Good morning, ladies and gentlemen, and welcome to the CVGI Q1 2024 Earnings Call. [Operator Instructions] This call is being recorded on Tuesday, May 7, 2024. I would now like to turn the conference over to Mr. Andy Chung, Chief Financial Officer. Please go ahead, sir. .

Thank you, operator, and welcome, everyone, to our conference call. Joining me on the call today is James Ray, President and CEO of CVG. This morning, we will provide a brief company update as well as commentary regarding our first quarter 2024 results, after which we will open the call for questions.

As a reminder, this conference call is being webcast in the Q1 2024 Earnings Call presentation, which we will refer to during this call is available on our website.

Both may contain forward-looking statements, including, but not limited to, expectations for future periods regarding market trends, cost-saving initiatives and new product initiatives, among others. Actual results may differ from anticipated results because of certain risks and uncertainties.

These risks and uncertainties may include, but are not limited to, economic conditions in the markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, financial covenant compliance and liquidity, risks associated with conducting business in foreign countries and currencies and other risks as held in our SEC filings.

I will now turn the call over to James to provide a company update. .

Thank you, Andy. I'd like to turn your attention to the supplemental earnings presentation, starting on Slide 3. As we discussed in last quarter's call, we launched restructuring initiatives, comprehending softer market conditions that were expected, and we continue to expect in the year.

These softer conditions as well as a strong quarter in the prior year period, made for a tough comparison versus the prior year across most metrics. We reported net sales of $232 million in the quarter and adjusted EBITDA of $12.7 million.

We remain focused on driving further operational efficiency improvements, strengthening our Vehicle Solutions segment, and growing our Electrical Systems segment to be our largest business.

We fully executed restructuring initiatives in the first quarter and combined with additional efforts I'll discuss later, underpin our financial guidance for 2024. Despite a net use of cash in the quarter, our net leverage ratio remained strong at 1.8x.

We also continued driving new business wins, recording approximately $45 million in new wins so far this year on a fully ramped basis.

Consistent with our strategy, these wins continue to be focused within our Electrical Systems segment and support the product ramp-up at our 2 new plants and additional Morocco facility, which are focused on meeting the demand growth in Electrical Systems. Turning to Slide 4.

I'd like to take this opportunity to highlight some recent strategic actions we've taken, which all serve as a reminder of our continued goal to align costs and improve margins at CVG.

First, we continue to make significant strides in our organizational efficiency improvements as our restructuring actions to reduce costs and align resources with our growth product lines remain underway. In line with that, we announced last quarter the consolidation of products manufactured in our facility in Chillicothe, Ohio.

We now have a signed purchase agreement for the sale of the Chillicothe facility, with the transaction expected to close in Q3. Second, our operational excellence emphasis supports our ongoing cost out program, which focuses on productivity, materials and conversion costs.

Finally, we are persistent in our efforts to increase engagement by prioritizing customer satisfaction across the organization. Our collaboration across business segments will help introduce new products, foster stronger customer relationships and help us manage inflationary price recoveries.

Collectively, these efforts are targeted to improve profitability, increase enterprise-wide efficiency and support our outlook for the full year 2024. Now moving to Slide 5, I'd like to highlight the expansion of our new Unity seat product line within our Vehicle Solutions segment.

The Unity seat line has many product features that are helping us win business globally, including powered full seat tilt and lever recline, decreased free play and performance above market requirements. Importantly, the Unity line has achieved safety compliance across all our strategic regions and market segments.

This expansion is a strong example of how we are strengthening our core vehicle solutions business through customer focus, solutions and technology. We look forward to growing our Unity sales globally and sharing our successes with you in future quarters.

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

Thank you, James, and good morning, everyone. If you are following along in the presentation, please turn to Slide 6. Consolidated first quarter 2024 revenues was $232 million as compared to $263 million in the prior year period.

The decrease in revenues is due primarily to a softening in customer demand globally, the anticipated wind down of certain programs in our Vehicle Solutions segment and a decline in our aftermarket and Industrial Automation segments, which more than offset an increase in Electrical Systems revenues.

