Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Commercial Vehicle Group 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 be given at that time. [Operator Instructions] And as a reminder, today’s conference call is being recorded. I’d now like to turn the conference over to Terry Hammett, Head of Investor Relations. Please go ahead.

Thank you, Candice, and welcome to our conference call. Joining me on the call today are Patrick Miller, President and Chief Executive Officer of Commercial Vehicle Group; and Tim Trenary, Chief Financial Officer. They will provide a brief company update as well commentary regarding our fourth quarter and full year 2018 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 initiatives and 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 as detailed in our SEC filings. And now Patrick Miller with a brief company update.

Thank you, Terry. And thank you, everyone, for joining our call this morning. We delivered strong results for 2018, with revenues reaching $898 million, representing 19% year-over-year growth driven for the most part by increased heavy-duty truck production volumes and continued strength in the global construction equipment markets. We also grew operating margins for the year, 330 basis points, driven by the completion of our restructuring and cost optimization initiatives, our operational excellence program and the higher revenue. While we continue to experience some labor and material cost headwinds, we were largely able to offset the impact of these headwinds last year. In February, we announced the reorganization of our business to align with our product segments versus industry markets. I will provide some color in this in a – on this in a moment. This was a strategic move to position our business for accelerating growth while leveraging the attractive industry trends impacting on our markets today. Let me quickly touch on the performance within our segments. Electrical Systems experienced broad-based strength compared to a year ago, delivering an 18% increase in revenues and a 45% increase in gross profit. We also successfully remedied a major capacity constraint created by labor shortage experienced in our wire harness operations in Mexico. The resolution of this constraint taken together with cost control and cost recovery initiatives and the completion of the facility restructure in 2017 drove the substantial increase in gross profit and 66% in operating income in 2018. Turning to Global Seating. Our results reflect strong growth with revenues and operating income up 21% and 68% year-over-year, respectively. The primary driver was strength in our end markets and cost containment and recovery initiatives we put in place to address rising material costs. Tim will provide more details in a moment…

Good morning. Before I review our financials in more detail, let me first provide a quick overview of our realigned segments in our end markets. Our segments, Electrical Systems and Global Seating drive approximately 70% of their sales from the global medium and heavy-duty truck and the construction equipment markets. In 2018, both of these markets performed very well. We also sell into the Boston light vehicle markets, the specialty and recreational vehicle markets, the industrial market and other markets. In terms of geographical presence, Electrical Systems sells into the truck and construction equipment markets, primarily in North America and Europe. We saw wire harnesses into the construction equipment and other industrial markets, trim and structures into the truck market in North America and wipers into both markets, but primarily in North America. Global Seating maintains operations in North America, Europe and Asia. Within the segment, truck seating sales are primarily in North America, where we have a leading market position in Class 6 through 8 trucks. Our truck seating business in Asia Pacific, particularly in China and India, is growing. In the construction equipment markets, Global Seating participates in North America, Europe and Asia Pacific. Majority of these sales are in Europe and Asia, where we believe we have a strong market position in medium and heavy-duty construction equipment. Turning to our results. For the fourth quarter 2018, consolidated revenues were $223.6 million compared to $188.3 million in the prior year period, an increase of 18.7%. This performance reflects a large part the performance of the medium and heavy-duty truck markets in North America, but also a strong global and construction equipment market. Class 8 truck build in North America increased 25% in the fourth quarter of 2018 compared to the prior year period, and truck build for Classes…

Thank you. [Operator Instructions] And our first question comes from Willard Milby of Seaport Global. Your line is now open.

Hey, good morning, gentlemen. I wanted to go back to what you just said about the, I guess, the Mexican minimum wage increase there. The headwind, I think, you called $5 million. But I guess, you took some actions to address that and the run rate for 2019 is $2 million to $3 million. Just wanted to clarify that real quick?

That’s correct. And I wouldn’t necessarily think we’ve taken all of the actions, but Will, we’re in the process of taking a number of actions that we believe will benefit us throughout the year. And as you said, by my sizing, at least, ultimately end up impacting the year 2019 by $2 million to $3 million.

