Good day, and welcome to the CTS Corporation Third Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kieran O’Sullivan, CEO. Please go ahead, sir. Kieran O’Sullivan: Thank you, Tracy. Good morning and welcome everyone to our third quarter 2021 earnings call. We reported solid financial results that were propelled by our ongoing diversification efforts. Sales in the third quarter were 122 million up 8% compared to the same period in 2020. Customer demand remains robust, our supply challenges persist especially for transportation products. Third quarter gross margin was 37.3% up 490 basis points from 32.4% in the third quarter of 2020. EBITDA margin up 21.7% was up 270 basis points from 19% in the same period last year. Third quarter adjusted earnings per share of $0.46 were up 35% from $0.34 in the third quarter of 2020. Later Ashish Agrawal our CFO who is with me for today’s call will speak to the GAAP performance. Operating cash flow of 21 million was down from 26 million in the third quarter of 2020. New business awards of 179 million were solid and up from 127 million in the same period last year. Ashish will take us through the Safe Harbor statement.

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. Kieran O’Sullivan: Thanks, Ashish. In the third quarter, our sales increased 8%, 122.4 million versus the prior period. Demand from customers remained strong. But not surprisingly, revenue has been dampened by persistent supply chain constraints reverberating throughout the global economy, especially for automotive products where we saw sales decline in the third quarter, excluding sales from the acquisition of Sensor Scientific sales were up 6% organically. Importantly, the SSI acquisition continues to deliver solid growth and we're pleased with the performance of our Temperature acquisitions and the momentum we are building to scale this platform. We are benefiting from the richness of our customer base, in particular in transportation end market. As a result, we performed better than the overall market as our teams excelled in sourcing initiatives globally, including the qualification of alternative sources. Gross margin for the third quarter was 37.3%, up 490 basis points from the 32.4% in the prior year, as we gained momentum from the advancement of our diversification strategy that I will talk about more in just a minute. EBITDA margin of 21.7% was up 270 basis points from 19% in the third quarter of 2020.…

Thank you, Kieran. Third quarter sales were $122.4 million, up 8% compared to the third quarter of 2020 and down 6% sequentially from the second quarter. Sales to transportation customers declined by 5% compared to the third quarter of 2020 and 13% sequentially. Conversely, sales to our other end markets increased 24% year-over-year, and 3% sequentially as the industrial aerospace and defense end markets exhibited consecutive year-over-year double digit growth. As Kieran mentioned, this quarter, we have made significant advances in our diversification strategy as the sales to transportation end market represented 51% of our total revenue. We remained committed to further diversifying the business. Changes in foreign exchange rate impacted our revenues favorably by approximately 1.3 million. Our gross margin was 37.3% in the third quarter up 490 basis points compared to the third quarter of 2020 and up 50 basis points sequentially from the second quarter of 2021. Our global teams operational efficiencies, as well as profitability in our industrial medical, aerospace and defense end markets helped mitigate the price increases in raw materials and freight costs that we've seen during the year. We are also working closely with our customer base to find the best ways to manage the macroeconomic pricing pressures we currently face. In the third quarter, we achieved $0.03 in EPS and savings from our restructuring program. We remain on track to achieve targeted annualized savings of $0.22 to $0.26 of EPS by the end of 2022. SG&A and R&D expenses were 26 million, or 22% of sales in the third quarter of 2021 versus $23 million, or 20% of sales in the third quarter of 2020. The higher expenses in 2021 were driven by higher incentive compensation, timing of certain projects, and the full restoration of cost reduction initiatives implemented in 2020. In…

Thank you, sir. [Operator Instructions] We will now take our first question. Please go ahead, caller your line is open.

Thanks and good Morning.

How are you doing Justin?

Doing well. Thanks, Ashish, and wanted to follow up on the last point you made about the supply chain headwinds. I know from the prior call, you were expecting third quarter to be the most challenged of the year. But if I look at margins sequentially from both gross margin perspective and adjusted EBITDA margin, they actually improved sequentially in the third quarter. So could you comment on what drove that outperformance? And then, as we think about these supply chain headwinds going forward, how do you anticipate things to trend in 4Q relative to 3Q?

