Good day and welcome to the CTS Corporation Fourth Quarter and Full Year 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kieran O'Sullivan. Please go ahead, sir.

Thank you. Good morning and thank you for joining us today, and welcome to CTS' fourth quarter and full year 2018 conference call. Sales in the fourth quarter were $120 million, up 8.3% versus the same period in 2017. We added three new customers in the quarter. Fourth quarter adjusted gross margins were 35.5%. Fourth quarter adjusted earnings per share of $0.41 were up from $0.39 in the fourth quarter of 2017. Full year sales were $470.5 million, up 11.2% from $423 million in the prior year. We ended the year with total booked business of $1.87 billion, up $129 million from 2017. Full year adjusted gross margins were 35.1% compared to 34.3% in 2017. Full year adjusted earnings per share of $1.53 were up from $1.23 last year, a 24% improvement. We have now gone live at seven locations with our ERP rollout. Ashish Agrawal is with me for today's call and 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 in the Investor section of the CTS website. I will now turn the discussion back over to our CEO, Kieran O'Sullivan.

Thank you, Ashish. In 2018, we exceeded our targeted sales growth of 10% with the result of 11.2%, a solid achievement by our CTS team. We ended the year with an organic growth rate of 10.8%. Total booked business at year-end was $1.87 billion, up 7.4% from $1.74 billion at the end of 2017. In the fourth quarter, we added three new customers. And for the full year, we added more than 10 new customers in several end markets. These results reflected the solid execution of our strategy and our operational effectiveness. We remain focused on being a leading supplier of sensing and motion devices and connectivity components, enabling an intelligent and seamless world. We recognize that we need to maintain our focus in a more uncertain economic environment. We are confident that the careful transition of our technology, competitive global footprint and customer relationships, supported by our talented associates, positions us for growth in our end markets. We continue to expand our product portfolio and our geographic reach with increased sales in Europe now at 15% of revenues. We have more to do as we transition our Company for success beyond 2020. Growth will be driven by demand for sensing, connectivity, precise motion, reduced size, electrification and automation, advancing safety and improving our environment as our world becomes more connected. We are making solid progress. In the fourth quarter, we secured several notable wins. We secured precision frequency application, travel position and sensing module wins with future annual revenues of $2.5 million; the EMC product continues to gain share in the marketplace where we win with our multi-layer technology; and we added the new telecom customer. In medical imaging applications, we secured a two-year contract with a large customer. Defense wins were driven primarily by sonar applications and next-generation…

Thank you, Kieran. Fourth quarter sales were $120.1 million, up 8.3% versus the prior year. Foreign currency rates impacted sales unfavorably by $900,000. Sales to transportation customers increased by 7.2% and sales to other end markets increased by 10.2%. Our gross margin was 35.5% for the fourth quarter compared to 34% in the fourth quarter of 2017, which was adjusted for pension settlement charges. During fourth quarter 2018, we realized approximately $1.5 million in savings related to product line transfers. Our effective income tax rate in the fourth quarter of 2018 was minus 4.1% due to certain discrete items. As we completed our 2017 tax return, we elected to make certain tax accounting method changes related to tax planning strategies around the 2017 Tax Act. These changes resulted in a significant favorable impact on our 2017 tax return and caused our GAAP tax rate to be very low during the fourth quarter of 2018. Our fourth quarter 2018 earnings were $0.52 per diluted share. Excluding restructuring, currency, tax and other one-time items, adjusted earnings per diluted share were $0.41, up $0.02 compared to the fourth quarter of last year. For full year 2018, sales were $470.5 million, up 11.2% versus the prior year. Foreign currency rates impacted sales favorably by $3.2 million. Sales to transportation customers increased by 9% and sales to other end markets increased by 15.3%. Our gross margin was 35.1% for the year, an improvement of 80 basis points from last year's gross margin of 34.3% which was adjusted for the pension charge mentioned earlier. During 2018, we realized approximately $4.1 million in savings related to product line transfers. Our effective income tax rate was 19.9% for the year. The key driver of the lower rate was the fourth quarter favorability, I mentioned earlier. This was partially…

Thank you. [Operator Instructions] Our first question comes from John Franzreb of Sidoti & Company.

Good morning, guys. Good quarter.

Thank you, John.

Hi, John, good morning.

I actually want to start with the guidance. At the midpoint, you're kind of suggesting 2% topline growth, but you've cautioned in the press release that you are modestly concerned, in my words about limitation [ph] industrial end markets. At the midpoint, that would suggest that new program wins, we're going to have to backfill on the topline. Could you talk a little bit about that and your expectations in new program wins going forward in a tougher end market for some of your -- your key customers?

Yes, John, just to give you some perspective, we talked about some softness in bookings in distribution and industrial coming out of the fourth quarter and we're cautious on transportation, but we're still continuing to grow and add new products to the line. And I would say, just for the comments this morning, our growth in defense and in medical areas is robust, and our innovation pipeline there is very strong. So we feel good about that. So again, we've got a number of things we're working on having the pipeline. And we're kind of tempering that with just the whole global trade, what we're seeing with just some uncertainty out there and we're following our strategy and we're going to execute like we always have.

Okay. So defense and medical wins are going to help offset. In a flat environment, on automotive, would you expect program wins that you've won in the past couple of years, plus content growth to result in positive revenue gain in '19 versus '18?

Yes, I think the way we've always talked about it John is, with the recent wins that we have over the last number of years, now it comes to the auto cycle, even in a flattish market, we will do well. And then we'll complement that with our other end-markets as well.

Perfect, got it.

