Q3 2020 Commercial Vehicle Group Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to <unk> third quarter 2020 earnings call.
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Please note that the speakers will be referring to the presentation that is available on the company's website at <unk>.
I think in the conference over to your Speaker today correspondent Chief Financial Officer, and Chief Accounting Officer. Thank you. Please go ahead Sir.
Thank you and welcome to our conference call joining me on the call today is Harold Davis, President CEO and CVG will provide a brief company update as well as commentary regarding our third quarter 2020 financial results after which we'll open up 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, 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 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 will now turn the call over to Harold to provide a company update.
Well.
Thank you, Chris and thank you to everyone for joining the call today.
First I want to introduce Chris Potter, who just spoke he joined CVG, Chief Financial Officer, and Chief Accounting Officer, a few weeks ago.
This brings over 25 years of global leadership across a wide range of industries, including industrial and plastics.
This has great experience in mergers acquisitions financial excellence and capital market financing, which we will leverage to help accelerate our activities to expand the company's portfolio.
In less than our exposure to medium duty and heavy duty combustion engine truck markets. We're excited to welcome him to our team. Thank you Chris.
Now please join me in and turn to page three in our Investor presentation. If you have that before you if not I'll make the same points firstly here.
Q3, 2020 was a good quarter for us and a strong bounce back from Q2, which was slammed by co but.
Most likely you've heard other Ceos of other companies. Thank their employees their families and their suppliers for going through this together I will be no exception.
Want to thank the CVG family for all we've gone through and conquer together this year.
7000, strong and getting stronger and in fact, while some companies were laying off people we were hiring.
We acquired approximately a thousand people in the last few months and we're still hiring.
We're committed to being a great place to work.
Where employees can advance have fun and be part of a diverse and inclusive global team.
Now, let's talk about our specific results in the quarter for a minute you can see that our sales were $188 million.
Which was down versus prior year.
Basically due to the market, which we're going to cover in a minute, but up 48% sequentially.
The commercial vehicle markets recovered sequentially and us with it but they are below 2019 levels.
And the warehouse automation market continues to be a bright spot for us.
Adjusted operating income improved as well it was down a little bit versus prior year.
But our margins increased and our operating income increased sequentially by quite a bit $15.6 million.
Our adjusted EBITDA actually increased in an absolute manner versus prior year to 16.4 million from $38 million less sales.
And we grew our liquidity again, our free cash flow generation was $9 million in the quarter.
And we paid down an additional $20 million of debt and we funded so far 6 million of Capex.
We're on pace to do about $8 million to $10 million for this year. So all in all it was a good quarter for us too.
Turning to page four please.
Our sales mix is turning the corner.
Seeing a couple and.
Analyses that show our mix, our sales mix being very similar over a long period of time.
And in fact, that's true if you look at our sales mix for about a 10 year period, approximately 45% of our sales were tied to truck sales truck markets.
Thats changed this year.
We're now at about 35% and it's lessening.
And the focus areas for us at the sales team and commercial team are the warehouse automation subsystems delay.
Delivery bands class five through seven trucks, especially tied to E. Commerce electric vehicles, and then alternate markets for current assets that we have to make plastic parts and wire harnesses. So it was a good quarter.
And year to date performance for our sales mix and just put a little graphic here of a truck turning the corner.
But we we purchase and that this is going to continue to be part of our future.
Turning to page five please.
You can see that the truck markets really went through the recovery.
It's a classic one.
The class eight market in the upper left corner dropped Q1 to Q2 by 54% and then recovered almost entirely.
With a 100, 109% gain in Q3 and you can see the quarterly outlooks.
Through next year are going to continue to be turning up and to the right. You can see the class eight market is expected to grow over the next couple of years is well below is the class five through seven market, which went through a similar drop in game.
Not quite as steep drop not quite as much again, but still have the recovery.
And and good outlook. So this is a 35% of our market.
It's a big part of our legacy core business.
