Q2 2023 Commercial Vehicle Group Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome.
<unk> second quarter 2023 earnings conference call. During today's presentation, all parties will be in a listen only mode.
During the presentation. The conference will be opened for questions with instructions to follow at that time.
A reminder, this conference is being recorded and now I would like to start.
Over to Mr. Andy Cheng Chief Financial Officer. Please go ahead.
Thank you operator, and welcome everyone to our conference call joining.
Joining me on the call today is Bob <unk>, Chairman of the board and interim President and CEO of CTG.
This morning, we will provide a brief company update as well as complementary complementary regarding our second quarter 2023 results.
To reach who will open the call for questions.
As a reminder, this conference call is being webcast and a supplemental earnings presentation, which we will refer to during this call is available on our website.
Both may contain forward looking statements, including but not limited to expectations for future periods regarding market trends cost saving initiatives and new product initiatives among others.
Actual results may differ from anticipated results because of certain risks and uncertainties.
These risks and uncertainties may include but are not limited to economic conditions in the markets in which <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'll now turn the call over to Bob to provide a company update.
Thank you Andy and good morning, everyone I would like to begin today's call by thanking and celebrating our CPG team members across the company for their commitment to delivering our strategic edge initiatives during the quarter. These.
These efforts have helped grow and diversify our revenue streams optimize our cost structure through process automation and cost reduction and increase our margins to become a bigger more profitable company.
As we enter the next chapter for CPG I know I can speak for myself and the board when I say that we are excited about <unk> future supported by the strength and depth of our organization and leadership teams.
Our team successfully accelerated our commitment to the company's strategic goals, which drove significantly improved financial results year over year we.
We will continue to focus on price and cost and believe our strong revenue and margin performance will continue to show meaningful expansion versus the prior year for the second half of 2023 based on the current market outlook.
Andy and I will cover this in more detail.
We have a solid balance sheet, winning new business is fully embedded in our company's culture, and we have a strong leadership team.
Positioning us well to achieve our longer term 2027 revenue and margin targets.
Before turning to our second quarter results I'd like to provide a brief update on our ongoing CEO search.
The board is following a very thorough vetting and selection process and currently we have retained a leading independent search firm to assist with this work.
We're eager to find the right leader, who will continue to drive our business strategy and culture.
The board and I look forward to sharing more with you.
As the search process evolves and we will continue working with the management team to ensure a seamless transition with no disruption to our accelerating momentum.
Now I'd like to turn your attention to the supplemental earnings presentation, starting on slide three.
Once again, our team delivered strong results in the second quarter highlighted by net sales of $262 million, which is up four 5% year over year.
And adjusted EBITDA of approximately $21 million, which is up 68% year over year.
This results in adjusted EBITA margin of seven 9% again, putting us on track to hit our long term target of 9% as we continue to win new business optimize costs and improve profitability.
Strong revenue and margin performance helped drive 32 sets of adjusted earnings per share in the quarter a substantial improvement over the prior year. We are also pleased with <unk> addition to the Russell 2000 index in June as we look to expand our reach within the investment community.
Turning to slide four as I already alluded to in my opening comments our team continued our profitable growth strategy during the quarter.
We continue to win new business with year to date, New business awards totaling $124 million.
These wins tend to be lumpy throughout the year due to customer demand. However, based on our progress. This year, we remain confident in achieving our goal of $150 million of new business wins in 2023.
These wins continue driving the transformation in our revenue mix towards new customers and platforms.
As you've heard from us many times so electrical systems is a key growth focus area for CPG and throughout this transformation process. We have remained focused on delivering best in class quality and service to our customers. We continue to drive price realization and cost reduction efforts.
<unk> placed us firmly on track to deliver improved profitability this year.
We're also heavily focused on optimizing working capital increasing cash flows and paying down our debt and we expect our debt leverage to decrease further in the coming quarters.
Turning to slide five.
Aligned with our comments from last quarter, our demand and market outlook remain positive for the balance of this year supported by forecasts across our key markets.
And FTR continue to project a strong build year for both class a truck built up between three and 8% in 2023 forecasts that have been echoed recently by the Oems.
For the North American class eight truck market. The second half of 2023 is projected to be softer year over year, namely in Q4 based on current forecast.
