Sypris Solutions Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 16, 2023

There are 4 speakers on the call.

Operator

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 President and Chief Executive Officer, Mr. Jeffrey Gill.

Operator

Please go ahead, sir.

Speaker 1

Thank you, and good morning, everyone. To 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 Q1 of 2023. For those of you who have access to our PowerPoint presentation this morning, please advance to Slide 2 now. To 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. To 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.

Speaker 1

Like to turn the call over to Mr. President. These factors are included in the company's filings with the Securities and Exchange Commission. And in compliance with Regulation to review any definitions of any non GAAP financial measures that may be discussed to conclude during this call. With these qualifications in mind, we'd now like to proceed with the business discussion.

Speaker 1

To 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. Rich will then provide you with a more detailed review of our financial results for the period. To now let's begin with an overview on Slide 4. We are pleased to report that revenue for the quarter increased 23.4 to turn the call over to Page 10.7 percent sequentially, reflecting continued strength across each of our business segments, With revenue rising 42% for Sypris Electronics and 13.7% for Sypris Technologies on a year over year basis.

Speaker 1

Like Orders for the quarter were up 73.6% year over year, driven by a 91.4% increase electronics in a 25.7% increase for the energy products of Sypris Technologies. Our backlog increased accordingly, raising 121% on a consolidated basis. Backlog for Sypris Electronics increased 125 percent to $131,600,000 at the end of the quarter, to up $73,000,000 from the prior year period. In a similar fashion, backlog for the Energy Products to Cypress Technologies increased 61% year over year, reflecting positive global demand for the segments highly engineered products. To On a consolidated basis, backlog has now increased for 11 consecutive quarters on a year over year basis With an average quarterly increase of 53%.

Speaker 1

In fact, over the past 17 quarters, going back more than 4 years, to Backlog has increased in all but two periods, the second of which was a 9.4% decline for the Q2 of 2020, Which reflected the impact of customer shutdowns of the onslaught of the pandemic. As many of you may remember, we mentioned previously that we were to enter in the inflection point, where rapidly rising demand was intersecting with the increasing availability of material. 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. Like. Turning now to Slide 5.

Speaker 1

We've been pleased to announce several additional new contract awards during the quarter. To More specifically, it's Sypris Electronics. In February, we announced an award to produce and test electronic interface modules to request the SEC to review the SEC to support the SEC. That is an important part of the DoD's ongoing modernization effort. To The result of the program will be to increase the strategic and tactical capabilities for a variety of aircraft platforms.

Speaker 1

To Production on this program is expected to begin in late 2023. And shortly after quarter end in April, We announced the receipt of additional releases under a multiyear production contract that was first announced in 2022. To The award provides for the manufacture and test of electronic assemblies for an additional 4 systems to be supplied to U. S. Department of Defense to contact our contractor.

Speaker 1

The modules to be produced by Sypris will be integrated into an electronic warfare improvement program. According to news sources, the upgrade will provide the capability to actively jam incoming missiles that threaten a warship, like to queue decoys and adapt quickly to evolving threats. Production on this program is scheduled to begin later this year with deliveries to begin in late 2023. Turning now to Slide 6, Sypris Technologies announced to acknowledge that it has entered into an amendment to its current supply agreement with Detroit Diesel Corporation, a subsidiary of Daimler Truck North America. To Daimler Truck North America is itself a subsidiary of Daimler Truck Holding AG, one of the world's largest commercial vehicle manufacturers.

Speaker 1

Like to The amendment adds a new series of part numbers to the agreement with DTC for drivetrain components used in DTC's to introduce our new fleet of truck drivers. The components to be produced by Cypress will be essential to the performance of the drive axles of Freightliners heavy duty vehicles. To production of these additional part numbers under the amended contract are expected to commence in 2023. Like to And shortly after quarter end in April, we announced the award of a new program to supply drivetrain components for use in to introduce the production of a new model of side by side all terrain vehicles. The new program award provides Cypress with the opportunity for further growth

Speaker 2

to review the conversion

Speaker 1

in the market. The finished components produced by Cypress to exacting specifications to will be incorporated into the differentials of these vehicles. The all train vehicle market is forecast to expand at a compound annual growth rate of to 15.8 percent between 2020 2025 according to Technavio Research. Production is expected to begin in 2024. Each of these contracts to conclude the year and we remain very optimistic about the potential for future program and revenue growth as we move forward.

Speaker 1

To In summary then, we are pleased with the substantial progress that continues to be made across our business. The supply chain challenges are continuing to abate and our focus is clearly on meeting the growing demand of our customers. To Now let's advance to Slide 7 to review the outlook for each of our major markets. According to ACT Research, to The demand for the production of Class 8 heavy vehicles increased 19% in 2022 and is expected to remain essentially flat at this elevated level during 2023. There are many factors to that are having a positive influence on the demand for transportation.

