Earnings Call Transcript - CTS Q4 2024

Operator, Operator

Hello, everyone, and thank you for joining the CTS Corporation Fourth Quarter and Full Year 2024 Earnings Call. My name is Marie, and I will be coordinating your call today. I will now hand over to your host, Kieran O’Sullivan, Chairman, President and CEO, to begin. Please go ahead.

Kieran O’Sullivan, CEO

Good morning, and thank you for joining us today for our fourth quarter and full year 2024 results. We continue to execute on our diversification strategy to accelerate growth in our diversified medical, industrial, aerospace, and defense markets, while also progressing on electrification and mobility. Revenue from our diversified markets accounted for 56% of overall company revenue in the fourth quarter and 51% for the full year 2024. We had six wins in electrification from our portfolio of existing powertrain agnostic products. Diversification will continue to be a strategic priority. We expect further progress in 2025 with a full year of revenue contribution from the SyQwest acquisition. Our strategic focus also improves the quality of earnings as reflected by our adjusted gross margin for the full year 2024, which was up 243 basis points from 2023. Driving revenue growth in a challenging macroeconomic backdrop through organic initiatives and by leveraging our strong balance sheet for appropriate acquisitions remains top of mind for the CTS leadership team. Ashish will take us through the safe harbor statement. Ashish?