As new business wins continue to shift our mix away from the heavy duty truck market. We expect the cyclicality of this market to have less of an impact on our future financial results.
For medium duty trucks forecast call for a 7% increase in 2023, but still see backlog to build ratio is at two times historical rates we.
You also see a long runway for continued growth.
Connectivity systems and electric vehicles are key driver to our new business wins outlook.
We also see attractive commercial vehicle aftermarket growth of 4% per year in the near future.
And after a slight retracement in 2023, we see strong growth for the global earthmoving market as well.
Turning to slide six we continue to drive new business wins and their cumulative contribution increases by year.
This chart shows the increase in expected annual contribution from our new wins in hand.
Year to date, we've added 124 million of new wins with approximately 80% of these wins within our electrical systems business and more specifically tied to electric vehicle production.
We continue to win business globally across both <unk> and EV markets, adding new customers and product types to our mix. We recently achieved several important wins in Europe with both IC and EV auto manufacturers and new wins continue to remain a key component of our culture here at <unk>.
G.
Turning to slide seven as.
As we highlighted last quarter CVD as global capacity expansion program continues to support our electrical systems business in multiple geographic markets led by the three projects highlighted on this slide we.
We are excited to report that we held our Grand opening at our Mexico facility in July and production is now underway.
Our expansion project in Tangier, Morocco, just completed customer audits and will ramp up production. In Q3. These expansion is greatly benefit our effort to further grow our electrical systems business globally.
As highlighted on slide eight our efforts to strategically reposition the business are paying off we have continued to reduce our exposure to class eight trucks grow our revenue share of electrical systems and reduce the weight of large customers in our mix.
Given the acceleration of our strategy and we expect this mix will further transform in our favor as we approach 2027 directly benefiting our profitability and ROIC profile.
At our current win and ramp up rate, we expect electrical systems to increase to approximately 40% of revenue by 2027. This business transformation will make <unk>, a bigger stronger more profitable comedy company in the coming years.
Turning to slide nine.
We believe we have the right strategy in place to continue driving shareholder value creation.
<unk> remains fully committed to our strategy to increase profits increased free cash flow and ultimately expand and invest in our capabilities going forward.
While we are committed to growing our exposure to the secular electrification trend we have a strong portfolio of businesses highlighted by a diverse customer base and decreasing cyclicality. We expect this portfolio to generate strong cash flow over the coming years, and we expect to maintain a balanced capital allocation approach to reinvest in our business to drive grow.
Pay down debt and pursue attractive inorganic growth opportunities with the goal of driving increased shareholder value.
On slide 10, we reiterate our long term revenue and profitability targets. The first half of 2023 has been a very solid and we continue to expect a year of record revenue higher EBITDA and continued free cash flow and debt paydown.
Given this year's expected performance, we have even more confidence in our abilities to achieve our long term targets winning.
Winning new business as part of our culture here at CPG and will be the key driver of hitting our 2027 targets. These new wins continue to diversify our product portfolio and our customer base, while simultaneously improving our growth and profitability.
Progress we have made thus far on wins puts us on pace to hit $1 $5 billion in revenue in 2027, and as you can see our first half EBITDA margin run rate of seven 7% continues to close in on our 9% target for 2027.
We expect strong cash flow over the next few years, which combined with our disciplined approach to working capital will be prioritized to fund both organic growth and additional debt paydown and to potentially fund bolt on M&A.
Turning to slide 11.
Before I turn the call back over to Andy I'll, just provide a few thoughts on the rest of 2023.
Similar to our comments last quarter, we continue to expect 2023 to be our third record revenue year in a row, even when factoring in a modest slowdown in second half truck builds forecast by ACG and FTR.
We expect to continue to show significant expansion year over year with pricing benefits, new business ramps and cost outs.
We're pleased with margins in the first half and as we move to the second half of the year believes that there will be a limited impact on margins as a result of the slightly lower volumes.
The cash flow generator will drive down leverage ratios through further debt pay down in addition to the higher EBITDA levels. We continue to generate strong new business wins focused primarily in electrical systems, which will continue to drive future growth in revenue and profits.
Our cost reduction program remains on target for the year.
