Q4 2020 CTS Corp Earnings Call
Good day, everyone and thank you for standing by.
Welcome to the Cts Corporation fourth quarter and full year 2020 earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to Mr. Kieran O'sullivan. Please go ahead.
Thank you Hannah and good morning, and thank you for joining us today and welcome to Cts.
Fourth quarter and full year of 2020 conference call sales in the fourth quarter were 123 million up 7% compared to the same period in 2019.
Full year sales were 424 million compared to 469 million last year.
Impacted by the pandemic in 2022 day, all of our plants are operational with varying levels of capacity for 85% to 100%.
Fourth quarter gross margin was up 110 basis points.
$234 seven per cent from the same period last year EBITDA margin of 21, 4% was up from 23% in the fourth quarter of 2019.
Fourth quarter adjusted earnings per share of 43 students were up 16% from 37 cents for the fourth quarter of 2019 full.
Full year adjusted earnings per share of $1 12 were down for $1 45 last year.
New business wins for the year were 442 million down from the prior year with several Oems pushed out sourcing decisions in 2020.
Operating cash flow for 2020 was $77 million.
Up 19% for 64 million in 2019, and the fourth quarter, we acquired sensor starting typically a temperature sensitive company, primarily serving medical customers.
Shakira ball, our CFO is with me for today's call as usual I'm going to take us through the Safe Harbor statement Ashish.
I would like to remind our listeners that this conference call contains forward looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward looking statements additional information regarding these risks and uncertainties is contained in there.
Press release issued today and more information can be found in the company's S. P. C findings.
For the extent that today's discussion refers to any non-GAAP measures under regulation G.
Required explanations and reconciliations are available in the investors section of the C. P. S website.
I will now turn the discussion back over to our CEO Karen Thanks, Ashish in the for.
This quarter, our sales increased to $123 million up 8% sequentially and up 7% from last year.
For full year 2020 sales were down 10% from 2019, driven lower by the impact of the pandemic. The quarter's performance was solid. However, we are operating cautiously as we enter 2021 and monitor for any new pandemic disruptions.
Semiconductor shortages for our OEM customers and the consistency of the recent robust recovery.
We continue to prioritize safety in our operations our teams ability to effectively manage through the crisis their resilience as well as the commitment and strength of the senior leadership team greatly helped us navigate these unprecedented market conditions this past year.
The restructuring plan, we announced last year is progressing.
With small delays due to the impact of COVID-19.
We are still planning to deliver an annualized EPS improvement in excess of 22 by the second half of 'twenty 'twenty two more importantly, we're focused on returning to growth building on our performance in the fourth quarter and leveraging the recent acquisition of Sensus scientific.
Sensor scientific is a manufacturer of high quality per misters and temperature sensor assemblies.
Serving Oems for applications that require precision.
And reliability and medical industrial and defense markets.
Sensors scientifics products are used in a variety of medical applications, including neonatal equipment lab for users fluid warmer and analytical instruments.
<unk> has locations in Fairfield, New Jersey and in the Philippines.
The acquisition expands our temperature sensing portfolio has complementary capabilities with our existing platform and expand Cts has presence in medical.
The annualized revenue was in the range of 6 million the purchase price was slightly less than two times revenue.
I'm pleased to welcome the Ssi team to Cts and excited by the addition of many talented individuals and the growth opportunities ahead.
We remain focused on our strategic growth investments as part of our planning for 2025.
Growing our business and expanding our range of products that sense connect and move as a priority.
New business Awards were 104 million for the quarter, we added six new customers during the quarter for in transportation, one in medical and one in telecom.
In transportation, we rewarded passive safety sensor wins with three Oh, yes, one of the wins was with a north American customer for electric trucks, a new customer for Cts.
This builds momentum on the large passive safety when we recorded last quarter, where the Chinese electric vehicle application.
We had accelerator module wins with several Oems across China.
Europe and North America are for.
These wins were in plug in hybrid electric platforms. We also added a new customer for passive safety sensors in Asia, and a new Chinese JV customer for accelerator modules.
We continue to focus on electric vehicle applications and products that are technology agnostic and are not impacted by the transition from internal combustion engines to be these.
New electric vehicle applications and current temperature sensing in advance do you break our innovation projects in our pipeline as well as next generation chassis right height sensing.
