Commercial Vehicle Group Inc
NASDAQ:CVGI
Earnings Call Analysis
Summary
Q4-2023
Despite facing a customer work stoppage and reduced demand impacting fourth-quarter results, the company reported a 26% year-over-year increase in full-year adjusted EBITDA to 6.8%. Consolidated revenues grew slightly, from $981.6 million to $994.7 million, with a significant $150 million in new business wins. They are actively working to improve margins and profitability, closing a North American facility, reducing organizational costs, and selling the FinishTEK business. Adjusted net income rose substantially from $16.4 million to $30.2 million. Looking ahead, the company intends to continue focusing on the Electrical Systems segment and expects new wins to remain in the $100 million range, pursuing a target revenue of $1.5 billion with a 9% adjusted EBITDA margin by 2027.
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Good morning, ladies and gentlemen, and welcome to CVG's Fourth Quarter and Full-Year 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Andy Cheung, Chief Financial Officer. Please go ahead, sir.
Thank you, operator, and welcome, everyone, to our conference call. Joining me on the call today is James Ray, President and CEO of CVG. This morning, we will provide a brief company update as well as commentary regarding our fourth quarter and full-year 2023 results. After which, we will open the call for questions. As a reminder, this conference call is being webcast in the Q4 2023 earnings call presentation, which we will refer to during this call, is available on our website. Both may contain forward-looking statements, including, but not limited to, expectations for future periods regarding market trends, cost-saving initiatives, and new product initiatives, among others. Actual results may differ from anticipated results because of certain risks and uncertainties. These risks and uncertainties may include but are not limited to, economic conditions in the market in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, financial confidence, 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, and good morning, everyone. It is an absolute pleasure to be joining you on my first earnings call as President and CEO of CVG. Having served on the Board of Directors since 2020, I've had the opportunity to witness the strength of CVG's business fundamentals, the transformative strategy in place, and the remarkable growth potential in this organization. We have great strategy, great people, and great customers. I was appointed President and CEO December of 2023, and there was a lot of good progress already underway from the leadership of our Chairman and interim CEO, Bob Griffin. I want to thank Bob for all his efforts in the months prior to my appointment as President and CEO. As this is the first time I'm speaking to the majority of you, I'd like to offer a bit of my perspective on the opportunity I see ahead for CVG. I'm sure you're curious what will change with me as CEO. And to be clear, my aim is not to change our strategy, but rather to enhance it. In my role as a Board member, I saw firsthand the hard work and planning that went into developing our transformation strategy. We think we are seeing the early benefits of that transformation as our new business wins drive top-line growth and margin improvement, even as we see a downturn in the Class 8 truck builds. And this improved profitability is leading to reduced leverage and a healthier balance sheet. Additionally, we have provided our outlook for the full year 2024. More on this later. My goal is to best equip our teams to continue driving this transformation and to make sure we have the right culture in place to enable our teammates to drive us forward every day. In order to build and maintain this growth-focused culture, we need to do 3 key things: one, develop and reward our employees; two, excite our customers; and three, deliver results to increase our value to shareholders. Fundamentally, it's all about people, processes, and capability. My goal as CEO will be to make sure we are developing all 3 aspects through strong teamwork, continuous improvement, and building capability. I am incredibly excited about that opportunity ahead of us at CVG. Before turning to the details of the quarter, I want to highlight that Bill Johnson was elected to the Board of Directors in December. He brings a wealth of operating experience and expertise across a variety of business areas, including his current role as CEO and a Board member of the Board of Directors of Avail Infrastructure Solutions. Bill also served as President and CEO of Welbilt from October 2018 to July 2022. And as the President and CEO and COO of Chart Industries from July '16 through June 2018. He possesses over 30 years of global experience and we're excited to have Bill join our Board. I have no doubt CVG will benefit from his skills and perspective. Now I'd like to turn your attention to the supplemental earnings presentation, starting on Slide 4. Following solid year-over-year improvements in the first few quarters of the year, our fourth-quarter results were negatively impacted by a work stoppage at a customer facility and reduced demand. We reported net sales of $223 million in the quarter and an adjusted EBITDA of $10.3 million. We continue to win and integrate new business, optimize costs, and work to improve profitability of our business. Our continued focus on margins as well as the contribution of new