Sypris Solutions Q3 2024 Earnings Call Transcript

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November 15, 2023

There are 2 speakers on the call.

Operator

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

Speaker 1

Thank you, Nick, and good morning, everyone. Rich Davis and I would like to welcome you to this call, the purpose of which is to review the company's financial results for the Q3 of 2023. Bob. For those of you who have access to our PowerPoint presentation this morning, please advance to Slide 2 now. Bert.

Speaker 1

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. Bob. 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. Bob. These factors are included in the company's filings with the Securities and Exchange Commission.

Speaker 1

And in compliance with Regulation G, you can access our website, cypress.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. Bob. I will lead you to 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.

Speaker 1

Rich will then provide you with a more detailed review of our financial results for the period. Bob. Now let's begin with the overview on Slide 4. We are pleased to report that revenue for the quarter increased 33% year over year, Bob. Reflecting continued strength across each of our business segments, with revenue rising 73.5% for Sypris Electronics Bob and 13.8% for Sypris Technologies on a year over year basis.

Speaker 1

Gross profit increased 105% for the period, Bob, reflecting an increase of 186.8 percent at Sypris Electronics and 36.2% at Sypris Technologies. The operator. Gross margin for the company followed suit, rising by 4 20 basis points for the quarter, driven by an increase to 7.10 basis points for Sypris Electronics and by 120 basis points for Sypris Technologies. Bob. Backlog for the period increased 8.4% on a consolidated basis, which was an important accomplishment following the 33% increase in sales during the operator.

Speaker 1

Backlog for Sypris Electronics increased 9% to $109,500,000 at the end of the quarter, Bob, up $9,000,000 from the prior year period. The company's financial performance was particularly notable Sensibor the negative weight of $800,000 in the form of foreign currency headwinds when compared to the prior year period. In other words, from an operating standpoint, it was another very positive quarter. As we mentioned previously, we have entered an inflection Dwight. Our rapidly rising demand is intersecting with the increasingly availability of material.

Speaker 1

Bob. We believe that the pace of conversion of our backlog into revenue will continue to accelerate as we now ramp up new programs to full rate production. Mike. Turning now to Slide 5. We've been pleased to announce several additional new contract awards during the quarter.

Speaker 1

Bob. More specifically at Sypris Technologies, in August, we announced an award for 72 inches insulated joints for use in the expansion to the Atoka water pipeline for the Oklahoma City Water Utilities Trust. According to news sources, the second Atoka pipeline is being built to provide Oklahoma City and its surrounding areas with potable water. Bert. The project is the largest municipal water infrastructure project in the history of the state and includes a new 100 mile long, seventy the 2 inches diameter pipeline that will transport raw water from Lake Hatoaka to Lake Stanley Draper in Oklahoma City, Bob, where it will then be treated and delivered to more than 1,400,000 people in Central Oklahoma.

Speaker 1

The pipeline is slated to cost $800,000,000 Bob and move more than 100,000,000 gallons of water per day. Cypress has agreed to manufacture and supply its 2 turns branded monolithic insulated joints for cathodic protection of the new 72 inches polyethylene coated and Cement Mortar Line Steel Pipeline. These insulated joints will be 72 inches in diameter and will be rated to a pressure of 300 PSD. Bob. Shipments under this contract are expected to start in 2023 and finish in 2024.

Speaker 1

Rick. In August, we announced an award for specialty high pressure closures for use in the Venture Global CP2 LNG export terminal Bert and the Venture Global CP Express Natural Gas Pipeline Project. The CP2 LNG facility will be a natural gas the liquefaction export terminal with a nameplate export capacity of 20,000,000 metric tons per annum. The CP2 LNG will be the 2nd LNG export project developed by Venture Global LNG in Cameron Parish, Louisiana, Bob. The first being the Calcasieu Pass project.

