Commercial Vehicle Group, Inc. (CVGI) Earnings Call Transcript & Summary

Hi, Doug Carson here. Thank you for joining us. I'm the automotive high-yield analyst at Bank of America. We're very happy to have Commercial Vehicle Group with us. We have the CFO and Chief Accounting Officer, Chris Bohnert, and he has a good slide deck here. He's going to run through the slide deck for about 20 minutes, and then we have about 10 minutes for Q&A. Without further ado, I'll turn it over to Chris.

Thank you very much, and good morning, everybody. Just run through the deck here, starting on Page 3. Just a little introduction to the management team. Just myself today. A little background. Harold Bevis joined the company about 7 years ago. He's been on the Board for the last almost 7 years. He stepped off the Board to become CEO in March. I joined the company just here in October. So we've got a relatively new management team here, transitioning the business into more of a diversified business. On Slide 4, just a little bit of background on the company. Through 9 months, we were about $0.5 billion in revenue. The company is a relatively new company. It was founded in 2000. It was bond out of a private equity roll-up in the trucking industry and went public in 2004. We've got about 7,500 employees worldwide. We've got a very large global footprint with operations scattered throughout, including places like India, China, the Ukraine and all around North America. Through the 9 months, our EBITDA was about $29 million; and free cash flow, $25 million through the first 9 months. We announced our quarterly results on November 9, and this presentation has a lot of the similar information that we provided. So just kind of high-level driving the company forward towards growth. We're pivoting into new markets. We're trying to diversify the revenue. We've taken on a couple of strategic areas that I'll talk about here shortly, essentially trying to move out of the cyclicality that the business has experienced in the past decade. We are a leading supplier to a lot of very sophisticated global equipment manufacturers, both in automotive and outside of automotive, and I'll talk about that in a minute. We're also expanding into new adjacent markets, and we're leveraging a lot of our know-how in assembly and harness making and so forth into new adjacent markets. Moving on to Slide 6. Just a little map of our footprint. As I mentioned, we're very global, 7,500 employees. We manage large workforces all around the globe. 2 large plants down in Mexico as well that I didn't mention, but sites over in China and India as well. So our assembly plants are very diversified and can make a variety of products. On Slide 7, if you're following along on Q3, just a few highlights there. We had $188 million of revenue. Our adjusted OI came in at $12 million, and our liquidity was very strong at $126 million. So COVID impacted the business significantly in Q2. So our year-on-year sales are down quite a bit on a GAAP basis. They were actually down 17% versus the prior year and third quarter. However, they were up 48% versus Q2. So we did see that V-shape recovery that a lot of businesses talk about in our markets, and that was primarily driven by the commercial vehicle market because they recovered significantly in the third quarter. The warehouse automation market also continues to be a bright spot for the business. We acquired a company called First Source Electronics in Q3 of 2019. And that business, which I'll talk about in a little bit has driven a lot of growth here in the third quarter, and, well, is expected to drive growth in the fourth quarter and beyond as well. Adjusted OI, while it was down slightly versus prior year, margins increased due to a lot of the cost takeouts that were executed in Q2. Those cost takeouts flowed through to the bottom line in Q3 and are expected to flow through in the coming quarters as well. Our adjusted EBITDA increased slightly to about $16.4 million versus $16.3 million on $38 million less sales. So that additional draft through is really driven by the cost-outs in the second quarter. We generated free cash flow of $9 million in Q3, and we paid down an additional $20 million of debt in the quarter. We had $15 million of borrowings on our ABL, which we paid down, and we paid down additional $5 million of debt in Q3. We also funded CapEx of about $6 million year-to-date with those cash flows, and we expect probably about $8 million to $10 million through the year. That's down slightly from prior years. Our prior year averages are around $13 million to $15 million. But with COVID and the downturn and the dampening of the markets in 2Q and early Q3, the amount of CapEx that we've been doing has just been tamped down just a little bit. So kind of turning the corner and looking into the future on Slide 8. One of the big changes that happened in Q3 is we had a further diversification of our revenue. The chart at the bottom on the left shows that about 55% of our sales mix was non-truck. For the last 10 years, that's jumped up to 65% in Q3. So we've had quite a bit of diversification. Mainly that's been driven by the acquisition of FSE, First Source Electronics, which is in the warehouse automation market. We also saw some other other diversification of revenue on a smaller basis, but the warehouse automation systems really drove performance in the third quarter. Our other focus areas outside of warehouse automation are moving more into the delivery bands in Class 5-7 trucks. So middle mile and last mile delivery vehicles. We've taken a renewed focus now on electric vehicles, and we've