Q4 2019 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Q4 two children in 19 per technology.

Our next conference call.

Time, all participants are in listen only mode.

Later, we will conduct the crushing actually session and instructions will follow at that time.

A reminder, this conference is being recorded.

I'll now turn to go over to Mr., Vincent Keaton, Vice President of Investor Relations. Sir. Please go ahead.

Thank you Lisa good afternoon, everyone and thank you for joining us for Emcores fourth quarter and full year 2019 earnings conference call.

Joining me today are steep Kelly, our chief Executive Officer, and Megan Faust, our Chief Financial Officer.

Our earnings press release was filed with the FCC. This afternoon and it's available on our website.

During this conference call, we will use non-GAAP financial measures and you can find a reconciliation to the U.S. GAAP equivalent on our website.

We will also make forward looking statements about our expectation for Emcores future performance based on the environment as we currently see it.

Of course actual results could be different.

Please refer to our press release and other FCC filings for information on risk factors, uncertainties and exceptions that could cause actual results to differ materially from these expectations.

Please note that the financial results discuss today, our preliminary and final data will be included in our form 10-K.

And now I would like to turn the call over to Steve Good afternoon, and thanks for joining the call.

Tony I'll discuss our fourth quarter and for your performance our 2020 priorities.

And our first quarter outlook.

Our fourth quarter revenue was up 9% sequentially.

End up 9% year on year.

Robust demand for advanced packaging, and the communications and consumer markets.

<unk> revenue above our guidance range.

Fourth quarter operating margin was 10%.

And EPS was 41 cents.

Looking back on 2019.

I am pleased with how we handle.

LNG market environment in the first half of the year.

We cut discretionary spending but continue to invest strategically.

The advanced packaging capacity.

Good quality improvement initiatives.

These investments contributed to our strong second half performance.

In 2019.

Many of our advanced technologies migrated into new high volume markets.

One example exam cores advanced that's IP technology.

Now as a firm foothold in the consumer and automotive markets.

Complementing our leadership position in.

And the smartphone market.

Another example.

It was our best in class wafer level fan out technology.

Which is now deployed in automotive radar.

As well as smartphone applications.

Customers in a wider variety of markets are not leveraging and of course technology.

<unk> rice improved performance.

Greece reliability and lower system cost.

Increased demand for advanced packages.

Particular advanced S&P packages.

Most of our revenue growth in the second half of 2019.

And then a four year basis or advanced system in package business grew 9%.

The $1.1 billion.

Now I'd like to review, our 2090 performance in some key target markets.

And communications, we experienced strong double digit growth.

In the second half of the year.

Fueled by our participation in successful flagship phone launches.

In automotive and industrial.

Advanced package revenue grew 14% year on year.

Driver assistance and infotainment applications accounted for much of that gross.

Finally in consumer.

New advanced S&P engagement drove impressive growth in the second half of the year.

2019 was that successful year for important.

The first half we demonstrated the resiliency of our business model under challenging market conditions and the second half the leverage in our business model drove significant improvement in profitability as revenue surged.

We generated more than 100 million doors and free cash flow in 2019, marking the fifth consecutive year, a positive free cash flow.

We exited the year significant revenue momentum in a strong balance sheet.

Looking forward, we're optimistic about 2020.

Demand in most of our target markets is expected to be strong.

And communications, we expect to ramp of Fiveg technology to spur a robust upgrade cycle as well as an increase in <unk> and electronic content per phone.

Much of the additional content growth.

Well come in the RF module and power management areas.

I am quite a strong.

Over the course of year, we also expect and tenant package revenue to grow.

In consumer miniaturization.

And performance requirements continue to expand the opportunity for EMCOR.

Our best S&P technology is a natural fit for customers trying to squeeze a lot of functionality into a very small space.

In high performance computing.

The need for advanced chips and modules continues to increase.

Particularly for datacenter applications.

This is a long time area of strength for EMCOR.

We expect to benefit from the continuing growth in data generation processing.

Storage and transmission.

In automotive.

We foresee continued growth in advanced packaging.

As data intensive driver assistance and infotainment systems.

Continue to migrate from the high end into the mid range of the market.

Our priorities in 2020 remain the same.

Continuous quality improvement.

Hi yields.

Great customer service and best in class technology.

These are the building blocks of customer satisfaction.

