Commercial Vehicle Group Inc (CVGI) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Commercial Vehicle Group Inc.

Earnings Conference Call.

My name is Thelma, and I will be your coordinator for today's event.

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

We will facilitate a question-and-answer session towards the end of today's presentation.

(Operator Instructions).

I would now like to turn today's presentation over to Mr.

Chad Utrup.

Thanks, Thelma and thanks, everybody for joining the call today.

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

Merv will then give a brief Company update.

And then I'll take you through the results of the first quarter of 2011.

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

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; commodity pricing; liquidity; new product initiatives; 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.

Thanks, Chad and thanks to all of you who have joined us today in our call.

During the first quarter, we saw a continuation of the improvements in our end markets that began last year.

I'm also pleased to report that since the beginning of the year, we have achieved several significant strategic milestones and new business gains starting with the acquisition of Bostrom Seating in an $8.8 million cash deal, which helped us gain further penetration to the OEM truck market and provide another path into the aftermarket and specialty vehicle market with another quality brand name, Bostrom Seating.

This month we're pleased to initiate a set of capital restructuring transactions to reduce some of our high rate interest and further increase our cash position.

Our initial private offering of $225 million in senior secured notes was upsized to $250 million in senior secured notes that are due in 2019.

We were pleased to complete the transaction at a 7.875% interest rate.

We intend to use the proceeds from this offering to continue our pursuit of our strategic efforts, manage working capital in the upturn, invest in new business, and growth opportunities such as our current expansion efforts into Mexico and China as well as our focus to grow CVG in regions such as India and Brazil and ultimately return value to our shareholders and investors.

Many of you have also asked about our rise in commodity prices and our ability to recover them.

The primary raw materials we use include steel, aluminum, copper, and resin foam materials.

The majority of our contracts have pass-through mechanisms which allow us to periodically true up against indices and recover raw material price increases.

There may be a lag period in recovery of these price increases but we are comfortable with our pass-through mechanics within our contracts, which have become very important over the last several years.

In addition to commodity pricing, we also watch petroleum prices as they can affect transportation costs.

And if they rise to a point that begins to affect the economic recovery, they could slow the movement of freight and the need for additional heavy truck capacity.

In a related note, we are not experiencing any supply shortages or difficult attaining materials we need to continue production.

For a long time, we have incorporated a double supplier strategy and feel this is helping protect us.

We can never have or be assured that supplier shortages, either for ourselves or the OEMs will not be present.

What we believe our strategy and current outlook does not present any issues for CVG.

As we look at Class 8 production in North America, we are pleased to see build rates continue to rise.

We believe this is based on a historical old fleet and the need to replace worn out capacity.

This appears to support -- be supported by the rise in used truck prices and shortages.

While North America Class 8 build levels are important to us, bear in mind that heavy truck sales accounted for only 40% of CVG's revenues in 2010 of which we estimate that approximately 35% was attributed to North America Class 8 vehicle builds.

Global construction continues to be a key revenue generator for CVG.

Although we are not seeing the steep rise we experienced in 2010, global construction continues to show strength and we are pleased with our business levels in this key end market.

During the quarter Foton Motor Company, a leading Japanese -- Chinese heavy truck manufacturer selected CVG as a key seat supplier for their new H4 heavy truck platform.

Under this program, we will provide our new GSX3000 driver seat for use in Foton vehicles.

We expect to begin production in the third quarter of 2011 and ramp up over a 4-year period.

We believe peak annual volumes could reach 150,000 units.

At full production, we could be providing Foton with approximately 50% of the H4 seats.

In support of the Foton business award, we announced that we will establish a new production facility in Beijing to supply Foton's new plant there.

In addition, this facility will be utilized for other current CVG customers in the region.

We estimate annual revenues from this new program will be approximately $11 million in 2012, growing to more than $30 million at full production.

Expanding our China operations into the Beijing region with a new quality customer such as Foton is a positive step in our continuing growth and success in expanding the Chinese market.

During the quarter, we also broke ground on the Company's new production facility in Saltillo, Mexico.

When completed, it will produce air suspension and static seats; formed flooring systems; thermoformed plastics and injection-molded hard and soft trim interior components such as headliners, back walls and curtains.

The CVG parts produced there will be used on several Daimler Trucks North American models, including the Cascadia, Columbia, Western Star and M2 platform-based vehicles.

