Good morning, ladies and gentlemen, and welcome to CVG's Third Quarter 2022 Earnings Conference Call. During today's presentation, all parties will be on listen-only mode. Following the presentation, the conference will be opened 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. Andy Cheung, Executive Vice President and Chief Financial Officer. Please go ahead, sir..

Thank you, operator, and welcome, everyone, to our conference call. I'm very excited to join the CVG team and participate in my first earnings call with the company. 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 third quarter 2022 results, after which, we'll open the call for questions. As a reminder, this conference call is being webcast and a supplemental earnings presentation is available on our website, which we will refer to during the call.

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 a sincere welcome to the team, and good morning, everyone. I will be referring to our earnings presentation, which is found on our website. So if you could locate that document that'll be helpful in the dialogue this morning.

CVG delivered solid results in the third quarter across key metrics, and we continue to build strong momentum in our business transformation.

And as part of this transformation and as a result of the new wins over the past several years, CVG is positioning itself as a leading global electric system supplier and we remain on track for electrical systems to become our largest product line.

As we have outlined in previous calls, this shift will prove to be accretive to our organic growth and profitability, all while reducing the cyclicality and historical customer concentration of our business.

If you could turn to Slide 3 of the earnings call -- or the Q3 earnings presentation, you'll see that our business transformation efforts are gaining traction with sales growth of nearly 5% in the quarter, driven by our pricing efforts with key customers this year as well as the impact of our new business wins.

Our year-to-date business wins are tracking above $150 million on an annualized basis, including $39 million of new wins in the third quarter. We're also continuing to push for additional pricing with customers where necessary to both cover inflation and earn a fair return for our value add.

Free cash flow generation was strong in the quarter as expected, and our efforts to transform our cost structure remain ahead of schedule, which will further improve our competitive positioning. This includes investments in new low-cost facilities in low-cost countries as well as next-generation manufacturing processes.

Furthermore, with the relief we're seeing in steel pricing and freight costs, we believe inflation pressures for CVG may have peaked. We are on track with the first phase of our vertical integration and regionalization plan.

We will eliminate approximately 50% of our ocean freight from China to North America in early '23 by switching from sourcing certain components from China to producing those same components in-house in Mexico. This will further reduce our working capital, increase our cash flow, lower our costs and improve our service competitiveness.

Turning to Slide 4. You will see the initial evidence of the second half improvement that we discussed during last quarter's call. We drove sequential improvement across key metrics due to improved pricing, continued cost restructuring efforts and the impact of new business wins.

We also continue to make progress returning working capital back to pre-COVID levels, helping boost our free cash flow generation of $34 million in the quarter, supporting the company's strategic initiative to self-fund its growth and pay down our debt.

We expect to hit the high end of our debt paydown range for the full year and expect to fully pay off our revolver during the fourth quarter. In fact, it's almost paid off as of today.

Despite ongoing supply chain pressures, especially in semiconductors and transitory demand headwinds within our Warehouse Automation segment, we're on pace to deliver a record sales year. Moving to Slide 5. Our team continues to do a great job winning targeted new business and particularly within the Electrical Systems segment.

In year-to-date, we've secured over 30 new customers for our company worth $143 million in annualized revenue when fully ramped up. In looking to the balance of the fiscal year, our new business pipeline is robust and remain on track to achieve greater than $150 million of new annualized business wins.

Ending the third quarter, our pipeline of new business stood at approximately $5 billion in platform value and spans electric vehicles, earthmoving equipment, heavy and medium-duty trucks as well as emerging opportunities in commercial aerospace and defense.

This visibility to potential future business wins and continued momentum for our business transformation efforts.

As highlighted on Page 6, if you can turn to that page, we are well on our way to making electric systems our largest product line for CVG as I've mentioned previously and today and simply layer in the contribution of our new business wins on top of our current revenue base, gives a picture of the expected shift in the business mix.

As a reminder, our Electric Systems segment generates much higher OI margins in the other segments of CBG, making for a powerful profit growth story in the coming years. We remain focused on becoming a leader in electrification systems across commercial vehicles, passenger vehicles, material handling equipment, earthmoving equipment and power sports.

We're also making strong initial progress, as mentioned, entering brand-new markets for us like aerospace and defense. On Slide 7, we lay out an update for our e-commerce aftermarket business.

We spent a little bit of time getting the business ready for launch and getting the product lines ready, getting the software platform ready, getting our production and logistics capabilities ready. We expect to go live in early '23 with aftermarket seats in North America being the first product to launch.

