Good morning, ladies and gentlemen, and welcome to the CVG's First Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. I will now have 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'll provide a brief company update as well as commentary regarding our first quarter results. After which, we'll open the call for questions.

This conference call is being webcast and a supplemental earnings presentation is available on our Web site. 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. Good morning, everyone. On today's call we'll provide an overview of our first quarter results followed by an update of our strategic initiatives, designed to grow our earnings while also positioning CVG to deliver more stable results that we strive to do the cyclicality of our business and improve clear growth outlook.

Chris will discuss our financial results in more detail, as well as view our debt refinancing which will reduce our interest expense getting in in the second quarter while also freeing us of restricted covenants that precluded us from M&A. We'll then conclude by opening the call and answering your questions.

Please turn to Page 4 of our earnings presentation. We delivered record sales for the of 2021 of 245 million, an increase of 31% as compared to the year ago first quarter.

This strong growth was largely driven by where we delivered 41.99 million of sales representing 22% sequential growth and remained on track to meet or exceed our full year goal of 150 million in warehouse automation sales.

Our operating income increased to $15.4 million in the first quarter, which compares favorably to a loss of $26.5 million in the first quarter of a year ago. The improvement was largely the result of better volumes combined with our success efforts over the past year to reduce our cost structure and drive operational efficiencies across the company.

Rationalizing and reallocating our cost profile has been a priority of our management team and will provide a benefit as our systems continue to improve. 2020 first quarter did include an impairment charge that did not recur.

Adjusted even at the end was 21.19 first quote, representing nearly a 100% increase as compared to the 11.9 that we delivered in the first quarter of 2020.

The improvement was due to higher revenues with an improved details combined with expense reductions and profit optimization actions that we executed throughout 2020, in which focused on the new path. We delivered 26 cents per diluted share in the third quarter, compared to a loss of 80 cents per diluted share in the first quarter a year ago.

As we have been speaking about over the last year, the key component of business transformation strategy, is achieving new growth. As we reported last quarter, we see 100 million of annual new sales awards in 2020 with approximately 40 new customers, the bulk of which were in warehouse automation, lesser vehicles, last mile delivery.

Our figures, when we speak about new business wins, is the annual revenue amount when the award is fully ramped up. Warehouse new building business is shorter cycle from awards delivery. So the wins that we sit in 2020 are transforming the revenues in 2021.

Running a business is a focus of our organization and central to accelerating our sales growth, expanding our profitability and diversifying our end market exposure away from legacy long haul diesel trucks..

Thank you, Harold. If you're following along in the presentation, please turn to Slide 13. First quarter revenues were 245.1 million, an all-time quarterly sales record and up 31% compared to 187.1 million in the prior year period.

This increase reflects the substantial increase in the warehouse automation business and the North American heavy truck market returning to near comparable levels to the prior year. On a sequential basis, revenue increased 13.5% over fourth quarter of 2020, revenue of 216 million.

Foreign currency translations favorably impacted our first quarter revenues by 4.3 million or about 2.3% compared to the prior year period. I'd like to spend a moment on our gross margins, which expanded a approximately 190 basis points to 12.7% as compared to the first quarter of 2020.

This expansion continues to reflect our renewed focus on profitability and our improving business mix. The key drivers of the expansion were volume leverage, business mix to the warehouse automation end market, and operational costs improvement as compared to 2020.

The company reported consolidated operating income of 15.4 million for the first quarter of 2021, compared to a loss of 26.5 million in the prior year period. And on adjusted basis, operating income was 15.8 million, compared to 7.1 million in 2020.

The improvement was primarily due to higher sales volume and an improved cost structure as a result of our cost actions and improved sales mix and an impairment that was taken in the prior year ago that did not reoccur in 2021..

And your first question will come from the line of Mike Shlisky with Colliers Securities..

I want to start off with a couple of easy related questions. First, congrats on all the new business. You had mentioned, in the slides, that you've got some companies, you don't want to name names here, you had a whole bunch that you're working with. Some of them are launching some models in 2021 and 2022.

