Commercial Vehicle Group Inc (CVGI) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2010 Commercial Vehicle Group Earnings Conference Call.

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

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

We will be conducting a question and answer session towards the end of today's conference.

(Operator Instructions) I would like to now hand the call over to your host for today, Mr.

Chad Utrup.

Please proceed.

Thank you, Katie.

Thanks everybody for joining us on the conference call today.

As usual, let me read a few things here first before we begin the formal portion of the call today.

I'll first read through our Safe Harbor language and then Merv will give a brief Company update.

And then we'll walk through our results for the first quarter of 2010 and then open it up to Q&A.

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 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'll turn the call over to Merv.

Buenos dias.

This is Merv.

Chad and I, when we get to the answer session, we'll try not to step on each other answering.

We're not together this morning.

I'm in Mexico with customers so get on with that.

I'd like to thank everyone for joining our call today.

Overall, the first quarter has progressed very well and we feel the economy may be starting to move forward.

We experienced decent Class 8 builds during the first quarter as we expected, which likely is due to the OEMs continued to manufacture the pre-2010 emission vehicle orders using existing inventories of older style engines.

We are seeing an uptick in construction orders on a global basis and continued to strengthen in military sales.

While our military business was exceptional and strong in Q1, we see this as a spike rather than start of a trend given the random order patterns for these vehicles.

That said, we believe we now have the leadership position in harnesses and wipers for wheel tactical vehicles.

Until this week, we had continued to feel that 2010 build rates will only be slightly ahead of 2009 production levels until the end of the year, when we may see the beginning of a return to normal volume levels.

We don't believe that we will see the meaningful recovery for Class 8 OEM vehicles till 2011.

Currently, we believe the Class 8 North American vehicle rates will be 130,000 to 135,000 units for 2010.

But as the news has come out, now we're seeing higher orders sooner than thought and some of our customers are saying that they will not see a downward motion in second quarter, third or fourth.

They believe it's taking off on Class 8 North America.

But regardless, during the first quarter we continued to focus on positioning CVG for a rebound in the overall economy and our end markets.

In March we were pleased to complete a public offering of common stock at 6.25 per share.

This offering resulted in total sales of 4.37 million shares, a newly issued CVGI stock, common stock for which we received approximately $25.4 million after fees and discounts.

We feel the proceeds from this offering and the $21.4 million tax return we previously discussed along with our ABL borrowing capacity provides CVG with a strong balance sheet and excellent liquidity.

As we mentioned before, one of our main goals is to be a global partner to our customers.

This includes customers such as UD Trucks, formerly known as Nissan Diesel, and [Bobble AB] and Daimler, which are heavy players in both heavy truck and with Volvo construction vehicle markets as well as US-based global construction customers such as Caterpillar to name a few.

As we look to continue and growing with our customers on a global scale, we believe there are opportunities to utilize some of the proceeds from our recent stock offering for new business purposes including expansion in China, India, and Mexico.

In China, we began operations in 2004 with a wholly-owned foreign entity in Shanghai.

Since then, we have experienced significant growth at that facility.

We began production in the facility with only $4 million in sales and today we are very close to $40 million in sales, with expectations of continued growth.

In addition to serving US-based OEM partners in Japan and other Asian markets, we have also gained domestic business in Chinese market.

In Mexico, we have established a presence in and we intend to extend and explore new potential opportunities to grow with our global OEM customers there.

Likewise, India is a market that interests us and we are looking at prospects and opportunities to expand our global footprint and participate in that market.

As you know, ours is a fragmented industry with many smaller, non-public competitors and suppliers.

The current economic situation has been difficult for all of us and especially for many of these companies.

And we feel that also presents opportunities for us.

Keep in mind that even during the downturn for '07, '08, and '09, we have continued to move our Company down our chosen strategy path, including a world-class tech center and the equipment needed plus high level of capable people.

During the quarter, we announced our national seating brand has been selected by Hino Motors Manufacturing USA, a Toyota group company, as the seat supplier of choice for Hino's North American-produced, medium-duty trucks.

Under this new agreement, we provide both suspension and static seats for Hino.

