Q2 2023 CTS Corporation Earnings Call
Okay.
Good morning, and a warm welcome to the Cts Corporation second quarter 2020 Conference call. My name is counties and I will feel much right today's call all lines have been placed on mute during the presentation portion of the call with an opportunity for a question and answer again, if you'd like to ask a question. Please press star one.
One on your telephone keypad I would now like to turn the call I spoke to a highest Kieran O'sullivan. Please go ahead.
Thank you Candice good morning, and thank you for joining our second quarter 2023 earnings call. We posted solid quarterly results and had strong new business wins, including robust electrification bookings, where we obtained our first award for our innovative E brake product.
We also continued to expand our customer base in medical and industrial markets.
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 by the significant awards in the quarter and remain focused on achieving our long term strategic goals.
Improving our operational performance.
For the second quarter 2023 sales were $145 million essentially flat compared to the same period last year.
Adjusted gross margin was 35% down 120 basis points from the same period in 2022, driven primarily by the mix shift to transportation products. We expect this mix shift to persist for a few more quarters.
Adjusted diluted earnings per share was <unk> 59.
Down <unk> <unk> compared to the second quarter of 2022.
New business awards were stellar in the quarter total booked business in transportation increased by $70 million to $1 6 billion. We also added 10, new customers across different end markets. I just mentioned the first E brake product award a significant strategic milestone as we capture growth opportunities.
Through the electrification megatrend.
Our <unk> team had a notable win and also secured a reference design award with a semiconductor OEM 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 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 Osullivan.
Thank you Ashish overall, we achieved solid results in the quarter as we manage through challenging market dynamics in non transportation markets, driven primarily by higher inventory levels at our customer sales were 145 million essentially flat from the same period last year organic sales.
<unk>, which excludes sales from the recent acquisitions were down four 4% for the quarter driven primarily by the burn down of inventory in distribution and with industrial customers.
Customer demand remained soft in certain markets in the quarter and we expect this trend to continue in the second half of the year for non transportation sales in the short term, we expect transportation sales to outpace non transportation sales impacting margin performance.
Inflationary impacts, though improving in some areas continues to be a challenge and we are adjusting pricing in partnership with our customers.
We are continuing to prioritize our organic growth projects and prudently manage operational expenses throughout this time.
Operationally, we are driving improvements to enhance our gross margin performance work is progressing on the previously announced site consolidations.
Denmark is now substantially complete and the Mexico transition will be completed next year.
With the reduced volume, we continue to focus on cost reductions and as previously communicated we will have some temporary cost increases as we complete our Mexico site consolidation.
We continue to implement our Cts operating system across the organization.
We seek to deploy capital on appropriate M&A to further enhance our growth prospects in line with our strategic plans for diversification electrification and channel growth.
The integration of the <unk> acquisition is proceeding well and we recently finalized a relationship with a semiconductor partner for advanced product development for an electric vehicle application.
We added 10, new customers in the quarter, one is defense and industrial in foreign medical we had strong new business awards, especially in electrification bookings and an expanding future customer base in non transportation markets.
Highlighting near term and long term growth trends, we had a book to bill rate in the quarter of <unk> 98, and our total booked business for transportation was at $1 6 billion up from $1 5 billion at the end of the first quarter of 2023.
Non transportation sales declined 10% in the second quarter compared to the prior year period and.
In the industrial market demand for micro actuators used in industrial printing applications has remained soft and we're also seeing softness across temperature sensing and distribution as inventory levels correct.
We were successful with sales wins across temperature sensing for H back and RF filters for use in industrial and tenant and EMC applications.
We added five new customers with applications in data transfer for oil and gas oceanic climate temperature monitoring flow metering and accelerometers for use in preventative maintenance.
Also of significance. Our recently added Mike Lab team was successful in winning a current sensing award for our broadband telecom application.
In medical markets, we see good momentum, we had multiple wins in the quarter for traditional medical ultrasound temperature sensing and sensing controls are targeted business development efforts are progressing as we added four new customers across multiple applications, including therapeutics health monitoring.
Laser control and minimally invasive sensors.
We see solid momentum going forward with existing and new customers and continued 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, we received multiple orders in the quarter for defense solar applications and RF filters across aerospace, we had wins with applications for <unk>.
And temperature sensing.
We are working with a new customer for an application in GPS anti jamming, we continue to leverage the FERC <unk> acquisition as we develop new material formulations for defense in Europe , and North America and are testing new applications.
Looking ahead for the rest of 2023 and non transportation end markets. We expect continued softness in industrial in the industrial end market and distribution as customer inventory levels are normalized for.
