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

Good morning, ladies and gentlemen, and welcome to CVG's First Quarter 2023 Earnings Conference Call. [Operator Instructions] 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.

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 will provide a brief company update as well as commentary regarding our first quarter 2023 results. After which, we will 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 unlimited 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 a lot 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 are detailed in our SEC filings. I will now turn the call over to Harold to provide a company update.

Thank you, Andy, and Good morning, everyone. I want to apologize in advance since I have a small cold, and I might cough a few times. And I also want 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, up 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 meaningfully 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 our 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-Class A 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 are 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 2x ahead into the warrants this year. On the customer front, we are 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 electric systems where we're making -- we're working on many electric vehicle platforms globally. We've broken to the China market in Q1 in an electric vehicle 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 their 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 powertrains and electric vehicle powertrains. 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 are 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 in new annualized wins since the start of this program 3 years ago, gives us improved line of sight to that target already. And we intend to win another $500 million of new business between now and the end of '27. We also are making meaningful progress towards our long-term EBITDA goal of 9% and 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 are still seeing. We expect additional accretive margin flow from our new business wins 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 build forecast. Our new business win rate is on track for $150 million a year. The year is off to a strong start, maybe even an inflection point for us, and our best performance is ahead of us. And CVG's future is very bright. We are 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 the amount of new wins in the first quarter, centered inner 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 often 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 is 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 cost-out plan at the same time. Turning to Page 4. Our team continued to execute our strategy during the quarter. And as I already mentioned, we are 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 position us further along our growth trajectory. Our revenue run rate is already reporting at $1 billion, and we're underway with ramping up another $350 million in new wins over the past few years. The impacts of our strategy execution were evident in our first quarter, and our EBITDA margin shows it. 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 new 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 nonprofitable 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 forecast 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 end markets 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 a record level of revenues and new business wins we are achieving. And of course, we're doubling down our normal market growth via our new wins program and business growth on top of this market growth. These are additives. Turning to Page 6. Our business wins continue to cumulatively increase, and so does the contribution by year. This chart shows an increase of expected contribution from new business in ahead versus our last update. During the quarter, 90% of our new business wins were within Electrical Systems business and more specifically tied to electric vehicle production. Notable wins during the quarter included a contract to manufacture electrical system for an electric delivery van in North America and a contract to manufacture of electric systems for electric vehicle in China. These are important for us, especially the China one will 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 exhaust in this space continues to be proprietary manufacturing software to make and test our products quickly and efficiently. Our speed, nimble and process engineering sets us apart from our competitors and is a key contributor during new business prospecting. This methodology and successful business prospecting has allowed us to move quickly and accurately and secure accretive new business in electric systems. We are 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 portfolio systems across a variety of geographic markets. We are looking to replicate our North America business model globally. And as previously mentioned, we are adding a new plan for European production in Morocco, and 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 of the 3 expansion projects that are underway right now and expect it to be ramped up in making electric system products before year-end 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 of additive new wins. 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 weight of large customers in our mix. Our strategic focus here as well as our continued strong pace of new wins, will shift the mix even further in our favor 527. 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 or exiting unprofitable or risky business. We'll 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're deepening our exposure to the secular trend in 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 paydown and allow for strategic acquisitions and increase our exposure to this powerful trend. Turning to 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 wins this year, we're still targeting at least $100 million in new wins each successive year, concentrated with intellectual 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 disciplined approach to working capital will be prioritized for additional debt paydown and to potentially fund bolt-on M&A. Our business transformation remains on track, and we are increasingly confident in delivering against our committed goals of $101.5 billion of 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 to be our third record revenue here 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 through further debt paydown in addition to higher EBITDA levels. We expect to secure $150 million in new business wins this year, and we are seeing the vast majority of our wins in electric systems. We remain on track to hit our $30 million of cost out target for this year, and we have reduced our exposure to large start-up costs in the vehicle solutions business. We will exit 2023 in a better financial position than we entered 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 a more detailed review of our financial results, and I get a new cost drop. Andy, I'd like to turn it over to you.

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 in revenues was primarily driven by increased pricing to offset material cost increases and increased vehicle-related sales, offset by lower volume in the Industrial Automation segment. Foreign currency translation also unfavorably impacted the 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 $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 were 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 3 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 our focus on price cost management as well as growth in the electrical systems and aftermarket segments help on our bottom line. In our Vehicle Solutions 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 costs, increased 106% to $13.5 million, primarily driven by increased pricing, lower fringe cost and overhead reduction. Our Electrical Systems 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 cost 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, revenues increased 25% to $37.6 million compared to the year ago quarter, primarily resulting from increased sales volume and increased 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 in restructuring expenses. Adjusted operating loss was $0.2 million compared to income of $4.1 million in the prior year period. The restructuring efforts are expected to improve performance in this segment throughout the rest of 2023. Highlighted on Slide 15, our key financial trends 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 leverage continues to decline as we have generated increasing profitability. Therefore, we believe our net leverage will decline 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?

