Good morning, ladies and gentlemen, and welcome to the CVG's Second Quarter 2021 Earnings Conference Call. During today’s presentation, all parties 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.

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. We will provide a brief company update as well as commentary regarding our second quarter results, after which we will open the call for questions.

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'll now turn the call over to Harold to provide a company update.

Harold?.

warehouse automation, electric vehicles, recreational vehicles and specialty vehicles. These are all end markets that are focused areas for us globally.

Complicated electromechanical assemblies, turnkey electrical systems, unique plastic parts and last mile delivery van solutions are end products that are focused areas for us from a product standpoint. We now have a live and dynamic new business pipeline that is multi-billion dollars in size and global.

This is a vibrant part of our company now, and it's becoming cultural. Turning to Page 6. We wanted to provide an overview of our year-to-date sales profile.

We've made real progress, reducing our reliance on North American Class 8 diesel trucks as our warehouse automation business continued to deliver strong growth and as electric vehicles become a more material share of our business over time.

Looking at our end markets in more detail, the North American truck market was 36% of our sales in the first half of 2021 as demand for Class 8 diesel trucks continues to increase despite the supply chain constraints and inflationary pressures that have been in place for much of the year.

ACT Research is forecasting truck builds to improve in the second half of this year and for truck builds to be in excess of 300,000 units annually through 2023.

This market dynamic will be supportive of our results and we'll keep Class 8 trucks as a high percentage of our sales as we are already on many truck platforms that are in full production and in the market today.

Warehouse automation continues to be a large proportion of our business, having been 20% of our total company revenues in the second quarter and 19% for the first half.

This strong end market is now our second largest end market and growing due to e-commerce behavior and the continued need for more capacity by the well-known brand names in this arena. The OEM construction market is now our third largest end market comprising 17% of our year-to-date sales.

Our business in this end market is relatively balanced across North America, Europe and Asia. Looking forward, we continue to see a strong order book globally through the balance of the year, which will be supportive of demand, those supply constraints are still an issue that we're monitoring closely.

The Biden Infrastructure Bill will likely help us in this area also in North America. Lastly, our aftermarket and service business, while not an end market per se, is an important component of our business, representing 11% of year-to-date sales.

Turning to Page 7, the warehouse automation end market continues to be a significant growth driver for the company as we delivered approximately $52 million of sales in the quarter, up 25% sequentially from the first quarter of 2021.

We supply subsections of these warehouse installations, including complete work centers and are developing new products to expand our business in this area. Importantly, our products are sophisticated electromechanical systems that contain electric panels and technology that enable the automated movement of parcels through the warehouse.

They are smart subsystems. The growth in e-commerce is driving the need for additional warehouse automation, parcel sorting and last mile delivery vans where industry expectations are for the warehouse automation industry to grow at a 14% CAGR through 2026, or nearly doubling in size at $30 billion over five years.

To support our warehouse automation growth and position CVG for further expansion, we've been repurposing our existing plant capacity and adding focus new capacity. So far, we have repurposed two entire commercial vehicle plants, expanded an existing warehouse automation plant and are implementing plant additions in Europe and in India.

We're doing the same things to enable our electric vehicle ramp ups. We've been able to leverage our existing footprint greatly. We've been adding people to both of our segments here; as we grow and expand these focus areas. An emerging end market per CVG is a electric vehicle and last mile market, as outlined on Slide 8.

Our competitive advantage resides in the fact that we have a natural value added product basket that makes it convenient for new vehicle companies to do their work with us. Importantly, we can design prototype and build a bundle of products for one OE and we have 40 years of global experience doing it.

As we've mentioned, we are currently involved with 52 opportunities globally, which includes both existing manufacturers that are expanding into electric vehicle platforms, as well as new electric vehicle market entrance.

We've essentially created a portfolio of new business wins on electric vehicle platforms that will allow us to participate in the transition from diesel to electric vehicles, which is underway and forecast to accelerate in the next five to 10 years.

