Commercial Vehicle Group Inc (CVGI) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Commercial Vehicle Group Inc.

conference call.

My name is Angela and I will be your coordinator for today.

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

Later we will conduct a question-and-answer session (Operator instructions).

As a reminder, today's conference is being recorded.

And now I would like to turn the presentation over to your host for today's event, Mr.

Chad Utrup, CFO.

Please proceed, sir.

Thanks, Angela.

Thanks, everybody, for joining the call today.

As usual, I'm going to read through our Safe Harbor language, then Merv is going to give a brief Company update, and I'll take you through our results for the third quarter of 2009.

And then we'll take time to answer your questions.

With that, I'd like to remind you that the 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.

With that, I'll turn the call over to Merv for a Company update.

Thank you, Chad, and thank you to everyone who has joined our call today.

Our end markets have continued to be pressured these last three months.

However, there are still some very positive things we will talk about.

In the October 5 edition of Transport Topics, the American Trucking Association reported that their tonnage index showed August freight volumes climbed to the highest level in six months.

Their report, supported by other indicators, anticipates continued modest improvements in tonnage and underlying demands for trucking.

Certainly, this is a welcome sign.

We have experienced a slight uptick in the Class 8 production levels in recent months.

As positive as this trend is, year-over-year Class 8 orders are still down more than 40%, and we still don't know how long we might be at the bottom of this cycle before meaningful volumes return.

So it makes you question -- is there a bright side?

We think so.

Over the past months we have made tough decisions to rationalize our capacity and take cost out of our business.

As you know, throughout 2009 we have reduced our manufacturing footprint with facility closures and consolidations.

Despite these actions, we feel we still have enough capacity to meet customer needs when the volumes return to normal levels.

From the cost side we have reduced our SG&A, optimized benefits, put a lid on discretionary expenditures and reduced our workforce.

Certainly, as volumes return, some of these costs will return too.

But we feel a much leaner CVG will be operating when the recession ends and business comes back.

As always, we will continue to review cost-saving opportunities.

On top of this, we have gained new business.

Earlier in the year we announced new programs with Nissan diesel for seats and other interior components that will be used in multiple global markets; additional interior trim products such as headliners, bunk walls, back walls, sidewalls, bunks, tables, ladders and door panels for use on Volvo and Mack branded trucks; a new contract to provide several different CVG interiors for Daimler trucks North America.

During the third quarter we continued to gain additional business including a contract to supply Navistar's heavy truck group with interior cabinets and other materials.

Also during the quarter we were selected to continue our participation in the latest MRAP, or Mine Resistant Ambush Protected vehicle, designed for service in Afghanistan.

Our involvement in the program included engineering assistance that helped develop parts for the prototype vehicle.

As we move into production, CVG will supply wiring harness and cable assemblies, wiper systems, driver seat components and electrical panel assemblies.

Overall, we have won recent contracts which have been announced throughout the year, totaling revenues between $25 million and $28.5 million.

In addition to these positive trends in our top-line growth, we also launched an innovative new flooring system called ComforTEK.

It is a high-performance flooring system that uses an innovation layer of bonded flexible polyurethane foam as the substructure to maximize thermal properties for driver comfort and increased operating economy.

With ComforTEK flooring system, we measure the cabin floor temperature improvements of up to 18°F versus standard production flooring.

In addition to the thermal benefits, the sound transmission performance was equal to or greater than the standard flooring productions.

Based on its material content and the ability to be economically recycled, we believe it also helps contribute to a better environment.

With customer price reductions and material cost increases over the last several years, we are also reviewing pricing levels for many of our accounts and products to ensure we remain competitive and profitable.

As a result, when pricing conflicts have not been agreed upon, we have made tough decisions to suggest our customers move this business to an alternative supplier.

This action is not new to CVG or our philosophy.

However, the pricing and volume pressures in today's economy have shown the situation to be slightly more common.

