Commercial Vehicle Group, Inc.

Good morning, ladies and gentlemen, and welcome to CVG's fourth quarter and full year 2023 earnings conference call. During today's presentation, all parties will be in the 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 call 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 Wei, President and CEO of CVG. This morning, we will provide a brief company update as well as commentary regarding our fourth quarter and full year 2023 results. After which, we will open the call for questions. As a reminder, this conference call is being webcast in a Q4 2023 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 confidence, compliance, and liquidity, risk 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, and good morning, everyone. It is an absolute pleasure to be joining you on my first earnings call as president and CEO of CVG. Having served on the board of directors since 2020, I've had the opportunity to witness the strength of CVG's business fundamentals, the transformative strategy in place, and the remarkable growth potential in this organization. We have great strategy, great people, and great customers. I was appointed president and CEO December of 2023, and there was a lot of good progress already underway from the leadership of our chairman and interim CEO, Bob Griffin. I want to thank Bob for all his efforts in the months prior to my appointment as president and CEO. As this is the first time I'm speaking to the majority of you, I'd like to offer a bit of my perspective on the opportunity I see ahead for CVG. I'm sure you're curious what will change with me as CEO. And to be clear, my aim is not to change our strategy, but rather to enhance it. In my role as a board member, I saw firsthand the hard work and planning that went into developing our transformation strategy. We think we are seeing the early benefits of that transformation. as our new business wins drive top-line growth and margin improvement, even as we see a downturn in the Class A truck builds, and this improved profitability is leading to reduced leverage and a healthier balance sheet. Additionally, we have provided our outlook for the full year 2024. More on this later. My goal is to best equip our teams to continue driving this transformation and to make sure we have the right culture in place to enable our teammates to drive us forward every day. In order to build and maintain this growth-focused culture, we need to do three key things. One, develop and reward our employees. Two, excite our customers. And three, deliver results to increase our value to shareholders. Fundamentally, it's all about people, processes, and capability. My goal as CEO is will be to make sure we are developing all three aspects through strong teamwork, continuous improvement, and building capability. I am incredibly excited about that opportunity ahead of us at CBG. Before turning to the details of the quarter, I want to highlight that Bill Johnson was elected to the Board of Directors in December. He brings a wealth of operating experience and expertise across a variety of business areas, including his current role as CEO and a board member of the Board of Directors of Avail Infrastructure Solutions. Bill also served as president and CEO of Wellbuilt from October 2018 to July 2022, and as the president and CEO and COO of Chart Industries from July 16 through June 2018. He possesses over 30 years of global experience, and we're excited to have Bill join our board. I have no doubt CVG will benefit from his skills and perspective. Now, I'd like to turn your attention to the supplemental earnings presentation starting on slide four. Following solid year-over-year improvements in the first few quarters of the year, our fourth quarter results were negatively impacted by a work stoppage at a customer facility and reduced demand. We reported net sales of $223 million in the quarter, and an adjusted EBITDA of $10.3 million. We continue to win and integrate new business, optimize costs, and work to improve profitability of our business. Our continued focus on margins, as well as the contribution of new wins, helped drive a 26% increase in full-year adjusted EBITDA to 6.8%, up 140 basis points compared to last year. For the full year, we generated $19 million in free cash flow, and combined with our strong EBITDA, our net leverage ratio declined to 1.5 times from 2.2 times. Speaking of new wins, we recorded in excess of $150 million of new wins this year on a fully ramped basis, continuing our strong track record of success. Consistent with our strategy, these winds continue to be focused within our electrical system segment and support the product ramp up at our two new plants in Mexico and Morocco, which are focused on meeting the demand growth in electrical systems. We're also currently expanding our footprint with an additional new plant under construction in Morocco. Turning to slide five, I'd like to take this opportunity to highlight some recent strategic actions we've taken. which all serve as a reminder of our ongoing focus to align costs and improve margins at CVG. First, we are closing one vehicle solutions facility in North America and shifting the production to other locations, in line with our goal of lowering our manufacturing costs and improving vehicle solutions margins. Second, we are taking additional steps to reduce organizational costs and align resources to support our highest growth product lines. These actions are part of our ongoing efforts to make sure we are cost competitive and improve our profitability over time. Finally, we announced the sale of our finished tech business in the vehicle solution segment in January of this year. While not a large transaction, it focuses our business portfolio more on our core growth opportunities and demonstrates our commitment to strategic capital allocation. These recent actions should echo well with our long-stated transformation strategy to improve the mix and profitability of our business through the growth of our electrical systems business. And 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 six. Consolidated fourth quarter 2023 revenue was $223.1 million as compared to $234.9 million in the prior year period. The decrease in revenues is due primarily to the impacts of a strike at a vehicle solution customer facility, which more than