Good morning, ladies and gentlemen and welcome to CVG’s First Quarter 2022 Earnings Conference Call. 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. This morning, we will provide a brief company update as well as commentary regarding our first quarter 2022 results, after which we will open up the call for questions. As a reminder, 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 will now turn the call over to Harold to provide a company update. Harold?

Thank you, Chris, and Good morning, everyone on the phone. On today’s call, we’ll provide an overview of our first quarter 2022 results, followed by an update on our progress to improve our company. Our intent is to position CVG to deliver higher and more stable results, and we’ll give you an update on the key components of that. And following my remarks, Chris will discuss our financial results in a little bit more detail, and we will conclude by opening the call and answering your questions. During the first quarter, we made significant progress, and at the same time, our operations were impacted by a challenging environment with global supply chain constraints, cost inflation, COVID lockdown in China and the Russian-Ukraine conflict. We’re going to touch on these points this morning. And these headwinds tempered our first quarter results and are continuing in the current quarter. That said, we made meaningful progress repricing our legacy Class 8 OEM business, while continuing to experience strong new business win activity, which is positioning CVG for improved results in the second half of the year, especially in electrification and electric vehicles. Please turn to Slide 3 in our earnings presentation. You’ll see that we delivered first quarter sales of $244 million, which is close to flat with the year ago first quarter, given the headwinds that we suffered this year from the COVID lockdown in China and the Russia-Ukraine conflict, which directly impacted our quarter. Our operating income was $8.4 million in the first quarter compared to $15.4 million last year. This decline was due to lower unit volumes and significant increases in inflation, given the global supply chain challenges that had persisted during the quarter. We also experienced high start-up costs associated with our new business wins. Excluding the impact of…

Thank you, Harold. If you are following along in the presentation, please turn to Slide 13. First quarter 2022 revenues were $244.4 million, primarily unchanged as compared to prior year’s $245.1 million, really due to the supply chain constraints Harold talked about, the COVID lockdowns in China, the Russian invasion of Ukraine, which is affecting our Lviv operations and the on-pace demand in Warehouse Automation due to a normalizing economy. While we experienced an impact to revenue and expenses due to factors that are largely out of our control, we’re aggressively managing this environment and has successfully implemented price increases on our legacy Class 8 OEM business, as Harold mentioned, to offset the severe inflation impacting our business since the second half of 2021. Foreign currency translations favorably impacted our first quarter revenues by $1.1 million or about 0.5% when compared to the prior year. Gross margins decreased slightly to 10.4% as compared to last year, but were up slightly compared to Q4 as we moderated our expenses and continue to increase prices. We did experience substantial inflation costs as well as, as Harold mentioned, $3.1 million in business startup costs in the quarter. The company reported consolidated operating income of $8.4 million for the first quarter of 2022 compared to $15.4 million in the prior year period, a decrease of 45.5%, primarily due to the significant inflation of raw product costs, new business start-up costs and operational transformation expenses. On an adjusted basis, operating income was $9.5 million, a decrease of 39.5% – 39.9% compared to the first quarter of 2021. Adjusted EBITDA was $13.5 million for the first quarter as compared to $21.1 million in the prior year. Adjusted EBITDA margins were 5.5%, reflecting a decrease of approximately 310 basis points as compared to adjusted EBITDA of 8.6%…

Your first question is from John Franzreb with Sidoti & Company. Your line is open.

Good morning, Harold and Chris. Thanks for taking the questions.

Good morning.

A lot to unpack here. So let’s, I guess, start with an update on the Ukraine. Can you talk a little bit about the impact on the P&L and what we should expect on a go-forward basis there?

