Ladies and gentlemen, thank you for standing by, and welcome to the CVG's Third Quarter 2020 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions].

Please note that the speakers will be referring to the presentation that is available on the company's website..

I'd now like to hand the conference over to your speaker today, Chris Bohnert, Chief Financial Officer and Chief Accounting Officer. Thank you. Please go ahead, sir. .

Thank you, and welcome to our conference call. Joining me on the call today is Harold Bevis, President, CEO and -- of CVG. We'll provide a brief company update as well as commentary regarding our third quarter 2020 financial results. After which, we'll open up the call for questions..

This conference call is being webcast and a supplemental earnings presentation 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, 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 production volumes of vehicles for which CVG is a supplier, financial covenant 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 Harold to provide a company update. .

Thank you, Chris, and thank you to everyone for joining the call today. First, I want to introduce Chris Bohnert, who just spoke. He joined CVG as Chief Financial Officer and Chief Accounting Officer a few weeks ago. Chris brings over 25 years of global leadership across a wide range of industries, including industrials and plastics..

Chris has great experience in mergers, acquisitions, financial excellence and capital market financing, which we will leverage to help accelerate our activities to expand the company's portfolio and lessen our exposure to medium-duty and heavy-duty combustion engine truck markets. We are excited to welcome him to our team. Thank you, Chris..

Now, please join me and turn to Page 3 in our investor presentation if you have that before you. If not, I'll make the same points verbally here. Q3 2020 was a good quarter for us and a strong bounce back from Q2, which was slammed by COVID.

Most likely, you've heard other CEOs of other companies thank their employees, their families and their suppliers for going through this together, I will be no exception..

I want to thank the CVG family for all we've gone through and conquered together this year. We're 7,000 strong and getting stronger. In fact, while some companies were laying off people, we were hiring, and we have hired approximately 1,000 people in the last few months, and we're still hiring.

We're committed to being a great place to work where employees can advance, have fun and be part of a diverse and inclusive global team..

Now, let's talk about our specific results in the quarter for a minute. You can see that our sales were $188 million, which was down versus prior year, basically due to the market, which we're going to cover in a minute, but up 48% sequentially. The commercial vehicle markets recovered sequentially and us with it. But they are below 2019 levels.

And the warehouse automation market continues to be a bright spot for us..

Adjusted operating income improved as well. It was down a little bit versus prior year. But our margins increased, and our operating income increased sequentially by quite a bit, $15.6 million. Our adjusted EBITDA actually increased in an absolute manner versus prior year to $16.4 million from $38 million less sales..

And we grew our liquidity again. Our free cash flow generation was $9 million in the quarter, and we paid down an additional $20 million of debt and we funded so far $6 million of CapEx, and we're on pace to do about $8 million to $10 million for this year. So all in all, it was a good quarter for us..

Turning to Page 4, please. Our sales mix is turning the corner, seen a couple of analyses that show our mix -- our sales mix being very similar over a long period of time, and in fact, that's true. If you look at our sales mix, for about a 10-year period, approximately 45% of our sales were tied to the truck markets. That's changed this year.

We're now at about 35%, and it's lessening..

And the focus areas for us is a sales team and the commercial team; the warehouse automation subsystems; delivery vans; Class 5 through 7 trucks, especially tied to e-commerce; electric vehicles and then alternate markets for current assets that we have to make plastic parts and wire harnesses.

So it was a good quarter and year-to-date performance for our sales mix. And just put the little graphic here of a truck turning the corner. But we portend that this is going to continue to be part of our future..

Turning to Page 5, please. You can see that the truck markets really went through a "V" recovery. It's a classic one. The Class 8 market, in the upper left corner, dropped Q1 to Q2 by 54% and then recovered almost entirely with 109% gain in Q3. And you can see the quarterly outlooks through next year are going to continue to be trending up.

And to the right, you can see the Class 8 market is expected to grow over the next couple of years as well..

Below it is a Class 5 through 7 market, which went through a similar drop and gain. Not quite a steep a drop, not quite as much of again, but still a "V" recovery and good outlook. So this is 35% of our market. It's a big part of our legacy core business. And it's healthy and growing, and there was a substantial improvement during the market..

If you follow any other companies in our sector, they've all been reporting the same thing. We all kind of use ACT. This data is from ACT Research. And the big thing is that e-commerce growth and GDP outlooks are driving favorable new truck builds.

Eventually, electric vehicle substitution is going to occur during these time periods, and I'm going to speak about that in a moment as well..