Adjusted EBITDA was $12.7 million for the first quarter compared to $19.8 million in the prior year. Adjusted EBITDA margins were 5.5%, down 200 basis points as compared to adjusted EBITDA margins of 7.5% in the first quarter of 2023, driven primarily by lower volumes and inflationary impacts, partially offset by lower SG&A expenses.

Interest expense was $2.3 million as compared to $2.9 million in the first quarter of 2023. The decrease in interest expense was primarily related to lower average debt balances during the respective periods.

Net income for the quarter was $2.9 million or $0.09 per diluted share as compared to a net income of $8.7 million or $0.26 per diluted share in the prior year. Adjusted net income for the quarter was $4.4 million or $0.13 per diluted share as compared to $9.2 million or $0.28 per diluted share in the prior year.

Moving to the segment results beginning Slide 7. Our Electrical Systems segment achieved revenues of $55.8 million, an increase of 1.9% as compared to the year ago quarter with the increase resulting primarily from increased pricing.

Sales volume with legacy customers saw a slight decline as a result of softening construction and agriculture end markets. Recent comments from OEMs in these end markets have indicated weakening demand, and we will continue to proactively adjust our cost structure should these trends continue.

We have also seen customer delays in the ramp-up of new business wins resulting in total sales volume being largely flat year-over-year. Adjusted operating income was $3.1 million, a decrease of $3 million compared to the first quarter of 2023.

Operating income was negatively impacted at our Mexico facilities by the strengthening of the peso and the government mandated wage increases that took effect on January 1. We are continuing to work with our customers to offset these headwinds. However, negotiations remain ongoing.

Construction on our second Morocco facility remains on track and is expected to be completed by the fourth quarter of 2024. We will remain focused on driving operational improvements and optimizing margins even as additional new wins flow through. Turning to Slide 8.

Our Vehicle Solutions segment's first quarter revenues decreased 14% to $137.9 million compared to the year ago quarter, due primarily to lower customer demand, including the impact of supply shortages at a key customer that negatively impacted our schedules.

Additionally, the anticipated wind-down of certain unfavorable programs in the segment weighed on revenues in the quarter. Adjusted operating income for the first quarter was $10.9 million, a decrease of $2.6 million compared to the prior year period as lower market demand was partially offset by operational improvements and lower SG&A.

We remain focused on strengthening our core business in vehicle solutions, and this segment remains a key focus for our team in terms of reducing costs, driving further operational improvements as well as winning business on new platforms, all with the goal of driving improved margins. Moving to Slide 9.

Our aftermarket and Accessory segment, revenues in the first quarter decreased 9.5% to $34.1 million compared to the year ago quarter, primarily resulting from decreased sales volume on lower customer demand and the drawdown of backlog in the prior year period.

Adjusted operating income for the first quarter was $4.6 million, a decrease of $1 million compared to the prior year period. The decrease is primarily attributable to lower sales volumes. On a sequential basis, results in this segment increased in terms of revenue and adjusted operating income as our operational improvement initiatives bar food.

Turning to Slide 10. Our Industrial Automation segment produced first quarter revenues of $4.3 million, a decrease of 56% as compared to $9.7 million in the first quarter of 2023 due to ongoing challenging market conditions and reduced demand from legacy customers.

Adjusted operating income was a loss of $1.9 million compared to a loss of $0.2 million in the prior year period. We continue to take actions to rightsize this business. We are focused on strengthening our both commercial excellence and operational execution to improve order intake.

In parallel with these activities, we are actively exploring new end markets and developing new, highly engineered products. An example of this is the development of a new product named STACK, which was located at the MODEX trade show in March. This concludes my financial overview.

I will now turn the call back over to James to discuss our updated 2024 outlook. .

Thank you, Andy. Turning to Slide 11, I'll share several thoughts on our outlook for 2024. Following the introduction of our quantitative annual guidance at the revenue and adjusted EBITDA level in March 2024, we are reaffirming our previously announced guidance ranges for both metrics.