We'll follow that up with launches in wipers, mirrors and road sensors. We will also design and trial new aftermarket seats on multiple platforms including our first-ever super comfortable low-profile suspension seats for top-selling pickup trucks and 4-wheel drive vehicles. It will be a first for us.

In looking to '24 and beyond, we expect to expand our platform geographically and continue to broaden our seating products to include delivery vans, school buses, construction equipment and tractors, while also expanding our North American footprint. Turning to Slide 8. We're reiterating here our key initiatives to drive value for shareholders.

We have a dual approach to optimizing our core business with proper pricing and aggressive cost reduction, and we continue to make substantial progress on both fronts. We'll continue to advance our new business endeavors and use our free cash flow to pay down our debt and fund growth. Turning to Slide 9.

CVG is executing against its long-term goals and business transformation plan, and we are determined to improve or exit underperforming segments of our business and replace it with new business and strengthen our balance sheet.

We believe we are on track to reduce the cyclicality of our business as we expand in secular growth industries, and we are reaffirming our long-term targets of delivering $1.9 billion in sales and approximately 8.5% adjusted OI margins. Turning to Page 10.

While we're proud of the progress we're making in our year-to-date performance, inflation and FX rates continue to mask our results. With that being said, we expect inflationary pressures to cool and our vertical integration plans to kick in, and we expect that CVG will experience less inflation-based profit compression in '23.

CVG continues to win in electric vehicle markets, and those wins are fundamentally transforming our top line and our margin outlook.

And as we look to the fourth quarter and into '23, we're confident that the momentum we have built, particularly as it relates to price, cost structure, base demand, verticalization and new business wins will further position us for further growth and profitability improvements.

Now I'd like to turn the call back to Andy for a more detailed review of our financial results.

Andy?.

Thank you, Harold. If you are following along in the investor deck, please turn to Slide 12. Third quarter 2020 revenues were $251.4 million as compared to $139.6 million from the prior year period.

The 4.9% year-over-year increase was primarily attributable to higher pricing to offset material cost increases and volume, but offset by a volume decrease in our warehouse automation business. Front currency translation also unfavorably impacted third quarter 2022 revenues by $6.5 million or 2.7%.

Gross profit was $26.8 million in the third quarter as compared to $30.1 million in the third quarter of 2021. Gross profit margins decreased to 10.7% as compared to 12.6% in the third quarter of 2021.

And primarily due to global supply chain and market disruptions, which have resulted in increased labor cost, raw material inflation and freight cost increases. As GVC stated, we expect to improve our gross margins in the coming quarters due to renegotiated pricing, continued cost restructuring and an improving supply chain environment.

The company reported consolidated operating income of $9.5 million for the third quarter of 2022 compared to $11.4 million in the prior year period, primarily due to the aforementioned lag in price increases, combined with $2.9 million of new business start-up costs and $0.6 million of restructuring expenses due to the continued execution of our core business optimization.

On an adjusted basis, operating income was $10.6 million compared to $12.2 million in the third quarter of 2021. Adjusted EBITDA was $14.3 million for the third quarter as compared to $16.9 million in the prior year. Adjusted EBITDA margins were 5.7% as compared to 7.1% in the third quarter of 2021.

Interest expense was $2.8 million as compared to $1.6 million in the third quarter of 2021. The increase in interest expense was primarily related to higher base interest rates on our variable rate debt.

Net income for the quarter was $3.6 million or $0.11 per diluted share as compared to net income of $7.5 million or $0.23 per diluted share in the prior year period. Turning to our segment results on Slide 13.

Our Vehicle Solutions segment's third quarter revenues increased 30.6% to $154 million compared to $117.9 million in the year ago quarter, primarily due to material cost pass-through and high volume. Operating income for the third quarter increased 227% to $9.6 million compared to operating income of $2.9 million in the prior year period.

primarily driven by volume leverage, increased pricing and lower health care costs. Third quarter of 2022 adjusted operating income was in line with GAAP operating income of $9.6 million.

Our Electrical Systems segment achieved revenues of $46.1 million, an increase of 15.1% as compared to $40.1 million in the year ago third quarter, resulting from material cost pass-through and contributions from the new business wins.

Operating income was $5.2 million, an increase of 5% compared to $4.9 million in the third quarter of 2021 due to a decrease in SG&A expenses, partially offset by increased labor cost, raw material inflation and freight cost increases. Adjusted operating income was the same as GAAP operating income in both periods.

Our aftermarket and accessory segment revenues increased 24.1% to $37.1 million compared to $29.9 million in the year ago quarter, primarily resulting from increased volume and pricing to offset material cost increases. Operating income was $5.4 million compared to operating income of $2.3 million in the prior year period.

