Good day and welcome to the Sypris Solutions Inc., Conference Call. 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. Jeff Gill. Please go ahead sir..

Thank you, Aaron, 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 fourth quarter of 2018. 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 www.sypris.com to review the definitions of any non-GAAP financial measures that may be discussed during this call.

With these qualifications in mind, we'd now like to proceed with the business discussion. Please advance to Slide 3. I will lead you through the first half of our presentation this morning, starting with an overview of the highlights this quarter to be followed by an update on the outlook for each of our primary markets.

Tony will then provide you with a more detailed review of our financial results for the quarter and year as well as walk you through our financial guidance for 2019. Now, let's begin with the overview on Slide 4.

Revenue for the fourth quarter increased 11.5% to $24 million on a year-over-year basis and was up 13.5% on a sequential basis from the third quarter of 2018.

Sales in our automotive and commercial vehicle business increased 20% on a year-over-year basis, while shipments to our electronics customers increased by 26% when compared to the fourth quarter of 2018 and increased by 41% sequentially.

Sales in our energy business were constrained during the quarter by late material deliveries and inventory rebalancing by certain customers at year end, but still increased by 22% on a sequential basis from the third quarter of 2018. Our backlog remained strong system wide providing important support for our growth objectives for 2019.

Gross margin for the quarter was 5.9% up slightly on a sequential basis, but down from the prior year quarter due to certain year-end and non-cash charges that we recognized in Sypris Electronics.

More specifically, gross margin for Sypris Technologies expanded to 14.3% for the quarter up from 11.3% for the prior year period and up from 8.9% sequentially. The improvement was driven by operational efficiencies that more than compensate for a less favorable mix of shipments when compared to last year.

Gross margin for Sypris Electronics was impacted by labor inefficiencies, engineering support costs and inventory adjustments. Tony will provide you with a more detailed review of these items shortly.

In short, demand in each of our markets continued to be positive during the quarter providing the company with a solid foundation for further growth and margin expansion during 2019. Turning now to Slide 5, let's take a look at the full year results.

Revenue for the year increased almost 7% to $88 million during 2018 driven by a 9% increase at Sypris Technologies, 0.7% increase in Sypris Electronics. Within Sypris Technologies, sales to our automotive and commercial vehicle customers grew by 19%. Our shipments to our energy-related customers expanded by 4.1%.

The completion of a contract at the end of 2017 accounts for the balance of the difference in the year-over-year growth for Sypris Technologies. Gross margin for the company more than doubled during 2018 increasing to 8.6% for the year.

Sypris Technologies led the way with gross margin expanding to 12.6% for 2018 up from 1.4% during 2017, which reflected the positive impact of the consolidation initiatives that were completed at the end of 2017. Gross margin for Sypris Electronics was substantially impacted by the items we discussed a moment ago.

Importantly, we believe that these issues are now substantially behind us and we are looking forward to a year of positive performance for the coming year. The company's SG&A expense fell to 14.1% of revenue for the year down from 15.9% for 2017, excluding the impact of a favorable settlement of a legal fee during the fourth quarter of 2018.

Operating income for the company improved by $7.9 million in 2018, when compared to the prior year driven by a $10.3 million improvement in Sypris Technologies. Turning now to Slide 6; North American demand for heavy duty trucks reached an all time high during 2018, driven by strong freight growth, tight capacity and an expanding economy.

Looking forward backlogs at most OEMs are extending out 12 months or more, while production levels appear to have stabilized at rates that are supportable by the supply chain. Both ACT and FTR issued a positive outlook for 2019.

We believe that stabilization demand at these high volumes will prove to be very good for the industry including suppliers like Sypris. With labor now trained and in place new productive capacity online and with demand operating within a narrow weekly bandwidth cost should continue to decline materially.

We are no longer operating certain equipment during peak utility demand periods, which will have a significant impact on our future charges for electricity. We have increased the use of automation on certain of our manufacturing cells thereby increasing output and improving quality and reliability.

Much work remains but we are looking forward to much improved results going forward. As we mentioned back in November, we entered into a new set of supply agreements during the quarter with Sisamex, the Monterrey -based joint venture of Meritor and Grupo Quimmco.

The agreements number three in total and cover a range of products used in the drive lines for commercial, agricultural and all terrain vehicles.

The agreement covering axle shafts and knuckles represents renewal of an existing contract, while the addition of input shafts, transmission shafts and other products will form a new layer of business for Sypris beginning in 2019.

