Q3 2021 CTS Corp Earnings Call

October 27, 2021

Good day and welcome to the C. T S Corporation third quarter 2021 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Kieran O'sullivan CEO. Please go ahead Sir.

Thank you Traci good morning, and welcome everyone to our third quarter 2021 earnings call. We reported solid financial results that were propelled by our ongoing diversification efforts sales in the third quarter were 122 million up 8% compared to the same period in 2020.

Customer demand remains robust while supply challenges persist, especially for transportation products.

Third quarter gross margin was 37, 3% up 490 basis points from 32, 4% in the third quarter of 2020 EBITDA.

EBITDA margin of 21, 7%.

It was up 270 basis points from 19% in the same period last year.

Third quarter adjusted earnings per share of 46 cents.

We're up 35% from 34 cents in the third quarter of 2020.

Later, Ashish Agra bolt, our CFO, who is with me for today's call will speak to the GAAP performance operating cash flow of 21 million was down from 26 million in the third quarter of 2020, New business Awards of 179 billion were solid and up from 127 million in the same period.

Last year, Ashish will take us through the Safe Harbor statement Ashish.

I'd 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's SEC filings.

To the extent that today's discussion refers to any non-GAAP measures under regulation G.

Required explanations and reconciliation are available in the investors section of the Cts website.

I'll now turn the discussion back over to our CEO Kieran O'sullivan. Thank you Ashish and the third quarter, our sales increased 8% to $122 4 million versus the prior period demand from customers remains strong, but not surprisingly revenue has been dampened by persistent supply chain constraints.

<unk> throughout the global economy, especially for automotive products, where we saw sales decline in the third quarter.

Excluding sales from the acquisition of sensor scientific sales were up 6% organically.

Importantly, the Ssi acquisition continues to deliver solid growth and we're pleased with the performance of our temperature acquisitions.

And the momentum we are building to scale this platform.

We are benefiting from the richness of our customer base.

In particular in transportation end market.

As a result, we performed better than the overall market.

As our teams excelled in sourcing initiatives globally, including the qualification of alternative sources.

Gross margin for the third quarter was 37, 3% up 490 basis points from the 32, 4% in the prior year as we gain momentum from the advancement of our diversification strategy that I was talking about more than just a minute.

EBITDA margin of 21, 7% was up 270 basis points from 19% in the third quarter of 2020, we continued to be impacted by rising commodity prices as well as increased freight costs that said, we've been working alongside our customers to offset our share of these costs.

Increases.

While inflationary pressures negatively impacted our earnings for the third quarter, we remain confident in our ability to navigate this dynamic environment.

Third quarter adjusted earnings per share of 46 cents were up 25% from 34 cents in the same period last year, New business awards of $179 million were solid and up from 127 million in the same period last year, we added two new industrial customers in the quarter.

One for an RF filter application and the other for a temperature controlled crystal component component applied in the G. P. S application.

Our long term strategy centers on diversifying our end market profile by expanding our range of technologies products customers and geographic reach.

This diversification will also enhance the quality of our earnings we made tremendous progress on this front with the non transportation related revenue moving closer to 50% of total revenue during the third quarter of 2021.

As a reminder, historically our non transportation related revenue was roughly a third of sales and our movement towards 50% of revenues is a meaningful shift that advanced our business across the board.

As we move forward, we will continue to strategically grow our transportation business.

At the same time, continuing to increase the growth rate of non transportation revenues.

We are well positioned in multiple end markets that offer attractive growth prospects in the industrial space. We are seeing good traction in inkjet printing related to packaging and ceramic tile printing.

We continue to expand our applications in cold and hot temperature sensing inflow of measurement, we have developed transducer applications in an area, where we see good growth opportunities.

In medical we see strong mid to long term growth driven by traditional ultrasound technologies. Additionally, with Intravascular ultrasound applications, we are in sample qualification phases with potential customers.

Expanding our offering of temperature sensors in the medical market is a priority for us.

In aerospace and defense outgrowth in undersea sonar is expanding as we develop samples with new European customers, where we expect future growth more recently, we provided samples for testing in underwater unmanned vehicle applications. We are working on new material formulations, which we expect to.

<unk> solid tailwind for next generation products and new applications.

In transportation, the move towards hybrid and electric vehicles as well as increased sensor content with passive safety and future E brake applications presents a tremendous opportunity importantly, except for the smart actuator. The rest of our portfolio is agnostic to the propulsion system, which allows us.

To be flexible to meet the needs of our customers.

Overall across all end markets demand remains robust in particular in transportation, which we expect to continue given the historic low days on hand of vehicle inventories.

As I highlighted last quarter, some automotive customers have confirmed demand through 2022 order intake in the non transportation end market was again strong in the third quarter.

We remain cautious of potential inventory buildup in various end markets, but most likely will not see this as an issue in the first half of 2022.

As I mentioned earlier non transportation sales now account for nearly 50% of our revenue supported by our efforts to diversify the business.

With a very challenging supply chain environment, our teams worked creatively and diligently to secure parts and adapt with speed to support our customers.

While transportation sales are lower than the previous quarter, we performed better than the outlook. We provided in the last quarterly update.

We expect that the third quarter to be the most challenging from a supply chain perspective.

The supply challenges and some customer shutdowns will likely persist for the balance of this year, we expect an improving trend in 2022, we also expect demand for automotive products to be robust in the year ahead as supply chain constraints improve.

In the accelerator module product lines, we had large wins with two existing Japanese customers.

We also had accelerated wins with customers in China, and North America for passive safety sensors, we secured a win with a north American OEM and were awarded the chassis right height sensor program with a Japanese OEM move.

Moving to make it phonics a customer for actuated products extended an existing platform for an additional year with products being supplied to all regions.

Two of the awards this quarter, where electric vehicle wins, one with a European OEM and one with a Japanese OEM bookings.

Bookings in sales for two Wheeler applications were consistent with prior quarters.

Our non transportation end market performed strongly in the third quarter.

Sales in industrial advance from robot robust demand for temperature products across pool, and Spa, where we had two large awards and we received multiple awards for H back applications.

Our focus on extending into the hot side applications is gaining momentum and we will begin shipments to a new customer later this year.

Also in industrial with wins for an EMC product measurement transducers, and a frequency product, we renewed contracts with two customers for an application in musical instrument instruments and end use market, which continued to gain sales growth throughout the pandemic environment as consumers shift to dedicating more of their time to leave.

As your products.

Momentum in our medical end market continues to improve in a more consistently positive direction.

We had several wins from eating drug delivery to next generation medical ultrasound applications.

Also for medical we secure temperature sensing awards with existing customers ranging from incubators to critical freezer and disposable applications.

