer's requirements.

This instance we've also greatly reduced fixed overhead and SG&A thereby substantially improving our margins, overhead rates, and competitiveness. And on a consolidated basis, we now have a cost competitive platform that is positioned for profitable growth. All major actions required to achieve our $26 million of savings have been completed.

Positive market conditions, recent multiyear program awards, and the anticipated follow-on business to those awards are expected to drive the growth of the company's top line during the coming years.

Our balance sheet is solid and our margins are expected to continue to expand materially in 2018 as a result of all the activities we’ve discussed here today.

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

Turning now to Slide 11, Tony Allen will lead you through the balance our presentation this morning.

Tony?.

Thanks, Jeff. Good morning everyone. I'd like to discuss with you some of the highlights of our third quarter financial results. Please advance to Slide 12. Q3 consolidated revenue closed at $21.4 million, which was consistent with the prior year period and keeps us on track for our second half of 2017 revenue target.

The revenue split between Sypris Technologies and Sypris Electronics was $13.5 million and $7.8 million, respectively. Revenue for Sypris Electronics increased by $1.2 million compared to the prior year third quarter which was offset by a decrease for Sypris Technologies of an equivalent amount.

Our gross profit for Q3 was $650,000 which represents a $1.2 million improvement over the prior year period. Sypris Electronics had another strong performance in Q3 with gross margin of 16.8% as compared to a negative 3% result in the prior year.

Consolidated gross margin for the quarter was 3.1%, which was an increase of 570 basis points from the prior year, but short of expectations as our revenue mix and cost were impacted by the transition of production within Sypris Technologies.

With the announcement to accelerate the end of production at our Broadway facility to November, coupled with the advancements our team in Toluca has made in the product launch for the transferred business, we expect equipment operational availability and labor productivity to begin to meet our targets in the fourth quarter and to further improve as we progress through 2018.

Selling, general and administrative expense was $3.1 million in Q3, a decline of $2.2 million from the prior year period and represents 14.7% of revenue in the current period as compared to 25.1% in the prior year.

Reductions across the business primarily related to the cost reduction program we’ve discussed contribute to this improvement and we are working diligently to continue to identify savings opportunities going forward to ensure we meet or exceed our goals.

The year-over-year improvement in gross profit combined with the reduction in SG&A result in the $3.5 million improvement in adjusted operating income from Q3, 2016. This measure of performance excludes the relocation and severance costs which totaled $0.4 million in the third quarter of 2017. Please advance to Slide 13.

Revenue for Sypris Electronics increased by $1.2 million or 18.8% to $7.8 million in the third quarter as compared to $6.6 million in the prior year. One of the key factors for the revenue growth was the ongoing production on one of our larger defense programs.

We work closely with our customer during the first quarter to troubleshoot and resolve certain technical issues associated with the integration of our product into the end users assembly and was able to increase production to a stable run rate by the end of the second quarter which continued into the third quarter.

Gross margin for Sypris Electronics improved to 16.8% for the third quarter compared to negative 2.6% in Q3 of 2016, an increase of 1,980 basis points. The increase in gross margin reflects the renewed focus by management on targeted markets following the sale of the CSS business 1-year ago.

The margin performance also reflects the significant change to the cost structure of the business, including the fixed overhead reductions driven by the relocation to a new facility as of the beginning of 2017.

As noted on the previous slide regarding SG&A spend versus the prior year, Sypris Electronics contributed materially to the overall reduction with a decrease of nearly 52% on a year-over-year basis.

Improved margins and lower SG&A spend contribute to the positive operating income for Sypris Electronics both for the third quarter and on a year-to-date basis.

The team in Tampa continues to build energy and momentum from their financial performance and that has maintained a healthy backlog to support expected shipments for the balance of this year and into 2018 together with the pipeline of opportunities to continue to grow the business. Please advance to Slide 14.

Revenue for Sypris Technologies decreased by $1.3 million or 8.4% to $13.5 million in the third quarter as compared to $14.8 million in the prior year period. One of the shortfalls in the quarter was the delay on a large energy product shipment, which was reduced to a partial shipment during the third quarter.

The remaining deliveries on this order are now expected to occur during the fourth quarter of 2017 and the first quarter of 2018. Although the shipment was partially delayed, the costs incurred for certain supplies, inspection and other outsourced services related to the order were charged to expense during the quarter.

We also experience more challenges than expected on the transfer of production to our Toluca operation. The product launch in Toluca continued during the quarter as well as completing the rebuild of certain manufacturing assets to support increased volumes which were up nearly 70% sequentially from the second quarter.

Our team rose to the occasion to overcome these challenges, but it was accompanied by a high price tag. The timing of the equipment rebuilds and the inefficiencies associated with increasing the direct labor workforce in Toluca meant that we had to produce higher-than-expected volumes at the Broadway plant.

The higher cost structure at Broadway combined with freight cost to transfer product between facilities contributed to the underperformance in gross margin.

Production levels for energy products which we produce in both Toluca and Louisville also increased, and we experienced lower than planned labor productivity in our operations during the quarter partly attributable to employee hiring and training cost. We further incurred excess overtime and utilized contract labor to fill skill gaps.

