CTS (CTS) 26 Oct 232023 Q3 Earnings call transcript

Hello, and welcome to the CTS Corporation Third Quarter 2023 Conference Call. My name is Alex, I'll be coordinating the call today. [Operator Instructions]I now hand over to your host, Kieran O'Sullivan, CEO, to begin. Please go ahead.

Thanks, Alex. you our thank earnings quarter and call. morning, for third joining XXXX Good

see industrial slowly demand impacting continue weak We to in elevated at sales inventories and our customers correct. as markets distribution

softening in market, where in for industrial customer transportation of the We are quarter.We impact wins. had also commercial demand several to light the was across strike UAW markets base continue and we vehicle product the third medical vehicle the low our seeing expand

award for in development motor We position application also first secured with a electrified sensor our vehicles.

and the We through our Our with through focus our quarter, given focused driving with our growth, mobility remain on remain sales improving operational achieving our performance. innovative on during pleased am team's growth and the profitable current prudent long-term our highest diversification advanced new strategic priorities.I products management materials capability of softness. also goals electrification markets expenses growth while operating

period megatrend will Motor last the statement. builds already win quarter. harbor electrification new through new X to Adjusted in momentum basis $X.XX XXXX.We Adjusted customers the the Award, e-break mentioned Position quarter per down to million, XXX period same points the beyond $XXX third XXXX, us $X.XX, first quarter.Ashish which line of share of enabling margin and earnings I XX.X%, third compared gross XXXX. growth in the the us the additional added were the through same first For quarter sales opportunity, was XX% Development last diluted from down down the compared product year. a opens take safe to capture

Ashish?

the our risks to statements. statements subject contains that cause and remind to from in to a forward-looking results that listeners like call These of this are materially expressed actual forward-looking uncertainties could those number differ statements. would conference I

any refers today's are regarding filings.To website.I the today, uncertainties in Investors required explanations CEO, extent back G, company's reconciliations that to more the non-GAAP the these issued CTS now SEC O'Sullivan. measures the will the risks is our the be and release and information the can discussion in and discussion Kieran in press of contained to information available turn found under Regulation section over Additional

Ashish. you, Thank

driven of Sales to million, same levels experience period dynamics customer XX% demand year. higher inventory. from continue down were challenging primarily by last $XXX We the

previously low will While in it pressure the reductions.As had have the we is the our site in to site impacts progressing track year. UAW cost on quarter. will with but expect continue strike Operationally, impact consolidation, Work quarter, a sales the improving communicated, Inflationary areas. further we volume, the to we transition the temporary complete cost fourth Mexico we some we announced focus consolidation. some reduced sales be a next as challenge are in to on and increases are continue on complete

pricing with X also material increases operating new management we investments progress through in in quarter orders in We continued and softer wage orders. environment. added customers are during the sales focusing as product new our and and projects short-term production experiencing countries.We partnership Mexico disciplined of sample our the customers cost We new especially certain while with on are other are still on and growth adjusting certain organic prioritizing raw inflation, expenses qualification

sales applications. X period.In the prior of the quarter year awards, compared declined rate for to qualify with the in had the be X.XX. in sales for partnering a platforms. book-to-bill wins wins XX% refrigeration continue in in applications RF had multiple for continue with to sensing business applications products to applications.We demand kitchen ranging two-wheel market, used temperature industrial by in correct. and We're across to Non-transportation decreased soft, a wins, inventory levels appliances especially China. also new had in transportation softness are also medical our to wins, successful sales for compressor X other third driven distribution for applications. printing quarter we monitoring addition, seeing EMC, to softness securing were We from and in primarily order actuators We industrial We In electrification different X production with industrial several micro as new HVAC and due customers applications solid industrial, and in

