Q2 2021 CTS Corp Earnings Call
Good day and welcome to the Cts Corporation second quarter 'twenty 'twenty 1 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Kieran O'sullivan. Please.
Go ahead Sir.
Thank you Traci good morning, Thank you for joining us today and welcome to Cts as second quarter 2021 conference call sales in the second quarter were $129.6 million.
54% compared to the same period in 2020.
Customer demand remains robust.
While supply challenges persist, especially for automotive products.
Second quarter gross margin was 36, 8% up 525 basis points from 31, 6% in the second quarter of 2020.
Although improved gross margin performance continues to be impact.
Packed it by semiconductor and commodity price increases as well as increased logistics costs.
EBITDA margin of 21, 5% was up 480 basis points from 16, 7% in the same period last year.
Second quarter adjusted earnings per share of <unk> 52.
We're up 225% from 16 in the second quarter of 2020.
Later, Ashish will add color to the GAAP performance.
<unk>, a noncash charge related to the U S pension plan termination.
Operating cash flow of $19 million was up from $12 million in the second quarter.
For a 2020, new business awards of 174 million were solid and up from $105 million in the same period last year Ashish.
Ashish <unk>, our CFO is 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 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 is contained in the press release issued today and more information can be found in the company.
Company's SEC filings to the extent that today's discussion refers to any non-GAAP measures under regulation G. The required explanations and reconciliations are available in the investors section of the Cts website.
I will now turn the discussion back over to our CEO Kieran O'sullivan.
Ashish in the second quarter, our sales were $129.6 million up 54% from the second quarter of 2020.
Excluding sales from the acquisition of sensor scientific sales were up 52% organically.
The Ssi acquisition continues to deliver solid growth.
Thanks, as I referenced in our last earnings call. We expected the transportation sales run rate to be slightly lower than our first quarter 2021 performance due to ongoing supply challenges.
Our teams worked creatively and diligently to secure parts approved substitutions and adapt with speed to support.
Customers.
Transportation sales, while up 88% from the same period last year would have been stronger by a few million dollars. If we did not have these supply challenges, we expect the supply challenges and some customer shutdowns to persist in the second half.
New business Awards were 100.
Our 3.4 million for the quarter up from $105 million in the same period last year.
We added 3 new customers in the quarter 2 in transportation and 1 in telecom.
In Asia, we added a new transportation customer in China for a large platform that will ship in the 2023 timeframe across.
Across this accelerator modules, we had wins with 2 existing customers in China.
Secured awards with 2 Japanese Oems for the North American market and added a new electric vehicle customer in Europe.
With passive safety sensors, we had wins with existing tier 1 customers across all 3 regions.
Third said 1 of the wins for an EV applications.
In Europe, and North America, we had wins for throttle position and transmission position sensing book.
Bookings in sales for 2 Wheeler applications were strong in Asia.
We continued to advance our diversification strategy by growing our non transportation end markets.
In defense, we had several undersea sonar wins and we also maintained good momentum with RF filter products for GPS anti jamming applications temperature sensor wins were solid in defence and we had an important win for an aviation application in Europe.
In industrial we continue to see strong.
With demand for temperature products across pool, and spa as well as H back applications.
We also had a large win in industrial printing securing a 2 year contract for the market has expanded into new applications such as garment printing.
Momentum in medical markets was positive.
For the inconsistency is.
Strongly due to countries emerging from Lockdowns, and some customers being impacted by material shortages.
We had various temperature application wins and additional wins in CPAP medical ultrasound and intravenous drug delivery for medical ultrasound, our design wins are increasing through new programs with existing.
Existing customers and several new customer sampling our solutions.
We received 2 transportation OEM quality awards and were also recognized for delivery performance by an industrial OEM and a large distributor.
Overall across all end markets demand remains robust some.
Automotive customers have confirmed demand through 2022.
Order intake for electronic components was strong in the second quarter.
Although we have not seen signs so far we remain cautious of potential inventory buildup in various end markets.
This past quarter, we announced a $50 million stock buyback program as.
To capital deployment, our emphasis remains firmly on supporting organic growth investments and using our strong balance sheet to advance on M&A and alignment with our strategic priorities.
