Q3 2020 CTS Corp Earnings Call
Please go ahead, Sir Thank you Greg.
Thank you great. Good morning, and thank you for joining us today and welcome to Ctss third.
Third quarter 2020 conference call I'll begin by sharing a few thoughts on our business performance and our operations.
As mentioned on our last earnings call, we expected sales to improve in the third quarter.
Sales were $113.8 million in the quarter down 2% in the third quarter of 2019.
And up 35% sequentially.
Turk quarter gross margin was 32.4% compared to 32% in the same period in 2019.
Up 40 basis points and up 80 basis points sequentially from the second quarter of this year.
Third quarter adjusted earnings per share was 34 cents up 17% from 29 cents in the term quarter of last year and up from 18 cents interest.
In the second quarter of 2020.
We delivered an EBITDA and adjusted EBITDA margin of 19% up 230 basis points from 16.7% in the second quarter of 2020.
New business wins were $127 million in the third quarter, and we added seven new customers.
We ended the quarter with 132 million in cash and $106 million in debt.
Operationally all our plants are running we continued to experience challenges at our Mexico locations.
Since last quarter those facilities have improved from approximately 60% capacity to more in the range of 90%.
We are monitoring local changes to COVID-19 restrictions at one of those facilities.
And at our strata facility in the Czech Republic.
As she shag evolves with me for today's call and 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 sedrin 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 Companys at SEC filings.
To the extent that todays discussion refers to any non-GAAP measures under regulation G. Derrick.
The required explanations and reconciliations are available in the investors section of the Cts Web site.
I will now turn the discussion back over to our CEO Conan settlement. Thank you Ashish.
As we navigate through COVID-19, our employees are supporting and helping the less fortunate in our local communities something we're very proud of our employees also continued to demonstrate flexibility and responsiveness throughout our operations to support all those customers.
Our first focus continues to be the safety of our employees and compliance with state and local regulations.
We are we are adapting our business and processes to focus on our priorities.
Driving profitable growth strengthening our go to market enhancing our operational capabilities and advancing our leadership talent and culture.
The restructuring plan, we announced on the last earnings call is progressing to plan.
And is expected to deliver an annualized EPS improvement of 22 to 26 cents by the second half of 2022.
More importantly, we are focused on returning to growth targeting 10% in line with our strategic plan, 5% organic and 5% through strategic acquisitions.
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 were $127 million for the quarter. The best quarterly performance this year.
We added seven new customers in the quarter for industrial and one each in defense medical and telecom.
In transportation, we were awarded a large passive safety sensor award for an electric vehicle application in the China market.
We also secured multiple OEM accelerator works with customers in Asia, Europe, and a global platform win with a north American OEM.
These recent wins are leveraging our inductive technology, which is a key enabler for growth to meet in mid and high end product requirements.
We secured an additional write high sensing award with the same customer.
Cumulative easy and hybrid wins this year are approximately $75 million and we expect further gains last quarter. We reported our first win with current sensing we aim to expand this application in other regions.
In defense, we were awarded contracts with several tier one customers for solar applications.
More recently, we developed and secured a new sample order for an ordinance application.
In Europe, we seek to gain share by building relationships with new customers, we are leveraging our footprint and capabilities in Denmark, and the Czech Republic, where we recently received sample orders with two new defense tier one customers.
With temperature sensing we secured a small initial order for an application in electric vehicles. The sensors part of the charging circuit for the battery management system.
In the precision frequency product line, we were selected for a design win.
Fiveg small cell application for systems in multiple countries and also secure distribution order.
We secured a multi year design award for low power pistol product in a defense application.
We continue to advance product innovations.
Our focus in the transportation market.
As we have stated previously is to develop sensor solutions that are agnostic to the underlying propulsion technology.
Strengthening our growth in the next decade as hybrid and electric vehicle penetration grows.
He these are expected to be less expensive than internal combustion engines in the 2025 timeframe as battery costs decline.
15 countries and to use states have announced phase outs of internal combustion engines in the 2030 to 2040 time period with Norway aiming for 2025.
We expect TV penetration to reach 9% by 2025 and 22% by 2030.
Our innovation during the series of electronic breaking new accelerator interfaces.
And high performance temperature applications.
We continue to research new material formulations, as we target growth in defense industrial and medical markets.
In defence our primary focus is on the solar market for forward and total rates.
In industrial we target inkjet printing flow and position as well as non destructive testing.
In medical the primary focus is medical ultrasound intra vascular medical ultrasound ultrasonic therapy and scalpel applications.