in be aerospace and traditional new ultrasound an and for destruction applications are where on tractor for with used improving we secured efforts We the are sample through We are therapeutic in capabilities vehicle contracts. development the audio, applications.Our tissue controls quarter had new trend, seeing an with end our In encoders to market for Aerospace applications the appliances qualifications ultrasound, unmanned and progressing ultrasound, stronger we defense customers ultrasound wins to formulations. prospects for and and multiple and multiple engaged and markets, printing, sales treatment.We therapeutics, sonar application in industrial cancer long-term pro We wheel underwater new given precise customers with intravascular home as sales engage orders applications solid to be are demand. defense for year. sensing potential solid RF enhanced continue optical expect business targeted deploying the varying quarter multiple and and optics tunable traditional defense material across of the received balancing. from end medical expected medical for

and Additionally, piezo continued non-transportation in expect communication for the in end distribution markets, in XXXX market ahead industrial balance for temperature the location we of satellites softness in levels to and had inventory sensing we aircraft as beacons.Looking customer wins end correct. for material emergency continue

know-how growth line expect stable a markets formulations markets, products progress in-house and in to continue qualification prospective support our we medical and on to strategy. our defense solid For our new non-transportation diversification high-quality for anticipate material with the end of customers.Long-term, our environment key and we in

were quarter. same down period these in X% year. million the Additionally, medical invasive were expansion of sales $XX procedures from growth anticipate the automation, provide as as the markets.Transportation as efficiency third last and momentum well continue we approximately us megatrends we will in connectivity minimally in Sales

speed, now decrease that a post-COVID lower, in We and commercial light sales demand been the with North manufacturer. as continue products and America wins customized demand China secured in stronger by OEM have and gain $X.X a share win other entered haptic sensor quarter for we OEMs the third a to provides front, OEM, environment driven between solid where on across quarter. forward.Total in dynamics added for in an a vehicle electrification. and we a In that Europe given softer were we aftermarket fourth accelerator the by awarded feedback as at momentum module vehicle and and the for distance end a of information period North for driver anticipate restocking.On as business track accelerometer was well we development vehicle be OEMs. quarter, opportunities American a competition expect all booked the had We the billion go the market product to additional we European wins local transplant modules, to with categories shorter-than-normal continue In new had product as

we electrified vehicle XXXX. continued modules securing goal accelerator height XX% by revenue benefiting including we We are come of as from our from on vehicle look opportunity wins sensors by having light excited and our we future, new electrification accelerometers to Maglab's and to XX market, of the driving business right haptics, opportunities.As to chassis Progress the current achieve continue electric strong our to are gain transition more added than the offers vehicle where platforms in pipeline we us. in electric the sensors, quarter, momentum of

customers. with in Drive traditional enables well modules, vehicle to the foot the offering flexibility a where travel the and see product We e-brake cost for interface modules, continue our accelerator advantages and low to technology, haptic accelerator expect we a product space of pad design footwell our increases new introduction customization the offering products and that driver as future weight expand our

forecasted strike. European in subject the XX production range. our expect is content these North range. of to will million be XX grow in unit and expected million greater our the of XX applications billion.Summarizing impact other We XXXX. light to outlook million to year increase range, expected full the potential are volumes American the unit million market The SAM vehicle XX a than is in China sensor the UAW unit for $X with ability to

the expected this softness to levels is continue expect into diversification expand the diluted for -- end in levels softness aim industrial communicated customer While markets, the comments commercial to correct remain year Demand that of range per our in in million terms applications my comments we defense We in also $XXX certain fourth non-transportation the of this and solid.In reduced especially strategy, to in normal sales continue XXXX.For to applications XXXX, earlier industrial, on in Inventory $XXX we medical and adjusted vehicle in full reduction demand of $X.XX and markets share to markets. range in distribution. demand focused early levels, XXXX. to my and remain more and medical in range to to the we earnings in guidance quarter, estimate with line of the defense $X.XX. previously in base expected we million at

in $X.XX.Now now second per I'll more share UAW adjusted in for the softening in the commercial million it turn over and during the updating $XXX markets the who strike market, in of guidance walk to and we half to industrial year, softness the detail. the the range range distribution and will the are of to us earnings $X.XX results financial Given the vehicle the $XXX impact continued the through sales Ashish, of million of diluted

