Q2 2020 CTS Corp Earnings Call
Please standby we're about to begin.
Good day and welcome to D.C.P.S. Corporation second quarter 2020 earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to Kieran O'sullivan. Please go ahead Sir.
Thank you.
Good morning, Thank you for joining us today and welcome to Cts is second quarter Twentytwenty Conference call.
Begin by sharing that you've talked in a company in our business performance.
As we mentioned on the last earnings call, we expected the second quarter to be our most challenging quarter. This year due to the impact of cobot 19.
Operationally all of our plants are running though we continue to experienced challenges that our Mexico locations.
The return to the appropriate production staffing levels has been impacted.
Like state and local regulations.
Our leadership in global teams are prioritizing the safety of until he.
And adapting quickly to serve our customers needs.
Sales were 84 million down 30% from the second quarter of 2019.
As expected we saw significant challenges into transportation end market.
And the rest of our business was stable.
Second quarter gross margins were 31.6% compared to 34.1% in the same period in 2019.
We delivered an adjusted EBITDA margin of 16.7%, despite a 30% drop in sales.
Second quarter adjusted earnings per share were 61 cents.
We had a promising new sensor when it transportation per application and hybrid electric vehicles.
And continue to make progress with our public wins in defense.
Yeah that searching your customers in the quarter.
We ended the quarter with 146 million in cash and 141 billion in depth.
We expect a prolonged recovery from the cold 19 impact as a result, we are implementing a restructuring plan to realign our cost structure to the new demand environment. This plan will be completed over the next 24 months.
She shack with all our CFO is with me for today's call I will take us through the Safe Harbor statement, Ashish I would like to remind our listeners that it's conference call contains forward looking statements. These statements are subject to 700, and then certainly be that could cause actual results to differ materially from those expressed in before looking.
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Additional information regarding these risks and uncertainties. It's contained in the press release issued today and more information can be found in the Companys, It's easy filings.
To the extent that today's discussion before any non-GAAP measures under regulation G.
Acquired explanations and reconciliations are available in the Investor section of the C.P.S. website.
I'll now turn the discussion back or to our CEO Kevin.
Thanks to switch.
The challenges of the covert 90, a pandemic have been I'm pleased today I.
I want to express our appreciation to all our employees customers and partners for their support as we work to get our factories online this past quarter.
Our people demonstrated remarkable flexibility in our operations and supply chain.
Our first focus at the safety of all employees and compliance with state and local regulation spot doing everything we can.
To meet our customers' requirements.
The temporary expense reduction measures, we discussed in our last earnings call are still in effect.
As I mentioned in my opening comments, we are announcing a restructuring plan.
Which we expect to be completed over to your timeframe.
This plan is necessary to realign our operating cost structure. So the new demand environment as we transition through the prolonged impact of cobot 19.
More details of the plan would be shared in the quarters ahead at a macro level because it involves site consolidations and streamlining other operating costs to leverage economies of scale across the company.
The plan is expected to deliver an annualized bps improvement of 22 cents to 26 cents.
By the second half off 2022.
We remain focused on <unk> strategic growth investments growing our business and expanding a range of sensing connectivity in motion products is a priority.
New business Awards were 105 billion for the quarter.
A solid performance given several Oems continue to push outs business decisions due to the corporate 19.
The results the wide scale shutdowns in Europe, and in North America in the quarter.
That said, we added 13, new customers in the quarter six in industrial tree in medical three in defense and one in telecom.
In transportation, we had an exciting wins.
For a new high load CRO sensor for a premium European Oh, yeah.
This is a new hybrid vehicle applications.
Since it is a customized design, we're still evaluating baldor market potential.
Also secured several wins for passive safety sensors with existing customers and for the new customer a large shall see right high sensor award with a north American OEM as well as accelerator module brands with several Oems across all the regions.
In defense, we were awarded to RF programs with existing customers.
We had multiple wins for military under water applications secure to contract with a European OEM.
Received our first order for texture ceramic material.
