Q4 2019 Earnings Call
Greetings and welcome to the Gen Therm yearend and fourth quarter 2019 earnings Conference call.
At this time, all participants are listen only mode.
Question answer session will follow the formal presentation.
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Time, I'll turn the conference over to using Brentano with Investor Relations sent out anyway now begin.
Thank you Rob and good morning, everyone. Thank you for joining us today.
Sometimes earnings results were released earlier this morning, and a copy of the release is available at Genzyme Dot Com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Gendarmes website.
During this call we may make forward looking statements within the meaning of federal security laws.
Statements reflect our current views with respect to future events and financial performance.
Undertakes no obligation to update them and actual results may differ materially.
Please see Gendarmes FCC filings, including the latest 10-K and subsequent reports what discussions of various risk factors and uncertainties underlying such forward looking statements.
During the call we may discuss non-GAAP financial measure as defined by FCC regulation G. for reconciliation.
The shows up these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release or Investor presentation.
On the call with me today are so high alert, President and Chief Executive Officer, and Mattel and burst that Chief Financial Officer.
Please note that during their comments, so and Mattel, we'll be referring to a presentation deck that we have made available our website agenda them dot com slash about.
In addition, they will refer to performance, excluding divested assets as our core business.
Which includes automotive and jump the medical.
After their prepared remarks, we won't be pleased to take your questions.
Before I turn to call to sell I would like to remind you about certain adjustments related to a reclassification of amortization of customer relationships and 2018, which Mattel discussed our one Q 19 earnings call.
These adjustments continue to impact some of our previously reported fourth quarter 2018 financial items.
This resulted in 2.4 million being reclassified from a contra revenue I I'm into SGN eight for the fourth quarter of 2018, which impacted revenue for automotive as well as revenue for each of our industrial business says.
As Mattel pointed out our first quarter earnings call. The annual impact for 2018 was 10.2 million increase in both product revenue and ask Gionee.
As a result, the gross margin rate and EBITDA margin rates were both impacted by 70 basis points and 10 basis points, respectively for full year 2018.
Now I'd like to turn the call over to Phil.
Thank you James Good morning, everyone and thank you for joining us today.
My comments this morning, I'd like to provide you a brief recap of our accomplishments on both the consolidated level and in each of our two core business units and then turn the call over time, a tail to provide more financial details on the fourth quarter and cover our guidance for 2020.
As we look back at the you're just completed I believe there are three key takeaways.
First we effectively executed against our strategic growth plans building and extending our core businesses.
Second we successfully completed the repositioning of our portfolio.
Vesting and or exiting non core business isn't product lines.
And third we anticipated the challenging headwinds facing our industry and our company and proactively repositioned our cost base. In addition, we simultaneously improved our productivity.
These two initiatives combined enabled us to remain well positioned to drive earnings growth and shareholder value.
As a result in 2019, we expanded our gross and operating margins.
Increasing operating income by 16% and we generated record free cash flow.
Accomplishing these achievements in such a challenging environment clearly demonstrate strong operational execution across our enterprise.
Now, let's go over this in a little bit more detail. Please turn to slide four.
2019, we faced strong macroeconomic and automotive industry headwinds, including a nearly 6% decline in global vehicle production and continued weakening of major foreign currencies.
In addition, the strike a general motors, our largest customer had a significant impact on our revenue.
Despite the challenging environment, we delivered solid financial results for the year.
First we were able to continue to outperform in automotive versus the key markets that we serve.
Excluding the impact of foreign currency translation and the GM strikes are 0.6% decrease in full year organic automotive revenue compares to a decline of nearly 6% and global vehicle production.
When looking specifically at the fourth quarter are <unk>, 0.5% decrease in automotive revenues.
Again, excluding the impact of foreign currency translation and the G.M. strike significantly outperformed the 4.4% reduction in global automotive production.
Well. The addition of a record 560 million at awards during the fourth quarter, we secured a total of $1.5 billion and automotive awards in 2019 and over 3 billion since the beginning of 2018.
Our strong track record of awards continues to position us well for long term growth.
In medical we achieved double digit growth in 2019, driven by demand for both our existing products such as blankets Russell.
And our exciting new products, such as you've even trio as well as the addition of steeler products to our portfolio.
With a strong double digit growth in the fourth quarter, the medical business achieved record annual revenues.
On the cost front, we continue to make progress on our fit for growth activities through purchasing excellence and rigorous cost improvements.
We have identified essentially all of our targeted 75 million an annual savings for 2021.
And we're well on our way to implementing these improvements with 44 million of annualized savings already in place.
In addition, we took proactive steps to right size, our factories for lower volumes earlier in the year when the slowdown in automotive production volume became apparent.
This allowed us to achieve an annual 60 basis point improvement in gross margin in our core businesses from 29.1% in 2018% to 29.7% in 2019.
We also continued our momentum in reducing operating expenses.
After adjusting for restructuring costs operating expenses in the fourth quarter were the lowest since the first quarter of 2016.
Adjusted operating expenses as a percent of revenue improved 70 basis points on our core businesses from 19.9% in 2018% to 19.2% in 2019.
With the divestitures of CSC industrial Chamber and global power technologies businesses in 2019.
We've now completed all the exits and divestitures identified under our focus growth strategy.
As a result of these divestitures and the shrinking automotive production volume our total company revenue decreased $77 million in 2019.
Nonetheless, we delivered an additional 2.2 million in adjusted EBITDA in 2019, improving our total company adjusted EBITDA margin rate by 130 basis points from 13.4% and 2018% to 14.7% in 2019.
For our core businesses, we achieved and adjusted EBITDA margin rate a 15% for the year.
Finally, we generated 95 million in free cash flow in 2019.
Third level for the company.
We repurchased approximately $63 million of our shares in 2019, as we continue to recognize the value of our shares.
We've repurchased a total of $217 million and share since our launching our share repurchase program.
We now have $83 million remaining in our current authorization.
But tail will provide more details about our financial results in a few minutes.
Now, let me turn to automotive highlights on slide five.
In the fourth quarter, we launched our automotive solutions on 28 different vehicles across 17, Oems, including Ford General Motors, Hyundai Kia and Skoda.
We continue to see momentum for our Ccs product and launched on the Buick enclave. The first Genesis Sq V., the Gvhd, Hyundai Sonata land Rover defender and they say I see maxus Datong.
And battery thermal management, if you recall, we announced the addition of battery heating to our portfolio of Btwob solutions in the first quarter of 2019.
I'm pleased to share that we started production of the solution for the plug in hybrid Jeep renegade through our customer LG Chem in the fourth quarter.
I'm really proud of our cross functional teams globally that worked hard to launch this proprietary solution in less than a year.
In addition, we're making great progress on climate sense.
Helmet projects with luxury German Asian, and U.S. automakers continue to move well in 2019 General Motors Engender jointly presented our development project results at the society of automotive Engineers thermal management system Symposium.
The results were highlighted in multiple technical journals. Since then and continued to gain attention in the industry.
As we previously shared climate sense delivered between 50% to 69% energy savings in cold weather testing and 34% energy savings and hot weather testing.
Lets translate those savings to arrange extension.
In the cold weather cycle climate sense increases range by 33% or adding approximately 50 miles to the range.
Our work with general Motors as well as development projects with other Oems demonstrates that our climate sense offering is a strong solution for passenger comfort and energy efficiency and cars of the future.
Now on to slide six where you can see that we continue to win new business pace that sets a solid foundation for future growth.
In the fourth quarter, we secured $560 million and New program awards across 18 different customers.
This is a company record for quarterly awards and brings us to $1.5 billion and cumulative New program awards for the full year 2019.
We won multiple Ccs awards, including platform wins with the Buick envision.
Jeep Grand Cherokee Honda H., RV, Hyundai Sonata, Mazda CX, five and CX eight.
The P.S.A. Citroen C.
Subaru legacy and Outback and in China, the FW Volkswagen large SCB platform.
And the FDIC EM PV.
