Commercial Vehicle Group, Inc.

Good morning, ladies and gentlemen. Welcome to CVG's fourth quarter 2024 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions with instructions to follow up that time. As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Andy Truong, 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 2024 results, after which we will open the call for questions. As a reminder, this conference call is being webcast and the Q4 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 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 governance 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 three. I'd like to take a moment to recap a very eventful 2024 for CVG. We've always focused on improving our cost structure, diversifying our end markets, and positioning for future accretive growth. To that end, we took some immediate and decisive actions in 2024 with the goal of becoming a more focused organization through divesting non-core businesses. In the first quarter, we sold Finish Tech, our hydrographic and paint decorating business. In the third quarter, we sold our Chillicothe, Ohio production facility, consolidating production into other CVG facilities, and closed on the sale of our cap structures business. In the fourth quarter, we closed on the sale of our industrial automation business, Over the course of the year, we also eliminated approximately 1,300 positions, or roughly 17% of our headcount. While continuous improvement is an ongoing focus for CVG, the reality is that marketing conditions accelerated the need for these business actions. Executing actions of this magnitude would be a heavy lift for any organization, and the level of difficulty was raised due to the in-market conditions we faced in 2024. I'd like to thank the entire CVG team for their efforts in positioning the company for a higher growth, more profitable future. Turning to the fourth quarter results, our financial performance was challenged due to both external market conditions and internal operating inefficiencies resulting from our portfolio actions. Most importantly, we continued to make transformational progress, which we believe will enable meaningfully improved operational efficiency and position us for success as our end markets begin to recover. The strategic actions I described earlier have positioned CVG well moving forward. Through the sale of our non-core facilities and businesses, we've improved our operational focus and believe we are now in a position to drive accretive growth, accelerate margin expansion, increase capital efficiency, and enhance shareholder value this year and beyond. While these actions created some operational inefficiencies in 2024, we believe we've remediated approximately 85% of those and expect to address the rest in early 2025. We'll discuss our 2025 financial guidance in a few minutes, but we believe these efficiency improvements, combined with our headcount reduction and restructuring efforts, put us on track to deliver 15 to 20 million in cost savings in 2025, setting us up for margin expansion this year. On the commercial front, we've continued to secure a new business at a very strong pace with approximately $97 million of new wins in 2024, when fully ramped. As a reminder, our new business wins figure represents a risk-adjusted assessment of our customers' estimate of their ultimate production rates. These new wind programs are key to our growth strategy, and a majority of these winds occurred in our electrical system segment, although we were awarded meaningful new business in our vehicle solution segment as well. Additionally, the winds within electrical systems were primarily outside of construction and agriculture in markets, which should further diversify our revenue profile. We were pleased to open our Morocco facility during the quarter, and we continue to ramp our facility in Aldama, Mexico. Overall, we identified several necessary and impactful opportunities to improve CVG. And now that we've completed these actions and are ramping our low-cost facilities, we expect our operating leverage to benefit later this year as the markets improve. While 2024 was a tough year financially, we believe we've taken the right steps to position CVG for the future. Turning to slide four, I'd like to highlight and provide further clarity around our new organizational structure, which we announced in early January 2025. In an effort to further align with our customers and in markets, we created a new business unit structure, which now has three operating segments, global electrical systems, global seating, and trim systems and components. As previously discussed, CVG has streamlined its operating model and lowered its cost profile. And we fully expect this new structure to enhance clarity and focus within each business unit. In short, the realignment better positions CVG for future growth while lowering corporate and administrative costs to align with the company's current revenue profile. This new organizational structure is an important step in our transformation to become a more agile company that puts our customers and our markets first and we anticipate that our new structure will accelerate our operational momentum and drive higher growth through a product-focused, customer-centric enterprise strategy. As a reminder, we will begin reporting results under the new reportable segment structure, beginning with first quarter 2025 results. 