Industry forecasts currently project a decline in North American Class A truck builds of approximately 10% for the year, a slightly positive revision from the previous estimate of a 16% decline.

This favorable revised Class 8 outlook is being offset by weakening in the construction and agriculture end markets, which we expect to be flat to down 10% in 2024. Notwithstanding these market changes, we are reaffirming our guidance range of $915 million to $1.015 billion in full year 2024 revenues.

We believe our business will continue to be resilient as we benefit from the diversification strategy and forward-looking resource allocation.

Given the aforementioned truck build estimates, construction and agriculture market outlooks and the expectation for further Electrical Systems segment growth we expect adjusted EBITDA to be solidly in the previously provided guidance range of $60 million to $73 million for 2024.

We believe that the actions being taken to consolidate operations, rescale our labor force, together with continued discussions with our customers to manage headwinds will serve to underpin the guidance.

We continue to expect that we will generate positive free cash flow, providing us with optionality to pursue either debt paydown or inorganic growth efforts should we find an attractive opportunity.

We continue to see multiple opportunities to improve profitability through operational cost efficiency and making strategic sourcing decisions and expect all of this to lead to improved working capital management and increased cash generation.

Collectively, our business transformation is expected to drive a stronger business mix and make CVG a stronger and more profitable company in the coming years. With that, I will now turn the call back over to the operator to open the line up for questions.

Operator?.

Our first question comes from the line of John Franzreb from Sidoti & Company. .

I'd like to start with the Vehicle Solutions segment and the wind down of certain programs.

I'm curious how much of that impacted the revenue line year-over-year? And are those program wind-downs complete or will they continue into the second quarter and beyond?.

So the majority of the wind down has been completed. So right now, we see for the quarter, we'll call it a single-digit million level of impact.

But you heard remember, this is anticipated wind down that we talked about a few quarters ago at, I'll call it, maybe during the time when we negotiate the pricing, last round, we decided that there are certain programs that are not favorable for us, and we decided to exit them. So you can see the impact actually showing up now in Q1.

So something that we've been working through quite a while ago, and it takes some time for us to work through the final production. And now Q1, you can see the numbers. .

And Andy, is it safe to say that all the repricing actions and everything related to that is now in the unintended rearview mirror?.

Yes, you're right. .

Regarding the restructuring actions, can you quantify how much in restructuring actions that you're going to take maybe collectively, you have an idea for calendar '24 and what your anticipated annualized savings rate will be from these actions?.

Yes. So a couple of things. We announced last quarter that we were doing the fuel restructuring, mainly here in North America. During the quarter, in Q1, we executed about $2 million of restructuring costs. I'll call it, maybe 2/3 of it related to head count reductions and then 1/3 of it related to facility closing.

We are, I would call it more than halfway through our restructuring program. We will still have some activity going on in Q2. And most of this should be ramped up by Q3. So both in terms of our facility, manufacturing as well as SG&A. So that's where we are right now. .

And you anticipated net savings annualized when you've done this process?.

Yes. So it depends really on the different type of the projects. We obviously have a mixed bag of multiple kind of projects, SG&A and manufacturing. Normally, we target about 2 years of payback in our saving projects, but it depends on the type of the actions within the restructuring program. .

I guess lastly, and I'll get back in the queue. The Industrial Automation business took a little step down as far as revenue compared to the second half of last year. I was under, I guess, the anticipation we were troughing at that high 30%, low 40% revenue level.

And I actually was also under the impression that maybe that business had to potentially get better in the year ahead.

Has something fundamentally changed? Can you kind of talk about what's going on there?.

Yes, we're in the middle of the transformation of that business. As we talked about on the last call, we're shifting from more of a contract manufacturing PO-based business to more engineered product, serialized production business with longer-term contracts. So part of this was anticipated.

However, the PO business is very cyclical, and it's very lumpy as it comes in. So several of our customers are in the government space. And when they have year-end spend toward the end of the third quarter, typically for government, that's when we tend to see a pickup. So that's been lighter than it was in prior year.