The North American automotive market remains solid for Sypris where our participation is focused on supplying products for a variety of specialty vehicles.

As we enter 2019, we expect new program launches in the automotive, all terrain, agricultural, off highway and refrigeration markets to further diversify our portfolio of business and support top-line growth in 2019 and beyond.

And when combined with our expanding oil and natural gas business, our customer and market profile starts to take on a very different look from that of just a few years back. Turning now to Slide 7, as we discussed during our last call, demand for oil and natural gas thereby supporting the forecast that the U.S.

will become a net exporter of energy within the next four to five years. The conversion of power generation used to natural gas as well as the construction of pipelines and LNG terminals to support export activities is also serving to bolster the market outlook.

Production in the Permian Basin continues to outpace current pipeline capacity, while the growth in pipeline gathering systems and the ageing of existing transportation infrastructure bodes well for this future demand of the company's closures, insulated joints and other such products.

Energy futures have been fluctuating recently with the price of oil rising and falling based on a range of changing assumptions. In our view, an expanding economy will require an increase in energy consumption. Our order boards remain robust, which would seem to support this contention.

As I mentioned a moment ago, we are working to resolve a series of supply chain and production issues that resulted in lower shipments during the quarter than was originally planned. We now expect these orders to be shipped during the first quarter.

Turning to Slide 8, as we discussed during our prior call, Department of Defense spending continues to increase in a positive manner. These positive market conditions when combined with the contract awards and our lower cost profile provides us with a solid base for optimism when looking forward.

During our last call, we mentioned that we've made significant progress in securing the electronic components that were necessary to meet our production schedules. Several large customers have joined with us to secure a long lead items and to place firm purchase orders with vendors to make certain that we receive this material.

We are pleased to report that we continue to make progress though it will take some time before material deliveries are completely back to normal. We currently expect to incur some delays in shipments during the first quarter of 2019 due to late material receipts and the delays in receipt of customer contract approvals.

We fully expect these issues to be substantially resolved during the quarter with full shipments resuming in the second quarter of 2019.

Turning now to Slide 9, as we resolve these issues, we expect for Sypris Technologies and Sypris Electronics to be solidly profitable for the coming year reflecting the benefits of top-line growth, improved mix and growing operational efficiencies.

Our outlook for 2019 forecast revenue growth of 19% for the year would compare to 2018 with new program launches during the second half of the year adding further momentum. From a gross margin standpoint, we are targeting to be in the range of 14% to 16% of revenue with both business segments registering solid profitability.

Turning now to Slide 10, Tony Allen will lead you through 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 fourth quarter and full year 2018 financial results. Please advance to Slide 11. Q4 consolidated revenue closed at $24 million, an increase of $2.5 million over the prior year period and at the lower end of our Q4 revenue target.

The revenue split between Sypris Technologies and Sypris Electronics was $15.1 million, an $8.8 million respectively. Both segments reported an increase over the prior year fourth quarter with Sypris Technologies up $600,000; the Sypris Electronics up $1.9 million.

With the fourth quarter increase, Sypris Technologies closed out 2018 with revenue growth in each quarterly period over the prior year, which reflects favorable market conditions during the year and price increases on certain programs. Our gross profit for Q4 was $1.4 million, which was just below the $1.5 million reported in the prior year period.

This was well short of our expectations as an improvement for Sypris Technologies during the fourth quarter was offset by a reduction for Sypris Electronics during the period. Consolidated gross margin for the quarter a 5.9% was 110 basis points below the prior year.

Margins for Sypris Technologies rebounded sequentially from the third quarter of 2018 to 14.3% which was 300 basis points above the prior year period.

The results for Sypris Technologies reflect operational improvements to drive labor productivity higher and controls over spend and consumption in our variable cost line items to increase profitability and cash flow. The disappointment for the quarter was with the performance of Sypris Electronics.

We encountered challenges on two programs during the quarter that had greater than expected impacts on profitability. The first was the ramp up on a new program on which we initially experienced some constraints due to material availability.

As we resolved these constraints and increased production rates, our manufacturing processes required higher levels of engineering resources to achieve a steady rate of production flow from our STM line through the final inspection of the board's.

The second program was an engineering manufacturing development program that was started in 2018 and substantially completed during the fourth quarter which involved a number of design and material component changes, which contributed to labor, inefficiencies and engineering support costs in excess of plan levels.

