Commercial Vehicle Group, Inc.

Good morning, ladies and gentlemen, and welcome to the CVG second quarter 2021 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 is being recorded. I would now like to turn the call over to Mr. Chris Barnard, Chief Financial Officer. Please go ahead, sir.

Thank you, Operator, and welcome to our conference call. Joining me on the call today is Harold Beebus, President and CEO of CVG. We will provide a brief company update as well as commentary regarding our second quarter results, after which we will open the call for questions. This conference call is being webcast 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 savings initiatives, and new product initiatives, among others. Actual results may differ from anticipated results because of certain risks and uncertainties. These risks and uncertainties may include, but are not limited to, economic conditions in the markets in which CVG operates, fluctuations in the 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 as detailed in our SEC filings. I'll now turn the call over to Harold to provide a company update. Harold? Thank you, Chris, and good morning, everyone. We're going to refer to our earnings presentation that's posted on our website if you wish to access it. And on today's call, we'll provide an overview of our second quarter results followed by an update of our strategic initiative designed to grow our earnings and expand our in-market participation. We have a goal to increase the stability of our earnings. And Chris will discuss our financial results in more detail and will then conclude by opening the call and answering your questions. I'd like to acknowledge the efforts and contributions of our global team throughout the second quarter. Our sales and product teams contributed significantly to our ongoing growth and diversification initiatives. and our entire workforce battled through ongoing supply chain constraints and COVID concerns, but remained focused on exceeding our customers' quality and delivery expectations. We're proud of our global team and look forward to more in-person employee celebrations and more active community outreach programs as the economy fully reopens. So let's review the big picture on our results. Turning to page four. We delivered record sales for the second quarter of 258 million, or almost double the amount of sales of a year ago. This strong growth was driven by COVID recovery, new business wins between then and now, and demand growth in both the warehouse automation and global vehicle markets. Warehouse automation continues to be a powerful engine for growth as we delivered 52.3 million in sales, representing 25% sequential growth. and are tracking to likely exceed our full year goal of $150 million in warehouse automation sales. Our operating income increased to $16.3 million in the second quarter, which compares favorably to a loss of $10.59 in the year-ago second quarter. The improvement was largely a result of better volumes combined with our successful efforts over the last year to reduce our cost structure and drive operational efficiencies across the company. Rationalizing and optimizing expenses and our base costs has been a priority of our management team and will provide a benefit as our sales continue to improve. Gross margins increased in Q2 as compared to Q1. However, we do not expect this to continue as we deal with global cost inflation, labor scarcity in key global locations, and COVID impacts in certain global locations. Adjusted EBITDA was $21.6 million in the second quarter, representing a significant increase as compared to the 1.2 million that we delivered in the second quarter of 2020. The improvement was due to a very weak COVID impact at Q2 2020, new business winds and warehouse automation and demand growth in the North American OEM truck market, coupled with our expense and base cost control disciplines. We delivered 33 cents of adjusted earnings per diluted share in the second quarter, compared to a loss of $0.24 per diluted share in the second quarter a year ago. So all in all, it was a quarter of results that were in line with our expectations. Turning to page five, we are in the midst of a strategic realignment with four key focus areas, and we wanted to provide you an update. Starting from the left side of this slide, I'd like to remind everyone that we are globally leveraging and adding to our capabilities to gain new business. We began this initiative 18 months ago and now have secured 217 new business awards that will add $229 million of annualized net incremental revenue that is additive to our top line. We use the word net because this figure is inclusive of purposeful losses of existing business that we are seeking to cleanse and correct and exit certain low-cost and low-profit customers. We use the word annualized because all of the wins that we are associated with have a development prototype and ramp-up profile, and most wins are on platforms that last multiple years. So it takes a little while for the wins to ramp up into our business profile and state of results. But then we have the business for quite a few years. And additionally, we have to build inventory profiles of materials to support the production schedule as they increase. And we use the word new because this is incremental business and exclusive of replacement wins. We aggressively compete on retaining business that we like. And this is a regular part of our company. And we have had many replacement wins also during the quarter. We're focused on a few strategic areas that are natural for us. Warehouse automation, electric vehicles, recreational vehicles, and specialty vehicles. These are all in markets that are focus areas for us globally. Complicated electromechanical assemblies, turnkey electrical systems, unique plastic parts, and last mile delivery van solutions are end products that are focus areas for us from a product standpoint. We now have a live and dynamic new business pipeline that is multi-billion dollars in size and global. This is a vibrant part of our company now and is becoming cultural. Turning to page