The increase is primarily attributable to the increase in pricing to offset higher material and labor costs. Adjusted operating income was $5.4 million, an increase of 130% compared to the year ago third quarter.

Our warehouse automation segment produced third quarter revenues of $14.1 million, a decrease as compared to $51.7 million in the third quarter of 2021 due to lower demand levels.

Operating loss was $1 million decrease compared to the operating income of $8 million in the year ago quarter, primarily attributable to the previously mentioned lower volumes. Adjusted operating loss was $0.7 million compared to income of $8.1 million in the prior year period.

This concludes my comments on the quarter, and I would like to add that I'm really excited to have joined the CVG team and look forward to driving the transformation of the business. Now I'll turn the call back over to Harold for some additional remarks..

Thank you, Andy. Turning to Page 14 in your deck. -- looking ahead, looking forward, we see stable order demand in our vehicle markets. However, we do expect order demand to remain weak in the warehouse automation segment in the near future.

We have additional pricing actions underway in our vehicle markets, and we expect to continue to generate stable positive free cash flow. We are having continued wins in Electrical Systems as this vehicle architecture naturally fits CVG's core strengths.

In order to support our growth in these markets, we are implementing new low-cost plants in both Mexico and Northern Africa. Our operations team is kicking in with aggressive vertical integration to lower our costs, improve our service and generate further free cash flow.

Our entire team here at CVG is committed to driving significant continued transformation. This concludes our prepared remarks, and I'll now turn the call back over to the operator, Sergio, to open the line up for questions. Thank you..

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] One moment, please, first question. First question comes from Joe Gomes from [Robo Capital]..

So last quarter, you talked about you still needed about 20% of the contracts that needed to be repriced. I was wondering where that stands today. Given the recent or ongoing increases in inflation here, how does that play on some of the contracts that you had already replaced.

Are you still looking at getting acceptable margins on that business?.

Yes. So 2 questions there. So we have roughly 20% of our revenue that's trapped in money-losing contracts. We're inside of a year on them now, and we have open negotiations with regards to repricing them and new terms and conditions. But that negative band of business is still in our reported results in the quarter.

With regards to the 80% that we can act on, yes, we're still continuing to actively negotiate pricing and inflation recovery as we go along, and we have a set of price increase actions underway right now for the fourth quarter, and we have another set underway for Q1.

It's an ongoing thing for us, Joe, and I'm sure our peers and fellow reporters are doing the same thing. We're labor intensive, and we're having labor inflation and energy inflation. And so we have active pricing negotiations as we go along here. We expect that to continue through '23..

Okay. And you talked about improving or exiting underperforming legacy businesses.

I was wondering if you might give us just a little bit more color of what segments of the business are you identifying there that really need to be improved or potentially exited?.

Yes. So we set financial goals that we want to achieve in order to have a proper financial returns so we can reinvest into the business and be competitive. We've had 2 losses, if you will, where we have not we resecured the business on a go-forward basis. One was in Electrical Systems, one was in seating.

So it's not necessarily a product category or a sector. It's really customer-specific where we have underperforming profit rates. We're just going in and either we're trying to get a deal that both sides can mutually agree to, which, in most cases, means we're trying to increase our price.

We've had only 2 losses that are noteworthy in the last 1.5 years..

Okay. And one more for me, if I may. So you talked about the '22 forecast for Class 8 and 57, Classes 5 to 7 production.

Can you give us an idea of early -- What you're seeing here for 2023 in that market?.

Yes. So the reports came out this morning on the orders and the orders are very high. The current backlogs for vehicles are approaching 1.5 years now. The entire year of '23 appears to be sold out from the order books right now. ACT is the third party that we usually quote, they're predicting a similar year to this year.

And there's various opinions on that.

But right now, with the order books have been opened for 23 by all the main OEs globally, there's been a big in rush of initial orders in the orders have increased significantly, and they are a very high rate that exceed the industry's ability to produce on a practical basis, the supply chain issues that our OE customers have had are continuing, and they seem to all be reporting that semiconductors are becoming less of a problem.

However, they continue to have problems, axles, brakes and other componentry. So it's still a supply chain constrained outlook for '23 and orders exceed the abilities in the industry's ability to produce. So we believe that next year right now looks very similar to this year and its supply chain based..

Great. Much appreciate it..

Your next question comes from John Franzreb from Sidoti..

Harold. Welcome aboard, Andy. I'd like to try to start with the warehouse automation business. How about some updated thoughts there on when you reached the trough in that business? What kind of recovery are you thinking about? I think last time you talked about maybe mid next year, is that still on target? Or has that moved left or the right..