Shipments on this program were complete during the first quarter of '19. Gross profit for Sypris Electronics was further impacted in the fourth quarter by $400,000 fiscal inventory adjustment, an additional excess and obsolete inventory reserves of $0.5 million.

Selling, general and administrative expense was $1.2 million in Q4, a decline of [$1.7 million] [ph] from the prior year period. Including an SG&A expense during the period was a benefit from the resolution of an outstanding disputed legal fee.

The agreement resulted in at $1.9 million reduction to SG&A in the period as the liability carried on the books was reduced to reflect the net present value of the payments set forth in the agreement.

Excluding the impact of the legal fee resolution, SG&A was $3.1 million or 12.9% of revenue in the current period as compared to $3 million or 13.7% in the prior year. Adjusted operating income for the fourth quarter of $200,000 also includes the benefit of the legal fee resolution.

Excluding this adjustment, we would have been down approximately 250,000 compared to the prior year. This metric also excludes the asset relocation and mothball costs for the Broadway facility, which totaled $300,000 and $100,000 in the fourth quarters of 2018 and 2017 respectively.

Please advance to Slide 12, full year consolidated revenue closed at $88 million, an increase of $5.7 million from the prior year. The revenue split between Sypris Technologies and Sypris Electronics was $59.8 million and $28.2 million respectively.

Revenue for Sypris Technologies increased by $4.9 million, Sypris Electronics increased by $800,000 from 2017. Our gross profit for 2018 was $7.6 million which represents a $4.2 million improvement over the prior year.

Gross profit for Sypris Technologies improved $6.8 million over 2017, which was offset by a decline for Sypris Electronics of $2.5 million. Consolidated gross margin for 2018 of 8.6% was an increase of 460 basis points over the prior year.

Sypris Technologies reported double-digit gross margin and three of the four quarters for 2018 and ended the full year with a gross margin of 12.6%. The quarterly margin performance also translated into positive adjusted operating income for Sypris Technologies in each of the four quarters of 2018.

Not a small accomplishment considering that road this segment has traveled since 2014. The team is energized and feels positive momentum and continuing to build with our continuous improvement initiatives which are anticipated to contribute to further margin expansion in 2019. Sypris Electronics ended 2018 with gross margin just above breakeven.

The operating results clearly fell below our expectations as component shortages throughout the year were compounded by the unfavorable results in the fourth quarter.

The efforts to reverse this trend and performance are underway, but will take time as management completes the implementation and rollout of a new ERP system in the first quarter and new program launches are expected to continue into the early third quarter of 2019.

Selling, general and administrative expense was $10.5 million for 2018, a decline of $2.6 million from the prior year period. Excluding the impact of the legal settlement, SG&A in 2018 was $12.4 million, which represented 14.1% of revenue as compared to $13.1 million or 15.9% of revenue in 2017.

We expect to continue to control SG&A spend in 2019 and pursue opportunities to further drive reductions as a percent of revenue. The year-over-year improvement in gross profit combined with a reduction in SG&A resulted in a $6.9 million improvement in adjusted operating income over 2017.

Excluding the adjustment for the legal fee resolution, adjusted operating income increased $5 million over 2017. This metric excludes the relocation, severance and other costs, which totaled $1.4 million in 2018 and $2.4 million in 2017.

Please advance to Slide 13, revenue for 2019 is expected to be in the range of $100 million to $110 million with gross margin coming in between 14% to 16%.

Our revenue outlook is based on a forecast that includes favorable market conditions continuing in 2019 for the automotive, heavy truck and energy markets, new programs expected to launch within Sypris Technologies in 2019 as well as the order backlog and anticipated program launches for Sypris Electronics.

We anticipate our margin performance will improve mix as compared to the outlook for the back half of the year. Additionally the CI initiatives for Sypris Technologies are forecast to reduce costs incrementally throughout the year, which would contribute to the sequential improvement in margin performance from the first half to the second half.

We expect SG&A expense as a percent of revenue to finish within 11% to 13% for the full year 2019 with relatively flat spend levels as compared to 2018 as a major cost reduction actions identified in 2016 are now complete.

We believe our team is well positioned to meet these targets and report a return to profitability on a consolidated basis for 2019. Please advance to Slide 14. This slide provides a view of consolidated revenue and gross margin performance for the three most recent years and our outlook for 2019 based on the midpoint of the range we just discussed.

We are forecasting revenue to increase 19% at the midpoint of the range for 2019 and to drive revenue above the level achieved in 2016. We have a number of new programs that are forecasted to contribute to this growth in both segments of our business.

