CTS Corp (CTS) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CTS third quarter 2009 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Mitch Walorski. Please go ahead.

Thank you, Christina. I'm Mitch Walorski, Director of Planning and Investor Relations, and I will host the CTS Corporation third quarter 2009 earnings conference call. Thank you for joining us today.

Participating from the Company today are Vinod Khilnani, Chairman of the Board and CEO, and Donna Belusar, Senior Vice President and Chief Financial Officer.

Before beginning the business discussion, I would like to remind our listeners that the 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 was set forth in last evening's press release, and more information can be found in the Company's SEC filings.

To the extent that today's discussion refers to any non-GAAP measures relative to Regulation G, the required explanations and reconciliation are available on our website in the Investor Relations section.

I will now turn the discussion over to our Chairman and CEO, Vinod Khilnani.

Thank you, Mitch, and good morning, everyone. Last evening, we released our third quarter financial results for 2009. Overall, earnings per share and free cash flow were both better than our expectations. Sequential and year-over-year improvement in our gross margin percent, despite lower volumes, was very encouraging.

Excellent performance on the balance sheet front is also noteworthy. Donna will go over the details with you a little later.

The global economy, after stabilizing in the late second quarter, showed some positive momentum in the third quarter. Our increasingly diversified business model and global customer base, combined with lower cost structure from our recent actions, helped us improve our sequential financial performance in the third quarter again, despite weak economic conditions overall.

We continue to take advantage of the current global recession, and the resulting business and competitor dislocations to win new business, increase our market share, and drive future growth. We recorded a number of significant new business awards in the third quarter, and the year-to-date September, we have booked a record $220 million in new business over a five to six-year program life starting in 2011 and '12 timeframe.

Sales in the third quarter of 2009 at $126.6 million were up 5% sequentially from the second quarter. Within our Components and Sensors segment, automotive sensors represented 28% of our total CTS sales in the third quarter.

The automotive industry, as we all know, has gone through a severe and unprecedented contraction in their volumes worldwide. North American and European light vehicle production volumes have begun to improve, and were up approximately 11% sequentially in the third quarter. CTS automotive sensor sales were up 15% sequentially in the third quarter, helped by improved OEM production volumes and our increased market share.

New business allowed us to increase our year-over-year sales to customers like Honda, Toyota, Nissan, and Renault, despite lower production volumes. North American vehicle inventories have continued to come down, and at approximately 30 days, were near a historic low at the end of September 2009. Clearly, this bodes well for OEMs to keep their factories running at reasonable production levels in the fourth quarter, assuming the demand continues to sustain.

We do expect our automotive Sensor and actuator sales to grow double digits sequentially again in the fourth quarter.

On the business development front, our sensors and actuators had yet another strong quarter with seven new business wins versus four in the same period last year. On a year-to-date basis, we have recorded 30 new business awards this year versus 16 last year. Most noteworthy include a large smart actuator award in our new emerging commercial market with a diesel engine manufacturer, totaling $50 million of expected revenue over a six-year program life starting in mid-2012.

Also in early October, we announce winning Asian volumes of a popular global small Japanese automobile, totaling $22 million over its program life starting in mid-2011. Both of these recent wins are very significant from a strategic and high revenue point of view. They're also good examples of our continuing success in diversifying our geographic and customer base, and helps broaden our sensor and actuator technology to off and on-highway diesel engine applications.

Continuing with the Components and Sensors segment, sales of electronic components representing approximately 16% of total CTS sales were up 8% sequentially, compared to the second quarter, although still 31% below 2008 levels. Improved sequential sales were driven by piezo and electro-component sales into defense and aerospace, inkjet, commercial and medical markets. Distribution channel sales were also up 12% sequentially.

The wireless infrastructure market, on the other hand, have yet to see any recovery. However, we still continue to record infrastructure design wins at a healthy clip, with 162 wins year-to-date versus 152 in the same -- in the first three quarters of last year.

Our EMS segment sales of $70.7 million in the third quarter 2009 were essentially flat sequentially, as increased sales in medical, defense, and communications were offset by weakness in the industrial market and expected reductions with Hewlett-Packard.

Overall, we were pleased to report a quarter with strong earnings, excellent working capital management, very healthy cash flow, and a conservative balance sheet. In addition, our fairly impressive record of strong new business wins in the last several quarters continued to underline our success in pursuing a vigorous growth through diversification strategy.

Looking forward, our automotive sensors and non-infrastructure electronic components are continuing to show gradual improvement in order intake. EMS and wireless infrastructure components on the other hand, are continuing to stay weak, but stable.

Full-year adjusted earnings per share are expected to be in the range of $0.27 and $0.31, and we believe our full year 2009 new business awards will reach approximately $300 million, which will make it a record year for CTS.

And now I will turn the meeting over to Donna Belusar, our CFO, who will provide further details regarding our financial results.

Thank you, Vinod. I am pleased to take all of you through the highlights of our third quarter 2009 financial results.