We're on track to exit 2023, and a solid financial position with a strong future outlook and balance sheet that provides us the optionality to drive additional growth.
And with that I'd like to turn the call back to Andy for a more detailed review of our financial results.
Thank you Bob and good morning, everyone.
If you are following along in the presentation. Please turn to slide 17.
Second quarter 2023 revenue was 262 upon to median.
As compared to 250 <unk> into <unk>.
Five year period.
The increase in revenues was primarily driven by increased pricing and new electrical system business, which was partially offset by lower volume in the industrial automation segment.
Foreign currency translation also favorably impacted second half second quarter of 2023 revenues by <unk> 7 million or <unk> pumps, 3%.
The company reported consolidated operating income of $15 $9 million for the second quarter of 2023.
Compared to income of $6 2 million in the prior year period.
The increase was driven by higher margins, partially offset by higher SG&A.
The second quarter of 2023, adjusted operating income was $16 7 million.
Adjusted EBITDA was $28 million for.
For the second quarter.
68% year over year compared to Charles town for a median in the prior year.
Adjusted EBITDA margin was seven 9% an expansion of 300 basis points as compared to adjusted EBITA margin of 12, 9% in the second quarter of 2022.
Yes.
Interest expense was $2 $8 million as compared to <unk> 1 million in the second quarter of 2022.
The increase in interest expense was primarily related to higher interest rates on variable rate debt. However, it was partially offset by lower average debt balances during the respective periods.
Net income for the quarter was $10 1 million or.
<unk> <unk> per diluted share as compared to net income of $2 $5 million.
<unk> per diluted share in the prior year period.
Turning to the segment results on the slide you can see the performance of our street vehicles, the latest segments on a combined basis.
The combined revenues increased 14% to $252 million compared to 222 punchy median in the year ago quarter.
Combined adjusted operating income was 20 to $27 7 million, an increase of 186% compared to $9 seven median in the prior year period.
The growth with adjusted operating profits again demonstrates the positive impact that our profitable growth strategy has on our bottom line.
Vehicle solutions segment second quarter revenues increased 7% to $152 7 million compared.
Compared to the year ago quarter.
Primarily due to increased pricing.
Operating income for the second quarter increased 837% to 14 $1 million compared to operating income of $1 five median in the prior year period.
Second quarter 2023, adjusted operating income, which excludes special cost was $14 5 million.
Primarily driven by increased pricing lower fixed cost and overhead reductions.
Electrical systems segment achieved revenues of $63 6 million, an increase of 34% as compared to the <unk> second quarter, resulting from increased sales volume and increased pricing.
Operating income was $7 7 million.
An increase of $1 8 million compared to the second quarter of 2022.
With the increased volume and pricing.
Our aftermarket and accessories segment revenues increased 14, 5% to $36 $8 million.
Compared to the quarter.
Primarily resulting from increased pricing.
Operating income was $5 $5 million, an increase of 388% compared to operating income of $1 $1 million in the prior year period.
The increase was primarily attributable to strong price realization.
Our industrial automation segments produced second quarter revenues of $9 million, a decrease of 68% as compared to $28 $5 million in the second quarter of 2022.
Due to lower demand levels.
Operating loss was $2 $1 million, a decrease compared to the operating income of $1 $3 million in.
In the year ago quarter.
Primarily attributable to volume reduction and an inventory charge of $1 6 million.
Adjusted operating loss was $1 $7 million over the second quarter.
As we have highlighted in the previous calls our restructuring efforts I expect it to improve performance in this segment in the second half of 2023.
Sure.
Highlighted on slide 14, our key financial trends and metrics for our business during the quarter, we were able to sustain the strong financial performance, we delivered last quarter.
Improved EBITDA and margin on a sequential basis.
The sequential improvements were again driven by a strong focus on price realization and cost reduction.
As highlighted on the bottom right chart.
<unk> to pay down debt during the quarter.
And our net leverage is trending down due to improving profitability and EBITDA generation.
We expect that our net differential will decline further in 2023 as our strategy continues to deliver strong financial results.
We remain committed to our financial priorities for fiscal 2023, which are to drive additional cost savings to generate higher profitability generate free cash flow and invest in our growing business platforms.
Efforts combined with improving line of sight into our production schedule gives us comfort in our 2023 near term financial targets as Bob already alluded to.