There was a considerable amount of activity for certain of the new programs for Sypris Technologies in 2018 to build prototypes and work through the product and process development phase in preparation for final product certification with our customers.

Our forecast considers the visibility we have on the start of production dates for these programs in 2019 which align with our customer requirements. We increased production during the fourth quarter on a new program for Sypris Electronics that is forecast to continue throughout 2019.

Additionally, we expect to finalize negotiations on two other key programs on which customer delivery schedules are anticipated to require shipments to begin in the second and third quarters of 2019.

We received funding from the customer during the second half of 2018 to purchase material in advance from one of these programs in order to meet the anticipated delivery schedule beginning in Q2. As in both 2017 and 2018, we expect our shipment volume during Q1 of 2019 for Sypris Electronics to be the lowest quarter for the year.

We anticipate the first quarter will be further impacted as certain shipments were pulled forward into the fourth quarter in anticipation of our system implementation in Q1. The lower expected volumes in Q1 are reflected in our outlook as we guide to sequential improvements from the first half to the second half of the year.

The midpoint of our gross margin outlook is 15% for 2019, which compares favorably to the trend line of gross margin over the past three years. The additional volume we expect in 2019 plays a role in this improvement. However, the operational improvements over which we have control are a top priority for our management team.

Included in the annual operating plan, we took to our board for the year are a number of initiatives to improve profitability a few of which are noted under our margin chart. Our CI team is implementing actions to increase labor productivity and improved product flow through our operations.

Our supply chain teams have specific initiatives underway to drive material cost reductions and to leverage internal and external resources to reduce the cost and consumption of tools and supplies. We recognize that material and design changes are an inherent element of our business for Sypris Electronics.

And we expect to more efficiently manage these changes during 2019, which will include improved communications with our customers at all levels in the organization and improving our documentation and the utilization of data as a service to add value for our customers. Please advance to Slide 15 for a brief summary.

Our revenue for the fourth quarter was $24 million, an increase of $2.5 million or 11.5% from the prior year. Revenue for the full year was $88 million, an increase of $5.7 million or 6.9% from the prior year. Gross profit for 2018 was $7.6 million or 8.6% of revenue compared to $3.3 million or 4% of revenue for 2017.

Sypris Technologies reported full year revenue of $59.8 million, gross margin of 12.6% in its fifth consecutive quarter of positive adjusted operating income. SG&A expense for 2018 excluding the legal fee resolution benefit recognized in Q4 was $12.4 million or 14.1% of revenue down from $13.1 million or 15.9% of revenue in 2017.

Our revenue outlook for 2019 is between $100 million and $110 million and our forecast for gross margin as in the range of 14% to 16% percent for 2019, with sequential improvement expected from the first half to the second half.

In closing, we appreciate your continued interest and support of our business and we look forward to reporting getting back to you as we continue along the path of our targeted return to profitability for 2019. This concludes our call today. And at this time, I'd like to turn it back over to Aaron to answer any questions you might have for us.

Thank you..

Thank you, gentlemen. [Operator Instructions] We'll go first to Jim Ricchiuti with Needham & Company..

Hi. Good morning..

Good morning, Jim..

Good morning, Jim..

It sounds like in Sypris Technologies you had to -- you potentially could have shipped a little bit more product into the energy market.

And I'm wondering if there is -- if you can quantify that? And I assume that you expect to see a pickup in that area in Q1, it sounds like?.

Yes, Jim. That would be correct. We do expect to catch up with those shipments that were missed in Q4..

Any way you are sizing it, Jeff? And I assume that also it would - that being higher margin business looks like your margins could have even been a little bit better in the ST business as good as they were..

You bet. I think we're looking at something of a neighborhood of three quarters of million dollars type of thing that held up in Q4. And certainly, this is the highest mix business that we have in terms of margins. So yes, you're correct..

Okay. And then just looking at the Q1, it sounds like there are some puts and takes with respect to some of the shipment delays on the electronic side of the business, and then, this pickup that you're seeing in other areas including the energy market.

In the past, we've seen a sequential decline in rent revenues in the -- I guess mid high single-digit sequential decline from Q4 to Q1.

Is that the way we should think about the year potentially starting for you guys?.

Is your question, Jim, specific to the electronics segment or are you looking overall?.

No, Tony. I'm sorry, I should have been a little clearer. No, I'm talking about the business overall. I mean it does sound like there's some puts and takes in both business segments in Q1.

