Q3 2024 CTS Corp Earnings Call
Nadia: Hello everyone and welcome to the CTS Operation 3rd quarter 2024 earnings call. My name is Nadia and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, please press star, followed by one on your telephone keypad.
Speaker Change: I will now have a true host, Karen O' Sullivan, President and CEO to begin. Karen please go ahead.
Speaker Change: Good morning and thanks for joining us today. Let's start with some key highlights for the quarter. First, third quarter saw revenue of 132 million and adjusted earnings per share of 63 cents.
Speaker Change: Second, we continue to execute on our diversification strategy with revenue from diversified markets now accounting for approximately 52% of overall revenue in the quarter.
Speaker Change: The first of the occasion will continue to be a strategic priority and we expect further progress next year.
Speaker Change: 3rd and finally we expanded overall adjusted gross margin by 416 basis points in the quarter, including foreign exchange, favourability.
Speaker Change: We are excited by the momentum in medical where our products enable critical ultrasound diagnosis and our technology enables minimally invasive procedures, helping improve patient experience and save lives.
Speaker Change: We have accelerated our defense growth with the cyclist acquisition which moves us up the value chain for sensors, transducers and subsystems and longer term has the capability to expand into new products.
Speaker Change: The man across the industrial market continues to rebuild slowly.
Speaker Change: Transportation.
Speaker Change: where we are navigating near-term market softness, interest in our e-break product continues.
Speaker Change: With a pre-development award for a premium European OEM and additional wins in electrification with current sensing and more recently, in early October, we added a new customer in North America for an accelerator modules on a premium truck platform.
Speaker Change: will take us through the safe harbor statement. Ashish I would like to remind our listeners that this conference call contains forward-looking statement.
Speaker Change: These statements are subject to a number of risks and uncertainties that could cause actual results to deformatively from those expressed in the forward-looking statements.
Speaker Change: Additional information regarding these risks and uncertainties is contained in the press release issue today and more information can be found in the company's SEC filings.
Speaker Change: To the extent that today's discussion refers to any non-gap measures under regulation G.
Speaker Change: The required explanations and reconciliation are available with today's earnings stress relief and supplemental flight presentations which can be founded in the investor section of the CTS website.
Speaker Change: I will now turn the discussion back to our CEO, Kieran O'Sullivan. Thank you Ashish. We finished the third quarter with sales of 132 million, down 1.6% from the third quarter of 2023.
Kieran O'sullivan: For the quarter, diversified medical, aerospace and defense and industrial sales were off 18 percent while transportation sales were down 17 percent from the same period last year.
Kieran O'sullivan: The Versubite Medical, Aerospace and Defense and Industrial Sales were 52% of overall company revenue in the third quarter.
Kieran O'sullivan: Our book to Bill Ratio was won in the third quarter compared to 0.92 in the third quarter of 2023.
Kieran O'sullivan: The Booktable Ratio reflects some positive improvement in the industrial and market with both OEM and distribution customers on a year over year basis as inventory is continued to improve.
Kieran O'sullivan: Boxing in the Industrial and Market were up 17% Europe year, medical Boxing were up 19% on a year of a year basis, aerospace and defense Boxing were up 92% on a year of a year basis, excluding the impact of the
Kieran O'sullivan: Court, a just-deluted airing's presher of 63 cents, were up 17% year-over-year. Ashish will add further color on our financial performance later in today's call.
Kieran O'sullivan: The Versivite Sales continued to improve up 18% in the third quarter compared to the prior year period. Excluding the Cycwest Acquisition, third quarter, the Versivite Sales Group 12% year over year.
Kieran O'sullivan: In medical markets, sales rough 3% from the same period in 2023. We expect softness in the fourth quarter as customers manage year end inventories.
Kieran O'sullivan: I'm Dr. Dalivery, and I'm a medical officer at the University of New York.
Kieran O'sullivan: We added a new customer for a vision correction application and that further progress on an innovation project would one of our key customers advancing capability for ultrasound.
Kieran O'sullivan: Finally, we received an order for a new application to support sonic lumen to ography which provides real-time dimensions of the artery and veins using a disposable catheter application.