And, while we have been awarded new business this year in excess of $25 million annually, we will also forfeit business in the range of $7 million to $10 million annually.

This is a possibility.

In summary, with leaner cost structure in place our ongoing business, new business gains and continuing development of new products, we are very excited about the potential for CVG when the recession is finally over and our end markets improve.

Rest assured that, going forward, we will continue our efforts to align costs with market realities and (technical difficulty).

At this point I'll turn the call over to Chad for a financial overview, and then we will take questions and answers after that.

Thanks again.

As you guys saw in the press release yesterday, our revenues for the quarter were $110.8 million.

This is a reduction of (technical difficulty) percent from the third quarter of last year.

This drop is not only the result of an estimated 42% decrease in North America and Class 8 build rate from the prior year but also reflects a decrease in our global OEM construction revenues, which were down more than 60% from the prior year period.

In addition to the reduction in demand in these markets, our OEM bus, aftermarket, military, service and other specialty product markets were also collectively down from the third quarter of last year.

Despite these negative trends compared to a year ago, the positive aspect is that each of our OEM truck, bus and military end market revenues did increase, even if only moderately, over the second quarter of this year.

We continue to remain heavily focused on cost reduction' and cash management.

Our SG&A expenditures for the quarter were down approximately $4.7 million or nearly 30% from a year ago.

Operating income decreased approximately $8.3 million from last year, primarily as a result of the reduction in revenues of $82 million.

This represents a moderate 10.2% detrimental margin on this severe change in revenues, which, as you know, is considerably better than the expected 20% to 25% impact on changes in revenues.

This is attributed to our major cost-cutting efforts over the past nine to 12 months.

Even when compared to the second quarter of this year, our revenues increased approximately $7.3 million while our operating income excluding non-cash impairments increased $4 million or more than 50% positive impact on the change in revenues.

Depreciation was approximately $4 million for the quarter, and amortization was $98,000 and capital spending was $1.6 million for the quarter or 1.5% of revenues and continues to remain a focus area for us.

We recorded on expense of about $1.2 million related to the mark to market of our [forward] foreign exchange contracts during the quarter, and in connection with our third quarter debt exchange we recorded expenses of approximately $2.9 million as loss on debt modification and approximately (technical difficulty) [$0.5 million] as loss on early extinguishment of debt.

Finally, our effective tax rate for the quarter was 2.8%.

As I've mentioned in previous quarters, this is driven primarily by valuation allowances required under FAS-109, due to the three-year cumulative loss created by the goodwill and intangible asset impairments from 2008.

So again, as we've mentioned in prior quarters, our effective tax rate will continue to look a bit [odd] going forward.

At the end of this most recent quarter we had zero funds borrowed under our ABL revolver and, as a result, had sufficient collateral to borrow up to an additional $30 million under our ABL facility.

Even more, we had the capacity to borrow an additional $22.5 million without financial covenant requirements.

This flexibility is a direct result of our debt modification during the quarter, our focus on working capital improvements and cash generation efforts through the quarter and through the first nine months of this year.

That said, we currently do not expect to have to comply with any financial maintenance covenants for the balance of this year.

And as both Merv and I have mentioned, we will work to continue to build upon the significant cost-cutting and cash generating initiatives implemented during the first nine months of this year, and we look forward to future discussions regarding the positive trends we've seen over the last several quarters.

With that, Angela, we'll open up the call for questions.

(Operator instructions) Ann Duignan, JP Morgan.

This is [Rahul] on behalf of Ann Duignan.

First, could you provide a little more detail into the taxes for the quarter?

You mentioned it was driven by valuation allowances.

Could you provide some numbers around that and a little more detail?

Yes, sure.

We've mentioned it a few times, really, since the start of this year because of -- under FAS-109 because of the three-year look back for positive pre-tax income we have to provide valuation allowances against our pre-tax earnings.

So what you create and what you've really seen over the last couple of quarters is a very negligible tax provision rate.

