Q1 2020 Earnings Call
Thursday Thursday
Good day and welcome to the synthetic Technologies Q 12020 earnings call all participants will be in listen-only mode. Should you need assistance. Please take awhile conference special start pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question. You may press the star than one on your touchtone phone to withdraw your question, please press * then two, please note this event is being recorded. Now, it's the conference over to mister Jacob Center. Vice president Finance, please go ahead and good morning. Everyone would like to lock your system. It's a 2020 earnings conference call joining me on sales call or Jeff since other CEO and president and Paul vasington comes out as Chief Financial Officer. We are also joined by Paul Chala gdpr out of business and knock a wallet you repeat of our industrial HBO and Aerospace businesses will be available to provide additional market-specific Insight during Q&A. In addition to the earnings release. We issued earlier today will be referencing a slide presentation during today's conference call. The PDF of this presentation can be downloaded from since August investor relations website will post a replay of today's webcast shortly.
After the conclusion of today's call.
Before we begin I would like to reference since that is safe harbor statement on slide to during the course of this conference call. We will make forward-looking statements regarding future events or the financial performance company that involves certain risks and uncertainties. The company's actual results May differ materially from the projections described in such statements factors that might cause such differences include but not limited to those discussed in all forms, 10-q and 10-K other subsequent filings with the SEC.
153 we show some Gap Financial results for the first quarter of 2020. We encourage you to review our gaap financial statements in addition to today's presentation than most of the subsequent information that we will discuss during today's call will be related to non-gaap financial measures reconciliations of our gaap to non-gaap financial measures are included in our earnings release and in our webcast presentation, the company provides details of a segment operating income on slides 11 and 12 the presentation which are the primary measures management uses to evaluate the distance wage. Jeff will begin to his call with a review of our overall business in the first particular the impact from covid-19 and our responses as well as the strong financial position of the company, they'll also wage its Revenue growth relative to an underlying markets drinks. You want to provide an update on recent progress in some of our key megatrend growth areas.
Paula then cover or detailed financials for the first quarter of 2020 provide insight into our financial model and describe leading economic indicators that we used to estimate the future performance of our business office will then take your questions after our prepared remarks now, I'd like to turn the call over to set aside as CEO and president Jeff.
Thank you Jacob. As we shared with you earlier this month. You can see on slide for that. We recognize the global impact of covid-19 early long. It took a wide range of steps across our organization designed to first and foremost to ensure the safety and health of our employees while also enabling us to suck critical customer needs and enhance our financial flexibility.
These actions position since aati to emerge from this worldwide disruption even stronger so we can better serve our customers employees shareholders as well as our communities.
Working with local state and federal government Health agencies in many countries. We moved quickly to implement measures to help protect employees and minimize the spread of covid-19.
At a high level these actions included sanitizing our facilities instituting safe distancing for our Central Workforce staggering work time implementing Healthtrax at our facilities.
providing
Paid leave for affected employees and mandating remote work as much as possible.
Well, it's been a challenge for all of us to learn how to work remotely from our colleagues. We recognize the importance of doing so especially given that some of our employees are not able to work from home.
I'm pleased to report that our teams are stepping up in adapting to The New Normal.
As I speak today after brief closures in certain locations are manufacturing facilities are open and we have sustained production adjusted for demand levels.
Governments have issued shelter-in-place orders and closed non-essential businesses by working with authorities in jurisdictions where we operate most of our manufacturing facility that have been deemed essential.
We manufacture critical products for Industries such as essential Transportation defense and medical equipment. So it is important that we keep operating during the crisis.
We were in a strong financial position and we have taken steps to enhance our financial flexibility.
We have lowered our operating expenses for the second quarter through management salary reductions and employee furloughs.
Implemented reductions in discretionary spending and are ramping down production in certain facilities in line with expected and Market demands.
For the second quarter. I am taking a salary of $1.
And we're have reduced the cash portion of our non-employee directors compensation by 50%
All members of Senior Management are taking a 25% reduction in pay and we are seeking a similar reduction in Pay through furloughs from all indirect employed.
We're reducing Capital expenditures and managing our working capital very carefully.
We drove down on our revolving credit facility to enhance our cash position more than 1.2 billion in total at the beginning of the second quarter.
And we have temporarily suspended our share buyback program.
We also with through our financial guidance for fiscal year two thousand and twenty in early April as our visibility into the economic impact of this crisis became less clear.
Paul will discuss leading indicators. We are tracking to estimate future Revenue shortly.
Throughout these unprecedented times. We've proven ourselves to be a strong and reliable partner to our customers as they to face uncertainty and disruption.
We are continuing to make progress on our key initiatives around smart and connected and electric station, which I will discuss in more detail momentarily
We have proven ourselves as good stewards of capital right-sizing our organization to the environment yet. Still investing in areas that offer significant long-term growth opportunities.
We have demonstrated the Integrity of our Global supply chain and flexible cost structure under the most difficult times.
All of this gives us confidence in our strategic Direction and our ability to continue to execute
the continued focus on our strategic Direction remains Central and we are aggressively managing our operations during this unprecedented Market environment.
As shown on Slide Five the rapidly escalating worldwide impact of covid-19 has adversely affected the global economy. Our entire industry wage, especially our employees suppliers Partners customers and the communities in which we operate around the world.
I'm so proud of how our entire organization has responded to this crisis locally and globally in extraordinary ways.
The health and well-being of our employee base is our first concern and we're doing everything we can to protect them from the spread of the virus.
Some examples of the extraordinary times in which we currently operate include China reported a GDP decline of 6.8% year-over-year in the first quarter long has the government shut businesses. This is the first decline in Chinese GDP since quarterly record-keeping began in nineteen, ninety two.
Global light vehicle production in the first quarter dropped 20% year-over-year
And within our industrial markets, we also experienced a 15% decline in Global Market volumes in the first quarter driven primarily out of China.
Given that the response to the spread of covid-19 came later in the first quarter for Europe and the us we expect this slow down to accelerate in the second quarter.
According to the latest Automotive production data released by IHS Global Production for the second quarter is forecasted to decline 47% year-over-year.
With your expected to decline 61% China expected to decline 9 and North America expected to decline 70%
Also, according to IHS for the full year 2020 Global Automotive production is now expected to decline 22%
in addition a substantial decline in global GDP is predicted for Q2.
