Q1 2021 CTS Corp Earnings Call
[music] you are now rejoining the main conference.
Good day and welcome to the Cts Corporation first quarter 2021 earnings call today's conference is being recorded on.
At this time I would like to turn the conference over to Kieran O'sullivan. Please go ahead.
Thank you Olivia good morning, Thank you for joining us today and welcome to Cts is first quarter 2021 conference call sales.
Sales in the first quarter were 128 million up 25% compared to the same period in 2020.
While customer demand has been robust we have been challenged by supply chain disruptions, including the impact of semiconductor and resident shortages.
Shutdowns and increasing logistics costs.
Due to the ongoing COVID-19 pandemic.
We are also seeing increases in raw material pricing, which have been significant in some cases, we expect some of the supply chain challenges to persist through the second quarter with the potential to improve from that point forward.
First quarter gross margin was 33, 2% up 130 basis points from 31, 9%.
In the same period last year.
Our gross margin performance was negatively impacted by the supply chain challenges already mentioned on pricing pressure, which is increasing across several commodities. This year.
EBITDA margin of 20% was up 500 basis points from 15% in the first quarter of 2020.
All our plants are operational and function functioning at approximately 100% capacity. Despite the pandemic challenges impacting our European and Mexican operations.
First quarter adjusted earnings per share of 46.
We're up 142% from 19 in the first quarter of 2020.
New business awards of $156 million were up from $105 million in the same period last year on.
Operating cash flow was $20 million up from $12 million in the first quarter of 2020.
Ashish Agricole, our CFO is with me for today's call and we will 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 the press release issued today and more information can be found in the company's SEC filings with.
For the extent that today's discussion refers to any non-GAAP measures under regulation G. The required explanations and reconciliations are available in the investors section of the Cts website.
I'll now turn the discussion back over to our CEO Kieran O'sullivan. Thank you Ashish and the first quarter, our sales increased to $128 million up 25% from the first quarter of 2020.
Excluding sales from the acquisition of sensor scientific sales were up 23% organically.
Ssi business delivered solid sales growth the quarter's performance was strong despite the many headwinds on our teams performed exceptionally well to deliver this result for <unk>.
Light chain disruptions are expected to continue and remain challenging in the second quarter on.
We anticipate those issues may improve in the second half of the year we.
We expect the semiconductor shortages to impact vehicle volumes in the range of two to 3 million units globally. This year.
Later, Ashish will provide more color on the gross margin challenges, we are navigating and commodity inflation pressures we are facing.
The price inflation in certain areas is impacting our cost basis by more than 20%. We are working with our customers to share the impact.
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 is a priority new business Awards.
We're 156 million for the quarter up from $105 million on the same period last year.
We added five new customers three in industrial and two in communications.
In transportation, we were awarded large wins for accelerated modules with five Asian, Oems and three North American Oems.
In sensors, we secured wins with a north American OEM for three right height sensing applications and wins with two tier one suppliers for passive safety products.
In addition, we were awarded a break sensor break position sensor for a Chinese OEM electric vehicle platform.
Across accelerator modules and sensors, we had five Edie awards in total EV wins as a percentage of total awards were 18% in the first quarter.
Moving to other electronic components, we secured a large win in industrial printing with an existing customer and an extension with other customers.
We also supply initial volumes for an industrial holo lens application.
With potential for approximately $1 million in sales in the next year.
In defense, we received two awards for undersea applications and shipped the first prototypes for next generation textured ceramic and we expect to deliver further samples throughout the year as we enhance product performance.
Additionally, we are developing next generation ceramic formulations for new solar programs.
We continue to make progress on sample qualification with new European customers.
Finally, we were awarded a grant by the office of Naval Research for a multiyear development program.
In communications, we had design wins for RF filters and in order for an antenna application, which will ship in the fourth quarter.
We continue to gain traction with our precision frequency products and niche areas as customers test their modems for <unk> applications.
Moving to medical where we experienced softness in sales in 2020, we now see signs of recovery. We were recently awarded a significant new order for single Crystal technology for a medical ultrasound application and ship samples to a new customer for an intravascular medical ultrasound.
Temperature sensing remains robust and industrial and medical applications. We received a new award for an aviation application, where the first revenue is expected later this year.
Building and strengthening our M&A pipeline continues to be a priority.
With domestic travel expanding in international travel not far behind we expect the improving conditions will help help us to continue to build relationships with companies in line with our strategy.
Our stated goal is to achieve 5% in organic growth on an annual basis.
Seek to expand our range of technologies products customers and geographic reach and at the same time continue to diversify our end market profile and ultimately enhance the future quality of earnings.
Given our strong balance sheet, we seek to make more meaningful progress on our inorganic growth goals, while remaining disciplined in our approach.
On the operations front, we recently went live on <unk>, Zhong Sheng facility, which brings our coverage to over 90% of revenue.
