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SMTC Corporation (NASDAQ:SMTX)

Q1 2013 Earnings Call

May, 09, 2013, 05:00 pm ET

Executives

Alex Walker - President & Co-CEO

Claude Germain - President and Co-CEO

Analysts

Fang Li - Baleen Capital

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from [Jeremy Hellman of Avenue Fund]. Your line is open.

Unidentified Analyst

I just wanted to get some color on, if I got you right there, because I hopped on a couple of minutes late, you had two customers that basically got pushed out of Q1, it looks like its going to come in this quarter, I had that part correct right?

Claude Germain

They got pushed out of Q1 and when you say pushed out it’s we've deducted that from our full year forecast for the following reasons. One customer sold off a division where we were the contract manufacturer to another company and simply discontinued that product line. So that business for us is simply gone. It won’t repeat in Q2, Q3, Q4; we lost it in Q1, and for most of Q1 it will not repeat.

And the other customer experienced a reduction in demand in Q1 and Q2 and obviously we can obviously stop it in Q1; the reason why we are less worried about future quarters is, for the first customers whose business was discontinued, we picked up additional market share that kicks in the back half of the year and for that other customer who was slow in Q1 and Q2 we picked up a lot of new programs which also kick-in, in the back half of the year that essentially replaced some of the ones that are slowing down.

Unidentified Analyst

Okay, that’s helpful. The question I was going to come up with or have on the Part B to that was what industry vertical that customer or customers are in and specifically I was wondering if that has anything to do with the sequester?

Claude Germain

Its non-correlated and it has nothing to do with the sequester and the first one, it’s a European customer that's in industrial machinery and you know they just discontinued through sold off for I mean without getting into too many details, they discontinued an unprofitable business line and it really has nothing to do with anything to do with the sequester or the economy as a whole. And the other customer, it’s a customer that's quite innovative and one which goes through a lot of new product revisions and the program, the product that we are manufacturing are selling more slowly than they forecast than we anticipated, because as I mentioned the flip-side to it is we get to participate in the new revision and the new generation of programs that should kick-in in the back end of the year.

Unidentified Analyst

Okay. That's great, so kind of normal core stuff, stop so to speak?

Claude Germain

I mean it is and it isn't; I mean these are ones we have seen in there; they were of a bigger magnitude than we would have thought. You know, the reality is, in our business you have a portfolio effect where you gain some and you lose some every quarter and in this quarter we just happen to have back-to-back two big volume hits, but those get compensated to some extent at the back end of the year, unless the time drive with some inventory in Q1 that we are moving off pretty fast in Q2.

Unidentified Analyst

Okay. And then you also referenced I think it was $20 million of incremental new business wins; if I heard you right, you said that would be $20 million next year, correct?

Claude Germain

No, $20 million this year. So this is the stuff that, these are the new customers we brought on since 2011, you know, we've said in the past calls that there is kind of a lagging effect on bringing on new customers, because it just takes time to solidify the design, get the supply chain cranked up and get these guys through the plant. (Inaudible) are here is that they are starting to have a pretty nice effect and that’s kind of a bit of compounding effect as you add more customers. You know, that new customer introduction revenue should start growing. So we're forecasting $20 million of revenues this year coming from the class of 2011 and the class of 2012 customers.

Unidentified Analyst

And one last one for me and I will hop of just. Just looking at to 2014 and beyond in terms of the top line, is there any reason to shift my viewpoint in terms of that topline growth curve being in that 5% to 10% range?

Claude Germain

You know, we're not giving future guidance at this stage of the game. I think when you are modeling and for all those listening, always remember that we’ve discontinued our Markham plants so that there is a moderating effect on our growth because we've taken out a plant which (inaudible) we don’t know why did it. it's going to boost our margin. So when you kind of adapt that, what you are left with is continuing on with the model of that 5% to 10% growth, which is correct.

The only caveat we will put to that is the risk in our business is if a customer gets bought by a large multi-national who has got a relationship with another contract manufacturers, or a set of contract manufacturers and it's both an threat and an opportunity for us and that’s because of some inherent volatility to kind of project that like clock work, 5% to 10% taken over year-over-year. It plays both ways, if that happens so we can gain a lot of market share. If that happens, we can lose some but on the main, with a portfolio affect that comes from adding a lot of new customers, our objective is to try to dampen that volatility as much as we can.

So that’s only we can tell you because otherwise we could be providing future guidance. But you get the idea, we are definitely aiming for the 5 to 10, back out the Markham, but then just recognize the volatility’s inherence in this business if there is M&A events that occur and you could either gain a chunk or lose a chunk.