Which will impact our other end markets?
Despite these challenges since aati has demonstrated progress in the first quarter on our strategic goals for the year.
wait
Delivered significant and Market outgrowth despite substantial Market declines.
We're continuing to win new business and invest in opportunities that once we're through this period of disruption will drive long-term growth for the company.
Now, let me discuss our performance by End Market for the first quarter of 2020.
Overall volumes were substantially lower and we reported revenues of 774.3 million which represented in organic Revenue decline of 6.4%
Watch six shows organic Revenue performance by End Market for the first quarter.
I will begin with our heavy vehicle offer a business.
Hvor posted it organic Revenue decline of 10.7% outperforming a 20% and market decline.
Our China on road truck business continued to post better-than-expected growth as a result of strong content performance driven by the adoption of ns6 emissions regulations off.
Industrial Aerospace and other Revenue declined 10.4% organically for the first quarter of 2020.
Our Aerospace business declined 2% organically with continued content growth offsetting the grounding of flights reduced production and a roughly 6% market decline.
Our industrial business is declined 12.3% organically driven by declines in China of more than 33% from extended pandemic related shutdowns wage Global industrial Market slowdown of approximately 15% our Automotive business posted in organic decline of 10.4% in the quarter off. This was primarily driven by an end market decline up 20%
The China Automotive Market declined 49% in the first quarter. However, since August strong content
growth helped to offset a significant portion of this decline.
As facilities begin to reopen and production ramps up in this region. We expect to see substantial recovery.
And our North American and European Automotive businesses, we saw meaningful Revenue declines link to our customers closing plants for the last two weeks of the quarter.
Globally, we still posted six hundred basis points of Market Oak Grove. In addition. We saw oems primarily in China build inventory during the quarter back in part to ensure that they have Supply when reopening their plants and ramping production.
We estimate that to be approximately 310 basis points of growth coming from this inventory build and we would expect this to unwind in the coming quarters.
Despite the underlying challenges in the end markets in the first quarter. We delivered significant Revenue outgrows as shown on slide seven relative to our end markets off.
Since I had a service high-growth segments in all of our end markets are competitive position is strong in censor Rich solutions for efficient connected substances subsystems as well as cleaner and more electrified equipment.
We have secured significant new business wins in recent years that enable us to achieve secular growth and we are on Pace to continue to grow underlying and Market production.
Underlying both of our recent new business wins has been Regulatory and consumer-driven Trends towards safer cleaner and more efficient equipment.
Which are the fundamental long-term drivers of our business?
Despite current and Market headwinds, we continue to demonstrate significant outgrowth relative to the end markets that we serve in the first quarter posting market growth of 930 basis points and heavy vehicle off road.
six hundred basis points in automotive and 430 basis points in Aerospace
the adoption of ns6 emissions regulations in China and Bs 6 and India is driving significant new content for us with local h b o r and Automotive. Yes.
Similar to the eu6 regulations in Europe. These regulations are aimed at reducing emissions.
To meet these regulations oems or installing more advanced exhaust control systems than include our high temperature in differential pressure sensors.
Similar Trends in Europe and North America are driving strong market growth in these regions as well.
moving to slide eight
I want to share some updates on keep progress. We are making in our megatrend initiatives. We continue to believe these investments will further our end Market diversification increase our long-term Grocery and provide important competitive advantages as these Trends transform our world.
Despite the impact of covid-19. We see no evidence that customers are meaningfully slowing their investments in these areas.
During q1, we close 15 million of new business with customers for sensing and Vehicle area Network Solutions within are smart and connected initiative this brings the total new business took over ninety million with a further $75 million being quoted.
We're testing proof of Concepts within smart and connected with some of the world's leading Fleet managers.
Initial results of four active Pilots demonstrate that our solution works very well in real-world environments so far capturing more than two million miles of Michigan medical data on trucks and trailers in our customers fleets in North America providing them with information on vehicle Readiness and reducing downtime and maintenance costs.
on the electric
Location front we are expanding the products and solutions we provide to include those for critical applications for hybrid and battery-electric vehicles as well as other electrical voltage such as charging stations.
During q1 we close fifty million in new business wins in the area of electrification.
As electrification gradually increases as penetration. It represents an increased opportunity for our high-voltage contactor the motor position thermal management and thermal runaway sensing offerings.
The acquisition of gigabit expanded our electrification offerings into high voltage contactors and disconnect devices.
We are quickly establishing ourselves as the premium stance the standard for premium equipment particularly for the most challenging applications with high current levels.
During the first quarter. We began production of high-voltage contactors in Aguascalientes Mexico to facilitate growth with a new highly efficient production line off.
We are pleased with our demonstrated progress against these two initiatives which offer an important long-term diversification as well as significant New Market opportunities person satta.
Now like to turn the call over to Paul to review our first quarter or 2020 results in more detail and to describe leading economic indicators that we track down which I will provide some summary comments Paul.
Thank you, Jeff.
Key highlights for the first quarter as shown on slide ten include revenue of 774.3 million a decrease 11.1% off the first quarter of 2019.
Changes in foreign currency decreased Revenue by 7% excluding the impact of foreign currency organic Revenue decline 10.4% largely due to the impact of the covid-19 pandemic.
Adjusted offering it come with a hundred thirty six point seven million a decrease of 27.5% compared to the first quarter of 2019 primarily due to lower revenues start activity headwinds from our manufacturing facilities running at significantly lower capacity elevated cost to safeguard our employees in local government restrictions, which altogether off limited our ability to align our cost for the declining and market demand.
Tire design and development spend to execute a new business wins in mega Trend growth programs as well as higher compensation costs to retain and send top talent or multi offset by saving a repositioning actions taken last year.
Adjusting that income was eighty three point two million a decrease of 40.3% compared to the first quarter of 2019.
EPS was $0.53 for the first quarter a decrease of 37.6% compared to the prior quarter and slightly better than a decline in adjusted. Net income the benefits Jerry purchases.
Now I'd like to come on the performance of our two business segments in the first quarter of 2020.
I will start with performance-enhancing on slide 11 our performance testing business reported revenues 568.7 million in the first quarter of 2020 a decrease of 11.1% compared to the same quarter last year.