And it's healthy and growing and there was a substantial improvement during the market. If you follow any other.
Companies in our sector Theyve all been reporting the same thing we all kind of use HCT. This data is from HCT research.
And the Big thing is that E commerce growth in GDP outlooks are driving favorable new truck sales oven.
Eventually electric vehicle substitution is going to incur during these time periods and I'm going to speak about that in a moment as well.
Please turn to page six.
We've spoken with some of you one on one and group sessions about the warehouse automation business, which we came to own when we acquired FSC.
We are in the process of integrating it and exploiting it and making it as big as it can be by leveraging the parks of CVG, and especially our global team and our footprint.
Weve expanded the capacity at four of our plants.
We are now evaluating next steps for additional capacity.
On the people side, we added dedicated resources during the quarter for leadership as well as procurement and.
And we staffed up an additional amount of personnel approximately 100 people.
We added to our product portfolio during Q3 and added some complicated sub assemblies.
Two our catalog and.
And we are evaluating further product line additions now.
We expect this to be over $100 million business next year.
For us.
And accretive business.
And Thats tethered to the warehouse automation market, which isn't and turn tied to the E commerce sales.
The order trends and growth rates are above 20%. So this is a nice bright spot for us and it's one of the reasons why we were so attractive.
FSP cabin.
Kevin and his team there and Kevin who is the founder of that business is still with us as still leading it.
Please turn to page seven.
Another big market that we're focusing on is electric vehicles.
This is a really important market for.
For the industry and for US we have a bundled product offering which is meaningful for these new startups theres a little over 20 startups globally.
That are properly funded we secured two marquee positions.
One in this quarter, one and second quarter.
And there have greater than $200 million of business potential what future start dates.
And we secured three smaller electric vehicle contingent awards also in the quarter and.
And that pending business opportunities at several other electric vehicle companies.
So this is working fine for us we have a natural value added product offerings to make life simpler for these new truck companies and delivery van companies to start up and buy a bundle of products from one place and it really helps us diversify our customer concentrations as well as being tethered to.
Part of this market is growing on a go forward basis, and we are attacking whole vehicle size spectrum from delivery vans, all the way through class eight and special purpose vehicles like garbage trucks like marine terminal vehicles that sort of thing.
So it was a good quarter for us for the future. If you think about warehouse automation and electric vehicles warehouse automation is here now we're shipping in this quarter were shipping in next quarter. It's a it's a current business that will help the quarters that are coming at us electric vehicles as more of a long term wins.
Where you need to tool up with the customer.
Production systems, and they're primarily are going to impact our company in 2022 and beyond.
Page eight.
So the takeaways for the quarter the markets that we're in perform well both the old markets Weve been in our traditional core markets as well as the brand new markets that we're focused on and the truck markets have absolutely recovered in a v. fashion.
Warehouse automation was strong in Q2 and its strong now so I would just say and stayed strong through this.
If anything the pandemic.
Has caused that to strengthen.
The cost reductions that we put in place were aggressive and worked.
If you look at why are our adjusted operating income margins went up a lot of it was due to the big cost Takeouts that we implemented.
We are starting to restore some of those costs now in Q4, and Q1 and as I mentioned, we are in our hiring case.
Staff up to the new businesses, we want as well as our recovered markets.
On the other hand, we are still permanently reducing some of our footprint which was redundant.
Looking backwards and we have several facility restructuring projects that are still underway.
On the growth side very happy with the pipeline.
Filling that we've done as well as the new business, So contingent new business awards that we have.
Gained as a company, we're focused on growth markets and less cyclicality.
We've added people capacity products and customers in the quarter.
And as I mentioned, we pull down another marquee electric vehicle customer I've spoken with some of the one on one and end up quite a few people are desirous to know the names of these startup customers, but we are bound by confidentiality to not speak about them, but.
They're good customers that are well capitalized.
And lastly on Cove it.
So, but it's still a concern for us.