wins helped drive a 26% increase in full-year adjusted EBITDA to 6.8%, up 140 basis points compared to last year. For the full year, we generated $19 million in free cash flow, and combined with our strong EBITDA, our net leverage ratio declined to 1.5x from 2.2x. Speaking of new wins, we recorded an excess of $150 million of new wins this year on a fully ramped basis, continuing our strong track record of success. Consistent with our strategy, these wins continue to be focused within our Electrical Systems segment and support the product ramp-up at our 2 new plants in Mexico and Morocco, which are focused on meeting the demand growth in Electrical Systems. We're also currently expanding our footprint with an additional new plant under construction in Morocco. Turning to Slide 5. I'd like to take this opportunity to highlight some recent strategic actions we've taken, which all serve as a reminder of our ongoing focus to align costs and improve margins at CVG. First, we are closing one vehicle solutions facility in North America and shifting the production to other locations in line with our goal of lowering our manufacturing costs and improving vehicle solutions margins. Second, we are taking additional steps to reduce organizational costs and align resources to support our highest growth product lines. These actions are part of our ongoing efforts to make sure we are cost-competitive and improve our profitability over time. Finally, we announced the sale of our FinishTEK business in the Vehicle Solutions segment in January of this year. While not a large transaction, it focuses our business portfolio more on our core growth opportunities and demonstrates our commitment to strategic capitals allocation. These recent actions should echo well with our long-stated transformation strategy to improve the mix and profitability of our business through the growth of our Electrical Systems business. And with that, I'd like to turn the call back to Andy for a more detailed review of our financial results.
Thank you, James, and good morning, everyone. If you are following along in the presentation, please turn to Slide 6. Consolidated fourth quarter 2023 revenue was $223.1 million as compared to $234.9 million in the prior year period. The decrease in revenues is due primarily to the impact of a strike and a vehicle solution customer facility, which more than offset an increase in Electrical Systems revenues. Foreign currency translation favorably impacted fourth-quarter 2023 revenues by $1.8 million or 0.7%. Adjusted EBITDA was $10.3 million for the fourth quarter compared to $13.3 million in the prior year. Adjusted EBITDA margins were 4.6%, down 110 basis points as compared to adjusted EBITDA margins of 5.7% in the fourth quarter of 2022, driven primarily by lower volumes and strike impacts. Interest expense was $2.4 million as compared to $2.9 million in the fourth quarter of 2022. The decrease in interest expense was primarily related to lower average debt balances during the respective periods, partially offset by higher interest rates on variable-rate debt. Net income for the quarter was $23.3 million or $0.70 per diluted share as compared to a net loss of $32 million or negative $0.98 per diluted share in the prior year.Adjusted net income for the quarter was $2.9 million or $0.09 per diluted share as compared to $1.4 million or $0.04 per diluted share in the prior year. Consolidated full-year 2023 revenue was $994.7 million as compared to $981.6 million in the prior year period. The increase in revenues is due primarily to pricing and an increase in Electrical System volume. Foreign currency translation favorably impacted full-year 2023 revenues by $2.0 million or 0.2%. Adjusted EBITDA was $67.6 million for the full year, up 26% compared to the prior year. Adjusted EBITDA margins were 6.8%, up 140 basis points as compared to adjusted EBITDA margins of 5.4% in 2022, driven by gross margin expansion, slightly offset by higher SG&A. Net income for the full year was $49.4 million or $1.47 per diluted share as compared to a net loss of $22 million or negative $0.68 per share in the prior year. Adjusted net income for the year was $30.2 million or $0.90 per diluted share as compared to $16.4 million or $0.51 per diluted share in the prior year. Turning to Slide 7. I would like to highlight a few items on the adjusted EPS bridge, which includes our adjustments to GAAP EPS as well as one additional special item. First, we reversed a charge we took last year for a deferred tax valuation allowance due to improved profitability in our U.S. operations. Second, we took a restructuring charge related to the footprint optimization and cost reduction efforts that James discussed, totaling $0.05 per share. Additionally, we were negatively impacted by a strike-related work stoppage at one of our customers' facilities during the quarter, which we estimate negatively impacted earnings by $0.06 per share. Adjusting for these items, our EPS would have been $0.15 per share. Now moving to segment results, beginning on Slide 8. Our Electrical Systems segment achieved revenues of $56.2 million, an increase of 19% compared to the year-ago fourth quarter, resulting from increased sales volume, including the impact of new customers and increased pricing. Adjusted operating margin was 11.6%, an increase of 30 basis points compared to fourth quarter of 2022, driven by increased sales volume and improved pricing. For the full year, revenues were up 