So, Justin the gross margin outperformance, let me address that and then I'll pass it on to Kieran in terms of comments on what we expect, as we look ahead. The gross margin in the third quarter is helped by several factors. Number one, we executed well and our teams have been working hard to make sure that we can manage through all the supply chain challenges despite all the cost increases. We also were able to work with our customers on the price increases that we've been working on, which helps offset some of the cost increases we were facing. And the big difference is also driven by the improvement in mix. Transportation was much closer to 50% of our total sales. And the other end markets did better in the quarter, which definitely has a positive impact on gross margin. Kieran O’Sullivan: Justin, as we look forward, on the transportation side, we see demand has been very robust. And I think I mentioned in my prepared remarks that we have some customers booking through 2022. And obviously we were impacted in the third quarter by several million here on the transportation side. We still will have some shutdowns and supply issues in the fourth quarter. But you can see from our guidance, we see us moving in a very good direction and continuing to improve into next year. I think the main theme that we're bringing out here is the diversification and maybe just trying to expand on that a little bit. While we get some benefit from transportation been down in the current quarter, what we've been doing over the last number of years is taking that transportation portion down from closer to 70% now closer to 50%. And that really helps the overall profile of the company and the quality of the earnings as we go forward and we want to make sure we continue to work on that, while also growing our transportation business.

Okay. That makes sense. And when you just look at the monthly trends related to the supply chain headwinds, does it feel like things have bottomed? Maybe you could just give an update on how those trends progress sequentially over the course of the third quarter? And maybe what you're seeing in October as well? Kieran O’Sullivan: Yes. I think just probably giving you a snapshot on the transportation side. And if you look back a few a week or two ago, the cuts globally were 115,000, up to 280,000. And this in the last week, the cuts now are more like 26,000 versus 84,000. So there's an improving trend there. But we got to say that we caution because it's been fluctuating. If I look at our Japanese customers, they've done much better than the American OEMs. What we've seen on the trend here is some of the North American OEMs been down over 30%, Japanese customers, which are a large percentage for us been down about at 24%. And we know Toyota has said, “Hey, instead of a million units, in November, we're going to be closer to 900,000.” So it's a moving thing, but the trend is starting to stabilize and the cuts. And it I'd like to say it's stabilizing and moving in a good direction but it's something to be watched carefully.

Understood. And last one for me, Ashish, you mentioned pricing. And I know FX has been a tailwind this year as well. Any way to help us think about the all-in tailwinds in 2021 from pricing and foreign exchange and how to think about those two items going into next year.

So Justin we've had some tailwinds on revenue from currency, not so much on the overall cost side. So when we look at the operating earnings impact, we don't see significant tailwind from currency. We actually see some headwinds in different parts of the world. Specifically, if you look at the Taiwanese dollar, that has appreciated quite a bit, so that has created some headwinds for us. And the Mexican peso is a little bit stronger than it was last year as well. So there's puts and takes on the revenue side, we fared favorably on the cost side, not quite so much. And on the price increases, it's more offsetting the cost increases we've seen. So I wouldn't say that they've had a positive impact on profitability, we've been able to offset some of the cost increases that we have dealt with during the year.

Please state your name and company before posing your question. We will now take our next question. Please go ahead caller.

Good morning, John Franzreb from Sidoti. Kieran, you mentioned in your prepared remarks, and you just kind of referenced it a bit that some customers have confirmed demand through 2022, based on those orders, what is the build rate kind of look like? What are the customers similar to build like kind of covers to in 2022 versus '21? Kieran O’Sullivan: And the wants to the confirm demand, because they're concerned about supply chain and making sure we have a good supply of components, are showing a robust strength. They want to make sure they can fill the orders that the pent-up demand they have there. So that's probably the best way of describing it John.

I mean, is it looking like a 17 million versus a 13.5 million, so I think we're going to finish this year, or is that too big of a stretch number? Kieran O’Sullivan: Well, I put it this way, John. And the reason why I'm being a little cautious is, as we come into this year, we would have expected, north of a 14 million SAR if I take the North American market and it's probably tracking now towards [15] [ph]. But they're showing robust demand and what happens out there with the supply chain is the unknown at the moment.

Yes, John, I think the SAR will be impacted pretty significantly because of supply chain. The demand environment expectation is that the demand looks okay.

Okay. And Ashish, you mentioned some of the restructuring actions that you'll exit the year on the target $0.22 to $0.26. What restructuring actions remain to be done or you just looking for revenue to kind of build up so you can hit that exit rate?

So John, in the prior quarters, we have talked about delays in some of the programs that we are working on because of demand, we have not been able to execute because the demand has been so strong. We want to complete the execution of those program to date since we announced the program in Q3 last year. We have achieved $0.16 out of the $0.22 to $0.26. So there are some remaining pieces that we are working on execution. And we are on target to complete those by the end of 2022.

Any specific programs that are meaningful that have to be done?

So I don't think there's anything that hasn't begun, but we haven't been able to complete the full scope of certain activities that we've already started John.

