Commercial Vehicle Group Inc (CVGI) 2010 Q4 法說會逐字稿

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

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

At this time all participants are in listen only mode.

(Operator Instructions) At this time, I would like to turn the call over to your presenter today, Mr.

Chad Utrup.

You may proceed, sir.

Thanks, Jeremy.

Thanks everybody for joining the call.

As usual before we begin the call, I'll read through some Safe Harbor language.

Merv will then give a brief update and then I'll take you through our results for the fourth quarter and full year 2010 and then we will open it up to Q&A.

So with that I would like to remind you that this conference call contains forward looking statements.

Actual results may differ from anticipated results because of certain risks and uncertainties.

These may include but are not limited to expectations for future periods with respect to cost savings initiatives, financial covenant compliance and liquidity, new product initiatives, the economic conditions in which -- in the markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, risks associated with conducting business in foreign countries and currencies and other risks detailed in our SEC filings.

And with that, I will turn it over to Merv.

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

Before discussing the past quarter and last years performance, I would like to first focus on an exciting development that took place during the current quarter.

Our January 31, we announced that we acquired substantially all the assets of Bostrom Seating in a cash deal for approximately $8.8 million.

As many of you know, Bostrom it is a quantity seat supplier to North American heavy truck aftermarket, bus and military markets.

Formerly a division of Accuright Corporation, Bostrom has one facility located in Piedmont, Alabama and an engineering office in Wixom, Michigan.

It employs approximately 135 associates.

We feel this acquisition will further expand our North American presence in the seating market and significantly enhance our aftermarket market position.

Bostrom's product offering and brand equity are a natural fit with our existing seat operations and our existing National and Cab seating brands.

For the full year 2011, we expect Bostrom's revenues to be around $40 million.

We believe its operating income will be neutral and depreciation amortization will be approximately $1.2 million with EBITDA level of around $1.2 million.

Looking at 2012, as we integrate our quality systems, purchasing power and CVG production expertise along with anticipated market improvements, we expect Bostrom's operating income will be around $0.7 million with depreciation amortization in the neighborhood of $1.3 million and thus an estimated EBITDA around $2 million.

Complemented by its $8.8 million purchase price we feel it presents an attractive valuation for us.

We are very excited about this opportunity.

As a look at last year, the global recession started to show signs of recovery and we continue to see improvements in our end markets throughout the year.

As we previously announced, our construction related market showed excellent improvement during 2010 and that helped us a great deal.

Given the extent and the rise in construction markets in 2010, we do not believe that part of the market will be able to sustain the kind of growth acceleration we saw last year.

We do think however, that construction will remain an excellent contributor to both our top and bottom lines over the next several years.

During the year North American Class 8 builds show signs of increasingly strong recovery and we expect that to continue through 2011 and further into 2012.

As you might recall, we did predict we would start to see a decrease in our military orders from a very high levels of late 2009 and early 2010.

That did happen during the latter part of 2010 and increasingly so in the fourth quarter.

As you know, this decrease can take a heavy toll on our bottom-line results, yet despite this impact we continue to show improvement in our operating results throughout the year.

During the year, we benefited from working capital improvements and cost reductions that were started in 2009.

Overall we feel we have positioned CVG with a strong balance sheet and excellent liquidity to go forward.

In 2010, we also achieved a number of important business wins.

In early September, we signed a long-term agreement with Daimler Trucks North America to continue production of seats, flooring and interior components through 2014.

As part of that agreement we recently started construction on a new facility in Saltillo, Mexico.

The new 160,000 square-foot multibuilding campus is expected to begin initial operations in mid-2011.

When completed, the facility will produce air suspension and static seats, flooring systems, thermoformed plastics and injection molded hard and soft trim interior components such as headliners, backwalls and curtains.

In addition to helping us serve the needs of Daimler, a major and valued CVG customer, this new facility should also help us explore new business opportunities in this region of the world.

Our Chinese operations continue to do well, too.

In 2010 XCGM, one of the largest construction equipment suppliers in China, selected CVG as one of its key seat suppliers.

