Hello everyone, and welcome to CTS Corporation's First Quarter 2024 Conference Call. My name is Lydia, and I'll be your operator today. I'll now pass you over to Kieran O'Sullivan, our CEO, to start. Please proceed.

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?

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.

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 managed 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 made 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 were 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 were 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 2 new programs for applications in blood analysis and therapeutic ultrasound. Additionally, we added 2 new customers, 1 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, sonar buoys, underwater unmanned applications, frequency controls, and RF filters. We added 3 new programs in the quarter for AUVs and satellite RF filter applications. We also added 1 new customer for an application in aerospace and defense nondestructive testing. Additionally, we are getting traction on European defense growth with sample qualifications in progress, and we anticipate sales growth in 2025 on a multiyear 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 3 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 softer demand 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, ride height 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 busbar 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 footwell in the vehicle as a space where we expect to expand our product offering with traditional accelerator modules, haptic modules, new eBrake products offering weight and cost advantages, and the future introduction of our DrivePad 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 trend. 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.

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 improvements in sales to industrial OEM customers. Sales to the medical end markets 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.

This is Sam on for Josh. It's good to see a positive book-to-bill for the non-transport side of the business. And I was wondering, based on your comments, it sounds like medical and A&D bookings were solid. But is your non-transport book-to-bill mostly driven, like entirely driven, by industrial? And then where do total bookings stand this quarter versus 2023's exiting at $1.36 billion? Was the $1.2 billion just for transportation?

Yes. The booked business is back in the transportation area. Back to your book-to-bill and the trend here, the industrial being a larger part of the overall revenue, is improving sequentially by double digits. We also saw improvements in medical. And in all areas, we saw an increased book-to-bill. On the defense side of it, we had some timing of shipments. Some of those orders come in a little bit lumpy. But I would tell you the book-to-build was very strong, and that's why we feel good about that for the full year period as well.

Yes, Sam, regarding your question about total booked business, we included in that number our long-term revenue expectation for the transportation sector. We also accounted for adjustments related to anticipated lower revenue from the secondary source in our commercial vehicle products and a smaller adjustment for the softness in China OEM sales that we mentioned earlier.

Understood. And then I think last quarter, I asked you all the progress of the burndown of the inventory in the distribution channel. And I think you mentioned or you noted that peers were talking about 60% or 70% burndown at the time, and it sounds like you're still working through that. Do you have any kind of update directionally on that and how long that might take to clear the channel?

Sam, probably the best way of describing it is we're seeing inventories continue to burn down. For the first time, I would say in the last few quarters, with our customers, their POS numbers have improved. And we've seen a small improvement in our bookings and also in our sales. So trending in the right direction but just being very cautious here at the moment. And remember, it's about 10% of our overall sales.

I think it's well understood that there is a shift from full battery electric vehicles to hybrids. Are you observing this trend more in non-Chinese markets compared to the Chinese market, where the battery electric vehicle market remains stable compared to six months ago? Can you provide a geographical breakdown of what you're experiencing?

Yes. Sam, I'd say on the BEV overall is North America, they have softened a little bit. Europe has gone a little bit flattish. I'm thinking North America in the 7% range, maybe a little less, Europe more in the low double digits. China has been higher and China was lower in the first quarter. But remember, you've got the Chinese New Year so I think that will correct itself overall. I think we're not so much worried about that because of the products are mostly agnostic. It does have some impact on us. As we called out, the thing that concerns us is our transplant customers losing share in China. That's where we're mostly focused.

Maybe to start with a question on the guidance, it sounds like the improvement you're expecting in industrial is more weighted towards the second half. So as we think about the cadence of both revenue and earnings over the rest of the year, does the guidance assume that the second quarter looks similar to the first and then we pick up in the back half? Or is there any more color you can provide around the progression of the business over the next 3 quarters?

Yes, I would say just to give an overall context on it, transportation, because of the commercial side of it, light vehicle in Asia is going to be a little bit of a challenge all year but that's factored in. The improvement, you'll see some improvement in the second quarter but most of it in the back half. But you definitely will see some improvement in the second quarter, Justin.

Justin, just to add that as we have previously communicated, we expect a softer second half for transportation and a recovery in the industrial business. So the mix should continue shifting towards the non-transportation revenue in the second half of the year.

Okay. And I guess on that point, Ashish, we did see about a 200 basis point improvement in gross margins, adjusted gross margins, sequentially in the first quarter. How much of that was just a function of better product mix versus some of the operational improvements that you discussed? And can you help us think about just the sustainability of this gross margin level going forward?

Yes. Justin, without going into too much detail there, we do see some improvement from operational improvements as well as the customer mix. What I would tell you is that as we see the mix shift continuing to change as we go through the rest of the year, we do expect more favorable impact. And obviously, we'll continue focusing on operational efficiency at the same time as well.