We substantially reduce these costs beginning in October as our workforce stabilized and the equipment return to operation.

With the recent announcement that production at our Broadway plant will end in November, we expect to begin to fully realize the benefit of the reduced cost structure in our Toluca operation and the additional freight costs will end.

The labor productivity and operational availability of our equipment in Toluca is expected to improve as we move beyond the launch phase and into a steady run rate. While the training of our workforce is a continuous process, we've progressed up the learning curve and the heavy lifting in this area should be behind us.

We have received customer approval on all parts scheduled for shipment in the near-term and the process to qualify parts with customers will continue in the normal course of business with our customers. On Slide 15, we provide an update to the cost reduction goals we discussed earlier this year.

Our 2-year cost reduction goal is $26.3 million for 2018 as compared to the actual results of 2016. In the pie chart we show the key elements of the cost reduction goal allocated in the amounts of $11.8 million for cost of sales, $9 million for SG&A, and $5.5 million for interest and charges for the extinguishment of debt.

The closing of the Broadway plant in November will move us closer toward our cost of sales goal and march the completion of the realignment in our operating footprint.

While the challenges and cost pressures we’ve discussed for Sypris Technologies in the second and third quarter of 2017 will impact our cost of sales targets for 2017, we expect to return to our targeted levels in 2018.

The lower [technical difficulty] resulting from the plant consolidation will drive the change primarily through lower employment costs and closing 450,000 square foot facility. Year-to-date SG&A expense is down $7 million in 2017 compared to 2016 and we expect further year-over-year reductions in the fourth quarter.

Following the repayment of our senior credit facilities a year-ago, our only debt obligation is the related party no payable and is the primary driver for the reduction in interest expense as compared to 2016.

All of the planned severance expense for the Broadway operation has been fully recognized as of the end of the third quarter and we expect to continue to incur equipment relocation costs through the balance of this year and into 2018.

The major actions necessary to drive our cost improvement goals are now behind us which leaves us well positioned to meet the 2-year cost reduction target for our business. Please advance to Slide 16.

Revenue for Q4 is expected to be in the range of $20 million to $22 million, which when combined with Q3's results is consistent with our prior guidance. We are expecting modest growth from our second half 2017 revenue run rate and are now guiding toward $86 million to $92 million in 2018.

We are lowering our expectation for gross margin in Q4 to 10% to 12% of revenue. The performance of Q3 is expected to incrementally improve as we progress through Q4, but we recognize the operational actions will take longer than initially planned to flow-through in our financial results.

We also expect our revenue mix to improve in Q4, which will help offset some of the manufacturing inefficiencies.

The major investments in capital and additional equipment -- and additional headcount to facilitate the transfer of production were completed in Q3, leaving us in a good position to continue to meet our customer delivery commitments and improve our profitability.

We expect to return to the previously announced range of 15% to 17% for gross margin in 2018. We don't expect the incremental costs incurred in 2017 to be repeated and feel that we have the correct initiatives in place to achieve the targets we established earlier this year.

Our SG&A expense as a percent of revenue is expected to stay within the range previously discussed for Q4 and we expect further improvements in 2018. We believe our team is well-positioned to meet these targets and report a return to profitability on a consolidated basis during the first half of 2018.

On Slide 17, we highlight significant improvement that has occurred since 2014 in customer concentration. In 2014, our two largest customers accounted for 75% of our consolidated revenue. In 2017, we expect our two largest customers to account for approximately 27% 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. On Slide 18, we show the impact our diversification efforts are having on revenue mix.

In 2014, approximately 83% of our revenue was from our top three markets served, but nearly 70% of revenue was attributable to the heavy truck market primarily with the two large customers noted on the previous slide.

In 2017, we expect the same three top markets to account for approximately 86% of revenue with the distribution more evenly balanced between the heavy truck, energy, and aerospace and defense markets. We now have considerably less dependence on the heavy truck market and have plans to expand in the 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. Please advance to Slide 19.

This chart provides an overview of the journey we started in 2015 by looking at gross margin over the past three years as compared to our results for the first three quarters of 2017, and our expected performance in Q4 and for the full-year 2018.

Our annual revenue in 2014 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 the cost structure and footprint that were significantly greater than today's levels.

During 2015 and 2016, we completed a number of transition activities including the divestiture of assets and the consolidation of operations for both segments into smaller more cost competitive footprints.

Gross margin improved considerably from the first quarter to the second quarter of 2017 as improved revenue mix and a lower cost structure contributed to drive gross margin up to 7.5%. We encountered our first major setback in Q3 with the issues previously discussed for Sypris Technologies overshadowing the positive performance of Sypris Electronics.

We expect that setback to be temporary, but have -- but with some impact to continue in Q4, and therefore lowered our gross margin range to 10% to 12% for the quarter but are expecting to return to the range of 15% to 17% in 2018 representing an increase in gross margin of nearly 50% as compared to 2014.

Please advance to Slide 20 and I will wrap-up with some key takeaways. Our revenue for the third quarter at $21.4 million was consistent with the prior year, while gross margin improved by 570 basis points. SG&A expense is down $7 million year-to-date compared to 2016 representing a 41% year-over-year decline.