Please turn to Page 6. We've spoken with some of you one-on-one and in group sessions about the warehouse automation business, which we came to own when we acquired FSE. We are in the process of integrating it and exploiting it and making it as big as it can be by leveraging the parts of CVG and especially our global team and our footprint..

We've expanded the capacity at 4 of our plants. We are now evaluating next steps for additional capacity. On the people side, we added dedicated resources during the quarter for leadership as well as procurement. And we staffed up an additional amount of personnel, approximately 100 people..

We added to our product portfolio during Q3 and added some complicated subassemblies to our catalog. And we are evaluating further product line additions now. We expect this to be over $100 million business next year for us.

It's an accretive business and it's tethered to the warehouse automation market, which is in turn tied to the e-commerce secular trends and growth rates are above 20%..

So this is a nice bright spot for us, and it's one of the reasons why we were so attracted to FSE -- Kevin and his team there. And Kevin, who is the founder of that business is still with us and still leading it..

Please turn to Page 7. Another big market that we're focusing on is electric vehicles. This is a really important market for the industry and for us. We have a bundled product offering which is meaningful to these new startups. There's a little over 20 start-ups globally that are properly funded.

We've secured 2 marquee positions, one in this quarter, one in the second quarter, and they have greater than $200 million of business potential with future start dates..

And we secured 3 smaller electric vehicle contingent awards also in the quarter and have pending business opportunities at several other electric vehicle companies. So this is working fine for us.

We have a natural value-added product offering to make life simpler for these new truck companies and delivery van companies to start up and buy a bundle of products from one place. And it really helps us diversify our customer concentrations as well as being tethered to what part of this market is growing on a go forward basis..

And we are attacking whole vehicle size spectrum from delivery vans, all the way through Class 8 and special purpose vehicles, like garbage trucks, like marine terminal vehicles that sort of thing. So it was a good quarter for us for the future..

If you think about warehouse automation and electric vehicles, warehouse automation is here and now. We're shipping in this quarter. We're shipping in next quarter. It's a current business that will help the quarters that are coming at us.

Electric vehicles is more of a long term win, where you need to tool up with the customer, set production systems, and they primarily are going to impact our company in 2022 and beyond..

Page 8. So the takeaways for the quarter, the markets that we're in performed well, both the old markets we've been and our traditional core markets as well as the brand new markets that we're focused on. And the truck markets have absolutely recovered in "V" fashion..

Warehouse automation was strong in Q2 and its strong now. And so I would just say it stayed strong through this. If anything, the pandemic has caused that to strengthen. The cost reductions that we've put in place were aggressive and worked..

If you look at why our adjusted operating income margins went up, a lot of it was due to the big cost takeouts that we implemented. We are starting to restore some of those costs now in Q4 and Q1. And as I mentioned, we're in our hiring phase to staff up the new businesses we won, as well as our recovered markets..

On the other hand, we are still permanently reducing some of our footprint, which was redundant, looking backwards, and we have several facility restructuring projects that are still underway..

On the growth side, very happy with the pipeline filling that we've done as well as the new business, so contingent new business awards that we have gained as a company. We're focused on growth markets and less cyclicality. We've added people and capacity, products and customers in the quarter.

And as I mentioned, we pulled down another marquee electric vehicle customer..

I've spoken with some of you one-on-one and quite a few people are desirous to know the names of these startup customers, but we are bound by confidentiality to not speak about them, but they're good customers that are well capitalized..

And lastly on COVID, although that's still a concern for us, it's a concern at our company, it's a concern in our supply chain and our customers. Cases have been rising rapidly. All of us saw the news this morning about the vaccine. Good news that happened. We're hopeful for a vaccine to COVID in the near future, but it is a concern to us at the moment.

We're dealing with it. And it could impact the outlook. If we have an impact, that's unforeseen right now, it would be due to COVID really, because the demand for our products is pretty steady..

Okay. With that, I'd like to turn it back to Chris, where he's going to take you through some of the financial summaries.

Chris?.

Thank you, Harold. If you're following along in the presentation, please turn to Page 10. Third quarter 2020 revenues were $187.7 million compared to $225.4 million in the prior year period, a decrease of 16.7%.

This decrease reflects the sharp declines in sales due to the COVID-19 pandemic end market decline and more specifically lower heavy-duty truck production in North America and in the global construction markets we serve. This was partially offset by an increase in industrial and military revenues, primarily attributable to the FSE business..