Saltillo, Mexico is an ideal place for CVG to build a new facility as part of our ongoing relationship with Daimler.

The area also has a large and growing automotive supply base that we feel offers CVG new development opportunities.

As we look forward, our strategy and vision will remain the same.

We intend to continue expanding our global footprint and product portfolio, especially in areas such as China, India, Mexico, and Brazil.

We will also continue our efforts to increase our market share and content in our North American end markets and focus on maintaining a lean and flexible cost structure on a global basis and a sustainable, financial foundation.

In summary, we are excited about the return of the volumes to our primary end markets and of the strategic process we continue to make as we reposition CVG for global growth.

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

Thanks, Merv.

Our revenues for this past quarter, as you saw, were $182.5 million, which is an increase of $36.1 million or 25% from the first quarter of 2010.

This increase is primarily the result of our global construction market revenues, which increased nearly $20 million or more than 70% from the first quarter of 2010.

Our OEM truck market revenues also saw a sharp increase of nearly $22 million, including the Bostrom acquisition during the quarter.

In contrast to these market increases, our military revenues decreased by approximately $9 million from the first quarter of last year while our other end markets collectively saw modest increases from the prior-year period.

Operating income was $8.1 million or 4.4% of revenues, which is an improvement of approximately $4.5 million over the prior-year period.

This represents a 12.5% contribution margin on the incremental revenues of $36.1 million.

Excluding the Bostrom acquisition and related costs as well as the cost of our Mexico expansion, certain raw material increases, restructuring and military end market shifts from this past -- first quarter, you get a clearer picture for comparison purposes of our 20% to 25% contribution margins, which has historically been our target.

Sequentially, revenues were up approximately $24.4 million from the fourth quarter of 2010, with an operating income increase of $2.7 million.

As I just mentioned, excluding the short-term investment costs for Mexico and the Bostrom acquisition as well as certain raw material impacts and restructuring charges for the quarter, net to contribution margin in the range of 20% when compared to the fourth quarter.

This is important for us to point out for a more accurate picture of our results and to ensure we provide further color on an apples-to-apples comparison of our results.

As Merv mentioned and as was mentioned in the press release, we are currently experiencing short-term impacts from certain raw material increases.

And while we have pass-through mechanisms to recover these amounts, they can't have short-term impacts until the true-up period gets resolved or commodity pricing levels improve.

Depreciation and amortization was $2.9 million and capital spending was $3 million for the quarter.

As of the end of this past quarter, we had a cash balance of approximately $18.5 million, which is down from our cash balance of approximately $42.6 million at the end of 2010.

This decrease is a result of several factors including the acquisition of Bostrom for $8.8 million in cash, cash interest payments during the quarter from our semiannual cash payment schedule of approximately $7 million, and standard beginning-of-the-year payments for items such as insurance and other matters, and an increase in working capital needs as a result of the increase in our end markets and revenues.

We just completed a new 8-year senior secured debt offering of 7.875% in addition to a modification of our asset-based loan agreement.

This new capital structure allows us to extend our maturity dates, reduce our overall interest rate, and provides us with a very strong capital and liquidity structure to pursue strategic and growth opportunities for the future.

The net proceeds to the Company from this transaction was approximately $70 million and provides us with access to the ABL of up to $40 million.

We were very excited to have been so successful in this transaction and look forward to the many opportunities this new structure will provide for us.

In summary, this past quarter marks our highest revenue level since the third quarter of 2008 and our 8th consecutive quarter of operating income improvement when excluding impairment and restructuring charges.

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, Thelma we'll open up the call for any questions.

(Operator Instructions) Ann Duignan with JP Morgan.

It's Greg Williams, actually, standing in for Ann Duignan, JP Morgan.

Hi, Greg.

Morning, Greg.

You guys didn't provide an update to the North America production forecast, so I assume it's still the same around 232,000, 240,000 builds then?

Well act is at --

247

247 and we're actually seeing a little bit better run rate than that I think.

Yes, I think our last call, Greg, we were at 230 to 240.

We've seen enough evidence for us to increase that -- our outlook for '11.

So we're probably in that 250, maybe 260 range.

Okay and can you guys provide a quarterly progression of your truck builds or said another way, as a supplier, are you guys any different than production forecasts for a truck OEM during this up cycle?