And maybe just to give you one other piece of color on it, when you look at the China, we are -- we're seeing softness as well. We've seen a bigger drop in sales in the domestic Chinese OEMs versus the transplants where we're stronger. And we don't have a heavy exposure at all to diesel in Europe where there's been a lot of term up.

Right. And maybe this would be good times to refresh everybody. My understanding is most of your transportation business is North American. Can you kind of put brackets around where transportation is geographically?

If you look at the overall Company, it's how we talked about it. We see just over 50% of our revenue in North America, 15% Europe, and the balance in Asia.

Okay, switching -- go ahead, I'm sorry Kieran.

No, we're fine. Thanks.

Okay, switching to the restructuring actions you're taking. You said you realized -- Ashish actually said realized $4.1 million in savings in calendar 2018. Sounds like some of the programs are being pushed back a bit as far as the timing of realizations and additional cost savings. What are your expectations in potential savings in 2019 and the timing of realizing those?

So John, the programs were actually completed mostly on schedule. There was some fine tuning to meet customer requirements and maintain a good supply chain. We expect another $2.5 million to $3.5 million of savings in 2019 and it will be less so in Q1 as we burn through the safety stock and we should see a further ramp-up after that.

Got it. That was actually really my next question about the inventory and the impact on the gross margin. So you would expect sequential gross margin maybe to dip a little in Q1 versus Q4, is that a fair assessment Ashish?

We don't guide to the quarter gross margin, John, but I would expect gross margin to be slightly better in the out quarters than in Q1.

Perfect, Ashish, thank you for that color, I'm going to get back in the queue.

Great, thank you.

Our next question comes from Hendi Susanto of G Research.

Good morning, Kieran and Ashish.

Hi, Hendi.

Hi, Hendi.

Kieran, can you share some insight and characterize what feasibility in inventories in channel for customers look like nowadays in particular in transportation and industrials? And when do you expect feasibility in rebuilding of inventories to take place despite of uncertainty. I know that it's hard to forecast that, but if you have some, let's say, like a data points or signpost that you are looking forward to?

I wish I could predict it accurately Hendi, but when you look at distribution, we saw some softness in the fourth quarter in bookings and also some inventories there, that will probably take some of the first quarter to burn off. In the automotive side of it and what we saw was more -- you know the North America side of it seems to be pretty, pretty decent on the on-hand days of supply. China is not as clear, in terms of how it's doing. The retail sales were down a little bit, and then Europe is kind of bouncing along a little bit flat. And then on the industrial side, the only thing that really concerned us a little bit was just some products moving toward China, relative to some trade impacts and tariff impacts, I should say, on some sales there. They are the kind of things we've seen in the quarter and managing through.

Got it. And then, question for Ashish. So, you mentioned about share buyback in Q4, should we expect CTS to return to its -- share buyback expectations in 2019?

Hendi, our approach on cash has been pretty consistent throughout the years. We will look at the right thing to do. Our priority is more on M&A and we have used share buybacks opportunistically from time to time. So I'd leave it at that and as our first priority, we would want to stay focused on finding the right M&A opportunities for us. Kieran would you want...?

No, I just -- the only thing I'd add to that is something we always discuss at our Board meetings in terms of what's the right use of capital.

Okay. And then Kieran, do you have updates on the secure identification technologies? Like, how many customers are evaluating your products and what exactly the technology's competitive advantage?

Yes, we're working with a few customers in this area, Hendi, using our PAs of ceramic technology. We can't talk about customers at this point in time because we're just in at different evaluation stages with them, but secure identification in mobile or in industrial applications is where we're working. We are encouraged by the progress we're making. And obviously, as we get further updates, we'd be happy to add more color as well.

Got it, OK. Let me return to the line. Thank you, Kieran Thank you, Ashish.

Thanks, Hendi.

Thank you.

Next we have a follow-up question from John Franzreb of Sidoti.

Hey guys, you kind of just touched on a second ago about your capital allocation strategy and M&A. Could you kind of give us an update on acquisition opportunities, what are the most viable ones? Are they geographic or strategic? Can you just -- any kind of color would be helpful, Kieran.

Yes, John, what I would say is, echoing Ashish's point, that's a primary focus for us. And the other aspect of it is, we're doing a lot more work in our pipeline and getting healthier in the pipeline, still looking for that geographic expansion, the technology expansion and expansion with our customers are the criteria we're working toward, and quite frankly, we didn't make a lot of progress in that area and changing our end market profile in 2018. And as I mentioned in that and this is my stated remarks, profitable growth, margin expansion and end market profile are priorities for us in 2019. So we're going to work it.

Okay, fair enough. And little bit on your expectations for R&D dollars and the spent there and where you'd like to be targeting internally, where do you think the most opportunity rests?

Yes, John we've talked about wanting to be in the 6% of sales range on R&D spend in the long run. We are slightly lower than in 2018 and I'm expecting an increase in 2019 as we work through various programs. But I expect us to remain at the less than 6% range for 2019 as well.

I'm sorry, you say less than 6% range, Ashish?

Yes, under 6%.

Okay. And what opportunities do you think are most attractive as far as spending your R&D dollars? I mean it sounded like RF filters before, so...

Yes, RF filters to several things in the ceramics space that we're nurturing along and several in the transportation markets, a few in switch and control -- in the other side electronic components as well. And so we've got a number of things we feel good about, John.

Okay guys, thanks for taking my follow ups. I appreciate it.

[Operator Instructions] At this time, we have no further questions in queue.

Great. Well, thank you all for your participation on today's call. We look forward to giving you an update at the end of the first quarter. Thank you again.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.