Commercial Vehicle Group, Inc.

Good morning, ladies and gentlemen, and welcome to CVG's fourth quarter and full year 2020 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Chris Bonner, Chief Financial Officer. Please go ahead, sir.

Thank you and welcome to our call. Joining me today is Harold Beavis, President and Chief Executive Officer of CBG. As a reminder, a telephonic replay of this call will be available on the investor section of our website until March 24th, 2021. Additionally, a slide deck to complement today's discussion is also available on our website. Both may contain forward-looking statements, including but not limited to expectations for future periods, regarding market trends, cost savings initiatives, new product initiatives, among others. Actual results may differ from anticipated results because of certain risks and uncertainties. These risks and uncertainties may include, but are not limited to, economic conditions in the markets in which CVG operates, fluctuations in production volumes of vehicles for which CVG is a supplier, financial covenant compliance, and liquidity risks associated with conducting business in foreign countries and currencies and other risks detailed in our SEC filings. I will now turn the call over to Harold. Thank you, Chris, and good morning, everyone. On today's call, we'll provide an overview of our fourth quarter and year-end results, followed by an update of our strategic initiatives designed to increase our earnings and make our earnings more stable and less cyclical. Chris will then follow this overview and discuss our financial results in more detail, and we will end up by opening the call and answering your questions. If you have the presentation from our website in front of you, please turn to slide four. We would like to point out that we continue to see recovery in our legacy end markets that were disrupted by COVID and also continue to see growth in our focus areas, especially warehouse automation. For the fourth quarter of 2020, we delivered sales of $216 million, up 14% as compared to the year ago fourth quarter. This growth was primarily driven by warehouse automation, where we delivered $34.4 million in sales, representing approximately 16% of the company's sales. Our operating income increased to $5 million in the quarter, which compares favorably to a loss of $4.3 million in the year-ago fourth quarter. Improvement was largely a result of better volumes combined with our successful efforts over the past year, to reduce our cost structure and drive operational efficiencies across the company. Rationalizing expenses has been a priority of our management team through the downturn and will provide a benefit as our sales continue to improve. Adjusted EBITDA was $13 million in the fourth quarter, representing a significant increase as we compared that to the $3.5 million that we delivered in the fourth quarter of 2019. Improvement was due to higher revenues combined with an improving sales mix and the aforementioned expense reductions. Looking at our new business backlog, we achieved net new business wins in excess of 100 million annualized in 2020, which is primarily in our growth in markets of warehouse automation and electric vehicles. And we expect substantially all of this new business to hit this year. These net new business wins represent approximately 14% of our annual sales and are a clear validation of our efforts to diversify our revenue mix. We are also pleased with our progress expanding into other new markets, including recreational vehicles, material handling equipment, boating, and mass transit, which further lessens our customer concentration and our in-market concentration. Looking forward, our expectation is to achieve another $100 million of net new business wins in 2021. This is a global team effort, and we have had wins in Japan, Korea, China, India, Europe, and the United States. Turning to slide five in the deck, 2020 was a pivotal year in our company's history where we made foundational changes transforming our business with the goal of improving our value acquisitions, focusing our commercial efforts on the specific growth areas, especially warehouse automation electric vehicles. As we continue to execute upon our strategy, we believe our earnings growth will accelerate due to higher sales volumes and that our earnings will become less volatile in the future due to lessened customer concentration and lessened in-market concentration. We will invest consistent with this approach and will run a balanced program of growth investment, cost reduction investment, and digital backbone investment. We will expect to use our excess cash flow to pay down debt, just like we did in 2020. Signs of our success can already be seen in our results, where we have continued to reduce our in-market concentration, having lowered our sales to North American heavy and medium duty diesel truck market to 35% of our 2020 sales as compared to 49% of 2019 sales. While our business was greatly impacted by the COVID pandemic, and we still have COVID-19 induced supply and cost risks in the business, we are aggressively taking advantage of these temporary downturns to accelerate our growth programs, reduce our cost structure, and improve our operating footprint. Central to this is our entrepreneurial spirit that we call find a way that ensures our entire workforce is focused on delivering better customer value and securing additional business streams. We are becoming more innovative and solutions focused where we can. We are optimistic about our forward pipeline of opportunities and hope to build upon what became a successful year in 2020, albeit in a truly challenging environment. I would like to thank our 8,000 employees for their extraordinary commitment to both protecting our company and serving our customers. Our goals are to make a difference, support a creative, diverse, and inclusive workforce