Commercial Vehicle Group, Inc.

Welcome to the C-Suite series presented by Channel Check and Noble Capital Markets. Noble is an SEC registered, finnal license broker-dealer and the source of the equity research available on Channel Check. Today's interview features Commercial Ve Noble Senior Research Channelist Joe Gomes interviews Commercial Ve Visit Channel Check. com or click the link in the description to access equity research, news and advanced market data on Commercial Ve All at no cost. And now, here's Joe, Harold andy. So for those in the audience unfamiliar with Commercial Ve Yes, thank you for asking. We're a young entrepreneurial company. Were founded in 2000. We're about a billion dollars in revenue. Our last year's EVITDA, just EVITDA, was about 75 million. We have 8,000 employees and we are a tier one and tier two supplier to the global transportation markets, commercial ve And a couple years ago, we also got into automated warehousing. Awesome. Now, can you give us a brief background on yourself and how you became CEO of Commercial Ve Yes. I've been here eight and a half years. I joined the board of directors in 2014. And a few years ago, the board asked me if I would consider becoming the CEO to accelerate our transformation, w I recruited Andy. Andy was at Johnson Controls for 25 years and he worked for many years in the seating business, now known as Adiant. And so he's an industry veteran Seating is one of our big product categories as well as electrical systems, winds So I was very pleased that Andy joined us and he has a lot of industry experience. Interesting backgrounds. Let's get back to the business and you kind of get a little bit of color there. But who are your customers and why did they choose CVGI? What is the CVGI differentiator? So we serve the big ve A lot of them were covered by NDA and not allowed to say their names, but we've previously put our top customer names in our 10K and some of our customers have named us in press releases. So with a little bit of work, you can see that we've named our top customers Volvo, Daimler, Packard, Navistar, Caterpillar, John Deere, Volkswagen and a recent one Rivian named us as a supplier to them. So it's the big ve Those are our big ones. So commercial ve Can you give us a brief overview of your markets in terms of size, growth rates, potential? You bet. So if you follow transportation or you invest in this sector, And we're a small company participating in very large markets. We have small market shares, therefore. And the good side of that is we have unlimited upside with dedicated focus. The biggest product, legacy product we have, I mentioned in the Minnego seeding and specifically driver seeds. They're very important to the ve So that's our big legacy business on a go forward basis. Our focus has been on the electric system itself. And for a long time, we've made the electrical system back up bones of these ve And with the advent of electric ve And there's pretty wild outlooks for the growth rates for the electric versions of all types of ve The big deal in the last year or so with COVID has been the ability to produce ve The demand dramatically exceeds the ability of the industry to supply. The supply chain pressure indexes are coming down if you follow those from the Federal Reserve or the conference board. And we feel that. We hope that what is be And so Joe, the demand outlooks are quite attractive for our industries and for us. And we've run backlogs as well through t Our outlook is our answer on our kind of revenue outlook is based is a supply chain outlook. And we believe that it will gradually improve in 23 and beyond and that we'll get through the constraints that we have. So in the short term, kind of next year in the year after gradual growth, it is way less than demand. Now, a key focus t How is t Yeah, it's a big t And what that means is coming into a period of spike inflation that the inflation rates were And it required us to attack the contracts and ask for price relief. And in the case where they got difficult notifications, we have a little over half of our business is contractual and less than half is P. O. based. So it required several waves of price increase activity by us and we're out with one right now. Depending on when you listen to t We announced that during our earnings call. And We don't want to blow up bridges or get ugly in these t So it's old fas And in the quarter that just ended Q3, we reported that we'd made progress relative to inflation and we continue to do so. So in the short term, that's really important to us. We call it right pricing, but getting our prices right to cover inflation that we have and inflation that we see and maintain our margins. So we hope to get a lift from that. We hope that keeps improving into 23. The company'seen a significant amount of new business wins t Can you talk a little bit about where the wins are coming from and how the company is ac Yes. So, In our case, it was untapped potential. It was one reason the board asked me if I would come lead the company for a we had an out aggressively tried to leverage our strengths in new customers and new market applications. We started from scratch in 2020. We've been winning a little over 150 million a year of new business, new customer. When we say new business, it's a new customer or a new application. So replacement wins are a big t We don't count that in the new business n When we say new, we're talking additive to our run rate. And so we've been targeting around 150 million a year, getting around 150 million a year. We don't have an unlimited ability to go hunting or onboard