This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Good morning, ladies and gentlemen, and welcome to CVG's Third Quarter 2022 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. Andy Chung, Executive Vice President and Chief Financial Officer. Please go ahead, sir.
spk01: Thank you, operator, and welcome everyone to our conference call. I'm very excited to join the CVG team and participate in my first earnings call with the company. Joining me on the call today is Harold Beefers, President and CEO of CVG. This morning, we'll provide a brief company update as well as commentary regarding our third quarter 2022 results. After which, we'll 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. 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 not limited to economic conditions in the market 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 will now turn the call over to Harold to provide a company update.
spk07: Thank you, 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, it would be helpful in the dialogue this morning. CBG 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, CVG is positioning itself as a leading global electric systems 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... Q3 earnings presentation, you'll 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 year-to-date business wins are tracking above $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 to both cover inflation and earn a fair return for our value add. Free cash flow generation was strong in the quarter, as expected, and 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 CBG 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 2023 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, lower our costs, and improve our service competitiveness. Turning to slide four, you will see the initial evidence of the second half improvement 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 levels, helping boost our free cash flow generation of $34 million in the quarter, supporting the company's strategic initiative to self fund its growth and pay down our debt. We expect to hit the high end of our debt pay down rage 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 year. 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've 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 of new annualized business wins. Ending the third quarter, our pipeline of new business stood at approximately $5 billion in and platform value and spans electric vehicles, earth moving equipment, 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 CVG as I've mentioned previously and today. And simply layer in the contribution of our new business once on top of our current revenue base gives a picture of the expected shift in business mix. And as a reminder, our electric system segment generates much higher OI margins than the other segments of CVG, making 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, we lay out an update for our e-commerce aftermarket business. We've spent a little bit of time getting the business ready for launch and getting the product lines ready, getting the software platform ready, getting our production and logistics capabilities ready. We expect to go live in early 2023, with aftermarket seats in North America being the first product to launch. We will follow that up with launches in 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 top-selling pickup trucks and four-wheel drive vehicles. It will be a first for us. Looking to 24 and beyond, we expect to expand our platform geographically and continue to broaden our seating products to include delivery vans, school buses, construction equipment, and tractors, while also expanding our North American footprint. Turning to slide 8, we're 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'll 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, CVG is executing against its long-term goals and business transformation plan, 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 in secular growth industries, and we are reaffirming our long-term targets of delivering $1.9 billion in sales and approximately 8.5% 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 CVG will experience less inflation-based profit compression in 2023. CVG continues to win in electric vehicle markets, and those wins are fundamentally transforming our top line and our margin outlook. And as we look to the fourth quarter and into 23, we're confident that the momentum we have built, particularly as it relates to price, cost structure, base demand, verticalization, and new business wins, will further position us for further growth and profitability improvements. Now I'd like to turn the call back to Andy for a more detailed review of our financial results. Andy?