Explain the negative impact from foreign currency of seven percent performance testing reported in organic Revenue decline of 10.4%
our Automotive business reported in organic Revenue decline of 10.4% in the first quarter, but L paid is End Market by 600 basis points in addition organic ravaged each of our three major geographic regions.
Our HBO our business reported or inorganic Revenue decline of 10.7% in the first quarter, but outpaced it's and Market by 930 basis points primarily due to Strom content growth in our China on road truck business driven by the adoption of commission's regulations.
Performance. I think operating income was 129.1 million in the first quarter 2020 a decrease of 14.2% as compared to the same quarter last year performance package profit as a percent of Revenue was 22.7% in the first quarter.
A decline of 80 basis points from the same quarter last year. The decline in segment operating income was primarily driven by lower revenues manufacturing facilities operating at significantly lower wage paucity and higher design and development effort to execute on new business wins in mega Trend growth programs somewhat offset by savings repositioning actions taken last year.
As shown on slide twelve sensing Solutions report revenues of 205.6 million in the first quarter of 2020.
A decrease of 10.8% as compared to the same quarter last year.
Excluding the negative impact from foreign currency of 4% financing Solutions organic Revenue declined 10.4% revenue and our industrial business declined 12.3% organically in the first quarter as industrial and markets declined 15%
Gravity, when our Aerospace business decline 2% organic in the first quarter producing 430 basis points of growth above Market which declined 6.3% an oem production say in a week or after market.
Nothing Solutions operating income was 55.9 Million the first quarter of 2020.
Decrease of 25.4% from the same quarter last year.
Nothing Solutions profits as a percentage of Revenue was 27.2% in the first quarter a decline of 530 basis points from the same quarter last year. The decline in segment operating comes 4. I'm really do to lower revenues manufacturing facilities operating at significantly lower capacity in unfavorable product mix somewhat offset by savings from restructuring actions taken last name.
Corporate and other costs not included in segment operating income or eighty eight point eight million in the first quarter of 2020 which includes a 29.2 million loss to an intellectual property litigation judgment, which we intend to appeal.
Higher compensation costs to retain and sent our top talent and higher administrative expenses contributed to higher corporate and other costs as compared to the same quarter last year.
Excluding charges added back to our non-gaap results corporate and other costs for 47 million in the first quarter of 2020 and increase of 12.3 million for the same quarter last month due primarily to higher compensation in administrative costs.
Why thirteen shows inside his first quarter 2029. Results?
Adjusted gross profit declined 17.2% as compared to the same quarter last year the two hundred forty three point nine million.
gross margins declined 230 basis points the 31.5%
declining gross profit. Margin were primarily due to lower revenues productivity headwinds from our manufacturing facilities running and significantly lower capacity.
Elevate cost to safeguard our employees and local government restrictions, which altogether limited our ability to align our cost.
the decline in Market the band
we continue to increase design and development spend to execute on new business wins and mega Trend growth programs.
primarily the areas of smart and connected and electrification
Despite this higher investment R&D costs were down 1.8% as compared to the same quarter last year.
Do the savings from repositioning actions in favor of changes in foreign exchange rates?
higher compensation of our top talent was the primary driver of the 1.9 million increase in sg&a costs as compared to the same quarter last year or a or a 2.9% wage increase
as a result adjusted operating income. Was it down 27.5% compared to the prior quarter. Our tax rate has represented adjusted profit before tax increase 410 basis points compared to the prior-year primarily due to jurisdictional profit mix.
Finally adjusted EPS with $0.53 down $0.32 or 37.6% as compared to the first quarter of 2019.
On slide 14 using 2019 financial data, we provide a breakdown of the types of span that make up our cost structure and their relative size two in that rabbit-hole.
The majority of our costs are variable in nature the largest portion portion, which is material purchases fob. I collect direct labor wages and operating supplies.
These types of costs deal directly with revenues and are reduced through continuous product design and cost productivity improvements.
Tell me variable costs are comprised primarily as indirect salaries and benefits projects outside services and utilities.
These costs are more structural in nature and scale with Revenue to some extent but require more specific management action to drive this outcome.
This cost include items such as depreciation facility leases and Licensing and support costs related to our Enterprise operating systems.
In the first quarter of 2020 we started detrimental margins higher than normal as the covid-19 pandemic restricted our operation the limited our ability to manage the ladder costs to the rapid decline demand and from our actions to protect our employees more over government mandates in certain locations required us to continue to pay our direct labor despite closures and free costs increased dramatically as Logistics Supply chains were disrupted.
You're picking the number of strong actions going into the second quarter to reduce our costs given the anticipated lower revenue. For example, as Jeff mentioned. We have reduced salaries for management by 25% off during the quarter and implemented furloughs across the employee base in line with regional and Country specific rules to achieve a similar savings across our indirect labor population.
They're also closely examining all of our operating costs to ensure they are prioritized appropriately.
We expect these actions to generate approximately 15 to 20 million it cost savings during the second quarter.
Is also important to note that approximately 5% of our total operating costs are non-cash such as depreciation expense amortization expense and Equity compensation.
In short we are actively managing our business and cost structure to diminish the impact of the operating challenges. We are facing In the End Market declines. We're experiencing anticipating while continuing to invest in our people our future and to create increasing value for all of our stakeholders.
5:15 demonstrates inside of the ability to manage down its net leverage and net leverage ratio, which has declined steadily from 4.6 times at the end of 2015 with a 2.9 today.
reflecting
Are strong cash generation ineffective Capital deployment?
Having drawn down four hundred million from our revolving might have credit on April 1st. We entered the second quarter with 1.2 billion in cash on the balance sheet. We have substantial buffer to our leverage cabinets in our dead.
And the first outstanding outstanding maturity of our debt is not until October 2023 when they five hundred million unsecured note becomes due consequently. We are confident about our liquidity position that our ability to manage through and adapt to the current market environment.
Free cash flow was $69 million during the first quarter of two thousand twenty 83% of adjusted net income, which is a dramatic Improvement when compared to fifty 1% of adjusted. Net income in the same quarter last year.
We are reducing Capital expenditures by 45 million to 120 to 130 million for the full year 2020 through further improve our financial flexibility.
As announced earlier this month, we have withdrawn our full-year guy has a negative impact of the covid-19 pandemic on our business remains highly uncertain off quickly changing unpredictable.