Okay, okay. And wanted to talk a little bit about, I guess, the input cost headwinds and labor cost headwinds that, I guess, are still lingering to a bit. I know you’ve taken some actions with the Mexican plants and training opportunities and various on-boarding initiatives to kind of retain employees and alleviate the situation there. But I was wondering, a little bit – maybe more in the cost controls and recouping elevated input cost, what actions are being taken there? How the conversations with the customers go as you look to kind of offset some of your elevated cost? And as you look at each individual segment, maybe what are the headwinds, if you can kind of slice and dice the numbers here, to the margin at each segment right now versus where – what a more normalized maybe input cost level would be?

Okay. So you have a lot of questions on your side there. So we’ll put…

We can take one at a time.

So the first thing is, how we’re going about mitigating the pressure and the cost on – labor availability is really what it comes down to, that’s what’s driving the inflation. It’s not in one region, it’s actually spread out all over the globe for us, and so we’ve had challenges in most of the countries in which we operate in some level or another. Couple of years ago, we really started an aggressive campaign to address and improve our work environment through employee engagement activities, through infrastructure development and investment in the buildings and the workspaces in which our employees operate. We’ve always had a strong focus on safety, but these things really were more related to the various types of work they do. We’ve been digitalizing our processes to make it more consistent and repeatable. You can imagine when the volumes go up this fast, is what they’ve done in the last couple of years, it can drive some inefficiencies and some lack of standard processes inside our operation, which are kind of detrimental to the employee environment. So we’ve worked really hard to improve that arena, and we’ve done that everywhere. You mentioned the training, we’ve really got a broad-based set of training development programs that we’ve implemented. We’re doing things like language lessons and a volunteer language lessons for anybody interested in either in our Spanish-speaking plants, they learn English, in our English-speaking plants, they can learn Spanish and these type of things. So we think those have had a positive effect. You mentioned standardized on-boarding, when you really need people badly, it’s – it is enticing to just throw them into the operation and not treat them – train them as well as what you normally would. We’ve been very diligent about not doing that…

No, I think you got most of them. I think I just wanted to ask on, I guess, maybe margin headwinds. What do you think is possible, I guess, to be addressed within each segment? Maybe what’s the drag you’re experiencing in each segment if you kind of spit it out that way? And what you think can be addressed in 2019?

So Will, it’s Tim. I – let me answer your question this way. There is – over this past 18 months or so when we’ve been dealing with these pressures and measuring than there is – just because of the nature of the business and the global nature of our company, there is a fair amount of, I don’t know, art is a little bit of a exaggerated term, but it’s not a precise science, okay. Suffice to say that during the year, as Pat mentioned, that process we ran, that – those measurements we ran, we believe by our reckoning that we have recovered the majority, the vast majority of these material cost pressures on our business. There has been some leakage and there is some continuing efforts on the part of our commercial and to a lesser extent our procurement organization to recover those going into 2019. Now as regards to the impact on 2019, I’m reasonably optimistic that we will to the extent we have some additional work to do on what transpired in 2018, that we can saw some of that off. I think, as Pat mentioned, the commodity pressures are easing moving into 2019, so perhaps they won’t be as challenging and the supply chain, I think, difficulties are abating a little bit. So while there may be a little bit of additional improvement in margin associated what those recovery actions, there’s also some additional risk. So sort of having said all of that, the company’s operating income margin in 2018 was about 7.5% that’s an EBITDA margin of 9%. So I mean, that’s – those are pretty good margins for this business in this environment. And we’re quite happy with where it ended up and with our ability to manage these – this margin compression, and we feel good about 2019 in that regard.

Right. I appreciate the color there. Thanks for that. I heard you mentioned, I guess, some recent slowdowns here and moderation, I think, was the wording in China in recent weeks and a strong North American construction markets. But I didn’t hear too much on Europe or maybe I missed it. What’s your outlook or view on Europe right now and for 2019?