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 five. Just a quick reminder, as a result of the divestiture of cap structures and industrial automation, those businesses have been reclassified to discontinued operations. Unless otherwise noted, all financial disclosures and comparisons made today will be focused on continuing operations. Consolidated fourth quarter 2024 revenue was $163.3 million as compared to $193.7 million in the prior year period. The decrease in revenues is due primarily to lower sales as a result of a softening in customer demand in our vehicle solutions and electrical system segments. Adjusted EBITDA was $0.9 million for the fourth quarter compared to $8.3 million in the prior year. Adjusted EBITDA margins were 0.6% down 370 basis points as compared to adjusted EBITDA margins of 4.3% in the fourth quarter of 2023, driven primarily by lower volumes and the operational inefficiencies we experienced across our business. Net loss for the quarter was $35 million or a loss of $1.04 per diluted share as compared to a net income of $22.6 million or 67 cents per diluted share in the prior year. Net loss included a non-cash tax valuation allowance of $28.8 million. Adjusted net loss for the quarter was $5.1 million or a loss of $0.15 per diluted share as compared to adjusted net income of $2.1 million or $0.06 per diluted share in the prior year. Free cash flow from continuing operations for the quarter was $0.8 million compared to $4.3 million in the prior year. The free cash generated in the quarter was supported by the second payment of $20 million received from the cap structure sales last year. I'll further discuss some of the factors affecting our cash flow performance in a moment. Now moving to our full year consolidated results. Consolidated revenue for the full year was $723.4 million as compared to $835.5 million in the prior year. The decrease in revenues was primarily driven by a softening in customer demand across all segments and the wind down of certain programs in our vehicle solution segment. Adjusted EBITDA was $23.2 million for the full year compared to $54.6 million in the prior year. Adjusted EBITDA margins were 3.2% on 330 basis points as compared to adjusted EBITDA margins of 6.5% in 2023, driven primarily by lower sales volume and operational inefficiencies These results were consistent with our adjusted full-year guidance ranges. At year end, our net leverage ratio stood at 4.7 times our trailing 12-month adjusted EBITDA from continuing operations. Moving to slide six, I want to touch on factors that impacted our 2024 free cash flow performance. Our divestitures were large contributors to cash flow in 2024, generating approximately $49 million in proceeds. Largely offsetting these proceeds were three areas of investment to better position CVG for the future. First is continued operations, which include the divested cap structures and industrial automation businesses consumed $15 million in cash in 2024. While there may be some small cash use in Q1 2025, related to these operations, we expect very limited cash impact in aggregate in 2025. We also spent approximately $11 million on restructuring to improve our cost position and drive operating leverage going forward. While we may still have some small additional restructuring actions in 2025, we expect restructuring spend to decline materially compared to 2024. And finally, We also invested in infantry this year with an increase of approximately $10 million in 2024 on the balance sheet. The investment helped facilitate the consolidation of the Chile coffee facility as well as new production launches and the ramp up of a new low cost facilities in Mexico and Morocco. Working capital improvements is a critical focus for CVG in 2025 and we expect to work down our infantry levels closer to historical levels over the course of the year. Collectively, we expect the vast majority of these investments needs to be behind us. And with a focus on improved working capital management, we expect to return to positive free cash flow in 2025. Moving on to our segment results starting on slide seven. Our electrical system segments achieved revenues of $40.3 million, a decrease of 28% compared to the year-ago fourth quarter, resulting from global construction and agricultural market softness and the slower ramp of new business wins. Adjusted operating loss for the fourth quarter was $1.7 million, a decrease of $8.4 million compared to fourth quarter of 2023. due to the impact of lower sales volumes and unfavorable foreign exchange. For the full year, revenues were down 17%, again driven by global construction and agriculture market softness and the slower ramp of new business wins. Adjusted operating income for the full year was $4.2 million, a decrease of $22.1 million compared to 2023. again due to the impact of lower sales volumes and unfavorable foreign exchange movements. As James already mentioned, we are continuing to shift production to our new low-cost facilities in Mexico and Morocco, which we expect will drive meaningful operating leverage as our end market stabilize and our new business wins ramp. Moving to slide eight, our vehicle solution segments achieved revenues of $91.4 million, a decrease of 15% compared to the year-ago fourth quarter, largely due to lower customer demand and wind down of certain programs. Adjusted operating income for the fourth quarter was $2.8 million, a decrease of $1.2 million compared to fourth quarter of 2023 due to lower volumes, operational inefficiencies, and increased freight costs. For the full year, revenues were down 14%, again, due to lower customer demand and wind down of certain programs. Adjusted operating income for the full year was $20.3 million, a decrease of $13.8 million compared to 2023, again, due to lower volumes, operational inefficiencies, and increased freight costs. we expect improved operational performance in 2025 as a result of the strategic portfolio and restructuring actions we took last year. Additionally, during the quarter, we were proud to be recognized by multiple global OEM customers in the areas of quality and service, signaling that our efforts to become more customer-centric are taking hold. Moving to slide nine, Our aftermarket segments achieved revenues of $31.6 million, an increase of 4% compared to the year ago in the fourth quarter as slightly improved customer demand and resolved production constraints drove increased volumes. Adjusted operating income for the fourth quarter was $3.1 million, a decrease of $0.2 million compared to fourth quarter of 2023, largely due to increased manufacturing costs. For the full year, revenues were down 5% due to lower volumes. Adjusted operating income for the full year was $16 million, a decrease of $2.4 million compared to 2023, also primarily driven by lower volumes for the year. Importantly, our aftermarket and accessory segment returned to a year-over-year growth for the first time in six quarters, and we remain focused on continuing to improve order to delivery lead times to further drive customer demand. That concludes my financial overview commentary. I will now turn the call back over to James to cover the market outlook, our guidance, and some closing thoughts.

