Q3 2023 CTS Corp Earnings Call

Hello, and welcome to the Cts Corporation third quarter 'twenty to 'twenty three conference call. My name is Alex there'll be cool, Thanks, Nicole Ste.

I'll ask a question at the end of the presentation Express style funds by one on your telephone keypad.

Mayfield question, you May press Star followed by two.

I'll now hand, it over to your host Karen Nice Sullivan CEO to begin. Please go ahead.

Thanks, Alex Good morning, and thank you for joining our third quarter 2023 earnings call. We continued to see weak demand in industrial and distribution markets impacting sales as the elevated inventories at our customers slowly correct. We are also seeing softening in commercial vehicle demand.

Across the light vehicle transportation market.

The impact of the UAW strike was low for the third quarter, we continued to expand our customer base in industrial and medical markets, where we had several project wins.

We also secured our first development award for our motor position sensor with application and electrified vehicles.

Our focus on profitable growth driving diversification through our advanced materials capability.

And growth through electrification and mobility market with innovative new products remain our highest priorities.

I am pleased with our team's prudent management of operating expenses during the quarter given the current sales softness we remain focused on achieving our long term strategic growth goals, while also improving our operational performance.

For the third quarter 2023 sales were $135 million down 11% compared to the same period last year.

Adjusted gross margin was 34, 5% down 210 basis points from the same period in 2022.

Adjusted diluted earnings per share of 54 D.

Down <unk> <unk> compared to the third quarter of 2022.

We added eight new customers in the quarter I already mentioned the first motor position Development Award, which opens a new product line opportunity, enabling us to capture additional growth through the electrification megatrend and builds momentum beyond the first E brake win last quarter.

Ashish will take us through the Safe Harbor statement, Ashish I would like to remind our listeners that this conference call contains forward looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward looking statements.

Additional information regarding these risks and uncertainties is contained in the press release 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 Reg explanations and reconciliations are available in the investors section of the Cts website.

I will now turn the discussion back over to our CEO Kieran Osullivan. Thank you Ashish.

We continue to experience challenging demand dynamics, driven primarily by higher levels of customer inventory.

Alex: My name is Alex. I'll be coordinating the course today. If you'd like to ask a question at the end of the presentation, you can press star, fold by one on your telephone keypad. If you'd like to remove your question, you may press star, fold by two.

Sales were $135 million down 11% from the same period last year.

While the UAW strike had a low sales impact in the quarter, we expect it will pressure sales further in the fourth quarter.

Kirin O'Sullivan: On our handout for your host, Kirin O'Sullivan, CEO, to begin, please go ahead. Thanks, Alex. Good morning and thank you for joining our third quarter 2023 airings call. We continue to see weak demand and industrial and distribution markets impacting sales as elevated inventory that our customers slowly correct. We are also seeing softening and commercial vehicle demand. Across the light vehicle transportation market, the impact of the UAW strike was low for the third quarter.

Operationally with the reduced volume, we continue to focus on cost reductions.

As communicated we will have some temporary cost increases as we complete our previously announced Mexico site consolidations.

Work is progressing on the site consolidation and we are on track to complete the transition next year.

Inflationary impacts are improving but continues to be a challenge in some areas. We are adjusting pricing in partnership with our customers as we are still experiencing certain raw material cost increases and continued wage inflation, especially in Mexico and certain other countries.

Kirin O'Sullivan: We continue to expand our customer base in industrial and medical markets where we had several product wins. We also secured our first development award for a motor position sensor with application in electrified vehicles. Our focus on profitable growth, driving diversification through our advanced materials capability, and growth through electrification in mobility markets with innovative new products remain our highest priorities. I am pleased with our team's prudent management of operating expenses during the quarter given the current sales softness.

We're also prioritizing our organic growth projects and new product investments, while focusing on disciplined management of operating expenses.

During the softer short term sales environment.

We added eight new customers in the quarter with new production orders and through qualification progress on sample orders.

In addition, we are partnering with five new customers in industrial two in medical and one in transportation to qualify our products in different applications.

Kirin O'Sullivan: We remain focused on achieving our long-term strategic growth goals while also improving our operational performance. For the third quarter 2023, sales were 135 million down 11 percent compared to the same period last year. Adjusted growth margin was 34.5 percent down 210 basis points from the same period in 2022. Adjusted diluted earnings per share of 54 cents down 8 cents compared to the third quarter of 2022. We added eight new customers in the quarter. I already mentioned the first motor position development award which opens a new product line opportunity enabling us to capture additional growth through the electrification mega-trend and build momentum beyond the first e-break win last quarter.

We had solid new business awards, especially for electrification platforms we.

We had a book to bill rate in the quarter on 0.93.

Non transportation sales declined 20% in the third quarter compared to the prior year period.

In the industrial market sales continued to be soft driven by decreased demand for micro actuators used in industrial printing applications due primarily to softness in China.

We're also seeing softness across other industrial sensing applications and distribution as inventory levels continue to correct.

If we're successful with several wins sales wins, securing a production order for kitchen appliances with wins for AMC to wheel and RF applications.

Ashish Agrawal: A sheesh will take us through the safe harbor statement. A sheesh, 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 defer materially from those expressed in the forward-looking statements.