six, we wanted to provide an overview of our year-to-date sales profile. We've made real progress reducing our reliance on North American Class 8 diesel trucks as our warehouse automation business continues to deliver strong growth and as electric vehicles become a more material share of our business over time. Looking at our end markets in more detail, the North American truck market was 36% of our sales in the first half of 2021, as demand for Class 8 diesel trucks continues to increase despite the supply chain constraints and inflationary pressures that have been in place for much of the year. ACT research is forecasting truck builds to improve in the second half of this year, and for truck builds to be in excess of 300,000 units annually through 2023. This market dynamic will be supportive of our results and will keep Class 8 trucks as a high percentage of our sales, as we are already on many truck platforms that are in full production and in the market today. Warehouse automation continues to be a large proportion of our business, having been 20% of our total company revenues in the second quarter and 19% for the first half. This strong end market is now our second largest end market and growing due to e-commerce behavior and the continued need for more capacity by the well-known brand names in this arena. The OEM construction market is now our third largest end market, comprising 17% of our year-to-date sales. Our business in this end market is relatively balanced across North America, Europe, and Asia. Looking forward, we continue to see a strong order of book globally through the balance of the year, which will be supportive of demand. Those supply constraints are still an issue that we're monitoring closely. The Biden infrastructure bill will likely help us in this area also in North America. Lastly, our aftermarket and service business, while not an end market per se, is an important component of our business, representing 11% of year-to-date sales. Turning to page seven, The warehouse automation in-market continues to be a significant growth driver for the company as we delivered approximately 52 million of sales in the quarter, up 25% sequentially from the first quarter of 2021. We supply subsections of these warehouse installations, including complete work centers, and are developing new products to expand our business in this area. Importantly, our products are sophisticated electromechanical systems that contain electric panels and technology that enable the automated movement of parcels through a warehouse. They are smart subsystems. The growth in e-commerce is driving the need for additional warehouse automation, parcel sorting, and last mile delivery vans where industry expectations are for the warehouse automation industry to grow at a 14% CAGR through 2026 or nearly doubling in size to 30 billion over five years. To support our warehouse automation growth and position CVG for further expansion, we've been repurposing our existing plant capacity and adding focused new capacity. So far, we have repurposed two entire commercial vehicle plants, expanded an existing warehouse automation plant, and are implementing plant additions in Europe and in India. We're doing the same things to enable our electric vehicle ramp-ups. We've been able to leverage our existing footprint greatly. We've been adding people to both of our segments here as we grow and expand these focus areas. An emerging end market for CVG is the electric vehicle and last mile market as outlined on slide eight. Our competitive advantage resides in the fact that we have a natural value added product basket that makes it convenient for new vehicle companies to do their work with us. Importantly, we can design, prototype, and build a bundle of products for one OE and we have 40 years of global experience doing it. As we've mentioned, we are currently involved with 52 opportunities globally, which includes both existing manufacturers that are expanding into electric vehicle platforms as well as new electric vehicle market entrants. We've essentially created a portfolio of new business wins on electric vehicle platforms that will allow us to participate in the transition from diesel to electric vehicles, which is underway and forecast to accelerate in the next five to 10 years. Overall, we have 13 different electric vehicle wins thus far in 2021 across North America in European trucks, buses, recreational vehicles, and construction equipment. These wins will result in production launches over the next few years. Turning to our new business awards, On slide nine, we have secured $129 million of net new business wins this year to date. Ninety-four percent of these wins were outside of our legacy diesel truck business as we continue to win new business in electric vehicles, warehouse automation, and recreational vehicle end markets. It's important to reiterate that the composition of our new business awards will determine when those revenues will flow through our P&L. Given that a majority of our wins have been in electric vehicles, we will hit peak financial performance in a few years in these areas. Our new business momentum is putting CVG in an enviable position in this industry. We are continuing to review our products and customers and will continue to exit unprofitable and or declining business areas. This is an important point to highlight is our new business wins that we report each quarter are on a net basis, as I mentioned earlier. So while our net new business wins were up nicely from Q1, the momentum is much stronger as we are also churning out low-profit customers. We're driving a strategic mix shift, which will slowly become evident in our results as we release them quarter after quarter. Turning to slide 10, We're very pleased with the success that we have achieved this year and over the last year and a half, but we're really just beginning. Our goal is to transform CBG. We're committed to optimizing our legacy business and using our know-how to expand aggressively into several focused end markets. Our second quarter results were another good data point that show that this is