Q4 2022 CTS Corp Earnings Call
Speaker 1: Hello everyone and welcome to the CTS Q4 2022 earnings call. My name is Bruno and I will be operating your call today.
Speaker 2: points versus the fourth quarter of 2021.
Speaker 3: Adjusted diluted airings for share increased 14% to 56 cents on a year-over-year basis.
Speaker 4: Operating cashflow was 25.5 million compared to 26 million in the fourth quarter of 2021.
Speaker 5: New Business Awards were 71 million.
Speaker 6: We add a four electric vehicle platform winds in the quarter and ten new customers in non-transportation markets.
Speaker 7: turning to full year 2022 results.
Speaker 8: sales rose 14.4% to 587 million from 513 million in 2021.
Speaker 9: adjusted gross margin was 36.5% off 50 basis points from 2021.
Speaker 10: Adjusted EBITDA margin increased 180 basis points to 22.8% from last year.
Speaker 11: Adjusted diluted airings per share increased 27% from $1.93 to $2.46.
Speaker 12: Operating cashflow was $121 million, up $35 million from 2021.
Speaker 13: New business awards were $523 million, below the elevated levels we achieved in 2021, as transportation customers delayed sourcing awards while they managed critical supply constraints.
Speaker 14: Going forward, we are reintroducing Total Book to Business for transportation only, and also introducing book to bill ratios for the company to provide more visibility into long and short-term trends.
Speaker 15: We continue to make progress on our diversification strategy as non-transportation sales increased to approximately 48% of our overall revenue, up from 45% last year.
Speaker 16: A sheesh will take us through the safe harbor stable, the sheesh. I would like to remind our listeners that this conference call contains forward-looking statement.
Speaker 17: These statements are subject to a number of risks and uncertainties.
Speaker 18: that could cause actual results to differ materially from those expressed in the forward-looking statements.
Speaker 19: 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.
Speaker 20: To the extent that today's discussion refers to any non-GAAP measures under Regulation G,patience,political footage and
Speaker 21: The required explanations and reconciliations are available in the investor's section of the FETS website.
Speaker 22: I will now turn the discussion back to our CEO , Kirin O'Sullivan. Thanks, Chief. Overall, we achieved strong results in 2022.
Speaker 23: finishing the year delivering sales growth of 7.4% in the Ford quarter and 14.4% with a full year.
Speaker 24: Organic sales which exclude sales from our two acquisitions in 2022 were essentially flat in the fourth quarter, due in part to the impact of the temporary semiconductor shortage.
Speaker 25: Full year sales grew nearly 10% organically.
Speaker 26: We continue to advance our diversification strategy throughout the year with non-transportation revenues increasing 24% and up 13% organically.
Speaker 27: Transportation sales were up 7% from last year.
Speaker 28: Customer demand was somewhat tempered towards the end of the year.
Speaker 29: We did see some supply chain stabilization in the fourth quarter, thanks in part to the agility of our teams to keep us on track to manage through the temporary semiconductor shortage that impacted sales.
Speaker 30: We expect to see continued easing of the semiconductor supply constraints.
Speaker 31: with supply expected to normalize by the end of the first quarter of 2023.
Speaker 32: We continue to benefit from our diverse and high-quality customer base across our end markets.
The integration of the acquisitions we completed in 2022, TIOA sensors and ferroperm remain on track and are performing well.
These acquisitions have further strengthened our ability to add new applications and improved our distribution offerings, which have helped us to continue to gain traction with our customers.
Gross margins of the fourth quarter decreased to 38 basis points.
to 36.3%.
and full year gross margin rose 50 basis points to 36.5% vs 2021.
We continue to gain momentum from our diversification strategy, despite margin pressures from supply-side cost increases.
While we expect cost pressures to persist in 2023,
We remain confident in our ability to partner with our customers.
to share these cost increases.
share these cost increases and to execute successfully together in the year ahead.
Our customer retention rate speaks to the deeper relationships and value we provide our customers.
In addition, to offset these pressures and support long-term margin improvement, we remain focused on implementing operational improvement projects.
Fourth quarter adjusted diluted earnings per share of $0.56 was up 14% from $0.49 in the same period last year.
Full year adjusted deluded earnings per share of $2.46 increased 27% from 2021.
Later, a sheet will add further color on our financial performance.