Speaker 1

Together, they represent more than $10,000,000,000 of direct investment in the parish the operator reporting to new sources. CP Express will consist of approximately 85 miles the Diameter Lateral Pipeline to connect the CP2 LNG terminal to the existing natural gas pipeline grid at East Texas the President and CEO of the President and CEO of the Global Venture LNG to develop clean and reliable North American energy supply. Wes. The project is proposed to be in service by mid-twenty 25. Cypress has agreed to manufacture and supply its Tube Turns branded specialty high pressure tool less closures for use on the filtration systems for the project.

Speaker 1

Bert. These closures will range up to 70 inches in diameter, will be rated to a pressure of 2,180 PSI Blair and weigh up to as much as 17.5 tons each. Shipments under this award are expected to be completed by year end. Bob. Turning now to Slide 6.

Speaker 1

At Sypris Electronics, we recently announced the receipt of 2 multimillion dollar follow on the Board of Directors from a U. S. Global defense contractor to produce modules to be incorporated into an advanced the Integrated Electronic Warfare and Communications Avionics System for 1 of the largest programs of the Department of Defense. Bob. The program is for an American family of single seat, single engine, all weather stealth multirole combat aircraft Bob that is intended to perform both air superiority and strike missions.

Speaker 1

The aircraft is also able to provide electronic warfare and intelligence, surveillance and reconnaissance capabilities. According to news sources, the U. S. Plans to purchase versions of the aircraft through the year 2,044 and the aircraft is expected to operate until 2,070. Bob.

Speaker 1

Cypress will produce and test the advanced integrated electronic avionics system modules for the communications, the navigation and identification suite of the aircraft. The system supports the simultaneous operation of multiple critical functions, Bert. Such as identification of friend or foe, precision navigation and various secure voice and data communications. Bob. Production is expected to begin in 2023.

Speaker 1

We also announced that we've received a follow on award to the U. S. DoD prime contractor to manufacture and test embedded circuit card assemblies that will perform certain of the cryptographic functions to the Army Management System. The AKMS is a fielded system that consists of 3 subsystems, our local communications security management software, automated communications engineering software the simple Keylo device. Under the umbrella of our nation's electronic key management system, AKMS provides tactical units in sustaining basis with an organic key generation capability and an efficient The embedded circuit card assemblies to be produced by Cypress Bert.

Speaker 1

We'll perform the cryptographic functions for ruggedized, portable, handheld simple key load device that will be used to securely receive, the store and transfer data between compatible cryptographic and communications equipment. The device incorporates features to provide for the streamlined management of communication security key, electronic protection data and signal operation instructions. The Production is expected to begin in 2023. Each of these contracts the representative of the high cost of failure applications for which Cypress is well known. We expect the momentum of new contract wins to continue into the coming year and we remain very optimistic about the potential for future program and revenue growth as we move forward.

Speaker 1

Bert. We expect full year revenue growth for 2023 to approximate 25%, with gross profit rising by a similar percentage despite the drag associated with the continued strength of the Mexican peso on a year over year basis. Bob. Our initial outlook for 2024 is positive, reflecting our strong backlog and the continued momentum of new contract awards both across many of our markets. Revenues forecast to increase 15% to 20% with gross profit rising 25% to 30%, Bert.

Speaker 1

While gross margins are expected to expand 150 basis points to 200 basis points. Now let's advance to Slide 7 Bob. According to ACT Research, the demand for the production of commercial vehicles is now expected to rise 7.3% to 625,000 vehicles during 2023 and for a softening of demand to occur in 2024, the With production forecast to decline by 13.4% for the year before rising sequentially in each of the following 2 years. Bob. We believe that the potential exists to grow through the cycles with momentum continuing to favor the reshoring of production to Western Europe and within North America to Mexico.

Speaker 1

Turning now to Slide 8, the market for the transportation and use of natural gas is key for Cypress and has become increasingly dynamic over this past year. The European countries boosted LNG imports by 60% in 2022 to offset declining pipeline shipments from Russia. Them. As part of the strategic response to their former dependency on Russia for the reliable supply of natural gas, Europe has embarked upon an aggressive campaign to source its needs elsewhere. The IEEFA the operator.

