Commercial Vehicle Group, Inc.

Ladies and gentlemen, and welcome to CVT's second quarter 2025 earning 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 introductions to follow at that time. As a reminder, this conference is being recorded. I will now like to turn the call over to Mr. Andy Chung, Chief Financial Officer. Please go ahead.

Thank you, operator, and welcome everyone to our conference call. Joining me on the call today is James Wei, President and CEO of CVG. This morning, we will provide a brief company update as well as commentary regarding our second quarter 2025 results, after which we will open the call for questions. As a reminder, this conference call is being webcast and a Q2 2025 earnings call 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, call saving initiatives, and new product initiatives, among others. Actual results may differ from anticipated results because of the certain risks and uncertainties. This risk and uncertainties may include, but are not limited to, economic conditions in the market in which CVG operates, fluctuations in the production volumes of vehicle for which CVG is a supplier, financial governance 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 James to provide a company update.

Thank you, Andy. Before I speak to the earnings presentation, I wanna take a moment to thank Ruth Gratzke, the CVG board member since July, 2021, for her contributions as she leaves our board for personal reasons, effective August 7th. Additionally, I also want to thank Scott Reed, our current COO for his contributions to the company. Scott will be leaving the company to pursue consulting opportunities, effective August 29th. We have a solid team in place and expect to fully execute on our plans going forward. Now, I'd like to turn your attention to the supplemental earnings presentation starting on slide three. As we have highlighted on this slide, CVG delivered solid second quarter results and continued improvement in our profitability and free cash generation in a very challenging market environment. During the quarter, we delivered an adjusted gross margin of 12%, which is up 120 basis points on a sequential basis and up 70 basis points compared to last year. The continued improvement in profitability was again driven by the operational efficiency initiatives we have spoken to in prior calls. I will cover this in more detail in a minute. Also highlighted on this slide is our continued improvement in free cash generation. During the quarter, we delivered $17.3 million in free cash flow, which is an improvement of $16.5 million compared to last year. I will also provide more detail regarding our free cash flow performance in a moment. Another highlight of the quarter is our improved performance within the global electrical system segment. For the quarter, we saw segment performance stabilize with revenues flat compared to prior year. Despite flat revenue, we delivered an adjusted operating income improvement of $0.4 million driven by lower salary expense as we continue to ramp production in our new low cost facilities. Before I move on, I'd also like to comment on our recently announced debt refinancing, which we completed and announced during the second quarter. These transactions provide us with significantly more financial flexibility as we look to advance our operational initiatives, including further cost reductions, margin improvement, and overall operational efficiency. Turning to slide four, I want to provide additional color as it relates to the continued sequential improvement we are seeing at the gross margin line. As we highlighted last quarter, the operational efficiency improvements made related to freight, labor, and plant level overhead continue to benefit our profitability. As a reminder, we have reduced our reliance on expedited freight, optimized our terms with suppliers, and improved our lead times and order qualities. We also continue to flex our direct labor to better align with customer volume changes and have continued to balance our production more toward lower cost facilities. And finally, our new segment alignment has provided a more optimal overhead structure, and we are continuously evaluating selling, general and administrative expenses, SG&A, for efficiency improvements. We are pleased to see our focus on operational efficiency payoff, which has supported our financial performance in a lower demand environment. While we acknowledge the broader market and macroeconomic uncertainty, we have, and will continue to take the necessary proactive actions. Looking ahead, we believe we are well positioned to drive accretive growth, accelerate margin expansion, increase our capital efficiency, and ultimately enhance shareholder value as our end markets recover. Moving to slide five, I'd like to again highlight a graphic we have shared in our last two earnings calls. Again, while the strategic portfolio actions we took last year led to cash flow headwinds in 2024, we are seeing these actions reverse meaningfully year to date in 2025. Through June of this year, our discontinued operations were net cash generative, and we had minimal restructuring spend at less than $2 million. We've also driven a $12 million improvement in inventory versus the end of 2024. Improvement in each of these areas helped drive free cash generation of $17.3 million in the quarter, which brings our year to date free cash generation up to $28.5 million. As Andy will cover in a moment, we have raised our free cash flow outlook for the year to be at least $30 million, as we expect to build on our year to date progress in the back half of the year. With that, I'd like to turn the call back to Andy for a more detailed review of our financial results.