For defense and medical markets, we anticipate good growth and solid prospects, which we believe will continue to enhance our strategic diversification plans.
Longer term, we expect our material formulations and in house Knowhow to continue to support our growth in key high quality non transportation end markets in line with our diversification strategy.
Surely we aim to continue expansion in these markets as we capitalize on the mega trends of automation connectivity and efficiency as well as growth in minimally invasive medical procedures.
Transportation sales improved in the second quarter.
Sales were up 10% from the prior year period.
We anticipate automotive demand to be up close to mid single digits for 2023, we.
We are tracking market share dynamics in China, given the competition between local and transplant Oems.
In the second quarter, we had strong wins across all product categories, and all regions with both Oems and tier one customers.
In accelerator modules, we secured our first award with a European OEM for the new modular accelerator pedal and had wins with existing Oems in Europe , Asia, and North America across the sensor portfolio. We had chassis right height awards with European and North American Oems and passive safety sensor wins with tier one.
<unk> customers in both North America and Europe .
Total booked business improved from $1 5 billion at the end of the first quarter to $1 6 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 business continued as we added 13 electric vehicle wins in the quarter Importantly, we want to highlight the first award for E break a significant strategic strategic accomplishment that initiate a new growth platform for our company.
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 introduction of a dry patch technology.
So travel vehicle velocity control product that simplifies the driver interface and increases the footwall design flexibility for our customers. We expect these and other sensor applications will increase our ability to grow content with a potential sam of greater than $1 billion.
Summarizing our outlook for the full year 2023, we expect the transportation market to be up single digits looking at our North American light vehicle transportation market.
<unk> is expected to be in the 15 million unit range for 2023.
European production is forecasted in the 16 to 17 million unit range.
China volumes are expected to the $26 million range and slightly down year over year.
The commercial vehicle market remains solid.
For non transportation markets in line with our diversification strategy, we aim to expand the customer base and the range of applications in the industrial medical and defense end markets inventory levels continue to correct to more normal levels, especially in certain industrial applications and in distribution we estimate.
This demand softness to remain at reduced levels in the second half.
<unk> and defense and medical markets is expected to remain solid.
In terms of guidance for full year 2023, we previously communicated that we expected results to trend closer to the lower end of our issued guidance of sales in the range of $580 million to $640 million and adjusted diluted earnings per share in the range of $2 40 to two.
Dollars 70.
Given the anticipated continued softness in distribution in the industrial end market during the second half of the year. We are now updating the guidance for sales in the range of $565 million to $585 million and adjusted diluted earnings per share in the range of $2 20 to $2 40 now.
Turn it over to Ashish, who will walk us through the financial results in more detail.
Thank you Karen second quarter sales were $145 million.
Essentially flat compared to the second quarter of 2022.
Sales, excluding acquisitions were down four 4% compared to the second quarter of last year.
Foreign currency exchange rates impacted revenue unfavorably by approximately $1 1 million.
Sales to the transportation end market increased 10% year over year.
Reflecting recovery in the market and from supply chain issues resolved in the first quarter.
Sales to other end markets declined by approximately 10% year over year due to the inventory reduction related slowdown primarily in distribution and the industrial end market our.
Our recent acquisition federal firm.
And Mac lab.
Well during the quarter expanding our capabilities in several key end markets.
Our adjusted gross margin was 35% in the second quarter down 120 basis points compared to the second quarter of 2022 as expected we were impacted unfavorably by the mix of end markets. We see this as a temporary challenge for the next few quarters.
Foreign currency exchange rates also impacted gross margin unfavourably by approximately $1 7 million.
As Kieran highlighted we will continue our focus on operational efficiency with the goal to improve gross margins and operating costs.
In the second quarter, we reported earnings of 41 per diluted share adjusted earnings were <unk> 59 per diluted share compared to <unk> 62 per diluted share in the same period last year.
During the quarter, we recorded approximately <unk> <unk> in onetime benefit from certain tax items.
We expect our tax rate for the full year to be in the range of $20 to 23% excluding discrete items.
Next discussing our cash flow and balance sheet, we generated $23 $4 million in operating cash flow during the second quarter of 2023 free cash flow was $19 5 million.
As we focus on carefully managing capital expenditures year to date operating cash flow was $35 million and free cash flow was $26 million.
Controllable working capital was 18, 4% compared to 17, 7% in the second quarter of last year as we mentioned in April .
We are transitioning from 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 our goal is to work through that safety stock quickly in 2024.
