Q2 2022 CTS Corp Earnings Call
Okay.
Yes.
Good morning, My name is daily and I will be your conference operator today.
This time I would like to welcome everyone to the Cts Corporation second quarter 2022 conference call.
All lines have been placed on mute to prevent background noise.
The mental slide presentation to accompany the prepared remarks can be found on the company's website.
After the Speakers' remarks, there will be a question and answer session.
I would like to ask a question. During this time simply press star followed by one on your telephone keypad. If you would like to withdraw your question. Please press star followed by the number two thank you.
At this time I would like to turn the call over to Mr. Kieran Osullivan CEO of Cts Corporation. Mr. Sullivan you may begin your conference.
Thanks, Patty good morning, and welcome everyone to our second quarter 2022 earnings call. We delivered another strong quarter. In addition, we finalized the acquisition of FERC peers of ceramics.
At the end of June further advancing our diversification strategy.
I'm excited to have this talented team join Cts.
Which will allow us to expand our market opportunities and support a broader range of customers.
Sales in the second quarter were $145 million up approximately 12% compared to the second quarter of 2021.
Second quarter adjusted gross margin was 36, 1% down 70 basis points from 36, 8% in the second quarter of last year.
Adjusted EBITDA margin of 22, 4% was up 90 basis points from 21, 5% in the same period last year.
Second quarter adjusted earnings per diluted share of <unk> 62.
We're up almost 20% from 52 cents in the second quarter of 2021.
As I ran as I am.
Already mentioned during the quarter, we completed the <unk> acquisition. The acquisition is expected to be accretive in 2023, 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 uncertain.
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. The required explanations and reconciliation are available in the investors section of the Cts website I will now turn the discussion back over to our CEO Kieran O'sullivan. Thank you Ashish, we had a solid quarter with sales increasing 12.
5% to $145 million versus the second quarter of 2021 organic sales were up approximately 9% for the quarter.
These results underscore our investments in business development as front end sales enabled us to expand our customer base.
The <unk> acquisition added $4 million in sales in the quarter and the business is performing well.
Demand was solid across medical and industrial markets, while defense was softer demand for transportation products was impacted by COVID-19 Lockdowns in.
In Asia, and some OEM production cuts.
Our global team continues to execute well and remains committed to vote operational excellence initiatives and achieving our long term goals.
Adjusted gross margin for the second quarter was 36, 1% down.
Down 70 basis points from 36, 8% for the same period last year.
We are operating in a very dynamic environment as we continue to be impacted by rising commodity prices supply chain headwinds and other macro challenges, which are likely to further pressure margins.
However, we continue to partner with our customers to offset our share cost increases and we expect freight costs to improve in the quarters ahead.
As transpacific container volumes to the U S returned to more normalized pre pandemic levels.
Operationally, we are seeing savings materialize from our restructuring activities as we move forward, we will continue to evaluate and refine our footprint to optimize our ability to serve our customers. While also enabling us to deliver improved operating leverage.
We are also continuing to gain traction with our Cts operating system with over 90 continuous improvement projects driving incremental performance.
Adjusted EBITDA margin was 22, 4% up 90 basis points from 21, 5% in the second quarter of 2021.
Second quarter adjusted earnings per share.
62, <unk> were up almost 20% from 52 in the same period last year.
Improved transportation awards, and solid electrification wins drove new business awards in the quarter to 173 million increasing from the prior quarter.
We remain confident in our robust pipeline of opportunities and see good momentum for awards in the coming quarters.
By continuing to focus on growth and diversification, we added six new customers in the quarter.
In industrial and two in medical. Additionally, we delivered samples for new products to multiple customers across all end markets.
We remain well positioned in end markets that offer attractive growth opportunities.
The quality of our material formulations supported by leading edge technologies, our deep industry experience and vertical integration leveraged over several end markets differentiate us from our competitors.
US deliver long term value to our customers.
As we noted earlier.
We completed the acquisition of FERC firm during the quarter.
The company was founded $19 52, and specializes in the design and manufacturer of high performance.
The ceramic components for use in complex and demanding medical industrial and aerospace applications.
This acquisition expands our capabilities and geographic reach of our peers are ceramic product portfolio.
For <unk> is recognized for its high quality and innovative technology.