We also headwinds for multiple temperature applications, ranging from <unk> and compressor monitoring to refrigeration applications.

Ashish Agrawal: 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-gap measures under regulation G, the required explanations and reconciliations are available in the investor's section of the CTS website.

We are engaged with new customers for potential sensing applications varying from pro audio industrial printing tunable optics and home appliances to track to our controls and wheel balancing.

In medical markets, where sales continue on an improving trend we are seeing stronger demand.

We had multiple wins in the quarter for traditional medical ultrasound <unk>.

Intravascular ultrasound and therapeutic applications.

Our targeted business development efforts are progressing as we engage with new customers across multiple sample qualifications with applications in traditional ultrasound therapeutics optical encoders and an application deploying ultrasound for precise tissue destruction used.

Kirin O'Sullivan: I will now turn the discussion back over to our CEO Karen O'Sullivan. Thank you, sheesh. We continue to experience challenging demand dynamics driven primarily by higher levels of customer inventory. Sales were 135 million down 11% from the same period last year. While the UAW strike had a low-sale impact in the quarter, we expect it will pressure sales further in the fourth quarter. Operationally, with the reduced volume, we continue to focus on cost reductions.

For cancer treatment.

We expect the long term prospects for aerospace and defense end market to be solid given our enhanced capabilities and new material formulations.

Aerospace and defense sales are expected to be solid through the end of the year.

We received multiple orders in the quarter for defense sonar, and RF applications and secured underwater unmanned vehicle contracts.

Kirin O'Sullivan: As communicated, we will have some temporary cost increases as we complete our previously announced Mexico site consolidation. Work is progressing on the site consolidation, and we are on track to complete the transition next year. Inflationary impacts are improving, but continue to be a challenge in some areas. We are adjusting pricing and partnership with our customers as we are still experiencing certain raw material cost increases and continued wage inflation, especially in Mexico and certain other countries.

Additionally, we had wins for temperature sensing in communication satellites and for <unk> material in aircraft emergency location beacons.

Looking ahead for the balance of 2023 and non transportation end markets. We expect continued softness in the industrial end market and distribution as customer inventory levels continue to correct.

For defense and medical markets, we anticipate a stable environment and solid progress on the qualification of our products for prospective new customers.

Kirin O'Sullivan: We are also prioritizing our organic growth projects and new product investments while focusing on discipline management of operating expenses during the short-term sales environment. We added eight new customers in the quarter with new production orders and through qualification progress on sample orders. In addition, we are partnering with five new customers in industrial, two in medical and one in transportation to qualify our products in different applications. We have solid new business awards, especially for electrification platforms.

Long 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.

Additionally, we anticipate the mega trends of automation connectivity and efficiency as well as growth in minimally invasive medical procedures will provide us momentum as we continue expansion in these markets.

Kirin O'Sullivan: We had a book to build rate in the quarter of 0.93. Non-transportation sales declined 20% in the third quarter compared to the prior year period. In the industrial market, sales continued to be soft, driven by decreased demand from micro actuators, used in industrial printing applications, due primarily to softness in China. We are also seeing softness across other industrial sensing applications and distribution as inventory levels continue to correct. We were successful with several wins, sales wins, securing a production order for kitchen appliances with wins for EMC, two wheel and RF applications.

Transportation sales were $76 million in the third quarter sales were down approximately 3% from the same period last year.

We have now entered a softer demand environment for our commercial vehicle products and anticipate fourth quarter sales to be lower driven by a decrease in aftermarket demand that had been stronger post COVID-19 for restocking.

On the light vehicle front, we continues to track market share dynamics in China, given the competition between local and transplant Oems.

In the third quarter, we had solid wins across all product categories and continue to gain momentum in electrification and.

An accelerator modules, we secured wins with Oems in North America, and Europe and were awarded a haptic module for a European OEM that provides the driver feedback on speed distance and other information as customized by the vehicle manufacturer.

Kirin O'Sullivan: We also had wins for multiple temperature applications ranging from HFAC and compressor monitoring to refrigeration applications. We are engaged with new customers for potential sensing applications varying from pro-audio, industrial printing, tunable optics and home appliances to tractor controls and wheel balancing. In medical markets where sales continue on an improving trend, we are seeing stronger demand. We had multiple wins in the quarter for traditional medical ultrasound, intravascular ultrasound and therapeutic applications. Our targeted business development efforts are progressing as we engage with new customers across multiple sample qualifications with applications in traditional ultrasound, therapeutics, optical encoders and an application deploying ultrasound for precise tissue destruction used for cancer treatment.

We added a new product win for an accelerometer sensor with a north American OEM, where we expect the shorter than normal development period as well as additional opportunities as we go forward.

Total booked business was $1 4 billion at the end of the quarter.

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 11 electric vehicle wins in the quarter, including accelerator module in haptics chassis right height sensors accelerometers and current sensors, where we continue to gain momentum in the market benefiting from <unk> strong pipeline of new.

Opportunities.

As we look to our future. We are excited by the opportunity that transition to electrification offers us we continue to see the footwell in the vehicle as a space, where we expect to expand our product offering with traditional accelerator modules haptic modules, new E brake products offering weight and cost.

