Andy Cheung

Thank you, James and good morning, everyone. If you are following along in the presentation, please turn to slide 6. Just a quick reminder that as a result of the divesture of our cap structures, business and industrial automation segment. 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. Third quarter, 2024 revenue was $171.8 million. As compared to $202.9 million in the prior year period. The decrease in revenues is due primarily to lower sales as a result of softening in customer demand in our vehicle solutions and electrical system segments. Adjusted EBITA was $4.3 million for the third quarter compared to $12.2 million in the prior year.
Adjusted EBITA margins were 3.5% down 350 basis points as compared to adjusted EBITA margins of 6% in the third quarter of 2023. Driven primarily by lower volumes, inflationary impacts and the operational inefficiencies we experienced across our business interest expense was $2.4 million as compared to $2.5 million in the third quarter of 2023.
The decrease in interest expense was primarily related to lower average debt balances offset by higher interest rates on variable rates that during the respective periods. Net loss for the quarter was $0.9 million or a loss of 3¢ per diluted share as compared to a net income of $4.7 million or 14¢ per diluted share in the prior year adjusted net loss for the quarter was $0.4 million or a loss of 1¢ per diluter share as compared to adjusted net income of $4.7 million or 14¢ per diluted share in the prior year.
Free cash flow from continuing operations for the quarter was $17 million compared to $11 million In the prior year. The free cash flow generated in the quarter was supported by the first payment of $20 million received from the cap structure sale in September operating cash flow in the quarter was weighed down by restructuring charges and the operational inefficiency we experienced.
As a reminder we received the second of the last $20 million of the proceeds from the cap structure sale on October 1st, meaning that the amount is not included in our cash balance as of September 30th adjusting our cash balance to include the additional proceeds. Our net leverage ratio is currently 2.5 times adjusted trailing 12 month adjusted EBIDTA from continuing operations.
Moving to segment results beginning on slide 7, our electrical system segment achieved revenues of $43.4 million a decrease of 19% as compared to the year ago quarter. With the decrease resulting primarily from a global softening in the construction and agricultural end markets and the slower real of new business wins.
Despite the revenue decline. We maintain our goal of making electrical systems our largest segment and we are still focused on growth opportunities. As James mentioned, we have made a senior leadership change to help ignite a return to growth in electrical systems.
Despite the ongoing weakness in construction and agricultural markets, we continue to achieve new business wins. Putting the company in a position to capitalize when end market demand within construction and agricultural markets rebound. Adjusted operating income was $0.9 million. A decrease of $5 million compared to the third quarter of 2023 operating income was negatively impacted by lower customer demand and unfavorable foreign exchange impact.
Turning to slide 8, our vehicle solution segment third quarter revenues decreased 16% to $97.3 million compared to the year ago quarter due primarily to lower sales volume as a result of decreased customer demand and the wind down of certain programs.
In addition, we experienced operational inefficiencies related to our plan's consolidation as we move production into new facilities, we continue to be impacted by new program launch costs, and we also conducted some operational remediation investments and faced increased freight cost in the quarter.
As a result of these factors adjusted operating income for the third quarter was $3.8 million a decrease of $4.5 million compared to the prior year.
As mentioned earlier, we have closed on our sales of both our cap structures. Business and our Chillicothe Ohio production facility streamlining our business and notably lighten the capital intensity of our vehicle solution business.
We believe the vehicle solutions business is now a more streamlined, less costly and more profitable business. Following the sale of our cap structure business and consolidation of production with the sale of our facility, we remain focused on vehicle solutions as a core business to CVG and it remains a focal point for our team as we continue to reduce cost, accelerate our operational excellence initiatives and win new business at higher margins.
Moving to slide 9, our aftermarket and accessory segment revenues in the third quarter decreased 8% to $31.1 million compared to the year ago quarter. Primarily resulting from lower sales volume due to a reduction of backlog in the prior year period, as well as decreased customer demand adjusted operating income for the third quarter was $3.9 million a decrease of $0.4 million compared to the prior year. The decrease is primarily attributable to lower sales volumes and operational inefficiencies.
Despite the charges taken on operational inefficiency remediation, the aftermarket specific revenue funnel opportunities continue to grow as we focus our efforts on improving order to delivery lead times to drive further customer demand within this business.
Moving to our key and market outlook on slide 10 according to ACT's class eight heavy truck bill forecast 2024 estimates imply a 7% decline year over year volumes ACT forecast a further decline in 2025 with a 10% drop in bills anticipated.
Despite the weakness projected in 2024 and 25 we expect a strong rebound in bills of almost 25% in 2026 as the industry prepares for an update in emissions regulations in 2027.
Moving to construction market outlook, the construction equipment and market is seeing global weakening with volumes anticipated to decline around 10% with continued higher interest rates weaker housing starts and slower commercial real estate activity.
Agricultural and markets are facing similar demand headwinds with current estimates indicating an approximate 15% year over year decline. This drop is largely driven by higher interest rates and lower commodity prices which have dampened demand for equipment. Based on the preliminary outlooks we receive from our customers for early 2025. Both construction and agriculture and markets are looking relatively flat year over year.
However, we also remain optimistic about the long term growth potential of both construction and agricultural end markets as we see ongoing replacement needs and undermining secular trends returning these markets to growth in 2026.
Turning to slide 11. I'll share some thoughts on our updated outlook for 2024. Accounting for recent CVG developments, delayed and lower new business win ramp schedules prevailing truck bill forecast and continued weakness in construction and agricultural and markets.
We are lowering our quantitative annual guidance for revenues and adjusted EBIDTA as well as tightening the respective ranges given current demand pressures coupled with inflationary impacts and operational inefficiencies. We are adjusting our full year 2024 revenue guidance range to $710 million to $740 million which is down from $730 to $780 million.
We are also lowering our adjusted EBIDTA guidance expectations to the range of $20 to $25 million for 2024 which is down from $28 to $36 million. Based on this updated outlook, we expect our full year 2024 margin performance to be down approximately 320 to 380 basis points compared to 2023.
However importantly, we believe the alignment of our organization and the strategic portfolio actions, James highlighted previously position us better for future growth and margin expansion in 2025.
We expect our portfolio actions to have the most immediate impact on growth margins with the opportunity to drive SMG and a leverage going forward as we align our support functions to our smaller footprint through our ongoing continued improvement process. That concludes my financial overview and outlook commentary. I will now turn the call back over to James for some closing thoughts.

