Sypris Solutions, Inc.

Good day and welcome to the Cypress 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, sir.

Thank you, Alyssa, 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 second 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 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 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'd 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 Cyprus. 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 in incoming visitors before admitting them into our facilities. Travel has been limited, spacing has been increased, gathering sizes have been reduced, and hygiene has become 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 Cypress. We are also providing special consideration for any specific employee who happens to be of an age or with an 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've had certain commercial vehicle and automotive customers close for weeks at a time and or reduce their demand. while the defense and communication markets remained rock 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 environment for our employees and their families. Now let's begin with the overview on slide four. Revenue decreased. 29.8% year-over-year and 23.5% sequentially as a result of the temporary closure of customer plants in April and May that served to reduce shipments for Cypress Technologies. The success of our diversification efforts played a major role in softening what would otherwise have been a very challenging quarter. Demand from customers in the defense, communications, and energy markets served to offset much lower purchases from commercial vehicle and automotive customers. Fortunately, the month of June witnessed the reopening of customer operations and the return of demand in these markets. The current outlook for the second half of 2020 is much improved, though a degree of caution is certainly warranted. We'll have to wait and see how the pandemic plays out in the fall. Revenue for Cypress Electronics increased 28% 0.3% year-over-year and 11.5% sequentially during the period, reflecting the continued strong demand from customers in the defense and communication markets mentioned previously. The strong sales performance by Cypress Electronics was surpassed by the 73% increase in gross profit and the 470 basis point expansion in gross margin. Our consolidated results benefit with gross margin for the quarter of 11.7% despite the decline in the top line during the period. As we discussed during our last call, 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 of land and had been closed since November of 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 preserve many skilled jobs, which we will review with you shortly. In subsequent to quarter end, we announced three new contract awards. At Cypress Electronics, we announced the initial contract award to manufacture and test electronic assemblies for a naval radar tracking system for Leonardo DRS Naval Electronics. Work under this contract is scheduled to begin production during 2020. At Cypress Technologies, we announced that it had received orders for its Tube Turns branded ultra high pressure closures for use in the Libra oil field in Brazil, and for double bulk closures for use in the Trans Mountain Pipeline Expansion Project in Western Canada. We will talk more about these important awards momentarily. Now let's take a look at the performance of each of our business units, starting with Cypress Electronics on slide five. As I mentioned a moment ago, revenue for Cypress Electronics increased 28.3% during the period from year-ago levels and increased 11.5% sequentially. The company's strong backlog of orders fed the growth, while the availability of components did not hinder the top line as it has periodically in the past. Sales are up 67.6% year-over-year for the first half of 2020, while backlog has increased 22.5% since December of 2019. Our book of business now extends well into 2021. 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. Operating margin benefited as well from the leverage provided by increased sales, expanding to 10.6% during the quarter, up 730 basis points year-over-year, and 590 basis points sequentially. As I mentioned a moment ago, subsequent to quarter end, Cypress Electronics announced the receipt of an initial contract award from Leonardo DRS Naval Electronics to manufacture and test electronic assemblies for a shipboard radar tracking system. Leonardo DRS is an industry leader in Naval Electronics, and we are certainly pleased to expand our relationship with this important customer. In short, it was a positive quarter for Cypress Electronics in almost all respects, and we remain positive as we look to the future for this business. And as an essential supplier to our customers in the defense and communication industries, we will continue to work hard to meet their vital needs. Now let's turn to slide six to review the performance of Cypress Technologies during Revenue declined substantially on both the comparable period and on a sequential basis, reflecting the temporary closure of operations by customers in the commercial vehicle and specialty automotive markets during the months of April and May. These customers subsequently began reopening during June and have remained open since. Sales of our energy-related products also softened during the period, as customers around the world, from the Permian Basin Kazakhstan to Southeast Asia closed or substantially pared back their businesses in response to the pandemic. At Cypress, we kept all of our locations operational and retained our workforce despite the reduction in customer demand. We used the time to perform preventative maintenance and to train our people to improve and expand the range of their skills and capabilities. This was made possible by the CARES Act. The result has been very positive, as you might imagine. Since demand returned from our customers, our productivity has been up and morale is very positive. The outlook going forward is much improved and our operations are performing well. It was clearly the right thing to do and we are thankful that we have the ability to do it. I think that it is also worth noting that on a year-to-date basis, Cypress Technologies has remained profitable. which is an incredible feat under the circumstances. Our team in this business has simply done an outstanding job under very challenging circumstances. From a business development standpoint, we continue to experience a great deal of activity as companies look to increase their North American sourcing content. As we evaluate these opportunities, our focus continues to be on further diversifying our business both in terms of markets, customers, and technology. It should also be noted that Cypress Technologies has been designated as an essential supplier to our customers in the energy and transportation sectors. And as such, we will continue to take whatever steps are necessary to ensure that our customers are supplied with the critical products that they need. Subsequent to quarter end, we announced the award of new orders for closures for projects located in Brazil and Canada. In the case of the Libra oil field in Brazil, the project is one of the world's largest ultra deep water oil discoveries at over 6,600 feet deep and containing between 7.9 and 15 billion barrels of oil. The project is expected to produce up to 1.4 million barrels of oil per day by 2021 with an estimated development cost of $80 billion. We will be providing specialty closers for this project that can handle pressure approximating 10,000 PSI. In Canada, the Trans Mountain Pipeline Expansion Project will add 609 miles of 42-inch pipeline to transport 590,000 barrels of oil per day to Canada's west coast for shipment to world markets. The project is estimated to cost $12.6 billion. We will be providing closures ranging in size from 30 inches to 48 inches in diameter that will be automated for ease of opening. These two projects serve as excellent examples of the type of work we do for demanding high cost of failure applications around the world. During our last call, we discussed the changes that have taken place in our market mix over the past several years. Turning now to slide seven, please note that in 2020, we now expect revenue from Defense Electronics to exceed 35% of our total sales, up from 22% last year, while sales to commercial vehicle customers are expected to represent 23% of the business, down from 41% in 2019. Some of you may even recall that in 2014, commercial vehicle represented fully 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. This diversification has served us well during the pandemic, both in terms of volume and margin. Looking forward, we expect margins to expand further. 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. 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 backlog has increased by 22.5% since year end, and our margins have increased significantly with the growth in the top line. Demand from commercial vehicles, specialty automotive, all-terrain, and off-highway customers resumed in June, and the current outlook for the second half of 2020 has improved significantly. The key question, of course, is will it last or will there be another shutdown of the economy? Time will tell, but we believe that we're well prepared in either event. In the long term, we believe that the economy and trucking will benefit significantly from the stimulus programs that have been implemented during this year. In recent months, the benchmark price for crude oil has recovered materially, but the near-term outlook for oil producers in the sector remains somewhat uncertain. 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 Cyprus on both a domestic and on an international front. Our performance during the first half of 2020 has been solid, especially under the circumstances. And we believe that we are well positioned for future success once the economy remains open on a reliably sustained basis. In the interim, we'll continue to be responsive to the safety needs of our employees and their families while working hard to meet the commitments we've made to our customers. We must and will remain agile and responsive to new data as it develops. Turning now to slide nine, Tony Allen will lead you through the balance of our presentation

