Good morning, ladies and gentlemen. And welcome to the CVG’s First Quarter 2023 Earnings Conference Call. During this presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference is being recorded.
I would now like to turn the conference over to Mr. Andy Cheung, Executive Vice President and Chief Financial Officer. Please go ahead, sir..
Thank you, operator. And welcome everyone to our conference call. Joining me on the call today is Harold Bevis, President and CEO of CVG. This morning, we’ll provide a brief company update as well as commentary regarding our first quarter 2023 results, after which, we’ll open the call for questions.
As a reminder, this conference call is being webcast and a supplemental earnings presentation is available on our website. Both may contain forward-looking statements, including, but not limited to, expectations for future periods regarding market trends, cost-saving initiatives and new product initiatives, among others.
Actual results may differ from anticipated results because of certain risks and uncertainties.
These risks and uncertainties may include, but not limited to, economic conditions in the markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, financial covenant compliance and liquidity, risks associated with conducting business in foreign countries and currencies and other risks as detailed in our SEC filings.
I will now turn the call over to Harold to provide a company update..
Thank you, Andy. And good morning, everyone. I want to apologize in advance as I have a small cold and I might cough a few times. And also you know I sound worse than I am. But we're very happy to be speaking this morning. And as is our usual format. We'll be referring to an earnings presentation which is found on our website.
While you locate that, I wanted to say a few opening comments. Our business performance in the first quarter was strong and consistent with the qualitative comments we made in the earnings call. The last earnings call. We delivered record quarterly sales of over 7% year-over-year through a combination of increased volumes.
The contribution of new business ramp ups and price increases flowing through, profitability was meaningful improved as well, due to better price cost spread realized in the quarter.
In addition to strong financial performance this quarter, we continued to deliver significant business growth for the future, adding approximately $85 million in additional new wins at full annual value, a record amount of new business awards for a single quarter.
And we are revising are 2023 $100 million new wins guidance to $150 million of new wins, 90% of this first quarter wins were in our electric systems business, and 90% of the wins are on electric vehicles, including vans, trucks, and other non-classic vehicles.
We continue to win globally with new customers and new products, diversifying our customer base and further upgrading our revenue mix toward electrical systems. During the quarter, we made progress on working capital through a focus on receivables and inventory. We have almost completely worked down our built up COVID Insurance layers.
And we're back to more historical working capital levels as a percentage of sales. COVID is behind us as far as material supply chains are concerned. And our net debt leverage is back to two times and headed into the one this year. On the customer front, we're all about customer satisfaction. And we had a good quarter on that front.
Across all of our products globally, and especially in the new area of electrical systems, we're making -- we're working on many electric vehicle platforms globally. We broke into the China market in Q1 within an electric vehicle for our customer who will be our anchor partner for a new high voltage electrical system. Our customers are satisfied.
And we are working with many of them globally to advance our electric vehicle platforms and we're proud to be doing so. Our growth, profitability and cash flow strategies are working. And we are looking to accelerate our efforts and cash flow strategies this year.
We're transforming our revenue mix organically by expanding our market share with new customers and getting on to new vehicle platforms, both internal combustion engine power trains and electric vehicle power trains.
We're transforming our cost profile organically as well by automating processes moving to low cost countries and lowering our cost of quality. We believe that we are delivering best-in-class quality and service to our customers.
With the progress we've made in our strategy, we also believe that we're on track to deliver against our long term sales goal commitment of $1.5 billion in 2027.
Our current revenue run rate combined with the ramp up of our cumulative $500 million and new annualized wins, since the start of this program three years ago, gives us improved line of sight to that target already. And we intend to win another $500 million new business between now and the end of ‘27.
We also are making meaningful progress towards our long term EBITDA goal of 9% in ‘27. We have caught up on price cost. And we continue to ramp up our $30 million per year of cost out program to protect our margins and offset new wage inflation that we're still seeing. We expect additional accretive margin flow from our new business one as well.
