CPS Technologies Corporation (CPSH) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to the CPS Technologies Corporation Second Quarter Investor Call. . I would now like to hand the conference over to your speaker today, Mr. Chuck Griffith, Chief Financial Officer. Sir, please go ahead.
Charles Griffith: Thank you, operator. Good afternoon. I'm joined today by Michael McCormack, our new President and Chief Executive Officer. Before we begin the business portion of the call, I would like to point out to all of you that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in CPS' operations and environment. These uncertainties include the impact of COVID-19, economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statements.
Michael McCormack: Thank you, Chuck. Good afternoon, everyone. Today, we announced revenues of $5.9 million and operating income of $253,000 for the quarter ending June 26, 2021. This compares with revenues of $5.8 million and operating income of $331,000 for the quarter ended June 27, 2020. The financial results in the second quarter were profitable and growing as compared to the first quarter of FY '21. Shipments are increasing to customers as the increased revenues. And more importantly, our book-to-bill ratio is increasing. Over the first half of FY '21, our book-to-bill was approximately 2:1, confirming our strategy for growth is beginning to indicate success with the largest sample of data. A key to our growth plan is to have all of our business lines performing well. This internal diversification of revenue sources reduces our customer concentration while utilizing more efficiently all of the existing resources to satisfy the requirements of a wide array of customers. These customers have shown significant growth in 2021. To put this in some perspective, revenue for the second quarter was 2% higher than the second quarter of 2020. In 2020, our top 3 customers in Q2 made up 80% of our revenue. In this past quarter of 2021, our top 6 customers equated to 80% of our sales in the quarter. We believe this broadening of our customer base will increase the likelihood of planned, sustained growth to both revenues and earnings moving forward. We are continuing to see a slow recovery from the pandemic to the base slate business and is expected to remain steady throughout 2021 as spending on high-speed rail and mass transit systems continues to lag. We are confident that demand in the sector will return in FY '22. I'll speak more later about our growth plans moving forward later on the call, but for now, Chuck will discuss the financial results in more detail.
Charles Griffith: Thanks, Michael. Revenues totaled $5.9 million in quarter 2 2021 compared to $5.8 million generated in quarter 2 2020, an increase of 2%. As Michael mentioned, the additional movement of additional customers into our top 80% more than offset the reduction in sales from certain other customers. Gross margin in quarter 2 2021 totaled $1.4 million or 23% of sales. This compares with gross margin in Q2 2020 of $1.2 million or 21% of sales. This increase in margin was primarily due to moderate price increases and product mix.
Michael McCormack: Thank you, Chuck. First of all, I'd like to take a moment to recognize the significant long-term contributions of Grant Bennett to CPS. Grant recently retired from this day-to-day CEO position, but he remains an active and contributing member to the Board of Directors. Grant's compassion, leadership and tireless dedication to the company over his 35 years of selfless service to CPS has built a solid foundation that moving forward will serve the company well.
Charles Griffith: So operator, we can open up for questions.
Operator: . Speakers, your first question is from Kenneth Pounce .
Unidentified Analyst: Yes, it sounds very encouraging. Maybe a few more details, you said markets in aerospace and defense, there was a contract, I guess, for protection for aircraft carriers. Maybe you could develop on that if there's some other ship classes that you might be able to get contracts soon?
Michael McCormack: Kenneth, this is Michael. Thank you for the thought. Yes, well, we are actively executing on our program right now for the U.S. Navy on the CVN carrier class of programs. We are developing alternative solutions and other integrated solutions with our partner Kinetic Protection to address other circle vessels in the U.S. Navy as well as the Coast Guard. And those are just the near-term opportunities we have, Kenneth. We are working some farther out opportunities in both U.S. rotary wing applications and foreign navies, I hope that helps.
Unidentified Analyst: Okay. How is the solid metal that you're producing yourself? Or is there -- obviously, the price of steel and other kinds of alloys have been going up. Or are you facing any cost pressures?