Presumably, it's in somewhat small numbers, but can you give us a sense as to whether those models are on track to launch this year, or is anyone seeing any issues? Again, without naming any names, get anybody in trouble. I'm curious to see if EBS is, in general, progressing the way you had hoped..

From our experience, Mike, we've seen no delays. If anything, the pause that happened over the last year with COVID and the related shutdowns that happened in the global vehicle industries, these new entrants didn't slow down at all and moved forward with their development program to close it. They have vehicle makers. That piece is on.

There's really no slowdown at all. The key part is really to get vehicles out faster and we're seeing people do engineering, prototyping, legal builds, vehicles and production vehicles. So you read more than we do, Mike. But from our standpoint, this industry is doing very well and it's not slowing down at all..

Another topic I wanted to talk about in the space as well, and again, a great set of new contact here.

Are any of them with some of the legacy diesel providers or are they all with startups?.

No, they are. That's not with our legacy customers as we've previously reported in previous years in our 10-K. They're all global powerhouses and they all have platforms. They're just as important to us as the new people, but the thing about the new for us, we'd never sold our electrical systems, our electrical solutions into the truck market.

We've always been focused on the construction equipment market and a couple other ancillary markets. And within this kind of whole cloth opportunity, we entered into it as not just the build to print manufacturer, but a designer of record. And the system designer may develop a Feeney product to do it, but we did it.

And we entered into that market, whole cloth and electric for our electric systems business as a one designer. And so far still good. And most of the new entrance as you would expect, are kind of in the prototype phase.

The incumbents, mainly as you know from your reading, have taken existing platforms in substitute of the powertrain from maternal engines, normally diesel powertrain to normally an electric power train. So they have the vehicles, if you will, on the back and make the most. And they're just converting the powertrain where the new guys, do both.

So we're in with both of them, they're both important to us now..

The other topic I want to touch on was some of the supply chain issues facing the industry. First of all, you had mentioned last quarter that there were some resin supply issues, given some of the weather in Texas and getting things logistically to where it needed to be, et cetera.

Has that changed at all? And I've been hearing some companies again, they might not be a customer, saying they can't get wire harnesses. It's been tough for them to find people who have them.

Are you faced with any kind of, because you're at record levels of sales, maximum capacity in certain places where you can't ship to people?.

Well, it's a constraint for sure. And there's a lot of public filers in this industry, and watching their Q1 results and what they said about that topic. Certainly, material availability, resin availability, chemical availability, metal availability, chips, and supply chain slowdowns are affecting the global industry.

It's pretty factored into our outlook. We've accepted it as a reality for this year, that they're not going to have a of demand, if you will, to get caught up with the orders. If you track orders in the global industry, the orders are far out-seeding production.

And so the production in the global industry is going to be muted or tapped a little bit for the remainder of the year, as this gets caught up with us. As far as connectors and electric harnesses, specifically, to your question, for sure. And there's probably files here.

They've said that there are global shortages in connectors and we've been impacted by that. The alternate, for a personal guess, is the material substitutions. And we've done more material substitutions than we can recall. We're coming on close to 1000 material substitutions that we did on a.

It makes keeping a season of plants pretty hard to do, substituting materials. We really see ourselves going backwards. Mike, maybe you see it as a go-forward constraint. It's not getting worse. It's just bad and this thing's bad, and the outlook for the component suppliers to get caught up are several quarters on, with the exception of chips.

If you read about the chip shortage, which impacts our customers, it's really a constraint to our customers. It looks like it's going to be going on about a year. And they have substitute chips, our designs, we're dealing on substituting the next set of our designs.

Our connectors made up to their electric control boxes and then their electric control box have chips in them. And so they have a job to do to work around this constraint and so do we. And we all are. So I see it getting designed around a little bit, Mike, but it's not going to be rapid. It takes a lot of detailed work..

Well, I'd like to kind of follow up there then, with my last question. Since last quarter, your last slide, your ATT balance, I don't know if you've changed all that much for 2021.