offset an increase in electrical system revenues. Foreign currency translation favorably impacted fourth quarter 2023 revenues by $1.8 million or 0.7%. Adjusted EBITDA was $10.3 million for the fourth quarter compared to $13.3 million in the prior year. Adjusted EBITDA margins were 4.6% down 110 basis points as compared to adjusted EBITDA margins of 5.7% in the fourth quarter of 2022, driven primarily by lower volumes and strike impacts. Interest expense was $2.4 million as compared to $2.9 million in the fourth quarter of 2022. The decrease in interest expense was primarily related to lower average debt balances during the respective periods, partially offset by higher interest rates on variable rate debt. Net income for the quarter was $23.3 million, or 70 cents per diluted share. as compared to a net loss of $32 million or negative $0.98 per diluted share in the prior year. Adjusted net income for the quarter was $2.9 million or $0.09 per diluted share as compared to $1.4 million or $0.04 per diluted share in the prior year. Consolidated full-year 2023 revenue was $994.7 million as compared to $981.6 million in the prior year period. The increase in revenues is due primarily to pricing and increase in electrical system volume. Foreign currency translation favorably impacted full year 2023 revenues by 2.0 million or 0.2%. Adjusted EBITDA was $67.6 million for the full year, up 26% compared to the prior year. Adjusted EBITDA margins were 6.8%, up 140 basis points as compared to adjusted EBITDA margins of 5.4% in 2022, driven by gross margin expansion, slightly offset by higher SG&A. Net income for the full year was $49.4 million, or $1.47 per diluted share, as compared to a net loss of $22 million, or negative 68 cents per share in the prior year. Adjusted net income for the year was $30.2 million, or 90 cents per diluted share, as compared to $16.4 million, or 51 cents per diluted share in the prior year. Turning to slide seven, I would like to highlight a few items on the adjusted EPS bridge, which include our adjustments to GAAP EPS, as well as one additional special item. First, we reversed a charge we took last year for deferred tax valuation allowance due to improved profitability in our U.S. operations. Second, we took a restructuring charge related to the footprint optimization and cost reduction efforts that James discussed, totaling 5 cents per share. Additionally, we were negatively impacted by a strike-related work stoppage at one of our customers' facilities during the quarter, which we estimate negatively impacted earnings by 6 cents per share. Adjusting for these items, our EPS would have been 15 cents per share. Now moving to segment results, beginning on slide eight. Our electrical system segment achieved revenues of $56.2 million, an increase of 19% compared to the year-ago fourth quarter, resulting from increased sales volume, including the impact of new customers, and increased pricing. Adjusted operating margin was 11.6%, an increase of 30 basis points compared to fourth quarter of 2022, driven by increased sales volume and improved pricing. For the full year, revenues were up 27%, again driven by pricing and new wins contribution. Full year adjusted operating income margin increased 100 basis points as volume leveraged and pricing more than offset inflationary impacts. Evident in these results are the impacts of our new business wins and the ramp-up of our two new plans in Mexico and Morocco, which remain on track to support these new wins. Furthermore, given the continued new wins, we are currently in the early construction phase for a second site in Morocco. As always, we will remain focused on driving operational improvements and optimizing margins, even as the additional new wins flow through. Turning to slide 9, our vehicle solution segment's fourth quarter revenues decreased 10% to $128.4 million compared to the year-ago quarter, due primarily to the impacts of a strike-related outage at one of our customer facilities. Adjusted operating margin for the fourth quarter was 3.1%, an increase of 20 basis points compared to the prior year period. as increased pricing and cost controls more than offset the impact of lower volumes related to the strike. For the full year, revenues were up 1% driven by increased North America Class 8 production. However, it was partially offset by lower volumes in Europe and China. Full year adjusted operating income margin increased 350 basis bonds different again by pricing and other cost controls. We are encouraged by the year-over-year improvements in vehicle solutions. But this segment remains a key focus for our team in terms of reducing cost, driving further operational improvements, as well as winning business on new platforms, all with the goal of driving improved margins. Moving to slide 10. Our aftermarket and accessory segment revenues in the fourth quarter decreased 8% to $31.4 million compared to the year-ago quarter, primarily resulting from decreased sales volume. It is also worth noting that our Q4 2022 performance benefited from a large backlog that did not repeat this year. Adjusted operating margin for the fourth quarter was 11%, an increase of 20 basis points compared to the prior year period. The increase is primarily attributable to pricing. For the full year, revenues were up 5%. Full year adjusted operating income margin increased 330 basis points, driven again by pricing as well as better cost performance. Turning to slide 11. Our industrial automation segment produced fourth quarter revenues of $7.1 million, a decrease of 35% as compared to $11 million in the fourth quarter of 2022 due to ongoing challenging market conditions. Adjusted operating margin was 3.7%, an increase of 850 basis points compared to the year-ago quarter, primarily attributable to the efforts taken to right-size this business. For the full year, revenues declined 56% and demand levels for this business remained at drop levels. Full year adjusted operating income margin declined 760 basis points, driven primarily by lower volumes. As mentioned, we have taken actions to right-size our core structure in this business, and we have broadened our market's focus to expand our revenue opportunity. That concludes my financial overview. I will now turn the call back over to James to discuss our key focus areas for 2024 as well as our outlook.