got some wins to talk about there. We're also looking for alternative markets for our plastic parts and wire harnesses. So 3 key focus areas for the business as we kind of turn the corner on our sales mix is warehouse automation, the EV space and then new markets for injection molding and plastic parts. Slide 9 just shows the truck market and the rebound in the truck market. You'll see Class 8 on the upper right-hand column in 2020, right around 200,000 build rate jumping up to about 275,000 now as of November. So really a nice recovery in the Class 8 build market. A little less so in 5-7, but those markets tend to move a little bit slower. Again, on Slide 10, our key focus areas are 4, really. We want to lead in all our core markets, and that's in the truck build and harness markets. We want to leverage into new markets in warehouse automation, the EV space and utilize our plants on injection molding. Some of that is going to come about in the next couple of quarters. For example, if you go to slide -- let's move on to Slide 11. In warehouse automation, we had a significant volume increase starting in late second quarter and driving in the third quarter. We actually expanded our plant capacity into 4 of our plants. Our main plant involves more, and then we use 3 of our other existing plants for the additional capacity due to the higher volume. We've added dedicated resources and additional products into those plants. So there's quite a bit of growth there. Our expected growth in 2021 is north of $100 million. That whole market is growing tremendously with rates exceeding 20% through 2022. Just to give you a picture of our products on the warehouse subassembly side on Slide 12. These are rather complicated subassemblies that go into large warehouses that essentially move products and packages around. Each warehouse implementation is unique. We are supplying most of the large retailers out there and these configurations that you're looking at are generally static, although they can be modified. But multiple iterations of the assemblies go into into a warehouse. So hence, the high-volume nature of the business. Moving on to Slide 13. The other core area that we've been focusing on is the EV market. It fits nicely and is obviously an adjacent market to our Seating business and all the supplies and trucking and other parts that we supply to that business. We secured 2 contingent awards already in 2020, north of $200 million in total potential. These start dates are -- they're similar to platform awards that we receive in the normal space, non-EV space. These awards get negotiated and they're essentially platform awards, which extend out into several year periods, typically 5 to 7 years. We're also working on a couple of other smaller awards in that space and supplying similar products, seats and other parts that go into the cab of the vehicle. Moving on to Slide 15. We're entering new markets in our injection molding space as well. We've got just a couple of pictures there of the equipment that we use on the left, the injection molding machines on the right, the wire harness platform. Both these markets are experiencing growth for us. We've got decades of experience in injection molding. We've got plenty of capacity. So we've been aggressively moving into a growth platform and position within the business, repositioning the people and our processes on how we grow the business. So that kind of winds up the summary comments that I had on business overall. Obviously, performance in Q3 was much improved over Q2, as I noted on Slide 18 there. Revenue of $187.7 million versus $126.9 million. Big rebound, primarily driven by the FSE acquisition, as I had mentioned, obviously, a huge increase, 47.9%. Adjusted OI and adjusted EBITDA also increased as a percent of revenue compared to prior year as the cost takeouts that were executed in Q2 dropped right to the bottom line. We have 2 segments, the Electrical Systems segment and the Global Seating segment that we report externally. On the Electrical Systems segment, revenues also increased significantly, about -- up 63.2% versus Q2, mainly driven by the increased truck build that I noted earlier in slide -- about Slide 8 on the Class 8 truck build. We also saw a drop-through on adjusted OI and increased margins as a result, primarily driven by the cost takeouts. So overall, gross margins were up -- way up above Q2 levels and slightly above Q3 levels with the reduction in cost. On the Global Seating segment on Slide 20. Revenues, again, up versus Q2, significantly; down, obviously, versus Q3 of 2019 as the truck builds were lower and the impacts of COVID have still impacted the business in Q3. Overall, margins relatively flat versus prior year despite the revenue decline. So we were able to hold margins even though revenues declined significantly. Just on the last -- on the balance sheet, essentially, I mentioned earlier, the cash and liquidity was $126.2 million. And again, we paid down $20 million of debt in Q3, and we expect to pay down more debt in the coming quarters. On Slide 22, just added a slide there on just our current debt structure. Obviously, we've got an ABL facility, $90 million. We've got a term loan that's roughly $151 million. And during Q2, the business struggled quite a bit and had an amendment -- covenant relief period amendments put in place, which obviously increased our interest quite a bit. So one of our goals going into 2021 is to refinance this debt at much more favorable rate. And so that is a high priority for the business. So those are all my comments. At this point, I welcome any questions that you'd have.

