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CTS Corp (NYSE: CTS) Call for effects of the quarter 2020 July 31, 2020, 11:00 BC
Operator
Good morning and welcome to CTS Corporation’s 2020 Quarter 2020 Earnings Call. [Operator Instructions]. At this point, I’d like to go to Kieran O’Sullivan. Go ahead, sir.
Kieran O’Sullivan – President, CEO and President
Thank you. Hello. Thank you for joining us today and welcome to the call to the CTS convention in Q.2020. I’ll start by sharing some ideas about our corporate and business performance. As noted in our last call for profit, we expected the quarter of the moment to be our most difficult quarter this year due to the effect of COVID-19. Operationally, all our plants are operating, however, we continue to face demanding situations at our sites in Mexico.
Return to adequate production grades has been affected by national and local regulations. Our leadership in global groups prioritizes the protection of our workers and is temporarily adapted to meet the wishes of our customers. Sales reached $84 million, 30% less than in the 2019 quarter.
Unsurprisingly, we have noticed significant and demanding situations in the ultimate transportation market, with sales from the rest of our business stable. Gross margins for the quarter were 31.6% compared to 34.1% for the same period consisting in 2019. We achieved a tight EBITDA margin of 16.7% despite 30% minimisation in sales. Adjusted earnings consistent with a consistent percentage for the quarter were $0.16. We have gained a promising new transport sensor for application in hybrid electric vehicles, and we continue to advance with profits on RF products in defense.
We added thirteen new consumers during the quarter. We ended the quarter with $146 million in cash and $141 million in debt. We expect a prolonged recovery of the effect in COVID-19. As a result, we are implementing a restructuring plan to realign our load design with the new environment request.
This plan will be completed in the next 24 months. Ashish Agrawal, our CFO is with me for today’s call and will consult us for the security statement. Ashish?
Ashish Agrawal – Vice President and Chief Financial Officer
I would like to remind our listeners that this convention requires forward-looking statements. These statements are the subject of a number of dangers and uncertainties that may cause the actual effects to differ materially from those expressed in the forward-looking statements. Today’s press release includes additional data related to these dangers and uncertainties, and further data can be discovered in the company’s filings with the SEC.
To the extent that today’s discussion concerns non-GAP measures under Regulation G, the required explanations and reconciliations should be held in the Investors segment of the CTS website.
Now I’ll refer you to our CEO, Kieran O’Sullivan.
Kieran O’Sullivan – President, CEO and President
Thank you Ashish. The demanding situations of the COVID-19 pandemic are unprecedented. I would like to thank all our painters, consumers and partners for their help as we paint to bring our plants online in the last quarter. Our painters have demonstrated remarkable flexibility in our operations and chain of origin. Our first objective is the protection of our painters and compliance with national and local regulations, doing everything possible to meet the needs of our consumers.
The transitional spending relief measures discussed in our last call for profit are still in place. As I discussed in my opening remarks, we are pronouncing a restructuring plan that we hope will be completed over a two-year period. This plan is mandatory to realign our operational load design with the new environment request as we move forward in the long term to take effect in COVID-19. More important points about the plan will be shared in the coming quarters.
At the macro level, this will involve consolidating the site and streamlining other operating prices to take advantage of economies of scale throughout society. The plan is expected to generate an annualized improvement in EPS from $0.22 to $0.26 by the time of 2022. We remain focused on our strategic expansion investments. The priority is to grow our business and expand our diversity of detection, connectivity and motion products. The new commercial awards were $105 million for the quarter, strong functionality as several OEMs continue to drive business decisions due to COVID-19 and the resulting large-scale closures in Europe and North America during the quarter.
As I said, we added thirteen new consumers during the quarter, six in the industry, 3 in the medical sector, 3 in defense and one in telecommunications. In the shipping industry, we have won an exciting victory for a new existing high-load sensor for a high-end European OEM. This is a new hybrid vehicle app. Because it is a traditional design, we compare a broader market potential. We have also won several victories for passive safety sensors with existing consumers and with a new traditionalist, a value for giant chassis frame height sensors with an North American OEM, as well as brands of multi-OEM accelerated modules in all regions.
