CTS Corporation

and I will be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I will now hand over to your host, Kieran O'Sullivan, Chairman, President, and CEO to begin. Please go ahead.

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 in 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 SideQuest 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? 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 investor section of the CTS website. I will now turn the discussion back over to our CEO, Kirno Sullivan.

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 SideQuest 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 profitability 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 53 cents 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 where our products help deliver enhanced ultrasound images, which make it easier for medical professionals to detect artery restrictions and deliver 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 the 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 SideQuest 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 SideQuest business is tracking the 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 enhanced 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 transplant 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 on our last earnings call, we received a pre-development award from a premium European OEM for our e-brake product. The near-term growth 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 bug 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 eBREAK product offering weight and cost advantages continues across several OEMs where our team is proceeding with samples and design customizations. We expect our eBREAK 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 SideQuest 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 15 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 16.5 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 China market dynamics 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 SideQuest acquisition will introduce some seasonality where the timing of revenue may be influenced by approval of funding by the US government. We expect the revenues for SideQuest will be stronger in the second half of 2025. For full year 2025, we expect sales in the range of $520 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?

Thank you, Kiran. 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. SyQuest 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 market mix, operational improvements, as well as a $1.5 million favorable impact from exchange rate changes. Earnings were 45 cents per diluted share for the fourth quarter. Adjusted earnings for the fourth quarter were 53 cents per diluted share, compared to 47 cents 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. SyQuest continues to perform in line with our expectation 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.

To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure that your device is unmuted locally. We have a question from John Franzeb of Sidoti. Your line is now open. Please go ahead.

Good morning, everybody, and thanks for taking the questions. I'd like to start with hearing maybe your overview of the hot topic of the week. Can you talk a little bit about the tariff's 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?

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, adjusting and 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 it.

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

John, when you look at our footprint on a global basis and 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 it at the moment. And obviously, given the comments on Europe, we're keeping a close watch on that as well.

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

Yeah, John, if I understood your question on SideQuest, you saw in our prepared remarks the revenue contribution for 2024. We expect solid growth there going forward. We feel good about it as well. And if you look at our guide overall, you can see we're going from a 1% growth to a 7% growth. To give you a little bit of color on that, we expect some single-digit declines in transportation, and we expect high single-digit growth in our other end markets as to your question on the commercial vehicle market. We think from everything we hear, first half may be more stable than the second half softness, but we said that softness throughout the year. We're dealing with some competition there. We're introducing our product as well. And then just while we're talking about the guide overall, I wanted to also mention we don't guide by quarter, but just to give you a sense, because we talked about seasonality with the SyQuest acquisition, that revenue tends to be heavier in the second half. We just talked about the last earnings call and covered it today as well. softness in the fourth quarter to a few percentage points on medical. We expect that to continue into the first quarter and then strengthen on an overall year basis. So with the side quest, with the medical in the first quarter, with the Chinese New Year, you know, we expect the first quarter to be flat, marginally up, but then solid for the whole year. So hopefully that gives you some good color.

Yep, that's kind of what I was looking for. Actually, Kieran, I'm going to get back into Q&A with somebody else to take a question. Thank you.

Okay. Thanks, John.

As a reminder, to ask a question, please press star followed by one on your telephone keypad. We have a question from Henry Susanto of the Belly Fund. Please go ahead.

Good morning, Kieran and Ashish.

Morning, Henry. Hi, Henry.

Kiran, I want to ask about the gradual recovery with distribution and OEMs in industrials. So you saw high year-over-year growth in Q4. What are the puts and takes and compare and contrast with other companies in terms of timing and recovery roadmap? If I see industrial, it has seen a significant decline since like 200, sorry, like 2022. I'm wondering whether You saw that earlier compared to others and then therefore the recovery may be sooner versus other companies.

Yeah, Hendy, just when you look at that period from 2022, I would say I've had a lot of discussions and understanding the market and what's happening with other companies. I think everybody was going to tell you the same story. The overstocking, the burndown of inventories has taken way longer than expected, several quarters more, so much so that I would tell you on the guidance last year, I was expecting recovery, which didn't really materialize. So to your question then on a go-forward basis, you'll see we clearly called out a 26% improvement year over year, but In our prepared remarks, we said we tempered that because it was a 2% improvement sequentially. So what we're seeing is a gradual improvement now. We see inventories back at the right levels. We see an improvement in book-to-bill. We're still looking for more positive POS sales. But we're expecting a gradual improvement now as we move forward and feel reasonably confident about that.

And then second question. Can you remind us and share more colors on e-brake in terms of the timing of ramp-up sales and unit shipment, dollar contents, and expected adoption by different regions?

Yeah, Hendi, a few points on that. First of all, from prior earnings call, we talked about a win with one OEM. We've talked about today on the call the pre-development win with a premium European OEM. In the past, we've talked about revenues in the 28, 27 to 28 time period. We are watching that very closely, Henry, because of the OEMs and the new administration here and what's going on to see if that shifts back and forth. So that's something that's really on our radar at the moment. And that's something where we've seen some at one stage, some movement to pull ahead, some other conversations around will it delay a little bit. So that's really something we're keeping a close eye on. The more important thing I would say is this trend with e-brake, we feel very good about longer term. Not in the next six months, but in terms of revenue going forward, we think it's going to be something that will steadily grow, and we'll keep adding customers as we go forward as well.

You mentioned like 2026 to 2028. May I clarify that?

27 to 28 is what we talked about in the past. Yeah, and to give you a sense, with the first customer, we talked in the range of $5 million to $10 million in the first year. Okay.

And then the pre-development, how soon can it go toward, let's say, like design win or work?

I wish I could give you a solid answer in that handy. It varies. Sometimes it could be six months. Sometimes it could be a year. It all depends. And again, the overarching watch for me here is two things. Number one, the trend is real. It will happen. We believe in this product line. Just with the whole shift in powertrains and mix, that's just something I think every OEM, and you're probably close to this as well, is just they're making decisions on it. We're waiting for clarification.

And then one more question about e-brake. Is it light vehicle market or is it like how universal can it be among like different sub-segment of transportation markets?

Yeah, we see it primarily in this early stages in the light vehicle market handy and really driven by electrification as well.

Okay. Thank you, Kiran. Thank you, Ashish. Let's get back to the queue.

You're welcome, Andy.

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

Great. Thank you, Murray, 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.

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