Thank you, Andy. Turning to slide 12, I'd like to highlight where our team will be focused in 2024. This will be no surprise to hear, but new business wins remain core to our culture at CVG. and we continue to add additional customers and platforms. We look to continue our new business wins in 2024, building on the wins we recorded in 2023. Our strategy calls for continued diversification of our revenue stream, which is key in transforming our revenue mix, reducing our cyclical exposure, and improving profitability. Next, we will continue the planned ramp-up of our new electrical systems plants in Mexico and Morocco, These expansions are key to growing our electrical systems business globally and our position to be cost competitive and provide outstanding service to our customers. Additionally, we are underway with the construction of an additional Moroccan plant, which will further support anticipated growth and supply chain optimization. So before turning to the fiscal 2024 outlook, I want to emphasize what we are doing with our three key businesses. One, We are focused on making electrical systems our largest business by continuing to win new electrical business across multiple end markets and diversifying our product portfolio, including diversifying our vehicle platforms toward higher growth markets, while simultaneously reducing our exposure to the cyclical Class A truck market. Two, we are optimizing our vehicle solutions in aftermarket businesses as we see multiple levers to improve profitability through operational cost efficiency and making strategic sourcing decisions. We expect all of this to lead to improved working capital management and increased free cash generation. Collectively, this fundamental business transformation is expected to improve our business fix and make CVG a larger, stronger, and more profitable company in the coming years. Turning to slide 13, I'll share a few thoughts on our outlook for 2024. You'll notice that for the first time, we are giving you quantitative annual guidance at the revenue and adjusted EBITDA level. We believe this will help indicate our underlying expectations for the performance of our business. Industry forecasts currently project a decline in North American Class A truck builds of approximately 16% for the year. However, we expect to benefit from growth in electrical systems revenue. As a result, we are forecasting revenues to be in the range of $915 million to $1.015 billion. With projected growth in electrical systems segment, notwithstanding the approximately 16% drop in North American Class A truck build, we expect adjusted EBITDA margins year over year to be relatively flat, as implied by the midpoint of our guidance range of 60 million to 73 million EBITDA for 2024. Our expectation is that this level of EBITDA generation, offset by capital expenditures in the range of 25 million to 30 million for the year, to drive further free cash flow, giving us the optionality of further debt pay down, or potential inorganic growth opportunities should we find an attractive deal. Overall, we expect 2024 to show solid demand and revenue for the full year as we continue to win new business at a strong pace, with wind centered in our electrical system segment. We believe this level of resilience in the face of lower North American Class 8 industry volumes is further evidence of the success of our diversification strategy. With that, I will now turn the call back over to the operator to open up the line for questions. Operator?

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star two. And if you are using a speakerphone, you will need to lift the handset before pressing any keys. Please go ahead and press star one now if you do have any questions. And your first question will be from Joe Gomez at Noble Capital. Please go ahead, Joe.