27%, again driven by pricing and new wins contribution. Full-year adjusted operating income margin increased 100 basis points as volume leverage and pricing more than offset inflationary impacts. Evidence in these results are the impacts of our new business wins and the ramp-up of our 2 new plants in Mexico and Morocco, which remain on track to support these new wins. Furthermore, given the continuing new wins, we are currently in the early construction phase for our second site in Morocco. As always, we will remain focused on driving operational improvements and optimizing margins even at additional new wins flow-through. Turning to Slide 9. Our Vehicle Solutions segment's fourth quarter revenues decreased 10% to $128.4 million compared to the year-ago quarter due primarily to the impact of a strike-related outage at one of our customer facilities. Adjusted operating margin for the fourth quarter was 3.1%, an increase of 20 basis points compared to the prior year period as increased pricing and cost controls more than offset the impact of lower volumes related to the strike. For the full year, revenues were up 1%, driven by increased North America Class 8 production. However, it was partially offset by lower volumes in Europe and China. Full-year adjusted operating income margin increased 350 basis points, driven again by pricing and other cost controls. We are encouraged by the year-over-year improvement in Vehicle Solutions, but this segment remains a key focus for our team in terms of reducing cost, driving further operational improvements, as well as winning business on new platforms, all with the goal of driving improved margins. Moving to Slide 10. Our Aftermarket and Accessories segment, revenues in the fourth quarter decreased 8% to $31.4 million compared to the year-ago quarter, primarily resulting from decreased sales volume. It is also worth noting that our Q4 2022 performance benefited from a large backlog that did not repeat this year. Adjusted operating margin for the fourth quarter was 11%, an increase of 20 basis points compared to the prior year period. The increase is primarily attributable to pricing. For the full year, revenues were up 5%. Full-year adjusted operating income margin increased 330 basis points, driven again by pricing as well as better cost performance. Turning to Slide 11. Our Industrial Automation segment produced fourth-quarter revenues of $7.1 million, a decrease of 35% as compared to $11 million in the fourth quarter of 2022 due to ongoing challenging market conditions. Adjusted operating margin was 3.7%, an increase of 850 basis points compared to the year-ago quarter, primarily attributable to the efforts taken to rightsize this business. For the full year, revenues declined 56% and demand levels for this business remained at trough levels. Full-year adjusted operating income margin declined 760 basis points driven primarily by lower volumes. As mentioned, we have taken actions to rightsize our cost structure in this business, and we have broadened our market focus to expand our revenue opportunity. That concludes my financial overview. I will now turn the call back over to James to discuss our key focus areas for 2024 as well as our outlook.
Thank you, Andy. Turning to Slide 12, I'd like to highlight where our team will be focused in 2024. This will be no surprise to hear but new business wins remain core to our culture at CVG, and we continue to add additional customers and platforms. We look to continue our new business wins in 2024, building on the wins we recorded in 2023. Our strategy calls for continued diversification of our revenue stream, which is key in transforming our revenue mix, reducing our cyclical exposure and improving profitability. Next, we will continue the planned ramp-up of our new Electrical Systems plants in Mexico and Morocco. These expansions are key to growing our Electrical Systems business globally and are positioned to be cost-competitive and provide outstanding service to our customers. Additionally, we are underway with the construction of an additional Moroccan plant, which will further support anticipated growth and supply chain optimization. So before turning to the fiscal 2024 outlook, I want to emphasize what we are doing with our 3 key businesses: one, we are focused on making electrical systems our largest business. By continuing to win new electrical business across multiple end markets and diversifying our product portfolio, including diversifying our vehicle platforms toward higher growth markets, while simultaneously reducing our exposure to the cyclical Class 8 truck market. Two, we are optimizing our Vehicle Solutions and Aftermarket businesses as we see multiple levers to improve profitability through operational cost efficiency and making strategic sourcing decisions. We expect all of this to lead to improved working capital management and increased free cash generation. Collectively, this fundamental business transformation is expected to improve our business mix and make CVG a larger, stronger, and more profitable company in the coming years. Turning to Slide 13, I'll share a few thoughts on our outlook for 2024. You'll notice that for the first time, we are giving you quantitative annual guidance at the revenue and adjusted EBITDA level. We believe this will help indicate our underlying expectations for the performance of our business. Industry forecasts currently project a decline in North American Class 8 truck builds of approximately 