Thank you, James, and good morning, everyone. If you are following along in the presentation, please turn to slide six. Consolidated second quarter 2025 revenue was $172 million, as compared to $193.7 million in the prior year period. The decrease in revenues is due primarily to a softening in customer demand across our global seeding and trim systems and component segments. Adjusted EBITDA was $5.2 million for the second quarter, compared to 8.2 million in the prior year. Adjusted EBITDA margins were 3.0%, down 120 basis points, as compared to adjusted EBITDA margins of .2% in the second quarter of 2024, driven primarily by lower volumes, but offset by reductions in SG&A expenses. Interest expense was $2.3 million, as compared to a 2.4 million in the second quarter of 2024, driven by lower debt levels. Net loss for the quarter was $4.1 million, or a loss of 12 cents per diluted share, as compared to a net loss of $1.3 million, or a loss of 4 cents per diluted share in the prior year. Adjusted net loss for the quarter was $2.9 million, or a loss of 9 cents per diluted share, as compared to adjusted net income of $1.5 million, or 5 cents per diluted share in the prior year. Net loss and adjusted net loss were impacted by shortened customer demand. Pre-cash flow from continuing operation for the quarter was $17.3 million, compared to $0.8 million in the prior year. The pre-cash flow generated in the quarter was supported by the company's ongoing strategic and working capital initiatives. At the end of the second quarter, our net leverage ratio, calculated as our net debt divided by our trading 12-month adjusted EBITDA from continuing operations, was 4.8 times, down from 5.0 times at the end of the first quarter. Moving to the segment results, starting slide seven. Our global seeding segment achieved revenues of $74.5 million, a decrease of 10%, as compared to the year-ago quarter, with the decrease primarily driven by lower sales volume as a result of reduced customer demand. Adjusted operating income was $3.1 million, an increase of $0.2 million, compared to the second quarter of 2024. While operating income was negatively impacted by lower sales volume and increased freight cost, we saw an improvement in adjusted operating income margin, primarily attributable to lower SG&A expenses. Turning to slide eight. Our global electrical segment's second quarter revenues remain essentially flat compared to the year-ago quarter at $53.6 million. As new business winds offset weaker construction and agriculture demand, adjusted operating income for the second quarter was $1.2 million, an increase of $0.4 million compared to the prior year. Primarily attributable to lower salary expense as we benefit from our new low-cost facilities. We are beginning to see the benefits of the restructuring actions we have taken in this segment, and we are encouraged by the stabilizations we are seeing. Global electrical systems remain a key area of focus for growth and cash generation moving forward. Moving to slide nine. Our trim systems and components revenues in the second quarter decreased 24% to $43.9 million compared to the year-ago quarter due to lower sales volume as a result of decreased customer demand. As a reminder, this segment solely serves the North American market and is most directly impacted by the reduction in class eight production volume. Adjusted operating income for the second quarter was $0.3 million, a decrease of $3.7 million compared to the prior year. The decrease is primarily attributable to lower sales volumes. We continue working through the last of our operational inefficiencies in this segment, and we are taking further actions to stabilize operations and improve operational efficiency and financial performance. That concludes my financial overview commentary. I will now turn the call back over to James to cover our market outlook, key strategic actions being taken, and our updated guidance.