We continue to advance our traditional physician sensing for industrial applications.
And new encoder products for medical equipment.
The developments for ultra low noise high frequency TCX, OWS and LC axles for millimeter wave and sub six gigahertz systems are progressing as we continue to gain design awards to a major telecom OEM.
While the M&A environment has become a little more challenging due to covance and associated travel restrictions, we are adapting and continue to strengthen our pipeline of opportunities.
We seek to expand our range of technologies products customers and geographic reach.
We continue to make progress on our foundry operations and expect to have completed the improvements. This year. The team is making steady progress on process controls and the subsequent efficiencies.
The focus 2025 initiative has an important emphasis on building stronger customer relationships.
As part of this initiative, we are improving our go to market capabilities skills and sales incentive plans.
Face a stronger focus on profitable growth.
We are working to improve the quality of the sales funnel optimize our end market approach target new accounts and align our functional areas to be more responsive and solution oriented in line with our core values as part of our realignment and profitable growth. We are evaluating the product portfolio for longer term growth and margin.
Spansion.
We have moved from a period of sharp decline in the second quarter to a time of uncertainty as inventory levels are rebalanced in the market responds to high unemployment and other economic challenges.
In the U.S the seasonally adjusted growth rate for 2020 is closer to 13 million units down 21% for last year. We expect next year to be in the 14 million unit range.
On 10 days of supply are now 55 days down from 65 days of supply in the third quarter of 2019.
European sales are forecasted to decline, 24% from last year, and we expect 18.7 million unit levels in 2021.
The China market continues to be more robust with volumes predicted to be down 9% in the 21 to 22 million range for this year and up to 24 million units next year.
There are signs the commercial vehicle market may be on an improving trend as freight fundamentals continue to improve.
It's a little early to say how sustainable this improvement will be weaker.
We continue to see stronger growth in industrial and defense markets.
We remain cautious and market conditions in the next several quarters.
We expect to resume annual guidance for fiscal year 2021 in February.
Our liquidity remains solid we view this challenging time period as an opportunity to strengthen our capabilities.
Now Ashish will walk us through our financial performance in more detail Ashish.
Thank you Ken.
Third quarter sales were $113.8 million down 2% compared to last year six.
Sequentially sales rebounded strongly up 35% from the second quarter.
Sales to transportation customers decreased by 9% year over year, however sequentially they grew by 71%.
Sales to other end market increased by 10% versus Q3 of 2019 and.
5% sequentially.
Our temperature sensing acquisition had solid growth and added $6.6 million.
Organic sales to non transportation customers were up 4% versus last year.
We experienced double digit growth in sales to both the defense and industrial end market.
As expected the medical end market was soft.
Our gross margin was 32.4% for the third quarter up 80 basis points compared to last quarter and up 40 basis points compared to last year.
Conditions remain uncertain due to the impact of corvette and we are maintaining a focus on cost efficiency and capability to ramp production up or down.
As the result of improved revenue and careful cost management adjusted operating earnings were 13% up 170 basis points from last year and up 450 basis points sequentially.
As Ken mentioned, we are making progress on the restructuring plan, we initiated a few months ago. We will update you on the improvement as we complete various parts of the plan in the coming quarters.
Our year to date tax rate was approximately 24% and we expect the full year rate to be in the range of 23% to 25% excluding discrete items.
Third quarter 2020 earnings were 34 cents per diluted share.
Adjusted earnings per diluted share were also 34 cents compared to 16 cents last quarter and 29 cents in the third quarter of 2019.
Focusing on the balance sheet, our working capital excuse.
Like to open the ninth of questions at this time.
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Will now take our first question from <unk>.
Thank you.
Please go ahead.
Your line is open thank you.
Morning issues this girl I come from Canada.
It was nice to see the material improvement in your results relative to the first half of the year I'm I'm curious what are your thoughts on automotive grows entering the fourth quarter and perhaps into 2021, no crosslight vehicles and commercial alright, I ask because some of your peers have spoken about how production maybe.
And your term Pecan December.
But at the same time, you know, giving you a long duration backlog how are you thinking about the trajectory profitability.
[noise] profitability and 2021.
So Carl the first the first thing is we were already transitioning into the fourth quarter. This point in time, we we've seen a solid transition and we're really on the look out in the fourth quarter. So for any of the balancing and inventories and different different products. We've got different demands levels were left me.
