Q2 2021 Commercial Vehicle Group Inc Earnings Call
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Good morning, ladies.
Ladies and gentlemen, and welcome to <unk> second quarter 2021 earnings conference call.
During todays presentation, all parties will be anyway for multi mode.
The presentation day conference will be opened for questions with instructions to follow at that time.
As a reminder, this conference is being recorded.
I would now like to turn the call over to Mr. Chris <unk> Chief Financial Officer. Please go ahead Sir.
Thank you operator, and welcome to our conference call joining me on the call today, as Harold Bevis, President and CEO of CPG.
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 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 <unk> operates fluctuations in the production volumes of vehicles for which <unk> is a supplier financial covenant compliance and liquidity risks associated with conducting business in foreign countries and currencies and other risks as detailed.
Our SEC filings I will 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 Thats posted on our website. If you wish to access it and on today's call. We will provide an overview of our second quarter results followed by an updated for our strategic initiatives designed to.
Grow earnings and expand our end market participation.
We have a goal to increase the stability of our earnings and.
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.
Our entire workforce battled through ongoing supply chain constraints and COVID-19 concerns, but remained 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 a year ago.
This 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 in 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.
<unk> 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 in our base costs 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 cash.
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-19 impacted Q2.2020.
New business wins, and warehouse automation and demand growth in the North American OEM truck market, coupled with our expense base cost control disciplines.
We delivered <unk> 33.
Adjusted.
Earnings per diluted share in the second quarter compared to a loss of <unk> 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 for 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 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 <unk>.
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.
Exit certain low cost and low profit excuse me low profit customers.
We use the word annualized because all of the wins that 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 state of results.
But then we have the business for quite a few years and additionally, we have to build inventory profiles of materials to support the production schedules as they increase.
And we use the word new because this is incremental business and exclusive replacement wins, we aggressively 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.
And last mile delivery van solutions and products that are focus areas for us from a product standpoint.
We now have a live in dynamic new business pipeline that is multibillion dollars in size and global this is a vibrant part of our company now and its 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 have become a more material share of our business over time.
Looking at our end markets in more detail.
North American truck market was 36% of our sales in the first half of 2021 as demand for class a diesel trucks continues to increase despite the supply chain constraints and inflationary pressures that have been in place for much of the year.
ACD research is forecasting truck builds to improve in the second half of this year and for truck builds to be in excess of 300000 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.
We are already on many truck platforms that are in full production and in the market today.
Our house 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 e-commerce 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 are.
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 those supply constraints for is still an issue that we're monitoring closely.
The by an 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 sub sections of these warehouse installations, including complete work centers and are developing new products to expand our business in this area.
Accordingly, our products are sophisticated electromechanical systems that contain electric panels and technology that enable the automated movement of parcels through warehouse they are smart sub system the.
The growth in E. Commerce is driving the need for additional warehouse automation parcel sorting and last mile delivery bands, 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 CVD for further expansion, we've been repurposing, our existing plant capacity and adding focused new capacity.
So far we have repurposed to 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.
Been able to leverage our existing footprint greatly.
Been adding people to both of our segments here as we grow and expand these focus areas.
And emerging and market for CPG is a electric vehicle and 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 imports.
Importantly, we can design prototyping and build a bundle of products for 1 OE 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 the 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, and 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.
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 we will hit peak financial performance in a few years in these areas our new business momentum is putting CVD in an enviable position in this industry.
We are continuing to review our products customers and we'll continue to exit unprofitable <unk> declining business areas.
This is an important point to highlight is our new business wins that we report each quarter or 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 churning out low profit customers.
We're driving our strategic mix shift, which will slowly become evident in our results as we released for the quarter after quarter.
Turning to slide 10.
We are very pleased with the success that we've achieved this year and over the last year and a half, but we're really just beginning our goal is to transform CVD.
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 close our results we believe the value of our business will grow.
Now I'll turn the call back over to Chris who will give a more detailed review for our financial results.
Thank you Harold if youre following along on the presentation. Please turn to slide 12.
Second quarter 2021 revenues were $257.9 million a quarterly sales record for our company revenues increased to 103, 3% compared to $126.9 million from the prior year period. This increase reflects the substantial increase in the warehouse automation business and a significant increase in our global <unk>.
<unk> for me.
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 margin 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 for.
Key drivers of the margin expansion, where volume leverage business mix shifts towards the warehouse automation and 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 highest 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 of 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 for 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 <unk> growth and moderating the historical cyclicality of our business.
Net income for the quarter was $5.1 million or <unk> 16 per diluted share.