It's a concern at our company, it's a concern in our supply chain and our customers' cases have been rising rapidly all of US saw the news this morning about the vaccine.
Good news that happen, we're hopeful for a vaccine to covance.
In the near future, but it is a concern to us at the moment when dealing with it.
And it it could impact the outlook is if we have an impact.
Since we're seeing right now would be due to coal, but really because the demand for our products is pretty steady.
Okay with that I'd like to turn it back to Chris where he's going to take you through some of the financial certainly Chris.
Thank you Harold if you're following along on the presentation. Please turn to page 10.
Third quarter 2020 revenues were $187.7 million compared to 25.4 in the prior year period. This decrease is 16.7%. This decrease reflects the sharp declines in sales due to the COVID-19 pandemic end market decline and more specifically lower heavy duty truck production in North America.
In the global construction markets. We serve this was partially offset by an increase in industrial and military revenue is primarily attributable to the FSC business.
On a sequential basis revenue increased 47.9% over second quarter 2020 revenue of $126.9 million foreign currency favorably impacted our third quarter 2020 revenues by about a million dollars.
Thanks, Gena Wang was $14.4 million in the third quarter of 2020, a decline of roughly 18% year over year and 10% sequentially driven by our continued focus on cost optimization. The company reported consolidated operating income of $8.9 million for the third quarter funded 20 compared to $11.5 million in the prior year.
Year period, primarily attributable to the decreased sales volume.
Third quarter 2020, adjusted operating income was 12 million a slight decrease compared to 12.4 in the prior year, but up sequentially from adjusted operating loss of $3.6 million in the second quarter of 2020.
The EBITDA of $16.4 million was slightly ahead as Harold mentioned versus prior year on a sequential basis adjusted EBITDA recovered slightly from $1.2 million in the second quarter of 2020.
The percentage of sales adjusted EBITDA increased to 150 basis points compared to the third quarter 2018, and increased 780 basis points sequentially.
As Harold also mentioned the impact of this client sales thus far.
Partially offset by the successful cost reduction initiatives.
Interest and other expense totaled $5.7 million in the third quarter of 2020 compared to $3.8 million in the third quarter of 2019 2020 included a $1.8 million charge for Pik interest related to loan refinancing which occurred in the second quarter of 2020.
Net income for the quarter with $4.2 million or 13 to 13 cents per diluted share compared to net income of $7.2 million in the prior period or 23 cents per diluted share.
If you. Please turn on slide 11, I'll talk a little bit about the electrical segment results.
For the third quarter of 2020, electrical systems revenues were 2100 $21.1 million compared to $131.4 million in the prior year period, the decrease of 7.9%.
Year over year decrease primarily resulted from declines in sales to the equivalent pandemic and market declines and more specifically from lower heavy duty truck production in North America and in the global construction markets, we serve which was partially offset by industrial and military revenue primarily attributable to the FSP business.
Of note warehouse automation subsystems contributed an incremental 26 million in the third quarter on a sequential basis segment revenue increased 63.2% over the second quarter foreign currency translation favorably impacted third quarter electrical.
Electrical segment revenues by about $400000.
The electrical.
Systems segment reported operating income of $12.2 million in the third quarter compared to $12.8 million in the prior year period. The decrease is primarily primarily attributable to lower sales volume.
Third quarter adjusted operating income for the electrical systems segment was 13.4 million when excluding special charges.
Slide 12 details RPL on the global seating segment.
Revenues declined 68.9% or $68.9 million in the third quarter of 2020 compared to $95.7 million in the prior year period, primarily resulted from the sharp declines in sales to the COVID-19, and other market declines and specifically the lower heavy duty production truck production in North America.
On a sequential basis revenues increased 27.8% over the second quarter of 2020 foreign currencies Favourably impacted sales by approximately $600000 in the quarter.
The global seating segment reported an operating income of $4.8 million during the third quarter compared to $7.2 million in the prior year period.