We added 10 new customers in the quarter, including one EV customer for a temperature sensing application.
In industrial, we added five new customers with broad applications, including test and measurement, home appliances.
small cell stations, and temperature applications in both water heating and refrigeration.
In Medica we added four new customers.
three for ultrasound imaging, and another for an ultrasonic dental cleaning application.
New business awards for the full year totaled $523 million, down from 2021's elevated levels, as certain transportation awards were delayed from the fourth quarter to 2023.
We expect a stronger performance in the year ahead as automotive supply challenges ease for our customer sourcing teams.
Our book to bill ratio was 0.9 in the fourth quarter and 1.0 for the full year.
The recent reduction in the bookings reflects normalization from several quarters of elevated book to Bill rates in 2021 and the early parts of 2022.
We will continue to include the book-to-bill ratio in our future communications for added transparency.
As we previously mentioned, consolidation of the sites in Denmark resulting from the acquisition of Furapuram is underway and is expected to be completed in the third quarter of 2023.
More recently, we began the process of consolidating our Juarez location into the Madamour site in Mexico.
This consolidation is driven by multiple factors, including the stability of the workforce in Madamoros, as well as the need to strategically align our operations in Mexico to achieve better efficiencies.
The consolidation is expected to be completed within the next 18 months.
In the non-transportation and markets, we have achieved strong double-digit growth in the last couple of years.
Our material formulations have continued to drive our performance.
throughout key high growth end markets.
Customers view our leading edge technologies, deep industry experience, and vertical integration as key differentiators, helping us deliver long-term value.
Our in-house know-how and proprietary processes...
Coupled with our competencies across three leading PAs of ceramic technologies.
are a proven key competitive advantage.
enabling us to develop new piezo material formulations such as textured and lead-free.
Our global Foundry Fought Print positions us to support and drive growth for our customers.
In the industrial market demand for micro-accusators used in industrial printing applications to solve it.
primarily driven by demand in China.
Across temperature sensing, we see more stable demand, although at a reduced level, which has been helped by the addition of new customers in refrigeration and cooler display applications.
We are working with a customer on a hydrogen fuel cell temperature application and added new winds in industrial food preparation.
For our EMC product line, we signed a contract with a European OEM and expect shipments to begin this year.
We also secured our F-winds for precision off-road vehicle tracking.
With our portfolio of sensor and control products, we are at various stages of qualification.
for home appliance, automation and marine applications.
In the fourth quarter, we added temperature sensor products to our distribution portfolio across Europe and US markets.
and are assessing the viability of moving tears of ceramic products through this channel.
In medical markets, we see good momentum in the year ahead. Our targeted business development efforts continue to progress as we add new customers and new applications.
We added four new customers, three for medical ultrasound, and one for an ultrasonic dental cleaning application.
across our portfolio of ultrasound applications.
We receive prototype orders for three new programs and a pre-production order for a new program with an existing customer.
Our temperature portfolio continues to support growth in medical applications.
We secured our first single crystal technology award for an application in pacemakers with an existing Furaprim customer and a new contract with an existing customer.
In therapeutics, we received a Next Generation Award with an existing customer.
Failed to the medical end market were a little softer in the fourth quarter as our customers focused on managing their inventory levels.
However, we expect demand to be solid in 2023.
We remain confident in the long-term prospects for the aerospace and defense end-market, given our enhanced capabilities, new material formulations, and the geopolitical landscape.
We receive multiple orders across several defense tier ones for sonar.
Hydrophone and Sonobuille applications.
We also had wins for munition detonation and countermeasure applications.
A new application is in development for depth detection where we expect first orders in the first half of 2023.
With temperature sensing products, we received orders in aerospace, defence and space applications.
We continue to make progress in unmanned underwater vehicle applications.
where we are deploying our single crystal technology and obtain additional advanced development awards.
Finally, we rewarded new contracts for RF filter products.
and precision frequency applications.
Looking ahead at 2023 for non-transportation end markets.
Growth remains mixed in certain industrial applications.
Distribution continues to adjust the inventory levels.
while defence and medical end markets remain more resilient, and in some cases we are improving our market share.
As I mentioned, we remain focused on advancing our long-term growth strategy, which centers on diversifying our end-market profile through expansion of our technologies, products, customers and geographic reach.