The third quarter 2009 sales were $126.6 million, up 5% from the second quarter 2009 sales of $120.4 million, though down 26% from the same period last year. The improvement from second quarter to third quarter 2009 sales was driven primarily from the modest recovery in our Components and Sensors segment, where both our automotive products and our component product sales were up sequentially. This growth shifted the overall segment mix to be more heavily weighted towards the Components and Sensors segment, which inherently has better margins and helped drive overall improvement in gross profit margins.

Sales in the Components and Sensors segment represented 44% of total sales, which is up from 41% in the second quarter of 2009. Our EMS segment represented 56% of total sales, which is down from 59% in the prior quarter.

The sequential improvement in sales and the diversification of our sales mix, which reflects the sale of higher value products, combined with an overall leaner cost structure, contributed to an improvement in our gross profit margin during the quarter. The gross profit margin for the third quarter of 2009 was 20.7% of sales, which is up from 18.2% in the second quarter of 2009, as well as an improvement year-over-year from 19.6% in the third quarter of 2008, despite the year-over-year decline in total sales.

With continued tightly managed expenses, Selling, General and Administrative expenses were reduced year-over-year by approximately $4.3 million to $16.5 million in the third quarter 2009. SG&A as a percentage of sales was 13% in the third quarter.

In the third quarter, we also continued our investment commitment to research and development with $3.4 million of spending in research and development for the quarter, which is approximately the same level of spending as prior quarters in 2009.

Total other expenses, which includes items such as interest expense, interest income, and currency translation gain and loss, and other non-operational expense and gains, were $0.6 million for the third quarter 2009, which is approximately $1 million lower than the third quarter 2008. The year-over-year decline is primarily attributed to the lower interest expense, as we prudently managed to lower our outstanding debt, which I will go over in more detail shortly. Our third quarter overall effective tax rate was 20.8%.

So, to summarize our third quarter 2009 results, we reported sales of $126.6 million, up 5% sequentially; operating earnings of $6.3 million; and net earnings of $4.5 million, or $0.13 per diluted share, which were both more than doubled over the adjusted second quarter 2009 results.

Now I would like to discuss CTS's balance sheet and cash flow. The Company has worked very hard to manage a solid balance sheet and is proud of its sustained financial strength. So let me start with debt, then cash, and then conclude briefly with controllable working capital management.

At the end of the third quarter 2009, we had $49.5 million of bank debt, which is down $1.5 million from the second quarter 2009 and down $30.5 million from year-end 2008. Our total debt to capital has now decreased to 17%, slightly improved from the 17.7% in the second quarter of 2009, and greatly improved from the 22.4% from the year-end of 2008.

Cash flow from operations for the third quarter was $18.4 million, increasing $10.6 million over the same period last year, and down slightly from the $19.7 million from second quarter. Year-to-date cash flow from operations was $34.1 million, which is significantly improved from the $20.1 million in the same period last year.

Capital expenditures continued to run as planned at around $1.8 million for the third quarter 2009, and we expect the full range -- as the full year to be in the range of $7 million to $10 million. Based on the year-to-date performance and barring any major unusual events, management expects operating cash flow from operations for the year to be in the range of $35 million to $40 million, and free cash flow, which excludes capital expenditures, to be in the range of $25 million to $30 million.

Let me wrap up now with a brief look at our controllable working capital, which includes accounts receivable plus inventory, less accounts payable.

Controllable working capital as a percent of annualized sales was 14.7%, down from 17.1% in the prior quarter. This improvement, even with the higher sales in the third quarter, was primarily due to our inventory reduction initiatives, which continue to drive our inventory levels down and improve our inventory turns. While we cannot predict where the macroeconomy will go, our efforts are helping to drive our processes back to normal levels, and we continue to remain optimistic about the future.

This concludes an overview of our financial performance for the third quarter 2009 and a perspective of the balance of the year performance.

With that, I will now open the call for your questions. Christina, I turn it over to you.

(Operator Instructions). John Franzreb, Sidoti & Company.

I guess my first question is -- I wonder if there is a change in the distribution as far as on a geographic basis? Because you have more volume come through in Asia, relative to the US and rest of the world. Can you talk a little bit about that?

I think overall, we are clearly benefiting from our presence in Asia, which is getting reflected in higher sales in Asia, primarily coming on our sensors and actuators side.

If I look at the total CTS mix, there is not a very clear shift towards Asia, primarily because you remember our HP sales, which have gone down -- those sales were getting shipped from our Asia location. So it's slightly misleading because overall, we don't see a clear shift towards Asia; but in reality, we are clearly benefiting from our stronger penetration into Asian customers.

I understand what you're saying, Vinod. When did the HP program end?

In 2000 -- in the third quarter, we hardly had any HP sales except we will continue to do business with HP on the service part. So starting from fourth quarter, you won't hear us even talking about sequential deterioration because of HP. So I think it's all behind us.

Okay, that's great. Now, regarding the MS business as a whole, were you a little surprised that it's sequentially flat with the second quarter, given maybe some of the commentary coming out of the larger EMS brethren?

