Sypris Solutions, Inc. (NASDAQ:SYPR) Q3 2023 Earnings Call Transcript

Sypris Solutions, Inc. (NASDAQ:SYPR) Q3 2023 Earnings Call Transcript November 17, 2023

Operator: Good day and welcome to Sypris 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 the President and Chief Executive Officer, Mr. Jeffrey Gill. Please go ahead, sir.

Jeffrey Gill: 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 third quarter of 2023. 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.

An engineer studying the blueprints of a large mechanical construction near a busy city skyline.

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 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. 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, reflecting continued strength across each of our business segments, with revenue rising 73.5% for Sypris Electronics and 13.8% for Sypris Technologies on a year-over-year basis.

Gross profit increased 105% for the period, reflecting an increase of 186.8% at Sypris Electronics and 36.2% at Sypris Technologies. Gross margin for the company followed suit, rising by 420 basis points for the quarter, driven by an increase of 710 basis points for Sypris Electronics and by 120 basis points for Sypris Technologies. Backlog for the period increased 8.4% on a consolidated basis which was an important accomplishment following the 33% increase in sales during the period. Backlog for Sypris Electronics increased 9% to $109.5 million at the end of the quarter, up $9 million from the prior year period. The company’s financial performance was particularly notable since we bore 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 point, where rapidly rising demand is intersecting with the increasingly availability of material. We believe that the pace of conversion of our backlog in the revenue will continue to accelerate as we now ramp up new programs to full rate production. Turning now to Slide 5. We’ve been pleased to announce several additional new contract awards during the quarter, more specifically, at Sypris Technologies. In August, we announced an award for 72-inch insulated joints for use in the expansion of the Atoka Water Pipeline for the Oklahoma City Water Utilities Trust. According to new sources, the second Atoka Pipeline is being built to provide Oklahoma City and its surrounding areas with potable water.

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The project is the largest municipal water infrastructure project in the history of the state and includes a new 100-mile-long 72-inch diameter pipeline that will transport raw water from Lake Atoka to Lake Stanley Draper in Oklahoma City, where it will then be treated and delivered to more than 1.4 million people in Central Oklahoma. The pipeline is slated to cost $800 million and move more than 100 million gallons of water per day. Sypris has agreed to manufacture and supply its Tube Turns-branded monolithic insulated joints for cathodic protection of the new 72-inch polyethylene-coated and cement mortar-lined steel pipeline. These insulated joints will be 72 inches in diameter and will be rated to a pressure of 300 psi. Shipments under this contract are expected to start in 2023 and finish in 2024.

In August, we announced an award for specialty high-pressure closures for use in the Venture Global CP2 LNG Export Terminal and the Venture Global CP Express Natural Gas Pipeline Project. The CP2 LNG facility will be a natural gas liquefaction export terminal, with a nameplate export capacity of 20 million metric tons per annum. CP2 LNG will be the second LNG export project developed by Venture Global LNG in Cameron Parish, Louisiana, with the first being the Calcasieu Pass Project. Together, they represent more than $10 billion of direct investment in the Parish, according to new sources. CP Express will consist of approximately 85 miles of new 48-inch diameter natural gas pipeline, an approximately 5.9 miles of new 24-inch diameter lateral pipeline to connect the CP2 LNG terminal to the existing natural gas pipeline grid in East Texas and Southwest Louisiana.

The investment will support the objective of Global Venture LNG to develop clean and reliable North American energy supply. The project is proposed to be in service by mid-2025. Sypris 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. These closures will range up to 70 inches in diameter, will be rated to a pressure of 2,180 psi and will weigh up to as much as 17.5 tons each. Shipments under this award are expected to be completed by year-end. Turning now to Slide 6. At Sypris Electronics, we recently announced the receipt of 2 multimillion-dollar follow-on contract awards from a U.S. global defense contractor to produce modules to be incorporated into an advanced integrated electronic warfare and communications avionics system for one of the largest programs of the Department of Defense.

The program is for an American family of single seat, single-engine, all-weather stealth multi-role combat aircraft that is intended to perform both air superiority and strike missions. The aircraft is also able to provide electronic warfare and intelligence, surveillance and reconnaissance capability. According to news sources, the U.S. plans to purchase versions of the aircraft through the year 2044 and the aircraft is expected to operate until 2070. Sypris will produce and test the advanced integrated electronic avionics system modules for the communications, navigation and identification suite of the aircraft. The system supports the simultaneous operation of multiple critical functions, such as identification of friend or foe, precision navigation and various secure voice and data communications.

Production is expected to begin in 2023. We also announced that we received a follow-on award from a U.S. DoD prime contractor to manufacture and test embedded circuit card assemblies that will perform certain of the cryptographic functions for the Army Key Management System. The AKMS is a fielded system that consists of 3 subsystems: local communication security management software, automated communications engineering software and the simple key load device. Under the umbrella of our nation’s electronic key management system, the AKMS provides tactical units at sustaining basis, with an organic key generation capability and an efficient secure electronic key distribution means. The embedded circuit card assemblies to be produced by Sypris will perform the cryptographic functions for ruggedized, portable, handheld simple key load device that will be used to securely receive, 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. Production is expected to begin in 2023. Each of these contracts are representative of the high-cost-of-failure applications for which Sypris 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. 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. Our initial outlook for 2024 is positive, reflecting our strong backlog and the continued momentum of new contract awards across many of our markets.