Overall, we have 13 different electric vehicle wins thus far in 2021 across North America and European trucks, buses, recreational vehicles and construction equipment. These wins will result in production launches over the next few years.

Turning to our new business awards on Slide 9, we have secured $129 million of net new business wins this year-to-date. 94% of these ones were outside of our legacy diesel truck business as we continue to win new business and electric vehicles, warehouse automation, and recreational vehicle end markets.

It's important to reiterate that the composition of our new business awards will determine when those revenues will flow through our P&L. Given that a majority of our wins have been at electric vehicles, we will hit peak financial performance in a few years in these areas.

Our new business momentum is putting CVG in an enviable position in this industry. We are continuing to review our products and customers, and we'll continue to exit unprofitable and or declining business areas. This is an important point to highlight is our new business wins that we report each quarter or on a net basis, as I mentioned earlier.

So while our net new business wins were up nicely from Q1, the momentum is much stronger as we were also turning out low profit customers. We're driving a strategic mix shift, which will slowly become evident in our results as we released them quarter after quarter.

Turning to Slide 10, we very pleased with the success that we have achieved this year and over the last year-and-a-half, but we're really just beginning. Our goal is to transform CVG. We're committed to optimizing our legacy business and using our know-how to expand aggressively into several focused end markets.

Our second quarter results were another good data point that show that this is working. As we continue to make progress and post our results, we believe the value of our business will grow. Now I'll turn the call back over to Chris, who will give a more detailed review of our financial results..

Thank you, Harold. If you're following along in the presentation, please turn to Slide 12. Second quarter 2021 revenues were $257.9 million, a quarterly sales record for our company. Revenues increased to 103.3% compared to $126.9 million from the prior year period.

This increase reflects the substantial increase in the warehouse automation business and the significant increase in the global demand for the vehicle end markets, which were heavily impacted by the COVID pandemic in Q2 of 2020.

On a sequential basis, our revenue increased 5.2% over first quarter 2021 revenue of $245 million, which was also a sales record for the company. Foreign currency translation favorably impacted our second quarter revenues by $6.8 million or 5.4% when compared to the prior year period.

Our gross margins expanded approximately 820 basis points to 13.3% as compared to the second quarter of 2020. The margin expansion continues to reflect our renewed focus on improving our business mix and the efforts to offset the significant cost inflation we are experiencing in our supply chain.

The key drivers of the margin expansion were volume leverage, business mixed shifts toward the warehouse automation end market and operational cost improvements as compared to 2020. The company reported consolidated operating income of $16.3 million for the second quarter of 2021 compared to a net loss of $10.5 million in the prior year period.

And on an adjusted basis, operating income was $16.6 million compared to a loss of $3.6 million in the second quarter of 2020. The improvement was primarily attributable to the higher sales volume improved mix and an improved cost structure.

Adjusted EBITDA was $21.6 million for the second quarter, which was up considerably as compared to $1.2 million in the prior year second quarter. Adjusted EBITDA margins were 8.4% reflecting an improvement of approximately 740 basis points as compared to the adjusted EBITDA margin of 1% in the second quarter of 2020.

This margin expansion was primarily the flow-through from the revenue and cost changes I mentioned earlier. Interest expense was $2.8 million in the second quarter, as compared to $5.3 million in the second quarter of 2020. The decrease in interest expense was primarily the result of refinancing our company's debt on April 30, 2021.

As a reminder, we expect our interest expense to be reduced approximately $3.1 million on a full quarter basis, beginning in the third quarter, as a result of the refinancing.

Additionally, our new debt structure is more flexible as it provides up to $200 million of borrowing capacity as we work to expand into attractive markets with the goal of accelerating CVDs growth and moderating the historical cyclicality of our business.

Net income for the quarter was $5.1 million or $0.16 per diluted share compared to a loss of $12.5 million in the prior year period, a loss of $0.40 per diluted share. Now turning to our segment results on Slide 13, we highlight the electrical system segment.