that goes for it as a team, has fun, and enjoys our business relationships. Turning to slide six and looking at the warehouse automation area in more detail, The growth of e-commerce is driving the need for additional warehouse automation, parcel sorting, and delivery vans. Industry expectations are for the warehouse automation industry to grow at a 14% pager through 2026, or nearly doubling in size to $30 billion in sales over five years. We supply components and sub-assemblies for these warehouse installations, including complete work centers, and are clearly benefiting from the market's robust expansion. In the fourth quarter, our sales into the warehouse automation and market grew to $34.4 million in revenue, as I mentioned. And we ramped up both new products and new capacity to support this business expansion. Importantly, warehouse automation represented 16% of the total company sales in the fourth quarter. And looking forward, Our goal is to deliver more than $150 million in sales to this market segment in 2021 as compared to approximately $65 million of warehouse automation sales in 2020 and approximately $1 million in 2019. We have a good pipeline of forward opportunities as well. Turning to slide seven, the electric vehicle and last mile market is another growth market that is important to the future of our company. Our competitive advantage resides in the fact that we have a natural value added product basket that makes it convenient for new vehicle makers to do their work. Simply said, we can design, prototype, and build a bundle of products and provide that in a one-stop shop basis to our partners. And we have 40 years of global experience helping others develop vehicles. We have won positions on multiple electric vehicle platforms already. and are working on quite a few others. This is a global business opportunity. Today, we are designing and delivering Prototac products for awards won in 2020 and early 2021 for mule builds, testing, and field trials. Some firsts for us are the global rollout of the new Unity suspension seat, which is modular, has a congruent backbone, has a highly automated production process, is globally sourced and is beautiful on top of that. We also are designing complete electrical systems for the very first time. And we have installed a high voltage production system for the manufacturing of electric backbone for electric vehicles. We expect these programs to largely remain in the development phase through 2021 and then turn into revenue after the product baselines have stabilized. There's a lot of fun. and really important work as we participate in the development of zero-emission vehicles and do our part to help the planet. An example of the success we are achieving and the type of partnerships that we are embracing in the electric vehicle market can be seen in our recently announced partnership with XOS, which is an electric mobility company that is dedicated to making suites more efficient, primarily in last-mile routes, that are seeing strong growth as a result of surging e-commerce demand. Our partnership with EXOS is full service design and manufacturing, including product sampling, prototypes, schematic electrical system designs, testing, and validation to support a cutting edge fleet of medium to heavy duty zero emission electric vehicles. And we are working with long haul transportation providers as well in both the US and Europe. Turning to slide eight, the success that we are achieving with growth in the warehouse automation market, combined with our early wins in the electric vehicle market, are having a positive impact on our legacy sales mix. In the fourth quarter, sales to North American medium and heavy duty conventional diesel truck markets represented 35% of the total company sales, which is a good improvement. versus the 45% of sales that this segment had represented over the last decade. Our sales mix is experiencing a purposeful shift to higher growth, less concentrated, more value added, and more profitable areas. Our goal is to continue to expand further into adjacent markets where our technology, intellectual property, and manufacturing capabilities are valued and also a natural fit. That said, our legacy truck market is set to experience steady growth also. If you turn to page 9, you can see that over the next three years, this growth will benefit our company as well. And as you can see, the data from third-party ACT research forecasts improving truck build in both Class 8 and Class 5 through 7 markets as a result of both industry growth and the significant contraction that the industry experienced going through COVID last year. While our legacy business will be a direct beneficiary of improving truck builds, our strategic focus will remain steadfast. We will continue to invest and expand into new, fast-growing markets that will increase our earnings and diversify and stabilize those earnings. Turning to page 10, We have been very successful winning new business in our targeted areas. The $100 million of net new business wins demonstrates the success that we are achieving, and our goal, as mentioned, is to win another $100 million of net new business in 2021. And as previously mentioned, the majority of this extra $100 million will hit in 2021, and we are underway to add another similar amount this year. Turning to page 11 and concluding, We had a tough year with significant COVID impact, but forged ahead with an aggressive transformation, and we have made good progress. We're happy about our team's accomplishments, but we really are just at the beginning. Our goal is to successfully transform our business into a more profitable and stable growth company. We are growing in the warehouse automation market, and to this end, We are expanding and sharing our global footprint, expanding our product line as well into this market. And looking forward, we have 30 global locations which provide