Commercial Vehicle Group Inc (CVGI) 2020 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to CVG's Fourth Quarter and Full Year 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Mr. Chris Bohnert, Chief Financial Officer. Please go ahead, sir.

Thank you, and welcome to our call. Joining me today is Harold Bevis, President and Chief Executive Officer of CVG. As a reminder, a telephonic replay of this call will be available on the Investors section of our website until March 24, 2021.

Additionally, a slide deck to complement today's discussion is also 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, 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 production volumes of vehicles for which CVG is a supplier, financial covenant compliance and liquidity, risks associated with conducting business in foreign countries and currencies and other risks detailed in our SEC filings. I will now turn the call over to Harold.

Thank you, Chris, and good morning, everyone. On today's call, we'll provide an overview of our fourth quarter and year-end results, followed by an update of our strategic initiatives designed to increase our earnings and make our earnings more stable and less cyclical. Chris will then follow this overview and discuss our financial results in more detail, and we will end up by opening the call and answering your questions.

If you have the presentation from our website in front of you, please turn to Slide 4. We would like to point out that we continue to see recovery in our legacy end markets that were disrupted by COVID and also continue to see growth in our focus areas, especially warehouse automation.

For the fourth quarter of 2020, we delivered sales of $216 million, up 14% as compared to the year ago fourth quarter. This growth was primarily driven by warehouse automation, where we delivered $34.4 million in sales representing approximately 16% of the company's sales. Our operating income increased to $5 million in the quarter, which compares favorably to a loss of $4.3 million in the year ago fourth quarter. Improvement was largely a result of better volumes, combined with our successful efforts over the past year to reduce our cost structure and drive operational efficiencies across the company.

Rationalizing expenses has been a priority of our management team through the downturn and will provide a benefit as our sales continue to improve. Adjusted EBITDA was $13 million in the fourth quarter, representing a significant increase as we compared that to the $3.5 million that we delivered in the fourth quarter of 2019. The improvement was due to higher revenues, combined with an improving sales mix and the aforementioned expense reductions.

Looking at our new business backlog, we achieved net new business wins in excess of $100 million annualized in 2020, which is primarily in our growth end markets of warehouse automation and electric vehicles. And we expect substantially all of this new business to hit this year. These net new business wins represent approximately 14% of our annual sales and are a clear validation of our efforts to diversify our revenue mix. We are also pleased with our progress expanding into other new markets, including recreational vehicles, material handling equipment, boating and mass transit, which further lessens our customer concentration and our end market concentration.

Looking forward, our expectation is to achieve another $100 million of net new business wins in 2021. This is a global team effort, and we have had wins in Japan, Korea, China, India, Europe, and the United States.

Turning to Slide 5 in the deck. 2020 was a pivotal year in our company's history where we made foundational changes transforming our business with the goal of improving our value acquisitions, focusing our commercial efforts on to specific growth areas, especially warehouse automation and electric vehicles. As we continue to execute upon our strategy, we believe our earnings growth will accelerate due to higher sales volumes and that our earnings will become less volatile in the future due to lessened customer concentration and lessened in market concentration. We will invest consistent with this approach, and we'll run a balanced program of growth investment, cost reduction investment and digital backbone investment.

We will expect to use our excess cash flow to pay down debt just like we did in 2020. Signs of our success can already be seen in our results, where we have continued to reduce our end market concentration, having lowered our sales to North American heavy and medium-duty diesel truck market to 35% of our 2020 sales as compared to 49% of 2019 sales. While our business was greatly impacted by the COVID pandemic and we still have COVID-19 induced supply and cost risks in the business, we are aggressively taking advantage of these temporary downturns to accelerate our growth programs, reduce our cost structure, and improve our operating footprint.

Central to this is our entrepreneurial spirit that we call FIND A WAY that ensures our entire workforce is focused on delivering better customer value and securing additional business streams. We are becoming more innovative and solutions focused where we can.

We are optimistic about our forward pipeline of opportunities. And hope to build upon what became a successful year in 2020, albeit in a truly challenging environment. I would like to thank our 8,000 employees for their extraordinary commitment to both protecting our company and serving our customers. Our goals are to make a difference, support a creative, diverse and inclusive workforce that goes for it as a team has fun and enjoys our business relationships.

Turning to Slide 6 and looking at the warehouse automation area in more detail, the growth of e-commerce is driving the need for additional warehouse automation, parcel sorting, and delivery vans. Industry expectations are for the warehouse automation industry to grow at a 14% CAGR through 2026, or nearly doubling in size to $30 billion in sales over 5 years. We supply components and subassemblies for these warehouse installations, including complete work centers, and are clearly benefiting from the market's robust expansion.

In the fourth quarter, our sales into the warehouse automation end market grew to $34.4 million in revenue, as I mentioned, and we ramped up both new products and new capacity to support this business expansion. Importantly, warehouse automation represented 16% of the total company sales in the fourth quarter. And looking forward, our goal is to deliver more than $150 million in sales to this market segment in 2021 as compared to approximately $65 million of warehouse automation sales in 2020, and approximately $1 million in 2019. We have a good pipeline of forward opportunities as well.