Michael McCormack: Well, excellent question. So our HybridTech Armor Panels, our proprietary panels, is a metal matrix composite. So there is components in there of steel and aluminum, the mixture. We're able to contain costs. We've been able to buy and have those goods on the shelf to execute our contracts today. And we're well aware of the pressures within the supply chain globally as the potential for inflation exists.
Operator: Speakers, your next question from Patrick White .
Unidentified Analyst: This is -- I wanted to congratulate you, and I appreciate all the enthusiasm you bring. And certainly, we will miss Grant Bennett. But I wanted to touch base quickly, if you don't mind, and see if you could add any color to what you're thinking about in terms of a 5-year execution plan towards becoming a medium-sized business? And would that implicate 15% internal growth rate? Or do you have any parameters you can add and define that a little bit further?
Michael McCormack: Well, certainly -- thank you, Patrick, for the kind words on the opportunity here the lead CPS. Well, certainly, we've built a plan going forward that has many opportunities for success. And as you allude to, it is based upon a combined compound annual growth rate of our existing business as well as additional new business coming from new products, and that's our focus been right now. We do see our ability to reach and touch more customers has been critical to expanding our footprint. And as we grow, obviously, we want to grow in a sustained predictable path, where we have predictable revenue and earnings.
Unidentified Analyst: Can I ask a follow-up question?
Michael McCormack: Sure. Go ahead, Patrick.
Unidentified Analyst: So obviously, the silicon carbide market for EVs and high-voltage application in EVs including with the larger vehicles is one that is getting a lot of attention these days. And there have been hints that maybe CPSH might be able to be involved and establish a . Can you add any color today or share any thoughts on whether, in fact, you are working with one or more providers like STMicro or Infineon towards maybe adapting an AlSiC solution to those applications?
Michael McCormack: Yes. We certainly work with a lot of the major players who feed the automotive industry. We are extremely excited about some of the recent new programs as well as some of the past design wins as they begin to mature within those companies to offer solutions. Yes, the answer is yes. We are participating with these companies. Some of it, I'd like to not reveal because it is competition-sensitive, but yes, Patrick, we are participating with them, reducing that the hybrid electric vehicle market and the use of our AlSiC metal matrix composite is going to be an enabler to help them achieve some of their goals.
Unidentified Analyst: Sure. Do you see that expanding into solar and other applications?
Charles Griffith: Well, certainly, we're already in wind power and wind turbines. And any high voltage application would be something that the OEMs and their engineers would certainly be looking at AlSiC as a likely solution, I would say, in solving some of thermal management problems and things like that.
Unidentified Analyst: Okay. Last couple of questions, and I'll put them together, and I'll excuse myself on this call. You're hinting at potential increases in efficiency, I assume that is hopefully to maybe enhance margins, particularly as you get more involved in the military side. And I don't know if you can comment on that. And then finally, the airborne laser systems is probably a long-term application but certainly a large application. Can you comment on that? And it's not evident to me at least how AlSiC would play a role there or maybe on a hermetic packaging or something else. So anyway, congratulations. Welcome aboard, and thank you for your efforts towards establishing CPSH as a growing company. Take care.
Michael McCormack: Thank you. Well, certainly, the airborne laser program in particular is, to your point, a longer-term effort. However, the point being is that we're involved early with large OEMs who provide that in the defense sector. It is a AlSiC solution, not an hermetic package solution, and we're extremely confident. It brings new challenges for us on the design side. We have just begun that process. So more to be determined. But to your point, it is a long design cycle, but the positive side of that is designed in, design win and then the production win for our customer, would be a long-term revenue stream for us. And then obviously, I think to your first question, our goal of streamlining activities is to improve earnings.
Operator: . Speakers, we don't have -- there is one right now. That's from Thomas Brandon.
Unidentified Analyst: What percentage of the military contract -- of the $32 million in the contracts, what percentage of that has been fulfilled and invoiced?
Michael McCormack: So that's the prime contracted value. I think we shared earlier that we're about half of their value represents our component of that. And I would say we haven't even billed the first 10% yet.
Charles Griffith: Correct. Yes, we have not.
Unidentified Analyst: Makes sense.
