Commercial Vehicle Group Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 11, 2025

There are 8 speakers on the call.

Operator

Good morning. Ladies and gentlemen, welcome to CVG's Fourth Quarter twenty twenty four Earnings Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be opened for questions with instructions to follow-up at that time. As a reminder, this conference is being recorded.

Operator

I would now like to turn the call over to Mr. Andy Truong, Chief Financial Officer. Please go ahead, sir.

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 fourth quarter and full year twenty twenty four results, after which we will open the call for questions. As a reminder, this conference call is being webcast and the Q4 twenty twenty four 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 savings initiatives and new product initiatives, among others.

Speaker 1

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 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 the supplemental earnings presentation starting on Slide three. I'd like to take a moment to recap a very eventful 2024 for CVG. We've always focused on improving our cost structure, diversifying our end markets and positioning for future accretive growth. To that end, we took some immediate and decisive actions in 2024 with the goal of becoming a more focused organization through divesting non core businesses.

Speaker 2

In the first quarter, we sold FinishTech, our hydro graphic and pink decorating business. In the third quarter, we sold our Chillicothe, Ohio production facility, consolidating production into other CVG facilities and closed on the sale of our cap structures business. In the fourth quarter, we closed on the sale of our industrial automation business. Over the course of the year, we also eliminated approximately 1,300 positions or roughly 17% of our headcount. While continuous improvement is an ongoing focus for CVG, the reality is that market conditions accelerated the need for these business actions.

Speaker 2

Executing actions of this magnitude would be a heavy lift for any organization and the level of difficulty was raised due to the end market conditions we faced in 2024. I'd like to thank the entire CVG team for their efforts in positioning the company for a higher growth or profitable future. Turning to the fourth quarter results. Our financial performance was challenged due to both external market conditions and internal operating inefficiencies resulting from our portfolio actions. Most importantly, we continue to make transformational progress, which we believe will enable meaningfully improved operational efficiency and position us for success as our end markets begin to recover.

Speaker 2

The strategic actions I described earlier have positioned CVG well moving forward. Through the sale of our non core facilities and businesses, we've improved our operational focus and believe we are now in a position to drive accretive growth, accelerate margin expansion, increase capital efficiency and enhance shareholder value this year and beyond. While these actions created some operational inefficiencies in 2024, we believe we've remediated approximately 85% of those and expect to address the rest in early twenty twenty five. We'll discuss our 2025 financial guidance in a few minutes, but we believe these efficiency improvements combined with our headcount reduction and restructuring efforts put us on track to deliver $15,000,000 to $20,000,000 in cost savings in 2025, setting us up for margin expansion this year. On the commercial front, we've continued to secure new business at a very strong pace with approximately $97,000,000 of new wins in 2024 when fully ramped.

Speaker 2

As a reminder, our new business wins figure represents a risk adjusted assessment of our customers' estimate of their ultimate production rates. These new win programs are key to our growth strategy and a majority of these wins occurred in our Electrical Systems segment, although we were awarded meaningful new business in our Vehicle Solutions segment as well. Additionally, the wins within Electrical Systems were primarily outside of construction and agriculture end markets, which should further diversify our revenue profile. We were pleased to open our Morocco facility during the quarter and we continue to ramp our facility in Alabama, Mexico. Overall, we identified several necessary and impactful opportunities to improve CVG.

Speaker 2

And now that we've completed these actions and are ramping our low cost facilities, we expect our operating leverage to benefit later this year as the markets improve. While 2024 was a tough year financially, we believe we've taken the right steps to position CVG for the future. Turning to Slide four, I'd like to highlight and provide further clarity around our new organizational structure, which we announced in early January twenty twenty five. In an effort to further align with our customers and end markets, we created a new business unit structure, which now has three operating segments: Global Electrical Systems, Global Seating and Trim Systems and Components. As previously discussed, CVG has streamlined its operating model and lowered its cost profile.

Speaker 2

And we fully expect this new structure to enhance clarity and focus within each business unit. In short, the realignment better positions CVG for future growth, while lowering corporate and administrative costs to align with the company's current revenue profile. This new organizational structure is an important step in our transformation to become a more agile company that puts our customers and our markets first. And we anticipate that our new structure will accelerate our operational momentum and drive higher growth through a product focused customer centric enterprise strategy. As a reminder, we will begin reporting results under the new reportable segment structure beginning with first quarter twenty twenty five results.

Speaker 2

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. If you are following along in the presentation, please turn to Slide five. Just a quick reminder. As a result of the divestiture of Cap Structures and Industrial Automation, those businesses have been reclassified to discontinued operations. Unless otherwise noted, all financial disclosures and comparisons made today will be focused on continuing operations.

Speaker 1

Consolidated fourth quarter twenty twenty four revenue was $163,300,000 as compared to $193,700,000 in the prior year period. The decrease in revenues is due primarily to lower sales as a result of a softening in customer demand in our Vehicle Solutions and Electrical Systems segments. Adjusted EBITDA was $900,000 for the fourth quarter compared to $8,300,000 in the prior year. Adjusted EBITDA margins were 0.6%, down three seventy basis points as compared to adjusted EBITDA margins of 4.3% in the fourth quarter of twenty twenty three, driven primarily by lower volumes and the operational inefficiencies we experienced across our business. Net loss for the quarter was $35,000,000 or a loss of $1.04 per diluted share as compared to a net income of $22,600,000 or $0.67 per diluted share in the prior year.