<unk> in Denmark for Perm has established a strong customer base across Europe , and North America.
FERC permits located within a short distance of our existing ceramics business in Denmark.
And we are already evaluating potential plans to consolidate operations into the FERC Perm facility.
We are delighted to welcome this talented team to Cts.
In the industrial market demand for our micro actuators for use in industrial printing applications remains solid driven by online demand.
Across temperature sensing hot and cold applications, we continue to see good momentum with awards for H back and strong demand for industrial appliances as consumers return to service industries.
We secured wins with two new customers for temperature applications, and coffee machines and high end blender products.
Though lower demand for pool, and spa applications remains at reasonable levels.
We gained awards in Europe for <unk> sensing applications and expect revenue from previously shipped samples for combined flow and temperature to begin in 2023.
Wins with the RF product line were good and industrial communications and applications.
With wins in three regions we.
We delivered our samples for a new <unk> application for a Japanese customer and added a new Asian customer for a semiconductor equipment application.
In Japan, we received an initial order for an industrial welding application. We also secured frequency product wins and demand was solid for our switch product used in industrial applications computing and entertainment equipment.
Distribution sales were a little tempered, which we expected after the higher periods we.
We have seen for several successive quarters.
Across medical we are seeing increasing momentum and long term growth opportunities building off our first quarter performance.
Our targeted business development efforts continue to deliver resulting in an expanding customer base.
We had wins with sleep apnea applications across several customers.
We continue to see solid growth across multiple customers.
For our traditional medical ultrasound products.
And we shipped samples to a potential new customer for our cardiac application, which removes plaque buildup in blood vessels.
We had an additional wind for our cataract surgical application that extends through 2023.
The sample qualification for handheld medical ultrasound that we discussed last quarter is now in the FDA approval process, which is expected to take between six to nine months to complete.
The precision insulin pump applications samples previously discussed.
I would expect it to gain approval for the first quarter of 2023.
Further we received multiple temperature sensing awards from existing customers ranging from incubator to critical freezer monitoring and disposable applications and added two new customers one for temperature cycling application and another for an application used in body aesthetics. We also received.
An award with an existing customer for an application in immunoassay equipment.
In aerospace and defense, we continue to remain confident in the long term prospects for this market <unk>.
<unk> by the geopolitical environment as we improve our capabilities with new material formulations.
We continued to experience good growth in solar and guided torpedo applications and we expect to gain more traction in the European defense market with the addition of FERC permit.
For unmanned underwater vehicles, we continue to develop sample product with a tier one defense customer and expect the initial small volume production between late this year and early 2023.
In RF filter applications, we experienced some near term softening due to program transitions, but expect to grow with new applications next year.
We were also awarded a precision harsh temperature application for a space vehicle and were also awarded extensions on existing timing products.
We continue to advance our M&A strategy, which is focused on expanding our geographic reach adding momentum to our end market profile and increasing the richness of our customer base.
As I mentioned earlier during the quarter, we successfully completed the acquisition of <unk>.
The addition of FERC <unk> strengthens our medical product portfolio by complementing our existing medical imaging products with therapeutic products.
Through this acquisition, we also gain industrial and defense product capabilities and new customers.
As we've discussed before our long term strategic plan is focused on diversifying our end market profile.
We plan to achieve this by expanding our range of technologies products customers and geographic reach to accelerate the revenue growth of our non transportation business, while also strategically growing our transportation business.
We believe this strategy continues to bear fruit as we are seeing the diversification of our business enhancing our quality of earnings. Despite the challenging macroeconomic factors we are facing.
Deferred from acquisition advances these efforts by supporting the growth of our non transportation revenue with the potential of expanding this portion of the business beyond 50% of total revenues.
We remain focused on continuing to strengthen our M&A pipeline of opportunities to meet our overall growth target.
Our track record of thoughtfully, expanding ceramic technology to support diversification, while at the same time, leveraging our expertise to build and scale the temperature sensing platform through the acquisitions of <unk> Ssi and now tos demonstrates the execution of our strategic plan.
Adding technology that will enhance our <unk> offering also remains a priority.
We continue to focus on acquisition targets in the range of up to $50 million a year in sales, but we remain open to the right larger opportunities that will advance our long term strategy.
