Commercial Vehicle Group, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Commercial Vehicle Group Q2 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star, then 1 on your telephone. If you require any further assistance, please press star, then 0. I would now like to hand the conference over to your speaker today. Mr. Cooke Feiler, Vice President, Corporate Development and Investor Relations. Please go ahead, sir.

Thank you, Amy, and welcome to our conference call. Joining me on the call today are Harold Beebus, President and Chief Executive Officer of Commercial Vehicle Group, and Ed Carney, Interim Chief Financial Officer and Treasurer. They will provide a brief company update as well as commentary regarding our second quarter 2020 financial results. We will then open up the call for questions. This conference call is being webcast and a supplemental earnings presentation is available on our website. Both may contain forward-looking statements including, but not limited to, expectations for future periods regarding market trends, cost-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 CBG operates fluctuations in the production volumes of vehicles for which CBG 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 Beavis to provide a company update.

Thank you, Kirk, and thank you to everyone for joining the call today. Ed and I are going to refer to the earnings deck that's available on our website as we speak This morning and bring our results to life a little bit. And I'm referring right now some of my comments to page three in that deck. I'm proud that our global team responded appropriately during this downturn and delivered positive EBITDA of a little over a million dollars and generated cash of a little over $9 million despite a 48% decline in revenue. We were able to offset some of that margin hit with a very aggressive and comprehensive set of cost-outs, which I'm going to elaborate on in a couple pages, of which $8 million showed up in the quarter and a larger amount on a full-year annualized basis. It was a combination of permanent and short-term actions and included corporate overhead reductions, plant overhead reductions, footprint consolidation, as well as additional actions on discretionary spending. We also offset some multimillion-dollar impacts that are in that $1 million of EBITDA and $9 million of cash. As you would expect in an abrupt downturn like this, we did have overhead absorption issues in the plants. We had excess inventory calculations that we needed to absorb. We had COVID-related absences. We had temporary closures of our facilities. We reconfigured our offices and our 25 plants. to add barriers and create social distancing for our approximately 7,000 employees. It's a lot of work. We're happy to say that our core markets are now in recovery mode. At the bottom of page three is the ACT research report and the outlook for our core market. About 35% of our revenue is North America truck. That's always been the heartbeat of our company. And when that market took a dive in the second quarter, it affected us. and we're happy that that abnormal and unnatural level of truck building is behind us and we have quite significant increases underway as we speak. We're feeling them. Our internal results are consistent with these outlooks and the heavy duty truck build market is expected to increase 50% in the quarter that we're in and medium duty 30%. So turning to page four, I'd like to elaborate a little bit on the comprehensive actions that we took. We have several actions in process and we completed some actions in the quarter. We did use the opportunity of light demand to initiate an aggressive consolidation and repurposing of 13 of our facilities. We have 25 facilities, so it was roughly half the facilities that we went after here to optimize and reposition. We were able to achieve a $14 million inventory reduction in the quarter as well, primarily by attacking procurement activities as our consumption and production rates were much lighter than we expected. We right-sized our staff and SG&A as well as the plants, and we right-sized our material order quantities to be consistent with the amount of production that we had. And we reset our discretionary spending decisions in travel, marketing, and other discretionary areas. We have improvements that are still underway that are not in our reported numbers here. We have consolidations that are underway, and we have some additional headcount actions that are forthcoming. So we have a full complement of actions that are very aggressive. Third point I want to make is that we did not rate our future. We kept going with the growth initiatives that we have underway, and we had some strong wins in the quarter. They're private. We can't say who the customers are. We're covered by NDA, but they're significant. And we had over $100 million of new business that's in its final stages now, one with an electric vehicle customer, one with a warehouse automation customer. And I'm going to touch on both of them in a couple slides. We are aggressively adding people and capacity to support these growth initiatives and add to our heritage of commercial vehicle part making. And on page four, just to tick you quick on the actions that are in process, We're consolidating and repurposing 12 facilities, right-sizing our salary staff and discretionary spending. We're hiring new leaders with knowledge of new markets. We're redesigning our supply chains to be more lean, and we have a strict management of working capital underway that's continuing. Turning to page five, another positive point is that there's a multi-year recovery expected in commercial vehicle production. This is, again, as an ACT research report that we're referring to, and our customer dialogues are consistent with these outlooks. There's an expectation to recover back to pre-COVID levels, and we will be recovering back to those levels with a lower cost structure. We've permanently lowered the break-even point of this company in our cost structure, and we do expect to have better margins as this unfolds. Additionally, we do expect to have additional revenue from the new business Wednesday. Beginning in the fourth quarter of this year. Turning to page six, we are aggressively trying to change in certain areas. We're very proud of our part-making heritage for commercial vehicles, and we continue to remain a leader in those areas, and they're core to what we do, but we are trying to add significantly to the revenue profile and our profit rates going forward. Three main areas are really leadership, innovation, and new markets. We are supplementing the strong team that we have here with new people that have knowledge of alternate markets. And we're kick-starting an innovation program to be much more aggressive with new product introduction across all our divisions. And we are explicitly entering new markets, again, by repurposing a portion of our manufacturing capacity and adding leaders who understand these markets and have them