Q1 2023 CTS Corporation Earnings Call
<unk> portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star followed by one on your telephone keypad. It is now my pleasure to pass the conference over to our host Kieran Osullivan CEO Kieran you May proceed.
Thanks, Daniel Good morning, and thank you for joining our first quarter 2023 earnings call, we posted solid quarterly top and bottom line results in a mixed global economy. The semiconductor supply challenge, we highlighted the past two quarters has been resolved due to the focus on management of our transportation.
<unk> team.
Our focus on profitable growth driving diversification through our advanced materials capability and growth through electrification and mobility markets with innovative new products remain our highest priorities. We are energized and focused on achieving our long term strategic growth goals and improving our operational performance while we.
Navigate the current macroeconomic challenges.
For the first quarter of 2023 sales were $146 million a decrease of one 2% from the same period last year.
Adjusted gross margin was 35, 4% down 180 basis points from the same period in 2022 foreign currency changes impacted our gross margin on favorably by approximately 120 basis points.
Adjusted EBITDA margin was 21, 9% down 164 basis points versus the first quarter of last year.
Adjusted diluted earnings per share was <unk> 61.
Down six <unk> compared to the first quarter of 2022 operating cash flow was $11 2 million compared to $19 3 million in the first quarter of last year.
New business awards were stronger in the quarter, we added nine new customers and had a book to Bill of <unk> 96, and total booked business in transportation increased to $1 5 billion.
We continue to make progress on our diversification strategy as non transportation sales increased to approximately 49% of our overall revenue up from 46% in the first quarter of last year.
Ashish will now 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.
And 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 reconciliations are available in the investors section of the Cts website.
I will now turn the discussion back to our CEO Kieran O'sullivan. Thank you Ashish.
Overall, we achieved solid results in the quarter as we managed through challenging market dynamics and works to resolve the semiconductor supply challenge.
We continue to advance our diversification with non transportation revenues, increasing to 49% of total sales year over year non transportation sales grew by 5% helped by acquisitions.
<unk> sales were down 6% from the same period last year, but up 4% sequentially.
Organic sales, which exclude sales from the three acquisitions were down seven 6% for the quarter due in part to the impact of the semiconductor shortage I noted earlier and the burn down of inventory in distribution and with certain industrial customers.
Customer demand slowed as expected in certain markets in the quarter, we continued to see a challenging demand environment as we move into the second quarter and expect transportation sales to outpace non transportation sales impacting margin performance short term.
We expect sales growth to remain mixed for the balance of the year as we prioritize our organic growth projects and prudently manage operational expenses, but not at the expense of our longer term growth goals.
Inflation continues to be a challenge and is appropriate in partnership with our customers we are adjusting prices.
We seek to deploy capital on appropriate M&A in line with our strategic plans for diversification electrification and channel growth.
The integration of the <unk> acquisition is proceeding well as we've positioned for further electrification growth in mobility and renewable energy markets.
Operationally, we are progressing on the previously announced site consolidations.
In Denmark, and in Mexico, and are strategically reviewing our longer term footprint needs to support growth and operational effectiveness APA.
Operational improvements are firmly in focus to enhance our gross margin performance.
With the reduced volume we have some extra costs that we're working through and we will have some temporary cost increases as we complete our site consolidations, we continue to implement our Cts operating system across the organization.
We added nine new customers in the quarter one in transportation one in defense to an industrial and five in medical we had strong new business awards rebounding well from the softer results in the fourth quarter of 2022.
Highlighting near term and longer term growth trends.
We had a book to bill rate in the quarter or <unk> 96, and our total booked business for transportation was $1 5 billion up from $1 48 billion at the end of 2022.
In non transportation end markets, we have achieved strong double digit growth in the last couple of years.
Our material formulations and in house Knowhow, continuing to advance our growth in key high quality markets in line with our diversification strategy.
The mega trends of automation connectivity and efficiency.
As well as the growth in minimally invasive medical procedures are supporting our growth in the non transportation end markets.
In the industrial market demand for micro actuators used in industrial printing applications remained soft and we're also seeing some softness across temperature sensing, where we see more stable demand at a reduced level as inventory levels correct.