Michael McCormack: Which may have orders...
Unidentified Analyst: Yes, that makes sense, I mean based on what we're seeing, I think.
Michael McCormack: Yes. So we're actively shipping, creating. We're still on the first ship set.
Unidentified Analyst: Okay. And then once you do ship these out, is this a paid if paid, paid when paid? Is this something that's a very long process to finally get ?
Michael McCormack: No. So obviously, one of the things that is attractive about the defense market and the U.S. government is they are very good payers. And so that once we invoice it, we get paid in the terms of agreement with our partner Kinetic Protection, and they have been nothing but outstanding to date.
Unidentified Analyst: Okay. So you guys are only in, you said, 10% right now, the first 10% of this contract. Is that what I heard?
Michael McCormack: Less than that.
Charles Griffith: Less than that.
Unidentified Analyst: Less than that? Okay. So it took a little time to get ramped up and to really get moving on this. I assume that as you continue to kind of refine this process, you're going to pump out. I mean I would assume they want this -- they have a certain time line they need this product then as well, correct? At what point should we expect it to be 100% complete? So that way, they can start placing other orders, and we can kind of see all the dust settle -- or let the market settle?
Michael McCormack: So, Thomas, we certainly shared with our partner Kinetic Protection and the U.S. Navy that we have additional capacity to do more. The current delivery cadence by which we deliver is predicated upon the Navy's ability to receive. Right now, we have, I think, it's 5 ship sets, 4 or 5 ship sets, and they are currently scheduled all the way through now through fiscal '23, about H2 to quarter 2 of '23 today and on the orders we have. And that's because the aircraft carriers aren't always available, right?
Unidentified Analyst: Sure. It depends on when they are in port, yes. So of this, let's say, $15 million or $17 million potential revenue, this is spread out through 2023 is what I'm hearing.
Michael McCormack: Today, yes.
Unidentified Analyst: Today? Okay. That was really it. I guess I just want to understand. I was -- I think myself and everybody else, we're really expecting a million -- at least a couple of million in increased revenue and profit based on these contracts. But I guess it's just -- it sounds like it's just a very long process.
Michael McCormack: Yes. Well, we agree with you, Thomas. That is going to significantly contribute to both revenue and earnings. It is a long delivery, long process. It's a -- obviously, aircraft carries our -- the U.S. naval fleet, and we kind of -- their scheduling. But we could go faster. We have often asked and we have the capacity already just delivery schedule is the delivery schedule. And the Navy has their own kind of way of doing things. .
Unidentified Analyst: You guys are getting some interest in this armor from other folks, too, right? I mean I assume there's private security and other -- everybody would want the stuff on all their cars, vans, trucks, tanks, whatever they could do, right?
Michael McCormack: Yes. The applications, to your point, Thomas, are virtually endless, right? And finding those applications where our product makes the most sense and conducting that sales engagement and closing is going on daily here. But just like the sales cycle, just like the revenue cycle, the sales cycle is a little long, too. So -- but we're actively engaged. We have lots of potential clients, end clients.
Charles Griffith: Yes, I think it's fair to say that we've probably seen an increase in our sales contacts from companies as a result of this Navy order and the fact that they're now -- there's a lot more interest from some of these other armor folks. Would you...
Michael McCormack: I agree, Chuck. I mean we currently have 4 or 5 active armor programs going on. We're talking just about the Navy program. So they're all in various stages, I'm cautiously optimistic. I've been in the armor business for a bit. And I love our product, I think it adds value, protecting sailors and marines. And there are many more applications, Thomas. And I think to your point, we're just scratching the surface of those.
Unidentified Analyst: Okay. I do have one more question for you guys. On the marketing and PR, I think you guys spoke in the last conference call that you're going to try and polish things up a bit. Wonder what kind of strides have been made in regards to that.
Michael McCormack: So I would say, Thomas, we're probably a little past halfway. We've selected a firm. We have a digital strategy about how we're trying to affect people, making that combined with our social media presence, our web presence, our collateral. And we -- I think we have a review this week or next to get an update. But I think we're at a 60% review, if that's helpful, Thomas. And our plan is still to hopefully be done on or around the first of October.
