Q4 2019 Earnings Call

And you know Jeff and I have worked closely together since his arrival at some Sada thirteen years ago over the past seven years. He has had significant company-wide operational responsibilities, including leading our Global operations team and all of our business segments with full p&l responsibilities Jeff and I along with the rest of the leadership team have collaborated closely in developing and executing the strategy to position sensor data for the next wave of future growth key to this effort is leveraging our industry leadership to take advantage of the megatrends that transform our industry and deliver growth to some sawdust. This effort would be first unveiled at our investor day and December 2017 provides excellent preparation for Jeff as he moves into the CEO position.

so as we close at

2019 and I include conclude my tenure and CEO. I wanted to share some perspective on some status progress and achievement and convey my excitement for some status future. I am confident that just and the rest of the leadership team will build on our past accomplishments to create strong returns and shareholder values. One of the differentiating features of Masada is that we have built long-standing relationships with customers around the world who rely on us to develop mission-critical sensor Rich Solutions office address both their current and evolving needs our relationships combined with our Innovation capabilities and strength and Engineering enable us to outgrow our end my life.

We have also built and are constantly optimizing a highly efficient Global manufacturing and supply chain Network these pillars of our strategy have reduced differentiate incentive solutions for our customers and industry-leading margins and will remain important elements of our strategy as we go forward over the past seven years. We've implemented an ineffective Capital deployment strategy that has created value for our shareholders while providing the company greater flexibility and optionality. We completed a life which are generating strong returns have added new capabilities and have led to Greater diversification of our end Market exposure are expanded position in life focused on executing growth opportunities in the industrial hvor in Aerospace Industries have reduced our exposure to the automotive Market from over 70% off.

approximately 59%

Today and will continue to decline this will continue to decline our son think Solutions business has greater scale and a broader portfolio to capitalize on attractive opportunities in this large and fragmented Market. Our m&a strategy has added important new capabilities in Wireless sensing software and subsystem integration and high voltage electrical architecture these capabilities along with our best-in-class something portfolio had provided the foundation for our electrification and smart and connected initial in addition since I read domicile to the UK in 2018. We have repurchased approximately $750 million dollars of some sort of stock. Well further strengthening our balance sheet enabling us to make returns based trade-offs between investing and our business completing m&a in buying back our own shares.

in light of this progress you can see where

We are so confident in some side of Futures Jeff and the rest of the leadership team have been integral to our effort to expand and high-growth auto and accelerate growth in HTE our industrial and Aerospace Industries.

Our Capital deployment decision combined with discipline operational management have enabled us to deliver solid financial performance while our end markets have been week off during my tenure is CEO. We have grown our revenue from 1.9 billion to 3.5 billion dollars. Well meaningfully outgrowing our end markets in nearly doubling our employee base wage additionally our focus on cost efficiency and our ability to capture m&a cost synergies helped us to generate a 7-year of approximately 9% off.

Well, I am proud of our team and their achievements. I am even more excited about the opportunities that lay ahead for the company. Jeff is the perfect leader to deliver strong value creation for our our our customers and our employees are progress. Thus far is a strong Testament to the high-caliber leadership and team who comprise sensitive today. I'm deeply grateful for their commitment and support over the years. I have tremendous confidence in the entire team and could not be more excited about the future. I look forward to continuing to provide support as an adviser and a board member especially around Innovation as we move forward. I also want to thank our long-term shareholders for your support of me and synthetic may have you have owned our shared for more than five years. I appreciate the constructive feedback. You have provided me over the years your conviction in our vision and strategy and your trust enough to be dead.

Possible stewards of your Capital. I'd like to now turn the call over to Jeb to speak.

In more depth about our recent performance in our key priorities for 2020 Jeff. Thank you Martha. It is an honor to be named the next CEO of some satta am thrilled to lead such a talented group of individuals during this very exciting time for our company.

Martha and I have worked closely to develop our strategy which will continue to focus on mission-critical hard to do applications further diversifying our own business.

Investing in high-growth megatrends and capitalizing on opportunities where we developed sensor Rich solutions that create value for our customers.

I look forward to continuing our Legacy of growth profitability and success.

now, let me turn my attention to our performance in the fourth quarter of 2019 on slide for I list some of the key highlights of the fourth quarter of

we

Recorded revenues of 846.7 million which represented in organic Revenue decline of 8% but exceeded the high end of our gas range. We delivered adjusted earnings per share of $0.89, which was also at the high end of our guidance range.

We faced a very difficult and Market environment in the fourth quarter particularly in our heavy vehicle off road and Market, which declined 14% in the quarter.

Despite these Market headwinds, we continue to significantly outgrow our end markets posting market growth of 490 basis points in a motive and 1190 basis points in heavy vehicle off road.

One of the key drivers of our overall secular growth was China which generated 20% or organic Revenue growth in the fourth quarter. This performance was off early driven by strong market growth as our customers prepare to comply with China six regulations. We generated a just adjusted operating margins up 22.7% in the fourth quarter, which was in line with our guidance and includes incremental growth Investments made in our megatrend initiatives.

We generated a hundred.

48 million in free cash flow in the quarter which exceeded our adjusted net income and represents a conversion rate of 104%

Finally we continue to make important long-term investments in megatrends for future growth and are excited about the progress. We are making in our smart and connected and electrification initial. Yes, which I will describe in more detail later in this presentation.

Y v shows organic Revenue growth or performance by End Market in the fourth quarter. I will begin with our Aerospace industrial and other end markets.

For the fourth quarter of 2019. We posted 7% organic growth in this business.

Our Aerospace business had a particularly strong fourth-quarter posting double-digit organic Revenue growth as a result of a strong and Market continued content growth and solid of aftermarket performance.

Drill business and trying to continue to decline but improved significantly on a sequential basis.

While Channel inventory reductions are pressuring results are fourth quarter performance benefited from honestly better market dynamics.

Our Automotive business posted in organic Revenue decline of 1.1% in the quarter.

This was 490 basis points better than the global end market decline of 6% in the fourth quarter.

