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

Thank you, Audra, 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 second quarter of 2019. 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'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 for the 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 as well as walk you through our financial guidance for 2019. Now, let's begin with the overview on Slide 4.

We were pleased to report that revenue for the second quarter of 2019 increased 6.4% to $24.4 million and was up almost 25% sequentially due to the recovery of shipments during the period from Sypris Electronics which as many of you may recall have been impacted by a shortage of electronic components earlier this year.

Sales to Sypris Technologies increased 10% on a year-over-year basis reflecting the positive environment for our commercial vehicle, automotive and energy markets.

Sales in our energy business in particular continued to expand on a year-over-year basis reflecting the positive combination of a strong backlog and improved supply chain delivery performance.

Sales to our electronics customers were even with the prior year period but increased to 121% on a sequential basis as shipments rose to $7.6 million during the quarter. Gross margin for the quarter increased to 16.3% up from 12.8% last year and up from 4.4% for the first quarter of this year driven by positive performances in each of businesses.

More specifically gross profit for Sypris Technologies increased 53.5% from second quarter of 2018 and rose 28.6% sequentially from the first quarter of this year. Gross margin for Sypris Technologies increased 500 basis points on year-over-year basis to 17.6% for the quarter and increased 330 basis points sequentially.

Operating margin increased significantly during the period rising to 9% of sales compared to 2.4% for the second quarter of last year.

Looking forward, we expect margins for Sypris Technologies to expand further reflecting the positive impact of a solid topline and a reduction in the cost we have incurred to support the launch of several new programs.

Gross profit for Sypris Electronics was even with that of last year, but increased by $2.5 million sequentially as shipments return to much higher levels during the quarter. Gross margin for Sypris Electronics increased 50 basis points during the period to 13.6%.

With our solid backlog the commencement of shipments under our new contract and improved component availability, we expect margins for Sypris Electronics to continue to expand as we move through the balance of 2019. The company reported earnings of $0.07 per share which represented a 75% increase from the prior year period of $0.04 per share.

The earnings for the quarter reflected the company's return to a positive operating margin, as well as the gain from a favorable contract settlement with the customer.

And finally, orders remain strong during the period with bookings for our energy products increasing 58% during the quarter while orders for Sypris Electronics reached their highest level in several years. As a result the backlog for Sypris increased 46% on a year-over-year basis and 42% sequentially.

Turning now to Slide 5, North American demand for heavy duty trucks reached an all-time high during 2018 driven by strong freight growth type capacity and an expanding economy. Looking forward build slots of most OEMs appear to be sold out for 2019 with any new orders being place today scheduled for production in 2020.

Customer demand is forecast to remain at or near current levels through the balance of the year before returning to historical norms in 2020. 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 move into the second half of 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 topline growth in 2019 and beyond.

And when combined with our expanding oil and natural gas business, our customer and market profiles begin to take on a very different look from that of just a few years back As we discussed during previous calls, demand for oil and natural gas continues to outpace domestic consumption thereby supporting the forecast that the U.S.

will become a net exporter of energy within the next year. The conversion of power generation 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 aging of existing transportation infrastructure bodes well for the future demand of the company's closures, insulated joints and other such products.

The 58% growth in our order boards during the second quarter reflected the result of these markets dynamics both domestically and internationally. Turning to Slide 6, as we discussed during our prior call Department of Defense spending continues to increase in an encouraging manner.

These positive market conditions when, combined with recent contracts 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 long lead items and to place firm purchase orders with vendors to make certain that we received this material. As we discussed at that time, we had expected to incur some delays in shipments during the first quarter of this year due to late material receipts and contract approvals.

These issues have been substantially resolved and we are now working to make certain that we have the components available to support shipments scheduled for later this year.

On a commercial front, bidding activity remains robust both with regards the number of potential new programs as well as the size and length of production terms with some budgeted to run five years or longer. The 200% increase in bookings on both the year-over-year and sequential basis reflect a positive momentum that is taking place.

It’s worth noting that roughly 40% of the orders placed during the quarter are scheduled for shipment during 2019 with another 40% slotted for 2020 and the remaining 20% for delivery during 2021.