Compared to a loss of $12.5 million in the prior year period, a loss of <unk> 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 translations 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 OE.
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.
For 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 718000 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 was due to higher sales volume as a result for the Covid impacted 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 for the key drivers to our business per ICT expectations are for an increase in the North American class a truck builds to 83850 units compared to 74400 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 will meet or exceed our goal of $150 million in full year warehouse automation revenue.
Finally, our gross margin.
We 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 call turn the call over to the operator to open up the line for Q&A. Thank you.
At this time I would like to remind everyone in order to ask a question press star and the number 1 on your telephone keypad.
Well pause for Jesse you may need to control the Q&A roster.
Yes.
And your first question comes from Chris <unk> with Barrington.
Good morning <unk>.
Hey, Chris.
Good morning.
This is a great quarter.
And.
Thank you.
A question lined up for you and for them.
The more important ones.
You talked about warehouse automation.
The growth that Youre seeing there are now 20% of Q2 sales.
Good sequential growth.
If we take that into consideration.
Right.
Line, the net new business awards related to electric vehicle.
55% of the pie, which would be about $71 million.
Thinking in terms of debt.
How do you expect relative size of opportunity between the 2 environments electric vehicle and warehouse automation to play out as that mix of business.
We further diversify away from the more cyclical areas.
Longer term.
Yes, that's that is a.
Primarily a question of timing.
So the warehouse automation wins and also the wins that we get into and recreational vehicles atvs and that sort of thing are short cycle.
And short term shorter term ramp up so that when the amount of wins that show up in our quarterly profile for skewed towards warehouse automation right now because they're faster ramp ups electric vehicle wins.
Skewed out.
A few quarters after that because.
A win in that area means that you are selected to do the prototyping and then the mule vehicle that go into the final test and then the hard tooling and then the production ramp up so there's a delay there.
So for you.
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.
It is growing.
Legacy business also because the day outlook for for trucking and transportation of goods and of course in North America. The Biden by an infrastructure packages heavily skewed towards transportation. So the core market is going to grow and I think that percentage is going to hang in there.
On the new business at or that we're putting in here and the mix shift electric vehicles are going to come on stronger.
Perfect.
The incremental growth that you saw in warehouse automation and the 25% sequential growth.
What comprised that growth as far as.
The number of new wins debt.
Came to fruition in the quarter versus maybe further existing share of wallet wins.
Can you kind of characterize that.
Growth in quarter.
Yes for.
We're doing 2 things we are we are participating in volume growth.
Thats 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 those.
Twofold I don't know, Chris you have a sense of the ratio there yes, Chris.
Bulk of it in the second quarter was was it expansion of existing business. The new wins that we got we'll see more in the third and fourth quarter.
Okay.
1 last question and then I'll hop back in the queue for others, but.
House automation, if we go back to the very initial screening were 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.
Gauged more learning environments.
And gain further understanding of the potential for growth.
Yes, Chris this is Chris.
I think the initial business that we picked up with.
Mildly accretive as we had said on previous calls as Harold mentioned in his.
We're picking up new business, that's a little more complicated and I would say.
Those margins are going to be.
A little bit higher than 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 are a little bit more accretive than the existing wins that we have.
Thanks for taking my question.
Thanks, Chris.
And your next question comes from John <unk> with Sidoti.
Good morning, guys.
Good morning.
Go back to the growth.
Question.
Talk about anticipated.
Certainly in the third quarter when you alluded to.
<unk> segment.
Segment versus other.
While the gross margin percents are well.
A lot of cost pass throughs, right now with inflated materials.
And the cost pass through price negotiations with customers they're very.
Shar to not let us have extra margin on cost pass throughs. So it's it's compressing our percentages.
As we go through that.
And I would say.
Its commodity based John So if you look at inflation, that's happening and how it ties to our type.
Types of materials, we buy steel is a big 1.
Anywhere is steel.
As having that dynamic and then inbound freight so when we have inbound freight our global supply chain the price of containers.
And the price of Oceangoing freight has gone up so it's.
It's tied into our.
Our components, we use in the material.
And.
And to that our supply chain strategy, So I would say.
Probably skewed towards seeding Chris versus electrical in terms of our reporting segments.
I would say, it's going to be focused in that area John.
Great. Thank you helpful.
Moving on this automation business I guess couple of things day.
It sounded like you're increasing capacity in that business can you give us a sense of how much are increasingly buying and how does that change your capex plans for the second half EBITDA breakeven.
Thanks.
Yes, the warehouse automation business.
As Capex light. So it's primarily an assembly business to Chris's point is complicated assembly.