And was in line with the expectations we shared with you in October.

During the fourth quarter. We generated double-digit organic Revenue growth in our China Automotive business as a result of strong content gains and end market growth of 3% off.

Our North American Automotive business saw its fourth-quarter performance adversely affected by the GM strike which resulted in meaningful and market decline even though content growth remains strong in this region.

in Europe

We continue to be affected by a volatile and Market primarily as a result of a General market declined due to software exports to China and specific weakness in the UK and Europe are heavy vehicle off road business posted an organic Revenue decline of 1.9% which represented 1190 basis points of Oak Grove versus a 13.8% and market decline during the fourth quarter.

The largest and market decline in the quarter was from the construction End Market, which was down 25% followed by double-digit and Market declines for both North America and European on road truck.

The bright spot for this business remains our China on road truck business which continues to post Healthy Growth as a result of strong content performance, especially as they prepare for the implementation of China six regulations.

Slideshow 6 we Show outgrowth versus n Market over the past two years.

At our investor Day in 2017. We made a commitment to significantly outgrow our end markets specifically we stated our growth in our Automotive business would be in the range of four hundred to six hundred basis points.

And are heavy vehicle off road business would be in the range of 600 to 800 basis points.

After two years of execution. I'm pleased to report that we are operating right in the middle of the targets. We set our Automotive business has generated average outgrown a 495 basis points while heavy vehicle off road business operated at an average of 735 basis points over that two-year. This performance speaks to the visibility that we have into our content performance even during periods of End Market volatility.

Currently are strong help growth has been offset by unanticipated declines in our end markets. For example in automotive. We have seen end market decline of 3.2 per month on average since 2017 compared to our expectations that the market would be flat.

And every vehicle off-road our end markets grew 8% per year since 2017 in contrast to our expectations that that market would grow 3% per year.

In 2019, we closed nearly four hundred million in new business wins, which is lower than our expectations as customers pushed out decision on a number of new platforms. We would expect an acceleration of new business wins in 2020 as we capture some of these delayed opportunities and we have that strong pipeline to support that outcome.

The key message that I want you to take away from the slide is that we have confidence in our ability to sustain a consistent level of outgrowth into 200 2020 and Beyond.

Moving to slide 7. I want to share some updates about progress. We are making in our megatrend initiatives as well as our plans to accelerate our investment in these areas in Georgia 2020.

I described on our last quarter's call our activities related to smart and connected. We are currently testing proof of concepts with some of the world's leading fleet manager of our solution is working in real-world environments and is currently capturing data on trucks and trailers in our customers beliefs.

Our tire pressure sensing application has demonstrated a clear and compelling value proposition. We are helping Fleet managers identify which trucks and trailers incomplete are not ready to be driven. Well before they hit the road.

This is helping them a limit down eliminate down time reduce operating cost and create safer driving conditions in their fleets.

We expect to be able to announce additional business winds with both Fleet managers and oems later this year.

Due to our progress and excitement about this initiative. We plan to increase our investment in smart and connected in 2020 to support our efforts.

On the electrification front we continue to have confidence that a large portion of our solutions that serve the market for combustion engines will continue to be required in an office environment further. We continue to add capabilities to allow us to capitalize on this electrification trend.

For instance a little more than a year ago. We acquired gigavac to expand our electrification offering into high voltage contactors and we are quickly establishing ourselves as the standard for premium electrified vehicles.

Particularly with the most challenging applications with high current levels.

I did.

Actually since aati has a leadership position in the DC fast-charging infrastructure segment, which is growing greater than 30% a year.

Also, we were the first company in the industry to develop a smart sensor that addresses safety issues associated with risk of thermal runaway in batteries.

And we have had several wins related to this solution in 2019. We continue to extend our market share leadership in various thermal management and motor position locations in both hybrid and full-electric Battery vehicles, and we have an active new business pipeline in electrification applications and we are increasing our earner investment to pursue this growth.

A significant portion of our new business wins will eventually serve electrification Trends in all of our end markets that we serve.

So for both smart and connected and electrification, we are very excited about our efforts best bar and continue to believe that our progress in these important initiatives will help since I'm not differentiate itself with customers and lead to long-term advantages for our company and our shareholders on slide a we summarize some key messages which we have discussed. We are delivering on our promise for Oak Grove to Market despite and Market volatility. We are accelerating our investments for growth given the opportunities. We say we are generating solid free cash flow and we will continue to strengthen our portfolio through disciplined value-add m a

And I'd like to turn the call over to Paul.

To review our fourth-quarter and full-year 2019 results in more detail and also to provide guidance for the first quarter and full-year 2020 Palm. Thank you Jeff King highlights for the fourth quarter has shown on slide ten include revenue of 846.7 million and 1/4 a decrease of 1% of the fourth quarter of 2018 changes in foreign currency decreased revenues by 3% The acquisition of gigavac increased revenues by 1% The net result was a 1% organic Revenue decline a quarter adjusted operating income was 192.5 million and 1/4 a decrease of 8.4% compared to the fourth quarter of 2018 Jeep driven primarily by the decline in organic revenues productivity headwinds partially due to increasing new product launches.

Greater design and development effort to support new business when in mega Trend growth initiatives and higher incentive compensation. These factors were somewhat offset by saving the reposition infection taken this year adjusted net income was 141.7 million and a quarter a decrease of 10.1% compared to the prior quarter adjusted EPS page eighty-nine cents in the fourth quarter a decrease of 6.3% compared to the prior-year quarter.

No.

Make a comment on the performance of our too busy business segments in the fourth quarter of 2019. I will start with performance dancing on slide eleven Apartments dancing reported off of 632.9 million for the fourth quarter a decrease of 1% compared to the same quarter last year reflecting a negative impact from foreign currency of 3% interest cuz of impact on the acquisition of gigabytes of 6% excluding these factors performance dancing organic Revenue declined 1.3% compared to the prior quarter.

Our Automotive business reported in organic Revenue decline of 1.1% in the fourth quarter of 2019, but outpaced and Market by 490 basis points.

