Commercial Vehicle Group, Inc. (NASDAQ:CVGI) Q1 2023 Earnings Call Transcript May 7, 2023

Operator: Good morning, ladies and gentlemen. And welcome to the CVG’s First Quarter 2023 Earnings Conference Call. During this presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Andy Cheung, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Andy Cheung: Thank you, operator. And welcome everyone to our conference call. Joining me on the call today is Harold Bevis, President and CEO of CVG. This morning, we’ll provide a brief company update as well as commentary regarding our first quarter 2023 results, after which, we’ll open the call for questions. As a reminder, this conference call is being webcast and a supplemental earnings presentation 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 not limited to, economic conditions in the markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, financial covenant compliance and liquidity, risks associated with conducting business in foreign countries and currencies and other risks as detailed in our SEC filings. I will now turn the call over to Harold to provide a company update.

Harold Bevis: Thank you, Andy. And good morning, everyone. I want to apologize in advance as I have a small cold and I might cough a few times. And also you know I sound worse than I am. But we’re very happy to be speaking this morning. And as is our usual format. We’ll be referring to an earnings presentation which is found on our website. While you locate that, I wanted to say a few opening comments. Our business performance in the first quarter was strong and consistent with the qualitative comments we made in the earnings call. The last earnings call. We delivered record quarterly sales of over 7% year-over-year through a combination of increased volumes. The contribution of new business ramp ups and price increases flowing through, profitability was meaningful improved as well, due to better price cost spread realized in the quarter.

In addition to strong financial performance this quarter, we continued to deliver significant business growth for the future, adding approximately $85 million in additional new wins at full annual value, a record amount of new business awards for a single quarter. And we are revising are 2023 $100 million new wins guidance to $150 million of new wins, 90% of this first quarter wins were in our electric systems business, and 90% of the wins are on electric vehicles, including vans, trucks, and other non-classic vehicles. We continue to win globally with new customers and new products, diversifying our customer base and further upgrading our revenue mix toward electrical systems. During the quarter, we made progress on working capital through a focus on receivables and inventory.

We have almost completely worked down our built up COVID Insurance layers. And we’re back to more historical working capital levels as a percentage of sales. COVID is behind us as far as material supply chains are concerned. And our net debt leverage is back to two times and headed into the one this year. On the customer front, we’re all about customer satisfaction. And we had a good quarter on that front. Across all of our products globally, and especially in the new area of electrical systems, we’re making — we’re working on many electric vehicle platforms globally. We broke into the China market in Q1 within an electric vehicle for our customer who will be our anchor partner for a new high voltage electrical system. Our customers are satisfied.

And we are working with many of them globally to advance our electric vehicle platforms and we’re proud to be doing so. Our growth, profitability and cash flow strategies are working. And we are looking to accelerate our efforts and cash flow strategies this year. We’re transforming our revenue mix organically by expanding our market share with new customers and getting on to new vehicle platforms, both internal combustion engine power trains and electric vehicle power trains. We’re transforming our cost profile organically as well by automating processes moving to low cost countries and lowering our cost of quality. We believe that we are delivering best-in-class quality and service to our customers. With the progress we’ve made in our strategy, we also believe that we’re on track to deliver against our long term sales goal commitment of $1.5 billion in 2027.

Our current revenue run rate combined with the ramp up of our cumulative $500 million and new annualized wins, since the start of this program three years ago, gives us improved line of sight to that target already. And we intend to win another $500 million new business between now and the end of ‘27. We also are making meaningful progress towards our long term EBITDA goal of 9% in ‘27. We have caught up on price cost. And we continue to ramp up our $30 million per year of cost out program to protect our margins and offset new wage inflation that we’re still seeing. We expect additional accretive margin flow from our new business one as well. And it will drive us towards our ‘27 target of 9%. Our ‘23 outlook continues to be positive.

Our quarterly sales and EBITDA margins through the year should look very similar to Q1 with the possibility of a minor slowdown in top line in the fourth quarter, which is tied to lower industry truck wheel forecasts. A new business win rate is on track for $150 million a year. Year is off to a strong start maybe even an inflection points for us. And our best performance is ahead of us. And CVG’s future is very bright. We’re already reporting out at a $1 billion revenue run rate. While still ramping up many of our new wins. Our profit rates are already improved. And we plan to maintain them and grow them with an aggressive cost out program, price maintenance program and a continued mix shift. Q2 is now underway and on track, and timing and amount of new wins in the first quarter centered in our electrical systems gives us further confidence regarding the outlook for 2023.

