Sypris Solutions, Inc. (SYPR) Q2 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Sypris Solutions Inc. Second Quarter 2012 Earnings 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, sir.

Thank you, Melanie, and good morning, everyone. Brian Lutes, Tony Allen and I would like to welcome you to this call, the purpose of which is to review the trends reflected in the company's financial results for the second quarter of 2012. 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 a brief discussion of each of our 2 business segments. Brian will then provide you with a more detailed review of our financial results for the quarter. Now let's begin with the overview on Slide 4. We're pleased to report that the company continued to make important progress during the quarter. Revenue increased 16% to $99 million for the quarter, compared to $85.1 million for the prior-year period. Gross profit increased 63% to $13.2 million, reflecting a $5.1 million increase from the second quarter of 2011. Gross margin increased to 13.4%, up 390 basis points from 9.5% in the second quarter of 2011, and up 13% sequentially. Earnings from continuing operations increased to $0.25 per diluted share, up from a loss of $0.08 per diluted share for the prior-year period. In other areas of activity for the business, the company was added to the Russell 2000 during the month of June. And subsequent to quarter end, we announced the election of Bob Lentz, former Deputy Assistant Director of Defense and Chief Information Security Officer for the U.S. Department of Defense, to our Board of Directors. Let's advance to Slide 5 and take a look at the first 6 months of 2012. Revenue increased 21% to $195.4 million, compared to $160.9 million for the prior-year period. Gross profit increased 58% to $25.7 million, up from $16.3 million during the first 6 months of 2011. Gross margin increased to 13.2%, up 310 basis points from 10.1% during the first half of 2011, while earnings from continuing operations increased to $0.52 per diluted share, up from $0.05 per diluted share for the prior-year period. Our net cash position followed suit, increasing by $12.4 million from the second quarter of 2011. So in summary, the results for the quarter and the first half of 2012 were quite positive, driven by productivity, efficiency and profitable growth in both segments. Now let's take a brief look at our Aerospace & Defense segment, beginning on Slide 6. During the quarter, revenue was $16.1 million, which was even with the second quarter of last year, but up 15% sequentially from the first quarter of 2012, and up 41% from the fourth quarter of 2011. These increases were driven by sales to our international customers including those in Australia and New Zealand. Gross margin increased to 26.9% compared with 6.4% for the prior-year period and up from 18.6%, that was reported in the first quarter of this year. We continued to invest in R&D, with a strong emphasis on our cyber initiatives, and our designation as a trusted source for our engineering design and manufacturing services continue to generate new opportunities with Lockheed Martin, Northrop Grumman, L-3, ITT and others. We continue to pursue opportunities for securing supply chain, network, mobile and cyber-physical applications. In addition, we are responding to a number of international solicitations for our Cyber Range capabilities. Turning to Slide 7. As we look forward, we believe that our sustained operational excellence and reliable execution is translating into high levels of customer satisfaction and resulting in an expanding sales funnel. The on-boarding of new customers, SubCom, L3 and others, and the expansion of coverage with current customers, Northrop Grumman, Lockheed Martin, will continue to be an important focus for us for the remainder of the year. Our country's budgetary and tax situations certainly raises questions as we approach the back half of 2012. The market has never been more dynamic, but along with the attendant risks, we believe that a number of important opportunities exist for companies that are well positioned and aggressive. More specifically, we believe that the rationalization of defense spending will result in more demand for products that offer common platforms, thereby eliminating the need to purchase a variety of single-use products. We also believe that resources will be increased for cyber defense and for modernization efforts to extend the life of currently deployed equipment at the expense of new platform development. If either or both of these scenarios turn out to be accurate, our sense is that we will be well positioned for the future. Advancing to Slide 8. Let's take a look at our Industrial segment. Revenue increased 20% to $83 million, up from $68.9 million for the prior-year period, reflecting continued industry expansion and shipments under new contracts. Gross profit increased by 26% to $8.9 million, up from $7.1 million in the second quarter of 2011. Gross margin was 10.7% of revenue, up slightly from the prior-year period, despite the short-term impact of investments in automation and production cell rebuilds. Key metrics for equipment uptime, quality and on-time delivery were excellent, once again exceeding expectations and serving as testimony to the outstanding work being performed by our team in this segment of the business. We continued to invest in leading technology to meet the needs of our expanding list of customers, while quoting activity for new business remains strong with significant opportunity to win additional new business for 2013 and beyond. Advancing to Slide 9. As we look forward, demand for heavy-duty trucks softened during Q2, and is expected to soften further during the coming months. Our sense is that the pullback reflects increasing economic uncertainty and the recognition that trucks can now be purchased on short lead time. The supply chain has simply become much more efficient now, resulting in a more conservative wait-and-see mentality on the part of the fleets. Demand for medium-duty vehicles is in line with expectations, with an outlook for sustained growth over the next several years, as both residential and commercial construction begin to expand from depressed levels. And demand for trailers also remains at healthy levels. Overall, the fundamentals remain positive with key metrics for fleet profitability, fleet growth, fuel prices, interest rates and equipment age at attractive levels. Going forward, we will continue to focus on further margin expansion through the continuous elimination of waste and the strict management of our variable costs. We believe that we're well positioned to succeed under a variety of scenarios with cost effective production capacity in place and new business coming online. It is now my pleasure to turn the balance of this presentation over to Brian.

