Commercial Vehicle Group Inc (CVGI) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Q3 2011 Commercial Vehicle Group [Incorporation] earnings conference call hosted by Mr.

Chad Utrup.

My name is DeLou, and I'm your event manager today.

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

(Operator Instructions) I would like to advise all parties that this conference is being recorded for replay purposes.

And now I'd like to turn the conference over to Mr.

Chad Utrup.

Please go ahead, sir.

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

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

Merv will then give a brief Company update and I'll take you through our results for the third quarter and we'll then take time to answer your questions at the end.

With that, I'd 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 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'll turn the call over to Merv.

Thanks, Chad, and thanks to everyone who joined our call today.

We continue to hear concerns about a double-dip recession.

We believe that even if this turns out to be the case, we won't see a material pullback in the North American Class 8 truck orders or build rates.

The projections we currently see for Class 8 vehicle builds in North America, which accounts for around 35% to 40% of our total revenues, continue to appear strong throughout the end of 2011 into 2012 and even into 2013.

We also continue to hear fears of the possibility of slowdown in the Chinese market and potential impact on CVG if that happens.

We are seeing annual heavy truck build rates estimates of 1 million units there.

Even if that market were to suffer a 20% decline, it would still mean the production of around 800,000 Chinese heavy trucks.

That would still be more than double the anticipated build rates for North American heavy trucks.

Since we are just beginning to establish CVG's presence in the domestic Chinese heavy truck market, we expect meaningful growth opportunities for CVG, even if China were to experience a significant build rate reduction.

We also hear concerns about the European economy and its potential impact on CVG.

About 15% to 20% of our revenue stream comes from Europe, and although important to us, we don't feel a European downturn would present a significant risk to us.

The reason I am bringing these points up today is to point out how diversification and growth strategy has served us well.

We believe we are extremely well-positioned to grow in the Asian market regardless of any slowdown in China.

Our diversification into new regions and end markets has become one of our many strengths, even in the face of current fears in the market, which we do not necessarily agree with.

This quarter, we are pleased to see our contribution margin improve compared to the second quarter of this year.

During the quarter, we worked hard to eliminate or reduce the inefficiencies and costs associated with supply chain and other issues we typically experience as our business ramps up or down.

Some of our customers continue to experience production disruptions that cause us to idle employees and incur additional expenses such as overtime or expedited shipping costs.

However, our employees and management team have done an excellent job to minimize these impacts.

At the same time, with our plans to expand and globalize CVG, we continue to see CapEx expenditures and developmental and startup expenses that are higher than our historical levels.

It is important to view our increased CapEx and expansion cost as investments in developing markets and new opportunities for growth that are not apparent in the more mature North American or European markets.

As you know, we are expanding our presence in the Mexican, Indian, and Chinese markets.

We continue to see them as good opportunities for CVG and our shareholders.

Our plans there are continuing to be on time and uninterrupted.

We firmly believe these investments and costs will serve our shareholders over the long term as we are placing CVG in a position to become a truly global supplier and leader in our industry.

I am pleased to report that the integration of Bostrom and Stratos acquisitions continue on track.

These acquisitions present a great opportunity for us to further develop our aftermarket sales and expand our brand offerings while increasing our global footprint.

Recently, we were pleased to announce a joint venture we entered in India with Hema Engineering.

Our new JV will produce seats and seating components destined for the Indian commercial vehicle market.

We hold a 90% ownership position in the new joint venture with Hema owning the other 10%.

This new JV will lease a production facility in the Delhi region of India where Hema has its existing manufacturing facilities.

Hema is an excellent choice for us to partner with given their engineering and manufacturing strengths in India along with their well-developed network of customers and suppliers there.

The new JV has already been awarded truck seating business for the Indian market and we expect production to begin there in early to mid 2012.

We plan to enter the Indian market using the same approach we took with our Chinese operations.

We will begin by initially transferring some of our existing product lines to India, and then we will grow our seating business there over the next several years.

In 2012, we expect we will use approximately $1.2 million in cash to fund the JV.

We anticipate this will include approximately $700,000 in capital spending and approximately $0.5 million of startup cost.

For 2012, we anticipate the JV revenues of approximately $2 million and the initial operating loss of around $300,000.

