Commercial Vehicle Group, Inc. Q3 FY2024 earnings call

• Strategic Steps: Sold FinishTEK, Cab Structures business, Chillicothe, Ohio facility, and Industrial Automation segment to streamline core capabilities, improve cost structure. Paid down $13 million debt to date, received final $20 million payment from Cab Structures sale in October. Secured $18 million in new business wins in Q3, year-to-date total new business wins ~$95 million. Cut ~1,200 roles (15% of workforce).
• Leadership Changes: Hired Peter Lugo to lead Electrical Systems, with experience in driving growth across diverse end markets. Hired Carlos Jimenez as Executive Vice President of Global Operations and Supply Chain to improve supply chain and manufacturing efficiency by consolidating functions.
• Financial Outlook: Lowered 2024 revenue guidance to $710 million - $740 million from $730 million - $780 million. Lowered adjusted EBITDA guidance to $20 million - $25 million from $28 million - $36 million. Expect margin improvement in 2025 through collective initiatives.

Electrical Systems

• Revenues: $43.4 million, decreased 19% year-over-year. Revenue contribution: approximately 25.25% (43.4/171.8). Adjusted operating income: $0.9 million, decreased $5 million compared to Q3 2023.

Vehicle Solutions

• Revenues: $97.3 million, decreased 16% year-over-year. Revenue contribution: approximately 56.64% (97.3/171.8). Adjusted operating income: $3.8 million, decreased $4.5 million compared to prior year.

Aftermarket & Accessories

• Revenues: $31.1 million, decreased 8% year-over-year. Revenue contribution: approximately 18.1% (31.1/171.8). Adjusted operating income: $3.9 million, decreased $0.4 million compared to prior year.

• 2024 revenue guidance adjusted from $730 million - $780 million to $710 million - $740 million.
• 2024 adjusted EBITDA guidance adjusted from $28 million - $36 million to $20 million - $25 million.
• Anticipate adjusted EBITDA margin improvement in 2025 associated with collective efforts.

• Economic conditions in markets where CVG operates. - Fluctuations in vehicle product volumes for which CVG is a supplier. - Financial covenant compliance and liquidity issues in foreign countries and currencies. - Risks detailed in SEC filings.

Q: Good morning. Thanks for taking my questions. The first one off, I just want to start kind of technical, Andy. You have plans to put out the adjusted continue operating results for the first and second quarter, so we can make our models from a historical perspective correct?

A: Yes. So Joe, if you look at our Q3 filings, so you can see that we have made the adjustment for the current quarter as well as year-to-date. So basically, you can always see our first half performance from adjusted basis for continuing ops. Our team will continue to provide that in Q4. We'll have a full-year number. So eventually, you should be able to see our run rate plan.

Q: The portfolio reshaping, the restructuring, that that was going on before you assumed the CEO role and also well over a year now. How much more of this needs to be done, in terms of the portfolio reshaping and restructuring and cost optimization? Are we at that point now or is there more still to do?

A: Yes. Thanks, Joe, for the question. Let me rewind the clock back to before I've started. We had initiated the footprint expansion projects in Mexico and Morocco. We also had started a process on our FinishTEK business. So those were the items that were in flight when I joined as CEO. Obviously, I was on the Board prior to that, so I had insight into that. And then in January, we closed FinishTEK. But we also took a harder and finer look at the balance of the portfolio to determine capital requirements, determine organizational focus and capability for growth and also the market outlook for the various segments that we were considering. In addition to that, the utilization of our assets. So during the first quarter, we determined that we were going to evaluate the success of the industrial automation launch of their new product innovation that we talked about in Q1. That did not yield the level of demand near-term and would require much more investment to bring that to market over time. So at that time, considering the sales funnel and considering the losses that were anticipated, we looked at other strategic alternatives, eventually engaged investment bankers, started the process in Q3 and went through multiple bidding efforts and eventually closed the sale. So from start to finish, that happened since I came in. And when we started the year in initial guidance, we had not comprehended that transaction would occur this year nor have we made the decision at that time to actually launch an evaluation process. As far as Kings Mountain, the Cab Structures business, again in Q1, we had discussions with the major customer there about their forward plans as well as their volume requirements as they were coming off an extended work slowdown and stoppage due to strikes as well as other supply chain issues of the customer. During those discussions week, we evaluated options for that facility because of the capital requirements in order to meet the future production requirements as well as the long-term outlook for the models that were going to be produced in that facility. We came to an agreement to evaluate what the best option was for that site. So we started that process at the end of Q1, beginning of Q2, eventually signed an asset purchase agreement. We also had an external banker evaluation for the asset itself considering the revenue stream and the offer and what we sold for within the range of the banker estimate. So from start to finish, call it Q2 to Q3, that was completed. And then in Q1, we also evaluated the utilization of our existing plants. And with the down year-over-year expectation in Class 8 for both 2024 and 2025, we determined that we needed to improve the utilization of some of our underutilized plants. And that's when we identified the Chillicothe site to move the production to other sites. It actually moved to four other plants. And we executed the move and the sale, in Q3. So they all came together. I would say at this point, Joe, there are no immediate term portfolio adjustments on our horizon. Once we prove ourselves and establish an earnings that meet expectations, and we look at our cash and capital allocation, we most likely will be looking at acquisitions, primarily focused in the Electrical Systems space. But from a divestiture and closure standpoint, we're pretty much at a point where we're in the phase of stability and now reshaping our margin profile going forward.

