Alight Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 6, 2024

There are 4 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the CVG Q2 20 24 Earnings Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. I would now like to turn the conference over to Andy Cheung, CFO. Please go ahead.

Speaker 1

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 Q2 2024 and the Q2 2024 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.

Speaker 1

These risks and uncertainties may include, but are not limited to, economic conditions in the market in which CVG operates, fluctuations in the product volumes of vehicles for which CVG is a supplier, financial covenants 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.

Speaker 2

Thank you, Andy. I'd like to turn your attention to supplemental earnings presentation starting on Slide 3. Our 2nd quarter results fell short of expectations with year over year declines in revenue profitability as multiple factors both internal and external impacted our performance. Specific to our Electrical Systems segment, construction and agriculture markets, a key driver of growth for that segment, have continued to soften. This is a continuation of the market weakness we experienced in the Q1 of this year as higher interest rates and lower agriculture, agricultural commodity prices continue to weigh on a majority of our key customers in this segment.

Speaker 2

Business margins continue to have FX headwinds and unrecovered economics from several major customers. Additionally, we have also experienced operational inefficiencies within our Vehicle Solutions segment as we have incurred disruptions during the execution of a significant product launch with a large customer across multiple sites, coupled with activities to optimize our CAB structures facility in Kings Mountain, North Carolina as we progress through the sale process. I'll dive deeper into the actions we're taking to strengthen our Vehicle Solutions segment shortly. Despite challenges we experienced in the Q2, we took multiple corrective actions to stabilize the losses and position CVG for future success and advance several key strategic initiatives. First, we executed an agreement for the profitable sale our cap structures business in Kings Mountain, North Carolina.

Speaker 2

This transaction will serve to streamline and focus our product portfolio. I will cover this in more detail in a moment. We also made progress on our ongoing cost reduction and business optimization efforts. Year to date, we have deployed almost $7,000,000 in restructuring expenses to optimize our cost structure and we are reducing our headcount by more than 10%. We also continue to drive new business wins in the quarter with approximately $32,000,000 in awards.

Speaker 2

This brings our year to date total to approximately $80,000,000 across all segments. We are updating our 2024 guidance, which we will cover later in the presentation. Turning to Slide 4. I will highlight the recently announced agreement to sell our cash structures business in Kings Mountain, North Carolina. The sale of cash structures is strategic in nature and marks another milestone in our mission to evolve our business towards a higher growth products and markets in line with our ongoing strategic transformation plan, while simultaneously generating shareholder value.

Speaker 2

Of note, the sale price of $40,000,000 will help further our debt pay down. In line with our long term strategy, the sale of cash structures reduces our exposure to the cyclical Class 8 market, lowers our customer concentration, removes complexity from our business and improves our overall return profile. We will continue to take the best actions to position CVG for future success. Now moving to Slide 5. I'd like to highlight our key focus areas for 2024.

Speaker 2

As I mentioned previously, we are highly focused on proactively continuing to lower our cost structure and improving our operational execution as we navigate a lower demand environment. Our priorities for the remainder of this year are to enhance our electrical systems operational efficiency and cost profile, strategic evaluation of our Industrial Automation segment and strengthen our Vehicle Solutions segment, closing on the sale of our Cap Structures business and by stabilizing and improving operational execution. As it relates to Electrical Systems, we are actively executing a restructuring program as our key end markets, particularly construction and agriculture continue to soften. We have also experienced delayed and slower customer rent volumes of new business originally scheduled for production launch in 2024. This includes actions such as further reducing headcount and optimizing plant capacity utilization to stabilize margins and right size our plant production to match current demand conditions.

Speaker 2

Our 2 new low cost manufacturing sites in Aldama, Mexico and Tangier, Morocco provide options to lower our cost in electrical systems. Also, I would like to highlight our efforts within our aftermarket segment. While we have been facing lower customer demand in recent quarters, we are working to refine our production processes to improve our seat delivery performance and reduce lead times to customers. These efforts should help CVG's wallet share with customers as our aftermarket segment remains a key focus area for the company. Finally, within vehicle solutions, we are focused on executing a smooth transition of our cash structures business and making required improvements as we prepare to finalize the transaction.

Speaker 2

We have increased oversight and resources to stabilize the Vehicle Solutions business and offset inefficiencies resulting from program launches, supply chain issues and unexpected volume changes. To help address the issues in our Vehicle Solutions segment, our team has deployed multiple internal and external support teams to the effective facilities. While this was a significant expense in the quarter, we expect these actions to provide greater stability for the balance of this year as we appropriately position our cost structure for a market rebound in 2025 beyond. Now moving to Slide 6, I'd like to briefly highlight the Navistar Supplier Excellence Award, which CVG received in June of this year. Annually, Navistar recognizes 4 of its top performing suppliers based on quality, delivery, cost and continuous improvement.

