Good morning, ladies and gentlemen, and welcome to the CVG’s Fourth Quarter and Full Year 2022 Earnings Conference Call. During this presentation, all parties will be in 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 conference over to Mr. Andy Cheung, Chief Financial Officer. Please go ahead.

Thank you, operator, and welcome everyone to our conference call. Joining me on the call today is Harold Bevis, President and CEO of CVG. This morning, we’ll provide a brief company update as well as commentary regarding our fourth quarter and full year 2022 results, after which, we’ll open 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-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 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.

Thank you, Andy, and good morning, everyone. As is our usual presentation format, we will be referring to an earnings presentation, which is found on our website and if you could locate that, I’d appreciate it when I have my presentation aligned to that document, and while you find that document, I wanted to say a few overview comments in three areas. One area is additional efforts that we’ve implemented to increase short-term performance. Second is additional efforts to improve the economics of our long-term revenue and product mix transformation. And the third is GAAP accounting versus our operating results. Regarding the first point on short-term performance or quarterly performance. You’ll see in our earnings release report here today that our vehicle businesses performed very well and overall they were up 17% in sales and 32% profits. And it’s the same story for the full year. Our vehicle businesses were up in sales and up in operating income. In fact, although, CVG’s revenues were up about $10 million for the full year, our vehicle businesses offset a $100 million decline in industrial automation. This weakness in industrial automation offset this year-over-year improvement for the quarter in the year. We now expect the weakness in industrial automation to continue and we have taken additional actions to show higher short-term profit improvement at the same time as we go about our business of changing our revenue and business mix away from Class 8 and customer concentration towards a wider spectrum of commercial vehicles, electrification and automation, especially in the electric vehicle industry. For those of you who have been following CVG the last few years, you know that we’ve been focused on combating spike cost inflation and new business startup costs with logical price increases in a cost out program. While this…

Thank you, Harold, and good morning everyone. If you are following along the presentation, please turn to Slide 13. Fourth quarter 2022 revenues was $234.9 million as compared to $228.9 million from the prior year period. The year-over-year growth was primarily attributable to increased pricing to offset material cost increases. Foreign currency translation unfavorably impacted four quarter 2022 revenues by $6.3 million or by 2.7%. The company reported consolidated operating loss of $4 million for the fourth quarter of 2022 compared to income of $6.5 million in the prior year period. This was primarily due to special items, which includes restructuring costs and an inventory write-down due to the increased demand in the Industrial Automation segment. Additionally, foreign currency translation unfavorably impacted operating loss by $0.9 million. Adjusted EBITDA was $13.3 million for the fourth quarter up year-over-year compared to $12.9 million in the prior year. Adjusted EBITDA margins were 5.7% as compared to adjusted EBITDA margins of 5.6% in the fourth quarter of 2021. Interest expense was $2.9 million as compared to $1.7 million in the fourth quarter of 2021. The increase in interest expense was primarily related to higher base interest rates and a higher average net debt balance during the fourth quarter of 2022 compared to the fourth quarter of 2021. Net loss for the quarter was $32 million or negative $0.98 per diluted share as compared to net income of $2.6 million or $0.08 per diluted shares in the prior period. Despite solid operating performance during the quarter, our reported financial results were negatively impacted by some headwinds. This included continued inflationary pressures, particularly steel pricing. Although as Harold already mentioned, we have taken pricing actions to offset these high cost and expect some alleviation in the near-term. Turning to business segment results. Our Vehicle Solutions…

Thank you, Andy. And I’d like to conclude my comments by reiterating that we’ve had a resilient year and 2022, we’ve had good recovery efforts, although some of them have lagged on a profit basis, and the pace of the progress we’ve been able to achieve in our strategic plan has been better than we thought, and fueled by a strong focus on our transformation strategy and a clear prioritization of our initiatives and our large and vibrant and growing customer base. We’re a much stronger company in 2023, and we’re ready to capitalize on secular growth and higher profits in the trend towards electrification. And we look forward to sharing these successes with you in future calls. And I’ll now turn the call over to our operator to open up the line for questions. Thank you.

Thank you. [Operator Instructions] First question comes from John Franzreb at Sidoti & Company. Please go ahead.

Good morning Harold and Andy. Thanks for taking the questions.

