Q3 2022 Commercial Vehicle Group Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to <unk> third quarter 2022 earnings Conference call.
During todays presentation, all parties will be in a listen only mode.
Hello, and the presentation. The conference will be opened for questions with instructions will follow at that time as a reminder, this conference is being recorded.
I will now like to turn the call over to Mr. Andy Chang Executive Vice President and Chief Financial Officer. Please go ahead Sir.
Thank you operator, and welcome everyone to our conference call.
We are excited to join the <unk> team and participate in my first earnings call with the company.
Joining me on the call today is Harold.
<unk> and CEO of CPG.
This morning, we will provide a brief company update as well as commentary regarding our third quarter 2022 results after which we will open the call for questions.
As a reminder, this conference call is being webcast and a supplemental earnings presentation is available on our website, which we will refer to during the call.
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 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 in our SEC filings.
I will now turn the call over to Harold to provide a company update.
Andy and a sincere welcome to the team and good morning, everyone.
I will be referring to our earnings presentation, which is found on our website. So if you could locate that document will be helpful. In the dialog this morning.
CPG delivered solid results in the third quarter across key metrics and we continue to build strong momentum in our business transformation.
And as part of this transformation and as a result of the new wins over the past several years CVD is positioning itself as a leading global electric system supplier.
And we remain on track for electrical systems to become our largest product line.
As we have outlined in previous calls this shift will prove to be accretive to our organic growth and profitability.
All while reducing the cyclicality and historical customer concentration of our business.
If you could turn to slide three of the earnings call.
Q3 earnings presentation.
Youll see that our business transformation efforts are gaining traction.
With sales growth of nearly 5% in the quarter driven by our pricing efforts with key customers. This year.
As well as the impact of our new business wins a.
Our year to date business wins are tracking above a $150 million on an annualized basis, including $39 million of new wins in the third quarter.
We're also continuing to push for additional pricing with customers where necessary.
<unk> cover inflation and earn a fair return for our value add free.
Free cash flow generation was strong in the quarter as expected and.
In our efforts to transform our cost structure remain ahead of schedule, which will further improve our competitive positioning.
This includes investments in new low cost facilities in low cost countries as well as next generation manufacturing processes.
Furthermore, with the relief, we're seeing in steel pricing and freight costs, we believe inflation pressures for CVT may have peaked.
We are on track with the first phase of our vertical integration and regionalization plan.
We will eliminate approximately 50% of our ocean freight from China to North America in early 'twenty three by switching from sourcing certain components from China to producing those same components in house in Mexico.
This will further reduce our working capital increase our cash flow.
Sure our cost and improve our improve our service competitiveness.
Turning to slide four you will see the initial evidence of the second half improvements that we discussed during last quarter's call.
We drove sequential improvement across key metrics due to improved pricing continued cost restructuring efforts and the impact of new business wins. We also continue to make progress returning working capital back to pre COVID-19 levels.
<unk> boost our free cash flow generation of $34 million in the quarter supporting the company's strategic initiative to self self fund its growth and pay down our debt. We expect to hit the high end of our debt pay down range for the full year and expect to fully pay off our revolver during the fourth quarter.
In fact, it's almost paid off as of today.
Despite ongoing supply chain pressures, especially in semiconductors, and transitory demand headwinds within our warehouse automation segment, we're on pace to deliver a record sales here.
Moving to slide five.
Our team continues to do a great job.
Winning targeted new business and particularly within the electrical systems segment and year to date, we secured over 30, new customers for our company.
Worth $143 million in annualized revenue when fully ramped up.
And looking to the balance of the fiscal year, our new business pipeline is robust and remain on track to achieve greater than $150 million.
Annualized business wins ending.
Ending the third quarter, our pipeline of new business stood at approximately $5 billion and platform value and spanned electric vehicles earthmoving equipment heavier.
Heavy and medium duty trucks, as well as emerging opportunities in commercial aerospace and defense.
This visibility to potential future business wins and continued momentum for our business transformation efforts.
As highlighted on page six if you could turn to that page.
We are well on our way to making electric systems, our largest product line for <unk> as I've mentioned previously and today and.
