Commercial Vehicle Group, Inc. (NASDAQ:CVGI) Q4 2023 Earnings Call Transcript March 5, 2024
Commercial Vehicle Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the CVG’s Fourth Quarter and Full Year 2023 Earnings Conference Call. During today’s presentation, all parties will be in 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 conference over to Mr. Andy Cheung, Chief Financial Officer. Please go ahead.
Andy Cheung: Thank you, operator, and welcome, everyone, to our conference call. Joining me on the call today is James Ray, President and CEO of CVG. This morning, we will provide a brief company update as well as commentary regarding our fourth quarter 2023 results. After which, we will open the call for questions. As a reminder, this conference call is being webcast in the Q3, 2023 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, 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 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 confidence, 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.
James Ray: Thank you, Andy, and good morning everyone. It is an absolute pleasure to be joining you on my first earnings call as President and CEO of CVG. Having served on the Board of Directors since 2020, I’ve had the opportunity to witness the strength of CVG’s business fundamentals, the transformative strategy in place, and the remarkable growth potential in this organization. We have great strategy, great people, and great customers. I was appointed president and CEO December of 2023 and there was a lot of good progress already underway from the leadership of our Chairman and Interim CEO, Bob Griffin. I want to thank Bob for all his efforts in the months prior to my appointment as President and CEO. As this is the first time I’m speaking to the majority of you, I’d like to offer a bit of my perspective on the opportunity I see ahead for CVG.
I’m sure you’re curious what will change with me as CEO. And to be clear, my aim is not to change our strategy, but rather to enhance it. In my role as a board member, I saw firsthand the hard work and planning that went into developing our transformation strategy. We think we are seeing the early benefits of that transformation, as our new business wins drive top line growth and margin improvement even as we see a downturn in the Class 8 truck builds and this improved profitability is leading to reduced leverage and a healthier balance sheet. Additionally, we have provided our outlook for the full year 2024 more on this later. My goal is to best equip our teams to continue driving this transformation and to make sure we have the right culture in place to enable our teammates to drive us forward every day.
In order to build and maintain this growth focused culture, we need to do three key things. One, develop and reward our employees. Two, excite our customers, and three, deliver results to increase our value to shareholders. Fundamentally, it’s all about people, processes and capability. My goal as CEO will be to make sure we are developing all three aspects through strong teamwork, continuous improvement and building capability. I am incredibly excited about that opportunity ahead of us at CVG. Before turning to the details of the quarter, I want to highlight that Bill Johnson was elected to the Board of Directors in December. He brings a wealth of operating experience and expertise across a variety of business areas, including his current role as CEO and a board member of the Board of Directors of Avail Infrastructure Solutions.
Bill also served as President and CEO of Welbilt from October 2018 to July 2022, and as the President and CEO and COO of Chart Industries from July 16 through June 2018. He possesses over 30 years of global experience and we’re excited to have Bill join our board. I have no doubt CVG will benefit from his skills and perspective. Now, I’d like to turn your attention to the supplemental earnings presentation starting on Slide 4. Following solid year-over-year improvements in the first few quarters of the year, our fourth quarter results were negatively impacted by a work stoppage at a customer facility and reduced demand. We reported net sales of $223 million in the quarter and an adjusted EBITDA of $10.3 million. We continue to win and integrate new business, optimize costs and work to improve profitability of our business.
Our continued focus on margins as well as the contribution of new wins helped drive a 26% increase in full year adjusted EBITDA to 6.8%, up 140 basis points compared to last year. For the full year, we generated $19 million in free cash flow and it combined with our strong EBITDA, our net leverage ratio declined to 1.5 times from 2.2 times. Speaking of new wins, we recorded in excess of $150 million of new wins this year on a fully ramped basis, continuing our strong track record of success. Consistent with our strategy, these wins continue to be focused within our Electrical Systems segment and support the product ramp up at our two new plants in Mexico and Morocco, which are focused on meeting the demand growth in Electrical Systems. We’re also currently expanding our footprint with an additional new plant under construction in Morocco.
Turning to Slide 5, I’d like to take this opportunity to highlight some recent strategic actions we’ve taken, which all serve as a reminder of our ongoing focus to align cost and improve margins at CVG. First, we are closing one vehicle solutions facility in North America and shifting the production to other locations in line with our goal of lowering our manufacturing cost and improving Vehicle Solutions margins. Second, we are taking additional steps to reduce organizational cost and align resources to support our highest growth product lines. These actions are part of our ongoing efforts to make sure we are cost competitive and improve our profitability over time. Finally, we announced the sale of our Finnish [ph] tech business in the Vehicle Solutions segment in January of this year.