Operator

Thank you. (Operator Instructions) Our next question comes from Fang Li of Baleen Capital. Your line is open.

Fang Li - Baleen Capital

Two questions from me; one was on the working capital changes I noticed that it wasn’t just inventory spec, you also had working capital [views] from accounts payable and account receivables, could you talk a little bit about what drove those.

Alex Walker

Sure. The inventory on those lower revenues were significantly higher than, then what you would want them to be. Even though it was not as much of an net increase over Q4, our Q4 revenues were significantly higher, so our inventory performance was actually worse, then you might see from the few million dollar increase. On the AP side, we were not able to drive what we call the stretcher the term in AP that we wanted to in the quarter and that has to do with to a certain extent carrying inventory through Q4 in to Q1 that’s actually not getting used, and what else is happening finally is you have to pay off that inventory and you are not replacing it because that’s inventory you are going to use in the future quarter. So typically when you do have kind of hang over of inventory there, it has a bit of double whammy. One is you hang on to the inventory and two you have to pay off the vendors associated with it. So we struggled a little bit to maintain the accounts payable terms that we would normally be able to maintain and we did maintain at the end of Q4.

On the receivable side, what was happening as the major customers that Claude was referring to were deferring, we were negotiating with them on exactly what we would be able to ship, and as a result we shipped the lot of product for them very late in the quarter. It was made but it wasn't shipped until the last couple of weeks of the quarter and what that does is it hangs a lot of receivables onto a balance sheet and at the end of the day, we don't really have the DSO problem, its very fresh receivables but you know if you turnaround and you do the standard calculation on trailing sales, it doesn't look like we are aging our receivables but we weren’t. Does that explain it? It largely works itself out in Q2.

Fang Li - Baleen Capital

Got it just timing issue. The inventory that are related to the customer that saw the division and they are using you guys anymore, do they given the terms that you talked about the inventory kind of rest of the customer, does that mean that they are going to pay for inventory or what is going to happen to that, can you elaborate?

Alex Walker

Absolutely, for every customer and black and white, every customer is obligated to take that would be called either, in that case that would be called obsolete inventory and that customer is required to pay for the obsolete inventory that would have happened when they obsoleted that product.

Claude Germain

Actually coincidentally we just got the checking for that stuff yesterday, for a lot of that stuff. So

Fang Li - Baleen Capital

Can you give me the (inaudible) like how much that was?

Alex Walker

I can't tell you off the top of my head, but it’s, I mean we typically Fang at any quarter be dealing with millions and getting payments for obsolete and excess inventory from our customers.

Claude Germain

An excess in obsolete process is something you will find in every CM and we are no difference and it grows over every months and but for this particular push-out there was a discontinued product lines. Just to be very clear, we are getting paid for that, and have been for the most of the parts that I am aware of right now, but the vast majority of the reduction and inventory though Fang is not going to come from getting those checks from that customer. It will come from burning down as Claude alluded to, burning down our inventory in Q2 against the demand that the customer that reduced its demand in Q1 still has.

Fang Li - Baleen Capital

And my last question is just -- can you give me a sense of how much money you lost in Markham this quarter?

Alex Walker

Actually, it’s difficult because we have restructuring charges that are part of it and some of the restructuring charges are pure cash and some of them are accrual. If I take the restructuring charges out, Markham was almost for the most part breakeven, but the restructuring charges are real. And so on a normalized basis, it’s difficult because I know what you are trying to do Fang, you are trying to kind of get the normalized EBITDA for the quarter.

The difficulty there is twofold. I'll tell you, one is we pull in a lot of business when we discontinue an operation into the quarters one and two. So there is an artificially high amount of revenue going through Markham in Q1 and Q2 because many of the customers that are discontinued need their full year demand satisfied in Q1, Q2. So it looks more profitable right now in Q1 than it would be on a normal standalone basis.

And then secondly, there's restructuring charges from layoffs. I could -- you know what would be best to do Fang is for me to meet with the finance guys here and do a calculation on cash based restructuring charges in Q1 and then get back to you with what that would be.

Operator

(Operator Instructions) I am showing no further questions in the queue at this time. I will hand the call back to Alex for closing remarks.

Alex Walker

That's it. Thanks for joining the call. And as Claude mentioned, we look forward to reporting on our future quarters and improve performance over Q1.

Claude Germain

Thanks, guys. Bye now.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

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