James Ray

Thank you, Andy. Turning to slide 12. I'd like to again reiterate our short-term plan to improve our operating model and build a stronger foundation for CVG as we enter into the fourth quarter in 2025. Within vehicle solutions. We've continued to focus on counteracting inefficiencies associated with customer product launches and we delivered on the sales of our cap structures business and our copy production facility sale. As previously communicated, we expect these efforts to result in a more streamlined vehicle solutions business with increased operating leverage.
Moving forward within electrical systems, we continue to adapt to weakening construction and agriculture and markets and slower new program ramps by reducing head count, right, sizing production and allocating utilization to our lower cost facilities.
Additionally, we are pleased to welcome Peter Lugo is our new electrical systems leader which I covered in my earlier remarks. Electrical systems growth remains a top priority and Peter's expertise and background will help us achieve our near term strategic goals.
In total. We expect these actions to mitigate near term demand pressure and provide an operating model that positions CVG for accelerated growth once these markets recover. Within aftermarket, we remain committed to optimizing our internal processes including the improvement of seat delivery performance and reduction of lead times. Taking these actions in advance of an improved customer demand environment will position us to capitalize when the market strengthens.
We have also made organization wide changes to drive performance and increased focus across all segments including the hiring of Carlos Jimenez to improve the efficiency of our supply chain and manufacturing operations. As I mentioned earlier, the addition of a subject matter expert will help strengthen our commercial excellence and further stabilize our operating system.
Bringing these actions together. We believe we are well positioned to be able to scale production with customer demand, improves driving incremental profitability with minimal cost added. As we look to 2025 and beyond, we expect these efforts to drive adjusted EBIDTA margin improvement directly associated with these collective efforts. With that i will now turn the call back over to the operator to open up the line for questions, operator.

