Commercial Vehicle Group, Inc. (NASDAQ:CVGI) Q1 2024 Earnings Call Transcript

Commercial Vehicle Group, Inc. (NASDAQ:CVGI) Q1 2024 Earnings Call Transcript May 7, 2024

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Operator: Good morning, ladies and gentlemen, and welcome to the CVGI Q1 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct the question and answer session. [Operator Instructions]. This call is being recorded on Tuesday, May 7, 2024. I would now like to turn the conference over to Mr. Andy Cheung, 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 James Ray, President and CEO of CVG. This morning, we will provide a brief company update as well as commentary regarding our first quarter 2024 results, after which we will open the call for questions. As a reminder, this conference call is being webcast and the Q1 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 market in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, financial covenants 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.

James Ray: Thank you, Andy. I’d like to turn your attention to the supplemental earnings presentation, starting on Slide 3. As we discussed in last quarter’s call, we launched restructuring initiatives comprehending softer market conditions that were expected and we continue to expect in the year. These softer conditions, as well as a strong quarter in the prior year period, made for a tough comparison versus the prior year across most metrics. We reported net sales of $232 million in the quarter and adjusted EBITDA of $12.7 million. We remain focused on driving further operational efficiency improvements, strengthening our vehicle solution segment, and growing our electrical system segment to be our largest business. We fully executed restructuring initiatives in the first quarter and combined with additional efforts I’ll discuss later, underpin our financial guidance for 2024.

Despite a net use of cash in the quarter, our net leverage ratio remained strong at 1.8 times. We also continue driving new business wins, recording approximately $45 million in new wins so far this year on a fully ramped basis. Consistent with our strategy, these wins continue to be focused within our electrical system segment and support the product ramp up at our two new plants and additional Morocco facility, which are focused on meeting the demand growth in electrical systems. Turning to Slide 4, I’d like to take this opportunity to highlight some recent strategic actions we’ve taken, which all serve as a reminder of our continued goal to align cost and improve margins at CVG. First, we continue to make significant strides in our organizational efficiency improvements.

As our restructuring actions to reduce costs and align resources with our growth product lines remain underway. In line with that, we announced last quarter the consolidation of products manufactured in our facility in Chillicothe, Ohio. We now have a signed purchase agreement for the sale of the Chillicothe facility, with the transaction expected to close in Q3. Second, our operational excellence emphasis supports our ongoing cost out program, which focuses on productivity, materials, and conversion costs. Finally, we are persistent in our efforts to increase engagement by prioritizing customer satisfaction across the organization. Our collaboration across business segments will help introduce new products, foster stronger customer relationships, and help us manage inflationary price recoveries.

Collectively, these efforts are targeted to improve profitability, increase enterprise wide efficiency, and support our outlook for the full year 2024. Now, moving to Slide 5, I’d like to highlight the expansion of our new UNITY Seat product line within our vehicle solution segment. The UNITY Seat line has many product features that are helping us win business globally, including powered full seat tilt and lever recline, decreased free play, and performance above market requirements. Importantly, the UNITY line has achieved safety compliance across all our strategic regions and market segments. This expansion is a strong example of how we are strengthening our core vehicle solutions business through customer focus, solutions, and technology.

We look forward to growing our UNITY sales globally and sharing our successes with you in future quarters. With that, I’d like to turn the call back to Andy for a more detailed review of our financial results.

Andy Cheung: Thank you, James, and good morning, everyone. If you are following along in the presentation, please turn to Slide 6. Consolidated first quarter 2024 revenues was $232 million as compared to $263 million in the prior year period. The decrease in revenues is due primarily to a softening in customer demand globally. The anticipated wind down of certain programs in our vehicle solution segment, and a decline in our aftermarket and industrial automation segments, which more than offset an increase in electrical systems revenues. Adjusted EBITDA was $12.7 million for the first quarter compared to $19.8 million in the prior year. Adjusted EBITDA margins were 5.5%, down 200 basis points as compared to adjusted EBITDA margins of 7.5% in the first quarter of 2023, driven primarily by lower volumes and inflationary impacts, partially offset by lower SG&A expenses.

Interest expense was $2.3 million as compared to $2.9 million in the first quarter of 2023. The decrease in interest expense was primarily related to lower average debt balances during the respective periods. Net income for the quarter was $2.9 million or $0.09 per diluted share as compared to a net income of $8.7 million or $0.26 per diluted share in the prior year. Adjusted net income for the quarter was $4.4 million or $0.13 per diluted share as compared to $9.2 million or $0.28 per diluted share in the prior year. Moving to the segment results beginning Slide 7. Our electrical system segment achieved revenues of $55.8 million, an increase of 1.9% as compared to the year-ago quarter. With the increase resulting primarily from increased pricing, sales volume with legacy customers saw a slight decline as a result of softening construction and agriculture end markets.