Turning to Slide 7. The electric vehicle in the last mile market is another growth market that is important to the future of our company. Our competitive advantage resides in the fact that we have a natural value-added product basket that makes it convenient for new vehicle makers to do their work. Simply said, we can design prototype and build a bundle of products and provide that in a one-stop shop basis to our partners. And we have 40 years of global experience helping others develop vehicles. We have won positions on multiple electric vehicle platforms already and are working on quite a few others. This is a global business opportunity.

Today, we are designing and delivering prototype products for awards won in 2020 and early 2021 for new builds, testing, and field trials.

Some first for us of the global rollout of the new Unity suspension seat, which is modular, has a congruent backbone, has a highly automated production process, is globally sourced and is beautiful on top of that.

We also are designing complete electrical systems for the very first time, and we have installed a high-voltage production system for the manufacturing of electric backbone for electric vehicles. We expect these programs to remain -- to largely remain in the development phase through 2021 and then turn into revenue after the product baselines have stabilized. It is a lot of fun and really important work as we participate in the development of zero-emission vehicles and do our part to help the planet.

An example of the success we are achieving and the type of partnerships that we are embracing in electric vehicle market can be seen in our recently announced partnership with Xos, which is an electric mobility company that is dedicated to making fleets more efficient, primarily in last-mile routes that are seeing strong growth as a result of surging e-commerce demand.

Our partnership with Xos is full service, design and manufacturing, including product sampling, prototypes, thematic electrical system designs, testing and validation to support a cutting-edge fleet of medium to heavy-duty zero-emission electric vehicles, and we are working with long-haul transportation providers as well in both the U.S. and Europe.

Turning to Slide 8. The success that we are achieving with growth in the warehouse automation market, combined with our early wins in electric vehicle market are having a positive impact on our legacy sales mix. In the fourth quarter, sales in North American medium and heavy duty, conventional diesel truck markets, represented 35% of the total company sales, which is a good improvement versus the 45% of sales that this segment had represented over the last decade.

Our sales mix has experienced a purposeful shift to higher growth, less concentrated, more value-added and more profitable areas. Our goal is to continue to expand further into adjacent markets where our technology, intellectual property, and manufacturing capabilities are valued and also a natural fit. That said, our legacy truck market is set to experience steady growth also.

If you turn to Page 9, you can see that over the next 3 years, this will benefit our -- this growth will benefit our company as well. And as you can see, the data from third-party ACT Research forecast improving truck builds in both Class 8 and Class 5 through 7 markets as a result of both industry growth and the significant contraction that the industry experienced going through COVID last year. While our legacy business will be a direct beneficiary of improving truck builds, our strategic focus will remain steadfast. We will continue to invest and expand into new fast-growing markets that will increase our earnings and diversify and stabilize those earnings.

Turning to Page 10. We have been very successful winning new business in our targeted areas. The $100 million of net new business wins demonstrates the success that we're achieving, and our goal, as mentioned, is to win another $100 million of net new business in 2021. And as previously mentioned, the majority of this extra $100 million will hit in 2021, and we are underway to add another similar amount this year.

Turning to Page 11 in concluding. We had a tough year with significant COVID impact but forged ahead with an aggressive transformation, and we have made good progress. We're happy about our team's accomplishments, but we really are just at the beginning. Our goal is to successfully transform our businesses into a more profitable and stable growth company. We are growing in the warehouse automation market. And to this end, we are expanding and sharing our global footprint, expanding our product line as well into this market.

And looking forward, we have 30 global locations, which provide the manufacturing footprint possibilities we need, to continue this expansion and positions us well for the future. We are focused on using our 40 years of vehicle development experience in our product line breadth to be a one-stop shop for electric vehicle makers. And we will benefit from improved demand for our legacy markets as we go along. We are having a lot of fun winning new business. We're optimistic, and we look forward to reporting out on our progress as we go along. Now I will turn the call back to Chris for more detailed review of our financial results. Chris?

Thank you, Harold. If you're following along in the presentation, please turn to Page 13. Fourth quarter 2020 revenues were $216 million, up 14% compared to $189.5 million in the prior year period. This increase reflects the tremendous amount of work our team has accomplished growing our business in addition to the rebounding heavy-duty truck market in North America.

On a sequential basis, revenue increased 15% over the third quarter of 2020, revenue of $187.7 million. Foreign currency translation favorably impacted our fourth quarter revenues by only $2.1 million or about 1%. Our gross margins expanded approximately 530 basis points to 11% as compared to the fourth quarter of 2019. This expansion reflects our renewed focus on profitability and improving our business mix. The key drivers of the expansion was volume leverage and operational cost improvement as compared to 2019.

The company reported consolidated operating income of $5 million for the fourth quarter of 2020 compared to a loss of $4.3 million in the prior year period. And on an adjusted basis, operating income of $8.3 million compared to a loss of $1.3 million in 2019. The improvement was primarily due to higher sales volumes and improved cost structure as a result of our cost actions and an improved sales mix. Adjusted EBITDA was $13 million for the fourth quarter, which was up sharply as compared to $3.5 million in the prior year fourth quarter. Adjusted EBITDA margins were 6%, an improvement of approximately 410 basis points as compared to adjusted EBITDA margin of 1.9% in the fourth quarter of 2019. This margin expansion was primarily the flow-through from the revenue and cost changes I mentioned earlier.

