Good day, ladies and gentlemen, and welcome to the Commercial Vehicle Group Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Terry Hammett, Head of Investor Relations. Please begin.

Thank you, Victoria, and welcome to the conference call. Patrick Miller, President and Chief Executive Officer of Commercial Vehicle Group, will provide a brief company update; and Tim Trenary, our Chief Financial Officer, will provide commentary regarding our fourth quarter and full year 2017 financial results. We will then open the call up for questions. This conference call is being webcast. It may contain forward-looking statements, including, but not limited to, expectations for future periods regarding market trends, cost-saving initiative, new product initiatives, among others. Actual results may differ from anticipated results because of certain risks and uncertainties. These risks and uncertainties may include, but are not limited to, the economic conditions in the markets in which CVG operates; fluctuations in the production volumes of vehicles for which CVG is a supplier; financial covenant compliance and liquidity; risks associated with conducting business in foreign countries and currencies; and other risks detailed in our SEC filings. And now Patrick Miller with a company update.

Thank you, Terry. Good morning everyone and welcome. Thank you for joining us today as we discuss our fourth quarter results, full year 20117 accomplishments and our markets and forward opportunity. Improve market environment for both heavy-duty truck and off-road construction provides the foundation for us, increase our 2017 consolidated revenues by 14% for the full year as compared to 2016. In this growth environment, Global Truck and Bus segment revenues were up 10% versus prior year and our Global Construction and Ag segment revenues were up nearly 22% as the construction equipment market improves throughout the year. The production ramp created higher build rates in the later part of the year, and that trend continues into 2018. Our fourth quarter benefited from this market momentum, we are pleased to report a fourth quarter with consolidated revenues of $188 million, an increase of more than 25% as compared to the same period last year. Both core segments within our business contribute to this strong performance. With our Global Truck and Bus segment revenues up 24% and our Global Construction Agriculture segment revenues up 30%, as compared to the same period last year. These fourth quarter period-over-period growth rates follow the very strong very third quarter revenue growth rates that we reported in November. Tim will cover our financial results shortly. Moving to some details on the market changes, the average Class 8 daily truck build rate in North America increased approximately 38% from December 2016 to December 2017. And our two OEM customers have been reporting strong year-over-year sales increases. There are good fundamentals driving and supporting the strength in market. At the macro level, we are seeing the strengthening economy, good GDP numbers, rising freight tonnage and tightening freight capacity, which are all driving freight pricing up. Higher freight…

Good morning. Revenues in the fourth quarter 2017 improved significantly from the prior year period and operating income was up as well. This progress reflects the upswing in the global economy and higher build volumes in our end-markets. However rising global commodity prices and tightening labor markets are adversely affecting pull through that is the conversion of the higher sales into operating income. More specifically consolidated fourth quarter 2017 revenues were $188.3 million, compared to $150 million in the prior year period, an increase of 26% primarily resulting from increase in heavy duty truck production in North America and improvement in the construction equipment markets we serve. Fourth quarter revenues benefited by $3.7 million or almost 3% from foreign currency translation. Operating income as adjusted for special items in the fourth quarter was $8.2 million compared to operating income of $5.1 million in the prior year period. This increase in operating income was primarily the result of the higher revenues, partially offset by rising commodity prices, tightening labor markets and cost associated with the sharp acceleration of build volumes in our end markets especially North American heavy duty truck build. Besides the impact of commodity prices on fourth quarter pull through at almost $2 million. Operating income margin before giving effect of the special items improved 100 basis points period-over-period. Selling, general and administrative expenses in the fourth quarter of 2017 were $14.2 million and consistent with recent quarterly spend. We were especially pleased with this flat SG&A performance in light of the significant increase in sales of 2017. Earnings in the fourth quarter of 2017 were adversely affected by the new federal tax legislation, the passage of the Tax Cuts and Jobs Act of 2017 resulting in a net loss for the quarter. The adverse impact of this legislation…

Thank you. [Operator Instructions] The first question is from Mike Shlisky with Seaport Global. Your line is now open.

Good morning, guys.

Good morning, Mike.

I wanted to start off with some of the costs questions that you guys outline. I guess first up I wanted figure out here, can you give us a sense as to what the operating pull through outlook is for 2018? And as suppose if you can just take out the $10 million that you had with the costs issues in 2017, what is the sort of apples-to-apples outlook here from a full company level?