Specifically, we believe we are well on track to deliver record revenues in 2023.
Longer significant yields like yet margin expansion.
That concludes my financial overview, and I will now turn the call back over to the operator open the line up for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by one on your telephone keypad.
We'll hear a thoughtful grump acknowledging your request questions will be taken in the order received should you wish to cancel your request. Please press the star followed later too.
One moment. Please for your first question.
Yes.
Yes.
Your first question comes from the line of Joe Gomes from Noble capital. Please go ahead.
Good morning, congrats on the quarter.
Hi, Joe Good morning, Thank you very much.
So I just wanted to start on the CEO search thanks for giving us some insight on that and I'm wondering if maybe you can just kind of give us a little more.
On an <unk>.
Timing for this and when you guys are hoping to have this all wrapped up it concluded.
Yes, I think that obviously is a question that is top of mind for many people and.
We have.
There's a process to these searches we have a search committee of the board is comprised of four of our independent directors are working with a leading.
Search firm global search firm.
And like all searches it starts with a pretty large funnel at the top and then it comes down to.
First interviewing a smaller number of people and then winnowing that down too.
And even smaller number and moving through.
Quite consistent process.
I would describe in the middle of that process at this point.
I think we're excited to see people who are interested in becoming the next CEO of CPG.
It's hard to pinpoint the exact timing of any of this.
Okay.
Yes, most of the people we talk to have jobs already and as a result of just doing it as quickly as the board and the company management might prefer is not always possible, but I think it will be timely and.
Ultimately I would go on to say that although I'm, an interim I've been a very active interim on peer every week.
And working every day when I'm not here and I don't think that the company and its management have lost a beat and pursuing a strategy or its short term quarterly operating goals are goals for 2023, while I've been sitting in the chair so.
More on that later I wish I could give you a definite date, but we'll certainly keep you posted and let you know when the searches completed and we're able to introduce our next CEO .
Thank you for that.
Andy.
Got all my numbers correct here I was just looking.
Operating margin percentage looks like yet.
Ah.
A whole lot of stuff here.
Alright.
Actually let me let me, let me skip that one because I think my numbers are.
Our incorrect I apologize for that.
No problem.
On the industrial automation segment.
Yes.
Had a had a difficult.
Let's call past.
12 to 18 months.
You were hoping it had bottomed out last quarter continue to decline modestly but revenues continue to decline.
What do we see as the future of that business.
Yes, Joe Good question, so as we mentioned in the past quarters, we see.
Seeing the bottoming of that business unit's revenues I think this quarter is relatively close to what we have last quarter I can see yields like year is still a fairly large decline as we expected.
What we have done there.
We have restructured the business we move the fixed cost so that we can scale. It at the current revenue level.
We have talked about that in the past at longer term, we expect that the warehouse industry is still growing longer term, maybe in the double digit 15% range.
Now we will have to wait for a field called us to see some meaningful rebound.
Just one one book to highlight this quarter you can see the business had a.
A write off of inventory so it's a better result, but that's.
We will be move that's a way off you can see the business is operating at a breakeven level as we mentioned last quarter. So we are hopeful that we'll see some good news out from a revenue standpoint, it will be a couple of quarters. The team is working really well driving additional pipeline.
Ship is really focusing on generating new business fall for that segment. So I think guys wanting as expected so hopefully tool out to see some good news in the couple of call it around the world.
Great and one more for me if I may.
On the aftermarket parts business, obviously, we had the new launch of the web site, maybe get a little more detail on how that is unfolding how.
Is it meeting expectations, how is that all going for that segment of the business.
Yeah. So so yes, we mentioned that the website has been operational since last quarter, we still are working for.
Continue to drive traffic to the website.
Frank.
The revenues not ramping up as fast as we expected we are still learning how to operate that.
The good news is that we are seeing some really good mix and profitability coming through that channel. We will continue to work to see how we can drive momentum to that channel saw a module.
Great. Thanks, I'll get back in queue. Thanks again.
Thanks Al Thank you.
Thank you and your next question comes from the line of Gen fence Squibb from Sidoti and company. Please go ahead.
Good morning, guys and thanks for taking the questions.
