Commercial Vehicle Group, Inc. (NASDAQ:CVGI) Q3 2023 Earnings Call Transcript
Commercial Vehicle Group, Inc. (NASDAQ:CVGI) Q3 2023 Earnings Call Transcript November 5, 2023
Operator: Good morning, ladies and gentlemen, and welcome to the CVG's Third Quarter 2023 Earnings Conference Call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Andy Cheung, Chief Financial Officer. Please go ahead.
Andy Cheung: Thank you, operator, and welcome, everyone, to our conference call. Joining me on the call today is Bob Griffin, Chairman of the Board and Interim President and CEO of CVG. This morning, we will provide a brief company update as well as commentary regarding our third quarter 2023 results. After which, we will open the call for questions. As a reminder, this conference call is being webcast in the Q3, 2023 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 markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, financial confidence, 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 Bob to provide a company update.
Bob Griffin: Thank you, Andy, and good morning, everyone. I would like to kick-off today's call by thanking and celebrating all of the CVG team members across the company for their ongoing commitment to delivering on our strategic initiatives. Their efforts are clearly evident in the results we've delivered, not only this quarter, but over the last few quarters. These results provide further evidence of the progress we've been made growing and diversifying our revenue streams, optimizing our cost structure and increasing our margins, with the goal of becoming a larger, more profitable company. We remain excited about CVG's future, supported by the strength and depth of our organization and leadership teams. Our team continued to successfully drive strong performance, while delivering on the company's strategic goals, resulting in significantly improved profitability year-over-year.
The year-to-date results, along with our ongoing cost discipline, gives us confidence that 2023 will show strong year-over-year margin improvements, and we believe we will have a record revenue year, subject to the resolution of the UAW strike at one of our customers. Andy and I will cover this in more detail. Our strong balance sheet, our culture of winning new business and our strong leadership team all position us well to achieve our long-term revenue and margin targets. Before turning to the details of the quarter, I want to highlight the election of Melanie Cook to the Board of Directors in September. Melanie brings a wealth of operating experience and expertise across a variety of business areas, including serving most recently as Chief Operating Officer of GE Appliances from 2017 until her retirement in 2021.
Melanie also served on the Board of Directors of a leading appliance manufacturer based in Mexico from 2019 to 2021. She possesses nearly 30 years of global experience, including business unit leadership roles with full P&L responsibility, product life cycle management, digitization, supply chain, sourcing and finance. We're excited to have Melanie join the Board, and CVG will definitely benefit from her skills and perspective. Finally - a brief update on our ongoing CEO search. The Board continues to work with a leading independent search firm to identify the right leader to continue driving our business strategy and culture. This is one of the most important jobs of any board, and ours is a disciplined process involving all seven of our Directors.
We're making progress, meeting with qualified candidates, and we remain within the standard time line for these types of searches. The Board and I will share more with you once the search process concludes, and we will continue working with the management team to drive a seamless transition with no disruption to our business and strategy. Now I'd like to turn your attention to the supplemental earnings presentation, starting on Slide 3. Once again, our team delivered good results in the third quarter, highlighted by net sales of $247 million and adjusted EBITDA of $16.6 million, which is up 16% year-over-year. Our adjusted EBITDA margin of 6.7% continues our solid year-over-year improvement, and we continue to win and integrate new business, optimize costs and improve profitability.
Our continued focus on margins helped drive $0.22 of adjusted earnings per share in the quarter, a substantial improvement over the prior year. We also drove strong free cash flow in the quarter, bringing us to $15 million in free cash flow generated year-to-date. The strong cash flow allowed us, to paydown debt in the quarter, which, along with the strong EBITDA generation, brings our net leverage ratio down to 1.5 times. We continued our strong pace of winning new business with approximately $140 million of wins year-to-date on a fully ramped basis. These wins continue to be focused within our Electrical Systems segment and coincide nicely, with the initial start-up of our two plants in Mexico and Morocco, which are focused on meeting the demand growth in Electrical Systems.
Turning to Slide 4. Consistent with prior quarters, our demand and market outlook remain positive for the balance of this year, subject to the resolution of the UAW strike I mentioned earlier. ACT continues to project a strong build year for Class 8 truck builds with volumes projected up roughly 7% in 2023. These forecasts have been echoed recently by the OEMs. Looking beyond 2023, ACT is forecasting 2024 Class 8 truck builds, to decline approximately 18% in 2024, before rebounding 15% in 2025. Volumes in 2026 are expected to further increase another 19% ahead of the EPA mandate going into effect in 2027. Across the four-year period of 2024 through 2027, ACT is projecting Class 8 truck builds to average 297,000 units, a level that is consistent with strong performance and profitability for CVG.