So, Mike, first of all thanks for your question. So, I can’t -- it's very difficult with the commodity environment the way it is the somewhat difficult labor market as such were to give you a precise answer with respect to pull through. What I can tell is this, and this is consistent with what we stated in the past, our objective here at CVG in other words what we manage to is a 20% to 25% variable contribution margin. Now, to your point in the fourth quarter of 2017 and for the full year of 2017 that pull through objective of 20% to 25% has been impaired, first of all by the labor situation in Mexico which I'll come back to in a moment, but also with the commodity prices that add about a $2 million impact on the fourth quarter. And then some impact from the labor markets and the production challenges associated with the rather dramatic increase in build volumes. So, let me comment it this way. With respect to the labor shortage in Mexico and the $10 million impact on 2017, we believe for the most part we've got our arms around that, Pat in a moment may want to speak about some of the additional things are that we're doing, but for the time being we believe we've got our arms around that and we don't have any reason to expect that that will repeat itself. So, the way I sort of look at 2018 is that's an add back. So long as the commodity prices continue to increase and we have steel, resins, we buy form and they're up reasonably significantly quarter-over-quarter. So as long as they continue to increase, I expect there to continue to be some pressure on the margins associate with that just because as Pat mentioned, our ability to recover that lags. Once they have stabilized however, we expect to be back to this 20% to 25% variable contribution margin. So the difficulty of being more specific on that is I can’t predict how the commodity prices are going to behave in 2018. I hope that was helpful.

Yes, we have to ask about beyond the commodity prices, which are some way out of your control in some cases, were there any cost we should be looking at that are of concern in the quarter. Was -- direct freight because you have got such a ramp up on production, were there any bottlenecks of things that were not expensive just every day supplies and things like that, or was it really -- is it really all about steel, resin, et cetera?

It’s primarily steel, resins, foam -- I’ll just give you the numbers. Now we don’t buy these commodities directly, but they are inherent in the products we buy. Fourth quarter 2017 compared to fourth quarter 2016, steel was up based on the index we use about 17%, poly propylene up 23%, foam up 26%. Okay, so, that’s -- those are extraordinary increases. We had some costs as I said, as we’ve highlighted from the increase in the production volumes and a little bit from the labor inflation. We also as we pointed out in our 10-K have had some supply constraints in the wire harness business for connectors, which were been able to manage through right now along with our customers without having to incur any extraordinary freight. So aside from those challenges, I think that’s it.

Let me jump in on that too. So I think what you see though is to Tim’s comments, certainly on the wire harness side, there are some global constraints, which are affecting all suppliers and OEMs. And those are affecting us to some degree just from a planning standpoint, but nothing extraordinary that like we incurred in 2017. There are daily challenges with the supply chain as it’s trying to ramp up in some of these other segments that we have, and that’s some of what’s driving some of these other costs. And so, as those problems get resolved, I would expect some of this extraneous production challenges in the way of overtime, and changeovers rapid changeovers in some of these issues to diminish.

Okay. Could you maybe give us a sense more broadly speaking, is there a timeframe that you hope for this to be done by, I mean, is it most likely that you’ll have these issues here in the first quarter, but could it get any better in Q2 or Q3 do you think?

So, Mike, I -- here we are, we are in the middle of March and this commodity effect has continued into the first quarter and as we have described we lag anywhere from let’s say three to six months. So I can’t tell you for how far into the future it will continue, so along as they start to step up, we’ll be managing this down as best we can. And again, as I think Pat just mentioned, once the commodity prices stabilize, our objective is to recovery substantially all of them and be back to this variable contribution margin.

Okay, okay. Can I also ask about your inventories and working capital, that appears to ramp up in dollars terms, maybe some of those commodity valuations, but at this point do you feel ramped up for your inventory for a full 300,000 plus unit year, or you need to invest more as we go through 2018 in your inventories?

If go along the current volumes by and large reflect where we think the volumes would be for 2018. So we don’t see any substantial increase in our operating working capital absent the volumes continuing to decline. We did have some build in our inventory in the fourth quarter of 2017, largely because the production schedules of certain of our OEMs became -- started changing. And so, we ended up with more raw material than we had anticipated, but we’ll use that, we fully intend to use that here early in 2018. So, the operating working capital taken as a whole as you know tends to fluctuate into mid to upper teens it’s up just a little bit, but it’s not extraordinarily high. So I don’t -- long way of saying, I don’t expect there to be any further dramatic increase in operating working capital unless the markets just really take off.

Okay. One more for me and then I’ll pass it along, I promise. And it’s about the outlook for 2019 for Class 8 trucks, Pat you kind of alluded to it’s been somewhere of a flattish maybe even up year if the planned things turnout and I kind of want to get a feel for if you have a similar mix year-over-year, or if it’s a very similar market in 2019 as is in 2018, I am kind of curious what does that mean for CVGI, I mean, are there additional platforms that you’re going to be kind of ramping on throughout 2018 here. And so if it’s a flat market could CVGI see some share gains in 2019 based on what you know today?

Well we don’t typically talk to share directly Mike, but I would say this we’re in process of ramping up some of the platform started ramping up in January. And so there’s been a few hiccups on those things at our customers and consequently we’ll see that ramp continue through this first part of the year. And once those things get stabilized I think the thing we would be looking for is not being in a state of flux. So Tim talked a little bit about the inventory. There are production increases across the board in North America specifically in truck as well as construction throughout 2018. So as things become more stable it certainly bodes well for us from getting some of our things -- some of our productivity levels and some of these other areas in control.

Okay, I will leave it there. I’ll hop back in queue. Thanks, guys.

Thank you. [Operator Instructions] The next question is from Barry Haimes of Stage Asset Management. Your line is open.