I would like to start I'd like to start with the pricing actions. It's been a important part of the story over the past year and change.
I Wonder if you could just parcel out of the 14% year over year change in vehicle related.
Revenue growth how much of that is attributed to price versus volume and if you could even drop that down the line. Similarly on the gross margin overall, probably then.
Yeah. So John let me give you I'll give you a highlight different segments.
Have a little bit different flavor there.
We look at the vehicle solutions segments.
The increase in revenues is mostly driven by price and if you look at the electrical systems segment.
It's mostly driven by volume as you can see that our expansion of that business are new launches is walking some price to it but the majority of that is in place.
And then your after market business about the majority of definitely supply so as that business different businesses have different <unk>.
Situation overall.
So overall you can see is a combination of both price and volume volume is driven by our electrical systems.
Got it.
And.
You're talking to.
Your presentation about a slowdown in the second half in the truck market relative to the first half and it's kind of been transmitted by other people also I'm curious about two things.
Some aggressive estimates about 2024 being weaker.
2023.
I'm curious, Mike any thoughts about that and B These new program wins.
Do they start to exploit the pointed to kind of at least offsets some if not all of that potential weakness.
Yes, you're absolutely right. So this is exactly what we see.
Second half will be a slight decline from the overall vehicle volume standpoint.
It's a little bit too early for us to talk about 2024 at this point, but as Bob also alluded to you exactly why that side. We are seeing some good news in terms of our mix because of our strategy and the new wins is actually helping us to soften the impact of the cost ex cyclicality. So we actually are very happy.
Seeing the strategy playing out the way that we wanted to and as we mentioned.
Second half will be a small decline in revenues, but the impact on the margin will be rather limited and then I believe we will have better line of sight next quarter, maybe at that time, we can talk a little bit more about 2024.
Fair enough fair enough.
And lastly.
Last quarter I believe when the discussion came about due to cost savings initiatives I think you are.
To capture about $9 million of.
Targeted $30 million for this year I may have missed it.
Much have you been able to realize in the second quarter and you're still on target with that $30 million for this year.
Okay.
Yes, we are.
<unk> on track.
Actually slightly higher than I'll meet ponds for the full year execution of that target.
Can see that our.
Margin expansion and other components of our financial said, you're going to see the execution of the cost reduction is really helping us in terms of deferring our financial results were happy with the progress. We're slightly ahead of schedule. We believe that that will continue the momentum.
Okay, Andy Thanks for taking my questions and Bob and I will get back into queue. Thank you.
Thank you.
Thank you once again should you have a question. Please press star followed by the one on your telephone keypad and your next question comes from the line of Gary <unk> from Barrington Research. Please go ahead.
Hey, good morning, everyone.
Good morning.
Couple of questions.
Okay.
Already the costs were addressed so that was one thing I wanted to ask but if I look at my math. It looks like you did about $39 billion of new business wins in the quarter is that correct.
Yes, that's about right around $40 million.
Okay.
Just some other things here.
Your tax rate was down.
Year over year.
What kind of tax rate are you looking at for the back end of the year.
Yes, so <unk>.
This year, we are expecting around China, 4% tax rate, which is a little bit.
The improvement from last quarter as well as last year.
As we mentioned at the end of last year, we were having some unfavorable mix because of our U S business.
Wasn't making enough money last year, so that situation, China wrong, it's actually helping us. So that's why we are seeing some good news there are longer term I would continue to expect that the rates will be around.
95% plus minus.
So we will have more line of sight as we continue to be able to grow and see the mix of the company, but our overall are we seeing some good news as compared to last year.
Okay and then just.
I am not looking for any exact numbers, but.
It looks like your adjusted EBITDA margin was seven 5% and jumped to seven 9% in Q2.
Are your expectations that on a sequential basis the back half of the year, we will continue to see.
Improvement.
Or is it more of we will see an improvement year over year, but you may be at somewhat of a little bit of a high watermark in Q2 here.
Yes, you are right Gary.
We mentioned yields like yeah, we definitely see a very meaningful margin expansion.
Mentioned second half.
We'll see a little slower revenue so it put some pressure on our margin I believe you mentioned the impact will be limited.
We're happy with the one way first half.
We expect that we'll have limited exposure.
Sure I think today the downturn.