Ashish Agrawal, CFO

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, CEO

Thank you, Ashish. We finished the fourth quarter with sales of $127 million, up 2% from the fourth quarter of 2023. For the full year, sales were $516 million, down 6% from 2023. For the quarter, diversified end market sales, including sales to medical, aerospace and defense, and industrial end markets were up 28%, while transportation sales were down 18% from the same period last year. Excluding the SyQwest acquisition, diversified end market sales for the fourth quarter were up 8% compared to the fourth quarter in 2023. Diversified end market sales were 56% of overall company revenue in the fourth quarter and 51% for the full year 2024. Our book-to-bill ratio for the fourth quarter remained at 0.96, similar to the fourth quarter of 2023. For the full year 2024, the book-to-bill ratio was 1.01 versus 0.97 in 2023. We achieved solid improvements in probability with gross margin up 394 basis points in the fourth quarter and 243 basis points for the full year. Fourth quarter adjusted diluted earnings per share of $0.53 were up 14% year-over-year. For the full year 2024, adjusted diluted earnings per share were $2.17, down from $2.22 in 2023. Ashish will add further color on our financial performance later in today’s call. In the medical market, full year 2024 sales were $70 million compared to $68 million in 2023, up 3%. In line with our expectations, fourth quarter sales were down sequentially as customers adjusted their inventory levels. The book-to-bill ratio in the fourth quarter was 1.22 compared to 0.86 in the fourth quarter of 2023. We are excited by the prospects for growth in minimally invasive applications for our products, which help deliver enhanced ultrasound images, making it easier for medical professionals to detect artery restrictions and liver treatment medications. We are proud to highlight that our products support solutions that help save lives. During the fourth quarter, we had wins for medical ultrasound across all regions and secured a large order for an application used in medical therapeutics. Additionally, we had a temperature win for a medical laboratory application. We added three new customers, one for an echocardiograph application, a second application for treatment of liver tumors, and another customer for a veterinary ultrasound application. Over time, we expect volume growth in portable ultrasound diagnostics and therapeutics will enhance our growth profile. As I already mentioned, we are seeing strengthening in demand for therapeutic products. Aerospace and defense sales for the full year 2024 were $70 million, up 37% from $51 million in 2023. Excluding sales from our SyQwest acquisition, sales were up 8% for the full year. Bookings in the fourth quarter were down 6% from the prior year period, mainly due to timing of orders as we maintain a healthy backlog. Our strategy is focused on moving from a component supplier to a supplier of sensors, transducers, and subsystems. We also expect to expand our product range and market opportunity after a period of integration. We received multiple orders in the quarter for solar applications in North America and Europe. We also had wins for RF filters in anti-jamming applications and a win for temperature sensing. The integration of the SyQwest business is tracking to plan, and the business continued to drive its opportunity funnel. During the fourth quarter, we completed first article work on three naval platforms. In the industrial market, we see a gradual recovery in distribution as well as with OEMs. Sales in the fourth quarter were up 2% sequentially and up 26% compared to the prior year period, underscoring our expectation of a gradual recovery in the industrial end market. For the full year 2024, sales were $125 million compared to $129 million in 2023. Bookings in the quarter were up 5% from the same period last year. Inventory levels now appear to be more normalized. We were successful with multiple wins in the quarter for EMC applications, industrial printing, temperature sensing for pool and spa, as well as wins for industrial switches, home appliances, current sensing, and distribution. We added a new customer in the quarter for a broadband communications application. Demand across the industrial market is expected to rebuild in 2025. The megatrends of automation, connectivity, and efficiency enhance our longer-term growth prospects. Transportation sales were $57 million in the fourth quarter, down approximately 18% from the same period last year. For the full year 2024, sales were $250 million, down from $301 million in 2023, primarily driven by demand softness for transport OEMs in China and competition in the commercial vehicle market. In the fourth quarter, we had wins across various product groups, including sensor wins for chassis ride height sensing, seat position sensing, and exhaust sensing. We had accelerator module wins with OEMs in China, Europe, and North America. During the fourth quarter, we added a new customer in North America for our modular accelerator design and had six EV platform wins for accelerator modules. As mentioned in our last earnings call, we received a predevelopment award from a premium European OEM for our eBrake product. The near-term boat rates for ICE versus EVs and hybrids are less of a concern for us given our products are mostly agnostic to the drivetrain technology. Total book business was approximately $1.1 billion at the end of the quarter. OEMs have continued to delay sourcing decisions, but we expect this to improve in 2025 as they get more clarity on government policy and initiatives. Recently, EV sales have increased in North America, likely in anticipation of subsidy changes from the new administration. Going forward, we expect hybrid sales to increase. Interest in our eBrake product offering weight and cost advantages continues across several OEMs where our team is proceeding with samples and design customization. We expect our eBrake and other sensor applications will increase our ability to grow content. Turning to the outlook for 2025. For our diversified end markets, in line with our strategy, we aim to expand the customer base and range of applications. Demand in the medical market may be soft in the first quarter of 2025 and is expected to strengthen in the remainder of the year driven primarily by medical ultrasound and therapeutic volume growth. In aerospace and defense, demand is expected to remain solid given our backlog of orders and the momentum from the SyQwest acquisition. Industrial and distribution sales are expected to improve gradually now that inventory levels have normalized. Longer term, we expect our material formulations, supported by three leading technologies, to continue to drive our growth in key high-quality end markets in line with our diversification strategy. Across transportation markets, production volumes are expected to be mixed in 2025. The North American light vehicle market is expected to be in the range of 50 million units, down from last year with on-hand days of supply growing. Some OEMs are reducing production build rates in the first half to burn down inventory levels. European production is forecasted in the 60.5-million-unit range and showing some increased softness due to overcapacity pressure from Chinese OEMs. China volumes are expected to be in the 29-million-unit range. Electric vehicle penetration rates have softened in some regions, while hybrid adoption continues to improve. Overall, we anticipate headwinds in our transportation revenue due to the dynamics of the China market and other regional factors. We expect our next-generation commercial vehicle actuator to go into production in the second quarter. However, we anticipate softness in commercial vehicle revenue throughout 2025. The first full year of revenue from our SyQwest acquisition will introduce some seasonality where the timing of revenue may be influenced by the approval of funding by the U.S. government. We expect the revenues for SyQwest will be stronger in the second half of 2025. For the full year 2025, we expect sales in the range of $520 million to $550 million and adjusted diluted EPS to be in the range of $2.20 to $2.35. Now, I’ll turn the call over to Ashish, who will walk us through the financial results in more detail. Ashish?