Speaker 1

We are very pleased that Europe will increase its LNG import capacity by 33% by the end of 2024 Bob and that the global LNG market will see a tidal wave of projects coming online starting in mid-twenty 25. The outlook projects the projects at the 64,000,000 metric tons of annual liquefaction capacity will be added by 2026. Bob. The U. S.

Speaker 1

Is a major provider of LNG and became the world's largest exporter in 2022 Bob with plans to do even more in the future. By way of illustration, the U. S. Exported 10 point Bob. 6,000,000,000 cubic feet per day in 2022 and is forecast to export 13,300,000,000 cubic feet per day in 20 the $24,000,000,000 $22,500,000,000 cubic feet per day by 2027.

Speaker 1

Bob. The maps to the right depict the various projects underway in the U. S. And Europe, identifying those that are proposed, the company approved under construction and in operation. The continued growth in our energy products backlog year over year reflects strong and growing demand to support these infrastructure programs.

Speaker 1

We remain cautiously optimistic that this positive outlook will remain in effect for some Brian. As you will see from the chart on Slide 9, the long term market expense spending remains positive Bob. And within the overall budgetary allocations, spending for technology upgrades at strategic platforms continues to be a very high priority. Bob. Our backlog of business now stands at $109,500,000 is up 9 Bassett year over year with firm orders extending into 2025.

Speaker 1

We are very pleased with the level of new business momentum Bob. We are optimistic that this important trend will continue going forward. During previous calls, we discussed the Bob. Changes that have taken place in our market mix over the past several years. Turning now to Slide 10, Doug.

Speaker 1

Please note that revenues forecast increased 15% to 20% for 2024, with shipments to our customers in defense related markets expect to the operator to

Operator

increase significantly.

Speaker 1

As a result, the Fence Electronics is forecast to represent 46 Bob. We believe that additional opportunity exists to further diversify our business and we will continue to aggressively pursue this outcome. Bob. Now let's turn to Slide 11 for a brief summary. Revenue for the quarter increased 33%, Bob.

Speaker 1

Our gross profit increased 105% and gross margins expanded 4 20 basis points despite the negative drag of the Mexican peso on our year over year results. The defense market should benefit from increased spending in fiscal 2024 Bob. With discretionary and emergency funding combining to exceed $1,000,000,000,000 for the year. And within this overall expected spend, the call. Investments in Electronic Warfare, Avionics and Communications are forecast to rise disproportionately.

Speaker 1

The operator. As a result, we are pleased to issue our initial outlook for 2024 with revenue expected to increase 15% to 20% year over year. Bert. We expect gross profit to rise 25% to 30%, while gross margin is forecast to expand 150 basis points to 200 basis points for the year. Bob.

Speaker 1

Turning now to Slide 12. Rich Davis will lead you through the balance of our presentation.

Operator

Rich? Thanks, Jeff. Doug. Good morning, everyone. I'd like to discuss with you some of the highlights of our Q3 year to date financial results.

Operator

Bob. Please advance to Slide 13. Q3 consolidated revenue was $33,600,000 an increase of 33% the Q3 of last year. Consolidated gross profit was $4,000,000 for the quarter, increasing 105% from the prior year quarter Bob. Due to overall higher production and shipment volumes in both segments and favorable mix, offset by the impact of 0.8 1,000,000 the operator in unfavorable peso to dollar exchange rates.

Operator

Revenue for Sypris Technologies increased 13.8% year over year the Q1 of 2019,300,000 for the quarter. Gross margin was up 120 basis points from the prior year the quarter due to favorable mix offset by the unfavorable peso to dollar exchange rate impact. On the cost side, we continue to experience some of the inflationary pressures that are being felt across the economy. Prices of consumable supplies and tooling have increased the Q1 of 2018. We continue to do daily management of spend in these areas, including scheduling production in off peak utility rate hours Bob as much as possible.

Operator

Our engineering and product development teams have also initiatives underway to reduce steel consumption both our forging and machining processes to improve our margins and deliver cost savings to our customers.