This strategy enhances the value creation opportunity for our stakeholders as well as the quality of our earnings.
We have made good progress on diversification efforts over the past year.
notably increasing non-transportation sales to approximately 48% of total 2022 sales.
Full year 2022 non-transportation related revenue increased 24% compared to 2021.
while transportation-related revenue increased 7%.
Looking ahead, we will continue to focus on further diversification to grow non-transportation revenues at a faster pace.
leveraging our balance sheet to pursue M&A opportunities, while continuing to strategically grow our transportation business and strengthen our product portfolio.
As a result, we continue to target long-term revenue growth of 10% with a goal of greater than 50% of total revenues coming from non-transportation markets in the years ahead.
Transportation sales in the fourth quarter were negatively impacted by the short-term IC shortage we discussed in our last earnings call, resulting in sales declining approximately 9% sequentially.
We expect this temporary shortage to be resolved by the end of the first quarter.
For the full year our transportation sales grew by 7% despite supply challenges and unfavorable currency impact.
We anticipate automotive demand to be flat to upload single digits in 2023.
IHS is forecasting 4% growth globally, attributed to a stronger rebound in Europe and North America. Southern America.
Transportation total book business was $1.48 billion at the end of the year.
Since the last time we published Total Bug Business, we have made a few changes.
First, to simplify, we have removed the contracts for our non-transportation customers as these contracts are shorter in duration and we will track them in our book to Bill Ratio.
Second, as you know, the auto market has faced supply chain issues that have meaningfully impacted volumes globally in the last few years, and the recovery is expected to take longer.
We have adjusted our transportation total book business numbers to reflect changes in industry production volumes from 2020 onwards.
In 2022, we saw significant delays in sourcing decisions as our customers focused on supply challenges to maintain current production.
In the fourth quarter we had wins in the accelerator module product line with a nation OEM across two platforms.
For Shafi Wright height sensing, we'd wins with the North American OEM. On the Megatronics front, we rewarded extensions related to existing products in commercial vehicle applications.
More importantly, we are driving to achieve our goal of having 25% of our light vehicle revenue come from electrified platforms by 2025.
Progress and securing electric vehicle winds continued as we added four electric vehicle platform winds including an application in a European shuttle vehicle.
In two wheeler applications, we had an award with a nation OEM.
We are also excited by the progress made in 2022 as we gain traction towards achieving our goal from new products.
In the fourth quarter, we launched products on the Toyota Yaris, General Motors Buick, GLA in China, Honda MDX, and Renault Duster in South America, as well as passive safety sensors with a Tier 1 customer.
The move towards electric and hybrid vehicles, as well as increased sensor content with passive safety and future e-brake applications, present tremendous opportunities for us.
Smart actuators aside, the majority of our portfolio is agnostic to the propulsion system, creating flexibility for us to meet the needs of our customers.
In 2022, the global share of electrified automobiles
grew to approximately 10 to 12 percent of global vehicle share and we expect this to accelerate to 15 percent or more by 2025 and above 30 percent by the end of the decade with the Chinese market delivering the largest share gains followed by Europe .
The man for two wheel applications such as throttle sensing modules and throttle position sensors is rebounding from recent softness in Asian markets.
We continue to invest in the company's future growth and are strengthening our electrification portfolio through M&A.
We are pleased to announce the completion of our acquisition of Maglab AG on February 6th.
MagLab has deep expertise in magnetic system design and current measurement solutions for use in e-mobility, industrial automation and renewable energy applications.
The company's domain expertise, coupled with CTS's commercial, technical and operational capabilities, positioned us to advance our status as a recognized innovator in electric motor sensing and controlled markets.
We'd like to welcome the Maglab Team to CTS.
We look forward to working together to achieve our goal of greater than 25% of light vehicle sales from electrified platforms and expanding into other end markets.
Our balance sheet, both through by strong cash flow generation, continues to provide us with a solid foundation to further our diversification strategy.
Our capital deployment priorities remain focused on supporting organic growth investments.
leveraging our financial strength to advance M&A in alignment with our long-term growth strategy.
and finally returning cash to shareholders.
management, while maintaining a disciplined approach to acquisitions as we have done in the past.
The investments we've made in the front-end processes, including commercial resources and IT capabilities, along with implementing SAP across the organization, have strengthened our foundation, operational performance, and position us to execute on our strategy.