Ashish Agrawal, CFO

Thank you, Kieran. Fourth quarter sales were $127 million, up 2% compared to the fourth quarter of 2023 and down 4% sequentially from the third quarter of 2024. Sales to diversified end markets increased 28% year-over-year. SyQwest added $11 million in revenue during the quarter. Organic revenue growth for diversified end markets was 8%. Sales to transportation customers were down 18% from the fourth quarter of last year due to the softness in sales related to commercial vehicle products and reduced volumes due to China market dynamics. Our adjusted gross margin was 38.1% in the fourth quarter, up 394 basis points compared to the fourth quarter of 2023 and down 50 basis points compared to the third quarter of 2024. The year-over-year improvement in gross margin was driven by the favorable impact of changes in end market mix, operational improvements, as well as a $1.5 million favorable impact from exchange rate changes. Earnings were $0.45 per diluted share for the fourth quarter. Adjusted earnings for the fourth quarter were $0.53 per diluted share compared to $0.47 per diluted share for the same period last year. For the full year, revenue was $516 million, a decrease of 6% compared to 2023. Sales to diversified end markets were up 7% year-over-year. SyQwest continues to perform in line with our expectations and added $14 million in revenue in 2024. Sales to the transportation end market were down 17% due to the softening of sales to our customers in China, and competition in sales of commercial vehicle products. Our adjusted gross margin was at 37.2% in 2024, up 243 basis points compared to 2023. Primary drivers of the improved gross margin include the favorable impact of end market mix and operational improvements. Foreign currency rates also impacted us favorably by approximately $2.1 million in 2024. We remain focused on strengthening our gross margin profile by growing our diversified end markets as well as continued operational improvements. For the full year 2024, our earnings were $1.89 per diluted share. Adjusted earnings for the full year 2024 were $2.17 per diluted share compared to $2.22 per diluted share for 2023. Our adjusted EBITDA margin for the year was 22.7%, an improvement of 80 basis points from 2023. Moving to cash generation and the balance sheet. We generated $26 million in operating cash flow for the fourth quarter of 2024 and $99 million for the full year, up from $89 million in 2023. Our balance sheet remains strong with a cash balance of $94 million as of December 31, 2024. Our long-term debt balance was $91 million at the end of '24 leaving us good liquidity to support strategic acquisitions. During the quarter, we repurchased approximately 154,000 shares of CTS stock totaling approximately $8 million. For the full year, we repurchased 898,000 shares totaling approximately $43 million. In total, we returned over $48 million to shareholders through dividends and share buybacks in 2024. We have another $61 million remaining under our current share repurchase program. We remain focused on strong cash generation and appropriate capital allocation and 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.

Operator, Operator

We have a question from John Franzreb of Sidoti. Your line is now open. Please go ahead.

John Franzreb, Analyst

I’d like to start with, Kieran, maybe your overview of the hot topic of the week. Can you talk a little bit about the tariffs potential impact? And what you’ve kind of maybe game played as far as how CTS could react or could not react to any notable changes in the tariff outlook?

Kieran O’Sullivan, CEO

John, just at an overall level, we’re working with our customers. We’re working with our suppliers to mitigate the impact. We’ve got a good track record on that. And of course, from a supply chain perspective, we’re always looking at even since the prior time on tariffs, just in adapting our supply chain. So, we feel like we’re ready to handle it. We’ve been proactively working with our customers and suppliers, so we feel like we’re well positioned to manage.

John Franzreb, Analyst

Is any one of your factories or facilities particularly at risk versus maybe some of the others?

Kieran O’Sullivan, CEO

John, when you look at our footprint on a global basis than what was called out in the last few days, obviously, Mexico was something we were preparing for. That’s been walked back for 30 days. We’ve got some impact coming out of China, which we’re already addressing. That’s probably the parts of the dome. And obviously, given the comments on Europe, we’re keeping a close watch on that as well.

John Franzreb, Analyst

Got it. Understood. And regarding the guidance, I guess, two questions there. Part one is how much have you embedded in the SyQwest revenue contribution for the full year? And secondly, maybe can you talk a little bit about your thoughts on how the Class 8 truck market kind of plays out in 2025?

