Sevcon, Inc. (NASDAQ:SEV) Q1 2016 Earnings Conference Call February 3, 2016 9:00 AM ET
David Calusdian - Sharon Merrill Associates
Matthew Boyle - President and Chief Executive Officer
Paul Farquhar - Vice President, Treasurer and Chief Financial Officer
Paul Sonkin - Gabelli & Company
Greetings, and welcome to the Sevcon Inc’s First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, David Calusdian with Sharon Merrill. Please go ahead sir.
Good morning everyone and thank you for joining us. If you have not received a copy of the earnings press release issued yesterday afternoon, you can find it in the Investor Relations section of the Sevcon website, Sevcon.com.
Please be reminded that remarks that management may make during this call may contain Forward-Looking Statements about future financial results. Important factors that may cause the Company’s actual results to differ materially from the anticipated events, performance, or results expressed or implied by the Company’s forward-looking statements are described in the Risk Factors detailed in its periodic reports filed with the SEC, which can also be accessed through Sevcon website.
The Company advises you to read them and cautions you not to place undue reliance upon any forward-looking statements that may be made this morning, which speak only as of the date of this call. Sevcon undertakes no obligation to update any forward-looking statements.
With us today are Sevcon’s Chief Executive Officer, Matt Boyle; and Chief Financial Officer, Paul Farquhar. At this point, I'll turn the call over to Matt.
Thank you, David. Welcome everyone. We appreciate you joining us this morning. In the announcement of our acquisition of Bassi on Monday, I'll be spending bulk of the call this morning discussing this important milestone for Sevcon. In short, we believe it will accelerate our strategic growth and create significant long-term value for our stockholders.
Before getting into more detail about Bassi, I'll provide some comments on the quarter and Paul will follow with his financial review as usual. I'll come back on to talk about Bassi at that point.
Looking into the first quarter overall, continued weakness on the industrial side of the business as a result of macroeconomic conditions offset nice growth in the on-road and other EV categories. Sales were down for the quarter by 5% excluding FX [it would] (Ph) have been down 1.4%.
As with quarter our sales performance beginning with the geography. As a reminder, it's our policy not to discuss specific customer relationships until we are in commercial production and shipping in volume. Sales in the United States were down 8% continued weakness in mining and other traditional markets were substantially offset by a significant increase in on-road sales in the U.S.
Marine sales were also strong. Sales in Asia were up 25% like the U.S., on-road continues to do very well in China. Industrial off-road was down in line with other geographies except Japan where aerial work platform demand doubled compared to the same period last year.
Sales in Europe declined approximately 19% year-over-year primarily due to industrial markets which were all lower year-over-year. In Europe, the on-road sector was also lower in quarter one fiscal 2016, a large volume shipment to an European customer production start did not repeat. This was partially offset by recognition of engineering services to European customers.
Looking at our quarter one results by end use sector, sales remained weak in our industrial off-road markets continuing to reflect the underlying macroeconomic trends. mining, airport ground support and fork-lift trucks were down double-digits from quarter one last year. Our platforms were up double digits driven by Japan, but were offset by lower shipments in two European and U.S. customers.
Turning now to the on-road business, we continue to see strong growth in the two-wheel sector, in fact we recorded the third consecutive quarter of double-digit growth up 47%. Sales in the two-wheel market were once again driven mainly by product shipments to electric motorcycle OEM's in Europe and United States.
In the four -wheel sector sales were down 5% as a result of the major European orders that we shipped in Q1 a year ago which did not repeat. We expect to see a return to growth in four-wheel steels in the remainder of the year. Most importantly, our reputation is growing in the four-wheel market and we look forward to increasing the number of contracts with automotive OEMs.
We also continue to make progress with a Chinese joint venture and we are on track to begin production shipments by the end of calendar 2016. We are initially targeting four-wheel on-road electric and hybrid vehicle applications in what is becoming the world's largest market for two and four-wheel electric vehicles.
In addition to the on-road and off-road sectors, we continue to see accelerated growth in our other EV market, our quarter one sales were up 17% in the prior year. We are making great progress with our emerging marine business in addition to other applications such as recreational and utility vehicles.