Question and Answer Session

Operator

Thank you, presenters and ladies and gentlemen, you will now begin the question-and-answer session. (Operator instruction). Our first question comes from the line of Joe Gomes of noble capital.

Joe Gomes

Good morning. Thanks for taking my questions morning. So, the first one off, I just want to start kind of technical Andy. You have plans to put out the adjusted continue operating results for the 1st and 2nd quarter so we can make our models from a historical perspective, correct?

Andy Cheung

Yeah. So, if you look at our Q3 findings, so you can see that we have made the adjustment for the current quarter as well as year today. So, basically, you can always see our first half performance from adjusted basis for continuing ops. Our team will continue to provide that in Q4, we have a full year number. So eventually you should be able to see our one rate.

Joe Gomes

Okay. Thanks for that. And then James, you know, the portfolio reshaping the restructuring, you know that, that was going on before you assume the CEO role, so well over a year now, how much more of this, you know, needs to be done in terms of the portfolio reshaping and restructuring and cost optimization. Are we at that point now or is there more still to do?

James Ray

Yeah, thank you for the question. Let me rewind the clock back to before I started, we had initiated the footprint expansion projects in Mexico and Morocco. We also had started a process on our finished tech business. So those were the items that were in flight when I joined as CEO, obviously, I was on the board prior to that. So, I had insight into that. And then in January, we closed finish check.
But we also took a harder finer look at the balance of the portfolio to determine capital requirements, determine organizational focus and capability for growth and also the market outlook for the various segments that we were considering. In addition to that the utilization of our assets. So, during the first quarter, we determined that we were going to evaluate the success of the industrial automation launch of their new product innovation that we talked about in Q1 that did not yield the level of demand near term and would require much more investment to bring that to market over time.
So, at that time, considering the sales funnel and considering the losses that we anticipated, we looked at other strategic alternatives. Eventually engaged investment bankers started process in Q3 and went through multiple bidding efforts and eventually closed the sale. So from start to finish, that happened since I came in and when we started the year in initial guidance, we had not comprehended that transaction would occur this year nor have we made the decision at that time to actually launch an evaluation process as far as Kings Mountain, the cap structures business again in Q1, we had discussions with the major customer there about their forward plans as well as their volume requirements as they were coming off and extended work, slow down and stoppage due to strikes as well as other supply chain issues of the customer.
During those discussions, we evaluated options for that facility. Because of the capital requirements in order to meet the future production requirements, as well as the long-term outlook for the models that we're going to be produced in that facility. We came to an agreement to evaluate what the best option was for that site. So we started that process at the end of Q1, beginning of Q2, eventually signed an asset purchase agreement.
We also had an external banker evaluation for the, the asset itself considering the revenue stream and the offer and what we sold it for was within the range of the banker estimate. So, from start to finish, call it Q2 to Q3 that that was completed. And then in Q1, we also evaluated the utilization of our existing plants and with the down year over year expectation in class eight for both 2024 and 2025 we determined that we needed to improve the utilization of some of our underutilized plants. And that's when we identified the chop site to move the production to other sites. It actually moved to four other plants, and we executed the move and the sale in Q3.
So, they all came together, I would say at this point, Joe there no immediate term portfolio adjustments on our horizon. Once we prove ourselves and establish earnings that meet expectations, and we look at our cash and capital allocation, we most likely will be looking at acquisitions primarily focused in the electrical system space. But from a divestiture enclosure standpoint, we're pretty much at a point where we're in the phase of stability and now reshaping our margin profile going forward. So hopefully that answers your question.

Joe Gomes

Yes. Thank you very much for that. And last one for me and I'll get back in queue. And if I'm, I'm looking at the revised guidance versus what the first nine months was, it seems to suggest the fourth quarter revenue expectation is somewhere in the 150 to 180 range, but the adjusted EBIDTA negative 2 to 3, a positive. We're just wondering, you know, why did the seemingly kind of reduced adjusted EBIDTA outlook there?