Kirin O'Sullivan: We expect a long-term prospects for aerospace and defense and market to be solid given our enhanced capabilities and new material formulations. Air space and defense sales are expected to be solid through the end of the year. We received multiple orders in the quarter for defense stoner and RF applications and secured underwater unmanned vehicle contracts. Additionally, we had wins for temperature sensing in communication satellites and for piezo material in aircraft emergency location beacons.

Advantages.

And the future introduction of our drive pad technology, a low travel accelerated product that enables the driver interface customization and increases the footwell design flexibility for our customers. We expect these and other sensor applications will increase our ability to grow content with a.

Kirin O'Sullivan: Looking ahead for the balance of 2023 in non-transportation and markets, we expect continued softness in the industrial end market and distribution as customer inventory levels continue to correct. For defense and medical markets, we anticipate a stable environment and solid progress on the qualification of our products for prospective new customers. Long-term, we expect our material formulations and in-house know-how to continue to support our growth in key high quality non-transportation and markets in line with our diversification strategy.

Sam of greater than $1 billion.

Summarizing our outlook for full year 2023, the North American light vehicle market is expected to be in the 15 million unit range subject to the impact of the UAW strike.

European production is forecasted in the 16 to 17 million unit range.

Kinda volumes are expected in the 26 million unit range.

My comments in my earlier comments focused on a reduction in commercial vehicle demand in the fourth quarter. We also expect this softness to continue in 2024 for.

Kirin O'Sullivan: Additionally, we anticipate the mega trends of automation, connectivity and efficiency as well as growth in minimally invasive medical procedures will provide us momentum as we continue expansion in these markets. Transportation sales were 76 million in the third quarter. Sales were down approximately 3% from the same period last year. We have now entered the software demand environment for commercial vehicle products and anticipate four quarter sales to be lower driven by a decrease in after market demand that had been stronger post COVID for restocking.

For non transportation markets in line with our diversification strategy, we aim to expand the customer base and 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 into early 2024.

Demand in defense and medical markets is expected to remain solid.

Kirin O'Sullivan: On the light vehicle front, we continue to track market share dynamics in China, given the competition between local and transplant OEMs. In the third quarter, we have solid wins across all product categories and continue to gain momentum in electrification. In accelerator modules, we secured wins with OEMs in North America and Europe and were awarded a haptic module for a European OEM that provides the driver feedback on speed, distance and other information is customized by the vehicle manufacturer.

In terms of guidance for full year 2023, we've previously communicated that we expected 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 gig.

Given the continued softness in distribution and the industrial markets. During the second half of the year the impact of the UAW strike and a softening commercial vehicle market. We are now updating the guidance for sales in the range of.

$545 million to $555 million and adjusted diluted earnings per share in the range of $2 15 to $2 25.

Kirin O'Sullivan: We added a new product win for an accelerometer sensor with a North American OEM where we expect a shorter than normal development period as well as additional opportunities as we go forward. Total 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 11 electric vehicle wins in the quarter, including accelerator modules and haptics, chassis ride height sensors, accelerometers, and current sensors where we continue to gain momentum in the market, benefiting from mag-lab strong pipeline of new opportunities.

Now I'll turn it over to Ashish, who will walk us through the financial results in more detail.

Thank you Karen.

Third quarter sales were $135 million.

Down 11% compared to the third quarter of 2022.

Sales to the transportation end market decreased 3% year over year, driven by softness in sales of smart actuators for commercial vehicles.

Sales to other end markets declined by approximately 20% year over year due to the inventory reduction related slowdown primarily in the industrial and distribution end market.

Adjusted gross margin was 34, 5% in the third quarter down 210 basis points compared to the third quarter of 2022.

Kirin O'Sullivan: As we look to our future, we are excited by the opportunity that transition to electrification offers us. We continue to see the foot well in the vehicle as a space for we expect to expand our product offering with traditional accelerator modules, haptic modules, new e-brake products offering weight and cost advantages, and the future introduction of our drive pad technology. A low-travel accelerator product that enables driver interface customization and increases the foot well-designed flexibility for our customers.

As expected margins were impacted by an unfavorable end market mix.

Foreign exchange rates also impacted gross margin unfavorably by approximately $1 8 million.

We are seeing continued pressure on wage costs in some of the countries. We operate in on the material side, we are still experiencing cost increases in some specific areas and we are working with our customers to share these cost increases.

Kirin O'Sullivan: Summers. We expect these and other sensor applications will increase our ability to grow content with a potential sum of greater than 1 billion. Summarizing our outlook for full-year 2023, the Nordamerican light vehicle market is expected to be in the 15-million-unit range, subject to the impact of the UAW strike. European production is forecasted in the 16-17-million-unit range. China volumes are expected in the 26-million-unit range. While my earlier comments focused on a reduction in commercial vehicle demand in the fourth quarter, we also expect this softness to continue in 2024.

As Karen highlighted if we remain focused on making operational improvements and driving cost reductions to enable long term gross margin expansion.

In light of the market conditions.

We implemented temporary cost reduction measures to flex our cost structure in the second half of this year.