However, based on current indicators of demand Revenue in the second quarter of 2020 will likely be down significantly for the first quarter of 2020.
On 5/16 I show a number of economic indicators that we track to help us future demand for our products and solutions.
I asked you asked is our primary source for information on future Automotive production. Currently, they are predicting a 47% decline in Global Automotive production the second quarter and 22% for the full year in addition. We track Automotive plant closures and communicate routinely with our Automotive customers to get an alignment on future demand expectations, which strongly influential view of the market.
Each week of Auto production in North America and Europe is worth approximately twenty-five million in Revenue to Sonata.
We estimate that during the second quarter Auto in these regions will shut down their production lines for an average of four to five weeks.
For I have your vehicle in off-road business. We use various production forecast from third-party firms such as LMC to help us understand future production levels for the second quarter LMC is projecting a 60% decline in North America Class 8 production rates.
We also evaluate economic indicators the gates the health of our HP our customers in the markets they serve and which we believe are strongly correlated to demand for our hbr project. These indicators include great load factors inventory to sales ratios building permits industrial production features and farm machinery in public statements from our large customers in the construction in sectors. Also help them to form our view of the market wage.
For industrial business we evaluate Regional p.m.
Forecast for GDP and housing starts to develop a forward-looking view and touch with them and given their strong correlation with our historical industrial revenue.
Aerospace expectations for future commercial and defense production and passenger miles flown are good indicators of future demand for our Aerospace products and after birth services.
In February, we expected lower production and demand relating to covid-19 with lower our Revenue by 40 million and our operating profit by approximately twenty million in the first quarter of 2020.
Those estimates proved to be insufficient as the experience a drop in both Revenue in operating profit of roughly twice that of what we predicted as covid-19 spread worldwide.
So we have a good sense for future levels of demand. It is difficult to accurately project Revenue operating profit and other Financial metrics.
With that said you will continue our efforts to align our costs to normalize the van level that we anticipate to develop over the coming quarters while ensuring we are able to protect employees and serve the needs of our customers in closing Echo Jeff comments that we are operating in unprecedented times. We're fortunate that our employees are happy and that has an organization we have risen to meet the challenges.
This crisis has presented are we cannot currently provide more comprehensive Financial guidance for the remainder of 2020. They're all working diligently to ensure some thought emerged from this time in a stronger financial position. I'll now turn the call back to Jeff or some remarks.
Thank you Paul before turning to Q&A. I want to wrap up with a few key messages that I show on slide 17.
We continue to actively monitor all of our end markets and customers to ensure that our resources are balanced against changing forecast and prioritized against critical growth opportunities.
We are adjusting manufacturing close not only to protect employees, but also to match demand from our customers.
We have been highly effective at growing our end markets no matter what conditions we Face we remain confident in our ability to deliver attractive and Market out growth this year and into the future.
We continue to deliver solid cash flow performance which demonstrates since Otto's resilient financial model.
We continue to plan investments in our Mega Trends and other growth initiatives and we are making excellent progress on this front.
And lastly we continue to believe that the overall Market environment May provide interesting opportunities to further strengthen our portfolio through value-creating bolt on Thursday.
First priority Remains the health and safety of our employees.
We have long-standing relationships with our customers and our financial position is strong.
This position will allow us to emerge from this period of Crisis as a stronger company now, I'll turn the call back over to Jacob.
Thank you. Jeff given the large number of listeners on the call. I'll ask each of you to try to limit yourself to one question. And then what we're going to do is circle back for follow-ups of time permits. Please assemble the team roster. Yes. Thank you. We will now begin the question-and-answer session to ask a question. You may press the star than one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to try your question, please press * then two this time. We will pause momentarily to assemble the roster.
And the first question comes from Lindsay Lohan with Bank of America Merrill Lynch.
Yes, thank you. Good morning. Hey Jeff. Can you talk a little bit about have used in Sada in in this cycle versus the financial crisis maybe, you know talk about some of the things that have changed between the two cycles and and maybe if you can contrast the peak to trough margin performance. I know you guys comment a little bit on decremental. It's being a little different. You know, what choice. Thank you.
Yeah, that great lumpy. Thanks for the question. I think we're we're different is that we're a more Diversified business from both an End Market Geographic same category standpoint. So that's an important area where we're very different from where we were going on. We're obviously much less leverage than we were in 08809 before Thursday. We were private equity-owned and we had a fair amount of debt on a balance sheet a lot more than we have today for sure.
I think the areas where where the same are quite important. We still have a very variable cost model.
Our cash flow characteristics are very similar in terms of capital needed to drive our business Paul went over the low amount of fixed cost in our business.
And we also continue to focus on mission-critical hard to do applications. So we stayed very true to that which is demonstrated in our overall margin profile. I think the other area where are the same is around our commitment to come out of this a stronger company and to do the things that we need to during this Market cycle that will allow us to do that off.
So those are my thoughts on on that once I appreciate the question.
Thank you. And the next question comes on some a strategy with JPMorgan.
Hi, good morning. Thanks for taking the question. If I were to check in with you, I'll be understanding of and market conditions at this point. But what kind of impact is that having on Thursday on the lawn skating so launch plans for the back half given the current disruption. Are you seeing any material slow down there? And at the same time there is some talk about kind of rolled back and emission regulations m u s are you seeing any other countries kind of follow the same path or likely to follow to Easter recovery and what kind of impact would that have?
Great. Well, I'll
Hit this a little bit from a high level and then I'll ask Paul chawla to give a little bit of commentary in terms of what he's seeing on the ground with his customers. I would direct you to look at sort of what we produce the first quarter in terms of outgrowth that should suggest you that at least in the first quarter and also my my prepared comments run our confidence associated with continued outgrowth for the balance of the year around the nature of how our customers will launch new platforms. We're not seeing them change their perspective on this and we're continuing to feel very confident. There may be some push-outs off a month or two or or three associated with folks inability to collaborate do things that they normally would but we're not seeing any meaningful change in terms of the long-term Outlook. I'll let them address the question associated with emissions regulation push-outs and other factors that you mentioned. Thank you Jeff. Good morning. Here is Paul Chala as Jeff said correctly said
We are not seeing any major change on the landscape in front of us in China in q1. We had still very strong pull from National Six content and that carries on happening Thursday. We are seeing the same in India for BS 6 and also in Europe despite. There are discussions of some delays of the around the CO2 potential penalties. The industry would have to pay even though there's some delays we are not seeing anything in launches or content some model years and face-lifts of vehicles and platforms could be in by 2 to 6 months, but especially in the electrification area. We're still seeing very strong fall and businesses. No. Thank you.