On a sequential basis, revenue increased 47.9% over second quarter 2020 and revenue of $126.9 million. Foreign currencies favorably impacted our third quarter 2020 revenues by about $1 million.

SG&A was $14.4 million in the third quarter of 2020, a decline of roughly 18% year-over-year and 10% sequentially, driven by our continued focus on cost optimization..

The company reported consolidated operating income of $8.9 million for the third quarter of 2020 compared to $11.5 million in the prior year period, primarily attributable to the decreased sales volume.

Third quarter 2020 adjusted operating income was $12 million, a slight decrease compared to $12.4 million in the prior year, but up sequentially from adjusted operating loss of $3.6 million in the second quarter of 2020..

Adjusted EBITDA of $16.4 million was slightly ahead, as Harold mentioned, versus prior year. On a sequential basis, adjusted EBITDA recovered slightly from $1.2 million in the second quarter of 2020. As a percentage of sales, adjusted EBITDA increased 150 basis points compared to the third quarter 2019 and increased 780 basis points sequentially.

As Harold also mentioned, the impact of the decline in sales was partially offset by successful cost reduction initiatives..

Interest and other expense totaled $5.7 million in the third quarter of 2020 compared to $3.8 million in the third quarter of 2019. 2020 included a $1.8 million charge for PIK interest related to the loan refinancing, which occurred in the second quarter of 2020..

Net income for the quarter was $4.2 million or $0.13 diluted share compared to net income of $7.2 million in the prior period or $0.23 per diluted share..

If you please turn on Slide 11. I'll talk a little bit about the Electrical Segment results. For the third quarter of 2020, Electrical Systems revenues were $121.1 million compared to $131.4 million in the prior year period, a decrease of 7.9%..

The year-over-year decrease primarily resulted from declines in sales due to COVID pandemic and market declines and more specifically from lower heavy-duty truck production in North America, and in the global construction markets we serve, which is partially offset by industrial and military revenues, primarily attributable to the FSE business..

Of note, warehouse automation subsystems contributed an incremental $26 million in the third quarter. On a sequential basis, segment revenues increased 63.2% over the second quarter. Foreign currency translation favorably impacted the third quarter Electrical Segment revenues by about $400,000..

The Electrical Systems Segment reported operating income of $12.2 million in the third quarter compared to $12.8 million in the prior year period. The decrease is primarily attributable to lower sales volume. Third quarter adjusted operating income for the Electrical Systems Segment was $13.4 million when excluding special charges..

Slide 12 details our P&L on the Global Seating Segment. Revenues declined 68.9% or $68.9 million in the third quarter of 2020 compared to $95.7 million in the prior year period. This primarily resulted from the sharp declines in sales due to COVID-19 and other market declines and specifically the lower heavy-duty truck production in North America..

On a sequential basis, revenues increased 27.8% over the second quarter of 2020. Foreign currencies favorably impacted the sales by approximately $600,000 in the quarter. The Global Seating Segment reported an operating income of $4.8 million during the third quarter compared to $7.2 million in the prior year period.

The decrease in operating income was primarily attributable to lower sales volume, partially offset by cost savings from ongoing restructuring initiatives..

Third quarter 2020 adjusted operating income was $5.1 million when excluding special charges, an increase of 143% over the second quarter. Adjusted operating income as a percent of revenue was essentially flat year-on-year despite a $26.8 million decline in revenue..

Turning to Slide 13, please. On September 30, 2020, the company had liquidity of $126.2 million, which was made up of $53.6 million of cash and $72.6 million of availability on our revolving credit facility. There were no outstanding borrowings under our revolving credit facility as of September 30, 2020.

And as Harold mentioned, we've paid down $15 million on the ABL, an additional $5 million on the term loan during the quarter. Free cash flow for the quarter was $9 million..

This concludes our prepared remarks. I will now turn it over to the operator for Q&A. Thank you. .

[Operator Instructions] Your first question comes from Mike Shlisky from Collier Securities. .

Can you just give a little more color on the newer EV contract that you just signed with the new contingent contracts.

Are they for similar seating systems that you announced -- pretty big contract in last quarter? Or are there additional or other parts here like wire harnesses or other products involved there?.

Yes. So 2 things there. The customer is a supplier of trucks in Europe and North America. That's about all I can say. In terms of our product that we offered, yes, it's similar. The moniker we have is a Unity seat -- it's the name of the seating system that we're selling -- seating solution..

And it's integrated with plastic parts of pedestal, harnesses, if needed, by the customer and a kind of leading-edge state-of-the-art form, fit, and function aesthetic package. And it's easily customizable by the customers. It's one of the reasons they love it. They get to pay for what they want and don't have to pay for anything extra.