Speak about the the fourth quarter, we talked about next year in terms of improvement in this are in North America Uhm, you'll Turkey. This year. The 14 million next year, China going from maybe 22 million back up in the range of 22 to 24.
And in Europe Yoga dropped below 216, getting it back up the bold 18, so what we're seeing overall is what we just called modest scale and you can tell that they're targeting the 5% organic we expect you know some some uncertainty out there over the next 12 to 15 months commercial vehicles side.
<unk>.
Yeah, I would say is improving M at a modest great and a little bit more in the mid range and then there's a class eight as well and our largest customer reported in the last day. They had some big declines in the last year and that they're expecting some improvement going forward as well. So that's how we see it but I would also tell you you know who you are.
Move outside of the the vehicle market in defense in industrial we've been performing very well and medical we had a little bit of softness in the quarter and add what we expect that doesn't prove next year and we're pretty excited by some of the products. We have in development and you know one of the most important things for us as we look at Yale.
The growth and everything else is in this remote environment, making sure I've engineering teams or engaged and making sure the products and develop that are coming through qualification. So that when is probably launch products for lunch with good quality and on time for our customers. So that's the fundamental value we bring in our proposition and we want to make sure. We're there for our customers.
And we're performing well enough to take care of away from the competition.
Very helpful. For my follow up you know I guess with sales recovering more quickly off lower levels is there any change in the scope of reinvestment priorities for the restructuring savings you've taken to.
Date, you know actually looking at 2021, such that those savings you know get entirely reinvested in you know other areas of the business.
A car we were how they put it very careful and very thoughtful over and a multiyear period for me put this restructuring plan together in terms of how we're approaching things like sure if services that we're going to make us more efficient as a company. So on the product side of it being very careful to make sure that.
Fundamental engineering capability of what we do is intact and I would say we'd left some leverage there that is b C improvements, we can and accelerate some things that we are regulated but obviously the most important thing for US is the safety of our employees, but really translating that then integrate with it.
Great I'll see the floor. Thank you.
Thanks Carl.
Thank you may take our next question.
Thanks, and good morning.
Hi, Justin.
So I I wanted to start with the follow up question on the fourth quarter I think he said you're optimistic about kind of the early meetings here in the fourth quarter and I know, you're not giving specific guidance, but just directionally is your expectation that the fourth.
And it looks pretty similar to the third in terms of revenue and earnings or is there anything sequentially headwind or tailwind that we should be mindful off.
Yeah, Yeah, just not starting out of hand, it over to Ashish as well and you know what we've seen a good transition in and we are and feeling it's pretty solid and we are also looking in terms of who is rebalancing on the industry. So do we think we're going to see a big difference.
Like that no could we see adjustments a few million up or down, yes, and and we've looked at not just the Oems, but the distribution side of it. So that's on the on the top line side on the on the earnings and margins you don't want leather she's comically rolled back in some some of the savings and that will have some impact but the obvious.
If we get any leverage on growth as well with the sushi yeah.
And just some details real quick the be talked about medical being soft in Q3, we are expecting that continued softness in queue for and then typically in December some of the Orient could be shut down. So you might have an impact on that but generally appeared man.
<unk>.
We are cautiously optimistic about Q4.
And on the cost side as the sales have improved.
To be fair retired employee base of the have reinstated some of the temporary cost measures that we have taken only on them to you.
For that will also have a little bit of an impact on the cost structure.
That's helpful on it.
Follow up on that last point. It is there any order of magnitude you can provide on that step up in cost if we think about modeling the fourth corner.
We would be looking to continue improving our overall profitability from the third quarter's Justin.
Understood.
And then secondly, maybe going back to the go to market strategy I know, that's been a focus and and the prepared remarks, you alluded to some of that the changes you were making on that front, but could you expand on that a little bit more and talk about you know this.
That's going forward and you know pro forma for some of these go to market changes, where you see the best opportunity for organic growth coming out of this downturn.
Yeah.
Yeah.
First of all you know for 2025 M. We've obviously set some goals entirely we haven't talked about the next sternly, yet and and one of the branches of that is being closer to the customers and not just the profitable growth, but the fundamentals of how you achieve that and where we see like in the laser focused at the moment in terms of.
We got a lot with the company in the last several years to reposition the product portfolio, the markets and and sometimes that causes you to focus Linda more internally. The next shortly and it's kind of been a little bit of a wake up call for all of us to say, we can do better here and so I'm looking at our our sales and and what really works and what needs to be.