Great. Thanks, Jeff. Good morning, everyone. I'd like to discuss with you briefly the highlights of the second quarter and our first half financials. And in that, starting with our Aerospace & Defense segment, and ask you to advance to Slide 10. Q2 revenue within A&D was $16.1 million, essentially flat with the prior-year period, however, gross margins expanded substantially as you see there from 6.4% to almost 27% as a result of our ongoing strategic objectives targeted at insulating us from the challenges related to the budgetary and funding uncertainty you heard Jeff speak about. This included expanding sales to international customers in Australia and New Zealand. Second, our journey into Lean and the Continuous Improvement endeavor has continued to strengthen our supply chain execution by lowering costs and achieving highest level ever in customer -- key customer satisfaction metrics. As you see, as a result, these initiatives drove EBITDA performance in a meaningful way, up just over $3 million from the prior-year period to $1 million, and did reflect ongoing R&D investment of about $1 million in the quarter, that was about $111,000 over the prior-year period. Let me ask you to advance to Slide 11 to talk about the sequential results. On a -- on revenue that increased 15.2% to $16 million for Q1, gross profit improved $1.7 million or just under 67%, and gross margin expanded considerably as well, coming in at 26.9% in Q2, versus just under 19% in Q1, reaffirming the strategic initiatives and the change in mix. Finally, EBITDA increased $872,000 from Q1 to Q2, and this is despite the R&D spending in the quarter that was $641,000 higher than the Q1 spend -- in Q1 of $394,000. Shifting gears through our Industrial segment, if you would advance to Slide 12. The Industrial Group's revenue in Q2 was $82.9 million, this was 20.3% higher from the prior-year period, reflecting continued market expansion for the medium and heavy truck market, as well as the impact of new business programs that are contributing in a meaningful way. At the gross profit line, Q2 came in at $8.9 million, this is up 25.8% from the prior-year period. You've heard us talk about this quite often, but driven by the positive conversion on the incremental sales and improvements in productivity and efficiency resulting from our efforts in continuous improvement. Despite the impact from certain automation and cell rebuild programs and associated maintenance expenses that we incurred during the quarter, our gross margins still improved 40 basis points from the prior-year period, coming in at 10.7%. EBITDA performance for the quarter came in at $9.8 million, up nearly 30% from the prior-year period, again, driven by the strength of profit conversion on incremental sales. If we look at the consolidated results for the quarter, please advance to Slide 13, you'll see that our consolidated revenue was $98.9 million. This was up $14 million or 16.3% from the prior-year period, and again, driven predominantly by the continued strength of the market conditions for commercial vehicles and trailers. Strong gross profit for the quarter coming in at $13.2 million, this is up $5.1 million or 63% from the prior-year period, driven by our Aerospace & Defense product mix, it's supply chain execution and, of course, the positive conversion on the incremental sales in our Industrial segment. As a result, this drove the EBITDA performance to $8.5 million or up $4.9 million or 137% from the prior-year period. An important metric in terms of our going forward and sustaining profitability, earnings from continuing operations increased to $0.25 per diluted share, this is up from a loss of $0.08 per diluted share for the prior-year period. Again, reflecting strong execution in both segments during the quarter. Let me now shift to the performance in the context of our first-half period with our Aerospace & Defense segment, and ask you to advance to Slide 14. For the first half A&D's revenue came in at $30 million, this is down slightly, $2.4 million from the prior-year period, attributable largely to the completion of certain electronic manufacturing and engineering services programs. However, gross profit for the first half increased $2.9 million, or nearly 71%, to $6.9 million, and was enabled by their strategy, largely around expanding sales into other markets with little to no defense spending uncertainty. And finally, EBITDA for the first half came in at $1.2 million, this reflects a $2.6 million increase from the prior-year period, and certainly reflects the positive impact of the items we've discussed. Shifting to our Industrial Group segment for the first half on Slide 15. First half revenue came in at $165.4 million, compared to $128.4 million from the prior-year