Kieran O'sullivan: Airspace and Defense Sales were up 89% from the prior year period, excluding the impact from the cyclist acquisition sales grew 56% year over year in the third quarter. We expect good momentum for the rest of 2024 given the backlog of orders.
Kieran O'sullivan: We received multiple orders for sonar applications with customers in North America and Europe. We continue to make progress on RF filter winds in anti-jamming and added a new customer to our SideQuest team.
Kieran O'sullivan: We expect the long-term prospects for the aerospace and defense end market to be solid given our material formulations and enhanced capabilities with the addition of PsyQuest.
Kieran O'sullivan: The integration of the Syquest business is tracking the plan, and the business continues to expand its opportunity funnel with qualification work across two new countermeasure and underwater communications landfills.
Kieran O'sullivan: In the industrial market, we see a gradual recovery in distribution, as well as with OEMs. Sales were up 2% year over year. Demand recovery continues to be tempered by inventory burndown, OEMs with exposure to China, and a tightening of inventory management.
Kieran O'sullivan: We were successful with multiple wins in the quarter for EMC, switches, industrial printing, flow metering, and temperature sensing. We added a new customer in Europe for a piezo-controlled valve application.
Kieran O'sullivan: Looking ahead for the balance of the year in the industrial and distribution and market, we expect improvement in revenue. For medical markets, we anticipate softness in the fourth quarter with some customers, but overall market growth as we move into next year.
Kieran O'sullivan: We also expect to make solid progress on the qualification of products for prospective new customers.
Kieran O'sullivan: We are excited by the prospects for growth in minimally invasive applications where our products enable medical professionals with enhanced ultrasound images, detect artery restrictions, and deliver treatment medications.
Kieran O'sullivan: We are proud to highlight that our products support solutions that save lives. Over time, we expect the volume growth in portable ultrasound diagnostics and therapeutics will enhance our growth profile.
Kieran O'sullivan: Sales to defense customers are expected to remain solid. Our strategy is focused on moving from a component supplier to a supplier of sensors, transducers, and subsystems. We also expect to expand our product range and market opportunity.
Kieran O'sullivan: Longer term, we expect our material formulations, supported by three leading technologies, to continue to drive our growth in key, high-quality end markets in line with our diversification strategy.
Kieran O'sullivan: The megatrends of automation, connectivity, and efficiency enhance growth in industrial applications.
Kieran O'sullivan: Transportation sales were $63 million in the third quarter, down approximately 17% from the same period last year.
Kieran O'sullivan: We are experiencing a softer demand environment for commercial vehicle products in 2024.
Kieran O'sullivan: On the light vehicle front, we continue to navigate the market share dynamics in China, given the competition between local and transplant OEMs.
Kieran O'sullivan: Additionally, we see the regional demand for light vehicles continuing to soften. This is consistent with most market analysts that are forecasting reduced build rates.
Kieran O'sullivan: The near-term growth rates for ICE versus EVs and hybrids are less of a concern for us given our products are mostly agnostic to the drivetrain technology.
Kieran O'sullivan: In the third quarter, we had wins across various product groups, including sensor wins for chassis ride height sensing, brake position sensing, and passive safety sensing.
Kieran O'sullivan: We had an accelerator module win with Japanese, Chinese, European, and North American OEMs.
Kieran O'sullivan: We had a current sensing win with a European Tier 1 supplier. OEMs continue to delay sourcing decisions as they work to correct their powertrain mix given market changes.
Kieran O'sullivan: However, even with these dynamics, we have been making progress in key areas. For example, after the quarter closed, we added a new North American customer for an accelerator module deploying our new modular design for a future premium truck platform.
Kieran O'sullivan: In addition, interest in our e-brake product offering, weight, and cost advantages continues across several OEMs, and we received a pre-development award post-quarter end with a premium European brand.
Kieran O'sullivan: We expect the e-brake and other sensor applications will increase our ability to grow content.
Kieran O'sullivan: During the third quarter, we added a new customer and had five EV platform wins, mostly in China and Europe.
Kieran O'sullivan: Total book business was approximately $1.1 billion at the end of the quarter.
