Good morning, ladies and gentlemen. And welcome to the CVG’s First Quarter 2023 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, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

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 first quarter 2023 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. I want to apologize in advance as I have a small cold and I might cough a few times. And also you know I sound worse than I am. But we're very happy to be speaking this morning. And as is our usual format. We'll be referring to an earnings presentation which is found on our website. While you locate that, I wanted to say a few opening comments. Our business performance in the first quarter was strong and consistent with the qualitative comments we made in the earnings call. The last earnings call. We delivered record quarterly sales of over 7% year-over-year through a combination of increased volumes. The contribution of new business ramp ups and price increases flowing through, profitability was meaningful improved as well, due to better price cost spread realized in the quarter. In addition to strong financial performance this quarter, we continued to deliver significant business growth for the future, adding approximately $85 million in additional new wins at full annual value, a record amount of new business awards for a single quarter. And we are revising are 2023 $100 million new wins guidance to $150 million of new wins, 90% of this first quarter wins were in our electric systems business, and 90% of the wins are on electric vehicles, including vans, trucks, and other non-classic vehicles. We continue to win globally with new customers and new products, diversifying our customer base and further upgrading our revenue mix toward electrical systems. During the quarter, we made progress on working capital through a focus on receivables and inventory. We have almost completely worked down our built up COVID Insurance layers. And we're back to more historical working capital levels as a percentage of sales. COVID is behind us…

Thank you, Harold. And good morning, everyone. If you are following along in the presentation, please turn to slide 14. First quarter 2023 revenue was $262.7 million as compared to $244.4 million from the prior year period. The increase revenues were primarily driven by increased pricing to offset material costs increases and increased vehicle related sales, offset by lower volume in the industrial automation segments. Foreign currency translation also unfavorably impacted first quarter of 2023 revenues by $3.6 million, or 1.5%. The company reported consolidated operating income of $14.6 million for the first quarter of 2023 compared to income of $8.4 million in the prior year period. The increase was driven by higher margins, partially offset by higher SG&A. The first quarter of 2023 adjusted operating income was $15.4 million. Adjusted EBITDA was $19.8 million for the first quarter, up 47% year-over-year, compared to $13.5 million in the prior year. Adjusted EBITDA margins was 7.5%, an expansion of 200 basis points as compared to adjusted EBITDA margins of 5.5% in the first quarter of 2022. Interest expense was $2.9 million, as compared to $2 million in the first quarter of 2022. Net income for the quarter was $8.7 million, or $0.26 per diluted share, as compared to net income of $4 million, or $0.12 per diluted share in the prior year period. Turning to the segment results on this slide, you can see the performance of our three vehicle related segments on a combined basis. The combined revenues increased 20% to $253 million, compared to $210 million in the year ago quarter. Combined adjusted operating income was $25.1 million, an increase of 122% compared to $11.3 million in the prior year period. The growth in adjusted operating profit again demonstrates the powerful impact that are focused on price cost management…

Thank you, Andy. I'd like to thank all of our employees for the contribution to our solid financial results and strategic priorities. And the pace of the progress that we've been able to achieve in our strategic plan has been better than we thought. And it's fueled by strong focus on our transformation strategy and a clear prioritization of our initiatives, and our large and vibrant growing and new customer base. We're much stronger company in 2023. And we're ready to capitalize on secular growth and higher profits and the trends towards vehicle electrification. And we look forward to sharing our successes for you in future calls. I'd now like to turn the call over to our operator and open the lineup for questions. Thank you.

[Operator Instructions] Your first question comes from Joe Gomes with NOBLE Capital.

Thank you for taking the questions and good morning. So wondering on the vehicle related segments, could you kind of break out for us? What was the contribution from volume versus pricing in the quarter?

Joe, so for the quarter we say with 20% growth in terms of revenues in three vehicle related segments, thinking about roughly 60% of that came from volume and 40% of that from pricing.

Excellent. Great. And I know you had talked in the past; I think you had like one more major contract that you needed to work on pricing. Have you been able to get that finalized? Is that something you're still working on?

Yes, we were able to finalize it. And we'll get extra contribution from that contract beginning April one. So it's already in place.

Okay, thank you for that. And I notice, corporate and other SG&A expenses rose fairly big on a percentage basis in the quarter. What was behind that? Was that just on the cost reduction program expenses or other things that would drove that?

Great question. A couple of things there. One is we invested in some of the SG&A costs to drive our cost reduction program. So we see some opportunity to invest and drive higher profitability there. And then the other thing that contributed to it was some of the variable compensation. Last year was low in terms of incentive comp. So those are the main driver for SG&A.

Okay, and one more if I may. On the new plant startups, just wondering how they're going how they're proceeding? Are they all on schedule for all the new plants?

