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

Thank you, 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 and full year 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, 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 and year.

Before we begin on Slide 4, however, I’d like to take just a moment to discuss our current environment, especially in light of the recent public and private activities being taken to address the COVID-19 virus and the potential impact of these actions on Sypris.

Let me begin with the statement that we do not, as of this date, had any employees or their family members who have contracted the virus. We have taken a number of steps to ensure a safe work environment, many of which include best practices recommended by the Center for Disease Control, OSHA and others.

We have on-site medical professionals at our largest campus to both be of service to our employees and to check any incoming visitors before admitting them into our facilities. Travel has been limited. Spacing has been increased. Gathering sizes have been reduced, and hygiene has been and continues to be emphasized, both at work and at home.

We are providing employees with regular updates while requesting their feedback and suggestions with regard to additional steps that we might take. We are discussing the importance of personal responsibility, recognizing that the majority of their day actually occurs outside of the confines of Sypris.

We're also providing special consideration for any specific employee who happens to be of an age or with underlying respiratory, pulmonary or other such conditions that would otherwise place the individual at substantial risk should he or she contract the virus.

We are closely monitoring the situation in both our customers and our suppliers on a daily basis. As of this date, we have not seen an interruption of demand or supply, but the environment is certainly dynamic, and circumstances may change rapidly.

In the interim, we will continue to focus on meeting the commitments we have made to our customers while working to provide a safe work environment for our employees and their families. Now let's begin with the overview on Slide 4.

The fourth quarter of 2019 reflected the continued advancement of our operating performance, with both business units posting substantial improvements in gross margin. The consolidated result was a 660 basis point increase in gross margin year-over-year and a 200 basis point improvement in gross margin sequentially.

The substantial advancement in performance was, however, significantly short of our objectives for the quarter driven by a $3.5 million shortfall in revenue for the period. The top line miss was incurred by both business units.

Order boards for Sypris Technologies declined in December, reflecting both the softening of demand from commercial vehicle customers and the decision by certain customers to place a hold on further shipments long before year-end.

Sypris Electronics was impacted by component shortages, both customer-induced and Sypris-caused as well as the availability of test equipment. And as you would expect, the delay in shipments had the further impact of increasing our investment in working capital at year-end beyond planned levels.

As we look into 2020, January and February performance for both business units has been consistent with our expectations, which represents a significant improvement in gross margin on both a year-over-year and on a sequential basis. Our teams are working hard in making significant progress.

We simply hope that the virus does not have a material impact on these efforts. From a business development standpoint, we continue to experience a great deal of activity at both Sypris Technologies and Sypris Electronics.

During the quarter, Sypris Technologies announced the award of long-term contracts to produce components for our new dual-clutch sports car transmission and for the transmission of a leading all-train vehicle. Both of these programs are expected to be at full run rates early in the second quarter of this year.

These contract awards are important, both in terms of their anticipated contribution to the company's future financial performance as well as to our efforts to further diversify our customer, product and market portfolios.

At Sypris Electronics, we announced new contract awards from Collins Aerospace to manufacture and test electronic assemblies for the power management, environmental control, and life-support systems of a Deep-Space Orion spacecraft program.

And subsequent to year- end, we announced the award of a new contract from BAE Systems to manufacture and test electronic power supply modules for a large, mission mission-critical, military program. Production for both of these customers is expected to commence during 2020.

Turning now to Slide 5, North American demand for heavy-duty trucks reached an all-time high during the past couple of years driven by strong freight growth, tight capacity and an expanding economy.

Looking forward, customer demand is forecast to return to historical norms in 2020, which is a factor will result in an estimated 25% year-over-year reduction in demand for Class 8 trucks. In past years, such a reduction would have been expected to have a material impact on the revenue and profit of our business.

But as of today, we believe that recent contract awards in the automotive ATV, commercial vehicle and industrial markets will materially offset the reduction in revenue associated with the Class 8 cycle.

