Good day, and welcome to the CTS Corporation Second Quarter 2015 Earnings Conference Call. Today's call is being recorded. At this time I would like to turn the conference over to the Mr. Kieran O’Sullivan. Please go ahead, sir. Kieran O’Sullivan: Thank you, Shannon. Good morning. And thank you for joining us today. Welcome to CTS’s second quarter 2015 conference call. We had a solid quarter as we advanced our plan to simplify, focus and drive profitable growth. On the simplification front, we’re on-track to complete the transition from Canada in the second half which will take us to 11 manufacturing locations globally. Our focus and strategy is to grow our business sort of on products that sense, connect and move. We had another strong quarter securing new business awards. Our continued focus on profitability is demonstrated in an improved EPS, margin expansion and improved working capital. As usual, Ashish Agrawal, our CFO is joining me on today’s call. And Ashish will take us through the Safe Harbor statements. Ashish?

Before beginning the business discussion, 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 can 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 yesterday 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 relative to Regulation G, the required explanations and reconciliations are available in the Investor Relations section of the CTS website. I will now turn the discussion back over to our CEO, Kieran. Kieran O’Sullivan: Thank you, Ashish. Yesterday we reported our second quarter 2015 financial results. Second quarter sales were a little over $100 million, down 3% compared to the same quarter last year. Currency impacted sales by $2.1 million primarily because of the U.S. dollar appreciating against the Euro. This impact was in line with our expectation of 2% to 3% of sales. Gross margins improved by 50 basis points, we improved our working capital performance from 11.9% or to 11.9% compared to our prior performance in the first quarter of this year. Adjusted earnings per share were $0.30, compared to $0.25 in the second quarter of 2014. We continue to focus on driving organic growth through new products and new customers. In the last quarter we added several new customers in defense and medical markets. New business awards for the quarter were $169 million, and our automotive products we were awarded $117 million in new business and program extensions, driven by customers for accelerator paddles, smart actuators and sensor products. We are working diligently to continue to focus on regional expansion and to upgrade our technology…

Thank you, Kieran. The second quarter 2015 sales were $100.1 million, down 2.8% compared to the same quarter last year. Currency impacted us unfavorably by $2.1 million as the U.S. dollar appreciated against the Euro compared to the second quarter of 2014. Gross margins for second quarter 2015, was 33.3% versus 32.8% in the same quarter a year ago. Margins increased year-over-year as we continue to achieve efficiency gains and implement material and labor productivity projects. Currency impact on gross margins was negligible as the unfavorable impact on sales was offset by a favorable impact on costs as the U.S. dollar appreciated against various local currencies in countries in which we have manufacturing operations. Operating expenses in the second quarter of 2015 were 22.8% of sales, compared to 23.2% in the same period last year. Operating expenses for the second quarter of 2015 include $2.1 million in restructuring charges compared to $2.7 million in restructuring charges in the second quarter 2014. Now let's break down the operating expenses. SG&A expenses were $15.2 million in second quarter 2015 compared to $15.8 million in second quarter 2014. For our strategy, we have improved the underlined G&A cost compared to the same period last year and refocus sales and marketing spend. R&D expenses were $5.5 million in second quarter 2015, compared to $5.3 million in the same period last year. We will continue to invest more in new products to drive organic growth. Net interest in second quarter 2015 was slightly better than the second quarter of 2014 on account of higher cash balances. In the second quarter 2015, other income was approximately $100,000. This was primarily due to the impact of changes in foreign currency rates on our assets and liabilities. In the second quarter 2014, we experienced a foreign currency translation…

[Operator Instructions]. And we'll take our first question from John Franzreb with Sidoti & Company.

Good morning guys. Kieran O’Sullivan: Good morning, John.

Hi, John.

Hi, I guess, I want to start with the new order intake and what we should take away from it. Another good quarter, you had a good quarter last quarter. What’s the timing of realizing on some of the - on these orders? I you can give us some kind of context what we should be thinking about since they’re up so much on a year-over-year basis? Kieran O’Sullivan: Yes, the real lift John comes in ‘17 from our perspective and that’s consistent with our messages in the past. And obviously we’re still targeting as I’ve said in the prepared comments on mid single-digits in 2016. The other thing I’d point out on the new business awards which we’re very pleased with is, at this point last year we were around the first half of the year of $225 million, now we’re sitting more like $361 million. So, we’re really making progress here. Obviously, we don’t like this, off-sales at the moment but with 70% of our business in automotive, it’s got to get through the pipeline. So, we feel like we’re making good progress. And probably want to get ahead of these current headwinds.

Sure. How of this is a function of the new sales personnel you put in place to address new opportunities versus some other factor? Kieran O’Sullivan: I would say John, it’s to some extent the teams are doing a good job and really supporting us in getting that regional expansion going about. And the other thing is just a different mindset and performance expectation that we have in the business that’s very simply it.

