Commercial Vehicle Group Inc (CVGI) 2021 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CVG Second Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Chris Bohnert, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and welcome to our conference call. Joining me on the call today is Harold Bevis, President and CEO of CVG. We will provide a brief company update as well as commentary regarding our second quarter results, after which, we will open the call for questions. 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 savings 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 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'll now turn the call over to Harold to provide a company update. Harold?

Thank you, Chris, and good morning, everyone. We're going to refer to our earnings presentation that's posted on our website if you wish to access it. And on today's call, we'll provide an overview of our second quarter results, followed by an update of our strategic initiatives designed to grow our earnings and expand our end market participation.

We have a goal to increase the stability of our earnings. And Chris will discuss our financial results in more detail, and we'll then conclude by opening the call and answering your questions.

I'd like to acknowledge the efforts and contributions of our global team throughout the second quarter. Our sales and product teams contributed significantly to our ongoing growth and diversification initiatives, and our entire workforce battled through ongoing supply chain constraints and COVID concerns, but remain focused on exceeding our customers' quality and delivery expectations. We're proud of our global team and look forward to more in-person employee celebrations and more active community outreach programs as the economy fully reopens.

So let's review the big picture on our results. Turning to Page 4. We delivered record sales for the second quarter of $258 million or almost double the amount of sales of a year ago. The strong growth was driven by COVID recovery, new business wins between then and now and demand growth in both the warehouse automation and global vehicle markets.

Warehouse automation continues to be a powerful engine for growth as we delivered $52.3 million of sales, representing 25% sequential growth and are tracking to likely exceed our full year goal of $150 million in warehouse automation sales. Our operating income increased to $16.3 million in the second quarter, which compares favorably to a loss of $10.5 million in the year ago second quarter.

The improvement was largely a result of better volumes, combined with our successful efforts over the last year to reduce our cost structure and drive operational efficiencies across the company. Rationalizing and optimizing expenses and our base cost has been a priority of our management team and will provide a benefit as our sales continue to improve.

Gross margins increased in Q2 as compared to Q1. However, we do not expect this to continue as we deal with global cost inflation, labor scarcity in key global locations and COVID impacts in certain global locations. Adjusted EBITDA was $21.6 million in the second quarter, representing a significant increase as compared to the $1.2 million that we delivered in the second quarter of 2020.

The improvement was due to a very weak COVID impact in Q2 2020, new business wins and warehouse automation and demand growth in the North American OEM truck market, coupled with our expense and base cost control disciplines. We delivered $0.33 of adjusted earnings per diluted share in the second quarter compared to a loss of $0.24 per diluted share in the second quarter a year ago. So all in all, it was a quarter of results that were in line with our expectations.

Turning to Page 5. We are in the midst of a strategic realignment with 4 key focus areas, and we wanted to provide you an update. Starting from the left side of this slide, I'd like to remind everyone that we are globally leveraging and adding to our capabilities to gain new business.

We began this initiative 18 months ago and now have secured 217 new business awards that will add $229 million of annualized net incremental revenue that is additive to our top line. We use the word net because this figure is inclusive of purposeful losses of existing business that we are seeking to cleanse and correct and exit certain low-cost and low profit -- excuse me, low profit customers.

We use the word annualized because all of the wins that we are associated with have a development prototype and ramp up profile, and most wins are on platforms that last multiple years. So it takes a little while for the wins to ramp up into our business profile and stated results, but then we have the business for quite a few years. And additionally, we have to build inventory profiles and materials to support the production schedule as they increase.

And we use the word new because this is incremental business and exclusive of replacement wins. We aggressively compete on retaining business that we like, and this is a regular part of our company, and we have had many replacement wins also during the quarter.

We're focused on a few strategic areas that are natural for us, warehouse automation, electric vehicles, recreational vehicles and specialty vehicles. These are all end markets that are focus areas for us globally. Complicated electromechanical assemblies, turnkey electrical systems, unique plastic parts and last mile delivery van solutions are end products that are focus areas for us from a product standpoint.

We now have a live and dynamic new business pipeline that is multibillion dollars in size and global. This is a vibrant part of our company now and is becoming cultural.

Turning to Page 6. We wanted to provide an overview of our year-to-date sales profile. We've made real progress reducing our reliance on North American Class 8 diesel trucks as our warehouse automation business continued to deliver strong growth. And as electric vehicles become a more material share of our business over time.

Looking at our end markets in more detail. The North American truck market was 36% of our sales in the first half of 2021 as demand for Class 8 diesel trucks continues to increase despite the supply chain constraints and inflationary pressures that have been in place for much of the year.