In the third quarter, our operating expenses were lower also due to a reversal of approximately $2 $5 million.

In reserves related to incentive plans.

We expect our fourth quarter total operating expenses, excluding restructuring costs to be slightly higher than the third quarter.

In the third quarter, we reported earnings of <unk> 44 per diluted share. Our adjusted earnings were 54 cents per diluted share compared to 62 cents per diluted share in the same period last year.

Kirin O'Sullivan: For non-transportation markets, in line with our diversification strategy, we aim to expand the customer-based and range of applications in the industrial, medical and defense and 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 into early 2024. Demand in defense and medical markets is expected to remain solid. In terms of guidance for full-year 2023, we previously communicated that we expected sales in the range of 565-585 million and adjusted the loot at earnings per share in the range of $2.20-$2.40.

Next discussing our cash flow and balance sheet, we generated $22 million in operating cash flow during the third quarter of 2023.

Free cash flow was $19 million as we carefully managed capital expenditures.

Year to date operating cash flow was $57 million and free cash flow was $46 million <unk>.

Controllable working capital was 19, 5% compared to 15, 6% in the same period last year.

As mentioned on prior calls this year, we are transitioning from our Juarez facility with activity picking up in the second half of 2023.

Kirin O'Sullivan: Given the continued softness in distribution and the industrial markets during the second half of the year, the impact of the UAW strike and the softening commercial vehicle market, we are now updating the guidance for sales in the range of 545-555 million and adjusted the loot at earnings per share in the range of $2.15-$2.25.

We have built up some safety stock to facilitate the transition and are expecting a further increase in the fourth quarter.

Our goal is to work through the safety stock quickly in 2024.

In the third quarter, we repurchased 188700 shares of Cts stock for approximately $8 3 million.

Ashish Agrawal: Now I'll turn it over to Ashish who will walk us through the financial results in more detail.

Year to date, we have returned approximately $30 million to shareholders through buybacks and dividends.

Ashish Agrawal: Thank you, Karen. Third quarter sales were 135 million dollars, down 11 percent compared to the third quarter of 2022. Sales to the transportation and market decreased 3 percent year-over-year, driven by softness in sales of smart actuators for commercial vehicles. Sales to other and markets declined by approximately 20 percent year-over-year due to the inventory reduction related slowdown, primarily in the industrial and distribution and market. Adjusted gross margin was 34.5 percent in the third quarter, down 210 basis points compared to the third quarter of 2022.

Our balance sheet remains healthy we had a cash balance of $160 million at the end of September 2023 up from $151 million in June 2023, supported by healthy operating cash generation in the third quarter.

Our long term debt balance was $77 million on our total $400 million facility.

Our robust balance sheet and strong cash flow generation give us a strong foundation, enabling us to make strategic acquisitions and drive long term growth for Cts.

Ashish Agrawal: As expected, margins were impacted by an unfavorable end-market mix. For an exchange rates, also impacted gross margin unfavorably by approximately $1.8 million. We are seeing continued pressure on wage costs in some of the countries we operate in. On the material side, we are still experiencing cost increases in some specific areas, and we are working with our customers to share these cost increases. As Karen highlighted, we remain focused on making operational improvements and driving cost reductions to enable long-term gross margin, in expansion.

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

Sure.

Keith.

As a reminder, if you'd like to ask a question. He compressed followed by one on your telephone keypad.

Excellent to remove your question you May press Star followed by two please.

Please ensure your Unmetered light fleet when asking your question.

Yeah.

Our first question for today comes from Joshua <unk> from TD Cohen.

Your line is now open. Please go ahead.

Hey, guys. Thanks for taking my question.

I appreciate that you called out the UAW as an impact.

Ashish Agrawal: In light of the market conditions, we implemented temporary cost reduction measures to flex our cost structure in the second half of this year. In the third quarter, our operating expenses were lower, also due to a reversal of approximately $2.5 million in reserves related to incentive plans. We expect our fourth quarter total operating expenses, excluding restructuring costs to be slightly higher than the third quarter. In the third quarter, we reported earnings of 44 cents per diluted share. Our adjusted earnings were 54 cents per diluted share compared to 62 cents per diluted share in the same period last year.

Are you able to strike as an impact in the year and also recognize this is literally happening in real time, but is there any way you can quantify how much of an impact that was in the third quarter and the fourth quarter outlook.

And is there any reason to think that this wouldn't whatever was lost because of the strike wouldnt be made up in the next couple of quarters as well. Thank you.

Joshua Thanks for your question so for the third quarter. The UAW impact was was pretty minimal, but as we go forward.

We see it we've already been impacted in the fourth quarter, and we see that impact probably in the $2 million to $4 million range and I also mentioned softness in commercial vehicle and we would see that somewhere maybe in the $10 million range for the fourth quarter.

Ashish Agrawal: Next, discussing our cash flow and balance sheet, we generated $22 million in operating cash flow during the third quarter of 2023. Free cash flow was $19 million as we carefully managed capital expenditures. Year-to-date operating cash flow was $57 million and free cash flow was $46 million. Controllable working capital was 19.5% compared to 15.6% in the same period last year.

Got it thank you.

