Good morning, ladies and gentlemen, and welcome to the CVGI Q1 2024 Earnings Call. 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, and 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 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 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 due to softer market conditions that we expected to continue in the year. These conditions, along with a strong quarter in the prior year, created tough comparisons 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 become 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 focus within our Electrical Systems segment and support the product ramp-up at our two new plants and an additional facility in Morocco, which are focused on meeting the demand growth in Electrical Systems. Turning to Slide 4, I'd like to highlight some recent strategic actions we've taken, which serve as a reminder of our continued goal to align costs and improve margins at CVG. 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. 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. Our operational excellence emphasis supports our ongoing cost-out program, focusing 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. These efforts are targeted to improve profitability, increase enterprise-wide efficiency, and support our outlook for the full year 2024. 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 were $232 million compared to $263 million in the prior year period. The decrease in revenues is primarily due 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 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 compared to $2.9 million for 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, 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, compared to $9.2 million, or $0.28 per diluted share in the prior year. Moving to the segment results beginning on Slide 7, our Electrical Systems segment achieved revenues of $55.8 million, an increase of 1.9% compared to the year-ago quarter, primarily resulting from increased pricing. Sales volume with legacy customers saw a slight decline due to 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, primarily due to lower customer demand, including the impact of supply shortages at a key customer that negatively affected 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 expenses. 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 bore fruit. Turning to Slide 10, our Industrial Automation segment produced first quarter revenues of $4.3 million, a decrease of 56% 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 right-size this business. We are focused on strengthening both commercial excellence and operational execution to improve order intake. In parallel with these activities, we are actively exploring new end markets and developing highly engineered products. An example of this is the development of a new product named STACK, which was showcased 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 help 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 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 for questions.

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?

The majority of the wind-down has been completed. For the quarter, we'll call it a single-digit million level of impact. Remember, this is the anticipated wind-down that we discussed a few quarters ago. At the time when we were negotiating pricing in the last round, we determined that certain programs were unfavorable for us, and we decided to exit them. The impact is reflected in Q1, which was a process we have been working through for some time, and it takes some time to conclude the final production. Now in 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 together, and what your anticipated annualized savings rate will be from these actions?

Yes. We announced last quarter that we were undertaking fuel restructuring, mainly here in North America. During the quarter, in Q1, we executed about $2 million of restructuring costs. I would say, about two-thirds of it related to headcount reductions and one-third related to facility closings. We are more than halfway through our restructuring program. We will still have some activity in Q2, and most of this should be ramped up by Q3 for both our facility manufacturing as well as SG&A. That's where we are right now.

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

Yes. It depends really on the different types of projects. We have a mixed bag of multiple types 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 actions within the restructuring program.

Lastly, the Industrial Automation business took a step down in revenue compared to the second half of last year. I was under the impression it would potentially improve in the year ahead. Has something fundamentally changed? Can you 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 P.O.-based business to more engineered product, serialized production business with longer-term contracts. So part of this was anticipated. However, the P.O. business is very cyclical and lumpy as it comes in. Several of our customers are in government contracting. Typically, we see a pickup around year-end spending toward the end of the third quarter. This time it has been lighter than in the prior year. As we invest in SG&A to move toward engineered products, such as the STACK product that we mentioned, we've added engineers and SG&A to participate in the MODEX show for this product and other new products with new customers. We're in the midst of this transformation, and we have seen recent improvements in our order input, as well as contracts where we'll be shipping products in Q3 and Q4. The leading indicators are giving us confidence that we'll continue to turn this around.

So James, it's fair to say you think this is a revenue trough while we are in that transition period?

To a certain degree, yes. But it can depend on the sharp rebound or if we secure near-term contracts on these new products, we could see more of a spike up, or it may take longer depending on the new products. These new products require prototype and alpha and beta testing, which takes 3 to 6 months for prototypes and 6 to 9 months for full-scale production. Many of these products have higher SKU prices than some of our existing contract manufacturing products.

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

My question revolves around what you're doing on the restructuring side. Given the fluidity of changes you're seeing in some of your markets, particularly in the electrical systems areas starting to see some weakness in construction and agriculture, have you identified most of what you want to do in 2024 in terms of restructuring, or is this more of a fluid process that will be ongoing?

It's really going to depend on how this market recovery tracks. In the construction and agricultural segments, our business is primarily with legacy long-term customers. We need to be prepared for a market recovery. So we will continue to adjust both up and down depending on signals we get from those customer segments. Last year, indications from our outlooks led to a low single-digit year-over-year improvement, but they've since communicated a flat to down 10% outlook for the year. We had plans in place for an increase, and now we are pivoting to scale things back. It's a delicate balance to maintain margins while ensuring we have adequate capacity when they do come back to fulfill contracts and not lose market share. Our outlook remains positive as these markets are somewhat cyclical.

Regarding your guidance, $60 million to $73 million for EBITDA, would it be more related to the Electrical segment that would push you below that $60 million?

It could be due to a number of items. It could stem from a deterioration in the Class 8 forecasts, which have been volatile in the last 6 months. Since the larger portion of our revenue stream relies on the Vehicle Solutions segment tied to Class 8 trucks, we could see a reversal of this positive trend back down. While we have more programs launching in the Electrical segment, some of those launches have been delayed, which contributes to our headwinds. We are confident that we will remain within that guidance range unless something significant occurs.