Andy Cheung

Yeah. So, Joe, you can see Q4 historically is the smallest quarter within the year, given the seasonality and the customer shutdown for holiday. So, we expect that the volume would be pretty light. So that would be the main driver for our contribution margin as we continue to see the end market going. So, class eight is going to have a small production volume for cast for Q4. And then from that point on, it's going to start to gradually bunding in 25. That's according to ACT. So that's how we see the end of the year. So, it is going to be the tough demand environment for us. But as James mentioned, we will start to see the benefits of all the restructuring and improvement actions going into 2025.

Joe Gomes

Okay, great. Thank you very much.

Operator

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

John Franzreb

Good morning, everyone. And thanks for taking the questions. First though 'd like to echo Joe's sentiment that AK filing on the readjusted first two quarters numbers would be helpful. So I think he's on point there. Secondly, regarding the $20 million payment, how much was put down towards debt repayment? And can you give us a sense of what your current interest rate expenses?

Andy Cheung

Yeah. So, the majority of the second payment is also used for debt pay down. So, and obviously this is inside the corner as every week we have fluctuation and up and down in our revolver. But right now, everything that we receive, we primarily put it to use for paying down debt.
So, interest expense, we are similar to the past. We were looking at average around the mid-single digit, 7% to 8% is our interest expense. So, as I mentioned, the interest expense is a little higher than a year ago, but our overall debt balances have been coming down throughout the year.

John Franzreb

Fair enough. Thank you, Andy. And regarding your commentary on the AG construction market. You suggested that expectations at the customer level is to be flat year over year. I just want to make sure I understand that. Is that flat compared to current levels of volume if you will or is that flat based on the total 2024 aggregate kind of a number?

Andy Cheung

Yeah, so John that's a year over year comparison. So, it's a total 2024 versus total 2025. So clearly there are still a lot of uncertainties out there. We have many data points that we look at and trying to understand the market is hard to predict the customer indication right now It's pretty flat. Some sources say that it's going to be slightly increased, and we see some sort of thing. So, it's still quite volatile here. But overall, at this point, our best prediction is about flat and year over year.

John Franzreb

And, and sticking with that market in a weakening market. Have you seen any increased competitive pressures in that business?

James Ray

Yes, we the competitive pressures haven't changed materially. We have the same set of competitors that are established with some of the legacy customers. We have given their dynamics as far as capacity utilization. They we have seen what I would consider unsolicited quotes into customers, and we get immediate feedback from customers.
But it, I don't see it being an attack on our business. We continuously are looking at margin expansion so we can remain competitive and not lose business. And that's described some of the actions that we've been taking as far as lower cost sites and electrical systems to make sure we don't deteriorate margins while staying price competitive with customers. So, I wouldn't say it was anything out of the ordinary, but it's pretty much a part of course.

John Franzreb

Understood. And one last question I got back into queue regarding the production inefficiencies from relocating from the two facilities. Are you behind that process? And if not, when will you be? And I guess lastly, can you quantify the impact that had on close margins in the third quarter? Thank you.

James Ray

Yeah. So, for continuing operations, we are at the tail end of those inefficiencies, bringing in the new leadership will further accelerate stability and margin expansion at the gross margin level. The divested assets had a pretty large amount of inefficiencies too, but those are closed and behind us. So, they're not going to repeat. And we also expect the cost structure improvement with the close site overall for vehicle solutions will expand margins there.
So, our focus really is on how we fill the new low-cost capacity in electrical systems. And also focus on strategic growth initiatives in electrical systems that are broader, that will broaden the funnel of opportunities that we're going after. As far as quantifying the impact of the gross margin and that's primarily where it was with the inefficiencies with freight and overtime and labor supply chain issues, equipment issues, rigging and moving business and machines.
That is in the upper single digits to low double digits, millions on the continual operations. So annualized on an annualized basis. So that's kind of a book in there a range and we don't expect the majority of that to repeat.

John Franzreb

Okay, thank you, James. I appreciate you taking my questions.

Operator

Sure. Thank you so much.(Operator instruction).. Next question comes from the line of Gary Prestopino of Barrington Research.

Gary Prestopino

Good morning. Andy, I know you don't have the pro forma numbers for Q1 and Q2 in terms of a full-blown income statement for each quarter. But can you at least give us an idea or, or if you have it, what the revenues were for Q1 and Q2 and the adjusted EBIDTA for both quarters given the doves materials that you've incurred?