And I'm just wondering, if we look at the business as a whole, should we see the same kind of seasonality that we've seen in past years or is where we see that kind of sequential decline from Q4 to Q1. Sorry..

Yes. I think overall that's a fair assessment because what we've talked about is that the electronics business, this will drop off. It will be again as we pointed out that the lower quarter for the year. But we see a little strength on the technology side. So, you will see that kind of reduction sequentially from Q4 to Q1..

Okay. That's helpful. I'll jump back in the queue. Thank you..

Okay. Thanks..

[Operator Instructions] We'll go next to Joel Cahill with the Jameson Companies. .

Good morning, Jeff and Tony..

Good morning, Joel..

Good morning, Joel..

Hi, guys. Thanks for the call. Can we just talk a little bit on the profitability then we've got kind of within a hair of a flat line at the -- in Q4, talking a hundred plus revenue for this year.

How do you anticipate that profitability playing out as we go quarter-to-quarter Jim was just talking about sequential decline or just that the expected decline in revenues for Q1? But what's our outlook for the year on profitability? And then, really what kind of cash do we -- can we produce out of that?.

For the year, Joel, I think that what we would -- what we're laying out is the margins that we see are in our 14% to 16% range. Our G&A is coming in 11% to 13%. That'll put us overall for the year in a profitable position. I think for the year on a cash basis those numbers we expect to be cash flow positive.

From operations we’ll have say a normal amount of capital expenditures somewhere in the, I'll call it 3 plus percent of revenue. We're still working on asset divestitures. We're not sure where that number is going to come out and the timing of that.

So there are different variables in play, but overall, we're looking at a profitable year and for the year -- full year positive cash flow..

And on the SG&A side that 11% to 13%, are you able to get more clarity into this year already, so that that can stay kind of at or below that ceiling?.

Yes. I think that we don't expect a lot of variability there in terms of the SG&A movement. I mean we had the thing in the fourth quarter of this year that we're not going to see that kind of blip again. But, I think the numbers that we have out for '19, we should stay within that range..

And then, you mentioned a couple of deals that you're working toward, this revenue range of 100 to 110 would potentially be affected if these deals that are in the works to become -- are come favorably or would that be a 2020 opportunity?.

No. Some of these do affect our '19 numbers. So things we need to close out on these opportunities and begin shipment on these opportunities. So some of that's baked into '19. It would have -- these are longer term programs, so it would have incremental impact in '20 over '19. But they are included in our numbers for '19..

Okay. Thanks guys. That's all I have for now..

Thank you..

And we'll take a follow up from Jim Ricchiuti with Needham & Company..

Jeff, I was wondering if there's any way to give us some flavor as to the incremental potential from that long-term agreement on the Sisamex portion of the business. It sounds like there is some incremental revenue that you're expecting.

And I'm just wondering how we should think about that either this year or looking out to next year?.

As we look at that part of the business, Jim, we're actually launching seven programs this year that will contribute incrementally to 2019. And then, provide additional full year lift in 2020. And I think if you are looking in the neighborhood of something in the range of 10% to 15% for 2019 that would probably be a good range..

Okay. That's helpful. I'm surprised to hear that at least, it sounds like you're hearing from your customers in the automotive area to expect demand to remain fairly solid.

I understand the strength in the -- I think the commercial vehicle market, but I'm a little surprised that your customers sound is relatively optimistic on the auto side of the business. Just in light of what we're seeing in some of the headlines about the weakness in the market..

We're not big in automotive and where we do play and where we'll be playing a larger role in the future is more in specialty vehicle. And so I don't think that's the subject to the normal cyclicality of the broader market..

Got it. Okay. That makes sense. And just with respect to the data that you're seeing on the Class A market and what you're hearing from your customers. Looks like you've got pretty good visibility looking out over the course of the year.

Is that a fair way to characterize it?.

Yes. I mean to put it in perspective, one of our customers who has the largest market share in North America has said that even after cleansing their order book to try to get rid of place holders is that their entire backlog is filled for 2019. And so, any orders they are taking now are really for 2020..

Got it. Great. Thank you. Good luck on the year..

Yes. Thank you..

And with no further questions in queue, Mr. Gill, Mr. Allen, I would like to turn it back to you gentlemen for any additional or closing remarks..

Okay. Thank you, Aaron. Tony and I like to thank you for joining us for the call and certainly welcome your continued interest, and of course, your questions about our business. So, we thank you and hope you have a great day..

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect..