Q4 2019 Earnings Call
Standby.
Good day, everyone and welcome to today Cts Corporation fourth quarter and full year 2019 earnings call.
Just as a reminder, today's call is being recorded.
At this time I would like to turn the conference over to your host for today Kieran O'sullivan. Please go ahead.
Thank you Sarah good morning, Thank you for joining us today and welcome to Cts shows fourth quarter and full year 2019 conference call.
Sales in the quarter were 115 billion down 4.2% compared to the same period in 2018.
Added five new customers in the quarter.
Full year sales were 469 million compared to 470 million last year.
What's margin, it's 33.6% into full quarter down from 35.5% industry could get last year.
End up sequentially by 60 basis points from the fourth quarter.
And your gross margin was 30, 336% compared to 35.1%.
2018.
Quarter adjusted earnings per share a pretty steady trends were down from 41 cents into fourth quarter of 2018.
Full year adjusted earnings per share of the dollar 45, and we're down with almost 53 last year.
We ended the year the Treaty book dozens of 1.8 billion up slightly from last year.
Operating cash flow for 2019 was 64.4 million.
Nothing consent from 58.2 million into 2018.
Free cash flow improved from 29.7 billion.
The 42.7 million.
With the recent could end the virus authority. So the safety of employees and managing the supply chain to focus on continuity of supply is a trusted partner for our customers.
Sure check your policy holder [laughter] its coal I will take us to the safe Harbor statement Ashish.
I'd like to remind our listeners that this conference call contain forward looking statements.
These statements are subject to a number of risks and uncertainties that could cause actual results could differ materially from those expressed in the fall victim.
Additional information regarding these risks and uncertainties.
It is contained in the press release issued today and more information can be found in the compete.
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To the extent that today's discussion dispersed and non-GAAP measures under regulation G as required the nation's under consideration.
In the Investor section of the previous website.
I think the discussion back what worked what youre carrying it Kevin. Thank you issues in the fourth quarter I feel declined 4.2% to 150 million.
Excluding sales for the Q T.I. acquisition sales declined 8.8%.
For the full year 2009 to sales were essentially flat at 469 billion, excluding sales from the Q2 I acquisition sales declines.
<unk>, 0.2% for the year.
We added five new customers in the fourth quarter for industrial and medical.
We continue to see softness in some of our end markets and 2020 defense end market continues with strong double digit growth.
Gross margin in the fourth quarter was 33.6%.
I'm from 35.5% than the fourth quarter of 2018.
Sequentially from the third quarter.
The improved performance by 160 basis points.
We saw improvements in a foundry operations and its previously communicated we expect full group business for the first six months of 2020.
We face margin pressure from Mexico wage inflation and increased cost for gold and other precious metals.
We are sharing some of the burden what our customers seem to have team remains focused on actions to deliver cost improvement.
It's an ongoing part of our operational process.
Fourth quarter adjusted earnings per share were 37 cents compared to 41 cents a full quarter of 2018.
And last quarter ends coal, we communicated that we would incident projects to align our operating costs and improve fourth quarter earnings.
These actions have been successfully implemented.
Full year adjusted earnings per share were $1.45 compared to the dollar 53 in 2018.
Despite a challenging year, we maintain the EBITDA margin above 90%.
We ended the year with 1.8 billion total book business.
Bookings in medical products were solid.
Where we were awarded the through your contract for medical Ultra sound application with the European OEM and a one year contract with an Asian Oems.
This is a testament to our leading technology talented teams a global footprint as we partner with our customers a next generation products.
We expect additional contracts to be finalized in 2020.
Transportation markets of excitement that people and we.
We continue to be guidance like this can start to look trends would increase safety protecting the environment transition to electrification and connected solutions.
We secured a large when would the Japanese OEM for an accelerator module and an award from the Chinese OEM.
Subsequently for accelerating modules, we were awarded the first contract with a Japanese OEM for commercial vehicle platform.
We continue to advance these up to pedal technology within the walk from the Chinese OEM.
In North America, we secured a light type sensor award in Europe, We deliver force working prototypes for a while the safety applications.
Electronic component applications continue to evolve I love Miniaturized nation and legal efficiency.
In defense was awarded the contract a single Crystal technology and that sort of contract with a tier one defense supply.
In telecom when she's an older for almost a default.
At the recent seem that show up huge electric public was featured in the beginning handsets, which would be a show innovation Award.
Excuse continued to advance innovations and haptics.
