Q1 2020 Earnings Call
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David Brown.
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Hi, Rob.
Thank you point emission can be found in the Companys SCC filings.
To the extent that today's discussion refers to any non-GAAP measures under regulation G.
The required explanations and reconciliations are available in the Investor section of the Cts website.
I will now turn the discussion back over towards the European Sutherland. Thanks Ashish.
We work through this challenging environment, our first focus of the safety of our employees, we have taken steps to ensure compliance with local regulations and have taken additional steps for employee safety.
Patients continue to operate.
Ceiling, we're working closely with our customers to meet their requirements to divest of our abilities.
To reduce operating expenses, we've implemented a temporary pay reductions temporarily eliminated for one k. match planned shutdowns plan furloughs and a reduction board cash compensation.
We will continue to evaluate further steps to optimize our cost structure and we'll update you on our progress.
We are prioritizing capital spend to grow projects and apply the brakes in all other areas on managing inventory and receivables.
During this process my Cts co workers across the world as displayed tremendous devotion to the company in its customers. They have stepped up to adapt new ways of conducting business displayed cooperation on understanding for the cost reduction efforts and demonstrated resiliency in these tough conditions.
As a team we've taken the learnings from our early experiences in the January February timeframe from our China locations and implemented safety measures at our other locations across the world.
We are maintaining our focus on the growth of our business as a key strategic priority.
And continue to expand our range of sensing.
Connectivity in motion products, New business Awards were 105 million for the quarter, which was a solid performance given most regions lost three to four weeks in the quarter due to OEM shutdowns.
We secured large awards in accelerator modules, one of the Japanese OEM and to the Chinese Oems for the local market and the winter and application in commercial vehicles in North America. We were awarded a contract for a REIT hype chassis sensor application in ceramics, we will deliver vascular medical ultrasound slowly.
Gary and defense undersea applications in total wins outside the transportation end market were approximately 46 million.
We see opportunities in this challenging market to gain new sales despite the strong headwinds in automotive.
Demand for net medical respirators is driving volume for our temperature sensors and see path machines require our analog and digital recorders.
Military communications with the RF filter products and speciality frequency applications R&D area focus where we are gaining traction.
But our first win in commercial vehicle accelerator modules, we are exploring architectures to scale more cost effectively as applications tend to be unique in design.
We are advancing innovations for hybrid vehicles and electric vehicles.
Where we are investigating content growth for pedals current sensing the break and terminal applications.
As previously reported we continue to progress on Predevelopment engagements on our attempting to reduce harmful emissions and protect our environment.
Lets ceramic material formulations, we are innovating with new texture leaves a formulation with a first award for military applications.
We continue to maintain a disciplined approach to innovations and product development and haptics in security by metrics for consumer electronic applications.
Making further progress in our end market profile is a strategic priority for US we continue to evaluate our portfolio of products and technologies for the work to strengthen our M&A pipeline.
We have good liquidity and balance sheet capability, we aim to emerge from this recession stronger and to advance our end market profile in an environment, where valuations may be favorable for acquiring companies.
We remain focused on adding the right technologies, expanding our geographic reach and strengthening our product portfolio and customer relationships.
Well as a key learnings for us with the temperature sensing acquisition is our ability to improve front end sales effectiveness for our other electronic component product lines. We are adopting these best practices with a goal to improve our ability to win new business.
Last year, we reported the difficulties we encountered in our ceramic foundry operation.
We saw good progress and continue to improve this year.
We're also focused on increasing operational efficiency in our temperature sensor manufacturing operations in Mexico.
The ERP rollout continues and will position us to gain further efficiencies beyond twentytwenty in various aspects of our supply chain and support structure.
To this end we are evaluating a shared services plan across the regions to be more efficient.
Fixed cost and operational expense reductions are always in view as we aim to live our core value of simplification.
End markets were challenging in the first quarter of 2020.
We expect the most challenging period this year to be the second quarter as the full impact of covert 19 is realized.
