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. Jeffrey Gill. Please go ahead..

Thank you Katie and good morning everyone. Tony Allen and I would like to welcome you to this call, the purpose of which is to review the company's financial results for the first quarter of 2020. For those of you who have access to our PowerPoint presentation this morning, please advance to slide two now.

We always begin these calls with a note that some of what we might discuss here today may include projections and other forward-looking statements. No assurance can be given that these projections and statements will be achieved and actual results could differ materially from those projected as a result of several factors.

These factors are included in the company's filings with the Securities and Exchange Commission. And in compliance with Regulation G, you can access our website at sypris.com to review the definitions of any non-GAAP financial measures that may be discussed during this call.

With these qualifications in mind, we would now like to proceed with the business discussion. Please advance to slide three. 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.

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

I am very pleased to be able to say that as of this date, we do not have 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 are 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 continue to monitor the situation with both our customers and our suppliers on a daily basis. During the months of April and May, we have had certain commercial vehicle and automotive customers close for weeks at a time and/or reduce their demand while our defense and energy markets have remained solid.

Our sense is the trough is behind us, but the environment is certainly dynamic and circumstances may change rapidly. 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 four.

The first quarter of 2020 reflected the continued advancement of our operating performance with both business units once again posting substantial improvements. Revenue increased 14.6% year-over-year and 3.7% sequentially as shipments from new programs in both segments of our business contributed to the company's topline.

Gross margin increased to 16% of revenue, up from 4.4% in the first quarter of last year and up 350 basis points sequentially. Operating income for the period was positive, reflecting the substantial increase in gross profit and a decrease in SG&A expense during the quarter.

In short, it was a solid performance for the company and its employees and would have been even better had the pandemic not impacted the economy in the latter part of March. Subsequent to quarter-end, in April we completed the sale of our 90-year-old former manufacturing facility in Louisville, Kentucky.

The plant was situated on approximately 20 acres and had been closed since November 2017. The sale generated $1.7 million of cash and will have the added benefit of reducing the company's operating expenses going forward. In May, we secured $3.6 million of financing under the Paycheck Protection Program of the CARES Act.

This funding was vital to preserving many skilled jobs, the details which Tony will review with you shortly. Now let's take a look at the performance of each of our business units, starting with Sypris Technologies on slide five.

Revenue declined 15% when compared to the prior year quarter, reflecting the expected reduction in demand from commercial vehicle customers, lower energy shipments and a reduction of orders during the last two weeks of the period as a result of the economic impact of the virus.

Shipments increased 5.4% sequentially however, driven in part by the new programs we have discussed on prior calls, more specifically, the long-term contracts to produce components for new dual clutch sportscar transmission and for the transmission of a leading all-terrain vehicle.

Gross profit increased 8.2% year-over-year and 24.4% sequentially as program launch costs subsided and operating efficiencies improved significantly. As a result, gross margin increased 390 basis points year-over-year and 280 basis points sequentially.

Operating income and operating margin followed these trends as well with each of these financial metrics posting substantial gains on both a year-over-year and on a sequential basis. From a business development standpoint, we continued to experience a great deal of activity as companies look to increase their North American sourcing contact.

In summary, it was a very positive quarter for Sypris Technologies, one that would have been even stronger had it not been for the impact of the virus. Now let's advance to slide six to review the performance of Sypris Electronics during the quarter.

As many of you may recall, shipments at Sypris Electronics were disrupted during 2019 by periodic shortages of electronic components. The availability of these components is now much improved, in many cases with the help and support of our customers.

As a result, revenue increased significantly on a year-over-year basis, with new programs and material on hand leading the way. Gross profit and gross margin followed suit with each of these key financial metrics expanding significantly on both a year-over-year and on a sequential basis.

And as we have reported on prior calls, the markets we serve in defense and telecommunications have remained solid even during the pandemic. Orders increased 133% during the quarter, while backlog increased 45%, with both business now extending well into 2021.

During our last call, we discussed our new contract awards from Collins Aerospace manufacturing test electronic assemblies for the power management, environmental control and life-support systems of the deep space Orion spacecraft program.

We also mentioned that during the first quarter we have received a new contract from BAE Systems to manufacture and test electronic power supply modules for a large mission-critical military program. Production for both of these customers is expected to commence during 2020.

In short, it was a positive quarter for Sypris Electronics in almost all respects and we remain cautiously optimistic as we look to the future for this business. I think that it may be helpful to pause for a moment and take a quick look at how our business has changed in recent years from a market standpoint.