We continue to strengthen our M&A pipeline potential changes in capital gains taxation may also provide some further.
Momentum in our areas of interest.
We continue to seek to expand our range of technologies products customers and geographic reach and at the same time continue to diversify our end market profile to complement our quality of earnings.
For the second quarter transportation sales represented.
As we have 55% of our total company revenues as we made progress in industrial medical and defense sales.
Operationally, we can see the end of our journey and the rollout of the SAP system.
Though we will continue to optimize our learnings and capabilities.
The previously announced restructuring.
<unk> is a 22% to 26.
By the second half of 2022 are tracking close to the targeted range building.
Building the Cts operating system capability continues with for sites advancing their proficiency on the system and tools as we aim to empower our teams and strengthen operational and.
Savings for Ts.
Transitioning to end markets for semiconductor shortage is expected to reduce vehicle builds by 6 million units this year.
The supply of global Microcontrollers is improving from companies, such as Renesas, and NXP, which should deliver some improvements to vehicle Oems.
For the U S light vehicle transportation market demand remains robust, we still expect approximately a 15% to 16 million unit range. This year up double digits year over year.
On hand days of supply are between 25, and 30 days the lowest in recent history and down 50% since January.
This year.
European production is forecasted in the 16 to 18 million unit range with some uncertainty persisting due to the extended Covid lockdowns.
The Chinese market has fluctuated recently, showing the first chip related impact China volumes are expected in the range of 23 to 20.
35 million unit range for this year.
The commercial vehicle market remains strong not only for this year, but likely into the first half of 2020 to the.
The biggest challenge is the supply of semiconductors as demand remains robust.
As I mentioned earlier for transportation the supply challenges will continue.
To impact our sales in the second half of this year.
However, we see improvements in medical and as well as solid growth in industrial and defense markets.
In terms of guidance for the full year 2021.
We are updating our range our previous guidance was for sales in the range of 400.
$5 million to $500 million and adjusted earnings in the range of $1.35 to $1.70.
We are now updating our guidance for sales to be in the range of $480 million to $500 million and adjusted earnings are expected to be in the range of $1.70 to $1.90.
Further updates will be.
<unk> as we continue to monitor the ongoing supply challenges.
Phase 2 of our journey and our biggest priority as we advance towards our 2025 goals is layering on a more robust sales growth profile. Our teams are making progress as we continue to focus on existing accounts and add resources and capabilities.
40 threes to further support business development at this time Ashish will take us through the financial performance Ashish. Thank you Kieran.
Second quarter sales were $102009.6 million.
Up 54% compared to the second quarter of 2020 and up 1% sequentially from the first quarter.
<unk> ability to transportation customers bounce back 88% compared for the pandemic driven those in the second quarter of 2020. However, we were down 6% sequentially as we saw the impact of supply challenges on global production volumes.
Sales to other end markets increased 26 percentage.
<unk> year over year and were up 10% sequentially.
We had another quarter of solid year over year double digit growth in the industrial as well as aerospace and defense end markets.
Sales to the transportation end market represented 55% of our total revenue Vista.
This reflects progress.
Sales of <unk> strategic goal to further diversify our business by growth in the industrial medical as well as aerospace and defense end markets our.
Our 2 temperature sensing acquisition have performed well and had strong topline growth in the second quarter change.
Changes in foreign exchange rates impacted our revenue.
Favorably by approximately $2.7 million.
Our gross margin was 36, 8% in the second quarter.
525 basis points compared to the second quarter of 2020, and up 360 basis points sequentially from the first quarter of 2021.
These improvements reflect the progress in operational efficiency in our foundry operations over the last 12 months as well as improvements in other parts of our business.
Also benefited from a larger portion of our revenue coming from the industrial medical and aerospace and defense end markets.
Raw material price increases as well as freight costs continue to impact of unfavorable <unk>.
And we are working closely with our customer base to offset or share these cost increases.
In the last quarter, we generated 3 cents of EPS and savings from our restructuring program announced.
In the third quarter of 2020, bringing the total savings to 12 cents of EPS so far.