Our team continues to develop our pipeline of prospects.
Appropriately deploying capital in line with our allocation framework is important.
And we've maintained a healthy balance sheet, which enables us to maintain flexibility to drive organic growth and make strategic acquisitions, while returning capital to shareholders.
To that end in the quarter, we repurchased approximately $7 $7 million of Cts stock.
In transportation, we continue to perform in an environment, where the Oems and tier one suppliers saw sales declines in the quarter.
We currently see robust demand in commercial vehicles, which we expect to extend into 2023.
On the light vehicle side, while the sales softness remains given the supply side challenges across the industry, our positioning from a product and geographic standpoint has propelled us forward.
We remain cautious on light vehicle demand more from a consumer weakness sentiment than supply disruptions and view demand trending flat for this year. However longer term, we see the need for a growth cycle, given the recession level industry volumes of recent years.
We continue to focus on strengthening our light vehicle sensor portfolio, especially around EV platforms.
Electric vehicle revenue ranges in the high single digits as a percentage of our total light vehicle revenue.
Our goal is to have greater than 25% of our light vehicle revenue coming from EV platforms by 2025.
This goal is supported by our ability to transfer our legacy accelerator module and sensor products to electric and hybrid vehicle applications.
This past quarter, the level of EV wins, as a percentage of transportation wins.
Was up given the lag in some prior quarters as Oems focus more on supply challenges.
We are also developing new products to integrate into existing and future EV architectures, such as our <unk> product, which has been prototypes and represents a future growth opportunity similar in magnitude to the existing accelerator module market.
In addition, we are getting traction with our current sensor products and are working on potential position sensing products for EV motor applications.
Our value proposition and transportation has been built on packaging position sensing for safety critical and harsh environments, where our teams have developed deep industry experience for.
For chassis right height sensing, we had wins with North American and Chinese Oems for passive.
Safety sensors, we had two large tier one wins across Europe , and North America.
The largest one for an EV application.
We had a break sensor win with a Chinese EV application and a legacy knock sensor award for a European customer.
We also had a second win for our EV current sensing product with a north American tier one customer.
Across the accelerator module products, we had multiple wins, three but Asian, Oems and additional wins with European and North American Oems and.
In addition, three of the accelerated rewards where for EV platforms in.
In the quarter, a total of 10 of the awards were for EV applications.
Looking ahead and recognizing the macro uncertainty we currently see good demand in industrial markets and strength in the medical market with some softness in defense as we transition programs.
We expect to see continued benefit from our recent acquisitions.
Channel inventories are back to more normal levels backlogs are flattening while demand currently remains stable.
However, we expect market demand may soften throughout the balance of the year.
In transportation the cumulative loss of vehicle builds so far this year has been driven primarily by two factors.
COVID-19 had an impact of over 1 million units and the semiconductor shortage impacted closer to 2 million units or more based on the trend. We are seeing which we feel is likely to end above 3 million units for the year.
As I mentioned earlier, we are cautious on auto build rates for this year and expect production volumes to grow in the low single digits versus the prior year with incremental gains in the years ahead, despite a recessionary environment.
We expect U S light vehicle production to be in the Turkey and to $14 5 million unit level European production has been revised down since the start of the Ukraine War and is now forecasted in the 15 to 16 million unit range. This year. The Chinese market is expected to be flat this year and the 24 to 25 million unit range.
Commercial vehicle demand remains solid.
Overall, we feel confident in the long term prospects for the business.
Our teams are creatively navigating the current environment to ensure supply for our customers. We were able to maintain operations this past quarter, while ensuring a safe work environment for our employees during the Asian Lockdowns, all our plants remain fully operational.
Some industrial and automotive customers continued to confirm demand into 2023.
As always we are monitoring the macro environment very closely I.
I am pleased to say in this very challenging environment. Our teams are working and adapting with speed and agility to support our customers.
In terms of the financial outlook for the full year 2022, our updated guidance, including the FERC <unk> acquisition is for sales to be in the range of $570 million to $800 million, sorry to 600 million up from the previous range of $550 million to $580 million adjust.
The earnings per share are now expected to be in the range of $2 40 to $2 55.
Compared to the previous range of $2 20 to $2 45.