While not a large transaction, it focuses our business portfolio more on our core growth opportunities and demonstrates our commitment to strategic capital allocation. These recent actions should echo well with our long stated transformation strategy to improve the mix and profitability of our business through the growth of our Electrical Systems business. And with that, I’d like to turn the call back to Andy for a more detailed review of our financial results.
Andy Cheung: Thank you, James, and good morning everyone. If you are following along in the presentation, please turn to Slide 6. Consolidated fourth quarter 2023 revenue was $223.1 million as compared to $234.9 million in the prior year period. The decrease in revenues is due primarily to the impacts of a strike at a Vehicle Solutions customer facility, which more than offset an increase in Electrical Systems revenues. Foreign currency translation favorably impacted fourth quarter 2023 revenues by $1.8 million, or 0.7%. Adjusted EBITDA was $10.3 million for the fourth quarter, compared to $13.3 million in the prior year. Adjusted EBITDA margins were 4.6%, down 110 basis points as compared to adjusted EBITDA margins of 5.7% in the fourth quarter of 2022, driven primarily by lower volumes and strike impacts.
Interest expense was $2.4 million as compared to $2.9 million in the fourth quarter of 2022. The decrease in interest expense was primarily related to lower average debt balances during the respective periods, partially offset by higher interest rates on variable rate debt. Net income for the quarter was $23.3 million or $0.70 per diluted share as compared to a net loss of $32 million or negative $0.98 per diluted share in the prior year. Adjusted net income for the quarter was $2.9 million or $0.09 per diluted share as compared to $1.4 million or $0.04 per diluted share in the prior year. Consolidated full year 2023 revenue was $994.7 million as compared to $981.6 million in the prior year period. The increase in revenues is due primarily to pricing and an increase in Electrical Systems volume.
Foreign currency translation favorably impacted full year 2023 revenues by 2.0 million or 0.2%. Adjusted EBITDA was $67.6 million for the full year, up 26% compared to the prior year. Adjusted EBITDA margins were 6.8%, up 140 basis points as compared to adjusted EBITDA margins of 5.4% in 2022, driven by gross margin expansion slightly offset by higher SG&A. Net income for the full year was $49.4 million or a $1.47 per diluted share as compared to a net loss of $22 million or negative $0.68 per share in the prior year. Adjusted net income for the year was $30.2 million or $0.90 per diluted share as compared to $16.4 million or $0.51 per diluted share in the prior year. Turning to Slide 7, I would like to highlight a few items on the adjusted EPS bridge, which include our adjustments to GAAP EPS as well as one additional special item.
First, we reversed a charge we took last year for deferred tax valuation allowance due to improved profitability in our U.S. operations. Second, we took a restructuring charge related to the footprint optimization and cost reduction efforts that James discussed, totaling $0.05 per share. Additionally, we were negatively impacted by a strike related work stoppage at one of our customers facilities during the quarter, which we estimate negatively impacted earnings by $0.06 per share. Adjusting for these items, our EPS would have been $0.15 per share. Now moving to segments results beginning on Slide 8. Our Electrical Systems segments achieved revenues of $56.2 million, an increase of 19% compared to the year ago fourth quarter, resulting from increased sales volume, including the impact of new customers and increased pricing.
Adjusted operating margin was 11.6%, an increase of 30 basis points compared to fourth quarter of 2022, driven by increased sales volume and improved pricing. For the full year, revenues were up 27%, again driven by pricing and new wins contribution. Full year adjusted operating income margin increased 100 basis points as volume, leverage and pricing more than offset inflationary impacts. Evident in these results are the impacts of our new business wins and the ramp up of our two new plans in Mexico and Morocco, which remain on track to support these new wins. Furthermore, given the continued new wins, we are currently in the early construction phase for a second site in Morocco. As always, we will remain focused on driving operational improvements and optimizing margins even as the additional new wins flow through.