We had wins in temperature sensing across the <unk> and precision instruments, where we continue to focus on adding new customers and applications. We added two new customers in the quarter, one for our nano positioning application and another for a smart flow meter application.
Flow metering is an especially attractive market for us is demand growth for high performance and extended life capabilities of ultrasonic solutions, which will replace the mechanical systems in use today.
While inventory levels in distribution continue to correct, we are making progress with new distributor partnerships across temperature sensing in North America and Europe .
In medical market sales improved from the levels in the fourth quarter of last year, and we continue to see good momentum in the year ahead, our targeted business development efforts are progressing as we added five new customers across various applications, we had multiple wins FERC traditional medical ultrasound.
We strengthened orders in <unk> and secured new business wins in cardiac pacing applications.
We added two new customers for Intravascular medical applications, one for traditional medical diagnostics and another for our heart mapping application.
We also added a new therapeutic customer for a cancer treatment or temperature portfolio continues to support growth in medical applications.
And we secured a win for our respiratory application, we see solid momentum going forward with existing and new customers and expansion into new applications.
We remain confident in the long term prospects for the aerospace and defense end market, given our enhanced capabilities and attractive new material formulations.
Last quarter, we discussed the development efforts for a new application in underwater depth detection. Our team was successful in partnering with a new customer and secure disorder with.
We received multiple orders across several defense solar defense tier one's for sonar hydrophone and sonar buoy applications.
With temperature sensing products, we received orders for aerospace applications.
We continue to make progress in unmanned underwater vehicle applications, where we are deploying our single Crystal technology and had a win for our traditional <unk> ceramic product in this field.
We received a new award for an ultrasonic welding application for a mission critical recording Beacon <unk>.
Leveraging the FERC <unk> acquisition, we are developing new material formulations for defense applications in Europe , and North America and are preparing samples for customers to test.
Looking ahead for 2023 for non transportation end markets, we expect growth to remain mixed in certain industrial applications. We also expect distribution will continue to adjust inventory levels, while in the defense and medical markets, we anticipate good growth and solid prospects, which we believe will can.
To enhance our strategic diversification plans.
Transportation sales in the first quarter were negatively impacted by the short term semiconductor shortage, which is now resolved sales.
Sales were down 6% from the prior year period, and up 4% sequentially from the fourth quarter of 2022, we anticipate automotive demand to be up single digits for this year.
We will continue to monitor monitor for any potential impact in the second half of the year due to consumer changes in confidence.
We are also carefully tracking market changes in China, given the competition between local and transplant Oems.
In the first quarter, we had wins in the accelerated product line with Asian Oems for the China and North American market.
We also had an accelerator win with a north American OEM for their truck platform a first for Cts in this area.
Across tier one automotive customers, we have multiple sensor wins for passive safety.
On the Megatron ex front, we were awarded extensions related to existing products and commercial vehicle applications and they are in development with new applications for the market.
During the quarter, we launched new products on the North American electric vehicle deploying right height sensing and an accelerator module with inductive technology total booked business improved from $1 48 billion at the end of last year to $1 5 billion.
We are driving to achieve our goal of having more than 25% of our light vehicle revenue come from electrified platforms by 2025.
Progress on securing electric vehicle wins continued as we added several electric vehicle application wins in the quarter, mostly with Asian Oems for passive safety and chassis right height sensing. We also had wins for accelerator modules on electrified platforms.
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 most of our portfolio is agnostic to the propulsion system, creating flexibility for us to meet the needs of.
Of our customers.
During the quarter I was able to spend time with our new European team at Mac lab, where we have a deep expertise in magnetic system design and current measurement solutions for use in E mobility, industrial automation and renewable energy applications.
The team is focused on several new growth opportunities and the completion of strategic partnerships to strengthen our product roadmap and position us for longer term growth the.
The alignment and targeted market approach is gaining strength.
As we look to our future. We are excited by the opportunity to transition to electrification offers us we see the footwell and the vehicle is a space, where we expect to expand our product offering with traditional accelerator modules, new E brake products offering weight and cost advantages and the future.
<unk> of our dry pad technology, a low travel vehicles velocity control product that simplifies the driver interface and increases the footwell design flexibility for our customers.
We expect these and other applications will increase our ability to grow content with an increasing Sam of $1 billion.