Yes. So you can tell from our numbers that, that segment is our disappointment. Our vehicle businesses are doing what we wanted them to do and behaving. We have good demand. But warehouse automation really went through a cliff event.

The big public reporter here is Amazon, and we're not allowed to really say our customer due to NDA, but they publicly report, they publicly said, and they do consume half of the industry's supply.

So if you look at what's happened with e-commerce and how it inflected up during COVID and now the shippers are reporting negative year-over-year comps, they put a hold on their infrastructures. It's not forever. They can't hold on forever.

But definitely, there's less spending in the physical infrastructures for e-commerce shipping, FedEx, UPS, Walmart, the top 50 e-commerce shippers and retailers. So, it is in a pause right now. We're suffering from it. We've pulled in our horns, John.

We've closed one of our plants, 1 of our 2 plants, one in Monona, Iowa and the cost -- our costs are still in Q3. But Q4 is going to look different in that business because we've adjusted our fixed cost structure, and we've aggressively reduced our staff.

So us as a supplier into the industry, we've rightsized our cost structure around our current run rate..

Okay. Fair enough. You mentioned that you're in process, I believe, of building greenfielding 2 new facilities, manufacturing facilities, one in Africa and one in Mexico.

Could you talk a little bit about the CapEx associated with that and when do you expect that to be completed?.

Yes. So the new wins that we've won, we need additional capacity that we don't have in North America and in Europe and the plant in Central Mexico. We haven't announced location yet, but it's in Central Mexico. It will be now it's probably within about 4 weeks. We're still kind of negotiating for the best deals we can get.

That one will be coming on line in Q3, and we'll begin producing products probably in Q4, the end of Q4. The one in Northern Africa is a little closer in. We need to begin producing in Q3. And so the plant will be coming online in Q2. With regards to capital, our Electrical Systems business is CapEx light.

But the spending will be inside of our corporate guidance of $20 million to $25 million of capital. That will be a similar number for next year. And we're running to the low end of that number this year but it's just a few million dollars, John. It's not a lot it's not expensive to expand in that business.

It's mainly setting up a good, low-cost hourly workforce. So we already have the equipment for one of the plants, and we have the equipment for the other one about ready to order it..

Okay. Got it.

And just for clarity, why the 2-step process in price increases in 4Q and 1Q again?.

Yes. So actually, this year, we had 4 separate price increases and that it gets down to our terms and conditions, like the 2 that are going to start on January 1, the deals we cut with them were that it's really when can you impact new POs. So this crowd gives you POs that go out a period of time so that they can secure supply for themselves.

And in a couple of instances, we acknowledged POs through 12/31. So when we renegotiate prices, they come into effect on the next set of POs that we accept. That's why there's a little bit of a timing lag because we honor their desire -- it's a partnership, and so they need certain oversupply.

And so when they put in the ADI portal set of POs and we acknowledge them, then we have to honor the price on them. It's kind of just layers in, John..

Okay. And one last question, I'll get back into queue. Your aftermarket business took a nice step-up in the third quarter.

What's driving all that?.

Yes. So 2 things. Well, I guess the main one is getting our production in order in both wipers and aftermarket seats in North America. We had a lot of part shortages in those businesses from Asia, and we've worked our way through them, and we vertically integrated in both of those areas.

And in the case of seeding, aftermarket seedinh, we've built an entire new plant and [Fimat], Alabama and the plant is online now. In the case of Vipers, we renovated our plant, which is in Indiana and did not need to build an additional plant. And so we worked through our backlog mainly.

It's mainly us working through our backlog, and we're still working through our backlog, John. We're not caught up yet on that one. It's one reason why we haven't launched the e-commerce second step on this because we have to build an inventory profile.

Fundamentally, we're going to go from make to order to ship from stock, and we've traditionally lost all of that business because we haven't had any available inventory, and that's going to be a big move for us, and we're coupling it with an electronic storefront. So the website is done. We have our Earl name that's called aftermarket truckparks.com.

The website's ready with Shopify in the background. But the covers are there because we still have a backlog we're working through. So, we expect to see a similar kind of flow in the fourth quarter in that business, John, and then picked up next year when we have a more proactive inventory position..

And I guess we should allow for higher inventory on a go-forward basis and leading into working capital a little bit?.

Yes and so we're going to have a bigger inventory profile in that business on an ongoing basis. Hopefully, it's a very good return for us. It's a very good return on investment. That's a capital business for us. So it will be accretive to return on invested capital, but it will have more inventory. Yes..