And as we invest in SG&A to go to the engineered products, like we have mentioned, the STACK product, we added engineers and SG&A to participate in the MODEX show, that's for the stack product, but also other new products with other new customers that are much more technical and engineering heavy.

So we're in the midst of this transformation, and we have seen a recent improvement in our order inbound as well as contracts where we'll be shipping product in Q3 and Q4. So the leading indicators are giving us some level of confidence that we'll be continuing to turn this around going on the upside. .

So James, it's fair to say you think this is a revenue trough there as we're in that transition period. .

To a certain degree, yes. But it can depend on the sharp rebound or whether or not we get near-term contracts on these new products, we could see more of a spike back up or it may be a longer recovery depending on the new products.

These new products require prototype and alpha and beta testing of prototypes and customer facilities and also in their customer facilities as well when you're into a full fulfillment center ecosystem, there's a double level of beta and alpha testing.

So the time line for the new products from a revenue standpoint, the prototype revenue as well as NRE is in the 3- to 6-month range. And then full-scale production, we foresee that being in the 6- to 9-month range on these new products, which, in many cases, have a higher SKU price than some of our existing contract manufacturing products. .

Our next question comes from the line of Gary Prestopino from Barrington Research. .

My question has also revolve around what you're doing on the restructuring side. Given the fluidness of the changes you're seeing in some of your markets, particularly, I think you said some of the electrical systems areas starting to see some weakness in construction and Ag.

Have you've identified most of what you want to do in 2024 in terms of restructuring or is this more or less a fluid process that's really going to be ongoing?.

It's really going to depend on how this market recovery track. So in this construction ag segment of the market, our business is primarily with legacy long-term customers. They're not like new startups. So we do need to be prepared for a recovery in the market.

So we will continue to adjust both up and down, depending on the signals we get from that customer segment in those market segments.

In the fall last year, indications from our outlooks from those customers led to a low single-digit year-over-year improvement in what they had communicated, but they've since communicated a flat to down 10% outlook for the year. So we had plans in place to comprehend a low single-digit increase in the market.

And now we're in the pivot mode to scale things back for a flat to down 10%. So it was a pretty significant swing, the number of macro items influence that in different regions, both Europe and North America.

But that is what we're doing to flex to try and maintain as much margin, but also make sure we have the appropriate amount of capacity in place when they do come back, we're not left short of capacity and not able to fulfill the contracts we sign up for and lose market share. So it's quite a delicate balance to do that.

But our outlook remains very positive in these markets as they are somewhat cyclical in nature. .

And then in terms of your guidance, $60 million to $73 million for EBITDA, would it be more or less the Electrical segment that would have to do an unexpected downturn for you to be below that $60 million?.

It could be a number of items. It could be a deterioration back in Class 8. So if you recall, the Cloud may forecast by ACT has been somewhat volatile over the last 6 months of up, down and how that we're back up a little.

And because the larger portion of our revenue stream is in the Vehicle Solutions segment tied to Class 8 truck, we saw a reversal of this positive trend back down to the minus 16% or more percent down, that could inflow where we end up in the range. On the Electrical segment, because we have more programs that are launching.

And some of those launches have been delayed, which is some of the headwinds we see that they will be coming and a rebound in the construction Ag market I would say that we still are confident that we'll be in that range unless something very significant happens. .

And Gary, if I may add to it, one thing that we see some uncertainties and volatility is really still the supply chain disruption, the pop up here and there. You probably remember, last quarter, there was some labor disruption at our customers and those labor issues are still happening from places to places at different customers.

We saw this quarter also some of our suppliers or our customers also have supply issues impacting our customers. And of course, we all know that the Suez Canal issue affecting logistics. So those are the things probably I see potentially a downside risk if something continue to happen throughout the year.

So the last couple of quarters, we've seen some of that happening. .

[Operator Instructions] We have our next question coming from the line of Joe Gomes from Noble Capital Markets. .