Thanks, Jeff, and good morning, everyone. I'd like to discuss with you some of the highlights of our second quarter financial results. Please advance to slide 10. Q2 consolidated revenue was $17.2 million, a decrease of 29.8% from the second quarter of last year and a decrease of 23.5% sequentially. The comparative numbers for both periods reflect the impact COVID-19 had on demand during Q2, with the favorable results of Cypress Electronics being offset by considerably lower revenue for Cypress Technologies. Consolidated gross profit dropped 2 million from the prior year, as the lower demand for Cypress Technologies adversely impacted our profitability for the quarter. Conversely, Cypress Electronics reported a $750,000 increase in gross profit, with gross margin expanding 470 basis points to 18.3% in Q2. While consolidated gross margin of 11.7% was down compared to the previous year in Q1, the upside achieved by Cypress Electronics in Q2 Coupled with a rather impressive effort by the entire team at Cypress Technologies to manage cost during a severe economic downturn gives us confidence we will get back on track for a return to profitability as the economy begins to recover. Our consolidated SG&A expense was $2.8 million for Q2, a decrease of approximately $400,000 sequentially and $800,000 from the prior year. The decrease in Q2 SG&A primarily reflects actions by management to reduce discretionary spend in response to the COVID-19 pandemic. Cost reduction actions include reducing hiring activities, reduced compensation for our CEO and certain other senior leadership and corporate personnel, suspended fees paid to our board of directors, lower travel-related spend, and reductions in other areas of controllable costs. The spending measures are expected to remain in place until we see the economy moving in the right direction and have better visibility to customer demand. Consolidated operating income failed to a loss of 900,000 for Q2, driven by the impact of COVID-19 on the results of Cypress Technologies. However, after difficult months in April and May, This segment began to rebound and generated an operating profit for the month of June. The demand outlook for this segment in Q3 is currently showing growth over Q2, which we expect will enable our consolidated business to return to profitability in the third quarter. Please advance to slide 11. Consolidated revenue for the first half was $39.6 million, a decrease of $4.4 million or 10% from the first half of 2019. The comparison for the first half period follows the theme for the second quarter with Cypress Electronics reporting an increase of 7.4 million and Cypress Technologies being down 11.9 million. Despite the drop in revenue, consolidated gross margin improved 310 basis points in the first half of 2020 over the prior year. The margin improvement reflects favorable mix associated with our diversification efforts and improved efficiencies driven by our continuous improvement initiatives. First half results for Cypress Electronics include revenue growth of 67.6% and improvements in profitability at the gross profit and operating income lines. Driven by the strength of the Q2 results, Gross margin for this segment is at 15.6% for the first half of the year and is expected to stay in the mid-teens for the balance of the year. As we entered the year, we expected demand from our commercial vehicle market customers would drop as the Class 8 market had entered a period of cyclical decline. However, COVID-19 amplified this expected decline and hit our other markets for Cypress Technologies as well during the second quarter. Although revenue on a year-to-date basis is down nearly 36% from the prior year, gross margin for this segment is at 12.9% for the first half, and operating income is positive. If demand rebounds as expected in Q3, Citrus Technologies is well positioned to expand margins from the first half's level and deliver quarterly operating margins in line with our pre-COVID results from Q1. Our consolidated SG&A expense was $6.1 million for the first half of 2020, a decrease of $1 million from the prior year. Certain of the spending reductions discussed on the previous slide were implemented late in Q1 in response to the COVID outbreak, with the full impact reflected in Q2. Additionally, we incurred certain consulting fees related to the implementation of a new ERP system for Cypress Electronics during the first half of 2019, and those costs were not incurred in the current year. Consolidated operating income for the first half is negative 600,000 due to the Q2 setback from COVID-19. However, this represents an improvement of 1.8 million year over year, despite the 10% decline in revenue. Given the challenges imposed by COVID-19, We are pleased with our performance over the first half of the year, but remain driven and focused on achieving profitability for the business in 2020. Please advance to slide 12. We will take a quick look at our consolidated quarterly revenue trend for 2019 and the first two quarters of 2020. The Class 8 commercial vehicle market started its downturn in Q4 of last year. and new program launches at Cypress Technologies for automotive and sport utility components