Thank you. And the next question comes from cricketer back with Morgan Stanley.
Yes, thank you understanding. You not providing specific guidance, but looking at kind of adjusted operating margin of 17.7% last quarter anything from a range that would expect in the coming quarters in terms of just kind of puts and takes it to think about the Augusta. Margin.
Yeah, so Paul Paul vasington if you wouldn't mind hitting on some points about that, that would be great.
Sure, I think the big a big Point here that we made in the prepared remarks is the fact that we're taking actions to reduce our cost structure through pay cuts and furloughs home and watching our operating expenses reducing any discretionary spend. It's not critical in that and that's an effort. We're making in q1. I'm starting to as we look for we're going to tell you to look to align our cost structure to the anticipated demand. We're going to see applying all the same tools and maybe other tools to achieve that outcome.
Got it. Thank you.
Thank you. And the next question comes from out with or thanks for watching my question. I guess maybe a comparable question. But on the web page think about June quarter revenues, you know, if you point we can see what items production numbers looks like on a year-over-year basis one of the puts and takes to that as you go forward and very specific. They did a lot of players have talked about June being the trough and revenue started to improve post. Would you endorse that belief system at this point?
Yeah, I'm at a great question based upon what we're hearing from third-party forecasters. And the some of the quotes that we provided for instance in the automotive Market given that to to is forecasted to be down so dramatically and the full year is is clearly expecting a recovery from the queue to rate. Obviously, we look at those third-party forecast. We talked with our customer. If you look at the specifics around what's happening in the second quarter associated with our customers many of them are shutting down for a lot of the quarter four or five six weeks. Their production will be down. And so unless we see continued impact associated with quarantine measures which which force our customers to continue those we would expect things to recovery. I think the big question a good that relates back to the question that that Craig asked which is what is the normalized demand profile and obviously we'll be looking to align our cost structure to that as opposed.
To a more depressed Outlook in terms of Any Given quarter. So that's sort of what we look at that would be our view as well that Q2 would be the lowest based upon where the third parties or forecasting it will continue to monitor that activity well as engagement with our customers fill rates and so forth to better judge, how will come out of Q2?
Thanks for the question. Thank you. Next question comes from Mark Delaney with Goldman Sachs.
Yes, good morning. And thanks very much for taking the question. I was hoping the company can provide an update on recent order translated to seeing globally and then also if you could specifically comment on what's inside a scene in China off of orders and how the orders trying are comparing to preclude levels.
Mark thanks for the question. So I'll I'll give some very high-level commentary regarding orders and then I'll ask Bonita Naga Wala to amplify a little bit in terms of discussions with customers. I think from a I think you all know. We tend to quote film rate in the quarter and what we've determined is Phil rate given customers our shut down and their attention is on other matters other than their fill rate. That's a not a very reliable measure for us right now and we've been working with them to to manage through that um, but but certain age you can see that because we built inventory or our customers built inventory in the first quarter. Some of that is due to them building inventory to make sure they're ready for a rep every some of it was EDI feeds and so forth that didn't get shut off because their response from didn't happen quick enough. This was a very significant decline in a very short time.
We have time and so the response rate took some time, but why don't you provide a little bit more color in terms of what we're hearing from our customers in terms of Phil and so forth.
George F. Good morning everybody. This is Bonita, Nevada. So as as we as outlined our end markets continue to be pretty volatile and it's it's the thought patterns continue to be pretty uncertain as we look at it. Regionally. We are seeing China come back to normal though the export Market of China continue to be challenged our customers in North America, Europe continue to be in various stages of lockdown with plans of reopening their plan in a phased and gradual manner. We're also seeing significant disruptions in the overall supply chain is also affecting our customers production plans despite this we continue to be very engaged with our customers in terms of understanding the state of operations and ultimately demand long as we think about our order books, especially in the industrial markets. They're continuing to be pretty stable relative to our historicals but dead.
Is not clear is how does the demand shape up once our customers come back?
I can what what is the fall on tonight look like from an inventory standpoint. We are seeing uh, some levels of inventory build-up in the channel as some customers took product to be ready for when the plants reopen wage that will draw down with the following quarter as the plant reopened and and the the normalized demand pattern comes into view, but we continue to work with that customer on new business opportunities and providing them the support to fill their fill their clients as they come back online.
Thank you. Thank you and the next question concerns Shaun Harrison with loop capital. Hi, good morning, quick clarification and then a long-term question the 600 basis points of outgrowth did that include any of the benefit from the pre by activity or is that adjusted and then second just wondering if you're seeing any kind of market share opportunities here in this downturn either other suppliers unable to fulfill demand or since that out executing in that maybe you can see some incremental outgrowth, you know as we come out of this recession.
Yeah, so let me hit on the market share question and then Paul vasington can touch on the outgrowth, you know from our business that shared doesn't shift dramatically. We're life cycle business where designed into applications with our customers and there's a lot of engineering work that's done to allow our products to enable the functionality and the systems that we go into soch Airship tends not to happen dramatically in most of our end markets. There are some small Park pockets of our end markets that we serve where they're more shorter cycle where there's an opportunity to shift. I think the key here that we're observing is that during these difficult times customers look to financial stability of their life partners and they look to whether or not we're weathering the storm with them and that's what allows us to continue to build these long-standing relationships over a very long period of time.
And customers remember that and so we'll we're you know, we've been around for a hundred years as a company we've established these relationships for decades with with our customers off and will continue to do that no major shift and share, but certainly the more we work with our customers through these tough times. They'll put the thumb on the scale in terms of who they pick up their next opportunity. So that's what we're viewing as the biggest opportunity work with them and and they'll they'll continue to choose us more frequently than others in terms of opportunity Paul. You want to hit on the head. Oh, gross question. Yeah quickly the the six hundred basis points about growth and Automotive does not include the building inventory. So they don't agree with the incremental growth and conquered mostly in China and a little bit in Europe.