Thank you, Andy. I will start with our key in-market outlooks on slide 10. According to ACT's class eight heavy truck build forecast, 2025 estimates imply a 24% decline in year over year volumes. ACT has removed any pre-buy impact related to the proposed 2027 emissions standard from their 2026 projections, and now forecast truck builds flat in 2026. Looking ahead to 2027, ACT is forecasting a 12% improvement in truck builds. Moving to our construction and agriculture market outlook, based on recent commentary and outlooks from our customers and key market players, we continue to expect construction market to be down approximately five to 15%, and agriculture market to be down in the same range as higher interest rates, weaker housing starts, slower commercial real estate activity, and lower commodity prices continue to weigh on demand. Despite the continued market softness, which mostly directly impacts our global electrical system business, we continue to remain optimistic about the long-term potential of both construction and agriculture markets as we see ongoing replacement needs and underlying secular trends driving a recovery in these markets in 2026 and beyond. Turning to slide 11, I'd like to reiterate the key actions we have underway to improve cash flow, as well as mitigate the impact of tariffs and broader macroeconomic headwinds. First, we remain focused on driving improved cash generation and aligning our SG&A structure with our current revenue base this year. Specifically, we expect $30 million in working capital reduction, focused primarily on inventory and accounts receivable, as well as a 50% reduction in planned capital expenditures this year. Through the first half of the year, we realized $12 million in inventory reductions and $11 million in accounts receivable reductions. We also continue to expect $15 to $20 million in cost savings this year, with a renewed focus on SG&A, which should drive incremental margin expansion as our top line returns to future growth. Second, we expect the strategic portfolio actions taken in 2024 to lower our cost structure, to continue lowering decremental margins, positioning us well to grow our earnings power as end market demand recovers. Third, we remain constant communication with our customers, improving our line of sight to production schedule changes, and allowing us to implement necessary cost actions in the event of future changes. In addition, our teams took immediate action in response to tariffs to mitigate potential impacts, and we've made solid progress in that regard. We continue to have successful negotiations on price recovery terms with our customers while building contingency plans to create flexibility across multiple scenarios, all with the end goal of securing our business competitiveness and meeting our customers' needs. We also continue to assess our relationship with suppliers, including evaluation of reshoring and nearshoring opportunities to further mitigate the potential impact of tariffs. Turning to slide 12, I'll share several thoughts on our updated outlook for 2025, which reflects the current estimated impact of tariffs, trade policies, and economic uncertainty, as well as the aforementioned actions that we are proactively taking in this current uncertain environment. Reflecting current macroeconomic trends, prevailing truck bill forecast, and continued weakness in construction and agriculture markets, we are lowering our quantitative annual guidance for revenue and adjusted EBITDA and tightening the range on both. The good news is we are increasing our free cash flow guidance to reflect robust performance year to date, as well as our ongoing focus on cash generation. Given current demand pressures, we are adjusting our full year 2025 revenue guidance range to $650 million to $670 million, which is down from $660 to $690 million from prior guidance. We are also revising our adjusted EBITDA guidance expectations to the range of $21 to $25 million for 2025, down from $22 to $27 million in the prior guidance. Based on this updated outlook, we still expect EBITDA margin expansion compared to full year 2024 at the midpoint of the ranges, supported by our continued focus on reducing manufacturing and SGMA costs. We expect to build on our free cash generation progress in the back half of the year, generating at least $30 million of free cash flow in 2025, which we expect to use to pay down debt. Our continued focus on reducing working capital and lowering capital expenditures underpin this outlook. Net leverage is expected to decline throughout 2025 and 2026 as we work toward returning to our targeted two times level. With that, I will now turn the call back over to the operator and open up the line for questions. Operator.

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 one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please release the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Joe Combs, company Noble Capsule. Please go ahead.

Good morning and thanks for taking my questions. Good morning, Joe. Hi, Joe. So I know you guys gotten away from, you know, giving a new business wins number, but given the environment, maybe you could kind of from a 10,000 foot perspective kind of give us, you know, are you seeing new business being bid? Are you winning new business? Is it within, you know, where you guys are hoping to be maybe above hopefully, and also kind of related, you know, from past new business wins, you know, how's the implementation of those going? Are we seeing any of those, you know, push to the right, so to speak, anything you could give us on that would be great also. Thank you.

Thanks, Joe. This is James. Responding to your question, we do continue to win new business. We have wins in Q1 and Q2, and we have a pretty robust funnel going through the balance of the year. Part of the difficulty in quantifying the new business is the uncertainty with schedules, launch timing, and as you mentioned, there's some that have been delayed, some that are with OEMs that have struggled financially, which is disruptive production, especially in the EV space, but we continue to see growth in that area. It's a secular trend that's gonna continue, so we're still focused on growing our electrical. And as an example, this year, about 15% of our revenue forecast for the electrical systems business segment is from new wins. So the flat revenue that you're seeing year over year is the new wins offset and continued softness in the CONAG markets. So we haven't shied away from pursuing business in any end market. We still continue to have very good relations with our CONAG customers, and there are opportunities for share of wallet gain in those customers as well due to our new low-cost manufacturing capacity that's online. So, and that's on a global basis, both in North America and Europe. So I feel really good about that. And as markets stabilize and we have a better quantification on launch timing and volumes, we may revisit reporting new business wins when that happens and occurs. As far as the implementation of new business wins, okay, I was gonna say the implementation dates for new business wins. Go ahead. Yeah, can you hear me? Okay, the new business wins implementation timing, it varies depending on the platform and the customer. We have seen some shifting, especially with the economic conditions, with launches being a little slower. There's some customers that still need regulatory approval, especially in the autonomous vehicle space. So we have seen some shifting there as well, but they're sizable wins and we'll be ready to bring those on with the creative margins based on our cost structure alignment and our new capacity in place.