Mature your formulations, we have a number of products in a AR and VR trucks.
The integration of the Q2 I took this is tracking to our plans.
And we expect it to be accretive this year.
Our priorities maintaining focus in our customers as we complete or integration.
Also focused on operational improvements and 2020 and further expansion into Europe and Asia in 2021.
I'm energized by the Qtr leadership team under approaching driving traffic at the gold for high performance applications.
We made progress in diversifying or end market profile last year with acute T.I. acquisition.
We have achieved significant increases in the proportion of medical and aerospace and defense revenues.
This is a strategic priority for us and make more to do.
We had a healthy M&A pipeline I think the potential to drive computing portfolio diversification.
We remain focused on adding to the right technologies strengthen your product portfolio.
Customer relationships and geographic expansion as we move into 2020.
As I said earlier some of our end markets continued to be challenging.
For transportation Global light vehicle volumes are expected to contract for ordering twentytwenty.
Commercial vehicle markets continued to be soft as the market. This fee in sharp declines for peak volume in North America.
Electronic component markets remain challenged due to inventory and some impact from traded telephone certainty.
Distribution inventory levels adults essential to more normal ranges.
We are expecting a stronger second half defense end markets continued to perform well.
Turning to walk at our two China sites has been delayed by at least one week due to the recent Corona virus.
Our first priority each of the safety of our employees and the supply of probably to our customers.
Like most manufacturers, we are assessing the impact on the supply chain and we'll likely see an impact on our weapons in the first quarter of Twentytwenty.
For Twentytwenty, we continue to focus on profitable growth market improvement and our end markets profile for full year Twentytwenty, we expect sales to be in the range of 450 million to 480 million.
Adjusted earnings are expected to be in the range of $1.35 to $1.60 I.
At this time I'll handle with refused to take us through the financial performance in more detail change. Thank you could.
Fourth quarter sales were $115 million down 4.2% forces last year.
Sales to transportation estimates declined by 11% and sales to other end markets increased by 7.9% excluding sales from Q T. I say it to other end market decreased 5%.
Sadly due to softness in the industrial end market.
Okay do they take back at fans and favorably by $581000.
Our gross margin, both 33.6% for the fourth quarter compared to 35.5% in the fourth quarter opinion cheap.
Improved sequentially from the fourth quarter by 160 basis points.
The Albuquerque foundry operations into during the quarter.
We have more work to do.
In the quarter.
We realized approximately 400000 involved in savings related to manufacturing transition.
As Kim mentioned.
In the fourth quarter de successfully implemented cost improvement action that we communicated in the last earnings call.
Our fourth quarter 2019 earnings were 31 cents per diluted share.
Adjusted earnings per diluted share with 37 cents compared to 41 cents in the fourth quarter of last year.
For the full year 2019.
Sales were $469 million almost flat to tie yet.
Sales to transportation customers declined by 4.4% and sales to other end markets declined but either by 2%.
Excluding 9.2 million in sales from Q Guy.
Sales to other end market decreased 5.6%.
Foreign currency, they impacted sales unfavorably by $5.1 million.
Our gross margin was 33.6% for the year down from 35.1% lofty.
The major drivers are lower volume.
Finally in efficiency neighborhood and commodity cost increases.
And an unfavorable impact from currency movements.
These were partially offset by cost improvement tried it.
As well as savings come on manufacturing transmission project.
Our focus is to drive improvements as we move forward and get back in our target range of 34% to 37% gross margin.
As June in R&D expenses were $96.4 million or 20.5% of sales for the year West is 99.
He was $98.9 million.
Or 21% of sales last year.
2019 expenses include incremental operating Paul.
Intangible amortization related to the Q.
Vision.
We also took a charge of 2.3 million bother to environmental.
We were able to that you spend through cost control during the year and cost reduction actions taken in the fourth quarter upturn MACI.
Operating expenses were also lower as they will not be out on the short term incentive plan, because we did not achieve minimum performance targets.
2019 earnings were $1.99 cents per diluted share.
Adjusted earnings per diluted share, a daughter and 45 cents.
But with all their and 53 cents last year.
Now, let's discuss the balance sheet and cash flow.
All controllable working capital as a potential sales were up 15.7%.
Fourth quarter.
I'm from 16.8% into <unk>.
We can do better on working capital and they continue driving further improvement.
Our cash flow performance in the quarter was strong with 23.7 million Bothers me operating cash flow.