Speaker 1

The operator. Revenue for Sypris Electronics was

Operator

$14,200,000 for the quarter, an increase of 73% year over year. The operator. Gross margin was at 18.1%, an increase of 7 10 basis points year over year on higher production and shipment volumes, favorable mix, Bob. We continue to implement a comprehensive approach to continuous improvement in lean manufacturing at Sypris Electronics and to expand its workforce to reinforce the team's efforts to effectively serve its customers and the execution of significant sequential quarterly increases in shipments in 20 the Q3 and on into 2024. We also continue to implement additional automated production and inspection equipment to further improve our manufacturing efficiency.

Operator

We expect these efforts to cost effectively further boost manufacturing output to meet the planned shipment increases. As we increase production and continue to make manufacturing process improvements, We anticipate an improvement in labor productivity and overhead absorption resulting in an improvement in margins. The operator. Consolidated operating income for Q3 was 0.1 $1,000,000 loss due to the 0.8 $1,000,000 unfavorable peso to the dollar exchange rate impact noted earlier, up from a loss of $1,600,000 in the prior year, due principally to the increase in gross profit. Bob.

Operator

Our operations teams are focused on execution and meeting our objectives for customer service at expanded volume levels, while also reducing cost per unit. Bob. The strong backlog in place provides a solid foundation to support this growth through the remainder of 2023 and into 2024. Bob. Please advance to Slide 14.

Operator

Year to date consolidated revenue was $101,500,000 Bill, an increase of $21,100,000 or 26 percent from the 9 months of last year. Both segments contributed to this year over year revenue growth. Bob. Year to date consolidated gross profit increased 25 percent to $12,900,000 Excluding the impact of $1,800,000 in year to date the operator to the operator to the operator. Unfavorable peso to dollar exchange rates, gross profit would have increased by 43% to 14,700,000 Bob.

Operator

Year to date revenue for Sypris Electronics was $42,600,000 an increase of 50% from the prior year Bob. And gross profit increased 72 percent to $6,800,000 Gross margin improved 202 basis points to 15.9%. In addition to the factors previously noted for Q3, the comparison of year to date revenue and gross margin for Sypris Electronics to the prior year period reflects the significant increase in revenue volume resulting from a very high level of bookings achieved Doug. In 2022 and continuing into 2023 and the significant progress our integrated manufacturing and continuous improvement team the operator who has made in delivering on the steeply increased backlog. Year to date revenue for Sypris Technologies increased the Q1 of 2018.

Operator

Gross profit decreased 3.6 percent to $6,100,000 mainly due to the $1,800,000 year to date the Q1 of 2019. Excluding the impact of the unfavorable exchange rates, gross profit would have increased to the operator by 25% to $7,900,000 Gross margin decreased 180 basis points to 10 to the Q4 for the period. Excluding the impact of the unfavorable exchange rates, gross margin would have improved 125 basis points to 13 point the 4%. The Mexican peso strengthened significantly against the U. S.

Operator

Dollar in 2023 to levels not seen since before the pandemic. Bert. In 2019, the rate varied from Ps. 18.76 per dollar to Ps. 19.91 per dollar.

Operator

Bob. After the disruption of the pandemic, the rate moved to MXN 19.47 per dollar on December 29, 2022, Bert after having varied in a range above that from early 2020 to that date. Since that date, the rate has fallen to 17.32

Speaker 1

the operator as

Operator

of this morning, a rate not seen in the previous 5 years. Forecast of the future rates vary widely. Bob. We are evaluating currency hedging options at this time under a variety of scenarios. Our year to date consolidated SG and A expense was 11 point Bob.

Operator

$6,000,000 an increase of 8.6 percent over the prior year. Merit pay increases and limited additions to business development and program management personnel contributed Bob. The increase. SG and A as a percent of revenue decreased to 11.4% from 13.3% a year ago. Bob.