If I may add, one uncertainty we see is still from supply chain disruptions. There have been labor disruptions with our customers, affecting production. Additionally, the Suez Canal issue has impacted logistics. These are potential downside risks if issues persist throughout the year.

We have our next question coming from Joe Gomes from Noble Capital Markets.

On the electrical side of the business, it looks like growth has been slower than expected due to recent contract wins. Is there a specific reason behind this slower growth rate?

As James mentioned, the legacy customers are mostly in construction and agriculture. We are seeing a slight decline. However, looking back at the last few quarters, the growth from this segment comes from the continued ramping of our new wins over the years. This year, we've seen a slowdown in those ramps due to logistical and supply chain challenges faced by our customers, impacting their production and subsequently our revenues. Overall, we are still witnessing some level of new revenues but not as fast as we would like. We are hopeful that our customers can overcome their challenges and continue ramping the new businesses.

We are not experiencing any lost business from new wins, which gives us confidence that the market will recover. Our large segments in the Electrical business are construction and agriculture, both in North America and Europe. We also serve infrastructure customers and EV applications in legacy and new OEM startups, which creates a diverse set of segments.

For the construction and agricultural markets, have you identified major drivers of the deterioration in those industries?

There are several points we've heard from our OEM customers. One is that market conditions in China are poor, leading to low activity in the Asia Pacific region. In Europe, we are seeing a reduction in overall demand, influenced by the economy. In North America, recently, our customers have reported reduced activities, as they mentioned in their own earnings calls.

With the first quarter behind us, is the new business wins of $45 million in line with your goals for the quarter? Are we still expecting the $100 million range for you?

Yes, we are still expecting $100 million for the year. The $45 million is tracking well. We have a good pipeline in each of our business areas, and we need to secure the pending awards along with the opportunities we are pursuing. We have ample capacity and an aggressive outlook on securing these opportunities, so we feel confident we'll achieve that $100 million.

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

You mentioned the second Moroccan plant would be completed by the end of the first quarter. Has it been completed and is it currently producing?

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

How are the new Moroccan plant and the new Mexican factory performing?

Both facilities are ramping up well. The Morocco footprint is improving our funnel of opportunities in Europe, yielding good customer responses. We also have a facility in Mexico, the Aldama facility outside of Chihuahua, which is ramping up well. We are managing both facilities in parallel, following a ramp schedule set for this year and early next year with some new business wins we secured in the past 12 to 18 months.

If I were to choose the midpoint of this year's guidance, and given how you've performed in the first quarter, that would imply that the back half would have to be up 10% to 15% to meet the midpoint of your guidance. What gives you that level of comfort? All four businesses were down in the first quarter.

Yes, Steve. If you look at our guidance, you'll clearly see there's a wider range communicated. James mentioned the potential upside if demand in Class 8 rebounds. It's tough to predict where the final year will land, but we confidently manage our earnings. We're also taking proactive actions to right-size the business based on anticipated customer demand changes. We are more confident in our ability to manage earnings.

Additionally, restructuring benefits will start ramping higher in the second half due to our efforts in the first half. Our cost-out program's savings will come in higher as volumes from new projects ramp up, helping mitigate some downside from lower top lines. We believe the trucking and Class 8 markets will continue to strengthen, but we are prepared to manage effectively whatever happens.

When do you expect to see the benefits of the new cycle coming in?

The 2027 calendar year will introduce new federal emissions for Class 8 vehicles. This may drive a prebuy effect in 2025 and 2026, leading to drops afterwards. We expect the new models will start ramping up production in the latter part of 2024. This gives us confidence in the back half of the year, as many manufacturers change models mid to late the previous year, affecting their production ramps.

The aftermarket benefits are tied to the new truck sales. Should we see those benefits, or will we not notice them until the business stabilizes?

We expect to see some benefit. The majority of our aftermarket business is in seating. We've implemented changes to improve our offerings and inventory fulfillment, which has driven increases in inbound orders. We are working on capturing market share from our competitors and have seen good early indicators of improvement, which we hope will lead to stronger aftermarket performance in the second half.

We have a follow-up question from Joe Gomes from Noble Capital Markets.

Can you provide more detail on the additional cost actions you mentioned and how much more of the previous cost actions need to be completed before the full savings are realized?

A large part of our cost actions aims to right-size our businesses to offset softer demand in our Vehicle Solutions and Electrical segments. Labor increases in Mexico due to government mandates are affecting our costs, along with the recently strengthened peso, which increases our peso-denominated costs. We are working on reducing our cost structure and resolving these pressures with our customers. We have seen some progress with labor inflation but still need to manage costs tied to the peso.

Last year, we achieved approximately $30 million of cost-out activity at a gross level. We are on track to achieve a similar goal this year, both in logistics, supply chain, and direct material. We are looking at indirect spend as well. The framework we set last year for direct material remains, but we are leaning more into supply chain logistics due to disruptions and risks. We are exploring onshoring or near-shoring to minimize foreign exchange and supply chain risks.

There seem 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 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 and 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.