Yes. We were impacted in the first quarter by what happened in the Ukraine. I – for those of you on the phone are not aware of that, we have a $50 million business there, that’s very profitable. And it was directly impacted by the Russian invasion of the Ukraine. It is on the West side of the country. But we have – there have been bombings in our area, and, of course, the whole country has been impacted. And it hurt us in the first quarter. We actually are having recovery in this quarter on what happened. And our – we are working with our top customers there. Our top customer is Volkswagen, and they have put their name connected to us in the public news. And we – our goal is to get back to full operating income recovery, and we’re on the path to do that, John.

And how much of revenue was lost for one award?

It was not as much revenue lost as profit. So we had to do a lot of work around a lot of expedites, a lot of extra costs. We moved some production to the Czech Republic. We built two new plants in the Czech Republic. So we have some extra rent that we didn’t have before extra overhead. And then we were able to go back to Volkswagen and asked to adjust our prices. And that’s a transparent conversation to prove what your costs are and we were able to do so. So it’s at that traditional lag that we get in our industry, maybe a lot of industries. And so we intend to have full recovery, John, of the profit compression.

By when?

I hope to get most of it in this quarter.

Meaning second quarter, John.

Second quarter.

Okay. Got it. Got it. Okay. And then if you could talk a little bit about the renegotiated contracts. Is it fair to assume you still have a $1.5 million or so op income headwind from those two businesses? And is there still another contract that remains to be renegotiated or not?

Yes. So those two customers represent quite a few global contracts for different products. They both buy almost everything we make.

Okay.

And so the recovery, one of them – one of the recovery starts now and one of the biggest one starts on July 1. We have many other contracts. We’ve previously said that we still have one big top contract that doesn’t expire . All the rest of the smaller contracts we’re renegotiating right now in this quarter. And we’ve initiated a lot of unplanned price increases based on inflation that we incurred in Q1 and those actions are underway. So I’d say 90%, John, of our business contracts were going after price increases right now. One big one is going to lag until second quarter of ‘23. And then the other point, John, I just wanted to add on to your Ukraine comment. The China Shanghai lockdown had an equivalent OI impact on us as the Ukraine. That’s a very profitable business for us. It was completely shut down. And we get a lot of parts from Shanghai as well for North America. And we incurred in Q1, almost $1 million of air shipping. So we’ve incurred excess costs due to the – this Shanghai lockdown and we had to stop our own production in the region. So the China lockdown which is now easing and started on Monday of this week, we were added to the white list, if they call it there as a key supplier to Volvo, and we were able to initiate some production. So that event, like you said, there is a lot to unpack that one was equivalent income impact to our quarter as Ukraine.

Alright. And I’ll ask one last question and then get back into queue. Regarding the start-up costs, it’s kind of a good, bad thing, but it did jump up sizably both sequentially and year-over-year as you pointed out, Harold. How should we think of that on a go-forward basis? Does it stay at this level? Does it reset back to one something number? How do we – how should we look at that?

Yes. We’re at a peak. Those are peaking right now, John. And the hardest one was our new seat program, which we were just bragging about. It was tremendously hard. And when we started the program, it was just prior to COVID. And we had used our 20-year suppliers that are in China, and everything was fine with global sourcing when we started this program, we ended up putting over 40 dies into five suppliers in Shanghai area, some of which are shut down right now. And it led us to a lot of air shipping in Q1 for our – some of our startup customers, two electric truck companies, our launch customers, two new truck companies. And we’re making the seating for them, and we had to air ship parts in because the containers of our parts were stuck in the ports and stuck in the finished good warehouses of our suppliers. So it’s already easing. And at the same time, our Board of Directors supported us with putting duplicate dies into Mexico. So, one of the biggest components of our inflation year-over-year was ocean freight, which inflated to a high number. We have over $10 million of it and airfreight has lifted off with this – the shutdown. So our goal is to get rid of in-transit freight costs by regionally producing the parts we need. And we are actually targeting a dramatic take-down in those costs by implementing regional production in Mexico for North American production. So given how high the start-up costs were with the seating program, we also put a self-imposed moratorium on ourselves until we got steady state part flow before we reboot on a very, very vibrant pipeline of opportunities we have. So I think they are at a peak right now, John.