Thanks, Chris. Maybe I could kick off the first question and we'll see if any questions come in from investors. If you could just give us a little color on the shift that you're making into warehouses. What strategic rationale did the company kind of follow to make that pretty significant shift? For now, the 65% of your business is in that. So I always kind of more pictured you on the truck side, right? But now it's like more of an industrial. So that's interesting. If you could kind of explain that a bit?

Yes. Obviously, the business has tried for a long time, even before I got here, to diversify its revenue base. I mean part of -- I think part of my hiring is I don't come from a trucking background, so they're looking for diversified management talent across the business. And warehouse automation, it fits well in the sense that it's managing a large labor pool, which the business has done well traditionally. It's assembling complicated structures, which -- wire harness, cab assemblies, kind of the older part of the business is very similar. So there's actually a lot of similarities in that acquisition. I know maybe from -- seeing from the outside, you think, oh, gosh, it's completely different. But the whole core competency of the business of managing large labor forces, doing complex assemblies, the engineering behind those, it's very similar to what the business does in the wire harness space as well as cabs. So I would call it a diverse adjacency but what it will allow us to do is diversify even further into that warehouse automation space into more subsystems, further automation in that space. And as you know, with COVID and the downturn in some cyclical markets and kind of brick-and-mortar, there's been a huge increase in the need for warehouse space and automation. So we feel like we're positioned well to capitalize on that.

Thanks for explaining that. I know EVs have always been kind of on the radar at Commercial Vehicle Group. If you could give us a little more depth on your scale of where you think you could be in the next few years on that? And then maybe just overall in the industry, if you could give us like maybe a window to where this industry is going with EV? Because there's a lot of exciting things going on there.

Yes. It is really an exciting time. It's a unique time in the sense that there's so many new platform awards on the horizon with all these new EV companies. Now one of the things that we're doing is making sure that we're going to market with those well-funded, well-supported EV businesses. We're not tracking that every brand-new start-up. And I think that market will consolidate over time. I think there's a couple of key players who've been awarded some significant awards already. From the likes of Amazon and so forth, which I think those folks will be kind of the longer-term players. So our strategy is to make sure we get in these new platforms. It's obviously a very adjacent market to us and make sure that we're aligned with the stronger players who will survive in that market because I think there's over 20 start-ups right now. And I think this will probably whittle itself down over time as things evolve. I mean, just this morning, there was articles coming out of us, a lot of the new consumer trucks coming up from Ford and everyone. So we're focusing more on our core strengths and adjacencies, as I mentioned in the middle mile and last mile delivery vehicles and trying to get onto those platforms. So in the traditional sense, there's not been this many potential platform awards in years. So we're trying to ensure that we gather up and get on the radar screens of these new start-ups, obviously, the well funded start-ups as soon as we can to get into these platform awards.

That's helpful. I was a little interested in getting a little more color on just some traditional Class 8 knowledge. So it looks like the build rate -- a pretty big recovery in '21. I was kind of surprised to see '22 to be well over 300,000. Can you just tell us a little bit of what you're seeing in the build rate Class 8 and...

Yes. So we obviously...

We look at 7, too.

Yes. So what we're seeing right now, I'll talk about kind of short term, mid-term and then long term. Short term, we're seeing build rates increasing rapidly. So every month -- this research comes out by ACT, right? And the build rates each month have been going up anywhere from 2% to 5% roughly in 2020 as the rebound and recovery has occurred. What we've also seen is there's been a big uptick. I think it was 14,000 units a month from October to November in the 2021 projection. So that projection is now, I think, around 275,000 units. Going out a couple of years, I think there's obviously a base turnover rate of as trucks get older. And I think the '22 projection and the increase there is, just because you had such a downturn in '20, I think the projection there is really supporting kind of the base turnover rate that's needed just to support the ongoing infrastructure of the number of trucks. I think the other thing that's compounding that is, obviously, overall volume increases as well. But I think '22 is driven by a..