Speaker 2

Navistar is a key CVG customer and we are delighted to receive the award and we'll continue to strive to retain this achievement. As a focal point of our customer value proposition, our focus remains on delivering operational excellence and growing together with our business partners and customers. Our team's passion for cultivating strong customer relationships creates an ongoing dividend that is reflected in our new program wins. With that, I'd like to turn the call back to Andy for a more detailed review of our financial results.

Speaker 1

Thank you, James, and good morning, everyone. You are following along in the presentation, please turn to slide 7. Consolidated Q1 2024 revenue was $230,000,000 as compared to $262,000,000 in the prior year period. The decrease in revenues is due primarily to a softening in customer demand impacting all segments and the anticipated wind down of certain programs in our Vehicle Solutions segment. Adjusted EBITDA was $10,000,000 for the 2nd quarter compared to $20,800,000 in the prior year.

Speaker 1

Adjusted EBITDA margins were 4.3% down 360 basis points as compared to adjusted EBITDA margins of 7.9% in the Q2 of 2023, driven primarily by lower volumes, inflationary impacts and the operational inefficiencies we experienced in vehicle solutions. Interest expense was $2,500,000 as compared to $2,800,000 in the Q2 of 2023. The decrease in interest expense was primarily related to lower average debt balances offset by higher interest rates on variable rate debt during the respective periods. Net loss for the quarter was $1,600,000 or $0.05 per diluted share as compared to a net income of $10,100,000 or $0.30 per diluted share in the prior year. Adjusted net income for the quarter was $2,100,000 or $0.06 per diluted share as compared to $10,700,000 or $0.32 per diluted share in the prior year.

Speaker 1

Moving to the segment results beginning on slide 8. Our Electrical Systems segment achieved revenues of $50,200,000 a decrease of 21.2% as compared to the year ago quarter, with the decrease resulting primarily from lower customer demand and the phase out of lower margin business that commenced in the 2nd quarter. We maintain our goal of making Electrical Systems our largest segment and still hold our view of this segment as our area of focused growth. Commentary from OEMs in the end markets we sell into, primarily construction and agriculture, has remained sour as the construction and agriculture markets continue to forecast a steep decline globally for the full year. Still, we continue to achieve new business wins, putting the company in a position to capitalize when end market demand within construction and agriculture markets rebound.

Speaker 1

Adjusted operating income was $1,900,000 a decrease of $5,800,000 compared to the Q2 of 2023. Operating income was negatively impacted by lower customer demand, restructuring costs, labor inflation and unfavorable foreign exchange impacts. Turning to slide 9, our Vehicle Solutions segment 2nd quarter revenues decreased 8% to $140,900,000 compared to the year ago quarter, due primarily to lower customer demand and the wind down of certain programs within the segment. In addition, we experienced elevated program launch costs for significant new product with a major customer that impacted multiple sites. We also saw throughput challenges in our cap structures business, increased freight costs, negative foreign exchange impacts and labor inflation.

Speaker 1

As a result of these factors, adjusted operating income for the Q2 was $8,300,000 a decrease of $6,200,000 compared to the prior year period. As James mentioned earlier, we have reached an agreement for the sale of our cap structure business, although preparing for the sale resulted in additional expense in the Q2. We also expect the consolidation of our Chillicothe facility to be completed in the Q3 of this year. We continue to view vehicle solutions as a core business and it remains a focus for our team as we continue to reduce cost, drive further operational improvements and win new business at higher margins to strengthen our profile. Moving to Slide 10, our aftermarket and accessories segment revenues in the 2nd quarter decreased 8.1% to $33,900,000 compared to the year ago quarter, primarily resulting from decreased sales volume on lower customer demand and the drawdown of backlog in the prior year period.

Speaker 1

Adjusted operating income for the Q2 was $4,700,000 a decrease of $800,000 compared to the prior year period. The decrease is primarily attributable to lower sales volumes, product mix and higher labor and benefit costs. On a sequential basis, results in this segment increased in terms of adjusted operating income for the Q2 in a row as we continue to apply our restructuring efforts in this business. Turning to slide 11, our Industrial Automation segment produced 2nd quarter revenues of $5,000,000 a decrease of 45% as compared to $9,000,000 in the Q2 of 2023 due to lower sales volume resulting from reduced customer demand. Adjusted operating income was a loss of $900,000 compared to a loss of $1,700,000 in the prior year period.