And that is definitely driven by the -- we had the $200 million-plus impairment charge in 2008.

And that becomes part of the three-year look back, and that's what's created by it.

And what was the size of the valuation allowance for the quarter?

I don't have an exact number.

But, given the fact that our provision has been $1 million or so for each of the last three quarters -- our typical go-forward tax rate has always been in that 35% to 36% of pre-tax income rate.

So roughly speaking, it would probably be in that range.

Are you guys seeing any signs of a bottom in North American Class 8?

And we've also heard that carriers are focusing on lower-end equipment.

And are you guys seeing any pressure on content per vehicle because of that?

And, also, if you could provide any additional outlook for 2010 Class 8 volumes?

We're seeing that currently we feel that we are in the bottom and that we are going to bounce around the bottom during the fourth quarter and possibly up to mid-2010.

My crystal ball is no better than your all's, and these are purely opinions.

So please treat them like that.

We think, in 2010, third and fourth quarter is going to be the start of the pickup for the Class 8 truck and even for some construction equipment.

Any color on content per vehicle?

Is it under pressure right now?

And are you guys expecting improvement going forward?

Yes, we are seeing pressure on that, especially if you think about the military trucks with the lack of, really, any interior panels and no sleeper units.

So we see content there -- even though we are supplying parts there, we still don't supply a large cab; we supply just a basic day cab, in some cases.

And then, with the replacement that we are seeing, we don't see as high end of seats and stuff like that going into it.

So yes, you are right.

I'll add a little bit to that.

I think, from our standpoint, we've always been in that $1200-$1300 range.

I think what we are seeing today is a little bit of a drop because of the fewer high-end vehicles, but we're picking that up with the new business wins that we've announced this year with the Volvo and the Daimler business.

So we've kind of got some of the content for us going down but being picked up by some of the new business wins we've created.

(Operator instructions).

Alan Weber, Robotti & Co.

In the press release, when you talk about $3.4 million in one-time financing, legal and other fees, Chad, is that the -- on the income statement, is that the loss of debt modification and loss of early extinguishment?

Yes, it is.

Correct.

Okay.

So none of it was in SG&A?

Okay.

No, that's correct.

Okay.

And then, I guess, in terms of the cost-cutting like that, how far along are you?

And at what point -- what did you think you need revenues to be, to really actually be earning money?

Earning money at what level?

That might help clarify.

I don't know if you are talking operating income or EBITDA or --

Okay, yes, at operating income.

Operating income?

Well, I think the biggest thing for us is the cost-cutting, where we are today -- I think everybody can see our SG&A went up a little bit on the second (technical difficulty) deep into the employee level from an SG&A perspective in the second quarter.

So you've seen a little bit of that come back in the third quarter for program launches and some new business wins.

But the contribution margin that we are seeing from an operating income level from Q2 to Q3 -- I think I mentioned it was roughly in that 50% range.

While we'd love that to be a go-forward rate, that maybe a bit unrealistic.

So I think we are into the cost-cutting savings that we've implemented throughout the first, I'll call it, the first several quarters of this year.

So we continue to look at things.

We've got a few things that we are working on.

But going from the first quarter of this year, excluding the impairments, going from an operating loss in that $16 million-$17 million range, to the second quarter of probably in the $10 million range to in the $7 million range of the third quarter -- that's the trend that we are working towards.

I think, in order to get that to a zero, to answer your question, we do need a little bit of volume.

We don't have $7 million of cost cutting that's coming next quarter.

So we do need a little bit of volume.

What we are typically targeting is in that 25% range from a contribution margin standpoint.

So that may give you a little bit of a color on where those revenues need to be and with the new business wins and some positive things that we are seeing for construction in truck, we are looking out a couple quarters, and hopefully we'll see that we'll get there.

And what about in capital spending?

I think you said, Chad, it was $1 million something for the quarter.

What would be your guess for next year?

What do you need to spend to maintain $500 million revenues, if you reach that?

