Commercial Vehicle Group Inc (CVGI) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Commercial Vehicle Group earnings conference call.

My name is Clarissa and I will be the coordinator for today.

At this time, all participants are in a listen only mode.

We will facilitate a question and answer session towards the end of the call.

(Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr.

Chad Utrup.

Please proceed.

Thank you.

Welcome, everybody to the conference call.

As usual, before we begin the formal portion of today's call I will first read through our safe harbor language and then I will pass the call over to Merv for a Company update and then I will take you through our preliminary results for the fourth quarter of ' 08 and a brief overview of our restructuring and cost-cutting initiatives as well as our impending impairment impacts and then we will take time to answer your questions.

With that, I would like to remind you that this conference call contains forward looking statements, actual results may differ from anticipated results because of certain risks and uncertainties.

These may include, but are not limited to, the economic conditions in the markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier.

Risks associated with conducting business in foreign countries and currencies.

And other risks detailed in our SEC filings.

And with that, I will turn the call over to Merv.

Good morning everyone.

Thank you Chad and thanks to everyone that has dialed in this morning.

It is not really news that the industry downturn that impacted us in 2007 continued into 2008.

As we look back, the fourth quarter and frankly the whole year was certainly challenging.

As we managed through the year and the fourth quarter, we continue to address volume declines by reducing our hourly and temporary work force and overtime to meet the dropping market demands and customer order requirements.

We also reduced capital expenditures and controlled inventory which can be tough when the volumes drop this rapidly.

We also kept a strong emphasis on managing logistics and transportation costs.

Because approximately 75% of our costs are variable, we can make these kinds of changes quickly which allow us to remain in-line with our contribution expectations us to remain in line with our contribution expectations on operating income for the fourth quarter.

Despite our revenues being down further than our initial estimates.

As you saw from the press release, we have extended our cost reduction initiatives into the beginning of 2009 and are further addressing our fixed costs by instituting a hiring freeze, eliminating a myriad of increases for the year and suspending the Company's match on employees' contributions to their 401K and other retirement programs outside of the US for 2009.

We have also started a 15% salary work force reduction and have put plans in place to reduce our manufacturing footprint costs by consolidating and closing five of our smaller manufacturing assemblies and sequencing facilities.

Our facility closures approximate more than 200,000 square feet of manufacturing footprint reduction.

While this is small in comparison to our overall size as a global company, these actions can have quicker returns on the closure costs as we keep our eye on profitability and cash.

Of course, as our markets dictate, we will also continue to monitor further our variable costs as well as fixed costs and our work force and manufacturing cost reductions the business may need, and we will be ready for the challenges ahead.

As you know, the economic downturn has not just impacted CVG, but our competitors also.

A number of them have not prepared as well in this extended downtime.

That presents potential business opportunities for us which we have talked about in the past.

Each day, it seems to bring new opportunities and we are prepared to move into those as soon as the customers-- and move the business and also as soon as they start production back up.

Despite tackling short-term issues, we have kept our eye on the long-term ball too.

At the [end] of December we restructured a management team.

We did this because the Company has changed over the past couple of years.

Our recent acquisitions along with the addition of new talent to our team made it necessary to realign our operations and our management.

We anticipate that over the long run it will result in a flatter, more cost effective, and efficient organization.

Although 2008 was a very difficult year, we continued to make strategic investment in new products.

An excellent example is our GSX 3000 Global truck seat, which we introduced at the IAA Truck Show in Hanover, Germany in September.

It is designed for truck and bus original equipment manufactures and was well received by the customers and distributors.

It has the common structure that is easily adaptable to different end customers and end market needs which makes it very flexible product in today's global market place.

It is part of our long-term strategy to expand our product offerings and increase our participation in non-US markets.

Also in January, we announced a new National Seating coach bus passenger seat at the United Motorcoach Association in Orlando, Florida.

This new seat was specifically designed for the global motor coach industry.

It has a three-point integral seat belt design that meets European Motor Coach Safety Standards and will be available across Nation Seating's full line of coach bus passenger seats beginning in the second quarter of 2009.

As I mentioned in the last quarter's call, we are continuing to see significant new opportunities for CVG China in the short time since we opened CVG Shanghai.

We have made meaningful gains in the local Chinese original equipment manufacturing market, and during 2008 we began expanding for CVG's Chinese products to include wiring harnesses and not just seating.

As we balance changing energy costs, volatile shipping expenses, the strengthening or softening and batting of the dollar, and other factors we may look to states side production to address cost savings and inventory issues.