And for what it’s worth, we’re also at record employment and added over 600 people in the first quarter alone. We’re off and running as a company. And one of our core values is to have fun while we work, and we’re absolutely having a blast. Now I’d like to turn to the investor deck. Starting with page 1, please. Our team delivered strong results in the first quarter highlighted by record levels of revenue and profitability levels that were in line with our long-term targets. As outlined on the slide, we delivered net sales of $263 million, which is up 7.5% year-over-year and adjusted EBITDA of almost $20 million, which is up 47% year-over-year. This results in an adjusted EBITDA margin of 7.5%, putting us on track to hit our long term target of 9%.

As we continue to win new business, optimize our costs and improve profitability. As I mentioned earlier, we had a very strong quarter for new business wins. And furthermore, we continue to see the realization of our pricing efforts. And we are delivering on our $30 plus million costs out plan at the same time. Turning the page 4, our team continue to execute our strategy during the quarter. And as I already mentioned, we’re making significant progress towards transforming our revenue mix through the success of our electric systems new business wins, and we’re committed to driving cost out as well, to improve profitability as we go. We have good visibility to the remaining of 2023. We fully expect to accelerate our efforts. Positioning further along our growth trajectory.

Our revenue run rate is already reporting at $1 billion and we are underway with ramping up another $350 million in new wins of the past few years. The impacts of our strategy execution were evident in our first quarter. And our EBITDA margin shows we’re on track to hit our 9% margin target for ‘2027. We continue to win new business in electrical systems. And it’s a key focus for us. We set a record for wins in the quarter. And as I mentioned, we’re increasing our guidance to $150 million for this year. Combined, we’ve already won over $0.5 billion in cumulative revenue across 300 new vehicle platforms and a few other industrial platforms. Finally, we continue to optimize our ongoing business. And we will continue to address non- profitable business areas.

We are delivering on our cost out plans. And we expect to reduce our debt leverage further in the coming quarters. Turning to page 5. Similar to the comments from the last quarter, our demand and market outlook is promising for the remainder of the year. Supported by healthy forecasts across our key end markets on this slide. We are increasingly confident in our positive 2023 outlook. Also, our large public customers are reporting strong year-to-date results, healthy order books, and are expecting continued momentum and growth across the end market this year. These trends and results give us confidence that we’re well positioned to participate in the growing demand from our customers and the industry. And that we will build on the record level of revenues and new business wins we are achieving.

And of course, we’re doubling down on normal market growth via our new wins program and business growth on top of this market growth. These are additive. Turning to page 6. Our business wins continue to cumulatively increase and so does the contribution by year. This chart shows an increase expected contribution from new business in hand versus our last update. During the quarter, 90% of our new business wins are within electrical systems business and more specifically tied to electric vehicle production. Notable wins during the quarter included a contract manufacturer electrical system for an electric delivery van in North America, and contract manufacturer of electrical systems for electric vehicle in China. These are important for us, especially the China one win more act as an anchor customer for us as we expand our electric systems manufacturing operations in China and we have already ordered the equipment to do so.

Turning to page 7, as we have highlighted in previous quarters, CVG stands to benefit and is participating in a secular transition of ICE powertrains to electric vehicles. Our secret sauce in this space continues to be proprietary manufacturing software to make and test our products quickly and efficiently. Our speed, nimbleness and process engineering sets us apart from our competitors, and is a key contributor during new business prospecting. This methodology in successful business prospecting has allowed us to move quickly and accurately, and secure accretive new business in electric systems. We’re continuing to target low to medium volumes, which we believe allows us to achieve a better margin profile. In terms of our targeted customer base CVG targets customers with large total addressable markets within the commercial vehicle space, and companies that service both electric vehicle and ICE propulsion systems across a variety of geographic markets.