Ashish will provide more commentary later as we can now see the end of the journey and the rollout of this new capability we.
We're very focused on maximizing the return on this capital investment through enhanced training of our teams smarter reporting data analytics and operational efficiencies.
The restructuring plan, we announced last year continues to progress with small delays from the ongoing impact of COVID-19.
We are on track to deliver an annualized EPS improvement of more than 22.
By the second half of 2022.
Transitioning to end markets for the U S light vehicle transportation market.
Outlook for demand has improved from our last call.
We expect approximately 15 to 16 million unit range. This year up from Turkey million units last year.
On hand days of supply of 50 days is below the five year average of 68 days.
European production is forecasted in the 18% to 19 million unit level.
So there may be further softening due to the ongoing lockdowns in that region for our sales exposure is lower.
The Chinese market remained solid with volumes expected in the 24 to 26 million unit range for this year.
The commercial vehicle market remains strong larger class eight backlog remains robust while on the mid range or below continues to demonstrate double digit growth. However supply chain shortages remain challenging and may impact our transportation sales in the second quarter.
The medical end market is expected to continue to improve in the second half of this year.
We see good growth in industrial and defense markets as we navigate some low risk supply chain issues.
In terms of guidance for full year 2021.
We previously communicated we would update the range as we progressed through the year.
Our previous guidance was for sales in the range of $430 million to $490 million and adjusted earnings in the range of $1 20 to $1 60.
We are now updating our guidance for sales to be in the range of 445 million to 500 million on adjusted earnings are expected to be in the range of $1 35 to $1 70.
Further updates will be provided as we gain more clarity on the supply chain disruptions we are facing.
Finally, our focus 2025 initiative is progressing as I look across the four initiatives. We previously communicated progress on talent and growth are central to success across the entire program.
Over the past years, we've continued to improve our ability to execute which we need to maintain phase two of our journey is about layering on a more robust sales growth profile at this time Ashish will take us through the financial performance in more detail Ashish. Thank you Kieran.
First quarter sales were $128 million up.
Up 25% compared to the first quarter of 2020 and up 4% sequentially from the fourth quarter.
Sales to transportation customers increased by 23% year over year, but were down 1% sequentially.
Sales to other end markets increased 27% year over year and were up 13% sequentially.
For solid double digit growth in all end markets, including the medical end market, which has been soft in the last two quarters of 2020.
Our most recent acquisition census, scientific had a strong start and added $1 $8 million in sales in the first quarter.
Our gross margin was 33, 2% for the first quarter up 130 basis points.
<unk> to the first quarter of 2020.
Gross margin is down from 34, 7% level achieved in the fourth quarter due to a challenging supply chain environment, including reduced material availability and cost increases.
Raw material price increases impacted us by approximately $1 6 million with a portion offset by price increases.
We expect a similar trend for the second quarter and are working with our customers today impact.
We have also reinstated most of the temporary cost reduction measures that were put in place in 2020.
In the first quarter of 2021 regenerated three cents of EPS in savings from our restructuring program announced in July 2020, bringing the total savings to eight of EPS profile.
However, some of our projects are facing challenges due to the ongoing impact of COVID-19 on travel as well as an increase in demand.
We are still on track to achieve the targeted annualized savings of 22 to 26.
By the end of 2022.
SG&A and R&D expenses were $24 million.
Or 19% of sales.
Versus $24 2 million or 23% of sales for the same period last year.
First quarter tax rate was 19%.
This improved tax rate is a result of the various projects we have been working on in the last couple of years.
We anticipate our 2021 tax rate to be in the range of 20% to 23% excluding discrete items. This may be impacted by new tax policies and the initiatives of the bite and administration.
First quarter 2021 earnings were <unk> 37 per diluted share.
Adjusted earnings per diluted share for 46.
Compared to <unk> 19 in the same period last year and 43 last quarter.
Now I'll discuss the balance sheet and cash flow.
Our controllable working capital as a percentage of sales was 14, 8% at the end of the first quarter. This is a slight improvement from the end of 2020.
We have made progress over the last few quarters and while we remain focused on working capital efficiency, we anticipate carrying some excess inventory there possible to manage supply chain concerns over the next few quarters.
Our operating cash flow was $20 1 million for the first quarter, which is an improvement from $12 million in the first quarter of 2020.
We achieved $18 5 million in free cash flow cash.
Capex was low in the first quarter, primarily due to the timing of various capex projects in 2021, we expect capex to be in the range of four to four 5% of sales.
Our cash balance on March 31, 2021 was $103 4 million.
Up from $92 million on December 31, 2020.
Our long term debt balance was $50 million.
Down from $55 million on December 31, 20 training our debt to capitalization ratio was 10, 3% at the end of the first quarter compared to 11, 4% at the end of 2020.