Our balance sheet bolstered by strong cash cash flow generation continues to provide us with a solid foundation to further our diversification and electrification strategy.
Our capital deployment priorities remain focused on supporting organic growth investments leveraging our financial strength to advanced M&A in alignment with our long term growth strategy and returning cash to shareholders.
We remain committed to effective capital management, while maintaining a disciplined approach to acquisitions as we've done in the past we're focused on acquisitions that meet our criteria, including enhancing our technology portfolio strengthening customer relationships as well as expanding products applications and markets and geographic reach.
In line with our capital allocation priorities, we continue to return cash to shareholders. This past quarter, we repurchased approximately $8 $9 million of stock as part of the previously announced buyback program.
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 products smarter.
As previously highlighted our strides in supporting innovative products like electric vehicles, and how we play a pivotal role in promoting health and safety by supplying components used in noninvasive medical devices, such as medical ultrasound.
We continue to grow and expand into new applications in this important medical field and expand our reach in electrified vehicle platforms.
We understand that we have a responsibility to help shape not only a smarter future, but one that is mindful of the needs of future generations.
Also work to bring these values to life through our Cts cares platform.
I am pleased to report that we recently issued our first ESG report and we look forward to continuing to report on our progress in the future.
Summarizing our outlook for the year ahead, we expect increased safety automation connectivity and efficiency needs will continue to drive demand for Cts solutions.
Our non transportation end markets are growing and we continue to use our core technology and domain expertise to expand our presence with new products and new customers. While also finding deeper penetration in current end market applications.
We expect the transportation market to be up single digits. This year.
Looking at the North America light vehicle transportation market. The Saar is expected to be in the 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.
The commercial vehicle market remains solid and we expect it to be a robust throughout the first half of 2023 for.
For non transportation markets in line with our diversification strategy, we aim to expand the customer base and range of applications in industrial medical and defense end markets. In some cases inventory levels are correcting to more normal levels, especially in certain industrial applications and in distribution we.
Expect demand in defense and medical markets to remain solid overall, we are energized and focused on our long term goals to drive profitable growth and improve our operational performance in the face of near term challenges.
We remain confident in the mid to long term outlook of the company. However, we are carefully monitoring the potential impact of macroeconomic.
And geopolitical conditions in the second half of this year.
<unk> on our current assessment of these conditions in terms of guidance for full year 2023, we expect results to trend closer to the lower ends of our previously issued guidance for sales in the range of $580 million to $640 million and adjusted diluted earnings per share in the range of $2 <unk>.
40 to $2 70.
We expect to be in a position to provide a better view into the second half of the year in our next earnings update now I'll turn it over to Ashish, who will walk us through our financial results in more detail Ashish. Thank you Kieran first quarter sales were $146 million down 1% compared to the.
First quarter of 2022 and up 3% sequentially from the fourth quarter of 2022.
Foreign currency exchange rate changes impacted revenue unfavorably by approximately $2 million.
Sales to non transportation end markets increased 5% year over year the.
Medical and defense end markets grew high single digits as we expected we experienced softness in the industrial end market.
Sales to transportation customers decreased 6% compared to the first quarter of 2022.
Primarily due to the short term semiconductor shortage, we experienced over the last five to six months we.
We were able to resolve the semiconductor supply shortage during the first quarter.
Our recent acquisition federal firm Tiwa, and Mac lab performed as we expected during the quarter.
Spending our capabilities in several key end markets.
Our adjusted gross margin was 35, 4% in the first quarter down 180 basis points compared to the first quarter of 2022.
<unk>.
Foreign currency exchange rate changes impacted gross margin unfavourably by approximately $1 8 million.
We regularly hedge a portion of our currency exposure to reduce volatility and these partial hedges are in place through the end of 2023.
Inflation continues to pressure margins and we continue to partner with our customers to partially share the burden of these cost increases.
In the first quarter, we reported earnings of <unk> 58 per diluted share adjusted earnings were <unk> 61 per diluted share compared to <unk> <unk> per diluted share in the same period last year.
<unk> 56 per diluted share in the prior quarter.
Included in the first quarter adjusted EPS on a couple of one time favorable impact. The first is a <unk> <unk> favorability on tax.
<unk> to equity based compensation.
We also had approximately $1 million of favorability in operating expenses. These items are not expected to repeat in the coming quarters.