16% for the year. However, we expect to benefit from growth in Electrical Systems revenue. As a result, we are forecasting revenues to be in the range of $915 million to $1.015 billion. With projected growth in Electrical Systems segment, notwithstanding the approximately 16% drop in North American Class 8 truck build, we expect adjusted EBITDA margins year-over-year to be relatively flat as implied by the midpoint of our guidance range of $60 million to $73 million EBITDA for 2024. Our expectation is that this level of EBITDA generation offset by capital expenditures in the range of $25 million to $30 million for the year to drive further free cash flow, giving us the optionality of further debt paydown or potential inorganic growth opportunities should we find an attractive deal. Overall, we expect 2024 to show solid demand and revenue for the full year as we continue to win new business at a strong pace with wind-centered in our Electrical Systems segment. We believe this level of resilience in the face of lower North American Class 8 industry volumes is further evidence of the success of our diversification strategy. With that, I will now turn the call back over to the operator to open up the line for questions. Operator?
[Operator Instructions]. And your first question will be from Joe Gomes at Noble Capital.
James, you gave us a quick overview. It's great to hear your voice here on the call. I was wondering maybe you've been there 2 months and you give us some more insight into your key findings or thoughts from the CEO position here in the first 2 months?
Sure, Joe. Yes, it's very exciting for me to come in. Fortunately, I had the benefit of observing the company on the board from the other side of the table. So I've had the opportunity to get a look closer during the time of our interim CEO, Bob Griffin. And that really excited me about the possibility of taking on this role. What I've seen since I've been here is that we have really good products that our customers value. We have a very enthusiastic team and really focused on growth in not just electrical but other aspects of our business. We have a good approach to finding solutions to help customers solve their problems. And also, we are focused on making sure we deliver on commitments. So I think the team is very engaged. I've had interaction with several of our top customers. And I've also had a chance to talk to a few investors as well. And we all see continued improvement in the value of this business and the value proposition it brings to the market.
And are there any significant contracts that might be coming up for renewal in 2024 or rebid in '24?
Well, as part of our new business win methodology here. And I think what's happened in our results is that we have a funnel of activities in the funnel of opportunities that we look at and align our product strategy to our customers' quoting opportunities. So across our businesses, there's a number of quoting opportunities that occur every week during the quarter. Some are prioritized higher. Some we have a stronger value proposition against our competition. But we do have a focus on making sure that we pursue opportunities that are sustainable, that have the appropriate margin profile, and that fit within our manufacturing and supply chain footprint. We do have some small ones we go after, and we also have some large ones we go after. We don't disclose our customers' specifics as we do book new business. But I would say that we're gaining a stronger reputation in the market of being able to provide what customers are looking for as well as a differentiated value proposition compared to our competitors, mainly in Electrical Systems, but we also have some strong areas in our plastics and trim business as well as our Seating business and aftermarket. So it's not just electrical. It's across the board, but our focus is really accelerating electrical growth beyond market growth.
And what are the goals in '24 for new business wins? I know historically, it's been at least $100 million. Are we still sticking to that? Or you get a higher number this year?
Obviously, we want to continue the trend we've been on. And it depends on the customer program cycles and when opportunities are quoted. So our funnel is larger than our target. We have different win rates in different segments and different products have different win rates based on the competition that we're going up against. But generally, we expect to be in the $100 million or more range on our bookings going forward. We've proven we have a right to play and the right to win. It all comes down to strong execution and making sure we deliver on our commitments, both to customers as well as to our organization for the financial commitments of the program. So that's going to continue to be the focus. And the great thing about this is we've had a couple of years of building momentum, and we're really starting to accelerate that. And our reputation is increasing within our customers.
Great. And one more for me. I'll get back in queue. So your expectations for '24, trying to get like what your thoughts, obviously, the range is about $100 million. I'm assuming some of that deals with where the Class 8 truck builds end up coming in. But on the electrical systems side, last year, you did a bang-up job. Top line was up 27%. Are you looking for that similar number similar rated growth in '24 in that segment? Are back maybe down closer to that 20% range or something other?
