Good morning, ladies and gentlemen, and welcome to CVG's First Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. I will now have to turn the call over to Mr. Chris Bohnert, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and welcome to our conference call. Joining me on the call today is Harold Bevis, President and CEO of CVG. We'll provide a brief company update as well as commentary regarding our first quarter results, after which we'll open the call for questions. This conference call is being webcast and a supplemental earnings presentation is available on our website. Both may contain forward-looking statements, including but not limited to expectations for future periods regarding market trends, cost savings initiatives, and new product initiatives, among others. Actual results may differ from anticipated results because of certain risks and uncertainties. These risks and uncertainties may include, but are not limited to, economic conditions in the markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, financial covenant compliance and liquidity, risks associated with conducting business in foreign countries and currencies, and other risks as detailed in our SEC filings. I'll now turn the call over to Harold to provide a company update. Harold?

Thank you, Chris. Good morning, everyone. On today's call we'll provide an overview of our first quarter results followed by an update of our strategic initiatives designed to grow our earnings while also positioning CVG to deliver more stable results as we strive to mitigate the cyclicality of our business and improve our growth outlook. Chris will discuss our financial results in more detail as well as our debt refinancing which will reduce our interest expense beginning in the second quarter while also freeing us of restricted covenants that previously precluded us from M&A. We'll conclude by opening the call to answer your questions. Please turn to Page 4 of our earnings presentation. We delivered record sales for the first quarter of 2021 of $245 million, an increase of 31% compared to the first quarter last year. This strong growth was largely driven by warehouse automation where we delivered $41.99 million in sales, representing 22% sequential growth, and we remain on track to meet or exceed our full year goal of $150 million in warehouse automation sales. Our operating income increased to $15.4 million in the first quarter, which compares favorably to a loss of $26.5 million in the same quarter a year ago. The improvement was largely the result of better volumes combined with our successful efforts over the past year to reduce our cost structure and drive operational efficiencies across the company. Rationalizing and reallocating our cost profile has been a priority of our management team and will provide a benefit as our systems continue to improve. The first quarter of 2020 included an impairment charge that did not recur. Adjusted EBITDA for the quarter was $21.19 million, representing nearly a 100% increase compared to the $11.9 million we delivered in the first quarter of 2020. The improvement was due to higher revenues along with improved details, combined with expense reductions and profit optimization actions that we executed throughout 2020, focusing on a new path. We delivered 26 cents per diluted share in the first quarter, compared to a loss of 80 cents per diluted share in the same quarter last year. As we have been discussing over the last year, the key component of our business transformation strategy is achieving new growth. As reported last quarter, we see $100 million of annual new sales awards in 2020 with approximately 40 new customers, the majority of which were in warehouse automation, lesser vehicles, and last mile delivery. When we refer to new business wins, we are speaking about the annual revenue amount when the award is fully ramped up. The warehouse automation business has a shorter cycle from awards to delivery. Therefore, the wins we secured in 2020 are transforming into revenues in 2021. Running a business is a key focus of our organization and is central to accelerating our sales growth, expanding our profitability, and diversifying our end market exposure away from legacy long-haul diesel trucks.

Thank you, Harold. If you're following along in the presentation, please turn to Slide 13. First quarter revenues were $245.1 million, an all-time quarterly sales record, and up 31% compared to $187.1 million in the prior year period. This increase reflects the substantial increase in the warehouse automation business and the North American heavy truck market returning to near comparable levels to the prior year. On a sequential basis, revenue increased 13.5% over the fourth quarter of 2020, which had revenue of $216 million. Foreign currency translations favorably impacted our first quarter revenues by $4.3 million, or about 2.3% compared to the prior year period. I'd like to spend a moment on our gross margins, which expanded approximately 190 basis points to 12.7% as compared to the first quarter of 2020. This expansion continues to reflect our renewed focus on profitability and our improving business mix. The key drivers of the expansion were volume leverage, business mix towards the warehouse automation end market, and operational costs improvement compared to 2020. The company reported consolidated operating income of $15.4 million for the first quarter of 2021, compared to a loss of $26.5 million in the prior year period. On an adjusted basis, operating income was $15.8 million, compared to $7.1 million in 2020. The improvement was primarily due to higher sales volume and an improved cost structure as a result of our cost actions, the improved sales mix, and the elimination of an impairment that was taken in the prior year, which did not reoccur in 2021.

