Commercial Vehicle Group, Inc. Q2 FY2025 Earnings Call

Good morning, ladies and gentlemen, and welcome to CVG's Second Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Andy Cheung, Chief Financial Officer. Please go ahead.

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 second quarter 2025 results, after which we will open the call for questions. As a reminder, this conference call is being webcast and a Q2 2025 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 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.

Thank you, Andy. Before I speak to the earnings presentation, I want to take a moment to thank Ruth Gratzke, a CVG Board member since July 2021, for her contributions as she leaves our Board for personal reasons, effective August 7. Additionally, I also want to thank Scott Reed, our current COO, for his contributions to the company. Scott will be leaving the company to pursue consulting opportunities effective August 29. We have a solid team in place and expect to fully execute on our plans going forward. Now I'd like to turn your attention to the supplemental earnings presentation, starting on Slide 3. As we have highlighted on this slide, CVG delivered solid second quarter results and continued improvement in our profitability and free cash generation in a very challenging market environment. During the quarter, we delivered an adjusted gross margin of 12%, which is up 120 basis points on a sequential basis and up 70 basis points compared to last year. The continued improvement in profitability was again driven by the operational efficiency initiatives we have spoken to in prior calls. I will cover this in more detail in a minute. Also highlighted on this slide is our continued improvement in free cash generation. During the quarter, we delivered $17.3 million in free cash flow, which is an improvement of $16.5 million compared to last year. I will also provide more detail regarding our free cash flow performance in a moment. Another highlight of the quarter is our improved performance within the Global Electrical Systems segment. For the quarter, we saw segment performance stabilize with revenues flat compared to the prior year. Despite flat revenue, we delivered an adjusted operating income improvement of $0.4 million, driven by lower salary expense as we continue to ramp production in our new low-cost facilities. Before I move on, I'd also like to comment on our recently announced debt refinancing, which we completed and announced during the second quarter. These transactions provide us with significantly more financial flexibility as we look to advance our operational initiatives, including further cost reductions, margin improvement and overall operational efficiency. Turning to Slide 4. I want to provide additional color as it relates to the continued sequential improvement we are seeing at the gross margin line. As we highlighted last quarter, the operational efficiency improvements made related to freight, labor and plant level overhead continue to benefit our profitability. As a reminder, we have reduced our reliance on expedited freight, optimized our terms with suppliers and improved our lead times and order quantities. We also continue to flex our direct labor to better align with customer volume changes and have continued to balance our production more toward lower-cost facilities. And finally, our new segment alignment has provided a more optimal overhead structure, and we are continuously evaluating selling, general and administrative expenses (SG&A) for efficiency improvements. We are pleased to see our focus on operational efficiency pay off, which has supported our financial performance in a lower demand environment. While we acknowledge the broader market and macroeconomic uncertainty, we have and will continue to take the necessary proactive actions. Looking ahead, we believe we are well positioned to drive accretive growth, accelerate margin expansion, increase our capital efficiency and ultimately enhance shareholder value as our end markets recover. Moving to Slide 5. I'd like to again highlight a graphic we have shared in our last two earnings calls. Again, while the strategic portfolio actions we took last year led to cash flow headwinds in 2024, we are seeing these actions reverse meaningfully year-to-date in 2025. Through June of this year, our discontinued operations were net cash generative, and we had minimal restructuring spend at less than $2 million. We've also driven a $12 million improvement in inventory versus the end of 2024. Improvement in each of these areas helped drive free cash generation of $17.3 million in the quarter, which brings our year-to-date free cash generation up to $28.5 million. As Andy will cover in a moment, we have raised our free cash flow outlook for the year to be at least $30 million as we expect to build on our year-to-date progress in the back half of the year. With that, I'd like to turn the call back to Andy for a more detailed review of our financial results.