And it will drive us towards our ‘27 target of 9%. Our ‘23 outlook continues to be positive. Our quarterly sales and EBITDA margins through the year should look very similar to Q1 with the possibility of a minor slowdown in top line in the fourth quarter, which is tied to lower industry truck wheel forecasts.
A new business win rate is on track for $150 million a year. Year is off to a strong start maybe even an inflection points for us. And our best performance is ahead of us. And CVG’s future is very bright. We're already reporting out at a $1 billion revenue run rate. While still ramping up many of our new wins. Our profit rates are already improved.
And we plan to maintain them and grow them with an aggressive cost out program, price maintenance program and a continued mix shift. Q2 is now underway and on track, and timing and amount of new wins in the first quarter centered in our electrical systems gives us further confidence regarding the outlook for 2023.
And for what it's worth, we're also at record employment and added over 600 people in the first quarter alone. We're off and running as a company. And one of our core values is to have fun while we work, and we're absolutely having a blast. Now I'd like to turn to the investor deck. Starting with page 1, please.
Our team delivered strong results in the first quarter highlighted by record levels of revenue and profitability levels that were in line with our long-term targets. As outlined on the slide, we delivered net sales of $263 million, which is up 7.5% year-over-year and adjusted EBITDA of almost $20 million, which is up 47% year-over-year.
This results in an adjusted EBITDA margin of 7.5%, putting us on track to hit our long term target of 9%. As we continue to win new business, optimize our costs and improve profitability. As I mentioned earlier, we had a very strong quarter for new business wins. And furthermore, we continue to see the realization of our pricing efforts.
And we are delivering on our $30 plus million costs out plan at the same time. Turning the page 4, our team continue to execute our strategy during the quarter.
And as I already mentioned, we're making significant progress towards transforming our revenue mix through the success of our electric systems new business wins, and we're committed to driving cost out as well, to improve profitability as we go. We have good visibility to the remaining of 2023. We fully expect to accelerate our efforts.
Positioning further along our growth trajectory. Our revenue run rate is already reporting at $1 billion and we are underway with ramping up another $350 million in new wins of the past few years. The impacts of our strategy execution were evident in our first quarter. And our EBITDA margin shows we're on track to hit our 9% margin target for ‘2027.
We continue to win new business in electrical systems. And it's a key focus for us. We set a record for wins in the quarter. And as I mentioned, we're increasing our guidance to $150 million for this year. Combined, we've already won over $0.5 billion in cumulative revenue across 300 new vehicle platforms and a few other industrial platforms.
Finally, we continue to optimize our ongoing business. And we will continue to address non- profitable business areas. We are delivering on our cost out plans. And we expect to reduce our debt leverage further in the coming quarters. Turning to page 5.
Similar to the comments from the last quarter, our demand and market outlook is promising for the remainder of the year. Supported by healthy forecasts across our key end markets on this slide. We are increasingly confident in our positive 2023 outlook.
Also, our large public customers are reporting strong year-to-date results, healthy order books, and are expecting continued momentum and growth across the end market this year. These trends and results give us confidence that we're well positioned to participate in the growing demand from our customers and the industry.
And that we will build on the record level of revenues and new business wins we are achieving. And of course, we're doubling down on normal market growth via our new wins program and business growth on top of this market growth. These are additive. Turning to page 6.
Our business wins continue to cumulatively increase and so does the contribution by year. This chart shows an increase expected contribution from new business in hand versus our last update. During the quarter, 90% of our new business wins are within electrical systems business and more specifically tied to electric vehicle production.
Notable wins during the quarter included a contract manufacturer electrical system for an electric delivery van in North America, and contract manufacturer of electrical systems for electric vehicle in China.
These are important for us, especially the China one win more act as an anchor customer for us as we expand our electric systems manufacturing operations in China and we have already ordered the equipment to do so.
Turning to page 7, as we have highlighted in previous quarters, CVG stands to benefit and is participating in a secular transition of ICE powertrains to electric vehicles. Our secret sauce in this space continues to be proprietary manufacturing software to make and test our products quickly and efficiently.