Thank you, Kieran.

the the driven Sales XX.X% third down inventory quarter vehicles.Sales end of XXXX.As the for and impacted expected, in were XX% the down due slowdown actuators XX% the compared the year-over-year margins quarter softness market by reduction market. primarily Third industrial margin declined end smart basis points in sales was compared distribution of in transportation end third XXX to Adjusted million, to year-over-year, XXXX. X% related decreased were other an market unfavorable third $XXX to to quarter markets sales gross mix. end quarter, commercial of approximately by by to

gross exchange approximately Foreign rates unfavorably by margin $X.X million. impacted also

areas, continued costs share with in material We on our in.On the some customers working increases. the operate are are to specific are we some countries side, wage we and cost of experiencing seeing increases pressure these still in cost we

to expenses reductions focused temporary half implemented light related the cost cost of operating and measures enable remain making in second to the of of improvements conditions, flex long-term we approximately this highlighted, Kieran $X.X reserves due driving we the third to market expansion.In quarter, incentive As reduction in margin In to gross structure year. operational our on plans. our were lower, million also cost reversal a

share. We expect we third diluted slightly reported third higher than excluding restructuring of be our fourth to quarter, costs, expenses, the quarter total $X.XX earnings the operating quarter.In per

diluted Controllable expenditures. facility million. diluted picking per free and $X.XX to managed XX.X% Year-to-date, were flow share last compared operating cash earnings flow same million XXXX. the We discussing cash per working our we adjusted the year.Next, mentioned same flow second we $XX $XX in to Free in transitioning $XX was in calls operating quarter capital period cash as million sheet. Juarez generated was Our the year, $XX last third half period was flow of cash of carefully $X.XX this XXXX. our up year.As on share the with flow during and in capital was million activity balance cash prior are XX.X% from compared

the stock fourth built have expecting the transition some quarter. are and further in to facilitate a We up increase safety

safety stock and the for shareholders Our of million million. the quickly buybacks through goal dividends. returned we is Year-to-date, quarter, to third have $X.X to through XXX,XXX in $XX work approximately CTS shares repurchased stock we approximately XXXX.In

balance by million $XXX was Our million balance million on third quarter.Our healthy. of end cash our $XXX XXXX, from up $XXX healthy debt of operating generation at the total June in balance September sheet long-term remains supported facility. had cash million XXXX, a We the $XX in

at prepared this for us Our to foundation, us would line This robust strong comments. cash the our to like drive give long-term strategic strong and time. sheet concludes a for CTS. and growth We open make flow balance generation questions enabling acquisitions

question today TD Joshua for Instructions] from Coen. Our comes [Operator first Buchalter from

also out there this wouldn't quarter much quarter And any you to was in as third the outlook? wouldn't way lost be is impact of this an and and appreciate time. in UAW year called the like But was quarters that as third reason can how happening well? you the the recognize quantify made an that that of whatever up an impact real a is literally in I in -- UAW next any has is the strike the there strike couple fourth think quarter the of impact -- because

thanks your for question. Joshua,

also and we -- million the $X million in XX in softness to maybe go mentioned forward, that the pretty see the So But would we've been quarter, for million we quarter. commercial in see the for And was that as fourth we see the quarter, third UAW range I already unit impact probably in $X impacted minimal. impact range. somewhere vehicle, the and fourth we

there in it. much like-for-like? then details Mexico? How the and tailwind or thanks be quantify margin Is site to running And any consolidation. Got help your for in on all of fully once you get the steady state up way that could a

Yes, for a Mexico-to-Mexico out that transition. we called Josh, have it's what is

the significant profitability just So we move in a are from not change expecting itself.