Thank you, Andy. Moving to our key in-market outlooks on slide 10. According to ACT's Class 8 Heavy Truck Build Forecast, 2025 estimates imply a 5% decline in year-over-year volumes. Given strong production levels in the first half of 2024, ACT is forecasting first half 2025 builds to decline 14% year-over-year, before increasing 6% year-over-year in the second half of 2025. ACT forecast a rebound in 2026 with a 12% increase in builds anticipated as the industry prepares for a change in emissions regulations in 2027. Moving to the construction market outlook, the construction equipment in market is seeing global weakening with volumes anticipated to decline around 5% to 10% with continued higher interest rates, weaker housing starts, and slower commercial real estate activity. Agriculture end markets are facing comparable demand headwinds, with current estimates also reflecting a 5 to 10% year-over-year decline. This drop is largely driven by higher interest rates and lower commodity prices, which directly affect equipment demand. Given the recent volatility in end markets, we have focused on increasing communication with our key customers at various levels to get better visibility into their production outlooks. This will help us better align our production schedules and improve efficiency. Based on these customer outlooks for 2025, heavy truck, construction, and agriculture end markets are all projected to slightly decline compared to the prior year as these markets continue to face demand pressures. We remain optimistic that these markets will experience a rebound in 2026 as replacement needs and underlying secular trends support our customers' future demand outlooks. Turning to slide 11, I'll share several thoughts on our guidance for 2025. Factoring in our current market outlook, our expectation for the ramp in new business wins, and improvement in operation efficiency, we have initiated guidance for revenue and adjusted EBITDA. We expect revenue to fall in the range of $670 to $710 million, and adjusted EBITDA to fall in the range of $25 to $30 million. We expect to see continued softness in our end markets, as discussed earlier, but despite that, we still expect EBITDA growth and margin expansion in 2025. This should enable us to produce positive free cash flow in 2025, which we will use to pay down debt. As I mentioned earlier, we are focused on returning working capital and inventory back to historical levels after the required investments in 2024. As a result, we expect net leverage to peak in the first half of this year before declining in the second half. We remain committed to returning our leverage back to near the two times level in the second half of 2026. Our strategic actions have positioned us well to execute on our guidance goals and achieve EBITDA growth and margin expansion for the year. We look forward to realizing our improved operating leverage, driving stronger financial results, and capitalizing upon an eventual in-market recovery in future periods. Turning to slide 12, I'd like to again reiterate what makes CVG a great investment opportunity at this time. Our new segments are customer-centric and supported by strong secular growth trends, which are increasing our total addressable market. While these end markets are in the midst of a down cycle, we expect them to bottom out and begin recovering in the coming quarters. We remain focused on growing our electrical systems, aided by the increasing electrification of vehicles that are both electric and internal combustion engine powered. We are also equally focused on strengthening our global seating, and trim systems and components businesses, proven by our new market-centric segmentation, allowing us to more closely align with our end markets and customer needs. We've taken decisive strategic actions with the goal of increasing operational efficiency and underlying profitability, while improving our business mix as we execute portfolio actions and restructure to better position for future success. These actions enable accretive growth and we expect margin expansion in the coming quarters as we remain focused on delivering improved operating performance. Finally, as we continue to move past our elevated cash investment needs in 2024, we anticipate our improved cost position and focus on working capital reduction to produce positive free cash flow in 2025, which we will prioritize to pay down debt. With that, I will now turn the call back over to the operator and open up the line for questions. Operator?

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. As a reminder, please ask only one question at a time. One moment, please, for the first question. Your first question comes from Joe Gomes with Noble Capital. Please go ahead.

Good morning. Good morning, Joe. So I wanted to talk about the new business wins. You said for the full year there were 97 million and the third quarter year to date was 95 million, which would imply very little winning in the fourth quarter. I was wondering if you could give us some more detail there about what's going on with the new business wins program. And you kind of, you talked about, you know, the new program ramps, see your hope to see in 25 and I'm wondering, you know, we didn't see that in 24. So what gives you confidence? We're going to see that in 25. Thank you.