Our fourth quarter interest expense was $5.2 million as compared to $3.6 million in the fourth quarter of 2019 due to the higher PIK interest costs resulting from the amendment of our credit facilities that occurred in the second quarter of 2020. I will touch on our balance sheet and liquidity in a moment but would like to add that we are very focused on reducing our interest expense through 2021 as our financial performance continues to improve and our leverage on a TTM EBITDA basis continues to decline.

Net loss for the quarter was $4.1 million or $0.13 -- $0.05 on an adjusted basis per diluted share to a net loss of -- as compared to a net loss of $7.5 million in the prior year period or $0.24 per diluted share. Included in EPS was a negative $0.10 per share tax adjustment primarily related to valuation allowance.

At this point, I'll talk a little bit about our segment results, starting with the Electrical Systems segment on Slide 14. For the fourth quarter of 2020, the Electrical Systems revenues were $138.6 million compared to $113.9 million in the prior year period, an increase of 21.7%. Foreign currency translation did not have a meaningful impact during the quarter. The year-over-year sales increase primarily resulted from new business wins in warehouse automation, as Harold mentioned previously. Our Electrical Systems segment now represents 64% of our total fourth quarter revenues as we continue to make progress diversifying both our business -- mix of business and customers.

Turning to operating income in the Electrical Systems segment. They delivered $7.8 million of operating income in the fourth quarter compared to $1.1 million in the prior year period. The increase was largely due to increased sales and the improved cost structure. During the quarter, we incurred $2.5 million of restructuring costs and contingent consideration related to our acquisition in 2019. Excluding these special charges, adjusted operating income was $10.2 million in the fourth quarter, compared to $3.2 million in the prior year.

Now turning to our Global Seating Segment on Slide 15. Global Seating revenues increased to $79.1 million in the fourth quarter of 2020 compared to $76.5 million in the prior year period, an increase of 3.4%. Foreign currency favorably impacted our sales in this segment by $1.5 million or approximately 2% in the quarter. The Global Seating Segment reported an operating increase of $2 million during the fourth quarter compared to an operating loss of $600,000 in the prior year period. The increase in operating income was primarily attributable, again, to slightly higher sales and an improved cost structure.

Now turning ahead a little bit further to Slide 21. The company had liquidity of $138.9 million, up from $94.6 million in the prior year and up from $126.2 million in the third quarter of 2020. Our liquidity is made up of $50.5 million of cash and $88.4 million of availability on our revolving credit facility at December 31, 2020.

On March 1, the company amended its revolving loan agreement and extended the facility to March 1, 2026. Also during the fourth quarter, the company paid down an additional $5 million of principal on the term loan. Free cash flow was $2.6 million in the fourth quarter and $28 million for the full year of 2020.

This concludes our prepared remarks. I will now turn the call over to the operator to open up the line for Q&A. Thank you.

(Operator Instructions) Your first question today comes from the line of Mike Shlisky with Collier Securities.

Maybe first, a quick housekeeping question. I know you signed $100 million worth of annualized new business, and you'll hit -- you should get most of it here in 2021, all of it. But how much of that was actually realized also in 2020, the kind of -- the first parts of that business? I'm trying to get a sense as it's kind of the year-over-year growth in that 1 section of your top-line.

Yes, less than 1/5 of [that point] last year.

Okay. Perfect.

And then in the second half, Mike.

Yes, sure. Yes. Nothing has happened throughout the year, of course.

Yes.

And then for the next $100 million that you're pursuing in 2021, is it roughly the same end markets that you've been looking at in the past? Or do you have a whole new slate of places to look for some new business?

Our pipelines are bigger now because we're more mature with that topic. And I would say they're going to be balanced between electric vehicles, warehouse automation, and alternate vehicle types. Last year was skewed towards warehouse automation. We need to put those numbers together because we were successful with some new products and got some big new business that was immediately needed. So I think that can be nice if that cap is happening, but we're not going to count on it. So we have a balanced program, Mike.

Okay. And I wanted to ask quickly on the Xos partnership. I was very pleased to see it and kind of read some of the details there. Can you give us a sense, are you working with any other EV OEMs? I see some stuff on social media and other areas where you are, but is there anything that you're doing that's on the same scale as what you're doing with Xos at the current time?

Yes. We have multiple programs of the same scale. Less than 10, more than 5. So we have to be deliberate about that, so we don't over commit. And we're expanding our ability to do that. But it's a new endeavor. We've had to connect all the junction doctors, better disconnects, prototyping, bread boarding. We hired an electrical engineering team last year that's in place now and have a leader of that.

And so -- and we've added -- we're continuing to add electrical engineers. And it's -- that's one where we can't get too far ahead of ourselves because this is new and it's super important that we get it right as it's the main backbone of the vehicle. And we have people -- we hired people that know how to do it and we combined it with our internal capability. So it's a step-up for us in value add. It's not new to the world or anything like that, but it's new to CVG. And we're prototyping with multiple vehicle makers, mass transit, last mile, long haul, the basic part of the e-commerce supply chain, from the long-haul part of it are getting the goods into the warehouse and the last mile getting it to the house. So we're very focused on participating in the long-haul truck. The warehouse automation, the last mile delivery has been mainstream provider there of that connectivity.

