Good day, and welcome to the CTS Corporation First Quarter 2020 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kieran O'Sullivan. Please go ahead, sir.

Thank you, David. Good morning, and thank you for joining us today and welcome to CTS' first quarter 2020 conference call. I'll start by sharing a few thoughts on our company and on our business performance. It's been a challenging first quarter for our employees, communities and our company globally. Three CTS employees have been impacted directly by COVID-19 and are returning to good health. Our hearts go out to the families affected by the virus. We are inspired by the healthcare and other essential service workers on the front lines and their relentless efforts to combat the virus. The uncertainty of COVID-19's impact weighs heavy. We've been dealing with COVID-19 in two China locations since early February and have been able to pass the key learnings quickly and effectively to all our European and American locations. Sales in the first quarter were $103 million, down 12.4% versus the same period in 2019. We added six new customers in the quarter. First quarter adjusted gross margin was 31.9% compared to 34.5% in the same period last year. The adjusted EBITDA margin of 15% was down from 19.2% in the same period last year. First quarter adjusted earnings per share of $0.19 were down from $0.39 in the first quarter of 2019. Our balance sheet is strong. We had $151 million in debt and $151 million in cash at the end of the quarter, resulting in a zero net debt position. We have made changes to adapt our business and continue to monitor conditions carefully. While the challenges of COVID-19 are unprecedented, we are working to position CTS to emerge from this recession as a stronger company.

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 in the Investors section of the CTS website. I will now turn the discussion back over to our CEO, Kieran O'Sullivan.

Thanks, Ashish. As we work through this challenging environment our first focus is the safety of our employees. We have taken steps to ensure compliance with local regulations and have taken additional steps for employee safety in our locations that we continue to operate. We are working closely with our customers to meet their requirements to the best of our abilities. To reduce operating expenses, we have implemented temporary pay reductions, temporarily eliminated 401K match, plant shutdowns, plant furloughs and a reduction in Board cash compensation. We will continue to evaluate further steps to optimize our cost structure and will update you on our progress. We are prioritizing capital spend for growth projects and have applied the brakes in all other areas in managing inventory and receivables. During this process, my CTS coworkers across the world have displayed tremendous devotion to the company and its customers. They have stepped up to adapt to new ways of conducting business, displayed cooperation and understanding for the cost reduction efforts and have demonstrated resiliency in these tough conditions. As a team we have taken the learnings from our early experiences in the January-February timeframe from our China locations and implemented safety measures at our other locations across the world. We are maintaining our focus on the growth of our business as a key strategic priority and continue to expand our range of sensing connectivity and motion products. New business awards were $105 million for the quarter which was a solid performance given most regions lost three to four weeks in the quarter due to OEM shutdowns. We secured large awards in accelerator modules, one with a Japanese OEM and two with Chinese OEMs for the local market and a win for an application in commercial vehicles. In North America, we were awarded a contract for a ride height chassis sensor application. In ceramics, we had wins in intravascular, medical ultrasound, flow metering, and defense undersea applications. In total, wins outside the transportation end market were approximately $46 million. We see opportunities in this challenging market to gain new sales despite the strong headwinds in automotive. Demand for medical respirators is driving volume for our temperature sensors and CPAP machines require our analog and digital products. Military communications with the RF filter product and specialty frequency applications are an area of focus where we're gaining traction. With our first win in commercial vehicle accelerator modules, we are exploring architectures to scale more cost effectively as applications tend to be unique in design. We are advancing innovations for hybrid vehicles and electric vehicles where we're investigating content growth for pedals, current sensing, e-brake, and thermal applications. As previously reported, we continue to progress on predevelopment engagements on RF sensing to reduce harmful emissions and protect our environment. With ceramic material formulations, we are innovating with new texture cumulative formulations with a first award for military applications. We continue to maintain a disciplined approach to innovations and product development in haptics and security biometrics for consumer electronic applications. Making further progress in our end market profile is a strategic priority for us. We continue to evaluate our portfolio of products and technologies while we work to strengthen our M&A pipeline. We have good liquidity and balance sheet capability. We aim to emerge from this recession stronger and to advance our end market profile in an environment where valuations may be favorable for acquiring companies. We remain focused on adding the right technologies, expanding our geographic reach, and strengthening our product portfolio and customer relationships. One of the key learnings for us with the temperature sensing acquisitions is our ability to improve front-end sales effectiveness for our other electronic component product lines. We are adapting these best practices with a goal to improve our ability to win new business. Last year we reported the difficulties we encountered in our ceramic foundry operation. We saw good progress and continue to improve this year. We are also focused on increasing operational efficiency in our temperature sensor manufacturing operations in Mexico. The ERP rollout continues and will position us to gain further efficiencies beyond 2020 in various aspects of our supply chain and for structure. To this end, we are evaluating a shared services plan across the regions to be more efficient. Fixed costs and operational expense reductions are always in view as we aim to live our core value of simplification. End markets were challenging in the first quarter of 2020. We expect the most challenging period this year to be the second quarter as the full impact of COVID-19 is realized. Transportation market demand is expected to be down in the 20% to 40% range in the second quarter depending on the region. For the full year, we expect a decrease in the range of 10% to 20% globally with some forecasts in a higher range. We are closely monitoring demand in other end markets given the evolving dynamics. We expect a slow steady recovery in the second half of the year with the recovery lingering into 2021. Medical and defense markets remain robust. We are also seeing some incremental opportunities in medical ultrasound, temperature, and position sensors for ventilators and respirators. Sales to the aerospace and defense end market increased to 9% of total revenues in the first quarter, up from 6% last year. Profitable growth, margin improvement, ERP implementation, and progress on our end-market profile remain priorities for us this year. This year we are initiating our drive toward 2025 goals for CTS focused on four key areas: profitable growth to portfolio management; working more closely with our customers and aligning on technology and product road maps; building the capability of CTS operating systems to be more consistent to enhance our continuous improvement capabilities and results orientation; and finally, enhancing our organizational capability through leadership and cultural programs aligned with our business performance, values, communities, and environmental priorities. We will update you annually on our progress. Due to the continuing uncertainties from COVID-19, we have withdrawn guidance for 2020. As we have said, we expect the second quarter to be more challenging with some recovery over the following quarters. Again, I want to emphasize our strong liquidity and cash position as well as our drive to emerge from this recession as a stronger company.