Okay, as promised, I will get back to queue and thank you for taking the questions.

Thank you, John.

Thank you.

Your next question, sir, is from Chris Howe with Barrington Research. Your line is open.

Good morning, Harold. Good morning, Chris. Thanks for taking the questions. I wanted to follow-up on one of John’s questions about the mutual agreements with the two large customers, understanding you still have some work to do with some other contracts as well. But specific to these two contracts, I know they improve the profitability outlook for these contracts based on Harold’s numbers that were provided. But can you talk about the different avenues or options you have within these contracts for price adjustments as it relates to continuing inflation? Do you have the ability to perhaps pass through price more frequently than before? Can you talk about the adjustment mechanism underneath these contracts?

Yes. We made a dramatic improvement in our price maintenance algorithms. And we are – we have a ability to pass through. One of the contracts did not even have the ability to pass through material inflation, zero. And so we have put in for all of our main inflated materials, freight and the bill of material items. And in the largest one, we also have the ability to pass through labor inflation. Regarding the frequency of the corrections, they are similar. So we didn’t win that one. But I will also say, Chris, that we were able to get significantly better payment terms. And so we will have a free cash flow benefit of that in the second half as well.

Okay. Okay. Okay. And given these are two of your larger contracts at 30% of revenue, as you move downstream to, let’s say, small to medium-sized contracts, this also sets a level of precedence for perhaps even greater operating profit improvements with some of the remaining contracts. Is that fair?

Well, relative to these – I would say that these two guys got our best deals that we have given anybody.

Yes.

So – and they deserve it, I guess. And everyone knows one of them is Volvo, because we previously have said that publicly. We are not saying the name of the other one, but it is a big truck company, a winner, a global winner. And we have cordial relationships and everything was done professionally, and we have growth programs with both of them. So, we are not even trying to slowdown with them. They are winners in the electric truck market as well. But in the other areas, a big significant area is our aftermarket business. And you can do – probably have done some of the math on the increases here that we have set. And by the way, the numbers I gave you are conservative relative to what happened, and we are being conservative with setting expectations because we still have inflation headwinds and adversity in the Ukraine and China. But the numbers are bigger than that, that we were able to achieve. But in the other markets, generally speaking, we are increases our – increasing our pricing 35%, Chris. That’s kind of the way the math works out for us to. When we look at inflation, we have an inflation outlook and then how do we stay in front of this on a profit margin. So, that’s generally what we get, and we have had very little fallout. In other words, bulking from customers to just change suppliers. There is still a lot of pricing power in this market because it’s really hard to change suppliers, us included. And so generally, both parties are trying to arrive at a mutually satisfactory deal. But with those smaller customers, we are going for bigger numbers.

Okay. And then I wanted to shift to Slide 8. I thought that was very helpful how that was broken out the chart in the bottom right how it shows electric vehicles ramping towards 2025. If we exclude start-up costs and one-time costs, how should we look at, let’s say, the margin for that $28 million of sales in 2022? And how do you expect electric vehicle-related margin to trend over time?

Yes. The start-up costs, they are really differentially high for seating. And so for us, the start-up costs are mainly tagged to our product versus the end market. So, the electric harness part of it, I don’t want to say it’s easy, but it’s less costly to ramp up an electric harness win. A seating win is hard no matter what industry it’s in, it’s turned out, but we are almost through it. Chris, do you want to comment on the margins?

Yes. Thanks, Chris. So, generally, the margins are accretive across the spectrum of the new business we are getting in EV, Chris. And I think as we have pointed out, some of the technology that we are getting involved in, this is – I don’t know, custom might be a strong word, but this is definitely designed for certain customers. And so that allows us to have margins which are a little bit more accretive than generally in our electrical systems business. And so we expect to see that improvement as this business gets feathered into electrical systems, as well as seating.