Yeah, no problem. Uh, thanks for your question, Joe. And relative to the new business wins, you're right. Uh, we booked the majority of those, uh, through Q3, uh, typically sourcing cycles, uh, are very slow in Q4. as well as some of the out year launch timing. We see the majority of the wins be a little more between Q1 and Q3 each year. So that explains the slow progress in Q4. The other thing I would say is that we have a large funnel of opportunities across end markets, across our various product lines that we track monthly and we are engaged with customers on quoting activity. But typically in Q4, not many awards are granted in Q4. So we're not reducing our emphasis on pursuing new business to grow overall as well as in each product segment. That's still a very high priority for us. It's the lifeblood of our company going forward. With respect to your question on vehicle ramps, new program launches, for this year, We expect a more meaningful impact to our top line with these launches. Even though our end markets are down, we're starting to see a little offset in our electrical systems business with more new business coming in. In the range of about 15% of the revenue for this year is going to be associated with new business wins, which offsets some of the end market decline that we've been experiencing, as well as other slow ramps that we're seeing. So we have more confidence this year. There are more programs launching. Several of the ones that were delayed from Q3 and Q4 of 24, we're already starting to supply material to those customers in a variety of end markets. So we see a little more traction in the new business winds taking hold this year. Hopefully that answers your two questions.

Yes, thank you. I'll get back to you. Thanks, Joe.

Thank you. Thank you. The next question comes from John Frenzrup with Sidoti. Please go ahead.

Good morning, gentlemen, and thanks for taking the questions. I'd like to start with the fact that the court is nearly done, and I'm curious about how your business is performing in the Class 8 market and the construction and ag market.

are relative to some of the aggregate outlooks out there are you performing in line down that expected 14 percent in class eight and five to ten percent in construction or are you trending differently uh so far year to date um in this quarter we're pretty much in line we have seen some softness uh toward the latter part of the quarter of this current month but all of our customers especially ones that we have new launches with they're very um very bullish on the outlook starting from Q2 on. There's several new models in Class 8 that we're actively supporting. Those have slowed a little bit in Q4 and got pushed more to this year due to some other startup issues that some of the OEMs are having. But the outlook is strong, especially Class 8, because the pre-buy is happening, 26 in the second half of this year. And that's a typical cyclical pre-buy whenever new emissions roll out and more expensive tractors are taking the market with the new emissions controls. So we feel pretty confident that we'll stay in line with that and hope we get additional tailwind to help us even more. This ACT forecast does change in aggregate, but we also are increasing our intimacy with customers to get better alignment on their modulating startup and ramp-up schedules. so we can align our cost structure. It's typically a lagging effect because they expect us to have a certain run at rate capacity. Then they make adjustments, which is somewhat disruptive to the supply chain because we have to manage labor, manage inbound supply. We have a global supply chain, so there's a lot of adjustments we need to make. But the most important thing is we keep our customers up and running. We don't shut them down while trying to minimize the costs associated with their schedule fluctuations.

Got it, James. Thanks. I'll get back into queue.

Thank you.

You're welcome.

Should you have a question, please press star followed by the number one on your touchtone phone. The next question comes from Gary Prestapino with Barrington Research. Please go ahead.

Hey, good morning, everyone. A couple of questions here. First of all, Embedded in your guidance, given the revenue range that you're putting in place here, will you be capturing most of that $15 to $20 million of expense savings throughout the year in 2025?

I would say it's probably, we'll capture it in 2025, but we're looking primarily at Q2 and beyond as we have a little run over from 24 into Q1. But our expectation is to capture the entire piece. Andy has some additional commentary as well.

Yeah, Gary, so short answer, yes, that's anticipated in our guide. You can see the revenue still coming down. You can see 5% or so in line with the market. Obviously, that comes with a reduction in contribution margin. And then if you just do some quick math year over year, you can already see that there's margin expansion And obviously, as we've been communicating in the past, when we look at a cost reduction, so a portion of that, obviously, we'll have to use for offsetting some of our headwinds, right? Inflation still around, wage increases. But overall, you can see there's double-digit million dollars of margin expansion that come from productivity or cost savings.

Okay, thank you. Could you, with these new facilities that you're opening, and just remind me because there was a lot of things going on with your company here, are you running facilities in tandem as you shift production and then you're going to be closing some other ones? Could you just kind of walk us through what you're doing there?

Sure, Gary, no problem. So our initial plans, which we set out in 2023, comprehended a stronger market in 24 and 25. Those facilities were required to launch the new business that we had won, plus accommodate market growth expected in 2025 and 2026. We are shifting some production from existing facilities into the new facilities, as well as launching some new business in those facilities. We expect with market recovery that we will need all the facilities in the midterm, so to speak, given the market outlook. And the big question for us is Con Ag. And we don't know what the rate of recovery is going to be in Con Ag. It's typically a little slower than Class 8 on recovery, but we're positioned well with these new sites. And some of our existing sites are still in low-cost areas. It just happens that these two new ones are in lower-cost areas. We look at inflationary dynamics, trade dynamics, et cetera. This gives us optionality, although it does have an increased cost structure associated with it. And we have customers that have come through both of these new facilities and approved production to be started there, as well as transferred there from some of our other facilities. So over time, we expect to grow into them. But given the economic outlook and given the uncertainty, We do have options to restructure and move things to other places as well.