Andy Cheung

Yeah, so. Well, so in our queue, so again, you have our first half result. If I would just give you some high level number, Q1 and Q2 revenues, they are almost the same. So, the first half of the year, you can basically speed it into 50-50. That's all about the same for our EBIDTA number adjusted EBIDTA number.

Gary Prestopino

Oh, so, so same for adjusted EBIDTA as well. Right.

Andy Cheung

That's right. That's right.

Gary Prestopino

Okay. That helps a little bit. We are in order to model this correctly, we're going to need to get those numbers. It's that's just how we do things. So, I'm going to echo what the other analyst said. Okay.
In terms of the new leadership changes, these gentlemen seem to be experts in their fields. How long would you say it would take them to get their imprint on the business in terms of when you can start seeing a turn? Is this a 12-month time frame? Is it a six-month time frame? Just give us an idea as you know, maybe what their priorities are coming in.

James Ray

For sure. Thanks. Thanks for the question, Gary. The I'll take them separately. So we hit in flight and the operational efficiencies launched several initiatives to bring stability after many of the footprint moves of portfolio changes. So, we have a number of initiatives that were already in flight. The operations and supply chain functions were within the business units. So, the business unit leaders were focused on growth customer relations as well as addressing the operational efficiency.
So, bringing in Carlos Jimenez who has proven that various companies in his background, transformational acceleration is the main focus and intent. The operations and supply chain functions will be centralized under his leadership. So, we have a more consistent deployment of operational excellence across our sites and also the tools and the processes, the accountability rhythms are going to be standardized. So, we have much better visibility focused on leading KPIS versus being reactionary to certain disruptions.
So, I expect this impact to be immediate as we as we aspire to have stability this quarter. So, when we enter into 2025 our jumper platform of more stable operations and ready for a margin expansion. So, some of the one-time cost won't repeat, improve our cost out process, get more standardization and accelerate lien manufacturing processes.
So, you know, going into Q1, I expect the impact with them coming into the organization to be felt near term with Peter Lugo in our electrical systems business. This priority is going to be reestablishing our view of where we stand across all the segments we supply into and immediately start to address what our strategic growth initiatives need to be and how they may need to change.
I would say since I've been in the role, we have done a really good job of expanding into diverse end markets. Many of our new wins are lower in volume while increasing the complexity of the customer management of that. And in some cases, we share of the business on certain platforms. We win new business as we go into new Ems.
So now that we are in the door, we have to accelerate expansion of share wallet. Peter has a lot of experience in organic growth initiatives as well as M&A. So as we stabilize our earnings profile and we deserve the right to go after M&A he's got the background and the view of how to do that successfully from an integration standpoint and also a synergy optimizing synergies from M&A and I would expect again an immediate impact from him reassessing where we are and launching strategic growth initiatives that we should start winning business in a different profile, maybe even at different scale.
But then also focusing on how we take our existing business and fill the capacity in the lower cost location through some of the launches that are coming up. We have a number of launches that are coming online in 2025. That somewhat mitigate some of the downside we see in the end markets, we had some this year. But the level of the downside really ate up the impact of the launch of a new business and then importantly the ramp.
So as these programs ramp and we further utilize capacity, it gives us a better view of how we can reshape our quote funnel and really focus on product management and portfolio management with the customers. So we have better traction on winning higher volume business at new customers as well as expenditure wallet at existing customers.

Gary Prestopino

Okay. As I read this right, and what you said, well, first of all, this may have been asked already, but I just want to make sure are we looking at any more restructuring expenses in Q4 or, or is this really all behind you?

Andy Cheung

So, I would say that is largely behind us. As James mentioned, portfolio actions are completed, we obviously constantly adjusting our footprint and our workforce depends on the demand that we are seeing. So, as I mentioned, there's still a lot of uncertainties and we're not going to stop until we rightsize our workforce. But I will also add that in my comments about overall enterprise cost structure.
So now that all the strategic actions, portfolio actions are behind us, we are in a position to further optimize, organize ourselves in a better way so that we find more efficiency that will be continuing throughout the rest of the year and hopefully give us a heads up mix up here in 2025 for margin expansion. That's what we are planning on and we're working on right now.