We are pleased with the progress made in 2022 with the integration of TIAA sensors and FERPRM and their financial performance.
We continue to build a solid M&A pipeline and are committed to leveraging value-creating acquisitions in order to accelerate our growth and diversification.
As mentioned, we will remain disciplined in our approach, focusing on acquisitions that meet our criteria, including enhancing our technology portfolio, and improving our
strengthening customer relationships, as well as expanding products, applications, end markets, and geography.
We will continue to target acquisitions in the range of up to 50 million a year in sales. However, we remain open to larger opportunities that will advance our long-term strategy.
In line with our capital allocation strategy,
We continue to return cash to shareholders. This past quarter we repurchased approximately $8 million of stock as part of the previously announced buyback program.
We have returned a total of 142 million to shareholders since 2013.
At CTS our purpose is to enable an intelligent and seamless world.
Through deep customer relationships, we play an instrumental role in helping our customers shape the future.
by designing components and solutions with effective and efficient technologies that make their product smarter.
I've previously highlighted our strides in supporting sustainable products like electric vehicles.
and how we play a pivotal role in promoting health and safety by supplying components used in non-invasive medical devices, such as medical ultrasound.
We are driving our growth on battery electric vehicles and hybrid light vehicle platforms, and our goal is to achieve greater than 25% by 2025.
We understand we have a responsibility to help shape not only a smarter future, but one that will be sustainable for future generations.
This begins with making sustainable business choices across our organization, creating long-term value for our company, our stakeholders, and the communities in which we do business.
We work to bring these values to light through the CTS CIRS platform, through which our employee is across the globe participated in community activities and contributed more than 4,400 hours to community projects in 2022.
Additionally, to report on our progress in driving sustainability throughout our operations, we plan to issue our first.
Sustainability Report in the second quarter of 2023.
Summarizing our outlook for the year ahead, increased safety, automation and efficiency needs will continue to drive demand for CTS solutions.
Our non-transportation and markets are growing and we continue to use our core technology and the main expertise to expand our presence with new products and new customers.
while also finding deeper penetration with current end-market applications.
We expect the transportation market to be flat to up low single digits.
Looking at the US light vehicle transportation market, the SAR was closer to 14 million for 2022, and we expect a 14 to 15 million unit range for 2023.
European production is forecasted in the 16 to 17 million unit range. China volumes are expected in the 26 million unit range marginally up compared to 2022. The commercial vehicle market remains solid and we expect it to be robust throughout the first half of 2023.
The near-term semiconductor supply challenge, which I mentioned earlier, will impact our sales in the coming months.
However, we expect it to be resolved by the end of the first quarter.
For non-transportation markets in line with our diversification strategy...
We continue to expand the customer base and range of applications in the industrial, medical and defense end markets.
In some cases, inventory levels are correcting to more normal quantities, especially in certain industrial applications and in distribution, impacting volume in 2023.
Demand in defense and medical markets remains more resilient.
As I mentioned earlier, we expect a softer first quarter, at levels similar to the fourth quarter of 2022, and an improving trend for the rest of the year.
Overall, we remain energized and focused on our long-term goals to drive profitable growth in the face of near-term challenges and improving our operational performance.
In terms of guidance for full year 2023, we are forecasting sales in the range of 580 million to 640 million and adjusted diluted earnings per share in the range of $2.40 to $2.70.
Now, I'll turn it over to Ashish, who will walk us through the financial results in more detail. Ashish. Thank you much.
Port Quarrel sales were up.
were at $142 million, up 7% compared to the fourth quarter of 2021, and down 6% sequentially from the third quarter of 2022. And currency exchange rates impacted revenue unsavorably by approximately $4.3 million.
mainly due to the changes in Euro and Chinese Renminbi exchange rates.
Sales to non-transportation end markets increased 22% year over year, supported by another quarter of double-digit growth in the industrial and medical end markets.
Our two acquisitions added $9 million in sales during the quarter.
Sales to transportation customers were down 4% compared to the fourth quarter of 2021 and decreased 9% sequentially.
The primary driver for the softness in transportation revenue was the supply issue that impacted sales of our actuator product line.
Our adjusted gross margin was 36.3% in the fourth quarter, down 38 basis points compared to the fourth quarter of 2021, and down 24 basis points compared to the third quarter of 2022. The total gross margin was 36.3% in the fourth quarter of 2021, and down 24 basis points compared to the fourth quarter of 2021.