Thank you, James, and good morning, everyone. If you are following along in the presentation, please turn to Slide 6. Consolidated second quarter 2025 revenue was $172 million as compared to $193.7 million in the prior year period. The decrease in revenues is due primarily to a softening in customer demand across our Global Seating and Trim Systems and Components segments. Adjusted EBITDA was $5.2 million for the second quarter compared to $8.2 million in the prior year. Adjusted EBITDA margins were 3.0%, down 120 basis points as compared to adjusted EBITDA margins of 4.2% in the second quarter of 2024, driven primarily by lower volumes, but offset by reductions in SG&A expenses. Interest expense was $2.3 million as compared to $2.4 million in the second quarter of 2024, driven by lower debt levels. Net loss for the quarter was $4.1 million or a loss of $0.12 per diluted share as compared to a net loss of $1.3 million or a loss of $0.04 per diluted share in the prior year. Adjusted net loss for the quarter was $2.9 million or a loss of $0.09 per diluted share as compared to adjusted net income of $1.5 million or $0.05 per diluted share in the prior year. Net loss and adjusted net loss were impacted by softened customer demand. Free cash flow from continuing operations for the quarter was $17.3 million compared to $0.8 million in the prior year. The free cash flow generated in the quarter was supported by the company's ongoing strategic and working capital initiatives. At the end of the second quarter, our net leverage ratio, calculated as our net debt divided by our trailing 12-month adjusted EBITDA from continuing operations, was 4.8x, down from 5.0x at the end of the first quarter. Moving to the segment results, starting Slide 7. Our Global Seating segment achieved revenues of $74.5 million, a decrease of 10% as compared to the year-ago quarter, with the decrease primarily driven by lower sales volume as a result of reduced customer demand. Adjusted operating income was $3.1 million, an increase of $0.2 million compared to the second quarter of 2024. While operating income was negatively impacted by lower sales volume and increased freight costs, we saw an improvement in adjusted operating income margin, primarily attributable to lower SG&A expenses. Turning to Slide 8. Our Global Electrical segment's second quarter revenues remained essentially flat compared to the year-ago quarter at $53.6 million as new business wins offset weaker construction and agriculture demand. Adjusted operating income for the second quarter was $1.2 million, an increase of $0.4 million compared to the prior year, primarily attributable to lower salary expense as we benefit from our new low-cost facilities. We are beginning to see the benefits of the restructuring actions we have taken in this segment, and we are encouraged by the stabilization we are seeing. Global Electrical Systems remains a key area of focus for growth and cash generation moving forward. Moving to Slide 9. Our Trim Systems and Components' revenues in the second quarter decreased 24% to $43.9 million compared to the year-ago quarter due to lower sales volume as a result of decreased customer demand. As a reminder, this segment solely serves the North American market and is most directly impacted by the reduction in Class 8 production volumes. Adjusted operating income for the second quarter was $0.3 million, a decrease of $3.7 million compared to the prior year. The decrease is primarily attributable to lower sales volumes. We continue working through the last of our operational inefficiencies in this segment, and we are taking further actions to stabilize operations and improve operational efficiency and financial performance. That concludes my financial overview commentary. I will now turn the call back over to James to cover our market outlook, key strategic actions being taken and our updated guidance.

