Commercial Vehicle Group Inc (CVGI) 2010 Q3 法說會逐字稿

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

My name is Grace Ann, and I will be your operator for today.

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

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

(Operator Instructions).

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

I will now turn the presentation over to Mr.

Chad Utrup.

You may proceed, sir.

Thank you, and welcome, everybody, to the conference call.

As usual, allow me to read through our Safe Harbor language.

Then Merv will give a brief company update and I will take you through our results for the third quarter of 2010.

And afterwards, we will take time to answer your questions.

With that, I would 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, expectations for future periods with respect to cost-savings initiatives, market conditions or financial covenant compliance and liquidity; 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 will turn the call over to Merv.

Thank you, Chad, and thanks to all of you that joined our call today.

During the third quarter, we continued to see an improvement in North American Class 8 builds, and according to Transport Topics, truck tonnage has continued to rise over 2009 levels.

In addition to these positive truck market trends, we've also seen our global construction markets increase sizably over the last year and more recently again this past quarter.

Although we don't currently expect these dramatic increases to be sustained, we are optimistic for 2011 and eager to move further past this economic downcycle.

We believe our cash position and the fact that we had no debt on our revolving credit facility at the end of the quarter continues to place us in a favorable position to develop new geographic markets and respond to our improving end markets.

As we have stated before, we see Mexico, China and India as key development areas to leverage our capability to be a global supplier to the global OEMs, and along with that, to develop a local presence within these markets.

In September, we were pleased to announce an agreement with Daimler Trucks North America to provide trucks for DTNA's manufacturing facilities in Saltillo, Santiago, Mexico, as well as three of their facilities in the United States.

In accordance with that agreement, we also announced that we will open a new facility near Saltillo, Mexico.

We expect this new facility, which is in addition to our facility in Agua Prieta, Mexico, to be in operation by mid-to late 2011.

Daimler has been a valued long-term CVG customer and partner.

The fact that they chose CVG for this strategic partnership is a testament to our engineering and production capabilities and our financial strength.

In line with our strategy, this agreement represents an opportunity for us to work with an existing customer and to also expand our geographic footprint to find new business opportunities in growing, low-cost production regions.

During the past quarter, we have also gained additional business awards in several exciting areas.

The first is with a Texas-based defense contractor to provide electrical components for use on a wheeled mine-resistant vehicle.

This additional military vehicle business is meaningful, because the M-ATV business we do for Oshkosh has moved from peak production volumes to more traditional replacement levels.

We anticipate production will begin in the first quarter of 2011, and revenues to be approximately $2 million on an annualized basis.

The next CVG customer awarded us with approximately $5 million to $6 million incremental electrical component business for its compact construction equipment.

Currently, we are entering the launch phase with this business, to be produced in our Agua Prieta, Mexico facility.

Additionally, we launched local production of wiring harness is to be used on excavators that John Deere manufactures with its partner, XCG, in China.

We are especially pleased this new business is our first harness production in China.

We anticipate annualized revenues for this new business to be around $850,000 in 2011 and grow to approximately $2.5 million in 2012, and rise to a range of $4 million to $4.5 million, 2013.

Finally, our Czech Republic operation has just been awarded EUR10 million to EUR12 million of annualized business for these wiring harnesses for Skoda, a neighboring light vehicle automotive customer.

This business starts in 2012, and is expected to hit peak revenues level during 2013.

CVG evaluates light vehicle business on a purely opportunistic basis.

This award is a unique case where historical relationships pair with a great performance record that makes sense for both CVG and our customer.

In September, we had a very successful exhibit at the 63rd IAA Commercial Vehicle Show in Hannover, Germany.

The IAA Show is one of the largest in the world and gave us a great opportunity to show off our products and capabilities on a worldwide stage and to meet with existing and potential new customers.

At the end of the show, we featured several displays, including the concept vehicle that addressed industry issues such as a safety, fuel economy, driver comfort and vehicle weight savings.

We also presented our self-extinguishing interior trim product called FlameTEK, that reduces potential property damage and operator harm in the event of a vehicle fire.

Finally, during the quarter, we launched an updated version of our company website.

It featured more user-friendly ways for distributors, OEM representatives and retail and aftermarket customers to find expanded information about CVG products and to more easily interact with our company.

We continue to focus on top-line growth and bottom-line accountability.

We remain heavily focused on our top-line growth and overall strategy, as outlined by the new business awards, global expansion and product development plans I mentioned.

We believe the positive trends we are going -- that we are seeing in our end markets and the incremental positive gains we are both achieving in global growth are the foundation for our long-term outlook and the drivers that will continue to make CVG a successful company in the future.

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

Chad.

Thanks, Merv.