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 liquidity to make progress on the right M&A transactions.
In early April we went live on SAP at another large manufacturing location.
Our teams completed the rollout successfully despite many of our resources, having to work remotely which is a significant accomplishment.
As Kieran already mentioned more than 90% of our revenue now comes from sites that are running on SAP.
The remaining sites are from our recent acquisitions in the last several years, we are expecting to complete these rollouts in early 2021, however, COVID-19 related restrictions could cause some delays.
This concludes our prepared comments.
We would like to open the line for questions at this time.
Thank you.
I would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again.
One to ask a question we will pause for just a moment to allow everyone the opportunity to signal.
We will.
I'll take our first question from Justin long with Stephens. Please go ahead.
Thanks, and good morning.
Good morning, Justin.
So I wanted to start with a question on the guidance.
In the first quarter was pretty strong when I look at the EPS. It was reported and what the guidance for the full year implies it suggests sequentially earnings will be down over the remainder of the year.
Can you talk a little bit more about the incremental headwind that youre expecting that are driving that because I mean I get that there's some macro uncertainties out there, but at the same time it feels like we're recovering the vaccine is being distributed and so there's a little surprised to see the guidance, suggesting some sequential.
Pressure.
Yeah, Justin that's a fair question on we understand it.
I think first of all from the COVID-19 perspective, the vaccines out there it's very good in North America, and making a lot of progress, but remember we've got business in China, and Europe, and Mexico operations. So from an operational side, we've got concerns with Mexico, and Europe, and we're just navigating our way.
For that and that will continue to improve and that's why we will continue to adjust as we as we gain confidence through the year. The second wildcard out there is the supply chain and I would tell you on.
On probably spending more and more of my time these days being in expedite or of materials than anything else on helping out situations. There were a few times in the first quarter, where we could have been several million dollars down in sales and then where we ended up and thats because of the great work of the team. So we're actually you can tell from the guidance, we're just being a little cautious.
Because we know as we go into the second quarter and sit here today.
We've got some some big bumps them to overcome on supply chain issues and I'm not going to get into the details of those.
We're working on with our supply chain on that our customers, but some of those or magnitude of billions of dollars and we've been fortunate that our teams have been really well managed really well through that.
And Youll also see we took the up the upper end of the guidance up as well because to your point if things go well, we will do better, but we got to get through the supply chain headwinds.
Okay and as a follow up to that is there a way to quantify what the supply chain headwinds cost in the first quarter and it sounds like the view is that those will continue into the second and then maybe get better. So do you think that the supply chain.
Costs are similar in <unk> versus <unk> do they get worse, just some directional guidance would be helpful.
So Justin.
<unk> talked about $1 6 million impact from.
Raw material costs.
In terms of the inflation pressures, we saw that's relatively easy to identify it as a little bit more on the freight side.
On the harder things to quantify is the impact of you know customers, reducing their capacity because they cannot find other components from other suppliers.
The impact of that becomes a little bit harder to quantify on the business. So to that extent, we expect second quarter to have a similar trend.
And as Kieran mentioned earlier.
Looking for improvements in the second half of the year.
And we just need to watch things very carefully as we go along.
Okay, and lastly, I'd love to just get an update on the acquisition pipeline, if you've seen any changes there year to date and just an update on on valuations that youre seeing in the market today.
Am.
Where it's a big part of our strategy, it's a 10% growth goal in 5% it through an organic acquisitions and it remains in focus we've got a pipeline, we're working and I would tell you we've been out there traveling.
Domestically internationally.
It's an important part of our our growth and progress and we feel good about the pipeline and what we need to continue to work it.
Okay I'll leave it at that thanks, and congrats on the quarter.
Thank you Joseph Bank adjusted.
Thank you next we'll move to Karl Ackerman with Cowen. Please go ahead.
Two questions if I may.
Yes.
Carl can you get closer to the microphone. Please.
Can you hear me.
<unk> had a little bit muffled.
Sales for <unk>.
Our modest right.
For us across the supply chain has spoken about.
Yeah.
I have been restocking inventory where possible.
Robert.
Sure.
Wow.
I'm curious.
<unk>.
Activity.
And on Crossroads.
Across Europe.
Automotive.
On the industrial product line.
Alright.
On the consumer.
Yes.
Hum.
So Carlos I am going to make an attempt to remove the state I think the first part of your question was on our distribution sales, which is pretty small in the concern over inventory buildup there.
We haven't seen any AD signals on the inventory buildup, but we're a little bit cautious there because we don't know.
What's happening.
We know some of our products would go through to contract manufacturers and we don't know what theyre doing after distribution. So it seems to be okay, but we're a little cautious there on the automotive side I would tell you demand is strong the biggest problem on automotive is having parts and making sure you're in good standing to supply.