Our tax rate was at 19, 2% in the first quarter due to the one time equity compensation benefit and we expect the full year tax rate to be in the range of 21% to 23% excluding discrete items.
Looking at the second quarter.
We expect sales to the transportation end market to be robust as we resolve the supply challenge we expect.
Continued softness in distribution and the industrial end market.
Overall, our expectation is for revenues in the second quarter to be similar to the first quarter.
This mix shift in end market sales.
Favorably impact our gross margins in the second quarter.
Although the unfavorable mix will be a headwind for the next few quarters in the mid to long term, we see strong momentum with our strategic path to diversify our business and deliver healthier margins.
Next.
Discussing our balance sheet and cash flow generation for the first quarter, we generated $11 2 million in operating cash flow for the first quarter of 2023.
Cash flow in the first quarter was impacted unfavorably by the timing of sales.
As well as the payout of incentive compensation.
<unk> focus on working capital efficiency and ended the quarter with 18, 5% in controllable working capital as.
As we mentioned in the February call, we will be consolidating our juarez facility with activity picking up in the second half of 2023.
During this period, we will build up some buffer stock to facilitate the transition and our goal is to work through that safety stock quickly in 2024.
During the first quarter, we repurchased 198000 shares of Cts stock for approximately $8 9 million.
In total we have.
$10 million to shareholders through dividends and buybacks during the quarter.
Sustaining a strong balance sheet continues to be a priority we.
We had a cash balance of $144 million at the end of March 2023 down from $157 million in December 2022, as we returned cash to shareholders and completed the acquisition of Mac lab.
Our long term debt balance was $80 million on our total $400 million facility down from $84 million at the end of 2022.
We remain focused on organic growth and strategic acquisitions supported by our strong cash position and healthy balance sheet.
This concludes our prepared comments, we would like to open the line for questions at this time.
If you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question. Please press star followed by two again to ask a question. Please press star one as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
All of US here briefly as questions are registered.
The first question comes from the line of Justin Long Stephens you May now proceed.
Thanks, and good morning.
I wanted to start my clarification, Hey, Ashish.
Wanted to clarify a comment that you made earlier Kieran on the transportation segment outperforming non transportation in the second quarter.
That a reference to year over year growth or absolute dollars of revenue just wanted to get some context there.
Yes with.
The context, Jason this is coming off the <unk>.
First quarter, if you look at.
We have the headwinds in certain industrial markets, we've burned down and distribution, we expect that to continue whereas on the transportation side, we're seeing good growth and we're seeing.
The resolution of the of the supply chain issue as well.
Coming into the year, we were a little bit more cautious on transportation and so we're seeing some uptick there and we're still trying to figure out the second half of the year, but that's how I would describe it and obviously if transportation is stronger it has a mix impact on our on our margins as well Justin.
In terms of absolute dollars. The transportation end market sales are larger than the rest of our business.
And that's what we expect second quarter to be as well.
Okay. So it sounds like that was a reference to the sequential change you would expect more sequential growth in transportation than non transportation in the second quarter correct that is right, yes, and yes.
Okay got it got it thank you.
I guess thinking about some of the commentary that you.
<unk> had on the second quarter revenue will be roughly in line with what we saw in the first quarter Youre going to have some mix headwind sequentially on the gross margin line is there anything from an operating expense perspective that can offset some of that mix headwind as we move into the second.
Quarter, one is it reasonable to expect some EPS pressure sequentially from <unk>.
Justin I'll start with some color I'll hand, it over to Ashish on the EPS, but I just want to reiterate a little bit that.
We're also seeing a good performance in medical and defense for the year. So while we highlighted transportation we feel good about those two end markets as well and then of course operationally, we still have some costs that we've made in our comments to to take cost to take out as we get adjusted to the lower volume and as you know we're going to be very much focused on <unk>.
Operational improvements as well Ashish on the EPS, yes on the on the surface just in the.
Comments that we've made.
That there will be some unfavorable mix impact just because of the end market sales how they are shifting in the short term.
We will be working hard to drive operational efficiency, so looking to offset as much of that mix unfavorable 80 as we can.
On the operating expense side, there was some favorability in the first quarter that are not expecting to repeat.
And based on that we may see a little bit of pressure.