Total EV wins for the year, we're in the range of 20% of new business awarded.
In Europe, we continue to leverage our footprint and capabilities in Denmark, and the Czech Republic with tier one defense customers and are currently in sample qualification. In addition, we were awarded funding from the European Agency for the development of next generation ceramic materials.
We saw softness in the medical market in the fourth quarter.
However, we are making progress in applications and renewed business with the free ultrasound customers in the quarter with one for a multi year period. We also secured a win for sleep apnea control application and a win for medical's temperature application.
In other electronic components, we had wins with application and EMC as well as the Michael actuator application.
In Asia, we secured a win for a two Wheeler truckload sensor application with temperature sensing, we secured orders in pool and spa applications, which continue to be strong. We also have temperature wind and industrial for H back and a win for our satellite application.
We're gaining momentum with our precision frequency products enabled by our reference design position.
We secured wins for five G applications linked to large telecom Oems and shipped a quarter a million samples in the quarter more recently in January our product was designed in for five G application selected by India's largest telecom provider.
For low power Crystal product is also in sample testing with a new North American customer.
Building and strengthening our M&A pipeline is a priority well this is more challenging due to the COVID-19 restrictions. We are actively building relationships with companies in line with our strategy, we seek to expand our range of technologies products customers and geographic reach while we continue to diverse.
The fire and market profile and enhance the future quality of earnings given our strong balance sheet, we seek to gain momentum with the right strategic fit and valuation.
The focus 2025 initiatives.
We have previously highlighted it has an important emphasis on building stronger customer relationships as part of this initiative. We continue to focus on our go to market capabilities and skills.
We're working to improve the quality of the sales funnel optimize our targeting new accounts and a line of functional areas to be more responsive and solution oriented in line, but our core values.
As we progressed into the first quarter of 'twenty 'twenty, one we've seen a positive start unexpected good first quarter given current customer demand.
As I mentioned earlier, we remain cautious for the full year in case of unexpected pandemic supply chain disruptions and the current semiconductor shortage. We are monitoring the consistency of demand in this recovery.
There may have been some pull forward in demand in 2020, we're all aware of the backdrop of higher unemployment and the potential for depressed economic and consumer confidence, though we are not experiencing it at this time.
We are facing some headwinds on commodity pricing.
Freight charges increased absenteeism due to the impact of COVID-19.
And working diligently to offset these but our continuous improvement projects.
We expect to stay within our targeted gross margin range.
For the U S light vehicle transportation market volume is expected to improve in the 14 to 16 million unit range on hand days of supply or that was 59 days approximately 9% below the five year average of 65 days.
We currently see reasonable control of inventory levels European sales are forecasted in the 18 to 19 million unit level. Although there is some uncertainty given the recent lockdowns throughout the region with some Oems announcing volume reductions our exposure to the European market is lower the Chinese market is expected to.
We remained solid with volumes for the 24 to 26 million unit range. This year.
The commercial vehicle market is on an improving trend that started last year.
Larger backlogs and heavy duty or driven by increasing fleet orders in the mid range or lower demand has been driven by the increase in E commerce deliveries.
The medical end market is expected to remain soft in the first half of 'twenty 'twenty, one due to lower elective surgeries, we see good growth in industrial and defense markets.
In terms of guidance for full year 'twenty 'twenty, one we expect sales to be in the range of 430 million to $490 million and adjusted earnings are expected to be in the range of $1 20 to $1 60, we are closely monitoring the impact of COVID-19 supply chain disruptions in the broader level of economic activity.
We expect to narrow the range as the year progresses.
In this more of a remote working environment, we continue to place an emphasis on connecting with our customers.
Monitoring products in development effectively navigating supply chain improvements innovations and importantly, our performance and results driven culture.
Our employees globally continue to provide tremendous support and demonstrate resilience to serve our customers while operating safely I want to thank them for their incredible support this past year.
We are confident in our strategy and are using just endemic period to enhance our foundation strengthen our core business and to advance our technology capabilities are 2025 initiative is focused on four key areas.
10% annualized profitable growth with active portfolio management.
Working more closely with our customers building relationships and aligning our technology and product Roadmaps.
But it's really building the foundation of Cts is operating system.
