Q1 2022 Commercial Vehicle Group Inc Earnings Call
Continued to gain momentum as we secured another $89 million of annualized New business Awards, driven primarily by electric vehicle platform wins in our electrical systems segment were off to a strong start this year.
With winning and we're set to exceed last year's record of more than $200 million of new business wins were committed to a transformative organic growth program as you know and our intent is to become a leader in electric vehicle market diversify our customer roster.
Add new market entrants improve our profitability and lessen our cyclicality as a corporate entity.
The underlying momentum represented by our new business awards points of strong growth and provides confidence in our goal of doubling our revenue by 2025.
And significantly improving our profitability.
Turning to page four.
Our first quarter results were impacted by strong inflation, which everyone on the phone is aware of with inflation at a 40 year record high driven and for US the key components of inflation, our increases in steel ocean freight and labor.
While these challenges are set to persist through the second quarter, we are taking meaningful steps to improve our profitability and operations. Despite these headwinds and it will position <unk> for improved results in the second half of this year.
First and foremost we reached a mutual agreement.
With our two largest class eight OEM customers and it improves our pricing and margins in light of the cost inflations were experiencing.
These two customers represent approximately 30% of our total annual revenues.
And together combined loss greater than $5 million of operating income in 2021.
The bulk of our new pricing takes effect on July one of this year.
And on a pro forma basis improves our operating income to greater than 20, greater than $15 million of similar volume or a $20 million swing.
And I'm sure we'll get a few questions on that later on we will be happy to discuss them.
But it is a key pillar of our improvement strategy to transform our legacy business contracts and unlock the trapped profit in our company.
These two agreements are a significant step in achieving our goals and we will continue to be vigilant to ensure our contracts provide adequate margins and represent the value that we provide to our customers as cost inflation persists.
While we are working hard to adapt our pricing to the current inflationary environment.
We have also continued to invest to position <unk> for long term growth.
And along these lines, we incurred and Expensed $3 1 million of new business startup costs in the quarter, primarily related to the success that we are achieving winning new business in electric vehicle market, while also improving our and increasing our investments in R&D to ensure our long term competitive.
Positioning at success.
We also made investments to further optimize our plant footprint in the first quarter and expand our capacity to make certain products as we continue to focus on mix shift efficiency and profitability.
As part of this we move production lines to create dedicated capacity for our aftermarket and our warehouse automation segments, having dedicated production capacity for these business units is a critical and key component to consistently meeting customer demand and improving customer satisfaction.
Our dedicated production now largely in place.
We can now.
To grow these business areas across our core products, which includes seats wipers mirrors. Additionally, we recruited a talented operating executive with more than 30 years of experience to help with our global manufacturing footprint evolution.
He began in the first quarter.
Turning to slide five.
I wanted to give you an update on the market.
We discussed that in our in each of our calls in our largest end market remains the north American class eight truck market.
Production remains constrained due to the continued supply chain challenges globally, and the resultant product shortages.
As a result, the first quarter builds were relatively flat with the fourth quarter and look to be constrained through the second quarter.
<unk> is a third party forecaster, who we quote.
And they are forecasting improved volumes through the second half of this year, though we expect supply chain challenges to limit production and for actual builds to be in a range of around 275 million to 295000 trucks, we directly speak with these customers and are integrated into their AI systems and we.
Pretty specific outlooks for each of these customers.
Given that we have materially improved our pricing.
With the two largest customers of our company, we expect our margins to expand significantly in the second half at current volumes, while also benefiting from improvement in production levels if they happen.
That said, we do expect inflation to be a headwind in the second quarter and in the second half.
For the company and for many companies like us.
Importantly, the North American fleet continue to age which sets the industry up for several years of strong growth.
Given the large backlog that has been built and has remained in this industry. The industry is running with a one year backlog and has for some time we.
We believe this dynamic will create several years of production for the industry.
The industry needs to catch up and will be a strong tailwind also for our aftermarket business and for our results.
As a reminder for CVD every 10000 trucks equates to approximately $13 million of sales, while our contribution margin should trend above historical leverage levels, given the recently improved pricing.
Turning to page six.
And we've discussed these areas on prior calls.
We believe we are becoming an emerging leader in electric vehicle industry for what we do we.