The decrease in operating income was primarily attributable to lower sales volume, partially offset by cost savings from ongoing restructuring initiative.
Third quarter 2020, adjusted operating income was $5.1 million when excluding special charges, an increase of 143% over the second quarter.
Adjusted operating income as a percent of revenue was essentially flat year on year, Despite a $26.8 million decline in revenue.
Turning to slide 13. Please on September 32020, the company had liquidity of 126.2 million, which was made up of 53.6 million of cash and $72.6 million of availability on our revolving credit facility that.
There were no outstanding borrowings under the revolving credit facility as of September Thirtyth 2020, and as Harold mentioned, we paid down $15 million on the BL, an additional 5 million on the term loan during the quarter.
Free cash flow for the quarter was $9 million.
This concludes our prepared remarks, I will now turn it over to the operator for today. Thank you.
Thanks will as a reminder to ask a question. Please press star followed by the number one on your telephone keypad Janney. Your question. Please pass the time.
Your first question comes from Mike Shlisky PSTN, calling in security. Please go ahead. Your line is open.
Good morning, gentlemen, and thank you.
Good morning, Mike Good morning, good morning.
Can we just.
Get a little more color on the newer he be contracts that you just you just onto that with the new.
Contingent contracts are they for a similar sitting systems as you announce that Theres big.
Contract last quarter or other additional or other parts, you're like a wire harnesses or other other products evolve there.
Yep so too.
Two things there the customer.
As a supplier of trucks in Europe, and North America.
Not all I can say.
In terms of our product that we offer you asset similar.
The Monaco, we have is a unity seat is the is the name of the seeding system that we're selling seeding solution.
And it's integrated with plastic parts of pedestal.
Harnesses if needed by the customer.
And day.
Kind of leading edge state of the art form fit and function.
Static package and its easily customize bubble.
By the customers, it's one of the reasons they love it they get to pay for what they want and don't have to pay for anything extra very modular seat.
Feeding system and they can also choose the point in the value spectrum may one on suspension technology.
And it's the main product offering we're selling now it's our nexgen bundled approach Mike.
Got it.
Can you can you also summarize any discussions youre, having with some of the big current truck measures that particular that make people trucks.
Sure. They all want to do battery powered has interest in the future.
You had a.
Any talks with them about how you can help and how much you can contribute to their models and can you give us a sense as to what the opportunity might be there both on an aggregate basis and maybe on a per truck basis compared to a diesel.
Yes so.
The legacy truck makers, who are already in the business generally have existing platforms.
Some of them are using the electric vehicle.
New product offering in there and their product line to upgrade their cabs some of them or not.
So we generally get to compete.
When there's an upgrade or a change or a refresh of the cab environment.
In the case, where they're just going to transition the powertrain.
I'm, a combustion engine to a low emission system.
Some sometimes they don't they don't change much of the cabs. So it varies so our quote new business opportunity.
Is different if they're not going to refresh the cap.
And so we are involved with the electric vehicles at all the traditional players, but whether or not as some additional business opportunity us is specific to what theyre doing Mike.
Would you would you be able to say in aggregate that you've got to see the table at most of the changes that they ever happen and the overall impact your number of trucks.
How CVG materials in them will roughly be the same as it was all attributable diesel mix in the future.
Well.
We have about a 30% market share and we're getting we're getting the same looks we've always had we we have access to all major.
Makers globally.
There's a lot of.
Companies in China, specifically, if you talk about the global market.
That 100% by domestically.
And those are hard accounts to crack into so I would say our looks are the same.
And mirror, our market share, but in terms of.
Are we growing share or trying to maintain share our initiative here with the electric vehicle pursuit is to gain share by basically being a winner and then electric vehicle product offering.
Great Fair enough to answer your question.
Yes, the debt.
Earlier, you don't you don't plan to be disruptive along in this process because that's certainly a good good to hear.