We’re looking to replicate our North American business model globally. And as previously mentioned, we’re adding a new plant for European production in Morocco. We will cover these expansion projects in a moment. Please turn the page to slide 8. As we’ve discussed previously, CVG has a large scale global capacity expansion program underway bringing on a significant amount of state-of-the-art capacity in electric systems in multiple markets at the same time. This is made possible due to our record breaking pace of new business wins. And highlighted here on page 8 are the three expansion projects that are underway right now. And expected to be ramped up and making electric system products before yearend 2023. These new facilities are in low cost country locations that are close to end markets and our customers and also provide a springboard to enable a higher continued rate additive new win.

All these projects are on schedule. We are being aggressive, but measured in our approach to adding capacity. Turning to page 9, as you can see our strategic focus on reducing cyclicality, expanding our customer roster, and increasing our exposure to secular growth trends is paying off. We’ve reduced our exposure to Class 8 trucks, we’ve grown our revenue share of electric systems. And we’ve reduced the wait of large customers and our mix. Our strategic focus here as well as our continued strong pace of new wins will shift the mix even further in our favorite by ‘27. As a reminder, the mix shift brings a more attractive growth, margin and return on invested capital profile for CVG. Turning to page 10, CVG is fully committed to driving shareholder value in both the short term and long term.

And we are delivering improved profitability in our ongoing business. And we are improving our exiting unprofitable or risky business, we will continue driving our costs and allocating our capital and resources to support strategic growth opportunities. The work we’ve done to reposition our portfolio is evident in today’s results. And we look forward to continued execution of our strategic priorities. We are deepening our exposure to the secular trend and electrification and automation. Increasingly winning new business which improves our growth outlook, diversifies our customer base and reduces the cyclicality of our business. We expect to generate meaningful cash flow, which will further fund our growth, drive debt pays down and allow for strategic acquisitions and increase our exposure to this powerful trend.

Turning the page 11. We are highlighting where we are relative to our long term commitments, we’ve made to you. On our last call, we told you that we were set up to win and make money in ’23, deliver a year of record revenue, higher EBITDA and continued free cash flow and debt pay down. After the first quarter, we’re even more confident in these statements. And we’re more confident in our ability to achieve our long term targets. These 2027 targets are well within our reach. And we just need to continue doing what we’re already doing. In addition to our expected $150 million in new ones this year, we’re still targeting at least $100 million in new wins each successive year concentrated within electrical systems. We expect these wins to diversify our product portfolio, our customer base and drive growth and profitability.

We expect strong cash flow which combined with our discipline approach to working capital, will be prioritized for additional debt pay down and to potentially fund bolt-on M&A. Our business transformation remains on track. And we are in increasingly confident in delivering against our committed goals of $1.5 billion revenue and 9% EBITDA margins. Turning to page 12 and before I turn the call back over to Andy, I’ll just quickly update you on how we are envisioning 2023 playing out compared to 2022. We expect 2023 be our third record revenue year in a row on the back of steady vehicle demand as forecasted by ACT and FTR, higher pricing and new business revenue. We expect both gross margin and EBITDA improvement with pricing ahead of inflation, new business ramp ups and additional cost out.

The cash flow generated will drive down our leverage ratios for further debt pay down in addition to higher EBITDA levels. We expect to secure $150 million in new business wins this year. And we’re seeing the vast majority of our wins in electric systems. We remain on track to hit our $30 million of costs out target for this year. And we have reduced our exposure to large startup costs in the vehicle solutions business. We will exit 2023 in a better financial position than we entered it with a strong future outlook and a strong balance sheet that provides optionality to drive additional growth. With that, I’d like to turn the call back over to Andy, as he gives you more detailed review of our financial results, and I get a new cough drop. Andy, I’d like to turn it over to you.

Andy Cheung: Thank you, Harold. And good morning, everyone. If you are following along in the presentation, please turn to slide 14. First quarter 2023 revenue was $262.7 million as compared to $244.4 million from the prior year period. The increase revenues were primarily driven by increased pricing to offset material costs increases and increased vehicle related sales, offset by lower volume in the industrial automation segments. Foreign currency translation also unfavorably impacted first quarter of 2023 revenues by $3.6 million, or 1.5%. The company reported consolidated operating income of $14.6 million for the first quarter of 2023 compared to income of $8.4 million in the prior year period. The increase was driven by higher margins, partially offset by higher SG&A.