Thanks for all the details on the site consolidation is there any way to quantify or help like for like how much of a margin tailwind that could be once you get fully up and running in your steady state in Mexico.

Yes, Josh what we have called out for that is it's a Mexico to Mexico transition.

So we're not expecting a significant change in profitability just from the move itself.

Ashish Agrawal: As mentioned on prior calls this year, we are transitioning from our whereas facility with activity picking up in the second half of 2023. We have built up some safety stock to facilitate the transition and are expecting a further increase in the fourth quarter. Our goal is to work through the safety stock quickly in 2024. In the third quarter, we repurchased $188,700 shares of CTS stock for approximately $8.3 million. Year-to-date, we have returned approximately $30 million to shareholders through buybacks and dividends.

We are looking to have more stability in our production processes.

<unk>.

That will enable us to do more business with the customers that we have.

Our existing whereas location.

Got it and then last one for me. It was interesting you called out China domestic competition in the prepared remarks.

Is that something new that you are seeing is that changes materially.

Any specific products or end markets, where you're feeling that the most thank you and I'll be quiet now.

Yes, Joshua on that one and we've spoken about it in the last few quarters and we have.

Two larger customers over there Toyota and Honda they've lost some share.

Ashish Agrawal: Our balance sheet remains healthy. We had a cash balance of $160 million at the end of September 2023 up from 151 million in June 2023 supported by healthy operating cash generation in the third quarter. Our long-term debt balance was $77 million on our total $400 million facility. Our robust balance sheet and strong cash flow generation gave us a strong foundation enabling us to make strategic acquisitions and drive long-term growth for CTS.

Short term so that's something we're keeping a close eye on that obviously impacts us.

Got it that's helpful clarification. Thank you.

Our next question comes from John the Rins ramp of Sidoti and company John.

Open. Please go ahead.

Good morning, Kieran and Ashish Thanks for taking the questions I'd like to go back to the change in the revenue guidance you called out 10 million from commercial vehicle in two to four from UAW.

Unnamed: This concludes our prepared comments.

What about the balance that makes it that $25 million mid.

Alex: We would like to open the line for questions at this time. As a reminder, if you would like to ask a question, you can press star followed by one on the telephone keypad. If you want to remove your question, you may press star followed by two. Please ensure you aren't muted locally when asking your question.

The midpoint.

It certainly seems in the second quarter, we were a little bit optimistic that some of those industrial end markets would rebound what changed.

John the inventory buildup enough if you read it just industry sentiment out there on inventory levels, while it's improving in terms of burning down the inventory, we're not there at the and at the level, we'd like to be at yet. So when you look at the guide going forward in terms of where we're going to be ended the year in the fourth quarter softness it's a combination of.

Joshua Buchalter: Our first question for today comes from Joshua Buculta from TD Cohen. Joshua, your line is out open. Please go ahead. Hey guys, thanks for taking my question. I appreciate that you called out the UAW as an impact. The UAW strike is an impact in the sort of year and also recognized like this is literally happening in real time. But is there any way you can quantify how much of an impact that was the third quarter and the fourth quarter outlook?

That continued industrial and distribution softness now the softness that we see in commercial vehicle and the UAW strike, which obviously is still impacting two of our customers directly.

Joshua Buchalter: And is there any reason to think that this wouldn't what you know whatever was lost because the strike wouldn't be made up in the next couple quarters as well. Thank you. Joshua, thanks for your question. For the third quarter, the UAW impact was pretty minimal, but as we go forward, we've already been impacted in the fourth quarter and we see that impact probably in the two to four million range, and I also mentioned softness in commercial vehicle.

Okay and then is this.

Just maybe customer specific.

Toyota has been a laggard in rebuilding their inventory compared to the Detroit three.

Joshua Buchalter: We would see that somewhere maybe in the ten million range for the fourth quarter. John, I thank you. And then thanks for all the details on the site consolidation. Is there any way to quantify or help alike or like how much of a margin tail would that could be once you get fully up and running in your steady state in Mexico? Yeah, Josh, what we have called out for that is it's a Mexico to Mexico transition.

Any sense of when theyre going to catch up a little bit.

What are you hearing from their production rates and what our outlook looks like.

And I think Toyota continues to do well in Europe, and North America are concerned John Moore is in China, where the competition and pricing has been a bit more.

Tougher and also the transition to electrification has been a little faster I know Toyota has come out in recent days and said that hey, now we're seeing a softness in demand for Evs and hybrids are going to benefit. So that's something we'll continue to track.

Okay, but no sense when they are going to rebuild their inventory here in North America.

They are at the lowest end of the curve.

Joshua Buchalter: So we're not expecting a significant change in profitability just from the move itself. We are looking to have more stability in our production processes and that will enable us to do more business with the customers that we have at our existing wireless location.

Yes, John.

They obviously are not communicating to us directly in terms of what their intentions are we do see there.

Orders as they place them few weeks out.

We are monitoring it carefully, but I wouldn't be calling out any significant uptake.

Take or downtick from there.

