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Commercial Vehicle Group, Inc. (CVGI)

Q3 2024 Earnings Call· Tue, Nov 5, 2024

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Transcript

Operator

Operator

Good morning, ladies and gentlemen, and welcome to the CVGI Third Quarter 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded in Tuesday, November 5, 2024. I would now like to turn the conference over to Andy Cheung, CFO. Please go ahead.

Andy Cheung

Analyst

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 third quarter 2024 results. After which, we will open the call for questions. As a reminder, this conference call is being webcast in the Q3 2024 earnings call presentation, which we will refer to during this call is available on our website. Both may contain forward-looking statements, including, but not limited to expectations for future periods regarding market trends, cost-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 markets in which CVG operates, fluctuations in the product volumes of vehicles for which CVG is a supplier, financial covenant compliance and liquidity, 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.

James Ray

Analyst

Thank you, Andy. I'd like to turn your attention to the supplemental earnings presentation starting on Slide 3. Since taking over as CEO 11 months ago, my focus has been on reshaping CVG's operating model, creating a lower cost and more agile foundation for the company. As is highlighted on the right hand side of this page, we have taken several strategic steps this year in order to refine our business model and create a more customer focused company, Specifically, the sale of FinishTEK, our Cab Structures business, Chillicothe, Ohio facility and Industrial Automation segment have streamlined our core capabilities, resulting in a more focused portfolio with an improved cost structure, a heightened focus on operational excellence and a more deliberate commercial strategy. I will cover the benefits of each transaction in a moment. But we've expect these transactions as well as our restructuring efforts to create a more streamlined operating model and drive margin expansion as we continue to execute and look to drive future growth, particularly within our Electrical Systems segment. Not only have these actions accelerated our near-term operating priorities, but they have also helped us pay down debt of $13 million to date. We also received an additional $20 million in proceeds associated with our cab structures sale in October. This was the final payment of the $40 million [Technical Difficulty] balance sheet. As I mentioned, we remain focused on a return to growth, and new business wins will play a key role in reaching that goal. We procured another $18 million in new business wins in the third quarter, bringing the year-to-date total new business wins to approximately $95 million across all segments. As a reminder, our estimates of the peak value of new business wins, once fully ramped, represent a risk adjusted assessment of…

Andy Cheung

Analyst

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 divestiture of our Cab 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 Systems segments. Adjusted EBITDA was $4.3 million for the third quarter compared to $12.2 million in the prior year. Adjusted EBITDA margins were 3.5%, down 350 basis points as compared to adjusted EBITDA 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 rate debt during the respective periods. Net loss for the quarter was $0.9 million or a loss of $0.03 per diluted share as compared to a net income of $4.7 million or $0.14 per diluted share in the prior year. Adjusted net loss for the quarter was $0.4 million or a loss of $0.01 per diluted share as compared to adjusted net income of $4.7 million or $0.14 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…

James Ray

Analyst

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 and 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 Cab Structures business and our Chillicothe 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 agricultural markets and slower new program ramps by reducing headcount, rightsizing production, and allocating utilization to our lower cost facilities. Additionally, we are pleased to welcome Peter Lugo as 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 end 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 when customer demand improves, driving incremental profitability with minimal cost added. As we look to 2025 and beyond, we expect these efforts to drive adjusted EBITDA 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?

Operator

Operator

Thank you, presenters. And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Joe Gomes of Noble Capital. Your line is now open.

Joe Gomes

Analyst

Good morning. Thanks for taking my questions.

James Ray

Analyst

Good morning, Joe.

Joe Gomes

Analyst

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 first and second quarter, so we can make our models from a historical perspective correct?

Andy Cheung

Analyst

Yes. So Joe, if you look at our Q3 filings, so you can see that we have made the adjustment for the current quarter as well as year-to-date. 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'll have a full-year number. So eventually, you should be able to see our run rate plan.

Joe Gomes

Analyst

Okay. Thanks for that. And then James, the portfolio reshaping, the restructuring, that that was going on before you assumed the CEO role and also well over a year now. How much more of this 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

Analyst

Yes. Thanks, Joe, for the question. Let me rewind the clock back to before I've started. We had initiated the footprint expansion projects in Mexico and Morocco. We also had started a process on our FinishTEK 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 FinishTEK. But we also took a harder and 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 were anticipated, we looked at other strategic alternatives, eventually engaged investment bankers, started the 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 Cab 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 an extended work slowdown and…

Joe Gomes

Analyst

Yes. Thank you very much for that. And last one for me, and I'll get back in queue, Andy. 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 EBITDA is negative two to three positives. Just wondering why the seemingly kind of reduced adjusted EBITDA outlook there?

Andy Cheung

Analyst

Yes. 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 will 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 8 is going to have a small production volume forecast for Q4. And then from that point on, it's going to start to gradually bounding 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, so we will start to see the benefits of all the restructuring and improvement actions going into '25.