Speaker 1

Net loss included a non cash tax valuation allowance of $28,800,000 Adjusted net loss for the quarter was $5,100,000 or a loss of $0.15 per diluted share as compared to adjusted net income of $2,100,000 or $0.06 per diluted share in the prior year. Free cash flow from continuing operations for the quarter was $800,000 compared to $4,300,000 in the prior year. The free cash generated in the quarter was supported by the second payment of $20,000,000 received from the cap structure sales last year. I'll further discuss some of the factors affecting our cash flow performance in a moment. Now moving to our full year consolidated results.

Speaker 1

Consolidated revenue for the full year was $723,400,000 as compared to $835,500,000 in the prior year. The decrease in revenues was primarily driven by a softening in customer demand across all segments and the wind down of certain programs in our Vehicle Solutions segment. Adjusted EBITDA was $23,200,000 for the full year compared to $54,600,000 in the prior year. Adjusted EBITDA margins were 3.2%, down three thirty basis points as compared to adjusted EBITDA margins of 6.5% in 2023, driven primarily by lower sales volume and operational inefficiencies. These results were consistent with our adjusted full year guidance ranges.

Speaker 1

At year end, our net leverage ratio stood at 4.7x our trailing twelve month adjusted EBITDA from continuing operations. Moving to Slide six. I want to touch on factors that impacted our 2024 free cash flow performance. Our divestitures were large contributors to cash flow in 2024, generating approximately $49,000,000 in proceeds. Largely offsetting these proceeds were three areas of investments to better position CVG for the future.

Speaker 1

First is continued operations, which include the divested cap structures and industrial automation businesses consumed $15,000,000 in cash in 2024. While there may be some small cash used in Q1 twenty twenty five related to these operations, we expect very limited cash impact in aggregate in 2025. We also spent approximately $11,000,000 on restructuring to improve our cost position and drive operating leverage going forward. While we may still have some small additional restructuring actions in 2025, we expect restructuring spend to decline materially compared to 2024. And finally, we also invested in inventory this year, with an increase of approximately $10,000,000 in 2024 on the balance sheet.

Speaker 1

The investment helped facilitate the consolidation of the Chillicothe facility as well as new production launches and the ramp up of our new low cost facilities in Mexico and Morocco. Working capital improvements is a critical focus for CVG in 2025, and we expect to work down our inventory levels closer to historical levels over the course of the year. Collectively, we expect the vast majority of these investments needs to be behind us. And with a focus on improved working capital management, we expect to return to positive free cash flow in 2025. Moving on to our segment results starting on Slide seven.

Speaker 1

Our Electrical Systems segment achieved revenues of $40,300,000 a decrease of 28% compared to the year ago fourth quarter, resulting from global construction and agriculture market softness and the slower ramp of new business wins. Adjusted operating loss for the fourth quarter was $1,700,000 a decrease of $8,400,000 compared to fourth quarter of twenty twenty three due to the impact of lower sales volumes and unfavorable foreign exchange. For the full year, revenues were down 17%, again driven by global construction and agriculture market softness and the slower ramp of new business wins. Adjusted operating income for the full year was $4,200,000 a decrease of $22,100,000 compared to 2023, again due to the impact of lower sales volumes and unfavorable foreign exchange movements. As James already mentioned, we are continuing to shift production to our new low cost facilities in Mexico and Morocco, which we expect will drive meaningful operating leverage as our end markets stabilize and our new business wins ramp.

Speaker 1

Moving to Slide eight. Our Vehicle Solutions segment achieved revenues of $91,400,000 a decrease of 15% compared to the year ago fourth quarter, largely due to lower customer demand and wind down of certain programs. Adjusted operating income for the fourth quarter was $2,800,000 a decrease of $1,200,000 compared to fourth quarter of twenty twenty three due to lower volumes, operational inefficiencies and increased freight costs. For the full year, revenues were down 14%, again due to lower customer demand and wind down of certain programs. Adjusted operating income for the full year was $20,300,000 a decrease of $13,800,000 compared to 2023, again due to lower volumes, operational inefficiencies and increased freight costs.

Speaker 1

We expect improved operational performance in 2025 as a result of the strategic portfolio and restructuring actions we took last year. Additionally, during the quarter, we were proud to be recognized by multiple global OEM customers in the areas of quality and service, signaling that our efforts to become more customer centric are taking hold. Moving to Slide nine. Our aftermarket segment achieved revenues of $31,600,000 an increase of 4% compared to the year ago in the fourth quarter as slightly improved customer demand and resolved production constraints drove increased volumes. Adjusted operating income for the fourth quarter was $3,100,000 a decrease of 200,000 compared to fourth quarter of twenty twenty three, largely due to increased manufacturing costs.