This is important as it proves CVG's to market and compete in the domestic Chinese markets.

Which as everyone knows had seen dynamic growth even during the recent economic downturn.

During the year, we also signed a new contract to provide wiring harnesses for excavators, John Deere builds in China.

This is an opportunity for CVG to grow as a global supplier to global OEM as well as an additional opportunity for us to participate in the growing Chinese domestic market.

In 2010, Deere awarded CVG with partners status demonstrating the strength of our working relationship with them.

In 2010, we were also chosen by Hino, a Toyota company to supply seats for the medium duty trucks manufactured in North America.

This is important since it positions CVG as a supplier of choice to a well-known, high quality producer.

It also expands our participation in a medium duty truck market.

During the year, our PEKM facility in Liberec, Czech Republic was awarded addtional wiring harness business with Skoda Automotive, a division of Volkswagen Group.

Although automotive is not our core business for CVG, this is an excellent opportunity to continue PEKM's longer-term relationship with a significant European customer.

In 2010 we launched a new seat the [quilen] for Asian markets.

In the US, we also unveiled a new line of heavy duty seating products that covers owner operator, fleet, and OEM needs from a basic economy line of seats to the highly engineered premium seats lines offered to the ultimate in operator comfort and safety for trucking.

Looking forward to 2011, our strategy and vision will remain the same.

We will seek to expand our global footprint and product portfolio.

We will continue to maintain a lean and flexible cost structure with substantial financial foundation.

And either through partnership or acquisitions we will seek additional opportunities to enter new markets such as medium duty truck segments or new geographic areas such as India, Brazil, Mexico or China.

In summary, we are very excited about the progress we've made during 2010 and throughout the last 24 months.

We are also very encouraged and eager as we go into 2011 and beyond, especially with our continued focus on growth and shareholder returns.

At this point, I'd like to turn the call over to Chad for financial review.

Thanks, Chad.

Thanks, Merv, our revenues this past quarter as you saw were $158.1 million, which is an increase of $22.3 million or 16% from the fourth quarter of 2009.

This increase is primarily the result of our global construction market which slightly more than doubled from the fourth quarter of 2009.

We also saw increases in various other markets which were offset by a sharp decline in our military revenues which we expected in the fourth quarter.

Excluding impairment and restructuring charges, our operating income was $5.5 million or 3.5% of revenues, which is an improvement of approximately $8.1 million over the prior year period.

This represents a 36% contribution margin on the incremental revenues of $22.3 million, which is a direct result of our cost realignment and margin enhancement efforts.

Sequentially revenues were up approximate $7.1 million from the third quarter with an operating income increase of $300,000.

We normally expect a 20% to 25% contribution on the incremental revenues, however, two primary drivers affected this quarter on a sequential basis.

First is our higher contribution military revenues which declined approximately $4 million from the third quarter to the fourth quarter and second is an increase of approximately $200,00 of expense related to the Bostrom acquisition and $600,000 related to new product initiatives and future programs.

We currently expect the first quarter of 2011 to include approximate $300,000 of expense for the Bostrom transaction and approximately $400,000 of expense related to new product initiatives which include engineering and prototype efforts for new customers and new business programs.

Depreciation and amortization was $2.7 million and capital spending was $4.9 million for the quarter.

We recorded a gain of approximately $1 million as other income which is primarily related to the mark to market of our foreign exchange contracts.

Our recorded tax benefits of $1.6 million for the quarter is primarily attributed to changes during the period related to certain state tax planning, foreign and other tax matters during the period.

As of the end of this past quarter, we had a cash balance of approximately $42.6 million and the capacity to borrow an additional $22.5 million under our ABL revolver without financial covenant requirements.

With this level of financial flexibility we believe we are in good position to absorb further working capital needs as well as continue to pursue key areas of growth.

With that said, we currently do not expect to have to comply with any financial maintenance covenants for 2011.

In summary, excluding impairment and restructuring charges, this marks our seventh consecutive quarter of operating income improvements.