Organic Revenue growth in China was offset by organic Revenue decline in North America and Europe.

The GM strike reduced our fourth quarter revenues in North America by approximately ten million, which was less than expected excluding the GM strike our North American Auto business delivered organic growth in a quarter driven by high single-digit content growth our HBO our business reported in organic Revenue decline of 1.9% in the fourth quarter.

Far out. Peace

In a 14% And Market declined by 1190 basis point primarily due to strong content growth in our China on road truck business.

Performance dancing operating income with 165.1 million a decrease of 7% as compared to the prior quarter in operating income as a percent of Revenue was 26.1% in the fourth quarter in decline of 170 basis points. The decline in segment operating income was due primarily the decline in organic Revenue productivity headwinds partially due to attract new product launches in Greater design and development effort to support new business wins and mega Trend growth initiative somewhat offset by savings from restructuring actions.

As shown on slide 12 something Solutions reported revenue is a 213.8 million in the fourth quarter an increase of 2.3% as compared to the prior quarter.

Organic Revenue increase 2.7% which excludes a negative impact on foreign currency of 4% and a positive impact and the acquisition of gigabytes of 2% this increase with a result of double-digit organic growth in our Aerospace business.

By shorter content and a healthy and Market partially offset by industrial market decline albeit less significant than previously anticipated.

Don't think Solutions operating income with 68.2 million in the fourth quarter a decrease of 8% from the prior quarter. The slight decline in operating income was due primarily to bring in foreign currency headwinds somewhat offset by savings from repositioning actions and the acquisition fee go back corporate and other costs not included in segment operating income. We're 52.3 million in the fourth quarter excluding charges added back to our non-gaap results corporate and other costs were 39.1 million in the fourth quarter of 2019. Approximately five million from the fourth quarter of 2018 primarily due to higher variable compensation in administrative costs.

513 shows since August fourth quarter 2019 non-gaap results

Adjusted gross profit declined 4.5% year-over-year to 298 million in Gross margins declined 160 basis points, the 35.2% off the decline in gross profit and margins were primarily due to declining organic revenues productivity headwinds Parts related to increasing new product launches higher variable compensation and unstable for currency somewhat offset by the opposition Giga back and saving some repositioning action.

R&D cost of 8.3% due primarily to increasing design and development effort support new business wins and investment in megatrends SGA cost increased 1% to the acquisition gigabyte excluding the impact of gigabyte s t a cost for flat with the prior quarter as we align our cost structure to the lower revenues. We are experiencing as result of income was down 8.4% compared to the prior-year quarter.

our tax

Great shown on the slide as a present of adjusted profit before tax was roughly flat compared to the prior-year.

Finally adjusted EPS was down $0.06 or 6.3% as compared to the fourth quarter of 2018 as a decline in operating income is partially offset by the benefit of Cherbourg.

514 shows inside of school year 2019 non-gaap results adjusted gross profit declined 5.4% year-over-year to 1.2 billion and gross margin declined 130 basis points to 35%

The decline in gross profit in margin were primarily due to the decline organic revenues productivity headwinds Parts related to increasing new product launches the net impact from Acquisitions and divestitures partially offset by table for currency and lower variable compensation costs.

R&D cost 448.4 million up 8% year-over-year as increases in design development efforts to support new business wins and Megatron growth initiatives were mostly off by the favorable impact of foreign currency.

afternoon

Costs were two hundred sixty seven point four million or 8.6% lower year-over-year due primarily to lower variable compensation and selling costs. They will foreign currency. It cost savings from repositioning action offering income was down 5.6% compared to the prior-year.

Our tax rate shown on the slide as a percent of adjusted profit before tax was up 40 basis points year-over-year to 8.6% in line with our guidance.

Finally adjusted EPS was down $0.09 or 2.5% as compared to 2018 as a decline in operating income was mostly offset by the benefit of share repurchases.

We talked with 458.3 million during the year or 79.6% of adjusted net income and exceeded a free cash flow guidance provided last October gain leverage end of the year at 2.8 times within our target range of 2.5 to 3.5 times.

On five fifteen I show our financial guys for the first quarter of 2020 which includes our best estimate of the business impact related to the recent Corona virus outbreak, which is quickly changing and highly uncertain.

Furthermore it's very difficult to predict when the government-imposed quarantines will end when when travel restrictions will be lifted when our plants will be fully operational and Altima and mark the mail that said we estimate for both the first quarter and full-year 2028 forty million revenue and a $20 million operating profit negative impact on the twenty million operating profit drop reflects the normal impact on the expected loss Revenue as well as underutilized and Stranded costs related to the event.

We continue to monitor the situation closely and we are doing everything possible to protect our employee and serve our customers.

For the first quarter of 2020 we expect report revenues between 793 and 817 million.

I have reported Revenue decline between 6 and 9% at the midpoint of our guide. We expect that foreign currency will decrease revenues year of year by approximately 5 million.

20 impact of foreign currency, we expect her for an organic Revenue decline of six to eight percent in the first quarter.

Our current flow rate is approximately 93% of the revenue guidance midpoint for the first quarter and reflects lower than normal production of our manufacturing sites in China and Thursdays customer demand.

We expect to report adjusted operating income between $149 and $155 million on the bottom line. We expect report adjusted net income between $98 and $100 million years would represent a decline of $25 30%

We expect report adjusted EPS between $62.66 which includes a $0.01 negative impact from foreign currency at the guidance Bitcoin.

Route 2019 we implemented significant restructuring actions to better align our costs to the lower bound volumes. We are experiencing more recently. We announced the clothing of our carrickfergus planning an island to further optimize our manufacturing Network and Footprints. This action will result in approximately 7 million of annualized savings. We expect this manufacturing plant to be fully took down an early 2021 and expect to incur approximately 15 million in restructuring costs in 2022. Complete disclosure looking forward Northern Ireland will remain important expanding R&D Center persons. Now, let me turn to our guidance for pull your 2020 shown on slide sixteen.

Before your 2020 we expect revenue between 3.4 billion and 3.5 billion.