Speaker 1

We are in the middle of due diligent process of evaluating strategic alternatives with multiple interested parties. As James already mentioned, we see this process culminating in the second half of twenty twenty four. We are quickly acting to balance ourselves through restructuring and headcount reduction efforts to improve our profitability in the face of end market and operational challenges. To date, we have invested $6,800,000 in restructuring expenses and have a 10% lower headcount, coinciding with our progress in the strategic evaluation of our Industrial Automation segment. Through taking these efforts, we aim to become a more efficient, agile and profitable company.

Speaker 1

On Slide 12, we have highlighted CVG's key end markets as well as commentary related to the Class 8 heavy truck and construction and Agriculture sectors, which when combined represents almost 2 thirds of our company's revenues. Excluding our cap structures in Industrial Automation Businesses, our end market exposures are ordered with increased exposure to the construction and agriculture markets and decreased exposure to the Class 8 markets. Despite the near term market dynamics, we believe that this exposure focuses on the point of our transformation strategy, which is to strengthen our core vehicle solutions business, while focusing on a high growth electrical system business. Shifting now to our key market outlooks. As it relates to ACT's Class 8 heavy truck bill forecast, 2024 estimates have remained relatively unchanged with Class 8 truck orders estimated to be down 9%.

Speaker 1

We continue to expect modestly lower second half production for Class 8 trucks in line with ACT projections and expect an acceleration of growth in 20252026 as the industry is preparing for a substantial 2020 7 emission regulations. On a 6 month sequential basis, ACT is projecting double digit percentage point growth in classic builds each half year from second half twenty twenty four to second half twenty twenty five. Then as it relates to Construction and Agriculture markets, our Electrical Systems business suffer from further deterioration as a majority of our key customers in the space have seen declines ranging from 15% to 20% compared to last year. As a result, the new business that we have loaned is ramping slower with the majority of new programs delayed or running at a lower volume. Despite this weakness, we remain focused on pursuing new business and calibrating our current footprint to current conditions.

Speaker 1

Turning to Slide 13, I'll share several thoughts on our updated outlook for 2024. Accounting for recent CVG developments and current market conditions, we are adjusting quantitative annual guidance at the revenue and adjusted EBITDA level. Industry forecasts are still projecting a decline in North America Class 8 truck builds by approximately 9%. Better than the prior projection of a 16% decline, this positive revision is still offset by a weakening in our construction and agriculture end markets, which is consistent with the commentary we've seen from large OEMs in those industries. Given the confluence of end market demand pressures, we are adjusting our guidance range to $900,000,000 to $960,000,000 in full year 2024 revenues.

Speaker 1

We are also providing an adjusted guidance scenario in which we exclude contributions from our PEP structure business and the potential industrial automation transaction, a scenario in which we expect a range of $730,000,000 to $780,000,000 in full year 2024 revenues. We believe these strategic actions will position us to benefit as our end markets rebound and streamline our organization. Given the previously mentioned truck build and construction and agriculture market outlooks combined with execution challenges, we have also ordered our adjusted EBITDA guidance expectations to the range of $42,000,000 to $52,000,000 for 2024. Our adjusted EBITDA guidance range is $28,000,000 to $36,000,000 assuming both transactions are finalized. We believe that the alignment of our organization and our internal efforts we have taken to reduce cost and increase efficiencies going forward will allow us to achieve our revenue and adjusted EBITDA goals.

Speaker 1

This financial position will also allow us to manage our debt levels. We still maintain our goal of improving profitability through restructuring efforts to cut cost and heighten efficiency while making other strategic decisions to streamline our organization and right size our businesses. We anticipate all of these actions will spur working capital improvements and increase free cash flow as we continue to execute our strategy. That concludes my financial overview and outlook commentary. I will now turn the call back over to James for some additional thoughts on the expected benefits of the key actions we are taking in 2024.

Speaker 3

Thank you, Andy.

Speaker 2

Turning to Slide 14, I'll reiterate our short term plan to simultaneously counteract our end market demand declines and improve our operating model. Within Vehicle Solutions, we're counteracting headwinds associated with the key customer product launch and operational inefficiencies that impacted multiple sites through several dedicated actions. These include the consolidation of our Chillicothe facility, which we expect to complete in Q3 of this year, the sale of our cap structures business and deploying both internal and external teams to improve productivity going forward. These efforts should result in a streamlined vehicle solutions business with increased operating leverage moving forward. Within Electrical Systems, the significant dislocation in construction and agriculture end markets and corresponding slower ramp of new business wins is being offset by our efforts to reduce headcount, right size production and allocate utilization to our lower cost facilities.