Thank you. The next question comes from John Fransrab from CWC.

Good morning, guys, and thanks for taking the questions. I guess I wanna start with the cost savings aspect. You mentioned 15 to 20 millions of expected savings in 2021, I'm sorry, 2025. I'm curious how much of those savings are permanent and how much will come back as volumes return and how much is still left to be done as far as in the SG&A side of the cost savings program?

So, yeah, thanks, John. On the cost savings, that's an interesting dynamic because these are both material, direct material cost savings, indirect expense cost savings as well as manufacturing cost outs with improved productivity. So we don't see these as being one time and actually as volume returns will generate more savings on higher volume. This year with the reduced volume, the savings that we had anticipated aren't coming in to the level a year ago that we thought they would because of the lower volume, but there are permanent savings in place with purchase price contracts, our logistics providers, et cetera. So we feel pretty good about the momentum that we're building from a cost reduction standpoint on SG&A and manufacturing overhead. Those are two areas that we will continue to take actions on. And with the current outlook from ACT, the manufacturing overhead pieces is going to be front and center with us. We've engaged an outside consulting firm to help us look at our supply chain optimization as well as our manufacturing overhead expense and those projects are in flight now. So we expect as we go through the balance of the back half to implement more actions to take cost out. So hopefully we'll see that come through and we continue to see the volume come through as forecasted by ACT.

Got it. And how far along are you in the tariff renegotiation process? Do you expect all your customers to have renegotiated by the end of the year?

Yes, we'd expect that to be the case. And the tariffs is, they've been changing a lot, as you know, the trade policy's been changing a lot. So we have a team of people and we meet every day to see what the latest changes are, try to assess the impact. And as you can imagine, both customers and suppliers, we're going through a lot of detailed information, port of entry, country of origin, all those elements that go into factor in the tariff impact. And then that information has to be submitted and discussed with our customers, as well as mitigating actions, whether it's supply changes or validating different materials to offset where the material is coming from. Those are a little longer from a timeline standpoint, price is the most immediate one. And there is a lagging effect because we have to submit the tariff impact post the actual impact that we have to the customers. And then there's a payment timeline from the customers to us. On the supplier side, we have the same stance with our suppliers that our customers have with us. We expect initial mitigation with price being a secondary or tertiary element to help them recover and stay viable. And then that gets translated back to our customers for relief. So it's a very dynamic process, a lot of negotiations, a lot of discussions, and it's top of mind for the entire supply chain, actually, from our suppliers to us, to our customers, and our customers in markets.

Certainly, certainly very dynamic right now. And one last question, I guess I'll get back into Q. Can you talk a little bit about how July looked relative to maybe the progression of the second quarter? Did it continue to weaken, stabilize, any kind of color, what the current climate is like?

Sure, no problem. On the class eight side, and even in trying to add to a certain degree, typically from June until August, early September, many of the OEMs on a global basis schedule downtime for a model changeover or vacation periods, et cetera. So we are seeing increased downtime in the back half of Q2 and also this quarter, which is causing us to quickly make adjustments with flexing our manufacturing plants down, ordering material so our inventory stay at a competitive level, as well as coordinating with our supply base to ensure we maintain on-time delivery and supply viability as these schedules change. So we're seeing more from June through August, more downtime than what was originally anticipated at the beginning of the year from our OEM customers.

Okay, make sense. Do you want to add that? Yes, go ahead. Add that,

so if you look at what we see right now is tracking towards ACT's projection in this quarter. So overall, if you look at what the market's forecasting is what we are seeing, but as James mentioned, we are doing all the actions that it takes to adjust for the volume.

I'll just sneak this in since you brought up ACT a couple of times in the responses. It seems to me like the new forecast from ACT looks more like the historical cyclical trends that we used to see in the Class 8 market. Is that your assessment or do you see anything different than that?

Well, what we see is that ACT has not included any type of pre-buy dynamic for emissions regulations that were initially intended for 2027. So the expectation was that we would see a pickup in pre-buy in the second half of 25 and for the balance of 26. They've now taken that dynamic out of the forecast and forecasted flat build rates into 26 and then a double digit, low teams double digit increase in 2027. So if volumes do come back sooner, obviously we'll be well prepared from a operating leverage standpoint, but if volumes stay flat like forecasted, we're gonna be positioned to ride through that down market until we see an uptick similar to what we're doing the past two quarters and going into the back half of this year.

