Good morning, ladies and gentlemen, and welcome to CVG Second Quarter 2023 Earnings Conference Call. During today's presentation, all participants 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. And I would now like to turn the call 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 Bob Griffin, Chairman of the Board and Interim President and CEO of CVG. This morning, we will provide a brief company update as well as complementary -- commentary regarding our second quarter 2023 results. After which, we will open the call for questions. As a reminder, this conference call is being webcast and a supplemental earnings presentation, which we will refer to during this call 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 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 Bob to provide a company update.

Thank you, Andy, and good morning, everyone. I would like to begin today's call by thanking and celebrating our CVG team members across the company for their commitment to delivering our strategic initiatives during the quarter. These efforts have helped grow and diversify our revenue streams, optimize our cost structure through process automation and cost reduction and increase our margins to become a bigger, more profitable company. As we enter the next chapter for CVG, I know I can speak for myself and the Board when I say that we are excited about CVG's future, supported by the strength and depth of our organization and leadership teams. Our team successfully accelerated our commitment to the company's strategic goals, which drove significantly improved financial results year-over-year. We will continue to focus on price and cost and believe our strong revenue and margin performance will continue to show meaningful expansion versus the prior year for the second half of 2023 based on the current market outlook. Andy and I will cover this in more detail. We have a solid balance sheet, winning new business is fully embedded in our company's culture, and we have a strong leadership team, positioning us well to achieve our longer-term 2027 revenue and margin targets. Before turning to our second quarter results, I'd like to provide a brief update on our ongoing CEO search. The Board is following a very thorough vetting and selection process. And currently, we have retained a leading independent search firm to assist with this work. We're eager to find the right leader who will continue to drive our business strategy and culture. The Board and I look forward to sharing more with you as the search process evolves, and we will continue working with the management team to ensure a seamless transition…

Thank you, Bob, and good morning, everyone. If you are following along in the presentation, please turn to Slide 13. Second quarter 2023 revenue was $262.2 million as compared to $250.8 million in the prior year period. The increase in revenues were primarily driven by increased pricing and new electrical system business, which was partially offset by lower volume in the Industrial Automation segment. Foreign currency translation also favorably impacted second quarter of 2023 revenues by $0.7 million or 0.3%. The company reported consolidated operating income of $15.9 million for the second quarter of 2023 compared to income of $6.2 million in the prior year period. The increase was driven by higher margins, partially offset by higher SG&A. The second quarter of 2023 adjusted operating income was $16.7 million. Adjusted EBITDA was $20.8 million for the second quarter, up 68% year-over-year compared to $12.4 million in the prior year. Adjusted EBITDA margin was 7.9%, an expansion of 300 basis points as compared to adjusted EBITDA margin of 4.9% in the second quarter of 2022. Interest expense was $2.8 million as compared to $2.1 million in the second quarter of 2022. The increase in interest expense was primarily related to high interest rates on variable rate debt. However, it was partially offset by lower average debt balances during the respective periods. Net income for the quarter was $10.1 million or $0.30 per diluted share as compared to net income of $2.5 million or $0.08 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 14% to $253.2 million compared to $222.3 million in the year-ago quarter. Combined adjusted operating income was $27.7 million, an increase of 186%…

Thank you. Ladies and gentlemen we will now begin the question and ask session. [Operator Instructions] Your first question comes from the line of Joe Gomes from NOBLE Capital. Please go ahead.

Good morning. Congrats on the quarter.

Hi, Joe. Good morning.

Thank you very much.

I just wanted to start on the CEO search. Thanks for giving us some insight on that. I'm wondering if maybe you can just kind of give us a little more thought on timing for this? And when you guys are hoping to have this all wrapped up and concluded?

Yeah. I think, that obviously is a question that's top of mind for many people. And we have -- there's a process to these searches. We have a search committee of the Board that's comprised of four of our independent directors. They're working with a leading search firm, a global search firm. And like all searches, it starts with a pretty large funnel at the top and then comes down to first interviewing a smaller number of people and then winnowing that down to an even smaller number and moving through quite consistent process. We're -- I would describe, in the middle of that process at this point. I think we're excited to see people who are interested in becoming the next CEO of CVG. It's hard to pinpoint the exact timing of any of this. It -- all the -- most of the people we talk to have jobs already. And as a result, just doing it as quickly as the Board might and the company management might prefer is not always possible. But I think it will be timely and ultimately, I would go on to say that although I'm an interim, I've been a very active interim. I'm here every week and working every day when I'm not here. And I don't think that the company and its management have lost a beat in pursuing its strategy or its short-term quarterly operating goals or goals for 2023, while I've been sitting in the chair. So more on that later. I wish I could give you a definite date, but we'll certainly keep you posted and let you know when the search is completed, and we're able to introduce our next CEO.

Thank you for that. And Andy, I've got all my numbers correct here, just looking. Operating margin percentage looks like it [Technical Diffculty] let me skip that one because I think my numbers are incorrect. I apologize for that.

No problem.