We continue to partner with our customers to partially offset the impact of cost increases we have experienced.
Foreign exchange rates impact gross margins unfavorably by $1.7 million in the quarter.
While some parts of our 2020 restructuring program will be completed in 2023, we have realized 25 cents of EPS in savings to date.
Earnings per diluted share were 47 cents in the fourth quarter.
adjusted earnings for the fourth quarter were 56 cents per deluted share compared to 49 cents per deluted share in the same time last year.
and 62 cents per deluted share in the prior quarter.
for the full year.
We achieved $587 million in revenue and increase of 14% compared to 2021.
Sales to the transportation end market grew 7%.
and sales to other markets grew 24% in 2022.
We achieved strong double-digit growth in the industrial and medical end markets.
and meet solid progress in sales to the aerospace and defense end market.
Our two acquisitions performed well and added approximately $23 million in revenue during the year.
Foreign exchange rates impacted sales unfavorably by almost $11 million in 2022.
Overall, as we continue to focus on diversifying our business.
Non-transportation sales were over 48% of our total sales in 2022, up from 44.6% in 2021.
Our gross margin was at 36.5% in 2022, up 50 basis points compared to 2021.
Our global teams executed efficiently in the face of significant supply challenges to offset the impact of cost increases and deliver solid results.
Supply challenges and inflation are expected to continue impacting us in 2023. However, we continue to work closely with our customers to share the cost increases.
and we are confident in our ability to execute successfully.
Foreign exchange rates impacted growth margin unfavorably by approximately $3.6 million.
For the full year of 2022, our earnings were $1.85 per diluted share. Adjusted earnings for the full year of 2022 were $2.46.
per diluted share compared to $1.93 per diluted share for 2021, an increase of 27%.
We achieved 22.8% EBITDA in 2022, an improvement of 100 in basis points compared to 2021.
Moving on to cash flow generation in the balance sheet.
We generated $25.5 million in operating cash flow for the fourth quarter of 2022 and $121 million for the full year, up from $86 million in 2021.
Our 2022 operating cash flow number includes $27 million in surplus cash received from the termination of our U.S. pension plan.
Our balance sheet remains strong with a cash balance of $157 million as of December 31, 2022, up from $141 million on December 31, 2021.
Our long-term debt balance was at $84 million, up from $50 million as of December 31, 2021, due to the partial funding of our ferroperm acquisition.
Our debt-to-capital ratio was at 14.2% at the end of the fourth quarter, compared to 9.7% at the end of 2021.
We remain focused on strong cash generation and are committed to maintaining a healthy balance sheet.
continue to support organic growth and strategic acquisitions.
During the quarter, we repurchased approximately 199,000 shares of CTS stock, totaling approximately $8 million. In total, in 2022, we returned over $27 million to shareholders through dividends and buybacks.
This concludes the prepared comments.
We would like to open the line for questions at this time.
Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypad now.
If you'd like to cancel the question, please press star followed by 2.
And please do also remember to unmute your microphone.
Our first question is from Brady Liers from Stevens.
Mr. Brady, your line is now open. Please go ahead.
Yeah, good morning everyone. This is Brady on for Justin and thank you for taking my question. So you mentioned expectations for a softer first quarter in the release. Could you kind of talk about the drivers to that comment and maybe kind of quantify the order of magnitude of that softness?
against your expectations for the remainder of 2023. And then I've got to follow up.
Yeah, Brady, just the real drivers for the first quarter softness. First of all, is the continued IC shortage we talked about in our last earnings call, which would be something that will be resolved at the end of the quarter. So it's still a temporary thing we're working through.
And then we're seeing softness in industrial and distribution primarily. That's where we've got some things that we're working through. You heard me say softness in micro actuators for industrial printing and some other applications and the inventory levels in distribution. On the flip side, the medical side, defense side remain robust and resilient.
we feel good about that for the rest of the year as well, as well as flat to single digit growth in in transportation.
Okay, thanks so much. And then maybe just a quick follow up. So your 2023 revenue and EPS guide kind of implies margins remain relatively flat on a year-over-year basis. Could you kind of talk about a few of the things that might be offsetting the potential for some margin expansion?
in 2023? Yes, Brady, that's a good question. If you look at the range that we provided, we are dealing with some volume uncertainty in different end markets.