Okay. And you said, in your prepared remarks, I don’t know if I copy this properly, you said $170 million in auto business, is that what you said? Kieran O’Sullivan: $117 million.

$117 million, okay, okay. Kieran O’Sullivan: Yes, that’s part of the $169 million.

Okay, that would make it perfectly right. Okay. And could you just talk about the restructurings that you’re doing, could you give us where we are on the progress, how much has been realized so far in 2015 in the first half and what are your expectations in the second half of 2015? Kieran O’Sullivan: I’ll give you kind of a pitch around that and then I’ll hand it over to Ashish for some of the financial impacts on that. But overall, when you look back, we said we’re down to 11 facilities now in the second half. Canada is on track to be finished in the second half of this year. And that reduction in facilities, I just want to point out, if you go back to when we had more than 20, it comes as part of the EMS sale and also part of the restructuring that we’ve done internally. So, we’re very much on track and we’re always looking to optimize in different parts of the company. But that’s the biggest action we have ahead of this. Ashish, do you want to add some comments?

John, the restructuring that was launched in June 2013, we are seeing the benefits of that in our financials already. For Canada, we expect a small benefit towards the very end of this year and then most of it in 2015.

Can you just put some numbers around that Ashish?

Sorry, John?

Could you put some numbers around that what you expect?

We haven’t disclosed the savings related to Canada. But you could, when you look at our 10-Q, it’ll give you a good range of what the restructuring expenses are, and the savings are roughly in line as well.

Okay. Kieran, can you talk a little bit about the automotive market what you’re seeing as far as demand? It seems like you had some currency hits, I was wondering if there is, it’s flattish for any other particular reason. Could you just talk about that a little bit? Kieran O’Sullivan: Yes, I mean, from a global perspective, North America is still going along pretty strong, Europe is softer, Asia softer, particularly in China it’s been reading into different news media out there. And we obviously have some headwinds in Automotive year-over-year because of the backlog that was there and that’s what we’ve been focused on correcting. So, that’s a little challenging at the moment. But it’s also I mean the team is working very hard to focus on those new business awards. To get the operating structure, number of plans, utilization, best cost percentages in place so that when we do get to the - the lift we get in ‘17 we’re ready and to make the most of it. So, a lot of hard work going on, some days it feels like we’re not moving the needle fast enough but we’re doing the right things. I’m comfortable that we’re doing the right things.

Okay. And one last question, I’ll get back into queue. You’ve expressed interest in being more active in the M&A market. Can you bring us up to speed on what the pipeline looks like, are you frustrated or encouraged? Kieran O’Sullivan: I’m not frustrated. But we are working it hard. What probably, maybe when you mentioned frustration, if there is anything that worries me is the, as I mentioned the multiples out there, they’re very expensive when I look at it as an example, technologies that we want to add, some of them in the automotive space are very high on the sensing multiples. And the other side of it is the automotive market is coming back to speak volumes, I mean, note that industry goes through cycle. So we want to be careful with first of all getting the right fit to the strategy but also at the right price so we can bring back return to shareholders. But even if we feel that little bit of a stalling point in automotive at the moment. And we’re looking at other areas and we talk about sense, connective and move as part of our growth strategy. There are other things we can do in the portfolio which would add sensors maybe in a different product line but it’s also applicable in the automotive space as well. So, we feel that we can still progress and we have the pipelines building and we’re very engaged.

Are you optimistic, close something by the end of the year? Kieran O’Sullivan: We could.

Okay. Thank you guys. I’ll get back into queue. Kieran O’Sullivan: Thanks John.

And we’ll take our next question from Hendi Susanto with Gabelli & Company.

Good morning, Kieran and Ashish. Kieran O’Sullivan: Hi Hendi.

Hi Hendi.

First question, Kieran, you mentioned that the mid single-digit revenue growth target would be in 2016. Could you break it down between sales and automotive market and sales of electronics market if you cannot like say the exact figure, maybe you can share like relatively speaking like where is the other forces [ph], another one? Kieran O’Sullivan: Yes, just at a high level Hendi, because we don’t guide on this. Automotive market, we’d be looking at somewhere in the 3% to 4%, maybe a little better than that growth, higher single-digits on certain components in the electronic component space. We’ve mentioned earlier and over the last year that we’re transitioning some of the product portfolios. We feel very good about some of the growth opportunities in Piezo. So, we’re fine-tuning some of the other components. So it’s the blend.

Okay. And then second question is for Ashish. The lower revisions of the 2015 guidance, is it mainly negative FOREX impacts or are there other things that you can share with us?