And these experienced assemblers.
But we primarily by the bill of material. We have just a few made parks in that arena.
As assembly or testing and checkout.
And so it's.
Its floor space, it's low level lining fair guns as torque wrenches and for that kind of thing it's not heavy on the capital side. However, it does pull through.
Our working capital profile and Youll see that our working capital went up.
It's around 68%, 68% of sales, which is what we average in 2019.
Kind of a normal level for us.
So it primarily pulls along with it working capital and we have to front end loaded because we have to build in the inventory profile for initiate production.
In the supply chain for circuit boards, and all that kind of thing or we have up to 52 week lead times. So we're putting in.
Decent amount of inventory so that we can continue to grow in the market.
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. Okay. Thank you Chris.
Warehouse automation should be downs potentially in terms of revenue.
New builds.
Some colors with it.
Yes, so so our customers will move into a new build cycle in China as they as they implement new warehouse builds and so.
They have a somewhat seasonal approach to to their build so they'll they'll contract out their business for on an annual basis and kind of a GAAP 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 that should increase in the fourth quarter and then next year as they continue to build into the coming quarters.
As we say that we're still expecting to hit $150 million in revenue.
For the full year.
I guess, 1 last question on the <unk>.
Debt refinancing.
The debt.
Net debt to balance sheet.
What was behind that decision.
Yes, it's all working capital John.
Our revenues have gone up tremendously so theres timing around.
When we sell a product that ultimately collect versus build the inventory and buy the parts. So some of this is timing overall, our working capital as a percentage of sales is.
It is fairly consistent with last year and our overall leverage is actually down from Q1.
And I guess, we will kind of what are your thoughts about debt repayment, maybe financing change that 1 way or the other.
Yeah, So we have and the new debt deal we have a.
Structured amortization paydown of the debt so that will start in the third quarter.
So we will report that out in the third quarter. It's.
And the details are in the debt deal and so it's a structured paydown.
On the on the terminated.
Got it alright, guys. Thanks for taking my question and great quarter.
Thank you John Thank you John.
As a reminder, kiosks question star and the number 1 killer.
Keybanc.
And your next question comes from Barry Haimes with seed assets.
Anthony.
Thanks, So much for taking my question great quarter.
2 questions actually first 1 is.
Could you talk a little bit about your truck business.
In terms of whether the chip shortage that they're facing.
<unk> affecting or pushing out any of your deliveries to them or is that pretty much on track for the first question I've got 1 of them.
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 for constantly we haven't had the traditional porpoise up and <unk> down in terms of.
Truck building so.
The truck the truck build rate.
Is it steady because of that and we have a steady outlook there Intel CEO announced 2 weeks ago that he thought that the chip shortage will 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 is impacting us here.
Okay, great. Thanks for that helps.
You're right if it smoothed out the cycle potentially could be a good thing.
Yes second question is.
Could you talk a little bit more about the recreational and specialty vehicle space.
Sure.
May not be as sexy as the easiest or the warehouse.
Makes me that Thats there.
For a big potential market.
So could you just talk a little bit about what you're trying to do here, which you're not trying to do there and how big could that get over the next couple 3 years. Thanks.
Yes, Okay. So there is some big public filers puzzle for quarters here, 1 of the ones that we read and follow as Polaris and what they say the industry is going to do or not because they are a global powerhouse of many types of vehicles and they are suggesting that that there is 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.
That all that all that type of ambulances fire trucks at those type of ancillary vehicles that are not high volume.
But theyre complicated and good we've always been in those businesses traditionally in seating.
And 1 of the things, we started a year and a half ago.
Most to bring our full product basket.
To those industries and so we've been pursuing the specialty plastic parts.
As well as the wipers that they have windshields mirrors and the electrical system. So we've been.
Big.
We've taken our full product basket to go after both of those industries in there they are doing well.
And we have some customer connectivity because of our legacy relationships from seating and we think standard that product offerings that we've had there and this has turned out to be good you can see it on our new wins chart is starting to show up on our Donut chart that we're getting bigger in those areas. So it's a focus area for us.
Great. Thanks, so much appreciate the color.
Debt Barry.
And there are no further questions I will now turn the call over to management for closing remark.
I want to thank everyone for calling in and supporting the company in.
We're very focused here on our strategy realignment and where we're benefiting from the hard earned success.
And we're still dealing with COVID-19, but were safe and have a safety.
And well at the company.
And we look forward to reporting continued progress at our next quarterly results. Thank you for your attention today.
This concludes today's conference call you may now disconnect.
Okay.
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