For the second quarter of 2021, the electrical systems revenues were $175.1 million compared to $74.2 million in the prior year period, an increase of 136%. Foreign currency translation favorably impacted second quarter revenues by $2.7 million or 3.6%.

The year-over-year sales increased primarily resulted from new business wins, warehouse automation growth and increased demand in the North American OEM truck markets as Harold mentioned previously.

Our electrical systems segment represents now 68% of our total second quarter revenues as we continue to make progress diversifying both our mix of business and customers. The electrical system segment delivered $18.6 million of operating income in the second quarter, compared to an operating loss of $6.2 million in the prior year period.

The increase was largely due to year-over-year increase in sales. Adjusted operating income was $18.7 million in the second quarter, compared to an adjusted operating loss of $718,000 in the prior year period. Now turning to our global seating segment on Slide 14.

Global seating revenues increased to $84.9 million in the second quarter of 2021 compared to $53.9 million in the prior year period, an increase a 57.6%. Foreign currency favorably impacted our sales in this segment by $4.1 million, or about 7.7% in the quarter.

The global seating segment reported an operating income of $5 million during the second quarter, compared to $1.5 million in the prior year period. The increase is due to higher sales volume as a result of COVID impacted Q2 of 2020. The second quarter of 2021 adjusted operating income was $5 million compared to $2.1 million a year ago quarter.

Now looking to the third quarter, and while we do not provide guidance, I thought it would be helpful to provide a few data points, the key drivers to our business. Per ACT expectations are for an increase in the North American Class 8 truck builds to 83,850 units compared to 74,400 in the second quarter.

This demand outlook is expected to be supportive of our third quarter results. In the warehouse automation space, we expect sales to be down sequentially in the third quarter, as we experienced a change over by our customers to new builds.

However, we continue to believe that we will meet or exceed our goal of $150 million in full year warehouse automation revenue. Finally, our gross margins will remain a focus in the second half of the year as we continue to implement actions as we work to overcome material and labor shortages and commodity cost pressures, we are experiencing.

This concludes our prepared remarks. I will now turn the call over to the operator to open up the line for Q&A. Thank you.

[Operator Instructions] And your first question comes from Chris Howe with Barrington..

Good morning, Harold..

Hi, Chris. Good morning..

This is a great quarter. And….

Thank you..

I have a lot of questions here lined up for you, but I'll try to find the more important ones. You talked about warehouse automation, the growth that you're seeing there now 20% of Q2 sales, a good sequential growth.

If we take that into consideration with the slide that outlines the net new business awards related to electric vehicle, I think, it was 55% of the pie, which would be about $71 million, thinking in terms of that how do you expect the relative size of opportunity between the two environments electric vehicle and warehouse automation to play out as a mix of business as we further diversify away from the more cyclical areas of the business longer term?.

Yes. That is a primarily a question of timing..

Yes..

So the warehouse automation wins and also the wins that we get into – in recreational vehicles, ATVs, and that sort of thing are short cycle and shorter term ramp-up. So, the amount of wins that show up in our quarterly profiles are skewed towards warehouse automation right now, because they're faster ramp-ups.

The electric vehicle wins are skewed out a few quarters after that because a win in that area means that you're selected to do the prototyping and then the new vehicles that go into the final test and then the hard tooling and then the production ramp-up. So there is a delay there.

So if you go on a pro forma basis, Page 9 is what we're going to look like. So the electric vehicles are going to be a larger proportion of our new business. Our core business is growing our legacy business also because of the outlook for trucking and transportation of goods.

And of course in North America, the Biden infrastructure packages heavily skewed towards the transportation. So the core market is going to grow, and I think that percentage is going to hang in there, but on the new business at or that we're putting in here in the mixed shift, electric vehicles are going to come on stronger..

Perfect.

And the incremental growth that you saw in warehouse automation, the 25% sequential growth, what comprised that growth as far as the number of new wins that came to fruition in the quarter versus mainly further existing share of wallet wins, can you kind of characterize that growth in quarter?.