spk01: Thank you, Harold. If you are following along in the investor deck, please turn to slide 12. Third quarter 2022 revenues are $251.4 million as compared to $139.6 million from the prior year period. The 4.9% year-over-year increase was primarily attributable to higher pricing to offset material cost increases and volume, but offset by a volume decrease in our warehouse automation business. Foreign currency translation also unfavorably impacted third quarter 2022 revenues by $6.5 million or 2.7%. 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 costs, raw material inflation, and freight cost increases. As previously stated, we expect to improve our growth margins in the coming quarters due to renegotiated pricing, continued 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 lack in price increases combined with $2.9 million of new business startup costs and $0.6 million of restructuring 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 prior year. Adjusted EBITDA margins were 5.7% as compared to 7.1% 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 11 cents per diluted share as compared to net income of $7.5 million or 23 cents per diluted share in the prior year period. Turning to our segment results on slide 13. Our vehicle solution segment third quarter revenues increased 30.6% to $154 million compared to $117.9 million in the year-ago quarter, primarily due to material cost pass-through and high volume. Operating income for the third quarter increased 227% to $9.6 million compared to operating income of $2.9 million in the prior year period. primarily driven by volume leverage, increased pricing, and lower health care costs. Third quarter of 2022 adjusted operating income was in line with GAAP operating income of $9.6 million. Our electrical system segment achieved revenues of $46.1 million, an increase of 15.1% as compared to $40.1 million in the year-ago third 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 increased labor costs, raw material inflation, and freight cost increases. Adjusted operating income was the same as GAAP operating income in both periods. Our aftermarket and accessory segment revenues increased 24.1% to $37.1 million compared to $29.9 million in the year-ago quarter, primarily 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 quarters of 2021 due to lower demand levels. Operating loss was $1 million decrease compared to the operating income of $8 million in the year-ago quarter, primarily attributable to the previously mentioned lower volumes. Adjusted operating loss was $0.7 million compared to income of $8.1 million in the prior year period. This concludes my comments on the quarter. And I would like to add that I'm really excited to have joined the CVG team and look forward to driving the transformation of the business. Now I'll turn the call back over to Harold for some additional remarks.
spk07: 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 in electrical systems as this vehicle architecture naturally fits CVG's 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 costs, improve our service, and generate further free cash flow. Our entire team here at CVG 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.
spk04: 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 the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to return from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. The first question comes from Joe Gomez from Noble Capital. Please go ahead.
spk03: Good morning. Thanks for taking the questions. You bet. Good morning. Morning. So, you know, last quarter you talked about you still needed about 20% of the contracts that needed to be repriced. I was wondering, you know, where that stands today. And given the recent or ongoing increases in inflation here, You know, how does that play on some of the contracts that you had already replaced? Are you still looking and getting acceptable margins on that business?
spk07: Yeah, so two questions there. So we have roughly 20% of our revenue that's trapped in money-losing contracts. We're inside of a year on them now, and we have open negotiations with regards to repricing them and new terms and conditions. But that negative band of 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 actively negotiate pricing and inflation recovery as we go along, and we have a 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 I'm sure our peers and fellow reporters are doing the same thing. We're labor intensive and we're having labor inflation and energy inflation and so we have active pricing negotiations as we go along here. We expect that to continue through 23. Okay.
spk03: Thank you for that. You talk about improving or exiting underperforming legacy businesses. I was wondering if you might give us just a little bit more color of what segments of the business are you identifying there that really need to be improved or you know, potentially exited. Yep.
spk07: So we've set financial goals that we want to achieve in order to have a proper financial return so we can reinvest into the business and be competitive. We've had two losses, if you will, where we have not re-secured the business on a go-forward basis. One was in electrical systems. One was in seeding. So it's not necessarily a product category or a sector. It's really customer specific where we have underperforming profit rates. And we're just going in and either we're trying to get a deal that both sides can mutually agree to, which in most cases means we're trying to increase our price. And we've had only two losses that are noteworthy in the last year and a half.
spk03: Okay. And one more for me, if I may. So you talk about the, you know, the 22 forecast for Class 8 and 5-7, Classes 5 and 7 production. Can you give us an idea of early, you know, what you're seeing here for 2023 in that market?
spk07: Yeah. So the reports came out this morning on the orders, and the orders are – Very high. The current backlogs for vehicles are approaching a year and a half now. The entire year of 23 appears to be sold out from the order books right now. ACT is the third party that we usually quote. They're predicting a similar year to this year. And there's various opinions on that, but right now, with the order books have been opened for 23 by all the main OEs globally, there's been a big inrush of initial orders, and the orders have increased significantly, and they're a very high rate that exceed the industry's ability to produce on a practical basis. The supply chain issues that our OE 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 23. And orders exceed the industry's ability to produce. So we believe that next year, right now, looks very similar to this year. And it's supply chain based.
spk03: Great. Thank you for taking the questions. Much appreciated. Thank you.