Please note on slide seven that in 2020, we expect revenue from defense electronics to exceed 30% of our total sales, up from 22% last year, but sales to commercial vehicle customers are expected to represent 25% of the business, down from 41% in 2019.

Some of you may even recall that in 2014, commercial vehicle represented for a 70% of revenue and these sales were highly concentrated with two customers. We have a much more balanced business today, both in terms of market served and customer concentration.

We expect margins to expand, reflecting increased value add and technical requirements while continuing to move away from commodity products and services. We believe that additional opportunities exist to further diversify our business and we will continue to aggressively pursue this outcome.

Now let's turn to slide eight to review the outlook for each of our major markets. North American demand for commercial vehicles reached an all-time high during the past couple of years, driven by strong freight growth, tight capacity and an expanding economy.

Pre-pandemic, customer demand was forecast to return to historical norms in 2020, which if accurate would have result in an estimated 25% year-over-year reduction in demand for Class 8 trucks. We now believe that estimate to the optimistic. But we also believe that the low point will be realized in the second quarter.

In the long term, we believe that the economy in trucking will benefit significantly from the stimulus programs that have been implemented. In recent months, the benchmark price for crude oil has been extremely volatile, 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 opportunity for Sypris on both the domestic and international front. DOD spending 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. Our performance since the start of the new year has been positive and in line with our expectations and we believe that we are well positioned for future success once the economy begins to reopen.

In the interim, we will 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. We are looking forward to moving past this virus and getting the economy back on its feet.

The sooner, the better for all concerned. Turning now to slide nine. Tony Allen will lead you through the balance of our presentation this morning.

Tony?.

Thanks Jeff. Good morning everyone. I would like to discuss with you some of the highlights of our first quarter financial results. Q1 consolidated revenue was $22.4 million, an increase of 14.6% from the first quarter of last year.

The year-over-year increase in revenue of $2.9 million was followed by an increase in consolidated gross profit of $2.7 million, a multiple of over three times the prior year period and an increase of $900,000 or 32.6% sequentially.

Consolidated gross margin was 16% for the first quarter, up 1,160 basis points from a year ago and 350 basis points sequentially from Q4. Revenue for Sypris Technologies decreased 15% to $13.7 million from $16.1 million a year ago. However, gross profit increased nearly $200,000 and gross margin improved 390 basis points to 18.2% in Q1.

During the first two months of 2020, we saw the commercial vehicle demand rebound sequentially from Q4 following the holiday shutdown. However, that changed in March as the impact of COVID-19 began to the impact North American production.

Thus far, the highest impact to revenue for Sypris from COVID-19 has been on our technology segment, primarily for our customers in the commercial vehicle and automotive markets.

Additionally, while energy product shipments decreased in Q1 about 15% on both a year-over-year and sequential basis, we anticipate that opportunities with our natural gas products will offset the headwinds from lower demand for oil over the balance of the year.

As expected, the launch of new programs in the automotive and sport utility markets contributed to revenue at a higher level in Q1 than in prior periods and served to partially offset the lower demand in other markets.

The year-over-year improvement in gross margin for technologies reflects the continuous improvement initiatives implemented by our team which are driving improvements in our internal operating metrics and our financial performance.

Revenue for Sypris Electronics was $8.7 million in Q1, an increase of over 150% from the prior year and gross profit improved $2.5 million to $1.1 million, resulting in gross margin of 12.6% for the quarter.

We experienced fewer issues with the electronic component availability during the quarter, especially as compared to the prior year period in which are revenue dropped materially.

We have further increased our communications with suppliers in response to the COVID-19 outbreak to ensure we minimize any future potential disruptions that could impact our supply chain. Our consolidated SG&A expense was $3.2 million for Q1, a decrease of approximately $250,000 on both a sequential and year-over-year basis.

The decrease in Q1 SG&A reflected some of the early actions by management to reduce discretionary spend in response to the COVID-19 pandemic. These reductions and certain other actions are expected to lower SG&A expense further in Q2.

We are pleased to report consolidated operating income of $300,000 for Q1 and feel that the quarter was on track to meet our targets prior to the outbreak and was indicative of all of the hard work by our employees in recent periods. We look forward to a safe reopening of the economy so that we can resume the progress shown during the first quarter.