Yes, we're doing two things. We are participating in volume growth, that's occurring in the segment and we also have expanded our product offering and the business wins that we had here were all tied to product additions to our portfolio. And so, it was twofold.

I don't know, Chris, do you have a sense of that ratio there?.

Yes, Chris, the bulk of it in the second quarter was the expansion of existing business. The new wins that we got, we'll see more in the third and fourth quarter..

Okay. And then one last question and then I'll hop back in the queue and leave it for others. But warehouse automation, if we go back to the very initial innings granted, we're still in the early innings of this opportunity. The gross margin profile was characterized as being accretive.

Can you talk about how that gross margin profile of warehouse automation has evolved as you gained more learnings in the environments and gained further understanding of the potential for growth?.

Yes, Chris, this is Chris. I think the initial business that we picked up was mildly accretive as we've said on previous calls. As Harold mentioned, in his notes, we're picking up new business that's a little more complicated, I would say.

And those margins are going to be, I guess, a little bit higher than the existing core business that we have today. So some of these new pieces of business have more complex assemblies, more complex panels and things like that.

I wouldn't expect that these margins are going to grow up tremendously, but they generally are accretive overall to our legacy business and the new wins are a little bit more accretive than the existing wins that we have..

Okay. Thanks for taking my questions..

Thanks, Chris..

And your next question comes from John Franzreb with Sidoti..

Good morning, guys.

How are you, Harold and Chris?.

Hi, John..

Good. Good morning..

I just want to go back to – question.

You talked about anticipated [indiscernible] during the third quarter is what you alluded to more acute in one segment versus other?.

Well, the gross margin percent are – we're having a lot of cost pass throughs right now with inflated materials and the cost pass through price negotiations with customers, they're very sharp to not let us have extra margin on cost pass through. So it's compressing our percentages as we go through that. And I would say its commodity based, John.

So if you look at inflation that's happening and how it ties to our types of materials, we buy steel as a big one. So anywhere we will use steel is having that dynamic and then inbound freight. So when we have inbound freight, our global supply chains, the price containers and the price of ocean going freight has gone up.

So it's tied into our components we use in the material and entered our supply chain strategy. So I would say probably skewed towards seating, Chris, versus electrical in terms of our reporting segments. So, I would say, it's going to be focused in that area, John..

Great, that actually helpful. And in the warehouse automation business, I guess, a couple of things there. Harold, it sounded like you're increasing capacity in that business.

Can you give us a sense of how much you're increasing it by? And how has that changed your CapEx plans for the second half of the year versus the first?.

Yes, the warehouse automation business is CapEx light, so it's primarily an assembly business, to Chris's point it's complicated assembly and these experienced assemblers, but we primarily by the bill of material, we have just a few main parts in that arena as assembly and testing and checkout. And so, it's floor space.

It's low-level lighting, its [indiscernible], its torque wrenches; it's that kind of thing. It's not heavy on the capital side. However, it does pull through a working capital profile and you'll see that our working capital went up it's around 16.8% of sales, which is what we average in 2019. That's kind of a normal level for us.

So it primarily pulls along with that working capital and we have to front end load it, because we have to build in the inventory profiles to initiate production and the supply chains for circuit boards and all that kind of thing. We have up to 52-week lead time.

So we're putting in a decent amount of inventory, so that we can continue to grow in the market. And you've seen some of the pronouncements from some of the big e-commerce shippers. So they have their foot on the gas.

So we're trying to stay synchronized with their expectations on putting in new warehouses to do parcel distribution and last mile delivery..

Okay. And I think Chris said that the warehouse automation should be danced eventually in terms of revenue through the new builds.

Could you please provide some followers with that statement?.

Yes. So our customers will move into a new build cycle John as they implement new warehouse builds. And so they have a somewhat seasonal approach to their build. So they'll contract out their business for an annual basis. And the kind of a gap period is right now, and so we're going to have a little bit of a dip in the revenue in the third quarter.