We are working with new customers sampling medical ultrasound and temperature sensing products.

In defense, we had several undersea sonar wins and extended and RF filter program for a G. P S anti jamming application.

As I mentioned earlier, we are testing samples with new customers and expanding new advanced material formulations for next generation products.

Turning to telecom, we had various smaller wins for RF antenna applications and continue to develop frequency solutions to support millimeter wave technology for five G applications.

Operationally Ashish will provide more color on the savings we anticipate from our restructuring activities. We are tracking close to the target range. We are nearing the end of our ERP implementation journey and the rollout of the SAP system, though we will continue to optimize our learnings and capabilities from the.

These important initiatives.

Our balance sheet his strong which was bolstered by strong solid cash flow generation.

Continues to be a competitive advantage as we advance our diversification strategy.

In the third quarter of 2021, we delivered operating cash flow of 21 million.

As we look to capital deployment.

Our emphasis remains firmly on supporting organic growth investments and using our financial strength to advance on M&A in alignment with our strategic priorities. We also remain committed to returning cash to shareholders. This past quarter, we repurchased approximately 148 hasn't chairs for slightly less than 5 million.

As part of our previously announced stock buyback program.

We continue to strengthen our M&A pipeline in an environment where activity is at record highs.

From an M&A perspective, our strategy centers on enhancing our technology and product capabilities as well as our geographic reach across our end markets to enhance our diversification goals at the same time, adding technology that will enhance our E. D offering remains a priority our sweet spot continues to be acquisition targets.

<unk> in the range of up to $50 million a year in sales, but we remain open for the right larger opportunities that will advance our long term strategy.

Looking ahead, the semiconductor shortages now expected to reduce vehicle builds by nine to 10 million units this year pressure.

Pressure from the semiconductor shortages and OEM shutdowns, certainly deteriorated downwards in the third quarter.

For the U S light vehicle transportation market, the Saar drops closer to $12 million in September and we expect approximately a 13 to $13 5 million unit range for this year.

On hand days of supply are now closer to 20 days the lowest in recent history and down over 60% from the five year average of 55 days.

European production is forecasted in the 16 to 17 million unit range. The Chinese market has fluctuated, which also reflects the chip related impact.

China volumes are expected to be in the 23 to 24 million unit range for this year the.

The commercial vehicle market remains solid and likely to remain robust in 2022, the biggest challenge to that outlook is the supply of semiconductors and the subsequent rescheduling of some unit builds into next year.

As I mentioned earlier for transportation the supply challenges will continue to impact our sales for the balance of this year. However, we continue to see improvements in the medical end market as well as solid growth in industrial and defense markets.

In terms of our guidance for full year 2021.

We are updating and narrowing our range our previous guidance was for sales in the range of 480.

To $500 million and adjusted earnings per share in the range of $1 70 to $1 90, we are now updating our guidance for sales to be in the range of 495 million to $505 million and adjusted earnings are expected to be in the range of $1 85 to $1 95.

Our global team continues to demonstrate strong execution and a commitment to delivering operational excellence and achieving our long term goals our investments in our business development program in front end sales are providing us with opportunities to build on our existing accounts and cross sell our technologies as you will find it.

Of our new business wins.

In our ongoing efforts to build our talent and culture. We came together in September as the global leadership team for the first time since the beginning of the pandemic.

Our event proved to be engaging and energizing as we collaborated and worked diligently on our focus 2025 initiatives to support growth.

Focusing on our strategic path forward customer relationships operating systems leadership talent and culture.

Along the same lines and as part of our ongoing efforts to bolster engagement in our communities. We launched Cts cares a new platform designed to help our employees across the globe collaborate on community engagement and charitable giving programs and share best practices for doing so.

This is our 125th anniversary and we're very proud of our rich heritage and excited by what we can give back to our communities in the years ahead as we integrate the Cts cares program into our culture.

In conclusion, Cts is well positioned for the future we have a strong team aligned around common goals that continue to advance the business for long term value creation for our shareholders and other stakeholders now I'll turn it over to Ashish, who will walk us through our third quarter financial results. Thank you Karen.

Third quarter sales were $122 4 million up 8% compared to the third quarter of 2020 and down 6% sequentially from the second quarter sales to transportation customers declined by 5% compared to the third quarter of 2020 and 13% sequentially.

Conversely sales to our other end markets increased 24% year over year.

And 3% sequentially as the industrial aerospace and defense end markets exhibited consecutive year over year double digit growth.

As Kieran mentioned this quarter.

Have made significant advances in our diversification strategy as the sales too.

Transportation end market represented 51% of our total revenue.

We remain committed to further diversifying the business.

Changes in foreign exchange rates impacted our revenue favorably by approximately $1 3 million.

Our gross margin was 37, 3% in the third quarter.

490 basis points compared to the third quarter of 2020, and up 50 basis points sequentially from the second quarter of 2021.

Our global teams operational efficiencies as well as profitability in our industrial medical Aerospace and defense end markets helped mitigate the price increases in raw materials and freight costs that we have seen during the year.

We're also working closely with our customer base to find the best ways to manage the macroeconomic pricing pressures we currently face.

In the third quarter, we achieved three in EPS and savings from our restructuring program. We remain on track to achieve targeted annualized savings of 22 to 26 cents of EPS by the end of 2022.

SG&A and R&D expenses were $26 million or 22% of sales in the third quarter of 2021 versus $23 million or 20% of sales in the third quarter of 2020.

The higher expenses in 2021 were driven by higher incentive compensation and timing of certain projects and the full restoration of cost reduction initiatives implemented in 2020.

In the third quarter.

We recorded a noncash charge of $106 million before tax as part of the U S pension plan termination process.

As a reminder, these are noncash charges as the U S pension plan was overfunded at settlement.

The third quarter tax rate was 28, 9% as a result of the impact of the final 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're also closely monitoring the U S government initiatives on tax that may impact our business in the future.

For the third quarter 2021.

We reported a loss of $1 97 per share adjusted earnings for the third quarter were 46%.

Compared to 34 cents per diluted share in the same period last year.

Our operating cash flow was 21 million for the third quarter of 2021 compared to $26 million in the same period last year.

The primary driver.

Our operating cash during Q3 was inventory increases in our plants as we worked through the supply chain challenges and our customers pushing out shipments.

We continue to focus on working capital efficiency, but anticipate carrying some excess inventory considering the ongoing supply chain challenges.

Our cash position is strong with a cash balance of $129 million as of September 30 of 2021 up from 92 million on December 31 2020.

Our long term debt balance is that $50 million.

<unk> decrease from the $55 million on December 31, 2020.

Debt to capitalization ratio was at nine 9% at the end of the third quarter compared to 11, 4% at the end of 2020.