Furthermore, as new business wins continue, to shift our mix away from the heavy-duty truck market, we expect the cyclicality of this market, to have less of an impact on our future financial results. For medium-duty trucks, forecasts call for a 10% increase in 2023, and we continue to see strong growth, broadly in the connectivity systems, a key driver to our new business wins outlook. As we look to our remaining end markets, the global commercial and automotive vehicle wire harness market is growing around 5% annually. Additionally, we see attractive commercial vehicle aftermarket growth, up 4% per year out through at least 2027 despite a modest slowdown in the back half of 2023. In global earthmoving equipment, after a slight retracement in 2023, we see strong growth ahead in the 4% to 5% range per year going forward.
Turning to Slide 5. New business wins are core to our culture at CVG, and we continue to add additional customers and platforms. As I mentioned, year-to-date, we've added approximately $140 million in new wins with roughly 75% of these wins within our Electrical Systems business. These wins span 50 different customers totaling over 70 awards across multiple different platforms and end markets. Our strategy calls for continued diversification of these new business wins, which is a key driver in transforming the revenue mix, reducing the cyclicality of the business has experienced in the past and will help improve the profitability of CVG in the future. Turning to Slide 6. We added this slide to give you a better perspective of our global electrical systems manufacturing footprint.
Last quarter, we gave you an update on our new electrical systems plants in Mexico and Morocco. We're excited to report that our Aldama facility in Mexico started production in the third quarter and Morocco is up and running in the fourth quarter. These expansions are key to growing our Electrical Systems business globally and are positioned to be cost competitive and provide outstanding service to our customers. In addition, we are concluding our evaluation of an additional Moroccan location, providing for anticipated growth in supply chain optimization. We have a dedicated staff with the expertise in opening - new electrical systems facilities as we position ourselves to go forward. Now turning to Slide 7. We have three key elements to our strategy to transform our business.
First, we are focused on making Electrical Systems our largest business by continuing to win new electrical business across multiple end markets and diversifying our product portfolio. Additionally, we're working to increase the design and engineering content offering in our products. Secondly, we're focused on diversifying our vehicle platforms toward higher growth markets while simultaneously reducing our exposure to the cyclical Class 8 truck market. As an example, we were recently certified to supply products into the aircraft end market. Lastly, as we focus on winning new business, we are selectively targeting new customers globally as evidenced by the number of new customers won this year. This fundamental business transformation is expected to make CVG a larger, stronger and more profitable company in the coming years.
Now turning to Slide 8. As I already mentioned in my opening remarks, our team continued to execute our profitable growth strategy, during the quarter. We continue pacing ahead of targets on new business wins, putting us on track to achieve our goal of $150 million of new business wins in 2023. These wins continue to drive the transformation in our revenue mix toward Electrical Systems, while simultaneously diversifying our customer base and product portfolio. As we've stated many times, Electrical Systems is a key growth area for CVG. On our existing portfolio of businesses, we remain focused on optimizing our footprint and cost structure to improve profitability. We're also heavily focused on reducing working capital, increasing cash flows and paying down debt.
The improved cash flow generation and lower net leverage increase our optionality to fund growth and pursue bolt-on M&A in the future. The continued momentum in our new business wins, alongside our strong underlying base business keeps us firmly on track to deliver long-term improvements in our business. Turning to Slide 9. We believe we have the right strategy in place to continue driving shareholder value creation. CVG remains fully committed to our strategy to optimize our existing businesses, drive organic growth and strategically allocate capital. We are pleased to have one business in the electrification market. We have a strong portfolio of businesses, and we are focused on optimizing our cost structure of each business to improve profitability.
Our new business wins demonstrate our ability to win in diverse markets globally, which helps diversify our customer roster, expand our product lineup and reduce cyclicality. Our business is positioned to generate strong cash flow over the coming years, and we expect to maintain a balanced capital allocation approach to reinvest in our business to drive growth, pay down debt and pursue attractive inorganic growth opportunities, all with the goal of creating additional value for our shareholders. Turning to Slide 10. And before I turn the call back over to Andy, I'll share a few thoughts on the remainder of 2023. Industry forecast for the remainder of the year shows slightly lower North American truck builds - for the fourth quarter versus last year.