Okay. And then just one last one here. Andy, did you have to get any covenant relief on your debt? Because the leverage ratio is pretty high at 4.7 times trailing.

Yeah, you're right, Gary. So, uh, we, we did, uh, if you remember, uh, CVG, uh, CVG, we did, uh, a, uh, amendment to our debt, uh, back in, uh, December. So we, uh, we, we released a publication on that. Um, so that gives us, uh, some additional wiggle room, um, for our, uh, near term covenants, uh, pretty much, uh, for our 2025, uh, that was, uh, the wiggle room that we receive from our lenders. But as you know, we've been talking about it, our debt overall is going to be maturing in 2027. So we already started to exploring refinancing options in here in 2025. So answer is right now, we received that additional wiggle room from our last amendment in December. Okay, thank you.

Thank you. The next question comes from Joe Gomes with Noble Capital. Please go ahead.

Thanks for taking the follow-up. Just on the aftermarket, under the new operating scenario, you're going to roll that into the segments. I just wonder how that's going to work. It seems, you know, it's something that the company had spent a lot of time, effort, capital on getting the aftermarket business, and now it seems we're going to kind of just, you know, put it amongst three, the three new operating units. Not quite sure how that all works or how that benefits from the capital that has been spent previously.

Yeah. Well, thanks, Joe. That's a very good question. I'm glad you asked it. So our Prior aftermarket business was primarily seats with wipers as well. And then there was a small amount of electrical systems. There were some level of inefficiencies, rebooking and remapping revenue to support service requirements for OE service, which now have more efficiency and we're working more closely together. The other thing I would say is that we didn't put a lot of capital in aftermarket when we formed aftermarket. We took the OE service business and a small level of independent aftermarket in one of our plants and seating. And we also, the wiper business stayed the same as part of aftermarket. And that's about half and half OE and then OES independent aftermarket. And electrical was a smaller part, primarily OES. So there weren't major investments made when the segment was created. It was intended to have a focus on growing the independent aftermarket. primarily in seats. So that remains, and I would say one of the advantages of putting it back, that seating product line, which was probably about 60% of aftermarket, 60 to 65% of the aftermarket business, back into the seating business, it will allow us to more effectively use the engineering resources as well as balance between the OES aftermarket seating plant and the OE seating plant where we can leverage combined resources in a more efficient way, which helps us address SG&A and also plant utilization. So between the segments previously, we were, in so many words, doing business with ourselves, where you had two of the same type of product plants supporting two different channels, and the resource efficiency wasn't what it needed to be. So that was one of the primary reasons for looking at putting it back into the product category. The other thing I would say is the independent aftermarket sales team, we use reps, somewhere between 50 and 60 reps, it just depends on time, to go to market with our aftermarket products. By having the two facilities under the same business, we can better optimize lead time improvements, as well as productivity improvements, as well as engineering needs to be more responsive to the independent aftermarket instead of trying to communicate back and forth and missing out on near-term opportunities. So I would say from a seeding perspective, it puts more focus on making sure we have the go-to-market and the lead time associated with being successful in the seeding aftermarket business. For wipers, it's a North America product. It was previously in a segment that had trim and plastics in it. It's a standalone plant. And some of the customers in the wiper business are similar to the customers in trim and plastics. So it's a little more diversified in market, and it's better managed within this trim systems and components business. The focus for independent aftermarket will remain in wipers as well. And we didn't really have any independent aftermarket business in electrical systems. It was primarily OE service, original equipment service business. That maintains the same. It was always built in the electrical systems plants with the revenue just mapped into the aftermarket segment previously. So this helps clean up our transactional process in month-end close, quarter close, year-end close, as well as it keeps our customers aligned, too, because in any of the Class 8 or other end markets we're in, the procurement organizations typically have both OE and OE service. on that side of it. So it helps clean things up for our customer communications, negotiations, and coordination, and helps us be more of one CVG to the OE service market. The independent aftermarket is separate because you go through distributors and dealers and retail outlets, et cetera. And we have an organization in place to do that. We'll continue to focus on that as well. And we do see that as a higher growth opportunity for us. As you noticed in our Q4 results, aftermarket for the first time, the six quarters actually grew year over year. And we expect to see that that that cycle continue throughout this year with the focus on it.

Great. Thanks for that.

Thank you. The next question comes from John Franz Reb with Sidoti. Please go ahead.

Yeah. A couple of quick questions here in terms of new business. Could you quantify how much additional new business is expected to come in in 2025? Also, what markets outside ag and construction have been? Have you been successfully gaining share and and just a point of clarification on the new business? This is all entirely no new business. You're not cannibalizing or replacing. other businesses going end-of-life.