We provide low voltage and high voltage connectivity systems for the electricity in these electric vehicles and it positions <unk> well for the coming conversion to EV and fuel cell trucks and passenger vehicles.
We're not standing still and we continue to invest in technology to expand our position expand our product offering and we're excited to open a new engineering center in Phoenix, Arizona for electrical R&D Center will be focused on our continuing development of high voltage distribution boxes for the.
Our vehicle market as well as fast prototyping and testing for new vehicles and.
Importantly, we have a robust investment roadmap as we invest in technology and products to ensure we not only maintain our competitive position, but also develop new products to expand our addressable market.
Our intent is to position <unk> for share gain.
One area that we have invested in over the last two years as our unity platform.
And if you turn the page.
You'll see that we have a modular lineup and it's highlighted on page seven we recently launched this unity seat line in the U S, Mexico, and China and modified our production facilities. It was a bit harder to do than we thought but we're getting to the finish line and our unity C allows for a high level of customization.
<unk> based upon customer needs and is a true source of competitive advantage for CPG versus our competition. We believe the seek will allow us to take market share across a broad range of focused areas, including last mile delivery vans construction equipment and trucks, but also position <unk> to take.
Back some share we lost in the aftermarket segment over the last few years to that end I am.
Pleased with the pending launch of our aftermarket ecommerce site, which is set to launch in the second half of 2022, and we will make it much easier and contemporary for fleet owners and customers to do business with us.
Turning to page eight.
The second pillar of our transformation strategy is to drive new profitable business and growth targeted areas to grow and to implement higher value added products and in the first quarter, we secured $89 million of New awards, which was largely in the electric vehicle industry.
We have now secured over $500 million of annualized new business in just two years, which points to the momentum we are achieving as we strive to enter new high growth markets, while improving our profitability and importantly, as our new business wins begin to ramp we have visibility to improve revenue looking out over the next several years as we expect.
Our new business to ramp from $208 million this year.
$368 million in 2025 on the chart here and there.
It's driven by wins in electric vehicle market.
Have said and we will continue to point out it's a focus area for us.
It's also important to reiterate that we are incurring.
Significant startup costs as we go through this as we ramp up our new business complete our prototyping and go through engineering changes to perfect the end product.
It is a drag on.
On current results, if you will and we expense these as we incur them in the quarter versus let them buildup.
And in 2022 first quarter, we had $3 1 million of startup costs compared to $1 seven last year.
And $1 8 million in the year ago quarter excuse me sequentially. It was $1 seven difference in year over year. It was $1 eight.
While we secured more than $500 million of annualized new business over the last two plus years. It's important to note that it does take time for these new wins to ramp to full production and therefore, a full revenue and profit contribution.
As a result, we believe looking at the lifetime value of our new business wins better demonstrates the long term value of these wins and what we're creating if you can turn to page nine we're giving you a little look at how this is building and thus far we secured.
Almost $2 $2 billion of lifetime revenue from our new business Awards, which provides significant visibility to our goal of achieving sustainable growth improve profitability and improve stability.
And more importantly, we're not standing still and we continue to add new business wins.
Aggressively to grow our new business pipeline and to continue winning new business in new areas.
Turning to page 10.
And as we have discussed previously we have a broad set of initiatives.
That are designed to expand the business into new areas that carry improved profitability and reducing our cyclicality.
As we expand our business, we're working aggressively to reduce our dependence on complex global supply change.
James while driving improved pricing terms with our legacy customers as we strive to unlock the trapped profits that are in our business, which we expect to yield results beginning in the second half of this year given the recent successes that I outlined as we do this our cash flows will continue to improve providing.
Capacity to pay down debt, while further investing in the business for growth and new product development.
And lastly at the bottom of this page I want you to know that.
Remind you that we're working on our first corporate sustainability report.
And we will be issuing that soon as we increase our focus on ESG and you can see at the bottom of the page what our three primary focus or increase the diversity and equity inclusion of our work team.
Increase our community involvement, where we are and reduce our carbon footprint.
To conclude my remarks on page 11.
I'm proud of the team and the progress that were making to achieve our results as well as transforming our business, while our first quarter results.
We're impacted by some global factors that were out of our control.
We are set to see improvement in the second half of the year's significant improvement, giving the pricing that we've made and the significant progress we're making on our key initiatives.
And importantly, we renegotiated pricing with the top two customers as we mentioned and that will largely take effect beginning in the beginning of Q3.