This is a testament to the quality, technology, and value of our national seating products.

Hino is recognized as one of the fastest-growing, medium-duty truck manufacturers in North America.

And we feel this business gain presents a nice opportunity for CVG to grow with them.

In March, we were pleased to unveil a new line of heavy truck seating at the 2010 Mid-America Truck Show in Louisville, Kentucky.

This new seat line covers owner/operator, fleet, and OEM needs from the basic economy line products to the highly-engineered premium seats that offer the ultimate in operator comfort and safety.

Part of the new product line includes our innovative infant seat that offers an economical choice but still provides high-level quality and comfort.

At the other end of CVG's seating spectrum are the Admiral and Commodore seats.

These are premium units built on national seating's high-performance base.

These new seats were developed with customer input to insure they meet the needs of the different kinds of operators in our different market segments.

They demonstrated our research and development capabilities along with our engineering expertise combines to offer real value across the broad spectrum of customer needs and market conditions.

I'm also pleased to announce that CVG's electrical systems business earned recognition as Partner Level status for 2009 in the John Deere Achieving Excellence Program.

Partner Level status is Deere's highest supplier rating.

CVG is the supplier of electrical and electronic distribution systems to John Deere Construction and Forestry operations.

We have been supplier to Deere for more than 25 years and we have participated in the Achieving Excellence Program since 1999.

We are very proud that our employees in Mexico and Iowa excelled in all of John Deere's rating categories for this distinction.

Overall, the first quarter of 2010 was very productive for CVG.

We continued to achieve business gains, to develop new products, and to solidify our financial position.

We believe we are continuing to properly position CVG to be a strong supplier and recognized industry leader as the economy improves and the recessionary forces we currently face come to an end.

At this point, I'd like to turn it over to Chad to talk a little bit about our financial overview.

Chad?

I'm sorry, Katie.

Yes, sir?

Were you able to hear me?

My phone was flashing mute and--

No, once Mr.

Dunn turned it over to you, it was just silence until now.

We couldn't hear anything on this end either, Chad.

Okay.

I think we're on the same line, Merv, so if you mute it, then it's going to mute here as well.

So-

Okay.

I apologize folks.

Let me just back up a little bit and start over.

Our revenues for this past quarter were $146.4 million, which is an increase of $37.9 million or 35% from the first quarter of 2009.

This increase is not only the result of an estimated 23% increase in the North American Class 8 build rate from the prior year but also reflects an increase in our global OEM construction revenues, which were up more than 50% from the prior-year period as well as our military revenues, which were up more than 70% from the prior-year period.

Obviously, we're very pleased with the incremental revenue base this quarter, both in comparison to the prior-year quarter as well as sequentially when compared to the fourth quarter of last year.

Most notably, our global construction markets, which continue to show signs of improvement as well as our military markets, which is indicative of our efforts to continue to grow within these markets.

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

Our operating income was $3.6 million for the quarter or 2.5%, which is an improvement of approximately $22 million over the prior-year period.

This represents a 58% contribution margin on the incremental revenues of $37.9 million.

And this is a testament to the cost realignment and margin enhancement efforts we've been discussing and taking action on for the past 12 to 18 months.

Depreciation was approximately $3.3 million for the quarter.

Amortization was $60,000.

And capital spending was about $0.7 million for the quarter or 0.5% of revenues.

We did record a gain of approximately $1.5 million as other income, which is primarily related to the mark to market of our forward-- foreign exchange contracts for the quarter.

And our effective tax rate for the quarter was negative 19.4%.

And as we mentioned in the previous quarter call, we were expecting a tax refund in the range of $18 million to $21 million in the second quarter of this year.

And I'm happy to report that we did, in fact, receive this refund in the final amount of $21.4 million.

And as mentioned in the press release, this refund was received in late April and, therefore, is not yet reflected in our first-quarter balance sheet.

As of the end of the past quarter, we had approximately $25.3 million cash balance and the capability to borrow an additional $22.5 million under our ABL without financial covenant requirements.

Adding this to the $21.4 million tax refund, and we have nearly $70 million of funding capability without financial covenants on a pro forma basis.