Now I'll turn it over to Ashish, who will walk us through the financial results in more detail Ashish. Thank you Kieran second quarter sales of $145 million up 11, 9% compared to the second quarter of 2021 and down 2% sequentially from the first quarter of 2020 to foreign currency exchange.
Rates impacted revenue unfavorably by approximately $2 2 million.
Sales to non transportation end markets increased 21, 1% year over year supported by another quarter of double digit growth in the industrial and medical end markets, excluding sales from <unk> acquisition.
Sales to non transportation end markets were up 14, 1% year over year.
Sales to transportation customers increased four 4% compared to the second quarter of 2021.
We have continued to see momentum in our smart actuator products, which primarily go into commercial vehicle applications.
Sales to the transportation end market decreased five 6% sequentially due to lower market volumes caused by supply constraints and COVID-19 related shutdowns.
Our adjusted gross margin was 36, 1% in the quarter down 70 basis points compared to the second quarter of 2021, and down 110 basis points compared to the first quarter of 2022 inflationary factors and supply chain had been pressured margins during the quarter, which we were able to.
Partially offset through pricing and operational improvements across our optimization foreign currency exchange rates also impacted gross margin unfavourably by approximately half a percentage point.
We have realized 19 of savings to date from our previously announced restructuring program.
As previously communicated.
We're on target to achieve the lower end of the 22% to 26% of savings. However, some of these projects will extend into 2023 as we balance growth with the completion of the projects.
We reported earnings of 39 per diluted share.
For the second quarter adjusted earnings for the second quarter were <unk> 62 per diluted share compared to 52 per diluted share for the same period last year and 67 per diluted share in the prior quarter.
Moving on to cash generation and the balance sheet.
We generated $16 1 million in operating cash flow for the second quarter of 2022 cash flow was impacted by the movement in foreign currency exchange rates controller.
Controllable working capital was at 17, 7% higher than the first quarter, primarily due to the addition of the balance sheet from our federal firm acquisition.
We remain focused on ongoing cash generation and a healthy balance sheet that have enabled our focus on organic growth and strategic acquisition.
We repurchased approximately 216000 shares of Cts stock during the quarter totaling $7 7 million.
In total we returned approximately $9 million to the shareholders in the second quarter and $14 million year to date through dividends and buybacks.
We ended the second quarter with a cash balance of $98 7 million as of June 32022, and our long term debt balance was $91 million.
The debt to capitalization ratio was at 15, 8% at the end of the second quarter compared to nine 9% at the end of the prior year period.
During the second quarter, we funded our federal firm acquisition, partly with cash outside the U S and the balance through our existing credit facility, our leverage and cash position allow us to continue evaluating further strategic acquisitions.
This concludes our prepared comments, we would like to open the line for questions at this time.
Thank you.
At this time I would like to remind everyone in order to ask a question. Please press star followed by one on your telephone keypad.
Our first question today comes from the line of Justin Long from Stephens. Please go ahead. Your line is now open.
Thanks, and good morning.
Good morning, Justin Hi, Justin.
To start I wanted to add.
Ask about the updated guidance is there any way you could ballpark how much of the increase was driven by the acquisition versus upside in the business from an organic basis.
So Justin in terms of sales.
We've talked about the acquisition delivering in the low to mid $20 million range. So that'll give you a rough idea of how much to expect in the second half of the year.
$10 million to $11 million is how we are thinking about it.
And the EPS.
Not counting on much accretion at this point most of it we are expecting in 2023.
Got it so that EPS.
Raise at the midpoint I think was around 15.
There are a little bit more color you can provide on the key drivers to that upside.
So the biggest one is our continued improved confidence in the revenue expectation from our core business.
And we have also been continuing to work on offsetting the cost pressures with <unk>.
Pricing and operational improvements like we talked about so those are what are contributing to our improved confidence around the EPS numbers.
Got it and last one on the guidance looking at the implied EPS guidance for the second half of the year is there anything you can share on your expectation for the quarterly cadence of EPS do you feel like it will be relatively even in <unk>.
<unk> and <unk> or is there anything or any reason to expect one quarter to be stronger than the other.
I think the best way to answer that.
As we see at the moment, we're off to a reasonable start in Q3, we don't have the same level of visibility yet into Q4 is probably the best way to answer that Justin.