Turning now to Slide 7, the combination of new contract awards, growing backlog, positive market conditions and lower costs provide us with a strong sense of opportunities we look to the future.

As we continue to make progress and address any remaining material supply issues, we expect both Sypris Technologies and Sypris Electronics to be profitable going forward, reflecting the benefits of top line growth ,improved mix and growing operational efficiencies.

The midpoint of our outlook for 2019 forecast revenue growth of 14% for the year when compared to 2018 with new program launches during the second half of the year adding further momentum.

From a gross margin standpoint, we're targeting to be in the range of 14% -- 16% of revenue for the year with both business segments posting solid margin growth during the second half of 2019. Material availability will remain a focus, but otherwise, the table is set for very positive year. We simply need to make it happen.

Therefore execution will continue to be our watchword as we move forward through 2019. We have much work left to do, but we are looking forward to the challenge of this new chapter in our journey. Turning now to Slide 8, Tony Allen will lead you to the balance of our presentation this morning.

Tony?.

Thank you, Jeff. Good morning, everyone. I would like to discuss with you some of the highlights of our second quarter financial results, so let’s please advance to Slide 9. Q2 consolidated revenue was $24.4 million, an increase of 6.4% from the second quarter of last year.

Consolidated gross margin was 16.3% for the second quarter, which is 350 basis points better than the prior year, and up nearly 1200 basis points sequentially. Sypris Technologies reported another strong quarter in Q2. Revenue increased $1.6 million from the prior year to $16.9 million and gross profit increased to $1 million to $3 million in Q2.

On a year-over-year basis, revenue for technologies was up 10.1% and the sequential increase was 4.6%. We continue to benefit from favorable market conditions and customer demand for our products in the commercial vehicle, automotive and energy markets.

Shipments to the commercial vehicle market which accounted for approximately 39% of consolidated revenue in 2018 are expected to be stable through the balance of the year with some upside coming from the launch of new programs.

Energy product shipments, which accounted for approximately 25% of consolidated revenue in 2018, are expected to increase over the balance of this year with a couple of large orders targeted to ship in Q4. Energy product shipments increased about 15% year-over-year in Q2 and was up slightly from Q1.

Gross margin climbed to 17.6% for Sypris Technologies in the second quarter, which compares to 12.6% for the prior-year period and 14.3% in Q1. The steady improvement in gross margin for technologies over the past two years reflects the completion of our cost reduction efforts as well as our operational improvements.

Our labor productivity is improving and we are concurrently reducing cycle times on some of our key assets which is allowing us to reduce or reallocate labor to other productive areas and providing capacity for growth.

After a difficult Q1, Sypris Electronics rebounded in Q2 with revenue of $7.6 million, which is flat with the prior year but more than double our Q1 performance.

Thanks to the efforts of our supply chain and program management teams working closely with our customers and vendors, the impact of components shortages has been greatly reduced from what we experienced over the last several quarters.

While this issue hasn't been completely eliminated, our supply chain planning and execution has allowed us to better balance the flow of production through the plant on a daily basis. On our last call, we discussed shipments that were expected to begin on a key follow-on program.

We are pleased to report that the contract was executed in Q2, which cause for shipments on this program to continue through 2021. Our gross margin for Sypris Electronics improved to 13.6% for the second quarter, which is a 50 basis point increase from the prior year and a significant turnaround from the loss reported in Q1.

With shipments volumes expected to increase sequentially in Q3 and Q4, we are targeting improvements in gross margin for Sypris Electronics on both a quarterly and half-over-half basis for the balance of 2019. Our consolidated SG&A expense for Q2 increased year-over-year by approximately 400,000 and was up about 150,000 sequentially.

Q2 SG&A expense included cost implementation fees associated with the new ERP system for Sypris Electronics, increased sales staffing, higher commissions on energy product sales and higher professional fees.

Additionally, while claim rates on certain of our employee benefit plans decreased sequentially from Q1, the year-over-year cost remain higher for the Q2 comparable periods. We're certainly pleased to be reporting operating income for the second quarter of 282,000.