Good morning. Thanks for taking my questions. Come on, Joe. Good morning, Joe. James, you gave us a quick overview. It's great to hear your voice here on the call. I was wondering, maybe you've been there two months, if you'd give us some more insight into kind of your key findings or thoughts from the CEO position here in the first two months?

Sure, Joe. Yeah, it's very exciting for me to come in. Fortunately, I had the benefit of observing the company on the board from the other side of the table. So I've had the opportunity to get a look closer during the time of our interim CEO, Bob Griffin, and that really excited me about the possibility of taking on this role. What I've seen since I've been here is that We have really good products that our customers value. We have a very enthusiastic team and really focused on growth and not just electrical but other aspects of our business. We have a good approach to finding solutions to help customers solve their problems. And also we are focused on making sure we deliver on commitments. So I think the team is very engaged. I've had interaction with several of our top customers, and I've also had a chance to talk to a few investors as well. And we all see continued improvement in the value of this business and the value proposition it brings to the market.

Thank you for that. And are there any significant contracts that might be coming up for renewal in 2024 or rebid in 2024?

Well, as part of our new business win methodology here, and I think what's happened in our results is that we have a funnel of activities and a funnel of opportunities that we look at and align our product strategy to our customers' quoting opportunities. So across our businesses, there's a number of quoting opportunities that occur every week during the quarter. Some are prioritized higher, some we have a stronger value proposition against our competition, but we do have a focus on making sure that we pursue opportunities that are sustainable, that have the appropriate margin profile, and that fit within our manufacturing and supply chain footprint. We do have some small ones we go after, and we also have some large ones we go after. We don't disclose our customers' specifics as we do book new business, but I would say that we're gaining a stronger reputation in the market of being able to provide what customers are looking for, as well as a differentiated value proposition compared to our competitors, mainly in electrical systems, but we also have some strong areas in our plastics and trim business, as well as our seeding business and aftermarket. So it's not just electrical, it's across the board, but our focus is really accelerating electrical growth beyond market growth.

And what are the goals in 24 for new business wins? Historically, it's been at least 100 million. Are we still sticking to that or you get a higher number this year?

Obviously, we want to continue the trend we've been on, and it depends on the customer program cycles and when opportunities are quoted. So our funnel is larger than our target. We have different win rates in different segments, and different products have different win rates based on the competition that we're going up against. But generally, we expect to be in the 100 million or more range on our bookings going forward. We've proven we have a right to play and a right to win. It all comes down to strong execution and making sure we deliver on our commitments both to customers as well as to our organization for the financial commitments of the program. So that's going to continue to be the focus and the great thing about this is we've had a couple of years of building momentum and we're really starting to accelerate that and our reputation is increasing within our customers.

Great. And one more for me, and I'll get back in queue. So your expectations for 24, I'm trying to get some of what your thoughts are. Obviously, the range is about $100 million. I'm assuming some of that deals with where the Class A truck builds end up coming in. But on the electrical system side, Last year you did a bang-up job. Top line was up 27%. Are you looking for that similar number, similar rate of growth in 24 in that segment or maybe down closer to that 20% range or something else?

Joe, let me answer that. So as you described, we're already seeing the benefits of the new wins that we secured over the last few years. So 2023 is really a strong year of revenues growth for the electrical systems segment. We expect that you'll continue to see us launching business that we already own. Right now, that's why we have a range here is sometimes a customer launch schedule is out of our control and it depends on many factors. So, but we expect that you'll continue to see good growth in our electrical segments.

Great. Thanks for taking my questions. Thanks, Joe.

Next question will be from John Franzrad at Sedoti. Please go ahead.

Good morning, guys, and thanks for taking the questions. I'd like to start with the revenue loss at the strike. Can you talk a little bit about maybe the size of the revenue and was it lost or was it deferred into the first quarter? Maybe more color there would be helpful.

Yeah. So the strike at the customer was actually lasted about six weeks. So it impacted us. We estimated to be about $12 million in revenues for the quarter. Mm-hmm. As the customer did not change their overall backlog, we expect that eventually they're going to put those lost vehicle back on the production schedule. The timing is a little unclear right now because they also have their own manufacturing constraint, but we expect that eventually it will come back to the production.

Excellent. And I guess if we start thinking about the Class A truck cycle, and last quarter I asked you You know, how is the first quarter shaping up? And you indicated it was looking good. I'll repeat the question. How is not only the first quarter looking, but how is the second quarter looking relative to the current production rates that you finished at?