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

I want to start off with a couple of related questions. First, congrats on all the new business. You mentioned in the slides that you've got some companies, without naming names here, you've had a whole bunch that you're working with. Some of them are launching models in 2021 and 2022. Presumably, it's in somewhat small numbers, but can you give us a sense as to whether those models are on track to launch this year, or is anyone seeing any issues? Again, without naming any names to avoid getting anyone in trouble, I'm curious to see if EBS is, in general, progressing the way you had hoped.

From our experience, Mike, we've seen no delays. If anything, the pause that happened over the last year with COVID and the related shutdowns that affected global vehicle industries, these new entrants didn't slow down at all and moved forward with their development programs. They have vehicle makers. That piece is on track. There's really no slowdown at all. The key part is really to get vehicles out faster, and we're seeing people do engineering, prototyping, legal builds, and production vehicles. So you read more than we do, Mike, but from our standpoint, this industry is doing very well, and it’s not slowing down at all.

Another topic I wanted to talk about is some of the legacy diesel providers or are they all with startups?

No, they're not with our legacy customers as we've previously reported in past years in our 10-K. They're all global powerhouses, and they all have platforms. They're just as important to us as the new players. The unique aspect of the new entrants for us is that we've never sold our electrical solutions into the truck market. We've always focused on the construction equipment market and a couple of other ancillary markets. Within this opportunity, we entered as not just a build-to-print manufacturer but as a designer of record. We have been good at this, and most of the new entrants, as you would expect, are in the prototype phase. The incumbents have modified existing platforms substituting their diesel powertrains for electric powertrains. They have the vehicles, and they're just converting the powertrain while the new players are doing both. We're engaged with both, as they are both vital to us now.

I want to touch on the supply chain issues facing the industry. You mentioned last quarter that there were some resin supply issues due to some weather events in Texas. Has that changed at all? Also, I've been hearing that some companies are saying they can't get wire harnesses. Is it tough for you to find suppliers for them considering you're at record levels of sales and maximum capacity in certain areas?

Well, it's a constraint for sure. There are many public filers in this industry, and if you follow their Q1 results, there have been concerns about material availability such as resin, chemicals, metals, chips, and general slowdowns in the supply chain affecting the global industry. This is factored into our outlook. We've accepted this as a reality for this year, that we might not have the demand to catch up with the orders. If you monitor orders in the global industry, they far exceed production capabilities. Therefore, production may be slightly muted as we work to catch up. Regarding connectors and electric harnesses, specifically, shortages are impacting us too. We've conducted nearly 1,000 material substitutions that make maintaining consistency in our plants challenging. While we see it as a constraint, it’s not worsening, it’s stable, but we expect this component supplier shortage to persist for several quarters.

Following up on that, in March, you had indicated there were challenges, and it seems those challenges are still present in May. Have you seen much change in your ATT balance for 2021, and do you believe it will be sufficient by the end of the year?

You're right that the annual amount for this year has not changed since our last report. However, the quarterly profile has shifted a bit. There was some hope for a slightly bigger Q2 than happened. But our belief is that the ATT information is reliable, and we embrace this outlook.

It seems like in March, the challenges you presented were already anticipated. Is it fair to say that the Fusion 3000 unit outlook we had then is still accurate?

I think that’s correct. People are actively working around these issues now. So yes, I would say the same issues exist, and there is a significant amount of effort being put into resolving these constraints.

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

Warehouse automation continues to perform well. Looking at Slide 7, I assume you would continue to perform ahead of market growth expectations. With electric vehicle platforms under development, could you speak about the opportunities for gross margin improvement through pricing cost initiatives or inorganic adjacencies around your current opportunity set?

Chris, do you want to take that one?

Our margins expanded significantly from the fourth quarter. We had mentioned in the fourth quarter call that we encountered a few items that affected our results, which did not reoccur this time related to bonuses. We have expansion in a couple of areas. One driver is the mix I’ve mentioned. We expect slight increases in the warehouse automation business on a percentage basis while still showing significant growth year on year. Our focus is to continue improving our business mix over the last couple of quarters. Now that the debt deal is behind us, Harold and I can focus more on improving those margins in the upcoming quarters. However, I wouldn’t expect significant increases in our margins due to the numerous emerging headwinds in supply chain and costs. But it will remain a continued focus for us moving forward.

Congratulations on getting that debt deal done. When you look at longer-term prospects, particularly regarding electric vehicles and warehouse automation, what is your sense of gross margin potential and revenue potential in a normal environment three to five years from now?