And simply layer and the contribution of our new business wins on top of our current revenue base.
The picture of the expected shift in business mix and as a reminder, our electric system segment generates much higher Oi margins in other segments of CPG.
<unk> for a powerful profit growth story in the coming years.
We remain focused on becoming a leader in electrification systems across commercial vehicles passenger vehicles material handling equipment Earth, moving equipment and power sports and we're also making strong initial progress as mentioned entering brand new markets for us like aerospace and defense.
On slide seven.
Lay out an update for our e-commerce aftermarket business.
Spent a little bit of time getting the business ready for launch and getting the product lines ready getting the software platform ready and getting our production and logistics capabilities ready.
We expect to go live in early 'twenty, three with aftermarket seats in North America being the first product to launch we will follow that up with launches and wipers mirrors and road sensors.
We will also design and trial, new aftermarket seats on multiple platforms.
Including our first ever Super comfortable low profile suspension seats for our top selling pickup trucks and four wheel drive vehicles and it will be a first for us.
Looking to 'twenty, four and beyond we expect to expand our platform geographically and continue to broaden our seating products to include delivery vans school buses construction equipment tractors, while also expanding our north American footprint.
Turning to slide eight.
We are reiterating here, our key initiatives to drive value for shareholders.
We have a dual approach to optimizing our core business with proper pricing and aggressive cost reduction and we continue to make substantial progress on both fronts and we will continue to advance our new business endeavors and use our free cash flow to pay down our debt and fund growth.
Turning to slide nine.
<unk> is executing against its long term goals and business transformation plan and we are and we are determined to improve or exit underperforming segments of our business and replace it with new business and strengthen our balance sheet.
We believe we are on track to reduce the cyclicality of our business as we expand and secular growth industries and we are reaffirming our long term targets of delivering $1 9 billion in sales and approximately eight 5% adjusted Oi margins.
Turning to page 10.
While we're proud of the progress, we're making in our year to date performance inflation.
And FX rates continue to mask our results.
With that being said, we expect inflationary pressures to cool and our vertical integration plans to kick in and we expect that CVT will experience less less inflation based profit compression in 'twenty three.
CVD continues to win and electric vehicle markets and those wins are fundamentally transforming our topline and our margin outlook.
And as we look to the fourth quarter to end of 'twenty. Three we're confident that the minimum momentum we have built particularly as it relates to price cost structure base demand vertical innovation and new business wins will further position us for further growth and profitability improvements now.
Now I'd like to turn the call back to Andy for a more detailed review of our financial results Andy.
Thank you Hello, if you are following along in the Investor deck, Please turn to slide 12.
Third quarter 2022 revenues of $251 4 million as compared to $39 6 million from the prior year period to four 9% year over year increase was primarily attributable to higher pricing to offset material cost increases in volume offset.
Volume decreased in our warehouse automation business.
Currency translation also unfavorably impact up to.
2022 revenues by $6 5 million or two 7%.
Gross profit was $26 8 million in the third quarter as compared to $30 1 million in the third quarter 2021.
Gross profit margins decreased to 10, 7% as compared to 12, 6% in the third quarter of 2021, primarily due to global supply chain and market disruptions, which have resulted in increased labor cost raw material inflation and freight cost increases.
As previously stated we expect to improve our gross margins in the coming quarters into renegotiated pricing continue cost restructuring and an improving supply chain environment.
The company reported consolidated operating income of $9 5 million for the third quarter of 2022 compared to 11 4 million in the prior year period.
Primarily due to the aforementioned that lag in price increases combined with $2 $9 million of new business startup costs and <unk> 6 million.
<unk> expenses due to the continued execution of our core business optimization.
On an adjusted basis operating income was $10 6 million compared to $12 2 million in the third quarter of 2021.
Adjusted EBITDA was $14 3 million for the third quarter as compared to $16 9 million in the pioneer.
Adjusted EBITDA margins with five 7% as compared to seven 1% in the third quarter of 2021.
Interest expense was $2 $8 million as compared to $1 6 million in the third quarter of 2021.
The increase in interest expense was primarily related to higher base interest rates on our variable rate debt.