Thank you, Andy. I will start with our key end market outlooks on Slide 10. According to ACT's Class 8 heavy truck build forecast, 2025 estimates imply a 24% decline in year-over-year volumes. ACT has removed any prebuy impact related to the proposed 2027 emissions standard from their 2026 projections and now forecast truck builds flat in 2026. Looking ahead to 2027, ACT is forecasting a 12% improvement in truck builds. Moving to our construction and agriculture market outlook. Based on recent commentary and outlooks from our customers and key market players, we continue to expect the construction market to be down approximately 5% to 15% and the agriculture market to be down in the same range as higher interest rates, weaker housing starts, slower commercial real estate activity and lower commodity prices continue to weigh on demand. Despite the continued market softness, which mostly directly impacts our Global Electrical System business, we continue to remain optimistic about the long-term potential of both construction and agriculture markets as we see ongoing replacement needs and underlying secular trends driving a recovery in these markets in 2026 and beyond. Turning to Slide 11. I'd like to reiterate the key actions we have underway to improve cash flow as well as mitigate the impact of tariffs and broader macroeconomic headwinds. First, we remain focused on driving improved cash generation and $30 million in working capital reduction focused primarily on inventory and accounts receivable as well as a 50% reduction in planned capital expenditures this year. Through the first half of the year, we realized $12 million in inventory reductions and $11 million in accounts receivable reductions. We also continue to expect $15 million to $20 million in cost savings this year with a renewed focus on SG&A, which should drive incremental margin expansion as our top line returns to future growth. Second, we expect the strategic portfolio actions taken in 2024 to lower our cost structure to continue lowering decremental margins, positioning us well to grow our earnings power as end market demand recovers. Third, we remain in constant communication with our customers, improving our line of sight to production schedule changes and allowing us to implement necessary cost actions in the event of future changes. In addition, our teams took immediate action in response to tariffs to mitigate potential impacts, and we've made solid progress in that regard. We continue to have successful negotiations on price recovery terms with our customers while building contingency plans to create flexibility across multiple scenarios, all with the goal of securing our business competitiveness and meeting our customers' needs. We also continue to assess our relationship with suppliers, including the evaluation of reshoring and near-shoring opportunities to further mitigate the potential impact of tariffs. Turning to Slide 12. I'll share several thoughts on our updated outlook for 2025, which reflects the current estimated impact of tariffs, trade policies and economic uncertainty as well as the aforementioned actions that we are proactively taking in this current uncertain environment. Reflecting current macroeconomic trends, prevailing truck build forecast and continued weakness in construction and agriculture markets, we are lowering our quantitative annual guidance for revenue and adjusted EBITDA and tightening the range on both. The good news is we are increasing our free cash flow guidance to reflect robust performance year-to-date as well as our ongoing focus on cash generation. Given current demand pressures, we are adjusting our full year 2025 revenue guidance range to $650 million to $670 million, which is down from $660 million to $690 million from prior guidance. We are also revising our adjusted EBITDA guidance expectations to the range of $21 million to $25 million for 2025, down from $22 million to $27 million in the prior guidance. Based on this updated outlook, we still expect EBITDA margin expansion compared to full year '24 at the midpoint of the ranges, supported by our continued focus on reducing manufacturing and SG&A costs. We expect to build on our free cash generation progress in the back half of the year, generating at least $30 million of free cash flow in 2025, which we expect to use to pay down debt. Our continued focus on reducing working capital and lowering capital expenditures underpin this outlook. Net leverage is expected to decline throughout 2025 and 2026 as we work toward returning to our targeted 2x level. With that, I will now turn the call back over to the operator and open up the line for questions.

Your first question comes from Joe Gomes from NOBLE Capital.

So I know you guys have gotten away from giving a new business wins number. But given the environment, maybe you could kind of, from a 10,000-foot perspective, give us, are you seeing new business being bid? Are you winning new business? Is it within where you guys are hoping to be, maybe above, hopefully? And also kind of related from past new business wins, how is the implementation of those going? Are we seeing any of those pushed to the right, so to speak? Anything you could give us on that would be great also.

Joe, this is James. In response to your question, we are still securing new business and have achieved wins in the first and second quarters, with a solid pipeline for the rest of the year. The challenge in quantifying new business arises from uncertainties around schedules and launch timings. As you noted, some projects have been delayed, particularly those with OEMs facing financial difficulties, which have impacted production, especially in the electric vehicle sector. Nevertheless, we continue to observe growth in this area, which is a long-term trend that will persist. We remain committed to expanding our electrical business. This year, approximately 15% of our revenue projection for the Electrical Systems segment comes from new wins. The flat revenue we see year-over-year reflects how new wins are balancing out ongoing challenges in the agricultural markets. We are actively pursuing opportunities across all markets and maintain strong relationships with our agricultural customers, with potential for growth in their business as we leverage our new low-cost manufacturing capacity on a global scale, including North America and Europe. I am optimistic about this. As the markets stabilize and we achieve better clarity on launch schedules and volumes, we may consider reporting new business wins again. Implementation timing for new wins varies by platform and customer, with some delays noted due to current economic conditions affecting launches. Additionally, some customers are still awaiting regulatory approvals, especially in the autonomous vehicle sector. Despite these shifts, we have significant wins lined up and are prepared to integrate them with positive margins due to our cost structure and new capacity.