We expect approximately $550 million and capital expenditures this year, an increase of $75 million over 2019.

Most of this capex will be used to increase advanced package capacity and capability.

Now, let's move to her first quarter forecast.

At the midpoint of guidance.

We expect revenue to be up 25% year on year and down 5% sequentially.

We foresee continued strong demand that communications and consumer markets.

I'd like to close with a few words on Corona virus containment efforts and their effect on our first quarter forecast.

Throughout her factory network.

We have taken strong protective measures to ensure the health.

And well being of our employees.

That is our first priority.

The next priority is to safeguard production output for our customers.

Today.

Oh, the amcor factories are fully operational.

Sufficiently staff to meet customer demand.

We are dealing with some minor relatively isolated supply issues.

Our first quarter forecast takes those supply issues into account.

As well as the incremental costs associated with our employee protection efforts.

At this point.

We have seen no meaningful changes in our demand profile as a result of the krona virus outbreak.

In summary, 2020, setting up as a strong growth year for EMCOR.

Key growth drivers include the rollout of Fiveg.

Advanced I'd be in multiple markets.

In advanced packaging for automotive.

Megan will now provide more detailed financial information.

Thank you, Steve and good afternoon, everyone.

Today, I will review, our fourth quarter and full year results and then provide some comments about our first quarter outlook.

Fourth quarter sales increased 9%, both sequentially and year over year to a record $1.18 billion.

Gross margin of 18.9% is up 200 basis points from a year ago quarter, an operating income margin increased 300 basis points year over year to 10%.

Our improved profitability. This quarter was a direct result of the leverage in our model.

We earned 41 cents per share in the fourth quarter, which includes approximately five cents that's tax benefits, we had not anticipated.

We also generated $244 million, an EBITDA and EBITDA margin was nearly 21%.

As Steve mentioned earlier 2019 with a year at two contrasting hat.

Well first half revenue was impacted by the inventory correction. The second half of 2019 was much stronger growing 26% over the first half.

As a reminder, we have relatively high fixed cost. So we typically expect 40% to 50% of any revenue dollar change to drop through the gross profit.

Cost control measures and 2019 mitigated the impact of lower sales on profitability in the first half.

And positioned us for strong leverage when growth returned in the second half.

Less than 25% of the 2019 revenue decline flow through the gross profit.

As a result, we generated $233 million, an operating income for the year and our operating income margin of 5.8% declined only 23 basis points from 2018.

Interest expense declined $7 million in 2019 or 9%.

This was primarily due to the full year impact at the 2018 redemption of $200 million up 6.58% senior notes with proceeds from a term loan from a fixed interest with the fixed interest rate of only 1.3%.

Net income for the year was $121 million or 50 cents per share.

Net income was reduced by $11 million, a noncash discrete income tax charges and an 8 million dollar charge related to the early redemption of $525 million of our senior notes due 2022.

The combination of these items represented an eight cents reduction of D. P. S.

We generated $756 million EBITDA and our EBITDA margin was 18.6% in 2019.

In response to the inventory correction, we took a cautious and pragmatic approach to Capex in 2019.

We reduced capex payments by $75 million from 2018 model.

Down to $475 million or 2019.

We targeted investment in strategic programs that increased capacity and capability and advanced packaging technology.

These investments are expected to support growth and 2020 as well as maintain our high quality standards.

Strong second half revenue combined with our cost control and Capex discipline resulted in $104 million a free cash flow for 2019.

Marking our fifth consecutive year of positive free cash flow.

The benefits of our consistent free cash flow are reflected on our balance sheet and our credit ratios have improved meaningfully.

During the fourth quarter, we entered into a new foreign syndicated term loan of approximately $260 million with a fixed interest rate of 1.35%.

The proceeds were primarily used to repay higher rate foreign bank debt and the refinancing is expected to generate annual interest savings of approximately $5 million.

Due to the timing of these transactions our balance sheet at December 31st includes proceeds of $120 million and the corresponding liability that was paid down in January 2020.

After getting pro forma effect to the pay down of the bank debt as of December 31st we are well positioned to fund future growth with total liquidity of $1.2 billion, including $775 million at cash on hand.

As Steve mentioned, we have included in our guidance and estimate.

Based on what we know today for the impact of supply chain constraints and increased labor costs due to the Corona virus outbreak.

We expect Q1 revenue to be between $1.08 billion and $1.16 billion.