As we mentioned back in April the timing of some of our projects is being impacted due to the ongoing impact of COVID-19 on travel as well as an increase in demand.
We are still on track.
To achieve the targeted annualized savings of 22 to 26.
By the end of 2022.
SG&A and R&D expenses were $27 million.
Or 21% for the second quarter.
Operations operating expenses increased primarily as a result of reinstating.
Announced cuts made during the pandemic to offset the impact of revenue declines and higher incentive compensation expenses.
In the second quarter, we recorded a noncash charge of $21 million related to the termination of the U S pension plan.
We are expecting.
The remaining non cash charge of approximately $101 million to be booked in the third quarter. When we complete the settlement process.
As a reminder, these are non cash charges and the U S. Pension plan is expected to be overfunded at settlement.
Second quarter tax rate was 246% as a result of the impact of the pension settlement charge on our income statement.
We anticipate our 2021 tax rate to be in the range of 19% to 21%, excluding the impact of the pension settlement and other discrete items.
We are carefully watching the new tax proposals and initiatives of the bite and administration.
<unk> will discuss the impact on our business in the coming months as we get more clarity.
Second quarter 2021 earnings were <unk> <unk> per diluted share adjusted earnings per diluted share.
For Q2.
Compared to <unk> 16 for the same period last year and 46 last quarter.
Now I'll discuss the balance sheet and cash flow.
Our controllable working capital is essentially flat from the end of 2020.
While we remain focused on working capital efficiency.
Or should we anticipate carrying some excess inventory where possible to manage supply chain concerns over the next few quarters.
Our operating cash flow was $19 million for the second quarter.
This is an improvement from $12 million in the second quarter of 2020.
We generated.
<unk> seen millions of dollars in free cash flow cash.
Capex was low in the first half primarily due to the timing of various projects in 2021, we expect capex to be in the range of 4 to 4.5% of sales.
Our cash balance on June 32021 was.
$117 million.
Up from $92 million on December 31, 2020 or.
Our long term debt balance was $50 million down from $55 million on December 31, 2020, our.
Our debt to capitalization ratio was at 9.9%.
At the end of the second quarter.
Compared to 11, 4% at the end of 2020.
The combination of our strong balance sheet with a net cash position and access to approximately $250 million through our credit facility gives us the liquidity to make progress on the right M&A translate.
Transactions.
In early July.
We've successfully went live on SAP.
At Boise, Idaho in Zacatecas, Mexico.
These are locations from our first temperature acquisition.
As we have previously mentioned more than 90% of our revenue now.
It's from sites that are running on F&B.
We expect to complete the rollout to our remaining sites in early 2022.
Before we wrap up as Kieran mentioned earlier, we see a sustained demand environment in the second half of 2021.
However supply chain challenges.
Now contacted to persist for us and our customers on both material availability and cost through the rest of the year.
Our current expectation is that Q3 could be the most challenging with some improvements in the fourth quarter.
This concludes our prepared comments, we would like to open.
As our clients for questions at this time.
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We will now take our first question. Please go ahead caller your line is open.
Thanks, and good morning.
So maybe Darren.
<unk>.
Maybe I'll start with 1 on the guidance. So if I look at the midpoint of the updated revenue guidance. It was up about 4% net.
Midpoint of the EPS guidance was up 18% can you just help us understand how your assumptions have changed.
Mkay margin perspective, along with any tailwind below the line that can just help us bridge that gap between the revenue upside in the EPS upside.
Yes, just and I'll start with the revenue side of it and Ashish can address the margin and.
If you look at it you can see that we're being.
A little cautious on the second half of the year.
The supply situation has been very challenging we did the teams did a great job here in the second quarter, where we faced an uphill battle on many parts. So we made a lot of progress and to give you a sense of it I'm on escalation calls on a regular basis here with our suppliers.
If you take the second.
Second half of the year, we're probably looking at a $10 million to $15 million risk per quarter in the revenue side of it now looks tell you we are doing everything possible to get parts and.
You talked to US earlier in Q2, we would have been in a tougher situation and we met a lot of progress, but its still pretty challenging out there and what we're seeing.