Our business today is a stark contrast from what we look like in 2014, which was when we last reported a quarterly operating profit on revenue of over $90 million.

While we were smaller today, we believe our cost profile is considerably more competitive, we are more diversified in the markets and customers we serve and we are well positioned to grow profitably in the future.

It has been a long journey to reach this milestone and we recognize the need to continue to improve our operations and our profitability as the journey continues.

We would like to thank our employees, our customers and our suppliers that have been with us on this journey and we look forward to continuing the hard work and realizing the rewards that will come with continued success.

We also recognize the $1.5 million gain in the second quarter, as we were able to negotiate the settlement of a contract with a customer for a specific program with Sypris Technologies. The settlement resolves all contract disputes with this customer and is not expected to have a material impact on our future operations.

The gain was reported as a component of other income below the operating income line and therefore not reflected in the number shown on this slide. Please advance to Slide 10. On this slide we will discuss our first half 2019 results.

Despite a very slow start with shipments for Sypris Electronics in Q1, we made up considerable ground in the second quarter and ended with first half consolidated revenue up and gross profit only slightly behind the prior year period. First half consolidated revenue was $44 million, an increase of 2.6% from the first half of last year.

Consolidated gross profit was $4.8 million for the first half, down just 100,000 from the prior year as a strong performance in Q2 offset the majority of the low margin results of Q1.

Consolidated gross margin was 11% for the first half of 2019 and only 60 basis points below the first half of 2018 revenue for Sypris Technologies increased by $3.2 million or 10.7% to $33 million and gross profit increased by $1.2 million to $5.3 million.

Gross margin for technologies in the first half was 16%, an increase of 250 basis points from the first half of 2018. Revenue for Sypris Electronics decreased 16% to $11 million from $13.1 million in the prior year, reflecting the low shipment levels for Q1 of 2019.

The drag in Q1 revenue also impacted the gross profit comparisons to 2018 resulting in a decrease of $1.3 million from the prior year.

Improved component availability contributed to the rebound in revenue and margins from Q1 to Q2 and together with the Q2 bookings and backlog, we believe that the electronics segment is positioned for growth and improved profitability in the second half of the year.

Our consolidated operating loss for the first half was $2.4 million, which was 240,000 unfavorable compared to last year, reflecting the lower Q1 gross profit in the electronics segment and higher SG&A expense in the first half of 2019 Please advance to Slide 11.

Revenue for 2019 is expected to be in the range of $95 million to $105 million with gross margin coming in between 14% to 16%. Our revenue outlook is based on the forecast that includes favorable market conditions for the automotive, heavy truck and energy markets.

New programs are expected to launch within Sypris Technologies as well as the order backlog and anticipated program launches for Sypris Electronics. We anticipate our margin performance will improve sequentially throughout the year as shipment levels for Sypris Electronics steadily increase from the first quarter low point.

Our continuous improvement initiatives for Sypris Technologies are forecast to reduce costs incrementally throughout the year which will contribute to the sequential improvement in margin performance from the first half to the second half.

We expect SG&A expense will decline in the second half as compared to the first half spend levels with reductions in ERP implementation and professional fees contributing to the improvement.

We are targeting SG&A expense as a percent of revenue for the second half to return to the 11% to 13% range, which will position us again at 13% to 14% for the full year. 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 12.

This slide provides a preview of our 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're forecasting revenue to increase 14% at the midpoint of the range and to drive revenue above the level reached in 2016.

With first half consolidated revenue up only 2.6% year-over-year, the majority of our growth will come in the second half. If we again look at the midpoint of our full year range, we are targeting comparable period growth of just under 25% for the second half.

The notable improvements in Q2 bookings at 200% for Sypris Electronics and 58% for technologies energy products provide support for the second half forecast. As Jeff mentioned earlier, a portion of the Q2 bookings as well as our other programs in backlog will also support our business in 2020.

Sypris Technologies has preproduction activities underway on a number of new programs that have targeted started production dates based on customer delivery schedules spread over the second half of the year.