This flexibility is a direct result of our debt modification during 2009, our focus on working capital, operational and cost improvements and the benefit from our equity offering and tax refund.

This puts CVG in a very good position, as our markets return and allows us to continue to focus on our strategic growth plans beyond market recovery.

Merv touched on a few of these strategic objectives such as our opportunities within Asia and Mexico.

In addition to these opportunities, we are also aware that we will have a need for working capital as we enter into the market recovery period for our end markets.

With the financial flexibility we have created over the past year, we believe we are in a strong position to absorb these working capital needs as well as pursue key areas of growth.

With that said, we currently do not expect to have to comply with any financial maintenance covenants for 2010.

I think I'll end it here, just indicating we believe our results for the quarter speak for themselves and we look forward to continuing our focus on improvements as well as our long-term growth strategy.

And Katie, with that, I think we'll open the call up for some questions.

[Operator Instructions] First question comes from the line of Ann Duignan from JPMorgan.

Please proceed.

Hi, good morning, guys.

It's Ann Duignan.

How are you?

Morning, Ann.

Morning.

Just a couple of questions on your-- the comments you made about Class 8 build.

The build came in at roughly 35,000 in the first quarter.

And I think you said you'd expect them to be roughly at that level each of the upcoming quarters.

Did I catch that correctly?

Well, I think that was the way we were feeling when we put our plan together the first of the year.

Obviously, with some of the news that's been coming out with, right at 15,000 orders a month.

It's kind of got people thinking more into 170 or so range.

And we're not willing to make that leap of faith yet and commitment.

We will keep right on our plan and if it goes above that, we'll be happy and we'll build all the truck seats and interiors and wiring harnesses they need.

Yes, I think to add to that Ann, we originally started the year with about 125,000 units was our thought for the year where -- with where Q1 is up in the 35,000-unit range.

You know I think Merv mentioned we're in the probably in the 130 to 135 range and maybe on the higher side of that with some recent orders as Merv mentioned.

So if you annualize Q1, you're in the 135 to 140 range.

That's probably where we're-- our thoughts are at this point.

Yes, cause it is interesting.

We had expected a decline in Q2 builds as people transition out of '09 and then into 2010.

And I thought your comment was interesting that you have at least one OEM customer who's saying that Q2 may not be down versus Q1 now cause we were expecting kind of a dip and then an acceleration in the back half.

But certainly the orders have been coming in stronger than any of us had anticipated.

So I think it's kind of encouraging.

On the flip side, on the military side, we understand that the content you have is on some of the M-ATV platform.

Can you talk about your expectation on the military side?

That you're in next and how much visibility you have?

I know orders are lumpy, but what are your expectations on the military front?

Well, Q1 military for us was exceptionally strong.

I think Merv mentioned earlier too, we don't expect that type of level for military to continue.

But I will say, military for us for Q1 was the highest level that we've ever had in military business, even going back to the MRAP days.

So, we had a spike.

We don't expect that to continue.

As far as the outlook and what visibility we have, it's pretty small.

We have I think everybody knows the way that these orders come in are in 1,000 to maybe 1,500 units at a time.

And when those orders come out and hit the press, that's kind of when we see them too.

So, the visibility is fairly small.

But Q1 was exceptionally strong for us.

So overall if I put all the pieces of the puzzle together, would you expect Q2 revenues to be as strong as Q1?

For military?

No, total when I put all the different end markets together?

We're hearing a lot on the Class 8 truck, we're hearing a lot of that Q2 is going to be as strong as Q1.

But, we're still sticking with our guidance on where we're at.

We are seeing that March didn't drop off or April.

We kind of expected not a dip in April like you suggested, but more of a cliff fall.

And we're not seeing that yet.

I would-- since we're not giving estimates, I'll answer this as vaguely as possible.

But as I'm sure you would expect.

But military was strong in Q1.

That likely may not continue into Q2.

We're working on some things to hopefully where it does.

But that may not continue.

That would be one pull back.

And the only other pull back would be obviously our [Itech] business that's been progressing down to [Itech's] facility in Mexico.