Yes, Hendi, the currency is impacting us on the top-line, in the range of 2% to 3% as we talked about. On the operating side as well as on the earnings per share side there is very small if any impact of currency. That is reflecting more of the change in volume. And if you look at our guidance for the second half of the year, we brought it a little bit down not only for currency but also some other volume conditions that we’re anticipating in the market.

Okay.

So, it’s more the reflection of a volume change rather than a currency impact on EPS.

Okay, yes. And then Kieran, people are talking that the PC market is weak. I’m wondering to what extent it affects your hard-disk drive, Piezo business. Kieran O’Sullivan: Yes, when Ashish was talking about volume, we’re seeing some softness on the hard-disk side of it in the second half of the year. We had a little bit of that going on last year, so we factored that into our guidance.

Got it, okay. Thank you. Kieran O’Sullivan: Thank you, Hendi.

And we’ll take our next question from Lisa Thompson with Zacks Investment Research.

Good morning. Kieran O’Sullivan: Good morning, Lisa.

Hi Lisa.

I would like to expand a little bit about the second half weakness, I mean, you’ve already done your $0.50 for the first half and you said you typically see some up-tick in the second half. And I guess that’s really not happening this year. I assume it’s due to volumes. Could you get more specific, is this really, is this due to China, Europe, any particular product lines or is it just global weakening? Kieran O’Sullivan: The way I would think about it is, if you look at some of the end-markets Lisa, cellular infrastructure, computing, oil and gas, which impacts some of our electronic components. We’re seeing softness there. And that’s why we looked at the guidance range and said we wanted to tighten that up. And of course Ashish already said that, we’ve got two things going on, we’ve talked in the first half about currency and we have some volume things which we factored in for the second half. So Ashish, do you want to add to that?

And just to reemphasize Lisa, as we have tightened the volume range that is impacting our EPS forecast for the second half of the year as well. We are not expecting at least for the current exchange rate, we’re not expecting any major impact of currency on our operating earnings.

Okay. And so, would this be specific to these industries or it more of a geographic country thing? Kieran O’Sullivan: More to the industries, end-markets for us.

Okay, all right. And so what are you thinking about 2016, is there going to be a little bit of pent-up demand for these markets to come back or is this just kind of new lower levels you’re functioning at? Kieran O’Sullivan: And there is always some of that fluctuation we can’t predict that fully. But I mean, we’re guiding that we wouldn’t grow at mid-single-digits in ‘16 and we feel good about that with the backlog. And as we’ve said before, we expect a bigger up-tick in 2017. That’s probably the best guidance I can give you.

Okay. And I was just a little curious if you could talk a little bit more about your new orders. This year versus last year, it’s just overwhelmingly different in the number of orders booked. Can you talk, just compare or contrast what was going on in second quarter last year versus what’s happened this year? Kieran O’Sullivan: Obviously we’re building the talent in the organization we’re focused on regional expansion. One of the big things we did was the first big customer in automotive market in Europe which was substantial for us we have that going on and other product lines as well. And we’re just getting traction on the focus because we really focused the company around products that sense, connect and move. And we’re just getting more laser-sharp in our focus and understanding our business and end-markets better. And going aggressively after growth but making sure it’s profitable growth.

So, what kind of new orders do you think you’ll see in Q3 and Q4 relative to this quarter? Kieran O’Sullivan: We don’t usually guide on that but I would tell you we’ve got targets for the year. And you can see if you look at 2014, we had typically the first quarter tends to be the strongest and then it’s kind of a little bit of seasonality from there on. But we’ve been very clear on how we’ve performed in each year. If you go back to ‘14, we were high in the first quarter, strong in the second, a little lighter in the third and then a little bit stronger in the fourth quarter as well. So, there is some seasonality.

Do you expect that same pattern? Kieran O’Sullivan: Yes, it wouldn’t dramatically differ in terms of seasonality.

Okay, because Q2 looks, looks amazingly strong this year, so. All right, great. Thank you so much. That’s all my questions right now. Kieran O’Sullivan: Thank you, Lisa.

And we’ll take a follow-up question from John Franzreb with Sidoti & Company.

Kieran, I’m sorry. You mentioned three markets that are “the driver for the second half weakness, computer, oil and gas and cell infrastructure”. I guess, I wanted to ask about the cell infrastructure. From what I recall, communication is like 4% of volume last year, is that the cell infrastructure business that you’re referencing? And how much of that is China related? Kieran O’Sullivan: I can’t give you exact number in China because I don’t have it in front of me. But the primary focus for us in this market is on the RF filter space. And we’re seeing, yes, we’ve always talked in terms of transitioning some products in the portfolio, so we have some products that are old and some new products coming out. And that’s really the dynamic that’s going on for us, John.