Okay, got it. And I guess the last one for me was around the competition from a second source in commercial vehicle. I'm just curious, is that new development? Is that something that you anticipated coming into this year when you initially gave guidance? And is there any more color you can provide on what the headwind from that could look like as we try to understand how much of the pressure is coming from the market and lower production versus issues with the second competitor?

So Justin, it's a newer development. As you know, in commercial vehicle markets, or even automotive light vehicle, it's not unusual to have second source. We're ready for that. And if we look at the nature of the product, the relationship we have with the customer, we think we're going to have good business there going forward. And then to your question on the run rate, has the softness been built in? Yes, the softness is built in but we anticipate some more softness in the second half of the year. So obviously, we've got to compete. We've got to do a good job in innovation and quality, and that's what we do in all our other markets as well. So that's probably the best way of describing it overall.

Yes. Justin, just to reiterate, when we put the guide out for the year, this was anticipated in the range of our sales expectation. So from that perspective, it's not new, but as Kieran said, it is a newer development that we were honing in on in early part of 2024.

Just sticking to the topic of pricing pressure, is it limited to the second-source competition or are you seeing it in other end markets as well?

John, it's primarily across all transportation markets. We would look at it that way, not just commercial. It's all transportation. We expect from the changes in the last few years, what's happened with Detroit 3 on union negotiations and different things that are happening, vehicle prices will start to drop a little bit, not completely yet. But we expect that pressure to build in the transportation market. We're not as concerned about the non-transportation markets.

Understood. And in the non-transportation markets, you alluded to the fact that you expect the second half to be better than the first half based on current bookings profiles. Which end market within the non-transportation businesses is probably going to be the first to recover in 2024?

John, I would frame it this way: the non-transportation sectors, specifically medical and defense, have shown consistent performance throughout last year and this year, and we anticipate they will continue to do so. Industrial has presented significant challenges, but we are seeing gradual improvements in sales and bookings, and we expect these areas to show the most progress as we move into the second half of the year.

And John, Kieran also talked about strong bookings in medical as well as in aerospace and defense in the first quarter, so we expect that momentum in medical and aerospace and defense to continue in 2024.

Understood. And just to ask, given the relocation of the facility, any update on capital spending for the year, what the budget looks like?

So, John, we typically talk about 4% of sales. Some years, it's a little less. Some years, we have been a little higher. That feels about right for us as we look at 2024 and beyond.

Kieran, I would like to ask further questions on the second-source competition in terms of, let's say, the timing of winning or losing shares. Are there some timing elements, meaning that when will CTS or your customers can regain shares back with regard to the second-source competition?

I think there are two points to consider. The sales decline is already reflected in our current run rate, but we expect to see additional decreases due to market softness in the latter half of the year. This is probably the best way to describe your question. Additionally, in transportation, having a second source is quite common, so we need to ensure we excel in innovation, quality, and on-time delivery, just as we do with the 20 other OEMs we work with in this sector.

And then in terms of like winning it back, can it happen any time or...?

I understand your question. Look, we always aim to win. I would tell you, though, in most OEM situations, they always like to have some second-source capability. Sure, will we fight for more share? Absolutely, that's what we're here for. But I would expect an OEM to maintain some flexibility.

Okay. And then even in the light cycle markets, Chinese OEMs winning against transplant, what is the current strategy or current plans to expand your presence among the local Chinese OEMs? Like where are we now? And then what should we envision for the next several quarters?

Hendi, that's a good question. Thank you. It's a tough one because with some OEMs in China, we know we can expand not just over in that region but as they expand globally as well. On the other hand, there are some that we probably won't play with because they tend to do a lot of vertical integration versus taking your technology over time. So we're very careful where we play. And then the other thing we've been doing is because, as you know, the cycle there, if you lose a few million in revenue, it takes a few years to gain it back, but we've already been working on this. As I mentioned in the last few earnings calls, we had wins on accelerometers. So doing that with new products and what we're doing with current sensing, those types of products are needed in the market so we can win in the market with that in motor position sensing and eBrake applications. So that's where we're doubling down.

Got it. And then with regard to the pricing pressure in transportation, may I verify whether that has been factored in within your guidance?

Yes, we always factor that within our guidance, Hendi. And obviously, we're driving productivity internally to make sure we're improving and doing the right things to preserve and improve our margin profile as well.

We have no further questions, so I'll turn the call back over to Kieran O'Sullivan for any closing comment.

Thank you, Lydia, and thank you, everyone, for your time. Despite the near-term headwinds, CTS is focused on future growth, driven by the megatrends of increased automation, connectivity, energy efficiency, and minimally invasive medical innovation. The continued expansion of our customers and pipeline of opportunities underscore our confidence in our future. Thank you for joining us today on the call. This concludes our call.

This concludes today's call. Thank you very much for joining. You may now disconnect your line.