Thanks Shawn.
last question question devaraja bond with Wells Fargo
Hey, good morning. An automotive question for me Jeff. Can you talk to the the pre by 310 bit of performance that seems to enjoy it? No more than seven hundred thousand Waco's equal. Is that even is that Matt even right. Can you help us provide your updated cpue and and politically I think he indicated roughly three million wait till 3 by work. I mean that itself is a rough estimate by the way, but can you help bridge that difference between you know, the three million versus you maybe seven hundred K way calls and maybe is that all driven by maybe a product category of sensors or maybe your supply base being overweight in China, which is also pick up some the quater excetera any anything any color on that is how I think you sure. Let me let me try to hit this high level and then if Paul's bye-bye get anything wrong in terms.
Of what you're seeing, please, please correct me or or amplify it. So let me quantify for the the magnitude of the inventory that we've observed. And so this isn't this is a little bit. Um, it's not precise right? Because we're looking at production levels across a wide range of mix of customers geographically and at college and we're comparing that actual production to what our Revenue looked like, right? So we're not getting specifics associated with we built x amount of inventory Thursday. We forecasted that to be about 20 to 25 million of inventory build. So not a huge amount right this this four hundred basis points in the automotive Market that that Paul vasington mentioned, We've also believe that that's largely in China. And so when you look at the content per vehicle in China, which is which is about half of what it is in Europe and North America that trash
Speak to about a million units, but but again, it may not have ended up in vehicles. It might have just been in raw material or or inventory at our customers so they could continue to be ready to expand. And so those would be my thoughts maybe Paul you could connect this to sort of what we're seeing in terms of n Market inventory days and their various markets that we have across the world.
Yep, so pull chawla morning and we are seeing some inventory increases in in China. It is off. We we it is on the site of the higher side with respect to the the quarterly run rate we're used to but we do believe that will tell you to over the next six months North America a country is also gone up but it's not on the highest peak level where it's been historically at 4.1 million units. And again that's been due to reduced mobility of consumers and home sales that have slowed down in the last six seven weeks. So they as Jeff I think correctly said our customers have been adopting big strategies around being ready for a comeback not knowing exactly when when that would be in place and making sure that in case Supply supply chain is disrupted. They had enough to start up with and yep.
thank you and
to believe that this is these peaks of inventory both at our customers in
The shapes and on the the the raw material side are going to dilute back as as production comes through in the next 2 quarters.
Thank you. And the next question comes to Steven Fox with fox fox fox advisors. Thanks. Good morning. I just a little still a little confused by the China comments. You've talked about, you know sort of trying to returning to normal from a production standpoint. But relative to where production is say today or last week. What does that mean relative, you know in terms of month demand, it seems like you know, there's a lot of inventory questions you've raised and even though the factories can produce it doesn't seem like they're producing that quote unquote free Chinese New Year normal. So if you could just sort of help us understand that a little bit I appreciate it. Thank you. Yeah. Yeah, that's a good question. So March was quite strong in China. And Paul may have the exact number in terms of a specific to the automotive Market, but we saw things come back pretty strong across all of our end markets in March. That's a that's a very good indication in terms of where we think to 2 a.m.
Going to be obviously we're looking at a number of other factors in terms of customer orders there. We're looking at the just the flow of people as you know, we have significant presence both from a manufacturing standpoint, but also also from a business and Engineering standpoint on the ground in China and by no means are they back to normal but they're certainly significantly Advanced from where we are. We're also seeing some incentives I guess is what you would call it. But in the form of relaxing rules around license plates and other things that are issued in major cities to incent more purchases. There is a there are a number of other government incentives that are in the work Works. None of which I am aware of that had launched yet, but certainly when they relax regulation around where vehicle license plates can be issued you can imagine that has a pretty strong.
Impact on the overall demand. So listen, we're not calling it out of the out of this in in China yet. But certainly when we look at China versus other markets that we serve. It seems to be much more robust than what we're seeing Paul or beneath. If you have anything you'd like to add to this please to just two points here. You're right off retail year-over-year was down but definitely March was better than February the dealership sales reopen and actually we the local office is telling us to do some good sales pick up there where monitoring two factors is Jeff said one is the the the local incentives government incentives and dealership incentives, but also a potential Trend where consumers now post the could be using less public transportation and prioritizing again an individual ma'am.
for transportation, so those
The two things were watching and whether they they will they they should bring back a stronger demand over the next three quarters. Thank you very much for its great color bulb sure. And the next question comes from Ed Sheeran with stifel. Yes. Thanks and good morning. I wanted to just ask about the Aerospace section. I know that's a relatively small segment for you. But you've had nice mid single-digit growth of the last few years there. And obviously, you know, we're seeing a big impact on on demand in terms of what's going on there in your peers are also talking about really not seeing any signs of recovery anytime soon. They're so could you talk about your footprint care and what you're seeing Jeff wage? Yeah. So again, I'll give some very high-level and then many who runs this business can give a little more color. It's it's always great when you have a business that has a mate or ten year or wage.
But it is also a an End Market. That's that's quite troubled right now the passenger miles or way down in all end markets China has recalls again not to keep going back to that. But trying to flush Asia more broadly has recovered back to I believe somewhere around 50% of those whereas Europe and North America are down. Still very dramatically and we're looking very closely at what the longer-term impact would be associated with where we might be able to serve this Market as it comes back in Hancock, uh environmental systems on planes and so forth that might be opportunities but anyone or to provide a little bit more color on terms of the order of what we're seeing if you would charge F. Hi everybody. This has been eat again. So our Aerospace business we have three broad segments one is commercial OEM II is depends. Yep.
Military and the third is aftermarket and maintenance and repair operations or mro our defense and Military business is actually holding a pretty well and we're seeing uh, pretty strong faith in that segment as Jeff pointed out. It's a long cycle business from a commercial standpoint. We've got a very strong order book. Um, and we are both supporting what the major airframe manufacturers and the tears. Um so far we haven't really seen a Major Impact to the auto patent in the commercial audience base wage other than what was already well-known around the Boeing 737 Max challenges, and and I think that's pretty public and in terms of what's out there. That was already factored into our plan. We are seeing an impact to our aftermarket business as um, uh flight hours come down dramatically. There is less need for spares wage.
and and and maintenance and so we're seeing an impact to our after market segment, but I think
Charlie speaking. We continue to Monitor and work very closely with our distributors in that space as well as with our tears in the commercial audience base to see there any changes to our long-term demand here. Thank you.