Texture ceramic provides enhanced <unk> electric performance at a lower cost point overtime. We expect this new materials formulation to expand our available market. It has the potential to grow at higher single digit levels.
With temperature sensing, we secured wins in industrial defense and medical applications, and adding new customers.
Our precision think can see product was selected for design win in aside cheech small cell application.
We also had design wins in pro audio and medical applications for encoder products.
We continue to advance product innovations are focusing the transportation market is to develop sensor solutions that are agnostic to the underlying propulsion technology.
Thereby strengthening I wrote in the next decade as hybrid and electric vehicle penetration grows.
Yeah, we start you knew maturity of formulations as we target growth in defense industrial and medical markets. We're also developing custom east it solutions to strengthen our frequency product portfolio.
We made more progress in the ceramic foundry operations this past quarter.
We expect further improvements this year.
We're also using our expertise it's around the formulation is to improve yields and margins in our temperature sensing acquisition.
And our focus 2025 initiative, we are concentrating on four areas number one driving profitable growth.
Number two building stronger customer relationships, but thats really improving operating systems and for strengthening talent culture locally.
As part of our emphasis on profitable growth, we are evaluating the product portfolio for longer term growth and margin expansion.
Our focus on the M&A is to strengthen our pipeline as we seek to expand our range of technologies products customers a geographic reach.
We are sharpening our go to market strategy by adopting our sales an application engineering setup to build stronger customer relationships working more closely but our customers on next generation products and applications is more important than ever as we emerged from the cold at 19 pandemic.
To advance Cts operating systems, we've added the senior resource to lead this initiative.
We aim to bill's capability and drive continuous improvements our goal is to eliminate waste and enhance profitability and this will be a multi year initiative.
Strengthening our talent pipeline and leadership bench, while aligning up culture globally will enable us to achieve our vision of being a leading supplier offensive in motion devices and connectivity components, and they thing and intelligent and seamless world.
We remain cautious on the broader economic environment in the second half was 2020.
From a light vehicle view it is still too early to close the book on the pandemic.
Premium brands are expected to rebound faster than volume brands.
In the U.S. sales if you used cars increased while the Saar for Twentytwenty, it's closer to 13 million down 23% last year.
On hand days and supply our 64 days down 20% from the five year average, but should help short term demand.
We expect an improving sales trend in the third quarter, providing operations run normally.
European sales are forecasted to decline, 26% last year.
The China market continues to recover with volumes predicted to be down 14% into 21 to 22 million range for the year.
We continue to see.
In medical and defense markets.
We suspended guidance for Twentytwenty earlier this year due to continued market uncertainty.
Our liquidity remained solid with a positive net cash position, we aim to emerge from this crisis a stronger company.
Now Ashish will walk us through the financial performance in more detail Ashish. Thank you Ken.
Our second quarter sales were $84.2 million.
Down 30% compared to the try again.
Sales to transportation customers decreased by 53%.
Sales to other end markets increased by 14%.
Temperature sensing acquisition added $5.4 million.
And organic sales came on transportation customers were up 1% <unk>.
We continue to get traction in the aerospace and defense as the medical end markets and saw robust double digit sales skilled trades to customers in these markets.
Gross margin was 31.6% to public second quarter.
In fact, it substantially by north face.
We are making progress on may yet various actually go into our tax rate as the result, we expect to be closer to the lawyer and all of our previously communicated range of 23% to 25% excluding discrete items.
As we complete that work on that that where we expect some further improvements in the tax rate in 2021.
Our second quarter, 2020 earnings or 15 cents or that you could share.
Adjusted earnings per diluted share was 16.
As we communicated back in April due to lower volume expectation be implemented measures to reduce cost to enter rebate over production.
I mentioned that for one k. contribution for those plant shutdown.
I would use for compensation and control over all discretionary spending.
Revenue in the second quarter was significantly lower and conditions remain uncertain.
We went regularly evaluate market conditions to try and be extended and duration of these temporary measures.
Ken mentioned.
We had started implementing age restructuring plan due to the prolonged impact of covert 19.