Speaker 1

For the full year, revenues were down 5% due to lower volumes. Adjusted operating income for the full year was $16,000,000 a decrease of $2,400,000 compared to 2023, also primarily driven by lower volumes for the year. Importantly, our aftermarket and accessories segment returned to a year over year growth for the first time in six quarters, and we remain focused on continuing to improve order to delivery lead times to further drive customer demand. That concludes my financial overview commentary. I will now turn the call back over to James to cover the market outlook, our guidance and some closing thoughts.

Speaker 2

Thank you, Andy. Moving to our key end market outlooks on Slide 10. According to ACT's Class eight heavy truck build forecast, twenty twenty five estimates imply a 5% decline in year over year volumes. Given strong production levels in the first half of twenty twenty four, ACT is forecasting first half twenty twenty five bills to decline 14% year over year before increasing 6% year over year in the second half of twenty twenty five. ACT forecast a rebound in 2026 with a 12% increase in builds anticipated as the industry prepares for a change in emissions regulations in 2027.

Speaker 2

Moving to the construction market outlook. The construction equipment end market is seeing global weakening with volumes anticipated to decline around 5% to 10% with continued higher interest rates, weaker housing starts and slower commercial real estate activity. Agriculture end markets are facing comparable demand headwinds with current estimates also reflecting a 5% to 10% year over year decline. This drop is largely driven by higher interest rates and lower commodity prices, which directly affect equipment demand. Given the recent volatility in end markets, we have focused on increasing communication with our key customers at various levels to get better visibility into their production outlooks.

Speaker 2

This will help us better align our production schedules and improve efficiency. Based on these customer outlooks for 2025, heavy truck, construction and agriculture end markets are all projected to slightly decline compared to the prior year as these markets continue to face demand pressures. We remain optimistic that these markets will experience a rebound in 2026 as replacement needs and underlying secular trends support our customers' future demand outlooks. Turning to Slide 11. I'll share several thoughts on our guidance for 2025.

Speaker 2

Factoring in our current market outlook, our expectation for the ramp in new business wins and improvement in operation efficiency, we have initiated guidance for revenue and adjusted EBITDA. We expect revenue to fall in the range of $670,000,000 to $710,000,000 and adjusted EBITDA to fall in the range of $25,000,000 to $30,000,000 We expect to see continued softness in our end markets as discussed earlier, but despite that, we still expect EBITDA growth and margin expansion in 2025. This should enable us to produce positive free cash flow in 2025, which we will use to pay down debt. As I mentioned earlier, we are focused on returning working capital and inventory back to historical levels after the required investments in 2024. As a result, we expect net leverage to peak in the first half of this year before declining in the second half.

Speaker 2

We remain committed to returning our leverage back to near the two times level in the second half of twenty twenty six. Our strategic actions have positioned us well to execute on our guidance goals and achieve EBITDA growth and margin expansion for the year. We look forward to realizing our improved operating leverage, driving stronger financial results and capitalizing upon an eventual end market recovery in future periods. Turning to Slide 12. I'd like to again reiterate what makes CVG a great investment opportunity at this time.

Speaker 2

Our new segments are customer centric and supported by strong secular growth trends, which are increasing our total addressable market. While these end markets are in the midst of a down cycle, we expect them to bottom out and begin recovering in the coming quarters. We remain focused on growing our electrical systems aided by the increasing electrification of vehicles that are both electric and internal combustion engine powered. We are also equally focused on strengthening our Global Seating and Trim Systems and Components businesses, proven by our new market centric segmentation, allowing us to more closely align with our end markets and customer needs. We've taken decisive strategic actions with the goal of increasing operational efficiency and underlying profitability, while improving our business mix as we execute portfolio actions and restructured to better position for future success.

Speaker 2

These actions enable accretive growth and we expect margin expansion in the coming quarters as we remain focused on delivering improved operating performance. Finally, as we continue to move past our elevated cash investment needs in 2024, we anticipate our improved cost position and focus on working capital reduction to produce positive free cash flow in 2025, which we will prioritize to pay down debt. With that, I will now turn the call back over to the operator and open up the line for questions. Operator?

Operator

Thank Your first question comes from Joe Gomes with Noble Capital. Please go ahead.

Speaker 3

Good morning. Good morning, Joe. So I wanted to talk about the new business wins. You said for the full year there were 97,000,000 and the third quarter year to date was $95,000,000 which would imply very little winning in the fourth quarter. I was wondering if you could give us some more detail there about what's going on with the new business wins program.

Speaker 3

And kind of you talked about the new program ramps you're hoping to see in 'twenty five. And I'm wondering, we didn't see that in 'twenty four. So what gives you confidence we're going to see that in 'twenty five? Thank you.

Speaker 2

Yes. No problem. Thanks for your question, Joe. And relative to the new business wins, you're right. We booked the majority of those through Q3.

Speaker 2

Typically sourcing cycles are very slow in Q4 as well as some of the out year launch timing. We see the majority of the wins be a little more between Q1 and Q3 each year. So that explains the slow progress in Q4. The other thing I would say is that we have a large funnel of opportunities across end markets across our various product lines that we track monthly and we are engaged with customers on quoting activity. But typically in Q4 they just not many awards are granted in Q4.