Speaker 1

Unfilled demand from 2022, Capacity shortfalls in the supply chain, elevated carrier profitability and the continued transition to e commerce among other factors. To Shortages of semiconductor chips, steel and other key components have served to hold OEM production levels down, to pushing backlog well into 2023. The current ACT outlook calls for medium and heavy duty truck production to remain at elevated levels before easing somewhat in the second half of twenty twenty three. Like Turning now to Slide 8, the market for transportation and use of natural gas is key for Cypress and has become increasingly dynamic over this to discuss the past year. European countries boosted LNG imports by 60% in 2022 To offset declining pipeline shipments from Russia.

Speaker 1

As part of the strategic response to their former dependency on Russia for the reliable

Speaker 2

to provide a summary of natural gas.

Speaker 1

Europe has embarked upon an aggressive campaign to source its needs elsewhere. The IEEFA forecasts that Europe will increase its LNG import capacity by 33% to provide. The outlook projects that 64,000,000 metric tons of annual liquefaction capacity will be added by 2026. Like The U. S.

Speaker 1

Is a major provider of LNG and became the world's largest exporter in 2022 to plan to do even more in the future. The maps to the right depict the various projects underway in the U. S. And Europe, to identify those that are operational, under construction, approved and proposed. To The 61% growth in our energy products backlog year over year reflects the strong and growing demand to support these infrastructure programs.

Speaker 1

To We remain cautiously optimistic that this positive outlook will remain in effect for some time to come. To As you'll see from the chart on Slide 9, the long term market for defense spending remains positive And within the overall budgetary allocations, spending for technology upgrades on strategic platforms continues to be a very high priority. To Our backlog of future business now stands at $131,600,000 and is up 100 to 25% or $73,100,000 year over year with firm orders extending into 2025. To We're very pleased with the level of new business momentum and we're optimistic that this important trend will continue going forward. To During previous calls, we discussed the changes that have taken place in our market mix over the past several years.

Speaker 1

To turn now to Slide 10. Please note that revenues forecast increased 25% to 30% for 2023, like to shipments to our customers in defense related markets expected to increase significantly. As a result, Defense Electronics is to forecast to represent 39% of consolidated sales in 2023, up from 28% to turn

Speaker 2

the call over to John.

Speaker 1

We believe that additional opportunity exists to further diversify our business And we will continue to aggressively pursue this outcome. Now let's turn to Slide 11 for a brief summary. Revenue for the quarter increased 23.4%, while backlog grew by 121%, to provide a strong platform to support future growth in 2023.

Speaker 3

Backlog

Speaker 1

to turn the call back over to the prior year end. In a similar fashion, backlog for our energy products is up more than 61% year over year. To Our consolidated backlog has now increased for 11 consecutive quarters on a year over year basis. And when to provide important support for the launch of our new program wins And the corresponding higher levels of forecasted revenue, margin and income. Our markets are in good shape.

Speaker 1

To Defense spending continues to increase and we may yet feel some additional tailwind depending upon the future outcome of our current global to review our financial results. As a result, we are pleased to confirm our outlook for 2023. To Revenue is expected to increase 25% to 30% year over year. We expect gross margin to follow suit, to extend the 150 basis points to 200 basis points in 2023, while cash flow from operations to turn the call over to Steve. Our next question comes from the line of John to turn the call over to Mr.

Speaker 1

Chairman. Now let's turn to Slide 12. Rich Davis will lead you through the balance of our presentation this morning. To Rich?

Speaker 3

Thanks, Jeff. Good morning, everyone. I'd like to discuss with you some of our highlights of our Q1 financial results. To please advance to Slide 13. Q1 consolidated revenue was $32,300,000 an increase of 23.4 to

Speaker 2

turn the call back to the Q1

Speaker 3

of last year and an increase of 8.7% sequentially as we continue to benefit from the abatement of Supply chain issues experienced in 2022, facilitating increased production, particularly at Sypris Electronics. To Consolidated gross profit was $4,200,000 for the quarter, a decrease of 7.7% from the prior year, despite the growth in revenue over the prior year quarter. Like to Gross margin was all 4.30 basis points compared to the prior year quarter due to an unfavorable shift in mix, to production ramp up costs, raw material price pass throughs at 0 margin and unfavorable foreign exchange rates. To Revenue for Sypris Technologies increased 13.7% year over year to $19,500,000 for the quarter. To Gross margin was down 480 basis points from the prior year due to raw material price increases passed through to the customer without markup and to While our shipment volume went down in Q4 at Sypris Technologies as our commercial vehicle customers rebalanced their inventory levels at year end, to share

Speaker 2

with you the Q1.