Got it. And maybe 1 last 1 for me. Great-looking growth here in Class 8 into a really above normal year that's appearing to turn out to be here and certainly like the growth in warehouse. Can you give us any kind of sense, your feel for the end market growth in the construction in ag segment?

Yes. The bellwether reporters there are Cat and Deer and Volvo also does report their construction segment. And they're all giving outlooks that are conservative and are flat to up a little.

Your next question today comes from the line of John Franzreb with Sidoti.

Howard, first for you, as you look back on the past year and as best you can exclude COVID from the equation, what has surprised you to the upside about the company? And did you find it to be a little bit more challenging than you expected?

You broke up a little bit there. Could you repeat the heart of your question?

Sure. Excluding COVID, what's surprised you to the upside of the company? And what has proven to a bit more challenging in the past year?

I mean, well, on the -- what did he say about upside, Chris? Did you make that out?

Yes. What are the upsides in the business?

Yes. The upsides, well, we started this pipeline activity kind of when I walked in the door, more or less. And it had to form, and it took a lot of coaching and mentoring. We did it with the exact same team that was here. And we just reoriented and reprioritized our time. And some people had a lot of opportunities right in front of them that they go after and some other teams, it was a little harder they had to go make those opportunities evident to themselves.

We have 9 sub business teams, if you will. And they had different levels of readiness for not just me encouraging it as a direction, but also their opportunity set. And so the pipelines have -- they've increased a lot in size, as we've gone long. And still are through the first beginning of this year. So the upsides, we're opportunity rich, and we're having to sort through and check off how good is it down to -- is it something that should be second-tier kind of focus for us.

So the upsides are nice, and we also recognize as we went along the way that, hey, it would really be nice if we had a person like this on our team. And so we added a few people to the current team that brought in some knowledge because we also studied why we lost, we have some losses in there. And we wanted to understand why we lost and how could we bolster those areas. And it's a process for us. So we have a database, and Chris has a person assigned to it. And we've made a little science out of it, and we're working on hit rates and all that. So we haven't milked it. The pipelines keep growing.

On the challenges side, the COVID has been a problem because it's caused steel constraints, supply chain constraints, people's health, people being out absenteeism, serious problems. And then recently, we had the cold weather in Texas, which zinged everybody. And for us, it hits us because we use foam in our seats. And there was a couple of the refineries that were hit are key to the foam industry in the United States. You might have read about that.

So short-term and then the chip -- chip shortage, too. So we have some short-term supply side things. The demand environment is favorable. And the forward pipeline of activities is favorable, like any good CEO, CFO, Chris and I are worried about the quarter we're in and the quarter thereafter, and there's some supply chain issues that we're dealing with. And I think COVID is -- we track COVID here and our 8,000 employees. We were up to maybe 100 a week of issues, and we're down to maybe 20. So we see it in our own employee base, becoming less of an issue, but we still have these global supply chain issues on getting material. So labor has become more stable, material is still a little bit hard. And so I think that's going to -- that's something that we're paying attention to in Q2, Q3.

All right. That's basically...

Go ahead.

It's perfect to answer, Howard, but that works perfectly into my next question. When we think about the cost side of the equation, Q1 versus Q4, how much increment costs still have to come back and how much of incremental raw material costs are you worried about in Q1 versus Q4?

Q1 of this year?

Yes.

Yes. So we brought on -- if you look at our SG&A through last year in Q3 and Q4, we brought all of our employees back in Q4 to full pay and we reinstituted incentive compensation. We did not start T&E, though. We did not start traveling and we, in the United States employee base, we had our 401(k) plan froze. So in Q1 of this year, incrementally, the only new "cost hit" on the labor side is on the 401(k) benefits.

I will say though that we're hiring right now, a decent amount of people. And generally speaking, we go through temp agencies as their probationary employees, and we temporarily play a 1/3 markup to the temp agencies. And so it's a little bit of an hourly hit, but we have that planned into our thinking anyway. What about you, Chris?

Yes. We're not -- there's no material items that are going to hit us in Q1 compared to Q4. So I agree with Harold.

Nothing major.

There's nothing major at this stage.

Just little zingers.

Yes, we're hiring for growth. But we're judicious about that and planning as we get the new business, but there's nothing material that will hit us in the first quarter that we can take...

That we can't offset. I mean, there's always pressure. But the minimum wage went up in Mexico on January 1 on border and border states, in which we're in them, and we have over 2,000 employees there, but we took actions to offset it. So we're -- it's just normal run the business stuff, I would say, Chris.

It is, yes.

Okay. And 1 more question, and I'll get back in the queue. Can you talk a little bit about your plastics initiative? And what do you think is a reasonable revenue and maybe margin targets for that business.

For plastics?

Yes.