And meet the forecast and the the rest of the markets industrial medical I would say, we feel we feel good about the second quarter. If you look into the second half of the year.
That's something we're still monitoring is probably the best way I would describe it but we haven't seen inventory buildups yet.
Got it.
As my follow up.
How long.
Jack.
On a year.
Understanding that.
Or.
Hi, Gary.
For us.
Upstream.
Yeah.
All right.
Good morning.
Okay.
Great.
Credit card.
And so on I'm curious.
To the extent you.
May not be able to pass along all of that cost.
Your OEM.
I'm curious.
Yes.
Perhaps.
Monitoring volume.
With that.
Hi, guys. Congrats on any commentary in terms of how you.
Sure.
Just on.
Unable to pass along.
Awesome.
Thank you.
Carl.
If I don't fully address your question. Please ask it again, because your voice was a little bit faint, but I'll give it a shot.
The the question you had was how are we working with our customers in terms of sharing the impact of increased cost for raw materials.
We have been able to price.
But some of it to our customers already there are several customers we are still in discussions with.
You know we are evaluating on auction ranging from.
Permanent price increase to temporary price increase to changes in contracts, how we work for them going forward all of those options are being evaluated.
Our teams are working very closely with our customers we want to make sure that we respect the long term nature of those relationships.
And you.
My expectation is that we will not get 100% recovery, but we should be able to work out good solutions going forward Kieran.
Yes, just to add to that Karl obviously, there's two sides of this equation. One is we're going to have some margin pressure here as we go through the year as Ashish already give us a run rate coming out of the first quarter and the other side with the customers and getting longer contracts or more volumes that we.
We can do that on the electronic component side harder to do it on the transportation side for contracts are pretty fixed.
And the volumes on more dependent on platform lifetime, that's remaining.
Okay.
Thank you hardly be answer your question for Lee.
Yes. Thank you.
Okay. Thank you for that.
Great.
Once again to ask a question you May press star one on your telephone keypad now.
We will move to our next caller.
For Santo with Gabelli funds. Please go ahead.
Barney Huron and losses.
Good morning Hendi.
Kieran and Ashish.
Are we at the volume now where you can talk about some benefit from as AEP or potentially in the coming 2022.
Okay.
For Hendi.
The.
The restructuring program that we initiated in Q3 last year.
Includes a cost savings that are related to efficiencies from the safety project.
We are working on consolidating our back office operation.
And that will generate a portion of the 22 to 26 cents of EPS that we talked about.
And then as we go further long Kieran highlighted a few other things that we're looking at.
Operational efficiencies in our plan.
A bit better data analytics, which will help us with decision, making both from the perspective of how we look at the information available to us and how quickly that information is available to us.
We are looking at those aspects as well that will help drive further improvement.
My my expectation is.
The restructuring related savings, we will achieve by 2022.
But longer term, we should see further improvement.
As we get better at using information coming out of the.
New system.
I see.
And then second question is in ceramic foundry operation what is the current status of yields and operational efficiency.
And Hendi, we talked with out of zone.
Correct last year, we've made a lot of progress and improved its running well and obviously, we never stop looking for improvements, but nothing to be concerned about there.
I see so you are done making the emperor.
Improvement that you.
Intended from last year.
Is that right, yes, the improvements we talked about last year Hendi, we've certainly turned the corner on that.
We're always looking for further improvements just to put it in perspective.
I would say Hendi and all the other participants on the call.
I accidentally said that the SAP implementation will be completed in early 2021 I meant to say early 2022, So just wanted to.
Correct that comment.
Okay. That's helpful. Thank you and then Kieran last question for me.
Any color on like new product development for 2021, Besides the one that you mentioned when you.
Presented a long list of awards.
Yeah Hendi when you look at it on the transportation side, we're looking for new sensors and applications on the EV side of it we were already working on temperature and terminal. The one that's probably the most advanced but is where.
We're working on concepts with customers as E break where youre getting electronic brake on that side of it and then if you move over on the electronic component side, we're getting into new markets on temperature and continue to expand our capability in medical and on the hot and cold side on the temperature for industrial.
New.
Sooner programs that we're working on texture ceramics is something we've started to ship samples to customers and received very good feedback. So we expect that to help us in the towed arrays in Florida raised as we go forward as well as other products too and will enable us to come down.
And some of the price curves in that area EU defense is something that's moving very nicely for us it takes a little bit of time, because these new materials and take time to get qualified but I would tell you. We're working on new products with a few customers over there. So there are just some things on a year, we continue to expand on on the frequencies.
Side, the RF filters, we're getting some good traction on those and.
We're also working on some newer formulations in ceramics because of the nature of lead on those areas that we think won't be something that you'll see in the next year, but it's something important for our future as well. So there are just some of the points I would highlight ending.
Thank you Kieran. Thank you asked is are the best assumed that for you gave the supply chain constrained this year.