And we are also looking at exchange rate as well as continued cost pressures on the raw material side that we have already talked about in the past. So those are some of the things that we are watching for carefully. And the other thing that we want to stay ahead of is
as the economy evolves during the year.
we could potentially see price pressures from our customers, and we'll be working the supply chain very hard to make sure that we can offset any pressures on the price side with cost savings from our material suppliers.
Okay, great. That makes sense. I'll pass it on.
Thank you, Mr. Brady.
Our next question is from Joshua Butchhalter from Cohen.
Mr. Joshua, your line is now open. Please go ahead.
Hey, team. Good morning. Thanks for taking my question, and congrats on all the progress in 2022. I wanted to ask again about the component shortage impacting your transport market. Is that sort of a single point of failure and you just can't get enough of the component for the actuator? And I guess –
What gives you the confidence that you'll be able to get that cleared up in 2023 and within the guide? Are there any embedded? I know in the past you talked about your customers not being able to get Temmie's also as wondering if that's still impacting the transportation segment as well. Thank you
Joshua, thanks for the question. It's not a customer thing, it's a supply thing for us. It's one part, it's...
a very well designed in part and take the design and substitution to replace it would take quite some time to qualify. Obviously, we're preparing for that for the future, but it will be solved in the by the end of the first quarter. We're already seeing an improved trend and we have the commitments of the capacity.
that's lined up to make that happen. So we've been good about resolving it. And as you said, it is impacting our sales in the first quarter, just like it did in the fourth quarter as well.
Yeah, thank you. So the second part of your sorry, go ahead.
I don't know please continue sorry.
You had also asked about the embedded risk from our customer volumes in our guide.
There is some level of built in, you'll see that we have guided to a slightly wider range that we normally do and embedded in that is some level of uncertainty primarily on the demand side of the equation.
We see a continuing improving trend on the supply side.
but we are watching carefully how the demand scenario looks in the interim. What I would also add is that we are...
very well positioned in our opinion on the mid to long term growth of the business with all the development activity that's underway and the traction that we're getting in winning in different end markets in industrial, medical and aerospace and defense.
Okay, thank you for all that color. And for my follow-up, if we sort of account for TWA and Ferroferm and I think the other acquisition you did, I'm laying it around $10 to $20 million of organic growth implied in the guide. One, I guess, can you confirm if I'm in the ballpark? And secondly, if I look at this study, or similarly, I think you'd be on the Injury Dry Univision.
Can you walk us through, directionally, which end markets and products you expect to contribute most? It sounds like aerospace and defense and medical in particular, but would be helpful to hear your directional color there. Thank you.
So, Josh, I think the first part of your question was asking about the expected contribution from acquisitions to this huge revenue, is that right?
Well, it was more of yeah, it was more about like what are the underlying drivers of the organic growth if we sort of back out the you know, you have half a year of feral in 2020. Yeah.
Well, it was more of, yeah, it was more about like what are the underlying drivers of the organic growth if we sort of back out the you know you have half a year of Farrell firm in 20 Yeah
Okay, so like Karen mentioned, we are expecting transportation to be flat to up low single digits, and that's going to be mostly driven by the demand environment.
Industrial, we are seeing some softness at the moment, including in the distribution space. Our expectation is that that could last Q1 and Q2 with potential for more stable to some recovery in the second half of the year.
medical and aerospace and defense look pretty stable to us at the moment. So that's kind of how we are looking at 2023 in terms of expectations by the different end markets. Kiran, would you want to ask something? Yeah, just since Joshua asked about acquisitions, you heard and are prepared with comments Joshua that we acquired Magglatt.
It's a company based in Switzerland. It's got an expertise in magnetic system design, primarily focused on custom current sensing and position sensing solutions. So it's a great addition for us. It doesn't come with revenues or anything. We're really bringing in a technical capability to advance our electrification strength and position going forward.
Thanks, guys. Appreciate it.
Thank you.
Our next question is from John Franz Robbe from C.DOTI.
Mr John , your line is now open. Please go ahead.
Good morning guys and thanks for taking the questions.
Just go back to your thoughts on revenues for the year.