Furthermore, the substantial costs that we incurred during 2019 to develop, tool up and launch these programs is not expected to carry over into 2020, thereby contributing to further margin expansion when compared to the prior year's performance.

In recent months, the benchmark price for crude oil has declined significantly, the result of which has raised a number of questions with regard to the near-term outlook for this sector.

Within the broad energy market, however, the conversion of power generation to natural gas as well as the construction of pipelines and LNG terminals to support export activities continues to be a source of strength for Sypris on both the domestic and international front. DoD spending also continues to remain solid with U.S.

military spending expanding, especially with regard to key long-term strategic programs that are expected to run for many, many years.

Turning to Slide 6, as we discussed during our prior call, these positive market conditions, when combined with recent contract awards and lower cost profiles, provides us with a solid base for 2020, subject, of course, to the yet-to-be-seen impact of COVID-19 on the economy.

The ramp-up of new programs is expected to further mitigate softness in the commercial vehicle market, while the reduction of new program launch costs is expected to contribute to margin expansion on a year-over-year basis.

Our performance to start the new year has been positive and in line with our expectations, but we have yet to feel the potential impact of COVID-19. If and when we do, we will respond quickly and decisively to adjust our business to any material change in outlook.

We will also continue to be responsive to the safety needs of our employees and their families, while working hard to meet the commitments we have made to our customers. We must and will remain agile and responsive to new data as it develops. This is clearly going to be an interesting year.

Turning now to Slide 7, Tony Allen will lead you through the balance of our presentation this morning.

Tony?.

Thanks, Jeff, and good morning, everyone. I will be discussing with you some of the highlights of our fourth quarter and full year financial results. Please advance to Slide 8. Q4 consolidated revenue was $21.6 million, a decrease of 9.7% from the fourth quarter of last year.

Although revenue declined, Q4 consolidated gross profit increased $1.3 million or 92.7% over the prior year period and $0.4 million or 16.4%, sequentially. Consolidated gross margin was 12.5% for the fourth quarter, up 660 basis points from a year ago and 200 basis points sequentially from Q3.

Revenue for Sypris Technologies decreased 14% to $13 million from $15.1 million a year ago. However, gross profit was down only $150,000 and gross margin improved 110 basis points to 15.4% in Q4. As Jeff noted earlier, we began to experience order board reductions for commercial vehicle products during the fourth quarter.

Additionally, with the way the holidays fell in December, certain of our customers took the opportunity to stop production during the last two weeks of the year and to rebalance inventory levels, which reduced our production and shipments in December.

During the first two months of 2020, we saw the commercial vehicle market demand ticked back up following the holiday shutdown and we increased production on our new automotive and all-terrain vehicle programs.

Offsetting the commercial market – vehicle market decline in Q4 was increased revenue from our energy products and early low volume production on the new programs just mentioned. Energy product shipments increased about 8.8% year-over-year and 11.6%, sequentially.

Gross margin for Sypris Technologies was 15.4% in Q4, an increase of 110 basis points from a year ago, although revenue was down just over $2 million for the comparable periods.

Year-over-year improvement in gross margin for technologies reflects the operational improvements made throughout the year, which are driving improvements in our internal operating metrics and flowing into our financial results.

Revenue for Sypris Electronics was $8.6 million in Q4, a decrease of 2.4% from the prior year, while gross profit improved $1.5 million to $0.7 million resulting in gross margin of 8.2% for the quarter.

Although margin improved on both a year-over-year and sequential basis, our team continued to battle material availability challenges on certain programs. Certain component shortages were attributable to customer-furnished parts and others relate to vendor-sourced parts that remain in short supply.

However, we were to blame for one of the material shortage issues late in the quarter. The shortage stemmed from a system upgrade that changed the replacement ordering process for certain components. Although our supply chain team detected and corrected the issue within a reasonable time, the component lead time pushed receipts into 2020.