Thank you, Kieran. First quarter sales were $103.1 million, down 12.4% compared to the prior year. Sales to transportation customers decreased by 22% and sales to other end markets increased by 7.1% due to the addition of $5.6 million in sales from our temperature sensing acquisition. Organic sales were down 17.1%. Our gross margin was 31.9% for the first quarter. Lower volumes impacted gross margin. As Kieran mentioned, we are starting to see improvements in our ceramic foundry operations and expect further operational improvements during the next quarter. Our first quarter 2020 earnings were $0.12 per diluted share. Adjusted earnings per diluted share were $0.19, down $0.20 compared to the first quarter of last year. As volumes are declining due to the impact of COVID-19, we have taken steps to reduce costs where possible through temporary payroll reductions, suspension of 401(k) contributions, furloughs, plant shutdowns, and control over all discretionary spending. We expect the second quarter to be significantly impacted due to the shutdowns and stay-at-home orders in most countries with the potential for a slow recovery in the third and fourth quarters of the year. On cash, CTS remains well funded. At the end of March, we had $151 million in cash on our balance sheet. Our debt balance was $151 million. Overall, we have zero net debt. We have access to an additional $147 million through our revolving credit facility. We have taken measures to ensure we have adequate liquidity for the next several quarters at all our sites around the world in order to manage through this difficult situation. In March, we borrowed $50 million from our credit facility. Including this additional debt, we remain well within our debt covenants. And at this time, it is our expectation that we will remain compliant. Our controllable working capital as a percent of sales was 17% in the first quarter. The increase was driven primarily due to the sharp slowdown in volume in the second half of March. We are focusing on actions to reduce working capital over the next quarters. Our focus is primarily on reducing inventory levels across our operations. We have also enhanced our efforts on credit and receivable collections, as we operate in an environment where many companies are cash constrained. We generated $11.9 million in operating cash flow in the first quarter. Our CapEx was $4.6 million. We are prioritizing CapEx spend on the most critical and strategically important programs. Our goal is to reduce capital spend by 25% to 30% to under $15 million for 2020. We are continuing to implement SAP and went live successfully at another large manufacturing location at the beginning of March. Due to current limitations on operations and travel, we are adapting our plans, and have delayed the target date for the next go-live to the third quarter. As a result of this push out, our target date for completion has moved into the middle of 2021. We are taking steps to manage costs related to the implementation. This concludes our prepared comments. We would like to open the line for questions at this time.