Thanks again for taking my questions. I'll get back into queue.

The next question comes from Gary Presapino, Barrington Research. Please go ahead.

Hi, good morning all. James, Andy, last conference call you had mentioned something about the Trump administration maybe rolling back some of these admission standards for trucks. Where does that stand right now? Is that

still in a state of flux here? Yes, as far as we know, there hasn't been a definitive position on that yet, but as ACT is comprehended in their forecast, there's an anticipation that they will either be pushed out or changed. So we're planning for the worst, which is no pre-buy.

Gary, as James mentioned, so ACT doesn't predict the 26 pre-buy. And then as a result, there's no major drop in 27 as well. So right now the projection is a year over year, pretty fast from 25 to 26. And then there will be a gradual low double digit increase in the next few years. So longer term horizon is actually a more stable environment, but you don't see the big up and down in the next couple of years.

Okay. Then maybe you could help me out because I'm not that multi-gather familiar with the class eight truck market, maybe some others are. Is there a natural replacement cycle here that somewhere along the line has to start kicking in to more units produced? Is that why the 27 numbers are going

up?

Yes.

So these are non-discretionary in markets. In class eight, Connach, in vehicle production in general, there is a replacement cycle. Given the economic uncertainty, some of the feedback that we've gotten from our OEM customers is that the fleets that order large quantities of class eight trucks are holding off on making purchases and pushing them out based on the uncertainty. Some of the indicators like freight rates, the impact of tariffs with goods moving in have come down. So the need for replacement may not be as high as it was originally planned to be. So that's one piece. The other piece is we have an aftermarket business and seats and other products. So as purchases are being held off, we may see a positive impact in some of our aftermarket sales for replacement components, which typically they last seven years or so, five to seven years, and then they're into replacements depending on the duty cycle of the vocational application. But we see an opportunity there. So that's one good thing that comes out of this. And the other piece is the Connach market and as economic challenges, potential recession, and those factors weigh into purchases. Some of the dealer inventories in the Connach segment have increased because of the slowness of the economy and capital purchases being made. So they do need to be replaced at some point. And interestingly enough with those customers, they're doing R&D work and coming out with autonomous variants of some of their models, which drive a much higher electrical content. So we're engaged with customers now to try to best position ourselves as they roll out those new models with higher electrical content, we have a share of those platforms. So yeah, it's uncertain and we're making sure we have the right balance of countermeasures and alternatives in place so that we can either flex up or flex down and still be profitable

and

generate cash.

Okay, let me kind of ask the question another way then. How many annually of these Class 8 trucks are taken off the road and scrapped on an annual basis? Again, I'm just trying to get an idea of what the replacement volume looks like kind of on an annual basis.

I don't have specific information around that and we could do some follow up and get back to you. Gary, if

you look at the long-term North America Class 8 production volume, look at the long horizon is somewhere just shy of 300,000 units per year. Look at the up and down, but if you look at a long-term average, that I would call it, you can call it both the replacement rate as well as just growing in the overall market.

Okay,

that's helpful.

And then it's good to see you extended the debt maturities and I did read through the document somewhat, but your leverage ratio is 4.8 times. Can you give us some idea of how that leverage ratio steps down over time with the new agreement?

Yeah, so two things. We talked about our long-term target leverage ratio is around the two times. So between now and sometime in 2026, we continue to work towards that target. So you can see that we're making progress there. So you also can see that from our filing back at the end of June, so our new financing agreement allows us to have a little bit more wiggle room here in the next few quarters. So starting with over seven times of our leverage is in the governance inside the agreement. So we believe that we'll continue to focus on generating cash. As you can see, the first half, we made very, very significant progress there. And right now, that's our number one priority on our capital allocation is generating cash and continue to pay down debt and allow us more flexibilities.

Okay, thank you.

As a reminder, if you wish to ask a question, please press star one. There are no further questions at this time. I will now turn the call over to James Ray. Please continue.

Thank you all for joining today's call. We can now begin the call. We continue to take the necessary steps to support our customers in this dynamic environment, drive operational improvements, and execute on our goal of delivering better results. We look forward to updating CVG's progress next quarter. Thank you again.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.