This is something we are very proud of and we look 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, Jeremy, we will open up the call for questions.

All right.

Thank you, sir.

(Operator Instructions)Ladies and gentlemen, your first question comes from the line of David Leiker.

You may proceed.

Good morning everyone.

Good morning, David.

On the military ramp, thanks for the color on that and I think there's some talk in the industry that might be starting to ramp up to production.

They might be starting to ramp up a little bit more quickly.

one, are you seeing that and two, what do you think the ramp is to reverse this loss that we've seen as we work between contracts?

Well, we talked about, I think it was probably the last couple earnings calls, David, we talked about our expectation for military to drop off in the last half of this year.

We have not seen anything lately.

We have -- we have seen some small upticksbut nothing meaningful at this point.

We have seen some stuff in the newspapers probably like what you've seen on some expectations that one of our major customers or two of our major customers.

But we have not seen orders starting to come through on that.

So as we look at your military volumes in Q1 versus Q4, do you think it is a comparable level or is there another step down here?

I think it is fairly comparable.

It may be a slight step down but nothing -- nothing what we've seen in the last couple quarters Dave.

And then from what you expecting, do you think it starts to build in Q2 or does that become the back end of the year before it starts to recover ?

Right now I do not think we really have any more news than what we have seen the news.

And that seems to point towards Q2.

But like everything else, we kind of expect that it will be later in the year.

Okay.

We think we are running pretty low.

Chad, we have had several quarters in a row will be are right around $1 million, do you think that -- that is a stable number or is that still going to be as big of a move potentially one way or another as we have seen in the past?

Are you talking about the mark to market, Dave?

Yes.

Yes, most of our contracts are, in fact, I think all of them but maybe a handful our completed now so I don't -- I don't expect significant numbers going forward at all.

So that is going to be zero then more or less?

That is probably the best way to look at it, yes.

Okay.

Okay.

And then lastly, Merv, and to look at some of your end markets, are there any areas of your customer base geographically or particular segments that are weaker and recovering than other ones?

Well, we have seen a little bit weaker recovery in Europe than we have obviously the way the US is ramping up significantly.

But remember in the trucks we have virtually no exposure.

Construction is starting to see a lot of life also in Europe.

China, there just seems to be no end there.

We are working very diligently with some opportunities there as I think Chad mentioned.

Some expenses we had for the quarter with the development of that.

And the US, I hate to say it but it seems to be ramping up faster than what we have anticipated and if you can take all of the input that we are getting from customers, it ramps up maybe more than what most people have expected.

But forecasting it and seeing it is two different things.

We do see good news that the used truck market is kind of drying up and the prices have gone up significantly in the used truck market which takes a lot of pressure off of pricing and the new truck market in the US

Okay.

Great.Thank you very much.

And also helps the export market since there's not as many used trucks to go to the export markets.

Okay.

Thank you.

You're welcome.

And your next question comes from the line of Ann Duignan.

You may proceed, ma'am.

Good morning.

This is actually Ingrid standing in for Ann.

I was wondering if you could talk about where you see your input costs in 2011 given the higher commodity prices and where you see your incremental margins going given your track forecast?

Well I think our incremental margins we are still in that 20% to 25% range.

I mean, excluding where we have one off type things like the Bostrom acquisition costs and some of these what I will call one-time product development costs that are not sustainable costs.

So from an operating income standpoint we are still comfortable in that 20% to 25% range.

I mean you can look '09 to '10, we exceeded that so we're still comfortable with that -- that range.

And as far as input costs, similar to what we saw in the last couple years we've got pass through mechanisms with our customers that really limits our exposure to the lag of when we get recovery or -- or price downs for material pass throughs so it's somewhat limited to the lag of maybe a couple months to six months at the most I think is the longest one.

Okay.

Great.

Thanks.

And then maybe if you could go back to your outlook for North America and Europe construction.

You had commented before looking kind of at a flat but your comments earlier seeing a little bit better.

Your customers seem to be seeing stronger growth.

Can you comment on that and are you still looking for that kind of growth?