You bet, John.

Harold, it sounds like you’re getting modestly, I’ll phrase it more positive about the commercial truck market, be it five to seven or eight, are you starting to see order bookings into the second half that give you maybe some sort of improved confidence that you might not have had say, three months ago?

Yes, we are definitely have a improved outlook and we have basically confirmation from our top customers making public remarks and the year has started out stronger than expectations and we can – we have good visibility. Our visibility extends into the second half, and yes, we are seeing a stronger outlook for our core business that we have, and we’re seeing attempts for startups on our new business as well. So there’s strong demand for the vehicles that we have and that we’re headed onto.

Good, that’s good news. And on the new Industrial Automation business, it sounds like you want to extend into new end markets, but what’s the pathway to get access to those markets and generate revenues there?

Right. So, we’re mainly leveraging our smaller positions that business had. We are not investing a lot of time or effort or distractions into brand new areas per se. We had legacy businesses that were leveraging. We put a new leader into that business last year, Minja Zahirovic. And he came with a broader industry background than warehouse automation. The whole warehouse automation thing was a spike event in retrospect now; it helped us a little bit while it went through more almost like a crazy brother. But it’s back to the business that it was and we bought it. And so we have a smaller warehouse automation business. We still have it, it’s just small and our outlook is that it’ll stay small for a period of time and just following gap accounting that would suggest the provision that we took. And so it’s really on the small end of system builds and contract manufacturing, John.

Okay. And just on your aftermarket initiative, can you bring us up to speed on how that’s proceeding? That’d be helpful. Thank you.

Yes, we are virtually completed with our inventory profiles now. We’re going to ship from stock aftermarket seats and windshield wipers. And we are – we put in place our Shopify software and it’s primarily a profit, it’s a profit grab primarily, John. The business is not a high growth business, it’s 4% or 5%. And we are going to be shipping from stock versus building to order with a eight week lead time. And we have an experienced leader we brought in there that understands on daily pricing and demand based pricing from his experience as an Amazon shipper. And we will be monitoring our – we won’t run out of inventory because we’ll raise our prices before that happens. So, we’re going to be running an e-commerce business, it’s called aftermarkettruckparts.com and it’s going to launch here in a couple weeks.

Okay, thanks. I’m going to back into queue.

Thank you, John.

Thank you. Next question comes from Joe Gomes at NOBLE Capital. Please go ahead.

Good morning and thanks for taking my questions.

You bet, Joe.

Pardon me. So in the last quarter we – you had talked about, you were in negotiations for about 20% of the revenue to improve the contracts there. You talked about some price increase beginning of this year. Kind of where do you stand on those and the price increases that you made in January. Are they sufficient to offset all these remaining inflationary pressures? Or do you think there’s going to be more necessary?

Nope, we’re now ahead. Our price realizations ahead of our costs, and we fully recovered. And the negotiations that I alluded to that we did in the fourth quarter that took effect on January 1 were as we had expected and were fully benefiting from that additional price increase in this quarter.

Okay, great. And you also had talked about eliminating 50% of the ocean freight in early 2023. How do you stand there?

Yes, we’ve done that too. We’ve implemented that program and our in region production is fully underway and we’ve offset half of our ocean freight and we’re benefiting from that cost improvement as well in this quarter. So on the price and cost side, we’ve had a big improvement coming into this year, Joe, as we had expected, and in the Vehicle Systems business, the Industrial Automation business is still very low level and, we just rip the cost out of it and right sized it as we should, but our vehicle businesses are still doing quite well and further rebounding from where we were in the fourth quarter.

Excellent. And last quarter you talked about a $5 billion pipeline. And you didn’t put out the same slide in this presentation, just wondering, where’s that pipeline today?

Yes, so as we both – Andy and I both alluded to, we definitely stared at our startup costs that increased $6 million in 2022 versus 2021, and we could see a pattern that they were tied heavily into new bespoke seats. We stopped doing bespoke seat programs and we’re using a common platform that we have in-house called Unity. And that took a bunch of the pipeline out and we also further focused the Industrial Automation business and removed a big portion of our pipeline. So the pipeline now is very dominated by electrification, automation, electric vehicles.