Speaker 2

So we're not reducing our emphasis on pursuing new business to grow overall as well as in each product segment. That's still a very high priority for us as the lifeblood of our company going forward. With respect to your question on vehicle ramps, new program launches, for this year we expect more meaningful impact to our top line with these launches even though our end markets are down. We're starting to see a little offset in our Electrical Systems business with more new business coming in in the range of about 15% of the revenue for this year is going to be associated with new business wins, which offset some of the end market decline that we've been experiencing as well as other slow ramps that we're seeing. So we have more confidence this year.

Speaker 2

There are more programs launching. Several of the ones that were delayed from Q3 and Q4 of twenty twenty four, we're already starting to supply material to those customers in a variety of end markets. So we see a little more traction in the new business wins taking hold this year. Hopefully that answers your two questions.

Speaker 3

Yes. Thank you. I'll get back in queue.

Speaker 2

Thanks, Joe.

Operator

Thank you. The next question comes from John Franzreb with Sidoti. Please go ahead.

Speaker 4

Good morning, gentlemen, and thanks for taking the questions. I'd like to start with the fact that the quarter is nearly done. And I'm curious about how your business is performing in the Class eight market and the construction and ag market relative to some of the aggregate outlooks out there? Are you performing in line down that expected 14% in Class 85% to 10% in ag and construction? Or are you trending differently?

Speaker 2

So far year to date in this quarter, we're pretty much in line. We have seen some softness toward the latter part of the quarter this current month. But all of our customers, especially ones that we have new launches with, they're very, very bullish on the outlook starting from Q2 on. There are several new models in Class eight that we're actively supporting. Those have slowed a little bit in Q4 and got pushed more to this year due to some other startup issues that some of the OEMs are having.

Speaker 2

But the outlook is strong especially Class eight because the pre buy is happening 26 in the second half of this year and that's a typical cyclical pre buy whenever new emissions rollout and more expensive tractors are taken to market with the new emissions controls. So we feel pretty confident that we'll stay in line with that and hope we get additional tailwind to help us even more. This ACT forecast does change in aggregate, but we also are increasing our intimacy with customers to get better alignment on their modulating startup and ramp up schedules so we can align our cost structure. It's typically a lagging effect, because they expect us to have a certain run at rate capacity. Then they make adjustments, which is somewhat disruptive to the supply chain because we have to manage labor, manage inbound supply.

Speaker 2

We have a global supply chain, so there's a lot of adjustments we need to make. But the most important thing is we keep our customers up and running. We don't shut them down while trying to minimize the costs associated with their schedule fluctuations.

Speaker 4

Got it, James. Thanks. I'll get back into queue.

Operator

Thank you.

Speaker 2

You're welcome.

Operator

The next question comes from Gary Prestopino with Barrington Research. Please go ahead.

Speaker 5

Hey, good morning, everyone.

Speaker 2

Good morning, Dur.

Speaker 5

Couple of questions here. First of all, embedded in your guidance, given the revenue range that you're putting in place here, will you be capturing most of that $15,000,000 to $20,000,000 of expense savings throughout the year in 2025?

Speaker 2

I would say it's probably we'll capture it in 2025, but looking primarily at Q2 and beyond as we have a little run over from '24 into Q1, but our expectation is to capture the entire piece. Andy has some additional commentary as well.

Speaker 1

Yes, Gary. So short answer, yes, that's anticipated in our side. You can see the revenue is still coming down. You can see 5% or so in line with the market. Obviously, that comes with a reduction in contribution margin.

Speaker 1

And then if you just do some quick math year over year, you can already see that there's margin expansion. And obviously, as we've been communicating in the past, when we look at a cost reduction, so a portion of that, obviously, we'll have to use for offsetting some of our headwinds, right? Inflation still around, wage increases. But overall, you can see there's double digit million dollars of margin expansion that come from productivity or cost savings.

Speaker 5

Okay. Thank you. And then, could you with these new facilities that you're opening, and just remind me because there was a lot of a lot of things going on with your company here. Are you running facilities in tandem as you shift production and then you're going to be closing some other ones? Could you just kind of walk us through what you're doing there?

Speaker 2

Sure, Gary. No problem. So our initial plans, which we set out in 2023 comprehended a stronger market in 2024 and 2025. Those facilities were required to launch the new business that we have won plus accommodate market growth expected in 2025 and 2026. We are shifting some production from existing facilities into the new facilities as well as launching some new business in those facilities.

Speaker 2

We expect with market recovery that we will need all the facilities in the midterm so to speak given the market outlook. And the big question for us is ConAg. If we don't know what the rate of recovery is going to be in ConAg. It's typically a little slower than Class eight on recovery. But we're positioned well with these new sites.

Speaker 2

And some of the our existing sites are still in low cost areas. It just happens that these two new ones are in lower cost areas. So we look at inflationary dynamics, trade dynamics, etcetera. This gives us optionality, although it does have an increased cost structure associated with it. And we have customers that have come through both of these new facilities and approved production to be started there as well as transferred there from some of our other facilities.