Yeah, I saw you kind of touched on this a bit during your prepared remarks can you just give us more color on some of your efforts to expand beyond the traditional markets.
Some of the hiring some of the new markets that you're pursuing which ones have been successful, so far which ones having et cetera.
Yes, so we have three main ones the.
The biggest being warehouse automation subsystems.
And we got a good foothold there when we bought FSC they had several sub systems they offered.
We expanded that business.
Assigned an executive internally that rich tasia.
He was waiting our elect require harness business to to lead.
Our big expansion of the product line globally and so.
That's the big one that we're doing and it is basically what's causing us to put in place new manufacturing department inside of our existing footprint I will say that our primary emphasis is to leverage our current plant teams and our Clark our current footprint.
We don't foresee at this moment in time doing any greenfield investments just leveraging current games that we have so that we can get overhead absorption from this as well as the risk the ramp ups from having our experienced people oversee them. So.
That's our biggest to the other two for sure.
A little smaller than warehouse automation.
Growth is and wiring harnesses.
We can make wiring harnesses for any kind of vehicle any kind of large equipment.
And our sales leader, there and and rich also.
Leading that business unit.
We have had great success this year.
Getting positions on new.
Non trucks.
So we've had we've had a good set of when some short term some of them longer term.
And our third areas and plastic parts, we have a we have a big portfolio of injection molding and thermal forming machines.
We have traditionally only make parts for trucks.
We have turned our attention to making parts for other industries.
Medical consumer products industrial products, and we had to hire sales leaders through new those markets new to competitors the customers.
To lead the way for US we have the footprint we have the know how we.
We have the capacity, but we didn't really have the commercial tip of the spear if you will so.
Thats been the nature of our main hiring as his commercial leadership.
Got it.
Yes, I'll leave it there I appreciate the answers. Thank you so much alright, thanks, Mike.
Your next question comes from Chris How from Barrington Research. Please go ahead. Your line is open.
Morning, Harold interest.
Hey, Neal on.
Good morning.
First off I wanted to start off on that slide we showed how the mix of the business is changing.
If we consider that slide in the context of.
Your comments surrounding electric the warehouse automation market of $100 million potentially.
How should we think about incremental margin on this 100 million.
The mix of the business continues to change we realigned.
To be less cyclical in nature, how could we see that positively impact the incremental margin as we look further out years.
This business.
Yes, good question.
So.
The main change 2020 year to date versus the 10 year average or even 2019 has definitely warehouse automation.
And it is accretive.
And it is.
It has some cyclicality looking back at Lumpiness I should say it's turned it up.
But with lumps because it comes in big chunks of new warehouses, and new warehouse automation.
But it's it's trending up at around 20% cage year.
And so.
The way to think about that as you know you have $100 million business, that's growing at 20% CAGR.
And it's accretive.
And then also what.
We're trying to expand what we do in that market. We basically the business. We bought have been serving this industry for six years. So there were unknown.
Play or a known supplier to some of the biggest there.
The top is basically a business of the top 100 retailers.
Putting in place ecommerce warehouse distribution system so when.
When we get a PEO, we see those customers names, who cannot treat a say down.
But we're making our name known now.
As a supplier to them.
And we're expanding what we do for them so were mainly making subsystems that form a piece of the puzzle entities automated warehouses.
Didnt think control boxes, like a motor control center or panel.
Has conveyors connected to it and in some cases, but at least half the time elevators.
Elevate and move material around.
So we're trying to the business. We have is growing and we're trying to add more to it with regards to the other two pieces on wiring harnesses.
And plastic parts that is going to be we're trying to go for mix, that's better than GDP, but I would think of it as GDP business right now Chris.
Great great.
As I kind of think about things.
On an aggregate basis you.
Key wins in the electric vehicle space.
We have to grow you warehouse automation space.
How should we assess key takeaways.
As you've been able to win and gain new business and how that has changed.
Your outlook or your approach on new strategic deals.