For the full year operating cash flow of $64.4 million.
Compared to $58.2 million into any aging.
Capex will 31.7 million bother for the full year down from 38.5 million in 2018.
We continue to manage Capex carefully and came in at the low end of the range that you communicated last quarter.
Our cash balance was 100.2 million volumes on December 31 from the monkey compared to 100 point Ninemillion bond is at the end of 2018.
Long term debt balance was 99.7 million Bobby.
Up from 50 million blogger at December 31 thing you do due to the Q G.I. acquisition.
Our debt to capitalization ratio of that might you, 1.7% at the end of 29 gene compared to 11.7% at the end of trim Eugene.
Our work on rolling out at the Btwog remaining flights it's continuing.
Our goal is to complete instrumentation to all our location, including our recent acquisition in early 2021.
During the fourth quarter.
We repurchased 134000 shares of our spot for $3.7 million for the you mean repurchase 421000 shares for $11.7 million.
At an average price or $27, a 92 cents.
We have 13.8 million board is remaining under our current repurchase plan.
As Kim mentioned.
We expect 2020 sales to be the range or 452 $480 million.
And adjusted EPS to be in the range or the bother and 35 cents.
And the daughter on 50 cents.
First half is anticipated to be solved and we expect into men in the second part based on better market conditions.
Yeah carefully monitoring and evaluating the impact of the core Novartis I'd break them out alteration customers and suppliers.
I've already discussed you do a government mandate the return to work at both of our sites in China delayed by at least one week.
They they continue to follow regulatory and public health mandates in order to mitigate the impact of this public health crisis.
The situation is continuing to evolve.
And we had not yet able to determine the impact on our but.
We will discuss any material impact in our next update.
During 2020.
Defeat pressure on Tricia maybe pricing.
EBIT costs and uncertainty on bunker.
To offset the impact our teams are focused on driving cost improvement project.
And improving efficiency at our foundry operations.
Our target is getting into gross margin by over 100 basis points during the.
As she and in R&D expenses.
Expected to increase by slightly more than one simple sales in 2020.
Mainly due to the full year operating expenses and amortization from the Q T.I. acquisition.
And higher expenses related to short term incentive compensation.
We anticipate our tax rate to be in the range of 20% to 25% excluding the 2000.
2020, Capex is expected to be in the range of 4% to 5% you'll sit for a moment levels.
This concludes our prepared comments, we would like to open delightful questions at this time.
Thank you.
If you have a question or comment today. Please press Star then one under Touchtone phone.
For those who is joining us today to me Speakerphone. Please make sure. Your mute function is turned off to a larger signal to reach our equipment.
Once again to the audience. Please press Star then one if you have a question.
Well go first Karl Ackerman of Cowen. Please go ahead.
Hi, good morning.
Thanks for taking my question.
The first you know in terms of your full year outlook for 2020, I would imagine your level of conservatism has more to do with near term challenges in U.S. commercial vehicle markets, a first where opportunities can you go after that your enable you to outgrow U.S. commercial vehicle for the year I think last call. You indicated you have you.
Ability to expand your customer base later in 2020.
And then secondarily does your outlook contemplates a two T.I. sales synergies in Europe, and Asia that would imply growth can scale above the $5 million rate novel follow up.
Alright car lets us quite a quite a few questions there, but let me make an attempt and yeah. We expect 2019 is gonna be challenging just like sorry, 2020, they'll be challenging just like the second half of 19 was and our oldest light vehicle products are performing better than the market. So we expect that to perform well.
For our commercial vehicle is a real headwinds, we had and severe declines in the fourth quarter. We had that for most of the second half of the year and if you looked at the customers out there that market you see especially in the heavy duty declines of 8% to 10% in Europe, 20% plus in North America. So were.
Anticipating some recovery towards the back into the year, we see some upside in terms of the individual industry collections in the at distribution side to thinks it's coming back to more normal levels and we see good growth in the queue CPI business and we're focused on some synergies at that fits into our plan in.
In the operations, there and the expansion of sales in the queue Pi business will be more evident in Europe and Asia in 2021.
I appreciate that thanks to Korea for my follow up.
You mentioned inventory, how would you characterize lead times and inventory levels at your automotive Oems I guess, what is the normal level of weeks on hand.
And do you have a view on when they sell in and sell through May more appropriately be matched is that something that gets rectified by the end of this quarter or is that something that perhaps built into the June quarter. Thank you.