We also delivered accelerating momentum in our new business development program and achieved $89 million of New awards in just the first quarter.
And as I mentioned before this now put us over $500 million per year.
Of annualized new business at full ramp taken together, we're on track to achieve our goal of $1 9 billion of sales and improve our profit rate to eight.
5% adjusted operating income by 2025, we're very focused on achieving these outcomes.
And as we continue to track to our goal, we will see our cash flow improve.
Improve and we'll use that free cash flow to continue to invest in the business.
While also strengthening our balance sheet and paying down our debt.
So with that I'd like to turn the call back to Chris who will give a more detailed review of our financial results. Thank you Harold if youre following along in the presentation. Please turn to slide 13.
First quarter 2022 revenues were $244 4 million, primarily unchanged as compared prior year's $245 1 million really due to the supply chain constraints here and we've talked about the Covid lockdowns in China. The rest of the invasion of Ukraine, which is affecting the.
Operations and on pace demand in warehouse automation to do a normalizing economy.
While we experienced an impact to revenue and expenses due to factors that are largely out of our control. We are aggressively managing this environment and have successfully implemented price increases on our legacy class eight OEM business as Harold mentioned to offset the severe inflation impacting our business since the second half of 2021.
Foreign currency translations favorably impacted our first quarter revenues by $1 1 million or about a half a percent when compared to the prior year.
Gross margins decreased slightly to 10, 4% as compared to last year, but were up slightly compared to Q4 as we've moderated our expenses and continue to increase prices, we did experienced substantial inflation costs as well as.
As Earl mentioned $3 1 million in business start up costs in the quarter. The company reported consolidated operating income of $8 4 million for the first quarter of 2022 compared to $15 4 million in the prior year period, a decrease of 45, 5% primarily due to the significant inflation.
<unk> costs, new business startup costs and operational transformation expenses on an adjusted basis operating income was $9 5 million a decrease of 39, 9% compared to the first quarter of 2021.
Adjusted EBITDA was $13 5 million for the first quarter as compared to $21 1 million in the prior year adjusted EBITDA margins were five 5%, reflecting a decrease of approximately 310 basis points as compared to adjusted EBITDA of eight 6% in the first quarter of 2021, the margin contraction was impacted by the previously discussed.
There's an inflation new business startup costs, new business startup costs associated with our wins.
And our operational transformation costs interest expense was $2 million as compared to $5 million in the quarter last year. The significant decrease in interest expense was due to our refinancing of our debt last year in April 2021 free cash flow was negative during the quarter as we mentioned in the factors new business startup costs and other items as we continue to build inventory.
<unk> has deep and as I mentioned, the increased startup costs related to new business launches. However, we expect these impacts to trend down in the coming quarters net.
Net income net income for the quarter was 4 million or 12.
Per diluted shares compared to net income of $8 5 million in the prior year period or 26 per diluted share.
Turning to our segments at the bottom of the slide our vehicle solutions segment delivered first quarter revenues of $140 2 million, an increase of 13% as compared to the prior year.
I'll go first quarter, primarily due to material cost pass throughs, and new business wins offset by shipment disruptions from China.
Operating income for the first quarter was $6 5 million a decrease of 16% as compared to the year ago first quarter. The first quarter of 2022, adjusted operating income decreased to $6 5 million a decline of 13% primarily due to a lag between price and cost offset increases in new business startup costs.
Warehouse automation segment delivered first quarter revenues of $34 1 million, a decrease of 14% as compared to the first quarter of 2021 due to reduced demand in volume operating income was $3 7 million a slight decrease from $3 9 million as compared to the year ago quarter. The decrease in operating income was primarily attributable to the reduced.
Demand in volume adjusted operating income was $4 1 million a decrease of 2%.
Our electrical systems segment achieved results our revenues of $39 9 million, a decrease of 14% as compared to the year ago first quarter due to lower shipment volumes caused by persistent supply chain constraints and semiconductor chip shortages as well as the geopolitical tensions impacting Ukraine operating income was $1 8 million a decrease.
$3 1 million as compared to the prior year first quarter due to startup costs lower volumes and a lag in price increases and higher costs.
On the aftermarket accessories segment.