Also we received steering wheel here awards across eight Oems, including the Honda CRV Jeep Grand Cherokee and Grand Wagoneer, Renault Zoe and the Volkswagen I'd lounge.
While we have seen production headwinds impacting our steering wheel heater revenues in 2019, Our award momentum in this product line positions us well to return to revenue growth in steering wheel heaters.
We achieved an important milestone in battery thermal management, winning our first sell conducting a board that leverages, our proprietary technology with a premium German OEM.
This new cell connecting award uses the same sinfield technology as the battery heating solution that we began shipping in November for the new Jeep Renegade launch.
As compared to our previously launched wire based sell connecting technology. This innovative solution enables more design flexibility weight reduction and added functionality to sell connecting boards, while simultaneously lowering costs.
In addition, our unique manufacturing process is more environmentally friendly than competitive alternatives.
Well I cant yet share the name of the OEM I can't tell you that this is a great example of how we're growing our business with Oems worldwide by adding content to their electric vehicle battery pack systems.
I'm also very excited to share that we want a number of significant electronics awards in the quarter.
First we want additional multi function electronic controller business with Ford on the Lincoln Navigator and the transit connect.
Binding general terms climate control solution with memory seat functionality, which utilizes our proprietary intelligent positioning system IP S technology.
In addition, we won significant incremental climate seat module electronics business with General Motors.
I'd like to take this time to congratulate our global teams for securing $1.5 billion in awards, especially in light of the challenging global automotive environment.
As I mentioned earlier, we've now secure $3 billion in automotive awards since the beginning of 2018 positioning us well for long term growth.
Now, let's turn to slide seven for a discussion of our industrial segment.
Recall that as a result of the divestitures of CSC industrial Chamber business and GPP. This segment is now comprised primarily of our medical business.
As I mentioned, a few moments ago strong double digit growth in the fourth quarter led to record revenue for the medical business for the full year.
During the quarter, we secured awards for blankets for all our liquid based patient thermal management solution from several large U.S. hospital systems, including the likes of Bellevue Hospital Center in New York.
Palomar health in California, and the parkland health and hospital system in Texas.
As well as several several customers in China, Indonesia and Japan.
In addition, we achieved significant revenue growth from you Vittorio in the quarter.
A new cardiovascular heat cool system with integrated disinfection technology.
We continue to make progress on develop of our product product pipeline, which positions us well for continued revenue growth.
And as a reminder, the medical business is highly synergistic with our automotive climate control solutions as thermal physiology is at the core of our comfort solutions.
Let me just make some quick comments about the Corona virus.
We are actively managing our response to the situation. Most importantly, we're working to ensure that our employees are safe.
All of our plants have been ramping backup after one week extended holiday our offices are open and the majority of our employees have returned to work.
This is the fluid and challenging situation that we will continue to monitor.
So to summarize I'm very proud of the agility hard work and commitment of the talented global Genthree team to overcome challenges in the market.
Deliver on our strategy and improve profitability.
Let me highlight this point.
Operating income increased 11.5 million from 2018 to 2019 or nearly 16%, even though total revenue decreased by 7.3%.
We achieved this by taking proactive steps to rigorously attack, our cost structure and keep our company well positioned for profitable long term growth.
As we've discussed achieving record automotive awards in Q4, as well as expanding operating margins and generating record free cash flow for the year in such a challenging environment demonstrate strong operational execution across our enterprise.
As we look forward from here, we're planning to host a strategic update meeting in Detroit on the morning of June 9th to share more details with investors regarding our strategy and longer term objectives.
EBIT details will be available shortly.
With that I'd like to turn the call over to Mattel for a little more color on the financial results of our 2020 guidance.
Thank you Phil and thank you to everyone joining the call. So we'll start on slide eight and focus my prepared remarks on the item that impacted our fourth quarter results.
The fourth quarter, our approach to revenues decreased year over year by 25.6 million or 10%.
Automotive revenues decreased by 5.8% and industrial revenues were reduced by 54% due to the disposition of the JBT and CNC Endexo chamber businesses in 2019.
So starting with automotive if we adjust for the impact of effects, our automotive organic revenues decreased by 4.6%.