Net income for the quarter was $3 6 million or <unk> 11 per diluted share as compared to net income up $7 5 million or.
<unk> <unk> per diluted share in the prior year period.
Turning to our segment results on slide 13.
Our vehicle solutions segment third quarter revenues increased 36% to $154 million compared.
Compared to $117 9 million in the year ago quarter.
I'm already due to material cost pass through and high volume.
Operating income for the third quarter increased 227% to $9 6 million compared.
Compared to operating income of $2 9 million in the prior year period.
Im not really driven by volume leverage increased pricing and lower healthcare cost.
Quarter of 2022, adjusted operating income was in line with GAAP operating income of $9 6 million.
Our electrical systems segment achieved revenues of $46 1 million, an increase of 15, 1% as compared to $40 1 million in the year ago quarter, resulting from material cost pass through and contributions from the new business wins.
Operating income was $5 2 million, an increase of 5% compared to $4 9 million in the third quarter of 2021.
Due to a decrease in SG&A expenses, partially offset by increase in labor cost raw material inflation and freight cost increases.
Adjusted operating income was the same as GAAP operating income in both periods.
Our after market and accessories segment revenues increased 2024, 1% to $37 1 million compared to $29 9 million in the year ago quarter.
<unk>, resulting from increased volume and pricing to offset material cost increases.
Operating income was $5 $4 million compared to operating income of $2 3 million in the prior year period.
The increase is primarily attributable to the increase in pricing to offset higher material and labor costs.
Adjusted operating income was $5 4 million.
An increase of 130% compared to the year ago third quarter.
Our warehouse automation segment produced third quarter revenues of $14 1 million.
A decrease as compared to $51 7 million.
In the third quarter of 2021 due to lower demand levels.
Operating loss was $1 million decreased compared to the operating income of $8 million in the year ago quarter.
Primarily attributable to the P 50 mentioned lower volumes at.
Adjusted operating loss was <unk> 7 million compared to income of $81 million in the prior year period.
This concludes my comments on Dakota, and I would like to add that I'm really excited to have joined the <unk> team and look forward to driving the transformation of the business.
Now I will turn the call back over to Harold for some additional remarks. Thank you Andy.
Turning to page 14 in your deck.
Looking ahead looking forward.
We see stable order demand in our vehicle markets.
However, we do expect order demand to remain weak in the warehouse automation segment in the near future.
We have additional pricing actions underway in our vehicle markets and we expect to continue to generate stable positive free cash flow.
We're having continued wins intellectual systems as this vehicle architecture naturally fits.
<unk> core strengths.
In order to support our growth in these markets, we're implementing new low cost plants in both Mexico and Northern Africa.
And our operations team is kicking in with aggressive vertical integration.
To lower our cost improve our service and generate further free cash flow.
Our entire team here at CVD is committed to driving significant continued transformation.
This concludes our prepared remarks, and I'll now turn the call back over to the operator Sergio to open the lineup for questions. Thank you.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question Bruce as Tom will only thing number one on your search terms.
Luciano <unk> your request and your questions, we will be bold in there would be a received should you wish to replay from <unk> resistance.
At this time well over that number.
Are you seeing a speaker phone.
Handset before bridging any Q1.
One moment please for users.
First question comes from your promise from <unk> capital. Please go ahead.
Good morning, Thanks for taking the questions.
You bet good morning, Bonnie.
Morning.
So last quarter, you talked about you still needed about 20% of the contracts that needed to be repriced.
I was wondering where that stands today and given the recent and ongoing increases in inflation here.
How does that play on some of the contracts that you had already replaced or are you still looking at getting acceptable margins on that business.
Yeah. So.
Two questions. There. So we have roughly 20% of our revenue that's trapped.
<unk>.
Money, losing contracts were inside of a year on them now and we have open negotiations.
With regards to repricing them and new terms and conditions.
That negative.
Band.
Business is still in our reported results in the quarter.
With regards to.
The 80% that we can act on yes, we're still continuing to.
To actively.
Negotiate pricing and inflation recovery as we go along and we have.
A set of price increase actions underway right now.
For the fourth quarter, and we have another set underway for Q1.