the manufacturing footprint possibilities we need to continue this expansion and positions as well for the future. We are focused on using our 40 years of vehicle development experience and our product line breadth to be a one-stop shop for electric vehicle makers. and we will benefit from improved demand for our legacy markets as we go along. We are having a lot of fun running the business. We're optimistic, and we look forward to reporting out on our progress as we go along. Now I will turn the call back to Chris for a more detailed review of our financial results. Chris? Thank you, Harold. If you're following along in the presentation, please turn to page 13. Fourth quarter 2020 revenue for $216 million, up 14%, compared to $189.59 in the prior year period. This increase reflects the tremendous amount of work our team has accomplished growing our business, in addition to the rebounding heavy-duty truck market in North America. On a sequential basis, revenue increased 15% over the third quarter of 2020, revenue of $187.79 million. Foreign currency translation favorably impacted our fourth quarter revenues by only 2.1 million, or about 1%. Our growth margins expanded approximately 530 basis points to 11% as compared to the fourth quarter of 2019. This expansion reflects our renewed focus on profitability and improving our business mix. The key drivers of the expansion was volume leverage and operational cost improvement as compared to 2019. The company reported consolidated operating income of $5 million for the fourth quarter of 2020 compared to a loss of $4.39 in the prior year period, and on an adjusted basis, operating income of $8.39 compared to a loss of $1.39 in 2019. The improvement was primarily due to higher sales volumes, an improved cost structure as a result of our cost actions, and an improved sales mix. Adjusted EBITDA was $13 million for the fourth quarter, which was up sharply as compared to $3.5 million in the prior year fourth quarter. Adjusted EBITDA margins were 6%, an improvement of approximately 410 basis points as compared to adjusted EBITDA margin of 1.9% in the fourth quarter of 2019. This margin expansion was primarily the flow through from the revenue and cost changes I mentioned earlier. Our fourth quarter interest expense is $5.2 million as compared to $3.6 million in the fourth quarter of 2019 due to the higher PIC interest costs resulting from the amendment of our credit facilities that occurred in the second quarter of 2020. I will touch on our balance sheet liquidity in a moment, but would like to add that we're very focused on reducing our interest expense through 2021 as our financial performance continues to improve and our leverage on a TTM EBITDA basis continues to decline. Net loss for the quarter was $4.1 million, or $0.135 on an adjusted basis per diluted share, as compared to a net loss of $7.5 million in the prior year period, or $0.24 per diluted share. Included in the EPS was a negative $0.10 per share tax adjustment, primarily related to valuation allowance. At this point, I'll talk a little bit about our segment results, starting with the electrical system segment on slide 14. For the fourth quarter of 2020, the electrical systems revenues were $138.6 million compared to $113.9 million in the prior year period, an increase of 21.7%. Foreign currency translation did not have a meaningful impact during the quarter. The year-over-year sales increase primarily resulted from new business wins in warehouse automation, as Harold mentioned previously. Our electrical system segment now represents 64% of our total fourth quarter revenue as we continue to make progress diversifying both our mix of business and customers. Turning to operating income in the electrical system segment, they delivered $7.8 million of operating income in the fourth quarter compared to $1.1 billion in the prior year period. The increase was largely due to increased sales and the improved cost structure. During the quarter, we incurred $2.5 million of restructuring costs and contingent consideration related to our acquisition in 2019. Excluding these special charges, adjusted operating income was $10.2 million in the fourth quarter compared to $3.2 million in the prior year. Now turning to our global seeding segment on slide 15, Global seeding revenues increased to $79.1 million in the fourth quarter of 2020 compared to $76.5 million in the prior year period, an increase of 3.4%. Foreign currency favorably impacted our sales in this segment by $1.5 million, or approximately 2% in the quarter. The global seeding segment reported an operating income of $2 million during the fourth quarter compared to an operating loss of $600,000 in the prior year period. The increase in operating income was primarily attributable, again, to slightly higher sales and improved cost structure. Now turning ahead a little bit further to slide 21, the company had liquidity of $138.9 million, up from $94.6 million in the prior year and up from $126.2 million in the third quarter of 2020. Our liquidity is made up of $50.5 million of cash and $88.4 million of availability on a revolving credit facility at December 31, 2020. On March 1, the company amended its revolving loan agreement and extended the facility to March 1, 2026. Also during the fourth quarter, the company paid down an additional $5 million of principal on the term loan. Free cash flow was $2.6 million in the fourth quarter and $28 million for the full year of 2020. This concludes our prepared remarks. I will now turn the call over to the operators to open up the line for Q&A. Thank you.

At this time, ladies and gentlemen, if you would like to ask a question, please go ahead and press star then the number one on your telephone keypad. Again, that is star then one to ask a question. Your first question today comes from the line of Mike Sielski with Collier Securities. Please proceed with your question.