Speaker 2

So over time, we expect to grow into them. But given the economic outlook and given the uncertainty, we do have options to restructure and move things to other places as well.

Speaker 5

Okay. And then just one last one here. Andy, did you have to get any covenant relief on your debt because you had a the leverage ratio was pretty high at 4.7 times trailing?

Speaker 1

Yes, you're right, Gary. So we did if you remember CVG CVG, we did an amendment to our debt back in December. So we released a publication on that. So that gives us some additional wiggle room for our near term covenants. Pretty much for our 2025, there was the wiggle room that we received from our lenders.

Speaker 1

But as you know, we've been talking about it. Our debt overall is going to be maturing in 2027. So we already started to exploring refinancing options in here in 2025. So answer is right now we received that additional wiggle room from our last amendment in December.

Speaker 5

Okay. Thank you.

Operator

Thank you. The next question comes from Joe Gomes with Noble Capital. Please go ahead.

Speaker 3

Thanks for taking the follow-up. Just on the aftermarket, you're not going to under the new operating scenario, you're going to roll that into the segments. I just wonder how that's going to work. It seems it's something that the company has spent a lot of time, effort, capital on getting the aftermarket business. And now it seems we're going to kind of just put it amongst three the three new operating units.

Speaker 3

Not quite sure how that all works or how that benefits from the capital that has been spent previously.

Speaker 2

Yes. Well, thanks, Joe. That's a very good question. I'm glad you asked it. So our prior aftermarket business was primarily seats with wipers as well.

Speaker 2

And then there was a small amount of electrical systems. There were some level of inefficiencies rebooking and remapping revenue to support service requirements for OE service, which now have more efficiency and we're working more closely together. The other thing I would say is that we didn't put a lot of capital in aftermarket when we formed aftermarket. We took the OE service business and a small level of independent aftermarket in one of our plants and seating. And we also the wiper business stayed the same as part of aftermarket and that's about half and half OE and then OES independent aftermarket and electrical was a smaller part, primarily OES.

Speaker 2

So there weren't major investments made when the segment was created. It was intended to have a focus on growing the independent aftermarket primarily in seats. So that remains. And I would say one of the advantages of putting it back those that seating product line which was probably about 60% of aftermarket 60% to 65% of the aftermarket business back into the seating business. It will allow us to more effectively use the engineering resources as well as balance between the OES aftermarket seeding plant and the OE seeding plant where we can leverage combined resources in a more efficient way which helps us address SG and A and also plant utilization.

Speaker 2

So between the segments previously, we were in so many words doing business with ourselves, where you had two of the same type of product plants supporting two different channels and the resource efficiency wasn't what it needed to be. So that was one of the primary reasons for looking at putting it back into the product category. The other thing I would say is the independent aftermarket sales team, we use reps somewhere between fifty and sixty reps. It just depends on time to go to market with our aftermarket products. By having the two facilities under the same business, we can better optimize lead time improvements as well as productivity improvements as well as engineering needs to be more responsive to the independent aftermarket instead of trying to communicate back and forth and missing out on near term opportunities.

Speaker 2

So I would say from a seating perspective, it puts more focus on making sure we have the go to market and the lead time associated with being successful in the seating aftermarket business. For wipers, it's a North America product. It was previously in a segment that had Trim and Plastics in it. It's a standalone plant and some of the customers in the wiper business are similar to the customers in Trim and Plastics. So it's a little more diversified in market and it's better managed within this Trim Systems and Components business.

Speaker 2

The focus for independent aftermarket will remain in wipers as well. And we didn't really have any independent aftermarket business in Electrical Systems. It was primarily OE service, original equipment service business. So that maintains the same, there were it was always built in the Electrical Systems plants, with the revenue just mapped into the aftermarket segment previously. So this helps clean up our transactional process in month end close quarter close year end close as well as it keeps our customers aligned too because in any of the Class eight or other end markets we're in The procurement organizations typically have both OE and OE service on that side of it.

Speaker 2

So it helps clean things up for our customer communications, negotiations and coordination and helps us be more of one CVG to the OE service market. The independent aftermarket is separate because you go through distributors and dealers and retail outlets etcetera. And we have an organization in place to do that. We'll continue to focus on that as well. And we do see that as a higher growth opportunity for us.

Speaker 2

As you noticed in our Q4 results aftermarket for the first time in six quarters actually grew year over year. And we expect to see that cycle continue throughout this year with the focus on it.

Speaker 3

Great. Thanks for that.

Operator

Thank you. The next question comes from Jean Francois with Sidoti. Please go ahead.

Speaker 6

Yes. Couple of

Speaker 4

quick questions here. In terms of new business, could you quantify how much additional new business is expected to come in, in 2025? Also, what markets outside Ag and Construction have been have you been successfully gaining share? And just a point of clarification on the new business, this is all entirely new business. You're not cannibalizing or replacing other businesses going end of life?

Speaker 2

That's correct, John. And give you a little color. I mentioned the around 15% number of revenue for 2025 in our Electrical Systems business is as a result of new business that was won from twenty twenty two, twenty twenty three and a little in 2024. Our biggest wins last year in Electrical Systems were outside of ConAg and it did focus in the electric vehicle space. We have a new leader in Electrical systems that's also expanding our end market focus into non transportation markets like data centers and other areas.

