Q2 2019 Earnings Call

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Michael.

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Era.

Hey.

Thank you down 6% to 7% with only the Russian market demonstrating growth.

Defense markets were strong in the quarter improving by double digits, we're keeping a close watch on volumes in various end markets and remain cautious about market trends over the next 12 to 18 months.

Profitable growth margin improvement ERP implementation and the appropriate capital deployment remain priorities for us this year.

In addition, we have begun new initiatives towards 2025 performance goals for Cts.

For full year 2019, we are tightening our guidance and expect sales to be in the range of.

$470 million to $490 million compared to the prior guidance of $460 million to $500 million.

Adjusted earnings are now expected to be in the range of $1.55 to $1.65.

Compared to the prior guidance of $1.50 to $1.70.

At this time Ashish will walk us through the financial performance Ashish. Thank you again.

Second quarter sales were $120.7 million up 2.3% compared to last year.

Sales to transportation customers increased by 8.7% and sales to other end markets decreased by 8.6% due to softness in the industrial.

And medical defense, sorry, industrialized in medical end markets.

Currency rates impacted sales unfavorably by $1.9 million.

Our gross margin was 34.1% for the second quarter versus 35.4% in the second quarter of 2018.

Execution challenges in our ceramic foundry operation and material cost and wage increases were the main drivers for the decline.

These were partially offset by approximately $1.8 million in savings related to manufacturing transitions.

We expect full year savings from the manufacturing transfers to be in the range of $3 million to $4 million.

Exchange rates impacted gross margins unfavorably by approximately half a percent.

As DNA and R&D expenses were $23.3 million.

Or 19.3% of sales compared to 22.1% in the second quarter last year.

2018 expenses included one time costs of approximately $1.5 million.

The remaining reduction in expenses related to lower spending and timing of certain expenses.

We remain focused on managing expenses.

As we work through challenging market conditions.

Our effective income tax rate in the second quarter of 2019 was 25.1% down from 37.7% last year.

Last year's tax rate included a 1.7 million dollar tax expense.

Related to a one time cash distribution from Taiwan.

As we have communicated previously.

We expect full year 2019 tax rate to be in the range of 23% to 25% excluding discrete items.

Our second quarter 2009.

Our second quarter 2019 earnings were 36 cents per diluted share.

Adjusted earnings per diluted share were 40 cents up from 39 cents in the second quarter of last year.

Now I will discuss the balance sheet and cash flow.

Our controllable working capital as a percentage of sales was 16% in the second quarter.

We had delayed payments from some customers that were received in early July our inventory levels are higher than planned.

And we are focused on improving in the second half of the year as we adjust inventories down for softer end markets.

We generated $14.6 million in operating cash in the second quarter.

Capex was $4.1 million.

Year to date, we have spent $9.4 million in capex.

We now expect our 2019 capex to be in the range of 5% to 7% of sales.

Down from our previous range of 6% to 8%.

Cash was $105.6 million at June Thirtyth, 2019, compared to $100.9 million at the end of 2018.

Our long term debt balance was $50 million at the end of June flat with December 2018, our debt to capitalization ratio was at 11.2% compared to 11.7% at the end of 2018.

During the second quarter.

We repurchased 148000 shares of our stock for $4.2 million.

We have $20.6 million remaining under the repurchase plan approved by our board in February .

We remain focused on our ongoing Sep implementation.

As we communicated previously our goal is to complete the rollout to our remaining sites in the first half of 2020.

We will keep you informed of our progress.

This concludes our prepared comments, we would like to open the line for questions at this time.

If you would like to ask a question. Please signal by pressing star one on your telephone keypad, you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again that is star one if you would like to ask a question.

We'll pause for just a brief moment to allow everyone an opportunity to signal for questions.

And we'll take our first question from Karl Ackerman with Cowen. Please go ahead.

Hey, good morning, gentlemen.

The narrowing of Europe , the narrowing of your outlook to the midpoint is somewhat impressive given that many cross currents for monetary policy and global trade, particularly production headwinds within automotive.