Given the strength of our balance sheet and cash flows we continue to carefully consider M&A transactions that will further help our diversification efforts.

We are near the end of our rollout of the SAP system.

We already have our sights are now running on SAP.

And we expect to complete the rollout to the remaining sites in early 2022.

As Kieran mentioned earlier.

See a sustained demand ahead of us however supply chain challenges.

Spector to persist for us and our customers on both material availability and costs through the rest of the year and into 2022.

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

Thank you Sir.

We would like to ask a question. Please take note that pressing star one on your telephone keypad.

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Six months to reach a real quick.

Otherwise on the phone line will indicate your line is open. Please state your name and company before posing your question. We will now take our first question. Please go ahead caller. Your line is open.

Okay.

Thanks, and good morning.

Hi, how are you feeling just.

Doing well, thanks, Ashish and wanted to follow up on the last point you made about the supply chain headwinds I know from the prior call you weren't expecting.

Third quarter to be the most challenged of the year, but if I look at margin sequentially from both at a gross margin perspective, and adjusted EBITDA margin actually improved sequentially in the third quarter. So could you comment on what drove that outperformance and then as we think.

The supply chain headwinds going forward.

How do you anticipate things to trend in <unk> relative to <unk>.

Okay.

So.

Justin the gross margin outperformance, let me address that and then I'll pass it onto Karen is in terms of comments on what we expect as we look ahead.

The gross margin in the third quarter is helped by several factors number one we executed well.

And our teams have been working hard to make sure that we can manage through all the supply chain challenges. Despite all the cost increases.

We also were able to work with our customers on the price increases that we have been working on which helps offset some of the cost increases we were facing.

And the Big difference is also driven by the improvement in mix.

Transportation was much closer to 50% of our total sales.

And the other end markets did better in the quarter, which definitely has a positive impact on our gross margin.

Justin as we look forward on the transportation side, we see demand has been very robust.

And I think I mentioned in my prepared remarks that we have some customers booking through 2022 and and obviously.

We were impacted in the in the third quarter by several million dollars year on the on the transportation side, we still will have some shutdowns and supply issues in the fourth quarter, but you can see from our guidance, we see us moving in a fairly good direction and continuing to improve into next year.

The main thing that we're bringing out here is the diversification and.

Maybe just trying to expand on that a little bit.

While we get some benefit from transportation been down in the current quarter, what we've been doing over the last number of years is taking that transportation portion down from closer to 70% now closer to 50% and that really helps the overall profile of the company and the quality of the earnings as we go forward and we want to make sure we continue to work.

That while also growing our transportation business.

Okay that makes sense and when you just look at the monthly trends related to the supply chain headwinds does it feel like things have bottomed, maybe you could just give an update on how those trends progressed sequentially over the course of the third quarter and maybe what youre seeing in <unk>.

October as well.

Yeah I think.

Just probably giving you a snapshot on the transportation side.

If you look back a.

A few a week or two ago. The cuts globally were were 115000 up to 280000 and this in the last week. The cuts now we're more like 26000 versus 84000, and so there is an improving trend there, but we got to say that with caution because its been fluctuating if I if I look at our <unk>.

And these customers they've done much better than the American Oems.

What we've seen on the trend here is some of the North American Oems being down over 30% Japanese customers, which are a large percentage for us being down about at 24% and we know Toyota has said hey, instead of a million units in November we're going to be closer to 900000. So it's a moving thing, but the trend is star.

<unk> to stabilize in the cuts.

I'd like to say, it's stabilizing and moving in a good direction, but it's it's it's something to be watched carefully.

Understood and last one for me.

You mentioned pricing and I know FX has been a tailwind this year.

As well in any way to help us think about the all in tailwind in 2021 from pricing and foreign exchange and how to think about those two items going into next year.

Suggesting the we've had some tailwind on revenue from currency.

Not so much on the overall cost side. So when we look at the operating earnings impact.

We don't see a significant.

Significant tailwind from currency, we actually see some headwinds in different parts of the world.

Specifically.

If you look at our the Taiwanese dollar that has appreciated quite a bit.

That has created some headwinds for us.

And.

The Mexican peso is a little bit stronger than it was last year as well so.

There's puts and takes on the revenue side.

Third favorably on the cost side not quite so much.

The price increases.

It's mostly more offsetting the cost increases we've seen so I wouldn't say that they have had a positive impact on profitability, we have been able to offset.

Some other cost increases that we've dealt with during the year.

Okay, Great I'll leave it there I appreciate the time.

Please state your name and company before posing a question we will now take our next question. Please go ahead caller.

Good morning, it's John <unk> from Sidoti.

Good morning, John Kiernan Kieran you mentioned in your prepared remarks, and you just kind of referenced it a bit that some customers have confirmed demand through 2022.

Based on those orders what does the build rate kind of look like.

What are the customer signal kind of recovers to in 2022 versus 21.

And the once stood a confirmed demand because they're concerned about supply chain and making sure. We have a good supply components are showing a robust strength.

They want to make sure they can fill the orders that the pent up demand. They have there. So that's probably the best way of describing John.

I mean is that looking like a $17 million versus the two five or so I think we're going to finish.

This year or is that too big of a stretch number.

Well I'll put it this way John M reasonably I'm being a little cautious is as we come into this year. We would have expected you know north of 14 million Saar, if I take the north American market and its probably tracking now towards <unk>, but they're showing robust demand and what happens out there with the supply chain is the unknown at the moment.

Yes.

Yes, John I think the Saar will be impacted pretty significantly because of the supply chain.

The demand environment that expectation.

That the demand looks okay.

Okay.

And.

Ashish you mentioned some of the restructuring actions that you will exit the year on the targeted 22 to 26.

What restructuring actions remain to be done or you're just looking for the revenue to kind of build up so he can hit that exit rate.

So John in.

In the prior quarters, we have talked about delays in some of the programs that we're working on because of.

Demand we.

We have not been able to execute because the demand has been so strong.

We want to complete the execution of those.

Program to date since we announced the program in Q3 last year.

<unk> 16 out of the 22 to 26.

There are some remaining pieces that we are working on execution and we are on target to complete those by the end of 2022.

Any specific programs that are meaningful that have to be done.

So.

I don't think theres anything that hasnt begun, but we haven't been able to complete the full scope of certain activities that we've already started John.

Okay.

And you mentioned I guess I'm, just hearing actually mentioned something smart actuators and how they are more sensitive to EV versus ice could you just explain that comment to me.

Yes, John before I do that I just wanted to go back to your question really I'm not going to lock in on a Saar number for next year, and but I want to emphasize the on the on the demand side and on the supply side, we're not able to hit some of the demand we have for this year because of supply chain constraints and those customers that we've been working with.

