雅虎香港財經 CTS Corporation (NYSE:CTS) Q4 2023 Earnings Call Transcript
CTS Corporation (NYSE:CTS) Q4 2023 Earnings Call Transcript February 6, 2024
CTS Corporation beats earnings expectations. Reported EPS is $0.4904, expectations were $0.46. CTS 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, 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. 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 $69 million in the fourth quarter, down approximately 3% from the same period last year. For the full year, Transportation sales were $301 million, down 1% from last year, primarily due to the softening of sales of commercial vehicle products in the fourth quarter. We expect a softer demand environment for commercial vehicle products in 2024. On the light vehicle front, sales are expected to be flat, and we continue to track market share dynamics in China, given the competition between local and transplant OEMs. Growth rates for ICE versus EV and hybrid moving into 2024 are less of a concern for us, given our products are agnostic to the drivetrain technology. In the fourth quarter, we had solid wins across various product groups.
Of note is a large award for accelerometer sensors with a North American OEM, a follow-up award to the first one we had in this space earlier in 2023. We had wins across all product platforms, including accelerator modules, ride height sensing and passive safety sensors. We added new customers in China, Canada and Europe for current sensing. Total booked business was approximately $1.4 billion at the end of the quarter. In 2023, we had a strong year of awards for electrified platforms, and continue to make progress on our goal of having more than 25% of our light vehicle revenue come from electrified platforms by 2025. We gained momentum on securing electric vehicle business in the quarter as we added three new customers. Our electrification wins were primarily driven by accelerometer and current sensors, where we continue to gain momentum in the market, benefiting from our strong pipeline of new opportunities from our maglab acquisition.
As we look to our future, we're 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 brief eBrake product offering, weight and cost advantages and the future introduction of our dry pad technology, a low travel accelerator 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 2024. The North American light vehicle market is expected to be in the 15.5 million to 16 million unit range. European production is forecasted in the 17 million unit range.
China volumes are expected in the 28 million unit range. Overall, we anticipate a flat market for light vehicle production. We expect softness in commercial vehicle related revenue throughout 2024, due to lower end market demand as well as competitive pressures. 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. Inventory levels continue to normalize at industrial customers and in distribution. While we are seeing some green shoots, it's too early to say this is a robust trend. We expect a soft first half, with the possibility of strength in the second half of the year. Demand in Defense and Medical markets is expected to remain solid.
In terms of guidance for full year 2024, we 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. Fourth quarter sales were $125 million, down 12% compared to the fourth quarter of 2022, and down 7% sequentially from the third quarter of 2023. Sales to transportation customers were down 3% for the fourth quarter of last year -- from the fourth quarter of last year, due to the softness in sales related to commercial vehicle products. Sales to non-transportation end markets decreased 22% year-over-year, driven by continued softness in the industrial and distribution end markets. Sales to the Medical as well as Aerospace and Defense end markets remain strong, with continued growth momentum going into 2024. Our adjusted gross margin was 34.2% in the fourth quarter, down 215 basis points compared to the fourth quarter of 2022, and down 29 basis points compared to the third quarter of 2023.
The decline was primarily driven by the unfavorable impact of lower revenue, the change in end market mix and approximately $900,000 from currency changes. As Kieran highlighted, we made good progress on our project to transition production from our Juarez location to our site in Matamoros. We expect completion of the transition in the first half of 2024. As we navigate the challenging revenue environment, we reduced operating expenses in the fourth quarter through temporary cost reduction measures and released reserves related to incentive compensation. We do not expect to have the impact of these items in the first quarter of 2024. As a result and due to an increase in R&D spend, we expect our operating expenses in the first quarter of 2024 to be higher by slightly more than 3% of revenue compared to the fourth quarter.
Our objective is to ensure we continue to invest in programs that will drive future revenue growth for our company. Earnings per diluted share were $0.49 in the fourth quarter. Adjusted earnings for the fourth quarter were $0.47 per diluted share, compared to $0.56 per diluted share at the same time last year. For the full year, revenue was $550 million, a decrease of 6% compared to 2022. Sales to the transportation end market were down 1%, due to the softening of sales of commercial vehicle products. Sales to the other end markets declined 12% in 2023. We had good momentum in the Medical as well as Aerospace and Defense end markets. As we had previously discussed, we saw softness in the industrial and distribution markets, which we expect will last into the first half of 2024, with a potential recovery in the second half.
Foreign exchange rates impacted sales unfavorably by approximately $2.5 million in 2023. Our adjusted gross margin was 34.8% in 2023 compared to 36.5% in 2022. The primary drivers of the reduced gross margin were the unfavorable impact of lower revenue and end market mix. Foreign currency rates also impacted us unfavorably by approximately $6 million. Supply chain is in better shape than the last couple of years. Although we still face pressure on certain material costs as well as labor. The impact of the recent events in the Red Sea has been minimal so far. As Kieran highlighted, we expect pricing pressure from our customer base, primarily in transportation. Our global teams will continue to focus on operational and supply chain improvements, with the goal to maintaining and enhancing profitability.
For the full year of 2023, our earnings were $1.92 per diluted share. Adjusted earnings for the full year 2023 were $2.22 per diluted share compared to $2.46 per diluted share for 2022. We achieved a 21.9% adjusted EBITDA margin in 2023, despite the drop in sales and the unfavorable impact of end market mix. Moving to cash generation and the balance sheet. We generated $32 million in operating cash flow for the fourth quarter of 2023 and $89 million for the full year, down from $121 million in 2022. The 2022 operating cash flow included $27 million in onetime inflow from the termination of the US pension plan. Our balance sheet remains strong, with a cash balance of $164 million as of December 31, 2023, up from $157 million at the end of 2022.
Our long-term debt balance was $68 million at the end of 2023, down from $84 million in December 2022. During the quarter, we repurchased approximately 386,000 shares of CTS stock, totaling approximately $16 million. And for the full year, we repurchased 970,000 shares, totaling approximately $41 million. In total, in 2023, we returned over $46 million to shareholders through dividends and share buybacks. As Kieran mentioned, our Board recently approved a new $100 million share repurchase program. 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 includes our prepared comments. We would like to open the line for questions at this time.
Operator: Thank you. [Operator Instructions] Our first question today is from Josh Buchalter from TD Cowen. Josh, please go ahead. Your line is open.
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