I guess when I first heard it, I thought that your non-transportation revenues would be up for the year. We're now wondering would the distribution shortfall maybe less into the second quarter? Are you looking at a potentially down year in non-transportation?
Now, John , we would see it just across those non-transportation markets. We would see growth in medical and in error in defense. What we are seeing is a mixed results in industrial and inventory corrections in distribution, which is impacting volumes.
Okay, and also in your prepared remarks, you mentioned something about potential pricing from your customers.
Could you talk a little bit about what you meant by that?
John , we haven't seen anything yet, but we are keeping our eyes and ears open on what's happening on that front. If there is softening of demand, then there is a potential that we could see some pressure. And as I mentioned earlier, we would want to stay ahead on the supply chain side to be able to offset that with any kind of a
holding prices as well as pushing some smaller price increases through in certain parts of our business.
Okay, so you were able to push through pricing during the recovery and you were able to push back, I guess mostly in the transportation market, should there be a weakening? Is that a fair assessment? Yeah, I would say in transportation, but I would go a little bit broader.
And then go back to an earlier question about how do the Q1 lines up versus?
versus Q4. I normally would think that seasonally it would be stronger. I just want to make sure that that's still the case on a normalized basis or is the aforementioned revenue problems.
result in something that's more flattish or even down versus Q4.
So John , our comments were that you can expect Q1 sales to be roughly in line with where we finish Q4 because of the semiconductor shortage and some adjustments in inventory as it comes to distribution or industrial markets. But again, we said very clearly an improving trend for the rest of the year. We feel very mortgagely based.
through the first quarter would have the macroeconomic situation evolving.
Perfect. Thanks a lot Kieran, I appreciate taking my questions. Thanks.
You're welcome, too.
Our next question is from David Kelly from Jeffries. David, your line is now open. Please go ahead.
Hey, good morning guys and thanks for taking my questions. I have a question on
the supply constraints, but from the angle of commercial vehicles, which I believe you noted, and the PowerPoint would likely have an impact on the first quarter. So can you talk specifically a bit more about visibility to your commercial vehicle exposure, and do you also expect those constraints to ease with kind of broader transport?
quarter of our run-up. We feel like we're on a good track with that. And then to your visibility on the commercial vehicle side, we feel good about the first six months of the year. I would tell you even some of our customers out there feel good about the rest of the year. We're just waiting to see the first six months evolve and take it from there.
Okay, got it. Thank you. And just, you know, to the strengthening EV platform wins. If we take a step back, we're seeing some OEMs cut EV pricing in the US. The US EV incentives were just adjusted that now includes.
you know, more models. So can you talk broadly about the bidding opportunity in electrification if you're seeing a meaningful uptick there in the recent months from customers and you've got the target out there to increase revenues but maybe talk about the cadence over the next.
couple years, you know, how you're expecting momentum to unfold an electrification.
Yeah, David, I think as we all know on the transportation side, pricing pressures in the competitive side of it is always high. We haven't seen any meaningful change and I imagine on the electric vehicles when you're big dollar items like the displays and other things that go in there, you're going to experience a lot of pressure.
Our products tend to be smaller dollar value, highly engineered, and customized to the customer's requirements, where, as you know, dependability, quality, and innovation is important. So we feel pretty good. Our focus more so is strengthening the portfolio. With the small acquisition we've done in Switzerland, we see that as a good step forward.
But we're also very excited about e-break applications and other things we've been developing around motor and current sensing that we think are going to build nice momentum for us in transportation markets. And also we're looking at how do we move that into other mobility applications as well.
Okay, got it. Thanks, guys. Appreciate the time.
Thank you, David.
As a reminder ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on your telephone keypad.
Our next question is from Andy Susanto from Gabelli Funds. Andy, your line is now open. Please go ahead.
Our next question is from Andy Susanto from Gabelli Funds. Andy, your line is now open. Please go ahead. Good morning, Kiran. Good morning, Ashish.
Morning, Andy. Hi, Andy. My first question is, is the softness in keep short date unique to CTS since you have a custom design products, meaning that...
meaning that I think in general for the market the chip shortage is better therefore we shouldn't expect any negative surprise
outside of
that particular tip shortage.
You know, Heddy is probably the best way to address that is we've gone through two plus years without actually impacting our customers with any shortages. We've obviously had tight situations and qualified and managed substitutions and we feel bad about this one because it's in a design that's going to move into the next generation design.
it's not impacting any other part of the portfolio.