Our consolidated SG&A expense was $3.5 million for Q4, an increase of approximately $300,000 on both the sequential and year-over-year basis as adjusted for the legal settlement last year. As you may recall, the Q4 2018 results included $1.9 million benefit from the favorable resolution of a legal fee dispute for fees incurred in prior periods.

The increase in Q4 SG&A was primarily due to higher medical claim expense as we experienced a spike in the number of claims and average claim value, particularly during December.

Higher claim expense is not uncommon during Q4 as many participants have met their full year deductible and/or out-of-pocket max, but the incurred value in Q4 exceeded averages from prior periods. We are disappointed with the consolidated loss of nearly $1 million for Q4.

However, we remain committed to improving the profitability of the company in the coming year. Please advance to Slide 9. Consolidated revenue for 2019 was $87.9 million, which was flat with our prior year revenue.

Consolidated gross profit was $9.9 million, an increase of $2.3 million or 30.5% over the prior year and gross margin was 11.2% or 260 basis points above 2018. For the full year, Sypris Technologies revenue increased by $1.9 million or 3.1% to $61.7 million, while gross profit increased $2.3 million or 30.1% over 2018.

Sypris Technologies gross margin for 2019 was 15.9%, an increase of 330 basis points from the prior year. Coming into 2019, Sypris Technologies targeted a number of cost reduction initiatives and the margin improvement reflects our success in the categories of supply spend and utilities in particular.

Management focus and controls over consumable tooling and other variable supplies spend resulted in a year-over-year 360 basis point reduction in supply expense as a percent of revenue.

Additionally, avoiding production on certain high electrical consumption machinery during peak rate periods at our Toluca facility drove a year-over-year 80 basis point reduction in utility expense as a percent of revenue. The combined effect of these two initiatives alone generated nearly $2 million of year-over-year cost reductions.

These improvements were partially offset by preproduction and ramp up costs on new programs being launched as we continue to diversify our markets and customer base.

We estimate that approximately $1 million in incremental costs and labor inefficiencies incurred in 2019 will not repeat in 2020 as these new programs move from startup to full-rate production.

Revenue for Sypris Electronics decreased 6.9% to $26.2 million from $28.2 million in the prior year as we were not able to overcome the low shipment levels for Q1 of 2019.

We have the backlog in place to support a more consistent revenue run rate as we enter 2020 and we are proactively managing production among our programs in the near term as we continue to anticipate supply chain challenges will arise in the ordinary course of business.

Consolidated SG&A expense for 2019 was $13.7 million or 15.6% as compared to $12.4 million or 14.1% for 2018, excluding the impact of the legal fee settlement in the prior year. Our consolidated operating loss for 2019 was $4.3 million, which was an improvement of $1.9 million over 2018, excluding the legal fee settlement.

Please advance to Slide 10 and I'll offer a few takeaways. Consolidated revenue for Q4 was $21.7 million, a decrease of 2.9% sequentially as the commercial vehicle market began to adjust downward during the period and certain customers rebalanced inventory levels as they shut down for the holiday season.

Gross profit for Q4 moved in a positive direction, increasing $1.3 million over the prior year and $0.4 million, sequentially. Gross margin for the quarter was 12.5%, an increase of 660 basis points over the prior year period. For the full year, consolidated revenue was flat, but gross profit increased $2.3 million to $9.9 million.

Consolidated gross margin improved 260 basis points year-over-year to 11.2% for 2019. Sypris Technologies reported a dip in Q4 revenue due to the market dynamics just discussed. However, full year revenue increased 3.1% over 2018.

Our notable advancements for Sypris Technologies are reflected in gross profit, which increased $2.3 million year-over-year and gross margin, which increased 330 basis points to 15.9% for 2019.

Although revenue for Sypris Electronics improved sequentially from Q3 and gross profit increase, we fell short of meeting the profitability gains we expected for this segment. The driving factor, again related to material issues. And although we are facing fewer issues, those we encountered unfavorably impacted our results in Q4.

On the positive side, the backlog in place for Sypris Electronics supports our expectation for a more consistent revenue run rate in 2020 accompanied by improved margin performance.

