Commercial Vehicle Group Inc (CVGI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Commercial Vehicle Group earnings conference call.

My name is Fab and I'll be your operator for today.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr.

Chad Utrup.

Please proceed.

Thanks, everybody, and welcome to the conference call.

Before we begin the call today, I'll read through the Safe Harbor language as usual, Merv will give a Company update and then I'll take you through the results of the second quarter of 2010, and afterwards 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.

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

Good morning and thanks, Chad.

And thanks to everyone who has joined our call today.

[I've come in to correct your chatter about each other].

We're not in the same location today.

I kind of got stuck on the West Coast on some customer calls.

Overall, the second quarter has shown continued progress on a year-over-year basis, as revenues increased and our cost containment efforts continued to work.

We're pleased with both our operating and financial performance.

We also feel that our cash position and the fact that we have no debt on our revolving credit facility at the end of the quarter left us in a solid financial position, as our industry recovers from the economic turbulence of the past few years.

We had originally anticipated a stronger start for 2010 with mid-year slowdown, followed by a moderate up-tick in the latter part of the year.

When looking sequentially at our second quarter, we are pleased to see that although revenues for the second quarter were down slightly compared to the first quarter, we were still able to make an improvement in our operating income excluding one-time charges, the previously announced closure of our Norwalk, Ohio facility in May.

To date, some recovery signals such as US employment figures are mixed; others such as the increasing trend in North American Class 8 sales show improvement.

In addition, we feel that our European and Asian construction business is experiencing a positive trend and strengthening as the year progresses.

Combined with American Trucking Association reports of improved freight levels, we believe that a moderate cyclical recovery may be progressing.

Additionally, we continue to feel that pent-up demand exists in our key end markets and we should start to see a moderate volume improvement towards the end of 2010.

While we are slightly optimistic for the balance of the year, we're still projecting that we won't see significant improvements in our heavy-duty truck business volumes up to 2011.

China continues to be a vibrant and growing market that has real potential for the growth of CVG in both the construction and the heavy truck market.

During the quarter, we were pleased to announce that CVG was selected by XCMG, a leading Chinese construction machinery manufacturer as one of the two key seat suppliers for their extensive family of products.

We will continue -- we will provide them with a range of construction seats' products for multiple vehicle lines, including mobile cranes, rollers, wheel loaders, excavators, graders, truck cranes and concrete pumps.

We recently started production of the seats designated for XCMG's crane products at our Shanghai facility and we find additional production for other XCMG construction vehicles over the next 12 months.

As we progress in our relationship with XCMG, we anticipate that we will supply around 70% of their seating requirements for all of their product lines.

We estimate the annualized revenue from this additional business to be in the range of $4 million to $6 million at today's volume levels.

XCMG is ranked as one of the largest construction machinery producers in China and this new agreement represents a great opportunity for us.

We consider this new business to be strategically significant because it demonstrates our ability to market and sell products in China where we think great long-term prospects exist for us to grow our business.

This additional revenue also supports the aggressive growth targets we have set for our China operations.

During the quarter, we were also pleased that CVG rejoined the Russell 3000 Index.

We see this as a positive development that shows we are emerging from the undervalued position of our Company's stock experienced during the recession.

We also feel that being included in Russell Index will result in increased exposure and help get the CVG story more widely distributed.

While our results over the past several quarters are showing positive trend, we continue to remain focused on profit improvement initiatives.

All of our employees around the world have worked extremely hard to improve our operating and financial performance.

And we're all excited to aggressively continue this trend into the future.

At this point, I'd like to turn the call back over to Chad for a financial review and then we'll get into questions and answers.

Again, Chad.

Thanks, Merv.

Our revenues for this past quarter were $142.3 million, which is an increase of $38.8 million or 37.5% from the second quarter of 2009.

This increase is not only the result of an estimated 42% 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 100% from the prior-year period, as well as our military revenues, which were up more than 70% from the prior-year period.

We recorded approximately $1.4 million of restructuring charges related to the previously announced closure of our Norwalk, Ohio facility.

Excluding this one-time charge, our operating income was $4 million or 2.8% of sales, which is an improvement of approximately $15.6 million over the prior-year period, when excluding one-time restructuring and impairment charges.

This represents a 40% contribution margin on the incremental revenues of $38.8 million, which is a direct result of the cost realignment and margin enhancement efforts we've been discussing and taking action on for the last 12 to 18 months.

This is also reflected in our performance compared to the first quarter of this year.

Sequentially, revenues were down approximately $4.1 million from the first quarter, while operating income actually increased $0.4 million, excluding restructuring charges.

Depreciation was approximately $2.8 million and amortization was $60,000.

Capital spending was $2.1 million for the quarter or 1.4% of revenues.

We recorded a gain of approximately $1.3 million as other income, which is primarily related to the mark-to-market of our forward foreign exchange contracts.