We really weren't surprised, John, because we knew that sequentially, we will have a little bit of a negative impact because of HP. If I exclude that, we are up.

We also knew that the industrial side of the business would be weak. We pretty much are focused on, as you know, on defense and medical, and that side of the business, which is sometimes driven by programs and the timing of different programs. We really do not compete and don't wish to compete in the low-margin consumer product side of the game, which normally drives volumes for the big boys.

Okay. And you also mentioned in your commentary, Vinod, that wireless infrastructure remains weak. Could you talk -- could you just provide a little color around that commentary?

As you know, our electronic components business is split between roughly half of it or 40% is in wireless infrastructure and the rest is in higher margin, piezo and some electro-products.

What we found in the third quarter was that we began to see positive momentum on the distribution side, on the piezo side, as people started to replenish their inventories. We saw a positive movement there for the first time in the third quarter.

My comment indicated that we have yet to see a clear trend change in our wireless infrastructure business. Partly program driven, it's partly major projects; so it may be a little chunky from that point of view, but we have yet to see a clear indication that we are increasing our order intake in that area.

We hope to see in the fourth quarter, in the later part of the fourth quarter, improvement in that part of our business, but we have yet to see it.

Okay. Now this might be a mistake on my part, but I had thought of the $220 million in new program wins, that some of that would start to roll in 2010. You clearly indicated it was a 2011 onward timeframe. Was that my mistake or has there been a pushback?

There have not been any pushback. There is a small piece which will begin in 2010. However, we clearly see a pretty significant step-up in 2011 and then again in 2012.

What kind of incremental annual revenue do you expect to flow through when everything's moving all at once, is online all at once?

In 2010?

Let's make it 2012.

Give us maybe another month. We have some interesting developments taking place in our commercial initiative, which you remember we have talked about. And I hope to come back and we are actually toying with the idea of doing a conference call in November timeframe, whereby we can give you a little bit more clarity around some significant developments in that part of our business. And we should be able to give you a clearer picture of a brand-new leg of our growth in commercial starting from 2012.

Excellent. One other question -- some of the cost savings initiatives you put in place, some of them were due to come back in 2010. Can you quantify how much of incremental costs is coming back? Could you just talk about that?

The cost which is going to come back is either of the nature of salary deductions, which we gave to the employees, and they will start coming back, frankly, starting from fourth quarter. We're rolling back some in the fourth quarter and the rest, like 401(k) matches and in other countries, we have what they call the 13th month salaries. They will -- we expect them to come back starting from January 1.

So the -- overall, the number is roughly $2 million per year, but some of it starts coming back starting from the fourth quarter. And that is based into our guidance, which we just gave.

Okay. By the way, it's great to see you issuing guidance again. It's a nice little confidence boost right there by itself.

Thank you.

Okay, guys. I'll let someone else go. Thank you.

Hendi Susanto, Gabelli & Co.

My first question is, could you quantify any benefit from the Cash for Clunkers program in Q3?

Which program?

The Cash for Clunkers.

Oh, Cash for Clunkers. That's a good question. Initially, we felt that there were probably some pull-up of automotive sales in the third quarter from fourth quarter. And we were thinking that maybe 1% to 2% of our growth in the third quarter was from Cash for Clunkers. However, our further analysis indicates that we had very minimal, if any, impact on our sales in the third quarter from Cash for Clunkers. And that is primarily indicated by continued strength in our automotive volumes in the fourth quarter.

So the impact on us is extremely minimal, frankly. And if I have to quantify it, maybe 0.5% of my 5% sequential growth came from that. But that is more an anecdotal kind of a percent or a -- quantifying that on an anecdotal basis than any exact science basis.

Okay. And my second question is for Donna. Do you have any plan to raise more capital in the near future?

In the near future, the answer to that is no. We have a really solid balance sheet. And our cash flow is very, very strong, so, no.

Okay. And next is, Vinod, when do you expect to see the recovery in industrial sales?

Are you talking about industrial from an EMS point of view?

Yes.

What we are hearing from our customers is that we are going to see improvement in 2010 or 2009, and the recovery probably will start from second quarter next year. But they're all very guarded and the comments we are getting are that it will be a fairly slow recovery.

Okay. And are you still actively looking for acquisitions? And whether there are any on the table at this moment?

We are actively looking at acquisitions. And we are, on a continuous basis, exploring acquisitions. At this time, I think we are looking at some electronic components companies and maybe exploring some ideas on the sensor side. So, yes, it's an ongoing process. Having said that, it's very difficult to predict exactly when one will be completed.

Okay. Thank you. Let me get back to the queue.

(Operator Instructions). Are there questions at this time?

Okay. Well, I would like to remind our listeners that a replay of this conference call will be available from 1:30 p.m. Eastern daylight time today through 11:59 p.m. on Wednesday, November 4, 2009. The telephone number for the replay is 800-475-6701 or 320-365-3844. If calling from outside the US, the access code is 118484. Thank you for joining us today.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.