Q2 2019 Earnings Call
Welcome to the Vivek Conference Center next available conference specialist will be with momentarily.
Welcome to the Vivek comfort.
Conference Center, which conference calling in for.
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Okay Adrienne Holden.
Balance of 2019 gives us confidence in our continued ability to significantly outperform the automotive market.
Also we saw strong double digit growth in medical as a result of growth from many of our existing products such as blankets role as well as the addition of steeler products to our portfolio.
Next we continued to make significant progress on our focused growth and margin expansion activities and are seeing positive results in both our gross margin and operating expenses.
As I shared with you on last quarter's call. We have turned our fit for growth cost reduction efforts towards gross margin expansion.
On top of this our teams took rapid operating actions to adjust our cost structure to the declining market.
These actions allowed us to achieve a 100 basis point improvement year over year and gross margin in the second quarter.
There are still significant opportunities ahead, as we finalize our plan to improve our manufacturing productivity and rationalize our global footprint.
Additionally, operating expenses declined 14% year over year in the quarter.
This improvement was achieved even as we increased our R&D investment in future product technologies, such as climate sense VTM and medical.
While we work through the current external challenges we're focused on those factors that we can control to help mitigate the impact of those we can't.
We achieved adjusted EBITDA margin rate of over 14% year to date in our core business.
My tail will provide more details about our financial results in a few minutes.
Finally, we repurchased approximately $25 million of our shares during the second quarter and continue to repurchase more in July pursuant to a tenbfive one plan.
As of this week, we've repurchased a total of $190 million in share since launching our share repurchase program and we have 110 million left in our authorization.
We recognize the value of our shares and we'll continue to evaluate and opportunistically deploy capital towards share repurchases.
Depending on market conditions.
Now, let's turn to slide five.
The strong execution by our automotive team continued in the second quarter with launches of systems on 20 different vehicles across a lemon Oems.
This included the key account three land Rover defender Subaru legacy Ford Ranger.
VW to Ron Gulf, Antiguan and F.A.W. Paunchy.
We are seeing continued momentum for our Ccs product and launch with Oems such as Sai C F VW in China and on Keith.
During the quarter, we launched our proprietary multi function intelligent positioning system memory module on the Ford explorer and Lincoln aviator.
This technology uses sophisticated algorithms to control both seat movement and memory position functions as well as the climate features in the seat.
In addition, we continued to make progress on climate sense with a new development project with a luxury German automaker and two follow on development projects with the U.S. automaker.
Now on to slide six where you can see that we're continuing to win new business at a pace that bodes well for our promising future.
In the second quarter, we secured $260 million and New program awards across 23 different customers.
Bringing us to $2.2 billion in cumulative New program awards over the past six quarters.
We won multiple Ccs awards, including platform wins with the Jeep Compass BMW seven series, Buick enclave and Chevrolet traverse.
Let me talk about specifically the BMW seven series.
This award is the Companys first ever Ccs active win with a German luxury OEM.
We believe this wind supports our view that Ccs active provides truly differentiated occupant comfort and system performance.
We also received steering wheel heater awards across 15, Oems, including the GMC, Sierra Chevy Silverado, Volkswagen I'd lounge.
Jeep Grand Cherokee and Wag and Grand Wagoneer.
The Opel Adam X and a leading north American electric vehicle company.
On the battery thermal management front, we continued to make progress in expanding our business winning an air cooling award with the plug in hybrid SGN Buick GL eight in China.
As we announced on our last earnings call. The addition of battery heating to our portfolio of thermal electric and air cooling GTM technologies positions us well to achieve our growth aspirations for this product portfolio.
I'm also very excited to share that we've recently added a new customer to our portfolio.
We won an award with Renault for seat heaters and electronic control units on multiple vehicles. These programs will start shipping in 2021.
Our customer business unit leaders are making significant contributions to existing customers and landing new important Oems.
Now, let's turn to slide seven for a discussion on our industrial segment.
Engender medical revenue in the second quarter grew almost 31% over the second quarter of 2018 and more than 20% over the first quarter of 2019.
Significant portion of this growth was the result of our Steeler acquisition, which delivered ahead of our expectations.
Steelers resistive warming products are further strengthening our operating room patient normal thermal portfolio.
Additionally, we saw continued strong growth in blankets Raul.
Our liquid based patient thermal management solution, particularly in Asia.
We received initial orders for the use of the trio, our new cardiovascular heat cool system with integrated disinfection technology.
This innovative device has allowed us to tap into new segments in Europe and other international markets.
To summarize the global automotive industry and the macro macroeconomic environment continues to present challenges. However, I'm very pleased with the team's ability to deliver improved gross margin rate and reduced operating expenses.