Do you feel like just in the end, the full year will get built, not the very end of the year, but it should be enough to make it work? Or are we just still waiting for any kind of changes in ACP to your forecast as you get through the year?.

The ATT, you're right, that the annual amount for this year hasn't changed since our last reporting out of, you see the information. And our experience is consistent with this information. But the quarterly profile did change a little bit. There was hope in the industry for a little bit bigger Q2 of track bills than happened.

And it's basically just getting smoothed out through Q4 next year or so. Our belief is that this ATT information is reliable and that it does very well. So we're embracing this outlook, Mike..

and in March there were challenges and there's just still challenges in May, so maybe it was already kind of baked into the March ATT outlook, and your own outlook.

You haven't seen much difference? Is that a fair statement?.

Can you say that again, Mike?.

Is it fair to say that the Fusion 3000 unit outlook that we had in March and sooner rather than today, they both factor in the same issue? Those issues were there in March and they're still there now. It's perhaps that already got kind of baked in to our expectations before this call..

I think so. The only thing that I would say, Mike, that I picked up, that I found is that people are trying to work around their issues now. Just like the question you asked about us and harnesses, there's ways to work around these constraints with material substitutions and design work.

And there's activity around that so that people can get more trucks at the door. But I don't think it's going to be a major change. So yes, I would say the same issues exist and that there is a lot of effort around them..

And your next question comes from the line of Chris Howe with Barrington Research..

Warehouse automation continues to perform well. I'm looking at Slide 7 now. I assume that you would continue to perform relatively well and ahead of market growth expectations. Electric vehicle platforms are under development and they should ramp moving forward in the development phase.

As we look at these 2 buckets of opportunity in the context of gross margin, internal and external to the company, what opportunities are you seeing now? And could you see in the future for gross margin improvement, whether that's through pricing cost initiatives or inorganic adjacencies around your current opportunity set?.

Chris, you want to take that one?.

Our margins expanded quite a bit from fourth quarter. We had a few items that we mentioned in the fourth quarter call that dented us a little bit, that did not reoccur related to bonus and so forth. So we've got expansion in a couple of areas. One, driver is mixed, as I've mentioned.

I think in the coming quarters, we're going to see continued, smaller, potentially increases in the warehouse automation business on a percentage basis, but still significant growth year on year. So as we've mentioned before, those margins are incrementally, slightly better than our overall margins.

So I think our focus now is to continue the business mix improvements that we've been making in the last couple of quarters. Now that the debt deal is behind me, Harold and I are going to focus more on improving those margins in the coming quarters. So I've got a little bit more time to spend on that.

So I wouldn't expect significant increases in our margins because we've got a lot of headwinds coming at us, with respect to the supply chain and costs and so forth. But it will be a continued focus for us, Chris, in the coming quarters with a little bit more attention there..

That's perfect, and congratulations on getting that debt deal done. And a follow-up to that, if we kind of look longer-term picture, I just would be interested in your take on these two buckets of opportunity, electric vehicle and warehouse automation. Obviously, we're moving on a sequential quarterly basis and environment remains uncertain now.

But internally, do you have a sense of gross margin potential and revenue potential for these two areas of the business, moving into a normal environment in perhaps three to five years from now?.

Yes, on the revenue side, we're going to continue to experience a nice growth. Obviously, moving into adjacent opportunities is a key focus area for us. With respect to margin enhancement, again, these are low capital intensive industries.

So we're assembling complex products and margin expansion is going to come through, looking at opportunities to improve our assembly processes and so forth. So I wouldn't expect fundamental change in those. I think incremental is definitely on the horizon.

And I think the warehouse automation piece is hitting the P&L now, which we're fortunate to have that. And I think on the EV side, as we note in the presentation, these are longer cycle wins. So more into the 22, 23 phase and the margin there, still kind of early to tell on those, but again, probably incremental to our overall business..