It's an ongoing thing for us Joe and Im sure our peers and fellow reporters are doing the same thing where labor intensive and we're having.
Labor inflation in energy inflation, and so we have active.
Pricing and negotiations as we go along here, we expect that to continue through 'twenty three.
Okay. Thank you for that.
You talked about improving or exiting.
Underperforming legacy businesses I was wondering if you might be missing.
Just a little bit more color of what path.
Segments of the business are you identify there or is that really need to be improved or or.
Potentially exited.
Yes, so we set financial goals.
That we want to achieve in order to have.
Proper financial returns, so we can reinvest into the business and be competitive with.
We've had two.
Two losses, if you will where we've had where we have not.
We re secured the business on a go forward basis, one was an electrical systems along with the seating. So it's not necessarily a product category or a sector. It's really it's really customer specific where we have underperforming.
<unk> rates.
And we're just going in and either we are trying to get a deal that we can both sides can mutually agree to.
Which in most cases means we're trying to increase our price.
And we have had only two losses.
That are noteworthy in the last year and a half.
Okay and one more for me if I may so you talked about the 22.
<unk> forecast for class eight and $5 seven and classes five to seven production.
The idea of early.
What youre seeing here for 2023 in that market.
Yes so.
The reports came out this morning on the orders and.
<unk>.
The orders are <unk>.
Very high.
The current backlogs for vehicles are approaching a year and a half now.
The entire year of 2003 appears to be sold out from the order books right now.
ACD is the third party that we usually quote.
They are predicting.
A similar year to this year.
<unk>.
And there's various opinions on that but right now with the order books have been opened for 'twenty three by all the main Oems globally. There has been a big inrush of initial orders in the orders.
Increased significantly and they are a very high rate.
That exceed the ability the industry's ability to produce.
On a practical basis, the supply chain issues that Roe.
Customers have had are continuing and they seem to all be reporting that semiconductors are becoming less of a problem. However, they continue to have problems axles brakes and other componentry. So.
It's still a supply chain constrained outlook for 'twenty three in orders.
Exceed the abilities and excrete the industry's ability to produce so we believe that next year right now looks very similar to this year end.
And our supply chain based.
Great. Thank you for taking the questions much appreciated.
Thank you I appreciate it.
Thank you Jim.
Your next question comes from John <unk> from Sidoti and company. Please go ahead.
Good morning, Harold welcome aboard Andy.
Good morning, John .
I'd like to start with the warehouse automation business.
How does the updated thoughts there.
When you reach the trough in that business and what kind of <unk>.
Cover you're thinking about.
Sam you talked about maybe mid next year is that still on target or has that moved.
Right.
Yes.
So you can tell from our numbers.
That segment is our disappointment in our vehicle businesses are doing what we wanted them to do and behaving we have good demand.
But warehouse automation really went through a cliff event the big public reporter here is Amazon.
And we're not allowed to really say our customer due to NDA, but they publicly report second.
Publicly said.
And they do consume half of the industries.
Supply.
And so.
If you look at what's happened with e-commerce, and how it inflect it up during COVID-19.
And now the shippers are reporting negative year over year comps.
Put a hold on their infrastructures.
It's not forever they can't hold on forever.
But definitely there is less spending in the physical infrastructures for E Commerce shipping Fedex EPS Walmart the top 50.
E Commerce shippers and retailers and so.
It is in a pause right now.
We're suffering from it we've pulled in our horns, John we've closed one of our plants.
One of our two plants one in banana.
Iowa and the costs our costs are still in Q3.
But Q4 is going to look different in that business, because we've adjusted our fixed cost structure and we have aggressively reduced our staff. So.
US as a supplier into the industry, we've right sized our cost structure around our current run rate.
Okay fair enough.
You mentioned that you are in process I believe building Greenfield two new facilities manufacturing facilities, one in Africa and one in Mexico.
Yes.
Could you talk a little bit about the capex associated with that and when do you expect that to be completed.
Yes so.
The new wins that we've won we need additional capacity that we don't have in North America and in Europe .
The plant in Central Mexico, We Havent announced location, yet, but it's in central Mexico there'll be now its probably within about four weeks, we're still kind of negotiating for the best deals we can get.