We don't expect that to impact our bottom line.

But from a revenue standpoint, Ann, I think it's fair to point it out.

Okay, that's helpful.

And I appreciate that you don't give guidance, but I do think that there are some moving parts that are kind of changing around here.

So I'm just trying to get a sense--

Yes, those are the-- that's-- those are the two that I would point out that are probably the anomalies if you go Q1 to Q2.

Okay and then finally, on Hino, when does that really become material?

When do you really see those revenues start to kick in?

Well, we've already seen the costs start to kick in.

So, that's the thing that we try to look at manage as well as anything else.

Before a program starts bringing in money, we are spending money.

And that's with all the programs that we do.

So, right now, we can tell you the costs are hitting.

I would guess it's probably 16 months out.

Okay, so sometime next year.

Okay, I'll get back in queue and circle back if I've got more questions.

Thanks, guys.

You're welcome.

Your next question comes from the line of [Craig Berenson] from [Berenson Loshak] Asset Management.

Please proceed.

Good morning, gentlemen, and congratulations on a great start to the year.

Regarding shares, so it's nice to hear about the share gains on the military side.

How do you feel you're positioned for this year, market-share wise, with your Class 8 customers?

This year with the customers other than the one that's moved some product to Mexico, which we've covered in the past, we're seeing still pretty strong market share.

We're gaining business in product lines such as flooring and hard plastics, which the hard plastic trim is a lot of the direction that the interiors are going.

We've gained business in electrical.

We've gained business in wipers.

So, if you give me a little bit more detail what you're looking for, I might be able to answer better.

No, I mean I was just looking for general tone on share.

It makes sense that-- no I was just looking for any additional color or detail.

That's just something that I, frankly, was looking for from your company for this year.

And I'm glad to be seeing it already.

So just I'm not-- just looking for general color, that's all.

Okay, well, I think the color is green that we're looking for, for the rest of the year.

Outstanding.

Thanks, guys.

You're welcome.

Your next question comes from the line of Derrick Wenger from Jefferies & Co.

Please proceed.

Hear from you, David?

Hello?

Hi, guys.

I think -- this is Joe Berwink on the line for David from Baird.

Really good quarter.

Just a few quick questions.

Following up on the question on Hino, as you're growing with them, do you expect maybe higher content?

What's maybe full potential of that business?

Well we've been to Japan meeting with them.

I have.

Chad's been there with me.

Frankly, we think that the door is wide open for us there on any product that we have the capability of making.

But typical one of the Toyota companies is you make the first product and you show your capability and then the door gets even wider open.

So we think the opportunity for many other products that we make is wide open there.

But we do have to prove ourselves first on the one product.

That's just normal methodology there.

Okay, so I think, if I remember the press release correctly, that business is around $4 million annualized when it comes online?

Well, with Toyota or with Hino, you don't how much the business is going to grow before they ever make the first one.

So, based upon the things that they've told us at that point, that's kind of what we figured.

Okay and then just in terms of mix, is that a higher content seats or kind of a mid-range that you're starting out with?

Is there a potential to maybe broaden that?

For all their seat, the static and suspension seat.

The suspension seats are on the higher end.

But it's for a medium-duty truck.

Okay, yes, that's helpful.

And then maybe I think the big surprise is just on the-- how costs were managed and really strong gross profits.

Looking forward, what's kind of a good way to think about the incremental margin you can drive at?

Maybe a sequential comparison quarter over quarter throughout the year a better way to look it based on your cost structure now and how you're operating?

Go ahead ,Chad.

Let's say-- we're still pretty comfortable sticking with that 25% at this point.

Q1 was compared to last year and even sequentially from Q4 was pretty strong for us.

There's part of that that's an increase in some aftermarket business and part of that, that's an increase in the military business and some other mixed things going there.

So I think looking forward we're still going to be comfortable with that 25%.

I mean we're-- we continue to look at ways to take out cost and further improve.

But as far as looking forward, I wouldn't shy away from what's been-- what's worked for us and that's kind of targeting 25%.

If we exceed it like we did this quarter, great.

But as a general rule, I'd still use 25.

All right.