Expect restructuring costs to be in the range of $10 million to $12 million over the next two years.
Anticipated annualized savings in the range of 20 to 26 cents per share.
By the end of 2022.
Savings from the restructuring once fully implemented will help offset the impact of that entry cost reduction measures as those costs return.
Dining for some aspects of the restructuring project is being finalized and we wait communicate more on the timing of savings and cost in the coming quarters.
In terms of cash either net cash positive by approximately $5 million.
Which is an improvement from viewing at cash at the end of first quarter.
We have access to an additional $157 billion through our revolving credit facility.
In March we borrowed $50 million from our credit facility.
We are continuing to maintain disposition to ensure adequate liquidity for the next several quarters at all our sites globally.
Including before that.
We remain well within our that government and at this time that design expectation that be they remain compliant.
Our controllable working capital as a potential sales was 21.2%.
At the end of the second quarter. The increase was driven primarily due to the sharp reduction in revenue in the second quarter.
In dollar terms controllable working capital increased slightly from Q1 to Q2.
And our focus remains on improvements in the upcoming quarters.
Our team by maintaining emphasis on reducing inventory levels across our operations and on receivables collections.
We generated $11.8 million in operating cash flow into second quarter.
Capex was $2.7 million for the full year, you had expected capital expenditures to be approximately 4% of sales.
We are committed to investing in programs that help us to address our strategic growth objectives.
We are continuing to implement at they'd be.
And when like successfully at another large manufacturing location at the beginning of July.
This go like was accomplished despite most of the implementation Dean bookings remotely due to covert 19 related travel constraints.
This is a significant accomplishment by our team in memos as well as VP instrumentation deep.
The goal I, even at a morals weve completed the roll out two plants that provided approximately 80% of the company's revenue.
We are on track to complete the implementation around the middle of 2021.
This concludes our prepared comments.
I would like to open the line for questions at this time.
Thank you he would like to ask a question. Please press star one on your telephone keypad gauging is speakerphone. Please make sure you function is turned off to layer signal to reach I quit.
Again that is star one to ask the question.
And we'll take our first question from Justin long.
Thanks, and good morning.
Morning, Justin I listen thanks, and good morning.
So maybe to start just given things are changing so rapidly in the world today could you.
All right a little bit more color on how your revenue trended throughout the second quarter kind of month to month, and then any update on what you're saying so far in July.
Yeah, probably the best way to us to describe it is and you obviously equal and they were tough months for us in June was a more normal month had we've seen a similar increasing trend in July just to give you a sense of how sales are going but that the earlier part of the quarter was particularly tough and if you look at the quarter as well.
Well and that 55% in transportation and if you remember last year, we were particularly strong from a comp basis on the commercial vehicle and that really skewed just a little bit this quarter as well because that was a tough market for us and we are on the on the light vehicle side were in line with where the market is from every.
Do you see.
Okay. That's helpful and I think you made the comment in the third quarter.
Expect sequential improvement in revenue I know, you're not giving formal guidance, but is there any additional color you can share.
Roughly how much of a pick up we could see in threeq.
Talking about the progression you're expecting for the transportation in markets first.
On transportation in markets sequentially.
Yeah. So the non transportation markets performed solidly yourself, we were up 1% organically, we still expect steady performance there I'm not going to give you percentages because it so it's a moving target out there little bit at the moment on that transportation side, what I'd like to emphasize is an improving trend and.
The reason why we're a little cautious is we've got some challenges in our Mexico operations and what we're not fully staffed with local regulations and while it's improving we need that to get back to a full run rate, but at the best way to give you an message on the third quarter is we expect this will improve we've seen.
That improving trend already in July and and we then you're going to make sure we try and support make that happen.
Great and last question for me.
More on that on the margin side.
You mentioned that there was some temporary cost outs I know you talked about those earlier in the year can you help us think about.
Half of it this year.
How those could come back online given the sequential pickup in revenue you're expecting.
So b.
Cost reduction measures have made up of several components.