In the second quarter, we repurchased 198000 shares of Cts stock for approximately $8 8 million.
In total during the quarter, we returned approximately $10 million to shareholders through buybacks and dividends year to date, we have returned $21 million to shareholders through buybacks and dividends sustaining.
Sustaining a strong balance sheet continues to be a priority.
Had a cash balance of $151 million at the end of June 2023 up from $144 million in March 2023, supported by stronger operating cash flow in the second quarter.
Our long term debt balance was $77 million on our $400 million facility.
Down from $80 million in the first quarter of 2023.
Our strong balance sheet and cash flow generation position us well to support strategic acquisitions to propel our growth.
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 you would like to withdraw your question Tom Polen Viking as a reminder, if people are using a speakerphone. Please pick up your handset before asking your question.
Our last question comes from the line Jonathan Mountain Steven Your line is now open. Please go ahead.
Thanks, and good morning.
Good morning, Justin Justin.
So maybe to start with a question on the guidance as we think about the second half of the year is there any additional color you can provide on the quarterly cadence of revenue and earnings as we think about the third quarter versus the fourth quarter I am curious if.
You are expecting those two quarters to look pretty similar or if there's a reason we should see either an improvement or a moderation into year end.
Yeah.
Ed just and I'll start with the sales Ashish you can comment on the profitability just we're seeing some softness Jason or Justin as we.
<unk> talked about at the end of the first quarter and that softness is continue and obviously you can see across the industrial end market were down considerably as the softest point, and we will see a little bit more softening into the third quarter and maybe.
The improvement in the fourth quarter, but just to give you some context on that.
If I look at a few different areas.
The distribution side of it we've had in inventory.
Buildup, there we've seen minimal correction and we think that's going to take two more quarters to fully correct. We talked in the prepared comments about the micro actuators for.
Industrial <unk> printing.
Impacted by softness in China, and then we have other products like Ed pool, and Spa and entertainment products that are closer to the consumer and we've seen more softness there and I think the overall backdrop in China overall is a little concerning too. So that's probably a good way of giving you a pitch.
Sure as we go into the second half of the year.
Okay helpful and maybe to follow up from an earnings perspective, just given this cyclical weakness is lasting a little bit longer than you anticipated or are there any cost actions that you're taking to help mitigate mitigated some of the top line.
Pressure and I guess, when you put it altogether or any thoughts on how gross margins progressing in the back half do you think we can stay relatively stable with second quarter levels or will we see additional pressure.
So just and those are good questions. If you look at our overall numbers.
We absorbed.
Addressing the cost 0.1st and then I'll come to gross margin if you look at.
The SG&A R&D expenses, we are continuing to invest in R&D Kieran talked about several new product wins that we have had including E break that we want to continue.
Investing in.
On the SG&A side the.
The business is doing reasonably well to manage cost.
We have absorbed a few acquisitions.
And still year over year cost is in reasonably good shape, especially.
Especially given the decline in revenue and we have been focusing heavily on managing operating expenses.
On the gross margin side.
We will follow a little bit of the trend that Kieran highlighted on the revenue side.
And our plants our business leaders remain focused on driving operating efficiency as much as we can give.
Given the.
Tough.
Backdrop of revenue that we are working our way through at the moment I would not expect anything.
Materially different between Q3 and Q4 other than following the revenue trends.
And just and just going back to the <unk>.
Topline sales just a few other points, we feel really good about our medical and also in <unk>.
Industrial and defense good trends there transportation, obviously is picking up from last year, we had a little bit of pick up as well in the second quarter from the supply shortage and.
But we feel good overall and even though we've got some softness here with customer inventory, we feel good about the fundamentals of the business and really encouraged by the strong wins, we had in the quarter, especially as Ashish mentioned on that E brake product line as well for the future.
Great. That's all helpful and one last quick one I was wondering if you could give an update on the acquisition pipeline and the valuation trends that you've seen in the market curious if theres any change on that front.
Yes, Justin we've got a healthy balance sheet and with the cash generation, we're looking to deploy that capital and Havent seen significant shifts in valuations, but we're obviously always working our pipeline as part of our diversification and electrification strategy and we'll be sure to keep the focus there too.
Yeah.
Got it thanks for the time.
Thanks Jesse.
Thank you. Our next question comes from the line.
John .
Brad.
Your line is now open. Please go ahead.
Good morning, Kieran and Ashish, thanks for taking the questions.
I'd like to go back to the change in our revenue guidance, what changed so meaningfully and the industrial markets that you didn't see a quarter ago and see now.