location. customers wireless that processes, enable to and have looking that to will more our the business do at our are in stability existing with we us We have production more

for interesting something Is you're And markets new called you're specific end changing out then domestic competition be one quiet that the most. any was you It products that seeing? that now. China that or materially? the it. I'll Is prepared where it in last remarks. Got Is me. feeling

that about quarters. Joshua, on the last one. few We've it Yes, in spoken

there, larger term. share Toyota They've X over customers lost have Honda. some We and short

keeping So close on that's a eye impacts us. it obviously we're something

of Our next John Sidoti Company. question Franzreb comes from &

I'd guidance. the go back revenue in change like to the to

those to a that makes $XX in you what markets out up $X balance end $X seems of It optimistic commercial What and some second million midpoint? certainly $XX that million million from But would changed? the industrial called bit UAW. You that about were rebound. vehicle quarter, little from million the

not just inventory build you while read at levels, level the the sentiment we're if there on terms John, inventory in like improving industry and of burning out the up the be there we'd at it's down to yet. inventory,

quarter to going the terms it's going of the a you when we're softness, be of year in distribution So softness. fourth end that continued and at of forward where look and combination guide the industrial

commercial vehicle UAW that strike, obviously softness which customers the in our is we directly. X Now still impacting see and the of

has production in they're then is to catch little specific. Toyota And up rebuilding and been X. Okay. a outlook looks sense are of their bit? just Detroit you Any the when compared going What a customer hearing like? their maybe rates their to inventory laggard what from

I do in think continues to America. Toyota well Europe North and

Toyota for has bit And been that, been China, a in transition more the faster. in competition Our know to recent concern, days said and the we're little has John, are hybrids where in and more is has pricing a going come tougher. to a demand also, seeing and EVs out electrification I hey, now softness benefit.

So we'll to something track. continue that's

Okay. America in to lowest rebuild end the they're going But inventory they're their when curve North at the sense because here no of

a their obviously they We not as in John, are intentions see there are. do of communicating us what place to orders they them Yes, directly weeks terms out. few

wouldn't I it significant are there. be any from but calling downtick carefully, or uptick monitoring We out

end budgeting vehicle thoughts about far 'XX trepidation in markets, end as just what there's build as early as a kind commercial And any the of the 'XX. kind look about like how versus rate would up expectations? versus relative or on as Any 'XX 'XX or of you're market, Okay. down again, far some certainly

will guide you the best like. you can would into estimate. No, the that be John. tell is, range moment. That's of in a of What million. And aftermarket at call. that the been called QX. We'll earnings I that's got give just the given first That's That's out our tell our it, off would in what and XXXX, full quarter, line I catch-up we've of $XX I sight better taper good the a why the the to obviously, there you side softness into QX continue year

of Our is next Stephens. from question Justin Long

year-over-year $XX And I that you you back sequential in comment? a about wanted was or headwind made the headwind. to quarter a comment commercial circle to to revenue a vehicle that the driving referring Were third weakness to million relative

No, sequential Justin.

Okay.

to run from midpoint, of the guidance X to based revenue all million And on it on So suggest XQ. like those items. strike sounds of for kind is about the pressure that if fourth of quarter, and seems XQ vehicle the the I weakness, it $XX commercial coming sequential implied the that UAW math

So quarter? revenue about in fourth interpretation? thinking stable? you the is look are non-transportation sequentially that how Could right the more And it

Yes.

with drop, that correctly UAW. it CV area. coming the to markets stable characterized You've some and and deal commercial improvement other the drop on in the getting And more hoping see

earlier like was roughly you're What a But significant look to decrease quarter, path? touched adjustment. the incentive drove second you quarter relative particular, Okay. on if in in could like I that the you year? sounds it costs cost some It operating at Understood. of pretty the it about next SG&A cuts, sustainability the Ashish, the $X of sounds was about a bit. that into line, third million. And implementing talk half the of other And just

Yes.

overall, So looking numbers correctly. at you're Justin, the

see have QX cost QX. of projects. improvement and What for timing expenses just you'll in taken is of also R&D elevated because measures quarter for third slightly different were the that We short-term

overall, but when that the the are reserve increase slight at primarily compared expenses, significant. in restructuring, QX, a compensation. look that about release I fourth for increase of I because So excluding is incentive operating And talked expecting not quarter to we

looking the back could are last, Okay. And whenever other longer is in for catalysts kind put business to the costs there quantify the much a designs of temporary you're improves? And what cost of how the those way to reductions? those that demand