On the Industrial Automation segment, it's had a difficult, let's call it, past 12 to 18 months. You were hoping that it bottomed out last quarter, continued to decline modestly, but revenues didn't continue to decline. I mean what do we see as the future of that business?

Yeah, Joe, good question. So as we mentioned in the past quarters, we're seeing the bottoming of that business unit's revenues. I think this quarter is relatively close to what we have last quarter. You can see year-over-year, it's still a very large decline as we expected. What we have done there is we have restructured the business. We removed the fixed costs so that we can scale it at the current revenue level. We have talked about that in the past. Longer term, we expect that the warehouse industry is still growing longer term, maybe in the double-digit 15% range. But for now, we'll have to wait for a few quarters to see some meaningful rebound. Just one look to highlight this quarter, you can see the business had a write-off of inventory. So it's embedded in the result. But as we move that right off, you can see the business is operating at a breakeven level as we mentioned last quarter. So we're hopeful that we'll see some good news from a revenue standpoint. It will be a couple of quarters. The team is working really well, driving additional pipeline. Our leadership is really focusing on generating new business for that segment. So I think it's running as expected. So hopefully, to see some good news in a couple of quarters down the road.

Great. And one more for me, if I may. On the aftermarket parts business, obviously, we had a new launch of the website. Maybe give us a little more detail on how that is unfolding? How -- is it meeting expectations? How is that all going for that segment of the business?

Yeah. So yeah, we mentioned that the website has been operational since last quarter. We're still working through -- continue to drive traffic to the website. I'll be frank that the revenue is not ramping up as fast as we expected. We're still learning how to operate that. The good news is that we're seeing some really good mix and profitability coming through that channel. We'll continue to work to see how we can drive momentum to that channel. So more to come.

Great. Thanks. I’ll get back in queue. Thanks again.

Thanks, Joe.

Thank you.

Thank you. And your next question comes from the line of John Franzreb from Sidoti & Company. Please go ahead.

Good morning, guys. And thanks for taking the questions. I'd like to start with the pricing actions. It's been an important part of the story over the past year and change. I wonder if you could just parcel out of the 14% year-over-year change in vehicle-related revenue growth, how much of that is attributed to price versus volume? And if you could even drop that down the line, similarly on the gross margin overall probably then.

Yeah. So John, let me give you a little bit highlights. Different segments have a little bit different flavor there. When you look at the Vehicle Solutions segment, the increase in revenues is mostly driven by price. And if you look at the Electrical Systems segment, that is mostly driven by volume, as you can see, that our expansion of that business, our new launches is working. There's some price to it, but the majority of that is in price -- in volume. And then your aftermarket business, the majority of that is in price. So it's a little business -- different business have different situation overall. So overall, you can see it's a combination of both price and volume driven by our electrical systems.

Got it. And you talked in your presentation about a slowdown in the second half in the truck market relative to the first half. And that's kind of been transmitted by other people also. I'm curious about two things. There's some aggressive estimates about 2024 being weaker than 2023. I'm curious by, a, your thoughts about that, and b, these new program wins, do they start to accelerate the point that it kind of at least offset some, if not all, that potential weakness?

Yeah, you are absolutely right. So this is exactly what we see. Second half will be a slight decline from an overall vehicle volume standpoint. It's a little bit too early for us to talk about 2024 at this point. But as Bob also alluded to, you're exactly why that we are seeing some good news in terms of our mix, because of our strategy and the new wins is actually helping us to soften the impact of the Class 8 cyclicality. So we're actually very happy seeing the strategy and playing out the way that we wanted to. And as we mentioned, second half will be a small decline in revenues, but the impact on the margin will be rather limited. And then I believe we will have better line of sight next quarter. Maybe at that time, we can talk a little bit more about 2024.

Fair enough. Fair enough. And lastly, last quarter, I believe, when the discussion came around to cost savings initiatives, I think that you were able to capture about $9 million of targeted $30 million for this year. I may have missed it. How much have you been able to realize in the second quarter and is still on target for that $30 million for this year?

Right. Yes. We are still on track. We are actually slightly higher than our midpoint for the full year execution of that target. So you can see that our margin expansion and other components of financials that you can see the execution of the cost reduction is really helping us in terms of delivering our financial results. We're happy with the progress. We're slightly ahead of schedule. We believe that we'll continue the momentum.

Okay, Andy. Thanks for taking my questions and, Bob. I’ll get back into queue. Thank you.

Thank you.

Thank you. [Operator Instructions] And your next question comes from the line of Gary Prestopino from Barrington Research. Please go ahead.

Hey, good morning, everyone.

Good morning.

Couple of questions. I mean, already the costs were addressed. So that was one thing I wanted to ask. But if I look at my math, it looks like you did about $39 million of new business wins in the quarter. Is that correct?

Yeah. That's about right around $40 million, yeah.

Okay. So just some other things here. Your tax rate was down year-over-year. What kind of tax rate are you looking at for the back end of the year?