<unk> delivered revenues of $30 2 million, an increase of 1% from the year ago quarter as increased pricing was able to offset inflation and supply chain constraints. Adjusted operating income was $3 1 million, representing a decline of $1 1 million.
To conclude we continue to make significant progress in our transformation strategy designed to diversify our revenue improve our operations reduce expenses and effectively implement pricing actions to offset the severe cost inflation that has impacted our business.
Beginning in the third quarter of 2021, we implemented a restructuring program to continue to trans form and rightsize our legacy costs. We're seeing the initial positive results from our actions and expect these activities to continue through the third quarter of 2022 with our program cost around $4 million to $6 million with roughly equivalent savings on an annualized basis.
We're also pleased with our recently announced contract renegotiations and expect the results to positively impact our top and Bottomline performance beginning in the second half of 2022.
This concludes our prepared remarks, I'll now turn the call over to the operator to open up the line for Q&A. Thank you.
Ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Your first question is from John Friends Rob.
Sidoti and company your line is open.
Good morning housing, Chris Thanks for taking the questions.
You bet.
Not a lot.
To unpack here, so let's start with an update on the Ukraine can you talk a little bit about the impact on the P&L and we should expect on a go forward basis.
Yes, we were impacted in the first quarter.
By what happened in the Ukraine.
For those of you on the phone are not aware of that we have.
A $50 million business, there that's very profitable.
And.
It was directly impacted.
Bye.
<unk> invasion of the Ukraine.
It is on the west side of the country.
But we have there have been bombings in our area and of course, the whole country has been impacted.
And.
It hurt us in the first quarter.
We actually are having recovery in this quarter.
What happened to end.
We are working with our top customers are our top customers Volkswagen.
And they have put their name connected to us in the public news.
And we our goal is to get back to full operating income recovery and we're on the we're on the path to do that John .
And how much revenue was lost.
One of award.
It was not as much revenue lost his profit. So we had to do a lot of work around a lot expedites.
A lot of extra cost we moved.
Some production to the Czech Republic, we built two new plants in the Czech Republic.
So we have some extra rent that we didn't have before extra overhead.
And then we.
We're able to go back to Volkswagen and asked to adjust our prices.
Again, that's a transparent conversation to prove what your costs are and we were able to do so so that traditional lag that we get in our industry may be a lot of industries.
And so we intend to have full recovery John of the profit compression.
By way.
I hope to get most of it in this quarter.
Meaning second quarter, Jonathan second quarter.
Got it got it.
Okay, and then if you could talk a little bit about the renegotiated contracts.
Is it fair to assume you still have a million.
Million in here so.
Op income headwinds.
Those.
Two businesses and is there still another contract that remains to be renegotiated or not.
Yes so.
Those two customers represent.
Quite a few global contracts for.
For different products, they both by almost everything we make.
Okay, and so the recovery.
One of them one of the recovery starts.
Now and one of the biggest one starts on July one we.
We have many other contracts.
We've previously said that we still have one big top contract that doesn't.
Expiring.
All the rest of the smaller contracts were renegotiating right now.
In this quarter.
And we've and we've initiated.
A lot of unplanned price increases based on inflation that we incurred in Q1 and those actions are underway. So I would say 90%.
John .
<unk> business contracts, we're going after price increases right now.
One big one out there is going to lag until.
Second quarter of 'twenty three.
And then the other point John I, just wanted to add onto your <unk> comment.
China, Shanghai Lockdown had.
<unk> had an equivalent oi impact on us as the Ukraine.
That's a very profitable business for us it was completely shut down.
And.
And we get a lot of parts from Shanghai as well for North America, and we incurred.
In Q1, almost $1 billion of air shipping.
So we've incurred excess costs due to the.
<unk>.
Shanghai, Lockdown, and we had to stop our own production in region. So.
The China, Lockdown, which is now easing and started on Monday of this week, we were added to the white list they call out there.
As a key supplier to volatile.
And we were able to initiate some production so that.
That.
That event like you said Theres a lot to unpack that one was equivalent.
Income impact to our quarter is Ukraine.
Alright.
I'll ask one last question and then get back into queue regarding the startup cost is kind of a good bit.
It did jump up size up both sequentially and year over year as you pointed out how should we think of that on a go forward basis stay at this level does it reset back to.
One something number.
We looked at that.
Yes.
Those are peaking right now John .
The hardest one.
Our new seat program.
We're just bragging about.