Kieran O'sullivan: Turning to our outlook for the year. For medical, industrial, aerospace, and defense markets, in line with our diversification strategy, we aim to expand the customer base and range of applications.
Kieran O'sullivan: Industrial demand has shown small improvements sequentially, and we expect this to continue.
Kieran O'sullivan: Demand in the medical market is expected to soften in the fourth quarter due to near-term inventory adjustments.
Kieran O'sullivan: In aerospace and defense, demand is expected to remain solid, given our backlog of orders and momentum from the SideQuest acquisition.
Kieran O'sullivan: Across transportation markets, production volumes have softened, as also reflected in the IHS industry reports and by other industry analysts.
Kieran O'sullivan: The North American light vehicle market is expected to soften in the fourth quarter with the full year in the range of 15.5 to 16 million units with on-hand days of supply growing.
Kieran O'sullivan: European production is forecasted in the 17 million unit range and showing some increased softness due to overcapacity pressure from Chinese OEMs and the upcoming Euro 7 emission changes in 2025.
Kieran O'sullivan: China volumes are expected to be in the 28 million unit range with the recent government subsidies only serving to stabilize demand.
Kieran O'sullivan: Electric vehicle penetration rates have softened in some regions, while hybrid adoption continues to improve.
Kieran O'sullivan: Overall, we anticipate a soft market for light vehicle production due to the China market dynamics and other recent regional build reductions. We expect softness in the commercial vehicle-related revenue throughout the remainder of 2024.
Kieran O'sullivan: For the full year 2024, we are updating guidance for sales in the range of $515 million to $525 million, compared to the prior range of $525 million to $540 million.
Kieran O'sullivan: Based on our operational performance, we are reiterating the adjusted diluted EPS guidance to be in the range of $2.05 to $2.25.
Speaker Change: Now I'll turn it over to Ashish, who will walk us through the financial results in more details. Ashish.
ashish: Thank you, Kiran. Third quarter sales were $132 million. As Kiran mentioned, we are seeing softness in the transportation and market, with sales down 17% year-over-year.
ashish: Our sales to diversified end markets grew 18% compared to the third quarter of 2023. Our recent acquisition, PsyQuest, contributed $3.6 million in revenue during the quarter.
ashish: Foreign currency changes impacted revenue favorably by approximately half a million dollars.
ashish: Adjusted gross margin in the third quarter was 38.6%, an improvement of over 400 basis points from the third quarter of last year, and sequential improvement of 286 basis points from the second quarter.
ashish: Our teams globally continue to focus on plant efficiency and cost improvements that contributed to the margin expansion.
ashish: The change in end-market mix away from the transportation end-market also impacted gross margins favorably.
ashish: We had a favorable impact of approximately $1.5 million from foreign currency changes.
ashish: During the third quarter of 2024, we benefited from some one-time tax items worth approximately two cents of EPS, and as a result, had a tax rate of 16.8 percent.
ashish: For 2024 overall, we expect our tax rate to be in the range of 18 to 20 percent.
ashish: Earnings per diluted share were 61 cents in the third quarter. Adjusted earnings for the third quarter were 63 cents per diluted share compared to 54 cents from the third quarter of last year.
ashish: Now focusing on cash generation and the balance sheet.
ashish: We generated $35 million in operating cash flow in the third quarter of 2024, compared to $22 million in the third quarter of 2023.
ashish: We continue to focus on driving efficiency in cash usage within the business and saw improvements in our controllable working capital during the quarter.
ashish: We completed the acquisition of SyQuest during the quarter using a combination of cash on hand and borrowings from our credit facility.
ashish: At the end of the third quarter, our cash balance was $95 million and the long-term debt balance was $103 million.
ashish: We remain focused on strong cash generation and continue to support organic growth, strategic acquisitions, and returning cash to shareholders.
ashish: During the quarter, we repurchased 245,000 shares of CTS stock, totaling approximately $12 million.
ashish: Year-to-date, we have returned $39 million to shareholders through share repurchases and dividends.
ashish: This concludes our prepared comments. We would like to open the line for questions at this time.