Q: Regarding the ag and construction market, you suggested that expectations at the customer level is to be flat year-over-year. I just want to make sure I understand that. Is that flat compared to current levels of volume, if you will? Or is that flat based on the total 2024 aggregate kind of a number?

A: Yes. So John, that's a year-over-year comparison. So it's a total 2024 versus total 2025. So clearly, there are still a lot of uncertainties out there. There are many data points that we look at and trying to understand the market. It's hard to predict. The customer indication right now is pretty flat. Some sources say that it's going to be slightly increased, and we see some sources saying it's done. So it's still quite volatile here. But overall, at this point, our best prediction is about flat on year-over-year.

Q: Regarding the production inefficiencies from relocating from the two facilities, are you behind that process? And if not, when will you be? And I guess lastly, can you quantify the impact that had on gross margins in the third quarter?

A: Yes. So for continuing operations, we are at the tail end of those inefficiencies. Bringing in the new leadership will further accelerate stability and margin expansion at the gross margin level. The divested assets had pretty large amount of inefficiencies too, but those are closed and behind us, so they're not going to repeat. And we also expect the cost structure improvement with the closed site overall for Vehicle Solutions will expand margins there. So our focus really is on how we fill the new low cost capacity in Electrical Systems and also focus on strategic growth initiatives in Electrical Systems that are broader -- that will broaden the funnel of opportunities that we're going after. As far as quantifying the impact, the gross margin, that's primarily where it was with the inefficiencies with freight and overtime and labor, supply chain issues, equipment issues, rigging and moving business and machines, that is in the upper single-digits to low-double-digits millions on the continuing operations. So on an annualized basis, so that's kind of a book in there, a range, and we don't expect the majority of that to repeat.

Q: Regarding the new leadership changes, these gentlemen seem to be experts in their fields. How long would you say it would take them to get their imprint on the business in terms of when you can start seeing a turn? Is this a 12 month timeframe? Is it a six month timeframe? Just give us an idea as you know, maybe what their priorities are coming in.