Have you increased that demand and we've actually been working to increase the supply chain, but we're sometimes at the mercy of other suppliers into those Oems to see how they're doing as well. So that's why I'm being a little hesitant on that robust demand and then back to your question on smart actuators.

Ill jump on just clarifying there was in the past we've made statements on the light vehicle market that we are agnostic to the propulsion system. So when it comes to EV all the products transferred over what we're saying is on the on the smart actuator that goes into heavy Judy mostly commercial vehicles, some mid range and trucks.

Well, but what we're saying there is that has well it helps the environment and reducing harmful emissions. It is an application that is ice related so we're just spelling that out.

Okay, Okay, and we're not we're not worried about demand for those products for the next decade.

[laughter] alright.

Guess what.

Sneak this in here another puts you on the heartbeat of a little bit.

The last year or so.

EPS has bested consensus by roughly 25%.

Is it is it the revenue that's been the greatest surprise or the execution on your side. That's been the biggest surprises in your model has driven better results over the past year.

I'll, let ashish comment on this too, but I would look at it from both.

Both sides of that equation I think we've always been good on managing and operating leverage and cost I also think that the diversification rate has helped us across the board as we said in the prepared comments Ashish you want to add to that John.

You know when we started the year, we were very concerned about how strong the markets will be and.

So from that standpoint, we have been.

Able to deliver more on revenue so that has definitely helped.

And the strength in our non transportation end market. They have done better than we started the year in terms of expectations.

And quite frankly, we've made good progress on.

Some of the operating challenges, we were dealing with as well.

If you think about last year, we were talking about significant problems with our foundry operations and they've made very good progress on.

Improving the consistency the official.

The efficiency of that operation. So that's also helping with the overall profitability.

Great guys, Thanks, I'll get back into queue.

Thanks, John.

Yeah.

As a reminder, please press star one.

We will now take our next question. Please go ahead your line is open.

Well this is Robert on for Karl Ackerman from Cowen and company.

Graduations on your formats all hard question.

Could you discuss the titles.

The automotive supply chain.

Customers for Peanuts.

Association of ongoing supply constraints.

Can I ask.

The constraints are pretty tight it's really really around the semiconductor side I think we said nine to 10 million units taken out of production this year and on the commercial vehicle side some units because of semiconductor shortage, even going into next year. So it's it's tightly constrained out there we.

We're working all the time in terms of securing supply of working directly with our customers and our suppliers.

We're constantly working on evaluating alternative sources. So we can actually gain capability, but it's been tight but we do expect it to begin improving and we expect kind of more significant improvement in the second half of next year.

Great. Thank you.

Last quarter on the call you had mentioned that you didn't see inventory buildup.

Customers are your distribution channels.

Steve any changes.

S T segments.

So what I would say is on obviously on the transportation side, we're not seeing.

Any lack of demand because of the inventory days.

20 days or less and when it should be up closer to 55 days of supply on the other end markets. We haven't seen any buildup in inventories in industrial medical and defense. There's small piece that goes into the consumer side, we've seen a little bit of change there, but it's minimal in our in our business. So.

And we would be more concerned about.

End of the second quarter of next year into the second half of next year, what we're seeing at that point in time.

Great and just one more question could you discuss the pricing environment currently and what leverage you can pull to offset on frozen and we've heard a lot of comments from other companies and competitors that freight continues to be worse.

Any color you can provide on passing along to customers from Sir Thank you.

Yeah, just as Ashish said earlier, we're really focused on the cost increases and sharing those cost increases with our customers whether it comes to freight or or part prices and that's what we've been doing and we concur with the freight increases are hugely up and we don't expect them to drop off in the next quarter even so.

It's a partnership with our customers are long term relationships to share that cost as we move forward.

Okay.

We will now take our next question. Please state your name and company before posing your question. Please go ahead.

Hendi the Santo Gabelli funds.

Hi, Karen good morning.

Good morning.

Susan Kieran your full year guidance implies about year over year growth between minus 7% and one 5% in Q4.

So at the top end of that guidance.

<unk> presents a small sequential sales increase from Q3 of <unk>.

You indicated that Q3 is the most challenging quarter in terms of supply chain.

Challenges so.

How should we think about like Q4, Directionally do you expect sales to transport them.

Patient market to decline stay flat or grow sequentially into Q4.

So hendi.

Fourth quarter guidance.

Just being cautious because there's still a lot of uncertainty.

In the supply chain.

We saw in the third quarter our customers.

Push out.

Shipments, which was much more in the third quarter than in the prior two quarters.

And we're just remaining cautious there because we're coming up on year end, where things could slowdown in the automotive.

And market the transportation end market.

It's just reflection of.

Taking a cautious view on how the quarter might evolve.

Thank you US is and then US just how should we think about potential benefit of ERP in 2022.

So a big portion of.

The cost savings programs that we implemented as part of the restructuring we started last year was related to.

Shared services implementation and we have done.

What portion of that already.

And as Karen mentioned, we are getting smarter on how to utilize.

The better data that we have coming out of the ERP system now.

So I'll be looking to.

Use that information to drive further operational efficiency improvement working capital improvement.

But we haven't specifically called out.

Improvements that you might see hendi in the coming year.

Years, it'll be a process of learning and getting smarter with how we are using the information that is available to us now.

Understood.

And then one last questions. So Kieran you mentioned about working and are working on and evaluating alternate sources.

Any potential benefit or impact from <unk>.

Source sourcing alternatives and then how fast can you implement alternate sources.

So.

The primary focus there obviously is to support our customers and.

When there is a shortage in supply like on chips that we can qualify and other sources of chip suppliers and obviously hendi. The second part of that is we usually have a dual sourcing strategy anyway, but it's more than dual sourcing. These days is trying to get three or four suppliers. So you got more options, but as you have more sources that gives you more.

Leverage on the supply base.

Okay got it. Thank you Ashish thank you Kieran.

Thank you and thank you Andy.

We will now take our next question. Please go ahead caller.

Hi, guys just a follow up maybe you Hendi question and rephrase it possibly embedded in your outlook for the balance of the year.

Is it safe to assume that transportation is a greater part of revenue in the fourth quarter than the 51% that you registered in the third quarter.

Hi, its quite possibly going to trend that way John unless we see further disruptions in the supply chain.

But based on the current environment, you would expect it to be higher and assuming that.

Is it safe to assume that the gross margin will be lower.

Or she is the remaining cost savings actions would that be sufficient to offset the mix change in the fourth quarter.

So I would expect gross margin to be in the similar to where we are at in Q3 or maybe slightly worse because of the.

Mix shift.

I am not expecting a significant movement John.

And.

Part of it could be interpreted as the unfavorable mix impact.