Before I turn the call over to Paul, I’ll sum up by saying that while off-road markets continues to be challenging, we are gaining excellent traction in growing our reputation and stable our clients appliance in on-road markets.
We are encouraged by this progress and look forward to reporting future successes to you as we capitalize on many opportunities related to the global demand for electrification. We believe that this progress will be accelerated with the acquisition of Bassi, and I’ll be back to discuss the second development after Paul reviews our quarter one financial results. Paul.
Thank you Matt and good morning everyone. Reviewing Sevcon’s financial performance for the quarter and starting with the income statement, total revenues decreased 8.2% to $9.1 million from $9.9 million in the same period in fiscal 2015. As Matt mentioned, this decline primarily reflects the continued weakness on the industrial side of the business.
Foreign currency fluctuation decreased reported sales by $312,000 or 3.1% for the quarter. Mainly due to a stronger U.S. dollar compared with the Euro and the British pound than in the first quarter of fiscal 2015. Excluding the impact of currency fluctuations, revenues decreased 5%.
In terms of geography, our overall Q1 sales decline was largely driven by the United States and Europe, where revenues increased by approximately 8% and 19% respectively from the same period last year. This was primarily due to continued weakness in mining and other traditional markets.
Sales were up approximately 25% in Asia due to the strength in the on-road sector. As Matt mentioned, we are making good progress with our Chinese JV, which continues to ship product prototypes designed specifically for the unique requirements of the Chinese markets.
Tuning now to operating expenses, we are continuing to benefit from our low cost manufacturing model. We have traditionally relied on third-parties for the majority of our production. Outsourcing to trusted manufacturing partners allows us to add capacity while minimizing the additional fixed costs. As a consequence, our operating expenses consists primarily of product development, engineering, sales related expenses and general and administrative expenses including compensation and direct R&D costs.
Our operating expenses including engineering and R&D costs, which are reported net of grants received. Engineering and R&D expenses net of grants was 10% of sales in the first quarter of fiscal 2016 compared with 8% in Q1 last year. This continuing level of expenditure reflects our ongoing commitment to product development and improvement.
On a reported dollar basis, total operating expenses to Q1 increased by $709,000 from the first quarter of fiscal 2015. This included $316,000 of cost incurred in the quarter related to the acquisition of Bassi S.r.l, which closed on January 29. The balance of the increase reflects investment in sales and engineering results including the hiring of additional staff.
This investment in additional results was in response to the increased project activity we are seeing, particularly in on-road markets. Foreign currency fluctuations decreased reported operating expense by $123,000 or 4% due to the stronger U.S. dollar compared with Euro and the British pounds than in the first quarter of fiscal 2015
Sevcon’s reported operating income for the first quarter of fiscal 2016 of $180,000 compared with operating income $282,000 in the same period last year. Excluding the $316,000 of acquisition costs, reported operating income for the quarter would have been $496,000 an increase of $214,000 or 76% compared to Q1 2015. We reported an income tax charge of $11,000 this quarter or 11.6% of pre-tax income compared with the charge of $40,000 or 13% of pre-tax income in Q1 last year.
Other dividends paid and accrued of $111,000 to whole as Series A convertible referenced shares, Sevcon reported net income attributable to common stock holders of $11,000 or $0.00 per share for the first quarter of 2016. This compares with the $171,000 or $0.05 per share in Q1 of fiscal 2015.
Let’s now turn to cash flow and working capital items. Excluding the impact of foreign currency, receivables, inventory and prepaid expenses and other current assets increased by a combined $58,000 which decreased cash during the period. Accounts payable, accrued expenses and accrued taxes decreased by a combined $1,287 million in the first quarter, which also decreased cash during the period.
The Company invested $323,000 in tooling, test and R&D equipment during the quarter as we continue to invest in capitalizing on electrification opportunities. The number of days receivables was 12-days higher at 73-days at January 2, 2016 than at the end of Q1 last year.
Sevcon ended the first quarter with cash and cash equivalents of $6.6 million, including the remaining rights issue funds. This compares with $8 million in cash also including the rights issue funds at year-end 2015. The $1.4 million reduction in cash year-to-date was net of the new loan of $500,000 drawn down under the Citizens Bank secured revolving credit facility.