Very modular seat -- seating system, and they can also choose the point in the value spectrum they want on suspension technology. And it's the main product offering we're selling now. It's our next-gen bundled approach, Mike. .

Can you also summarize any discussions you're having with some of the big current truck makers that make diesel trucks? I'm sure they all want to do battery powered hydrogen trucks in the future.

Have you had any talks with them about how you can help and what you can contribute to their models? And can you give us a sense as to what the opportunity might be there, both on an aggregate basis and maybe on a per truck basis compared to a diesel?.

Yes. So the legacy truck makers who were already in the business generally have existing platforms. Some of them are using the electric vehicle new product offering in their product line to upgrade their cabs, some of them are not.

So, we generally get to compete when there's an upgrade or a change or a refresh of the cab environment in the case where they're just going to transition the powertrain from a combustion engine to a low-emission system..

Sometimes, they don't change much of the cab. So it varies. So our "new business opportunity" is different if they're not going to refresh the cab. And so we are involved with electric vehicles at all the traditional players, but whether or not it's an additional business opportunity, yes, it's specific to what they're doing, Mike. .

Would you be able to say in aggregate that you've got to see the table, most of the changes that ever happened and the overall impact, your number of trucks that have CVG materials in them will roughly be the same, whether they're all-electric or whether they're all diesel in the future?.

Well, we have about a 30% market share, and we're getting the same looks we've always had. We have access to all major makers globally. There's a lot of companies in China, specifically, if you talk about the global market, that 100% buy domestically, and those are hard accounts to crack into.

So I would say our looks are the same and mirror our market share. But in terms of are we growing share or trying to maintain share, our initiative here with the electric vehicle pursuit is to gain share by basically being a winner in the electric vehicle product offering.

Did that answer your question?.

Yes, yes, it did. You did. Clearly, you don't plan to be disruptive in this process, so that's certainly good to hear. I saw you kind of touched on this a bit during your prepared remarks.

Can you just give us more color on some of your efforts to expand beyond the traditional markets, some of the hiring, some of the new markets that you're pursuing, which ones have been successful so far, which ones haven't, et cetera?.

Yes. So we have 3 main ones, the biggest being warehouse automation subsystems. And we got a good foothold there when we bought FSE. They had several subsystems they offered. We expanded that business.

We assigned an executive internally, that's Rich Tajer who's leading our electric wire harness business to lead a big expansion of the product line globally. And so that's the big one that we're doing, and it is basically what's causing us to put in place new manufacturing departments inside of our existing footprint..

I will say that our primary emphasis is to leverage our current plant teams and our current footprint. We don't foresee at this moment in time, doing any Greenfield investments, just leveraging current teams that we have so that we can get overhead absorption from this, as well as derisk the ramp-up from having our experienced people oversee them.

So that's our biggest..

The other 2, which are a little smaller than the warehouse automation, growth is in wiring harnesses. We can make wiring harnesses for any kind of vehicle, any kind of large equipment and are sales leader there, and Rich kind of also leading that business unit, had great successes here getting positions on non-trucks.

And so we've had a good set of wins, some of them short term, some of them longer term..

And our third area is in plastic parts. We have a big portfolio of injection molding and thermal forming machines. We have traditionally only made parts for trucks.

We have turned our attention to making parts for other industries, medical, consumer products, industrial products, and we had to hire sales leaders who knew those markets, knew the competitors, knew the customers to lead the way for us..

We have the footprint. We have the know-how. We have the capacity, but we didn't really have the commercial tip of the spear, if you will. So that's been the nature of our main hiring is commercial leadership. Thanks Mike. .

Your next question comes from Chris Howe from Barrington Research. .

First off, I wanted to start off on that slide where you showed how the mix of the business is changing.

If we consider that slide in the context of your comment surrounding electric -- the warehouse automation market of $100 million potentially, how should we think about incremental margin on this $100 million? And as the mix of the business continues to change and realign to be less cyclical in nature, how could we see that positively impacting incremental margin as we look to the further out years of this business?.

Yes. Good question. So the main change 2020 year-to-date versus the 10-year average or even 2019 is definitely warehouse automation. And it is accretive, and it is -- it has some cyclicality looking back its lumpiness, I should say. It's trended up, but with lumps because it comes in big chunks in new warehouses and new warehouse automation.

