CTS Corporation (NYSE:CTS) Q1 2024 Earnings Call Transcript May 1, 2024
CTS Corporation misses on earnings expectations. Reported EPS is $0.3588 EPS, expectations were $0.41. CTS Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello all, and welcome to CTS Corporation’s First Quarter 2024 Conference Call. My name is Lydia, and I’ll be your operator today’s. All lines have been placed on mute to prevent any background noise and after the prepared remarks, there will be an opportunity to ask questions. [Operator Instructions] I’ll now hand you over to Kieran O’Sullivan, CEO, to begin. Please go ahead.
Kieran O’Sullivan: Thank you, Lydia. Good morning, and thank you for joining our first quarter 2024 earnings call. Sales were in line with our expectations for the quarter, as non-transportation sales started to stabilize from the ongoing reduction in customer inventory. In the quarter, we also saw an improved booking trend for non-transportation markets. Sales to commercial vehicle markets declined as expected, driven by softer demand and a more competitive environment. Light vehicle sales were stable across most regions, except in China, where our sales to transplant OEMs were softer. While defense sales were lower, due primarily to the timing of shipments, we expect good momentum for the rest of 2024. Across medical, we saw solid performance. Ashish, our CFO, will take us through the Safe Harbor statement. Ashish?
Ashish Agrawal: 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 with today’s earnings press release and supplemental slide presentation, which can be found in the Investors section of the CTS website. I’ll now turn the discussion back over to our CEO, Kieran O’Sullivan.
Kieran O’Sullivan: Thanks, Ashish. We finished the first quarter with sales of $126 million, a decline of 14% from the first quarter of 2023. For the quarter, non-transportation sales were down 17% and transportation sales were down 10% from the same period last year. Sequentially, non-transportation sales were up 7%, as we see some early signs of recovery in the industrial end market. Sales to the transportation end market were down 4% versus the fourth quarter of 2023. I want to thank our teams for their support, as we carefully manage the operations while we navigate a challenging revenue environment. Our book-to-bill ratio was 1.07 in the first quarter, up from 0.96 in the first quarter and the fourth quarter of 2023. The improvement in the book-to-bill ratio is in line with our expectations of recovery in the industrial end market with both distribution and OEM customers.
We are encouraged by these early signs. However, inventories are still correcting, and we will continue to monitor the order intake carefully. Adjusted gross margin in the first quarter was 36.2%, up 86 basis points from the first quarter of 2023, driven by operational improvements and the mix shift to non-transportation sales. On the operations front, our teams worked on improvements to help offset the unfavorable impacts from lower volumes. We are still experiencing some cost pressures, especially for certain materials and from labor cost increases. We expect pricing pressure this year, particularly in transportation markets. We remain confident in our ability to drive efficiencies in our supply chain and manufacturing sites and to improve our operational performance and profitability.
We also met significant progress on the consolidation of the Juarez facility into the Matamoros site in Mexico and expect to fully exit the Juarez location in the second quarter. This has been a tremendous effort by our teams to advance this project while successfully supporting our customers. First quarter adjusted diluted earnings per share of $0.47, we’re down from $0.61 in the same period last year. Later Ashish will add further color on our financial performance. Non-transportation sales decreased 17% in the first quarter compared to the prior year period, but we’re up 7% sequentially. The book to bill ratio was above 1 and new order trends were positive across several product lines. In medical markets, sales were essentially flat from the same period in 2023, but bookings were up sequentially as well as from the same period last year.
We are seeing steady demand and expect further growth in 2024. We had multiple wins in the quarter for diagnostic ultrasound across all regions and secured a new order for an intravascular ultrasound application. We were engaged on two new programs for applications in blood analysis and therapeutic ultrasound. Additionally, we added two new customers, one for facial therapeutics and a second for a disposable blood analyzer. In the quarter, we also partnered with an existing customer on an advanced development project that has the potential to expand our intravascular applications by leveraging the capabilities of our single crystal technology. We expect the long-term prospects for the aerospace and defense end market to be solid given our enhanced capabilities and material formulations.
Aerospace and defense sales were down in the quarter primarily due to the timing of shipments to some customers. Bookings were strong in the quarter as we received multiple orders for hydrophones, sonobuoys, underwater unmanned applications, frequency controls and RF filters. We added three new programs in the quarter for AUVs and satellite RF filter applications. We also added one new customer for an application in aerospace and defense non-destructive testing. Additionally, we are getting traction on European defense growth with sample qualifications in progress and we anticipate sales growth in 2025 on a multi-year opportunity. In the industrial market, overall sales were down from the prior year period. Sales and bookings were up sequentially.
We were successful with several sales wins in the quarter including for industrial printing, EMC components, temperature sensing, flow metering and switches. We added three new customers in the quarter for temperature and EMC applications. While we saw a small sequential improvement in distribution sales and bookings, inventory reduction is still in progress. Looking ahead for the year in non-transportation end markets, we expect improvement in our industrial and distribution end market revenue in the second half of 2024. For defense and medical markets, we anticipate a stable environment and we expect to make solid progress on the qualification of products for prospective new customers. Longer term, we expect our material formulations and in-house know-how to continue to support our growth in key high-quality end markets in line with our diversification strategy.