And you mentioned, I guess it's Kieran actually mentioned something smart actuators and how they are more sensitive to EV versus ICE. Could you just explain that comment to me? Kieran O’Sullivan: Yes. I would John. John, before I do that, I just wanted to go back to your question, really, I'm not going to lock in on SAR number for next year. And but I want to emphasize on the demand side and on the supply side, we're not able to hit some of the demand we have this year because of supply chain constraints. And those customers that we've been working with have increased that demand, and we've actually been working to increase the supply chain, but we're sometimes at the mercy of other suppliers into those OEMs to see how they're doing as well. So that's why I'm being a little hesitant on that robust demand. And then, back to your question on smart actuators. John, what I was clarifying there was, in the past, we've made statements on the light vehicle market, that we are agnostic to the propulsion system. So when it comes to EV, all the products transfer over, what we're seeing is on the smart actuator that goes into heavy duty, mostly commercial vehicles, some mid-range, and trucks as well. But what we're seeing there is, that has while it helps the environment in reducing harmful emissions, it is on an application that is ICE related, so we're just spelling that out. And we're not worried about demand for those products for the next decade.

I guess, we will do certain sneak us in, Kieran, I'm going to put you on the hot seat a little bit. For the last year or so, EPS has bested consensus by roughly 25%. Is it the revenue, that's been the greatest surprise, or the execution on your side that's been the better surprise in your market is driven, better results over the past year? Kieran O’Sullivan: I will let Ashish comment on this too. But I would look at it from -- its both sides of the equation. I think we've always been good on managing and operating leverage and cost. I also think that the diversification rate has helped us across the board, as we said in the prepared comments. Ashish do you want to add to that.

Yes, John. When we started the year, we were very concerned about how strong the markets will be. And so from that standpoint, we have been able to deliver more on revenue. So that has definitely helped and the strength in our non-transportation end markets, they've done better than we started the year in terms of expectations. And quite frankly, we made good progress on some of the operating challenges we were dealing with as well. If you think about last year, we were talking about significant problems with our foundry operations. And we made very good progress on improving the consistency, the efficiency of that operation. So that's also helping with the overall profitability.

[Operator Instructions] We will now take our next question. Please go ahead caller, your line is open.

Hello, this is Manny on for Carl Ackerman from Cowen & Company. Congratulations on your performance. I have just a few questions. Could you discuss the tightness you are seeing in the automotive supply chain and your customers procurement behavior in anticipation of ongoing supply constraints? And I have some follow ups. Kieran O’Sullivan: The constraints are pretty tight. It's really, really around the semiconductor side. I think we said nine to 10 million units taken out of production this year. And on the commercial vehicle side, some units because of semiconductor shortage even going into next year. So it's tightly constrained out there. We're working all the time in terms of securing supply, working directly with our customers and our suppliers. And we're constantly working on evaluating alternative sources. So we can actually gain capability. But it's been tight, but we do expect it to begin improving and we expect kind of more significant improvement in the second half of next year.

Great, thank you. And last quarter on the call, you had mentioned that you didn't see any inventory buildup through your customers or your distribution channels just yet, have you seen any changes for those two segments? Kieran O’Sullivan: So what I would say is, obviously, on the transportation side, we're not seeing any lack of demand, because the inventory days are 20 days or less, when it should be up closer to 55 days of supply. On the other end markets, we haven't seen any buildup in inventories in industrial medical, defense, the small piece that goes into the consumer side, we've seen a little bit of change there, but it's minimal in our business. So we would be more concerned about end of the second quarter next year into the second half of next year what we're seeing at that point in time.

Okay. And just one more question. Could you discuss the pricing environment currently and what levers you can pull to offset inflation? We've heard a lot of comments from other companies and competitors, that freight continues to be getting worse. So any color you could provide on passing along pricing to customers from here? Thank you. Kieran O’Sullivan: Yes. Just as Ashish said earlier, we're really focused on the cost increases and sharing those cost increases with our customers, whether it comes to freight or part prices and that's what we've been doing. We concur with the freight increases, they're hugely up and we don't expect them to drop off in the next quarter even. So again, it's a partnership with our customers or long-term relationships to share that cost as we move forward.

We will now take our next question, please state your name and company before proposing question. Please go ahead.

Hendi Susanto, Gabelli funds. Ashish and Kieran, your full year guidance implies about year-over-year growth between minus 7% and 1.5% in Q4. So at the top end of that guidance, it presents like small sequential sales increase from Q3. You indicated that Q3 is the most challenging quarter in terms of supply chain challenges. So how should we think about like Q4 directionally, do you expect sales to transform patient market to decline stay flat, or grow sequentially into Q4.

Hendi, the fourth quarter guidance, we're just being cautious because there's still a lot of uncertainty in the supply chain. We saw in the third quarter, our customers push out shipments, which was much more in the third quarter than in the prior two quarters. And we just remaining cautious there because we're coming up on year end where things could slow down in the automotive end market or the transportation end market. So it's just a reflection of taking a cautious view on how the quarter might evolve.