No, I mean our progression for the rest of this year is maybe the third and fourth quarter are fairly similar with an uptick in Q2 from where Q1 ended up.

Q1 was around 52,000 or so.

I think Q2 will be up and then Q3 and 4 maybe close to each other, but up from Q2 and ending up in that 250 to 260 range.

Okay.

Chad, you spoke a little bit about the incremental margins being comfortable with 20% to 25%.

Is that a full-year goal or is that contribution margins or incremental margins on a go-forward basis?

Can you help me understand that?

Yes, that's a go-forward basis.

I think the reason I walked through that in the -- in what I just went through Greg is we constantly point to our variable cost structure, which drives the 20% to 25% contribution margin.

We're still very comfortable with it.

If you look at Q4 to Q1, we actually were in that range.

Year over year, we're actually in that range too.

But you got to -- the thing that doesn't show that on the face of the financials is the one-time type things like Mexico.

Back earlier in the middle of 2010 we talked about Mexico expansion probably being a $1 million to $2 million expense for us in 2011.

So, you got to take those things out and you'll see that 20% to 25% contribution margin in things like raw material impacts, those are things that when you exclude those and like restructuring type things, if you back out those anomalies, you'll see that 20 to 25 come through.

Got it.

You guys aren't seeing any supplier shortages or any issues with Japan are you?

We've heard of some but most of the OEMs have really done a good job and scrambled.

And we're not seeing where it's impacting any -- of any significance on the build rate.

We know it has caused a lot of extra work on them and scrambling to make sure that it hasn't.

Okay, thanks guys.

You're welcome.

David Leiker with Robert W.

Baird.

Good morning, everyone.

Morning, Dave.

Chad, on the construction side, I think you said the revenues were up $20 million.

Is that right?

Correct, from Q1 of last year.

And so if we take where your revenues were in a quarter then construction, is that something you expect to be a sustainable number going forward?

Yes, Merv and I were actually just talking about that this morning.

It's a little bit different between North America and the rest of the world.

Our outlook for the balance if this year is probably somewhere between flat to a 5% increase from Q1 run rates to maybe where we end up at the end of the year.

Although I say that and we've said that for the last year and we continue to be surprised with the production levels out of the construction market.

So, hopefully we're still continuing to be a little bit conservative.

But our outlook right now is 0 to -- flat to 5% from Q1 levels.

If you look at that construction revenue base right now, how's that split between Europe, North America, and Asia?

North America and the rest of the world Dave is probably 50/50.

Is Asia bigger than Europe right now?

Yes, it would be split, yes.

You have a lot of good things going on over there right now.

Can you give us -- I don't know if you can do it quantitatively or not, but if we look at the truck and the military aftermarket, those other revenue slices, how those might have changed for you in the quarter or some commentary on that?

Yes, I kind of lumped everything together.

I mean the big changes for us year over year, Dave, was total truck was about 22 up -- 22 million up.

A couple million of that is European, outside of North America market.

Construction was up 20.

Military was down and the difference between that would be up $3 million to $5 million for those other markets.

So military aftermarket and that up $2 million to $3 million?

No, military was down $9 million.

So it would be bus, ag and aftermarket and other specialty markets collectively were up $3 million to $5 million.

$3 million to $5 million, okay, great.

Perfect, that's useful.

On the SG&A line, I know you walked through the items here in Q1.

The run rate we should look at going forward in a dollars terms or --?

I think the Bostrom add was two months for Q1.

So we'll see a little bit of an increase from that but we'll also see a dip from the acquisition cost of Bostrom come out of there.

So, maybe I'm guessing because we have a lot of projects going on right now, but it may come down a couple hundred thousand just as a guess.

The $16 million to $17 million is probably the range we should look at going forward quarterly?

I think so, probably closer to 16 at least.

Okay and then I'll come back and circle back around.

You got a lot of new business that you won during the downturn.

Where are we on the timing of that launching and flowing through the revenues -- the revenue stream?

Well we've already started some of the Saltillo, Mexico, in a temporary facility.

We move into the new facility in August.

By the end of the year we should be probably 50% ramped up of moving down there I would guess, maybe close to it on the interior trim side of it.

On the seat side, that will lag probably a quarter or so.