Speaker 2

But what we won last year though was in more autonomous vehicle and electric vehicle space. And as you know, autonomous vehicles have a redundant system. So the content per vehicle is significantly higher than a non autonomous vehicle. So we're really excited about that one. That was already ramping, slowly, but it's expected to increase significantly more in Q2 in the back half of the year to fill in the whole of the ConAg down market.

Speaker 2

So our emphasis is maintaining our ConAg customers. We have opportunities and this is Electrical Systems I talked about. We have opportunities to expand our share of wallet with ConAg customers. And we've had several top to top meetings with our new leader with their leadership, our customers' leadership and we're positioning ourselves for more near term new business as we continue to fill and ramp some of the lower cost capacity that we brought in place. So it's good that we have this capacity online.

Speaker 2

It gives us an opportunity there. As it relates to Vehicle Solutions, there were some programs that ran off. So the number you're seeing the portion of the new business wins in Vehicle Solutions is some of it's replacement and some of it is actual runoff and some of it's new incremental. Smaller amounts in vehicle solutions, but now with the new segmentation and seating, trim systems and components, we can be a little more transparent with where we're winning and how we're winning in those new segments. The Trim Systems and Components business is primarily a North American business.

Speaker 2

So our expectation is we have a lot more focus on filling open capacity we have in the plants and trim systems and components as well as our Seating business is more of a global business. So we mentioned a couple of months ago I I'm sorry a couple of quarters ago about our new UnitySeek launch. That is a global platform. We're seeing opportunities and we've also won business in each region of the world, primarily North America and Asia with some opportunities in Europe. So we're really excited about that business.

Speaker 2

But that business is a different profile because of the global supply chain aspect of it. We're leveraging a platform design, our first global platform, which allows a lot of flexibility as you deploy it in different regions. So we're very excited about that and expect to have more new business wins in the Seating business as a result of this new Unity platform launch going forward.

Speaker 4

And James, what would you think is a reasonable target of new business wins in 2025?

Speaker 2

We are targeting $100,000,000 each year. It does depend on sourcing cycles, but we're targeting $100,000,000 and that is adjusted. So we are looking at kind of derisking some of the customer outlook volumes based on historical experience we've had here. So the number that we're communicating has some risk adjustment factor applied to the peak annual revenue that our customers are sourcing us the business at. It does require a little flexibility because we're expected to capacitize at the business award level.

Speaker 2

So we have to look at how fungible our capital is deployed and how much how we're utilizing capacity to have that flexibility. So we don't put 100% of what they said they were going to give us two years prior into all of our capital and hiring and then have to scale back when they don't meet those peak annual numbers. In rare cases, they do exceed, but in most cases, they don't exceed the peak annual revenue.

Speaker 4

Sure enough. One last question. Embedded in the EBITDA guidance, what is the D and A number? And also since you mentioned it, what's the capital expenditures do you anticipate for 2025?

Speaker 1

Yes. So the D and A number is pretty consistent year over year, John. So one thing that clearly from a cash flow standpoint as James already mentioned, right, it will be a big focus for CVG. The entire enterprise is now already around that. So we are trying to attack that from several areas.

Speaker 1

The number one area will be working capital as we mentioned. So we have entitlement to get back a lot of cash from there. And obviously, CapEx, if the use of cash in the past, we guided 2% to 3% is our typical year CapEx. And I think that you'll see 2025 will be near the low end of that lumber. So again, continue to evaluate investment and growth.

Speaker 1

Investment is still our priority, make sure that the company continue to grow back our top line. Clearly, you can see that we'll be controlling CapEx, controlling working capital. And as James mentioned, we are anticipating a positive free cash flow year.

Speaker 4

Thank you, Andy. And thank you, James, for taking the follow-up.

Speaker 1

Thanks. Thanks, John.

Operator

Thank you. The next question comes from Douglas Daphne with DC Capital Partners. Please go ahead.

Speaker 6

Hey, good morning.

Speaker 2

Good morning, Douglas.

Speaker 6

Good to talk to you. So we've been holding the stock for a while and follow the company closely. And I just want to get a sense, I guess, that I feel a little bit like a frog on the stove and the water is boiling and it's not good. I mean the results were not good in my opinion. And I want to get a view on kind of a you talk a lot about revenue and operating income, but there's also a breakdown in revenue, gross margin and SG and A.

Speaker 6

And the company basically is making no money right now. And what's the sense of urgency down there? The SG and A has gone from about 7% to about 10% to 11% and that's about $20,000,000 or $25,000,000 And historically, the business generates 10% to 12% gross margins. It's very hard for me to figure out how the math works on a recovery here and what the urgency is to improve the financial performance. And we're looking at a very increasingly bleak '25 outlook on the economy.

Speaker 6

So what's the plan here? What's the sense of urgency? Tell me about the SG and A, where we're going with this business?