Being offset with some improvements in operational efficiency.

John just to add to that.

If we do well on the supply chain side in transportation revenue could be up a few million dollars as Ashish said I just want to emphasize though this this this diversification trend Ron and the goals, we set for ourselves and over the medium to long term, that's going to bring more sustained benefit to the margin profile of the company.

Agree yeah, I guess I'll just extend that thought with this question a year from now given the demand you indicated on the transportation side of the business.

Is the mix going to come closer to 60% or 55%. This time next year.

Or is it kind of or do you have enough orders in non transportation related programs that you can sustain something closer to 55%.

So John.

But I've given you any strong guidance on this I would say that we would expect the transportation percentage of our portfolio.

To be in the low to mid fifties bye.

By the end of next year, but we would have set more aggressive goals for ourselves. If we can do some things that we want to get done as well.

Okay, and what are the question I guess Kieran.

Earlier in your prepared comments and correct me if I'm wrong here.

Regarding M&A, you're actually looking at maybe some potential products in the EV market did you say that and if so can you just give.

Give us some kind of examples of what you'd be looking to add network.

So John just to frame. It we said we will grow in our transportation market and do acquisitions that would strengthen our EV play on the flip side. I also said, we will grow at a faster rate than our other end markets, which corresponds to what I just said about the diversification goals. We set ourselves. So we would look for <unk>.

Nicola plays Navy that would complement the products we have today.

Okay is there anything that you could give me. An example, Greg described kind of I can't visualize it I guess is what I'm, saying.

Or will you be looking forward.

Yeah.

Well I suppose put it this way John.

Organically, we've been very clear that we're excited about E brake and what we're doing in that space and we see that it's a tremendous opportunity we would look at other sensors and capabilities around it around the vehicle.

Okay sorry.

Sorry to put you there.

But a little stress on your data tiered okay.

Alright, Thanks for taking my question guys great quarter.

Thank you.

There has to be no further questions I'd like to turn the conference back to the host for any additional or closing remarks.

Okay. Thank you Tracy and thank you again for joining us today I am proud of the strong execution and operational efficiency exhibited by our global teams driving measurable results for the business together as an organization, we're not only focused on advancing our business, but also improving and enhancing the communities, we live and work in.

In closing as we enter the fourth quarter of 2021, I am confident that our diversification strategy and expensive reach of geographic locations will position us for profitable growth and mitigate the supply chain challenges impacting industries worldwide. Thank you for joining us today and this concludes our call.

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

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Yes.

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Good day and welcome to the Cts Corporation third quarter 2021 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Kieran O'sullivan CEO. Please go ahead Sir.

Thank you Traci good morning, and welcome everyone to our third quarter 2021 earnings call. We reported solid financial results that were propelled by our ongoing diversification efforts sales in the third quarter were $122 million up 8% compared to the same period in 2020.

Customer demand remains robust while supply challenges persist, especially for transportation products.

Third quarter gross margin was 37, 3%.

490 basis points from 32, 4% in the third quarter of 2020.

EBITDA margin of 21, 7% was up 270 basis points from 19% in the same period last year.

Third quarter adjusted earnings per share of 46.

We're up 35% from 34 cents in the third quarter of 2020.

Later, Ashish Agricole, our CFO is with me for today's call will speak to the GAAP performance operating cash flow of 21 million was down from 26 million in the third quarter of 2020, New business awards of $179 million were solid and up from 127 million in the same period.

Last year, Ashish 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.

<unk> issued today 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 under regulation G.

Required explanations and reconciliations are available in the investors section of the Cts website.

I'll now turn the discussion back over to our CEO Kieran Osullivan.

You Ashish in the third quarter, our sales increased 8% to $122 4 million versus the prior period demand from customers remains strong, but not surprisingly revenue has been dampened by persistent supply chain constraints.

Reverberating throughout the global economy, especially for automotive products, where we saw sales decline in the third quarter.

Excluding sales from the acquisition of sensor scientific sales were up 6% organically.

Importantly, the <unk> acquisition continues to deliver solid growth and we're pleased with the performance of our temperature acquisitions.

And the momentum we are building to scale this platform.

We are benefiting from the richness of our customer base.

In particular in transportation end market as a result, we performed better than the overall market as our teams excelled in sourcing initiatives globally in <unk>.

The qualification of alternative sources.

EBITDA margin of 21, 7% was up 270 basis points from 19% in the third quarter of 2020.

We continue to be impacted by rising commodity prices as well as increased freight costs that said, we've been working alongside our customers to offset our share of these cost increases.

While inflationary pressures negatively impacted our earnings for the third quarter, we remain confident in our ability to navigate this dynamic environment.

Third quarter adjusted earnings per share of 46 cents were up 35% from 34 in the same period last year, New business awards of $179 million were solid and up from $127 million in the same period last year, we added two new industrial customers in the quarter, one for an RF filter applications.

And the other for a temperature controlled crystal component component applied in the GPS application.

Our long term strategy centers on diversifying our end market profile by expanding our range of technologies products customers and geographic reach.

As we move forward, we will continue to strategically grow our transportation business, while at the same time continuing to increase the growth rate of non transportation revenues.

We continue to expand our applications in cold and hot temperature sensing in flow measurement, we have developed transducer applications in an area, where we see good growth opportunities.

In medical we see strong mid to long term growth driven by traditional ultrasound technologies. Additionally, with Intravascular ultrasound applications, we earn sample qualification phases with potential customers.

Expanding our offering of temperature sensors in the medical market is a priority for us.

<unk> solid tailwind for next generation products and new applications.

To be flexible to meet the needs of our customers.

Overall across all end markets demand remains robust in particular in transportation, which we expect to continue given the historic low days on hand of vehicle inventories.

As I highlighted last quarter, some automotive customers have confirmed demand through 2022.

Intake and the non transportation end market was again strong in the third quarter.

We remain cautious of potential inventory buildup in various end markets, but most likely will not see this as an issue in the first half of 2022.

As I mentioned earlier non transportation sales now account for nearly 50% of our revenue.

Supported by our efforts to diversify the business.

With a very challenging supply chain environment, our teams worked creatively and diligently to secure parts and adapt with speed to support our customers.

<unk> transportation sales are lower than the previous quarter, we performed better than the outlook. We provided in the last quarterly update.

We expect that the third quarter to be the most challenging from a supply chain perspective.

In the accelerator module product lines, we had large wins with two existing Japanese customers.

We also had accelerated wins with customers in China, and North America for passive safety sensors, we secured a win with a north American OEM and were awarded a chassis right height sensor program with a Japanese OEM.

Moving to make it Phoenix, a customer for actuator products extended an existing platform for an additional year with products being supplied to all regions.