Thank you. And the next question comes from Joe's backhoes with RBC Capital markets. Thanks. Good morning. I was wondering if I could Circle back maybe some of the factors that help explain the decrement wage differential between performance sensing and sensing Solutions in the corridor. Their their major differences in variable costs is sensing Solutions more more automated and and you also seem to be in divorce document emerges could be worse in the second quarter. Maybe you could give us a sense of what the last two weeks of March look like as a guidepost for how to think about that.
Let me so there are differences between performance-enhancing incentive Solutions. The the the cost structure form of Times Higher the variable costs a little bit higher variable costs in the businesses lower. So the prophet drop up and volume when we're not able to try to on down able to influence those changes has a bigger impact. And so we laid out on the Fly DEC page or try to break down one of our variables semi variable and fixed costs are variable costs with volume. But we also have a year working to take those costs out through new product designs cost productivity initiatives and we've been very successful in the years in the past and continue and will continue to be a future if somebody variable piece is what we really Target in terms of real productivity Improvement around and structural changes.
And that's takes time to do as far as management to engage on productivity initiatives. And in this environment we're struggling with being able to do that with the restrictions and terms of our operating conditions. The incremental costs that were occurring to safeguard the employees the disruption we're seeing in the supply chain, the duplicate salaries that were paying when the plants are are actually saved as far as we're paying with the plants were closed. All those types of things are driving across higher and preventing our ability to drive the same level of productivity that we normally do and that's why you're seeing the bigger Drop Out The Simple Solution is also had some headwinds in a quarter and we typically don't see given the significant drop out and some of the higher-margin industrial business as well as our in our heavy vehicle business. So, hopefully that explains it. We tried to lay it out on the slide provide some greater transparency of what we're seeing in terms of the reduction in the margin rate on the volumes that were declined that we wage.
Yeah, and Paul, let me add a little bit on that. I think Joe was getting at as well around 2 to we want to align our cost structure to more normalized. Right if we I think we're hearing from every company that's recording that Q2 is going to be tough sledding in terms of demand profile, but I don't think anybody is forecasting that Q2 levels are long-term normalized levels. And so I think you're reading incorrectly that as we look at them as we think about ways to align the cost structure in the business. We're thinking about what the More normalized Level would look like and I don't think at this point for calling que tu as a normalized level, but certainly there is a new normal in terms of where we enter the year versus where we think we're going to end the year, but but you to log
It's like it's uh more.
Negative then uh, then uh where we would expect the balance of the year and as that's evidenced by obviously a lot of the third-party forecast as well.
Thanks for the question Joe.
Thank you. And the next question comes from Ryan Johnson with Barclays.
Yes, you know in your in going kind of opening you talked about coming out stronger. Can you tell us are you seeing any or you thinking about business stabilized m&a opportunities, you know your balance sheet people join extra leverage, obviously that's going to deteriorate with a cash deals, but I certainly have a stock that's held up better. But many so is that something we can think about over the remainder of the year?
Yeah, absolutely. So, you know, we're we're going to definitely aim to keep the pipeline. As I think everyone knows there's always a period of time when there's a market dislocation like this where buyer expectations align much more quickly than seller expectations. So you've got to go through an equilibrium process there that will that will eventually occur but there are a number of things in the pipeline of varying sizes, but I want to be very clear there's there's nothing that that's huge in our pipeline right now. That doesn't mean that we would identify opportunities over the coming quarters where we will pursue opportunities, but the pipeline is more bite-sized bolt-on type m&a related activity that I think it's in our best interest to continue to pursue those to look forward to you know, where the business is going. But at the same time make sure that we're doing the right thing.
Around the financial flexibility on the business. So, um, you know clearly there's been a Slowdown more broadly in m&a related activity. We're continuing to work very diligently on the pipe life and we'll we'll monitor it then keep you posted.
Okay. Thanks. Can you do bite-size deals with stock?
We with the 1.2 billion in cash available to us with a very strong financial position. We think that you know, that's the preferred correct in terms of what we would do smaller deals. We don't see our stock at this point as being the currency that we need to go to for for deal activity.
Okay. Thanks. Thank you. And the next question comes from David Kelly with Jeffries.
Hi, good morning. I just quickly could you provide some color on your supply chain? If you're seeing any significant disruptions there and how you're navigating the volatile environment with your supplier? Yeah, so absolutely the the supply chain has been disrupted. You know, the the team is just done an absolute fabulous job of engaging with all of our supply chain, you know benite and Paul had provided commentary in terms of how we even we as suppliers to our customers and partners to our customers have engaged with them and we're doing the same thing with our suppliers. They're all dealing with the exact same issues that we are we haven't had any significant, uh changes in terms of our terms. So we haven't had any large suppliers that have have called us looking for financial assistance. That's not to say that we won't see that but we're we're going to make sure
We do everything possible to me.
Pain are very critical supply chain intact and we've been navigating shortages of Parts as we've continued our essential activity, but we've been able to manage through it quite quite nicely and due to a lot of work on the part of the the teams around the world to make sure it happens. But there there's been disruption there and and as well and Paul mentioned the logistics supply chain has been dramatically disrupted large portion of logistics transport is in the belly of Passenger Jets, and with that down dramatically month, we've navigated that aspect of it as well as trying to shift to other modes of transportation. That would be more appropriate given the circumstances.
Thank you. And the next question comes from Joe Jordan with Colin. Thanks for taking my question. Just first. I just wanted to clarify something real quick. If you could you mentioned in the car business the Defence the OEM and the aftermarket, if you could just break those down into like how big they are relative to the total arrow. And then my my question is, you know, give it just given the final assembly nature of a loss product and the variable cost nature. Like what does that mean in like a social distancing future from here? Like is it just a menu intensity of it? How do you have to think through is it shift your view on like normal monthly rentals and ability to put through capacity in the in the facilities. Thank you.