Joe Gomes

Analyst

Okay, great. Thank you very much.

Andy Cheung

Analyst

Thanks, Joe.

Operator

Operator

Thank you so much. And your next question comes from the line of John Franzreb of Sidoti. Your line is now open.

John Franzreb

Analyst

Good morning, everyone, and thanks for taking the questions. First, I'd like to echo Joe's sentiment that an 8-K filing on the readjusted first two quarters numbers would be helpful. So I think he's on point there? Secondly, regarding to the second $20 million payment, how much was put down towards debt repayment? And can you give us a sense of what your current interest rate expense is?

Andy Cheung

Analyst

Yes. So the majority of the second payment is also used for debt paydown. So and obviously, this is inside the quarter as every week, we have fluctuation and up and down with over. But right now, everything that we receive will be primarily put into 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, so interest expense is a little higher than a year ago, but overall debt balances have been coming down throughout the year.

John Franzreb

Analyst

Fair enough. Thank you, Andy. And regarding your commentary on the ag and 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

Analyst

Yes. 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. There are many data points that we look at and trying to understand the market. It's hard to predict. The customer indication right now is pretty flat. Some sources say that it's going to be slightly increased, and we see some sources saying it's done. So it's still quite volatile here. But overall, at this point, our best prediction is about flat on year-over-year.

John Franzreb

Analyst

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

James Ray

Analyst

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 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 on the ordinary. But it's pretty much part [indiscernible].

John Franzreb

Analyst

Understood. And one last question, I'll get 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 gross margins in the third quarter? Thank you.

James Ray

Analyst

Yes. 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 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 closed 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, the gross margin, 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 continuing operations. So 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

Analyst

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

James Ray

Analyst

Sure. Thanks, John.

Operator

Operator

Thank you so much. [Operator Instructions]. And your next question comes from the line of Gary Prestopino of Barrington Research. Your line is now open.

Gary Prestopino

Analyst

Good morning all. 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 if you have it, what the revenues were for Q1 and Q2 and the adjusted EBITDA for both quarters, given the divestitures that you incurred?

Andy Cheung

Analyst

Yes. So, well, so in our Q, 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 split it into 50:50. That's all about the same for our EBITDA number -- adjusted EBITDA number.

Gary Prestopino

Analyst

So same for adjusted EBITDA as well, right?

Andy Cheung

Analyst

That's right. That's right.

Gary Prestopino

Analyst

Okay. That helps a little bit. In order to model this correctly, we're going to need to get those numbers. 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 timeframe? Is it a six month timeframe? Just give us an idea as you know, maybe what their priorities are coming in.

James Ray

Analyst

Sure. Thanks for the question, Gary. I'll take them separately. So we hit in flight in the operational efficiencies, launched several initiatives to bring stability after many of the footprint moves and 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 at 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 aspire to have stability this quarter. So when we enter into 2025, our [indiscernible] platform of more stable operations and ready for margin expansion. So some of the onetime cost will repeat, improve our cost out process, get more standardization and accelerate lean manufacturing processes. So 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, his 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…

Gary Prestopino

Analyst

Okay. As I read this, okay, 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 is this really all behind you?

Andy Cheung

Analyst

So Gary, I would say that it's largely behind us. As James mentioned, portfolio actions are completed. We're 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 uncertainty, and we're not going to stop until we right size our workforce. But I will also add that in my comment 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

Analyst

Okay. And then as I read what you've done here with bringing in Carlos Gimenez, 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 umbrellaed under what he's going to do. Is that a correct assumption?

Andy Cheung

Analyst

Yes, it is.

Gary Prestopino

Analyst

Okay. So 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 every one of these plants, reporting back to him, and he's setting up meetings, setting metrics for each of these organizations, these businesses to hit. How does this all work?

Andy Cheung

Analyst

Yes, 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 in 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. Some of the operational inefficiencies that we referred to throughout this presentation and also the prior earnings call were 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 logistics, et cetera, 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 will go to weekly to monthly. But we're currently and have been since the middle of Q3 in a 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 in maturity in that process with him coming on board.

Gary Prestopino

Analyst

Okay. Thank you very much.

Operator

Operator

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

Steven Martin

Analyst

Yes. Guys, I'm so tired of these calls. 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. 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 a question. That's just a statement.

James Ray

Analyst

It's a statement and 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 Martin

Analyst

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

James Ray

Analyst

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 planned, I expect it in the first half.

Steven Martin

Analyst

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

James Ray

Analyst

Thank you.

Operator

Operator

Thank you so much. [Operator Instructions].

James Ray

Analyst

I think 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 in 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, be 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

Operator

Thank you, presenters. And thank you, ladies and gentlemen. This concludes today's conference call. Thank you for your participation, and you may now disconnect. Have a great day.