Two of the awards this quarter, where electric vehicle wins, one with a European OEM and one with a Japanese OEM bookings and sales for two Wheeler applications were consistent with prior quarters.

Our non transportation end market performed strongly in the third quarter.

Sales in industrial advanced from robot robust demand for temperature products across pool, and Spa, where we had two large awards and we received multiple awards for <unk> applications.

Our focus on extending into the hot side applications is gaining momentum and we will begin shipments to a new customer later this year also in industrial with wins for an EMC product measurement transducers, and a frequency product, we renewed contracts with two customers for an application in musical instrument instruments and <unk>.

<unk> market, which continued to gain sales growth throughout the pandemic environment as consumers shift to dedicating more of their time to leisure products.

Momentum in our medical end market continues to improve and are more consistently positive direction.

We had several wins from aiding drug delivery to next generation medical ultrasound applications also for medical we secure temperature sensing awards with existing customers ranging from incubators to critical freezer and disposable applications.

We are working with new customers sampling medical ultrasound and temperature sensing products.

In defense, we had several undersea sonar wins and extended and RF filter program for a GPS anti jamming application as.

As I mentioned earlier, we are testing samples with new customers and expanding new advanced material formulations for next generation products.

Turning to telecom, we had various smaller wins for RF antenna applications and continue to develop frequency solutions to support millimeter wave technology for <unk> applications.

Important initiatives.

Our balance sheet is strong which is bolstered by strong solid cash flow generation.

<unk> continues to be a competitive advantage as we advanced our diversification strategy.

In the third quarter of 2021, we delivered operating cash flow of $21 million.

As we look to capital deployment.

As part of our previously announced stock buyback program.

We continue to strengthen our M&A pipeline and an environment where activity is at record highs.

From an M&A perspective, our strategy centers on enhancing our technology and product capabilities as well as our geographic reach across our end markets to enhance our diversification goals at the same time, adding technology that will enhance our offering remains a priority our sweet spot continues to be acquisition targets.

And the range of up to $50 million a year in sales, but we remain open for the right larger opportunities that will advance our long term strategy.

Looking ahead, the semiconductor shortages now expected to reduce vehicle builds by nine to 10 million units this year pressure.

Pressure from the semiconductor shortages and OEM shutdowns, certainly deteriorated downwards in the third quarter.

For the U S light vehicle transportation market, the Saar dropped closer to $12 million in September and we expect approximately a 13 to $13 5 million unit range for this year.

On hand days of supply are now closer to 20 days the lowest in recent history and down over 60% from the five year average of 55 days.

European production is forecasted in the 16 to 17 million unit range. The Chinese market has fluctuated, which also reflects the chip related impact.

China volumes are expected to be in the 23 to 24 million unit range for this year.

In terms of our guidance for full year 2021.

We are updating and narrowing our range our previous guidance was for sales in the range of 480.

Our global team continues to demonstrate strong execution and our commitment to delivering operational excellence and achieving our long term goals our investments in our business development program in front end sales are providing us with opportunities to build on our existing accounts and cross sell our technologies as you will find it.

Of our new business wins.

In our ongoing efforts to build our talent and culture. We came together in September as the global leadership team for the first time since the beginning of the pandemic.

Our event proved to be engaging and energizing as we collaborated and worked diligently on our focus 2025 initiatives to support growth.

Focusing on our strategic path forward customer relationships operating systems leadership talent and culture.

Third quarter sales were $122 4 million.

Up 8% compared to the third quarter of 2020 and down 6% sequentially from the second quarter sales to transportation customers declined by 5% compared to the third quarter of 2020 and 13% sequentially.

Firstly sales to our other end markets increased 24% year over year, and 3% sequentially as the industrial aerospace and defense end markets exhibited consecutive year over year double digit growth.

As Karen mentioned this quarter we.

Have made significant advances in our diversification strategy as the sales too.

Transportation end market represented 51% of our total revenue.

We remain committed to further diversifying the business.

Changes in foreign exchange rates impacted our revenue favorably by approximately $1 3 million.

Our gross margin was 37, 3% in the third quarter.

490 basis points compared to the third quarter of 2020, and up 50 basis points sequentially from the second quarter of 2021.

We are also working closely with our customer base to find the best ways to manage the macroeconomic pricing pressures we currently face.

In the third quarter, we achieved three in EPS and savings from our restructuring program. We remain on track to achieve targeted annualized savings of 22 to 26 of EPS by the end of 2022.

SG&A and R&D expenses were $26 million or 22% of sales in the third quarter of 2021 versus $23 million or 20% of sales in the third quarter of 2020.

The higher expenses in 2021 were driven by higher incentive compensation timing of certain projects and the full restoration of cost reduction initiatives implemented in 2020.

In the third quarter.

We recorded a noncash charge of $106 million before tax as part of the U S pension plan termination process.

As a reminder, these are noncash charges as the U S pension plan was overfunded at settlement.

The third quarter tax rate was 28, 9% as a result of the impact of the final 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're also closely monitoring the U S government initiatives on tax that may impact our business in the future.

For the third quarter 2021.

We reported a loss of $1 97 per share adjusted earnings for the third quarter were <unk> 46 per diluted share compared to 34 per diluted share in the same period last year.

Our operating cash flow was $21 million for the third quarter of 2021 compared to $26 million in the same period last year.

The primary driver of our lower operating cash during Q3 was inventory increases in our plants as we worked through the supply chain challenges and our customers pushing out shipments we.

We continue to focus on working capital efficiency, but anticipate carrying some excess inventory considering the ongoing supply chain challenges.

Our cash position is strong with a cash balance of 129 million as of September 32021 up from 92 million on December 31 2020.

Our long term debt balance is at $50 million.

Slight decrease from the $55 million on December 31, 2020.

Debt to capitalization ratio was at nine 9% at the end of the third quarter compared to 11, 4% at the end of 2020.

Given the strength of our balance sheet and cash flows we continue to carefully consider M&A transactions that will further help our diversification efforts.

We are near the end of our rollout of the SAP system.

A majority of our sites are now running on SAP.

And we expect to complete the rollout to the remaining sites in early 2022.

As Kieran mentioned earlier.

We see a sustained demand ahead of us however supply chain challenges.

Expected to persist for us and our customers on both material availability and costs through the rest of the year and into 2022.

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

Thank you Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

If you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our questions otherwise pumps on the phone line for indication. Your line is open. Please state your name and company before posing your question. We will now take our first question. Please go ahead caller. Your line is open.

Yes.

Thanks, and good morning.

Hi, how are you doing.

Doing well, thanks, Ashish and wanted to follow up on the last point you made about the supply chain headwinds I know from the prior call you weren't expecting.