Of the net $1.9 billion reduction in cash and cash equivalents, we paid $217,000 of preferred stock dividends and as I mentioned earlier, invested $323,000 in capital items with the remaining $1.4 million reduction in cash in the quarter representing the net effect of the working capital changes I also mentioned earlier. In January 2016, we paid off the Citizens Bank $1 million loan and terminated that loan and security agreements with the bank.
We also have a $1.4 million bank overdraft facility with RBS Nat West Bank available to our UK subsidiary companies. We did roll down a $172,000 of this facility at the end of Q1, although it was unused at the end of the first quarter last year. This overdraft facility was renewed for a further period of 12-months in July 2015, although and probably with most overdraft facilities in Europe, it can be withdrawn on demand by the bank.
Before I turn the call over to Matt for a discussion of Bassi, I would like to summarize the terms of the Bassi deal. The acquisition was funded with €10 million in cash, which is just under $11 million, 500,000 shares of Sevcon common stock and a dividend distribution of €3.38 million over a three-year period. We obtained funding for the transaction under a five-year loan facility provided by the New York City branch of the Italian bank Monte dei Paschi di Siena.
The details of the loan facility were disclosed with the company's Form 8-K filed on Monday of this week. In terms of Bassi’s financials, the company generated approximately $16 million of sales in 2015 and was profitable. The business will be disclosed as a separate segment for financial reporting purposes going forward.
With that I'll turn the call back to Matt.
Thank you, Paul. The strategic implications of our acquisition of Bassi are very compelling. First and foremost, adding Bassi’s state-of-the-art battery charging technology and power management capabilities to Sevcon's advanced control technologies will significantly strengthen our ability to deliver the more integrated solutions that our markets and our customers are demanding.
Bassi's product starts at low cost laying of low frequency charges were simple lead-acid battery applications. From there the portfolio ranges to high frequency charges using current modules for battery technologies such as lithium-ion to a newly introduced fast charger system with sophisticated charge algorithms and communications to battery monitoring modules.
Bassi is also developing a lane of high frequency chargers which [indiscernible] which are highly efficient and compact with exciting potential for induction charging applications. We'll be able to integrate Bassi charger and power management technology with Sevcon's new GEN5 family of motor controllers to offer a unified suite of electronics for on-road vehicles.
These integrated control solutions will include stand-by overnight charging capabilities as well as fast charging and potentially electric vehicle induction charging. By offering customers a broader portfolio that eliminates motor controller battery charger interoperability concerns, we believe that company can secure a greater share of the on-road and industrial electrification markets. All told, the acquisition of Bassi enables us to expand an addressable share of the high-growth vehicle electrification market.
Secondly, we have opportunities to deploy Sevcon's marketing and sales resources to accelerate standalone sales of Bassi’s products and solutions. This includes selling products through a joint venture in China. Thirdly, the acquisition will enable us to pursue opportunities to cross-sell our own offerings along with Bassi's in each company's respective markets. Finally, Bassi offers us the opportunity to enhance earnings by adding an immediately accretive business excluding transaction costs.
[indiscernible] our strategic rationale let me provide you with some additional information on Bassi. We operate out of a combined headquarters and production facility in Lugo di Ravenna, Italy which is not far from the city of Bologna. And manufacturing is highly integrated with all necessary processes on-site. Bassi will operate at its current location of the Sevcon and Andrea Bassi will continue to lead the business, we look forward to having him and Bassi’s 100 employees become part of the Sevcon’s team.
I’ll close these prepared remarks by echoing Andrea's comment in our press release. We believe this transaction is an opportunity to combine to the standing and complementary organizations, both companies have long been committed to innovation and the highest levels of customer service.
Most importantly, we share the same vision that is to play a key role in world's quest for more efficient and environmentally sustainable transportation. We are thrilled to welcome Bassi's world-class engineering and production teams to the Sevcon family.
With that Paul and I would be happy to take your questions. Kevin you can proceed with Q&A notes.