Yes, so Aldama, which is near Chihuahua, Mexico, is significantly ahead of schedule. We may get to open that one quarter early. And Morocco and [Ago Piata] are on schedule. Ago Piata is scheduled to produce Q4, and Morocco in Q3. And we have, they have to start up to, Joe, we have new wins for new vehicles that are ramping up both in Europe and in the United States that need our electrical systems inside of them. So we're on the clock. And we have backup plans in case some unforeseen action happens. But in the vehicle world, you have to do these things in a high quality manner. And PPAM is the term and pass quality regimens and we're on track and significantly ahead in Aldama.

Your next question comes from John Franzreb with Sidoti.

Good morning, guys. Congratulations on a great quarter. I like to start with the margin profile. Either the gross or the operating term, we want to address it but increased significantly. And it seems to me there's a bunch of buckets that could have drove that, it could have been volume, pricing, cost savings, new business or the exclusion of startup costs. Can you kind of walk through the puts and takes of how those changes impacted? The gross and/or operating margin?

Yes, so I think you're right, John, all of the above, you mentioned, I will say the biggest impact is pricing. Our recovery of the inflation that we saw last year. So our price cost management is our single biggest contributor. At the same time, we also see a strong volume leverage in our vehicle segments, but those are kind of got offset by our industrial automation side. The other thing that really add to our profitability is the cost reduction. So as Harold mentioned, we are on track and we are very confident of our cost out programs. So that's helped us a lot in that. And then lastly, last year, if you remember, the supply chain disruption as well as the Ukraine war generated some inefficiency in the business and we were able to recover and get back on efficiency level. So those will help us with driving strong results.

Got it. Now, Andy, and Harold, I think you deferred to giving specifics on the cost savings plans. Now that it's starting to really impact the P&L. Can you maybe talk a little bit of what the actions are you are taking and how much you realize about $30 million so far in the first quarter?

Yes, so we have multiple categories of cost out. We have procurement, we have cost efficiency. We have plant overhead consolidation. And we have global supply chain optimization. And we have some SG&A. And we have about 350 projects in a Project Tracker. And in the first quarter, we were ahead of plan, we did almost $9 million of costs out of the plan. So the plans are delivering. So it's our -- it's the highest amount of cost out we've attempted. And coupled with Joe's question and Andy's answer, we've added some talented people and continuous improvement. And we're opportunity rich. And we're actually contemplating plans to increase our focus on this effort, but it brings CapEx with it. And we'll report out on that in the future. We're not trying to withhold it. We were hesitant to make many public comments, because it was a first time thing for us, John, but it's turning out to be much more successful than we thought.

Your next question comes from Gary Prestopino with Barrington Research.

Good morning, Harold and Andy, a couple of questions here. I just want to be clear; you're saying that the margins that you guys have attained in this quarter are pretty much sustainable throughout the years? Is that correct?

Yes.

Okay. So. And then as far as the SG&A expense, somebody asked a question about that it is somewhat elevated, I think there was a couple of puts and takes there. But as we're looking at this, should it kind of stay at that almost 7.8% of revenue as we go through the year?

Yes, I would say that's about right. So for the year, again, we are capitalizing on a lot of opportunities that we see. So there's a lot of good payback projects that we are very happy to invest. I think we'll stay around the level for the moment, we'll continue to see the profit that come with it.

I am sorry, Harold, go ahead.

I was just going to say that it's mainly people cost. So we'll be able to flex it, if needed.

Okay. When you guys released numbers for Q4, you said about $85 million, I'm sorry, $100 million of new business wins, you got $85 million of that in quarter and raise it by $50 million? I mean, what was the surprise there that occurred that caused it to your almost get that entire new business win in q1? And then given the ability to raise it, was there something there that you didn't think you were going to sign and it came over the transom?

So we have a big pipeline. And in previous decks, we've reported out on the size of the pipeline, and we are running about a one out of six hit rate. And so Gary it’s around an 18% hit rate. And so at all times, including right now, we have finish line proposals that we've made to customers to produce their products for them. And they have won -- they have a few people they're going to choose from and so we were able to win a decent amount of business in the quarter, because our pipeline, the timing of our pipeline came into the quarters, it was not really a higher hit rate per se. It was really a timing of decisioning. And if you look at the rest of this year and the timing of decisioning, it is still at a high rate, there's a lot of awarding being done in our industry and in the case of electrical systems we have one of our main competitors, Gary, his name Leoni, they are public company in Germany, and they filed bankruptcy in the first quarter. And so our amount of looks actually is increasing. And so we're organizing to do that, and get our capacity lined up to be able to more aggressively bid so that our pipeline coupled with a big industry participant kind of in trouble is giving us confidence to increase the outlook for the year. And we're not going to, we didn't increase outlook for next year or the year after we said $100 million. But it looks like this year, we're going to have a more fruitful environment than we expected.

Does that German competitor, are they liquidating or they just going to be restructuring?