Our revenues this past quarter, as you saw, were $150.9 million, which is an increase of $40.1 million or 36.2% from the third quarter of 2009.

This increase is not only the result of an estimated 35% 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 160% from the prior-year period, as well as our military revenues, which were up more than 25% from the prior-year period.

Our operating income was $5.1 million, which is an improvement of approximately $12.9 million over the prior-year period.

This represents a 32% contribution margin on the incremental revenues of $40.1 million, which is a direct result of our cost realignment and margin enhancement efforts.

Sequentially, revenues were up approximately $8.6 million from the second quarter, with an operating income increase of $1.2 million, excluding restructuring charges.

While we would normally expect a 20% to 25% contribution on incremental revenues, two primary drivers are affecting this for this quarter on a sequential basis.

First is our higher contribution military revenues, which declined approximately $2.7 million from the second quarter to the third quarter; and second is an increase in SG&A and other areas of the business we believe are necessary to continue our strong momentum in continuous improvement, new business wins and overall strategic objectives.

Depreciation was approximately $2.6 million and amortization was $60,000.

Capital spending was $3 million for the quarter, or 2% of revenues.

We did record our gain of approximately $1 million as other income, which is primarily related to the mark-to-market of our foreign exchange contracts.

Our tax provision of $0.6 million recorded for this quarter is primarily attributed to changes in tax reserves, geographic tax rates and valuation allowances against our deferred tax assets.

This quarter's tax provision rate of 35% is primarily related to the mix of geographic income and related rates for the quarter and is not an indicator of future provision rates, given our overall valuation allowance status.

As of the end of this past quarter, we had a cash balance of approximately $43.8 million and the capability to borrow an additional $22.5 million under our ABL without financial covenant requirements.

As mentioned, we do not have any funds borrowed on our ABL revolver.

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

As Merv mentioned, we announced during the quarter our agreement with DTNA for the expansion of a facility in the Saltillo, Mexico region.

We currently estimate the initial capital requirements for this facility to be in the range of $4 million to $5 million, with initial startup expenses, net of savings and incentive programs, in the range of $1 million to $2 million.

We expect these capital expenditures and startup costs to begin during the fourth quarter of this year, with the majority being incurred during 2011 as we ramp up the facility and related production.

In summary, we are pleased to report our sixth consecutive quarter of operating income improvements, excluding restructuring charges.

We look forward to continuing our focus on operating and financial improvements, as well as our long-term growth strategy, as we move forward.

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

(Operator Instructions) Ann Duignan, JPMorgan.

Glad you made it back safely from Hanover.

We are kind of, too.

I bet.

Just a couple of questions, I suppose, on the balance sheet.

You have -- inventories were up a little bit sequentially, days sales outstanding up a little bit -- on a days basis and days payables also.

Should we read no more into that other than the fact that these are up in support of growing sales, or is there anything structural we should know about?

No, some of it is -- a little bit of it is timing, Ann, and frankly, most of it is plans that we've got in place to take inventory out.

Inventory crept up more than we had wanted it to at the end of the quarter.

So there is -- our net debt, I guess is the best way to look at it, went up about $9 million, $10 million from the second quarter.

Recall we have a bond payment in July of about $4.5 million.

So that is half of it.

And the other half is some creep in working capital that we are working to take back out.

So if we were to look forward, we would expect to see days inventories come back down in the fourth quarter.

Is that the way I should interpret that?

Yes.

Yes.

And also, as we do cost improvements in purchasing and areas like that, sometimes there is inventory builds to be able to do engineering changes.

There is inventory builds to be able to move suppliers.

There is things like that that just normally happen in the event of your continuous improvement that you are doing in your operations.

Sure, and I appreciate that, particularly if you are moving things around from facility to facility.

Which leads me to my second question.

If you could talk a little bit more about the investments that you are making in the DTNA business.

You said $1 million to $2 million in startup costs.

Will those flow into SG&A somewhere; is that where we should kind of model that?

And if you could talk about will it to start slowly in Q4 and the vast majority of that cost will flow into 2011?

Again, just from a modeling standpoint, how should we think about that?

Yes, there will be some in SG&A, Ann, although I wouldn't say -- that is a small portion of the startup costs.

I would say very little at this point will come into the Q4 of this year.

A majority of it, and frankly, mostly all of it, will come into 2011.

I would say mostly cost of sales and almost all in 2011.

We are carrying a few hits to deal with the Mexico project.

We are also having a lot of travel, but we are having a lot of travel into many regions of the world with new business opportunities that we are dealing with.

Yes, and I appreciate that, and that is exactly kind of what I was thinking about, is that until the facility is up and running, it is going to be more hiring people, getting stuff organized, etc., etc.

So good, I just wanted to make sure I understood that correctly.