Yeah, so we don't forecast quarter by quarter what our customers do. But as you can see on the market, there's public information about the ACT forecast, which is one of the more important forecasts you use. So right now, you see ACT is actually expecting some decline from Q2 and beyond in terms of overall market production. But we'll see. We're still not seeing full visibility on our customers' own schedule, but the ACT forecast is showing some drop-off from Q2 and beyond.

Got it. And just a little bit about the Mexico and Moroccan facilities. When would they be fully operational?

The Mexico facility launched in Q3, and the Morocco facility, the initial Morocco facility launched in Q4, and they are ramping up, bringing on the new programs that we have won in prior years to those facilities. The new facility that's under construction in Morocco, the additional facility, should be online in Q1 next year.

Q1 next year. Got it. And just if I think back to about a year ago, you were rolling out a new aftermarket initiative. Looking back on it, can you talk a bit about the successes and maybe where it's lagging a little bit relative to expectations going in?

Sure, no problem. We did change leadership of the aftermarket business in Q3 last year and kind of reassessed the effectiveness of the prior strategy, especially on the e-commerce side. What we have found is e-commerce, you have to have a lot of discipline around your production planning and your inventory strategy and how you're going to market and what you're focusing on. We believe that there's probably more work that could have been done there. So the new leadership that came in, actually, we participated in the heavy duty aftermarket week in January. And we have a number of, a pretty large number of field sales reps that we met with that will represent our product with various dealers, retail outlets in various regions of the country. And we recognize from that interaction, we needed to do a better job of getting our name and brand out there. And I think the aftermarket truckparts.com probably mid to late this year may have a lot more traction based on the work that our field reps are doing out in the field with our brand improvement and brand awareness. So I think going forward, or I expect going forward, we'll see better traction sequentially in our aftermarket business sales opportunities.

That's great to hear. And I guess one last question, then I'll get back into Q. Clearly, you've right-sized the industrial automation business. What's kind of the updated thoughts on when the revenue profile kind of turns around there, you know, now that you've kind of right-sized the business?

Well, that's a really good question. I've been able to take a really good look at what we've done even before coming into the CEO role. The business profile there was primarily more contract manufacturing, lower value add, but we had an opportunity to really gain inputs and access to the local market. And with the takeoff of warehouse automation, that's where the business really popped up. And as that tailed off, it kind of came back to the legacy contract manufacturing box builds. And the leadership in that business intentionally has been focusing on a more highly engineered solution in the market and various customers in various different configurations. So we're somewhat at the inflection point of where this business could potentially go based on these new products. We do have favorable customer feedback, but there's going to be a runway to ramp back up to more substantial revenue numbers, and early indications are by mid to late this year, we should start to see more of a bounce back in that business. Based on orders we have and customer insights, we are actually going to be participating in the MODEX show in mid-March, demonstrating one of our new innovative products in that show to get feedback and determine how we need to potentially scale that new product innovation. So that's pretty much an update on that business. It's at an inflection point and trying to pivot it to more value add.

That's also good to hear. Thanks, guys. I'll go back into queue. Thanks, John.

Next question will be from Gary Prostapino at Barrington. Please go ahead.

Good morning, all, and welcome, James. A couple of questions here. First of all, James, with you coming on board, I mean, The company had a target of revenue of 1.5 billion, 9% adjusted EBITDA margin by 2027. Is that something that you want to stick to here, or can we throw that baby out with the bathwater?

That's a good question. I wouldn't say we're throwing the baby out with the bathwater, but I do think we have an opportunity right now to look at the profile more specifically through market segmentation, customer and product segmentation and have a more intentional profile management as we look at future business. And we're still assessing what that profile might look like and where it could potentially go to ensure that we have an appropriate margin accretion algorithm in front of us. But we're really focused on executing our annual guidance expectations and continuing to book new business so with these two things we'll have a better chance to i think shape what this looks like longer term uh and we're still defining how that's going to be staged out so at this point we're not really discussing the long-term targets we're not throwing the baby out with the bath water but i do think there's work that needs to be done on a on a more disciplined approach to shape the profile of that revenue stream okay and that's fine i just wanted to

get that out there because that also, those targets have been out there and we don't want to obviously repeat them if they're not something that you want to adhere to.