Yes. So we have special purpose assets when you get down to it. And if you know a lot about the plastics industry, there are some mainstream equipment and mainstream type of machinery. I spent 10 years in that industry. And we have special purpose large machinery generally. And so we have to be targeted with our pipeline activities there to areas that are conducive and we're nationally competitive. We have a couple of little machines we need. But if you look at one that fits us really well. It's the recreational vehicle market.

Snowmobiles, ATVs, golf carts, those sort of things have big plastic bodies like big plastic truck pieces. So we're focused in there. But we had to be specific in that one. And that was not a generic one where we have an open road with our capabilities. And we're not to the point where we want to aggressively spend money there.

It's very expensive type of capacity. So we're being very focused on high ROIs, but it's competing against momentum that we have in other areas. So I'm going to say help me out, Chris, but I'm going to say in the plastics area, we want to grow. We're being focused but we have modest expectations.

Agreed. Yes. Obviously, we want to fill up our equipment. We do have some processed technologies that are relatively unique, that are more difficult to do than other plastics manufacturers. So we're going to try to capitalize on that. But it's filling the volume selectively with higher-margin business. But again, Harold, I agree. We're going to be very selective about that volume, especially in the off-road space as well.

And I'll say 2 more things. There's a lot of plastic parts in an automated warehouse. And so we are looking at all the plastic and they're large.

There's all kinds of plastic parts. I won't say exactly because you would sniff out what we're doing. But there's a lot of plastic parts in there. And so we're focused on strengthening ourselves as a supplier into there by expanding our product line. And then my last point is, which -- it's not here and now, but eventually, Chris and I do want to reboot the business development team. And the plastics area is 1 that would be a good 1 because we could add capacity that's complementary to what we have and then some good customer positions, but that's later. We're not underway with that right now.

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

First question, can you talk about -- you have many areas of growth here as we head into this next fiscal year, warehouse automation, last-mile delivery, electric vehicles, et cetera.

Can you talk about cash, different areas of cash opportunity that you see for the business this next fiscal year, leading to cash priorities? I'm sure, as you gain more traction in these high-growth areas, you're developing some key learnings, whether it's from deals that you've won or from observation of some of the competitive proposals that are out there. So is there anything from a tuck-in perspective that would change the mix of some of your cash priorities?

Yes. Thanks, Chris, for the question. So obviously, our goal overall is still to be cash flow positive to continue to pay down debt. We do have a couple of areas of investments that we're making. Harold mentioned in the call that Unity is (inaudible) through that. And we're making other smaller investments. I think Unity is the big one. But I don't know if you want to speak about Unity a little bit.

Yes. Chris, did you say tuck-ins like a tuck-in acquisition?

That's right.

Yes. Now we're not looking at that right now. We are growing pretty briskly relative to our path. And so we're dealing with the "good problems of growing." We're hiring a decent amount of people relative to our past, and we're digesting. And our core markets are flattening up. So the operating team, from my perspective, has their hands full.

And as of this writing right now, we don't have anyone in charge of business development. So when I came in last March, we had a 3-person team that had disbanded and we just haven't added it back because we started to have quite a bit of organic growth, which obviously, we reported out is $100 million net.

And we're reporting that, Chris, because our amount of growth wins exceeds that, but we lost some business, and we are being more aggressive on our legacy business that's not profitable and pricing it up. And if we lose it, we lose it, but the mindset we have now here is to replace it more than one for one with future business. So we're transforming the revenue line. I'm really happy we were able to do 15% churn out for the better last year, and we're going to do. Our goal is to do it this year. Nothing can be guaranteed there, but that's what our -- we're geared up to do. We have the pipelines to do it, but we need to convert. And we have competition at every account that we're at. So it's the best person wins.

On the investment side, as Chris mentioned, Unity is a big deal. We're refacilitizing several big plants. And we're investing some CapEx into our digital backbone, Chris is leading that to get everyone on the same financial system and manufacturing systems, supply chain, and a unified customer interface through data warehouse. So I think our CapEx 20 to 25, Chris, something like that. We held it back last year going through what we did, and we got coached in that amendment.

So Chris got that and those things to-do list, but we kept -- we had to mine our cash, and we did. Our CapEx, we don't have a big need. It's not a surging need, but it's going to trend towards the high side because we got a little bit of catch-up for last year. And we have a little bit of investment to do with some of the new business.

That's very helpful. Appreciate the color. And just another question or a few other questions that are related to one another. You mentioned the $150 million warehouse automation revenue opportunity in fiscal year '21.

If we take that in consideration of electric vehicle, and we think about the pipeline that continues to grow respective to these 2 areas of the business, how should we think about the maturation and conversion of this pipeline in combination with what's existing as we think about the cadence of these 2 markets in fiscal year '21?

Yes. So 2 separate questions there. Warehouse automation, there are reporters here, Cognex, Honeywell, and foreign reporters as well foreign public companies like Fuku and others, Zion Group out of Europe, which their brand name in the North American market is Dematic. They report out this information in their third-party data and the industry, the supply -- the supply industry is a constraint.

So there's over 1-year backlog in that industry, and there's a need for people like us to increase our output. And so there's upside opportunity there with what we already have, but we also are trying to continue to expand our product offering.