Speaker 1

Thanks for the question. So let me put it down in a few pieces. Clearly, we see that right now in tough environment, right? So continue drop in revenues. You can see that sequentially Q4 is a smallest revenues quarter for ourselves.

Speaker 1

We'll continue to adjust our cost structure. You can see that our Q4 performance come in pretty close to our guidance, the midpoint of our guidance. And so we did have better line of sight compared to a few quarters ago on where the environment is and adjust accordingly. To your point about SG and A reduction, so if you look at our financial year over year, we have a double digit percentage reduction in our overall headquarter cost that you can see when you look at the financials. We'll continue to look at it and as James mentioned, we did quite a few rounds of restructuring and that's where we invested about $11,000,000 And most of those restructuring spend is focused on taking headcount out, right, both manufacturing and SG and A headcounts.

Speaker 1

So those are the actions that we've been taking. We will still continue to look at some of these actions in Q1, will not be to the level as extensive as you see in 2024, but we are not done with continuing to look at and meaning our cost structure. Overall, we have a view that SG and A of this business probably somewhere around 9% to 10% to 11% based on our benchmarking with a similar business. We'll continue to look for opportunity to lean that out. But for us to get to a lower level, that definitely depends on the overall end market and revenues level of the business.

Speaker 1

So beyond that, clearly, the urgency of the company right now is also on generating free cash flow. As we mentioned that we did have to spend quite a bit of cash in 2024 to do what we needed to do from consolidation, rightsizing and also building inventory to allow us to make sure that the low cost LiU facility are up and running consolidation are in place. So now the urgency for us is making sure that we regain our cash position here for the working capital management. And then obviously sequentially, we are expecting revenues starting to go from there, we call it the bottom in Q4 and hopefully the end market will continue to improve and our restructuring and other cost reduction effort will add to the bottom line sequentially.

Speaker 2

I think gross margin is an area that we really are having a lot of focus on starting in Q4 last year. Given the challenges of some of the consolidations and slower ramp, it did hinder us a bit in expanding gross margin. But this year I expect us to have the majority of the EBITDA improvement is on the gross margin line with some coming from SG and A, but we're really focused on gross margin, maniacally focused on gross margin. And we had leakage points and inefficiencies last year that we don't expect to repeat this year due to all of the movement with consolidation and business divestitures. So that's going to be the biggest lever of year over year improvement now that we have the portfolio cleaned up.

Speaker 2

We've got underutilized plant with the consolidation that's closed and sold. So I expect the margin to expand the gross margin to expand this year.

Speaker 6

No, I appreciate that. So but if you do the math on this, what you said, Andy, you say it's 9%. And James, just looking at the gross margin to achieve an EBITDA of 5%, which I think is a reasonable business case here, then the gross margins are going to have to be around 14%. And historically, that's a bit above where the company is. So maybe you could comment, James, on the new business and that you've booked.

Speaker 6

What gross margin? And I understand the volume, but if you most projections as companies do that, there's sort of a standardized expectation on volume and plant utilization. What's kind of the standardized gross margin that you are achieving on your new business and what's your target? If you could mention that just to elaborate on what you were saying.

Speaker 1

Yes. That's right, Doug. I think your view of the P and L is right. So we expect that for us to get back to the five plus percent of EBITDA or we set that our entitlement of EBITDA margin will be somewhere around 9%. So we have work to do.

Speaker 1

So if you think about that 9% SG and A to your point, we got to get up to the 15% gross margin, which in CVG, I know that you follow us for quite a number of years, we have not got to that level. I think 13% to 14% is what we have demonstrated in some period of time in the past. But we still believe that that is not the full potential of our business. 15%, I think we believe that once we get our utilization right, get rid of those inefficiency, 15% will be our entitlement. Now we have work to do on that, there's no doubt.

Speaker 1

But that is a bigger opportunity for us, as James mentioned, compared to SG and A. So now we just have to work hard to take out all these inefficiencies and get our entitlement. For your new business questions you mentioned, so typically when we win a new business, we will be above that level. So but again, as you can see, it takes some time for us to see those new businesses coming in and as a percentage of revenues, it's still a smaller percentage. So it would take time to move that needle.

Speaker 1

I think that right now, the short term, the more realistic and faster gross margin expansion opportunities is within our operational efficiencies.

Speaker 2

Yes. In addition to what Andy said, as we see the end market, especially in Class eight recover in the second half of this year, we expect operating leverage expand more operating leverage for every revenue dollar as we've got our cost structure fixed and it's minimal variable that we're adding on top of that. So that's what we really expect to see tailwind in addition to the non repeating one time inefficiencies we had last year. So we're really looking forward to seeing how that operating leverage is going to come through. And as a result, the percent SG and A to sales would decline as well compared to where it currently is.

Speaker 6

Well, thank you very much.

Speaker 1

Thank you, Doug.

Operator

Thank you. The next question comes from Stephen Martin with Slater. Please go ahead.

Speaker 7

Hi. I'm not going to rail at you this anymore because it doesn't seem to matter that much and the previous questioner has asked some of the questions. Historically, in my experience, when someone specifies an out of pocket restructuring charge and it's mostly focused on severance and labor, you get a multiple return of that. You spent $10,000,000 roughly in restructuring charges at cash and yet your adjusted EBITDA is going up modestly. You talk about big headcount reductions.