So just a quick question. Just on the electrical side of the business. You kind of look to have this kind of a bit of a slower revenue growth than kind of we expected just given the kind of recent contract wins there.

Was there really something behind that like slower growth rate?.

Yes. So Josh, so as James already mentioned, so the legacy customer is mostly construction and agriculture. So as we explained that that's made up the majority of the end markets of the electrical segments. So that we are seeing a slight decline.

So at the same time, if you look back into the last couple of quarters, the growth of the segment, it comes from continued ramping our new wins over the years. As we described this year, we saw a slowdown of those ramp. So mostly because of customers seeing logistical and supply chain challenges. So they were not able to ramp up their production.

So in turn, obviously, we don't get the revenues to supply to them. So that's the combination that impacting this quarter. Overall, the volume is still up.

So meaning that we're still seeing some level of new revenues but not as fast as we would like but we hopefully that our customer can overcome their challenges and continue to ramp the new businesses. .

Yes. And Josh, I'll just add to that point. We are not seeing any lost business from new wins we booked. So that gives us a leading indicator that the market will come back at some point. We don't have any leakage of lost business. So we still feel confident that we're going to have a longer-term tailwind from all these new business wins.

And in addition to construction and Ag, it's also infrastructure customers as well as EV and electrification applications within legacy and new OEM startups. So it's a very diverse set of segments we serve into. But to Andy's point, the largest 2 segments in the Electrical business are ConAg, both in North America and Europe. .

And then just as for the ConAg markets, is there really a big driver in that deterioration of those industries that you guys have noticed?.

There are a few things that we heard from our OEM customers. One, as you know, China is in a bad spot right now. So the Asia Pacific activity is pretty low at this point. Europe, we also see some reduction in demand overall, again, with the economy over there. And then I think the most recent development here in the North America.

So compared to a few months ago, the market has low and our customers also publicly mentioned that in their own earnings call that they are seeing some reduced activities. So it's mostly demand-driven based on what we heard from our customers. .

And last one for me, I'll get back in queue.

I guess, with the first quarter over, is the new business wins of $45 million just in line with your goals for the quarter? Are we still really expecting the $100 million range for you?.

Yes. For the year, we're still expecting $100 million. The $45 million is tracking well. When you look at our pending awards that we've quoted as well as our pool opportunities that we're pursuing, not just within electrical, but also in our vehicle solutions group and aftermarket and accessories and also in industrial automation.

We have a good funnel in each one of those businesses. We just need to bring home the awards that are pending and then on the pursuit opportunities. We have ample capacity in our outlook to be aggressive on winning those opportunities in the pursuit funnel, too.

So we feel confident at this point that we will achieve that $100 million on an annualized basis that we have mentioned before in prior calls. .

Our next question comes from the line of Steven Martin from Slater. .

You said the second Moroccan plant would be completed by the end of the first quarter. Well, that was 40 days ago.

So I guess my question is, was it completed and is it producing?.

So we have an initial Morocco facility that we're currently producing and that was completed in Q4. The second facility was started in Q1 this year that will be complete by the end of Q4 this year with beneficial occupancy Q1 of '25. .

And how is the new Moroccan plant and the new Mexican plant doing?.

They're both ramping up very well. We are able to actually improve our funnel of opportunities with the North African Morocco footprint for the European market. So we're seeing good customer response from our expansion of our European footprint.

As you may know, we have facilities in the Ukraine as well as Czech Republic for the Electrical Systems business. So this expansion in the North Africa is positioning us well from a value proposition on new opportunities in Europe. And for Mexico, the Aldama facility, which is outside of Chihuahua, is ramping up very well.

Our main facility in Mexico was in Agrarian.

So the team that's managing those facilities is based in Chihuahua and graphite, and we're somewhat running those 2 in parallel, and we have a ramp schedule that will continue to ramp throughout the year and early next year with some of the North America new business wins that we booked over the past 12 to 18 months. .

And to follow up someone's earlier question about your guidance. If I were to choose the midpoint of this year's guidance, and given how you've done in the first quarter, that would imply that the back half would have to be up 10% to 15% to make the midpoint of your guidance.