Transportation market demand is expected to be down in the 20% to 40% range in the second quarter, depending on the region for the full year, we expect a decrease in the range of 10% to 20% globally with some forecasts and a higher range. We're closely monitoring demand in other end markets given the evolving dynamics.
We expect a slow steady recovery in the second half of the year with the recovery lingering into 2021.
Medical and defense markets remain robust.
We're also seeing some incremental opportunities in medical ultrasound temperature and physician sensors per ventilators in respirators.
Sales to the aerospace and defense end market increased to 9% of total revenues in the first quarter up from 6% last year.
Marketable growth margin improvement ERP implementation and progress on our end market profile. The main priorities for us this year.
This year, we are initiating our derived for 2025 goals for Cts focused on four key areas.
Profitable growth and portfolio management.
Working more closely with our customers and aligning and technology and product Roadmaps.
Building the capability of Cts operating systems to be more consistent globally to enhance our continuous improvement capabilities and results orientation, and finally, enhancing our organizational capability to leadership and cultural programs aligned with our business performance our values communities.
And environmental priorities, we will update you annually on our products.
Due to the continuing uncertainty from covert 19, we have withdrawn guidance for 2020.
As we have said, we expect the second quarter to be more challenging with some recovery over the following quarters again, I want to emphasize our strong liquidity and cash position as well as our drive to emerge from this recession a stronger company.
This time, Ashish will walk us through the financial performance Ashish. Thank you again.
First quarter sales were $103.1 million down 12.4% compared to the prior year sales or transportation customers decreased by 22%.
And sales to other end markets increased by 7.1% due to the addition of $5.6 million in sales from our temperature sensing acquisition organic sales were down 17.1%.
Our gross margin was 31.9% for the fourth quarter lower volumes impacted gross margin.
As Karen mentioned, we are starting to see improvements in our ceramic foundry operations and expect further operational improvement during the next quarter.
Our first quarter 2020 earnings were 12 cents per diluted share adjusted earnings per diluted share were 19 cents.
Down 20 cents compared to the first quarter of last year.
As volumes are declining due to the impact of coded 19, we have taken steps to reduce cost where possible through temporary payroll reduction suspension of total onto a contribution.
Our lows plant shutdowns and control over all discretionary spending.
We expect the second quarter to be significantly impacted due to the shutdown and stay at home orders in most countries with potential for a slow recovery in the third and fourth quarter opinion.
On cash Cts remains well funded at the end of March we had $151 million in cash on our balance sheet.
Our debt balance was $151 million overall, we had zero net debt.
We have access to an additional $147 million through our revolving credit facility.
We have taken measures to ensure we have adequate liquidity for the next several quarters at all our sites around the world in order to manage through this difficult situation in March we borrowed $50 million from our credit facility.
Including this additional debt, we remain well within our debt covenants and at this time. It is our expectation that we will remain compliant.
Our controllable working capital as a percent of sale was 17% in the first quarter.
The increase was driven primarily due to the sharp slowdown and volume in the second half of March.
We are focusing on action to reduce working capital over the next quarters.
Our focuses primarily on reducing inventory levels across our operations.
We have also enhance our efforts on credit and receivable collection as we operate in an environment, where many companies are cash constrained.
We generated $11.9 million in operating cash flow in the first quarter.
Our capex was $4.6 million.
Our prioritizing capex spend on the most critical and strategically important programs.
Our goal is to reduce capital spend by 25% to 30% to under $15 million for 20 trend.
We are continuing to implement safety and centralized successfully at another large manufacturing location at the beginning of March due to current limitations on operations and travel we are adapting our plans and have delayed the target date for the next we'll like to the per quarter.
As a result of this push out our target date for completion has moved into the middle of 2021, we are taking steps to manage costs related to the implementation.
This concludes our prepared comments.
I would like to open the line for questions at this time.
Thank you. The question answer session will be conducted electronically press star 100 see benefits replaced.
We used speaker phone.
Function is turned off the line.
Right.
Once again, please press star one to ask a question for cost for a moment to assemble the queue.
We'll take our first question from Brian Colley with Stephens.