Speaker Change: Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you would like to remove your question, please press star followed by 2.
Speaker Change: And our first question goes to John Franzreb of Sidoti & Co. John, please go ahead.
John Franzreb: Good morning, gentlemen, and thanks for taking the questions.
John Franzreb: I guess I'd like to start with the...
John Franzreb: The third quarter in and of itself, a couple of things kind of stood out to me. First and foremost, the gross margin was better than my expectations. Can you talk a little bit about what are the puts and takes that's going on in the gross margin profile?
Speaker Change: Yeah, John, just at a high level, and I'll hand it over to Ashish. The mixed change is a primary driver in terms of our diversification strategy. We've been driving this approach strategically to move in this direction from a capital allocation as well, and you're seeing the results in the gross margin materialize here. So, Ashish. Yeah.
ashish: John, the other thing, we talked about foreign currency change which had a favorable impact of about 1.5 million.
ashish: for the quarter. And then the other thing that's extremely important as part of our culture is driving continuous improvement through our factories and that contributed across different parts of our business in a meaningful way to the gross margin improvement as well.
ashish: And John, one other point I would add here as we as we go forward, you saw it in my in my comments as well, the patent diversification is moving in a good direction. We expect it to improve next year. So we expect to keep this gross margin improvement, maybe not completely at this upper level, but to be improving as we go forward.
John Franzreb: Fair enough. The other item that kind of stood out to me was the R&D sequentially dropped.
John Franzreb: and has been dropping all year long. Is there anything unusual going on reimbursements in the quarter or are you just conserving cash?
Speaker Change: It's primarily related to the timing of
Speaker Change: We are continuing to focus on...
Speaker Change: The growth opportunities, obviously, prioritizing the ones that we want to fund, the ones that we don't want to fund, but the R&D spend that you're seeing for the quarter, the fluctuation in that is primarily driven by the growth.
Speaker Change: timing of customer reimbursement.
Speaker Change: Okay.
Speaker Change: not only on the sales side, but how it's impacted the mix, and was it accretive or dilutive at the end of the day for the quarter?
Speaker Change: So John, overall with SideQuest, with Bob and the team there, the integration is going very well. The sales in the quarter are about 3.6 million. I think Ashish highlighted that in his comments.
Speaker Change: And the team is also doing really well with the next qualifications for countermeasures and undersea sonar applications. So it really is moving in a good direction. We're very pleased with it. Obviously, we've got a lot of work still to do here, but happy with how it's going.
Speaker Change: With the interest expense burden and everything, EPS is slightly diluted this year.
Speaker Change: and we expect accretion at the EPS level in the second half of next year.
Speaker Change: Got it.
Speaker Change: I guess one last question and I'll get back into queue.
Speaker Change: Can you talk a little bit?
Speaker Change: hearing about your expectations on the markets in 2025. We're getting to that point where everyone's planning the year ahead. There seems to be a lot of uncertainty. What are your thoughts about the transportation market? What are your customers telling you?
Speaker Change: It certainly seems that most of your other non-transportation end markets are looking to improve, except you did call out weaker medical. Just some high-level thoughts about what you see, how you see the year ahead playing out.
Speaker Change: So John, we'll give a better picture on 2025 in our in our next quarter update but just at a macro level to touch on some of the things you commented on.
Speaker Change: from a diversification perspective.
Speaker Change: We're doing really well with growth there. Some of those markets like industrial have been down for several quarters and we saw a 2% improvement in revenue this quarter and we expect that to continue in the fourth quarter.
Speaker Change: Medical you touched on, we said near term just in the fourth quarter we're going to have a little bit of softness. It's an overall growth story but as some of the customers are adjusting the revenue
Speaker Change: And we feel very good about that market as well going into next year. Defence, we've got a strong backlog doing well. It'll be a positive story as we move forward as well.
Speaker Change: And then, on the transportation side, hard to tell you much about next year at this stage. We thought this year would have been a little bit different for most people. If you read the industry reports out there, I think people are talking about, in general, about a 1% growth.