We believe the domestic Indian market will add approximately $20 million to $25 million in business over the next several years beyond 2012.

In summary, we are encouraged by the continuing production levels we see in North America heavy truck market and we are pleased to feel the stability of the global construction markets.

We are investing in the future and delivering on the promises we have made to diversify our product offerings and geographic reach.

At this point, I'll turn the call back over to Chad for a financial review.

Chad?

Thanks, Merv.

Our revenues for this past quarter, as you saw, were $216.9 million, which is an increase of $66 million or 44% from the third quarter of 2010.

This increase is primarily the result of our global OEM truck market revenues, which increased nearly $47 million or 80% from the third quarter of 2010.

Our global OEM construction revenues also saw a sharp increase of approximately $13 million from the same period last year.

In contrast to these market increases, our military revenues decreased by approximately $3 million or 24% from the third quarter of last year while our other end markets collectively increased approximately $9 million or 23% from the prior year quarter.

Operating income was $13.5 million or 6.2% of revenues which is an improvement of approximately $8.4 million over the prior year period.

Sequentially, revenues were up approximately $10.1 million from the second quarter of 2011 with an operating income increase of $2.2 million or 22% contribution margin.

Considering the cost increases related to industry ramp ups and supplier disruptions, as well as our current startup costs for Mexico and Beijing, we're extremely pleased with our performance this quarter and the contribution on incremental revenues.

Depreciation and amortization was $3.3 million and capital spending was $4.8 million for the quarter, and our interest expense and tax provision levels were generally in line with what we discussed during the last quarter conference call.

From a fully diluted EPS standpoint, the quarter came in at $0.26, which we are proud to report is our highest diluted EPS level since the fourth quarter of 2006.

As of the end of this past quarter, we had a cash balance of approximately $85.3 million.

This cash balance combined with our unused ABL revolver capacity means we have approximately $122 million of liquidity immediately available as we continue to look at strategic opportunities.

To recap, and as mentioned in the press release, this quarter marks our highest revenue, operating income, and diluted earnings per share since the fourth quarter of 2006.

This is also our tenth consecutive quarter of operating income improvements when excluding impairment and restructuring charges.

This is something we continue to be extremely 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.

With that, we'll open up the call to any questions.

Thank you.

(Operator Instructions) The first question is from the line of David Leiker.

Please go ahead.

Hi.

Good morning.

This is Joe Vruwink on the line for David.

Good morning, Joe.

Hi, Joe.

Hi.

I'm just wondering, Chad, quick numbers question.

I missed how much construction revenues increased year over year.

Year-over-year was $13 million.

Okay.

Great.

Quarter-to-quarter was about $3 million -- sequentially, sorry.

Okay.

I'm just wondering -- really good operating margin performance during the quarter.

Were the acquisitions at all dilutive to the incremental margin, so from maybe a pure organic perspective it was better than the 22%?

No.

I mean, the really -- the meaningful acquisition from a sales perspective would be Bostrom when you're looking year over year.

That would've added maybe $10 million in sales year over year and on track with kind of what we had talked about, maybe a 4% or 5% operating level, which I believe is what we mentioned.

So, to your point, it's a little bit dilutive when you're looking year over year.

Quarter to quarter, it would not be because we expect the same circa 20% contribution from Bostrom as we do the rest of the business.

Sure.

Okay.

Just on the investments being made in Mexico, did you talk about what costs ended up being during the quarter?

It was about $600,000, Saltillo and Beijing combined, operating income impact.

Okay.

Great.

I believe on the last call, just since you brought it up, we talked about between Mexico and China expansions between $1 million and $1.5 million for the balance of the last half of the year, and then, obviously, some additional costs going into 2012.

So, we'll be in that range.

Fourth quarter will probably be around maybe $800,000 or so combined for both of them, operating income impact.

Okay, and then I'm just wondering what sort of actions were you able to do in Q3 versus Q2, because it sounds like your OEM customers still had a little bit of choppiness in their production schedules.

So what can you do as a company to kind of mitigate that?

And was the improvement sequentially also a factor of just the OEM choppiness getting a little better?

We continued the same actions that we were doing in Q1 and Q2.

As with any process, when you're starting with it, you have your bumps.