We continue to take proactive steps to help mitigate the challenges. We currently face as we work towards our longer term objectives for focus growth.
I remain proud of the hard work and commitment of the talented global Gen therm team to deliver on our plans.
With that I will turn the call over to retail for a little more color on the financial results.
Thank you Phil and thank you to everyone joining the call today.
So we'll start now on slide eight and focus on the items that most significantly impacted our second quarter results.
So while not shown on slide eight there is a table in the earnings release, which shows the breakdown of segment revenues for your reference.
So now for the quarter product revenues declined by 8.7% compared to the same period of last year.
While we outpaced the market in the automotive segment, where our revenues declined 5.5% actually 3% if we exclude the impact of foreign exchange.
The industrial segment declined by more than 40%, primarily due to the disposition of the CZ industrial chamber business.
If we exclude the assets held for sale and the impact of FX, our overall revenue declined by 1.9%.
The 3% year over year decline in automotive was the result of a significant headwinds in the global vehicle production.
However, we outperform our key markets again in the second quarter.
According to chase latest data global light vehicle production in the second quarter declined 8% year over year, and approximately 400 basis points below their meat April forecast.
Our automotive business outpaced the market as a result of the continued strength in the Ccs product line.
Where revenue was nearly flat year over year, excluding the impact of FX, despite the market headwinds.
Additionally, revenue in BTM increased almost 23% compared to the same period of last year.
Primarily due to the pace award winning BTM solution that we discussed during last quarter.
This revenue increase was offset by declining seat heaters and stealing wheel heaters.
Seaters revenue declined by 8% primarily due to the continued decline in Volkswagen sales in China.
As well as our conscious decision to walk away from low margin business.
Seating wheel heater sales decline almost 9% due to the lower vehicle production.
Additionally.
Automotive cables declined 13% due to the continued decreasing orders from a large tier one customers in Germany.
And finally electronics revenue was down 28%, primarily due to the continued slowdown in the RV industry.
If we move to why industrial.
Industrial revenue declined 41% compared to the second quarter of last year.
The decline in revenue was primarily due to the absence of revenue from the CSC industrial Chamber business, which as you know we'll sold in February .
As well as the lower sales coming from GP team, which has been classified as held for sale.
Conversely, we saw continued strength in medical where revenues increased almost 31% year over year due to the Seaton acquisition that we closed in the first quarter.
As well as the higher blankets wholesales.
If we exclude the suite of products acquisition medical revenues increased almost 9% compared to the second quarter of last year.
If we move to <unk>.
The gross margin.
Gross margin for the second quarter was 29.9%, which is an increase of 100 basis points compared to the year ago quarter.
And our gross margin also improved sequentially by 70 basis points compared to the first quarter of 2019.
The year over year, increasing the gross margin was primarily driven by supplier cost reductions, which more than offset the annual customer price decreases in the quarter.
As well as higher labor productivity, and our factories lower premium freight and savings coming from our fit for growth initiatives.
These improvements were partially offset by the negative impact of Paris lower margin in BTM associated with the launch phase lower new actively cool technology program.
As well as the negative fixed cost leverage from the lower unit volume and higher wages.
Just to add a little more color.
The labor productivity in the quarter was achieved by right sizing our factories to the lower volume.
As I referenced manufacturing headcount decreased by approximately 12% since the beginning of the year.
Additionally.
Better efficiencies allowed us to minimize premium freight compared to last year, particularly out of our factories in Mexico.
On Paris.
While we were able to mitigate some of the impact as a result of the efforts from our sourcing team.
The net negative impacting the quarter was approximately $800000, which is pretty much in line, we what we experienced in the prior quarters.
The 70 basis point sequential improvement in gross margin was primarily driven by improved labor efficiencies in our plants.
As well as the rapid cost adjustments in response to the lower customer demand.
If we move to operating expenses.
Operating expenses in the quarter were $52.7 million.
Now this amount included $1.2 million of restructuring charges, mostly related to the factory right sizing that I mentioned earlier.
If we adjust for the restructuring charges in both periods.
And this quarters acquisition expense will put anything expenses were $51.1 million down from $55.3 million in the second quarter of last year.
This year over year decline of 8% was primarily driven by the impact of the fleet for growth cost reduction initiatives.
As well as the sales with the CZ industrial chamber business, partially offset by higher SGN a medical.
Also during the quarter as we continuously evaluate the fair value of our assets held for sale.
We recorded a 9.9 million impairment charge related to JBT.
Adjusting for the non deductable impact of this impairment charge the effective tax rate in the quarter was 30.5%.
For the first six months of 2019.
Adjusting for the $20 million impairment charges related to the GPP business, which we have recorded in the first and the second quarter's effective tax rate was 28.3%.