And if you look at our growth last year, we've got more volume per part number when we acquired FSC. But the big enabler really was expanding our product and we've partnered it a couple bit with repurposing portions of existing plants to make new products. And so we're going to keep going with that. It's working.

Could it be upside this year if we convert similar to last year? Yes, but we're not going to count it into our base thinking. And the cash flow is good. It's not CapEx intense. It's know how intense and delivery intense. I should say it's intense, but not financially dense. On the commercial vehicle side, electric vehicle side, if you're following the path here, the electric vehicle wins are primarily future revenue, future revenue, and we're very conservative with our thinking and reporting and comments here. They -- those companies are starting up with big market caps, and no vehicles.

And then you have the big companies that are fielding their electric versions, and they have big sales plans, but we are only putting in our pipeline's conservative revenue figures and OI, operating income figures for the anchor orders that they have. So there's upside on that in the future period, but we're going to wait until it turns into POs before we start talking big numbers on -- in electric vehicles.

Okay. Great. And I guess I'll squeeze 1 last 1 in about the partnership with Xos trucks. It's hard to ignore. And as you said, it's groundbreaking.

How should we think about this partnership from a long-term perspective? I imagine as we revisit this announcement a few years from now, some of the inflection for the electric vehicle business may be attributable to announcements like this.

Yes. Xos is an important customer. We offer natural advantages that companies like that. We are a mature, experienced partner to vehicle makers. And we have a full product basket. We offer a lot of products at the same time.

We can make 1 delivery of parts and they can give 1 bill and they can make 1 payment. So there's a lot of simplicity that's natural there. And we have a global footprint because the global truck market is so mature itself and cost -- global costs knowledgeable that we have plants in the right places to make it happen. So we're a natural partner.

We have multiple programs like that, that are different types of vehicles than Xos. And most of them prefer to keep the partnership private and covered under NDA. Xos, we asked them if we could say, if we could announce our partnership and they got comfortable with it. And I'd say your first question was what should you take away from that. I'd like it if you would take away that we have multiple relationships like that, but we can't speak about them that are underway in parallel right now.

And we're doing our very best to be partnered with the companies that we believe have differentiated business strategies and are well capitalized and we're going to make it. And we believe in what they're doing. We believe in zero- emissions and making the world better.

So we are also our own values align into that industry. And we're trying to defeat our legative customer concentration, which previously we reported out in our 10-K because it was so significant. And so we want to get rid of that customer concentration.

So I'd like you to take that away that we're aligning with new names to do that. And then the third point is a more sophisticated product offering from us. So we've elevated our value-add into design versus just build-to-print something that someone else has designed. We are proffering a design and then testing it and accepting accountability for it working, and we had access to people that know how to do it because we're in and around it all day long. So it is a big deal for us, and we're quite excited about it. And we have multiple vehicles we're working on globally.

Your next question today comes from the line of Barry Haimes with Sage Asset Management.

Had a couple of questions. First one is, looking at this year, as volumes come up, in the legacy businesses, what sort of incremental margin, variable margin should we be thinking about sales dropping down their pretax? And then as you add volumes in warehouse, similar question, what sort of variable margins?

Yes. It's a good question. So -- and the legacy ramp up, we expect to leverage properly there. So we have the fixed structures that we need. And we've made, although the outlook for 302,000 Class 8 trucks this year, for instance, for North America, we've made more than that. We have the capacity to make more than that, and we've surged higher than that. So we have the teams in place to inflect up at variable contribution margins.

Warehouse automation and electric vehicles is a little different. You asked about warehouse automation. So when we've had to expand and we are now, we have a fifth plant right now that we're commissioning. It brings along a whole cost structure. It brings along rent. We've had to expand. We're bringing so long new equipment that we didn't have, supervision that we didn't have, setup crews that we didn't have.

So we're getting a little bit of -- we're leveraging our SG&A, obviously, and there's some leverage of the fixed line in the plants. But that one leverages a little worse, per se. Barry, because it's bringing along a cost structure with it because we didn't have the open capacity or open leadership bandwidth to onboard that amount of business in that area. So we're adding slivers of costs as we go.

No, that makes sense. Any ranges you could give us numerically for the 2 businesses in terms of contribution margins?

I think in the past, Tim, the prior-CFO gave guidance on that. I know what it is, but I don't really want to say. I don't want to give too much here, Chris.

Yes. I think the way I would characterize it is, you see where we're at in the full year. We don't -- there's upsides and downsides. I think the upsides there, we're going to gain more leverage as we put more volume into the plants that make all the truck related components. The downside is there's a little bit of supply chain pressure, as Harold mentioned, and steel prices have gone up and so forth.

So net-net, I don't anticipate any significant changes in our margins. We've publicly disclosed that our warehouse automation margins are accretive overall. So as that business grows, you would see some uplift in gross margin there. But I think that's kind of where it is.

At a minimum, obviously, we're going to commit to leverage over our SG&A. So I mean, that's a minimum. And in warehouse automation a little bit in seating. Out of the 2 reportable segments, seating will leverage according to its historical rates.

Got it. Okay. And then my other -- one other question is, you mentioned in EVs that '21 is more a development year. But as we look to '22, what's sort of the revenues we could see at, is this the first year that you are really starting to deliver product.