Thank you Randy.
Thank you with no further questions in queue. Mr. O'sullivan I will turn the conference back to you for any additional remarks.
Great. Thank you Olivia and thank you all for your participation on today's call and we look forward to updating you again on our progress in July. Thank you against this ends the call.
Thank you and thank you all for your attention. This does conclude today's conference you may now disconnect.
Okay.
[music].
Yeah.
[music].
Okay.
Okay.
[music].
[music].
Good day and welcome to the Cts Corporation first quarter 2021 earnings call.
<unk> conference is being recorded on.
At this time I would like to turn the conference over to Kieran O'sullivan. Please go ahead.
Thank you for Lithia. Good morning, Thank you for joining us today and welcome to Cts is first quarter 2021 conference call sales.
Sales in the first quarter were 128 million.
25% compared to the same period in 2020.
Well on customer demand has been robust we have been challenged by supply chain disruptions, including the impact of semiconductor and resident shortages.
Shutdowns and increasing logistics costs.
Due to the ongoing COVID-19 pandemic.
We are also seeing increases in raw material pricing, which have been significant in some cases, we expect some of the supply chain challenges to persist through the second quarter with the potential to improve from that point forward.
First quarter gross margin was 33, 2% up 130 basis points from 31, 9%.
In the same period last year.
Our gross margin performance was negatively impacted by the supply chain challenges as already mentioned on pricing pressure, which is increasing across several commodities. This year.
EBITDA margin of 20% was up 500 basis points from 15% in the first quarter of 2020.
All our plants are operational and function functioning at approximately 100% capacity. Despite the pandemic challenges impacting our European on Mexican operations.
First quarter adjusted earnings per share up 46.
We're up 142% from 19 in the first quarter of 2020.
New business awards of $156 million were off on $105 million in the same period last year on.
Operating cash flow was $20 million up from $12 million in the first quarter of 2020.
Ashish Agricole, our CFO is with me for today's call and we will 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 on the forward looking statements.
Additional information regarding these risks and uncertainties is contained in the press release issued today and more information can be found in the company's SEC filings with.
For the extent that today's discussion refers to any non-GAAP measures under regulation G. The required explanations and reconciliations are available in the investors section of the Cts website.
I'll now turn the discussion back over to our CEO Kieran O'sullivan. Thank you Ashish and the first quarter, our sales increased to 128 million up 25% from the first quarter of 2020.
Excluding sales from the acquisition of sensor scientific sales were up 23% organically.
Ssi business delivered solid sales growth the quarter's performance was strong despite the many headwinds on our teams performed exceptionally well for delivered this result.
Light chain disruptions are expected to continue and remained challenging in the second quarter. Although we anticipate those issues may improve in the second half of the year.
We expect the semiconductor shortages to impact vehicle volumes in the range of two to 3 million units globally. This year.
Later, Ashish will provide more color on the gross margin challenges, we are navigating and commodity inflation pressures we are facing.
The price inflation in certain areas is impacting our cost basis by more than 20%. We are working with our customers to share the impact.
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.
We're $156 million for the quarter.
Up from $105 million in the same period last year.
We added five new customers three in industrial and two in communications.
In transportation, we were awarded large wins for accelerated modules with five Asian, Oems and three North American Oems.
In sensors, we secured wins with a north American OEM for three right height sensing applications and wins with two tier one suppliers for passive safety products.
In addition, we were awarded a break sensor a break position sensor for a Chinese OEM electric vehicle platform.
Across accelerator modules and sensors, we had five Edie awards in total EV wins as a percentage of total awards were 18% in the first quarter.
Moving to other electronic components, we secured a large win in industrial printing with an existing customer and an extension with other customers.
We also supplied initial volumes for an industrial holo lens application with potential for approximately $1 billion in sales in the next year.
In defense, we received two awards for undersea applications and shipped the first prototypes for next generation textured ceramic and we expect to deliver further samples throughout the year as we enhance product performance.
Additionally, we are developing next generation ceramic formulations for new solar programs.
We continue to make progress on sample qualification with new European customers.
Finally, we were awarded a grant by the office of Naval Research for a multiyear development program.
In communications, we had design wins for RF filters and in order for antenna application, which will ship in the fourth quarter.
We continue to gain traction with our precision frequency products and niche areas as customers test their modems for <unk> applications.
Moving to medical where we experienced softness in sales in 2020, we now see signs of recovery. We were recently awarded a significant new order for single Crystal technology for a medical ultrasound application and ship samples to a new customer for an intra vascular medical ultrasound.
Temperature sensing remains robust and industrial and medical applications. We received a new award for an aviation application with first revenue is expected later this year.
Building and strengthening our M&A pipeline continues to be a priority.
With domestic travel expanding on international travel not far behind we expect the improving conditions will help help us to continue to build relationships with companies in line with our strategy.