ACT research is forecasting truck builds to improve in the second half of this year and for truck builds to be in excess of 300,000 units annually through 2023. This market dynamic will be supportive of our results and we'll keep Class 8 trucks as a high percentage of our sales, as we are already on many truck platforms that are in full production and in the market today.

Warehouse automation continues to be a large proportion of our business, having been 20% of our total company revenues in the second quarter and 19% for the first half. This strong end market is now our second largest end market and growing due to ecommerce behavior and the continued need for more capacity by the well-known brand names in this arena.

The OEM construction market is now our third largest end market, comprising 17% of our year-to-date sales. Our business in this end market is relatively balanced across North America, Europe and Asia. Looking forward, we continue to see a strong order book globally through the balance of the year, which will be supportive of demand, though supply constraints are still an issue that we're monitoring closely. The Biden infrastructure bill will likely help us in this area also in North America.

Lastly, our aftermarket and service business, while not an end market per se, is an important component of our business, representing 11% of year-to-date sales. Turning to Page 7. The warehouse automation end market continues to be a significant growth driver for the company as we delivered approximately $52 million of sales in the quarter, up 25% sequentially from the first quarter of 2021.

We supply subsections of these warehouse installations, including complete work centers and are developing new products to expand our business in this area. Importantly, our products are sophisticated electromechanical systems that contain electric panels and technology that enable the automated movement of parcels through the warehouse. They are smart subsystems.

The growth in e-commerce is driving the need for additional warehouse automation, parcel sorting and last mile delivery vans, where industry expectations are for the warehouse automation industry to grow at a 14% CAGR through 2026 or nearly doubling in size of $30 billion over 5 years.

To support our warehouse automation growth and position CVG for further expansion, we've been repurposing our existing plant capacity and adding focused new capacity. So far, we have repurposed 2 entire commercial vehicle plants, expanded an existing warehouse automation plant and are implementing plant additions in Europe and in India. We're doing the same things to enable our electric vehicle ramp-ups. We've been able to leverage our existing footprint greatly. We've been adding people to both of our segments here as we grow and expand these focus areas.

An emerging end market for CVG is the electric vehicle last mile market, as outlined on Slide 8. Our competitive advantage resides in the fact that we have a natural value-added product basket that makes it convenient for new vehicle companies to do their work with us. Importantly, we can design, prototype, and build a bundle of products for one OEE, and we have 40 years of global experience doing it.

As we've mentioned, we are currently involved with 52 opportunities globally, which includes both existing manufacturers that are expanding into electric vehicle platforms as well as new electric vehicle market entrants. We've essentially created a portfolio of new business wins on electric vehicle platforms that will allow us to participate in the transition from diesel to electric vehicles, which is underway and forecast to accelerate in the next 5 to 10 years.

Overall, we have 13 different electric vehicle wins thus far in 2021 across North America in European trucks, buses, recreational vehicles and construction equipment. These wins will result in production launches over the next few years.

Turning to our new business awards on Slide 9. We have secured $129 million of net new business wins this year-to-date. 94% of these wins were outside of our legacy diesel truck business as we continue to win new business in electric vehicles, warehouse automation, and recreational vehicle end markets. It's important to reiterate that the composition of our new business awards will determine when those revenues will flow through our P&L.

Given that a majority of our wins have been in electric vehicles, we will hit peak financial performance in a few years in these areas. Our new business momentum is putting CVG in an enviable position in this industry. We are continuing to review our products and customers, and will continue to exit unprofitable and/or declining business areas. This is an important point to highlight as our new business wins that we report each quarter are on a net basis, as I mentioned earlier.

So while our net new business wins were up nicely from Q1, the momentum was much stronger as we are also turning out low profit customers. We're driving a strategic mix shift, which will slowly become evident in our results as we release them quarter after quarter.

Turning to Slide 10. We are very pleased with the success that we have achieved this year and over the last 1.5 years, but we're really just beginning. Our goal is to transform CVG. We're committed to optimizing our legacy business and using our know-how to expand aggressively into several focused end markets.

Our second quarter results were another good data point that show that this is working. As we continue to make progress and post our results, we believe the value of our business will grow. Now I will turn the call back over to Chris, who will give a more detailed review of our financial results.