I think we always try to stay between 1% and 1.5%.

Yes; we've typically been between 2% and 3%.

What Merv had mentioned is that we are down about 1% to 1.5% from where we typically are.

So that's what we are targeting to reduce.

And for 2010, we've launched quite a few new business programs this year, as we've seen, and we've still been able to keep it in the 1.5% range.

I think we both feel fairly comfortable, barring anything major, we could still be in the same range we are today, maybe 1.5302%.

(multiple speakers) higher, it will be for new business.

What are you seeing in terms of potentially bidding on new business?

Any idea of magnitude of potential contracts or anything like that?

Your question didn't come through at all on this end.

Just the first two words and the last two.

Any idea or number in terms of the amount of business that you are bidding on or hope to bid on over the next year or two and the volumes and -- like that?

Is that coming through on your end?

It's being (technical difficulty) we can't understand the question on our end here.

Yes, gentlemen; I'm hearing him clearly.

I do hear some technical feedback coming from your line.

Do you have a secondary line, possibly, I could dial out to you, to rectify that matter?

Alan, maybe let's try one more time, if you don't mind.

I can hear you.

Can you hear me now?

We can, right now.

My question was -- in terms of what you are bidding on, new programs, new contracts or like that, any volume, revenue numbers or anything like that that you can talk about?

Not really.

We are always bidding on, at any given time, probably up to $100 million right now in business.

And we need to -- in some cases, once we get this business -- and the customer has to give us the okay before we can ever say anything about what business we are getting and everything.

So just like the Nissan diesel, we had to wait until they gave us the okay to announce it.

In terms of the bankruptcy by some competitors and the overall -- the financial problems of some of the competitors, Merv, are you seeing -- I know you've talked in the past about winning some of that business.

Are you seeing any additional pricing pressure as some of the competitors enter bankruptcy or are on the brink of bankruptcy?

You mean, do I see the customer trying to lower my price because my competitor is going bankrupt?

Well, if they are lowering their prices just to generate cash, that kind of a thing?

Or maybe it's no impact on you?

Well, I think we have seen some of that, Alan.

And that's the business I said that we -- some of the business we are walking away from, and some of the business we may end up walking away from if the customer doesn't realize what they are trying to do.

So what we've done, in one case, is offered to help them move the business out.

And they will be moving it out or are moving it out.

It's a small -- it's not one of our big, major customers.

And we just feel that there's certainly not any money to give back to them on these kind of programs.

Kirk Ludtke, CRT Capital Group.

The way we're looking at the numbers, it looks like clean EBITDA for the third quarter was a negative $3.3 million.

Are we missing anything?

3.7-ish.

Just take the operating income and add $4 million of depreciation, $4.1 million of D&A.

So it's a negative $3.7 million?

Something like that, yes.

I'm just trying to think about that.

The current industry run rate and let's say the build stays here, and then let's try to bridge back to whatever cost savings you have in the pipeline and whatever net new business you have.

Let's say you're running on a run rate basis about a negative $15 million, based on the third quarter.

Is that the 3.7 times 4?

If you look at it that way, yes.

And how much do you have in cost saves, incremental -- incremental cost saves that you think you could, say, realize in the next year?

I really don't know because we are working hard on many programs.

And some of them are with suppliers, and some of those suppliers may do the same thing that we did, say go ahead and move it out.

And when you do that, then that extends it another six months, at least, to get product out.

We have some product that's in China that we are re-sourcing to the US, and that takes a little bit of time.

And so, to give you even a ballpark number, it would be very hard to do.

But I think you can see the direction that we've been going and maybe pick up something off of that.

So there should be some lost contracts you can eliminate, some additional costs saves?

But we are not really able to quantify them at this point?

Maybe won't would be better than not able, totally.

Because I just don't have a good feel of which ones are going to fall through and which ones are going to come in their place, because we constantly have people doing nothing but working on cost reductions.