Speaker 7

I don't see it in your guidance. And why is with all the restructurings we've been hearing about for the last twenty four months, you're talking about an adjusted EBITDA that's up a couple of million dollars off of a basically crappy 2024.

Speaker 1

All right, Steve. So thanks for the question. Let me maybe give you a little walk from 2024 to 2025, right? The number one thing is we got to remember, 2025 still representing a declining revenue year, looking at our end market, 5% in Class A, 5% to 10% in ConAg, right? If you look at the midpoint of our revenue guide for next year, it represents about $30 -ish million of revenues reduction.

Speaker 1

If you think about that contribution margin related to that, that's roughly about $6,000,000.7000000 dollars right? So this year, we're running a $23,000,000 of adjusted EBITDA, so in 2024. So if you take that $7,000,000, 6 million dollars, 7 million dollars down, then we're at about $16,000,000, 17 million dollars of EBITDA on a comparable revenue basis. Yes, but 2024

Speaker 7

was a hold on a second. Twenty twenty four was a I'll refrain from using language. 2024 was a horrible year, Okay. Everything was down. You missed everything.

Speaker 7

So your comparison to 2024 is sort of a false comparison. Compare it to 2023 or 2022. Okay? 2024, well, I won't say it, but 2024, you guys should frankly, you should have resigned after 2024, but you didn't, okay? So basing your comparison off of 2024 is just false.

Speaker 1

Yes. So Steve, that's a fair comment. So obviously, 2024, we are challenged with the inefficiency and the down market. So maybe you can look at the 2023 volume. Obviously, it's a very different volume comparison.

Speaker 1

So with our overall infrastructure and fixed costs, so you have to adjust for revenue in order to compare. And you can see there are some actions that we took to take our fixed costs related to our treatment component business to telecoffee facilities and some of the actions that James mentioned about moving our higher cost electrical location to a lower cost. So those are the things that we do. And clearly, like the restructuring payback, as you mentioned, is we clearly have to wait until the volume come back, right? So we take down the headcount.

Speaker 1

Overall, the company take down thousands of people compared to a year ago, right? Now with this linear structure and to James' point about when the revenues come back, we could continue with a leaner cost structure, that conversion is going to come back. So we're counting on that to happen most likely towards the later part of 2025.

Speaker 7

All right. So let me ask you a question, James. At the end of twenty twenty five, if you don't make these numbers, when is there going to be a commitment to do something for your shareholders who have been sacrificing and struggling for years? Okay, your stock is down 80%, ninety % from where it was two years ago. PACCAR is trading at near highs.

Speaker 7

At what point do you say we have failed and it's time to not change management again because you guys keep shuffling the deck chairs. Everybody who's been the CEO has been on the board, so they can't claim they didn't know what was going on. When are you going to commit to sell the company and do the right thing for your shareholders? And what is the metric that tells you that?

Speaker 2

Steve, that's a good question. And it's something that the board evaluates quarterly. We have Board meetings and we talk about the future outlook of the company, what our position is, where we stand with customers, what our headwinds are. And that is a regular topic in each one of our board members our board meetings where we talk about what can we do to get the stock price up and what can we do to reward our shareholders for their patience. So it is front and center.

Speaker 2

As far as the metrics on doing something different, we have evaluated and that's why we took the actions we took last year when we sold IA which we had a great experience with the first couple of years with COVID and then it went under then it was bleeding cash. So we sold that. The Kings Mountain facility and cap structures we sold that because it's a very capital intensive business and it needed a massive reinvestment and the product in that site is $135,000,000 site. The main product in that site was ending production in 2027, which meant we would have been holding an empty bag, which we couldn't monetize. So some of the actions that we've been taking represent what we're trying to do to clean up the portfolio, get our operating model right.

Speaker 2

So when we do get end market recovery, you'll see more operating leverage and definitely a larger stock price.

Speaker 7

I get that. And we've been hearing all this and frankly your former CEO who's now gone on to another company is trying to sell the same bullshit he did at CVGI. I get all the things you're doing, but at what point and I guess there's no answer because nobody wants to sort of give up their job. But at what point do you just say in board, we have failed, it's time to hand this over to somebody else. And it's a rhetorical question.

Speaker 7

And a long answer is not a long answer about our restructuring and realignment is not the answer. So I just hope you take it into consideration before you wither away to nothing.

Speaker 1

Thank you, Steve. So yes, definitely great input. James mentioned we'll continue to evaluate that, but we appreciate the voice of our shareholders. Thank you.

Operator

Thank you. There are no further questions at this time. I will now turn the call over to James. Please go ahead, sir.

Speaker 2

Thank you all for joining today's call. While our 2024 results were challenged, the fourth quarter showed signs of stabilization. We believe we've created a more focused agile company position for future success and we look forward to accelerating our operational momentum and driving improved outcomes through our product focused customer centric strategy in 2025. Thank you all. Have a good day.

Operator

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

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Earnings Conference Call
Commercial Vehicle Group Q4 2024
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