And given the.
A level of sales reduction be saw in the second quarter <unk> that would be the quarter behalf the maximum.
Impact and we would expect smaller impact of the cost reduction measures the temporary measures.
Some of them build continued through the third quarter and then as I mentioned didn't continue evaluating.
As a volume level in the market are changing will adapt our approach to those country measures.
Okay, but do you still feel like revenues getting better sequentially than directionally.
Adjusted operating margin she gets a coin sequentially better as well.
That would be it but assumptions estimate.
Okay. Thanks, I appreciate the time.
Thanks, Jeff.
And we'll take our next question from John Franzreb.
Good morning, guys I, just want to start a little bit about especially on the revenues.
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Hertz properly.
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We also expect.
Okay.
It seems to be down, 26% and and trying to be down switching circles referencing back as the second quarter, what actually happens.
No John that's a web presence and those percentages on a full year basis year over year from 19 to 24, they industry, but the industry.
I'm not sure expectations for the full year swanee versus 19.
Yeah.
Transportation side, yes.
To give you a sense, we certainly stated that from Q2, which was one of their most challenging quarter, we expect revenues to improve in Q3.
And and App, obviously, you want to make sure that operation stay stable and we're improving in Mexico, but that's an important improvement that we need to have to go to the quarter fully and again I'm going to emphasize our June and July performance was trending into right direction.
Got it so what's the north American portion of the transportation and that assumption.
That's your for China.
John They don't breakout our numbers.
For the different than markets by region.
But as we've talked about then be generally inline with what the overall.
Okay.
I know you kind of.
You want to flex much color on the consolidation efforts are you going to do but.
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And it sounds like either you drugs works.
2022.
So.
Better so we'll see some sort of.
Cost of improvements some of these actions to 2021 or is that.
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John If you look at it you'll see the minimum impact in the second half of the of this year more of the impact as we get to the second half I'll add 2021, and it's pretty good.
There is something that projects are more longer term projects with a very and focus.
Got it thank you Keith.
And just two quick questions I guess.
Got it.
It's your supply chain this has been like.
Mexico is going to Tom with a lot of auto suppliers, what are your thoughts about when that kind of.
Eases up.
Corrections in the.
On the local and federal less down there.
John a couple of supply chain overall, we've been doing pretty well I'm really pleased with our plan to come back online and in Mexico. Yeah. We're monitoring everything as you can imagine on a daily basis and the staffing levels are limited by the local regulation so going from the cold led to a code orange you're allowed to increase your your rent.
Percentage at the plant and there's been some positive lose but we want to just see it stabilized and continue to move.
Okay and one last question just because you came up you'll see any call. When a company. Some was getting government reimbursements from southern sponsored programs that were part of not both there.
Cost of sold in the city launch coaching sees any just kind of reimbursements.
So John there are certain portion.
Government incentives that you're getting a benefit of what we chose not to move in the direction of getting.
Financings through the.
Children.
But there are certain tax incentives that we are taking benefit, though but they're not significant enough to have a material impact on our connection.
Okay.
Thank you see so thanks, guys I'll get back into queue.
Thanks, Jeff.
And again, if you break that question that of Star one.
Well take our next question from Karl Ackerman Colin.
Hey, good morning, generally I wanted to follow up first on the topics commentary you mentioned you take you took some cost actions or are in process, taking some restructuring actions this quarter.
You know that of course would follow some actions you took in both the December quarter and March quarter. So I guess, just as a as a catch up you know how much costs have you taken out of the model at this point.
And how much would you view as temporary that gets reinvested in the business or just how much is permanent.
So.
Caused the actions that you have taken a over the last couple of quarters to adjust the structure where more in line with what was happening in the commercial vehicle market at the end of last year.
And then the.
Impact that we were dealing with in the second quarter, which was more temporary in nature.
The the restructuring that we are implementing.
Will allow us to offset the impact of the temporary measures.
That we were able to implement into second quarter. Once we start realizing the full benefit so that that should give you some ideal the magnitude of.