began contributing to revenue. Additionally, the electronic segment increased revenue as component availability improved and backlog remained healthy. This allowed Q1 revenue to increase sequentially from Q4 before COVID-19 began impacting revenue in late March. The impact of COVID-19 on Cypress Technologies drove a 55.9% year-over-year decline in segment revenue. The last four quarters of revenue for Cypress Electronics have increased from 6.6 million in Q3 of 2019 to 8.6 million to 8.7 million to 9.7 million in Q2 2020. The second quarter for this segment represents the highest revenue since 2015. Cypress Technologies saw demand start to rebound in June, and at this point, the outlook for the second half shows a considerable improvement from the Q2 volume. Additionally, new program revenue is expected to contribute during the second half to partially offset the cyclical decline in the Class 8 markets. Please advance to slide 13. On this slide, we will show our trend of consolidated gross margin over the most recent four years, along with the performance in the first two quarters of 2020. The impact of COVID-19 contributed to a drop in margin from the 16% we reported in Q1 to 11.7% for Q2. The Q2 margin is above the levels for the last four years but well short of our target for the year. As noted earlier, our year-to-date gross margin is at 14.1%, and we anticipate our full-year margin can increase based upon our current outlook. The electronics segment continued to show margin improvement in the quarter, up from 12.6% in Q1 to 18.3% in Q2, which ranks as the best quarterly performance since 2012. The increase in margin for SE demonstrates the leverage that we gain from the growth in revenue by this segment. The contribution margin we pick up on additional revenue converts to higher gross margin. And with the increase in backlog since year end, we anticipate SE can continue to maintain margins in the mid-teens in the second half. Improved material availability also contributed to the SE margin improvement which enabled our management team to more efficiently balance production schedules and increased our overhead absorption. We started to see some relief to the demand challenges imposed by COVID-19 on Cypress Technologies in June. And with customer plants resuming production and the benefits from our continuous improvement initiatives, we remain optimistic that this segment can deliver improved margins during the second half of the year. Please advance to slide 14 and I will offer a few takeaways. Consolidated revenue for Q2 was $17.2 million, a decrease of 29.8% year-over-year and 23.5% sequentially as COVID-19 drove lower demand. Gross profit for Q2 was impacted by the lower revenue volume and gross margin ended at 11.7% for the quarter compared to the 16% margin reported in Q1. Our gross margin for the first half is 14.1%, up 310 basis points from the first half of 2019. After seeing very difficult months during April and May, Cypress Technologies began to see customer demand rebound in June as customers resumed operations at their facilities. Our outlook for Q3 is positive at this time, but certainly subject to changes driven by COVID-19. Cypress Electronics performed well amid the difficult economic conditions during the second quarter, and the order backlog in place as we exit the quarter is up 22.5% from year end and positions this segment well for the second half of the year. Revenue for the second quarter and first half periods increased 28.3% and 67.6% respectively. We've recently announced three new contract awards and we are optimistic our new business funnel will provide additional growth opportunities to support our business later this year and into 2021. Both operating segments are profitable for the first half of 2020, which is no minor accomplishment given the challenges imposed by COVID-19 on the global economy and our end markets. Our ability to increase our revenue and continue to pursue market diversification will provide us with the opportunity to further expand our margins as we leverage our current business model. We reduced SG&A beginning in March, and we'll continue to manage our discretionary spend closely as we adjust for the impact of the pandemic, and we are focusing on reducing our working capital investment to further optimize cash flow. We received proceeds of $1.7 million in the second quarter from the sale of a manufacturing facility that had been closed since the fourth quarter of 2017. And on May 6, we secured a PPP loan 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 deepened further in April and May. 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 all 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'd like to turn it back over to Alyssa to answer any questions you might have for us. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster. Again, if you have a question, please press star, then 1. Knowing no further questions at this time, this does conclude our question and answer session. I would like to turn the conference back over to Mr. Jeffrey Gill for any closing remarks.

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

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