And we track the days on hand, and Theyve been up at the higher levels in the last few quarters and so we don't expect a huge contraction and in the light vehicle market in 22, I think the will be some and and so we expect that to collect the.
<unk> sales last year and incentives were pretty high so that's something we're watching carefully for an impact in the sell through with the Oems going forward I think the bigger concern for us in the short term is and we China and with the closing of artist and what's happening over there you are hearing in the news and something that South Korea.
In manufacturers were shutting down and some and I think it listen in China was looking for ways to open up but that's really what was the most concerned in terms of self.
Thank you very much.
Well go next to Brian Colley of Stephens.
Please go ahead your line is gentlemen.
Hi, Good morning. So I was wondering if you guys could just talk a little bit more.
I wanted to more detail what your guidance assumptions are for your various end markets and geographies and how we should think about the cadence.
Earnings in revenue.
2020.
If you look at the guidance on sales and I'll just start with the sales you can see that I'd be at the lower end of the range, what probably showing mid single digits declines and at the high end, Neil and low single digits growth and a lot of that is paced by.
What we're seeing in the commercial vehicle market and that the slow recovery in the first half a year.
And then Brian laundry, Oh, sorry go ahead.
Oh, so just in terms of the cadence I mean I'm just curious if you guys can give any color on the magnitude you.
You know a pick up you're expecting in the back half are you expecting kind of mid high single digit revenue cost declines in the front in the first time.
Slide grants in the back half for.
You know any any color around just.
Split between first half and so the second half.
Right and if you look at 29 team <unk>. So a considerable declined in the second half, especially when you exclude the.
Sets trauma to T I acquisition.
Its pretty realistic to assume that the first half could look similar to those trends.
And then we'd be looking for a pickup in the second half.
Okay. That's helpful. Thank you.
And then secondly, just wondering if you could give an update on pipeline of opportunities for new design wins across your different end markets at any particular areas that you're saying a lot of traction with customers right now.
Yes, the traditional all the products are running well, we had strong bookings and when and when we look at five Gee. This is something we're working on we've we've had a number of design wins most of that you wouldn't see in revenue until 2021, because we're in the.
And we need to wait technology areas, but we're targeting we've got to look as you saw in the script going on the trials in haptics and in VR and they are and then we were featured our product was featured in a phone a game phone at CES pick up an award so we've seen some opportunities there as best you do application.
Add becomes more relevant in different interface devices as we go forward on top of that we're working on wireless sensors were looking at more electronic solutions in the transportation markets for for EM at electronic braking and looking to expand our actuator product portfolio as well. So we've got quite a pipeline of things will.
Working out, but we're also very targeted in terms of wouldn't go.
Got it.
And then.
Typically you guys get you know work and how much of your booked business backlog do you expect to ship and 20.
And then coming years is that a number you guys can give us a here today.
Let me get that for you.
Ryan the they'll be publishing it that's part of our Investor.
A presentation.
And it should be.
In the range of 300 and need to $319 million.
Got it that's helpful. And then lastly, just wanted to ask about industrial business and I were saw.
Yes manufacturing PMI for January rebound back into positive territory I'm curious if you got started to see that in your industrial business at all.
We're seeing signs off some green shoots what works I'm, a little bit cautious don't so and some of our customers were seeing one or two trends that look directionally positive but.
It's early so we becomes a little bit cautious about some green shoots appears though.
Okay. That's helpful. I'll leave it there I appreciate your time today.
Thank you very excellent.
And once again to the audience to the Star then one if you have a question.
Next from Sidoti and company.
John franchise.
Good morning curious you show.
Hi, guys want to start with restructuring actions just kind of reach you how much cost saving actions we used in 2019.
Our.
You know is on an annualized run rate.
If you intend on taking anymore.
With those actions.
Yes.
So John the let me address the at that point, both the cost actions that we talked about in the Q3 any formal remarks relate that to be a safety project.
As you talked about if you want to get the whole about compete at first before we start.
Looking for efficiency improvements from that.
We talked about feet of four cents improvement in the fourth quarter earnings.
From the cost action.
It's getting booked about it we did successfully incremental cost actions and achieve the thing.
The range that we gave was eight to 12 cents for the full year.
And that's what it's been expecting most of the actions were completed in Q4.
And us somebody trickling into the cloud as this year.
The other thing John that we could working on had just from the last two quarters or sell it and what we've had opportunities to get second sourcing in place to get to some leverage going forward, but we saw some commodity pricing pressures, we obviously computer to work that side as well.