And then if you want to go out a year or 2 beyond that, with -- looking at your existing partners you have today, so adding no new partners, what sort of run rate revenues 3 or 4 years down the road might we be thinking about? Any help you can give us.

Yes. Underneath your question is what do I think the substitution rate is going to be between electrical and diesel engines in the truck market. That's going to be a driver behind my answer. And if you look at the expected substitution rates, they vary by type of vehicle, bus being the highest at 60%. We'll go all-electric buses and transit and the lowest is Class 8 truck because of the dynamics of the pool and the mid-range.

And so then the thinking there is that's primarily going to be hydrogen fuel cell, alternate fuel but not electric all the way, battery electric. If you smooth that out, we're trying to net grow and ratios versus the truck build and deconcentrate our customer dependency that we've had. So when we get out through this into the years you're mentioning, instead of a top 4 customer list, we want a top 10 or top 15 list.

So we don't want to be as customer concentrated. And we still want to be in diesel trucks for those routes that are going to stay like that globally. And if you look at these reports, there's a lot of them -- a lot of need for a diesel truck on them and certain routes going over the Rocky Mountains, things like this.

But we are going to be tougher on our economics. In our past, we kind of cloned to those legacy positions like a life raft. And there -- we have some legacy positions that aren't very profitable. And we're staring into them. And so I hope that the real hope is to increase our profit and getting that revenue. That's the win plus plus. But we're not going to overcommit to it right now because you have to get into who's going to win, who's going to lose that kind of thing. And I'm not smart enough to do that. There's so many players underway. But we have already added to our customer roster.

So for us, we are already getting new names on our customer list we didn't have 1 year ago, and they're well capitalized and they have anchor orders from the premier companies. And I can't stay because then you know who our partners are, but and another thing we're doing, Barry, is we're flat out trying to penetrate the delivery van market. We had never done that before, and we are, and we've been successful. It's a key part of e-commerce.

Your next question comes from the line of Josh Taykowski with Crédit Suisse Asset Management.

Congrats on the results. Just wanted to talk a bit about the profitability in 4Q. Obviously, you saw some great expansion on the margin line year-over-year. But just wanted to ask a little bit further about the deterioration in margin sequentially from 3Q. I think you were kind of in the mid 8s EBITDA margin last quarter versus 6% this quarter. I realize there's a bit of seasonality, so not perfectly comparable, but is it possible to maybe bucket kind of the big drivers of that sequential contraction?

Yes, Chris -- or Josh, thanks for the question. Yes. We reported 6% adjusted EBITDA. There's a couple of onetime items in 4Q. We -- as Harold mentioned, we put salaries back up to full both strength, the 401(k) plan. Obviously, that was in the year-over-year comps.

There were some bonus adjustments that we put into the fourth quarter of this year as well. And then naturally, as our stock price goes up, our other incentive comp impacts our P&L as well. So those are the big items in Q4 of 2020.

Yes, it was not -- we didn't have anything that happened on this operating side. It was really a rebuild of our SG&A model. And then funding of discretionary incentive comp because we had not -- we had cut our bonuses out and we announced that in Q2, and then we started to take off. And so we had to do a full year catch up almost and fund a discretionary pool.

Got it. Makes sense. And then second question for me. Just on the legacy truck business, I know you've got the 1Q Class 8 truck builds expected for 1Q. I think it's up 14% year-over-year for this first quarter. Not asking for guidance from you for 1Q this year.

But are you feeling in your own customer releases, that type of growth as we kind of end the first quarter here?

Yes. So if you read these reports, I'll speak to you the highlights. The backlog in the industry is about 9 months, and dealer inventories are low, and the miles travel is good. So there's a demand for vehicle capacity in North America. And the natural replacement rate is around 260,000 trucks. That's how the trucks retire and need to be replaced to not add capacity just to stay even and last year came out below that level. So there was a pent-up demand. That's why inventories are low at the dealer level as far as a backlog of new vehicle orders from the fleet. So we are consistent with that. So we see that. And so we have a consistent outlook that shows that type of a good demand environment.

And then we get firm releases 30 days ahead in a frozen schedule, it's a JIT business. And the real deal is the demand is there. There's supply constraints that the industry is dealing with. Chips, chemical chips globally because of COVID, everyone bought a PS5 and a new iPhone and all that. So chips are a problem. And the truck industry actually is way down the toad and pull. We're not the first in line. And there's been steel problems, there's been supply chain delays from China. And then recently, with the weather in Texas chemical outages which affect foam, they're making foam. And we use foam in both our trim business to make the trim soft. And we use it in our seating, obviously, to make the cushioning. So...

Your next question today comes from the line of Steven Martin with Slater.

You made the comment that Chris had some work to do on the balance sheet. Can you get a little more specific about timing and you're sitting with a fair amount of cash while you're not paying down the debt a little more aggressively?

Yes, go ahead, Chris.

Steve. Yes. So we -- as you saw, we announced that we extended our ABL recently. Obviously, as I mentioned in the third quarter, we're taking a much more active approach to managing the balance sheet, not only on the kind of the working capital side, making sure our terms are all appropriate, both on AR and AP and balancing that out a little bit better to stay cash flow positive.