Recent comments from OEMs in these end markets have indicated weakening demand and we will continue to proactively adjust our cost structure as these trends continue. We have also seen customer delays in the ramp-up of new business wins, resulting in total sales volume being largely flat year-over-year. Adjusted operating income was $3.1 million, a decrease of $3 million compared to the first quarter of 2023. Operating income was negatively impacted at our Mexico facilities by the strengthening of the peso and the government-mandated wage increases that took effect on January 1st. We are continuing to work with our customers to offset these headwinds. However, negotiations remain ongoing. Construction on our second Morocco facility remains on track and is expected to be complete by the fourth quarter of 2024.

We will remain focused on driving operational improvements and optimizing margins even as additional new wins flow through. Turning to Slide 8, our vehicle solutions segment’s first quarter revenues decreased 14% to $137.9 million compared to the year-ago quarter, due primarily to lower customer demand, including the impact of supply shortages at a key customer that negatively impacted our schedules. Additionally, the anticipated wind-down of certain unfavorable programs in the segment weighed on revenues in the quarter. Adjusted operating income for the first quarter was $10.9 million, a decrease of $2.6 million compared to the prior year period, as lower market demand was partially offset by operational improvements and lower SG&A. We remain focused on strengthening our core business in vehicle solutions, and this segment remains a key focus for our team in terms of reducing costs, driving further operational improvements, as well as winning business on new platforms, all with the goal of driving improved margins.

Moving to Slide 9, our aftermarket and accessory segment’s revenues in the first quarter decreased 9.5% to $34.1 million compared to the year-ago quarter, primarily resulting from decreased sales volume on lower customer demand and the drawdown of backlog in the prior year period. Adjusted operating income for the first quarter was $4.6 million, a decrease of $1 million compared to the prior year period. The decrease is primarily attributable to lower sales volumes. On a sequential basis, results in this segment increased in terms of revenue and adjusted operating income as our operational improvements elicited by effort. Turning to Slide 10, our Industrial Automation segment produced first quarter revenues of $4.3 million, a decrease of 56% as compared to $9.7 million in the first quarter of 2023 due to ongoing challenging market conditions and reduced demand from legacy customers.

Adjusted operating income was a loss of $1.9 million compared to a loss of $0.2 million in the prior year period. We continue to take actions to right-size this business. We are focused on strengthening our both commercial excellence and operational execution to improve order intake. In parallel with these activities, we are actively exploring new end markets and developing new highly engineered products. An example of this is the development of a new product named Stack, which was showcased at the MODEX Trade Show in March. This concludes my financial overview. I will now turn the call back over to James to discuss our updated 2024 outlook.

James Ray: Thank you, Andy. Turning to Slide 11, I’ll share several thoughts on our outlook for 2024. Following the introduction of our quantitative annual guidance at the revenue and adjusted EBITDA level in March 2024, we are reaffirming our previously announced guidance ranges for both metrics. Industry forecasts currently project a decline in North American Class A truck bills of approximately 10% for the year, a slightly positive revision from the previous estimate of a 16% decline. This favorable revised Class A outlook is being offset by weakening in the construction and agriculture end markets, which we expect to be flat to down 10% in 2024. Notwithstanding these market changes, we are reaffirming our guidance range of $915 million to $1.015 billion in full year 2024 revenues.

We believe our business will continue to be resilient as we benefit from the diversification strategy and forward-looking resource allocation. Given the aforementioned truck bill estimates, construction and agriculture market outlooks, and the expectation for further electrical system segment growth, we expect adjusted EBITDA to be solidly in the previously provided guidance range of $60 million to $73 million for 2024. We believe that the actions being taken to consolidate operations, rescale our labor force, together with continued discussions with our customers to manage headwinds, will serve to underpin the guidance. We continue to expect that we will generate positive free cash flow, providing us with optionality to pursue either debt pay down or inorganic growth efforts should we find an attractive opportunity.

We continue to see multiple opportunities to improve profitability through operational cost efficiency and making strategic sourcing decisions, and expect all of this to lead to improved working capital management and increased cash generation. Collectively, our business transformation is expected to drive a stronger business mix and make CVG a stronger and more profitable company in the coming years. With that, I will now turn the call back over to the operator to open the line up for questions. Operator?

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Q&A Session

Operator: Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of John Franzreb from Sidoti and Company. Go ahead, please.

John Franzreb: Good morning, everybody, and thanks for taking the questions.

James Ray: Good morning, John.

Andy Cheung: Good morning, John.