Joe, let me answer that. So as you described, we're already seeing the benefits of the new wins that we secured over the last few years. So 2023 is really a strong year revenues growth for the Electrical Systems segment. We expect that you'll continue to see us launching business that we already won. Right now, that's why we have a range here is sometimes a customer launch schedule is out of our control, and it depends on many factors. So we expect that you'll continue to see good growth in our Electrical segments.
Next question will be from John Franzreb at Sidoti.
I'd like to start with the revenue loss at the strike. Can you talk a little bit about maybe the size of the revenue? And was it lost stores with deferred into the first quarter? Maybe more color there would be helpful.
Yes. So the strike at the customer was actually lasted about 6 weeks. So it impacted us -- we estimated it to be about $12 million in revenues for the quarter. As the customer did not change their overall backlog, we expect that eventually, they're going to put those lost vehicles back on the production schedule. The timing is a little unclear right now because they also have their own manufacturing constraint, but we expect that eventually, it will come back to the production.
Excellent. And I guess if we start thinking about the Class 8 truck cycle and last quarter, I asked you how is the first quarter shaping up? And you indicated it was looking good. I'll repeat the question, how is not only the first quarter looking, but how is the second quarter looking relative to the current production rates that you finished that?
Yes. So well, we don't forecast quarter-by-quarter, what our caution about the ACT forecast, which is one of the more important forecast or you use. So right now, you'll see ACT is actually expecting some decline from Q2 and beyond in terms of overall market production but we'll see. We're still not seeing full visibility on our customers on schedule, but the ACT forecast is showing some drop-off from Q2 and beyond.
Got it. And just a little bit about the Mexico and Moroccan facilities. When would they be fully operational?
The Mexico facility launched in Q3 and the initial Morocco facility launched in Q4, and they are ramping up, bringing on the new programs that we have won in prior years to those facilities. The new facility that's under construction in Morocco, the additional facility should be online in Q1 next year.
Q1 next year, got it. And just if I think back to about a year ago, you were rolling out a new aftermarket initiative. Looking back on it, can you talk a bit about the successes and maybe where it's lagging a little bit relative to expectations going in?
Sure. No problem. We did change leadership of the Aftermarket business in Q3 last year and reassessed the effectiveness of the prior strategy, especially on the e-commerce side. What we have found is e-commerce, you have to have a lot of discipline around your production planning and your inventory strategy and how you're going to market and what you're focusing on. And we believe that there's probably more work that could have been done there. So the new leadership that came in, actually, we participated in the heavy-duty Aftermarket week in January. And we have a pretty large number of field sales reps that we met with that will represent our product with various dealers, retail outlets in various regions of the country. And we recognize from that interaction, we needed to do a better job of getting our name and brand out there. And I think the aftermarkettruckparts.com, probably mid- to late this year may have a lot more traction based on the work that our field reps are doing out in the field with our brand improvement and brand awareness. So I think going forward or I expect going forward, we'll see better traction sequentially in our Aftermarket business sales opportunities.
That's great to hear. And I guess one last question, then I'll get back into queue. Clearly rightsized the Industrial Automation business. What's the updated thoughts on when the revenue profile turns around there now that you've rightsized the business?
That's a really good question. I've been able to take a really good look at what we've done even before coming into the CEO role. The business profile there was primarily more contract manufacturing, lower value add, but we have an opportunity to really gain inputs and access to the local market. And with the takeoff of warehouse automation, that's where the business really popped up. And has that tailed off, it came back to the legacy contract manufacturing box builds. And the leadership in that business intentionally has been focusing on a more highly engineered solution in the market, in various customers, in various different configurations. So we're somewhat at the inflection point of where this business could potentially go based on these new products. We do have favorable customer feedback. But there's going to be a runway to ramp back up to more substantial revenue numbers. And early indications are by mid to late this year, we should start to see more of a bounce back in that business based on orders we have and customer insights, we are actually going to be participating in the MODEX show in mid-March, demonstrating one of our new innovative products in that show to get feedback and determine how we need to potentially scale that new product and innovation. So that's pretty much an update on that business. It's at an inflection point and trying to pivot into more value add.
Next question will be from Gary Prestopino of Barrington.