And I think, just to add on what Merv's saying, we do, obviously, look at those things internally.

But at this point it's probably a little bit difficult, since we are not putting -- we don't have any guidance out there, let me just say.

We are not putting guidance out there at this point going forward, so we're a little reluctant to talk about it.

But what we would like to point to is what we've done in the last several quarters.

Hopefully, that gives you at least some level of what we're focused on.

Are most of the operational improvements that you're contemplating the elimination of lost contracts rather than cost reductions?

No.

We have one group that's going through and looking at lost contracts and we have other groups that are on specific cost reductions like one might be a seat back and the other one might be a headliner.

And they are constantly running different materials.

They are constantly running different thicknesses to try to get to the price.

They are engineering the price reductions and not trying to go after our suppliers all the time and get blood.

We do get enough of that blood, but you've got to engineer yourself better.

We're doing a lot of cost reductions in the plants and have better process.

We're bringing new products to the market like the ComforTEK flooring, which saves the customer, the end-user.

It adds to their fuel economy and it also is a greener product for us.

And it carries our name on it, the ComforTEK name.

And that's a patented product.

So what we've done to those of you that have been here to our new tech center -- the reason for the tech center is to engineer product and take it out of the commodity area.

And that's what they've done on flooring.

And to add on to what Merv said, as an example of what we are constantly looking at, I'll give you an example.

We had a review yesterday where one of our -- a re-layout of one of our facilities could turn a three-month payback.

So there's things like that that are constantly being reviewed.

It could be $1 million impact in one year for a couple of hundred thousand dollar investment.

So those are things that are constantly looking at.

And that's what you've seen that we've implemented over the last couple quarters as well.

I missed the beginning of the call.

Did you quantify the incremental revenue from MRAP?

No, we did not

Is it meaningful?

Should we try to make an estimate of that (multiple speakers)?

What you may have missed is that we said that we had $25 million to $28 million, basically, of new revenue coming in.

So that's the net new business.

Okay, I'm sorry.

And that's in the next year?

Some of it started in the third quarter.

Some does not start until '010.

That's an annualized number.

What do you think you won't get in just the next year, 2010?

Well, the $25 million to $28 million is what we've got out there right now.

We've always targeted in that spot, 4% to 6%, 5% range organic growth.

And with -- take Q3 annualized, we are in that $430 million, $450 million range.

So we are right in that ballpark.

We are obviously working on some things, but hopefully we'll exceed our 4% to 6% target here in the next year.

Just to add on that, another thing that Merv mentioned too is, some of that business, where the pricing pressures may be too much -- we will see some that go away.

That may affect the top line but not necessarily impact the bottom line or maybe even help it.

And then minimum liquidity to run the business?

What do you think?

Well, we've got headroom to borrow up to $30 million as of the end of the quarter.

We are pretty pleased with where that's that, so it's not really a question, at this point, as we look out.

Right.

But per the comments, it's $22 million?

$22.5 million, yes.

And then you've got $10 million in cash, so you've got total liquidity of about $32 million, it looks like.

What do you need to run the business?

Is there a rule of thumb, like (multiple speakers) --

-- I don't think we can get into that question without understanding where you are and where you're going.

We feel that we have plenty of room to be able to run the business with the amount of revolver that we have, and we do not plan on borrowing into that revolver very much.

Our goal is to keep that down below --

-- below any level that requires a financial maintenance covenant.

That's really our goal.

I think -- what do we need to run the business?

I'm not sure where to go with that question.

But I think, if you look at the second quarter or the third quarter or maybe just even look into the fourth quarter, our goal is obviously to remain cash-neutral to maybe a burn of several million, at the current levels.

So that's the objective --

Obviously, if sales goes up, we're going to need more working capital.

But that will be a good call to the banks.

I guess I'm just trying to see how long you can go at the current build rate without a liquidity issue.

That's really what I'm trying to get at.

We have always put the Company in a position where that would not do to our Company what has happened to some of them.

