Good day, ladies and gentlemen. Welcome to the CTS Corporation Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to hand things over to Kieran O’Sullivan, CEO. Please go ahead, sir. Kieran O’Sullivan: Thank you, Lisa. Good morning, and thank you for joining us today and welcome to CTS' third quarter 2018 conference call. The following are some notable items for the quarter. Third quarter sales were $118.9 million, up from $106.2 million in the same period last year. Gross margins were 35.4% compared to 35.3% in the third quarter of last year. Adjusted earnings per share were $0.39 versus $0.31 in the same quarter of 2017, a 26% improvement. Total book-to-business increased to $1.83 billion and we added three new customers in the quarter. The transition of our manufacturing operation is on track with the consolidation of our Illinois locations and the end of production in Elkhart this year. Ashish Agrawal is with me for today's call and 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 in the Investor section of the CTS website. I will now turn the discussion back over to our CEO, Kieran O’Sullivan. Kieran O’Sullivan: Thank you, Ashish. Third quarter sales were $118.9 million, up 11.9% compared to the same quarter last year. Automotive sales improved by 9.6% driven primarily by share gains in actuators and accelerator pedals. Electronic components sales increased by 15.9% driven by demand for ceramic products in various end markets. We saw strength in EMI filters and precision frequency solutions in oil and gas applications and RF filters with the new customers we announced earlier this year. We also saw increased demand for our mechanical switch portfolio manufactured in our Kaohsiung, Taiwan factory. These products are tariff-free into the U.S. market, in contrast to some of our China-based competitors. We continue to win new customers as we advance our vision of being as we advance our vision of being a leading provider of sensing and motion devices and connectivity components. We added three new customers in the quarter, two of them were in China, providing a new accelerator pedal for an EV platform with one and an actuator application with the other. We are very pleased to report the addition of the second actuator customer, which has been a goal for…

Thank you, Kieran. Third quarter sales were $118.9 million, up 11.9% versus the prior year. Foreign currency rates impacted sales unfavorably by $400,000. Sales to transportation customers increased by 9.6% and sales of electronic components increased by 15.9%. Our gross margin was 35.4% for the third quarter, slightly higher than last year and flat sequentially. During the third quarter, we realized approximately $1.2 million in savings related to product line transfers. For the full year, we expect savings in the range of $3.5 million to $5 million, which is a little bit higher than we have communicated previously. We're also seeing unfavorable impact from margin – excuse me, material price increases and tariffs, that is partially offsetting the savings from product line transfers. As Kieran mentioned, our sales teams are working with customers on recoveries related to tariffs and material costs. SG&A expenses were $18.5 million or 15.5% of sales in the third quarter of 2018 compared to 15% of sales in the third quarter last year. Including in the SG&A expenses is higher equity-based compensation expense and an unfavorable impact from noncash pension expense. The total change in pension expense is an unfavorable impact of $600,000 compared to the third quarter of 2017. We also incurred $200,000 for tax projects. We spent $6.5 million on R&D in the third quarter of 2018. We are committed to making additional investments in organic projects that will drive growth for our company. Our effective income tax rate in the third quarter of 2018 was 28.9% due to certain discrete items. Our estimate for the 2018 tax rate remains unchanged, and we expect the rate to be in the range of 24% to 27%, excluding discrete items. Our third quarter 2018 earnings were $0.30 per diluted share. Excluding restructuring, currency and other onetime…

Thank you, sir. [Operator Instructions] We will go first to John Franzreb, Sidoti.

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

Good morning.

Given your prepared remarks about what is going on in the transportation market, Kieran, can you just remind us what your exposure is in Europe and to China as far as transportation related? Kieran O’Sullivan: John, our overall breakout of our regional sales as a company is about 15% in Europe and about 30% to 34% in China. And transportation overall is about 64% for the whole company. I don't have a precise breakdown on the exposure in Europe and China for you. Ashish, do you have that, please?

We don't split out China. Asia, our total sales to Asia are about 34%, to Europe about 13%.

Okay, it’s a little bit less in Europe and more so in Asia. Okay. Kieran O’Sullivan: Yeah.

Yeah.

And when you look at the new customers and the modestly improved bookings that you got, were they predominantly North American or is the distribution stronger in one region versus another? Kieran O’Sullivan: And the bookings, John, are up – $1.8 billion to $1.83 billion. And when we look at it, we're pretty even across the different markets. We tend to be strong in Asia, especially not just with the building with the local OEMs, but with the transplants from Japan. We've added two customers in Europe and we're with literally two OEMs in North America on the light vehicle side and obviously commercial vehicle side, too. So we feel pretty balanced and we're obviously trying to gain more in Europe as we grow the company and in the China market, too.