Our speed, nimbleness and process engineering sets us apart from our competitors, and is a key contributor during new business prospecting. This methodology in successful business prospecting has allowed us to move quickly and accurately, and secure accretive new business in electric systems.
We're continuing to target low to medium volumes, which we believe allows us to achieve a better margin profile.
In terms of our targeted customer base CVG targets customers with large total addressable markets within the commercial vehicle space, and companies that service both electric vehicle and ICE propulsion systems across a variety of geographic markets. We're looking to replicate our North American business model globally.
And as previously mentioned, we're adding a new plant for European production in Morocco. We will cover these expansion projects in a moment. Please turn the page to slide 8.
As we've discussed previously, CVG has a large scale global capacity expansion program underway bringing on a significant amount of state-of-the-art capacity in electric systems in multiple markets at the same time. This is made possible due to our record breaking pace of new business wins.
And highlighted here on page 8 are the three expansion projects that are underway right now. And expected to be ramped up and making electric system products before yearend 2023.
These new facilities are in low cost country locations that are close to end markets and our customers and also provide a springboard to enable a higher continued rate additive new win. All these projects are on schedule. We are being aggressive, but measured in our approach to adding capacity.
Turning to page 9, as you can see our strategic focus on reducing cyclicality, expanding our customer roster, and increasing our exposure to secular growth trends is paying off. We've reduced our exposure to Class 8 trucks, we've grown our revenue share of electric systems. And we've reduced the wait of large customers and our mix.
Our strategic focus here as well as our continued strong pace of new wins will shift the mix even further in our favorite by ‘27. As a reminder, the mix shift brings a more attractive growth, margin and return on invested capital profile for CVG.
Turning to page 10, CVG is fully committed to driving shareholder value in both the short term and long term. And we are delivering improved profitability in our ongoing business.
And we are improving our exiting unprofitable or risky business, we will continue driving our costs and allocating our capital and resources to support strategic growth opportunities. The work we've done to reposition our portfolio is evident in today's results. And we look forward to continued execution of our strategic priorities.
We are deepening our exposure to the secular trend and electrification and automation. Increasingly winning new business which improves our growth outlook, diversifies our customer base and reduces the cyclicality of our business.
We expect to generate meaningful cash flow, which will further fund our growth, drive debt pays down and allow for strategic acquisitions and increase our exposure to this powerful trend. Turning the page 11. We are highlighting where we are relative to our long term commitments, we've made to you.
On our last call, we told you that we were set up to win and make money in ’23, deliver a year of record revenue, higher EBITDA and continued free cash flow and debt pay down. After the first quarter, we're even more confident in these statements. And we're more confident in our ability to achieve our long term targets.
These 2027 targets are well within our reach. And we just need to continue doing what we're already doing. In addition to our expected $150 million in new ones this year, we're still targeting at least $100 million in new wins each successive year concentrated within electrical systems.
We expect these wins to diversify our product portfolio, our customer base and drive growth and profitability. We expect strong cash flow which combined with our discipline approach to working capital, will be prioritized for additional debt pay down and to potentially fund bolt-on M&A. Our business transformation remains on track.
And we are in increasingly confident in delivering against our committed goals of $1.5 billion revenue and 9% EBITDA margins. Turning to page 12 and before I turn the call back over to Andy, I'll just quickly update you on how we are envisioning 2023 playing out compared to 2022.
We expect 2023 be our third record revenue year in a row on the back of steady vehicle demand as forecasted by ACT and FTR, higher pricing and new business revenue. We expect both gross margin and EBITDA improvement with pricing ahead of inflation, new business ramp ups and additional cost out.
The cash flow generated will drive down our leverage ratios for further debt pay down in addition to higher EBITDA levels. We expect to secure $150 million in new business wins this year. And we're seeing the vast majority of our wins in electric systems. We remain on track to hit our $30 million of costs out target for this year.
And we have reduced our exposure to large startup costs in the vehicle solutions business. We will exit 2023 in a better financial position than we entered it with a strong future outlook and a strong balance sheet that provides optionality to drive additional growth.