It was tremendously hard and when we started the program. It was just prior to Covid and we had used our 20 year suppliers that are in China.
And everything was fine with global sourcing when we started this program we ended up putting over 40 dies to five.
Suppliers.
In the Shanghai area, some of which are shut down right now.
And it led us to a lot of air shipping.
In Q1 for our some of our startup.
Customers two electric truck companies.
Our launch customers to new truck companies.
And we're making the seating for them and we had to air ship parts and because the containers of our parks were stuck in the ports and stuck in the finished goods warehouses of our suppliers. So.
It's already easing and at the same time, our board of directors supported us with putting duplicate dice into Mexico.
So.
One of the biggest components of our inflation year over year was ocean freight.
Which inflated to a high number.
Have over $10 million.
And air freight has lifted off with this the shutdown so.
Our goal is to get rid of in transit freight costs by regionally producing the parts we need.
And.
We are actually targeting a dramatic.
Take down in those costs by implementing regional production in Mexico for North American production. So.
Given how high the startup costs were with these the seeding program.
We also.
Put a self imposed moratorium on ourselves.
Until we got steady state park flow before we reboot on a very very vibrant pipeline of opportunities. We have so I think they are at a peak right now John .
Okay.
Okay as promised I'll get back into queue.
Thank you for taking my questions. Thank you John Thank you.
Again, if anyone would like to ask a question. Please press star one on your Touchtone telephone. Your next question is from Chris Howe with Barrington.
Barrington Research your line is open.
Good morning, Good morning, Chris.
Okay. Thank you.
Steve.
Good I wanted to follow up.
I'm one of John's questions about the mutual agreements with two large customers understanding you still.
Have some work to do.
Some other contracts as well.
Typically these two contracts.
I know they improved the profitability outlook for these contracts.
Based on Harold's numbers that were provided.
But can you talk about.
The different avenues or options you have within these contracts with price adjustments.
As it relates to continuing inflation.
Do you have the ability to perhaps pass through price more frequently.
And then before.
Can you talk about the adjustment mechanism underneath these contracts.
Yes.
We've made dramatic improvement in our price maintenance algorithms.
And we are we have ability to pass through one of the contracts did not even have the ability to pass through material inflation.
Zero and so we have put in for.
All of our main inflated materials freight and the bill of material items.
And in the largest one we also have the ability to pass through labor inflation.
Regarding the frequency of the corrections.
They're similar.
So we didn't win that one.
I will also say, Chris that we were able to get significantly better payment terms.
And so we will have a free cash flow benefit of that in the second half as well.
Okay.
Okay. Okay.
Okay.
And given these are two of your larger contracts at 30% of revenue as you move downstream to.
Let's say small to medium sized contracts.
So that's the level of precedent for perhaps.
Even greater operating profit improvement.
With some of the remaining contracts is that fair.
Well relative to the.
I would say that these two guys got our best deals that we've given anybody.
And they deserve it I guess and everyone knows one of them is volatile because we previously have said that publicly.
We're not saying the name of the other one but it is a big truck company when our global winter.
And we have quarter relationships and everything was done professionally.
And we have growth programs with both of them. So we're not even trying to slow down with them.
They are winners in the electric truck market as well, but.
And the other areas of big significant areas, our aftermarket business and.
You can probably have done some of the math on the increases here that we've said and by the way the numbers I gave you a conservative.
Relative to what happened and we're being conservative.
Setting expectations, because we still have inflation headwinds in adversity in the Ukraine in China, but.
The numbers are bigger than that that we were able to achieve but in the other markets. Generally speaking were increases are increasing our pricing 35% Chris.
It's kind of the way the math works out for us to when we look at inflation, we have in the inflation outlook and then how do we stay in front of this on our profit margins. So.
That's generally what we get and we've had very little fallout in other words bulking from customers to just change suppliers there.
There's still a lot of pricing power in this market because it's really hard to change suppliers us included and so generally both parties are trying to arrive at a mutually satisfactory deal.
But with a smaller customers.
We're going for bigger numbers.
Okay, and then I wanted to shift to slide eight.
That was very helpful and how that was broken out.
Let's start in the bottom right.
It shows electric vehicles ramping.
2025.
If we exclude startup costs and.
One time costs.
How should we look at let's say the margin for that $28 million.
Sales in 2020, Q I mean, how do you expect.