John Franzreb: I’d like to start with the vehicle solutions segment and the wind down of certain programs. I’m curious how much of that impacted the revenue line year-over-year? And are those program wind downs complete or are they continuing to the second quarter and beyond?

Andy Cheung: Yes. so, John, thanks for the question. So, the majority of the wind down has been completed. So, right now we see for the quarter, we’ll call it a single digit million level of impact. But you will remember this is anticipated wind down that we talked about a few quarters ago at, I’ll call it maybe during the time when we negotiated pricing. Last round, we decided that there’s certain programs that are not favorable for us, and we decided to exit them. So, you can see the impact actually showing up now in Q1. So, it’s something that we’ve been working through quite a while ago, and it took some time for us to work through the final production, and now Q1 you can see the numbers.

John Franzreb: Got it. Got it. And, Andy, is it safe to say that all the repricing actions and everything related to that is now in the, no pun intended, rear view mirror?

Andy Cheung: Yes, yes, you’re right.

John Franzreb: Okay. Regarding the restructuring actions, can you kind of quantify how much of restructuring actions that you’re going to take maybe collectively? Do you have an idea for calendar 2024 and what your anticipated annualized savings rate will be from these actions?

Andy Cheung: Yes, so, a couple of things. We announced last quarter that we were doing a few restructuring mainly here in North America. During the quarter in Q1, we executed about $2 million of restructuring costs. I’ll call it maybe two-thirds of it related to headcount reductions, and then one-third of it related to facility closing. We are, I will call it, more than halfway through our restructuring program. We will still have some activity going on in Q2, and most of this should be wrapped up by Q3. So, both in terms of our facility manufacturing as well as SG&A. So, that’s where we are right now.

John Franzreb: And you anticipated net savings annualized when you’ve done this process?

Andy Cheung: Yes, so it depends really on the different type of the projects. We obviously have a mixed bag of multiple kind of projects, SG&A and manufacturing. Normally, we target about two years of payback in our saving projects, but it will be depends on the type of the actions within the restructuring program.

John Franzreb: Okay. I guess last thing I’ll get back into Q. The industrial automation business took a real step down as far as revenue compared to the second half of last year. I was under, I guess, the anticipation we were kind of troughing at that high 30, low 40 revenue level. And actually, it was also an impression that maybe that business had to potentially get better in the year ahead. Has something fundamentally changed? Can you kind of talk about what’s going on there?

James Ray: Hi, John, this is James. Yes, we’re in the middle of the transformation of that business. We talked about on the last call, we’re shifting from more of a contract manufacturing PO-based business to a more engineered product, serialized production business with longer term contracts. So part of this was anticipated. However, the PO business is very cyclical and it’s very lumpy as it comes in. So, several of our customers are in the government space. And when they have year-end spend toward the end of the third quarter, typically for government, that’s when we tend to see a pickup. So that’s been lighter than it was in prior year. And as we invest in SG&A to go to the engineered products, like we mentioned the stack product, we added engineers and SG&A to participate in the MODEX show, but also that’s for the Stack product, but also other new products with other new customers that are much more technical and engineering heavy.

So we’re in the midst of this transformation and we have seen a recent improvement in our order inbound as well as contracts where we’ll be shipping product in Q3 and Q4. So the leading indicators are giving us some level of confidence that we’ll be continuing to turn this around going on the upside.

John Franzreb: Okay. So James, it’s fair to say you think this is a revenue trough that we’re in as we’re in that transition period?

James Ray: Yes. So yes, to a certain degree, yes. But it can depend on the sharp rebound on whether or not we get near-term contracts on these new products. We could see more of a spike back up or maybe a longer recovery depending on the new products. These new products require prototypes and alpha and beta testing of prototypes in customer facilities and also in their customer facilities as well when you’re into a full fulfillment center ecosystem. There’s a double level of beta and alpha testing. So the timeline for the new products from a revenue standpoint, the prototype revenue as well as NRE is in the three to six month range and then full scale production, we foresee that being in the six to nine month range on these new products which in many cases have a higher SKU price than some of our existing contract manufacturing products.

John Franzreb: Got it. Thank you. So, I’ll get back into queue.

James Ray: Thank you.

Operator: Our next question comes from the line of Gary Prestopino from Barrington Research. Go ahead, please.

Gary Prestopino: Hi. Good morning, James and Andy. My questions also revolve around what you’re doing on the restructuring side. I guess given the fluidness of the changes you’re seeing in some of your markets, particularly I think you said some of the electrical systems areas starting to see some weakness in construction and ag. Have you — you’ve identified most of what you want to do in 2024 in terms of restructuring or is this kind of more or less a fluid process that’s really going to be ongoing?