On the operating expense side as well, so EPS could be unfavorably impacted compared to Q1.
Okay got it and I guess the last question for me is on organic growth. So it was down.
Roughly 8% in the first quarter I am curious when you think that will inflect positively.
And maybe you could also comment on the trend in organic growth versus the recent trend in orders, which was pretty strong here in the <unk>.
First quarter. It feels like there is a discrepancy there would love to get your thoughts around that.
Okay.
So Justin just on as we go forward when you look at distribution.
Not sure if it's going to be one or two more quarters of burn down in inventory and we've certainly seen some softness as we called out in terms of industrial printing applications with micro actuators, that's impacted by China <unk>.
A rebound starting in China, we are carefully monitoring that yet we don't see full line of sight temperature has been a little bit softer so.
That's how we see some of those those trends evolving, but I do want to emphasize from an organic growth perspective, we it wasn't as near term headwinds we feel very good the new pipeline of products that we have coming forward in terms of current sensing. The nightclub addition, what we're doing with E break with pre development and.
Motor position sensing and then in terms of therapeutics and diagnostics and expansion that we're doing with new materials and defense in the new regions, we feel pretty good about that but there are some short term headwinds for sure in industrial and in the distribution side.
Okay. Thanks, I'll pass it on and congrats on a good quarter in a tough environment.
Thank you Justin.
Thank you. The next question comes from John brands Rib.
<unk>. Please proceed.
Good morning, guys and thanks for taking the questions.
Good morning, Sharon I wanted go back to the revenue side here. It seems like there's been a step function change in the industrial market.
Versus three months ago.
Can you just talk to us about what the change was that.
What's your outlook, a little bit could be thinking about.
The lower half of your midpoint of guidance.
Yes, John the first industrial we include our distribution as well so theres a softness in distribution for more over ordering in the past 12 months that may take one to two more quarters to burn down that inventory to get orders moving again.
<unk>.
On the flip side by the way.
Forming new partnerships as we go forward in that area temperature has been a challenge in terms of some of the applications. There anything that gets kind of them, so what consumer and.
Related or construction related light H fact temperature is an area, we've seen a slowdown and definitely an industrial printing that was impacted by what we see the demand coming for that area, particularly for China and again, we're seeing some rebounding there, but it's not clear yet. So we think those headwinds are around for a little bit of time here.
And but again, we feel we feel better today about transportation that we did several months ago with the last earnings call and we're doing pretty solid in terms of medical and defense.
So it comes.
Remember you are talking about industrial printing last quarter in consumer last quarter. So it sounds like the new changes.
Further weakness in distribution and further weakness or new weakness in construction.
Yeah, John what I would say is if I think back to what we messaged in the last quarter just to give a contact Ryan we said that we expected first quarter to be the softest quarter of the year and we see that extending as you can tell into into the next quarter.
John we talked about distribution.
Could we see pressure in Q1 and Q2.
And now our view is that we could potentially see some pressure in the third quarter as well.
Inventory levels normalize.
But again a lot remains to be unfolding in the next few months.
Okay.
Got it.
Just to stick on the revenue theme here.
You're seeing better demand in transportation is that because China is recovering or are you seeing better demand here in North America than you expected.
Definitely in North America is China was a little slow to start the year here and so we're continuing to watch that I talked about what we're seeing with the locals and the transplant Oems, but definitely John seeing an uptick from where we were in the January earnings call.
And it looks it looks good and we're trying to figure out based on the macroeconomic things. We see out there is the consumer going to stay strong in the second half of the year. I mean, you saw some of the vehicle Oems, giving some strong earnings at this stage, we're just waiting to see how that plays out.
Okay.
And Ashish if I remember correctly, you said, there's onetime benefit.
Benefits in the first quarter I think you said tax and.
Remove.
Can you just go over that again, but those two expenses or benefits were and when we find them or identify them in the P&L.
So there was a 2% benefit on tax expense related to equity based compensation.
So that you would see on the tax line and then on the operating expenses.
Between gross margin and operating earnings we had.
About $1 million of <unk>.
Our ability that are not expecting to repeat as we move forward.
Okay got it okay.
I can pick up enough target back in the queue. Thanks guys.
Thanks, Jonathan.