To execute globally on a consistent basis, while we enhance our continuous improvement capabilities and finally advancing organizational capability for leadership and culture.
Line to our customers' needs our business performance, our core values supporting our communities and environmental priorities at this time Ashish will take us through the financial performance Ashish. Thank you Karen fourth quarter sales for $123 million up 7% compared to last year and up 8%.
Surely.
Sales for transportation customers increased by 12% versus the fourth quarter of 2019.
Sequentially, we were up 17% in sales for transportation customers.
Sales to other end markets were essentially flat year over year, we saw solid growth in sales for both for the industrial and defense end market and.
And softness continued in the medical end market.
Our gross margin was $34 seven per cent for the fourth quarter.
Up 230 basis points compared to last quarter, and up 110 basis points compared to last year adjust.
Adjusted EBITDA in the fourth quarter was 21, 4% up 240 basis points sequentially and up 110 basis points from last year.
Fourth quarter 'twenty 'twenty earnings were 46 cents per diluted share adjusted earnings per diluted share for 43 cents.
Paid for 37 last year and 34 since last quarter.
For full year 'twenty 'twenty sales.
Sales were $424 million down 10 per cent from 2019.
Sales for transportation customers declined, 19% and sales to other end markets increased by 7%.
Industrial and aerospace and defense end market sales experienced double digit growth medical end market was soft with sales down 7%.
Our gross margin was $32 eight per cent for the year.
From 33, 6% last year. The major driver was lower volume attributable to Covid, 19, which was partially offset by temporary and other cost reductions implemented throughout the year.
Our focus is to drive improvement and move towards the higher end of our target range of 34% to 37% gross margin.
In the second half of 'twenty 'twenty region.
We generated five cents of EPS and savings from our restructuring program announced in July 2020.
Foreign currency rates impacted gross margins favorably in 2020 by approximately $3 million.
Based on recent exchange rates currency could impact our 'twenty 'twenty, one gross margins unfavorably by approximately 100 basis points.
SG&A and R&D expenses were $92 $1 billion or 21 seven per cent of sales for the year.
Consistent with prior communication, we expect 2021 operating expenses to be higher as a result of the reinstatement of temporary cost measures.
Our 'twenty 'twenty tax rate was 23, 7%.
We anticipate a 'twenty 'twenty, one tax rate to be in the range of 23% to 25% excluding discrete items.
This is subject to change due to the impact of any changes that may be introduced by the new U S administration.
2020 earnings or a dollar and six cents per diluted share.
<unk> earnings per diluted share for a dollar and talk then.
Compared to a dollar and 45 cents last year.
Now lets discuss the balance sheet and cash flow.
Controllable working capital as a percentage of sales was 15, 5% in the fourth quarter improved slightly from the third quarter. We have made progress over the last couple of quarters, but still have more work to do.
We are balancing improvements in working capital with having some safety stock for minimized.
Its all supply chain disruptions.
Capex was $14 9 million for the full year down from 21 7 million in 2019.
We continue to manage capex carefully given the current environment in 'twenty 'twenty one.
We are expecting capex to be in the range of four to four and a half per cent of sales.
Primary focus being on drugs related projects.
We finished 2020 with a healthy balance sheet and a strong liquidity position, our operating cash flow in the quarter was $26 million for the full year operating cash flow was $77 million compared to $64 million in 2019.
We ended the year with $92 million in cash.
<unk> to $100 million in December 2019.
In the fourth quarter.
Do you start long term debt balance to $55 million for.
From $106 million at the end of the third quarter.
Our debt to capitalization ratio was at 11, 4% at the end of 'twenty 'twenty compared to 19, 7% at the end of 2019 the.
The combination of our strong balance sheet with a net cash position and access to over 240 million through our credit facility gives us the flexibility to appropriately deploy capital.
Award for our strategic objectives.
We are progressing on our SAP implementation as.
As we communicated earlier more than 80% of our revenue comes from sites that are running on S&P. The.
We expect to complete the implementation in the second half of 'twenty 'twenty. One however, COVID-19 related restrictions COVID-19 caused some delays.
This concludes our prepared comments.
Like to open the line for questions at this time.
Thank you if you would like to ask a question. Please signal by pressing star followed by the one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off for a while your signal to reach our equipment.