Third quarter to be the most challenged of the year, but if I look at margin sequentially from both at a gross margin perspective, and adjusted EBITDA margins actually improved sequentially in the third quarter. So could you comment on what drove that outperformance and then as we think about.

The supply chain headwinds going forward.

How do you anticipate things to trend in <unk> relative to <unk>.

Okay.

So.

Justin the gross margin outperformance, let me address that and then I'll pass it onto Karen is in terms of comments on what we expect as we look ahead.

The gross margin in the third quarter is helped by several factors number one we executed well.

And our teams have been working hard to make sure that we can manage through all the supply chain challenges. Despite all the cost increases.

We also were able to work with our customers on the price increases that we have been working on which helps offset some of the cost increases we were facing.

And the Big difference is also driven by the improvement in mix.

Transportation was much closer to 50% of our total sales.

And the other end markets did better in the quarter, which definitely has a positive impact on our gross margin.

Justin as we look forward on the transportation side, we see demand has been very robust and I think I mentioned in my prepared remarks that we have some customers booking through 2022.

And obviously, we were impacted in the in the third quarter by several million dollars year on the on the transportation side, we still will have some shutdowns and supply issues in the fourth quarter, but you can see from our guidance, we see us moving in a fairly good direction and continuing to improve into next year.

I think the main thing that we're bringing out here is the diversification and.

Maybe just trying to expand on that a little bit.

Work on that while also growing our transportation business.

In October as well.

Yeah I think.

Just probably giving you a snapshot on the transportation side.

If you look back.

A few a week or two ago. The cuts globally. We're we're at 115000 up to 280000 and this in the last week. The cuts now we're more like 26000 versus 84000, and so there is an improving trend there well, we got to say that with caution because its been fluctuating if I if I look at our Jack.

And these customers they've done much better than the American Oems.

We've seen on the trend here is some of the North American Oems being down over 30% Japanese customers, which are a large percentage for us being down about 24% and we know Toyota has said hey, instead of a million units in November we're going to be closer to 900000. So it's a moving thing but the trend is starting.

To stabilize in the cuts.

I'd like to say, it's stabilizing and moving in a good direction, but it's something to be watched carefully.

Understood and last one for me.

Ashish you mentioned pricing and I know FX has been a tailwind this year.

As well in any way to help us think about the all in tailwind in 2021 from pricing and foreign exchange and how to think about those two items going into next year.

Suggesting the we've had some tailwind on revenue from currency.

Not so much on the overall cost side. So when we look at the operating earnings impact would be.

We don't see Cigna.

Significant tailwind from currency, we actually see some headwinds in different parts of the world.

Specifically.

If you look at our the Taiwanese dollar that has appreciated quite a bit.

So that has created some headwinds for us and.

The Mexican peso is a little bit stronger than it was last year as well so.

There's puts and takes on the revenue side.

Third favorably on the cost side not quite so much.

On the price increases.

It's more really more offsetting the cost increases we've seen so I wouldn't say that they have had a positive impact on profitability, we have been able to offset.

Some of the cost increases that we have dealt with during the year.

Okay, Great I'll leave it there I appreciate the time.

Please state your name and company before posing a question we will now take our next question. Please go ahead caller.

Good morning, it's John <unk> from Sidoti.

Good morning, John curious Karen you mentioned in your prepared remarks, and you just kind of referenced it a bit that some customers have confirmed demand through 2022.

Based on those orders what does the build rate kind of look like.

What are the customer signals kind of recovers to in 2022 versus 21.

And the once to the confirmed demand because they are concerned about the supply chain and making sure. We have a good supply components are showing a robust strength.

They want to make sure they can fill the orders that the pent up demand. They have there. So that's probably the best way of describing John.

I mean is that looking like a $17 million versus <unk> five or so I think we're going to finish this year or is that too big of a stretch number.

Well I'll put it this way John.

Reason why I'm being a little cautious is as we come into this year. We would have expected you know north of 14 million Saar, if I take the north American market and its probably tracking now towards <unk>, but they're showing robust demand and then what happens out there with the supply chain is the unknown at the moment.

Yes, John I think that will be impacted pretty significantly because of the supply chain.

The demand environment the expectation is.

That the demand looks okay.

Okay.

And.

Ashish you mentioned some of the restructuring actions that you will exit the year on the targeted 22 to 26 cents.

What restructuring actions remain to be done or you're just looking for the revenue to kind of build up so you can hit that exit rate.

So John in the prior quarters, we have talked about delays in some of the programs that we're working on because of.

Demand we.

We have not been able to execute because the demand has been so strong.

We want to complete the execution of those.

Program to date since we announced the program in Q3 last year.

We have achieved 16 out of the 22 to 26.

So there are some remaining pieces that we are working on execution and we are on target to complete those by the end of 2022.

Any specific programs that are meaningful that have to be done.

So.

I don't think theres anything that hasnt begun, but we haven't been able to complete the full scope of certain activities that we've already started John.

And you mentioned I guess I'm, just hearing actually mentioned something smart actuators and how they are more sensitive to EV versus ice could you just explain that comment to me.

Yeah, John John before I do that I just wanted to go back to your question really I'm not going to lock in on a Saar number for next year, and but I want to emphasize on the on the demand side and on the supply side, we're not able to hit some of the demand. We have this year because of supply chain constraints and those customers that we've been working with.

In the past we've made statements on the light vehicle market that we are agnostic to the propulsion system. So when it comes to EV all the products transferred over what we're seeing is on the on the smart actuator that goes into heavy Judy mostly commercial vehicles, some mid range and trucks as well, but what we're saying there is that.

That has well it helps the environment and reducing harmful emissions. It is an application that is ice related so we're just spelling that out.

Okay, Okay, and we're not we're not worried about demand for those products for the next decade.

[laughter] alright.

Guess what.

Sneak this in here and as I put you on the heartbeat of a little bit.

The last year or so.

EPS has bested consensus by roughly 25%.

Is it the visit the revenue that's been the greatest surprise or the execution on your side. That's been the biggest surprises in your model has driven better results over the past year.

I'll, let ashish comment on this too, but I would look at it from both.

You know when we started the year, we were very concerned about how strong the markets will be and.

So from that standpoint, we have been.

Able to deliver more on revenue so that has definitely helped.

And the strength in our non transportation.

<unk> end markets they have done better than we started the year in terms of expectations.

And quite frankly, we've made good progress on <unk>.

Some of the operating challenges, we were dealing with as well.

If you think about last year, we were talking about significant problems with our foundry operations and we've made very good progress on.

Improving the consistency the efficiency of that operation. So that's also helping with the overall profitability.

Great guys, Thanks, I'll get back into queue.

Thanks, John.

As a reminder, please press star one.