Representative range between a 1% decline in 1% growth. We expect foreign currency to increase revenues by approximately 15 million excluding foreign currency. Organic. Revenue guidance office is a range between a 1% Decline and 2% growth.

We expect adjusting operating income between $753 and $781 million which would represent a range between a 1 and 4% decline on the bottom line. We expect adjusted income between 539555000000 and adjusted earnings per share between $3.42 and $3.58 for the full year 2028, which represents the decline of 4% to growth of 1%

We expect foreign currency will have a $0.04 negative impact on EPS the 2020.

Our EPS performance in 2020 reflects continued strong Revenue Elk Grove to our major end markets which continued to decline in the case of china a significant Market uncertainty as noted earlier in our prepared, currently, we expect the effects of the coronavirus will reduce our EPS by 11% off with all that occurring in the first quarter with that said we expect ongoing net productivity gains and savings for repositioning actions to fund our efforts to further strengthen our Core Business as well as expand or an issues intersect promising new Mega Trend growth opportunities most will be in the area of electric station and smart connected.

we respect the

Just the tax rate will increase by approximately hundred basis points over 2019 and being the range of 9.8% of adjusted profit before tax.

We expect to generate free cash flow of approximately four hundred thirty four hundred seventy million this free cash flow of guys assume annual Capital expenditures were practically $165 off and $75 million for the full year 2020.

I don't invest your day in 2017. We share with investors a three year financial plan since then we have achieved a number of critical objectives such as accelerating content growth over that package in creating greater flexibility in deploying Capital. However, with our current 2020 guide we expect a full short of our Revenue earnings and cash flow Target first off our end markets have weakened significantly below the market growth assumptions embedded in our three year projections. This end Market weakness will result in nearly $425 million less Revenue off over the three-year period than originally expected second deducted a profitable but very slow growing nausea teaching business involved and purchase a small but very fast-growing business in gigabyte, which is critical for all expectation growth platform.

these two factors combined

I would lower than expected for activity games mostly due to lower volume are the main contributors to our expected shortfall to our through your targets.

And 517 I share our expectations regarding most of our major end markets in 2020, which all continue to determine we expect another another difficult an office environment in 2020, but overall we expect less of a headwind from our end markets in 2020 do the Mazda Improvement in the Global Auto & Industrial markets awful. So my offset by a week or HBO our end market now, I'd like to turn the call back over to Joshua.

Thank you, Andrew. Please assemble the Q&A roster.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster the first question he comes from stomach Chatterjee of JPMorgan, please go ahead. Hi. Good morning. Thanks for taking my question before I start congratulations to both Martha and Jeff. I just want to push start off with the content gains in 2020 related to 2019. You're getting two similar levels of content gains or even modestly higher if you can help me with the driver's of the content games you think about an 2020 looks like China six regulation will be one on the heavy vehicle side. And then how do you think about the change in mix of the content gain towards the megatrends that you're investing?

Yeah.

Great great question. So, um, we we tend to look at the content gains over a very long period of time much like we look at our opportunities given the long cycle nature of our business office as we mentioned in our prepared comments. We would expect similar content gains in 2020 and beyond that we've experienced over the last couple of years. And so that's an average wage of about four hundred ninety five hundred basis points. And on HBO are in that six hundred eight hundred range. So midpoint about seven hundred in terms of the opportunities that we're seeing very much similar to the trend that we've been seeing in the past in terms of all of our customers aiming to achieve regulatory requirements around the world. And also we are seeing in fact of megatrend related activity and so about a third of our activity in 2019 was related to megatrend related opportunities that will eventually gain

Turn into content group. And so

Over the long period of time of 357 years. We'll see content shift more toward Mega Trends in in the business helping our customers achieve their objectives.

Got it, that's helpful. And if I can just clarify one more thing, which is, you know guide to China Automotive production being down 6% in twenty-twenty. That's some third-party for cars that are more wage flat. Some is even a big part of that impact is the one Q impact given the events there. So if you can just help me think about how much of that how you thinking about 1 Q China Automotive production and then if you can remind me what the average content vehicle is person's heart I know right now sure so yes a very large portion of the decline of 6% is Renee to the impact in the first quarter. Although there is a slight decline expectation in our forecast for China, but the the big is component of that is related to the to the virus very odd situation will come back to that. I think in terms of providing a little bit more color on it, so that that's the the trend that we see there.

the next question

Comes from a meat daryanani of evercore, please. Go ahead. Thanks for taking my questions. I guess list of best of luck Martha. It's been a pleasure working with you and congrats Jacob the new role. Yeah, I guess maybe to start off of these the the two groups in the shadows that you guys have been talking about spot and connected and electrification. Is there a way to think about how much are the investment speaking for my daughter terms in 2024 those two initiatives? And when do you think revenues will start to accrue a show up on your p&l from these Investments? Yeah, So when you compare 19 to 20, there's about a twenty million dollar incremental investment in smart and connected some of that is reallocation within other Investments, but Net 10 to 15 million incremental R&D spend associated with growth opportunities, that's baked into 2020, but there is some reallocation as well. So we have been shifting over time.

our investments are

Long-term Investments associated with growth to megatrend in year-over-year. There's about a twenty million dollar incremental spend on that side in terms of when we will start to see impact. Can we see some impact already? So we have some Revenue in our 2020 plan that relates to some of the the the megatrend related areas, but I think it's also important to note that a large portion of the revenue that we are experiencing today will apply in the future as well. So it's not a completely from one platform to another there are elements of our product categories that will continue to have a role going forward even as those megatrends get implemented more broadly in the end markets that we serve.