What gives you that level of comfort? All 4 businesses were down this first quarter.

What businesses are going to swing enough to make that midpoint?.

Yes. So Steve, if you look at our guidance, you clearly see there's a little bit of a wider range that we communicated. James already mentioned, so there's the upside of potentially the ACT depressed in the demand on the customer side.

So I think right now, it's hard to say where the final year are going to land, but we believe that our range is pretty well covered in case of those scenarios. But we probably have more confidence in our ability to manage our earnings.

So as we mentioned that we've been taking proactive actions about rightsizing the business, anticipating the customer demand changes. So there's a few more levers for us to pull. So we are pretty confident in terms of our EBITDA guidance that the range that we produce. .

Yes. An additional point too, Steve, is the restructuring benefits will start to ramp higher in the second half after some of the efforts we took in the first.

In addition to that, as we have mentioned in prior calls, our cost-out program, some of those savings items will kick in higher as volume ramps up on new projects that were implemented in Q4 and Q1, and we continue to implement in Q2.

So on the cost side, we see opportunities to help mitigate some of the downside of lost top line or lower top line through the cost-out process that we're doing. And that, to Andy's point, it helps us manage the earnings a little better, especially in the second half.

And we're hopeful that the ACT and the Class 8 market will continue to strengthen in the outlook. We're not banking on it, but we're hoping that, that happens. And then Kanye, I do think that it's volatile right now, I'm not really sure where it's going to end up, but I don't have any indication that it's going to get much worse than flat to down 10%.

So we're planning for the worse and putting things in place to try and mitigate pressure on the EBITDA outlook. .

Follow-up to that. So first of all, as I said on the last call, 2023 ACT was not as bad as everybody expected at the beginning of the year. '24 ACT looks to be plus or minus, as you said, maybe a little better. '25 is supposed to be a new cycle.

When do you expect that you're going to see or we will start to see the benefits of that new cycle?.

Yes. So that's a very good question, Steve. It's interesting because, as you know, the '27 calendar year are new federal emissions for Class 8 vehicles. And I've seen ranges and estimates of potentially 30% higher engine costs as all of the emissions. So the '25 and '26 outlook from ACT is pretty much factoring in a prebuy.

So you'll see a larger drop in '27 because the buy was pulled ahead. And we would expect to see a '25 model year would start the summer of or to the latter part of '24 as the new models come on and they ramp up new production. A lot of the vehicle manufacturers have a model changed mid to late prior year of the stated year model.

So that's given us some indication and I think, to another question earlier, which gives us a little more confidence in the back half of the year. Even though ACT's forecast is showing a decline in Q4 compared to the prior quarters, we still see it depends on when those customers start their next model and how fast they ramp up.

So we have to be somewhat flexible and agile so that we can respond to those ramps, both on the high side and the low side. .

And ACT projected a bad Q4 in '23 and it ended up being a lot better. One last question. I would assume that aftermarket is the end to new truck yang in the sense that if somebody doesn't replace a truck, they have to buy some more stuff in the aftermarket to keep the existing truck on the road.

Should we see aftermarket benefit, or until you get it righted, we're just not going to see that benefit?.

No. We should see some benefit. And based on our portfolio, the majority of our aftermarket business is in seating. So we took an 80-20 approach since I came into the role to figure out how we can win an aftermarket seating. And there are some pretty solid players out there that we're going up against. And it comes down to 2 or 3 different things.

One is how easy it is to do business with ones we had a website that launched that really didn't hit that well, and it's because we didn't leverage our field sales reps that I mentioned in our last earnings call. We've done that now.

Then the second thing is what does the customer really want and how does that fit into our ability to carry inventory and have quick turnaround within 48, 72 hours of when they want to see. And that's what we've been working on in Q1 with our factory in Piedmont, Alabama, which makes our after-market seeds.

So we've put in some new processes for scheduling. We put in a different inventory profile model. We have a more regular touch point with our field sales reps. We have recently seen an increase in our inbound orders for aftermarket seating.