Speaker Change: We haven't given a guide for next year at this point in time. I would tell you, though, that we're very pleased with the progress on e-brake, electrification, and adding a new customer, which we were... this customer we wanted to add for the last three years. We feel really good about that. So, more to come.
Speaker Change: Okay, fair enough. Thank you gentlemen, I'll get back in the queue.
Speaker Change: Thanks, John.
Speaker Change: Thank you. As a reminder if you would like to ask a question please press star followed by one on a telephone keypad.
Speaker Change: And the next question goes to Hendy Sestanto of Ibelli Funds. Hendy, please go ahead.
Hendy Sestanto: Good morning Kiran and Ashish. Morning Andy.
Hendy Sestanto: And where do you see opportunity with local Chinese OEMs? I'm wondering, let's say like if certain products are agnostic, I think there are pockets of growth opportunities, including, for example, let's select pedals.
Speaker Change: Yeah, Hendy, we've talked now for probably two or three quarters.
Speaker Change: In terms of the headwinds
Speaker Change: We are facing there and our transplant mostly Japanese customers and some European and North American are facing in that market.
Speaker Change: We don't think those headwinds are going away. We think that's going to be just a bit of a tough grind, but we're working selectively with OEMs that we believe will be in the long run in the Chinese local OEM sphere. So that's probably the best way how I phrase it, and we've done well with electrification in that area, and we expect that to continue to improve.
Speaker Change: life cycle. In general, when you work with new OEMs in China, how long may it take?
Speaker Change: Hendy, traditionally outside of China it can be anything from two years to three years depending on the type of product but I would tell you we see much faster development periods in in the China market and when it comes to our sensing solutions and electrification for some electrification solutions we can be in production after development a period of maybe 18 months or even less.
Speaker Change: And I think you have to be in that market if you want to compete.
Speaker Change: I have a question for Ashish. Ashish, I'm wondering, I think I may not catch the SideQuest expected revenue run rate.
Speaker Change: Yeah, so, Henry, we had talked about for the period in 2024 that they are under our ownership from starting, say, August through the end of the year, a range of $10 to $14 million.
Speaker Change: And then do you have any information in terms of the last 12 months revenue downgrade?
Speaker Change: Thank you, Ashish. Thank you, Kiran.
Speaker Change: Thank you, Andy.
Speaker Change: Thank you and we have a follow-up from John Franzreb of Sidoti & Co. John please go ahead.
John Franzreb: Yeah, just I'm curious about your thoughts about additional M&A and your diversification efforts. Do you think it's time that you're going to take a step back and maybe consolidate the Cyclest purchase or are you still going to be aggressive in the M&A front?
Speaker Change: of industrial, aerospace and defense, and medical, and at the same time making sure we're investing for growth in our transportation, where we've got some key products that can be nice winners for us in the future too.
Speaker Change: Okay, fair enough. And can you talk a little bit about your thoughts on debt repayment? How aggressive are you going to be on that front? Do you have any targets on debt leverage ratios you'd like to be at by the end of next year?
Speaker Change: So...
Speaker Change: John, the priority on capital allocation, as Ciarán mentioned, we are continuing to work the M&A pipeline.
Speaker Change: a modest increase in the debt after the Cyclist acquisition. We'll first focus on those two priorities on capital allocation and then look at, obviously, if we have still excess cash, then we'll pay down the debt, but that's not the biggest priority at this point.
John Franzreb: Okay, thank you very much Ashish. I appreciate it. Thank you.
Speaker Change: Thanks John. Thank you.
Speaker Change: Thank you. We have another question from Hendy Sosanto of the Belly Funds. Hendy, please go ahead.
Speaker Change: So, Hindi, some of our debt is hedged already and those details you can see in our public filings.
Hendy Sestanto: Got it. Thank you.
Speaker Change: You're welcome
Speaker Change: Thank you we have no further questions I'll hand back to Kieran for any closing comments
Kieran: Great, Nadia. Thank you, everybody, for joining us this morning. We will continue to advance our strategy on diversification and electrification to improve the quality of our earnings, and we look forward to updating you in the next quarter. Thank you.
Speaker Change: Thank you, this now concludes today's call. Thank you for joining, you may now disconnect your lines.