Now as you May recall, our fourth quarter was also negatively impacted by the GM strike and if we adjust for the effects and the impact of the GM strike, our automotive revenues would have been down 0.5% compared to a decline in the global vehicle production of approximately 4.4%.
So our automotive business outpaced the market once again.
Is that is the continued strength in our BTM product line, where revenue increased by approximately 4% due to the pace award winning BTM solution with diner.
In addition, we saw an increase of 28% in other automotive is that is out of the strong take rate of thermal cup holders we'd BMW.
Conversely, Ccs revenue decreased by nine on a half percent or 8.4% if we exclude effects.
Primarily due to the GM strike lower automotive production levels, new platform changed what effect as well as vehicle cancellations.
Sito revenues decreased 6.5% or 5.8%, if we exclude effects, primarily due to the GM strike and lower production volumes at monster.
Stephen will heaters revenue decreased 5% or 4% if you exclude effects.
Now if we exclude the impact of the GM strike, we would have seen an increasing stealing will heaters is the result of higher revenues from Ford vehicles.
Similar to last quarter electronics revenue decreased by 7%, primarily due to the continuous slowdown in the RV industry, partially offset by the newly launched most a function electronic control unit with Ford.
And finally automotive cables revenue increased by 1% compared to last year.
Moving to industrial.
Investor revenue decreased 53.8% compared to the fourth quarter of last year is that is out of the disposition of the CZ Endexo chamber and GBT businesses.
Conversely medical revenue increased approximately 54% compared to the fourth quarter of last year.
If we exclude the benefit from the standard acquisition medical revenues increased approximately 29%.
This increase was primarily driven by the continued strength of blanket throw sales and the success of the newly introduced you will be for your product as well is the shift in timing of certain equipment order shipment for undeterred for the fourth quarter.
First full year medical revenues increased more than 20% compared to 2018, an approximate 7% year over year increase if we exclude the benefit of this dealer acquisition.
Now moving to gross margin.
Gross margin for the fourth quarter was 28.5% an increase of 80 basis points compared to the year ago quarter.
The year over year, increasing gross margin rate was primarily driven by the labor productivity at the factories supplier cost reductions as well as other favorable impact of free for growth.
These improvements were partially offset by the annual price reductions lower volume and the impact of our wage inflation.
As Weve previously mentioned deliberate productivity improvement was achieved by proactively right sizing our factories as we anticipated lower volume.
Overall, our employment level in the production decreased by approximately 16% since the beginning of 2019.
Additionally, we incurred lower premium freight and maintenance cost into fourth quarter compared to last year.
If we move to operating expenses.
Operating expenses in the quarter with 43.6 million now this amount included approximately 1.1 million of restructuring charges.
And if we adjust for restructuring charges operating expenses were down both sequentially and year over year.
The year over year improvement of nearly 12% was primarily driven by the impact of fit for growth did these positions of our industrial businesses and partially offset by the higher incentive compensation.
Also as discussed last quarter.
Fourth quarter. It does include a 5.9 million pre tax loss on the sale of GP.
Adjusting for the non deductible impact of discharge.
Effective tax rate in the quarter was approximately 15%.
And for the full year 2019, adjusting for the charges related to the GBT business. Our tax rate was approximately 25%, which was slightly lower than our guidance range of 28% to 30%.
The lower tax rate was primarily due to higher earnings in jurisdictions, we low tax rate as well as some discrete items that we do not expect to repeat in the future.
So these are resolved our adjusted EPS in the quarter was 65 cents a share compared to 50 cents a share into fourth quarter of last year.
And the for the full year 2019, our adjusted EPS was to daughter and 34 cents a share compared to $2.12 a share in 2018.
If we move to slide nine uncovered the balance sheet.
So our cash position at the end of 2019 was approximately 53 million, including two and half million over to restrict cash coming from the disposition of the CZ industrial chamber business.
Our cash position increased by 13 million compared to the end of 2018 and increased sequentially by 5 million into fourth quarter of 2019 compared for the third.
We generated 119 million in cash from operating activities in a record 95 million of free cash flow in 2019 more than offsetting 63 million cash outlay for our share repurchase program.