Finally, our adjusted EPS in the quarter was 47 cents a share compared to 58 cents a share in the second quarter of last year.
If we move to slide nine on the balance sheet.
Our cash position in the quarter was $36.2 million, including two and a half million over to stick the cash coming from the disposition of CZ industrial chamber.
Our cash position decreased sequentially by $5.1 million in the quarter.
We generated 33.5 million in cash from operating activities.
Compared to $27 million in the year ago quarter.
And also year to date, we generated $40.4 million in cash from operating activities compared to $32.5 million last year.
In the quarter, we had approximately 25 million of cash outlay for our share repurchase program.
And the 15 million cash outlay related to the acquisition of this dealer business.
As a result, our net debt increased by $12 million from $59 million at the end of the first quarter of 2019 to 71 million at the end of the second quarter.
As of June 30, the total debt stands at approximately hands of 7 million.
Additionally, during the quarter, we also announced that we amended our credit agreement.
This amended agreement provides genter with a new 475 million secured revolving credit facility.
We will provide the company with ample liquidity in an uncertain macroeconomic environment as well as lower interest rates.
As a result of the new credit facility, our revolving line of credit availability at the end of June stands at approximately $380 million.
If we turn to slide 10, I will walk you through guidance.
So based on our second quarter results.
And the challenging macroeconomic environment, we are reducing our 2018 guidance for revenue.
We now expect revenue growth to be flat to up 2% year over year for our core business, excluding the impact of foreign exchange.
Compared to our prior guidance of 4% to 6% growth.
As a result of our continued progress on cost reduction activities. We are tightening the gross margin range to be between 29, and 30% and maintaining the adjusted EBITDA rate of 14% to 15% in spite of the revenue decline.
With respect to our long term outlook as you have seen in recent quarters that have been significant adverse changes in the automotive industry outlook for future years.
Due to these challenging and volatile order environment as well as the continued macro economic uncertainty.
We believe it is appropriate to seize providing quarterly updates to our 2021 outlook.
We will be completing our annual planning cycle in the upcoming month, and we will be prepared to provide an updated longer term outlook in early 2020.
With that said.
I will also note that based on our recent financial performance and the volatile market conditions, we believe that our cumulative free cash flow from 2018 to 2021 will be reduced from our aspirational goal of $550 million, which we shared back in June of 2018.
So in summary, while we still have work to do to further improve our margins. We are pleased with the progress that we've made to date.
I would say that our most importantly, our ability to proactively improve our cost structure has proven beneficial, especially in light of the rapidly changing market conditions.
And with that I will turn the call back to lexi to beginning the QNX session.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Your first question comes from Chris Van Horn with FBR.
Please go ahead.
Good morning, Thanks for taking my call.
Hey, Chris Good morning, good morning.
I guess can we just get into the guidance, maybe some of the puts and takes that you're seeing and in terms of reducing.
The revenue guide and how you get from.
What causes zero versus 2% is that just.
You know the cadence of your launches and then a similar kind of question on the gross margin because obviously, that's coming up a little bit on the bottom and are you just seeing from something from a mix perspective or is fit for growth just progressing quicker and better than you thought thanks.
Hi, good questions, Chris I'll start with the revenue side.
Looking back at the when we put the guidance together.
We originally assumed flat I just growth for the year and now it's based on the latest Hs.
Market estimates, it's down 4% compared to last year. So that's that's obviously an indicator of what's happening in the space and if you just compare.
That that number versus what we expected at the beginning of the quarter back in mid April it's a full 300 basis points degradation for full year 2019, So obviously market the market is driving the bulk of.
Our downward trend there and there are a couple of unique issues that were dealing within the business I think you've heard over the last couple of quarters that we continue to struggle in our non automotive electronics business.
Especially really related to RV and consumer and industrial.
Products.
That's something that's that's been moving.
Kind of in the wrong direction, and certainly our cable business as well.
And were heavy weighted on one customer there and that that.
That outlook continues to look pretty difficult and the remainder arraignment remaining part of the year.
And then finally.
A couple of our high volume cars are experiencing some mix challenges and we referred to this in the last quarter as some roll off issues, but these are new vehicle transitions that are happening.
Where I will just give you an example.
The old vehicle that is phasing out.
This customer has decided to kind of stripped down the option. So it's running at very very low take rate on Ccs and the new car launching is running as expected very nice take rate, but when you blend the two volumes.
Our Ccs take rate overall in that vehicle is less than we expected. So we've got two or three of those examples that kind of provide other unique challenges for us certainly happened in Q2, and we expect that also in Q3.
With that.
Getting to your gross margin question.
The bulk of our confidence in achieving gross margin is is related to.
Our own cost improvements.
The mix is a part of that as we've mentioned we've.