Yeah, so let me hit the second question regarding impact of social distancing on the operating model if you will if I've got the question, right and then I'll let the need give you the specifics on the airline or the the space business. So, you know, it's interesting. We we spent a lot of time thinking about what the impact would be more broadly on our end markets associated with this Paul chawla touched on a fact that if uh as things start to normalize some people will be less willing to do mass transit and so forth. We think there are instances where the friends that will continue will be beneficial to our customers and therefore beneficial to us in terms of the supply chain, you know, we've implemented a number of measures already because we've continued to operate much like if you think back to nine eleven and the protocols that were required to be put in place post that in terms of Security checks and so forth
Our number of protocols that have been implemented in terms of social distancing in our in our sights screens being put in place wearing of mass temperature checks help checks. Ugh cleanliness related features in terms of what we're doing in um in our sights and uh people's habits regarding washing hands and so forth. I don't see those in a meaningful way impacting business model or cost structure clearly. We're going to have to adjust the way we do things off shift changes will be very different when you have a large site where large numbers of people are coming in and out, but I think we'll be able to navigate those once we get to a new norm and we Implement those protocols when people get accustomed to them.
And I don't see it change.
In a big way, you know some additional supplies and so forth, but nothing dramatically impact and cost structure or business model and if you want to touch on the breakdown of error page and hydro, so so the way to think about our business Joe is we roughly a third third third with commercial OEM events military and then are aftermarket and mro business office service guys. Thank you. Thank you and the investment research
Thank you very much Jeff. I just have one question. Some of the oems have talked about, you know, working back down the supply chain to get more cost-efficient agencies or pressuring prices for some of our suppliers. I'm just wondering that does that reach back to since a little bit or just the dollar content for automobiles and trucks and vehicles just such a small part of the bill of materials that it doesn't hit their radar screen. Thank you.
Thanks Jim. So I think folks know that our contracts with our customers often have volume related requirements associated with us off and they also have commercial concessions that we've contracted long-term now granted in a very difficult environment. Every company is looking for its Partners to work together to figure out to get to the win-win so that we can all navigate through this but we have we have historically been able to and we would expect to continue to be able to navigate back quite well, certainly we made concessions with customers in terms of getting them product when they need it based upon the disruption that they've seen in their business working with them through that in terms of the drop out of their order rate, uh, that was within a order fence, uh Frozen order fence. Yep.
Technically we could have contractually forced them to take the inventory, but we didn't believe that was the right long-term answer but in terms of the economic arrangement we have with our customers. We haven't seen significant impact there historically when we see significant volume drops, we're able to do Fair reasonably. Well from a financial standpoint in our customer contracts. Appreciate the questions. Thank you. Thank you from from evercore. I'm not seeing the follow-up guys. It gets too quick ones one, you know, it was really focused on these detrimental margins that you guys are seeing in March quarter is really a call to perhaps lights on and say your thoughts look like if this was a normal Revenue delivered versus the incremental head when you had from back to that you couldn't control the restraints and controls by governments and play. I don't disagree with us license to the numbers that I would be great job.
and then maybe I missed this but
Ashley expectations with doing quote as well. Thank you.
Paul do you want to take Costco? Yeah, I'm sure for the question. So in the past our drop out on volume was closer to the even the thirty to forty percent range depending on the the different products the lines in which they were moving up and down the drop off that we're seeing now. They mentioned earlier is is just much more dramatic given given the respect that we're seeing in the plants the disruptions were seeing in the supply chain. The higher costs were elevated cost. We're incurring to protect the employees to deal with disruption to not the social distancing the inability to have the plants running at the full level of capacity. And so all that spending a whole bunch of disruption that is unusual and it's not driving drop for in our in our Revenue declined at a bigger better bigger percent. And so that's why you're seeing that significant volume of profit drop in the city of significant volume declines. It would be unusual.
Given our Path Performance and experience as far as things begin to normalize. We will be able to manage those costs more effectively will be able to do more structural changes when we were able to fully operate the plants and the sites as we have done dorkly.
And on the the free cash flow of question, we did not provide guidance on YouTube for free cash flow, but from a qualitative standpoint the transpac see around our structure our excuse me are Ugg expense and cost structure. Hopefully will be helpful there. And and we have a very keen focus on making sure that we manage our working capital and we've taken a number of steps that will reduce our cash cost to the business and in terms of the the furloughs and the pay cuts and so forth on the indirect side essentially reducing that cost structure by, you know, about 15% on a net benefits basis because obviously when people take pay cuts, they're strong benefits side of the equation there and so we're we're focused on making sure that that we manage Cashflow very aggressively during the the second quarter. Yep.
The disruption that we're seeing. Thanks for the question of it.
Thank you. And we also have a follow-up from Lindsay Lohan with Bank of America Merrill Lynch. Yes. Thanks for taking the follow up just to follow up on your comments on on free cash flow, you know that both lower capex and managing working capital. Any anyway, they give us some guide rails around those on cash conversion cycle, maybe as we go through the course of of the month also. I don't know if I missed this but can you give us some sense of the utilization rates of your manufacturing sites in China now things seem to be more, you know, normalizing they are worth is out of China. Thank you. Yeah Grace, I'll hit the utilization question. And then Paul if you could hit the cash flow Point, um, utilization obviously varies, very dramatic walk around the different locations around the world in China. I would say we're running at about seventy 75% utilization, but at other locations around the world, we're running quite
significantly lower than
But I would say that in our larger sites everything's running at about 50% or better and then some of our smaller sites Dead are there hasn't been as much of a demand in Q2. We see it as instances where it might be a little bit lower than that. Every one of our sites is operating in some way at some level of capacity. And again, you know, we've been working with local governments to make sure that we run at the rate that our customers need us off. So we're we're going to do everything we can to make sure that we deliver Rodham and and we don't see a supply chain disruption and an impact on Revenue that's caused by us.
Do you want to hit the cash flow point?
Sure, one of the castle was pretty good into one. We talked about the $16 free cash flow in q1 conversion rate was high was eighty-three percent, which is very good. So far customers, we've been engaging with customers are paying on time. We've haven't seen any major disruptions in terms of Collections and receipts page and so as it stands now things feel pretty normal, I mean,
BSL was about was in the low 60s for the for the quarter. So, you know things are progressing fairly normal on that front.
Thank you. Thank you. Thank you. That's all the time. We ever questions right now. I would like to return to the comments. Thank you would like to thank everyone for joining us this morning. Somebody will be participating in the upcoming JPMorgan TMC investor virtual conference on May 13th. Thank you all for joining us this morning and for your interest in Sada human out in the whole thank you. See conference has concluded. Thank you for attending today's presentation, you know disconnect your lines.