Thank you. The next question comes from Hindi Susana.
Gabelli funds. Please proceed.
Good morning, Kieran and Ashish.
Good morning Hendi.
Yes.
Hi, Tim.
I'd like to ask about the timing of the timeline of new product introductions.
I think you listed.
Brake drive pad AC mater, carload sensor and an AC module position sensor can you give us a sense of timing when the revenue ramp up will take place.
Yes, it's different for each one of those products Hendi at current sensing has already been in development and actually we will launch on a European premium vehicle later this year.
The E brake, which we're very excited about given its benefits in terms of weight and what it can do in terms of system cost.
As in pre development with an OEM and timing on that I can't give you exact at the moment, but we would expect to secure a win in the next 12 months.
The motor position sensing is still in development, but making good progress there we see good opportunity with that because of the complexity of the solution. That's out there today and we see it and to have a more simplified approach to that which we think will be successful and the dry pad is something we've been really testing with our.
With customers here in several of the markets. It's been well received we are not in pre development, but the level of interest in that product and what it can do in the footwall in terms of its design and the flexibility. It gives to the OEM with the Footwall design and safety is getting a lot of traction and interest but don't.
We expect revenue in that one until.
Beyond 2027, because of the automotive development period, but we feel really good about that and then in the non transportation markets. You can tell we're actually bringing new products to the market every quarter here.
Obviously, a smaller impact, but very long runway on those products and.
We're very pleased you saw us into new heart mapping applications. This quarter depth applications. We're really pleased how we're leveraging the FERC <unk> acquisition with new material formulation. So that piece, we feel like we've done a lot of good work in the last 12 months and even though it's a tough macroeconomic environment.
That's why we feel good about the mid to long term.
Okay.
And then Ashish I would like to ask about.
The impact of the factory consolidation.
In the form of gross margin pressure I.
I would like to clarify whether this one is the factory consolidation in Mexico I think in the past.
Cts may have mentioned that it will be completed.
In like 18 months I would like to clarify that and I'm wondering whether you can share.
The rough magnitude of the impact on the gross margin.
Yes, Hendi, we haven't specifically called out the amount of impact most of the activity from the plant consolidation in Mexico will be happening between now and the end of the year and then we will be completing the project in 2024.
My expectation is that the cost burden will be heaviest in the second half of 2023, and we'll call it out at that point in time.
Got it.
And then I may have missed this I think.
In the prior earnings call, there's discussion about the impact of component shortage shortages in <unk>.
Smart actuators in commercial vehicle market.
I think you've talked about it but I would like to.
To review that again, so to rehearse again, one more time, yes hendi.
Hendi the shortage that shortage has been resolved.
We're back running where we need to be running.
Obviously, we continue to watch for shortages out there because while we see the passive components have improved and semiconductors, there's still something to be watched but we're back and as we said the demand in the commercial vehicle market in the first half of the year it looks very solid.
Okay got it. Thank you asses, thank you Kieran.
Thank you Hendi.
Thank you. The next question comes from Joshua <unk>.
<unk> good shelter of TD Cowen. Please proceed.
Hey, guys. Congrats on the resilient results in a tough backdrop.
I wanted to ask about the transportation market again, so I guess if we.
Isolate the fact that the semi shortages sort of mind.
Is there any sort of catch up.
Baked into your outlook for the fiscal year or is it just we're now shipping towards.
Or closer to independent demand I'm trying to understand like where inventory levels are downstream within your transportation vertical. Thank you.
Josh the semiconductor problem as Karen talked about was resolved in the first quarter.
We were able to pick up based on those shipments towards the third month of the quarter and we expect that to be.
Good momentum moving forward.
In terms of timing of revenues.
We talked about in some of our prior earnings call that the customers have been managing in terms of how they balance between supplying to Oems versus supply to aftermarket. So there may be some pick up in the next few months from that but I would expect us to see more normal levels and be more drill.
By what's happening in the end market demand.
Which at this point in time in the commercial vehicle space as Karen mentioned, we are seeing a pretty robust demand at the moment.
Got it. Thank you and then I wanted to ask about gross.
Gross margin.
The puts and takes together it sounds like.
Current levels are sort of the right way to think about things unless there's a change in FX or.
Your cost basis.
I guess on.