Gary Prestopino

Okay. And then as I read what you've done here with bringing in Carlos Jimenez, it seems like you're really taking the operating model refinement for lack of a better word out of the core leadership of each individual business that you have and it's going to be umbrella under what he's going to do. is that a correct assumption?

James Ray

Yes, it is.

Gary Prestopino

Okay. So how, how will this gentleman operate? I mean, does he come with the team? Do you use existing people? Are there are his people down at, you know, at every one of these plants reporting back to him and, and he setting up you know, meetings, setting metrics for each of these or these businesses to hit. How does this all work?

James Ray

Yeah, it's a I guess in simplest, in simple terms, it's going to be a combination of bringing in outside talent to top grade where we have deficiencies and capability or competency and also continuing to develop existing resources that have a runway and bandwidth to expand their capability and competency. So that's going to be a combination effort of some of the operational inefficiencies that we refer to throughout this presentation and also the priorities call where expenses related to consultants and subject matter experts that we brought in to help in our operations.
They brought some good tools and processes, accountability, processes, operating rhythms that we just need to further refine and deploy consistently across the operations. There will be a direct report from plant managers and supply chain districts, etcetera, into Carlos directly with a service model to the business unit leaders. So, the margin profile, the cost savings year over year, the quality and delivery metrics that our customers expect will be the those will be the requirements that Carlos and his team have to meet and have a plan to meet.
And again, this is in an effort to be more customer focused, but also just rightfully take what we're entitled to from a margin standpoint between leakage and inefficiencies we're entitled to a much better margin. So, he's going to have and as well as a direct reporting to myself, our operating rhythms are going to continue to be daily and weekly cadence until we achieve stability and then it'll go to weekly to monthly.
But we're currently and have been since the middle of Q3 and the daily operating cadence over things that are going on in the business trying to get ahead and stay ahead. And this is the next step of maturity in that process with him coming on board.

Gary Prestopino

Okay. Thank you very much.

Operator

Thank you so much. And your next question comes from the line of Steven Martin of Slater.

Steven L. Martin

Yeah, guys, you know, I'm so tired of these calls. You know, there isn't one part of your business that is functioning properly and you have the audacity to talk about acquisitions. You should be talking about who to sell the company to instead of trying to improve or show that you can improve something you haven't improved anything in three years, you've probably had one or two up quarters. Every quarter i hear about all these initiatives aftermarket was going to be the new panacea and it's nothing.
You were restructuring all your contracts and you're still down, you know, electrical systems was going to be the new growth vehicle and the margins are lower and the growth is lower. How do you with a straight face, look at yourself and address us shareholders and then have the audacity to talk about looking for acquisitions. You can't run your existing business. That's not even questions, that's just a statement.

James Ray

I understand that. And if you recall my comments, I said that when we achieve stability and we get to a point where we have margin expansion and beat expectations and we're properly positioned from a capital allocation standpoint at that time, we will look at potential acquisitions.

Steven L. Martin

Okay. Here's the question. When do you expect your first up quarter on an operating profit basis?

James Ray

We haven't provided guidance at this point, but I would expect in 2025 in what I aspire to be is before the first half is done. And if everything comes into play like we plan I expected in the first half.

Steven L. Martin

Okay. I hope so, because the stock can't go much lower. Thank you.

Operator

Thank you so much. (Operator instruction).

James Ray

Okay, I think we're, yeah, we're ready to close the call. So, I want to thank everyone for joining today's call. We appreciate your feedback, your insight, your perspective and your curiosity as to how things are going to continue to move forward while we're not satisfied with our recent performance.
We're taking necessary actions as we talked about on the call to enable CVG to be a growing more profitable business going forward. We also look forward to reshaping CVG to be a better partner of choice for our customers. And very importantly the best choice for our investors and shareholders as we continue to improve this business model and our performance.
So, thanks again, appreciate your engagement and we look forward to keeping you up to date on the progress we make. Have a good day.

Operator

Thank you, presenters and thank you, ladies and gentlemen, this includes today's conference call. Thank you for participation and you may now disconnect. Have a great day.