Gross margin is expected to be in the range of 14.5% to 17.5%.

In Q1, we expect operating expenses of around $110 million.

The increase from Q4 is primarily due to restructuring costs and Japan.

We are lowering our full year effective tax rate to around 20%.

We expect net income in Q1 of between $22 million and $59 million or nine cents to 24 cents per share.

Our 2024 cats for capital expenditures is around $550 million.

With that we will now open the call up for your question.

Operator.

Ladies and gentlemen, if you had the question at this time, Please press star and then zero.

And it doesn't number one key on your Touchtone telephone if your question that's been answered arguably Sri moved yourself into Q press the pound key.

I don't you asked a question has that number one key on your touched on telephone we'll pause for just a moment.

Your first question is from Sidney Ho from Deutsche Bank. Your line is the open.

Great. Thank you and congratulations I get to pitch quarter and guide on my first question is on the China Korea, Cyrusone pack, you talked plus or minus supply issues related to that can you help is quantified that impact in terms of how that.

I think your revenues cost of goods sold and operating expenses.

Yes, it any we're not gonna get too granular on the exact number but let me just walk you through our analysis.

Huh.

The manufacturing team, but on top of the issues pretty early and we identified alternative sources of supply for most of the components in peace birds.

We have sourced under Chinese factories.

And there were basically a few items, where we didn't see a way to mitigate a the short falls within the quarter to incorporate other short falls into our manufacturing plant in there right into our Q1 financial forecast.

Okay, maybe move onto the next one I think here one Q revenues generally down high single digit low teens on a sequential basis and clearly you're guiding down about 5%. Steve you talked about continued strength in communications and consumer but outside of consumer how should we think about the growth rate.

Other segments, when compared to the seasonality and I can extend a that question a little bit more how should we think about your revenue growth maybe over rather relative to normal seasonality beyond first quarter.

Sure City. So in Q1 again, we're forecasting 25% up from Q1 of 19 and 5% down sequentially.

In addition to the consumer S&P Bernard would you be running it and high volume similar to the same volume that we saw in.

In the fourth quarter, we also see did he strictly communications.

We saw the iOS ecosystem demand.

Continue into January and we expect to be relatively strong through most of the quarter.

There are also a couple of a flagship phones that will be launched towards the end of Q1, which are helping us in the communication space.

I think when you look beyond communications and beyond the consumer I say project.

Look to the general market.

That looks pretty seasonal you know, it's it's down mid to high single digits. So it's about what we would expect in a normal year.

Okay. That's helpful. My last question, if I May fleet gross margin guidance for Q1 is down sequentially, which is understandable given how I was getting low revenue, but it declined a little more than I expected. If you can help us reached the gross margin from Q4 to Q1, specifically how much is related French back.

That's an increase maybe product mix and mark and makes depreciation et cetera that will be great and and if you go through the remainder of the year. What are some of the factories, we should think about other than the incremental revenue yet again.

Okay 70, so I'll start with your question on Q1. So as you know are guideline for modeling flow through is generally 40% to 50% and as you mentioned the flow through from Q4. Two Q1 is shy of that things can impact our flow through various headwinds.

Their tailwinds and that was can include product makes utilization foreign currency et cetera. So in Q1 as compared to Q4, we are forecasting a product mix shift to higher material content advanced packages, such as S&P and flip chip. So this is whats constraining the flow through.

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Our mix or fixed manufacturing costs are actually declining as you would expect in the normal model. So there's nothing unusual happening there.

With respect to your question on a full year as a reminder, we don't get full year guidance.

But as it relates to the material percentage, we do expect to have continued growth in advanced S&P. So as you're looking for the full year you could probably use the Q4 exit amounts as a guideline.

Just to remind you, though we are still experiencing under utilization in the general market and so once that general market does recover that will benefit the gross margin expected later in the here.

Very helpful. Thanks.

Your next question is from Randy Abrams from Credit Suisse. Your line is open.

Okay. Thank you and I'm good job I never talk.

To ask maybe the first follow up on the first time to virus situation.

You could maybe talk a little bit more about bottlenecks I guess directly what you're seeing in terms of.

Where some of the material constraint and then maybe just a productive with some of the factory.

Having a bit of in Kuwait coming back I'm curious like.

Maybe the unknown factor kinda, a tricky point I'm happy to call now I'm, just whether you're getting back on production impact.