As Jeff noted earlier and as disclosed in our Form 8-K filed with the SEC on May 6, we secured a PPP loan after the end of Q1 in the principal amount of $3,558,000.

Our receipt of this loan was critical to enable us to retain our workforce as the reduction in customer demand from the COVID-19 outbreak began to impact our business in Q1 and deepen further in April and May.

We have implemented various cost reduction actions across our business in response to the pandemic to preserve our liquidity and this loan will serve to mitigate our domestic payroll costs incurred as we strive to retain these employees until our customer demand fully recovers.

The note was dated April 30, has a two-year term and bears interest at 1% per year. Monthly payments of principal and interest are due beginning seven months from the date of the note.

We can apply for a portion or all of the loan to be forgiven, subject to limitations and based on the use of the proceeds to fund payroll costs, rent and utilities over the eight weeks following the receipt of proceeds.

Any forgiveness will be subject to the approval of the SBA, but no assurance can be provided that we will obtain forgiveness in whole or in part. Please advance to slide 11. We will take a quick look at our consolidated revenue trend for 2019 and Q1 of 2020.

As discussed, our revenue of $22.4 million was up on both a year-over-year and sequential basis. As the Class 8 commercial vehicle market started its downturn in Q4 of last year, new program launches for automotive and sport utility components began contributing to revenue.

Additionally, the electronics segment increased revenue as component availability improved and backlog remained healthy. Sypris Electronics revenue for the last two quarters of $8.6 million and $8.7 million compares favorably to the average of $5.9 million posted for the first three quarters of 2019.

Most defense electronics customers have remained open as essential businesses during the COVID-19 outbreak and we will continue to work closely with them to meet their demand. Sypris Technologies had a slight increase from Q4, primarily reflecting the ramp of new programs and the normal market conditions in North America through early March.

We expect a more material impact from COVID-19 in the second quarter as a number of our customers have been forced to temporarily close. Each day, we are evaluating the dynamic effects of the volatility in demand and taking actions to mitigate the impact to our business.

We believe we are now in the trough of this impact and we sense that the momentum is beginning to turn for businesses to reopen and establish some form of a new normal for us all. Please advance to slide 12. On this slide we show our trend of consolidated gross margin over the most recent four years, along with the performance in Q1 of 2020.

Hitting the 16% gross margin was a target we expected to meet as we exited 2019, but that was well before COVID-19 was a part of our daily lives. Looking back at 10 years of history, the consolidated gross margin of 16% was second only to Q2 of 2019. For the technology segment, gross margin of 18.2% was our best over the last 10 years.

The technologies margin improvement reflects a shift in our revenue mix and favorable cost performance from continuous improvement initiatives. The electronics segment also showed improvement in the quarter, delivering 12.6% gross margin, which is the best for this segment since Q2 2019.

Improved material availability contributed to SE margin improvement, which enabled our management team to more efficiently balance production schedules and it increased our overhead absorption. Please advance to slide 13 and I will offer a few takeaways.

Consolidated revenue for Q1 was $22.4 million, an increase of 14.6% year-over-year and 3.7% sequentially. Gross profit for Q1 improved to $3.6 million for a gross margin of 16%. The revenue increase of $2.9 million converted to a $2.7 million increase in gross profit, compared to the prior year period.

On a sequential basis, revenue increased $800,000 and gross profit improved over $900,000. Sypris Technologies gross margin increased 390 basis points to 18.2% compared to the prior year quarter despite lower revenue coming from the cyclical decline in the commercial vehicle market, coupled with the impact of the COVID-19 pandemic.

Revenue for Sypris Electronics increased to 154% over the prior year, reflecting the resolution of many of the electronic component shortages experienced during the prior year.

Sypris Electronics has maintained a strong and stable backlog that supports our expectation that this segment can perform consistently in 2020, absent an adverse impact of COVID-19 on the essential business operations of the U.S. DOD contractors and our customer base or from disruptions in our supply chain.

We generated operating income of $300,000 for the quarter and feel this was dampened late in the quarter as demand dropped for technology segment.

The extent and duration of the impacts that COVID-19 may have on our business are not known at this time and we will take every action possible to protect the health of our business associates 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 would like to turn it back over to Katie to answer any questions you might have for us. Thank you..

[Operator Instructions]. We will take a question from Joel Cahill with Jameson Companies..

Hi. Good morning guys. Thanks for the call..

Good morning Joel..

Good morning Joel..