Our tax benefit of $0.7 million recorded for the quarter is primarily attributed to changes in tax reserves, and geographic tax rates and valuation allowances against our deferred tax assets.

As of the end of this past quarter, we had a cash balance of approximately $52.4 million and the capability to borrow an additional $22.5 million under our ABL without financial covenant requirements.

With this level of financial flexibility, we believe we are in a very good position to absorb working capital needs as our end markets continue to recover 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.

While we're not providing guidance at this time, we would like to point out a few key revenue assumptions for the balance of this year.

Recall from prior conference calls and announcements, Navistar's decision to in-source the cab assembly business to Mexico, we currently estimate this to impact our revenues by approximately $6 million to $7 million per quarter moving forward.

In addition, our military business has performed extremely well over the last several quarters.

However, we do not currently anticipate these levels to sustain without incremental vehicle orders.

This may impact our revenues by approximately $3 million to $4 million per quarter moving forward.

And lastly, the key assumption we'd like to mention today is that we're currently estimating North American Class 8 units in the range of 150,000 to 155,000 units for the full-year 2010, which is obviously a positive trend from the run rates we've seen from the first half of this year and which should partially offset the other items that I mentioned.

In summary, we believe that our results this past quarter speak for themselves and we are looking forward to continuing our focus on operating and financial improvements as well as our long-term growth strategy as we move forward.

And with that, we'll open up the call for any questions.

Thank you.

(Operator Instructions).

And your first question will come from the line of Greg Williams from JPMorgan.

Good morning, guys.

Thanks for taking my questions.

Good morning, Greg.

Good morning, Greg.

Hi.

With your truck forecast update, can you maybe help us with a quarterly progression of truck builds, how do you see that unfolding in North America for the back half of the year?

Yes, probably something with a range of 150 to 155; you're probably in the 40 range for Q3 and approaching the 45 range for Q4.

We still see a tail in the latter half of the year.

Okay, great.

And given, Chad, the updates to the Navistar and the military revenue outlook, do you expect to be earnings positive in the back half of the year?

Well, I don't want to get into too much of the revenues.

The key point is pointing out for you guys the revenue impact for the military and the Navistar, and then obviously that's going to be at least partially offset by at least our positive outlook for the truck market.

I think we'll be pretty close to that.

I don't want to get into too much of that because there is so many variables that go into it, Greg, since we're not giving guidance.

But you've seen what we've done in the first half of the year, and trucks are going to be -- we're forecasting truck units to be higher than that in the latter half and offset by the some of these other things.

So, without getting into it too much, I don't expect it to be significantly different.

Okay.

And can you just let me know how your investments -- the new investments in China, India and Mexico?

Do you have a timetable or outlook for these investments?

Yes, I think, on the last call, we talked about Mexico probably being more of an immediate priority for us and would expect to see something from us.

We're looking to do something here in the next 12 months or so.

India may be a little bit longer horizon, 12 to 18-month period.

Okay.

Thanks, guys.

Your next question will come from the line of David Leiker from Robert W.

Baird.

Hi, good morning.

It's Keith Schicker on the line for David.

Good morning.

Good morning, Keith.

I just want to circle back and hit the Navistar question again.

If I want to think about the profit impact of that business, you've said you've taken out all the fixed costs.

So that basically just assume -- or is it safe to just assume the variable profit of that business is lost sequentially.

How should I think about that?

Yes, that's correct.

Okay.

And then, the military is going to dip $3 million to $4 million on a year-over-year basis?

Yes, sequentially, the number that I gave, $3 million to $4 million, that's without a whole lot of visibility in the military side for new vehicles.

That's kind of just our current estimate based off of where Q2 was.

Okay, so that's kind of a sequential drop.

Yes.

And then, if I look -- the sequential performance Q1 to Q2 is the reason for the gross margin increase that you didn't have some cost associated with this Navistar business in there, and maybe that was a little higher than it would normally be or what was the up gross profit and down revenue, what was behind that?

Yes, that's part of it.

The other piece is, as the year progresses, things like material cost reductions and just further overhead absorption within the cost of sales helps alleviate some of that.

So, the Navistar piece, the closure is part of that, but you're going to get into further cost reductions -- cumulative cost reductions as the year progresses too.

The $4 million down from Q1 to Q2 and being at a higher margin is probably a little abnormal.

I wouldn't say that that's something to pencil out quarter-over-quarter, as we've talked about and we're still pretty comfortable with that 20% to 25% contribution margin level, but we did exceed that and outperformed that from Q1 to Q2.

Okay.

And then lastly, if I think about some of the business announcements and even smaller acquisitions that you've made, specifically here in North America really over the '07 through '10 time period, how would you look at or how would you conceptualize your content per vehicle over the course of the next cycle relative to the previous cycle?