Unidentified Analyst: Okay. Yes, I see that there have been some increased post. And there's a couple of guys here at the office that are really trying to do what they can to at least keep people like myself tuning in to kind of see what's going on, and that's helpful. But I think some overall polish in investor relations kind of would go a long way.
Michael McCormack: We're extremely excited about the product and how it's developing. I mean we're going -- we go through the pages and the content reviews weekly. And we really like the way the message is going to come out, and it's consistent to what we want. It just takes a little time. And to your point, we are trying to continue our dialogue and improve our communications with not just you, but all our customers, shareholders and the entire investment community. It's -- we're excited about the progress we're making forward. And we're hopeful to start leaking some of this stuff out as part of our build to launch. How is that, Thomas?
Unidentified Analyst: Yes, absolutely. And I don't know if you guys are working with as far as when these leaks happen and how they happen. And the timing is obviously crucial on all the different stuff, but...
Michael McCormack: Yes. Well -- and again, to your point, we're acutely aware of how the social media informs the website, how SEOs, we are working through all of these things. And we also have a plan for the first 6 months of releases of information that aren't material, so employee profiles, et cetera, et cetera.
Unidentified Analyst: And are you guys continuing to reinvest in your sales team and put quite a bit back into the company for future growth? Is that something that's part of...
Michael McCormack: Absolutely.
Unidentified Analyst: Is it part of this earnings release -- is that something that you're showing as far as we're, hey, we did this, but you got to understand, I see you just improved your offices and we're bringing on these folks and we're getting ready for the next wave, I guess?
Michael McCormack: Yes. Well, certainly, growth requires some timing, right? And we have made some measured investments that we shared. But obviously, the goal is to increase revenue, increase market share to be the solution provider our customers are looking for. And that's what we're focused on. We need to attract more employees. It's a very competitive space these days to hire talented folks, and we're doing well. In fact, we had a couple more folks except this week. So I think there's more positive news we'll share once we actually get them in the door, but it's all trending well. And I couldn't be happier with our progress to date. Chuck, do you want to...
Charles Griffith: No, I think -- we hired -- had the press release, was it in May with Tim?
Michael McCormack: Yes. Tim Davis joined us.
Charles Griffith: in May in Florida. And I think that -- and already he's looking like a great hire.
Michael McCormack: Everybody's .
Unidentified Analyst: Good. And can we expect a lot out of you, Michael, as far as bringing some of your older contacts and relationships into this new business?
Michael McCormack: Absolutely. I think that was -- the Board when they hired me knew that I had a pretty strong Rolodex of contacts and specifically in the aerospace and defense market. And we have been in communication with them, and we've begun some contract research and the development activities. They are lower level, longer term. But our goal is to fill the product pipeline with all kinds of products at different stages of development and just fill that thing up and keep pushing for solutions with customers. And it's a dynamic environment. Obviously, there's competitors. And we're doing our best, and we hope to do better.
Unidentified Analyst: Sure. Well, good deal because I know Tim, or Michael McCormack there, he had quite a resume of kind of grooming and polishing these companies, and I guess also went to West Point. So I was just -- I was thinking that a lot of those contacts are going to come with him and a lot of those relationships. I, for one, years ago, used to work in defense and electronics manufacturing place. And it seemed like the old general was always out to rubbing elbows up in Washington to get the next contract. I mean I know that sounds funny, but it really was. He would be gone for a few weeks and he'd come back and he'd say, "Yes, we're working on another -- we're going to bring out the old jigs. And we're going to start making this to begin or this." So I assume the same thing is happening with Michael.
Michael McCormack: Yes. Well, obviously, business is about relationships, right? And you got to build some and you got to bring some. Thank you, Thomas, for your time. Those are great questions.
Unidentified Analyst: Yes. I appreciate your answers. We -- I'm going to hang on for the long term and the long ride here. I hope everybody else is on the same page. I do look forward to the next 20% or 30% of these contracts being fulfilled hopefully and kind of seeing what that looks like and have a few windfalls here for everybody. Well, I appreciate you guys and .