Performance and financial results of both segments in the first two months of 2020 showed sequential improvement from Q4 and are in line with the 2020 outlook we last provided on our earnings call in November. The extent and duration of the impacts that COVID-19 may have on our business are not known at this time.

And like the rest of the world, this is something we are monitoring minute to minute and we’ll take every action possible to protect the health of our employees and mitigate the impact to our business. We greatly appreciate the continued support of our employees, customers, and suppliers during this uncertain and challenging period.

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

Thank you. [Operator Instructions] We can take our first question from Jim Ricchiuti of Needham & Company. Please go ahead. Your line is open..

Hi, thank you. Good morning..

Good morning, Jim..

Good morning, Jim..

Good to hear guys that your employees and family are – had not been impacted thus far. What is – what are you seeing in the Toluca area? Have there been cases that have begun to crop up? And in general, what – I would assume that just steps you’re taking in your facilities, not just in Mexico, but in the U.S. is also driving up costs as well.

And how much of an impact do you think that’s going to be additional impact on gross margins for some of these steps you’ve had to take?.

Jim, this is Jeff. In Toluca, we have not seen any impact to COVID-19 yet. And we’re not familiar with any outbreaks in the area. In fact it seems to be relatively quiet compared to the U.S. I’m sure that’ll change as time goes by. But up to this point, we’ve been very, very fortunate.

The steps that we’ve been taking are primarily ones of education review, personal responsibility, all the spacing, limited supplier visits, limited travel, those types of things. We’ve increased the cleaning, the hygiene, separated tables in the cafeteria. We’re in the process of setting up a secure websites.

So that all the communications that we’re making with our employees regularly can be accessed from home by spouses and other family members. We’re setting up hotlines where employees or their families can call in with suggestions or questions or just wish to discuss proper behavior or different things of that nature.

So all of the things that we’ve been doing to secure the workplace and just as importantly to help employees adjust their habits when they’re not at work, really have been not investment type things.

And so even in our other plants, we have some people working from home, but those are typically engineering technical type people who can work from home and be just as effective. And the spacing that we have in our plants is viewed as being very positive by the professionals and therefore reducing the risks.

So until we see a material change in potential volume, we don’t anticipate these activities will have a negative impact on our market..

Got it. And then as we look at the forecast for the heavy vehicle market, yes, a 25% decline. Given what we’re anticipating, at least the hit that the U.S. economy appears to be taking in the June quarter that seems conservative. And I’m just wondering what you’re hearing of late.

I would assume that 25% number that kind of decline in Class 8 could be worse.

And I’m wondering you know what, you have a different business in that area now, but certainly that’s going to pose a bigger headwind, isn’t it?.

Well, certainly in the COVID-19 spiral is creating a great deal of uncertainty for everybody. As of today, our order boards on the commercial vehicle side of the business, every moment constant. But in two weeks that could change.

And so I think your point of is there the potential for near-term reductions from our current run rate? I’d say the probability is yes, there certainly is. And longer-term we’ll just have to see how it plays..

And then that that internal component is your material issue that you describe Tony, is there a way to size that from a revenue standpoint or a gross margin hit that you might have taken from that in the electronics business?.

It’s on one specific program, that issue in particular affected one specific program. And I would estimate that the margin, the revenue margin impact of that it would have a quantified exactly as a pro forma what does with and without, but I would say that something under $1 million in top line would have been the difference..

It’s surprising that you still – and I am hearing this from some other companies that there are some still some component shortages.

What specifically are we talking about? Are these kind of unique type components for your defense customers?.

They are the typically the specific sourced items that we can’t, where our ability to move that to other suppliers or substitute components in is extremely limited, if not impossible. And in those cases it requires customer approval. So it's not the general market items, components that we're seeing, right now.

It's really more isolated than it has been in the past..

Got it.