We had such growth in construction in 2010 and we know that most of our customers are predicting even more growth.

But we are very comfortable hanging around and being a little bit more conservative with it.

We kind of got burned in 2008 and 2009 going along with market forecasting and all of that and we are going to take the more conservative approach with it.

And if it goes up then we are going to be very happy and if it stays flat, we are going to be okay.

So it's basically just conservatism on our part at this point?

Yes, well another -- another way to look at it is, we're -- we're our construction market is -- the fourth quarter was our fifth or sixth consecutive substantial increase in the construction market.

So what we are saying is we don't expect those levels of increases to continue but when you look at the full year '10 to the full year '11 you may see some market increases because of the ramping up in the first two, three quarters of the year if that makes sense.

So it is more of a full year to full year impact.

So we're probably, well what we are expecting is the levels we saw in Q3 and Q4 to probably sustain and not continue double digit increases each quarter into '11, if that makes sense.

Okay, that's helpful.

And then if you could just talk about what your outlook for quarterly progression for truck builds in North America for 2011 is.

We are generally in line with I think probably what you have seen from ACT.

We will probably look at a little bit higher in Q3 and pull it out of Q4.

Just our estimate at this time.

So, we are in that -- I think ACT's around $244 million, we are not far from that.

We're in the $230 million, $240 million range.

Okay so you are in line basically with them?

Yes, we've brought our range up a little bit so I do not think we are too far off.

Great.

Thank you very much.

And you now have a question from the line of [Robert Castillo], Jr.

You may proceed.

Hi.

I have a couple of questions.

With the acquisitions on the seating manufacturer, what is your market share in North America seating going to be and how it does that market share relate to ability for price increases given where material costs might be going?

Well, I think we said that we pass our material costs along to -- it is in our contracts to our customers.

As far as market share, when you put the medium and heavy-duty truck market into it, it's probably less than 50%.

If you look to heavy truck alone, it probably would be in the 75%.

And the remaining competitors in the seat markets?

It would be 85%, I am sorry in the heavy truck alone.

All right.

What is the capability of the remaining competitors to meet the expansion in demand that you expect in 2011?

Do you have the ability or is it pretty much there is a lot of excess capacity still there in the market?

Well, as far as we go we have the capacity basically because during the downturn we have not sat on our hands, we've really put a lot of our lean manufacturing processes in place.

And we have the ability because our Company is one that unlike the automotive industry, we rely more on labor than we do very automated equipment.

So if the capacity doubles then we add people.

As far as -- does that answer everything you had or was there something else?

No, that's it.

Going forward in the heavy-duty truck market, are you going to have to add shifts to the plants?

How are you able to ramp up production to meet the demand?

Our first line of defense when production accelerates is overtime and bringing in temps.

During the overtime, we train the temps.

We also make sure it is sustainable before we bring in the temps.

And then once we bring in the temps, we grow our process through temps and we spread people out over the shifts.

We add a second shift if necessary, if necessary we add a third shift.

Remember, we have got basically the same facility plus the one in Piedmont now that we had when this industry ran 380,000 some units.

So when you look at a utilization or your optimization of your production, how is it different today than say in '08 on a per unit basis?

Before -- I want to make sure that you understood when I was talking about the same capacity that we did when we did 380,000 I was talking about her seating group.

Right.

Okay.

The units per person is something that we usually do not give out because not only do we have you on the phone but we have five or six competitors on the phone.

Okay.

What we do tell you is that our productivity, most of our guys are disciples who have worked through the Toyota production system for, you know, 30 years and even have worked with Chairman Cho in some cases when he was Chairman of Toyota.

So we have a very good process in place that we train all employees in and we are very comfortable that we are able to stay up with inflation and a cover our costs of our returns to productivity returns to customers and still have a very profitable business.

Thanks very much.

You're welcome.

And ladies and gentlemen, at this time there are no further questions.

Thank all of you very much we appreciate your interest in our Company and support, and we look forward to the next conference call.

Thank you.

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

This does wrap up the call now, you may now disconnect.

Have yourselves a great day.