And this has kind of been smoothing out some of those bumps by having the temporary employees -- have gathered better training because we don't necessarily let them go home when the OEM may shut down for a day.

That cost has been less this quarter because of -- the better trained work force has been one of the changes, and it's just been continuing to manage with higher expectations.

Great.

And then just one last question from me.

If I look at your defense business, it looks like volumes were essentially flat year over year, if I'm backing into the year over year comparison correctly.

Is that pretty much the expectation for the foreseeable future that you see, kind of a $10 million type run rate, or would you expect a ramp up maybe beginning in your calendar 2012?

Just a correction quick, Joe.

Year-over-year was down $3 million for the quarter.

Okay.

So, it was around $10 million for the third quarter of this year --

Okay.

-- which is roughly the same number we expect.

We expect it to be between $9 million and $10 million for the fourth quarter at this point, and frankly, without substantial orders that we see, we would expect that level to continue throughout 2012.

Okay.

Thanks a lot, guys.

Good quarter.

Thanks, Joe.

Thanks a lot.

Thank you, and the next question is from the line of Aaron Duignan.

Please go ahead.

I think maybe you mean Ann Duignan?

This is Mike [Schliffke] filling in for Ann this morning.

How are you?

Hey, Mike.

Fine.

How are you, Mike?

Good.

Thank you.

Just maybe a quick two-part question on your new JV in India.

You mentioned that you transferred some business there, so I was wondering what you were going to do with the capacity that is being sort of released with the new India business.

And then secondly, just your thoughts on entering the India market given some of the bumpiness that we might see going forward there in the truck market.

First of all, the -- I think the main thing to think about is the business that has been won there already that we'll be putting in production line to start to handle.

The business that we talked about transferring is some of the business that we currently already supply to India and we're putting in a line of a low-cost seat that we think will do well in that marketplace, but it really -- if you looked at the total cost -- the total production that we might transfer there, it's probably going to be less than $2 million worth of sales.

So, it's more of a -- just something to have our employees there get used to our production methods, get used to our way of running a business.

Okay, and that's a good lead into my question -- is basically can you maybe give us a little more bit -- more of a precise timeline as to when you think you'll be profitable in India?

Our target is -- 2012 is going to be a startup year, low volume as we start the production from scratch.

2013 is our target.

Okay.

Great.

Thank you.

But keep in mind these -- Joe, keep in mind that these businesses when we start up are not -- that's the reason the approach that we take -- it's the same approach we took in China and that we take in Mexico.

They're not huge investments and they're not huge losses.

It's a methodology that's proven well for us.

In China, I think we started out with less than $4 million in 2005 maybe.

Today, we're at $75 million, I believe, and we see next year being at --

A hundred.

-- over $100 million.

Interesting.

So, it's a -- I think it's a proven method that we've gotten.

It's the approach that we're taking with all investment into emerging markets.

Yes, Mike, just to add to that, to Merv's point, your question is a good one in terms of when will we see it be profitable.

But I think we even -- Merv mentioned earlier today, our 2012 operating loss estimate is about $300,000.

So just to reiterate, we're not talking about huge investments.

We think we do it the right way with small investments and over time build it to a strong business.

Great.

Thanks.

I guess I was kind of asking whether it will sort of turn positive towards the back half of the year rather than the exact year.

Will it get better as time goes on or is it going to be a pretty big year-long startup phase?

We -- it's hard for us to put a number on this over more than just what we gave you as a lump because it is a startup.

There's pasture land right now, basically, so for us to be able to give you if it's going to be first half or second half, obviously, we're hoping that as the year goes along, the $300,000 that we expect to lose is going to be a lot less at the rear end.

But we also have 10 global partners over there that we hope that we're going to be expanding business with very shortly.

So, it's just real difficult to say that that's what it's going to look like.

We hope that during the first year that that might not be the case, that we hope that we're growing faster than that with 10 global partners already there.

We think that this could be -- it's a very opportunistic time for us.

Great.

I understand that.

Thank you.

I also appreciated your comments on Class 8 truck in North America.

I'm just wondering if you had any similar thoughts about the construction equipment market in 2012?

In North America?

Yes.

We see it as flat, maybe 5% growth.

I mean, for all practical purposes, in our planning model, we're kind of looking at flat and we'll take any positive surprises we get.