Turning to Slide 9. Our Vehicle Solutions segment’s fourth quarter revenues decreased 10% to $128.4 million compared to the year ago quarter due primarily to the impacts of a strike related outage at one of our customer facilities. Adjusted operating margin for the fourth quarter was 3.1%, an increase of 20 basis points compared to the prior year period, as increased pricing and cost controls more than offset the impact of lower volumes related to the strike. For the full year, revenues were up 1% driven by increased North America Class 8 production. However, it was partially offset by lower volumes in Europe and China. Full year adjusted operating income margin increased 350 basis points, driven again by pricing and other cost controls. We are encouraged by the year-over-year improvement in Vehicle Solutions, but this segment remains a key focus for our team in terms of reducing cost, driving, further operational improvements, as well as winning business on new platforms, all with the goal of driving improved margins.
Moving to Slide 10, our Aftermarket and Accessories segment revenues in the fourth quarter decreased 8% to $31.4 million compared to the year ago quarter, primarily resulting from decreased sales volume. It is also worth noting that our Q4 2022 performance benefited from a large backlog that did not repeat this year. Adjusted operating margin for the fourth quarter was 11%, an increase of 20 basis points compared to the prior year period. The increase is primarily attributable to pricing. For the full year, revenues were up 5%. Full year adjusted operating income margin increased 330 basis points, driven again by pricing as well as better cost performance. Turning to Slide 11, our Industrial Automation segment produced fourth quarter revenues of $7.1 million, a decrease of 35% as compared to $11 million in the fourth quarter of 2022 due to ongoing challenging market conditions.
Adjusted operating margin was 3.7%, an increase of 850 basis points compared to the year ago quarter, primarily attributable to the efforts taken to right size this business. For the full year, revenues declined 56% at demand levels for this business remained at trough levels. Full year adjusted operating income margin declined 760 basis points, driven primarily by lower volumes. As mentioned, we have taken actions to right size our core structure in this business and we have broadened our market focus to expand our revenue opportunity. That concludes my financial overview. I will now turn the call back over to James to discuss our key focus areas for 2024 as well as our outlook.
James Ray: Thank you, Andy. Turning to Slide 12, I’d like to highlight where our team will be focused in 2024. This will be no surprise to hear, but new business wins remain core to our culture at CVG and we continue to add additional customers and platforms. We look to continue our new business wins in 2024 building on the wins we recorded in 2023. Our strategy calls for continued diversification of our revenue stream, which is key in transforming our revenue mix, reducing our cyclical exposure and improving profitability. Next, we will continue the planned ramp up of our new Electrical Systems plants in Mexico and Morocco. These expansions are key to growing our Electrical Systems business globally and are positioned to be cost competitive and provide outstanding service to our customers.
Additionally, we are underway with the construction of an additional Moroccan plant, which will further support anticipated growth and supply chain optimization. So, before turning to the fiscal 2024 outlook, I want to emphasize what we are doing with our three key businesses. One, we are focused on making Electrical Systems our largest business by continuing to win new electrical business across multiple end markets and diversifying our product portfolio, including diversifying our vehicle platforms toward higher growth markets while simultaneously reducing our exposure to the cyclical Class 8 truck market. Two, we are optimizing our Vehicle Solutions and Aftermarket businesses as we see multiple levers to improve profitability through operational cost efficiency and making strategic sourcing decisions.
We expect all of this to lead to improved working capital management and increased free cash generation. Collectively, this fundamental business transformation is expected to improve our business mix and make CVG a larger, stronger and more profitable company in the coming years. Turning to Slide 13, I’ll share a few thoughts on our outlook for 2024. You’ll notice that for the first time we are giving you quantitative annual guidance at the revenue and adjusted EBITDA level. We believe this will help indicate our underlying expectations for the performance of our business. Industry forecasts currently project a decline in North American Class 8 truck builds of approximately 16% for the year. However, we expect to benefit from growth in Electrical Systems revenue.
As a result, we are forecasting revenues to be in the range of $915 million to $1.015 billion [ph] with projected growth in Electrical Systems segment notwithstanding the approximately 16% drop in North American Class 8 truck build, we expect adjusted EBITDA margins year-over-year to be relatively flat as implied by the midpoint of our guidance range of $60 million to $73 million EBITDA for 2024. Our expectation is that this level of EBITDA generation offset by capital expenditures in the range of $25 million to $30 million for the year to drive further free cash flow, giving us the optionality of further debt paydown or potential inorganic growth opportunities should we find an attractive deal. Overall, we expect 2024 to show solid demand and revenue for the full year as we continue to win new business at a strong pace.
With [indiscernible] in our Electrical Systems segment. We believe this level of resilience in the face of lower North American Class 8 industry volumes is further evidence of the success of our diversification strategy. With that, I will now turn the call back over to the operator to open up the line for questions. Operator?
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