Good morning, Thanks for taking my question.
Hi, Brian first.
So you get season commentary around.
Yes.
Expected Caribbean transportation and market.
From a second corner.
Full year, just curious if you can offer some similar commentary on what you see.
We are other end markets for QQ.
In the full year and also.
If you could talk little bit about demand trends and how the business performance so far in April.
So Brian.
On the on the automotive side just to recap.
We were down about 22%, we saw the market down somewhere in the region of 24% in the first quarter second quarter, as we said, 20% to 40% down and as differ across the regions for the year, We said, 10% to 20% range, we've seen some forecast around 23% of year and it's different in each of the region, but were well.
Prepare for those situations on the non automotive markets, we're feeling pretty good ample will also being cautious because we don't know what affects our if you look out beyond two months three months, so that side of things is running reasonably well and as I said, we've got opportunities to gain some new sales so.
For those may be short term the growth looking for opportunities on longer term contracts, we're pretty pleased with our new business Awards and you saw that they were strong in the sense of solid performance in a in a quarter, where we just had two weeks of shutdowns in orders or contracts were not been awarded and.
Our non transportation performance was very solid there so again and we feel good about the non transportation side. There were also cautious because it's an evolving market at this time.
Got it the telco.
Second question.
The timing of recovering some segments impossible to predict at this point, but whenever we do see diamonds in quite positively whether its line numbers here next year can you talk about areas of the business, where you would expect to see a sharper snap back to monitor vitiate recovery versus the areas.
We're in recovery to be more prolonged.
Yes, so under the under transportation side, and it's it's only been tough in the second quarter, we think there'll be a slow improvement as you look at the forecast that are coming out. There every week there are evolving and I think when you look at big ticket items like vehicles and Lithia.
Unemployment levels and changes, it's going to take some time now Fortunately at there you can buy vehicles aligned these days so it helps a little bit in the process versus the dealership, but it will be as slow steady recovery not a quick flip back on some of the other areas. We're seeing good progress in the ceramic product line and MPLX.
Many components and we've got some new products in Fiveg, but we're making some progress I mentioned that on Rs in certain applications now Justin in telecom, but in military applications for frequency for Fiveg, we see good demand there and as steady performance in medical as well so.
So obviously, we're continuing to evaluate the dose is still a little better.
Got it.
Last question from a cost structure.
Curious VNC, maybe quantify the cost.
Taken out in response.
To comment so far.
And then just as we think about additional emailed sponsor expense reduction.
It sounds like you guys. There are kind of planning for macro scenario, where we have kind of a slow steady recovery in the back half.
But if we do see a more prolonged recovering.
You guys have the ability to take another step function down the cost structure.
So Brian as as we talked about we took some cost actions in the third quarter last year than to get started seeing some slowdown in our commercial vehicle and market.
And.
Via taking additional steps, which we talked about on the earnings call today.
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We are staying away from trying to quantify the full impact from both cost action because we are considering them as temporary based on market conditions.
And at the same time.
Looking at additional.
Options in terms of how we could take further steps down if the market condition.
Evolve unfavorably from a volume standpoint, so all of those things in.
Our playbook from that standpoint, and we will take the additional test of the right time.
And Brian just to add a little bit to what she said you know obviously our employees are helping out here in this situation and we want to make sure as things improve it that we are fair with our employees as well and on the flip side to your point as you look out beyond the end acute two quarters here. How is demand is is that a new world adverse is cut.
Passing did you have today, that's something that you've got to be constantly analyzing and planning for and I think thats. When she should also pointing towards the tail.
That makes sense.
Our return on a crucial Campbell.
Yes.
Thank you weren't thank you.
Next well go to our Karl Ackerman.
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Hey, good afternoon, Selner morning, gentlemen.
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Two questions on May.
Versus on manufacturing is era.
And with the impact to margins were.
Some work stoppage orders as a very small ashley facilities.
And our your manufacturing facility in Mexico.
Sorry.
Now our yields will reduce summer bottlenecks in other geographies commonsensical installations.
Current view mind repeating the question the line not perfectly clear.