The first quarter of 2023 adjusted operating income was $15.4 million. Adjusted EBITDA was $19.8 million for the first quarter, up 47% year-over-year, compared to $13.5 million in the prior year. Adjusted EBITDA margins was 7.5%, an expansion of 200 basis points as compared to adjusted EBITDA margins of 5.5% in the first quarter of 2022. Interest expense was $2.9 million, as compared to $2 million in the first quarter of 2022. Net income for the quarter was $8.7 million, or $0.26 per diluted share, as compared to net income of $4 million, or $0.12 per diluted share in the prior year period. Turning to the segment results on this slide, you can see the performance of our three vehicle related segments on a combined basis. The combined revenues increased 20% to $253 million, compared to $210 million in the year ago quarter.

Combined adjusted operating income was $25.1 million, an increase of 122% compared to $11.3 million in the prior year period. The growth in adjusted operating profit again demonstrates the powerful impact that are focused on price cost management as well as growth in the electrical systems and aftermarket segments have on our bottom line. In our vehicle solution segment, first quarter revenues increased 15% to $160.6 million compared to the year ago quarter, primarily due to increased sales volume and increased pricing to offset material cost increases. Operating income for the first quarter increased 112% to $13.4 million, compared to operating income of $6.3 million in the prior year period. First quarter 2023 adjusted operating income, which excludes special cost increased 106% to $13.5 million, primarily driven by increased pricing, lower freight cost and overhead reduction.

Our electrical system segment achieved revenues of $54.7 million, an increase of 37% compared to the year ago first quarter, resulting from increased pricing to offset material costs pass-through and new business wins. Operating income was $6.1 million, an increase of $4.3 million compared to the first quarter of 2022 due to increased volume, pricing and manufacturing efficiencies. Our aftermarket and accessories segment’s revenues increased 25% to $37.6 million compared to the year ago quarter, primarily resulting from increased sales volume and increase pricing to offset material cost pass-through. Operating income was $5.6 million, an increase of 82% compared to operating income of $2.6 million in the prior year period. The increase is primarily attributable to increased pricing, offsetting moderating cost inflation.

Our industrial automation segment produced first quarter revenues of $9.7 million, a decrease of 71% as compared to $34.1 million in the first quarter of 2022 due to lower demand levels. Operating loss was $0.9 million, a decrease compared to the operating income of $3.7 million in the year ago quarter due to volume reduction and restructuring expenses, adjusted operating loss was $0.2 million, compared to income of $4.1 million in the prior year. The restructuring efforts are expected to improve performance in these segments throughout the rest of 2023. Highlighted on slide 15, a key financial trend in our business. As I previously mentioned, this quarter EBITDA and margin percentage strongly improved on a sequential basis. The sequential improvements were driven by pricing, our focus on operational excellence, and new business launches.

Additionally, our net average continues to decline as we have generated increasing profitability. Therefore, we believe our net leverage growth declined further in 2023, as our strategy continues to deliver financial results. For the remainder of this year, our financial priorities will be to drive additional cost savings to generate higher profitability, free cash flow, and invest in our new growing business platforms. Thank you. And I will now turn the call back over to Harold for some closing comments. Harold?

Harold Bevis: Thank you, Andy. I’d like to thank all of our employees for the contribution to our solid financial results and strategic priorities. And the pace of the progress that we’ve been able to achieve in our strategic plan has been better than we thought. And it’s fueled by strong focus on our transformation strategy and a clear prioritization of our initiatives, and our large and vibrant growing and new customer base. We’re much stronger company in 2023. And we’re ready to capitalize on secular growth and higher profits and the trends towards vehicle electrification. And we look forward to sharing our successes for you in future calls. I’d now like to turn the call over to our operator and open the lineup for questions. Thank you.

Q&A Session

Operator: [Operator Instructions] Your first question comes from Joe Gomes with NOBLE Capital.

Andy Cheung: Joe, so for the quarter we say with 20% growth in terms of revenues in three vehicle related segments, thinking about roughly 60% of that came from volume and 40% of that from pricing.

Operator: Your next question comes from John Franzreb with Sidoti.

Operator: Your next question comes from Gary Prestopino with Barrington Research.

Operator: Your next question comes from Barry Haimes from Sage Asset Management.

Operator: Your next question comes from Steven Martin with Slater Capital Management.

Operator: There are no further questions at this time. Mr. Bevis back over to you.

Harold Bevis: Thank you everyone for calling in today. We appreciate your interest and investment in our company.