Okay, thanks for that clarification there. And then one last one, and I’ll get back in queue. Kind of again, I’m looking at, the long-term roadmap that you put out today, and you talked about revenue of $1.5 billion 2027 and adjusted EBITDA margin of about 9%. And I compare that to the same roadmap that you put out last quarter. That roadmap showed revenue of $1.9 billion in an adjusted operating margin of 8.5%. And I just wondering, if you could kind of clarify where the changes come into two.

Yes, so let me take that one. So the key things between the last version of the $1.9 and the $1.5 right now here, clearly we fractured our strategy of focus growth. So as Harold alluded to by, we are not shining away from exiting our unprofitable business and we’re executing that and we are being a lot more selective in terms of winning business. So, we believe that that is a better approach for the overall value of the enterprise. So, we are now creating our new strategy plan, aligning to that new target, and definitely that will give us a more confidence and a more executable roadmap to get to the improvements of over 300 basis point in terms of our bottom line. So that’s the new thinking. It’s aligned with everything Harold just mentioned. I think this is a lot more focus and more execution of reentered, so that’s why we put it out there as our new financial targets.

And we’re hardwiring it too. So the areas, the non-electrical areas in our vehicle business where we’ve curtailed or modified our growth plans going forward. We have cut costs in those areas and their job in the portfolio is to deliver additional cash and EBITDA growth. So we’ve clarified the missions of each person in the portfolio and basically removed some of the growth aspirations in industrial automation and then non-electrical vehicle businesses. And it’s a tight plan and it will generate good free cash flow and improved operating margin and we’re underway with implementing it.

Great. Thanks guys.

Thank you, Joe.

Thanks, Joe.

Thank you. Next question is follow-up from John Franzreb at Sidoti & Company. Please go ahead.

Great, thanks guys. I might have missed this in the presentation, Harold, but what are your thoughts about debt repayment in 2023?

Yes, it’s probably not going to be as strong as last year. We had some low hanging fruit coming out of COVID and the, all the ocean freight stuff, but we do have a free cash flow plan. You should target it modestly. Right now, $20 million to $25 million is what we’re aiming. We do have upside plans, but right now the growth that we’re incurring, we do – we are contemplating a growth here, and we do use, we do consume working capital, so we’re going to have a use of cash here back into working capital somewhat, but net-net we will be generating cash. That’s similar to last year, the first quarter we use cash because of the truck building starts out hot and heavy and it’s doing that this year too. So our AR goes up. And if you look at the source of our cash last year and the components of it was AR, it was AR so we got really good about managing accounts receivable, going after customers that were overdue. And we had a big customer in industrial automation that had extended terms plus didn’t pay on time, and they blended out of the profile as well. We have an explicit improvement plan this year and Andy, I think is going to be in that range.

That that’s why John and we’ll be looking at a more steady pay down both for the next couple of years. I think we are approaching, a better level that we’re starting to feel comfortable with. So that’s where we are right now and that’s Harold mentioned. So the company going to grow for the next couple of years and we’ll be funding, all this growth with our own cash. So that’s what we are thinking at this point.

Got it. And the cost takeouts of $30 million this year, how much cash is going to be requiring the cost takeout? And if I heard you correctly, you’re calling it a neutral impact to operating income. Why is that the case?

I’m just suggesting let’s not add to the EBITDA outlook for the year. We’re trying to underpin our steady growth that’s out there with expectations of us and, we want to increase our ability to deliver. And the plans are underway now, and in first quarter we’re on track. We initiated a pretty significant headcount cut in Europe that’s underway with regards to the cash use of the programs course severance. Our severance is salary continuation, so there’s no additional use of cash. We don’t pay lump sum. They’re on the payroll today, they’re on severance tomorrow and they blend off. We do have some CapEx associated with the cost out programs and our CapEx this year will be similar to last year. So no net incremental use of cash John to accomplish that. It’s more of a business focus where we’re not going to try to grow everything with the same gusto where we’re going to be very focused, where we grow, and then other areas where we’re cutting the cost down and optimizing our ongoing profits. Andy, would you add to that?