And then can you give us any guidance in terms of directionally?

I know we are early thinking about 2011 thus far.

But things like tax rate, where would you expect that to normalize out?

And then maybe incremental profits next year, again, with the ramp up of DTNA, should we expect some headwinds for incremental profits?

Just trying to get a sense of, gee, we can all come up with our own revenue outlook for next year, but what are some of the puts and takes that we should be looking at that we should be careful about at this point?

Well, I think the Mexico startup is one.

We are in that $1 million to $2 million range; like I said, most of that will be in 2011.

That is probably a big one.

From a tax rate perspective, that is a real difficult one because it just really depends on the geographic region.

But given the large valuation allowances we still have in place, Ann, the 35% we had in the third quarter is more of a coincidence than anything.

I still think we will probably be in that maybe for the next couple quarters at least, a couple hundred thousand dollar up to maybe $0.5 million provision level, regardless of pretax.

And that is a real tough guess because of where geography pretax income falls out.

Those are, I think, specifically to address your two questions.

The other thing as you look out to 2011, you mentioned revenue.

I mean, one of the big things that we saw this year that we're not quite confident on yet is the military.

Military was so strong for us this year, and we are really taking a hard look and seeing where we think that may shake out for 2011.

Could your military business with Oshkosh, could that potentially go to zero, or would you anticipate aftermarket -- I know they will get the aftermarket, but is there any kind of follow-on kind of annuity with that business?

I think with anything military like that, we would always take our direction from Oshkosh.

So he's looking at how Oshkosh builds are going up or down or Navistar's or anyone else's is more of an indication of how ours is going to go.

Some of that, we hear at the same time you hear.

Got you.

And then your outlook for truck, yes, we understand that you're a little ahead of us for next year.

But I think, frankly, we are probably a bit low.

What are you hearing on the construction side by region?

What are your customers telling you to get ready for?

CAT is out there saying that their revenues will approach $50 billion next year.

Are they giving -- are they out talking to suppliers again, like they were last year, ensuring that you guys can ramp up?

Or at this point, do they expect that everybody has their supply chain in order and can ramp up with them?

I think most of the customers are still checking on suppliers to make sure that they are comfortable with them, doing financial reviews.

Because if you look at it and you look at the shakeout that we've had with the supply base or the bankruptcies that we've had in the supply base -- and I'm not just talking about the Tier 1's; down Tier 2 to Tier 3, that is something we all pay attention to during ramp-ups.

So I think that will continue.

And as far as the construction build itself, we kind of got layered in our plan kind of flat from this year to next year on a global basis.

And I think just to add on that, last year obviously was down for us for construction.

We were probably in the $67 million, $60 million range in revenues for OEM construction.

And this year, especially the last few quarters, have really ramped up.

I mentioned more than 160% over 2009.

We know 2009 was down, but if you look at where our full year may end up this year versus 2009, it is going to be almost pretty close to a doubling.

So we are a little bit reluctant to pile on a lot more of a market increase on that, given where we have ramped up to today.

But we are still coming off of a five-year decline in US construction.

So is that just you being a little bit conservative at this point?

If anything -- if we're going to falter on anything, we will falter on the conservatism side.

Okay.

But we really think it is going to be kind of flat.

But hopefully we will be wrong, and you'll be right.

And just on DTNA again, we understand the CapEx and the ramp-up costs.

Can you just remind us when revenues will start up?

Will that be 2012 revenues?

Do you have to build the facility from scratch?

Yes, we are building the facility from scratch.

We've actually worked with a construction park down there.

We've got the building defined.

We think the building will be about seven more months before it is completed.

And that doesn't necessarily mean it will be that long before we are functioning more in Mexico.

But that's --

So you are saying that sales may start to ramp up earlier than seven months?

Well, keep in mind, we are still selling to those plants.

We are just shipping it out of other plants.

Right.

Okay.

So the new business -- there will be some new business start when the plant is completed.

But as of right now, we are still continuing to ship our products out of three or four facilities here in the US to Saltillo.

Okay.

Well, I don't know if there is anybody else on line -- in line for questions, but I'll jump (multiple speakers).

Yes, there appears to be.

Okay.

So, sorry.

I didn't mean to hog it.

So I'll get back in the queue.

That's okay.

It's always a pleasure to talk to you, and certainly with the way the economy is going right now, it is always a little bit more pleasure to talk to all of you.

Here, here.

Okay, I'll get back in line.

Thanks, guys.

David Leiker, Robert W.

Baird.

A couple of things I wanted to dig through.

As we look at the revenue numbers here going sequentially, and you take the build rates out of it, are you all done with the business that is rolling off from Navistar or is there still some left there?

There is a little bit, say, in Q3, David.

Not much.