John, I mentioned 13% for Europe, year-to-date that’s 15%. So just a correction on my part, sorry.

And I think you said Kieran, you had a pedal award for a EV vehicle in Europe, so I guess theoretically that should be going up a little bit? Kieran O’Sullivan: Yeah, we will be – obviously, if we just got the award, John, it won't be in development for two years plus. And we also got an EV award with a local Chinese OEM as well. The other thing that hopefully came through in the message is, we added a second actuator customer, which is something we've been trying to do for the last few years and we're really pleased with that.

And thanks for reminding me about the development time I was – I should have realized that. And just one other thing about the product mix, just given how the market is gyrating. Can you tell us how much of your transportation sales or remind us how much is cars and light truck versus commercial vehicles?

John, that’s primarily related to the actuators, some of it is going into commercial vehicles, I would say lighter commercial vehicle. We don't go into Class 8 and some of it goes into heavy-duty pickup trucks, those sort of markets.

Great, thanks. Thanks, Ashish. Okay, no, I am going to get back into queue and let someone else ask questions. Thank you. Kieran O’Sullivan: Thanks, John.

Up next, we’ll hear from Hendi Susanto, Gabelli.

Good morning, Kieran and Ashish, and congratulation on booking double-digit growth for three consecutive quarters. Kieran O’Sullivan: Thank you, Hendi.

Thank you, Hendi.

So Kieran, how should we think about strength in the last nine months in terms of business wins and sales traction that will continue into Q4 and beyond? Kieran O’Sullivan: We feel good about the business bookings, the new awards. And we feel good obviously with the change in guidance upwards towards the end of the year. You can probably tell from our comments that we're just cautious on that transportation end market, right around the world. I mean, if you look at North America, we see it as being more flattish to marginally down from the 17.2 million units last year. Europe, we think, it's kind of fairly flat. And China is, there's some softer forecasts coming out September. The seasonally adjusted rate was down to 26, we see the year finishing at 28 million or so. So we feel good about the business bookings. We feel good about the end of the year. We are cautious on watching that end market to make sure we are doing the right things. And we're in line with what we plan from a strategic perspective as we move forward.

Got it. And Kieran you have mentioned CTS added a second actuator consumer. May I know in what category and what kind of revenue timing and trajectory we should expect? Kieran O’Sullivan: Yeah, it was an actuator customer in the transportation market in China. And we would expect to see first revenues probably in the 2020 time frame.

Okay. And then Ashish you mentioned that CapEx will – some of the CapEx will shift from 2018. And if my number is correct, it's about 2% of sales. So should we expect 2019 CapEx to be like 2% above your long term model, so probably somewhat close to 6%?

At a high level your math would be pretty close, Hendi, but we will provide more specific guidance on that probably closer to the February earnings call.

Got it.

But at a high level, you will be close enough in how you're thinking about it.

Okay, got it. And Kieran, you have mentioned that telco market is showing some growth, and at least one semiconductor also shared the same message with investors. Can you provide more colors and whether you expect this to be like in multiple quarters or whether it's just a short temporary strength? Kieran O’Sullivan: And we’re seeing steady improvement. And when you look across the product portfolio, it's primarily driven by our RF filter products and we've been adding more customers and that continues to happen. And then as they test it and put it into their systems, we get into frequent orders with them then. So that's the piece that's making us more confident and we feel because the product is smaller, lighter, higher Q factor performance. It’s going to be a good product for us.

Got it. And then one more question for Ashish. Ashish, do you have updates on your recent works with smartphone companies on, I think, some kind of – for some security sensor function in smartphones?

So what we have talked about is haptics in mobile phone or mobile devices. And that work is still progressing, Hendi, and moving in a good direction. But we need to have more traction there before we are able to give more broader detail on that.

Okay. Thank you. Let me get back to the queue. Kieran O’Sullivan: Thanks, Hendi.

[Operator Instructions] We will take a follow up from John Franzreb [Sidoti].