Seeing from some of the OEM customers is extending some shutdowns in certain areas as well along with the summer months shutdowns. So thats on the on the topline and Ashish true Jim.
Justin on the profit side Youll see that the gross margin and the EBITDA performance.
In the.
The second quarter was considerably stronger than the first quarter.
We are gaining more confidence in the operating efficiency in our operations.
And we have been working hard on that for the last 12 plus months is we have updated you guys every quarter.
So that is built into it.
<unk>.
We are actually being cautious as Kieran mentioned on the revenue. So the same level of profitability may not continue in the second half just as the volumes come down and we still have the pressure from commodity pricing freight costs. Although some of it is we've talked about.
We are passing onto our customers.
So it's a mix of all that is giving us a little bit more confidence from the.
Earnings for the second half.
Okay.
For 1 Kieran following up on what you said about the $10 million to $15 million revenue risk.
Second half is most of that in the transportation segment or is a component of that within the non transportation end markets. Maybe you could just give us a rough split on that.
Yes, just an absolutely.
Nearly all of it is in the transportation segment the other the other areas of the.
The business had some small challenges, but we overcame dose it's really the transportation side.
Okay, and then Ashish maybe a quick 1 for you on the share repurchase authorization anything on the timing of executing on this plan that you could share and maybe you could clarify.
This is baked into the updated 2021 guidance as well.
So Justin the 1 thing that I'd like to point out that Kieran mentioned, our biggest priority in capital deployment is on organic.
And the right inorganic activities.
The share buyback program was authorized by the board in the second quarter. The primary purpose is not to significantly reduce the share outstanding it's more from a.
Opportunistic as well as.
Maintenance sort of buyback.
Erotically do stuff, but I don't think.
We'll have a.
Massive impact on our earnings per share in the second half.
Okay. That's very helpful. Congrats on the quarter. Thanks for the time.
Thanks, Justin.
We will now take our next question. Please state your name and company for for posing a question.
Alright, John <unk> from Sidoti.
Good morning, Kieran and Ashish good.
Morning, John Hi, John.
I guess I'll start with some of the input costs that you expect in the second half is there any meaningfully different cost and do you expect in the second half from the first half.
2 day.
Exact same issues.
John the issues are the same the magnitude has actually increased.
We saw inflation, we talked about roughly $1.6 million impact.
And that number has gone up slightly.
And freight costs also.
Along with the continued to impact us unfavorably.
And as we discussed earlier in the year, we are actively working with our customers too.
Pass on some of those cost increases and we are getting traction in.
Many cases, some more than others, obviously, but yes.
Yes, working closer.
Also to balance that out to the extent possible.
Okay, and then our expectation John is that the price the cost increases will continue impacting us in the second half.
Okay. So in recovering these cost for these 2 price increases or surcharges.
Closely we've gone with price increases in most of the cases John.
We are also evaluating whether it makes sense to do surcharges.
For freight costs would be a good example of that.
Alright, but in our case, it's mostly through price increases at the moment.
And John just.
Add to that I mean, the main challenges across the supply base are on semiconductors.
And also on residences and then there's some other areas too for those to really stand out that's been the biggest challenge.
Resin is still of course.
Supply issue there was a thought that there was obviously, a texas issue and Thats.
Kind of way for the most part.
Yes, I understand the Texas piece, but there's other components or materials that go into it like some glass substrates and other things and that I would tell you. The the inflation there is not just double digit it's high.
Okay.
And Kieran you actually said something in your prepared.
Good comments.
Concerns about.
<unk>.
Inventory buildup, where are your concerns what market are you seeing that in.
Yes, Jon just to be clear and my comment was we are not seeing signs so far of any inventory buildup.
Remain a bit cautious we're watching that checking that well we haven't seen any yet.
Okay.
Misunderstanding alright and.
Automotive customer confirmations through 2022, and it sounds like cliffs.
Commercial vehicle.
Construction through the first half of 2022 at least as far as visibility.
How is that different than in prior years.
Yeah.
And normally we would while we have long term contracts that would extend for a few months.
As we go forward on the transportation side. So some of our customers that have come and said Hey, we want to book.