Our downstream and it off so it's kind of a moving part but the demand impact.

I'm from what's happening in China, I'm, just curious how much you're getting that feedback now we're factoring into guy.

Okay.

Yeah on the bottlenecks.

Basically they're very small parts, you know things like leads and and capacity and so forth that were run into issues on so for most of those parts. There are alternatives available, but for a few of them. We couldn't find alternative this quarter, that's what's causing us to to back off a little bit in our guidance for Q1.

As far as the demand signals like I said.

Earlier, we have not seen anything change in the demand picture, except we have seen some increases in demand in our wirebond factories outside.

China.

And so we've Oh, we booked some additional revenue there is some additional orders that we attribute to customer concerns about trying to shortages.

And that's really want advantage, we have is emcores, but we have 20 factories 19 of which are outside China. So that that helps us quite a bit and helping our customers I come up with alternative supply chains.

Now the second part of your question was regarding.

Any.

Any other demand signals, we see out there I think your concerns are valid you know obviously, our customers are gathering data as well on other parts of that may be short supply.

We're monitoring that situation on a daily basis, it's fluid.

And then of course, it's or changes in end customer demand pick you out of China.

That's going to take some time to to filter through into our order book, but we're going to monitor then on daily basis.

Okay, great and.

I can talk on a if you could just give us kind of the record how much of your production.

China factory and I mean, if there if you had to deal with any.

Slowdown from labor coming back.

There are competitors could take and then how much demand side, if you kind of a view of how much of you're going to and I think there's what it for direct customer like how much of your direct customer and then media. If it's it's probably difficult to know where all the parts go but like the end demand from kind of trying to market just to kind of how much demand.

This impact or could be impacted into China market.

Yeah. So let me I think you're asking two different question is one is about are trying to factor in the always about the trying to market. So we just take those an order.

So we're trying to factories is a pretty well again we.

We move quickly and are basic approach was to.

Put in place a relatively close system for the employees. So it's actually safer to work in important is to.

To go to outside World and so we enhanced a number of aspects.

Within the factory, we we improved or meals and so forth.

We.

Enhanced or screening. So it includes the usual things like body temperature checks in Washington mask and so forth.

We eliminated visits to the factories by our customers in north central personnel.

Finally, we shut down travel.

So I think we've created a pretty safe environment within the factory in China [noise].

We also adjusted the shift schedule. So that it allows us to keep the factory running a more or less at full speed.

So I'm very happy with the measures we've taken in China in the output continues unabated <unk> at this point.

With regards to the trying to market demand again, that's something we're just have to wait and see and see see what impact that has.

On or on our order book.

But today, we haven't seen any meaningful shifts except for the additional orders we perceived in our wirebond factories outside China.

Okay, great and.

Talk on the advances.

Consumer.

I think they did.

Perfect clarification from back in the fourth quarter I think when you're trying to run rate in Q4 is that kind of that filling if we take that times for.

It's kind of your rough run rate, you're expecting for 2020 and I'm curious because those are lumpy depending on project [laughter], maybe your visibility for the new wave for projects later 2020.

Our feeling is in terms of growing within new ways and.

Maybe how you see a broadening out or any risk on that side pretty I believe in the consumer side.

Yeah, Randy so as far as comments made with respect to and I think you're getting at the elevated material content.

And my suggestion to at least look at Q4 is that's an actual yeah.

Collaborate on all the hard products mix together in Q4, and and that's a good marker because there was strong S&P in Q4. So as we look out to 2020 as you had said you know material content can be pretty lumpy with new projects coming on seasonality et cetera. So I think that's it.

Decent guide to look forward and then the unknown is the return of the general market, which would help to moderate that.

Okay. I guess my question on Friday on the revenue side, how you're thinking about the revenue side for.

2020, and then how you're thinking about ER product are defined and traction for kind of the next wave of projects like any for next week fees, and I'm like any upside or or risk at least at this stage it could change.

Yeah, Randy I would have to say that we're very optimistic about 2020 based on our position in the markets that we target.

I think on the communication side Uh huh.

You know were there and most of the the new Fiveg phones.

And.

I think in the general market will expect that to recover at some point this year, it's hard to predict exactly when but it will recover.

I think in automotive, where the clear leader and we're very well positioned.

As the demand for advanced packaging I will continue to increase.

These data intensive systems.