It seems like there will be a bigger opportunity there for you.

Yes.

I think the biggest change as much as we hate talking about content per vehicle; the Navistar change, that's a cab assembly, that's a high dollar content.

So, just off the top of my head, that may be -- on an average, we've probably been in that $1,100, $1,200 per unit range.

That may be a couple hundred dollar impact overall -- weighted average overall impact to us, but the new business that we brought in last year and things that we've targeted this year -- I mean obviously, our target is to get it back up to and exceed that but in relatively short order.

We've already -- of the 25 or so million of new business that we announced last year, 75% of that was Class 8 truck related.

So, we've already picked up quite a bit of that.

How much of that is an average content, I'm not exactly sure, but we're pretty comfortable and confident of the ground that we've gained with those, and current new business wins and prospects that will outweigh the Navistar removal.

Okay.

Thank you, that's all I had.

Keep in mind, we're also seeing our growth start-up in Asia with our truck business too with the announcement of [Nissan, Volvo or UD as] maintenance now.

So, we're not just seeing the content in the US, we're seeing content in the rest of the world change too.

That's exactly right.

Good point, Merv.

Your next question will come from the line of Derrick Wenger from Jefferies & Company.

Yes, three parts.

First of all, depreciation and amortization for the second quarter.

What was CapEx as well and what's the outlook for CapEx for the year?

And then lastly, availability on the lines and their letters of credits drawn?

Yes.

As I mentioned earlier, our depreciation was $2.8 million, amortization was $60,000, CapEx was $2.1 million.

Our CapEx for the year would probably be in that 1.5% to 2% of sales.

And then, availability on the lines and their letters of credit?

We have $1.7 million of letters of credit.

We have nothing drawn on our lines.

So we've got the full availability, up to $22.5 million without covenants, $27.5 million with some fixed charge covenants, and $52.4 million in cash.

Okay.

And the $22.5 million, that would be before the $1.7 million of letters of credit, right?

Yes.

So, it would be a net of $20.8 million or whatever?

That would be true.

Okay.

Thank you.

(Operator Instructions).

And your next question will come from the line of Kirk Ludtke from CRT Capital Group.

Good morning.

Good morning.

I just wanted to touch again on the Navistar contract.

Is this a contract where you still assemble or you still manufacture components and you just lost the assembly portion of the contract or was it just assembly?

First of all, we didn't lose it, and the prospect of that term is normally used.

This was something that was in-sourced because they had a plant; they wanted to move it to Mexico that was underutilized.

We still supply components -- all the components to it and we still supply many of the -- or started supplying many of the interior components.

So, I tend to think that we're so focused upon the perception of the negativity of the cabin source that we're forgetting about all those business that has been awarded to us by them plus that cab was for two years in a row, their Diamond Star award for quality and delivery.

So the performance of CVG to Navistar was in no regards with this move.

So it's simply that it was no longer economic to ship it that far?

Right, no, it never was economic to ship it that far.

Or the fact that they moved the production to Mexico really precipitated the change?

Exactly.

We could have put a plant out in Mexico, but it did not make economic sense for us nor did it for them.

Okay.

So the -- I would think that just the assembly portion of the contract to be pretty low margin business?

[We have been] splitting out the margin on that, but I think you can see the performance that has been going on since this [moved out from] what we're projecting for the future plus with the new business that we gain and with what we're seeing pickup in the agriculture or the construction markets.

And, Europe and Asia for us, we feel very comfortable with our Company and the way that we're growing it to strategically placing it.

Do you have any other assembly business that might be at risk because of the Navistar's decision to move production to Mexico?

We -- that is the only assembly business we had for Navistar and our other business, we have pretty good long-term contract with that and we feel pretty comfortable where we're at with that business.

Okay.

And we look to still be growing the structures business.

This wasn't one of these things where we're closing down and getting out of the structures business.

Right.

Right.

And I know you don't like to talk about margins by program, but I guess the military is probably an above-average margin program?

Well, I think we normally see military and after-market slightly above some of the other margins here.

Okay.

Thank you.

You're welcome.

There are no further questions in the queue.

I would now like to turn the call back over to management for closing comments.

Thanks, everybody, for joining the call.

We're pretty pleased with the progress.

This is our fifth consecutive quarter of operating income improvement and looking forward to moving forward.

Again to echo, Chad, thank you very much.

We are extremely proud of our Company.

We have -- even during the downturn, we were continuously winning business.

We've got our Company very well positioned, starting back from '99 when we were 100% in the US and with two customers basically making up about 95% of our business.

With one product line, you can see where our Company is positioned itself now.

And we will continue to move forward with that strategic plan to globalize our Company as well as introduce new product lines and become more of a technical innovative-led Company.

And, I think the results are showing for themselves.

Thank you, again.

Thank you.

Thank you, all, for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.