Good morning, ladies and gentlemen, and welcome to the CVG's Second Quarter 2021 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Chris Bohnert, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and welcome to our conference call. Joining me on the call today is Harold Bevis, President and CEO of CVG. We will provide a brief company update as well as commentary regarding our second quarter results, after which we will open the call for questions. This conference call is being webcast and a supplemental earnings presentation is available on our website. Both may contain forward-looking statements, including, but not limited to, expectations for future periods regarding market trends, cost savings 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, 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. I'll now turn the call over to Harold to provide a company update. Harold?

Thank you, Chris, and good morning everyone. We're going to refer to our earnings presentation that's posted on our website if you wish to access it. And on today's call, we'll provide an overview of our second quarter results followed by an update of our strategic initiative, designed to grow earnings and expand our end market participation. We have a goal to increase the stability of our earnings, and Chris will discuss our financial results in more detail and we'll then conclude by opening the call and answering your questions. I'd like to acknowledge that efforts and contributions of our global team throughout the second quarter, our sales and product teams contributed significantly to our ongoing growth and diversification initiatives and our entire workforce battled through our ongoing supply chain constraints and COVID concerns, but remain focused on exceeding our customers' quality and delivery expectations. We're proud of our global team and look forward to more in-person employee celebrations and more active community outreach programs as the economy fully reopens. So let's review the big picture on our results. Turning the Page 4, we delivered record sales for the second quarter of $258 million or almost double the amount of sales of a year ago. This strong growth was driven by COVID recovery, new business wins between then and now, and demand growth in both the warehouse automation and global vehicle markets. Warehouse automation continues to be a powerful engine for growth as we delivered $52.3 million in sales, representing 25% sequential growth and are tracking to likely exceed our full year goal of $150 million in warehouse automation sales. Our operating income increased to $16.3 million in the second quarter, which compares favorably to a loss of $10.5 million in the year ago second quarter. The improvement was largely…

Thank you, Harold. If you're following along in the presentation, please turn to Slide 12. Second quarter 2021 revenues were $257.9 million, a quarterly sales record for our company. Revenues increased to 103.3% compared to $126.9 million from the prior year period. This increase reflects the substantial increase in the warehouse automation business and the significant increase in the global demand for the vehicle end markets, which were heavily impacted by the COVID pandemic in Q2 of 2020. On a sequential basis, our revenue increased 5.2% over first quarter 2021 revenue of $245 million, which was also a sales record for the company. Foreign currency translation favorably impacted our second quarter revenues by $6.8 million or 5.4% when compared to the prior year period. Our gross margins expanded approximately 820 basis points to 13.3% as compared to the second quarter of 2020. The margin expansion continues to reflect our renewed focus on improving our business mix and the efforts to offset the significant cost inflation we are experiencing in our supply chain. The key drivers of the margin expansion were volume leverage, business mixed shifts toward the warehouse automation end market and operational cost improvements as compared to 2020. The company reported consolidated operating income of $16.3 million for the second quarter of 2021 compared to a net loss of $10.5 million in the prior year period. And on an adjusted basis, operating income was $16.6 million compared to a loss of $3.6 million in the second quarter of 2020. The improvement was primarily attributable to the higher sales volume improved mix and an improved cost structure. Adjusted EBITDA was $21.6 million for the second quarter, which was up considerably as compared to $1.2 million in the prior year second quarter. Adjusted EBITDA margins were 8.4% reflecting an improvement of…

[Operator Instructions] And your first question comes from Chris Howe with Barrington.

Good morning, Harold.

Hi, Chris. Good morning.

This is a great quarter. And…

Thank you.

I have a lot of questions here lined up for you, but I'll try to find the more important ones. You talked about warehouse automation, the growth that you're seeing there now 20% of Q2 sales, a good sequential growth. If we take that into consideration with the slide that outlines the net new business awards related to electric vehicle, I think, it was 55% of the pie, which would be about $71 million, thinking in terms of that how do you expect the relative size of opportunity between the two environments electric vehicle and warehouse automation to play out as a mix of business as we further diversify away from the more cyclical areas of the business longer term?

Yes. That is a primarily a question of timing.

Yes.