The next question comes from John Franzreb from Sidoti.

I would like to begin with the cost savings topic. You mentioned an anticipated savings of $15 million to $20 million for 2025. I'm interested in knowing how much of those savings will be permanent and how much might return as volumes increase. Additionally, what remains to be accomplished regarding the SG&A side of the cost savings program?

Yes, John, regarding the cost savings, it's a noteworthy situation because we are seeing significant direct material cost savings, indirect expense reductions, and manufacturing cost savings through improved productivity. We don't view these savings as one-time measures. In fact, as volume increases, we will realize additional savings on higher volumes. This year, due to reduced volume, the anticipated savings have not met last year's levels as expected. However, there are lasting savings from our purchase price contracts, logistics providers, and more. We are optimistic about the progress we are making in reducing costs. In terms of SG&A and manufacturing overhead, we will continue to take measures in these areas. With ACT's current outlook, addressing manufacturing overhead is a priority for us. We have brought in an external consulting firm to assist us in optimizing our supply chain and managing manufacturing overhead expenses, and these initiatives are currently underway. We plan to implement further cost reduction actions as we move through the rest of the year, and we hope to see the anticipated volume materialize as forecasted by ACT.

Got it. And how far along are you in the tariff renegotiation process? Do you expect all your customers to have renegotiated by the end of the year?

Yes, we'd expect that to be the case. And the tariffs have been changing a lot, as you know. The trade policy has been changing a lot. So we have a team of people, and we meet every day to see what the latest changes are, trying to assess the impact. And as you can imagine, both customers and suppliers, we're going through a lot of detailed information, port of entry, country of origin, all those elements that factor into the tariff impact. And then that information has to be submitted and discussed with our customers as well as mitigating actions, whether it's supply changes or validating different materials to offset where the material is coming from. Those are a little longer from a timeline standpoint. Price is the most immediate one. And there is a lagging effect because we have to submit the tariff impact post the actual impact that we have to the customers, and then there's a payment timeline from the customers to us. On the supplier side, we have the same stance with our suppliers that our customers have with us. We expect initial mitigation with price being secondary or tertiary elements to help them recover and stay viable. And then that gets translated back to our customers for relief. So it's a very dynamic process, a lot of negotiations, a lot of discussions, and it's top of mind for the entire supply chain, actually from our suppliers to us, to our customers and our customers' end markets.

Certainly very dynamic right now. And one last question, I guess I'll get back into queue. Can you talk a little bit about how July looked relative to maybe the progression of the second quarter? Did it continue to weaken, stabilize? Any kind of color what the current climate is like?

Sure. No problem. On the Class 8 side, and even in ConAg to a certain degree, typically, from June until August, many of the OEMs on a global basis schedule downtime for model changeovers or vacation periods, etc. So we are seeing increased downtime in the back half of Q2 and also this quarter, which is causing us to quickly make adjustments with flexing our manufacturing plants down, ordering material, so our inventories stay at a competitive level as well as coordinating with our supply base to ensure we maintain on-time delivery and supply viability as these schedules change. So we're seeing more from June through August more downtime than what was originally anticipated at the beginning of the year from our OEM customers.

So if you look at what we see right now is tracking towards ACT's projection in this quarter. So overall, if you look at what the market is forecasting, is what we are seeing. But as James mentioned, we are doing all the actions that it takes to adjust for the volume.

I'll just sneak this in since you brought up ACT a couple of times in the responses. It seems to me like the new forecast from ACT looks more like the historical cyclical trends that we used to see in the Class 8 market. Is that your assessment? Or do you see anything different than that?