The German bankruptcy laws, they had the equivalent of a prepack, they have a white knight who's well known billionaire from Austria, when I'm with them, but it's going to be like any bankruptcy, there'll be good old fashioned litigation from the bondholders that have to take a haircut and all that. So it's going to go on for a while, there's a court process, but it's well-known that the cable industry is pretty tight. And they have constrained capital. We're getting more looks than we expected. And we already had a vibrant pipeline. So we feel pretty confident in $150 million.

Your next question comes from Barry Haimes from Sage Asset Management.

Thanks so much, and congrats on the great quarter. My question is, on the various EV programs. Could you give us a little thumbnail sketch, on average, how the margin progression looks? I presume there's some amount of cost before you start production. And then when you do start production, how many quarters to ramp to normal. And then are the normalized margins on these programs anticipated to be less than equal to or greater than, let's say your legacy truck away margins. Thanks so much.

You're welcome. I'm going to address the program lifecycle part of it. And I'm going to hand it to Andy to talk about the margin comments. So the typical EV program is about two years. So we get an award. And then we go through some prototyping and first article testing. And then the vehicle maker goes through some prototype vehicle testing. And then we solidify and freeze the design. And then we have to prepack bill of material in the manufacturing process so that they're repetitive and consistent through every vehicle, and set up for metrics for quality and on time and all that. And we've been expensing that cost as we go. And we started this three years ago, we were reporting out what our startup costs were, because they were impeding our profits when we were just getting started. Spin forward to today, we're more than covering those startup costs, and they're in our number. And they're becoming less and less on a percentage basis, because we're growing. We also reported that we were not going to aggressively pursue startups seeding business, because it had a very high startup cost. And we had a well-known one that was in the press last year. And we've basically have focused in our bullseye of electric systems, and actually, the startup cost profile is minimal. With regards to the planned startups, that the reason why the electric systems businesses are accretive from an ROIC standpoint is they are CapEx light. Our secret sauce in that business is actually software. It's not capital equipment. So we have a special internal software program that we've designed. And we're using globally, that allow us to take our designs, put them straight onto a plasma screen, and have in testing that's automated. And we have really obviated the need for a lot of capital. So we have a very good setup here. When a when a plan starts up, of course, there's some overhead and efficiencies. And because the way we're playing the game here is that we're pre-selling out most of the capacity and then ramping up the plans with business we already have. So it's actually about a one quarter breakeven kind of a deal when we get started, but I'll now turn it over to Andy to talk further about margins.

Yes, so in terms of the electrical system margin, so you can see today we are already at a low double digit, OI operating income margin level. Just say that the new business all are coming in at an accretive margin profile. So we're happy to continue to launch a business and then will actually continue to give us the improvements to the overall business unit margin.

Your next question comes from Steven Martin with Slater Capital Management.

Hi, guys. So aftermarket parts, finally, I guess you turned it on in the first quarter. How did the new business perform, and what should we expect over the balance of the year?

Yes, so we're out of the gates on that. And it's been performing as expected with a meaningful expansion, our profit margins. So basically, it's a direct customer play versus going through an intermediary. And so the end customer has a price they're willing to pay, and so we have a direct channel to the end user there. And so you should expect to see our profit rates gradually increase in that business. The business itself grows around 4% to 5% unit volume and another amount based on annual price increases. So you'll see modest growth relative to electric vehicles, electric systems, where we're having explosive growth for us. So it'll be a modest growth outlook. But with margin expansion.

You at one point said it was a $100 million opportunity over what time frame, a, is that still your target? And over what time frame?

Yes. So the business in the first quarter was $37 million. So it's well above the $100 million rate. And our goal in that business is in the 2027 business plan. Our goal is to double that business, and it involves replicating our business strategy in APAC, Asia Pacific. It involves replicating our business strategy in Europe and it involves expanding our product line into other aftermarket products other than Class 8 truck seats.

So from -- when you look at 2027 from a margin perspective what would you expect the operating margin of that to be?

It will be accretive to our company average that we've articulated.

Correct. So overall our long term target is 9% EBITDA margin. So now see we are well on our way there and clearly growing the electrical system business and the aftermarket business are the one that will drive to that target. So the mix shift is going to be meaningful and help contribute to that target.

Okay. And turning to unfortunately the lagging business, how low does that go and can we expect to arrest or at least break even in that over the course of the year?

Yes, so it's bottomed out now, we think that we're nearing an inflection point up. If you look at the leading indicators from Amazon and other e-commerce shippers, they're suggesting that they're going to restart modest rebuilding. So we get orders when they build new parcel distribution centers. That's the automation part of it that we participating in and we have non warehouse automation business as well. So it's not going to get worse. I can say that. And we have hope that in the second half is better than the first half. It's too early to say that though. This is a PO business. If we had POs in hand, I would make more confident comments here. But as of right now we're expecting a turn in the second half, but we're yet to see it.

Right. And last year it started to fall off in the second quarter, but really fell off in the back half. So the comparisons for that business get easier as we get through the year.

Exactly, right.

There are no further questions at this time. Mr. Bevis back over to you.

Thank you everyone for calling in today. We appreciate your interest and investment in our company.