We will now take our next question. Please go ahead your line is open.

Well this is rami on for Karl Ackerman from Cowen and company Congratulations on your performance.

With your question.

Could you discuss the tightness, we're seeing in the automotive supply chain and our customer.

Customer is procurement.

Rotation of ongoing supply constraints.

Can I ask one follow up.

Curing supply working directly with our customers and our suppliers.

Great. Thank you.

Last quarter on the call you had mentioned that you didn't see any inventory build ups through your cuts.

Alright, your distribution channels just yet.

Any changes.

So those two segments.

So what I would say is on obviously on the transportation side, we're not seeing.

Any lack of demand because of the inventory days are.

90 days or less and when it should be up closer to 55 days of supply on the other end markets. We haven't seen any buildup in inventories in industrial medical and defense.

The small piece that goes into the consumer side, we've seen a little bit of change there, but it's minimal in our in our business. So.

We would be more concerned about.

End of the second quarter of next year into the second half of next year, what we're seeing at that point in time.

Okay, and just one more question could you discuss the pricing environment currently and what leverage you can pull to offset inflation.

Made a lot of comments from other companies and competitors that freight continues to be getting worse.

Any color you can provide on passing along pricing to customers from here. Thank you.

Yeah just.

As Ashish said earlier.

We're really focused on the cost increases and sharing those cost increases with our customers whether it comes to freight or or part prices and that's what we've been doing and we concur with the freight increases are hugely up and we don't expect them to drop off in the next quarter, even so again, it's a partnership with what our customers are long term.

<unk> to share that cost as we move forward.

We will now take our next question. Please state your name and company before posing your question. Please go ahead.

Hendi the Santo Gabelli funds.

Hi, Karen good morning.

Morning entity.

Assistant Kiran your full year guidance implies about year over year growth between minus 7% and one 5% in Q4.

So at the top end of that guidance.

Two presents like small sequential sales increase from Q3.

You indicated that Q3 is the most challenging quarter in terms of supply chain.

Challenges so.

How should we think about like Q4 directional lead do you expect sales to transform patient market to decline stay flat or grow sequentially into Q4.

So hendi.

Fourth quarter guidance.

Just being cautious because there's still a lot of uncertainty.

In the supply chain.

We saw in the third quarter our customers.

Push out.

Shipments, which was much more in the third quarter than in the prior two quarters.

And we're just remaining cautious there because we're coming up on year end, where things could slowdown in the automotive.

And market other transportation end market.

It's just a reflection of.

Taking a cautious view on how the quarter might evolve.

Thank you <unk>.

And then I was just how should we think about potential benefit of ERP in 2022.

So a big portion of.

The cost saving programs that we implemented as part of the restructuring we started last year was related to.

Shared services implementation and we have done.

Good portion of that already.

And as Kieran mentioned, we are getting smarter on how to utilize.

The better data that we have coming out of the ERP system now so I'll be looking to.

Use that information to drive further operational efficiency improvement working capital improvement.

But we haven't specifically called out.

Improvements that you might see ending in the coming year.

Years, it'll be a process of learning and getting smarter with how we are using the information that is available to us now.

Understood.

And then one last questions. So Kieran you mentioned about working at them working on them and evaluating alternate sources.

Any potential benefit or impact from a source sourcing alternatives and then how fast can you implement alternate sources.

So.

The primary focus there obviously is to support our customers.

And half when Theres a shortage in supply like on chips that we can quantify and other sources of chip suppliers.

Obviously hendi the second part of that is.

We usually have a dual sourcing strategy anyway, but it's more than dual sourcing. These days is trying to get three or four suppliers. So you got more options, but as you have more sources. It gives you more leverage on the supply base.

Okay got it. Thank you asses, thank you Kieran.

Thank you and thank you Andy.

We will now take our next question. Please go ahead caller.

Hi, guys just a follow up maybe you Hendi question, we freeze it possibly embedded in your outlook for the balance of the year is.

Is it safe to assume the transportation is a greater part of revenue in the fourth quarter than the 51% that you registered in the third quarter.

It's quite possibly going to trend that way John unless we see further disruptions in the supply chain.

But based on the current environment, you would expect it to be higher and assuming that.

Is it safe to assume that the gross margin will be lower.

Or ashish.

The remaining cost savings actions would that be sufficient to offset the mix change in the fourth quarter.

So I would expect gross margin to be in the similar to where we're at in Q3 or maybe slightly worse because of the.

Mixed shift.

I am not expecting a significant movement John.

And.

Part of it could be interpreted as the unfavorable mix impact.

Being offset with some improvements in the.

Operational efficiency.

John just to add to that.

If we do well on the supply chain side in transportation revenue could be up a few million dollars as Ashish said I just want to emphasize though this diversification trend Ron and the goals, we set for ourselves and over the medium to long term, that's going to bring more sustained benefit to the margin profile of the company.

Agree I guess I'll just extend that thought with this question a year from now given the demand you indicated on the transportation side of the business.

Is the mix going to come closer to 60% or 55% at this time next year or is it kind of or do you have enough orders in non transportation related programs that you can sustain something closer to 55%.

So John.

But I've given you any strong guidance on this I would say that we would expect the transportation percentage of our portfolio.

To be in the low to mid fifties and by the end of next year, but we would have set more aggressive goals for ourselves. If we can do some things that we want to get done as well.

Okay.

The question I guess Kieran.

Earlier in your prepared comments and correct me if I'm wrong here that regarding M&A, you're actually looking at maybe some potential products in the EV market did you say that and if so can you.

Give us some kind of examples of what you'd be looking to add in that market.

So John just to frame. It we said we will grow in our transportation market and do acquisitions that would strengthen our EV play on the flip side. They also said we would grow at a faster rate than our other end markets, which corresponds to what I just said about the diversification goals, we set ourselves. So we would look for.

Particular places maybe that would complement the products we have today.

Okay is there anything that you could give me. An example, Greg described I can't visualize it I guess is what I'm, saying.

Will you would be looking forward.

Well I suppose put it this way John.

Organically, we've been very clear that we're excited about E brake and what we're doing in that space and we see that as a tremendous opportunity we would look at other sensors and capabilities around it around the vehicle.

Okay, sorry, sorry to put you there.

Pivotal stress on your debt here okay.

Alright, Thanks for taking my question guys great quarter.

Thank you.

Sure Christy no further questions I'd like to turn the conference back to the host for any additional or closing remarks.

In closing as we enter the fourth quarter of 2021, I am confident that our diversification strategy and expensive reach geographic locations will position us for profitable growth and mitigate the supply chain challenges impacting industries worldwide. Thank you for joining us today and this concludes our call.

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

Q3 2021 CTS Corp Earnings Call

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