Obviously '10 to '11, you will have a difference.

But Q3, I would say it is substantially out of there.

Okay, and in terms of the timing of the new things coming in, some of that is starting now, right?

Some of it has already come in a little bit, and it is starting to ramp.

And yes, we still have some to be coming in in 2011.

When we look at it quarter by quarter, is there an inflection point where all of a sudden it starts to accelerate at all, or is it pretty smooth ramp-up for you?

So far, the business that we've been bringing in has fit well into the processes that we have in-house, and the ramp has been pretty smooth.

Okay.

The business with Skoda, how much of your business today is automotive-related?

There is very little.

We have some Skoda business that we've had since we bought the Company.

And it had kind of moved some of it away from us before we bought the Company.

And with the improved performance and everything, it's [had them] coming back.

We've always kept our fingers in automotive; I guess maybe our fingertips is more of the right analogy.

Even in 2006 when we hit record-breaking revenues of 900 and some million, we were doing the Ford GT.

Back before we became public, we designed the -- and program managed the interior for the Chevrolet SSR.

So we've always --, we didn't build any products for it, but we did -- so we've always done design work for small programs, niche markets or things that fell into taking up capacity into a facility as we go.

And that is the way we will continue to do automotive.

We are not an automotive company, but we have the capability, because of our strong engineering abilities, to function in that arena, and it also helps us with R&D and keeps us current.

Okay, great.

A long answer to a short question, how's that?

That's all right.

One of the things that has been coming out here in recent weeks is Caterpillar coming out and talking about working more collaboratively with their suppliers, and reducing their supply base.

I just want to know what kind of opportunities that presents from you and if you've seen any of that develop yet.

Well, we've -- excuse me, David -- we travel quite a bit with CAT, going into the facilities, have -- are invited to their strategic partner meetings.

We just had one not too long ago with them.

I was in the CAT China plants a few months back, I think right before or right after IAA.

Our relationship with them is extremely good.

We have strong relationships with them on some of their metal components.

We have a strong relationship with them on the wiring and very strong relationships with them in the seats.

And we are looking to expand that relationship into other products, whether it may be interiors or flooring or metal structures.

CAT is a key customer of ours and a key partner of ours.

So anytime we can expand, whether it's geographically or whether it is products or innovation, we are right there with them.

Okay, great.

And then the last item, as we look at the opportunities that you've talked about with the proceeds from the equity offering and these investments in growth initiatives, how much of that have you -- is under way versus what you need to do yet going forward?

So much of this, we can't really talk about, and we have many customers that are not -- when they make supplier changes, they do not want to announce those until the process is started.

So some of those, we just can't talk about.

We have spent -- myself and Chad and the presidents of each one of the businesses have spent a ton of time traveling to our customers and working with our customers on new potential programs, whether it be in Thailand, or whether it be in Brazil or India or Mexico or China.

Those -- and in the US, obviously, or North America.

We are very determined to get the top-line growth while managing the bottom line to continue a strong trend.

We are in the growth mode.

We want to outgrow the market.

Did you think -- it sounds like you have most of those initiatives are under way at this point.

We've got our fingertips in most of them.

Okay.

I think the Mexico is the clear-cut one, Dave.

I mean, that one is out there, we are under way with -- we talked about that about -- at the beginning of this year -- about expanding in Mexico, India and China.

Mexico is the clear-cut one that we've talked about for a couple quarters about new facility and whatnot.

Czech Republic, the wiring harnesses, we also are producing seats there now.

And Merv and I and Gordon have a trip planned late this year to India to explore that opportunity further as well.

So (multiple speakers)

India and Australia.

So we are getting plenty of points that we are willing to share with you, David.

Where is Brazil on your hit list here?

Brazil is real close behind India for us.

We are getting a lot of pull to be there.

Like anywhere else, we'll go in, but -- we go in small, but we go in with a plan laid out pretty well to get the growth.

I think it has been obvious how we do it with our model, with what we did in China, starting out with 4 million that we transferred there.

And today, that thing is greater than 10-fold what it was when we started four or five years ago.

Great.

Thank you.

(Operator Instructions) Since there are no further questions, I will now turn the call back over to management for closing remarks.

Well, I think as everyone has seen, the Company is very focused on performance.

We have been over a good while now.

The economy is starting to respond a little bit, and all the hard work and the efforts that we've put in place are starting to show.

And I think they've been showing now for about four consecutive quarters, and we are seeing a good response to that.

We plan on to continue, like I've said, on our top-line growth with bottom-line accountability.

And we are very positive the way that we see our company going.

Chad?

I feel the same thing.

Thank you, everybody.

We look forward to next quarter.

Thank you for your participation in today's conference.

This concludes the presentation, and you may now disconnect.