Okay.
Got it and last question from me. Obviously, there is there are a lot more headlines around the economy and economic concerns.
I kind of reflect back on when the pandemic initially hit in 2020, I felt like you moved pretty quickly to adjust our cost structure lower.
The recession headlines become a reality can you talk about how quickly you can adjust the cost structure moving into next year and.
Maybe just from a high level I'm curious what kind of economic environment Youre planning for as we look into 2023.
So just two points and that is in our <unk>.
Prepared remarks, we said, we expect some softness in the second half of the year, obviously the degree of that it's not clear yet.
And if you look back to the Covid period, when we had to respond to a pretty down market and where we saw huge drops even in transportation. We remain positive we adapted our cost structure pretty much within the within a quarter and had things moving in and we try to do that very thoughtfully. So that we are improving the long term prospects of the business as well.
Okay I'll leave it there thanks for the time.
Thanks sure. Thank you.
Thank you.
The next question today comes from the line of John <unk> from Sidoti. Please go ahead. Your line is now open.
Good morning.
Thanks for taking the questions.
Good morning.
I wanted to start with you guys previously voiced some concerns about supply chain issues will be calling it a whack a mole kind of a situation can you give us an update.
Pricing issues facing the company are that behind you at this point.
Any kind of color would be appreciated.
Yes, John I would say for the most part in the non transportation markets were doing pretty well that doesn't mean, we don't have issues, but we are still managing through that pretty well on the transportation side. It has improved and is improving.
We still have one or two watches on the semiconductor side, but several have improved so we expect.
Little better second half I think more of a concern in transportation as we look forward.
Beyond supply chain is just where the consumer is with inflation and would that bring any softness to demand as well.
Got it and regarding apparel firm.
Can you talk a little bit about the diesel technologies do they board is it materially different than what you were doing or is it a scenario, where you just access to new markets and new customers was the bigger driver of the acquisition.
Yes, the technology John is very similar to what we're doing at the moment, but it allows us to scale with new products and new customers. As an example, we said therapeutics over in the pacemakers were into skin care and other applications.
In that area, but we really like it and it also gives us capability in industrial applications in aerospace and defense for high temp applications.
John .
They have a good.
Technology team they have good powder formulations, which will add to our portfolio of ceramic compounds that we can offer that are suitable for different applications. So that's really what we gain out of the acquisition. In addition to depth in the European market.
And John <unk> to help us penetrate the defense markets in Europe , even more.
Right. So when you talk about the potential non transportation related.
This is <unk>.
Potentially being above the 50% threshold and I'm looking at that.
<unk> sensing portfolio.
Yes.
Portfolio, which would be the most significant driver of reaching that kind of a threshold of greater than 50%.
John .
Both product areas are pretty important to us and we're moving them in several end markets with each of those.
I'll tell you if we look today, we are probably closer to $48 52 split so thats before <unk>. So we see ourselves crossing that bridge in the future.
Got it.
And just one last thing I think I heard you say that the inventory levels at the customer level.
As close to equilibrium now is that the cases.
Our stocking going on people worried about some margin issues.
Worry about.
John what I was talking about inventory was more for the distribution side of the business, which is now approximately 10% of our sales and just saying, it's getting back to more normal levels.
And if you look at that on a broader sense of the balance of the year.
Customer base inventory.
Deliberate.
Air Transportation side, we're not seeing any inventory issues and in the other markets and we're doing pretty well no big issues to flag at this point in time.
Great Great Alright, thanks for taking my questions I'll get back in the queue.
Thanks, John .
Thank you.
Today's question today comes from the line of Joshua <unk> from Cowen. Please go ahead. Your line is now open.
Hey, guys. Thanks for taking my question and congrats on another solid quarter.
I wanted to follow up on Justin's questions from earlier.
Guidance sort of implies a flat second half versus the first half despite tailwind from Ferro Perm and <unk>.
I understand you pointed to some weakness, but could you could you walk us through some of the assumptions that are baked into the guidance.
In particular, I'm, asking because bookings were again above $170 million this quarter.
So it doesn't seem like you're seeing a material slowdown in demand yet, but I was wondering where you are taking them potentially more conservative approach. Thank you.
Yes.