We experienced our first major setback in the third quarter that changed our planned production mix between facilities and we incurred additional costs for labor, freight, outsourced services and product inspection among others. These issues were addressed during Q3 and we expect that they will have been substantially resolved during November.

In addition, we’ve announced that the end of production in our Broadway facility has been accelerated to November which completes the production transition process and allows us to move forward and begin realizing the associated cost savings.

We've completed the major actions that were identified to drive our 2-year $26.3 million cost improvement target. Revenue in the fourth quarter is projected to be in the range of $20 million to $22 million with gross margin in the range of 10% to 12%.

Revenue in 2018 is projected to be in the range of $86 million to $92 million with gross margin in the range of 15% to 17%.

The diversification of our customers, markets, and products continues to improve resulting in a more balanced portfolio for the company and 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.

With the challenges faced in Q3 and our revised outlook for Q4, we now expect to return to profitability in the first half 2018. This concludes our call today and at this time I'd like to turn it back over to Cecilia to answer any questions you might have for us. Thank you..

Thank you. [Operator Instructions] And we will take our first question from Joel Cahill of The Jameson Companies..

Hey, guys..

Hi, Joe..

Thanks for the call..

Good morning, Joe..

So, obviously we’ve some disappointments from last quarter, we are talking about profitability in the second half of this year and now we’re pushing that out to kind of midyear next year. What is that’s getting you guys excited at this point? It sounds like energy, despite this delivery delay, I mean, energy continuing to move along well.

Obviously, the Harris stuff is nice and with the -- I’m assuming with the kind of tight revenue forecast for next year you’re feeling confident on existing and potentially some new projects?.

Joe, this is Jeff. An answer to your question, the first point with regard to the shift in our return to profitability from the latter part of this year to the first part of next year, really reflects the realization of the transition costs that that we’ve had to incur to get things completed.

And so, in terms of outlook for our markets, in terms of our backlog, in terms of our new customer awards, all of those things are proceeding in a very positive way.

When we look at the energy field, things have been very positive for us in that aspect and as we look forward with the price stability ranging between $55 and $60 of oil with the continued production of Shale and natural gas, it's a very interesting field for us. In electronics, we've got some great momentum there.

The guys, our team in electronics is doing a magnificent job. And in the heavy truck market, in 2018, we will be launching a number of the new programs that we’ve talked about during previous calls that should carry growth in that side of the business through the back half of '18 and into '19.

So with the wrap-up of all the major moves, as you may recall with this early closure of Broadway, which was originally anticipated to operate through 2018 will now have reduced our overall footprint by over a million square feet and the cost saving is significant..

Do you expect -- we're talking about -- end of quarter cash balance is staying pretty stable and it looks like there has been a little bit of deterioration probably I’m assuming some of that could be from this -- the energy delivery delay given that you’ve taken a lot of the cost, recognize a lot of the costs.

Do you expect that going forward we will be able to maintain cash balances around these levels are better?.

Yes, what we -- you’re right on your comment on the shipments and further what we're coming out of is an investment in some of the inventory to support the transition that we’ve been going through.

So, yes, we expect to see that improve as we move through Q4 and that we will be certainly doing everything we can looking for other opportunities outside of operations to drive cash flow..

The -- do you have any estimate on how much cash to be generated from some of these idle assets that you’re looking to sell?.

Yes, we do, Joe. But I think that the timing of that is always subject to the market and those types of things. So we haven't talked about that publicly, but the potential I think is fairly material, certainly in low seven-figures type thing..

Okay. And on -- we are talking about gross margins been 15% to 17% range, on about $90 million. A lot of that still is going to get eaten up by SG&A.

Do you have any thoughts on ways to continue to improve from there? I mean, I know we’re talking about profitability for next -- coming the next year, but while the margin -- the gross margin expansion is great, it's awesome and I certainly applaud it, it is going to get quickly eaten up, it still looks like..

Yes.

So we’re, as discussed during the call, we’re down considerably on an year-over-year basis from '16 to '17, and we do believe in both absolute dollars certainly and as a percent of revenue, and we believe that going into '18 now, we will have more opportunities to drive that relationship, that metric down going forward to contribute to the profitability as you point out.

With the margins of 15% to 17%, we're looking for opportunities to further reduce SG&A..

And my final one guys, I appreciate your help.

As cash is stable and losses are removed, do you have thoughts on uses for that cash whether it would be for reinvestment, potentially paying down just family's note or potentially any buybacks?.

Well, our plans, Joe, at this point are to build the business and we need to grow the business to get the level of profitability where it really needs to be. And so our plans would be to try to beat the objectives that we’ve laid out for our sales for 2018..

All right. Thank you, guys. I appreciate your time this morning. That’s all I have..

Yes, thank you. Yes..

[Operator Instructions] And with no further questions in queue, I’d like to turn the conference back over to Mr. Jeffrey Gill for any additional or closing remarks..

End of Q&A:.

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

Again that does conclude today’s conference ladies and gentlemen. We appreciate everyone's participation today. You may now disconnect..