The slowdown on the revenues so.
I think the one thing up in a consistent manner SPL originally expected.
Okay, and then two more quick questions.
You said you were on target to add $150 million of new business as I look at my notes.
In Q1, you said you were targeting at least $100 million of new wins in 2024, and 2025 is that still a good number as you see it.
Yes. So these are good numbers, yet that number we gave.
No.
Think about a quarter or two ago, we said that on an ongoing basis, we expect about $100 million of new win longer tab.
You can see Q1 Q2, the team is really running strong and we are expecting this year to be around 150.
We'll have to see you at these new wins out fairly lumpy as you can see it depends on the customer's launch schedule that model change schedule. So I think we are very happy with the current momentum. So hopefully that will continue to seek good news in the next couple of quarters.
And then just the last one for me and I'll jump off.
For Bob.
In terms of.
What are the qualities you're looking for.
A new CEO as well as do you feel if the background has to be 10 genital to the.
Businesses that you're in right now.
Yes.
So that's a good question.
I think optimally, we'd like to have somebody who has some.
Successful managerial experience.
The current business.
<unk> that we have obviously, the electrical systems business as a growth business for the company that primary is.
Really a focused growth area, so having somebody who has that experience is important.
Equally as important as somebody who has got the gravitas and the cultural instincts that are going to keep this we've got a very good leadership team right now and.
We want somebody who's going to come in and meld with that leadership team and his strategic minded it pushes pushes our strategy together.
Forward, so one of the things that were.
We're not looking to us.
As to as my typically happen is to have a CEO come in and then do a complete strategy review and a potential strategy reset the board feels that the strategy, we have although it might be modified certain small ways is a very solid strategy for the company and.
So one of the attributes of somebody who can identify with the strategy.
<unk>.
And as <unk>.
<unk> to pursue the strong growth that we're currently experiencing.
With this individual has to come from a public markets background or would you look at somebody who has run private companies as well.
I think as you do with all searches.
You try to create has brought to <unk>.
Cross section of people as possible.
So we've been looking at public market people private marketing people.
Someone who has previous CEO experience somebody who has run a large piece of a larger company.
I think.
I think experience attributes are very important to us operational Astral buttes.
We certainly want somebody who's got a manufacturing or operational background at some point in their career.
And who has experienced P&L responsibility. So all these things go into a long laundry list and then.
And then you end up defaulting in many ways to the person aboard six who is going to be able to come on.
The CEO position and drive the strategy forward.
Yes.
I think we'll be able to based on what I've seen so far I think we will be successful in finding somebody like that in a timely fashion.
Okay. Thank you.
Thank you.
We have a follow up question comes from the line of John <unk> from Sidoti and company. Please go ahead.
Sure.
Thanks for taking the follow up I'm, just looking for little point of clarity here, you're talking about sustainability of the margin profile are you.
Talking about it as a starting point the second quarter are you talking about the first half.
As far as the sustainability of the margin into the second half.
I will say a public closer to the first half.
So again.
Second half, we will have margin pressure due to the volume, but we believe that limited based on what we are doing in terms of driving execution. So I would say first half.
Probably be closer to two.
Q2.
Okay and in regards to debt repayments can you just give us an update on your thoughts on how quickly can repay debt.
Well every every caller, we're paying Donald Thats at this point.
We are not necessarily trying to aggressively paying down all the debt.
You can see that steel.
Certainties aligned with future recessions and the truck market.
Make sure that is out we have ample.
<unk> on the head.
We're managing it right now with generating cash flow. Our first priority is use it to fund our growth internally.
And then did use it to pay down debt as we see fit so we're happy with the current liquidity and also the allocation strategy.
Perfect Alright, Thank you very much I appreciate the clarity.
Alright, Thanks John .
Thank you Mr. <unk> there are no further questions at this time. Please proceed.
Thank you operator, and thank everyone for joining today's call I want to emphasize that fueled by a strong focus on our strategy clear prioritization of initiatives depth of our leadership team. We remain encouraged by <unk> business outlook and we continue to believe we are on track to achieve our short term and long term.
<unk> targets I.
I wish everybody a great day.
Thank you, ladies and gentlemen that does conclude our conference for today. Thank you all for participating you may all disconnect.