Yeah, I guess, just a follow up on Hendi’s question. What is your exposure to a 5G upgrade either in the handset or the backbone infrastructure? Is it de minimis or is it something that's accelerating or decelerating because you're not there? Kieran O’Sullivan: Whether it is the existing 4, 4.5G or 5G, we think our RF type product is going to gain good traction in that market. We also think with the deployment of small cells with multiple antennas, there's a greater niche for that going forward and also our frequency products. As you get into leakage to IOT, we think, that requirement is going to help some of those products as well. So John, we feel like we've been, when we look back over the last few years, we were investing in this area and we're seeing very little traction and we kind of contained our investment and slowed down our development. But never backed off on it because we felt the market was there and now we're starting to see that. So we feel good. Of course, what we want to do is get more design wins, keep increasing those sockets, so that when that growth comes, we're positioned well.

Okay, so this is kind of a new kind of a revenue opportunity for you that you have kind of been missing out on in the past couple of years. Is that how I should view this? Kieran O’Sullivan: Yeah, we have got some products that were in like – in base stations. We have these RF filters, which now get into multiple solutions, John. And then back to your handset side of it and as Ashish said, we've been working with different applications, whether it's security or haptics. And we think our technology has got a very good foundation there, but as Ashish said, we've nothing to report in that today.

Okay. And, Kieran, can we just go over M&A, broadly speaking, can you kind of review how recent acquisitions have performed relative to your expectations? And then after you have concluded that, maybe a discussion on what you're looking for as far as future M&A, be it product acquisitions or geographic acquisitions. What are your thoughts there, in order? Kieran O’Sullivan: Yeah, so, if we put a score card up in terms of how we're doing here, we look with the single crystal technology, we're very pleased with the growth there. We said we would grow it at – we aimed to grow at 10%, we are growing at much better rate than that, and the performance of the business has been very good. We're increasing our customer concentration in terms of new customers and with existing customers. So I feel very good there. Our tape cast acquisition in Europe is performing well, and obviously that's the more recent one. And just like the single crystal, we give that a green. We have other things to do there to continue to boost revenue and improve efficiency, but very pleased with how that's going. And to be quite frank with you, the smallest acquisition that we did with the RF filter – RF sensor, I should say, for soot and ash, and we would rate that red. Red because we haven't won awards on it. And on the flip side, we still remain very strong on that investment and we got a lot of tests going on. One of these calls we are going to bring you some good updates.

Okay. All right, and then the going forward outlook? Kieran O’Sullivan: Yeah, all I would say is we have been very busy with many things. The best way describing it is, we are still targeting that 5% inorganic growth. Our pipeline is getting a bit more robust, but nothing to talk about today. It’s always going to be in that sense, connect, and move space in line with our strategy and the regional expansion.

Got it. And Ashish, can you just remind me have you repatriated all the cash you were kind of looking into or is that still to come? I can't recall.

John, the repatriation that we did in the second quarter was opportunistic – we had some expiring tax credits in Taiwan. We are not actively looking to do more repatriation at this point in time, but we have the flexibility, primarily based on M&A activity, we'll prioritize cash deployment from that perspective depending on the region, and particular M&A activity is unfolding.

Got it. Thanks. I appreciate it. Thank you guys for taking my questions. Kieran O’Sullivan: Thanks, John.

We will go to a follow up from Hendi Susanto [Gabelli].

Kieran, when you discuss how to transfer the material price increase to your customers, how long should we expect that process to take and how long do you think we, you – CTS will be able to pass on the increase in material cost? Kieran O’Sullivan: Hendi, we’ve got deep and long relationships with our customers, and we partner together in terms of where we want to go in the future. I would tell you we've already made some improvements, there is some things we're still working on. And from a partnership perspective, we're never going to get 100%, but we’re getting a fair portion and some done and some more to do. We feel like we're working it in the appropriate way.

Got it. And then Ashish, can you help us to think about what positive impact once the product line transfer of Elkhart manufacturing reach completions in the soft gross margin?

Hendi on that our previous communications of $6 million to $8 million on an annualized basis, that's still consistent. As I mentioned, $3.5 million to $4 we expect this year. So in the $3 million range in 2019…

Got it. Okay, thank you.

Additional to what we have realized this year.

Yeah, okay, got it. Thank you. Kieran O’Sullivan: And Hendi, I would just add that we're very pleased with our teams that are on the receiving locations that have taken these products and they've done really hard work and really good work to make this a good transition.

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

At this time there are no further questions. I will hand the conference back over to Mr. O’Sullivan for any additional or closing remarks. Kieran O’Sullivan: Great, thank you, Lisa, and thank you everyone for your participation on today’s call. We look forward to updating you again in early 2019. Thank you.

Ladies and gentlemen that does conclude today’s conference. We would like to thank you all for your participation. You may now disconnect.