Welcome, James. A couple of questions here. First of all, James, with you coming on board, I mean the company had a target of revenue of $1.5 billion, 9% adjusted EBITDA margin by 2027. Is that something that you want to stick to here? Or can we throw that baby out with the bath water?
That's a good question. I wouldn't say we're throwing the baby out with the bath water. But I do think we have an opportunity right now to look at the profile more specifically through market segmentation, customer and product segmentation, and have a more intentional profile management as we look at future business.And we're still assessing the -- would that an appropriate margin accretion algorithm in front of us, but we're really focused on executing our annual guidance expectations and continuing to book new business, shape what this looks like longer term, and we're still defining how that's going to be staged out. So at this point, we're not really discussing the long-term targets. We're not going to be on a more disciplined approach to shape the profile of that revenue stream.
Okay. And that's fine. And I just wanted to get that out there because those targets have been out there, and we don't want to obviously repeat them if they're not something that you want to adhere to.
Well, let me just, I guess, backtrack a little bit. We did state on the prior question that we expect to book the $100 million or more new business wins a year. So that is another data point that you can use in determining where we're going longer term. We're not backing off or throwing the AP out with the bath water. We're sticking to that.
Okay. So in terms of the closing of the facility and the higher cost reduction in organizational costs, can you slap a number on what expense capture you're looking to get from these actions in 2024?
So Gary, let me answer that question. So you can see that this quarter, we took a charge of about $0.05 per share to roughly about $3 million. It's not all the charges that related to the actions. So some of the action will continue into Q1 as well. We normally look for about less than 2 years payback in our spending on Wi-Fi thing and improving the operations. So there we will see multimillion dollars of benefits based on the charge that we take. But that's also rolled into our annually, the cost reduction that we do. So we'll continue to use those actions to expand our margins as well as offsetting the inflation that we are still seeing in the business.
Okay. And then just something just -- well, I got 2 more questions. But with the Electrical Systems business, a nice percentage of that was going to electrified vehicles. Is that correct?
Actually, our largest segment in that business is CON-AG, Construction-Agriculture, some of the key industrial customers. The EV portion of that revenue stream is relatively small. And we're focused on some of those customers in our growth and business wins. But as you know, based on recent publications, some of the customers, even the non-new OEMs, some of the legacy OEMs that are going to electrification have somewhat backed off of the volume estimates as well as the years of introduction. So because we're more intentional about how we shape the profile of our new business wins in Electrical, we didn't have an overreliance on that to hit our longer-term growth objectives.
Okay. That's good. That's what I was trying to get at here. And then James, another question for you. You got a great background here in terms of where you've been and companies you've worked for. Where do you see your strengths and how they match up with the needs of CVGI? I guess what I'm trying to get at here is that in your prior roles at Stanley Black & Decker and that, were you more operationally oriented?
Yes. So that's a great question, and I'll try and answer it to the best of my abilities. So if I work backwards, the 7 years I was at Stanley Black & Decker was focused a lot on transformation, both from a supply chain business model or efficient -- truly general management. During my time at TE was really focused on operational transformation at the Plant 4 level. And that was during the post '08, '09 downturn. So there was a lot of hands-on heavy lifting there. And I see that coming into this role and after observing some of the needs of the business from a board seat, I felt very comfortable that I can understand what exactly needs to be done, where we needed additional capability, where we needed more capacity, and also improved processes and tools to help us run our operations. So as many of you know, it's a journey in operational transformation. And I would say we're probably in the early phases, and we're gaining traction. So the difference in my approach may be that I'm focused on culture, change management as well as sustainable process and tool improvement as compared to brute force and just trying to muscle things through sustainability of improvement is very important to me. So I believe that's where I add a lot of value coming into the business. And I would also add on the customer relations management. I think that we have some very strong and exampler customers in our portfolio, and there's opportunities to manage them in a different way. So it's long-term strategic relationships and we keep the comprehensive picture of our relationship in front of us. And it's a win-win mutually beneficial relationship balance that I'm aspiring to achieve with our large customers, our new customers as well. All of our customers are important, but there are some that really sway your business one way or the other, and we just need to make sure we're very intentional about how we manage them.
Next question will be from Guillermo Herrera at Gabelli Funds.