Got it. You kind of just follow up sign out with the health concern. I heard the numbers you guys have just forty million in revenues $20 in operating income impact you want off. I'm hoping if you could just talk a little bit more on what impact it's having on your supply chain at this point and you see that being an issue in the ability to ship products globally to meet demand. It'll be on just tryna. Yeah, so I appreciate the comment. Let me provide a little bit more context associated with the the virus and what we're seeing. So I think everyone knows that we have to manufacturing plant based in China. We also have a business and engineering center based in China. So we're getting first-hand information regarding what's going on on the ground and we're doing everything we possibly can to make sure that we protect our people and we serve our customers and we're having constant dialogue with both to make sure that we're doing

what we need to as well as with

The local governments to make sure that we're complying with with the mandates that they put in place based upon those that's how we came up with the estimate. We're also speaking with our supply chain to make sure that our supplier is more deep in the supply chain or ready to respond as this recurs and we're examining the inventory levels that are suppliers have that we have our customers have to make sure that we can have strict continuity of Supply having said all that it is a very fluid situation and we're watching day-to-day life demand ugh unfolds and also the impact that it has overall on our supply chain, but it's an active dialogue our best estimate at this point is the Forty million of of Revenue and Thursday or profit largely The Profit drop through is more significant than you would expect because the way that the government implemented the quarantines is to extend holidays. So there was an obligation during dead.

Some portion of that time to continue to pay our employees.

Which is also the the right thing to do for them given that the situation they're in and so that's the more color that we have and and we'll continue to monitor the situation very closely.

The next question comes from David Kelly of Geoffrey's please go ahead. Hey, good morning. And and I'd also like to convey my congrats to Martha and Jeff as well. Just following up on that coronavirus commentary. I guess could you provide some color on how we should think about the actual individual in Market impacts? Is it mostly automotive and and where else do you see the the flow through as well? Yeah. So we we have a a broader business obviously then in China outside of automotive and it's pretty pretty widespread in terms of the impact took all of those and markets that we serve. So when you think about the Forty million impact in q1 that represents about four and half percent of our decline in Revenue that we've guided mm, I decline an overall market and it's pretty consistent across each of the end markets automotive industrial hvor because candidly all of the customers that we serve in that region are impacted in the same.

Way the the the interesting question will be on the rebound side of this. We're not expecting that. There will be a

Covery of this forty million dollar loss but will watch closely because I think on the recovery side, you might see a different outcome across those end markets going forward which which will update when we have or data on one other, just if you look at our exposures in China about about two-thirds or 70% of our business is auto or truck related in our own know the impact here is is roughly a line to our exposure in China in those end markets.

Okay, great. Thank you. And the follow-up I guess how are you thinking about the the timing of of your customers returning to production and how that flows through the Forty million we've heard from others and certainly seen the headlines around some sort of mid February timeframe is is that in line with your thinking or you're trying to take a more cautious approach and again recognizing this is a very fluid situation and and hard to pinpoint at this point.

Yeah, so it the the government is lifting quarantines in a different way across different provinces. I can speak to the specifics that we may see it's hard to really understand how that would impact others in the supply chain because it's very facts and circumstances specific both of our manufacturing plants. We've been given uh clear signed to restart production now now the challenge with that is when our workers come in from outside of the province Thursday in some instances need to go through a quarantine. And there are also instances where if there are indications of the virus in that area not in our plant, but in that area then we wiped might be asked to put a halt and so for instance on Monday when we restarted our volleying China location, there was an instance of a virus outside dog.

Aunt in the area that the government asked us.

To postpone the rest of the day so our plan is to get back to close to full production by the end of the 17th. So that gives us a little bit of leeway and Back Again continue to monitor the situation very closely here.

The next question comes from Lindsay Lohan of Bank of America Merrill Lynch, please. Go ahead. Yes. Thank you congrats to Martha and Jeff as well. Can you maybe address the fact that if you take out the $40 million impact from coronavirus, you're still guiding one Q somewhat sub seasonal at roughly flat versus which is back up so I can you talk about some of the factors that are driving that and and how should we think about the seasonality if let's say you get back to full production as you said Jeff after on the 17th. So how should we think about the sequential projections from their forward as you go through the course of the Year? Obviously, you're starting from ready to press one key level.

Hey, Jake, Paul

Oh just a couple of comments. I mean the first would be that as you know, Q one is always the lowest margin quarter. It's going to allow the new pricing kicks in its beginning of the year off her party to be an issue with the accelerate over the course of the year. So this is a normal somewhat normal Trend that we see every year. We're still even if the exclude the 14 we're still down. So we still struggling a little bit in terms of productivity along with the lower volume and operating leverage. We have some time year-round expenses related to compensation. So although I think it's a it's a solid quarter. It's consistent with what you've seen the path took him to improve the course of the year of her activity will continue to improve so I think it's I think it's similar to what are Trends in patterns have been historically.

Thanks Paul. And can you maybe also address what your expectation in 2024 free cash flow is I might have missed that but can you just talk about how you're thinking that the flow through and and how much wage structure in cash restructuring impact we should expect in 2020 be sure that we should share the range of 430 million for 474 the midpoint of 450 which is is in line with what we deliver this year. We lose 458 lower given the lower profit levels. Um, we have a little higher capex than in 20 verses nineteen. So it's largely in line restructuring a payment will be slightly less than we saw in 2019 so that that does help a bit and we have some one-time expenditures this year that don't repeat next year. So it's it's consistent in line. I think with the level of operating profit that that we're generating.

Once again, if you have a question, please press * then 1 on a touch-tone phone. The next question comes from Dan Galvez of wolf, please go ahead.

Hey, good morning. Thanks for taking my question in in terms of the Eevee opportunity. You know our sense is that the current batch of these launching now aren't very optimized, you know partially due to to not you know, having fully optimized automotive parts from the supply chain. Is that your impression as well. Do you have content on on kind of some of the the movies that are launching late last year this year and kind of what is the sourcing environment currently and in terms of pipeline of new business?

So yes, yes, we do have content on the vehicles that are being launched today. And yes, I would agree with you that as customers use new evolving Technologies the Rd and product roadmaps that they experience very sometimes based upon the challenges that they face as they really are known know what their vehicle architecture will look like and I think you know what you mentioned in terms of the supply chain, then largely pulling on suppliers that were more typical in the industrial supply chain is accurate the you good example, that would give you is that the Giga back acquisition that we had primarily served that market and we're then I'm bringing it to Automotive levels that the product quality and the manufacturing standards. So I think your observations are absolutely accurate and I would say we're considering

With what we're experiencing.