In defense, we receive two RF systems with existing customers. We have several victories for underwater army applications, we have secured a contract with a European OEM and we have won our first order of textured ceramic material. Textured ceramics will offer progressive piezoelectric electrical functionality at a lower cost.
Over time, we expect these new fabric formulations to expand our market. You have the possibility to grow at the upper levels of the digits. With temperature detection, we’ve achieved victories in industrial, defense and medical programs and added new customers. Our precision frequency product has been decided by a winning design in a small 5G mobile app.
We have also won design awards in the professional audio box and medical programs for coder products. We continue to advance product innovations. Our purpose in the transportation market is to expand the responses of sensors that are independent of the underlying propulsion technology. To our expansion over the next decade as the penetration of hybrid and electric cars increases. We are looking for new fabric formulations as we try to expand into the defense, commercial and medical markets.
We also present custom-designed ASIC responses for our frequency product portfolio. We have made more progress in our ceramic sediment operation during the subsequent quarter and expect further improvements this year. We also use our expertise in ceramic formulations to improve yields and margins in our temperature sensing acquisition.
In our Focus 2025 initiatives, we focus on 4 areas: First, drive successful expansion; Number two, relationships with visitors; number three, improving operating systems and; 4, ing global skability and culture. As a component of our focus on successful expansion, we compare the product portfolio for long-term expansion and margin expansion.
Our purpose in mergers and acquisitions is our portfolio of projects as we seek to expand our diversity of technologies, products, consumers and geographic reach. We are refining our marketing strategy by adapting our sales and application engineering configuration to visitor relationships. Working more intensively with our consumers on next-generation products and programs is more vital than ever as we emerge from the COVID-19 pandemic.
To advance CTS operating systems, we have added a high-level resource to lead this initiative. Our goal is to build capacity and drive ments non-stop. Our purpose is to eliminate waste and profitability, and it will be a multi-year initiative. Strengthening our skill capacity group and leadership bank as we align our culture globally will allow us to realize our vision of being a leading provider of detection and motion devices and connectivity components, and provide intelligence and transparent work.
We remain wary of the broader economic environment by 2020. From a quiet vehicle perspective, it is still too early to close the pandemic e-book. Premium brands recover faster than volume brands. In the United States, sales of used cars have increased, while SAAR by 2020 is closer to thirteen million, 23% less than last year. The days of origin available are 54 days, 20% less than the five-year average, which short-term assistance requires.
We expect the sales trend in the third quarter, as long as operations are normally developed. European sales are expected to fall by 26% compared to last year. The Chinese market continues to recover and volumes are expected to decline by 14% between $21 million and $22 million for the year. We continue to see an expansion in the medical and defense markets of the markets. We suspended our 2020 forecast for this year due to continued market uncertainty. Our liquidity remains strong with a positive net money position. Our goal is to get out of this crisis as a more powerful company.
Ashish will now have the monetary functionality in more detail. Ashish?
Ashish Agrawal – Vice President and Chief Financial Officer
Thank you Kieran Our quarterly sales were $84.2 million, 30% less than last year. Sales to consumers in the transport sector decreased by 53% and sales to other end markets increased by 14%. Our temperature sensing acquisition added $5.4 million and biological sales to non-carrier consumers increased 1%. We continue to gain ground in the aerospace and defense sectors, as well as in medical finishing markets, and have noticed a physically powerful double-digit sales expansion for consumers in those markets. Our gross margin of 31.6% for the quarter, heavily affected by declining sales.