This is a delicate balance that we will continuously monitor and manage going forward, but the fact of the matter is, that global production and sourcing costs are dramatically different than those of three to four years ago.

Given that we are in a recession, the analysts are predicting low production volumes for 2009 for tri-state trucks in North America.

They are also predicting weak construction markets in Europe and Asia.

Everyone is expecting tight credit markets to manage Commercial Vehicle purchasing around the world.

Looking forward, we expect 2009 will present an even more challenging year than ' 08.

We are prepared to continue to control our costs and realign our business as necessary.

While we are not providing 2009 estimates at this time due to the volatility of our global market environment, we do currently estimate North America's tri-state production levels to be in the range of 130,000 to 150,000 units.

Considerably down from 2008 levels.

In addition, our global construction customers continue to refine their production volume projections on a daily basis, and in some cases, are currently indicating 40% to 50% reductions.

They do expect this to pick up in the third and fourth quarter.

These are primary reasons why CVG is taking all the actions deemed necessary at this time to make sure that we align our costs as quickly as possible.

Fortunately for us, our variable cost structure does provide us an advantage to react quickly and take costs out effectively.

Over all, our primary goal in 2009 would be to continue our strategy of protecting our Company against the effects of the economic downturn while taking actions necessary to keep CVG competitive in the long-term.

At this point, I would like to turn the call over to Chad for a brief financial interview.

Chad.

Thanks, Merv.

As noted in the press release, we have provided only preliminary revenue and operating results at this time.

It is probably no surprise, but like many companies today we are in the mist of finalizing our goodwill and intangible asset impairment evaluations, which will impact our final results as well as our tax provision rates and certainly balance sheet values.

Therefore, today, we will only be discussing key operating results and balance sheet items for the fourth quarter and full year and all results remain subject to change.

Our preliminary revenues for this past quarter were $164.4 million, which is down about $14 million or 8% from the fourth quarter of last year.

Of which, approximately half of the decline was due to currency translation of our foreign operations.

While the Class A production levels were relatively flat year-over-year for the fourth quarter, we did experience volume declines in our other end markets over the prior year with the notable exception of our military orders which remain strong over ' 07.

SG&A expense continue to improve for the third consecutive quarter as a result of our ongoing cost-reduction efforts and came in at approximately $15 million compared to $16 million in the third quarter of ' 08 and $16.8 million in the second quarter of ' 08.

Depreciation and amortization was approximately $4.9 million for the quarter and capital spending was approximately $3.5 million for the quarter.

As we look at our full year 2008 result, our revenues were up $66.7 million over 2007 of which approximately $50 million was related to our acquisitions in late 2007.Preliminary operating income for the full year was approximately $16.1 million, compared to $18.8 million in 2007.

Depreciation and amortization was $19.1 million for the year and capital spending was $14.4 million or 1.9% of revenues.

While our revenues were down compared to our estimates for the fourth quarter, we are pleased with our ability to reduce our cost structure and help minimize the rapid volume impacts towards the end of the year.

Net debt in this case defined as total debt less cash and cash equivalents, was approximately $157.6 million at the end of 2008 consisting of our $150 million 8% senior notes which aren't due until 2013 and $14.9 million outstanding revolver balance with approximately $7.3 million of cash on hand.

We continue to focus on cash and working capital management to ensure we achieve the highest level of cash generation as possible.

This covers the extent of our preliminary results which we will be discussing today as we expect to finalize our results and file our full financial statements upon completion of our impairment impacts over the coming weeks.

There has been a lot of recent discussion regarding Company pension and post retirement plans and unfunded status and all those scenarios given the weak returns in the overall global markets.

So I wanted to touch base a little bit on it today.

I'm actually pleased to report that through our contribution efforts and management of our plan assets, our unfunded liability of these plans only increased a modest 7.8% from approximately $19 million at the end of ' 07 to about $20 million at the end of '08.

We take very serious the management of our plans and ensuring the long-term viability and are very pleased with the performance throughout this past year despite the marketplace.

And as Merv mentioned, we announced today's certain restructuring and cost reduction initiatives with annualized cost savings of $10 million including the 15% salary work force reduction, the freezing of our Company match to our certain retirement plans and the freezing of merit increases for 2009.

What is important to note is that while we focus more on our immediate fixed cost reduction efforts, we have taken similar actions in regards to our variable labor costs by reducing our overtime and temporary and hourly staffing within our operations in connection with our volume declines.