I think, maybe phrased a little bit differently, at the current run rate, going forward, without any changes in working capital improvements, which we are always working on it -- I think you can realistically calculate a burn of a couple million dollars.

But that's without any working capital improvements, which we've done for the last year, 12 months.

A couple million dollars over what period -- a quarter, a year?

Yes, a quarter, a quarter.

$2 million a quarter?

Well --

Okay, thank you.

I didn't say $2 million; you did.

I said a couple million.

So I don't want to pin down a number here.

I'm just trying to give you at least some direction to answer your question.

Okay?

Look at what was burned in the third quarter and realize that we are working on improvements, and I think you can draw your own number.

(Operator instructions) Carter Newbold, Rutabaga.

A question about the competitor set; I guess, two things.

Do you think, by and large, that liquidations and capacity reductions are happening in a rational way?

And if you could highlight any specific situations, that might be helpful.

Secondly, I definitely hear what you said about new business opportunities.

But I'm actually surprised, given the extreme distress down in the OEM supplier base, that there are not significantly larger dollar volumes up for bid and that the Class 8 guys are not walking away from a lot of what appear to be really, really marginal competitors.

My expectations must be upside down or the timing not quite right.

But can you shed some light on that?

When they get weak or go out, not all their business is business for us.

Our goal is the same it's always been, to stay inside the cab or anything that bolts on to the cab.

And when a competitor may go out of business, he may make headliners and back walls, and he may make transmissions for the, obviously, extreme comparison.

Obviously, we wouldn't get the bulk of the business, which is transmissions.

We might pick up the $2 million of headliners, and we might pick up the $1 million of back walls.

So, just because there are competitors that go out of business doesn't mean that all the business that they have is business that we compete with them on.

Are you all seeing some pretty meaningful examples where the lenders are just shutting things down and doing a real liquidation?

Or are the majority of the assets limping along under some curtailed production and may make it back to the market if the volume turns some time soon?

Can you generalize there?

We are seeing a little bit of both or maybe a lot of both.

It seems like sometimes the banks have enough money to lend it, and if the company cannot burn a lot, they let them limp along because they don't want to close out a company that might come back.

So we are seeing a lot of limping, and we are seeing quite a few foreclosures.

Is there anybody in the industry that competes directly with you guys that has a clean enough balance sheet to serve as a consolidator?

Is any of that happening?

I don't know how about their balance sheets are.

I know how ours are, and if we run across opportunities, we will find the money for them.

But they have to be very good deals.

I'm not going to put my Company in any jeopardy to do that.

My choice is, if I've got a competitor that's weak or limping or going out of business, it's to try to get their business without buying it.

[Rafi Lehman], Eaton Vance.

Did you have any borrowings on the revolver during the quarter?

You are testing my memory here, Rafi.

I don't think so.

I can't say for 100% certainty, but since the debt exchange that we did in August I don't believe we did.

There may have been a day or two or something like that where it crept up, but I don't recall any.

Okay, but the idea is might -- you sort of tap into that throughout the quarter, but overall not have a permanent usage of it?

Is that how you think of it?

Yes, that's fair.

Our working capital -- we can swing $4 million or $5 million from any given day to two days later.

But that's a rare or extreme case, but it does happen.

(Operator instructions).

Gentlemen, at this time, I show no further questions in queue.

Angela, thank you very much for the job you did with the call today, thank all of you for joining us.

It's hard to be excited in an economy like we have today, but we are very excited about what the future holds for us, with the cost reductions that we've done, putting our Company in the position that it's in versus the position that a lot of the industry is in, and the new business that we've won.

That, coupled with the cost reductions that we've done, we see a very bright future with the market.

And we see a decent future if it stays where it's at.

But we will survive; that's our Company.

And once again, I appreciate your time today.

Thank you.

Ladies and gentlemen, we appreciate your participation in today's conference.

This does conclude today's presentation, and you may now disconnect.

Have a wonderful day.