That's correct, John, and I'll give you a little color. I mentioned the around 15% number of revenue for 2025 in our electrical systems business is as a result of new business that was won from 22, 23, and a little in 24. Our biggest wins last year in electrical systems were outside of CONAG. And it did focus in the electric vehicle space. We have a new leader in electrical systems that's also expanding our in-market focus into non-transportation markets like data centers and other areas. What we won last year, though, was in more autonomous vehicle and electric vehicle space. And as you know, autonomous vehicles have a redundant system. So the content per vehicle is significantly higher than a you know, non-autonomous vehicle. So we're really excited about that one that was already ramping slowly, but it's expected to increase significantly more in Q2 in the back half of the year to fill in the hole of the Con-Ag down market. So our emphasis is maintaining our Con-Ag customers. We have opportunities and this is electrical systems I'm talking about. We have opportunities to expand our share of wallet with Con-Ag customers. And we've had several top-to-top meetings with our new leader, with their leadership, our customers' leadership, and we're positioning ourselves for more near-term new business as we continue to fill and ramp some of the lower-cost capacity that we've brought in place. So it's good that we have this capacity online. It gives us an opportunity there. As it relates to vehicle solutions, there were some programs that ran off. So the number you're seeing, the portion of the new business wins in vehicle solutions is some of its replacement and some of it is actual runoff, and some of it's new, incremental. Smaller amounts in vehicle solutions, but now with the new segmentation in seating, trim systems and components, we can be a little more transparent with where we're winning and how we're winning in those new segments. The trim systems and components business, is primarily a North American business. So our expectation is we have a lot more focus on filling open capacity we have in the plants and trim systems and components, as well as our seeding business is more of a global business. So we mentioned a couple of months ago, I'm sorry, a couple of quarters ago, about our new Unity seed launch. That is a global platform. We're seeing opportunities, and we've also won business in each region of the world. primarily North America and Asia with some opportunities in Europe. So we're really excited about that business. But that business is a different profile because of the global supply chain aspect of it. We're leveraging a platform design, our first global platform, which allows a lot of flexibility as you deploy it in different regions. So we're very excited about that and expect to have more new business wins in the seeding business as a result of this new Unity platform launch going forward.

And James, what would you think is a reasonable target of new business wins in 2025?

We are targeting a hundred million dollars each year. It does depend on sourcing cycles, but we're targeting a hundred million and that is adjusted. So we are looking at kind of de-risking some of the customer outlook volumes based on historical experience we've had here. So the number that we're communicating has some risk adjustment factor applied to the peak annual revenue that our customers are sourcing us the business at. It does require a little flexibility because we're expected to capacitize at the business award level. So we have to look at how fungible our capital is deployed and how we're utilizing capacity to have that flexibility so we don't put 100% of what they said they were going to give us two years prior to into all of our capital and hiring and then have to scale back when they don't meet those peak annual numbers. In rare cases, they do exceed, but in most cases, they don't exceed the peak annual revenue.

Sure enough. One last question. Embedded in the EBITDA guidance, what is the DNA number? And also, since you mentioned it, what's the capital expenditures do you anticipate for 2025?

Yeah, so the DNA number is pretty consistent year over year, John. So one thing that clearly from a cash flow standpoint, as James already mentioned, it will be a big focus for CVG. The entire enterprise is now riding around that. So we are trying to attack that from several areas. The number one area will be working capital, as we mentioned. So we have our entitlement to get back a lot of cash from there. And obviously, cap backs is the use of cash. In the past, we guided 2% to 3% is our typical year cap backs. And I think that you'll see 2025 will be near the low end of that number. So again, continue to evaluate investment and growth. Investment is still our priority. Make sure that the company continue to grow back our top line. Clearly, you can see that we'll be controlling cap backs, controlling working capital, And as James mentioned, we are anticipating a positive free cash flow year.

Thank you, Andy. And thank you, James, for taking the follow-up.

Thanks.

Thanks, John.

Thank you. The next question comes from Douglas Dessy with DC Capital Partners. Please go ahead.

Hey, good morning.

Morning, Douglas.

Good to talk to you. So, you know, we've been holding the stock for a while and follow the company closely. And I just want to get a sense, I guess, that I feel a little bit like a frog on the stove and the water's boiling and it's not good. I mean, the results were not good, in my opinion. And I want to get a view on kind of a, you talk a lot about revenue and operating income, but there's also a breakdown on revenue, gross margin, and SG&A. And The company basically is making no money right now. And what's the sense of urgency down there? The SG&A has gone from about 7% to about 10 to 11%, and that's about $20 million or $25 million. And historically, the business generates 10% to 12% gross margins. It's very hard for me to figure out how the math works on a recovery here and what the urgency is to improve the financial performance. And we're looking at a very... increasingly bleak 25 outlook on the economy. So what's the plan here? What's the sense of urgency? Tell me about the SG&A. Where are we going with this business?

