Commercial Vehicle Group, Inc. Q1 FY2025 earnings call

• The company completed the shift to a new segment structure, providing enhanced clarity and focus within each business unit. - Achieved a 10.8% adjusted gross margin in Q1, a 240 basis point sequential improvement from Q4 2024, driven by operational efficiency initiatives. - Free cash flow improved by almost $18 million compared to the prior year, with working capital management a key focus. - Decided to discontinue reporting new business wins due to macroeconomic uncertainty. - Discontinued operations were net cash generative in Q1, minimal restructuring spend, and $5 million inventory improvement compared to year-end.

The company has three operating segments: Global Seating, Global Electrical Systems, and Trim Systems and Components. Global Seating achieved revenues of $73.4 million, a 9% decrease year-over-year. Adjusted operating income was $2.7 million, a $0.1 million decrease from the prior year. Global Electrical segment's first quarter revenues decreased 14% to $50.5 million compared to the year ago quarter, with adjusted operating income of $0.2 million, a $1.3 million decrease. Trim systems and components revenues in the first quarter decreased 17% to $45.9 million compared to the year ago quarter, with adjusted operating income of $1.6 million, a $3.1 million decrease from the prior year.

• Lowered 2025 revenue guidance range to $660 million to $690 million from $670 million to $710 million. - Lowered adjusted EBITDA guidance to $22 million to $27 million from $25 million to $30 million. - Expect to generate at least $20 million of free cash flow in 2025 to pay down debt. - Net leverage expected to decline towards the targeted 2x level throughout 2025 and 2026.

• 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. - Risks associated with conducting business in foreign countries and currencies, as detailed in SEC filings.

Q: So nice work again on the cost improvements and everything. And just on the gross margin improvement. I wonder if you could just remind us in a normalized environment, how high you think gross margin could be?

A: Yes, Joe, we talked about -- overall, we see the entire business get to a high single-digit EBITDA margin, and that would involve us getting to about 15% gross margin. I think right now, we still have a long way there. But as you pointed out, that with 15% we will likely be returning to a more normalized end market demand plus some of our own self-help. So as you can see in Q1, obviously, the revenues are pretty low in the quarter, but we demonstrated that we were able to pull through some of the self-help. And then as you continue to see through the rest of the quarter, hopefully, both the self-help and the end market recovery will start to show more towards the end of this fiscal year.

Q: A couple of questions here. First of all, as I look back on the stats that you gave for Class 8 truck build when you reported in March. ACT was at, I believe, 316,000 of production. Now it's down to 255,000, and that's just really in a 2-month span. So is that a reaction to the possibility of the EPA considering delaying some of these emissions issues? Or is that just really a function of that they felt that the economy is really slowing dramatically, and this is where they think production is going to be?

A: Yes. I would say our largest exposure is on the Mexico and Canada tariffs. And we are currently -- the majority of our business right now in those -- that set of tariffs are under USMCA, which we've had some relief from. So we're -- I believe there's a 90-day pause on some of that. So we are working with customers to make sure that we're aligned with them. We have the appropriate recovery mechanisms in place. We are starting to see tariff recovery come in from customer invoices and POs on the amounts that we've experienced to date. The China tariffs are on a lower percentage of our spend, and it's primarily related to our global seating business. And we are working closely with the OEMs to make sure we have recovery mechanisms there. But also, they expect us to implement mitigating actions from the standpoint of nearshoring, onshoring and also renegotiation with suppliers to make sure that they're doing all the things that they have to do similar to our customers expecting us to do that. So there are a lot of moving pieces right now. Things still haven't settled down, but we feel like we're making momentum, both in the mitigating side and also the recovery side.

Q: I'd like to go back to the topic of the revenue profile for the current year. I'm curious how April played out relative to March. Are you seeing the revenue profile decrease in line with the ACT numbers? Or is it more or less aggressive than that forecast?

A: It depends. In some areas, it's in line. In some areas, it's not quite as low. So the ACT forecast primarily impacts our Global Seating and our Trim systems and components business. And depending on the customer and depending on the platform, you see a mixture of what models they're continuing to build and what models they put down weeks in, in their production, and we correspondingly do that with our plants. But we feel like that we're aligned with them with our increased interaction with their organizations on a planning and supply standpoint as well as production supply. And they've been very helpful in communicating to their supply base when they expect to have down weeks in the 12-week to 13-week outlook. So that does give us time to flex a bit. We don't exactly know when things will stabilize, and I think they're watching it closely as well. So we're just remaining flexible and agile to make the adjustments necessary. And as it relates to April versus March, we don't really see a significant shift in revenue profile. It's coming in as we expected back in the February, March time frame for April.