Hello, all, and welcome to CTS Corporation's First Quarter 2024 Conference Call. My name is Lydia, and I'll be your operator today. [Operator Instructions] I'll now hand you over to Kieran O'Sullivan, CEO, to begin. Please go ahead.

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…

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…

[Operator Instructions] Our first question today comes from Josh Buchalter of TD Cowen.

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, on your question on the total booked business, we did reflect in that number -- that reflects our long-term revenue expectation for the transportation part of our business. And we reflected adjustments related to the expectation of lower revenue because of the second source in the commercial vehicle products and also a smaller adjustment for the China OEM sales softness that we talked about just a moment ago.

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.

Loud and clear. And last 1 for me. I think it's pretty well known that you're seeing a little bit of a shift from full BEV to hybrid. And I was just wondering, is that comment -- are you seeing that more in non-Chinese markets than the China market, the BEV market in China is still doing well and status quo versus 6 months ago? Or can you break that down for us to kind of give us the geographical split on what you're seeing?

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.

Our next question comes from Justin Long of Stephens.

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 1 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.

Okay, that's helpful to clarify.

The next question comes from John Franzreb of Sidoti & Company.

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, the way I'd frame that a little bit is we've been -- if you look at the non-transportation, medical and defense have been doing steady all last year, this year as well, and we expect them to perform. Industrial has been the big headwind. And we've seen sequential improvement in sales and bookings, and that's where we expect the biggest improvement going into the second half.

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.

[Operator Instructions] Our next question comes from Hendi Susanto of Gabelli Funds.

Kieran, I would like to ask further questions on the second-source competition in terms of, let's say, like, 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?

So Hendi, I think 2 things there. I mentioned that from -- the sales drop is already in our run rate but we will see some further drop due to market softness in the second half of the year. So probably that's the best way to characterize your question. And as you know, in transportation, not unusual to have second-source, so we've got to make sure we're doing a good job in innovation, quality, on-time delivery, just like we do with the 20 other OEMs we do business with in transportation.

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 -- one of 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.

[Operator Instructions] 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.