As Merv said this is, of course, one of the primary benefits of our variable cost structure having the ability to reduce our cost rapidly has definitely proven beneficial with the decline throughout the fourth quarter and into the first part of '09.

Finally, in response to recent stock price and market value declines as well as the impacts of current and potential market conditions, we, like many other companies, are in the middle finalizing our evaluation for impairment of our goodwill and intangible and certain other assets.

That said, the pending outcome is, of course, non-cash and does not impact the underlying operations and strategy of the Company.

We do not have an estimate to provide at this time but certainly expect to finalize that over the next coming weeks and our expectation is that we will likely impair substantially all or all of our goodwill intangible assets and expect to do that on or before our Form 10-K filing deadline of March 16th.

As of the end of 2008 we had approximately $143 million of goodwill and $87 million of intangible assets for reference.

In conclusion, again, as Merv said, we are not providing guidance for 2009 at this time.

With that said, again, we currently expect the North American Class 8 market to be in the range of 130,000 to 150,000 units for '09.

And we have seen indicators that the global construction market could decline up to 40% to 50% in the first half of ' 09 from ' 08 levels.

It is no surprise that our primary focus will remain on these market conditions and should volumes in these markets or other markets continue to deteriorate, we will be prepared to take further actions as needed to ensure we achieve the highest return possible for our shareholders.

With that, we would like to open up the call for any questions.

(Operator Instructions) Your first question comes from the line of David Leiker.

Please proceed.

Hi guys, this is Keith Schicker on the line for David.

Chad, I think we can probably back into this number from the information you provided.

But, can you offer a gross profit number for the quarter X items that you haven't quite yet determined.

$13.1 million.

Okay, that's great.

And if we look at the restructuring program that you guys announced, can we assume that it contemplates -- when you are talking about you may need to take additional action, can we assume that that will be needed if we are below 130,000 to 150,000 in the Class 8 and Global Construction is worse than the numbers you provided?

Is that --

Yes, absolutely.

That's right, Keith.

When do the savings reach the 10 million annualized run rate?

It is pretty close.

We are taking the actions in the first quarter so we will be substantially complete.

Of the $10 million, obviously, we have some costs with that which we mentioned.

So, for ' 09 it is probably in the $7 million to $8 million range year over year, Keith.

The 2.5 million, is that all cash?

Yes, it is.

Is that net of any proceeds from the sale of the land or the facilities that you are going to be closing?

They are all primarily leases so there won't be any of that activity for this.

Are the savings primarily concentrated in SG&A or gross profit?

t is throughout.

The salaried work force reduction is both in SG&A as well as in our operations.

Is it maybe 50/50?

Just across the board.

I don't have a split out for you, Keith.

Okay.

It impacts both.

And if we look at D and A, roughly about $20 million this year.

Is that number going to be lower next year?

Is that a safe assumption to make?

D and A this year was $19 million or so.

You know, our cap X is something we will definitely be taking a look at for next year.

Probably something similar or maybe a little bit higher really depends on what may roll off.

But I wouldn't expect a substantial change.

Lastly, can you just comment on market conditions that you are seeing thus far in Q1 relative to Q4?

They are lower.

Okay.

Thanks.

(Operator Instructions) Your next question comes from the line of Chip Miller.

Please proceed.

Hi guys, it is Chip Miller for Ann Duignan at JP Morgan.

First off, point of clarification on the operating income, does that include the $6.1 million gain in the first quarter?

So for the quarter for Q4, the loss was about $2.2 million at the operating line?

That's correct.

And is that a clean number?

Or are there any one timers in there that we should be aware of?

No.

That's a relatively clean number.

Okay.

So if I look at the net debt in the quarter, net debt went up by about $6 million.

It appears that cap X was in line with your guidance.

What was the driver there?

Was working capital a source or use of cash in the quarter or was there something else driving that need to increase debt?

I think a lot of it is timing, Chip, which we have talked about before.

Our numbers can change $5 million to $10 million on Friday until Monday.

A lot of it can be that.

A lot of the challenges that we had at the end of the year with volumes being down even further was getting our inventory out.

There is certainly less opportunity to use that inventory.

That is one piece of it and the other piece of it -- a lot of it is timing.

I know it can be difficult to manage inventory when you are closing down facilities and the industry is ramping down as well.

Do you think working capital is going to be a source or use of cash in the first and second quarter?

I think I can speak to it generally.

When volumes go down, you typically get a use of cash -- inventory is going to be a big piece of that depending on how much of our -- at the end of the year -- how much we can really use based where our volumes come out.