Some electronic contract manufacturing and semiconductor companies are expecting positive demand and a continued positive growth in automotive. Having said that, I think those companies are in different places of the transportation supply chain. There are reports that there is no 24 hertz power supply which D
May I inquire, what is the case of CTS automotive sales to be flat in 2023 under the low-end scenario?
Andy, both the last part of your question you just broke up? Yeah, so what is the case of the select CTS automotive cells to be flat in 2023? What kind of scenario may contribute to CTS automotive cells to be flat? Whether it's, let's say like the sound numbers will be...
significantly worse than what you have stated or like what are some external market situation for your lower end of the automotive sales at the flat year-over-year growth in 2023.
Yeah, Andy, the way we're looking at it a little bit is if you look at the SAR, it's one thing we could expect softness in China, where the market has been softening for a period of time now. Some people would say a second half pick up in China. We've seen mixed results in Europe .
We think North America may be up a little bit to flat, but you're seeing different companies give different views out there in your traditional automotive suppliers. Some are up high single digits, some are flat, some are slightly down. I don't need too many down, more flat is the situation.
And the way we look at it is obviously we're impacted a little bit in the first quarter from the shortage, which is a temporary thing. And then as we look at the rest of the year, will China rebound as strong as it should rebound? And you know, that's one thing that's on our mind. And what's going to evolve in the commercial vehicle space? We see it has been robust in the first half of the year.
but not sure that's going to hold up for the full year. They would be some of the things that would take us towards a more flat view.
That's very helpful, Kiran. Thank you. And Kiran, in electronic vehicles, I think people usually talk about increasing dollar contents.
How should we think about CTS benefiting from increasing dollar contents per vehicle? And then would you be able to share the timing of new product introductions?
Hendy, we haven't disclosed content per vehicle. It's something we are tracking internally because it's a key part of how we manage our growth trajectory. We've launched accelerator modules into both electric vehicles and hybrid electric.
We've got current sensing that will be launched with the European OEM this year for electrification application. We're very excited about the e-brake. I think we said in our last NARMS call we're in pre-development activity with a customer. And we're really focused on getting that portfolio.
as solid as it can be to make sure we are growing with the market as we go forward. Ashish, I think the EPS guidance is above my projection. Can you share more colors on gross margin and OPEX for the high end of the EPS guidance?
So, Handy the high end and the low end of the EPS guidance will be...
fairly consistently mirroring our volume. So if you look at it from the range of revenue, you know, if you're on the high end, then we'd see some leverage on OPEX as well as gross margin. And if we are on the lower end, then we'll be focusing on,
managing costs a lot more carefully as we navigate through a tougher environment. So that's what I would point to. We are continuing to focus on pricing. We are continuing to focus on managing the cost side of it. As Karen mentioned earlier, material cost is still an issue.
We are seeing some increases in labor costs. But so far, in terms of managing that equation, we've been able to do that fairly well. And I expect that we'll do the same in 2023. The other area that we'll be watching carefully is how the currency movements are happening. That impacted us pretty significantly negatively in 2022.
and I'm wondering what 2023 may look like.
Yeah so CapEx was slightly lower. I'm expecting 2023 to be more in line with our longer term expectation.
But obviously, as you know, we will be looking at all CapEx requirements carefully and making the appropriate capital allocation decisions based on the amount of return we can generate. So we always watch that equation carefully.
And then, may I verify, I think your long-term model has CAPEX at around 4%. So when you mentioned closer to
your business model has that implied closer to 4% of the revenue.
Yeah, that would be a reasonable assumption, Andy.
Okay, thank you, Assis. Thank you, Kiran.
Thanks and thank you.
We currently have no further questions.
I will now hand back to our speaker and CEO , Mr. Kieran O'Sullivan. Mr. Kieran, please go ahead. Thanks Bruno, and thank you ladies and gentlemen. In conclusion, despite experiencing a challenging macroeconomic environment towards the end of the year, we achieved solid financial results in 2022.
CTS is well positioned for future growth, driven by demand for increased automation, connectivity, and energy efficiency. We are supported by global teams whose deep expertise and custom engineered solutions fuel growth across our customer base, driving sustained long-term value for our global stakeholders.
Thank you for joining us today. This concludes our call. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.
So.