And then that should increase in the fourth quarter and the next year as they continue to build into the coming quarters. As we say that we're still expecting to hit $150 million in revenue for the full year..

Okay.

I guess one last question on the debt re-financing; it looks like you actually added debt – net debt to the balance sheet what was behind that decision?.

Yes. It's all working capital, John. Our revenues have gone up tremendously, so there's timing around when we sell product and ultimately collect versus build the inventory and buy the product. So some of this is timing.

Overall our working capital as a percent of sales is fairly consistent with last year, and our overall leverage is actually down from Q1..

And I guess I'm going to stick us in.

We will kind of – what are your thoughts about debt repayments? How does the new refinancing change that one way the other?.

Yes. So we have a – in the new debt deal, we have a structured amortization pay down of the debt. So that'll start in the third quarter. So we'll report that out in the third quarter. It's in the – the details are in the debt deal, and so it's a structured pay down on the Term A, note..

Got it. I got it. Thanks for taking my questions. Great quarter..

Thank you, John..

Thank you, John..

[Operator Instructions] And your next question comes from Barry Haimes with Sage Asset Management..

Thanks so much for taking the question. Great quarter. Two questions actually. First one is could you talk a little bit about your truck business in terms of whether the chip shortage that they're facing is affecting or pushing at any of your deliveries to them or is that pretty much on track? That's the first question, I've got another..

Yes. It does affect us. It's putting a cap on the industry production cycles globally. And so it's actually beneficial a little bit because we haven't had the traditional purpose up and purpose down in terms of truck building. So the truck – the truck build rate is steady because of that, and we have a steady outlook there.

Intel CEO announced two weeks ago that he thought that the chip shortage for last for two years and we read like everyone else on this. We're not in that business. So the market forecasters for our industry are adopting that outlook and are suggesting that it's going to be steady production builds for several years because of that.

So it's impacting us. Yes..

Okay, great. Thanks. That helps me. And you're right. If it's moves out the cycle, especially could be a good thing. Second question is, could you talk a little bit more about the recreational and specialty vehicles space may not be as sexy as the EVs or the warehouse, but it strikes me that that's a very big potential market.

So could you just talk a little bit about what you're trying to do there, what you're not trying to do there and how big could that get over the next couple of three years? Thanks..

Yes. Okay. So there's some big public filers public reporters here. One of the ones that we read and follow is Polaris, and what they say the industry is going to do or not because they're a global powerhouse of many types of vehicles. And they're suggesting that there's a big backlog here.

And the COVID change in habits has led to many people seeking that type of recreational activity. So the demand is strong on specialty vehicles for us also includes military vehicles, buses, transit vans, beer delivery trucks, all that type of ambulances as far trucks at those types of ancillary vehicles that are not high volume.

But they're complicated and good. We've always been in those businesses traditionally in seeding, and one of the things we started a year-and-a-half ago was to bring our full product basket to those industries. And so we've been pursuing the specialty plastic parts as well as the wipers, if they have windshields, mirrors and the electrical system.

So we've been a big – we've taken our full product basket to go after both of those industries and they're doing well. And we have some customer connectivity because of our legacy relationships from seeding and we've had expanded the product offerings that we've had there. And it's turned out to be good. You can see it on our new wins chart.

It's starting to show up on our doughnut chart that we're getting bigger on those areas. So it's a focus area for us..

Great. Thanks so much. Appreciate the color..

Thanks, Barry..

And there are no further questions. I will now turn the call over to management for closing remarks..

I want to thank everyone for calling and supporting the company. And we're very focused here on our strategy realignment and we're benefiting from this hard earned success. And we're still dealing with COVID, but we're safe and have a safety, alive and well at the company.

And we look forward to reporting continued progress in our next quarterly results. Thank you for your attention today..

This concludes today's conference call. You may now disconnect..