Speaker 2

These efforts should result in a new operating model that positions CVG as a beneficiary once these end markets recover, with improved economics as our new business wins ramp up with a lower cost structure than they would have had previously. Within aftermarket, as we mentioned earlier, we remain diligent in our actions to take steps that optimize our internal processes, including seat delivery performance and reduced lead times. Taking these productive actions ahead of an improved customer demand environment should prove to be fruitful, similar to actions taken across the company. Our collective efforts are poised to effectively transform business through our strategic refocusing of our efforts toward our core vehicle business and our high growth segment Electrical Systems. We look forward to reshaping CVG to be a more profitable industry leader and a partner of choice for our customers.

Speaker 2

With that, I will now turn the call back over to the operator to open up the line for questions. Operator?

Operator

Your first question comes from John Franzreb with Sidoti.

Speaker 3

Good morning, everyone. Thanks for taking the questions. I'd actually like to start with the delays and deferred revenue that you're experiencing. Can you kind of put that in context? And when would you expect that to catch up?

Speaker 2

Yes, John, this is James. Thanks for the question and thanks for calling in. Several customers that we booked new business with modify their start production days as well as their ramp schedules. As you may have noticed with several of the EV OEMs, they have significant delayed ramp up schedules. Some of the major electrical vehicle OEMs that have electrical vehicle platforms as well as electric vehicle OEMs in both light duty, medium duty, heavy duty truck markets and other delivery van markets like that.

Speaker 2

So we don't know for sure when they will get to the original volume that they had telegraphed when they won the business. But we expect as markets recover that their ramp schedules will go up. But they don't give us any indication exactly what volumes will hit in what time period post when we are awarded the business. They expect us to have capacity in place and be able to respond to the awarded quoted volume that we won the business at. So we make adjustments when their volumes don't materialize or when they're delayed or slowed with our cost structure, but we still have to be ready whenever they ramp up to a point where they're closer to the awarded volumes.

Speaker 3

Okay. And in a similar vein, you mentioned that there's program wind downs. How much in revenue was hurt by that process? And is that process completed? And if not, when will it be?

Speaker 2

Yes. So each year, when we win new business, some of it is replacing business that's ending. And also we have programs that we have exited configuration or we didn't win the replacement business or it was a non profitable revenue stream for us. So we intentionally allow that program to end without continuing our work with our customers and OEMs to make sure that we have alignment on a reasonable and consistent exit strategy they're aligned with. We might be able to share a little more from Andy's perspective on quantifying the impact on that.

Speaker 1

Yes. So John, good morning. It's Andy. So the one that I think you're asking about is what we noted in our Electrical Systems segment this quarter as we indeed have one program related to passenger vehicles in Europe that back a year ago when we remember we have a lot of price negotiation with our customers and when we discussed that when we saw business that's not profitable, we will walk away from them. So as you know that the passenger vehicles tend to have lower profitability and that's one program that we exited in Europe.

Speaker 1

It's not so big in terms of the overall company's revenues. It's the low single digit $1,000,000 but nevertheless that's something that we committed not to maintain an unprofitable business.

Speaker 3

Thank you, Andy. And I got to say guys that slide about the bridge to the new guide and the old guide, it was very helpful. And I'm kind of curious about 2 things that I on that slide. 1, when you're talking about and the slide before, when you talk about the softening in the ag and the construction markets of 10% 15%. Are you signaling to us that you expect your business to be down in lockstep with global market declines?

Speaker 3

Or will you be different from that because of new program wins?

Speaker 1

John, I would say overall, our legacy business will tend to follow our OEM schedules. So we saw them talking about 15% to 20% declines in different sub segments of the overall construction and agriculture markets. We clearly have some offset with new programs. And if you can see our end market exposures in Electrical Systems, we have the majority of exposure to the construction and agriculture market, but we also started to have medium duty trucks and other end markets as well. So those would be a little bit of an offset to the current dynamics.

Speaker 3

Okay. I was just trying to get a sense of that. And I don't want to hog this, but just I mean, I am curious about how this changes your CapEx budget for the full year and what you're looking to spend for 2024?

Speaker 1

Yes. So as we look towards the next couple of quarters as the company will remain a business portfolio with down the KAPS Business and Industrial Automation. Our previous forecast of 2% to 3% CapEx of revenues will apply. So meaning that as the revenues come down, we'll also see our CapEx coming down in a similar fashion.

Speaker 3

Okay. Thank you, Andy. Thank you, James. I'll get back in the queue.

Speaker 1

Thanks,

Operator

John. And we do not have any questions at this time. I will turn the call back over to Mr. James Ray for closing comments.

Speaker 2

Thank you, operator, and I would like to thank you all for joining today's call. I want to thank the entire CVG team for their hard work and continued focus on executing our long term growth strategy. We are working aggressively to position CVG as a more durable business. We look forward to executing our transformation strategy and we are confident we can improve our operating model and sustain a profitable business in the future. Thank you very much.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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Earnings Conference Call
Alight Q2 2024
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