And then one last question. Shifting back to some of Harold's comments, just about the importance, but it may often be overlooked, the aftermarket piece, $100 million in sales.

Can you talk about the positive dynamics you're seeing in that portion of the pie and how you see that business moving forward, whether from a pricing perspective or even a market share perspective?.

If you look at our organic growth pipeline activities, of course we had a couple of early victories here in warehouse automation and with electric vehicle platforms. We're just now starting to get a going and that's why I mentioned it in today's dialog. Those are also short cycle.

And so those help in the short term, but we have other areas that we're still working on pipelines, and the aftermarket business is one of them. Our traditional business approach has been to service the vehicles that we are on, from an OE standpoint, in the aftermarket.

But there's an all makes aftermarket opportunity and to really dramatically grow that business. And we're looking at, for instance, we make floor mats and our floor mats go under certain trucks. And then the floor mats wear out. We would get an aftermarket order to send a floor mat now.

But our equipment doesn't care whose floor mat it's making product for and there's an all make opportunity to expand our floor mat business, our mirror business, our heating business. One of our top customers in the aftermarket is receiving, doesn't even have that many big positions in the LE market at all.

So we think that business has a lot of opportunity on a go-forward basis. And then we have several businesses we haven't spoke about in these sessions together. I just picked up on a couple of them.

Floor mats, mirrors, our sensor business, our business in Europe, our business in Australia, our business in Thailand, that we have pipelines that we're working on, grow those organically. And so we have hope to have more of a full potpourri of topics here. And you mentioned over five year period, three to five year period.

We're working on these now but the results are not material yet. So I'm not really talking about it but it's work that we're doing, and we expect similar results that we've been getting out of warehouse automation, and the electric vehicle push. So aftermarket's a big deal. We've never treated it as a big growth business, but it is, and others do.

So it's one that I hope we can talk about in the future , when the back suggested that it's material enough to speak in these sessions..

And the next question will come from the line of John Franzreb with Sidoti & Company..

To follow up on your last thought on the aftermarket, is there a sizeable gross margin contribution difference in that business versus your overall product portfolio?.

John, this aftermarket business has several components. And as Harold mentioned, we hope to be able to talk more about this as we develop this segment or this line of business, rather, a little bit more fully in the future. There are components of that wipers, mirrors, and so forth that do have above kind of average margins and so forth.

So driving this business further will definitely help us with margin enhancement..

And John, I'll just add that a lot of our business proceedings, for instance, we are obligated on the pricing on a per unit basis. And then as those contracts go into the aftermarket, we have some freedom to pry, plus you get them one at a time.

We're already a serialized manufactory so we make our products one at a time, so that doesn't give us a headache, but we are used to making one at a time, but spending a full truck load of one at a time. So there are extra costs with the aftermarket, but we're able to more than recoup that on the pricing side.

So it's one of our nicer businesses from a financial statistics standpoint..

And regarding the PEV market, I recognize there'll be some substitution in this business, but what's your sense of the incremental dollar that you'd be getting seeing patterns versus these in platforms in the future?.

Yes, it's a big difference for us and it's primarily because we've not really been a participant with our electric products business in the retail market. It's close to doubles our content per vehicle when we're able to be an electric harness supplier. It's harnessing the junction boxes and disconnect.

So it's a lot of passive electrical components that the meeting up to boxes and motors and drivers and batteries on the vehicle to do both low voltage electrical distribution, as well as the high voltage. And in this world. High voltage is 48 volts and in a spark there's around 400 volts. And so that's high voltage level, right at 40 and above.

So we both do low voltage, the 12 volts and the high voltage we do them both. And we just flat out haven't been after the vehicle market and this was a big opportunity for us to bring it on and to show what we could do as a technical system maker and it's a couple thousand dollars per vehicle, if we can become the system person on it, John..

And regarding the warehouse automation business, you did $42 million in the quarter and your commentary is more than $150 million for the year. I'm just curious about the cadence of rep in that business for this.