The impact of these actions combined with a 44 million net proceeds from dispositions of our industrial businesses allowed us to reduce our net debt by approximately $70 million from 100 million or the end of 2018 to 30 million at the end of 2019.
As of yearend 2019, the total debt stands at approximately 81 million.
In our revolving line of credit availability stands at 403 million up from 222 million at the end of December 2018.
Turning to is like Dan I will provide you with our guidance for 2020.
So first 2020, we are projecting product revenues, excluding the impact of foreign exchange to being the range of down 1% to up 3% for our core businesses compared to 2019.
We expect actually year over year revenue growth to gradually increase as the year progresses.
And as Phil said, we are also carefully monitoring the quarter, Nevada situation and any potential impact on our business.
At this time the impact on our supply chain or value operations has been relatively small.
And based on our customer orders, we are expecting between five to 10 million revenue impact in the first quarter.
However, we will continue to assess the situation to determine if any adjustment becomes necessary.
We are expecting gross margin to continue to being the range of 29% to 20%.
Well predicting expenses are expected to further improve to be between 18, and 19% of revenues primarily due to the impact of defeat for growth actions.
And as a result, adjusted EBITDA margin is also expecting to improve to being the range of 15% to 16% of revenue.
We're expecting our tax rate to be between 27, and 29% and capital expenditures to being the range of $40 million to $50 million.
Now with that I'll turn the call back to Rob to begin the Kunaev session rope.
Thank you will now be conducted question and answer session.
If you like to ask your question. Please press star one from your telephone keypad and the confirmation Tellme indicate your line is in the question Q.
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Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith.
One moment, please hold we pull for questions.
Thank you our first question will be coming from the line of Chris Van Horn with B. Riley FBR. Please proceed with your question.
Good morning, everyone and congrats on the quarter.
Hi, Chris Thank you.
First on the gross margins, obviously, you were able to expand into declining revenue environment.
Maybe maybe could you highlight I know you've I know you. Those said there is some fixed cost leverage and better supply agreements, but.
Guys any main driver there was it just a multitude of things and then kind of along that question imagine fit for growth had a lot to do with it and where are we in fit for growth relative to where we were kind of a year ago.
Yes so.
So let me give you the if you look at the fourth quarter over this year versus last year. So the 80 Bips improvement a couple key factors at the biggest one which is about 150 basis points was the labor productivity at the factories.
If you may recall, the fourth quarter of last year.
The productivity was then it'll bumpy so thats why this quarter at the magnitude of this amount is a little higher than what we've experienced in the prior quarters during the year.
Dan Despite of cost reductions was another 120 basis points as we continue to drive.
Sourcing cost out.
And then the impact of the feed for growth combined with.
The lower premium freight I noted maintenance cost again again most of the data to improve productivity was another 50 60 basis points each.
And then these positive impacts were partially offset by the normal annual price reduction, which is about 200 basis points and then obviously the impact of the lower volume and the wage inflation.
Makes the rest so thats kind of give you kind of an idea on the quarter I think we feel good where that fit for growth is I think we continue to make.
Very good progress we.
Completed about 44 million dollar of the 75 identified actions and now more to come for coming future.
Let me add to that Chris that.
If you recall in previous quarters, we we've discussed that we're turning more attention too.
Cost of goods sold reduction and in our that for both projects. So.
Although we're still seeing improvements in Opex, we're pretty excited about the momentum that our operations team is gaining on driving down.
Variable costs.
Okay great.
And then just want to focused on the awards.
She really strong quarter.
Maybe could you highlight the cell connecting board in and what.
Is that technology.
Competing with other types of technologies are there other players doing exactly what you're doing and I imagine the.
The market for that is going to be significant and maybe some just highlights around that.
Sure, yes, thanks for asking that when we're really excited about about the sell connecting business that we're starting to built it's it's based on the same been foil technology that we previously announced with the LG Chem heater thats going into the Jeep renegade and basically its a.
Proprietary technology that uses mechanical.
Manufacturing process as opposed to most of the competing product which uses chemical etching.