ACT has not incorporated any kind of prebuy dynamic for emissions regulations that were originally planned for 2027. The expectation was for a rise in prebuy during the second half of 2025 and throughout 2026. They have now removed that from the forecast, predicting flat build rates into 2026 and then a low double-digit increase in 2027. If volumes return sooner, we will be ready in terms of operating leverage. However, if volumes remain at the forecasted flat levels, we are prepared to navigate through the downturn until we see an improvement similar to what we experienced in the past two quarters and moving into the latter half of this year.

The next question comes from Gary Prestopino, Barrington Research.

James, Andy, in the last conference call, you mentioned the possibility of the Trump administration rolling back some emission standards for trucks. Where does that stand now? Is it still uncertain?

Yes. As far as we know, there hasn't been a definitive position on that yet. But as ACT has comprehended in their forecast, there's an anticipation that they will either be pushed out or changed. So we're planning for the worst which is no prebuy.

Gary, as James mentioned, so ACT doesn't predict the '26 prebuy and then as a result, there's no major drop in '27 as well. So right now, the projection is a year-over-year pretty flat from '25 to '26, and then there will be a gradual low double-digit increase in the next few years. So longer-term horizon is actually a more stable environment, but you don't see the big up and down in the next couple of years.

Okay. Then maybe you could help me out because I'm not that altogether familiar with the Class 8 truck market. Maybe some others are. Is there a natural replacement cycle here that somewhere along the line has to start kicking in to more units produced? I mean is that why the '27 numbers are going up?

Yes. The end markets in Class 8 trucks, California, and vehicle production are essential, and there is a replacement cycle. Due to economic uncertainty, feedback from our OEM customers indicates that fleets ordering large quantities of Class 8 trucks are delaying purchases. Various indicators, such as freight rates and the effects of tariffs on goods, have decreased, meaning the need for replacement might not be as urgent as initially planned. Additionally, we have an aftermarket business involving seats and other products. As purchases are postponed, we may see a positive effect on some of our aftermarket sales for replacement components, which typically last about 5 to 7 years before needing replacements, depending on usage. This situation presents an opportunity for us. In the ConAg market, economic challenges and potential recession are impacting purchases, resulting in increased dealer inventories due to slower capital purchases. These inventories will eventually require replacement. Furthermore, our customers are conducting R&D to develop autonomous variants of some models, which will have greater electrical content. We are working with these customers to position ourselves effectively as they introduce these new models. It's uncertain, but we are ensuring we have the right strategies and alternatives in place to remain profitable and generate cash, whether we need to increase or decrease our production.

Okay. Let me kind of ask the question another way then. How many annually of these Class 8 trucks are taken off the road and scrapped on an annual basis? Again, I'm just trying to get an idea of what the replacement volume looks like kind of on an annual basis.

I don't have specific information around that, and we could do some follow-up and get back to you.

Gary, if you consider the long-term production volume for Class 8 trucks in North America, it's nearly 300,000 units per year. While there are fluctuations, the long-term average reflects both the replacement rate and the overall market growth.

Okay. That's helpful. And then it's good to see you extended the debt maturities, and I did read through the document somewhat, but your leverage ratio is 4.8x. Can you give us some idea of how that leverage ratio steps down over time with the new agreement?

Yes. So two things. We talked about our long-term target leverage ratio is around 2x. So between now and sometime in 2026, we continue to work towards that target. So you can see that we're making progress there. So you also can see that from our filing back at the end of June. Our new financing agreement allows us to have a little bit more wiggle room here in the next few quarters. So starting with over 7x of our leverage is in the covenants inside the agreement. So we believe that we'll continue to focus on generating cash. As you can see, in the first half, we made very significant progress there. And right now, that's our #1 priority on our capital allocation is to keep generating cash and continue to pay down debt and allow us more flexibilities.

There are no further questions at this time. I will now turn the call over to James Ray. Please continue.

Thank you all for joining today's call. We continue to take the necessary steps to support our customers in this dynamic environment, drive operational improvements and execute on our goal of delivering better results. We look forward to updating CVG's progress next quarter. Thank you again.

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