Yeah, thanks for the question. So let me break it down in a few pieces. Yeah, clearly we see that right now in a tough environment. So continual drop in revenues. You can see that sequentially Q4 is a smallest revenues quarter for ourselves. I will continue to adjust our core structure. You can see that so our Q4 performance come in pretty close to our guidance, the midpoint of our guidance. And so we did have better line of sight compared to a few quarters ago on where the environment is and adjust accordingly to your point about SG&A reduction. So if you look at our financial year over year, we have a double digit percentage reduction in our overall headquarter cost that you can see when you look at the financials. We'll continue to look at it, and as James mentioned, we did quite a few rounds of restructuring, and that's where we invested about $11 million, and most of those restructuring spend is focused on taking headcount out, like both manufacturing and SG&A headcounts. So those are the actions that we've been taking. We will still continue to look at some of these actions in Q1, will not be to the level as extensive as you see in 2024, but we are not done with continuing to look at and leaning our core structure. Overall, we have a view that SG&A of this business, probably somewhere around the 9 to 10 to 11%, based on our benchmarking with a similar business, will continue to look for opportunity to lean that out But for us to get to a lower level, that definitely depends on the overall end market and revenues level of the business. So beyond that, clearly the urgency of the company right now is also on generating free cash flow. As we mentioned that we did have to spend quite a bit of cash in 2024 to do what we needed to do from consolidation, right-sizing, and also building inventory to allow us to make sure that the low-cost new facility are up and running, consolidation are in place. So now the urgency for us is making sure that we regain our cash position here for the working capital management. And then obviously, sequentially, we are expecting revenues starting to go from the, we call it the bottom in Q4, and hopefully the end market will continue to improve And our restructuring and other cost reduction effort will add to the bottom line sequentially.

I think gross margin is an area that we really are having a lot of focus on starting in Q4 last year. Given the challenges of some of the consolidations and slower ramp, it did hinder us a bit in expanding gross margin. But this year, I expect us to have the majority of the EBITDA improvement is on the gross margin line with some coming from SG&A, but we're really focused on gross margin, maniacally focused on gross margin. And we had leakage points and inefficiencies last year that we don't expect to repeat this year due to all of the movement with consolidation and business divestitures. So that's going to be the biggest lever of year-over-year improvement now that we have the portfolio cleaned up. We've got underutilized plant with the consolidation that's closed and sold. So I expect the margin to expand, the gross margin to expand this year.

No, I appreciate that. But if you do the math on this, what you said, Andy, you say it's 9%. And James, just looking at the gross margin, to achieve an EBIT of 5%, which I think is a reasonable business case here, then the gross margins are going to have to be around 14%. And historically, that's a bit above where the company is. So maybe to comment, James, on the new business that you've booked. What gross margin? And I understand the volume, but if you, you know, most projections as companies do that, there's sort of a standardized, you know, expectation on volume and plant utilization. What's kind of the standardized gross margin that you are achieving on your new business? And what's your target? If you could mention that, just to elaborate on what you were saying.

Yeah, that's right, Doc. I think your view of the P&L is right. So we expect that for us to get back to the 5 plus percent of EBITDA, we said that our entitlement of EBITDA margin would be somewhere around 9%. So we have work to do. So if you think about that 9% SG&A to your pawn, we've got to get up to the 15% growth margin, which in CVG, I know that you follow us for quite a number of years. we have not got to that level. I think 13 to 14% is what we have demonstrated in some period of time in the past, but we still believe that that is not the full potential of our business. 15%, I think we believe that once we get our utilization right, get rid of those inefficiency, 15% will be our entitlement. Now, we have work to do on that, there's no doubt, but that is a bigger opportunity for us, as James mentioned, compared to SG&A, So now you just have to work hard to take out all these inefficiencies and get our entitlements. For your new business questions you mentioned, so typically when we win a new business, we'll be above that level. But again, as you can see, it takes some time for us to see those new businesses coming in and as a percentage of revenues, it's still a smaller percentage. So it would take time to move that needle. I think that right now, the short term, the more realistic and faster growth margin expansion opportunities is within our operational efficiencies.

Yeah. In addition to what Andy said, as we see the end market, especially in Class 8 recover in the second half of this year, we expect more operating leverage for every revenue dollar as we've got our cost structure fixed and it's minimal variable that we're adding on top of that. That's where we really expect to see tailwind in addition to the non-repeating one-time inefficiencies we had last year. So we're really looking forward to seeing how that operating leverage is going to come through. And as a result, the percent SG&A to sales would decline as well compared to where it currently is.

Well, thank you very much. Thank you, Doc.

Thank you. The next question comes from Steven Martin. With Slater. Please go ahead.