With that, I'd like to turn the call back over to Andy, as he gives you more detailed review of our financial results, and I get a new cough drop. Andy, I'd like to turn it over to you..
Thank you, Harold. And good morning, everyone. If you are following along in the presentation, please turn to slide 14. First quarter 2023 revenue was $262.7 million as compared to $244.4 million from the prior year period.
The increase revenues were primarily driven by increased pricing to offset material costs increases and increased vehicle related sales, offset by lower volume in the industrial automation segments. Foreign currency translation also unfavorably impacted first quarter of 2023 revenues by $3.6 million, or 1.5%.
The company reported consolidated operating income of $14.6 million for the first quarter of 2023 compared to income of $8.4 million in the prior year period. The increase was driven by higher margins, partially offset by higher SG&A. The first quarter of 2023 adjusted operating income was $15.4 million.
Adjusted EBITDA was $19.8 million for the first quarter, up 47% year-over-year, compared to $13.5 million in the prior year. Adjusted EBITDA margins was 7.5%, an expansion of 200 basis points as compared to adjusted EBITDA margins of 5.5% in the first quarter of 2022.
Interest expense was $2.9 million, as compared to $2 million in the first quarter of 2022. Net income for the quarter was $8.7 million, or $0.26 per diluted share, as compared to net income of $4 million, or $0.12 per diluted share in the prior year period.
Turning to the segment results on this slide, you can see the performance of our three vehicle related segments on a combined basis. The combined revenues increased 20% to $253 million, compared to $210 million in the year ago quarter.
Combined adjusted operating income was $25.1 million, an increase of 122% compared to $11.3 million in the prior year period. The growth in adjusted operating profit again demonstrates the powerful impact that are focused on price cost management as well as growth in the electrical systems and aftermarket segments have on our bottom line.
In our vehicle solution segment, first quarter revenues increased 15% to $160.6 million compared to the year ago quarter, primarily due to increased sales volume and increased pricing to offset material cost increases.
Operating income for the first quarter increased 112% to $13.4 million, compared to operating income of $6.3 million in the prior year period. First quarter 2023 adjusted operating income, which excludes special cost increased 106% to $13.5 million, primarily driven by increased pricing, lower freight cost and overhead reduction.
Our electrical system segment achieved revenues of $54.7 million, an increase of 37% compared to the year ago first quarter, resulting from increased pricing to offset material costs pass-through and new business wins.
Operating income was $6.1 million, an increase of $4.3 million compared to the first quarter of 2022 due to increased volume, pricing and manufacturing efficiencies.
Our aftermarket and accessories segment’s revenues increased 25% to $37.6 million compared to the year ago quarter, primarily resulting from increased sales volume and increase pricing to offset material cost pass-through. Operating income was $5.6 million, an increase of 82% compared to operating income of $2.6 million in the prior year period.
The increase is primarily attributable to increased pricing, offsetting moderating cost inflation. Our industrial automation segment produced first quarter revenues of $9.7 million, a decrease of 71% as compared to $34.1 million in the first quarter of 2022 due to lower demand levels.
Operating loss was $0.9 million, a decrease compared to the operating income of $3.7 million in the year ago quarter due to volume reduction and restructuring expenses, adjusted operating loss was $0.2 million, compared to income of $4.1 million in the prior year.
The restructuring efforts are expected to improve performance in these segments throughout the rest of 2023. Highlighted on slide 15, a key financial trend in our business. As I previously mentioned, this quarter EBITDA and margin percentage strongly improved on a sequential basis.
The sequential improvements were driven by pricing, our focus on operational excellence, and new business launches. Additionally, our net average continues to decline as we have generated increasing profitability. Therefore, we believe our net leverage growth declined further in 2023, as our strategy continues to deliver financial results.
For the remainder of this year, our financial priorities will be to drive additional cost savings to generate higher profitability, free cash flow, and invest in our new growing business platforms. Thank you. And I will now turn the call back over to Harold for some closing comments.
Harold?.