In China, we've been working on Foton test samples, pre-production runs.

We see that starting in the fourth quarter of this year but it will ramp up in 2012 will be -- 12, 13 million.

Okay.

John Deere, some business there.

That the wiring and harness business in China starting to ramp up.

It's about 10% ramp maybe.

I think other than the Foton piece, which has not started yet, Dave, I'd say half to three-fourths of the new business we've announced is really already running -- starting to run.

We're starting to ramp up in some cases like the [util master].

Yes.

If I recall correctly in aggregate, that's like $40 million, $50 million annualized, couple years out?

Yes, that's right.

If you include Foton at full ramp, it's closer to 60 I believe.

So it's close, yes.

Okay, great.

I'll come back.

Have a few more, but I'll follow up with you in just a minute.

Okay.

Jon Otterberg with MAST Capital.

Hi, Merv and Chad.

It's Jon.

Hi Jon.

Can you walk through your raw material impacts for this quarter?

Looking at the prices of the 4 that you mentioned the last 6 months, they've had a pretty nice run and I'm pleasantly surprised that you could hold it down to just a $300,000 impact for the quarter.

How did you do that?

The biggest thing for us in this first quarter Jon was copper, copper and gold related to harnesses and with the pass-through mechanisms that generally allows us to mitigate the impacts.

But the biggest impact for us in Q1 was copper.

As long as copper and some of the other commodities continue to rise, we may still see some impacts from that on a lag basis.

So, depends what they do, but that was the biggest impact for us.

And are you getting any -- it seems like your pass through -- there are agreements and not contractual so, I could see some of the OEMs at some point pushing back a little bit.

But basic --

Well that's not exactly correct.

Most of ours are contractual.

Okay.

All right.

How about aluminum, is that a significant impact?

Aluminum is purchased by our customer in the biggest case of where we use it.

Okay.

So it's just directly passed through at the standard price and they make their own adjustments internally.

Right, never really impacts you.

Right, correct.

Okay.

And you do not hedge anything for the remainder of this year, right?

No, I mean we have contracts with suppliers, but we don't currently have any true commodity hedges in place.

They're kind of tied to the indice charts.

And then those are tied to our customer indice charts.

So as one goes up, the other one kind of goes up.

We may look at doing some of those in the future, but currently we don't have any commodity hedges in place.

All right thank you --

In the past, we got lucky once on steel and we got unlucky once on copper.

So we kind of -- we're proving that we're not the greatest at that, so and I don't think anyone really is, so what we try to do is work with our customers and work with our suppliers on getting contracts in place that kind of help us all stay away from spending all our time fighting over increases.

All right.

Thank you.

You're welcome.

Gregory Macosko with Lord Abbett.

Yes, hi, Merv.

Hi, Greg.

Just with regard to the new business that David mentioned, what is left to ramp at this point?

Foton, John Deere, Daimler Truck North America.

We got some mid-range trucks that are like UPS, FedEx type trucks that we've got quite a bit of content that we've added recently.

So that's yet to ramp up.

Those are the bigger ones.

Some John Deere business and some Caterpillar business.

Those are --

Is there much left to -- is there any out there sort of in the pipeline or you doing much quoting?

Any sense of that?

We're doing a tremendous amount of quoting.

There's some great opportunities out there that we're working on.

Obviously we can't go into the customer names but yes, we're --

More in North America or Europe or kind of equally or -- ?

Quite a bit in Asia, some in Europe but and quite a bit in North America.

Okay.

Then you mentioned Brazil and India.

Are you close to making any kind of a decision as to kind of where you might locate or anything to be done there?

Or really are you -- is it a question of just finding a customer that's interested and then you'll do?

Give us a feeling for you're not there yet, but you're looking is what you're saying?

We're not there in India yet, but we can see it from where we're sitting.

You got good vision there, Merv.

As far as getting to announcements and things like that, we're working very hard.

I think we've made a lot of progress.

Brazil, we've spent a lot of time going down with customers in the last couple months.

So obviously that's progressing very well.

Okay.

Okay, good.

Thank you.

You're welcome.

David Leiker with Robert W.

Baird.

A couple of other follow-ups here.

If we look at the military business, when does that start to ramp back up with -- for you at Oshkosh?

Whenever Oshkosh comes out with an announcement.