Through the first half or the end of 2022 in transportation.
Years and in some other areas as well John So it's a much longer.
For it's a firm commitment on the part.
And John that does not apply to all customers.
And there's a few customers that have done that.
More to ensure that we can provide more clarity on the supply chain continuity there.
And does that encompass for price increases that you're talking about is that kind of factored into those longer term no.
Agreements.
It's a mix John some of the pricing terms are for this year and net.
Next year is kind of probably going to get reevaluated as well.
Okay, and 1 last question I'll get back in queue, you talked about.
The higher SG&A as other deferred costs come back.
Is there anything else in that $27 million number that's kind of hard backed it out in the quarter.
Or is that a good go forward kind of a run rate for the balance on that this year, but through 2022 or whether it be changes from the restructuring.
Yes.
Non we'd be normally don't guide at that level, but are there 27, it should be a reasonably good representation of where our cost base is right now.
And you know as we go forward, we'll give more updates.
On that is.
They'd be generally don't guide on the SG&A, but we'll obviously talk about it as we publish our actual results.
Okay.
But I'll rephrase. The question are there any other restructuring actions that have yet to.
Happened there that are going to lower the SG&A number go forward.
The restructuring costs that we are working on are the savings sorry more associated at this point with the gross margin side.
There will be some impact on overall operating expenses as well as the larger portion of the remaining will come out from the.
Gross margin numbers.
Great Great. Thank you Ashish and Kieran Thanks for taking my questions.
Sure. Thanks, Joe.
We will now take our next question. Please state your name and company before posing a question.
Hey, Hello, guys.
Hey, Hello.
Thank you Ravi for Karl Ackerman from Cowen Congrats on the quarter.
So last quarter, you indicated 18% of our their backlog was tied to electric vehicles.
While you have previous a fab yard mostly between electric vehicles and gas powered.
Would you. My question is what did you receive a price premium or margin uplift from your AG products and I hope another question. Please.
So and just on the EV side of it.
For pure Transportation Awards.
Automotive market is tough it's always been.
Been difficult and you got to women you gotta be reducing cost in good quality. So I wouldn't say a huge difference at all.
Okay Alright.
And you talked about commercial.
Vehicle build is staying strong and through the first half of next year, maybe just tell us what assumptions you.
You have for commercial vehicles and light vehicles at the end of the growth for Q3.
Any color would be helpful.
Yeah.
Just I'd probably take your part of your question for for next year, obviously, we read some industry reports out there on the forecast and where the volume to ramp.
The biggest headwind there is just components supply, but if we're going from that is just what we're hearing from our customers and what we can secure in parts in terms of supporting that as well.
Thank you.
Youre welcome.
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We'll now take our next question. Please state your name and company before posing. Please go ahead.
Hendi societal Gabelli fun good morning, Ashish good morning Kieran.
Hi, Hendi.
Okay.
I'm wondering whether you are.
Whether you can give us some insight on customer behaviors.
At some point.
Our gifts under supply short day, its customer will start building up their inventory of components.
This applies to your customers as well.
So what what kind of threat or pass or are we expecting going forward like okay, I don't need their supply chains or dates and then at some point in customer wheel bill like perhaps like higher inventory of components within some of your products as well so what is your expectation.
And.
In that area.
Andy its its M.
As we said in the earlier comments.
We're cautious about inventory buildup, but we haven't seen any certainly on the on the component side of it on the transportation side of it actually inventory levels are way down they're.
<unk> historic lows at 25% to 30 days on hand days of supply in North America, when that should be up in the 65 day range.
We're basically at the moment, it's just get get every part you can do to build the vehicles and so we're not seeing any any inventory buildup and I'm looking at the forecast.
Down net out there for some people, saying, if we didn't have supply that could be getting back to a.
16 to 17 million Saar I don't think we're going to fly back to a 17 million Saar in the next day, a year or 2 but staying more robust around 16 million seem somewhat possible.
And again on the other end markets and through distribution.
We're not seeing an inventory buildup and believe me, we're keeping a very cautious eye on that the other side of that is an escalation meetings with our suppliers, they're checking as well as making sure that people are not over ordering because you can imagine they've got other customers, who can take the parts as well and so it's really a pretty.