Thank you, Andy. I'd like to thank all of our employees for their 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 is fueled by a 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 a 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 line up for questions. Thank you.

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

So I was wondering on the vehicle-related segments, could you kind of break out for us what was the contribution from volume versus pricing in the quarter?

So for the quarter, we say with 20% growth in terms of revenues in 3 vehicle-related segments. Thinking about roughly 60% of that came from volume and 40% of that from pricing.

And I know you had talked in the past, I think you had like one more major contract that you needed to work on pricing. Have you been able to get that finalized or that's something you're still working on?

We were able to finalize it, and we'll get extra contribution from that contract beginning April 1. So it's already in place.

I noticed corporate and other SG&A expenses rose fairly big on a percentage basis in the quarter. What was behind that? Was that just on the cost reduction program expenses? Or are there other things that would drive that?

A couple of things there. One is we invested in some of the SG&A costs to drive our cost reduction program. So we see some opportunity to invest and drive higher profitability there. And then the other thing that contributed to it was some of the variable compensation last year was lower in terms of incentive comp. So those are the main driver for SG&A.

On the new plant startups, just wondering how they're going, how they're proceeding, -- are they all on schedule for all the new plans?

Yes, Aldama which is near Chihuahua, Mexico is significantly ahead of schedule. We may get to open that one a quarter early. And Morocco and Agua Prieta are on schedule. Agua Prieta scheduled to produce Q4 and Morocco in Q3. And we have -- they have to start up too, Joe. We have new wins for new vehicles that are ramping up, both in Europe and in the United States that need our electrical systems inside of them. So we're on the clock and we have backup plans case some unforeseen action happens. But in the vehicle world, you have to do these things in a high-quality manner and path as the term and past quality regimens, and we're on track and significantly ahead in Aldama.

Congrats on the quarter, and I'll pass it on for other questions.

Your next question comes from John Franzreb with Sidoti.

Congratulations on the great quarter. I'd like to start with the margin profile, either the gross or the operating delivery you want to address it, but increased significantly. And it seems to me there's a bunch of buckets that could have drove that. It could have been volume, pricing, cost savings, new business or the exclusion start-up costs. Can you kind of walk through the puts and takes of how those changes impacted the gross and operating margin?

So I think you're right, John, all of the above, you mentioned. I would say the biggest impact is pricing our recovery of the inflation that we saw last year. So our price/cost management is our single biggest contributor. At the same time, we also see a strong volume leverage in our vehicle segments, but that those are kind of offset by our Industrial Automation side. The other thing that really adds to our profitability is the cost reduction. So as Harold mentioned, we are on track, and we are pretty confident of our cost-out program. So that's helped us a lot in that. And then lastly, last year, as you remember, the supply chain disruption as well as the Ukraine war generated some inefficiency in the business, and we were able to recover and get back on efficiency level. So those really help us in driving the strong results.

Now Andy and Harold, I think you deferred giving specifics on the cost savings plans. Now that it's starting to really impact the P&L, can you maybe talk a little bit about what the actions are you are taking and how much you realized about $30 million so far in the first quarter?

Yes. So we have multiple categories of cost out. We have procurement. We have cost efficiency. We have plant overhead consolidation, and we have global supply chain optimization, and we have some SG&A. And we have about 350 projects in a project tracker. And in the first quarter, we were ahead of plan. We did almost $9 million of cost out in the plan. So the plans are delivering. It's the highest amount of cost out we've attempted. And coupled with Joe's question and Andy's answer, we've added some talented people and continuous improvement. And we're opportunity risk-- we're opportunity-rich. And we're actually contemplating plans to increase our focus on this effort. But it brings CapEx with it. It bring some CapEx with it. And we'll report out on that in the future. We're not trying to withhold it. We were hesitant to make many public comments because it was a first-time thing for us, John, but it's turning out to be much more successful than we thought.

Your next question comes from Gary Prestopino with Barrington Research.

I just want to be clear. You're saying that the margins that you guys have attained in this quarter are pretty much sustainable throughout the year. Is that correct?

Yes.

And then as far as the SG&A expense, somebody asked a question about that. It is somewhat elevated. I think there was a couple of puts and takes there. But as we're looking at this, should it kind of stay at that almost 7.8% of revenue as we go through the year?

Yes, I would say that's about right. So for the year, again, we are capitalizing on a lot of opportunities that we see. So there's a lot of good payback projects that we are very happy to invest. I think we'll stay along the level for the moment. We'll continue to see the profit component.