And that one will be coming online in Q3.
And we will begin producing products probably in Q4.
Q4, the one in Northern Africa.
A little closer in.
We need to begin producing in Q3.
And so the plant will be coming online in Q2 with regards to capital.
Our electrical systems business is Capex light.
And but we will the spending will be inside of our corporate.
Guidance of 20% to $25 million.
Of capital that will be similar number for next year and we're running to the low end of that number this year, but if.
It is just a few million dollars John it's not a lot.
Not.
Expensive to expand in that business, it's mainly.
Setting up a good low cost hourly workforce.
So we already have the equipment.
For one of the plants and we have the equipment for the other one about ready to order it.
Okay got it.
And just for clarity why the two step process.
Price increases in <unk> and <unk> again.
Yes, so actually this year, we had four separate price increases.
And then it gets down to our terms and conditions like.
The two that are going to start on January one.
The deals we cut with them or that it's really when can you.
Impact new pose and so.
This proud gives you pose that go out of period of time, so that they can secure.
Supply for themselves.
And in a couple instances we acknowledged.
At $12 31.
And so when we when we renegotiate our prices.
They come into effect on the next set of <unk> that we accept.
So.
That's why that's why there's a little bit of a timing lag because we honor.
Their desire.
As a partnership and so they need they need certainty over supply and so when they put in the Adi portals are set appeals and we acknowledged them then we have to honor the price on them.
And so it kind of just layers and John .
Okay.
And then last question I'll get back into queue.
Your aftermarket business took a nice step up in the third quarter whats driving that.
Yes, so two things well I guess the main one is getting our production in order.
And both wipers and aftermarket seats in North America.
We had a lot of part shortages in those businesses.
From Asia, and we've worked our way through them and we vertically integrated in both of those areas and in the case of feeding aftermarket shading. We've been we've built an entire new plant.
And Piedmont, Alabama, and the plants online now.
In the case of wipers, we renovated our plant, which is in Indiana and did not need to build an additional plant.
And so we worked through our backlog mainly.
Mainly us working through our backlog and we're still working through our backlog John we're not caught up yet on that one and it's one reason why we havent launched.
The e-commerce.
Second step on this because we have to build an inventory profile.
And fundamentally we're going to go from make to order to ship from stock and we've traditionally lost all of that business.
Because we haven't had any available inventory and that's going to be a big move for us and we're coupling it with an electronic storefront.
So the website is done.
Have our URL named it's called aftermarket truck parks Dot com.
The website is ready with shopify in the background, but we the cupboards are bare.
Because we still have our backlog we're working through so we expect to see a similar kind of flow in the fourth quarter in that business, John and then pick up next year.
When we have a.
More proactive inventory position.
And I guess, we should allow for higher inventory on a go forward basis.
The working capital a little bit.
Yes, and so we're going to have a bigger inventory profile in that business.
On an ongoing basis and hopefully it's a very good return for us. It's a very good return on investment invested capital business for us so.
It will be accretive to return on invested capital, but it will have more inventory yes.
Thanks, Ron Thanks for taking my questions.
Thank you John .
Thank you.
Next question comes from Steve Emerson Alright, Thank you.
Sir Please go ahead.
Okay.
I was just thinking to what extent you are able to reposition.
Warehouse automation to all the re shoring.
Currys auto nation and sub.
Prime contractors like crop well it strikes me that the very similar systems and equipment.
Correct.
Weak.
Rockwell.
As a supplier to us so we by automation.
Parts and pieces and Meg sub systems.
But your first point is correct and if so what are we trying to do in warehouse automation, we're trying to reboot it.
AD customers.
And expand our service offering we've fundamentally offer a service, which is assembling automation components too.
Conveyance systems automated storage and retrieval systems.
Put away systems take off and put away systems.
And kind of low end robotics and these automated facilities.
We hired a new business leader from the industry and we are.
Modifying our system solution and we're repurposing.
Our inventory and two.
Systems that we can sell to other people.
Rockwell.
They would be a consumer of this internally for their own manufacturing, but primarily they're pushing.
They would like us to get on with what we're doing because we procure their components and put them into implementations.
When do you think it will be putting out bids for copper.