We are kind of always waiting on their or Navistar or EAE -- their announcements to come out before we can announce anything.

Do you think that starts a flow back here in your second quarter or is that a third quarter item?

I haven't seen any announcements from them, David, so I'm not really sure to be honest.

So that cuts us back to pushing a $20 million quarter business for you.

Is that what you're seeing?

Yes, military for us right now is about 9, 9.5, Dave.

No, I'm saying when it fully ramps back up at Oshkosh, you're --

Yes, our highest Q1 of '10 was about 18, getting close to 20 a quarter.

So you got -- and you think you get back to that level at some point?

Well, if they're running the number of units that they ran in late '09 and early '10, it's certainly possible, yes.

The tax rate, what sort of comments or help you -- can you give us on that number?

My favorite question.

I know.

It's totally dependent, as you know, from the valuation allowances and non-North American business.

The best thing I can say is we've been in that half a million to a million range.

The tricky part is can't really pay attention to percentages because of the absolute dollar amount from the pretax income levels.

It just throws the percentages off.

So we're probably in that I'm going to guess 20% to 30% range maybe, just as a total guess.

So I mean we're better -- so if we look at this first quarter, I mean obviously as your income goes up here, that 850 million -- 850,000 in taxes goes higher.

That's more the way we should look at it?

Yes, that's kind of how I would look at it.

It's a frustrating situation because it's very difficult to answer because of how the VAs play on certain items and other items they don't.

And how long do you have to show profitability there --

I think as we get towards the end of this year, beginning of '12, we'll see a lot more normal tax provision level because the 3-year look back falls off from the '08 -- the large impairments from '08, Dave.

So I think hopefully this is our last year of the cumbersome tax situation and we'll get to a more normalized level as get into 2012.

Okay, a couple last items here on the balance sheet.

I mean you've completed debt refinancing post quarter so where -- what does the balance sheet look like right now in terms of cash and debt?

That's a question that we've been waiting for a good while to try to answer or have asked.

We're looking forward to it.

Yes, it's -- we actually closed it yesterday, Dave.

Company netted about $70 million.

So we're taking the March balance sheet, we're sitting on about $90 million in cash.

Does that answer your question?

That number in the balance sheet is 250?

Correct.

Yes, the debt -- that was the net number of cash received to the Company and then we -- the balance was used to pay off the -- all of the other preexisting debt.

So the total debt will be 250 and cash will be 90.

Is there an overallotment to get exercised yet or not?

No.

That's your final number there?

Yes.

Obviously it's easy enough to calculate the interest rate on that.

Yes.

Have you finalized then what the charge is going to be for the early debt extinguishment?

Yes, it's going to be -- there'll probably be an expense of around $1 million, $1.2 million.

And then there'll be loss of modification of debt probably $7.5 million to $8 million.

That's the prepayments and the write off of the previously deferred fees.

So right around -- right around $10 million or so that will -- ?

Yes, so there will be about $1 million expense in the operating line and there'll be $7.5 million to $8 million below the line, so to speak.

Okay.

And then one last item here, we look at the North America build and the mix between Mexico exports.

That mix number is pretty high.

I guess given where the volumes are, we're not really seeing that in the numbers, but I would imagine that's showing up a bit on your average content?

Is that right?

It is.

There's about -- I think the number was about 10,000 Mexico export units out of the 52.

So it's getting close to that 20% number.

We see it a little bit.

We're starting to see some more favorable content than we would have say a year ago.

But no doubt, those Mexico export units on average tend to have a lower content value for us.

Okay, great.

I think you're not seeing it in the total numbers because the new business wins and because the higher content in the non-Mexico export is kind of overweighing it.

And the continuation of the construction market portion too.

Plus the Bostrom piece that added to our truck business, Dave.

That'll -- if you average it out that may add, I don't know, $100 per unit or something like that.

Okay, great.

It's nice to be on the other side of the curve here.

Yes.

Agree.

All right, thank you.

Welcome.

At this time, we have no additional questions.

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

Thank all of you again for joining us.

Each quarter seems to be getting a little brighter and we're very pleased that you would take the time to join us.

We see the ramp up moving in favorable direction in most all of our business segments.

Chad, you got anything to add?

No, that's it.

Thank you everybody.

Look forward to speaking with you on the next call.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation and you are free to disconnect.

Have a great day.