We are moving on other movements towards our tax rate. As a result, we hope to be closer to the reduction in the restriction of our reported diversity in the past from 23% to 25%, excluding discrete items. As we complete our paintings in this effort, we anticipate an additional amount in the tax rate by 2021. Our 2020 quarter earnings were $0.15 consistent with a diluted consistent percentage, adjusted gains consistent with a diluted consistent percentage were $0.16. As we communicated in April, due to lower volume expectations, we implemented cost reduction measures through a transitional payroll reduction, a suspension of 401,000 contributions, license, plant closure, reduced board payment, and control of all discretionary expenses.
Second quarter earnings declined particularly and situations remain uncertain. We will assess market situations to determine the scope and duration of these transitional measures. As Kieran mentioned, we have begun to put in place a restructuring plan because the extension has an effect on COVID-19. We expect restructuring prices to be between $10 million and $12 million over the next two years. Expected annualized savings are between $0.22 consistent with a consistent percentage and $0.26 consistent with a consistent percentage until the end of 2022.
Restructuring savings, once fully implemented, will help offset the effect of transitional cost-cutting measures as those prices return. The timing of some facets of the restructuring task is being completed, and we will provide more information on the timing of savings and prices in the coming quarters.
In terms of moneyArray, we recorded positive net money of approximately $5 million, an improvement on net money at the end of the first quarter. We have access to another $157 million through our revolving credit service. In March, we borrowed $50 million from our credit line. We continue to maintain this position to ensure some liquidity good enough for the coming quarters at all of our sites around the world. By adding this debt, we are complying with our restrictive covenants. And for now, we expect us to continue to comply. Our controlling working capital as a percentage of sales was 21.2% at the end of the quarter.
The build-up was basically due to strong revenue relief in the quarter. In dollar terms, controllable working capital accumulation increased slightly from Q1 to Q2, and we are still focused on innovations in the coming quarters. Our groups continue to focus on reducing securities in our operations and on debt collection. We generated $11.8 million in trade money in the quarter. Capex was $2.7 million.
For the full year, we are expecting capital expenditures to be approximately 4% of sales. We are committed to investing in programs that help us progress our strategic growth objectives. We are continuing to implement SAP, and went live successfully at another large manufacturing location at the beginning of July. This go-live was accomplished despite most of the implementation team working remotely due to COVID-19 related travel constraints.
This is an achievement for our Matamoros team and the SAP implementation team. With the launch in Matamoros, we have implemented the deployment in factories that supply about 80% of the company’s revenue. We are on track to complete the SAP deployment until mid-2021.
This concludes our ready comments. We’d like to open the question line right now.
Operator
Thank you. [Operator Instructions]. And we’re going to take our first Justin Long.
Justin Long – Stephens Inc. – Analyst
Thank you and hello
Kieran O’Sullivan – President, CEO and President
Good morning, Justin.
Ashish Agrawal – Vice President and Chief Financial Officer
Hey, Justin.
Justin Long – Stephens Inc. – Analyst
Thank you and hello then, maybe to begin with, since things are becoming today’s world, you can provide a little more color about how your revenues have evolved all the time quarter by month, and then any update of what you see. away in July?
Kieran O’Sullivan – President, CEO and President
Yes, probably the most productive way to describe it is obviously April and May have been difficult months for us. June was a more general month, and we observed a similar upward trend in July, just to give you a concept of sales evolution. But the beginning of the quarter was difficult. And if you also take a look at the quarter, and that 55% in transportation, if you remember, last year we were especially strong compared to the advertising vehicle, and that also paid us this quarter, because it was a difficult place for us in the market. And we’re on the side of the gentle vehicle, we’re in line with the marketplaceplace scenario of everything we see.
Justin Long – Stephens Inc. – Analyst
Okay, that’s useful. And I think you commented that in the third quarter, you’ll be expecting a sequential improvement in revenue. I know it’s not providing any formal guidance, but there’s an additional color you can calculate on the approximate amount of collection we can see in the 3Q and communicate about the progress you expect for the most important transport markets in relation to the latest non-transportation market sequentially.