Okay. Got it. Thanks and just one housekeeping the the negative FX impact for sense. Is that related to the Top Line impact that's happening this year or is that more of an impact of some of the the hedging that benefited 2019 it has to do with some of the hedges that are coming off. We are heading program consisted. We have job about eighteen to twenty-four months wage about 80% heads on the major currencies, which would be the CNY the Euro of the peso on the pound and so it's just a reflection of what we've had and we're spot rates were at the end of December that we have.

The next question comes from Joe of RBC Capital markets, please. Go ahead.

Thank you. Good morning. I wanted to to talk a little bit about some of the comments on on HBO. I think again, you mentioned the potential that's M programs could be pushed out a little bit. I think you mentioned that last quarter as well. Even though it looks like organic growth or outgrowth is quarter and became a little bit better than expected. Um, but how does that sort of um, I guess dovetail with the seven hundred basis points of outperformance that you're guiding to engage in that segment from from a from a Cadence perspective. Um, and and also with the with the virus does does that not at all impact the page sold out performance like I guess is is the does the virus really impact some of the uh, potential uh outperformance and sort of further push out some of the programs.

Yeah, so on the HBO our business we've talked during 2019 about the fact.

Dad, some of our customers pushed out launches partly due to Market circumstances also partly due to Readiness more broadly on the the architecture and systems that the the implementing and but we do also see at the end of the day we although we saw some lumpiness in terms of content by quarter within hvor we landed quite nicely and over the last five years. We landed quite nicely. And so although ugh Market circumstances customer Readiness other supplier Readiness to launch platforms could hang out of quarter quarter impacts on overall content growth. We continue to have very high confidence in the long-term content growth in terms of the virus impact. It's it's a it's a broader impact it's nice and and when there's lower demand there's lower content clearly, but but we don't expect that that would have a lasting impact in terms of how customers think about new product launches.

okay, and then just I appreciate your comments and sort of the the migration and

Packed with with in China. I think that's um been a little bit underreported. I guess as you're starting to maybe it's still too early for this because you're starting to see some employees come back. Are you noticing any any hesitancy of birth of workers to come back and like could there be a potential for you know, a little bit of ramp up or startup disruption as you might have to you know, also do some some new hiring

No on the employee desire to come back to work part and we are doing other activities associated with providing Mass said we're they gathered eat to make sure that we're taking the necessary precautions to make them feel comfortable with the working environment. Obviously testing temperatures. We have doctors on Thursday at our plants to make sure that we're monitoring that situation, you know, a variety of other logistics things associated with wiping down flat surfaces and so forth. So we're we're doing everything to make sure that our own voice as they come back feel comfortable with the working environment that they're coming back to.

The next question comes from Shawn Harrison of long ago research, please. Go ahead. Hi. Good morning. Just following up on the China virus topic. I know most of the automotive supply chain is localized to a region. But are you seeing any potential wrist either into Europe or other regions of you know, another supplier, maybe not being able to get product to either, you know, the integrator the auto OEM themselves and that potentially impacting demand for you and in the first quarter of the first half of the year.

So the Forty million that we've quoted is China region-specific as we examine that potential impact to our customers in Europe and North America, but we do not see any impact on that right now. I would also mention that over the last several years. We've we as a company have worked to make sure that we have regionalized manufacturing to minimize that impact but you're absolutely right that is it is a very complex supply chain and there are some suppliers and others deeper in the supply chain that could have an impact that we're monitoring in terms of our view. We don't feel as though there's any incremental impact the question that you're bringing up is a is a good one, which is Will other suppliers in the supply chain impact that more broadly wage. Um, and we're we're not seeing that right now. But again, we'll we'll continue to monitor it very closely.

And then it's a brief.

Jeff you mentioned I think program wins were down, you know a hundred and some million over over the average relative to the average the past two years what gives you confidence in terms of maybe the push out that you saw in 2019 that it accelerates in in 2020. And that that maybe doesn't get pushed again a little bit Yeah. So two two things the first would be if you look at the average new business win over the last five years. It's 440 million. So although in individual years we might see higher amounts of opportunities and wins do to just bought a timing of when customers choose to to launch new items. But but given its a long cycle business that long-term average I think is the more meaningful number in terms of what we should watch wage. Also the pipeline. So what we look at the pipeline of opportunity that we have now versus what we have the beginning of 2019. It's a bigger Pipeline and nothing replaces the Dead.

personal contact with customers

To make sure we understand where they are and they were decision making process and all of those things give us comfort in the fact that we will see a higher wage board in 2020 than we did in 2019.

The next question comes from Brian Johnson the Barclays, please go ahead. Thank you. Just want to talk a bit about the margin guide for 2020. You know, I'm kind of strip out the virus impact looks like slightly growing Top Line but flattish margins, can you kind of give us some color on the puts and takes hey is that directly reject the puts and takes around the margin?

Sure, the if you back out the the Forty million we were in the one one half percent organic growth in earnings were offered at a similar level. So what's happening there, you know, we continue to benefit from the repositioning actions that we took but has Jeff mentioned we have a significant increase investment around megatrends those two are somewhat offsetting and then we look at life compensation cost investing in the core business for sustainable long-term growth. Those things are being funded by continued for activity and that productivity gains in the email. So net-net you back up virus impact. It's about flat earnings, uh, you know earnings growth in line with Revenue growth. I don't organic-based currencies a little bit of a head when like we know it is about $0.04

Okay, so not really any margin expansion with this person takes know when you back slightly down.

I've got a bunch of strategic questions. We'll get those good Florida. Look forward to seeing you. Jeff will miss you but congrats. I just one quick and hate to just keep feeding the virus. But you know with about sort of Life by mid fives 5.4 million in production expected in China this quarter. Can you give us a sense of just so we can track and every week or so the production assumption invalid in your virus guide?

Yeah, so we believe there's about four fifty to five hundred thousand units per week of production. So given the fact that we're down three thousand three weeks uhmm you can that math is, you know translate to 1.5 million units would be around the estimate just incremental impact on life. If you are a professional businesses that add to that right

the next question

Comes from Christopher Glenn of Oppenheimer, please. Go ahead.