Yeah. So this year, we're expecting around 24% tax rate, which is a little bit of an improvement from last quarter as well as last year. As we mentioned at the end of last year, we were having some unfavorable mix because of our US business wasn't making enough money last year. So that situation turned around, and it's actually helping us. So that's why we're seeing some good news there. Longer term, I'll continue to expect that the rate will be around 25% plus/minus. So we'll have more line of sight as we continue to build the growth and see the mix of the company. But overall, we're seeing some good news as compared to last year.

Okay. And then just -- I'm not looking for any exact numbers, but looks like your adjusted EBITDA margin was 7.5%, jumped to 7.9% in Q2. Are your expectations that on a sequential basis, the back half of the year, we will continue to see improvement? Or is it more of we will see an improvement year-over-year, but you may be at somewhat of a little bit of a high watermark in Q2 here?

Yeah, you're right, Gary. As we mentioned, year-over-year, we definitely see a very meaningful margin expansion. As we mentioned, second half we'll see a little slower revenue. So it puts some pressure on our margin, but as we mentioned the impact will be limited. So we're happy with the one way first half. We expect that we’ll have limited exposure due to the downturn of the slowdown on the revenues. So I think we're rounding up in a consistent manner as we originally expected.

Okay. And then two more quick questions. You said you're on target at $150 million of new business. As I look at my notes, you -- in Q1, you said you were targeting at least $100 million in new wins in 2024 and 2025. Is that still a good number as you see it?

Yeah. So these are good numbers. These are number we gave. So I think about a quarter or two ago, we said that on an ongoing basis, we expect about $100 million of new win longer term. As you can see, Q1, Q2, the team is really running strong, and we are expecting this year to be around $150 million. We'll have to see. These new wins are very lumpy as you can see, it depends on the customer's launch schedule, their model change schedule. So I think we are very happy with the current momentum. So hopefully that we'll continue to see good news in the next couple of quarters.

And then just the last one for me, and I'll jump off and this is for Bob. In terms of, what are the qualities you're looking for in a new CEO as well as, do you feel that the background has to be tangential to the businesses that you're in right now?

Well, that's a good question. I think, optimally, we'd like to have somebody who has some successful managerial experience in the current business suite that we have. Obviously, the Electrical Systems business is a growth business for the company, a primary -- is really a focused growth area. And so having somebody who has that experience is important. But equally as important is somebody who's got the gravitas and the cultural instincts that are going to keep this -- we've got a very good leadership team right now. And we want somebody who's going to come in and meld with that leadership team and his strategic minded and pushes our strategy together forward. So one of the things that we're not looking to is to, as might typically happen, is to have a CEO come in and then do a complete strategy review and a potential strategy reset. The Board feels that the strategy we have, although it might be modified in certain small ways is a very solid strategy for the company. And so one of the attributes is somebody who can identify with the strategy and is anxious to pursue the strong growth that we're currently experiencing.

Would this individual have to come from a public markets background? Or would you look at somebody who has run private companies as well?

I think, as you do with all searches, you try to create as broad a cross-section of people as possible. And so we've been looking at public market people, private marketing people, someone who has a previous CEO experience, somebody who has run a large piece of a larger company. I think experience attributes are very important to us, operational attributes. We certainly want somebody who's got a manufacturing or operational background at some point in their career and who has experienced P&L responsibility. So all these things go into a long laundry list. And then you end up defaulting in many ways to the person the Board sees who is going to be able to come on to the CEO position and drive the strategy forward. And I think we'll be able to -- based on what I've seen so far, I think we'll be successful in finding somebody like that in a timely fashion.

Okay. Thank you.

Thank you. And we have a follow-up question that comes from the line of John Franzreb from Sidoti & Company. Please go ahead.

Thanks for taking the follow-up. I'm just looking for a little point of clarity here. You're talking about sustainability of the margin profile. Are you talking about it as a starting point in the second quarter? Or are you talking about the first half as far as the sustainability of the margin into the second half?

I would say probably closer to the first half. So again, second half, we have margin pressure due to the volume, but we believe that's limited based on what we are doing in terms of driving execution. So I would say first half is probably closer to the Q2.

Okay, Andy. And in regards to debt repayment, can you just give us an update on your thoughts on how quickly can repay debt?

Well, every quarter, we're paying down our debt at this point. We are not necessarily trying to aggressively paying down all the debt. As you can see, there's still some uncertainties around future recessions and the truck market. So I want to make sure that we have ample liquidity on hand. So we're managing it right now. We're generating cash flow. Our first priority is use it to fund our growth internally and then deduce it to pay down debt as we see fit. So we're happy with the current liquidity and also the allocation strategy.

Perfect. Thank you very much. I appreciate the clarity.

All right. Thanks, John.

Thank you. Mr. Griffin, there are no further questions at this time. Please proceed.

Well, thank you, operator, and thanks, everyone, for joining today's call. I want to emphasize that fueled by a strong focus on our strategy, a clear prioritization of initiatives, depth of our leadership team, we remain encouraged by CVG's business outlook, and we continue to believe we are on track to achieve our short-term and long-term financial targets. I wish everybody a great day.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.