That's all I have.

Thanks a lot guys.

Thanks.

Now, you have your question from Mr.

Derrick Wenger from Jefferies & Co.

Please proceed.

Thank you.

I missed the depreciation and amortization figure you gave.

And then if you could review your total revolver facility.

You said you had 22.5 million available under the ABL.

I thought you had $37.5 million facility?

And what letter of credit's been drawn against it?

And then lastly, capital expenditure outlook for 2010 entirely?

Sure, let me take those three pieces here.

Amortization was $60,000 for the quarter.

Depreciation was $3.3 million.

Your next question was, well let take me CapEx.

CapEx was $0.7 million, about $720,000 for the quarter.

Outlook for the rest of the year-- I just still think we're probably going to be in the 1.5% to 2% range.

Q1 was a little bit low.

Some of that's timing but we are still watching it very closely.

So we may be-- I'd just point to maybe like 1.5%, barring any significant growth or major projects.

And lastly, walking through the ABL, the ABL is a 37.5 million.

It's got a-- the reason I used the $22.5 million is because that's the threshold that we can borrow up to without financial covenants.

So 37.5 less a $15 million block if we have at least $15 million of availability from that 37.5, which gives you $22.5.

We can borrow up to $22.5 million without financial covenants.

So that's why we use that number because and that's really one of the key points that we've put in place with our amendment last year along with the modification with the bonds was an ABL revolving structure without financial covenants.

So, especially in this environment.

So, and as far as letters of credit, hasn't changed.

We're still $1.7 million, pretty small.

And could you just refresh me on when the block of the $15 million would be lifted with what kind of covenant levels?

There's a permanent $10 million block unless we have a trailing 12 months, fixed charge of 1.1 to 1.0 I believe as it is.

Then it just moves to 7.5 block.

So it's got some level of block to it at all times.

Okay, thank you.

You're welcome.

Your next question comes from the line of Kirk Ludtke from CRT Capital Group.

Please proceed.

Good morning, everyone.

Good morning.

I'm sorry if you've already quantified this.

I might have missed it.

But I think you mentioned that working capital will be a cash requirement during 2010.

And I missed the number and I'm just curious just if you're offering that?

Well, I think the general rule for us is if-- let me see if I can answer it this way.

If markets or revenues go up say $200 million for whatever reason on an annual basis, our typical working capital is probably in that 10% to 12% range of the annualized revenue increase.

It's kind of a general rule of thumb to use for us.

So, if markets increase and our revenues as a result would pick up say $200 million, we'd probably be in that 20 million, 23 million, 24 million range need for working capital.

Okay.

We haven't really given any other numbers other than that.

But that's fairly typical for us with where our metrics are.

Okay and I might have missed this as well, but did you-- do you provide a cash tax rate, effective rate?

No, we don't.

We've got valuation allowances against all of our deferred tax assets right now.

So, trying to get a rate, a normalized rate is very difficult to provide.

So, I would expect we'll be very low to zero cash tax payer here in the short term.

Okay and do you--

It all goes back to the carry back against our impairments from the last couple years.

So we've got to overcome those impairments, like from '08 for example, before you get into probably a more normalized rate structure.

Okay.

And is it possible that you could get more refunds, tax refunds?

We have a few things that we're chasing but that may come for us, R&D credits and things like that.

But the-- I like your attitude in terms of 21.4 million in the last month.

Can we get more?

But, there's a few things out there.

But this one is-- this one's definitely a big one.

Okay and then lastly, do you have any pension funding requirements or anything like that?

Nothing outside of normal course.

We have and will continue to fund a couple million a year to our pension plans.

We have done that since inception and that's nothing out of normal.

Okay, great.

Thank you very much.

You're welcome.

Your next question comes from the line of [Rahim Shetty] from [Alaglass] Capital.

Please proceed.

Good morning, guys.

I was wondering if you guys could comment on status of your outstanding debt and if you plan to issue any new notes in 2010?

The status of our existing debt-- well we've got our revolver.

There's nothing borrowed on it.

We've got our second lien term loan which expires in November of 2012.