Yes.

half our the further year things we the And is as reviewing keep we'll along. just looking, second are of we primary then objective. So go in

quarter book-to-bill and today pipeline the environment in that that's continue you trend the The close this some me. for Could of the demand comment seeing you're Xx level to uncertain. challenges can your Okay. no book-to-bill? order comfort Understood. just that we on And around to was last despite and one Xx

of of doing on very well. that Justin winning we're it, terms business new in side

mention double-digit for me percent. And that's defense, new of We what's an opportunities. happening with a us. of $XXX been motor a in a opportunity We've see heard where well. You at on million, of got about good in doing new SAM and just medical That's market pipeline position we've It great sensing. a opens a sensor. up progress current growing top

So it's a quarter. tough

momentum business. of we more we steady of You're the new going calling good But winning is getting. book-to-bill what longer is, about got a be we've going forward quarter-to-quarter to term, feel wins kind to term, and but it like improvement. longer going medium we're feel The good

next Our Hendi question comes of from [ Susanto ]. CTS

then for, the can have and X material goods just should like to whether think we the a question I single-digit account percentage those say, let's is cost margin increase, -- way, of of any weight or like magnitude, the increase into where just the the X those ends? magnitude the some on the labor like, raw cost get about of there insight pressure on gross like sold we

Yes.

we that The some It's wage of materials there places, in, in pressure back and challenges. years, out you that the still significant are are on it's Hendi, is quantified. we we operate were in seeing we specific still some improving, but go other to called areas in if suppliers Europe. increases which call is where X is So out have some side, Mexico. countries we to the we improving. What seeing last some The some dynamic wanted we

we impact. to as impact to as our are still mentioned are I those base what just wouldn't the be that with And managing overall I working call, margin saying increases so we a appropriate the margin trying customer significant on are cost our has out. business. share that's call it for we that So

and one feel we want challenges, to they're not is thing sources. we Hendi, highlight turning And have to where not on best about new market, we're I those shy

see. of impact Kieran, go in whether may I And the terms beyond your strike, I seek can UAW QX? insight the

impact The big enough is Hendi. not, hope for. would I

stage. last heard is Ford You this that settlement the night a proposed up at obviously for

all. soon are customers happening things hope bigger with get given and would what's Our GM would into But convert next and Stellantis. I year not at with Ford,

I yes. eBrake when win associated start? commercial first may And the on in congratulations securing know then see, win May I Kieran sales of the with eBrake. that

it's -- It's new Hendi, it's product. a complex. very a

come the our The either in very or revenues first with 'XX. customer. product is 'XX popular And late

We a lot be that well. can as million-plus have accelerator just as see a platform modules, platform like it over interest in We of our $XX this years. a

of then what that the And Yes. the AC carton is sensors, motor Okay. you awards sales? timing the in have commercial the

fact The not X good maglab to little have what automotive sensors in or applications. current they're the ones be On X bit years. trajectory. going It's to sales in already impact a going years. and be with out industrial some take we've acquisition, the a of It's to we done closer longer, but X on actual

Thank currently you. questions. At no we have further this time,

hand I'll for remarks. Kieran further O'Sullivan to any So back

new headwinds, well Thanks, efficiency. Alex, for positioned several energy teams is quarter, development successfully automation, solid of drive to by during in pipeline and products your less and launching to underscore I to wins driving on Despite future. our long-term back CTS for our profitable increased time. in for to the strategic continuing support in all communities connectivity those new goals and of the initiatives, near-term opportunities the confidence expansion fortunate our and global CTS' Overall, thank their want you we thank the our growth, the give strong our contracts focused of megatrends are growth quarter. in driven customers, future

enhance all call. Thank to performance. us also concludes operational our our to hard We joining today. work continue for This you

for joining you Thank today's call.

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