spk07: Appreciate it.
spk04: Thank you. Your next question comes from John Framstrip from CDRT and company. Please go ahead.
spk05: Good morning, Harold, and welcome aboard, Andy. Good morning, John. I'd like to try to start with the warehouse automation business. How about some updated thoughts there on when you reach the trough in that business and what kind of recovery you're thinking about? I think last time you talked about maybe mid-next year. Is that still on target or is that moved left or the right?
spk07: Yep. You can tell from our numbers that that segment is our disappointment. 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, so I can quote what they publicly said, and they do consume information. half of the industry's supply and so if you look at what's happened with e-commerce and how it inflected up during covid and now the shippers are reporting you know negative year-over-year comps they put a hold on their infrastructures it's not forever they can't hold on forever but definitely there's less spending in the physical infrastructures for e-commerce shipping, FedEx, UPS, 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 Monona, 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've aggressively reduced our staff. So us as a supplier into the industry, we've right-sized our cost structure around our current run rate.
spk05: Okay, fair enough. And you mentioned that you're in process, I believe, of building, green-fielding 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?
spk07: Yes, so the new wins that we've won, we need additional capacity that we don't have in North America and in Europe, and the plant and central Mexico. We haven't announced the location yet, but it's in central Mexico. It'll be announced 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'll begin producing products probably in Q4, the end of Q4. The one in northern Africa is 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 Lite. But the spending will be inside of our corporate guidance of $20 to $25 million of capital. That will be a similar number for next year. And we're running to the low end of that number this year. But it's just a few million dollars, John. It's not a lot. It's not expensive to expand in that business. It's mainly setting up a good low-cost hourly workforce. And 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.
spk05: Okay, got it. And just briefly, For clarity, why the two-step process in price increases in 4Q and 1Q again?
spk07: Yeah, so actually this year we had four separate price increases and it gets down to our terms and conditions. Like the two that are going to start on January 1st, the deals we cut with them were that It's really when can you impact new POs. And so this crowd gives you POs that go out a period of time so that they can secure supply for themselves. And in a couple instances, we acknowledged POs through 1231. And so when we renegotiate our prices, they come into effect on the next set of POs that we accept. So That's why there's a little bit of a timing lag because we honor their desire. It's a partnership, and so they need certainty over supply. And so when they put in the EDI portals a set of POs and we acknowledge them, then we have to honor the price on them. And so it kind of just layers in, John.
spk05: Okay. And one last question. I'll get back into Q. Your aftermarket business took a nice step up in the third quarter. What's driving all that?
spk07: Yes, so two things. Well, I guess the main one is getting our production in order in 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've vertically integrated in both of those areas. And in the case of seating, aftermarket seating, we built an entire new plant in Piedmont, Alabama, and the plant's 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. It's mainly us working through our backlog. And we're still working through our backlog, John. We're not caught up yet in that one. And it's one reason why we haven't launched the e-commerce platform second step on this because we have to build an inventory profile. Fundamentally, we're going to go from make to order to ship from stock. We've traditionally lost all of that business because we haven't had any available inventory. That's going to be a big move for us. We're coupling it with an electronic storefront. The website's done. We have our URL named. It's called aftermarkettruckparts.com. The website's ready with Shopify in the background, but the cupboards are bare because we still have a 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.
spk05: And I guess we should allow for higher inventory on a gold-fold basis and eating into working capital a little bit.
spk07: Yes. And so we're going to have a bigger inventory profile in that business on an ongoing basis. And hopefully, you know, it's a very good return for us. It's a very good return on investment. That's a capital business for us. So it'll be a creative to return on invested capital, but it will have more inventory. Yes.
spk05: Thanks, Rob. Thanks for taking the questions.
spk07: Thank you, John.
spk04: Thank you. Your next question comes from Steven Emerson, a private investor. Please go ahead.