I’ve read some of the broader European news around some softening in their overall GDP. For us, though what we’ve seen so far in the first part of the year is the volumes have been very strong. Now we’re trying to make sure we understand whether any that’s related to some preparation in regards to Brexit. As you know, we have operations in the UK, a shift in the Europe, and then we have operations in mainland Europe as well. In general, we’ve seen a pretty healthy volume so far. And we can see probably into the first half of 2019. And at least, on the construction side of the business, I think there’s been – as you may know in our makeup, we’ve got a little bit of light vehicle in Europe. And some of that light vehicle has a little bit of softening, but the rest of the construction side and that side of our business has been pretty strong. So we’ve not seen any detrimental impacts from some of the proposed softening in Europe.

Got you, got you. Also kind of maybe sticking in Europe and then pivoting maybe to wire harnesses. I think Volvo had an announcement beginning of this year, making some fully electric lighter, I guess, construction equipment. Does that – I guess, for your business for maybe – for your strategy, does that kind of business fit where you see your wire harness business going that lighter construction market? And I guess, B, is that fully electric construction market something that, I guess, would buds up against your business well? In general, is that something that you see and may be making some inroads in?

So we supply electrical wire harnesses today into electric drive powertrains. And so as things move that direction, when we kind of look at the differences between the vehicles, there is pretty good content for us in that arena, and we don’t have great concerns of any major transformation on that front. I think some of those vehicles that Volvo unveiled, if you’re referring to what I think, were around the mining applications, some of that kind of drone vehicles that will run around a large mining operation, those are certainly things that we can – that we are and can be a part of. And so that transformation, I think, in some cases has already happened on some of the markets we participate, and we’re part of that. So I think if I understood the gist of your question.

No, no. That’s great. And also speaking about wiring harness, what’s the current, I guess, penetration of those digital design boards within the business? I think you had a handful, maybe within the last couple of quarters, but we’re looking to significantly ramp your use of those. Can you talk about the penetration of that technology and how that’s grown margin within that business?

I’m trying to do the math here real quick. I don’t remember the exact number of boards. But I would tell you that we’ve double down on the investment in that arena. We probably are about little over 50% into the implementation of the newest round of investment. As we’ve announced, we are – we’ve made some investments in a new operation in Mexico to expand our wire harness capacity outside of the region that we’re in today in Agua Prieta and new facility would be in Morales, Mexico. We expect that operation will have predominantly digital boards. I think those digital boards only make up probably, I’m going to estimate, okay, because I don’t have the exact numbers, 20% once we get them fully implemented this first round of investment. And we will continue to migrate those. Now they’re not going to work on everything, because there are some harnesses that are too heavy for the current structure. We are evolving, so we’re learning, and we’ve been able to add more and more things to the digital application. But it won’t be able to go across the board completely, I think, from the type of work we do. And so that’s kind of where I would tell you we are.

All right. I appreciate all the comments. Two quick housekeeping things, and I’ll turn it over to – back – and I’ll jump over in the queue here. The interest expense in the quarter, a little bit elevated sequentially here. Was there any kind of one-time lift in that? Or maybe what’s a good run rate as we should think about for modeling for 2018?

Well, you might recall that $80 million of our variable rate debt is fixed, we have an interest rate swap, an $80 million interest rate swap. And so every quarter, we mark that to the market. As you know, the interest rate environment relaxed a little bit recently, and so that mark turned a little bit against us, so it’s non-cash charge in the fourth quarter. To your question about modeling going forward, absent some significant aberration in interest rates in 2019, I think $4 million a quarter would be good for interest expense, absent any of the swap marks.

Got you. Okay. And lastly, with the reorganization of the business kind of thinking about just quarterly cadence. Is there anything we should be aware of – any – maybe quarters, in particular, where there might be spikes or troughs in business that we should look for when kind of looking out 2019, 2020?

No, I don’t think that our reorganized business will behave any differently than it has in the past with respect to the modest ebbs and flows during the year. I mean, you go back and look, I mean, the fourth quarter is a little lighter on the sales generally because of the holidays and other activities going on. So it should be a similar ebb and flow during the year.

Okay. Thanks, guys. I appreciate the time this morning.

Thank you. [Operator Instructions] And I’m showing no further questions at this time. I’d like to turn the conference back over to Patrick Miller, Chief Executive Officer, for closing remarks.

Well, we’re energized by our new organizational changes, and we’re optimistic about the coming year. I want to tell everyone thank you for joining the call. And we look forward to future discussions. Have a good rest of the day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.