So we've heard a bit on margins being up from both pricing as well as contribution from the ES business. Curious whether part of the story here is also being more selective in your contracts. So in other words, have you had to walk away from any significant customers based solely on margin profile? You mentioned not disclosing specific contracts, but if you could just provide some color on whether this was part of the margin story over the past year or so, that would be helpful.
Yes. So if you remember, we did talk about that in the past that there is one customer that we didn't like the terms of the contract, and we walked away from a seating standpoint. So that was ended actually this fiscal year. So that will help to streamline our operation and as well as get it of some of the terms that we didn't like. So that's part of the margin reflection.
Next question will be from Steven Martin at Slater Capital.
James, you're new, but you've been on the Board. So as a shareholder who's been around longer than any of the senior management, I'd like to share a couple of thoughts. I think Harold sold us a bill of goods over the last 3 or 4 years. If I look back at his comments about recutting the truck contracts and blaming things on increased costs that couldn't pass through. And now here we are 4 years later, you recut the contracts. Last year, April 1, you recut supposedly, the last contract. Freight costs are down and by the way, I'll point out that if you look at your fourth quarter press release last year, the same time last year, you said ACT was projecting 305, and it ended up being 345 than you guys anticipated. Yet, your business didn't and you underwhelm. When it comes to last year, you made a big deal about a $30 million cost savings program, we don't see it. There was a big deal and you talked about it, Harold made a big deal about Aftermarket, and all the money that got spent reorganizing plants, building inventory, hiring new people, we don't see it. When we talk about the Electrical business, you just pointed out, they made a big deal out of all the EV wins we had. And now you're saying EV is not really a big part of it. I won't even go into the acquisition, which has been an unmitigated disaster. So while you weren't the CEO, you were on the board, and I just want to share with you the level of frustration of your long-term shareholders who watched the stock go nowhere for 5 years.
Steve, thanks for your feedback and your observations are very well grounded. So I'm going to let Andy comment on a few things, and then I'll come on the back of Andy's comments.
Yes. So Steve, thank you for the feedback. So we actually look at the business, as you said, there are some areas that we believe is really doing well. Some areas that we have for short a bit, particularly like to your point, and James already mentioned, the Aftermarket e-commerce. I think we mentioned that it was an experiment and trial for us that we learned from it, and that initiative didn't pan out as strong as we thought. So we have made some changes to leadership, and we will be booking and seeing other ways to grow the business. Business that you mentioned that the CEO have also measurement. That those are the wins that we saw over the past couple of years. What James mentioned about EV is not a big part of our business is if you look at today, our revenue profile and EV has not been a big part of our revenue base. Would that be and it would depend on some of these customers, whether they ramp up to their expected volume and when will they ramp up. So there is something in the backlog in the pipeline in the future. You have to see, but as James mentioned, we are not going to count on that one basket. So we continue to diversify our revenues. So in terms of productivity, we did follow through of our cost reduction initiatives. This year, we met our own internal target about the cost reduction. But at the same time, we mentioned that in the past, some of the growth cost reduction will be used to offset some headwinds that we have inflation still continue, particularly in labor and others. So yes, we would continue to like to see margin expansion, as you described. And I think we are on the same boat. And as James mentioned, so this will be, again, our focus from the end center, the Vehicle Solution business, optimizing the margin will be our top priority in addition to our Electrical System growth. Thanks for your feedback, we appreciate it.
Yes. Steve, thanks again. I really appreciate your comments. And I see the business in a similar fashion. There are operational excellence things we can do across our functions to improve the stickiness of our cost reductions. And we also have a lot more structure and process rigor we can put in place to ensure that the cost reductions are sustainable and not necessarily onetime. So I see that as an opportunity for margin expansion, both on the material, the operations side as well as some of our business processes and customer relationships as it relates to debits, delivery, quality, things like that, that don't excite our customers and that is my priority. So without our customers and without their confidence, we can't continue to grow this top line. So that is a very top priority in my mind.
Yes. But keep in mind, top line with no profitability doesn't do any of us any good.
No, I totally agree with you, and that's why we're going to focus on the process rigor and operational excellence across all of our functions, not just in the manufacturing.
[Operator Instructions] Next is a follow-up from John at Sidoti.
Yes. Just in your comments about -- of course, talk a little bit about how you expect to do that? Will you need to add sales personnel? And what's the pathway to entering new end markets?