Third lien that's-- and a third lien note, which expires in February of 2013 and our 8% notes expire in July of 2013.

Are we going to issue anything in 2010?

We may look at planning and seeing what makes sense for us.

But, all that will come into play on that as where premiums for early retirement are and where interest rates are and what we may be able to get.

So, we'll start planning.

But it's hard to comment if we do anything in 2010.

If we saw an opportunity to do something that made a lot of sense, we would consider it.

But we'll definitely at least start planning for a strategy.

I hope you can tell from what's happened in Q1 and what happened last year when many, many were going bankrupt and we didn't that this management group tries to turn over every rock, every day.

We don't-- a lot of the ideas you guys have got are great.

And they're ideas that we're working on or have worked on.

And if it pans out, then we do it.

Okay, thank you.

You have a follow-up question from the line of Derrick Wenger from Jefferies & Co.

Please proceed.

Yes, I believe at the end of the fourth quarter you had said that you expected organic growth rate of about 5% to 6% and about 28 million of new business.

Can you refine those?

The new business is spread across electrical, interior and the-- at this time, I'm not-- I'm obviously involved in many negotiations that are going on.

But at this time, we're not willing to break down the amount of sales.

And most of the guys that are dealing with their business unit, president of the electrical here,.the president of (inaudible) is here and the president of interiors is here with me in Mexico.

I was just wondering if you could comment on the growth rate and the level of new business?

Well our growth rate is typically always in the 4% to 6%.

And even in down times, we've continued to march forward with that.

Yes, I would add to that that we're comfortable we will meet or exceed that number that we gave towards the end of last year.

I think Q1's pretty strong.

A lot of that's military, which is new business for us.

So, I think the best way to say it is along with what Merv said is we're comfortable with that number.

Would it be too aggressive to kind of annualize the first quarter sales level?

For what?

The full year?

Yes.

Yes, I'm not going to get into kind of getting there.

I talked to Ann's questions earlier about military being spiked up.

Very, very limited visibility on that.

And that's a big factor for Q1.

And there's a few other things.

So that's a little hard to comment on it.

(inaudible) construction and heavy truck taking off.

Now, none of us are willing to gamble taking off.

(inaudible)

Right.

What it's going to be in Q2, 3, and 4, and just not in our realm of knowledge.

Our guess is going to be no better than yours, so why don't you go with yours.

Okay.

Thank you so much.

You have a follow-up question from the line of Ann Duignan from JPMorgan.

Please proceed.

Hi, Ann.

Hi.

It's Ann Duignan again.

Just a quick follow-up.

The mark to market gain from FX, given what we've seen happen with the dollar versus the euro, what's your best guess as to what happens to that line item as we move forward?

If we say today's exchange rate were to prevail?

Well, the way that that method, that valuation comes about, Ann, is based on the March 31, valuations.

So it depends how much it moves from where it was at the end of the first quarter.

Okay, so if the exchange rates remain at the March 31 level, we would expect something similar in Q2?

No, if it remains exactly where it is today, I would expect that number to be smaller.

Okay, okay.

It's a point in time.

It's not an average.

Maybe that helps explain a little better.

Okay, okay, yes, that does help.

I appreciate that.

And then you made some comments earlier about-- I know it was kind of off the cuff, but you said something about being green for the rest of the year.

Am I reading too much into that if I take that as you would expect to be profitable for the rest of the year?

That's always our goal.

So it remains a goal?

I think the comment on-- that Merv made on green was in respect to market share gains, not necessarily the whole rest of the year.

But--

We can (inaudible)--

If I remember right.

To stay in the green area when it comes to winning business.

Okay, I'll read back through the transcript just to make sure.

But thanks, guys.

I appreciate it.

At this time, you have no further questions.

I'd like to hand the call back over to management for closing remarks.

Well, again, thank you very much for putting up with some of our phone problems.

Sometimes the greatest landlines in Mexico and the US don't always connect together quite well.

So, again, thank you very much for your time.

And look forward to talking to you next quarter.

Thanks, everybody.

Ladies and gentlemen, thank you for your participation in today's conference call.

You may now disconnect.

Have a wonderful day.