Hi. I'm not going to rail at you this anymore because it doesn't seem to matter that much. And the previous questioner has asked some of the questions. Historically, in my experience, when someone specifies an out-of-pocket restructuring charge and it's mostly focused on severance and labor, you get a multiple return of that. You spent $10 million roughly in restructuring charges at cash, and yet your adjusted EBITDA is going up modestly. You talk about big headcount reductions. I don't see it in your guidance. And why is, you know, with all the restructuring as we've been hearing about for the last 24 months, you're talking about an adjusted EBITDA that's up a couple million dollars off of a basically crappy 2024.

Well, Steve, so thanks for the question. Let me, uh, let me maybe give you a little walk from 24 to 25, right? The number one thing is we got to remember. 2025 still representing a declining revenue year, looking at our end market, 5% in Class A, 5% to 10% in CONAC. If you look at the midpoint of our revenue guide for next year, it represents about $30-ish million of revenues reduction. When you think about that contribution margin related to that, that's roughly about $6 million, $7 million. Right. So this year we're running a $23 million of adjusted EBITDA. So in 24, so if you take that 7 million, 6, 7 million down, then we're at about 16, $17 million of EBITDA on a comparable revenue basis.

Right. So hold on a second. 2024. I'll refrain from using language. 2024 was a horrible year. OK, everything was down. You missed everything. So your comparison to 2024 is sort of a false comparison. Compare it to 2023 or 2022. OK, 2024, well, I won't say it, but 2024, you guys should, frankly, you should have resigned after 2024, but you didn't. OK, so basing your comparison off of 2024 is just false.

Yeah, so Steve, that's a fair comment. So obviously, 2024, we are challenged with the inefficiencies and the down market. So maybe you can look at the 2023 volume. Obviously, it's a very different volume comparison. So with our overall infrastructure and fixed costs, so you have to adjust for revenue in order to compare. And you can see there's some actions that we took to take our fixed costs related to our treatment component business, the trailer coffee facilities, and some of the actions that James mentioned about moving our higher cost electrical location to a lower cost. So those are the things that we do. And clearly, the restructuring payback, as you mentioned, is we clearly have to wait until the volume come back. So we take down the headcounts. Overall, the company takes down thousands of people compared to a year ago. Now, with this leaner structure, and to James' point about when the revenues come back, we could continue with a leaner cost structure that conversion is going to come back. So we're counting on that to happen most likely towards the later part of 2025.

All right. So let me ask you a question, James. At the end of 2025, if you don't make these numbers, when is there going to be a commitment to do something for your shareholders who have been sacrificing and struggling for years? okay, your stock is down 80, 90% from where, you know, 80% from where it was two years ago. PACCAR is trading at near highs. You know, at what point do you say we have failed and it's time to not change management again because you guys keep shuffling the deck chairs. You know, everybody who's been the CEO has been on the board so they can't claim they didn't know what was going on. You know, When are you going to commit to sell a company or do the right thing for your shareholders? And what is the metric that tells you that?

Steve, that's a good question. And it's something that the board evaluates quarterly. We have board meetings and we talk about the future outlook of the company, what our position is, where we stand with customers, what our headwinds are. And that is a regular topic in each one of our board members, our board meetings. where we talk about what can we do to get the stock price up and what can we do to reward our shareholders for their patience. So it is front and center. As far as the metrics on doing something different, we have evaluated, and that's why we took the actions we took last year when we sold IA, which we had a great experience with the first couple of years with COVID, and then it went under, then it was bleeding cash, so we sold that. The Kings Mountain facility and cap structures, We sold that because it's a very capital intensive business and it needed a massive reinvestment. And the product in that site is $135 million site. The main product in that site was ending production in 2027, which meant we would have been holding an empty bag, which we couldn't monetize. So some of the actions that we've been taking represent what we're trying to do to clean up the portfolio, get our operating model right. So when we do get in market recovery, you'll see more operating leverage and definitely a larger stock price.

I get that, and we've been hearing all this, and frankly, your former CEO who's now gone on to another company is trying to sell the same bullshit he did at CVGI. I get all the things you're doing, but at what point, and I guess there's no answer because nobody wants to sort of give up their job, but at what point do you just say, and board, we have failed, it's time to hand this over to somebody else. And it's a rhetorical question, you know, and a long answer is not, a long answer about our restructuring and realignment is not the answer. So I just hope you take it into consideration before you wither away to nothing.

Thank you, Steve. So yeah, definitely a great input. James mentioned we'll continue to evaluate that, but we appreciate the voice of our shareholders. Thank you.

Thank you. There are no further questions at this time. I will now turn the call over to James. Please go ahead, sir.

Thank you all for joining today's call. While our 2024 results were challenged, the fourth quarter showed signs of stabilization. We believe we've created a more focused, agile company position for future success And we look forward to accelerating our operational momentum and driving improved outcomes through our product-focused, customer-centric strategy in 2025. Thank you all. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.