Operator

As our revenue increases, we expect further reductions in SG and A as a percent of revenue as operating leverage improves. Bob. Our year to date operating income was $1,300,000 an increase of over 3.5 times the operating loss of the $4,000,000 for the same period in 2022. Please advance to Slide 15. Bob.

Operator

On this slide, we show our trend of consolidated gross margin for 20222023 along with the performance expected for 2024. Bob. 2023 is expected to approximate the prior year as the impact of negative peso of the negative peso to dollar exchange rate more than offset the positive impacts of higher volumes on production efficiencies, favorable mix, material savings on certain programs the and the positive impact of our continuous improvement initiatives. As noted in the 2023 pro form a bar on the graph, Our gross margin would have been 14.4 percent or 90 basis points higher had it not been subject to the full year estimate of 1,900,000 Bob for the unfavorable peso dollar exchange rate impact. With our 2024 outlook for a revenue increase of 15% to 20% In a more limited impact of the peso dollar exchange rate, our 2024 gross margin outlook is 14.8% to the operator on higher volumes at the expected mix.

Operator

We will strive to continuously improve manufacturing output and productivity, while maintaining excellent quality. Bob. We will also continue our efforts to diversify our markets served and our customer base and to deliver more value added services to our customers, Mike, which we believe can provide further upside to our current margin levels. Please advance to Slide 16 Doug for a quick summary of our comments. Key highlights for the quarter year to date include the continued strong backlog position Bob and a significant increase in gross profit both for the Q3 and the year to date periods despite the unfavorable impact of the Mexican Basso relative to the U.

Operator

S. Dollar. We expect rapid growth in Sypris Electronics Defense market, supplemented by additional funding to meet the defense needs of our the operator. This market will likely exceed $1,000,000,000,000 for the fiscal year 2024. We also expect significant growth in its the Communications and Space Markets.

Operator

The outlook for Sypris Technologies remains positive, though the current forecast for commercial vehicles in 2024 Bob. Is for a year over year decline of 13.4%. That decline is expected to be offset by planned increases in new programs the operator with existing commercial and other vehicle customers and currently strong demands for its energy products for use in the rapidly growing LNG export markets among others. Sypris Technologies, in addition to expanding its energy product line to include pig signalers, the operator. Augmenting its distribution resources to expand its energy products presence in Europe, Asia, the Middle East and Mexico the has booked its first order for insulated joints in a waterline expansion application.

Operator

Based on our strong backlog, growing new business funnel And growing market potential, we offer our initial guidance for 2024 at 15% to 20% growth in revenue, the 25% to 30% growth in gross profit and a 15 to 200 basis point increase in gross margin. Bert. We look forward to the opportunity to continue the positive momentum of growth and continuous improvement in 2023 into a bigger the and more profitable 2024. Thank you for your continued support and interest in our business. Now, I'd like to turn it over to Jeff for closing remarks.

Operator

Bob.

Speaker 1

Thank you, Rich, and thank you for joining us on this call this morning. We're looking forward to another year of double digit growth, expanding margins and increased profitability. And please know, we appreciate your continued interest in our business. Thank you and have a good day.

Operator

Them. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • In Q3, revenue rose 33% year-over-year, driven by a 73.5% increase at Sypris Electronics and 13.8% growth at Sypris Technologies.
  • Gross profit climbed 105% with gross margins expanding by 420 basis points, and consolidated backlog increased by 8.4% to $109.5 million.
  • Cypress secured major energy infrastructure contracts, including 72-inch insulated joints for the $800 million Atoka water pipeline and high-pressure closures for Venture Global’s CP2 LNG and CP Express projects.
  • The company received multimillion-dollar follow-on awards to supply advanced avionics modules for stealth combat aircraft and cryptographic card assemblies for the Army Key Management System, with production slated to begin in 2023.
  • Unfavorable Mexican peso exchange rates imposed a headwind of approximately $0.8 million on Q3 results and remain a notable currency risk.
AI Generated. May Contain Errors.
Earnings Conference Call
Sypris Solutions Q3 2024
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