Speaker 3

Class 8 demand finished 2022 with to provide a 19.6% increase over 2021 and is expected to increase 0.9% from that high level for 2023 to discuss some decline in the second half. 1st quarter orders and backlog for Energy Products increased 26%

Speaker 1

to and

Speaker 3

61%, respectively, year over year, which we expect will translate into higher revenue from these products in 2023. 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 as to have utility rates. We are working both internally and with our suppliers on cost effective solutions to control spend in these areas. To The price of steel has increased over the prior year and certain of our contract terms provide for sales price adjustments to pass the increased cost on to our customers.

Speaker 3

To turn the call over to Eric. This material price adjustment is based on market prices and flows through as additional revenue and cost of goods sold. Like to While the impact of steel price adjustments preserves our gross profit, the adjustments do reduce our gross margin percentage. Our engineering and product development teams have also have initiatives underway to reduce steel consumption in both our forging and machining processes to improve our margins to provide an update on our financial results and deliver cost savings to our customers. Revenue for Sypris Electronics was $12,800,000 for the quarter, an increase to be recorded to 40 2% year over year and 1.9% sequentially as the supply chain issues that impeded shipments throughout 2020 to abated and we ramped up production for defense and communication customers in the quarter.

Speaker 3

Gross margin was at 11.9%, to a decrease of 3.40 basis points year over year on production ramp up costs and unfavorable mix and higher material cost on certain programs. We're implementing an improved approach to lean manufacturing of Sypris Electronics, and we continue to expand its workforce to reinforce the team's efforts to execute the significant planned sequential quarterly increases in shipments in 2023. We are also in the process of implementing additional automated production and inspection equipment to further improve our manufacturing efficiency. We expect these efforts to boost manufacturing capacity to meet the planned increase. To 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.

Speaker 3

As programs mature, we also have the opportunity to reduce material costs by working together to our suppliers and customers to qualify components that lower our cost per unit. To Consolidated operating income for Q1 was $400,000 down 63% from the prior year due principally to production ramp up costs, to unfavorable mix and foreign exchange rates as previously discussed. Our operations teams are focused on execution to begin meeting our objectives for customer service and expanded volume levels, while also reducing cost per unit. The strong backlog in place provides a solid foundation to to support this growth through the remainder of 2023. Please advance to Slide 14.

Speaker 2

To turn the call over to our operator.

Speaker 3

On this slide, we show our trend of consolidated gross margin for 2021 2022 to turn the call over to the operator for the Q3. 2022 decreased by 140 basis to take some questions from the prior year on production inefficiencies induced by the supply chain challenges and material price pass throughs without markup. To turn the call over to Eric. With the anticipated shipment volume increases supported by our record backlog, we expect revenue growth in the range of 25% to 30% in 2023. We expect to deliver year over year margin improvement in the range of 150 basis points to 200 basis points on these higher volumes, placing us at to 15.3 percent margin at the midpoint of this range in 2023.

Speaker 3

We want to again recognize to recognize the efforts of all of our teammates involved in pushing our backlog to a record level, and we also want to recognize and thank Our reinforced Sypris Electronics team for its intense focused efforts to meet its customers' expectations to provide some shipments in 2023 and the Sypris Technologies team for similar efforts to improve new programs for existing customers. We will continue also continue our efforts to diversify our markets served and our customer base to deliver more value add services to provide further upside to our current margin levels. Please advance to Slide 15 for a quick summary of our comments. A key highlight for the quarter was the significant increase in orders and backlog in both segments. To Backlog increased 120% for the period, marking the 11th consecutive quarter of year over year growth.

Speaker 3

To Typus Electronics orders were $25,800,000 for Q1, up 91% year over year, increasing its backlog to 131,600,000 to We expect shipments to rise significantly in each quarter of 2023 as a function of the increase in backlog to and increase production efficiency. Sypris Technologies Energy Products were up 26% over the prior year period, supporting continued near term Revenue expansion. Cypress Technologies has also augmented its energy product line and distribution resources to expand its energy presence to in Europe, Asia and the Middle East. The outlook for Sypris Technologies remains favorable with the current forecast for Class to update demand in 2023 basically even with a high level of 2022 and further supported by planned increases in new programs with existing customers. Like to We expect both segments will generate double digit year over year top line growth in 2023, to With gross margin also increasing in 2023.

Speaker 3

Based on our record backlog and momentum in orders, we are holding our outlook for a 20 to provide 30% growth in revenue. With unfavorable foreign currency exchange rates impacting margins in the near term, We've adjusted the gross margin guidance to a 150 basis point to 200 basis point improvement over the prior year. To thank you for your continued support and interest in our business. Now, I'd like to turn it over to Jeff for closing remarks.

Speaker 1

To Thank you, Rich. We would like to thank you for joining us on the call this morning. We are looking forward to another year of double digit growth, expanding margins to speak to the operator. And please note, we appreciate your continued interest in our business. Thank you, and have a good day.

Powered by Quartr
Earnings Conference Call
Sypris Solutions Q1 2023
00:00 / 00:00