Your next question comes from Stephen Emerson, private investor..

I was just thinking to what extent you're able to reposition warehouse automation to all the reshoring of factories automation and such prime contractors like Rockwell. It strikes me that it's very similar systems and equipment..

Correct. And we -- Rockwell is a supplier to us. So we buy automation parks and pieces and make subsystems. But your first point is correct. And so what are we trying to do in warehouse automation. We're trying to reboot it, add customers and expand our service offering.

We fundamentally offer service, which is assembling automation components and to put away systems, take off and put away systems and kind of low-end robotics in these automated facilities.

We hired a new business leader from the industry, and we are modifying our system solution, and we're repurposing our inventory into systems that we can sell to other people.

Rockwell, they would be a consumer of this internally for their own manufacturing, but primarily, they're pushing -- They would like us to get on with what we're doing because we procure their components and put them into implementations..

When do you think you'll be putting out a bit for components and suppliers of automated factories..

So we have a lot of RFQs out. We're bidding on one of the -- well, the largest retailer in the world, you can get to that. We're bidding on their warehouses and their subsystems. We have an active pipeline in that business. That pipeline is inclusive to the $5 billion pipeline that we refer to.

That includes all of our pipeline activities for warehouse automation. But the industry is in a pause. So with Amazon taking a time out and FedEx taking a time out and they publicly reported it, you can surmise that the whole industry is in a wait-and-see mode here on what the steady state need is for their distribution networks.

And so we're bidding, but there's not a lot of active building right now, Steve. It's really -- the industry is down right now..

I'm referring to new segments that use your kind of skill sets, which is automated factories that are reshoring from the Orient..

Correct. We have a -- we're mainly focused on distribution and parcel handling, and our know-how is in warehousing and logistics versus like a factory. We don't have a skill set there..

The next question comes from [Flor Deli] from VT Capital..

Good morning.

Following up on that question, what product the new plant in Mexico and Northern Africa, what products or product lines will they be feeding into? Then following on that, what -- to the extent that they are replacing that supply out of third-party supply out of China, what percent of those products that you were buying will they be replacing?.

Okay. So the answer is different for each of those plants. So in Mexico, we're doing 2 things. One is we're building a brand-new plant to make electrical harnesses in Central Mexico to make high-voltage electrical systems for electric vehicles. We ran out of capacity with the amount of business that we won, and it's a big plant.

It will grow to be a big plant like a 1,000-person plan, and it will be focused in on making electric quire harnesses for electric vehicles for North America. We have another plant in Saltillo, Mexico, which I can say that name.

And that is a place where we're vertically integrating and reshoring metal fabrications and stampings that we've traditionally bought from China from vendors, and we bought equipment over the last year robotic welding equipment and finishing equipment.

And we've installed it in our plant in Mexico and sell to our existing plant in Mexico to make components for our seeding business and the amount of components in Phase I, we attacked our -- what we did is we attack our escalating ocean 3. And we attacked 50% of our ocean freight spend.

The ocean freight spend is coincident with the weight of the part. So we attacked 50% of our weight. It's not 50% of our buy, no. It's not 50% and of our spend, but it is 50% of our weight. And so our Phase 1, which is underway right now, and we'll kick in in Q1, will obviate eliminate 50% of our ocean freight.

Phase 2 of that is also next year, and we are going to be bringing in-house and onshoring our new Unity seat components, and we currently source those from China also and bring them into Mexico. We also bring them into Europe, but we are going to be putting in place the production capacity. Again, in that case, it will be in our U.S. plant.

We're targeting or Tennessee to make our Unity seed products instead of sourcing them. That will be about another 20% of the weight. So we will have brought we will have eliminated a big portion of our ocean freight, which has been in our cost model and in our business model for 14 years. So we will have redesigned that portion of our supply chain..

Just to add more, the new plant in Africa is also going to be our electrical business cabin -- Bring more of the new businesses. We are adding capacity over there to support our European-based customers..

Thank you, Andy. Yes. That helpful -- Thank you..

[Operator Instructions] There are no further questions at this time. You may proceed..

Thank you, Sergio. Well, thank you for listening in and asking questions. You can see that our vehicle businesses are doing well and improving and have a good outlook in terms of demand and our warehouse automation business is suffering right now as the industry is in a wait-and-see mode.

We've made a decision to rightsize our cost structure down, but we are bidding aggressively to add new customer positions when the business and the industry rebounds. And thank you for calling in this quarter, and we look forward to speaking with you in our next quarter. And with that, Sergio will end the call for today..

Thank you, and I ask that you please disconnect your lines..