Some of the larger automotive tier one providers have called out that the market should decline low to mid single digits. This year.

But based on your outlook. This year. It seems that you should actually outperform and demand and maybe many peers in your space.

So I'm curious if you may discuss existing or new programs within actuators.

RF sensors are brushless, DC motors, or maybe even accelerator pedals.

That are enabling you to outpace global production this year.

And I am also particularly interested in the geographical areas of strength to given the well publicized challenges across China and Europe .

Hey, Carter you got a few questions in there and good morning to you and first of all as we've been saying for a few quarters now we feel that and if the markets down the feud at a few points will perform better than the market and Thats what were seeing we've seen strength and in really a lot of the work that we've done from 14, 15, and 16 and Thats bearing fruit at this point in time, you asked about actuators, we added a second customer of one of the best customers still in development and we're also in development on next generation products with existing customers and the good news and the exciting news as well this quarter is that small acquisition. We did back in 2015 would at the RF sensing has gained momentum with funding now from two customers, which were excited about as well, we know that won't be revenue until.

Plus 2020 and beyond that but those things are moving well. So we feel weve. It's the work we've been doing the last number of years that is giving us momentum, especially in the transportation market. When we look across the regions. We've seen North America, as I said down 2% to 3%, but we've been gaining but Oems in that market Europe has been challenging for everybody. We've added some customers there that we've talked about in the past and continue to pursue new opportunities and gain share and in the China market for people, who are getting a lot of pressure were strong with the Japanese transplants and that really has worked pretty well for us. So hopefully that gives you some color around the market performance.

Understood.

Given the variability in the second half the year.

Broadly speaking.

How are you thinking about the trade off between Opex management and opportunistic M&A.

Well on the Opex side of it we're always very prudent about managing our cost, but not at the expense of making those rights strategic choices and on the M&A side of it we've been very focused in terms of our strategy EV products and end markets that will fit our portfolio and we continue to work that very hard.

Understood last one for me and I'll cede the floor.

Regarding distribution, we understand that you have very little acts very little indirect sales within the distribution channel.

Surely given your exposure toward automotive.

But any thoughts from Cts about how long you think inventory de stocking in the channel may last for and its impact on your industrial outlook. Thank you.

Yes card you're right about the percentage there of our overall business and I would tell you we would think it's going to take another.

Two quarters, or maybe a little bit more to burn off all that inventory there is going to be some differences across the regions, but it's still going to take a little bit of time to to adjust that inventory.

I think we're ready for the next question.

Well take our next question from John Franzreb with Sidoti and company. Please go ahead.

Good morning, Kieran and Ashish.

Hi, Mike Hi, John how are you, making sure you can hear me.

Karen I guess regarding the revenue guidance tapping down the top line a bit.

Has there been a fundamental change in one year end markets Thats.

Major want to reassess what the revenues will look like.

And.

Maybe a few points to that John obviously and.

From an automotive perspective, and we're just cautious a little bit in terms of where things are going we've had and strong progress in the commercial vehicle side of it and mid to heavy duty we've seen some at the maybe some softness in that going forward. So that's something that staying very much on our mind and the other thing that you might have and caught in my opening comments is Chinese tariffs on the industrial side. We've we've seen one or two customers were at their growth is not what we expected. It's good regionally in North America, and Europe , but when they're going to China to being hit by the tariff. So there's some of the things that have caused us to adjust the top end a little bit.

Got it got it.

And you mentioned.

A problem it went to ceramic ceramic foundry.

Could you just walk me through the implications of that.

Either on a revenue line actually on the revenue in the quarter.

And on the gross margin in the quarter.

And then is that problem been resolved those are continue to linger.

Yes, so we're not happy about it and its poor execution on our part. So you can tell it's got our full attention and from a sales perspective, and it's probably somewhere in the region of 1% impact on sales in the quarter and what we've had is it's material formulations and if we get some variation in the material it impacts our yields if it impacts our yield and impacts our finishing and therefore it creates inefficiency in the production environment. So again, just that part of what it is its poor execution by US we know we can fix it but and not pleased to be in that situation and again, it's got our full attention Ashish you want to add any color, yes, John on the margin side. It obviously has a negative impact on us.