Kieran O’Sullivan – President, CEO and President
Yes. As a result, non-transport markets behaved well. We saw that we went up 1% organically. We’re still waiting for solid functionality there. I’m not going to give percentages, because it is, it’s a moving goal, because they’re a little [phonetic] right now. On the transport side, I would like to point out a trend of ment. And the explanation for why we are a little cautious is that we have demanding situations in our operations in Mexico, and we don’t have completely local regulations, and even if so, we want them back to a full race. Speed. But the most productive way to send you a message about the third quarter is that we hope that Array has already noticed this trend in July. And we, we want to make sure that we’re looking for help and that this happens.
Justin Long – Stephens Inc. – Analyst
Excellent. And the last consultation of my end. More in the margin. Ashish, you talked about the costs of transitority. I know you talked about it earlier in the year. Can you think part of this year, how they could be back online, given the sequential accumulation of revenue you expect?
Ashish Agrawal – Vice President and Chief Financial Officer
Cost-cutting measures are therefore composed of several elements. And, given the point-of-sale relief we saw in the current quarter, this would be the quarter in which we have maximum effect and we expect a smaller child to have an effect on cost-cutting measures, transitority measures. Some of them will continue in the third quarter and then, as I mentioned, we will continue to evaluate as the volume grades in the market change, we will adapt our technique to those transitority measures.
Justin Long – Stephens Inc. – Analyst
Everything is fine. But it still has the impression that, if the revenue is sequential, the directional adjusted operating margin also deserves it sequentially.
Ashish Agrawal – Vice President and Chief Financial Officer
That would be a guess, Justin, yes.
Justin Long – Stephens Inc. – Analyst
Thanks a lot. I’m the weather.
Ashish Agrawal – Vice President and Chief Financial Officer
Thank you, Justin.
Operator
And we’re going to answer our next query from John Franzreb.
John Franzreb – Sidoti & Company, LLC. – analyst
Good morning, boys. I guess I need to start a little bit, especially in the revenue stream sequentially. You: if I listened to you correctly, you’ll be waiting for revenues to rise, but you’ll also be waiting for European revenues to fall to 26% and China by 14% or refer to that as in the current quarter, which happened.
Kieran O’Sullivan – President, CEO and President
No, John, it’s a benchmark and those percentages for a full year from year to year from 19 to 20.
Ashish Agrawal – Vice President and Chief Financial Officer
For the industry
Kieran O’Sullivan – President, CEO and President
For the industry
John Franzreb – Sidoti & Company, LLC. – analyst
And those are your expectations for the total year, “20 vs. 19”?
Kieran O’Sullivan – President, CEO and President
Yes. On the transport side, yes. And to give you an idea, we’ve made it clear that since the current quarter, which will be our toughest quarter, we expect an improvement in profits in the third quarter and we want to make sure the transaction stays strong. and that we’re in Mexico. Array But it is a great improvement that we want to get through the full quarter, and back, I want to emphasize, our June and July performances moved in the right direction.
John Franzreb – Sidoti & Company, LLC. – analyst
They gave it to me. So what is the north American shipping percentage in this case, without Europe and China?
Ashish Agrawal – Vice President and Chief Financial Officer
John, we don’t divide our numbers for the other end markets across the region. But as we talk, they will be in line with our business in general.
John Franzreb – Sidoti & Company, LLC. – analyst
Everything is fine. I know you don’t seem to need to give too much color to the consolidation efforts and you’re going to do it [Phonetic], but [Technical Problems] at some point here and [Phonetics] worked until 2022. So you deserve – Is it fair to assume that we will see some kind of improvement in the profits of those shares in 2021, or is it not fair to assume?
Kieran O’Sullivan – President, CEO and President
So, John, if you look at that, you’ll see that we have a minimum indeed at the time of this year, more will have an effect as we get to the time of 2021 and in ’22. Projects are long-term projects, however, they are very specific.
John Franzreb – Sidoti & Company, LLC. – analyst
They gave it to me. Thank you Kieran And I guess only two small questions, in some way, is recently [Phonetic], what are the challenges of its source chain and Mexico has been a challenge with many other suppliers. What do you think of the moment it relaxes local and federal restrictions there?