Our stated goal is to achieve 5% organic growth on an annual basis.
Seek to expand our range of technologies products customers and geographic reach and at the same time continue to diversify our end market profile and ultimately enhance the future quality of earnings.
Given our strong balance sheet, we seek to make more meaningful progress progress on our inorganic growth goals, while remaining disciplined in our approach.
On the operations front, we recently went live on S&P at our zone channel facility, which brings our coverage to over 90% of revenue.
Ashish will provide more commentary later as we can now see the end of the journey and the rollout of this new capability we.
We're very focused on maximizing the return on this capital investment through enhanced training of our teams smarter reporting data analytics and operational efficiencies.
The restructuring plan, we announced last year continues to progress with small delays from the ongoing impact of COVID-19.
We are on track to deliver an annualized EPS improvement of more than 22.
By the second half of 2022.
Transitioning to end markets for the U S light vehicle transportation market.
Outlook for demand has improved from our last call.
We expect approximately a 15% to 16 million unit range. This year up from Turkey million units last year.
On hand days of supply at 50 days is below the five year average of 68 days.
European production is forecasted in the 18 to 19 million unit level.
So there may be further softening due to the ongoing lockdowns in that region for our sales exposure is lower than.
The Chinese market remained solid with volumes expected in the 24 to 26 million unit range for this year.
The commercial vehicle market remains strong larger class eight backlog remains robust while the mid range and below continues to demonstrate double digit growth. However supply chain shortages remain challenging and may impact our transportation sales in the second quarter.
The medical end market is expected to continue to improve in the second half of this year.
We see good growth in industrial and defense markets as we navigate some lower risk supply chain issues.
In terms of guidance for full year 2021.
We previously communicated we would update the range as we progress through the year.
Our previous guidance was for sales in the range of $430 million to $490 million and adjusted earnings in the range of $1 20 to $1 60.
We are now updating our guidance for sales to be on the range of 445 million to 500 million on adjusted earnings are expected to be in the range of $1 35 to $1 70.
Further updates will be provided as we gain more clarity on the supply chain disruptions we are facing.
Finally, our focus 2025 initiative is progressing as I look across the four initiatives. We previously communicated progress on talent and growth are central to success across the entire program.
Over the past years, we've continued to improve our ability to execute which we need to maintain phase two of our journey is about layering on a more robust sales growth profile at this time Ashish will take us through the financial performance in more detail Ashish. Thank you Kieran.
First quarter sales were $128 million up 25% compared for the first quarter of 2020 and up 4% sequentially from the fourth quarter.
Sales and transportation customers increased by 23% year over year, but were down 1% sequentially.
Sales to other end markets increased 27% year over year and were up 13% sequentially.
For a solid double digit growth in all end markets, including the medical end market, which has been soft in the last two quarters of 2020.
Our most recent acquisition incentive scientific had a strong start and added $1 $8 million in sales in the first quarter.
Our gross margin was 33, 2% for the first quarter up 130 basis points.
Impaired to the first quarter of 2020.
Gross margin is down from 34, 7% level achieved in the fourth quarter due to a challenging supply chain environment, including reduced material availability and cost increases.
Raw material price increases impacted us by approximately $1 6 million with the ocean offset by price increases.
We expect a similar trend for the second quarter and are working with our customers to day impact.
We have also reinstated most of the temporary cost reduction measures that were put in place in 2020.
In the first quarter of 2021 regenerated three of EPS in savings from our restructuring program announced in July 2020, bringing the total savings to eight of EPS profile.
However, some of our projects are facing challenges due to the ongoing impact of COVID-19 on travel as well as an increase in demand.
We are still on track to achieve the targeted annualized savings of 22 to 26.
By the end of 2022.
SG&A and R&D expenses were $24 million.
Or 19% of sales.
For the $24 2 million or 23% of sales for the same period last year.
First quarter tax rate was 19%. This improved tax rate is a result of the various projects. We have been working on in the last couple of years.
We anticipate our 2021 tax rate to be in the range of 20% to 23% excluding discrete items. This may be impacted by new tax policies and these initiatives of the Biden administration.
First quarter 2021 earnings were <unk> 37 per diluted share.
Adjusted earnings per diluted share for 46.
Compared to <unk> 19 in the same period last year and 43 last quarter.
Now I'll discuss the balance sheet and cash flow.
Controllable working capital as a percentage of sales was 14, 8% at the end of the first quarter. This is a slight improvement from the end of 'twenty 'twenty.
We have made progress over the last few quarters and while we remain focused on working capital efficiency, we anticipate carrying some excess inventory there possible to manage supply chain concerns over the next few quarters.
Our operating cash flow was $20 1 million for the first quarter, which is an improvement from $12 million in the first quarter of 2020.