be the tip of the spear for us as we enter in and choose correctly and target correctly. Page 7, we are pivoting the company towards these new markets, tilting towards these new markets, and there's three parts to it. There's optimizing the financial performance of the business that we have. Number two is adding the people and growing outside of our traditional markets. And number three is building on the strong momentum that we already have. The FSE acquisition was a really good one. We've got a great team there, and we've got a lot of new customers that add to our customer roster and completely new product sets. Assembly of high-speed automation equipment for warehouses as well as military equipment. And there's a little graphic on the bottom of page 7 of what we're trying to do. We want to maintain our business and our shares that we have in our traditional markets and grow disproportionately in the new targeted markets that we have. Page 8, we do have a multi-period reposition of our footprint underway. and this is just a graphic to show you what we're doing. We're implementing a set of actions that's involving many, many people. I won't take you through the different plant agendas, but we are repositioning factories in three countries, China, Mexico and the United States. We're adding dedicated floor space to make new products. We're consolidating production to lower our cost points in mature product areas. and we're consolidating where we've made a determination that we have excess cost and excess space. We expect to generate an ability to support another $100 to $150 million of new business in our targeted markets, mix dependent. That's a big range because the mix and the size of these products is quite different and unique. Additionally, we are targeting to lower our cost by $4 to $6 million as we go through this repositioning. On page 9, I want to talk a minute about the fast-growing e-commerce and last-mile delivery market. We had our first big win in this market with our Unity seat. You see a little picture here where we have a global platformer rolling out across our seat factories. And we're absolutely trying to penetrate the medium-duty commercial vehicle market. As you know, trucks are delineated by the tonnage they can carry. And the medium-duty product lines and medium-duty trucking is growing nicely around the world. and it's driven in many cases by e-commerce and last mile delivery. They're also coupled with a trend away from combustion engines to electric vehicle propulsion. And in this quarter, we had a big seeding win with a company that's focused on using electric vehicles for last mile delivery. Once again, we're not at liberty to say who that company is through the privacy agreements that we've agreed to. But it's someone that you would be happy that is entered into our customer roster. This is a growing market. The e-commerce market, as we all know, is growing rapidly, especially boosted a little bit during the coronavirus as people have stayed at home and huddled at home and ordered more online than was expected even. Page 10, just a little bit more about our growing warehouse automation business. This was a key reason why we went out looking for FSE, First Horse Electronics. and we're leveraging their know-how and relationships. We've brought into play three other factories within Commercial Vehicle Group to make their products. So in the quarter just ended, we expanded from one facility to four and it gave us a bigger footprint to accommodate both growth with the customers they had as well as new customers. And this market is absolutely central to what we're trying to be and add to our commercial vehicle heritage. This business is growing nicely. It's expected to grow to $27 billion, and we are a central player in this business right now. Page 11, we are absolutely navigating near-term market disruption. This has been very disruptive, what's happened in our traditional markets. Our customers abruptly closed down their factories. Given that we are a JIT supplier to them, we abruptly shut down as well. Then they restarted. We previously put out an 8K that we had to lay off 5,250 people when this happened. We've now rehired over 4,000 of them. So it was an abrupt layoff, furloughs, closures, restart, rehire that we've been through. It's behind us now. It happened during the quarter. It happened in April mainly. But right now, we're experiencing the ACT forecast that we've seen. We're experiencing that kind of a growth back as well. We continue to invest right through here with long-term investments in hiring people. You can see a graphic, medical housings to add to our plastic parts business, warehousing equipment, and designing of new products. These are the pictures here. Page 12. Just to recap it a little bit on the four focus areas that we have underway to pivot and change the company's profile. Number one is to optimize the core business. That's cost, that's working capital, that's on-time delivery, that's quality. We also have a really special aftermarket business that we're differentially focused on now. to grow, and then we have a new look that we're taking at certain business that's never made much money for us and making new decisions. I've spoken about the electric vehicle market a little bit. Each of our businesses is trying to win in this market, electrical vehicle market. The warehouse automation business led by the FSA team and now supplemented by other commercial vehicle group team is leading to a major charge into that market and we have excellent customer references and the e-commerce business is absolutely exploding and the delivery business through internet ordering is unbelievably growing. So we're very happy to have a footprint in there. And then new markets all together. So we have great equipment, great people that know what they're doing and we're repurposing a big portion of our capabilities to be able to grow in these new markets with new customers and new products. So page 13, we're embracing new, we're embracing who we are, and really today our heartbeat is all about commercial vehicles. We're proud of that. We're adding new approaches, new direction, and new decisions to add to it in warehousing, electric vehicles, and new markets on top of it. So all in all, the quarter was a tough one, really tough one, really hard on a lot of our employees. The temporary actions we had to take, the layoffs we had to do, the shutdowns we had to go through, the people that got sick with coronavirus themselves. It was a tough quarter but we're through it. Coronavirus is still here. We're set up to deal with it in our factories and in our offices and we're working through it and attacking these new areas. So with that, I'd like to turn it over to Ed Carney. Ed joined during the quarter. I was thankful that Ed joined. He's our interim chief financial officer. We put out an announcement on that. Been working hand-in-hand going through this quarter. And Ed, if you could take it from here, please. Thank you, Harold.