So I think the opportunity is out there for us to take advantage of capturing share that's existing with other competitors out there as long as we focus our offering and we do a much better job of advertising and having the right inventory fulfillment model. The other activity we started in Q1 was an incentive program for our field sales reps.

I think that was the leading behavior is driving the trailing result of increased inbound orders for aftermarket teams. So hopefully, we'll continue to see positive momentum in that. But we're looking at all different angles and being contemporary in our approach on how we're driving aftermarket sales.

It has been somewhat of a legacy business that was really focused on OE service for the major truck manufacturers. And now we're taking a more retail type approach with our field sales reps to have a more contemporary go at it.

So proofs in the footing, but right now, we have some good early indicators that we should see some uplift, which is also helping us put a better pencil on the second half of the year overall in the aggregate level of revenue. So we hope to see more aftermarket performance in the second half. .

We have a follow-up question coming from the line of Joe Gomes from Noble Capital Markets. .

Just a quick follow-up for me. Just a couple of quick questions. Like, you guys mentioned the additional cost actions in the press release. Can you provide just a little bit of detail what you guys are doing just to offset inflation and foreign exchange headwinds.

And then how much more of the previous cost actions need to be completed before the full savings to realize. .

Yes. So let me answer you on a few areas. So one is a large part of the cost action that we have is to make sure that we rightsize our businesses so that we can offset the impact of the softer demand of our businesses, Mostly in vehicle solutions, as well as electrical.

So electrical, as you can see, our margin pressure for the quarter came from really 2 main things. One is there's labor increases in Mexico and many of us are all aware that there's some government mandate of labor cost increase in the border region of Mexico up to about 20-ish percent.

So it's really impacting some of our locations in our Electrical business. And then the other one that is also creating some cost pressure for us is the strengthening of the Mexican peso which compared to a year ago is a double-digit increase in terms of the cost of Mexican peso-denominated costs for us. So we're working on both ends.

One is continue to do a reduction in our cost structure. We're taking our labor, rightsizing the overhead. At the same time, and more importantly, we're also working with our customer commercially to resolve some of this cost pressure.

I would say that we have made some progress already in terms of offsetting some of the labor inflation but we're still working through offsetting some of the peso strengthening cost pressure for us. So we'll continue those efforts in Q2, but we believe that we should be able to work with our customer to find some solutions. .

And referencing the other part of your question, last year, we said we achieved $30 million or approximately $30 million of cost-out activity at a gross level gross projects. And then obviously, the net once you roll inflation in and other things that brings that number down.

But we're on track to a similar number this year, both in logistics print supply chain as well as direct material, and we're taking a fresh look at indirect spend as well to achieve that same level. So we are leaning in, I would say, more specifically this year in other areas in addition to direct material.

Some of our direct material is directed by from our customers. We have a little less opportunity there than the spend that we have where we select our own suppliers and drive savings. So the framework that was put in place last year to drive the focus on direct material still there.

The framework that was put in place last year to have a specific cost out debt for manufacturing facility or conversion cost is still in place, pursuing that. More emphasis now this year pretty much driven by some macro items.

So freight on logistics is one area with the disruption in the Suez Canal and some of our supply chains that go across regions.

That has caused us to take a more specific look at our freight and logistics and supply chain costs and see what opportunity we can get there, also looking at onshoring or near-shoring to reduce long supply chains, which have both FX risk as well as supply chain risk.

So there are a number of items we're looking at to achieve that similar level of savings at a gross level that we achieved last year for this year, which is helping us further solidify our range on the EBITDA margin line. .

There seems to be no further questions at this time. I'd now like to turn the call back over to Mr. Ray for final closing comments. .

I'd like to thank you all for joining today's call. We remain excited for the prospects that we see for CVG as we continue to execute our forward-looking strategy of resource alignment, cost management and customer engagement. We reaffirm our business outlook, and we look forward to continuing to drive growth at CVG.

I hope you all have a great day and a safe day. Thank you very much for joining the call. .

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day..