Thank you. We'll take our first question from Brian Colley with Stephens.

Hey, good morning, guys. Thanks for taking my questions.

Hi Brian.

Hi. So you gave some good commentary around expected trends in the transportation end market for the second quarter and the full year. Just curious if you could offer some similar commentary on what you see for your other end markets for 2Q and the full year. And also if you could talk a little bit about demand trends and how the business is performing so far in April.

So Brian on the automotive side, just to recap, we were down about 22%. We saw the market down somewhere in the region of 24% in the first quarter. Second quarter, we said 20% to 40% down. It will differ across the regions. For the year, we said 10% to 20% range. We've seen some forecasts around 23% for the year. And that's different in each of the regions. But we're prepared for those situations. On the non-automotive markets, we're feeling pretty good. But we're also being cautious, because we don't know what the effects are if you look out beyond two months, three months. So that side of things is running reasonably well. And as I said, we've got opportunities to gain some new sales. Some of those may be short-term. But we're all looking for opportunities on longer-term contracts. We're pretty pleased with our new business awards. You saw that they were strong in the sense of solid performance in a quarter where we just had two weeks of shutdowns and orders or contracts were not being awarded. And our non-transportation performance was very solid there. So again, we feel good about the non-transportation side. But we're also cautious because it's an evolving market at this time.

Got it, that's helpful. And then second question, I know the timing of recovery is something that's impossible to predict at this point. But whenever we do see things inflect positively, whether it's later this year or next year, can you talk about the areas of the business where you would expect to see a sharper snapback and more of a V-shaped recovery versus the areas where the recovery could be more prolonged?

Yes. So on the transportation side, it's going to be tough in the second quarter. We think there'll be a slow improvement. If you look at the forecasts that are coming out there every week, they're evolving. And I think when you look at big ticket items like vehicles and with the employment levels and changes, it's going to take some time. Now fortunately out there, you can buy vehicles online these days, so it helps a little bit in the process versus the dealership. But it will be a slow steady recovery, not a quick flip back. On some of the other areas, we're seeing good progress in the ceramic product line. And in the electronic components, we've got some new products in 5G where we're making some progress. I mentioned that on RF in certain applications, not just in telecom, but in military applications for frequency and for 5G, we see good demand there and a steady performance in medical as well. So, obviously, we're continuing to evaluate it, but those areas feel a little better.

Got it. And then last question just on the cost structure. Curious if you guys could maybe quantify the costs that you've taken out in response to COVID so far. And then just as you think about additional expense reductions, it sounds like you guys are planning for a macro scenario where we have a slow steady recovery in the back half. But if we do see a more prolonged recovery, do you guys have the ability to take another step function down in the cost structure?

So, Brian as we talked about we took some cost actions in the fourth quarter last year when we had started seeing some slowdown in our commercial vehicle end market. And we have taken additional steps, which we talked about on the earnings call today. We are staying away from trying to quantify the full impact from those cost actions because we are considering them as temporary based on market conditions. And at the same time, we are looking at additional options in terms of how we could take further steps down if the market conditions evolve unfavorably from a volume standpoint. So all of those things are in our playbook from that standpoint and we will take the additional steps at the right time.

And Brian, just to add a little bit to what Ashish said. Obviously, our employees are helping out here in this situation. And we want to make sure as things improve that we are fair with our employees as well. And on the flip side to your point, as you look out beyond a few quarters here how is demand? Is it a new world versus capacity that you have today? That's something that you've got to be constantly analyzing and planning for and I think that's what Ashish was also pointing towards.