The defense business, the electronics business, sounds like you're assuming it's going to be a little bit more from a revenue standpoint spread a little bit more evenly, in the past it's often been very backend loaded, is that the way you're viewing the business going into the year?.

As we built our plan for the year and even our more recent forecast again, absent any impact of COVID-19, the way that our backlog is structured today, the launch date of programs and the flow of those programs during the year does provide us with a more stable run rate for 2019, which is good for many reasons.

So that will be – as always, there'll be some give and take as things go day-to-day and week-to-week, some programs may shift from period-to-period, but the good thing is we have a little more volume across different programs to play with to help those to offset items as they develop..

Got it. Thank you..

Thank you. We can take our next question from Joel Cahill from The Jameson Company. Please go ahead. Your line is open..

Yes. Hey, good morning Jeff and Tony. Thanks for the call..

Hey, Joe. Good morning..

So I want to switch a little bit away from kind of the fundamentals. We're kind of facing again I mean, we keep getting to this NASDAQ delisting warning.

I'm interested what would take for you guys to see an indication that you would want to buy back stock, if there is anything that you're looking at whether from a valuation standpoint or from a financial metrics, the balance sheet metrics?.

Well, I think all those things are an option, Joel, and you bring up a good point. And we'll do whatever we can obviously to avoid having a problem with NASDAQ and the COVID-19 activity recently probably makes that yet another challenge, but it certainly has our attention and we're looking at all the potential levers and options that we have..

Okay.

And so does that mean that there – I mean, is this something that you guys will discuss actively? I mean, given that we're down at such a remarkably low level in the stock now?.

Right. Well, we were certainly reviewing these things internally. We don't have anything at this point to talk about externally..

Tony, on the – you mentioned the 2020 outlook you've affirmed and would you just remind me again what you guys are looking at on top line in that regard?.

Well, what we've said Joe this morning is that, we provided an outlook in November and that our performance in the first two months of the year has been tracking to that outlook, where we've stopped short is providing an outlook for – an updated outlook for 2020 in light of COVID-19 would just not be something that we're prepared to do this morning.

Too many uncertainties that are floating around as you might imagine..

Sure. Yes, absolutely.

And is there a way that you guys going to kind of bring – it seems like there's been, obviously there's been a lot of transition in the business, but, and previously it's been heavily in – heavy in aerospace and defense, but really in the heavy trucking, is there a way that you can kind of tie together what it is that you're doing when it's now, whether it's undersea or in space or oil and gas, what does it – is it just purely enclosures or is there something that kind of more broadly pulls together what the core business is at this point, particularly on the FT side?.

Okay, sure. What we've targeted is we've gone about our diversification Joe, is to try to be in segments where there are unique requirements, where there's a high cost of failure, where there's a high engineering content. And that type of thing is a way of distinguishing ourselves from more of a commodity type player.

And so when you look at the closures we do in the energy field, and particularly for natural gas transmission and that type of thing, some of these closures are 70 inches to 80 inches in diameter and weigh up to 34,000 pounds a piece. And they're going into large natural gas fields in places like Kazakhstan and other places around the world.

On the electronic side, whether it's deep sea, whether it's the Orion Spacecraft or Deep-Space these types of applications all have a very, very high cost of failure. So the electronics that we build for them tend to be in smaller quantities, but much higher price.

And I think that is a distinguishing factor in the – what used to be basically our commercial vehicle segment. We've now moved into a much higher precision transmission components and doing that both for the new dual-clutch transmission that's going into sports car as well as the components for the all terrain vehicle.

And so more value-add, so materials will have smaller component of the overall content and really working to distinguish ourselves. So that's the theme, that's kind of running through our business at the moment..

Okay, understood. That's helpful. I don't have any other questions. Thank you, guys..

Okay, thank you..

Thank you. It appears there are no further questions in the telephone queue, Mr. Gill, I'll pass it back to you for any additional closing or additional remarks..

Okay. Thank you very much. Tony and I would like to thank you for joining us for this call. 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 today's conference call. Thank you for your participation. You may now disconnect..