working. As we continue to make progress, and post our results, we believe the value of our business will grow. Now I will turn the call back over to Chris, who will give a more detailed review of our financial results. Thank you, Harold. If you're following along in the presentation, please turn to slide 12. Second quarter 2021 revenues were $257.9 million, a quarterly sales record for our company. Revenues increased 103.3 percent compared to $126.9 million from the prior year period. This increase reflects the substantial increase in the warehouse automation business and the significant increase in the global demand for the vehicle and markets, which were heavily impacted by the COVID pandemic in Q2 of 2020. On a sequential basis, our revenue increased 5.2% over first quarter 2021 revenue of $245 million, which was also a sales record for the company. Foreign currency translation favorably impacted our second quarter revenues by $6.8 million, or 5.4%, when compared to the prior year period. Our gross margins expanded approximately 820 basis points to 13.3% as compared to the second quarter of 2020. The margin expansion continues to reflect our renewed focus on improving our business mix and the efforts to offset the significant cost inflation we are experiencing in our supply chain. The key drivers of the margin expansion were volume leverage, business mix shift toward the warehouse automation end market, and operational cost improvements as compared to 2020. The company reported consolidated operating income of $16.3 million for the second quarter of 2021 compared to a net loss of $10.5 million in the prior year period. And on an adjusted basis, operating income was $16.6 million compared to a loss of $3.6 million in the second quarter of 2020. The improvement was primarily attributable to higher sales volume, improved mix, and an improved cost structure. Adjusted EBITDA was $21.6 million for the second quarter, which was up considerably as compared to $1.2 million in the prior year's second quarter. Adjusted EBITDA margins were 8.4%, reflecting an improvement of approximately 740 basis points as compared to the adjusted EBITDA margin of 1% in the second quarter of 2020. This margin expansion was primarily the flow through from the revenue and cost changes I mentioned earlier. Interest expense was $2.8 million in the second quarter as compared to $5.3 million in the second quarter of 2020. The decrease in interest expense was primarily the result of refinancing our company's debt on April 30th of 2021. As a reminder, we expect our interest expense to be reduced approximately $3.1 million on a full quarter basis beginning in the third quarter as a result of the refinancing. Additionally, our new debt structure is more flexible as it provides up to $200 million of borrowing capacity as we work to expand into attractive markets with the goal of accelerating CFG's growth and moderating the historical cyclicality of our business. Net income for the quarter was $5.1 million, or $0.16 per diluted share, compared to a loss of $12.5 million in the prior year period, a loss of $0.40 per diluted share. Now turning to our segment results on slide 13, we highlight the electrical systems segment. For the second quarter of 2021, the electrical systems revenues were $175.1 million compared to $74.2 million in the prior year period, an increase of 136%. Foreign currency translation favorably impacted second quarter revenues by $2.7 million or 3.6%. The year-over-year sales increase primarily resulted from new business wins warehouse automation growth, and increased demand in the North American OEM truck market, as Harold mentioned previously. Our electrical systems segment represents now 68 percent of our total second quarter revenues as we continue to make progress diversifying both our mix of business and customers. The electrical systems segment delivered 18.6 million of operating income in the second quarter compared to an operating loss of 6.2 million in the prior year period. The increase was largely due to year-over-year increase in sales. Adjusted operating income was $18.7 million in the second quarter compared to an adjusted operating loss of $718,000 in the prior year period. Now turning to our global seeding segment on slide 14, global seeding revenues increased to $84.9 million in the second quarter of 2021 compared to $53.9 million in the prior year period, an increase of 57.6%. Foreign currency favorably impacted our sales in this segment by $4.1 million, or 7.7% in the quarter. The global seeding segment reported an operating income of $5 million during the second quarter compared to $1.5 million in the prior year period. The increase is due to higher sales volume as a result of the COVID-impacted Q2 of 2020. The second quarter of 2021 adjusted operating income was $5 million compared to $2.1 million a year ago quarter. Now looking to the third quarter, and while we do not provide guidance, I thought it would be helpful to provide a few data points to the key drivers to our business. Per ACT, expectations are for an increase in the North American Class A truck build to 83,850 units compared to 74,400 in the second quarter. This demand outlook is expected to be supportive of our third quarter results. In the warehouse automation space, we expect sales to be down sequentially in the third quarter, as we experience a changeover by our customers to new builds. However, we continue to believe that we will meet or exceed our goal of $150 million in full-year warehouse automation revenue. Finally, our gross margins will remain a focus in the second half of the year as we continue to implement actions as we work to overcome material and labor shortages and commodity cost pressures we are experiencing. This concludes our prepared remarks. I will now turn the call over to the operator to open up the line for Q&A. Thank you.

At this time, I would like to remind everyone, in order to ask a question, press star and the number one on your telephone keypad. We'll pause for just a minute to compel the Q&A roster. And your first question comes from Chris Hall with Barrington.