Yes, on the revenue side, we anticipate continuing to experience nice growth. Our focus remains on moving into adjacent opportunities. Regarding margin enhancement, these industries aren’t highly capital-intensive. Therefore, we will achieve margin expansion through improvements in our assembly processes. I don’t expect fundamental changes, but rather incremental improvements ahead. The warehouse automation piece is affecting our P&L now, and we are fortunate to have that. For the EV side, as noted in the presentation, those are longer cycle wins occurring more in the 2022-2023 phase, with margins still uncertain but likely incremental overall.

One last question. Regarding the aftermarket piece, contributing about $100 million in sales, could you discuss the positive dynamics you’re seeing and how you see that business moving forward?

In our organic growth pipeline activities, we’ve had a couple of early successes in warehouse automation and electric vehicle platforms that are just now gaining traction. The aftermarket business presents substantial opportunities as well. We’ve primarily serviced our vehicles from an OE standpoint in the aftermarket. However, there’s a significant opportunity in all makes aftermarket. For instance, we produce floor mats for certain trucks, and these aftermarket orders are significant. Our equipment can produce for any make, so we see ample opportunity to expand our product portfolio in the aftermarket. Notably, some of our top customers in the aftermarket don't even have significant positions in the LE market, indicating potential for growth. We're aiming to diversify and enhance our aftermarket business significantly in the future.

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

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

John, this aftermarket business has several components. As Harold mentioned, we hope to provide more insight into this as we develop this segment further in the future. There are components such as wipers and mirrors that have above-average margins. So significantly driving this business will definitely aid us in enhancing margins.

John, I'll add that many of our business proceedings involve obligations on a per-unit pricing basis. As those contracts transition to the aftermarket, we gain pricing flexibility. We are accustomed to producing our products one at a time, which helps mitigate headaches associated with variable demand. While there are additional costs tied to the aftermarket, we consistently recoup those on pricing, making it a highly profitable sector for us.

Regarding the PEV market, what is your sense of the incremental dollar contribution you expect to see from these platforms in the future?

Yes, it’s significant for us because we’ve not been a player in the retail market with our electric products. It could double our content per vehicle when we provide electric harnesses. It’s harnessing junction boxes and connections, involving many passive electrical components for both low and high voltage distribution. This has turned out to be a substantial opportunity for us, potentially contributing a few thousand dollars per vehicle if we can become the system supplier.

You did $42 million in the warehouse automation business this quarter, with guidance for over $150 million for the year. How does the cadence of revenue generation appear for this? Are there cyclicality patterns we should be aware of, or do you feel your guidance may be conservative?

Chris?

Yes, John. As we projected the $150 million goal for 2021, our order books presently indicate no cyclicality. In fact, we observe slightly stronger performance than we previously anticipated. We're not seeing any cyclical patterns. As mentioned before, these margins are slightly better than our overall margins, and we expect consistent year-on-year growth.

Regarding the recent refinancing of debt, you mentioned freeing up about $200 million in M&A capital. Can you elaborate on your acquisition criteria and any hurdles you anticipate when targeting M&A?

As a diversified industrial company, we have various options. It makes sense for us to pursue areas where we're already strong, particularly in complex assemblies and large labor forces. We might look at adjacencies first, but we aren't opposed to exploring opportunities that fit our operational model.

I agree. Our goal is to achieve higher earnings and stable earnings while reducing reliance on vehicle markets. We prefer smaller acquisitions versus large ones. We’ve had a pipeline of several hundred candidates going into the quarter with a successful strategy that led us to acquire the FSC business, creating a significant warehouse automation business. We're looking for value-adding acquisitions that integrate well into CVG's resources and global reach. We’re targeting acquisitions that support our growth strategy in a careful and thoughtful manner.

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

I have a question on the RV and specialty vehicle market, where you're starting to pursue some opportunities. I think it was around $9 million in orders for the quarter. Could you provide more details on the products you're supplying in this market and the competitive landscape?

There are many injection molders in this sector, but not many can manage large pieces like us. Our history of manufacturing large parts for trucks positions us as specialists in this area. We’re exploring various markets, especially off-road vehicle markets where we can deliver large plastic components. Our involvement in recreational vehicles doesn't include larger RVs but smaller vehicles with sizable plastic bodies, including components for ATVs, snowmobiles, boats, and more. Our expertise positions us well to capitalize on this growing segment.

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

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

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