Well, let me just, I guess, backtrack a little bit. We did state on the prior question that we expect to book 100 million or more new business ones a year. So that is another data point that you can use in determining where we're going longer term. We're not backing off or throwing the baby out with the bathwater. We're sticking to that.

Okay. So in terms of the closing of the facility and then higher cost reduction in organizational costs, can you slap a number on what kind of expense capture you're looking to get from these actions in 2024?

Gary, let me answer that question. So you can see that this quarter we took a charge of about $0.05 per share, so roughly about $3 million. It's not all the charge that's related to the actions. So some of the action will continue into Q1 as well. We normally look for about less than two years payback in our spending on wide sizing and improving the operations. So we can see there you will see multimillion dollars of benefits based on the charge that we take. But that's also rolled into our annually the cost reduction that we do. So we'll continue to use those actions to expand our margins as well as offsetting the inflation that we're still seeing in the business.

Okay. And then just something, well, I got two more questions, but with the electrical systems business, a nice percentage of that was going to electrified vehicles. Is that correct?

Actually, our largest segment in that business is CONAG, construction and agriculture, some of the key industrial customers. The EV portion of that revenue stream is relatively small. Okay. We're focused on some of those customers and our growth and business wins, but as you know, based on recent publications, some of the customers, even the non-new OEMs, some of the legacy OEMs that are going to electrification have somewhat backed off of the volume estimates as well as the years of introduction. So because we're more intentional about how we shape the profile of our new business ones in electrical, we didn't have an over reliance on that to hit our longer term growth objectives.

Okay, that's good. That's what I was trying to get at here. Okay, and then James, another question for you. You got a great background here. in terms of where you've been and companies you've worked for. Where do you see your strengths and how they match up with the needs of CBGI? I guess what I'm trying to get at here is that in your prior roles at Stanley Black and Decker and that, were you more operationally oriented?

Yeah, so that's a great question. I'll try and answer it to the best of my ability. So if I work backwards, the seven years I was at Stanley Black & Decker was focused a lot on transformation, both from a supply chain, business model, org efficiency, engineering, go-to-market, customer relations management, so truly general management. During my time at TEE was really focused on operational transformation at the Plant 4 level. And that was during the post 08-09 downturn, so there was a lot of hands-on heavy lifting there. And I see that coming into this role and after observing some of the needs of the business from a board seat, I felt very comfortable that I could understand what exactly needs to be done, where we needed additional capability, where we needed more capacity, and also improved processes and tools to help us run our operations. Many of you know it's a journey in operational transformation, and I would say we're probably in the early phases and we're gaining traction. So the difference in my approach may be that I'm focused on culture, change management, as well as sustainable process and tool improvement as compared to brute force and just trying to muscle things through. Sustainability of improvements is very important to me. So I believe that's where I add a lot of value coming into the business. And I would also add on the customer relations management. I think that we have some very strong exemplar customers in our portfolio, and there's opportunities to manage them in a different way. So it's long-term strategic relationships, and we keep the comprehensive picture of our relationship in front of us. And it's a win-win, mutually beneficial relationship relationship balance that I'm aspiring to achieve with our large customers and our new customers as well. All of our customers are important, but there's some that really sway your business one way or the other, and we just need to make sure we're very intentional about how we manage them.

Thank you very much, and I wish you well.

Thank you. Thanks, Gary.

Next question will be from Guillermo Herrera at Gabelli Funds. Please go ahead.

Good morning. Thanks for taking the question. Good morning. Thanks, Guillermo. So we've heard a bit on margins being up from both pricing, you know, as well as contribution from the ES business. I'm curious whether part of the story here is also being more selective in your contracts. So in other words, have you had to walk away from any significant customers based solely on margin profile? You know, you mentioned not disclosing specific contracts, but if you could just provide some color on whether this was part of the margin story over the past year or so, that would be helpful. Thanks.

Yeah, so if you remember, we did talk about that in the past that there is one customer that we didn't like the terms of the contract and we walked away from a ceiling standpoint. So that was ended actually this fiscal year. So that will help to streamline our operation and as well as get rid of some of the terms that we didn't like. So that's part of the margin refraction.

Got it.

Thank you.

Thank you. Next question will be from Steven Martin at Slater Capital. Please go ahead.