Thank you, Andy. I'd like to thank all of our employees for the contribution to our solid financial results and strategic priorities. And the pace of the progress that we've been able to achieve in our strategic plan has been better than we thought.
And it's fueled by strong focus on our transformation strategy and a clear prioritization of our initiatives, and our large and vibrant growing and new customer base. We're much stronger company in 2023. And we're ready to capitalize on secular growth and higher profits and the trends towards vehicle electrification.
And we look forward to sharing our successes for you in future calls. I'd now like to turn the call over to our operator and open the lineup for questions. Thank you..
[Operator Instructions] Your first question comes from Joe Gomes with NOBLE Capital..
Thank you for taking the questions and good morning.
So wondering on the vehicle related segments, could you kind of break out for us? What was the contribution from volume versus pricing in the quarter?.
Joe, so for the quarter we say with 20% growth in terms of revenues in three vehicle related segments, thinking about roughly 60% of that came from volume and 40% of that from pricing..
Excellent. Great. And I know you had talked in the past; I think you had like one more major contract that you needed to work on pricing.
Have you been able to get that finalized? Is that something you're still working on?.
Yes, we were able to finalize it. And we'll get extra contribution from that contract beginning April one. So it's already in place..
Okay, thank you for that. And I notice, corporate and other SG&A expenses rose fairly big on a percentage basis in the quarter.
What was behind that? Was that just on the cost reduction program expenses or other things that would drove that?.
Great question. A couple of things there. One is we invested in some of the SG&A costs to drive our cost reduction program. So we see some opportunity to invest and drive higher profitability there. And then the other thing that contributed to it was some of the variable compensation. Last year was low in terms of incentive comp.
So those are the main driver for SG&A..
Okay, and one more if I may.
On the new plant startups, just wondering how they're going how they're proceeding? Are they all on schedule for all the new plants?.
Yes, so Aldama, which is near Chihuahua, Mexico, is significantly ahead of schedule. We may get to open that one quarter early. And Morocco and [Ago Piata] are on schedule. Ago Piata is scheduled to produce Q4, and Morocco in Q3.
And we have, they have to start up to, Joe, we have new wins for new vehicles that are ramping up both in Europe and in the United States that need our electrical systems inside of them. So we're on the clock. And we have backup plans in case some unforeseen action happens. But in the vehicle world, you have to do these things in a high quality manner.
And PPAM is the term and pass quality regimens and we're on track and significantly ahead in Aldama..
Your next question comes from John Franzreb with Sidoti..
Good morning, guys. Congratulations on a great quarter. I like to start with the margin profile. Either the gross or the operating term, we want to address it but increased significantly.
And it seems to me there's a bunch of buckets that could have drove that, it could have been volume, pricing, cost savings, new business or the exclusion of startup costs.
Can you kind of walk through the puts and takes of how those changes impacted? The gross and/or operating margin?.
Yes, so I think you're right, John, all of the above, you mentioned, I will say the biggest impact is pricing. Our recovery of the inflation that we saw last year. So our price cost management is our single biggest contributor.
At the same time, we also see a strong volume leverage in our vehicle segments, but those are kind of got offset by our industrial automation side. The other thing that really add to our profitability is the cost reduction. So as Harold mentioned, we are on track and we are very confident of our cost out programs. So that's helped us a lot in that.
And then lastly, last year, if you remember, the supply chain disruption as well as the Ukraine war generated some inefficiency in the business and we were able to recover and get back on efficiency level. So those will help us with driving strong results..
Got it. Now, Andy, and Harold, I think you deferred to giving specifics on the cost savings plans. Now that it's starting to really impact the P&L.
Can you maybe talk a little bit of what the actions are you are taking and how much you realize about $30 million so far in the first quarter?.
Yes, so we have multiple categories of cost out. We have procurement, we have cost efficiency. We have plant overhead consolidation. And we have global supply chain optimization. And we have some SG&A. And we have about 350 projects in a Project Tracker. And in the first quarter, we were ahead of plan, we did almost $9 million of costs out of the plan.