Got you.

Thanks.

One last one, is there anything behind the unusually low tax rate in Q3, and what can we expect the tax rate to be going forward?

Chad?

Yes, it's kind of the same commentary from the last couple quarters, Mike.

We've got valuation allowances and NOLs that keep the domestic tax rate down.

For the fourth quarter, I'll kind of point to the same thing that we pointed to all year, which is probably in that $1 million dollar range from an absolute dollar standpoint.

Until we get into 2012 and the three-year look-back for valuation allowances kicks in, we likely won't see a normal tax rate until maybe end of 2012.

That's a best estimate at this point, but for the fourth quarter, I'd expect it to be about the same, absolute dollar figure for -- that we've seen all year.

Great.

Well, thanks very much, guys.

You're welcome.

You're welcome.

Thank you, and the next question from the line of David Leiker.

Please go ahead.

Yes, hi, guys.

Just one more question from me.

I'm wondering -- several truck OEMs have been out talking about the Brazil market and how content-rich and profit-rich it is for them.

And I'm just wondering -- you may not have a direct exposure because the footprint isn't there, but I'm wondering if you are able to track, maybe, production units from Mexico, be it from OEMs that are there that end up making their way to Brazil.

Because it seems like a pretty opportunistic market for you guys given that there's buyers that like to spend a lot of money and you have the premium seating product in the industry.

Well, we do ship some product straight into Brazil on our seats.

At this time, we really would not want to get into the exact number and the customers.

I can tell you that from a management standpoint, myself and our top management have spent probably on average two weeks each in Brazil and we have people down there right now.

Customers are pulling very hard for us to move there, and we've got some very good strategic partners that are either there or moving there.

So, obviously, that's -- as we've said for the last few years, our growth is -- that we see coming up was China, which we've shown that that has worked well for us, India, which we just got the joint venture signed there, and they're starting to work diligently, and Brazil's the next on our list.

Is that a market that you could maybe pursue maybe a sales office and expanding on the aftermarket side before really honing in on the OE business?

Well, there's a large requirement of content in Brazil.

What's the content requirement, do you remember?

Sixty.

60%.

So without a huge import tax on it.

So, our goal is -- we're already selling in Brazil, so our goal is more focused on getting production opportunities in Brazil because it's a much bigger market.

And as far as people spending a lot, it's an expensive market to be in also.

Sure.

No, I appreciate that.

That's all I got, guys.

Thanks very much.

You're certainly welcome.

Thank you, and you do have another question from Aaron Duignan.

Please go ahead.

Hey, guys.

It's Mike Schliffke again.

Hi, Mike.

Hey.

Quick follow-up on some of the OEM scheduling issues.

I guess my question is if North America truck market keeps on growing, do you expect to continue to have these issues going forward?

And I guess, would a flattening out or a slowdown in the market actually help you guys from a profitability standpoint?

And just how can we think about that?

Secondly, I guess, do you have any sort of view on timing as to when these things could be resolved in the next few quarters?

Well, we're going to choose to focus and continue to focus like we have been on the positive, how do we make sure that these speed bumps don't slow us down any more than possible.

We think that a slow down would not be beneficial for anyone.

First of all, we don't think that the market will allow that with the need for the trucks that they've got.

So, if one decides to slow down, somebody else is going to pick up their market share, and so we don't think that's going to happen.

Now, what we do think is that as the OEMs continue to push the envelope, they're going to continue to have opportunities for improvement with suppliers that maybe can't keep up and that's going to give opportunities for those of us that can keep up as it has done in the past few quarters.

Being an on-time, quality supplier in a down cycle pays off.

Being an on-time quality supplier in an up cycle pays off, and we're taking advantage of it in both cycles.

So, we don't see any advantage of a slow down.

We do see the advantage of keeping supplying on time with a quality product.

Interesting.

Great commentary, guys.

Thank you so much.

You're certainly welcome.

Thank you.

(Operator Instructions)

Well, thank all of you for joining us today.

We appreciate your time and look forward to talking to you next quarter, if not sooner.

Thanks, everybody.

Appreciate it.

Bye.

Thank you, ladies and gentlemen.

You may now disconnect and enjoy your day.

Thank you.