The impact on both sides.
Okay. So so it sounds like the sounds like the restructuring actions that you're taking today are going to be.
You know Lindy from a a from a from a.
Marching recovery standpoint in second half certainly will lower fixed cost that much of the the benefit it seems as gateway wanting twice what do you have I understand correctly.
Yeah Karla. Good mentioned, we are expecting are they getting back from the restructuring actions in the second half of 21.
And then going into 20 during two.
Got it okay.
Hi.
That's off if I may its how would you characterize your inventory in the channel today and from a working capital perspective.
Sorry taken to improve inventory days on hand.
Ah that I think that drives improving cash flow later on this here. Thank you yes.
So as you saw the mentioned that the working capital sequentially into increased very slightly and you know our plans have been.
Are you thinking of purchases and just the impact of the sudden drop in sales.
You're not able to police connect that situation, but we expect that we should be able to make good progress as we go forward here in Q3 and into Q4.
And in terms of.
Receivables and payables both components of the working capital remained in good shape.
And Ah via managing both carefully and Ah the quality of the field to make good as far as we can see so far.
Thank you.
Thank you and your take on <unk> question.
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Good morning to Ron Good morning, I says.
We have Andy how are you.
Good like Q1, <unk>, if I see it does sell to automotive transportation market. The sales declined seem we cleared and all for automotive market.
Some properties belief that the second quarter was the trough or can you share your insight into those.
And so Andy on the when we look at the commercial vehicle side of it we think the second quarter was the trough as well we think we'll see improvements there and when you look at it and if you look at some of our bigger customers in that space. They had the times of about 55% so much steeper than.
Just seem to like Eagle side of things and so we think that will recover steadily and some of those products go into the mid range, which may do a little bit better into heavy duty side of it we're not sure exactly yet if that's a one or two quarter cycle more but that's something we're monitoring closely.
Got it.
And then Kieran you also mentioned that the premium brand in automotive should rebound fast service could you remind us what kind of exposure Cts house with regard to gimi emphasis on premium.
So and in North America, we've got good exposure in Europe, we're a little lighter and the premium side of it and we're good with the Japanese tried and spend some of the premium side as well, but Europe is a little weaker first.
Got it.
Assist.
With regard to the new 12 million of restructuring costs between now and you and 25 to chew up what do you still lead Nieto, usually the Austin 12 million costs.
India is a kid and mentioned we had expecting a small impact in 2020.
We expect a bigger in back towards the end of 2021.
And then obviously by the end of 2022, we should be able to realize or all of those targeted savings.
I I meant the costs associated with that benefit.
Like Okay, sorry, I misunderstood your question I'll cover the cost should be generally in line as we get improvements, maybe leading by a quarter or two quarters, but as the timing of some of those projects is still being finalized and the ability to relate to little bit more on.
That as we go forward Hendi.
Got it.
And then keen on.
The Q T.I. Christian contribution was stronger than my expectation, where did you see strength in Q <unk> business into second quarter, and whether or not do you expect to see those strength to continue some companies have mentioned the benefit of let's say like outdoor activities and outdoor equipment I'm wondering what.
The Cts did benefit from dose in the second quarter.
We're very pleased with the performance of boat on a topline on the margin perspective with the acute yeah acquisition, mostly our improvements have been coming and industrial and and on the medical side and we're focused on expanding in both of those areas on the.
Hot and cold side, one of expand we also want to go deeper into the medical and leverage some of the channels that we'd have some existing customers that Cts and then I'll be see expand into the regions, which is part of our plan as we go forward as well in Europe and Asia.
Got it. Thank you assist thank you Karen.
Thanks, Andy Cindy.
Oh, it looks like there no further questions I'd now like turn call back over to Kieran O'sullivan for any closing remarks.
Thank you so lets Dina and thank you all for your participation on today's call and be safe, we get back to work here with much to do when we look forward to updating you again in October Thank you very much.
Thank you and that does conclude today's call. Thank you for your participation you may now disconnect.
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