So the plans are delivering. So it's our -- it's the highest amount of cost out we've attempted. And coupled with Joe's question and Andy's answer, we've added some talented people and continuous improvement. And we're opportunity rich. And we're actually contemplating plans to increase our focus on this effort, but it brings CapEx with it.
And we'll report out on that in the future. We're not trying to withhold it. We were hesitant to make many public comments, because it was a first time thing for us, John, but it's turning out to be much more successful than we thought..
Your next question comes from Gary Prestopino with Barrington Research..
Good morning, Harold and Andy, a couple of questions here.
I just want to be clear; you're saying that the margins that you guys have attained in this quarter are pretty much sustainable throughout the years? Is that correct?.
Yes..
Okay. So. And then as far as the SG&A expense, somebody asked a question about that it is somewhat elevated, I think there was a couple of puts and takes there.
But as we're looking at this, should it kind of stay at that almost 7.8% of revenue as we go through the year?.
Yes, I would say that's about right. So for the year, again, we are capitalizing on a lot of opportunities that we see. So there's a lot of good payback projects that we are very happy to invest. I think we'll stay around the level for the moment, we'll continue to see the profit that come with it..
I am sorry, Harold, go ahead..
I was just going to say that it's mainly people cost. So we'll be able to flex it, if needed..
Okay.
When you guys released numbers for Q4, you said about $85 million, I'm sorry, $100 million of new business wins, you got $85 million of that in quarter and raise it by $50 million? I mean, what was the surprise there that occurred that caused it to your almost get that entire new business win in q1? And then given the ability to raise it, was there something there that you didn't think you were going to sign and it came over the transom?.
So we have a big pipeline. And in previous decks, we've reported out on the size of the pipeline, and we are running about a one out of six hit rate. And so Gary it’s around an 18% hit rate. And so at all times, including right now, we have finish line proposals that we've made to customers to produce their products for them.
And they have won -- they have a few people they're going to choose from and so we were able to win a decent amount of business in the quarter, because our pipeline, the timing of our pipeline came into the quarters, it was not really a higher hit rate per se. It was really a timing of decisioning.
And if you look at the rest of this year and the timing of decisioning, it is still at a high rate, there's a lot of awarding being done in our industry and in the case of electrical systems we have one of our main competitors, Gary, his name Leoni, they are public company in Germany, and they filed bankruptcy in the first quarter.
And so our amount of looks actually is increasing. And so we're organizing to do that, and get our capacity lined up to be able to more aggressively bid so that our pipeline coupled with a big industry participant kind of in trouble is giving us confidence to increase the outlook for the year.
And we're not going to, we didn't increase outlook for next year or the year after we said $100 million. But it looks like this year, we're going to have a more fruitful environment than we expected..
Does that German competitor, are they liquidating or they just going to be restructuring?.
The German bankruptcy laws, they had the equivalent of a prepack, they have a white knight who's well known billionaire from Austria, when I'm with them, but it's going to be like any bankruptcy, there'll be good old fashioned litigation from the bondholders that have to take a haircut and all that.
So it's going to go on for a while, there's a court process, but it's well-known that the cable industry is pretty tight. And they have constrained capital. We're getting more looks than we expected. And we already had a vibrant pipeline. So we feel pretty confident in $150 million..
Your next question comes from Barry Haimes from Sage Asset Management..
Thanks so much, and congrats on the great quarter. My question is, on the various EV programs. Could you give us a little thumbnail sketch, on average, how the margin progression looks? I presume there's some amount of cost before you start production. And then when you do start production, how many quarters to ramp to normal.
And then are the normalized margins on these programs anticipated to be less than equal to or greater than, let's say your legacy truck away margins. Thanks so much..
You're welcome. I'm going to address the program lifecycle part of it. And I'm going to hand it to Andy to talk about the margin comments. So the typical EV program is about two years. So we get an award. And then we go through some prototyping and first article testing. And then the vehicle maker goes through some prototype vehicle testing.