We achieved $18 5 million in free cash flow cash.
Capex was low in the first quarter, primarily due to the timing on various capex projects in 2021, we expect capex to be in the range of four to four 5% of sales.
Our cash balance on March 31, 2021 was $103 4 million.
Up from $92 million on December 31, 2020.
Our long term debt balance was $50 million.
Down from $55 million on December $31, 20 training our debt to capitalization ratio was 10, 3% at the end of the first quarter compared to 11, 4% at the end of 2020.
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 liquidity to make progress on the right M&A transactions.
In early April we went live on SAP at another large manufacturing location.
Our teams completed the rollout successfully despite many of our resources, having to work remotely which is a significant accomplishment.
As Kieran already mentioned more than 90% of our revenue now comes on sites that are running on SAP.
The remaining sites are from our recent acquisitions in the last several years, we are expecting to complete the rollout in early 2021, however, COVID-19 related restrictions could cause some delays.
This concludes our prepared comments.
We would like to open the line for questions at this time.
Thank you.
I would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again.
One to ask a question we will pause for just a moment to allow everyone the opportunity to signal.
We will.
Our first question from Justin long with Stephens. Please go ahead.
Thanks, and good morning.
Good morning, Justin.
So I wanted to start with a question on the guidance.
In the first quarter was pretty strong when I look at the EPS. It was reported and what the guidance for the full year implies it suggests.
<unk> earnings will be down over the remainder of the year.
Can you talk a little bit more about the incremental headwind that youre expecting that are driving that because I mean I get that there's some macro uncertainties out there, but at the same time it feels like we're recovering the vaccine is being distributed and so there's a little surprise to see the guidance, suggesting some sequential.
Pressure.
Yes, Justin it's a fair question on we understand it.
First of all from the COVID-19 perspective, the vaccines out there it's very good in North America, making a lot of progress, but remember we've got business in China, and Europe, and Mexico operations. So from an operational side, we've got concerns with Mexico, and Europe, and we're just navigating our way through that.
Net and doesn't continue to improve and Thats why we will continue to adjust as we as we gain confidence through the year for second wildcard out there is the supply chain and then I would tell you.
I am probably spending more more of my time these days being in expediter of materials than anything else and helping out situations. There were a few times in the first quarter, where we could have been several million dollars down in sales than where we ended up and thats because of the great work of the team. So we're actually you can tell us on the guidance for just being a little cautious.
Because we know as we go into the second quarter and sit here today.
We've got some some big bumps them to overcome on supply chain issues and I'm not going to get into the details of those.
We're working on with our supply chain on that our customers, but some of those or magnitude of billions of dollars and we've been fortunate that our teams have been really well managed really well through that.
And you'll also see we took the up the upper end of the guidance up as well because to your point if things go well, we will do better, but we got to get through the supply chain headwinds.
Okay and as a follow up to that is there a way to quantify what the supply chain headwinds cost in the first quarter and it sounds like the view is that those will continue into the second and then maybe get better. So do you think that the supply chain.
Costs are similar in <unk> versus <unk> do they get worse, just some directional guidance would be helpful.
So Justin.
You talked about $1 6 million impact from.
Raw material costs.
In terms of the inflation pressures, we saw that's relatively easy to identify it as a little bit more on the freight side.
On the harder things to quantify is the impact of.
Customers, reducing their capacity because they cannot find other components from other suppliers.
The impact of that becomes a little bit harder to quantify on the business. So to that extent, we expect second quarter to have a similar trend.
And as Kieran mentioned earlier.
We are looking for improvements in the second half of the year.
And we just need to watch things very carefully as we go along.
Okay, and lastly, I'd love to just get an update on the acquisition pipeline, if you've seen any changes there year to date and just an update on on valuations that youre seeing in the market today.
And.
We're it's a big part of our strategy with a 10% growth goal on 5% it through an organic acquisitions and it remains in focus we've got a pipeline we're working.
I'll tell you we've been out there traveling.
Domestically internationally.
It's an important part of our our growth progress and we feel good about the pipeline and what we need to continue to work it.
Okay I'll leave it at that thanks, and congrats on the quarter.
Thank you Joseph Bank adjusted.
Thank you next we'll move to Karl Ackerman with Cowen. Please go ahead.
Two questions if I may.
Carl can you get closer to the microphone. Please.
Can you hear me.
You've always had a little bit muffled.
Sure.
Sure.
Alright.
For us across the supply chain has spoken about.
Retailer.
Inventory where possible.
In order to revert.
Supplies for second.
I'm curious if you are seeing.
Activity.
It all on Crawford.
Across Europe.
Automotive.
On the industrial product line.
Alright.
On the consumer.
Go ahead.
Got it.
So Carla I'm going to make an attempt to be relentless phase I think the first part of your question was on our distribution sales, which is pretty small in the concern over inventory buildup there.