Similar to the sales probably in the 1% range.

And we would look to recovery in the second half as Ken mentioned, the strong focus on it.

We are working through several challenges.

We expect to see some improvements in Q3 and more in the.

In the fourth quarter.

Great great.

And.

And I guess.

Okay back to the transportation topic, those does kind of brought up you mentioned youve.

You have been and you were outperforming the.

The sector as a whole, but I didn't catch a number how much your automotive sales were up in the quarter.

Did you did you provide that I just missed it.

Yes, I think we said John and auto sales were up over 8%, yes, just a person.

8.7%.

Thanks, Chito transportation customers.

Yes got it.

And one last question the reduction in the Capex spending is that a change in plans or deferral from something from this year to next year.

So John some of it is just.

Managing carefully.

Where the Capex is being spent making choices.

Given the tougher end market condition and some of it is deferring.

So that.

You know ERP.

Hoping to accomplish more in 2019 as we have deployed that.

Some of the launches into 2020, then some of that Capex also get deferred into next year.

Great. Thanks Ashish.

Second half.

Okay go ahead.

Now in the second half will be working through more clarity on.

Timeline of various projects, we are working on and.

As we get closer.

Provide more clarity on what the expectations are for 2020.

Great. Thank you Sir.

And once again, if you would like to ask a question that is star one on your telephone keypad, we'll take our next question from Hendi Susanto from GE Research. Please go ahead.

Good morning, you're on good morning offices.

Good morning, Andy.

If I look at your annual guidance it rubies than second half year over year between 3% decline, 5% positive growth how should we think about the divergence of those white screens.

Hendi the as we talked about in Kevins comments.

There is still uncertainty about the various end markets.

And the evolution of those both on the industrial side.

We saw some softness in medical in the second quarter. So we are watching that carefully as well.

On distribution.

The largest.

End market for US is the automotive and we still remain concerned about how that is evolving in the second half as well.

I wanted to see if I may.

Revisit that questions.

In the past is a 5% year over year growth in the second half where will that growth come from.

If you see our sales.

We are getting traction on many different fronts with new programs.

As well as new product launches that Kevin talked about in terms of getting business been traction so that will be a key part Ken did you want to I think hendi, maybe some of the things we pointed out new products like the the total sensing module for the market in Europe is gaining good traction our RF products continue to gain good traction and medical side of it and as the she said was a little soft in the in the second quarter. There were some adjustments of inventory there, but we are seeing orders pick up and we expect that to be good and defense has been good and so far this year and we continue that to continue going forward.

Got it thank you for that.

For the inside.

And then.

Kieran I know that.

Now that you have like new ERP, and then you would think of us.

Like more new ERP system.

Vitesse.

By the first half of 2020 in the long run what can you do with your new ERP can you produce more cost savings.

Or like a squeeze your working capital efficiency.

We definitely will increase our working capital efficiency I can tell you that's a focus for us and I am not happy with where we're at at the moment and handy. Obviously work we're very much in our message has been on the implementation because you know companies have problems here when they implement we're making sure we're doing it carefully and robustly and but we're making that investment because when we're through this it's going to give us more data around the company and we've done a lot of simplification over the last number of years, but we still see opportunity ahead and as I talked about the 2025 goals. We've set some internal things that we haven't talked about but we'll talk about those as we make progress and it will relate to ERP as well.

Got it okay. Thank you that's it thank you Karen.

Thank you Andy.

And it appears there are no further questions in the queue at this time Mr. O'sullivan I would like to turn things back to you for any additional or closing remarks.

I just wanted to thank everybody for joining us this morning, and we look forward to updating you again in October on our performance. Thank you.

Thank you.

This does conclude today's call. Thank you for your participation you may now disconnect.