Is this cyclicality for a specific quarter that you should be aware? Or does that sort of raise different and maybe lower than the current rate? Or are you just being conservative maybe in your guidance?.

Chris?.

Yes, John, as you know when we came out and we said it would be $150 million business in 2021 for us, we're not seeing at this stage, our order books aren't indicating any cyclicality. In fact, we're seeing a little bit stronger performance than maybe what we previously indicated.

So not seeing cyclicality, as we mentioned previously, these margins are slightly incremental to our overall margins. And so our order books remain full and expect consistent growth year on year..

And one last question is something, the refinancing debt freed up about $200 million, I believe is what you said in M&A capital.

Could you talk a little bit about what your honorary acquisition criteria is and if there's any hurdles that we should be aware of when you start targeting M&A?.

Obviously, we're diversified industrial, so we have a lot of different we can look at. It makes sense for us to do things that we're good at, right? So obviously we're in the markets that you know.

We're going to probably look at those adjacencies first, although I think we're not opposed to looking at opportunities that fit what we do as far as complex assembly and managing large labor forces and so forth. So maybe I'll stop there and see if Harold has something to add on that..

No, I agree. Our main goal is to have higher earnings and more stable earnings and to be less dependent on the vehicle markets. So I would say we have a bias towards doing that. We all have a bias towards smaller check-in type of acquisitions with preferred versus some big Kaboom.

We had a pipeline going into the quarter with several hundred candidates. We were looking at it was a successful game plan. IT led us to buy the FSC business, which led us to have this big warehouse automation business. So we have good taste in our mouth with being a careful shopper and buying the right asset where we get the right team.

The value add in that business was lower value add, but unique people, unique customer relationships, and an opportunity to a one plus one equals three, one folded into CBGs resources and global footprint. So we're looking for that again.

We'd like to expand our value add, as well and have a little more pickiness, maybe a little more complicated, get us into a couple other markets that would help us diversify and not take many risks, I guess. We like the profile of the FSC acquisition, I guess I think if you could mimic that we certainly would.

And that was hopefully reported that it was $50 million and it's helped us create a really good business in a short amount of time. And it was kind of what we saw and it happened. So we'll be careful. Have anything specific to say, nothing yet, but as Chris had something smarter to say, than what I just said, we'll share it with you as we go along..

And you next question will come from the line of Barry Haimes with Sage Asset Management..

I had a question on the RV and specialty vehicle market, where you're starting to pursue some things. And it looks like, if I did the math right, maybe get about 9 million of orders in the quarter.

Could you just talk a little bit more about the products you'd be supplying in that market, what the competitive set looks like and how big that could possibly be over a couple, three year periods? So any color around that segment would appreciate..

There's a lot of injection molders in , but there's not a lot of injection molders that can do large pieces. There's not a lot of injection molders that have a lot of 3510 process like us. Our heritage of making large parts for trucks makes us a specialist in large parts, naturally.

And there's other larger parts, there's housing for permit and exterior bodies for ATVs, shells for snowmobiles, parts for boats, this sort of a thing. So when we talk about recreational vehicles, it's not the Winnebago kind of deal, it's the smaller vehicles that have plastic bodies, large plastic bodies.

There's also large plastic bodies on baby seats. There are shelves for X-ray machines. The outer domes for antennas, there's unique needs for large injection, molded glass parts that are monolithic and high compression like we have for truck parts. So that one is one area where we've characterized what we can do.

And we're looking at where is it done? So we're being open-minded to the markets, but the big natural markets definitely off-road vehicle market it in and we're having successfully run business in those areas..

And there are no more audio questions at this time. I will now turn the call back over to management for closing remarks..

Well, Chris and I want to thank you for staying on an hour with us and appreciate your support. We're happy with the quarter that we turned in, but we're even happier about what we see ahead of us. And we look forward to speaking with you again at the end of this quarter. Thank you very much for your attention today. With that, we'll conclude the call..

Thank you, everyone. This concludes today's conference call. Thank you for your participation. You may now disconnect..