We rolled off a couple of vehicles that we chose not to go after.
With some customers do too.
Low pricing low margin, but most of it is.
Accelerated cost management.
Let me hit on that note. Let me talk quickly about 2021 as you noted we found it appropriate to delay our update until early 2020 and.
I think this is this is prudent given the volatility and uncertainty in the market just to give an indication on the 2021 numbers.
Compared to the overall vehicle production, we were expecting when we put out the 2021 outlook in June of 2018.
We've seen a 10% reduction in overall vehicle production in 2021.
That compares to mid April .
The difference was only 5% so just in a quarter weve seen a five point drop in that situation.
So that gives you a little bit of a reason why we found it.
Made a lot of sense to complete our detailed annual planning and then.
Kind of give an update in early 2020.
So that said, we're very pleased with our execution in the business. We are steadily outperforming to market and we expect to continue that significant outperformance.
And we're ahead of plan on gross margin and cost management. So we have good line of sight to achieve our cost profit and return outlook for 2021.
Okay. Great. Thanks. Thank you for all that color that makes a lot of sense.
I just wanted to.
Ask you about the the climate sense bullet that you have on slide five.
You mentioned, new and follow on development projects could you give us a little more color there just in terms of.
Is it are you progressing quicker than you thought because it seems like.
Every time, we talk during the quarter it seems like more and more climate sense opportunities are arising and then maybe any update on timing of of potential awards or the product rollout.
Sure.
Yes first of all let me talk about the follow on Theres a couple of follow on development projects with the U.S. OEM that we announced previously.
We completed the first phase of that development project and we had some very specific targets in terms of.
Climate comfort performance and.
The efficiency power efficiency gains.
Especially related to range extension on this easy that we were working on that was very successful and as a result that extended into two more very specific development platform. So we're with that OEM, we're really optimistic and excited about the progress that's that's continuing.
The other one is with the with a.
European OEM.
Is a brand New award and one that's the kind of ensued. After many months of working with this OEM and discussion that we have a very specific project on a very specific platform.
So lots of activity there and obviously, we're it's difficult to say when a potential award would come but we're certainly moving at a very fast pace with that technology.
Okay got it thank you and then.
Last for me, how do you see the mix of SG Nay versus R&D spend progress for 2019, and then if you look if you can look out maybe in the out years, how you see that mix progressing and where where you're kind of putting putting the dollars in those areas.
Hi, Chris its nothing I would expect.
Pretty much the mix that we have had for the first six months will pretty much stayed in line. We will you will see for the remaining for the remainder of the for the remainder of the year.
So if you take about 200 million we've got about.
On the 20 is.
As DNA and $80 million net R&D and needy million includes the R&D income that we receive from our customers. So that's kind of the way I was clinic.
Okay great.
Thanks again for the time guys.
Sure. Thank you Chris.
Thank you.
Once again as a friendly reminder, if you wish to ask a question. Please press star one on your telephone keypad and Mycio name to be announced.
Your next question comes from Gary Prestopino from Barrington Research. Please go ahead.
Good morning, everyone.
Morning, Gary.
Phil I would assume that most of that delta in the Hs data.
As a result of China, right and about 9% of your sales are in China is that correct.
About 10% of our sales are in China.
But most of the delta between the expectations that I. Just add then then what actually happened I think as a result of China is that a correct assumption.
It's definitely heavyweight in China, Yes, we are seeing at other markets as well, but if you look at the numbers China's highest.
Okay.
So.
Going forward now I mean, you definitely gaining share got some great new products out there.
Obviously, I think theres going to be tamp down on on your expected revenue growth can we expect maybe as an offset to that that you guys would find more expense savings on fit for growth initiative. As you go through your planning I mean, it's supposed to be about 75 million by 2021 is there is there a possibility that you could increase that.
Yes, yes, yes, and as a matter of fact thats that.
What I pointed out was we have good line of sight to achieve our cost profit and return outlook.
Even if even as we face this volatile market so.
I'm feeling really good about our ability to manage the costs and also manage our product portfolio. So that we're.
We're really going after higher margin business.
Okay all right. Thank you.
Gary.
Thank you.
There are no further questions at this time I would like to turn the floor back over to Mr., Alex for closing remarks.
Well, thanks, everyone for joining our call today as I've consistently shared in the past we remain very focused on execution innovation and cost improvement.
Also we are perfectly positioned to capitalize on the automotive technology trends for the future, including electrification connectivity and personalization and autonomous driving.
I'm extremely proud of our team's ability to take Swift operating action in light of the current challenges in the macroeconomic environment and with global automotive production levels.
I'm confident that our efforts will allow us to deliver significant shareholder value in the future.
We appreciate your interest and support and look forward to keeping you apprised of the progress.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Mm.
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