It's probably on the phone line will indicate when your line is open once again that is star one at this time.
And we'll go first to Justin long from Stephens.
Yeah.
Thanks, and good morning, and congrats on a solid quarter.
Thank you Justin.
And so maybe to start with a question on the 'twenty and 'twenty one guidance I was wondering if you could help us think through day, the cadence on a quarterly basis of revenue and earnings if theres any color you can provide there they're just a lot of swing factors with the macro environment.
Structuring that you've talked about so just curious if you could give us a little bit more color as we think through updating our models.
Yeah, and Justin maybe not on a quarterly basis with just been told him because we guided for the year.
But the way I would look at it is if you look at the lower end of the range, but we're still concerned about some pandemic disruptions, we've seen that a second wave and in the European region.
Fortunately, we havent seen it here, yet, but you were concerned about.
There could be some things there and so far we haven't seen anything.
The second thing is if you get towards the middle of the range you can see good healthy just above single digit or mid single digit growth and obviously, where we're aiming to do with better than that and with organic growth and acquisitions at the higher end.
Other things on our mind or you're hearing in the automotive market, where the shortage on semiconductors, and we've been monitoring that pretty closely and I would say at this point in time, we see that the number of units has gone up for about 650000 vehicles impacted to maybe 850000.
And our impact in the first quarter. So far is minimal it's less than you know maybe a half a billion in revenue. So we've got those things going on in the background and as you can imagine where we're also dealing with some supply chain disruptions you know that's been debit because hurt the supply base and we got to make sure we can carefully navigate.
True that as well.
Yeah.
Okay and thinking about the first quarter, you mentioned you're off to a strong start any kind of directional commentary you can help us out with as we think about first quarter versus the fourth quarter do you think sequentially revenue and in earnings can be flat to up for anything.
That's around that.
Yeah, I would say flat and it could be plus or minus a little bit just depending on how things evolve here in February and March.
Okay very helpful. And then last one for me I wanted to ask about the acquisition pipeline I know you just closed the deal at the end of the year, but.
Any commentary on the level of activity, you're seeing out there that the likelihood that we see another deal here in the near term and is that something thats baked into this forecast.
Yeah.
And.
And what I would say is obviously this is our this one recently with sensor scientific which we really like for its technical skills and capabilities and end markets, especially in the medical and its our second temperature acquisition. So you can tell we've got some strategic plans in this area as we scale the product and to the platform globally.
And our pipeline were active in our pipeline, it's a bit more challenging because of COVID-19, and we're not likely to do a deal without being underground and seeing everything but it's certainly active we've got a strong balance sheet and we want to deploy it for the right fit and the right valuation as well.
Makes sense I'll leave it at that for the time.
Thanks, Justin.
And we'll go next to Karl Ackerman with Cowen.
Yes.
Yes, good morning, gentlemen, hi.
[noise] for my for my first question could you discuss your order bookings on a year over year basis I asked because if you shipped March quarter based on just orders on hand that would imply sales down kind of mid teens.
For your outlook, but could you just comment again on I guess your order momentum heading into the March quarter.
Yeah, I'll start with Ashish do you want to add to it first of all we reported I'm taken at that Youre looking at the new business wins of one O for and that was a little softer than we normally would have and let me tell you that we had several Oems push decisions on the transportation side primary.
We probably had some you know something in the region of $50 million of decisions made and let me, let me kind of out a bit of color on that by saying we're off to a good start in January and we Didnt report and if you look at the new business wins, we didnt reported year over year, because a year ago, we were.
Recording our golf business in backlog, what we have there. So we just wanted to make sure. We're sticking consistently with what we've done in the past, we'd like to get back into the.
And reporting our backlog later this year as we get through the pandemic and things stabilize but we feel we feel pretty good that was a little soft in the fourth quarter, but it's not unusual and we've seen it and I think twice in 2020, where some large Oems in the transportation.
Mark It's just we're slow when making decisions and they are deciding on platforms and what they're going to do we're not at all it's panic about it we feel like we're on a good trend and as I said, we are already off to a good start in January and we just got some really good things working in the pipeline that we're and there are promising for our future as well.
The other thing to keep in mind is the.
The new business awards that you're reporting here not the short term purchase orders.