Joshua Buchalter: Got it. And then last one for me, it was interesting you called out China domestic competition in the prepared remarks. Is that something new that you're seeing? Is that changing materially? Is it any specific products or end markets where you're feeling that the most? Thank you. And I'll be quiet now. Yeah, Joshua and that one. And we've spoken about it in the last few quarters and we have two larger customers over there, Toyota and Honda. They've lost some share short term, so that's something we're keeping us close eye on and obviously impacts us. Thank you. Josh, that's helpful for our navigation. Thank you.

Okay.

Again on the end markets.

Commercial vehicle end market is certainly some trepidation about how 'twenty four would look like versus 'twenty three.

Any early thoughts about what you're budgeting as far as kind of a build rate and 24 versus <unk> 23, as far as up or down or any kind of relative expectations.

No John what I would tell you is obviously, we've got good line of sight to Q4, that's why I called out the range of $10 million as our estimate.

And into 2024, just given the that taper off that's been there in the catch up in the aftermarket side of it that softness will continue into the first quarter, what the full year would be like will give you a better guide in our Q1 earnings call and that's the best I can tell you at the moment.

John Franzreb: Our next question comes from John, the France Reb of Sedoti and Company. John, your line is now open. Please go ahead. Good morning, Karen and sheesh. Thanks for taking the questions. I'd like to go back to the change in the revenue guidance. You called out 10 million from commercial vehicle and two to four from UAW. But what about the balance that makes up that $25 million midpoint? It certainly seems in the second quarter, you were a little bit optimistic that some of those industrial end markets would rebound.

Okay. Thank you guys to get back into queue.

Thanks, Jonathan.

Our next question is from Justin long of Stephens.

Your line is now open. Please go ahead.

Thanks, and good morning.

Good morning, Justin I, just wanted to circle.

I wanted to circle back to that.

John Franzreb: What changed? John, the industry build up and we read just industry sentiment at there on inventory levels while it's improving in terms of burning down the inventory. We're not so when you look at the guide going forward in terms of what we're going to be end of the year and the fourth quarter softness, it's a combination of that continued industrial and distribution softness. Now the softness that we see in commercial vehicle and the UAW strike, which obviously is still impacting two of our customers directly.

That you made about commercial vehicle weakness driving at a $10 million headwind were you referring to a sequential headwind in revenue relative to the third quarter or was that year over year comment.

No sequential and Justin.

Okay. So if I kind of run the math on the implied revenue guidance for the fourth quarter. It seems to suggest that the midpoint about $10 million.

<unk> pressure from <unk> to <unk> and based on the UAW strike and commercial vehicle weakness. It sounds like all of that is coming from those two items is that the right interpretation and how are you thinking about non transportation revenues sequentially in the fourth quarter kind of look more stable.

John Franzreb: Okay, and then is this maybe customer specific. Toyota's been a lagged in rebuilding their inventory compared to Detroit 3. Any sense of when they're going to catch up a little bit? What are you hearing from their production rates and what their outlook looks like? I think Toyota continues to do well in Europe and North America. Our concern, John Moore, is in China where the competition and pricing has been a bit more tougher and also the transition to electrification has been a little faster.

Yes.

You've characterized it correctly with the CV dropped commercial vehicle drop and the UAW and on that on the other markets getting more stable and.

Hoping to see some improvement coming in that area.

Okay understood.

He touched on operating costs.

John Franzreb: I know Toyota has come out in recent days and said that, hey, now we're seeing a softness in demand for EVs and the hybrids are going to benefit, so that's something we'll continue to track. Okay, but no sense when they're going to rebuild their inventory here in North America. We stir at the lowest end of the curve. Yeah, John, they obviously are not communicating to us directly in terms of what the intentions are.

Earlier, a bit but if I look at the SG&A line in particular, it was a pretty significant decrease.

In the third quarter relative to the second quarter.

$5 million.

It sounds like half of that roughly was the incentives.

Adjustment what drove that other half and could you just talk about the sustainability of some of the cost cuts it sounds like you're implementing into next year.

John Franzreb: But we do see their orders as they place them a few weeks out. We are monitoring it carefully, but I wouldn't be calling out any significant uptake or downtake from there. Okay, and just again on the end markets, the commercial vehicle and market is certainly some trepidation about how 24 would look like versus 23. Any early thoughts about what you're budgeting as far as kind of a build rate in 24 versus 23 as far as up or down or any kind of relative expectations?

Yes, so overall Justin.

Looking at the numbers correctly.

We have taken in short term cost improvement measures.

For Q3 and for Q4.

What you'll also see is that R&D expenses were slightly elevated in the third quarter because it just timing of different projects. So overall when I look at operating expenses excluding restructuring.

We are expecting a slight increase in the fourth quarter compared to Q3, but not significant.

And the increase is primarily because of that reserve release that I talked about before incentive compensation.

John Franzreb: Thank you. No, John, what I would tell you is obviously we've got good line of sight to queue for. That's why I called out the range of 10 million as our estimate and into 2024. Just given the the taper off that's been there and that catch up in the aftermarket side of it. That softness will will continue into the first quarter. What the full year will be like will give you a better guide in our Q1 earnings call. And that's the best I can tell you at the moment. Okay, thank you guys to get back into queue. Thanks John, thank you.

Okay and is there a way to quantify the other temporary cost reductions.