So that's the real competitive differentiation from a process standpoint, and we think that puts us in a really good position from a cost standpoint flexibility standpoint.
Provides more functionality for our customers and then also.
As we pointed out on.
On the comments, it's a it's more environmentally friendly so there's a lot of advantages there we've got a ton of interest. The first win was huge and with the with the premium OEM in Germany, So I think thats.
It's got to be one of our fastest growing products and our BTM line over the coming years.
Okay got it and then.
Climate sense, obviously, I know, it's still in development, but it seems like every quarter. Your there's more and more people looking at it and it feels like its are really going to be a really strong product now obviously I think the low hanging fruit will be electric vehicles, but I imagine there still people looking at it from a.
For more of a traditional.
You'll drive train perspective, and it just.
I know I know timing is difficult, but if you could give us a sense of how is progressing and where you see it maybe in the next six to 12 months.
Yes continue every quarter, we make good progress on the development the GM last quarter, we talked about the GM presentation that we that we did together with them at the say conference, which was I think of.
Pretty important milestone to get the message out there with really good customer test results and Thats create even more interest. So we've had a total of were up to a total of seven development projects and those are with customers and all in all regions.
And.
We continue to refine the.
The product in the solution, both the mechanical side of it but most importantly, the the software and the algorithm side continues to get sharper and were able to really optimize the comfort and the energy management of the system and optimize applies that mix with our algorithm and.
So obviously, we're quite optimistic we're investing heavily in it and believe that thats going to be a core driver to long term growth. We do we do expect still sometime between now and won an award will come.
Most of this is being developed for cars in the 2023 and beyond range at this point in time because of the significant architecture change that would be required.
Okay, great. Thanks for all that color appreciate the time.
Thanks, Chris census.
Our next questions from the line of Ryan Brinkman with Jpmorgan. Please proceed with your question.
Hi, Thanks for your comments on Corona virus can you share what youre seeing in terms of.
The latest relative to the restarted production at your customers in China can you remind us of who your major customers are in that market and what have you assumed for China production in your 2020 guide.
And how at this stage should we maybe think about the cadence of dealt in earning tracking for the overall company in 2020 in light of the Doctor.
Well, let's start with first of all we're happy to say the our plants are a gradually ramping up majority of people are in the plants operating now our team is done I think an incredible job.
Of managing that whole process as many other suppliers I'm sure doing the same.
Where we're seeing the same ramp up effects that you probably heard from everyone else.
They are slow to ramp up.
Our customers are so to the predominant business comes from the global Oems, who have jvs in China.
Customers like the GM STM and.
Volkswagen just as examples and then and then two smaller accident, but still important extent the domestic Oems so.
You know that's been obviously extremely slow to ramp up and Thats most of the impact of.
Now that we're seeing on on the $5 million to $10 million Q1 expectation.
That said, we're we're working really hard to make sure that the supply chain as.
As being managed on a daily basis, we've got a Swat team in place.
That are managing that.
Daily and doing a good job of keeping the flow going obviously with with challenges and the as this slow ramp up extends we expect more challenges to come on that front.
When you look at our total revenue for the year as a company we had 7.4% in 2019.
Kind of use that as a representation of the the potential impact for the year and and then as we said Q1 five to 10 million.
Okay. Thanks, and then I think of the Threeq you call. You had commented you might address to 2021 target in early 2020 I see in the press release your planning now to update in June around time of the Detroit Auto show is that change in timing, primarily a function of wanting to get a better understanding of the krona virus out.
Look in inch broadly speaking how would you characterize the company's performance center.
You know those figures were first provided in June 2018, do you think that you are on track or even ahead of plan relative to what is under your control, but you're just dealing with a lower volume environment to that how you characterize that are I'd be interested.
Well go back to the first it's more about the fact that we want to give a comprehensive overview of where the company is going including the the financial targets, which.
We've locked in to that specific day, so we actually have the.
The time date location, all coming together on that June night. So.
Thats really whats behind it of course that gives us a little more time to see what's happening with this dynamic market.
On top of that.
Back to your second question, we definitely.