But it's trending up at around 20% CAGR..

e-commerce, warehouse distribution system. So when we get a PO, we see those customers' names, we're not free to say them, but we're making our name known now as a supplier to them and we're expanding what we do for them. So we're mainly making subsystems that form a piece of the puzzle into these automated warehouses..

Just you think control boxes like a motor control center or panel that has conveyors connected to it, and in some cases, at least half the time elevators to elevate and move material around. So we're trying -- the business we have is growing, and we're trying to add more to it.

With regards to the other 2 pieces on wiring harnesses and plastic parts, that's going to be -- we're trying to go for mix that's better than GDP, but I would think of it as GDP business right now, Chris. .

As I kind of think about things on an aggregate basis, you had 2 key wins in the electric vehicle space. We have the growing warehouse automation space.

How should we assess key takeaways as you've been able to win and gain new business, and how that has changed your outlook or your approach on new strategic deals in the future? And as we look at future opportunities, given the current mix of products going into these customers, what sort of product development opportunities are you currently working on or are available in a short or long term?.

Yes. So we've had 5 electric vehicle victories, 2 big ones, 3 smaller ones. And we have -- we're basically pursuing the top 20 globally. We don't expect to get them all, but we're being as greedy as we can be. Then you should expect the profit rates to be similar as they have been in that business.

We have the same gentleman leading that business, Doug Bowen. He's got command of both sides of this thing, and it's a transition for us. So we're tethering ourselves to the high-growth part of the industry. And as a company, we're committed to the sustainability and having an impact there..

And so we're doing that move, and it's more of a longer term repositioning. It's not a quickie, because the big deal is for the truck company to put in place an entire, huge complex for truck assembly, which is quite complicated. Our stuff is easy compared to that. But we're tying into those growth stories.

So that one you should think about as a multiyear layering in slices as we win this business as it goes along. And yes, we are using it as a chance to advance our capabilities..

It is a design change to the Unity platform. It's a modular platform and we're putting -- we're going to put a presentation on our website to make it more clear.

But it's a modular design, but the manufacturing processes are state-of-the-art -- robotic welding, robotic painting and higher level paint quality system, higher level form, fit, and function so that you don't have wrinkles on the covers of the seat and all this sort of thing..

So, a very better aesthetics and also a smart process inside our plant so that the -- it's -- there are precedents for this in the automotive industry -- these smart lines. And we are putting in a smart manufacturing process. We're doing one in North America, and we're doing one in China.

And so, we're going to be set up to supply Japan, Thailand, China, all the Asian countries from that point, and we're supplying North America from Mexico..

And so these new lines are going to [ start ]. We've benchmarked the best and we are going to adapt it into our Unity manufacturing process. That's going to take a little bit of CapEx, Chris. .

And just circling back quickly to your comments about the $100 million opportunity based on what we've just discussed, that $100 million, the timing of which -- or the cadence of which may change from quarter-to-quarter.

But the 2021 as a whole, you feel confident in that $100 million?.

We do. We do. We did release what FSE was in the quarter. And it's primarily a PO business, Chris. You have overriding bracket agreements to handle terms and conditions. But the business is tied to retailers and e-commerce distributors, the people that deliver the box parcels to our doors.

It depends on them choosing to do an investment to speed up their processes or expand their capacity..

So it comes at us in project form and firm. And so we -- our -- we can see out 3 to 6 months in terms of planned projects and the forecast for projects go out to the end of next year.

So the industry right now look forward in quite a ways because you have to get -- in case of a new warehouse, you have to get land, you have to build a building, a lot of trucks are going to come in and out. And then you have to design the warehouse system inside of it, and then give it out to suppliers like us..

So the visibility is okay. The visibility is okay. I would say it's a little better than trucking. Trucking is up and down quite a bit. And this one right now is secular growth at a high number. Thank you, Chris. .

[Operator Instructions] We have no further questions in queue. I'd like to turn the call back over to Harold Bevis, President and Chief Executive Officer, for closing remarks. .

Thank you, everyone for joining us. I spoke a lot today, because Chris has only been here a few days. In the subsequent meetings we're going to have, obviously, Chris is going to speak a lot more. I want to thank Chris again for joining..

And I want to thank the employees for the tough year. We went through this year of furloughs and layoffs and salary cuts and benefit cuts and then a hire back and then hiring of new people. So like many industries, our company has gone through that, and I'm very happy that we've delivered good results here in the quarter and have a good outlook..

Thanks for calling in. We look forward to speaking with you on our next call. With that, we'll end it. Thank you. .

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