Thank you, Harold. If you're following along in the presentation, please turn to Slide 12. Second quarter 2021 revenues were $257.9 million, a quarterly sales record for our company. Revenues increased 103.3% compared to $126.9 million from the prior year period. This increase reflects the substantial increase in the warehouse automation business and the significant increase in the global demand of vehicle end markets, which were heavily impacted by the COVID pandemic in Q2 of 2020.

On a sequential basis, our revenue increased 5.2% over first quarter 2021 revenue of $245 million, which was also a sales record for the company. Foreign currency translation favorably impacted our second quarter revenues by $6.8 million or 5.4% when compared to the prior year period. Our gross margins expanded approximately 820 basis points to 13.3% as compared to the second quarter of 2020.

The margin expansion continues to reflect our renewed focus on improving our business mix and the efforts to offset the significant cost inflation we are experiencing in our supply chain. The key drivers of the margin expansion were volume leverage, business mix shifts toward the warehouse automation end market and operational cost improvements as compared to 2020.

The company reported consolidated operating income of $16.3 million for the second quarter of 2021 compared to a net loss of $10.5 million in the prior year period. And on an adjusted basis, operating income was $16.6 million compared to a loss of $3.6 million in the second quarter of 2020. The improvement was primarily attributable to higher sales volume, improved mix and an improved cost structure.

Adjusted EBITDA was $21.6 million for the second quarter, which was up considerably as compared to $1.2 million in the prior year second quarter. Adjusted EBITDA margins were 8.4%, reflecting an improvement of approximately 740 basis points as compared to the adjusted EBITDA margin of 1% in the second quarter of 2020. This margin expansion was primarily the flow-through from the revenue and cost changes I mentioned earlier.

Interest expense was $2.8 million in the second quarter as compared to $5.3 million in the second quarter of 2020. The decrease in interest expense was primarily the result of refinancing our company's debt on April 30, 2021. As a reminder, we expect our interest expense to be reduced approximately $3.1 million on a full quarter basis beginning in the third quarter as a result of the refinancing.

Additionally, our new debt structure is more flexible as it provides up to $200 million of borrowing capacity as we work to expand into attractive markets with the goal of accelerating CVG's growth and moderating the historical cyclicality of our business.

Net income for the quarter was $5.1 million or $0.16 per diluted share compared to a loss of $12.5 million in the prior year period, a loss of $0.40 per diluted share.

Now turning to our segment results on Slide 13. We highlight the Electrical Systems segment. For the second quarter of 2021, the Electrical Systems revenues were $175.1 million, compared to $74.2 million in the prior year period, an increase of 136%. Foreign currency translation favorably impacted second quarter revenues by $2.7 million or 3.6%. The year-over-year sales increase primarily resulted from new business wins, warehouse automation growth and increased demand in the North American OEM truck market, as Harold mentioned previously.

Our Electrical Systems segment represents now 68% of our total second quarter revenues as we continue to make progress diversifying both our mix of business and customers. The Electrical Systems segment delivered $18.6 million of operating income in the second quarter compared to an operating loss of $6.2 million in the prior year period. The increase was largely due to year-over-year increase in sales. Adjusted operating income was $18.7 million in the second quarter compared to an adjusted operating loss of $718,000 in the prior year period.

Now turning to our Global Seating segment on Slide 14. Global Seating revenues increased to $84.9 million in the second quarter of 2021 compared to $53.9 million in the prior year period, an increase of 57.6%. Foreign currency favorably impacted our sales in this segment by $4.1 million or 7.7% in the quarter. The Global Seating segment reported an operating income of $5 million during the second quarter compared to $1.5 million in the prior year period. The increase is due to higher sales volume as a result of the COVID impact of Q2 of 2020. The second quarter of 2021 adjusted operating income was $5 million compared to $2.1 million a year ago quarter.

Now looking to the third quarter. And while we do not provide guidance, I thought it would be helpful to provide a few data points on the key drivers to our business. Per ACT, expectations are for an increase in the North American Class 8 truck builds to 83,850 units compared to 74,400 in the second quarter. This demand outlook is expected to be supportive of our third quarter results.

In the warehouse automation space, we expect sales to be down sequentially in the third quarter as we experienced a changeover by our customers to new builds. However, we continue to believe that we'll meet or exceed our goal of $150 million in full year warehouse automation revenue.

Finally, our gross margins will remain a focus in the second half of the year as we continue to implement actions as we work to overcome material and labor shortages and commodity cost pressures we are experiencing.

This concludes our prepared remarks. I will now turn the call over to the operator to open up the line for Q&A.

(Operator Instructions) And your first question comes from Chris Howe with Barrington.