What you would normally look at a book to Bill type of ratio. These are containing long term contracts that go out two to three years in terms of generating revenue.
And then giving us revenue for the next four to five years beyond that so most of these wins that we are reporting a more longer term in nature. So Ah Ah Ah.
A fluctuation in any given quarter or it.
It doesn't really get us the way, we do want to make sure it stays healthy for the long run.
I appreciate that for my follow up question, you know Asp's are clearly benefiting from some supply chain tightness for discrete basket devices.
You know and several of your component peers have raised prices.
Quite a bit which I think should provide a strong umbrella to use against normalized price declines so in that context.
Well, you've also sort of a higher input costs in your prepared remarks, so I guess in that context. How are these dynamics driving your discussions on both pricing and volume commitments with your customers. Thank you.
And Karl I would say first of all on the ASP side of it with our customers.
Customers were not seeing anything significant in terms of E. S. P erosion that we would've seen in normal years.
And on the supply side of it.
We and this past year in 2020, we've actually raised prices and with a number of different end markets.
And we're also seeing as you pointed out some semiconductor price increases and as they happen there where we don't have the discussions with our with our with our customers to share the long right.
And to your point, we had seen some commodity price increases as well that we are working with our customers.
To walk through that equation.
Thank you.
We'll go next to John <unk> with Sidoti.
Yeah.
Yeah.
Less comments ashish on commodity pricing.
How much are you taking into account for the full year.
It's a completely true and also I think mentioned something about currency could work against you.
So to the tune of 100 basis points.
Is that something that is a near term impact or later in the year.
John the 100 basis points on currency that we talked about it for the full year based on what we have seen recently in the ex.
These rates are the biggest impact is from the appreciation of the Mexican peso.
And Ah.
To a smaller extent, but also important is the.
The Taiwanese daughter, both of those currencies have appreciated quite a bit.
Compared to 'twenty 'twenty averages and that's what you're talking about and the commodity pricing is.
Important but the impact is not quite as losses are the currency impact can be.
And John I'd like to just reinforcing that message that we expect to stay within our gross margin range that we've published out there too.
Okay.
Regarding the guide at the high end is better than you were able to do in 18 and 19.
But it's also pretty much for the run rate of the fourth quarter.
Well I think about the high end of the revenue guidance.
Am I thinking that the current transportation outlook is stable in the balances of the business is stable.
Or are we thinking that maybe there'll be a step down in the transportation market.
Maybe we'll see a pick up in well either Aero and industrial since you indicated the medical's first half what we saw.
So on the way we are looking at it as we have been improving our exposure to industrial defense.
Medical those end markets.
And you know that that will.
<unk> continued to provide.
Our expectation is that they'll continue to provide good momentum into 2021.
And then the range the higher end of the range will be influenced probably more by how the transportation end market performed.
And probably on the low side as well it'll be more influenced by the performance in the transportation end market.
Got it.
And regarding your targeted gross margin.
Could you just talk about the ability of the cheapest when you completed all your.
Cost saving actions.
Our next year.
Let me make sure I understand your question are you asking where the gross margin is expected to be after the completion of the restructuring action.
Yes, Sir.
Hum for the range that we talk about John is the 34 to 37 per cent.
And in my comments I mentioned that we want to get towards the higher end of that range.
And once we get through all the restructuring action that day.
<unk> is getting slightly impacted because of COVID-19.
Good.
Malls delays and stuff, but our goal is to be towards that higher end of that range.
Okay. Thank you for your site you know like we talked about currency commodity some of those things.
Either help us or hurt us depending on how things are going.
Certainly I'm sure Kieran pressing hard on it.
[laughter] squeezing.
[laughter].
And then as a quick reminder, if you'd like to ask a question that is star one at this time.
We'll go next to Santana with Gabelli funds.
Good morning, Huron and losses, and congratulation on strong Q4 performance.
Hey, good thank you Sandy.
Do you want.
As what products are you excited in 'twenty 'twenty, one and then could you also talk about your EV EV exposure in terms of how much exposure you have to pure EV and then how much exposure you have two products that all right.
Our agnostic when we look at your.
Transportation market.
Yeah.
Second one day and.
Yeah, Andy in terms of the year ahead.
