SMTC's (SMTX) CEO Sushil Dhiman on Q2 2014 Results - Earnings Call Transcript

| About: SMTC Corporation (SMTX)
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SMTC Corporation (NASDAQ:SMTX) Q2 2014 Results Earnings Conference Call August 13, 2014 8:00 AM ET

Executives

Sushil Dhiman - President and CEO

Jim Currie - Interim Chief Financial Officer

Greg Gaba - Vice President, Finance

Analysts

Jeremy Hellman - Avenue Fund

Operator

Good day, ladies and gentlemen. Welcome to the SMTC Corporation Second Quarter 2014 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

As a reminder, today’s call is being recorded. I would now like to turn the conference over to Sushil Dhiman, Chief Executive Officer. Sir, you may begin.

Sushil Dhiman

Thank you, Shannon. Welcome and good morning, ladies and gentlemen. I’m Sushil Dhiman, SMTC’s President and Chief Executive Officer. On this call with me today is Jim Currie, our Interim Chief Financial Officer; and Greg Gaba, Vice President, Finance.

Before we begin the call, I would like to remind everybody that the presentation includes statements about expected future events and financial results that are forward-looking in nature and subject to risks and uncertainties.

The company cautions that actual performance will be affected by a number of factors, many of which are beyond the company’s control and future events and results may vary substantially from what the company currently foresees.

Discussions of the various factors that may affect future results is contained in the company’s annual report on Form 10-K, on Form 10-Q and subsequent reports on Form 8-K and other filings with Securities and Exchange Commission.

I am pleased to announce that we are ahead in implementation of our 2014 cost reduction and inventory remediation plan. These efforts have positively contributed to improvements in margins in our Q2.

I would also like to point out that comparisons in our press release are to Q1 2014 and not to prior years due to several unusual charges in prior years combined with the year end inventory adjustment. However, we will start reporting prior year comparisons effective Q1 2015.

During the quarter, we added two new customers, one of which is in Medical sector and the other is in Multimedia sector. These customers are expected to ramp production volumes in Q4 of this year and we expect one to be significant customer in 2015.

During the quarter, we also received notification from one of our customers that in 2015 they will consolidate their manufacturing with another low cost electronic manufacturing service provider. However, SMTC 2015 revenue last from this product line is expected to be more than offset by Q2 customer wins.

Implementation of our year end inventory-related remediation plan in Mexico operation has been successfully completed. Now our best practices and compliance team will continue to conduct side audits on a quarterly basis. We are continuing to strengthen our management team and have filled several key management positions in Mexico operations.

I will now hand it over to Jim Currie. He will present the financial results.

Jim Currie

Thanks, Sushil. Revenue for the second quarter was $58 million, similar to the revenues recorded in the first quarter of 2014. While our revenues were similar to the prior quarter, our gross profits excluding unrealized foreign exchange climbed to 8.6%, compared to 7.4% in the prior quarter, reflecting continued improvement in our cost structure.

Net income reported for the quarter is $0.03 million, compared to a net loss of $1.1 million in the prior quarter. This was mainly due to the unrealized foreign exchange gain recognized in the quarter of $0.8 million, compared to $0.1 million in the prior quarter.

Total debt levels increased during the quarter, primarily due to the addition of capital leases for the purchase of new equipment to enhance the capabilities and capacity of our Mexico facility.

Subsequent to the quarter end, we signed an agreement to sub-lease warehouse space in our Canadian facility. This will result in annual rent savings of approximately $300,000 for the remainder of our lease.

As Sushil indicated, our cost reduction initiatives for 2014 are well ahead of plan and have contributed favorably to our second quarter results. We expect these efficiency improvement efforts to continue for the balance of the year and continue to focus on the management of working capital.

I will hand it back to Sushil to provide some closing remarks.

Sushil Dhiman

Thanks, Jim. In summary, during the first half of 2014, our priorities have been to achieve efficiencies, cut costs, add to the talent pool and enhance profitability. These efforts have paid dividends as evidenced in our Q1 and Q2 results.

We’re continuing to add new quality customers to our portfolio and our late-stage customer development pipeline is healthy. We are adding resources to our sales team to help accelerate new customer acquisitions and add to organic growth.

We have developed a mergers and acquisitions profile, and are closely working with our advisors in identifying attractive opportunities in the strategic locations and the markets we have identified. This activity is in line with our previously stated goal of adding inorganic growth via mergers and acquisitions beginning in 2015.

Overall, we are excited about our year-to-date customer wins and we expect to continue to add customers in targeted markets. We believe that we will provide our customer partners the best supply chain solution.

To expand our portfolio of services, we have now added a new product introduction tech center in San Jose, California. We expect to expand this service in other regions in 2015. This service has shortened the lead time required to bring new products to the market.

Finally, I want to thank our employees across the globe for their dedication and contribution to our quality operations and improving results. I also want to thank our customers for trusting us, as our manufacturing partner and thank our shareholders for their investment in SMTC.

Thank you. And we will now open the line for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from [Tony Dogof], private investor. You may begin.

Unidentified Analyst

Good morning, Sushil, Jim.

Sushil Dhiman

Hi, Tony.

Unidentified Analyst

I was wondering about inventory, it looks like its up sequential, you just tell us anything about Q3?