spk06: I was just thinking to what extent you're able to reposition warehouse automation to all the reshoring of factories automation and such prime contractors like Rockwell. It strikes me that it's very similar systems and equipment.
spk07: Correct. Rockwell is a supplier to us, so we buy automation parts and pieces and make subsystems. But your first point is correct. So what are we trying to do in warehouse automation? We're trying to reboot it, add customers, and expand our service offering. We fundamentally offer a service which is assembling automation components into conveyance systems, automated storage and retrieval systems, put-away systems, take-off and put-away systems, and kind of low-end robotics in 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 into 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
spk06: When do you think you'll be putting out bids for components and suppliers of automated factories?
spk07: We have a lot of RFQs out. We're bidding on the largest retailer in the world. You can guess who that is. We're bidding on their warehouses and their subsystems. We have an active pipeline in that business. That pipeline is inclusive to the $5 billion pipeline that we refer to. That includes all of our pipeline activities for warehouse automation. But the industry is in a pause. And so with Amazon taking a timeout and FedEx taking a timeout and they publicly reported it, you can surmise that the whole industry is in a wait-and-see mode here. on what the steady state need is for their distribution networks. We're bidding, but there's not a lot of active building right now, Steve. The industry is down right now.
spk06: I'm referring to new segments that use your kind of skill sets, which is Automated factories that are reshoring from the Orient.
spk07: Correct. We're mainly focused on distribution and parcel handling. Our know-how is in warehousing and logistics versus a factory. We don't have a skill set there. Okay, thank you. Thank you.
spk04: Thank you. The next question comes from . Please go ahead.
spk02: Good morning. Good morning. Following up on that question, what product, the new plant in Mexico and Northern Africa, what product or product line will they be feeding into? And then following on that, to the extent that they're replacing that supply out of third-party supply out of China, what percent of those products that you were buying will they be replacing? Thanks.
spk07: Okay, so this answer is different for each of those plants. So in Mexico, We're doing two things. One is we're building a brand new plant to make electrical harnesses in 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 grow to be a big plant, like a 1,000 person plant. And it will be focused in on making electric wiring harnesses for electric vehicles for North America. We have another plant in Saltillo, Mexico, which I can say that name. And that is the place where we're vertically integrating and reshoring metal fabrications and stampings that we've traditionally bought from China from vendors. And we've bought equipment over the last year, robotic welding equipment and finishing equipment, and we've installed it. in our plant in Mexico, our existing plant in Mexico, to make components for our seeding business. And the amount of components in phase one, we attacked our escalating ocean freight. And we attacked 50% of our ocean freight spent. And The ocean freight spend is coincident with the weight of the part. So we attack 50% of our weight. It's 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, we'll kick in in Q1, will obviate, eliminate 50% of our ocean freight. Phase two of that, is also next year and we are going to be bringing in-house and on-shoring 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 the production capacity again in that case it will be in our U.S. plant we're targeting Vanora, Tennessee to make our UnitySeat products instead of sourcing them. And that will be about another 20% of the weight. So we will have eliminated a big portion of our ocean freight, which has been in our cost model and in our business model for 14 years. So we will have redesigned that portion of our supply chain.
spk01: And just to add more, the new plant in Africa is also going to be our electrical business. I guess we're seeing more of the new businesses. We are adding capacity over there to support our European-based customers. Thank you, Andy. Yep.
spk02: That's helpful. Thank you.
spk01: Thank you.
spk04: Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press Start followed by the number 1. There are no further questions at this time. You may proceed.
spk07: Thank you, Sergio. Well, thank you for listening in and asking questions. You can see that our vehicle businesses are doing well and improving and have a good outlook in terms of demand. And 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 right-size our cost structure down, but we are bidding aggressively to add new customer positions when the business and the industry rebounds. And thank you for calling in this quarter, and we look forward to speaking with you in our next quarter. And with that, Sergio will end the call for today. Thank you.
spk04: Thank you. This concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Disclaimer