Just.
With the actions works and what I remember last quarter some of them, we're going to be temporary.
So which ones are or.
Temporary or permanent.
Actions.
Certain costs that meet book in any given quarter, especially if they like short term incentive compensation and all.
That wont reoccur.
They have more dependent on any particular year.
And on.
And ongoing savings.
So out of dose of that suite for essentially realized in the fourth quarter.
How much was of the incentive program.
So as I mentioned in the comments, we didn't want to achieve any.
You're not going to have anybody else in the short term incentive plan, because we did not that you've been minimum target.
We haven't spells out the exact them out but it was included as part of that Cheetah for some improvement in the fourth quarter John.
Okay.
You're talking to improved gross margins by 100 basis points this year how much.
Revenue detentions, how much of that.
Thanks.
Easy if we used to be.
And then been volumes due to some extent the other thing that we are looking to improve is the foundry operation.
But you have talked about and then also.
We have in <unk> in our regular operations, the guy cost improvement projects and all that give us offset to any pricing, but you have to give up.
The improvement of a percent.
Yeah, well over 100 basis points as we've talked about is a combination of all those.
And as we move forward John.
We just have to.
Drives the overall improvement, we don't break it down into specifically, which action and driving how much improvement, but the overall improvement they're expecting is over 100 basis.
Okay, and then just shifting over to China.
We already kind of baked into your thoughts.
A little bit about.
Is this just any deferred revenue speaking about six moving into Q1.
So.
How do you think about you know.
Delaying or reopening and how it impacts.
Beyond the current quarter.
John in terms of the cooling the virus, we're monitoring very closely with all our plants because there's some connection points across the globe as well.
It's really hard to quantify this at this stage. So we're just modestly obviously every week is going to be more impactful, but we can't give it the guidance on that at this point in time.
Okay Fair enough. Thank you guys are going back and secure.
Thanks, John.
And as a final reminder to the audience today. It is star then one if you have a question.
Well go next to Hendi Susanto Capelli fund.
Good morning, assays and Kieran.
What are you finding.
Coupons, we just got to called will not impact can you help us out thinking about the potential impact split between Q1 in Q2, that's cute <unk> back up at least like like pushed out orders or is there more today.
And be big could not here. The first part of your question could you.
Yeah, let me repeat it so with regard to quarter enough fibers impact.
Can you help us think about the potential impact.
In Q1, and Q2 does Q2 impacts the flag push out orders.
From Q1 or is there more to that.
Yes.
This is just as a she seven this in his prepared remarks is we're reflecting a softer first half and a stronger second half, we're still evaluating the corona virus and obviously if extend longer than the week that we're seeing at the moment.
Potential for push out into Q2 goes up and definitely.
And at the end at how about you know Cts internal production in China.
Is there any direct impact on that.
So Hindi the return to work is already be lead by a week.
And our leadership team in those locations as coordinating with the local government.
To make sure we'd come back online as soon as it is appropriate and safe and allow them to the local mandates.
Things are pretty fluid and via just keeping track on the day to day basis in terms of as things start developing.
Got it and about current where do you see strength in defense and aerospace markets in Twentytwenty.
Yeah, we continued to see good growth there.
Yeah, as we came through 2019 and expected to continue and with the customers. We have with the products, we have and that we're continuing to book of business in that area as well. So we feel very confident about the go.
And then have to run up what are there some may given your products that investors should dissipate coming in twentytwenty.
You probably less than 2020, M., we talked about different applications with pizza ceramic that we're hoping they'll them as ramp up a little bit here as we go to the improvements in the foundry fab, we have at several new products be launched and into Q.
I business as well with several new customers and wear and actively expanding in Europe and with new innovations over there. So hendi will give you more color as we get into the next quarter and the second half of the year as well, where obviously always launching new products as we move through each quarter.
Thank you all she's thank you Karen.
And it appears there are no further questions at this time I would like to turn the conference back over to Mr. O'sullivan for any additional or closing remarks.
2019 was a challenging year, yet we advance several strategic initiatives as we plan ahead for the next five years, we will be emphasizing for strategic initiatives through 2025, a focus on profitable growth stronger customer relationships operating systems to support.
Genius improvement and talent development. Thank you for joining us on the call today I look forward to update today again in the next quarter. Thank you.
And again that does conclude today's conference. We thank you all for joining.
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