Good point. Losing 150,000 units, '19 to '20, probably.

You got it. You got it.

And could you maybe just talk on the balance sheet, leverage, is there targets? Where do you think you guys revision your rating to be? Then priority of cash. I know you talked about refinancing next year. Can give us any more color on what you -- length of bond that you may have interest in? Just kind of those kind of balance sheety-type questions. Just thought it'd be useful.

Yes. No, I appreciate the questions. I think we're taking a more active approach to balance sheet management, maybe than prior management's done. So we are ensuring that we've got the cash in the right locations and repatriating as needed. We're focused on growing cash flow and paying down debt. Short of that, obviously, we've also got a -- just now kicking off a very active M&A process. When I say that, just the process, we don't have any targets or anything identified, but just kicking off our M&A process and strategy here. So it's early days there. If we were able to leverage an M&A deal and refinance at the same time, that would be wonderful, but life is not always about timing. Sometimes the timing doesn't work out. But if that works out great, then we would execute or refinance at that stage. Short of that, we're going to continue to pay down debt and then post a couple more good quarters. Hopefully, fourth quarter and first quarter are also solid with recovery in our markets and then look to refinance sometime in the second quarter.

Perfect. Maybe you can talk a little bit about what you're seeing globally, and there's been widespread lockdowns in Europe, and if we think about the U.S., there are some pockets of real challenge out there of COVID. Give us a little color on what you really -- Europe would have interested me.

Yes, yes. So yes, we're in the Czech Republic and Ukraine, primarily. That's where our -- the bulk of our employees are. And we have experienced COVID issues. We are obviously taking as many precautions as we can, and safety is a priority. It hasn't impacted our operations significantly other than the lockdowns in 2Q. We haven't been informed if there's any new lockdowns at this stage. Obviously, that's a risk. So overall, for our business, we have not been materially impacted so far. Obviously, the next couple of weeks are going to be critical in Europe, and one can only predict what the governments and countries will do. But for us, there hasn't been a material impact yet.

Perfect. I had a question coming in from the audience. Do you see the growth in China to be modestly -- how do you see the growth in China in...

Yes, so -- yes, good question. So we've got -- we've been talking about a whole new China strategy. Basically, our China facilities are supplying other facilities at this stage. And we're not -- we haven't been too heavily involved in the local markets. One of the things that we've been discussing internally is how do we expand out of our kind of existing supply chain. So we're -- our presence is fairly small, and it's really more of an intercompany-type supplier. But our -- we're seeing strong growth in Asia right now as we are around the world. But obviously, our strategy in China is going to evolve over the coming quarters. And I think we're going to look more towards the existing markets and potentially with new products to take to those markets.

It's good, it's perfect. I guess on the M&A side, the company I guess wants to grow. What sector should we be thinking about? Would it be EV? Would it be in the warehouse side? It could be traditional truck? Or could it just be something diversified globally? Maybe that will make that our last question because we only have about 1 minute left.

Yes, yes. No, I appreciate the question. So traditionally, as I mentioned, the cyclicality of the business has driven a certain type of investor, one that expects the stock to kind of go up and down with time based on the cyclical markets that it's in. So our focus will most likely not be in those kind of older markets. And we've thought through and decided that participating in warehouse automation and further expanding in those markets makes a lot more sense from a diversification strategy. On the EV side, I think we're going to participate as we can on the new platforms. We're open to a lot of whatever opportunities can kind of come our way as far as EV and injection molding as well. So I think really from a top line standpoint, it's really warehouse automation and injection molding. And then as things come to us on the EV space, we'll take a look at those as well. It's still early days for us, though.

Yes, sure. All right. That was great. That was very informative. So thanks, Chris, for sharing your time this morning with us. If there's any investors that have follow-up questions could e-mail me directly, and I'll get that to Chris. And thank you, everyone, for joining us, and this will conclude our meeting today. Thank you. Bye.

Thank you. Bye-bye.