Electric vehicle related margin.
And over time.
Yes.
Yes.
The startup costs.
They're really differentially high for seating.
And so for us the startup costs are mainly tax our product versus the end market. So the electric harness part of it.
I don't want to say, it's easy, but it's less costly.
To wrap up electric harness win a seating when its hard no matter what industry. It's in it's turned out but we're almost through it.
Chris do you want to comment on the margins, yes, yes. Thanks, Chris So generally the margins are accretive across the spectrum of the new business, we're getting in EV Chris.
And I think.
As we pointed out some of the technology that we're getting involved in.
This is.
Custom might be a strong word but this is definitely designed for certain customers and so that allows us to to have margins, which are a little bit more accretive than generally in our electrical systems business and so.
We expect to see that improvement as this business gets feathered into electrical systems as well as seeding.
Generally I will say, Chris that we're targeting.
Double our profit rate.
And then it will the market Barrett.
Because none of the instances are we a solo guy. So we usually have three or four competitors in the electrical markets in North America Stoneridge.
And the seating market is re in grammar.
So we have competitors on every single one of them but.
We are trying to double our profits every time and if the profits.
Our at our company average or less we walk away from it.
Okay.
One quick one and I know.
Kind of asked too many here, probably but I'll hop back in the queue.
Chris brought up another thought.
Given that these contracts are custom work customer specification.
You also by that nature.
A an ability to pass through price.
Much easier given their.
A unique SKU, however, you would like the terminal.
Youre talking the new business Chris.
Yes.
No we still have the same arguing.
So as we've been developing these programs inflation has been happening and so we go in and modify.
Our price ask.
And the way that the contracts work is you have production excuse me prototype pricing.
Generally we get paid for some of the upfront prototyping it would be nice if we got paid for all of it like a meritor or someone like that we don't have that kind of power, but we try to get paid first.
Second we do get a revenue for prototype shipments.
And then you get into the production agreement and.
Virtually all cases.
The last two years when it comes to that point.
Generally we are increasing the price because of inflation and it's a show me deal.
And that's a new argument so.
The good thing is though youre down way down a path and you have custom tooling and you've passed crash tests and other things and so the switching.
<unk> and effort.
It's exponentially harder for the customer and so we just need to hang it we hang in there and we just negotiate we've concentrated iron negotiating under.
Our chief commercial officer, so that we have one way of doing this.
Because many of these startups by a lot of our new products for instance in the electric vehicle World. This year year to date, we've had.
Eight windshield wiper wins.
And so we call it sell in the house and so we go in and try to sell everything that we make money on.
And.
And pricing is still on the table until you have that final production agreement and then you need algorithms, what youre going to do about inflation.
Perfect. Thank you for taking my question.
Thank you Chris Thank you.
And you have a follow up from John friends, Rob with Sidoti <unk> Company. Your line is open.
Hi, guys.
A little bit about about the segments.
Can you talk a little bit about what drove the year over year growth in vehicle solutions.
On the revenue side.
Yes, primarily John it was material cost pass through.
As Harold mentioned.
Truck build was fairly flat. It was about 70000 units. So it's not really driven by demand. So a lot of material cost pass through John .
If China.
If the China shutdown, the China, Shanghai, Covid Lockdown hadn't happened Jon.
With that that segment would have benefited.
From that year over year.
Got it.
And in warehouse automation.
Down year over year.
Can you talk a little bit about what's going on there.
Cadence revenue, we do expect in that segment with the balance of the year.
Yes last year we.
Had some.
Temporary extra orders as the industry was doing a COVID-19 catch up program.
That we don't have this year, so we have the base business.
Our house build outs now so.
Our our revenues this year are going to be kind of consistent to where we are right. Now we don't have that extra surge that we had last year on the cash upside that being said it's very.
Project dependent so if people build more or less warehouses, then will directly benefit from it our visibility.
It is only.
A couple of quarters.
So right now we're looking into the third quarter in doing that kind of staffing but.
It's going to be similar kind of revenue John until we land new business and we do have a good pipeline in this business.
Tim we are shipping out of the check now thats new this year.
And then we do have some new business starting to feather in but it's small so as Harold mentioned, where we're beholden to the to the market to some degree as well.
Are you able to get pricing in that market.
Yes.
Yes.
All markets are half price, arguing.