Improved and quite frankly, as we do acquisitions, we learn from those acquisitions and that we certainly learned from the temperature acquisition and some things in the front end so to give you. Some examples the quality of the funnel what are we winning in the funnel and how much are we putting into the funnel at is one thing and how do we get a better percentage conversion wait on that.
That and the other thing is the model is it is it a salesperson or as a salesperson paired with the Reds and engineering application engineer, depending on the market and how that Formula works for US is another example, and then there's some other areas. We're looking at and saying you know, we expect an account manager to be.
Maintaining an account and doing some go to put you always expected, but we're putting a bigger emphasis on business development and how we free up more painful for that aspect of it as well in each of the end markets. Now. This is something that we're going to incrementally step up but I would tell you where absolutely committed and I'm personally committed to this.
In terms of improving just across the company, we've got great people, but we can improve and to give you. Just some examples suggest some I'm not sure if that answers. Your question in total, but I wanted to give you a framework of the you know the urgency and the passion, we failure and I'll tell you what this remote working environment getting to the customer.
And using every aspect of how we go to market more effectively.
The important.
Great. That's that's helpful and and maybe just one last one kind of along those lines you know as we look into 2021, and I know, you're not giving guidance but.
As we think about B and market forecast and maybe we kind of wait bad across your your business.
What are your thoughts around your ability to outperform that and market forecast or are there new program program wins, we should be keeping in mind for next year that would allow you to outperform next year or maybe you could just give us some type of framework around that.
Yeah, I'm, just starting with transportation if you look at how we performed even this quarter. If you were to back out the commercial vehicle aspects of it for the light vehicle, we were very much in line with the market and we obviously wanted to improve that going forward, we know there's capability into transportation market to bounce back.
Quicker, but it's uncertain environment and high unemployment and post selections and everything else I think you've got to let things stabilize a little bit on the other hand EM on the defense side, we've been making solid gains I'd be making solid gains there for a number of quarters you heard us talk and are prepared room.
<unk> getting a number of new sample orders wouldn't you and Oems and the defense area at some of those take a little bit of time and then the long what we would call long sticky programs. So we feel like we've got a good focus there and on the industrial side and we think we can be more effective.
Getting back even to the go to market I will changing some things across the front end. There. So we're we're cautiously optimistic in that area and then as you heard back to transportation and what we're really looking hard at how we can get extra momentum on D. M electric vehicle and hybrid side of it and you can see the even the <unk>.
With your acquisition is paying into some of those areas as well and then she said that temperature acquisition work for very pleased with the performance.
Okay, Great I'll leave it at that I appreciate the time.
And can just some thanks joke once again, if you would like to ask a question P signal by pressing sty one.
Alright take our next question. Thank you.
Alright, John furniture severity.
Hi, John one John Dark.
Go back to the temporary costs, a little bit Uhm do you expect them to be fully backfiring fourthquarter order still be some of your holdings be holding back into 2021.
John via evaluating that based on how the quarters turn out.
And the third quarter would be brought back some of the.
Temporary cost measures that we have taken we've continue evaluating how things are.
Progressing in the fourth quarter into Q1 them into the queue to so.
No problem. So then that it'll.
It'll be driven by how the and market type of farming.
Okay and regarding B b.
Earns benefit cost reduction actions can.
And talk about the comedy remember, it's realizing that in your heart before.
<unk> 22 to 26 cents to the bottom line.
To John the the the progress on that is ongoing as we speak in the third quarter back in July that'd be talked about.
The restructuring plan the way we had communicated it was that.
Acting the first half of 2021.
To be.
Little bit more under pressure in terms of cost and then we would see improvements from the restructuring programs, giving us a lift in the second half of 2021. So that has not changed and then we continue getting progressive improvement from that and putting into 2022.
So by the end of 2021, you're <unk>.
<unk> realized run rate or whatever that targeters.
If he should be most of the way there John but not but there are some.
Things that are stretching to 2022 and stuff.
Okay.
On the commercial vehicle sorry, it seems like according to most estimates that where we fit the bottom and a certain a classic truck working here in a multiyear recovery.
Is that what you're you're breaking into your outlook and and how you position to benefit from that I'm Gonna go falling basis, all sorts a margin impact for you for somebody to kind of go from there.
So John on the on the top line part of that question.
Where am see some improvement I think and are prepared remarks, my comrade laws and.
Yeah, that's the trying to figure out how sustainable that is and we've seen good improvement in the somebody couldn't already in the mid range M and M. Obviously as you said the the transit heavy duty there's improvements there just wanted to see that it's sustainable and you know our largest customer.