Kieran O’Sullivan – President, CEO and President
John, in terms of the source chain as a whole, we are doing pretty well and we are very pleased with the way our plans have come back online. And in Mexico, we paint and monitor every day as you may believe. And the numbers are limited by local regulations, so by switching from bloodless red to bloodless orange, you are allowed to increase your percentage at the plant. And there was some positive news, but we’re looking for it to stabilize the [indecipherable] movement.
John Franzreb – Sidoti & Company, LLC. – analyst
Everything is fine. And one last question, just because [Indecipherable] in an [Indecipherable] Appeal Company gets government reimbursements from government-sponsored systems that were from the non-indecipherable charge of goods sold and SG-A lines. Have you won any government refunds?
Ashish Agrawal – Vice President and Chief Financial Officer
So, John, there are some portions of the government incentives we have, however, we’ve selected not to go in the direction of getting investment through the programs. But there are safe tax incentives that we have merit for. But they are not vital enough to have a significant effect on our bottom line.
John Franzreb – Sidoti & Company, LLC. – analyst
Everything is fine. Thank you Ashish. Thanks guys. I’m going to get in line.
Kieran O’Sullivan – President, CEO and President
Thank you, John.
Operator
[Operator Instructions]. We’ll answer our next Karl Ackerman of Cowen.
Karl Ackerman – Cowen – Co. – Analyst
Good morning, gentlemen. I tried to respond to Opex’s comment first, you know, discussed that you’ve taken action or are in the restructuring procedure this quarter. That, of course, would remain in some of the movements he made in the December and March quarters. So I guess to catch up, how many prices have you gotten away from style right now, and how much transitory you reinvest into the business compared to how long is permanent?
Ashish Agrawal – Vice President and Chief Financial Officer
For example, Karl, the steps we’ve taken in the last two quarters to adjust the design were more in line with what was happening in the advertising vehicle market late last year. And then they had an effect that we faced in the quarter, which was more transient by nature.
The restructuring we are implementing will allow us to compensate for the effect of the transitional measures we were able to implement in the quarter, once we started taking full credit for them. This deserves to give you a concept of the magnitude of the effect on both sides.
Karl Ackerman – Cowen – Co. – Analyst
Everything is fine. It appears that the restructuring measures it is taking today will be limited in terms of margin recovery at the time of part of the year, which will in fact decrease its ongoing cost. Much of the … merit turns out to be on days 21 and 22, as I perceive it.
Ashish Agrawal – Vice President and Chief Financial Officer
Yes. Karl, as Kieran mentioned, we expect that a larger effect on restructuring movements at the time of 21 and then in 2022.
Karl Ackerman – Cowen – Co. – Analyst
Okay. If I can, how would you characterize your stock in the chain today? And from the perspective of working capital, what steps are you taking to have days of inventory that I think money may flow later this year? Thank you.
Ashish Agrawal – Vice President and Chief Financial Officer
Yes. So, as you saw, we discussed that working capital increases very slightly sequentially, and our factories reduce our purchases and only have an effect on the sudden drop in sales. We have not been able to fully correct it, however, we expect us to deserve smart progress as we move here in the third and fourth quarters.
When it comes to receivables and debts, the parts of working capital remain in a smart position and we manage them thoroughly and the quality of receivables remains smart, as we can see.
Karl Ackerman – Cowen – Co. – Analyst
Thank you.
Operator
Thank you. And let’s go to our last question, which comes from Hendi Susanto from Gabelli Funds.
Hendi Susanto – Gabelli – Analyst
Good morning, Kieran. Good morning Ashish.
Kieran O’Sullivan – President, CEO and President
Good morning, Hendi.
Ashish Agrawal – Vice President and Chief Financial Officer
Hey, Hendi, are you okay?