How much longer those could could last kind of what are the signs are the catalysts that you're looking for that.

To put those costs back into the business whenever demand improves.

Yes so.

We are looking Justin.

Justin Long: Next question is from Justin Long of Stevens. Justin, you're lunch now open. Please go ahead. Thanks and good morning. Morning. I wanted to circle morning. I wanted to circle back to the comment that you made about commercial vehicle weakness driving at a 10 million dollar headwind. We're you referring to a sequential headwind in revenue relative to the third quarter or was that a year over your comment? No sequential and Justin. Okay, so if I kind of run the math on the implied revenue guidance for the fourth quarter.

The second half of the year as our primary objective.

And then we'll keep reviewing things as we go further along.

Okay understood and last one for me.

Justin Long: It seems to suggest that the midpoint about 10 million dollars of sequential pressure. Three Q to four Q and based on the UAW strike and commercial vehicle weakness. Sounds like all of that is coming from those two items. So is that the right interpretation and how are you thinking about non transportation revenues sequentially in the fourth quarter? Could it look more stable? Yeah, you've you've characterized it correctly with the with the CV drop commercial vehicle drop and the UAW.

The book to Bill was close to one times in the quarter. Despite some of the demand challenges in macro environment.

<unk> could you just comment on the order pipeline that youre seeing today and your comfort level that we can continue to trend around this one times book to Bill.

Just on the on winning new business in terms of that side of it.

We're doing very well you heard me mentioned, a new motor position as sensor that's a new market for us it opens up an opportunity with a Sam of about 700 million growing at a double digit percent.

We see great progress and current sensing we've got a good pipeline of opportunities and Thats just on top of what's happening in medical and defense, where we've been doing well so.

It's a tough quarter, you're calling on what it is but we feel like we've got good.

Good momentum going on winning new business the book to bill quarter to quarter going forward is going to be a kind of more of a steady improvement but longer term medium to longer term, we feel good about the wins we're getting.

Justin Long: And on the on the other markets getting more stable and hoping to see some improvement coming in that area. Okay. Understood. And Ashish, she touched on operating costs earlier a bit. But if I look at the S-GNA line in particular, it was a pretty significant decrease in the third quarter, relative to the second quarter, about $5 million. It sounds like half of that roughly was the incentive adjustment. What drove that other path?

Great. Thanks, I appreciate the time.

Thanks Catherine.

Thank you. Our next question comes from the centre of Cts. Your line is now open. Please go ahead.

Good morning, Kieran and Ashish.

Good morning Hendi.

Yes.

I have a question on the labor wage increase and then the roll.

Material cost increase.

Should we.

Justin Long: And could you just talk about the sustainability of some of the cost cuts? It sounds like you're implementing in the next year. Yeah, so overall, just in you're looking at the numbers correctly, we have taken short-term cost improvement measures for Q3 and for Q4. What you'll also see is that R&D expenses were slightly elevated in the third quarter because just timing of different projects. So overall, when I look at operating expenses, excluding restructuring, we are expecting a slight increase in the fourth quarter compared to Q3, but not significant.

Is there any way, where we can think about the magnitude later.

Dose to account for like let's say like single digits.

Person dates of the cost of goods sold or.

Just two.

Get some insight into the magnitude of the gross margin pressure on those two ends.

Yes, so hendi.

If you go back to the last two years, we were seeing some significant increases, which we called out and be quantified.

The dynamic is improving.

What we wanted to call out is that we are still seeing some areas of pressure on the wage side. It's in Mexico. It's in some other countries that we operate in in Europe.

Justin Long: And the increase is primarily because of that reserve release that I talked about for incentive compensation. Okay. And is there a way to quantify the other temporary cost reductions, and how much longer those could last, what are the designs or the costs back in the business whenever demand improves? Yeah, so we are looking just in the second half of the year is our primary objective, and then we'll keep reviewing things as we go further along.

The material is improving but there are some places some specific suppliers, where we still have challenges. So thats what were trying to call out I wouldn't be saying.

Saying that it has a significant margin impact for our business and as I mentioned on the call.

We are still working with our customer base to share those cost increases as appropriate.

Just saw that.

We are managing the overall margin impact and Hendi one thing I want to highlight is where we have those challenges.

And we feel they are not the best to market, we're not shy about turning on new sources.

I see.

Justin Long: Okay, understood. And last one for me, the book to bill was close to one time in the quarter, despite some of the demand challenges and macro environment that's uncertain. Could you just comment on the order pipeline that you're seeing today and your comfort level that we can continue to trend around this one time book to bill? Just on the winning new business in terms of that side of it. We're doing very well.

And then Kieran.

Yes.

Thank you insight in terms of the UAW strike weighted impact can go beyond Q4.

I would hope not handy.

The impact is big enough for you obviously heard last night that the Ford is up for proposed settlement at this stage and our bigger customers are with GM and <unk>, but given what's happening with forward I would hope things would convert soon and not get into next year at all.

Justin Long: You heard me mention a new motor position sensor. That's a new market for us. It opens up an opportunity with a sum of about 700 million growing at a double digit percent. We see great progress in current sensing. We've got a good pipeline of opportunities, and that's just on top of what's happening in medical and defense where we've been doing well. So it's a tough quarter, calling it what it is, but we feel like we've got good momentum going on winning new business.