Hi. James, you're new, but you've been on the board. So as a shareholder who's been around longer than any of the senior management, I'd like to share a couple of thoughts. I think Harold sold us a bill of goods over the last three or four years. If I look back at his comments about recutting the truck contracts, and blaming things on increased costs that couldn't pass through. And, you know, now here we are four years later, you recut the contracts. Last year, April 1st, you recut the last, supposedly the last contract. Freight costs are down. And by the way, I'll point out that if you look at your fourth quarter press release last year, the same time last year, you said ACT was projecting 305, and it ended up being 345. So every quarter this year, ACT got better than you guys anticipated, yet your business didn't, and you underwhelmed. When it comes to Last year, you made a big deal about a $30 million cost savings program. We don't see it. You know, there was a big deal and you talked about it. You know, Harold made a big deal about aftermarket and all the money that got spent reorganizing plants, building inventory, hiring new people. We don't see it. When we talk about the electrical business, you just pointed out They made a big deal out of all the EV wins we had. And now you're saying EV is not really a big part of it. I won't even go into the acquisition, which has been an unmitigated disaster. So while you weren't the CEO, you were on the board. And I just want to share with you the level of frustration of your long-term shareholders who've watched this stock go nowhere for five years.

Steve, thanks for your feedback, and your observations are very well grounded. So I'm going to let Andy comment on a few things, and then I'll come on the back of Andy's comments.

Yeah, so Steve, thank you for the feedback. So we actually look at the business, as you said, there's some areas that we believe is really doing well, some areas that we are falling short a bit, particularly like to your point, and James already mentioned, the aftermarket e-commerce. I think we mentioned that it was a experiment and trial for us that we learned from it, and that initiative didn't pan out as strong as we thought, so we have made some changes to leadership and we are regrouping and seeing other way to grow the business. As you also pointed out, so we have some wins in the electrical business that you mentioned that the previous CEO have also mentioned and those are the wins that we saw over the past couple of years. What James mentioned about EV is not a big part of our business is, if you look at today, our revenues profile, EV has not been a big part of our revenue space. Would that be? And it would depend on some of these customers, whether they went up to the expected volume, and when would they ramp up? So there's something in the backlog, in the pipeline in the future. Yet to see, but as James mentioned, we are not going to count on that one basket, right? So we continue to diversify our revenues. So in terms of productivity, we did follow through of our cost reduction initiatives. This year we met our own internal target about the cost reduction. But at the same time, we mentioned that in the past some of the growth cost reduction will be used to offset some headwinds that we have. Inflation still continue, particularly in labor and others. So, yeah, we would continue to like to see margin expansion, as you described, and I think we are on the same boat. And as James mentioned, so this will be, again, our focus, front and center, the vehicle solution business, optimizing the margin will be our top priority in addition to our electrical system growth. Thanks for your feedback. We appreciate it.

All right. Thank you. Steve, thanks again. I really appreciate your comments. And I see the business in a similar fashion. There are operational excellence things we can do across our functions to improve the stickiness of our cost reductions. And we also have a lot more structure and process rigor we can put in place to ensure that the cost reductions are sustainable and not necessarily one-time. So I see that as an opportunity for margin expansion, both on the material, the operation side, as well as some of our business processes and customer relationships as it relates to debits, delivery, quality, things like that that don't excite our customers. And that is my priority. So without our customers and without their confidence, we can't continue to grow this top line. So that is a very top priority in my mind.

Yeah, but keep in mind, top line with no profitability doesn't do any of us any good.

I totally agree with you, and that's why we're going to focus on the process rigor and operational excellence across all of our functions, not just in the manufacturing.

All right. I hope you succeed.

Thank you, Steve. Thanks, Steve.

Once again, ladies and gentlemen, if you do have any questions, please press star followed by one. Next is a follow-up from John at Sedoti. Please go ahead.

Yeah, just in your comments about diversifying the end markets in order to foster growth, can you just talk a little bit about how you expect to do that? You need to add sales personnel. What's the pathway to entering new end markets?