Additionally, we're closely monitoring the UAW labor negotiations at one of our OEM truck customers. Overall, we expect 2023 to show solid demand and revenue for the full year, and we continue to win new business at a strong pace, with a win centered on our Electrical Systems segment. Importantly, we continue to expect significant year-over-year margin expansion driven by improved pricing, contribution from new business and benefits from our cost reduction program. We also expect to see a continued strengthening of our balance sheet this year. Our focus on working capital optimization is paying off, helping drive strong free cash flow and debt paydown. We expect to pay down debt further in the fourth quarter, and the lower debt levels, combined with stronger year-over-year EBITDA generation, are expected to drive our leverage lower as we exit 2023, compared to where we started the year.
And with that, I'd like to turn the call back to Andy for a more detailed review of our financial results.
Andy Cheung: Thanks, Bob. If you are following along in the presentation, please turn to Slide 12. Third quarter 2020 revenue was $246.7 million, as compared to $251.4 million in the prior year period. The decrease in revenues is due primarily to higher revenues in the prior year as a result of a significant COVID backlog in Asia Pacific within our Vehicle Solutions business, partially offset by growth in the Electrical Systems business. Foreign currency translation also favorably impacted third quarter 2023 revenues by $2 million or 0.8%. The company reported consolidated operating income of $12.4 million for the third quarter of 2023, compared to income of $9.5 million in the prior year period. The increase was driven by higher gross margins, improved pricing, partially offset by higher SG&A.
The third quarter of 2023, adjusted operating income was $12.5 million, compared to $10.6 million in the prior year. Adjusted EBITDA was $16.6 million for the third quarter, up 16% year-over-year compared to $14.3 million in the prior year. Adjusted EBITDA margins were 6.7% and expansion of 100 basis points, as compared to adjusted EBITDA margins of 5.7% in the third quarter of 2022. Interest expense was $2.6 million as compared to $2.8 million in the third quarter of 2022. The decrease in interest expense was primarily related to lower average debt balances during the respective periods, partially offset by higher interest rates on variable rate debt. Net income for the quarter was $7.3 million or $0.22 per diluted share, as compared to net income of $3.6 million or $0.11 per diluted share in the prior year period.
Moving to the segment results on this slide. In our Vehicle Solutions segment, third quarter revenues decreased 6% to $145.4 million, compared to the year ago quarter due primarily to the previous year benefiting from a significant post-COVID backlog in Asia Pacific. Operating income for the third quarter increased 13% to $10.9 million, compared to operating income of $9.6 million in the prior year period, primarily driven by increased pricing and lower material and freight costs. Our Electrical Systems segment achieved revenues of $53.9 million, an increase of 17%, as compared to the year ago third quarter, resulting from increased sales volume, including the impact of new customers, increased pricing and favorable foreign exchange. Operating income and adjusted operating income were $5.9 million, an increase of 14% compared to the adjusted operating income in the third quarter of 2022, driven by increased sales volume and improved pricing.
Our Aftermarket & Accessories segment revenues decreased 7% to $34.4 million, compared to the year ago quarter, primarily resulting from decreased sales volume. Operating income and adjusted operating income were $4.5 million, a decrease of 17%, compared to adjusted operating income of $5.4 million in the prior year period. The decrease is primarily attributable to the reduced volume offset by increased pricing. Our Industrial Automation segment produced third quarter revenues of $13 million, a decrease of 8%, as compared to $14.1 million in the third quarter of 2022 due to lower demand levels. Adjusted operating income was $0.8 million, an increase, compared to the adjusted operating loss of $0.7 million in the year ago quarter, primarily attributable to the liquidation of certain excess inventory that was previously partially reserved.
Highlighted on Slide 13, our key financial trends and metrics for our business. During the quarter, we were able to sustain the strong year-over-year financial performance as evidenced by improved EBITDA and margin versus the prior year, driven by a strong focus on price realization and cost reduction. As highlighted on the bottom right chart, we continue to paydown debt during the quarter, which combined with our improving profitability served to significantly reduce our net leverage to 1.5 times. We also expect that our net leverage will decline further in 2023 as our strategy continues to deliver strong financial results. We remain committed to our financial priorities for fiscal 2023, which are to drive additional cost savings to generate higher profitability, generate free cash flow and invest in our growing business platforms.
These efforts give us comfort in our 2023 near-term financial targets, as Bob already alluded to. Specifically, we believe we are well on track to deliver record revenues in 2023, along with significant year-over-year margin expansion. That concludes my financial overview. I will now turn the call back over to the operator to open the lineup for questions.
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