Components and suppliers.
Automated factories.
So we have a law.
Lot of RF queues out we're bidding on.
One of the largest retailer in the world you can guess who that is.
We're bidding on their warehouses and their sub systems and we have an active pipeline in that business that pipeline is inclusive to the $5 billion pipeline that we referred to that includes all of our pipeline activities for warehouse automation, but the industry.
As in a pause and so.
With Amazon, taking a time out.
And Fedex, taking a time out and they publicly reported it.
You can surmise that the whole industry is in a wait and see mode here.
What the steady state need is for their distribution networks.
And so we're bidding but theres not a lot of active building right now Steve its really.
She is down right now.
I'm referring to.
New.
Segment that use here kind of skill sets, which is.
All of them.
<unk> that are re shoring from the Oregon.
Correct.
Okay.
We have.
We're mainly focused on distribution and parcel handling and our know how.
As in warehousing and logistics versus.
Like a.
Factory.
We're not we don't have a skill set there.
Okay. Thank you.
Thank you.
Hey, Jim.
Next question comes from Sean <unk>.
From <unk> capital. Please go ahead.
Good morning.
Let me jump on.
Following up on that question what product the new plant.
Chicago and Northern Africa.
Our product line.
Thank.
Thank you and then.
Following on that.
To the extent that they're replacing.
Hi.
Third party.
China.
What percent.
Those products.
Bye.
Okay.
Sure.
Okay.
Okay. So the answer is different for each of those.
Those plants so in Mexico.
We're doing two things one is we're building a brand new plant to make electrical harnesses.
And central Mexico to make high voltage electrical systems for electric vehicles.
And we ran out of capacity with the amount of business that we won and it's a big plant. It will it will grow to be a big plant like a 1000 person plan and it will be focused in on making electric wiring harnesses.
For electric vehicles.
For North America.
We have another plant in <unk>.
Mexico, which I can say that name.
And that is a place where we're vertically integrating and re shoring.
Metal fabrications and stampings that we've traditionally bought from time from vendors and.
And we bought equipment over the last year.
Robotic welding equipment, and finishing equipment and we've installed it in our in our plant in Mexico and sell to our existing plant in Mexico.
To make.
Opponents components for our seating business.
And the amount of components in phase one.
We attacked our what we did is we attack our escalating ocean freight.
And we attacked 50% of our ocean freight spend.
And.
The Ocean trade spend.
Is coincident with the weight of the parts. So we attack 50% of our weight.
Not 50% of our buy though it's not 50% of our spend but it is 50% of our weight.
And so our phase one which is underway right now will kick in in Q1.
Well obviously.
M&A, 50% of our ocean freight.
Phase two of that is also next year and we are going to be bringing in house and onshoring, our new unity seat.
Components and we currently source those from China also.
And bring them into Mexico, we also bring them into Europe .
But we are going to be putting in place.
Production capacity again in that case, it will be in our U S plant.
We're targeting Vanore, Tennessee to make our unity seat products instead of sourcing them and that will be about another 20% of the weight.
So we will have brought.
We will have eliminated a big portion of our ocean freight which has been in.
And our cost model and in our business model for 14 years. So we will have redesigned that portion of our supply chain.
And just to add multiple new plans in Africa is also going to be our electrical business.
Business.
I mean more of the new businesses, we are adding capacity to support our European based customers. Thank you Annie.
Is that helpful. Thank you.
Thank you.
Thank you.
Ladies and gentlemen, as a reminder, so you have a question. Please press star followed by the number one.
There are no further questions at this time you May proceed.
Thank you Sergio well, thank you for listening in and asking questions and see that our vehicle businesses are doing well and improving and have a good outlook in terms of demand.
Our warehouse automation business is suffering right now as the industry is in a wait and see mode.
And we've made a decision to rightsize our cost structure down.
But we are bidding aggressively to add.
<unk>, new customer positions, when the business and the industry rebounds.
Thank you for calling in this quarter and we look forward to speaking with you on our next quarter and with that Sergio will end the call for today.
Thank you ladies and gentlemen, this concludes your conference over to Lee we thank you for participating.
Disconnect your lines.