So the warehouse automation wins and also the wins that we get into – in recreational vehicles, ATVs, and that sort of thing are short cycle and shorter term ramp-up. So, the amount of wins that show up in our quarterly profiles are skewed towards warehouse automation right now, because they're faster ramp-ups. The electric vehicle wins are skewed out a few quarters after that because a win in that area means that you're selected to do the prototyping and then the new vehicles that go into the final test and then the hard tooling and then the production ramp-up. So there is a delay there. So if you go on a pro forma basis, Page 9 is what we're going to look like. So the electric vehicles are going to be a larger proportion of our new business. Our core business is growing our legacy business also because of the outlook for trucking and transportation of goods. And of course in North America, the Biden infrastructure packages heavily skewed towards the transportation. So the core market is going to grow, and I think that percentage is going to hang in there, but on the new business at or that we're putting in here in the mixed shift, electric vehicles are going to come on stronger.

Perfect. And the incremental growth that you saw in warehouse automation, the 25% sequential growth, what comprised that growth as far as the number of new wins that came to fruition in the quarter versus mainly further existing share of wallet wins, can you kind of characterize that growth in quarter?

Yes, we're doing two things. We are participating in volume growth, that's occurring in the segment and we also have expanded our product offering and the business wins that we had here were all tied to product additions to our portfolio. And so, it was twofold. I don't know, Chris, do you have a sense of that ratio there?

Yes, Chris, the bulk of it in the second quarter was the expansion of existing business. The new wins that we got, we'll see more in the third and fourth quarter.

Okay. And then one last question and then I'll hop back in the queue and leave it for others. But warehouse automation, if we go back to the very initial innings granted, we're still in the early innings of this opportunity. The gross margin profile was characterized as being accretive. Can you talk about how that gross margin profile of warehouse automation has evolved as you gained more learnings in the environments and gained further understanding of the potential for growth?

Yes, Chris, this is Chris. I think the initial business that we picked up was mildly accretive as we've said on previous calls. As Harold mentioned, in his notes, we're picking up new business that's a little more complicated, I would say. And those margins are going to be, I guess, a little bit higher than the existing core business that we have today. So some of these new pieces of business have more complex assemblies, more complex panels and things like that. I wouldn't expect that these margins are going to grow up tremendously, but they generally are accretive overall to our legacy business and the new wins are a little bit more accretive than the existing wins that we have.

Okay. Thanks for taking my questions.

Thanks, Chris.

And your next question comes from John Franzreb with Sidoti.

Good morning, guys. How are you, Harold and Chris?

Hi, John.

Good. Good morning.

I just want to go back to – question. You talked about anticipated [indiscernible] during the third quarter is what you alluded to more acute in one segment versus other?

Well, the gross margin percent are – we're having a lot of cost pass throughs right now with inflated materials and the cost pass through price negotiations with customers, they're very sharp to not let us have extra margin on cost pass through. So it's compressing our percentages as we go through that. And I would say its commodity based, John. So if you look at inflation that's happening and how it ties to our types of materials, we buy steel as a big one. So anywhere we will use steel is having that dynamic and then inbound freight. So when we have inbound freight, our global supply chains, the price containers and the price of ocean going freight has gone up. So it's tied into our components we use in the material and entered our supply chain strategy. So I would say probably skewed towards seating, Chris, versus electrical in terms of our reporting segments. So, I would say, it's going to be focused in that area, John.

Great, that actually helpful. And in the warehouse automation business, I guess, a couple of things there. Harold, it sounded like you're increasing capacity in that business. Can you give us a sense of how much you're increasing it by? And how has that changed your CapEx plans for the second half of the year versus the first?

Yes, the warehouse automation business is CapEx light, so it's primarily an assembly business, to Chris's point it's complicated assembly and these experienced assemblers, but we primarily by the bill of material, we have just a few main parts in that arena as assembly and testing and checkout. And so, it's floor space. It's low-level lighting, its [indiscernible], its torque wrenches; it's that kind of thing. It's not heavy on the capital side. However, it does pull through a working capital profile and you'll see that our working capital went up it's around 16.8% of sales, which is what we average in 2019. That's kind of a normal level for us. So it primarily pulls along with that working capital and we have to front end load it, because we have to build in the inventory profiles to initiate production and the supply chains for circuit boards and all that kind of thing. We have up to 52-week lead time. So we're putting in a decent amount of inventory, so that we can continue to grow in the market. And you've seen some of the pronouncements from some of the big e-commerce shippers. So they have their foot on the gas. So we're trying to stay synchronized with their expectations on putting in new warehouses to do parcel distribution and last mile delivery.