Michael McCormack: Thank you, Thomas confidence.
Operator: Sir, you have a follow-up question from Patrick White .
Unidentified Analyst: I'm just following up to Tom's question a little bit and probe just a little bit further because if I think I heard some hesitance to say exactly what the cadence of these sales would be over the next 2 years. But if it was on a level basis at maybe $16 million of the existing orders, we would be talking about roughly $2 million additive to your base business a year. And I'm assuming that because this is a bit of a unique technology, unlike AlSiC where you may have competitors that the contribution margins might be 25% or higher. And so can you confirm that? And is that a sound way of thinking of this going forward over the next couple of years?
Michael McCormack: Well, certainly, we've gotten half of the ship sets that are available to us ordered already, and we're executing. And we agree with you Patrick, that we believe our margin on this product line moving forward will increase. We just started. We're almost done with ship set 1. We have some other requests into from the Navy. And so it's going extremely well. I think that if you could do the math, right, we essentially have from this point on 2 more years of delivery already on the books. And that's only half of the value of that order. So -- and it is extremely productive and protective piece of the .
Unidentified Analyst: Okay. That sounds promising. It sounds promising.
Michael McCormack: It's wonderful. It's absolutely wonderful.
Unidentified Analyst: Yes. No, it sounds more promising than I perhaps appreciated. I thought these were longer-term deals. And I certainly did not appreciate that it might extend into -- you mentioned 4 or 5 programs. I'm assuming you're counting this existing Navy program with the carriers to be one program.
Michael McCormack: Correct. We currently have 4 other ones active. But they're not at the production award stage.
Charles Griffith: Right, right.
Unidentified Analyst: I understand, but would they be at the same relative magnitude or much smaller?
Michael McCormack: Unsure. It could be the same. It could be more. It could be less. I mean the data they've shared with us, the OEMs we're working with, makes it on par, if not better, than the existing Navy order. But we'll see, right? I mean they have competitors, too. So they have to win, too. We agree with you, Patrick. We think the armor business line is consistent with our long-term strategy, which was develop another business line or 2 to stabilize the business. We talked about that earlier in the call about getting our concentration down while improving our revenues and margin that's consistent with what we've been planning to do for years. We're just starting to see the results now.
Unidentified Analyst: Is the tank side of -- the Army tanks, is that something that is off the radar, no longer viable? Or is that something also that's a possibility?
Michael McCormack: Depending on the platform, it is very appliable. It's just -- it's a combination of the threat, the platform, the ballistic protection, the kinetic energy threat. They're all different combinations, whether it's a truck, a tank, an aircraft carrier. All of our service members , men and women, at sea or on land deployed forward are in harm's way. And so they have a need to protect. It's a significant item in the budget. It's not a nice to have, it's a must-have. And we're sitting right in there with other competitors, but we do have certain advantages of our HybridTech Armor Panel that does extremely well. It does very well at low weight. It does extremely well with high kinetic energy threats. So that's all we can really say, Patrick. I don't know if that's helpful, but...
Unidentified Analyst: That's quite helpful. And I'm implicit in the math is that the higher the volume, the higher contribution margins might be assumed.
Michael McCormack: Yes. I mean we've been in high-volume manufacturing for a long time here. And so we realize in order to get that high volume, there are certain trade-offs at the lower side, but it's very lucrative at the high side.
Operator: Speakers, we don't have questions on queue. You may proceed.
Michael McCormack: Okay. All right. Well, thank you, Catherine. We appreciate all those who have called and listened in. And Chuck, do you want to take us on?
Charles Griffith: Just say thank you to everybody for calling. And hopefully, we'll have lots of good news this coming quarter to announce as we go forward, but we'll see. And we'll certainly add a minimum to be talking to you at the end of the quarter. So thank you very much.
Michael McCormack: Thank you, everyone.
Operator: This concludes today's conference call. Thank you all for joining. You may now disconnect.