period. Again, this is about a 29% increase bolstered by the continuing industry expansion within the medium and large commercial vehicle markets, as well as revenues related to new growth platforms. Gross profit for the first half was $18.8 million compared to $12.2 million, or 54.2% higher than the prior-year period. Again, driven by the profit conversion, new customer platform sales and, certainly, sustained operational efficiencies as a result of that segment's extensive efforts in the areas of readiness planning undertaken during 2010 and into 2011. And of course, as you heard Jeff mention, the continuing manufacturing line rebuilds continued aim to driving further improvements in productivity and efficiency. And finally, gross margin for the first half of the year, this was at 11.4%, this is up from 9.5% from the prior-year period, and this is despite the impact of some of the automation and equipment rebuilds that we undertook in Q2. EBITDA performance. You see there, first half came in at nearly $22 million, or $5.6 million higher from the prior year, again, as a result of the items I discussed earlier. If you really summarize the themes, it was continued industry expansion, profit conversion and new growth platforms, all interwoven with a relentless focus on execution and managing costs throughout the first half of the year. Finally, shifting to the consolidated financial results on Slide 16. Again, we feel that it was a very, very solid quarter as well as a solid first half in terms of execution, and reflects significant progress on many fronts. In terms of profit conversion, we've talked about Industrial Group's ability to drive maintenance and throughput. We talked about expanding and diversifying our customer mix, not only in the Industrial Group but our Aerospace & Defense segment to better insulate our financial performance from the all-too-familiar truck and trailer industry dynamics and the ongoing uncertainty and rationalization of U.S. Defense spending. And finally, we've discussed with you several years ago, we embarked upon our journey in Lean. We went outside the 4 walls and all of our operating executives were immersed in comprehensive training. We benchmarked the best of the best, and we've recruited individuals to advance our progress and seed our D&A. All of these efforts contributed in a meaningful way. First half, sales and gross profit increased 21% and 58%, respectively, while gross margin expanded 310 basis points from the prior-year period. This ends up driving a $0.47 improvement in earnings per diluted share from continuing operations. In terms of concluding Jeff and I's presentation, if you'll advance to Slide 17. Again, for the quarter, sales and gross profit increased 16% and 63%, respectively, while gross margin expanded 390 basis points from the prior-year period. Our Industrial Group sales increased 20%, and gross profit increased 26% despite our short-term project spending and equipment rebuilds targeted to improve productivity. On a very, very positive note, our Aerospace & Defense gross margin came in at 27% of revenue, this was up from 6% for the prior-year quarter, and again, reflects the initial impact of efforts to increase the value add across our product mix. For the second quarter, earnings from continuing operations increased $0.25 per diluted share, again, this was up from a loss of $0.08 per diluted share for the prior-year period. Overall, as we look at the first 6 months of the year, again, sales and gross profit increased 21% and 58%, respectively, while gross margin expanded 310 basis points. Again, this drives our earnings, in terms of the first half year performance, to $0.52 per diluted share, this is up from $0.05 for the prior year. We will continue, of course, driving the margin and expansion through the elimination of wastes, strong process control, cost effective production capacity and increasing value add and the addition of profitable new business in both the segments. We look forward to the challenges and opportunities in front of us at this time. And we'll now open it up and turn it back over to Melanie for any questions you might have.

[Operator Instructions] And gentlemen, it looks like we have no questions today.

Well, thank you, Melanie. I want to say that first of all, we want to thank everyone. It was obviously a good quarter and a good start to the year, and it must be reflective of that fact because this is the first time we've never had any questions. So on behalf of Brian and Tony, we want to thank you for joining in this -- joining us this morning, we welcome your continued interest, and of course, your questions about our business. We thank you, and have a good day.

And that does conclude today's conference, we thank you for your participation.