Sypris Electronics ramp production on a following contract executed in the second quarter and is also expecting to launch new programs with our existing customer base that will contribute to revenue beginning in the second half of 2019.

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 we're driving in both segments are expected to make a material contribution to the margin expansion.

Our metrics for labor productivity and throughput on certain of our key manufacturing sales in the technology segment continued to improve and we made significant reductions in [supply] [ph] spend during the quarter.

Production levels were more evenly balanced in Q2 for the electronics segment and the opportunity to increase revenue sequentially over the next two quarters is expected to enable the team to further advance the operational initiatives they established coming into the year. Please advance to Slide 13, and I will offer a few takeaways.

Revenue for Q2 increased to $24.4 million, up nearly 25% sequentially and 6.4% from the prior year. Gross profit increased $3.1 million sequentially to $4 million or 16.3% of revenue. Sypris Technologies increased revenue to $16.9 million and posted $3 million in gross profit or 17.6% of revenue.

The margin percentage is 330 basis points above Q1 and 500 basis points above Q2 of 2018. Sypris Electronics reported revenue of 7.6 million and posted $1 million in gross profit or 13.6% of revenue.

With both segments reported gross margin in double-digits for the quarter we were able to generate consolidated operating income of nearly 300,000 for the quarter making it our first positive quarterly operating income since 2014.

We continue to benefit from favorable market conditions in the heavy truck, energy, and A&D markets and achieved a 58% year-over-year increase in new orders for our energy products and a 200% growth in orders for Sypris Electronics in the second quarter.

We updated our outlook for revenue to 95 million to 105 million for the year and maintained our gross margin outlook at 14% to 16% for the year. We are targeting sequential improvements in both revenue and margin from the first half to the second half. And finally, we are targeting a return to profitability for 2019.

This concludes our call today and at this time, I'd like to turn it back over to Audra to answer any questions you might have for us at this time. Thank you..

[Operator Instructions] We'll go first to Joel Cahill at The Jameson Companies..

Can we just jump back just real quickly, so you pulled down revenue guidance with 5 million on both sides you know midpoint the same. Gross margins maintained, SG&A though is bumped up two points from previous outlook. You mentioned ERP and some higher sales commissions.

Is there anything else to kind of guide where that’s going to go because we’re most of the way through 2019, we're really not talking about 2020 at all other than some strong bookings.

Can you give any thoughts on where that looks for going forward because as we’re kind of talking about turning the page into this new chapter?.

Sure, I mean if the question was specifically around the SG&A expense and where that’s going to go what we referenced in the call was if we think our second half is going to drop back down into the 11% to 13% range which is a pretty significant drop from the first half.

And so that's revenue growth that’s one of the factors, but also the absolute dollar spend is going to come down as we move into the second half as well..

And do you have any numbers to put around expectations for 2020, I know you’ve kind of avoided that aside from kind of talking about some percentage increases in orders and things, but how does that look to you?.

Yes, we’re not putting anything out yet Joel for 2020 we - as referenced in the call our backlog is strong, orders momentum is going very well at this point.

So the foundation is there, we do see some softening on the production side on the commercial vehicle market, but with the launch of some of the programs that we have and the diversification that we have in other - with customers in other markets today, we don't see that being a significant drag to 2020..

On that I mean Class A orders have dropped off pretty materially with current - you know as you're saying like everybody's - the backlog for the OEMs is through this year up to 2020.

Where did that drop off I mean, as far as in the lifecycle has Sypris already delivered most of that for those kinds of orders, delivered axles already or do you still expect to see some - from that existing backlog where does it start - I guess where I am heading is, where do we start feeling that drop off with ST?.

Sure Joel that’s a great question. We see our order boards for the balance of this year as it relates to the commercial vehicle market as being solid and steady. We don't see any material change in the order boards for 2019.

What the industry is expecting is that in 2020 there will be a cycle down in terms of orders from what is taken place in 2018 and 2019. And the current view is somewhere in the 20% to 22% range I believe..

[Operator Instructions] And at this time we have no further questions. I’ll turn the conference back over to management for any closing remarks..

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

And that does conclude today's conference again. Thank you for participation..