Generally, I will say, Chris, that we are targeting double our profit rate, and then it’s well, the market bear it, because in none of the instances, are we a solo guy. So, we usually have three or four competitors. In the electrical market, it’s – in North America, it’s Stoneridge, in the seating market, it’s Isri and Grammer. So, we have competitors on every single one of them. But we are trying to double our profits every time. And if the profits are at our company average or less, we walk away from it.

Okay. And just one quick one, and I know I have kind of asked too many here probably, but I will hop back in the queue. Chris brought up another thought, given that these contracts are custom work or custom specification, do you also, by that nature, have an ability to pass through price much easier given their unique SKU, however you would like to term it?

You are talking the new business, Chris?

Yes.

No. We still have the same arguing. So, as we have been developing these programs, inflation has been happening. And so we go in and modify our price ask. And the way that the contracts work is you have production – excuse me, prototype pricing. Generally, we get paid for some of the upfront prototyping. It’d be nice if we got paid for all of it, like a Meritor or someone like that, we don’t have that kind of power. But we try to get paid first. Second, we do get revenue for prototype shipments. And then you get into the production agreement. And virtually all cases in the last 2 years when it comes to that point, generally, we are increasing the price because of inflation, and it’s a show-me deal, and it’s a new argument. So, the good thing is, though, that you are down – way down a path and you have custom tooling and you have passed crash tests and other things. And so the switching time and effort is exponentially harder for the customer. And so we just need to hang in – we hang in there and we just negotiate. We have concentrated our negotiating under our Chief Commercial Officer, so that we have one way of doing this because many of these start-ups buy a lot of our new products. For instance, in the electric vehicle world, this year, year-to-date, we have had elect eight windshield wiper wins. And it’s – so we call it sell them a house, and so we go in and try to sell everything that we make money on. And pricing is still on the table until you have that final production agreement. And then you need algorithms for what you are going to do about inflation.

Perfect. Thank you for taking my question.

Thank you, Chris.

Thank you.

And we have a follow-up from John Franzreb with Sidoti & Company. Your line is open.

Hi guys. A little bit about the segments. Can you talk a little bit about what drove the year-over-year growth in vehicle solutions on the revenue side?

Yes. Primarily, John, it was – it is material cost pass-through. As Harold mentioned, the truck build was fairly flat. It was about 70,000 units. So, it was not really driven by demand. So, a lot of material cost pass-through, John.

If China – if the China shutdown, the China, Shanghai COVID lockdown hadn’t happened, John, would that – that segment would have benefited from that year-over-year.

Got it. And warehouse automation down year-over-year. Can you talk a little bit about what’s going on there, what do the cadence of revenue would you expect in that segment for the balance of the year?

Yes. Last year, we had some temporary extra orders as the industry was doing a COVID catch-up program that we don’t have this year. So, we have the base business, base warehouse build-outs now. So, our revenues this year are going to be kind of consistent to where we are right now. We don’t have that extra surge that we had last year on the catch-up side. That being said, it’s very project dependent. So, if people build more or less warehouses, then we will directly benefit from it. Our visibility is only a couple of quarters. So, right now, we are looking into the third quarter and doing that kind of staffing. But it’s going to be similar kind of revenue, John, until we land new business, and we do have a good pipeline in this business.

John, we are shipping out of the Czech now, that’s new this year. And then we do have some new business starting to feather in, but it’s small. So, as Harold mentioned, we are beholden to the market to some degree as well, so.

Are you able to get pricing in that market?

Yes. Yes, that’s – all markets are – have price arguing in them. So…

Okay.

And generally, suppliers like us have some pricing power in the short-term. So, it’s one of those short-term, long-term things of reaching for what you can’t adopt, provoke a bid-out process. And so far, with business we want to keep, we have been able to do that. We are pushing the limit though.