There are several parts to your question first of all the bookings Karen pointed out in his call that a lot of the strength in the bookings compared to the first quarter came from the transportation market, where we don't recognize sales from those bookings for a period of time typically two to three years.
The the demand environment.
If you are expecting.
Stable compared to Q to Q1 for the transportation with potential to increase but again there is that question mark of the consumer demand start softening because of higher interest rates.
And in the rest of the end markets.
We are concerned about potential softening as we go towards the end of the year. So that's sort of the backdrop that we are looking at.
In terms of end market dynamics.
That's helpful. Thank you.
And then on the inventory line.
<unk> picked up some.
Acquired Chile, but Joseph flows fell apart on June 30th I believe is there a way to back out how much of the inventory increase was due to just closing the deal and the inventory step up versus what your what happened organically.
Prior Cts thank you.
Yes, so our working capital would be.
<unk>.
About one five points lower.
Without the federal court of <unk> acquisition.
Got it. Thank you last one for me I saw on the deck you called out.
Target of greater than 25% of transport.
From Evs in 2025.
And then longer term.
It was like 25% of your Sam being from Evs is there any benchmarks. We can view as you know how that business is tracking today.
For some of the applications like current sensors and E breaks or is that more of a second half of a decade before it becomes material thanks and congrats again.
Great. Thanks, just on that question well some of the wins in <unk> and some of the growth in EV today is from legacy product.
And we mentioned in the prepared remarks that on the EV side, our first wins.
New products are with current sensing, where we've had to wait so youre going to see that grow incrementally and obviously, our past 2025, we would expect that to accelerate.
On the E brake product, Josh we would expect.
As revenue only in the second half of the decade beyond 2025.
Makes sense, thanks, guys I'll get back in the queue.
Okay.
Thank you.
Again, if you would like to ask a question. Please press star followed by one on your telephone keypad.
The next question today comes from Hendi <unk> from Gabelli Fund. Please go ahead. Your line is now open.
Good morning, Kieran and Ashish.
Good morning Hendi.
Yes. My first question is on Farrell from I think you indicated that the accretion will be in 2023.
May I inquire like how much operate operating expense dollars.
Come from federal from let's say in the second half for 2022.
And given your comment that acquisitions will be in 2023 does that imply that the operating profit totaled.
What comparable too.
To your corporates at the <unk> level.
So hendi in the initial period of the acquisition, we will be incurring some incremental expenses. So.
Without going into the details of operating expense levels.
The overall profitability of the business.
Will be accretive to Cts, so that gross margins will help us.
From a mix standpoint.
And as we worked through the initial integration then that's when we start expecting.
Accretion as we get towards the end of this year early next year.
And Hendi the quality of the earnings is something we liked about the business.
Okay.
And then I think.
On the more optimism.
Optimistic side May I know what.
What the top end of the sales guidance imply Kieran.
So on the high end, we would be looking at.
Either no softening in the other end market to may be very marginal softening.
And transportation remaining strong to slightly growing.
And you could take the inverse of that on the lower end, where the markets on the other non transportation side are softening.
As we expect.
And transportation is stable.
That's kind of how we're thinking about the guidance range.
And then we.
With regards to the goal of modern practice.
Hi.
Fine.
Revenue in light vehicle sensors come from EV.
Should we expect.
<unk> customer base by $2025 two presents.
Your existing customer base or should we expect it may look different than your legacy customer base Kieran.
It will have some legacy but also some new customers I'm actually we've been adding some new customers in that space already Andy So it'll it'll definitely changing.
Thank you so much Kieran thank you Andreas.
Thank you.
Thank you.
There are no additional questions waiting at this time, Mr. Sullivan attend the call back over to you.
Thanks, Dave and thank you again for joining US today I also wanted to thank our global teams for their dedicated efforts in driving strong execution and operational efficiency.
Confident that our diversification strategy bolstered by our recent M&A activities and the breadth of our geographic footprint will position us for profitable growth, while navigating the macro uncertainty, we all face I'd like to reiterate that Cts is well positioned for future growth, we have a strong team aligned around common goals.
That continues to advance the business for long term value creation for our shareholders. Thank you. This concludes our call.
Thank you all for your participation you may now disconnect your lines.
Okay.
Okay.