Probably the best way of describing that John is as we saw the inventory buildup, we didn't see that positive inflection where would tell us that we're hitting the bottom so.
Those markets have remained soft and with the current inventory levels that were aware of.
We see that softness continuing in the third and fourth quarters, we may see a small inflection in the fourth quarter, but it definitely feels appropriate to balance it this way.
John one thing so it wasn't highlighted that.
Sorry go ahead.
No youre more important you speak Ashish.
I was just going to.
Call out that we did mention that we were expecting revenue to be closer to the lower end of our guidance range. So yes, we have had to adjust it further but.
Okay.
That would be important to keep in the back of our heads as well.
I was just curious if you're seeing worse than the <unk>.
Industrial printers, you just talked about.
<unk> or construction equipment or any of that.
The sub sectors of industrial I, just wanted to one of them stood out more than the other.
No. There is a blend of things there I think the one that probably stands out a little bit to us is just that China backdrop in terms of the impact there it's been softer than we expected.
Got it got it.
<unk>.
Talk a little bit about.
The transportation market, how much wasn't of second quarter revenue and.
And how do you see that playing out for the balance of the year being total revenue for the full year.
John could you ask your question again.
Transportation sales.
What percentage of revenue was within the second quarter.
And what.
Revenue do you expect them to be in your full year guidance.
So transportation was about 50 little over 55% I think it was.
56% ish of.
Second quarter revenues.
And as Kieran mentioned.
There was a.
Little bit of recovery from a supply chain issue, which helped second quarter sales.
During the year.
John we haven't really.
Specifically call out what the transportation share would be but what I would expect based on the comments that Karen also just mentioned we are expecting transportation to be more stable through the rest of the year.
And.
We are expecting industrial distribution that softness to continue through the end of the year. So that will give you some things to take into account as we look at the mix.
And John as we as we talk about diversification as part of our strategy, obviously that transportation numbers kicking up a little bit here short term with some end market softness in industrial and we think in a few quarters that'll correct.
Okay.
I guess switching gears again here when you talk about the new product Awards I'm curious about how long we are looking at your non transportation markets to turn from award to revenue, particularly I guess, the medical and maybe the aerospace and defense with a little bit longer tail, but medical and industrial markets.
Whats the turnaround from order to revenue there.
People covenant color there that'd be helpful.
Yes, it typically depends on the product line in the end market the development period can be.
At 12 months to two years Max usually in between but the more important thing John is when it comes to the likes of medical it's a step up year over year, because it's a very slow evolving market and then it steps up and then it's sticky for a long period of time. So it takes a while but all the qualifications with customers as you can imagine.
Yes, John just keep in mind, the new customers. The 10, new customers that we called out we would report them based on that we have received from them. They will be relatively small volumes to start with and then ramp up as Karen mentioned.
Alright, and one last question I'll get back into queue, you mentioned something about inflation and price adjustments or what market are you seeing the most impact on inflation and where you're getting those price adjustments.
We're seeing inflation right across the board, we've seen a little bit of correction in some places, but we still see as seen continued inflation John and we're we're talking to all customers in all markets on pricing.
Okay, guys, thanks, I'll get back into queue.
Alright, Thanks John .
Thank you. Our next question comes from the line.
Sure My Counsel TT Harlan.
Go ahead. Your line is now open.
Hey, guys. Good morning, Thank you for taking my question.
I guess I wanted to follow up on that last question first so were there any changes intra quarter I guess as you it seems like there.
There is more inventory in the channel that needed did that impact pricing at all and have there been any changes in.
The pricing environment and your ability to pass on the input cost that I guess over the last three months. Thank you.
Joshua ICM.
I don't see the inventory and the pricing connected directly at all we're just working through that burned down.
Outside of that we're having those discussions on pricing, where we have the pressure points.
Got it okay. So it's really mix, that's driving the margins lower.
Not so much anything in the pricing environment as Youre seeing it.
Correct, and we would be very careful in terms of where we've had pricing we brought inventory at a higher level, we'd be very careful to make sure we're not absorbing that inventory increase.
Okay understood. Thank you and then it sounds like things did move.
I guess more than you expected intra quarter can you speak to your confidence.
How youre managing your factory loadings.
I have.
Confidence in your ability to get the channel into a healthy spot I guess exiting this year and get back to normal growth into 2024.
Thank you.
Okay.
So Josh that is something that we are watching very carefully the inventory levels as Kieran mentioned in the distribution channels as well as several of our industrial customers.