Cash robust demand environment is just this whole supply chain and we see it getting better in the in the fourth quarter and into next year, but it's just just challenging at the moment.
I see so kieran.
So, let's say if a supply shortage like persist for several quarters I'm wondering whether a teleconference.
And frankly built up may happen later and therefore in for.
<unk> built up may not be in the second half of 'twenty or 'twenty 1.
Yes.
We're not seeing any signs of inventory buildup in the second half of 'twenty, 1 and it's probably a little too soon to comment with great detail.
Tail on 'twenty, 2 but all the signs we're seeing are just securing supply for more sustained demand.
I see yeah.
Okay.
And and then second question is for Ashish.
So I think my understanding about growth.
Margin is a directional lead for the second half we will feel see some headwinds, but there's also some improvement.
And then I.
Can we look at your long term target range as our base case scenario or of the restructuring may take.
Our gross margin a little bit above the high end of the gross margin target.
Target range.
So hendi I think youre right on in terms of restructuring we would expect further improvements.
Some of the headwinds that we did talk about volume is probably the biggest 1.
That we're anticipating in the second half and you can see the magnitude of that based on our guidance that we've provided.
And the material cost increases that we just mentioned they've gotten slightly worse compared to the first half so there'll be some added pressure there and the other thing that does have an impact.
And our cost structure is the foreign exchange rates most of our manufacturing is done outside the U S.
And that can also have an impact from the gross margin percentage from time to time.
Thank you for US is thank you Kieran a great Q2 results.
Thanks.
Thank you Hendi Kieran.
We will now take our next question. Please go ahead.
Hi, guys just a quick follow up Ashish I think you said you got you've realized 12 cents of savings.
And maybe I didn't hear you properly in the.
First half for the year from restructuring actions.
Is that did I hear that properly.
12 cents from the launch of the restructuring program John So.
I believe the number was 3 <unk> in the first quarter 3 in this quarter and we had said 5 in the second half of last year and there.
Rounding in there.
So its total program to date.
Net.
So that's an annualized number 3 from the first quarter of <unk> from the second Youre running at an annualized 12 am I understanding that properly.
It would be 12% in the last 12 months.
And we are looking for more savings as we go forward.
Okay. Okay. Okay. I was just for confused on that 1 okay and.
Just just on the revenue.
Expectations to go down could can we just work for that 1 more time why is that the case.
And supply chain challenges John.
John particularly in transportation Thats, where the real issue is.
Getting semiconductors is the real crunch pointed at the moment and then the other side of that is some of the customers are doing extended shutdowns as well or shutting down because there's other semiconductors that they can't get like micro controllers.
Okay.
Right.
Sorry, John I was going to say karen's comments earlier on the call.
We were able to pretty reasonably manage the second quarter.
And we did better than we expected to be able to do because of the supply chain challenges.
We are expecting things to be much tougher in Q3.
John.
Obviously, we'll be doing everything we can to support our customers and minimize that as much as possible, but that challenge and risk exists at the moment.
Well I guess I'm, just curious because we had.
A fair amount of high.
The high profile shutdowns in the first half of the year, So you're suggesting you expect more shutdowns in the second half for the year than the first.
Yeah.
Yeah, I mean at least at least the same or a little sorry, a little more as what we're reading John M M.
Look at the whole forecast, we see about $6 million.
Of shortage on vehicles.
Overall globally, and I think 5 million has been.
Announced up to about a week ago, but there's other noise out there thats, indicating more like 6.
Okay alright. Thanks, Thank you guys okay.
Okay. Thank you.
As a reminder to ask a telephone question. Please signal for pressing star 1 we'll pause for just a moment to allow everyone off.
For Tunis sheet to signal for questions.
Okay.
For the personnel further questions at this time I would like to turn the conference back to Mr. O'sullivan for any additional or closing remarks.
Thank you for AC and thank you for everyone for your participation on.
On today's call and for.
We look forward to updating you on our performance in October and getting through these supply chain challenges and best we can thank you.
This concludes today's call. Thank you for your participation you may now disconnect.
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