And then we solidify and freeze the design. And then we have to prepack bill of material in the manufacturing process so that they're repetitive and consistent through every vehicle, and set up for metrics for quality and on time and all that. And we've been expensing that cost as we go.
And we started this three years ago, we were reporting out what our startup costs were, because they were impeding our profits when we were just getting started. Spin forward to today, we're more than covering those startup costs, and they're in our number. And they're becoming less and less on a percentage basis, because we're growing.
We also reported that we were not going to aggressively pursue startups seeding business, because it had a very high startup cost. And we had a well-known one that was in the press last year. And we've basically have focused in our bullseye of electric systems, and actually, the startup cost profile is minimal.
With regards to the planned startups, that the reason why the electric systems businesses are accretive from an ROIC standpoint is they are CapEx light. Our secret sauce in that business is actually software. It's not capital equipment. So we have a special internal software program that we've designed.
And we're using globally, that allow us to take our designs, put them straight onto a plasma screen, and have in testing that's automated. And we have really obviated the need for a lot of capital. So we have a very good setup here. When a when a plan starts up, of course, there's some overhead and efficiencies.
And because the way we're playing the game here is that we're pre-selling out most of the capacity and then ramping up the plans with business we already have. So it's actually about a one quarter breakeven kind of a deal when we get started, but I'll now turn it over to Andy to talk further about margins..
Yes, so in terms of the electrical system margin, so you can see today we are already at a low double digit, OI operating income margin level. Just say that the new business all are coming in at an accretive margin profile.
So we're happy to continue to launch a business and then will actually continue to give us the improvements to the overall business unit margin..
Your next question comes from Steven Martin with Slater Capital Management..
Hi, guys. So aftermarket parts, finally, I guess you turned it on in the first quarter.
How did the new business perform, and what should we expect over the balance of the year?.
Yes, so we're out of the gates on that. And it's been performing as expected with a meaningful expansion, our profit margins. So basically, it's a direct customer play versus going through an intermediary. And so the end customer has a price they're willing to pay, and so we have a direct channel to the end user there.
And so you should expect to see our profit rates gradually increase in that business. The business itself grows around 4% to 5% unit volume and another amount based on annual price increases. So you'll see modest growth relative to electric vehicles, electric systems, where we're having explosive growth for us. So it'll be a modest growth outlook.
But with margin expansion..
You at one point said it was a $100 million opportunity over what time frame, a, is that still your target? And over what time frame?.
Yes. So the business in the first quarter was $37 million. So it's well above the $100 million rate. And our goal in that business is in the 2027 business plan. Our goal is to double that business, and it involves replicating our business strategy in APAC, Asia Pacific.
It involves replicating our business strategy in Europe and it involves expanding our product line into other aftermarket products other than Class 8 truck seats..
So from -- when you look at 2027 from a margin perspective what would you expect the operating margin of that to be?.
It will be accretive to our company average that we've articulated..
Correct. So overall our long term target is 9% EBITDA margin. So now see we are well on our way there and clearly growing the electrical system business and the aftermarket business are the one that will drive to that target. So the mix shift is going to be meaningful and help contribute to that target..
Okay.
And turning to unfortunately the lagging business, how low does that go and can we expect to arrest or at least break even in that over the course of the year?.
Yes, so it's bottomed out now, we think that we're nearing an inflection point up. If you look at the leading indicators from Amazon and other e-commerce shippers, they're suggesting that they're going to restart modest rebuilding. So we get orders when they build new parcel distribution centers.
That's the automation part of it that we participating in and we have non warehouse automation business as well. So it's not going to get worse. I can say that. And we have hope that in the second half is better than the first half. It's too early to say that though. This is a PO business. If we had POs in hand, I would make more confident comments here.
But as of right now we're expecting a turn in the second half, but we're yet to see it..
Right. And last year it started to fall off in the second quarter, but really fell off in the back half. So the comparisons for that business get easier as we get through the year..
Exactly, right..
There are no further questions at this time. Mr. Bevis back over to you..
Thank you everyone for calling in today. We appreciate your interest and investment in our company..