Sure.
Yes.
Corner I was hoping you could quantify what the impact to your margins were.
From these factory shutdowns.
Okay order.
Typically within Europe.
Non directors facilities and are those factories at this point.
Fully functional.
It's not are you able to alleviate some of those bottlenecks in your us based locations.
So.
Because if we got your question right, you're asking about their margin impact and how much we can protect margins as we navigate through the situation.
You saw that our gross margin declined somewhat in some in the first quarter.
As the volumes dropped.
We are looking at ways, where we can review.
Manufacturing costs.
And we are also making sure that we stay compliant with any local requirements.
Which may prevent us from being able to fully reduce cost.
Just based on country by country different regulation that we have to comply with.
And as we move forward the same situation will.
Continue to evolve.
In terms of as Ken mentioned.
What does the volume scenario looked like and then based on that we'll be looking to manage.
Our cost structure as best we can and targeted to give you some color and on the locations. If you look to EM Asia. We obviously were down during the shutdown in China doses, but as easement back up and running since about mid March of full level, our Taiwan facility is in running over there.
Through and we come to Europe, we've had some shutdowns and as the back in operation There and if you come to North America, we're running some medical products continuously and Mexico operations have been impacted and they're waiting for tourism clarity on that what is clear.
There is with the volumes in automotive we will have furloughs in our facilities as we go through the second quarter.
No. That's that's helpful. I presume that let me just.
Follow up to margins.
I understand at realizations challenged.
In summary supply chain disruptions.
Which is.
Concentrate injectors.
But from here.
Thats helpful too to talk about some decent market dynamics firms or.
Yes, it a margin recovery.
Dictated by sales moment transportation or are there other onetime supply chain costs you've incurred.
That may have paid over next few quarters that shutdown supervisors a mark.
Thank you.
Currently the primary driver, it's going to be recovery in volumes.
And as Karen mentioned and I covered as well we are seeing from underlying improvement in some problem areas that we had last year.
But that going to be tampered with.
What we have seen on the volume front.
The other thing I would add there that we're doing is we're looking at the heat maps globally in terms of first of all we've got inventory that we need to obviously burn down but also very focused on those heat maps in terms of critical components is there a component that there that can chose down that we need to be planning for and at the same time.
We're also looking at the front end of the business to say do we have competitors that are in trouble into an opportunity for us to get stronger gainshare because there's a both ends of the of the supply chain in the front end, we need to be flexing to make sure we operate as to the maximum of our ability.
Very helpful. Thank you.
And as a reminder to star one if you'd like to ask a question exports John Franzreb with Sidoti.
Good morning, guys. So as anyone from how many your facilities fully operational today.
Asset dynamic situation.
Just to give you a set of color John from what I said, we've got.
Three facilities running in Asia, we got and three running in Europe somewhat as different levels and we've got to two running in North America Whatnot and then in Mexico. We've got three four for Mexico of which three are fully shutdown waters.
Sorry tour, Felicia down and to a partial.
Okay.
Okay and can you just walk me through the dynamics have a restarting in China facility is kind of looks like and what you learned in that listen as you can apply to when the restart happens here in North America.
John does that Sam for something that was really beneficial to us our teams in China did an excellent job coming back and very difficult circumstances, and we really took the learnings from them as they were the first ones and getting back it didnt as wasn't as digital back on it was a slow ramp it took several.
The weeks first to ramp up we had some implied toysrus trapped in areas that we're not there were not free to travel obviously, so we had to flex we did things from first of all and different monitoring and safety and add considerations detaining in our facilities to make sure we protect our employees.
Our cross training that we done and cross training that we added on to flex and introduce at people to that production lines in a controlled manner was very important and we've taken those lessons and also applied adhere to our locations in Europe and in the Americas as well the other thing that I would add as you mentioned earlier Karen the.
Map to ensure that we cannot adequately secure supply.
Other suppliers.
That are critical.
We are working to make sure that to the extent possible we can keep.