Fair enough. Regarding working capital, it was a sizable outflow in the quarter. I think you mentioned some of it had to do with start-up costs, but you did end up borrowing, I guess, to fill the gap. Can you just talk a little bit about your cash expectations versus your debt pay-down expectations and a little bit about the outflow?

Yes. The – we will tag team here, Chris, on this one. The year-over-year variance was primarily due to the Shanghai lockdown. So, we typically repatriate from China. We have about $10 million held up there, Chris.

Yes.

So, we had a temporary hold up in China due to the lockdown, and then we had expected to invest in the quarter. And then we have a profile for the year and that is – suggests also that this is peaking now because we are obviously advocating free cash flow and debt pay-down in the second half. I will turn it over to you, Chris.

Yes. John, with the new pricing, I think that the inventory builds that we needed for a lot of this new business starting this year and early next, as well as Harold mentioned that we are peaking on the business start-up costs, with all that easing over the course of the next quarter, I think yes, as well as we did a lot of vertical integration as well, trying to source now both domestically and make more products in-house. All those factors kind of put a lot of pressure on working capital, but we expect that to ease in the coming quarters, which will then facilitate debt pay-down.

Yes. The big – we did what a lot of people did, John, of kind of building up our inventories against the COVID shocks that happened. And the biggest impact we had was in our vehicle solutions business, because 70% of our company’s revenue is in North America, and that business had been sourcing parts from China forever. And so we ordered robotic welding, powder coating, metal fabrication equipment. We are installing it into our plants as it comes in. And we are going to eliminate this in-transit that we have. So, the supply chains from China are 22 weeks, and they have been running at six weeks, eight weeks for years. And so that really put a kink into what we were doing. And so we just had to build up our inventories to protect. And this is going to collapse all the way back down to raw material inventory versus having finished goods in-transit on the water and in our reported results. So, it’s not really a hope it gives better plan, and so we are working our way out of this plan. And additionally, Chris is putting a banking facility in China so that we can automatically get our cash out of there and not get stuck like this again. So, we are very cash generative in Asia-Pacific, and we need to have our money out of there. The other one I already mentioned, which is with our largest customer, our largest two customers, we have a significant improvement in payment terms.

Alright. And I might just sneak this last one in. Harold, you mentioned labor cost is one of the inflationary issues. Are you fully staffed? How does it look like on the labor front for you?

Yes. The Ukraine has its own thing. So, I will leave that one out for now. But we had to rehire a workforce of 100%, almost 100% women because the men are called into military service, 60 and under – 18 to 60. And we have already had employee deaths fighting the Russians. So, we had to go through dramatic rehiring in Q1 of the workforce in the Ukraine, 1,200 people. It’s only a $50 million business, but there is a lot of people in it. It’s an assembly business. Except for that, we are still hiring around 300 to 350 a month due to turnover of hourly. So, our hourly workforce turns over. There is more jobs and people around several of our big plants. And we are still down people and working excessive overtime. So, we have mandatory overtime, which is fatiguing, but we are – we are still down. We have around 8,000 employees and 7,000 hourly, and we are probably down 200 people, John, and filling it with overtime.

Got it. Thanks for the color. I appreciate it.

Thank you.

Thanks John.

There are no further questions at this time. I would like to turn the conference back to our CEO, Harold Bevis, for closing.

Thank you, and thank you for all the questions and the interest. And I want you to know that we are very convicted to offsetting some of these headwinds that we have and they are action based. And our goal is to improve our profits a lot, and we are on track for that. And we are thankful to our top customers if they are listening for being our partner through this. It was very professional, and we are very thankful for the outcomes here, and it’s going to help us be able to reinvest for the year at the right time. And we look forward to speaking to you about the quarter that we are in. We have had a lot of exciting things happening in this quarter that we look forward to reporting out on. And with that, we would like to end the call, Katrina.

Thank you, presenters. Ladies and gentlemen, this concludes today’s conference. Thank you again for your participation, and have a wonderful day. You may all disconnect.