I see.

And then Kieran congratulation on securing the first we are in a break.

I know when the commercial sales of E brake associated with that Weird may start.

Hendi.

A very its a new product is complex it the first revenues come in either late 2006, or 27% and and.

The product is very popular with our customer we have a lot of interest in it as well we see this as a platform that can be just like our accelerator modules, a $50 million plus platform over over years.

Justin Long: The book to bill, the quarter to quarter going forward is going to be a kind of more of a steady improvement, but the longer term, medium to longer term, we feel good about the wins we're getting. Great. Thanks. I appreciate the time. Thank you, Justin.

Okay.

And then the awards that you have in the AC water sensors.

What is the timing of the commercial sales.

Unnamed: Thank you.

And on the current sensors in actual fact and with what we've done out of.

Hendi Susanto: Our next question comes from Hendi Susanto or CTS. Your line is now open. Please go ahead. Good morning, Kiran and Ashish. Morning, Hendi. Yes. Ashish, I have a question on the labor weight increase and then the raw material cost increase. Is there any way where we can think about the magnitude, whether those two account for like the single-digit percentage of the cost of goods sold or just to get some insight into the magnitude of the growth margin pressure on those two ends?

The <unk> acquisition, we already have some impact in sales in industrial applications, the automotive ones take a little bit longer but.

They're on a good trajectory, it's not going to be three or four years, there's going to be closer to two years.

I see okay.

Yeah.

Thank you Kieran. Thank you asked this.

Thanks Sandeep sandeep.

Thank you at this time, we currently have no further questions. So I'll hand back to Kieran Osullivan for any further remarks.

Thanks, Alex and thank you all for your time, despite the near term headwinds Cts is well positioned for future growth driven by the Mega trends of increased automation connectivity and energy efficiency. Overall, we're focused on our long term goal is to drive profitable growth.

Hendi Susanto: Yes. So, Hendi, you know, if you go back to the last two years, we were seeing some significant increases, which we called out and we quantified. The dynamic is improving. What we wanted to call out is that we are still seeing some areas of pressure on the weight side. It's in Mexico, it's in some other countries that we operate in Europe. The material is improving, but there are some places, some specific suppliers where we still have challenges.

Solid wins in the quarter expansion of customers, new development contracts and pipeline of opportunities underscore our strong confidence in cts's future I want to thank our global teams for their support in driving our strategic initiatives successfully launching several new products and continuing to give back to those less fortunate.

In our communities during the quarter. We also continue to work hard to enhance our operational performance. Thank you all for joining US today. This concludes our call.

Hendi Susanto: So, that's what we're trying to call out. I wouldn't be saying that it has a significant margin impact for our business and as I mentioned on the call, we are still working with our customer base to share those cost increases as appropriate just so that we are managing the overall margin impact. And, Hendi, one thing I want to highlight is where we have those challenges and we feel they're not invested to market, we're not shy about turning on new sources.

Yes.

Thank you for joining today's call you may now disconnect your lines.

This concludes our call.

Thank you.

Hendi Susanto: I see. And, can go beyond Q4? I would hope not, Hendi. You know, the impact is big enough. You obviously heard last night that the Ford is up for proposed settlement at this stage. Our bigger customers are with GM and Stellantis. But, given what's happening with Ford, I would hope things would converge soon and not get into next year at all. I see. Yeah.

Hendi Susanto: And then Q1, a congratulation on securing the first win in eBreak. May I know when the commercial sales of eBreak associated with that win may start? Hendi, it's a new product. It's complex. The first revenues come in either late 26 or 27. And, the product is very popular with our customer. We have a lot of interest in it as well. We see this as a platform that can be just like our accelerator modules, a 50 million plus platform over years. Okay. Yeah.

Hendi Susanto: And then the work that you have in the AC motor current sensors, what is the timing of the commercial sales? On the current sensors and actual fact with what we've gone out of the Maglab acquisition, we already have some impact in sales in industrial applications. The automotive ones take a little bit longer but they're on a good trajectory. It's not going to be three or four years. It's going to be closer to two years. Thank you, Karen, thank you, Ashish. Thanks, Andy. Thank you.

Kirin O'Sullivan: At this time, we currently have no further questions, so I'll have back to Karen, though, Sullivan, any further remarks. Thanks, Alex, and thank you all for your time. Despite the near-term headwind, CTS is well positioned for future growth, driven by the mega trends of increased automation, connectivity and energy efficiency. Overall, we're focused on our long-term goals to drive profitable growth, the solid winds in the quarter, expansion of customers, new development contracts, and pipeline of opportunities, underscore our strong confidence in CTS's future.

Kirin O'Sullivan: I want to thank our global teams for their support in driving our strategic initiatives, successfully launching several new products, and continuing to give back to those less fortunate in our communities during the quarter. We also continue to work hard to enhance our operational performance.

Kirin O'Sullivan: Thank you all for joining us today.

Unnamed: This concludes our call. Thank you for joining us today. You may now disconnect your lines.

Unnamed: This concludes our call. Thanks.