There are a couple of different ways, John. One is to bring sales and engineering people into the organization that have experience, and contacts and credibility in those segments. There are also opportunities for what I would say is cross-selling or white space, where we have a major customer in one of our businesses, but we're not penetrating it with all of our product lines. And that's probably a bigger opportunity than doing it organically with hiring. And on the hiring side, we look at this from a talent management perspective and making sure we have the right people with the right skill sets. Some of what we do in restructuring is part of that rotation to make sure we have the right people with the right skill sets and the right experience. So we have seen traction over the past year and in these various segments that are new. We also have a value proposition where we're successful in one segment with one OEM that gives us a stronger right to play and right to win in that particular segment. So we are in flight as far as building momentum outside of Class 8 truck segments as well as continuing to expand outside of construction and agriculture as well.
Okay. One on debt repayment in the year ahead. And two, what's the CapEx budget, especially in light of the continued ramping of the new facilities and the start-up of the third?
Yes. So from a CapEx standpoint, we expect $25 million to $30 million in our 2024. And you can see long term, we will normally target a range between 2% to 3% of sales. That's kind of been our trend, and we expect that going forward. When it comes to debt paydown, so we will minimum pay down somewhere around $15 million next year as part of our amortization. And in the past, we talked about that. We'll continue to do that. And then when we see excess cash, then our first priority will continue to be funding our organic growth. And for the CapEx and other working capital, et cetera. And then we'll have some options as excess cash becomes available for further debt paydown or potential M&A at that point. We'll share more as we get into closer into the year, and we'll share more about our cash flow expectation.
Next question is from Steve Emerson of Emerson Investment Group.
Thank you, gentlemen. I noticed that admin went from around $22 million to, call it, $34 million, up 50%. How much of this is a cash expense increase?
For this quarter, I would say, you could call it maybe 60% to 2/3 of it is cash. And I explained in the cost in the past, this year, there is a bit higher SG&A increase because if you compare to last year, it was a year that we literally didn't pay our incentive comp from a bonus standpoint. So that's a big part of the SG&A increase this year. And that is actually right now has not been cash impacted yet because we haven't paid the actual bonus. So a big part of that is due to that. The rest will be mostly cash.
In view of the downbeat forecast this year, I find an incentive compensation equal to, call it, 40% bump in G&A highly inappropriate.
And that was, I think, reforming back to a 2023 versus the 2022.
I do hear you. Thank you.
Next question will be from Andrew Brickman at Altair.
Gentlemen, one question I have is, if I look at the appendix of the chart you sent out or the slides you sent out, it breaks down the profitability from an operating income standpoint by business unit. And as I look at that, I have some familiarity with the Vehicle Systems business, and I believe that's still a just-in-time business and there's a lot of work that goes into those components. It's 3.1%, which this is showing as of the end of the year, it just doesn't seem like the rent return for a business that requires the infrastructure that, that business requires and the investment in capital and working capital. So I'm just wondering of your thoughts on that.
Yes. So clearly, if you just look at the return on sales in Q4 alone is not what we were expecting longer term. Look, there's 2 reasons. One, Q4 historically been a very small revenue quarter. And as you mentioned, with the infrastructure, there is a certain degree of fixed cost in the business. Small revenues quota are always impacting our ROS. And then also, as James mentioned in the call earlier, we were impacted by a customer strike during the quarter. So it impacted almost 10% of the revenues of that segment in the quarter. And that is obviously difficult for us to adjust fixed costs during the quarter to accommodate for that. So that also impacted the margin of that business. I think longer term, your point is valid. So have a mid- to high single-digit return on that business from a margin standpoint will be probably a more appropriate than a low single-digit margin.
Yes. I mean, I guess I'd just follow up by saying I don't know if we ever analyze it from the customer standpoint. But I know for our big customers, we save them a lot of money by being just in time, right when they need it, low inventory. I continue to say there could be increasing return even the 7.3% isn't as strong relative to some of your other businesses for the year. But point taken.
And at this time, we have no other questions registered. Please proceed.
Thank you all for joining today's call. While 2023 was a strong year for the company, I'm even more excited for the opportunities that lie ahead for CVG. We remain encouraged by our business outlook, and we look forward to continuing to execute our long-term growth strategy. Have a great day.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.