We haven't seen any signals on the inventory buildup, but we're a little bit cautious there because we don't know.
What's happening.
Yes, some of our products would go through to contract manufacturers and we don't know what theyre doing after distribution. So it seems to be okay, but we're a little cautious there on the automotive side I would tell you demand is strong the biggest problem on automotive is having parts and making sure youre in good standing to supply.
And meet the forecast and the the rest of the markets industrial medical I would say, we feel we feel good about the second quarter. If you look into the second half of the year.
It's something we're still monitoring is probably the best way to describe it but we haven't seen inventory buildups yet.
Got it.
As my follow up.
How are you.
Jack.
On a year.
Understanding that.
Or.
Hi, Gary.
For us.
Yeah.
That's great.
Hi.
On them.
Occupancy standpoint.
On a.
Okay.
Rising freight cost and elevated credit costs.
So I'm curious.
For the extent.
May not be able to pass along.
Of that cost.
Some of your OEM.
I'm curious.
If you've been able to do.
And for now.
Yes.
Monitoring volume.
With them.
Perhaps on the.
Any commentary in terms of how you are working with.
Largest oems.
As long.
Brian.
Thank you.
Carl if I don't fully addressed your question. Please ask it again, because your voice was a little bit faint, but I'll give it a shot.
The question you had was how are we working with our customers in terms of sharing the impact of increased cost for raw materials.
We have been able to price.
Some of it to our customers already there are several customers we are still in discussions with.
We are evaluating on auction ranging from.
Permanent price increase to temporary price increase to changes in contracts, how we work with them going forward all of those options are being evaluated and our teams are working very closely with our customers. We want to make sure that we respect the long term nature of those relationships.
<unk>.
My expectation is that we will not get 100% recovery, but we should be able to work out good solutions going forward.
Yes, just to add to that Karl obviously, there's two sides of this equation. One is we're going to have some margin pressure here as we go through the year and Ashish already get a run rate coming out of the first quarter and the other side with the customers and getting longer contracts or more volumes.
We can do that on the electronic component side harder to do it on the transportation side for contracts are pretty fixed.
And the volumes on more dependent on platform lifetime, that's remaining film.
Okay.
Thank you piloted the answer your question for Lee.
Yes. Thank you.
Okay. Thank you for Greg.
Great.
Once again to ask a question you May press star one on your telephone keypad now.
We will move to our next caller.
Hamid Disanto with Gabelli funds. Please go ahead.
Good morning, Ron on Rcs.
Good morning Hendi.
Kieran and Ashish.
Are we at a point now where you can talk about some benefit from as AEP or potentially in the coming 2022.
Yes.
For Hendi.
The restructure.
The restructuring program that we initiated in Q3 last year.
Includes a cost savings that are related to efficiencies from the SAP <unk> project.
We are working on consolidating our back office operation.
And that will generate a portion of the 22 to 26 of EPS that we talked about.
And then as we go further long Kieran highlighted a few other things that we're looking at.
Operational efficiencies in our plan.
Better data analytics, which can help us with decision, making both from the perspective of how we look at the information available to us and how quickly that information is available to us.
We are looking at those aspects as well that will help drive further improvements.
My my expectation is.
The restructuring related savings, we will achieve by 2022.
But longer term, we should see further improvement.
As we get better at using information coming out of the.
New system.
I see.
And then second question in ceramic foundry operation what is the current status of yields and operational efficiency.
Andy that we talked about that is you are correct last year, we've made a lot of progress and improved its running well and obviously, we never stop looking for improvements, but nothing to be concerned about there.
I see so you are done making the improve.
Improvement that you.
Intended from last year.
Is that right, yes, the improvements we talked about last year Hendi certainly turned the corner on that but we're always looking for further improvements just to put it in perspective.
I would say hendi and on the other participants on the call.
I accidentally said that the SAP implementation will be completed in early 2021 I meant to say early 2022, So just wanted to.
Correct that comment.
Okay. That's helpful. Thank you and then Kieran last question for me.
Any color on like new product development for 2021, Besides the one that you mentioned when you.
Presented a long list of awards.
Yes, Hendi when you look at it on the transportation side, we're looking for new sensors and to add applications on the EV side of it we were already working on temperature and terminal. The one that's probably the most advanced but is where.
We're working on concepts with customers as E break where youre getting electronic brake on that side of it and then if you move over on the electronic component side, we're getting into new markets on temperature and continue to expand our capability in medical and on the hot and cold side on the temperature for industrial.
New.
Sooner programs that we're working on texture ceramics for something we've started to ship samples to customers and received very good feedback. So we expect that to help us in the total raised on forward to raise as we go forward as well as other products too and will enable us to come down.
Some of the price curves in that area EU defense is something that's moving very nicely for us it takes a little bit of time because.