And is is and reported yesterday and they work I'm cautious with a little bit that had a tough year I think their sales with them more than 20% and.
It's gonna be.
Just just something we we we were carefully managing through at the moment and then obviously, if there's gonna be some inventory adjustments out there. We think it's starting to move in a decent direction, but we we'd like a quarter or two behind us before we get very bullish.
Karen.
Mid range do you trust the five to seven close truck springs or products.
The the biggest the biggest area for us in the in that range would be the the Dodge Ram those kind of trucks.
Okay. So you you don't <unk> the delivery trucks that were saying.
There's a park a second range minerals.
We do a small portion and small portion of that.
Cause they're also.
Four cats, and a sharper covering up business or you can tell from Walmart Amazon packages I was just wondering if that's in their furniture at all so.
<unk>.
Yeah, what's that we should get a little bit of help there, but the overall mixed in the total volumes if I look at heavy Judy what you just described in the mid range.
We expect.
<unk>, two 5%, but it could be better it could save some headwind depending on how things go out there with some of the uncertainty and obviously ready for capacity and ready to move.
Okay Gotcha, alright, thanks for taking my question, sorry get back into your.
Thank you Joe.
It appears paying no further questions at this time that sound Sullivan.
Tend to conference Bakhtin from your personal exogamy right. Thank you.
Okay, great hold on I think there was somebody in the queue would you mind checking again.
Yeah, No problem my apologies.
Once again, if you would like to ask a question. Please take note by pressing sty one.
Unlike take our next question.
Uh-huh.
Good morning to you right.
I didn't have any <unk>.
Oh. Thank you. Thank you for giving US can view on your private funded by that actually tomato market opportunity huh.
<unk> high temperature assassin, Jason <unk> E V can you help us.
The product strategy, including how <unk> you can put in a portfolio.
Other works like how much can be built based on your problem or a portfolio and and how much my compromise position.
Yep and Hendy just get it takes give you some color on that obviously, we talked about charging circuit and some other things that relate to the to the fast food circuit. There's other things that we wouldn't have been the father portfolio today definitely want to add to it going forward to give us much more capability on the E V site.
So am that's and involving story at the moment and as you know world was a little cautious about getting too bullish until we have our products ready and got some good traction, but you can see some early signs there that we're making progress in that part of the longer term thinking that we have as we move forward with the first steps on that acquisition too.
Thank you Uhm and then two months keep them concerns on another wave of coffee sightseeing across the country again.
When you talk about in Pennsylvania down Tuesday effect sample in demand in two four in general.
And Hindi I think Ashish may have a reference to this already that we saw a little bit of southwestern medical in the third quarter, we think that and continue the maybe some rebalancing of inventories a little bit and we seem to have a message would be receive a good transition into the <unk>.
Months, we see a solid quarter might we have a few million up or down that's possible and then in the two that was getting balanced, but we're not sitting here worried about that big decline and what we're trying to figure out for 2021 is just how we moved to this pandemic in the stability of things.
Got it and then last name Smith.
I can't for us it looking back historically, how much <unk> what caused by mold around great that Mexico location and resolving your family's policy issues.
And if you have not talked about specific numbers, there, but generally what I would say to you is.
We have talked about the truth margin expectation to be in the range of 34% to 37% and that'll be a working hard to get back break back into that range B b used to be there several quarters ago and that is first school to get back there on a sustainable basis and then make for.
The improvements from there as we go forward.
I see and then I said to help off modeling C. T S.
That'd be one.
Can you share homeless extra expand when she was at one P. S. <unk> February constantly here.
Can be we talked a little bit about this and the earnings call in July.
That the improvement.
The restructuring program will be.
Roughly the offset.
To the reinstatement all essentially cost measures.
But that should give you an indication of approximately what are you talking about and that's why we think we will see a slightly more pressure on profitability in the first half.
And then as the savings from the restructuring program start kicking in.
Maybe we should see improvements in the second half of the year.
Got it and then and a great Q3 resolved all the basketball games and strong on queue for thank you.
Thanks and <unk>.
And it appears sit there and I know further questions. At this time I would like to have to call back to you Mister Sullivan from them clothing or additional EMACS Ikea.
Great. Thank you Grace and thanks, everybody for your participation on today's call I hope everybody stay safe and healthy and we look forward to update you again in the next quarter. Thank you very much.
Okay. It's today's conference you may 9th disconnect your lines. Thank you.
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