Kieran O’Sullivan, CEO

Yes, John, if I understood your question about SyQwest, you saw in our prepared remarks that we expect solid revenue growth for 2024. We are optimistic about it. As you look at our overall guidance, you can see an increase from 1% growth to 7% growth. To provide some context, we anticipate some single-digit declines in transportation, while we expect high single-digit growth in our other markets. Regarding the commercial vehicle market, we believe the first half may be more stable compared to the expected softness in the second half. There is some softness projected throughout the year, and we are facing some competition. We are also launching our product. As for our overall guidance, we typically don’t provide quarterly forecasts, but to give you an idea, because we mentioned seasonality related to the SyQwest acquisition, the revenue is usually heavier in the second half. We discussed this in our last earnings call as well. We expect some softness in the fourth quarter for medical, which might continue into the first quarter but should strengthen over the year. Therefore, with SyQwest and medical considerations in the first quarter, along with the Chinese New Year, we expect the first quarter to be flat to slightly up, but overall solid for the entire year. I hope that provides you with useful insights.

John Franzreb, Analyst

Yes, fair. That’s kind of what I was looking for. Actually, Kieran, I’m going to get back into the queue with some of these take question.

Operator, Operator

We have a question from Hendi Susanto of Gabelli Funds. Please go ahead.

Hendi Susanto, Analyst

Kieran, I would like to inquire about the gradual recovery in distribution and OEMs within the industrial sector. You experienced significant year-over-year growth in the fourth quarter. Can you discuss the factors at play and how your recovery timeline compares to other companies? It appears that the industrial sector has faced a notable decline since 2022. Did you observe this decline earlier than others, and does that suggest a potential for a quicker recovery compared to your competitors?

Kieran O’Sullivan, CEO

Yes. Hendi, looking back at 2022, I've had many discussions to understand the market and what's happening with other companies. It seems that everyone is experiencing similar challenges; the process of reducing excess inventory has taken much longer than anticipated over several quarters. I initially expected a recovery last year, but that did not happen. Moving forward, you'll see a clear 26% improvement year-over-year. However, we mentioned that we adjusted this expectation because it was only a 2% improvement sequentially. We are observing a gradual improvement now, with inventories back at appropriate levels and an uptick in book-to-bill ratios. While we are still aiming for better point-of-sale sales, we anticipate continued gradual improvement as we progress and feel reasonably confident about that.

Hendi Susanto, Analyst

And then second question, can you remind us and share more colors on eBrake in terms of the timing of ramp up sales and unit shipment, dollar content, and expected adoption by different regions?

Kieran O’Sullivan, CEO

Yes, Hendi, I have a few points regarding that. First, we previously mentioned a win with one OEM, and today we discussed the predevelopment win with a premium European OEM. In earlier discussions, we projected revenues in the 2027 to 2028 timeframe. We're monitoring that closely due to the OEMs and the new administration here, as things may shift. This is definitely on our radar. We’ve observed some movement towards expediting timelines as well as conversations about potential delays. So, we're paying close attention to that. More importantly, we feel confident about the long-term trend with eBrake. While we’re not expecting significant growth in the next six months, we believe that revenue will steadily increase, and we anticipate adding more customers as we progress.

Hendi Susanto, Analyst

Kieran, you mentioned like 2026 to 2028. Can you clarify that?

Kieran O’Sullivan, CEO

’27 to ‘28 is what we talked about in the past. Yes. And to give you a sense, with the first customer, we talked about in the range of $5 million to $10 million in the first year.

Hendi Susanto, Analyst

Okay. And then the predevelopment, how soon can it go toward, let’s say, like design win or work?

Kieran O’Sullivan, CEO

I wish I could provide a definite answer to that, Hendi. It varies greatly. Sometimes it could take six months, and other times it could take a year. It all depends on various factors. The key points I’m focusing on are two things. First, the trend is genuine and will occur. We have confidence in this product line. With the overall shift in powertrains and the mix, this is something I believe every original equipment manufacturer is contemplating, and we're awaiting further clarification.

Hendi Susanto, Analyst

Okay. And then one more question about eBrake. Is it targeted at the light vehicle market or can it be applicable across different subsegments of the transportation markets?

Kieran O’Sullivan, CEO

Yes, we see it primarily in these early stages in the light vehicle market, Hendi, and really driven by electrification as well.

Operator, Operator

We currently have no further questions, so I will hand back to Kieran O’Sullivan for closing remarks.

Kieran O’Sullivan, CEO

Great. Thank you, Marie, and thank you all for your time today. We look forward to updating you on our first quarter 2025 performance in April. This concludes the call. Thank you.

Operator, Operator

This concludes today’s call. Thank you for joining. You may now disconnect your lines.