Thank you. Had a couple of questions, I’ll just go one at a time here. First, just steel and aluminum obviously affected by the tariffs, could you give us a feel for what percent of your costs of goods sold is from steel and aluminum?

We don’t use much aluminum, right?

Yes, so we don’t use much aluminum. I would say that I think when we look at our costs of goods sold we talk about metals, which includes more than just steel that includes the small amount of aluminum and a little bit of copper, which we use in our wire harness business is around 40% of our COGS.

Great, thanks. That’s helpful. And…

Add some color Barry to that, in light of some of the tariff thing. So it’s not clear exactly how that’s going to impact us, some of the exceptions that have been made were helpful to us as well as the fact that when we go through some of the harmonized tariff codes we see a lot of the things we buy, we don’t buy straight deal, we tend to buy fabricated and value added components. So far I think the biggest effect we will see from that is just what happens in the market dynamics inside North America. So as far as the direct tariffs, I'm not sure we’re going to have a lot of impact on that and what we’re looking more at is what will it do to the domestic market pricing.

Great, thanks. And then second question…

I somewhat mitigated from that…

Yes, I may want to mention that too, so that was a global number I gave you by the way.

Got it. The second question just to get a feel is if you take your projected sales for the year for 2018 and you said how much of those sales are already priced to the customer with no ability to renegotiate second bucket price, but you’ve got raw materials pass throughs with that three to six months lag you mentioned will go through. And then third bucket, haven’t been priced yet or you haven’t made the sale yet and therefore you’ve got more of an ability to recover on price can you give us some rough guideline as to where we sit?

Right, well so Barry we just don’t slice it that way, okay, and the way we look at the business I can tell you this is that as you can appreciate most of our large customers we have arrangements with long-term agreements. And for the most part those agreements provide for recovery of raw material increases or give back in the case of decreases. The issue is a delay in the give back or the recovery. So I don’t view that as too much of an issue. Another bucket you mentioned were relationships we have with customers on an ongoing bases that we don’t always have long-term agreements with. In those cases we intent and in fact are and went into discussions with them to pass through some or all of these increases. So those discussions are underway. We have plans in place and we are approaching them rather ambitiously. And then the final been our customers and sales that we don't have sort of booked yet, and we’ll price those in appropriate level when the time comes. So aside from that I can't slice it anymore finer.

Okay, great. That's helpful. And then just one last fairly quick and easy question, I think you mentioned the D&A number for 2017. But I didn't catch it if you could repeat that? And then to the extent you've got a budgeted number for D&A for 2018? Thank you.

Right. So for 2017 the depreciation expense was $14 million and the amortization expense was $1.3 million. CapEx in 2017 was $13.6 million. We don't provide any forward-looking information with respect to D&A, but I can -- you can sort of scale it yourself with the historical spend. We do plan to spend somewhat more on CapEx in 2018 and we you have $15 million to $18 million in our business plan.

Got it, thank you very much. Appreciate the help.

Thank you, Barry.

Barry, I want to make a quick correction. So on the total metal spend including copper and steel and aluminum, of which steel is the biggest part of it, it's 55% of our COGS. I'm not sure where 40% came from, but it's 55%.

Okay, got it. Thank you.

All right. Thanks, Barry.

Thank you. [Operator Instructions]. The next question is from Mike Shlisky of Seaport Global. Your line is open.

Okay, hey guys thanks again. A couple of quick model questions here. I guess, first, I was trying to see if you can give me a sense as to the SG&A for the year. You had a solid job holding the line in 2017. On your corporate costs piece for 2018, do you think you can hold the line again in the coming year?

We've done, I think a very admirable job of managing our SG&A, Mike, to your point especially in the context of these improved sales. I don't expect them to rise dramatically in 2018. There might be some upward drift to small amount. But I don't expect them to rise dramatically from where they're at.

Okay. And the other one for me was about your interest costs. It was down year-over-year, but it was also down about 10% quarter-over-quarter, if I'm not mistaken. And I was curious whether the flat $3 million you had in the fourth quarter is the appropriate run rate going forward as well given your recent changes?

The fourth quarter of 2017 should be a pretty good reflection of our run rate. Now we are in a rising interest rate environment. We have $80 million of the debt swapped out so that's fixed. But the rest of it is floating. So if the interest rates continue to drift up a little bit, I would expect there to be some increase going forward on the interest expense, but absence some very, very dramatic increase in interest rates, it shouldn't go up by a whole lot.

Okay, got it. I'll leave it there, guys. Thank you.

Thank you. There are no further questions at this time. I like to turn the call back over to Patrick Miller for closing remarks.

Okay, well I appreciate everybody taking time to listen to us today. I want to just wrap up with the fact that our markets and top-line direction is very strong. We saw the increases in the third and fourth quarter 2017, and we see further increases in 2018 and then carrying over to '19. So we do have some headwinds on the cost side and we're working diligently on those. I have belief that we will be able to pass through and get some of the commodity recoveries and that will start at the end to reflect it in the near future. As Tim mentioned, that's usually a three to six months process, but it's one we’ve been historically pretty good at. So thanks again everybody for joining. Appreciate your time. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day, everyone.