Thank you, Ashish. And then, Ashish how should we think about potential benefits of ERP in 2022?

So a big portion of the cost saving programs that we implemented as part of the restructuring we started last year was related to shared service implementation. We have done a good portion of that already. And as Kieran mentioned, we are getting smarter on how to utilize the better data that we have coming out of the ERP system now. So I'd be looking to use that information to drive further operational efficiency improvement working capital improvements, but we haven't specifically called out improvements that you might see in the coming years, it will be a process of learning and getting smarter with how we are using the information that is available to us now.

Understood. And then, one last question. So Kieran, you mentioned about working on and evaluating alternate sources. Any potential benefit or impact from sourcing alternatives? And then how fast can you implement alternate sources? Kieran O’Sullivan: So the primary focus there obviously, is to support our customers and have when there's a shortage in supply, like chips that we can qualify other sources of chips, suppliers and obviously Hendi, the second part of that is, we usually have a two-sourcing strategy anyway. But it's more than two sourcing these days is trying to get three or four suppliers. So you've got more options. But as you have more sources, that gives you more leverage on the supply base.

We will now take our next question, please go ahead caller.

Hi, guys, just a follow up maybe to Hendi’s question and rephrase it possibly, embedded in your outlook for the balance of the year, is it safe to assume that transportation is a greater part of revenue in the fourth quarter than the 51%, that you were just certain in the third quarter?

It's quite possibly going to trend that way, John, unless we see further disruptions in the supply chain.

But based on the current environment, you would expect it to be higher. And assuming that is it safe to assume that the gross margin will be lower? Or Ashish, the remaining cost savings actions, would that be sufficient to offset the mix change in the fourth quarter?

So I would expect gross margin to be in similar to where we are at in Q3 or maybe slightly worse, because of the mix shift. I’m not expecting a significant movement, John, and part of it could be interpreted as the unfavorable mix impact being offset with some improvements in the operational efficiency. Kieran O’Sullivan: John, just to add to that, if we do well on the supply chain side in transportation, revenue could be up a few million, as Ashish said, I just want to emphasize though this diversification trend we are on and the goals we set for ourselves, and over the medium to long-term, that's going to been more sustained benefit to the margin profile of the company.

Agreed, I guess I'll just extend that thought with this question, a year from now, given the demand you indicated on the transportation side of the business? Is the mix going to come closer to 60% or 55%, this time next year? Or is it going to -- or do you have enough orders in non-transportation related programs that you can sustain something closer to 55%? Kieran O’Sullivan: So John, but I've given you any strong guidance in this, I would say that we would expect the transportation percentage of our portfolio to be in the low to mid 50s by the end of next year. But we would have set more aggressive goals for ourselves, if we can do some things we want to get done as well.

Okay. And one other question, I guess, Kieran, you said early in your prepared comments. And correct me, if I'm wrong here, that regarding M&A, you're actually looking at maybe some potential products in the EV market. Did you say that? And if so, can you just give us some kind of examples what you'd be looking to add in that market? Kieran O’Sullivan: So John, just to frame it, we said we will grow in our transportation market and do acquisitions that would strengthen our EV play. On the flip side, we also said we'd grow at a faster rate in our other end markets, which corresponds to what I just said about the diversification goals we set ourselves. So we would look for particular plays, maybe that would complement the products we have today.

Okay. Is there anything you can give me example, right, just can kind of, I can’t visualize it, I guess is what I'm saying. What will you be looking forward in the EV? Kieran O’Sullivan: Well, I suppose put it this way, John. Organically, we've been very clear that we're excited about ebrake and what we're doing in that space, and we see that has a tremendous opportunity. We would look at other sensors and capabilities around the vehicle.

Okay, all right. Sorry to put you there, little stress on you there Kieran okay. Thanks for taking my question, guys. Great quarter. Kieran O’Sullivan: Thank you.

There appears to be no further questions. So I'd like to turn the conference back to the host for any additional or closing remarks. Kieran O’Sullivan: Okay, thank you, Tracy. And thank you again for joining us today. I'm proud of the strong execution and operational efficiency exhibited by our global teams, driving measurable results for the business. Together as an organization, we're not only focused on advancing our business but also improving and enhancing the communities we live and working. In closing as we enter the fourth quarter of 2021, I'm confident that our diversification strategy and expansive reach up geographic locations will position us for profitable growth and mitigate the supply chain challenges impacting industries worldwide. Thank you for joining us today. And this concludes our call.

This concludes today's call. Thank you for your participation. You may now disconnect.