Okay. And I think Chris said that the warehouse automation should be danced eventually in terms of revenue through the new builds. Could you please provide some followers with that statement?

Yes. So our customers will move into a new build cycle John as they implement new warehouse builds. And so they have a somewhat seasonal approach to their build. So they'll contract out their business for an annual basis. And the kind of a gap period is right now, and so we're going to have a little bit of a dip in the revenue in the third quarter. And then that should increase in the fourth quarter and the next year as they continue to build into the coming quarters. As we say that we're still expecting to hit $150 million in revenue for the full year.

Okay. I guess one last question on the debt re-financing; it looks like you actually added debt – net debt to the balance sheet what was behind that decision?

Yes. It's all working capital, John. Our revenues have gone up tremendously, so there's timing around when we sell product and ultimately collect versus build the inventory and buy the product. So some of this is timing. Overall our working capital as a percent of sales is fairly consistent with last year, and our overall leverage is actually down from Q1.

And I guess I'm going to stick us in. We will kind of – what are your thoughts about debt repayments? How does the new refinancing change that one way the other?

Yes. So we have a – in the new debt deal, we have a structured amortization pay down of the debt. So that'll start in the third quarter. So we'll report that out in the third quarter. It's in the – the details are in the debt deal, and so it's a structured pay down on the Term A, note.

Got it. I got it. Thanks for taking my questions. Great quarter.

Thank you, John.

Thank you, John.

[Operator Instructions] And your next question comes from Barry Haimes with Sage Asset Management.

Thanks so much for taking the question. Great quarter. Two questions actually. First one is could you talk a little bit about your truck business in terms of whether the chip shortage that they're facing is affecting or pushing at any of your deliveries to them or is that pretty much on track? That's the first question, I've got another.

Yes. It does affect us. It's putting a cap on the industry production cycles globally. And so it's actually beneficial a little bit because we haven't had the traditional purpose up and purpose down in terms of truck building. So the truck – the truck build rate is steady because of that, and we have a steady outlook there. Intel CEO announced two weeks ago that he thought that the chip shortage for last for two years and we read like everyone else on this. We're not in that business. So the market forecasters for our industry are adopting that outlook and are suggesting that it's going to be steady production builds for several years because of that. So it's impacting us. Yes.

Okay, great. Thanks. That helps me. And you're right. If it's moves out the cycle, especially could be a good thing. Second question is, could you talk a little bit more about the recreational and specialty vehicles space may not be as sexy as the EVs or the warehouse, but it strikes me that that's a very big potential market. So could you just talk a little bit about what you're trying to do there, what you're not trying to do there and how big could that get over the next couple of three years? Thanks.

Yes. Okay. So there's some big public filers public reporters here. One of the ones that we read and follow is Polaris, and what they say the industry is going to do or not because they're a global powerhouse of many types of vehicles. And they're suggesting that there's a big backlog here. And the COVID change in habits has led to many people seeking that type of recreational activity. So the demand is strong on specialty vehicles for us also includes military vehicles, buses, transit vans, beer delivery trucks, all that type of ambulances as far trucks at those types of ancillary vehicles that are not high volume. But they're complicated and good. We've always been in those businesses traditionally in seeding, and one of the things we started a year-and-a-half ago was to bring our full product basket to those industries. And so we've been pursuing the specialty plastic parts as well as the wipers, if they have windshields, mirrors and the electrical system. So we've been a big – we've taken our full product basket to go after both of those industries and they're doing well. And we have some customer connectivity because of our legacy relationships from seeding and we've had expanded the product offerings that we've had there. And it's turned out to be good. You can see it on our new wins chart. It's starting to show up on our doughnut chart that we're getting bigger on those areas. So it's a focus area for us.

Great. Thanks so much. Appreciate the color.

Thanks, Barry.

And there are no further questions. I will now turn the call over to management for closing remarks.

I want to thank everyone for calling and supporting the company. And we're very focused here on our strategy realignment and we're benefiting from this hard earned success. And we're still dealing with COVID, but we're safe and have a safety, alive and well at the company. And we look forward to reporting continued progress in our next quarterly results. Thank you for your attention today.

This concludes today's conference call. You may now disconnect.