Can't answer it directly but the probably the biggest key is inventory, no question.

It is certainly something we are very focused on.

Have you received any concessions from your customers as far as, are they paying you faster?

Are you getting any price increases?

Have any of your customers been working with you through this downturn?

They are on the phone call.

It is something that we are going to pass on answering.

Okay.

Fair enough.

Just the last one and I will get back in line is on your new credit facility, you have covenants with respect to minimum levels of EBIDTA for each quarter.

Are you currently -- given the down turns you are talking about in the first half, do you run any risk of violating those in the first quarter?

With the volume declines, it is something we will obviously be paying attention to and working with our banks.

I don't want to give any further color since we are not giving estimates for either Q1 or ' 09, Chip.

I will get back in line and let somebody else go.

Thanks.

(Operator Instructions) Your next question comes from the line of Alan Weber.

Please proceed.

You made a comment on previous calls where you talked about the competition, potentially new business and I know in one of the calls or presentations you made, you talked about not I think closing some facilities because you might be in the process of bidding on business.

Can you elaborate more in terms of where that really stands today with potentially getting more business with your customers due to the competitors problems?

Frankly, Allan, one of the things that has slowed down, the movement of this business is frankly -- they are not building any trucks.

So they don't need the parts.

That will be made in a public announcement as soon as we possibly can.

At this point we will not be closing either one of the factories that I had alluded to.

So you are still -- when the industry does turn, you still -- does turn, you still think you will be positioned to win some of that business.

We will probably win business before the industry turns.

But the industry to use the parts has to start back up building product.

Right.

Okay.

Fair enough.

On the recent credit facility, Chad, you know, your bonds traded like $0.50 on the dollar.

Under the credit facility you have, are you allowed to repurchase the bonds?

No.

The ABL we have, Allan, is capped at 47.5.

We are obviously going to work with our banks.

At some point when it makes sense to up size that and take a look at that from more of a long-term approach.

Right now, while it is attractive, no question, that is not something that we are focused on at this point

I understand I wasn't sure if you allowed.

The last question for now, can you talk about by the products, which product lines were most impacted and had losses for the quarter or for the year?

We don't get into product profitability, Allan.

With the truck and construction markets being down and virtually a lot of our end markets with the exception of military for the fourth quarter, it was pretty well spread across all of our products because of the construction and truck markets really being impacted.

Okay.

Thank you.

You have a follow-up question from the line of Chip Miller.

Please proceed.

Just asking for a little bit more detail on the restructuring actions that you took.

The five facilities, it looked like they were primarily concentrated in seat.

Can you give any kind of a rough number as to how much capacity you took out overall for the Company in seats particularly?

My guess is we have about 2 million square feet.

Took out 200,000 so far.

So about 10%.

And am I correct in guessing that most of that was seats?

Yeah, a good portion of that was seats, chip, with Kent and Belgium and our Statesville seating assembly, those three in particular were -- those three included seats as well as some other products but those three in particular did have seats, yes.

I was a little bit surprised that you didn't take more out of Europe and if I heard Merv correctly, any future actions would be concentrated stateside.

Is that due to the fact it costs a lot more to take capacity out of your European operations or are you seeing something in the market over there that I'm not?

With our businesses that we have over there, we have them pretty well concentrated in areas where we -- I think we have done Sweden also.

There are basically two plants there that closed.

The major or mother ship is in the UK and we supply out of there.

So anything if we would close other than the UK, basically would be a lined sequencing facility.

Okay.

Less is more, manufacturing.

I think the down turns that we see right now in the -- in the market, obviously we don't have much business in Europe and in the Class 8 market, a substantial amount anyway and most of our business in Europe is construction seating.

That has gone down that we have seen.

We are taking it down through -- very intense reduction in force both in the hourly and in salaried area.

And as far as locations go, chip, for Europe, we really only have -- we are only located in two locations in Czech.

Of course, our location in the UK.

With the closure of our Belgium operation, that's really all we have.

Okay.

Then just a follow-up on the asset impairment that you are going to take, is that going to impact any of your current covenants on the new revolver or the senior debt?

No, it is all non-cash based.

So there is an exclusion for that.

Did I read the new revolver correctly that the fixed charge coverage ratio doesn't kick in until 2010?

That's correct.

Thanks very much for the time.

There are no further questions at this time.

Once again, thank all of you for joining us and we certainly have a lot of work to do ahead of us but we certainly are up for it and I think we are taking the right steps each day to make the Company the kind of company we all want to be associated with.

Thank you, everybody, for joining