Thank you. Good morning, and congrats to Martin Jeff on the transitions had a question about the vehicle area network topics on HBO wage. You've been you know, right down the middle on your content growth targets the last couple of years it is this something that you know, you'd see improving on that or more sustaining it a year or two out. It's it's a the goal would be to have it improve and the interesting part that I think you and others have caught on is that it's just we're we're serving a different market segments. Right? So it's an after-market which might have shorter periods or will have shorter periods in terms of the pipeline. So it would be in a mental are megatrend investments broadly. When you think of some of these things that are if you will be on the center component will naturally have larger asps and

create more content grow for

Has your company and and as you know, they're very large addressable markets in terms of the opportunity that we're pursuing. Thanks for that. And my follow-up is on your new business with them as in particular with China content like vehicle being great and Evie's taking off. Is this still primarily a single Source business any particular variations as pertaining to eBay or China? For instance? Yeah. No no major changes in terms of how our customers are thinking about their sourcing strategies. The the the fact that we focus on those mission-critical hard to do applications requires a lot of engineering effort on the part of our customers. And so the Dynamics associated with that and the need for us to make sure that we can deliver for them when they need it is is critically important to them in terms of selecting their suppliers.

The next question comes from Deep of Wells Fargo, please. Go ahead.

And good morning all let me also echo my congratulations to both the market and get a couple of questions for me. First one. How are you thinking about the fully organic decline page that you guided splits between performance sensing and sensing Solutions given that you you exhibit sensing Solutions on a positive organic growth in Q4.

So for the full year, if you if you look at the you know, our guide is essentially fly non-revenue, we would expect our performance sensing business to be down. Largely driven by the HBO our Market we're expecting the automotive business to be slightly better than it was last year and the performance sensing business will be up. So really the the impact aside from the virus. Obviously, the impact of the virus is the HBO our business in terms of year-over-year decline versus is some improvement. Yeah, so it's not exclusive to give me Solutions offer our space business that continues to show really strong contact person to twenty and that's that's why the the organic growth incentive Solutions is positive but um performer is impacted by the virus and gently. All right. That's right. Yes got it. My follow-up is on

The wire sorry about that. I know that you're getting a lot of questions, but why do you think the Lost revenues from the wireless may not be?

The tube is that you're you know, is is that your worst case scenario? Just curious why you think this is last demand and on the flipside, how are you're situated from a production capacity or utilization perspective if demand where they come back? I mean, what are some of the governing factors there? Yeah, so I wouldn't say it's our worst case scenario the worst case scenario is that there's continued disruption here, right? So, I think it's right down the middle of the road in terms of the impact. It's a it's a great question that around whether or not it will snap back and it really does in in my view depend on a couple of things the consumer sentiment which may be driven by government in terms of other incentives. We expect from the past certainly the the government and and China can Implement very quickly incentives to create incremental demand. And so that's an option that that may exist that could change this month.

and the other is around the capacity your

It's a great one. And so what's capacity with us and also deeper in the supply chain and with our customers in terms of them being able to catch up. We like to think that we can always find a way to make sure that we can deliver for incremental demand, but there are areas of capacity within our business where we are running pretty much at at close to full capacity within 5% or so. And so they could be minimal impact, but our goal would be if demand materializes to make sure that we can deliver on it.

The next question comes from Joe Giordano of Colin, please. Go ahead.

Hey guys. Thanks for taking my question. Just starting on on sensing Solutions some other players in China industrial have talked about like a pool full of demand into the fourth quarter given the timing of Lunar New Year and kind of stocking ahead of that. So did you see I know you said that sending Solutions did better than you thought on Industrial as wondering if if that has anything to do with it Thursday.

It does it does have some of the impact when you when you peel back the what we believe to be the market impact in the industrial business in the fourth quarter is about it was down about 5%. We are expecting that to improve into 2020. But yeah, it's the combination of market decline and also inventory takeout. It's it's a very fragmented complicated supply chain on the industrial side and we saw a fair amount of inventory take out in the supply chain. That is the channel inventory take out which which ultimately impacted our demand for our products. So that's separate from Rodman from customers. So we saw more of an impact in two thousand and nineteen then pure demand reduction because of that channel inventory takeout. I guess I was referring to some were talking about like a positive impact just in fourth quarter from China wage.

ahead of new

Or something like so there was a a little bit of a surge in demand from kind of stocking ahead of that outside of the the general these talking that happened all throughout 2019. Yeah. Yeah. I think that would be normal markups cycle for us. I don't think that we saw anything that was different than what we would normally see in terms of our quarterly Trend in the business as I was going. Okay, perfect. And then Paul just on the tax guidance for next year. I guess the ramp a little bit quicker than we probably than most probably anticipated. How do you kind of see that progression over the next couple of years? I know generally talked about like 50 bit say, you know, you know, this is a hundred and eighteen. So how how quickly should we see that kind of increase over the next few and do you have kind of like an endgame number that you that we should think about?

So go back to 7 2017 got your day. We did talk around $50 fifty basis points here for for a few years. We've done better than that that's around the mix of where the profits are generated wage tax rates in those different jurisdictions. So we are a little bit ahead of where we thought we're going to be we've had some some tax benefits that naturally expired in 2019. That won't benefit 20. So that's drink some of the increased but over the three-year period were about where we thought we would be it should that we did better in the first two and now we're giving a little bit that back in in 2020.

The next question comes from Steven Fox of Cross Research, please go ahead. Thanks. Good morning. Just on the HBO our markets. Obviously a lot of money is in markets are in cyclical decline. I was wondering if you can sort of give us a sense of where you think, you know construction versus versus commercial vehicles are at this point in that cycle and secondly em when you look at your growth over Market, it was in those markets. It was substantially above the two year average. I was wondering what you would attribute that to given that the cyclical pressures. I just mentioned wage.