No.
Our happy with the progress, we're making and we're ahead of.
What we expected when it comes to cost.
Fit for growth is already been achieved the 75 million I expected to take all of 2018 to achieve the identified projects on that front and on top of that I think we've done a great job of proactively managing the the.
The change in in the dynamics of the market.
Great. Thanks, a lot.
Next question, it's from the line of Justin Clare with Roth Capital. Please proceed with your question.
Hi, everyone. Thanks for taking my questions.
Hey, Joe Yes.
First off.
So given the strong level of awards you saw in Q4 and then in 2019 was wondering if you could talk about your market share for your various products. Do you believe you are taking meaningful share in heated and cooled seat heated seats or with other product lines here.
I think so Justin were our win rate would would give me confidence that we're doing that now we're taking on where many business with customers that haven't been our customers in the past.
And we measure our hit rate, it's about it's above 80% for the year on our core business. So yes, I have a and I have a good feeling that we are and I don't have the specific number to share with you but.
Let them certainly would tell me that's happening.
Okay great.
And then battery thermal management sales slowed a bit in Q4, I know, there's a number of different factors that impacted Q4.
But can you talk about why.
BTM sales took a pause in the quarter and then how we should think about growth moving forward in 2020.
Yeah, we talked about it in the last earnings call that we were seeing declining orders from Mercedes for the quarter and that did come through a little bit better than we expected, but it did come through.
I'd say declining so the wrong word, but less than we expect had previously previously expected so.
That was it we still see.
Ongoing growth of our BTM business as we head into 2020, though.
Okay, Great and then just one more for me for 2020 can you talk about your gross margin expectations for the automotive segment and then for the medical business I think for medical Youve indicated margins are roughly in the 50% range is that a number we should be thinking about going forward here.
I think I would say.
Let me make a comment more overall comment on the gross margin guidance.
I think one side, we're really pleased with.
The progress that we made.
We did manufacturing that growth TBT into sourcing savings throughout 2019 and will be keeping focusing on this that couple of items.
Also in 2020, which obviously would benefit.
Mostly the automotive gross margin.
However, as you know every year, we face headwinds that we need to overcome.
Mostly price reduction with our customers, which is about two 2.5% every year.
Wage inflation.
And not get aspect that I think it's important to consider is that we are launching some new product programs, particularly BTM.
And generally when we launch new programs we.
Face a little higher cost that in manufacturing sites to make sure that it launches is done properly. So also this one is an aspect that we considered in our in our guidance for the gross margin, but with that I think we're comfortable that we continue implementing to feed for growth actions as well as increasing revenue.
Which will give us.
Cost leverage that we got into Wright patt to achieve our target of 30, plus gross margin in the future.
And then back to your question on medical this is automotive.
Medical margin.
Gross margins actually hired and automotive so that.
Helps us a little bit.
Indeed.
So mix in 2020 vessels 19 as we are.
Projecting growth in revenue medical at a faster pace than automotive.
Okay. Thanks, guys.
Thank you Justin.
The next question comes from the line of Ryan Macdonald with Craig Hallum. Please proceed with your question.
Hey, guys good morning, and congrats on the good quarter.
Thanks, Ryan good morning.
As it relates the revenue guidance and kind of alluded to it there that you expect faster growth in medical this year, but at least Directionally. Some guidance is negative one to plus three for the year.
Growth in medical.
Actually are you expecting growth in automotive in 2020 within your guidance.
Maybe I can break down the the guidance a little bit for you.
And just give us some of the key elements that went into it certainly as everyone well knows the Hs estimates of vehicle production continue to be dynamic.
Right up to the moment of this call almost and now down 2% as the estimates.
I have to say, though we're definitely seeing.
In addition, further headwinds for some of our customers with our product I.
I'll give you some examples.
The Ford has a little bit of outsized decline as compared to the market and there are large customer of ours.
In addition to that we have some large customers that are Japanese Oems Honda Nissan that have a little bit more effect on our on our revenue.
That said, we're seeing really nice growth with several customers. Some some of our large customers and bringing on new customers. So that's that's helping to offset that we'll also continue to see full year effect of sedans that were canceled by some of our North America customers last year.