There are a couple of different ways, John. One is to bring sales and engineering people into the organization that have experience and contacts and credibility. in those segments. There are also opportunities for what I would say is cross-selling or white space where we have a major customer in one of our businesses, but we're not penetrating it with all of our product lines. And that's probably a bigger opportunity than doing it organically with hiring. And on the hiring side, we look at this from a talent management perspective and making sure we have the right people with the right skill sets Some of what we do in restructuring is part of that rotation to make sure we have the right people with the right skill sets and the right experience. So we have seen traction over the past year and some of our sales funnel looking into this year, what we're quoting in these various segments that are new. We also have a value proposition where we're successful in one segment with one OEM that gives us a stronger right to play. and right to win in that particular segment. So we are in flight as far as building momentum outside of Class A truck segments, as well as continuing to expand outside of construction and agriculture as well.

Okay, got it. And just some updated thoughts on on two items, I guess. One, on debt repayment in the year ahead. And two, what's the CapEx budget, especially in light of the continued ramping of the new facilities and the startup of the third?

Yeah, so from a CapEx standpoint, we expect $25 to $30 million in 2024. And you can see long term, we will normally target a range between 2% to 3% of sales. That's kind of been our trend, and we expect that going forward. When it comes to debt pay down, so we will minimally pay down somewhere around $15 million next year as part of our amortization. And in the past, we talked about that. We'll continue to do that. And then when we see excess cash, then our first priority will continue to be funding our organic growth. and food cap backs and other working capital, et cetera, and then we'll have some options as excess cash becomes available for further debt pay down or potential M&A at that point. We'll share more as we get closer into the year, and we'll share more about our cash flow expectation.

Okay, fair enough. Thank you, Andy. Thank you, James.

Thank you.

Next question is from Steve Emerson at Emerson Investment Group. Please go ahead, Steve.

Thank you, gentlemen. I noticed that admin went from around $22 million to call it $34 million, up 50%. How much of this is a cash expense increase?

for this quarter I would say you could call it maybe 60 to two-thirds of it is cash so and I explained in the course in the past this year there is a bit higher SG&A increase because If you compare to last year, it was a year that we literally didn't pay our incentive comp from a bonus standpoint. So that's a big part of the SG&A increase this year. And that is actually right now has not been cash impacted yet because we haven't paid the actual bonus. So a big part of that is due to that. The rest will be mostly cash.

In view of the downbeat forecast this year, I find incentive compensation equal to call it 40% bump in GNA highly inappropriate.

And that was, I think, referring back to a 2023 versus a 2022. I do hear you.

Thank you.

Thank you. Next question will be from Andrew Brickman at Altair. Please go ahead, Andrew.

Yeah. Hi, gentlemen. One question I have is if I look at the appendix of the chart you sent out or the slides you sent out, it breaks down the profitability from an operating income standpoint by business unit. As I look at that, I have some familiarity with the vehicle systems business, and I believe that's still a just-in-time business. There's a lot of work that goes into those components. 3.1%, which this is showing as of the end of the year, it just doesn't seem like the right return for a business that requires the infrastructure that that business requires and, um, you know, the investment in capital and working capital. So I'm just wondering of your thoughts on that.

Yeah. So, um, clearly if you just look at the, uh, return on sales in Q4 alone, is not what we were expecting longer term. Look, there's two reasons. One, Q4 historically been a very small revenues quarter. And as you mentioned, with the infrastructure, there is a certain degree of fixed cost in the business. Small revenues quarter always impacting our ROS. And then also, as James mentioned in the call earlier, we were impacted by a customer strike during the quarter. So it impacted almost 10% of the revenues of that segment in the quarter. And that is obviously difficult for us to adjust fixed costs during the quarter to accommodate for that. So that also impacted the margin of that business. I think longer term, your point is valid. So have a mid to high single digit uh, return on that business from a margin standpoint will be, will be probably a more appropriate than a low single digit margin.

Yeah. I mean, I guess I just follow up by saying, um, I don't know if we ever analyze it from the customer standpoint, but, um, I know for our big customers, we save them a lot of money by being just in time, right. When they need it low inventory, I just continue to say there could be increasing return. Even the 7.3 isn't as strong relative to some of your other businesses for the year. But point taken. Thank you for taking my question.

Thank you for your feedback. Thank you.

Thank you. And at this time, we have no other questions registered. Please proceed.

Thank you all for joining today's call. While 2023 was a strong year for the company, I'm even more excited for the opportunities that lie ahead for CVG. We remain encouraged by our business outlook, and we look forward to continuing to execute our long-term growth strategy. Have a great day.

Thank you, sir. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.