That makes sense. I’ll leave it there. I appreciate the time today.

Thank you, Brian.

Thank you.

And next we'll go to Karl Ackerman with Cowen.

Hi, there. Good morning, gentlemen. Two questions if I may. First is on manufacturing, is there any way to impact margins from work stoppage orders at your various manufacturing facilities? And are your manufacturing facilities in Mexico fully functional or not, or are you able to alleviate some of those bottlenecks and other geographical manufacturing locations?

Karl, do you mind repeating your question? The line is not perfectly clear.

Sure. I was hoping you could quantify the impact of the factory shutdowns on your margins, particularly in your non-U.S. facilities. Are those factories fully operational now? If not, are you managing to reduce some of the bottlenecks in your U.S. locations?

So, Karl if we got your question right you're asking about the margin impact and how much we can protect margins as we navigate through this situation. You saw that our gross margin declined somewhat in the first quarter as the volumes dropped. We are looking at ways where we can reduce manufacturing costs. And we are also making sure that we stay compliant with any local requirements, which may prevent us from being able to fully reduce costs. Just based on country-by-country there are different regulations that we have to comply with. And as we move forward the same situation will continue to evolve in terms of as Kieran mentioned what does the volume scenario look like, and then based on that we'll be looking to manage our cost structure as best as we can.

And Karl to give you some color on the locations, if you look to Asia, we obviously were down during the shutdown in China. Those facilities were back up and running since about mid-March at full level. Our Taiwan facility has been running all the way through. When you come to Europe, we've had some shutdowns and we're back in operation there. And if you come to North America, we're running some medical products continuously. And our Mexico operations have been impacted and we're waiting for some clarity on that. What is clear is with the volumes in automotive, we will have furloughs in our facilities as we go through the second quarter.

That's helpful. I appreciate that. Regarding margins, I understand that factory utilization is facing challenges due to supply chain disruptions this year, which may impact the trajectory. It was beneficial to discuss some of the end market dynamics moving forward. Will margin recovery be influenced by sales changes in transportation, or are there other one-time supply chain costs you've faced this year that are expected to decrease in the coming quarters and potentially provide a margin boost? Thank you.

Karl, the primary driver is going to be recovery in volumes. And as Kieran mentioned and I covered as well we are seeing some underlying improvement in some problem areas that we had last year, but that's going to be tempered with what we are seeing on the volume front.

Karl, the other thing I'll add there that we're doing is we're looking at the heat maps globally in terms of; first of all, we've got inventory that we need to obviously burn down, but we're also very focused on those heat maps in terms of critical components. Is there a component out there that can shut us down that we need to be planning for? And at the same time, we're also looking at the front end of the business to say, do we have competitors that are in trouble? Is there an opportunity for us to get strong or gain share because there's both ends of the supply chain and the front end we need to be flexing to make sure we operate to the maximum of our ability.

Very helpful. Thank you.

Next we'll go to John Franzreb with Sidoti.

Good morning guys. I'll start with an easy one. How many of your facilities are fully operational today?

It's a dynamic situation. To provide some context, we currently have three facilities operating in Asia, three in Europe at varying capacities, and two in North America, with one not operational. In Mexico, we have four facilities, of which three are completely shut down, and two are partially operational.

Okay. And can you just walk me through the dynamics how the restart in your China facilities kind of look like? And what you learned in that lesson that you can apply to when the restart happens here in North America?

John, that experience was incredibly valuable for us. Our teams in China performed exceptionally well under very challenging conditions, and we learned a lot from them. They were the first to resume operations. It was not an immediate return to normal; it was a gradual process that took several weeks. Some employees were unable to travel due to restrictions, which required us to adapt our approach. We implemented various monitoring and safety measures within our facilities to ensure the protection of our employees. Our focus on cross-training and introducing additional personnel to the production lines in a controlled way was crucial. We have applied those lessons to our facilities in Europe and the Americas as well.