Yes, so say short answer is, well, it will be net cash positive for us. The amount of CapEx required to execute the cost reduction is not high. And back to the cost reduction and the EBIT margin comments, what John, you can look at this year as a year, that will continue to optimize our cost with our existing business. That’s what Harold is talking about. At the same time, we are building two new factories, right? So there’s a little bit of a ramp up curve there with productivity for the new businesses. So net-net I think right now we’re looking at pretty stable, slightly positive, but I think as we ramp through those new factories, we’ll see a benefit down the road.

We’ll modify our comments, John, as we get through a couple quarters of performance, but for now we just wanted to break the ICE [ph] and let everyone know that we’re going after our cost structure with gusto in the areas that we’re not going to be growing as much.

Okay, got it. And just two quick ease I guess, on the pension settlement. Is there any impact from that on the P&L and in regarding to the tax? What is the tax rate kind of look like for the year? And you, I think you said you expect a reversal again at the end of the year. Can you just easily walk me through those?

Yes. So the couple things here, one is, we completely finished the settlement of the pension. So now in the U.S. we no longer have a pension liability, which is really a good thing for the company. So you can see in a filing, we recorded the settlement charge for the follow [ph] and you can see also the filing the tax implication on that. And the other topic that you mentioned here is the tax rate. I think right now we have put through a lot of the large adjustments at year end, the special items. So the biggest one is we evaluated our deferred tax assets on the book and based on the evaluation, we made the determination that right things due to provide a evaluation allowance, which is in the – in the size of about $14 million, $15 million. We believe that as we are going to the future, right with the profitability, that allowance may not be necessary in the near future. And then you ask about the tax rate. I think at this point our effective tax rate will be in the high 20s. That’s where we are looking at. So, but I know that there’s a fewer big items here, but these all items are all done cash and as Harold mentioned, there’s no impact to operating results short-term or long-term. So if you feel comfortable with those.

Great. Thank you very much, Andy. Thank you. I’ll get back into queue.

Thank you, John.

Thank you. Next question comes from Steve Emerson at Emerson Investment Group. Please go ahead.

Congratulations on a excellent quarter in a tough environment.

Thank you, Steve.

What proportion in terms of your goal year 2027 and 2022 were EV related?

What are you saying? What proportion of our new ones were EV related in 2022?

No, like your $1.5 billion objective in 2027. How much of that is EV related?

It’s going to be good question. Good question. I’m going to say it’s going to be around, the electric system’s going to be 40%. The electric vehicle portion of that is going to be around half, 20%.

So 20% of the business. And do you have a similar number for 2022 or 2023?

It’s very small. The big picture on what we started in 2020, we had only ever been on off-road ICE vehicles and electrical systems. We jump started an on-road vehicle program and went straight after electric vehicle startups. It has and ICE, but primarily focused on electric vehicles. And the majority of our new business wins have been on the electric commercial vehicles and secondarily, on-road and secondarily ICE on-road vehicles. And we are continuing in that manner, with no modification. So we have a program that’s working and we’re have kind of an evergreens all we’ve set up so far to continue growing in that area. The example that we put in the deck with the electric vehicle, electric van example is exactly the type of programs we’re pursuing. We’re pursuing multiple delivery vans and multiple work trucks. And when we get in there and we get it to be an approved supplier and we win an electric vehicle program, we’re immediately an approved supplier to bid on the ICE vehicles that are in there as well. So if you look at FedEx, Amazon, UPS, Bimbo Bakery, any of the delivery vans are out there to their ICE and they all have ambitions to switch to EV and we’re right in there as our proof supplier. Our electric systems on the low voltage side don’t care what type of the powertrain it is. There’s only a high voltage opportunity when it’s an electric vehicle. So, we have a solution for both and we’re going for both of them, Steve, equally hard.

Excellent. And I assume by your comments that this year’s going to be quite backend loaded in terms of EBITDA. You’ve got the two plants starting up and startup, let’s say on the EV van program.

Steve, I would say this year I think we’re looking at pretty even quarter four out per year because we see continued Q1, Q2 very strong production. As Harold already mentioned. Clearly there is a little bit of extra risk on the market of the second half, but we have improvement program in place. I would say it’s pretty even with not very extreme.

Excellent. Thank you.

Thank you, Steve.

Thank you. There are no further questions in queue. You may proceed.

Very good. Thank you everyone for listening in and we look forward to performing this year, short-term and long-term and reporting out on our results in our next conference call. With that, Joanna will end the call.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.