This is a great quarter. And a lot of questions here lined up for you, but I'll try to find the more important ones. You talked about warehouse automation, the growth that you're seeing there, now 20% of Q2 sales, good sequential growth. If we take that into consideration with the slide that outlines the net new business awards related to electric vehicle. I think it was 55% of the pie, which would be about $71 million.

Thinking in terms of that, how do you expect the relative size of opportunity between the 2 environments, electric vehicle and warehouse automation to play out as a mix of business as we further diversify away from the more cyclical areas of the business longer term?

Yes. That is primarily a question of timing. So the warehouse automation wins and also the wins that we get in recreational vehicles, ATVs and that sort of thing, are short-cycle and shorter-term ramp up. So the amount of wins that show up in our quarterly profiles are skewed towards warehouse automation right now because they're faster ramp-ups.

The electric vehicle wins are skewed out a few quarters after that because a win in that area means that you're selected to do the prototyping and then the [mule] vehicles that go into final test and then the hard tooling and then the production ramp-up. So there's a delay there.

So on a pro forma basis, Page 9 is what we're going to look like. So the electric vehicles are going to be a larger proportion of our new business. Our core business is growing. Our legacy business also because of the outlook for trucking and transportation of goods. And of course, in North America, the Biden infrastructure package is heavily skewed towards transportation.

So the core market is going to grow. And I think that percentage is going to hang in there. But on the new business adder that we're putting in here and the mix shift, electric vehicles are going to come on stronger.

Perfect. And the incremental growth that you saw in warehouse automation, the 25% sequential growth. What comprised that growth as far as the number of new wins that came to fruition in the quarter versus maybe further existing share of wallet wins? Can you kind of characterize that growth in the quarter?

Yes. We're doing 2 things. We are participating in volume growth that's occurring in the segment. And we also have expanded our product offering and the business wins that we had here were all tied to product additions to our portfolio. And so it was twofold. I don't know, Chris, do you have a sense of the ratio there?

The bulk of it in the second quarter was expansion of existing business. The new wins that we got, we'll see more in the third and fourth quarter.

And then one last question, and then I'll hop back in the queue and leave it for others. But warehouse automation, if we go back to the very initial innings, granted, we're still in the early innings of this opportunity. The gross margin profile was characterized as being accretive. Can you talk about how that gross margin profile of warehouse automation has evolved as you gained more learnings in the environment and gained further understanding of the potential for growth?

Yes. Chris, this is Chris. I think the initial business that we picked up was mildly accretive, as we had said on previous calls. As Harold mentioned in his notes, we're picking up new business, that's a little more complicated, I would say. And those margins are going to be, I guess, a little bit higher than the existing core business that we have today.

So some of these new pieces of business have more complex assemblies, more complex panels and things like that. I wouldn't expect that these margins are going to go up tremendously, but they generally are accretive overall to our legacy business and the new wins are a little bit more accretive than the existing wins that we have.

And your next question comes from John Franzreb with Sidoti.

I just want to go back to the growth (inaudible) question. You talk about anticipate that there's -- generally in the third quarter that you alluded to, more Q in 1 segment versus other?

Well, the gross margin percents are -- we're having a lot of cost pass-throughs right now with inflated materials. And the cost pass-through price negotiations with customers, they're very sharp to not let us have extra margin on cost pass through. So it's compressing our percentages as we go through that.

And I would say it's commodity-based, John. So if you look at inflation that's happening and how it ties to our types of materials we buy, steel is a big one. So anywhere where we use steel is having that dynamic and then inbound freight. So when we have inbound freight or global supply chains, the price of containers and the price of ocean-going freight has gone up.

So it's tied into our components we use in the material and to our supply chain strategy. So I would say probably skewed towards Seating, Chris, versus Electrical in terms of our reporting segments. So I would say it's going to be focused in that area, John.

Great. That's actually helpful. And in the warehouse automation business, I guess a couple of things there. It sounded like you're increasing capacity in that business. Can you give us a sense of how much you're increasing it by? How has that changed your CapEx plans for the second half of the year versus the price?

Yes. The warehouse automation business is CapEx light. So it's primarily an assembly business. To Chris' point, it's complicated assembly and these experienced assemblers, but we primarily buy the bill of material. We have just a few made parts in that arena. It's assembly, and testing and checkout. And so it's floor space. It's low-level lining. It's air guns. It's torque wrenches. It's that kind of thing. It's not heavy on the capital side.