In the future and as we look at future opportunities.
Given the current.
Mix of products going into these customers.
What sort of product development opportunities.
Are you currently working on or are available.
In the short or long term.
Yes.
So the we've had five electric vehicle victories too.
Two big ones three smaller ones.
And we have.
We're basically pursuing the top 20 globally.
We don't expect to get them, all but we're being as greedy as we can be.
You should expect the profit rates to be similar.
As they have been in that business.
We have the same gentleman leading that business.
The one.
These lead East got command of of both sides of this thing.
And it's a transition for us so were tethering ourselves to the high growth part.
Of the industry and as a company, we are committed to sustainability and having an impact there.
And so.
We are doing that move and it's more of a longer term repo.
Repositioning its not a quickie the constant big deal is for the the truck company to put in place an entire huge complex for truck Assembly.
Which is quite complicated our stuff easy compare to that but we're tying into to those growth story. So.
That when you should think about as a.
Multi year.
Layering in slices as we win these this business as it goes along.
And yes, we are using it as a chance to advance our capabilities.
It is a design change to the unity platform its a modular platform.
And we're putting we're going to put a presentation on our website to to make it more clear, but it's a modular web modular design.
But the manufacturing processes are state of the art.
Robotic welding.
Biotic painting.
At a higher level paint quality system.
Higher level form fit and function.
So that you don't have wrinkles on the covers of the C and all that sort of thing so very bad.
Better aesthetics.
And also a smart process inside our plant.
So that the it's it's there are precedents for this on the automotive industry the smart lines.
And we are putting in a smart manufacturing process, we're doing one in North America.
We're doing one in China.
And so we're going to be set up to supply, Japan, Thailand, China all.
Paul the agent.
Countries from that point, and we're supplying North America.
From Mexico, and so these new these new lines are going to Mark.
We benchmark the best.
And we are going to adapt it into our unity manufacturing process.
So it's going to take a little bit of Capex Chris.
Okay great.
That's all very helpful and just circling back quickly. So your comments above 100 million dollar opportunity based on.
What we just discussed that hundred million, the timing of which are the cadence of which.
May change from quarter to quarter, but.
The 2021 as a whole you feel confident in that 100 million.
We do we do we did release you know what.
FSC was in the quarter.
And it's primarily appeal business Chris.
You have you have a.
Overriding bracket agreements to handle terms and conditions, but the business is tied to.
Retailers.
An E commerce distributors.
The people that deliver to the bok parcels to our doors it depends on them choosing to do an investment to speed up the.
Their processes or expand their capacity so it comes that out and project form.
And.
It from and so we are.
We can see out three to six months in terms of planned projects.
And.
The forecast for projects go out to the end of next year, so to the industry right now looked forward quite a ways because you have to.
Yes, hi, its in case of a new warehouse you have to get land you have to build a building.
A lot of trucks are going to come in and out.
And then you have to design the warehouse system inside of it.
And then.
Divvied out to suppliers like us so the the visibilities, Okay visibilities, Okay, I would say, it's a little better than trucking.
Trucking is.
Up and down quite a bit.
And this one right now is secular growth at a high number.
Yes, thats flowing through now I'll hop back in queue. Thank you for your comments.
Thank you Chris.
As a reminder to ask a question. Please press star followed by the one by one.
We have no further questions until I think the tenant all back over the Hill Davis, President and Chief Executive Officer for closing remarks.
Thank you everyone for joining I spoke a lot today, because Chris has only been here a few days.
In the subsequent meetings were going to have obviously, Chris is going to speak a lot more I want to thank Chris again for joining us.
And I want to thank the employees for the tough year, we went through this year furloughs, and layoffs and salary cuts and benefit cuts.
And then a higher back and then hiring of new people. So it's like many industries. Our company has gone through that and I'm very happy that we've delivered good results here in the quarter and have a good outlook. Thanks for calling in we look forward to speaking with you on our next call with that we'll end. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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