wins. And so we've been pretty targeted. We're t And if we did, we'd need more people and we'd incur more startup expenses, quoting expenses. But we're pretty comfortable with where we are at the moment. And we've been able to do it and onboard it and expense it and innovate it and get it through quality regiments in our industry that are significant. Quality is very important. And on time delivery. Having said that, we've won so much business show that it's exceeded our capacity in a couple spots. And we're underway with building two new low cost plants, one in North America, one in Europe. The one in North America is in central Mexico. It will house 1,000 employees. It's underway. We'll be starting it up in mid 2023. And we have another 1,000 employee plant we're building in North Africa. And that will also be a 1,000 employee plant. And in both cases, we need that extra capacity to onboard business that we've already won and ramp up on the ve So you kind of leapfrog my next question here, but we'll go for it We've got a large global presence in terms of facilities, including the new engineering center in Phoenix. Can you talk a little bit about what you're expecting out of the new Phoenix facility and anyt Yep. Thank you, Joe. And it's led us into innovation more deeply than our past. If you had to stereotype our past, you'd say we're a contract manufacturer. If you were trying to stereotype our future, we are coming in with our own designs. And we're offering design services and bespoke designs and patented designs that have unique offering, value offering. We had to open an electrical design center due to the magnitude of the innovating we're doing. Phoenix was a good location for us in the United States because our largest plant in North America is on the Arizona, Mexico border in Agrippietta. We have a little over 2,000 employees right there. So it's convenient place to do our innovation. We can have customers fly in there, co-develop with them. And then in the case of factory audits, w In Europe, we also have won so much business there and we're innovating at a We know that we need an innovation in Europe also. We have pinpointed where we'd We haven't announced it yet. And so we see that happening and then the third spot is most So we see ourselves having three R&D centers, one in each time zone and language and being close to the customers in both of those three areas. There have been some headwinds in recent quarters, C And how should we be two of those are pretty temporary. One is going to be probably a couple of years. So the Ukraine situation happened, it dramatically impacted our Q1 and Q2. We had a full shutdown at the beginning of the war on February 24th. And all of our men were called into military service. We had to re We did do that. We now have 1,600 women in our plant. And we also had to redo our so we did that. And at the same time, we implemented duplicate backup at our Czech Republic plant. So in the case of a supply chain event or a bombing event or any type of interruption, we could hot swap and make the products in the Czech Republic. So we did both t And we're back online and we have revenue and profit continuity there. With COVID shut down in Shanghai, that did impact us. That actually is our most profitable plant. So it actually was a negative mix event for us too, to be honest. It wasn't just the revenue, but it was a great profit mix. We have some of our most We're back online there as well. But we're working through a pretty big backlog. So we developed a pretty big backlog there. And at the same time, we implemented a duplicate production capacity in Thailand. So we expanded our plant in Thailand and we re-qualified some of our customers into our Thailand plant so that if a disruption might happen, again, we could keep continuity of service. So those we've kind of worked through, the warehouse automation one is a little different. We now know that the big e-s But we had money and we kept ordering retail items and we did it over the internet. And then they were s And then when we took our masks off and went back to the stores, e-commerce settled down a bit. And so there's year-over-year negative comps amongst the e-commerce crowd. And several public filers have sat at FedEx, UPS, Amazon, here in the U. S. and others around the world. So that impacted us greatly, Jill. T We know what their outlooks are of the big reporters on t We get orders when people are building capacity and automated warehousing and parcel distribution. So that one, we decided to right-size our cost structure. And towards the end of the t And so we right-sized our cost structure with the t But the long-time outlook is still very favorable, but no one knew COVID was going to happen. And it kind of inflected up, then went down, and it's gradually building again. So that one, we're not counting on it to deliver too much for us. And we have our foot on the pedal to continue winning business in the ve And if you look at Q3 results that we've posted, our views approximately doubled and almost completely offset the wipeout in our warehouse automation business. And we expect that kind of to be our story. We're going to continue to show good results in the ve And we've right-sized the cost structure in the warehouse automation business, and it will come back gradually in Q4, Q1, and into Q23. So it sounds It's a really exciting opportunity in the warehouse automation space. Maybe you could just briefly describe to people what do you actually do in the warehouse automation space? It's a pretty cool product. They have specific industry names. But what we do is we