The ceramics business has been on a good trend I think if you remember last year, we had some challenges with the foundry, which the team has been making really good progress on it.
We've got a lot more you'll hear me talking about the front end of the business. We've put a lot of emphasis on and you're improving the front end of the business our go to market.
So it's not just the products since our ability to work with the customers and getting new accounts and we've been making changes in the organization and leadership in those areas too and across all of our Cts.
Just one area. So we see some good things happening there. It's good good seeds sown in Aero and defense and when we look at the automotive side of it obviously, we're watching the market side of the equation in terms of the rebound in staying robust we've had a lot of good momentum in passive safety and that's extending into different regions of the war.
We feel good about that short term a little bit longer term and from an accelerator module you with with them the increase in autonomous capabilities of cars, we see the braking system, becoming more electronic and that's something we're working on already but it's unlikely you can have a revenue benefit before 2002.
For 25, so those things are going on the temperature front, we've really been pleased with how we're performing and the acquisition from two years ago had a good growth year last year, continuing to expand into new products for new customers.
And so there were just some of the things that we that we see out there as as we move forward and then to your question on the EV side of it.
I keep referencing I think we said back in 17 and 18, we said our exposure to products going away due to easy was probably in the high single digits and would be fully compensated for a balanced by about 'twenty one 'twenty two.
So we're seeing that as a very very low single digit percentage at this point in time, so not a concern.
Got it and then.
Kieran when we wrap news about like short tastes in automotive semiconductor how should we.
How should we relate that to Cts.
Earlier, you mentioned that C. D S exports Youtube European is less.
Like any any guideposts on how we should think about the supply.
Short dates.
Automotive semiconductor if it's proof while EBIT gets worse.
Okay.
So hendi two things. The first thing is we don't have any surprise ourselves for our products. That's the first thing I'd like to point out. So it's our OEM so as theyre getting the electronics for the semiconductors for the electronic control units and infotainment systems and other things. That's the watch so we've seen things from general Motors.
And we don't have any you've seen things from forward with other any big exposure with Ford and we've said so far in the first quarter, we would see that at this point in time less and you'll have a minion impact. So we haven't seen heavy impact we've seen the number of units impacted from the industry reports Goldman.
About 600000 units to about 850000, and that's something we're tracking lie then.
You may see in the next report before we do but and haven't heard anything we know there's a lot of pressure out there from the Oems and back to the suppliers in Taiwan and other areas to ramp up production and I'm sure. They're they're really focused on that at this point in time.
Okay.
And that's embedded in your 'twenty 'twenty one guidance you indicated that you expect like sell for us in medical market to continue in the first half of 'twenty 'twenty one.
What is your assumption in that guidance for medical market in the second half.
Do you expect like a gradual rebound or do you expect like a solid rebound.
And we would say you know what we've seen in softness so far is and little bit higher than mid single digits and we'd expect that to start flattening out in the second half of the year.
Got it and then a quick.
<unk> for US is a for us is.
Would you be able to share.
T I sales contribution so that we know what kind of growth Q T I S.
Having.
Hendi, we haven't disclosed that but when you look at the run rates are that that acquisition is delivering.
It is.
Strong improvement.
And what really.
We are happy about is that is despite a good portion of their customer base are.
The restaurants, and the food service industry being down last year. So.
That business has done a good job of getting new customers online.
To continue providing the growth momentum and as Kieran pointed out that's what we are looking forward to in 'twenty 'twenty, one as well.
Okay, Yep and Ashish with regards to your tax project do you have any updates.
For Hendi, we completed a big portion of it in 'twenty.
Training and there are some other pieces that we're working on.
The.
Challenge on the tax side is the uncertainty with what we might see in terms of changes in the U S. At this point in time.
But we are watching that very very carefully.
And you know we will talk about it when things become a little bit more clear in terms of what impact it could have on us.
Okay. Thank you for US is thank you Kieran.
Thank you Andy Thanks, Andy.
And that concludes today's question and answer session I would like to turn today's call back over to Mr. O'sullivan for any additional for closing remarks.
Great. Thank you Hanna and thank you all for your participation on today's call. We look forward to updating you again in April besides thank you very much.
And that concludes today's conference. Thank you for your participation you may now disconnect.
Yeah.
Yeah.
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Yeah.
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