Hendi Susanto – Gabelli – Analyst
Okay. Kieran, if I see sales from their car market to transportation, declining sales are weaker than that of the entire car market, some corporations feel the time is the lowest quarter. Can you percentage your perspectives on that?
Kieran O’Sullivan – President, CEO and President
So, Hendi continues: when we take a look next to the advertising vehicle, we think the moment with the channel too, we think we see innovations there. And when you take a look at that, and if you take a look at some of our biggest consumers in this space, they’ve noticed decreases of about 55%. Much stiffer than you’d see on the side of the soft vehicle.
So, we think you will do it regularly, and some of those products will go into the midrange, which you can do a little bit more on the heavy duty side. We still don’t know exactly if it’s a cycle or two or more quarters, but it’s something we’re looking at closely.
Hendi Susanto – Gabelli – Analyst
They gave it to me. And then Kieran, you also discussed that the high-end automotive logo recovers faster. Could you remind us what type of exposure CTS has with respect to premiums compared to non-premium ones?
Kieran O’Sullivan – President, CEO and President
So, in North America, we have a smart exhibition in Europe. We’re a little lighter on the premium side, and we’re also smart with Japanese grafts on the premium side. But Europe is a little weaker for us.
Hendi Susanto – Gabelli – Analyst
And then Ashish, with respect to the new $12 million in restructuring prices until the end of 2022, what is the linearity of the $12 million cost?
Ashish Agrawal – Vice President and Chief Financial Officer
Hfinishi, as Kieran mentioned, we expect a small one to have an effect in 2020. We hope that a major will have an effect by the end of 2021. And then, of course, until the end of 2022, we deserve to be able to achieve all those specific savings.
Hendi Susanto – Gabelli – Analyst
I mean, the charge related to this gets advantages like … [Voice Overlay]
Ashish Agrawal – Vice President and Chief Financial Officer
Everything is fine. I’m sorry, I didn’t understand your question.
Hendi Susanto – Gabelli – Analyst
No problem.
Ashish Agrawal – Vice President and Chief Financial Officer
The charge will sometimes be online as we get upgrades, maybe a quarter or two before the quarters. But the timing of some of these projects is still being completed, and we’re going to communicate a little more about it, Hendi.
Hendi Susanto – Gabelli – Analyst
They gave it to me. Yes. And then Kieran, the contribution to the acquisition of QTI more powerful than I expected. Where did you see the strength of QTI’s activity in the quarter and whether you expect that force to continue? Some corporations discussed the benefits, for example, of outdoor activities and then outdoor facilities. I wonder if CTS benefited at the time quarter.
Kieran O’Sullivan – President, CEO and President
We are very satisfied with the functionality, either on a higher line, in the margin of QTI acquisition. Most of our innovations come from the commercial and medical side, and we’re focusing on expanding into those two spaces on the hot, bloodless side to grow. We also delve into the medical box and take advantage of some of the channels we have with existing CTS customers. And then, of course, we are extending to the regions, which is a component of our plan as we move forward in Europe and Asia as well.
Hendi Susanto – Gabelli – Analyst
They gave it to me. Thank you Ashish. Thank you Kieran
Kieran O’Sullivan – President, CEO and President
Thank you hendi
Ashish Agrawal – Vice President and Chief Financial Officer
Thank you hendi
Operator
And it turns out there are no more questions. Now I would like to deliver the land to Kieran O’Sullivan for any final comment.
Kieran O’Sullivan – President, CEO and President
Thank you, Sylverstina, and thank you all for your participation in today’s appeal. And be careful, we will return to the paintings here with a lot to do, and we hope to update it in October. Thanks a lot.
Operator
[Operator’s Final Observations].
Running time: 31 minutes.
Kieran O’Sullivan – President, CEO and President
Ashish Agrawal – Vice President and Chief Financial Officer
Justin Long – Stephens Inc. – Analyst
John Franzreb – Sidoti & Company, LLC. – analyst
Karl Ackerman – Cowen – Co. – Analyst
Hendi Susanto – Gabelli – Analyst
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