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 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 a stronger company. 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 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's 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 on 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…

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 reduction, 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 potential for a slow recovery in the third and fourth quarter 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…

Thank you. [Operator Instructions] And 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, what -- 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 difference 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. It's -- 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 make 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 were for 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. Yes. Just wanted to -- I was hoping you could quantify what the impact to your margins were from these factory shutdowns will be in orders particularly within your non-U.S. based facilities. And are those factories at this point fully functional? And if not, are you able to alleviate some of those bottlenecks in your U.S. based 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 cost. 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. And just a follow-up to margins, I understand factory utilization is challenged given some of the supply chain disruptions year-to-date, which is probably -- trajectory. But from here it was helpful to talk about some of the end market dynamics going forward. But sort of margin recovery will be dictated by sales movement in transportation, or are other onetime supply chain costs you've incurred year-to-date that may abate over the next few quarters that should provide you a margin tailwind? 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.

[Operator Instructions] 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. But just to give you a bit of color John as I said we've got three facilities running in Asia. We got three running in Europe somewhat at different levels. We've got two running in North America one not. And then in Mexico we've got three -- four in Mexico of which three are fully shutdown. One is -- sorry two are fully shutdown and two are partial.

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 was something that was really beneficial to us. Our teams in China did an excellent job coming back in very difficult circumstances and we really took the learnings from them. They were the first ones getting back. It didn't -- it wasn't a digital back on. It was a slow ramp. It took several weeks for us to ramp up. We had some employees who were trapped in areas that were not – were not free to travel obviously. So we had to flex. We did things from first of all different monitoring and safety considerations detaining in our facilities to make sure, we protect our employees. Our cross-training that we've done and cross-training that we added on to flex and introduce people to the production lines in a controlled manner was very important. And we've taken those lessons and also applied them here to our locations in Europe and in 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 start-up 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?

What we're seeing is on the transportation side, we're -- our facility has moved back up. We're running as normal. We're looking out in terms of what does the end of the second quarter look like? What will the third quarter be like? I was on with our plant there last night and we saw some new incentives coming into the marketplace in China, where they're incentivizing cleaner fuels like hybrid and electric. Some of those subsidies won't come until 2021, so we expect some impact as we go into next year. On some other areas we've seen some softness in two-wheeler markets. We expect some of that to rebound but more slowly. On the components side, other than that, we've seen pretty steady performance. So, again, it's a little bit of a mix as you can tell, but we're being careful and cautious, because it's an evolving situation still.

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 Noliac 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, like 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 -- sorry, QTI.

Noliac?

No, no QTI. QTI. I meant, QTI.

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.