Additionally, we anticipate the megatrends 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 $66.5 million in the first quarter, down approximately 10% from the same period last year and down 4% sequentially. We are experiencing a softer demand softer demand environment for commercial vehicle products in 2024, driven primarily by market softness and second source competition. On the light vehicle front, as I mentioned earlier, we continue to navigate the market share dynamics in China, given the competition between local and transplant OEMs. The 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.
In the first quarter, we had wins across various product groups, including accelerometer modules, [indiscernible] sensors, and passive safety sensors. We added a new EV customer in North America and are progressing on advanced development awards with other new customers for accelerator modules and EV bus bar applications for current sensing. Total booked business was approximately $1.2 billion at the end of the quarter. As we look to our future, we are excited by the opportunity the transition to electrification offers us even as penetration rates adjust near-term. We continue to see the foot well 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 advantages, and the future introduction of our Drive-Pad technology, a low-travel pedal product.
We expect these and other sensor applications will increase our ability to grow content with a potential SAM of greater than $1 billion. Turning to our outlook for this year. The North American light vehicle market is expected to be in the 15.5 million to 16 million unit range with on-hand days of supply now approaching normalized levels of 3 million units. European production is forecasted in the 17 million unit range. China volumes are expected in the 28 million unit range. Electric vehicle penetration rates have softened in most regions, while hybrid adoption has improved. Overall, we anticipate a slightly down market for light vehicle production due to the China market dynamics. We expect softness in commercial vehicle related revenue throughout 2024, primarily due to lower demand as well as the second source competition.
For the 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. The green shoots we mentioned last quarter in the form of inventory level corrections and improved bookings are slowly becoming apparent and are indicators of a potential recovery in the second half of 2024. As we outlined in our last earnings call, we expect a soft first half and continued near-term challenges in transportation sales, while we see strengthening in non-transportation sales and an improved margin profile. Demand in defense and medical markets is expected to remain solid as industrial and distribution begins to demonstrate early signs of an improving threat.
Our balance sheet is strong with ample liquidity, supported by strong cash generation, which enables us to focus on strategic acquisitions and returning cash to shareholders. In terms of guidance for full year 2024, we are maintaining our prior guidance and anticipate sales in the range of $530 million to $570 million and adjusted diluted earnings per share in the range of $2.10 to $2.35. Now, I’ll turn it over to Ashish, who will walk us through the financial results in more detail. Ashish?
Ashish Agrawal: Thank you, Kieran. First quarter sales were $126 million, down 14% compared to the first quarter of 2023 and up 1% sequentially from the fourth quarter of 2023. Sales to transportation customers were down 10% from the first quarter of last year, due primarily to the softness in sales related to commercial vehicle products and sales to our light vehicle customers in China. Sequentially, sales to the transportation market were down 4% compared to the fourth quarter of 2023. Sales to non-transportation end markets decreased 17% year-over-year, driven mainly by continued softness in the industrial and distribution end markets. Compared to the fourth quarter of 2023, sales to non-transportation customers increased 7% as we saw some improvement in sales to industrial OEM customers.
Sales to the medical end market were stable. And although, we saw lower sales in the aerospace and defense end market in the first quarter, we expect to have strong momentum in both these end markets in 2024. Our adjusted gross margin was 36.2% in the first quarter, up 86 basis points compared to the first quarter of 2023 and up 205 basis points compared to the fourth quarter of 2023. The improvements were driven by a favorable change in customer mix as well as efficiency improvements in our manufacturing operations. As Kieran highlighted, we made good progress on our project to transition production from the Juarez location to our site in Matamoros. We expect completion of the transition in the second quarter of 2024. As we navigate the challenging revenue environment, we reduced operating expenses in the fourth quarter of 2023 through temporary cost reduction measures and released reserves related to incentive compensation.
We restored these temporary cost measures in the first quarter of 2024. As a result, we saw an increase of approximately 4% of sales in our operating expenses. Our objective is to ensure we manage operating expenses appropriately considering both the market environment and the focus to balance funding investments in programs that will drive future revenue growth for our company. During the first quarter of 2024, we benefited from some discrete tax-related items, and as a result, had an improved tax rate of 18.6%. For 2024, overall, we expect our tax rate to be in the range of 19% to 22%. Earnings per diluted share were $0.36 in the first quarter. Adjusted earnings for the first quarter were $0.47 per diluted share compared to $0.61 per diluted share for the first quarter of last year.
Moving on to cash generation and the balance sheet. We generated $18 million in operating cash flow in the first quarter of 2024 compared to $11 million in the first quarter of 2023. Our balance sheet remains strong with a cash balance of $162 million as of March 31, 2024, and the long-term debt balance was $68 million. During the quarter, we repurchased approximately 272,000 shares of CTS stock totaling approximately $12 million. We remain focused on strong cash generation and are committed to maintaining a healthy balance sheet to continue to support organic growth, strategic acquisitions and returning cash to shareholders. This concludes our prepared comments. We would like to open the line for questions at this time.
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