build about a 20 by 40 subsystem that's about 10 feet It's automated. It's automated conveyors, it has drive systems and actuators, and a little elevator on it. And it's called sortation equipment. So it's automated sortation equipment. It's controlled by the automation solution in the warehouse. There's big integrators that do t And if you look at Walmart or Target or Aldi or Amazon or FedEx or UPS, they don't actually build warehouses, right? They contract that. And so there's integrators that put the software together in all the hardware pieces and have performance agreements on how much throughput they can get through a facility. And they erect these big warehouses. The industry jargons actually, they call them plants. But these big plant facilities of the warehouses are automated. And so we make equipment that is pieces of the puzzle that take, we're mainly on both ends of the warehouse. We have sortation equipment for when the trucks unload the goods and parcels from the manufacturers. And then they're stored. And then when they're ordered by you, me or someone, they need to be sorted out and go into a delivery truck. And that part of the sortation, we also do that automation so that ASP of an order for us is around $30,000 each. And a typical Amazon warehouse will have 80 to 90 truckloads of our equipment in it. And so we absolutely love it when new warehouse is being built. There's a little bit of a pause going on there, but it's not forever. And we're using the time to do something we wanted to do And so we're not just going to do nothing and wait for it to come back and pull our th So we're using the time to retool, expand our product offering and do other types of warehouse and industrial automation. T It's a question that you see pop up often. The first part of it is, is commercial ve But on the flip side of that, the company has talked about M&A in the past. And do you t Yep. Well, M&A was a big part of how we came together, right? Our originally, our company was put together by a private equity firm in Canada, ONX, before went public. And so we have that DNA. We're not afraid to buy anyt We're not afraid to sell anyt So the first, yeah, you had a few t Are there pieces of the puzzle? Are we in too many t Are there pieces of the puzzle that don't fit? There's a couple pieces of the company that aren'that strategic, I would say, that we're not trying to grow as much as we are others. We don't have any pieces of our company that lose money. So there's no kind of addition by subtraction. It's really how strategic are the company, the little pieces of the puzzle to our go forward agenda. We don't have anyt We, everybody's contributing either cash or profit or sales growth. And they have a role in our portfolio strategy. Looking forward, we definitely do want to acquire. We intend to. It's going to be intentional. And it's going to be additive to the vectors we just said of being strong in electrification. We didn'talk a lot about aftermarket here, Joe, but at the top level, the two sectors that were after our electric systems and our aftermarket business growing most differentially there. They have good ROICs. They have good profits. They're growing. They're needed. And so those are our two focus areas. Second to that is retooling the warehouse automation and get ready for the future again. And for us, we would buy companies that strengthen those, those ideas. You won't find us getting into anything odd or not like us, like, We serve others. We know how to be a tier one, tier two partner to others. Big, big companies. We know on time delivery, quality, And there's businesses So we're not on the hunt right now. We kind of articulated that we would get our leverage down into the ones before we did anyt Right. So we're aware of that. We saw that coming. We're acting to that. We have very good cash generation in the last two quarters. And we articulated that would continue Q4 and into next year. So I know we you have a s One of them I'll just preview it and say that we're very focused on cash generation and having low leverage. So M&A, there's what we want to do in the timing of it. So we are going to wait until no one even asks a question about that. And we're going to close in on that. It's not far around the corner. And I t And so we've said we want to get into the ones and that's and we're going to do it. So we're warming up right now looking at different t We're not going to do a big transformation kind of a deal where we bet the farm. It will be more So we don't Our we've put our long term goals in the investor deck. We're trying to double the company right now to two billion. It will be a combination of organic growth and focused M&A. You're stealing some of the my next question. I was going toss a one over to Annie get I know there's a goal to reduce debt by 25 million to 40 million. So we'll throw that one over to you, Andy. Thanks Joe. Right now if you look at the company, we are about 60 percent debt to capital. And as Harold said, our commitment and our n We have about 180 million dollars of term loans and we are well on our way to get rid of our revolver by the end of the year and starting to pay off the term loans. So I t And then once we are ready and find the right M&A target, then we'll use our cash. So I t Excellent. So Harold, back to you. I mean, what do you see as the biggest challenges for commercial ve Well, short term, we're in these hand to hand combat battles. I'm getting our prices that we want. That's a run the business topic. I wouldn't say it's a problem, but it is. Pricing is a big lever always for any company and definitely for