I think one of the things that was most helpful was showing that revenue mix. I really do appreciate that and that seems like a very important step to show really how far you guys have come and that's remarkable. I really applaud that..

Okay. Thanks Joel..

So just to like, so the PPP that came, that's post quarter-end and so is the Kentucky facility, right?.

It did come subsequent to quarter-end and the sale of the property, the real estate was also subsequent to Q1. So those would be reported in Q2..

Now while we are just on that real quick, there was a $2 million decline in PP&E but that wouldn't be this Kentucky facility? Am I wrong?.

No. You are not wrong. What you are looking at on the balance sheet reflects some movement in the translation due to the FedEx -- or to the FX change, I am sorry. So the peso moved up..

Okay. Thanks..

Yes. The peso moved up considerably and as we were peso functional in Mexico and so we have to remeasure and that's what you are seeing..

Okay. Got it.

So this is from just, you are saying, the decline in the peso since it was moved up to the 25 area?.

Yes. Correct. It moved up from close to 19 to closer to 24 from December to March. Yes..

Yes. Absolutely. Okay. And so just so I am aware, is that something that you guys do, any typical hedging on? Or is this you have the [indiscernible] facility..

No. We do not do any hedging on that, Joel. And what you are seeing on the balance sheet is really a non-cash event on those assets..

Okay. Yes. I am familiar. I just wanted to make sure that I understood. And so okay, great. And while we are on the balance sheet too and I am sorry if this is just pretty simple. But that the Gill family note, it looked like there was $2.5 million that had moved to current. I don't recall what the current expiry is on that.

Would you just give me some insight here?.

Yes. It's three tranches. The first is April 1, 2021. So that's what you are seeing..

Okay. Got it. All right. That's helpful. Okay. Great. And when you were touching on margins, if we can just go back to that now, you were saying 15% consolidated which is excellent.

Do you see that there is upside opportunity there? Do you believe that you can maintain that for the year? I mean I know you are not giving guidance for the end of the year right now other than just kind of anecdotally.

But where do you see that?.

Well, in the short term, Joel, no, we don't anticipate that we are going to maintain that. We are going to need to see the recovery in the market before we will be able to achieve that again. So the impact, in particular what we are seeing in Q2, on us is going to change that. We need to see where the markets go in Q3 and Q4.

We believe that the pieces are in place operationally, certainly for when demand ramps that we will get back to that number. But we are going to need to topline them to move up before we can do that..

Okay. Great. And I will jump back if anybody else has any questions. And I will follow-up if there is time. Thank you..

[Operator Instructions]. We will take a follow-up from Joel Cahill with Jameson Companies..

Okay. Great. Sorry. I just wanted to be cognizant in any case. So two questions.

Do you know roughly kind of just for tracking balance sheet like for next quarter, roughly where this building has been held on the balance sheet on its depreciated basis that we are selling?.

Sure. It was included in the assets held for sale as of the end of the year and not quite half of that number..

Okay..

So we will be reporting a gain on that in the second quarter..

Yes. I figured as much. And then if I could just touch on one of the unpleasant ones.

As far as the NASDAQ reporting or the NASDAQ issue with potential delisting, do you have anything that, any approach to that and any thoughts to share there?.

Yes. I don't know if you are aware, if you followed it or not, but they did, NASDAQ implemented a tolling period due to the pandemic that will extend the period of compliance for us about another 60 days from July 1..

Okay..

So we are going to have some additional time to cure that to regain compliance. And so we will be monitoring that as we go through the balance of Q2 and then into the early Q3 to see if there is any further actions required..

Okay. Yes. That's great to know. And then my last one. Jeff, you mentioned some new markets.

Are you open to sharing anything that's looking particularly interesting?.

Well, I don't think I should talk specifically about it, Joel. But the diversification has been really working for us. And so our objective is to continue to open new markets for both of our segments.

And the expectation also is to move up the value add chain, if you will and take on more technically challenging, more proprietary type work because, as Tony indicated, we believe there is a nice opportunity to over time continue to accrete our margins.

And that's what we have been working on, on the last several years and that's what we will continue to do..

Okay. Great. Yes. Fully understood. I just was interested if there was any to share. But yes, gentlemen, thank you. I don't have any other questions. So thank you very much..

Okay. Thank you, Joel..

With no additional questions in the queue, I would like to turn the call back over to Mr. Gill for any additional or closing remarks..

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

That concludes today's call. We appreciate your participation..

Thank you Katie..