Obviously, we're working on, as it has been mentioned in the call, taking a look at our current debt structure and making sure it's going to fit long-term with our business growth. So that's very, very tight on the radar right now. And I think more to come on that. Obviously, our interest was really high in the fourth quarter, which is affecting and so forth compared to prior year. So we can lower that obviously frees up a lot of cash flow for further investment and so forth later in the year.

And debt pay down.

And debt pay down, yes.

Okay. Because see, the markets are, as you and I -- as we've discussed off-line, pretty aggressive right now, the financing markets for companies like yours.

Yes. We're seeing that as well.

On the cost saving side, where are you on -- not divisional, but sort of corporate G&A. I know you've done some downsizing there. And are there -- as you look at the asset base of the company, are there assets that are available to get returns?

Well, the mainline strategy we have is to be a good partner to vehicle makers, have profitable productive relationships where our value-additives is recognized in the form of pricing and to participate in the e-commerce spring from long-haul trucking, middle market, middle mile trucking, the warehouse itself and logistics center in the last-mile delivery. We are mainstreaming into that macro trend. We also have complementary good businesses in. We're in the European passenger car market. We're in the military equipment market. We're in recreational vehicles. We're in material handling equipment, farm equipment, construction equipment, road paving equipment, a lot of different types of vehicle platforms. And they're similar in that they have a long life. They're JIT produced and they have global cost structures, globally optimized cost structure. So then we're in 10 geographies, geographic countries.

So there's a few -- if you force rank them, we know what's at the bottom. We don't have any of those operations losing money. So there's not an addition by subtraction per se on a dollar bills, but it does improve your ratio. So yes, we -- Chris and I are looking hard at the portfolio. And we intend over time to transform the portfolio also to be supportive and win in these areas that we're focusing on. But those are private things. So even if we were selling something this afternoon, I couldn't say it. But it's on our things to do list, get our capital structure to be quote market and look at the portfolio. But I mentioned it earlier in the earlier remarks on business development, kind of have our hands full right now. The business is doing well and it's commanding our attention.

Okay. And when you look at the new automation business, can you give us some idea of the key -- since we don't have a history with it, can you give us some idea of what the cadence of that business is going to look like over the 4 quarters?

Well, the builds are annual, so the -- it's the top 50 retailers and shippers, right, that are in this. So if you look at the industry, we mimic it. So look at the industry, and you can see the people at the end of the chain are FedEx, UPS, Amazon, Walmart, all those type of people. And they report what they intend to do and how they're going to compete against each other and beat on each other, and they all need physical infrastructure to pull that off as well as last mile delivery vehicles.

So there -- so far, there's no cadence except we want more now. But they do a annual design freeze because they're very driven by software. Like you will be sitting at -- you probably order something at your kitchen table this morning on your iPhone, and you expect it in 48 hours to be delivered to your doorstep in a delivery van. That whole shebang it's very integrated software, preplanning of inventory and a smart warehouse and a smart connected delivery route. And it's secular so the e-commerce, the desire by us on the phone and everyone is more quicker. And so it doesn't have a cadence.

So the delivery -- the industry's ability to deliver is behind our desire to get it. And so that's why the industry is sold out for over a year right now. It's not -- it will eventually have a pause, and we all know it. It will probably be an exogenous event we're not talking about. But in terms of the core through the cycle, macro thing, it's pretty solid, and it's just tied into consumer behavior.

Your next question comes from the line of John Franzreb with Sidoti.

Question has been addressed.

Okay. Amy, do we have any more questions in the queue?

There is 1 further question from the line of Mike Shlisky with Collier Securities.

All right, Mike, take us home.

Okay. I know we're kind of running long, but I've got 1 more for you, perhaps I can follow-up later with other stuff. Maybe I'm waiting a bit much on this, but I did notice, this was the first time I ever saw in your slide deck, in your press release that you never actually used the words Commercial Vehicle Group, only using CVG, and it appears to be scrubbed mostly from your website as well.

I'm curious, do you have any kind of major brand change underway or any kind of long-term plan for how you name yourselves and call yourselves given that you're trying to go beyond just commercial vehicles?

You're correct that we've shortened ourselves to CVG. And Commercial Vehicle Group adds a lot of credibility to what we're doing. There's commercial vehicles all along the route here. Is it a perfect name? No, but it's good enough. And if you look at all the vehicle work that we're aligned with, they're not all commercial, of course, some military and recreational and other types of vehicles.

If you get -- if you would maybe not have to see in there, if you could do it over again. But it's good enough. We started a social media campaign yesterday with our new image electric vehicle market, and it's called CVG EV, and it's just rolling out right now. So we're sticking with CVG right now, and we're building upon it. And it's net helpful. It's net helpful, that legacy knowledge and the name recognition.

Thank you, Amy. With that, I think that we're through with the Q&A period.

All right. If you have any further closing remarks, please proceed.

Okay. So thank you, everyone, for your attention today, and we appreciate your support as current and future investors. And we're very optimistic about our future, and we look forward to reporting out our results in a balanced manner as we go through this. Thank you very much. And with that, we'll end the call.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.