us. So we're very focused on that. I would say it's a big focus area, not a problem area. In terms of answering your question, we have a big backlog. Our customers have a big backlog. And if supply chains can solve them, resolve their problems a little bit faster, we will have natural Our customers all have big plans for their electric ve And they just don't have the parts. And anyone who's tried to buy any ve We see that as a supplier globally. So a biggest opportunity for us would be a natural easing of our customers constraints. We've been able to stay out of the way in terms of being a clog. And so we help them solve their problems. So that would be a natural uplift in terms of the rising interest rates do have an impact on our industry. And if rates get really, really And it, of course, impacts the IRR on buying a new $150,000 tractor or if you use leverage to buy a passenger ve So leverage does matter to cons So that one, we're keeping our eye on that there's a lot of analyses been done on that, Joe, and different outlooks. Because the industry is so backed up and has been undersupplied on ve And if next year is impacted, it's going to be the second half. We can kind of see six months pretty clearly with our EDI portals with all of our customers. And they have to do manpower planning. Most of our customers have unionized workforces. We don't. We're 100% non-union. But they do. And so they have notification requirements and have to plan ahead deliberately. So we can see a couple quarters ahead. We feel, Andy and I feel pretty good about next year. We haven't looked hard at 24, 25, 26 yet. In terms of economic outlooks, we definitely have the IMF outlooks and the conference board, w And so we have good information, global information that we plan with. And we're planning to keep winning business, Joe. And so we're winning at a strip at a time. We have a goal to double, but we're not elephant hunting. We're trying to, our average wind size is about $2 million. And it's about 10 years. So we're on the ve So we're trying to build our way to $2 billion in a very sustainable manner and a brick at a time, if you will, so that we're not over-dependent on others, on any one customer or any one ve And so we've de-risked our future revenue and future profit by the way in w And we're almost no bidding these big elephants that come at us because it's horrible if you win it because then you're dependent upon it. And it's hard to say no when you get pushed around. So we've steered clear of that. We're small to medi And would you add anyt Well, I t Obviously the supply chain situation is still uncertain, but it's mostly impacting our customers more than us. Harold mentioned, I t We have plan B for pretty much all the t So I t Excellent. We'll hope that we, for all of our sakes, we stay out of a deep recession here. So why don't we wrap it up here, Harold? Why don't you give us your elevator pitch for an investor looking at commercial very good. First, I want to say we have a strong team here that we've assembled. I've been very deliberate about putting a strong team together that really knows industry. I'm entering my 20th year as a CEO and an old dude. Just reported my 79th quarter. Andy's 25 years spent time in t Our top leaders are very experienced. We know Detroit, we know Munich, we know Berlin, we know Shanghai. We're experienced at what we do. We know our products. We love our products. We And we're being very deliberate about growing logically, not recklessly. And so we had to put a lot of money into our work capital during COVID, over $90 million. And if you look forward on our cash flow, we're going to be gradually improving our profits. But our cash flow will be stronger than our profits because we're going to be getting that money back off of our balance sheet. And we didn'talk a little bit about kind of our costs and our internal t And we faced that reality and we fixed it. We regionalized a lot of our production so that we never have to have that much dependency on sourcing from one country. And so we're making a lot more of our own parts now than, and previously we're sourcing them. So we intend to get our work in capital down and be very cash generative. And the question you asked, Joe, about the impact of the China shutdown, we don't ever want to have again that something So we do risk the company permanently by reengineering that and duplicating our tooling. We didn't move tooling. We duplicated it. So I t We have an entrepreneurial team that's new. We're showing progress. We're not giving quarterly guidance, but we're given kind of six month guidance and expectations and we're doing it. So I t And if you look at our value as an investment, we're undervalued to our sector and we're undervalued to the stock market. And I believe that, I hope we eventually get a multiple correction as we earn the right for that by performing. And I do believe we'll head $2 billion. That's our goal. It might take longer than we want because of supply chain and if we have a recession, but it won't stop us from the path. So Andy came here from pretty big company and I've recruited some people here that have run big businesses. So we don't have, the company's not too complicated, Joe. We intend to make it bigger and generate more profit dollars and have a So that was probably a long elevator ride, but that's the pitch on why you should look at our stock and consider us. Well, Harold andy, we covered a lot of ground today and got significant insight into what commercial ve We appreciate you taking the time to do thanks again. Thank you. other small and microcap companies listed.