[Operator instruction] Our first question today is coming from Paul Sonkin from Gabelli & Company. Please proceed with your question.
Good morning or good afternoon depending on where in the world you are.
Good morning Paul.
I guess I had a few questions on the Bassi acquisition. I guess in your particular order, have you been working jointly together before this acquisition? Is there any customer overlap, I guess some other questions that I had, I just wanted to ask about kind of the installed base and where they get that revenue and giving a fact that they are going to be a significant portion of sales, was there any talk of someone from Bassi taking a board seat?
I thought you only got one. I will tell you four questions…
Well, I guess since we own half of the stock, we can ask half of the questions.
I'm teasing, I'm teasing, I'm teasing.
I know, I know, I know. Let me take them one at a time. Working together, I guess we have worked together in the past that was very successful. We worked, we develop some battery monitoring technology that we sold to a customer that integrated with GEN4. We've come across the business on a number of occasions over the last 20 or so years, as you may expect delivering essentially the same electrical kit. Our electrical kit to vehicle manufacture, we have come across a numbers of suppliers, we supply something not in direct competition with you and we've come across the Bassi at chargers before in areas like the U.S. and Europe.
Customer overlap, there is some customer overlap, but it's complementary products so we don’t compete anywhere and the customer overlap is really in industrial and a little bit in off-road, but again they are totally complementary, so we are not competing anywhere. If they want a board seat, I think we have to know the individual, they are very focused on growing the business. We were very, very comfortable with the management of Sevcon and the fact that they would be part of a substantial shareholder and part of very much larger group, we saw that as being strategically important to them, getting the board seat was not, so they didn’t ask for one. Did I cover every one of your question Paul?
Yes I guess in terms of their competition - I guess whoever is managing the calls like if there are lot of people in the queue, you could just - I'll differ and go back. But I guess who do they primarily compete with. And then the other is that lets say that with the Chinese joint venture, that you are going to try and get them involved. In terms of the length of the sales cycle, like are there people that have already been chosen for that phase of the project, I guess what I'm asking is that in projects where you are way into the design cycle, can you bring them in at this later point?
As far as completion is concerned there are number of people who compete in sectors that they address, they are different depending on the sector you are talking about. They range from AVB all the way down to QTech, which is a Korean business that makes small chargers. They have grown our business quite nicely over the last 10-years or so, quite a nice clip and the [indiscernible] a lot into the development roadmap and that allows them to compete against people who are far larger because they have got - they are far nimbler.
And now going to your second question. We on a regular basis when we are talking to customers, especially in the on-road sector, we asked for more - as much as the electrical kit our equipment that we go onto a vehicle of the associate of the sale. So it's very usual for us to be asked to provide DC-DC's which we have in our stable, displays which we have in our stable, but chargers is one of those things that we have to defer out somebody else for up until this point.
And the great thing about having the engineering under one roof as it were, is that we can affect hold that development timescale is shortened or lengthened. With them being an independent third-party that's very, very difficult, because we often have competing objectives of their own. So bringing them in-house allows us to both offer a complete solution to the customer if that's what they want and many, many do and also to affect how quickly that’s done and achieved.
And then what is their installed base of chargers and I guess in terms of looking through their website like in terms of the product mix that they have, like are the chargers like a small percent of sales and the backups stuff a large percent of sales or like kind of what's the rough breakdown?
[indiscernible] chargers everything else.
Okay and what kind of operating margins do they get? like a 35 gross to 10 operating kind of business?
I'll take that one Paul, it's Paul Farquhar here. First of all just to say that we will be releasing further financial information in the follow-up 8-K in the coming weeks, but to answer your questions specifically their EBITDA returns historically have been double-digits, so not dissimilar to the numbers you threw out there.
Okay so the EBITDA margins would be like I guess in like the 14% to 15% range?
Yes, low double-digits.
Okay. All right. I think I'll let somebody else to ask a question.
Thank you Paul.
Thank you [Operator Instructions] That does conclude our question-and-answer session. I would like to turn the call back over to management for any further or closing comments.
Thank you, Kevin and thanks everybody for getting on the call today. And we look forward to talking to you again next quarter.
Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.
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