A: Sure. Thanks for the question, Gary. I'll take them separately. So we hit in flight in the operational efficiencies, launched several initiatives to bring stability after many of the footprint moves and portfolio changes. So we have a number of initiatives that were already in flight. The operations and supply chain functions were within the business units. So the business unit leaders were focused on growth customer relations as well as addressing the operational efficiency. So bringing in Carlos Jimenez, who has proven at various companies in his background, transformational acceleration is the main focus and intent. The operations and supply chain functions will be centralized under his leadership, so we have a more consistent deployment of operational excellence across our sites. And also the tools and the processes, the accountability rhythms are going to be standardized. So we have much better visibility focused on leading KPIs versus being reactionary to certain disruptions. So I expect this impact to be immediate as we aspire to have stability this quarter. So when we enter into 2025, our [indiscernible] platform of more stable operations and ready for margin expansion. So some of the onetime cost will repeat, improve our cost out process, get more standardization and accelerate lean manufacturing processes. So going into Q1, I expect the impact with them coming into the organization to be felt near-term. With Peter Lugo in our Electrical Systems business, his priority is going to be reestablishing our view of where we stand across all the segments we supply into and immediately start to address what our strategic growth initiatives need to be and how they may need to change. I would say, since I've been in the role, we have done a really good job of expanding into diverse end markets. Many of our new wins are lower in volume, while increasing the complexity of the customer management of that. And in some cases, we have a share of the business on certain platforms. We win new business as we go into new OEMs. So now that we are in the door, we have to accelerate expansion of share of wallet. Peter has a lot of experience in organic growth initiatives as well as M&A. So as we stabilize our earnings profile and we deserve the right to go after M&A, he's got the background and the view of how to do that successfully from an integration standpoint and also a synergy optimizing synergies from M&A. And I would expect, again an immediate impact from him reassessing where we are and launching strategic growth initiatives that we should start winning business in a different profile, maybe even at different scale. But then also focusing on how we take our existing business and fill the capacity in the lower cost locations through some of the launches that are coming up. We have a number of launches that are coming online in 2025 that somewhat mitigates some of the downsides we see in the end markets. We had some this year, but the level of the downside really ate up the impact of the launch of new business. And then importantly, the ramp. So as these programs ramp and we further utilize capacity, it gives us a better view of how we can reshape our quote funnel and really focus on product management and portfolio management with the customers, so we have better traction on winning higher volume business at new customers as well as expanding share of wallet at existing customers.

Q: As I read this, okay, and what you said, well, first of all, this may have been asked already, but I just want to make sure, are we looking at any more restructuring expenses in Q4? Or is this really all behind you?

A: So Gary, I would say that it's largely behind us. As James mentioned, portfolio actions are completed. We're obviously constantly adjusting our footprint and our workforce depends on the demand that we are seeing. So as I mentioned, there's still a lot of uncertainty, and we're not going to stop until we right size our workforce. But I will also add that in my comment about overall enterprise cost structure. So now that all the strategic actions, portfolio actions are behind us, we are in a position to further optimize, organize ourselves in a better way so that we find more efficiency that will be continuing throughout the rest of the year and hopefully, give us a heads up mix up here in 2025 for margin expansion. That's what we are planning on and we're working on right now.

Q: As I read what you've done here with bringing in Carlos Gimenez, it seems like you're really taking the operating model refinement, for lack of a better word, out of the core leadership of each individual business that you have and it's going to be umbrellaed under what he's going to do. Is that a correct assumption?

A: Yes, it is.

Q: How will this gentleman operate? I mean, does he come with the team? Do you use existing people? Are there -- are his people down at every one of these plants, reporting back to him, and he's setting up meetings, setting metrics for each of these organizations, these businesses to hit. How does this all work?

A: Yes, it's a, I guess in simplest -- in simple terms, it's going to be a combination of bringing in outside talent to top grade, where we have deficiencies in capability or competency and also continuing to develop existing resources that have a runway and bandwidth to expand their capability and competency. So that's going to be a combination effort. Some of the operational inefficiencies that we referred to throughout this presentation and also the prior earnings call were expenses related to consultants and subject matter experts that we brought in to help in our operations. They brought some good tools and processes, accountability processes, operating rhythms that we just need to further refine and deploy consistently across the operations. There will be a direct report from plant managers and supply chain logistics, et cetera, into Carlos directly with a service model to the business unit leaders. So the margin profile, the cost savings year-over-year, the quality and delivery metrics that our customers expect will be the -- those will be the requirements that Carlos and his team have to meet and have a plan to meet. And again, this is in an effort to be more customer focused, but also just rightfully take what we're entitled to from a margin standpoint. Between leakage and inefficiencies, we're entitled to a much better margin. So he's going to have and as well as a direct reporting to myself, our operating rhythms are going to continue to be daily and weekly cadence until we achieve stability and then it will go to weekly to monthly. But we're currently and have been since the middle of Q3 in a daily operating cadence over things that are going on in the business, trying to get ahead and stay ahead. And this is the next step in maturity in that process with him coming on board.

Q: When do you expect your first up quarter on an operating profit basis?

A: We haven't provided guidance at this point, but I would expect in 2025 in what I aspire to be is before the first half is done. And if everything comes into play like we planned, I expect it in the first half.