Okay. So, when you think about that business was probably 10% volume two or three year ago, is that the transition of existing on profitable products or is there something else going on in that dynamic? Kieran O’Sullivan: I don’t know if I’d say 10% and I don’t think we’ve ever given numbers around that. But we’re seeing some fluctuations in that area, nothing overly dramatic. But we are transitioning some products that we prefer and like we talk about ClearPlex for the future and some things we’re doing with on/off logs and different types of RF filter.

John, both in RF and frequency, last year we also talked about repositioning, we had some older technology products which had become outdated and we were working on repositioning our product lines there. So, there is some follow-on impact of that as well. Really but at this point the industry softness in the cell infrastructure that is definitely impacting us.

And can you just remind me if that’s a relative to your company margin profile if, and I’ll just bundle those few more because you put together the cellular, oil and gas, computer, are they collectively above or below the company margin profile?

They will not be that different, there could be some differences based on specific customers and product lines but at a high level they’ll be relatively in-line.

Okay, all right. And last quarter you mentioned that you were going to redirect some R&D efforts if I remember correctly. I wonder if you can just give me an update on your progress on that front or just maybe little color now that we’re a quarter behind us, what are you doing on that front to maybe improve some of your R&D efforts? Kieran O’Sullivan: Yes, John, we’re moving forward in that area. I would tell you our emphasis on advanced engineering and innovation, that’s where we’re putting a lot of the effort. Obviously we’re still focused on executing on the products in the pipeline too. But we’re just moving forward, the thinking and the mindset and the company getting back possibility thinking about things we can do for the future. And so, we feel like we’re gaining momentum but obviously you don’t see that on the outside yet.

Okay. And lastly, how much of the cash is now overseas, I wonder if there is any material change there? And will you continue to borrow since we purchase stock?

John, at this point in time, the cash balances that we have there almost all overseas. We have improved U.S. operations considerably. And we do expect better cash flow within the U.S. so there should be some U.S. cash generation that will help us support the dividend as well as the buyback program. And that is one of the reasons we actually converted the foreign taxes in terms of how we treat them on the U.S. tax return, we changed them from a deduction to a credit. As we exhaust our NOL in the U.S. that allows us to utilize those credits a lot better.

Perfect. And when I got you on the tax line, what are our expectations for the second half of the year as far as the tax rate?

On the second half of the year, I do expect the tax rate to be in the low 30s range. There is a slight improvement in the tax rate as a result of using foreign taxes as a credit instead of a deduction, but other than that no major changes.

Okay. And for the full year, will it be in the high 20s adjusted?

Yes, it should end up being close to 30 or somewhere around that range?

Perfect. Thank you very much guys for taking my questions. Kieran O’Sullivan: Thanks John.

And we’ll take a follow-up question from Hendi Susanto with Gabelli & Company.

Hi Kieran, so looking forward in terms of product mix in 2016 and 2017 compared to 2015. Would you be able to share some insight in terms of the compositions and whether or not we may see positive shift in gross margin despite of the current FX situation? Kieran O’Sullivan: We’ve maintained the view that our gross margins will be in the low 30s and we’re consistent on that, Hendi. We’re always driving for improvement you see some improvement in the last quarter. But materially we don’t expect that to change. And as we get out into ‘16 and ‘17, the profile of the revenue, nothing is going to swing terribly in one year but I will tell you we’re very clear as a company that we want to rebalance our end-markets over time. And that’s not just a goal for ‘16 or ‘17, it’s a longer-term goal. Well, we’d like automotive to be our live vehicle to be less than 50%, but still a growing business and obviously growing the company overall as well.

Okay. So, outside of the automotive market like where are your major interests? Kieran O’Sullivan: Major interests are in the RF products, we’re making good progress there, repositioning some of the components. And then we’ve always talked about our Piezo line, we like what we have in the Piezo, the team is doing a good job. And we’re growing that product like and we’d like to excel.

Got it, thank you. Kieran O’Sullivan: You’re welcome Hendi.

And we’ll take a follow-up question from Lisa Thompson with Zacks Investment Research.

Hi, quickly, while we’re on the tax rate question, what you’re thinking right now for 2016 and going forward?

We haven’t talked about that Lisa but I am not expecting any fundamental changes at this point in time. As things evolve that could change obviously, but right now I don’t expect a significant shift in tax profile in 2016.

So, stick to 30% like this year?

Low 30s, yes.

Okay, great. Thank you.

[Operator Instructions]. And there are no additional questions in the queue at this time. I’ll turn the call back to Kieran for any additional or closing remarks. Kieran O’Sullivan: Thank you, Shannon. And thank you all for joining us today. We’ll continue with our drive forward with our emphasis on simplification and driving profitable growth around products that sense, connect and move. Thank you all. I look forward to talking to you in the months ahead. Bye-bye.

That does conclude today’s conference. Thank you for your participation.