The flip side, how do you feel about your like for like pricing. It sounds like your customers are willing to share some of the increased input cost, but I'd be curious on how we should be thinking about gross margin trajectory from here through the rest of the year. Thank you.
So Josh going back to the pricing first.
Those discussions continue to get more challenging theres no doubt about that the first time. It is a hard discussion and then the second and third time it continues getting harder.
We are working through those our teams are doing a good job of.
Having those discussions with our customers and finding the appropriate path forward.
We are continuing.
Continuing to monitor carefully if we see.
That trend reversing on that at some point.
Which we haven't seen yet and as we mentioned in our comments, we are actually still seeing some inflationary pressures in different parts of our business.
So.
That's something we'll have to continue monitoring as we move forward on the gross margin.
We did talk about a little bit of an unfavorable mix impact just as we see stronger transportation sales.
Some softness on the industrial side of the business.
My expectation is.
Could that continue for the next.
Definitely in the second quarter I'm expecting some unfavorable impact and then we need to monitor how the second quarter second half of the year.
Balls as we worked through those different demand environments.
Okay, and then last one for me I mean within the mix of non transport could you remind us our aerospace and defense and medical materially different than in the industrial segment from a margin perspective, thanks, and I'll hop back in the queue.
Yes.
They tend to be higher margin products in medical and defense.
Yes.
Josh just to clarify karen's comment they are higher.
Then the rest of our business the industrial.
It's a little bit of a mixed bag. There are some parts of it where we have higher margin some parts of it that we have.
To be more competitive based on.
Distribution channels may not be quite as.
Rich at some of our custom engineered solutions.
Got it thank you.
Thank you and our final question is a follow up from John Friends Rib acidity. Please proceed.
Hey, guys just on the EV growth outlook.
I believe you finished 2022 something around.
To 9% volume what is your thoughts about the targets for.
Where are you going to be an EV by the end of this year.
John I think if you look at it the the penetration rate is out there.
If you look at China, it's probably trending more towards 30% in total.
Over time.
Europe is trending more by 15, 7% for North America. So.
We're in the double digits, but we haven't gotten to a goal yet so we're trending in the right direction and we feel pretty confident that we're on target for what we're trying to achieve by 2025, but we've got a good pipeline of quotes you can see our our wins in the first quarter is still very robust and transportation and we think this is going to be a year or two.
To build momentum.
Did you just say you already are in double digits at this point.
Yes, but we didnt.
<unk> been double digits, but in.
In terms of momentum, we're not going to hit the 25% until 2025 that directionally.
No that I recognize that's what I'm just trying to see what the.
Slope of this growth is kind of looking like is it all back ended or how much momentum we could see in 2023.
I think youre going to see good momentum this year John from the products, we have and the momentum were ticket because remember it's some of it's on new products, we're winning on existing products in the portfolio as well and have been for some time.
Got it and just on the total transportation.
<unk> portfolio.
What kind of visibility you have for the balance of the year do you have it through the third quarter through year end.
Can you just give us some color there.
Yeah, John it's them.
Yeah.
Got decent visibility going out three months from now beyond that.
Even though we have some visibility we're just being a little bit cautious in terms of end demand at the consumer confidence. If you look at some of the backlogs in commercial vehicle. They would indicate a strengthening beyond the first half of the year, but we want to really see how demand develops that's why we said in terms of guidance. We wanted to give a better update because we'll have more insight into the second half.
In the in the next earnings call.
Fair enough. Thanks, Gary I appreciate it.
Youre welcome John .
Okay.
Thank you and with that we will conclude our time a question and answer I would now like to pass the call back over to Mr. O'sullivan for closing remarks.
Thank you Daniel and thank you all for your time.
Cts is well positioned for future growth driven by market demand for increased automation connectivity and energy efficiency, our strategic focus on diversification electrification of mobility and channel development enhances profitable portfolio I want to thank our global teams for their ongoing focus on operational execution and.
In a difficult environment and their support in driving our strategic initiatives with the support of our dedicated teams, whose deep expertise and custom engineered solution capabilities fueled growth across our customer base. We will continue to deliver sustained long term value for our stakeholders. Thank you for joining our call today. This concludes the call.
That concludes today's call. Thank you for participating you may now disconnect your lines.