Consumer obviously, we've got a great position and we'll be filing for more consumer business as we head into 2021.

I'm pretty optimistic I think 2020 is going be a good year for EMCOR.

Okay, that's great.

Question on the general market it last year, it looks like advanced packaging it actually drove a lot of the growth in general market.

Kind of.

Well, you can say sluggish through the year and I think you've been looking for kind of it signals to pick up I guess at this stage now into 2020, How's your view for general market.

Like maybe relative tend to track you start to truck growth again, or it looks like it's still going to be sluggish for a bit longer.

Yeah, I think in Q4, we saw some positive signals picky and automotive so that was good after you know many quarters of declining revenue wire bond.

You know I think.

If you if you think about the general market in total Oh, I think the common theme from our customers is they believe the inventory correction is over.

So that's good then the real question is how fast you recover.

Yeah, and a that's the tough when the answer.

But if I look back in our history, you know we see.

Changes in market psychology, you know when you're when you're contracting the psychology is to did not build inventory into restrict orders.

But then a when lead time started to firm up and perhaps stretch of the psychology changes and more customers decide to place orders and you know we're back into more normal run rate. So at some point that's going to happen.

Oh, I don't know exactly when but I think it sometime this year.

Okay, great. Thanks.

Appreciate the color.

Thanks, Rick.

Your next question is from Krish Sankar from Cowen <unk> Co. Your line is open.

Yeah, Hi, Thanks for taking my question and congrats Stephen Meghan and the greater so.

A couple of questions number one oh, it's on Capex looks like your topics is back to 2017 18 level.

Can you help us understand you did say that a lot up it is going to adopt packaging.

Isn't a me too like kinda like quantify what it is today.

Well this year relative to 17 18 and that Apollo.

Yeah, I think you're right. It's very close to 17 18 levels more normal level of Capex, we had restricted it last year in response to the the downturn.

But if I break it down the 550 million that we intend to spend.

Capex in 2020.

More than 60% of that will be spent on expanding.

Advanced packaging capacity. So this is for advanced system in package.

For wafer level for flip chip products.

That's a that's for demand we see in the near term.

I'm a bit more than 30% will be spent on facilities a quality improvement in R&D.

That includes are continuing work on pena level fan out there's a potential most <unk> successor technology for a wafer level fan out.

And then the remainder of or by 50 will be spent on on Wirebond package capacity expansion.

Got it very helpful. Steve and then another follow up thanks for giving the color I understand you don't want to quantify the impact of <unk> Q1 revenues to go the wires and just kind of curious like you know Oh, hopefully sooner than later when divided issues upside I.

I've demand snaps back do you actually thing that is gonna be a lag effect because the supply chain cannot keep up with the demand in back and if so is that to be too like to get out what the lag effect would be.

Yeah, I really that's a tough one answer.

But I think certainly when we run into issues like this.

I think people start to her on the side of building more not building less.

Because you want to ship as much as possible into year end market. So we think we think things will come back later this year.

Got it if I can just squeeze one more Steve you know last your Chinese new year was in February. This time. It is only a and typically in the Bakken business demand snaps back after Chinese new year arguably the stem is like delayed because the buyers.

Do you think the dynamics this time would be different than a year ago quoted.

Well the thing is we haven't seen any change in the demand picture yet.

Except for some of the additional demand we received in or Wirebond factories outside China.

So you know we are going full speed ahead until we see signals that tell us that there's gonna be impact on our demand.

Got it thank God, Steve, Thanks, Steve and sort of congrats even make it.

Thank you for calling in.

Again, ladies and gentlemen, if you have a question at this time. Please press star intended number one on your touched shown telephone.

If your question that's been answered arguably certain with yourself from the Q Postipankki.

I'm showing no further question at this time I'll like to trying to conference back to Mr. Vincent Keenum for any closing remark.

Thank you. Thank you Lee this ends the question and answer portion of our call I would now like to turn the call back to Steve for his closing remarks.

Like the recap are key messages.

First we closed out 2019 was a very strong fourth quarter as both revenue and profitability exceeded the high end of expectations.

Second the momentum.

Which drove our fourth quarter performance is continuing into the first quarter 2020.

And finally, we're optimistic about becoming here.

Given are excellent position in many of the industry's highest growth markets. Thank you for during the call today.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation in how the wonderful day you me all disconnect.

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