The other thing that I would add as you mentioned earlier, Kieran, the heat map to ensure that we can adequately secure supply. Other suppliers that are critical we are working to make sure that to the extent possible we can keep our supply lines open so that we can produce products when we are able to get back up and running.

And John, the other aspect that was pretty important there was with our customers. And obviously, we have some finished goods, but knowing their demands and making sure we were aligned with their startup plans was extremely important, so that they knew our ability to flex and support them and had the confidence in coming back to CTS.

So do you produce right now for the transportation market here in North America even though they're not taking products, or are they taking products?

So we have some product that goes into critical transportation like ambulances or fire engines. So some of those products are still moving at lower volumes, so hopefully that helps you get an understanding.

Okay. And regarding the medical market, my understanding is that elective procedures being deferred that a lot of the medical suppliers are getting hit pretty badly. It doesn't seem to be the case with you. Is that because of the temperature sensors doing well, or have you not just seen it yet?

So we're being very careful and that's why our comments on growth outside of transportation, what we see is reasonable, but we're also very concerned once you look at beyond four to eight weeks what could be changing in demand that we haven't seen yet. And obviously, when you think about our temperature sensors they go into food and other areas support restaurants what's happening there. On the flip side, on medical respirators and medical ultrasound, we've seen solid demand and seen some increasing demand as well. But we are very cautious there in terms of understanding what the longer-term demand is.

Okay. Fair enough. And can you remind me what your debt covenants are Ashish?

So John, the primary debt covenant that we monitor carefully is the gross debt to EBITDA and the upper limit is 3.5 times. And at this point, we are well under 2. And as I mentioned, we had borrowed $50 million additional beyond what we would normally be borrowing and that is why the covenant is a little bit higher than what it normally would be. So we expect to stay within our covenant. And at least at this point in time, we are not seeing a risk of having any problems on the covenant side.

Okay. So that $137 million you had left on your revolver, did that include the $50 million?

$147 million.

Sorry, say that again?

So after having borrowed the $50 million, we have another $147 million available under the existing facility.

Okay. All right. Great. Thank you. Actually, I'll stop here and let other people ask questions. Thank you, guys. I appreciate it.

Thanks, John.

Next we'll go to Hendi Susanto with Gabelli.

Good morning, Kieran. Good morning, Ashish.

Good morning, Hendi.

Hi, Hendi.

Kieran, can you talk more about China? Like I think we read on news that some customers in China have revamped back to like higher level of production. So what are you seeing in China in terms of current market demand and then feasibility in general?

On the transportation side, our facility has returned to normal operations. As we look ahead to the end of the second quarter and the third quarter, there are some new incentives emerging in the Chinese market that encourage cleaner fuels like hybrid and electric. Some of these subsidies will not take effect until 2021, so we anticipate some impact as we move into next year. Additionally, we've noticed some softness in the two-wheeler market, which we expect to recover but at a slower pace. In terms of components, the performance has been relatively steady. Overall, it's a mixed situation, and we're exercising caution as things continue to evolve.

Got it. Thank you, Kieran. And then, Ashish is it reasonable to assume that share buyback will be temporarily suspended.

So, Hendi, we are discussing with our Board on what the appropriate steps are to take. And as decisions get made we will talk about that.

Got it. And then one more question Ashish. So when we look at QTI acquisitions, how do you distribute the sales when you report like individual segment? Like how much of that is in industrial, how much of that in, let's say, medical and transportation, et cetera?

So, Hendi, for the different end markets, which acquisition were you referring to? I thought I heard you say Noliac, but...

Noliac. Noliac, I'm sorry.

Are you referring to the most recent one we made or Noliac?

Yes, Noliac.

I see. Okay, okay. So QTI, the primary end market they go into is industrial and a relatively smaller portion does go into defense end market as well as medical, relatively smaller portions. The primary end market is industrial.

Got it. Thank you, Ashish. Thank you, Kieran.

Thank you, Hendi.

Thanks, Hendi.

I'll turn the call back over to Mr. O'Sullivan for any additional or closing remarks.

Well, thank you for your participation in today's call. I wish everybody to be safe and we look forward to updating you again in our July update. Thank you very much.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.