Yeah, so we we started seeing a decline we we we start with we had forecasted a decline in the latter part of 2019 and those markets we saw that come a little bit earlier than a starting really into the tail end of the second quarter of 2019. We started to see the decline in some of those end markets and it really accelerated as we got to the end of the year. And so we quoted some of the stats on Market in the fourth quarter of 2019 on road truck down 14% Europe North America Europe down almost 14 as well a downtown and so cross that overall Market down 14% So going forward were expecting it to be some similar Trends but overall about 9 bucks in the market. So, uh less than fourth quarter, but more than full year 2020 in terms of the timing on that. I think that our view is that it's a year to eighteen months cycle. So, yep.

See more.

The balance of the end of 2020 but we're not forecasting that there's any, you know big uptick in terms of that market during this year.

The next question comes from Mark Delaney of Goldman Sachs, please. Go ahead.

Yes, good morning. And thanks for taking the question mark. Thanks for all your help and time over the years and Jeff best of luck in your new role the questions about the the comment you made in your prepared remarks about a goal of one of your goals s c e o of diversification by End Market. Are you referring mostly to organic growth and markets like Aerospace which I which I know did pretty well in Iraq in 2019, or are you alluding to potential m&a potentially CST size or or maybe even something larger in order to achieve that objective? So it's it's nice to home based business that's growing at the rate that it is. Well some of our end markets are are down or seeing decline, but it would also be on the m&a front to identify potential targets that would help to continue to diversify the business over the long term.

Got it. My phone questions around sg&a. And the first quarter. I've been a couple of in a very good job, especially a second half nineteen of managing sg&a expense, but I don't typically in the first quarter. There's some some stuff up with it. Just try to get a better sense for where it would be thinking about sg&a dollars in the first quarter. Thank you for 20 we would expect it to move up a little bit from where we exited, uh, the fourth quarter off part that's just normal timing of employee cost and then there's also just the timing around at the top.

The next question comes from William Stein of SunTrust, please go ahead great. Thanks for taking my question. I wanted to ask question and a follow-up about the electrification Meg friend over the last few quarters. I'm hoping you can help us understand how your end OEM customers plans might have changed regarding the anticipated mix of internal combustion vs. Hybrid vs. Electric vehicle.

Yes.

I don't think we're seeing any major shift every one of our customers has a pretty robust product development strategy associated with electrified platforms, but I don't think we've seen any major shift. I think what we've observed as we've been engaging with customers on this new product category for us is a couple of things. I alluded to the fact that as customers Implement new emerging Technologies the product development life cycle doesn't always follow the same path as what it historically has with has with more mature Technologies. And the second is they tend to be a little more more lumpy as would be expected given the platforms will be more concentrated in an electrified environment the the opportunities tend to be a little bit more lumpy in terms of the size of the opportunities that we're pursuing that's helpful. And then another thing you mentioned in the prepared remarks was a significant overlap between the two categories. Yep.

broadly speaking internal combustion

Within your portfolio. That was a surprise to me. I thought most of the products that are used internal combustion relate to that relate to that power type song. Can you maybe elaborate as to what the overlap is what types of sensors where you know any details on that would be helpful. Thank you. Yeah, absolutely. So breaking electronic stability control applications will be still applied in an electrified platform for redundancy associated with the vehicle cabin management type thermal management type applications tire pressure monitoring. So there are a number of applications outside of the engine and transmission that we serve today that would be applicable and are being designed into those those vehicles are going forward, you know half or better of the total portfolio ports right over to an electrified platform.

The next question comes from Jim Suva of City, please. Go ahead.

Thank you very much. I just have one question and that is regarding you mentioned your plants. You expect to be back into production February 17th and off and the sales, uh-huh shortage or the the challenges associated with that for the plant closures. We talked a lot about Automotive so far. Is it fair to assume that you're also making a similar adjustment to the heavy vehicle the construction side and all that and you expect that to come back kind of to the the same magnitude or how should we think about that? Cuz a lot of the commentary so far was kind of on Automotive. Yeah. So two-thirds of the of the business in China is Automotive, but we we would Jim expect a similar impact proportionate impact to the other end markets that we serve not just Iraq war but also the industrial markets as well. We don't have a at Aerospace presence in in China and so it would be those three end markets that would be impacted proportionately wage.

the shutdowns that

record

The next question comes from Craig hettenbach of Morgan Stanley, please. Go ahead. Yes. Thank you. I just had a question on the strong growth in China on the automotive side just took visibility into that sustaining and then is there anything on the competitive front terms of how your position in that region versus some of the things you're saying kind of in in Europe and America?

Yeah, great visibility into the sustaining content growth in the China market and more broadly and the other Automotive markets and other end markets that we serve the long-term nature of the business office wins and engagement with customers provides that level of visibility into into the future.

Got it. And then just a quick follow-up on gigavac. You kind of help frame just that the growth that you're seeing that business maybe versus the overall growth for the company and then just the commentary about kind of Summer applications moving the TV just kind of where you are at that process. Yeah. So we're seeing strong double-digit growth in the in the back business despite the market headwinds that that we're facing. So the investment case that we had laid out that we under wrote is playing out as we would expect as we you know, beyond this year. And in addition to the next five years in terms of platform development. I mentioned in my prepared comments some of the other areas where we're exploring beyond the acquisition of gigavac that we're looking at battery pressure sensors to enable this battery monitoring motor position. There are a number of different other organic applications that we're working on that will yep

Watch to be able to continue to serve the electrification market is that unfolds so feel really?

What about those initiatives both the ones that we've Acquired and will continue to invest in and the ones that were working on organically?

That is all the time. We have allotted for today's call. I'd like to turn the call back over to Joshua Young for closing remarks.

I'd like to thank everybody for joining us this morning since I will be attending the following conferences in the first quarter the Goldman Sachs technology conference the Barclays industrial conference the city in a conference in the wolf research investor conference. We also invite you to visit us at our headquarters in Attleboro, Massachusetts. Thank you for joining us this morning and for your interest in Sada wage, you may now and the call.

The conference has now concluded thank you for attending today's presentation. You may now disconnect.

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