Sushil Dhiman

So, as I mentioned, that we will be -- we added three customers in Q1 that’s we announced in Q1. So to start ramping some of those customers, we have a work in progress in some inventory.

We also for A customer, one of our large customers entertained a inside of a lead time book and chase opportunity far with some of the shortages were not cleared in time for the quarter, but subsequent to the quarter end those products have been shipped to the satisfaction of customer needs.

Unidentified Analyst

Okay. Great. And you said you’re ahead of plan with your cost reduction, so you’re still interested to take industry margins by the end of the year?

Sushil Dhiman

Our expectation as per the 2014 plan are to reach the industry margin by Q4 and based on the current outlook, we expect to deliver that.

Unidentified Analyst

Excellent. Thank you.

Operator

Thank you. Our next question is from Jeremy Hellman of Avenue Fund. You may begin.

Jeremy Hellman - Avenue Fund

Hi. Good morning guys.

Sushil Dhiman

Good morning.

Jeremy Hellman - Avenue Fund

Tony hit two of my main questions. Just to round out the question on margins, you obviously are having some nice improvement due to cost savings measures. Is there anything else happening in terms of product mix up or down or kind of going sideways in terms of margins and the product mix?

Sushil Dhiman

Jeremy, that’s a great question. So during second quarter, we did experience our product mix change, so some of the better-than-expected performance is as a result of that. We’re also going forward, continuing to focus as I mentioned in today’s script quality customers to us, those are in the areas of medical field in industrial. And we are continuing to look at the way we build a more complex niche product with higher margins.

Jeremy Hellman - Avenue Fund

Okay. And have you been turning away any business that’s been lower margin, essentially within notion that better margins on maybe even lower revenues than you might otherwise be able to chase?

Sushil Dhiman

Today -- no, that’s not part of our strategy. Our strategy is to like continue to focus on cost reduction efficiencies, make our factories more competitive and then continue to work with our customers where there may be a cost misalignment and then move the path forward.

We are not in a position today or that’s not our strategy that we turn any customers away. We have to weight based on what the technology needed but we can provide it a good manufacturing solutions and at the right cost.

Jeremy Hellman - Avenue Fund

Okay. And then a couple of last minor one’s for me. Just reading the thank you, it sounds like the restructuring charges in terms of, particularly down in Mexico are pretty much adamant. Am I right in reading that way and then second question, what kind of tax rate can we assume on our models going forward?

Sushil Dhiman

I’ll answer on the restructuring and let Greg answer the tax question. So, on the restructuring, yes we’re at the tail end that’s why like I said earlier, we are ahead of the plan. We have taken all the actions we needed to and most, if not all, of the restructuring parties, done that. It’s very minor in Q3, none scheduled for Q4. So I’ll now turn over to Greg for the tax question.

Greg Gaba

Yeah. For the tax question, we do have the NOLs in U.S. and Canada as we expect minimum tax in the U.S. at a lower tax rate. For China, we expect around 30% tax rate on our income there and Mexico, pretty similar to that.

Jeremy Hellman - Avenue Fund

Okay. Thanks a lot guys. Keep up the good work.

Sushil Dhiman

Thanks Jeremy.

Operator

Thank you. (Operator Instructions) Our next question is from [Stephen Cole of Mangrove] (ph). You may begin.

Sushil Dhiman

Good morning Stephen.

Unidentified Analyst

Hello.

Sushil Dhiman

Good morning. Yes.

Unidentified Analyst

Good morning. My apologies, the connection, this may not work very well but I’ll try to ask them. Could you -- first of all congratulations on getting the business stable and in a much better position in your tenure year. So with that, let me ask I did read in Q that we’ve had -- you mentioned them in your prepare remarks the comment about the one customer giving notice for 2015 on couple of your products.

And I noticed your big customers come up a little bit. Can you may be give us some sense on what the -- it’s again, is the case for us certain products why are they moving them? Is it a margin issue or pricing issue or what’s the -- what is the logic on their side that shifts them away from you guy at this point?

Sushil Dhiman

So couple of questions, that is -- one of them is regarding the consolidations. Let me try to answer that. Our customer -- one of our long-standing customers got acquisition to buy another large company as a result of their due diligence and consolidations of supply chain, the decisions with a combined entity were made that some product lines are better suited by combining into another low-cost EMS provider.

That business over all to us brought a ultra lower margin business. And as I mentioned that based on our current customer event, the replacement revenue and the 2015 revenue stream as a result of those customers more then offset what we’ll be losing in 2015.

And I believe on the second one, you just had a statement, not a questions where the largest customer. Our relationship with that customer continues to be strong and we’re continuing to provide that our number one customer the supply chain solutions out of our Chihuahua operation.

Operator

Thank you. I’m showing no further questions at this time. I’d like to turn the conference back over to Sushil Dhiman for closing remarks.

Sushil Dhiman

Thank you, Shannon. Thank you all for joining the call, we’re looking forward to your continued support of SMTC. As you have heard in Q1 and Q2 calls now, management is focused on continuing to work on our 2014 plan and now our focus goes on revenue growth and start focusing on our one-year, three-year and five-year plan which we’ll be discussing in future. Thank you all.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day.

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