Okay and <unk>.
Generally suppliers like us have some pricing power in the short term. So it's one of those short term long term things of reaching for what you can to provoke.
A bit out process, so far with business. We've wanted to keep we've been able to do that.
Pushing the limit though.
Yes.
Fair enough.
Regarding working capital it was sizeable outflow in the quarter.
I think you mentioned some of that had to do a startup cost, but you did end up borrowing I guess to fill the gap can you just talk a little bit about <unk>.
Cash expectations.
Versus your debt paydown expectations, and a little bit about the outflow.
Yes.
We'll tag team here Christie on this one.
The year over year variance was primarily due to the Shanghai Lockdown, So we typically repatriate.
China, we had about $10 million out of there Chris.
We had a temporary holdup and.
In China.
Due to the Lockdown and then we had expected to invest.
In the quarter.
And then we have a profile.
For the year.
And.
That suggests also that this is peaking now because we're obviously advocating free cash flow and debt pay down in the second half I will turn it over to you Chris Yeah, Yeah, John with that with the new pricing.
I think the inventory builds that we needed for a lot of this new business starting this year and early next.
As well as Harold mentioned that we're peaking on the business startup costs with all of that easing over the course of the next quarter I think as.
As well, we did a lot of vertical integration as well trying to trying.
Trying to source now both domestically and make more products in house all of those factors kind of put a lot of pressure on working capital that we expect that to ease in the coming quarters, which will then facilitate debt paydown.
Yes, okay the big.
Did what a lot of people did John of of kind of building up our inventories against the Covid shocks that happened and the biggest impact we had was in our vehicle solutions business because.
70% of our company's revenue was in North America, and that business had been sourcing parts from China forever.
And so we.
We ordered robotic welding powder coating metal fabrication.
Equipment, we're installing it into our plants as it comes in.
And we're going to eliminate this in transit that we have so the supply chains from China are 22 weeks.
And they have been running at six to eight weeks for years, and so that really put a kink into what we're doing.
And so we just had to build up our inventories to protect.
Going to collapse, all the way back down to raw material inventory versus having finished goods and.
In transit on the water and in our reported results. So.
It's not really a hope it gets better planning so we're working our way out of this plan.
And Additionally, Chris is putting a banking facility in China. So that we can automatically get our cash out of there and not get stuck like this again.
So we are very cash generative in Asia Pacific and we need to ever need to have our money out of their other one I.
Already mentioned, which is with our largest customer.
Our largest two customers we have a significant improvement in payment terms.
Alright.
I might just sneak this last one and how you mentioned labor cost is one of the inflationary issues.
We staffed.
Please would look like on the labor front for you.
Yes.
Ukraine is its own thing so I'll leave that one out for now, but we had to re hire workforce of 100%.
100% women and men are called into military service.
60 in under 18 to 60 and.
And we've already had employee deaths fighting the Russians.
So we had to go through dramatically hiring in Q1 of the workforce and <unk> 1200 people.
It's.
It's only a $50 million business, but there's a lot of people in a it's an assembly business except for that.
We're still hiring around 300 300 to 350 a month.
Due to turnover of hourly so our hourly workforce turns over.
There's more jobs and people around several of our big plants.
And we are still down people and working excessive overtime. So we have mandatory overtime.
Which is fatiguing.
But we are we're still down.
We have around 8000 employees and 7000 hourly and we're probably down to.
200 people, John and filling it with overtime.
Got it got it thanks for the color I appreciate it.
Thanks, Chad.
There are no further questions at this time I'd like to turn the conference battery CEO Harold.
We're closing.
Thank you and thank you for all the questions and the interest.
And I want you don't know that were very convicted too.
Offsetting some of these <unk>.
Headwinds that we have in their action based.
And our goal is to.
Our profits a lot.
And we're on track for that and we're thankful for our top customers if they are listening.
For being our partner through this if necessary.
Professional and we're very thankful for the outcomes here and it's going to help us be able to reinvest for.
For the year at the right time, and we look forward to speaking to you about the quarter that we're in we've had a lot of exciting things happening in this quarter that we look forward to reporting out on and with that we'd like to call Katrina.
Thank you presenters ladies.
Ladies and gentlemen. This concludes today's conference. Thank you again for your participation and have a wonderful day you may all disconnect.
[music].
Yes.