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CTS Corporation (CTS) Q4 2023 Earnings Call Transcript

CTS Corporation (CTS)

Q4 2023 Earnings Conference Call

Company Participants

Kieran O'Sullivan - President and Chief Executive Officer

Ashish Agrawal - Vice President and Chief Financial Officer

Conference Call Participants

Justin Long - Stephens

John Franzreb - Sidoti & Company

Hendi Susanto - Gabelli Funds

Presentation

Operator

Hello, everyone, and welcome to the CTS Corporation Fourth Quarter 2023 Conference Call. My name is Daisy, and I'll be coordinating your call today. [Operator Instructions]

I would now like to hand over to your host, Kieran O'Sullivan, CEO, to begin. So Kieran, please go ahead.

Kieran O'Sullivan

Great. Thank you, Daisy. Good morning, and thank you for joining our fourth quarter and full year 2023 earnings call.

We continue to experience soft demand in the industrial, distribution and commercial vehicle markets as outlined in our last earnings call. The light vehicle market is more stable. Across medical and defense, we saw good growth and see continued momentum in the year ahead.

We are committed to a disciplined capital structure, focused on supporting organic growth, strategic acquisitions and returning cash to shareholders. Our Board recently approved a $100 million share repurchase program that replaces our existing program authorized in February 2023.

Ashish will now 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 will now turn the discussion back over to our CEO, Kieran O'Sullivan.

Kieran O'Sullivan

Thanks, Ashish. Overall, 2023 was a challenging year.

We finished with sales of $125 million in the fourth quarter, a decline of 12% from the fourth quarter of 2022. For the full year, sales were $550 million, down 6% from 2022. For the full year, Non-transportation sales were down 12%, and Transportation sales were down at 1% from last year.

Customer demand remained soft as expected in the fourth quarter. Our book-to-bill rate was 0.96 in the fourth quarter and 0.97 for the full year. I want to thank our teams for their support as we carefully managed operating expenses, while we navigated a challenging revenue environment, particularly in the fourth quarter of 2023.

We expect a soft revenue environment in the first quarter of 2024, similar to the last quarter. Adjusted gross margin in the fourth quarter was 34.2%, down 215 basis points, partially driven by the impact of lower volumes this quarter and the mix shift to transportation. Full year adjusted gross margin was 34.8%, down 177 basis points versus 2022.

We expect some cost pressures to persist in 2024, especially for certain materials and from labor cost increases. We expect pricing pressure to return, particularly in the transportation markets. We remain confident in our ability to drive cost in our supply chain and manufacturing sites to improve our operational performance and profitability.

Fourth quarter adjusted diluted earnings per share of $0.47 were down $0.09 from the same period last year. Full year adjusted diluted earnings per share of $2.22 decreased $0.24 from 2022. Later, Ashish will add further color on our financial performance.

Although 2023 was a challenging year, we continue to make significant progress executing our long-term strategy. 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.

During 2023, we made solid progress across our non-transportation end markets in multiple areas, with new customers and applications.

In Industrial, we had wins in areas such as automation, flow metering and climate control. In Medical, we expanded our reach beyond traditional ultrasound, securing several awards for diagnostic and therapeutic applications.

In Defense, we had strong traction in secure communications, autonomous unmanned vehicles and advanced undersea imaging. In Transportation, we secured our first eBrake and accelerometer awards and won a development contract for motor position sensing. Our maglab acquisition met strong inroads on multiple opportunities for current sensing applications.

On the operations front, our plans work to drive improvements to offset the unfavorable impacts from the mix shift, lower revenue and currency rate changes. We made significant progress in the consolidation of our Juarez facility into our Matamoros site in Mexico, and the project is on track to be completed in the first half of 2024.

Earlier in 2023, our teams completed the consolidation of our two facilities in Denmark. In 2024, we look to build on this momentum. Non-transportation sales declined 22% in the fourth quarter compared to the prior year period and declined 12% versus last year, driven primarily by the burn down of customer inventories across the industrial and distribution markets.

In the industrial market, sales continue to be soft in the quarter, driven by decreased demand for microactuators used in industrial printing applications, due primarily to softness in China. We also saw softness across other industrial and distribution customers, as inventory levels continue to correct.

We were successful with several sales wins in the quarter, including in industrial printing, EMC components and temperature sensing with two existing customers. We added three new customers in the quarter, including one for temperature sensing for heat pump application, one for a subsea piezo sensing application and another for condition monitoring.

In medical markets, where sales remain more stable, we are seeing steady demand and expect further growth in 2024. We had multiple wins in the quarter for diagnostic ultrasound as well as with a therapeutics customer. We added one new customer in the quarter for therapeutic ultrasound.

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 are expected to grow in 2024.

We received multiple orders in the quarter for hydrophones, added two new programs for solar buoys, and had awards with multiple customers for temperature sensing, as well as awards for aerospace beacons and an RF filter application. We added one new customer for an application in current sensing.

Looking ahead to 2024 in non-transportation end markets, we expect continued softness in the industrial and distribution end market for the first half of the year, with the potential to improve in the second half of 2024.

For defense and medical markets, we anticipate a stable environment, with solid progress on the qualification of 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 end markets, in line with our diversification strategy....

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