And then obviously as we mentioned some early impact of the Corona virus in China, creating some more headwind.
If you think about our products.
Certainly medical VTM and steering wheel heat, we expect above company average growth.
Most of our headwinds and challenges would be in more of the mature core climate products, which we expect to.
To be kind of on the relatively flat side given the headwinds.
That said on the core business the Ccs seat heater cable business, we're still quite confident in longer term growth given our strong win rate.
And a new products there will be launching in the upcoming year that'll help us offset these headwinds.
Great you talked about a lot of the headwinds from kind of Oems what.
If any benefit or uptick are you expecting from GM, probably you'll have them basically fully ramp back up to production.
Yes, it's good that their ramp back up we havent seen a any further uptake, though as compared to kind of the normal run rate.
We continue to win new business, a ramp and wrap up new vehicles, which helps us helped us grow with them.
So that's I think thats a good summary, there.
And then shifting over to R&D was down 9% in 2019, 12% looking back two years.
Given kind of your operating expense guidance and the remaining 31 million to be relies on your fit for growth initiatives do you expect further reduction in R&D spend in 2020 or are we at a good kind of run rate here.
Yes, I would say a I would actually would expect kind of the opposite dynamic.
The.
Feed for growth actions and.
We have to steal implemented in the benefits are all gross right and.
But we as we continue to win awards and we won several awards in the in the past few quarters as you know.
I would expect the R&D cost actually to go slightly higher because we have to invest in more engineering resources to make sure that we proper property. We launched the awards that we won so.
That's the way I would think so if you look at that mix between as DNA and R&D I would expect a little more reduction on DNA versus the R&D.
Great. Thanks, guys. Good luck that's it for me.
Thank you.
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And that's from the line of Scott Stember with CL King. Please proceed with your question.
Good morning, Thanks for taking my questions.
Sure. Thanks, Scott Scott.
Maybe just talk about Ccs some of the New awards can you maybe talk about.
The composition.
Whether active versus.
You know passive than anything else you can give us just given.
The trends and the appetite from your customers as they continue to put this kind of.
You know techniques.
Their vehicles.
Yes, so ccs a great momentum in Ccs awards for the year.
That's about the quarter of our awards in the year. So really excited about the momentum as I said that the win rate is very high.
Still continues to be.
More weight on the Ccs Vince side than the Ccs active although as we've previously talked about we do continue to win Ccs active awards and see more interest being developed.
Especially looking more towards.
Electric vehicles, and how much more benefit the Oems are seeing there with.
With energy efficiency.
But definitely the recent award with with BMW has garnered a lot of attention with other Oems and we expect to continue to see more opportunities there with the active side.
Got it and just from a high level perspective, including.
You.
Talk about comparisons year over year.
When do we anniversary the elimination of.
The.
The industrial businesses that you have sold or discontinued.
So one of the two businesses were sold earlier in the year into first half and then the GPP business. While showed on October Onest. So really the fourth quarter of 2020 would be the first quarter, we're really not going to see any impact on that when we do the year over year competitors.
Got it.
Alright, Thats all I have thank you I'll, let me now let me clarify one thing on an adjusted basis, though remember that as I said in my prepared remarks into fourth quarter. We took a 5.9 million dollar charge for the GBT business that you're still going to see but when we report 2020 on adjusted basis, you're not going to see the discontinued businesses.
Got it.
Thank you.
You bet.
Thank you we've reached the end of the question answer session and I'll turn the call over to fill out there for closing remarks.
Great. Thanks, everyone for joining our call today.
I'd like consistently shared with you in the past we remain very focused on operational execution innovation and cost improvement I'm extremely proud of our team's ability to take Swift operating action in light of the current challenges in the macroeconomic environment and the global automotive production environment.
While we expect continued industry headwinds in 2020.
The momentum in New awards, along with expanding demand for our new technologies and our continued focus on productivity position us very well to deliver significant long term shareholder value.
We appreciate your interest and support and look forward to keeping you apprised of our progress.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.