Our supply lines open so that we can produce products than we are able to get back up and running and John the other aspect of is pretty important there was with our customers and obviously, we have some finished goods, but knowing their demands and making sure. We were aligned with their startup plans was extremely important so the same you.
Our ability to flex and support them and have the confidence and coming back to Cts.
So do you produce right now for the transportation market here in North America, even though they're not taking products both are they taking products.
So we have and some products that go it goes into critical air transportation like ambulances or fire engines. So some of those products are still moving at lower volumes and so hopefully that helps you get an understanding.
Okay, and then regarding the medical market.
I am I understanding there is elective procedures being for does allow the medical suppliers are mitigate pretty badly.
As a seems to be the case view.
Is that because of the temperature sensing sensor is doing well or.
I just seen it yet.
So.
And we're being very careful and that's why our comments on growth outside the transportation, what we see is reasonable but we're also very concerned once you look at the on four to eight weeks what could be changing in demand that we haven't seen yet and obviously when you think about our temperature sensors. They go into food and other areas support restaurants whats.
Happy there on the flip side on medical Respirators, and medical ultrasound, we've seen solid demand and see some increasing demand as well, but we're very cautious there in terms of understanding what the longer term demand is.
Okay.
Thank you I mean, what your debt covenants are change.
So John.
The primary that covenant that we monitor carefully as the gross debt to EBITDA.
And then upper limit as three and half time.
And.
At this point we are.
Well under two.
And as I mentioned, it we had borrowed $50 million additional beyond what you would normally be borrowing and that is why the covenant is a little bit higher than what it normally would be.
So we expect to stay within our covenants.
And.
At least at this point in time, you're not seeing a risk of having any problems on the covenants site.
Okay. No 137, you have left in your revolver.
Doug.
40 estimate.
Sorry.
So after having followed the 50 million we have another 147 available under the existing facility.
Okay, all right great all right. Thanks, Thanks actually asked I'll stop here that other people ask questions. Thank you guys I appreciate it.
Thanks.
Next we'll go to.
So with.
Good morning, Karen Good morning Ases.
Good morning anti handy.
Karen can just talk more about China like I think we have with on news that some.
Customers in China.
After the fab back to like higher level of production. So what are you seeing in China in terms of current market demand and that feasibility in general.
And what we're seeing is and on the transportation side and we're where.
He has moved back up we were running as normal and we're.
Looking out in terms of what does the end of the second quarter looked like and what was the third quarter be like I was on what our plant there last night and and we saw add some new incentives coming into the marketplace in China further incentivizing cleaner fuels like hybrid and electric.
As some of those subsidies won't come until 2021, so and we expect some some impact as we go into next year and on some other areas. We've seen some softness in tubular markets and we expect some of that to rebound, but more slowly and on the components side weve to other than that we've seen pretty pretty steady perform.
Plants, and so again and it's a little bit as a mix as you can tell but we're being careful and cautious because.
It's an evolving situation still.
Got it. Thank you Karen and then assists up is it reasonable to assume that share buyback.
We'll be temporally suspended.
So hendi, we are discussing with our board.
On what's the appropriate steps factor taken as decisions get made we will talk about that.
Got it.
One more question assist so when we look at Nordea acquisitions.
How do you distribute.
The sales when you report by individual segment like how much of that is in industrial how much of that.
In let's say like medical and transportation.
Central Andy.
For the different end markets, which acquisition Lee referring to I thought I heard you stated earlier, but.
Yes.
Are you referring to the most recent one we made or Nordic yet not our debt.
Oh no.
No not guilty to the I went to the.
Okay. Okay.
So cute the primary end market. They go into is industrial.
And a relatively smaller portion it does go into.
Defense end market as well as medical.
Relatively smaller portions the primary end market is industrial.
Got it.
Thank you offices, thank you Karen.
Thank you and extending.
I'll turn the call back over to Mr. O'sullivan for any additional or closing remarks.
Well. Thank you for your participation in today's call I wish everybody to be safe and we look forward to updating you again in our July update thank you very much.
That does conclude today's conference. We thank you for your participation you may now disconnect.
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