The expectation is that it'll take a couple of quarters.
For the inventory too correct.
Having said that we have highlighted that same thing in the past two earnings calls it's taken longer than we anticipated.
But we do feel that it will take at least another couple of quarters to normalize before we get back to normal state and the other thing Josh that I would mention there is that even with these customers with inventory we're out there working on new products in the pipeline things, we need to do to advance our growth beyond the second half softness.
Feel good about the fundamentals of the business.
Got it. Thank you last question congrats on the E brake.
Any anything you can give us on timing or magnitude of when that can layer into the model. Thank you and congrats.
Yes, Josh that one it's obviously a transportation product takes a little bit of development time. So we would expect that product to first shipments to start in 2027 and revenue to be evident than and as I've mentioned in the prepared comments that as a first step forward in this market, which we see as a new growth platform for us.
So we would be feeling very good about adding future customers in the future and growing that early stages of that revenue profile over several years could be in the $10 million range five to 10 million range.
I appreciate the color. Thank you.
Thank you.
Our next question come from D C sometime.
Your line is now open. Please go ahead.
Thank you good morning, Kieran and Ashish on my first question you mentioned, an inventory correction may take a few quarters.
How should we anticipate the shape of recovery.
<unk> concrete once inventory correction and.
Do you anticipate a V shape recovery once that inventory correction has been completed.
And I don't know about a V shaped recovery, what I would say is and we want to make sure we get to that positive inflection points and get back to more normal growth that we've seen in the non transportation markets, where we've had healthy.
Single digit or double digit growth, but not obviously not in the next two quarters.
I see.
Kieran congratulation on the first wave of E break.
I know, what kind of product placement or like strategy and Youre a break.
Let's start from the premium vehicles going to more like.
Midstream market or like.
We are the market opportunities in a break.
Across different types of so hendi first of all I think our team did a great job they've been working this strategy for a number of years to get this product to market. So kudos to the team and then the other side of it is our customers when we get into these breakthrough technologies don't like us, giving us too much information on it and but needless to.
Say over time, we see this just like the accelerator module penetrating.
Deeply into the marketplace. So we feel confident in terms of the direction of this and it's got some compelling reasons for our customers to move in this direction.
Thank you Kieran Thank you asses.
Thank you Hendi.
Thank you we now have a follow up question from John <unk>.
This is Ryan of Sidoti. Please go ahead. Your line is now open.
Yes, just to follow up on Andy's question I guess in general the EV strategy, you talk about the revenue opportunity, but it is a is there a gross margin opportunity or is it just a revenue stream similar gross margins.
John .
Obviously, we.
We feel we feel confident in terms of the initial steps forward here on the revenue side of it.
Gross margin I would just tell you that automotive is competitive.
Hard to say youre going to be above market long term initially.
There is always challenges launching a product so I just want to be careful.
I prefer to keep it in much more in line with how we've historically performed.
Okay fair enough.
And one of the earlier questions was about the cadence of the revenue is the reason I wouldn't think.
Fourth quarter wouldn't be.
Seasonally weaker than the third quarter.
Or is there.
Orders that have been pushed back for delivery into the fourth quarter that I'm, just not thinking about it or don't recognize.
John We generally don't have a significant amount of seasonality in the fourth quarter, we do see some towards the tail end of the year because of the holidays, but overall during the quarter is not a material level of seasonality.
Having said that as Kieran highlighted.
We do expect.
Maybe later in 2023, some level of recovery starting to show itself in the.
Industrial end market and potentially in distribution as well as inventory levels normalized.
Great. Thanks for clearing that up for me Ashish. Thanks for taking my follow ups guys.
Thank you and welcome.
Thanks, Keith as there are no additional questions at this time I would like to hand, the call Buckeye Kieran O'sullivan.
Remarks.
Thank you Candice and thank you all for your time.
<unk> is well positioned for future growth driven by the Mega trends of increased automation connectivity and energy efficiency. Overall, we are energized and focused on our long term goal is to drive profitable growth and improve operational performance the strong wins in the quarter and expansion of new customers underlying our confidence in the future.
And our ability to deliver on our strategic plans around electrification and diversification supporting long term profitable growth I want to thank our global teams for their support in driving our strategic initiatives.
The robust wins this past quarter. We also continued to work hard to enhance our operational performance.
You for joining us today this concludes our call.
Ladies and gentlemen, this concludes today's Cts Corporation second quarter 2023 conference call. Thank you for joining you may now disconnect.
Okay.
Gentlemen, this concludes today's Cts Corporation second quarter.