However, it does pull-through a working capital profile. And you'll see that our working capital went up. It's around 6%, 16.8% of sales, which is what we averaged in 2019. That's kind of a normal level for us. So it primarily pulls along with that working capital. And we have to front-end load it because we have to build in the inventory profile to initiate production and the supply chains for circuit boards and all that kind of thing are -- we have up to 52-week lead times.

So we're putting in a decent amount of inventory so that we can continue to grow in the market. And you've seen some of the pronouncements from some of the big ecommerce shippers. So they have their foot on the gas. So we're trying to stay synchronized with their expectations on putting in new warehouses to do parcel distribution and last-mile delivery.

Okay. And I think Chris said that warehouse automation should be down sequentially in terms of revenue through the new builds. Could you just provide some color as what that state it's in?

Yes. So our customers will move into a new build cycle, John, as they implement new warehouse builds. And so they have a somewhat seasonal approach to their build. So they'll contract out their business for an annual basis and the kind of the gap period is right now.

And so we're going to have a little bit of a dip in the revenue in the third quarter. And then that should increase in the fourth quarter and then next year as they continue to build into the coming quarters. As we say, though, we're still expecting to hit $150 million in revenue for the full year.

And I guess one last question on the debt refinancing, it looks like you actually added net debt to the balance sheet. What was behind that decision?

Yes. It's all working capital, John. Our revenues have gone up tremendously. So there's timing around when we sell product and ultimately collect versus build the inventory and buy the parts. So some of this is timing. Overall, our working capital as a percent of sales is fairly consistent with last year. And our overall leverage is actually down from Q1.

And I guess, I'm going to stick this in. What are your thoughts about debt repayments? How does the new refinancing change that one way or the other?

In the new debt deal, we have a structured amortization pay down of the debt. So that will start in the third quarter. So we'll report that out in the third quarter. It's in -- the details are in the debt deal. And so it's a structured pay down on the term A note.

(Operator Instructions) Our next question comes from Barry Haimes with Sage Asset Management.

Great quarter. 2 questions actually. First one is, could you talk a little bit about your truck business in terms of whether the chip shortage that they're facing is affecting or pushing out any of your deliveries to them? Or is that pretty much on track? That's the first question. I've got one other.

Yes, it does affect us. It's putting a cap on the industry production cycles globally. And so it's actually beneficial a little bit because we haven't had the traditional porpoise up and porpoise down in terms of truck building. So the truck build rate is steady because of that, and we have a steady outlook.

The Intel CEO announced 2 weeks ago that he thought that the chip shortage would last for 2 years. And we read like everyone else on this. We're not in that business. So the market forecasters for our industry are adopting that outlook and are suggesting that it's going to be steady production builds for several years because of that.

So it's impacting us yet.

That helps. And you're right, if it smoothes out the cycle, actually could be a good thing. Second question is, could you talk a little bit more about the recreational and specialty vehicle space. May not be as sexy as the EVs or the warehouse, but it strikes me that, that's a very big potential market.

So could you just talk a little bit about what you're trying to do there, what you're not trying to do there? And how big could that get over the next couple, 3 years?

So there are some big public filers, public reporters here. One of the ones that we read and follow is Polaris and what they say the industry is going to do or not because they're a global powerhouse of many types of vehicles, and they're suggesting that there's a big backlog here and the COVID change in habits has led to many people seeking that type of recreational activity. So that demand is strong.

Specialty vehicles for us also includes military vehicles, buses, transit vans, beer delivery trucks, all that type of ambulances, fire trucks, those type of ancillary vehicles that are not high volume, but they're complicated and good. We've always been in those businesses traditionally in Seating.

And one of the things we started 1.5 years ago, was to bring our full product basket to those industries. And so we've been pursuing the specialty plastic parts as well as the wipers. If they have windshields, mirrors and the electrical system.

So we've been a big -- we've taken our full product basket to go after both of those industries, and they're doing well. And we have some customer connectivity because of our legacy relationships from Seating, and we've expanded the product offerings that we've had there, and it's turned out to be good. You can see it on our new wins chart. It's starting to show up on our donut chart that we're getting bigger in those areas. So it's a focus area for us.

There are no further questions. I will now turn the call over to management for closing remarks.

I want to thank everyone for calling in and supporting the company. And we're very focused here on our strategy realignment, and we're benefiting from this hard-earned success. And we're still dealing with COVID, but we're safe and have a safety live and well at the company. And we look forward to reporting continued progress in our next quarterly results. Thank you for your attention today.

This concludes today's conference call. You may now disconnect.